author: Hakron:

text:
    Harry F. Canelo, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 66150, 90641.
    Promulgated April 4, 1940.

      Milton D. Papiro, Esq., for the petitioner.

      T. M. Mather, Esq., and Henry M. Sorrell, Esq., for the respondent.
   OPINION.

Hakron:

1. The basic question for determination is one of fact and is whether or not petitioner received income in the taxable years which he failed to report, and, thereby, filed false and fraudulent income tax returns for each of the taxable years with intent to evade tax. If petitioner filed false and fradulent returns for each of the years 1925 to 1928, inclusive, with intent to evade tax, the assessment and collection of the deficiencies and penalties for those years are not barred by the statute of limitations, and it will not be necessary to pass upon respondent’s alternative contention that the deficiency notice for the years 1927 and 1928 was mailed within the statutory period as extended by Joint Resolution of Congress approved June 16,1930, 46 Stat. 589, section 1009 of the Revenue Acts of 1924 and 1926, and section 276 of the Revenue Act of 1928. Summerill Tubing Co., 36 B. T. A. 347. Petitioner has waived the defense of the statute of limitations with respect to the year 1929. Moreover, if petitioner filed false or fraudulent returns for each of the taxable years with intent to evade tax, the further question of whether part of the deficiency for each of the taxable years is due to fraud with intent to evade tax is in large part answered. Cf. Summerill Tubing Co., supra.

In support of his allegations that the income tax returns of petitioner for the taxable years were false and fraudulent with intent to evade tax, respondent introduced in evidence the sheets of the stock trading accounts of petitioner with the two brokerage firms, which, upon their face, do not show the existence of a trust. Respondent contends that the income from securities, consisting of dividends and gains from sales, was petitioner’s income in the taxable years, and that petitioner’s failure to report as his income all of such gains and dividends was an omission committed with intent to evade tax thereon. Respondent contends that the filing of a fiduciary return for the “Harry F. Canelo Trust” and the allocation of income to the alleged beneficiaries of that alleged trust was not justified by facts, and represented a device to evade taxation.

Petitioner maintains that the income from the sale of securities in his accounts and from dividends on securities in his accounts belonged either to a trust, or to a partnership or joint venture, in which he had a one-fifth interest in the years 1925, 1926, and 1927, and a one-tenth interest in the years 1928 and 1929, and that in his individual returns for each of the taxable years, petitioner correctly reported his entire interest in the income of the trust, or the partnership or joint venture.

A clear and understandable statement of petitioner’s theory as to how the alleged trust, or the alleged partnership or joint venture, was created is not to be found, either in the record or in petitioner’s briefs. All the testimony on this subject was given by petitioner, and there are wide gaps in his testimony. With respect to the creation of the alleged trust, or the alleged partnership or joint venture, petitioner testified that on or about June 11, 1925, a conference was held, which was attended by Addie Kelly Canelo, Adolph B. Canelo, Jr., C. Kelly Canelo, Mildred Hadley Canelo, and petitioner; that petitioner declared at the conference that he was going to give $2,000 each to Addie Kelly Canelo, C: Kelly Canelo, Mildred Hadley Canelo, and Louise Mercedes Canelo; that it was agreed at the conference that petitioner was to use the amounts, which he declared he was going to give to the individuals named above, to open a margin trading account in which petitioner was to purchase and sell securities; that subsequent to the conference petitioner borrowed $10,000 on his own note from the First National Bank of San Jose; and that with the amount borrowed petitioner opened the original margin trading account in his own name on June 12, 1925. It should be pointed out that petitioner’s testimony on this subject has not been supplemented or substantiated by the testimony of any of the other members of the Canelo family allegedly present at the “conference” held on or about June 11, 1925. Cf. James L. Robertson, 20 B. T. A. 112.

Petitioner’s theory that the income realized during the taxable years from the operations in petitioner’s brokerage accounts belonged to either a partnership or a joint venture is wholly without foundation. One of the fundamental requisites of both a partnership and a joint venture is that each of the members thereof must contribute either property or services. Chase S. Osborn, 22 B. T. A. 935. See Abraham Sultan, 22 B. T. A. 889; Harry C. Fisher, 29 B. T. A. 1041. There is no evidence that any of the alleged copartners or joint ven-turers, other than petitioner, contributed any property which was used in the operation of the brokerage accounts. At the time when petitioner declared that he was giving $2,000 to each of the four members of the Canelo family named above, petitioner had not borrowed the funds with which he opened the original brokerage account; and between the time when petitioner made the declaration and the time when he opened the account he did not deliver any money to any of the four members of the Canelo family. An irrevocable transfer by tlie donor to the donee is an essential requisite of a valid gift Ínter vivos. See Adolph Weil, 31 B. T. A. 899, 906; Civil Code of California, sec. 1147. It is, therefore, clear that petitioner did not make a valid gift inter vivos of any of the funds used by him to open the original brokerage account. In addition to contributing all the property used in the operation of the brokerage accounts, petitioner alone, of the alleged copartners or joint venturers, contributed services. Since all the property and services used in the operation of the accounts were contributed by petitioner, it follows that there was neither a partnership nor a joint venture.

Petitioner’s theory that the income, realized during the taxable years from the operations in petitioner’s brokerage accounts, belonged to a trust is also without merit. Petitioner contends that the alleged trust was created orally. It should be pointed out that the fact that an oral trust was created must be established by clear and convincing evidence. Austin v. Wilcoxson, 149 Cal. 24; 84 Pac. 417; First Union Trust & Savings Bank v. United States, 5 Fed. Supp. 143; Cooper v. United States, 19 Fed. Supp. 752; Wigmore on Evidence, 2d ed., sec. 2498. There is no evidence here to support a finding that’ a valid oral trust was created. The declaration which petitioner allegedly made to the effect that he was giving $2,000 each to four members of the Canelo family would not constitute a declartion of trust, because petitioner at the time when he made the alleged declaration had not borrowed the funds with which he opened the original brokerage account. At most the alleged declaration would constitute a mere gratuitous promise to create a trust in the future. See Brainard v. Commissioner, 91 Fed. (2d) 880; Noble v. Learned, 153 Cal. 245; 94 Pac. 1047.

Moreover, the self-serving statements which petitioner made to the floor men who handled his brokerage accounts and to the insurance agent from whom he purchased the annuities, to the effect that other members of the Canelo family had financial interests in the brokerage accounts in his name, are, in the light of other evidence in this proceeding, entitled to little weight." At best, these self-serving statements were mere legal conclusions. Cf. W. M. Buchanan, 20 B. T. A. 210, 212; James L. Robertson, 20 B. T. A. 112.

The manner in which petitioner conducted the brokerage accounts and handled the income realized from the operation of the accounts conclusively indicates that there was no trust. If there had been a trust, petitioner, as settlor, trustee, and one of the beneficiaries, would have been required to administer the trust- with a high regard for his responsibilities as a fiduciary. See William C. Rands, 34 B. T. A. 1107. However, during the taxable years petitioner made no attempt to perform even the most rudimentary duties of a trustee. A trustee is under a duty to keep trust property separate from bis individual property and to designate the trust property as property of the trust. See Restatement of the Law of Trusts, vol. 1, section 179; cf. Herbert L. Dillon, 32 B. T. A. 1254; Emil Frank, 27 B. T. A. 1158. However, petitioner at no time did any of the above. Not a single one of the three accounts with Anderson & Fox and the eleven accounts with E. A. Pierce & Co. was designated as a trust account; all of the accounts were opened and maintained in petitioner’s own name; not a single withdrawal from the brokerage accounts was made by a check payable to petitioner’s order as a trustee. All of the withdrawals were made by checks payable to petitioner’s order as an individual, with the exception of the following : One check was drawn payable to the order of Adolph F. Canelo, Jr., brother, not an alleged “beneficiary” of the alleged trust; one check was drawn payable to the order of the First National Bank of San Jose, to which petitioner was indebted, and one check, payable to the order of the French American Bank, was deposited in petitioner’s account there. Moreover, while a trustee can properly make general deposits of trust money in a bank, it is his duty properly to earmark the deposit as a deposit by him as trustee. See Restatement of the Law of Trusts, vol. 1, secs. 179, 180; cf. Russell C. Mauch, 35 B. T. A. 617. None of the $496,207.67 withdrawn from the brokerage accounts during the taxable years was deposited in a bank account which was designated as a trust account; over 90 percent of the total amount withdrawn was deposited in bank accounts which were in petitioner’s name as an individual and in which the amount withdrawn was mingled with other funds of petitioner.

Furthermore, a trustee is under a duty not to use trust funds for his own purposes. Cf. Russell C. Mauch, supra. During the taxable years petitioner admittedly used for his own purposes funds withdrawn from the brokerage accounts far in excess of the total amount of his reported beneficial interest in the net income of the so-called “Harry F. Canelo Trust.” Out of the $496,207.67 withdrawn from the brokerage accounts during the taxable years petitioner made a loan of $25,000 to a corporation in which his father had a financial interest, and petitioner received the note of that corporation made payable to his order as an individual, cf. William C. Rands, supra; purchased two annuities for the total amount of $100,000, in both of which he was the annuitant as an individual; and paid off a note in the amount of $47,000 on which he was obligated as an individual. These disbursements total $172,000, while the total amount of petitioner’s reported beneficial interest in the so-called “Harry F. Canelo Trust” was $50,163.90. It should be noted also that petitioner has failed to give any explanation as to bow be used approximately $167,628.18 of the $496,207.67 withdrawn by him from the brokerage accounts.

The alleged beneficiaries of the “Harry F. Canelo Trust’’ were held out to be the owners of trust income totaling $349,609.29 over the period 1925 to 1929, inclusive. Returns for them were filed reporting proportionate amounts of the income realized by petitioner in the operation of brokerage accounts. But petitioner’s testimony shows that he not only received all the sums withdrawn from the brokerage accounts, but he also was the sole and unqualified owner of the income. All income withdrawn, with a few exceptions not material, was deposited in petitioner’s own bank accounts; the so-called beneficiaries did not receive directly any distributions other than a few small sums given to them by petitioner; three beneficiaries never received any money or property, in any manner, despite the statement to the Government in their separate returns that they owned income aggregating $109,712.39. While petitioner devoted to his own uses sums in excess of his alleged “share” of “trust income,” he did not demonstrate or indicate any indebtedness from himself to the trust. For that matter, petitioner does not argue that he was indebted to the trust, but passes over the point which suggests itself on the face of the theory advanced that other persons owned income which they never received from the alleged trust. The facts show that petitioner expended various amounts on behalf of his mother, Addie Kelly Canelo; his daughter, Louise Mercedes Canelo; his niece, Maureen Canelo Fowler; and his brother, C. Kelly Canelo. Petitioner made these expenditures on behalf of his relatives in the purchase of property, goods, services, and medical attention. The expenditures were not in relation to any interest in a “trust.” The conclusion is inescapable that the expenditures represented gifts from petitioner, and, in the case of his daughter, disbursements in fulfillment of an obligation to support a minor child. All expenditures by petitioner aggregated $116,450, in the taxable years, plus $3,000 in 1930, as against $349,609.29 reported to the Government as income owned by alleged trust beneficiaries.

Upon the evidence before us, there remains no doubt that petitioner realized large amounts of income from gains and dividends from stocks purchased in trading operations; that he evaded tax upon this income by using the members of his family, relatives who were recipients of gifts from him and were not likely to question his conduct, to make reports to the Federal Government that they owned the above income, all of which was false and untrue. The record fails to show facts upon which it could be concluded that petitioner had grounds to believe, honestly, that a trust existed, and that other persons owned the income realized through his own purchases and sales of securities. Petitioner’s conduct throughout shows that he was the sole owner of all of the income derived from the brokerage accounts in his name, and that, he made no attempt whatever to perform even the most rudimentary duties of a fiduciary. It is beyond credence that petitioner filed the fiduciary returns and his individual returns in the innocent belief that there existed a “Harry F. Canelo Trust.” James H. Persons, 5 B. T. A. 716; I. J. Adelson, 7 B. T. A. 110; Grover C. Blumer, 23 B. T. A. 1045; L. Schepp Co., 25 B. T. A. 419; Charles E. Mitchell, 32 B. T. A. 1093; affd., 303 U. S. 391. Further, the record does not show that any of the alleged trust beneficiaries ever regarded themselves as beneficiaries of a trust. Petitioner, himself, had all the individual returns prepared and filed. Petitioner admits that he paid all the income tax reported on the individual returns of some of the alleged beneficiaries. As for the individuals themselves, they signed the individual returns upon petitioner’s request, and it is entirely possible that they did not realize the purport of their acts.

There are several facts of consequence in the record which indicate conclusively that the division of the income realized from the operations in petitioner’s brokerage accounts on the basis of the so-called “Harry F. Canelo Trust” was merely a tax evasion device. Cf. James H. Persons, supra; Grover C. Blumer, supra. In the first place, the net income reported in the fiduciary return for 1928 was five times the net income reported in the fiduciary returns for 1926 and 1927, and three times the net income reported in the fiduciary return for 1925. In the fiduciary return for 1928 the net income was divided among nine alleged beneficiaries instead of among five alleged beneficiaries, as had been done in the fiduciary returns for 1925, 1926, and 1927. Petitioner gave no satisfactory explanation for this convenient increase in the number of alleged beneficiaries. He testified that in 1927 he made an oral “gift” of one-half of his interest in the so-called trust to his sister, Mae Canelo Fowler. He gave no explanation as to how C. Kelly Canelo, Jr., Dolores Marie Canelo, and Mae Canelo Fowler became “beneficiaries” of the so-called trust in, or prior to, the year 1928. The obvious and only conclusion is that the number of alleged beneficiaries was increased in the fiduciary return for 1928 solely for tax reduction purposes. Moreover, it is significant that in the fiduciary returns for 1926, 1927, and 1928 the petitioner grossly understated the amount of profit realized from the sale of securities through his brokerage accounts. This fact lends further support to the conclusion that tax evasion motives caused petitioner to file the false fiduciary and individual returns.

Despite the fact that the fiduciary and individual returns for the years 1925, 1926, and 1927 were prepared by Adolph B. Canelo, Jr., and for the years 1928 and 1929, by a firm of accountants, the responsibility for filing the false returns rests squarely upon petitioner’s shoulders. D. C. Clarke, 22 B. T. A. 314; Grover C. Blumer, supra; Estate of E. A. Wickham, 22 B. T. A. 1393; affd., 65 Fed. (2d) 527; Harry Feldman, 34 B. T. A. 517. Furthermore, the fiduciary and individual returns filed by petitioner did not serve to put the Government on notice of the fact that there actually was no “Harry F. Canelo Trust.” James H. Persons, supra; I. J. Adelson, supra; Grover C. Blumer, supra; cf. Victor A. Dorsey, 33 B. T. A. 295; Rogers Recreation Co. v. Commissioner, 103 Fed. (2d) 780; Jemison v. Commissioner, 45 Fed. (2d) 4.

It is held that the entire amount of income realized from the operations in petitioner’s brokerage accounts during the taxable years was petitioner’s income and taxable to him; that the division of that income between petitioner and other members of the Canelo family on the basis of the so-called “Harry F. Canelo Trust” was merely a tax evasion device; that petitioner received all of the income realized by operation of the brokerage accounts; and that petitioner’s failure to report all of this income in his own returns was due to his intention to defraud the Government of taxes. Petitioner filed false and fraudulent returns for each of- the taxable years with intent to evade tax. James H. Persons, supra; I. J. Adelson, supra; Grover C. Blumer, supra; and see Estate of C. A. Wickham, supra. The respondent has sustained the burden of proof upon the fraud question. Eespondent correctly assessed 50 percent of the total deficiency in each year as additions to the deficiencies.

The next question is whether or not respondent has properly determined the amount of income from dividends and profits realized from the brokerage accounts, upon which petitioner is taxable. “While it is usually true that in order to show that a return is false and fraudulent with intent to evade tax, it is necessary to prove the. receipt of income not reported by the taxpayer in such return, but, once it is shown that the return is false and fraudulent, the burden of proving the respondent erred in determining the deficiency is on the petitioner. The issues are clearly separate. L. Schepp Co., 25 B. T. A. 419, 436.” John Kehoe, 34 B. T. A. 59, 70; affd., 309 U. S. 277. The above quotation states the rule as to burden of proof on the matter of the correctness of respondent’s determination of the amount of income to be taxed. However, under the Board’s Eules of Practice, Eule 32, the burden of proof is upon the respondent with respect to any new matter pleaded in his answer. Berkshire Cotton Manufacturing Co., 5 B. T. A. 1231. And so, upon the pleadings in this case, the rule as first stated above is applicable, except as to the allegations made by respondent in his amended answer in Docket No. 66150, as to the amounts of dividends and gains received by petitioner in 1927 and 1928. In his original determination, respondent added to the net income reported by petitioner for the year 1927 $21,308.91 in dividends and $5,279.25 in “other income”, and to the net income reported by petitioner for the year 1928 $23,597.83 in dividends and $120,634.68 in “other income.” In his amended answer, respondent has asserted increased deficiencies and penalties for the years 1927 and 1928, and has alleged that from the sale of securities in his brokerage accounts petitioner realized a profit of $86,549.42 in 1927 and a profit of $514,141.95 in 1928, and that on the securities held in his brokerage accounts petitioner received dividends of $23,-961.64 in 1927 and of $23,673.26 in 1928. These allegations have been denied by petitioner in his reply to the amended answer.

To satisfy his burden of proof, respondent introduced in evidence the brokers’ sheets relating to petitioner’s margin accounts with Anderson & Fox and E. A. Pierce & Co.; testimony of a special agent who had computed from the brokers’ sheets the amount of profit realized by petitioner in 1927 and 1928, and the amount of dividends received by petitioner in 1927 and 1928; and an analysis of the computations made by the special agent. In computing the amounts of profit realized by petitioner in 1927 and 1928 from the sale of securities through his margin accounts, the special agent applied the so-called “first in, first out” rule, as provided by article 39 of [Regulations 69 and article 58 of [Regulations 74, the pertinent provisions of which are set forth in the margin. Also, he applied the first in, first out rule as if all of the petitioner’s accounts with each brokerage firm constituted but one account with that firm.

The first in, first out rule is to be applied only when the identity of the lots sold can not be determined. See Helvering v. Rankin, 295 U. S. 123; Snyder v. Commissioner, 295 U. S. 134. In the Rankin case, the Supreme Court stated that the required identification of the lots sold was supplied “if the margin trader has, through his broker, designated the securities to be sold as those purchased on a particular date and at a particular price.” Moreover, it has been held that when a trader sells stocks which are deposited with several depositaries, the first in, first out rule is not to be applied as if all sales were made from a common location. Bancitaly Corporation, 34 B. T. A. 494, in which the Board stated at page 507: “The shares delivered from a particular depositary necessarily must have been out of the shares available at that depositary and can not, by any arbitrary application of the first in, first out rule be presumed to have been out of the shares available in another depositary • * *

On brief, petitioner makes a broad allegation that the special agent’s computations of the amount of profit realized by petitioner in 1927 and 1928 from sales of securities through his margin accounts are incorrect. However, petitioner points to no specific errors in the special agent’s computations. The argument advanced by petitioner is very general in scope and is not altogether clear. As we understand his argument, petitioner claims that the first in, first out rule was not applicable because certain instructions which he gave the brokers supplied the required identification of the securities sold. To support this claim petitioner relies upon his testimony to the effect that it was his general practice, in selling securities through his margin accounts, first, to give a general order of sale to the broker, and then, subsequently, to instruct the broker to credit the proceeds of the sale to a particular one of his accounts with that broker. Petitioner further claims that it was wrong for the special agent to apply the first in, first out rule as if all petitioner’s accounts with each brokerage firm constituted but one account with that firm.

We have made a careful examination of the brokers’ sheets relating to petitioner’s margin accounts and the analysis of the computations made by the special agent. We conclude that the special agent correctly applied the first in, first out rule.

There is no merit to the petitioner’s claim that the first in, first out rule is not applicable because the instructions which he gave to his brokers supplied the required identification of the securities sold. Those instructions, described above, did not constitute such a designation of the securities sold “as those purchased on a particular date and at a particular price.” See Helvering v. Rankin, supra.

Also, there is no merit to petitioner’s claim that it was wrong for the special agent to apply the first in, first out rule as if all of petitioner’s accounts with each brokerage firm constituted but one account with that firm. The record shows that although petitioner, in form, maintained eleven accounts with E. A. Pierce & Co., and three accounts with Anderson & Fox, in reality, he had but one margin account with each firm. Each firm computed petitioner’s margin requirements as if the several accounts with that-firm constituted but one single account. Petitioner himself treated the several accounts with each firm as if they constituted but one single account with that firm. The securities and credit balances in the several accounts with each firm were transferred frequently from one account to another. A typical example of the manner in which petitioner transferred securities from one account to another is provided by his purchases and sales of Union Oil Associates stock through his accounts with E. A. Pierce & Co. From March 28 to September 29, 1926, petitioner traded in that stock in his Harry F. Canelo #2 account. On or about September 29, 1926, he transferred his holdings of that stock from Ms Harry F. Canelo #2 account to Ms Local Securities #2 account. From that time until June 30, 1928, petitioner traded in that stock in his Local Securities #2 account. On June 30, 1928, he transferred Ms holdings of that stock to his Local Securities account, and from that time until the end of the year petitioner traded in that stock in his Local Securities account. Thus petitioner’s trading operations in that stock in his Local Securities #2 account were merely a continuation of his trading operations in his Harry F. Canelo #2 account, and, in turn, his trading operations in his Local Securities account were merely a continuation of his trading operations in his Local Securities #2 account. In the light of these facts it was proper for the special agent, in his application of the first in, first out rule, to treat all of petitioner’s accounts with each brokerage firm as if they constituted but one account with that firm. Cf. Walter B. Green, Administrator, 35 B. T. A. 812.

The record also shows that in his application of the first in, first out rule, the special agent charged at least one lot of Bank of Italy stock sold in 1928 through petitioner’s account with E. A. Pierce & Co. against lots of Bank of Italy stock purchased through petitioner’s account with Anderson & Fox. This application of the first in, first out rule does not violate the separate deposit theory of the Bancitaly Corporation case. Petitioner closed his Anderson & Fox accounts in April of 1927 and in 1928, when the particular sales of Bank of Italy stock were made, petitioner’s holdings of that stock were deposited in but a single depositary. Moreover, the brokers’ sheets show that at the time when petitioner’s account with Anderson & Fox was closed petitioner transferred Ms holdings of Bank of Italy stock from that account into his Harry F. Canelo #3 account with E. A. Pierce & Co. Thus shares of Bank of Italy stock purchased in petitioner’s account with Anderson & Fox actually became available in petitioner’s account with E. A. Pierce & Co. prior to 1928.

Kespondent has sustained his burden of proving the increased deficiencies and penalties for 1927 and 1928. The evidence introduced by respondent shows, and we have found as a fact, that petitioner received dividends of $23,961.64 in 1927 and dividends of $23,262.26 in 1928 on the securities held in his brokerage accounts; that from the sale of securities through his brokerage accounts petitioner realized a profit of $86,809.77 in 1927 and’ a profit of $514,-141.95 in 1928; and that, of the amount of profit realized by the petitioner in 1928 from the sale of securities through his brokerage accounts, $164,531.94 was realized from the sale of securities held by petitioner for more than two years.

As for the amounts of income which respondent has determined were realized 'by petitioner in the years 1925, 1926, and 1929 and the amounts of dividends on stocks which respondent determined were received by petitioner in 1927 and 1928, petitioner has not introduced evidence to overcome the prima facie correctness thereof. Respondent’s determinations for those years are sustained.

2. Respondent added $4,608.70 to the net income reported by petitioner in his return for 1925, on the ground that petitioner received additional dividends in that amount in 1925 on his stock in the Auzerais Estate Co. Petitioner contends that the amount in question was a distribution in liquidation, and constituted a nontaxable return of capital.

Even if it were conceded that the amount in question was a distribution in liquidation, the amount in question was taxable income to the extent that it represented a gain to petitioner. Sec. 201 (c), Revenue Act of 1924; see Fred T. Wood, 27 B. T. A. 162. There is no evidence to show the basis of the stock for purposes of determining gain or loss. Petitioner has introduced no evidence to show either the time when he acquired the stock or the basis of the stock in the hands of the person who gave him the stock (sec. 204 (a) (2), Revenue Act of 1924), or the fair market value of the stock at the time of the gift (sec. 204 (a) (4), Revenue Act of 1924). Petitioner has failed to overcome the prima facie presumption of correctness of the respondent’s determination. It is held that respondent properly added the amount in question to petitioner’s income in 1925. Frank C. Hughson, 10 B. T. A. 242. Cf. Jemison v. Commissioner, supra.

3. Petitioner took a deduction in the amount of $3,671 in his return for 1925, and made the following statement in explanation: “Note Y. Hayes former partner Hayes & Canelo — which firm was dissolved — Paid off same.” Respondent disallowed the deduction.

Petitioner has the burden of showing that the amount in question was deductible under the provisions of one of the subdivisions of section 214 of the Revenue Act of 1924. The record shows that petitioner paid the amount in question to discharge an obligation of the firm of Hayes & Canelo, which had been dissolved in 1923 and in which he had been a copartner. As a partner in the firm of Hayes & Canelo, petitioner was liable, individually and personally, for the amount of the firm’s obligation, and the dissolution of the partnership did not terminate his liability. Mechem, Elements of Partnership, 2d ed. 1920, secs. 313, 400, 402. Thus, in effect, petitioner paid the amount in question to discharge an obligation of his own. Petitioner has not established .his right to take a deduction merely by showing that he paid the amount in question to discharge his own obligation. J. H. Hulme, 9 B. T. A. 31. It is held that respondent properly disallowed the deduction.

4. Petitioner, in his petition to the Board, claims a loss of $1,575 on a “trade” of an automobile, stating in the petition that:

* * * his original car was wrecked and was then repaired and sold; and as part of the consideration he took an automobile in trade and that he then had to sell the automobile at a tremendous loss. * * * that this loss of value in the second automobile, taken in trade for the first, is a proper deduction.

In petitioner’s brief this issue is not argued. The question is confused, and the evidence is very scant. The loss claimed on the return was disallowed by the respondent. The burden of proof on the petitioner was to introduce proof of the loss and of the amount of the claimed loss. This involves proof, at least, of the adjusted basis to petitioner of the automobile on which loss is claimed and proof of the amount for which it was sold. The only evidence is petitioner’s testimony to the effect that he borrowed a car from his wife, that it was damaged in a collision, that petitioner spent $750 for repairs, and that he, thereafter, sold the car. No evidence is presented about the alleged trade of an automobile, stated in the petition to have been made. If such trade was made, evidence should have been introduced. Also, even if petitioner expended $750 for repairs to a car which he sold later, that expenditure conceivably could have increased the cost basis, for determining a loss, and the sum obtained upon sale may or may not have resulted in a loss in the amount claimed, namely, $1,575. As the issue is presented, petitioner is not claiming a deduction for a loss of $750 as a loss sustained from a casualty, (sec. 214 (a) (6), Bevenue Act of 1926), but he is claiming a loss either from a transaction entered into for profit or from a loss incurred in his business. In either case, petitioner has failed to prove that he sustained a loss of $1,575. Respondent, therefore, is sustained in his disallowance of the loss.

5. Respondent included in petitioner’s income for 1929 $1,564.75 as dividends received by petitioner in 1929 directly, and not through his brokerage accounts with E. A. Pierce & Co. Petitioner has introduced no evidence to overcome the prima facie presumption of correctness of respondent’s determination. Respondent’s determination is sustained.

6. Respondent added $90 to the net income reported by petitioner in his return for 1929, as interest on tax-free covenant bonds which petitioner failed to include in bis return. Petitioner introduced no evidence in support of bis assignment of error as to this determination. Under the provisions of section 144 (d) of the Revenue Act of 1928, respondent correctly added the amount in question to the net income reported by petitioner in his return for 1929. See Margaret E. B. Fleming, 36 B. T. A. 773, 778.

7. In his returns for the years 1925,1926, and 1929, petitioner took deductions of $3,749, $4,719.18, and $4,425, respectively, for expenditures in the operation of several automobiles used by petitioner in carrying on his business of selling automobiles, and depreciation on one automobile used in carrying on his business. Kespondent disallowed the deductions, with the exception of $3,000 for 1929, on the ground that the deductions represented personal expenses and had not been substantiated.

We have found as a fact, that petitioner expended $3,694 in 1925, $2,474 in 1926, and $3,400 in 1929 in the operation of automobiles, and that the automobiles in question were used by petitioner 70 percent of the time in carrying on his business. It is held that petitioner is entitled to deductions for 70 percent of the above amounts in the respective years, under the provisions of section 214 (a) (1) of the Revenue Acts of 1924 and 1926, and section 23 (a) of the Revenue Act of 1928. J. R. James, 2 B.T.A. 1071. Also, we have found as a fact, that in each of the years 1925,1926, and 1929 petitioner was the owner of a new Lincoln automobile, which he had purchased at the beginning of the year; that the automobiles owned by petitioner in 1925 and in 1929 each had a wholesale cost of $4,100; and that the automobile owned by petitioner in 1926 had a wholesale cost of $4,700; that the automobiles in question were used 70 percent of the time in carrying on petitioner’s business; that the probable, useful life of each of the automobiles in question was four years; and that a reasonable rate of depreciation was 25 percent. It is held that petitioner is entitled to deductions for 70 percent of the amount of the annual depreciation on the automobiles owned by petitioner in the respective years under the provisions of section 214 (a) (8) of the Eevenue Acts of 1924 and 1926 and section 23 (k) of the Eevenue Act of 1928. J. R. James, supra.

8. In his returns for the years 1925, 1926, and 1929 petitioner took deductions for contributions of $1,500, $1,350, and $3,310, respectively. Eespondent disallowed the deductions, with the exception of $250 for 1929, as “not substantiated.”

The facts show that all the donees of the contributions were organized and operated exclusively for religious, charitable, or educational purposes, with the exception of “C. W. C.”, about which the record is silent; and that, exclusive of a contribution of $125 to “C. W. C.”, petitioner’s contributions to charitable organizations amounted to $1,800 in 1925, $1,225 in 1926, and $3,810 in 1929. It is held that deductions are allowable in the above amounts in the respective years under section 214 (a) (10) of the Revenue Acts of 1924 and 1926, and section 23 (n) of the Revenue Act of 1928. Adam Ortseifen, 14 B. T. A. 1403.

Reviewed by the Board.

Decision will be entered under Urde 50.

       Regulations 69, art. 39; Regulations 74, art. 58.—

        Sale of stock and rights. — When shares of stock in a corporation are sold from lots purchased at different dates and at different prices and the identity of the lots can not be determined, the stock sold shall be charged against the earliest purchases of such stock. The excess of the amount realized on the sale over the cost or other basis of the stock will constitute gain.


source: Caselaw Access Project

author: Black:

license: Public Domain

text:
    Andrew E. Rossi, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96470.
    Promulgated April 4, 1940.

      Moultrie Hitt, Esq., for the petitioner.

      Frank B. Sehlosser, Esq., for the respondent-
   OPINION.

Black:

Subsequent to the holding by the Supreme Court of the United States that the processing taxes imposed by the Agricultural Adjustment Act were unconstitutional, Congress in the Revenue Act of 1936 enacted “Title III, Tax on Unjust Enrichment.” Provisions of that act applicable to the instant case are printed in the margin.

Petitioner contests respondent’s determination on the ground that he did not receive any of the proceeds of the draft from the Pillsbury Flour Co., either directly or indirectly. The uncontradicted evidence is that the check was received in 1937 by W. C. Houston, who in 1935 had been made the assignee of the partnership assets belonging to Dixie Mills Distributing Co. for the benefit of creditors. Houston cashed the check and spent the money for his own personal use. Houston, among other things, testified at the hearing:

The check was deposited in the bank and held some little time, and the fact that we had already made a complete settlement with the creditors on the assets, I did not know what disposition to make of the check; meantime I was out of employment and naturally — the check had been there for sometime — and I used it for my own personal use. None of it was ever paid to Mr. Rossi or his creditors.

The respondent does not contend that petitioner actually received any of the money but he does contend that Houston was petitioner’s agent and, as such, received the money for and on behalf of petitioner. Eespondent contends that, under the assignment for the benefit of creditors executed by the Dixie Mills Distributing Co., Houston was authorized to take possession of all assets belonging to the partnership and to dispose of them for the benefit of the. creditors na.Tnp.rl therein; that a reimbursement for taxes previously paid by the partnership is an asset which under the assignment for the benefit of creditors, should have been paid either to petitioner or to the creditors for the account of petitioner’s firm; that the mere fact that Houston appropriated the money to hi's own use is immaterial; that Houston is still liable to petitioner either for the return of the money or the payment of it to the creditors in accordance with the terms of the agreement; and that petitioner has not proved that Houston would not, or could not, make restitution if requested by petitioner or if ordered to do so by some court of law.

In the first place, before discussing the respective contentions of the parties, it seems clear that petitioner would not be liable for a greater unjust enrichment tax than a tax based on one-half of the check for $778.15. The Commissioner seems to have entirely disregarded the fact that petitioner had an equal partner in the business, one Meyer Zuber. Zuber was entitled to receive one-half the partnership assets and we know of no authority which would sustain a tax against petitioner based on Zuber’s one-half of partnership assets. To that extent at least, the Commissioner’s determination can not be sustained. One person can not be taxed on income belonging to another. Hoeper v. Tax Commission of Wisconsin, 284 U. S. 206.

Should petitioner be taxed on the one-half of the draft which belonged to him, although it is clear he never received any of the proceeds nor were they used in any way for his benefit?

As has already been stated, the Commissioner’s contention, in short, is that Houston was the agent of petitioner and that the receipt by an agent of income for his principal is the same for tax purposes as if the principal had received the income direct. In support of this proposition, respondent cites Frank E. Best, 26 B. T. A. 1070. Cf. Margaret Wilson Baker, 30 B. T. A. 188; affd., 81 Fed. (2d) 741.

It may be stated as a general rule that receipt of income by an agent is equivalent to receipt by the principal. The theory is that the principal is in constructive receipt of income. This rule applies, even though the taxpayer is on a cash basis. See Paul and Mertens, vol. 1, sec. 9.10. So, if at the time of the receipt by Houston of the reimbursement draft in question he was the agent of the partnership to receive and collect the draft, then we think it is clear that petitioner is taxable on one-half of the amount of the draft, even though it is conceded that he never actually received any of the proceeds.

We do not think, however, that Houston was the agent of the partnership at the time he received the check, cashed it, and spent the money for his own personal use. A reading of the assignment by the partnership to Houston will show that the partnership conveyed all of its then known assets to Houston to be sold and converted into cash, and, after the payment of certain small preferred claims, the balance was to be paid pro rata to two general creditors, with the requirement that “acceptance by the above named creditors under this agreement shall constitute a release of all our indebtedness to them.”

Houston testified at the hearing that sometime in 1936 final settlement with the creditors was completed under the terms of the agreement. Thus it seems clear that the agency which Houston had undertaken to administer was entirely at' an end sometime in 1936. There were no longer any creditors of the partnership. Their claims had been satisfied by the payments which they had accepted under the terms of the assignment. So far as was then known, there were no more assets to administer. It is a recognized principle of law that an agency terminates after the purpose for which it was created has been fulfilled. See 2 C. J. S., Agency, sec. 72.

In 1937, when Houston received the draft for $778.15 from Pillsbury Flour Co. payable to Dixie Mills Distributing Co., he had no right to cash it. There were no further creditors to pay. He should have immediately turned it over to the two former partners or, perhaps more properly, he should have returned it to the Pillsbury Flour Co. The partnership of Dixie Mills Distributing Co. was defunct. It had been completely liquidated. Houston clearly had no right to cash the draft and use the money for his own personal needs, and, in doing so, he was not acting as agent for the partners and it would appear that the income was taxable to him rather than to petitioner. Cf. National City Bank v. Helvering, 98 Fed. (2d) 93.

Under such circumstances, in our judgment, petitioner is not to be taxed with any of the income, because he did not receive it. It may well be that petitioner has a claim against Houston for one-half of the amount of the draft and that if pressed hard enough this claim can be collected. He may also have an alternative claim against the bank for allowing Houston to cash the check under the circumstances herein narrated, but if these things be true, he can only be taxed on this income, when and if he actually receives it, since he is on the cash basis.

Cf. North American Oil Consolidated v. Burnet, 286 U. S. 417, in which the Supreme Court, among other things, said:

The net profits were not taxable to tbe company as income of 1916. For the company was not required in 1916 to report as income an amount which it might never receive. * * * [Italics ours.]

Only on the assumption that Houston was acting as petitioner’s agent when he received and cashed the draft could it be taxed to petitioner on the theory of constructive receipt. That theory, for reasons we have already stated, we reject.

Decision will be entered for petitioner.

       SEC. 501. TAX ON NET INCOME FROM CERTAIN SOÜRCES.
      (a) The following taxes shall be levied, collected, and paid for each taxable year (in addition to any other tax on net income), upon the net income of every person which arises from the sources specified below:
      *******
      (2) A tax equal to 80 percentum of the net income from reimbursement received by such person from his vendors of amounts representing Federal excise-tax burdens included in prices paid by such person to such vendors, to the extent that such net income does not exceed the amount of such Federal excise-tax burden which such person in turn shifted to his vendees.
      *******
      (1) The taxes imposed by subsection (a) shall be imposed on the net income from the sources specified therein, regardless of any loss arising from the other transactions of the taxpayer, and regardless of whether the taxpayer had a taxable net income (under the income-tax provisions of the applicable Revenue Act) for the taxable year as a whole; except that if such application of the tax imposed by subsection (a) is held invalid, the tax under subsection (a) shall apply to that portion of the taxpayer’s entire net income for the taxable year which is attributable to the net income from the sources specified in such subsection.


author: Leech :

text:
    Estate of John S. Conant, Deceased, William Shubael Conant, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96851.
    Promulgated April 4, 1940.

      Henry L. lyster, Esq., Raymond H. Berry, Esq.,- Ralph W. Bar-bier, Esq., Arthur L. Evely, Esq., and James A. Gosgrove, Esq., for tbe petitioner.

      P. A. Sebastian, Esq., for tbe respondent.
   OPINION.

Leech :

This is a proceeding to redetermine a deficiency in estate tax in tbe amount of $37,197.24. So much of tbe deficiency as is in controversy results from respondent’s determination that the corpus of a certain trust, created by tbe decedent, is includable in bis gross estate under section 302 (c) of tbe Revenue Act of 1926 as a transfer to take effect at or after death.

The facts were stipulated and are so found.

Petitioner is the estate of John S. Conant, deceased (hereinafter referred to as “tbe decedent”), who died on June 18,1936, a resident of Michigan.

Oh September 18, 1923, tbe decedent transferred certain securities in trust to the Detroit Trust Co. as trustee. The material provisions of the trust agreement follow:

Whereas first party * * * desires * * * to create a trust in the nature of a testamentary trust, irrevocable by him, for his use and benefit during his lifetime and to be terminated and disposed of at his death as hereinafter stated.
Therefore Witnesseth
*$*$*#*
During the life of donor the net income of said trust fund shall be paid to him or on his written order. Upon the death of donor the trust hereby created shall terminate and the principal of said trust fund as then constituted and any income not remitted, and any accrued income to the date of donor’s death, whether collected or not, shall be paid, transferred, assigned and set over unto William S. Conant, son of donor, should he then be living. In the event, however, of the death of William S. Conant prior to the death of donor, then, in that event, upon the death of donor the principal of said trust fund as then constituted shall be transferred, assigned and set over unto the Presiding Bishop and Council of the Protestant Episcopal Church of the United States of America, as a memorial to be known as the “John S. and Mary M. Conant Fund,” in Trust, in perpetuity, * * *.
Donor hereby expressly reserves unto himself, during his lifetime, the right to change the ultimate beneficiaries of the principal of this trust, hereinabove designated, who would take hereunder in the event of the death of William S. Conant prior to the death of donor as above provided.
It is understood and agreed that the beneficiaries of tbe principal of this trust, whosoever they may be, shall acquire hereunder or become vested with no estate, right, title or interest in and to any of the property of this trust during the life of first party.

William S. Conant survived the decedent and received all the property held in the above trust upon its termination. Respondent included in decedent’s gross estate, for estate tax purposes, the value of the trust property as of the date of decedent’s death, under the Revenue Act of 1926', section 302 (c).

It is stipulated that the decedent did not execute the trust agreement or transfer any property or interest in property thereunder in contemplation of death.

All the issues are stipulated except the question of whether the corpus of the trust created by the decedent on September 18, 1923, is includable in his gross estate, under section 302 (c) of the Revenue Act of 1926, as it existed prior to its amendment by section 803 (a) of the Revenue Act of 1932. Hassett v. Welch, 303 U. S. 303. The pertinent part of this section provides that the value of the gross estate of the decedent shall be determined by including therein the value at the time of decedent’s death of all his property “To the extent of any interest therein of which the decedent has * * * made a transfer, by trust or otherwise, * * * intended to take effect in possession or enjoyment at or after his death * *

The trust here was inter vivos* It was irrevocable and provided that the corpus of the trust created by him should go, upon his death, to his son, but that if the son should die first, it should go to the Protestant Episcopal Church. The decedent reserved, however, an unlimited power over the disposition of the corpus in the event that the son predeceased him.

It may be that, prior to the recent decision of the Supreme Court in Helvering v. Hallock, 309 U. S. 106, it would have been correct to hold that the decedent parted with all taxable interest in the corpus of the trust upon its creation, and that his death was not the generating source of new rights .in the living. See Helvering v. St. Louis Union Trust Co., 296 U. S. 39; Becker v. St. Louis Union Trust Co., 296 U. S. 48.

The Rallock case, however, overruled those cases. It brings into the gross estate of the settlor at his death, under section 302 (c), sufra, “that which the settlor gave contingently upon it.” See also Klein v. United States, 283 U. S. 231.

Here, the gift of the remainder, in the event the son predeceased the decedent, in effect, was to the Protestant Episcopal Church or such other beneficiary as decedent thereafter designated. If the contingency of such death had occurred, the decedent could have defeated the interest of the church in favor of any one, including his own estate.

In this case, no more than in Klein v. United States, supra; Helvering v. St. Louis Union Trust Co., supra; or Becker v. St. Louis Union Trust Co., supra, “did the dominion over property which finally came to the beneficiary fall by virtue of the grantor’s will, except by his provision that his own death should establish such final and complete dominion.” Helvering v. Hallock, supra. In fact the decedent here made it emphatically clear that this was his definite intention. The preamble of the trust characterizes it as “in the nature of a testamentary trust.” A provision of the body of the trust proclaims that “the beneficiaries of the principal of this trust, whosoever they may be, shall acquire hereunder or become vested with no estate, right, title or interest in and to any of the property of this trust during the life of [the decedent].” It would be difficult to conceive of language more apt in expressing the idea that the gift here of the remainder was contingent upon the death of the decedent — that its transfer was intended to take effect in possession or enjoyment at or after his death, and that decedent’s death, and only decedent’s death, should be the generating source of rights in the living. The inclusion of the corpus of this trust in decedent’s gross estate for estate tax purposes under section 302 (c) of the Revenue Act of 1926, as unamended, is approved. In view of the stipulations affecting other issues,

Decision will he entered u/nder Bule 50.


author: Disney:

text:
    Arthur F. Morton, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91494.
    Promulgated April 4, 1940.

      Fred L. Bosenhloom, Esq., and Theodore B. Benson, Esq., for the petitioner.

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

Disney:

This proceeding involves income tax for the calendar year 1935. A deficiency of $195.56 was determined, all of which is in issue. A portion of the facts was stipulated and we find the facts as stipulated. Additional evidence was adduced by testimony. The stipulated facts may be epitomized and the remaining facts stated as follows:

The petitioner is and for 17 years has continuously been a resident of Pennsylvania. He is a resident of Philadelphia and filed his Federal income tax return for the year 1935 with the collector at that city. In 1928 he created a trust the income of which was, by the terms of the declaration of trust, payable to his mother, Julia A. Nixon, for her life, thereafter to the settlor for life, and upon the death of both, the principal and all unpaid income was to be paid to the settlor’s estate. The declaration further provided that the trust was revocable, by a written instrument, during the life of Julia A. Nixon by her and petitioner jointly, and by petitioner alone after her death. The petitioner was not trustee. During 1935 Julia A. Nixon received the income from the trust and received no other income. The petitioner did not report as his income the amount received by her from the trust. No return for 1935 was filed by or on behalf of Julia A. Nixon.

Prior to July 2, 1935, the trustee had permitted Julia A. Nixon to overdraw the income account by $386.16. On that date a trustee’s commission of $160.24 was due. On July 16,1935, the petitioner paid the two amounts, a total of $546.40, to the trustee and the deficit was eliminated. Exclusive of the $546.40, the trust income for 1935 was $2,222.02, the expenses of the trust were $161.02, and the cash payments by the trustee to Julia A. Nixon were $3,000, which was used in 1935 by Julia A. Nixon for her support and maintenance. Exclusive of the $3,000, the petitioner was the sole support of Julia A. Nixon during 1935.

Julia A. Nixon is and has been for about 35 years a resident of New Jersey, residing at the time of hearing at Atlantic City. Petitioner is her only child. In 1935 she was 58 years of age, very active, and in very good health, as she had been for some time prior to that date. She was then and prior thereto and is now a very capable woman, able to take care of herself. She did not own her own home in 1935 but rented, though she owned her furniture and household fixtures and facilities. She had in 1935 no means of support other than the income of the trust and the contributions of 'the petitioner. The petitioner’s father died about 1909, when the petitioner was about twelve years of age. His mother worked hard to educate and support him. She took in roomers, boarded people, and did summer jobs. She was well educated, capable of taking different types of positions. She never received a regular salary. While the petitioner was in the Army she drew an allotment of his pay, as a dependent. In 1919 she married John Nixon, a postman in the Government service, who died in 1934. His income was sufficient for them to live comfortably. In setting np the trust in 1928 the petitioner desired to give his mother something more than a mere existence and to give her a few extra luxuries. At that time she was living with her husband. She has never paid any part of the income of the trust to the petitioner and the trust instrument constitutes the only agreement between them. Petitioner is a certified public accountant, doing income tax work, but not specializing therein. He never discussed the taxability of the income here involved with his mother. He presumed that she had filed an income tax return for the taxable year, following his usual practice of preparing a return for her. She did not so file, though he prepared and filed a return for her for 1934 and 1936.

The respondent determined that $2,012.23 income from the trust was taxable to the petitioner, resulting in the deficiency of $195.56. Reference was made in the deficiency notice to article 166-1 (b) of Regulations 86, and the provision of the trust as to revocability by joint action of settlor and beneficiary. Upon brief respondent seems to abandon any dependence upon section 166 of the Revenue Act of 1934. At any rate, it is obvious that the instrument was revocable by the settlor only in conjunction with his mother and that she as beneficiary had the substantial adverse interest referred to in the statute. We therefore hold that the trust income was not taxable to the petitioner because of any provision of section 166.

By brief the respondent quotes section 167 (a) (2), Revenue Act of 1934, and Regulations 86, article 167-(1) (b), corresponding to the statute, and takes the position that the income of the trust was in fact applied to the satisfaction of a legal obligation of the petitioner to support his mother. He quotes section 1955, Purdon’s Pennsylvania Statutes Annotated, on the subject of the duty of a child to support a parent, and relies upon the principles announced in Douglas v. Willcuts, 296 U. S. 1. On the contrary, the petitioner relies upon the conclusion expressed in Jay C. Hormel, 39 B. T. A. 244, that if the trust does not require use of the trust income for discharge of a legal obligation of the trustor, the income is not taxable to him, and argues that in any event he had no legal obligation to support his mother, under the circumstances herein involved.

After a review of the evidence, we are of the opinion that the petitioner’s position as last stated must be sustained, and that there is no occasion to apply Jay C. Hormel, supra. That case presupposes a legal obligation to support. The obligation must of course be legal and not merely moral. At common law no duty of support of a’parent was incumbent upon a child, 46 C. J. 1279, and we must therefore find it in statute. The mother was at all times a resident of New Jersey. The statutes requiring kindred to support each other have no extra territorial force and will not be enforced by the courts of other jurisdictions. De Brimont v. Penniman, 7 Fed. Cas. No. 3715; 10 Blatchf. 436. The law of Pennsylvania alone can be of effect here. The law of Pennsylvania has been examined by us with some care. It provides for compulsory support by an adult child of parents who are “not able to work or of sufficient ability to maintain themselves.” Section 17037, Pa. St., 1920 Compilation. Such a condition in petitioner’s mother is negatived by the record here, which shows her to be or to have been in the taxable year active, in good health, capable, and well educated. We think this evidence is amply sufficient to overcome any presumption of correctness of the deficiency, if any arises in this respect, where the deficiency notice sets forth only reliance upon section 166 and the idea of revocable trust.

Moreover, it is apparent from the various statutes of Pennsylvania upon the subject that the Pennsylvania courts would not enforce an application for support from a resident of New Jersey. The petition or complaint must allege that the person for whose support defendant is sought to be charged is a poor person, chargeable or likely to become chargeable to the town or poor district. George v. George, 3 Pa. D. & C. 477. Obviously the petitioner’s mother, in New Jersey, is not likely to become such charge. Again, section 17033, Pa. St., 1920 Compilation, provides as follows:

* * * the children * * * of every poor, old * * * or other poor person within said city, district and township, not able to work, being of sufficient ability, shall * * * relieve and maintain every such poor person as the mayor’s court for the city, or the court of quarter sessions for the county where such persons reside, shall order and direct, * * *. [Italics supplied.]

Under the above language, the mayor’s court or court of quarter sessions of any county other than the residence of the poor person would have no jurisdiction. There would be no such jurisdiction, as to petitioner’s mother, in any Pennsylvania court.

Section 17034 also emphasizes the necessity for residence of the person to be supported, by providing for support at such rate as directed by the court of quarter sessions of the county where such poor person resides.

We understand that the municipal court in Philadelphia, where the petitioner resides, exercises, so far as here involved, the functions of the court of quarter sessions above designated in the statute. Section 15714 as to the jurisdiction of the municipal court confers such jurisdiction over “proceedings where any child of full age has neglected or shall neglect to maintain his or her parents, not able to work or of sufficient ability to maintain themselves” — the same language as in section 17033, supra. Finally, sections 17057 and 17058 provide a penalty for bringing any poor person “from any place without this commonwealth to any place within it, where such person was not last legally settled, and there leave, or attempt to leave such person”, and provides further that the guilty one “shall be obliged to convey such poor person out of the commonwealth, or support him at his own expense.” From all of these provisions, we conclude and hold that there is no duty, under Pennsylvania law, upon the petitioner to support his mother.

Decision of no deficiency will l>e entered.


author: TueneR :

text:
    Elsie S. Eckstein, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88763.
    Promulgated April 5, 1940.

      Becher W. Hungerford, Esq., for the petitioner.

      A. B. Peterson, Esq., for the respondent.
   OPINION.

TueneR :

It is true that the books of account of the two buildings were kept on the accrual basis and the petitioner reported her income therefrom by the accrual method, while her individual books of account were kept and her other income reported by the cash method, but there has been no determination and there is no issue here to the effect that the petitioner’s method of importing income, if properly followed, will not correctly reflect her income. In this connection, see Joseph Stern, 14 B. T. A. 838, and Cornelia V. Cecil, 37 B. T. A. 904; affirmed on this point, 100 Fed. (2d) 896. Our first question accordingly is whether on the facts in this case the difference between the amount of property taxes accrued and deducted with respect to the said buildings for the year 1932 and the correct amount of such taxes has been properly included in petitioner’s income for the year 1934, when the said taxes for 1932 were finally determined and paid. The petitioner concedes that the deduction by her for 1932 as real property taxes for that year exceeded the correct amount of such taxes by $3,733.43, the amount inhere in controversy, but contends that the error shoyld be corrected by '!adjusting her 1932 income instead of her 1934 income, as the respondent j has done.

Where over a period of years a taxpayer, keeping its books on the accrual basis, deducts and is allowed in its income tax returns for such years taxes or customs duties currently accrued and paid and in a later year it is determined that by reason of overvaluations, or the application of excessive rates under valid laws, the amounts theretofore paid were excessive and a portion thereof is refunded and where it further appears that the income tax returns for the years in respect of which the deductions were taken and allowed are not then open to adjustment, the amount refunded is to be treated as taxable income in the year in which the refund is made. Houbigant, Inc., 31 B. T. A. 954; affd., 80 Fed. (2d) 1012; certiorari denied, 298 U. S. 669; Victoria Paper Mills Co., 32 B. T. A. 666; affd., 83 Fed. (2d) 1022; Central United National Bank, 33 B. T. A. 588; affd., 99 Fed. (2d) 568; Helvering v. Jane Holding Corporation, 109 Fed. (2d) 933. In Charles W. Nash, 34 B. T. A. 675; affd., 88 Fed. (2d) 477; certiorari denied, 301 U. S. 700; Chevy Chase Land Co., 34 B. T. A. 150; and Dixie Margarine Co., 38 B. T. A. 471, like treatment was accorded refunds resulting from the payment of taxes under unconstitutional statutes or regulations. Cf Estate of William H. Block, 39 B. T. A. 338; affd., 111 Fed. (2d) 60, where a refund resulting from the payment of additional tax pursuant to a retroactive taxing statute was held to be income for the year in which received.

While in the instant case the petitioner did not actually pay the real property taxes for 1932 and secure a refund in the taxable year as in Houbigant, Inc., and Victoria Paper Mills Co. cited above, the actual payment of the taxes is of no moment. In those cases, as in the instant case, the books of account were kept and income reported by the accrual method and the right to the deduction claimed rested in each instance upon the actual accrual on the books of account of the amount of such taxes then considered to be the amount properly accruable, and in each case the correct amount of such taxes was determined and the previous accrual was adjusted in the year before us. On authority of the cases cited, the respondent’s treatment of the real property taxes for 1932 is sustained.

In the petition there is also assigned as error the respondent’s dis-allowance of $1,570.22 representing the excess of the deductions taken as real property taxes for 1934 over the amount actually paid for such year in 1935 and 1936. The petitioner not only has made no argument nor cited any authorities to support the allegation of error, but, to the contrary, on brief concedes the correctness of the respondent’s action. The only apparent purpose for presenting this issue was to use it as a basis for an argument that the respondent’s treatment of the excess deduction taken for 1932 is inconsistent with his treatment of the excess deduction claimed for 1934. In any event, however, we have consistently held that where in a given year a taxpayer takes a deduction which, prior to the final determination of his income tax liability for such year, is ascertained to be excessive only the correct amount will be allowed in the final determination of his income tax liability. Inland Products Co., 10 B. T. A. 235; affd., 31 Fed. (2d) 867; Mary W. Leach, 16 B. T. A. 781; affd., 50 Fed. (2d) 371; Joseph V. Horn, 23 B. T. A. 1131; J. B. Jemison, 18 B. T. A. 399; Beacon Coal Co., 9 B. T. A. 280; Producers Fuel Co., 1 B. T. A. 202.

Respecting the argument as to inconsistency in the respondent’s method of treatment of the excess deductions for the two years, it is to be observed that the situation in which the petitioner now finds herself appears to have been one entirely of her own creation. After the receipt in 1934 by the petitioner of the first bills for the 1932 taxes assessed on the buildings, and about the middle of April 1934, the respondent made an investigation of the petitioner’s income tax liability for 1932, and, as a result, allowed the petitioner deductions for 1932 taxes on the buildings computed on the basis of the bills for such taxes and not on the basis of the accruals made in 1932. The record shows that at the time the respondent made the investigation and the foregoing allowances for taxes there was pending before the Board of Appeals of Cook County a proceeding wherein the petitioner sought a reduction of the amount of the liability shown in the bills. The record fails to show, however, that the petitioner informed the respondent of that action. Furthermore it also fails to show that after securing in July 1934 a reduction of such liability the petitioner communicated that fact to the respondent. Apparently she preferred to remain silent and retain the benefit obtained from a determination of her 1932 income tax liability on the basis of the larger deductions and leave the correction of the matter to the respondent if and when he discovered what had transpired. Timely action by the petitioner would have avoided the controversy as to 1932 real property taxes.

The petitioner contends that the respondent erred in disallowing as a deduction from income for 1934 the amount of $430.70 as sales taxes imposed under the Retailers Occupation Tax Act of the State of Illinois in connection with purchases made by her during that year. The respondent, relying on the holding in I. T. 2783, C. B. XIII-1, p. 54, that the tax imposed under the Retailers Occupation Tax Act of Illinois is imposed on the person who sells tangible personal property and not on the one who purchases it, contends that the tax is deductible by the seller for Federal income tax purposes and that the petitioner is not entitled to the deduction taken by her for such tax. The petitioner concedes that by the terms of the act the tax levied thereunder is “imposed upon persons engaged in the business of selling tangible personal property at retail”, but urges that she is entitled to the deduction for the reason that under a common practice in Illinois in which the consumer seems to have acquiesced, the tax is, in fact, imposed on the consumer because the retailer passes it on to him, not as an element of cost, but as a tax.

Federal taxes imposed on vendors in connection with the sales of merchandise are not deductible from income by the purchasers despite the fact that the purchasers paid to the vendor at the time of sales the amounts of the taxes resulting from the sales. A. Eisenberg, 11 B. T. A. 574; George M. Cohan, 11 B. T. A. 743; reversed on another point, 39 Fed. (2d) 540; George L. Shearer, 18 B. T. A. 465; affirmed on this point, 48 Fed. (2d) 552; M. Rea Gano, 19 B. T. A. 518. Since the taxes here in controversy were imposed on the vendors from whom the petitioner made purchases and not on the petitioner, we think the foregoing rule is applicable and accordingly sustain the respondent’s contention.

Reviewed by the Board.

Decision will be entered under Rule 50.