author: MoRRis:

text:
    Adrian C. Humphreys, Petitioner, v. Commissioner of Internal Revenue, Respondent. W. Jule Day, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 53324, 56386, 64301, 64302.
    Promulgated February 11, 1936.

      Newton E. Fox, Esq., for the petitioner.

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

MoRRis:

The sole remaining question pertains to whether or not the alleged distributive shares of the petitioners’ wives in the earnings of the copartnership of Humphreys & Day, of which, it is contended, they were members, are taxable to the petitioners.

The respondent, in the notice of deficiency, cites as his authority for transferring the wives’ distributive share of the partnership profits to the husbands’ income, Ormsby McKnight Mitchel, 1 B. T. A. 143, and Edward J. Luce, 18 B. T. A. 923. In neither of those proceedings was it contended that the partner’s wife was a member oí the partnership. In the former a subparfcnership agreement was involved and in the latter a trust instrument relating to the husband’s distributive share of his partnership profits. The questions presented and the facts are clearly distinguishable from the instant proceeding.

The petitioners contend that there was a partnership during the taxable years of which the wives were members and that therefore each partner was taxable on his or, her distributive share of the profits as apportioned in the partnership agreement. They point to the original contribution of capital by their wives and their further contribution under the written agreement of January 4,1923, and to the other factors indicative of the wives’ membership in the partnership. These arguments would be- persuasive of the-ultimate conclusion contended for by the petitioners if we were considering the taxability of the distributive shares of a trading partnership the income from which is dependent upon the use of capital. The picture here presented, however, is that of a partnership deriving its income from personal service. Whether that service was of a legal or accounting nature, a question upon which the parties disagree, it is admitted that the petitioners’ wives were not qualified along either line nor is it contended that they rendered any such service. Our question is to determine whether, under such circumstances, the petitioners can relieve themselves of the payment of tax on a portion of their income attributable to personal service through the medium of a partnership agreement with their wives. The problem as thus presented has not been specifically ruled on by the courts but a number of decisions point the way.

The Supreme Court in Lucas v. Earl, 281 U. S. 111, stated:

* * * There is no doubt that the statute could tax salaries to those who earned them and provide that the tax could not bo escaped by anticipatory arrangements and contracts however skilfully devised to prevent the salary when paid from vesting even for a second in the man who earned it. That seems to us the import of the statute before trs and we think that no distinction can he taken according to the motives leading to the arrangement by which the fruits are attributed to a different tree from that on which they grew.

The rule of that case is that earned incomes are taxed to and must be paid by those who earn them, not to those whom the earners are under contract to pay the income. Saenger v. Commissioner, 69 Fed. (2d) 631. In the course of its opinion the court, in the latter case, said:

It [Lucas v. Earl, supra] establishes once for all that no 'device or arrangement, be it ever so shrewdly and cunningly contrived, can make future earnings taxable to any but the real- earner, of them, can- make future income from profits taxable to any but the owner of the right or title from which the income springs. * * *

The court in Van Meter v. Commissioner, 61 Fed. (2d) 817, used the following language:

The Supreme Court has definitely determined that Congress has the power to tax the earner of income therefor, irrespective of whether it is paid to some one else [citations deleted]. Our only question is, therefore, has Congress manifested such an intention in the statutes here applicable.
The “earner” of income is one whose personal efforts have produced it; who owns property which produced it or a combination of the two. Decisions of the Supreme Court have declared that the income statutes require taxation to the earner in each of the' three above sources of income where the income was actually realized but never came to beneficial enjoyment by the earner.

See also Emery v. Commissioner, 78 Fed. (2d) 437.

The controlling principles underlying the above decisions are equally applicable to the instant proceedings. The amounts which the respondent has added to the petitioners’ income were earned through their personal services. They may not relieve themselves of tax liability thereon by an agreement that their wives shall share equally in said earnings, even though such contract is binding as between themselves. The respondent’s determination in this respect is approved.

The parties in recomputing the deficiencies herein shall give effect to the stipulated adjustments.

Reviewed by the Board.

Judgment will Toe entered under Bule 50.

TurNer dissents.


source: Caselaw Access Project

author: ARuNDELn:

license: Public Domain

text:
    Solomon B. Kraus, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 66369.
    Promulgated February 12, 1936.

      Henry P. Molloy, Esq., for the petitioner.

      H. F. Morton,- Esq., for the respondent.
   OPINION.

ARuNDELn:

Tjhe respondent, in determining the deficiency applied the first in, first out rule to the sales in 1929, and, as the basis of the earlier acquired shares was lower than that of the shares designated by the petitioner this resulted in an increase in income. Petitioner does not now attempt to sustain his arbitrary selection which he used to compute the gain reported. That obviously was wrong. His present primary claim is that his records sufficiently identified the stock so that the gain on the specific shares sold can be determined and there is no occasion to resort to the first in, first out rule. In the alternative he, claims that the total cost of the old stock should be spread over the new, and the average per share thus calculated used as the basis.

Recent cases have laid down some general principles concerning the matters of identification of shares and the application of the first in, first out rule. Stock certificates provide the ordinary means of identification, but they are not the only possible means. A margin trader who has no certificates in his name sufficiently identifies his shares when he designates, through his broker, “the securities to be sold as those purchased on a particular day at a particular price. It is only when such a designation was not made at the time of the sale, or is not shown, that the first-in, first-out rule is to be applied”, Helvering v. Rankin, 295 U. S. 123. In Miller v. Commissioner, 80 Fed. (2d) 219, stock certificates covering the taxpayer’s shares had been issued in either the name of the taxpayer or his broker and were held by the broker. The taxpayer directed the broker to sell certain shares, designating them by date, of purchase and-price paid. The broker covered the sale by delivery of certificatas other than those specified by the taxpayer. -The court held that gain or loss should be computed by using as a basis the cost of the shares designated for sale by the taxpayer, saying that “written instructions to sell embodying the number of shares and dates of purchase are an even more persuasive identification of the shares to be sold than the certificates which a broker may deliver without any thought about the particular lot lie is selling.” The opinion concluded with this statement:

It follows from tlie foregoing (1) that wliere'tliere is no designation by the taxpayer at the time of making the sale, the certificate should be treated as the proper means for identification; (2) that a designation by instructions to the broker of the shares to be sold is controlling though the certificate delivered does not correspond with the instructions; (3) that the “Mrst-in, first-out’’ rule applies only where there is neither identification' by a certificate, nor by designation of the taxpayer.

In Fuller v. Commissioner, 81 Fed. (2d) 176, the taxpayer liad purchased stock at various dates and prices from 1922 to 1928.' There was a five for one-split-up of the stock in 1929, and in 1930 the taxpayer sold some of the new shares. He instructed his assistant to sell those shares that had cost the most. The assistant ascertained from the taxpayer’s books the lots acquired at the highest prices- and instructed the bookkeeper to sell those lots. Sales were made through a broker, and appropriate records made on the taxpayer’s books to record the sales as having been made according to his instructions. The, court held that the taxpayer’s instructions, and the action taken pursuant thereto, identified the new shares sold with specific lots of the old shares, so that cost of the old shares was the proper basis for gain or loss.

The question here is whether this petitioner, under the principles of the above cases, has identified the shares .sold in 1929 with any of the old shares owned before the split-up in 1928 so as. to use cost of specific lots of the old shares as a basis for gain or loss. It is stipulated that there was no identification of new certificates against old certificates on the books of the- Manufacturers Trust Co. There was no such identification by the petitioner himself on his books. Consequently, the only possibility of identification left to the petitioner is that of designation of shares. It is to be noted that in the/ cases cited above there was in each instance a clear and specific designation by tlie taxpayer of the shares to be sold contemporaneously with the sale. A mere intention to sell particular shares “without further designation does not constitute sufficient identification.” Snyder v. Commissioner, 295 U. S. 134. Evidence of an intention to retain a certain number of shares, without more particular designation, does not establish the identity of those retained or of those sold. Helvering v. Rankin, supra. In this case the petitioner made no designation of his shares before or contemporaneously with the sales that can be construed as an identification of them. The schedule copied into his books of account was neither made by him nor pursuant to his instructions. The accountant who made up the schedule was called as a witness and testified that he suggested to the petitioner after the split-up' in 1928 that some means be taken to identify the shares. According to the testimony the petitioner “was not very free in his conversation” with the accountant. “He didn’t say very much. I don’t think he took it very seriously and he discussed it very little.” The accountant then went to the petitioner’s nephew and had him acquire the old and the new certificate numbers, from which he made up the schedule described in the findings of fact which was copied into his books by the bookkeeper. The petitioner did not authorize the identification purported to be made by the schedule and did not thereafter adopt it as an identification. Indeed, when his return was made up he entirely disregarded the schedule and attempted to compute his gain on a wholly different basis. It is not shown that he ever had any knowledge of the schedule made up by his accountant. The petitioner did not appear as a witness and we have no information at all as to his knowledge of the schedule or of what his intentions were in regard to the shares sold. Nor do we know what instructions, if any, he gave at or before the sale in 1929. Further, we do not know how, if at all, the sale was entered on his books. If his computation of gain in his return can be taken as a record contemporaneous with the sale it amounts to a repudiation of the accountant’s schedule. In brief, all we have is a schedule made by someone other than the petitioner, not shown to have been made with the petitioner’s knowledge nor ratified by him, and in fact repudiated by him in preparing his tax return. There was thus no identification at all by the petitioner, hence no ground upon which we can compute gain by allocating the sales price of any new shares against cost of any specific shares.

The alternative method proposed by the petitioner is the use of average cost of the old stock as a basis. That method has been applied in cases of sales of stock of a new corporation acquired in a reorganization in exchange for shares of other corporations. See Christian W. Von Gunten, 28 B. T. A. 702; affd., 76 Fed. (2d) 670; Helvering v. Stifel, 75 Fed. (2d) 583; Olive Hume Oliver, 30 B. T. A. 1381; affd., 79 Fed. (2d) 561. The rule of those cases is not applicable here, for in this case the petitioner kept the stock of the same corporation, merely exchanging his old shares for a larger number of shares of the same corporation, the new shares having a reduced par value. The exchange here was of the same kind as in Fuller v. Commissioner, supra, in which the court held that the taxpayer had sufficiently identified his shares to permit of an allocation of the new shares sold against particular lots of the old stock.

The petitioner here having failed to establish an identification of shares, and the case not being of a kind in which an average cost can be used, it was proper to resort to the first in, first out rule.

The parties have stipulated that if the application of the first in, first out rule is proper in this case, the correct cost is $110,905.08 and the profit on the sale in May 1929 is $774,064.92.

Decision will be entered under Buie 50.


author: Trammell:

text:
    Helen B. Sulzberger, Petitioner, v. Commissioner of Internal Revenue, Respondent. Kate F. Becker, Petitioner, v. Commissioner of Internal Revenue, Respondent. James H. Becker, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 63636, 63637, 72976.
    Promulgated February 12, 1936.

      Marry Thom, Esq., Freeman Day, Esq., and Herbert A. Friedlich, Esq., for the petitioners.

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

Trammell:

The first question presented here is whether Federal estate taxes, assessed against the estate of the decedent and paid by the beneficiaries after administration of the estate had been closed and the executors discharged, are deductible from gross income of the beneficiaries.

The applicable statute is the Revenue Act of 1928. In determining the net income of a beneficiary for years prior to 1928, that is, under the Revenue Act of 1926 and prior acts, the amount of estate taxes paid and claimed as a deduction, by a beneficiary, is allowable as a deduction to the beneficiary. See the retroactive provisions of section 703 of the 1928 Act. However, a different rule was adopted for computing net income for 1928 and succeeding years, as follows:

SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
(c) Taxes yeneralln.- — Taxes paid or accrued within the taxable year, except—
* * * * * * *
For the purpose of this subsection, estate, inheritance, legacy, and succession taxes accrue on the due date thereof, except as otherwise provided by the law of the jurisdiction imposing such taxes, and shall be allowed as a deduction only to the estate.

Petitioners contend that since their income for the taxable, year was derived largely, if not entirely, from the property distributed to them from the estate of their decedent, the word “estate” as used in the above quoted statute may be fairly construed to mean their respective estates in the property after distribution, and that therefore the taxes in controversy are allowable as deductions to them under this statute.

We are unable to agree with this contention for several reasons. In the first place, the phrase “shall be allowed as a deduction only to the estate”, is plainly intended to appfy as a restriction. If Congress had intended thereby to permit the deduction to be taken in 1928 and subsequent years either by the estate of the decedent or by the beneficiaries, according to whether the tax was paid and the deduction claimed by the one or the other, as specifically authorized for the years prior to 1928, the quoted phrase would have effected no restriction in the allowance of the deduction and would have made no change in the existing law. Indeed, under the construction urged by the petitioners, it would be difficult to perceive why this particular language was used; no effect or meaning could he given to it, since the deduction would be allowable either to the estate of the decedent or to the beneficiary if the provision quoted bad not been included in the act.

We think it is plain, therefore, that the legislative intent was to change the existing law and to restrict the allowance to the estate of a deduction which theretofore had been allowable either to the estate of the decedent or to the beneficiaries, under certain circumstances. This conclusion is supported by the report on the Revenue Bill of 1928 by the Senate Committee on Finance, 'TOth Congress, First Session, which reads as follows:

SEC. 20 (C). DEDUCTION FOR TAXES.
Section 23 (c) of tbe House Bill provides lliat estate, inheritance, legacy and succession taxes shall be allowed as deductions only to the decedent’s estate and not to the beneficiary. This is a change in existing law and is a substantial simplification. Furthermore, there is no sound policy which requires Hie deduction to be allowed to the beneficiary. The distributions of corpus which he receives are not treated as income and the tax which he is required to pay in effect is merely a decrease in the corpus trnnsmilied io him.

In Elmon C. Gillette, 29 B. T. A. 561, we held that a California inheritance tax paid in January 1928 by a beneficiary of.the estate was not deductible by him in computing his taxable net income for 1928. There the taxpayer made substantially the same contention that is urged here. In affirming our decision (C. C. A., 2d Cir., 76 Fed. (2d) 6) the court said:

* * * Such deductions are ordinarily matters of grace and a statute which only allows them to estates could not seem to involve an arbitrary classification. Essentially they are carved out of the estates of decedents prior to devolution of the property and beneficiaries get nothing but what is left. Keith v. Johnson 271 U. S. 1, supra. There can be no objection to depriving a legatee of a deduction of inheritance taxes from his income for naturally they are not payable by him but from his legacy which properly he only receives less the taxes. If he gets the gross amount and has to pay the tax personally, it is not the fault of the taxing system * * *.

Respondent’s action on the first issue is approved.

The second issue is whether interest on Federal estate taxes, assessed against the estate and paid by the beneficiaries after administration had been closed and the executors discharged, is deductible by the beneficiaries. Section 23 (b) of the Revenue Act of 1928 provides that in computing net income there shall be allowed as a deduction “all interest paid or accrued within the taxable year on indebtedness”, with exceptions not material here.

Petitioners contend that they are entitled to deduct from their gross income, under the above quoted statute, the amount of the interest computed on the Federal estate taxes paid by them. The reasons hereinabove stated which preclude the allowance to the petitioners of a deduction for the taxes paid by them also impel us to the conclusion that they may not deduct the interest.

Obviously, the deduction claimed by the petitioners, in order to be allowable under the statute, must represent interest paid by them as such on their own indebtedness, that is, on indebtedness for which they were liable. The statutory deduction does not embrace amounts paid to or for another to discharge the other’s interest obligation. Automatic Sprinkler Co. of America, 27 B. T. A. 160, and authorities cited. The indebtedness involved here was .a liability of the estate of the decedent, and not of the beneficiaries. It was the duty of the executors to pay the interest, as well as the taxes, and the petitioners, as beneficiaries, were entitled to receive only what thereafter remained of the property of the estate. If they received the gross amount, without the payment of the taxes and interest due, they were liable therefor as transferees to1 the extent of the property so received. The amount would be collectible only out of the property, and thus the final position of the beneficiaries would be the same as if the taxes and interest had been paid by the executors prior to distribution. The voluntary payment of the taxes and interest by petitioners amounted only to the discharge of an obligation of the decedent’s estate. Such expenditures are not deductible. William Ainslie Colston, 21 B. T. A. 396 (and authorities cited); affd., 59 Fed. (2d) 867; certiorari denied, 287 U. S. 640.

Respondent did not err in denying the deductions claimed.

In the stipulation filed by the parties, it is agreed that certain adjustments shall be made to the taxable income of the petitioners. Such adjustments will be given effect under Rule 50.

Judgment will be entered wnder Rude SO.


author: TURNER: Arundell,

text:
    Luther Bonham, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 66799.
    Promulgated February 14, 1936.

      Peter iS. Rash, Esq., and P. J. Coffey, Esq., for the petitioner.

      E. L. Corbin, Esq., for the respondent.
   OPINION.

TURNER:

In his determination as originally made the respondent applied the provisions of subsection (c) (l) of section 112 of the Revenue Act of 1928, thereby limiting the petitioner’s taxable gain from the transaction in question to $67,500, the amount of cash received. The petitioner does not dispute the application of this provision of the statute to.the facts in this case, but alleges that if the proper basis for the bank stock, and the fair market value of the company stock received therefor are used in the computation, it is apparent that no taxable gain was realized.

By amended answer the respondent now contends that subsection (c) (1), supra, is inapplicable, and that the petitioner realized taxable gain to the extent of the difference between the basis of the bank stock and the cash plus the fair market value of the company stock received.

From an examination of the statute, it is apparent that in this case the applicability of subsection (c) (1) is dependent upon subsection (b) (3) of the same section of the act. It is necessary therefore to determine whether or not the exchange of bank stock for company stock would be within the provisions of subsection (b) (3) if the item of cash had been omitted and only company stock had been received in exchange for bank stock.

To make subsection (b) (8) applicable the exchange must have been in pursuance of a plan of reorganization and both the bank and the company must have been parties to that reorganization. Subsection (i) (1) of section 112 of the Revenue Act of 1928 defines the term “reorganization” as “a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting-stock and at least a majority of the total number of shares of all other classes of stock of another corporation, * * *).” Subsection (i) (2) of the same section provides that the term “a party to a reorganization” includes “both corporations in the case of an acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation.”

Giving careful consideration to the meaning of the term “reorganization” quoted above from- the statute and the facts in this case after omitting from consideration, in accordance with the provisions of subsection (c) (1), the cash payment received by the stockholders of the bank, we can find nothing of substance which would distinguish this case from that of Commissioner v. Watts, 296 U. S. 387. Under authority of that decision, we accordingly hold that but for the fact that cash was received in the instant transaction, the exchange would be within subsection (b) (3) of section 112, supra, and under subsection (c) (1) of the same section the gain to the petitioner may not be recognized in an amount in excess of $67,500.

So far as the record shows, the parties have accepted cost as the basis for computing the gain on all of the bank stock transfen-ed except the 520 shares which the petitioner acquired by inheritance, and with reference to the 520 shares they are in apparent agreement that the basis is the fair market value of the stock on January 29, 1920. The petitioner contends that the stock had a fair market value of $279.64 on that date, while the respondent takes the position that the fair market value of the stock was $175 per share, as reflected by sales made soon thereafter and over a period of several years.

The petitioner claims that the fair market value of the bank assets on the date in question was $204,635.36, or approximately $204 for each share of stock outstanding and relies on the testimony of several witnesses, called in his behalf, who were of the opinion that the fair market value of the stock was between $250 and $270 per share. On the other hand it is noted that the book value of the capital stock on January 29, 1920, was only $128,059.36, or approximately $128 per share. Further, it appears, from the. statement of earnings and dividends introduced in evidence by the petitioner, that net earnings adjusted to reflect losses on loans and bonds, and all recoveries for the years 1915 to 1920, inclusive, were $9,429.26, $11,919.79, $5,643.80, $8,094.31, $10,971.65, and $15,016.50, respectively, and that the net earnings so adjusted did not again reach the high of 1920 until the year 1928. It is also noted'that' all sales or purchases of the stock in 1920, or near that time, were made at $175 per share.

After considering all of the evidence before us, we have decided and have found as a fact that the fair market value of the bank stock on January 29, 1920, was $175 per share. •

The nest- question for determination is the fair market value of the stock of the Northwest Bancorporation on October 30, 1929. While it might be argued that this stock was valued at $90 per share under the contract, it is apparent that that figure was used as the basis of exchange and not as an indication of fair market value at a given date. The contract did not give the petitioner the privilege of receiving $360 per share for his bank 'stock, but required him to accept a minimum of three shares of Northwest Bancorpo-ration stock and a maximum of cash in the sum of $90. Such a provision in the contract could not be held to establish the fair market value for the stock on the date of exchange in the face of evidence introduced by the petitioner showing sales of 2,883 shares of the stock on that date on the St. Paul Stock Exchange, at prices ranging from a low of 66% to a high of 71 and a closing price of 70. The petitioner has alleged in his petition that the stock on that date had a fair market value of $70 per share and we have so found as a fact.

The only remaining question to be determined is whether or not the petitioner, being on a cash receipts and disbursements basis, received in the taxable year the 750 shares of the Northwest Bancor-poration stock covered by paragraph 4 of the contract. If so, this stock, at $70 per share, must also be included in computing the gain recognized for the year 1929. '

The petitioner contends that never at any moment until this stock was released to him in 1931 and 1932 did he receive it or have a right to receive it, and that under no circumstances did it constitute income to him in any prior year.

The contract between the parties best reflects the actual transaction. By its terms the petitioner and his wife disposed of 750 shares of bank stock and received therefor 2,250 shares of stock of the Northwest Bancorporation and $67,500 in cash. In section 4 of the contract, it appears that the company had questioned certain paper carried in the assets of the bank, and the 750 shares of stock were deposited with the company and were to be held by it until the actual work-out of these assets had been determined. According to the terms of the contract the petitioner and his wife received the entire amount of the stock in the year 1929 and posted the 750 shares as security for the representations made by them with reference to the assets of the bank. Cf. Mead Construction Co., 3 B. T. A. 438, and Cleveland Trinidad Paving Co., 20 B. T. A. 772; affd., 62 Fed. (2d) 85. See also Preston R. Bassett, 33 B. T. A. 182, and Stoner v. Commissioner, 79 Fed. (2d) 75, reversing 29 B. T. A. 953. In the last two cases cited stock was sold for cash and it was pointed out in the opinions that the sellers did not receive in the taxable year the full amount of the purchase price, nor did they have the right to receive it. Payment of this balance was conditional and it was held that such balance did not constitute income until the events on which payment was conditioned were fulfilled. This case is different. Here the contract contained no condition whatever with reference to the payment of the full amount of the stock agreed upon. Even though the assets of the bank did not work out as represented, there was no right on the part of the seller to reduce the number or to take back any of the shares exchanged under the contract, but only a right to sell collateral to the extent required to make good the representations as to the bank assets. Ownership of this stock had passed to the petitioner and he was exactly in the same situation as if other securities had been deposited in the place of the 750 shares of company stock.

On this point the petitioner relies on Commissioner v. Darnell, Inc., 60 Fed. (2d) 82, affirming a decision of the Board reported at 18 B. T. A. 125. There the facts are quite different from the facts here. In that case the petitioner was selling a sawmill and the price to be received was conditioned on the amount of timber available. The purchasers had offered a fixed price for the mill provided a definite amount of timber should be guaranteed, but the petitioner refused such a contract and the contract entered into postponed both the determination of and final settlement on the purchase price of the mill until the actual work-out of the timber was known. In the instant ease the amount of cash and number of shares to be transferred were fixed, and the transfers made, and in this respect the transaction was not thereafter to be disturbed, the company having only the right to sell company stock, held by it as collateral, to the extent necessary to make itself whole in respect of the representations of the shareholders of the bank.

On this point the respondent is sustained and the 750 shares of stock in question should be included in computing petitioner’s taxable income for the year 1929.

Reviewed by the Board.

Decision will be under Bule 50.

Arundell,

dissenting: I disagree with the holding in the majority report to the effect that petitioner received in 1929 750 shares of stock of the Northwest Bancorporation. As a matter of fact, the shares were not received by the taxpayer within that year, either actually or constructively. He had no right within the year to demand their delivery and indeed did not receive them until the years 1931 and 1932. In 1929 it was not definitely known if he would ever receive the shares in question. Under such circumstances it seems to me that the conclusion reached in the majority opinion on this point is wrong. Commissioner v. Cleveland Trinidad Paving Co., 62 Fed. (2d) 85; Stoner v. Commissioner, 79 Fed. (2d) 75; Preston R. Bassett, 33 B. T. A. 182. Mead Construction Co., 3 B. T. A. 438, treats of a deduction and is not ini point.

Trammell agrees with this dissent.

       See. 112. (e) Gain pom exchanges not solely in Itínü,.-—
      (1) If an exchange would he within the provisions' of subsection (b) (1), (2), (3), or (5) of this section if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.

       Sec. .112. (b) (3) Stock foe stock on reorganization. — No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.


author: McMahon :

text:
    Lester L. Robison, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 53878.
    Promulgated February 14, 1936.

      John F. Watson, Esg., for the petitioner.

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

McMahon :

This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1928 in the amount of $760.76, not all of which is in controversy. It is alleged that the respondent erred in including in petitioner’s income the sum of $4,739.70, since such amount represented income to Mary S. Robison from the partnership of Robison & Trippeer.

The petitioner and his present wife, Mary S. Bobison, have been married 11 or 12 years, during which time they have resided at Walla Walla, Washington.

In 1925, the partnership known as Bobison & Trippeer was formed for the purpose of acquiring and operating a farm or ranch located in the State of Oregon.

On September 16, 1925, A. N. Dyer and his wife and W. G. Hawkinson, a single man, of Lewiston, Idaho, entered into an agreement to sell to petitioner and his wife and H. A. Trippeer and his wife, certain real estate located in Wallowa County, Oregon, known as the Brockman Eanch, together with all cattle, horses, and other chattels thereon, in consideration of the payment of $56,850. It was recited in such agreement that $10,000 thereof had already been paid and receipt was acknowledged. It was provided that of the remainder the sum of $11,850 should be paid on or before November 2, 1925, and that all the rest of the purchase price should be paid on or before November 2, 1935, to be evidenced by promissory jiotes.

Pursuant to the above agreement dated September 16, 1925, there was transferred by deed dated November 2, 1925, to petitioner and his wife and Trippeer and his wife, by A. N. Dyer and wife and W. G. Hawkinson, a number of tracts of land situated in Wallowa County, Oregon, containing approximately 677.74 acres and used as one ranch, another separate tract in the same county containing 90.24 acres, and numerous cattle, horses, mules, and other chattels on the real property. The consideration recited therein was $56,850, of which it was acknowledged that $21,850 had been paid. It was provided that the balance of $35,000 should be payable in installments, evidenced by promissory notes.

On November 2, 1925, petitioner and wife and Trippeer and wife executed four promissory notes, two of which were each in the principal amount of $6,000, one of which was in the principal amount of $14,000, and one of .which was in the principal amount of $9,000, each payable on or before November 2, 1935. To secure the payment of the notes, petitioner and wife and Trippeer and wife, on the same date, executed in favor of the sellers of the property a mortgage covering both the real estate and personal property. Later, on December 9, 1926, after there had been some question about the clarity of the title or description of the land, the same parties entered into another mortgage to take the place of the mortgage first executed. The new mortgage embraced the same properties and secured the same four notes and some interest.

When the partnership was organized it did not have any cash or other assets. The above described property was bought with borrowed money. The down payment of .$10,000 was paid with borrowed money. The business was operated entirely on borrowed money. Petitioner’s wife did not contribute any capital to the business.

In the operation of the partnership business petitioner took care of the business — looking after the sales and trades and ordering the supplies. The property in question' was a considerable distance from Walla Walla, the residence of petitioner and his wife. During the time that the partnership existed petitioner went to the property and worked five or six times a ¡year. Petitioner’s wife usually went to the property once each year, in the fall. Her services to the partnership consisted of putting up fruit to be consumed by the help employed on the property, taking petitioner by automobile to and from a boat on his trips to the property in question, and obtaining food for the ranch.

Petitioner and Trippeer signed the checks of the partnership. However, they gave petitioner’s wife the privilege or right to sign checks in their absence; and notice of such privilege was given to .the bank.

The partnership went out of existence in 1928 at the time that the properties owned by it were sold to one Johnson for $85,201.04. The purchaser took the property subject: to the mortgage which w'as still outstanding. The indebtedness of the partnership was paid out of the cash proceeds of the sale.

The books of the partnership, consisting of journal, cash book, and ledger, were kept by one Mellally from information and checks turned over to him by petitioner.

The opening entry on the partnership books, which is not dated, is as follows: “L. L. Eobison, capital, credit, $27,868.04. H. A. Trippeer, capital, credit, $27,868.04.” The books show that the property was paid for by the partnership. They show that the money received from Johnson on the disposition of the properties of the partnership went to pay the debts of the partnership and that the profit was credited to the capital accounts of petitioner and Trippeer equally.

The name of neither petitioner’s wife nor Trippeer’s wife appears anywhere in any of the books of the partnership. Therein all the credits or charges went either to petitioner or Trippeer.

The estate of Elsie Eobison, petitioner’s former wife, did not at any time have any interest in the business of the partnership of Robison & Trippeer.

The partnership of Eobison & Trippeer was composed of only the petitioner and H. A. Trippeer.

No separate funds or property of the petitioner were used by him in the acquisition of the partnership interest standing in his name.

In its return for the calendar year 1928, the partnership of Eobison & Trippeer showed net income of $18,958.79, the most of which was derived from the sale of its real and personal property. Therein it was represented that the partnership was composed of petitioner and H. A. Trippeer, that each of them owned a 50 percent interest, and that each received one half of the net income of the partnership. This was in accord with the partnership books.

In his income tax return for the calendar year 1928, petitioner showed one half of the income from the partnership of Eobison & Trippeer in the amount of $9,479.40, but reported only one half of that amount, or $4,739.70, as taxable to him. His return showed tax due in the amount of $1,440.46, which was paid.

In her income tax return for the calendar year 1928, the petitioner’s wife showed one half of the income from the partnership of Eobison & Trippeer in the amount of $9,479.40, and reported one half of that amount, or $4,739.70, as taxable to her as her community interest. The return showed tax due in the amount of $61.64, which was paid.

In the notice of deficiency the respondent, among other adjustments, added to net income, as reported by petitioner in his return, the amount of income, $4,739.70, which had been returned by petitioner’s wife as income from the partnership of Eobison & Trippeer, with the following explanation:

Your contention that income received from the partnership of Robison and Trippeer represents community income and, therefore, is reportable as such on the returns filed by you and your wife, Mary S. Robison, has been denied for the reason that the information furnished is not sufficient to sustain your contention.
You stale in your letter that the financing of the transaction was on money borrowed on notes of the partnership firm and under the laws of the State of Washington constituted obligations of the community of Robison and Trippeer and their respective wives. ' ■
Since the notes were signed by you and your partner and your portion of tlie cash payment was made from earnings in the partnership of E. L. Robison and Estate of Elsie Robison which is your separate property, it is apparent that your wife assumed no obligation for the money borrowed or that any community funds were invested therein. Furthermore, there is no evidence of any community effort in this transaction.
The action of the agent in taxing the entire amount of income received from the partnership on your return has been approved by this office.

Upon the foregoing facts, which we find, the only issue presented is whether respondent erred in including in petitioner’s taxable income the amount of $4,739.70, the amount which petitioner’s wife had included as part of her taxable income from the partnership of Eobison & Trippeer either as her distributive share as a partner or as her community interest. There is no question raised as to the correctness of the amount of the earnings of the partnership, which was $18,958.79. The effect of respondent’s holding is to tax to petitioner one half of the earnings of the partnership rather than one fourth thereof as contended for by the petitioner.

The first question presented is whether the partnership was composed of petitioner and Trippeer or of those two men and their wives. From a consideration of all the evidence, none of which has been overlooked, we have found as a fact and now hold that the partnership of Bobison & Trippeer was composed of only the petitioner and Trippeer; and the record does not justify a finding- or holding that petitioner’s wife, or Trippeer’s wife were, at the time in question, members of the partnership of Robison & Trippeer. Here, from the evidence, it appears that the partnership books show that only the petitioner and Trippeer were the partners. The income tax return of the partnership for the year 1928 shows the same. Such return also shows that the profit was distributed equally to petitioner and Trippeer. Evidence adduced by the petitioner apparently for the purpose of showing that petitioner’s wife was a member of the partnership, regarding the right given her by petitioner and Trippeer to sign checks on behalf of the partnership, is of little significance. It might be considered as evidence that she was not a member of the partnership since if she was a partner she would have the right to sign checks as a partner and it would not be necessary for her to receive authorization. There was nothing- done by the parties which can not be reconciled with the view that the partnership was composed of only petitioner and Trippeer. The fact that the property, which was used and operated by the partnership, was transferred to petitioner and Trippeer and also the wives, and that the wives joined the husbands in executing back to the seller of the property notes for the unpaid purchase price, and that they also joined in the mortgage given back, may be explained by the desire of the seller to have the added security of the obligations of the wives. The help rendered by petitioner’s wife, as set forth in the findings of fact, is not necessarily indicative that she was a partner. She did not testify at the hearing, nor did either Trippeer or his wife. We have no evidence whatever as to the activities of Trippeer or of his wife in regard to the partnership activities. Furthermore, the evidence shows that the petitioner’s wife did not contribute any capital to the business. Thus it can not be said that petitioner is taxable upon only one fourth of the net income of the partnership upon the ground that the wives were members of the partnership.

However, it is our opinion that even so the result here must be the same, since he is taxable upon only one fourth of the net income of the partnership for the reason that under the community property laws of the State of Washington only one fourth of such income belonged to him, his wife sharing equally with him in the income of the partnership accruing to the partnership interest standing in his name, as community property. We so hold upon the authority of Rucker v. Blair, 32 Fed. (2d) 222, and J. P. Schumacher, 32 B. T. A. 1242. The latter oase follows tlie former. No application .for a writ o.f certiorari was applied for in the Rucker case.

Upon the whole record we have found as a fact and now hold that no separate funds or property of the petitioner were used by him in the acquisition of the partnership interest standing in his name. The evidence shows that the partnership property was bought on borrowed money and that the partnership was operated on borrowed money. We know from the evidence that the real and personal property was purchased in part in the names of, and upon the credit of, the wives of the petitioner and the other partner. Each of the wives joined in the notes and the mortgage given to secure the remainder of the purchase price of such assets. In any event it has not been shown that there was ■ separate property of petitioner employed in the partnership. It is clear from Rucker v. Blair, supra, and cases cited therein,- that the presumption is that any property held by either spouse is community property and that the burden of proof is upon any one alleging the contrary. Here there is no showing that the funds or property invested by the petitioner in the partnership were not community property.

It is our opinion and we have proceeded upon the theory, that the law of the State of Washington, the state of residence of the petitioner, applies, rather than the law of the State of Oregon, in which the partnership property giving rise to the income was located. There is no proof to show where Trippeer and his wife resided or where the partnership agreement was executed, but this lack of information is not vital since the proof does show that the petitioner, as well as his wife, were residents of the State of Washington in the year in question. In C. M. Weatherwax, 21 B. T. A. 861, a husband and wife, residents of the State of Washington, went to the State of California but retained their residence in the State of Washington. In 1921 the taxpayer borrowed money on a parcel of community real estate located in Washington and invested it in an oil venture in California. In the taxable years 1924 and 1925, during which years a wife in the State of California had a mere expectancy rather than a vested interest in community income, income was received from this oil venture. In that proceeding we stated in part:

Tlie facts above set out establish to our satisfaction that in 1924 and 1925 petitioner and his wife were residents of and had their domicile in the State of Washington. They are accordingly entitled to each report one-half of the community income. The funds invested in an oil venture in California, and from which it appears that income was received in the taxable years, were community funds and the interest of petitioner therein and in the income therefrom is governed by the law of the domicile. See John Henry, 6 B. T. A. 131. * * *

It thus appears that the law of the state ,of the residence is governing in the determination of who owns income. For this reason in the instant proceeding, we are governed by the law of the State of Washington, and the law of the State of Oregon has no bearing.

Decision will Toe entered under Buie 50.


author: Black:

text:
    F. F. Nicola, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 57417.
    Promulgated February 14, 1936.

      W. D. McBryar, Esq., and Geo. M. Ilosaclc, Esq., for the petitioner.

      O. H. Ourl, Esq., for the respondent.
   . OPINION.

Black:

As has already been stated, petitioner concedes that the addition of $12,991.15 dividends which the Commissioner has made to his 1928 income is correct. • Effect will be given to his concession in a recomputation under Rule 50. There remain two issues for us to decide: (1) Was the commission of $101,250 paid by Miller Co. for the sale to Brandtjen & Kluge taxable income to petitioner? (2) If the $101,250 in question was income to petitioner, did he omit it from his income tax return because of a fraudulent intent to evade the tax upon such transaction?

The burden of proof is different! upon the two issues. Upon issue (1) the burden of proof is on petitioner. The Commissioner has made a determination that the $101,250 in question was a part of petitioner’s income for 1928 and the .presumption is in- favor of the correctness of the Commissioner’s determination.! The burden is on petitioner to overcome it by satisfactory evidence.

On issue (2) the burden of. proof is on,the Commissioner. He-has added a fraud penalty to the deficiency which, he has determined and the burden of proof is placed by statute upon him to sustain this fraud penalty. A discussion as to the-difference in the. burden of proof as to the two issues is found in L. Schepp Co., 25 B. T. A. 419, at pages 436 and 437.

We will first take up for determination issue (1). Petitioner contends that the $101,250 in question was not earned by him in his individual capacity but as an officer of the Point Co; for its benefit. If we find that the evidence sustains .petitioner in this contention, he wins.

But respondent contends that the evidence does not show that petitioner earned these commissions as an officer of the Point Co., but that on the contrary it shows that he earned them in his individual capacity and merely assigned the commissions to the Point Co. after they were earned, and that under the income tax láws income is taxable to him who earns it and no assignment of income can defeat the tax to him who earned it. The legal question in a matter of this kind is not difficult but it is often exceedingly difficult on facts such as we have in the record in the instant case, where the taxpayer was an officer of several corporations, to determine whether in the particular transactions involved he was acting in his capacity as officer of one or more of the corporations or in his individual capacity in earning the income in question. :

In Van Meter v. Commissioner, 61 Fed. (2d) 817, the court gave a very interesting discussion of the rules governing the determination of to whom income is taxable: Among other things the court said in that opinion:

In determining who is taxable for an income, there are three considerations which may be of importance, to-wit, who earns the income, who receives it, and who enjoys it. Where the same person earns, receives, and enjoys the income (the normal and usual situation), there is no difficulty. Where different persons earn, receive and/or enjoy the income, disputes occur.' In determining such disputes, the vital matter is always the relation of the earner (whether a person, owner of property or combination of the two) of the income to the income so earned. The rule and intent of the taxing statutes is that the earner of income which he might and, normally, would receive and enjoy for himself is not relieved because he chooses not to receive or not to enjoy it, and this is not necessarily changed by snch deprivation tailing the form of an obligation legally binding him thereto. If there exists a legal relationship of the earner to others which results in the earnings (in part or whole) being for the benefit of others than the actual earner, the statutes do no attempt to tax the earner for such income as he was not earning in his own .right, but where the earner of the income does nothing more than transfer the income earned in his own right to another, even though such disposal be in advance of the earning thereof (Burnet v. Leininger and Lucas v. Earl, supra), or where he retains any power of control over the income earning property or the income therefrom (Corliss v. Bowers, 281 U. S. 376, 50 S. Ct. 336, 74 L. Ed. 916, and analogous as to transfer tax Chase Nat. Bank v. U. S., 278 U. S. 327, 49 S. Ct. 126, 73 L. Ed. 405, 63 A. L. R. 388. Reinecke v. Northern Trust Co., 278 U. S. 339, 49 S. Ct. 123, 73 L. Ed. 410, 66 A. L. R. 397, and as to State succession tax Saltonstall v. Saltonstall, 276 U. S. 260, 48 S. Ct. 225, 72 L. Ed. 565), such income is taxable to him within the intent of the statute (Burnet v. Leininger, Lucas v. Earl, and Corliss v. Bowers, supra).

The part of the court’s opinion above quoted which is most applicable to the contention made by petitioner is, we think, that part which reads: “If there exists a legal relationship of the earner to others which results in the earnings (in part or whole) being for the benefit of others than the actual earner the statutes do not attempt to tax the earner for such income as he was not earning in his own right.”

The court then cites in a footnote as instances to illustrate the court’s meaning, as follows: “Instances are where an employee earns money through his efforts for his employer (such as sales agents); where a partner earns for a partnership (Burnet v. Leininger, 285 U. S. 136); or a husband for a community estate (Poe v. Seaborn, 282 U. S. 101).” The court might have added to these illustrations, the instance where an officer is acting for a corporation in transactions by which profits are earned for the corporation. The thing we have to decide here is whether Nicola in negotiating the sale of assets of the Miller Co. to Brandt jen & Kluge and in earning the commissions in question earned them for himself as an individual or earned them as an officer representing the Point Co. We have carefully examined every bit of evidence in the record and we do not feel warranted in finding that in negotiating and effecting this sale Nicola was acting as an officer of the Point Co. Henry A. Brandtjen, who was one of those representing the purchasers of the property, testified that in purchasing it he carried on the transactions with F. F. Nicola representing the Miller Printing Co., and that in the negotiations he had. no negotiations with the Point Co.

The reason for assigning this commission to the Point Improvement Co. is stated by Nicola in his testimony, as follows:

The Point Improvement Company’s business in itself that year would have meant a loss of $53,000. This commission of $101,250 was given to the Point Improvement Company for the reason that I have spoken before, of its relationship with the interests of the Miller Company and the fact that it was my business as the president of the company to seek endeavors that would be profitable to each one of those corporations of which the Point Improvement Company was one and to them I gave this assignment.

He .further testified that practically all the business he transacted was transacted through his respective corporations and that has been so for the last BO years. In this connection he testified: “When I undertake a problem, I decide to which one of these corporations I will allocate the results.” We do not think that the incidence of the income tax can be so easily shifted as that. There is no evidence in the record which shows that the Point Improvement Co. had any contract, oral or otherwise, with the Miller Co., to sell the assets in question. If such a contract had been shown it would be reasonable enough to hold that Nicola was acting for the Point Co. in the transactions. No corporate minutes of either company bearing upon the subject were introduced. We have not overlooked the testimony of Paul C. Dunlevy, wherein he testified in part as follows:

Q. How many meetings were there, if you remember, around September and October, 1928?
A. The first meeting with Mr. Brandtjen in 1928 on the subject of the sale of these patents and the patents pertaining to the feeders was in New York City.
Q. Were you present?
A. Yes, sir.
Q. Were you a director of Miller Printing Machinery Company?
A. I was, and vice president.
Q. What other officers or directors were present at that meeting in New York?
A. Nobody but Mr. Nicola and myself, representing the Point Improvement Company and the Miller Printing Machinery Company.

While this evidence is, of course, entitled to some weight in passing upon the issue which we have here to decide, we do not think it is of sufficient weight to overcome the other evidence which has been cited. Nor do we think that the fact that the Miller Co. credited on its books the $101,250 in question to the Point Co. is controlling. The controlling question is: Were the commissions earned by Nicola for and on behalf of the Point Co., and was he acting for it in the transactions in question? As already stated, we can not find .that they were. The mere fact that Nicola assigned or allocated the commissions to the Point Co. after they were earned, and they were thus credited to it, would not, as we have already stated, change the incidence of the tax. Such assignment or allocation would simply mean a capital contribution on his part to the Point Co.

Also, the fact that the Point Co. included the $101,280 in question in its income for 1928 would not be controlling. If the income in question was not its taxable income, the fact that it returned it as such would not make it so. Its remedy in case of such an error would be to apply for a refund. On careful consideration of all the evidence we sustain respondent as to issue (1).

As to issue (2) we feel that we must hold in favor of the petitioner.

There is no plea of res adjudícala here, but the Circuit Court of Appeals has considered the same evidence, passed on the same identical facts, and reversed the verdict in the lower court that there was fraud and remanded the case for a new trial.

The principal evidence relied upon by the respondent in that case to establish fraud was a typewritten letter dated December 1, 1928, signed in typewriting with petitioner’s name and found among the papers of the Miller Co., which was as follows:

Mr. Girts:
Herewith find a number of salesmen’s items that I have taken over from the Miller P. M. Go. on which the collections are expected to be made and credited to me.
Report to me on this the 15th day of every month. I have not entered these on my books although I may do so in connection with taxes if we can declare a loss without bringing suit.
It is very important that I have directly and I know this will take a great deal of time and overtime a study of what shift is necessary for me to put on the various books in connection with profits and losses for 1928. As we understand it there is a heavier tax on the individual than on the corporation and therefore I want to pass as many of these profits through land companies like the Point Improvement Company, Nicola Bros. Co., or Nicola Band Go. as I can. Make a careful survey of all of this year’s transactions. I anticipate in view of having sold 240 shares of Chase National Bank that I will have a very large amount to account for there.
Let me know what each one of the companies seem to have in overhead burden that would be an offset to possible profits that might be swung to them.
F. F. Nicola.

This letter was held inadmissible as evidence by the Circuit Court on the ground that it was not shown to have been written or authorized by the petitioner Nicola.

The parties at the hearing in this proceeding stipulated:

We have agreed to submit the case on the record, that is, on the record at No 5248, October Term, 1933, in the United States Circuit Court of Appeals for the Third Circuit, wherein F. F. Nicola, defendant below, is the appellant and the United States of America is the appellee.

In view of the foregoing stipulation, we do not regard the letter as in evidence before us and we have not considered the so-called letter as evidence for any purpose.

We do not think that the evidence which we have considered, and which is legally a part of the record, is sufficient to show that any part of the deficiency is due to fraud with intent to evade the tax. See section 293 (b), Revenue Act of 1928. On this issue we hold in favor of the petitioner.

Reviewed by the Board.

Decision will he entered under Rule 50.


author: Turner:

text:
    Marie Minor Sanborn and J. A. Minor, Former Executrix and Executor of the Estate of William E. Minor, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 66387.
    Promulgated February 14, 1936.

      Llewellyn A. Luce, Esq., John M. Oleary, Esq., and Phil D. More-loch, Esq., for the petitioners.

      Shelby S. Faulkner, Esq., for the respondent.
   OPINION.

Turner:

The respondent has determined that the action taken at the meeting of the stockholders of the Midland Eealty Co. on February 13,1929, constituted the declaration of a dividend to the extent of the surplus accumulated and undistributed from and after February 28, 1913, and to that extent constitutes taxable income to the decedent’s estate. The petitioners take issue with this determination on two grounds: First, that the transfer of the real estate direct to Marie Minor Sanborn from the Midland Eealty Co. was not a dividend received by the estate, and second, that if it was a dividend received by the estate, it ivas immediately distributed, and under the provisions of section 162 (c) of the Eevenue Act of 1928, is an allowable deduction in determining net income.

In support of the contention that the estate received no dividend from the Midland Realty Co., the petitioners argue that the real estate in question was transferred direct to Marie Minor Sanborn for good and valuable consideration, or to use the words of the brief, “In consideration of one dollar and in compliance with the terms of decedent’s will the property was conveyed to her by warranty deed.” The recital of the one dollar consideration is obviously a matter of form, nothing'more. There was nothing resembling a purchase of the property from the Midland Realty Co., and the resolutions of the stockholders indicate that no payment therefor was expected. With reference to the statement that the property was transferred in compliance with the terms of decedent’s will, the same statement would be equally applicable if the will had provided that the dividends to be paid on certain stock owned by the decedent were to go to Marie Minor Sanborn and arrangements had been made for the dividends to be paid to her direct. In such a case we doubt that it would be seriously contended that the distributions so made on such stock were not dividends merely because made under specific direction of the will and because for .convenience they were paid direct to the beneficiary designated by the will to receive them.

In section 115 (a) and (b) of the Revenue Act of 1928, the term “dividend” is defined “as any distribution made by a corporation to its shareholders, whether in money or other property, out of its earnings or profits accumulated after February 28, 1913;” and further, it is provided that “every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings or profits.” In our opinion the facts show the distribution of a dividend to the extent of $212,200.79. Security First National Bank of Los Angeles, Executor, 28 B. T. A. 289. In so far as the issue here under consideration is concerned, facts in that case parallel the facts in the instant case. The distribution was made to a third party, was a distribution in kind, and was not designated as a dividend. As we there pointed out, a dividend may be paid in kind, Peabody v. Eisner, 247 U. S. 347, and it need not be called a dividend, Phelps v. Commissioner, 54 Fed. (2d) 289, affirming, 20 B. T. A. 866; certiorari denied, 285 U. S. 558. With reference to payment to a third party, we pointed out that the transfer was so made solely to accommodate the stockholder. Such was the situation here. The estate was the stockholder and the transfer of the real estate to Marie Minor Sanborn was for its accommodation and benefit. It was relieved of the payment of a cash bequest and the stock was made available for other purposes. We accordingly hold that the distribution to the extent of $212,200.79, the surplus earned and accumulated from and after February 28, 1913, constituted a dividend to the estate within the meaning of the act.

Our next consideration is the., alter native contention of the petitioners that they are entitled to deduct the amount of the dividend under the terms of section 162 (c), supra. In that section it is provided that “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 * * * ■ which is .properly paid or credited during such year to any legatee, heir, or beneficiary.” The facts show that the entire amount of the dividend- was paid to one of the beneficiaries of the estate, and from this it is argued that the estate is entitled under section 162 (c) to the deduction claimed. The Supreme Court has held, however, that it is not enough that income to an estate or trust is actually used in making a distribution to beneficiaries, but that the payment must be paid out of income as such, Burnet v. Whitehouse, 283 U. S. 148, and that a distribution is not a distribution of income as such, if the distribution is payable in any event and is not dependent upon the receipt of the income by the estate. Helvering v. Pardee, 290 U. S. 365. Cf. Irwin v. Gavit, 268 U. S. 161.

The instant case, in our opinion, falls within the rule laid down in Burnet v. Whitehouse and Helvering v. Pardee, supra. The decedent made alternate bequests leaving it to the beneficiary to elect to receive money, real estate, or stock, and in neither case was the payment of the bequest to be dependent-upon the receipt of income by the estate. The will did not provide that Marie Minor Sanborn, as executrix, could vote the distribution of the real estate only if the surplus of the Midland Eealty Co. was sufficient to vote a dividend equal in value to the said real estate. Furthermore, the facts show that the value of the real estate distributed was in excess of the surplus available for dividend distribution. The daughter, as executrix, had the right to vote the distribution, even though the corporation had no- surplus, and if such a distribution was voted, the entire property distributed thereby was, by the terms of the will, to be transferred to Marie Minor Sanborn regardless of the receipt of income by the estate.

We accordingly hold that even though a portion of the real estate so transferred to Marie Minor Sanborn was income to the estate, it was not distributed to her as income and, within the meaning of section -162 (c), supra, is not deductible in determining the net income of the estate.

Reviewed by the Board.

Decision will he entered, for the respondent.

       Sec. 162. (c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, 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 properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary.


author: ARNOLD:

text:
    Anna M. Chambers and William J. Gealy, Trustees Under Last Will of Fred N. Chambers, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 71427.
    Promulgated February 14, 1936.

      James H. Courtney, Esq., for the petitioners.

      O. R. Marshall, Esq., for the respondent.
   OPINION.

ARNOLD:

The question here before us is whether the capital gain of $9,913.85 from the sale of securities is taxable to the petitioners. This question is controlled by the will of Fred N. Chambers and the laws of Pennsylvania applicable thereto.

The petitioners considered that the entire net income of the estate— including the gain from the sale of corpus — was yearly distributable to the two beneficiaries in equal amounts and they made the return for the estate on. that basis, using form 1041.

The respondent considered that the profits from the sale of the corpus of the estate were not part of the income of the estate which was distributable, and that such gains were taxable to the estate since they were accumulated to and became a part of the corpus of the estate.

These questions were raised and were considered by us in Anna M. Chambers et al., Trustees, 29 B. T. A. 971; affd., Chambers v. Commissioner, 77 Fed. (2d) 95, which involved the same will, and gain from the sale of capital assets by the same trust estate in 1927 and 1929. We there held that where, under the state law of Pennsylvania, capital gain from the sale .of stock becomes a part of the corpus and is not distributable to the beneficiaries as income from the trust estate, and under the terms of the will corpus is distribuí-' able only at the discretion of the trustees, capital gain so realized and not distributed is taxable to the fiduciary. In our opinion in that case, after reviewing the law and some of the applicable decisions of the Supreme Court of Pennsylvania, we said:

Clearly, under 1he laws of Pennsylvania, capital gain from the sale of stock becomes a part of the corpus and is not distributable to the life tenant as ineome from the estate. Only where such gain is shown to represent income is it distributable to the life beneficiaries. Here there is no showing that any of the gain in question represents income. * * *
Admitting that all income from the trust estate was distributable to the beneficiaries, and taxable to them whether distributed or not, the corpus, or any part of it, was distributable only at the discretion of the trustees. The capital gain which became a part of the corpus of the trust is not income distributable under the will to the beneficiaries, and is not taxable to them. Cf. William S. Hotchkiss Estate, 16 B. T. A. 1334; Marion Shainwald Sevier, 14 B. T. A. 709. The petitioners have failed to show that any part of the gain here in question was from income or that it was actually distributed.

There is no controversy concerning the ordinary net income of the trust, arising from rents, interest, dividends, etc., which were currently distributable to the beneficiaries.

The capital gain in question must be taxed to petitioners unless the statute authorizes its deduction in computing the taxable income of the trust estate. The applicable sections of the Kevenue Act of 1928 are set out in the margin. In Anna M. Chambers et al., Trustees, supra, we held that such capital gains are not deductible under section 162 (b). It remains to be determined whether they are deductible under section 162 (c).

We think .the .word “income” as used in section 162 (c) includes gain from the sale of corpus which is distributed as income but does not apply when under the laws of the state it is a part of the corpus of the estate and is not distributable as income. This construction is, we think, further justified when we examine the whole section, which must be considered in its relation to other sections of the act in arriving at the content of the word “income.” It is provided in (c) that “the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary” but under section 22 (b) (3) of the Revenue Act of 1928 a legatee, heir, or beneficiary is not taxable on the corpus of an estate which is distributed to him under the provisions of the will. Cf. Burnet v. Whitehouse, 283 U. S. 148. He is, however, taxable upon amounts paid to him as an ordinary beneficiary of income. Cf. Irwin v. Gavit, 268 U. S. 161; Helvering v. Butterworth, 290 U. S. 365. The fact that under the revenue laws capital net gain is taxable income does not prevent such gain from becoming a part of the corpus of the estate immediately upon its realization nor change its character to income when distributed by the trustees under a power given them by the will .to distribute corpus. If, as here, such gain is in fact distributed by the trustees under their discretionary power to distribute corpus, it is a distribution of corpus to the heirs, legatees, or beneficiaries under the will, and is not deductible by the fiduciary, cf. Helvering v. Pardee, 290 U. S. 365.

In Helvering v. Pardee, supra, the Court held that payments of an annuity given to the testator’s wife, payable at all events, and so not dependent upon the income of the trust estate, were not deductible from the income of the trust estate and were taxable to the fiduciary. In holding she took as an ordinary legatee the Court said, “Payments to her were not distribution of income but in discharge of a gift or legacy.”

We think the capital gain here in question was distributed to the. beneficiaries as legatees of the decedent. It was a distribution of. corpus of the estate, and, following the reasoning of Helvering v. Pardee, supra, and Burnet v. Whitehouse, supra, is not deductible in determining the net income of the. petitioners.

Reviewed by the Board.

Decision will be entered under Bule 50.

Sternhagen and Murdock concur in the result.

       SEC. 161. IMPOSITION OP TAX.
      (a) Application of tax. — The taxes imposed by this title upon individuals shall apply to the income oí estates or of any kind of property held in trust, including — (1) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust; (2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct; (3) Income received by estates of deceased persons during the period of administration or settlement of the estate; and (4) Income which, In the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.
      (b) Computation and payment. — The tax shall be computed upon the net income of the estate or trust, and shall be paid by the fiduciary, except as provided in section 166 (relating to revocable trusts) and section 167 (relating to income for benefit of the grantor). Por return made by beneficiary, see section 143.
      SEC. 162. NET INCOME.
      The not 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, and the amount of the income collected by a guardian of an infant which is to be held or distributed as tlie court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year;
      (c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, 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 properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary.

       SEC. 22. GROSS INCOME.
      (b) Exclusions from gross income. — The following items shall not be included in gross income and shall be exempt from taxation under this title:
      (3) Gifts, bequests, and devices.. — The value of property acquired by gift, bequest, devise, or inheritance (but the income from such property shall be -included in gross income).


author: Matthews : TRAmmell,

text:
    Malloy & Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 57906.
    Promulgated February 18, 1936.

      Phil I). Morelocle, Esq., for the petitioner.

      W. B. Lems ford, Esq., for the respondent.
   OPINION.

Matthews :

The respondent has taken the position that the contract executed in August 1928 constituted the sale of a capital asset; that the full amount of $140,000 received by the petitioner in 1928 should be taxed as income in that year, diminished only by that portion of the leasehold costs attributable to the gas leases; that the petitioner is not entitled to any deduction for depletion based on the total sale price of $140,000; and that the petitioner is not entitled to deduct therefrom the unexhausted cost of plant and equipment, or expenses incurred and to be incurred in the performance of the contract.

Although the petitioner originally reported the sum of $140,000 as income for 1928, and claimed depletion of 27% percent, limited to 50 percent of the net income from the property, it is now claiming that the $140,000 should be spread or prorated over a period of 10 years representing the estimated life of profitable production of the gas field from the effective date of the contract, and that the cost of plant and equipment and operating expenses should likewise be prorated and allowed as deductions annually over the same period; or if it should be held that the entire amount of $140,000 constituted income for 1928, then such amount should be reduced by the estimated expenses of operation and the unexhausted cost of plant and equipment as of August 1,1928, plus the sums later expended in constructing additional plants. Regardless of the method by which the net income for 1928 is computed, the petitioner earnestly contends that it is entitled to a deduction for depletion on the total sale price at the rate of 27% percent, in accordance with the provisions of section 114 (b) (3) of the Revenue Act of 1928.

We construe the contract of August 1928 to provide for the sale of all the gas to be produced during the life of the field by the petitioner under certain oil and gas leases which it held. Under its leases petitioner had the right to extract gas and oil and the gas content of the oil. Under such leases, petitioner did not become the owner of these products until they were extracted and possessed. Osborn v. Arkansas Territorial Oil & Gas Co., 103 Ark. 175; 146 S. W. 122. Furthermore, petitioner was required under the contract to extract and deliver the gas to the purchaser at its own expense. Since the petitioner was not the owner of the gas in place, the contract can not be construed to convey any title or interest which did not belong to the petitioner. Under these circumstances we hold that the contract was for the sale of gas to be produced during the life of the field and not a sale of the gas in place or an assignment of a portion of the petitioner’s leasehold rights.

The petitioner correctly included in its income for 1928 the sum of $140,000 which it received in that year in payment of the gas produced after August 1, 1928, and as an advance payment for the gas to be produced during the life of the field and delivered by it to the Standard Oil Co. of Louisiana. This amount clearly constitutes gross income within the meaning of section 22 (a) of the Revenue Act of 1928 and since it was received in 1928, must be included in income for that year, .section 42. Under petitioner’s method of accounting, it was properly accounted for in the year 1928.

In the view we take of the case, it is not necessary to determine the life of the field and wte have therefore made no finding of fact as to this.

If the petitioner had extracted and sold the gas from month to month, as had been its previous practice, there could be no doubt that it would be entitled to deduct percentage depletion, as provided in section 114 (b) (3) of the Revenue Act of 1928, set out in the margin. So far as its right to a deduction for depletion is concerned, we think it is immaterial that petitioner sold all the gas to be produced for a lump-sum consideration which was paid to the petitioner during the taxable year. The amount thus received by the petitioner. is no less “gross income from the property” and it is, therefore, entitled' to a deduction for depletion computed in accordance with the provisions of section 114 (b)(3). The respondent’s action on this issue is reversed. Cf. Bankline Oil Co., 33 B. T. A. 910.

There remains for our determination the question whether the petitioner may offset against the total consideration of $140,000 the unexhausted • cost of its plants and equipment and operating expenses to be incurred in later years in connection with the performance of the contract. Petitioner continued to own these properties and subsequently constructed two additional plants to be used in the operation of its business. The plants and equipment were used for the production of oil as well as for the production of casing-head gas. It is impossible to allocate any part of the operating expenses to the production of the gas. In each year of operation, therefore, the petitioner will be entitled to a deduction for depreciation on these physical properties and for operating expenses incurred in that year. Petitioner may not anticipate these deductions but they must be charged against income from the sale of future products derived from the petitioner’s wells. The petitioner’s contention on this point is denied.

Reviewed by the Board.

Judgment will be entered imder Rule 50.

Murdock dissents.

TRAmmell,

dissenting: I am unable to agree that the entire amount of $140,000 is gross income in 1928. The fact is that it can not be determined what part, if any, of said amount constituted gross income, or certainly net income.

The petitioner sold the gas output, which it would require several years to produce and deliver, for $140,000, received in advance. If the expenses of production, including the exhaustion of physical equipment used for that purpose, equaled the amount received, there would have been no income at all. If a contractor receives an amount in one year as a contract price for building a house, obviously the total amount received is not income. There must be offset against the amount received what it cost to build the house. The illustration is applicable to this case in that petitioner received $140,000 in 1928 for the production and delivery of gas in future years. What it cost to produce and deliver the gas, certainly, would reduce the profit the taxpayer received.

The respondent takes the position that the contract constituted a sale of a capital asset; that the full amount received by petitioner in 1928 should be taxed as income for that year, diminished only by that portion of the leasehold cost applicable to the gas leases; that the petitioner is not entitled to any deduction for depletion based on the amount of $140,000 so received; that petitioner is not entitled to deduct the unexhausted cost of plant and equipment nor expenses incurred or to be incurred in the performance of the contract.

In my opinion, the amount received should either be spread or prorated over the estimated period representing the life of profitable production from the effective date of the contract. In other words, the amount received should be allocated in accordance with the amount of gas delivered each year, and against that should be deducted expenses of operation, depreciation of plant, etc.; or the determination of the amount of taxable gain should be deferred until it could be determined what the actual amount of the taxable gain was. It is entirely possible that the taxpayer at the expiration of the contract had-no gain whatever from the receipt of $140,000. While the taxpayer reported upon the accrual basis, that method clearly did not reflect income and some method should be used which would clearly reflect the income of the taxpayer. I see no objection to the use of the completed contract method in the determination of income in this case. In my opinion, it is immaterial that the respondent’s regulations restrict the long term contract method of reporting income to building, installation, or construction contracts. Neither the Commissioner’s regulations nor the taxpayer’s erroneous method of accounting as to this transaction can operate to nullify the mandatory requirements of the statute that the computation of net income shall be made in accordance with such method as will clearly reflect the income.

We applied the long term contract method, in the case of Falketind Ship Co., 6 B. T. A. 44. In that case the taxpayer received money for passage and freight in advance of the voyage, which occurred during portions of two accounting periods. We held that the receipts or gross income should be offset by the expenses of the voyage subsequently incurred, and that the net income be reported for the year in which the voyage was completed. This decision was cited with approval in Kahuku Plantation Co., 12 B. T. A. 977. The same principle is involved in Kekaha Sugar Co., Ltd., 13 B. T. A. 690, affirmed on this point, 50 Fed. (2d) 322.

All receipts obviously do not constitute income. Before income can be received the cost of producing it must be returned. That is not true in this case.

Mellott agrees with this dissent.

       Sec. 114. (t>) Basis for depletion.—
      *******
      (3) Percentage depletion for oil and gas wells. — In the case of oil and gas wells the allowance for depletion shall he 27% per centum of the gross income from the property during the taxable year. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property, except that in nó case shall the depletion allowance be less than it would he if computed without reference to this paragraph.

       This dissent was filed during Mr. Trammell’s term of office.


author: ARUndell :

text:
    Oxford Institute, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 77952.
    Promulgated February 18, 1936.

      A. A. Jones, Esq., and J. W. North, G. P. A., for the petitioner.

      J. D. Kiley, Esq., for the respondent.
   OPINION.

ARUndell :

The issue is the deductibility as “expenses paid or incurred during the taxable year” (sec. 23(a) of the Revenue Act of 1932) of three items of $6,406, $4,980, and $410 paid during 1932 by the corporation to trustees as bonuses for its various classes of employees, which amounts were subject to be paid back to the corporation if the employees failed to fulfill their contracts.

Contingent bonuses for employees have been held not accruable as expenses until the occurrence of the event on which liability depends. S. Naitove & Co., 8 B. T. A. 589; affd., 32 Fed. (2d) 949; certiorari denied, 280 U. S. 582. See also, Fuller Brush Co., 8 B. T. A. 855; Commercial Electrical Supply Co., 8 B. T. A. 986; Western States Envelope Co., 10 B. T. A. 856; Horn & Hardart Baking Co., 19 B. T. A. 704. In all of these cases the corporations made no present payments on account of the contingent bonuses, but merely attempted to accrue them as expenses on their books, and they were disallowed.

The present case presents a different fact situation. The corporation here was under a binding liability to make monthly payments to a trust of all bonuses accrued for its employees. Hibbard, Spencer, Bartlett & Co., 5 B. T. A. 464; Elgin National Watch Co., 17 B. T. A. 339. Each month the corporation actually paid out and expended as required by its irrevocable trust agreement the sums for which deduction is sought here. The sums were put beyond the control of the corporation. The fact that they were subject to be paid back to the corporation on the happening of contingencies within the control of the employees does not change their character as present expenses to the corporation. They are deductible as “expenses paid * * * during the taxable year.”

Judgment will be entered under Rule 50.