text:
    New Quincy Mining Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 56331.
    Promulgated July 27, 1937.

      Walter G. Moyle, Esq., for the petitioner.

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

Hill :

The first question for determination is whether petitioner is entitled to include as part of its capitalized development costs recoverable through depletion an amount of $122,239.19, representing money embezzled or misappropriated by one of its officers in years prior to 1926. This amount is made up of the following items: $22,316.55 proceeds of sales of unauthorized stock; $89,441.78 collected as assessments on such stock; and $10,480.86 of other funds of petitioner, being the amount shown in the findings of fact which were embezzled or misappropriated by petitioner’s secretary.

Petitioner’s mine was in the development stage prior to March 1928, and petitioner contends that the items enumerated should be included in its capitalized development costs in order that they may be recovered through deductions for depletion. Respondent contends to the contrary.

Section 28 (1) of the Revenue Act of 1928 is, so far as pertinent here, as follows:

(I) Depletion.—In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements,'according to the peculiar conditions in each case; such reasonable allowance in all cases to be made under rules and regulations to be prescribed by the Commissioner, with the approval of the Secretary. * * *

Article 242 of Regulations 74, promulgated by the Commissioner under the Revenue Act of 1928, is applicable to this question and is as follows:

Art. 242. Allowable capital additions in case of mines.—(a) All expenditures in excess of net receipts from minerals sold shall be charged to capital account recoverable through depletion while the mine is in the development stage. The mine will be considered to have passed from a development to a producing status when the major portion of the mineral production is obtained from workings other than those opened for the purpose of development, or when the principal activity of the mine becomes the production of developed ore rather than the development of additional ores for mining.
(Z>) Expenditures for plant and equipment, not including expenditures for maintenance and for ordinary and necessary repairs, shall be charged to capital account recoverable through depreciation.

We think it a fair construction of the meaning of such regulation that expenditures which may be included in the capitalized development costs of a mine must be expenditures made for the purpose of such development. The items involved here had no relationship to the development of petitioner’s mine. The stock sold by the secretary and issued in excess of the authorized capital stock was not a part of the authorized capital structure of petitioner. However, petitioner was legally obligated either to adjust its capital structure to validate the stock in question or to reimburse or satisfy the holders thereof for the moneys received by it for such stock and assessments collected thereon. The moneys so received by petitioner were lost to it through misappropriation or embezzlement by its secretary in the years prior to 1926. Thus petitioner sustained a loss in such prior years in the amount of the moneys so embezzled, but the loss was sustained through the unauthorized and illegal acts of its secretary, entirely separate and apart from the operations in the development of its mines or mineral lands. The proceeds of the sale of the unauthorized stock were not chargeable to capital account in petitioner’s mining operations because they were never invested either in the purchase of the mining properties or in the development of such properties.

For the same reasons the moneys collected as assessments on the unauthorized stock were not chargeable to capital account either as capitalized development costs or otherwise.

The item of $10,480.86 claimed by petitioner to be part of the capitalized development costs of its mining operations was money which petitioner’s secretary abstracted and embezzled from petitioner’s operating funds and was thus prevented from being used as such. The embezzlement was a thing apart from the development operations of the mines. This money, not having been used or lost in such development, can not be capitalized as development costs.

We hold, therefore, that none of the items comprising the amount of $122,289.19 can be charged to capital account, recoverable through depletion.

The second question presented for determination is (1) whether the losses sustained or expenditures made by petitioner through the exchange of valid shares of its stock for unauthorized shares fraudulently issued by one of its officers should be allowed as statutory net losses in the sum of $22,316.55 for 1926 and $31,510.21 for 1927, deductible in subsequent taxable years; or, in the alternative, (2) whether such amounts should be included as part of the capitalized development costs, recoverable through depletion. The amount of $22,316.55 represents the value of 446,331 shares of petitioner’s stock which it exchanged for an equal number of shares of outstanding spurious stock in 1926. The market value of petitioner’s stock at the time of such exchange was 5 cents per share. The amount of $31,510.21 represents the excess of the market value of 173,133 shares of petitioner’^ stock on March 3, 1927, the date that amount of borrowed stock was returned to its principal stockholders, over the market value of the same number of shares of its stock on June 12, 1926, the date the stock was borrowed. The value of the stock on June 12, 1926, was 5 cents per share, and the value of such stock on March 3,1927, was 23.2 cents per share.

Petitioner contends that these amounts represent losses incurred in the operation of a trade or business regularly carried on by it and therefore constitute statutory net losses in 1926 and 1927, respectively, which may be carried forward into the two succeeding years as deductions from gross income in such years. The respondent contends that the losses in question were not so incurred and hence do not constitute statutory net losses, deductible subsequent to the taxable year in which incurred. Assuming without deciding that the items in question represented losses deductible in the taxable years in which incurred, it is necessary to the solution of the question presented to determine whether such losses were incurred in a trade or business regularly carried on by petitioner.

The applicable provisions of the statute are section 117 (a) (1), (b), and (e) of the Revenue Act of 1928.

Petitioner’s mine was in the development stage up to March 1, 1928, and up to that date all expenditures were added to capitalized development costs, except expenditures for tangible depreciable assets, as required by article 242 of Regulations 74 hereinabove set out. Petitioner contends that in the development of the mine it was carrying on a business within the meaning of section 117, supra, and that the losses in question were incurred in such business and were net losses for the years 1926 and 1927. Assuming, for argument only, the correctness of this contention, the items are not deductible as net losses but recoverable only through depletion deductions as capitalized development costs. Article 242, supra; G. E. Cotton, 25 B. T. A. 866, 869; cf. Marsh Fork Coal Co. v. Lucas, 42 Fed. (2d) 83. The principle upon which article 242 rests is that the development of a mine is the development of a capital asset entailing expenditures for original construction and equipment.

However, it is obvious from the facts in this case that petitioner was not engaged in the development of its mining properties as a trade or business regularly carried on, but that such development was merely preliminary to the carrying on of the trade or business of mining after such development had been accomplished. The losses here sought to be deducted as net losses were sustained within the period of the development stage of the mine and not after it had reached a producing status. The losses, not having been incurred in a trade or business regularly carried on by petitioner, are not statutory net losses and not deductible as such. Harrisburg Hospital, Inc., 15 B. T. A. 1014.

The case of North American Investment Co., 24 B. T. A. 419, cited and relied on by petitioner, is not in point on the question of whether such losses constitute net losses deductible in subsequent taxable years, since this question was not involved in that case.

Petitioner contends, in the alternative, that if the items in question totaling the amount of $53,826.76, are not statutory net losses, deductible in subsequent taxable years, they should be charged to capital account as part of development costs, recoverable through depletion.

These items had no connection with the development operations of petitioner’s mines. They had to do solely with the adjustment of claims affecting petitioner’s capital stock structure and involved no expenditure in connection with petitioner’s mining or mine development operations. Therefore, they can not be capitalized as development costs recoverable through depletion allowances.

The third question presented for determination is whether the items of allowable depreciation on petitioner’s equipment in the amounts of $1,667.50, $1,759.99, and $308.74 for the years 1926, 1927 and the period January 1 to February 29, 1928, respectively, are deductible in the taxable years here involved as net losses in the taxable years above mentioned, or, in the alternative, chargeable to capital account as development costs recoverable through depletion.

Respondent, in his brief, confesses error in disallowing the items in question as capitalized development costs and admits that they constitute a part of development costs recoverable through depletion, but contends that there is a failure of proof to show the amount of net loss, if any, that was sustained in either of the periods above named. In our view of the case it is unnecessary to consider whether there was a failure of proof of the amount of the claimed net loss based upon the items of allowable depreciation. Since this depreciation was sustained during the development stage of the mine it does not constitute the basis for net loss because such loss was not incurred in a trade or business regularly carried on by petitioner and such depreciation is, therefore, not deductible as net loss. Respondent admits that the items of depreciation constitute a part of development costs recoverable through depletion. We so hold.

Judgment will be entered under Rule 50.

       SEC. 117. NET LOSSES.
      (a) Definition of “net loss”.—As used in this section the term “net loss” means the excess of the deductions allowed by this title over the gross income, with the following exceptions and limitations: ,
      (1) Non-business deductions.—Deductions otherwise allowed by law not attributable to the operation of a trade or business regularly carried on by the taxpayer shall be allowed only to the extent of the amount of the gross income not derived from such trade or business;

      (b) Net loss as a deduction.—If, for any taxable year, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be allowed as a deduction in computing the net income of the taxpayer for the succeeding taxable year (hereinafter in this section called “second year”), and if such net losses in excess of such net income (computed without such deduction), the amount of such excess shall be allowed as a deduction in computing the net income for the next succeeding taxable year (hereinafter in this section called “third year”) ; the deduction in all cases to be made under regulations prescribed by the Commissioner with the approval of the Secretary.

      (e) Net loss for 1926 or 1927.—If for the taxable year 1926 or 1927 a taxpayer sustained a net loss •within the provisions of the Revenue Act of 1926, the amount of such net loss shall he allowed as a deduction in computing net income for the two succeeding taxable years to the same extent and in the same manner as a net loss sustained for one taxable year is, under this Act, allowed as a deduction for the two succeeding taxable years.


source: Caselaw Access Project

author: Morris:

license: Public Domain

text:
    Coast Counties Gas and Electric Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 69843.
    Promulgated July 27, 1937.

      Granville S. Borden, Esq., for the petitioner.

      George D. Brabson, Esq., for the respondent.
   SUPPLEMENTAL OPINION.

Morris:

By order dated June 14,1937, the petitioner’s motion, filed April 13,1936, for reconsideration and revision of the opinion heretofore promulgated in this proceeding, 33 B. T. A. 1199, was granted. Action was deferred thereon and the decision was not entered pursuant to the opinion as the Board was reconsidering, in Metropolitan Edison Go.., Docket No. 57869, the principal question involved in this proceeding. The report in that proceeding was promulgated May 14, 1937, 35 B. T. A. 1110, and upon the basis thereof said motion was granted, the Board still having jurisdiction to take such action. That opinion held, on parallel facts, that the petitioner was entitled to deduct the amount of the premiums paid in redemption of bonds issued by its subsidiaries and assumed by it in a transfer of the assets of these subsidiaries to it, and overruled the opinion in the instant proceeding on that point. The amount of premiums paid in 1930 by this petitioner in the redemption of its subsidiaries’ bonds was $68,052.50, which was disallowed as a deduction in the prior report. Upon the authority of Metropolitan Edison Go., supra, it is now held that the petitioner is entitled to the claimed deduction of $68,052.50 for 1930 and the prior opinion is modified accordingly.

Judgment will be entered under Rule 50.


author: Disney:

text:
    The Puget Sound National Bank of Tacoma, Washington, John W. Davis, and Mrs. Mildred Fuller Wallace, as Residuary Legatees under Will of H. C. Wallace, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 80461.
    Promulgated August 3, 1937.

      George Donworth, Esq., for the petitioners.

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

Disney:

The petitioners are residuary trustees under the will of H. C. Wallace, who died January 1, 1931, a citizen and resident of the State of Washington. On March 14, 1932, the executors of his estate filed an income tax return for 1931 with Burns Poe, collector of internal revenue at Tacoma, Washington, under the name of “Estate of H. 0. Wallace”, showing deductions in excess of gross income. The entire income was received by the estate of the decedent.

In April 1932 Forbes P. Haskell, a coexecutor of the estate, orally requested the collector to do whatever was necessary to have an audit made of the return so that the estate could be closed. Accordingly, on April 20, 1932, the collector wrote the following letter to George G. Earley, internal revenue agent in charge at Seattle:

One of the local trustees of the Estate of Hugh C. Wallace, former Ambassador to France, would like to have an early audit of bis 1931 income tax return.
Would it be possible for you to assign Mr Carl D Eshelman or someone else to do the work before the transcripts are received back from Washington, D C? The trustee, who is Mr. Forbes B Haskell, President of the Puget Sound National Bank, has made a special request that this be done, which will expedite the closing of the estate.

On April 21, 1932, Earley wrote the following letters to Haskell, the collector, and the revenue agent, Eshelman:

To Haskell:

A letter has just been received from Mr. Poe stating that you are desirous of having an early audit of the 1931 income tax return of the Estate of Hugh C. Wallace.
Usually we do not take up the audits until the receipt of the 1931 return, hut in this instance, in order that the closing of the estate may .be expedited, we shall be glad to start the 1931 examination and get it out of the way as soon as possible. Mr. C. D. Eshelman will no doubt arrange with you for the audit within a few days.

To the collector:

We shall of course be glad to comply with the request of Mr. Haskell that the examination of the 1931 tax return of the Estate of Hugh C. Wallace be expedited in order that the estate may be closed. Mr. Eshelman has been advised of Mr. Haskell’s wishes and will no doubt have the case under way in a day-or so.

To Eshelman:

The two attached copies of letters just written are no doubt self-explanatory, but I might add that Mr. Poe’s letter states that Mr. Haskell is rather desirous of having an early audit of the estate’s 1931 tax return out of the way so that the closing of the estate might be expedited. I think in this instance we might very well take up the examination and make it from the retained copy and then we can associate the original return with the ease when we receive it.

A copy of the report made by the revenue agent on April 26, 1932, showing net income of $992.15, was transmitted to the estate on June 1, 1932, by the internal revenue agent in charge, with the information that the original had been forwarded to the Commissioner for final action. The letter of transmittal to the Commissioner contains the following paragraph:

The Collector of Internal Revenue in his letter dated April 20, 1932, states that Forbes P. Haskell, one of the executors of the estate, made a request for an early audit of the 1931 return.

The Commissioner received the letter on June 6, 1932.

At a hearing held on June 24, 1932, before the Superior Court of the State of Washington at Tacoma on the final report and petition for distribution of the estate of the decedent, Haskell testified that an audit of the income tax return of the decedent for 1931 disclosed that no tax was due. Thereafter on the same day the court Issued an order distributing the residuary estate of the decedent, having a value in excess of one million dollars, to the petitioners to hold in trust pursuant to the terms of the will. On August 19, 1932, pursuant to an application therefor, the court discharged the executors of the estate.

On March 1, 1934, the respondent mailed a notice of deficiency by registered mail to the estate of the decedent, care of Haskell, disclosing a deficiency of $8,926.73 in income tax for 1931. The deficiency, together with interest thereon in the amount of $1,164.88 to May 18, 1934, was assessed May 18, 1934.

A notice and demand for the tax, plus interest, was made by the collector on May 23, 1934, and was received, by Haskell on May 24, 1934.

In letters written on May 29, 1934, to the collector and the respondent, Haskell acknowledged receipt of the notice and demand, and advised them of the distribution of all of the assets of the estate of the decedent, the discharge of the executors, and the names and addresses of the residuary trustees of the estate.

On April 16, 1935, the respondent mailed a notice to the petitioners proposing to assess against them, as transferees, the deficiency, plus interest, determined and assessed against the estate of the decedent. Whether this proposed assessment is barred by the statute of limitations is the only question presented for decision.

The petitioners contend that the request made by Haskell for a prompt audit of the 1931 income tax return of the estate, construed in the light of the action taken thereon, constituted a request for assessment of tax liability within one year within the meaning of section 275 (b) of the Revenue Act of 1928, and operated to bar assessment against the estate after one year from April 21, 1932, the date of receipt of the collector’s letter by Earley, and against them as transferees on April 21, 1934.

Section 275 (a) of the Revenue Act of 1928 provides generally for assessment of income tax within two years after the return was filed. Subdivision (b) provides, in part, that:

In the ease of income received during the lifetime of a decedent, or by his estate during the period of administration, * * * the tax shall be assessed, * * * within one year after written request therefor (filed after the return is made) by the executor, administrator, or other fiduciary representing the estate of such decedent, * * * but not after the expiration of two years after the return was filed. * * *

A statute of limitations operates against the Government only when it gives its consent. The statute here prescribes a precise method for shortening the general period of limitation for assessment of taxes on income received during the course of administration of an estate. One of the conditions is that the request therefor be made in writing. We have said that the provision requires a strict construction. Mrs. Niels (Mellie) Esperson, Executrix, 13 B. T. A. 596; affd., 49 Fed. (2d) 259; certiorari denied, 284 U. S. 65.8. “When a statute limits a thing to be done in a particular mode, it includes the negative of any other mode.” Botany Worsted Mills v. United States, 278 U. S. 282. To obtain the benefit of a period of limitation there must be a “meticulous compliance” by the taxpayer with all of the prescribed conditions. Lucas v. Pilliod Lumber Co., 281 U. S. 245.

No contention is made here that the executors, or any of them, ever actually signed a request for assessment within one year. The petitioners argue, however, that the statute does not require a request signed by the taxpayer; that the letter written by the collector to Earley was written by the former as agent for the executors, and that Earley had ample authority to receive the request. The present proceeding does not require a consideration of the legal points raised by the argument.

We have said that if a taxpayer desires to come within the terms of section 275 (b), supra, his “request for assessment within the specified period must meet all the statutory requirements and be sufficiently clear to put the Commissioner on notice of such intention.” Mary Lee Winger, Executrix, 30 B. T. A. 357.

The evidence of record on the verbal request made by the taxpayer is confined to the following testimony of Haskell:

X communicated with Mr. Poe. I talked with Mr. Poe regarding the matter and told him that we wanted to close the estate and that we would like to have an audit, and asked him what was necessary to do, and he advised me that request would have to be made to Mr. Earley in Seattle for the audit, and he offered to write Mr. Earley on my behalf to ask him to make the audit.

The words employed by Haskell to convey his intent to the collector were not of the kind that would have been used to clearly express a desire to bring the estate within the terms of the applicable statute. Neither the term “assessment” nor anything equivalent thereto, was used, and no reference was made to section 275. The request expressed nothing more than a desire to have an audit made of the income tax return of the estate to place the executors in a position to close the estate, something entirely different from a desire to be bound by a shorter period of limitation. It falls short of putting the Commissioner or any of his agents on notice of a desire to have the income tax liability of the estate assessed within one year. The correspondence of the collector and Earley reveals a like interpretation, for it refers merely to a request received for an audit, and does not disclose an understanding that the audit, in order to be effective for assessment purposes against the estate, would have to be made within one year. The request did not comply with the requirements of the statute and did not serve to shorten the period of limitation for assessment against the taxpayer. Mrs. Niels (Mellie) Esperson, Executrix, supra; Mary Lee Winger, Executrix, supra.

The petitioners next argue that the discharge of the executors on August 19, 1932, terminated the existence of, and the right to make a deficiency assessment against, the estate, and had the effect of shortening the statutory period of limitation for assessment against them as transferees to one year later.

The respondent is not attempting in this proceeding to sustain an asserted deficiency in income tax against the estate and there is no need to consider the laws of Washington to determine whether the respondent has or had a right to make an assessment against the estate or whether power exists to compel the discharged executors to respond in their representative or individual capacity to an assessment against them for the deficiency. Our problem here is to determine whether the transferee liability asserted against the petitioners is barred by the statute of limitations, and the answer is not controlled by lack of a right to proceed against the taxpayer because of the functus oficio status of its representatives. See Hulburd v. Commissioner, 296 U. S. 300.

The statute provides that income taxes of taxpayers “shall be assessed within two years after the return was filed.” Sec. 275 (a), Revenue Act of 1928. This period was not shortened by the discharge of the executors of the estate prior thereto after a final accounting. William B. Weigel et al., Trustees, 34 B. T. A. 237. The case of Hulburd v. Commissioner, supra, relied upon by the petitioners, is not contrary to the rule. That case, as presented to the Supreme Court, involved transferee liability of an estate for unpaid income tax of a corporation dissolved during the lifetime of the decedent. The major question for decision was whether the executors were subject to assessment as transferees in their representative capacity after their discharge. The question of whether the liability was barred by the statute of limitations was decided by us in a preliminary report (21 B. T. A. 23) and was not presented to the Supreme Court for decision. Neither does Nauts v. Clymer, 36 Fed. (2d) 207, help the petitioners. There the deficiency notice mailed to one of the discharged executors of the estate was held to be insufiicient to stay the running of the statute, with the result that neither the assessment subsequently made against the estate nor the transferee notice sent to Clymer was timely.

A further contention of the petitioners is that, if the request of Haskell for an audit be ignored, the statute bars assessment against them not later than March 15, 1935, or one year after the two-year limitation period for assessment against the estate. The argument on the point is, in substance, that with the discharge of the executors the estate ceased to exist as an entity and that the deficiency letter mailed to the estate on March 1, 1934, was a nullity and did not serve to extend the statute. The contention is without merit.

Irrespective of their previous discharge by the probate court,.the executors could have used the deficiency notice as the basis for an appeal to the Board and the period of limitation would have been stayed during the pendency of the petition before us even though we lacked jurisdiction to redetermine the deficiency. American Equitable Assurance Co. v. Helvering, 68 Fed. (2d) 46, affirming 27 B. T. A. 247; U S L Battery Corporation, 32 B. T. A. 810; affd., 84 Fed. (2d) 1020; certiorari denied, 299 U. S. 593.

The period for assessment against the estate did not expire until March 14,1934, or two years after the return was filed. Sec. 275 (a), supra. The mailing of the deficiency notice to the estate extended the period of limitation for assessment against the taxpayer for 120 days, or to July 12,1934. Secs. 272 (a) and 277. The provisions of section 311 (b) (1) extended the period for assessment against the petitioners to “within one year after the expiration of the period of limitation for assessment against the taxpayer.” Commissioner v. Gerard, 78 Fed. (2d) 485. The notice to the petitioners, as transferees, 'was mailed on April 16, 1935, a date within the limitation period of three years and 120 days allowed by the statute under the facts prevailing here (in fact less than three years and 60 days), and less than one year after assessment was made against the transferor. It follows that assessment of the liability of the petitioners as transferees is not barred by the statute of limitations.

In view of the timely notice given the petitioners it is not necessary to consider the effect of the failure of the executors to notify the Commissioner of their discharge, as required by section 312 (a) in order to be relieved of liability in their representative capacity.

Reviewed by the Board.

Decision will be entered for the respondent.


author: Arnold :

text:
    Ralph W. Street, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 72609.
    Promulgated August 3, 1937.

      Ralph W. Street, Esq., pro se.

      A. H. Fast, Esq., for the respondent.
   OPINION.

Arnold :

The respondent contends that the assignment by petitioner to his wife under date of July 29, 1927, was not effective to relieve him of the tax (1) because he had agreed not to assign his claim against the Missouri corporation during the continuance of the option and (2) because it was, if effective, an assignment of future income and taxable to the assignor under the rule laid down in Lucas v. Earl, 281 U. S. 111, and Burnet v. Leininger, 285 U. S. 136.

Petitioner contends that the assignment in 1927 was only an evidence of the agreement made in 1923; that there was a joint venture and that Mrs. Street had a property interest of one-half of her husband’s interest therein from the time of the agreement in 1923.

Considering all the evidence in the record, we agree with the contention of the petitioner. The evidence shows that long before the assignment in 1927 petitioner and his wife agreed that they should be associated in the enterprise and share equally. He and his wife were joint adventurers in the enterprise, cf. Denny v. Guyton, 327 Mo. 1030; 40 S. W. (2d) 562; Hobart-Lee Tie Co. v. Grodsky, 329 Mo. 706; 46 S. W. (2d) 859. Each participant in a joint adventure is taxable on the profits he realizes from the joint enterprise and it is not necessary that they furnish capital and services in equal amount, and the fact that one contributes property previously acquired does not destroy the validity of the arrangement, Motter v. Smyth, 77 Fed. (2d) 77. As the wife was a joint adventurer in the enterprise, the amount she realized therefrom was taxable to her and not to petitioner, H. S. Tuthill, 22 B. T. A. 887; Charles C. Ruprecht, 16 B. T. A. 919; affd., 39 Fed. (2d) 459. His interest, and consequently hers, was indefinite and uncertain prior to the contract of April 28, 1927. When it was ascertainable the assignment was made, which simply evidenced their understanding as it existed from the time they embarked in the enterprise. Mrs. Street was actively engaged in promoting the enterprise from its inception and we think had a property right in the profits. This right existed and was enforceable regardless of the assignment of July 29, 1927. Cf. William E. Seatree, 25 B. T. A. 396 (and cases cited therein); affd., 72 Fed, (2d) 67; Leonard Marshall Wright, 26 B. T. A. 21; John F. Canning, 29 B. T. A. 99; Hall v. Burnet, 54 Fed. (2d) 443; certiorari denied, 285 U. S. 552.

The fact that petitioner had agreed not to assign his claim during the period of the option did not preclude him from making an assignment evidencing the rights of those associated with him in such amount as should ultimately be realized from the venture. This we think is all he did.

It is immaterial that the $100,000 was carried on the books of the Missouri corporation as a credit to petitioner or that it was termed a promotion “fee” by various parties. It represented the interest of petitioner and his associates in the enterprise and came to be the only profit made by them. He was acting for himself and those associated with him in what he did. Nor do we think the fact that the stock of the Missouri corporation stood in the name of petitioner and Cravens is controlling. It appears from the balance sheet that the stock was “authorized but not issued” on December 31, 1926, and from the various contracts, it is clear that there was no permanent arrangement as to the final disposition of the stock before the option agreement was entered into. Moreover, the $200,000 was carried on the books of the Missouri corporation as a credit to petitioner and Cravens.

Considering all the facts in the record, we think the $36,000 was properly returned by Mrs. Street and therefore sustain the contention of the petitioner.

Reviewed by the Board.

Decision will Toe entered for the 'petitioner.

Morris dissents.


author: Hill :

text:
    Edward T. Hall, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81118.
    Promulgated August 3, 1937.

      Luther E. Smith, Esq., for the petitioner.

      H. F. Noneman, Esq., for the respondent.
   OPINION.

Hill :

Respondent has determined that the income in 1932 of the trust involved here is taxable to petitioner on the theory that such income was used to discharge a legal obligation of petitioner. If respondent’s premise is correct, then under the law as now settled, his determination must be approved.

Thus, it has been held that where a husband establishes a trust, the income of which is to be paid to his wife in lieu of alimony, the income is taxable to the husband, Douglas v. Willcuts, 296 U. S. 1; and such is the rule notwithstanding the contemporaneous divorce decree is silent as to alimony, Albert C. Whitaker, 83 B. T. A. 865. Also, the income is taxable to the grantor where the trust is established to provide for the support, maintenance, and education of his minor children, Helvering v. Stokes, 296 U. S. 551; Helvering v. Schweitzer, 296 U. S. 551, or where the income is paid to the wife in settlement of her dower or other statutory interest in the husband’s property, Commissioner v. Brooks, 82 Fed. (2d) 173, reversing 31 B. T. A. 70.

In the instant case the parties have stipulated that petitioner’s wife, being the guilty party, had under the facts and the statutes of Missouri forfeited all rights and claims under and by virtue of the marriage, including maintenance, support, alimony, dower, and other marital rights, and had fully and completely forfeited all rights in and to the property of her husband by reason of the marriage. It is further stipulated that in such circumstances the courts of Missouri were without jurisdiction to render a decree of alimony in favor of the wife. It must follow, therefore, that the trust involved was not established by petitioner to discharge any legal obligation on his part in respect of alimony, support, or maintenance, or as consideration for the release of his wife’s dower or other marital rights in his property. Nor was the trust intended to provide support and maintenance for the children, since they remained in petitioner’s care and custody.

Respondent does not defend his action on any of these grounds, but contends that the income of the trust in question is taxable to petitioner solely on the theory that the trust instrument itself was a valid contract between petitioner and his wife and created an obligation upon petitioner, which the income of the trust was used to discharge. Such contention, we think, can not be sustained. Plainly under the facts disclosed here, petitioner was not moved to establish the trust in order to discharge a then existing legal obligation. The parties have stipulated, and we have so found, that petitioner created the trust “because of his love for her (his wife) and the fact that she was the mother of his four children, and because he could not see her suffer.” To justify taxation of the income of the trust to the grantor, it must appear that the trust was established to discharge a legal obligation of the grantor. It can not be said under the facts here that the trust instrument itself gives rise to the obligation which the trust income is to satisfy.

Respondent further argues on brief that the trust agreement was predicated not only upon a good consideration, but in addition upon a valuable consideration, in that the wife relinquished any rights she might have had in any property jointly owned by her and petitioner, and agreed to reconvey any such property. This argument, we think, must fail in the light of the stipulated facts. It is not shown that there was any property jointly owned by the spouses. On the contrary, it is stipulated that petitioner’s wife and the man involved, whom she intended to marry, were without means and without definite income to support themselves. It was because she was wholly without means that she begged her husband for an allowance. The trust agreement, which contained a clause relinquishing the wife’s interest in any jointly owned property, was in the form ordinarily used in drafting separation agreements, and obviously was used by petitioner not for the purpose of effecting a transfer of Ms wife’s interest in property jointly owned by them, but as a part of his plan to protect his young children from the notoriety and scandal which would result from a publication of the true situation.

The divorce decree was granted in 1927. Petitioner’s wife married the man involved shortly thereafter. During the taxable year 1932 petitioner was under no legal obligation to contribute to the support of his former wife, or to pay her alimony. The issue presented here, we think, is governed by our decisions in Henry Oliver Rea, 35 B. T. A. 1132, and Harry S. Blumenthal, 34 B. T. A. 994.

In the Rea case, the husband created a trust, the income of which was payable to his wife during her life. The wife had instituted divorce proceedings prior to the creation of the trust and an absolute divorce was granted her subsequently. However, no obligation on the part of the husband existed under Pennsylvania law to support his former wife after the divorce, and we held that the income of the trust for 1932 was not taxable to him.

In the Blumenthal case, we held that the petitioner’s income did not include the income of a trust established by him for his divorced wife, who had since remarried, saying:

But there was no obligation upon the part of the petitioner during the taxable year (1931) to support his former wife, who had married in 1926. * * * His entire obligation to support her had been discharged prior to 1931. He had only a contingent remainder interest in the trust established for her and was not taxable with the income of that trust. Cf. Reinecke v. Smith, 61 Fed. (2d) 324; Sidney R. Bliss, 26 B. T. A. 962; Nanaline H. Duke et al., Executors, 23 B. T. A. 1104; affd. 62 Fed. (2d) 1057 ; 290 U. S. 591.

Respondent’s determination on the submitted issue is reversed.

Reviewed by the Board.

Judgment will be entered under Rule 50.

Mellott dissents.


text:
    The Alamo National Bank of San Antonio, Executor of the Estate of Lewis Williams Alexander, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. L. W. Alexander, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 77082, 77083.
    Promulgated August 3, 1937.

      Robert Ash, Esq., for the petitioner.

      R. P. Hertzog, Esq., F. T. Donahoe, Esq., and O. N. Kitchin, Esq., for the respondent.
   OPINION.

Hill :

These proceedings, duly consolidated for hearing, involve deficiencies in income tax of petitioners for the year 1931 in the amounts of $30,741.74 and $15,250.48, respectively. The sole issue raised by petitioners is the action of the respondent in refusing to place a value, as of December 31, 1921, on the franchise acquired by them on that date for the exclusive right to bottle and distribute Coca-Cola in certain specified counties of Texas. In his answer, in addition to denying the error alleged, respondent specifically pleaded estoppel, based upon certain matters referred to hereinbelow.

The consolidated proceedings were heard at San Antonio on October 1 and 3, 1934. Upon motion of the petitioners, the issues were separated, and the hearing in the first instance was limited to the question of estoppel. On April 20,1935, a memorandum opinion was filed herein, and on the same date an order was entered pursuant thereto, denying respondent’s plea of estoppel. Subsequently, on suggestion of death of the petitioner, L. W. Alexander, an order was entered substituting in his place and stead the Alamo National Bank of San Antonio, executor of the estate of Lewis Williams Alexander, deceased. The cases were heard on the merits at Washington on August 19, 1936.

Respondent now urges reconsideration and reversal of the Board’s prior action on the issue of estoppel “in view of certain decisions rendered subsequent to the entering of the memorandum opinion.” The facts pertinent to the issue of estoppel were stipulated by the parties, and, in so far as deemed material here, are set forth below.

The original petitioners, herein for convenience sometimes referred to as the “petitioners”, were husband and wife, residents of San Antonio, Texas, who for the years 1921 and 1931 filed separate income tax returns on the community property basis.

They were the sole stockholders of the San Antonio Coca Cola Bottling Co., a Texas corporation, which prior to 1913 acquired an exclusive franchise to bottle and distribute Coca-Cola in certain designated counties in Texas.

At December 31, 1921, the San Antonio Coca Cola Bottling Co., was liquidated and its assets taken over by petitioners. The income which resulted from such liquidation was taxable income to the community estate of the petitioners. Each of the petitioners filed an income tax return for 1921, which. showed total “liquidating dividends” in the amount of $17,035.40.

Neither the books of the San Antonio Coca Cola Bottling Co., nor the 1921 returns of the petitioners made any mention of the Coca-Cola franchise which was owned by the company and was acquired by the petitioners upon liquidation of the company in 1921. The petitioners did not pay any income tax for the year 1921 on account of the acquisition of such franchise as a liquidating dividend, although an income tax in excess of the amount now in dispute would have been due for 1921 from each petitioner, based upon the value now claimed by petitioners for the franchise, amounting to $216,560, less the March 1, 1913, value thereof. At the time the petitioners filed their 1931 income tax returns and claimed a value of $216,560 for the franchise in determining the taxable profit realized from the sale thereof in 1931, the statute of limitations for the - assessment and collection of any additional taxes due for 1921 had expired.

Effective as of September 7, 1931, the petitioners sold, for a total consideration of $775,000, the business which they had acquired, in 1921 upon liquidation of the San Antonio Coca Cola Bottling Co.

In their income tax returns for 1931 the petitioners, in computing capital gain on the sale of the bottling business, placed a value on the Coca-Cola franchise, as of the date of acquisition, December 31, 1921, of $216,560.

Respondent’s notices of deficiency held that the basic date for computing gain from the sale in 1931 was December 31, 1921, but that as no franchise value had been reported as income upon liquidation of the bottling company in 1921, the petitioners were estopped from claiming that the franchise had a value as of that date.

The decisions rendered subsequent to the Board’s memorandum opinion and order of April 20,1935, above referred to, and which are cited and relied on by respondent to sustain his plea of estoppel, are: Commissioner v. Farren (C. C. A., 10th Cir., Jan. 28, 1936), 82 Fed. (2d) 141, reversing a memorandum opinion of the Board dated November 20, 1934; Rose v. McEachern (C. C. A., 5th Cir., Nov. 9, 1936), 86 Fed. (2d) 231; Larkin v. United States (C. C. A., 8th Cir., Aug. 15.1935), 78 Fed. (2d) 951; and memorandum opinion of the Board in the case of Carl J. Sehmidlapp, dated November 18, 1936. Respondent also cites Bothwell v. Commissioner (C. C. A., 10th Cir.), 77 Fed. (2d) 35, which was decided on April 10, 1935, just prior to, but was not considered in connection with, the Board’s memorandum opinion of April 20, 1935.

Petitioners seek to distinguish the cited cases on the ground that the transaction involved in each was not reported in the taxpayer’s return or the Commissioner otherwise placed on notice, while in the instant case, the respondent was fully advised of the liquidation of the bottling company in 1921. The distinction, we think, is not well founded. Very clearly the decisions referred to do not turn upon that point, and it is not discussed in the opinions except as it may incidentally appear in the statements of fact.

Solution of the issue presented here, we think, is not to be found in an attempt to determine whether or not the facts bring it within the technical rules applicable to the doctrine of estoppel. A more fundamental consideration is involved.

By failing to report as income in 1921 any value on account of the franchise received by them upon the liquidation of the bottling company, the petitioners in effect declared that such franchise had no value at that time. Crane v. Commissioner (C. C. A., 1st Cir.), 68 Fed. (2d) 640, 641; Bothwell v. Commissioner, supra; Fordyce v. Helvering (C. C. A., 8th Cir.), 78 Fed. (2d) 525, 528. Limitations having run, petitioners can not now change their position and take advantage of their own error by claiming a value for the franchise in 1921 in computing the gain derived from its sale in 1981. Stearns Co. v. United States, 291 U. S. 54.

In William Merriam Crane, 27 B. T. A. 860; affirmed as Crane v. Commissioner, supra, we attained the same result as in the cited cases, although not predicated upon precisely the same reasoning. In the Crane case, the petitioner owned certain realty which he had leased to an insurance company for a term of years. The lessee made improvements to the value of $95,182 in 1920, which were to revert to the lessor upon termination of the lease. Petitioner sold the property in 1927, and, in computing gain or loss on the sale, contended that he was entitled to deduct the depreciated cost of the improvements made by the lessee, although he had never reported any part of such cost or value in his income. We denied the petitioner’s contention, saying:

Furthermore, he is not in position to charge himself with any amount of increase in capital value as he might have been had he first taken some part of the increase into income. Prior to the sale he never recognized the receipt of any benefit from the expenditures made by his lessee. Until he has recognized the receipt of the asset, he can not set up capital value for it. ⅜ ⅜ * He argues that the Commissioner should have, taxed him with a profit in 1920, hut, since the bar of the statute of limitations prevents any additional assessment for 1920, the Commissioner can not avoid the effect of the statute and correct his mistake in 1927 by refusing to recognize a proper adjustment under the law. * * * Under such circumstances he (taxpayer) should not have an adjustment for which he never laid a proper foundation.

In Stearns Co. v. United States, supra, the Commissioner, at the request of the taxpayer, credited an overassessment for 1918 upon tax due for 1917. Thereafter, the taxpayer brought suit for a refund for the 1918 overassessment, substantially on the ground that such crediting of the overassessment was void because at that time collection of the 1917 tax was barred by limitation. The Supreme Court denied the taxpayer’s claim upon equitable grounds, stating in its opinion in part as follows:

The applicable principle is fundamental and unquestioned. “He who prevents a thing from being done may not avail himself of the nonperformance which he has himself occasioned, for the law says to him, in effect: ‘This is your own act, and therefore you are not damnified.’ ” Dolan v. Rodgers, 149 N. Y. 489, 491, 44 N. E. 167; and Imperator Realty Co. v. Tull, 228 N. Y. 447, 457, 127 N. E. 263; quoting West v. Blakeway, 12 Man. & G. 729, 751. Sometimes the resulting disability has been characterized as an estoppel, sometimes as a waiver. The label counts for little. Enough for present purposes that the disability has its roots in a principle more nearly ultimate than either waiver or estoppel, the principle that no one shall be permitted to found any claim upon his own inequity or take advantage of his own wrong. Imperator Realty Go. v. Tull, supra. A suit may not be built on an omission induced by him who sues.

In Commissioner v. Farren, supra, the taxpayers in 1918 each received 10,000 shares of stock in an oil company, of an actual value of $9.42 per share, as compensation for services rendered. Although taxable as income for 1918, no return was made for that year because the taxpayers honestly believed that no return was necessary until the stock was sold. The stock was sold in 1926, and the taxpayers contended that they were entitled to deduct the value of the stock when acquired in computing gain or less on the sales. The court denied such right on authority of Stearns Co. v. United States, supra, and other decisions mentioned, saying:

Petitioner (Commissioner) also urges that the taxpayers having, however, innocently, failed to return the stock as income in 1918 when received, may not for the purpose of reducing their 1926 taxes, rely upon a fact which they innocently concealed in 1918, after the statute has run on 1918 taxes. The Commissioner pleads that since the taxpayers treated the stocks in 1918 as having no market value, they ought not now to be permitted to ascribe a value to them. Petitioner’s position is supported by our decision in Bothwell v. Commissioner, 77 E. (2d) 35, in two decisions of the Eighth Circuit Court of Appeals, Larkin v. United States, supra, and Fordyce v. Helvering, 78 F. (2d) 525, of the First Circuit in Crane v. Commissioner, 68 F. (2d) 640, and by language used by the Court of Claims in Raleigh v. United States, 5 F. Supp. 622.

The principles laid down in the Stearns Co. case, supra, have in effect been recognized by the Courts of Appeals for the First, Eighth, and Tenth Circuits and the Court of Claims as being applicable to situations such as we have before us in the present case. Also, in Rose v. McEachern, supra, substantially the same views were expressed by the Court of Appeals for the Fifth Circuit.

Petitioners cite Estate of William Steele, 84 B. T. A. 173, which is, we think, clearly distinguishable on the facts from the instant proceedings. There we held that the taxpayer was not estopped to deny liability in 1931 on income realized in 1923 where a representative of the respondent was fully apprised of tire facts and both the taxpayer and respondent’s representative relied on a ruling of the respondent’s office to the effect that the transaction resulted in no income in 1923. It is to be noted that neither the instant case, nor any of those herein cited, involves a mutual mistake of law without more.

Upon consideration, in the light of the subsequent decisions above referred to, we are constrained to the view that our former action was in error. This conclusion renders it unnecessary to consider the issue raised by petitioners. The deficiencies determined by the respondent are approved.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: ARNOLD:

text:
    Daisy Christine Patterson, Executrix of the Estate of Frank H. Patterson, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 76580.
    Promulgated August 4, 1937.

      A. F. Hillix, Esq., and Elmer B. Hodges, Esq., for the petitioner.

      C. C. Holmes, Esq., and E. L. Weber, Esq., for the respondent.
   OPINION.

ARNOLD:

The respondent contends (1) that the transfer was made in contemplation of death, and/or intended to take effect in possession and enjoyment at or after the death of the transferor; (2) that the beneficial use and enjoyment of the property was subject at the date of the transferor’s death to the exercise of a power to alter, amend, and change and the property was therefore taxable under section 302 (d) of the Revenue Act of 1926.

From the evidence in the record we have found as a fact that the transfer was not made in contemplation of death. In fact it appears that the decedent did not want to create the trust and that the motivating cause was to prevent his son-in-law, Stephen S. Chandler, whom he disliked and distrusted, from getting hold of the securities belonging to his daughter, Margaret Patterson Chandler. To accomplish this the plan to create trusts by each of the parties in interest was worked out by his attorney, and the decedent, according to the agreement, established the Frank H. Patterson trust and transferred to it the property here in question. This, we think, bears no relation to a transfer in contemplation of death or intended to take effect in possession or enjoyment at or after death within the meaning of the revenue act.

The respondent argues that, because of the provision in the trust instrument that it was not to be construed to vest in any beneficiary an absolute interest in the trust property prior to the termination of the trust (five years after the death of himself and wife or the survivor of them), that it must be included in the gross estate as intended to take effect in possession and enjoyment at or after death, citing Reinecke v. Northern Trust Co., 278 U. S. 339. The Reinecke case is not authority for respondent’s contention. As to the “two trusts” there considered it was held that the tax was rightfully imposed because the donor had reserved the power of revocation and the transfers were not completed until the death of the donor. But as to the other five trusts where the donor alone did not have an absolute power of revocation or change it was held that the corpus was not subject to the estate tax upon the donor’s death. As to these trusts the Court in its opinion said:

* * * One may freely give his property to another by absolute gift without subjecting himself or his estate to a tax, but we are asked to say that this statute means that he may not make a gift inter vivos, equally absolute and complete, without subjecting it to a tax if the gift takes the form of a life estate in one with remainder over to another at or after the donor’s death. It would require plain and compelling language to justify so incongruous a result and we think it is wanting in the present statute.
*******
* * * In the light of the general purpose of the statute and the language of section 401 explicitly imposing the tax on net estates of decedents, we think it at least doubtful whether the trusts or interests in a trust intended to be reached by the phrase in section 402 (c) “to take effect in possession or enjoyment at or after his death,” include any others than those passing from the possession, enjoyment or control of the donor at his death and so taxable as transfers at death under section 401. That doubt must be resolved in favor of the taxpayer. Gould v. Gould, 245 U. S. 151, 153, 38 S. Ct. 53, 62 L. Ed. 211; United States V. Merriam, 263 U. S. 179, 187, 44 S. Ct. 69, 68 L. Ed. 240, 29 A. L. R. 1547.

In Shukert v. Allen, 273 U. S. 545, a gift of a remainder interest which, did not Test in possession and enjoyment until after the donor’s death, was held not to be a transfer intended to take effect in possession or enjoyment at or after the donor’s death and for that reason not subject to the tax.

Here the decedent had irrevocably transferred to the trustee the property in question. As to him the transfer had been completed when the property was transferred to the trust, and at the time of his death no interest in the trust property remained in him which could be passed on to the living and on which the Federal estate tax could accrue. Cf. Knowlton v. Moore, 178 U. S. 41; Reinecke v. Northern Trust Co., supra. The rights of the beneficiaries became fixed at the time the trust was executed and could not thereafter be changed, cf. Helvering v. St. Louis Union Trust Go., 296 U. S. 39; Becker v. St. Louis Union Trust Co., 296 U. S. 48. The death of petitioner did not affect these rights.

The respondent further argues that, because of the provision in the trust that the trustees shall have the power, “when the net income is insufficient therefor”, to use and disburse from time to time, principal of the trust estate “for the support, maintenance and/or care of Frank H. Patterson”, the corpus of the trust should be included in the gross estate under section 302 (d), Revenue Act of 1926, which provides that in determining the gross estate of the decedent there shall be included therein the value at the time of his death of all property “to the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke * * *.”

The fallacy of respondent’s argument lies in the fact that at the date of his death the decedent had no power to use any of the principal of the trust and never had possessed that power. The power of the trustees to use any part of the trust corpus for the support and maintenance of Frank H. Patterson was contingent upon a state of facts which never arose, i. e., when the net income of the trust was insufficient for the comfortable support, maintenance, and care of the transferor. This limitation on their power was recognized both by the trustees and the transferor, and the trustees never used nor were they asked to use any of the principal for that purpose.

The action of the trustees upon any request of Frank H. Patterson to use and disburse principal of the trust was likewise contingent upon the insufficiency of the income for his comfortable support, maintenance, and care, which we have found did not exist during the lifetime of decedent.

Under the terms of the trust it was not only necessary that the income of the trust be insufficient for the support and maintenance of the transferor before the trustees had the power to make any disbursement from the corpus, but it was necessary that a majority of the trustees decide that it was insufficient before such disbursement could be made.

True, the transferor was a trustee and entitled to participate in any such decision equally with the other trustees, but we can not assume from this fact that he would connive with the other trustees to dissipate the trust corpus in violation of the trust instruments by making a decision contrary to the known facts. This would be sheer speculation, unjustified by the record. We must rather assume that the trustees will act, as they did, within the power conferred upon them by the trust instrument.

Since the power granted the trustees to disburse any part of the trust corpus of the Frank H. Patterson trust was not absolute, but conditional upon a certain contingency which did not happen during the decedent’s lifetime and which he did not control, we hold that at the time of his death the decedent did not have the power, either alone or in conjunction with any other person, to change or alter the trust by diverting the property to himself. Tait v. Safe Deposit & Trust Co. of Baltimore, 74 Fed. (2d) 851.

There was here no absolute power in the transferor alone to revoke as in Reinecke v. Northern Trust Co., supra, nor in the transferor in conjunction with other persons as in Helvering v. City Bank Farmers Trust Co., 296 U. S. 85. There was here nothing more than a remote possibility that the contingency might occur which would give the trustees power to disburse trust corpus. Cf. Helvering v. St. Louis Union Trust Co., supra. Upon the facts in the record we think the Commissioner erred in including the value of the trust property in the gross estate of the decedent.

Reviewed by the Board.

Decision will he entered under Rule 50.

Mellott and Disney dissent.


author: Black:

text:
    R. E. Wyche, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 75071, 75072, 75073, 75074, 75075, 75083, 75102, 75156, 75807, 75808, 75809.
    Promulgated August 4, 1937.

      S. P. Cousin, Esq., and S. L. Herold, Esq., for the petitioners.

      Lloyd W. Creason, Esq., and G. R. Marshall, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: J. Elmer Walker, W. M. Pollock, D. A. Pollock, George W. Wetherbee, C. W. Lane, W. E. Hall, J. T. Tanner, Fenet & Caldwell, S. J. Caldwell, Jr., and J. D. Fenet-

   OPINION.

Black:

There are two questions presented by the pleadings for decision.

(1) Are petitioners liable as transferees of the Sales-Walker Co.? The amount which each petitioner received of the January 20, 1930, dividend distribution is not in issue. Those amounts have been stipulated. Each petitioner does however dispute that he is liable as transferee for any amount.

(2) If petitioners are liable as transferees, are they entitled to have the transferors’ tax liability for the year 1930 reduced by the allowance of 27½ per centum depletion of the $100,000 cash payment received from Phillips Petroleum Co. as part payment for the assignment of the oil leases in question ?

It will be unnecessary to discuss issue No. 2 until we have decided issue No. 1, for if we decide issue No. 1 in petitioners’ favor then it will be unnecessary for us to decide issue 2, not having the trans-feror corporation before us.

The burden of proof to establish transferee liability is of course upon respondent. As we have already stated, petitioners each admit that they received certain cash dividend distributions from the Sales-Walker Co. in January 1930, but the mere fact of a transfer of part of its assets by a corporation to its stockholders does not establish transferee liability. A necessary item of proof in any transferee proceeding is that the taxpayer transferor was insolvent at the time of the transfer or that the transfer itself made the transferor insolvent, or that the transfer was one of a series of distributions in pursuance of complete liquidation, which left the corporation insolvent. Stockholders receiving dividends from a solvent corporation not in liquidation can not be held as transferees.

Respondent does not dispute the correctness of the foregoing propositions, but he does contend that when the Sales-Walker Co. distributed in January 1930 the cash dividend of $89,505 to its stockholders, it thereby distributed the most of its assets which had value and that the remaining assets left in the hands of the corporation were of insufficient value to discharge its liabilities, including the tax liability here involved.

Petitioners contend that no tax liability against the corporation bad yet accrued for the year 1930, when the dividend distribution was made in January 1930, and therefore the $9,556.28 tax liability here in question should not be considered in determining the corporation’s solvency after the dividend distribution was made. We cannot agree with this contention.

It seems to be well settled that transferee liability extends to after-accruing taxes in the sense of retroactive liability for taxes in the year of transfer or prior years. In other words, the liability need not have been known when the transfer was made. So, after all, the decision as to whether petitioners are liable as transferees in the instant case turns upon a question of fact rather than one of law. That question of fact is whether the contingent payments of $150,000 which Phillips Petroleum Co. had contracted to pay the Sales-Walker Co. out of oil, if and when produced, had a fair market value of $75,000 at the time contract was received and at the time the cash dividend distribution of January 20, 1930, was made.

The parties all seem to be agreed that the principal asset which the Sales-Walker Co. had left on hand after the payment of the dividend in question was the $150,000 Phillips Petroleum Co. contract for the contingent oil payment. There was, to be sure, several thousand dollars cash left on hand and some other property against which there were only small liabilities exclusive of the tax here involved. The exact amount of these assets and liabilities, exclusive of the oil payment, we have been unable to determine from the evidence. If, however, as respondent contends, this contingent oil contract in question had no fair market value at the time of the dividend payment in question and was not salable at any price, then it seems clear that the Sales-Walker Co. was made insolvent by the dividend distribution and continued so until the present time and there was never any time after the dividend was paid that the corporation could have sold its assets for enough to pay all its liabilities, including the tax liability here in question. On the other hand, if petitioners’ contention that the transferor corporation’s contract for these contingent oil payments of $150,000 had a fair market value of $75,000 at the time the dividend distribution was made is true, then it is clear that the corporation was not made insolvent by the dividend distribution, but its insolvency resulted from subsequent events which had nothing to do with the dividend distribution.

The petitioners produced three witnesses: George W. Wetherbee, It. G. Smitherman, Jr., and W. E. Hall, who testified that the contract for $150,000 contingent oil payments from the Phillips Petroleum Go. could have been sold for at least 50 cents on the dollar, or $75,000 in all.

Wetherbee and Hall are petitioners in these proceedings and their testimony is of course subject to being weighed from the standpoint of self-interest, but the other witness, R. G. Smitherman, Jr., so far as the record shows, has no interest in these proceedings and his testimony must therefore be viewed as a witness who has no self-interest. On this evidence we have found that the corporation’s contract with the Phillips Petroleum Co. for contingent oil payments had a fair market value of $75,000 at the time of the dividend distribution. This holding makes it necessary for us to hold that the transferor corporation was not rendered insolvent by the dividend distribution to stockholders in question, but that its insolvency resulted from later events which occurred in 1930.

Counsel for the Commissioner, in contending that the contract of the Sales-Walker Co. with the Phillips Petroleum Co. for contingent oil payments of $150,000, if and when produced, had no fair market value and should be considered valueless in determining whether the dividend distribution of $89,505 rendered Sales-Walker Co. insolvent, cites such cases as Burnet v. Logan, 283 U. S. 404, and E. F. Simms, 28 B. T. A. 988. From these cases respondent seems to deduce that as a matter of law such contracts have no salable value and therefore should not be considered in determining the solvency or insolvency of a particular taxpayer at the time of a dividend distribution to its stockholders.

We do not think Burnet v. Logan, supra, and Board and court cases which have followed it go so far. These cases simply hold that where the future payments are highly contingent in character, a taxpayer on the accrual basis should not be compelled to accrue them as income even though they do have some value, or where the taxpayer is on the cash basis he should not be compelled to treat them as property, the equivalent of cash, received in exchange for other property. For example, in the recent case of Edwards Drilling Co., 35 B. T. A. 341, we held that the rights acquired by the taxpayer to certain contingent oil payments similar to those in question in the instant case were contingent in character and that, although the evidence showed they had a fair market value and could have been sold at a substantial discount, the fair market value of such contracts was not accruable as taxable income. In that case we said:

The fact that the rights had a fair market value does not of itself require that the amount thereof he accrued as taxable income. Bedell v. Commissioner, 30 Fed. (2d) 622; Commissioner v. Darnell, Inc., 60 Fed. (2d) 82; Teck Hobbs, 26 B. T. A. 241: * * *

While it is undoubtedly true, as above stated, that the fact that these contracts are property of a sort and have a fair market value does not of itself require that the amount thereof be accrued as taxable income, it is also true, we think, that the value of such contracts, where the evidence shows they have value, would have to be considered in determining whether the corporation owning them was solvent or insolvent.

In the Burnet v. Logan case, supra, although the Supreme Court held that the taxpayers were entitled to a return of capital investment before paying income tax based on conjectural market value of annual payments, the Commissioner had valued and taxed the right to receive such contingent payments as a part of Mrs. Logan’s mother’s estate. As to that phase of the matter, the Supreme Court said:

* * * Prom her mother’s estate Mrs. Logan obtained the right to share in possible proceeds of a contract thereafter to pay indefinite sums. The value of this was assumed to be $277,164.50 and its transfer was so taxed. Some valuation, speculative or otherwise, was necessary in order to close the estate.

Thus, while the value of such a right to receive contingent payments will not be counted as accrued income for one on the accrual basis, or as the receipt of property equivalent to cash for one on the cash basis, nevertheless the value of such a right will be counted as a part of the estate, for estate tax purposes. Suppose, for example, that in the case of Mrs. Logan’s mother the contract to receive contingent payments, valued at $277,164.50 by the Commissioner for estate tax purposes, had been the only property of the estate and there had been claims against the estate of $25,000. Would it have been held that the estate was insolvent and unable to pay its debts ? We think not.

Just so in the instant case we do not think we can hold that the Sales-Walker Oil Co. was left insolvent when it distributed to its stockholders a dividend of $89,505 and had left on hand a few thousand dollars cash, some tangible property of comparatively small value, and this contingent right to receive $150,000 in oil payments, which witnesses have testified could have been sold for $75,000.

The facts show that the transferor company continued in business a good long while after the dividend distribution in question. As a matter of fact the evidence shows that it has never been dissolved, but still owns a small oil royalty interest from which it occasionally derives an income of an inconsequential amount. There is no doubt but that the transferor corporation is at present insolvent and can not pay the tax liability here in question, but, as we have already endeavored to point out, we do not think that respondent has met the burden of proof of showing that this insolvency was brought about by the January 20, 1930, dividend distribution to stockholders. On the contrary, the facts show that several months after the dividend distribution in question, to wit, in July 1930, the transferor corporation, Sales-Walker Co., reacquired the leases from the Phillips Petroleum Co. for $1,600 cash and the cancellation of the contingent oil payments of $150,000. This was after the Phillips Petroleum Co. had drilled three dry holes on the leases and had evidently concluded that the land was unproductive of oil in paying quantities. The transferor corporation was however more optimistic and spent approximately $7,000 more in trying to develop the property as oil producing property and finally abandoned the effort in 1931 after practically all of its funds had been exhausted.

It seems to us that it was these subsequent events, including the collapse of Phillips Petroleum Co. obligation to pay $150,000 out of oil if and when produced, which brought about the insolvency of the transferor corporation.

We think this case is distinguishable from Benjamin E. May, 35 B. T. A. 84. In that case a corporation exchanged most of its assets for cash and stock of another corporation and pursuant to a plan of complete liquidation, distributed assets to its stockholders in liquidation of its capital stock. A fund left for the payment of creditors was dissipated so that the Federal income tax liability was never paid. On these facts we held that all stockholders receiving-distributions in complete liquidation of their stock are liable as transferees of the corporation, since a stockholder is not entitled to receive in such complete liquidation any assets of a corporation until all of its obligations to creditors are discharged.,

In the instant case there is no evidence to show that the $89,505 dividend declared and paid January 20, 1930, was in pursuance of a plan for the complete liquidation of Sales-Walker Co. On the contrary, as we have already pointed out, the corporation continued in business and later on in the year bought back the leases which it had sold to the Phillips Petroleum Co. and endeavored to develop them. This effort proved a commercial failure and in 1931 the corporation found itself wholly insolvent, with all its money spent and nothing with which to pay the tax liability here involved.

We therefore hold on these facts that petitioners are not liable as transferees of the Sales-Walker Oil & Gas Co. This holding makes it unnecessary that we pass upon issue Ho. 2, relating to the question of percentage depletion on the alleged bonus payment of $100,000.

Reviewed by the Board.

Decision will he entered as to each petitioner that there is no liability as transferee of the Sales-Walker Oil & Gas Co.

        American Feature Film do., 24 B. T. A. 18; R. E. Burdick, 24 B. T. A. 1297; Isaac Michael Green, 26 B. T. A. 719; Kinnett-Odom Co., 19 B. T. A. 1124; Samuel Keller, 21 B. T. A. 84; affd., 69 Fed. (2d) 499 ; Eliza J. Wray, 24 B. T. A. 94; Helen Dean Wright, 28 B. T. A. 543; and Benjamin E. May, 35 B. T. A. 84.

         M. H. Graham, 26 B. T. A. 301; appeal dismissed, 63 Fed. (2d) 997 ; Mrs. J. F. Alexander, Executrix, 27 B. T. A. 1210; and United States v. Armstrong, 26 Fed. (2d) 227.

       See in general upon this subject: Updike v. United States, 8 Fed. (2d) 913; United States v. Armstrong and Keaton v. United States, 26 Fed. (2d) 227; Bass & Peake Automobile Co. v. United States, 285 Fed. 410; affd., 290 Fed. 167; United States v. McHatton, 266 Fed. 602.


author: Disney :

text:
    Durkheimer Investment Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83290.
    Promulgated August 4, 1937.

      Robert F. Maguire, Esq., for the petitioner.

      William E. Davis, Esq., Frank M. Thompson,. Esq., and A. T. Akin, Esq., for the respondent.
   opinion.

Disney :

The respondent included the value of the improvements at the time of repossession in gross income pursuant to provisions of article 63 of Regulations 11, as amended April 10,1935, by X- D. 4539, reported in C. B. XIV-1, 141. The regulations, after providing, in substance, that when buildings erected by a lessee immediately become the property of the lessor, as in cases where they are not subject to removal by the lessee, the lessor has the option of reporting the fair market value thereof or an aliquot part of the value, based upon the life of the lease, in the year of completion of the buildings, reads as follows:

If the lease is terminated so that the lessor comes into possession of control of the property prior to the time originally .fixed for the expiration of the lease, the lessor shall report income for the year in which the lease is so terminated to the extent that the value- of such buildings or improvements when he becomes entitled to such possession exceeds the amount already reported as income on account of the erection of such buildings or improvements. * * *

The respondent contends that the regulations are valid and govern the question. The argument is based upon the theory that in substance there was no termination prior to 1932 of the lease under the terms of which the building was erected. The case of Emma C. Morphy, 35 B. T. A. 289, cited by the respondent as sustaining the validity of the regulations, involved the propriety of including in income of a lessor, for the year during which a lessee erected a building on the leased premises, an aliquot part of the value of the improvements under the optional provision of like regulations promulgated under the 1928 Act. The question was a narrow one and did not include the validity of the paragraph of the regulations in question here.

The petitioner relies upon the rule announced in Miller v. Gearin, 258 Fed. 225; certiorari denied, 250 U. S. 667. There, as here, the lessee, pursuant to provisions of a lease, erected a new building on the realty, and, upon the termination of the lease because of default of the lessee, the Commissioner held that the lessor received taxable income in the year of repossession in an amount equal to the value of the improvements. The court held that the income was derived in a prior year during which the improvements were made, “Assuming that the building was income derived from the use of property”; that the owner acquired nothing in the taxable year “save the possession of that which for many years had been her own,” and that such possession did not result in a realization of income. The rule there announced is recognized as sound, Louise C. Slack et al., Executors, 35 B. T. A. 271, and Emma C. Morphy, supra, and cases cited therein on the point, and is reflected in the Commissioner’s regulations. G. C. M. 9755, C. B. X-2, p. 120, and opinion of Judge Chase in Hewitt Realty Co. v. Commissioner, 76 Fed. (2d) 880.

The respondent contends that Miller v. Gearin, supra, and Cryan v. Wardell, 263 Fed. 248, are distinguishable on the ground that in the former, ownership of the property vested in the lessor immediately upon the erection of the improvements and that in the latter, the lessee had no right to remove the building from the realty. The alleged differences in the facts do not exist. The terms of each lease involved here required the lessee to protect the petitioner against loss of the building by fire and to deliver up the premises upon the termination of the lease in as good condition as the improvements were in at the time of execution of the lease, or might be put in, ordinary wear and tear excepted.

In Louise C. Slack et al., Executors, supra, the facts were in all material respects the same as those here, and, following the reasoning of Miller v. Gearin, supra, we concluded that the lessor did not realize income upon the termination of the lease in the taxable year because of default 'of the lessee. We reach the same conclusion here, assuming that the two leases are, in substance, but one lease.

Although the petitioner relies upon the 99-year lease entered into in 1925 merely as one of several circumstances requiring a holding that it acquired the building prior to the taxable year, the fact that the petitioner acquired repossession in 1932 under the terms of a lease separate and distinct from the one under the terms of which the building was erected is an additional ground for deciding that there was no realization of income within the taxable year.

Article 48 of Regulations 65, promulgated under the 1924 Act, like article 63 of Regulations 77, supra, required lessors coming into possession of property prior to the termination of the lease to report as income in the year of repossession the value of the improvements at the time the right to take possession occurred, less the amount already reported as income. The building in question here was erected in 1913, pursuant to provisions of the lease* entered into in 1910 for a term of 30 years. This lease was terminated May 7, 1925, effective June 30, 1925, 15 years prior to the expiration of its term, by mutual consent for the purpose of entering into a new lease with the same lessee, having terms in many respects different from those embodied in the first lease. The intent of the parties to rescind the original lease is as clear as it was possible to express it.

It does not appear that the lessor took actual possession of the property upon the termination of the old lease, or made physical delivery under the new lease. The circumstances did not require it. There was, however, constructive delivery, first from the lessee to the lessor under the old lease, and then from the latter to the former under the new lease. Thereafter, .the position of the petitioner as regards the ownership of the property was the same as though it had erected the building at its own expense. If, therefore, the old lease was terminated prior to the expiration of its term, and there appears to be little, if any, doubt about it, pursuant to the Commissioner’s regulations in effect at that time, the income was realized m 1925.

Decision will be entered for the petitioner.


author: Hill:

text:
    Fred Taylor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 79354.
    Promulgated August 4, 1937.

      Frank M. Thompson, Esq., and R. B. Cannon, Esq., for the respondent.
   OPINION.

Hill:

On April 26, 1937, respondent filed a motion to dismiss this proceeding for lack of jurisdiction, on the ground that the notice mailed to petitioner on February 8, 1935, which purports to be a notice of deficiency in accordance with section 274 (a) of the Revenue Act of 1926, as amended by section 501 of the Revenue Act of 1934, and section 283 of the Revenue Act of 1926, from which notice the appeal herein was taken, is not such a notice as is provided for by the statute, “in that the tax liability and additions thereto inputed in such notice are not in excess of the amount of such liability and additions thereto shown in the taxpayer’s return.”

' Section 273 of the Revenue Act of 1926 defines the term “deficiency”, in so far as material here, as meaning the amount by which the true tax liability “exceeds the amount shown as the tax by the taxpayer upon his return.” Section 274 (a) provides that if in the case of any taxpayer the Commissioner determines that there is a deficiency in respect of the tax imposed by that act, the Commissioner is authorized to send notice of such deficiency to the taxpayer; and further provides for the filing of a petition by the taxpayer with this Board for the redetermination of the deficiency. Section 283 of the same act makes substantially the same procedure applicable to taxes imposed by prior acts, including the Revenue Act of 1917.

Petitioner did not personally file an income tax return for the year 1917, but on February 5, 1935, respondent prepared and signed a return for petitioner under the provisions of section 3176 of the Revised Statutes, as amended. This return disclosed a tax due in the amount of $10,657.88 and a penalty of $5,328.94. These are the amounts shown in the notice mailed to petitioner by respondent on February 8, 1935.

The return filed by respondent became the return of petitioner, and stands on the same basis as if it had been filed by petitioner. It is prima facie good and sufficient for all legal purposes. Joe Goldberg, 14 B. T. A. 465, 467. Respondent contends, therefore, that, since the amount of the tax and addition thereto “imputed” in the notice above mentioned are not in excess of the amount shown on the taxpayer’s return, no deficiency has been determined, and the Board is without jurisdiction.

Respondent’s position, we think, can not be sustained under the facts of this case, which disclose that neither prior nor subsequent to the filing of the return did petitioner admit that the amount of tax and penalty shown thereon was correct. Respondent’s notice indicates that as early as October 23, 1934, long prior to the filing of the return, petitioner was protesting the proposed action. After the relief requested in the protest had been denied, the return filed and notice mailed by respondent, petitioner timely filed with the Board a petition for redetermination, in which it was admitted that the amount of tax due was only $250.90.

In the ordinary case where a return is filed by the taxpayer, the amount of tax shown thereon is admitted to be due, and in such case a deficiency is the amount of tax determined by respondent to be due in excess of that shown on the taxpayer’s return. But where a taxpayer shows an amount of tax on his return but does not admit that such amount is due and collectible, the amount admitted to be due and not the amount shown on the return is the starting point in computing a deficiency.

In John Moir, 3 B. T. A. 21, we said:

The Commissioner in his answer pleaded that the Board is without jurisdiction to hear and determine these appeals for the reason that he has not, since the passage of the Revenue Act of 1924, determined a deficiency in tax in respect to these taxpayers. The Commissioner’s position in this plea is that the taxpayers have been assessed on the basis of the tax -shown upon the taxpayers’ returns, and that a deficiency is only an amount of tax determined by him to be due in excess of that shown on the taxpayer’s return. This is true in the ordinary case, but in cases in which the taxpayer shows an-amount of tax upon his return, but does not admit that that amount of tax is due and collectible, it is the amount which he admits to be due and not the amount which appears upon the face of his return which is deemed the starting point in the computation of a deficiency. Appeal of Continental Accounting & Audit Co., 2 B. T. A. 761. The Commissioner’s motion to dismiss is therefore denied, * * * .

We cited and followed the Moir decision on this point in United States Fidelity & Guaranty Co., 5 B. T. A. 23, 26; Powell Coal Co., 12 B. T. A. 492, 497; and Edward J. Lehmann et al., Trustees, 21 B. T. A. 664, 671.

In the instant case we hold that, to the extent the tax and penalty determined by respondent exceed the amount, of $250.90, respondent has determined a deficiency within the meaning of the taxing statute, and that we have jurisdiction to redetermine such deficiency. Accordingly, respondent’s motion will be denied.