author: Smith:

text:
    J. Weingarten, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99707.
    Promulgated June 25, 1941.

      Homer Mabry, Esq., and J. L. Lockett, Esq., for the petitioner.

      Frank B. SoKlosser, Esq., and D. P. Moyers, Esq., for the respondent.
   OPINION.

Smith:

The first question for decision is whether the petitioner is entitled to deduct from gross income $20,413.80 invested in the Kee-doozle contracts. The petitioner contends that the loss was sustained in 1937, since in that year Clarence Saunders, acting for the Keedoozle Corporation, had practically acknowledged the worthlessness of the Keedoozle system by its abandonment. It therefore charged off its investment as a loss in 1937.

The respondent contends that the loss was not sustained in 1937 by reason of the fact that in 1938 Saunders continued his efforts to make the electrically operated system a success and that during 1938, 1939, and 1940 the petitioner had made requests upon the Kee-doozle Corporation for it to furnish the equipment which was called for by the contracts.

The question of when a loss is sustained is a question of fact, to be determined in the light of all the circumstances of the case. This Board and the courts have many times held that a taxpayer may not, in the light of known facts, refuse to recognize a loss in one year and claim it in a subsequent year. If there is an identifiable event fixing a loss in one year it may not be claimed in a later year.

The petitioner contends that the identifiable event in the proceeding at bar was the practical acknowledgment by Saunders that the Keedoozle system was a failure in 1937. That is shown by the fact that he abandoned that system after it had been tried out in a store in Memphis. Admittedly it was in an experimental stage in 1937. We think, in the light of all of the facts in this case, that the loss was sustained in 1937. The respondent’s action in disallowing the deduction of the loss is reversed.

The second question in issue is whether the petitioner is entitled to include in its dividends paid credit the amount of $27,180 which represents the premiums paid in cash or, to the extent of $19,400, in an issue of 6 percent cumulative preferred stock of the petitioner in connection with the transaction involving the retirement of its 8 percent and 7 percent preferred stock.

Section 27 of the Revenue Act of 1936, under the heading “Corporation Credit for Dividends Paid” provides:

(a) Dividends Paid Credit in Generad.—Por the purposes of this title, the dividends paid credit shall be the amount of dividends paid during the taxable year.
*******
(e) Taxable Stock Dividends.—In case of a stock dividend or stock right which is a taxable dividend in the hands of shareholders under section 115 '(f), the dividends paid credit with respect thereto- shall be the fair market value of the stock or the stock right at the time of the payment.
(f) Distributions in Liquidation.—In the case of amounts distributed in liquidation the part of such distribution which is properly chargeable to the earnings or profits accumulated after February 28, 1913, shall, for the purpose of computing the dividends paid credit under this section, be treated as a taxable dividend paid.
* * ⅜ ⅜ * * *
(h) Nontaxable Distributions.—If any part of a distribution (including stock dividends and stock rights) is.not a taxable dividend in the hands of such of the shareholders as are subject to taxation under this title for the period in which the distribution is made, no dividends paid credit shall be allowed with respect to such part.

Section 112, under the caption “Recognition of Gain or Loss” provides in material part as follows:

(b) Exchanges Solely in Kind.—
*******
(2) Stook for stock of same corporation-.—No gain or loss shall be recognized if common stock in a corporation is exchanged solely for common stock in the same corporation, or if preferred stock in a corporation is exchanged solely for preferred stock in the same corporation.
(3) Stock for 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.
* * * * * * - *
(c) Gain from Exchanges Not Solely in Kind.—
(1) If an exchange would be 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.
(2) If a distribution made in pursuance of a plan of reorganization is within the provisions of paragraph (1) of this subsection but has the effect of the distribution of a taxable dividend, then -there shall be taxed as a dividend to each distributee such an amount of the gain recognized under paragraph (1) as is not in excess of his ratable share of the undistributed earnings and profits of the corporation accumulated after February 28, 1913. The remainder, if any, of the gain recognized under paragraph (1) shall be taxed as a gain from the exchange of property.
* * * * * * *
(g) Definition of Reorganization.—As used in this section and section 113—
(1) The term “reorganization” means * * * (D) a recapitalization * * *.

Section 115, so far as material, provides:

SEO. 115. DISTRIBUTIONS BT CORPORATIONS.
(a) Definition of Dividend.—The term “dividend” when used in this title (except in section 203 (a) (3) and section 207 (c) (1), relating to insurance companies) means any distribution made by a corporation to its shareholders, whether in money or in other property, (1) out of its earnings or profits accumulated after February 28, 1913, or (2) out of the earnings or profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at thle time the distribution was made.
*♦**#■* •
(c) Distribution in Liquidation.—Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112. * * *
****** *
(f) Stock Dividends.
(1) General rule.—A distribution made by a corporation to its shareholders in its stock or in rights to acquire its stock shall not be treated as a dividend to the extent that it does not constitute income to the shareholder within the meaning of the Sixteenth Amendment to the Constitution.
(2) Election of shareholders as to medium of payment.—Whenever a distribution by a corporation is, at the election of any of the shareholders (whether exercised before or after the declaration thereof), payable either (A) in its stock or in rights to acquire its stock, of a class which if distributed without election would be exempt from tax under paragraph (1), or (B) in money or any other property (including its stock or in rights to acquire its stock, of a class which if distributed without election would not be exempt from tax under paragraph (1)), then the distribution shall constitute a taxable dividend in the hands of all shareholders, regardless of the medium in which paid.
(g) Redemption of Stock.—If a corporation cancels or redeems its stock (whether of not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend.

Admittedly all of the $27,180 in premiums called for by the outstanding 8 percent and 7 percent preferred stock was charged against earned surplus, both those paid in cash ($7,780) and in 6 percent preferred stock ($19,400). The petitioner submits:

* * * Since all outstanding stares of each of the three issues (8% voting stock, 8% non-voting stock, and 7% non-voting stock) were redeemed and retired, the distribution in connection therewith was a distribution in liquidation within the meaning of subsection (f) of Section 27 of the Act. And since th!e amount of such distribution which applied against or covered the premium on the liquidated stock was properly chargeable (and was in fact charged) to earnings and profits accumulated since February 28, 1913, that amount must under subsection (f), and for the purpose of computing the dividends paid credit, be treated as a taxable dividend paid.

It further submits that the Board in Colorado Life Co., 29 B. T. A. 950, held that premiums paid on redemption of stock, pursuant to previous agreement, constituted a dividend, which was taxable to recipients.

The respondent, on the other hand, submits that the transactions presently under consideration amounted merely to a recapitalization of the petitioner’s capital structure, cognizable as a reorganization under the applicable provisions of the Revenue Act of 1936; that the recipients of the 194 shares of petitioner’s 6 percent preferred stock in payment of part of the premiums due them upon the redemption of their shares were not liable to income tax for 1937 upon their fair market value under section 112 (b) and (c) of the act. He cites in support of the latter proposition Skenandoa Bay on Corporation, 42 B. T. A. 1287 (now pending on appeal before the United States Circuit Court of Appeals for the Second Circuit). The facts in that case were that the taxpayer corporation had outstanding shares of 7 percent cumulative preferred stock on which there were unpaid dividends of $45.50 per share. Upon a recapitalization of the corporation each of the shareholders was entitled to receive and did receive 1.4 shares of new preferred stock plus $5.50 cash. In his determination of the deficiency the respondent allowed a dividends paid credit in respect of the cash paid but refused to allow a dividends paid credit in respect of the excess number of shares of the new preferred stock issued in exchange for the old. We held that the taxpayer was not entitled to a dividends paid credit in respect of those excess shares. Compare South Atlantic Steamship Line, 42 B. T. A. 705, in which the Board held:

In the course of readjustment of the capital structure of a corporation petitioner exchanged preferred stock upon which dividends were in arrears for new stock, bonds, and cash. Held, that receipt of the new stock was neither a dividend nor essentially equivalent to a dividend under section 115 (a) and 115 (g) of the Revenue Act of 1936; held, further, that the stock, debenture bonds, and cash were received by petitioner in the course of a reorganization and gain is recognized under section 112 (c) (1) only to the extent of the cash received.

The petitioner submits that the situation presented by the instant proceeding is different from the' situations in the last two cited cases for the reason that the 8 percent and 7 percent preferred stockholders were given an option to receive either new shares of 6 percent preferred stock for their old stock or cash. . It submits that, since they could have received cash had they so elected, the receipt of the cash and new shares in payment of their premiums makes the distribution of the $27,180 in question taxable dividends of the recipients. It relies upon section 115 (f). That section relates to “Stock Dividends.” We are of the opinion that it is not applicable to this case. Clearly the corporation did not declare a stock dividend.

Although nothing is said in the resolution adopted by the stock- . holders of the corporation relative to a “recapitalization” of its capital structure, cf. Skenandoa Rayon Corporation, supra, we think it must be held that there was a recapitalization of the corporation within the meaning of the reorganization provisions of the Revenue Act of 1936—at least to the extent that the holders of 4,567 shares of the 8 percent and 7 percent preferred stock exchanged them for 4,761 shares of the new 6 percent preferred stock and $6,300 cash. At the time the resolution was adopted it was known that many of the 8 percent and 7 percent preferred stockholders would accept the 6 percent stock in exchange for their stock. The directors were instructed to obtain an amendment of the corporation’s charter whereby the corporation would be permitted to issue 6,000 additional shares of 6 percent preferred stock to carry the plan into effect. Such plan constituted a recapitalization, and, hence, a reorganization within the meaning of the statute.

We think it plain that if all of the 8 percent and 7 percent preferred stockholders had accepted the plan and had received nothing but 6 percent preferred shares in exchange for their shares, the stockholders would not have been liable to any income tax on the gain under section 112 (b) (3) of the statute. Section 112 (c) (1) provides that if something besides stock is received upon a reorganization the recipients shall be taxable upon the gain “but in an amount not in excess of the sum of such money and the fair market value of such other property.” Except for the cash in the amount of $6,300 received upon the exchange for the 4,567 shares, no other property was received. The recipients of the $6,300 cash are liable to income tax upon that amount of money and no more. See South Atlantic Steamship Line, supra.

Section 112 (c) (2) provides in part:

'If a distribution made in pursuance of a plan of reorganization is within the provisions of paragraph' (1) of this subsection but has the effect of the distribution of a taxable dividend, then there shall be taxed as! a dividend to each distributee such an amount of the gain recognized under paragraph (1) as is not in excess of his ratable share of the undistributed earnings and profits of the corporation accumulated after February 28,1913. * * *

The above quoted language appeared first in section 208 (d) (2) of the Revenue Act of 1924. In the Ways and Means Committee Report (68th Cong., 1st sess., H. Rept. 179) is this statement:

* * * There is no provision of the existing law which corresponds to paragraph (2) of subdivision (d). This subdivision provides that any amount distributed by a corporation in connection with a reorganization which has the effect of a taxable dividend shall be taxed as a dividend and not as a taxable gain.
The necessity for this provision may best be shown by an example: Corporation A has capital stock of $100,000, and earnings and profits accumulated since March 1, 1913, of $50,000. If it distributes the $50,000 as a dividend to its stockholders, the amount distributed will be taxed at the full surtax rates.
On the other hand, corporation A may organize corporation B,‘ to which it transfers all its assets, the consideration for the transfer being the issuance by B of all its stock and $50,000 in cash to the stockholders of corporation A in exchange for their stock in corporation A. Under the existing law, the $50,000 distributed with the stock of corporation B would be taxed not as a dividend, but as a capital gain, subject only to the 12½ per cent rate. The effect of such a distribution is obviously the same as if the corporation had declared out as a dividend its $50,000 earnings and profits. If dividends are to be subject to the full surtax rates, then such an amount so distributed should also be subject to the surtax rates and not to the 12½ per cent rate on capital gain. Here again this provision prevents evasions. * * *

We think, therefore, that the $6,300 paid out by the corporation and charged to its earned surplus in connection with the exchange of the 4,567 shares was a taxable dividend of the petitioner corporation and the petitioner is entitled to a dividends paid credit in respect of that amount.

The respondent submits that the evidence does not show whether the recipients of the $6,300 in cash are taxable thereon, since the cost of the shares to the several stockholders .is not shown. The evidence does show, however, that the shares were issued by the petitioner corporation at par either for cash or for property of a. value equal to par. This issue relative to the disallowance of the claimed dividends paid credit in the amount of $27,180 was raised by the respondent by an amendment to his answer. The burden of proof of showing that the stockholders were not taxable upon the $6,300 is upon the respondent. Since the respondent has not borne that burden it must be held that the $6,300 constitutes a taxable dividend of the recipients thereof.

We think that it may logically be said that the reclassification of the petitioner’s capital structure relates only to the 4,567 shares of 8 percent and 7 percent preferred stock referred to above. The remaining 234 shares of that stock were redeemed in cash. That transaction constituted a liquidating distribution. The cash paid in connection therewith was $1,480, which was likewise charged against earned surplus. Petitioner is entitled to a dividends paid credit in respect of that amount under section 27 (f) of the statute.

We thus reach the conclusion that petitioner is entitled to a dividends paid credit in the amount of $1,780, but not to a dividends paid credit in the claimed amount of $19,400, representing the portion of the premium paid by the issuance of 194 shares of the 6 percent preferred stock.

Reviewed by the Board.

Decision will be entered under Rule 50.


source: Caselaw Access Project

author: Hill:

license: Public Domain

text:
    Otto S. Grunbaum, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 99318, 99319.
    Promulgated June 25, 1941.

      George E. E. Goodner, Esq., for the petitioner.

      B. H. Neblett, Esq., for the respondent.
   OPINION.

Hill:

The issue before us is whether or not dividends on stock owned by petitioner before his marriage and stock acquired by contract entered into before his marriage are includable in petitioner’s gross income as income from separate property.' Petitioner contends that he and his wife orally agreed at the time of their marriage that all separate property of each of them should be community property. He asserts that this agreement was reaffirmed throughout their marriage and was finally put in written form in 1937. He urges two alternative contentions. He contends that even if we find that there was no oral agreement which converted separate property into community property, the 125 shares of stock subject to the escrow agreement were acquired after marriage and dividends from those shares and their increment are community income. Petitioner’s second alternative contention is that, if we find that there was no oral agreement and hold that the stock in escrow was not acquired after marriage, then at least $20,000 of the purchase price of the Woodhouse stock was paid from community funds and one-fifth of those shares became community property.

Kespondent contends that the contract between petitioner and Woodhouse marked the acquisition of such stock by petitioner as his separate property. Bespondent argues that the evidence is insufficient to establish an oral agreement between petitioner and his wife converting their separate property into community property.

The applicable provisions of law are Kemington’s Bevised Statutes of Washington, sections 6890 and 6892.

We are of the opinion that petitioner has not presented sufficient evidence to establish the existence of an oral agreement between himself and his wife. The only evidence regarding the alleged oral agreement was the testimony of petitioner and his wife. This evidence is counterbalanced by the fact that petitioner reported as his separate property dividends from the company’s stock in both his original and amended income tax returns for the years 1919 and 1920. Petitioner testified that neither he nor his wife had ever mentioned the agreement to any one before the controversy giving rise to this proceeding. The instrument entitled “Declaration Converting Separate Property Into Community Property”, executed by petitioner and his wife on December 23,1937, neither refers to a preexisting oral agreement nor suggests the existence of one. The title of the instrument, together with the phrase “shall from this date be the property of the community of ourselves as husband and wife”, to our mind, completely negatives the testimony in regard to the alleged oral agreement. It is necessary, therefore, that we consider petitioner’s alternative contentions.

Petitioner argues that he did not acquire the 125 shares of the company’s stock from Woodhouse until the stock was released from escrow in 1920. He points to the provision of the escrow agreement under which the bank was instructed to deliver certificates of stock to Woodhouse in the event of default by petitioner and contends that he had no property in the stock until he had fulfilled his obligations under the contract.

We do not agree with this contention. Petitioner, prior to his marriage, acquired the stock from Woodhouse by purchase, subject to forfeiture of the stock and all payments thereon in case of default in making payment of the purchase price. There was no default and such payments were completed more than a year after petitioner’s marriage and thereupon the certificates of stock issued in his name were surrendered to him by the escrow agent. Immediately upon the execution of the contract of purchase the stock ownership of Woodhouse and wife ceased and he and his wife accordingly resigned as directors and officers of the company and surrendered the full management and control thereof to petitioner. The latter thereupon, in the exercise of full proprietary rights in the entire stock of the company, had the company declare and pay to him monthly dividends on all of its outstanding stock in amounts equal to the monthly installments due on the price of the stock purchased. These dividends were applied on such purchase price to the extent of $70,000. The evidence and concessions by petitioner show that at least $80,000 of the purchase money was paid from the separate funds of petitioner. The evidence does not disclose the source or character of the funds with which the remaining $20,000 of the purchase price was paid.

We have previously considered the question of whether or not rights under a contract which after marriage materialize into legal title are separate or community property in the State of Washington. William Semar, 27 B. T. A. 994. In that case we stated:

It is quite obvious that the petitioner bad much more than, as he contends, a mere option to buy the stock. He had a right to have the dividends which might be declared on such stock applied by the stockholders toward the purchase of the stock for himself. While not owning legal title to the tree, in other words, he was to be given its fruits; the right to enjoy the fruits being, of course, one of the most important incidents of ownership. * * * We are of the opinion that petitioner’s contract right on January 1,1924, which later brought him title to the company’s shares, was one of real substance and clearly “property” within the meaning of the Washington statutes.
And we are of the opinion that petitioner’s “property” was acquired before March 4,1924, when he married. It has been said:
As between husband and wife, when a right, legal or equitable, is acquired whether before or during marriage, all things of value into which the initial right develops by the performance of conditions, the running of time or the like, or into which it is converted by an assignment, or if the initial right rests in obligation, all that which is obtained through the performance, discharge, satisfaction, enforcement or assignment of the obligation, are deemed in law to have been acquired as of the date of the acquisition of the initial right, and take the character, as separate or common, of that right. (McKay See. 517, p. 352.) * * *
* ******
There is no doubt on the authorities that this rule obtains in Washington. The date of acquisition of property determines its character as separate or community property, In re Brown’s Estate, 214 Pac. 10 (Washington); and cases therein cited. And the date of acquisition taken is that when the equitable interest arises and not when the legal title is transferred, Guye v. Guye, supra; Ahern v. Ahern, 71 Pac. 1023 (Washington); Forker v. Henry, 57 Pac. 811 (Washington); Teynor v. Heible, 133 Pac. 1 (Washington). The same rule appears to be general, as stated by McKay, § 533, supra, and to obtain also in Nevada, Barrett v. Franke, 208 Pac. 435, 437; and in California, Vieux v. Vieux, 251 Pac. 640, 643. Cf. 5 R. C. L. 834.

In the case of In re Binge's Estate, 105 Pac. (2d) 689, the Supreme Court of Washington stated:

It is the rule in this state that the status of property, whether real or personal, becomes fixed as of the date of its purchase or acquisition, and that the status, when once fixed, retains its character until changed by agreement of the parties or operation of law. Property acquired through contractual obligation, as between husband and wife and all others claiming under them, has its origin and is acquired as of the date when the obligation becomes binding, and not as of the time when the money is paid or the thing is delivered or conveyed. The fruit of the obligation is legally acquired as of the date when the obligation becomes binding.

On these authorities we hold that petitioner acquired the Wood-house stock at the time of the execution of the contract of purchase thereof, to wit, April 30, 1919, and that it became thereby his separate property.

Petitioner presents as an alternative contention that upon the basis of the facts as we have found them at least 20 percent of the purchase price of the Woodhouse stock was paid with community funds and that therefore such stock to the extent of 20 percent thereof was the community property of petitioner and his wife. This contention is apparently based on the fact that under the laws of Washington property acquired by a spouse during the marital relation is presumed prima facie to have been acquired with community funds and is therefore presumed 'prima facie to be community property. This presumption can not be availed of by petitioner for the reason that the stock in question was not acquired by petitioner during the existence of the marital relationship. It was acquired before Ms marriage. Under the laws of Washington there is no presumption that payment during the existence of the marital relation on the purchase price of property acquired before marriage is made with community funds. To establish such fact direct and positive evidence is required. “Moreover, the right of the spouses in their separate property is as sacred as is the right in their community property, and, when it is once made to appear that property was once of a separate character, it will be presumed that it maintains that character until some direct and positive evidence to the contrary is made to appear.” Guye v. Guye, 63 Wash. 340; 115 Pac. 731, 735, cited with approval in In re Binge’s Estate, supra, at page 702.

Since the stock purchased from Woodhouse became petitioner’s separate property at the time of its purchase on April 30, 1919, and was his separate property at the time of his marriage, the petitioner, in order to support his contention that the stock or any percentage thereof became community property after his marriage, had the burden of showing by evidence that the purchase price of the stock or a part thereof was paid from community funds. There is no such evidence in the record.

We hold, therefore, that the stock purchased by petitioner from Woodhouse and the shares of stock subsequently derived therefrom as the result of a stock dividend distributed by the company to petitioner were his separate property during the taxable years 1936 and 1937. The number of shares of such stock was 1,775. We hold further that the 113 shares of the company’s stock owned by petitioner at the time of his marriage, other than that purchased from Woodhouse, and the stock derived therefrom as the result of a stock dividend distributed by the company to petitioner, were the separate property of petitioner in such taxable years. The number of shares of such stock was 1,096.4. We hold further that 501.52 shares of the company’s stock held in the name of petitioner were the community property of petitioner and his wife in the taxable years and that petitioner owned a community one-half interest therein. It follows that the dividends distributed by the company in the taxable years 1936 and 1937 on 2,871.4 shares of the company’s stock were income to petitioner as his separate property and that one-half of such dividends distributed on 501.52 shares represented community income to petitioner, all of which is properly includable in petitioner’s income in computing his tax liability for the years in question. This is in accordance with respondent’s determination.

Decision will be entered for respondent.

       Sue. 6890. Separate property of husband.
      Property and pecuniary rights owned by the husband before marriage, and that acquired by him afterward by gift, bequest, devise or descent, with the rents, issues, and profits thereof, shall not be subject to the debts or contracts of his wife, and he may manage, lease, sell, convey, encumber, or devise, by will, such property without the wife joining in such management, alienation, or encumbrance, as fully and to the same effect as though he were unmarried.
      [Section 6891 contains similar provisions with respect to the wife.]
      Sec. 6892. Community property defined—Husband’s control of personalty.,
      Property, not acquired or owned as prescribed in the next two preceding sections, acquired after marriage by either husband or wife, or both, is community property. The husband shall have the management and control of community personal property, with a like power of disposition as he has of his separate personal property, except he shall not devise by will more than one-half thereof.


author: Steknhagen:

text:
    Trust Under the Will of Sarah B. McLean, Germantown Trust Company and William L. McLean, Jr., Trustees, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101688.
    Promulgated June 25, 1941.

      Frederick H. Knight, Esq., and Henry Gross, Esq., for the petitioners.

      Brooks Fullerton, Esq., for the respondent.
   OPINION.

Steknhagen:

The Commissioner, in determining the deficiency, stated that 100 percent of the gain realized in the 1937 distribution of the assets of the Queen Lane Investment Co. should be taken into account in computing net income in accordance with section 115 (c), Revenue Act of 1936. No facts are stated to throw light on the ground of the determination. The petitioner admits that the distribution was one in liquidation and contends that under section 115 (c) only 30 percent of the gain is taxable. The argument of both parties is focused upon the question whether the liquidation, which admittedly was taking place in 1937, began in 1935. The respondent treats the deficiency determination as equivalent to holding that the distribution in question for 1937 was but a step in a process of liquidation which began in 1935, and upon this postulate reasons that the 1935 plan of liquidation did not contemplate its consummation within two years and hence that the distribution in 1937 is taxable to the extent of 100 percent of the gain.

The petitioner, adopting the respondent’s treatment of the deficiency determination as a determination of all the facts necessary to support it, has undertaken to establish that the 1935 and 1936 distributions were not in liquidation and that the distribution in 1937 was the first such distribution in a plan which was to be concluded within two years. The evidence supports the petitioner’s contention. The directors of the corporation were fully alert to the effects of their conduct on Federal and state taxes of both the corporation and its shareholders. They had been fully advised by counsel. The reasons for the distributions of 1935 and 1936 out of special capital account had to do entirely with taxes of Pennsylvania. The directors gave consideration in 1935 and 1936 to the advisability of liquidation and decided against it. They intended to make a distribution of the sort described in section 115 (d). There is no evidence to indicate that liquidation was intended or was consciously or inadvertently being carried out. Nothing was done looking to a winding up of business; there was no cessation of normal activities; aside from a reduction of the assets by the distributions, there was nothing to indicate liquidation, and there was no thought of canceling shares. If the issue before the Board today were the applicability of section 115 (c) to the distributions of 1935 and 1936, for the purpose of determining tax for those years, the evidence would establish that the distributions were not in liquidation and that the section was not applicable.

The evidence shows why the liquidation did not begin until 1937. It was not until then that the franchise tax of Pennsylvania became so burdensome as to arouse an inquiry by the directors as to whether it was cheaper, from a tax standpoint, to continue the existence of the corporation with the new burden of Pennsylvania taxes or to liquidate the corporation with the consequent immediate burden of taxes upon the shareholders. As a result of that inquiry and upon advice, the directors decided to liquidate. This was the first time such a decision was made. The character of a distribution as one in liquidation is determinable as a fact upon all the evidence, including evidence of the directors’ intention and the attendant circumstances, Tootle v. Commissioner, 58 Fed. (2d) 576, affirming 20 B. T. A. 892; Gossett v. Commissioner, 59 Fed. (2d) 365, affirming 22 B. T. A. 1279; Helvering v. Edison Securities Corporation, 78 Fed. (2d) 85, affirming 29 B. T. A. 483. The conclusion has been reached that the distributions of 1935 and 1936 were not distributions in liquidation; that there were no plan for liquidation and no liquidation activities prior to 1937; and that the distribution made in 1937 was a distribution in liquidation under a plan to be completed within two years from the close of 1937.

The petitioners now concede that they should have used $154,742.74 as the basis for the 30 percent gain instead of the $147,724.91 which they used. Except for this change, the Commissioner’s determination is reversed.

Decision will be entered wnder Rule 50.

       (c) Distributions in Liquidation.—Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112. Despite the provisions of section 117 (a), 100 per centum of the gain so recognized shall be taken into account in computing net income, except in the case of amounts distributed in complete liquidation of a corporation. Dor the purpose of the preceding sentence, “complete liquidation” includes any one of a series of distributions made by a corporation in complete cancellation or redemption of all of its stock in accordance with a bona fide plan of liquidation and under which the transfer of the property under the liquidation is to be completed within a time specified in the plan, not exceeding two years from the close of the taxable year during which is made the first of the series of distributions under the plan. In the ease of amounts distributed (whether before January 1, 1934, or on or after such date) in partial liquidation (other than a distribution within the provisions of subsection (h) of this section of stock or securities in connection with a reorganization) the part of such distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or profits.


author: Mellott :

text:
    Midland Cooperative Wholesale, a Co-operative Association, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100612.
    Promulgated June 26, 1941.

      E. J. Pearlove, Esq., and Benjamin Drake, Esq., for the petitioner.

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

Mellott :

The Commissioner determined that the amounts credited by petitioner to its members and held in its “Patrons’ Equity Reserve” account are not deductible from its gross income for the taxable years. Whether this determination is or is not correct is the first issue to be determined.

■ Both parties recognize that there is no specific statutory provision for the deduction of patronage dividends from the gross income of a cooperative association. The Treasury Department, however, as pointed out in Fruit Growers Supply Co., 21 B. T. A. 315, 326; affd., 56 Fed. (2d) 90, with “great liberality”, has allowed such deductions “to the end that substantial justice may be done to an association which is engaged in cooperative marketing or purchasing work but which may not be exempt from taxation.” The justification for the ruling rests upon the fact that the so-called dividends are in reality rebates upon the business transacted by the association with its members rather than true income to the association.

Respondent, in determining the deficiency, correctly allowed the deduction of the amounts paid in cash by petitioner to its members, based upon the business transacted by them in each year, though payment was not made of such amounts until the following year. He concedes that a definite liability to make such payments—clearly a prerequisite to their deduction—arose during the taxable years. Home Builders Shipping Association, 8 B. T. A. 903; Anamosa Farmers Creamery Co., 13 B. T. A. 907; Farmers Union Cooperative Association, 13 B. T. A. 969; Farmers Union State Exchange, 30 B. T. A. 1051, 1066.

As to the amounts credited by petitioner to its members upon its books and not paid over to them during the following year respondent takes a different position. Pointing to some of the corporate records received in evidence, especially the minutes of the directors’ meetings and the minutes of the annual meetings, he argues that they show petitioner was in need of working. capital and that the members recognized the necessity of either borrowing it or raising it among themselves; that this could be, and was, accomplished by the members leaving a substantial portion of their dividends with petitioner; that the so-called reserve was not a true reserve, but an allocation of a part of petitioner’s undivided surplus made in the hope of avoiding income tax; that setting aside a portion of its income in such an account “was contrary to, or at least not provided for by, the state law, petitioner’s Articles of Incorporation and its bylaws”; and that additional corporate action is required to be taken before petitioner becomes under any liability to pay to its members the amounts set aside.

The evidence does indicate that petitioner was in need of working capital and that the membership. desired to aid it in getting out of debt by leaving a portion of their dividends with it. It is also true that at least petitioner’s directors knew all earnings placed in “permanent surplus” would be included in its gross income in computing the amount of its income tax. The motive of petitioner and its members does not seem to be very material to the present controversy. It is important to determine, however, whether the action taken was in violation of state law or charter provisions and whether additional corporate action is required before petitioner is under any definite liability to make payment;, so these questions will now be considered.

Petitioner’s articles of incorporation and bylaws follow quite closely the provisions of the Minnesota state law. Both provide for the deduction of operating costs,, the setting aside of a reserve for depreciation, and the creation of a reserve against other possible losses. Both require that there be deducted an amount sufficient to pay interest on the paid-up capital of the association. The bylaws provide for the payment of interest at not to exceed 5 percent per annum. The state law authorizes the, payment of interest at a rate not in excess of 6 percent per annum. There may also be deducted and set aside such amounts as may be required to provide for the erection of new or additional buildings or for additional machinery or equipment. Provision is also made for “creating a reserve for permanent surplus.” The balance of the net income, in the language of the state statute, is to “be considered and termed as ‘undivided surplus’ for such fiscal year and shall be available for distribution among the members of such cooperative association on the basis of patronage.” Distribution of the undivided surplus is required to be made annually on the basis of patronage during the preceding fiscal year.

It is true that neither the state law nor petitioner’s articles of incorporation and bylaws, at least prior to the annual meeting of 1988, specifically referred to a patrons’ reserve account. The “undivided surplus,” however, clearly belonged to the members or patrons and, both under the law of the state and under petitioner’s bylaws, was required to be distributed to them annually on the basis of patronage. While the setting aside of a portion of such amount is not specifically authorized, there is nothing in the state statute or the bylaws prohibiting such action being taken. We are therefore of the opinion that when petitioner, with the consent and knowledge of its members, set aside a portion of its earnings in a reserve account and allocated it among them, it did not violate any provision of the state law or act in violation of its charter provisions.

The nest question is whether additional corporate action is required to be taken before petitioner becomes under a definite liability to pay to its members the amounts set aside to their credit. Petitioner points out that the amounts to be paid forthwith to its members in cash and the amounts to be held in reserve were both authorized at the same time and by the adoption of one resolution; that both were allocated to the members at the same time and entered upon the corporate ledger as credits;' and that both were computed upon the business transacted with the association, It argues, therefore, that both were properly accrued as liabilities upon its books. We agree with petitioner. In our opinion all necessary steps were taken in the taxable years to obligate petitioner to pay the earnings over to its members. The resolutions of the board of directors recognized that the entire amounts—$53,601 in 1936 and $58,673.43 in 1937—belonged to the members. The statutes and the bylaws so provide. If any other disposition of such earnings had been made—other than putting them in permanent surplus—the directors would have committed an unlawful act, which under the statutes of Minnesota would have been “cause for the cancellation of the charter.” The amounts in question were not put in permanent surplus. They were allocated to the members, though held in reserve. Moreover, though perhaps wholly unnecessarily, the directors sought and secured the approval of the membership at tbe annual meetings of their action in withholding the portion of the earnings which had been set aside for them, and, in connection with the earnings for 1937, such approval was also secured during the month of December and before the end of the taxable year of the action then contemplated—i. e., that 50 percent be paid in cash at once and 50 percent be placed to the credit of the members and be held in reserve.

Eespondent places considerable reliance upon the new bylaw adopted at the annual meeting in 1938 which, he says, indicates that petitioner was under no definite liability to pay the amounts credited upon its books to its members unless it should choose to do so. He relies particularly upon the last sentence of the bylaw, which provides that “in case of liquidation, winding up or dissolution, such certificates shall be paid only after all corporate liabilities (including the liabilities arising from the issuance of preferred stock but excluding its liability arising from the issuance of common stock) have been paid in full.” This, he says, indicates that unless some definite corporate action' is taken prior to the liquidation or dissolution of petitioner, the members will receive the credits which have been made to their respective accounts only in the event all corporate liabilities shall have been paid and all preferred stock redeemed.

Petitioner, hi its reply brief, argues that the new bylaw is immaterial to the present issue and that no corporate action taken during a succeeding year can add to, or detract from, the rights and obligations of the petitioner and its members which had come into being by virtue of corporate action previously taken. There is considerable substance to petitioner’s argument. We are of the opinion, however, that if the bylaw is to be considered, still it does not have the effect that respondent contends it has. It recognizes that the amounts set aside and credited to the members belong to them, that interest must henceforth be paid, and, in the event of liquidation or dissolution of the cooperative, that the members shall have the rights of general creditors. No additional action is required to be taken by the corporation to create such liability.

It is apparent we are of the opinion respondent erred in holding that the amounts credited to the members must be included in petitioner’s income. One additional reason for so holding may be given. Petitioner’s books were kept upon an accrual, as distinguished from a cash, basis. All events occurred within the taxable years determining the liability of petitioner to its members and the amounts thereof. United States v. Anderson, 269 U. S. 422. The fact that the entries could not be made upon petitioner’s books until its audit of the year’s business was completed is unimportant and does not de-, prive it of its right to accrue all proper items in closing its books for the year. It accrued upon its books, and showed as accounts payable upon its balance sheet, the amounts credited to its members. This action was in accordance with the corporate resolutions adopted by it in December of each year. The amounts so credited, in our opinion, could have been withdrawn by the members at any time. In at least two instances they were, in effect, withdrawn. As shown in our findings, they were applied by petitioner in liquidation of the members’ accounts.

Eespondent cites an unpublished memorandum opinion of this Board holding that amounts set aside in an account entitled “Reserve for Working Capital” by a cooperative association organized under the laws of Idaho are not deductible as patronage dividends. The cited decision has now been affirmed by the Circuit Court of Appeals for the Ninth Circuit. Cooperative Oil Association, Inc. v. Commissioner, 115 Fed. (2d) 666. An examination of the opinion of the court discloses that the taxpayer, as provided in its bylaws, had set aside a substantial portion of its earnings “to create a reserve or reserve funds necessary to provide working capital.” In the letter to its members it stated that “as rapidly as our reserves accumulate these earnings will be released and disbursed to you as patronage dividends.” The reserve established by the taxpayer in the cited case was similar to the “permanent surplus” set aside by petitioner in the instant proceeding rather than to the amounts set aside by it in- the patrons’ equity reserve account and credited to its members. Additional corporate action was required before it was available to them. This fact distinguishes the cited case from the present.

We are of the opinion and hold that respondent erred in including the amounts in issue in petitioner’s income.

Petitioner claims an overpayment for each of the years based upon its present assertion that it should be allowed a credit of $18,011.33 for the year 1936 and $28,051.41 for the year 1937 under section 26 (c) (1) of the Revenue Act of 1936. The petition alleges that these amounts equal the excess of the adjusted net income over the aggregate of the amounts which petitioner could distribute within the taxable years as dividends (for purposes of the surtax on undistributed profits imposed by section 14 of that act) without violating state statutes and the provision of a written contract executed prior to May 1, 1936.

The returns were not introduced in evidence. The deficiency notice indicates that the credits now sought were not claimed in the returns. The basis upon which they are claimed is that under the laws of Minnesota petitioner was prohibited from paying dividends in excess of 6 percent per annum and under its charter it was prohibited from paying dividends in excess of 5 percent per annum.

Since the filing of briefs the Supreme Court has settled the question now before us. It held that the section relied upon by petitioner “referred to routine contracts dealing with ordinary debts and not to statutory obligations”, and that the mere fact that a corporation was prohibited by state law or charter provisions from distributing a portion of its earnings did not entitle it to the credit specified in section 26 (c). Helvering v. Northwest Steel Rolling Mills, Inc., 311 U. S. 46; Crane-Johnson Co. of North Dakota v. Helvering, 311 U. S. 54.

While the cited cases completely dispose of petitioner’s contention that it is entitled to the credit specified in section 26 (c), there are other equally sound reasons why it can not be allowed. The statute merely limits the amount of interest which may be paid upon the paid-up capital. Such interest, for some purposes, is, no doubt, a dividend; but it is questionable, to say the least, whether a statutory provision making specific reference to “interest” could be construed to include “dividends.” It is also not inappropriate to point out that petitioner’s contention that the “net income” of a corporation is being “distributed”, if sustained, would deprive it of the deduction of the amounts paid to its members or allocated to them upon its books; for such deductions may be allowed only upon the theory that the distributions were rebates upon the business of the members rather than income of the association.

Petitioner’s claim for the credit is denied. No overpayment in tax has been, established.

Other adjustments made by the respondent and not contested by petitioner are approved.

Decision will be entered under Bule 50.


text:
    Estate of Emma Frye, Don Eggerman, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101631.
    Promulgated June 27, 1941.

      W. S. Greathozise, Esq., for the petitioner.

      B. H. Neblett, Esq., for the respondent.
   OPINION.

Hill:

The decisive questions before us are (a) what, if any, interest in the Oregon property was owned by’ petitioner and (b) whether petitioner is estopped from denying ownership in part of that property. Only that part off the deficiency determined which respondent attributes to income of petitioner as owner of an interest in the Oregon property is in dispute. Other adjustments are not in controversy.

Petitioner contends that title to the Oregon property was in Charles H. Frye and that no gain from the sale thereof or other income therefrom is taxable to petitioner. Petitioner further contends that, in any event, the estate of decedent realized no gain from the sale, since the trustee sold the property for the benefit of creditors. This latter contention is without merit. The property was sold to pay debts of Frye & Co., one-half of whose stock petitioner owned.

Respondent argues that the Oregon property was purchased with community funds, that decedent owned a one-half interest therein at the time of her death, and that such interest passed at her death to petitioner. Respondent also pleaded estoppel, alleging in substance that for estate tax purposes petitioner included as an asset of decedent’s estate a one-half interest in the Oregon property; that Charles H. Frye as executor of the estate, in negotiating the estate tax liability, averred that the Oregon property was purchased with community funds; that the executor filed an income tax return for the taxable period in which was reported profit of $41,210.13 upon the sale of the Oregon property, taxable to the extent of $24,726.08; that the income tax returns of petitioner for the fiscal years 1935, 1936, and 1937 claimed deductions for one-half of the taxes on, and one-half of the operating expense of, this property; that a sale of a portion of the property was reported in petitioner’s income tax return for the fiscal year 1936 as having been made by petitioner; that the statute of limitations now bars the assessment or collection’’of income taxes against petitioner for the years in which deductions were taken for such taxes and expenses; that such acts and averments amount to representations or concealment of material facts unknown to respondent and relied upon by him to his detriment; and that petitioner is therefore estopped to deny ownership of an interest in the Oregon property.

On the question of estoppel we think respondent can not be sustained. On reference to our findings of fact it will appear that petitioner did not represent to respondent that it owned an interest in the Oregon property. On the contrary, petitioner represented and contended, both in the matter of the estate tax of decedent’s estate and in the first income tax returns of petitioner and of Charles H. Frye after decedent’s death, that the Oregon property was the separate property of Charles H. Frye. It was upon the insistence of respondent that an undivided one-half of this property should be included in decedent’s estate for estate tax purposes and that it should be treated as owned in equal shares by petitioner and Charles H. Frye in their returns for income tax purposes, that petitioner and Frye so treated such property. Under such facts it can not be said that respondent was misled by or that he relied on representations of petitioner or of Charles H. Frye, or anyone on their behalf, that the property in question was so owned in equal shares. Respondent made his own investigation of facts and reached a- conclusion as to the ownership of the property contrary to that represented by petitioner. The acquiescence therein of petitioner and Charles H. Frye for the purposes of estate and income taxes prior to the taxable period here involved was not such representation of facts as would constitute an element of estoppel. The plea of estoppel is not sustained.

The facts which petitioner contends demonstrate that the Oregon property was Frye’s separate property are that the property was referred to as his separate property, that it was not included in the inventory of the probate proceedings of decedent’s estate, that the property was treated as Frye’s separate property in his first income tax return filed after decedent’s death, that title insurance was issued upon conveyance of the property to the Oregon-Mesabi Corporation, and that Frye individually executed a warranty deed to the purchaser and made an affidavit to the effect that decedent’s estate disclaimed any interest in the property.

On the other hand, while the bookkeeper of petitioner, of Charles H. Frye, and of Frye & Co. testified that the property was referred to as Frye’s separate property, she also testified that there was no indication on his books that the property was his separate property. Also petitioner, acting through Charles H. Frye as executor, acquiesced in the inclusion of half of the value of the Oregon property in decedent’s estate for estate tax purposes and in treating the property as owned in like manner in petitioner’s and Charles H. Frye’s income tax returns for the three taxable years next prior to the taxable period here involved.

The facts upon which petitioner relies are not sufficient to overcome the presumption that the property was purchased in large part with community funds. We have found upon the evidence that the community and separate income of decedent and her husband, Charles H. Frye, were inseparably commingled during the existence of their marriage and that the greater part of such income was their community property. Under the laws of Washington, when such indis-tinquishable intermingling of property occurs the whole mass of such property is presumed frima facie to be’community property. Yesler v. Hochstettler, 4 Wash. 349; 30 Pac. 398; In re Binges Estate (Wash.), 105 Pac. 689, 697. There being no evidence to rebut the presumption as above stated, we hold that all of the income received by decedent and her husband, Charles H. Frye, during their marriage was community property. The record shows that, aside from his interest in the Oregon property, the only separate property which Charles H. Frye had during such marriage was approximately, but not more than, $18,000. Whether such separate property was commingled with the community property of the spouses the evidence does not disclose. The inventory and appraisement of the estate owned by decedent at her death shows separate property of her estate of the net appraised value of $156,000.56 and a community estate of herself and Charles H. Frye of the net appraised valué of more than $600,-000. The evidence does not disclose the character of ownership of the funds used to purchase the Oregon property. Petitioner’s counsel conceded at the hearing “that we don’t profess to be able to trace them.” Since the purchase of the property was made by Charles H. Frye and since under Washington laws he had the control and management of community personal property, sec. 6892, Rem. Comp. Stat. of Wash., but not of decedent’s separate property, we assume that none of the latter was used in such purchase. It follows that, since the separate property of Charles H. Frye did not exceed $18,000, the purchase price of the Oregon property came from community funds to the extent of at least $221,050.18, one-half of which was the measure of the community interest of decedent in the funds used to purchase such property. Also, it is apparent from the excerpt of the letter of petitioner’s attorneys, set forth in our findings of fact, relative to the investment of separate funds of Charles H. Frye in the Oregon property, that he did not claim that more than $18,000 of his separate property was so invested.

ISTo evidence was offered of any agreement or other arrangement between decedent and her husband or of any act by her alone whereby she relinquished her interest in the community funds used in the purchase of the Oregon property or whereby she relinquished her interest in the latter property. Moreover, no contention is advanced herein that decedent made a gift to her husband of any property or otherwise relinquished to him her interest in any property. We hold, therefore, that decedent had a beneficial interest in the Oregon property -at her death and thereupon such interest passed to petitioner. While the legal title to the Oregon property rested in Charles H. Frye, he held such title in trust for the benefit of the decedent to the extent of the proportion which her one-half interest in the community funds used in the purchase of the property bore to the total cost of the property. Blacklaw v. Blacklaw (Ore.), 44 Pac. (2d) 728; Cary v. Cary (Ore.), 80 Pac. (2d) 886, 891. Cf. Savage v. Savage (Ore.), 94 Pac. (2d) 134. Petitioner, therefore, had a beneficial interest in the Oregon property. The per centum of such beneficial ownership was the quotient of 113,525.09 divided by 245,050.18, or 46.327 per centum.

It follows that, since the value of the Oregon property at the death of decedent was $150,000, petitioner’s interest therein was 46.327 percent of that amount. Petitioner realized gain on the sale of the Oregon property in the taxable period measured by the difference between 46.327 percent of the net sale price of the property and the adjusted basis to petitioner of its interest in such property. Sixty percent of such gain is includable in petitioner’s income in computing its tax liability. Other income from such property within the taxable period is likewise so includable to the extent of 46.327 percent thereof.

Decision will he entered, under Bule 50.

         Sec. 6892. Community property defined—Husband’s control of personalty.
      Property, not acquired or owned as prescribed in the next two preceding sections, acquired after marriage by either husband or wife, or both, is community property. The husband shaU have the management and control of community personal property, with a lite power of disposition as he has of his separate personal property, except he shall not devise by will more than one-half thereof.


text:
    Estate of Leopold Kaffie, Harold Kaffie, Jeanette Kaffie, and Saera Kaffie, Sole Heirs, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100526.
    Promulgated June 27, 1941.

      Sowell 'Ward, Esq., for the petitioners.

      "Wilford H. Payne, Esq., for the respondent.
   OPINION.

Smith:

The question presented by this proceeding is the value for estate tax purposes of the decedent’s one-half community interest in his one-half interest in the partnership of Kaffie Lumber & Building Co., which respondent concedes was dissolved by the death of Leopold Kaffie on September 29, 1937. In the estate tax return such value was reported to be $97,252.41, which is one-fourth of the value of the partnership assets at the date of death, as shown by the partnership books of account. The partnership books of account did not, however, show any value for good will. As we understand, the record in this proceeding the respondent does not contend that this amount does not reflect the fair market value for estate tax purposes of the decedent’s interest in the tangible assets of the partnership which passed to his heirs at his death. He contends, however, that the partnership had a good will which enhanced the value of the decedent’s interest in the business which jpassed to his heirs and that the value of the interest is $171,093.35. The method of his computation of value is shown in our findings of fact. His determination is based solely upon the large earnings of the partnership in relation to invested capital for the period 1933 to 1937, inclusive.

■ The incidence of the estate tax -is upon “the transfer of the net estate.” Sec. 301 (a), Revenue Act of 1926. Section 302 of that act (as amended by section 404 of the Revenue Act of 1934—48 Stat. 754), declares in part:

Tbe value of tbe gross estate of tbe decedent shall be determined by including tbe value at tbe time of bis death of all .property, real or personal, tangible or intangible, wherever situated except real property situated outside tbe United States— '
(a) To the extent of tbe interest therein of the decedent at tbe time of his death.

Regulations 80 (1937 Edition), pertaining to the estate tax imposed by the Revenue Act of 1926, as amended, provides in part as follows:

Aut. 10. Valuation of property.—(.a) General.—The valué of every itém of property includible in the gross estate is the fair market value thereof [italics ours) at the time of the decedent’s death; * * * The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell. * * * All relevant facts and elements of value as of the applicable valuation date should be considered in every case. * * * .
* * * , * * . * *
(d) Interest in business.—Care should be taken to arrive at an accurate valuation of any business in which the decedent was interested, whether as partner or proprietor. A fair appraisal as of the applicable valuation date should be made of all the assets of the business, tangible and intangible, including good will, and the business should be given a net value equal to the amount which a willing purchaser, whether an individual or corporation, would pay therefor to a willing seller in view of the net value of the assets and the demonstrated earning capacity. Special attention should be given to fixing an adequate figure for the value of the good will of the business in all cases in which the decedent has not agreed, for an adequate and full consideration in money or money’s worth, that his interest therein shall pass at his death to his surviving partner or partners.

The respondent’s determination that the fair market value of the decedent’s interest in the partnership of Kaffie Lumber & Building Co. at the date of his death was $171,093.35 is presumably correct. The burden of proof of showing otherwise is upon the petitioners. In an effort to bear such burden they have presented to the Board all of the material facts with respect to the carrying on of the partnership business, its earnings, invested capital, etc.

So far as the Board has been able to determine the question presented by this proceeding is one of first impression. The Board has in many cases been requested to redetermine deficiencies in estate tax of estates of deceased persons owning shares of stock of corporations where the respondent has found that the value of the shares was in excess of cost or of the book value, due to the element of good will or other intangibles. Those cases are not, however, in point in this proceeding; for a corporation has a life independent of the life of a deceased stockholder.

Also, it seems plain that where a decedent has operated a business as sole proprietor the business might have a value in excess of the cost or book value of the tangible assets of the business at date of death. The location of the business and the name under which it was conducted might give the property to be valued a fair market value in excess of the cost or book value of the assets. In any consideration of such a case the question is the fair market value of the assets left by the decedent which are transferred to his heirs or legatees by reason of his death.

We apprehend that the same rule would apply in the case of the death of a partner in a profitable business. In Rowley on Partnership (1916), it is stated at section 278.: “Partnership property includes the good will of the firm”, citing Smith v. Walker, 57 Mich. 456; 22 N. W. 267; Smith v. Imus, 57 Mich. 456; 24 N. W. 830; Spiess v. Rosswog, 63 How. Pr. (N. Y.) 401; 48 N. Y. Super. Ct. 135; affd., 96 N. Y. 651. Upon the death of a partner, the surviving partner, at least under the laws of Texas, holds the assets of the dissolved partnership as trustee for the purpose of paying the debts of the partnership, winding up its affairs, and paying over to the deceased representatives their shares of the partnership assets. Altgelt v. Alamo National Bank, 98 Tex. 252; 83 S. W. 6, 9. If the partnership assets can be sold or liquidated at a price in excess of the net worth of the partnership, as shown by its books of account at the date of the death of the deceased partner, the deceased partner’s representatives are entitled to receive their share of the net assets. In the proceeding at bar that would be one-fourth of the total.

It is a general rule, however, that the surviving partner may set up business for himself at the old stand without being liable for damages to the good will as a part of the firm assets. Hutchinson v. May, 187 Mass. 262; 72 N. E. 974; Witbeck v. Chittenden, 50 Mich. 426; 15 N. W. 537; Chittenden v. Witbeck, 50 Mich. 401; 15 N. W. 526; Scudder v. Ames, 142 Mo. 187; 43 S. W. 659; Lobeck v. Lee, 37 Nebr. 158; 55 N. W. 650; Rice v. Angell, 73 Tex. 350; 11 S. W. 338. He may also solicit the customers of the old business where not prevented from doing so by the articles of copartnership, as is the condition which obtains in this case, without being liable to account to the deceased’s representatives therefor. He may also conduct such business by the use of his own surname in connection therewith. He is not barred from so doing by the fact that a like business under the same name was formerly conducted by a partnership of which he was a member. Goidl v. Advance Neckwear Co., 123 S. W. (2d) 865. It was said in the Goidl case:

* * * It is now well settled that every- person has the right to honestly use his own name in his own business,- and any injury resulting' from such use is damnum absque injuria. Singer Mfg. Co. v. June Mfg. Co., 163 U. S. 169 * * *.

It is difficult to see, upon the facts which obtain in the instant proceeding, wherein the decedent’s interest in the Kaffie Lumber & Building Co. which passed to his heirs had a value in excess of one-fourth of the value of the tangible assets of the business. What is there in the facts of the case which would warrant a willing buyer to pay more for the decedent’s interest in the business than he would receive upon a liquidation of the tangible assets ?

There is nothing in the evidence that leads us to believe that the location of the partnership’s lumber business was of any particular value to the business. A breakdown of the fixed assets of the partnership business on September 30,1937, shows as follows:

Lumber yards, sbeds, etc-'— $16,987. 72
Rent houses_ 810. 36
Delivery equipment- 8, 897. 63
Office fixtures_:- 216. 93
Total_ 26,912.6-4

Most of the business was done in the oil fields. For such business the partnership found' it necessary to “follow the fields”, changing its offices and lumber yards to meet the demands of the trade. We can not conceive that location contributed any good will value to the partnership business.

If it be true that the name “Kaffie Lumber & Building Company” had a value, we can not conceive what value it would have to a purchaser of the business, since Harold Kaffie, who was responsible for the profitable business, had the right to continue that business under the name Kaffie Lumber & Building Co. Quite clearly no willing purchaser of the entire business would have given any more for it by reason of its name. He would appreciate that he would be in competition with the business which was to be carried on under the name of Kaffie Lumber & Building Co. by Harold Kaffie, who, as the evidence shows, had the contacts with the builders and oil operators and, indeed, was the business “go-getter” of the partnership.

Furthermore, it is to be noted that the services of Leopold Kaffie to the partnership were lost by his death. To the extent that his efforts, business acumen, and popularity contributed to the good will, such value died with him.

We have stated above that the determination of the respondent as to the value of the decedent’s interest in the partnership is presumptively correct. It is a question as to the amount of proof that the petitioners must offer to rebut that presumption. The petitioners have offered evidence showing the earnings, net worth, and character of the business, and the manner in which it was conducted. They contend that any good will value which the partnership business might have had was lost upon the dissolution of the partnership. In their brief they state:

* * * It is so stated [that any good will ends with dissolution of a partnership] in a digest often cited and highly regarded by the Texas Courts, 32 Tex. Jur. 278:
“If the firm name consists of the surnames of the partners, dissolution without any agreement or right to take and preserve the name and good will extinguishes both; it is otherwise, possibly, if the name is an assumed one not descriptive of the partners.” [Italics ours.]

The respondent has made his determination of the value of the good will solely upon the basis of the earnings of the partnership. We think it is clear, however, that a partnership may have large earnings without having any appreciable good will which survives, the partnership. The large earnings may be due to the efforts of the partners, to the exercise of business judgment, or to fortuitous circumstances in no wise related to good will. Such appears to be the situation in the instant case, for, as testified by Harold Kaffie, there was flush production in certain oil fields which created an enormous demand for lumber during the years 1935,1936, and 1937. The large earnings of the partnership for those years appear to be due largely to such demand and not to good will.

We are furthermore of the opinion that the nature of the business was not such that good will, as the term is ordinarily understood, was of particular importance. Of course, honest dealings contribute to the prosperity of any ■ business. But the retail lumber business is not one that is patronized by a large percentage of the public. It caters principally to builders and those having a use for lumber. In the majority of instances builders will purchase from those concerns which offer the lumber at the cheapest price and can make prompt deliveries. There is nothing in the facts in this case which leads us to believe that another retail lumber dealer having the knowledge and business acumen of the Kaffie Lumber & Building Co. could not have entered the field and done as well as that company did.

The respondent has made his computation of an assumed good will upon the basis that the business of the partnership was worth 10 times the average annual earnings for the period 1933 to 1937. It has been recognized that where the evidence clearly warrants the finding of good will the good will may be based upon earnings. See Matter of Silkmann, 121 App. Div. 202; 105 N. Y. Supp. 872; affd., 190 N. Y. 560; 83 N. E. 1131. The respondent on brief says that his determination of the good will value of the partnership is based upon A. R. M. 34 (1920), Cumulative Bulletin 2, p. 31. He admits, however, that other formulae provided by A. it. M. 34 might be applicable. He states that other formulae, possibly applicable, would show a value for the decedent’s interest in the partnership varying from $115,105.46 to $171,093.35. We do not think, however, that any formula for the determination of the valué of the good will of the dissolved partnership can be resorted to in this case; for we are of the opinion that the good will value of the partnership which passed to the heirs of Leopold Kaffie, the decedent, had no fair market value at the date of his death.

Reviewed by the Board.

Decision will be entered winder Rule 50.

Steenhagen, Mubdoce, Mellott, and Opper dissent.


author: Disney :

text:
    John B. Hollister, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 94998.
    Promulgated July 3, 1941.

      John H. More, Esq., for the petitioner.

      Paul A. Sebastian, Esq., for the respondent.
   OPINION.

Disney :

This proceeding involves income tax liability for the calendar year 1932. The respondent determined a deficiency in the amount of $2,500.89. The petition alleged error in the entire amount and that there is overpayment in the amount of $1,057.23, but on brief petitioner admits a deficiency of $1,414.18. The principal question presented by the petition was whether the basic date for computing gain or loss upon corporate stock is the date of distribution to a testamentary trustee by an executor, or the date of distribution by the trustee to the petitioner, as legatee. It being agreed that that question has now been answered by the Supreme Court, only ancillary questions remain.

The parties filed a stipulation of facts and we find the facts as so stipulated. In addition, petitioner’s income tax returns for the years 1930 and 1932, with addenda, were placed in evidence, but we find therein no material facts not covered by the stipulation.

The petition and answer herein set up an issue as to whether the basis of stock received by petitioner as legatee was the value at the date of receipt by him from the testamentary trustee, or the date of receipt by the trustee from the executor. Since the decision on that subject in Helvering v. Gambrill, 313 U. S. 11, the parties on brief now agree, and we hold, that the basis of the stock is the value at the date of receipt by the trustee from the executor. The parties agree upon the value at that date. This leaves for our consideration only the question of whether the petitioner utilized the base of the entire stock in an earlier year (by erroneously using the basis of value at the date when the stock was distributed to him by the trustee), and, if so, whether, the statute of limitations having run against assessment for such earlier year, the petitioner may use such basis in the taxable year.

In substance the material facts are that- the petitioner received from the testamentary trustee 215 shares of corporate stock, the total basis of which, adjusted as agreed, was $10,201.04 (using agreed values on the date of distribution to the trustee).

In 1930 the petitioner sold 56 shares of the stock, together with 100 other shares of the same stock received by gift from his wife, for a total sale price of $20,689.50 and in the taxable year sold the other 159 shares for $1,237.81, and he claims a deduction for loss. Petitioner in his income tax return for 1930 computed and claimed a( loss of $7,156.50 by using a cost basis of $27,846. The cost to petitioner’s wife of the 100 shares received from her by gift was $15,975. The respondent therefore contends that in the 1930 return the petitioner utilized $11,871 ($27,846—$15,975) as the basis for the 56 shares received as legatee. The petitioner argues that the basis used for the 56 shares was a pro rata basis, i. e., 56/156 of $27,846, or $9,996. Since the only proper basis for the stock acquired by gift was $15,975, the cost to the donor, we hold that the respondent’s view is correct and that in 1930 the petitioner recovered $11,871 of the basis of the 215 shares. It thus appears that, more than the entire basis of the 215 shares having been recovered in 1930 upon the sale of 56 shares thereof, no basis remains for recovery upon sale of the remaining 159 shares in the taxable year, unless, as the taxpayer contends and respondent denies, the fact of-such recovery of basis in the earlier year can not be' set up and considered in the taxable year. It is agreed that the statute of limitations has run against assessment for the year 1930. The basis used by the petitioner in that year was approved by the Commissioner, the deduction claimed for loss of $7,156.50 was allowed, and the $2,009.69 income tax paid by the petitioner was later refunded, through allowance of a large loss not claimed in the original return.

Both parties cite authority in support of their contentions. The petitioner points out that the error in using the wrong and excessive basis in computing loss on the 56 shares of stock sold in 1930 was innocent, with no culpable misrepresentation by the taxpayer, and was merely the use of a basis generally regarded correct at that time; and he contends, therefore, that there is no basis for estoppel, even if estoppel was not pleaded.

After reviewing the authorities cited by both parties, we are of the opinion that the basis, in the amount above determined, was available for use as a deduction by the petitioner for the taxable year. In the first place, there is no plea whatever as to estoppel, and the point may be passed. Helvering v. Salvage, 297 U. S. 106. Moreover, the respondent does not suggest that there was misrepresentation, fraud, or even silence, so that the ordinary bases of estoppel do not appear. This is plainly a case of innocent use of an erroneous base, accepted by the respondent and in nowise not shown to have been considered at that time as improper by him, or in any way imposed upon him. In Wobber Brothers, 35 B. T. A. 890, and Estate of William Steele, 34 B. T. A. 173, we considered situations similar to that here involved and held that there was no estoppel. To the same general effect are Sugar Creck Coal & Mining Co., 31 B. T. A. 344; Nicollet Associates, Inc., 37 B. T. A. 350; Grauman’s Greater Hollywood Theatre, Inc., 37 B. T. A. 448; and R. E. Baker, 37 B. T. A. 1135. See also Schmidlapp v. Commissioner, 96 Fed. (2d) 680. We find the cases cited by the respondent to involve other facts and principles. Thus, this is no suit to recover taxes paid, as in Stearns Co. v. United States, 291 U. S. 54, apparently with plea and proof of estoppel. In Commissioner v. Farren, 82 Fed. (2d) 141, no return was filed, and cost of stock was not proved. The refund for the year 1930 was not based upon the allowance of the loss on the stock herein involved, as in John J. Flynn, 35 B. T. A. 1064, but upon another loss not here pertinent. Moreover, in that case no basis of stock was established. Alamo National Bank of San Antonio, Executor, 36 B. T. A. 402, involved a failure to file a return for stock -received as a dividend and therefore denial of cost basis in a later year. We think such cases do not here control. We hold that the respondent erred in denying deduction of the loss claimed by petitioner, to the extent determined on the proper basis as above determined.

Decision will he entered under Bule 50.


author: Disnet:

text:
    Estate of John Q. Sherman, Deceased, Katherine M. Sherman, Executrix, William C. Sherman and Wellmore B. Turner, Executors, and Mrs. Katherine M. Sherman, Surviving Wife, Philadelphia Road, R. R. #1, Dayton, Ohio, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103041.
    Promulgated July 3, 1941.

      W. B. Turner, Esq., and G. H. Wells,. Esq., for the petitioners.

      Paul A. Sebastian, Esq., for the respondent.
   OPINION.

Disnet:

The petitioners contend that the settlement did not contemplate the use of the certificates of claim in the settlement at any amount other than the price paid for them and that, so far as they are concerned, the situation is the same as it would have been if they had increased the cash payment from $64,465.92 to the compromise figure, $110,894.35, leaving to the bank the question of how to use the additional money. Under this theory they argue that not more than $46,428.43 was received for the certificates of claim and, as this amount is equal to cost, there was no gain to be taxed. The proof here is that the certificates had a cost basis of $46,194.80. The respondent asks us to view the case as one in which there was a satisfaction of indebtedness of a solvent taxpayer for less than the amount due, resulting in taxable gain within the principle of United States v. Kirby Lumber Co., 284 U. S. 1.

In the Kirby case there was a purchase by the taxpayer of its own bonds at less than the selling price, in a previous year. Ho other property was involved. In Helvering v. American Chicle Co., 291 U. S. 426, the liabilities of a corporation, including outstanding bonds, were assumed in connection with the purchase of its assets and later the taxpayer purchased blocks of bonds for amounts less than their face value. The record did not disclose the disposition made of the assets acquired. Under the circumstances, the difference between the par value of the bonds and the amounts for which they were taken up was held to be taxable gain, following the doctrine announced in the Kirby case. In each proceeding the court distinguished Bowers v. Kerbaugh-Empire Co., 271 U. S. 170, upon the ground that therein the transaction as a whole showed loss, not gain.

The transaction here involved more than a mere purchase of a debt for less than its face amount or a voluntary forgiveness of indebtedness. The petitioners’ decedent actively contested the legal right of the mortgagor to payment of the face amount of the mortgage, alleging, in general, misrepresentations in connection with the sale of the property to him. Nothing indicates to us a lack of good faith in the defenses set up in the litigation. Negotiations ended in a settlement of the controversy by a payment of less than the principal of the mortgage. It is not clear whether both parties understood the reduction of the mortgage debt to be a forgiveness of indebtedness or an adjustment of the selling price. The decedent’s offer of settlement discloses an intent to regard the adjustment as a decrease in the selling price of the property, for he recited that he would carry the property on his books at $135,894.35. The original selling price of the property was $200,000. The application of the-superintendent of banks to the court for approval of the settlement treated the matter as a compromise of the suit to enforce payment of the principal and interest due under the mortgage, although he accepted the proposition of the decedent as made. Irrespective of whether there was a meeting of the minds on the question, the transaction enabled petitioners’ decedent to acquire unencumbered title to the property for a price less than the amount originally agreed upon. The mortgagee, by accepting as part payment certificates of claim worth 55 percent of face value, recognized it was receiving a reduction upon the original price for the property. There was not forgiveness of debt nor bargain payment of admitted obligation, but compromise of the question whether there was debt. The final payment of cash and certificates of claim completed the transaction and, viewing it as a whole, there was no gain, since the property at that time was worth less than the unpaid amount of the mortgage. The effect of the whole transaction was a induction in the purchase price of the property.

In L. D. Coddon & Bros. Inc., 37 B. T. A. 393, a case relied upon by respondent, the property had a value at the time of settlement in excess of the mortgage indebtedness. A like situation prevailed in Commissioner v. Coastwise Transportation Corporation, 71 Fed. (2d) 104.

In Kalman Hirsch, 41 B. T. A. 890, tbe petitioner purchased a piece of real estate, for $29,000, of which he paid $10,000 in cash and assumed mortgages outstanding on the property in the aggregate amount of $19,000. Payments prior to the maturity of a new mortgage placed against the property reduced the indebtedness to $15,000. Upon maturity of the mortgage the mortgagee demanded payment and the mortgagor refused. In subsequent negotiations the mortgagor offered to reconvey the property in satisfaction of the indebtedness. The mortgagee refused, but later, when the property had a value of $8,000, or $7,000 less than the mortgage indebtedness, accepted $8,000 in discharge of the debt. The mortgagor was personally liable for the debt and was solvent before and after the settlement. We sustained the action of the Commissioner in determining that the mortgagor realized taxable income of $7,000 in the settlement, upon the theory of the Kirby case, i. e,, that the petitioner was relieved of a liability of $7,000, and until the property was disposed of it could not be ascertained whether the transaction as a-whole would be a loss as in Bowers v. Kerbaugh-Empire Co., supra. Upon appeal the decision was reversed. Hirsch v. Commissioner, 115 Fed. (2d) 656. The reasoning of the court was, in general, that there was in essence a reduction of purchase price, and, the property having decreased in value, nothing of value moved to the mortgagor in the settlement, since the reduction of indebtedness merely decreased the loss in a capital investment; that the reduction operated as a credit upon cost, thereby to that extent reducing the purchase price; and that until the property is finally disposed of there is no way of determining whether the transaction as a whole will result in gain or in loss.

The situation here is in most material respects parallel with that in the Kirsch case, with here the additional fact of litigation as to whether there was actually any indebtedness owing by the petitioner. Such litigation rendered incomplete the matter of purchase and payment for real estate, because of the defenses, including fraud, set up. By the settlement of such litigation the parties thereto in effect agreed upon the actual amount of indebtedness and an actual purchase price, as the court holds in the Kirsch case. Until that time the whole matter was unfinished. At the time of completion of the settlement the property acquired was worth less than the amount paid, in part in cash, in part by certificates of claim. What the petitioner paid was in substance a reduced purchase price. On the whole transaction, purchase, execution of note and mortgage, and litigation and settlement, through which the property, free from encumbrance, was acquired, no profit was made. Following the decision of the court in the Kirsch case, we conclude and hold that no taxable income resulted for the petitioner.

Decision will be entered under Rule 50.


author: Opper:

text:
    Huron River Syndicate, Walter F. Haass, Trustee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100775.
    Promulgated July 3, 1941.

      Harry Allen, Esq., and Harry B. Sutter, Esq., for the petitioner.

      Homer J. Fisher, Esq., for the respondent.
   OPINION.

Opper:

The primary issue is petitioner’s taxability as an association similar to a corporation. Petitioner contends that this record more nearly resembles Commissioner v. Gerstle (C. C. A., 9th Cir.), 95 Fed. (2d) 587, than Del Mar Addition v. Commissioner (C. C. A., 5th Cir.), 113 Fed. (2d) 410, relied upon by respondent.

Like all proceedings of this nature, the present controversy must be decided upon its individual facts. We think these bring it more nearly within the rule of the Del Mar case than of Commissioner v. Gerstle. Three important distinctions from the latter appear to us to require this outcome: First, in the agreement which these individuals made, it is expressly provided that their interests “are not interests in the property” but are rights to “the distribution of the net profits to be derived therefrom and distribution of any trust property remaining on termination”, and that this interest “is personal estate and not real estate”; whereas in the Gerstle case, which was held to be a joint venture, “it seems clear that the members were equitable owners of the real property acquired.” The latter is, of course, a relationship consistent with a true trust, while the former more nearly resembles the interest of a corporate stockholder. Second, these individuals expressly agreed that if, as was permitted, the enterprise should be transformed into a de jure corporation, the duties which petitioner would then perform as director, president, and manager would be “as nearly as may be the duties which he has undertaken hereunder as trustee”; thus indicating that his relationship to the participants in the enterprise was to be as nearly as possible comparable to that of the managing officer of a corporation. No such provision appears in the agreement construed in the Gerstle case. Finally, the original purpose of the Gerstle syndicates was the purchase and immediate resale of the respective properties and only business reverses were responsible for its modification; while in the present case it was at all times contemplated that the enterprise would engage in subdivision and development, an undertaking similar to that involved in Del Mar Addition v. Commissioner, supra; so that it is questionable whether the Gerstle ventures were originally intended as the vehicle for carrying on a business. This is a prerequisite to taxability as a corporation, Chase National Bank of the City of New York, Trustee, 41 B. T. A. 430, and in fact the Board found that the Gerstle syndicates “were not organized with the idea of remaining in existence for any substantial length of time or of actively operating in business, as is generally the case when corporations are created,” and Judge Denman concurred in the Gerstle opinion on the express ground that “whatever may be the form of the syndicates, they did not control after the frustration of the plan for immediate resale.” For the same reason Cleveland Trust Co. v. Commissioner (C. C. A., 6th Cir.), 115 Fed. (2d) 481; certiorari denied, 312 U. S. 704, also cited by petitioner, is equally inapplicable. For there “the trust instrument shows no plan to carry on a business in buying, selling, leasing or dealing in real estate.”

Of the five salient characteristics of an association taxable as a corporation, which Morrissey v. Commissioner, 296 U. S. 344, catalogs, three are readily discernible in this proceeding. Title to the property was taken for the benefit of the enterprise by petitioner and provision was made for succession by a trustee or corporation; management and control were centralized in petitioner; and death of the individual participants would not cause any change in the constitution of the venture. Here, as in Del Mar Addition v. Commissioner, supra, “the fourth feature, the transfer of interests without affecting the continuity of the enterprise, was not expressly provided for, but such transfers actually were made.” There were, to be sure, no certificates or other documents evidencing the respective interests. But, as the Supreme Court observed in Morrissey v. Commissioner, supra: “While the faculty of transferring the interests of members without affecting the continuity of the enterprise may be deemed to be characteristic, the test of an association is not to be found in the mere form of evidence of interests or in a particular method of transfer.” Finally, while there was no express limitation of liability, absence of this single feature is “insufficient to remove the taxpayer from the corporate class.” Jordan Creek Placers, 43 B. T. A. 131, 135.

It is in the nature of things improbable that such an issue as the present will ever be free from doubt, or that controversies presenting such sharp and simple facts as to leave no room for uncertainty will often find their way into the field of litigated controversy. But we are of the opinion that in the present case the preponderance of all the facts leans appreciably in favor of respondent; that they are distinguishable from those in Commissioner v. Gerstle, supra, for the reasons above set forth and on grounds similar to those thought to be sufficient for the same distinction in the Del Mar case; and that on this issue respondent’s action was correct.

The second question, petitioner’s right to obtain the benefit of a capital stock tax return filed out of time, is conceded by respondent to have been disposed of contrary to his contention by Del Mar Addition v. Commissioner, supra, and Jordan Creek Placers, supra. On this issue petitioner is accordingly to be sustained.

Finally, petitioner contests the imposition of penalties for failure to file corporate returns. The question under the Revenue Act of 1936, section 291, is whether there was reasonable cause for the failure. We should be more easily persuaded of the justification for the omission to file corporate returns if there had been a voluntary filing of the documents proper on any permissible theory. Cf. Germantown Trust Co. v. Commissioner, 309 U. S. 304. But petitioner never filed fiduciary returns, which would have been appropriate on the assumption that there was a true trust, nor partnership returns, called for in a joint venture, except for the three latest years and then only when the respondent so demanded. The trustee testified to his familiarity with the provision of law requiring the filing of association returns, which is the same section as that classifying joint ventures as partnerships and trustees as fiduciaries; and see, e. g., Kevenue Act of 1932, sections 189, 142. If the reasonable cause for failure to file corporate returns was the assumption that petitioner was not an association taxable as a corporation, that fails to explain the apparent in difference to the filing of the returns which would have been necessary under petitioner’s own theory. Information returns, the only ones regularly and voluntarily filed, would fail to supply respondent with that factual material to which he was entitled, even upon petitioner’s assumptions. Cf. Germantown Trust Co. v. Commissioner, supra. The record lacks the slightest effort to explain the consistent failure to file any returns of income whatever. We are not convinced that petitioner has sustained its burden of proving that failure to file the returns required was due to “reasonable cause.” See Frank W. Ross, 44 B. T. A. 1, 16. Respondent’s imposition of the delinquency penalty is approved.

Decision will be entered under Bule 50.

       SEC. 1001. DEFINITIONS. [Revenue Act of 1936.]
      (a) When used in this Act—
      ****** *
      (2) The term “corporation” includes associations, Joint-stock companies, and insurance companies.

       SEC. 291. EAILUKE TO FILE RETURN.
      In case of any failure to make and file return required by this title, within the time prescribed by law or prescribed by the Commissioner in pursuance of law, unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the tax: 5 per centum if the failure is for not more than thirty days with an additional 5 per centum for. each additional thirty days or fraction thereof during which such failure continues, not exceeding 25 per centum in the aggregate. * * *

       E. g., Revenue Act of 1932, sec. 1111.