author: Adams:

text:
    Reynolds Cattle Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 68445, 71463.
    Promulgated September 27, 1934.

      B. B. Stone, Esq., and Y. D. Harrison, Jr., G.P.A., for the petitioner.

      Frank B. Schlosser, Esq., and R. B. Gannon, Esq., for the respondent.
   OPINION.

Adams:

These two cases were consolidated and heard together. Docket No. 68445 involves a deficiency in income tax for 1929 of $6,664.91, and Docket No. 71463 involves a deficiency of $1,572.52 for 1930. ■

Practically all of the material facts were stipulated in writing, which we adopt by reference as part of our findings of fact. The same question is presented in each case, viz., whether the petitioner has the right to change from an inventory system of making its returns to a cash receipts and disbursements system without the formal permission of the Commissioner.

The petitioner is a Texas corporation, organized about 1884, and has its principal office in Fort Worth, Texas. It is engaged in the cattle ranch business and Operates on a large scale, raising about 95 percent of its cattle and buying and feeding the other 5 percent. Early in its existence and many years before the inception of the present income tax laws the petitioner adopted for its own convenience and information an inventory system of accounting by which it divided its livestock into two classes, namely, “ calves ” and “ other cattle.” The inventory value placed upon the calves was $10 per head, and when the calf became a yearling the value was increased to $20 per head. While the arbitrary values thus placed on the inventory remained constant, the number of cattle varied greatly and frequently throughout the years, as did also the market value of cattle. Arbitrary values were also fixed for lambs and horses. This system was continued after the enactment of the income tax laws and was used by petitioner up to and including the year 1930, and petitioner made its income tax returns on that basis up to and including the year 1928. In 1929 field representatives of the Internal Revenue Bureau, after an examination of petitioner’s returns and accounts for the years 1926, 1927, and 1928, objected to the use of the inventory by petitioner on the ground that it did not properly reflect petitioner’s income and ordered returns made on the basis of cash receipts and disbursements.

Petitioner protested the proposed change to the revenue agent in charge at Dallas, Texas, who sustained the field examiner and ordered the cash basis used.. Returns were thereupon prepared on the cash basis, and the respondent proposed a deficiency of $27,354.52 for the three years. Petitioner claimed that on the cash basis it was entitled to a refund of about the same amount. The .matter was determined in Washington in June 1931 by the Commissioner making a refund to petitioner of approximately $5,000, using the inventory basis in closing the case.

While the controversy was pending in the Internal Revenue Bureau relative to the years 1926,1927, and 1928, petitioner prepared and filed its returns for 1929 and 1930 on the cash receipts and disbursements system in accordance with the instructions given it by the field examiner and the revenue agent in charge at Dallas, Texas. These returns were received and filed, but in determining the deficiencies in controversy the respondent held that the returns should have been, made according to the inventory system formerly in use and not the cash system, because the respondent had not granted permission for the change. For the calendar year 1932 and subsequent years the respondent granted permission in writing to make the change.

According to the inventory method applied by the respondent there were included the following unsold animals at the prices indicated, which were fixed without any reference whatever to market prices, or classification as- to condition, quality, or age, except into calves and other cattle:

For the year 1989:
' 4,665 unsold calves' grown in 1929, valued at $10 per head-$46,650
2,834 unsold calves grown in 1928, increased in value by $10 per
head to $20 per head_!--- 28, 340
564 lambs grown in 1929, valued at $4 per head- 2,256
Total___ 77-, 246
For the year 1980:
3,264 calves grown in 1930, valued at $10 per head-:-$32,640
3.639 calves grown in 1929, increased in value by $10 per head to
$20 per head- 36, 390
950 lambs grown in 1930, valued at $2.10 per head- 1,995
Total ___ 71, 025

It is the position of the petitioner that, although it did not have the formal permission of the Commissioner to change its basis of reporting income, the actions of the field examiner arid revenue agent in charge are tantamount to a permission by the respondent to make the change, and that whether this be so or not the inventory system used by petitioner did not fairly reflect its income in that by its use there was included in income mere appreciation of value, or marking up on the books, which was in no sense income until there wa,s a sale of such assets.

Section 41 of the Revenue Act of 1928 provides that “the net income shall be computed * * * in accordance with the method of accounting regularly employed in keeping the books of such taxpayer,” but if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income.”

Both the statutes and the regulations recognize that the selection of the method of keeping his books is primarily for the taxpayer (see Morris-Poston Coal Co. v. Commissioner, 42 Fed. (2d) 620), but, while the taxpayer may adopt his own method of accounting, he must compute his net income in accordance with such method if it clearly reflects income, Ribbon Olif Fruit Go., 12 B.T.A. 18. If the taxpayer desires to change his method of computation he must, as a general rule, have the approval of the Commissioner. See Regulations 74, art. 322; American Conservation Service Corp., 24 B.T.A. 183.

The primary purpose of the statute is to tax income and the computation must be made with this purpose in view. To this end the Commissioner is authorized to approve any change in the method of computation, but his authority does not extend to the use of any method that does not clearly reflect income and he may not arbitrarily require the use of such method.

In Daily Record Co., 13 B.T.A. 458, we said: “It is well settled that the income of the petitioner is to be determined by actual facts as to which the books of account are only evidential. Doyle v. Mitchell Bros., 235 Fed. 686; Southern Pacific Co. v. Menter, 260 Fed. 837. The gist of these decisions is that in order to be income amounts must have been received or accrued and that this is a question of fact not to be determined by any error in bookkeeping made either during the taxable year or in prior years.”

In Theodore H. Beckman, 8 B.T.A. 830, the petitioner was a farmer engaged in raising grapes, horses, cattle, and hogs. He took inventory of all his stock at the beginning and the close of the year. The Commissioner determined his tax liability upon the basis of cash receipts and disbursements. In affirming the Commissioner’s determination we said: “ The fact that inventories were taken at the beginning and close of each year is not sufficient in itself to show that the cash receipts and disbursements method did not clearly reflect income.”

In D. B. Dearborn, Jr., 2 B.T.A. 59, the petitioner contended that his net income was properly reflected upon an accrual basis because that was the method of accounting regularly employed in keeping his books. The Commissioner contended that the method of accounting employed did not clearly reflect income and the cash basis should be used. There was no well established method of accounting. The petitioner’s books showed the estimated earnings. In affirming the Commissioner, we said:

This is not a situation whore the estimates are merely exceptional or incidental items in a larger consistent system of accounts. The entire earnings of the business are here involved and the alleged accrual basis is sought to be evolved from this crude practice of tentative estimates. If for any reason the estimates should prove to be excessive they would not measure the taxpayer’s tax liability. Conversely, he should not be permitted to substitute his own estimates for the income which he actually receives.

The inventories of petitioner were not even estimates of the value of its stock. They were merely a constant price or nominal value assigned to certain classes of stock.

Article 106 (a),.(b) of Regulations 74 provides in part as follows:

Because of the difficulty of ascertaining actual cost of livestock and other farm products, farmers who render their returns upon an inventory basis may, at their option, value their inventories for the current taxable year according to the “ farm price method ”, which provides for the valuation of inventories at market price less cost of marketing.

It is further provided in Regulations 74, article 102:

The following methods, among others, are sometimes used in taking or valuing inventories, but are not in accord with these regulations, viz:
****** *
(4) Using a constant price or nominal value for so-called normal quantity of materials or goods in stock.

The Commissioner admits that the petitioner did not use the farm price method of accounting, and that its whole system of accounting is a hybrid system. Clearly, the method employed was not in accordance with the regulations.

In Lucas v. Kansas City Structural Steel Co., 281 U.S. 264, the company had valued its base stock or normal stock at a constant price, regardless of the actual cost or the market. In disapproving this method the Supreme Court said:

It is not contested that, if inventories are necessary in order to determine the company’s income, the “ base stock ” method does not fulfill the desiderata. The federal income tax system is based upon an annual accounting period. This requires that gains or losses be accounted for in the year in which they are realized. The purpose of the inventories is to assign to each period its profits and losses. In years of rising prices, the “ base stock ” method causes an understatement of income; for it disregards the gains actually realized through liquidation of low price stock on a high price market. In times of falling prices, it causes an overstatement of income; for it ignores the losses which result from the consumption of high price stock. This method may, like many reserves which business men set up on their books for their own purposes, serve to equalize the results of operations during a series of years. But it is inconsistent with the annual accounting required by Congress for income tax purposes. It results in offsetting an inventory gain of one year against an inventory loss of another, obscures the true gain or loss of the tax year, and thus misrepresents the facts. It does not conform with the general or best accounting methods and is apparently obsolete. The company disclaims any defense of the base stock method; and the lower court disapproved it.

In Chatham & Phenix National Bank, 1 B.T.A. 460, the Board held that, notwithstanding the objection of the Commissioner, the taxpayer had the right to change from a system of accounting which included in income something that was not income to a system which would clearly reflect its income. We there said:

The statute contemplates an accounting method which will correctly reflect income, and we do not doubt the reasonableness of the above regulation when the change is from a method of accounting which reflects the income to another approved method, and the Commissioner may be justified in refusing to permit a change without adjustment of prior returns. Here we have a change from a method of accounting which includes items not properly income and we do not think a change to a method which will clearly reflect income can he prevented, and the taxpayer compelled to report amounts not properly taxable as income. * * *

No argument is made and we think none can be made that the computation of petitioner’s income according to the method used in its inventories clearly reflects its income. This was the decision reached by the field agent after an examination of petitioner’s books and by the agent in charge at Dallas, Texas, upon a review of the field agent’s action, and, while not controlling, we think the action of these duly authorized representatives of the Commissioner in the course of their regular duties is evidential of that fact. Moreover, as indicated above, the use of a constant price method in valuing inventories is condemned by the Commissioner in his regulations and by the courts.

It is nowhere contended that the cash method of reporting income does not reflect the true income of the petitioner in the taxable years, and in 1932 the Commissioner approved it and consented to its use.

The making of an audit and the approval of a method for the computation of income are administrative acts and the regulation requiring the Commissioner’s consent to any change is purely administrative in character. Cf. Burnet v. Chicago Ry. Equipment Co., 282 U.S. 295. The Commissioner may in the first instance direct that a change be made, and in that event, it could hardly be argued that the taxpayer must secure formal permission to change in order to comply with the regulations. This would be requiring the doing of a vain thing, which the law does not require.

We think the method urged by the respondent does not clearly reflect petitioner’s income. It ■ appears that the cash receipts and disbursements method as used by petitioner does correctly reflect its income. Therefore, in view of all the circumstances, we hold that the Commissioner’s refusal to approve the cash method is an unreasonable and arbitrary exercise of his power not contemplated by the statute.

Under the facts and conditions of this case we hold petitioner properly reported its income for the taxable years 1929 and 1930 on the cash basis.

Reviewed by the Board.

Decision will be entered, wnder Rule 50.


source: Caselaw Access Project

license: Public Domain

text:
    Frank Kell, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 65921, 65924, 69677-69686.
    Promulgated September 27, 1934.

      John B. King, Esq., and Harry G. Weeks, Esq., for the petitioners.

      Frank B. Schlosser, Esq., DeWitt M. Evans, Esq., and B. B. Gan-non, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Mrs. Prank Kell; Sadie Bullington; Mrs. John P. O’Donohue; Joe A. Kell; Mrs. Wiley Blair, Jr.; Mrs. Malcolm Putty; Orville Bullington; Willie May ICell; John P. O’Donohue; T. P. Duncan; and Mrs. T. P. Duncan.

   OPINION.

Adams:

We will consider first the issue common to all of these cases, which is whether or not the reorganization- of the four Texas corporations was a nontaxable reorganization, and whether petitioners received any taxable income therefrom.

Prior to January 2, 1929, there was in existence a group of corporations engaged in the grain and milling business known as the “ Kell Mills.” Four of these were Texas corporations and two were Oklahoma corporations. Their names and locations were: Wichita Mill & Elevator Co., a Texas corporation, Wichita Falls, Texas; Waco Mill & Elevator Co., a Texas corporation, Waco, Texas; Kell Mill & Elevator Co., a Texas corporation, Vernon, Texas; Great West Mill & Elevator Co., a Texas corporation, Amarillo, Texas; Oklahoma City Mill & Elevator Co., an Oklahoma corporation, Oklahoma City, Oklahoma; Perry Mill & Elevator Co., an Oklahoma corporation, Perry, Oklahoma.

Each of the petitioners was a stockholder in one or more of the Texas corporations and petitioners Frank Kell and Joe A. Kell were also stockholders in the Oklahoma corporations. Petitioner Frank Kell owned or'controlled a majority interest in each of the corporations.

In 1928 and subsequent years the General Mills, Inc., a Delaware corporation, was extensively engaged in. the grain and milling business in various parts- of the United States, and -during 1928 negotiations were had between General Mills, Inc., and the executive heads of Kell Mills for the purpose of the acquisition by General Mills, Inc., of the assets and properties of the Kell Mills.

On account of .certain provisions of the Texas antitrust laws it was believed advisable to contract with the stockholders of the Texas corporations to dissolve those corporations and convey their assets to General Mills, Inc., in the process of dissolution. In order to accomplish this purpose Frank Kell, Joseph Kell, T. 0. Thatcher, and T. P. Duncan, acting for themselves and on behalf of other stockholders, entered into a contract on December 18, 1928, with General Mills, Inc., by which it was provided in substance that the Texas corporations should be dissolved and that their entire business, assets, and good will should be conveyed to General Mills, Inc., and that the latter was to assume all outstanding liabilities. The consideration was the issuance of preferred and common stock of General Mills, Inc., to the stockholders of the Texas corporations.

Similar contracts were made with the Oklahoma corporations at the same time, but these were made directly with the corporations and there was no prior dissolution before conveyance of the properties.

Between December 18, 1928, and January 2, 1929, all of the stock in the Texas corporations was transferred to the names of Frank Kell, Joe A. Kell, and T. P. Duncan. This was done for the purpose of' convenience in handling the various matters involved in the reorganization.

On January 2, 1929, the four Texas corporations were duly dissolved in accordance with the laws of Texas, and at that time petitioner Frank Kell was president of .each of the Texas corporations and he, T. P. Duncan, and Joe A. Kell constituted the entire board of directors of each company. Under the terms of the contract the date of purchase was January 3, 1929.

■ On January 25, 1929, Frank Kell, T. P. Duncan, and Joe A. Kell, as trustees of the dissolved Texas corporations and individually, conveyed the properties and assets of the Texas corporations to General Mills, Inc. A number of conveyances were necessary, of which the following is a sample:

State or Texas)
Cotxntt 0Q? Wichita)
Whereas, prior to and on the 2nd day of January A.D. 1929, Great .West Mill & Elevator Company was a corporation duly incorporated under and by virtue of the laws of the State of Texas; and,
Whereas, on the said 2nd day of January 1929, said corporation was duly dissolved in accordance with the laws of the State of Texas; and,
Whereas, at the time of the dissolution of said corporation, Frank Kell was the President thereof, and together with Joe A. Kell and T. P. Duncan constituted the Board of Directors of said corporation, and upon the dissolution thereof became Trustees of the creditors and stockholders of said corporation under the Statutes of Texas; and,
Whereas, at the time of the dissolution of said corporation, the said Frank Kell, Joe A. Kell and T. P. Duncan were also the solé stockholders of said corporation, owning all of its shares of stock;
Now, Therefoke, Know All Men by These Presents, that we, the said Frank Kell, Joe A. Kell, and T. P. Duncan, of the County of Wichita, and State of Texas, as such Trustees, aforesaid, and individually, for and in consideration of the sum of One ($1.00) Dollar, cash to us in hand paid by General Mills, Inc., a Delaware corporation, and of other valuable considerations, the receipt of which is hereby acknowledged and confessed, have granted, sold and conveyed, and by these presents do grant, sell and convey unto the said General Mills, Inc., a Delaware Corporation, all that certain real estate, lying and being situated in the County of Potter, State of Texas, and more particularly described as follows: * * * [Description of property not material.]
To Have and to Hold the above described premises, together with all and singular, the rights and appurtenances thereto in any wise belonging unto the said General Mills, Inc., a Delaware corporation, aforesaid, its successors and assigns forever, and we do hereby bind ourselves, our heirs, successors, executors and administrators, to warrant and forever defend all and singular the said premises unto the said General Mills, Inc., a Delaware corporation, aforesaid, its successors and assigns, against" every person whomsoever lawfully claiming or to claim the same, or any part thereof.
Witness our hands at Wichita Falls, Texas, this 25th day of January, A.D. 1929.
Frank Kell
T. P. Duncan
Joe A. Kell
Individually and as Trustees of
Great West Mill & Elevator Company.

There were no transfers of title or of the assets of the Texas corporations from the corporations to Frank Kell, T. P. Duncan, and Joe A. Kell, but the title to said properties vested in them as trustees in dissolution by virtue of article 1388, Revised Civil Statutes of Texas, which is as follows:

Art. 1388. Liquidation by Officers. Upon the dissolution of a corporation, unless a receiver is appointed by some court of competent jurisdiction, the president and directors or managers of .the affairs of the corporation at the time of its dissolution shall be trustees of the creditors and stockholders of such corporation, with power to settle the affairs, collect the outstanding debts, and divide the moneys and other property among the stockholders after paying the debts due and owing by such corporation at the time of its dissolution, as far as such money and property will enable them after paying all just and reasonable expenses; and for this purpose they may in the name of such corporation, sell, convey and transfer all real and personal property belonging to such company, -collect all debts, compromise controversies, maintain or defend judicial proceedings, and exercise full power and authority of said company over such assets and property. Said trustees shall be severally responsible to the creditors and stockholders of such corporation to the extent of its property and effects that shall have come into their hands.

At the same time the Oklahoma corporations, acting through their regular executive officers, conveyed the properties of those corporations to General Mills, Inc. On January 2, 1929, when the Texas corporations were dissolved, their liabilities, which were to be assumed by General Mills, Inc., were as follows:

Wicliita Mill & Elevator Co- $351, 961. 58
Waco Mill & Elevator Co--- 275, 963. 26
Kell Mill & Elevator Co__- 96, 375. 60
Great West Mill & Elevator Co- 1,177,123.15

Upon the delivery of these conveyances General Mills, Inc., issued and delivered its common and preferred stock as agreed upon, being 52,151.24 shares of common stock and 13,274.86 shares of preferred stock in General Mills, Inc. Of this, 39,062.09 shares of common stock and 9,955.02 of preferred stock were issued in the name of petitioner Frank Kell, and the remainder was issued in the names of Frank Kell, Joe A. Kell, T. P. Duncan, and T. G. Thatcher, as joint tenants. Thus all of the stockholders of the Kell Mills became stockholders in General Mills, Inc., and Frank Kell, head of the Kell Mills, became a director of General Mills, Inc., and all of the officers of the Kell Mills, except T. P. Duncan, became connected with General Mills, Inc., or its subsidiary companies.

In his determination of the deficiencies the respondent ruled that when the Texas corporations were dissolved the distribution of their assets to a committee acting for themselves and others constituted a liquidation and a constructive receipt by the stockholders of liquidating dividends, resulting in a taxable transaction. Petitioners on the other hand contend that the transaction was a nontaxable reorganization under section 112 of the Revenue Act of 1928.

There was no corporate action taken authorizing or declaring a liquidating or any other form of dividend, nor was there any distribution of any of the assets of the corporations to the stockholders.

We think the answer to the question is to be found in what capacity Frank Kell, T. P. Duncan, and'Joe A. Kell were acting in consummating the transaction and that this is answered in favor of petitioners by our decision in Taylor Oil & Gas Co., 15 B.T.A. 609; affirmed in 47 Fed. (2d) 108; certiorari denied, 283 U.S. 862.

The Taylor Oil & Gas Co. was a Texas corporation, which had been negotiating with the Magnolia Petroleum Co. for the sale of practically its entire assets to the Magnolia Petroleum Co. In order to avoid taxes at the corporate rate, if the sale were made by the corporation, it was decided to dissolve the corporation and have the sale made through the president and directors of the corporation as trustees of the stockholders.

'Resolutions were adopted by the stockholders appointing the president and directors trustees for the stockholders and authorizing dissolution of the corporation and the subsequent sale of the assets to the Magnolia Petroleum Co. for $150,000 cash. This was carried out by the trustees and the question arose as to whether or not the profit resulting from the transaction accrued to the corporation or directly to the stockholders in a liquidating dividend. The Board held that under the laws of Tesas a corporation may continue- for the purposes of liquidation for three years after formal dissolution and during such period the president and directors of the corporation are trustees for the stockholders and creditors of the corporation and that the sale of the Taylor Co.’s assets by the trustees was a sale by the corporation and the profit accrued to it.

This case was affirmed by the Circuit Court of Appeals for the Fifth Circuit in Taylor Oil & Gas Co. v. Commissioner, 47 Fed. (2d) 108. In its opinion the Circuit Court of Appeals said:

It is contended, Toy petitioners that the legal title to the property vested) in the president and directors as trustees by operation of law immediately upon the consummation of the necessary steps to effect the dissolution, and that the sale of the property made thereafter was for the benefit of the creditors and stockholders and not for the company. Various decisions of the Texas courts are relied upon to sustain this position, but we do not consider them in point.
Under the law of Texas, the existence of a corporation may be extended for three years for the purpose of settling its affairs. Vernon’s Annotated Civil Statutes Texas, art. 1389. Article 547 tr. Reg. 45, (1920), adopted to cover situations such as here presented, provides in part as follows: “ When a corporation is dissolved, its affairs are usually wound up by a receiver or trustees in dissolution. The corporate existence is continued for the purpose of liquidating the assets and paying the debts, and such receiver or trustees stand in the stead of the corporation for such purposes. Any sales of property by them are to be treated as if made by the corporation for the purpose of ascertaining the gain or loss.”
This is a reasonable regulation, and should be given effect. Universal Battery Co. v. U.S., 281 U.S. 580, 50 S.Ct. 422, 74 L. Ed. 1051.
It may be doubted that the contract of sale was merely executory. Except for executing the formal deed, there was nothing.,to be done. The price, the thing, and the effective time of delivery, December 15, 1919, had been agreed upon. But, if it was executory, it was still the contract of the company to be executed before there could be any liquidation of its affairs. Conceding for the purpose of argument that the legal title to the property vested in the trustees by the dissolution, no part of the title passed to the stockholders thereby. The real owner was still the company until such time as its affairs were liquidated, the debts paid, and the residue distributed to the stockholders. The profit on the transaction was earned by the corporation, and the assessment of the taxes based thereon was valid.

A large number of cases have been decided by this Board and the courts to the effect that, where the sale of the corporate assets has been agreed upon before dissolution of the corporation and' before the creation of a trust, a sale by the- trustee is a sale by the corporation. Commissioner v. Lexington Ice & Coal Co., 62 Fed. (2d) 906; Fred A. Hellebush et al., Trastees, 24 B.T.A. 660; affd., 65 Fed. (2d) 902; S. A. MacQueen Co., 26 B.T.A. 1337; affd., 67 Fed. (2d) 857; Nace Realty Co., 28 B.T.A. 467.

Tn the cases under consideration there was no purpose to dissolve and liquidate the Kell Mills and distribute their assets or their proceeds among the stockholders. The object and purpose of the entire transaction was to transfer the entire business and assets of the Kell Mills to General Mills, Inc., and have the stockholders in Kell Mills become stockholders in General Mills, Inc. Under such circumstances the dissolution of the Texas corporations was a mere step in the proceeding to accomplish the final result above indicated.

In a somewhat similar transaction in the case of Teck Hobbs, 26 B.T.A. 241, we held that where it was necessary to organize a common law trust as a means to carry through the deal, it did not alter the character of the transaction. In the instant cases the character of the transaction was a merger of Kell Mills into General Mills, Inc., and the dissolution of the Texas corporations was merely a means to an end, which was reorganization. Howard v. Commissioner, 56 Fed. (2d) 781, affirming 20 B.T.A. 207; certiorari denied, 287 U.S. 619.

The dissolution of the Texas corporations did not effect a distribution of their assets to the stockholders. Milton E. Bickley, 1 B.T.A. 544; Mrs. Grant Smith, 26 B.T.A. 1178; Whitney Realty Co., Ltd., 29 B.T.A. 453.

It seems clear that this was a nontaxable reorganization and is covered by section 112 (b) (4) of the Revenue Act of 1928, which is as follows:

No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.

“ Reorganization ” is defined in section 112 (i) (1). as follows:

The term “reorganization” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation) * * *.

These corporations conveyed substantially all of their properties to General Mills, Inc., solely for stock in the latter. Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462.

Treasury Regulations from 1924 to the present have provided in substance that transactions such as this in controversy are nontaxable reorganizations and that sales made by receivers or trustees in dissolution are sales by the corporation.

At the hearing respondent urged as an alternative, in the event that the Board held that the Texas corporations were merged and reorganized rather than dissolved and liquidated, that it was still a taxable transaction under section 112 (c) (1) of the Act of 1928, which is as follows:

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.

Respondent filed no pleading raising this issue, which is utterly at variance with his findings in the deficiency notices. Petitioners insist that the question may not be considered without an appropriate pleading. Without passing on the question of pleading we will determine the question.

Under the contracts for the disposition of the Kell Mills to General Mills, Inc., it was necessary for the Kell Mills to take out certain assets and replace them with other assets or cash. To accomplish this Frank Kell, T. P. Duncan, and Joe Kell borrowed $810,506.95 personally and took out certain assets, principally grain, and replaced them with cash.

On December 18, 1928, a contract was made and entered into between Krank Kell, Joseph Kell, T. C. Thatcher, and T. P. Duncan, as vendors, and the First Security Co., a corporation of the State of New York, and the National City Co., a corporation of the State of New York, vendees, for the purchase by the vendees from the vendors of 14,428% shares of the common stock of General Mills., Inc. A true copy of this contract is attached to the stipulation of facts and marked “ Exhibit 1 ”, and provides in substance that, upon the completion by General Mills, Inc., of the acquisition of the properties of the six corporations and the issuance by General Mills, Inc., of the shares of its common stock and preferred stock, the vendors would sell.the number of shares of common stock as above set out.

The circumstances surrounding the making of this contract were related by Frank Kell in oral testimony had at the hearing, and substantiated by T. 0. Thatcher. In substance, Kell’s testimony was that while negotiations were pending with General Mills, Inc., a representative of the National City Co. approached him with reference to the willingness of himself and the other signers of the contract to sell a portion of the common stock which they were to receive from General Mills, Inc.; that at no time during the negotiations with General Mills, Inc., had General Mills, Inc., even offered to pay cash in whole or in part for any of the properties, and under the contracts drawn with General Mills, Inc., he and his associates were to get nothing for the assets except stock in General Mills, Inc.; that he was desirous of selling some of the stock in order to meet some obligations and also on account of the condition of the market at that time; that the contract was made by himself, Joseph Kell, T. 0. Thatcher, and T. P. Duncan, contracting only for themselves, whereas in the contract with General Mills, Inc., the same parties had contracted for themselves and the other stockholders in the four Texas mills, for the reason that in the contract with General Mills, Inc., he and the other three named individuals had authority from all the stockholders to make the contract with General Mills, Inc., whereas in making the contract with the bankers, the other stockholders were not consulted, as he and the other named individuals had sufficient stock to comply with the contract, even if the other parties did not desire to participate in the benefits of such contract; and that after the contract was made whereby he and the other three named individuals obligated themselves to sell the stock to the bankers as provided in the contract, he and the three named individuals offered to their other associates the privilege of participating in the contract which had been made, share and share alike, which privilege or opportunity all accepted.

The debts created by Frank Kell and others to adjust the assets of the Kell Mills to conform to the requirements of the General Mills, Inc., contracts were largely paid from the sale of stock to the underwriters and of some on the open market, which amounted in all to $1,238,415.86. It is the alternative contention of the respondent that the sale of this stock and receipt of the consideration therefor constituted the receipt of cash and made the reorganization taxable under section 112 (c) (1) of the Revenue Act of 1928.

We think not, as the sale of the stock was plainly a separate transaction. Gash formed no part of the consideration moving from General Mills, Inc., to the Kell Mills or their stockholders. The contracting parties were different and neither contract was connected with or formed part of the other. Petitioners all returned the profits made on these sales in their individual capacities and paid tax thereon at the individual rate. This alternative claim is decided against the respondent.

The remaining issue relates to the loan of stock by Frank Kell and wife to the Plant Flour Mills Co. and the Kansas Mill & Elevator Co. This issue affects only Frank Kell and wife. Without repeating the facts as found by us, it is sufficient to say that they were testified to by petitioner Frank Kell, T. C. Thatcher, an executive of the two mills, and C. M. Crowell, auditor and office manager for Frank Kell, all of whom testified that the conference and agreement took place between July 1 and July 8, 1929, before the sale of any of the stock was made, and that the written contracts of July 15, 1929, merely reduced to writing the previous oral agreement.

Respondent introduced no contradictory evidence, but merely pointed to the fact that the sale tickets were in the name of Frank Kell. But this is of no consequence, for Kell was an officer of the borrowers and was selling for their account as provided in the loan contracts, as follows:

It is further understood and agreed that the Kansas Mill & Elevator Company, may at its option, sell for itself or sell through Erank Kell for its account, said shares or any part thereof, for the purpose of securing available cash. * * *

In the recent case of Fremont C. Peck et al., Executors, 31 B.T.A. 87, we held that, where stock was loaned under circumstances and agreements similar to those involved herein, a sale of the stock by the borrower resulted in no taxable gain to the lender. In that case Clara S. Peck loaned to the Brooklyn Daily Times a large block of Woolworth Co. stock, some of which the borrower sold, and the respondent taxed a gain thereon against her. Two written agreements were made evidencing the loans. One dated January 5, 1927, was as follows:

The Brooklyn Daily Times hereby acknowledges the receipt from Mrs. Carson C. Peek, of eighty-eight hundred (8,800) shares of the stock of E. W. Woolworth Co., certificates Nos. WO-43112/19, inch, W-15844/48, inch, W/20981, and W-20968/69, inch, which have been loaned to it by her, for its accommodation, and to assist it in financing and conducting its business; to be used as collateral, or sold, as may be needed for temporary requirements; and, for value received, hereby agrees to return such stock to Mrs. Carson C. Peck, or replace it with an equal number of shares, on or before January 1st, 1931, or at any previous date, upon thirty days written demand.
Any dividends declared on such stock, in the meantime to belong to her. In case the stock, or any part of it, is sold, the amount of the dividends that would have been received on such stock, if not sold, will be paid to her on January 1st, 1931, with interest from the date each such dividend would have been payable.

On or prior to January 2, 1928, 8,000 shares of stock of the same company were transferred under the following agreement of that date:

The Brooklyn Daily Times, Inc., hereby acknowledges receipt from Mrs. Carson C. Peck of eight thousand shares of the stock of the E. W. Woolworth Co. certificates numbered WO-43120/27, inclusive, which have been loaned to it by her for its accommodation and use in financing its business as may be needed for current requirements, and for value received, hereby agrees to return said stock to her, or if transferred, replace it with an equal number of shares on or before January 1st, 1933.
It is further agreed that in case the stock or any part of it is transferred, the amount of the dividends that would have been received on said stock if not transferred, shall be paid to her on January 1st, 1933.

It may be noted that the essential provisions of these agreements are substantially the same as those involved in the cases under consideration. In holding that no gain resulted from the sale to Mrs. Peck, the lender, we said:

The purpose of the transfer to the Times was merely to relieve its financial difficulties, in accomplishing which, Mrs. Peck was obviously deeply interested. In effectuating this purpose by the transfer of the Woolworth stock under the terms of these agreements, no idea of securing pecuniary profit to her is apparent. No agency or trust was created under which this stock was to be sold for petitioners’ decedent, or petitioners. She intended to and did provide for the return to her of an equal number of shares of the same stock borrowed and the payment to her of any dividends paid thereon in the meantime, or, in the event of the sale of the stock, the equivalent thereof. However, no obligation upon the Times to account to petitioners’ decedent, or petitioners, for any part of the proceeds of their sale of this stock, directly or indirectly, resulted from these agreements, or otherwise.
Under the terms of the recited agreements, decedent loaned this stock, not money, as in the case of Frame E. Best, supra. In exchange for the promises of the Times contained in these agreements, petitioners’ decedent transferred the stock, together with all incidents of ownership therein, except the right to enjoy the dividends thereon. These incidents of ownership, so transferred, included the right to sell or hypothecate the stock for its own account. The Times exercised this right. No gain was derived by petitioners’ decedent, or petitioners, in such sale. Provost v. United States, 269 U.S. 443; James v. United States, 63 Ct. Cls. 379. The assignment of error directed to the inclusion of such gain in the computation of the distributed deficiencies, is sustained.

In view of this case we hold that respondent erred in including as income any gain resulting from the sale of the. General Mills, Inc., stock loaned to the Plant Flour Mills Co. or the Kansas Mill & Elevator Co.

As we understand the record, respondent determined that the Oklahoma corporations were properly merged and reorganized, and no question is raised relative to them, except the alternative raised by respondent at the hearing, which we have previously herein decided against him.

Reviewed by the Board.

Decision will he entered under Bule 50.


author: Smith :

text:
    Marie E. Harnischfeger, Walter Harnischfeger, and Rene von Schleinitz, Executors under the Last Will and Testament of Henry Harnischfeger, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 69636.
    Promulgated October 3, 1934.

      Louis Quarles, Esq., James T. Guy, Esq., and Richard 8. Doyle, Esq., for the petitioners.

      J. R. Johnston, Esq., for the respondent.
   OPINION.

Smith :

The principal issue in this proceeding is whether the gifts made by the decedent within two years prior to the date of his death, which were valued by the respondent at the date of death at $1,951,-800.50, were made in contemplation of death and are therefore to be included in the gross estate for estate tax purposes.

The deficiency involved herein was determined under the provisions of section 302 of the Revenue Act of 1926, which, so far as pertinent to the question at issue, read? as follows:

Seo. 3,02. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
* * * * *■ * 1 *
(c) To the extent of any interest therein of which the déeedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to' take effect in possession or enjoyment at or after his death, except in case of a bona fide sale for an adequate and full consideration in' money or money’s worth. Where roithin two years prior to Ms death but after'the enactment of tMs Act and without such a consideration the decedent has made a transfer or transfers, by trust or otherwise, of any of 7Us property; or an interest therein, not admitted or shown to have been made in contemplation of or intended to take effect in possession or enjoyment at or after his death, and the value or aggregate value, at the time of such death, of the property or interest so transferred to any one person is m excess of $5,000, then, to the extent of such excess, such transfer or transfers shall be deemed and held to have been made in contemplation of death ^oitMn the meaning of tMs title. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent Within two years prior to his death but prior to the enactment of this Act, without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title. [Italics supplied.]

The second sentence of subdivision (c) italicized above was held unconstitutional in Heiner v. Donnan, 285 U.S. 312. Thereafter section 302 (c) of the Eevenue Act of 1926 was amended by an act approved March 3, 1931, and by section 803 (a) of the Eevenue Act of 1932, by which amendment the conclusive termination was eliminated. The amendments were not, however, declared to be retroactive. The respondent has determined, however, that the gifts in question were made in contemplation of death and his determination is prima facie correct. Whether the gifts Under consideration in this proceeding were made in contemplation of death is a question of fact which must be determined from the evidence before us, and the burden of proving that they were not so made rests upon the petitioners.

In United States v. Wells, 283 U.S. 102, it was stated with regard to the meaning of the phrase “ in contemplation of death ”:

* * * It is recognized that tbe reference is not to tbe general expectation of death which all entertain. It must be a particular concern, giving rise to a definite motive; The provision is not confined to gifts causa' mortis, which are made in anticipation of impending death, are revocable, and are defeated if the donor survives the apprehended peril. * * * The statutory description embraces gifts inter vivos, despite the fact that they are fully executed, are irrevocable and indefeasible. * * * The dominant purpose is to reach substitutes for testamentary dispositions and thus to prevent the evasion of the estate tax. * * * As the transfer may otherwise have all the indicia of a valid gift inter vivos, the differentiating factor must be found in the trans-feror’s motive. Death must be “ contemplated,” that is,, the motive which induces the transfer must be of the sort which leads to testamentary disposition. * * *
As the test, despite varying circumstances, is always to be found in motive, it cannot be said that the determinative motive is lacking merely because of the absence of a consciousness that death is imminent. It is contemplation of death, not necessarily contemplation of imminent death, to which the statute refers. It is conceivable that the idea of death may possess the mind so as to furnish a controlling motive for the disposition of property, although death is not thought to be close at hand. Old age may give premonitions and promptings independent of mortal disease. Yet age in itself cannot be regarded as furnishing a decisive test, for sound health and purposes associated with, life, rather than with death, may motivate the transfer. The words “ in contemplation of death ” mean that the thought of death is the impelling cause of the transfer, and while the belief in the imminence of death may afford convincing evidence, the statute is not to be limited, and its purpose thwarted, by a rule of construction which in place of contemplation of death makes the final criterion to be an apprehension that death is “ near at hand.”
If it is the thought of death, as a controlling motive prompting the disposition of property, that affords the test, it follows that the statute does not embrace gifts inter vivos which spring from a different motive. * * * It is common knowledge that a frequent inducement is not only the desire to be relieved of responsibilities, but to have children or others who may be the appropriate objects of the donor’s bounty, independently established with competencies of their own, without being compelled to await the death of the donor and without particular consideration of that event. There may be the desire to recognize special needs or exigencies or to discharge moral obligations. The gratification of such desires may be a more compelling motive than any thought of death.
* * * There is no escape from the necessity of carefully scrutinizing the circumstances of each case to detect the dominant motive of the donor in the light of his bodily and mental condition, and thus to give effect to the manifest purpose of the statute.

A careful weighing of the' evidence in this proceeding leads us to the conclusion that the gifts were not made in contemplation of death. It is quite apparent that the reorganization of the Harnischfeger Corporation in 1929 was not prompted by any thought of death on the part of the decedent. The time was propitious for the selling of stock in the corporation to the public. The corporation was heavily in debt to the banks. It needed additional funds. The decedent also owed an estate $150,000 for assets purchased from it.

By the sale of shares of stock to the public the decedent temporarily lost control of the corporation. His attorneys suggested to him the organization of Harnischfeger Investment Co. for the purpose of regaining control of the corporation in the manner pointed out by the attorneys. This was done.

The decedent’s only daughtér and his son-in-law were ill and they were going to move to Germany to reside there permanently. The decedent wished them to have independent incomes.

It was pointed out to the decedent that after the reorganization of the Harnischfeger Corporation he would be subject to heavy income taxes upon, his income, and also how these income taxes could be minimized by making gifts of the stock to his wife and children. This appears to us to have been the predominant motive of the decedent in making the gifts of stock of Harnischfeger Investment Co. to his wife and children. Consonant with the thought the decedent discovered that the income tax liabilities of each member of his family would be further minimized by making donations of stock to the Harnischfeger Foundation, Inc. It was the decedent’s thought that his own income tax liability and that of his wife and two children might be minimized ea<jh year for a perod of four years by donations of a portion of the stock of the Harnischfeger Corporation, which he proposed should be given ultimately to the Foundation. The gifts of the Harnischfeger Corporation common stock to the amount of 10,330 shares were therefore made to the decedent’s wife and his two children with this sole purpose in view. It was not the decedent’s intention that the donees of this stock should retain it permanently. '

Where the dominant motive for making gifts is to escape income tax liability, such gifts are not includable in the gross estate. Emily J. Pratt et al., Executrices, 18 B.T.A. 377; R. B. White, Executor. 21 B.T.A. 500; Safe Deposit & Trust Co. of Baltimore v. Tait, 3 Fed. Supp. 51; American Security & Trust Co. et al., Executors, 24 B.T.A. 334.

As a further motive for making the gifts the decedent wished to insure financial independence for his wife and children. Such gifts have been held not includable in the gross estate for tax purposes. Philip T. Starch, Executor, 3 B.T.A. 514; Rochester H. Rogers, Executor, 21 B.T.A. 1124; Willard Foster et al., Executors, 25 B.T.A. 414; Delaware Trust Co. v. Handy, 53 Fed. (2d) 1042; affd., 285 U.S. 352.

The facts here are similar to those in Commissioner v. Nevin, 47 Fed. (2d) 478; certiorari denied, 283 U.S. 834. Up to within a short time of his death the decedent in this proceeding took an active interest in the management of his business, was mentally and physically alert, was cheerful and optimistic, and was still planning for the future. The decedent there was 83 years of age at the date of death and was not in as good health comparatively as the decedent in this proceeding at the time of his death at the age of 75 years. The court held, affirming the Board, 16 B.T.A. 15, that the gifts of approximately one half of his large estate to his son were not made in contemplation of death.

We have set forth above the detailed facts concerning the decedent’s state of health and mind for a period of years preceding his death, during which the gifts in dispute were made. All of the evidence indicates that the decedent was in the best of health and spirits at the time the gifts were made and that he had given very little thought to the eventuality of death. On the contrary he continued up to the very day of his death to take an active part in his business and to plan for its future expansion and development. His death came very suddenly from an unexpected cause. While it is true that in reorganizing his business and dividing the interests among the other members of his family he was “ putting his house in order ”, as the respondent contends, there is no indication whatever that what he was doing was in contemplation of death. The things done are all quite as reasonably to be associated with pur- ■ poses relating to life as those relating to the eventuality of death. United States v. Wells, supra.

The respondent relies strongly in his contention in this case upon the holding of the Supreme Court of Wisconsin in In re Harnischfeger’s Will, 208 Wis. 317; 242 N.W. 153. In that case it was held that gifts and transfers here under consideration were taxable in the decedent’s gross estate for purposes of the estate tax levied by the State of Wisconsin. After, a lengthy discussion of the meaning of the phrase “ in contemplation of death ” with reference to the case of United States v. Wells, supra, the court stated in conclusion as follows:

It is earnestly contended that, since the deceased apparently enjoyed good health up to the time of his death, was cheerful and optimistic, was actively engaged in conducting a large industry, was making plans for industrial developments which involved new undertakings and enterprises, the presumption to which the statute gives rise was clearly overcome, and that it was affirmatively shown that the gifts were not in fact made in contemplation of death. This argument would be quite persuasive did it not appear that in the fall of 1929, and continuing into February of 1930, the deceased was engaged in carrying out extensive plans looking to the putting of his house in order. He was then nearly seventy-four years of age. He reorganized the Harnischfeger Corporation so that stock might be listed on the Chicago Stock Exchange and so that some of it might be sold to provide funds to liquidate his indebtedness. He organized the Harnischfeger Investment Company so that he and the trustees under his will might have unquestioned control of the corporation. He organized the Harnischfeger Foundation for the benefit of the employees of his company and provided for its permanent endowment out of his properties. He gave large gifts to his wife, who was then about seventy-six years of age, and also large gifts to his son and daughter, as well as substantial gifts to some of his faithful employees and to some of his other relatives.' ■ He made arrangements ■ for giving $50,000 to his native village of Salmuenster for the purpose of founding a school, and finally, on February 9, he executed his will, which consisted of twenty typewritten pages, evidenced much thought and planning, but by which nothing was bequeathed directly to his son or daughter, and by which the residue of his estate, worth only about $440,000, was given to his wife.
While there is no testimony tending to show that the deceased had any premonition or promptings of death as distinguished from that ordinary expectation of death which every one entertains, or that he was conscious or had knowledge of any disease or other affliction, there is abundant evidence, as it seems to us, to support the inference that the gifts were made in contemplation of death. While the enjoyment of health, actively engaging in business, and the making of plans for the future may at times, and in certain eases, be very persuasive, they are not in any sense conclusive. Impelling motives or inducing causes, being subjective in nature, are not always easily discoverable. Without further discussion, it is our opinion that, under all of the circumstances, the conclusion of the county court may not be disturbed.

We have given careful consideration to the well considered opinion of the Supreme Court of Wisconsin. It is to be noted, however, that the decision of that court was under a state statute which provided in part as follows:

* * * Every transfer by deed, grant, bargain, sale or gift, made within two years prior to the death of the grantor, vendor or donor, of a material part of his estate, or in the nature of a final disposition or distribution thereof, and without an adequate valuable consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this section.

The decision of the Probate Court of Milwaukee County, which was affirmed by the Supreme Court of the State of Wisconsin, was made upon an entirely different record from that which is before us. The court apparently stresses the fact that- in February 1930 the decedent made his will and bequeathed nothing thereby directly to his son or daughter. Apparently, as contended by counsel for the petitioners, that court was not in possession of -the facts that the decedent had theretofore in prior years made wills and that the will executed in 1980 was necessitated by changes made in the ownership of his property. The decision of the state court has no binding effect on the Board. Joseph Edward Phillips, Executor, 7 B.T.A. 1054; Commissioner v. Nevin, supra.

Upon the evidence we are constrained to hold that the gifts made by the decedent in 1929 and 1930 were not -made in contemplation of death. Having reached this conclusion, it is not necessary to pass upon the alternative contentions of petitioners.

Reviewed by the Board.

Judgment will be entered under Rule 50.

Goodrich concurs in the result.


author: Van Fossan:

text:
    A. R. Glancy, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 62062.
    Promulgated October 3, 1934.

      Pierpont J. E. Wood, Esq., and 0. A. Oestreioh, Esq., for the petitioner.

      John D. Kilep, Esq., for the respondent.
   OPINION.

Van Fossan:

This proceeding was brought to redetermine a deficiency in the income' tax of the petitioner for the year 1929 in the sum of $44,181.59. The facts were largely stipulated.

The primary issue is whether or not a certain sale of 5,000 shares of common stock of the Motor Products Corporation constituted a bona fide transaction.

A collateral issue, immaterial if the foregoing issue is decided affirmatively, is whether or not the petitioner is entitled to apportion the cost of such shares of stock between the stock and the rights issued applicable thereto, after having elected to allocate the entire cost to the stock.

The petitioner is a corporation, organized in 1926, and is engaged in the investment business. Its outstanding capital stock consists of 700 . shares, of which A. R. Glancy, its president and managing officer, owns 142 shares and P. J. E. Wood, 1 share, and the remaining 557 shares, form the corpus of an irrevocable trust, whose beneficiaries are Mrs. A. R. Glancy and the three children of Mr. and Mrs. Glancy and whose trustee and manager is A. R. Glancy. The trust was created on August 5, 1929. The first and only dividend paid by the petitioner in the year 1929 amounted to $273,000 and was distributed on December 10,'1929. Prior to the payment of that dividend the trust had no cash. Thereafter it acquired other securities and received dividends.

During the year 1929 and prior to March 5 of that year the petitioner acquired by various purchases 4,800 shares of stock of the Motor Products Corporation at an aggregate cost of $913,075. On March 28, 1929, the Motor Products Corporation issued to its stockholders rights to purchase one half of a share of additional common stock at $28 per share for each share owned by the stockholder. On that day the fair market value of each right was $50,625 and the fair market value of each share of common stock of the corporation was $129,375. The cost to the petitioner of the common stock of the Motor Products Corporation in respect to which any rights were issued on March 28, 1929, should be allocated in the proportion of 28.125 percent to each right and 71.875 percent to each share of stock.

The petitioner utilized 400 of such rights in the purchase of 200 shares of common stock of the corporation at $28 per share, or a total expenditure of $5,600. It sold the remaining rights during April 1929 for an aggregate sum of $209,625. It did not reacquire the rights so sold nor any other.such rights. It continued to hold the 5,000 shares of said stock until November 14, 1929.

On November 5, 1929, the board of directors of the petitioner passed a resolution authorizing the sale of 5,000 shares of the Motor Products Corporation stock as part of a program of liquidating bank loans of about $530,000 and brokerage loans of $250,000, and to pay a dividend of $273,000.

On November 14, 1929, A. R. Glancy, representing the petitioner, gave an order to Watling, Lerchen & Hayes, brokers, to sell the 5,000 shares. At the same time, as trustee of the trust of August 5, 1929, he instructed the brokers to buy 5,000 shares of Motor Products Corporation common stock. On the next day both transactions were put through the brokers’ office and through the Ne.w York Stock Exchange in the regular course of business, at the market price of 40%. Certificates of stock standing in the petitioner’s name were delivered to the brokers. The petitioner’s account with Watling, Lerchen & Hayes, with whom it had dealt for years, was credited with $199,675, the proceeds of the sale, less tax and the usual commissions, and the account of A. R. Glancy, trustee, was likewise charged. The petitioner did not make subsequent purchases of Motor Products Corporation stock. The brokers charged-interest on the trustee account, which later developed into an active trading account. Glancy considered the Motor Products Corporation stock a good buy for the trust at 40%. Later it was sold at a lower price.

The only issue before us is whether or not the sale of 5,000 shares of stock of the Motor Products Corporation by the petitioner, consummated on November 15, 1929, was a bona fide transaction.

The respondent has determined that the sale was not bona fide. Bona fide means with good faith; without fraud or deceit. To charge lack of bona fides is substantially equivalent to charging the petitioner with fraud or deceit. Corrado & Gdliardi, Inc., 22 B.T.A. 847.

The petitioner, acting through its duly authorized officer, sold the stock in question in the ordinary course of business through duly established brokers, who made entries on their books properly reflecting such a sale. The petitioner delivered to the brokers certificates of stock evidencing its ownership thereof. A commission was charged and tax paid. It is immaterial that the brokers issued no check in payment to the petitioner or required no check from the trust. Crediting the proceeds of the sale to the petitioner’s account pro tanto liquidated the account. The brokers accepted the trust as a customer worthy of credit.

We find no reason to question or cast suspicion on the action of the petitioner’s directors in authorizing the sale of the stock in furtherance of their plan to liquidate certain large amounts of loans and obligations. Subsequent to the sale, the petitioner did not repurchase Motor Products Corporation stock at any time or in any amount. Thus, its loss from the decrease in the market value of the stock was absolute.

A. R. Glancy’s purchase of the 5,000 shares of Motor Products Corporation stock in behalf of the trust was impelled by his belief that at 40% it was “ a good buy.” The fact that his judgment proved to be erroneous is immaterial. His motive was proper. The market price determined the value of the stock at the time of the sale and purchase. Glancy purchased for the trust 5,000 shares of Motor Products Corporation stock on the market just as he would have bought any other security — as an investment, calculated to be advantageous to the trust.

The corporation and the trust were wholly separate legal entities. Moreover, the interests of Glancy and the members of his family in the corporation were entirely different from the beneficial interests of the trust. Glancy owned 142 out of 700 shares of the petitioner’s stock and had no share whatever in the trust. Consequently, the benefit of the deduction accrued to different persons in wholly different proportions. The situation here is entirely dissimilar to that found in Luella Hoyt Slayton, 29 B.T.A. 931, in which we held that the transfer was a nondeductible gift, or that in Sydney M. Shoenberg, 30 B.T.A. 659, in which we held that the whole transaction showed a persistent intention by the taxpayer to hold title and retain dominion over the stock and, hence, was not a bona fide sale.

We are convinced that the transaction in question was not tainted with mala fdes and the deduction should be allowed. See David Stewart, 17 B.T.A. 604, and Corrado & Galiardi, Inc., supra, in which we held likewise under somewhat similar conditions.

In view of our decision, discussion of the collateral issue becomes unnecessary.

Reviewed by the Board.

Decision will be entered for the petitioner.


author: Murdock :

text:
    Henry C. DuBois, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 74363.
    Promulgated October 3, 1934.

      E. Perry Gam/pbell, Esq., for the petitioner.

      G. G. Holmes, Esq., for the respondent.
   OPINION.

Murdock :

The only question for decision in this case is whether or not the Keystone Foundation, Inc., was operated during 1931 exclusively for charitable purposes within the meaning of section 23 (n) (2) of the Revenue Act of 1928. The petitioner claims that it was and, therefore, his contributions to it are deductible, subject to the 15 percent limitation. But the Commissioner has held that it was not operated exclusively for such purposes and contends that it was operated principally for private purposes which were personal to the petitioner.

The petitioner testified in regard to his reasons for organizing the corporation and his plans for widening the field of its operations. Inability to clearly establish the fact that contributions to it would be deductible under section 23 (n) was his reason for not soliciting funds for the corporation from others. He contends, however, that during 1931 it was operated. exclusively for charitable purposes, despite the fact that he contributed practically all of the funds and (wo of his relatives and an old family employee received most of the benefits from those funds. He said that he chose these three individuals because he knew them and knew that they were worthy of assistance.

If the corporation was operated even partly for purposes that were private or personal to the petitioner the contributions are not deductible. Charitable contributions to be deductible must be for public, as opposed to private, charity, i.e., “ free from stain or taint of every consideration that is personal, private, or selfish.” Cf. Gimbel v. Commissioner, 54 Fed. (2d) 780; Bok v. McCaughn, 42 Fed. (2d) 616; James Sprunt Benevolent Trust, 20 B.T.A. 19. Direct gifts by the petitioner to the seven organizations, to which Keystone Foundation, Inc., contributed a total of $310, would have been deductible by the petitioner, but direct gifts' by him to the three individuals to whom or for whose benefit the Keystone Foundation, Inc., paid $2,111.55 would not have been deductible by him. The petitioner dominated and controlled the corporation and its operations. The evidence indicates that it was operated in 1931 partly to permit him to contribute to the three individuals through the corporation in the hope that in this way contributions, otherwise not deductible on his income tax return, would be deductible. This is the view the Commissioner has taken and the evidence relating to the operations for this particular year does not show that he erred. The situation in other years is another matter.

Decision will be entered for the respondent.


author: Seawell:

text:
    Katharine H. Putnam, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 64282.
    Promulgated October 3, 1934.

      Edward O. Thayer, Esq., and Earle W. Oarr, Esq., for the petitioner.

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

Seawell:

Respondent determined a deficiency in the income tax of petitioner for the year 1929 in the sum of $17,317.78, of which sum $8,749.87 is in controversy. The controversy arises from the disallowance by the respondent of a claimed deductible loss of $69,999, subject to the provisions of section 101 of the Revenue Act of 1928, resulting from the sale of certain notes, aggregating $70,000, of the Newfield Corporation sold by petitioner in the taxable year for $1.

Petitioner is the wife of George Putnam and they are citizens and residents of Manchester, Massachusetts. George Putnam from about 1919 to 1923 was a member of the partnership of Richardson, Hill & Co., investment brokers of Boston, hereinafter called the partnership. In 1919 the partnership purchased from the International Products Corporation certain of its capital stock for which they paid $1,440,000. The partnership’s assets became depleted and at the requirement of certain bankers the Newfield Corporation, hereinafter called Newfield, was organized, and certain of the assets of the partnership transferred to it, and it assumed the partnership debts to the bankers, the individual partners becoming sureties on Newfield’s notes. Later, to clarify the situation, Newfield received cash or its equivalent from the individual partners, and in 1923 gave to each its own 5-year series C notes representing the amount which it had received from the various individual partners. George Putnam received in this way notes for which he paid par. In 1928 he had on hand $142,000 of those notes and that year gave to petitioner $72,000 thereof for her use in obtaining a reduction in her income taxes for the year. The $72,000 of notes were sold by George Putnam for the account of petitioner for $1 and a capital net loss for the difference was taken and allowed on her income tax return for the year 1928. In 1929, the taxable year before us, George Putnam gave the remaining $70,000 of the notes to the petitioner for a similar use in that year. George Putnam had a power of attorney from his wife to manage her financial affairs, keep her books of account, make out and verify her income tax returns, and generally to act in her behalf. On July 8, 1929, he sold for petitioner’s account said $70,000 of Newfield notes for $1 net, and petitioner claimed in her return for the year as a deductible loss the difference, $69,999. This loss was disallowed by respondent on the ground that the notes were worthless in 1928 and known to be such by petitioner prior to the taxable year 1929.

At the conclusion of the evidence offered in the proceeding counsel for respondent claimed an additional ground for disallowance of the loss. He contended that the evidence failed to show that George Putnam had given petitioner the notes. The evidence of the gift was slight. Superficially examined, it shows an attempt to donate a loss rather than notes. But in his opening statement of the case respondent’s counsel said, inter alia\

* * * So that at the beginning of 1928 we find the petitioner’s husband was the owner of ,$142,000 worth of these notes, and during that year 1928 he gave to his wife, the petitioner, $72,000 worth. The remaining $70,000 worth were given to her in the taxable year 1929..

This statement by respondent’s counsel on the trial relieved petitioner of the burden of proving the fact which is therein admitted. For this reason we sustain the petitioner as to the gift of the notes without any analysis of the evidence bearing on the point.

The amount of the deduction is being claimed as a loss resulting from the sale as distinguished from a debt ascertained to be worthless and charged off within the year. Section 23 (e) of the 1928 Act allows as deductions “ * * * losses sustained during the taxable year and not compensated for by insurance or otherwise * * * ” and subsection (j) of the same section permits the deduction of “Debts ascertained to be worthless and charged off within the taxable year * * These provisions of the act are mutually exclusive. Clearly the claimed deduction falls within section 23 (j). Spring City Foundry Co. v. Commissioner, 292 U.S. 182, affirming 67 Fed. (2d) 385, which reversed 25 B.T.A. 822.

Among the book assets of Newfield as of the close of 1928 was an item of $1,578,684.68 representing an accrual of a pending equity suit instituted by the partnership against the International Products Co. and its directors for $1,440,000 and interest, based upon an alleged right to rescind the contract under which the partnership had purchased stock of the defendant corporation. In maintaining that the notes did not become worthless until the suit was finally concluded, counsel for the petitioner concedes that without the pending suit the notes had no value.

The suit was instituted in about 1924. The trial court held in favor of the defendants on November 10, 1925, on the ground that the plaintiffs’ laches estopped them from disavowing the contract. Hill v. International Products Co., 220 N.Y.S. 711. The judgment was affirmed by the Supreme Court of New York, Appellate Division, April 12, 1929, 233 N.Y.S. 784, and on July 11, 1929, the Court of Appeals of the State of New York denied the motion of the appellants for leave to appeal the case to that court.

The petitioner and her husband testified that they believed the suit would eventually end favorably for the plaintiffs, and, if so and the judgment were collected, that the notes would have some value, the husband’s testimony being that the notes would be worth from 10 to 30 percent of their face amount. We have not been furnished with the basis for their opinions a,s to the probable worth o.f the notes, based upon the outcome of the suit, and we know nothing about the financial responsibility of the defendants in the case to satisfy any judgment that might have been obtained against them. If we were to assume that a judgment for $1,440,000, the principal amount of the claim, plus interest, which at the close of 1928 amounted to about $850,000, could have been recovered, we could not say that any part of it could have been used to satisfy the series C notes,- part of which were held by the petitioner. The book assets of Newfield as of December 31, 1928, including the item for the pending suit, were only $3,733,200.52, and the corporation’s liabilities at that time were $5,664,346.63, leaving a deficit of $1,931,146.11. Of the liabilities, $4,405,000 in round numbers represented obligations under two issues of notes other than series C notes in the face amount of $1,259,000. A bank owned about $2,650,000 of the corporation’s series A notes. No evidence was offered as to the value of the assets and, excepting cash on hand of about $14,000, we are in no position to place "a value on the corporation’s property. Without evidence proving the fact we can not find that the series C notes had priority over the other obligations of the corporation. Neither does the record show what prospects, if any, the corporation had of improving its financial condition. There was some question about the as-signability of the partnership claim to Newfield, and we have only the statement of counsel for the petitioner that arrangements were made to place any proceeds derived from the suit in trust for the benefit of the corporation. Thus there is doubt whether Newfield would have received the proceeds of any judgment obtained in the action.

We seriously doubt whether the petitioner and her husband placed as much reliance upon the pending claim as their testimony indicates. The husband testified in the suit and the petitioner manifested interest in the proceedings. The husband knew nothing about the case from November 1925, when the unfavorable decision was rendered by the trial court, until the spring of 1929, when he learned that the judgment of the trial court had been affirmed and that an appeal would be taken to the Court of Appeals. He did not learn of the decision of that court until August or September 1929. The petitioner did not follow the case through the appellate courts any closer. Having sold $72,000 face value of the notes in 1928, and $70,000 on July 8, 1929, three days before the order of the Court of Appeals was signed, for nominal amounts, it seems apparent that the petitioner and her husband were convinced that the pending suit added little, if anything, to the value of the notes,- otherwise they, or one of them, would have made inquiry about the status of the suit before making the sales. The petitioner’s husband did not consult the balance sheets, reports of operations, or officers of the corporation prior to the sales. The inference to be drawn from this condition of the record is that the petitioner, or her attorney in fact, had ascertained from other sources prior to the 1928 sale that the notes were worthless.

The respondent found that all of the donor’s notes became worthless in 1928. The evidence before us sustains, rather than overcomes, that determination. We are also of the opinion, and so hold, that the donor and donee ascertained all of the debts to be worthless in 1928. Having made such a determination, the then owner of the notes in question was required to deduct his loss in that year. He could not carry the deduction over to the next year. Avery v. Commissioner, 22 Fed. (2d) 6; Stephenson v. Commissioner, 48 Fed. (2d) 348.

The petitioner relies upon Ward Ames, Jr., 27 B.T.A. 624; aifd., 71 Fed. (2d) 939. Cases of this sort must be decided upon their peculiar facts. From the facts prevailing there the conclusion was reached that the entire indebtedness was not worthless prior to the taxable year. Here the evidence establishes that all the notes were ascertained to be worthless in 1928.

Section 113 of the Revenue Act of 1928 provides that where property is acquired by gift after December 31, 1920, as here, the basis for determining gain or loss from the sale or other disposition thereof “ shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift.” The donor’s right to claim a deduction for ascertainment of worthlessness of the debts having expired with the close of 1928, thereafter he had no basis for deduction purposes. Obviously, the donee acquired no greater rights than the donor had at the time of the gift.

Judgment will be entered for the respondent.


author: MuRdock: VAN FossaN,

text:
    Amy S. Richardson, Executrix of the Estate of Charles W. Richardson, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 64023.
    Promulgated October 3, 1934.

      C. H. Merillat, Esq., for the petitioner.

      Lewis /S. Pendleton, Esq., for the respondent.
   OPINION.

MuRdock:

The evidence does not show that the Commissioner erred in valuing the property at 1337 Connecticut Avenue and the 500 shares of stock of the Union Trust Co. On the contrary there is evidence supporting his valuations. No question was raised as to the value of the Duxbury property. The value placed by the Commissioner upon the residential property at Grant Road was too high and a lower value, based upon the evidence in the record, has been found. This property had an area of 21.14 acres, whereas the witnesses at times had in mind only 17.691 acres. Due allowance has been made for this difference.

The only remaining question is to determine what part of the value of each of the three pieces of real estate should be included in determining the value of the gross estate of the decedent. Section 302 of the Revenue Act of 1926 is in part as follows:

Seo. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
(a) To the extent of the interest therein of the decedent at the time of his death;
& * ;¡:
(e) To the extent of the interest therein held as joint tenants by the decedent and any other person, or as tenants by the entirety by the decedent and spouse, * * * except such part thereof as may be shown to have originally belonged to such other person and never to have been received or acquired by the latter from the decedent for less than an adequate and full consideration in money or money’s worth: Provided, That where such property or any part thereof, or part of the consideration with which such property was acquired, is shown to have been at any time acquired by such other person from the decedent for less than an adequate and full consideration in money or money’s worth, there shall be excepted only such part of the value of such property as is proportionate to the consideration furnished by such other person * * *.
* * ❖ ❖ * * Hs
(h) Except as otherwise specifically provided therein subdivisions (b), (c), (d), (e), (f), and (g) of this section shall apply to the transfers, trusts, estates, interests, rights, powers, and relinquishment of powers, as severally enumerated and described therein, whether made, created, arising, existing, exercised, or relinquished before or after the enactment of this Act.

All of the property in question, with the exception of a certain part of the Grant Road property, was held by the decedent and his wife at the time of his death either as joint tenants or as tenants by the entirety. Code of District of Columbia, sec. 1031; Loughran v. Lemmon, 19 App. D.C. 141; Settle v. Settle, 56 App. D.C. 50; 8 Fed. (2d) 911. The wife never owned any of the property separately from her husband. Cf. Rita O'Shaughnessy, Executrix, 21 B.T.A. 1046; affd., 60 Fed. (2d) 285; certiorari denied, 288 U.S. 605; Estate of Edward T. Kelley, 22 B.T.A. 421. However, she acquired a joint legal interest in some of the property from her husband and she acquired a legal interest in some of the property jointly with him at the same time that he acquired his interest. Therefore if any of the property is to be excluded in computing the value of the gross estate of the decedent it must appear either that the wife furnished some certain proportionate part of the consideration with, which a piece of property was purchased or that she acquired an interest in certain property from the decedent by paying him full and adequate consideration in money or money’s worth for what she received. Phillips v. Dime Trust & Safe Deposit Co., 284 U.S. 160; Walter J. Reese, Executor, 25 B.T.A. 38; Herbert D. Robinson, Executor, 21 B.T.A. 1373; affd., 63 Fed. (2d) 652; Marmaduke B. Morton, Administrator, 23 B.T.A. 236; City Bank Farmers Trust Co., Executor, 23 B.T.A. 663; Regulations 70, art. 23. Cf. J. H. Gwinn, 20 B.T.A. 1052.; affd., 54 Fed. (2d) 728; 287 U.S. 224. Neither appears with sufficient clarity to justify a finding which would benefit the petitioner.

The record fails to show that any money belonging to the wife ever was used to purchase any of the properties in question. She testified that she gave the decedent $600 or $700 when they were married which was put into property. They were married in 1889, they purchased many properties, and it is impossible to trace or even begin to trace this first contribution which she made. Certainly it can not be traced into any of the properties in question. Next she testified in regard to an interest in a trust established by her father from which she received money. However, the record does not show the date when any distribution was made from this trust or the amount of any distribution received by her, except that she received $7,669.46 in 1925. All of the property in question with the exception of lot 801 was purchased prior to this distribution. There is no showing of how lot 801 was purchased, whose money was used, or how much was paid. The only evidence of a payment on account of the purchase price of any of the property having been made after the above mentioned distribution relates to a payment of $5,023.33 on the mortgage on the Duxbury property. The $7,669.46 belonging to the wife was deposited in the husband’s bank account on July 30, 1925, increasing the balance in that account from $11,827.97 to $19,795.65. A check was drawn on August 1, for a purpose not shown, which reduced the balance to $6,681.82. Thereafter a few small deposits were made and on August 7 a check for $5,023.33 was drawn in payment of notes given in 1923 to purchase the Duxbury property. The cost of that property has not been shown. How much of the wife’s money went to pay the notes, how much of it was used to pay the check dated August 1, and how much of it was left in the account? Even if these questions could be answered satisfactorily, still the proportion of the consideration represented by the wife’s payment could not be determined because the cost of the property has not been shown. Hence the portion of the value to be excluded could not be determined.

The wife also testified that she saved $200 per month out of an allowance of $100 per week given her by her husband for household expenses. We need not decide whether or not this represented a gift from the husband or whether or not there was full and adequate consideration in money or money’s worth to meet the requirements of the statute. None of this money has been traced into any o,f the properties in question and of course no certain amount has been traced into any particular property, as would be necessary if a change were to be made in the determination of the Commissioner.

The wife said that she managed all of the decedent’s business affairs, yet she has not mentioned one instance of the contribution of any of her own separate money toward the purchase of a particular piece of property nor has she stated the amount of any contribution by her toward the purchase of any particular property. Counsel for the petitioner alleged in the petition that there existed between the decedent and his wife “ a community of interests and property ” to which the wife made contributions of her services. He argues that under this agreement the wife was entitled to all of the jointly owned property upon the death of the husband. Apparently counsel relies upon proof of this alleged agreement in lieu of evidence tracing definite amounts of the wife’s money into particular properties. The value of the services rendered by the wife has not been shown. There is no community property law in the District of Columbia, where this couple lived, to correspond with that of Texas and other community property states. If there were, no agreement would be necessary. The testimony of the wife does not adequately support the view of counsel for the petitioner. She testified that with respect to properties purchased with the funds of both “ the arrangement was, if I should die, it was all his; if he should die, it was all mine ” and their wills were made to carry out that arrangement. They held most of the property in question either as joint tenants or as tenants by the entirety and consequently all so held would go to the survivor. The wife was the sole beneficiary under the husband’s will. Thus the arrangement testified to by the wife is really immaterial in the decision of the case for it does not change the facts as otherwise established. The evidence does not show any further arrangement or agreement between the husband and wife in regard to any of the properties here involved. Thus it is unnecessary to consider the possible effect of any such agreement as was alleged to exist.

The value of the property standing in the name of the decedent alone must be included in determining the value of the decedent’s gross estate. Likewise the entire value of the property standing in tlie name of the decedent and bis wife either as joint tenants or as tenants by the entirety must be included in determining the value of the decedent’s gross estate, since her separate contribution, if any, toward the purchase of those properties has not been shown, and consequently the proportionate part of the value to be excluded can not be determined. Tyler v. United States, 281 U.S. 497; Third National Bank & Trust Co. of Springfield v. White, 45 Fed. (2d) 911; affd., 58 Fed. (2d) 1085; affirmed per curiam, 287 U.S. 577, on authority of Tyler v. United States, supra, and Gwinn v. Commissioner, 287 U.S. 224; Putnam v. Burnet, 63 Fed. (2d) 456; Levy's Estate v. Commissioner, 65 Fed. (2d) 412; Luman W. Goodenough, Executor, 30 B.T.A. 69; Henry M. Butzel, Executor, 21 B.T.A. 188; American Security & Trust Co. et al., Executors, 24 B.T.A. 334, 340.

Reviewed by the Board.

Decision will he entered under Bule BO.

VAN FossaN,

dissenting: I find myself unable to subscribe to the holding of the majority of the Board. I believe the evidence in this case fully spells out a contract between the decedent and his wife which existed throughout all of their married life and was basic in all property accumulations. If such a contract existed, it should be given effect. I cannot subscribe to the narrow view that the exact money contribution of the wife must be traced through each change in property, however obvious it may be that there is merit in the petitioner’s primary contention. I' believe the powers and the duty of the Board are broader than the prevailing opinion would indicate.

As above suggested, the basic issue involved in the case at bar is whether or not a business contract existed between the decedent, Richardson, and his wife. The evidence shows clearly that such a contract was entered into in 1899 and continued until August 15, 1929, the date of the decedent’s death.

All available funds arising from the joint efforts of the parties were invested in real and personal property. To such proceeds were added the petitioner’s distributive share of her father’s estate. In the management of those assets, a strictly business activity, the wife took a major and dominant part. Under the terms of the original agreement the decedent and his wife were to share equally in the results of their endeavors and the consequent profits therefrom.

In the District of Columbia a husband and wife may enter into contracts with each other, Bronson B. Brady, 28 App. D.C. 250; Ellis v. Ellis, 51 App. D.C. 383; 280 Fed. 457; and in event of such a relationship the court will enforce the same as to the respective rights of the parties. Ellis v. Ellis, supra.

Since the existence of the contract has been established, it is imma- . terial in whose name the property was held or the enterprise was conducted. John T. Newell, 17 B.T.A. 93; Leonard M. Gunderson, 23 B.T.A. 45; J. Rammer diner, 25 B.T.A. 495. As a matter of fact, however, substantially all of the realty in question was held jointly.

The proof establishes that the three properties in controversy, the Connecticut Avenue, the Grant Hoad, and the Duxbury, were acquired and held pursuant to the contract between the parties. In my opinion but one half of the value of each property should be included in the taxable estate.


author: Sea well:

text:
    The Morris Plan Bank of Cleveland, Petitioner, v. Commissioner of Internal Bevenue, Respondent.
    Docket No. 68226.
    Promulgated October 3, 1934.

      Francis R. Lash, Esq., for the petitioner.

      Arthur Garnduff, Esq., and E. M. Woolf, Esq., for the respondent.
   OPINION.

Sea well:

The respondent determined a deficiency of $359.85 in income tax against the petitioner for 1930 by disallowing, among other deductions, the sum of $2,500 claimed as a deduction for exhaustion of the cost of a license to use a copyrighted system of conducting a loan and investment business, known as “The Morris Plan.” Whether or not such action on the part of the respondent was proper is the only question before us for decision.

From the stipulation of facts, which constitutes the only evidence before us, it appears that the petitioner is an Ohio corporation existing under a perpetual charter. In 1916 it paid to the Industrial Finance Corporation, a Virginia corporation, the sum of $50,000 for, among other things, the exclusive right to use a system, including trade name, trade-mark, copyrights, and forms, together with . all renewals and improvements thereof and additions thereto, necessary for conducting and operating a loan and investment business in Cuyahoga County, Ohio, for an indefinite period. The system was copyrighted by the Industrial Finance Corporation on April 1, 1910. The trade name and trade-mark for the system was “ The Morris Plan.” In its return for 1930 the petitioner claimed as a deduction the sum of $2,500 for exhaustion of the cost of the right or license to use the copyrighted system. The respondent disallowed the deduction on the ground that the right to use the property was unlimited as to time.

The petitioner claims that it will be protected against the use of the copyrighted system in Cuyahoga County, Ohio, by others only until 1938, the year in which the original term of copyright will expire, and even though its corporate existence is perpetual and the legal right exists to renew the copyright for an additional period of 28 years, it should be permitted to deduct the cost of the asset, which is claimed to be $50,000, ratably over a period of 22 years. The respondent contends, among other things, that the intangible asset has an indefinite life and, accordingly, is not subject to exhaustion, citing Coca-Cola, Bottling Co., 6 B. T. A. 1333.

There is no need to decide whether the life of the license to use the system, including the trade name and trade-mark, is limited to 20 years as claimed by the petitioner, 22 years as computed on the basis of the original term of the copyright, or indefinite as claimed by the respondent, because irrespective of such a determination we would be compelled to sustain the respondent. The petitioner’s claim is' predicated upon the fact that it paid $50,000 for the license. Reference to the contract of January 27, 1916, between the petitioner and the Industrial Finance Corporation, under the terms of which the right was acquired, discloses that the sum was paid for more than the mere right to use the copyrighted system.

By the provisions of the contract the Industrial Finance Corporation agreed to install in the office of the petitioner a complete system of accounts and to furnish without cost to the petitioner a complete initial set of books and forms necessary for the proper operation of its business; to pay all expenses involved in organizing the peth tioner, including legal fees and charter costs, and at its own expense to install the system and supervise the opening of the books and instruct the petitioner’s officers and employees in the conduct of the petitioner’s affairs for such period as the Industrial Finance Corporation deemed necessary; to furnish from time to time statistical information of the business of other corporations operating under “The Morris Plan” and other information of assistance to the petitioner in perfecting its methods according to the system, and such sample copies of its literature, publicity pamphlets, advertising matter, and statistical records as may be helpful to the petitioner in the preparation of advertising matter; and to render legal services in matters pertaining to the operation of petitioner’s business.

Section XVIII of the contract, pursuant to the terms of which the sum of $50,000 was paid, reads in part as follows:

The Coiipany further agrees, in consideration of the transfer to it by the Corporation of the right to operate “ The Morris Plan ” in the territory aforesaid under the terms of this Contract and in further consideration of the rights and benefits assigned and transferred to it by this Contract and in further consideration of the services rendered and to be rendered and the expense incurred and to be incurred by the said Corporation in the premises, to pay to the Corporation a sum equal to Ten Dollars ($10.00) per share of the par value of One Hundred Dollars ($100.00), or its equivalent, on its original issue of capital stock of Dive Hundred Thousand Dollars ($500,-000.00). * * *

This provision of the contract shows beyond question that the petitioner paid the sum of $50,000 not only for the exclusive right to use the copyrighted system of conducting a loan and investment business, but also for the use of the trade-mark and trade name known as “ The Morris Plan,” organization expenses, books, forms, and services rendered and to be rendered, etc. Organization expanses may not be deducted, as ordinary and necessary business expenses nor amortized ratably over the period of the corporation’s life. Surety Finance Co. of Tacoma, 27 B.T.A. 616. Such costs may be deducted as a loss when the corporation is dissolved. Malta Temple Association, 16 B.T.A. 409. Trade-marks are not subject to exhaustion with the passage of time. Norwich Pharmacal Co., 30 B.T.A. 326. Other items for which the amount was paid constitute ordinary and necessary business expenses deductible in the year paid. The record furnishes no basis for determining the cost of the license to use the copyrighted system known as “ The Morris Plan ” and if we were to decide, as we do not, that the license is subject to exhaustion, we would lack a basis for making any allowance. Under the circumstances, we must sustain the action of the respondent in disallowing the deduction in question.

Decision will be entered, for the respondent.