author: Arundell:

text:
    Rafael Sabatini, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 50134.
    Promulgated June 7, 1935.

      Eugene Meacham, Esq., for the petitioner.

      Mason B. Lenvmg, Esq., for the respondent.
   OPINION.

Arundell:

The issue presented is whether the petitioner, a nonresident alien, is taxable on the rentals or royalties which he received in the manner set forth in our findings of fact. Some of the income originally contested is now conceded to be income from sources within the United States, and as such subject to income tax. In view of these concessions, we have confined our findings to those contracts which we understand are those from which the presently disputed income was derived, namely, the contracts with the Houghton Mifflin Co., the contracts relating to five motion pictures, and the contract with Wagner concerning the dramatization of “ Scaramouche.” The amount of income from these contracts is not in evidence, but the parties are agreed that they can and will determine it upon our decision as to whether such income is taxable.

The questions presented involve the construction of sections 212(a) and 119 (a) (4) and (c) (4) of the Revenue Act of 1928 and corresponding provisions of earlier statutes. The pertinent parts of these sections of the 1928 Act are:

Sec. 212. (a) General rule — In the case of a nonresident alien individual gross income includes only the gross income from sources -within the United States.
* ***** *
Sec. 119. (a) Gross income from sources in United States. — The following items of gross income shall be treated as income from sources within the United States:
*******
(4) Rentals and Royalties. — Rentals or royalties from property located in the United States or from any interest in such property, including rentals or royalties for the use of or for the privilege of using in the United States, patents, copyrights, secret processes and formulas, good will, trade-marks, trade brands, franchises, and other like property; and
*******
(c) Gross income from sources ivithout (he United States. — The following items of gross income shall be treated as income from sources without the United States:
* * * * * * *
(4) Rentals or royalties from property located without the United States or from any interest in such property, including rentals or royalties for the use of or for the privilege of using without the United States, patents, copyrights, secret processes and formulas, good will, trade-marks, trade brands, franchises, and other like properties; and
❖ * * ’ * * * *

Petitioner’s view is that the contracts involved the sales of personal property in the form of rights to his literary productions, and that such sale took place in England, inasmuch as he executed the contracts in that country. On this premise he argues that the income received under the contracts was not “ gross income from sources within the United States” within the meaning of section 212 (a), above quoted.

The rights granted- under the contracts executed by petitioner did not amount to sales of his property. “ A sale of personal property when completed, transfers to the purchaser the title to the property sold.” Whitfield v. United States, 92 U. S. 165, 170. He did not part with title to his manuscripts nor did he sell or assign his copyrights. In fact, it is stated in some of the contracts that copyrights could not be obtained, and in some of the others it is at least doubtful whether petitioner had copyrights, in view of the provisions authorizing the Houghton Mifflin Co. to take out copyrights. It may be conceded that whatever rights petitioner had in his compositions were personal property, but we fail to see wherein granting the privilege of publication or other exploitation amounted to a sale. “A man can not sell his chattel by a. perfected sale, and still remain its owner.” Butler v. Thompson, 92 U. S. 412, 415. It is quite obvious from the contracts themselves that the Houghton Mifflin Co. did not contract to buy petitioner’s writings outright with all rights therein, but contracted to pay him royalties on sales in the United States. Petitioner reserved to himself all rights of translation and all rights to market his books in countries other than the United States, and it seems he also reserved all motion picture and dramatic rights.

The payments made to petitioner for the right to reproduce his compositions seem to us to be clearly rentals or royalties for the use of property. Whether they were technically “ rentals ” or “ royalties ” is immaterial, for if they were either one they constituted income. “ Eoyalties, like rent, are inherently income and have been commonly so considered.” Estate of Ernest Gustav Hoffman, 8 B. T. A. 1272. Moreover, the statute here specifically includes “ rentals and royalties ” in income. Nor is it necessary to determine whether the payments were made for the use of copyrights which we assume were obtained by Houghton Mifflin Co. under some of its contracts. Petitioner undoubtedly had a property right of some kind in his writings, and as such comes within the statutory phrase “ other like property.” Payments based on earnings made for the use of a secret process are income. Kaltenback v. United States, 66 Ct. Cls. 581; likewise payments for the right to manufacture and market an invention with application for patent pending, Frank W. Elliott, 24 B. T. A. 5, and payment in stock for a license under patents, Superheater Co., 12 B. T. A. 5; affd., 88 Fed. (2d) 69. The application of the statute does not turn upon the place of execution of the contract for the use of property; that is not mentioned. The vital element is that the payments be made “ for the use of or for the privilege of using [property] in the United States.” That, as we understand the arrangement between petitioner and the publishers, is the situation here. The substance of the contracts is that under them petitioner granted to the publisher the right to publish his books in the United States upon payment to him of the specified royalty upon each book sold in the United States. In other words, if no books had been sold in the United States there would have been no income. When the petitioner conveyed a restricted interest in his books to the Houghton Mifflin Co., reserving to himself a royalty on all sales in the United States, that interest became/ property located in the United States, and the income therefrom is of the kind described in section 119(a)(4). We see no occasion for attempting a strained construction of section 119 for the purpose of placing the income from sales in the United States in a nontaxable classification. Cf. Helvering v. Stockholms Enskilda Bank, 293 U. S. 84.

What we have said above applies alike to those publications which were subject to copyright and those which were not. It also applies to the income under the contract granting to Wagner the right to dramatize “Scaramouche.” Under the Wagner contract, as in the case of the Houghton Mifflin Co. agreements, there would have been no income to petitioner, save perhaps the down payment of $500 in the nature of an advance royalty, unless the American public had patronized the theatres where the play was produced. All income derived by petitioner as royalties from this dramatization constituted taxable income to him.

The situation respecting the granting of motion picture rights is quite different from the other rights above discussed. In none of the motion picture contracts did petitioner obtain any income from the reproduction and sale or other use of his writings in the United States as in the case of the Houghton Mifflin Co. and Wagner contracts. Here the granting of rights was m,ade in consideration of a lump sum. The sale of these rights took place in England (cf. Compania General, etc. v. Collector, 279 U. S. 306), and there was no subsequent income in the nature of rents or royalties from sources within the United States. We are accordingly of the opinion that the lump sums received by petitioner for the motion picture rights do not come within the statutory definition of income from sources within the United States and are not taxable income.

We note in passing that the contract with Wagner was not confined to the dramatization in the United States, but also granted Canadian rights. The statute which we have above held applicable relates only to income for the use of property in the United States, and further, section 119 (c) (4) of the act treats as income from sources without the United States rentals or royalties for the use of property without the United States. As the parties have agreed that they can make a computation if the question presented is decided, they may exclude from income on recomputation the Canadian receipts, if any, under the Wagner contracts.

The respondent has asserted 25-percent penalties for the years 1921 to 1925, inclusive, on account of petitioner’s delinquency in filing returns. There is no evidence in this case of any “ reasonable cause ” for the delinquency which would warrant setting aside the penalty. Petitioner was represented in this country and undoubtedly could have obtained a ruling as to the taxable status of the payments he was receiving from within the United States. In the absence of a showing of reasonable cause we have no course but to sustain the imposition. See Charles E. Pearsall & Sons, 29 B. T. A. 747; Berlin v. Commissioner, 59 Fed. (2d) 996.

Reviewed by the Board.

Decision will l>e entered- wider Rule 50.

       Tile same provisions appear in tile earlier acts. Sec. 213 (c), Revenue Acts of 1921, 1924, and 1926.

       The same provisions, with immaterial differences, appear in section 217 of the Revenue Acts of 1921, 1924, and 1926.


source: Caselaw Access Project

author: Arundell :

license: Public Domain

text:
    Claude D. Cass, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75521.
    Promulgated June 7, 1935.

      John E. McOlwre, Esq., for the petitioner.

      T. G. Histon, Esq., for the respondent.
   OPINION.

Arundell :

In the notice of deficiency the respondent states that the loss deduction claimed by petitioner “has been disallowed for the reason that this office holds that the stock became worthless prior to 1931.” In a written stipulation of facts filed prior to the hearing, it is stated, “The respondent disallowed this loss on the ground that the stock was worthless prior to 1931.” The one error alleged in the petition for redetermination is the finding of the Commissioner that the stock was worthless prior to 1931. This allegation of error is denied in the respondent’s answer. On this state of the record we have presented for decision the single question of whether the respondent erred in his determination that the Railway Co. stock was worthless prior to 1931. As the issue is thus narrowly framed we have no occasion to go into other matters which obtrude in a reading of the facts, for instance, the question of the bona fides of the sale in 1931.

A deduction for worthless stock may be taken in the year in which the stock becomes worthless, art. 177, Regulations 77; art. 23 (c) (4), Regulations 86, and in the case of worthlessness the owner has no option to take the loss in a later year on a sale for a nominal amount, De Loss v. Blair, 28 Fed. (2d) 803; Jessie S. Meachem, 22 B. T. A. 1091; Harry C. Kayser, 27 B. T. A. 816. But where stock is not in fact worthless in the year of sale for a nominal amount, the holder is not precluded from taking a loss deduction on another sale of similar stock in a subsequent year. Elliott R. Corbett, 28 B. T. A. 46; J. Harvey Ladew, 22 B. T. A. 443.

In the present case the petitioner’s evidence against the respondent’s determination of worthlessness was, in substance, that the Railway Co. has been in continuous existence and operation ever since organization and that it has always had earnings, has never been in receivership or bankruptcy, and has never been in process of liquidation. Respondent, on the other hand, points to losses sustained by the Railway Co. over a period of years, to the mounting deficit of the company, and its annually increasing amount of unpaid interest.

The determination of the respondent is prima facie correct, Brown v. Commissioner, 22 Fed. (2d) 797; Bishoff v. Commissioner, 27 Fed. (2d) 91, and it “ presumably rests on a correct determination of the facts.” Old Mission Portlamd Cement Co. v. Helvering, 293 U. S. 289. “ The burden of disproving a deficiency as determined by the Commissioner is recognized to be upon the taxpayer.” Bishoff v. Commissioner, supra. Having in mind these rules, we inquire whether petitioner’s evidence establishes error in the respondent’s finding of worthlessness of the stock prior to 1931.

Petitioner offered no direct evidence as to the value of the stock in any year. His nearest approach to it is his testimony that he has always considered the stock to be of value. Despite his long connection with the corporation his knowledge concerning any sales of the stock was limited to one, other than his own, and he did not know the price in that case. His own sales can hardly be said to be indicative of value, one being at the rate of 8y3 cents per share, the second at $1.50 per share, and the third at 25 cents per share. The last two were made to persons who naturally would give the petitioner the benefit of any doubt as to the worth of the stock. The circumstances were not such as to affirmatively establish a value.

Continued operation of a corporation does not in itself demonstrate that the stock had worth. Gilbert H. Pearsall, 10 B. T. A. 467; Floyd E. Poston, 17 B. T. A. 921. Particularly is this true in the case of railroads and other public utilities, which are often required by public utility commissions to continue operations long after reaching the state of hopeless insolvency and when it is obvious that there is not the slightest possibility of the stockholders ever realizing anything on their investment. While the corporation had gross income in each year prior to and in 1931, that gave no value to the stock, inasmuch as it was far from sufficient to meet fixed charges. The ever mounting deficit is at least an indication of decreasing value of the stock. The deficit increased from $2,954,891.35 in 1926 to $4,718,326.97 in 1931. In the same period the unpaid interest more than doubled. It was $2,251,684.27 in 1926 and $4,580,273.30 in 1931. This situation would not inspire hope for the salvaging of the stock investment. In the face of these facts we are of the opinion that the petitioner’s showing of continuous operation and the absence of receivership or bankruptcy is insufficient to establish error in the respondent’s determination of worthlessness of the stock prior to 1931.

Reviewed by the Board,

Decision will be entered for the resyondent.


author: Blacn :

text:
    Frances R. Walz, Administratrix, Estate of W. G. Walz, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75790.
    Promulgated June 7, 1935.

      H. B. Gamble, Esq., for the petitioner.

      T. H. Histon, Esq., for the respondent.
   OPINION.

Blacn :

In this proceeding respondent has determined a deficiency against petitioner’s decedent for the year 1931 of $405.70. Only a part of the deficiency is contested.

There is only one issue for us to determine, which is whether the petitioner is entitled to deduct an alleged loss of $10,231 representing the difference between the cost to the community of 400 shares of Radio Corporation of America stock, amounting to $16,881, and its fair market value, amounting to $6,650, which resulted from a partition of community property of the petitioner’s decedent and his wife, Rosalie B. Walz, at the time of their divorce on July 16, 1931.

The facts have been stipulated and are a part of the record. Only such facts will be stated herein as are necessary to make clear the issue which we are to decide.

The petitioner’s decedent, W. G. Walz, and Rosalie Behr Walz were married1 in El Paso, Texas, on May 9,1917, and they were divorced in El Paso, Texas, on July 16,1931. On July 15,1931, they entered into an agreement dividing and partitioning their community property. During the year 1930 there were purchased by the community of petitioner’s decedent, W. G. Walz, and his wife, Rosalie Behr Walz, among other property, 400 shares of stock of Radio Corporation of America at a cost of $16,881.

Under and pursuant to the aforesaid agreement dated July 15, 1931, the 400 shares of stock of Radio Corporation of America were partitioned to the wife of the deceased petitioner and at the date of the partition this stock had a fair market value of $6,650.

After describing the property which was to be distributed to the wife, the property settlement agreement dated July 15, 1931, contained the following paragraph:

In connection with the foregoing, it is agreed that the community property to be divided between the parties, not including the household furniture and furnishings, is of the value of Ninety-two Thousand ($92,000.00) Dollars, and that the party of the first part is entitled to one-half of all the amount, or Forty-six Thousand ($46,000.00) Dollars. In setting apart to her such interest, she shall be charged with Four Thousand ($4,000.00) Dollars for the North El Paso Street house, and with the market value of the four hundred (400) shares of ft. C. A. stock, the value of the stock to be determined as aforesaid, and the value of the stock, plus Four Thousand ($4,000.00) Dollars having been deducted from the sum of Forty-six Thousand ($46,000.00) Dollars, the party of the second part shall execute unto the party of the first part his promissory note for such sum, which note shall bear interest at the rate of six per cent (6%) per annum, interest to be payable monthly; * * *

Then follows a description of the property set apart for the husband in the division of property, which need not be set out here in detail.

In decedent's income tax return filed for the year 1931 there was claimed a loss of $10,231 on the distribution of this stock to his wife. The respondent disallowed this loss in the deficiency notice and, among other things, said in connection with the disallowance:

Investigation discloses that the losses claimed resulted, from a partition of community property of the taxpayer and his wife, Mrs. Rosalie B. Walz, at the time of their legal separation in July, 1931, and represents the difference between the cost of the properties and their listed price at the time of separation. It is held that “losses” resulting from the partition of community property or resulting from a separation agreement do not constitute allowable deductions from taxable income of the parties to the partition or the agreement. The loss has accordingly been disallowed.

We think respondent must be sustained in this determination. Section 23 (e) (2) of the Revenue Act of 1928 reads as follows:

(e) Losses by individuals. — In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise—
* * * * * * *
(2) if incurred in any transaction entered into for profit, though not connected with the trade or business * * *.

Can it be said that when two or more parties are the owners in common of a mixed aggregate of assets purchased for profit and decide to partition it, a gain or loss results from such partition? We think not. If, when the property owned in common is distributed in kind to the respective parties in accordance with their partition agreement, one of the parties is allowed a deductible loss because certain of the property has declined in value from the cost of its original purchase, it would mean by the same line of reasoning that, if the property had appreciated in value from the time of its original purchase, there would be a taxable gain in the partition transaction. We know of no Board or court case which would be authority for such a proposition and we have been cited to none.

In Texas a wife owns a vested one-half interest in the community property. Hopkins v. Bacon, 282 U. S. 122. In the instant case when the one-half interest of the wife in the community property was set apart to her in the separation agreement, she was only receiving that which was hers already. We think the situation is not affected by the fact that 400 shares of Radio Corporation of America stock were awarded to the wife in the division of property and charged to her at its then fair market value, $6,650. Other property of an equivalent value was awarded to the husband.

Gain or loss on this property thus divided would depend upon its subsequent disposal by the respective parties. Here there has been no sale or exchange of the property in question, but a division of property. Mere shrinkage in the value of some of this property does not give rise to a deductible loss. See article 174 of Regulations 74, Revenue Act of 1928.

Even if, in the division of property between husband and wife when the marriage is dissolved, the husband gets the worst end of the bargain (and there is no claim here that the husband did not get his full share of the property), the husband could not claim a deductible loss. S. George Ullman, Executor, 6 B. T. A. 100. In that case we said:

The rights of the wife arose from the marriage and the settlement of those rights by the husband is a personal expense, if it may be said to be an expense. Gould v. Gould, 245 U. S. 151; Audobon v. Shufeldt, 181 U. S. 575, and David G. Joyce, 3 B. T. A. 393. They had a division to make and if one made this on favorable terms and the other on unfavorable terms, that one who lost is not thereby entitled to a deduction under section 214(a) (5) of the Revenue Act of 1921.

Reviewed by the Board.

Decision will be entered for respondent.


author: Van Foss an:

text:
    Marian Otis Chandler, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 67468-67476.
    Promulgated June 7, 1935.

      A. Oalder Madcay, Esq., and George M. Thompson, Esq,, for the petitioners.

      M. B. Leming, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Ruth Chandler Williamson; Harrison Gray Chandler; Constance Chandler; May Chandler Goodan ; Norman Chandler; John L. Kirkpatrick; Helen Chandler; and Philip Chandler.

   OPINION.

Van Foss an:

These proceedings were brought to redetermine deficiencies in the income taxes of the petitioners for the year 1929 in the following amounts:

Two issues are presented:

(1) Was the transaction by which petitioners exchanged certain notes and interest for stock consummated in 1929 or 1930?

(2) Did the petitioners realize taxable income by reason of such exchange?

The facts were stipulated in part and in part adduced by testimony.

In 1916 Harry Chandler incorporated the Chandis Securities Co., hereinafter called the company, with a capital stock of 500 shares of the par value of $1,000 per share, for which stock he transferred to it certain real and personal property. He transferred 200 of such shares to his wife, Marian Otis Chandler, and 280 shares thereof to his children, all of whom are petitioners. Later he transferred other properties to the company for its promissory notes, which he assigned to his wife and children in approximately the same proportion as their stockholdings. The notes so assigned and interest accrued to December 31, 1923, were in the following amounts:

On December 31,1923, tbe Chandis Securities Co. issued new notes for the foregoing notes and accrued interest to the petitioners, which notes and interest accrued to December 31, 1929, were as follows:

On October 14,1929, the board of directors of the company passed a resolution increasing its capital stock from 500 shares of the par value $1,000 per share to 50,000 shares of the par value of $100 per share and, pursuant thereto, filed the certificate reciting such action, as required by the state statute.

On December 18, 1929, the board of directors of the company passed a resolution authorizing the company’s officers to apply to the Corporation Commissioner of the State of California for permission to sell or issue 40,000 shares of its capital stock at par to liquidate the indebtedness of the company to its stockholders represented by the above notes. The resolution contained the following recitals and provisions:

WHEREAS, Chandis Securities Company is indebted to the following named persons, to-wit:
Marian Otis Chandler
Franceska C. Kirkpatrick
May O. Goodan
Helen Chandler
Philip Chandler
Ruth C. Williamson
Harrison G. Chandler
Constance Chandler
Norman Chandler
in the aggregate principal sum of $2,640,598.21 all of which is evidenced by several promissory notes of this company held by said persons, dated December 31st, 1923, due on or before the 31st day of December, 1928, which notes bear interest at the rate of 5% per annum, compounded annually, on which no part of said principal or accrued interest has been paid, and
Whereas, the aforesaid persons have expressed their willingness and have offered to accept stock in this corporation at full ¡par value thereof in full or part payment of their respective notes together with interest thereon.
Now, Therefore, be it resolved that, subject to the approval of the Commissioner of Corporations of the State of California, this corporation issue to any and/or all of the aforesaid persons in liquidation and payment of all or part of the indebtedness as aforesaid, together with interest thereon accrued to the time of the issuance, fully paid stock in this corporation at its par value for the amount of the indebtedness so liquidated and paid, and that this corporation take and receive from the persons aforesaid a cancellation and satisfaction of said notes to the extent that stock may be so issued to the respective holders thereof,
And Be It Further Resolved, That the President and Secretary of this Corporation be and they are hereby, authorized and empowered to make application to the Commissioner of Corporations of the State of California, for a permit to sell and/or issue to and/or among the foregoing persons only, and one other, forty thousand shares of the capital stock of this corporation, at par, either
(a) For cash, lawful money of the U. S., and/on
(b) Such amount thereof as may be necessary to pay, liquidate and discharge not to exceed the amount of the indebtedness to said persons, herein-before referred to, for principal and/or interest accrued on said notes to the time when said stock may be issued.

On December 20, 1929, the company filed such application, which was granted on December 26, 1929. The permit contained the following provision:

1. To issue to any or all of the persons named in its application filed on the 20th day of December, 1929, an aggregate of not to exceed 35,156 shares of its capital stock as consideration for the cancellation of the indebtedness of applicant to them, described in said application; $100.00 of such indebtedness to be canceled upon the issuance of each of said! shares.

By its terms the permit expired December 26, 1931.

A table showing the stockholdings of the taxpayers and consideration therefor was incorporated in the stipulation.

On January 2, 1930, the petitioners surrendered their notes in exchange for the stock certificates issued by the company that day and the notes thereupon were canceled. The certificates were actually delivered in May 1930. The canceled notes each bear on the face a receipt signed by the respective former holder as follows: “ January 2,1930. The receipt of capital stock of Chandis Securities Company in full settlement of principal and accrued interest to December 31, 1929 is hereby acknowledged.”

From 1924 to 1929 the company accrued interest on the above described notes at 5 percent per annum and deducted such interest on its income tax returns. The company kept its books and made its income tax returns on the accrual basis, while each petitioner kept his books and filed his returns on the cash receipts and disbursements basis. The individuals did not report any interest received in connection with the above notes.

The notes in question were in the custody of Horace Downing, secretary of the company, throughout the year 1929. The balance sheet of the company on December 31, 1929, lists the notes of the petitioners among its liabilities. The books of the company contain appropriate entries to show that the transactions were consummated in 1930. It was stipulated that the value of the stock of the company was $60 per share at any time material to these proceedings.

If it be decided that the transaction of exchange was consummated in 1930, such determination disposes of the cases. There would be no need to consider the second issue. On the facts found above we are of the opinion that petitioners’ contention that the exchange Avas made in 1930 is well taken.

The record discloses that on December 18, 1929, the petitioners, as owners of the above described notes issued on December 31, 1923, expressed their willingness to exchange them for stock in the company in proportion to the respective amounts of such notes and unpaid interest thereon. The company thereupon proceeded to apply for permission to issue the additional capital stock required to accomplish the exchange. Such a permit was a prerequisite to the contemplated exchange and an issuance without such permit would have been void. See section 12 of the Corporate Securities Act, California. On December 26, 1929, the commissioner of corporations issued his permit authorizing the company to issue to the taxpayers:

An aggregate of not to exceed 35,156 shares of iis capital stock as consideration for the cancellation of the indebtedness of applicant to them, described in said application; $100.00 of such indebtedness to be cancelled upon the issuance of each of said shares.

The permit thus required that the exchange should involve simultaneous cancellation of the notes and issue of stock — that the cancellation and issuance were to coincide in time. The company had no right to issue and hence, the petitioners had no right to acquire, the new stock until the notes were surrendered and canceled. The acts were mutually dependent and the transaction which is asserted to be the source of income could not have been completed without both acts.

The record discloses that the petitioners’ notes were surrendered and canceled on January 2, 1930, and the stock certificates were issued on that day or later in that month, but as of January 2, 1930. They were delivered in May 1930. In this situation we are of the opinion that the exchange took place in 1930 and that, therefore, the taxpayers could not have received any income from the exchange of their notes for stock before January 2, 1930. In support of this conclusion it appears that the company’s books reflect the continued ownership of the notes by the petitioners through December 31, 1929, and the consummation of the exchange in 1930.

The conclusion reached above disposes of the cases and requires a finding for the petitioners. We need not inquire whether taxpayers received income in 1930 as a result of the exchange.

Keviewed by the Board.

Decision will be entered, under Rule 50.


author:
Sternhagen :
      Black,

text:
    C. B. Ferree, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 61542.
    Promulgated June 10, 1935.

      N. 0. Do-mhoff, Esq., and John J. Dougherty, Esq., for the petitioner.

      John H. Pigg, Esq., and D. L. Shepherd, Esq., for the respondent.
   OPINION.

Sternhagen :

The respondent determined a deficiency of $9,430.51 in petitioners income tax for 1929. The respondent disallowed a deduction for loss upon the sale, through a broker, of 800 shares of Continental Can; and this disallowance is the only subject of controversy. At the hearing, the respondent, by an amended answer, claimed an increase of $261.32 in the deficiency by reason of a change in the treatment of a certain gain from capital gain to ordinary income. The petitioner expressly concedes the correctness of this increase, and it is therefore unnecessary to give it any consideration.

The facts are stipulated in writing, but it is unnecessary to set forth the stipulation at length. On August 26, 1929, the petitioner bought 1,000 shares of Continental Can for $86,950, took the certificates and put them in his safety-deposit box. December 19, 1929, he sold 200 of these shares and delivered certificates to the broker on December 20, retaining certificates for 800 shares. December 27, petitioner instructed the broker “ to sell for him the eight hundred (800) shares of Continental Can Company stock represented by the certificates which remained in his safe deposit box.” December 30, the broker sold 200 shares for $9,957, and December 31, 600 shares for $29,286. Petitioner, however, did not deliver the certificates and they continued to remain in his box.

January 31, 1930, petitioner, through the same broker, bought 500 shares, and February 3,1930, he bought 1,000 shares. On February 4 the broker delivered certificates for 700 shares, which petitioner put in his box with the aforesaid certificates for 800 shares.

The petitioner treated the sales of December 27 and December 30, 1929, as being sales of the remaining 800 shares purchased in the preceding August, and deducted $30,317 as the resulting loss. This the Commissioner disallowed.

The respondent first defends his disallowance upon the theory that the sale of 800 shares in December 1929 was a short sale, the result of which could not be determined until the covering purchase, which the respondent regards as having occurred in the following January and February. Cf. Robert W. Bingham, 27 B. T. A. 186. He argues that the petitioner’s failure to deliver the certificates to the broker at the time of the sale demonstrates a short transaction. But the evidence shows that the petitioner intended to sell the 800 shares which he owned, that he instructed the broker to sell such shares, and, in view of the fact that the broker promptly sold 800 shares, the conclusion is inescapable that the broker was carrying out the instructions and sold the shares he was directed to sell. There is not the slightest reason to believe that either the petitioner or the broker was considering a short sale, and the mere failure of petitioner to deliver the certificates is not alone sufficient to establish one.

The respondent argues further that even if there was not a short sale there was still no loss sustained in 1929, because the sale was incomplete until delivery of the certificates to the broker. Cf. Charles H. Oshei, 31 B. T. A. 23; Francis S. Appleby, 31 B. T. A. 533; Beardsley Ruml, 31 B. T. A. 534. In Francis S. Appleby, supra, the situation differed only in that the omission to deliver the shares sold was a mere inadvertence and for a short period, while in the present case there is no evidence of inadvertence and the period of nondelivery was substantial. However, there is no explanation for the nondelivery of the shares from which it could be found whether the delay was deliberate or served any purpose. In both Charles H. Oshei, supra, and Beardsley Ruml, supra, the shares were in the rightful possession of another and the taxpayer was therefore unable to make the delivery until the claims of the holder were satisfied. There was substantial reason, therefore, in those cases why the sales could not be said to be complete. In the present case, the failure to deliver appears to have been without substantial significance. In all substantial respects the transaction was complete and petitioner had realized the results of his purchase and sale as completely as he ever would. Indeed, if we are to treat the broker as a mere agent, it must be assumed that in behalf of his principal, the petitioner, he made a delivery as required by the rules of the Stock Exchange, and thus completed the sale. It was to his own broker that the petitioner was then obligated to deliver the certificates, and we can not regard his delay as postponing the realization of loss. The deduction for 1929 was proper.

Beviewed by the Board.

Judgment mill be entered) wider Rule 50.

Black,

dissenting: Article 171 of Regulations 74, relating to deductible losses, contains, among other things, this language: “ Losses must usually be evidenced by closed and completed transactions.”

To constitute a completed sale of stock on a stock exchange there must be delivery. See G. C. M. 12570, C. B. XIII-1, p. 114. In this memorandum the General Counsel of the Bureau of Internal Revenue ruled that where a contract to sell stock on a stock exchange was entered into on December 31,1930, and delivery of the stock was made in the regular way on January 2, 1931, the loss, if any, was incurred in the year 1931 and constituted a proper deduction for that year. In this ruling, I think the General Counsel was correct.

In Charles W. Dahlinger, 20 B. T. A. 176; affd., 51 Fed. (2d) 662, we said: “Although a contract to sell is consummated when the parties execute it, a sale, even where the subject of a contract, is incomplete and imperfect until title passes. But a sale is complete when title passes * *

In the instant case there appears to be no evidence that petitioner made any delivery, either actual or symbolical, in 1929, of the 800 shares sold. Quoting from the majority opinion: “ December 27, petitioner instructed his broker £to sell for him the eight hundred (800) shares of Continental Can Company stock represented by the certificates which remained in his safe deposit box.’ ” Whatever might have been his intentions as to the delivery of these 800 shares of stock represented by the certificates which were then in his safe-deposit box, petitioner did not deliver them. He evidently changed his mind and converted what appears to have been an intention to sell shares of which he was actually possessed, into a short sale, because what he actually did was to cover his sale of 800 shares in 1929 by purchases of 1,500 shares of the same stock on January 31 and February 3, 1930. After petitioner had made these later purchases, the 800 shares which he had sold in December 1929 were subtracted therefrom and the broker delivered to him 700 shares representing the balance of his 1930 purchases. These 700 shares, the majority opinion states, “ petitioner put in his box with the aforesaid certificates for 800 shares.”

Under these circumstances, it seems to me that petitioner is in no position to claim a loss on the sale of 800 shares of Continental Can Co. stock in 1929. If what petitioner actually did in these transactions is to be construed as a short sale of the 800 shares in question, then it is clear petitioner could not claim any loss in 1929. Cf. Robert W. Bingham, 27 B. T. A. 186. But whether the transaction be treated as a short sale or as an ordinary sale, there was no completed transaction in 1929 and the claimed loss is not deductible. Charles H. Oshei, 31 B. T. A. 23; Beardsley Ruml, 31 B. T. A. 534.

In the latter case, among other things, we said:

The petitioner’s counsel would have us completely ignore the iaet that a “ short ” sale was effected in 1928 of the 2,500 shares of stock in question. This he dismisses with the explanation that “ There is no magic in the word ‘ short ’ ”, which, he says, was used by the broker to “ signify that delivery of the stock was yet to be made.” Furthermore, notwithstanding his ease must rest upon the proposition that there was a closed and completed sale in 1928, he would also have us ignore the fact that there was no delivery of the stock until the following year. Neither of which may we do.

In the instant case, as I construe the transaction, there never was any delivery of the 800 shares which petitioner says he instructed his broker to sell. The contract of sale was covered by purchases in 1930 and petitioner remained possessed of the same certificates for 800 shares which he had in his deposit box at the time he gave his broker orders to sell, December 27, 1929. Under these circumstances it seems to me there is no better ground to allow petitioner’s claimed loss than there was in the Oshei and Bwnil cases, in both of which we denied the losses claimed in the taxable years which were before us.

Decision should be for the respondent.

Smith, ARUNDell, and TURNER agree with this dissent.


author: Matthews :

text:
    Ruby W. C. Jones, as Executrix of the Estate of David H. E. Jones, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 62528.
    Promulgated June 10, 1935.

      Hervry P. Mdlloy, Esq., for the petitioner.

      F. B. Thompson, Esq., for the respondent.
   OPINION.

Matthews :

The sole question before us is whether the petitioner, as executrix of the will of her husband, David PI. E. Jones, who died on December 15, 1919, was entitled to deduct in 1929 and 1930 the full amounts of attorneys’ fees paid out in those years for services in Federal income tax litigation involving income of decedent as a member of a partnership, the estate having been in process of administration and the partnership in liquidation since the decedent’s death. The petitioner had successfully defended the estate before this Board against additional taxes sought to be imposed by the respondent for the years 1917 and 1918, and had recovered by a suit in court a refund of tax for that period of 1919 before decedent’s death. The interest on the refund was returned by petitioner as income in the year it was received. Of the sums paid out by the petitioner as attorneys’ fees in the taxable years the respondent allowed one tenth as attributable to the earning of gross income in those years, but disallowed the remaining nine tenths on the theory that it was chargeable against the corpus of the estate and represented capital expenditures which were not deductible from the income of the estate.

Sections 23 (a) and 162, Revenue Act of 1928, set out in part in the margin, are controlling.

It must be determined whether the attorneys’ fees constituted “ ordinary and necessary expenses ” and also whether they were paid “ in carrying on any trade or business.”

The respondent directs our attention to the provisions of article 282 of Regulations 74, as follows:

* * * The cost of defending or perfecting title to property constitutes a part of the cost of the property and is not a deductible expense. * * * Expenses of the administration of an estate, such as court costs, attorneys’ fees, and executors’ commissions, are chargeable against the corpus of the estate and are not allowable deductions. * * *

It is contended by the respondent that the petitioner, in asserting claims which arose in the decedent’s lifetime, was merely protecting something which properly constituted part of the corpus of the estate, and it is denied that the petitioner was carrying on a business.

We are of the opinion that the position of the respondent must be sustained. In James C. Ayer et al., Trustees, 26 B. T. A. 9, a similar question was presented, the issue being the correctness of the respondent’s action in refusing to allow as a deduction from gross income the sum of $10,000 paid out during the taxable year by the decedent’s estate as legal fees in connection with a suit brought against the estate for an additional estate tax, and it was held that such deduction was properly disallowed, as being a corpus charge which was not deductible in determining the net income of the estate for the taxable year. The Board said:

* * * Ordinarily the purpose of the administration of an estate is to collect together the assets, pay the debts and claims against the estate and make distributions of remaining assets according to the terms of the will or according to the law of the jurisdiction. The respondent’s demand for the payment of an additional estate tax would come within the classification of debts and claims against the estate and any action taken by the executors toward the settlement of it either by contesting it in court or by paying it would not constitute the carrying on of business, but would be the performance of a usual and ordinary duty arising from the administration of an estate. Consequently, any legal expenses incurred in performing such a duty would be in the nature of pure administration expenses.

See Estate of B. Mahler, 32 B. T. A. 644. Cf. Refling v. Burnet, 47 Fed. (2d) 859, affirming 17 B. T. A. 327; Ames v. Commissioner, 49 Fed. (2d) 853; Monell v. Helvering, 70 Fed (2d) 631; People's Pittsburgh Trust Co. v. United States, 6 Fed. Supp. 447.

The petitioner has cited and places reliance on the case of Commissioner v. Wurts-Dundas, 54 Fed. (2d) 515 (C. C. A., 2d Cir.), which affirmed the decision of this Board reported at 17 B. T. A. 881. There the question at issue was the deductibility of attorneys’ fees paid by a guardian on behalf of its ward in a proceeding instituted in the orphans’ court by the trustee under a will to determine to whom the share of a deceased beneficiary should be paid. The guardian participated in the action and succeeded in establishing its claim that the ward was entitled to be paid the deceased beneficiary’s share. The court held that the attorneys’ fees were deductible, saying:

* * * But, where a guardian incurs reasonable and necessary expenses in securing the income to which it is entitled as guardian, it is acting wholly in its capacity as a fiduciary, and is carrying on the business of administering its ward’s estate. The income received is the income which results from the guardian's conduct of that business, whatever may be the source of the income. The expenses of the guardian are the expenses of that business. * * *

In Van Wart v. Commissioner, 69 Fed. (2d) 299, the Circuit Court of Appeals for the Fifth Circuit declined to follow the Wwr^Dvindas case and because of this conflict of decisions certiorari was granted by the Supreme Court' of the United States in the Van Wart case. In an opinion rendered on April 29, 1935, 295 U. S. 112, the Supreme Court affirmed the decision of the lower court in the Van Wart case and in effect disapproved the reasoning contained in the above quoted opinion of the circuit court in the Wurts-Dundas case.

In view of the foregoing we hold that the respondent did not err in refusing to allow as deductions from the gross income of the estate for the taxable years the full amounts paid by the petitioner as executrix in those years to attorneys for legal services rendered.

Reviewed by the Board.

Judgment 'will be entered for the respondent.

       SEC. 23. deductions PROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      (a) Mwpenses. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *.
      SEC. 162.' NET INCOME.
      The net income of the estate or trust shall he computed in the same manner and on the same basis as in the case of an individual * * *.


author: Black:

text:
    James H. Lockhart, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 69039.
    Promulgated June 10, 1935.

      J. Merrill WHght, E'sg., for the petitioner.

      Ralph E. Smith, Esq., for the respondent.
   OPINION.

Black:

In this proceeding the Commissioner has determined a deficiency of $101,255.16 against petitioner for the year 1929.

The petition assigns numerous errors, all of which have been settled by stipulation except that which relates to the deduction which petitioner is entitled to have allowed to him under the provisions of section 23 (n), Revenue Act of 1928.

The parties have submitted a stipulation of facts which reads as follows:

1. Petitioner’s taxable net income for the year 1929 (before the allowance of any deduction for contributions pursuant to Section 23 (n)' of the Revenue Act of 1928) is $911,599.10.
2. Said amount of $911,599.10 consists of ordinary income in the amount of $966,467.20 and capital net loss in the amount of $54,868.10.
3. During the year 1929 petitioner made contributions or gifts to the persons and organizations specified and desci'ibed in Section 23 (n) of the Revenue Act of 1928 in the total amount of at least $144,970.08.
4. Petitioner concedes that he is not within the exceptions to the 15% limitations set forth in Section 120 of the Revenue Act of 1928.
5. The deduction for contributions claimed in petitioner’s income tax return for the year 1929 was $131,200.84. The deduction for contributions allowed by the Commissioner in determining the deficiency was $202,162.06. The Commissioner contends that the amount of petitioner’s allowable deduction for contributions is $136,739.87, viz., 15% of $911,599.10. Petitioner contends that the entire amount of $144,970.08, viz, 15% of $966,467.20, is allowable as a deduction in computing his ordinary net income subject to normal and surtaxes.

6. The parties agree that the proceeding may be taken under submission upon the promulgation by the Supreme Court of the United States of a decision in the ease of William Albert Harbison v. Commissioner, B. T. A. Docket No. 54347; and that upon the Board’s determination of the issue above set forth its decision as to the amount of deficiency or overpayment may be entered pursuant to Rule 50 of the Board’s Rules of Practice.

From the foregoing stipulation it will be seen that petitioner is contending that the limitation oni the deductions allowed by section 28 (n), Revenue Act of 1928, should be applied by tailing 15 percent of the net income unreduced by capital net losses, whereas the Commissioner contends that the limitation should be applied by taking 15 percent of the net income after it has been reduced by capital net losses.

Petitioner’s contention finds support in Hallie D. Elkins, 24 B. T. A. 572, and Charles J. Livingood, Executor, 25 B. T. A. 585. However, both of these cases were decided prior to the decision of the Supreme Court in Helvering v. Bliss and Helvering v. Harbison, 293 U. S. 144. In these latter cases the Supreme Court decided .that if a taxpayer elects to be taxed at the 12% percent capital net gain rate under section 101 (a) of the 1928 Act, capital net gain may be included in the net income in computing the 15 percent deduction allowable for charitable contributions under section 23 (n) of the same act. The Supreme Court in the above cited cases, among other things, said:

For “net income”, the base specified in section 23 (n) upon which the 15 percent deduction of charitable contributions is to be calculated, the petitioner would substitute “ ordinary net income ” as defined in section 101. So to read the Act would violate its plain terms and run counter to the history of the legislation.
* * * The Acts provide that the taxpayer shall first deduct from gross income the total of all permissible deductions save that for contributions thus arriving at a provisional net income, and then deduct therefrom his contributions, but in no event to an amount greater than 15 percent of the provisional net income. By the last mentioned operation the final net income— the base for calculation of the tax — is ascertained. * * *
:{: * ❖ * * % *
* * * In the Act of 1928, as will be seen by reference to sections 21, 22, and 23 * * * the statutory concept of net income is preserved. * * *
*!• ^ $1* «i»
By the express words of section 23 (n) charitable contributions are to be deducted from net inome as defined in section 21; and nothing in section 101, which prescribes merely a method for segregating a portion of that net income for taxation at a special rate, in any wise alters the right of the taxpayer to taire the deduction in accordance with section 23 (n).
* * * Moreover, from 1923 to 1932 the Commissioner uniformly ruled that the deduction for charitable contributions was to be taken from net income before computation of the tax and hence in whole from ordinary net income. * * *

Although the Bliss and Harbison cases involved the question of including capital net gain in applying the statutory limitation on the deduction, the Supreme Court indicated that “ net income as computed without the benefit of this subsection ” under section 23 (n), 1928 Act, and similar provisions of other revenue acts, regardless of whether the tax is computed under the capital net gain provision or the capital net loss provision, means gross income less all permissible deductions except the one for contributions.

It seems clear that, under this opinion of the Supreme Court, capital net losses should not be excluded in computing such net income any more than should capital net gains. Furthermore, the Supreme Court stated in effect (see footnote 2 of the Supreme Court’s opinion) that the decisions of the Board in Hallie D. Elkins, supra, and Charles J. Limingood, Executor, supra, which hold that capital net losses must be excluded in computing the “ net income ” for the purpose of the 15 percent limitation on the deduction for contributions where the tax is computed under the capital net loss provision, are in accordance with the contention made by the Government in the Bliss and Harbison cases.

In said footnote the Supreme Court, in discussing the Elkins and Limingood decisions, calls attention to the fact that “ subsequently the full Board reached an opposite result in Aaron Straus, 27 B. T. A. 1116. See also Robinette v. Commissioner, 27 B. T. A. 1426.” While-in the Straus case we did not overrule the Elkins and Limmgood cases, contenting ourselves with, calling attention to the fact that they dealt with capital net losses, whereas in the Straus case we were considering capital net gains, nevertheless the Supreme Court appears to have considered that in the Straws case we in effect overruled the Elkins and Livingood cases.

In Bliss v. Commissioner, 68 Fed. (2d) 890; affirmed by the Supreme Court in Helvering v. Bliss, supra, the Commissioner was contending that the principle of strict construction should be applied on the theory that the taxpayer was claiming the benefit of something in the nature of an exemption. The court (Second Circuit) in answering that contention pointed out that, in applying the statute as contended for by the taxpayer, taxpayers in general would gain by the construction contended for where there were capital gains and would lose where there were capital losses, thus indicating that in applying the statutory limitation capital gains and capital losses must be treated in the same, manner. The court, in discussing this point and commenting upon section 101, Act 1928, said:

It is to be noted that the phrase “ ordinary net income ” occurs in both paragraph (a), which deals with the case of capital net gain, and paragraph (b), which deals with the case of capital net loss. It must have the same meaning in each. A construction favorable to the taxpayer in the former will operate to his detriment in the latter, and vice versa. Hence the canon of strict construction invoked by the commissioner on the theory that the taxpayer is claiming the benefit of an exemption seems inapplicable. We can hardly say that there is any plain advantage to be gained by taxpayers from one construction rather than the other; it depends on whether in the long run cases of capital net gain involve larger sums than cases of capital net loss. Canons of interpretation aside, it seems to us that merely as a matter of verbal construction the meaning contended for by the petitioner is the more reasonable and the more compatible with the purpose of the statute. * * *

Since the decision of the Supreme Court in the Bliss and Harbison cases, G. C. M. 14030 has been issued. See C. B. XIII, 2, p. 135, December 24, 1934. In this G. C. M. it is recommended that the Commissioner withdraw his acquiescence in Hcdlie D. Elldns, supra, and Charles J. Livingood, supra, and that nonacquiescences be announced and that it be held that the basis for the computation of the 15 percent limitation on the deduction for charitable and other contributions is gross income less all permissible deductions except contributions, regardless of whether the tax is computed under the capital net gain or capital net loss provisions of the Revenue Act of 1932 and prior revenue acts.

In view of the Supreme Court’s decision in the Bliss and Harbison cases, we think the foregoing G. C. M. correctly states the law. It now seems settled that, in computing the deductions for contributions, capital net gains and losses are not to be excluded from net income. Accordingly, we hold that the contentions of the Commissioner on this point, as set out in the stipulation, should be sustained.

Reviewed by the Board.

Decision will be entered under Rule 50,


author: Matthews:

text:
    George S. Van Schaick, as Superintendent of Insurance of the State of New York, as Liquidator of the Liberty Marine Insurance Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67263.
    Promulgated June 11, 1935.

      Morris Barasoh, Esq., for tbe petitioner.

      B. W. Wilson, Esq., for tbe respondent.
   OPINION.

Matthews:

Other questions than those raised by the pleadings suggest themselves. First, have we jurisdiction? The answer to this depends on whether the liquidation proceeding under section 63 of the Insurance Law of New York is a receivership proceeding in a state court within the meaning of section 274 (a) of the Bevenue Act of 1928. This section provides that no petition for the redeter-mination of a deficiency shall be filed with the Board after the appointment of a receiver for the taxpayer “ in a receivership proceeding before any court ” of any state.

If the Superintendent of Insurance of the State of New York is the receiver of the taxpayer in a “ receivership proceeding before a court of the State of New York ”, we have no jurisdiction, the taxpayer having been decreed insolvent and liquidation ordered in 1921, long before the taxable years here involved and the filing of the petition. In Farrell v. Stoddard, 1 Fed. (2d) 802, the court had before it the question as to the nature of the liquidation proceeding under section 63 of the Insurance Law of New York. With respect to this, the court said:

An examination of section 63 of the Insurance Law of the state of New York makes it clear that the superintendent of insurance is a public officer in the executive department of the state government, and that he still retains his character as a public officer when he acts as liquidator of insurance companies under the provisions of this statute. His power to act as custodian of th,e res comes alone from the statute. The judicial power cannot change or modify this statute, or affect his power in any respect whatever. True, the defendant must first apply to the court for an order to act as liquidator. That, however, merely means that the court must give the signal to start the machinery under which the superintendent, the agent of the executive power, acts. Thereafter the defendant, as the representative of tire executive power, pays no heed to the court or its mandates. His chart is the statute under which he acts.

The Superintendent of Insurance of New York is, therefore a statutory receiver and the liquidation proceeding is not a receivership proceeding in a state court within the meaning of section 274 (a). The Board has jurisdiction.

The question also arises as to whether an insurance company in process of liquidation, as here, is subject to the special provisions of the revenue act relating to insurance companies.

The taxpayer is an insurance company other than life or mutual. The fact that it is being liquidated by the Superintendent of Insurance of New York and has been in process of liquidation since February 1921' does not change the character of the corporation. It is, therefore, subject to the tax imposed by section 204 of the Revenue Act of 1928 on insurance companies other than life or mutual, and its net income is required to be computed under the provisions of that section, the pertinent portions of which are quoted in the margin.

The petitioner concedes that the interest received in 1928 and 1929 on the awards is subject to tax, but contends that the principal of the awards is not subject to tax, since it is neither investment income, underwriting income, nor gain on the sale or disposition of property.

It is clear that the principal of the awards was neither investment income nor gain derived from the sale of property; hence, it is not to be included in gross income unless it is underwriting income within the meaning of the statute.

Counsel for petitioner states that from the terms employed m the statute and the reference in the statute to the annual statement approved by the National Convention of Insurance Commissioners, the question whether the principal of the awards received by the taxpayer was taxable income resolves itself finally into the question whether the proceeds of the award come within the meaning of the term “ salvage ”, and reaches the conclusion that the proceeds of the awards are not salvage. He contends that the technical meaning of the term “ salvage ” as used in the law of insurance, which has application here, is the proceeds received by the insurer (1) after paying total loss or amount of valuation in a valued policy, out of the property, the subject matter of the insurance contract, or (2) after paying total or partial loss, out of the claim that passes to the insurer by virtue of the right of subrogation and not as an incident to the property in the subject matter of the insurance contract, citing Richards on Insurance, 3d ed., sec. 196; Phoenix Insurance Co. v. Erie & Western Transportation Co., 117 U. S. 312, 320; and St. Louis, Iron Mountain & Southern Railway Co. v. Commercial Union Insurance Co., 139 U. S. 223, 235. It is further contended that clearly the awards were not received out of the subject matter of the insurance contracts and that it is equally apparent that the principal of the awards was not received out of the claims that passed to the taxpayer as an insurer by virtue of the right of subrogation, since the assured had no claims agáinst the German Government by whose order the boats were sunk, for the reason that under the rules of international law a belligerent has the right to capture, confiscate, and destroy enemy property on the high seas and no right of indemnification accrues to the enemy whose property has been captured or destroyed, citing United States v. White Dental Mfg. Co., 274 U. S. 398, 402; that since the awards received from the Mixed Claims Commission were received neither out of the property which was the subject matter of the insurance contract nor by virtue of the right of subrogation, the principal of the awards does not come under the definition of the term “salvage ”, and is, therefore, not brought within the classification of underwriting income in section 204.

We agree with petitioner that the term “ salvage ” as used in section 204 has the meaning ascribed to it, but we do not agree that taxpayer did not receive the awards by virtue of its right of subrogation to the claims of the assured whose boats were sunk or captured by Germany. Cf. Marine Transport Co. v. Commissioner, 77 Fed. (2d) 177.

In the instant case the taxpayer, as a marine insurer, was called upon to pay and did pay substantial amounts on policies written by it because the property insured had been seized or destroyed by the German Government during the years 1914 to 1918, inclusive. A marine insurer is entitled to be subrogated pro tambo to the claims of the insured against a third person primarily liable for the losses and it was by virtue of its right of subrogation that the taxpayer received the awards in question. In Phoenix Insurance Co. v. Erie & Western Transportation Co., supra, one of the cases cited by petitioner, the Supreme Court said:

When goods insured are totally lost, actually or constructively, by perils insured against, the insurer, upon payment of the loss, doubtless becomes sub-rogated to all the assured’s rights of action against third persons who have caused or are responsible for the loss. No express stipulation in the policy of insurance, or abandonment by the assured, is necessary to perfect the title of the insurer. From the very nature of the contract of insurance as a contract of indemnity, the insurer, when he has paid to the assured the amount of the idemnity agreed on between them, is entitled, by way of salvage, to the benefit of anything that may be received, either from the remnants of the goods, or from damages paid by third persons for the same loss. But the insurer stands in no relation of contract or of privity with such persons. His title arises out of the contract of insurance, and is derived from the assured alone, and can only be enforced in the right of the latter. * * *

We deem it unnecessary to discuss the nature of the claims against the German Government which passed to the taxpayer, as insurer, for it is evident that the awards were paid by the German Government on account of the damages caused by the destruction or confiscation of certain vessels, and that these awards were received by the taxpayer 'because it had made payments to the owners of those vessels under contracts of insurance and had thereby succeeded to their rights.

We are of the opinion, therefore, that the principal of the awards is “ salvage ” within the meaning of that term as used in section 204 (b) (6).

In view of the fact that “ salvage ” is not included specifically as an item of underwriting income, but is to be used only in computing “ losses incurred ”, a further question arises. The taxpayer had been in process of liquidation since it was declared insolvent in 1921 and was carrying on no business; therefore, it had no premiums earned on insurance contracts during the taxable years. Section 204 (b) provides that in the case of an insurance company subject to the tax imposed by that section, gross income means the sum of (A) the combined gross amount “ earned during the taxable year from investment income and from underwriting income as provided in this subsection ”, computed on the basis of the underwriting and investment exhibit of the annual statement approved by the National Convention of Insurance Commissioners, and (B) gain, during the taxable year from the sale or other disposition of property. “ Underwriting income ” as provided in subsection (b) means “ the premiums earned on insurance contracts during the taxable year less losses incurred and expenses incurred.” This subsection also prescribes in detail the meaning of “ premiums earned on insurance contracts during the taxable year ” and “ losses incurred.” Article 992 of Regulations 74 provides:

Abt. 992. Gi’oss income of insurance companies other than life or mutual.— Gross income as defined in section 204 (b) means the gross amount of income earned during the taxable year from interest, dividends, rents, and premium income, computed on the basis of the underwriting and investment exhibit of the annual statement approved by the National Convention of Insurance Commissioners, as well as the gain derived from sale or other disposition of property. It does not include increase in liabilities during the year on account of reinsurance treaties, remittances from the home office of a foreign insurance company to the United States branch, borrowed money, gross increase due to adjustments in book value of capital assets, and premium on capital stock sold. The underwriting and investment exhibit is presumed clearly to reflect the true net income of the company, and in so far as it is not inconsistent with the provisions of the Act will be recognized and used as a basis for that purpose. All items of the exhibit, however, do not reflect an insurance company’s income as defined in the Act. By reason of the definition of investment income, miscellaneous items which are intended to reflect surplus but do not properly enter into the computation of income, such as dividends declared, home office remittances and receipts, and special deposits, are ignored. Gain or loss from agency balances and bills receivable not admitted as assets on the underwriting and investment exhibit will be ignored, excepting only such agency balances and bills receivable as have been charged off the books of the company as bad debts or, having been previously charged off, are recovered during the taxable year.

This article recognizes that not all items of investment income and underwriting income which properly appear on the underwriting and investment exhibit of the annual statement are required to be included in gross income under the provisions of section 204. This Board has also recognized that not all items constituting gross income under other sections of the statute are income of an insurance company subject to the special provisions of the statute. Massachusetts Protective Association, Inc., 18 B. T. A. 810; Farmers Life Insurance Co., 27 B. T. A. 423; National Capital Insurance Co. of the District of Columbia, 28 B. T. A. 1079. The only item of underwriting income which is required to be reported in gross income under section 204 is premium income, which is to be offset by losses incurred and expenses incurred. In the instant case the question arises as to whether the excess of the awards received by way of salvage over losses incurred becomes underwriting income in view of the fact that there were no premiums earned on insurance contracts during the taxable years. In other words, can there be any underwriting income within the meaning of the statute when there are no premiums earned on insurance contracts during the year ? “ Losses ” as defined in subsection (b) (6) are allowed as deductions from gross income, subsection (c) (4), provided they have not already been allowed in computing underwriting income, subsection (e). While we do not doubt that the excess of the salvage received over losses paid is underwriting income in so far as the insurance company is concerned and that it would appear on the underwriting exhibit of the annual statement as such, it is not “ underwriting income ” within the meaning of the statute which limits the items of gross income to the items enumerated in subsection (b) (1) and prescribes in detail in other paragraphs of subsection (b) how this income should be computed.

The Revenue Act of 1932 has cured the omission in the 1928 Act by adding to section 204 (b) (1), item (C): “All other items constituting gross income under section 22.”

The effect, therefore, of the receipt of the awards in the taxable years before us is that losses will be reduced or wholly offset but the excess, if any, of the principal of the awards received over losses should not be treated as underwriting income subject to tax.

Respondent determined that the taxpayer was liable for delinquency penalties as provided in section 291. This section provides in part:

SEO. 2SI. EAILIfflE TO PILE EETDEN.
In case o£ any failure to make and file a return required by this title, within the time prescribed by law or prescribed by the Commissioner in pursuance of law, 25 per centum of the tax shall be added to the tax, except that when a return is filed after such time and it is shown that the failure to file it was due to a reasonable cause and not due to willful neglect no such addition shall be made to the tax. * * *

We are of the opinion that the facts support the petitioner’s contention that there was no willful neglect on the part of the Superintendent of Insurance in failing to file timely tax returns for this taxpayer. But, as was held in Charles E. Pearsall & Son, 29 B. T. A. 747, the proposed penalties are avoided only when, in addition to the absence of willful neglect, the tardy filing is the result of “ reasonable cause ”, which has been defined to.be such a cause as would prompt an ordinarily intelligent and prudent business man to have so acted under similar circumstances. We have found that the delay in filing the returns in the instant case was not due to reasonable cause. The record discloses that the General Counsel of the Bureau of Internal Revenue rendered an opinion in June 1928, which is prior to the due dates of the returns for the taxable years involved herein, holding that the Superintendent of Insurance of New York was required to file tax returns for companies in process of liquidation under section 63 of the Insurance Law of New York. The Superintendent of Insurance had authority, under section 63, to employ additional help to assist in the preparation of such returns and did call in outside accountants in July 1931, which was too late to file returns within the time prescribed by law for the year 1930 and prior years. The determination of the respondent that the taxpayer is liable for delinquency penalties is, therefore, approved.

Reviewed by the Board.

Judgment will be entered under Rule 50.

       SHC. 204. INSURANCE COMPANIES OTHER THAN LIRE OR MUTUAL.
      (a) Imposition of tow. — In lieu of the tax imposed by section 13 of this title, there shall be levied, collected, and paid for each taxable year upon the net income of every insurance company (other than a life or mutual insurance company) a tax as follows:
      *******
      (b) Definition of income, etc. — In the case of an insurance company subject to the tax imposed by this section—
      (1) Gross income. — “ Gross income ” means the sum of (A) the ' combined gross amount earned during the taxable year, from investment income and from underwriting income as provided in this subsection, computed on the basis of the underwriting and investment exhibt of the annual statement approved by the National Convention of Insurance Commissioners, and (B) gain during the taxable year from the sale or other disposition of property;
      (2) Net income. — ■“ Net income ” means the gross income as defined in paragraph (1) of this subsection less the deductions allowed by subsection (c) of this section.
      (3) Investment income. — “ Investment income ” means the gross amount, of income earned during the taxable year from interest, dividends, and rents, * * *
      (4) Under writing income. — “ Underwriting income ” means the premiums earned on insurance contracts during the taxable year less losses incurred and' expenses incurred;
      (5) Premiums earned. — “ Premiums earned on insurance contracts during the taxable year ” means an amount computed as follows:
      From the amount of gross premiums written on insurance contracts during the taxable year, deduct return premiums and premiums paid for reinsurance. To the result so obtained add unearned premiums on outstanding business at the end of the preceding taxable year and deduct unearned premiums on outstanding business at the.end of the taxable year;
      (6) Losses incurred. — “ Losses incurred ” means losses incurred during the taxable year on insurance contracts, computed as follows:
      To losses paid during the taxable year, add salvage and reinsurance recoverable outstanding at the end of the preceding taxable year, and deduct salvage and reinsurance recoverable outstanding at the end of the taxable year. To the result so obtained add all unpaid losses outstanding at the end of the taxable year and deduct unpaid losses outstanding at the end of the preceding taxable year.


text:
    W. A. Forrester, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 73591.
    Promulgated June 11, 1935.

      H. V. Blcoxter, Esq., for the petitioner.

      Deem P. Kimball, Esq., for the respondent.
   OPINION.

Matthews:

This proceeding involves a deficiency in petitioner’s income tax for the calendar year 1929 in the amount of $2,546.46. At the hearing the respondent moved for an increase in the deficiency on the ground that the revenue agent had erred in the calculation of the deficiency determined. A single issue is involved, whether the first in, first out ” rule, admittedly applicable to the sale of shares held in a broker’s margin account, was correctly applied by the respondent, where petitioner’s earliest purchased shares were put into his broker’s account after various other later purchases were made through the account.

The facts and method of computation used by the respondent were stipulated and may be summarized as follows: Petitioner is an individual resident at Wilkinsburg, Pennsylvania. From April 23 to June 28, 1929, petitioner purchased through his brokers, Post & Flagg, Pittsburgh, on margin account, a total of 1,600 shares of the common stock of the Pittsburgh Screw & Bolt Corporation, which were delivered to him later in the same year. The dates of purchase, number of shares1, purchase prices, dates of delivery to petitioner, and certificate numbers were as follows:

Date delivered
July 8,1929 600 shares delivered in six 100-share lots, certificates numbered 6039 to 6044, inclusive.
July 20,1929 1,000 shares delivered in ten 100-share lots, certificates numbered 6420 to 6429, inclusive.

On July 17, 1929, petitioner purchased through the same brokers, also on margin, 3,000 shares of the same stock for a total price of $80,872.50. These shares were purchased in blocks, some at $26.50 and some at $27. In addition to these 3,000 shares in the account from the date of purchase, petitioner delivered to the same brokers, Post & Flagg, to be placed in the same margin account, 2,300 shares of common which he had previously bought. The deliveries to the brokers were at various dates from October 26 to December 27,1929, and the certificate numbers, costs, and dates of delivery to the account are given in a table below.

Of the 2,300 shares placed by petitioner in his account, 900 had been bought by him before June 1927. These were represented by certificate numbers 1573,1574, and 8170 to 8176, inclusive. Of the remaining 1,400 shares, 300 were bought by the petitioner as follows:

Certificate 6516 for 100 shares on July 23, 1929.
Certificate 7519 for 100 shares on October 3, 1929.
Certificate 04238 for 50 shares on October 4, 1929.
Certificate 04217 for 50 shares on October 4, 1929.

The remaining 1,100 shares were part of the 1,600 shares bought in 1929 and delivered to him in the same year, mentioned above.

Beginning on November 11,1929, and continuing through the year, petitioner sold 4,100 shares of the same stock from his margin account. The amounts, dates, and sale prices are set out in the following table, which shows the details of stock in petitioner’s margin account and the sales from such account:

The respondent in his final determination reckoned the first 700 shares sold as coming from what he considered to be petitioner’s' original holdings, to wit, certificates numbered 8170 to 8176, inclusive, with a total cost of $2,968. He also determined that the balance of the 4,100 shares sold, or 3,400 shares, came from the stock purchased in 1929, including that delivered to the petitioner and redelivered by him to the broker, and was sold in the order in which it had been purchased. For these 3,400 shares a cost basis of $92,-019.75 was allowed, made up as follows:

200 shares--'---$5,901.25
800 shares_ 21, 845.00
600 shares- 15, 690. 00
1,800 shares_ 48, 528. 50
Total_,_-92,019.75

On his return petitioner claimed a cost for the 4,100 shares sold of $111,293.75.

The petitioner included nothing in the capital net gain and capital net loss section of his return.

All capital stock of the Pittsburgh Screw & Bolt Corporation purchased through or delivered to the margin account was merged and blended and lost its identity, with the result that none of the stock sold from the margin account can be identified as being any particular, stock purchased through or delivered to the margin account.

At the hearing the respondent moved for an increase in the deficiency by reason of the revenue agent’s error in failing to take into account two certificates, Nos. 1573 and 1574, for 100 shares each, and with the same cost of $5.5555 a share. This was obviously an oversight and the cost of these shares should be reckoned in the recom-putation as contended by respondent.

The respondent contends simply that in the application of the first in, first out rule, as set out in article 58, Treasury Regulations 74, the stock earliest purchased by the taxpayer, regardless of the date when it was first deposited in the margin account, must be taken, in the absence of any proof of identity of particular shares, to be that first sold.

Counsel for petitioner admits that the first in, first out rule applies to stock in a broker’s margin account, citing John A. Snyder, 20 B. T. A. 778; 54 Fed. (2d) 57; Burdett Stryker, 21 B. T. A. 561; Richard B. Turner Estate, 26 B. T. A. 1204; John A. Snyder, 29 B. T. A. 39; Ralph H. Seelye, 29 B. T. A. 695; but contends that in applying the rule, the first stock sold and unidentifiable shall be taken to be the first stock placed by the taxpayer in. the particular account, not the stock which he had earliest purchased. Admitting also that this question is one of first impression, petitioner contends that his view follows logically from what we said in J. T. Hedrick, 24 B. T. A. 444.

We are unable to accept petitioner’s view. In the Hedrick case we dealt with a very different situation, the withdrawal from an account of stock by the taxpayer who did not sell it but pledged it to a bank. We said:

* * * The “ first in ” the account from which the 1923 sale was made, was the purchase of $15,000 scrip on September 29, 1922. The “ next in ” was the $11,900 scrip purchased October 27, 1922, but $15,000 scrip was taken out on November 15, 1922, and delivered to the Hanover Bank as collateral for a loan to petitioner. This $15,000 scrip, then, is the “ first out ” of the account and we see no reason why the same principles should not be followed in the case of stock delivered to the customer, as well as with respect to stock sold for the customer. After delivery of this $15,000 scrip, the $11,900 purchased on October 27 became the “ first in ” the account. * * *

The rule is simply one of common convenience to enable the respondent to fix readily taxable gains on stock sales where identification of particular shares is impossible. When a lot of stock is taken from the account, whether for sale by the taxpayer, for pledging as collateral elsewhere, or for any other reason, it is withdrawn for all purposes from the account in question, and the cost basis of the shares remaining after its withdrawal should be determined by the application of the simple rule of first in, first out. That is all that we said in the Hedrich case.

Because the first stock taken from a particular account for any purpose is to be treated as “ first out ”, the converse does not necessarily follow, namely, that the first stock placed in a particular account shall be treated as the “ first in ”, regardless of its date of purchase. The rule is intended to hit the earliest purchases of unidentifiable stock. It is unambiguous. It does not mean, of course, that the taxpayer’s next sale will be held to be a sale of all the earliest purchases he may hold, regardless of their situation, for identification of many of these earliest purchases may be possible. Separation of the taxpayer’s shares in several brokers’ accounts is in itself identification, as far as it goes. We are therefore brought back to the lot of unidentifiable shares in a particular broker’s account, and the rule is applied to the “ earliest purchases ” within this account. It must mean the stock earliest bought by the taxpayer and not the earliest bought through the particular account or earliest placed in the account, for such a construction would, as we have said, wholly defeat the object of the rule. Upon this point, therefore, we must sustain the respondent.

One final point remains for determination. In his return petitioner made no claim to have his tax computed under the capital net gain provisions of the statute, section 101 (a), Revenue Act of 1928. Under his original basis of computation, his counsel stated at the hearing that no occasion arose to make such a claim, since he considered the earliest purchase in the account to have been the 3,000 shares purchased in July 1929, but he now asks the benefit of this section should the respondent’s method be followed. It would apply, of course, only to those 900 shares which, under the stipulation of facts, were purchased by the petitioner before June 1927 and placed in the margin account in 1929. The cost of the shares sold as determined by petitioner was $119,293.75, which is the sum of the cost of the 3,000 shares purchased through the account on July 17 ($80,-872.50) and the cost of the first 1,100 of the 1,600 purchased between April 23 and June 28 and placed in the account on various dates between October 26 and November 30 ($30,421.25). This latter amount is the cost of the 1,000 shares purchased between April 23 and May 2 ($27,806.25), and of 100 of the 600 shares purchased on June 28 ($2,615). Since the petitioner treated all the shares sold as being those purchased in 1929, he had no occasion to elect whether he would claim the benefit of the capital net gain provisions of section 101 (a) of the Revenue Act of 1928. He did elect through his counsel to claim such benefit if the determination is that the shares purchased prior to June 1927 were sold. We have so determined and we hold, therefore, that the petitioner is entitled to the benefit of section 101 (a). Cf. Samuel W. Weis, 30 B. T. A. 478.

Judgment will be entered under Rule 50.


author: Artjndell:

text:
    Citizens’ Water Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 71710, 74076.
    Promulgated June 11, 1935.

      LaMonte Cowles, Esq., for the petitioner.

      G. W. BrooJcs, Esq., for the respondent.
   OPINION.

Artjndell:

The sole issue presented for our decision is whether the entire net income of petitioner is exempt from Federal income tax under the provisions of section 116 (d) of the Revenue Act of 1928, which provides as follows:

In addition to the items specified in section 22 (b), the iollowing items shall not be included in gross income and shall be exempt from taxation under this title:
***** * *
(d) Income of States, municipalities, etc. — Income derived from any public utility or the exercise of any essential governmental function and accruing to any State, Territory, or the District of Columbia, or any political subdivision of a State or Territory, or income accruing to the Government of any possession of the United States, or any political subdivision thereof.
Whenever any State, Territory, or the District of Columbia, or any political subdivision of a State or Territory, prior to September 8, 1916, entered in good faith into a contract with any person, the object and purpose of which is to acquire, construct, operate, or maintain a public utility—
(1) If by the terms of such contract, the tax imposed by this title is to be paid out of the proceeds from the operation of such public utility, prior to any division of such proceeds between the person and the State, Territory, political subdivision, or the District of Columbia, and if, but for the imposition of the tax imposed by this title, a part of such proceeds for the taxable year would accrue directly to or for the use of such State, Territory, political subdivision, or the District of Columbia, then a tax upon the net income from the operation of such public utility shall be levied, assessed, collected, and paid in the manner and at the rates prescribed in this title, but there shall be refunded to such State, Territory, political subdivision, or the District of Columbia (under rules and regulations to be prescribed by the Commissioner with the approval of the Secretary) an amount which, bears the same relation to the amount of the tax as the amount which (but for the imposition of the tax imposed by this title) would have accrued directly to or for the use of such State, Territory, political subdivision, or the District of Columbia, bears to the amount of the net income from the operation of such public utility for such taxable year.
(2) If by the terms of such contract no part of the proceeds from the operation of the public utility for the taxable year would, irrespective of the tax imposed by this title, accrue directly to or for the use of such State, Territory, political subdivision, or the District of Columbia, then the tax upon the net income of such person from the operation of such public utility shall be levied, assessed, collected, and paid in the manner and at the rates prescribed in this title.

The first contention of the petitioner is that its entire net income under the terms of the ordinance accrues to and is the property of the city of Burlington and is exempt from tax under the provisions of the first paragraph of section 116 (d), supra. With this contention we do not agree. This paragraph was intended to exempt the city from taxation upon income which it actually receives from any public utility or from the exercise of an essential governmental function. Cf. Philadelphia Rapid Transit Co. Fed. Supp. 152. During the taxable years here under consideration the city of Burlington owned one third of petitioner’s outstanding common stock and approximately one third of its preferred stock. The city also owned approximately one half of the petitioner’s outstanding first mortgage 5-percent bonds. As a stockholder it received from petitioner dividends of 6 percent on the common stock and 5 percent on the preferred stock, and as a bondholder it was entitled to receive the interest due on the bonds. These dividends and this interest represent the only part of the petitioner’s income which accrued to or was received by the city during the taxable years 1930 and 1931. It is true, as petitioner points out, that the city under the terms of the ordinance could take full possession and ownership of the water works by giving petitioner one year’s notice and paying par and accrued dividends on all outstanding stock, and thus get the benefit of accretions in the “ water fund ” arising out of the tax of 5 mills and unused earnings. But the city did not exercise this right during the taxable years here under consideration and we are not, therefore, impressed with petitioner’s argument that its net income accrued to and became the property of the city of Burlington. The petitioner is a private corporation and the city is one of its stockholders. It is too well settled to require citation that a corporation is a taxable entity separate and distinct from its stockholders and that the income of a corporation is not the income of its stockholders. The first paragraph of section 116 (d), supra, exempts from taxation income which is received by a state or political subdivision thereof from any public utility. In our opinion it grants no exemption to a public utility corporation even though a substantial portion of its unused earnings may at some future time accrue to the benefit of a political subdivision of a state.

It is unnecessary here to discuss in detail the provisions of the second paragraph of section 116 (d), supra, because under either subdivision (1) or (2) of this paragraph the entire net income of the petitioner is taxable. Under subdivision (1) the city of Burlington would be entitled to a refund if the imposition of the tax upon the net income of petitioner diminished the amount of the proceeds from the operation of the water works which would accrue directly to the city during the taxable year. The city is not a party to these proceedings and the question of how much of the tax, if any, is refundable to it need not here be determined.

In support of its position that its entire net income is exempt from taxation petitioner relies on the decision of the Circuit Court of Appeals for the First Circuit in Jamestown & Newport Ferry Co. v. Commissioner, 41 Fed. (2d) 920 (reversing 16 B. T. A. 638). That decision is not controlling here as the facts in that case differ in manv important respects from those here involved and it was decided under the provisions of section 213 (b) (7) of the 1921 Act, which differ materially from those contained in section 116 (d) of the 1928 Act. Section 213 (b) (7) provided that “no tax shall be levied under the provisions of this title upon the income derived from the operation of such public utility, so far as the payment thereof will impose a loss or burden upon such state * * * or political subdivision.” Section 116 (d) of the 1928 Act provided that “ a tax upon the net income from the operation of such public utility shall be levied, assessed, collected, and paid * * * but there shall be refunded to such State, * * * political subdivision an amount ” etc. Under the 1921 Act the public utility was exempted from the payment of that part of the tax on its net income which would impose a burden on the state or political subdivision. Under the 1928 Act the public utility paid the tax on its entire net income and the state or political subdivision was granted a refund of the amount which it lost as a result of the imposition of the tax.

It is our conclusion that section 116 (d), supra, was not intended by Congress to relieve a private public utility corporation, such as petitioner, operating a water works under contract with a municipality, from taxation on its net income. This section was in our opinion enacted to relieve states and political subdivisions thereof from the loss or burden which might result from the imposition of taxes by the Federal Government on income received by or accruing to them from any public utility or from a public utility corporation with which a contract had been negotiated prior to September 8, 1916. It grants no exemption to this petitioner.

Judgment will be entered for the respondent.