author: ARItndell :

text:
    Liberty Iron Works, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4398.
    Promulgated February 18, 1927.
    1. Value of plant and equipment acquired by petitioner, and cost thereof for purpose of computing amortization allowance, determined.
    2. Amortization allowance reduced by the amount awarded petitioner by the United States as loss in value of special facilities chargeable to canceled contract.
    3. Petitioner held, entitled to deduct from 1918 income the net loss sustained in 1919, if any, which is to be determined by a reaudit of its 1919 return.
    4. Amount of expenditures made in 1917 held not deductible from 1918 income.

      Theo. J. Roche, Esq., for the petitioner.

      A. Odder Maehay, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income and profits taxes for the calendar years 1918 and 1919, in the respective amounts of $39,196.89 and $423.45. The questions for decision are: (1) The value and cost to the petitioner of certain properties acquired in 1918 for the production of aeroplanes for the United States War Department, upon which depends the amount allowable for amortization. (2) Whether the petitioner sustained a net loss in 1919 which it may deduct from 1918 income. (3) Whether certain expenditures made in 1917 may be deducted from 1918 income.

      BINDINGS OB BACT.
    The petitioner is a California corporation, with its principal office at Sacramento, and during the year 1918 was engaged in the manufacture of aeroplanes under contracts with the United States Government.
    The basic plant and equipment used by the petitioner in the construction of aeroplanes were formerly owned' by the Globe Iron Works, which was incorporated about 1912. The Globe Iron Works issued bonds in the amount of $100,000 secured by a deed of trust upon its property, dated December 27, 1912. Between 1912 and some time in 1914 it retired $30,000 of the bonds. In 1914 it was ■ forced to close due to financial difficulties. Thereafter, some of the creditors of the company having unsecured claims against the company assigned their claims to the San Francisco Board of Trade and that organization caused certain assets of the company, not covered by the deed of trust, to be sold.
    After the Globe Iron Works had defaulted in payment of interest on its bonds, the trustee on May 10, 1915, sold the property secured by the trust deed to one J. M. Henderson, Jr., who represented the holders of the bonds outstanding in the amount of $70,000. By deed dated June 3, 1915, jointly executed by the trustee under the trust deed and the Globe Iron Works, the property of the latter was conveyed to Henderson. Although this deed was absolute in form, the title conveyed by it was in fact taken by Henderson as trustee for the bondholders who became the beneficial owners of the property.
    The bonds of the Globe Iron Works were owned by the persons and in the amounts as follows:
    Fort Sutter National Bank_$35, 000
    Mrs. Anna Cadle_ 15, 000
    San Francisco Board of Trade_ 13, 000
    United States Farm Lands Co_ 5,000
    S. H. Jones_ 2, 000
    Total_ 70, 000
    Henderson was the president of the Fort Sutter National Bank; he represented Mrs. Cadle under a power of attorney; he was a member of the San Francisco Board of Trade and its authorized representative. S. H. Jones was Henderson’s attorney.
    Between the time in 1915 when title was conveyed to Henderson and the early part of 1917, numerous unsuccessful efforts were made to dispose of the property at a price approaching the face value of the outstanding bonds. Offers were made for the purchase of the foundry which was a part of the Globe plant, but it was deemed inadvisable to sell the plant except as a whole. The real estate consisted of about four and one-half acres across the American River from Sacramento, adjacent to the main line of the Western Pacific Railroad, with which the plant was connected by a spur track about 800 feet in length. There were five large buildings on the property, three of which, namely, the pattern shop, the foundry, and the machine and forge shop, were of cement block construction with corrugated iron roofs. Other buildings and improvements included a machine shop, a warehouse, transformer house, tank house, water system, fuel oil tanks, steám plant, Avagon scale, telephone system, and a large quantity of machinery. The buildings were constructed in 1910 or 1911. When the Globe Iron Works discontinued operations it greased the machinery to protect it and placed a watchman on the premises.
    Shortly after the entrance of the United States into the World War in 1917, Henderson was approached by one John A. Jordan, an aeroplane expert, and questioned as to Avhether he would be interested in the manufacture of aeroplanes at the Globe plant if it were shown that the plant was adaptable to such use. The proposition interested Henderson and he so advised Jordan. Thereafter, a Government representative examined the Globe properties and reported favorably upon their adaptability for the manufacture of aeroplanes. While the investigation of the plant was being made, O. A. Robertson became interested in the proposition and requested of Henderson to be allowed to participate in the event the plant was found suitable. Robertson was a capitalist and president of the United States Farm Lands Co.
    About this time, June or July, 1917, Henderson interviewed the holders of the bonds of the Globe Iron Works to determine their attitude towards Jordan’s proposition. He found that none of them desired to participate, but they were willing to have Henderson and Robertson take over the property and engage in the manufacture of aeroplanes on condition that they (Henderson and Robertson) guarantee the new bonds they proposed to issue in place of the Globe Iron Works bonds.
    About July, 1917, upon invitation of an official of the War Department, Henderson and Jordan visited Washington Avith the object of securing contracts for the manufacture of aeroplanes for that Department. They did not obtain any contracts at that time, but they were assured by officials of the War Department that they would be awarded a contract for the manufacture of 800 planes.
    Under date of July 12, 1917, Henderson and Robertson, as parties of the first part, and Jordan, as party of the second part, entered into an agreement whereby the parties of the first part were to form a corporation and to convey to it the plant and equipment of the Globe Iron Works for the consideration of 80,000 shares of stock of the corporation. Bonds of the new corporation were to be issued in an amount sufficient to take up and liquidate the $70,000 indebtedness of the Globe Iron Works. The parties of the first part were to subscribe for and purchase the remainder of the preferred stock of the new corporation in the amount of $100,000, and for every share of preferred stock issued to them they were to receive as bonus stock seven-tenths of a share of common stock, and at the same time there was to be issued to Jordon three-tenths of a share of the common stock. Jordan’s stock, however, was to be placed in escrow until such time as the bonds and preferred stock were retired.
    On September 24,1917, Henderson and Robertson and three others, as directors, executed articles of incorporation of the Liberty Iron Works, the petitioner herein. The company was to. have a bond issue of $70,000 and was capitalized at $280,000, of which $180,000 was-to be preferred stock and $100,000 to.be common stock, all stock to be of the par value of $1 per share. These articles were filed with the Secretary of State of California on September 26, 1917, and on the same date a certificate of incorporation was issued. On or about the same date an application to sell its capital stock was filed by the petitioner. This application set forth in part that:
    It is proposed to buy from Henderson and Robertson tbe Globe Iron Works situated in North Sacramento, California, for $160,000, which is the reasonable and fair value of said property and its present equipment. To pay for said plant the corporation proposes to issue to the said Henderson and Robertson 80,000 shares of its preferred stock and to assume an indebtedness of $70,000 now outstanding against said plant, and held by Henderson and Robertson.
    On November 8, 1917, amended articles of incorporation were executed setting forth more fully the purposes for which the petitioner was organized, the first of which is stated to be:
    To purchase and take over from J. M. Henderson, Jr. and O. A. Robertson that certain manufacturing plant owned by them, located at North Sacramento, and commonly called “ The Globe Iron Works,” consisting of real estate, buildings and machinery for which said sellers are to receive 90,995 shares of the common stock of the Corporation, Eighty Thousand shares (80,-000) of preferred stock and bonds of the Corporation for Seventy Thousand Dollars ($70,000) out of a bond issue composed of 70 bonds of $1,000 each * * *.
    By deed dated November 9, 1917, Henderson conveyed to the petitioner the properties formerly owned by the Globe Iron Works.
    On December 21, 1917, the petitioner executed an amended and supplemental application for permission to sell its capital stock and bonds. On December 24, 1917, the State Corporation Commissioner issued a certificate reading in part as follows:
    1st. To issue 99,995 shares of its common capital stock, 80,000 shares of its preferred capital stock, and bonds of said corporation, not exceeding in their aggregate face value .$70,000, to J. M. Henderson, Jr. and O. A. Robertson, in exchange for all that certain real and personal property described in said application and in the mortgage or deed of trust, to which reference is hereinafter made, free from all liens and encumbrances, save only the lien of any taxes thereon, the payment of which is not now delinquent.
    2nd. To sell and issue to said J. M. Henderson, Jr. and O. A. Robertson, or either of them, 100,000 shares of its preferred, stock at par for cash, lawful money of the United States, and so as to net said applicant the full amount of said selling price thereof.
    Prior to that time five shares of common stock had been issued to the directors as qualifying shares. Thereafter, but prior to December 31,1917, bonds of the petitioner in the amount of $70,000, secured by a deed of trust on its property, were executed and delivered to Henderson and Robertson for delivery to the holders of the bonds of the Globe Iron Works. The 80,000 shares of preferred stock referred to in the articles of incorporation as a part of the purchase price of the property, and the remaining 99,995 shares of common stock were issued between December 24 and December 31, 1917. Of this preferred stock Henderson and Robertson each received one-half, or 40,000 shares. During 1917 Henderson and Robertson paid in to the corporation $46,000 and received that amount of the preferred stock which they had agreed to purchase, and in 1918 they paid in the balance of $54,000 in accordance with their agreement.
    After the Globe plant had been determined to be suitable for the manufacture of aeroplanes and at the time of its acquisition by the petitioner, it had a fair market value of at least $150,000, of which amount $20,000 represented the fair market value of the land.
    In September, 1917, the petitioner received an order from the War Department for the construction of 300 aeroplanes to cost $1,425,000. This order was subsequently canceled, and other orders which were completed during 1918 were received as follows:

    On October 16,1918, the petitioner was given an order for the construction of 100 aeroplanes, but on November 14, 1918, it was notified of the suspension of the order and no part of it was completed. The petitioner shortly thereafter closed its plant and did no manufacturing after the last of the year 1918. The only business it conducted in 1919 was the winding up of its affairs.
    . On April 25, 1919, the petitioner received a settlement award of $160,411.01 for the cancellation of the order it received in October, 1918, and which was suspended in November, 1918, before completion. Of the amount of the award there was paid to the petitioner during 1919 the sum of $151,775.12. Included in the award was an amount of $22,085.61 for loss in value of special facilities chargeable to the canceled contract.
    The amount paid the petitioner under the award, $151,775.12, was included in its income reported for the year 1919.
    During 1917 the petitioner expended the sum of $9,407.76, consisting of the following items:
    Labor, wages, etc. (nonproductive), fuel, light, power, etc- $4, 634.17 .
    Preliminary_ 2, 083. 04
    Stationery, postage, etc_ 802. 30
    Miscellaneous_ 1, 888. 25
    Total_ 9, 407. 76
    The petitioner had no income in 1917.
    In determining the deficiency for 1918 the Commissioner computed the amortization allowance on the basis of the property acquired in 1917 having a fair market value of $70,000. The petitioner made additions to its property in the amount of $101,859.19, which was included by the Commissioner as an amount subject to amortization. •
    The petitioner exchanged its plant in 1921 for bonds of the face value of $100,000 and on the transaction paid a commission of $5,000 of the bonds received. The bonds were actually worth only 50 cents on the dollar, making a net amount of $47,500 received by the petitioner for its property.
   OPINION.

ARItndell :

The Commissioner does not dispute that the petitioner is entitled to a deduction for the amortization of the plant and equipment acquired in 1917 for the manufacture of aeroplanes for the United States War Department. Nor is there any dispute as to the cost of subsequent additions for which the petitioner is entitled to an amortization deduction, both parties agreeing upon the amount of $101,859.19 as the cost of the additions. It is the cost to the petitionfer of the plant and equipment acquired in 1917 that is in controversy.

The Commissioner has computed the deficiency upon the basis of a value of the plant and equipment of $70,000, and a cost to the petitioner of that amount. The petitioner claims the sum of $150,000 as the cost to it of the Globe Iron Works properties, including the land, which sum was paid by stocks and bonds, and which represents the actual value of the properties at the time of acquisition.

We have found as a fact that the properties acquired by the petitioner had a value of $150,000 at the time acquired by the petitioner. This value is amply supported by testimony of men familiar with the character and condition of the land and buildings and the state of preservation of the machinery. As to the cost of the property to the petitioner, the record is clear' that the officers of the petitioner considered the Globe properties to be worth $150,000, and that they intended to pay and did pay that amount by the issuance of $70,000 in bonds and $80,000 in preferred stock. The Commissioner takes the position that the sale was directly between the equitable owners of the Globe Iron Works properties (the bondholders) and the petitioner, as Henderson and Bobertson did not have title to the properties. This is controverted by the evidence which shows that Henderson acquired the record title by deed dated June 3, 1915, which, for anything we know to the contrary, he had power to convey, and further the deed by which the petitioner acquired the property was a deed given by 'Henderson.

Our conclusion on the points we have so far considered are that the properties of the Globe Iron Works at the time of acquisition by the petitioner had a value of $150,000 and that the petitioner acquired them at that price.

Included in the amount awarded the petitioner by the United States in 1919 for cancellation of the order given in October, 1918, was an amount of $22,085.61 awarded for loss in value of special facilities chargeable to canceled contract. This amount, $22,085.61, should accordingly be subtracted from the amount which would otherwise be subject to deduction for amortization in accordance with our findings and opinion set forth above. This is in accordance with the opinions heretofore rendered in Appeals of G. M. Standifer Construction Corporation, 4 B. T. A. 525, 558, and Peninsula Shipbuilding Co., 5 B. T. A. 739.

The record does not show the changes made by the Commissioner in the items listed by the petitioner in its return for the year 1919, and the petition filed sets forth no allegations of error with respect to that year. However, as the Commissioner has determined a deficiency for 1919 and the petition specifically sets forth that the deficiency for that year is in controversy, it is within our jurisdiction to take into consideration the facts presented with respect to that deficiency. Counsel for the Commissioner agreed at the hearing that a reaudit of the petitioner’s 1919 return would be made so as to properly reflect the amount of $22,085.61 received in that year as an award for loss in value of special facilities. If a reaudit discloses a net loss for the yaar 1919, as the result of the allowance of the item of $22,085.61, the amount of the net loss determined should be allowed as a deduction from 1918 income under the provisions of section 204 of the Revenue Act of 1918.

The petitioner claims a deduction from 1918 income of the amount of $9,407.76 expended in 1917, for the reason that it had no income in the latter year against which to deduct this amount. The evidence does not show these expenditures to have been of such a nature as to permit of their deduction as expenses in any year, and on this state of the record we must affirm the action of the Commissioner in disallowing as a deduction for 1918 the amount claimed.

Judgment will be entered on 15 days’ notice, under Rule 50.


source: Caselaw Access Project

author: Arundell:

license: Public Domain

text:
    Appeal of R. W. Ramming.
    Docket No. 5983.
    Promulgated February 18, 1927.
    1. Depletion allowances corrected in accordance with admitted errors of the Commissioner.
    2. Evidence held, to establish creation of trust in mineral rights before execution of both the contract to lease and the oil and gas lease on the lands involved.
    3. Community Pbopekty. — Under statutes of Texas a wife’s interest in community income is vested during coverture, and where husband and wife reported their income for 1919 on the community property basis the Commissioner is precluded by section 1212 of the Revenue Act of 1926 from taxing the whole of such income to the husband.

      Harry G. Weeks, Esq., for the petitioner.

      Bruce A. Low, Esq., for the Commissioner.
    This is an appeal from the determination of deficiencies in income taxes for the calendar years 1919 and 1920 in the respective amounts of $6,644.73 and $17,899.64, a total of $24,544.37, of which only a part is in controversy.
    • In the answer filed by the Commissioner, he admits error in the computation of the tax in certain respects as alleged by the taxpayer and admits that adjustments should be made as follows:

      1919. (a) A reduction of income of each the taxpayer and his wife of $927.52, representing proportionate part of depletion allowable to the Five Oil Co., a partnership, in which the taxpayer and his wife owned a one-fifth interest.
    (b) A reduction of taxpayer’s income in the amount of $16,592.59 and of the income of taxpayer’s wife in the amount of $5,776.63. These reductions represent additional depletion allowances of $10,-815.96 against taxpayer’s income from oil and $11,553.26 againsl community income from oil.

      1920. A reduction of taxpayer’s income in the amount of $28,850.05, representing additional depletion allowable.
    Of the errors alleged in the pétition, there remains in issue only that of whether the taxpayer had made a valid gift of mineraJ rights in certain property prior to the execution of an oil and gas lease thereon. In an amended answer filed at the hearing the Commissioner asserts that he erred in attributing any income to the wife of the taxpayer and that, under the community property laws of Texas, the entire income is taxable to the husband.
    FINDINGS OF FACT.
    The taxpayer is an individual residing at Fort Worth, Tex. On December 8, 1919, he and his wife entered into a separation settlement and on January 8, 1920, they were divorced. They had at that time one child, Helen Virginia Bamming, a minor. Upon their separation the taxpayer and his wife created a trust fund, consisting of an interest in an oil and gas lease and Liberty bonds, for the benefit of their minor child. Shortly after the creation of this trust the property covered by the lease was drilled and salt water was struck, which rendered the well and the lease worthless.
    Desiring to make further provision for his minor daughter, the taxpayer, by an instrument dated April 2, 1920, placed in trust for the daughter a seven-sixteenths interest in the oil and gas and other minerals in a 49-acre tract of land described by metes and bounds in the trust instrument. This trust, by its terms, was to remain in effect until the beneficiary reached the age of twenty-four years, she being at the time of its creation about four years old. The trustees were empowered to lease or sell the corpus of the trust in their discretion, to collect the rents and revenues, and to reinvest the proceeds, all for the benefit of the beneficiary. The only provision for reversion of the property to the taxpayer is in the event of the death of the beneficiary before reaching the age of twenty-four years. J. A. Staley, grandfather of the beneficiary, and C. C. Cabiness, vice president of a Wichita Falls, Tex., bank, were named as trustees.
    The trust agreement was signed by the taxpayer and by the trustees therein named. The date of the signatures is given in the instrument as April 2, 1920. All three of the signers acknowledged their signatures before a notary public on April 8, 1920.
    By a contract dated April 2, 1920, the taxpayer acting for himself, and J. A. Staley and C. C. Cabiness, designating themselves as trustees for Helen Virginia Eamming, agreed to execute an oil and gas lease to the 49 acres above mentioned in favor of several individuals named in the contract. The expressed consideration for the lease was $100,000, payable $20,000 upon the approval of abstract of-title and the balance in eight notes for $10,000 each, four payable to the taxpayer and four payable to the trustees. Two of these notes, one to the taxpayer and one to the trustees, were payable each year. It was provided that the contract, the initial payment of $20,000, and the lease should be placed in escrow pending submission and acceptance of abstract of title to be obtained by the lessors. The signatures of the parties to this contract are stated therein as having been affixed on April 2, 1920.
    On the same date as the previous instruments, April 2, 1920, an oil and gas lease to the 49 acres was executed by the taxpayer and by J. A. Staley and C. C. Cabiness, trustees for Helen Virginia Ramming, as lessors. The taxpayer and Stale3r and Cabiness acknowledged their signatures to this lease and the capacity in which they acted before a notary public on April 9, 1920. The lease was filed for recording with the clerk of the county court of Wichita County, Texas, on April 21, 1920, at 8:26 a. m.
    The trust agreement was executed prior to the execution of both the contract to lease and the lease of the property.
    On April 10, 1920, the taxpayer deposited to his credit at a bank in Wichita Falls the cash payment in the amount of $20,000 received under the oil and gas lease and at the same time gave his note for $10,000 to the trustees. He has also borrowed on his note $14,000 from the first trust fund created for his daughter. The notes bear 6 per cent interest. They have been renewed and are due in 1928. The taxpayer has paid, in cash, the interest as it came due on the notes and has paid $4,000 of the principal.
    A portion of the income and property involved in this appeal are community income and property of the taxpayer and his wife. The-taxpayer has made an agreement to assume liability for his wife’s share of the community income for the calendar year 1919.
   OPINION.

Arundell:

In determining the deficiency for 1920 the Commissioner included in the taxpayer’s income the sum of $10,000 which, it is contended by the taxpayer, was received by the trustees of the trust created for his minor daughter. This sum is one-half of the cash payment made for an oil and gas lease on a tract of land owned by the taxpayer. There appears to be no question of the validity of the trust. The dispute arises as to whether the trust or the contract to lease the land are prior in point of time. The Commissioner contends that the agreement to lease the land was executed prior to the time of the execution of the trust agreement, and that consequently the cash payment of $20,000 was all income to the taxpayer.

Both instruments by their terms purport to have been executed on the same date, April 2, 1920. The acknowledgments of the signers of the trust agreement were taken by a notary on April 8, 1920. In the copy of the agreement to lease which is in evidence the spaces designated for the acknowledgments of the signatures of the parties thereto are blank.

The only witness in the case was the taxpayer, who, while being somewhat uncertain as to the exact date of the execution of the trust agreement, was positive that the agreement was executed prior to the time both the contract to lease and the lease were executed, and this evidence finds support in the recitals contained in the instruments themselves. In both the contract foe the lease and in the lease Staley and Cabiness are referred to and sign their names as “ Trustees for Helen Virginia Bamming,” indicating that not only had the trust arrangement been made but that the trustees had accepted the trust prior to the execution of the contract and lease.

There is also in favor of the taxpayer’s claim the presumption that the several instruments were executed in logical order. Jones on Evidence, 1924 ed., states,'on p. 53, that—

When different deeds and leases are made bearing date on the same day and the order of the execution does not appear, it will be presumed that they were made in the proper order and to carry out the obvious intent of the parties.

The case of Fowler v. Merrill, 11 How. 375, involved the question of the date of execution of a mortgage. It was there held (p. 393):

But it must be presumed to have been executed at its date till the contrary is shown * * *.

In People v. Campbell, 160 Mich. 108; 125 N. W. 42, 45, the rule stated in 16 Cyc., p. 1072, is quoted as follows:

Facts which usually and regularly coexist in business affairs are assumed in the absence of evidence to the contrary to coexist in any particular case. Thus it is assumed * * * that the date on a written instrument is the day of its execution.

The fact that the trust deed was not acknowledged until April 8, 1920, is of little significance in determining the time of its execution and certainly does not operate against its complete effectiveness from the date of execution.

In the case of McCracken v. Sullivan, (Tex. Civ. App.) 221 S. W. 336, it is held that—

In case of a deed by a party competent to execute it, neither the acknowledgment nor record is necessary to make it a valid and binding obligation * * *.

In McLane v. Canales, (Tex. Civ. App.) 25 S. W. 29, it is said—

A deed without witnesses or acknowledgment is sufficient to convey land, those formalities being requisite only with respect to registration and notice.

This decision is cited with approval in Canon v. Scott, 230 S. W. 1042, 1046, and in Eadie v. Chambers, 172 Fed. 73, 76.

Finding as we do that the trust agreement was executed prior to the contract to lease and the lease, it follows that of the amount of $20,000 paid under the contract only one-half was income to the petitioner and the Commissioner erred in including the entire amount in petitioner’s income.

By amending his answer at the hearing of this appeal the Commissioner asserted that he erred in determining that any portion of petitioner’s income for 1919 and 1920 should be credited to the wife of the petitioner, thus raising the question of whether a husband and wife domiciled in Texas may report income on a community property basis. The evidence shows that the petitioner and his wife entered into a separation settlement on December 8, 1919. Whether the circumstances surrounding this settlement were such as to render it enforceable and such as to dissolve the community at that date does not appear from the record. It does appear, however, that the Commissioner accepted the settlement as effecting a dissolution of the community at that time, as in determining the deficiency here involved he has attributed no part of the taxpayer’s income for any period subsequent to that date to the wife. In the absence of evidence to the contrary, we must accept the Commissioner’s finding as to the validity of the separation settlement for the purposes of this case. It thus follows that the Commissioner’s claim of error in distributing 1920 income on a community basis is without foundation in fact, as the community had terminated prior to 1920. As to the year 1919, the income of the petitioner and his wife from community property was divided on the community basis, and the Commissioner by his amended answer has placed the question of the propriety of such division before us for decision. The only provision in any of the Federal revenue acts which relates specifically to community property is section 1212 of the Bevenue Act of 1926 which provides that:

Seo. 1212. Income for any period before January 1, 1925, of a marital community in the income of which the wife has a vested interest as distinguished from an expectancy, shall be held to be correctly returned if returned by the spouse to whom the income belonged under the State law applicable to such marital community for such period. Any spouse who elected so to return such income shall not be entitled to any credit or- refund on the ground that such income should have been returned by the other spouse.

As the concessions made by the Commissioner appear to wipe out the deficiency asserted against the petitioner for the year 1919, we have only to determine whether the community income which has heretofore been reported by the husband and wife, each returning one-half thereof, was properly returned, or whether the husband should have returned the full amount as his income. In view of the provisions of section 1212, this question is to be decided by a determination of the nature of the interest of the wife in the income of a marital community under the laws of Texas.

The statutes of Texas (article 4622, Vernon’s Complete Texas Statutes, 1920) provide with respect to community property, as far as is here material, that:

All property acquired by either the husband or wife during marriage, except that which is the separate property of either, shall be deemed the common property of the husband and wife, and during coverture may be disposed of by the husband only * * *.

The early case of Wright v. Hays, 10 Tex. 130, says, on the subject of the rights of husband and wife as to community property, that:

Their rights of property in the effects of the community are perfectly equal to each other. The difference is this, that, during coverture, her rights are passive; his are active.
* * * * * * *
Her right in that property is equal to that of the husband.

The case of Edwards v. Brown, 68 Tex. 329; 4 S. W. 380, holds:

It is settled law in this state that the interests of the husband and wife in the community property are equal, whether , the deed be taken in the name of either, or the names of both (Veramendi v. Hutchins, 48 Tex. 531; Cooke v. Bremond, 27 Tex. 460; Mitchell v. Marr, 26 Tex. 330; Higgins v. Johnson, 20 Tex. 389;) and there are decisions of our courts in which the title of the wife or of her heirs in the common estate, held in the name of the husband, is denominated a legal title, (Johnson v. Harrison, 48 Tex. 268; Garner v. Thompson, 1 Tex. Law Rev. 286.) But, as we take it, by this must be meant the wife or her heirs have beneficial title in fee-simple, which, save as to the husband’s power of management and disposition during her life, and power to sell for the payment of community debts after her death, is in no degree subordinate or inferior to his right. The legal title is in him or the heir of him who is the grantee in the face of the conveyance, although another, such, for example, as a wife or a partner, may have an equal interest in the property conveyed.

The case of Kircher v. Murray, 54 Fed. 617, involved the question of the right of a widow to recover a share in her deceased husband’s estate consisting of bounty lands granted him by the State of Texas. It is there held, at p. 626, that:

The plaintiff acquired a real, beneficial interest in and to one-half, of the land in controversy by virtue of her community rights; but the interest and title thus acquired were equitable.

The case of Merrell v. Moore, 47 Tex. Civ. App. 200; 104 S. W. 514, was one in which the former wife of the decedent Merrell was seeking to recover as her share of the community property one-half of the estate of the decedent. In the decision it is said, in part, that:

If she [the wife] had not forfeited her share of the community property, she was the absolute owner of one-half of it, and, in the absence of community debts to be paid, she would be entitled to a division and the possession of the same.

Cullers v. James, 66 Tex. 494; 1 S. W. 314, holds that:

.She [the wife] has equally with her husband an interest in the community property * * *.

In Patty v. Middleton, 82 Tex. 586; 17 S. W. 909, 911, it is said:

It cannot be denied that the beneficial interest of husband and wife in their community property is equal, and so without regard to the fact that it may have been conveyed in terms to one only * * *.

The cases of Edwards v. Brown, Kircher v. Murray, and Merrell v. Moore, supra, are construed in Bek v. Miller, (App. D. C.) 8 Fed. (2d) 797, 799, to hold that in Texas the wife has “ a present vested one-half interest in the community property.” In view of these decisions there would seem to be little room for doubt that in a marital community in Texas the wife has a vested interest in the community income. So that, if, as appears to be the case here, the taxpayer and his wife reported their income for 1919 on a community property basis, the Commissioner is now precluded by section 1212 of the Revenue Act of 1926 from taxing the whole of the income to the taxpayer.

Judgment will he entered on 15 days’ notice, under Rule 50.


author: ARUndell:

text:
    G. D. Rigsby, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5599.
    Promulgated February 18, 1927.
    1. A corporation in which the taxpayer was a stockholder was dissolved and the assets transferred to a partnership composed of the former stockholders. Held, that the taxpayer realized taxable gain to the extent the value of the property received in liquidation exceeded the cost of the stock.
    2. Income to which the corporation was entitled but which it never received, it being appropriated by the stockholders, may not be included in the assets of the corporation at the time of its dissolution.
    3. Under the community property laws of Texas the wife has a vested interest in community property and under section 1212 ' oí the Revenue Act of 1926 such income was properly returned for 1920 when divided between husband and wife.

      Hmry G. Weeks, Esq., for the petitioner.

      Bruce A. Low, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income tax for the calendar years 1919 and 1920 in the respective amounts of $3,262.34 and $44.44, a total of $3,306.78. The petition alleges that the Commissioner, in determining the deficiency for 1919, erred in including in income a liquidating dividend, and in the computation of the amount of the dividend if any part of it should be included in income. The error alleged for 1920 is the failure of the Commissioner to credit the overassessment which would result from the disallowance of the deficiency determined for 1919.
    The Commissioner, in an amended answer filed at the hearing, asserts that the taxpayer is not entitled to report income for 1920 on a community property basis.
    BINDINGS OB BACT.
    The taxpayer is an individual residing at Wichita Falls, Tex.
    In 1918 he was a stockholder in the Hunt-Rigsby Co., a Texas corporation, engaged in the cotton and grain business at Burkburnett, Tex. The corporation had capital stock of $6,000, divided into 60 shares, of which the taxpayer owned 29, his brother, F. E. Rigsby, owned one share, and J. C. Hunt owned the remaining 30 shares.
    The corporation owned approximately two city blocks in Burk-burnett on which it gave oil and gas leases. A producing well was brought in on these properties about September, 1918, and for a short time thereafter the royalties received under the lease were paid to the Hunt-Rigsby Co. At that time the corporation had in its employ a manager and bookkeeper, who, under his employment agreement, was to receive 10 per cent of the profits of the corporation. When the corporation began to receive oil royalties in 1918 this employee demanded a share of them as profits of the corporation. The taxpayer and Hunt, the president of the corporation, thereupon arranged to have the oil royalties run directly to them in. equal proportions, instead of to the corporation. No formal corporate action was taken to effect this change in the payment of royalties.
    On January 11, 1919,- the stockholders of the Hunt-Rigsby Co. agreed to dissolve the corporation and a certificate evidencing the dissolution agreement was filed with the Secretary of State of the State of Texas on February 14, 1919. Upon the dissolution of the corporation its assets were taken over by a partnership composed of Hunt and the taxpayer who, as partners, conducted the business during the remainder of 1919.
    Between the time of the discovery of the well on the property of the corporation and the dissolution of the corporation, royalties were received by Hunt and the taxpayer, individually, in the amount of $30,179.04. This amount was not shown on the books of the corporation and was not listed among its assets at the time of dissolution. The Commissioner, as the result of a revenue agent’s report, added the amount of $30,179.04 to the corporate assets and thereby increased the liquidating dividends of the stockholders.
    At or about the time the corporation was dissolved the taxpayer purchased his brother’s one share of stock for $2,700. After the dissolution of the corporation the manager and bookkeeper, who was pressing a claim for a share of the royalties,' was paid $1,000 to drop his claim.
    At the close of the year 1919 the taxpayer was single and reported his income as his own. On the last day of the year 1920 he was married and living Avith his wife, and for that year he and his wife each filed a return dividing equally the income from community property.
   OPINION.

ARUndell:

The first proposition of the taxpayer is that, as his ownership in the partnership was in the same proportion as his OAvnership of stock had been in the corporation, the transaction Avhereby the partnership took over the corporate assets did not result in taxable gain. This question has been before the Board in several cases and we have consistently held that in such cases the stockholder realized taxable gain to the extent that the value of the property receded in liquidation exceeded the cost of the stock. Appeal of Huffman, 1 B. T. A. 52; Appeal of Estate of Buchmiller, 1 B. T. A. 380; Appeal of Shapiro, 2 B. T. A. 620.

The taxpayer further says that Avhere the property transferred has no market value the transaction does not result in taxable income. No evidence on this point Avas offered and we must sustain the finding of the Commissioner with respect thereto.

The principal question involved in this appeal is whether the oil royalties, amounting to $30,179.04, should be included in the assets of the Hunt-Bigsby Co., a corporation, at the time of its dissolution, thus increasing the amount distributable to stockholders upon liquidation. The Commissioner added this amount to the assets of the corporation as “ oil income receivable.” The taxpayer contends that, being drawn by the stockholders ratably and with the knoAvledge and consent of all the stockholders and without intent to reimburse the corporation, the royalties constituted dividends and can not be treated as accounts receivable of the corporation.

The legal ownership and the right of disposition of the royalties was in the Hunt-Eigsby corporation. It could receive the royalties and distribute the amount thereof as dividends; or it could authorize the lessee of the property to pay the royalties directly to the stockholders; in either event there is the same result, income is received and a distribution of dividends is made. It adopted, in effect, the latter course. This method of distribution was arranged by the two men who owned all the stock except for one qualifying share held by a person who took no part in the conduct of the business. It was the custom of Hunt and Eigsby to conduct most of the corporate business in this informal manner. Official action determined upon by directors of a corporation will not be defeated merely by the absence of a formality such as the failure to record in the corporate minute book the action decided upon.

The situation in this case with respect to the action of the corporation in waiving its right to actual receipt of the royalties and directing their payment directly to its stockholders, is in all material respects on all fours with the situation in Rensselaer & S. R. Co. v. Irwin, 249 Fed. 726; 1 Am. Fed. Tax Rep. 945. It was there held thaf dividends paid by the lessee to the lessor’s stockholders as rent for the lessor’s property must be treated as income to the lessor. A number of cases on this question are collated in Appeal of American Telegraph, & Cable Co., 2 B. T. A. 991.

It necessarily follows then, that if the royalties to which the corporation was entitled were income to it and such income was distributed pro rata to the stockholders, the amount of the royalties no longer constituted assets of the corporation and did not exist as assets for distribution upon liquidation of the corporation in 1919. This seems to us to be the case here, and in our opinion the Commissioner erred in adding to the income of the taxpayer as a liquidating dividend any part of the oil royalties which prior to the dissolution of the corporation had been distributed to the stockholders.

We have heretofore held in Appeal of R. W. Ramming, 6 B. T. A. 188, that under the laws of Texas the wife has a vested interest in community property and that, under section 1212 of the Eevenue Act of 1926, such income for any period prior to January 1, 1925, was properly returned if divided between husband and wife. In support of his affirmative defense, the Commissioner has made no showing that such was not the case here. The decision in the Ramming appeal is controlling in the present appeal. *

Judgment will be entered on 15 days’ notice, under Rule 50.