author: McMahon :

text:
    T. P. Wittschen, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 39633.
    Promulgated December 31, 1931.

      T. P. Wittschen, Esq., pro se.

      J. E. Marshall, Esq., for the respondent.
   OPINION.

McMahon :

In the petition in this case it was alleged in the fifth paragraph, among other things, that the petitioner was an officer of the East Bay Municipal District and the district was a political subdivision of the State of California engaged in governmental functions. The respondent in his answer admitted all the allegations of the fifth paragraph except that the East Bay Municipal Utility District was a political subdivision of the State of California engaged in governmental functions, which was denied.

The only question raised by the pleadings therefore is whether the district was a political subdivision of the State engaged in governmental functions.

The principle that the Federal Government cannot tax the means and instrumentalities of the States was enunciated in Collector v. Day, 11 Wall. 113. The rule, however, is restricted to those cases in which the State through the instrumentalities and political subdivisions is performing a governmental function, which as applied to the judicial department or function of the States is said to be in the opinion in that case “ one of the sovereign powers vested in the states by their constitutions, which remain unaltered and unimpaired, and in respect to which the state is as independent of the general government as that government is independent of the states,” and that “ all of the thirteen states were in possession of this power, and had exercised it at the adoption of the constitution.”

In Veazie Bank v. Fenno, 8 Wall. 533, it is stated:

* * * that the reserved rights of the states, such as the right to pass laws, to give effect to laws through executive action, to administer justice through the courts, and to employ all necessary agencies for legitimate purposes of state government are not proper subjects of the taxing power of congress.

In South Carolina v. United States, 199 U. S. 437, it is stated:

* * * The exemption of the State’s property and its function from Federal taxation is implied from the dual character of our Federal system and the necessity of preserving the State in all its efficiency. In order to determine to what extent that implication will go we must turn to the condition of things at the time the Constitution was framed. What, in the light of that condition, did the framers of the convention intend should be exempt? [Italics ours.]

The expansion and enlargement of state control and enterprise has been deemed necessary by the needs of advancing civilization. State governments have taken an active part in promoting and developing their own resources, in assisting and aiding their citizens commensurate with public welfare and higher standards of living, and in creating organizations to carry out such purposes. However, as the operations of the States progressed and enlarged and the right to tax its citizens for the carrying on of such activities was upheld by the courts as being levied for a public purpose, this did not effect .a corresponding decrease of or limitation upon the taxing power of the Federal Government.

The court, in South Carolina v. United States, supra, it seems to us, fully recognized the imperilment of the powers of taxation of the Federal Government by such activities of the States, if such be deemed governmental, in the following language:

* * * Each State is subject only to the limitations prescribed by the Constitution and within its own territory is otherwise supreme. Its internal affairs are matters of its own discretion * * *. Mingling the thought of profit with the necessity of regulation may induce the State to take possession, in like manner, of tobacco, oleomargarine, and all other objects of internal revenue tax. If one State finds it thus profitable other States may follow, and the whole body of internal revenue tax be thus stricken down.
More than this. There is a large and growing movement in the country in favor of the acquisition and management by the public of what are termed public utilities, including not merely therein the supply of gas and water, but also the entire railroad system. * * *
We may go even a step further. There are some insisting that the State shall become the owner of all property and the manager of all business. Of course, this is an extreme view, but its advocates are earnestly contending that thereby the best interests of all citizens will be subserved. If this change should be made in any State, how much would that State contribute to the revenue of the Nation? If this extreme action is not to be counted among the probabilities, consider the result of one much less so. Suppose a State assumes under its police power the control of all those matters subject to the internal revenue tax and also engages in the business of importing all foreign goods. The same argument which would exempt the sale by a State of liquor, tobacco, etc., from a license tax would exempt the importation of merchandise by a State from import duty. * * *
Obviously, if the power of the State is carried to the extent suggested, and with it is relief from all Federal taxation, the National Government would be largely crippled in its revenue. Indeed, if all the States should concur in exercising their powers to the full extent, it would be almost impossible for the Nation to collect any revenues. In other words, in this indirect way it would be within the competency of the States to practically destroy the efficiency of the National Government. * * *
# * * • * *

It is true that some cases may hold that the purpose and intention to earn a profit is one of the distinctions between a private and public or municipal corporation. Nevertheless, when governments undertake enterprises which have been and could be carried out by private corporations, profit is an important consideration, the difference being that the profit goes to the inhabitants in increased value oí property and to the consumer in prices at cost, while in a private corporation, the profits are distributed to stockholders. No one can deny that the wealth of the state is materially increased by such projects if properly carried out.

To sustain his contention that the district was a political subdivision of the State engaged in governmental functions, the petitioner relies on the case of Fallbrook Irrigation District v. Bradley, 164 U. S. 112, and on the case of Houck v. Little River Drainage District, 239 U. S. 254. While it may be conceded that there is some language in these cases apparently sustaining his contention, yet upon a careful examination and analysis of the same we have come to the conclusion that these cases are distinguishable and not controlling in the determination of the question before us.

The language of the court in both cases quoted by the petitioner in his brief as sustaining his contention was used in the discussion and determination of the same question, i. e., whether the purpose of the tax assessed and collected was a public purpose. In the former case the action was commenced to restrain the collector of the irrigation district from giving a deed to the district of the premises belonging to the plaintiff based on the sale of her land made by the collector for the nonpayment of a certain assessment upon such lands under the act incorporating the irrigation district, to set aside such assessment, and for other relief. In the latter case the action was commenced by owners of several thousands of acres embraced within the drainage district to restrain the collection of a tax of 25 cents per acre levied generally upon the lands within the district for the purpose of paying its preliminary expenses. It is stated in volume 1 of Cooley on Taxation (4th ed.) § 87: “ It is the first requisite of lawful taxation that the purpose for which it is laid shall be a public purpose.”; and in volume 2 of Cooley on Taxation (4th ed.) § 639: The test of the right to tax is whether the property is devoted to a public use rather than whether it is used for governmental purposes.” The terms “ public use ” or “ public purpose,” and “ governmental use ” or “ governmental purpose,” have been used interchangeably. However, it has been held that such terms are not synonymous. State of North Dakota v. Olsen, 33 Fed. (2d) 848. When these terms are used interchangeably, the question to be determined must be borne in mind and the language limited in its application to the question involved.

Although “public use ” expands with the new needs created by the advance of civilization and although courts have recognized that the definition of “ public use ” must be such as to give it a degree of elasticity capable of meeting new conditions and improvements and the ever increasing needs of society, it does not follow that the same degree of elasticity must be given to the definition of “ governmental function.”

The case of Jones v. City of Portland, 245 U. S. 217, is, in our opinion, a good illustration of the elasticity accorded to the words “ public purpose ” or “ public use ” to validate taxes levied by a municipality. In that case the city of Portland, Me., voted to establish and maintain within its limits a permanent coal and fuel yard for the purposes of selling at cost wood, coal and fuel to its inhabitants and that the money necessary for such purposes be raised by taxation. Certain citizens and taxpayers brought suit to enjoin the establishment of the yard. The Supreme Court of the United States in its opinion quotes from the opinion of the Supreme Court of the State of Maine as follows:

Answering the objection that sustaining the act in question opens the floor to the exercise of municipal authority to conduct other lines of business and commercial activity to the destruction of private business, the court said (111 Maine 500) :
“ But it is urged, why, if a city can establish a municipal fuel yard, can it not- enter upon any kind of commercial business, and carry on a grocery store or a meat market or a bakery. The answer has already been indicated. Such kinds of business do not measure up to either of the accepted tests. When we speak of fuel, we are dealing not with ordinary articles of merchandise for which there may he many substitutes, but with an indispensable necessity of life, and more than this, the commodities mentioned are admittedly under present economic conditions regulated by competition in the ordinary channels of private business enterprise. The principle that municipalities can neither invade private liberty nor encroach upon the field of private enterprise should be strictly maintained as it is one of the main foundations of our prosperity and success. If the case at bar clearly violated that principle, it would be our duty to pronounce the act unconstitutional, but in our opinion it does not. The element of commercial enterprise is entirely lacking. The purpose of the act is neither to embark in business for the sake of direct profits (the act provides that fuel shall be furnished at cost) nor for the sake of the indirect gains that may result to purchasers through reduction in price by governmental competition. It is simply to enable the citizens to be supplied with something which is a necessity in its absolute sense to the enjoyment of life and health, which could otherwise be obtained with great difficulty and at times perhaps not at all, and whose absence would endanger the community as a whole.”
*******
In any event we are not prepared to say that when a State authorizes a municipality to tax with a view to providing heat at cost to the inhabitants of the city, and that purpose is declared by the highest court of the State to be a public one, the property of a citizen who is taxed to effect such purpose is taken in violation of rights secured by the Constitution of the United States. [Italics ours.]

In this case, as in Fallbrook Irrigation District v. Bradley, supra, and Houck v. Little River Drainage District, supra, the Supreme Court of the United States decided that the tax in question was for a public purpose.

Whatever language may have been used by the courts in the determination of the question whether certain taxation was for a public use or purpose, we do not believe that it was intended to thereby enlarge or increase the reserved rights of the States as embraced within the three fundamental functions of government — legislative, judicial and executive, so that the taxing power of the Federal Government would be seriously hampered and restricted.

The implied prohibition against Federal taxation herein involved, in our opinion, covers only such political subdivisions as are created and organized primarily for governmental purpose. Not being organized primarily for governmental functions, such subdivisions, districts, or organizations for the purpose of Federal taxation must be treated as private corporations. The Supreme Court in Flint v. Stone Tracy Co., 220 U. S. 107, stated:

The cases unite in exemption from Federal taxation the means and instru-mentalities employed in carrying on the governmental operations of the State. The exercise of such rights as the establishment of a judiciary, the employment of officers to administer and execute the laws and similar governmental- functions cannot be taxed by the Federal Government. The Collector v. Day, 11 Wall. 113; United States v. Railroad Co., 17 Wall. 322; Amibrosini v. United States, 187 U. S. 1.
* ***** *
It is no part of the essential governmental functions of a State to provide means of transportation, supply artificial light, water and the like. These objects are often accomplished through the medium of private corporations, and, though the public may derive a benefit from such operations, the companies carrying on such enterprises are, nevertheless, private companies, whose business is prosecuted for private emolument and advantage. For the purpose of taxation they stand upon the same footing as other private corporations upon which specific franchises have been conferred.
The true distinction is between the attempted taxation of those operations of the States essential to the execution of its governmental functions, and which the State can only do itself, and those activities which are of a private character. The former, the United States may not interfere with by taxing the agencies of the States in carrying out its purposes; the latter, although regulated by the State, and exercising delegated authority, such as the right of eminent domain, are not removed from the field of legitimate Federal taxation.
* # * * * * *

While tbe courts of California have used rather broad language in cases involving the question whether taxation by irrigation districts, drainage districts and the like was for a public purpose in order to approve and validate the creation of and provide maintenance for such organizations, the courts have been more circumspect in defining the legal status of such organizations,

In tbe case of Bettencourt v. Industrial Accident Commission, 175 Cal. 559; 166 Pac. 323, 324, in determining tbe status of a reclamation district of California and whether it came within the definition of “ employer ” as used in the Workmen’s Compensation Act of California, to wit: “ The state, and each county, city and county, city, school district, and all public corporations therein, and any person, firm, voluntary association, and private corporation (including any public service corporation) who has any person in service,” the court in its opinion states as follows:

It is manifest that this definition was advisedly and carefully framed, as much to include those who were meant to be included as to exclude those who were meant to be excluded. The state itself and all its political subdivisions existing at the time the act was adopted are all named. Districts, as such, were necessarily in the minds of the framers of this definition, since a district of a particular hind, namely, a school district, is expressly designated. And to the end that if there should be created by law any new forms, classes, or kinds of “ public corporations,” there might be no doubt but that they were included, as well as all public corporations which were specifically enumerated, it was in terms added and decreed that all such after-created public corporations came within the definition of employer. But a “ public corporation ” is a descriptive term not only of well-recognized meaning, but of absolute legal definition. Section 284 of the Civil Code defines public corporations as follows:
“ Public corporations are formed or organized for the government of a portion of the state.”
Public corporations, therefore, under the controlling definition of the law are those corporations formed for political and governmental purposes and vested with political and governmental powers. There is another class, for convenience of description, called quasi public corporations, and such of those as are engaged in public service are included in this definition to remove the possibility of misunderstanding and contention. But reclamation districts organized as was this petitioner possess no political nor governmental powers, are not organized for political or governmental purposes, and are- therefore not public corporations at all. Indeed, they are not in strictness corporations, public or private, blit governmental mandatories or agents vested with limited powers to accomplish limited and specific work. Such has been the frequent and unvarying decision of the courts of this state. [Citing numerous cases]. In People v. Reclamation Dist. No. 551, supra, it is said:
*******
“ Certainly, these districts were not municipal corporations, as that term is used in the Constitution, and I think it equally clear that they do not belong to any class of corporations defined in the Civil Code. Section 284 reads: ' Corporations are either public or private. Public corporations are formed or organized for the government of a portion of the state. All other corporations are private.’ ”
*******
Of significance also is the fact that in this state are many districts similar in character to reclamation districts, levee districts, swamp land districts, drainage districts, protection districts no one of which class is enumerated, while school districts are specifically named. Of all such districts and their characters the Legislature, as it created many and provided for the creation of all, was fully advised, and it appears too plain for discussion that the omission to include these districts was with the design of excluding them. * * *

However, with due respect to such court, it is rather difficult to reconcile all the cases involving the determination of the. status of irrigation and similar districts. In the case of Orosi Public Utility District v. McCuaig, 196 Cal. 43; 235 Pac. 1004 (a proceeding to determine the validity of bonds of the district) the court states as follows:

* * * When related to the class of districts, the cases cited are clearly in point. The improvements contemplated by the acts under which they were formed cannot be considered “ municipal purposes.” In re Madera Irrigation Dist., 92 Cal. 344, 28 P. 675, 14 O. R. A. 755, 27 Am. St. Rep. 106 (on rehearing). One of the distinguishing features of such districts is that they are created for the purpose, generally, of some special local improvement, and may exercise only such powers as may be conferred by the Legislature in the line of the object of their creation. They are merely special state organisations for state purposes, created to perform certain work which the policy of the state requires or permits to he done, and to which the state has given a certain degree of discretion in making the improvements contemplated. The other distinguishing feature is that the exactions which such districts may enforce in order to carry out their purposes are in the nature of assessment or taxes for local benefits, to be spread on the property in the districts in proportion to the peculiar advantage accruing to each parcel from the improvement. * * *
Districts of the nature just discussed are not municipal corporations in the contemplation of the Constitution. * * * [Italics ours.]

The Orosi Public Utility District was organized under the Public Utility District Act (St. 1921, p. 906), which applies only to unincorporated territory. The Municipal Utility District Act (St. 1921, p. 245), under which the East Bay Municipal Utility District was organized, is similar in nature to the Public Utility District Act except that it applies to incorporated territory alone or in combination with unincorporated territory. Morrison v. Smith Bros. (Cal.), 293 Pac. 53.

In Morrison v. Smith Bros., supra, actions were commenced to recover damages for alleged wrongful death of certain named persons. The defendant district was organized under the Municipal Utility District Act, as was the District which petitioner served as attorney. The court discusses at length and quotes the above language in the case of Orosi Public Utility District, supra. However, it concludes as follows:

* * * No good reason occurs to us why those districts should be cloaked with the immunity that respondent claims when acting in a purely proprietary capacity; and, in fact, many reasons exist why the same rule that applies to municipal corporations proper should apply to respondent. It would certainly be an anomalous situation if a municipality engaged in a proprietary function, such as running, operating or constructing waterworks, would be liable for the torts of its agents, but if that same municipality should join with other municipalities and organize a municipal utility district it would thereby immunize itself from all such liability. Such a rule does not appeal to our sense of justice nor to our reason. * * *

The conclusion of the court in the latter case involving a district organized under the same act as the East Bay Municipal Irrigation Company is very pertinent in this proceeding and in particular the observation of the court that it would certainly be an anomalous situation if a municipality engaged in the proprietary function, such as running, operating or constructing waterworks, would be liable for the torts of its agents, but if that same municipality should join with other municipalities and organize a municipal utility district it would thereby immunize itself from all such liability. In this case the court held that a municipal utility district is engaged in proprietary functions and not governmental.

Whatever disagreement and differences there may be in the classification of irrigation and similar districts, the cases are in accord in stating that such districts are organized not for governmental purposes, but for the benefit of certain portions of the State and the inhabitants therein. This is apparent from the context of the organic act itself.

The exemption from Federal taxation of the property, means and instrumentalities of the States is also implied from “the necessity of preserving the State in all its efficiency.” That the Federal taxation of the compensation of the petitioner received from the district would in any degree affect the State’s governmental efficiency or even its efficiency in developing and improving its resources to the benefit of the State and its inhabitants is so remote as to make extended discussion thereof unnecessary.

In W. J. Howard, 10 B. T. A. 62, reversed by the Circuit Court of Appeals for the Fifth Circuit, 29 Fed. (2d) 895; and affirmed by the Supreme Court in Lucas v. Howard, 280 U. S. 526, the Board said:

* * * The test to be applied is the effect of the particular tax on the functioning of the State government. It does not appear in the present case that the tax served to increase the burdens of the cities or impaired the ability of the cities of Houston, Narasota, and Victoria to procure the service of private individuals for the employment upon which petitioner was engaged or the ability of petitioner to discharge his obligations to them.

As the district in the instant proceeding was not organized as a subdivision of the State primarily for governmental purposes, we hold that it is not engaged in performing essential governmental functions; that the services of petitioner as attorney for such district were not rendered in connection with the exercise of an essential governmental function; and that therefore compensation received by the petitioner from sucb district in payment of bis services is not exempt from Federal taxation within the implied prohibition against Federal taxation of compensation of State officers or employees engaged in essential governmental functions or within the provisions of section 1211 of the Revenue Act of 1926. See Mary W. Niles, Executrix, 20 B. T. A. 949.

Reviewed by the Board.

Judgment will be entered for the respondent.

Goodrich concurs in the result.


source: Caselaw Access Project

author: Love:

license: Public Domain

text:
    Galveston Wharf Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 34602.
    Promulgated December 31, 1931.

      Fred R. Angevine, Esq., for the petitioner.

      P. M. Olarh, Esq., for the respondent.
   OPINION.

Love:

This proceeding is for the redetermination of deficiencies in income taxes for the calendar years 1923, 1924 and 1925 in the amounts of $10,689.08, $7,940.81 and $13,081.19, respectively. Petitioner is a corporation, organized under the laws of Texas, with its principal office at Galveston.

A petition and three amended petitions have been filed, in which several errors were assigned, all of which have been withdrawn except the one relating to the amount of depreciation that should be considered in arriving at the amounts of certain losses due to the abandonment of certain properties during the years in question.

The parties have stipulated that" during the years in question petitioner either retired or replaced the properties listed below, and that the date of acquisition, cost, rate of depreciation and the depreciation sustained on such properties (for two different periods of time) were as follows:

The respondent contends that, in determining the amount of the loss due to the abandonment of the properties included in the preceding schedules, all the depreciation sustained since the acquisition of such properties, as shown in the next to the last column above, should be deducted from the basis of such properties. Petitioner, on the other hand, contends that only the depreciation sustained and allowed subsequent to the year 1919, as shown in the last column above, should be deducted.

At the hearing the parties orally stipulated as follows:

Mr. Angevine: * * * I will state to your Honor that last year before the Board we tried another case of the Galveston Wharf Company, where a similar issue was presented, and that was Docket 39511.
I think it is agreeable that we enter into a stipulation with regard to the' rate of depreciation and the amount written off, but the question of how much these particular properties sustained depreciation down to the date they were written off depends on the outcome of the other case, the findings of the Board in the 1920 and 1921 ease.
The Member: That has not been decided yet?
Mr. Angevine: That has not been decided yet, and if it is agreeable to Mr. Clark, I would like to have it stipulated in this case, Docket 34602, that the evidence before the Board on the question of depreciation and the question as to the value of the assets, the depreciable assets on the books as of the beginning of this taxable year, that that be determined by the evidence in the other case.
I do not want to make this case dependent upon the other ease, but I would like to stipulate that we consider the evidence in the other case before the Board in this ease.
The Member: Just in lieu of introducing it now?
Mr. Angevine : Yes, sir.
Mr. Clark : That is quite agreeable. What I did want to particularly avoid is stipulating the decision in the prior case shall be controlling in this case, but, I would like for the Board to have an open mind on this case. However, I am agreeable to have the evidence stipulated in this ease so far as pertinent.
The Member: It will be so considered.

Our report of the proceeding referred to in the above stipulation may be found at 22 B. T. A. 1312. We there found as a fact that any depreciation which may have been sustained prior to the year 1920 was more than offset by improvements, replacements and repairs, the cost of which was charged to expense, and we perceive no grounds for changing our conclusions as therein expressed. Petitioner has not been allowed any depreciation on the assets in question prior to the year 1920. We, therefore, hold that the basis for determining the loss- at issue in the instant case should not be reduced by any adjustment for depreciation prior to the year 1920.

Judgment will he entered u/nder Rule 50.


author: McMahon:

text:
    George H. Gabel, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 38022.
    Promulgated December 31, 1931.

      George E. Gabel, Esq., pro se.

      J. M. Leinenkugel, Esq., for the respondent.
   OPINION.

McMahon:

Respondent contends that the petitioner is not an officer or employee of a political subdivision, but is an independent contractor.

Whether or not the village of Whitefish Bay, School District No. 4 of the village of Shorewood, and School District No. 1 of the village of Whitefish Bay are political subdivisions of the State of Wisconsin is not questioned and need not be determined in this proceeding.

In studying the facts before us, we are impressed with the similarity of the relationship existing between the petitioner and the village of Whitefish Bay, the school district of Whitefish Bay, and the school district of Shorewood, respectively, and that existing between an attorney and his client.

In respect to compensation, pursuant to agreement the petitioner was paid by the village a certain amount as retainer to cover certain general services, and in addition a per diem rate to cover other services as requested by the board from time to time. He was paid a per diem rate only by the school districts, the per diem rate being considered more just and equitable to the petitioner and the school districts because the amount of legal services was uncertain and varied greatly from year to year. The general services covered by the retainer in the case of the village consisted of attendance at meetings, advice and counsel, and drawing of routine resolutions, ordinances, contracts, etc.; and the per diem rate covered legal services not covered by the retainer and such as would be requested from time to time. We see no difference in this arrangement from that usually and customarily entered into between an attorney and client of this character.

His appointment was of no definite term and could be terminated at the pleasure of the respective boards. Section 17.13 (1), Wisconsin Statutes, 1929.

Petitioner’s time was his own and neither the village board nor either of the school boards imposed any restrictions upon petitioner as to the number of his clients, municipal, political or otherwise.

In this regard, the language of the court in Blair v. Byers, 35 Fed. (2d) 326, is significant and enlightening in determining the instant proceeding:

We think this is sufficient to establish that he was free to engage, and was engaged, in other business for other clients; that he was a free professional agent as to the nature of his services and the advice that he would give. Nowhere in the record is it revealed to what extent, if at all, his services were subject to the control of the board of trustees. Furthermore, we are of opinion that an attorney who is engaged in this manner, who has not contracted to give to such a client his entire and exclusive services, does not thereby become an officer or employee in the sense of this statute. * * * [Italics supplied.]

In the case of United States v. Butler, 49 Fed. (2d) 52, in distinguishing Metcalf & Eddy v. Mitchell, 269 U. S. 514, the opinion states:

Except that appellee was required to use his judgment and skill as a lawyer in serving the Board there is no similarity between his employment and that of Metcalf and Eddy. Unlike Metcalf and Eddy he was continuously employed by one political subdivision to render any and all legal services that might be required. The Board óf Commissioners had first call upon his services and the right to demand and use all his vime. He was not at liberty to take other employment if his services were required by the Board. * * * [Italics supplied.]

In the instant proceeding, petitioner performed services not for one political subdivision, but for three, and during all the time was free to engage in the general practice of his profession and did so. George W. Fuller, 9 B. T. A. 708.

The use of petitioner’s office by members of the various boards as a place for conferences, negotiations, consultations and discussions was in accordance with the customary use an attorney’s office is put to by his clients.

The members of the various boards, no doubt, demanded fuller and more detailed explanations and discussions of the. matters handled by petitioner than the ordinary client, but, in our opinion, this unusual interest and active participation on the part of the members was not such control as limited and restricted the use by petitioner of his legal judgment and discretion. It was the usual and customary interest in and direction and control of affairs by persons in public office who are responsible for the results, the results often determining their continuance in office. The petitioner in testifying stated the difference, as ascertained from his own experience, in the control exercised by the boards and the usual client was that a body of men occupying public office seemjfco have an idea that their responsibility is much greater than when they are conducting their own affairs. The control exercised by them over the petitioner was not a directing, restraining, or regulating control.

We quote from David Burnet v. J. Jones, 50 Fed. (2d) 14, reversing S. J. Jones, 11 B. T. A. 1131, cited by petitioner as follows:

* * * The lawyer who is retained in the affairs of his client is not properly designated an employee. He is an officer of the court. As counsellor and advisor to Ms clients and as an advocate before tbe court, whatever action he takes is upon independent judgment illuminated fry his learning, his skill, his experience and his ethics. The relationship of attorney and client is entered into and maintained with regard to these considerations and is not that of employer and employee. [Italics supplied.]

See Burnet v. McDonough, 45 Fed. (2d) 944 (reversing James B. McDonough, 16 B. T. A. 556), cited in the opinion with approval and followed.

In our opinion the above quoted language is applicable to this proceeding and supports the view that the relationship between petitioner and the village board and school districts was not that of employer and employee. See Joseph Milton Howe, 19 B. T. A. 849; Robert J. Cummins, 19 B. T. A. 498; Burnet v. McDonough, supra.

Not only were the members of the boards elected public officers to whom the public entrusted the management of their affairs (including the selection and appointment of a competent attorney), and whose return to office depended largely upon the successful conduct and result of such affairs, but during the time the petitioner acted as attorney at least one of the members was a practicing attorney and some of the members had an extensive knowledge in reference to some of the members of the Wisconsin Legislature which the petitioner did not have, and had their own ideas, as men versed in public affairs, as to how certain legislation could be passed and how it could be defeated. That the petitioner under such circumstances was influenced in his decisions and conduct of litigation and other matters is quite natural, yet such influence was not the control exercised by an employer over an employee, which is a determining factor of the existence of that relationship.

Clearly, from the foregoing discussion of the facts in the instant proceeding, petitioner does not qualify as an officer. Metcalf & Eddy v. Mitchell, supra; W. A. Franken et al., 24 B. T. A. 39; George I. Haight, 14 B. T. A. 844; affd., 52 Fed. (2d) 779; W. J. Howard, 10 B. T. A. 62; affirmed by the Supreme Court per curiam, 280 U. S. 26, in authority of Metcalf & Eddy v. Mitchell, supra.

In Metcalf & Eddy v. Mitchell, supra, the court stated:

* * * An office is a public station conferred by the appointment of government. The term embraces the idea of tenure, duration, emolument and duties fixed by law. Where an office is created, the law usually fixes its incidents, including its term, its duties and its compensation.

Furthermore, section 28 of Article VI of the Wisconsin Statutes of 1929 provides that all officers, executive and judicial, except such inferior officers as may be by law exempted, shall, before they enter upon the duties of their respective offices, take and subscribe to an oath of office. There is no evidence that the petitioner was required to or did take such an oath.

In our opinion petitioner was not an officer or employee of a political subdivision of a State, but an independent contractor, and, as such, compensation received from the village and two school districts is not exempt from Federal tax.

As respondent conceded that the amount of $8,104.50 for the year 1923 and the amount of $4,397.50 for the year 1924 were erroneously duplicated as additions to income in the recomputation of the petitioner’s tax liability, as appears in the statement attached to the deficiency letter, and as the parties stipulated to correct such error,

Judgment will be entered under Bule 50.


author: Black:

text:
    J. H. Tippett, Administrator of the Estate of Laura Tippett, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46719.
    Promulgated January 4, 1932.

      G. 0. Harris, Esq., and M. E. Sedberry, Esq., for the petitioner.

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

Black:

The issues in this proceeding will be stated and ruled upon in their order.

Issues 1 and 2 will be treated together, and are as follows:

1. That petitioner should not have been proceeded against as administrator, it being averred that prior to the years 1926 and 1927 his administrative duties had been completed, and that the income involved was properly returned by and tax paid by and on behali of petitioner and his four children as individuals and as tenants in common of the property.
2. That if a fiduciary his relation to the property was “trustee” and not “ administrator ”; that in connection with his control of the community estate he kept books showing the respective undivided interests of petitioner and his children in the- corpus and income of said estate; and that the action of petitioner in reporting one-eighth of the income as distributable and taxable to each of the four children was in effect equivalent to a distribution to each of them of her pro rata share of the corpus and income.

Petitioner further contends that if J. H. Tippett, as such fiduciary, was required to return and pay the tax on said estate, there were four trusts instead of one, and the tax should be calculated upon the interest of each of said Annie, Velma, Homer J. and June Tippett, both as to the normal tax and surtax.

Section 219 of the Bevenue Act of 1926 reads:

Sec. 219. (a) The tax imposed by Parts I and II of this title shall apply to the income of estates or of any kind of property held in trust, including—
(3) Income received by estates of deceased persons during the period of administration or settlement of the estate; and
$ ‡ & $ $ $ ‡
(b) Except as otherwise provided in subdivisions (g) and (h), the tax shall be computed upon the net income of the estate or trust, and shall be paid by the fiduciary. The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212, except that [None of the enumerated exceptions apply in the present proceeding].

In this proceeding it appears plain that the community administration has not been closed. Article 3670, Revised Civil Statutes of Texas, reads:

Art. 3670 (3601) (2228) (2173) Survtvok Shall Keep Account — The survivor shall keep a fair and full account and statement of all community debts and expenses paid by him, and of the disposition made of such community property; and, upon final partition of said estate, shall account to the legal heirs of the deceased for their interest in such estate, and the increase and profits of the same, after deducting therefrom all community debts, unavoidable losses, necessary and reasonable expenses, and a reasonable commission for the management of the same.

So far as appears from the evidence, the community property of J. H. Tippett and his wife, Laura Tippett, has been held together and managed by the petitioner as a unit just as it was before the death of Laura Tippett.* No partition or settlement of any kind up to and including the taxable years in question had been made and there is no evidence of any payments or credits made to any of the children. No guardian of their estate has ever been appointed. It is of course true that upon the death of Laura Tippett, her interest in the community real estate immediately vested in her heirs, who were the minor children, whose names have already been stated in our findings of fact. But that fact does not affect the control of the community administrator or survivor over the property. Until the community administration is closed, the income from the estate would be taxable in the hands of the administrator, the same as any other estate, under section 219, which we have quoted.

We held in the case of J. B. Brewer, Administrator, 17 B. T. A. 704, that the survivor of the community in Texas occupies a fiduciary relation thereto until there is a partition or settlement of the estate and that it is immaterial whether he is denominated administrator, executor or survivor of the community, so long as it is clear that the purpose is to tax that part of the community property that belonged to the deceased spouse and which is under his control as a fiduciary. On the authority of that case, we approve the respondent’s action in holding that the income from Laura Tippett’s half of the community estate is taxable, for 1926 and 1927, as a whole against J. H. Tippett, administrator, subject to proper deductions as prescribed in section 219 of the Revenue Act of 1926.

Petitioner’s assigmnents of error 3 and 4 are as follows:

3. That for the year 1926 the sum of $17,164.23 should have been taxed as capital net gain instead of ordinary income.
4. That for' the year 1927 the sum of $114,056.07 should have been taxed as capital net gain instead of ordinary income.

The Texas courts and recently the Court of Appeals for the Fifth Circuit in Ferguson v. Commissioner, 45 Fed. (2d) 573, and this Board in W. T. Waggoner Estate, 24 B. T. A. 711, have held that leases of oil and gas in Texas convey a vested fee title to the oil and gas in place and the cash consideration or bonus received therefor is taxable as a capital gain if the property has been owned and held the required length of time. The leases involved in W. T. Waggoner Estate, supra, for which bonuses were received, were in all essential respects the same as the leases involved in the instant case. On issues 3 and 4 petitioner is sustained.

We will next consider petitioner’s fifth assignment of error, which is as follows:

5. That $25,970.21, being 14th of the sum of $103,880.86 collected by J. H. Tippett for oil and gas leases on mineral classified lands and credited to the Laura Tippett Estate, as ordinary income, was funds belonging to the State of Texas and not taxable to J. H. Tippett, as such fiduciary, unless the Supreme Court of Texas overrules the decision (on that point) of Green v. Robison, 8 S. W. (2) 655.

During 1927 petitioner sold a number of leases on mineral classified lands, viz., lands in which the State of Texas reserved the minerals. These sales were made under what was known as the Relinquishment Act, under which the landowner was constituted the agent of the state to dispose of these mineral rights. The amount received as bonuses from the sale of these leases has been stated in our findings of fact.

In an extended opinion in the case of Green v. Robison, 8 S. W. (2d) 655; 117 Tex. 533, the Supreme Court of Texas, in passing upon the constitutionality of and construing the Relinquishment Act said:

We thiuk the act, as it says in article 5367, creates the owner of the soil the state’s agent for the purposes mentioned therein. For the accomplishment of those purposes, said agent is authorized, “ to sell or lease * * * the oil and gas * * * upon such terms and conditions as such owner may deem best, subject only to the provisions ” of the act. There is no vesting of title or interest in the oil and gas in the owner of the soil. No rights pass to any one until a sale or lease is effected according to the terms of the act. What is sold, the consideration therefor, the provisions inuring to the benefit of the owner of the soil, what are the proceeds of the sale, and their application, must all be determined from the act.
*******
We interpret the act to fix a minimum price of 10 cents per acre per annum and the value of one-sixteenth of the gross production free of cost to the state, for which the state is willing to sell the oil and gas, and the agent is authorized to secure the highest price obtainable for the benefit of the fund to which the land belongs; like amounts received by the state to be paid by the purchaser to the owner of the soil. If a bonus is paid, if a larger royalty or other amounts are contracted for, the state and the owner of the soil receive equally in like amounts.

Subsequent to tbe sale of the leases of the mineral classified lands involved in this proceeding, the State of Texas instituted an action against J. H. Tippett, individually, and as community survivor of his deceased wife, and the Empire Gas and Fuel Company, lessee, to recover one-half of $16,800 cash bonus and one-half of $1 per acre rental remaining after deducting 10 cents per acre paid the State. The trial court rendered judgment of $8,592, as prayed for, which on appeal to the Court of Civil Appeals of Texas, at Austin, was affirmed upon the authority of Green v. Robison, supra, and Empire Gas & Fuel Co. v. State, 21 S. W. (2d) 376. Petitioner has appealed the decision of the Court of Civil Appeals to the Supreme Court of Texas, and, so far as we have been advised, no final decision by the Supreme Court of Texas has yet been rendered on the appeal.

The last session of the Texas Legislature passed an act for the relief of land holders who had purchased mineral classified land from the State of Texas and were affected by the decision of the Supreme Court of Texas in Green v. Robison, supra. This act was approved by the Governor on March 13, 1931, and sections 3 and 8 thereof seem clearly to cover petitioner’s situation.

In view of the act of the Texas Legislature just cited, and of the fact thg,t there is no evidence to show that petitioner has ever paid over to the State of Texas any of the sums received as bonuses from the sale of mineral classified lands, except the 10 cents per acre called for in the General Leasing Act, and that the evidence does not show that petitioner has ever been sued for an accounting by the State of Texas, except in the one suit of State of Texas v. Empire Gas & Fuel Co. and J. H. Tippett, already referred to, and that he is contesting his liability in said suit, it is not believed that any of the sums received as bonuses for these mineral classified lands should be excluded from petitioner’s gross income. As to these items, petitioner’s books were kept on the cash receipts and disbursements basis and the items of income were properly returnable in the years when received. Our decision on this issue is for respondent. Cf. Ford v. Commissioner, 51 Fed. (2d) 206; Board v. Commissioner, 51 Fed. (2d) 73.

Petitioner’s sixth assignment of error is as follows:

6. That petitioner is entitled to additional depletion on the sum of $1,690.83 reported on Exhibit 2 as income from the sale of oil from producing wells.

The fiduciary return for 1927 on Form 1041 shows that the only item of oil royalties from producing oil wells was $1,690.83, and from this the full depletion allowance of 27y2 per cent, amounting to $464.98, was deducted and this deduction respondent has allowed. Petitioner is not entitled to any further deduction on this account.

Decision will be entered under Rule 50.


author: Lansdon:

text:
    Elsie A. Drexler, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 31772, 41818.
    Promulgated January 7, 1932.

      Maroel E. Oerf, Esq., Henry Robinson, Esq., and Myrtile Gerf, G. P. A., for the petitioner.

      F. R. Shearer, Esq., for the respondent.
   OPINION.

Lansdon:

The petitioner contends that the trust here involved is a charitable organization and that it is exempt from tax under section 231 of the Eevenue Act of 1926. The respondent has determined that it is taxable under section 219. Clearly the petitioner does not come within the provisions of section 231. The law there refers to an organization which is engaged in carrying on a charitable function. A revocable trust is taxable under section 219, which provides in subsection (g) as follows:

Where the grantor of a trust has, at any time during the taxable year, either alone or in conjunction with any person not a beneficiary of the trust, the power to revest in himself title to any part of the corpus of the trust, then the income of such part of the trust for such taxable year shall be included in computing the net income of the grantor.

Under the above provisions of the act, which contain no limitation, the petitioner is taxable on the income from the trust property, regardless of the nature of the trust. Cf. Corliss v. Bowers, 281 U. S. 376; Elida B. Langley, 24 B. T. A. 1156; Grace Whitney Hoff, 20 B. T. A. 86; Irenee Du Pont. 20 B. T. A. 482; Alfred F. Pillsbury, 19 B. T. A. 1229.

We think it is clear that the two residence properties acquired by petitioner for the use and occupancy of her relatives were not used in carrying on a business or held for income-producing purposes and that she is entitled to no deduction for expenses incurred for maintaining such properties. The respondent now concedes that $400.90 paid as taxes on petitioner’s residential property should be allowed as a deduction.

Decision will be entered under Rule 50.


author: MuRDOCK:

text:
    The Gregg Company, Ltd., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 4648, 9923.
    Promulgated January 7, 1932.

      Richard E. Dvright, Esq., for the petitioner.

      Harold Allen, Esq., for the respondent.
   OPINION.

MuRDOCK:

The record in these cases does not disclose the computation of the petitioner’s invested capital used by the Commissioner in determining the deficiencies, and we do not know exactly what he has done as a result of the declaration of the dividend on May 11, 1918. It appears, however, from the statements attached to the deficiency notices, that he has reduced invested capital for each year to some extent on account of this dividend. The petitioner claims that the deficiencies result from the failure of the Commissioner, in determining invested capital, to treat the dividend as invested capital between the time of its attempted declaration and the time of its restoration. We will assume that this is what he has done.

There is a statement in the stipulation that “ the remaining issues * * * other than the issue as to the legality of the dividend of May 11, 1918, are waived.” The petitioner argues from this statement that the Board has only to determine whether or not the dividend was legal. However, the parties may not stipulate as to the law and, in our opinion, the real issue is, Did the dividend declaration serve to reduce surplus, and in this way justify the Commissioner in reducing invested capital? The petitioner contends that the attempted declaration was illegal and entirely ineffective, and in the alternative it contends that even if it ■ were effective to some extent it did not reduce invested capital by more than the amount of cash and securities actually paid to the stockholders after subtracting the amount of the checks which the stockholders paid to the corporation at the same time. It contends that the purported declaration of the dividend was void because no notice of the directors’ meeting was given to the absent directors.

The management of a corporation, including the power to declare dividends, is vested usually in a board of directors. The members of the board are entitled as a general rule either to be present at its meetings or to receive notice thereof. However, the requirement of notice may be dispensed with in cases of emergency arising when directors are absent or inaccessible, and action taken under such circumstances is binding on the corporation and valid. See Chase v. Tuttle, 55 Conn. 455; 12 Atl. 874. Cf. In re Kenwood Ice Co., 189 Fed. 525; Porter v. Robinson, 30 Hun (N. Y.) 209. If the meeting is a regular meeting, notice is presumed. Porter v. Robinson, supra. Directorate action taken without notice to absent directors, and under circumstances requiring such notice, is only voidable. Chambers v. Sterling Automobile Mfg. Co., 163 N. Y. S. 574. Unless such action offends against the public or the rights of creditors are involved, it may be ratified by a majority of the stockholders of the corporation. Continental Securities Co. v. Belmont, 206 N. Y. 7; 99 N. E. 138; Continental Ins. Co. v. New York & H. R. Co., 187 N. Y. 225; 79 N. E. 1026; Martin v. Niagara Falls Paper Mfg. Co., 122 N. Y. 165; 25 N. E. 303; Remington & Son Pulp & Paper Co. v. Caswell, 110 N. Y. S. 556. Moreover, where a corporation pays dividends which are informally declared, but the payment is not unlawful as an impairment of capital, a violation of the rights of creditors, or otherwise, the corporation may be estopped to deny the validity thereof. Berryman v. Bankers’ Life Insurance Co., 102 N. Y. S. 695. Subject to the same conditions, a corporation may be bound by informal action, where its practice is to allow its affairs, including the declaration of dividends, to be conducted informally. See Thiry v. Banner Window Glass Co., 81 W. Va. 39; 93 S. E. 958; Baker v. Smith, 41 R. I. 17; 102 Atl. 721; Kahn v. Colonial Fuel Corporation, 198 N. Y. S. 596. A corporation may declare a dividend whenever it has surplus profits equal to or greater than the amount of the dividend. The fact that it does not have ready cash with which to pay does not render the dividend illegal. Gilbert Paper Co. v. Prankard, 198 N. Y. S. 25; Cox v. Leahy, 204 N. Y. S. 741. Upon the declaration of a dividend a corporation becomes the debtor of the stockholder for his proportionate part thereof, and. the amount of the dividend is no longer a part of the company’s assets. W. E. Caldwell Co., 6 B. T. A. 47; Zenith Milling Co., 8 B. T. A. 1279; affd. 41 Fed. (2d) 905; Georgia Engineering Co., 21 B. T. A. 532.

A meeting of the petitioner’s board of directors was held at 4 p. m. on May 11, 1918. William C. Gregg, the president, Louis D. Gregg, the secretary, and Hiram Merritt were present. They were three of the five members of the petitioner’s board of directors. They owned 2,470 of the 3,000 shares of stock outstanding. At the meeting a dividend of approximately 293 per cent was declared. The dividend was paid in the manner heretofore stated. The other two directors were with the American Expeditionary Forces in France, and had no notice of the meeting. When they learned of the dividend action, one of them communicated his disapproval to William C. Gregg. After receipt thereof by the latter an annual meeting of the petitioner’s stockholders was held, and a resolution was passed approving “ all the acts of the directors and executive committee in the discharge of their duties since the last annual meeting of stockholders.”

Under the above authorities the declaration of the dividend was not void. Indeed, in the light of the circumstances existing at the time; the nature of the business in which the petitioner was engaged; the inaccessibility of the absent directors, who beyond all reasonable probability would have been unable to attend; and the concession by both parties that the directors present at the meeting, constituting a quorum of the board, acted in good faith and according to their best judgment, we can not say that the action was not valid as an emergency measure. We are also unable to find that the meeting in question was not a regular meeting, in which case notice would be presumed.

In any event, the irregularity of the meeting made the declaration at most voidable. On July -15, 1918, after William G. Gregg had received word of Otis’ disapproval of the dividend action, a stockholders’ meeting was held at which no attempt was made to rescind or restore the dividend. On the contrary, a resolution was passed approving the acts of the directors. Cases are cited by counsel for the petitioner holding that directorate action ean not be ratified by the same directors voting as stockholders. Those cases, however, deal with acts which result in a fraud on the corporation, its stockholders or creditors. They have no application to this case.

Furthermore, the petitioner is in no position to set up the invalidity of the action of May 11, 1918. It not only paid the dividend, but as a general practice it allowed its affairs to be conducted informally. At forty-six of the sixty-two directors’ meetings held between July 15,1910, and May 11,1918, directors were absent without notice. It was not shown that notice was waived. Acquiescence in these informal methods implies ratification. Berryman v. Bombers’ Life Insurance Co., supra.

Aside, however, from any question of estoppel or of ratification or acquiescence, either by the stockholders or the petitioner, its contention is without merit. The scheme of taxation under the various revenue acts has as its basis an annual accounting period. The tax must be computed in the light of facts as they exist during each such period, and a taxpayer is not permitted to await the final results of particular transactions in order to compute the amount of his tax. Since the declaration and payment of the dividend were at most voidable, we are of the opinion that the petitioner’s invested capital was reduced, at least, until the dividend was restored. Cf. Burnet v. Sanford & Brooks Co., 282 U. S. 359; Ripley Realty Co., 23 B. T. A. 1246.

We can not agree with the petitioner’s alternative contention that the action of May 11, 1918, was illegal or inconsequential at least to the extent of $445,000 because the petitioner did not have funds with which to pay that amount of the dividend. The case is distinguishable on its facts from Eaton v. English & Mersick Co., 7 Fed. (2d) 54, and other cases upon which the petitioner relies.

The action of the Commissioner in connection with the only issue here raised is approved.

Judgment will he entered under Rule 60.


author: Lansdon :

text:
    Charles Blaine, Petitioner, v. Commissioner of Internal Revenue, Respondent. C. P. Anderson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 44887, 44888.
    Promulgated January 7, 1932.

      Charles E. Garnett, Esq., and G. S. Levy, Esq., for the petitioners.

      Frank B. Sohlosser, Esq., for the respondent.
   opinion.

Lansdon :

These consolidated appeals involve the petitioners’ liability for assessment under section 280 of the Revenue Act of 1926, for the unpaid taxes of a corporation of which they both are stockholders. The tax year is 1927 and the disputed assessment is $994.83. Four assignments of error were alleged in the petitions filed, but three were abandoned by the petitioners’ counsel at the hearing and the causes submitted for decision upon the single issue as to whether or not the petitioners were transferees of the assets of the corporation within the meaning of the act. The record shows that prior to 1924 the petitioners were engaged as copartners in a business which they incorporated in August of that year, under the name of “ Anderson Theatre Supply Company,” taking most of the capital stock to themselves. The amount, value or cost of this stock to the petitioners is not shown.

In the taxable year the corporation sold all of its assets, except notes and accounts receivable, to the National Theatre Supply Company for the cash consideration of $36,762.17. Out of the proceeds of this sale the corporation paid to petitioners Anderson and Blaine $5,000 and $15,000, respectively; which left it insolvent and without means of paying its other debts, including these taxes. Petitioner Anderson claims he did not receive any of the funds distributed by the corporation, but on the evidence we must find against him on that point. He also claims, as an alternative defense, that the corporation is still indebted to him, regardless of payments made, if any, in excess of such payments, for back salary. Petitioner Blaine claims that the corporation is indebted to him for loans made to it in excess of the amounts paid him. Neither petitioner introduced any evidence at the hearing in support of these claims; but rested their defense entirely upon unsupported denials and assertions made by them while testifying as witnesses for the respondent. In our opinion the respondent has sustained the burden of proof necessary to establish the liability of these petitioners under section 280 of the Revenue Act of 1926.

Decision will be entered for the respondent.


text:
    Sam Cook, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 35014.
    Promulgated January 7, 1932.

      W. M. Shaw, O. P. A., for the petitioner.

      Frank B. Schlosser, Esq., for the respondent.
   OPINION.

Lansdon:

The law here invoked by the parties to support their respective contentions is found in the provisions of the Revenue Act of 1921, reading as follows:

Sec. 214. (a) In computing net income there shall be allowed as deductions:
(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * *
* * * # * * *
(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business; * * *
(5) Losses .sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business; * * *

The petitioner seeks to deduct, as a loss under section 214, supra, the cost to him of the lease which he transferred to the corporation in that year, under conditions and circumstances above set forth. Thé petitioner’s business in the year was drilling oil wells and contract oil-well drilling, which he carried on as an individual business proprietorship known as Cook Drilling Company.” He also has interests in a number of copartnerships engaged in buying, selling, and speculating in oil properties. Obviously, he was engaged in all of these activities for profit. He purchased this lease and transferred it to his corporation, which agreed to develop it under the terms provided; and, as an inducement, he agreed to indemnify it against loss in carrying out such terms. Whether this was a transaction entered into for profit, or merely good business to get from under his obligations of that lease, it was, to say the least, well within the regular line of business in which he was engaged in that year, as shown by the statement of facts. Upon the bringing in of the dry hole, he immediately became indebted to the corporation in the sum of $21,507, under his indemnity agreement. The corporation at once entered a charge in the above amount in its books against the petitioner which canceled the credit of $10,000 it had given the petitioner as purchase price of the lease. Through this process the petitioner lost whatever property he ever had in the lease and his right to collect his sale price to the corporation. Whether allowable under subparagraph (4) or (5) of section 214 (a), supra, it is clear that the petitioner’s investment in the lease, in the regular course of business, was lost to him in 1925, and he should be entitled to take credit for the same on his taxable income for that year. On this issue the petitioner is sustained. Appeal of A. L. Huey, 4 B. T. A. 370; Oscar K. Eysenbach, 10 B. T. A. 716; David Stewart, 17 B. T. A. 604; Mrs. R. B. Lawler, Executrix, 17 B. T. A. 1083; Ida C. Calloway, Executrix, et al., 18 B. T. A. 1059; Flint v. Stone Tracy Co., 220 U. S. 107.

In respect to tbe second point in controversy, tbe burden is upon tbe respondent to show that the disputed expense item set forth in his amended answer was claimed as a deduction by tbe petitioner in bis income-tax return and erroneously allowed. This be failed to do. The statement attached to tbe deficiency letter was incomplete and failed to show what items figured in the computation of the tax; and tbe return, put in evidence, merely shows, under “ Expense & Deductions,” that the petitioner claimed a gross credit of $21,507, for “ Ezzell Lease & Dry Hole.” Assuming that that claim included the drilling-expense item which the respondent seeks to restore to petitioner’s income, we can not further assume, in the absence of proof, that it was allowed even in part. The respondent alleges that it was allowed, but has failed to sustain the burden of establishing the fact. In view of this lack of proof, we must hold in favor of the petitioner on this last issue raised in respondent’s amended answer. Fred Wolferman, Executor, 10 B. T. A. 285.

Decision will be entered for the fetitioner.


author: Murdock:

text:
    Hotel Plaza Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43108.
    Promulgated January 7, 1932.

      Jolm D. Kiley, Esq., for the respondent.
   OPINION.

Murdock:

This proceeding was called from the day calendar of December 8, 1931, for hearing on the merits. There was no appearance on behalf of the petitioner. It appears however that depositions were taken pursuant to an order of the Board, and the orginal depositions and exhibits were filed with the Board on November 26, 1931. On December 7, 1931, counsel for the petitioner filed a brief in which he stated it was in lieu of personal appearance as provided in Rule 29 of the Board’s rules of practice. Rule 29 contains the following provision: “ Testimony taken by deposition will not be considered until offered and received in evidence.” It further provides that the rule shall not relieve the party upon whom rests the burden of proof from adducing at the hearing proper evidence in support of the issues.

Rule 46, containing general provisions as to depositions, contains the following provision: “(j) The deposition of any witness shall not constitute a part of the record until received in evidence at a hearing of the proceeding.”

The only allegations of the petition which are admitted in the answer relate to the jurisdiction of the Board. Thus, there are no facts before us to support the issues raised in the petition.

The Commissioner determined deficiencies of $25,930.51 and $2,-812.77 for the years 1925 and 1926, respectively. The only issue for the year 1925 raises the question of whether or not the Commissioner erred in treating the assumption by a purchaser of a mortgage and the notes given by the purchaser secured by second mortgages at the face value of the mortgages in computing the profit or loss from the sale of the mortgaged property. The petitioner also claims that statutory net losses for 1924 and 1925 should be applied to the year 1926. The Commissioner deducted the entire loss for the year 1924 from the income which he determined for the year 1925. Unless the Commissioner erred as to the year 1925, there is no loss to be carried over to the year 1926. The sole support for its contention as to the year 1925 which the petitioner cites is Schneider v. Lucas, decided by the District Court of the United States for the Western District of Kentucky on August 3, 1929. In Lucas v. Schneider, 47 Fed. (2d) 1006, the Circuit Court of Appeals for the Sixth Circuit reversed this case, and certiorari was denied October 12, 1931, 284 U. S. 622. See also Metropolitan Properties Corporation, 24 B. T. A. 220.

Judgment will he entered for the respondent.


author: Marquette:

text:
    W. H. Hay, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 37499.
    Promulgated January 8, 1932.

      Melvin D. Wilson, Esq., for the petitioner.

      B. M. Coon, Esq., for the respondent.
   OPINION.

Marquette:

The question here presented is whether, for the purpose of Federal income tax, petitioner is entitled to treat as capital gain the amounts he received from sales of certain real estate. Three tracts are involved. Two of them, known as Trusts No. 3500 and No. 3614, were subdivided and gradually sold as lots by petitioner after he had held them for more than two years. The third, known as Trust No. 5878, was sold as an entirety about one year after petitioner acquired it, but the sale was not for cash and the final payment was not received by petitioner until about five years after he first bought the land.

It is clearly shown by the facts before us that petitioner was simultaneously engaged in several lines of business, and that one of them was the buying and selling of real estate. He was a licensed real estate broker and maintained an office. He had platted subdivisions and during the taxable years he had a branch office on or near the property and kept salesmen there. A person may be engaged in more than one trade or business at the same time. Louis M. Goldberg, 9 B. T. A. 1355; Walter F. Brown, 13 B. T. A. 832.

With respect to the year 1923 the question is governed by the Bevenue Act of 1921, section 206, the pertinent provisions of which are:

(1) The term “capital gain ” means taxable gain from tbe sale or exchange of capital assets consummated after December 31, 1921;
**!£#***
(6) Tbe term “capital assets” as used in this section means property acquired and held by the taxpayer for profit or investment for more than two years (whether or not connected with his trade or business), but does not include property held for the personal use or consumption of the taxpayer or his family, or stools: in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer' if on hand at the close of the taxable year.

As to the other years here involved, the Bevenue Acts of 1924 and 1926 govern. Section 208 (a) (8) of each of those acts provides:

The term “ capital assets ” means property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business.

Bespecting the land which petitioner had subdivided and placed in Trusts No. 3500 and No. 3614, the exact question before us was considered in John S. Phipps, 19 B. T. A. 1293. The Board held that real estate could not be included in an inventory, citing Atlantic Coast Realty Co., 11 B. T, A. 416, and Albert F. Keeney, 17 B. T. A. 560. Therefore, real property sold in 1923 that had been held by the taxpayer for more than two years was a capital investment. The same reasoning applies in the instant proceeding, and petitioner’s receipts from Trusts No. 3500 and No. 3614 during 1923 should be taxed as capital gain. But his receipts from those trusts for 1924, 1925 and 1926 were not derived from capital assets as defined by the controlling statutes, but from property held primarily for sale in the course of his business. Hence, such receipts constitute taxable income under sections 210.and 211 of the Revenue Acts of 1924 and 1926. Cf. John S. Phipps, supra.

With respect to the tract known as Trust No. 5878, petitioner had held it less than two years when, in November, 1923, he entered into a contract for its sale. The purchase price was paid to him in installments during the next four years. He contends that the sale was not consummated until 1927, when the final payment was made.

In our opinion petitioner’s agreement in 1923 was a contract of sale of the tract. He received a substantial sum as a down payment and placed the property in trust for the benefit of the purchasers after payment of the balance of the purchase price. The dominion of the property passed from petitioner to the purchasers. Such circumstances preclude the idea of an executory contract to sell at some future date. Davidson & Case Lumber Co. v. Motter, 14 Fed. (2d) 137; Grace Harbor Lumber Co., 14 B. T. A. 966; Shipowners & Merchants Tugboat Co., 22 B. T. A. 1084. The petitioner acquired the tract in 1922 and sold it in 1923. Therefore, the property did not constitute a capital asset within the meaning of section 208 (a) (8) of the Revenue Acts of 1924 and 1926, and profits from its sale are taxable as ordinary income.

Decision will be entered under Rule 50.


author: Teammeul :

text:
    The United Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Richfield Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 38082, 42921, 42922, 51622.
    Promulgated January 8, 1932.

      Joseph D. Peeler, Esq., for the petitioners.

      Philip M. Ciarle, Esq., for the respondent.
   OPINION.

Teammeul :

The material facts have been stipulated by the parties, the stipulation in full being incorporated herein by reference and accepted as the facts. The above findings of fact contain what we deem to be the material facts. Predicated thereon three separate issues have been formally presented for decision, as set out in the preliminary statement above. The petitioners were affiliated and filed consolidated returns for each of the taxable years, but the issues presented pertain only to deductions claimed by the petitioner, the United Oil Company, from its gross income for the respective taxable years, and in no wise involve the tax liability of the petitioner, Rich-field Oil Company, except in so far as it may be affected by the allocation, on the basis stipulated, of the deficiency as finally redetermined by the Board, if any, for the calendar year 1924.

The United Oil Company claimed deductions in computing net income for the taxable years 1923, 1924 and 1925 on account of depreciation sustained on its oil wells on the basis of including in the total cost of the wells not only the cost of the physical equipment, but also amounts expended for wages, fuel, repairs, hauling, etc., in connection with the development and drilling of such wells. Apparently the respondent has allowed deductions for depreciation on the basis of the cost of tbe physical equipment only, and now contends that the incidental expenditures made in connection with the development and drilling of the wells are not subject to depreciation, but should be added to the cost of the leases subject to depletion. This same question runs through all three issues submitted, and they may therefore be considered collectively rather than separately.

During the years 1923 and 1924 the petitioner abandoned certain wells which had theretofore produced oil but had become dry in those years. In the consolidated returns for 1923 and 1924 the petitioner claimed deductions for such losses on the basis of including the depreciated cost not only .of the physical equipment, but also of the amounts expended in connection with the development and drilling of the wells. The respondent allowed deductions for the losses only to the extent of the depreciated cost of the physical equipment.

In 1925 petitioner abandoned (1) wells which had theretofore produced oil but became dry in that year, and (2) wells which had never produced oil but were dry holes when finally abandoned in that year. The respondent has allowed no deductions for losses on. account of the abandonment of such wells in 1925, and the petitioner contends that in the redetermination of the deficiency for that year it is entitled to deductions for losses on the basis of including not only the depreciated cost of the physical equipment, but also amounts expended in connection with the development and drilling of the wells.

The precise question, which in essential aspects is raised in reference to the three classes of deductions here claimed by the petitioner, was considered by us at length in A. T. Jergins Trust, 22 B. T. A. 551, where we held that expenditures for fuel, wages, repairs, hauling, etc., in connection with the drilling of oil and gas wells, are capital expenditures recoverable through depreciation rather than depletion. That case involved deductions claimed for the years 1922, 1923 and 1924, under the Revenue Acts of 1921 and 1924.

The decision in the Jergins case was followed by us in Petroleum Exploration, 23 B. T. A. 890, under the Revenue Act of 1926, and in Albert W. Ziegler et al., 23 B. T. A. 1091, under the same act.

It follows that at least the first issue presented here is governed squax-ely by the foregoing decisions, on authority of which the petitioner’s contention must be sustained.

"We think the same view must prevail also in respect to the second and third issues. No brief has been filed in this case by the respondent and we are not advised of his position other than as disclosed by the deficiency letters and the stipulation of facts. We do not know, therefore, what reasons moved the respondent to allow deductions for losses sustained on abandonment of wells in 1923 and 1924 to the extent of the depreciated cost of the physical equipment, and to deny similar deductions for 1925. As indicated in our decisions above cited, the applicable provisions of the revenue acts governing the three years mentioned are in all material respects identical.

Losses sustained on account of the abandonment of oil wells constitute allowable deductions from income for the year or years in which abandoned, and this principle has been specifically recognized by the respondent. Belridge Oil Co., 11 B. T. A. 127, 137.

In connection with the second and third issues, there remains only the question whether the basis for computing losses sustained on abandonment of oil wells should be the depreciated cost of the physical equipment only, or whether such basis should include also the expenditures made in connection with the development and drilling of such wells. Since we have decided that development and drilling expenses properly constitute a part of the cost of the wells for the purpose of computing deductions for depreciation, we know of no reason why such expenditures should not be treated as a part of the cost of the wells in determining loss sustained on abandonment.

The amounts of the additional deductions to which the petitioner is entitled have been stipulated by the parties and set out in our findings of fact above. The deficiences will be redetermined accordingly.

Judgments will be entered under Bule 50.


author: Teammell :

text:
    The Ulster and Delaware Railroad Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 28927.
    Promulgated January 8, 1932.

      James W. Garmalt, Esq., and A. Kaplin, Esq., for the petitioner.

      E. G. Algire, Esq., for the respondent.
   OPINION.

Teammell :

The principal issue involved in this case is whether or not the respondent erred in including in the petitioner’s income for 1920 the amount of $47,086.62 as profit or income derived from the adjustment made with the Director General of Railroads on account of materials and supplies. The amount stated represents the excess over cost to the petitioner of materials and supplies returned by the Director General, which the petitioner charged to expense and deducted from income, as determined by the respondent. Said amount so determined by the respondent as representing excess over cost was included in the petitioner’s income in computing the deficiency for the taxable year 1920.

On January 1, 1918, the petitioner turned over to the Director General of Railroads its various railroad properties, including the materials and supplies then on hand, which were inventoried as of December 31, 1917, at a total cost to the petitioner of $189,725.48. The parties are in agreement as to this amount.

On March 1, 1920, at the termination of Federal control, the Director General returned to petitioner its properties, including the materials and supplies on hand inventoried as of that date at a cost to the Director General of $173,548.36, not including fuel. The parties are also in agreement as to this amount. Said inventory was taken into the petitioner’s accounts and charged to expense as the materials and supplies were used.

The Director General and the petitioner had not entered into any contract during the period of Federal control, but in May, 1921, they negotiated a settlement of the petitioner’s claims arising out of Federal control on the basis of the standard form of contract, which provided in section 9 (b) as follows:

At the end oí Federal control the Director General shall return to the Company all uncollected accounts received by him from the Company and also materials and supplies equal in quantity, quality and relative usefulness to that of the materials and supplies which he received and to the extent that the Director General does not return such materials and supplies he shall account for the same at prices prevailing at the end of Federal control. To the extent that the Company receives materials and supplies in excess of those delivered by it to the Director General it shall account for the same at the prices prevailing at the end of Federal control, and the balance shall be adjusted in cash.

On May 4,1921, as a result o.f the negotiations theretofore carried on, the Director General and the petitioner had agreed on the settlement of all claims except that of the petitioner for the amount claimed to be due it for materials and supplies. On May 5, 1921, the parties agreed to a lump-sum settlement of $390,000, to be paid to the petitioner by the Director General, which included the petitioner’s claim for shortages of materials and supplies.

Here arises the first disagreement between the respondent and the petitioner respecting the facts. The respondent contends, and on that basis computed the deficiency for 1920, that as a result of the lump-sum settlement the Director General paid to the petitioner tbe sum of $98,000 for shortages of materials and supplies. The allocation by the respondent of that amount ,of the lump-sum settlement to materials and supplies is admitted to rest upon the similar allocation made by the Director General upon his books, and in support ox his determination the respondent in his brief sets up a comparison o,f the difference in the various accounts as they appeared upon the books of the petitioner and o.f the Director General. Careful consideration of those accounts discloses, in our opinion, that neither party attempted to allocate the lump-sum settlement of $890,000 in its accounts so as to reflect the actual facts of the final agreement, but the allocation made by each was a mere matter of bookkeeping convenience. '■ ' -,

However, the record establishes, and we have so found, that on or prior to May 4, 1921, the Director General and the petitioner had agreed upon the amount to be paid in-settlement of each of the petitioner’s claims, except that for shortages of materials and supplies. The aggregate of the amounts so agreed upon, subtracted from the amount of the lump-sum settlement made on May 5, 1921, leaves only the amount of $89,040.54 to be allocated to the settlement of the petitioner’s claim for shortages of materials and supplies. This is the amount which the petitioner now contends is a proper allocation, and we agree with its contention on this point.

The petitioner claimed as due to it from the Director General on account of shortages in materials and supplies the net amount of $119,951.90, computed as follows: The shortages by units at prices prevailing on March 1, 1920, amounted to $160,207.72, and the overages by units at prices of the same date amounted to $40,255.82, leaving the net balance of $119,951.90'which the petitioner claimed to be due it for shortages. It is apparent that in the process of this settlement the petitioner in effect paid the Director General for the overages, by means of a credit, as effectively as if the Director General had first paid the petitioner the full amount due for shortages and the petitioner had thereupon paid to the Director General the full amount due to him for the overages.' Nor is such result changed by the fact that the Director General settled the petitioner’s net claim for shortages by the payment of an amount less than that claimed. ' .

The petitioner having in effect purchased the overages from the Director General, for which it paid at March 1, 1920, prices, this item should be eliminated from the Director General’s inventory in determining the cost to the petitioner of the materials and supplies returned to it in kind by the Director General. Since the respondent did not take this item into consideration in computing the deficiency, his determination must be modified accordingly.

The parties are agreed that the Director General’s inventory of materials and supplies returned in kind as of March 1, 1920, should be reduced from $173,548.36 to $140,999.98. This results from the respondent’s action in deducting from the inventory value (1) items included in the inventory but missing, in the amount of $4,121.21, and (2) items on hand at December 31,1917, which were not included in the petitioner’s inventory but which were included in the Director General’s inventory of March 1, 1920, in the amount of $28,427.27, making the total deduction for these two items of $32,548.48, recognized by the respondent.

Giving effect to the adjustments hereinabove indicated, the amount charged to expense in excess of the cost to the petitioner of the materials and supplies returned by the Director General should be recomputed as follows:

Director General’s inventory of March 1, 1920, and taken into petitioner’s accounts_$173, 548.36
Reduced by :
Items included but missing_$4,121.21
Items on hand on Dee. 31, 1917, but not included in petitioner’s inventory and included in Mar. 1, 1920, inventory_ 28,427. 27
Items of overages included in March 1, 1920, inventory but paid for by petitioner_ 40, 255. 82
- 72, 804.30
March 1, 1920, inventory value of similar units returned in kind by Director General- 100, 744. 06
Cash paid by Director General for shortages_ 89,040.54
189,784. 60
Value of petitioner’s inventory Dec. .31, 1917_ 189, 725.48
Excess over cost_ 59.12
Deduct: Proportion of materials and supplies estimated to be charged to additions and betterments $59.12 X 4.44%_ 2. 63
Issued for maintenance and charged to expense in excess of cost- 56.49

The respondent erred in disallowing $47,086.62 of the amount claimed by petitioner as a deduction for materials and supplies used during the year 1920. The amount which should be disallowed as representing the sum charged to expense in excess of cost of such materials to petitioner is $56.49. See Terminal Railroad Association of St. Louis, 17 B. T. A. 1135, and Chicago Junction Railways, etc., Co. v. United States, 52 Fed. (2d) 906.

With regard to the second issue the respondent must be sustained, for, while we have held in Los Angeles & Salt Lake Railroad Co., 18 B. T. A. 168, that an amount paid in the taxable year to the Association of Railway Executives is a deductible expense, the petitioner bas failed to prove that during 1920 it paid the sum of $160.01 to the association as alleged.

We have found as a fact that during the year 1921 the petitioner incurred expenses totaling $20,998.14 in negotiating a settlement of its claims against the Director General of Railroads, and that such expense has not been heretofore allowed as a deduction from gross income for the year 1921. This expenditure constituted an ordinary and necessary business expense and should be allowed as a deduction for 1921, pursuant to section 234 (a) (1) of the Eevenue Act of 1921.

The deficiencies will be redetermined in accordance with the foregoing opinion.

Judgment will he entered under Rule 50.


text:
    Thomas H. Welch, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 40852, 51929, 53119.
    Promulgated January 8, 1932.

      Alexander E. Horn, Esq., and P. J. Goff eg, Esq., for the petitioner.

      G. H. Gurl, Esq., for the respondent.
   OPINION.

Lansdon:

We think the respondent correctly disallowed the deductions claimed. If the payments relate at all to “ carrying on a trade or business,” they still may not be allocated as expense of any particular year. Doubtless petitioner more quickly reestablished his standing and credit and built up his new business by reimbursing those who had lost money through a corporation dominated by him and his father, but we do not understand payments of such a nature to be ordinary and necessary business expenses.

In two recent decisions we have held that the payment of discharged obligations for the purpose of reestablishing credit resulted in the acquisition of an intangible capital asset, in the nature of good will, which had a probable life coextensive with the business. Herbert Brush Manufacturing Co., 15 B. T. A. 673; and A. Harris & Co., 16 B. T. A. 705. The latter case was reversed by the Circuit Court of Appeals for the Fifth Circuit in Harris & Co. v. Lucas, 48 Fed. (2d) 187, and the deduction claimed was allowed. The facts of the instant proceeding are distinguished from those of the Harris case. There, a mercantile establishment, which had been discharged from its debts in a compromise settlement, reimbursed its former creditors in an effort to reestablish its-credit so that it could buy without having to pay cash for each order. Here, the bankrupt corporation is no longer in business and an individual is seeking to build up a business by reimbursing creditors of the corporation who have lost money.

Decision will be entered for the respondent.