author: Smiti-i:

text:
    Southwestern Ice & Cold Storage Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 41183.
    Promulgated November 30, 1932.

      George G. Witter, Esq., for the petitioner.

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

Smiti-i:

The respondent has determined deficiencies in the petitioner’s income tax for the period January 1, to September 30, 1926, in the amount of $17,309.86, and for the period October 1 to December 31, 1926, in the amount of $5,769.96.

The petitioner on September 30, 1926, sold to an outside interest all of the capital stock of an affiliated company. The respondent computed the petitioner’s profit on the sale at the difference between the cost of the stock to the petitioner in 1924 and the selling price and has allocated nine-twelfths of the profit so computed to the period January 1 to September 30, 1926, for which period the petitioner filed with its affiliated company a consolidated return, and three-twelfths to the period October 1 to December 31,1926, for which the petitioner filed a separate return. The petitioner contends (1) that it derived no taxable profit from the sale of the stock of its affiliated company; and (2) that the taxable profit, if any, as determined by the respondent should be reduced by the amount of the accumulated earnings of the affiliated company for the period January 1 to September 30,1926, which were reported in the consolidated return filed for that period and taxed to the affiliated group.

The material facts are stipulated and are as follows:

Petitioner was incorporated under the laws of the State of Arizona on or about January 9, 1924.
The Yuma Utilities Company was incorporated under the laws of the State of Arizona on or about January 9, 1924.
The total issued capital stock of said Yuma Utilities Company from January 9, 1924 and until September 30, 1926, inclusive, consisted of 1,250 shares of Preferred stock of $100.00 par value and 500 shares of Common stock of no par value.
Prom January 9, 1924 and until September 30, 1926, inclusive, all of the outstanding stock of the Yuma Utilities Company was owned by the petitioner, with the exception of one share of common stock. Petitioner owned on January 1, 1926, and continuously from that date until September 30, 1926, 1,250 shares of Preferred and 499 shares of Common stock of the Yuma Utilities Company out of an outstanding stock issue of 1,250 shares of Preferred and 500 shares of Common.
Petitioner paid in 1924 in cash or equivalent the amount of $96,250.58 for the 1,250 shares of Preferred and 499 shares of Common stock of the Yuma Utilities Company.
During the month of September, 1926, petitioner entered into negotiations with the Sierras Construction Company, a Wyoming corporation, for the sale of its entire stockholdings in the Yuma Utilities Company, and on September 30, 1926, completed the sale to the Sierras Construction Company of all of the said stock owned by it.
Petitioner realized in cash or equivalent on September 30, 1926, on account of the sale of the Yuma Utilities Company the amount of $267,726.65.
Petitioner expended in 1926, during the period January 1st, to September 30, 1926, on account of selling expenses and cost of replacing transformers in connection with the sale of this stock the sum of $2,068.36.
Petitioner and the Yuma Utilities Company filed separate income tax returns for the years 1924 and 1925. For the year 1926 the new interests who had purchased the stock of Yuma Utilities Company from the petitioner filed original and amended separate returns of its income covering the period January 1, 1926 to September 30, 1926. On or about June 17, 1927 the petitioner filed a consolidated income tax return within the period allowed by law as extended by the Collector of Internal Revenue at Phoenix, Arizona. In this return there was included the income of the petitioner for the calendar year 1926 and the income of the Yuma Utilities Company for the period January 1st to September 30, 1926.
Treasury Department Form No. 1122, being Information Return of Subsidiary Corporation, was filled out and filed by the Yuma Utilities Company at the same time of filing the consolidated return noted above.
The total tax as shown by the consolidated return was $11,922.72. Of this sum $2,989.07 was agreed upon by petitioner and the Yuma Utilities Company as being the part assessable to the Yuma Utilities Company, and $8,933.65 assessable to the Southwestern Ice & Cold Storage Company.
There was not included as taxable income on the consolidated return filed by petitioner and the Yuma Utilities Company any gain that may have been realized from the sale by petitioner of its holdings of stock of the Yuma Utilities Company on September 30, 1926.
Nor was there claimed as a deduction from gross income on the said consolidated return filed the selling expenses and cost of replacing transformers in the aggregate amount of $2,068.36.
A statement was attached to the consolidated return wherein the sale of the stock of the Yuma Utilities Company was disclosed and in which statement it was stated that the difference between the cost and the sales price thereof was not being included in taxable income on the grounds that the sale was in fact the sale of the capital stock of the affiliated or consolidated entity upon which sale no taxable gain or loss could be realized. The book profit was shown as an addition to surplus on line 9 (a) of Schedule L of the consolidated tax return, in the amount of $86,337.50.
The Commissioner of Internal Revenue has included in the taxable net income of the consolidated entity allocable to the petitioner the sum of $169,-407.71, as taxable profit on the sale of the said stock of the Yuma Utilities Company.
Nine-twelfths of this profit, or $127,055.79, was included by the Commissioner of Internal Revenue in petitioner’s net income for the period January 1st to September 30, 1926, and three-twelfths thereof, or $42,351.93, was included by the Commissioner in petitioner’s net income for the period October 1, 1926, to December 31, 1926, and the deficiencies in tax asserted by the Commissioner are almost entirely due to these additions to taxable income.
The Yuma Utilities Company on September 30, 1926 had an earned surplus balance of $54,928.87. Of this amount $24,172.56 represented earnings of the Yuma Utilities Company from January 1, 1926 to September 30, 1926 and had been reported in the consolidated income tax return filed by this petitioner and the Yuma Utilities Company and a federal income tax paid thereon by the affiliated group. The balance of said surplus is the earnings of the Yuma Utilities Company during 1924 and 1925 during which years all of its outstanding stock as aforesaid was owned by this petitioner. For the years 1924 and 1925, however, Yuma Utilities Company filed separate returns and paid a tax on its said earnings for the years 1924 and 1925.

The facts in this proceeding are indistinguishable from those in Remington Rand, Inc. v. Commissioner, 33 Fed. (2d) 77, in respect of both of the issues raised. In that case the court held, reversing the Board (Remington Rand, Inc., 11 B. T. A. 773), that, where the sale of the stock of the affiliated company terminated the affiliation, the sale was not an intercompany transaction, but occurred outside of the period of affiliation and resulted in a. taxable profit to the seller, measured by the difference between the cost of the stock and the selling price. The court there said:

Concededly a gain of $15,000 was realized, unless the parent company may take into account as additional cost of the stock the subsidiary’s accumulated earnings of $28,454.35. It is argued that the parent company could have had its subsidiary declare its net profits as dividends, without subjecting the parent company to any tas, by reason of section 234 (a) (6), Revenue Act of 1918, and that it could then have invested such dividends in the business of the subsidiary, in which event they would be treated as an addition to the price paid for the stock. Regulation 45, art. 543. In other words, we are urged to hold that the accumulation of earnings by the subsidiary was a constructive receipt of dividends and reinvestment of them by the parent company. But the same argument could be made with equal force in respect to an individual or corporate owner of stock sufficient in amount to control the board of directors of the subsidiary, yet insufficient to result in affiliation. Tax liabilities must be determined by what in fact was done. See United States v. Phellis, 257 U. S. 156, 172, 42 S. Ct. 63, 66 L. Ed. 180. The fact is that no 'declaration of dividends and no reinvestment of them has occurred in either case, and it would seem unreasonable to accept the theory of constructive receipt :and investment in the one case, but not in the other. Where affiliation is absent, no one doubts that the theory would be rejected; to accept it would contradict the theory of Eisner v. Macomber, 252 U. S. 189, 40 S. Ct. 189, 64 L. Ed. 521, 9 A. L. R. 1570.
Again, it is urged that a failure to treat the accumulated earnings as an addition to the cost of the stock will produce the inequitable result of double taxation, because the earnings have already been taxed as income of the affiliated group. But double taxation of this character will exist, though there be no affiliation between the owner of the stock and the corporation which issued it, and is, as pointed out in Hellmich v. Hellman, 276 U. S. 233, 237, 48 S. Ct. 244, 72 L. Ed. 544, 56 A. L. R. 379, the ordinary incident of a profitable sale of stock. We hold, therefore, that the sale resulted in taxable gain of $15,000.

The Board has followed the Remington Rand case in the following cases: Obenchain-Boyer Co., 18 B. T. A. 293; Universal Corp., 18 B. T. A. 319; Canal-Commercial Nat. Bank, 22 B. T. A. 541; Roy & Titcomb, Inc., 23 B. T. A. 12; H. Liebes & Co., 23 B. T. A. 787; and Carey Salt Co., 26 B. T. A. 675. See also United Publishers’ Corp. v. Anderson, 42 Fed. (2d) 781; Wilmington Steamboat Co. v. Sturgess, 52 Fed. (2d) 210; affd., 55 Fed. (2d) 831; American Printing Co. v. United States, 53 Fed. (2d) 98; Charles Ilfeld Co. v. Hernandez (U. S. Dist. Ct., for Dist. of New Mexico, Aug. 19, 1932). In United Publishers’ Gory. v. Anderson, suyra, the District •Court for the Southern District of New York, upon authority of the Remington Rané case, held that the deductible loss resulting from the sale of the stock of an affiliated company is the difference between the cost of the stock and the selling price, without any allowance for the operating loss of the affiliated company which had been allowed as a deduction in the consolidated returns previously died by the affiliated group. The court considered the question there as the direct converse of that in the Remington Rand case. In Riggs Nat. Bank, 17 B. T. A. 615; affd., 57 Fed. (2d) 980, we held, however, that in computing the deductible loss sustained by the taxpayer upon liquidation and merger of a subsidiary company on June 10, 1922, allowance should be made for the operating loss of the subsidiary company for the period of affiliation from J anuary 1 to J une 10,1922, which loss was reported in the consolidated return filed by the companies for that period and allowed as a deduction in computing the consolidated income. See also Houghton & Dutton Co., 26 B. T. A. 1420, following Riggs Nat. Bank, supra.

The petitioner argues that the situation here is the direct converse of that in the Riggs Nat. Bank case; that if the loss resulting from liquidation (or sale), must be reduced by the amount of the operating loss of the subsidiary, which was deducted in the consolidated return filed for the period of affiliation prior to the sale, then also the gain, if any, upon the sale should be reduced by the amount of the operating gain of the subsidiary which likewise was reported in the consolidated return filed for the period of affiliation preceding the sale. We are of opinion that the argument is not sound. For, while the statute governing the filing of consolidated returns permits the loss of a subsidiary company to be applied against the taxable gain of the parent company, or vice versa, it does not impose any liability on the one company for the tax on the income of the other. It does not follow, from the fact that the net income of one member of an affiliated group may be reduced by the operating loss of another member of the group, that the net income of one member may be reduced by the net income of another member which itself pays tax upon its net income. In other words, the operating gain of the Yuma Utilities Company for the period January 9 to September 30, 1926, was its separate income, for which it would have been separately liable to pay the tax; while if, instead of a gain, the subsidiary had sustained an operating loss, the petitioner would have been allowed to reduce its own taxable gain by the amount thereof, as was the situation in the Riggs Nat. Bank case.

Obviously, too, the petitioner’s reasoning leads us to a result directly contrary to that reached by the court in the Remington Rand case upon identical facts.

For reasons fully expressed by the court in the Remington Rand case, and upon authority of that and the other cited cases, we hold that the petitioner’s taxable profit on the sale of the stock of its affiliated company was the difference between the cost, $96,250.58, and the selling price, $261,726.65, less the expenses of $2,068.36 incident to the sale.

Judgment will be entered! wnder Rule 50.


source: Caselaw Access Project

author: Matthews :

license: Public Domain

text:
    M. Gertrude Semmes and Raphael Semmes, Trustees of the Estate of Charles W. Semmes, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 53599.
    Promulgated November 30, 1932.

      J. A. Sweeney, Esq., for the petitioners.

      Maxwell M. Mahany, Esq., for the respondent.
   OPINION.

Matthews :

This is a proceeding for a redetermination of a deficiency in income tax for the year 1928 in the amount of $425.78.

The deficiency arises from the respondent’s action in disallowing, as a deduction from the gross income of the estate of Charles W. Semmes, the amount of $12,000 .paid by the estate to the decedent’s widow as an annuity under the provisions of his will.

The parties have filed a stipulation of facts, which it is not necessary to set forth in full, but which is incorporated herewith'by reference and made a part of this opinion. The parts of the stipulation material to a decision of the case are as follows:

Tbe petitioners herein are executors and trustees of the estate of Charles W. Semmes, who died testate on September 11, 1924, while a resident of Washington, D. C. The will, dated May 27, 1924, and codicil dated August 12, 1924, duly admitted to probate, after providing for the disposition of certain personal belongings such as jewelry, clothing, etc., the payment of debts and funeral expenses, and for several small bequests, read as follows:

(3) I give, devise and bequeath all the rest and residue of my estate* * to my * * wife, M. Gertrude Semmes * *and to my brother, Ralph Semmes * * as trustees * * for the following purposes, viz: * * * *.
(4) I direct my said trustees to pay out of the net income of my estate * * the * * following, viz:
(a) I direct my said trustees to pay to my * * wife * * the sum of ($1,000.00) a month during the term of her natural life for her support and maintenance and to pay also to my said wife the * * sum of * * $250.00 a month for the support * * of our son, William A. Semmes, until he reaches the age of twenty-one years * *.
(b) I direct my said trustees to pay to my sister, Mrs. Eva OostS-gan * *, and to my sister, Cora Eastman, * *and to my brother, Edward B. Semmes, the sum of * * $100.00 a month each, during the term of their natural lives * *.
(c) I direct my said trustees to pay to my cousin, Eva Hichew, the sum of * * $50.00 a month during the term of her natural life.
(d) I direct my said trustees to pay to my sister, Mrs. Eva Costigan, for the support * * of my niece, Dorothy Richardson, the sum of $100.00 a month during the term of the natural life of my said niece.
(e) I direct my said trustees to pay * * out of my estate to each of my said sisters, Mrs. Eva Costigan and Mrs. Cora Eastman, and to my brother Edward B. Semmes, the sum of * * $10,000.00 each, and to my brother Raphael Semmes the sum of * * $25,000.00, said sums to be payable at such times and in such amounts as my trustees may deem advisable, the available assets of my estate shall warrant and when the requirements of the Semmes Motor Company have been provided for * * *.
*******
Within the statutory period and according to the manner in such cases provided, M. Gertrude Semmes, the widow, elected to take under the will in lieu of the interest allowed her in decedent’s estate by the laws of the District of Columbia.
During the year 1928, the year involved in this proceeding, the trustees, pursuant to the authority contained in paragraph (4) of decedent’s will, distributed cash to the widow in amounts aggregating $12,000.00, which amounts, added to payments of prior years, did not aggregate a sum equal to that which would have been apportionable to her as of the date of deceased’s death under the controlling District of Columbia statutory provisions had she not elected to take under the will.
The monthly payments provided for under paragraph 4-a-b-c-d of the will were regularly made by the trustees, deducted on petitioners’ return, and allowed as deductions by the respondent. No distributions were made by the petitioners during the year 1928 in connection with the bequests aggregating $55,000.00, referred to in paragraph 4 (e) of the will, and of which there still remained unpaid as of January 1, 1928, the sum of $44.000.00, payments aggregating $11,000.00 having been made in prior years subsequent to testator’s death. The trustees filed a form 1040 income tax return for the year 1928, and reported taxable net income of $1,721.11, arrived at in substantially the following manner:
Income :
Interest on bank deposits, notes, etc-$12, 902. 99
Rents from Real Estate, stores, etc_ 23,002. 50
-$35, 905. 49
Deductions :
Repairs, depreciation insurance, taxes, etc_$13, 729.18
Cash distributions to Wm. A. Semmes, son: Eva Costigan. and Cora Oostigan, sisters; Edw. B. Semmes, brother; Eva Hichew, cousin; Dorothy Richardson, niece, pursuant to paragraphs 4 (a), (b), (c), (d) of the will, aggregating- 8,455.20
Cash distributions made to M. Gertrude Semmes, widow, pursuant to paragraph 4 (a) of the will, aggregating_ 12, 000. 00 34,184.38
Net Income_$1,721.11
The petitioners computed the tax upon the net income of $1,721.11 and paid the tax which they estimated to be due. The respondent commissioner, in arriving at the deficiency for the year 1928, disallowed as a deduction in arriving at petitioners’ net income the $12,000.00 representing distributions to the widow, and computed the deficiency upon a net income of $13,721.11 in lieu of the $1,721.11 returned by the petitioners. Mrs. M. Gertrude Semmes, the widow, when filing her income tax return for the year 1928 reported the $12,000.00 distributed to her as being taxable income; thereafter she was advised and learned that said amount was not properly taxable to her and accordingly filed a claim for refund, which was thereafter allowed by the Commissioner, and refund made to her of the taxes paid by her for the year 1928 on this amount,

We have consistently held, beginning with the case of Julia Butterworth et al., Trustees, 23 B. T. A. 838, that amounts paid in accordance with a will to a widow in lieu of dower are payments to her in satisfaction of her dower rights, and, where the total of the amounts so paid do not equal the value of her dower rights, they are not deductible by the trustees of the estate, since they do not constitute distributions of income within the meaning of section 219 (b) (2) of the Revenue Act of 1924. The same result was reached under section 219 (b) (2) of the Revenue Act of 1926, and under section -162 (b) of the Revenue Act of 1928, which is controlling here. (Fidelity-Philadelphia Trust Co., Trustee, 25 B. T. A. 1359; Boston Safe Deposit & Trust Co. et al., Executors, 26 B. T. A. 486; Anthracite Trust Co. et al., Trustees, 26 B. T. A. 89).

Petitioners’ counsel does not contend that these cases are not controlling in the instant proceeding, but he contends, in the alternative, in the petition and in the brief that although this $12,000 paid to the widow was in lieu of dower, it is nevertheless deductible, since it was held and accumulated to pay the bequests provided for in paragraph 4 (e) of the will. Section 162 (b) and (c), Act of 1928.

In his brief, counsel also refers to various other provisions in the will which are set forth in the stipulation, but which we have not included in our facts, to show that the trustees were not allowed any discretion to withhold or pay said bequests and that such amounts were, therefore, taxable to the beneficiaries and deductible by the trustees.

We see no merit whatsoever in the petitioner’s contentions. The amount of $12,000 was paid to the widow and it can not be paid to> her and at the same time be accumulated to pay other bequests. Such a thing is physically impossible. The fact that it is not deductible under the law does not change the physical fact of its having been paid to her. There is no question raised as to the $1,721.11 which remained as income to the trustees and which was not distributed or credited in any way to the beneficiaries. We do not see any necessity of going into a discussion of the construction of the will or the discretion of the trustees. Clearly, they had to pay the $12,000 to the widow, and did so. After paying this amount, necessary expenses and other distributions provided for in paragraphs 4 (a), (b), (c) and (d) of the will, they did not have enough left to pay any of the amounts provided for in paragraph 4 (e). There is no basis for holding that the amount of $12,000 was accumulated for further distribution to pay the bequests provided for in the latter paragraph!

Judgment will he entered for the respondent.


author: Seawell:

text:
    Wells-Elkhorn Coal Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 44786.
    Promulgated November 30, 1932.

      Chester A. Bennett, Esq., for the petitioner.

      B. Ü. Steele, Esq., for the respondent.
   OPINION.

Seawell:

The issue raised in the petition as to the constitutionality of section 280 of the Revenue Act of 1926 is fully answered by Phillips v. Commissioner, 283 U. S. 589, in which it was held that the section in question is not in violation of the Federal Constitution.

On the issue as to whether the petitioner is a transferee within the meaning of the aforementioned section, we do not think there can be any question as to the correctness of an affirmative answer thereto. In effect, what the petitioner says is that it was a purchaser in good faith for value and therefore comes within the principle of Fostoria Milling & Grain Co., 11 B. T. A. 1401, where such a purchaser was not considered a transferee within the meaning of the statute. We disagree. What occurred was that the petitioner first sought to acquire the assets of the Black Diamond Coal Company through the issuance of its own stock therefor, but, since certain stockholders were not agreeable to such a transaction, the petitioner issued its stock to certain of the stockholders of that corporation for stock of a like par value and then acquired the remaining stock through a cash purchase. After the entire stock of the Black Diamond Coal Company had been thus acquired, the petitioner, as sole stockholder, had the assets of the Black Diamond Coal Company transferred to itself. In addition, under the resolution of the Black Diamond Coal Company authorizing the transfer of the properties, it was recited that the petitioner expressly assumed all of the liabilities and indebtedness of the Black Diamond Coal Company, and an agreement to that effect was signed by both corporations. The evidence offered as to the value of the assets received by the petitioner was not of the most satisfactory nature, but we regard it as sufficient to justify our finding that such value was in excess of the amount now sought to be collected from the petitioner. Whether, therefore, we view the liability as one in equity arising on account of the liquidation of the Black Diamond Coal Company to its sole stockholder, the petitioner, or as one arising at law on account of the contractual obligation under which the petitioner received the assets, we reach the same conclusion, namely, that the petitioner is a transferee within the meaning of section 280 of the Revenue Act of 1926 and therefore liable for any additional tax due from its transferor for the years here in question.

The petitioner contends, however, that, even if it should be held that it is a transferee, the amounts now in question may not be collected since the statute of limitations bars such collection. The returns of the Black Diamond Coal Company for 1919 and 1920 were filed on March 6, 1920, and March 15, 1921, respectively, and the applicable statute (section 280 (d) of the Revenue Act of 1926) provides five years from the date the returns were due or were made within which to make assessments thereon, thus permitting assessment at any time prior to March 6,1925, in the case of the 1919 return and March 15,1926, in the case of the 1920 return. On or before January 5, 1925, a waiver was filed which purported to extend the time for assessment of the tax for 1919 to December 81, 1925. Within the statutory period as thus extended for 1919 and the original statutory period for 1920, namely, on November 19, 1925, the Commissioner mailed a deficiency notice to the Black Diamond Coal Company, setting out deficiencies for 1919 and 1920. Within the 60-day period allowed for such action the Black Diamond Coal Company filed a petition with the Board, which was finally disposed of through entry of judgment on May 24, 1928, for the deficiencies here in question. After failure to collect from the Black Diamond Coal Company, the Commissioner sought to make collection from the petitioner as transferee, a deficiency notice being mailed on April 4, 1929; that is, well within the one year provided by section 280 of the Revenue Act of 1926 for such assessment.

The contention of the petitioner is that the petition which was filed, and the proceedings which were had before the Board, by the Black Diamond Coal Company were void, since that corporation was dissolved in 1920 and the person who signed the petition was unauthorized to take such action and therefore the filing of such petition did not operate to suspend the running of the statute of limitations. A similar objection is made as to the waiver. At the date of dissolution of the Black Diamond Coal Company, section 561 of the Statutes of Kentucky provided as follows:

Any corporation organized under this chapter may, by the consent in writing of the owners of the majority of its shares of stock, unless otherwise provided in the articles of incorporation or amendments thereto, close its business and wind up its affairs; and when any corporation expires by the terms of the articles of incorporation, or by the voluntary act of its stockholders, it may thereafter continue to act for the purpose of closing up its business, but for no other purpose; and it shall be the duty of the officers to settle up its affairs and business as speedily as possible; and they shall cause notice to be published, for at least once a week for four consecutive weeks, in some newspaper printed and published in the county, if any, of the fact that it is closing up its business; and all debts and demands against the corporation shall be paid in full before the officers receive anything.

The argument advanced is that the foregoing statute contemplates an existence after dissolution of only a reasonable length of time and that a continuation from 1920 until 1925, when the waiver and petition were signed, would constitute an unreasonable length of time. We think it clear from the expressed purpose of the statute for a continuation of the corporate existence after dissolution, namely, to enable the corporation to close its business and wind up its affairs,” that such period will necessarily vary in accordance with the peculiar circumstances surrounding a given case, and we find nothing in the decided cases of Kentucky from which a definite time limit could be fixed for all cases. In the case of Ewald Iron Co. v. Commonwealth, 140 Ky. 692; 131 S. W. 774, it was stated that “ Two years is a reasonable time ordinarily for closing up the business of a corporation and, where the provisions of the statute are entirely disregarded, the parties will not be heard to say that two years is not a reasonable time,” and from the above holding the petitioner argues that, “ The highest court of the State of Kentucky has laid down the rule that under Section 561 two years is a reasonable time for closing the affairs of a dissolved corporation.” We do not so interpret the opinion of the court. In that case there had been a disregard of the provisions of the statute and an attempt to escape certain taxes by failing to wind up the affairs of the corporation and the court said it would not allow the corporation (or its stockholders) “ to profit by its own wrong.” That the facts in a particular case must govern is shown from the following statements by the court in Holliday v. Cornett, 6 S. W. (2d) 497, where reference is made to the case relied upon by the petitioner:

The rigorous rules oí the common law by which all rights and liabilities oí a corporation cease upon its dissolution have long since been modified by statute in this state; and now, even after dissolution, such corporation may continue to act for the purpose of closing its business and winding up its affairs, gee section 561, Ky. Statutes. The statute places no limitation on the time allowed for this purpose, but necessarily contemplates a reasonable length of time. In Ewald Iron Co. v. Commonwealth, 140 Ky. 692, 131 S. W. 774, it was held that two years were sufficient for the purposes of taxation. But, as pointed out in Young v. Fitch, 182 Ky. 29, 206 S. W. 29, that case has no application to the period in which the dissolved company may continue to act in settling its affairs, and it would seem that this must depend on the facts- in the particular ease. See Castle's Adm'r v. Acrogen Coal Co., 145 Ky. 591, 140 S. W. 1034; Smith v. Commonwealth Land & Lumber Co., 172 Ky. 607, 189 S. W. 912; Young v. Fitch, supra.

The evident purpose of the statute is to enable a corporation to wind up its affairs, and among the very essential duties to be performed under such circumstances is the payment of debts, including outstanding taxes. There is no suggestion that the tax liability with which we are concerned was left unsettled an unreasonable length of time, but rather that the corporate existence of a dissolved corporation could not continue longer than two years. We disagree. Certainly, it is not unusual for controversies of this character to continue for a much longer period. In some cases the extension of time is at the request of the taxpayer, who desires that the fullest consideration be given to whatever issue has arisen, and, again, at the instance of the Commissioner, who, because of the pressure of business, is unable to give earlier consideration to a particular case. In any event, on the record before us, we are satisfied that an unreasonable length of time had not expired on January 5, 1925, when the waiver was signed and on November 19,1925, when a deficiency notice was mailed to the Black Diamond Coal Company.

Further, it ‘is suggested that John E. Buckingham was not authorized to sign the waiver or petition in question. It is true that no meeting of the board of directors was held after the dissolution of the corporation at which authority could be given, but we do not consider that material. The statute (section 561, sufra) provides that it shall be the duty of the officers of the corporation to settle up its affairs, and certainly action looking to the settlement of a tax controversy would come within such duties. Buckingham was president of the Black Diamond Coal Company at dissolution and became president of the petitioner, the successor. As such officer, he signed the returns of the Black Diamond Coal Company for 1919 and 1920, as well as the waiver for 1919, and the petition with respect to deficiencies which had been determined for 1919 and 1920. “ The board of directors of the corporation acts as a body in managing the corporate affairs, but a tax waiver signed by one, an authorized corporate officer, is sufficient.” (Commissioner v. Godfrey, 50 Fed. (2d) 79, and cited cases.) There is no suggestion that such action was beyond his ordinary corporate authority or that any other officer had been selected to perform such function. A situation such as we have here is distinguishable from that which arose in Farmers & Planters Tobacco Warehouse Co., 22 B. T. A. 1331, where it was affirmatively shown that two officers had been authorized to wind up the affairs and an officer, other than those designated, sought to extend the statutory period through the execution of a waiver. The waiver was held ineffective. A similar situation does not exist in the case at bar.

In view of the foregoing, we are of the opinion that the waiver was effective to extend the statutory period for assessment to December 31, 1925; that the petition was properly filed by or on behalf of the Black Diamond Coal Company and accordingly operated to suspend the running of the statute until its disposition on May 24,1928; and that accordingly the deficiency notice to the petitioner, as transferee, on April 4, 1929, was timely.

The conclusion which we have reached with respect to the statute of limitations makes it unnecessary to consider the further contention advanced by the Commissioner as to the conclusiveness against the petitioner, as transferee, of the judgment rendered against the Black Diamond Coal Company, the transferor.

Judgment will be entered for the respondent.


author: Trammell :

text:
    Susan Dwight Bliss, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 58391, 60709.
    Promulgated December 2, 1932.

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

Trammell :

This case was submitted upon the pleadings and certain stipulations of the parties, set out above as our findings of fact. The issues presented in the original pleadings have been disposed of by the stipulations, but in an amended answer the respondent alleges that the deficiencies as originally determined by him were understated because of the allowance of deductions for contributions in excess of 15 per cent of the petitioner’s “ ordinary net income ” before deducting contributions, and asserts claim for increased deficiencies accordingly.

The petitioner claimed deductions from gross income for each of the taxable years in excess of 15 per cent of her ordinary net income, but in amounts less than 15 per cent of her combined “ ordinary net income ” and “ capital net gain.” It is stipulated in effect that the amounts so claimed by. the petitioner on account of contributions constitute allowable deductions within the purview, and subject to the limitations, of section 23 (n) of the Revenue Act of 1928, which provides that in computing “ net income ” there shall be allowed as deductions, among other things:

(n) Charitable and, other contributions. — In tbe case of an individual contributions or gifts made witbin the taxable year * * * to an amount which * * * does not exceed 15 per centum of the taxpayer’s net income as computed without the benefit of this subsection. * * *

Thus, the issue presented is whether the maximum amount which an individual may deduct for contributions in computing net income is 15 per cent of “ ordinary net income,” or whether such maximum deduction may include also a corresponding percentage of “ capital net gain.” This question involves a construction of the provisions of the statute relating to net income and capital net gains.

The Revenue Act of 1928 provides for the taxation of capital net gains as follows:

[Sec. 101.] (a) Taw in case of capital net gain. — In the case of any taxpayer, other than a corporation who for any taxable year derives a capital net gain * * * , there shall, at the election of the tawpayer, be levied, collected, and paid, in lieu of all other taxes, imposed by this title, a tax determined as follows: a partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner as if this section had not been enacted and the total tax shall be this amount plus 12y2 per centum of the capital net gain. [Italics supplied.]

It follows from the above provisions of the statute that if an individual taxpayer derives a capital net gain and elects to have the tax computed at the special rate therein provided, as the petitioner in this case has done, the amount of such capital gain is excluded from gross income for the purpose of computing normal and surtaxes upon ordinary net income.

Section 21 of said act defines “ net income ” as meaning the gross income computed under section 22, less the deductions allowed by section 23, and the latter section provides in subsection (n) that in computing net income deductions for charitable contributions shall be allowed to an amount which does not exceed 15 per cent of the taxpayer’s net income computed without such deductions.

Hence, if the capital net gain has been excluded from gross income for the purpose of computing the tax thereon at the special rate provided, it can not at the same time form a part of the basis for computing the maximum deduction allowable for contributions. On the other hand, if the taxpayer does not elect to have the capital gain taxed at the special rate, it is then included in the gross income, and the charitable deduction would be computed on the basis of the resulting net income.

This construction of the statute is further supported by the fact that section 101 (c) defines “ ordinary net income ” as meaning “ the net income computed in accordance with the provisions of this title, after excluding all items of capital gain, capital loss, and capital deductions.” If capital gain is excluded from gross income, and capital deductions are also excluded in computing “ ordinary net income,” it is obvious that the term “ net income ” as used in section 23, which furnishes the basis for computing the maximum deduction for contributions, means “ ordinary net income,” and such deductions must be computed on the basis of net income from which all capital gain, capital loss and capital deductions have been excluded.

Again, section 101 (c) defines “ capital net gain ” as meaning “ the excess of the total amount of capital gain over the sum of (A) the capital deductions and capital losses, plus (B) the amount, if any, by which the ordinary deductions exceed the gross income computed without including capital gains.”

Charitable contributions are not allowed as capital deductions, and can not be used in computing maximum deductions for charitable contributions. The taxpayer can not exclude capital gain from gross income for the purpose of getting the benefit of the lower rate of tax thereon, and at the same time include capital gain in gross income for the sole purpose of computing the maximum deduction for contributions.

In the above provisions of the statute, we think Congress has; clearly and designedly limited allowable deductions for charitable and other contributions to a maximum of 15 per cent of the ordinary net income computed upon the basis of excluding all items of capital gain, capital loss and capital deductions.

The contention of the petitioner can not be sustained. The deficiencies will be redetermined accordingly, after giving effect to the stipulations of the parties on other points, as set out in our findings of fact.

Judgment will he entered under Rule 50.


author: Trammell: Matthews,

text:
    George Drumheller, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 41515, 45752.
    Promulgated December 2, 1932.

      J. F. Watson, Esq., for the petitioner.

      P. A. Bayer, Esq., for the respondent.
   OPINION.

Trammell:

The portion of the deficiency for the calendar year 1925 which is in issue results from the inclusion in petitioner’s gross income of the whole amount of a dividend on Whitehouse-Drumheller Company stock (owned by the marital community) distributable by the company in that year. The deficiency for the calendar year 1927 results from the inclusion in petitioner’s gross income for that year of $33,886.24, representing one-half the income of the community estate of which Anna M. Drumheller, deceased wife of petitioner, and petitioner had been owners.

The basis of respondent’s determination for both years is that no separate books of account were kept and that the entire income of the estate was distributed to the petitioner.

The petitioner contends that only one-half of the income of the estate is taxable to him and that the other half was not distributed to him and could not be distributed to him because the estate was insolvent and still in the process of administration, and, under the laws of the State of Washington, where an estate is insolvent there can be no distribution in whole or in part to devisees or legatees until all the debts are paid and a final order is entered by the probate court.

We have considered the provisions of the statutes of Washington relative to probate law and procedure, Title X, Remington’s Compiled Statutes of Washington, 1922. Sections 1462, 1463 and 1464 provide for the settlement of estates without administration. These sections are quoted in part as follows:

§ 1462. Settlement Without Court Intervention-Order of Distribution — Management-Citation. In all cases where it is provided in the last will and testament of the deceased that the estate shall be settled in a manner provided in such last will dnd testament, and that such estate shall be settled without the intervention of any court or courts, and where it duly appears to the court, by the inventory filed, and other proof, that the estate is fully solvent, which fact may be established by an order of the court on the filing of the inventory, it shall not be necessary to take out letters testamentary or of administration, except to admit the will to probate and to file a true inventory of all the property of such estate and give notice to creditors and to the state board or person having charge of the collection of inheritance tax, in the manner required by existing laws. After the probate of any such will and the filing of such inventory all such estates may be managed and settled without the intervention of the court, if the last will and testament shall so provide. But when the estate is ready to be closed the court, upon application, shall have authority and it shall be its duty, to make and cause to be entered a decree finding and adjudging that all debts have been paid, finding and adjudging also the heirs and those entitled to take under the will and distributing the property to the persons entitled to the same, such decree to be made after notice given as provided for like decrees in the estates of persons dying intestate: * * * (L. ’17, p. 666, § 92.)
§ 1463. Powers of Nonintervention Executors. Executors acting under wills such as are mentioned in the last preceding section shall have power, after the filing of an inventory of the estate, if the said estate has been adjudged solvent, to mortgage, lease, sell and convey the real and personal property of the testator without an order of the court for that purpose and without notice, approval or confirmation, and in all other respects administer and settle the estate without the intervention of the court. (L. ’17, p. 667, §93.)
§ 1464. Right to Possession and Management. Every executor or administrator shall, after having qualified, by giving bond as hereinbefore provided, have a right to the immediate possession of all the real as well as personal estate of the deceased, and may receive the rents and profits of the real estate until the estate shall be settled or delivered over, by order of the court, to the heirs or devisees, and shall keep in tenantable repair all houses, buildings and fixtures thereon, which are under his control. (L. ’17, p. 667, § 94.)

Section 1366 of the Washington statute provides that title to real estate shall vest immediately in the heir or devisee, subject to the debts of the decedent and any other charges for which such real estate is liable under the law, with the provision that no person shall be deemed a devisee until the will has been probated.

Under section 1439, the giving of a bond may be waived if the will expressly provides that no bond be required of the executor.

With respect to claims against an estate, section 1477 provides that every executor or administrator immediately after his appointment shall publish a notice of his appointment and qualification as executor or administrator, and a notice to the creditors of the deceased requiring all persons having claims to serve the same on the executor or administrator or his attorney of record and file with the clerk of the court, together with proof of such service, within six months after the date of the publication of such notice. Claims not filed within the six months are barred. This section also provides that where all the property is awarded to the widow, husband or children, the notice to creditors may be omitted.

Section 1529 provides that within thirty days after the expiration of the time for filing of claims of creditors, the executor or administrator shall make, verify by his oath and file with the clerk of the court a report of the affairs of the estate; such report shall contain a statement of the claims filed and allowed and all those rejected, and, if it be necessary to sell or mortgage any property for the purpose of paying the debts or settling any obligations against the estate, he may in such report set out the facts, showing such necessity, and ask for such sale or mortgage; such report shall likewise state the amount of property, real and personal, which has come into his hands and give a detailed statement of all sums collected by him and all sums paid out.

Section 1531 provides that, when the estate shall be ready to be closed, the executor shall make, verify and file with the court his final report and petition for distribution.

Section 1543 provides that no claim against the estate shall be paid until the same shall have been allowed by both the executor or administrator and the court.

Section 1462 provides that the court has power, upon application, to enter an order of distribution in the case of a nonintervention will. In the case of Schirmer v. Nethercutt, 288 Pac. 265, the court held that under a nonintervention will no final decree of distribution is necessary for the persons entitled to the estate to take possession thereof. See also State ex rel Johnson v. Superior Court for Walla Walla County, 131 Wash. 264; 230 Pac. 434.

In the instant proceeding it is the petitioner’s contention that the estate was insolvent, and, therefore, it did not come within the provisions of section 1462, but is subject to the provisions of the statute applicable to other estates. While it does not appear that the petitioner has complied with the provisions of the statute applicable in the case of an estate under an ordinary will or of an intestate, it is clear that the estate was insolvent, and does not come under the provisions of section 1462, which relate only to solvent estates. There were debts in an amount in excess of the value of the estate. The administration on the estate had not been completed and no distribution had been ordered. The petitioner was acting in a fiduciary capacity for the estate of his deceased wife in so far as her .interest in the property and income was concerned. We, therefore, are of the opinion that under the decisions in J. H. Tippett, Administrator,, 25 B. T. A. 69, and J. B. Brewer, Administrator, 17 B. T. A. 704, half of the community income should be taxable to the petitioner, and the other half to the estate of his deceased wife.

We do not see any merit in the petitioner’s contention that, since the crediting of the dividend by the companv resulted in a reduction of indebtedness to the company, which was incurred in community business of farming and which would have been deductible as business expenses, no part of the dividend constitutes taxable income. We think that the dividends on the community stock should be treated as other community income without any reduction on account of the offsetting indebtedness. The evidence is not sufficient to show that the indebtedness at the store was with respect to items which would be deductible as expense.

Reviewed by the Board.

Judgment will be entered under Rule 50.

Matthews,

dissenting: By its order, the court determined that the will of Anna Drumheller was a nonintervention will, within the meaning of the statute, and authorized and empowered the executor to settle the estate in accordance with the terms of the will and without the intervention of the court. When the petitioner filed the inventory and appraisal with the court on November 30, 1925, and published notice to creditors on December 11, 1925, he had complied with the necessary statutory requirements. Thereafter, he could settle the estate without the intervention of the court.

Except for the nominal bequests of $1 each to the four children, petitioner was sole beneficiary. Both his half of the estate and that willed to him by his wife were subject to the community debts. Sec. 1342, Washington Statutes. Petitioner thus acquired title to all the estate subject to all the community debts. As he was the only person interested in the estate, other than the creditors, there was no reason why he should hold the estate in his capacity as executor. No decree of distribution was necessary for him to take the estate as sole distributee. Schirmer v. Nethereutt, 288 Pac. 265. TTis method of handling the estate and the income from it after December 11,1925, was that of an owner and not that of an executor.

The filing of a list of the claims with the court on June 11, 1931, five years after a list of such claims should have been filed with the court if the estate was to be settled in accordance with the provisions of the statute, is not sufficient, in my opinion, to prove that the estate was insolvent and could not be settled under the nonintervention provisions of the statute or that it had not been distributed to the petitioner.

It would not appear from section 1462 of the Washington Statutes, relative to settlement without court intervention, that an order of solvency is required, but the court must be shown that the estate is fully solvent before an order authorizing the executors to settle it in accordance with the terms of the will, without the intervention of the court, will be issued. In Strand v. Stewart, 51 Wash. 655; 99 Pac. 1027, which involved a nonintervention will, the court said that “the only purposes of the adjudication of solvency is to determine whether the estate shall be administered according to the provisions of the will or according to the provisions of the statute.”

While no order of solvency was issued in the instant case, the court must have been satisfied that the estate was fully solvent, because it authorized and empowered the executor to settle the estate in accordance with the terms of the will and without the intervention of the court.

The position which the petitioner now takes is inconsistent with that which he took at the time he offered the will for probate and he must abide by the earlier one. See Matern v. Commissioner, 61 Fed. (2d) 663.

It is a general rule that, when an executor is also legatee or dis-tributee, no formal act is necessary to vest title to the legacy or distributive share in him as an individual, any act on his part showing an intention to retain assets in payment being sufficient. 24. C. J. 411, and Mallet v. Hall, 150 Atl. 583.

In Henbestfs Estate, 12 Phila. (Pa.) 72, it was held that a deposit in his individual name by an executor who is also legatee, of rents which he had collected, is legitimate proof of his intention to retain them in part payment of his legacy.

In the instant proceeding, the general conduct of the farm, and the deposit of the proceeds from the operation of the business in his personal bank account, indicate a distribution of the estate, as well as of the income to himself as legatee and distributee.

I think, therefore, the determination of the respondent should be approved.

SteRNHAgen agrees with this dissent.


author: Smith:

text:
    Leon C. Coblens, Petitioner, v. Commissioner of Internal Revenue, Respondent. Maurice U. Cahn, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 50168, 50169.
    Promulgated December 6, 1932.

      Bernard B. Youngman, Esq., and Eli Frank, Jr., Esq., for tlie petitioners.

      Nathan Gammon, Esq., and Vernon F. Weekley, Esq., for the respondent.
   OPINION.

Smith:

These proceedings, consolidated for hearing, are for the redetermination of deficiencies in income tax for 1928 of $16,664.28 in the case of Leon C. Coblens, and of $12,886.49 in the case of Maurice U. Cahn. The question presented for decision is whether the petitioners sustained statutory net losses in 1927 which may be deducted from gross income in the determination of tax liabilities for the year 1928.

The petitioners were the owners of all of the outstanding stock of a department store corporation known as Cahn-Coblens Company, which for many years prior to 1923 had conducted a department store in Baltimore, Maryland. In 1923 the Cahn-Coblens Company was consolidated with Bernheimer Brothers, a partnership, which also conducted a department store in Baltimore, the new corporation being known as “ The Bernheimer Leader Stores, Inc.”

As a result of the reorganization in 1923, the petitioners by exchange of their shares of stock in Cahn-Coblens Company for stock of the new corporation, which exchange was nontaxable under the Federal income tax laws, acquired 8,000 shares and 7,600 shares, respectively, of no par common stock of The Bernheimer Leader Stores, Inc. Pursuant to an agreement with the petitioners .to have an investment in the new corporation approximately equal to the investment of Bernheimer Brothers therein, Coblens and Cahn purchased from the corporation, at $50 per share, 2,000 shares and 2,360 shares, respectively, additional of the no par common stock. Coblens became president of the new corporation and Cahn vice president, and remained as such until some time in 1927, when each sold his holdings of common stock to the May Department Stores Company, which corporation operated a chain of department stores in different cities. Upon the sale of their holdings in 1927, Coblens sustained a loss of $91,281.35 and Cahn a loss of $114,948.83.

During the years 1927 and 1928 the petitioners were, and had been for many years prior thereto, large speculators in stocks, buying some outright and carrying others on margin. They purchased and sold shares for their own account. Purchases and sales were numerous and each considered the trading in stocks his principal business.

Shortly after the organization of The Bernheimer Leader Stores, Inc., the petitioners endeavored to sell their holdings of stock in that company. Cahn agreed with Coblens not to press his stock for sale until Coblens bad sold enough to pay off certain debts. Coblens listed his shares of stock with a New York brokerage concern for sale at $50 per share, and in 1924 succeeded in selling 200 shares at that price. He sold a few additional shares at slightly less than $50 per share, but both petitioners retained most of their stock until they had an opportunity to sell their entire holdings to the May Department Stores Company in 1927, at the losses above indicated.

Upon the sale of their shares in 1927, Coblens was employed by the May Department Stores Company and served in an advisory capacity throughout the balance of the year 1927 and in 1928, but devoted little time to the affairs of the company. Cahn had no business after the sale of his shares in 1927 other than that of buying and selling securities for his own account.

In their income tax returns for 1927, the petitioners Coblens and Cahn reported net losses for the year of $72,141.45 and $52,319.23, respectively, which amounts include the losses on the sale of the stock of The Bernheimer Leader Stores, Inc. In their income tax returns for 1928, the petitioners brought forward the net losses shown in their 1927 returns and claimed their deduction from gross income in the determination of net income for 1928. The respondent has disallowed these deductions in the determination of the deficiencies herein, upon the ground that the losses on the sale of The Bernheimer Leader Stores, Inc., stock were not incurred in a trade or business regularly carried on by the petitioners.

A net loss, to be deductible from the gross income of a succeeding year under the provisions of the Revenue Act of 1926, must be “ attributable to the operation of a trade or business regularly carried on by the taxpayer.” Sec. 206. A net loss sustained from the operation of a trade or business in 1926 or 1927 may be deducted from the gross income of 1928 under the provisions of section 117 (e) of the Revenue Act of 1928.

The petitioners contend that the losses on the sale of their stock in The Bernheimer Leader Stores, Inc., are includable in computing their statutory net losses for 1927, either as losses incurred in their regular business as dealers in securities, or in their regular business as owners and operators of a department store.

We are of the opinion that neither of these contentions is supported by the facts in these proceedings. Even if it be conceded that the petitioners were both established dealers in securities to such an extent that their trading in securities constituted a regular business carried on by them, it would have to be held that the transactions by which they sold the shares of stock in question were not in the regular course of such business. With respect to this stock the petitioners were in no sense traders. The stock was not of a speculative character. The history of its acquisition by the petitioners, dating back over a period of several years, clearly refutes the idea that it was held for trading or speculative purposes.

The facts here are similar to those in Wade L. Street et al., Executors1, 26 B. T. A. 17, where we held that, where the decedent was the principal owner of the stock of a company and gave one-half of his time to the active services of the company and spent one-fourth of his time in the purchase and sale of stocks listed on the New York Stock Exchange, he did not sustain a statutory net loss when he sold all of his stockholdings in the company. In that opinion we said:

* * * Tlie Preserve Company stock was not an asset used in the conduct of the business of buying and selling stocks and bonds, but was an asset quite apart from that business and held for an entirely different purpose and under different circumstances. It had no relation whatever to that business. Some of the capital assets used in the conduct of that business were shares of stock similar to the Preserve Company stock, but there the similarity ends. Under such circumstances we hold that the loss did not result from the operation of a business of buying and selling securities regularly carried on by the decedent.

See also Dalton v. Bowers, 56 Fed. (2d) 16, and cases therein cited.

The purpose and scope of the net loss provisions of the statute were defined in Dalton v. Bowers, supra, as follows:

By the statute, allowing the deductions and carrying over the loss for two years, Congress intended to give relief to persons engaged in an established business for losses incurred during a year of depression in order to equalize taxation in the two succeeding and more profitable years. It was not intended to apply to occasional or isolated losses. Congress had made this distinction. Anderson v. U. S., 48 F. (2d) 201 (C. C. A. 5) ; Pabst v. Lucas, 59 App. D. C. 154, 36 P. (2d) 614; De Haven Mfg. Co. v. ¶. S., (D. C.) 31 F. (2d) 999. * * *

The transactions resulting in the losses here were, with respect to any business that the petitioners may have been conducting as buyers and sellers of securities, occasional or isolated transactions to which the statute was not intended to apply.

The facts of record do not bring this case within the rule of Washburn v. Commissioner, 51 Fed. (2d) 949, and cases therein cited, upon which the petitioners rely. The facts in the Washburn case were that:

* * * The business of petitioner was not merely looking after investments or reaping the return of past labor represented thereby. He had an office with a complete organization, and gave personal attention to, and participated in, the management of these various companies and enterprises in which he had the investments, not for the purpose cf conserving them merely, but of carrying them on successfully and making them profitable. To this he gave his entire time, receiving no salary, except such as might cover his expenses. His work for these different enterprises was not merely sporadic, but ivas a continuous and regular carrying on. * * *

The court said:

* * * A party may have investments in corporate stock, have no particular occupation, and live on the return of his investments. That would not constitute business under the statute in question. He may, however, take such an active part in the management of the enterprise in which he has investments as to amount to the carrying on of a business. * * *

The facts in the instant proceedings do not show to what extent either of the petitioners actively participated in the business of The Bernheimer Leader Stores, Inc. They held the offices of president and vice president, respectively, but apparently they were not active in the business. Upon this point, petitioner Cahn testified as follows:

Q. You were a vice-president cf the Bernheimer Leader Company, but you have already said that your duties were not very confining. What was the purpose of your remaining as an officer of the Bernheimer Leader Company?
A. Well, I attended the meetings; I gave some attention to matters that came up that pertained to the operation of business when they were discussed with me, but I was not active.

Petitioner Ooblens testified that he accepted the position of president of The Bernheimer Leader Stores, Inc., principally on account of his connection as a dealer in securities and the advantages that this would afford in marketing the stock of the company. Instead of their holding “ most of the stock ” of the corporation, as was the situation in the Washburn case, the petitioners together held not more than 50 per cent of the stock of The Bernheimer Leader Stores, Inc. It is upon these facts, namely, that the petitioners did not consider the operation of the department store as their principal business, that the petitioners urge their claim for the net loss deduction on the grounds that the sale of the stock was a transaction in the regular course of their principal business as dealers or traders in securities.

Clark v. Burnet, 59 Fed. (2d) 1031, also is distinguishable from these proceedings upon the facts. There, as in the Washburn case, the court found:

* * * that during the times in question appellant was engaged in regularly carrying on the business of dredging, operated by a corporation of which appellant was principal owner and active directing head, and to which he devoted all of his time and energies. Appellant accordingly was necessarily concerned with the financial conditions and difficulties which beset the business, and he was compelled by circumstances to indorse the company’s notes in order to supply it with necessary operating funds. This action was not isolated or occasional but became part of the operation of the business, and helped to carry it on. * * *

See also Strouse v. Commissioner, 59 Fed. (2d) 600, where the Circuit Court of Appeals for the Fourth Circuit, upon similar facts, affirmed the Board’s ruling, 24 B. T. A. 748, that a loss sustained by a stockholder on account of his guarantee of certain operations of the corporation was not incurred in a trade or business regularly carried on by the taxpayer and was not a statutory net loss.

In these circumstances we find no error on the part of the respondent in denying the deduction of the loss sustained by the petitioners from the sale of the stock in 1927 in computing net income for 1928.

Judgment will be entered for the respondent.


author: Steenhagen :

text:
    H. Seldon Taylor, Jr., and Virginia Trust Company, as Executors of the Estate of H. Seldon Taylor, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 64444.
    Promulgated December 6, 1932.

      Eugene G. Smith, Esg., for the respondent.
   OPINION.

Steenhagen :

The petitioners omitted any value for the Broad Street or Franklin Street properties from the decedent’s gross estate shown on the estate tax return. The respondent determined that the value of such properties at the time of death was part of the statutory gross estate, and he argues that the inclusion is required by section 302(c) of the Revenue Act of 1926. This provides that the value of the gross estate shall include all property,' “ To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, * * * intended to take effect in possession or enjoyment at or after his death * *

The petitioner contends that no part of the properties was transferred by decedent to take effect in possession or enjoyment at or after decedent’s death, and furthermore that, since both transfers were made before the first estate tax was imposed (Revenue Act of 1916), an application to them of the Revenue Act of 1926 would be unconstitutionally retroactive.

We are of opinion that the petitioner’s contention that section 302(c) is inapplicable is correct. The Broad Street property was, according to this record, transferred in 1895 not by decedent, but by Minna Keppler. It does not appear by whom the consideration was paid, but even if it were assumed that decedent had paid it, and further that for this reason the trust might be attributed to decedent, and further that this justified regarding the real prop-ery as the subject of a transfer by decedent, yet it could not be said that such transfer was one taking effect in possession or enjoyment at or after his death. It was complete in 1895, with the entire beneficial interest in Sallie during her life and in the children after her death. Nothing was, by the original transfer, to take effect at or after decedent’s death. Such death during Sallie’s life merely ended the possibility of his expectancy without enlarging or enhancing Sallie’s estate. This was unlike the first trusts considered in Union Guardian Trust Co., 26 B. T. A. 1321, relied upon by respondent, whereby the decedent by his original transfer reserved as much as he transferred, namely the right to retake if he survived. Here he kept nothing, but created the right to take upon his wife’s death. While her death before his was made an occasion for an effective transfer, his death had no such effect, but merely destroyed his own possibility of acquisition. May v. Heiner, 281 U. S. 238.

The Franklin Street property was transferred by decedent and his wife in 1911. It must also be held to be beyond the reach of section 302(c), for its effectiveness was- unrelated to decedent’s death. While.upon Sallie’s death before his, he would take, his own death left the possession and enjoyment unaffected. It was already in Sallie and there it continued, all by virtue of the original transfer.

If it could be said that section 302(c) were applicable, the question would then confront us whether the Constitution forbids such application, since the original transfers were made in 1895 and 1911 before the 1926 Act or any of its forerunners were enacted. This, however, we must refrain from considering, since the statute as we have construed it avoids constitutional difficulty.

The petitioner concedes that one-half the value of partnership office furniture is properly within decedent’s gross estate.

Judgment will loe entered under Rule 50.


text:
    Evelyn F. Gregory, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 55299.
    Promulgated December 6, 1932.

      George W. Saam, Esq., for the petitioner.

      E. L. Qorbin, Esq., for the respondent.
   OPINION.

Steenhagen :

The respondent determined a deficiency of $10,678.16 in the petitioner’s income tax for 1928, all of which is assailed by the petitioner on the ground that the respondent has erroneously treated $133,333.38 as a dividend from the United Mortgage Corporation. There is no dispute about the facts, both parties having agreed that they are essentially as set forth in the report of a revenue agent.

The petitioner was the owner of all the outstanding (5,000) shares of the United Mortgage Corporation. Of these, 3,300 shares had been purchased between October 1, 1920, and December 16, 1921, at a cost of $180,000, and 1,700 shares between January 12, 1927, and January 3,1928, at a cost of $170,000. The United corporation had among its assets 1,000 shares of the Monitor Securities Corporation. On September 18, 1928, the Averill corporation was organized under Delaware law. On September 20,1928, the United corporation transferred to the Averill corporation the 1,000 shares of Monitor stock, in consideration for which the Averill corporation issued its shares to the petitioner. On September 24, 1928, the Averill corporation liquidated and dissolved, thus distributing its entire assets, consisting of the Monitor shares, to its only shareholder, the petitioner. On the same date as the liquidation distribution, petitioner sold the Monitor shares for $133,333.33.

In her return, she treated these several transactions as governed by the several reorganization provisions of the statute, and returned as capital net gain derived from the sale price of $133,333.33 the amount of $76,007.88 upon an apportioned cost basis of $57,325.45.

None of the foregoing facts or figures is in dispute, the respondent conceding that, if the petitioner was legally correct in applying the reorganization provisions of the statute to the situation, her computation of gain is correct. His determination is based upon the view that the creation of the Averill corporation was without substance and must therefore be disregarded, and that the petitioner must be taxed as upon a dividend consisting of the amount received upon the sale of the Monitor shares as if such amount had been distributed by the United corporation directly to her. He argues that the mere organization of the Averill corporation for the purpose, as it is conceded, of enabling the petitioner and the United corporation to avoid tax, followed almost immediately by the dissolution of the Averill corporation, was a transparent fiction.

In our opinion, the respondent erred in disregarding the Averill corporation. During the short period of its existence it performed its function of issuing its shares, taking and holding the Monitor shares, and then distributing them in liquidation. As long as corporations are recognized before the law as if they were creatures of substance, there is nothing to distinguish this corporation from innumerable others, whether they be devised to achieve a temporary tax reduction or some other legitimate end. Congress has not left it to the Commissioner to say, in the absence of fraud or other compelling circumstance, that the corporate form may be ignored in some cases and recognized in others. Whatever can be said of the . wisdom of recognizing the corporate device, the taxing statutes have so plainly accepted it and provided the detailed methods of taxing its transactions, that to disregard it in a case like this would vary the time, method and amount of tax which the statute imposes.

The purpose to rediice taxes does not control the recognition of the corporation, Bullen v. Wisconsin, 240 U. S. 625, nor does the extent of its legitimate function or operations. Its existence can not be denied to escape liability, Nowland Realty Co. v. Commissioner, 47 Fed. (2d) 1018; People v. Williams, 198 N. Y. 54; 91 N. E. 266; 112 West 59th Street Corp., 23 B. T. A. 767, and with equal force it may enjoy its corporate benefits. That the petitioner was its sole shareholder does not serve to obscure its identity, Planters Cotton Oil Co. v. Hopkins, 286 U. S. 332, else the United corporation would likewise be obliterated, and this is not suggested. The shortness of its life does not indicate less than a complete entity while it lived. Regal Shoe Co., 1 B. T. A. 896.

It should be remembered, when considering the effects upon tax liability of corporate plans, that the statute has, since the Act of 1918, provided in more or less detail the system of tax determination, and this system unmistakably permits the bona fide use of the corporate device. That its effect may be, as here, to tax a profit piecemeal over several periods is so clearly within the legislative system that it can not be denied. As a result of it, the benefit of one year may be the burden of another; and the incidence of the statute may be as favorable to the Government in one case as it is unfavorable in another. A statute so meticulously drafted must be interpreted as a literal expression of the taxing policy, and leaves only the small interstices for judicial consideration. The general legislative plan apparently was to recognize the corporate entity and, in view of such recognition, to specify when the gains or losses would be recognized and upon what basis they should be measured. We may not destroy the effectiveness of this statutory plan by denying recognition to the corporation and thus preventing consideration of its transactions.

The recognition of the Averill corporation being determined, it follows, as the respondent concedes, that the petitioner’s computation of gain was correct. There was a statutory reorganization under the Revenue Act of 1928, section 112 (i), and hence no gain to the petitioner as distributee from the United corporation of the Averill shares, section 112(g). See Miller on Reorganizations, ch. 13. The effect was to apportion the basis formerly applicable to petitioner’s United shares between the United shares and the Averill shares, section 113 (a) (9); art. 600, Regulations 74; Miller on Reorganizations, ch. 20. The liquidation of the Averill corporation, whereby petitioner received the Monitor shares, resulted in gain of $76,007.88, the difference between the undisputed basis of $57,325.45 attributed to the Averill shares, and $133,333.33, the undisputed value of the Monitor shares so received, section 115 (c). The immediate sale by petitioner of the Monitor shares for no more than their value as used in the foregoing computation resulted in the realization by her of no further gain. See Edgar J. Hesslein, 21 B. T. A. 61; affd., 53 Fed. (2d) 1081; I. T. 2259, V-1 C. B. 18; I. T. 2530, IX-1 C. B. 194.

Since only 3,300 of her United shares were held by petitioner more than two years, her gain was subject to the capital gains provision, section 101, only to a like extent. This the petitioner concedes.

Judgment will be entered under Rule 50.

       Section 112(k), Revenue Act of 1932, is an indication that when a corporation is not to he “ considered as a corporation ” the statute expressly says so.


author: Sternhagen : Love, Smith, Matthews,

text:
    British-American Tobacco Company, Ltd., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 41224.
    Promulgated December 6, 1932.

      3. 3. Shelton, Esq., and 3. M. Robertson, Esq., for the petitioner.

      O. G. 3ol/mes, Esq., and John D. Foley, Esq., for the respondent.
   OPINION.

Sternhagen :

The respondent determined deficiencies of $12,600.20 for 1925 and $182,832 for 1926 in the income tax of the petitioner, a foreign corporation. The facts are stipulated and are, in essence, that in the years in question the petitioner received from the United States stipulated amounts of interest upon refunds of overpayments of income and profits taxes paid for 1917, 1918, and 1919, which respondent has determined were within petitioner’s taxable income. This determination the petitioner challenges and cites Stoekholms Enskilda Bank, 25 B. T. A. 1328. That decision decides precisely the same issue; and in accordance therewith, the respondent’s determination is reversed.

Reviewed by the Board.

Judgment will be entered under Bule 50.

Teammell concurs in the result.

Love,

concurring: I concur in the prevailing opinion in this case, but as it is based entirely on the opinion and decision in the Stoek-holms Enskilda Bank case, and as I believe that case, while correct in result, was based on unsound grounds, I here desire to set forth my views.

I agree with the dissenting opinion of Smith, Member, on the proposition that the Government of the United States is a resident within the territorial limits of the United States.

As pointed out by the Supreme Court in Van Brocklin v. State of Tennessee, 117 U. S. 151, the Government of the United States is a. “ great corporation,” ordained and established by the American people in their sovereign capacity as an agency of government, to exercise, and empowered to exercise, on behalf of the sovereign, certain governmental functions, and that “ corporation’s ” domicile, or residence, is within, and coextensive with, the territorial limits of the United States. See United States v. Borcherling, 185 U. S. 223.

I do not agree with the result of the Smith dissenting opinion or, with the ground upon which the Stoekholms Enskilda Bank case was decided, for the reason that, even assuming for the sake of argument that the words “ obligations of residents, corporate or otherwise” used in section 217 (a)(1), supra, could be construed as meaning “ obligations of the United States,” it has been held, in American Viscose Corp. v. Commissioner, 56 Fed. (2d) 1033, that a refund by the United States of illegal taxes was not an “ obligation of the United States ” and that, therefore, the interest received by the Viscose Corporation on such refund was not exempt from taxation under section 213 (b) (4) of the Revenue Act of 1926, which provided that “ the term ‘ gross income ’ does not include the following items, which shall be exempt from taxation * * * interest upon * * * (C) the obligations of the United States * *

That issue was the controlling issue in the case, and the Supreme Court denied certiorari on October 10, 1932.

In the instant case, section 233 (b) provides that “In the case of a foreign corporation, gross income means only gross income from sources within the United States, determined * * * in the manner provided in section 217.” Section 217 (a) provides that “the following items of gross income shall be treated as income from sources within the United States: (1) Interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise ” and subdivision (c) provides that, “ The following items of gross income shall be treated as income from sources witKout the United States: (1) Interest other than that derived from sources within the United States as provided in paragraph (1) of subdivision (a) * * In other words, unless the interest in the instant case be brought within the provisions of section 217 (a) (1), supra, it is not subject to tax under the specific provisions of the statute. The interest in question was not interest on a bond or a note, and, as decided in the American-Viscose Gorp. case, it was not interest upon an “ obligation of the United States.” The term “ obligation ” can not mean one thing under section 213 and an entirely different thing under section 217 of the same act.

Black agrees with this concurring opinion.

Smith,

dissenting: Section 233 of the Revenue Act of 1926 provides in part as follows: .

(b) In tbe ease of a foreign corporation, gross income means only gross income from sources witbin the United States, determined (except in tbe case of insurance companies subject to tbe tax imposed by sections 243 or 246) in tbe manner provided in section 217.

Section 217 provides, in part, as follows:

(a) In tbe case of a nonresident alien individual * * * tbe following items of gross income shall be treated as income from sources witbin tbe United States:
(1) Interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, not including (A) interest on deposits with persons carrying on tbe banking business paid to persons not engaged in business within tbe United States and not having an office or place of business therein, * * *
* * * * * • * *
(c) Tbe following items of gross income shall be treated as income from sources without tbe United States:
(1) Interest other than that derived from sources witbin tbe United States as provided in paragraph (1) of subdivision (a).

The prevailing opinion of the Board holds, in accordance with Stockholms Enskilda Bank, 25 B. T. A. 1328, that the interest paid on refunds of Federal income taxes is not income from sources within the United States within the purview of section 217 (a)(1), above quoted. In that case we denied the petitioner’s contention that the interest thus received was not on “ interest-bearing obligations ” within the purview of section 217(a) (1), but gave judgment for the petitioner upon the ground that the United States was not a “ resident ” of the United States within the contemplation of the applicable provision of the statute. With this conclusion I can not agree.

The manifest intention of the statute was to include in the income of foreign taxpayers interest upon all obligations where the interest was paid by corporations or other payors which might be classed as “residents.” The statute then provides in subdivision (c) of section 217 that all other interest received by nonresidents shall be regarded as from sources without the United States. It seems to me utterly incompatible with a reasonable construction of the statute that interest paid by the United States Government is to be regarded as from a source without the United States, and that is necessarily the conclusion of the Board in the Stockholms Enskilda Bank case. I can see no reason for construing the statute as exempting from income tax the interest paid on refunds of Federal income taxes received by foreign corporations transacting business and having an office in the United States, as was the petitioner, and subjecting to tax a domestic corporation in similar circumstances, as was done in American Viscose Corp., 19 B. T. A. 937; affirmed by the Circuit Court of Appeals for the Third Circuit in American Viscose Corp. v. Commissioner, 56 Fed. (2d) 1033.

If the United States is not a resident ” of the United States within the contemplation of the statute, of what country is it a “ resident? ” In Van Brocklin v. State of Tennessee, 117 U. S. 151, the Supreme Court, quoting Chief Justice Marshall, said:

* * * The United States is a government, and consequently a body politic and corporate, capable of attaining the objects for which it was created, by the means which are necessary for their attainment. This great corporation was ordained and established by the American people and endowed by them with great powers for important purposes. * * *

In United States v. Borcherling, 185 U. S. 223, 233, it was stated:

In Vaughn v. Northrup, 15 Pet. 1, Mr. Justice Story, delivering the cpinion of the court, said: “ The debts due from the government of the United States have no locality at the seat of government. The United States in their sovereign capacity have no particular place of domicile, but possess, in contemplation of law, an ubiquity throughout the United States; and the debts due by them are not to be treated like the debts of a private debtor, which constitute local assets in his own domicile,” and accordingly it was held, in that case, that “ the administrator of a creditor of the government duly appointed in the State where the creditor was domiciled at the time of his death, has full authority to receive payment and give a full discharge ctf the debt due his intestate in any place where the government may choose to pay it, whether it be at the seat of government or at any other place where the public funds are deposited; and that moneys so received constituted assets * *

See also Mackey v. Coxe, 18 How. 100, 105; Wyman v. Halstead, 109 U. S. 654. I am of opinion that interest received by a foreign corporation upon refunds of Federal income taxes paid by the United States Government constitutes income from a source within the United States within the meaning of the statute.

Seawell agrees with the above dissent.

Matthews,

dissenting: I am unable to concur in the majority opinion in this case, because I think the decision in Stockholms Enskilda Bank, 25 B. T. A. 1328, upon which it rests, is wrong.

The decision in the Stockholm# Bank case rests on the view that, although section 217 (a) (1) is not limited to interest on obligations similar to bonds and notes, interest paid by the United States on a refund of tax does not come within such provision because the United States is not a resident of the United States, and, therefore, that such interest comes within subsection (c) 1, and is to be treated as income from a source without the United States. To hold that interest paid by the United States Government is to be treated as from a source without the United States is to construe the statute as exempting such interest from tax when paid to a nonresident alien or foreign corporation.

It is a well settled rule that exemptions from taxation must be express and must be strictly construed. The rule as to the proper-construction of doubtful statutes, which was invoked in the Stockholm# Bank case, is not the rule to be applied in determining exemptions from taxation.

In Bank of Commerce v. Tennessee, 161 U. S. 134, the Supreme Court said:

These cases show the principle upon which is founded the rule that a claim for exemption from taxation must be clearly made out. Taxes being the sole means by which sovereignties can maintain their existence, any claim on the part of any one to be exempt from the full payment of his share of taxes on any portion of his property must on that account be clearly defined and founded upon plain language. There must be no' doubt or ambiguity in the language used upon which the claim to the exemption is founded. It has been said that a well founded doubt is fatal to the claim; no implication will be indulged in for the purpose of construing the language used as giving the claim for exemption, where such claim is not founded upon the plain and clearly expressed intention of the taxing power.

The rule was reaffirmed in Theological Seminary v. Illinois, 188 U. S. 662, 672, in these words:

The rule is that, in claims for exemption from taxation under legislative authority, the exemption must be plainly and unmistakably granted; it cannot exist by implication only; a doubt is fatal to the claim.

The rule was discussed fully in this Board’s decision in Kansas City Southern Ry. Co., 16 B. T. A. 665.

The question involved can not be decided by looking only at subsections (a) 1, and (c) 1, of section 217, as was done in the Stock- holms Bank case, nor even by looking merely at all of section 217. The statute as a whole must be taken into consideration.

Reading the statute as a whole,; it plainly intends to tax nonresident aliens and foreign corporations on net income from sources within the United States. Section 217 contains the rules for determining the source of items of gross income, and the manner in which net income from sources in the United States is to be computed. It also exempts one item of gross income from a source within the United States, namely, interest on deposits in banks in the United States, when such income is paid to a nonresident alien individual or a nonresident foreign corporation. But “ gross income ” is defined in section 213. Subsection (a) of section 213 enumerates various items which the term “ gross income ” includes. Interest is an item specifically included. Subsection (b) enumerates certain items of income which are not included in the term “ gross income ” and which are specifically exempted from tax.

. Among the items of gross income enumerated in subsection (b) as exempt from tax is interest on “ obligations of the United States,” but in the case of obligations of the United States issued after September 1, 1917, such exemption applies only if and to the extent provided by the act authorizing the issue thereof. Subsection (b) (4) (C). It has been held that the expression “obligations of the United States,” as used in section 213 (b) (4) (C), in connection with the word “ issued,” has acquired a restricted meaning and that the exemption of such obligations and the interest thereon is based on the policy of safeguarding the public credit, and is strictly limited to this object. Kansas City Southern Ry. Co. v. Commissioner, supra; affirmed on this point, 52 Fed. (2d) 372; certiorari denied, 284 U. S. 676. It has also been held that interest on a refund of income tax is not interest on an “ obligation of the United States,” within the meaning of this provision of section 213 (b), but is taxable under section 213 (a). American Viscose Corp., 19 B. T. A. 937; affd., 56 Fed. (2d) 1033; certiorari denied, 287 U. S. 615.

Demonstrably, then, such interest as is here involved is not exempted under section 213 (b). It is taxable income in nature. The only question left is whether it is gross income from a source within the United States. Viewed from the standpoint of fact and logic, to say that the Government of the United States, which is the “ source ” of the interest here involved, is not within the United States, would be to utter a palpable absurdity. The imperium or sovereignty of the United States is coextensive with its territorial domain, and the United States as a body politic and corporate exists or resides within that domain. An obligation issuing from it, which is created by its will and consent, must, therefore, derive from a “ source within the United States.” Consequently, I have no difficulty in reaching the conclusion that the interest here in question is within the meaning of section 217 (a) 1. Certainly, any intention to exempt such an item of income on the part of Congress would have to be plainly and unmistakably expressed. There is no such expression. If it had been the intention to exempt all interest paid by the United States to nonresident aliens and foreign corporations, Congress could have written in such exemption just as it has written in the exemption of interest on bank deposits paid to nonresident aliens and nonresident foreign corporations.

If a technical argument were necessary to achieve the desired end, it might be pointed out that under section 3220 of the Revised Statutes, as amended by the Revenue Act of 1926, “ The Commissioner of Internal Revenue * * * is authorized to remit, refund, and pay back all taxes erroneously or illegally assessed or collected,” and under section 1116 interest, at the rate of 6 per cent per annum from the date such tax was paid to the date of the allowance of the refund, is to be allowed and paid on such refund. The Commissioner is an officer of the United States. Congress has imposed on him the duty and lodged in him the power to assess and collect all income taxes. It is his duty to refund all unlawful or erroneous exactions of taxes. The refund is his obligation. He is the “ source.” He is a resident of the City of Washington, the seat of the Federal Government, and certainly within the ambit of section 217 (a) 1.

That the Commissioner is to be treated as the “ source ” of the interest paid by the United States on a refund, also appears from section 221, the provisions of which, except as to rate of withholding, are made applicable to nonresident foreign corporations by section 237. Section 221, entitled “ Payment of Individual’s Tax at Source,” provides:

All persons, in whatever capacity acting, including * * * all officers and employees of the United States, having the control, receipt, custody, disposal, or payment of interest (except interest on deposits with persons carrying on the banking business paid to persons not engaged in business in the United States and not having an office or place of business therein), * * * of any nonresident alien individual, * * * shall (except in the cases provided for in subdivision (b) and except as otherwise provided in regulations prescribed by the Commissioner under section 217) deduct and withhold from such * * * income a tax equal to 5 per centum thereof. [Italics mine.]

The Commissioner has not issued any regulations under section 217 relieving officers and employees of the United States from the duty of withholding the tax from the items of income specified in section 221. It would seem, therefore, that tax should have been withheld at the source from the interest paid on the refunds made to the Stockholms Enskilda Bank, a nonresident foreign corporation.

The possibilities of a tax-free yield of 6 per cent to foreign corporations and nonresident aliens, which the decision in the Stock-holms Bank case opens up, will not be overlooked, particularly by resident foreign corporations. Under our system of self-assessment, there is nothing to prevent such corporations from including in the return of income and paying income tax on items of foreign income or, even for that matter, tax-exempt income from United States sources, such as interest on Liberty Bonds and municipal bonds, knowing full well that a claim for refund filed within the statutory period, two years, based on the erroneous inclusion in gross income of items of income from sources without the United States and items of tax-exempt income, will be allowed and that the amount of such refund will draw interest at the rate of 6 per cent from the date the tax was paid to the date of the allowance. The statute does not now require that the tax be paid under protest in order to obtain a refund.

In the instant case the parties stipulated that the petitioner, a resident foreign corporation, received in 1925 a refund of Federal income and profits taxes for 1917, and at the same time interest on such refund in the amount of $132,407.17; and that in 1926 the petitioner received a refund of income and profits taxes for 1918 and 1919 and interest upon such refund in the amount of $1,394,357.64.

If the above amounts had been paid to a citizen, resident, or domestic corporation, they would have been taxed. There is no reason of public policy why they should not be taxed when paid to a nonresident alien or a foreign corporation. They are from a source in the United States — the Government itself. The statute does not expressly exempt such interest from tax. I think, therefore, the decision in the Stockholms Enskilda Bank case should be overruled, and judgment found for the respondent in this case.