author: Black:

text:
    Alice G. K. Kleberg, Petitioner, v. Commissioner of Internal Revenue, Respondent. Alice G. K. Kleberg, Executrix of the Estate of Robert J. Kleberg, Sr., Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 86178, 86179.
    Promulgated January 14, 1941.

      Leroy G. Denman, Esq., for the petitioners.

      John E. Marshall, Esq., for tbe respondent.
   OPINION.

Black:

We shall first discuss and decide those issues which are common to both proceedings. The first of these issues is whether the agreement by petitioners with the representatives of the King estate' by which they agreed to transfer their right to receive $11,983.55 per annum for a period of 20 years from Humble for their oil and gas ilease of a three thirty-seconds interest in the King ranch for a consideration of $149,341.51, payable in two installments, was a sale of the right to receive such payments, as the Commissioner contends, ‘and whether the entire amount was taxable in 1933 although only .one-half of it was received in 1933, as the Commissioner contends, or whether the transaction simpty amounted to a step-up plan as to the time of payments, as petitioners contend, and petitioners are only required to return for taxation the actual amounts that they received in 1933. They were both on the cash receipts basis. The facts with reference to this transaction are fully stated in our findings of fact and need not be here repeated.

It is our opinion that the respondent is correct in his contention that the transaction between petitioners and the representatives of the King estate was a sale, but we do not agree with the respondent that the entire $149,341.51 is taxable to petitioners in 1933.

In Hale v. Helvering, 85 Fed. (2d) 819, the elements necessary to constitute a sale were discussed. Among other things the court said:

TRe word “sell” * * * in its ordinary sense means a transfer of property for a fixed price in money or its equivalent. United States v. Benedict (C. C. A.) 280 F. 76, 80.

Let us examine the agreement between petitioners and the representatives of the King estate. The parties were competent to contract. There was mutual consent. The thing the absolute or general property in which was transferred from petitioners to the King estate was petitioners’ right to receive 20 annual rental payments of $11,983.55 each. The price in money paid or promised was $14,670.75 in cash paid upon the execution of the agreement, and a promise to pay $74,670.75 in cash on January 2, 1934. Thus all the elements of a sale are present. Thereafter, the King estate had the absolute right to receive as its own property from Humble the entire annual rental of $127,824.60 without accounting to petitioners for any of it. Petitioners had transferred to the King estate all of their right to receive any portion of such annual rental for a cash consideration of $149,341. 51. In our opinion that transaction between petitioners and tbe King estate must be regarded as a sale as tbat word is understood in its ordinary signification.

It, however, does not follow, as respondent contends, that the entire gain is taxable in 1933, the year the sale was made. Section 111(a) of the Revenue Act of 1932 provides that the gain from the sale or other disposition of property shall be the excess of the “amount realized” therefrom over the basis. Section 111 (b) provides:

(b) Amount Realized. — Tbe amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received.

What “property” did petitioners receive during 1933 other than the sum of $14,670.15 in money? Obviously, petitioners received nothing); more in the year 1933 than the contractual promise of the King estate; to pay the remaining one-half of $149,341.51 during 1934. In C. W. Titus, Inc., 33 B. T. A. 928, after reviewing at considerable length several cases where a part of the consideration for the sales there involved was evidenced only by a contract to pay in a later year, we said:

la none of the foregoing cases was there any evidence introduced directed to the question of the fair market value of the promise to pay, except in the case of Dudley T. Humphrey, supra, discussed above.
In all of the court decisions above discussed the courts took the position that, when evidence was introduced showing that the deferred payments were evidenced only by contract, where no notes, bonds, or other evidences of indebtedness other than the contract were given, such contract had no fair market value, and that the amounts of the deferred payments should be included in income when received. * * *

Applying the principles enunciated in the Titus case and the cases discussed therein to the instant proceedings, it seems clear that only one-half of the total consideration of $149,341.51 was realized by petitioners in the taxable year 1933, and that the respondent erred in proposing to tax petitioners in 1933 upon the amount that was to be received and which was actually received in 1934.

We have examined the cases cited by the respondent in his brief in support of his contention that the entire consideration was taxable in 1933, but we do not regard these cases as being in point.

Petitioners next contend that they are entitled to a percentage depletion allowance upon the $74,670.75 which they received from the King estate during 1933 as a result of the transactions just above discussed. They contend that the payment to them of $74,670.75 in 1933 represents a cash advanced royalty payment and as such is 1 depletable. It seems to us that this contention can not be sustained, for tbe reason that petitioners did not retain théir right to receive-three thirty-seconds of the annual rental of $127,824.60 to be paid by Humble. As has already been held in this opinion, they sold that right to the King estate for a consideration of $149,341.51 payable in two installments. The reason given by the respondent in bis statement attached to the deficiency notice in Docket No. 86178 for denying depletion as to this item is that “it is held by the Bureau that the transaction represented a sale of future lease rentals, or right to receive future lease rentals and the amount received was, therefore, not subject to depletion.” We think this determination by the respondent is correct and is a valid reason for denying petitioners a deduction for depletion on the $74,670.75 which they received from the King estate during the taxable year 1933. Cf. Commissioner v. Fleming, 82 Fed. (2d) 324; Helvering v. O'Donnell, 303 U. S. 370; Helvering v. Elbe Oil Land Development Co., 303 U. S. 372; Blankenship v. United States, 95 Fed. (2d) 507; Hammonds v. Commissioner, 106 Fed. (2d) 420; and Anderson v. Helvering, 310 U. S. 404. In the Anderson case the Supreme Court, among other things, said:

The sole owner and operator of oil properties clearly has a capital investment in the oil in place, if anyone has, and so is taxable on the gross proceeds of production and is granted a deduction from gross income as compensation for the consumption of his capital. See Burnet v. Harmel, supra, at 107-108; Helvering v. Clifford, 309 U. S. 331. By an outright sale of his interest for cash, such an owner converts the form of his capital investment, severs his connection with the production of oil and gas and the income derived from production, and thus renders inapplicable to his situation the reasons for the depletion allowance. * * * [Italics supplied.]

See also R. R. Ratliff, 36 B. T. A. 762.

When petitioners transferred to the King estate their right to receive the annual payments from Humble for the lease of their three thirty-seconds interest in the King ranch lands, the King estate became entitled to receive whatever depletion, if any, was allowable as to this interest. Two separate and distinct taxpayers are not entitled to receive depletion deductions as to the same oil interest. Helvering v. Twin Bell Oil Syndicate, 293 U. S. 312. Oil this issue we sustain respondent.

We will next discuss issue 3, raised in Docket No. 86179. This issue was raised by petitioner in the alternative, and in substance is that if the Board sustains the Commissioner in his disallowance of percentage depletion deductions as respects the payments received from the three thirty-seconds interest, then the Commissioner erred in tnot allowing the petitioner in Docket No. 86179 a recovery of cost (basis in determining gain from the disposal of such interest to the King estate.

Since this opinion holds that the transaction between petitioners and the King estate was a sale of petitioners’ right to three thirty-seconds of the annual rental of $127,824.60 to be paid by Humble for a period of 20 years, it follows that the amount of gain or loss from this sale must be determined in accordance with sections 111 and 113 óf the Revenue Act of 1932. As far as the present issue: is concerned, the material provisions of these sections are as follows:

SEC. 111. DETERMINATION OF AMOUNT OF GAIN OR LOSS.
(a) Computation of Gain or Loss. — Except as hereinafter provided in this section, the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 113 (b), and the loss shall be the excess of such basis over the amount realized.
SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.
(a) Basis (Unadjusted) of Property. — The basis of property shall be the cost of such property; except that—
% * * * * * *
(o) Property transmitted at death. — * * * If the property was acquired by the decedent’s estate from the decedent, the basis in the hands of the estate shall be the fair market value of the property at the time of the death of the decedent. * * *

Petitioner Alice G. K. Kleberg in Docket No. 86118 concedes she has no cost basis to be applied against her one-half of the amount realized in determining the amount of her gain or loss from the sale. Therefore, the remainder of the discussion under this issue will apply only to the petitioner in Docket No. 86119, namely, Alice G. K. Kleberg, executrix of the estate of Robert J. Kleberg, Sr., deceased.

Does the estate of Robert J. Kleberg, Sr., have a basis to be applied against its one-half of the amount realized in determining the amount of its gain or loss from the sale?

Our findings of fact show that decedent Robert Kleberg’s one-half interest in three thirty-seconds of the mineral rights in the King ranch property was valued for estate tax purposes at $100,000. The estate tax return was made approximately a year after Kleberg’s death and shortly after the Humble lease had been executed.

If the Kleberg estate had sold its entire interest in all the oil, gas, and other minerals in the King ranch, there could be no question but in computing the gain or loss on the sale it would be entitled to a basis of $100,000 under section 113 (a) (5) of the Revenue Act of 1932. But it did not do this. It merely sold its right to receive one-half of three thirty-seconds of the annual rental of $127,824.60 to be paid by Humble. Should any part of the basis of $100,000 he allocated to that sale? We think that unquestionably such an allocation must be made, if it is possible to make it, because the Kleberg estate sold part of its mineral rights in the three thirty-seconds interest and it retained part of this interest. Cf. Columbia Oil & Gas Co., 41 B. T. A. 38.

The evidence shows that the value of $100,000 was arrived at by attributing $75,000 to the right of the Kleberg estate to receive the annual rental from the Humble lease and $25,000 to the right of the Kleberg estate to receive its share of the specific reserved royalties mentioned in paragraph 3 of the lease. No value was attributed to the retained interest of one-half of three thirty-seconds of all the oil, gas, and other minerals, if any, in the King ranch after the expiration of the lease to Humble made on September 26, 1933. Petitioner, the Kleberg estate, contends that it is entitled to use, as [a basis in determining the gain or loss upon the sale in question, f $75,000 of the $100,000 basis attributable to the entire mineral interest [ owned by the Kleberg estate at the time of the sale. We think that ’■ under the sections of the statute above cited this contention must be sustained.

The petitioner in Docket No. 86178, Alice G. K. Klebei’g, had no cost basis and claims none. Kecomputation under Rule 50 should be made in accordance with the above.

The remaining issues concern only Alice G. K. Kleberg, petitioner in Docket No. 86178. The first of these issues is whether she is entitled to depletion on the amount of $24,656.92 received by her from Humble in 1933 as the result of the lease to Humble of her 30,439.23-acre tract.

In denying depletion as to this item the respondent in a statement attached to the deficiency notice said:

Depletion claimed of $6,780.65 on an amount of $24,656.92 received from the Humble Oil and Refining Company in 1933 has been disallowed since it is held that the amount received represented advanced delay rentals and as such was not subject to depletion.

Paragraph 8 of the agreement executed between petitioner and Humble provided in part:

8. During the second ten year period from date hereof, Humble Oil & Refining Company shall have the right to appropriate unto itself and to retain as its own property, the proceeds of all the royalties on oil, gas and other minerals accruing during each year ,to Alice G. K. Kleberg and Robt. J. Kleberg, Jr., individually and as trustee, and/or either of them, from and under said leases to the extent of an aggregate of twenty two thousand one hundred seventy five and 40/100 dollars ($22,175.40) each year; and such deduction shall be made before applying any of the proceeds during such years from such royalties on said notes as hereinbefore provided.
If the proceeds from all of such royalties in any year during said second ten year period should not equal said sum of twenty two thousand one hundred seventy five and 40/100 ($22,175.40) the deficiency between such proceeds and the twenty two thousand one hundred seventy five and 40/100 ($22,175.40) shall not be carried forward into succeeding years. * * *

It will be noted that the $22,175.40 named above, as the' amount which Humble had the right to reimburse itself out of royalties during the second 10-year period of the lease, represents the sum of $3,957.07 and $18,218.33, annual payments to Alice G. K. Kleberg and Robert J. Kleberg, Jr., respectively. In other words, during the second 10-year period of the lease between Alice G. K. Kleberg and Humble, the latter had the right to appropriate unto itself the proceeds from royalties up to the annual rent of $3,957.07 which was payable to her, but if the proceeds from royalties in any one of those years of the second 10-year period failed to equal $3,957.07, the deficiency could not be made up in any succeeding year. In order for the annual rental during the second 10-year period to take the place of royalties to the extent of the entire annual rental of $3,957.07, two things wea§e necessary. First, oil, gas, or other mineral would have to be discovered and produced, and, second, the proceeds from production each year during the second 10-year period would have to be sufficient to at least equal the annual rental of $3,957.07.

On September 26, 1933, Humble wrote a letter to the King estate in which, among other things, it said:

It is our understanding that no exploratory work is to fee required under said leases during the first five (5) years from this date; but during the 20-year primary term of said leases Humble Oil & Refining Company is to explore the leased area as adequately as it can by its geophysical and geologic technique. It is further understood that no exploratory work by drilling is required of Humble Oil & Refining Company except to drill such offset wells as may be implied from the terms of the leases.

Instead of Humble paying Alice G. K. Kleberg an annual amount of $3,957.07 each year for 20 years, this amount was discounted down to a present value of $49,313.83, one-half of which was paid petitioner in 1933 and the other half in 1934.

On the basis of the above facts it is our opinion that the amount received by petitioner in 1933 (one-half of $49,313.83 or $24,656.92) is in the nature of advance royalties, as petitioner contends, rather than advance delayed rentals, as respondent contends, and is, therefore, subject to depletion. The respondent in his brief contends that the amount received was not subject to depletion upon the grounds that it was rent rather than a bonus or advance royalty. He relies upon Duffy v. Central Railroad Co. of New Jersey, 268 U. S. 55; Commissioner v. Wilson, 76 Fed. (2d) 766; J. T. Sneed, Jr., 33 B. T. A. 478; and Continental Oil Co., 36 B. T. A. 693. The Dufy case is not very helpful, as the Supreme Court was not called upon to distinguish between rental on the one hand and royalties on the other. The three other cases cited above and relied upon by the respondent, although holding the amounts there involved to be delayed rentals, do lay down certain principles that govern in the determination of the difference between delayed rentals and royalties.

For example, in the Sneed case the payments which we held to be “delayed rentals” and not a “bonus” in the nature of advance royalties were paid to Sneed as tbe lessor 'under tbe following clause in tbe lease:

If no well be commenced on said land on or before the 26th day of May, 1927 (one year after its execution) this lease shall terminate as to both parties unless the lessee on or before that date shall pay or tender to the lessor, * * * the sum of $160 [$1 per acre], which shall operate as a rental and coyer the privilege of deferring the commencement of a well for twelve months from said date. In like manner and upon like payment or tender the commencement of a well may be further deferred for like periods of the same number of months successively.

Tbe $4,334 rent payment involved in Continental Oil Co., supra, we held to be a similar payment to that involved in tbe Sneed case, supra. In tbe instant case tbe situation is different. The payment of $24,656.92 involved was not made by Humble to petitioner as delayed rental. Tbe transaction as we view it was substantially this: Petitioner in consideration of a payment of $49,313.83 payable to her in two installments, plus a reserved oil and gas royalty of one-eighth of the oil and gas to be produced, leased her 30,439-acre tract to Humble for a period of 20 years, and thereafter as to any developed structures for as long as production is had from such structure. Under this state of facts we hold that the $24,656.92 received by petitioner in 1933 was a bonus in the nature of advance royalties, and that petitioner is entitled to percentage depletion thereon.

Issue 4- — Disallowance of One-half of a Community Bad Debt.

Issue 4 in Docket-No. 86178 concerns the Commissioner’s disallowance of one-half of $409 which the community estate of petitioner and her deceased husband, .Robert J. Kleberg, Sr., had to pay by reason of a guaranty contract which he had entered into during his lifetime. The deficiency notice, in disallowing to petitioner a deduction of one-half of this claimed community bad debt, says:

The amount of $204.60 claimed as interest paid on a note on which Robert J. Kleberg, Sr. was one of two guarantors has been disallowed since the amount actually represented a bad debt, the total of which was deductible by the Estate of Robert J. Kleberg, Sr.

What the parties have stipulated with reference to this issue is shown in the concluding part of our findings of fact.

The Commissioner in his brief, after quoting the stipulation with respect to this issue, says:

Respondent determined that the full amount of $409.00 represented a bad debt, the total of which was deductible by the estate. Petitioner offered no proof on this point; and the, Commissioner’s determination should be approved for lack of proof.

The stipulation as to the facts involved in this issue is not as clear as it should be. However, at the hearing when the stipulation on this issue was entered into it was done by respondent’s counsel stating orally into the record what we have copied in our findings of fact, and after respondent’s counsel had thus stated it petitioner’s counsel agreed thereto. We think it is only fair to construe the pt.ipnln.tion as an agreement that the facts with reference to this issue were as had been stated by petitioner in her petition and that only an issue of law was being presented to the Board for decision. Otherwise, it seems to us that the stipulation to which we have referred would have no point.

The facts stated in the petition with reference to this issue are as follows:

During the year 1933 petitioner and her deceased husband’s estate were required to pay out of their community estate the sum of $409 upon a note guaranteed by .said Robert J. Kleberg during his life. Said note was then wholly uncollectible and was uncollectible as a bad debt during the year 1933. It was a liability of the community estate of petitioner and her deceased husband and was paid out of said estate belonging one-half to each. Commissioner has allowed the same as a bad debt, but has attempted to allow it wholly to the husband’s estate as a deduction, whereas it should be deducted one-half from the income of petitioner and one-half from the income of her husband’s estate.

The Commissioner makes no point that the debt was not ascertained to be worthless in 1933 nor that it was not properly charged off in that year. The only point that he makes is that the deduction of the entire debt of $409 should be allowed to the estate of Kobert J. Kleberg, Sr., as he has determined, and that petitioner Alice G. K. Kleberg has not offered sufficient evidence to overcome the presumptive correctness of this determination. Assuming, that the facts are as stated in the petition of Alice G. K. Kleberg, and we do make that assumption because of the reasons just stated, we hold in favor of petitioner on this issue.

In Hinzie v. Robinson, 50 S. W. 635, a Texas case, it was held that a husband’s debt as a surety on a bond was a community debt, even though the debt became fixed by the principal’s default after the dissolution of the marriage by death of one of the spouses, the court holding that all such debts by the husband are charges upon the entire community estate. In that case, the court, among other things, said:

A debt or obligation created by the husband during coyerture, as this one was, creates a charge upon the community estate, and hence, in general terms, a community debt may be said to be any d.ebt or liability made by the husband during marriage. Ballinger, Community Property, Sect. 117.

Our sustaining petitioner on this issue means that in a recomputation under Kule 50 the petitioner in Docket No. 86179 should only be allowed a deduction of one-half such bad debt instead of being allowed all of it as the Commissioner has done in his determination of the deficiency.

Issues 5 and 6. — Claimed Deductions for Bad Debt and for Worthless Stoclc.

Petitioner in Her income tax return for the year 1934 claimed a •deduction of $29,760 as a bad debt, which she had ascertained to be worthless in that year and had charged off to that extent out of a total indebtedness which she held against the Kleberg Town & Improvement Co. She also claimed a deduction of $24,800 as representing cost of stock she owned in that corporation, which she alleged became worthless in 1934. We do not have the year 1934 before us. Petitioner has now changed her position and claims that she is entitled to these deductions in the year 1933, which we have before us, and she has made appropriate assignments of error to that effect. This change in position she, of course, has the right to make, and if the evidence sustains her claims as to these deductions in 1933 she will be entitled to have them allowed in a computation under Rule 50.

We shall first take up the claimed bad debt deduction. The respondent opposes this claimed deduction on the ground that if a debt exists it was not without value nor charged off during the year 1933.

Even if we assume that $29,760 of petitioner’s $59,520 debt became uncollectible in 1933, and we are not deciding that such is the fact, we could not allow petitioner’s claim. The claimed deduction for a bad debt must be disallowed for the adequate reason that the debt was not charged off during the taxable year. On this point the evidence is clear that no entry charging off the debt ivas made on petitioners’ books until the year 1934. In this circumstance the deduction may not be allowed. Sec. 23 (j), Revenue Act of 1932; A. P. Hunt, 33 B. T. A. 946, and cases there cited.

It should be noted that section 23 (j) of the Revenue Act of 1932, unlike prior revenue acts, in the case of a partial worthlessness of a debt provides that “The Commissioner may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a deduction.”

The requirement of a charge-off made during the taxable year, since it is found in the taxing statute itself, may not be excused on any showing such as petitioner now contends, that she was in doubt as to the year of worthlessness or that she was uninformed during the taxable year as to the financial condition of the debtor. Petitioner claims a deduction allowed by the statute and must therefore bring herself clearly within the terms of the law. New Colonial Ice Co. v. Helvering, 292 U. S. 435. This she has not done and accordingly the action of the respondent in disallowing the claimed bad •debt deduction is approved.

There remains the question of the worthlessness of the stock held by petitioner in the Kleberg Town & Improvement Co., for which she claims a loss in 1933 in the amount of $24,800. The evidence on this point shows substantially the following situation: The Kleberg Town & Improvement Co. during the years from its founding down through the taxable year had its principal source of income in the sale of its lands. Prior to the year 1928 the gross income or gain realized therefrom was in excess of all expenses, but during the period 1928 through 1933 it was not sufficient to cover taxes and other items of expense. The prospects for the profitable sale of its lands declined during this period, due to generally poor business conditions that prevailed in the towns in which the lands were located. The company’s balance sheet at the end of the taxable year shows a deficit in the amount of approximately $46,000, which left only about $4,000 of unimpaired capital. In 1934 the corporation’s losses continued and its balance sheet at the end of 1934 showed that all the capital stock of the corporation had been wiped out and that there was a capital deficit according to the books at the end of that year. It was in that year that the petitioner charged off the investment on her books. It may well be that she is entitled to the deduction in 1934, but we have not that year before us, and we are not passing upon the merits of the deduction in that year. We simply say that we do not think petitioner has sustained her burden of proof to show that the stock became entirely worthless in 1933. Doubtless the value of the stock had shrunk to where it had only a small value in 1933, but that is not enough to entitle her to the deduction which she claims.

Petitioner in her proof on this point is under the necessity to show that the company’s stock had no value in 1933. Gowen v. Commissioner, 65 Fed. (2d) 923; Sacks v. Commissioner, 66 Fed. (2d) 308; Paul Pryibil, 31 B. T. A. 164; John J. Flynn, 35 B. T. A. 1064. This we think has not been shown.

On the basis of all the evidence we can not say petitioner has sustained the burden she must assume to show the error in Commissioner’s determination and accordingly the claimed deduction for stock loss in the amount of $24,800 must be disallowed.

Decision will be entered imder Rule 50.


source: Caselaw Access Project

author: Disney:

license: Public Domain

text:
    Piedras Negras Broadcasting Co., and/or Cia Radio Difusora De Piedras Negras, S. A., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97045.
    Promulgated January 14, 1941.

      Robert Ash, Esq., and F. G. Rodgers, G. P. A., for the petitioner.

      Franli B. Sohlosser, Esq., for the respondent.
   OPINION.

Disney:

The question presented for our consideration here is whether the petitioner, a foreign corporation organized and existing under the law of Mexico, received during the taxable years, 1936 and 1937, income from sources within the United States within the purview of section 231 (a), (b), and (d) of the Revenue Act of 1936.

The facts involved here may be summarized as follows: Petitioner during 1936 and 1937 operated a broadcasting station which was located, both as to studio and transmitting station, in Mexico. It executed in Mexico contracts to broadcast advertising programs for a consideration, either at flat rates or for a percentage of the moneys received from sales made by the advertisers resulting from the radio advertising. Some payments were made direct to Piedras Negras, Mexico, but in the case of the percentage contracts collection was made by representatives of the petitioner in Eagle Pass, Texas, where the mail which was addressed to the advertisers was received and opened by the advertisers with representatives of the petitioner. This was done in a sample room furnished free by a hotel in Eagle Pass, Texas. A part of the money of petitioner was deposited in Eagle Pass. Only such deposits are here involved. This division of the proceeds of the mail was a daily process. A typical contract recited that petitioner’s mail address was Eagle Pass, Texas. About 95 percent of the monetary results of the radio advertising came from within the United States, as did about 90 percent of listeners’ responses.

That the income in question was collected from advertisers within the United States is not determinative of the source. In East Coast Oil Co., S. A., 31 B. T. A. 558; affd., 85 Fed. (2d) 322; certiorari denied, 299 U. S. 608, we held that though a Mexican corporation received payment for oil at its office within the United States, and though the contract was made in the United States, the source of income from the sale of the oil was not within the United States, since the title to the oil, produced or purchased abroad, passed in Mexico. The statutes there involved were the Revenue Acts of 1918 and 1921, section 233 (b) which were, in effect, the same as that here applied. In Briskey Co., 29 B. T. A. 987, sales of skins by a domestic corporation were consummated in India, largely to Pennsylvania corporations. We held that the income was from sources without the United States.

In N. V. Koninklijke Hollandische Lloyd, 34 B. T. A. 830, a foreign steamship company recovered and collected a judgment against the United States because of detention of its steamship in a port in the United States. We pointed out that the phrase “income from sources within the United States” is defined by section 119 (a) of the Revenue Act of 1932 — the same, so far as here concerned, as section 119 (a) of the 1936 Act — and held that no portion of the judgment or interest constituted income from sources within the United States within the-provisions of section 119 (a) (4) and section 231 (a) of the Revenue-Act of 1932.

In Helvering v. Stein, 115 Fed. (2d) 468, affirming the Board, it ivas held that, Avhere bankers in Germany by guaranteeing drafts: drawn by their German customers on New York banks obtain funds for such customers, there was, in the profit made by the bankers, no income from sources Avithin the United States, under section 119 (e) and (f) of the Revenue Act of 1928 (the same as in the Act of 1936, so far as here material), although the negotiation of the drafts comprised sale of personal property in the United States.

In Nicholas Roerich, 38 B. T. A. 567, affd., 115 Fed. (2d) 39, Ave considered amounts received by a nonresident alien from the United States Government for services performed in Asia, under sections 119 (c) (3) and 211 (a) of the Revenue Act of 1934. The Commissioner argued “that the amounts, being paid by the United States, were necessarily from sources Avithin the United States,” but we held that fact to be “without force against tire unambiguous language of the controlling statute”, which provides that gross income of a nonresident alien includes only gross income from sources Avithin the United States and includes compensation for labor or personal services performed without the United States within income from sources without the United States. The Commissioner in I. T. 2976, C. B. XV-1, p. 138, apparently recognizes that the mere fact of payment by one Avithin the United States does not determine the source of income to be therein, since there it is held that payment of benefit payments under the Agricultural Adjustment Act by the Secretary of Agriculture of the United States to a foreign corporation conducting all of its business of sugar cane production outside of the-United States is not Avithin the intendment of the statute. The income was said to arise “from the ownership of land * * * without the United States and constitutes income from sources without the United States.” Therefore we hold that the mere receipt of income by the petitioner at Eagle Pass, Texas, from advertisers within the United States does not determine the amounts received to be income within the United States.

The respondent seems to consider that such acts as took place in Eagle Pass, Texas, constitute doing business there and that such business indicates, the source of income to be within the United States. Thus he argues that, to the extent that petitioner’s income came from the division in' Eagle Pass, Texas, of the moneys received by the advertisers, there was source within the United States because the sale of articles by the advertisers took place within the United States and there was joint adventure between the petitioner and advertiser for sale of merchandise in the United States. Though he does not state so expressly, we presume that he contends that this was engaging in trade or business by the petitioner and that therefore this was the source of the amounts received. It is true that in such instances the petitioner’s income depended upon the amount of sales made by the advertiser, and we have no evidence as to where title to advertised articles sold passed. But even if we assume title to have passed in- the United States, it does not, in our opinion, follow that the petitioner was engaged in a joint venture with the advertiser. The remittances from customer to advertiser were addressed to the advertiser. There was no contract or privity between customer and petitioner. We may, we think, reasonably assume that such remittances would generally be by check, money order, or some form other than cash. If so, the advertiser would be required either to deposit such remittances and give petitioner a check or other payment for its proportion or endorse and deliver to the petitioner checks or money orders to the extent of its contractual position. In case of cash received, it could be and was divided between advertiser and petitioner. Yet in all cases the petitioner received income, not by any dealings or contract with the customers of the advertiser, but in fact from the advertiser, pursuant to contract with him. There was no agreement for sharing losses with him, or for receipt of only a portion of his net proceeds, but petitioner received a certain portion of the gross receipts of sales made. Even a contract to share profits does not constitute one of joint adventure. A joint adventurer has the burden of the performance of the other’s contracts and liability therefor. National Surety Co. v. Winslow, 173 N. W. 181. The petitioner plainly was in -no such position. It contracted no liability for the expenses or defaults of the advertisers. On the contrary, the contracts expressly provided against such liabilities, e. g., expenses, patent or copyright infringement, personal injxxries, slander. It did not ■guarantee reception. Its liability for failure to broadcast due to negligence was pro rata return of consideration. None of the elements of joint adventure appear -in the contracts made. The respondent cites no authority on the point, and suggests it only upon brief. We conclude that there was no joint venture in trade or business within the United States, and that source can not be predicated thereon.

Nor should greater effect be given to the use by petitioner of a room in the hotel in Eagle Pass, Texas, for the purpose of sorting, the mail received by advertisers and dividing the proceeds of remittances received. No rent was paid for the room and no furniture or desk was owned or maintained therein by the petitioner. It was a basement sample room donated by the hotel, obviously because of the patronage realized from those in connection with the broadcasting operations. It was not an office in any usual sense. As a place of business it was only incidental — for the sorting of mail and collection of income. Regulations 94, article 231-1 (b), says in part:

Whether a foreign corporation has an “office or place of business” within the United States depends upon the facts in a particular case. The term “office or place of business,” however, implies a place for the regular transaction of business and does not include a place where casual or incidental transactions might be, or are, effected.

Though the use of the sample room was not “casual” but daily, we think it was plainly “incidental” and not such part of petitioner’s business as to indicate that the source of income was within the United States. The reason for the use of the term “incidental” by the above regulation appears to be those cases, such as Neely v. Philadelphia Inquirer Co., 62 Fed. (2d) 873, to the effect that in order for a foreign corporation to be held to be doing business within a jurisdiction the business done must be such as to warrant the inference that the corporation is present and has thereby subjected itself to the law of such jurisdiction. See also Erving v. Chicago & Northwestern Railway Co., 214 N. W. 12; Temple v. Gates, 56 S. W. (2d) 417. Various activities have been held not to be doing business, e. g., solicitation of business. Maxfield v. Canadian Pacific Railway Co., 70 Fed. (2d) 982; certiorari denied, 293 U. S. 610; Mandel Brothers v. Henry A. O’Neil, Inc., 69 Fed. (2d) 452. This, we think, indicates that any solicitation of business in the United States by W. E. Branch as “Radio Service Company” for the petitioner did not constitute doing business or indicate source of income within the United States. However, the only indication of the use of that company or name for solicitation in the United States is the fact of registration in the assumed name records of Maverick County, Texas. Internal activities of a corporation, such as holding a stockholders’ meeting, do not constitute transacting business. Nor is collection of debts, nor litigation to so collect, doing business. Equitable Credit Co. v. Rogers, 299 S. W. 747; Continental Assurance Co. v. Ihler, 26 Pac. (2d) 792. That Maverick County, Texas, was made the venue of any litigation over the contracts, is therefore immaterial. No litigation is shown by the record. In Wells Fargo & Co. of Mexico, S. A. v. McArthur Brothers Mercantile Co., 26 Pac. (2d) 1021, it was held that the using of mail and telegraph facilities in Arizona by a Mexican corporation did not constitute doing business therein and did not give Arizona courts jurisdiction over the Mexican corporation. The decision was not affected by the fact that the Mexican corporation employed a Mexican broker to effect transfer of express from Arizona to Mexico and that the broker in revising and classifying express used a room maintained by the Mexican corporation adjoining the American company’s office in Arizona. We conclude that the use of the sample room in Eagle Pass, Texas, for collection of payment for broadcasting-advertising was not such activity as to indicate the source of income was within the United States. The same conclusion applies to the fact that moneys received were deposited in banks in Eagle Pass, Texas. The mere deposit of money is not transaction of business. Cottonwood Coal Co. v. Junod, 236 Pac. 1080; People v. Knapp, 128 N. E. 892. That the contracts placed in evidence indicated, in the heading thereof, that petitioner’s mail address was Eagle Pass, Texas, can not be given different effect. Assuming what is not shown by the record, that petitioner received mail there, it would be only an incidental matter and not constitute such business activity as to demonstrate source of income.

We have now examined the activities carried on in the United States, with reference to their effect as indicating source of income, except the broadcasting itself. Does radio broadcasting of advertising from a studio and power station outside of, but through the ether over, the United States (as well as elsewhere), resulting in income to the foreign corporation so broadcasting from advertisers’ paying for such advertising constitute a source of income within the United States ?

The necessary plant and equipment for broadcasting the various programs put on the air were located in Mexico, just across the river from Eagle Pass, Texas. From this point the radio waves or impulses were transmitted across the international border, primarily for reception in the United States. All contracts for such broadcasts were signed or executed in Mexico and, by virtue of such contracts and the broadcasts pursuant thereto made from the station in Mexico, petitioner received income. Income has been defined as the gain derived from capital, from labor, or from both combined, or from the sale or conversion of capital assets. Eisner v. Macomber, 252 U. S. 189. In Paul and Mertens’ Law of Federal Income Taxation, vol. 4, p. 850, it is said, in part:

* * * It [the “source”] is not a place, it is an activity or property. As such it has a situs or location; and if that situs or location is within the United States the resulting income is taxable to nonresident aliens and foreign corporations. * * * Thus, if an income be taxed, the recipient thereof must have a domicile within the jurisdiction, or the property or activities out of which the income issues or is derived must be situated within the jurisdiction so that the source of the income may be said to have a situs in this country. The basic rule is that the consideration for taxation is protection of life and property and that the income rightly to be levied upon to defray the burdens of the United States government is that income which is created by activities and property protected by this government. * * *

That the Commissioner has recognized this rule, see T. D. 3111, C. B. 4, p. 280, of which the language last above quoted is in part, in effect, a paraphrase.

The question of whether a foreign corporation does business within the United States and is subject to income tax in the United States merely by broadcasting from its foreign station programs designated for listeners in the United States, as a result of which income is received because of payments for advertising broadcast, has never, so far as we are advised, or can ascertain, been judicially determined. In Hoffman v. Carter, 192 Atl. 825, affirming 117 N. J. Law 205; 187 Atl. 576, the court, after holding that the Columbia Broadcasting Syfetem, Inc., had not been served with process, said:

* * * We reserve decision as to whether the delivery at radio receivers in this state of programs transmitted by the Columbia Company from its New York studio in any sense or to any degree constituted the doing of business by it in this state.

However, that case involved no broadcasting by the Columbia Broadcasting System, Inc., which did not own or operate a radio station, but used leased wires to carry its programs from city to city, and owned and operated another company which held a license to broadcast and did broadcast the programs from a station within New Jersey, the jui’isdiction involved. It was held that such ownership of the company which owned the local station and the furnishing of programs to it was not doing business in New Jersey. The petitioner’s activities were involved in W. E. Branch, 38 B. T. A. 1139, but that proceeding covered years prior to the discontinuance of the studio at Eagle Pass, and the only question was the liability of W. E. Branch as withholding agent. The proceeding therefore affords no help here.

The record in this case does not contain any technical or engineering evidence as to the mechanics of the process of radio broadcasting. In Fisher's Blend Station, Inc. v. State Tax Commission, 297 U. S. 650, it is said:

Broadcasting, according to the allegations of the complaint, is accomplished by the generation, at the broadcasting station, of electro-magnetic waves, which pass through, space to receiving instruments which amplify them and translate them into audible sound waves. The essential elements in the broadcasting operation are a supply of electrical energy, ■ a transmitter, the connecting medium or “ether” between the transmission and receiving - instruments, and the receiving mechanism.

That case holds that radio broadcasting is interstate commerce and that a state occupation tax measured by gross receipts, where no income was allocable to intrastate commerce, was an unconstitutional burden on interstate commerce. Thej respondent apparently views it as authority that such broadcasting is doing business within the different states covered; but “commerce” and “doing business” are not analogous terms, the former being much broader in its application than the latter. “Doing business” between citizens of different states is “commerce”, but all commerce between them may not be “doing business.” Since the decision merely involves the ordinary question as to what activity so far traverses state lines as to cause application of the commerce clause of the Constitution of the United States, we do not find it helpful upon the present question, which is not whether business or commerce is carried on, but where the source of income is, in the United,States or outside. •

In a later case, Western Live Stock v. Bureau of Revenue, 303 U. S. 250, the Court held valid a law of New Mexico imposing a tax upon gross receipts from sale of advertising space by those engaged in publishing magazines, though the distribution of the magazines was interstate commerce. The Court held the business of providing and selling advertising space to be local. We think the petitioner here was likewise engaged in a local business of providing and selling advertising space on its programs and that, just as the Court in the cited case called the burden on interstate business “remote” and “attenuated”, the use of the ether over the United States (as well as elsewhere) does not conceal the fact that the locale of petitioner’s source of income was in Mexico.

In International Textbook Co. v. Pigg, 217 U. S. 91, the Court'held that a correspondence school in Pennsylvania was engaged in interstate commerce in imparting instruction by correspondence from its offices in Pennsylvania to students in Kansas, transportation of its publications, and use of agents to procure and forward applications and payments; but it did not conclude that, merely because of such interstate commerce, business was done in Kansas within the statutes of that state requiring foreign corporations doing business to file a statement with the Secretary of State, but separately examined the facts to determine that question. It thus appears that interstate commerce does not ipso facto demonstrate the transaction of business within a state affected.

That there is some actual physical effect in the United States produced by the passage of broadcasted programs, can hardly be denied; for it is common knowledge, and we take judicial notice, that one station may interfere with another station. This fact is, in effect, one of the reasons for licensing radio stations by the Federal Communications Commission. United States v. American Bond & Mortgage Co., 31 Fed. (2d) 448. Interference with Station WOW of Omaha, Nebraska, by the petitioner’s station, XEPN, was one of the facts recited by the Federal Communications Commission in denying the application for a license to broadcast programs from a studio in Eagle Pass, Texas, through XEPN. The interesting question then arises whether such physical effect within the United States is such as reasonably to indicate business transacted therein and source of income therein. The business of another station in the United States may be interfered with by the interference in reception of broadcasts. But does that indicate that business is done in the United States, or that the source of income is therein? In United States v. American Bond & Mortgage Co., supra, the court, discussing the contention that regulation of broadcasting is taking private property, says:

Just wliat is the property right which is claimed for the broadcaster when it is subjected to analysis? When we speak of waye lengths or frequencies, we are dealing with intangible things, about which we really know nothing at all, except as we perceive the effect produced in an electrical deyice. The waves, it seems, are in some kind of a medium which permeates every particle of matter. Their effect is produced in and upon the property of others. There is no real analogy between this unknown medium and the air or the water. In' one aspect, the waves may be treated as intruders. Whatever rights may exist among these intruders in their relations with each other, there certainly is no property right which can be asserted against the right of those upon whom the intrusion is made to have the intruders come “by cold gradation and well-balanced form,” and not in a mob. In the very nature of things, there Can be no right to the use of any particular frequency' or wave length, or of the ether as against the legitimate exercise of the regulatory power of the United States.

It thus appears that broadcasting through the ether does not in any ordinary sense cause contact or interaction between properties of different owners, such as transaction of business usually entails, and that the foreign broadcasting corporation here can not be said to be using property in the United States. Shipping goods into a state is not doing business therein. Novelty Manufacturing Co. v. Connell, 34 N. Y. S. 717; nor is sale by solicitor, transportation of merchandise into a state, and collecting therefor, Bruner v. Kansas Moline Plow Co., 168 Fed. 218; nor distributing a magazine by a foreign corporation, System Co. v. Advertisers' Cyclopedia Co., 121 N. Y. S. 611. If these physical activities do not constitute transaction of business within a state, we think that mere broadcasting through the ether over a state is not such.

There is some indication in the record that the petitioner regarded the broadcasting as resulting in income. One contract recites that petitioner is to receive “Fifty cents out of every dollar sale made as a result of radio advertising”, while another refers to “Fifty percent of any monies received as a result of the broadcast.” (Italics supplied.) The expressions are, however, obviously rather loose language and we think that even a conclusion by the parties on the present question as to whether the broadcasting of advertising was done in the United States can hardly fairly be drawn therefrom. At any rate, it would be at most a conclusion.

The gain or income which the petitioner received from persons residing in the United States was effected or produced to the extent of about 95 percent thereof by reason of the contracts with United States advertisers and as the result of petitioner’s broadcasting from its station at Piedras Negras, Mexico, intended primarily for the reception of listeners in the United States, pursuant to the terms of its contracts with the advertisers. But for the contracts entered into in Mexico, the radio station therein, and the broadcasts from Mexico, no gain or income would have been realized or received by petitioner from the advertisers in the United States. The property, the power station, and the activities, the radio entertainment at the studio, which originated broadcast programs and advertising, all were in Mexico and without the jurisdiction of the United States. T. D. 3111, supra, on the subject “Income from Sources within the United States Defined”, says in part: “A merchant exercises his trade where he has Iris principal place of business, viz., where his profits come home to him.” In Lord Forres, 25 B. T. A. 154, 161, examining the meaning of “sources within the United States” under sections 213 (c) and 217 (a) of the Revenue Acts of 1921 and 1924, we said:

* * * The commonly accepted definition of the term “source” is “that from which anything comes forth, regarded as its cause or origin, the first cause.” Webster’s New International Dictionary. * * *

Certainly labor and personal services, both in the radio programs themselves and in the operation of the power station or broadcasting plant, contributed in a major degree to the dissemination of the advertising. Such labor and personal services were wholly without the United States. Section 119 (c) (3) of the Revenue Act of 1936 lists as gross income from sources without the United States “Compensation for labor or personal services performed without the United States.” The mechanical appliances to which such labor and services were to produce broadcasting the advertising were also wholly in Mexico. Mexico was the situs of the “device” which “produces energy which reaches every part, however small, oí the space affected by its power.” United States v. American Bond & Mortgage Co., supra. The initiation of such impulse seems truly the first cause in this matter. The transmission of the impulse through the ether over the United States and reception at receiving sets therein seem to be intermediate steps in the process, and not the source. Any activity within the United States is secondary, not primary. We are unable to discern, in the mere fact of broadcasting across the ether over the United States, that capital or labor was employed therein, or that an activity took place therein which can truly be said to be the source of the income here involved. The source, we think, was the studio and power plant or broadcasting station in Mexico and the labor there employed. With and through them, as instrumentalities, the petitioner employed capital and labor, and earned its income. It had no expense within the United States under Regulations 94, article 119-13 (1), p. 298. Without them no effect would have been secured upon receiving sets and the advertisers’ customers in the United States. The United States has no power to regulate or control the petitioner’s broadcasting activities, which occur and are exercised in Mexico. McCulloch v. Maryland, 11 U. S. 316, says:

* * * All subjects over which the sovereign power of a state extends, are objects of taxation; but those over which it does not extend, are, upon the soundest principles, exempt from taxation. This proposition may almost be pronounced self-evident.

The subject matter of the tax is in Mexico. Hart v. Tax Commissioner, 132 N. E. 621. The United States extends no protection to such activities or the petitioner’s ^property. On the contrary, it licenses interfering broadcasters.

Neither broadcasting nor the other facts above examined come within the items which section 119 of the Revenue Act of 1936 enumerates as to be treated as income from sources ¡within the United States, viz., interest, dividends, personal services, rentals, royalties or sale of property, real or personal.

Under the facts as found herein and authorities cited, w'e are of the opinion and hold that the amounts of income received by the petitioner were not from sources within the United States in the taxable years, 1936 and 1937, and therefore are not subject to income tax in those years. The Commissioner’s action in asserting income and excess profits taxes and delinquency penalties against the petitioner, as heretofore herein set forth, is therefore disapproved. This conclusion renders it unnecessary to pass upon other issues as to deductions, returns, and penalties.

No question has been presented in this proceeding as to whether the income may have been partly from sources within the United States and partly from sources without the United States; nor has there been any contention presented as to whether radio broadcasting constitutes “services rendered partly within and partly without the United States,” within the language of section 119 (e) (1) of the Revenue Act of 1936. Apparently there has been no allocation of incom’e to sources within or without the United States under rules and regulations prescribed by the Commissioner, within the intent of section 119 (e) of the Revenue Act of 1936. Since the contention between the parties here is simply whether, as contended by petitioner, the income was from sources without the United States to a nonresident foreign corporation, or, as contended by the respondent, from sources within the United States to a resident foreign corporation, our opinion is devoted only to that question.

Reviewed by the Board.

Decision will be entered for the fetitioner.

Sternhagen, Murdock, TuRNer, Mellott, Arnold, and Oi-ter dissent.

       SEC. 231. TAX ON FOREIGN CORPORATIONS.
      (a) Nonresident Corporations. — There shall be levied, collected, and paid for each taxable year, in lieu of the tax imposed by sections 13 and 14, upon the amount received by every foreign corporation not engaged in trade or business -within the United States and not having an office or place of business therein, from sources within the United States as interest (except interest on deposits with persons carrying on the banking business), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments or other fixed or determinable annual or periodical gains, profits, and income a tax of 15 per centum of such amount, except that in the case of dividends the rate shall be 10 per centum, and except that in the case of corporations organized under the laws of a contiguous country such rate of 10 per centum with respect to dividends shall be reduced to such rate (not less than 5 per centum) as may be provided by treaty with such country.
      fb) Resident CORPORATIONS. — A foreign corporation engaged in trade or business within the United States or having an office or place of business therein shall be taxable without regard to the provisions of subsection (a), but the normal.tax imposed by section 13 shall be at the rate of 22 per centum instead of at the rates provided in such section.
      * * * * * * <!
      (d) Gross Income. — In tbe case of a foreign corporation gross income includes only the gross income from sources within the United States.


author:
Turner:
      Leech,

text:
    Arden-Rayshine Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100156.
    Promulgated January 14, 1941.

      Roger W. Hardy, Esgn for the petitioner.

      Alexander M. Wilding-White, Esq., for the respondent.
   OPINION.

Turner:

The tax herein is imposed by section 501 (a) (2) of the Revenue Act of 1936 in words as follows:

SEC. 5 01. TAX ON NET INCOME PROM CERTAIN SOURCES.
(a) The following taxes shall be levied, collected, and paid for each taxable year (in addition to any other tax on net income), upon the net income of every person which arises from the sources specified below:
* * * * ❖ * *
(2) A tax equal to 80 per centum of the net income from reimbursement received by such person from his vendors of amounts representing Federal excise-tax burdens included in prices paid by such person to such vendors, to the extent that such net income does not exceed the amount of sueh Federal excise-tax burden which such person in turn shifted to his vendees.

The petitioner does not deny that it has been reimbursed by certain of its vendors for that portion of the purchase price of cotton cloth attributable to the processing tax which had been paid by the said vendors with respect to the cotton in such cloth, and there is no dispute as to the amount of such reimbursement. The only question between the parties is to what extent, if any, the processing tax burden was in turn shifted by petitioner to its vendees. In section 501 (e) of the act, Congress has given its approval to certain methods of computing or demonstrating the extent to which the said tax burden has been shifted to others by providing that the extent of the shift is presumed to be the amount shown by computation under one of the methods outlined. That section 501 (e) was intended to do no more than suggest an approved method for establishing the fact essential to the determination of the tax, namely, the extent of the shift of the processing tax burden to others, and to give the computation under such method a presumption of correctness, is further shown by section 501 (i) of the act, which provides that either the taxpayer or the Commissioner may by proof of the actual extent to which the burden has been shifted to others rebut the presumption so established. Admittedly the petitioner in making its return did not supply the information necessary for a computation under either of the methods set forth in section 501 (e), and, accordingly, there is no presumption on the facts or under the statute as to the extent to which the burden of the processing tax here under consideration was or was not shifted to others. The petitioner having failed in its return, or at any time after the filing of the return, to supply the respondent with any facts to show that it had absorbed the tax in question and had not shifted the burden therefor to its vendees, the respondent concluded, and justifiably so, that the burden for the full amount of the tax for which the petitioner has now been reimbursed was shifted to others and on that basis determined the deficiency herein. Accordingly, the burden of proving by proper and sufficient proof that it did bear the said tax burden, as it alleges, and did not shift it to others is on the petitioner.

To sustain its burden the petitioner has placed in the record certain facts as to the cost of cotton cloth and other materials used in its operations and the testimony of two of its officials has been received. It is the petitioner’s contention that those facts and the testimony mentioned are sufficient to show and do show that it did absorb the tax burden in question and did not shift it to its vendees. The respondent’s contention is that the petitioner has not sustained its burden of proof in that the proof of record is not sufficient to show that the petitioner absorbed the tax in question. In his brief the respondent refers to the method prescribed in section 501 (e), supra, for demonstrating the extent to which the tax burden has been shifted to others, but with respect to the situation present in this case, states:

The Government does not contend that section 501 (e), supra, specifies the only method by which it shall be determined whether or not the taxpayer bore the tax burden. It is believed that the burden of proof may be met by any other relevant and substantial evidence. It is also believed that section 501 (e), supra, not only provides a method which may be used by the taxpayer but also serves to illustrate the degree of substantial evidence which the Act requires the taxpayer to produce in order to satisfy the Commissioner or the Board of Tax Appeals that it bore the burden of the tax. If a statute sets forth a method by which a burden of proof may be met it seems clear that even if that is not the sole method, the statute does not contemplate the use of any less substantial a method so that the method suggested must logically be used as a measure of the quality of the evidence sufficient to meet this burden.
Thus, under Bule 32 the taxpayer has the burden of proof. The Revenue Act of 1936 emphasizes that this evidence must be substantial and in good faith aimed at showing the true tax liability.

As we read the statement quoted above, the position of the respondent is that the petitioner, if he does not choose to submit proof of the nature specified by section 501 (e), may nevertheless submit other proof, but such other proof must be sufficient to show that the tax burden in question was in fact absorbed by the petitioner, as it contends, and was not passed on to its vendees or shifted.to others. Such also is our understanding of petitioner’s burden of proof. We find no claim by the respondent that the petitioner is limited as to the form of his proof to the formulae prescribed in section 501 (e), supra, and certainly there is nothing in the statute to suggest that in a proceeding before this Board with respect to a deficiency in tax on unjust enrichment the proof required is any less or any more substantial than the proof required with respect to the determination of a deficiency in any other tax over which the jurisdiction of the Board extends.

The tax imposed by section 501 (a) (2) is imposed upon the net income of petitioner from reimbursement by its vendors to the extent that the portion of the purchase price of cotton cloth reflected by the amount now refunded, namely, $537.97 was in turn shifted by petitioner to its vendees. The question is therefore a question of fact and we must determine here, as in any other case in which the petitioner has the burden of proof, whether that burden has been sustained and the evidence of record shows as a fact that the said processing tax burden was absorbed by petitioner and was not shifted to its vendees.

That fact, petitioner contends, is demonstrated or established by the smallness of the amount of the refund and the relatively small amount of cotton cloth used in the manufacture of its product and by the further fact that it neither increased the price of its product because of the Agricultural Adjustment Act nor decreased the said price when that act was declared to be invalid, so that at no time during the period of enforcement of the act was its prices influenced by the processing tax on cotton.

The smallness of the refund here under consideration is of little, if any, significance in determining the question before us. The sum in question merely represents the amount refunded to petitioner by its vendors during 1936 and it does not follow that it is the full amount by which the price paid by petitioner for cotton cloth during the designated period represented the processing tax on the cotton consumed in the manufacture of the cloth purchased. Neither does it give us any basis for determining that part of the cost of materials attributable to the said tax. We do know that the processing tax rate on cotton was 4.2 cents per pound of lint, see section 9, Agricultural Adjustment Act, and Cotton Regulations, Series 2, approved July 14,1933, and we also know that the total amount paid by petitioner for cotton cloth during the period from August 1, 1933, to December 1, 1934, was $50,099.95, but in the absence of some information as to the lint cotton consumed in the manufacture of the cloth purchased or the weight thereof and its cotton content (these latter facts, it would seem, petitioner should have been able to furnish with little trouble), we have no way of knowing or even approximating that portion of petitioner’s cost of materials attributable to the processing tax on cotton. The cost of cotton cloth was slightly less than one-seventh of the total cost for all materials purchased by petitioner, and since the processing tax on lint cotton was 4.2 cents per pound, the processing tax may well have been a substantial part of the total cost of the cloth, and, if so, we are inclined to the view that petitioner with minimum difficulty should have been able to some extent at least to demonstrate the effect of such tax not only upon its cost but upon its profits, even though it did not choose to adopt the elaborate method of computation set out in section 501 (e), supra, and called for in the return.

Over the objection of respondent’s counsel, and as a matter claimed to be within his independent knowledge, petitioner’s president was permitted to testify that in box toes costing $33 per thousand pairs the cost of cotton was 75 cents and in that grade of box toes costing $12 per thousand pairs the cost of cotton was 80 cents. He testified further that he fixed the selling price for petitioner’s product, namely, box toes, and also over objection of respondent’s counsel, testified that there was no change in such selling prices immediately before, after, or during the designated period. On brief, petitioner now states that the cost of the cotton in box toes was 45 cents in each one thousand pairs costing $8, 75 cents in each one thousand pairs costing $82, and 80 cents in each one thousand pairs costing $45. It seems apparent, therefore, that on this point at least petitioner itself does not rely very strongly on the accuracy of the testimony of its president. Furthermore, we are unable to corroborate in any way the figures given by petitioner’s president and those set out in the brief with the figures read into the record as to petitioner’s gross sales, the total cost of materials and the cost of cotton cloth. We have no information whatever as to petitioner’s labor or other operating costs and do not know whether, in comparison with the periods preceding and following the period here under consideration, such costs were greater, less, or remained constant.

The testimony to the effect that prices were not changed is little, if any, more impressive. Petitioner’s president testified that he fixed the prices at which petitioner sold the box toes manufactured by it and that prices remained constant before, during, and after the designated period and, to corroborate this testimony, read from a few invoices selected at random from petitioner’s files. At a subsequent stage in his testimony he stated, however, that the business of manufacturing box toes was highly competitive and that “the price is as is often the case fixed by the lowest successful bidder in the industry” and “that there is very little, if any, contractual relationship” with the customers so that the petitioner’s salesmen “feel every call is a new sale.” It seems to us hardly likely both statements of the witness are correct. The fixing of prices by the lowest successful bidder in a highly competitive industry hardly indicates a constant price for the product produced. It is true the incorrectness of either one or both of these statements would not necessarily indicate that the processing tax burden was shifted by petitioner to its vendees, but by the same token it also falls short of establishing the conclusion petitioner is contending for, namely, that the said burden for the processing tax was not shifted to others but was absorbed by it. Furthermore it is not beyond the realm of probability that even though the industry is highly competitive the added cost resulting from the payment of the processing tax was a factor in the fixing of prices by the various competitors during the period in question.

From the record and the argument advanced, it seems that the petitioner feels that because the amount of the tax is small and the expense and trouble of preparing the data outlined in section 501 (e), supra, is rather substantial, the requirements as to the adequacy of the evidence are correspondingly lessened. In its brief, petitioner states that “the real issue is the extent of trouble to which the Bureau of Internal Revenue can compel a taxpayer to go to prove that a small tax is not owed”, and at another stage it is stated that the petitioner “in disclosing the amount of refund has done all that can reasonably be required.” As we have previously indicated, a taxpayer is not bound to produce the data necessary for computation under section 501 (e), supra, but that is not to say that the fact to be established is not the same or that the proof that is offered must be adequate and sufficient to support the conclusion of fact contended for. We have considered the record carefully and, except for the facts showing the steps in the manufacture of box toes and the description of the return filed, the only facts which on the evidence we feel justified in finding that might have some bearing on the ultimate fact here sought to be established are the figures reflecting the amount of the refund, the total cost of materials, the cost of the cotton cloth, and the gross sales, and these facts are far short of being sufficient to permit us to make any finding that petitioner absorbed the processing tax burden and did not shift it to its vendees. The establishment of an ultimate fact requires something more than a mere statement of the conclusion of the fact sought to be proved.

Reviewed by the Board.

Decision will be entered for the respondent.

Black concurs only in the result.

AeNold dissents.

Leech,

dissenting: I agree with the exposition of the applicable law in the prevailing opinion. However, it seems to me, the petitioner has overcome the presumption of correctness attaching to the de' termination of the deficiency.

I think it is implicit in the record that $537.97 was the entire amount of processing taxes paid on the cotton used by petitioner during the period in which the processing tax was in effect. In my opinion, it is unfair to make the contrary assumption as the majority opinion does. If that amount is the total tax thus paid, it requires only a simple computation to find that the tax paid on the cotton used in each thousand pairs of box toes varied between three and five cents per thousand. This seems comparatively insignificant and supports rather than attacks the credibility of the president of the petitioner when he testified, unqualifiedly, that he fixed the prices at which these box toes were sold throughout the entire period in controversy and that those prices were constant. This testimony was uncontradicted and unimpeached. I do not think it can be ignored. The witness impressed the sitting Division as entirely worthy of complete credence. The two classes of box toes were the only commodities manufactured and sold by the petitioner during the period in review. The relative insignificance of the tax item, coupled with the facts that the prices for the box toes were not changed during this time, a finding which I think this record warrants, and that the president of the petitioner, who fixed the prices, knew nothing about the processing tax until after its repeal, seem to me to be wholly sufficient to overcome the presumption that the petitioner company passed on and did not absorb the tax. See Hutzler Brothers Co. v. United States, 33 Fed. Supp. 801; Ney v. United States, 33 Fed. Supp. 554; Regulations 95, art. 16.

Tyson agrees with tins dissent.

       (e) For the purposes of subsection (a) (1), (2), and (3), the extent to which the taxpayer shifted to others the burden of a Federal excise tax shall be presumed to be an amount computed as follows :
      (1) Prom the selling price of the articles there shall be deducted the sum of (A) the cost of such articles plus (B) the average margin with respect to the quantity involved ; or
      (2) If the taxpayer so elects by filing his return on such basis, from the aggregate selling price of all articles with respect to which such Federal excise tax was imposed and which were sold by him during the taxable year (computed without deduction of reimbursement to purchasers with respect to sueh Federal excise tax) there shall be deducted the aggregate cost of such articles, and the difference shall be reduced to a margin per unit in terms of the basis on which the Federal excise tax was imposed. The excess of such margin per unit over the average margin (computed for the same unit) shall be multiplied by the number of such units represented by the articles with respect to which the computation is being made; * * *
      *******

       (i) Either the taxpayer or the Commissioner may rebut the presumption established by subsection (e) by proof of the actual extent to which the taxpayer shifted to others the burden of the Federal excise tax. * * *

       United States v. Butler, 297 U. S. 1.


author: Smith:

text:
    Sophie Jaski, Trading as White House Bakery, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100241.
    Promulgated January 15, 1941.

      Arthur W. A. Cowan, Esq., for the petitioner.

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

Smith:

By section 501 (a) (2) of the Revenue Act of 1936 a tax on unjust enrichment is imposed:

* * * equal to 80 per centum of the net income from reimbursement received by such person from his vendors of amounts representing Federal excise-tax burdens included in prices paid by sucb person to such vendors, to the extent that such net income does not exceed the amount of such Federal excise-tax burden which such person in turn shifted to his vendees.

After the Agricultural Adjustment Act was declared to be unconstitutional by the Supreme Court in United States v. Butler, 297 U. S. 1, on January 6, 1936, the petitioner received from vendors certain amounts in reimbursement of processing taxes. She filed unjust enrichment tax returns for 1936 and 1937 showing the receipt by her of such reimbursements of $300 in 1936 and $1,125.02 in 1937. In such returns there was not given the detailed information called for by the return form. The returns showed, however, no taxes due.

The respondent has determined the deficiencies herein in question upon the ground that the petitioner is liable for the taxes. The burden of showing that she is not liable rests upon her.

Petitioner is not able to furnish all of the information called for by the respondent in the unjust enrichment tax returns and he contends that without such information it must be held that the deficiencies in tax are correctly determined.

We think it clear that it was not the intention of Congress to impose the unjust enrichment tax in a case where the burden of the tax has been borne by a taxpayer and not shifted to others. In our opinion Congress did not limit a taxpayer to any particular form of proof to show that he has borne the burden of the processing taxes and not shifted such burden to his vendees. For instance, if a taxpayer can prove to the Board that he has refunded to his vendees the reimbursement which , he received from his vendors we lb ink that such proof is competent to show that the taxpayer is not liable for the unjust enrichment tax, even though all the information called for by the return form is not given. We also think that this is not the only method of proof which is open to a taxpayer. Cf. Arden-Rayshine Co., 43 B. T. A. 314; Ney v. United States, 33 Fed. Supp. 554; Hutzler Brothers Co. v. United States, 33 Fed. Supp. 801. In the last cited case the court said with reference to floor stock taxes:

* * * I know of no decision which goes to the length which the Government now asks this Court to go. To put such interpretation upon the requirements as to the burden of proof prescribed by Section 902 would be, in effect, to say that the taxpayer faces a duty that is impossible of performance, namely, he must produce figures, which do not exist,- — in this case they do not exist, through no wilfulness or neglect on the part of the taxpayer, but because of the very nature of the business * * *. The obvious result would be to-defeat, by an arbitrary ruling of the administrative branch of the Government, the very mandate of the Supreme Court in United States v. Btitler, supra, to the effect that the tax toas invalid. [Emphasis supplied.]

The evidence in this case is to the effect that the petitioner, sold during the years 1936 and 1937 the same bakery products at the same prices at which like bakery products were sold by the corporation before the processing taxes went into effect. While such taxes were in effect the petitioner was required to pay more for her flour than she would have paid if the taxes had not been in effect. The result was that her profits from the sales of bakery products during the years that the processing taxes were in effect were less than they otherwise would have been by the amount of the taxes. When she received the refunds which are here in question she was not unjustly enriched within the meaning of the statute. The reimbursements simply restored to her a part of the profits that she lost by reason of the levying of the processing taxes.

The tax deficiencies are expunged.

Reviewed by the Board.

Decision will l>e entered for the petitioner.


author: Leech:

text:
    Atlas Supply Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101323.
    Promulgated January 15, 1941.

      Frederick L. Pearce, Esq., for the petitioner.

      Chester A. Gwinn, Esq., and L. W. Creason, Esq., for the respondent.
   OPINION.

Leech:

Petitioner contends that it is entitled to the credit under section 26 (c) (1) of the Revenue Act of 1936 because its duly executed bylaw prevents it from declaring dividends if its capital would thereby be impaired.

In Davison-Joseph Campau Realty Co., 41 B. T. A. 675, the Board held that a bylaw does not constitute “a written contract executed by the corporation” within the meaning of the statutory provision. The rationale of that opinion appears from the following quotation therefrom:

The shareholders may thus be bound in their relations with the corporation and with each other by a reliance upon the existence of that law or declared policies of the corporation. But a bylaw seems to us to' lack the essence of a formal contract in that it is “adopted” and not “executed.” There is only one party, the corporation, acting through its stockholders, to the adoption of the law and the declaration of its policy. It thus becomes a part of the fundamental law of the corporation. Commissioner v. Vandegrift, supra.
In the Crane-Johnson case, supra, the Circuit Court, in affirming 38 B. T. A. 1355, said:
We are here considering a tax law, and the question is not whether for any purpose a charter or a state law may be treated as a contract, but rather whether they together may be considered a written contract executed by the corporation within the meaning of Section 26 (c) (1) of the Revenue Act of 1936. * * * Clearly, this provision relates to a corporate undertaking to discharge a certain obligation out of earnings, and not to any statutory provisions. [Emphasis supplied.]

We think that any contract existing here by virtue of the bylaw was in the nature of an implied contract, which arose, not from any statutory obligation, it is true, but from a similar obligation imposed by the “law” of the corporation. But, there was no “written contract executed by the corporation” within the meaning of the cited section preventing the payment of dividends.

This reasoning finds support in Thibaut & Walker Co., 42 B. T. A. 29, and the legislative history of the cited controlling statutory provision.

It does not appear that any written contract with the corporation was executed by anybody relying on the bylaw involved here. See Johnson v. State Mut. Rodded Fire Ins. Co., 232 Mich. 204; 205 N. W. 163. So, it would seem, the corporation could have changed this bylaw at will.

The petitioner concedes that our decision in Davison-Joseph Campau Realty Co., supra, concludes it here, but cogently argues on brief that our decision in that case was wrong. However, after careful consideration, we reaffirm our position as taken in that case, and hold that the bylaw, as such, upon which the decision of the issue here rests, is not “a written contract executed by the corporation”, petitioner, within the meaning of section 26 (c) (1) of the Revenue Act of 1936.

Reviewed by the Board.

Decision will be entered for the respondent.

       The Crane-Johnson case was affirmed, 311 U. S. 54.

       Seidman, Legislative History of Federal Income Tax Laws, p. 218.
      Discussion on floor of House (80 Cong. Rec. 10265) :
      “Mr. Samuel B. Hill. * * » If a corporation as of March 3, 1936, finds itself in a position, by reason of a contract entered into with its creditors, not to pay dividends until it has paid its creditor his debt or has established a sinking fund, or otherwise provided means of paying the obligation, if it is under that handicap by reason of a written contract, then we allow a 22% per cent flat rate on that portion of the net income which it is unable to pay out, by reason of this contract, in dividends. * * *” [Emphasis supplied.]


author: Ssiith:

text:
    Binghamton Candy Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96737.
    Promulgated January 15, 1941.

      William Cogger, Esq., for the petitioner.

      B. H. Transue, Esq., and Percy C. Yoimg, Esq., for the respondent.
   OPINION.

Ssiith:

The question for our determination in this proceeding is whether the amount of $719.24, which the petitioner received in 1936 from its vendors as reimbursements of processing taxes on corn syrup, cornstarch, and peanuts, collected under the provisions of the Agricultural Adjustment Act as amended and supplemented is subject to the tax imposed by section 501 (a) (2) of the Revenue Act of 1936.

The pertinent provisions of Title III of the Revenue Act of 1936 follow:

TITLE III — TAX ON UNJUST ENRICHMENT

SEC. 5 01. TAX ON NET INCOME PROM CERTAIN SOURCES.
(a) The following taxes shall be levied, collected, and paid for each taxable year (in addition to any other tax on net income), upon the net income of every person which arises from the sources specified below:
»* + **♦*
(2) A tax equal to 80 per centum of the net income from reimbursement received by such person from his vendors of amounts representing Federal excise-tax burdens included in prices paid by such person to such vendors, to the extent that such net income does not exceed the amount of such Federal excise-tax burden which Such person in turn shifted to his vendees.
• *».***
(d) The net income from reimbursement or refunds specified in subsection (a) (2) * * * shall be computed as follows: From the total payment or accrual (1) of reimbursement to the taxpayer from vendors for amounts representing Federal excise tax burdens included in prices paid by tbe taxpayer to such vendors or (2) of refunds or credits to tbe taxpayer of Federal excise taxes erroneously or illegally collected, there shall be deducted the expenses and fees reasonably incurred in obtaining such reimbursement or refunds.
(e) For the purposes of subsection (a) (1), (2), and (3), the extent to which the taxpayer shifted to others the burden of a Federal excise tax shall be presumed to be an amount computed as follows:
(1) From the selling price of the articles there shall be deducted the sum of (A) the cost of such articles plus (B) the average margin with respect to the quantity involved; or
(2) If the taxpayer so elects by filing his return on such basis, from the aggregate selling price of all articles with respect to which such Federal excise tax was imposed and which were sold by him during the taxable year (computed without deduction of reimbursement to purchasers with respect to such Federal excise tax) there shall be deducted the aggregate cost of such articles, and the difference shall be reduced to a margin per unit in terms of the basis on which the Federal excise tax was imposed. The excess of such margin per unit over the average margin (computed for the same unit) shall be multiplied by the number of such units represented by the articles with respect to which the computation is being made; * * *
* * * # * # *
(f) As used in this section—
(1) The term “margin” means the difference between the selling price of articles and the cost thereof, and the term “average margin” means the average difference between the selling price and the cost of similar articles sold by the taxpayer during his six taxable years preceding the initial imposition of the Federal excise tax in question, * * *
(2) The term “cost” means in the ease of articles manufactured or produced by the taxpayer, the cost to the taxpayer of materials entering into the articles; or, in the case of articles purchased by the taxpayer for resale, the price paid by him for such articles (reduced in both cases by the amount for which he is reimbursed by his vendor),
(3) The term “selling price” means selling price minus * * *
(i) Either the taxpayer or the Commissioner may rebut the presumption established by subsection (e) by proof of the actual extent to which the taxpayer shifted to others the burden of the Federal excise tax. * * *
» * * * 4 * *
(1) The taxes imposed by subsection (a) shall be imposed on the net income from the sources specified therein, regardless of any loss arising from the other transactions of the taxpayer, and regardless of whether the taxpayer had a taxable net income (under the income-tax provisions of the applicable Revenue Act) for the taxable year as a whole; * * *

Petitioner alleges that it is not subject to the tax imposed by section 501 (a) (2) for the reason that if bore the burden of the processing taxes for which it received reimbursement in 1936 and did not shift that burden to others. It admits that prior to some date in 1935 it shifted the burden of the processing taxes to its vendees but alleges that after it learned that one or more of its vendors had obtained injunctions against the collection of the tax by collectors of internal revenue it thereafter deducted from the cost to it of corn syrup, peanuts, etc., the amount of the processing taxes included therein in determining cost of sales. At what time in 1935 this change in the method of computing cost of sales took place the evidence does not disclose. The petitioner’s president testified that he did not know. Neither did he know whether the deduction from the cost of the estimated amount of the processing taxes included in the purchase price had any effect upon the sales prices of the different kinds of candies. The element of the processing taxes in cost of materials purchased was very small. The prices at which candies were sold were largely determined by competition.

Although the Board is of the opinion that a taxpayer appealing to it from the determination of a deficiency in the unjust enrichment tax is not limited to any particular form of proof, Sophie JasM, 43 B. T. A. 321, and article 16 of Regulations 95, the proof must be such as to satisfy the Board that the taxpayer himself has borne the burden of the tax before the taxpayer may prevail. A presumption of correctness attaches to the respondent’s determination of the deficiency.

The petitioner has offered proof to the effect that its margin of profit per pound of candy sold during the calendar years 1935 and 1936 was less than during the six-year period 1927-1932. It submits that this is proof that it bore the burden of the excise taxes for which it was reimbursed.

We do not think that the profit margins for 1935 and 1936 and for the period 1927-1932 prove that the taxpayer bore the burden of the processing taxes for which it was reimbursed in 1936. The data offered for 1935 and 1936 do not purport to show the margin of profit for the portion of the years 1935 and 1936 to which the reimbursements of the processing taxes relate. That period began at some time in 1935 and ended on January 6, 1936, the date on which the Supreme Court promulgated its opinion in United States v. Butler, 297 U. S. 1. During a part of 1935 petitioner admits that it shifted the burden of the processing taxes to its vendees and the processing tax was not effective after January 6, 1936. For all that the record shows to the contrary the petitioner’s margin of profit per pound of candy sold during the period for which the petitioner received the reimbursements was greater than during the balance of the yearly periods. We therefore do not think that the comparison of profit margins made by the petitioner in this case is any proof that the petitioner bore the burden of the processing taxes for which it was reimbursed.

In our opinion the proof offered by the petitioner does not show that the respondent erred in his determination of the deficiency.

Reviewed by the Board.

Decision will he entered for the respondent.