author: Black:

text:
    Huntington Beach, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent. Donberry Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 59239, 59240.
    Promulgated May 16, 1934.

      'Horace P. Griffith., G.P.A., and Robert H. Rissinger, C.P.A., for the petitioners.

      J. M. LeinenTcugel, Ns<7., for the respondent.
   OPINION.

Black:

These proceedings are for the redetermination of deficiencies in income tax for 1928 of $2,249.56 in the case of Huntington Beach, Inc., and $10,698.71 in the case of the Donberry Corporation. The petitions allege that the respondent erred in computing the tax liabilities of the petitioners upon the basis of separate returns instead of on the basis of a consolidated return as filed by the petitioners.

The facts were stipulated as follows:

1. That during tiie year 1927 petitioners were members of an affiliated group, wliicb was composed of tlie following corporations:
Donberry Corporation, which company had an authorized capital of $25,000 represented by 250 common shares of $100 par value, all of which was outstanding, and of which Fred W. Gordon owned 50% and Z. D. Berry owned 50%.
Huntington Beach, Inc., which company had an authorized capital of $100,000, represented by 1,000 shares of $100 par value, all of which was outstanding and of which 100% was owned by the Donberry Corporation.
134 East 64th Street Corporation, which company was chartered April 20, 1927, and its entire authorized and outstanding capital stock was owned by Donberry Corporation.
2. That the three corporations listed above elected to file and did file separate income tax returns for the year 1927.
3. That on January 18, 1928, and thereafter during the year 1928, petitioner was a member of an affiliated group composed of Donberry Corporation, Huntington Beach, Inc., 134 East 64th Street Corporation, and 254 West 54th Street Corporation. The last named company had an authorized capital of: $50,000, consisting of 500 shares of common stock of $100 par value, of which 50% was owned by Fred W. Gordon, and 50% was owned by Z. D. Berry from January 18, 1928 to December 31, 1928.
4. That Donberry Corporation, Huntington Beach, Inc., 134 East 64th Street Corporation, and 254 West 54th Street Corporation joined in the filing of a consolidated return for the year 1928, without first having secured permission of the Commissioner of Internal Revenue to change the basis of filing which had been elected by Donberry Corporation, Huntington Beach, Inc., and 134 East 64th Street Corporation in 1927.

Section 142 of the Revenue Act of 1928 provides in part as follows:

SEC. 142. CONSOLIDATED RETURNS OK CORPORATIONS-TAXABLE TEAR 1928.
(a) Consolidated returns permitted. — Corporations which are affiliated within the meaning of this section may, for the taxable year 1928, make separate returns or, under regulations prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income for the purpose of this title, in which case the taxes thereunder shall be computed and determined upon the basis of such return. If return for the taxable year 1927 was made upon either of such bases, return for the taxable year 1928 shall be upon the same basis unless permission to change the basis is granted by the Commissioner.

Petitioners admit that the three corporations, Donberry Corporation, Huntington Beach, Inc., and 134 East 64th Street Corporation, which were affiliated in 1927, elected to file separate returns for that year, and they concede that if no change had been made in the affiliated group the corporations would not have been entitled to file a consolidated return for the year 1928 without first securing permission from the Commissioner.

Petitioners contend however that by reason of another corporation coming into the affiliation on January 18, 1928, to wit, the 254 West 54th Street Corporation, there was a new affiliated group and the taxpayers became entitled to a new election and had the right to file a consolidated return for the period January 18 to December 31, 1928.

For the year 1928 the Donberry Corporation had a net income of $112,974.84 and the Huntington Beach Corporation had a net income of $14,164.14. The 134 East 64th Street Corporation had neither income nor losses for 1928 and the new affiliate, the 254 West 54th Street Corporation, had a loss of $100,333.70.

The Board has held contrary to the contention made by petitioners in several cases. Imperial Assurance Co., 19 B.T.A. 1068; Peerless Pattern Co., 29 B.T.A. 767. Cf. Duke Power Co. v. Commissioner, 44 Fed. (2d) 543; Dr. Pepper Bottling Co. v. Commissioner, 69 Fed. (2d) 768. Petitioners cite our decision in Albert Leon & Son, Inc., 29 B.T.A. 251, in support of their contention.

In that case we held that where two affiliated corporations filed separate returns for 1927 and the affiliation was terminated at the end of that year and a new group of seven corporations was formed in 1928, which included the two corporations formerly affiliated, the new group had an election to file a consolidated return under section 142 (a) of the Revenue Act of 1928. We based our decision in the Leon & Son, Inc., case on the fact that the affiliation of two of the corporations in the year 1927 was terminated at the end of that year and that an entirely new group was formed in 1928.

That this was the basis of our distinction in the Leon & Son, Inc., case from the Board cases heretofore cited was made plain in our opinion, from which we quote as follows:

Tlie applicable statute, section 142 (a) of the Revenue Act of 3928, has provided a limitation on the right of election for 1928 where an affiliation existed and an election was made in the prior year. Under earlier revenue acts (in which the applicable sections of the statute are practically identical with the one before us) it has been held that where an election has been made and separate returns filed by affiliated corporations, the addition to the affiliated group of one or more corporations in a succeeding year does not entitle the several companies to make a new election to file a consolidated return without the consent of the Commissioner. Bowic Lumber Co., Ltd., 20 B.T.A. 342; B. Mifflin Hood, Brick Co., 19 B.T.A. 785; Imperial Assurance Co., 19 B.T.A. 1068; Swift & Co. v. United States, 38 Fed. (2d) 365. And in those cases where affiliation existed during the prior year and a consolidated return had been filed, the corporations thereafter coming into the group had no right of election to file a separate return because it was required that a consolidated return include the entire group. Southern Power Co., 17 B.T.A. 962; aff'd., Duke Power Co. v. Commissioner, 44 Fed. (2d) 543; certiorari denied, 282 U.S. 903; Park Avenue Corp., 20 B.T.A. 288; Fontana Union Water Co., 24 B.T.A. 1045. Seemingly, the 1928 Act, together with Regulations 74, article 731 et seq., promulgated thereunder, requires no change in the rules laid by these decisions with respect to returns of affiliated corporations for the taxable year 1928, but, as we see it, we have in the case at bar not the addition of new inembers to cu continuing affiliated group, but a dissolution of the group previously existing and the creation of a new group. [Emphasis supplied.]

Another case which petitioners cite in support of their contention is Marvel Equipment Co. v. Commissioner, 67 Fed. (2d) 354, reversing the Board’s decision at 26 B.T.A. 515. In the Marvel Equipment Co. case the conclusion of the court appears to be based largely on the fact that the affiliated group in 1927 had a different parent company from that which the affiliated group had in 1925 and 1926.

The emphasis on the importance of the parent corporation is touched upon by the court in its opinion in the recent case of Dr. Pepper Bottling Co. v. Commissioner, supra, where the following language is used:

Where one of several affiliated corporations, especially if it is the one having dominant control, elects to file a separate income taxi return by filing such a return, the other affiliated corporations are deprived of the right to file a consolidated return in the absence of a granting by the Commissioner of Internal Revenue of a permission to do so. Duke Power Co. v. Commissioner of Internal Revenue, 44 Fed. (2d) 543, certiorari denied, 282 U.S. 903.

The stipulated facts in the instant case show that the Donberry Corporation was the parent corporation when the election to file separate returns was made in 1927 and it continued to remain the parent corporation in 1928. We see no evidence that the affiliation which existed in 1927 was terminated or broken up in 1928. Hence we hold that petitioners have no right to file a consolidated return for 1928 without first securing the consent of the Commissioner.

We think this holding is not in conflict with Albert Leon & Son, Inc., supra, and Marvel Equipment Co. v. Commissioner, supra, but is entirely consistent therewith. We concede it is in conflict with Stonega Coke & Coal Co. v. Commissioner, 57 Fed. (2d) 1030, reversing the Board’s decision at 21 B.T.A. 835. The facts of that case were very similar to those of the instant case. The decision has given the Board much concern, and it is only after a full and most respectful consideration that we find ourselves unable to adopt it as the uniform rule for this Board to follow. This is especially so in view of the later emphasis by the court in the Marvel case of the question whether the parent or dominant corporation remained identical, and also in view of the reasoning of the Circuit Court of Appeals for the Fifth Circuit in reaching its conclusion in Dr. Pepper Bottling Co. v. Commissioner, supra. For this reason we regard the present proceeding as requiring renewed consideration of the question.

If the mere addition of a member to an affiliated group without any change in the dominant parent worked such a chánge in the situation as to give the affiliated group a new election, then that part of section 142 (a) of the Kevenue Act of 1928, which reads “If return for the taxable year 1927 was made upon either of such bases, return for the taxable year 1928 shall be upon the same basis unless permission to change the basis is granted by the Commissioner ” would not mean very much. An affiliated group which had elected to file separate returns could, by the mere creation of a new corporation, establish a new election and thus file a consolidated return as a matter of right, despite the Commissioner’s nonpermission or even his express disapproval. We think it is not to be assumed that Congress would have imposed this express restriction upon the voluntary election given corporate taxpayers and yet leave open such an obvious means of its circumvention and frustration. It must be borne in mind that the requirement for securing the Commissioner’s permission is not merely a regulatory requirement laid down by the administrative officer, but is an express statutory condition of the legislation itself. Congress might have withheld any recognition of consolidated returns or any election, and therefore the condition is a necessary incident of the grant. Especially apt, in such circumstances, is the Supreme Court’s admonition in Rock Island A. & L. R. Co. v. United States, 254 U.S. 141, that “ Men must turn square corners when they deal with the Government. If it attaches even purely formal conditions to its consent to be sued, those conditions must be complied with. * * * At all events the words are there in the statute and the regulations, and the Court is of opinion that they mark the conditions of the claimant’s right.”

A case often cited having to do with the effect of additions or subtractions to the affiliated group is Swift & Co. v. United States, 38 Fed. (2d) 365. In that case there were 60 or more corporations, of which Swift & Co. was the dominant parent corporation.

Suppose that Swift & Co., the dominant parent corporation in 1927, had elected that the group file separate returns and in 1928 another subsidiary had been added in the same manner as the 254 West 54th Street Corporation was added to the affiliated group in the instant case, without any change in the dominant parent corporation. Would it be contended that the mere addition to the group of this one new affiliate, without any change in the dominant parent corporation, would give the group the right of a new election and enable the corporations to file a single consolidated return without first securing the consent of the Commissioner? We think not. Under such circumstances the group would not be permitted to file a consolidated return without first securing the consent of the Commissioner.

We think the weight of authority supports the Commissioner in his determination in the instant case and is against the contention made by petitioners.

Keviewed by the Board.

Decision will be entered for respondent.

MaRQuette, Smith, and AruNdell dissent.


source: Caselaw Access Project

author: Adams:

license: Public Domain

text:
    Texas Coca-Cola Bottling Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 54177.
    Promulgated May 16, 1934.

      Llewellyn A. Luce, Esq., for the petitioner.

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

Adams:

The respondent determined a deficiency in income tax of $541.13 against the petitioner for the period March 1 to December 31,1928. The deficiency arises from the disallowance by the respondent of certain deductions for taxes claimed by the petitioner. The taxes were real estate taxes for the year 1928 due the State of Texas and its governmental subdivisions and amounted to $3,859.26. They were paid during the taxable year 1928.

The facts were stipulated and the stipulation is adopted as our findings of fact.

The material portions of the stipulation are as follows:

1. The Petitioner Corporation was organized under the laws of the State of Texas, on March 1st, 1928, with a paid in Capital Stock of $100,000.00, and is engaged in the business of bottling and distributing Coca Cola, and was so engaged from the time of its organization March 1st, 1928, to and including December 31st, 1928.
2. Petitioner Corporation was the result and product of the incorporation of four partnerships, which were in existence on January 1st, 1928, and had been in existence during the year 1927 and for several years prior thereto. These partnerships were, during their years of existence, in the business of bottling and distributing Coca Cola. The said Partnerships were as follows: Texas Coca-Cola Bottling Co., Abilene, Texas; Coca-Cola Bottling Co., East-land, Texas; Dublin Coca-Cola Bottling Co., Dublin, Texas; Sweetwater Coca-Cola Bottling Co., Sweetwater, Texas.
3. [The stipulation here sets out the respective holdings of partnership interests by the individual partners.]
4. During the early part of the year 1928 the partners composing the four above mentioned partnerships decided to unite the four partnerships and to incorporate them. This plan was carried out, and the Petitioner Corporation was formed. Stock in the Petitioner Corporation was issued to the members of the aforesaid partnerships, in exchange for the assets thereof, which consisted of both real and personal property. At the time of the incorporation the assets of the Petitioner Corporation were set up on the same basis that they were carried on the partnership books, which created the following Capital and Surplus of the Petitioner Corporation:
Capital Stock_$100,000. 00
Surplus- 108,923.75
Total Assets_$208,923. 75
5. [This paragraph of the stipulation shows the number of shares issued to each of the stockholders.]
6. During the months of November and December, 1928, the Petitioner Corporation paid the following taxes payable in 1928: [Here is set out a list of taxes paid by petitioner totaling the amount of $3,859.26.]
7. These taxes were based upon real estate owned by the four partnerships on January 1st, 1928. Said real properties were acquired by the Petitioner Corporation on March 1st, 1928, and said Petitioner Corporation held said properties throughout the balance of the year 1928, and used said properties in its business during that period of time. The same real properties were owned, prior to the incorporation, by the four partnerships which united to form the Petitioner Corporation. On January 1st, 1928, the said real properties were held in the name of the four partnerships named hereinafter.
8. The City, School, State and County taxes on the said real properties payable in the year 1927, were paid by the four partnerships.
9. In its income tax return for the period March 1st to and including December 31st, 1928, the Petitioner Corporation claimed as a deduction the sum of $3,859.26, representing the aforesaid City, School, State and County taxes paid by the Petitioner Corporation during the months of November and December, 1928.
10. This deduction was disallowed by the Respondent on the theory that the sum of said taxes represented additional cost of the properties taken over by the Corporation from the partnerships, and was not an ordinary and necessary business expense of Petitioner Corporation.
11. It is agreed between parties hereto that the Board may take judicial notice of the statutes of the State of Texas, regarding liability for the payment of State, Oounty, School and City- taxes, and the assessment and payment thereof.

We have for determination the sole question as to whether one acquiring real property in the State of Texas on March 1, 1928, may take as a deduction from its income tax return for that year taxes paid to the state and its subdivisions on such property as an ordinary and necessary business expense.

Petitioner’s specification of error is as follows:

The failure of the Commissioner to find that the payment of City, County, State and School taxes in the amount of $3,869.26 in taxable period covered by this appeal by petitioner was an allowable deduction from gross income.

In support of its assignment of error, petitioner asserts that the partnership here involved united to form the petitioner corporation; that the petitioner in all its ordinary business occupied the same position as the partnership; that the assets of petitioner were set up on its books on the same basis as carried on the partnership books; that there was no gain or loss to the members of the partnership upon the transfer of their assets in the organization of the petitioner corporation for the reason the members of the partnership were in control of the partnership immediately after the exchange.

In support of these propositions, petitioner cites Western Maryland Ry. Co. v. Commissioner, 33 Fed. (2d) 695, in which case it was held by the Circuit Court of Appeals for the Fourth Circuit that a railroad company might deduct in its income tax returns an amortized portion of the bond discount arising upon the sale of bonds by a predecessor corporation which had formerly owned the railroad. In that case, the respondent based his denial of such deductions primarily upon the fact that a distinct and separate entity had been created as a result of the consolidation of the Western Maryland Railway Co. with other corporations. The court held that while there was a technical legal difference between the old and the new corporations, they were the same as a practical matter, both holding the same property and representing the same ownership, and it further declared it is a settled principle that courts will not permit themselves to be blinded or deceived by mere forms of law, but, regardless of fictions, will deal with the substance of the transaction involved as if the corporate agency did not exist and as the justice of the case may require.

Petitioner further cites the case of Paradox Land & Transport Co., 23 B.T.A. 1229, which held that where partners sold assets of a partnership to a corporation receiving in payment therefor the common stock of the corporation and were immediately in control of more than 80 percent of all outstanding voting stock of the corporation, and there was no preferred stock outstanding at that time, the basis of cost of such assets to the corporation in determining the profit on a subsequent sale of such assets is their cost to the partnership from which the purchase was made.

In our opinion, the cases relied upon by the petitioner are not controlling here. Those cases were dealing primarily with the question of gain or loss and the proper basis for determining such gain or loss. In the instant case, the question is whether the taxes paid are an allowable deduction under the statute.

Section 23 of the Revenue Act of 1928 provides:

In computing net income, there shall he allowed as deductions:
*******
(c) Taxes Generally. — Taxes paid or accrued within the taxable year except * * *.

This provision of the statute has often been construed to apply only to taxes accrued within the taxable year, such taxes being those due by the taxpayer and for which it is primarily liable. Cf. Charles R. Holden, 27 B.T.A. 530; First Bond & Mortgage Co., 27 B.T.A. 430; Benjamin I. Powell, 26 B.T.A. 509; National Casket Co., 29 B.T.A. 139.

It is settled that the owner of property on the date the tax is assessed and becomes due is the taxpayer with respect to such taxes and that such owner is primarily liable for the same. In the event such qwner conveys the property after that date and during the taxable year, the taxes so accrued are his taxes and not those of his vendee. The vendee takes the property subject.to the lien against it for such taxes and it becomes to him a part of the cost of such property.

The question here is controlled by the statutes of the State of Texas, from which it appears that in that state all property must be listed for taxation between January 1 and April 30 of each year when required by the assessor with reference to the property held or owned on the 1st day of January in the year for which it is required to be listed or rendered. Any property purchased or acquired on the 1st day of January shall be listed by or for the person purchasing or acquiring it. Each assessor of taxes is required between the 1st day of January and the 30th day of April of each year to proceed to take a list of the taxable property in his county and assess the value thereof. The assessor is required prior to the first Monday in June or as soon thereafter as practicable to submit to the board of equalization for his county for inspection, approval, correction, or equalization all the lists of property rendered to him. After the approved list is returned to the assessor he is required to make a roll or book, as required by the comptroller, from the corrected list. On or before August 1 he must submit this roll or assessment book to the county board of equalization. After the board of equalization has returned the roll or assessment book, a copy thereof must be delivered to the tax collector. On or before October 1, or as soon thereafter as the collector is able to obtain the assessment roll or book, he is required to begin the collection of taxes. (Revised Civil Statutes of Texas, 1925, title 122, ch. 6, art. 7151; ch. 7, arts. 7189, 7218, 7219, 7222, and 7224; ch. 8, art. 7255.)

In the case of Winters v. Independent School District of Evant, 208 S.W. 574, it was held by the Texas Court of Civil Appeals that the “ ownership of property on the 1st day of January of any year creates a liability on the part of the owner for taxes levied upon such property for that year.”

In United States v. Anderson, 269 U.S. 422-433, the United States Supreme Court said:

In a technical legal sense it may be argued that a tax does not accrue until it has been assessed and becomes due; but it is also true that in advance of the assessment of a tax, all the events may occur which fix the amount of the tax and determine the liability of the taxpayer to pay it.

The ownership of property in Texas on January 1 is the event which determines the liability for property taxes and fixes the amount, although not ascertainable on that date. (See G.C.M. 6272, VIII-1, p. 170.)

We hold that the taxes in question accrued and became a lien on the property conveyed to the petitioner on January 1, 1928, and that petitioner, having acquired the property on March 1 of that year, took it subject to the tax lien, and that the expenditure for the payment of such taxes became a part of the cost of the property to petitioner and is, therefore, not deductible under the statute. Cf. Grand Hotel Co., 21 B.T.A. 890; Leamington Hotel Co., 26 B.T.A. 1004; First Bond & Mortgage Co., 27 B.T.A. 430.

The determination of the respondent is affirmed.

Judgment will be entered for the respondent.


author: Lansdon:

text:
    Fairmount Cemetery Association, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 55570, 63753, 70639.
    Promulgated May 16, 1934.

      John A. Btolp, 'Esq., for the petitioner.

      Nathan Gammon, Esq., for the respondent.
   OPINION.

Lansdon:

The petitioner acquired 560 acres of land in 1890, at a cost per acre not disclosed by the record. Carved out of such land it sold certain cemetery lots in 1927, 1928, 1929, and 1930 for amounts which the respondent has determined resulted in large profits. In substantially identical sections, the Revenue Acts of 1926 and 1928 provide that the basis for determining gain or loss from the disposition of property acquired before March 1, 1913, shall be cost, or fair market value at that date, whichever is greater. Although not proved for the record, all the circumstances indicate that the lands here involved had a fair market value at the basic date greatly in excess of their cost, and we so find.

The land in question was bought by the acre and sold by the square foot. The petitioner bases its claim on an average value at March 1, 1913, of 78 cents per square foot, which was the value fixed upon unimproved lands by the retrospective appraisal made in 1927. The respondent has classified the lands as to their condition on the basic date into improved, partly improved, and unimproved categories, and has determined fair market values thereof in the respective amounts of 80 cents, 40 cents, and 3.968 cents per square foot. Based on the value claimed by the petitioner, its 540 acres of lands not then sold or improved for burial purposes had a fair market value at March 1, 1913, of approximately $34,000 per acre, or $18,000,000 for the entire tract, which seems a little high even for acreage located 10 miles from Denver. The values per square foot as of March 1, 1913, determined by the Commissioner give the acreage values as of that date in the respective amounts of $1,102, $11,020, and $22,040.

It is clear that the value claimed by the petitioner results in an absurdity which impeaches the credibility of all the evidence adduced in its support. The meaning of fair market value is well fixed. It is what property can be sold for at a given date in a transaction in which vendor and vendee are equally free to act. It is true that petitioner has proved some sales of improved lots about two years before March 1, 1913, at prices approximating the values here claimed. The record discloses, however, that at the basic date the land owned by petitioner was sufficient to supply all its demands for burial lots for 200 years. The appraisal of 78 cents per square foot and the expert evidence offered in connection therewith by the petitioner ignores this situation. If it be assumed that all the lots on hand would be sold over a period of 200 years, it follows that on an average the receipt of the sales price by the petitioner would be deferred for 100 years. It would then become necessary to determine the present worth of $34,000, the value per acre claimed in 1913, but not realizable until 2013, which, at a discount rate of 6 percent, would be $100.20.

The facts disclose that in 1911 the petitioner sold 15 acres of its then unimproved land for use as a Jewish cemetery for $15,000. Just what consideration impelled the purchasers to pay $1,000 per acre when similar land just across the road could have been bought for a fraction of that price, is not disclosed by the record, but that is immaterial, since the price so paid was approximately equal to the value of the land at March 1, 1913, as determined by the respondent.

In rebuttal of the testimony of petitioner’s experts, the respondent called two real estate dealers who were familiar with land prices at the basic date. They testified that acreage prices in that neighborhood were not in excess of $500 per acre at that time. Undoubtedly the dedication of petitioner’s land to cemetery purposes increased its value as compared with nearby agricultural or grazing tracts in the same neighborhood, but respondent has recognized this in his determination of a value for unimproved cemetery lots somewhat in excess of $1,000 per acre. In our opinion the petitioner has failed to overcome the presumption of correctness which attaches to the determination of the respondent.

The basic value of block No. 90, upon which the mausoleum stands, is also an issue in connection with the computation of profit realized from the sale of mausoleum space in the year 1930. This block was unimproved at March 1, 1913, and its fair market value at that date is settled by our affirmation of the respondent’s determination as set out above. Duquesne Steel Foundry Co., 15 B.T.A. 467.

The remaining issue relates to petitioner’s right to have excluded from its taxable income of the years involved the payments made into a reserve fund, so-called “ in trust ” to maintain mausoleum properties under contracts with space purchasers.

The exact legal question involved in this last issue was before this Board in different form, but under almost identical facts, in Acacia Park Cemetery Assn., Inc., 27 B.T.A. 233, wherein that taxpayer contended that it had the right to add to the cost of cemetery lots sold the sums paid in to a bank as a perpetual care fund.” Its theory was that its contractual obligation with lot purchasers to perpetually maintain and care for the properties had the effect of imposing a trust upon so much of the purchase payments as was necessary to guarantee its fulfillment. In our discussion of that case we distinguished between sales contracts which provided that a specified portion or percentage of the purchase payments should be segregated as a separate fund and used for perpetual care and those, as then involved, in which the company merely agreed to perform such services. The Board held that in the latter class of cases there was no trust impressed upon any part of the payments reserved, even though the selling agents had represented, orally, to the purchasers that 10 percent was to be held in trust for that purpose; and that such payments not impressed by a trust at the time they were made could not be changed in such respect by any subsequent contract which the cemetery corporation might make with a bank or trust company for its own convenience in carrying out its obligations to its customers. This decision was affirmed by the United States Circuit Court of Appeals for the Seventh Circuit in Acacia Cemetery Assn., Inc. v. Commissioner, 67 Fed. (2d) 700.

This decision and others equally in point settle the law upon this last issue, and upon authority thereof we affirm the determination of the respondent.

Decision will be entered for the respondent.


author: Marquette:

text:
    A. T. Evans, Petitioner, v. Commissioner of Internal Revenue, Respondent. M. Ruiz, Petitioner, v. Commissioner of Internal Revenue, Respondent. W. E. Steege, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 64397, 67097, 67098.
    Promulgated May 17, 1934.

      A. W. Eelvem, Esq., for the petitioners.

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

Marquette:

In each petition it is asserted that the respondent erred in not determining that the profits derived from the exchanges of stock of the Miller Co. for cash and stock of the Union Co. were the income of the marital community under the laws of California. No evidence was introduced on this issue, nor was it referred to by counsel on either side. This issue was abandoned.

Petitioners insist that' their common stock was sold for cash and their preferred stock was exchanged for cash and stock, thus resulting in separate transactions. They further contend that there was a reorganization within the meaning of section 112 (i) (1) of the Revenue Act of 1928, and also that they had the right to return so much of their gross gain as was recognized under section 112 (c) (1) on the installment basis, as provided in section 44 of the same act. The respondent determined that there had been a reorganization, but computed the gain as on a single transaction. He denied that the petitioners were entitled to the benefits of section 44. At the hearing respondent’s counsel stated that the respondent had erred in determining that there had been a reorganization and insisted that there had been a straight-out exchange of stock for stock and cash, all the gain on which was subject to income tax. He claimed a larger deficiency on the ground that the petitioners should be held to have been in receipt in 1928 of all the stock of the Union Co. which that company had agreed to exchange for Miller Co. stock and cash.

We see no merit in the contention that there were two separate transactions. The Union Co. desired to purchase and in fact did acquire all the stock of the Miller Co. The contract further provided that if the contracting stockholders could not acquire all the stock of the Miller Co. (except perhaps 20 shares of preferred stock), then they agreed to have that company take snch action as would result in the transfer of all its assets to the Union Co., for which the latter agreed to pay the same consideration which it had agreed to pay for the stock. It is clear that the contract called for the purchase and exchange of all the stock except perhaps 20 shares, and not for the purchase of the preferred stock separately. Furthermore, the consideration which was at once to be paid in cash was 39 percent “ of the total purchase price ” and not that percentage of the price to be paid for the preferred stock alone.

Whether the whole gain of the petitioners arising from their transfers of Miller stock for cash and stock of the Union Co. should be recognized for income tax purposes, or should be recognized only to the extent of the cash paid and to be paid, depends on the application of section 112 of the Bevenue Act of 1928, the pertinent parts of which read:

(a) General rule. — Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.
*******
(b) (3) Stock fob stock on beoboanization. — No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
*******
(c) (1) If an exchange would be within the provisions of subsection (b) (1), (2), (3), or (5) of this section if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received within the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.
* # *
(i) (1) The term “ reorganization ” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) a transfer by a corporation of all or part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (O) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.

We find it unnecessary to decide whether a reorganization occurred, when in July 1929 the Union Co. as sole stockholder of the Miller Co. acquired all the assets of the latter, except $500, the Miller Co. still surviving. Conceding, however, that the answer should be in the affirmative, there still remains the question of whether the petitioners are entitled to participate in the benefits arising from such reorganization. All the petitioners made their returns on the calendar year basis. We have before us only the calendar year 1928. Petitioners’ claims must stand or fall by what was done in that year. Burnet v. Sanford & Brooks Co., 282 U.S. 359. All that the record discloses that was don© in that year was the execution of the agreement, the transfer by the stockholders of the Miller Co. of all their stock in that company to the Union Co., and the payment by the latter in cash of 39 percent of the contract price. The acquisition by the Union Co. of all the stock of the Miller Co. in exchange for cash and the Union Co. stock, standing alone, did not constitute a reorganization as that term is used in section 112. John J. Watts, 28 B.T.A. 1056. Of course, it is not necessary that all the steps essential to a complete reorganization must be taken in the taxable year, but if the words used in section 112 (b) (3) as modified by section 112 (c) (1) mean anything, it is that an exchange made in a taxable'year to be effective under section 112 must have been made in pursuance of a plan of reorganization. In the first place, the Miller Co. was not a party to the agreement of December 11, 1928, and no covenants were made in its behalf except that the stockholders who were parties to the agreement agreed that if they could not by January 10, 1929, secure all the stock of the Miller Co. except 20 shares, then they agreed to procure the transfer of all the Miller Co.’s assets to the Union Co. for the same consideration which the latter had agreed to pay for the stock. There is nothing in the agreement which even remotely refers to what was to occur to the Miller Co. after the transfer of the stock. Much less does the agreement contemplate such action as was taken by the directors of that company on July 1, 1929, when all its stock was owned by the Union Co. As we see it, the contract was one of sale and exchange and nothing else. In fact, the words of the contract are: “ Second parties agree, to sell to first party, and first party agrees to purchase from second parties, all of the shares of stock of Miller Company owned by second parties at a price as follows, to-wit: * *

It is true that the resolution of the directors of the Miller Co. of July 1, 1929, states that their action was taken “ pursuant to its plan of reorganization.” But when that plan was adopted and what its provisions were are not disclosed. It is pertinent to point out that in July 1929 the Union Co. was, and for several months had been, the owner of all of the Miller Co.’s stock. Neither the petitioners nor any of the old stockholders then had any connection whatever with that company. In the absence of any evidence that a plan of reorganization was adopted in 1928, and at a time when the old stockholders were in control, we are compelled to find that the petitioners should be taxed as on a straight sale and exchange and that they are entitled to the benefits of section 44 of the Revenue Act of 1928.

The claim of the respondent that in 1928 the petitioners were in receipt of all the stock of the Union Co. must be denied. The agreement of the Miller Co. was that its preferred stock should be delivered to the petitioners and the other stockholders of the Miller Co. immediately following the granting of the permit by the Corporation Commissioner of the State of California. That permit was granted January 12, 1929. Under the laws of California there was no stock in existence and. none could exist until the permit was granted. National Iron Works, 22 B.T.A. 382. In that case, after referring to the fact that one may be a stockholder even- though no certificate has been issued to him and after setting forth all the pertinent provisions of the California Securities Act of 1917, the Board said:

Under tlie provisions of tliis act it was held by the California District Court of Appeals in Reno v. American Ice Machine Co., 237 Pac. 784, that not only was stock issued without a permit void, but a contract to sell such stock was also void and could not be ratified. In MacDonald v. Reich & Lievre, 281 Pac. 106, the same court held that where one had purchased stock so issued without a permit from another holder the stock was void, the sale was void, and “ in reality the plaintiff and her assignor never became stockholders in the corporation.” In each of the above cases hearing was denied by the Supreme Court of California.

Judgment will he entered under Bule 50.


author: Stjgknhagen :

text:
    American South African Line, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 62955, 68830, 70701.
    Promulgated May 17, 1934.

      Frank V. Barns, Esq., and Luke D. Stapleton, Jr., Esq., for the petitioner.

      Henry A. Gox, Esq., for the respondent.
   OPINION.

Stjgknhagen :

The Commissioner having determined that as to all of the ships owned by the petitioner during the taxable years in question the proper rate to be used in determining the statutory reasonable allowance for depreciation, including obsolescence, is 3 percent, the petitioner has instituted this proceeding to establish that the rate as to all of its ships, except the City of New York, should be 5 percent, and as to the City of New York should be approximately 4 percent. This issue was tried at length, both sides presenting, in addition to the evidence of direct fact as to the properties, the opinions of persons engaged in one way and another in the design, construction, operation, engineering, insurance, registration, survey, inspection, and appraisal of ships generally and of this character.

Since the determination of the proper rate of depreciation involves a consideration not alone of facts borne of observation and experience, but also of inferences as to future probability, it is impossible to make a purely logical exposition of the decision. The weight given to the opinions of the several witnesses eludes analysis. The contest can not be tabulated like the strikes, balls, hits, and errors of a baseball game. If a complete exposition were made of the evidence and of the manner of its appraisal and consideration, there would still remain an imponderable leap to the conclusion. The crucial part in reaching a decision must be played by the trier who hears the evidence and observes the witnesses. The opinion in such a case can perform only a slight service as a legal precedent. It is merely a specific conclusion which embodies a consideration of the entire record in that case — no more and no less. The rate fixed, unlike the depreciation base, is not unalterable. If it becomes demonstrably evident that the probable period of amortization of the investment is shorter or longer than now determined, the rate applicable to future years is still subject to adjustment in the light of such evidence. With passing years, added experience should reduce the field of necessity for prediction and estimate.

We have considered with great care all of the evidence and find it impossible to sustain the Commissioner’s determination. Thirty-three and one third years is, as shown by this record, longer than anyone could reasonably expect these ships usefully to last. It would be exceptional if they should do so, and the depreciation rate should not be based on an extraordinary possibility. On the other hand, the facts and circumstances shown by the evidence indicate that the 20-year life predicted by some of the petitioner’s witnesses is probably too short. The experience of the Chincha has itself been such as to cause the petitioner to compromise with this 20-year estimate, and it can not be said that the Chincha is atypical.

The implication of some of petitioner’s evidence is that the depreciation, or more especially the obsolescence, deduction may be an instrument of relief to a taxpayer from the rigors of commercial competition. But the deduction is applicable not to a taxpayer’s business, but to the property used in the business. Obsolescence is measured primarily not by earnings, but by the duration, in time, of economic usefulness of the property under investigation.

Our own conclusion, from the evidence, is that a reasonable depreciation allowance, sufficient to include obsolescence, should be measured by a useful life of 25 years for all of the petitioner’s ships except the City of New York, and that the useful life of the City of New York should be taken at 28½ years. On these periods, the straight-line annual percentage rate which should properly be used is 4 percent upon the Eastern Glen, Eastern Glade, West Isleta, West Cawthon, and Ohinoha, and 3% percent upon the City of New York.

Judgment will be entered under Bule 50.


author: Murdock;

text:
    Stephen M. Clement, Petitioner, v. Commissioner of Internal Revenue, Respondent. William S. Rogers, Petitioner, v. Commissioner of Internal Revenue, Respondent. Ella C. Goodyear, Petitioner, v. Commissioner of Internal Revenue, Respondent. William A. Rogers, Petitioner, v. Commissioner of Internal Revenue, Respondent. Norman P. Clement, as Trustee of the Estate of Stephen M. Clement, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 50805, 50861-50804.
    Promulgated May 17, 1934.

      Ralph M. Andrews, Esq., for the petitioners.

      George D. Brabson, Esq., for the respondent.
   OPINION.

Murdock;

The Commissioner determined deficiencies for the year 1926 as follows:

The sole issue in each case is, Did the petitioner sustain a loss in 1926 from the disposition of common and preferred stock of Rogers-Brown Iron Co., and, if so, in what amount? The facts in all five cases are substantially identical except for the number of shares involved and the amounts of the checks which passed as part of the transaction. The facts have been stipulated. A brief statement of the facts relating to the case of Ella C. Goodyear will suffice for our purposes.

In the latter part of 1925, Ella C. Goodyear was the owner of 5,000 shares of the common stock and 1,600 shares of the preferred stock of Rogers-Brown Iron Co. Her basis for gain or loss on each of these shares was $100.

Rogers-Brown Iron Co. was a corporation engaged in the manufacture of pig iron. Its operations had been successful prior to 1920, but it began to lose money in 1920 and 1921 due to a severe depression in the industry, increased taxes, increased freight rates, and sharp competition. It owned a large and valuable ore property in Minnesota known as the Susquehanna Mine, which it could not operate profitably because of the reduction in the amount of pig iron which it could market. Its earnings declined and its surplus disappeared. At the beginning of 1925 it had a deficit. It did not have sufficient funds with which to meet the next payment of interest on its outstanding indebtedness. M. A. Hanna Co., another iron manufacturer, in August 1925 offered to provide the needed financial assistance. M. A. Hanna Co. wanted to obtain an interest in the Susquehanna Mine, control, jointly with other allied interests, of Rogers-Brown Iron Co., through ownership of 80 percent of its stock, a contract with Rogers-Brown Iron Co. permitting M. A. Hanna Co. to manage Rogers-Brown Iron Co.’s Iron River mines on a commission basis, and a contract with Rogers-Brown Iron Co. for the exclusive sale of its output of pig iron. In consideration of these things M. A. Hanna Co. was willing to take such steps and to provide such additional working capital as might be necessary to relieve the Rogers-Brown Iron Co. from its current difficulties, including (1) refunding of its indebtedness over a substantial period of time; (2) additional working capital; (3) relief from operating the Susquehanna Mine on an unprofitable basis.

An agreement was executed on September 24, 1925. The parties to it included Rogers-Brown Iron Co., certain stockholders of that company, including the petitioner, M. A. Hanna Co., Central Trust Co., Central Securities Co., and a group of banks to which Rogers-Brown Iron Co. was indebted. Central Securities Co. was interested in the plan in order to protect the bondholders of Rogers-Brown Iron Co., for which its affiliate, Central Trust Co., was trustee, and also in underwriting. such new securities as might be marketed as a part of the refinancing plan. Central Securities Co. agreed to sell gold notes of Rogers-Brown Iron Co. of the par value of $1,000,000. Rogers-Brown Iron Co. by this plan obtained relief from certain onerous requirements of a mortgage, additional time in which to pay its indebtedness to the banks, and additional working capital, and conveyed the Susquehanna Mine to a new corporation which assumed indebtednesses amounting to about $4,000,000. The following paragraphs are quoted from the agreement:

4. The Rogers Company will issue and sell to the Rogers Stockholders (in proportion to their aggregate holdings of stock — both common and preferred included) and the Rogers Stockholders severally agree to purchase from the Rogers Company (in such respective proportions), One Million Dollars ($1,000-000.00) in principal amount of the gold notes maturing January 1, 1931, at par and accrued interest.
5. The Rogers Stockholders, severally owning or controlling the number of shares of preferred and common stock of the Rogers Company set opposite their respective names, collectively amounting to more than eighty per cent. (80%) of the outstanding common and preferred stock of’the Rogers Company, severally agree to sell to the Securities Company, and the Securities Company agrees to purchase from the Rogers Stockholders, said $1,000,000.00 of gold notes and (in proportion to their aggregate holdings of stock) $2,040,-000 par value of the present outstanding preferred stock and $4,000,000 pat-value of the present outstanding common stock of the Rogers Company at and for the price of $1,000,604.00 plus any accrued and unpaid interest on such notes.
Each of the Rogers Stockholders, within five (5) days after the execution of this Agreement by him, shall deposit with The Marine Trust Company of Buffalo certificates duly endorsed in blank for the number of shares of preferred and common stock of the Rogers Company agreed by him to be sold to the Securities Company; as provided in this paragraph 5, in escrow, to be delivered by said Trust Company to the Securities Company upon the consummation .of this contract and to be returned to said respective stockholders if, without default on the part of the Rogers Stockholders or the Rogers Company, the transactions provided for in this Agreement shall not be consummated on or before February 1, 1926. ■
* * * # * * *
S. The transactions hereinbefore provided for shall be consummated substantially simultaneously on or before February 1, 1926; but irrespective of the date when so consummated the transactions shall be deemed to be closed and all adjustments made as of January 1, 1926.

On October 15,1925, representatives of the Rogers-Brown Iron Co. stockholders orally agreed with Central Securities Co. that, instead of each stockholder depositing his stock within five days after the execution of the written agreement, each should deposit 80 percent of his total stockholdings with the escrow agent on or before the close of business on December 80, 1925, and Central Securities Co. should deposit its check, payable to the respective depositing stockholders, with the escrow agent on or before December 30, 1925. They further agreed that each stockholder should elect, not later than the time at which he deposited his stock, how much of that stock should be delivered to Central Securities on December 30, 1925, and how much should be delivered on January 2,1926, and Central Securities should then issue its checks dated 1925 or 1926 as the stockholder had elected.

Ella C. Goodyear, in accordance with this agreement, elected to have one half of the common and preferred stock which she deposited delivered to Central Securities Co. on December 30, 1925, and to have the other half delivered to Central Securities Co. on January 2, 1926, and to have two checks delivered to the escrow agent in the appropriate amounts, one dated December 30, 1925, and the other dated January 2, 1926. On December 28, 1925, Ella C. Goodyear deposited with the escrow agent certificates duly endorsed in blank for 4,000 shares of common stock and for 1,280 shares of preferred stock of Rogers-Brown Iron Co., being 80 percent of her total holdings of each of, these stocks, and her two checks each in the amount of $43,708.61, one dated December 30, 1925, and the other dated January 2, 1926, in accordance with paragraph 4 of the agreement quoted above. At the same time she instructed the escrow agent that 2,000 shares of the common stock and 640 shares of the preferred stock should be delivered to Central Securities Co. or its nominees on December 30, 1925, provided that a check of Central Securities Co. payable to the petitioner in the sum of $43,735.01 was received on that date and, further, that 2,000 shares of common stock and 640 shares of preferred stock were to be delivered to Central Securities Co. or its nominees on January 2,1926, provided that a check of Central Securities Co. payable to her in the sum of $43,735.01 was received on that date. On December 30, 1925, Central Securities Co. delivered to the escrow agent its two checks payable to Ella 0. Goodyear, each in the amount of $43,735.01, one dated December 30, 1925, and the other dated January'2, 1926, with instructions to deliver these checks and others to the payees provided the latter deposited 80 percent of their holdings of Rogers-Brown Iron Co. preferred stock with the agent. Ella C. Goodyear received the two checks from the escrow agent on J anuary 2,1926, and on the same day deposited them in her bank account. On J anuary 23, 1926, the escrow agent delivered to nominees of Central Securities Co. certificates for the Rogers-Brown Iron Co. common and preferred stock deposited with it, including the petitioner’s 4,000 shares of common and 1,280 shares of preferred. Ella C. Goodyear kept her accounts and reported her income on the basis of cash received and disbursed. On her income tax return for the calendar year 1926, she claimed a deduction of $263,973.60 representing an alleged loss by her from the disposition of 2,000 shares of common and 640 shares of preferred stock of Rogers-Brown Iron Co. deposited by her with the escrow agent for delivery on January 2, 1926. The Commissioner disallowed this claimed deduction.

The Revenue Act of 1926 provides that the loss from the sale or other disposition of property shall be the excess of the basis over the amount realized, and the amount realized shall be the sum of any money received plus the fair market value of the property (other than money) received. The petitioners disposed of a part of their stock. The bases have been stipulated. If the amount realized by each can be determined from the evidence, the loss of each can be computed. The petitioners contend that the amount realized by each was one cent a share. They rely upon the decision of the Board in Ganson Depew, 27 B.T.A. 515. Ganson Depew, the petitioner in that case was, like these petitioners, a stockholder of Rogers-Brown Iron Co. The only difference between the facts in that case and those in the present case, aside from differences of amount, is that Depew elected to have all of his stock delivered in 1926 instead of having part of it delivered in 1925 and part in 1926. This difference seems immaterial. The Board held in that case that Depew sold a part of his stock, the sale was consummated in the year 1926, the petitioner suffered a loss of the difference between $100 per share, his basis, and one cent per share, and was entitled to a deduction for 1926 equal to the amount of that loss. On further consideration of the evidence, the Board is of the opinion that it erred in the Depew case in holding the evidence sufficient to establish the amount of the loss sustained.

The agreement of September 24, 1925, provided that each stockholder of Rogers-Brown Iron Co. should issue his check to Rogers-Brown Iron Co. in an amount equal to a proportional part of $1,000,000 par value of the notes of that company, and the bankers should issue their checks to each stockholder in an amount which would exceed the amount of the check issued by the stockholder to the Rogers-Brown Iron Co. by one cent for each share transferred by the stockholder to the bankers. The checks were issued and the stock and notes were transferred to the bankers in accordance with the agreement. The petitioners contend that each sold a number of shares of stock to the bankers for one .cent a share. The shares were disposed of but the evidence does not show that they were sold for one cent each. It is true that, in computing the amount of the check to be issued by the bankers, one cent was added for each share transferred by that particular stockholder. But the bankers received notes and stock for which they paid a lump sum, and we cannot conclude from the evidence presented, either that they paid par for the notes or that they paid only one cent a share for the stock. Where two kinds of property are transferred, a lump sum is received in payment, and it is necessary to determine how much of the payment was for each class of property, consideration must be given to the relative values of the different classes of property. The use of one cent a share in the computation does not show conclusively that but one cent was paid for each share of stock. The fact of the matter probably is that the notes were worth less than par and the stock was worth more than one cent a share. The record does not show how much the bankers received for the notes nor what they did with all of the shares which they received. The apparent effect of what was done was that each stockholder made a capital contribution to his corporation by going through the form of purchasing notes at par which he well knew were not worth par, and then selling those notes and a part of his stock for a net amount equivalent to the par value of the notes plus one cent for each share of stock transferred. The net amount received may have been the equivalent of the fair market value of the notes and stock or it may have been more or less than that amount. The obvious purpose of these petitioners in entering into this agreement was to relieve their corporation of some of its financial burdens and to obtain additional working capital for it so that added value would be given to the shares which each retained. This purpose was accomplished and the stock which each retained may have been enhanced in value. In order to establish a loss under the statute, it is necessary for the petitioners to show the fair market value of the property (other than money) received. The value of the consideration received by each of these petitioners is not shown by the evidence and, consequently, the Board is unable to compute the gain or loss from the disposition of the shares.

The Circuit Court of Appeals for the Seventh Circuit held in a similar situation that “the fair market value of the stock at the time of surrender may properly be regarded as the price realized for it by the taxpayer in the form of contemplated advantage ”, and the deductible loss would be the difference between this value and the basis. Commissioner v. Wright, 47 Fed. (2d) 871, reversing 18 B.T.A. 471. However, the value of the stock at the time surrendered is not shown by the evidence in this case. The book value of the outstanding common and preferred stock as of January 1, 1925, and as of January 1,1926, after the various adjustments under the agreement of September 24, 1925, were made on the books, is shown. There were 25,500 shares of preferred and 50,000 shares of common outstanding on each of those dates. The book value of 80 percent of tbe stock was $5,507,546.40 on January 1, 1925, and $3,078,274.73 on January 1, 1926. This is the stock which the petitioners contend was sold for a total consideration of $640.

In the case of Helene Baldwin Burdick, Executrix, 20 B.T.A. 742, Burdick, a stockholder and creditor of a corporation, owning all of the preferred shares and one half of the common shares of the stock of the corporation, which was in financial difficulties, entered into an agreement with two other stockholders and an outside party in order to induce the outsider to contribute $40,000 to the corporation and become its manager. The $40,000 was used to pay off some indebtedness of the corporation, Burdick’s preferred shares were canceled, and a part of his common shares were transferred to the new manager. The Board, purporting to follow its decisions in Edith Scoville, 18 B.T.A. 261, and the Wright case, supra, which had not yet been reversed, held that the stockholder was entitled to deduct as a loss the cost of the common and preferred stock which he surrendered, less the proportionate benefit to his retained common stock which resulted from the cancellation and retirement of the preferred stock. Thus the Board recognized that in computing Burdick’s loss reduction would have to be made for the benefits which he received under the plan and which came to him indirectly through the probable increase in value of his retained stock. These benefits might have been greater or less than the Board thought. The case was affirmed on appeal, Commissioner v. Burdick, 59 Fed. (2d) 395. In the present case the preferred stock surrendered by these petitioners was not canceled, but apparently was held by other stockholders. However, as we have said before, these petitioners, in disposing of their stock, were bargaining for and obtained some valuable consideration, the precise value of which is not shown. They had the burden of showing the amount of their loss, and we are unable to determine that amount from the evidence.

Reviewed by the Board.

Decision will be entered wnder Bule 50.

Smith and Leech dissent.


author: Marquette :

text:
    Emanuel Solomon Ullmann, Petitioner, v. Commissioner of Internal Revenue, Respondent. Joseph Ullmann, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent. Joseph Ullmann, Jr., and Theresa Ullmann, as Executors of the Estate of Samuel Ullmann, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 56470-56472.
    Promulgated May 17, 1934.

      J. R. Little, Esq., for the petitioners.

      Prew Savoy, Esq., for the respondent.
   OPINION.

Marquette :

These proceedings have been consolidated and involve the determination of the following deficiencies in income tax for the year 1928:

Emanuel Solomon Ullmann_$5,794.86
Joseph Ullmann, Jr_ 12,089.23
Estate of Samuel Ullmann_ 5,981.30

The petitioners assert that payments made to them as surviving members of a partnership pursuant to awards of the Mixed Claims Commission, United States and. Germany (hereinafter referred to as the Commission), were not taxable income, but were gifts made to them by Germany, and, in the alternative, that the payments constituted a return of capital from which no taxable income can arise until their capital has been made whole. They further contend that since the firm in 1918 kept its books on an accrual basis, their rights against Germany should have been accrued as of that year or at least as of 1923, when their claim was allowed.

Respondent in his amended answer alleges that he erred in allowing as a deduction from gross income attorney fees paid in 1928 in a sum in excess of such proportionate part of the attorney fees paid as the sum of payments made on account of awards of the Commission to be included in gross income for 1928 bears to the total sum of the payments so made in that year. He admitted that he had erred in including in the gross income of each of the petitioners on account of awards of the Commission sums in excess of the following amounts:

Emanuel Solomon Ullmann_$11, 783.11
Joseph Ullmann, Jr_ 20,620.46
Estate of Samuel Ullmann_ 11, 783.11

These proceedings were submitted on a stipulation of facts from which we make a condensed statement. In January 1912 Charles Ullmann, Emanuel Solomon Ullmann, Joseph Ullmann, Jr., and Samuel Ullmann, all American citizens, formed a copartnership and in 1918 were, as partners, the owners of various assets in Leipzig, Germany, which cost them $237,000. Their partnership interests were: Charles Ullmann, Samuel Ullmann, and Emanuel Solomon Ullmann 26% percent each, and Joseph Ullmann, Jr., 20 percent. The firm was dissolved in January 1918. On April 9, 1918, when a state of war existed between the United States and Germany, the said assets were seized by the German Government. None of the petitioners took any deduction in his return for 1918 by reason of the loss of such assets and the partnership continued to carry the same upon its books. After the termination of the war the petitioners, as surviving partners, filed a claim against the German Government with the Commission and an award was made by the Commission in their favor in 1923 in the principal sum of $237,000. with interest thereon at 5 percent from October 1, 1920.

Charles Ullmann died July 24, 1921, and by his will bequeathed his estate to his widow, including his interest in the property seized by the German Government. In August 1924 his widow made a gift of the interest of Charles Ullmann in the seized assets to Joseph Ullmann, Jr.

In 1928 and 1929 the petitioners received payments on account of the award of the Commission as follows:

The payment made on each of the five dates was accompanied by a letter of the Treasury Department. The letter of August 15 is as follows:

There is inclosed herewith checks drawn on the Treasurer of the United States against the German Special Deposit account as part payment on account of award of the Mixed Claims Commission, United States and Germany, in accordance with the provisions of paragraph (4) of Section (b) of the Settlement of War Claims Act of 1928, and your application for the payment.
The amount due under the award is as follows:
Principal Interest account account
Principal of award_^_$237, 000. 00 -
Interest from Oct. 1,1920 to Jan. 1,1928, at 5 per cent per annum 7 years 92 days (365 day basis)_ $85,936.85
Total due as of Jan. 1, 1928_$322, 936.85
Interest on this amount from Jan. 1, 1928, to August 15,1928 at 5 per cent per annum — years 227 days, (366 day basis)_ 10, 014. 57
Payment as of August 15, 192S_$99, 500. 00
Deduction of % of 1%_ 500. 00
Total payment. 100, 000. 00
Balance due as of August 15, 1928. _$222,936.85 $10,014. 57
Check No. Name Amt. Check Mop. Total
2945 Samuel Ullmann_ $26,533.33 $133.33 $26, 666.66
2946 Emanuel S. Ullmann_ 26, 533.33 133. 33 26, 666.66
2947 Joseph Ullmann, Jr_ 46, 433.34 233.34 46,666.68
. 500. 00 $500. 00 $100. 000. 00
Thereafter all payments were deducted solety from the “principal account,” but there was added to the “ interest account ” interest on the balances of the “principal account.” The result of this method of payment was that on December 16, 1929, the “ principal account ” had fallen to $118,863.02 while the “ interest account ” had risen to $19,615.04. Samuel Ullmann died January 11, 1930, and Joseph Ullmann, Jr., and Theresa Ullmann are his duly qualified executors.
The partnership paid attorney fees to the firm of attorneys who prosecuted their claim before the Commission as follows: March 12, 1920, $5,164.50; March 2, 1928, $13,947.31. It charged these amounts on its books to the respective petitioners. The partnership kept its books of account on the accrual basis and the petitioners kept their books of account on the cash receipts and disbursements basis.
We are met at the threshold with the contention that no part of the payments received by the petitioners on awards of the Commission constitutes income, since, as contended, they were gifts from Germany. The argument runs in this wise: A voluntary payment made under no legally enforceable obligation is a gift; Germany, as a belligerent, had the right to sequester the property of the petitioners; this left petitioners without right to demand return or compensation for its seizure at least until the declaration of peace and what might come back would be secured not as a matter of right, but as a matter of grace or exaction by the victor.
It would startle the German people if they were informed that the payments they have been compelled to make to their former enemies, as the result of a disastrous war and at such sacrifice to themselves, were nothing more or less than gifts from one people to another. In making this contention counsel overlooks the realities of the case — the Great War, the Armistice, the Treaty of Berlin, which incorporated a part of the Treaty of Versailles, the Settlement of War Claims Act, and the Commission which made the awards here involved. In Administrative Decision No. Ill of the Commission it is said:
Tlie provisions of tlie Armistice require “ Reparation for damage done.” Throughout the Treaty of Berlin the provisions fixing Germany’s pecuniary liabilities express the measure of her obligation in terms of “ compensation ” or “reparation.” As pointed out by this Commission in that part of its opinion in The Lusitania Gases dealing with exemplary damages, pages 28-31, while there is no warrant in the Treaty of Berlin for the assessment of any penalty against Germany she is obligated (save where limited by the Treaty terms) to make full, adequate, and complete compensation or reparation for all losses sustained by American nationals falling within its terms. The ascertainment of the amount of such compensation is a judicial function — the task of this Commission.
It is a far cry from an award of compensation or reparation for losses sustained, to the making of gifts, the latter not being a function of a judicial tribunal. We can find no element of gratuity in these payments. As said in Phelps v. McDonald, 99 U.S. 298, relative to a similar award by a mixed commission of the United States and Great Britain:

There is no elem'ent of a donation in the payment ultimately made in such cases. Nations, no more than individuals, make gifts of money to foreign strangers. * * *

See also Comegys v. Vasse, 1 Pet. 193; Williams v. Heard, 140 U.S. 529; Forsyth v. Reynolds, 15 How. 357; In re Westbrook's Estate, 240 N.Y.S. 301.

While it is true that Germany under the laws of war had the right to sequester the property of American citizens (United States v. White Dental Mfg. Co., 274 U.S. 398), it is equally true that under the treaties the United States had the right to recover for such losses, and suck recovery when received by a taxpayer is income to the same extent as any other recovery of compensation- or reparation might be income.

In his deficiency notice the respondent included in the gross income of each petitioner the gross amounts received by him on the award. He now confesses error in that he has included in gross income a part of the cost basis, $237,000, but contends that he has the right to include in income that part of the interest which he asserts the petitioners received with each payment. This apportionment he made under G.C.M. 9210, C.B. X-1, p. 129. In James Speyer, 30 B.T.A. 517, we had occasion to pass on this question. In that proceeding, as in this, the Secretary of the Treasury paid in 1928 amounts which were less than the cost basis. We see no necessity for reviewing again the facts and history pertaining to the claims of American nationals against Germany. These are of public, even international, notoriety. They pertain not to the individual claims — these were settled by the Commission — but to the ability of Germany to pay and the present prospect of that Government paying the claims. Here, as there, we hold that there is not only a lack of certainty of future payments, but that it is highly probable the petitioners will never receive a substantial part of what is due them and therefore they are entitled to recover their cost before being called upon to pay income tax on sums received under the award.

This conclusion disposes of petitioners’ contentions that the amounts received should have been accrued as of 1918 when the property was seized or in 1923, when their claim was allowed by the Commission, for to accrue payments which probably never will be received would distort income. Great Northern Ry. Co., 8 B.T.A. 225; Sowers Mfg. Co., 16 B.T.A. 268; Oregon Terminals Co., 29 B.T.A. 1332. See also G.C.M. 9466, C.B. X-1, p. 133.

Lastly, respondent asserts that he erred in allowing a deduction of a certain part of the fees paid by the petitioners to their attorneys for their services before the Commission. This is denied on the authority of James Speyer, supra, and also for the reason that we do not know the amount of the fees respondent permitted to be deducted.

Judgment will be entered wider Bule 50.


author: Smith:

text:
    Durand-McNeil-Horner Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 43285, 55788.
    Promulgated May 18, 1934.

      Harry Thom, Esq., and Freeman Day, Esq., lor the petitioner.

      J. R. Johnston, Esq., for the respondent.
   OPINION.

Smith:

These proceedings, consolidated for hearing, involve income tax deficiencies as follows:

The questions presented by the petitions relate principally to the basis to be used in the computation of gain or loss and in the computation of depreciation allowances on assets acquired from the consolidating corporations. They also allege that the deficiencies are barred by the statute of limitations.

At the hearing of these proceedings a stipulation of facts covering all issues at that time urged upon us by the petitioner was filed. No data are contained in such stipulation relative to the question of the bar of the statute of limitations. The Board therefore assumes that the petitioner has waived that allegation of error.

On or prior to July 1, 1924, the Durand & Kasper Co., McNeil & Higgins Co., and Henry Horner & Co., were all incorporated and doing business under the laws of the State of Illinois. These three companies desired to consolidate. In pursuance of that purpose they entered into a formal agreement on July 1, 1921, whereby they consolidated under the name of the Wholesale Grocers Cor-portion, which was thereafter changed to Durand-McNeil-Hor-ner Co. Under the consolidation the new company, the petitioner herein, acquired all of the assets of the three consolidating companies and assumed the payment of all the debts and liabilities of the consolidating companies. The-consolidation was copsum-mated by a certificate of consolidation filed with the Secretary of State for the State of Illinois on September 9, 1921.

Under the agreement above referred to and the confirmatory resolutions of the directors and stockholders of the three consolidating companies the stockholders of those companies were entitled to receive preferred stock of the consolidated company to an amount of par value equal to the “ net value ” of the assets of the respective consolidating companies and in addition an equal number of the shares of common stock of the consolidated company of no par value.

Subsequently, on or about January 24, 1922, the July 1, 1921, agreement was modified, under which modification the net value of the assets of the three consolidating companies as of July 1, 1921, was found and determined to be as follows:

McNeil & Higgins Co_$903, 800
Durand & Kasper Co_ 844,200
Henry Horner & Co_ 391,000

In connection with the consolidation the stockholders of the constituent companies received shares of capital stock of the petitioner out of a total issued stock in connection with the consolidation of 42,780 shares as follows:

The parties have stipulated:

The Commissioner has determined that the consolidated company, Durand-McNeil-Horner Co., the petitioner herein, in computing depreciation, leasehold amortization and gain or loss in the sale of its assets for the years 1924, 1925, and 1928, must use the same basis as the transferor companies would have used, whereas the petitioner contends that it should be allowed to use the value of said assets when acquired by the Durand-McNeil-Horner Co. from the constituent companies.
It is stipulated that if the Board should sustain the Commissioner’s determination the deficiencies set forth in the notices of deficiency are correct, but if the Board should sustain the Petitioner’s contention then there are no deficiencies and no overassessments with respect to the Petitioner’s liability in these proceedings for the taxable years 1924, 1925 and 1928.

The only question before the Board for determination is the basis to be used by the petitioner for the taxable years involved in the determination of depreciation allowances upon the assets acquired from the consolidating corporations and in the determination of profit realized froift the sale or other disposition of some of those assets. The respondent contends that the petitioner must use the same basis as would have been used by the consolidating companies had there been no consolidation. Pertinent provisions of the taxing statutes are:

[Revenue Act of 1921:

Seo. 202. (a) That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the cost of such property; except that—
*******
(c) For the purposes of this title, on an exchange of property, real, personal or mixed, for any other such property, no gain or loss shall be recognized unless the property received in exchange has a readily realizable market value; but even if the property received in exchange has a readily realizable market value, no gain or loss shall be recognized—
*******
(2) When in the reorganization of one or more corporations a person receives in place of any stock or securities owned by him, stock or securities in a corporation a party to or resulting from such reorganization. The word “ reorganization,” as used in this paragraph, includes a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or of substantially 'all the properties of another corporation), recapitalization, or mere change in identity, form, or place of organization of a corporation, (however effected) ; * * *

Revenue Act of 1924:

Sec. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that—
*******
(7) If the property (other than stock or securities in a corporation a party to the reorganization) was acquired after December 31, 1917, by a corporation in connection with a reorganization, and immediately af-ter the transfer an interest or control in such property of 80 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made.
*******
(c) The basis upon which depletion, exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the same as is provided in subdivision (a) or (b) for the purpose of determining the gain or loss upon the sale or other disposition of such property * • *.

The Revenue Act of 1926 (sections corresponding with the above) is the same in all essential respects with reference to the questions herein involved.

Bevenue Act of 1928:

SEC. 113. BASIS FOR DETERMINING GAIN OR LOSS.
(a) Property acquired) after February 88, 191S. — The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that—
(7) Tran seeks to corporation wi-iiore control of property remains in same persons. — If the property was acquired after December 81, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 80 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to (he year in which the transfer was made. This paragraph shall not apply if the property acquired consists of stock or securities in a corporation a party to the reorganization, unless acquired by the issuance of stock or securities of the transferee as the consideration in whole or in part for the transfer.
* * * * * * *
SEC. 114. BASIS FOR DEPRECIATION AND DEPLETION.
(a) Basis for depreciation. — The basis upon which exhaustion, wear and tear, and obsolescence are to be' allowed in respect of any property shall be the same as is provided in section 113 for the purpose of determining the gain or loss upon the sale or other disposition of such property.

Although not denying that all of the petitioner’s capital stock was issued to the stockholders of the constituent companies for the net assets of those companies, the petitioner, nevertheless, contends that it is not limited to the same basis that would have been applicable had there been no consolidation. Its argument upon this point is that immediately after the transfer of the properties by the several corporations to the petitioner “ an interest or control in such property of 80 per centum or more ” did not remain in the same persons; that the percentage of interest or control of the various groups of persons associated with the assets immediately before the transfer should be considered independently in determining whether an 80 percent interest or control remains in the same persons or any of them immediately after the transfer; that the Board has recognized that section 331 of the Revenue Acts of 1918 and 1921 ,is very much the same as section 204 (a) (7) of the Revenue Acts of 1924 and 1926 and section 113 (a) (7) of the Bevenue Act of 1928, except as to the percentage of ownership of stock required to determine the question of control, citing Watab Paper Co., 27 B.T.A. 488, in support thereof. The petitioner also relies upon R. H. Perry & Co., 12 B.T.A. 328; and Independent Aetna Sprinkler Co., 15 B.T.A. 521. The last two cited cases deal with the computation of invested capital. We are of the opinion that they are not apposite in the proceedings at bar.

It can not be doubted that it was the intent of Congress that where there is a reorganization of corporations under the Revenue Acts of 1926 and 1928, and the constituent companies and their stockholders are relieved from the payment of income tax upon the profits realized from such reorganization, the new corporation which takes over those assets is not entitled to use a basis for the computation of depreciation allowances and for the computation of gain or loss upon the sale of the assets thus acquired in excess of the basis that would have been available to the former owner or owners of the assets. Otherwise actual gains would escape income tax.

We.are of the opinion.that the contention of the petitioner for a stepped-up basis for the computation of depreciation allowances and for the computation of gain upon the sale of the assets acquired from the consolidating companies is not sound. All of the assets with which we are here concerned were paid in to the petitioner corporation in exchange for all of its shares of stock. The stockholders of the consolidating corporations collectively owned 100 percent of the stock of the corporations which owned the assets in question. The same stockholders had a 100 percent ownership in the stock of the petitioner corporation. Upon these facts we think that an interest or control in the property transferred of 80 per centum or more ” remained in the same persons after the consolidation as before.

In Monarch Electric & Wire Co. v. Commissioner, 38 Fed. (2d) 417; affirming 12 B.T.A. 158, it was held that assets transferred on reorganization could not be allowed an increased value in determining invested capital where stock was owned by the same stockholders, though control within the group shifted. With equal force it must be said that the assets transferred on reorganization can not be allowed an increased value for the purpose of determining depreciation deductions and gains on the sale where' the stockholders of the constituent companies receive all of the shares of stock of the new corporation in proportion to their ownership of the net assets paid in to the new corporation. The Board has held in numerous cases that where property is acquired by a corporation for its stock in nontaxable transactions the basis for computing depreciation thereon is cost to the transferor. Grain King Mfg. Co., 14 B.T.A. 793; D. O. James Mfg. Co., 17 B.T.A. 205; Burlington Gazette Co., 21 B.T.A. 156; Olean Sand & Gravel Corp., 24 B.T.A. 324. The contentions of the petitioner are not sustained.

Reviewed by the Board.

Judgment mill ~be entered for the respondent.