author: MoRRis:

text:
    Witherspoon Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 52491.
    Promulgated October 20, 1936.

      J. B. Lewright, Esq., for the petitioner.

      Bruce A. Low, Esq., and R. B. Oannon, Esq., for the respondent.
   OPINION.

MoRRis:

The first question for our determination pertains to the deductibility of a proportionate part of the partnership loss sustained in the taxable year 1924 by Medina Refining Co., of which the petitioner contends it ivas a member. The respondent concedes the loss to be properly deductible if we find, as a matter of law, that the petitioner was a member of such partnership. While there are many factual obstacles which might, without more, defeat the petitioner’s cause — such, for instance, as the failure of the petitioner to supply .us with the details surrounding the sale of Witherspoon’s Medina Refining Co. interest to his daughters and the resale of that interest back to the petitioner (instead of the legal conclusions of witnesses that such interest was “sold”); failure to supply us with the various agreements of copartnership, or the terms thereof, or with the books of account of Medina Refining Co. to show who the partners of that company were at the various times alleged; the fact that it is not at all clear that the partnership interest purchased by Witherspoon’s daughters was ever actually paid for — indeed, just the opposite appears, or that any legal consideration passed from the petitioner to them; and the fact that it does not appear that, although Medina Refining Co. earned large profits, distributions thereof were ever made to them, as partners — we believe it sufficient to rest our decision upon the failure to establish the exception to the general rule of law prohibiting corporations from becoming members of partnerships. Abraham B. Johnson, 7 B. T. A. 820.

In Southern Oil & Gas Co. v. Mexia Oil & Gas Co. (Tex. Civ. App.), 186 S. W. 446, a question was whether a corporation could legally become a member of a partnership, and in holding that it could not, the court said:

* * ⅜ Again, the appellant and the appellees Mexia Oil & Gas Company and Texas Gas Company are separate private corporations and there is no' allegation or proof that either of them was authorized by its charter to enter into private partnerships, and without such authority being so conferred they would not be authorized so to do. [Citations.] In the last-cited case it is said:
“Unless specially authorized to do so, corporations have no power to enter into partnership with other corporations or persons, and as the petition in this case failed to allege any such charter powers, it was insufficient to fix the liability of the Irrigation & Improvement Company as a partner.”

Also, in Ogus, Ravinovich & Ogus Co. v. Foley Brothers Dry Goods Co. (Tex. Civ. App.), 241 S. W. 267, it was said:

It is a well-established general rule that a corporation cannot form a partnership with another corporation, nor with an individual. The reason for the rule is that in entering into a partnership the identity of the corporation is lost or merged with that of another, and the direction and management of its affairs is placed in other hands than those provided by the law of its creation. Both the law and public policy forbids enforcement by the courts of such partnership agreements. [Citations.]

In Humble Oil & Refining Co. v. Strauss (Tex. Civ. App.), 248 S. W. 528, the court said:

⅞ ⅝ * ippg appellant was a corporation, and as a general rule cannot enter into partnership relations with other parties. But sometimes after the execution of such a contract courts will sustain the relation to prevent injustice. For a discussion on this point we refer to Millers’ Indemnity, etc. v. Patten (Tex. Civ. App.), 238 S. W. 240, rendered by Mr. Justice Boyce of this court. There will be no presumption that the parties intended to enter into an ultra vires contract, but the presumption is that they knew the powers of the corporation and the law with reference thereto, and that they intended to obey the law. The trial court was therefore justified in finding there was no partnership. * * *

See also Burton-Lingo Co. v. Federal Glass & Paint Co. (Tex. Civ. App.), 54 S. W. (2d) 170, and Buffington v. American Grocery Co. (Tex. Civ. App.), 81 S. W. (2d) 808.

The basic issue is clearly defined, i. e., whether the petitioner was a member of the partnership of Medina Refining Co. It neither alleges nor has it offered proof that its charter authorized it to do so. Under the laws of Texas the general rule must apply except where there is some special charter authorization. The petitioner’s charter has not been placed in evidence and we know nothing of its provisions. A matter so susceptible of proof does not warrant the substitution of conjecture. If such proof were favorable to the petitioner’s cause is it not as reasonable to presume that it would have been supplied — that all doubt might be removed — as to presume that it acted lawfully under the circumstances, as it would have us do ? The only reasonable inference to be drawn from the failure to make this simple proof, if infer we must, is that it would defeat the petitioner’s cause. Upon this issue the respondent’s determination must be approved.

Since the petitioner has assigned no error in the respondent’s determination for 1925 it is approved.

The remaining three allegations of error pertain to the same question; i. e., may the petitioner deduct the undepleted and undepre-ciated cost, less salvage, in the taxable years 1924 and 1926, of oil wells known as Burke Nos. 8,10, 4, 6, and 9, and Brewer No. 1, such wells having ceased to produce and having been abandoned in these ■two taxable periods, in the computation of net taxable income.

Section 234 of the Revenue Acts of 1924 and 1926 provides in part as follows:

(8) In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case; such reasonable allowance in all cases to be made under rules and regulations to be prescribed by the ■Commissioner with the approval of the Secretary. In the case of leases the deductions allowed by this paragraph shall be equitably apportioned between the lessor and lessee; * * *

Regulations 65, promulgated under the Revenue Act of 1924:

Art. 215. Computation of depletion alloioance for combined holdmgs of oil ■and gas wells. — The recoverable oil belonging to the taxpayer shall be estimated for each property separately. The capital account for each property ■shall include the cost or value, as the case may be, of the oil or gas lease or rights plus all incidental costs of development not charged as expense nor returnable through depreciation. The unit value of the recoverable oil and/or gas for each property is the quotient obtained by dividing the amount returnable through depletion fon each property by the estimated number of units of recoverable oil and/or gas on that property. This unit for each separate property multiplied by the number of units of oil and/or gas produced within the year by the taxpayer upon such property will determine the amount which may be deducted for depletion from the gross income of that year for that property, subject, however, to the limitation contained in article 201 (7x). The total allowance for depletion of all the oil and/or gas properties of the taxpayer will be the sum of the amounts computed for each property separately. However, in the case of gas properties the depletion sustained for each pool may1 be computed by using the total amount returnable through depletion of all the tracts of gas land owned by the taxpayer in the pool and the average decline in rock pressures of all the taxpayer’s wells in such pool In the formula given in article 212. The total allowance for depletion in the gas properties of the taxpayer will be the sum of the amounts computed fox-each pool.
Art. 201. (c) A “mineral property” or “property” is the mineral deposit, the development and plant necessary for its extraction, and so much of the surface only as is reasonably expected to be underlaid with the mineral. The value of ■a mineral property is the combined value of its component parts.

Regulations 69, promulgated under the Revenue Act of 1926:

Art. 211. (¾) When the value of the property at the basic date has been determined and the allowance is based upon such value, depletion sustained for the taxable year shall be computed by dividing the value remaining for ■depletion by the number of units of mineral to which this value is applicable, •and by multiplying the unit value for depletion, so determined, by the number •of units sold within the taxable year. Such depletion deduction is subject, however, to the limitation in article 201 (7x). In the selection of a unit for •depletion preference shall be given to the principal or customary unit or units paid for in the product sold.
Art. 201. (c) A “mineral property” is the mineral deposit, the development and plant necessary for its extraction, and so much of the surface only as is reasonably expected to be underlaid with the mineral. The value of a mineral1 property is the combined value of its component parts.

In so far as the amounts here claimed represent undepreciated costs of physical assets — other than those held includable in de-pletable cost in United States v. Dakota-Montana Oil Co., 288 U. S. 459; Petroleum Exploration v. Burnet, 288 U. S. 461; and Burnet v. Jergins Trust, 288 U. S. 508 — the petitioner is entitled to deductions upon abandonment of the wells to which they relate. Belridge Oil Co., 11 B. T. A. 127, and United Oil Co., 25 B. T. A. 101.

This leaves for consideration whether the costs of preliminary development and drilling of the wells in question, exclusive of the costs of physical property which is subject to depreciation, may be deducted as a loss when the wells were no longer commercially profitable. The petitioner’s claimed deduction is based on the theory that the entire cost of any particular well should be recovered ratably over the production of that particular well. The respondent treated the producing tract as a unit, applying against each barrel of oil produced the depletion unit derived from the total cost of all wells and estimated recoverable oil. Under his method each barrel of oil produced is burdened with an equal proportion of the cost of all wells on the tract. That method obviously precludes such a deduction as the petitioner claims, as long as the entire tract is not abandoned.

Because of the recognized difficulties in the computation of depreciation and depletion the Congress expressly delegated the right to-make rules and regulations therefor. Burnet v. Thompson Oil & Gas Co., 283 U. S. 301; New Creek Co. v. Lederer, 295 Fed. 433; certiorari denied, 265 U. S. 581. Article 215 of Regulations 65 prescribes how the reasonable allowance for depletion authorized by the statute shall be computed. It is therein provided that the allowance shall be based upon the production of each separate property which is defined as the mineral deposit (art. 201 (e)), or separate tracts or leases of the taxpayer (art. 221, Regulations 69). That article further provides that the unit of depletion for each separate property,, multiplied by the number of units produced within the year upon such property, will determine the amount which may be deducted for depletion from the gross income of that year. This clearly indicates that all costs recoverable through depletion are to be returned over the producing life of the tract or property, which was the principle' followed by the respondent in this proceeding. To hold otherwise would necessitate constant revision of the depletable base with corresponding change in the unit of depletion. Depleting on the basis of the entire property returns to the taxpayer all his costs providing-his estimate) of recoverable oil is fairly accurate. Such a method removes the uncertainties that are inherent in the petitioner’s method-Subsequent regulations have carried the same interpretation of similar provisions ox the statute. This interpretation, which is reasonable and practical, must be regarded as having the approval of Congress. Brewster v. Gage, 280 U. S. 327; Murphy Oil Co. v. Burnet, 287 U. S. 299, Vinton Petroleum Co. of Texas v. Commissioner, 71 Fed. (2d) 420.

Under the 1926 Act the taxpayer was permitted to calculate depletion upon the basis of cost alone (sec. 204 (c)), or else to deduct 27½ percent of gross income from the property without reference to cost or discovery value (sec. 204 (c) (2)). In United States v. Dakota-Montana Oil Co., supra, the Court held that there was no ground for supposing that Congress, by providing a new method for computing the allowance for depletion, intended to narrow the function of that allowance but that depletion includes, under the 1926 Act, precisely what it included under the earlier acts. It then used the following language:

Article 226 [Regulations 69] limits the depreciation for which an allowance may be made to that of “physical property such as machinery, tools, equipment, pipes” etc. We do not doubt that the effect of this language is to require the taxpayer to look to the depletion allowance, in this case 27½ per cent of gross income, for a return of the costs of developing and drilling the well, which are involved here.

It was likewise held in Vinton Petroleum Co. of Texas v. Commissioner, supra, that when a taxpayer elects to take the percentage depletion that allowance covers all elements of depletion.

The statute provides for a reasonable allowance which connotes as accurate a determination as is possible to accomplish the purpose of its enactment. One defect is immediately noticeable in the application of the facts to the petitioner’s theory, even assuming its soundness. The petitioner kept no production records of the individual wells after the second well was brought in. All the oil was run into field tanks where a gauge was made of the production of the entire tract. It was therefore impossible for it to determine, based on actual production of any well, the amount of depletion that particular well had sustained and consequently the remaining costs to be recovered. It substituted average for actual production; that is it divided the total production by the number of producing wells, thus arriving at an average production per well and used that average as the prior sustained depletion of the wells in question. That these wells were not average is evidenced by the fact that their productive life was considerably shorter than their estimated life, although extra measures were taken to keep them at profitable production. The computation of sustained depletion upon that basis in •order to arrive at the unrecovered costs distorted those costs by the difference between the actual and average production. The petitioner computed separate depletion upon the wells in question only for the purpose of the deductions in controversy. In so doing, reasonable accuracy, as contemplated by the statute, was sacrificed.

The respondent’s determination on this point being in accordance with the regulations, which are a reasonable interpretation and application of statute, is sustained.

Reviewed by the Board.

Judgment will he entered v/nder Bule 60.


source: Caselaw Access Project

author: Muedook:

license: Public Domain

text:
    Charles J. Delone, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 77865.
    Promulgated October 20, 1936.

      H. Sta/nley Hinrichs, Esq., and Oscar P. Mast, Esq., for the petitioner.

      John E. Marshall, Esq., and J. L. Deveney, Esq., for the respondent.
   OPINION.

Muedook:

There are two fraud issues in this case. The first is whether the returns for 1925, 1927, and 1928 are false or fraudulent with intent to evade tax within the meaning of sections 278 (a) of the Revenue Acts of 1924 and 1926 and section 276 (a) of the Revenue Act of 1928. If the returns are not false or fraudulent, then the statute of limitations on assessment and collection of the deficiencies and penalties for those years bars recovery by the Commissioner, and decisions for the petitioner as to those years would be proper. Thej second fraud question is whether any part of any one or more of the deficiencies is due to fraud with intent to evade tax so as to justify imposition of the penalty of 50 percent of the deficiency, as provided in sections 275 (b) of the Revenue Act of 1926 and 293 (b) of the Revenue Act of 1928. The burden of proof in respect of these issues is upon the Commissioner. Sec. 907 (a), Revenue Act of 1924, as amended by sec. 601, Revenue Act of 1928. See also Drawoh, Inc., 28 B. T. A. 666. The petitioner, of course, has the burden of showing error in the amount of the deficiencies, wherever that issue is involved. Welch v. Helvering, 290 U. S. 111; Old Mission Portland Cement Co. v. Helvering, 293 U. S. 289. Therefore we have considered the evidence as it relates to fraud separately from such part of that same evidence as may relate to the deficiencies. The two fraud issues in any one of the years 1925, 1927, and 1928 need not be considered separately, for here, if there was a false or fraudulent return, then a part of the deficiency for that year must have been due to fraud with intent to evade tax. Each year must be considered separately, although evidence particularly relevant to one year may also have some bearing upon the question of fraud in another. Is there a preponderance of clear and convincing evidence of fraud in each year or in any year? Drawoh, Inc., supra. That question has been decided upon the evidence to support the fraud issues alleged in the answer, without any benefit to the Commissioner from his determination or from evidence relating to matters not alleged in the answer as supporting fraud.

The evidence shows clearly that the petitioner received but did not report interest on Hanover <S McSherrystown Water Co. bonds belonging to him. This interest amounted to $600 in 1925 and $600 in 1927. Likewise it is clear that he realized a profit on the redemption of those bonds in 1928 which he did not report. The amount of his profit has not been proved by the Commissioner, but the fact that there was some profit has been established. The petitioner has admitted that he owned some bonds, received some interest, and had some profit from the redemption. He also received and did not report in 1927 $350 of interest on Republic of Finland bonds which belonged to him. This is admitted by the petitioner.

The evidence leaves no doubt that the petitioner sold his Hanover Cordage Co. stock in 1925 for an amount greatly in excess of the cost of the stock to him and greatly in excess of his basis for gain or loss, i. e., cost of that acquired after February 28, 1913, and cost or fair market value as of March 1,1913, whichever is greater, of that acquired before March 1, 1913. Sec. 204, Revenue Act of 1926. The only difference between the parties at the hearing as to the factors in the computation of the gain was over the fair market value of the stock which the petitioner held on March 1, 1913. The evidence, including the opinions of the witnesses, shows clearly that the value on March 1, 1913, was much less than the amount realized in 1925 for the same corporate interest. The petitioner gave his unsupported statement that the value was a certain amount which was double the figure mentioned by his other witness as the highest value which the stock possibly might have had on March 1,1913. But other evidence shows that the actual value was much less. Even if the petitioner’s figure were used, a profit would result. The petitioner knew in 1925 that he had a very substantial profit from the sale of this stock. This case differs from Doric Apartment Co., 32 B. T. A. 1187, where there was a range in reasonable differences of opinion as to the value of notes sufficient to absorb the actual profit. Here, there was clearly a large profit under any reasonable opinion as to the value of the stock on March 1,1913. Since the hearing (which was once continued for four days to aid the petitioner), new counsel for the petitioner has tried to make the point that the notes given by the purchaser in 1925 were of so little value as to wipe out the profit. Not only was that point not made at the hearing, but the evidence is the other way. The makers of the notes were responsible business men with whom the petitioner had been associated for many years, they had been running the company successfully, and their notes were secured by a sufficient part of the stock sold.

The petitioner realized but did not report a substantial profit in 1925 from the sale of the Hamm property. The Commissioner has proven the basis (cost of $17,100 in 1920) and the amount realized in 1925 ($25,000 in cash). The petitioner made some improvements to the property, but the cost of the improvements did not approach the difference between the amount realized and the original cost of the property. Furthermore, minimum reasonable allowances for depreciation on this business property for the period of the petitioner’s ownership would reduce the basis for gain by a substantial amount. Thus, giving the petitioner the benefit of every doubt, the conclusion is inescapable that he had a substantial profit which should have been reported.

The Commissioner has proved convincingly that a part of the amount paid in 1928 and 1929 by Revonah to Hart was paid over to the petitioner or was used by Hart to pay obligations of the petitioner. The petitioner also benefited from the amount used by Hart to purchase Revonah stock, but since the evidence on that is not clear and convincing, it will not be considered as supporting the fraud charges. The petitioner testified that he had some kind of an arrangement with Hart in regard to these matters, but he refused to explain what it was. Two thousand five hundred dollars used in 1927 for the petitioner’s benefit or paid to him and $3,125 used in 1928 in the same way represented income to the petitioner under the general definition of income given in the revenue acts. He knew about these matters, but failed to report these amounts in his income tax returns.

The petitioner realized more from the sale of the Krug property than the cost of the property. But the evidence does not show the fair market value of his interest on March 1, 1913. Thus the Commissioner has not shown clearly and convincingly that the petitioner realized any profit in 1927 from the sale of the Krug property. This item has been disregarded in considering the proof of fraud, even though the strongest claims made by the petitioner do not completely eliminate a profit.

Although the determination of the Commissioner is of no benefit to him on the fraud issue and the evidence in the case does not show the details of the sale of the First National Bank stock, nevertheless the petitioner has admitted that he realized a profit in 1927 from the sale of that stock and has conceded the correctness of the figures used by the Commissioner in computing the profit. Yet he did not report any profit.

The Hanover Engineering Co. was completely owned and controlled by the petitioner and used by him for his own purposes. He purchased and received from it in 1928 a valuable property. Instead of paying for the property in some other way, he had the corporation open an account on its books in his name in which he was charged with the purchase price. He was credited in this account in 1928 with an item of $1,120, representing compensation for legal services which he had rendered to the corporation up to that time. That credit, under the circumstances, constituted the receipt of income by him. Cf. William B. Grise, 6 B. T. A. 743; B. O. Lauerman, 3 B. T. A. 683; John Griffiths, 15 B. T. A. 252 (reversed, 50 Fed. (2d) 782); Hiram C. Wilson, 17 B. T. A. 976. He failed to report it in his return.

The cost to the petitioner of the property mentioned in the preceding paragraph was $68,250. He had acquired another property in 1926 for $75,000. He sold the two properties in 1929 for $165,-000. He thus realized a profit in 1929 of at least $21,750. Seduction of his basis for depreciation allowable would increase his profit. He did not claim, up to the close of the hearing, that the bonds which he received as principal payment for the properties were not worth their face value. The evidence is that they were worth face value. He did not report any profit from the sale on his return for 1929, but instead stated on his return that he had realized no profit from .the sale of real estate.

The above paragraphs contain a brief statement of the evidence relating to the omissions to which the Commissioner points in support of his fraud charges. One or two of the omissions might be •excused on one ground or another, or at least might not be regarded •as clear and convincing evidence of fraud. But most of them can not be ignored or condoned. This is particularly true where, as here, the petitioner was a lawyer, having a familiarity with and knowledge of income tax law greater than the average taxpayer might be expected to possess, and a keen appreciation of the consequences of his own acts. No tax was shown to be due on any of his returns for the four years in question. Even ignorance of the law does not excuse omissions such as this petitioner made. A finding of fraudulent intent must almost always depend upon circumstantial evidence. Here we are satisfied, beyond all reasonable doubts which might arise from the evidence, that the petitioner intentionally omitted income from each of his returns with an intent to evade tax.

He has attempted to explain and make excuse for some of the ■omissions. His testimony along that line has been carefully considered, but is deemed wholly inadequate to avoid the effect of the statutes. He claimed, for example, that he was entitled to deductions not shown on his return which would more than offset omissions of income. But he failed to' establish his right to any such deductions, and failure to claim deductions is no excuse for failing to report income. M. Rea Gano, 19 B. T. A. 518. The statutes require that all income shall be reported. Deductions are allowed by statutes, but the statute does not allow taxpayers to make a mental -calculation and report onty a part or the net result of such undisclosed computations. The petitioner knew this. The petitioner had income which required the filing of returns. He knew that and filed •returns, but he failed to include all of the income which he knew he had received.

The petitioner testified at length in this proceeding. He is an experienced, keen, alert business man and quite capable as a lawyer of handling his own affairs, including the presentation of all evidence which might help him in this proceeding. He had ample opportunity to make every explanation which might have been proper and helpful to him. He had with him his bookkeeper, Hart, and a capable accountant who had familiarized himself with the books and records of the petitioner. The latter gave such testimony as he was called upon to give so that it was clear and to the point. The petitioner and Hart were different. On some questions they were clear enough, but on others they were surprisingly vague and indefinite. They frequently contradicted themselves. They made general statements when they should have been specific. The petitioner understood that there was need of clear and specific explanations of his business transactions. Yet many of his explanations are muddled ■and wholly unsatisfactory. We do not think that this situation was ■due to ignorance, indifference, or inability to clarify on the part of the petitioner. Having failed to satisfactorily meet the fraud charges proven by the Commissioner, the petitioner must suffer the ■consequences.

Taking up each year separately, it appears that the petitioner realized income in 1925 from bond interest, from the sale of his Hanover Cbrdage Co. stock, and from the sale of the Hamm property, yet reported none of it. All of these omissions can not be condoned, if indeed, any one of them could be. They clearly show a false ■or fraudulent return and a fraudulent intent to evade tax. The situation in 1927 differs only in detail. He omitted two items of bond interest and the profit from a sale of bank stock. He admits all three of these omissions, at least in part, but has offered' no valid excuse for his acts. The items omitted from his return for 1928 are the profit from the redemption of bonds, money paid to him or expended to pay his obligations, and fees for legal services which he received through a credit against the purchase price which he owed for a property acquired in that year. All of these can not be explained except by concluding that he made at least one of the omissions in an attempt and with an intent to evade income tax which he knew was lawfully due. For 1929 he again omitted the money which came to him through Hart or which was expended by Hart in paying obligations of the petitioner, and he also omitted a large profit from the sale of the factory sites to the Bevonah Spinning Mills. One or both of these was omitted with intent to evade tax. We think that all of these omissions were made wih fraudulent intent, but merely point out that such a conclusion is not necessary to the Commissioner’s case. The occurrence of such omissions in other years is corroborative of our conclusion that the petitioner had a fraudulent intent in each separate year.

Most of the adjustments made by the Commissioner in the actual determination of the deficiencies must be approved, either because the evidence shows affirmatively that they are correct or because the evidence does not show that they are incorrect. The petitioner admits that he received some interest on Hanover & McSherrystown Water Co. bonds, but denies that it amounted to $600 in any one year. Yet he redeemed $10,000 par value of the 6 percent bonds in 1928 with interest at 6 percent, and for 1927 was shown owner’s certificates (form 1000) which he had filed claiming credit for 2 percent tax paid at the source, showing the receipt by him in that year of $600 interest on the bonds. He said he was “absolutely unable to explain” the filing of these certificates. He said that some of the bonds belonged to others but he failed to disclose the amounts owned by the others. He used the proceeds of the redemption for his own purposes. He said he did not know how much the bonds had cost him. He stated that some of these bonds and the Finland bonds were up as collateral for bank loans, he did not claim deductions for the interest paid on the loans, and the income offset the deductions. But his statement is unsupported and incorrect. The one did not exactly offset the other and he was allowed deductions for interest paid which may have included the interest on the bank loans. He made no effort to show what it included. He admits receipt of the interest on the Finland bonds.

The evidence fails to show) any error upon the part of the Commissioner in computing the profit upon the sale of the Hanover Cordage Co. stock. The petitioner attacked the March 1,1913, value determined by the Commissioner. He gave an unsupported statement of his own that the value was much higher. Gitt, a witness for the petitioner, gave the value per share as between $200 and $250, but admitted that he was only guessing. The value determined by the Commissioner is supported by the opinion of one witness, by book values, by earnings, and other evidence. The sale was not an installment sale and the Commissioner taxed it correctly.

The petitioner, at times, attempted to tie-up for income tax purposes the sale of the Hamm property and his purchase of Community Hotel Co. stock. There is no such connection. The facts in regard to his purchase of the stock show clearly that that purchase in no way reduced his profit from the sale of the Hamm property.

The corporation known as the Community Hotel Co. was organized in 1924 for the purpose of constructing a modern hotel in Hanover. Residents of the town subscribed and paid for $300,000 par value of its stock during the years 1925 to 1927, inclusive. The petitioner subscribed on January 21, 1925, for 50 shares of the 6 percent $100 par value preferred stock of the corporation. He paid $1,000 on account of his subscription on August 2, 1925, $2,000 on July 10, 1926, and the balance later at a time not disclosed by this record. Thereafter, he purchased $2,000 par value of additional stock. The corporation erected a hotel building at a cost of about $500,000, which it still owns and operates. The petitioner is vice president of the corporation and a member of its executive committee. The stock of the corporation did not become worthless in 1925. The petitioner sustained no loss in 1925 as a result of his subscription and partial payment for the stock of the Community Hotel Co.

The petitioner claimed a somewhat larger expenditure for improvements than the Commissioner allowed on the Hamm property, but failed to substantiate it. The Commissioner proved his figures from the petitioner’s books, and the petitioner offered nothing further in support of his claim. The total depreciation by which the Commissioner reduced the basis is not excessive.

The petitioner refused to testify in regard to the items of $5,000 included in his income although received by Hart, except to deny that they were income to him. He said that there was something about the situation that was confidential between Hart and himself, a “life and death” matter, and for that reason he would make no explanation regardless of the consequences. Hart discussed the matter with apparent freedom, even though a clear understanding of the entire situation can not be gained from his testimony. It is clear that the petitioner directly benefited from a large part of the amounts paid to Hart by Revonah in 1928 and 1929. Hart tried to show that these amounts were repayments of loans made to him by the petitioner to purchase the Revonah stock, but his explanation failed when he was reminded of his earlier statement that the Revonah stock had been purchased with the rest of his so-called salary. Hart is a clerk or bookkeeper. If he performed services for Revonah worth $5,000 each year, the record fails to show it. The money paid to him was used in part to buy stock which was then endorsed in blank and turned over to the petitioner and in part to pay cash to and obligations of the petitioner. The Commissioner has taxed the entire amount as income of the petitioner. The evidence does not show any error in that action.

The Commissioner has determined that the petitioner realized a profit of $6,905.21 in 1927 from the sale of the Krug property. The petitioner has contended that the property was worth $12,000 on March 1,1913, and, therefore, he had no profit when he disposed of it for that same amount. But in fact he owned only an undivided one-half interest in the property on March 1, 1913, since he had sold the other one-half by a fee simple deed and did not reacquire it until 1920, when he repurchased it for $4,250. He failed in his attempt to explain the details of those early transactions in order to show that the other party merely held the property as pledge for an indebtedness. Furthermore, the evidence fails to support his claim that the property was worth $12,000 on March 1, 1913. If it was, he owned only one-half and depreciation would reduce his basis and increase his profit. He undoubtedly had a profit from the sale of that property. The determination of the Commissioner has not been shown to be incorrect.

He concedes that he has failed to show error in the Commissioner’s computation of a profit from the sale of his First National Bank stock. The credit for legal fees for services rendered to Hanover Engineering Co. has been discussed sufficiently in connection with the fraud issues, except to state that the correct amount was $1,120, instead of $1,650. The Commissioner determined the latter amount, but $530 of it was shown to have been a return of advances made by the petitioner for organization expenses of the corporation, and,, therefore, not income to him. The amount determined by the Commissioner as profit from the sale of the two factory sites to Revonah Spinning Mills was correct. If the Hanover Engineering Co. had a loss on that one of the properties which it sold to the petitioner, that fact would be immaterial here since the corporation was a separate taxpayer. Likewise, if it be a fact, as the petitioner contends, that the General Gas Electric Co. owed him a large debt which was never paid, that fact would not be relevant here, since the profits and losses in such a series of transactions, more or less loosely connected but occurring in different years, can not be summarized on the return for the final year. Income and deductions must be reported upon an annual basis. The transaction was not an installment sale. Thomas F. Prendergast, Executor, 22 B. T. A. 1259. The Commissioner did not err in taxing this profit.

The Commissioner disallowed $1,800 of a deduction claimed by the petitioner for 1927. The remainder of the deduction was allowed on some theory because expended in settlement of a claim against the petitioner pressed by S. L. Johns. The $1,800 was disallowed because for that amount the petitioner obtained title to two frame dwellings which he immediately sold for $2,000. The petitioner claims that these properties always belonged to him, but the evidence does not establish that fact. He was one of two trustees of the S. L. Johns estate and these properties were omitted from a deed, but that would not make the petitioner personally the owner of the properties. He was extremely vague on that point and failed to show his right to the deduction of $1,800. He also claims deductions for several alleged losses not claimed on his returns. The first is the cost of Magnetic Motors Car Co. stock. He contends that the stock became worthless in 1925 because in that year, so he says, the company lost its license to manufacture electric transmissions and went out of business. But he disclosed that he had practically no knowledge of the affairs of the company, its assets and liabilities at any time, or any other fact which might show just when the stock became worthless. The stock may have been worthless long prior to 1925 for all he knew or disclosed. The next is an alleged loss in .1925 of the amount of a loan to Hanover Motor Co. The loan was due in 1922 and the petitioner failed to show when he ascertained that the debt was worthless. The company went out of existence in 1925, but the petitioner may have known long before that that his debt was worthless. He was either unwilling to disclose his knowledge of the affairs of that company or was not familiar with its financial condition either in 1922 or in 1925. He did nothing in 1925 towards ascertaining that the debt was then worthless. He asks for a deduction for 1927 representing an amount he paid in 1924 as a result of endorsing the note of his first cousin. He has not. shown either that he entered into the transaction for profit or that he-ascertained that the note became worthless in 1927. Just why he-now picks the year 1927 does not appear. The debt of $420 owed by-Stine is next. That seems to have been the accommodation of a friend. But in any event we see no reason to conclude that the debt was ascertained to be worthless in 1927. Another item is a debt of $5,000 owed by C. S. Garman as part of the purchase price of some-stock which the petitioner sold to Garman in 1918. There is no-showing that the petitioner ever took or should have taken the-amount into his income. Cf. Charles A. Collin, 1 B. T. A. 305. He held collateral. When, if ever, did it become worthless? Garman is still living and in business. The petitioner did nothing about this-debt in 1927. The last item is the cost of stock of Hanover Printing Co. The purchase of that stock was not a transaction entered into-for profit. The evidence does not show that the stock became worthless in 1927. There is no evidence of the earnings, prospects, or financial condition of the company at any time. These claims all appear-to be afterthoughts upon the part of the petitioner. In no instance-has he made a complete showing of worthlessness such as might reasonably be expected before a deduction should be allowed.

Reviewed by the Board.

Decision will be entered v/nder Bule 5(t


author: Sterni-iagen :

text:
    Cambria Development Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75411.
    Promulgated October 20, 1936.

      F. A. Pike, C. P. A., and Herman A. Bachrach, Esq., for the petitioner.

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

Sterni-iagen :

The respondent, in determining the deficiency, has computed the cost to be used as the basis for determining petitioner’s gain upon the sale of its lots as including only the amount actually spent, and excluding the estimated amount of future expenditures for improvements such as the laying out of streets and the installing of water mains. There is no substantial dispute as to the amount of such unexpended reserve, although there are minor discrepancies in the figures. As shown by the findings of fact, the correct figure derived from the evidence is $46,614.62. The respondent’s disallowance is predicated upon the view that no estimate of future expenditures whatever may be included in the petitioner’s cost, and in .defending this view he urges that at most such inclusion is a gracious privilege which the Commissioner by his regulations has heretofore granted, but that the grant is upon the express condition stated in Mim. 4027, XII-1 C. B. 60, that petitioner must file a waiver of; the statute of limitations, which it has not done. It is well established that as a matter of law the petitioner has the right to include in its cost such estimated future expenditures for the development of the property as required by its contracts of sale. Kentucky Land, Gas & Oil Co. 2 B. T. A. 838; Milton A. Mackay, 11 B. T. A. 569; Osgood Land & Livestock Co., 22 B. T. A. 387; Birdneck Realty Corporation, 25 B. T. A. 1084. The Commissioner has, since 1919, recognized this right, O. D. 226, 1 C. B. 76; O. D. 567, 3 C. B. 108. In the Revenue Act of 1926, section 214 (a) (11) , such expenses in case of.pasual sales of real property, were included among deductions, and this was carried through the Revenue Acts of 1928 and 1932. In omitting it from the Revenue Act of 1934, the Senate Finance Committee made it clear that it was because the Treasury had not theretofore limited such inclusion in cost or deductions to casual sales and therefore it was unnecessary to continue such provision in the statute.

The argument that the cost may not include future expenditures because the condition of Mim. 4027 has not been complied with, must be rejected. That ruling was not published until 1933, long after the return for 1931 was due, and was not by its terms made retroactive, and therefore has no application in this proceeding. It may, however, be seriously doubted also' whether, since the inclusion of future expenditures in cost has been held to be a matter of right, the Commissioner may refuse it because the taxpayer has omitted to file the waiver required by the mimeograph regulation. This needs not to be decided in this proceeding, since in no event is the mimeograph regulation applicable.

The respondent is reversed in his determination that the estimated future expenditure should be excluded from cost.

The petitioner sold 300 of its lots under contracts upon which 40 percent or more of the contract price was paid down. The deficiency is based upon the determination that the contracts were, at the end of 1931, of a fair market value equal to their face, and that in consequence the entire amount of both the down payments and the unpaid obligations should be included in petitioner’s gross income. The petitioner contends that the fair market value of the unpaid balance of the contracts was nil. This is supported by the testimony introduced in petitioner’s behalf and which was neither broken down by cross-examination nor overcome by countervailing evidence. The Commissioner introduced no evidence. From the petitioner’s evidence, it appears that in 1931 the obligations of the vendees of lots sold in that year were without a market at any price; that a dealer in such paper familiar with the market, whose customers might normally be exjiected to purchase such paper, was unable to find a buyer at any price, and that this was, in his opinion, because of the location of the development in question, the extent and nature of its encumbrances, and the continuous fall in value of such real estate at that time. While there is evidence, as shown by the findings, that in subsequent years substantial collections were made by the petitioner upon these outstanding obligations, this is not enough to support an inference of fair market value in 1931 contrary to the direct statements of the unimpeached witnesses.

Upon the two contested points, the Commissioner’s determination was in error.

Judgment will be entered under Rule 60.

       Sec. 214. (a) In computing net income there shall" be allowed as deductions :
      * * * * * * *
      (11) In the case of a casual sale or other casual disposition of real property, a reasonable allowance for future expense liabilities, incurred under the provisions of the contract under which such sale or other disposition was made, under such regulations as the Commissioner, with the approval of the Secretary, may prescribe, * * *.

       The present law permits an individual who makes a casual sale of real property to reduce his gain from such sale by expenditures which he has contracted to make but which cannot be determined until a later year. The Treasury interprets section 22 as authorizing the application of this principle to any sale of real estate regardless of whether it is a casual sale, under such an interpretation, a special rule is unnecessary and this subsection is, therefore, omitted as surplusage. * * * [Senate Finance Committee Report No. 558, p. 25 (73d Cong., 2d sess.).]


author: Disnex: Mellott,

text:
    Stanley Hagerman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78023.
    Promulgated October 20, 1936.

      Russell D. Morrill, Esq., Henry Mannix, Esq., and Francis L. Casey, Esq., for the petitioner.

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

Disnex:

The issues presented for our determination are (1) whether it is practicable to apportion fairly to the declarations of interest sold by the petitioner a part of the unit cost of his stock in the Bank and in the Security Co., and (2) if so, what cost should be apportioned to such declarations of interest, otherwise designated herein Security Co. stock.

The petitioner contends that it is practicable to apportion fairly the cost of the units of Bank stock and Security Co. stock on the basis of their respective values at the dates of purchase (1) on the basis of the respective asset values of each stock and (2) on the basis of their respective values, as appraised by the expert witnesses, who testified at the hearing.

The Commissioner controverts both of petitioner’s contentions.

The statute applicable to the issues involved herein is found in the Revenue Act of 1932, sections 111 (a) and 113 (a). That act and prior acts provide for an apportionment of cost under certain circumstances, the method of apportionment of cost of property re-ceiyed in connection with tax-free distributions being left to rules and regulations prescribed by the Commissioner. See Philip D. C. Ball, 27 33. T. A. 388, 394; aff'd., Von Weise v. Commissioner, 69 Fed. (2d) 439, and authorities therein cited. Article 58 of Regulations 77, which is quoted by both petitioner and respondent herein, provides in part as follows:

* * * where common stock is received as a bonus with the purchase •of preferred stock or bonds, the total purchase price shall be fairly apportioned between such common stock and the securities purchased for the purpose •of determining the portion of the cost attributable to each class of stock or securities, but if that should be impracticable in any case, no profit on any ■subsequent sale of any part of the stock or securities will be realized until •out of the proceeds of sales shall have been recovered the total cost.

Inasmuch as both parties have quoted said article, they seem to be in accord that this is a case arising thereunder. No regulation seems to provide definitely for an apportionment of cost under the •exact circumstances arising in this case, hut it comes within the general principle embodied in the above statute and regulations.

In the instant case, during all of the period from 1908 to 1933 there were two separate corporations, a bank and an investment company, with separate assets, liabilities, income, dividends, and businesses.

The Security Co. commenced business with a capital of $10,000,000 in cash, which was largely invested in high-grade stocks paying large amounts in dividends. Schedules of net asset value, earnings and dividends of the Security Co. and of the Bank were stipulated and were known to and considered by the witnesses who as experts expressed opinions, as indicated in our findings of fact.

The Bank stock prior to the formation of the Security Co. and thereafter bearing the Security Co. endorsement, the record shows, had been traded in on the “over the counter” market in New York City and the market price of the units had at all times exceeded the combined net asset values of the Bank and Security Co.

By the testimony of witnesses and other evidence in the record, it was, in our opinion, shown that the fair market price of the aforesaid units at all times exceeded the market value of the Bank stock if considered separately and so offered for sale. Each of the two stocks, or interests, at all times had a value. The aforesaid agreement between stockholders that neither stock should or could be sold separately did not have the effect of depriving either stock of its value nor, in our opinion, did the agreement make the determination of their separate values impossible or impracticable. Cf. Collin v. Commissioner, 32 Fed. (2d) 753; Newman v. Commissioner, 40 Fed. (2d) 225, 227; certiorari denied, 282 U. S. 858; Tex-Penn Oil Co. v. Commissioner, 83 Fed. (2d) 518.

There were no actual sales of either Bank stock or Security Co. stock separate from the other at any time prior to December 1933, so that it is impossible to determine the values of either stock on the basis of sales. The absence of sales, however, in our opinion, does not necessarily make impossible or impracticable the determination of the fair market value of the separate stocks or interests or their value for the purpose of apportionment.

We have heretofore held: “The absence of active trading in a stock does not necessarily show lack of fair market value, and under the circumstances other evidence, including evidence as to the intrinsic value of the assets back of the stock, should be considered in determining whether the stock had a fair market value.” George M. Wright, 19 B. T. A. 541, 548; aff'd., 50 Fed. (2d) 727; certiorari denied, 284 U. S. 652. See also George W. Griffiths, 25 B. T. A. 1292; aff'd., 70 Fed. (2d) 946; Helvering v. Kendrick Coal & Dock Co., 12 Fed. (2d) 330; certiorari denied, 294 U. S. 716.

The unit here involved was created by a voluntary agreement and consisted of two separate interests in corporations possessing different powers, one organized because the powers of the other were too limited to permit it to do certain business desired to be done by parties interested in both corporations.

In Tex-Penn Oil Co., supra, the Board, 28 B. T. A. 917 (961-966), considered the effect of a restrictive agreement imposed by a banker’s syndicate which, it was contended, prevented realization of income because by the agreement certain corporate stock could not be sold. After reviewing a number of cases involving restrictive agreements, we concluded that the restrictive agreement did not militate against the fact of value in the stock. We emphasized the fact that the restriction was voluntary, and temporary, to some extent, during the life of the banker’s syndicate. We have the same principle in the instant case. The restrictive agreement herein was wholly voluntary, entered into by the stockholders of the bank and, through trustees, by the stockholders of the Security Co.; likewise it was temporary, for a period of five years and thereafter until terminated by a vote of the holders of two-thirds of the stock. Obviously, being voluntary, the restrictive agreement could have been terminated at any time by the agreement of those who made it, but after five years it required only a two-thirds vote. The opinion of the Circuit Court in Tex-Penn Oil Co., supra, reversing this Board, on this point, does not suggest that the Board’s conclusion was incorrect as to voluntary agreements, but pointed out that the agreement was, in fact, an involuntary one. We conclude then that that decision agrees that a purely voluntary agreement, as in the instant case, would, as we held, not prevent the imposition of the tax upon any profit calculated upon a value of tlie stock, notwithstanding the agreement was restrictive against sale.

In T. W. Henritze, 28 B. T. A. 1173, we held that shares of stock received in a reorganization under an agreement stamped on the certificates not to sell them for a year without a certain banker’s consent were not without fair market value for purposes of computing taxable profit on an exchange. If in that case there was fair market value for computing taxable profit, then obviously there is fair market value for purposes of arriving at a basis in the present case where the restrictive agreement is so remarkably similar to that in the cited case.

Collin v. Commissioner, 32 Fed. (2d) 753, reversed this Board in a case involving income tax on profits from sale of common and preferred stock in units consisting of one share of preferred and two shares of common. The constituents of these units could not be sold separately because of a prohibition by the Ohio Commissioner of Securities, to which the parties had agreed. The taxpayer, therefore, contended that apportionment of value between the preferred and common stock was impracticable, relied upon regulations, the same in effect if not in words as those involved herein, and contended, as herein contended by the respondent, that gain or loss should not be computed until the final sale of all the stock. The Commissioner took the view that the common stock had no value — which, of course, entailed determination of proportionment values. We found, as a matter of fact, that no part of the consideration was paid for the common, and assigned as cost to the preferred the entire consideration given for both, but the Circuit Court said:

We are satisfied that some part of the total price paid for the stock units was paid for the common stock — what part we are unable to determine on the record here. Upon another hearing it may be practicable to obtain data or facts upon which a fair apportionment of cost as between the two classes of stock may be made, but, if it should not be, then, under article 39 of Regulation 45, the petitioner will not be chargeable with any profits until he shall have recovered the entire purchase price.

It is obvious, therefore, that the above court considered the very situation herein involved — but concluded that evidence, data, or facts, should be sought as a basis for a fair apportionment of cost. These data and facts were sought and presented before this Board in the instant case. The cited case is authority for a conclusion that despite the restrictive agreement herein, a proper inquiry was made by this Board into the practicability of apportionment.

It is only because the unit was in fact separated and one of its constituent parts sold that the present issue arose. The evidence clearly indicates that each of the component parts of the unit had a monetary value; one part of the unit being the stock of a long ■established bank and the other the stock of, or an interest in, an important investment company.

The instant case is not like the case of Erskine Hewitt, 30 B. T. A. 962, which is cited and relied on by the respondent. In that case, the “Petitioner purchased both the bonds and coupons after the latter had matured and were in default.” The principal of the bonds and the matured interest coupons in default, we held, were not “different classes of property where it is contemplated that an apportionment of costs be made, if practicable.” The facts and circumstances in the instant case, with respect to the Bank stock and the Security Co. interest or stock, are quite different from those in the Hewitt case, supra, and the latter is not, therefore, applicable nor controlling.

The only other decision cited by the respondent is Edwin D. Axton, 32 B. T. A. 613, which is also distinguishable upon the facts from the instant case. In the Axton case, supra, there were two different kinds of stock received in exchange for a third kind of stock, but there was no satisfactory basis of comparison of the values of the two types of new shares received and we held that the book value in that particular case was an unsatisfactory basis of comparison, and stated:

* * * Consideration has been given to all of the evidence and it indicates with reasonable certainty that no figure can be satisfactorily fixed upon to represent the value of the class B stock at the time it was received by these petitioners. Under such circumstances the entire old basis should be recovered ■out of the proceeds and the excess taxed as income as received. ⅜ * *

The Axton case does, however, support the introduction and consideration of the opinion evidence upon which the petitioner relied in this case to establish fair market value; for that case shows that opinion evidence of experts was used in an attempt to arrive at a fair market value. The effect of the Axton case is, therefore, that a proper method was used in this case to arrive at the fair market value, although the facts of that particular case, as found by the Board, showed that there was no fair market value of the class B stock therein.

In the instant case the situation is quite different, as our findings ■of fact show, and “It is well settled that where property is acquired ■en bloc or en masse and subsequently sold in lots or parcels, a computation of gain or loss must be made upon each separate sale and ■the result reported in the tax return and not held in abeyance or ■suspense until the entire cost of the property is recovered.” Bancitaly Corporation, 34 B. T. A. 494, 504. The principle above enunciated, in our opinion, is applicable in the instant case, since it is not impracticable in the circumstances to apportion fairly the cost of the component elements making up a unit of said Bank stock and the endorsement thereon of beneficial interest in the Security Co.

This case is in all essential particulars the same in principle as Glenn H. Curtiss, 21 B. T. A. 629; aff'd., 57 Fed. (2d) 847. Therein the Curtiss Aeroplane & Motor Corporation was reorganized and, instead of stock therein, each stockholder received stock in a new company, the Curtiss Aeroplane & Motor Co., and a certificate of beneficial interest in the Curtiss Assets Co. Later, in 1924, the petitioners sold their certificates of beneficial interest in the Curtiss-Assets Co. We approved apportionment of value to the certificate of interest. The certificate of beneficial interest in the Curtiss Assets Co. is not essentially different from the certificate of interest in the Security Co. in this case. In both cases it was a certificate of participation in a company other than the original company. It is true that in the present case there was a prohibition upon alienation separate from the original stock.

Impracticability has been defined as incapable of being effected1 from lack of adequate means, impossible of performance, not feasible. Des Portes v. Southern Railway Co., 69 S. E. 148; People v. Poly, 40 N. Y. S. 990, 992. Also, it has been said that “impracticability”"' and “impossibility” are of equal legal effect. Cosden Oil & Gas Co. v. Moss, 267 Pac. 855. We can not believe that it was “impracticable” to arrive at separate valuations upon the Bank stock and the certificate of participation in the Security Co. in this case. Obviously, it was not impossible, not even particularly difficult. The evidence used was competent under the Axton case, supra, and the difference of opinion between the witnesses was no more than indicative of good faith testimony.

In Salvage v. Commissioner, 76 Fed. (2d) 112, the taxpayer made the very contention herein made by the respondent, that is, that the entire cost of the old stock must first be recovered, but the court, although, as in this case, there were no actual sales, considered the fact that the business had been extraordinarily successful over a. period of several years (very similar to the situation herein) and approved the Board’s finding that the apportionment was practicable, citing, among other cases, Houghton v. Commissioner, 71 Fed. (2d) 656, wherein the Commissioner did find a basis for value of' stock received in exchange for former stock by examination of the-average income of the company and appraisal of tangibles and intangibles. The court remarks: “The question is not so much whether the value fixed was right as whether the shares had any ‘market value’ at all”, and refers to the fact that the business was an old, profitable, thoroughly seasoned one, and that although the stock had not been dealt in, there might have been persons familiar with such securities who would have undertaken to appraise them, whose evidence would have been reliable judgment as to their market value. This seems to be substantially what was done in the instant case. We hold, upon the facts herein, that it was possible and practicable to apportion fair market value to the certificates or declarations of interest at the time of purchase thereof.

The stipulated facts and the testimony furnished, in our opinion, a satisfactory basis for a fair apportionment of the unit cost to the Bank stock and the beneficial interest or stock in the Security Co.

Upon consideration of the entire record and the authorities cited in briefs of counsel, we are of the opinion and hold that a fair apportionment of aforesaid unit cost to declarations of interest in the Security Co. in the particular circumstances of the instant case is practicable.

Therefore, we are of the opinion and hold the cost per share of the declaration of interest in the Security Co., as of the following dates: December 26, 1918, December 16,- 1919, and September 16, 1931, was in the respective amounts of $458, $344, and $1,281; upon which basis the tax will be recomputed.

Reviewed by the Board.

Decision will be entered wider Bule 50.

Mellott,

dissenting: The petitioner purchased a share of bank stock and thereby became entitled “to share equally and ratably with all other holders of stock certificates of the Bank similarly endorsed, according to their several interests, in the dividends or profits, and, in the case of dissolution, in the distribution of the capital” of a security company. The security company had been organized in conformity with an agreement which provided that the “* * * officers or directors of the bank shall be the directors, and, as joint tenants and not as tenants in common, shall be stockholders, in such way, however, that the beneficial interest resulting from such stock (but not the right to vote) may accrue continuously and irrevocably to such persons assenting thereto as from time to time shall be registered stockholders of the Bank or of its successor, severally and respectively, in proportion to their registered holdings of the stock of the Bank or of its successors * * *.”

The holding of the majority to the effect that petitioner became a stockholder in the security company, through the purchase of a share of the Bank stock bearing the endorsement set out in the opinion, seems to me to be wrong. He did not buy two separate shares of stock, one in the Bank and one in the security company. He could not do so. He bought a share of Bank stock. That is what was “actively traded in * * * ‘over the counter’ ” and “all quotations of prices for Bank stock were for certificates of stock bearing that endorsement.”

If the unit which he bought — the bank stock with the endorsement — had been sold, gain or loss would have been computed upon its cost. But he did not sell it as a unit. He surrendered it on December 9, 1933, and, in the language of the majority, “in exchange therefor * * * received * * * certificates of Bank stock without said endorsements and declarations of interest.” This, it seems to me, is analogous to the situation which the Board had before it in Glenn H. Curtiss, 21 B. T. A. 629. It was there held that the cost of the exchanged securities should be apportioned to the securities received in the exchange according to the respective market values of the securities at the time received in the exchange. The Circuit Court affirmed, Curtiss v. Commissioner, 57 Fed. (2d) 847. Cf. I. T. 2302, V-2, C. B. 15. Sallie Strickland Tricou, 25 B. T. A. 713-723; aff'd., 68 Fed. (2d) 280; certiorari denied, 292 U. S. 655. (Rule recognized but not applied for lack of proof.) Frances Elliott Clark, 28 B. T. A. 1225; aff'd., 77 Fed. (2d) 89. I. T. 2335, C. B. VI-1, p. 18. Fifth, Avenue Bank of New York, Executor, 31 B. T. A. 945; aff'd., 84 Fed. (2d) 787. H. A. Green, 33 B. T. A. 824 (petition to review dismissed, C. C. A., 9th Cir.).

In H. A. Green, supra, we pointed out that while there is no specific provision in the statute directing an apportionment of cost between two or more kinds of property received in a nontaxable exchange (which, it seems to me, is what we have here) still article 1567 of Regulations 62, interpreting the Revenue Act of 1921, must be considered as laying down a principle which is equally applicable in determining gain or loss under subsequent revenue acts. This regulation provides in part as follows:

* * * the proportion of the original cost, or other basis, to be allocated to each class of new securities is that proportion which the market value of the particular class bears to the market value of all securities received on the date of the exchange. * * * [Italics supplied.]

This is certainly a more “practicable” solution of our problem than that adopted by the majority.

Aiujndbll, Van Fossan, and Arnold agree with this dissent.


author: Smith:

text:
    Ralph Leslie Raymond, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 79130.
    Promulgated October 20, 1936.

      WilMam R. Green, Jr., Esq., for the petitioner.

      G. W. Broohs, Esq., for the respondent.
   OPINION.

Smith:

The principal issue in this proceeding is whether the petitioner is entitled under section 131 of the Revenue Act of 1932 to a credit against his income tax for 1932 of the taxes due the Canadian Government for that year, when he did not claim the credit in his return as originally filed, but did claim it in an amended return subsequently filed.

Section 131 of the Revenue Act of 1932 reads in material part as follows:

SEC. 181. TAXES OE FOREIGN COUNTRIES AND POSSESSIONS OE UNITED STATES.
(a) Allowance op Credit. — If the taxpayer signifies in his return his desire to have the benefits of this section, the tax imposed by this title shall be credited with:
(1) Citizen and Domestic Corporation. — In the case of a citizen of the United States and of a domestic corporation, the amount of any income, war-profits, and excess-profits taxes paid or accrued during tifie taxable year to any foreign country or to any possession of tifie United States; * * *
*******
(b) Limit on Credit. — The amount of the credit taken under this section shall be subject to each of the following limitations:
(1) The amount of the credit in respect of the tax paid or accrued to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer’s net income from sources within such country bears to his entire net income for the same taxable year; and
(2) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer’s net income from sources without the United States bears to his entire net income for the same taxable year.
‡ ⅜ # ⅝ # ⅜ ⅜
(d) Tear in Which Credit Taken. — The credits provided for in this section may, at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year in which the taxes of the foreign country or the possession of the United States accrued, subject, however, to the conditions prescribed in subsection (c) of this section. If the taxpayer elects to take such credits in the year in which the taxes of the foreign country or the possession of the United States accrued, the credits for all subsequent years shall be taken upon the same basis, and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year.

Article 131-3 of Regulations 86, promulgated under the Revenue Act of 1932, provides that:

Conditions of allowance of credit. — If the taxpayer signifies in his return his desire to claim credit for income, war-profits, or excess-profits taxes paid other than to the United States, the income tax return must be accompanied by Form 1116 in the case of an individual, and by Form 1118 in the case of a corporation. * * *
* ⅜ ⅜ sfc ⅜ * *
If it is the desire of the taxpayer to claim as a credit and not as a deduction accrued income, war-profits, and excess-profits taxes imposed by the authority of any foreign country or possession of the United States but at the time the return is made it is impossible to estimate the amount of such taxes that may have accrued for the period for which the return is made, Form 1116 in the case of an individual, and Form 1118 in the case of a corporation, may be filed at a later date but a credit can not be allowed for such taxes unless the taxpayer signifies in his return his desire to have to any extent the benefits of section 131.

The following additional provisions of the Revenue Act of 1932 are pertinent to this proceeding:

SEO. 2 3. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
⅜ # # ⅜ * ⅜ ⅜
(c) Taxes Generally. — Taxes paid or accrued within the taxable year, except—
⅜ * ⅜ ⅜ ⅜ ⅜ *
(2) income, war-profits, and excess-profits taxes imposed by the authority of any foreign country or possession of the United States; but this deduction shall be allowed In the case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of section 131 (relating to credit for taxes of foreign countries and possessions of the United States) ; * * *
SEO. 116. EXCLUSIONS EROM GROSS INCOME.
In addition to the items specified in section 22 (b), the following items shall not be included in gross income and shall be exempt from taxation under this title:
(a) Earned Income from Sources Without United States. — In the case of an individual citizen of the United States, a bona fide nonresident of the United States for more than six months during the taxable year, amounts received from sources without the United States (except amounts paid by the United States or any agency thereof) if such amounts constitute earned income; but such individual shall not be allowed as a deduction from his gross income any deductions properly allocable to or chargeable against amounts excluded from gross income under this subsection. * * *

The above quoted provision of section 131 (a) that the credit here sought “shall be” allowed “if the taxpayer signifies in his return his desire to have the benefits of this section” was new in the 193¾ Act. Likewise, section 23 (c) (2) of the Revenue Act of 1932 is materially different from section 23 (c) (2) of the Revenue Act of 1928, which provides that there may not be deducted from gross income “so much of the income, war-profits, and excess-profits taxes imposed by the authority of any foreign country or possession of the United States as is allowed as a credit against the tax under section 131.”

The Ways and Means Committee Report upon H. R. 10236, which later became the Revenue Act of 1932, makes this explanation with respect to section 28 (c) (2):

The existing law allows a deduction in computing net income of so much of the income, war-profits, and excess-profits taxes paid to a foreign country as is not allowed as a credit against the tax due the United States. In thus allowing both a credit and a deduction, preferential treatment is frequently given to taxpayers receiving income from foreign sources. * * ⅜ Since the entire foreign income is, in effect, excluded from the taxpayer’s gross income because of the allowance of the credit for foreign taxes, the result of the additional deduction is that the taxpayer fails to pay a full tax upon its income from domestic sources. As your committee believes that a full tax should be paid upon income from sources within the United States, the section has been amended to deny a deduction for foreign taxes in all cases where the taxpayer has indicated on the return an intention of claiming a credit for foreign taxes under section 131.

The same committee report also has this comment to make with respect to section 131:

Subsection (a). The present law has been amended to provide that a taxpayer is entitled to a credit for income, war profits, and excess-profits taxes paid to foreign countries only where he indicates his desire to elavm such credit on his return. Under section 23 (c) (2) of the proposed bill the taxpayer is not allowed any deduction for such foreign taxes in case he claims a credit for such taxes on his return.
Subsection (b). Under section 131 (b) of tbe existing law tbe credit allowed for taxes paid to foreign countries is subjected to a limitation in order to prevent foreign taxes from absorbing tbe tax on income from sources witbin the United States. This limitation being based upon tbe ratio of net income derived from all sources without tbe United States to tbe total net income, gives preferential treatment to some taxpayers deriving income from more than one foreign country. * * * [Italics supplied.]

The petitioner did not signify in his 1932 return, as originally filed, any desire to have a credit for his Canadian income taxes for that year, but the return as filed showed no tax due the United States. The petitioner argues, and with good reason, we think, that he was not required to claim in his return a credit against tax when the return showed no tax due, and that there was a substantial compliance with the statute when he filed a claim for the credit, and later an amended return in which the credit was claimed, after the respondent had determined that there was a tax due on the return. Statutes should be construed “in such manner as to avoid absurdity or injustice.” Piper v. Willcuts (C. C. A., 8th Cir.), 64 Fed. (2d) 813; Echols v. Commissioner (C. C. A., 8th Cir.), 61 Fed. (2d) 191. In Crompton & Knowles Loom, Works v. White (C. C. A., 1st Cir.), 65 Fed. (2d) 132, the court said:

Statutes are to be construed in a reasonable and sensible way. Fleischmann Const. Co. v. U. S., 270 U. S. 349 at page 360, 46 S. Ct. 284, 70 L. Ed. 624. There is a strong presumption that Congress does not intend absurdities. The plaintiffs contention, as was recently said by tbe Supreme Court with reference to certain provisions of tbe Bankruptcy Act (11 USCA), “ignores tbe practical purpose of tbe statute as applied to such a situation. * * * We should therefore construe tbe language of the Act so as to effectuate the evident purpose of tbe legislation, and not so narrowly as to defeat tbe true intent of Congress.” Roberts, J., Royal Indemnity Company v. American Bond & Mortgage Company, 53 S. Ct. 551, 77 L. Ed. -, opinion April 10, 1933.

The broad purpose of section 131 is to allow a citizen of the United States, at his election, a credit for income taxes paid or accrued to a foreign country. The election becomes apparent when section 131 is considered in conjunction with section 23. The taxpayer may either claim the foreign taxes as a credit under the former section or as a deduction under the latter. The deduction would in some cases be advantageous, as where the return shows a net loss which might be carried forward to the next succeeding taxable year. It is to be noted, however, that the petitioner in his original return for 1932 did not claim either a credit, since no tax was shown to be due, or a deduction for the Canadian taxes for that year. It can not be said therefore that he exercised any election in respect of the Canadian taxes.

A question similar to the one here under consideration has been before the Board in respect of the capital net gain and loss provisions of the statutes. Section 101 of the Revenue Act of 1928 permits a taxpayer “at his election” to have his capital net gain taxed at a special rate oí 12½ per centum. We held in W. A. Forrester, 32 B. T. A. 745, 749, that under this provision of the statute the election was timely made at the hearing had before the Board, conditioned upon the Board’s ruling as to whether certain of the disputed items were capital gains or ordinary income. We there said:

* * * In his return petitioner made no claim to have his tax computed under the capital net gain provisions of the statute, section 101 (a), Revenue Act of 1928. ⅝ * * Since the petitioner treated all the shares sold as being those purchased in 1929, he had no occasion to elect whether he would claim the benefit of the capital net gain provisions of section 101 (a) of the Revenue Act of 1928. He did elect through his counsel to claim such benefit if the determination is that the shares purchased prior to June 1927 were sold. ⅜ * ⅜

To the same effect is Fifth Third Union Trust Co., Trustee, 20 B. T. A. 88. There the taxpayer in its return, which showed no taxable income, had failed to claim the benefits of the net capital gain provisions of section 206 of the Revenue Act of 1921, believing that it was exempt from taxation under section 231. In our opinion we said:

The respondent, while not denying that the petitioner is otherwise entitled to the benefits of section 206, contends that, since it did not make an election or request that the profit on the sale of the stock be taxed under that section until the filing of an amended petition shortly before the date of the hearing, it is not now entitled to have its tax computed under that section.
The Act does not restrict the time of election, and it is our opinion that under the circumstances here presented the capital net gain provision is still available to the petitioner. James F. Hoey, 4 B. T. A. 1043.

See also Lucas v. Sterling Oil & Gas Co. (C. C. A., 6th. Cir.), 62 Fed. (2d) 951.

The situation here is analogous to that presented in the cited cases. It was not until the respondent determined that there was a tax due on the return that the petitioner had any occasion to signify his desire to have the benefits of section 131. If the question of whether there was any tax due on the petitioner’s return for 1932 had been left to the Board’s determination in this proceeding, and not conceded by the petitioner, the alternative claim for the credit and amended return might still have been timely offered at the hearing under the ruling in Fifth Third Union Trust Co., Trustee, supra.

It is to be observed that the statute does not fix a definite time for d aiming the credit, such as on or before the due date, or filing date, of the return. It requires only that the taxpayer signify his desire to have the credit “in his return.” The petitioner so signified in an amended return filed with the respondent prior to the hearing in this proceeding. In Zellerbach Paper Co. v. Helvering, 293 U. S. 172, the Court said that:

None the less, the return exacted by the statute, the one that in the absence of fraud is to start the term of limitation (section 250 (d)), is the return filed by tbe taxpayer at tbe close of tbe fiscal year, though supplementary information may modify or add to it. Cf., Florsheim Bros. Dry Goods Co., Ltd., v. United States, 280 U. S. 453, 462, 50 S. Ct. 215, 74 L. Ed. 542.
* * # ⅜ * * *
From this administrative history the inference is compelling that a second return, reporting an additional tax, is an amendment or supplement to a return already upon the files, and being effective by relation does not toll a limitation which has once begun to run. Florsheim Bros. Dry Goods Co., Ltd., v. United States, supra. Cf. United States v. Memphis Cotton Oil Co., 288 U. S. 62, 67, 53 S. Ct. 278, 77 L. Ed. 619; New York Central & H. R. R. Co. v. Kinney, 260 U. S. 340, 346, 43 S. Ct. 122, 67 L. Ed. 294. * * *

In considering questions involving the statute of limitations, as was the Court in the Zellerbach case, the element of time is, of course, of primary importance. The period of limitations governing the assessment of taxes is necessarily definite in each revenue act and the rights of the parties do not depend upon the exercise of any option or election by either the taxpayer or the Commissioner. In the administration of section 131, however, the element of time is not of such importance. The Commissioner suffers no detriment and gives up no right conferred by statute when he permits a taxpayer to file an amended return and claim a credit for foreign taxes against a tax which the Commissioner himself has computed on the return originally filed.

We are of the opinion that the respondent erred in not accepting the amended return offered by the petitioner for the taxable year 1932 and allowing credit for the income tax accrued to the Canadian Government in that year and paid by the petitioner in the succeeding year.

Reviewed by the Board.

Judgment of no deficiency will be entered for the petitioner.

Steeni-iagen dissents.