author: Black :

text:
    Standard Oil Company (and Affiliated Subsidiaries), Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 86516.
    Promulgated March 18, 1941.

      Lee I. Parlt,, Esq., and A. L. Green, Esq., for the petitioner.

      D. A. Taylor, Esq., for the respondent.
   OPINION.

Black :

The first issue is whether the respondent erred in disallowing as a deduction from petitioner’s gross income for the calendar year 1930 “Excess depreciation on Burton patents” in the amount of $618,587.18. Petitioner claimed $686,247.51 and respondent allowed $67,687.33.

On March 1, 1913, petitioner owned an invention known as the Burton Process for the cracking of gasoline. This invention was patented January 7,1913, under the patent laws of the United States as patent No. 1,049,667. Also on March 1,1913, petitioner owned two applications for patents. One application was filed with the United States on September 23, 1912, and was for an improvement on the Burton Process patent. This improvement was patented March 11, 1913, under the laws of the United States as patent No. 1,055,707. The other application was filed with the Dominion of Canada on December 20,1912, and was for the same invention which was the subject matter of patent No. 1,049,667. This invention was patented April 8, 1913, under the laws of Canada as patent No. 147,094, and, pursuant to the laws of that country, this patent expired on April 7, 1931.

The parties to this proceeding have stipulated that:

As of March 1, 1913 petitioner, Standard Oil Company (Indiana) owned an invention known as the Burton Process for the cracking of gasoline. On January 7, 1913 the United States Government had issued a patent on the said invention to “William M. Burton, of Chicago, Illinois, assignor to Standard Oil Company of Whiting, Indiana, a corporation of Indiana.” A true and correct copy of said patent is attached hereto as Exhibit A and a true and correct copy of William M. Burton’s assignment to petitioner is attached hereto as Exhibit A-l. The fair market value as of March 1, 1913 of the said Burton Process patent was $70,000,000. * * *

Both parties agree, as stated in their respective briefs, that: “The real question here is: How much of petitioner’s $70,000,000.00 basis should be recognized as remaining at January 1, 1930?”

The amount of $686,274.51 claimed by petitioner is exactly equal to 2/i2 of y17 of $70,000,000. It is accordingly manifest that petitioner has proceeded on the theory that its $70,000,000 basis as of March 1,1913, should be exhausted over a period of exactly seventeen years from March 1, 1913, and that the amount claimed represents exhaustion for the two months of January and February, 1930. The amount allowed in the deficiency notice, $67,687.33, is exactly equal to %65 of %7 of $70,000,000.

Petitioner contends (1) that respondent’s action for 1930 was arbitrary and without rational foundation; (2) that respondent is estopped from asserting that petitioner’s basis should be reduced by additional charges for prior years; and (3) that in any event, respondent’s allowances in prior years were reasonable and should be used in determining petitioner’s remaining basis as of January 1, 1930, unless respondent can show that the action in prior years was wrong, i. e., that the facts as stipulated will not admit of any interpretation which would support the action in prior years.

In support of its contention that respondent’s action was arbitrary and without rational foundation petitioner argues that the effect of respondent’s determination of allowing only %65 of the annual amount which he had allowed for each of the years 1918 to 1929, inclusive, “leaves him in the implied and absurd position of saying that petitioner had an exhaustible patent value as of March 1, 1913, of $70,000,000.00, but that- $618,587.18 of that vaíue must have been exhausted prior to that date.” Petitioner further argues that, even on the basis that petitioner’s patent exhaustion period ended with the expiration of the basic patent, rather than February 28, 1930, as petitioner contends, the respondent also erred in determining the expiration date to be January 6, 1930, instead of January 7, 1930, citing Burnet v. Willingham Loan & Trust Co., 282 U. S. 437, and cases cited therein. Petitioner then contends that, by pointing out these obvious eiTors on the part of the respondent, it has brought respondent squarely within that part of the Supreme Court’s decision in Helvering v. Taylor, 293 U. S. 507, wherein the Court said:

* * * The fact that the Commissioner’s determination of a deficiency was arbitrarily made may reasonably be deemed sufficient to require the Board to set it aside.

We fail to see wherein Helvering v. Taylor is of any help to petitioner, for in that case the Supreme Court also said: “Frequently, if not quite generally, evidence adequate to overthrow the Commissioner’s finding is also sufficient to show the correct amount, if any, that is due.” The parties have agreed upon the facts with reference to the Burton Process patent and it remains only for the Board correctly to apply the law to those facts. Under these circumstances Helvering v. Taylor has no application.

The respondent, in his brief, now concedes that he “did not correctly compute the amount of the basis remaining at J anuary 1, 1930, and consequently the allowable depreciation for the six-day period in the taxable year, in that he used %7 of $70,000,000.00 as the annual depreciation charge, whereas the life of the patent from March 1, 1913, to its expiration date was only 16 and 31%65 years.” He now contends that the remaining basis at J anuary 1, 1930, and the allowable depreciation for 1930, should be computed as follows:

3§5°f (163^I6¡) of $70,000,000=$68,270.47.

In making this concession the respondent rejected petitioner’s suggestion that January 7, 1930, be treated as the expiration date of the Burton Process patent. He argues that if January 7, 1930, be treated as the expiration date “it would be necessary either to refuse depreciation for the date on which a patent is issued, or to allow depreciation for a life of seventeen years and one day.”

Every patent grants to the patentee, his heirs or assigns “for the term of seventeen years,” the exclusive right to make, use, and vend the invention or discovery throughout the United States and the territories thereof. See U. S. Code, title 35, sec. 40. Upon the reasoning of the Supreme Court in Burnet v. Willingham Loan & Trust Co., supra, we hold that the Burton Process patent expired on January 7, 1930. It may be noted in passing that the same rule apparently does not prevail in Canada, for the Canadian patents offered in evidence in this proceeding have the expiration date recorded therein, which is eighteen years from the date of issue, counting the day of issue as the first day of the period. In the instant proceeding, it is our opinion that the first day of the seventeen-year period of the Burton Process patent was January 8, 1913. If, therefore, the remaining basis at January 1,1930, and the allowable exhaustion for 1930, should be computed as now suggested by the respondent, it will be necessary to revise his computation, as follows:

¿ of (i63i3/365) of $70,000,000=$79,635.95

Petitioner, however, strongly contends that it should be allowed the entire amount of $686,274.51, upon the ground that the exhaustion period was seventeen years from March 1, 1913, to February 28, 1930, both dates inclusive, and not 1631%65 years from March 1, 1913, to January 7, 1930, both dates inclusive. But petitioner’s argument in this connection assumes as the major premise a fact which is not a fact in this record, namely, that the $70,000,000 value was the value on March 1, 1913, of the Burton Process patent and the two applications that were pending on that date. In its brief petitioner says:

It is at once apparent, therefore, that we are.not here considering just one patent, the original patent issued January 7, 1913. If that constituted the only property rights which petitioner had at March 1, 1913, or at any other time with respect to the Burton process and pressure stills, there would1 probably be no question as to the life of the '$70,000,000.00. We have here, however, not only the original patent, but also an application for a Canadian patent thereon, an application for a United States patent on an improvement, and a preemptive right to a Canadian patent on the improvement.

Under the facts as stipulated it becomes immaterial that petitioner on March 1, 1913, owned two patent applications in addition to the Burton Process patent. If the value of $70,000,000 agreed to by petitioner and respondent in 1928 was intended to represent the combined value of the Burton Process patent and the two applications, and if the allowances for the years 1918 to 1929 were intended to represent the allowable deductions for exhaustion of the Burton Process patent and the two applications, the record certainly does not show such to be the facts. Our decision on this issue must rest on the facts. The statements in the deficiency notice referring to “patents” are not on the whole inconsistent with the stipulation, and if they were, the stipulation would control. We need only to apply the law to the facts as stipulated.

Section 23 (k) of the Bevenue Act of 1928, in so far as is material, provides:

SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
*******
(k) Depreciation. — A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. * * *

Article 207, Regulations 74, in so far as is material provides:

Aet. 207. Depredation of patent or copyright. — In computing a depreciation allowance in the ease of a patent or copyright, the capital sum to be replaced is the cost or other basis of the patent or copyright. The allowance should be computed by an apportionment of the cost or other basis of the patent or copyright over the life of the patent or copyright since its grant, or since its acquisition by the taxpayer, or since March 1, 1913, as the case may be. * * * The fact that depreciation has not been taken in prior years does not entitle the taxpayer to deduct in any taxable year a greater amount for depreciation than would; otherwise be allowable. * * *

The above regulation has the force and effect of law. Hazeltine Corporation v. Commissioner, 89 Fed. (2d) 513, 521.

In the instant proceedings the capital sum to be replaced in connection with the Burton Process patent is $70,000,000, the fair market value of that patent as of March 1, 1913. This capital sum must be apportioned over the life of the patent since March 1, 1913. As we have already held, the life of the Burton Process patent expired on January 7, 1930. The proper apportionment for the seven days in 1930, is, as we have indicated above, the amount of $79,635.95. This much of petitioner’s $70,000,000 basis remained on January 1, 1930. We hold, therefore, that the amount of $79,635.95 should be allowed petitioner as a deduction from its gross income for the calendar year 1930 on account of exhaustion or depreciation of its Burton Process patent instead of the amount of $67,687.33 allowed by respondent in his deficiency notice.

On the basis of the correct apportionment for each full year of ■...J,, — r- of $70,000,000 instead of one-seventeenth thereof, peti-(10^7365) tioner would have been entitled to a deduction of $4,152,445.96 for each of the years prior to 1930 instead of the amount of $4,117,-647.06 allowed by the respondent. This fact, however, does not entitle petitioner to deduct in the taxable year a greater amount than would otherwise be allowable. Art. 207, Regulations 74, supra; cf. Burnet v. Thompson Oil & Gas Co., 283 U. S. 301.

The second issue is whether the respondent erred in disallowing as a deduction from gross income the' amount of $2,901,865.46 claimed by Stanolind on its return for the period January 1 to September 21, 1930. This issue becomes material by reason of the fact that on September 22, 1930, Stanolind became a 100 percent owned subsidiary of petitioner, which fact entitles petitioner in arriving at the consolidated net income for the calendar year 1930 to deduct any statutory net loss sustained by Stanolind for the period immediately preceding affiliation. Sec. 117, Revenue Act of 1928; art. 41 (c), Regulations 75. Stanolind reported a net loss of $3,715,123.57 for the period January 1 to September 21, 1930, and the effect of respondent’s disallowance of the claimed deduction of $2,901,8.65.46 now under consideration was to reduce Stanolind’s reported net loss by a like amount.

In a statement attached to the deficiency notice set out in full in our findings under paragraph 42, the respondent gave as his reason for disallowing the claimed deduction of $2,901,865.46 the fact that the amount represented a judgment obtained by the United States against Mammoth which was voluntarily paid by Stanolind. The stipulation of facts clearly shows that this was an erroneous finding on the part of the respondent, and respondent now concedes as much. The true facts are that the judgment obtained by the United States against Mammoth in the Wyoming suit has never been paid, except for the small amount of $3,509.19, and that the $2,901,865.46 here in question represents a judgment for $2,906,484.32 (less a recoupment of $4,618.86) which the United States obtained against Stano-lind in the Delaware suit on May 28, 1930, and which Stanolind paid to the United States on June 2, 1930. Although the respondent was mistaken in his determination of the deficiency as to what the amount of $2,901,865.46 actually in fact represented, he now contends that the amount should nevertheless be disallowed for the reason that, in view of what the Supreme Court, in Mammoth Oil Co. v. United States, 215 U. S. 13, 53, held with regard to Stanolind’s participation in the illegal scheme, it would be against public policy to allow Stanolind to deduct from its gross income an amount which it was compelled to pay on account of such participation.

At the outset petitioner contends that, since the respondent has changed his reasons as to why the amount of $2,901,865.46 should not be allowed as a deduction from gross income, the burden is upon the respondent to both plead and prove the facts necessary to support the disallowance upon the new ground. In support of this contention petitioner cites Alexandria Gravel Co. v. Commissioner, 95 Fed. (2d) 615, and T. G. Nicholson, 88 B. T. A. 190, 198. These cases do not support such a contention. The issue here is Stanolind’s right to the deduction sought. Upon that issue petitioner has the burden of pleading and proof. Burnet v. Houston, 283 U. S. 223; Welch v. Helvering, 290 U. S. 111. The respondent correctly argues in his brief that “Deductions may be disallowed by the Commissioner without assigning any reason or theory for his action and if he assigns a reason or advances a theory in his deficiency notice, though it be erroneous, he is not restricted thereto in his defense of an appeal to the Board asserting such disallowance as error.” Cf. Edgar M. Carnrick, 21 B. T. A. 12, 21; Crowell v. Commissioner, 62 Fed. (2d) 51, 53; James P. Gossett, 22 B. T. A. 1279, 1284; affd., 59 Fed. (2d) 365; rehearing denied, 60 Fed. (2d) 484; John I. Chipley, 25 B. T. A. 1103, 1106; Charles J. O'Laughlin, 30 B. T. A. 1327; affd., 81 Fed. (2d) 289; Alexander Sprunt & Son, Inc. v. Commissioner, 64 Fed. (2d) 424, 427; Raoul H. Fleisch mann, 40 B. T. A. 672. Petitioner was not taken by surprise. In his opening statement to the Board, counsel for respondent said that, on the question of the deductibility of the payment by Stanolind, the respondent had two positions, namely, (1) that as a matter of public policy the deduction was not permissible, and (2) that in any event the amount of $2,901,865.46 should be excluded from Stanolind’s not loss for the period immediately preceding affiliation because it was not of such a character as may be carried forward as a net loss under section 117 (a) (1) of the Revenue Act of 1928. All of the facts upon which the respondent relies are in the record. Consideration of those facts is not precluded by reason of the absence of a special pleading on the part of the respondent. If, upon the consideration of all the evidence, petitioner has failed to establish Stanolind’s right to the claimed deduction, the respondent’s disallowance thereof must stand, even if it be for a reason other than that given in the deficiency notice.

Aside from the public policy feature of the case, petitioner contends that the payment in question falls squarely within the general rule that payments made in connection with, or as a result of, litigation affecting the taxpayer’s business are deductible in computing taxable net income; that the part of the payment in question representing principal was deductible either as an expense, loss, or bad debt under subsection (a), (f), or (j), respectively, of section 23 of the Revenue Act of 1928; and that the part representing interest was deductible as interest under subsection (b) of the same section. These contentions, however, become unimportant if the respondent is upheld in either one of his two positions mentioned in the preceding paragraph. Lawrence A. Wagner, infra.

We shall, therefore, consider first the respondent’s position that it would be against public policy to allow any deduction for the item in question, because of the Supreme Court’s decision in Mammoth Oil Co. v. United States, supra.

In approaching the position that an allowance of any part of the $2,901,865.46 as a deduction from Stanolind’s gross income would be against public policy, the respondent in his brief says: “The factual question, with which this appeal is concerned, is the Dad faith and/or fraud of Stanolind. A direct finding on that subject should be made. The evidence to be considered includes the intire record in the Wyoming suit. If, from an examination of hat record, it is found that the question of the bad faith and/or fraud of Stanolind was there presented and decided, this Board s bound to so find in this case if such a finding is material, as respondent contends it to be.” Later in his brief the respondent ■equests a direct finding on this subject, as follows:

(13). The lease and agreement were executed without warrant or authority f law and contrary to the policy of the Federal Government to conserve its petroleum resources. The lease and agreement were fraudulent. Stanolind is charged with notice that those instruments were executed contrary to law, and with knowledge of the fraud perpetrated. Stanolind acted in bad faith and as a mala fide trespasser upon the Government-owned lands in acquiring the oil in question.

The basis for the above requested finding is, as counsel for respondent says, “the entire record in the Wyoming suit.” There are in evidence in this proceeding true copies of all the pleadings filed in the Wyoming suit, the Teapot Dome lease, the supplemental agreement of February 9, 1923, the order of the District Court appointing the receiver, the argument made before the District Court, the briefs filed before the Eighth Circuit and Supreme Courts on behalf of Stanolind, a reference to the volume and page in the printed imports of the decisions of the District, Circuit, and Supreme Courts, respectively, the mandate of the Supreme Court, and the final decree of the District Court.

We think that the holdings of the Eighth Circuit and Supreme Courts in the Mammoth case, that Stanolind was a mala fide trespasser, that Stanolind was presumed to have known that no law authorized the making of the lease, that the use of the tanks by Stanolind to. take oil from the Government’s reserve was a part of the illegal scheme, that Sinclair’s knowledge of the conspiracy to defraud was imputed to Stanolind, and that the lease and supplemental agreement were fraudulently made to circumvent the law and to defeat public policy, are res judicata, as to those matters in the instant proceeding.

Three principal objections to respondent’s requested finding No. 13 (our finding No. 44) are argued by petitioner. They are: (1) that the doctrine of res judicata is not available to respondent because he has not specially pleaded it; (2) that Stanolind’s good faith or bad faith was not an issue in the Wyoming suit; and (3) that the character of the payment in question for tax purposes must be determined and limited by the pleadings and proceedings in the Delaware suit. We shall consider these objections in the order given.

We think petitioner’s first objection is without merit. The rule with respect to this subject is stated in 34 C. J. 1056, 1066 as follows:

* * * Where a second suit between the same parties involves a different cause of action which depends upon the existence or nonexistence of a fact adjudicated in the first suit, the judgment rendered in the first casé, being evidence showing or tending to show that fact, may be introduced, even though it is not specially pleaded.
* * * * * * *
* * * Moreover, where the judgment is relied on, not as a bar to the present action, but as a judicial determination of given facts, issues, or controversies, it is not necessary to plead it specially, but it is conclusive when given in evidence.

The rule is stated by the Supreme Court in Southern Pacific Railroad Co. v. United States, 168 U. S. 1, at page 48, to be:

The general principle announced in numerous cases is that a right, question, or fact distinctly put in issue and directly determined by a court of competent jurisdiction, as a ground of recovery, cannot be disputed in a subsequent suit between the same parties or their privies; and even if the second suit is for a different cause of action, the right, question, or fact, once so determined, must, as between the same parties or their privies be taken as conclusively established, so long as the judgment in the first suit remains unmodified.

The parties, Stanolind and the United States, are the same in the instant proceedings as they were in the Wyoming suit. Cf. Tait v. Western Maryland Railway Co., 289 U. S. 620; Sunshine Anthracite Coal Co. v. Adkins, 310 U. S. 381. The instant proceeding involves a different cause of action. If, therefore, the present cause of action, namely, the right of Stanolind to deduct the amount paid in settlement of the Delaware judgment, depends upon the existence or nonexistence of a fact adjudicated in the Wyoming suit, namely, the good faith or bad faith of Stanolind, the Wyoming judgment may be introduced, even though it is not specially pleaded, and when given in evidence it is conclusive of the fact adjudicated. Southern Pacific Railroad Co. v. United States, supra (see pages 59 and 60 of that opinion).

Petitioner’s second principal objection to respondent’s requested finding No. 13 is, we think, likewise without merit. The opinion of the Supreme Court in the Wyoming suit, in so far as it applies to Stanolind, is set out in paragraph 21 of our findings. We do not think the Supreme Court intended these statements to be obiter dicta. In the separate brief which Stanolind filed on its behalf in the Supreme Court in the Wyoming suit, Stanolind alleged that the Court of Appeals erred (1) “in finding that there was any evidence as matter of law to establish fraud in the making of the lease of April 7th, 1922, and the supplemental agreement of February 9th, 1923”; (2) in holding that Stanolind “was a trespasser mala fides on the government land, as no fraud was alleged or proved as to it”; (3) in holding that Stanolind “should be enjoined and restrained from entering upon Naval Petroleum Eeserve No. 3”; and (4) in enjoining and restraining Stanolind “from entering upon Naval Petroleum Eeserve No. 3 without affording it the right to remove from said reserve the property it had in good faith purchased and constructed thereon.” If Stanolind’s transactions with Mammoth had been in good faith, as Stanolind contended before the Supreme Court, it seems clear that it would have been permitted to remove its seventeen tanks that were located on the lands covered by the Teapot Dome lease. There can be no doubt but that Stanolind’s good faith or bad faith in its transactions with Mammoth was an issue in the Wyoming suit and that the issue was decided adversely to Stanolind.

Neither are we impressed with petitioner’s third principal objection to respondent’s requested finding No. 13. Under this heading petitioner emphasizes all the facts directly pertaining to the Delaware suit, as it is the amount of the judgment which the United States obtained against Stanolind in that suit which Stanolind seeks to deduct from its gross income. Petitioner argues that the Board should look no further than the Delaware suit in determining whether Stanolind’s transactions with Mammoth were made in good or bad faith, and that when this is done no finding of bad faith can be made. Petitioner points to the letter of April 3,1930, which counsel for the United States wrote to the United States Senate recommending that Stanolind’s offer to terminate the suit be accepted. (See paragraph 37 of our findings.) It particularly emphasizes the portions which say that “this suit was for the conversion of the oil by the Sinclair Crude Oil Purchasing Co. based upon the theory that as the Mammoth Oil Co. had never acquired a valid title to the leasehold it could not give good title to the oil taken therefrom”, and “Under the proposed arrangement the Government is, we think, getting as favorable a result as it could get by pursuing the litigation to judgment and execution.” Petitioner says there is no suggestion of bad faith on Stanolind’s part in that letter. The United States Senate accepted Stanolind’s offer (see findings, par. 34) to terminate the Delaware suit. By so doing petitioner argues that the United States in effect dropped all the allegations of fraud and bad faith on the part of Stanolind, for the settlement included only the value of the oil as represented by the prices which Stanolind had paid Mammoth, less the value of the tanks which were the subject of the litigation in the Wyoming suit, and included nothing for the exemplary or punitive damages asked for in counts 2 and 3 of the Delaware suit. Petitioner further argues that, if the Wyoming suit adjudicated Stanolind’s good or bad faith in its transactions with Mammoth in the manner contended for by the respondent, then counsel for the United States in the Delaware suit did not obtain for the United States all that the latter were entitled to, in that, if Stanolind were guilty of had faith, it should not have been given credit for the seventeen tanks and should have been assessed exemplary or punitive damages, as alleged in counts 2 and 3 of the declaration.

We do not think it is necessary to enter upon a discussion of the reasons which caused the Congress to accept Stanolind’s offer to terminate the Delaware litigation. Suffice it to say Stanolind’s good or had faith in its transactions with Mammoth was not litigated in the Delaware suit, that suit being settled by compromise, whereas it was litigated in the Wyoming suit and passed upon by the United States Supreme Court. Stanolind’s good or bad faith in its transactions with Mammoth is now an issue of fact in the instant proceedings. That issue having been litigated and adjudicated in the Wyoming suit and the record in that case having been offered and received in evidence in the instant proceedings, the judgment of the Supreme Court determining that issue is conclusive here. Southern Pacific Railroad Co. v. United States, supra. We, therefore, grant respondent’s requested finding No. 13, which is set out in paragraph 44 of our findings.

Under the facts found in our findings, would it be against public policy to allow Stanolind to deduct from its gross income any part of the payment of $2,901,865.46 here in question?

Deductions are frequently disallowed upon the ground that it would be against public policy to allow them. The cases uniformly hold that fines paid because of violation of law are not deductible. Great Northern Ry. Co. v. Commissioner, 40 Fed. (2d) 312; certiorari denied, 282 U. S. 855; Burroughs Building Material Co. v. Commissioner, 47 Fed. (2d) 178; Chicago R. I. & P. Ry. Co. v. Commissioner, 47 Fed. (2d) 990; certiorari denied, 284 U. S. 618; Tunnel R. R. of St. Louis v. Commissioner, 61 Fed. (2d) 166; certiorari denied, 288 U. S. 604. In the Burroughs case the Second Circuit said: “The disallowance may properly rest on a refusal to sanction expenditures of such a character as we have here on grounds of public policy.”

In Easton Tractor & Equipment Co., 35 B. T. A. 189, we held that certain commissions paid by the taxpayer to an agent who was to use his personal influence with the state government ,in making sales could not be deducted from gross income because the agreement under which the commissions were paid was void as against public policy. To the same effect is T. G. Nicholson, supra.

In Lawrence A. Wagner, 30 B. T. A. 1099, the Board sustained the disallowance of a deduction of a loss arising from the operation of a loan business prohibited by state statutes “upon the ground of public policy” and said that “In our view it is immaterial whether the deduction is classified as an ordinary and necessary expense or as a loss.”

On the other hand, deductions have been allowed in Commissioner v. Continental Screen Co., 58 Fed. (2d) 625, involving attorney fees paid for the successful defense of a charge of operating in violation of the Sherman Act; W. B. Hervey, 25 B. T. A. 1282, involving cash profits and stock surrendered by Hervey in order to avoid a suit threatened by the receivers of a corporation whose stock had been dealt in by a syndicate or pool composed of Hervey and his associates, the receivers charging that the members of the syndicate or pool had violated the usury laws of the State of California; Foss v. Commissioner, 75 Fed. (2d) 326, involving attorney fees paid by Foss in unsuccessfully defending a suit in equity brought against him by the minority stockholders of a corporation in which Foss was the majority stockholder, alleging that Foss and certain others were in combination to waste the assets of the corporation and to violate the Sherman AntiTrust Act; Helvering v. Hampton, 19 Fed. (2d) 358, involving the amount paid in settlement of a judgment against Hampton and in favor of a lessee upon the cancellation of a lease for fraud in a prior tax year in negotiating for the lease and for other expenditures claimed by Hampton to have been made in defense of the suit; Alexandria Gravel Co. v. Commissioner, supra, involving commissions paid to a state senator as salesman on sales to the state highway commission in the absence of evidence that the state senator agreed or attempted to use any personal or political influence in making the sales; and International Shoe Co., 38 B. T. A. 81, involving attorney fees and an amount paid in settlement of a suit for damages brought against petitioner and its officers and directors by the Menzies Shoe Co.

Petitioner makes the statement in its brief that in most of the cases where the claimed deduction was denied upon the ground of public policy the particular taxpayer involved was charged with conduct that either was or could have been made the subject of criminal action. It contends that these cases can not be applied to the instant proceeding, because: “First, Stanolind was never guilty of, nor charged with even reprehensible conduct, much less conduct which could have been made the subject of criminal action; Second, there not only has never been any determination or admission, either actual or implied, that Stanolind was guilty of criminal or reprehensible conduct, but the record completely negatives culpability on its part; Third, the payments certainly can not be said to have been made for the purpose' of influencing legislative, or. any other kind of Governmental, action.” In support of these contentions petitioner relies particularly upon W. B. Harvey; Helvering v. Hampton; and International Shoe Co., all supra.

We do not deem it necessary in this proceeding to determine whether Stanolind’s participation in the illegal scheme to defraud the United States of its oil could have been made the subject of a criminal' action. The Supreme Court held in the Wyoming suit, in which Stanolind was a party defendant, that the lease and supplemental agreement between Mammoth and the United States were fraudulently made to circumvent the law and to defeat public policy; that Sinclair’s knowledge of that conspiracy to defraud was imputed to Stanolind and that Stanolind was a mala f,de trespasser; that Stanolind was presumed to have known that no law authorized the making of the lease; and that Stanolind participated in the illegal scheme by using the tanks to take oil from the Government’s reserve. This is enough, we think, to deny Stanolind the right to deduct from its gross income an amount which it was compelled to pay by reason of its participation in the scheme. The Supreme Court held it was against public policy for Mammoth to produce the oil. We think it was equally against public policy for Stanolind to buy the oil from Mammoth with the imputed knowledge of the fraud and corruption by which Mammoth had obtained the lease, and that it would likewise be against public policy to allow the deduction sought in this proceeding.

The cases relied upon by petitioner, we think, do not hold to the contrary. They are cases where private rights were invaded and not where wrongs were committed in bad faith against the Government. The court in the Hampton case clearly draws the distinction, wherein it says:

In none of these rules is it suggested that if the defendant in a civil suit charging medical malpractice, or tortiously wounding a person, or infringing a patent, is unsuccessful, the private wrongdoing so adjudged infects the payment for its defense. On the contrary, the italicized portion of the solicitor’s opinion shows that the distinction it makes is between the defense of offenses against the government, of which governmental policy prohibits consideration as ordinary incidents of a business, and defending private wrongdoing in the course of business, the cost of which is ruled deductible. [Italics by the court]

We hold, therefore, in view of what the Supreme Court held in Mammoth Oil Co. v. United States, supra, that it would be against public policy to allow Stanolind to deduct from its gross income any part of the payment of $2,901,865.46 here in question. The respondent’s disallowance of this deduction in determining Stanolind’s net loss for the period in question is sustained. It thus becomes unnecessary to consider issue (4).

Reviewed by the Board.

Decision will he entered u/nder Bule 60.


source: Caselaw Access Project

author: HaRRON :

license: Public Domain

text:
    H. G. Butler, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100793.
    Promulgated March 18, 1941.

      H. Kennedy McOoolc, Esq., for the petitioner.

      Stanley B. Pierson, Esq., for the respondent.
   OPINION.

HaRRON :

The parties present the question for determination on the premise that the sale of a capital asset is involved. They are in agreement tliat petitioner realized a gain in 1987 of $25,950. Respondent computed the gain, in determining the deficiency, as follows:

Amount realized on sale — September, 1037-$36,000'
Purchase price of mineral rights — September, 1937-$5,000
Development costs- 5, 050
- 10,050
Capital gain as corrected (100 percent taxable since the property was not held more than one year)-$25,950

Petitioner reported capital gain of $15,570, 60 percent of $25,950, as gain from sale of a capital asset held over two years. Respondent increased the capital gain by $10,380, thereby taxing all the gain. The question is whether that which was sold in 1937 was held for over two years or less than one year for purposes of determining the amount of capital gain taxable under section 117 (a) of the Revenue Act of 1936, and the answer to this question turns upon a determination of what petitioner sold.

Petitioner contends, but his argument is not clear, that under the 1937 agreement with Lay and under the transactions carried out in September of 1937 he transferred all his rights under the “Lease and Option Agreement” of September 15, 1934, and that, having held such rights under that agreement for more than two years, he is taxable on only 60 percent of the gain realized. Petitioner argues that, while he had the right to exercise his option to purchase the mineral rights from Crittenden, he “never took title to the property” and so he sold something other than title to the mineral rights to Lay and his principal, Ball. Petitioner appears to place reliance upon the factor that the deed to the mineral rights was from Crittenden to Ball. It is true that there were not two deeds, one from Crittenden to petitioner and one from petitioner to Ball, but in view of the fact that petitioner apparently exercised the option he had by giving his check for $5,000 to Crittenden, and that Ball did not pay anything to Crit-tenden, it appears that all parties concerned eliminated one step in an economy of effort and that the deed from Crittenden to Ball was in reality a deed on behalf of petitioner, conveying title which he had acquired under exercise of his option, to Ball, who exercised the option he obtained from petitioner. In our opinion, the substance rather than the form of the transaction is controlling.

We believe that petitioner can not say that he did not exercise his option under the lease and option agreement of September 15, 1934. Petitioner paid $5,000 to Crittenden. Neither Lay nor Ball paid anything to Crittenden. When petitioner paid $5,000 to Crittenden, Crittenden did not have thereafter any title to the mineral rights to convey to Ball except as agent for petitioner.

Petitioner is exceedingly technical in contending that he did not obtain title to the mineral rights which were conveyed to Ball. We think the terms of Ms agreement of July 1937 with Lay are controlling. Nowhere in that agreement is any reference made to an assignment or a sale of all of petitioner’s rights under the lease and option agreement of September 15, 1934, with Crittenden, or to a sale of his option under that agreement. Rather, the agreement, clear in its terms, deals with a sale by petitioner of the fee title to the mineral rights covered by the 1934 agreement with Crittenden. Of course, mineral rights are classed as distinct corporeal hereditaments . which are subject to conveyance separate from other property. Kincaid v. McGowan, 88 Ky. 91; 4 S. W. 802; Thompson, Real Property, sec. 80. Also, while an option in itself is property and in some in.stances is assignable, the evidence here, the terms of the agreement with Lay, does not indicate in any way whatsoever that petitioner sold or agreed to sell his option to Lay, or that the $5,000 which petitioner paid to Crittenden was paid on behalf of Lay or his principal, Ball. Petitioner’s testimony is to the effect that he paid the $5,000 out of his own funds. The evidence, outside the agreements and the checks involved, is meager. Petitioner appeared and gave testimony but his testimony is brief. Petitioner did not testify as to the details of what was done and neither has he, by his testimony or otherwise, shown that his delivery of his check to Crittenden was not in exercise of his option under his agreement of 1934 with Crittenden. Petitioner relies ahnost entirely upon the written agreements. The checks are almost the only bits of evidence to indicate what steps were taken. All of the evidence upon its face indicates that petitioner exercised his option, thereby acquiring title to the mineral rights, and Ball exercised his option under his agreement with petitioner and acquired title to the mineral rights from petitioner. All was done at about the same time and we believe it is immaterial that a deed to petitioner was not executed, and that the deed received by Ball was executed by Crittenden. No explanation is given and petitioner has failed to prove his contentions, assuming, arguendo, that his proof could have gone any further than it did go.

Also, petitioner testified that he received the $36,000 “for all my mineral rights.” Petitioner’s check to Crittenden has the notation “Por purchase mineral rights under H. G. Butler land.” The record indicates that the balance of the purchase price, or $35,000, was paid over to petitioner by the bank after he had purchased the mineral rights by payment of $5,000 and after delivery of the deed thereto to Ball.

When petitioner paid $5,000 to Crittenden he became the owner of the mineral rights both at law and in equity, Walker v. Edmundson, 111 Ga. 454; 36 S. E. 800; Thompson, Real Property, sec. 1297; and his leasehold merged with the fee. M. Ernest Greenebaum, Jr., 27 B. T. A. 889; Henry Boos, 30 B. T. A. 882. The ownership resulting to petitioner from the exercise of his option and the payment of the purchase price does not relate back to the time when Crittenden originally gave the option to petitioner in 1934. Helvering v. San Joaquin Fruit & Investment Co., 297 U. S. 496; Arthur J. Coyle, 17 B. T. A. 368.

It clearly appears that the property which petitioner sold was the fee title to mineral rights; that such fee title was held for a short time by petitioner, for less than one year; and that petitioner is taxable on the entire gain under section 117 (a). Respondent’s determination is sustained.

Decision will he entered for the respondent.


author: HaReon :

text:
    Lawrence C. Phipps, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88241.
    Promulgated March 19, 1941.

      Devoid A. Reed, Esq., for the petitioner.

      Angus R. Shannon, Esq., and Frank T. Donahoe, Esq., for the respondent.
   OPINION.

HaReon :

Issue 1. — The first question relates to petitioner’s gift tax liability for the year 1935. The question is whether or not petitioner is entitled to a specific exemption deduction in 1935 under the provisions of section 505 (a) (1) of the Revenue Act of 1932. Petitioner claims a specific exemption deduction in the amount of $26,150 for the purpose of computing his gift tax liability for the year 1935. Respondent disallowed the claimed deduction because petitioner had' been allowed as specific exemption for preceding calendar years three? deductions aggregating $50,000. The facts support respondent’s determination because petitioner was allowed specific exemption deductions in 1932 and 1933 in tbe respective amounts of $12,000 and $38,000 in the computation of petitioner’s gift tax liability for each of those years. Even so, petitioner advances the theory that he is entitled to •elect and determine himself the particular years in and over which the statutory exemption of $50,000 is to be claimed and allowed, under the provisions of section 505 (a) (1). In short, petitioner contends that he elected to take a deduction for the specific exemption of only $11,850 for the year 1933; that the Commissioner had no right to increase the exemption deduction to $38,000 in the year 1933, so that •petitioner is entitled to a further deduction of $28,150 for the year 1935. Petitioner argues that the doctrine of equitable estoppel applies and estops the Commissioner from disallowing the exemption claimed in 1935.

It is necessary to refer to the proceeding before this Board in Docket No. 78915, reported in Lawrence O. Phipps, 34 B. T. A. 641, and to consider the procedure which petitioner has followed heretofore, in the present consideration of the above argument of petitioner. We find no case involving the exact contention which petitioner makes. Petitioner’s argument, in our opinion, fails because it would xequire, if it were sustained, that petitioner receive aggregate specific •exemptions in excess of the $50,000 allowed by section 505 (a) (1). Also, if it is at all proper to import into our determination any of the elements of the doctrine of equitable estoppel, we believe that it is petitioner who is now estopped rather than respondent. Petitioner admits that he has paid the deficiency in gift tax for the year 1933 in the amount of $4,108.17 and petitioner has in fact been allowed total specific exemption deductions in the amount of $50,000. John J. Flynn, 35 B. T. A. 1064. Petitioner, by his conduct in acquiescing, when his gift tax liability for 1933 was before this Board, in respondent’s allowance for an exemption of $38,000 for computing gift tax for 1933, has received the benefits of the statute and has put the Commissioner in a position where “to retrace their steps on a different state of facts would cause the loss of taxes to the Government.” Robinson v. Commissioner, 100 Fed. (2d) 847. It can not be said fairly that the Commissioner has been at fault, that he has been arbitrary, or that he has placed petitioner in a disadvantageous position.

Respondent mailed a notice of deficiency in gift tax liability for 1933 to petitioner on February 28, 1935, which represented his final determination. In computing that deficiency in the amount of $4,108.17 respondent allowed a specific exemption deduction of $38,000. The deficiency resulted from an increase in the total amount of gifts made in the year 1933. It would have been greater in amount if respondent had allowed as a specific exemption deduction only $11,850.. the exemption claimed by the petitioner in his gift tax return for 1933. Petitioner filed a petition with this Board on March 27, 1935, in which, he contested only the respondent’s increase in the amount of taxable gifts made in 1933. Petitioner did not contest respondent’s allowance of the specific exemption deduction in the amount of $38,000. If the petitioner had alleged in the petition that he was entitled to a specific exemption for 1933 of only $11,850, respondent could have-moved for an increase in the deficiency in gift tax for 1933 at or before the hearing. See section 272 (e) of the Revenue Act of 1932. However, upon the issues presented, the Board determined the total amount of petitioner’s gift tax liability for 1933 and found that there-was a deficiency in the amount determined by the respondent. Even after the report of the Board was promulgated petitioner did not. move to have the proceeding reopened to consider any additional question such as his right to a deduction for the smaller amount for the-specific exemption. Under such circumstances it must be held that petitioner acquiesced in respondent’s allowance of a specific exemption-deduction for the year 1933 in the amount of $38,000. Petitioner now has no equitable ground for claiming that respondent is estopped from disallowing a further specific exemption deduction for the year 1935.

Section 505 (a) (1) contemplates that a taxpayer may elect to spread over several years the $50,000 specific exemption rather than apply it to one year only. However, the statute clearly limits this right of election by limiting the aggregate deductions to those which have been claimed and allowed in prior years. In other words, where-the aggregate deductions allowed in prior calendar years aggregate $50,000 no further deductions for specific exemption may be claimed or allowed. In Lunsford Richardson, 39 B. T. A. 927, the taxpayer believed that he had not made any taxable gifts in the year 1932 and he did not file a gift tax return for that year, his theory being that certain gifts were made prior to the effective date of the gift tax provisions in the Revenue Act of 1932 which became effective June 6, 1932. The respondent determined that the taxpayer was liable for gift tax for the year 1932 and asserted a deficiency. The taxpayer filed a petition with this Board alleging error in that determination, and he also raised the specific issue in the proceeding before the Board with respect to his right to receive in 1932 the specific exemption of $50,000 provided by section 505 (a) (1). The taxpayer raised the issue in his petition as an alternative issue, in the event that the Board should determine that gifts had been made which were subject to gift tax. The taxpayer had filed a gift tax return for the year 1934 in which he had claimed the specific exemption of $50,000 for that year, and the Commissioner urged that he should be held to the election which he made in filing his 1934 gift tax return. The Board held that the petitioner was entitled to the $50,000 specific exemption in the year 1932 and stated as follows:

It is doubtful whether petitioner made such an “election” in claiming the specific exemption in the year 1934 that it cannot now be claimed in the year 1932. Generally, the doctrine of election applies only where there are two or more remedies, all existing at the time of election, and which are inconsistent with each other. If the remedies are not cumulative the choice of one makes all others unavailable. But we have no such situation here. Our first question is whether or not petitioner is subject to a gift tax for the year 1932. We have held that he is. Then, says petitioner, he is entitled to the $50,000 specific exemption allowed by section 505 (a) (1) of the Revenue Act of 1932. Since the act specifically grants him the exemption, and since, in our opinion, he has not heretofore “elected” to claim it in some other year, we hold that in recomputing the deficiency for 1932 the specific exemption of $50,000 should be allowed.

The Richardson case is distinguishable from the present case, but the above reasoning is applicable here. When petitioner received the notice of deficiency in gift tax for the year 1933 and when he filed a petition with this Board to review the Commissioner’s determination, he then had a choice either of claiming the full benefit of section 505 (a) (1) or only a part of the benefit with respect to his gift tax for the year 1933. He also had the right either to accept the respondent’s determination as to his gift tax liability and pay the deficiency of $4,108.17, or to file a petition with this Board to have his gift tax liability redetermined. Petitioner chose the latter course. That choice, however, did not exclude the possibility of seeking to have less of the specific exemption deduction applied than the $38,000 which respondent had applied in determining the gift tax deficiency. There was nothing inconsistent with petitioner’s claiming before the Board that there was no deficiency in gift tax liability and at the same time claiming, in the alternative, that if the main question should be decided against him he should nevertheless be allowed less than $38,000 as an exemption under section 505 (a) (1) in the computation of the gift tax for the year 1933. Petitioner, by acquiescing in respondent’s allowance of the exemption of $38,000 for the year 1933 in the proceeding before this Board, modified his original election to deduct only $11,850, the amount claimed in the gift tax return for 1933. Petitioner can not now, with good grace, say that he elected to receive less than the $38,000 which was allowed him for 1933. It is immaterial that petitioner filed a protest with the Commissioner in 1936 against disallowance of a specific exemption deduction for the year 1935. After petitioner had tried his case before this Board with respect to his gift tax liability for 1933 without raising any issue with respect to the amount of the exemption deduction to be allowed for 1933, it was not incumbent upon the Commissioner to change his final determination of gift tax liability for the year 1933 merely because a claim for a further exemption deduction was made in the gift tax return for 1935, which on its face was not an allowable claim. Also, it is entirely outside the scope of the Board’s jurisdiction to give any consideration whatever to any offers in settlement which the petitioner may have made to the Commissioner for gift tax for the year 1933 outside the proceeding before the Board. We have reference to a statement in petitioner’s brief that he made an offer to the Commissioner to pay a larger gift tax for 1933 than the amount determined by the Commissioner for that year.

On this issue respondent is sustained. Petitioner has received aggregate specific exemption deductions in the sum of $50,000 for the years 1932 and 1933 and he is not entitled to any further exemption in the year 1935.

Issue 0. — Petitioner made gifts to 13 persons on October 15, 1935, of various amounts of stock in 3 corporations, one of which was the Nevada-California Electric Corporation. In the Federal gift tax return for 1935 petitioner reported each group of gifts under the name of each donee, reported the value of each block of stock, and since the value of the several blocks of stock given to each individual aggregated a total value of more than $5,000, petitioner claimed and received aggregate exemptions of $65,000 from gift tax under section 504 (b) of the Revenue Act of 1932. Respondent determined that the value of the shares of Nevada-California Electric preferred stock given to each donee was an amount equal to the number of shares comprising each gift multiplied by the unit value of $51 a share. Petitioner reported the value of the preferred stock given to each donee by multiplying the number of shares in each gift by a value of $50 per unit, which he believed was the market price of the stock in over the counter transactions in Denver on the date of the gifts. Respondent found that there had been a transaction in this stock on the date of gift at a price of $51 a share and he determined that such amount was the value per unit of the stock and increased the value thereof for the purpose of computing the tax. There was a sale of 50 shares of the preferred stock on the New York Curb Exchange on the date of gift at $51 a share. The evidence also shows that there was a sale in Denver on October 15,1935, of 50 shares for $51.17.

In this issue the only question for determination is the value, for the purpose of computing petitioner’s gift tax liability for the year 1935, of the gifts of the Nevada-California Electric Corporation preferred stock at the date of the gifts. The statute provides that “If the gift is made in property, the value thereof at the date of the gift shall be considered the amount of the gift.” Sec. 506, Revenue Act of 1932. The parties appear to agree that value, as used in the statute, means, “fair market value,” and for the purposes of the opinion it is assumed that the value to be determined is the fair market value on the date of the gifts.

At the outset there appears to be a question as to what property is to be valued. Petitioner contends that the property to be valued is a block of 10,000 shares of stock. Respondent contends that the standard prescribed by section 506 requires that the property to be valued is the property involved in each gift to each of the IB donees. Respondent contends that the value to be determined as of the date of the gifts is not the value of a block of 10,000 shares of the preferred stock, but the value of the number of shares given to each donee. Petitioner made 13 separate gifts of the preferred stock as follows: 1 gift of 2,500 shares; 2 gifts of 1,250 shares; 4 gifts of 1,000 shares; 2 gifts of 300 shares; and 4 gifts of 100 shares. The aggregate number of shares of tlie preferred stock given away by petitioner on October 15, 1935, is 10,000 shares, but, obviously, petitioner did not give a block of 10,000 shares to one donee. In this situation respondent submits that petitioner must fail in his contentions in that he has not attempted to show the value of the stock comprising each separate gift on any other basis than on the basis of a gift of a block of 10,000 shares. Respondent contends that petitioner has failed to overcome the presumption of correctness of respondent’s determination.

Petitioner contends that the value of 10,000 shares of the preferred stock should be determined by multiplying the 10,000 shares by the unit price of $40 per share. Petitioner concedes that there were sales, on the date of the gifts, of 50 shares of the preferred stock at $51 per share. However, petitioner contends that the fair market value of 10,000 shares is much less per unit than the fair market value per unit of 50 shares. At the hearing counsel for respondent clearly indicated that it was his theory that each gift should be treated separately and that the value of each gift should be determined by considering the number of shares of stock involved in each gift, only. However, petitioner proceeded upon the theory that the value to be proved was the value of a block of 10,000 shares. The question calling for an opinion as to value, directed to each one of petitioner’s expert witnesses was: “What, in your opinion, would be the fair market value of a block of 10,000 shares of the preferred stock of the Nevada-California Electric Corporation on October 15,1935, as between a willing buyer and a willing seller ? Please leave out any question of a distress sale or a compulsory purchase.” Petitioner did not offer evidence as to the fair market value per unit of a block of 2,500 shares, or 1,250 shares, or 1,000 shares, or 300 shares, or 100 shares. Petitioner contends that, since 10,000 shares were given away on the same day and since the gift tax is assessed against the donor, the value to be determined in this case is the value of the entire block given away by petitioner. Proceeding upon this theory, petitioner’s expert witnesses, who were qualified to express opinions as to value, were asked to give their respective opinions of the fair market value of a block of 10,000 shares of the particular preferred stock on the date of the gifts. Of the four opinions expressed, two witnesses expressed the opinion that the value of the block of 10,000 shares was $40 per unit. One witness was of the opinion that the large block had a value computed at a unit price of $41 a share, and one witness was of the opinion that the value of the large block of stock was an amount computed on a unit value of $38 a share. Upon the entire record petitioner asks the Board to determine that the value of a block of 10,000 shares is $400,000 computed at a unit price of not more than $40 per share.

Section 506 states that the value of the property constituting a gift shall be considered the value of the gift. In our opinion the statute requires that first each gift of property is to be valued separately. Then, the separate values are to be taken together in a total amount and the statutory exclusions and specific exemption deduction, allowed by sections 504 and 505, are to be subtracted to arrive at the computation of “net gifts” made in the taxable year. The underlying theory of the gift tax statute appears to be to impose a tax “upon the transfer during such taxable year by any individual, * * * of property by gift.” Sec. 501. It is the .transfer of property by gift which is taxed. Therefore, at the outset, petitioner errs in his conception of the question in this case when he states that the question to- be determined is the value of a block of 10,000 shares of the preferred stock. While petitioner may validly advance a theory that the value of each lot of stock in blocks of 2,500 shares, 1,250 shares, 1,000 shares, 300 shares, and 100 shares may be affected by the fact that all gifts made on the same day aggregated 10,000 shares, or that the value of each gift of a comparatively small block of shares was less than the value indicated by market price on the date of gift because on the same date 12 other gifts of blocks of the same stock were made, such circumstance does not alter the question to be determined under the pertinent statute. The property to be valued, under section 506, is the property constituting the gift. Here there were 13 gifts. Petitioner’s premise and theory have the effect, in our opinion, of asking us to substitute a different property for the property which was in fact the property in each gift. It might be that the value of a block of 10,000 shares is the same as the aggregate of the values of each of the 13 gifts, but the standard adopted in the statute requires that the value of the property given shall be considered the amount of the gift, and we understand this to mean that each gift is to be valued.

The problem presented is unusual because the property constituting each gift is the same, stock in the same company. It is important, however, to keep clear the object of the present inquiry, the accurate nature of the question, because petitioner rests his argument entirely upon the presumption that “blockage” is involved. Respondent argues that petitioner’s presumptions are as follows and that they are not sound: That value is to be determined oil the basis that 10,000 shares are to be offered for sale; that no one could find a willing buyer for a block of 10,000 shares on the basic date; that on account of 10,000 shares en bloo being involved, value is to be determined by what a dealer would pay for it wholesale for resale to eñe general public at a profit; and that because a block of 10,000 shares is allegedly involved the market price on the basic date is not evidence of value because of a further presumption that an increase in the supply of the stock in such a large quantity would depress the existing market price.

Upon due consideration of all of the evidence, including the opinion evidence of the expert witnesses called by petitioner, it has been found as fact that each gift of the preferred stock had a value of $51 per unit of the property multiplied by the total units involved in each gift. >

The evidence relating to fair market value of the preferred stock •of the Nevada-Califomia Electric Corporation consists of the annual financial reports of the company for the years 1930 to 1935, inclusive; monthly combined comparative statements of earnings and expenses for the first 8 months of 1935, including the month of August ; statement of consolidated net income for 1930 to 1935, inclusive, as shown on Federal income tax returns; dividends and earnings per share of the preferred stock in question and of comparable 7 percent preferred stocks of similar utility companies for the years 1930 to 1935, inclusive; lists of transactions in the preferred stock in question in Denver throughout the year 1935 in which 3 Denver over the •counter firms participated; a list of transactions in the particular stock on the New York Curb Exchange for 60 days before and after October 15, 1935, the date of the gifts; a table classifying stockholders of the preferred stock by number of shares held and by residence (respondent’s Exhibit H, admitted in evidence); the testimony of petitioner and three expert witnesses called by petitioner; and the testimony of one expert witness called by respondent.

Consideration has been given to all of the evidence, including the testimony of petitioner and petitioner’s expert witnesses. The question relating to the value of the stock constituting the gifts is a question of fact. Heiner v. Crosby, 24 Fed. (2d) 191. The value to be determined is the “fair market value” of the property constituting each gift. “Fair market value” has been defined as the price which would probably be agreed upon by a willing seller and a willing buyer, neither being under any compulsion, and both having reasonable knowledge of the facts. John J. Newberry, 39 B. T. A. 1123, 1129. Actual sales of the property to be valued are evidentiary of fair market value. Under certain facts and circumstances, actual sales made between willing parties are reliable evidence of value*. Cecil H. Gamble, Executor, 33 B. T. A. 94; affd., 101 Fed. (2d) 565; certiorari denied, 306 U. S. 664; Estate of Leonard B. McKitterick, 42 B. T. A. 130, 136; John J. Newberry, supra. On the other hand,, actual sales, although evidentiary, are not always conclusive, and under certain proven situations and circumstances do not signify fair market value. The existence of exceptional circumstances which deprive actual sales of evidentiary worth will not be presumed but must be proved. Whether or not the fair market value of a block of stock is in reality evidenced by the value of a share of the same stock in a small block or a smaller block in a transaction on the market between willing parties to the sale is always a matter of evidence in each case, and “If the value of a given number of shares is influenced by the size of the block, this is a matter of evidence and not of doctrinaire assumption.” Safe Deposit & Trust Co. of Baltimore, Executor, 35 B. T. A. 259, 263; affd., 95 Fed. (2d) 806. -Tn some cases it is a paramount circumstance that the stock to be valued consists of a large block and the valuation of a large number of shares involves consideration of factors different than those applicable to the unit market price resulting from transactions on the market in small lots of the stock. Cf. Safe Deposit & Trust Co. of Baltimore, Executor, supra. In other cases the value of a large block of stock has been based upon the market price of small share lots thereof, notwithstanding the testimony of experts that such a market price is not evidence of fair market value. Cecil H. Gamble, Executor, supra; Roth v. Wardell, 77 Fed. (2d) 124; Union National Bank of Pittsburgh v. Driscoll, 32 Fed. Supp. 661; Richardson v. Helvering, 80 Fed. (2d) 548. In each case the question of fact, fair market value, is to be determined' upon full consideration of all of the evidence in the case.

The Nevada-California Electric Corporation and its subsidiary companies, prior to the year 1985, had gradually increased gross operating earnings and surplus earned each year, so that at the end of 1934 and 1935 surplus after reserves and after dividends on the T percent preferred stock was $2,157,553, and $3,092,139, respectively*. Gross operating earnings for every year from 1929 to 1935, inclusive, exceeded $5,000,000 except in 1933, when gross earnings were approximately $4,782,000. In all of these years the Nevada-California Electric Corporation and its subsidiaries realized net operating profits each year in excess of $2,000,000. The parties introduced in evidence as joint exhibits the corporation’s annual reports for the years 1930 through 1935, which give a comparative consolidated statement of income and profit and loss which includes the year 1929, so that the evidence includes financial reports covering six years prior to the year 1935, as well as for the year 1935 and for the first 8 months of 1935. A reading of these annual reports leaves a strong impression that the Nevada-California Electric Corporation was exceedingly well managed throughout the entire 7-year period, which included .a period of severe economic depression, 1929 through 1933, as well as periods of shortage of water during drought periods. From 1932 through 1934 the total amount of outstanding bonds in the hands of the public was reduced each year. In 1934 the debenture debt was reduced by $1,857,200. It is true that the highest figure for gross ■earnings was reached in 1929 at $5,674,700 and that gross earnings fell off gradually to $4,782,608 in 1933, increased in 1934 to $5,209,151, but during this period the management practiced various economies, extending the area of its business, gained new business, successfully carried on a “load-building” campaign, and reported to its stockholders each year that it was in a “sound financial position.” It maintained “ample cash” reserves and developed a “simplified” financial structure. While 1933 had been a year of lowest earnings since 1925 and. dividends on preferred stock had been reduced to $4 a share in that year, the corporation recovered its average position in 1934 and resumed payment of $7 dividends on the preferred stock. The corporation had paid dividends on the 7 percent preferred stock from 1929 through 1934 as follows:

ways regarded the 7 percent pre-Petitioner testified that he had a' ferred stock in the Nevada-California Electric Corporation as a sound investment.

The Nevada-California Electric Corporation and its subsidiaries carried on business and served agriculture, mining, and various industries in Nevada and California. Its directors reside in Denver .and Pasadena. Its general office is in Denver and its operating headquarters are in Riverside, California. Out of 1,163 stockholders, 995 reside in California and Nevada. It is not unnatural that the market for its stock is largely in Denver, and the evidence relating to over the counter transactions is not diminished at all by the fact that they are transactions in Denver.

The parties introduced as a joint exhibit lists of transactions in the year 1935 in Denver, over the counter by three Denver firms, and this evidence, while incomplete as to all transactions in the Denver market during the year 1935, is important. It shows that, as far as it goes, the purchases and sales, as reported by the exhibit, involved a total of 10,946 shares of the preferred stock. One of petitioner’s witnesses testified that according to the records of the secretary of the corporation a total of only 6,200 shares of the preferred stock were transferred on the books of the corporation in. 1935. The record does not reconcile the apparent discrepancy. However, even on the testimony of this witness there was a large increase in the turnover of the preferred stock in 1935 as compared with 1934, when, according to the witness’s information received from the secretary of the corporation 3,300 shares were transferred on the books. According to the corporation’s records, as reported by this witness (the records not being offered in evidence) transactions in the preferred stock were almost twice as great in 1935 as in 1934.

The market prices of the preferred stock in Denver in over the counter transactions increased gradually and steadily from January through December of 1935. Industrial conditions were on the upgrade throughout the country in 1935, market prices of securities advanced generally from April to the end of 1935, and they advanced in October of 1935. During the month of October the market prices for the preferred stock in Denver ranged from a low of 46.25 on October 2 to a high of 55.50 on October 29. The purchases and sales reported in Denver during the month of October were for small lots of stock of 5 shares, 10 shares, 25 shares, 30 shares, 50 shares, 88 shares. The transactions as reported for the entire month of October involved an aggregate of 579 shares. The market prices gradually rose during the month. On October 1, 18 shares were bought for $46.50 a share; on October 2, 88 shares were sold for $46.25 a share; on October 4, 88 shares were sold for $46.50 a share; on October 15, 50 shares were bought for $51.17 a share; on October 18, 50 shares were bought for $51 a share; on October 19, 51 shares were sold for $53 a share. Market prices for the preferred stock increased in every month prior to October, as the table in the findings of fact shows. Prices held up under sales of blocks of 100, 500, and 1,000 shares. Thus on September 17, 10 shares sold at 47; on September 20, 100 shares sold at 48; and on October 2, 5 shares sold at 48. In another period, in the month of January, on January 3, 800 shares were bought at 39; on January 26, 550 shares were bought at 39; on February 1, 1,000 shares were sold at 40.50; on February 4, 100 shares were sold at 43. In another period, after October 15, in November, prices gradually increased and purchases and sales of 100 and 200 share lots did not drive the market prices down. For example: November 1, bought 200 shares at 59.50; November 2, sold 100 shares at 59.75; November 6, sold 100 shares at 63.50; November 26, bought 100 shares at 64; November 27, sold 202 shares at 62; November 29, bought 100 shares at 64, sold 100 shares at 66.50. Considering the evidence as to purchases and sales in over the counter transactions in Denver in the months preceding and succeeding October of 1935 we find that the evidence before us shows transactions involving 879 shares of the preferred stock in September, and 1,749 shares in November. In November, on the New York Curb Exchange, in the week ending November 1 there were 100 shares sold, and in the week ending November 8 there were 100 shares sold. During the month of December of 1935, according to the evidence, purchases and sales of the preferred stock in Denver involved 1,719 shares at prices ranging from 64 to 70, with a gradual rise. There were transactions involving blocks of 100, 150, 250, 500 shares.

The foregoing clearly shows, in our opinion, that there was a fair market for the preferred stock. In our opinion the market price on the date of the gifts is the best evidence of the value per unit of the stock comprising each gift. The evidence does not support a finding that the value of the stock given to each donee in lots of 100, 300,1,000, 1,250, and 2,500 shares was less than $51 a share.

All of the witnesses for petitioner, including the petitioner, were asked to express an opinion as to the fair market value of a block of 10,000 shares on the basic date. Each was of the opinion that the size of the block would bring the unit value down to a price below the current market price to $38 a share, or $40, or $41 a share. The testimony of petitioner and of his three expert witnesses has been carefully considered in an effort to give to that evidence such weight as it deserves. Their testimony has been considered together with the general evidence relating to the financial condition of the Nevada-California Electric Corporation, its record of earnings, surplus, and dividends, and the evidence relating to the over the counter market in Denver in 1935 in the preferred stock. In our opinion the testimony of the petitioner’s witnesses shows that they did not give sufficient consideration to the extent and volume of trading in the stock in the Denver market, and the trends of the market prices during 1935 and during the period shortly before and after the date of the gifts. All of petitioner’s [witnesses were concerned with the problem of valuing a block of 10,000 [shares rather than the property involved in each gift. In our opinion, jail of petitioner’s witnesses assumed a greater possible shortage of [buyers and a more inactive or “thin” market than the general evidence indicates.

I Eespondent, on brief, points out that petitioner assumes that the walue of the gifts in question is to be determined on the basis of the effect on market prices of offering a block of 10,000 shares for sale; and [upon the assumption that such an offering would not bring forth Buyers at the market price prevailing on the date of the gifts. Or, In the language of respondent:

I The objection of the respondent is not to the operative results of the law of lupply and demand but to its application here upon an assumption of a non-Ixistent. fact, an unbalancing of the existing supply and demand by the addition If the property to be valued to the existing supply without assuming an equal Increase in the demand, and a speculation as to the operative effect of such Bssumed fact on the market price.
Regardless of how the theory of the petitioner may be camouflaged, it results in the application of the standard of a forced sale. Its adoption would substitute such a standard for the long-established standard of sale prices of similar property in a free and open market where such prices are in evidence or its equivalent, the value based on the assumption of a willing buyer and a willing seller evidenced by the price at which comparable property is being actually bought and sold in a free and open market.

Respondent points out further that petitioner assumes that value is to be determined upon the basis of for what amount a syndicate would purchase such a block for resale at a profit, and that all of petitioner’s assumptions lead to the contention that the standard of value at law, contemplated in section 506, is a standard which shifts according to the size of a block of stock, where the property involved is stock; that value may be evidenced by market price (that which a willing buyer and a willing seller will agree to), where the block of stock is small, but that another standard of value is to be applied where the block of stock is larger than the blocks involved in actual market transactions making the market price what it is. Respondent submits that the standard of value contemplated by the statute does not admit of classification dependent upon whether or not the size of the block of stock to be valued is the same as the size of the lots or the blocks of stock involved in the actual market transactions giving rise to market price.

We believe petitioner’s theory places too much reliance upon that which is conjectural and speculative. The evidence shows that there was a market in Denver for the stock in question and that there was extensive market activity in 1935, and in the month of October, and in the 30-day periods before and after the date of the gifts. The stock in question was widely held by more than 1,000 stockholders. Market prices steadily advanced prior to October, during October, and thereafter to the end of 1935. (Cf. Helvering v. Safe Deposit & Trust Co. of Baltimore, supra, where market prices steadily declined after the date of the gifts in question in that case). The earnings of the Nevada-California Electric Corporation were increasing. At $51 a share, $7 dividends per year represent a yield of 13.72 percent. There is no evidence that the market in the stock was not a fair market or that market prices were not fair. We believe it is a rather speculative assumption that if any one or all of the donees of the gifts in question looked to the market at the date of the gifts they would not find willing buyers for the stock involved in each gift, or that if buyers appeared they would not be willing to enter into transactions at market prices. It may as well be assumed that the market price would go up rather than go down if offerings of the property involved in each gift had been made on the date of the gift.

The property involved in each gift in this case was property which was regularly purchased and sold in an established market. The standard oí value which, at law is to be applied in valuing the property in question is “fair market value.” Fair market value is evidenced here by established market price. The market price is not shown to have been a price resulting from transactions between any special classes of “willing sellers” and “willing buyers.” There is no evidence, or circumstance, in our opinion, which would require us to determine value on the basis of what a special class of buyers, syndicate managers, would agree to as the value of the stock in question, or to substitute a syndicate wholesale price for market price as the best evidence of value. Cf. Helvering v. Kendrick Coal & Dock Co., 72 Fed. (2d) 330, 333; Adams Express Co. v. Ohio State Auditor, 166 U. S. 185; Metropolitan Life Insurance Co. v. United States, 65 Ct. Cls. 149; United States v. New River Collieries Co., 262 U. S. 341. On the basis of all the evidence, we think the record supports the respondent’s determinations of the value of each gift.

Respondent called one expert witness. His testimony has been considered. He had made a study of market conditions, trends of market prices of comparable 7 percent preferred utility stocks, and other factors. However, in arriving at the conclusion that respondent’s determination of value is correct, little weight has been given to the testimony of respondent’s witness. His answers to many questions were confusing because of a failure to make clear in the record the distinction between his general theories and his opinion of the fair market value of the particular stock.

Petitioner concedes that respondent’s determination of the deficiency in gift tax for the year 1934 is correct. The conclusions reached herein support the deficiency in gift tax for the year 1935.

Reviewed by the Board.

Decision will he entered for the respondent.

       SEC. 505. DEDUCTIONS.
      In computing net gifts for any calendar year there shall be allowed as deductions:
      (a) Residents. — In the case of a citizen or resident—
      (1) Specific exemption. — An exemption of $50,000, less the aggregate of the amount® claimed and allowed as specific exemption for preceding calendar years.


author: Van Fossan :

text:
    Henry Martyn Baker, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99944.
    Promulgated March 19, 1941.

      Edward S. Bentley, Esq., for the petitioner.

      L. A. Spalding, Jr., Esq., for the respondent.

       § 1170. Custody and maintenance of children, and support of plaintiff in action for divorce or separation. Where an action for divorce or separation is brought by either husband or wife, the court, except as otherwise expressly prescribed by statute, must give, either in the final judgment, or by one or more orders, made from time to time before final judgment, such directions as justice requires, between the parties, for the custody, care, education, and maintenance of any of the children of the marriage, and where the action is brought by the wife, for the support of the plaintiff. The court, by order, upon the application of either party to the action, or any other person or party having the care, custody and control of said child or children pursuant to said final judgment or order, after due notice to the other, to be given in such manner as the court shall prescribe, at any time after final judgment, may annul, vary or modify such directions, or in case no such direction or directions shall have been made, amend it by inserting such direction or directions as justice requires for the custody, care, education and maintenance of any such child or children or for the support of the plaintiff in such final judgment or order or orders. But no such application shall be made by a defendant, or any other person or party having the care, custody and control of said infant or infants, unless leave to mate the same shall have been previously granted by the court by order made upon or without notice as the court in its discretion may deem proper after presentation to the court of satisfactory proof that justice requires that such an application should be entertained.

   OPINION.

Van Fossan :

The single issue for our determination is whether the income from the trust created by petitioner for his wife and child is taxable to him for the years 1934,1935, 1936, and 1937. No issue was made or proof adduced as to the specific amounts of money involved in the various payments herein referred to. It is assumed the parties are in agreement as to the segregation and application thereof.

Petitioner contends that the trust was a lump sum settlement of all claims of petitioner’s wife for maintenance and support and no obligation of petitioner was satisfied or discharged by payment of the income of the trust. He asserts that he realized no income from the payment of trust income to his wife, since he was relieved from all obligation to support her upon dissolution of their marriage. He urges that the assumption by his wife of the duty to support their son relieved him of that burden, so that the income of the trust which was payable for maintenance and support of the son'was not includible in his income, under the doctrine of Douglas v. Willcuts, 296 U. S. 1. He further contends that, since he paid a gift tax upon that portion of the trust attributable to the support of his son, the present position of respondent is not tenable.

Respondent argues that petitioner has not sustained the burden of showing, by clear and convincing proof, that he was discharged from all obligation to support his wife after the divorce. He maintains that the income of the trust used for the education, maintenance, and support of the son is includible in petitioner’s gross income, since it discharged petitioner’s obligation. Finally, he contends that the possibility of reverter which petitioner retained is sufficient to bring the accumulated income of the trust within the purview of section 167 (a) (1) of the Revenue Acts of 1934 and 1936.

Petitioner has cited many cases in his attempt to distinguish this proceeding from Helvering v. Leonard, 310 U. S. 80. In that case the Supreme Court had before it an “alimony trust” which had been approved and incorporated in a New York divorce decree. The husband who had created the trust guaranteed principal and interest of certain bonds which formed approximately two-thirds of the trust corpus. The court decided in favor of the Commissioner on two grounds — that the guaranty of the bonds constituted a continuing obligation of the taxpayer which was discharged fro tanto by payment of interest on those bonds to the trustee, and that the taxpayer had not “shown by ‘clear and convincing’ proof that the [divorce] court lacks the power to add to his personal obligations in any such circumstances.”

Petitioner contends that the present proceeding differs materially from the Leonard case in that here the state court did not incorporate the trust agreement in its decree of divorce. We do not believe that to be a valid distinction. Section 1170 of the New York Civil Practice Act provides that a court, in an action for divorce brought by the wife, may amend its final judgment by inserting in it such directions as justice requires for the custody, care, education, and maintenance of the children of the marriage or for the support of the wife. It has been held that the “effect of the statute [section 1110] is to write a reservation into every final judgment of divorce.” Fox v. Fox, 263 N. Y. 68; 188 N. E. 160. Thus the court retained as much power to revise its decree as did the divorce court in Helvering v. Leonard, supra. Furthermore, the interlocutory decree of divorce rendered in favor of petitioner’s wife stated that “the defendant has provided for the support and maintenance of the plaintiff and that no further provision need be made at this time? Although this is not an incorporation of the trust agreement in the divorce decree such as was present in the Leonard case the reference inferentially indicates approval of the agreement by the court. We believe the final clause of the quoted provision is significant.

The same arguments with regard to lack of power in the state court to change the trust instrument or the obligations of the taxpayer husband were made in Helvering v. Leonard, supra, as petitioner has urged here. Those contentions were not sufficient to persuade the Supreme Court in the Leonard case and do not convince us. We hold that the income from the trust payable to petitioner’s former wife for her maintenance and support was income to petitioner in the taxable years.

In his notice of deficiency respondent included in petitioner’s gross income for the taxable years the trust income which was used for the maintenance and support of his minor son. Respondent’s action in this respect was clearly correct. Helvering v. Schweitzer, 296 U. S. 551; Helvering v. Stokes, 296 U. S. 551.

Upon brief counsel for respondent argued that any income accumulated under terms of the trust is taxable to petitioner under section 167 (a) (1) of the Revenue Acts of 1934 and 1936. He contends that petitioner failed to divest himself of every right which might enable him to have the income of the trust distributed to him at some future date. He relies on Kaplan v. Commissioner, 66 Fed. (2d) 401; Mary Ryerson Frost, 38 B. T. A. 1402; and Everett D. Graff, 40 B. T. A. 920; affd., 117 Fed. (2d) 247. We think, however, that this case more closely resembles Christopher L. Ward, 40 B. T. A. 225, and Harrs McLean, 41 B. T. A. 565, and John P. Wilson, 42 B. T. A. 1260, in which we held that mere possibility of reverter was not sufficient to make accumulation of income taxable to the grantor under section 167 (a) (1). The possibility that the present trust might revert to petitioner is too remote for us to hold that its income is or may be held or accumulated for petitioner.

Altmaier v. Commissioner, 116 Fed. (2d) 162, is not contra. There the taxpayer created trusts the income of which was to be accumulated while he lived or until his wife died. If she should predecease him he was to receive the income for the rest of his life. The taxpayer and his wife were given the right to terminate the trust during his lifetime by joint action. The court held that the accumulations were within the scope of section 167. That case may be distinguished from the one before us, however, in that there the wife was not a substantial adverse interest, whereas here, by virtue of the divorce, the wife’s interest was substantially adverse. Furthermore, in the case before us the possibility that the trust corpus might revert to petitioner is much more remote. The facts in Everett D. Graff, supra, are like those in the Altmaier case and may be similarly distinguished.

We can not concern ourselves in the instant case with the fact that respondent determined a gift tax liability as to the son’s interest and collected a tax thereon. We are here considering solely petitioner’s income tax liability.

We hold that petitioner is taxable in each of the years before us on the trust income paid to the wife and upon that part of the trust income which was paid for the maintenance and support of the son. The amounts accumulated under the terms of the trust are not in-cludible in petitioner’s gross income for the taxable years.

Decision will be entered under Bule SO.


author: SteeNiíagen :

text:
    Morris Michel, Petitioner, v. Commissioner of Internal Revenue, Respondent. Max E. Weinstock, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 97311, 97312.
    Promulgated March 19, 1941.

      Morris ¿V. Friedland, Esq., for the petitioners.

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

SteeNiíagen :

The Commissioner’s notices of deficiency were based upon the determination that the value of the shares at the time of the gift was greater than the petitioners had reported. The original petitions assail the Commissioner’s valuation. Before the cases came on for hearing, the United States Supreme Court, on November 6, 1939, decided Sanford's Estate v. Commissioner, 308 U. S. 39, and on January 29, 1940, decided Helvering v. Hallock, 309 U. S. 106, and amended pleadings were filed. The primary issue when the cases were tried was whether, in view of the retained possibilities of reversion upon the death of the beneficiaries of the trusts, the petitioners had made gifts of the shares of stock placed in trust. After the cases were submitted' and the briefs filed, the respondent filed a motion (to which petitioners would not consent) to reopen for additional evidence thought to be necessary to conform to the Board’s decision of May 28, 1940, in Marrs McLean, 41 B. T. A. 1266. The motion was granted. The parties then filed a stipulation of further evidence. The cases are now under submission upon the entire record.

1. The decisions in Sanford's Estate v. Commissioner, supra, and Helvering v. Hallock, supra, leave no doubt that the reservation by the donors of the reversion in the event the beneficiaries die is sufficient to preclude recognition of gifts and the imposition of gift tax. Lorraine Manville Gould Dresselhuys, 40 B. T. A. 30; William T. Walker, 40 B. T. A. 762; dismissed, 111 Fed. (2d) 646; Emily Trevor, 40 B. T. A. 1241; Marrs McLean, supra; Margaret White Marshall, 43 B. T. A. 99. Cf. Commissioner v. Flanders, 111 Fed. (2d) 117; Estate of Homer G. Day, 41 B. T. A. 580. The Commissioner was in error in determining any gift tax on the transfer of the securities' in trust, and the original issue as to the correct value of the shares so transferred is moot. This disposes completely of the issues framed by the pleadings.

2. There has been no amendment of the pleadings to claim a gift tax upon the transfer by the petitioners of something other than the shares of stock of the corporation. Upon the amended pleadings filed at the hearing, the cases were tried, and they raised the question of the propriety, as a matter of law, of taxing the transfer of the shares and the propriety, as a matter of fact, of the Commissioner’s valuation. The Commissioner’s “Motion to Reopen” is:

that the cases be restored to the calendar in order to afford the parties an opportunity to present additional evidence, either by stipulation or by deposition or in open hearing, bearing upon the discount factors if any which should be applied to the values otherwise determined for the stock which petitioners transferred in trust in 1935 and 1937, by reason of the reservation of possibilities of reverter to the petitioners.

It was stated that counsel for petitioners “does not consent to the reopening of the cases.” A stipulation was filed of facts constituting additional evidence. It contains: 1. The dates of birth of petitioners and the beneficiaries of the trusts.

2. If it be held and determined (contrary to petitioners’ contentions) that the transfers in trust made by petitioners during 1935 and 1937 as otherwise shown by the record herein, or any of said transfers in trust, constituted completed gifts, but consisted (contrary to the Commissioner’s determination) of something less than the full value of the securities transferred, then, based upon recognized expectancy and mortality tables and using 4% as the proper income or discount factor, it is agreed as follows:

Subparagraphs (a) to (q) purport to set forth factors for mathematical computations. Paragraph (c) is:

(c) If it should become material in these proceedings (as maintained by the petitioners) to determine the value of one or more estates or interests measured in each instance by the life of one person, or to determine the present worth of a remainder or reversionary interest at the death of one person, then such determinations may be made in accordance with Article 19, and Table A thereof, of Regulations 79, relating to the Federal Gift Tax, which Article and Table are incorporated herein by reference.

Article 19 of Regulations 79 deals with the valuation of property. It covers eight pages and contains nine subdivisions, of which only one paragraph of subdivision 7 appears to be within possible range. The parties reserve the right to contest the Board’s decisions. No briefs have been filed since the stipulation.

Such a record will not support a decision as to whether a gift of other than the shares, e. g., a life estate, as intimated, was made by either of the petitioners, nor will it support a determination of the value of such a different property if it could be said that one was transferred. No such issue had been framed by the pleadings affd even if the motion to' reopen could be treated as a pleading, the evidence stipulated is insufficient to permit of a decision as to the nature or value of what was given.

The respondent, in seeking to avoid the full effect of the Sanford decision, is intimating by his motion that gifts were made by petitioners of an interest or estate in the shares other than the fee. To raise this question he must plead it affirmatively, for it is not fairly implicit in the pleadings. So pleading, he must prove the contention. It is not enough that he be permitted to place in the record evidence “bearing upon the discount factors if any”, etc. Nowhere is there an allegation that these petitioners made gifts other than the transfers of the securities in trust; and it is far from clear, from the motion and the stipulation, as to what in fact the Commissioner now contends was the gift or gifts which the petitioners made or what the value of such gifts, if any, was. Indeed, it is difficult to kriow what significance some of the stipulated evidence is intended to have. Clearly the petitioners may not be regarded as making a gift of the possibility of reverter; and yet the stipulation proffers alleged methods of determining the value of the retained possibility of reverter. If it be supposed that by this method a mathematically computed value of the .possibility of reverter is to be subtracted from a determined value of the shares, and the remainder regarded as the value of the life estate given, it can only be said that the determination of value by such a hypothetical formula is alone, not sufficient to support a decision. In1 any event, none of the 1935 trusts gives an unabridgable life estate. The donors’ renunciation as to these trusts was not'made until 1936, cf. Emery May Holden Norweb, 41 B. T. A. 119, a. year which is not in issue in these cases. So the only transfers to which the intimated shift could apply would be those of Michel for his two children in 1937.

It results that the Commissioner has failed to plead or prove what is necessarily an affirmative contention, and for even stronger reason than in Marrs McLean, supra, the deficiency may not be modified to reflect the possible value of the alleged gift of a life estate.

Decisions will be entered for the petitioners.