author: HaRROn:

text:
    East Coast Motors, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 74227.
    Promulgated December 23, 1936.

      W. H. Harris, Esq., for the petitioner.

      O. W. Bwecher, Esq., for the respondent.
   OPINION.

HaRROn:

In support of its allegation that the respondent erred in refusing its request to change the accounting period from a fiscal to a calendar year basis, petitioner contends that after January 31, 1931, it became a new taxable entity and that it consequently had the right to elect to compute its net income and file its tax returns on the basis of a calendar year. It is pointed out that if this contention is sustained the issue disappears with respect to deduction from gross income of bonuses accrued to employees at the end of the fiscal year.

Petitioner is a corporation, organized under the laws of the State of Florida. It is an elementary principle that a corporation is a legal entity separate from its stockholders. About January 31, 1931, W. A. Huguley invested money in the stock of the petitioner corporation and became its new president. He was undertaking a new business venture. But the corporation was not entering into any new business, nor do we find from the evidence that it became a new corporation or a new taxable entity. No change was made in the corporate name, charter, bylaws or business of the corporation on or after January 31, 1931. The- sale of part of its assets to retiring stockholders resulted in nothing more-than a reduction of its capital assets and a change in its stockholders. The argument of petitioner advances a theory that the entire transaction liquidated the petitioner corporation and that a new corporation came into being, in substance, although without going through the usual formal procedure. However, we are unable to find in the minutes of the corporation submitted any evidence of intent of the retiring stockholders to effect a complete liquidation and the various steps followed throughout the transaction do not support this theory. There is no evidence to show' exactly what Huguley received for his payment of $19,451 to the retiring stockholders, but such payment appears to have been made for the 19,252 shares of stock still outstanding rather than for an inventory.of assets. There was no bill of sale from the corporation to Huguley to evidence his purchase of the remaining assets of the corporation in liquidation in support of his contention to that effect. Furthermore, petitioner corporation did not resort to the procedure provided in article 391 of Regulations 74 for the filing of a final income tax return on liquidation of a corporation.

The petitioner’s argument is directed at length to the theory that if we look “through form to substance” we will reach the conclusion that a new corporation or a new taxable entity resulted frojn negotiations set forth in the findings of fact. 'After reviewing the evidence submitted and the authorities cited by the petitioner to sustain the theory advanced, we find that neither this argument nor the authorities cited are persuasive in the instant proceeding. To agree with petitioner’s theory would be to assume the existence of facts which the evidence does not show to exist. From review of the evidence submitted, we find that the petitioner corporation continued to be the same corporation and the same taxable entity after January 31, 1931.

There is a further question of whether respondent erred in refusing petitioner’s request to change its accounting period from a fiscal to a calendar year basis. Petitioner had filed its returns on a fiscal year basis for several years prior to the taxable year. It was, therefore, required to obtain consent of respondent to change its accounting period by the provisions of section 46 of the Revenue Act of 1928. Article 361 of Regulations 74 sets forth the procedure to be followed by a taxpayer in obtaining permission to change its accounting period. Petitioner filed its request February 9, 1931, which was several days after the time prescribed by the pertinent regulation. Since the petitioner failed to comply with the regulations of the Commissioner, we find that respondent was not in error in refusing, at the time, permission to change the accounting period. See Trorlicht-Duncker Carpet Co., 22 B. T. A. 466. The instant proceeding is distinguishable from Stevens Manufacturing Co., 1 B. T. A. 610 and Brooklyn City Railroad Co., 27 B. T. A. 77, cited by the petitioner. Furthermore, there is no evidence to show that the annual accounting period (fiscal year) employed by the petitioner to compute net income did not clearly reflect income within the provisions of section 41 of the Revenue Act of 1928, The fact that certain bonus agreements with employees were for the calendar year is not material to the contention that it was necessary for petitioner to change its accounting period to a calendar year basis.

There remains the further question of whether or not the petitioner is entitled to deduct from gross income the amount of $5,662.61. This sum petitioner accrued to its surplus account as bonuses payable to employees at the end of the fiscal year. We hold that respondent is not in error in disallowing this deduction for the reason that the amount of bonuses payable, to employees could not be determined at the close of the fiscal year and because no liability to pay the bonuses arose during the taxable year. The written bonus agreement with Collins and the oral bonus agreements with other employees were for a term of eleven months from February 2, 1931. The payment of bonuses -was made contingent upon the existence of “net profits, if any” at the end of the calendar year 1931. Collins was to. receive 25 percent of the net profits after other employees’ bonuses had been paid, but no evidence was introduced to show what percentage of net profits was to be paid to individual employees. Consequently the method of computing the individual amounts of bonuses accrued to certain employees totaling $5,662.61 as of .July 31, 1931, is not clear. There was no liability in the petitioner to pay bonuses to employees until net profits existed as of the close of the calendar year 1931. The rule has been established that “except as otherwise provided by statute, a liability does not accrue so long as it remains contingent.” See Brown v. Helvering, 291 U. S. 193. See also Kaufmann Department Stores, Inc., 11 B. T. A. 949; affirmed in Kaufmann Department Stores v. Commissioner, 34 Fed. (2d) 257; Southland Coal Co., 16 B. T. A. 50; Block & Kohner Mercantile Co. v. United States, 37 Fed. (2d) 877.

Judgment will ~be entered for the respondent.


source: Caselaw Access Project

author: Tyson:

license: Public Domain

text:
    New Orleans Tractor Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 80018.
    Promulgated December 29, 1936.

      Thomas A. Williams, Esq., for the petitioner.

      L. W. Oreason, Esq., for the respondent.
   OPINION.

Tyson:

This proceeding involves income tax deficiencies in the amounts of $426 for the year 1930 and $291.16 for the year 1931.

Petitioner assigns as error, for both years, the respondent’s disallowance of deductions of $3,550 for 1930 and $2,292 for 1931 as commissions paid to R. H. Brothers, based upon respondent’s determination that such commissions did not constitute ordinary and necessary business expenses.

Petitioner is a Louisiana corporation, having its principal office in the city of New Orleans. During the years in controversy it was engaged in the business of selling tractors and road machines. It had an exclusive agency agreement with the Caterpillar Tractor Co. of Peoria, Illinois, to sell that company’s products in a territory embracing approximately the southern half of the State of Louisiana, and the compensation to be received by it was 20 percent on the list prices of tractors sold by it. Petitioner regularly employed two or three salesmen, each of whom was paid a fixed salary, expenses, and 1 percent commission on sales, which amounted to something in excess of the 10 percent paid Brothers as commissions. Petitioner’s entire exclusive territory was divided between those salesmen.

In January of 1930, and after W. H. George, petitioner’s president, and Brothers had been brought together by one Easton of the Easton Tractor & Equipment Co., petitioner, through its president, George, made an oral agreement with Brothers to pay him a commission of 10 percent of the list price, f. o. b. factory, on all Caterpillar tractors sold by him on behalf of petitioner to the Louisiana State- Highway Commission, and this commission was reasonable in amount. Brothers, who lived in Baton Rouge, where the Louisiana State Highway Commission was located, was required under the agreement to pay his own expenses and he was employed for the sole purpose of making sales to the highway commission, and any other department of the state government. Brothers was employed in the same capacity by the Easton Tractor & Equipment Co., whose exclusive agency for Caterpillar tractors embraced the northern half of the State of Louisiana, and he also represented, as salesman, several other concerns engaged in selling road machinery or other merchandise to the highway commission and other departments of the Louisiana State Government.

The reasons for petitioner’s employment of Brothers were that other concerns were making sales through Brothers to the Louisiana State Highway Commission, whereas, petitioner’s predecessor agent had been unable to make any sales; that Brothers’ close, friendly connection with- the state administration and the following he had built up around the highway department enabled him to make sales that others could not make to the highway commission.

During the years 1930 and 1931 Brothers made a number of sales of tractors on behalf of petitioner to the Louisiana State Highway Commission, to which commission such tractors were billed at the regular list price plus freight, just as was done in the case of each other customer. The total list price of such sales of tractors amounted to $34,000 during 1930 and $24,420 during 1931, or a total of $58,420 for the two years here in controversy. At various times during those two years Brothers drew drafts on petitioner, which were honored by petitioner’s checks payable to the batiks through which the drafts were presented. Prior to the time any sales were made by Brothers on behalf of petitioner, the latter, in.February 1930, honored his draft for $250 as advanced commissions and also, sometime in the spring of 1930, in order to enable Brothers to obtain a loan for $2,000, W. H. George, petitioner’s president, endorsed Brothers’ 60-day note, in that amount, payable to the Whitney National Bank. The $2,000 so obtained by Brothers was considered and treated by petitioner as advanced commissions paid on sales of tractors to be made by Brothers. The note was renewed several times and finally paid by petitioner on November 17, 1930, at which time the commissions due and credited to Brothers’ account on sales of tractors made to the Louisiana State Highway Commission on behalf of petitioner equaled slightly more than the face amount of the note. Frequently, Brothers drew on petitioner in advance or in excess of the 10 percent commissions on sales completed by him. During 1930 and 1931 petitioner paid to Brothers commissions in the amounts of $3,550 and $2,400, respectively, or a total $5,950, on sales of Caterpillar tractors made by him for petitioner to the Louisiana State Highway Commission. At the end of the year 1931 petitioner charged off, as a bad debt, the then existing excess of $108 paid to Brothers over the amount of commissions due him on sales of tractors made during the two-year period and this amount of $108 is not involved here.

In its income tax returns for the years 1930 and 1931 petitioner included in gross income the gross sales made by Brothers and claimed as deductions, on account of the commissions paid to Brothers, the amounts of $3,550 for 1930 and $2,292 for 1931 as ordinary and necessary business expenses. Respondent disallowed the claimed deductions upon his determination that the amounts so paid to Brothers were not ordinary and necessary business expenses within the meaning of section 23 (a) of the Revenue Act of 1928.

The agreement under which Brothers made the sales to the Louisiana State Highway Commission and for which he was paid the above mentioned commissions was entered into by petitioner for the purpose of utilizing, in the making of said sales, the personal influence Brothers had with the state administration and the highway commission officials.

The question here involved is the same as that considered in the case of Easton Tractor & Equipment Co., 35 B. T. A. 189, wherein it was held that an agreement similar to the one here involved, between Brothers and petitioner, was void and unenforceable as contrary to public policy and, further, that commissions paid pursuant to such an agreement did not constitute such an ordinary and necessary business expense as was contemplated by the applicable revenue1 act. The holding in that ease is controlling here and we consequently affirm the respondent’s determination in this proceeding.

Decision-will'be entered for respondent.


author: Disney: Leech,

text:
    Pauline L. Sheets and First National Bank and Trust Company as Executors of the Estate of Leveret T. Sheets, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75223.
    Promulgated December 29, 1936.

      Abbott L. Fletcher, Esq., for the petitioners.

      Lewis S. Pendleton, Esq., for the respondent.
   OPINION.

Disney:

The respondent contends that the full value of the property in question should be included in the gross estate as property held by the decedent and his wife as joint tenants within the meaning of section 302 (e) of the Revenue Act of 1926. The petitioners contend that the property was not held by joint tenancy; that if the property was so held, it is not subject to tax because it was acquired by the wife for a full and adequate consideration in money or money’s worth; that section 804 of the Revenue Act of 1982, adding a new provision to section 303 (d) of the 1926 Act, may not be applied retroactively; and that the value of some of the securities was less than the amount determined by the respondent.

The petitioners argue that no joint tenancy existed with respect to the property in question by reason of the fact that, pursuant to provisions of the settlement agreement resulting from the divorce proceeding, the decedent was entitled to all of the income from the securities and had no right to alienate his interest without the written consent of his wife.

The instrument transferring the property to the decedent and his wife is not before us for examination. We assmne, in the absence of any evidence to the contrary, that it transferred the securities to these parties as “joint tenants and not tenants in common”, with light of survivorship, as set forth in the settlement agreement. Personal property transferred by such terms creates a joint tenancy. Peterson v. Lake City Bank & Trust Co., 181 Minn. 128; 231 N. W. 794.

A joint tenancy may be severed by the destruction of one of its four unities, namely, interest, title, time, and possession, provided the act is such as to preclude the joint tenant who severs his interest from claiming any interest in the estate by survivorship. In re Wicks (1891), 3 Ch. 59; Siemianoski v. Union State Bank of South Chicago, 242 Ill. A. 390. The cotenants acquired like interests at the same time under one conveyance. The limitation subsequently placed on the right of the decedent to convey his interest without the consent of his wife, transferred no property rights in the estate. The obvious purpose of the agreement was to protect the wife against a severance of the tenancy by the husband through a conveyance of his interest. Its effect was to continue the right of survivorship, free of any independent act of the husband, rather than to destroy the tenancy. The right of survivorship is the chief characteristic of a joint tenancy. Farr v. Trustees, 83 Ohio 446; 53 N. W. 738; Hernandez v. Becker, 54 Fed. (2d) 542; Peterson v. Lake City Bank & Trust Co., supra; In re Putman’s Estate, 20 Pac. (2d) 783 (Cal.).

The right given the decedent to receive the income from the property was not partition of the estate. The wife’s right to convey her interest, and the right of survivorship of both joint tenants, continued to exist. The agreement respecting the income related merely to the enjoyment of the estate. Joint tenants may enter into such agreements without severing the tenancy. Huffman v. Pollard, 6 Ky. L. 519; Ward v. Ward’s Heirs, 40 W. Va. 611; 21 S. E. 746. The agreement herein plainly recognizes the joint tenancy as continuing. The intent of the parties governs. Sanderson v. Everson, 93 Neb. 606; 141 N. W. 1025.

The parties may agree as to a subdivision of time for the exclusive occupancy of the joint property. Curtis v. Swearingen, 1 Ill. 207; 33 C. J. 909. A joint tenancy is not destroyed by the withdrawal, by one of the joint tenants, of money in a joint bank account, and the placing thereof in his separate account. Morrow v. Moskowitz, 255 N. Y. 219; 174 N. E. 460; In re Porianda’s Estate, 256 N. Y. 423; 176 N. E. 826. Mutual agreement as to management of the joint estate obviously would, then, not destroy it. It appears that conduct or a course of dealing working severance of a joint tenancy is such as indicates that the parties mutually treated their interests as belonging to them in common. 33 C. J. 909 and cases cited. One alleging severance of a joint estate has the burden so to establish. Hahn v. Ironbound Trust Co., 118 Atl. 744.

Examination of the authorities fails to disclose inhibition, as between joint tenants, of the usual right of husband and wife to contract with each other as to their properties, and we can not believe from the evidence before us that there was any intent to destroy the joint tenancy already created or that the contractual limitation upon the husband’s right of alienation would destroy it. The four unities seem to be preserved. Certainly there appears no intent to reduce this tenancy to one in common. We think this conclusion is particularly justified in a construction, not primarily of a question of real estate, but of the intent and purpose of a revenue act. Section 302 (e) plainly intends the imposition of an estate tax based upon the value at death of property passing by right of survivorship, rather than the original technical elements of joint tenancy. We have recently made a distinction between a decision of title to real property and decision of the legislative base for computation of a Federal tax. Carrie S. Fair, 35 B. T. A. 41. It might be doubted whether within the purview of this section any element of joint tenancy is necessary, except that of survivorship. Construing said section, we hold that the joint tenancy which had been created previously was not severed by the settlement agreement, as contended by petitioners.

The petitioners also argue that, since by provisions of the settlement agreement growing out of the divorce suit the wife surrendered rights in the homestead and other real property, and personal property of the decedent which could not be defeated by will, together with such rights as she had in the divorce suit, she paid an adequate and full consideration in money or money’s worth for the property in question.

In United States v. Banks, 17 Fed. 322, the court, in construing section 132 of the Act of Congress of June 30, 1864, defining a taxable succession as including any “deed of gift or other assurance of title made without valuable or adequate consideration”, said:

The valuable and adequate consideration referred to in section 132 must be held to mean either money paid or some legal interest or estate parted with ■ or charged, or service rendered, to the value of the property received. U. S. v. Hart, 4 Fed. Rep. 293.

To the same effect is In re Reynolds’ Estate, 169 Cal. 600; 147 Pac. 268.

The case of State Street Trust Co. v. Stevens, 209 Mass. 373; 95 N. E. 851, followed in Worcester County National Bank v. Commissioner of Corporations and Taxation, 175 N. E. 726 (Mass.), involved a state statute levying a succession tax unless’.there had been a “purchase for full consideration in money or money’s worth.” The court said that “The statute also requires that the consideration must be for the full value of the property whether paid in money, or the acceptance by the transferor of property or service, or some benefit of an equivalent pecuniary measurement. * * * The statute is not complied with unless the consideration, whatever form it may assume, is not only valuable, but full, by covering the value in money, or its equivalent in money of the property transferred.”

The case of Ferguson v. Dickson, 300 Fed. 961, involved only the question of whether a prenuptial agreement, in which property was acquired for a waiver of an inchoate right of dower, was entered into for a “fair” consideration. The question in McCaughn v. Carver, 19 Fed. (2d) 126, was no broader. See also Lillian T. Latty, Executrix, 23 B. T. A. 1250, and Central Union Trust Co. of New York et al., Executors, 24 B. T. A. 296.

The statute in question here at one time contained only the requirement of a “fair” consideration, as was considered in Ferguson v. Dickson, supra, but this was changed by the Act of 1926, to require that the consideration be “adequate and full.”

In United States v. Mitchell, 74 Fed. (2d) 571, the Circuit Court of Appeals for the Seventh Circuit considered the history of section 303 (a) (1) of the Revenue Act of 1926 and noted particularly that the requirement of consideration therein had evolved from “fair” to “adequate and full”, and the court remarked: “It is apparent that the 1924 and 1926 Acts successively narrowed the scope of deductible claims.”

We are therefore constrained to believe not only that Ferguson v. Dickson, supra, is not authoritative in the instant case, but that the evolution as to the character of consideration both in section 302 (e), here being considered, and in section 303 above, indicates the petitioner must make an affirmative showing of equivalence in consideration and that for which consideration passes.

Was the consideration here in money or money’s worth equal to the value of the property transferred ? We think not.

The statutes of Minnesota provide generally for the passing of homestead property to the surviving spouse in fee or for life, depending upon whether there are children, or issue thereof, surviving, and an undivided one-third of all other lands of the decedent. As to personalty, the widow is entitled to the decedent’s wearing apparel, all of certain other property up to a prescribed value, and an undivided one-third of any other personal property. These rights can not be defeated without the consent of the survivor in writing. Secs. 8719, 8720, and 8726, Mason’s Minnesota Statutes for 1927. Sec-fcion 8602 authorizes the court to allow the wife as alimony not to exceed in present value one-third of her husband’s personal estate, income, and earnings, and one-third in value of his real estate.

In this case no money passed from the wife to the decedent as consideration for the transfer of the property. No proof was offered of the value of the wife’s inchoate dower rights. In the settlement agreement the parties agreed that the decedent’s estate, exclusive of the homestead and any property not listed in the agreement, had a value of $152,270.47 at that time, but no evidence was offered upon trial to prove that the property had such a value. It may be, so far as the record shows, that the decedent had other property at the time which, from oversight or otherwise, was not listed in the agreement. It can not be said that the decedent’s estate was in any respect increased by the transaction. In fact, it was decreased by reason of payments made to and on behalf of his wife.

The wife did not, as part of the consideration for the agreement, agree to dismiss the divorce suit and the agreement was to be effective whether the proceedings were dismissed or proceeded to trial and judgment. Thus the wife was under no binding contract to dismiss her divorce suit or, if dismissed, refrain from filing one on a subsequent date. It does not appear whether or not the decedent answered the complaint or the proceedings went to trial. What his defense would have been, had he filed an answer, is not known, and we have no facts, other than the allegations in the complaint, upon which to judge the outcome of the suit. Without evidence on the point, we do not know what value, if any, the wife’s mere statement-of a cause of action had. Neither are we in any position to decide whether the court, if the wife had succeeded in the proceeding, would have made an award to her, and, if so, the amount thereof. Under the circumstances, we find that the petitioners have failed to prove that the wife received or acquired her interest in the property in question for an adequate and full consideration in money or money’s worth, or for an amount less than such a consideration.

In view of this disposition of the issue there is no need to consider the effect of section 804 of the 1932 Act on the question.

The full value of the property in. question constitutes a part of the gross estate of the decedent. Rita O'Shaughnessy, Executrix, 21 B. T. A. 1046; affd., 60 Fed. (2d) 235; certiorari denied, 288 U. S. 605; Bushman v. United States, 80 Ct. Cls. 175; certiorari denied, 295 U. S. 756.

There is no controversy as to the value at the time of the decedent’s death of the securities listed in the estate tax return as items 3, 5, 7, 8, 9, 14, 17, and 18, or the amount of accrued interest on all of the securities. This property will be included in gross estate at the aggregate value determined by the respondent. The remaining securities, namely, items 1, 2, 4, 6, 10, 11, 12, 13, 15, and 16, will be included in the gross estate of the decedent at the values set forth in our findings of fact, which values we have determined from the uncóntradicted testimony of the petitioners’ witness.

The stipulation of the parties that the petitioners are entitled to a credit of $560.67 for state inheritance taxes will be reflected in the recomputation to be filed under Buie 50.

Eeviewed by the Board.

Decision will be entered under Bule SO.

Leech,

dissenting: I agree with the majority opinion that a joint tenancy between the decedent and his wife in the disputed property existed at decedent’s death.

I disagree with the conclusion in that opinion that the wife’s withdrawal of her divorce proceeding against decedent, her performed pi’omise to resume her marital status with decedent, and her relinquishment of her statutory rights in the property of decedent were not “adequate and full consideration in money or money’s worth” for the interest she received in the contested joint tenancy property and other financial emoluments.

. The record discloses that at the time of the agreement creating this joint tenancy the wife was 48 and the husband 79. They were involved in a serious domestic dispute. This agreement was in settlement of that controversy. It was made at arm’s length. Each party employed counsel who were equally interested in securing the most advantageous trade. In the agreement, so concluded, the parties agreed upon a value for the property included in that joint tenancy, and by the same token, I think, characterized what the wife agreed to do and did do in compliance therewith, as being “adequate! and full consideration in money or money’s worth” for the joint tenancy interest and other financial benefits she received in exchange therefor. The parties’ receipt of none of the benefits provided for each in the agreement was conditional upon any contingency. Cf. Chemical Bank & Trust Co. et al., Executors, 25 B. T. A. 1153.

In any event, the statutory right of dower, or otherwise, which the wife relinquished as a partial consideration for the creation of the disputed joint tenancy and the other benefits was, as the Third Circuit said in Ferguson v. Dickson, 300 Fed. 961, “the separate property of the wife, and has pecuniary value and is money’s worth. Beal's Executor v. Strom, 26 N. J. Eq. 372, 376; Wheeler v. Kirtland, 27 N. J. Eq. 534; Magniac v. Thomson, 7 Pet. 346, 8 L. Ed. 709.” McCaughn v. Carver, 19 Fed. (2d) 126, and United States v. Mitchell, 74 Fed. (2d) 571.

The controlling date affecting the question of the legal quality and amount of the consideration here is the date upon which the contract including the creation of the joint tenancy was made. In my opinion, no question can be raised as to the computability of the value of the wife’s dower interest then. It is merely the discounted value of a life estate in decedent’s then owned property, measured, in time, by the excess of the wife’s then expectancy over that of decedent. Cf. E. A. Holmes, Trustee, 27 B. T. A. 1229.

It may be that this record is not sufficiently complete upon which to make that calculation. If this be so, then the petitioner should be given a further opportunity to establish a basis for that computation (Helvering v. Taylor, 293 U. S. 507; Ray W. Torrey Co. v. Commissioner, 84 Fed. (2d) 659) if the computation of the proportion of the property in the joint tenancy that should be excepted from the decedent’s estate is necessary. Sec. 302 (e), Revenue Act of 1926. (See majority opinion.)

Section 804 of the Revenue Act of 1932 is not retroactive. Mildred Kienbusch et al., Executors, 34 B. T. A. 1248; Smith v. United States, 16 Fed. Supp. 397; Myers v. Magruder, 15 Fed. Supp. 488. Cf. United States v. Wells, 283 U. S. 102; Coolidge v. Long, 282 U. S. 582; Reinecke v. Northern Trust Co., 278 U. S. 339; Morsman v. Burnet, 283 U. S. 783; McCormick v. Burnet, 283 U. S. 784; May v. Heiner, 281 U. S. 238.

Nor is it declaratory of existing law. Ferguson v. Dickson, supra; McCaughn v. Carver, supra; United States v. Mitchell, supra; Chemical Bank & Trust Co. et al., Executors, supra.

The Report of the Finance Committee of the Senate accompanying the Revenue Act of 1932 strongly confirms that conclusion. That report states:

This amendment excludes, in determining “consideration in money or money’s worth”, the value of a relinquished, or a promised relinquishment of, dower, curtesy, or other marital rights in decedent’s property. Section 302 (a) and (b) of the 1926 act require the value of such an interest to be included in the gross estate, and, if its value may, in whole or in part, constitute a consideration for an otherwise taxable transfer (as has been held to be so), or an otherwise unallowable deduction from the gross estate, the effect produced amounts to a subversion of the legislative intent expressed in section 302 (a) and (b).
For example, a decedent dies leaving an estate of $1,500,000 (after payment of all charges), and under the State law the surviving spouse is entitled to one-third, or $500,000, of which she cannot be deprived by will without her consent. Under existing law, the estate is entitled to no deduction on account of her statutory rights, but, if she and decedent had entered into a contract by which she was to receive from his estate a stated sum in consideration of a waiver of her statutory rights, the amount due her under the contract might be held a deductible claim against the estate as having been contracted for an adequate and full consideration in money’s worth, namely, the value of her waived marital rights. [Emphasis supplied.]

I think it is immediately apparent from that report that “This amendment excludes, in determining 1 consideration in money or money's worth' the value of a relinquished, or promised relinquishment of, dower, * * * or other marital rights in decedent's property." (Emphasis supplied.) The Senate recognized the amendment as effecting a change in existing law, which, though denying the exclusion of the statutory “dower rights" of the surviving spouse from a decedent’s estate, under section 302 (a) and (b) of the Revenue Act of 1926, permitted the exclusion of contractual rights of the surviving spouse, which petitioner actually possessed here immediately upon decedent’s death. It was this very inconsistency in existing law that the amendment was intended to correct.

       Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
      ****** *
      (e) To the extent of the interest therein held as joint tenants by the decedent and any other person, or as tenants by the entirety by the decedent and spouse, or deposited, with any person carrying on the banking business, in their joint names and payable to either or the survivor, except such part thereof as may be shown to have originally-belonged to such other person and never to have been received or acquired by the latter from the decedent for less than an adequate and full consideration in money or money’s worth: Provided, That where such property or any part thereof, or part of the consideration with which such property was acquired, is shown to have been at any time acquired by such other person from the decedent for less than an adequate and fnll consideration in money or money’s worth, there shall be excepted only such part of the value of such property as is proportionate to the consideration furnished by such other person: * * *

       sec. 804. Relinquishment of dower, etc., as consideration.
      Section 303 (d) of the Revenue Act of 1926 is amended by adding at the end thereof a new sentence to read as follows :
      “For the purposes of this title, a relinquishment or promised relinquishment of dower, curtesy, or of a statutory estate created in lieu of dower or curtesy, or of other marital rights in the decedent’s property or estate, shall not be considered to any extent a consideration ‘in money or money’s worth’.”


author: Mukdook:

text:
    Henry D. Mygatt, Petitioner, v. Commissioner of Internal Revenue, Respondent. Lillian P. Hayes and John A. Hayes, Jr., as Executors of the Estate of John A. Hayes, Dec’d., Petitioner, v. Commissioner of Internal Revenue, Respondent. F. Kingsley Rodewald, Petitioner, v. Commissioner of Internal Revenue, Respondent. Edwin D. Morgan, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent. Richard Whitney, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 76657, 76658, 76659, 76660, 76661.
    Promulgated December 29, 1936.

      Frederic E. Mygatt, Jr., Esq., for the petitioners.

      W. R. Lansford, Esq., for the respondent.
   OPINION.

Mukdook:

The Commissioner determined a deficiency in the income tax of each petitioner for the year 1929. Counsel have agreed that there will be no deficiencies if the partnership known as Richard Whitney & Co. was entitled to inventory its holdings of United Corporation common stock.

The petitioners were partners during 1929 in the partnership of Eichard Whitney & Co. The partnership owned a membership on the New York Stock Exchange. It became a “specialist” in United Corporation stock, common and preferred, on October 8, 1929, and continued as such throughout the remainder of the year 1929. The partnership, as specialist, constantly provided a market for other brokers desiring to buy or sell the United Corporation stock. It bought if there was a seller but no other bidder, and it sold if there was a buyer but no other seller. It conducted this business at a fixed post on the floor of the exchange. In order to conduct this business, it was required to own quantities of the stock at times and at other times to be short of the stock. At the close of business on December 31, 1929, it owned 1,800' shares of United Corporation common stock which had cost it $42 per share and then had a market value of $32 per share. The partnership reported a loss of $18,400, representing the above difference, and that loss was reflected in the returns of the partners. The Commissioner disallowed the loss and increased the income of the partners accordingly.

No reference was made on the partnership return for 1929 to the fact that the income had been computed by the use of inventories or that the use of inventories was necessary in computing its income.

The figures and other facts are not in dispute. The question is whether a specialist in a security on the New York Stock Exchange may inventory its holdings of the security for income tax purposes. The answer is that it may. Helvering v. Fried, 299 U. S. 115. This is so regardless of whether or not “a description of the method employed” was “included in or attached to the return.” Vaughan v. Commissioner, 85 Fed. (2d) 497, reversing on this point 31 B. T. A. 548; certiorari denied, 299 U. S. 606; Commissioner v. Stevens, 78 Fed. (2d) 713; Commissioner v. Charavay, 79 Fed. (2d) 406; Estate of Harry E. R. Hall, 29 B. T. A. 1255. The case of Schafer v. Helvering, 299 U. S. 171, affirming 83 Fed. (2d) 317, and 32 B. T. A. 289, did not involve the present question. The same is true of Seeley v. Commissioner, 77 Fed. (2d) 323. The cases of James B. Lowell, 30 B. T. A. 1297; Alfred Fried, 31 B. T. A. 638 (reversed, supra); and Frederic H. Brendle, 31 B. T. A. 1188, were, of course, incorrectly decided so far as this point is concerned.

Decision will he entered for the petitioners.


author: Leech :

text:
    Oklahoma Contracting Corporation and T. R. Jones, Inc., Assignee of and Successor to Oklahoma Contracting Corporation, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 77871.
    Promulgated January 8, 1937.

      I. J. Underwood, Esq., for the petitioners.

      DeWitt M. Evans, Esq., and L. 0. MitoheTL, Esq., for the respondent.
   OPINION.

Leech :

The income tax deficiency predicating this proceeding was determined against Oklahoma Contracting Corporation, alone. Therefore, that corporation, and no other, can be the petitioner here. Accordingly, the petition is dismissed as to T. R. Jones, Inc. Revenue Act of 1928, sec. 272 (a); Rule 6 of the Rules of Practice of the Board of Tax Appeals; Fred, Shingle, 34 B. T. A. 875. See Helvering v. Morgan's, Inc., 293 U. S. 121; Forest Glen Creamery Co., 33 B. T. A. 564. The dissolution of petitioner occurred within the three years preceding the filing of this petition, so it is the proper petitioner. Vernon’s Revised Statutes of Texas, art. 1389.

The deficiency resulted from the computation of petitioner’s income on a separate basis and was determined for the period January 1 to July 23,1931. The validity of all or any part of that determination is the controlling question presented.

The right of petitioner to have its income and taxes thereon computed upon a consolidated basis depends upon two premises: (1) The fact of its affiliation within the applicable statute and regulations (Revenue Act of 1928, sec. 141 (cl); Regulations 75, art. 2 (b)); and, (2), its election of that basis under the applicable statute and regulations (Revenue Act of 1928, sec. 141 (a); Regulations 75, arts. 1 and 10).

"VVe believe this record sustains beyond reasonable doubt that the Company, and not T. R. Jones, Inc., was affiliated with petitioner during the entire calendar year 1931. That status of affiliation between the Company and the petitioner was not changed during that year.

The right to have corporate income computed on a consolidated basis and the tax determined on such basis is a privilege extended by Congress, conditional upon the strict compliance with the regulations of the Commissioner, authorized by the statute, and antecedent to the grant of that privilege. Revenue Act of 1928, sec. 141 (a) and (b); Regulations 75, art. 1. Commissioner v. Manus-Muller Co., 79 Fed. (2d) 19; certiorari denied, 296 U. S. 657; Wishnick-Tumpeer v. Helvering, 77 Fed. (2d) 774; Smith Paper Co., 31 B. T. A. 28; affd., 78 Fed. (2d) 163; certiorari denied, 296 U. S. 627; Manchester Savings Bank & Trust Co., 34 B. T. A. 1008; Fletcher American National Bank, 33 B. T. A. 453.

The regulations decisive here are reasonable. Corner-Broadway-Maiden Lane v. Commissioner, 76 Fed. (2d) 106; American Gas & Electric Securities Corporation, 33 B. T. A. 245. The election to exercise that privilege must be exercised when the return of the parent corporation is filed, and at no other time. Regulations 75, art. 10. Manchester Savings Bank & Trust Co., supra; Detroit Gear & Machine Co. v. Helvering, 75 Fed. (2d) 660; Radiant Glass Co. v. Burnet, 54 Fed. (2d) 718.

The several tentative returns filed here, though captioned differently than the final return, were upon a consolidated basis. The only final return here is that of T. R. Jones, Inc., parent, and petitioner, subsidiary. Whether or not the election to file consolidated returns was properly exercised is controlled by that final return. It purports to include the income of petitioner, as subsidiary,' and T. R. Jones, Inc., as parent. The schedules attached to this return purported to detail and segregate that income. Such return was obviously in error and was so noted by respondent as to the period in 1931 preceding July 23, since it was clear that T. R. Jones, Inc., could not be a parent prior to its birth on the latter date. But, obvious as was that fact on the return, the actual parent for that period, or any other period during 1931, was not indicated in any way. That return, erroneous as it was, has not been amended nor has any attempt to amend it been made. The question of whether, under the present circumstances, it could have been amended, is not before us. Accordingly, not only is the petitioner not entitled under the applicable statute and regulations to have its income and tax thereon computed upon a consolidated basis with any company for the calendar year 1931 (Revenue Act of 1928, sec. 141 (a) and (b); Regulations 75, art. 12 (a) and art. 18 (b)), but, on this record, respondent could legally compute petitioner’s income tax for the calendar year 1931 only on a separate basis. Regulations 75, art. 18 (b). Cf. Corner-Broadway-Maiden Lane v. Commissioner., supra; American Gas & Electric Securities Corporation, supra.

However, the pending deficiency determined by respondent covers only the period in 1931 from January 1 to July 23. The respondent has no authority to determine a deficiency for any other than a taxable period or year of the taxpayer. Revenue Act of 1928, sec. 41; Brooklyn City Railroad Co., 27 B. T. A. 77; affd., Helvering v. Brooklyn City Railroad Co., 72 Fed. (2d) 274. The status of affiliation existing between the Company and petitioner throughout the entire calendar year 1931 was not changed in any way at any time during that year. Therefore, petitioner corporation had no other taxable period or year than the entire calendar year 1931. It follows that respondent had no legal right to determine a deficiency against petitioner for any other period than the entire calendar year 1931. Accordingly, there is no deficiency against the petitioner for the period in controversy, to wit: January 1 to July 23, 1931. Mrs. Grant Smith, 26 B. T. A. 1178; Elgin Compress Co., 31 B. T. A. 273; Pittsburgh & West Virginia Railway Co., 32 B. T. A. 66; Forest Glen Creamery Co., supra.

And, since there is no deficiency, the delinquency penalty was improperly imposed. Oscar K. Eysenbach, 10 B. T. A. 716; F. Hunt Lowry, 11 B. T. A. 409; Mollie Netcher Newbury, Trustee, 31 B. T. A. 41.

Decision will be entered for the petitioner»


author: Smith :

text:
    John D. McKee, S. Waldo Coleman, and the Bank of California, N. A., Trustees, Josephine C. Grant Trust, Petitioners, v. Commissioner of Internal Revenue, Respondent. John D. McKee, S. Waldo Coleman, and the Bank of California, N. A., Trustees, Edith Grant Magee Trust, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 82177, 82178.
    Promulgated January 8, 1937.

      Adolphus E. Gmupner, Esq., and John O. Altman, Esq., for the petitioners.

      Bean P. Kimball, Esq., and Dewey L. Shepherd, Esq., for the respondent.
   OPINION.

Smith :

Section 101 of the Revenue Act of 1928 provides in part as follows:

(a) Tax in case of capital net gam. — In the case of any taxpayer, other than a corporation, who for any taxable year derives a capital net gain (as hereinafter defined in this section), there shall, at the election of the taxpayer, be levied, collected, and paid, in lieu of all other taxes imposed by this title, a tax determined as follows: a partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the' manner as if this section had not been enacted and the total tax shall be this amount plus 12y2 per centum of the capital net gain.
*******
(c) Definitions. — For the purposes of this title—
(1) “Capital gain” means taxable gain from the sale or exchange of capital assets consummated after December 31, 1921.

At the time the transactions involved in these proceedings took place, I. T. 2488, C. B. VIII-2, p. 127, was in effect and provided that profit realized upon the redemption of bonds at maturity should be treated the same as profit realized upon sales of bonds. This Board held, however, in John H. Watson, Jr., 27 B. T. A. 463, overruling Henry P. Werner, 15 B. T. A. 482, that where bonds were paid off at maturity or pursuant to an authorized call prior to maturity the transaction was not a “sale or exchange” of such bonds and that a taxpayer who had held securities thus redeemed for more than two years was not entitled to be taxed at the capital net gain rate on the profit realized from the redemption. The Commissioner then changed his rulings by I. T. 2678, C. B. XII-1, p. 117, to bring them into accord with the Board’s opinion.

The petitioners, cognizant of the provisions of section 101 of the Revenue Act of 1928 and fearing that if they held the bonds until they matured the respondent might hold that the gains were not realized from a “sale or exchange of capital assets”, decided to sell them prior to maturity. They therefore sold them on January 31, 1931, to the American Securities Co. in the manner stated in our findings of fact.

The respondent in the determination of deficiencies has treated the gains on the sales as ordinary gains and has disallowed the contentions of the petitioners that they were capital gains. In his brief he states:

The Commissioner's position is that the petitioners are not entitled to the benefit of the capital net gain section of the statute because they did not make actual sales in good faith to the American Securities Company and because the transactions were not normal business transactions even if they were actual sales and made in good faith. The transaction of each trust was not a sale but essentially a redemption.

We are of the opinion that there is no merit in the respondent’s contention that the sales of the bonds were not made in good faith. The petitioners were acting for the best interests of the trusts. They desired to make the savings in tax that would accrue to the trusts if the profits were realized on a sale rather than on the redemption of the bonds. The petitioners were acting in abundant good faith in taking the steps which they took on January 31, 1931. The fact that by selling the bonds on that date they made a saving in income tax gives rise to no complaint on the part of the respondent. United States v. Isham, 17 Wall. 496; Bullen v. State of Wisconsin, 240 U. S. 625; Iowa Bridge Co. v. Commissioner, 39 Fed. (2d) 777; Helvering v. Gregory, 69 Fed. (2d) 809; affd., Gregory v. Helvering, 293 U. S. 465; Jones v. Helvering, 71 Fed. (2d) 214; certiorari denied, Helvering v. Jones, 293 U. S. 583.

Nor is there any merit in the respondent’s contention that the transactions were not normal business transactions. Apparently this contention of the respondent is based upon the fact that the American Securities Co., by purchasing the bonds at par, would not by any possibility realize a gain upon the transaction. With equal truth it can be said that it would not sustain any loss; for it was known to that company, as well as to the petitioners, that the bonds were to be redeemed on February second at their par value. It is unquestionably true that the American Securities Co. purchased the bonds to accommodate the Bank of California, N. A. But this did not alter the fact that the American Securities Co. purchased the bonds on January 31.

The facts clearly show that on the morning of January 31, 1931, the petitioners were the owners of the bonds. Prior to 12 o’clock noon on January 31 they had effectively disposed of all their right, title, and interest in and to the bonds and accepted in payment therefor a cashier’s check of the American Trust Co. in the amount of $1,184,400. Although the check is in the same amount as the petitioners would have received if they had retained ownership of the bonds until the maturity date, the profit realized was nevertheless on a sale and not on the redemption of the bonds.

The petitioners are entitled to have the profits realized on the sale taxed under section 101 (a) of the Revenue Act of 1928.

Reviewed by the Board.

Judgment will he entered u/nder Rule 50.


author: Disney:

text:
    Helen Sperry Lea, Petitioner, v. Commissioner of Internal Revenue, Respondent. Edward G. Sperry, Executor of the Estate of Elmer A. Sperry, Petitioner, v. Commissioner of Internal Revenue, Respondent. Edward G. Sperry, Petitioner, v. Commissioner of Internal Revenue, Respondent. Elmer A. Sperry, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent. Edward G. Sperry, Administrator of the Estate of Zula A. Sperry, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 74287, 74296, 74297, 74298, 74299.
    Promulgated January 12, 1937.

      Francis L. Casey, Esq., Walter -S'. Orr, Esq., and A. C. Newlin, Esq., for the petitioners.

      J. E. Marshall, Esq., J. L. Dev any, Esq., and Paul Waring, Esq., for the respondent.
   OPINION.

Disney:

1. The petitioners contend that they acquired the Patent Corporation stock in a nontaxable transaction within the meaning of section 112 (g) and (i) (1) (B) of the Revenue Act of 1928, set forth in the margin, and, accordingly, that it was proper for them to report the profit they derived from the disposition of the stock as capital gain. The respondent adheres to the conclusion he reached in the determination of the deficiencies, that the transfer of the assets to the Patent Corporation did not result in a reorganization and that the fair market value of the patents is taxable to the petitioners as an ordinary dividend.

In Helvering v. Gregory, 69 Fed. (2d) 809; affd., 293 U. S. 465, the taxpayer owned all the stock of A corporation, which owned shares of stock of B corporation. For the purpose of enabling her to seli the stock of B corporation for her individual profit, and to reduce income tax liability, she organized C corporation, to which B corporation’s stock was transferred for the issuance of O’s stock to the taxpayer. Three days later C corporation dissolved and liquidated by distributing its assets, consisting of B’s stock, to the taxpayer. In holding that the transfers were not within the meaning of the statute, the court remarked:

* * * But the underlying presupposition is plain that the readjustment shall be undertaken for reasons germane to the conduct of the venture in hand, not as an ephemeral incident, egregious to its prosecution. To dodge the shareholders’ taxes is not one of the transactions contemplated as corporate “reorganizations.”
****** *
* * * All these steps were real, and their only defect was that they were not what the statute means by a “reorganization,” because the transactions were no part of the conduct of the business of either or both companies; so viewed they were a sham, though all the proceedings had their usual effect. * * *

Herein, in exchange for part of the assets of the Development Co., the petitioners, as sole stockholders thereof, received, pro rata, all of the capital stock of the Patent Corporation without surrendering any of their Development Co. stock. So far as these facts are concerned, the transaction could be said to be in conformity with the words of section 112 (i) (1) (B). But it is now settled by the Gregory case that to come within the meaning of that provision, the substance of the transfer must agree with its form and it must be •“in pursuance of a plan of reorganization” to make it nontaxable, as under subdivision (g), the applicable provision here. Did the substance of the transaction herein agree with its form? Was the stock “distributed in pursuance of a plan of reorganization” ?

The petitioners argue that the facts here meet the business purpose test laid down in the Gregory case. If after the transfer to the Patent Corporation the stock distribution made to the petitioners was “in pursuance of a plan of reorganization”, was a business purpose, their contention should be sustained. But an analysis of all the evidence discloses to us that the transfer to the Patent Corporation and the distribution of its stock was not germane to the conduct of any business purpose of the Development Co.’s business or properties, or to intent to operate them as the business of the Patent Corporation.

The offer of the Development Co. to exchange the assets for stock of the Patent Corporation, the acceptance of the offer, the transfer of the assets for stock, the issuance of the stock and the sale of the stock so acquired by the wife and children of Elmer A. Sperry to him at a price in conformity with the selling price of the patents and patent rights, and the liquidation of the Patent Corporation and distribution of the patents as liquidating dividend to Elmer A. Sperry, all occurred on January 18, 1929, as parts of a transaction used for convenience to place Elmer A. Sperry in a position to sell the patents directly to the Sperry Gyroscope Co. The Patent Corporation was used merely as a conduit through which to pass the title, although it had been decided prior to the transfer of the assets to the Patent Corporation, that the purchaser should take title to the patents through Elmer A. Sperry, instead of purchasing the stock of the Patent Corporation as originally contemplated.

The situation is indistinguishable on principle from that passed upon by us in Robert R. McCormick, Executor, 33 B. T. A. 1046, and the facts are closely analogous to those in that case. Therein we held that within the intendment of the revenue act there was no reorganization, and that the corporate acts of the several entities involved were valid and effect must be given thereto, where the newly created corporation, in consideration of properties transferred, issued its stock to the original corporation, corresponding to the Development Co. herein, and such stock was issued to the stockholders of the original corporation as a dividend. Following that case, we conclude that the Patent Corporation and all of the transactions between it and the Sperry family served no corporate business purpose, but constituted, as in the Gregory case, “an elaborate and devious form of conveyance masquerading as a corporate reorganization, and nothing else”, and we hold that the stock distribution herein was not “in pursuance of a plan of reorganization.”

2. By regarding the patents and patent rights as a dividend by the Development Co., taxable at their fair market value of $1,000,000, the respondent adopted the procedure he followed in the Gregory case. While it did not fully agree with the Commissioner’s method, the Circuit Court of Appeals in that case approved the result on the ground that the tax was the same whether the Commissioner’s method was adopted or the tax was computed on the value of the shares of stock of the new corporation. No question appears to have been raised in that case as to the amount of earnings available for dividends. Herein, prior to the submission of the proceedings the parties stipulated that at the time the Development Co. exchanged the patents and patent rights for stock of the Patent Corporation it had earnings of not less than $51,015.28 available for dividends. After the briefs were filed a further stipulation was filed agreeing that after such transfer the earnings subject to dividend payments were not more than that sum unless increased by earnings or profits derived from the sale of the assets.

On brief the petitioners contend that, if we rule against them on the reorganization question (as we have done), the dividend taxable to them should be limited to $51,015.28 and that the remainder of the amount of $1,000,000 ultimately received for the patents and patent rights should be applied against the cost of their stock of the Development Co.

The statute defines the term “dividend” as “any distribution made by a corporation to its shareholders, whether in money or in other property, out of earnings or profits accumulated after February 28, 1913.” Sec. 115 (a), 1928 Act. If any distribution is not out of earnings or profits, the amount is treated as a return of capital to the extent of the shareholder’s basis of his stock. Sec. 115 (d). The extent of the earnings or profits of the Development Co. in excess of $51,015.28 available for dividends depends upon the amount of earnings or profits, if any, it derived from the disposition of the patents and patent rights.

In Robert R. McCormick, Executor, supra, we held also that the dividend declared by the Tribune Co., corresponding to the Development Co. herein, was an ordinary taxable dividend. Herein the dividend was not actually declared, but a distribution may be taxed as a dividend without corporate action formally declaring same. Hadley v. Commissioner, 36 Fed. (2d) 543, affirming 6 B. T. A. 1031; Smith v. Moore, 199 Fed. 689; Spencer v. Lowe, 198 Fed. 961.

The transaction herein resulted in a disposition for $1,000,000 of corporate assets having a cost basis of $108,758. The Development Co. constructively received this amount for the benefit of its stockholders, the petitioners. Royal Marcher, 32 B. T. A. 76. The profit of $891,242 derived from the exchange when added to the $51,015.28 agreed earnings increased its earnings available for dividend payments to $942,257.28. Robert R. McCormick, Executor, supra; Lynch v. Hornby, 247 U. S. 339. The Development Co. is not before us and it is not necessary to decide whether or not the profit so realized constitutes taxable income to it.

We hold that of the $1,000,000 received by the petitioners, $942,-257.28 constitutes a distribution of earnings of the Development Co., taxable to them in proportion to their stock holdings, the remainder being a return of capital. To that extent we sustain the determination of the respondent that the petitioners received taxable dividends from the Development Co,

Reviewed by the Board.

Decision will be entered under Rule 50.

       Sec. 112. (g) Distribution of stock on reorganisation. — If there is distributed, in pursuance of a plan of reorganization, to á shareholder in a corporation a party to the reorganization, stock or securities in such corporation or in another corporation a party to the reorganization, without the surrender by such shareholder of stock or securities in such a corporation, no gain to the distributee from the receipt of such stock or securities shall be recognized.
      *******
      (i) Definition of reorganisation. — As used in this section and sections 113 and 115—
      (1) The term “reorganization” means * * * (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the trans-feror or its stockholders or both are in control of the corporation to which the assets are transferred.


author: Hill:

text:
    Edith M. O’Donnell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 79980.
    Promulgated January 12, 1937.

      Charles 8. Fettretch, Esq., for tlie petitioner.

      Ralph F. Staubly, Esq., for the respondent.
   OPINION.

Hill:

Petitioner’s decedent died leaving assets subject to the payment of funeral expenses and claims against the estate in the total amount of $55,611.84. The parties have stipulated, and we have'so found, that the funeral expenses amounted to $862.25, which amount was fair and reasonable, and that there were valid claims against the estate, contracted bona fide and for an adequate and full consideration in money or money’s worth, in the total amount of $708,473.01, or an aggregate o'f funeral expenses and claims in the amount of $709,335.26.

Respondent disallowed the deductions claimed for funeral expenses and debts of the decedent in excess' of the amount of $55,611.34, representing the value of the assets subject! to the payment of such items. Petitioner received the proceeds of certain policies of insurance on the life of the' decedent, and concedes that she is liable for whatever estate tax deficiency may be due, but contends that the deficiency should be computed by allowing as deductions from the gross estate the full amount of the funeral expenses and claims as stipulated by the parties and set out in our findings of fact above.

Under the laws of the State of New York, where decedent died, the life insurance received by petitioner was not subject to the payment of decedent’s debts nor of the charges against his estate.

The Revenue Act of 1926, in so far as pertinent here, is quoted in the margin.

The question presented in this case has heretofore been considered and decided by us, in harmony with petitioner’s contention, in Union Guardian Trust Co., Administrator, 32 B. T. A. 996; Mary Q. Hallock et al., Trustees, 34 B. T. A. 575; Edna F. Hays et al., Executors, 34 B. T. A. 808. See also Commissioner v. Strauss (C. C. A., 7th Cir.), 77 Fed. (2d) 401.

However, in the instant proceeding, respondent presents a new thesis with such insistence as to merit specific consideration and discussion. While respondent does not argue that the deductions in controversy do not come within the letter of the quoted statute, he says that it is an established rule of statutory construction that the intent of tlie legislature should govern; that the intendment of the Federal estate tax statute is to impose an excise upon the donative transfer of property at death; that in addition to exemptions, including $40,000 of .insurance proceeds received by a specific beneficiary, there is excluded from the measure for the tax property set aside for public and charitable uses, as well as all property which does not pass as a gratuity, leaving as the measure for the tax only the property which passes from the decedent to others as a gift. ■

Respondent, therefore, argues in effect that to allow the deductions claimed by the petitioner would be to permit a corresponding amount of property to pass from decedent to another as a gift without being taxed, which would defeat the object and purpose of the statute and lead to an absurdity.

In Crooks v. Harrelson, 282 U. S. 55, the collector there urged substantially the same argument as is presented by the Commissioner here. In rejecting such theory, the Court in part said:

It is urged, however, that, if the literal meaning of the statute be as indicated above, that meaning should be rejected as leading to absurd results, and a construction adopted in harmony with what is thought to be the spirit and purpose of the act in order to give effect to the intent of Congress. The principle sought to be applied is that followed by this court in Holy Trinity Church v. United States, 143 U. S. 457 * * *. But a consideration of what is there said will disclose that the principle is to be applied to override the literal terms of a statute only under rare and exceptional circumstances. The illustrative cases cited in the opinion demonstrate that, to justify a departure from the letter of the law-upon that ground, the absurdity must be so gross as to shock the general moral or common sense. Compare Pirie v. Chicago Title & Trust Co., 182 U. S. 438, 451, 452, 21 S. Ct. 906, 45 L. Ed. 1171. And there must be something to make plain the intent of Congress that the letter of the statute is not to prevail. Treat v. White, 181 U. S. 264, 268, 21 S. Ct. 611, 45 L. Ed. 853.
* * * But an application of the principle so nearly approaches the boundary between the exercise of the judicial power and that of the legislative power as to call rather for great caution and circumspection in order to avoid usurpation of the latter. * * * It is not enough merely that hard and objectionable or absurd consequences, which probably were not within the contemplation of the framers, are produced by an act of legislation. Laws enacted with good intention, when put to the test, frequently, and to the surprise of the lawmaker himself, turn out to be mischievous, absurd, or otherwise objectionable. But in such ease the remedy lies with the lawmaking authority, and not with the courts. [Citing authorities.]

The effect of respondent’s argument is that we should supply what he conceives to be an omission in the statute by adding the provision that the net estate should be determined by deducting claims, within the limitations stated, only to the extent of the value of the assets or property available to pay them. In United States v. Goldenberg, 168 U. S. 95, 102, the Court commented on this point as follows:

The primary and general rule of statutory construction is that the intent of the lawmaker is to be found in the language that he has used. He is presumed to know the meaning of words and rules of grammar. The courts have no function of legislation, and simply seek to ascertain the will of the legislator. It is true there are eases in which the letter of the statute is not deemed controlling, but the eases are few and exceptional, and only arise when there are cogent reasons for believing that the letter does not fully and accurately disclose the intent. No mere omission, no mere failure to provide for contingencies, which it may seem wise to have specifically provided for, justify any judicial addition to the language of the statute.

Respondent’s contentions can not be sustained, and on authority of the decisions hereinabove cited, his action in the instant case is reversed.

Judgment will be entered wider Rule 50.

       Sec. 303. For the purpose of the tax the value of the net estate shall be determined—
      (a) In the case of a resident, by deducting from the value of the gross estate—
      (1) Such amounts for funeral expenses, administration expenses, claims against the estate, * * * to the extent that such claims * * * were incurred or contracted bona fide and for an adequate and full consideration in money or money’s worth, * * * as are allowed by the laws of the jurisdiction * * * under which the estate is being administered * * *. ,


author: SteRnhagen: Leech,

text:
    Frank J. Digan, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 77529.
    Promulgated January 12, 1937.

      Benedict Ginsberg, Esq., for the petitioner.

      Willis R. Lansford, Esq., for the respondent.
   OPINION.

SteRnhagen:

The petitioner seeks the exclusion of $15,000 from the sale price in computing his gain, claiming that this was not received by him, but was paid to his wife as purchase price of her dower. This contention must be rejected. The property was purchased and owned by him and he sold it for $100,000. While his wife was “endowed of the third part” thereof as dower, Real Property Law § 190, McKinney’s Consolidated Laws of New York, this was inchoate and was not sold by her, but released. Witthaus v. Schack, 105 N. Y. 332, 11 N. E. 649; Crawford v. Woods, 191 N. Y. S. 786; Stokes v. Stokes, 196 N. Y. S. 184. Whether the $15,000 was given by petitioner to his wife directly, as inducement for joining in the conveyance, or assigned to her out of the forthcoming price, it is nevertheless to be regarded as part of the sale price which inured to him for the property which he alone owned. Cf. United States v. Robbins, 269 U. S. 315.

The petitioner cites Frank v. Commissioner, 51 Fed. (2d) 923, and there is indeed some support in that opinion for his position. But the court was apparently primarily concerned with whether the $40,000 paid to the taxpayer’s estranged wife was by way of alimony, as the Board had held. As to the wife’s position in respect of dower, we must in this case act upon the New York decisions upon the law of New York, even if they be at variance with the law of Pennsylvania, which alone was under consideration in the Franlc case.

If sustained, the petitioner’s theory would afford a widespread means of artificially shifting the incidence of tax. Dower is generally provided for, not only in New York but in other states. If the sale price of property owned and sold by a husband is to be attributed to the wife to the extent that she demands it as an inducement to release her dower, there is little reason for a husband to be charged with any gain from a sale. This has never been suggested heretofore and it is difficult to believe that the statute may be regarded as contemplating it. Cf. Lucas v. Earl, 281 U. S. 111. The Commissioner has correctly treated the $100,000 as realized by the petitioner.

The petitioner assails the Commissioner’s computation of the basis. By section 113 (b), Revenue Act of 1928, the basis is the larger figure as between cost (with proper adjustments for depreciation) and March 1, 1913, value. If a taxpayer relies upon a basis greater than cost, he must prove the March 1, 1913, value. Burnet v. Houston, 283 U. S. 223. This the petitioner has failed to do, and it matters not that the proof was too difficult. The Commissioner has given him a basis higher than original cost by $2,400, and has computed depreciation on the building to a figure which the petitioner does not dispute. This has not been shown to be in error. The payment for improvements in an uncertain amount, which petitioner sought to establish at $8,000 and which has been found at not less than $4,000, does not serve on this record to change the basis used by the Commissioner, for it does not clearly enough appear that the improvements were made before March 1, 1913, or to what extent, or how their cost should be adjusted by depreciation.

There is no evidence on the subject of the penalty, and it must therefore be affirmed.

Reviewed by the Board.

Judgment will be entered for the respondent.

Leech,

dissenting: The petitioner owned real estate. His wife then owned a dower right in that real estate. That right, even though inchoate, was her valuable right, measurable in money. Ferguson v. Dickson, 300 Fed. 961; McCaughn v. Carver, 19 Fed. (2d) 126; United States v. Mitchell, 74 Fed. (2d) 571. She could not be divested of it without her consent. If the purchaser had bought from the husband, alone, his interest in the property, for half the consideration paid here for the interests of both the husband and wife in the property, and -in another transaction secured a quitclaim deed from the wife for her rights in the same property for the other half of the consideration paid here, it certainly would not be held that the husband was taxable on the consideration paid to the wfife for the rights she and she, alone, owned and could relinquish. It seems to me that, in effect, is the situation here. Frank v. Commissioner, 51 Fed. (2d) 923.


author: Steenhagen :

text:
    Safe Deposit and Trust Company of Baltimore, Executor of Will of Henry Walters, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 77674.
    Promulgated January 15, 1937.

      Charles Moll. Howard, Esq., for the petitioner.

      B. P. Hertzog, Esq., for the respondent.
   OPINION.

Steenhagen :

1. The petitioner seeks a determination in this proceeding that it is free from any “personal liability” which might be asserted under the Eevised Statutes, § 3467, because, acting under the Eevenue Act of 1926, section 313 (b), it made written application to the Commissioner for the determination of the estate tax and discharge of its personal liability. The entire record in this proceeding establishes clearly that the deficiency has been determined against the estate and notice thereof sent to the petitioner in its representative capacity as executor. It has not been suggested by either party (except in the apprehension of petitioner) that the Commissioner is using this proceeding to establish personal liability upon the petitioner for any deficiency which may be finally determined. Cf. Hulburd v. Commissioner, 296 U. S. 300; DeForest Hulburd, Executor, 27 B. T. A. 1123. In this proceeding, brought by the executor in its representative capacity, to determine a deficiency of the estate of which notice has been sent by the Commissioner to the executor in such representative capacity, the Board is confined to the redetermination of the deficiency, and may not consider the question whether the executor is, under the Revised Statutes, § 3467, “answerable in his own person and estate.” Newton H. Neustadter, Executor, 15 B. T. A. 839. Cf. Rodenbough v. United States, 25 Fed. (2d) 13, 18; United States v. Rodenbough, 21 Fed. (2d) 781, 785.

2. The first and principal matter in controversy is the amount to be included in the gross estate under the Revenue Act of 1926, section 302, as the value at the time of death of property consisting of shares of stock in four corporations, namely, 35,966 shares of Atlantic. Coast Line Railroad Co., 104,663 shares of Atlantic Coast Line Cov of Connecticut, 1,000 shares of Safe Deposit & Trust Co. of Baltimore, and 3,000 shares of Wilmington Savings & Trust Co. As to the Wilmington Savings & Trust Co. shares, the record is without evidence as to their value, and for this reason, as petitioner in its proposed findings admits, no finding can be made that the value of these shares is other than $105,000, as the Commissioner determined.

(a) The petitioner, in its return, included in the gross estate, as the value of the 35,966 Railroad Co. shares, $1,078,980, which was arrived at upon a unit valuation of $30 per share. The Commissioner, after audit and negotiation, determined the value of these shares at date of death to be $1,582,504, a unit value of $44 per share. The issue is whether, from the evidence in this record upon this question of fact, it is established that the Commissioner’s determination is in error, and, if so, what the preponderance of, the evidence establishes as the correct value of the shares.

The Commissioner’s determination was based upon the fact that on the date of death the shares wrere listed on the New York Stock Exchange and that several sales occurred on that day in the aggregate of 600 shares at various prices between 45 high and 43 low. Upon this fact, the Commissioner, in accordance with his Regulations 80, article 13, took the mean price of the day as 44 and treated this as the unit value per share, thus giving the total value of $1,582,504. The petitioner criticizes this as a formalistic mathematical method which in this instance is at variance with reality, primarily because it leaves out of account the paramount circumstance that the block of its shares consisted of 35,966 shares and that the valuation of this large number of shares involves considerations and factors different from those applicable to the unit daily mean market price resulting from a few 100-share transactions. To this end, it introduced the testimony of witnesses with various kinds of experience, to prove that in fact the sale of 35,966 shares could not be accomplished as readily or simply as the sale of 100 or 600 shares, and that both the seller and the purchaser would make a different investigation before a price, or an aggregation of prices could be arrived at. The Commissioner, on the other hand, submitted the testimony of an investment counselor of experience and learning who made an analysis of what were, in his opinion, the considerations affecting the value of a block of stock of this size, and arrived at the conclusion that, since each share must be of the same value as every other share of the same kind, the unit price of 100 or 6Ó0 shares sold correctly represented the unit price of all such shares, irrespective of the number in any block. There was evidence that in all probability the New York Stock Exchange would not have permitted such a large block to be offered for sale on one day, and that if it had the price would have thereby been instantly depressed; that a sale not on the Exchange might have been possible to a capitalist or an investment trust or corporation, but that the stock could only have been sold publicly by “feeding” it out in small lots over a period of time; that such a period might cover several months, since in fact it was three months after the date of death before the accumulation of sales of similar stock on the Stock Exchange reached 33,000 shares. Exhibits, some of petitioner and some of respondent, show by tables and charts that over a substantial period of time the earnings of the Railroad Co. and the Stock Exchange prices of its shares were declining and would probably continue to decline, and it was testified that one contemplating a transaction involving 35,966 shares would surely not ignore this, as might one engaged in a casual Stock Exchange transaction of a small block.

The evidence demonstrates to a reasonable assurance that the Commissioner’s method, while it has the administrative advantage of certainty, does not, as to this block of shares, result in a figure which, is consistent with reality. It seems clear that the unit figure of 44 is too high and can not be sustained. A lower figure must be found from the evidence, however difficult it may b,e to find one. That there is room for a flexible judgment as to the point at which supposititious willing buyers might agree with this seller, should not paralyze the function of deciding. Cohan v. Commissioner, 39 Fed. (2d) 540, 543; Bryant v. Commissioner, 76 Fed. (2d) 103, 105; Clinton Cotton Mills, Inc. v. Commissioner, 78 Fed. (2d) 292, 295. A reasonable figure must be fixed within the bounds of the evidence, and if it be not arbitrary it is not important that it can not be rationalized beyond every logical objection. Baltimore & Ohio R. R. Co. v. Commissioner, 78 Fed. (2d) 460, 465; Hummel-Ross Fibre Corporation v. Commissioner, 79 Fed. (2d) 474, 478.

On November 30, 1931, the history of the Eailroad showed steadily declining earnings, from the end of 1929 at about $15 per share, to less than $10 on the date of death. The stock prices had been going through a general decline, with occasional short spurts upward, since the middle of 1931, when in July it was in the 90’s, in September in the 70’s, in October in the 60’s and 50’s, until at the date of death it was, as has been seen, 43-45. Since, as the evidence shows, this performance was embedded in the general economic depression which was at that time well known and widely felt, there was no reason for belief that the downward trend had reached its end, so that stocks which could only be sold piecemeal over a substantial period would continue to command the price of that day. With the information at hand on that day which is present in this record, one could not reasonably have expected to realize for the entire 35,966 shares to be sold during the forthcoming months an average price reflected by a curve projected in any other than the general downward direction which it had taken in the recent past.

In our opinion, the value of the 35,966 shares of Atlantic Coast Line Railroad Co. stock on November 30, 1931, was not more than $35 per share, or $1,258,810, and this value has been found as a fact.

This conclusion has not been arrived at by any dogmatic recognition or nonrecognition of any so-called “blockage” rule, i. e., that a large block of shares of one kind is ipso facto to be valued with or without relation to the value of one share in a smaller block. “Blockage” is not a law of economics, a principle of law, or a rule of evidence. If j 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.^ See James Couzens, 11 B. T. A. 1040, 1161; T. B. Hoffer, 24 B. T. A. 22; Laird v. Commissioner, 85 Fed. (2d) 598; Rogers v. Strong, 72 Fed. (2d) 455; William S. Gordon, Trustee, 33 B. T. A. 460; St. Louis Union Trust Co. et al., Trustees, 30 B. T. A. 370, 381; Frank J. Kier et al., Executors, 28 B. T. A. 633. Whatever force the Commissioner’s regulations (article 13) may have during the consideration of the matter in the stages before litigation in the Board or the courts, it can not lay down a controlling rule of evidence in such litigation, Second National Bank of Philadelphia, 33 B. T. A. 750, 755.

(b) The gross estate included 104,663 shares of Atlantic Coast Line Co. of Connecticut, which was an investment corporation the greater part of the assets of which consisted of securities of the Atlantic Coast Line Railroad Co. Its shares were listed on the Baltimore and Richmond Exchanges, but were dealt in very infrequently. On the Baltimore Exchange the price was “pegged” from September 25,1931, to February 2, 1932, at the September 25 price of 68. There was a sale on the Richmond Exchange of 27 shares on November 24, 1931 (6 days before the death of decedent), at 44, and there was a sale of 8 shares on December 7 (7 days after death), at 30. Since the regulations, article 13, prescribe that the price at the nearest date be used, the Commissioner took $44 as the unit price and thus determined a value of $4,605,172. The petitioner, in its return, used a unit price of $30 and a total of $3,139,890. Both sides, it will thus be seen, have used the same unit figure per share for the Connecticut Co. shares as for the Railroad Co. shares. There is testimony and argument on the subject of the relation between the two, but it seems to elude satisfactory rationalization. There is in the record evidence enough to show that the parity of values which both sides have adopted is fair and reasonable. Thus the finding has been made of a total value of the 104,663 Connecticut Co. shares of $3,663,205, at the same unit figure of $35 as has been used for the Railroad shares. This unit figure also reflects, apart from any relation with the Railroad shares figure, a reasonable point in the downward trend of the value of the Connecticut Co. shares which one might be expected to consider in arriving at a price.

(c) The gross estate included 1,000 shares of Safe Deposit & Trust Co. stock, the value of which the petitioner included in its return at a rate of $550 and the Commissioner determined at a rate of $635 per share. The shares were not listed, and actual transactions had occurred in small lots at prices -which were gradually declining from $695 early in October to $590 and $600 shortly after the death. No early rise was then reasonably in prospect. Both sides agree that as to this sort of stock book value is not significant. Upon all the evidence in the record, the finding has been made that the value at the date of death was at the rate of $600 per share, or an aggregate value of $600,000.

(3) The subject of deductibility, as claims against the estate, of outstanding amounts of subscriptions made by a decedent during his life to charitable organizations has been dealt with in prior decisions, and needs no further general discussion. Jeptha H. Wade, Jr., et al., Executors, 21 B. T. A. 339; Frances Plumer McIlhenny et al., Executors, 22 B. T. A. 1093; David A. Reed et al., Executors, 24 B. T. A. 166; Robert A. Taft, Executor, 33 B. T. A. 671, 678, 679 (on review C. C. A., 6th Cir.); Margaret Day et al., Executors, 34 B. T. A. 11 (on review C. C. A., 3d Cir.); Maude L. Porter et al., Executors, 34 B. T. A. 798 (on review C. C. A., 2d Cir.); Edna F. Hays et al., Executors, 34 B. T. A. 808; Turner v. Commissioner, 85 Fed. (2d) 919 (C. C. A., 3d Cir.); Glaser v. Commissioner, 69 Fed. (2d) 254 (C. C. A., 8th Cir.); Porter v. Commissioner, 60 Fed. (2d) 673 (C. C. A., 2d Cir.); affd., 288 U. S. 436; Latty v. Commissioner, 62 Fed. (2d) 952 (C. C. A., 6th Cir.); Bretzfelder v. Commissioner, 86 Fed. (2d) 713. The evidence shows that the $30;000 pledge to the Emergency Unemployment Belief Committee of New York was made in consideration of subscriptions of others, and it may therefore be regarded as based on an “adequate and full consideration in money or money’s worth”, Jeptha H. Wade, Jr., et al., Executors, supra. The claim of $24,000 is therefore a proper deduction. The consideration for the other three subscriptions is not so shown, and from the evidence it appears that the promises were entirely voluntary, or, if legal obligations, cf. Gittings v. Mayhew, 6 Md. 114, were not supported by consideration of money or money’s worth. They are not deductible. Robert A. Taft, Executor, supra. The claim of petitioner in the alternative, that these pledges should then be included in the value of the residuary estate for the purpose of computing the fraction to charity, is without support and must be rejected.

Beviewed by the Board.

Judgment will be entered under Rule 50.

       Every executor, administrator, or assignee, or other person, who pays any debt due by the person or estate from whom or for which he acts, before he satisfies and pays the debts due to the united States from such person or estate, shall become answerable in his own person and estate for the debts so due to the united States, or for so much thereof as may remain due and unpaid.

       If the executor makes written application to the Commissioner for determination of the amount of the tax and discharge from personal liability therefor, the Commissioner (as soon as possible, and' in any event within one year after the making of such application, or, if the application is made before the return is filed, then within one year after the return is filed, but not after the expiration of the period prescribed for the assessment of the tax in section 310) shall notify the executor of the amount of the tax. The executor, upon payment of the amount of which he is notified, shall be discharged from personal liability for any deficiency in tax thereafter found to be due and shall be entitled to a receipt or writing showing such discharge.