author: Lansdon : Smith, dissenting:

text:
    J. A. Folger & Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Folger Estate Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 22212, 30721, 31200, 35147.
    Promulgated November 4, 1932.

      Jamies 8. T. Ivins, Esq., Joseph II. Brady, Esq., and II. Edwin Nowell, O. P. A., for the petitioners.

      Eugene Meacham, Esq., for the respondent.
   OPINION.

Lansdon :

Each of the petitioners here claims that it was affiliated with the parent corporation for Federal income tax purposes in each of the taxable years. . The parent corporation and the Nevada Company had common stock outstanding in the several taxable years in the respective amounts of 3,300 and 6,000 shares. Five persons and corporations which may be regarded as the Folger family interests owned stock in the two corporations in the respective amounts of '2,950 and 4,660 shares or 89% and 77% per cent of the entire issues. Four persons not members of the Folger family owned -respectively 350 and 1,340 shares of such corporations. Emma F. Platt owned 100 and 265 shares, respectively; A. K. Munson owned 250 shares of the parent corporation and none of the Nevada company; E. E. Tail and F. P. Atha owned respectively 175 and 900 shares of the Nevada company and none of the parent corporation. The record contains no evidence of any effective legal control of the minority stock by the Folger family interests. Since such interests, even if they were the same within the meaning of the law owned only approximately 90 per cent and 78 per cent, respectively, of the stock of the parent corporation and the Nevada company, they fall short, as now determined by the courts, of ownership of substantially all the stock of those corporations. As they had no legal control over the minority stock holdings, we think it follows that the parent corporation and the Nevada company were not affiliated in any of the taxable years. Handy & Harmon v. Burnet, 284 U. S. 136.

The Folger family interests owned all but two of the shares of the Folger Estate Company and all but 351 shares, or slightly under 90 per cent, of the stock of the parent corporation. There is no evidence that the minority holdings in the parent corporation were subject to any effective legal control by the. majority, and, as the stock of the parent corporation falls short of substantially all of the ownership, we think it follows, on the authority above cited, that the parent corporation and the Folger Estate Company were not affiliated in the taxable years.

Inasmuch as the common stock situation in the taxable years deprived the petitioners of the right to file consolidated returns as subsidiary corporations, of the parent corporation it is not necessary to discuss the effect, if any, of the diverse holdings of the preferred stock of that concern..

The petitioners also contend that the statute of limitations had run against their deficiencies for 1921, if any, prior to the date of the respective deficiency notices. The consolidated return for the fiscal years ended November 30, 1921, was filed on February 16, 1922. It was a completed return and stated separately the income and invested capital of each corporation. Since the record discloses that consolidated returns filed by the parent corporation had been accepted and tax liability thereunder settled in prior years, it can not be said that such return was unauthorized at the date of its filing. In our opinion it was sufficient to start the statute of limitations running against the tax liability, if any, for each of the petitioners. F. A. Hall Co., 3 B. T. A. 1172; National Tank & Export Co., 3 B. T. A. 1217; Fibre Container Co., 9 B. T. A. 575; Matteawan Mfg. Co., 4 B. T. A. 953; Kellogg Commission Co., 6 B. T. A. 771; Stetson & Ellison, 11 B. T. A. 397; affd., 43 Fed. (2d) 553.

The four-year limitation period applicable to the tax liability of the three corporations included in the consolidated return filed on February 16, 1922, expired on February 16,1926. On March 4, 1926, the petitioners separately executed waivers extending the time for assessing and collecting their 1921 taxes to December 31, 1926. On December 14, 1926, new waivers were executed by all three corporations extending the time for making assessments to December 31, 1927. The deficiency notices that are the bases of these proceedings were mailed to the Folger Estate Company and the Nevada Corporation on November 12, 1926, and July 20, 1927, respectively. Since the statute of limitations ran against the petitioners on February 16, 1926, and no waivers were filed prior to the enactment of the Revenue Act of that year on February 26, the agreements entered into on March 6, 1926, could not extend the time for assessment. Section 1106 of the Revenue Act of 1926 extinguished all tax liability against which the statute had run prior to its enactment unless waivers had been executed prior to that date. Peerless Woolen Mills, 13 B. T. A. 1119; Steiner Mfg. Co., 18 B. T. A. 740; White Oak Transportation Co., 24 B. T. A. 307.

The record discloses that the parent corporation filed a waiver on October 25, 1925, which extended the time for making assessments of 1921 taxes to December 31, 1926, and that it filed similar waivers on April 19, 1926, and December 14, 1926, extending such time to December 31, 1927. In his brief counsel for respondent argues that such waivers were effective to extend the period of limitation as to the petitioners, since the parent corporation had acted as the agent for its subsidiaries in filing the consolidated return and so had authority as such agent to execute waivers binding on the petitioner. A sufficient answer to this argument is that, even if the parent corporation had authority to execute waivers as the agent of its subsidiaries, it never did so. The waivers filed by the parent corporation related only to its own tax liability. They include no mention of the subsidiaries. They were not signed by any officer of either of the petitioner taxpayers here as such and therefore are lacking in all ’ the statutory requirements of binding agreements effective to extend the period of limitations. Nor would this situation have been different had the respondent finally held in favor of the affiliation contended for here. In that event the parent corporation would have been liable for all the taxes due upon the income of its subsidiaries in conformity with the information returns filed and neither of these petitioners would have the standing of a taxpayer within the meaning of the law. In our opinion the respondent was without authority to assess or collect any 1921 taxes as to these petitioners when the notices of deficiencies were issued.

The parent corporation filed consolidated returns for itself and the petitioners in each of the years under review and paid all the taxes shown to be due thereon. The information return filed by the petitioners for each of such years stated that none of the tax was to be assessed against either subsidiary corporation. On or about the dates at which the parent corporation paid the several installments of taxes shown on the consolidated returns it was reimbursed by each of the subsidiaries, as set forth in our findings of fact. The petitioners contend that in the computation of the deficiencies here involved the respondent should have credited each of them in each of the taxable years with the amounts it paid in discharge of its liability shown on the consolidated return. This contention is in conformity with decisions of this Board in several proceedings involving similar questions. Affiliation having been denied, it follows that the true deficiency against each of the separate companies is the difference between its share of the tax shown on the consolidated return and the amount of its tax liability as a separate taxpayer. The deficiencies asserted against the several petitioners should be credited with the amounts which each of them paid to the parent corporation in discharge of its proportion of the tax shown on the respective consolidated returns. Mather Paper Co., 3 B. T. A. 1; George A. Fink Co., 5 B. T. A. 76; C. A. O'Meara, 11 B. T. A. 101; Oilbelt Motor Co., 16 B. T. A. 831; Robert Treat Motel Co., 20 B. T. A. 968; Myresdale Fuel Co. v. United States, 44 Fed. (2d) 497; West Virginia R. R. Co. v. Jewett Bigelow & Brooks Coal Co., 26 Fed. (2d) 503.

Petitioners also claim the right to have their taxes computed under the provisions of section 328 of the Revenue Act of 1921. The evidence of abnormalities in income and invested capital does not convince us that either petitioner will suffer any hardship, as compared with like corporations in a similar business, if its tax liability for each of the several years under review is determined under the provisions of section 230 of the Revenue Act of 1921. The plea for special assessment is denied.

The findings of fact and opinion herein take the place of our findings of fact and opinion in these proceedings promulgated on May 13,1931, which are hereby vacated.

Reviewed by the Board.

Decision will be entered under Rule 50.

Smith, dissenting:

I dissent from so much of the opinion of the Board as holds that the tax liability of each of the petitioners for the year ended November 30, 1921, was extinguished by the statute of limitations prior to the issuance of the deficiency notices for that year.

The consolidated and information returns filed for that year showed that the parent company was liable for the tax due on the consolidated return. All of the evidence goes to show that the parent company acted as the agent of the subsidiary corporations.

Marquette, Sternhagen, and Goodrich agree with this dissent.


source: Caselaw Access Project

author: Sternhagen :

license: Public Domain

text:
    New York Zinc Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 36189.
    Promulgated November 4, 1932.

      Hugh Satterlee, Esq., and Albert S. Lisenby, Esq., for the petitioner.

      Elden McFarland, Esq., and James K. Polk, Esq., for the respondent.
   OPINION.

Sternhagen :

Respondent determined deficiencies of $5,203.21 and $4,808.37 in petitioner’s income taxes for 1925 and 1926, respectively, and a statutory net loss of $6,216.74 for 1924. He allowed petitioner a deduction of $28,957.59 for depletion on zinc ore mined in 1924; in 1925 and 1926 he allowed no such deduction, on the ground that petitioner’s 250,000 ton ore reserve of March 1,1913, had been exhausted and the entire amount of $310,000 representing this item of depletable capital had been recovered. Petitioner assails these deductions as inadequate, claiming that on March 1, 1913, its ore reserves were greatly in excess of the 250,000 tons determined, and the value thereof greater than $310,000.

Petitioner, a New York corporation, was dissolved in 1930, and the present proceeding is brought by its directors as trustees in dissolution. In December, 1923, it acquired all the property and assumed all the obligations of the Northern Ore Company in a non-’ taxable exchange of its own shares therefor. Revenue Act of 1926, sec. 204(a). Thereafter and during 1924, 1925 and 1926, Theron I. Crane, who owned all of the Northern Ore Company’s shares at the time of the exchange, was petitioner’s sole shareholder.

Among the properties passing to petitioner by the exchange of 1923 were the Edwards and Balmat mineral properties, located 12 miles apart in St. Lawrence County, New York. The Balmat mine was undeveloped in 1913 and is not here of interest. The Edwards property comprised three tracts, known as the Brown, White and Brodie properties, containing zinc ore, or sphalerite and pyrites. The Ore Company owned the White tract in fee; it held the Brown tract under a lease running for 40 years from 1903, inclusive of an optional renewal period, and providing for a royalty payment not in excess of 50 cents per ton of concentrate. The Brodie property so acquired by petitioner in 1923 was a large tract, only one part of which had in 1913 been held by the Ore Company under a leasehold term beginning in 1906. This lease ran for 20 years from January 1, 1906, and provided for a royalty of 25 cents per ton of ore extracted, a higher royalty for talc and precious metals, and a minimum annual royalty of $150. This lease was canceled on July 2, 1915, and a new lease covering the same and additional properties of the Brodie tract was made for a period of 20 years and 7 months from June 1, 1915, at an increased minimum annual royalty of $800. The entire Brodie tract, including that covered by the earlier lease as well as that covered by the later lease, was acquired by the Ore Company in fee on March 3,1920.

After the settlement, in 1911, of protracted litigation, the Ore Company began development, and by March 1, 1913, had contracted for the sale of zinc ore and concentrates to the Grasselli Chemical Company and had a mill under construction. At that date three veins of ore on the Brown and White tracts had been worked — Brown No. 1 and No. 2, 350 and 100 feet, respectively; the White vein, 150 feet — and drifting had been done at various levels to these depths. The developed portions of the Brown veins showed 4 to 6 feet of thickness and 150 to 300 feet of width. No. 1 extended 350 feet along the slope; No. 2, 100 feet. The White vein was twice as thick and about-200 feet wide; it extended 150 feet along the slope. The Brown and White veins’ incline indicated that they would pass at 1,000 and 2,000 feet, respectively, under that portion of the Brodic property not covered by the original lease.

On March 1,1918, 10,000 tons of ore had been extracted for treatment. The mill, shortly after its completion but before operations had fairly begun, burned in 1914. It was immediately reconstructed and operations were begun in March, 1915. The ore contained 17 per cent zinc, about 75 per cent of which was recoverable, and would yield 1 ton of concentrate to 3,834 tons of crude ore. A ton of concentrate yielded 50 per cent zinc, and cost $17.38 to mine, mill, and ship. Pyrites yielded 50 cents per ton of crude ore. The market price of zinc in 1913 was 5.7 cents per pound. The price per ton of concentrate under the Grasselli contract was $33.40. The operating-profit per ton of crude ore which mathematically resulted from these agreed figures was $4.68.

In 1916 William S. Pilling, owner of one-half the outstanding shares of the Ore Company, sold them for $300,000 after the declaration of a cash dividend of $120,000 by the company. In 1923 these shares were repurchased by the Ore Company for $294,000.

For the years 1915 to 1917, the Ore Company reported to the Bureau of Internal Revenue its ore reserve of March 1, 1913, as 250,000 tons of the value of $1,000,000. In 1920 it claimed a. recom-putation of depletion on the ground that the reserves would be exhausted in 1920. In 1920 it reported the-1913 reserve at 250,000 tons and the value thereof at $605,000. New ore was developed between 1920 and 1922 on which the Ore Company claimed discovery value. On one vein the claim was allowed.

From 1913 to 1926 the tonnage mined and shipped from the Edwards property was:

Tons
1913_ None
1914_ None
1915 (March 1 to Sept. 30) _ 9,113
1915-1916 (Oct. 1, 1915, to
Dec. 31, 1916)_ 47,039
1917_ 48,371
1918_ 40, 540
1919_ 51, 411
1920_ 48, 564
Tons
1931- 25, 006
1022- 45,512
1923_ 63, 659
1024-i.- 33,184
1925-■— 46,965
1926 (to June 26)_ 20,683
Total_ 480, 547

In 1926 the Edwards mine, mill and plant were sold for $1,427,-081.68; in 1928 the Balinat mine was sold for $250,000.

In making the finding as to March 1, 1913, ore content and value of the properties, there is noi reason to attempt to set' forth either the evidence in the record or an exposition of the considerations, both ponderable and imponderable, leading to the conclusion that the respondent has recognized as large a value on March 1, 1913, to be used as a depletion base as the petitioner may properly claim. The facts of that period, as distinguished from the surmises, inferences, and opinions drawn from them, are substantially free from controversy. Upon them as premises, the several witnesses for both parties have reached widely divergent and irreconcilable conclusions as to the known and reasonably prospective ore content of the properties and its value. Their opinions as to value vary not only because of the variance in the estimate of content, but also in the method of evaluating the content estimated. There is no reason to disregard the opinions of any of these witnesses. All compel and have been given respectful and careful consideration. It is in the light of all of their views that the duty is upon the Board to consider the facts in evidence and find the ultimate fact of value; and thus we find no preponderance of the evidence to justify, let alone compel, the conclusion that the respondent’s determination is erroneously based on an inadequate value of the Northern Ore Company’s properties on March 1,1913. The finding of fact therefore is that the known and probable ore reserve of the Northern Ore Company upon the properties here in question was on March 1, 1913, 250,000 tons, all of which was in the Brown and White tracts, and its fair mai'ket value on that date was $310,000.

In accordance with this finding of fact, the determination of the respondent is sustained.

Judgment will be entered undef Bide 50.


author: Goodrich:

text:
    N. W. Pugh Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 48176.
    Promulgated November 4, 1932.

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

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

Goodrich:

Petitioner’s claim is bottomed upon section 234 (a) (?) ■of the Revenue Act of 1926, and section 23 (k) of the Revenue Act of 1928, which permit as a deduction from gross income u a reasonable allowance for the exhaustion * * * of property used in * * * business.” It is not denied that the leases were used in business or that they were subject to exhaustion. The question here is whether there is a basis for exhaustion of these leases under section 204 (a) of the Revenue Act of 1926, which provides that such basis, for property acquired subsequent to March 1, 1918, shall-be its cost. Petitioner contends that the cost of these leases, and therefore the basis for computing the deduction for their exhaustion over their remaining term of 54 months, is $49,740.93. Respondent contends that the leases have no cost basis, for the reason that they were acquired in the first instance by the Hancock company without cost, that they remained the property of that company, unaffected by the purchase of its capital stock, and that the transaction gave rise to no new basis whereby a revaluation of the company’s assets was permissible for the purpose of computing exhaustion allowance' for existing leases. In short, he contends that the intervening events were of no consequence.

We agree with respondent. It is apparent that petitioner desired and intended to purchase the leases, and that it agreed to purchase all of the assets of the Hancock company, except those specifically excepted, in order to accomplish its purpose. But' it was discovered that one of the leases could hot be transferred and that fact prevented consummation of the sale of assets. Possibly the consent of the lessor to a modification of the lease which would permit of its transfer might have been obtained, but it was not. Apparently, neither of the parties was aware of the restriction in the lease when the agreement for'purchase and sale of the assets was made and, because of that mutual mistake respecting the possibility of making valid delivery of the assets, the first agreement was rescinded and a new contract made covering the purchase and sale of the capital stock of the Hancock company. That second agreement was carried out and the transaction before us is plainly a purchase by the old Pugh company of all the capital stock of the Hancock company, which gives rise to no new basis for the leaseholds owned by the latter corporation.

It appears also that, immediately upon obtaining the first agreement, the old Pugh company took possession of the merchandise of the Hancock company, and of the store premises, and dealt with them as if they were its own. These activities continued after the transaction was changed to one of purchase and sale of capital stock and included the disposal of part of the Hancock merchandise upon sale and intermingling it with the stock of the Pugh company. This, petitioner contends, constituted a liquidation of the Hancock company to its sole stockholder, thus establishing as the cost basis for the assets received the cost of the capital stock. That argument must fall because the restriction Avhich prevented the consummation of the first agreement, namely, the nontransferability of the lease, likewise prevented a complete distribution of the assets of the Hancock company.

Finally, petitioner urges that the recapitalization and change of name of the Hancock company effected a reorganization; that the transfer of its assets and the dissolution of the old Pugh company effected a merger; and that, as a consequence, a new basis was established for the assets in the hands of the new Pugh company, this petitioner. In other words, it contends that the sum paid for the capital stock in excess of the book value of the Hancock assets was paid for the leases, and in the merger carried over as the cost basis of the leases. Assuming that a reorganization and merger were accomplished, it does not follow that the basis for the leases was thereby changed. Ownership of the leases did not change, it remained in the Hancock company and was unaffected when, by change of name and recapitalization, that company was reorganized to become this petitioner. The assets of the old Pugh company, on the other hand, were brought into petitioner in the merger, presumably in consideration of the exchange of petitioner’s stock for the stock of the old Pugh company. Doubtless, these additional assets increased the value of petitioner’s stock, but the stockholders are not before us. There was no additional cost to petitioner of the assets, including the leases, which it theretofore owned, whether under the old name or the new, nor was their value increased, and, as we are not concerned with the cost or value of the assets of the old Pugh company, we see no reason upon which to bottom a finding that the merger effected a change in basis of the Hancock leases or other assets.

Judgment wül lie entered for the respondent.


author: Lansdon :

text:
    Co-operative Central Exchange, Petitioner, v. Commissioner of Internal Revenue, Respondent.

      Docket Nos. 46479, 53366.
    Promulgated November 7, 1932.

      A. A. Toivonen, Esq., for the petitioner.

      B. M. Goon, Esq., for the respondent.
   OPINION.

Lansdon :

In its brief the petitioner abandons the contention that the 6 per cent dividend which it paid to each of its shareholders in the several taxable years is deductible from income -as interest. This issue, therefore, is determined in favor of the. respondent. Soared Heart Cooperative Mercantile Co., 2 B. T. A. 24; Farmers Cooperative Assn., 5 B. T. A. 61; Cloquet Cooperative Society, 21 B. T. A. 744.

. The second contention of the petitioner is that, under the provisions of section 231 (12) of the Revenue Act of 1926 and section 103 (12) of the Revenue Act of 1928, it is an exempt corporation. The statutory provision relied on by petitioner in the Acts of 1926 and 1928 is as follows:

Farmers’, fruit growers’, or like associations organized and’ operated on a cooperative basis (a) for the purpose of marketing the products of members or other producers, and turning back to them the proceeds of sales; less the necessary marketing expenses, on the basis of either the quantity or the value of the products furnished by them, or (b) for the purpose of purchasing supplies and equipment for the use of members or other persons, and turning over such supplies and equipment to them at actual cost, plus necessary expenses. Exemption shall not be denied any such association because it has capital stock, if the dividend rate of such stock is fixed at not to exceed the legal rate of interest in the State of incorporation or 8 per centum per annum, whichever is greater, on the value of the consideration for which the stock was issued, and if substantially all such stock (other than nonvoting preferred stock, the owners of which are not entitled or permitted to participate, directly or indirectly, in the profits of the association, upon dissolution or otherwise, beyond the fixed dividends) is owned by producers who market their products or purchase their supplies and equipment through the association; nor shall exemption be denied any such association because there is accumulated and maintained by it a reserve required by State law or a reasonable reserve for any necessary purpose. Such an association may market the products of nonmembers in an amount the value of which does not exceed the value of the products marketed for members, and may purchase supplies and equipment for nonmembers in an amount the value of which does not exceed the value of the supplies and equipment purchased for members, provided the value of the purchases made for persons who are neither members nor producers does not exceed 15 per centum of the value of all its purchases.

The language of the statutes and of the interpretive regulations indicates very clearly that Congress intended to exempt cooperative associations organized to act as marketing and/or purchasing agents for producers. Consumers’ cooperative associations may be highly beneficial to their members, but certainly are not included in the provisions of the law upon which the petitioner relies. It follows, therefore, that the 13 members of the petitioner function as distributive cooperations for city consumers and must be eliminated for consideration here, and this applies also to the two cooperative publishing houses, the cooperative store and the cooperative bank, all of which we think have the status of nonproducers. The law and the regulations are generously elastic, but can not be stretched to cover business activities with such a large number of patrons who are not within the categories which are to be exempt from the burdens of taxation, even though they are members of the cooperative agency claiming exemption. There is nothing in the record to show that the petitioner’s sales to such patrons were less than 15 per cent of its total sales in the several taxable years. It follows, therefore, that in this respect the petitioner has failed to establish its claim for exemption. South Carolina Produce Assn., 19 B. T. A. 1028; affd., 50 Fed. (2) 742; Fruit Growers Supply Company, 21 B. T. A. 315; affd., 56 Fed. (2d) 90.

The remaining members of the petitioner are farmers’ cooperatives, but the evidence fails to disclose that such associations come within the provisions of the exempting statute. We are not advised whether these concerns are marketing or purchasing agents or whether all or any of them combine both functions. Certainly there is no evidence that all the members of each of such organizations are producers of commodities that are marketed through the petitioner as their agent. Even if all the individual members of the farmers’ cooperatives which enjoyed membership in the petitioner are producers, it does not follow that the organizations themselves are producers, or even agents of producers. Unless it is shown that title to the farm products marketed through the petitioner remained in the producers thereof until sales were effected by it, we think the conditions contemplated by Congress and prescribed by the statutes are not satisfied. If the member cooperatives bought commodities from its producing members and resold them to petitioner for further sale to the public, it could hardly be argued that petitioner acts as agent for producers. In our opinion the petitioner has failed to prove that any of the members are producers or producers’ marketing agents within the meaning of the statutory provisions granting tax exemption to farmers’ cooperatives.

The petitioner is a wholesale concern. It does not buy farm supplies as the agent of producers, or even of the component corporate members. It buys its merchandise on the open markets, and out of stocks to which it holds title by purchase it fills orders from its members and others. In these circumstances it is no more the agent of producers than is any other wholesale merchant engaged in selling supplies that are ultimately consumed by producers. In our opinion it is too far removed from producers to be regarded as their agent for selling products or purchasing supplies.

Decision will be entered for the respondent.


author: Lansdon:

text:
    George Leavenworth, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46611.
    Promulgated November 7, 1932.

      George Leavenworth, pro se.

      Maxioell M. Mahrneg, Esq., for the respondent.
   OPINION.

Lansdon:

The petitioner relies on the cited decisions of the Supreme Court of Tennessee and contends that the effect of the decree was such as to establish a loss to him in 1924 of his timber rights measured at their fair market value on March 1, 1913. We are unable to agree with the petitioner’s construction of that-decision. The single issue involved there was the petitioner’s right to cut standing timber on land belonging to Hunter, in virtue of a written instrument which fixed a time limit for such cutting and specifically provided that after said date the title to all uncut timber shpuld revest in said Hunter. It was a denial of the petitioner’s claim of title to any uncut timber on Hunter’s land, but in no sense a denial of his right for a money judgment against Hunter for taking timber from the Hughes’ lands which he owned, or upon which he held an option, if he had such a right.

There is no proof as to how much cottonwood timber Hunter cut from the lands covered by petitioner’s contract, or that such cutting actually created a deficiency in quantity to the extent that petitioner could not have recovered the whole 6,000,000 feet claimed, but this case has been submitted to us by both parties to this controversy upon the theory that the trespass created such a deficiency and that the petitioner had a cause of action against Hunter for the value of the timber taken. Assuming that a cause of action arose in favor of petitioner against Hunter, as indicated, we think it equally clear that petitioner had a cause of action against Mrs. M. E. Hughes, who became his indemnitor through her contract with Hunter, in which she received $2,100 in cash and an assignment of timber rights in consideration of her agreement to make good any loss he might sustain through Hunter’s trespass. Ruohs v. Traders Fire Ins. Co., 111 Tenn. 405; 78 S. W. 85; Princess Amusement Co. v. Wells, 211 Fed. 226; National Transit Co. v. Davis, 6 Fed. (2d) 729; Gooch v. Buford, 262 Fed. 894; Silver King Coalition Mines Co. v. Silver King, 204 Fed. 166; Barker v. Pullman Palace Car Co., 124 Fed. 555; Union Pacific Ry. Co. v. Durant, 95 U. S. 576; Hendrick v. Lindsay, 93 U. S. 143.

The right of action against Hunter accrued in 1914, when the acts of trespass were committed. Emil Stern, 5 B. T. A. 89; Parker Wire Goods Co., 8 B. T. A. 448. Under1 the laws of Tennessee the petitioner could sue in tort for damages for such trespass, or upon an implied promise to pay the value of the timber taken. Whittaker v. Poston, 120 Tenn. 207; 110 S. W. 1019. At the latest the statute of limitations would have barred suit in six years, or at some time in 1920, so that whatever loss the petitioner suffered through his failure or inability to procure reimbursement from Hunter, if the loss is to be determined by that test, must have been sustained in that year and not in 1924, when Hunter’s suit against him terminated.

Respecting petitioner’s contract with his grantors, that terminated in 1922, and on June 1 of that year it was definitely known, or at best the petitioner then claimed, that the deficiency in timber which resulted in the loss existed. Obviously the loss, if any, was then a recognized fact; and the only question thereafter was one connected with recoupment, or payment for said loss. Bankers Pocahontas Coal Co., 18 B. T. A. 901. Hughes attempted to make such payment, in kind, by conveyance of timber to petitioner under the Hunter settlement. The court held that the petitioner received nothing through that attempt, which left the parties exactly in their original position respecting the alleged deficiency. In addition to the timber rights which Hunter conveyed to Hughes for petitioner’s benefit, he also paid $2,700 in cash for a guarantee that Hughes would save him harmless from any claims made by petitioner. Other than the fruitless settlement, just noted, there is nothing in the record to show what attempt, if any, the petitioner ever made to hold Hughes to that indemnity agreement, or to secure an accounting of the cash paid by Hunter for his benefit. As hereinbefore pointed out, petitioner’s loss in timber, if any, occurred at the time Hunter cut and removed the timber in 1914, and his rights, if any, for an accounting with his grantors matured when it was definitely known that a deficiency in timber existed or would exist at the expiration of his contract on June 1, 1922. If the contract of settlement had the effect of postponing that loss, as claimed by him, then it would seem that no loss could be attributed to him until he had exhausted his legal remedies against his grantors, who had agreed to make good the deficiency in their contract with Hunter. The record would indicate that petitioner’s grantors were at all times solvent and good for any judgment he might have procured against them, or to otherwise discharge any orders that a court might make in an action brought on the contract. The statute of limitations had not run on such an action in 1924 and it can not be said that his rights against them were concluded in that year. We think, however, for reasons hereinabove stated, that whatever loss the petitioner sustained in the transactions here considered was sustained prior to the taxable year and that the issue respecting the year of its deduction must be decided in favor of the respondent.

At the hearing the respondent confessed error in disallowing depletion of timber rights claimed in the taxable year and, accordingly, that issue is decided in favor of the petitioner.

Decision will be entered wider Bule 50.


text:
    Ethel D. Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 32032.
    Promulgated November 8, 1932.

      M. K. Wild, Esq., Robert A. Littleton, Esq., and Vincent K. Butler, Jr., Esq., for the petitioner.

      F. R. Shearer, Esq., and E. L. Updike, Esq., for the respondent.
   OPINION.

Lansdon:

Petitioner contends that the return filed on March 6, 1920, was a sufficient compliance with the statute to start the running of the statute of limitations and that the statutory period as extended by the waivers filed expired on December 31, 1925, as provided in the second waiver.

The respondent contends, first, that the document filed by petitioner on March 6, 1920, which purported to be an income tax return for the calendar year 1919, was not a sufficient return to start the running of the statute of limitations, and, second, that in any event the unlimited waiver filed with the collector of internal revenue on April 1, 1925, was valid and effective at the time the notice of deficiency was mailed. The respondent’s position is that the alleged return filed on March 6, 1920, was not sworn to “ by the treasurer or assistant treasurer,” as required by section 239 of the Revenue Act of 1918, and that the balance sheets as of the beginning and end of the taxable year were not attached to and made a part of the return as required by paragraph 14 of the general instructions accompanying Form 1120.

The facts are clear that, while J. R. Murphy held the official position of assistant secretary and signed the return as such, he, in fact, was the person responsible for petitioner’s financial matters. We think he was a proper person to execute and acknowledge the return along with the president of the corporation. Indiana Rolling Mills, 13 B. T. A. 1141, and Anderson Lumber Co., 15 B. T. A. 475. The facts presented here do not come within the language of the Supreme Court in Lucas v. Pilliod Lumber Co., 281 U. S. 245. The court there held that the requirement of the Revenue Act of 1918, that returns of corporations shall be acknowledged, is not subject to waiver. In that case the return was unsupported by oath. Here the only irregularity is that the return is sworn to by the president and assistant secretary instead of the assistant treasurer, and we have found that to all intents and purposes the assistant secretary was the assistant treasurer.

The petitioner does not explain why the balance sheets requested were not attached to the return, but shows that the respondent accepted and acted upon the return as made and that such return contained the essential facts relative to income and deductions. In our opinion the omission did not make the return void. It contained the basic facts upon which the respondent determined the deficiency involved and is sufficient, we think, to start the statute running. Mabel Elevator Co., 2 B. T. A. 517; Colmer-Green Lumber Co., 12 B. T. A. 256; Stetson & Ellison, 11 B. T. A. 397; affd., 43 Fed. (2d) 553; Valentine-Clark Co. v. Commissioner, 52 Fed. (2d) 346; and Myles Salt Co. v. Commissioner, 49 Fed. (2d) 232.

The statute of limitations started to run on March 6, 1920, and under the provisions of section 250 (d) of the Revenue Act of 1918 the respondent had five years from that date to assess and collect any additional tax found to be due. The statutory period expired on March 6, 1925. Thereafter, on April 1, 1925, the petitioner filed an unlimited waiver of the statute of limitations, which, being prior to the passage of the Revenue Act of 1926, was effective to revive and extend the statute which had theretofore tolled. Stange v. United States, 282 U. S. 270; Wells Brothers Co. of Illinois et al., 16 B. T. A. 79; Pittsburgh Union Stockyards Co., 16 B. T. A. 139. An unlimited waiver extends the statutory period for a reasonable time, or until termination by either party upon reasonable notice. Wirt Franlelin, 7 B. T. A. 636; Greyloch Mills, 9 B. T. A. 1281; affd., 31 Fed. (2d) 655; certiorari denied, 280 U. S. 566; William S. Doig, Inc., 18 B. T. A. 256; Corn Products Refining Co., 22 B. T. A. 605; and Herman Frost, 23 B. T. A. 411. The second waiver, which was requested immediately upon receipt of the first, fixed a definite date for the termination of the statutory period and in our opinion was a reasonable and sufficient notice to effect a termination of the unlimited waiver as of that date. If the first waiver remained in effect after the execution of the second, the latter could have had no meaning. Since the respondent required the second waiver after his receipt of the first, it is clear that he must have intended that it should be substituted for the unlimited waiver, which we think was abrogated by the request for and the execution of the second waiver. The statute of limitations had run on September 26, 1927, and the respondent was barred from making any further determination with reference to petitioner’s tax liability.

Reviewed by the Board.

Decision will be entered for the petitioner.


author: Van Fossan:

text:
    The Prosperity Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 45896, 59468.
    Promulgated November 8, 1932.

      Benjamin E. Shove, Esq., for the petitioner.

      John H. Pigg, Esq., for the respondent.
   OPINION.

Van Fossan:

In Docket No. 45896 the-petitioner abandoned its claim for a deduction of $90,089.41 covering expenses, losses and bad debts incurred in its dealings with its subsidiary, O. O. Eeeps, Inc. The correct net income for the year 1926 is stipulated to be $29,559.15 and the recomputation of the tax may be made accordingly.

In Docket No. 59468 the petitioner’s contention that it may deduct from its own net income for the year 1928 the net losses of its subsidiaries sustained before affiliation is governed by the decision of the United States Supreme Court to the contrary in Woolford Realty Co. v. Rose, 286 U. S. 319, and consequently the only remaining issue is whether or not the petitioner may deduct the sum of $243,206.52 as a bad debt due from its subsidiary, C. O. Eeeps, Inc., and ascertained to be worthless and charged off in 1928, and also the sum of $30,000 representing the cost of the capital stock in O. O. Keeps, Inc., which stock became worthless in that year. Against the said bad debt and stock loss the petitioner allows a credit of $25,080.69, the amount of the net assets of O. O. Keeps, Inc., acquired by the petitioner in the liquidation of that corporation, and also the sum of $44,340.36, the amount of the net loss of O. O. Keeps, Inc., deducted in the consolidated return of the petitioner and its subsidiaries for the year 1928. Thus the deduction claimed is reduced to $203,785.47.

The facts in the case at bar are on all fours with those of Houghton & Dutton Co., 26 B. T. A. 52. In that case we held that both the loss on the stock of an affiliate and the bad debt due from the affiliate were proper deductions from the gross income of the petitioner, Houghton and Dutton Company. See also Manatee Crate Co., 22 B. T. A. 996; H. Liebes & Co., 23 B. T. A. 787; Aluminum Goods Mfg. Co., 56 Fed. (2d) 568; Catreg Salt Co. et al., 26 B. T. A. 675.

In the stipulated facts it was agreed that the open account of the petitioner against C. O. Keeps, Inc., on December 31, 1928, was $243,206.52 and that the petitioner’s stock investment in C. O. Keeps, Inc., was $30,000. The evidence presented at the hearing showed that such items were ascertained to be worthless and charged off by the petitioner within the taxable year 1928. The loss so determined was reduced by $25,080.69, the net value of all assets of C. O. Keeps, Inc., received by the petitioner upon the liquidation of its subsidiaries. Upon such stipulation and proof the essential elements of loss to the petitioner have been established and it should be allowed. The amount of the net loss of C. O. Keeps, Inc., for 1928, or $44,340.36, has already been deducted from the petitioner’s net income for that year and, therefore, the proper final deduction for losses sustained by the petitioner through C. O. Keeps, Inc., is $203,785.27.

Judgment will be entered under Rule 50.


author: GoodRioh :

text:
    R. E. Nail and George Thompson, Jr., Independent Executors of the Estate of M. M. (Mrs. W. I.) Cook, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 53044
    Promulgated November 9, 1932.

      Percy W. Phillips, Esq., and George Thompson, Jr., Esq., for the petitioner.

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

GoodRioh :

There is no question but that the amounts received from the sale of oil and gas constituted income within the meaning of the revenue acts and, ordinarily, are taxable. The issue here is, Whose income was it? Respondent contends the income belonged to-petitioners’ decedent, because decedent transferred only a right to receive income; petitioners contend that it belonged to the trust, because the trust was the owner of the property from which the income arose.

It is well settled that an assignment of income does not relieve the assignor of the tax thereon, but that if property, or property rights, are transferred the income subsequently arising therefrom is taxable, not to the transferor — for neither the propertv nor the income belongs to him — but to the new owner. This principle is so familiar that citation or discussion of the many decisions of this Board and of the courts in which it is reiterated is unnecessary. It applies equally to real or personal property; consequently, it is here immaterial whether, under the taxing statutes, we regard the oil and gas interests owned by decedent as interests in real property or in personal property. It is only necessary to determine whether Mrs. Cook assigned income, or the property from which income arose. If the former, the income is taxable to her; if the latter, the income was not hers and she is liable to no tax thereon.

At the outset Mrs. Cook owned certain lands in fee. She first sold various undivided fractional interests in the oil and gas underlying certain parts of her property and thereafter, under the leases, disposed of a seven-eighths interest in the oil and gas underlying the entire property, retaining to herself the remaining undivided fractional interest, which varied in amount as to different parts of the property, according to her previous conveyances. It need not be argued that the several property interests embraced by a fee title may be severed and separately may be conveyed or dealt with otherwise. Under the Texas law this is so, particularly of mineral rights, including oil and gas. Stephens County v. Mid-Kansas Oil & Gas Co., 113 Texas 160; Texas Co. v. Daugherty, 107 Texas, 226; Waggoner Estate v. Wichita County, 273 U. S. 113. The severance may be accomplished by a conveyance of oil and gas in place, Hager v. Stakes, 294 S. W. 836, which vests title to the minerals themselves; Ferguson v. Commissioner, 45 Fed. (2d) 573. And, in Texas, oil and gas leases convey to the lessee an interest in the real estate, which is likewise the nature of the interest of the lessor respecting any undivided fractional share of the minerals retained by him under the lease. Japhet v. McRae, 276 S. W. 669; Thiesen v. Robinson, 117 Texas, 289; Group #1 Oil & Gas Corp. v. Bass, 282 U. S. 877, and other cases cited above.

Therefore, at the time she created this trust Mrs. Cook had, with respect to the oil and gas underlying her lands, an undivided fractional interest, recognized as an interest in real property, and she was to be paid ratably from the sale of oil and gas as produced. Now, what did she transfer to the trust? The terms of the instrument are perfectly clear — “ all my present right, title and interest, both legal and equitable, now owned or possessed by me in and to all oil, gas, and other minerals of every nature and description.” In other words, she transferred her entire present interest in all minerals in or under her property. Under the local laws, her interest was recognized as an interest in real property and the instrument was in a form proper for the conveyance, of real property interests. The conveyance created either a determinable fee, an estate well recognized in the substantive law of real property and in Texas (see Thompson on Real Property, vol. 3, secs. 2105 et seq.; Tiffany on Real Property, vol. 1, sec. 93; Waggoner Estate v. Sigler Oil Co., 284 S. W. 921; Texas Co. v. Davis, 113 Texas, 321), or an estate for years, an estate likewise well recognized. We need not decide which, because, as we have stated, it is immaterial whether the interest was in real or personal property, our inquiry is whether that interest was transferred. Here it is apparent that there was a complete transfer of decedent’s present interest in the property. She kept a reversionary interest, but that gave rise to no income. The income here involved arose from the property conveyed and belonged, not to Mrs. Cook, but to the trust. On this issue we hold for petitioner.

As to the second issue, we affirm respondent. In our opinion, the expenditures for attorneys’ fees are not deductible under section 214 (a) (1) of the Revenue Act of 1926 as “ ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business,” nor are they expenditures for the acquisition of additional rights to property to be capitalized and subsequently recouped. Neither the suit, nor the fees paid attorneys for participation therein, served to enlarge, change or acquire for Mrs. Cook any interest in the property; she merely defended what she had. That situation is distinguishable from the decisions relied upon by petitioner—Bliss v. Commissioner, 57 Fed. (2d) 984, where the suit was instituted by the landowner to make realizable income under leases effective only when title was cleared, and F. M. Bugher et al., Executors, 9 B. T. A. 1155, where the taxpayers were engaged in business, in conection with which the expenditures were made for the purpose of enlarging their rights to income or in property. The expenditures in the case at bar fall within that class of personal expenses for the deduction of which the statute makes no provision. Marshall Field, 15 B. T. A. 718; reversed, 42 Fed. (2d) 820; Grace McBride Crile, 26 B. T. A. 1020.

Judgment will be entered wider Bule 60.


author: MaRQUette:

text:
    DeVer C. Warner, Petitioner, v. Commissioner of Internal Revenue, Respondent. DeVer H. Warner, Petitioner, v. Commissioner of Internal Revenue, Respondent. John Field, Petitioner, v. Commissioner of Internal Revenue, Respondent. Ira F. Warner, Petitioner, v. Commissioner of Internal Revenue, Respondent. Bradford G. Warner, Petitioner, v. Commissioner of Internal Revenue, Respondent. Margaret W. Field, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 53743-53747, 60453.
    Promulgated November 11, 1932.

      Arthur M. Marsh, Esq., for the petitioners.

      Arthwr Gamdwff, Esq., for the respondent.
   OPINION.

MaRQUette:

The contention of the petitioners is that the capital assets of the Warner Brothers Company were allocated, part to the common stock and part to the preferred stock, and that so-called dividends paid out of capital assets to the preferred stockholders were paid from that portion allocated to the common stock. Hence, they say there was no distribution of capital assets applicable to the preferred stock and therefore there should be no deduction from the par value of that stock to determine its basic value for gain or loss purposes. There is no dispute respecting the accuracy of respondent’s computations if his premise is correct.

We can not agree with the petitioners. Whatever bookkeeping practice may have been adopted by the Warner Brothers Company, the fact remains that its capital assets constituted a single fund to which creditors and all classes of stockholders alike must look for payment of their claims. We know of no law, and none has been cited to us, by which corporate capital may be allocated among various classes of stock and each allocation made sacred to its assigned stock. Whatever benefit to a corporation and its stockholders may spring from such an allocation, it is simply an accounting device which can not vary or nullify the provisions of the revenue acts. These acts make no distinction. Section 201 (d) of the Revenue Act of 1926 is plain. It provides that:

If any distribution (not in partial or complete liquidation) made by a corporation to its shareholders is not out of increase in value of property accrued before March 1, 1913, and is not out of earnings or profits, then .the amount of distribution shall be applied against and reduce the basis of the stock provided in section 204, and if in excess of such basis, such excess shall be taxable in the same manner as a gain from the sale or exchange of property. * * *

The same language is used in the Revenue Act of 1928, section 115 (d).

Petitioners admit that the distributions to preferred stockholders, in the guise of dividends, were not wholly out of earnings or profits, but were in part out of capital. There is no contention that the distributions were in partial or complete liquidation of the Warner Company. It follows that to the extent that such distributions were made out of capital they constituted returns of capital to the petitioners. Respondent has determined that the earnings of the company were exhausted prior to the time when petitioners acquired the preferred stock in question, hence all the so-called dividends were paid out of capital. No evidence overthrowing that determination was presented.

Petitioners having thus received back a part of their capital through quarterly distributions, the cost basis of their preferred stock was reduced pro tanto, with resulting gain when they resold their stock to the company for par. This applies to petitioner Margaret W. Field as well as to the other petitioners, for after receiving some capital distributions upon her preferred stock she exchanged that stock for bonds which were redeemed by the company at par.

Decision will be entered for the respondent.


author: Trammell :

text:
    Robert R. Meyer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 44032.
    Promulgated November 14, 1932.

      H. A. Mihills, O. P. A., for the petitioner.

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

Trammell :

The petitioner contends that, as a result of the redemption in 1926 of the 213 shares of preferred stock in the Consolidated Naval Stores Company issued to him in 1923 as a stock dividend, he realized a gain of $5,325, which is taxable as a capital gain, since the stock was held by him for more than two years. The respondent contends that the entire amount of $22,365 received by the petitioner upon redemption of the stock is taxable as a cash dividend.

The parties have stipulated that, if we should hold that the income resulting to the petitioner from the transaction is taxable as capital gain, the amount of such income is $5,825, instead of $2,840.14 as reported by him in his return.

The respondent contends that under the provisions of section 201 (g) of the Revenue Act of 1926 the entire amount of $22,365 received by the petitioner upon the redemption of his stock is to be treated as a taxable dividend and subject to surtax. Section 201 (g) of the Revenue Act of 1926 provides as follows:

If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend. In the case of the cancellation or redemption of stock not issued as a stock dividend this subdivision shall apply only if the cancellation or redemption is made after January 1, 1926.

At the time of the stock dividend in 1923 the corporation had earned surplus accumulated since February 28, 1913, sufficient to pay such amount as well as at the time of redemption of such stock in 1926. There is no controversy between the parties as to the shares of the preferred stock in the Consolidated Naval Stores Company received by the petitioner in 1923 being a true stock dividend, nor is there any controversy between the parties respecting the redemption and cancellation by the Consolidated Naval Stores Company of its entire issue of preferred stock in 1926. Accordingly, the question presented for determination is whether the redemption and cancellation by the Consolidated Naval Stores Company of its preferred stock under the circumstances set out in our findings were at such time and in such manner as to make the amounts paid by the company upon such redemption and cancellation essentially equivalent to the distribution of a taxable dividend.

In Pearl B. Brown, Executrix, 26 B. T. A. 901, we considered the purpose and the manner of application of this provision of the act, and there said:

The ordinary intendment and purpose of the statute is plain enough. A stock dividend being constitutionally free from tax, Eisner v. Maeom'ber, 252 ü. S. 189, and a stock redemption being a pro tanto liquidation of investment, the two could easily be used in a common plan so as to circumvent the tax which would be imposed if the distribution were made directly by way of ordinary dividend. To bar such circumvention, the Revenue Act of 1921 taxed the distribution as a dividend whether it was made directly as a dividend or by the more roundabout course, and the subsequent statutes have carried the same provisions with such refinements of expression as were found necessary by experience to fulfill the purpose. Revenue Act of 1921, sec. 201 (d) ; 1924, sec. 201 (f) ; 1926, sec. 201 (g) ; 1928, sec. 115 (g). See H. Kept. 1, 69th Cong., 1st sess., p. 5; S. Rept. 52, 69th Cong., 1st sess. p. 15. While the obvious device, by a close corporation having a surplus, consisting of an expansion of capitalization, a stock issue and stock redemption, all within a short time pursuant to a unified plan, is plainly within the statute (see C. B. YIXI-2, p. 133), the flexible language of the provision makes it clear also that its burdens were not to be imposed arbitrarily (see C. B. VI-2 p. 14). As the taxpayer may not, in view of this statute, avoid the tax by an artificial device of empty forms, cf. W. O. Suntoon, 14 B. T. A. 459, so the Government may not, under this statute, impose a tax merely because there has been a stock redemption, where the circumstances are free from artifice and beyond the terms and fair intendment of the provision. Of course, where the language of the statute is specific and inelastic there is no room for avoiding its effect, whatever the inconsistency with the general purpose as disclosed by later enactments, cf. John Stewart Byran, 20 B. T. A. 573; but, generally speaking, the provisions should be treated as special and applied to promote its special purpose (see Aítfreé A. Lawn, 26 B. T. A. 764).

When the stock dividend was declared in 1923, the corporation did not have sufficient cash available to pay the dividend in cash. This stock dividend was declared in order to bring the capitalization of the company to a figure which more nearly approximated the value of its assets and to have available to- the corporation as capital for its business uses such earnings and profits as it had accumulated. We find nothing in this case to distinguish it from our decision in the Brown case, supra.

The fact that an officer of the company in a subsequent year expressed the view that the redemption of the preferred stock was the equivalent of a cash dividend is not material. It is only his opinion, by which we are not bound, and which in fact throws no light upon the case. We must reach our conclusion on the facts. We see nothing in the case which indicates that the stock redemption should be treated as the equivalent of a cash dividend. '

The amount of gain received in 1926 as the result of the redemption and cancellation of the stock should be taxed as capital gain. Sec. 208 (a) (1) and (8) of the Revenue Act of 1926.

Reviewed by the BoaRd.

Judgment will be entered under Rule SO.


author: ARUndell :

text:
    T. I. Hare Powel, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 64464.
    Promulgated November 14, 1932.

      E. W. Bradford, Esq., for the petitioner.

      B. U. Steele, Esq., for the respondent.
   OPINION.

ARUndell :

The respondent determined a deficiency of $477.40 in income tax for 1929. The error alleged is the imposition of a tax on the value of certain “ rights ” to subscribe for bonds convertible into stock of the issuing corporations.

In 1929 the American Telephone and Telegraph Company, pursuant to authority given it by its stockholders, increased its capital stock and issued ten-year convertible 4y2 per cent gold debenture bonds, dated July 1, 1929. The authorizations provided for the issuance to stockholders of record May 10, 1929, of one “ right ” to subscribe for the bonds for each share of stock held and that six subscription rights would entitle the holder to subscribe, on or before July 1, 1929, for a bond of the face amount of $100. The stockholders exercising the subscription rights had the privilege of exchanging the bonds for stock on or after January 1, 1980, at $180 per share during 1930, $190 per share during 1931 and 1932, and $200 per share during 1933 to 1937, inclusive, subject to reduction on account of the issuance of additional stock. The bonds had a value for conversion purposes equal to their principal sum.

The petitioner owned 600 shares of stock of the American Telephone and Telegraph Company on May 10, 1929, and received 600 subscription rights. He exercised the “rights” prior to their expiration date, and in 1930 exchanged them for 100 shares of stock, paying the difference of $8,000 in the fixed values in cash.

In 1929 the Missouri Pacific Railroad Company issued to the petitioner, as one of its stockholders, 100 “ rights ” to subscribe to convertible bonds, with similar conversion privileges. These subscription rights were issued in March, 1929, expired May 1, 1929, and were exercised by the petitioner.

In his audit of petitioner’s return for 1929 the respondent treated the value of the subscription rights as a taxable dividend.

The respondent’s theory of the case is that the subscription rights were issued for the purchase of bonds of the issuing corporations, not stock, at less than their market value, and that the corporations parted with, and the petitioner received, property, taxable to the latter as a dividend at its market value.

Whether the subscription rights related to the purchase of one or the other of the securities, or both as part of one transaction, is not decisive of the question. None of the stockholders or purchasers from them were under any compulsion to exercise the “ rights,” or, having acquired bonds under them, to exchange the bonds for stock. The purchase of bonds and their exchange for stock was optional with the holders of the “ rights.” The “ rights ” were dealt in freely on the market before the dates of their expiration, and at all times prior thereto had a value. The uncontradicted testimony is that the option given in the subscription rights, to convert the bonds into stock at less than prevailing market quotations, was what made the authorizations valuable. The decision must turn upon whether, with the establishment of a market value for the subscription rights, the petitioner received taxable income. We think this question is answered by Miles v. Safe Deposit & Trust Co. of Baltimore, 259 U. S. 247.

In that case the trust company in 1919 received and sold certain subscription rights to. new stock which it had acquired in its capacity as guardian for the next of kin of a stockholder of the issuing corporation. The Commissioner held the entire sales price to be taxable income. In holding that only the amount received from the sale in excess of cost, computed in a prescribed manner, constituted taxable gain, the court remarked:

It is evident, we think, that such a distribution in and of itself constituted no division of any part of the accumulated profits or surplus of the company, or even of its capital; it was in effect an opportunity given to stockholders to share in contributing additional capital not to participate in distribution. * * * This privilege of itself was not a fruit of. stock ownership in the nature of a profit; nor was it a division of any part of the assets of the company.
4i ***** *
The stockholder’s right to take his part of the new shares therefore— assuming their intrinsic value to have exceeded the issuing price — was essentially analogous to a stock dividend. So far as the issuing price was concerned, payment of this was a condition precedent to participation, coupled with an opportunity to increase his capital investment. In either aspect, or both, the subscription right of itself constituted no gain, profit or income taxable without apportionment under the Sixteenth Amendment. Eisner v. Maoomber, 252 U. S. 189, 40 Sup. Ct. 189, 64 L. Ed. 521, 9 A. L. R. 1570, is conclusive to this effect.

Here there was no sale of the subscription rights during the taxable year, with the result that there was no realization of income on which to levy a tax.

Reviewed by the Board.

Decision, will be entered under Rule 50,


text:
    Richard G. Babbage and Seth Sprague Terry, Executors of the Estate of Frederick M. Hilton, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 47770.
    Promulgated November 15, 1932.

      George R. Jaókson, Esq., and Henry Taray, G. P. A., for the petitioners.

      G. G. Holmes, Esq., for the respondent.
   OPINION.

Trammell :

The sole issue in this proceeding is whether or not the petitioners are entitled to a deduction from gross income for the taxable year on account of legal fees and expenditures made in connection with certain litigation arising from the construction of a building by a lessee on real estate in which the decedent owned a one-half interest. The decedent kept his books and reported his income for tax purposes on the basis of cash receipts and disbursements.

The decedent originally claimed a deduction for legal fees in the amount of $4,962.24, and for court costs, printing briefs and other similar items in the amount of $433.65, making a total of $5,395.89. The parties have since stipulated that the amount paid by the decedent during the taxable year 1926 for legal fees was $2,500, so that the total deduction now claimed by the petitioners is $2,933.65.

The petitioners contend that the deduction of said amount from income for 1926 should be allowed as an ordinary and necessary business expense. The respondent disallowed the deduction as originally claimed on the ground that it represented a capital expenditure, and now contends in effect that the stipulated amount paid by the decedent during the taxable year was in the nature of a capital expenditure which should be allowed as deductions spread ratably over the life of the lease.

A lease contract represents a valuable property right, the right to receive the stipulated rental. The expenditures here in question pertain not alone to the earning of income in the taxable year, during which year they were paid, but are incidental to the earning of income throughout the life of the lease contract. Such expenditures should therefore be exhausted or spread proportionately over the life of the contract, and this is true whether the taxpayer is on a cash or accrual basis.

In Julia Stow Lovejoy, 18 B. T. A. 1179, we held that commissions, fees and printing costs paid by a taxpayer in securing a loan for a period of years covered by a mortgage on property to be leased were not deductible in full in the year of payment, even though the taxpayer was on a cash basis. In that connection we said at page 1182:

In its essence such a disbursement is not unlike bond discount, prepaid rent, cost of acquiring or disposing of a leasehold or term■ contract and many other transactions. They should be spread over the definite period of the loan, lease or contract [citing authorities]. This is on the theory that they result in property of a sort and its cost is being exhausted proportionately over a period of years * * [Italics supplied.]

In Central Bank Block Assn., 19 B. T. A. 1183; affd., 57 Fed. (2d) 5, we applied the principles of the Lovejoy decision in holding that commissions paid by a lessor to an agent for services in procuring a lease contract on the lessor’s property for a period of 50 years represented cost of the lease contract, and that such cost should be spread and allowed as deductions over the years of the lease on the time basis.

In the instant case it is apparent that the lease contract in question was entered into by the lessors in full contemplation of the restrictive clause in the deed by which they took title to the property, and that they anticipated litigation would probably be instituted to prevent the carrying out of the terms of the contract. Such litigation did in fact ensue, which, however, terminated favorably to the lessors. They were thereafter in position to receive the money rentals and to enjoy all other benefits which accrued to them by virtue of the lease contract. The attorneys’ fees and court costs paid in connection with said litigation, therefore, represent the cost to the lessors of the unimpaired contract. The value of that contract was and is being exhausted in proportion to the passage of time, and an aliquot portion of the cost should be allowed as a deduction from gross income for each year of the life of the contract. The life of the contract was 21 years from July 1, 1924, and the decedent’s portion of the cost paid in 1926 was $2,933.65. For the said taxable year the allowable deduction is $139.69. The deficiency will be redetermined accordingly.

Judgment will be entered under Bule 50.


author: SteRNhagen:

text:
    The Siegel Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 21359.
    Promulgated November 15, 1932.

      Arthur B. Foss, Esq., and Florence L. Sivertson, C. P. A., for the petitioner.

      Arthw Oarn&wff, Esq., for the respondent.
   OPINION.

SteRNhagen:

Respondent determined deficiencies in petitioner’s income and profits taxes of $3,526.98 for 1918, $6,036.57 for 1919, and $4,579.20 for 1921. Several issues have been removed by the parties from controversy. The only remaining issue is whether respondent has erroneously reduced petitioner’s invested capital by $14,-250.60, part of a dividend paid in 1917 and which petititioner treated as an account receivable. The following facts were stipulated:

During the period here involved the petitioner corporation had four stockholders, namely, Ferdinand Siegel, Max Baer, Abram I. Wolf and Bernard B. Selling. The first three were the chief stockholders, the fourth one held only one share of stock. The first three were also the directors. Ferdinand Siegel was president, Max Baer was secretary and general manager, and Abram I. Wolf was vice-president and treasurer. During the period here involved and for many years prior thereto, Max Baer was the moving spirit of petitioner corporation.
It was the custom of petitioner to allow Max Baer to determine and direct distributions to stockholders from earned surplus prior to any formal declaration of dividends. Subsequently such distributions, except in the one instance described in the next paragraph, were fully ratified and approved by the Board of Directors as dividends in the amount so distributed. An example of this course of action is reported in the minutes of the directors’ meeting on March 29, 1916, as follows:
“ It appearing that the net earnings of the corporation during the past year was in excess of Twenty-one thousand dollars a dividend of twenty-one thousand dollars was declared, of which six thousand dollars had been distributed September 21, 1915, and nine thousand dollars had been distributed on February 7, 1916. It was moved, supported, and unanimously carried that the remaining six thousand dollars should be distributed among the stockholders in accordance with their respective interests as soon as conditions permit and the part payment of the dividends previously distributed were unanimously ratified and confirmed.”
During the year 1917 the sum of $30,000.00 was distributed in this manner to the stockholders. The Board of Directors at a meeting held on February 2, 1918, took action on said distribution as reported in minutes thereof, as follows:
“ The Secretary reported that checks had been sent out for $30,000.00 as dividends to the stockholders. After a discussion and it appearing that a very large sum of money must be set aside to pay the war income and excess profits tax, it was determined that the amount sent out to stockholders was too large for dividends, and it was moved and carried that a dividend of 75% upon the par value of the stock be declared for the entire year and that each of the stockholders should be charged up with the amount which he had been overpaid and should be considered as a debtor to the corporation therefor, the sum to be deducted from any future dividends payable upon stock.”
In compliance with said action of the Board of Directors the distributees of said $30,000.00 were then charged on petitioner’s books of account with the sum of $14,250.60. These are the accounts receivable referred to in this proceeding as “ ofiicers’ accounts receivable.”
Said stockholders who had so received said total amount of $14,250.60 were responsible financially far in excess of said amount and were at all times financially able to pay said amount and said accounts receivable in said amount were not doubtful or in any part worthless. However, no interest on said accounts receivable was paid by any of said stockholders to the petitioner and no notes or other evidences of indebtedness were given to the petitioner by any of them. During the month of January, 1921, dividends in excess of said amount of $14,250.60 payable to the said stockholders were distributed by the petitioner. At the time of the signing of this stipulation the fact as to whether said dividends in excess of $14,250.60 were paid in cash or whether a credit for said amount was entered against said accounts receivable in lieu of actual cash payment of the dividend or whether the said stockholders received the said dividends in cash and then paid and discharged said accounts receivable by the payment in cash to the petitioner, has not been definitely ascertained by counsel but the fact has been ascertained that said accounts receivable so incurred and so entered in respect of said stockholders was balanced and closed on the books of the petitioner at or about the time of the distribution of said dividends.

The “ sundry accounts ” of petitioner’s ledger show charges in January, 1918, to the four shareholders of $14,250.60 and credits in January, 1921, of the same amount.

The petitioner argues that the amount of $14,250.60 was an account receivable in 1918 and 1919 and therefore within its invested capital. We are of opinion that the amount was not an account receivable nor other asset to be included in capital or surplus or undivided profits. The corporation in 1917 properly distributed $30,000 in the customary manner of a dividend. There is no evidence which would support an attack upon this distribution when it was made, and nothing which would fortify a demand for its return if any shareholder insisted upon keeping it. Feick & Sons Co. v. Blair, 26 Fed. (2d) 540; affirming 7 B. T. A. 106; Hadley v. Commissioner, 36 Fed. (2d) 543; affirming 6 B. T. A. 1031. Of course, if any or all shareholders had actually given it back, whether voluntarily or by virtue of some conceivable agreement, it would have enlarged the existing surplus, and the invested capital would have been augmented accordingly. This would have been by way of paid-in surplus under the statute, but not by way of the corporation’s rescission of a dividend validly declared and paid.

But, in fact, there was no repayment by the shareholders and no express obligation assumed by them to make repayment. They merely consented (if we may take the directors’ resolution as an indication of the shareholders’ individual acquiescence) that each “ should be considered as a debtor to the corporation therefor, the sum to be deducted from any future dividends payable upon stock.” This was, therefore, not an account receivable of the corporation, but only a statement that, in respect of earnings already actually distributed, the distribution should be charged as future rather than present dividends. So far as a present right of the corporation against the shareholders was concerned, it was without substance. The shareholders had the money and the right to keep it. Of course, they had no right to receive it again, and. the directors’ resolution to deduct it from future dividends added nothing to their inherent power to deal with future profits in their official discretion.

The distinction between this case and Pictorial Review Co., 5 B. T. A. 416, relied on by petitioner, lies not alone in the promissory notes which were there given, but also on the circumstances which gave substantial character to an absolute right against the shareholders. That case indicates that it is not the attempted rescission of a prior dividend which enlarges invested capital to its prior state, but the contribution by the shareholders of substantial assets. The mere attempt retroactively to recall the declaration of a dividend where it had already been distributed or otherwise given substantial effect has been refused sanction. L. Schepp Co., 25 B. T. A. 419, 434. In C. S. Webb, Inc., 1 B. T. A. 269, such a distribution was excluded from invested capital until it was actually paid back to the corporation. The decisions cited by petitioner, Kate C. Ryan, Executrix, 2 B. T. A. 1130; Booth Furniture & Carpet Co., 6 B. T. A. 886; Convey & Johnson Co., 8 B. T. A. 52; Younker Brothers, Inc., 8 B. T. A. 333; D. B. Forrester et al., 12 B. T. A. 104; Byrd Printing Co., 15 B. T. A. 55, in which loans to shareholders were held not to be dividends and not outside invested capital, are not controlling here, where there was a dividend in the first place. More similar cases have gone the other way, Greenfield Brothers Clothing Co., 9 B. T. A. 9; Temte-Johnson Co., 10 B. T. A. 287; and see Zenith Milling Co. v. Lucas, 41 Fed. (2d) 905; affirming 8 B. T. A. 1279; Consolidated Electric Lamp Co., 1 B. T. A. 616; Electrical Supply Co., 1 B. T. A. 658; O'Neil Construction Co., 4 B. T. A. 401; Lobsitz Hardware Co., 5 B. T. A. 295; R. Hamerslough Mercantile Co., 6 B. T. A. 824; Good Manufacturing Co., 7 B. T. A. 202; Elgin Butter Tub Co., 12 B. T. A. 1313; Adam, Meldrum & Anderson Co., 15 B. T. A. 812; George Engineering Co., 21 B. T. A. 532. Even when amounts distributed to shareholders have been subsequently actually used by the corporation, they have been held to be borrowed and excluded from invested capital, Weed & Brother v. United States, 69 Ct. Cls. 246; 38 Fed. (2d) 935; certiorari denied, 282 U. S. 846; Logan Gregg Hardware Co. v. Heiner, 26 Fed. (2d) 131; Feick & Sons Co. v. Blair, 26 Fed. (2d) 540; affirming 7 B. T. A. 106; Southport Mills, Ltd. v. Commissioner, 26 Fed. (2d) 17; affirming 6 B. T. A. 1073; Cohn-Goodman Co., 7 B. T. A. 475; Roshek Brothers Co. et al., 2 B. T. A. 260; William H. Davidow Sons Co., 1 B. T. A. 1215; Kelly-Buekley Co., 1 B. T. A. 1154.

The determination of the respondent is sustained upon this point.

Judgment■ will be entered under Buie 50.


author: Black:

text:
    J. J. Carroll, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 47669, 51880-51892.
    Promulgated November 15, 1932.

      Moultrie Hitt, Esq., and G. Kibby Mv/nson, Esq., for the petitioners,

      J. M. Leinenkugal, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Mrs. Lena Carter Carroll; A. L. Carter; Mrs. A. L. Carter; Mrs. H. A. Carter; Mrs. Lillie N. Carter; W. T. Carter, Jr.; Frank Haywood Nelms; Mrs. Frank Haywood Nelms; R. D. Randolph; Mrs. Frankie Carter Randolph; Mrs. Jessie Carter Taylor; Judson L. Taylor; A. L. Carter, Administrator of the Estate of Mande H. Carter.

   OPINION.

Black:

There are two issues in this proceeding and petitioners state them in their brief as follows:

(1) Shall the petitioners, who were recipients of a gift on September 15, 1919, of an interest in the assets of the partnership of W. T. Carter and Bro., be denied a computation for depletion of the new partnership’s timber which gives due consideration to the value of such timber on the day of the gift.
(2) Shall the petitioners each be denied the election to compute the tax on his or her share of partnership profits derived from the sale by a manufacturer of lumber (not a corporation) of timber which has been owned for more than two years, under the provisions of section 206(b), Act of 1921, and sections 208(b), Acts of 1924 and 1926.

It is contended by petitioners that there should be a revaluation of the timber assets of the new partnership as of the date of its organization, September 15, 1919, for depletion purposes in determining the distributive income of the respective partners. The respondent contends that no new basis was created for depletion purposes by the organization of the new partnership and that it remained as before. We agree with respondent in this contention.

In the case of Henry Wilson, 16 B. T. A. 1280, F. A. Wilson and Winfred T. Wilson had acquired by gift from their father on January 2, 1918, a interest in a partnership known as Wilson Brothers & Company, which on that date owned a large acreage of standing timber, together with logging railroads and equipment. The Board held that the new partnership was not entitled thereby to a new basis of depletion of its timber.

To the same effect is the case of Alpin J. Cameron, 8 B. T. A. 120, where a father made a gift of a $250,000 interest in a woolen mill to his son. It was contended that, so far as the son’s interest was concerned, depreciation should be calculated upon the value of his interest in the depreciable assets of the partnership at the time of the gift. But the Board held to the contrary and denied taxpayer’s contention. The Garrieron case was before the Board again in 20 B. T. A. 805, and was decided in the same way as in the former case. The latter case was affirmed in Cameron v. Commissioner, 56 Fed. (2d) 1021. These decisions are controlling here, and, under clause 10(b) of the stipulation of facts, the value of the timber for depletion purposes is $4,937 per thousand for pine and $3 per thousand for hardwood.

The remaining question is the claim by petitioners of the right to elect to have the profits derived from the sale of certain quantities of standing timber cut during the taxable years computed on the basis of capital net gain on a sale of capital assets under section 206(b) of the Revenue Act of 1921, and section 208(b) of the Revenue Acts of 1924 and 1926.

Petitioners contend that growing timber owned by the partnership of W. T. Carter & Bro. constituted capital assets, having been owned and held by the partnership for more than two years next prior to the years of sale, and come within the capital gain provisions of the applicable revenue act, while respondent claims that the timber sold was stock in trade, or was property held by W. T. Carter & Bro. primarily for sale in the course of its trade or business and was therefore excluded from the benefits of the capital gain provisions of the law.

The 13th clause of the stipulation of facts provides as follows:

“W. T. Carter and Bro., a partnership, is and always has been engaged in the manufacture and sale of lumber at wholesale.”

The deficiency for 1923 is governed by the Revenue Act of 1921 while those for 1924 and 1925 come within the provisions of the Revenue Acts of 1924 and 1926. The difference in the acts was stated by the Board in Clinton Gilbert, Executor, 20 B. T. A. 765, as follows:

“ Capital assets ” are defined by the Revenue Act of 1921 as follows:
Seo. 206. (a) That for the purpose of this title:
*******
(6) The term “capital assets” as used in this section means property acquired and held by the taxpayer for profit or investment for more than two years (whether or not connected with his trade or business), but does not include property held for the personal use or consumption of the taxpayer or his family, or stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year.
And by the Revenue Act of 1924 as follows:
Sec. 208. (a) For the purposes of this title—
# * * * * $ *
(8) The term “ capital assets ” means the property held by the taxpayer for more than two years (whether or not connected with his trade or business) , but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business.
Under the 1921 Act property had to be “ acquired and held by the taxpayer for investment or profit for more than two years (whether or not connected with his trade or business),” but under the 1924 Act the property merely had to be “held by the taxpayer for more than two years,” without mention of whether it was held for investment or profit, before such property could be considered “ capital assets.” After having specifically provided that property held for two years would be considered capital assets, both acts expressly excluded property which would properly be included in a taxpayer’s inventory if on hand at the close of the year. In addition, the 1921 Act excluded property held for the personal use or consumption of taxpayer or his family, while the 1924 Act excluded “property held * * * primarily for sale in the course of his trade or business.”

Section 208(a) (8) of the Revenue Act of 1926 is substantially the same in its definition of capital assets as is section 208(a) (8) of the Revenue Act of 1924.

Property excluded by all three acts from capital assets includes “ stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year.”

Under the laws of Texas, where the owner of standing timber enters into a contract to sell it and the vendee agrees to cut, remove and pay for it as removed within a specified time, the title to the timber remains in the vendor until the timber is cut, removed and paid for. Florence A. Foster, 18 B. T. A. 819, affirmed on this point in 67 Fed. (2d) 516. It results that until so cut and removed the timber is part of the realty, and we have decided in a number of cases that real estate is not stock in trade and not properly included in an inventory. Atlantic Coast Realty Co., 11 B. T. A. 416; Albert F. Keeney, 17 B. T. A. 560; John M. Welch, Sr., 19 B. T. A. 394.

We think it clear that the standing timber of W. T. Carter and Bro., the partnership, was not a part of its stock in trade and was not property which it should properly include in its inventory. We hold, therefore, that as to the taxable year 1923, taxable under the 1921 Act, petitioners are entitled to have the gains derived from the sale of standing timber computed under the capital gain provisions of the 1921 Revenue Act. But this holding does not dispose of the taxable years 1924 and 1925, governed by the Revenue Acts of 1924 and 1926.

Both of these acts carry a provision which excludes, in addition to the exclusion carried in the 1921 Act, from the benefits of the capital gain provisions of the. acts, property held by the taxpayer primarily for sale in the course of his trade or business. This provision manifestly broadens the exclusions found in the 1921 Act, referred to above. In construing the meaning of this provision the Board said, in John M. Welch, Sr., 19 B. T. A. 394:

It may at once be admitted that real estate is not property to be included in the inventory. We so held in Atlantic Coast Realty Co., 11 B. T. A. 416, and Albert F. Keeney, 17 B. T. A. 560. As we see the problem presented by these proceedings, it is whether the real estate owned by the petitioner and sold partly during the taxable years and partly in prior taxable years constituted property held by the petitioner primarily for sale in the course of his trade or business. What connotation is to be given to this language of the taxing acts as applied to the instant proceedings?
We think that it means that where a person is engaged in business and in the conduct of that business sells property which is held for sale in the business, such person may not claim the benefit of the capital gains provision of the statute. The question here is whether the petitioner was engaged in a real estate business during the years 1924, 1925 and 1926. We think that he was. He was a member of a partnership which was actively engaged in a real estate business and which was selling and endeavoring to sell the property held by the petitioner. Clearly, he was engaged in the real estate business in which the partnership was engaged. But the evidence shows further that the petitioner had over a series of years subdivided different tracts of land and held the lots in such subdivisions for sale. We think, indeed, that as an individual the petitioner was engaged within the meaning of the statute in a real estate business.
There can be no question that the real estate owned by the petitioner was property within the meaning of section 208(a) (8) of the Revenue Acts of 1924 and 1926 and that the property was held primarily for sale. * * *

Undoubtedly any timber which the partnership of W. T. Carter and Bro. cut into lumber during the taxable years and sold as lumber, would be, under the above cited case and other cases of the Board, excluded from the capital gain provisions of the law. Petitioners do not contend otherwise. The business of the partnership was to cut timber and manufacture it into lumber and sell such lumber at wholesale. The lumber would be its “ stock in trade,” would be “ property includable in its inventory,” and would also be property “ held primarily for sale.” But we do not think we should hold, under the facts as they have been stipulated, that the standing timber of W. T. Carter and Bro. was property held by the partnership “ primarily for sale in the course of its trade or business.”

We have already pointed out that its trade or business was that of a wholesale lumber manufacturer and dealer and we believe it is reasonable to say that the ordinary course of manufacturers and sellers of lumber at wholesale is not to sell their standing timber, but to cut it themselves and manufacture it into lumber and sell the lumber. We hold that the standing timber owned by the partnership of W. T. Carter and Bro., and sold by it during the taxable years in the manner specified in the stipulation, was not property held by the partnership “ primarily for sale in the course of its trade or business,” and hence is not excluded from the capital gain provisions of the Revenue Acts of 1924 and 1926. On this issue we hold for petitioners.

Reviewed by the Board.

Decision will be entered vmder Bule 50.

Sternhagen and Matthews dissent on the second point.