author: Arnold:

text:
    George N. Spiva, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 98293.
    Promulgated March 27, 1941.

      Ellsworth O. Alvord, Esq., Floyd F. Toomey, Esq., and O. S. Dobs,on, G. P. A., for the petitioner.

      Gene W. Reardon, Esq., for the respondent.
   OPINION.

Arnold:

This proceeding involves a deficiency in income taxes for 1936 of $2,412.73. One of the two errors alleged was apparently abandoned by petitioner, as no evidence was offered with respect thereto. The issue to be determined is whether the income from a certain trust, paid to the beneficiaries thereof, is taxable to petitioner under section 166 of the Revenue Act of 1936. A written stipulation of facts was filed at the hearing and a further stipulation was read into the record. We adopt the stipulated facts as our findings, but set forth only such portions thereof as we deem' necessary for a proper determination of the controversy.

Petitioner resides in Joplin, Missouri, and filed his income tax return for 1936 with the collector at Kansas City, Missouri. At all times material herein he was an officer of the Conqueror Trust Co. •of Joplin, Missouri, and during 1936 he was and at all times since has been its president.

On August 14, 1926, petitioner and his wife, Bessie T. Spiva, entered into a trust agreement with the Conqueror Trust Co. of Joplin, Missouri, as trustee, under which they transferred 1,200 shares of •6 percent cumulative nonvoting debenture stock of E. I. du Pont De Nemours & Co. of the par value of $100 each, in trust for the benefit of their three children, Hubert T. Spiva, Bessie Spiva Tim-mons and George A. Spiva, all of whom were then adults. The stock certificates transferred in trust bore the following inscription: '“George N. Spiva and Bessie T. Spiva as joint tenants and not as tenants in common with the right of survivorship. 214% West Eourth St., Joplin, Mo.”

The trust instrument provided for the payment of the net income in monthly installments to the named beneficiaries, share and share .alike, for a period of 20 years, at the end of which time the trust fund was to be distributed to them share and share alike. The surviving child or children were to take the income and principal •of any deceased beneficiary, if no child or children survived then •to the other beneficiaries. If all beneficiaries died without child or children surviving, the trust fund was to go to the donors, or either •of them, or, if neither survived, to petitioner’s estate and was to pass under the residuary clause of his last will and testament.

Paragraph Eighth of the trust agreement provided as follows:

The Donors expressly reserve the power to be exercised only by themselves in writing to alter, amend, modify or revoke in whole or in part the Trust hereby ■established and to direct the Trustee as to the disposition of the then Trust Fund.

The petitioner’s wife, Bessie’T. Spiva, died November 15, 1926.

On February 12, 1929, petitioner drafted and signed a proposed ¡amendment to the trust agreement of August 14, 1926, which, after •reciting that the donors had reserved “unto themselves the right to amend, modify or change said trust instrument at any time in writing”; -that Bessie T. Spiva “has since died without exercising the right to revoke said instrument”, and that petitioner “has no desire to change •said instrument other than in this amendment provided”, states:

Now Therefore, in consideration of the covenants in said trust instrument ■contained and in pursuance of the power conferred on him by said Section Eight ■(8) in said trust agreement, George N. Spiva, the surviving Donor, hereby waives ¡and surrenders all right and power to further amend said instrument in whole or in part from this date the provisions in said Section Eight notwithstanding, all other terms and conditions to remain nnchanged.

During the calendar year 1936 the net income of the trust, consisting of dividends on E. I. du Pont De Nemours & Co. debenture stock, amounted to $7,020, which was paid to the beneficiaries thereof for their own use and benefit.

On December 31, 1938, the trustee, as plaintiff, filed an action in, the Circuit Court of Jasper County, Missouri, under the Missouri Declaratory Judgment Act, against Hubert T. Spiva, Bessie Spiva Tim-mons, George A. Spiva,-and George N. Spiva, defendants, in order to secure a declaration of the rights of the parties under the trust. On May 13, 1939, all of the defendants waived issuance and service of summons and voluntarily entered their appearances.

On May 22,1939, the court:

* * * decreed, adjudged and declared that the effect of the death of Bessie T. Spiva and the execution and delivery of said written amendment of February 12,1929, to plaintiff as trustee by defendant George N. Spiva as surviving donor of said trust now is, and at all times since death of Bessie T. Spiva and said date of February 12, 1929, has been, to constitute said trust and trust agreement irrevocable by said defendant George N. Spiva as of date of February 12, 1929, and that said trust and trust agreement is now, and has been since death of said Bessie T. Spiva and at all times since said date of February 12,1929, irrevocable by said George N. Spiva and that plaintiff as said trustee consider and hold said trust and trust agreement as irrevocable by said George N. Spiva at'all times since death of Bessie T. Spiva and said date of February 12, 1929, and administer said trust as irrevocable by said George N. Spiva acting alone and that the costs of this proceeding be taxed against plaintiff.

No appeal was taken from said decree and it has become final.

The respondent determined that the trust was revocable during 1936 and that its net income of $7,020 was taxable to petitioner under-section 166 of the'Revenue Act of 1936. This increase in petitioner’s taxable income, together with the disallowance of certain deductions, resulted in the deficiency in controversy.

Petitioner contends that the power of revocation contained in the eighth paragraph was terminated prior to 1936 and that section 166,1 which relates to revocable trusts, is inapplicable. Petitioner relies entirely upon the judgment of the state court as being determinative of the only issue presented. If, as a matter of law, the decision of the' state court is determinative of the character of the trust, i. e., whether revocable or irrevocable, then this trust was irrevocable after February 12, 1929.

In Helvering v. Rhodes Estate, 117 Fed. (2d) 509, the Eighth Circuit considered the effect of two certain decrees of the Circuit Court of the County of St. Louis, and agreed with the Board, 41 B. T. A. 62, that such decrees were binding and determinative of the ownership of the property involved. Here the Circuit Court of Jasper County has determined and declared that, after the death of petitioner’s wife and after the amendment of February 12, 1929, the trust was irrevocable, and should be so considered by the trustee. The donor was a resident of Missouri and his disposition of property within that state was subject to its laws. By that law the character of the trust is to be determined. Blair v. Commissioner, 300 U. S. 5. The decree of the Circuit Court of Jasper County recites that all the parties were before the court, represented by counsel or in person, that an actual controversy existed, and from the evidence adduced, found and determined that the trust was irrevocable. Since that decision has become final it can not be ignored. Freuler v. Helvering, 291 U. S. 35; Estate of Frederick R. Shepherd, 39 B. T. A. 38; Susan B. Armstrong, 38 B. T. A. 658.

The deficiency should be recomputed by eliminating the trust income from petitioner’s taxable income. In all other respects respondent’s determination is approved.

Decision will T)e entered under Rule 50.
      SEC. 166. REVOCABLE TRUSTS.
      Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested—
      (1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or
      (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom,
      then the income of such part of tne trust shall be included in computing the net income of the grantor.


source: Caselaw Access Project

author: Sternhagen :

license: Public Domain

text:
    Albert E. Schwabacher, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 100864, 100865, 101268, 101269.
    Promulgated March 27, 1941.

      John C. Altman, Esq., and Willard L. Ellis, Esq., for the petitioners.

      Arthur L. Murray, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: James H. Schwa-hacher ; May K. Schwabacher; and Sophie D. Schwabacher.

   OPINION.

Sternhagen :

1. The petitioners claim that in determining the partnership income a deduction is required of the $25,000 paid in 1936 in settlement of the litigation to compel the transfer of Ehrich’s stock exchange membership and the $8,540.08 attorneys’ fees. Both parties agree that the same considerations affect the question of deduction of each of the two items.

There is no conflict in the evidence and no dispute as to the facts, although many of them were not stipulated and were introduced by testimony.

The petitioners’ contention must be rejected. The payment was an additional cost of the membership in the Stock Exchange which was not an expense of carrying on the trade or business but an investment in one of the essential assets of the business, the use of which was to be felt steadily in the firm’s stock exchange transactions for an indefinite period. The technical question of pwnership of the seat and of the right of the partnership to be a member of the exchange is of no significance in this controversy. The 1936 payments were made for the-same purpose as the. earlier payment to Ehrich, i. e., to secure the use of a stock exchange membership. Essentially the rationale of the 1936 payments is not affected by whether the estate’s refusal to execute the transfer papers was unethical, as it apparently was. Even though it were a “hold up” to which petitioners were willing to yield, the price was not an ordinary and necessary expense of doing business, but was a means of clearing the way for getting the use of what it had bought from Ehrich. It is no more deductible than' the payments in Moynier v. Welch, 97 Fed. (2d) 411; Murphy Oil Co. v. Burnet, 55 Fed. (2d) 17; Morgan Jones Estate, 43 B. T. A. 691.

The deduction was properly disallowed.

2. The Commissioner would tax the entire gain to Albert E. Schwabacher and May K. Schwabacher which it is agreed they realized in the exchange by them of their debentures in the old' Theatre Equipment company for shares in the new company and warrants to buy Twentieth Century Fox Film shares. The petitioners demand that under section 112 (c) (1), Revenue Act of 1936, the gain is to be recognized only to the extent of the agreed value of the warrants. It is not disputed that they held the debentures more than two and less than five years and that only 60 percent of the recognizable gain is to be taxed. The question upon which there is disagreement is whether there was a “reorganization” under section 112 (g) (1) (C).

There is no essential difference here from the “reorganizations” under the same section which existed in Commissioner v. Kitselman, 89 Fed. (2d) 458; certiorari denied, 302 U. S. 109; Alabama Asphaltic Limestone Co., 41 B. T. A. 324; James Q. Newton Trust, 42 B. T. A. 478 (on review C. C. A., 10th Cir.). The doctrine of those cases is that the term “stockholders” in subdivision (C) is not to be literally applied only to holders of shares but is to be interpreted broadly enough to include bondholders and other creditors who, because of the excess of liabilities over assets of the corporation, have become “pretty much the corporation” and are like stockholders in that they have a beneficial, if not a technical, ownership of the corporation. In this view, the “stockholders” were, after the transfer of the old company’s assets to the new, the owners of more than 80 percent of the combined voting power of the stock of the new corporation. Upon the authority of those decisions, the Commissioner’s determination upon the point must be reversed and the recognition of taxable gain limited to the agreed value of the warrants to buy Twentieth Century Fox Film shares.

Decisions will Toe entered, wnder Bule, 50.

         SEC. 112. RECOGNITION OF GAIN OR LOSS.
      ***** * *
      (g) Definition of Reorganization. — As used in this section and section 113—
      (1) The term “reorganization” means * * * (C) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred.


author: HakroN:

text:
    Max Freedman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99886.
    Promulgated March 27, 1941.

      Charles B. Berne, Esq., for tbe petitioner..

      W. W. Kerr, Esq., for tbe respondent.
   OPINION.

HakroN:

The sole question is whether in the taxable year petitioner is entitled to a credit of $400 for each of his two children. The question arises under section 25 (b) (2) of the Revenue Act of 1936, the pertinent provisions of which are as follows:

There shall be allowed for the purposes of the normal tax and the surtax the following credits against net income:
(2) Cheeet fob dependents. — $400 for each person (other than husband or wife) dependent upon and receiving his chief support from the taxpayer if such dependent person is under eighteen years of age or is incapable of self-support because mentally or physically defective.

On bis income tax return for tbe taxable year petitioner claimed a credit of $400 for each of bis two children. In tbe statement attached to tbe deficiency notice respondent disallowed tbe credits on the ground that the children were not financially dependent on petitioner in tbe taxable year.

In the taxable year tbe children were under eighteen years of age and received their entire support from petitioner. Thus the basic question for determination is whether in the taxable year the children were “dependent upon” the petitioner within the meaning of section 25 (b) (2).

The credit for dependents provided for under section 25 (b) (2) “is plainly designed to effectuate a system of income taxation based on the taxpayer’s ability to pay.” Morrell v. Commissioner, 107 Fed. (2d) 34. Congress has not defined the meaning of the words “dependent upon” as used in section 25 (b) (2). The words import on their face the orthodox conception of dependency which connotes “actual support plus some form of preexisting and at least ethical obligation.” Morrell v. Commissioner, supra. In his regulations respondent consistently has stated that the credit for dependents “is based upon actual financial dependency and not mere legal dependency.” See art. 25-6, Regulations 94; Harry Sommers, 32 B. T. A. 490. Actual financial dependency alone is not enough; there must be also an obligation to support resting “upon some moral or legal or equitable grounds.” Morrell v. Commissioner, supra. Even though a taxpayer’s minor children have independent means, there is legal dependency if he is under a legal obligation to support them, and there is actual financial dependency if he actually furnishes their entire support. Warren S. Booth, 43 B. T. A. 846.

Respondent contends that in the taxable year the two children were financially independent because each of the two trusts for their benefit had an income of approximately $6,000 and that thus they were not “dependent upon” petitioner within the meaning of the statute. He relies on Augustus S. Loyless, 40 B. T. A. 600. Petitioner contends that in the taxable year the two children were not financially independent because their right to receive income or principal of the two trusts was within the sole discretion of the trustee and none of the income or principal of the two trusts in fact was distributed to them; and that, in any event, they were “dependent upon” petitioner because he was under a legal obligation to support them and in fact furnished their entire support.

In our opinion the two children were “dependent upon” petitioner in the taxable year within the meaning of the statute. Petitioner was under a legal obligation to support the two children out of his own personal funds (Ohio General Code, sec. 7997); regardless of whether or not the two children had property of their own sufficient for that purpose. See In re Gould, 2 Ohio D. (NP) 398; Warren 3. Booth, supra. And in the taxable year he furnished the entire support of the two children out of his own personal funds. See Warren S. Booth, supra; Paul & Mertens, Law of Federal Income Taxation, 1939 Cum. Supp., sec. 30.10; I. T. 1618, C. B. II-1, p. 123. In the taxable year the two children had no property other than their interests under the three trusts created by petitioner. Under the trust created for the joint benefit of their mother and themselves, the two children had no right to receive the income or principal until their mother’s death, and their mother was living throughout the taxable year. Under the two trusts created for their benefit the right of the two children to receive the income or principal was within the sole and absolute discretionary power of the trustee in the taxable year. The clear weight of the evidence indicates that the trustee exercised her discretionary power in the taxable year so that none of the income or principal of each of the two trusts was distributed; and that all of the income of each of the two trusts was accumulated with the exception of a small amount used to repay a loan to the trust and a small amount used to satisfy personal property taxes levied on the trust estate. Even if the income or some of the principal of the two trusts had been distributed in the taxable year, the children would have still been “dependent upon” petitioner within the meaning of the statute, because he was under a legal obligation to support them and actually furnished their entire support. Warren 8. Booth, supra. See Paul & Mertens, Law of Federal Income Taxation, 1939 Cum. Supp., sec. 30.10; I. T. 1618, supra. The conclusion that the children were “dependent upon” petitioner in the taxable year falls clearly within the legislative purpose underlying section 25 (b) (2), i. e., “to effectuate a system of income taxation based on the taxpayer’s ability to pay.” See Morrell v. Commissioner, supra.

Augustus S. Loyless, supra, on which respondent relies, is distinguishable. In that case the person on account of whom the taxpayer claimed a credit under section 25 (b) (2) was an adult, the taxpayer’s mother, who did not receive her “chief support” from the taxpayer (except under a contract entered into by the taxpayer for a valuable consideration) and who owned property the value of which was not shown.

It is held that petitioner should be allowed a credit of $400 for each of his two children in the taxable year.

Decision will be entered under Rule 50.


author: OppeR:

text:
    David A. DeLong, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101264.
    Promulgated March 27, 1941.

      Raymond A. Food, Esq., for the petitioner.

      Homer J. Fisher, Esq., for the respondent.
   opinion.

OppeR:

This proceeding was brought for a redetermination of a ■deficiency in petitioner’s 1936 income tax in the amount of $986.53.

At the hearing respondent obtained leave to make the allegations ■conform to the proof and asserted an additional deficiency by reason thereof. Petitioner claims an overpayment of $209.70 oil an alternative theory of the case.

The primary question involved is the character of a transaction wherein petitioner transferred 8 shares of stock in the American Broach & Machine Co. and received 782 shares of stock in the Sundstrand Machine Tool Co. and $14,000.

For approximately 18 years prior to the reorganization hereinafter set forth, taxpayer was the owner of 8 shares of stock of the American Broach & Machine Co. of Ann Arbor, Michigan (hereinafter referred to as the American Co.), which had a total of 297 shares issued and outstanding. All of the stock except the shares owned by petitioner were owned by Francis J. Lapointe, individually •or as trustee, and his wife. Lapointe had been the president and general manager of the American Co. from its incorporation.

Prior to February 3,1936, Lapointe approached petitioner and negotiated with him to exchange his stock in the American Co. for 782 shares in the Sundstrand Machine Tool Co. (hereinafter referred to as Sundstrand) in a proposed reorganization which Lapointe was negotiating. At one stage in the negotiation he offered to buy petitioner’s stock for $10,000. He had to have petitioner’s stock to go along with the deal and he was willing to pay him for it. Petitioner decided that he wanted $30,000 in Sundstrand stock or its cash equivalent for his American Co. stock, which Lapointe refused. In the latter part of January 1936 Lapointe and petitioner orally agreed that petitioner should receive 782 shares of Sundstrand stock or its equivalent in cash at $10 per share, and $14,000 in cash. The cash was to be paid by Lapointe. Petitioner was not willing otherwise to go along with the reorganization.

The agreement was conditioned upon Lapointe effecting the proposed reorganization with Sundstrand. It was also part of the agreement that petitioner was to sign any papers at Lapointe’s request for the consummation of the reorganization.

On February 3, 1936, Lapointe presented to petitioner and asked him to sign a document authorizing Lapointe “to sell and transfer” all petitioner’s interest in the American Co. to the Sundstrand Co., “or any person or persons whatever and for the transfer to” him of 782 shares of Sundstrand and $14,000 in cash. Lapointe was also “for me and in my name, place and stead to make and pass all necessary acts of assignment, and to receive and give receipt for the consideration, money and stock arising from the exchange of stocks and the receipts of cash as above provided.” Petitioner executed and delivered this instrument to Lapointe. The words “or any person or persons whatever” were used in order that Lapointe might, if necessary, have the stock issued to himself.

On the same day petitioner executed the reorganization agreement, under which the stockholders of the American Co. and Sundstrand agreed “to effect an exchange whereby the Stockholders [of the American Co.] shall acquire from Sundstrand Company, 29,145 shares of its capital stock, no par value, and the Sundstrand Company shall acquire from the Stockholders all the issued and outstanding capital stock of the American Company and * *

As part of the consideration for the exchange it was further agreed that Sundstrand would enter into an employment contract providing for the employment of Lapointe by Sundstrand for a period of five years, at an annual salary of $15,000 per year.

It was further agreed that Lapointe and his wife would lease to the American Co. for five years the land and buildings in which the plant is located, with an option running to Sundstrand.

Petitioner also on that day executed transfer certificates for his stock in the American Co. in blank and delivered the stock certificates and the transfer certificates to Lapointe at Ann Arbor.

It did not make any difference to petitioner whether he received the cash from Lapointe or Sundstrand, or whether he transferred his stock to one or the other.

Immediately following the execution of these papers by petitioner, and on the 4th or 5th of February 1936, Lapointe took petitioner’s American Co. stock certificates, the reorganization agreement, and the power of attorney with him to Chicago, where he consummated the reorganization on behalf of the stockholders of the American Co. with Sundstrand.

The reorganization agreement is dated January 31, 1936, but was executed by petitioner on February 3, 1936, and the reorganization consummated a day or two later. The dating of the reorganization agreement as of January 31, 1936, was for accounting purposes.

Petitioner took no part in the negotiations with the Sundstrand Co. His dealings were with or through Lapointe.

The reorganization agreement called for the stockholders of the American Co. to pay the expenses for an audit of the books and an appraisal of the assets of the American Co. Petitioner contributed no part of that expense or any of the expense incident to the reorganization.

The reorganization was effected by the transfer to Sundstrand of 297 shares of the American Co. for 29,145 shares of Sundstrand stock.

On February 6, 1936, after the reorganization was consummated in Chicago, Lapointe delivered to petitioner a stock certificate for 782 shares of Sundstrand stock and paid him $14,000 out of his own money. The stock was issued direct to petitioner.

The fair market value of Sundstrand Co. stock on February 3 and February 6, 1936, was $10 per share.

Petitioner paid $400 for 4 shares of his American Co. stock and was given 4 shares at the time of the incorporation of the American Co. in 1918. Its par value was $100 per share.

In his return, showing a net income of $12,708.57, petitioner treated the transaction as a sale of his 8 shares of American Co. stock for. cash of $14,000 and 782 shares of Sundstrand stock at $10 per share, with 30 percent of the gain to be recognized.

In disallowing this respondent in his notice of deficiency stated:

Based on the facts of record it is the opinion of this office that the exchange of stocks is an exchange in reorganization as contemplated under Section 112 (g) of the Revenue Act of 1986, from which no gain or loss is recognized. * * *
Inasmuch as the cash of $14,000.00 was paid to you by Francis J. Lapointe, majority stockholder of the American Company, and not by the Sundstrand Company, and inasmuch as such payment was not a part of the agreement of reorganization dated January 81, 1936, nor did other stockholders of the American Company receive a similar cash payment, it is held that such payment constitutes ordinary income taxable in full as adjusted in item (b) of this statement.
Tour contention that the $14,000.00 constituted part of the sale price of a capital asset, or in the alternative was received as part of an exchange in reorganization, cannot be conceded.

Even though we assume, as urged by respondent, that petitioner participated in the plan of reorganization, and obtained from that source the Sundstrand stock in exchange for his American Co. shares, it does not follow that the additional consideration he received for selling his stock was ordinary income as opposed to capital gain. There is no requirement of which we have been made aware that the sales price of an article can not be paid in whole or in part by one other than the vendee. It seems to us to be apparent from the record that petitioner disposed of his American Co. stock and received in exchange 782 shares of Sundstrand stock and $14,000 in cash. “That was the crux of the business” to petitioner, as it should be to us. Griffiths v. Helvering, 308 U. S. 355, 357. We see no reason why the total consideration should not be treated as the sales price of the stock, and the excess over cost as capital gain. James Brown, 10 B. T. A. 1036, 1054.

To the extent, however, that the stock received came to petitioner in what was concededly a reorganization subject to the nonrecognition provisions of section 112, the gain is not subject to tax. In computing the proper amount payable, therefore, the total capital gain should be apportioned between the stipulated value of the stock and the cash, and only that portion of the gain attributable to the cash should be included as presently taxable.

It is true a somewhat different version of the same facts has been arrived at. Lapointe v. United States (U. S. Dist. Ct., E. Dist. Mich., Feb. 28, 1941). But for such variation the difference in presentation and record may be largely responsible. At any rate there is no indication that such inconsistencies as may exist will work any hardship or injustice on either party to this proceeding.

Decision will he entered under Bule 50.


author: Black: Leech,

text:
    Frank W. Ross, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91107.
    Promulgated April 1, 1941.

      Marion N. Fisher, Esq., Montgomery B. Angelí, Esq., and Crad-dock M. Gilmour, Esq., for the petitioner.

      Thomas H. Lewis, Jr., Esq., for the respondent.
   OPINION.

Black:

We shall consider the issues m the order of their statement. We think the primary issue is controlled by section 217 (a) (2) (B) of the Revenue Act of 1926, section 119 (a) (2) (B) of the Revenue Acts of 1928, 1932, and 1934, respectively, and by our decision in Lord Forres, 25 B. T. A. 154. The cited statutory provisions being substantially the same, we have set out in the margin only those of the 1934 Act. To the extent that petitioner has received “dividends” from the Ross Corporation there can be no question as to the intent of Congress to tax such dividends. Section 211 (a) of the Revenue Act of 1934 provides that “In the case of a nonresident alien individual gross income includes only the gross income from sources within the United States.” To the same effect see section 213 (c), Revenue Act of 1926, and section 212 (a), Revenue Acts of 1928 and 1932, respectively. See also sections 210 (b) and 211 (a), Revenue Act of 1926, and section 4 (d), Revenue Acts of 1928, 1932, and 1934, respectively.

In Lord Forres, supra, we held that such income as is involved in the instant proceeding was not'beyond the taxing power of the United States as a sovereign. . The only difference, which it seems to us is at all substantial, between the facts in the Lord Forres case and the facts in the instant proceeding is that in the Lord Forres case both the nonresident alien and the foreign corporation owned property in the United States, whereas in the instant proceeding, at the time of the hearing, neither the petitioner nor the Ross Corporation owned property of any value in the United States. It is our opinion that the difference in the facts between the two cases is one that concerns the collection of the tax rather than the determination of its legality, and, as we said in Winterbottom Book Cloth Co., Ltd., 43 B. T. A. 572. “The Board is not concerned with the difficulties that may beset the Commissioner in collecting a deficiency in tax after re-determination. Our primary function is to determine the correct deficiency, if any, leaving to the Commissioner the enforcement or collection thereof.” In view of our holding in the Lord Forres case, we think this issue must be decided against petitioner.

In Lord Forres, supra, in the concluding paragraph of our opinion, among other things, we said:

Perhaps we should concede the possibility of an opposite view with respect to dividends'paid by the corporation from earnings received from properties situate without the United States whose operations have received no protection and benefit from this country. But that is a matter of proof. The record discloses that the corporation’s earnings from sources within the United States were more than sufficient to provide for the dividends it paid. * * *

As will be seen later on in the course of this opinion, we are holding that petitioner is taxable on dividends received from the Boss Corporation in the amount of $19,911.88 in 1926 and on dividends received in 1935 in the amount of $163,966.57. As to all other years involved we are holding that petitioner did not receive any dividends from the Eoss Corporation, and, therefore, there are no deficiencies and no penalties for those years.

Exhibit K, which is a part of the record in this case and has been incorporated by reference as a part of our findings of fact, shows that at the time the 1926 and 1935 dividends were paid the Eoss Corporation’s earnings from sources within the United States were far in excess of the amounts of the dividends paid. Thus the situation in that respect is the same as it was in the Lord Forres case and what we said there has equal application here.

We shall now consider to what extent petitioner received “dividends” from the Eoss Corporation during the years 1925 to 1935, inclusive. The facts show and petitioner concedes that on March 1, 1926, he received from the Eoss Corporation a dividend in Canadian dollars amounting to $19,996. In addition to this admitted dividend petitioner during the years 1925 to 1935, inclusive, received from the Eoss Corporation payments in Canadian; dollars amounting to $1,452,783.46. Of this amount $900,500 received during 1925 to 1929, inclusive, was treated, by both the petitioner and the Eoss Corporation, together with $60,000 received in 1922, a year not before us, as representing a complete liquidation of the note for $960,500 which the Eoss Corporation issued to petitioner in part consideration for the securities transferred to the corporation by petitioner in accordance with the April 27,1922, agreement. The $386,400 received during 1930 to 1935, inclusive, was treated by both the petitioner and the Eoss Corporation as representing a complete liquidation of the $386,400 purchase price of stocks and bonds transferred to the corporation by petitioner in accordance with the December 18,1922, resolution. Petitioner contends that these two amounts of $900,500 and $386,400 must be held by the Board to constitute repayments of indebtedness by the corporation and not the receipt of dividends by petitioner, as the respondent contends. Petitioner concedes that the balance of the $1,452,788.46 payments, amounting to $165,883.46 in Canadian dollars received in 1935, should be regarded as a dividend received by petitioner in that year from the Ross Corporation.

The respondent, in contending that the two amounts of $900,500 and $386,400 must also be regarded as dividends, does not contend that the separate entities of petitioner and the Ross Corporation should be disregarded. In his brief he sums up his argument on this issue as follows:

* * * It is not so much that the separateness of the corporate entity is to be ignored as that the form of the transaction with that corporation must be ignored and its substance given effect. * * * All the evidence in this case points with almost unescapable certainty to the conclusion that Ross Corporation was the petitioner’s alter ego: one of his “two pockets”. The supposed agreements of sale were nothing more than formal devices adopted for the purpose of facilitating shifting from one pocket to another. They should be ignored.

In other words, the respondent would have us hold that the two transactions in 1922 whereby petitioner transferred securities to the corporation in consideration for 20,000 shares of stock, a note for $960,500, and an open account for $386,400 to petitioner’s credit, should be regarded as if petitioner merely transferred the securities in consideration for the shares of stock. We see no justification for such a holding. The facts do not support respondent’s contention that the $960,500 and $386,400 in question represented “Nothing more than formal devices adopted for the purpose of facilitating shifting from one pocket to another.” On the contrary, the evidence fully supports petitioner’s contention that the amounts in question represented bona fide indebtedness owed to petitioner by the Ross Corporation. We think we must so treat it in the disposition of these proceedings.

Petitioner’s counsel, who acted for him in the forming of the Ross Corporation, testified that he was entirely unfamiliar with section 119 (a) (2) (B) of the Revenue Act of 1934 and similar provisions of earlier acts until April 23, 1937, when petitioner was first notified by the respondent of the proposed tax liability. This, it would seem, makes it unlikely that the manner in which petitioner organized the Ross Corporation by transferring securities to it in part consideration for capital stock and in part consideration for a note and an open account, and the later payment by the corporation to the petitioner of the corporation’s indebtedness to petitioner, was in any way done with a view of avoiding any United States tax liability. If any doubt exists as to the correctness of such a statement, it seems that it would be dispelled by the recognition of the fact that if at any time petitioner bad known of tbe provisions of section 119 (a) (2) (B) of the Bevenue Act of 1934 or similar provisions of earlier acts be could have avoided their application entirely simply by transferring a sufficient amount of Canadian securities to the Ross Corporation so that tbe latter’s gross income derived from sources within tbe United States would have been less than 50 percent of its gross income from all sources. The evidence shows that the gross income of the Ross Corporation from sources within the United States for all of the periods involved was only slightly over 50 percent, and that petitioner individually owned at all times large amounts of income-producing Canadian securities which he could easily have sold or transferred to the corporation.

After a careful consideration of the entire record, we are of the opinion and have so found as an ultimate fact as to this issue, that all payments received by petitioner from the Ross Corporation during the years 1925 to 1935, inclusive, with the exception of the dividend of $19,996 (Canadian money) in 1926 and payments aggregating $165,883.46 (Canadian money) in 1935, constituted payments in discharge of legal and binding obligations of Ross Corporation to petitioner instead of dividends. Carl G. Fisher, 7 B. T. A. 968; Herff & Dittmar Land Co., 32 B. T. A. 349. Cf. Curran v. Commissioner, 49 Fed. (2d) 129. It follows that there are no deficiencies and no penalties due for the years 1925 and 1927 to 1934, inclusive.

In view of our holding in connection with the previous issue, the remaining issues are material only in so far as they affect the years 1926 and 1935.

To what extent, if any, should the 25 percent delinquency penalties be imposed for the years 1926 and 1935 ?

Since no return was filed for the year 1926, the imposition of the 25 percent penalty for that year is mandatory. Section 3176 of- the Revised Statutes, as amended by section 1103 of the Revenue Act of 1926; Douglas L. Edmonds, Administrator, 31 B. T. A. 962; affd., 90 Fed. (2d) 14; certiorari denied, 302 U. S. 713; Axel Holmstrom, 35 B. T. A. 1092; Theodore R. Plunkett, 41 B. T. A. 700, 710; Vahram Chimchirian, 42 B. T. A. 1437.

The question as to whether the 25 percent penalty should be -added for the year 1935 is presented under somewhat different circumstances, hut we think the result must be the same. The applicable statutory provision is section 291 of the Revenue Act of 1934. The respondent contends that we should regard the year 1935 as if no return had been filed, in which event the' imposition of the penalty would likewise be mandatory. Petitioner contends, however, that we can not ignore the return filed .on or about January 20, 1940; that this return must be regarded as a delinquent return; that the evidence shows that the failure to file the return on time was due to reasonable cause and not due to willful neglect; and that, therefore, no penalty should attach.

Petitioner’s return for the year 1935 was due to be filed on or before June 15,1936. Sec. 216, Revenue Act of 1934. No return was filed by petitioner for the year 1935 until on or about January 20, 1940, which was after the respondent on August 5,1937, had made his determination of the deficiency for that year and after petitioner had on October 26, 1937, filed his petition with this Board and respondent had filed his answer thereto.. Since January 20, 1940, is more than 150 days after June 15,1936, section 406 of the Revenue Act of 1935 has no application here. On January 26, 1940, petitioner filed a motion for leave to file an amendment to his petition, in which amendment additional facts were alleged relating to the filing of the 1935 return. This motion was granted on January 29,1940. In Taylor Securities, Inc., 40 B. T. A. 696, we held that returns filed after the respondent had made his determination of deficiencies were insufficient to relieve the petitioner there of the mandatory operation of the statutory provisions imposing the 25 percent penalty.

In Theodore R. Plunkett, supra, we said:

* * ⅜ Qijje purported income tax return of tlie petitioner for 1934 mailed by tbe petitioner from Adams, Massachusetts, on March 15, 1935, was not a return required by the statute. It was no return at all. The first return which was filed was filed on October 10, 1938. That return was filed after all,pleadings in this case had been filed and issue joined. It was filed too late to avoid the attachment of the penalty. Taylor Securities, Inc., supra.

The action of the respondent in adding to the tax the 25 percent penalty for delinquency is approved.

Following the foregoing decisions, the Commissioner’s action in determining a delinquency penalty of 25 percent against petitioner for the year 1935 is approved.

Even if we are in error in treating the return filed by petitioner on January 20, 1940, long after issue had been joined by the parties, as “no return” within the meaning of section 291, sufra, and assuming that we should treat the return in question as a “delinquent return” within the meaning of that section, nevertheless, we think the result would be the same. The burden of proof would be on petitioner to show that his failure to file his return for the year 1935 at the time it was required by law was due to reasonable cause and not due to willful neglect. Petitioner has not made such a showing. All that he has proved in that respect, is that he was ignorant of the law which imposed such a tax and, therefore, filed no return under it. While that sort of a showing doubtless absolves him from “willful” neglect, it does not constitute “reasonable cause.” See Charles E. Pearsall & Son, 29 B. T. A. 747; Rafael Sabatini, 32 B. T. A. 705; affd., 98 Fed. (2d) 753; Berlin v. Commissioner, 59 Fed. (2d) 996.

Is petitioner entitled to a credit for dividends received in computing his income subject to normal tax for the years 1926 and 1935, respectively? In his■ deficiency notice, the respondent did not determine any “normal tax” liability against petitioner for any year, but confined his determination to one of “surtax” liability. In his third amended answer to the petition as amended, the respondent affirmatively alleged “that in his deficiency notice he allowed as credits against net income for normal tax purposes the amount received as dividends in each of the years involved; the allowance of such credits was erroneous.” Section 216 of the Revenue Act of 1926, in so far as material herein, provides as follows:

Sec. 216. For the purpose oí the normal tax only there shall he allowed the following credits:

(a) The amount received as dividends * * * (2) from a foreign corporation when it is shown to the satisfaction of the Commissioner that more than 50 per centum of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period ás the corporation has been in existence) was derived from sources within the United States as determined under the provisions of section 217.

Section 217 (g) (1) of the Revenue Act of 1926, in so far as material herein, provides as follows:

Except as provided in paragraph (2) a nonresident alien individual * * * shall receive the benefit of the deductions and credits allowed in this title only by filing or causing to be filed with the collector a true and accurate return of his total income received from all sources in the United States, in the manner prescribed in this title; including therein all the information which the Commissioner may deem necessary for the calculation of such deductions and .credits. [Italics supplied.]

Petitioner did not file any return for the year 1926. In view of the plain provisions of section 217 (g) (1), sufra, it follows that, in computing the normal tax for the year 1926, petitioner is not entitled to any credit for dividends received from a foreign corporation which would otherwise be allowable under section 216 (a) (2), supra.

Relative to the year 1935, it is sufficient to note that the Revenue Act of 1934, for the purpose of the normal tax, does not allow any credit for dividends from foreign corporations as does section 216 (a) (2) of the Revenue Act of 1926 and section 25 (a) (2) of the Revenue Acts of 1928 and 1932, respectively. See sec. 25, Revenue Act of 1934. It follows that, in computing the normal tax for the year 1935, petitioner is not entitled to any credit for dividends received from a foreign corporation.

The final issue is whether that portion of the amounts received by petitioner from the Ross Corporation in 1926 and 1935, which we have under a previous issue held to be dividends, should be included in petitioner’s income in terms of United States money at the rate of exchange existing at the time of receipt or at the rate existing at the end of the year. The payments which the respondent included in petitioner’s income were included by him in terms of Canadian dollars, which was erroneous. The respondent’s ruling O. D. 419, Cumulative Bulletin No. 2, p. 60, which we think correctly interprets the law, provides in full as follows:

Income returnable for the purpose of Federal taxes should be expressed in terms of United States money. The rate of exchange at the time of receipt governs in making the computation.

We hold as to this issue that the portion of the amounts received in Canadian dollars by petitioner in 1926 and 1935 which we have held to be dividends should be expressed in terms of United States money at the rate of exchange in force at the time of receipt. Upon this basis petitioner is taxable on dividends received in 1926 in the amount of $19,911.88 and on dividends received in 1935 in the amount of $163,966.57.

The deficiencies and penalties for the years 1926 and 1935 should be recomputed in accordance with this report. There are no deficiencies and no penalties for the years 1925 and 1927 to 1934, inclusive.

Reviewed by the Board.

Decision will be entered under Bide 60.

Leech,

dissenting: I disagree with the conclusion of the majority on the. first issue. This issue, decisive of the controversy, is disposed of wholly without discussion of the facts or the principles involved, upon the assertion that it is controlled by the decision of the Board in the Lord Forres case, 25 B. T. A. 154. This conclusion is predicated upon a statement that the facts in the two cases are identical with one exception which is said to be immaterial. I think the record convincingly discloses that the facts in the two cases are radically different and that the Forres case is not controlling here.

In the years 1925 to 1935, inclusive, the Ross Corporation made payments in large amounts from its bank balances in Canada to petitioner. Respondent contends these payments were, in substance. dividends from a foreign corporation. Upon this premise the disputed deficiencies and penalties were determined by taxing such “dividends” to petitioner as “income from sources within the United States” under the definition quoted in section 119 (a) (2) (B) of the Bevenue Act of 1934 and similar provisions in the prior applicable revenue acts.

Petitioner contests the validity of the proposed assessments upon several counts. His primary position is that the United States is without jurisdiction to tax him, a nonresident citizen of a foreign country, upon his receipt of income from a foreign corporation, taldng place in a foreign country, the United States having no jurisdiction of his person or property.

Bespondent argues that this contention confuses the power of the Government to impose the tax with its power to enforce payment. It is then said that it is the existence of the latter power, only, that is here subject to question, which thus requires us to redetermine the deficiencies by literal application of the statute, even though their collection be impossible. I agree that mere apparent inability to collect the tax would not affect the liability to pay it with which liability, alone, we can be concerned.

But here, contrary to'the view of the majority, I think the primary question is whether the statutory provisions, supra, in so far as they affect the taxpayer here, were within the legislative jurisdiction of the Government. If such jurisdiction was lacking, then the liability falls with the statutory authority supporting it. McCulloch v. Maryland, 4 Wheat. 316; Rose v. Himely, 4 Cranch, 241; The Appollon, 9 Wheat. 362; St. Louis v. Ferry Co., 11 Wall. 423; Dewey v. Des Moines, 173 U. S. 193; Whitney v. Commissioners of Inland Revenue, A. C. 37; City of New York v. McLean, 170 N. Y. 374 ; 63 N. E. 380. The Supreme Court thus states the rule in St. Lows v. Ferry Co., supra:

tyhere there is jurisdiction neither as to person nor property, the imposition of a tax would be ultra vibres and void. If the legislature of a State should enact that the citizens or property of another State or country should be taxed in the same manner as the persons and property within its own limits and subject to its authority, or in any other manner whatsoever, such a law would be as much a nullity as if in conflict with the most explicit constitutional inhibition. Jurisdiction is as necessary to valid legislative as to valid judicial action.

In Dewey v. Des Moines, supra, the rule is again applied. In that case, Dewey, a citizen and resident of Illinois, filed a petition in the State Court of Iowa to have certain paving assessments on his lots in Des Moines set aside and to obtain an injunction enjoining any proceedings for the sale of such property and for a judgment that there was no personal liability upon him to pay the excess of the assessment over the amount realized upon the sale. The contractor who did the paving work, who was made a party to the proceeding, counterclaimed for a foreclosure of his lien upon the lots and for a personal judgment against Dewey. Under the statutes of Iowa the lot owner was made personally liable for the assessment. The Supreme Court specifically held that a state, in exercising its sovereign power of taxation, could not by legislation impose a personal liability upon a citizen and resident of another state for taxes on property located within the state, and that the imposition of such a liability constituted a violation of the due process clause of the Constitution. The Court stated:

* * * This plaintiff was at all times a non-resident of that State, and we think that a statute authorizing an assessment to be levied upon property for a local improvement, and imposing upon the lot owner, who is a non-residént of the State, a personal liability to- pay such assessment, is a statute which the State has no power to enact, and which cannot therefore furnish any foundation for a personal claim against such non-resident. There is no course of reasoning as to the character of an assessment upon lots for a local improvement by which it can be shown that any jurisdiction to collect the assessment personally from a non-resident can exist. The State may provide for the sale of the property upon which the assessment is laid, but it cannot under any guise or pretense proceed farther and impose a personal liability upon a non-resident. to pay the assessment or any part of it. To enforce an assessment of such a nature against a non-resident, so far as his personal liability is concerned, would amount to the taking of property without due process of law, and would be a violation of the Federal Constitution.

However, the limits of legislative jurisdiction, in our Constitution, have been clearly defined. Chief Justice Marshall, in Rose v. Himely, supra; said:

It is conceded that the legislation of every country is territorial; that beyond its own territory, it can only affect its own subjects or citizens.

St. Louis v. Ferry Co., supra; The Apollon, supra; Dewey v. Des Moines, supra; Shaffer v. Carter, 252 U. S. 37; Prof. Beale, Conflict of Laws, § 74.1; Whitney v. Commissioners of Inland Revenue, supra; Prof. Beale, 32 Harv. L. R. 587, 589-90; Black on Judgments, vol. 1, 2d Ed. § 227; Cooley on Taxation, 4th Ed., vol. 3, § 1333.

These cases, and others, disclose the premises of those limitations. In Shaffer v. Carter, supra, the Supreme Court thus states:

* * * Governmental jurisdiction in matters of taxation, as in the exercise of the judicial function, depends upon the power to enforce the mandate of the State by action taken within its borders, either in ‘personam or m rem according to the circumstances of the case, as by arrest of the person, seizure of goods or lands, garnishment of credits, sequestration of rents and profits, forfeiture of franchise, or the like; and the jurisdiction to act remains even though all permissible measures be not resorted to. * * *

The question as presented here seems to be novel. I can not find, nor has my attention been called to, any decision in point on the present facts. Though the taxpayer is a citizen and resident of Canada, he is entitled to the protection of the due process clause of the Fifth Amendment to the Constitution. See Lem Moon Sing v. United States, 158 U. S. 538; Downes v. Bidwell, 182 U. S. 244, and other cases therein cited. Thus if the United States had no such jurisdiction as to the taxpayer, either in personam or in rem, then the quoted statute and its prototypes in so far as they authorize the determination of the contested deficiencies against this taxpayer, fall, because violative, in such instances, of the Fifth Amendment to the Constitution. Dewey v. Des Moines, supra. And, if neither essential factual premise for legislative jurisdiction existed when the distributions occurred upon which the contested liabilities are said to have arisen, neither personal protests of the taxpayer to the respondent nor his appearance in this proceeding to contest the validity of those liabilities could retroactively supply the necessary original jurisdictional prerequisites and reinstate a liability which never existed. Shaffer v. Carter, supra; Dewey v. Des Moines, supra; City of New York v. McLean, supra.

Petitioner is and always has been a nonresident alien, a citizen and resident of the Province of Quebec, Canada. He has never resided in or carried on business in the United States and during all the period here involved has owned no property, real or personal, in the United States. Since its incorporation in 1922 he has owned all of the issued capital stock, except four qualifying shares, of the Eoss Corporation, a Canadian corporation with its place of business in Canada, which has carried on no business in the United States. From 1922 to 1935, Eoss Corporation owned certain stocks and bonds of corporations organized under the laws of the United States or the states or territories thereof and in each of those years the dividend and interest income it received therefrom constituted more than 50 percent of its gross income from all sources.

These earnings of the United States corporations, produced under the protection of the laws of the United States and while yet in this country, were distributed in dividends and interest to the Boss Corporation. The source to that corporation of these dividends and interest was the United- States. Thus at the time of their distribution from that source, when they represented credits due this foreign corporation, these earnings were within the jurisdiction of this country and subject to the exercise of its power to tax. The imposition of an income tax on such nonresident foreign recipient has been recognized as in the nature of the garnishment of a credit due it from the domestic corporation. The presence in the United States of the obligor or the obligee of that credit is said to support jurisdiction for the imposition of the tax. As stated by the Circuit Court of Appeals for the Second Circuit, in Commissioner v. Nevius, 76 Fed. (2d) 109 (certiorari denied, 296 U. S. 591) : “The United States has jurisdiction to tax when it can lay hold of either the obligor or the obligee of a chose in action. In the case of shares of stock, the corporation is the obligor.” This jurisdiction in the United States over the payment on account of this credit existed at the time of its receipt by the foreign corporation, and the payment was thus received burdened with this obligation. De Ganay v. Lederer, 250 U. S. 376; Burnet v. Brooks, 288 U. S. 378; Commissioner v. Nevius, supra; Travis v. Yale & Towne Mfg. Co., 252 U. S. 60.

This same basis of jurisdiction, I think, was present in Lord Forres, sufra, upon which case, alone, the conclusion of the majority on the first issue is supported, But the question of jurisdiction raised here was not and could not have been raised on the facts revealed in that case.

The majority says that “The only difference between the facts in the Lord Forres case and the facts in the instant proceeding is that in the Lord Forres case both the nonresident alien and the foreign corporation owned property in the United States, whereas in the instant proceeding, at the time of the hearing, neither the petitioner nor the Ross Corporation owned property of any value in the United States.” Then follows their conclusion that this difference is insufficient to distinguish the two cases. I think that difference is important and may be sufficient, in itself, to afford a basis of jurisdiction in rem on the facts in the Lord Forres case which is wholly absent here. See Shaffer v. Carter, supra; Scottish Union & National Insurance Co. v. Boland, 196 U. S. 611; Nickey v. Mississippi, 292 U. S. 393.

That basis would, of course, not support the imposition of a judgment in fersonam, to which, I think, the Board is limited by statute. But that question became moot in the Lord Forres case since there the petitioner ceased, in effect, to be a nonresident alien by bringing himself personally under the jurisdiction of the United States. In that case the petitioner was and had been for some years a member of a domestic partnership, actively carrying on a business under the protection of the laws of the United States. The petitioner had filed an income tax return to this Government, including only his share of that partnership income. He was contesting before the Board a deficiency in the tax on the income so returned. Jurisdiction to impose a personal judgment therefore existed in fact.

But, beyond that, the records in these two cases definitely disclose other and even more important factual differences. These can not, so easily, be ignored. The question presented to the Board in the Lord Forres case was whether, in addition to certain items of partnership income, the return should also have included dividends distributed to Forres from its earnings by a domesticated foreign corporation in which Forres was a stockholder. This fact most strikingly differentiates the Lord Forres case from that under discussion. The distributed earnings in question in the Lord Forres case were those of the Olympic Portland Cement Co., Ltd., from its cement business actually and actively carried on in the United States. Forres was a stockholder in that corporation. The earnings from which the taxed distributions were declared and paid were subject to the jurisdiction of the United States as and when there earned under the protection of its laws. When the contested dividends from those earnings were declared to Forres and the other shareholders, these dividends constituted choses in action or credits due Forres from a corporation over both the person and property of which this country then had jurisdiction. Commissioner v. Nevius, supra.

Here, the Boss Corporation was not in business in the United States. It was that corporation and not the. petitioner, its shareholder, which owned the stock and bonds in the United States corporations, the earnings of which arose under the protection of the United States. In short, Lord Forres occupied exactly the same status in reference to the taxed income there that the Boss Corporation occupies here. The basis for jurisdiction to tax upon that status was exhausted when that corporation received the distribution of these earnings and removed them from the jurisdiction of the United States to Canada with no liabilities against such earnings other than those it has already admitted and paid.

However, respondent askes that we go further than the Lord Forres case. His position is not predicated upon the disregard of the entity of the Boss Corporation as separate from its shareholders. Indeed that entity must be recognized here. Rhode Island Trust Co. v. Doughton, 270 U. S. 69. Under Canadian law, found as a fact, it is so recognized. Bespondent has already recognized and taxed it as such. Its recognition is implicit even in the statutory provision under which the present taxes were determined.

The position of the respondent is that, because the origin of the earnings with which the dividends and the interest on the stocks and bonds owned by the Boss Corporation were paid was in the United States, they were then subject to the jurisdiction of the United States. It is then argued that, as a condition precedent to the removal of that income from this country, the United States had the jurisdiction to and in the statutes under consideration did attach to such income the condition that if and when, at any túne in the future, this Canadian corporate recipient later distributed this income in Canada to this petitioning Canadian stockholder, such stockholder took it with the obligation to pay this additional tax. Counsel for respondent epitomized his argument thus: “The power to tax this income when it comes into the hands of the stockholder flows not from any disregard, as I have said, of the corporate entity, but from the power of the Sovereign to control the future course of that which originates within its borders.”

No authority is cited and I can find none supporting such a theory. In my judgment, this country can not project its tax laws beyond its territorial limits and thus create liabilities against foreign citizens to the United States as a result of transactions taking place in a foreign country, merely upon the ground that the subject matter of the tax, in some prior period, originated in the United States. The Ross Corporation could not obligate its shareholders. Vermont Loan & Trust Co. v. Gillis, 282 U. S. 796. Extraterritorial jurisdiction of the United States extends only to its citizens, since, as such, they alone receive the benefit of the protection of this country when resident in a foreign country. Rose v. Himely, supra; The Apollon, supra; Cook v. Tait, 265 U. S. 47.

Two recent decisions by the Supreme Court sustain that view. Both have to do with the taxing power of the state under the prohibition of the Fourteenth Amendment, but are, of course, in point here in determining the legislative jurisdiction of the Federal Government to lay a tax under the corresponding prohibition of the Fifth Amendment. The first case, Connecticut General Co. v. Johnson, 303 U. S. 80, denied the jurisdiction of the State of California to tax transactions by a foreign corporation taking place outside the state, although the corporation was licensed to do business in the state and the transactions were in connection with matters which had their origin there. The Court there said:

But tlie limits of tlie state’s legislative jurisdiction to tax, prescribed, by tbe Fourteenth Amendment, are to be ascertained by reference to the incidence of the tax upon its objects rather than the ultimate thrust of the economic benefits and burdens of transactions within the state. As a matter of convenience and certainty, and to secure a practically just operation of the constitutional prohibition, we look to the state power to control the objects of the tax as marking the boundaries of the power to lay it. Hence it is that a state which controls the property and activities within its boundaries of a foreign corportion admitted to do business there may tax them. But the due process clause denies to the state power to tax or regulate the corporation’s property and activities elsewhere. * * *

In the second case, Wisconsin v. Penney Co., 311 U. S. 435, the Supreme Court of Wisconsin, on authority of Connecticut General Co. v. Johnson, supra, held a statute of that state in contravention of the Fourteenth Amendment in imposing a tax upon foreign corporations for the privilege of receiving and distributing dividends representing earnings derived from business carried on under license within the state. In reversing this decision and sustaining the validity of the statute the Supreme Court of the United States held the tax to be in effect an additional income tax laid on the foreign corporation which produced the income in Wisconsin and under the protection of its laws, the collection being merely delayed until the time of distribution of the income.

A reading of these cases, together with the dissent in the latter, I think, discloses that the contested legislation in the Penney case would not have been a constitutional exercise of the taxing power of the state if the tax had been imposed upon the shareholder and not the corporation.

Here the income tax is laid directly upon the stockholder and not the corporation and therefore is under the ban of that reasoning. This liability can not be held to be an income tax imposed upon earnings as and when derived in this country, and its collection merely deferred until distribution, as in the Penney case. This tax, a personal liability, is imposed by the statute upon that individual who, by reason of his ownership of the stock at the time of the taxed distribution, is in receipt of that distribution. Who that individual may be, is unknown until after the earnings have passed beyond the jurisdiction of the United States and, in the present case, happens to be a noneresident alien, carrying on no business and owning no property in the United States.

The title of the relevant provision in the 1934,1932, and 1928 Revenue Acts is “Income from Sources Within United States.” However, despite that title, it will be noted that the tax which the acts in question seek to impose is not alone upon income as defined in that title, but upon the total distribution of income by the foreign corporation to a stockholder, irrespective of the source from, which it was derived, if in the year of distribution, 50 percent or more of the net income of the foreign corporation for the prior three years was derived from sources within the United States.

Petitioner is and always has been a nonresident alien. He has never carried on any business in the United States and, during all the years in review here, has owned no property in this country.

When the earnings of the United States corporations, which arose from sources in this country, were paid to the Ross Corporation, those earnings then lost their character as from those sources and became a part of the surplus in Canada of the Canadian corporation. They were thereafter used, not in the United States, but in Canada, to which country its business was limited. But no liabilities are said by the statutes to have arisen until the alleged dividend distributions by the Canadian corporation to the Canadian stockholder occurred. At that time the Canadian corporation was in possession, ini Canada, of the payments from the United States corporations. Any credit or chose in action in favor of the petitioner, which thereafter arose because of that income, existed therefore only within the jurisdiction of Canada— not the United States. And neither the obligor nor obligee therein was within the jurisdiction of this country. See Commissioner v. Nevius, supra.

The taxpayer owned only stock in the Canadian corporation, the situs of which stock was Canada. Corry v. Baltimore, 196 U. S. 466. The distributions taxed here as dividends, if such, were those of the Canadian corporation from its surplus. The actual source of those distributions as to petitioner was Canada—not the United States. That source can not be changed merely by what I think is an arbitrary statutory definition. Rhode Island Trust Co. v. Doughton, supra.

I think that section 119 (a) (2) (B) of the Revenue Act of 1934, and parallel sections of the earlier revenue acts, were ineffective in so far as they authorize the imposition of the contested liabilities, and that the deficiencies fall with the authority supporting their determination.

Harron agrees with this dissent.

       SEC. 119. INCOME FROM SOURCES WITHIN UNITED STATES.
      (a) Gross Income From Sources in united States.—The following items of gross income shall be treated-as income from sources within the United States:
      * ’ * * * # * ⅜
      (2) Dividends.—The amount received as dividends—
      ⅛ , * * , * * ⅞ ⅜
      - (B>) from a foreign corporation unless less than 59 per centum of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence) was derived from sources within the United States as determined under the provisions of this section; but dividends from a foreign corporation shall, for the purposes of section 131 (relating to foreign tax cpedit), be treated as income from sourpes without the United States.

       SBC. 291. failure TO FILE RETURN.
      In case of any failure to make and file a return required by this title, within tbe time prescribed by law or prescribed by tbe Commissioner in pursuance of law, 25 per centum of the tax sbaU be added to tbe tax, except that when a return is filed after such time and it is shown that the failure to file it was due to reasonable cause and not due to willful neglect no such addition shall be made to the tax. * * *

       SEC. 119. INCOME FROM SOURCES WITHIN UNITED STATES.
      (a) Gross Income erom Sources in United States.—The following Items of gross Income shall be treated as income from sources within the United States:
      (2) Dividends.—The amount received as dividends—
      (B) from a foreign corporation unless less than 50 per centum of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence) was derived from sources within the United States as determined under the provisions of this section; but dividends from a foreign corporation shall, for the purposes of section 131 (relating to foreign tax credit), be treated as income from sources without the United States ;
      *******

       Sec. 119 (a) (2) (B), Revenue Act of 1932 ; sec. 119 (a) (2) (B), Revenue Act of 1928 ; sec. 217 (a) (2) (B), Revenue Act of 1926.

       The title of the relevant provision in the 1926 Act is “Net Income of Nonresident Alien Individuals.”


author: Arnoed:

text:
    The John Gerber Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101605.
    Promulgated April 1, 1941.

      W. G. Boone, Esq., for the petitioner.

      Frank M. Thompson, Esq., for the respondent.
   OPINION.

Arnoed:

The Commissioner determined a deficiency in income tax for the fiscal year ended January. 31,1937, in the amount of $3,653.89. In determining the taxable net income of petitioner the Commissioner made several adjustments, which resulted in an increase of net income from $69,075.64 to $74,015.46. These adjustments are not in dispute. In his computation of surtax on undistributed profits the Commissioner disallowed $19,009.92 of a claimed dividend paid credit under the provisions of section 27 (a) and (g) of the Revenue Act of 1936. The petitioner alleges error in this respect. It also claims overpayment of tax in the amount of $831.24. The facts were stipulated and are found as stipulated. A summary thereof is as follows:

The petitioner has been a Tennessee corporation since September 19, 1893, and is now operating a department store in Memphis, Tennessee. Its capital consists of 200 shares of the par value of $100 a share, which were owned during the taxable year by the following, all residents of Memphis:

Mrs. O. A. Gerber. 70 G. A. Lawo. _ 12
F. G. Beurer_ 60 Elsa Gerber. _ 10
P. A. McPhillips-. 36
Wm. Moriarity_ 12 Total_ _200

All of the stockholders, excepting Elsa Gerber, were directors of petitioner. None of the stockholders was related to any other by blood or marriage, except that Elsa Gerber was the sister-in-law of Mrs. C. A. Gerber. All of the stockholders excepting Mrs. C. A. Gerber and. Elsa Gerber were employees of the petitioner in various capacities. Because of the long association of the stockholders with petitioner and each other, the business of petitioner was conducted very much in the same manner as if they were members of a family group.

The books of account of petitioner were kept on the accrual basis and its fiscal year extended from February 1 to January 31.

At a special meeting of its directors held on January 31, 1936, at 4 p. m., at which all directors weie present, a dividend of $125 per share was declared, it being resolved that “as customary * * * the dividend payment be applied on the account of any stockholder indebted to the Company.” The meeting adjourned at 6 p. m.

The petitioner on that date had a cash balance of $245,144.74 and could have paid the dividend declared of $25,000. However, it had been a long established custom to credit its stockholders’ accounts with dividends declared and to permit them to withdraw the dividends so credited at their pleasure, without restriction, except in those instances where a stockholder was indebted to petitioner in excess of the dividend credit. In such instance the dividend credit liquidated the indebtedness to the extent of the amount of the dividend credit.

Two accounts were carried on the books of petitioner for each stockholder, one in the general ledger in which loans, advances or withdrawals, and dividends declared were recorded and the other in the customers’ ledger, in which purchases of merchandise from petitioner by the stockholders were recorded as in the case of any of petitioner’s merchandise purchasers. On January 31, 1936, the only debit balances in the stockholders’ customer accounts were as follows: Mrs. C. A. Gerber, $1.20; Elsa Gerber, $231.12; and P. A. McPhillips, $1,990.08.

An entry was made on petitioner’s journal under date of January 31, 1936, debiting surplus account with $25,000 and crediting the general ledger account of each stockholder with the amount of dividend to which he or she was entitled. This entry was not physically recorded on January 31, 1936, but was made after that date in the regular course of operating petitioner’s bookkeeping and accounting department.

After such entry had been posted to the stockholders’ general ledger accounts, such accounts reflected the following debit balances and dividend credits. The following schedule also shows withdrawals later made by the stockholders against the dividend credits:

In its Federal income tax return for the year ended January 31, 1937, petitioner claimed a dividend paid credit in the amount of $19,009.92 on account of the dividend of $25,000 declared January 31, 1936. The accountant who prepared the return was of the opinion that the remainder of $5,990.08 ($25,000-$19,009.02) was not applicable to the fiscal year ended January 31, 1937, because of certain stockholders’ debit balances on January 31, 1936. The amount of $5,990.08 is composed of the credits to stockholders’ accounts which the accountant deemed to have been applied to debit balances as of January 31,1936, as follows:

No part of the dividend declared January 31, 1936, to which Mc-Phillips was entitled was in fact credited to his customers’ ledger account. He paid that account in cash in the amount of $1,990.08 on July 10, 1936.

On January 30, 1937, a dividend of $30,000 was declared. Of this amount $26,400 was paid by the delivery to stockholders of notes of petitioner dated January 30, 1937, payable June 30, 1937, with interest at 2 percent per annum and $3,600 was credited to two stockholders having debit balances. Contrary to its regular course of accounting procedure, these dividend credits to the stockholders’ accounts were actually entered on the journal and ledger on January 31, 1937, at the instigation of petitioner’s counsel, who had impressed upon petitioner’s secretary the necessity of the actual physical entry of the dividend prior to the end of the fiscal .year in order to avoid any contention by the Bureau of Internal Bevenue that the credits did not represent payments of dividends during the fiscal year ended January 31, 1937. The petitioner, in addition to the above dividend credit of $19,009.92, also claimed a dividend paid credit of $30,000, or a total of $49,009.92. The respondent allowed a credit of $30,000 but disallowed the remainder of $19,009.92.

The only issue presented by the pleading is whether the petitioner is entitled to a dividend paid credit in the amount of $25,000. Although the petitioner in its return claimed a credit of only $19,009.92, it now claims that it was entitled to a credit of the entire dividend, the amount of $5,990.08 having been omitted through error.

The statute allows a credit for “dividends paid during the taxable year.” The dividend of $25,000 was declared on January 31, 1936, the last day of the year prior to the taxable year involved herein. Such dividend was not paid to the stockholders on that date by checks, cash, or other property of the petitioner.

The respondent contends that the crediting of the dividend to the accounts of the stockholders on the books of the petitioner constituted payment of the dividend within the fiscal year ended January 31, 1936. This contention is predicated on the assumption that the credits were made on January 31, 1936. However, it appears that, although the entries reflecting the declaration of the dividend were dated January 31, 1936, such entries were actually made after January 31, 1936, and in the fiscal year ended January 81, 1937. Book entries are merely evidentiary. What was actually done is controlling.

The liability of a corporation arising from the declaration of dividends and the resultant accrual of the stockholders’ rights to such dividends do not constitute dividends paid within the purview of section 27. The test of payment is whether “the [stockholders’] right has so matured as to subject the dividend credited on the corporation’s books to the complete control of the stockholders and thereby remove it from the control of the corporation.” Cox Motor Sales Co., 42 B. T. A. 192. In Atlantic Land Co., 43 B. T. A. 74, we held that credits to stockholders of dividends declared, without restriction as to withdrawal, so that no check of the corporation was necessary, constituted dividends “paid during the taxable year.” Here credits without restriction as to withdrawal were not made on January 31, 1936, but were actually made in the year ended January 31, 1937. The meeting at which the dividend was declared did not adjourn until 6 p. m. and nothing was done at the meeting or thereafter on that day, which was the last day of the fiscal year, except to declare the dividend. The dividend was credited to each stockholder’s account after the expiration of the fiscal year ended January 31, 1936, and in the fiscal year ended January 81, 1937, tlie year before us. Not until the dividend was credited to the accounts of the stockholders was the amount credited available to each stockholder without restriction or further check. Petitioner did not lose control and dominion of the dividend funds until after the close of the fiscal year ended January 31, 1936. Three of the stockholders (Mrs. C. A. Gerber, $1,000; Wm. Moriarity, $1,500; and G. A. Lawo, $1,500) received payment in effect on the day the dividend credits were actually made, as the credits extinguished their indebtedness to the petitioner to the extent of $4,000. The balance of $21,000 was then with-drawable at the pleasure of the stockholders and was all withdrawn during July 1936 and within the taxable fiscal year. It is our conclusion that the dividend of $25,000 declared on January 31, 1936, was paid in the taxable year ended January 31, 1937, within the meaning of the statute.

It is our conclusion also that the dividend distribution was “pro rata, equal in amount, and with no preference to any share of stock as compared with other shares of the same class.” Sec. 27 (g), quoted supra. See Elmore Milling Co., 42 B. T. A. 1410. Black Motor Co., 41 B. T. A. 300, cited by the respondent, is distinguishable on the facts. Therein the majority stockholders received the dividend in full during the taxable year, whereas the minority stockholders received only 50 or 25 percent of their dividends. Herein each and every stockholder received $125 a share within the taxable year. Payment was not delayed as to any of the stockholders until funds should become available or to serve any purpose or convenience of petitioner. All the stockholders were treated alike. The fact that a part of the dividend was offset against indebtedness of certain stockholders, constituting payment to them as of the time of the dividend credit, and that the balance of the dividend was not withdrawn by stockholders until July 1936, is immaterial in view of the circumstance that at the time the credit was made the dividend was immediately available to all the stockholders. See Valley Lumber Co. of Lodi, 43 B. T. A. 423.

On brief the respondent for the first time claimed that his allowance of a credit for the dividend of $30,000 declared on January 30, 1937, was erroneous and therein made claim for an increased deficiency, the correct amount thereof to be furnished after promulgation of the Board’s opinion herein and upon recomputation under Bule 50. A presentation and assertion of a claim for increased deficiency in this manner is improper. It is well established that issues not raised by the pleadings will be disregarded and not considered. See Warner G. Baird, 42 B. T. A. 970, 975; Mason L. Dean, 35 B. T. A. 839; affd., 102 Fed. (2d) 699; Drawoh, Inc., 28 B. T. A. 666; Cascade Milling & Elevator Co., 25 B. T. A. 946; Nora M. Carney, 22 B. T. A. 721; Commissioner v. Sussman, 102 Fed. (2d) 919; Moise v. Burnet, 52 Fed. (2d) 1071; sec. 272 (e), Bevenue Act of 1936.

Beviewed by the Board.

Decision will be entered wider Rule SO.

       SEC. 27. CORPORATION CREDIT FOR DIVIDENDS PAID.
      (a) Dividends Paid Credit in General.—For the purposes of this title, the dividends paid credit shall be the amount of dividends paid during the taxable year.
      *******
      (g) Preferential Dividends.—No dividends paid credit shall be allowed with respect to any distribution unless the distribution is pro rata, equal in amount, and with no preference to any share of stock as compared with other shares of the same class.


author: Steenhagen:

text:
    Estate of Estelle P. Clark, Deceased, Stuart Daggett, Sr., and American Trust Company, Executors of the Last Will and Testament of Estelle P. Clark, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100411.
    Promulgated April 1, 1941.

      Reece Clark, Esq., for the petitioners.

      E. A. Ton jes, Esq., for the respondent.
   OPINION.

Steenhagen:

The Commissioner determined deficiencies of $2,-365.06 and $1,149.14, respectively, in the income tax of Estelle P. Clark (called petitioner), for 1936 and 1937, periods prior to her death, September 19, 1937. The petitioner assails the inclusion in her income of amounts received from a trust. The facts are all stipulated.

The trust had been created in 1906 by petitioner’s former husband in an agreement made in contemplation of a separation and in consideration “of the release by [her] of all further claims against [him] and his estate, for the support of herself and their child” and of her assumption of the maintenance, education, and support of the child during minority. The husband agreed “at all times to keep and maintain in the hands of the Trustee good, valid and marketable securities of a market value which shall at no time bear and yield an annual income of less than Twenty Five Thousand Dollars ($25,000).” The trustee was to pay this amount of income to the wife annually for life (or after her remarriage, $15,000), and to pay any excess income to the husband. In case of a deficiency in trust income, the husband agreed to pay the amount of it to the trustee. The wife was given the right to dispose by will of trust corpus of $150,000; upon her death, remaining corpus was to revert to the husband. Husband and wife mutually released curtesy and dower rights in realty owned by each.

On October 1, 1906, petitioner procured an absolute, divorce in South Dakota. After adverting to the fact that suitable provision had been made for the support of petitioner and the daughter, the court decreed “that no allowance be made the plaintiff for alimony, support or maintenance, and that in this respect this decree shall be final and not subject to future modification or amendment.”

The trust was carried out; petitioner never remarried, and prior to 1930 the daughter attained her majority. The husband died on December 9, 1935. Petitioner died on September 19, 1937, a resident of California since 1980. She disposed by will of $150,000 of trust corpus, and that appointment is now the subject of litigation. During the husband’s life, he made good deficiencies in trust income when it was less than $25,000. For the fiscal year ending July 7, 1937, there was a deficiency of $4,040.06, which petitioner’s executors have recovered from the trustee by a judgment of the Supreme Court of New York, entered June 23, 1937, in which it was:

Obdeeed, Adjudged and Decbeed that the rights and obligations of the respective parties to the agreement of February 28, 1906, were intended by the parties to be in lieu of and in substitution for any and all obligations resting upon said James F. A. dark for the maintenance or support of Estelle P. Clark; * * *

During the husband’s life, amounts distributed to the wife out of income of the trust were excluded from her taxable income; but the Commissioner has now held that upon his death she became the sole beneficiary of the trust and liable under section 162 (b), Revenue Act of 1936, for tax upon the distributable income.

If the amounts petitioner received had been simple alimony paid by her husband during his life, they would not have been taxable income to her, Gould v. Gould, 245 U. S. 151; Douglas v. Willcuts, 296 U. S. 1; Helvering v. Fitch, 309 U. S. 149. If the amounts had been simple periodic distributions of the income of a general nonalimony trust, she as beneficiary would have had to include them in her taxable income and the trustee would have had the right to deduct them, sec. 162 (b), irrespective of whether the settlor were her husband and were living or dead. But the trust was a bona -fide alimony and maintenance trust, the purpose of which was to discharge the settlor’s marital obligation to provide for his wife; and if the marital obligation continued to run and the payments to the wife served periodically to discharge it, the trust income so used was imputable to the husband and within his taxable income, Douglas v. Willcuts, supra; Helvering v. Fitch, supra; Helvering v. Leonard, 310 U. S. 80.

The divorce court of South Dakota in 1906 recognized the separation agreement as making sufficient and suitable provision for the maintenance and support of the wife, and therefore provided no alimony, support, or maintenance. There is no doubt of the finality of the decree, Cameron v. Cameron, 140 N. W. 700. Under such an unchangeable decree, the broad rule of Douglas v. Willcuts, supra, is inapplicable and the income of the trust would not be imputed to the husband merely because it arose originally from a marital obligation, Helvering v. Fuller, 310 U. S. 69; Helvering v. Fitch, supra. This should be true, a fortiori, when the husband is dead and there is no longer a marital obligation for maintenance and support. Here the petitioner continued to receive the trust income after the husband’s death, by reason of her continuing right as beneficiary under the trust agreement. It can no longer be regarded as coming from him in discharge of Ms marital duty to support her, but only from the trustee in discharging the trust, her exemption under the aegis of Gould v. Gould, supra, having ended with her former husband’s death. Whether his estate be taxable or not is beside the point as to her liability. It is conceivable that a continuing obligation to make up deficiencies in income would survive the settlor’s death and would continue also to invite the tax even though there is a tax upon her as a periodic distributee. This could be seen if the trust income had been charged with the continuing obligation to a service creditor, where both the settlor and the creditor might be respectively taxable.

The income of the trust distributable to the petitioner under the agreement is taxable to her as the beneficiary under the agreement, Revenue Act of 1936, sec. 162 (b). The Commissioner’s determination is sustained.

Decision will be entered for the respondent.

      For a comprehensive survey of the subject of alimony trusts, see Randolph E. Paul, Studies in Federal Taxation, Third Series, p. 243 et seq.


author: Turnek:

text:
    Farmers Union Co-operative Association, Fairbury, Nebraska, a Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97989.
    Promulgated April 3, 1941.

      Edward, P. McDermott, Esq., for the petitioner.

      Gene W. Reardon, Esq., for the respondent.
   OPINION.

Turnek:

The respondent determined deficiencies in income and excess profits taxes for the fiscal year ended May 31, 1937, in the respective amounts of $660.07 and $375.64. The only issue is whether petitioner is exempt from tax as a farmers’ cooperative association within the meaning of section 101 (12) of the Revenue Act of 1936. More specifically, the controlling question is whether the word “supplies”, as used in the act, embraces “grain and feed” purchased by petitioner for the use of its member and nonmember patrons.

The facts are stipulated and as stipulated constitute our findings of fact.

Section 101 (12), supra, provides in part that an exempt cooperative association “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 * * Article 101 (12)-1 (6) of Regulations 94, promulgated pursuant to the statutory provision cited, provides in part as follows:

* * * term “supplies and equipment” as used in section 101 (12) includes groceries and all other goods and merchandise used by farmers in the operation and maintenance of a farm or farmer’s household.

The parties have stipulated that the value of supplies and equipment (including grain and feed) purchased by petitioner for nonmembers was in excess of the value of supplies and equipment (including grain and feed) purchased for members; and further that if we determine that the word “supplies” as used in the act includes grain and feed purchased by petitioner for use of its members and nonmembers, then the deficiency as determined by the respondent is correct, but if we determine otherwise the petitioner is exempt from the tax.

The sum and substance of petitioner’s argument, as stated on brief, seems to be that grain and feed purchased by petitioner “do not constitute supplies as set forth in the Act”; that “the Act seems to emphasize groceries and all other goods and merchandise used by farmers”; that “feed or grain is never referred to as goods or merchandise, and was not in contemplation of the lawmakers when the Act was passed”; that “it was never intended to include grain or feed unless it was used for human consumption”; and that “had the lawmakers had in contemplation that grain and feed were supplies, they would have set it out specifically in the Act as they did groceries.” Petitioner cites no authority in support of his contentions.

We do not think there is any sound reason or basis for limiting the meaning of the term “supplies” as contended for by the petitioner. In fact, we can think of nothing which would be more likely to fall under the category of “supplies” used by farmers in the operation and maintenance of a farm than grain and feed. For a definition of the word “supply”, see Words and Phrases, vol. 8, pp. 6800, 6801. Cf. Rockingham Co-Operative Farm Bureau, Inc. v. City of Harrisonburg (Supreme Court of Appeals of Virginia), 198 S. E. 908.

The respondent’s determination tha,t petitioner is not an exempt cooperative association is sustained.

In the stipulation the petitioner concedes that the respondent correctly disallowed the following deductions, which are set forth in the deficiency notice; reserve, $1,879.85; depreciation, $129.85; and patronage dividends, $8,433.12.

Decision will be entered for the respondent.