author: Oppek :

text:
    Eugene Fruit Growers Association, a Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87425.
    Promulgated June 1, 1938.

      Arthur A. Goldsmith, Esq., and I. D. Wood, Esq., for the petitioner.

      T. G. Histon, Esq., for the respondent.
   OPINION.

Oppek :

Petitioner contests this deficiency on the ground, first, that it is a tax exempt organization, and, second, that even if it is not, the two controverted items involved in the deficiency were nontaxable, since they do not represent income to the petitioner. The respondent concedes error in his disallowance of two small items, leaving in dispute the $8,062.28 “Building Fund” item and the amount of $5,948.10 deducted from the proceeds of the pools and used for the payment of a 3 percent dividend.

Exemption from tax is claimed under section 103 (12) of the Revenue Act of 1932, which grants exemption to farmers’ and fruit growers’ marketing associations organized and .operated on a cooperative basis. Bespondent asserts that the provisions of this section, and of the regulation issued in connection therewith, must result in rejection of the claim for exemption if in any respect petitioner fails to meet the requirements therein specified. We have accordingly examined the facts disclosed by the record for the purpose of determining what, if any, of the requirements set forth “are absent here.

It is apparently conceded that petitioner complies with the provision that dividends shall be limited to 8 percent, that substantially all of its stock be owned by producers who market through the association, and that products marketed for nonmembers shall not exceed in value those marketed for members. We do not understand respondent’s position to be that the building fund reserve, for which the item of $3,062.28 was retained out of the carrot pool by petitioner, is not for a necessary purpose or is not reasonable in amount as required by the statute. Indeed, one example of a “necessary purpose” given by the regulations is “to provide for the erection of buildings and facilities required in business.” Respondent urges, however, that petitioner* was not “organized * * * on a cooperative basis”, and that its operations do not accord with the statutory definition because of its so-called “commercial departments” and because no provision is made for turning back to nonmember producers the proceeds of sales of their products less necessary marketing expenses.

It is true that petitioner’s articles of incorporation authorize it to exercise powers much broader than the mere operation of a farmers’ marketing cooperative. It is in evidence, however, that at the time of incorporation no Oregon law particularly applicable to the organization of cooperative associations had yet been passed. It is stipulated that petitioner was organized “for the purpose of marketing fruit and other agricultural products for farmers.” And petitioner’s manager testified that petitioner:

* * * was organized in 1908, and it engaged in the business of processing and marketing fruits and vegetables grown by its members.
Q. Was that the primary purpose of this organization?
A. The purpose of the organization was to create an outlet for the products of the farmers of that section on a cooperative basis.
Q. State whether or not this policy has been followed * * * since its organization.
A. It has.

This testimony is uncontradicted, and seems to us to furnish evidence as to the basis of petitioner’s organization much more persuasive than the formal terms of a charter. See Fruit Growers’ Supply Co. v. Commissioner, 56 Fed. (2d) 90, 91; Unity School of Christianity, 4 B. T. A. 61, 69; I. T. 1914, C. B. III-1, p. 287. We think it must be concluded that petitioner was organized on a cooperative basis.

In addition to the processing and marketing of members’ products on a nonprofit basis, petitioner also conducts “commercial departments”, which apparently engage in certain other activities. These departments operate a refrigeration plant selling ice and ice cream, maintain a machine shop in which some custom work is done, manufacture vinegar, beverages, and certain “specialties” such as pectin, mayonnaise, salad spreads, pickles, jams, jellies, and juices, and handle certain supplies such as sprays and fertilizers. Besides this, they take over from the producers’ “pools” inventories of canned and processed products which have not been disposed of at the end of a reasonable period, “paying” for these items on an estimated fair market basis and thus permitting the more expeditious liquidation of the pools themselves. The products so acquired are disposed of by this department as occasion permits.

The last item is by far the largest in dollar volume. It accounts for $102,409.61 out of total gross sales of all the “commercial departments” of $236,572.42. It may be questioned whether this item is essentially different from the sales made out of the pools themselves, since sales of the same products are made to the same market. Though referred to as a “sale” by the pools, the transfer to the “commercial department” is nothing so imposing, since title to the products is in the association from the beginning. The distinction is principally one of bookkeeping. Sales out of the pools are prorated among the producers in the pool and the proceeds of these sales are distributed only after the sales have been made and the inventory exhausted, there being first deducted an amount later used for payment of dividends. Products not so disposed of, and taken over to be sold by the “commercial department”, return a payment to the producers immediately, but this is an estimate of what they would have brought had they been sold from the pool, namely, estimated market price less estimated cost of marketing. Only if these estimates prove erroneous can there be any “profit.” And this “profit”, even if it results, is not essentially different from the dividends paid out of pool operations. It goes almost entirely to the producer-members in any event, though not as participants in the operation of the pools but as stockholders. This single factor, however, can not be sufficient to condemn petitioner’s plan of operation, since the payment of dividends up to 8 percent is expressly permitted by the revenue act, and petitioner is not authorized to exceed this figure. Petitioner’s practice appears to be an appropriate method of solving one of its operating problems and we should be reluctant to conclude that it would thereby become disqualified for exemption.

Another group of products is presumably specially processed or mixed, such as vinegar, “soda fountain supplies”, and “specialties.” These items are apparently little different from that just described except that the ingredients seem to be “purchased” from the pools from time to time and without awaiting the outcome of the pool operation. We do not understand respondent to contend that the producer members are not paid their pro rata share of the proceeds of the ingredients so used, and there is no evidence in the record to that effect. The purpose is “the salvage of by-products” and the grower members supply the ingredients “in a large part.” This was explained by petitioner’s manager on the ground that “there are always certain byproducts of a fruit-growers’ plant which may be better marketed by further processing and by mingling with other products which must be purchased on the outside.”

As to the sale of ice and ice cream and the custom work done in the machine shop, the same witness stated:

“The refrigeration is an essential to the marketing of certain fruit products, and the association, for that reason, acquired a refrigeration plant adjoining its property. This refrigeration plant was at that time engaged in a wholesale and retail ice business, and also the manufacture and sale of ice cream. The association continued to carry on these functions in order to balance the operations of the ice plant. * * * The machine shop is necessarily maintained in the plant. The association provided a machine shop, and in order to make that machine shop more profitable, did some custom work there.”

It seems to us that. alTof the activities mentioned originated and were continuously maintained as incidents of the association’s principal function, cooperative marketing for agricultural producers. They were, according to the uncontroverted evidence, designed to assist in the efficient performance of that function by facilitating the marketing of products, on the one hand, and by reducing the cost of necessary operations, on the other. The encouragement extended to such enterprises by the favorable provisions of the revenue acts would to say the least be anomalous if the sacrifice of efficient operation were to be required in order to attain the statutory exemption. We find no justification for such a construction of the law or of the regulations.

We refrain from extended discussion of the phase of petitioner’s business involving the purchase of growers’ supplies and their resale. The gross sales in this category are negligible, being less than 10 percent of the “commercial” items and approximately 2 percent of total gross sales. For all that appears they were handled at cost, and, although such articles were admittedly supplied “to some extent” to nonmembers, no attempt was made by respondent to elicit further details, it being apparently conceded that “The providing of fertilizers and sprays and other commodities peculiarly essential to fruit and vegetable growers is a matter of importance to an association of this kind.” No claim of exemption as a cooperative purchasing association is made by petitioner. And, since no particular significance appears to be attributed by respondent to this specific item, we feel justified in considering this aspect of petitioner’s activity as governed by the principles applicable generally to its so-called “commercial” operations.

Looked upon as a whole it seems to us that these “commercial departments” were purely incidental to petitioner’s principal purpose. They were conducted, not for their own sake, but as an adjunct and supplement to the cooperative marketing of farm products. See Producers’ Produce Co. v. Crooks, 2 Fed. Supp. 969. This seems to us to be the test, and not the numerical percentage of petitioner’s business attributable to those branches. It may be that the proportion of business done could be so great that it would be unreal to consider such operations incidental. Cf. Hills Mercantile Co., 22 B. T. A. 114. On this point we need express no opinion, since in our view no such contention could prevail on the facts before us. The principle we have stated has been applied in construing other subsections of section 103 and similar provisions, and we see no reason to reach a different result here. Santee Club v. White, 87 Fed. (2d) 5; King County Insurance Association, 37 B. T. A. 288; Trinidad v. Sagrada Orden de Predicadores, 263 U. S. 578; Unity School of Christianity, supra; Sand Springs Home, 6 B. T. A. 198. And it is to be noted that there is no statutory requirement that petitioner be engaged “exclusively” in cooperative marketing, as there was in some of the provisions construed by those decisions, but merely that it be “organized and operated on a cooperative basis (a) for the purpose of marketing the products of members * * We believe petitioner falls clearly within that definition.

It is urged with great force on respondent’s behalf that petitioner can not be both exempt and nonexempt and that if exempt there was no ground for the filing of any return or the payment of any tax as to any part of petitioner’s income. That may be true, but whether true or not it raises no issue for our determination in this proceeding and we therefore refrain from deciding the question. If, on the one hand, it were possible for petitioner to be exempt .as to part of its income and subject to tax as to the balance, there would be no question before us, since petitioner would then have made the return and paid the tax required. If, on the other hand, petitioner is exempt as to all of its income, including that part on which it has already paid the tax, there is nevertheless no question before us, since no claim of overpayment is made, and petitioner specifically disclaims any attempt to litigate the necessity of filing a return or paying a tax as to its “commercial income.” Petitioner’s counsel stated: “No, we are not contending that the commercial department is free from taxation or is exempt. The only thing we are claiming is that the cooperative operations are exempt.” There being thus no basis in this contention for a different result on the issue before us, whichever way it might be decided, we refrain from discussing it further. See Central Co-Operative Oil Association, 32 B. T. A. 359.

We are thus brought to respondent’s final contention, that provision has not been made for participation by nonmember producers. It may first be remarked that it is only when nonmembers participate in operations that they must be permitted to share in the proceeds, and that it is not essential that the privileges of the association be extended to nonmembers in the first place. “The clear intent of this provision of the statute is that nonmember patrons, if dealt with, at all, will be treated the same as members * * (Italics supplied.) C. B. X-2, p. 164. Here, the fact that petitioner’s charter fails to establish a profit-sharing arrangement for nonmember producers is deprived of significance by the circumstance that petitioner’s marketing business is done exclusively for members. The stipulation of facts recites: “The Petitioner has Marketing Agreements (Exhibit ‘3’) with Growers, all of whom, are stockholders of Petitioner.” (Italics supplied.) On these facts it seems to us unnecessary that provision should be made for participation in profits by nonmembers until such time as nonmembers participate in petitioner’s operations.

This situation furnishes the distinction from the cases cited by respondent. In Fruit Growers' Supply Co. v. Commissioner, supra, where the petitioner was a cooperative purchasing association, the Circuit Court of Appeals for the Ninth Circuit, in affirming 21 B. T. A. 315, said (p. 92): “Where, however, the corporation engaged in business with nonmembers, the situation to that extent is entirely different. The nonmember pays the market price. From this market price the petitioner can and did derive a profit.” Exemption was accordingly denied. In Farmers' Union Co-Operative Co. v. Commissioner, 90 Fed. (2d) 488, affirming 33 B. T. A. 225, the corporation operated a grain elevator, feed store, and general merchandise store, and it purchased, sold, and shipped grain and other farm products, and handled machinery supplies and repairs. It claimed that all of its activities constituted either marketing or purchasing on a cooperative basis. It had extensive dealings with nonstockholders, but its bylaws allowed the payment of patronage dividends only to stockholders ; nonmember patrons were wholly excluded from any possible participation. Thus in its allegedly cooperative activities of marketing and purchasing it failed to meet the requirement that nonmember patrons are to be treated the same as member patrons in the distribution of patronage dividends. Producers' Creamery Co. v. United States, 55 Fed. (2d) 104, involved a corporation buying dairy products at market prices and reselling them. Stockholders received a smn.11 bonus based on the quantity of the products they furnished, but 30 percent of the petitioner’s products were purchased from nonmembers to whom it turned nothing back. Because of this difference in treatment of members and nonmembers in its allegedly cooperative operations, the taxpayer was denied the statutory exemption. A similar result was reached in Farmers Cooperative Co. of Wahoo, Neb. v. United States, 23 Fed. Supp. 123, and Farmers Union Cooperative Supply Co. of Stanton, Neb. v. United States, 23 Fed. Supp. 128, decided on the same day on the authority of the preceding case. And cases where exemption was denied under the early revenue acts because of nonmember dealings not then permitted are of course entirely irrelevant to this proceeding. See Riverdale Co-operative Creamery Association v. Commissioner, 48 Fed. (2d) 711; Burr Creamery Corporation v. Commissioner, 62 Fed. (2d) 401, affirming 23 B. T. A. 1007.

The amendment contained in the 1926 Act was directly and designedly intended to “assure associations * * * that the liberal construction * * * of existing law is sanctioned by Congress.” That liberal construction included “allowing such associations to manufacture their products, to change the form of raw materials, and: in some cases to operate subsidiaries, so long as the operations are not conducted on an ordinary profit-making basis.” Senate Beport No. 52, 69th Cong., 1st sess., pp. 23, 24. For the reasons stated, we believe petitioner’s operations bring it within the ambit so defined, and do not at any point exceed the restrictions placed upon organizations seeking exemption. It follows that there is no ground upon which to sustain respondent’s determination.

In view of our conclusion on the main issue, it is unnecessary to consider the petitioner’s alternative contention that the items giving rise to the deficiency do not in any event constitute income to it. Reviewed by the Board.

Decision will be entered for the petitioner.

Black, Leech, and Hxll dissent.

       SEC. 103. EXEMPTIONS FROM TAX ON CORPORATIONS.
      The following organizations shall be exempt from taxation under this title—
      * ******
      (12) Farmers’, fruit growers’, or like associations organized and operated on a cooperative basis (a) for the purpose of marketing the products of members or other producers, and turning back to them the proceeds of sales, less the necessary marketing expenses, on the basis of either the quantity or the value of the products furnished by them, or (b) for the purpose of purchasing supplies and equipment for the use of members or other persons, and turning over such supplies and equipment to them at actual cost, plus necessary expenses. Exemption shall not be denied any such association because it has capital stock, if the dividend rate of such stock is fixed at not to exceed the legal rate of interest in the State of incorporation or 8 per centum per annum, whichever is greater, on the value of the consideration for which the stock was issued, and if substantially all such stock (other than nonvoting preferred stock, the owners of which are not entitled or permitted to participate, directly or indirectly, in the profits of the association, upon dissolution or otherwise, beyond the fixed dividends) is owned by producers who market their products or purchase their supplies and equipment through the association; nor shall exemption be denied any such association because there is accumulated and maintained by it a reserve required by State law or a reasonable reserve for any necessary purpose. Such an association may market the products of nonmembers in an amount the value of which does not exceed the value of the products marketed for members, and may purchase supplies and equipment for nonmembers in an amount the value of which does not exceed the value of the supplies and equipment purchased for members, provided the value of the purchases made for persons who are neither members nor producers does not exceed 15 per centum of the value of all its purchases.

       [Treasury Regulations 77.] Aet. 532. Farmers’ cooperative marketing and purchasing associations, and corporations organized, to finance crop operations. — (a) Cooperative associations engaged in the marketing of farm products for farmers, fruit growers, live-stock growers, dairymen, etc., and turning back to the producers the proceeds of the sales! of their products, less the necessary operating expenses, on the basis of the products furnished by them, are exempt from income tax and shall not be required to file returns. Thus cooperative dairy companies which are engaged in collecting milk and disposing of it or the products thereof and distributing the proceeds, less necessary operating expenses, among the producers upon the basis of the quantity of milk or of butter fat in the milk furnished by such producers, are exempt from the tax. If the proceeds of the business are distributed in any other way than on such a proportionate basisi, the association does not meet the requirements of the Act and is not exempt. An association which has capital stock will not for such reason be denied exemption, (1) if the dividend rate of such stock is fixed at-not to exceed the legal rate of interest in the State of incorporation or 8 per cent per annum, whichever is greater, on the value of the consideration for which the stock was issued, and (2) if substantially all of such stock (with the exception noted below) is owned by producers who market their products or purchase their supplies and equipment through the association. Any ownership of stock by others than such actual producers must be satisfactorily explained in the association’s application for exemption. The association will be required to show that the ownership of its capital stock has been restricted as far as possible to such actual producers. If by statutory requirement ail officers of an association must be shareholders, the ownership of a share of stock by a nonproducer to qualify him as an officer will not destroy the association’s exemption. Likewise, if a shareholder for any reason ceases to be a producer and the association is unable, because of a constitutional inhibition or other reason beyond the control of the association, to purchase or retire the stock of such nonproducer, the fact that under such circumstances a small amount of the outstanding capital stock is owned by shareholders who are no longer producers will not destroy the exemption. The restriction placed on the ownership of capital stock of an exempt cooperative association shall not apply to nonvoting preferred stock, provided the owners of such stock are not entitled or permitted to participate, directly or indirectly, in the profits of the association, upon dissolution or otherwise, beyond the fixed dividends. The accumulation and maintenance of a reserve required by State statute, or the accumulation and maintenance of a reasonable reserve or surplus for any necessary purpose, such as to provide for the erection of buildings and facilities required in business or for the purchase and installment of machinery and equipment or to retire indebtedness incurred for such purposes, will not destroy the exemption. An association will not be denied exemption because it markets the products of nonmembers, provided the value of the products marketed for nonmembers does not exceed the value of the products marketed for members.

        (b) Cooperative associations engaged in the purchasing of supplies and equipment for farmers, fruit growers, live-stock growers, dairymen, etc. and turning over such supplies and equipment to them at actual cost, plus the necessary operating expenses, are exempt. The provisions of paragraph (a) relating to a reserve or surplus and to capital stock shall apply to associations coming under this paragraph. An association which purchases supplies and equipment for nonmembers will not for such reason be denied exemption, provided the value of the purchases for nonmembers does not exceed the value of the supplies and equipment purchased for members, and provided the value of the purchases made for nonmembers who are not producers does not exceed 15 per cent of the value of all of its purchases.
      In order to be exempt under either (o) or (5) an association must establish that it has no net income for its own account other than that reflected in a reserve or surplus authorized in paragraph (a). An association engaged both in marketing farm products and in purchasing supplies and equipment is exempt if as to each of its functions it meets the requirements of the Act.
      (o) Corporations organized by farmers’ cooperative marketing or purchasing associations, or the members thereof, for the purpose of financing the ordinary crop operations of such members or other producers are also exempt, provided the marketing or purchasing association is exempt under section 103 (12) (see paragraphs (a) and (6) of this article), and the financing corporation is operated in conjunction with the marketing or purchasing association. The provisions of paragraph (a) relating to a reserve or surplus and to capital stock shall also apply to corporations coming under this paragraph.

       Net income on all the “commercial departments” combined was reported for the year we are considering at $2,967.76.


source: Caselaw Access Project

author: Murdock: Van Foss an,

license: Public Domain

text:
    Stonewall J. Jackson, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 72002, 72119, 72127, 72244, 73625, 75762, 76448-76455, 76980.
    Promulgated June 7, 1938.

      O. Walker Taylor, Esq., and John F. McCabe, Esq., for petitioners Estate of Nathan T. Pulsifer, Bankers Trust Co., Executor, and Dorothea V. A. Swift.

      James A. O'Callaghan, Esq., and F. C. Laird, G. P. A., for petitioners Thomas R. Wyles and W. D. Waugh.

      Cr. L. Carroll, Esq., for petitioner Stonewall J. Jackson.

      H. A. Mihills, C. P. A., for petitioners Henry U. Birdseye, Hext M. Perry, Theodore Gabert, Philip L. Maury, George M. Seibert, E. C. Roberts, Horace S. Boutell, William E. Vincent, William J. Boston, and Frank T. Hogan.

      J. B. Johnston, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Henry U. Birdseye ; Estate of Nathan T. Pulsifer, Bankers Trust Co., Executor; Dorothea V. A. Swift; W. D. Waugh; Hext M. Perry; Theodore Gabert; Philip L. Maury; George M. Seibert; E. C. Roberts; Horace S. Boutell; William E. Vincent; William J. Boston; Frank T. Hogan; Thomas R. Wyles.

   OPINION.

Murdock:

The only question for decision in this case is the fair market value of the Valspar stock on February 14 and on June 12, 1930. The first date is determinative in the Pulsifer and Swift cases, while the latter date is determinative in all of the remaining cases. The parties agree that each distribution was pursuant to a plan of reorganization, and the profit received by the stockholders is recognized only to the extent of the cash. They have also agreed upon the basis for gain or loss on all of the old shares surrendered. The Commissioner has not recognized a profit in any case in excess of the amount of the cash. But in every case he has computed a profit by attributing a certain fair market value to the stock. The petitioners contend that the stock had no fair market value. The stock of all of the companies was closely held and there were no sales at or near the dates in question. There were no sales of the Valspar stock.

The Commissioner used $22.35 as the fair market value of the stock on July 12, 1930. He obtained that figure from a balance sheet for the new Valspar Corporation as of June 12, 1930, which he apparently constructed by taking the last available balance sheet and making certain adjustments thereto. He used two different figures to represent the fair market value of the stock on February 14, 1930, one in the case of Pulsifer and a different one in the case of Swift. Each was slightly less than the figure used as the value on July 12. He claims that his figures are justified, not only by the book values of the stock, but by earnings and the past history of the corporations. He also claims that the parties to the reorganization themselves recognized that the value of the Valspar stock was in the neighborhood of $25. His arguments are supported, for the most part, by evidence in the record which ordinarily would be entitled to great weight. Yet other evidence in this record indicates that that evidence upon which the Commissioner relies is not a reliable indication of the fair market value of the stock.

A very serious situation in the affairs of Valentine developed when Duco came on the market. The officers of Valentine recognized the seriousness of that competition and they tried in every way they knew to save their corporation. They tried to save as much of its business as could be saved and they tried to develop profitable new lines. But immediately following the advent of Duco came the stock market crash and the depression, which began in the fall.of 1929. Despite the earning history of its predecessors, Valspar never earned money. On the contrary, it sustained large operating losses. The effect of the two reorganizations was that the stockholders of Valentine, Con-Ferro, and Graphite received a very large amount of cash which they took out of the business. The stock which they received was never sold. Although it had a substantial book value, the evidence indicates that that book value was the result of certain writeups of the book value of a number of the assets which were not justified .under the circumstances. The petitioners did not believe that the Valspar stock which they received had any fair market value at the time they received it, and, with one exception, they did not report it on their returns as having any fair market value. Subsequent events confirmed their opinions. Any reasonable person interested in buying this Yalspar stock on the critical dates would have learned of the prospects of this company, and we can not assume that any reasonable person knowing those prospects would have given anything for the stock. This is not a case of the disposition of stock where the gain or loss must be determined in some definite amount, but is a case where the question of further gain or loss is postponed under the statute to await the final disposition of the stock. See Paul & Mertens, sec. 52.01. It is, of course, possible that the stock may not have been entirely worthless, but, after considering all of the evidence, we have come to the conclusion that for the purposes of this case our finding that it had no fair market value on the critical dates is in accordance with the' weight of the evidence.

Reviewed by the Board.

Decisions will be entered, wnder Bule 50.

Van Foss an,

dissenting: I am unable to agree that on the record before us the stock in question has no fair market value. The fact that it may be difficult, on the evidence, to find some intermediate figure between that found by respondent and that contended for by the petitioners (here, no value) does not absolve the Board of its duty to find such correct value.

Aenold agrees with the above dissent.


author: Black :

text:
    Mary H. Haines, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87725.
    Promulgated June 7, 1938.

      G. Russell Phillips, Esq., for the petitioner.

      E. 0. Algire, Esq., for the respondent.
   OPINION.

Black :

In this proceeding there is no dispute between the parties that taxable gifts have been made of certain insurance policies by the petitioner to her four children. These gifts were made in the taxable year and petitioner has returned them for gift tax purposes and has paid the tax thereon. The values at which the petitioner returned the gifts were the cash surrender values of the policies. The Commissioner has rejected these valuations and has computed the values in accordance with article 19 (9) of Regulations 79 (1936 Edition).

Section 506 of the Revenue Act of 1932 provides: “If the gift is made in property, the value thereof at the date of the gift shall be considered the amount of the gift.” Article 19 of Regulations 79 deals with the valuation of property for gift tax purposes, and paragraph (9) thereof deals with the valuation of life .insurance and annuity contracts and is printed in the margin.

In contending that the value of the insurance policies taken out by petitioner in behalf of her children and paid for by single lump sum premiums is represented by their cash surrender values, petitioner argues that the gift tax is an excise tax upon the value of the property which passes from the donor to the donee as the subject of the gift and that this value is not necessarily controlled by the cost of the thing given, as the Commissioner has endeavored to provide in his regulations dealing with the valuation of life insurance policies. The petitioner’s argument may be summed up by the following quotation taken from her brief:

The fact that insurance companies assume risks and make a charge for doing so which reduces the salable value of the contract from the moment of its issue is of no importance. The 'true test of value is what such contracts can be Sold for, not what it will cost to turn- around and buy another one from the insurance company which chooses to make a service charge for issuing another.

Petitioner further argues in her brief:

It is especially to be noted that the petitioner in this case did not give away the premium. The premium she paid to the insurance company. It was the policies which were the subject of the gift and not the amount of the premiums. To say that the policies are worth the amount of the premiums is to say that an insurance company should work for nothing, because its services are worthless. Such a position is untenable.

Respondent relies upon Ms regulations quoted in the margin, supra, and in support argues that the cash surrender values represent the minimum values, the forced sale values, citing Lucas v. Alexander, 279 U. S. 573; Gustav Anderson, 26 B. T. A. 1208; and that in the instant case the premiums paid by the insured represented the market value of the policies on the dates of the gifts; that was the amount which similar policies of life insurance upon the lives of the same age, sex, etc., as the insured were being sold for; that such premiums were based upon the probable remaining life of the insured as determined by mortuary tables, citing Ithaca Trust Co. v. United States, 279 U. S. 151.

We consider that the issue involved in the instant case is essentially the same as that which was raised in the recent case of Ernest A. Cronin, 37 B. T. A. 914. In that case the two life insurance policies which were the subject of the gift tax were single premium policies, with cash surrender values. There were no paid up additions to the policies and there were no dividends standing to the credit of the policies. The Commissioner had valued the policies at the amounts which it would have cost the petitioner to take them out if taken out by him on the date the gift was made. In doing so the Commissioner followed article 19 (9) of Regulations 79, the same regulation that was applied in the instant case.

In that case we declined to give a conclusive effect to the Commissioner’s regulations, stating that “The respondent’s valuation of the insurance policies here under the method prescribed in the quoted regulation is at best arbitrary and inconclusive.” We thereupon held that the value of the policies for gift tax purposes under the evidence in that case was their cash surrender values on the date of the gifts. In that connection we said:

It has been stipulated that the cash surrender value of the policies in question on December 30, 1935, was $16,237.50 each. While their cash surrender value does not conclusively establish their market value, Lucas v. Alexander, 279 U. S. 573, it is nevertheless substantial evidence of market value and it is the only evidence of value which the record offers, except for the further stipulation as to what would have been the cost of similar new policies.

In the instant case the cash surrender value of each policy has been stipulated. It is also clear that neither policy had any paid up additions or dividends standing to the credit of the policy because the dates of the gifts of the policies were the dates of the policies themselves. In addition to the stipulated cash surrender values of the policies in question, petitioner offered in evidence the testimony of one witness, Louis J. Santamarie, who testified that the policies could not have been sold to outsiders for more than their cash surrender values.

We do not attach, a great deal of importance to the testimony of this witness on this point. His testimony established that he was an experienced underwriter in the sale of insurance policies by life insurance companies to the public, but his testimony failed to show that he had such experience or knowledge of the sale of insurance policies by the insured by assignment to outsiders as would qualify him to give the Board an expert opinion as to what life insurance policies would sell for under such circumstances. Therefore we do not regard his testimony as of any particular value in the determination of the issue we have here to decide.

However, without his testimony, the stipulated facts in the instant case are as strong for petitioner as they were for the taxpayer in Ernest A. Cronin, supra. Therefore, following that case, we hold for petitioner.

In the Cronin case gifts of the policies were not made until a little more than two years after the date of the issuance of the policies, whereas in the instant case the dates of the gifts of the policies were the dates of their issuance, but we do not think that the differences in fact in this respect affect the result. The controlling fact in the Cronin case was that the policies there involved had certain cash surrender values, with no additions of paid up insurance and no dividends standing to the credit of the policies, and we held that those surrender values represented the values of the policies at the date of the gift rather than what it would cost the insured to take out similar policies of insurance at his attained age.

Here it has been stipulated what the cash surrender values of the policies were immediately following the dates of the gifts and there are no additions of paid up insurance and no accumulations of dividends to the credit of the policies.

Therefore, following the holding of the Board in the Cronin case, we decide the only issue involved in favor of petitioner.

Decision will he entered for the petitioner.

       (9) Life insurance and anntiity contracts. — The value of a life insurance contract or of a contract for the payment of an annuity issued by a company regularly engaged in the selling of contracts of that character is established through the sale of the particular contract by the company, or through the sale by the company of comparable contracts. As valuation through sale of comparable contracts is not readily ascertainable when the gift is of a contract which has been in force for some time and on which further premium payments are to be made, the value may be approximated, unless because of the unusual nature of the contract such approximation is not reasonably close to the full value, by adding to the interpolated terminal reserve at the date of the gift the proportionate part of the gross premium last paid before the date of the gift which covers the period extending beyond that date.
      The examples given below, so far as relating to life insurance contracts, are of gifts of such contracts on which there are no accrued dividends or outstanding indebtedness.
      Example: A donor purchases from a life insurance company for the benefit of another a life insurance contract or a contract for the payment of an annuity; the value of the gift is the cost of the contract.
      #**«**«
      Example: A donor owning a life insurance policy on urhich no further payments are to be made to the company (e. g., a single premium policy or paid-up policy) makes a gift of the contract. The value of the gift is the amount which the company would charge for a single premium contract of the same specified amount on the life of a person of the age of the insured.


author: Muedock:

text:
    Estate of G. A. E. Kohler, Deceased, Mary E. Kohler, Administratrix, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mary E. Kohler, Transferee of the Estate of G. A. E. Kohler, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent. John B. Kohler, Transferee of the Estate of G. A. E. Kohler, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 76208, 79606, 79607.
    Promulgated June 10, 1938.

      Errett G. Smith, Esq., for the petitioners.

      Frederick R. Shearer, Esq., for the respondent.
   OPINION.

Muedock:

I — Loss—Suspension, Steel Concrete Co. — The petitioners do not contend that the $57,530.27 is deductible as a debt ascertained to be worthless and charged off within the taxable year 1931. Although the decedent kept books he made no charge-off on those books in connection with this item. The evidence does not clearly demonstrate -whether the advances represented debts, that is, amounts which the decedent intended should be repaid to him by the corporation, or capital contributions. Before they could be deducted there would have to be a disclosure of whether they represented debts or capital contributions. Daniel Gimbel, 36 B. T. A. 539; Spring City Foundry Co. v. Commissioner, 292 U. S. 182. But, if it be assumed that the amount in controversy represented a debt, no more of that debt is deductible in 1931 than the Commissioner has allowed. A taxpayer may not select the year in which to deduct a debt which to his knowledge has been worthless for some time. Louis D. Beaumont, 25 B. T. A. 474. If the amounts paid in prior years were a debt, it was worthless long prior to 1931 and should have been charged off and deducted in some other year or years.

The petitioners claim the deduction as a loss sustained in 1931. Sec. 23 (e) (2), Revenue Act of 1928. They say that the advances were capital investments in the corporation and the loss was sustained when the corporation was dissolved in 1931. If a stockholder contributes capital to his corporation, the contribution may represent additional cost of his stock which is recoverable as part of the basis, either when the stock is sold or when it becomes worthless. John G. Paxton, 7 B. T. A. 92; Warren E. Burns, 11 B. T. A. 524, affd., 31 Fed. (2d) 399; certiorari denied, 280 U. S. 564; B. Estes Vaughan, 17 B. T. A. 620. If a stockholder is forced to make advances to a corporation from which he can expect no return, the amount advanced in any year may be deductible as a loss as soon as it is made. The Commissioner has allowed the deduction of $256.40 apparently on this principle. Cf. George H. Stanton, 36 B. T. A. 112; C. H. White, 15 B. T. A. 1375. The advances here in question were made prior to the taxable year 1931. The evidence shows that the stock was absolutely worthless prior to 1931 and all cost of stock paid theretofore was deductible prior to 1931. Consequently, the petitioners have failed to show that the decedent was entitled to the deduction for 1931 as a part of the cost of his stock.

The petitioners advance one other theory to support their claim for the deduction. They point out that the decedent conducted experiments and invented an improved method of construction somewhat like the method covered by the patents belonging to Concrete but using square tubing with certain interlocking devices, as a result of which he received patents in 1926 and 1931. He did not assign these patents to Concrete. The petitioners claim that the advances to Concrete were thus merely a part of the work being done by the decedent to develop a method of construction, and, since he abandoned the enterprise in 1931, he is entitled to deduct as a loss for that year the amount which he had advanced to Concrete. However, if the promotion and development of the method be regarded as a single business enterprise, as the petitioners now urge, they are no better off. Some of the amounts were paid for taxes and other items, which on this theory of the case would be deductible as expenses in the year in which paid. The advances to Concrete were apparently related entirely to the patents owned by Concrete. As development expenses of those patents, they probably would have to be deductible during the life of the patents. Claude Neon Lights, Inc., 35 B. T. A. 424, 442; Leggett & Platt Spring Bed Manufacturing Co., 18 B. T. A. 1012. The decedent did not abandon in 1931 his patents for the improved method. Consequently, if the enterprise be regarded as a single enterprise, there is still no sufficient reason for deducting the advances to Concrete from 1931 income.

II — Capital gain or loss — Cutler-Hammer Mfg. Co. settlement.— The claims of the parties on this issue are rather complicated and no good purpose would be served in setting them forth in detail. The most extreme contention of the petitioners is that the decedent did not realize any profit in 1931, but, on the contrary, sustained a very large loss at that time. Their theory is that on March 1, 1913, he had a business which was worth $200,000, the $100,000 which he received in 1910 and $28,584.30 which was available to him in 1921 represented income under the contract, no part of which should be reported in 1931, $5,200.90 of the amount received in 1931 represented additional income and should be reported in that year, and the balance of $43,314.40 was all that he received in 1931 for his business. Consequently, he sustained a loss of $156,685.60 which is deductible for 1931. The respondent, on the other hand, contends that he erred in reducing the amount of $77,099.64 received in 1931 by $28,584.30) the profits which the decedent refused to receive in 1921.

There are a number of reasons why the contentions of the petitioner can not be sustained. In the first place the evidence does not show that the decedent’s interest in the Kohler System business, including patents, personnel, drawings, and everything pertaining thereto, was worth $200,000 on March 1, 1913. Although there is evidence to indicate that this business was a valuable one, nevertheless no reasonable estimate of its actual value to the decedent on March 1, 1913, can be intelligently made from this record. The option price of $200,000, mentioned in the agreement, can not fairly be taken as evidence that the value of the business was $200,000 on March 1, 1913. That contract was entered into prior to March 1, 1913, and the option was never exercised. Unaccepted offers and unexercised options, particularly where they are in effect over a long period of time, may not be reliable evidence of value. Anson V. Prouty et al., Executors, 5 B. T. A. 107; Eli J. Taylor, 9 B. T. A. 442; Union Terminal Elevator Co., 14 B. T. A. 55. There is other evidence to. indicate that the business was not worth $200,000 on March 1, 1913.

Furthermore, a large percentage of the value was attributable, apparently, to patents which were exhausting year by year. The decedent during the life of the contract could have taken deductions for depreciation on any patent or other property used in the business which was depreciating or becoming obsolete. Likewise, if the contract itself had value on March 1, 1913, he could have taken deductions for the exhaustion of that contract during the period of its life. It is impossible to determine from this record what portion, if any, of the value on March 1, 1913, of the decedent’s property, was left at the termination of the contract after proper adjustments as of that date for exhaustion, and wear and tear, including obsolescence. A fair inference to be drawn from the record in this proceeding is that the appliances required rather frequent modifications, adaptations, and improvements to meet the ever changing demands of the printers. This, in turn, indicates that much of the value of the business as it existed on March 1, 1913, had become obsolete prior to April 1920. Any new devices or improvements developed during the contract would, of course, have no basis for gain or loss to the decedent, since they cost him nothing. If they had any cost to Cutler-Hammer, their cost was deducted before the decedent’s share of the profits had been determined. That was equivalent to deducting all costs of the business as expenses, whereas the only costs which might form a basis would be such as had been capitalized, instead of deducted as expenses. Thus, not only is it impossible to determine the amount of the basis which remained, but it is impossible to determine whether any of the basis remained as of the date of the termination of the contract in April 1920. Cf. Burnet v. Houston, 283 U. S. 223.

Although the Commissioner makes no point of it, it is apparent that the decedent received or retained in the settlement some very valuable patents and rights in addition to the $50,000 and the forgiveness of the indebtedness. For example, he received the Stone patent, on which he later was able to collect $550,000. That patent had been applied for in 1910. Thus, there seems to be reason for not using all of the basis, even if we knew it, to offset the cash which was received.

The record also indicates that a large part of the success of the business would have to be attributed to the personal services and abilities of the men .conducting it, particularly the engineers. These were items in which the decedent could have no property interest and on which he would have no basis for gain or loss. If the engineers, upon the termination of the contract of 1920, preferred to stay with Cutler-Hammer, the decedent could not compel them to come with him, and their failure to come with him could not give rise to a deductible loss. The contract of April 1910 contained no provision which required Cutler-Hammer to return to the decedent upon the termination of the contract any personnel, charts, designs, or blueprints.

If it were not for the action of the Commissioner, we would have some doubt whether the $11,099.64 received in 1931 was received for anything which had a basis for gain or loss in the hands of the decedent. However, the Commissioner determined the deficiency and made bis claim for an increased deficiency on the theory that a part or all of the payments received in 1931 represented amounts realized by the decedent from the disposition of the business which he owned on March 1,1913, a capital asset. Consequently, if any basis were shown, it could be deducted from the amount realized. The burden was upon the petitioners to show error in the determination of the Commissioner. They have failed to show that the amount which the Commissioner has included in income in connection with this transaction was larger than or different from the correct amount. Also there is no sufficient reason to disturb the Commissioner’s method of taxing the gain as a capital gain.

The Commissioner claims an increased deficiency on the ground that the amount of $28,584.30 should also be added to the decedent’s income for 1931. That was the amount which was shown to be due the decedent on the statement rendered by Cutler-Hammer in February 1921. The decedent did not receive that amount in 1921 nor did he report it on his income tax return. However, the evidence fails to show that it should not have been included in his income for 1921 or some other year prior to 1931. The Commissioner has neither pleaded nor proved estoppel, and we are unable to say from this record that any larger amount should be included in the decedent’s income for 1931 in connection with the Cutler-Hammer settlement than was included by the Commissioner in determining the deficiency.

Ill — Income—Westinghouse litigation. — The Commissioner has determined that all of the income from the settlement agreement with the Westinghouse Electric & Manufacturing Co. and the other companies was income which should have been accrued for 1931. The decedent kept his books upon an accrual basis. The amount which he was to receive was fixed in July 1931. It was to be paid absolutely, that is, there was no condition precedent to its payment. It is true that the decedent inserted in the agreement a condition that, if the second payment was not made, then the whole agreement would be called off. But Westinghouse had agreed without qualification to pay it. The petitioners make no contention that the amount recovered was not income within the definition stated in Eisner v. Macomber, 252 U. S. 189. Cf. W. W. Sly Manufacturing Co., 24 B. T. A. 65. Income accrues when the amount of it and the right to it are fixed, provided the right is not contingent, and provided that there is a reasonable expectation that payment will be made in due course. Continental Tie & Lumber Co. v. United States, 286 U. S. 290; Automobile Insurance Co. v. Commissioner, 72 Fed. (2d) 265; Bettendorf Co., 34 B. T. A. 72; Corn Exchange Bank v. United States, 37 Fed. (2d) 34; United States v. Anderson, 269 U. S. 422. No good reason appears why the amount should not have been accrued for 1931 or why it did not represent income for 1931 to one who kept books and reported his income on an accrual basis. The determination of the Commissioner on this point is approved.

The petitioners contend that the amount received in 1932 should not be included in income for 1931 because the Commissioner has taken inconsistent positions in regard to this income. It is true that the Commissioner determined deficiencies for the period from January 1, 1932, until the date of the decedent’s death on the basis of including these same payments in income for that period. He did that so that if he was wrong in including it all for 1931 he could protect himself. However, at the hearing in this case he agreed that decision should be entered in the proceeding, relating to the short period in 1932, holding that there was no deficiency for that period. He thus elected to stand upon his contention in this proceeding that all of the payment was income for 1931. The equitable grounds underlying the doctrines of abandonment and vexatious litigation do not favor these petitioners, who now have the advantage of a decision of no tax liability in 1932 and seek to escape tax altogether. There appears to be no merit in this contention. Cf. James Couzens, 11 B. T. A. 1040; Stanford University Bookstore, 29 B. T. A. 1280; Cape Henry Syndicate, 30 B. T. A. 794; Swiss Oil Corporation, 32 B. T. A. 777, 790; Estate of William Steele, 34 B. T. A. 173, 176.

IY — Transferee liability. — The transfers which the decedent made to his wife and his son left him with no assets. There is evidence that at the time of the transfers a suit was pending against him in which judgment was finally entered against his estate. There is also evidence that counsel were advising him to transfer his property to avoid the effect of that judgment, which was anticipated in January 1932. The wife and the son are each liable as transferees to the extent of the value of the property which they received. Helen Dean Wright, 28 B. T. A. 543; Lehigh Talley Trust Co., 34 B. T. A. 528; Margaret Wilson Baker, 30 B. T. A. 188; affd., 81 Fed. (2d) 741; Isaac Michael Green, 26 B. T. A. 719; Updike v. United States, 8 Fed. (2d) 913; Continental Baking Co. v. Helvering, 75 Fed. (2d) 243; Benjamin E. May, 35 B. T. A. 84.

The petitioners point out that the Commissioner assessed the full amount of the deficiency as a jeopardy assessment against the estate on January 11, 1935, and against Mary E. and John B. Kohler as transferees on January 28, 1935. They contend that he was without authority to make a jeopardy assessment of a transferee liability. But that question need receive no consideration by the Board because the Board has nothing to do with the assessment and collection of the taxes. It exhausts its authority when it determines the amount of the deficiency and the liability of the transferees in this proceeding.

Decisions will be entered u/nder Bule 50.


author: Mellott :

text:
    The Colson Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. The Colson Company of California, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 85535, 85536.
    Promulgated June 10, 1938.

      H. A. MiMlls, O. P. A., for the petitioners.
    /S'. B. Pierson, Esq., for the respondent.
   OPINION.

Mellott :

The petitioners, being an “affiliated group” of corporations within the meaning of section 141 of the Revenue Act of 1932, filed a consolidated income and excess profits tax return for the calendar year 1933. Upon audit the respondent determined a deficiency in excess profits tax against them severally in the amount of $1,128.01. The facts, all of which were stipulated, may be briefly summarized.

The Colson Co., hereinafter referred to as the Ohio corporation, was a corporation duly organized under the laws of Ohio, engaged in. the manufacture of bicycles, casters, small trucks, etc., and having its principal office at Elyria, Ohio. On May 13, 1932, the Court of Common Pleas of Lorain County, Ohio, appointed Hall Kirkham receiver of all its property, assets, rights, and franchises. He was authorized to operate and use the property of the company and to conduct its business in the usual course, without personal liability for loss. Subsequently, and in September 1932, the receiver was authorized, if in his judgment it should become desirable to do so, “to make the necessary expenditures and investment to organize a California corporation controlled by the receiver for the purpose of handling Colson products on the West Coast.” Pursuant to such authorization the Colson Co. of California, hereinafter referred to as the California corporation, was incorporated under the laws of California on September 23, 1932.

The business of the Ohio corporation was conducted by the receiver under the appointment of May 13, 1932, until February 13, 1935, when an order was entered by the District Court of the United States for the Northern District of Ohio, Eastern Division, approving a creditors’ petition in proceedings for the relief of debtors under sections 77A and 77B of the Bankruptcy Act. The court thereupon appointed Hall Kirkham, then receiver, as temporary trustee of the debtor’s estate.

The National Industrial Becovery Act (48 Stat. 195) was approved by the President June 16,1933. We show in the margin the portions of sections 215 and 216 of that act which are especially applicable to the issue to be decided.

The regulations issued by the Department provided, in substance, that returns were to be filed by all domestic corporations on or before September 29, 1933, covering the first taxable period under the statute, i.e., from June 16, 1933, to June 30, 1933. Every corporation, which was “doing business” during that period, was subject to the tax and, even if a corporation claimed that it was not doing business or that it was exempt from tax, it was nevertheless required to file a return on the form prescribed by the Department, namely, form 707. If the corporation claimed exemption, it did not need to declare a value for its capital stock or to pay any tax, but it was required to file form 717, being a specific claim for exemption from the tax.

The Department ruled (XII-2 C. B. 405, S. T. 702) that “where a corporation is in the hands of a receiver, the receiver and not the corporation is carrying on the business. * * * and [the corporation] is not subject to the capital stock tax imposed by * * * ” the act.

The receiver, relying upon the rulings and regulations, filed a capital stock tax return (form 707) on behalf of the Ohio corporation and a claim for exemption (form 717), which was sustained on May 9,1934.

■The California corporation filed a capital stock tax return for the period required by the act, in which it declared a value of $5,000 for its entire capital stock.

Treasury -Decision No. 4390 (XII-2 C. B. 409) was approved September 16, 1933. It provides, among other things, that “An affiliated group of corporations as defined by section 141 of the Revenue Act of 1932, * * * which pursuant to that section, has the privilege of making a consolidated income-tax return, and has exercised such privilege, shall make a consolidated excess-profits tax return. The excess-profits tax shall be computed on such portion of the consolidated net income for the income-tax taxable year of the affiliated group as is in excess of 12y2 per centum of the combined adjusted declared value of the capital stock of the members of the group as separately returned under section 215.”

The deficiency in excess profits tax was determined by the respondent in accordance with the above ruling, as is shown from his computation, which is as follows:

Net income for excess profits tax computation-$23,185.24
Less: 12%% of $5,000.00, value of capital stock as declared, in the capital stock tax return of The Colson Company of California
for the year ended June 20, 1933- 625.00
The Colson Company (Exemption sustained)---
Balance subject to excess profits tax at 5%- 22,560. 24
Excess-profits tax liability- 1,128.01
Excess-profits tax previously assessed- None
Deficiency in excess-profits tax- $1,128. 01

Section 141 of the Revenue Act of 1932 grants the privilege, to an affiliated group of corporations, of making a consolidated return of income in lieu of separate returns, upon the condition that all the corporations “consent to all the regulations” prescribed by the Commissioner prior to the making of such return. The making of a consolidated return is, under the act, considered as such consent. The gist of petitioners’ contention is that the Treasury decision, rulings, and regulations of the Department imposed a tax not specifically placed upon them by an act of Congress.

The parties apparently agree: (1) That the Ohio corporation was not subject to the capital stock tax; (2) that it claimed and was properly granted an exemption; and (3) that if it and the California corporation had filed separate returns of income rather than consolidated returns of income, neither would have been subject to any excess profits tax. It may be that the respondent does not concede No. 3 in this proceeding; but, as will hereinafter be pointed out, at least under his earlier rulings, he did do so. The parties also agree that the Committee Reports indicate (Report of the Senate Finance Committee,- 73d Cong., 1st sess.) that the primary object of the excess profits tax on corporations was “to induce corporations automatically to declare a fair value for their corporate stock.” They disagree, however, upon the effect of the two sections (215 and 216) upon each other.

The respondent, citing cases which support the well recognized principle that statutes granting an exemption from tax must be strictly construed, concludes that it was not contemplated by Congress that a corporation should be exempted from the payment of an excess profits tax simply because of the fact that it was exempt from the capital stock tax because a receiver was operating its business. Petitioners, on the other hand, contend that section 216 is in itself a tax imposing statute; that it is dependent upon section 215; and that no tax can be imposed under it unless the corporation is subject to a capital stock tax.

We are. of the opinion that the construction urged by the petitioners is the more tenable. Section 216 imposes an excess profits tax upon the net income for the year “ending after the close of the first year in respect of which it is taxable wider section £15.” If there is any ambiguity in this language — and we perceive none — it disappears when the other provisions of the sections are analyzed. Thus, it will be noted that the amownt of the excess profits tax can only be determined by deducting the 12y2 per centum of the “declared value” (under section 215) from the net income. Surely Congress did not intend to subject a corporation to the excess profits tax if its stock had no value and it was not carrying on or doing business. Such a corporation was specifically exempted from the capital stock tax, as were also charitable corporations, insurance companies, and foreign corporations not carrying on or doing business in the United States. To impose the excess profits tax against a corporation which was not carrying on or doing business, would do as great violence to the language used by Congress as would be done if we were to impose it upon the other corporations which are specifically exempted.

Some support may be found for our conclusion in Reinecke v. Gardner, 277 U. S. 239. In that case the Supreme Court had before it the following question certified to it by the Court of Appeals for the Seventh Circuit:

Question 1. Is a trustee in bankruptcy, operating under order of the Bankruptcy Court the business of a bankrupt domestic corporation in the year 1917, and realizing net profits from the operation, subject to the excess-profits t-ax imposed by the Revenue Act of 1917, in a ease where the corporation, if itself conducting the business, would, under the Act, have been subject to such tax?

The Supreme Court pointed out that under the Bankruptcy Act (11 U. S. C. A.) the entire property of the bankrupt vested in the trustee, that the income in question was not the income of the bankrupt corporation, but of the trustee, and that it was subject to income and excess profits tax only if the statute authorized the assessment of the tax against the trustee. The Court gave recognition to the provisions of the act which subject trustees in bankruptcy to the income tax, but, in reaching its conclusion upon the question presented, stated that:

The case is different with respect to the excess-profits tax. That tax was imposed by Title II of the Act of 1917 on corporations, partnerships, and individuals engaged in trade or business. The Title made no mention of executors, receivers, trustees or persons acting in a fiduciary capacity, and contained no language corresponding to the quoted provision of Title I, Section 4, extending the additional income tax to “the same incomes” taxed by Section 10 of the Act of 1916. A tax imposed on corporations alone does not extend to a trustee in bankruptcy of a corporation.

It may be that by analogy the same conclusion should be reached here and specific holding should be made that the receiver, as such, is not subject to* the excess profits tax because not specifically made so by the act. But we reach the conclusion that the Ohio corporation, under the facts before us, was not subject to such tax by giving full effect to the language of sections 215 and 216, so it is unnecessary to approach the question as it was approached by the Supreme Court in the above case.

Having concluded, as we do, that the receiver would not have been subject to the excess profits tax if he had filed a separate return of income for the taxable year on behalf of the Ohio company, we must yet determine what effect, if any, the filing of a consolidated return had upon him or the two companies.

We have set out above .the portion of Treasury Decision No. 4390 requiring that an affiliated group which has exercised the privilege of making a consolidated return of income, “shall make a consolidated exceSs-profits tax return.” The parent company and its receiver had exercised the option to file a consolidated return of income in 1932, previous to the enactment of the capital stock tax law or the excess profits tax law. It is significant, we think, that neither section 215 nor section 216 contained any provision requiring, or even authorizing, the filing of consolidated returns. Section 215 specifically requires “every corporation liable for tax” under it to make a return under oath. Section 216 provides that, “The tax imposed by this section shall be assessed, collected and paid in the same manner, and shall be subject to the same provisions of law (including penalties) as the taxes imposed by Title I (Income Tax) of the Revenue Act of 1932.” It may be that the quoted language authorized the Department to permit the use of consolidated returns in connection with the excess profits tax; and, probably in most instances, combining the net incomes and adjusted declared value of the capital stock of the members of the group, as required by the Treasury decision, worked no hardship. Under the facts before us, however, a very definite hardship has resulted; so it is necessary for us to consider whether the requirement that the net incomes and adjusted declared values be consolidated, is, or is not, a valid one.

Upon brief respondent contends that we should not give a “literal construction” to the language of section 216 (b), since to do so, he says, would lead to an unreasonable result. In that connection he points out that a literal construction would make applicable not only the administrative but also the substantive provisions, including both the tax base and the tax rate of the general title, thereby making it impossible to apply the method of computation provided by the sections. Of course, we would approve no such far-fetched construction and we do not do so. We do hold, however, that the act must be strictly construed in so far as it levies an additional tax

It is fundamental that tax imposing statutes are not to be extended by implication. “In case of doubt they are construed most strongly against the government, and in favor of the citizen.” Gould v. Gould, 245 U. S. 151. Nor may such statutes be extended or enlarged under the general power to prescribe rules and regulations. This power is given “not * * * to make law, for no such power can be delegated by Congress”, but merely for the purpose of carrying into effect the will of Congress. Manhattan General Equipment Co. v. Commissioner, 297 U. S. 129; cf. Panama Refining Co. v. Ryan, 293 U. S. 388; Schechter Poultry Corporation v. United States, 295 U. S. 495. The Treasury decision and the rulings of the Department, it seems to us, go further than merely laying down a general rule for carrying out the will of Congress. They have the effect, as contended by petitioners, of imposing an excess profits tax upon them because of the fact that they had previously, and before the enactment of the National Industrial Recovery Act, elected to file consolidated returns of income and hence were required to file a consolidated income and excess profits tax return for the taxable year. This, we think, transcends the power of the Department. We hold, therefore, that the respondent erred in determining the deficiencies.

Reviewed by the Board.

Judgment will he entered for the petitioners.

       Sec. 215. (a) For each year ending June 30, there is hereby imposed upon every domestic corporation with respect to carrying on or doing business for any part of such year an excise tax of $1 for each $1,000 of the adjusted declared value of its capital stock.
      *******
      (c) The taxes imposed by this section shall not apply—
      * * * * * * *
      (3) to any domestic corporation in respect of the year ending June 30, 1933, if it did not carry on or do business during a part of the period from the date of the enactment of this Act to June 30, 1933, both dates inclusive; * * *
      Sec. 216. (a) There is hereby imposed upon the net income of every corporation, for each income-tax taxable year ending after the close of the first year in respect of which it Is taxable under section 215, an excess-profits tax equivalent to 5 per centum of such portion of its net income for such income-tax taxable year as is in excess of 12% per centum of the adjusted declared value of its capital stock (or in the case of a foreign corporation the adjusted declared value of capital employed in the transaction of its business in the united States) as of the close of the preceding income-tax taxable year (or as of the date of organization if it had no preceding income-tax taxable year) determined as provided in section 215. The terms used in this section shall have the same meaning.as when used in the Revenue Act of 1932.
      (b) The tax imposed by this section shall be assessed, collected and paid in the same manner and shall be subject to the same provisions of law (including penalties), as the taxes imposed by title I of the Revenue Act of 1932.


author: Haeron:

text:
    Eastern New Jersey Power Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88566.
    Promulgated June 10, 1938.

      Richard W. Wilson, Esq., and George Ruling, G. P. A., for the petitioner.

      E. M. Woolf, Esq., for the respondent.
   OPINION.

Haeron:

There is no dispute that petitioner charged off on its books the debt as worthless. There is no question that the item was a debt. A bank deposit creates a debtor-creditor relation. The sole question is whether the petitioner’s ascertainment of worthlessness of the debt occurred in the same year that the debt in fact became worthless. The question here is a fact question upon which the burden of proof is on the petitioner.

A taxpayer is not expected to be too optimistic. United, States v. White Dental Manufacturing Co., 274 U. S. 398, 403. Neither should he be too pessimistic when claiming deductions for bad debts. He “must make a reasonable investigation of the facts and draw a, reasonable inference from the information thus obtainable.” Sherman & Bryan v. Blair, 35 Fed. (2d) 713, 715. The facts are that at the end of 1933 petitioner had received 10 percent payment of the deposit; the bank had reopenecl and depositors had been given an equitable interest in preferred stock of the bank having a par value of $10 per share and redeemable at $190. The petitioner received under the reorganization plan, a right, evidenced by preferred stock participation certificates, to receive preferential payments out of the orderly liquidation of certain assets and earnings of the bank up to the full amount of its unpaid deposit. Petitioner also received the voting rights that the preferred stock carried. It appears that there was no time agreed upon within which the unpaid deposits were to be paid off. The agreement of May 26, 1933, was for an undetermined period.

The payments which petitioner had a right to receive were to be made from the orderly liquidation of certain assets and from earnings. No evidence is presented in this proceeding as to what comprised the assets to be liquidated, the value thereof in 1933, nor the relation of assets to liabilities. Petitioner’s officer who testified in this proceeding stated that he was unable to obtain any information from the bank as to what amount of deposits might ultimately be paid. Lacking any information as to the future probabilities, 'petitioner’s officers concluded at the end of 1933 that the debt was uncollectible and wholly worthless.

We do not have here a situation where a creditor is given stock or other property in settlement of his claim. Cf. Sunflower Packing Corporation, 2 B. T. A. 1104; Allie M. Turbeville, 31 B. T. A. 283. Petitioner here received an equitable interest in preferred stock held by a trustee, the voting rights of the preferred stock, and the right to receive payments on account of the unpaid deposit out of both liquidation of certain assets and future earnings. While participation certificates were received, the preferred stock was not received. While the participation certificates were quoted on the market, there is not any substantial evidence before us as to their fair market value in 1933 and petitioner has not made claim for a partial loss. It may be that petitioner could have sold the certificates, but it did not, and it appears that the certificates were not traded in. The intent of the plan under which the certificates were issued was to gradually redeem the stock against which the certificates were issued. Under these facts we do not believe that the issuance of the certificates in 1933 constituted a “closed transaction” upon Avhich petitioner could determine that the claim was worthless at the end of 1933.

Under the plan which petitioner agreed to with other depositors, the Asbury Bank was reopened and carrying on business at the end of 1933, with the approval of the New Jersey State Commissioner of Banking. Unpaid depositors were to be paid, in full, if liquidation proceeds and earnings were sufficient, over an indefinite period of time. It appears that the claim of petitioner had possibilities of being paid in part if not in full, even though collection appeared to be a slow prospect. Therefore, we do not believe that, merely because the possibilities of collection of the claim depended upon the success of liquidation of certain assets and future conduct of business, the petitioner could conclude that the claim was worthless at the end of 1933. A creditor may not charge off as worthless a claim merely because collection may be slow. The issue before us requires proof as to the value and nature of the assets to be liquidated, prospects of liquidation, the relation of assets to liabilities. This proof has not been presented by the petitioner. Cf. Equity Silk Corporation, 21 B. T. A. 1114. The explanation of the lack of any such proof as described above is that petitioner’s officers were unable to obtain information as to the financial condition of the bank. We accept the explanation as being the true situation, for it appears that constant and reasonable efforts were made to obtain such information. We must, therefore, conclude that petitioner’s officers were unable to ascertain that the petitioner’s claim was worthless at the end of 1933 and we have found this to be a fact. Cf. Frank D. Stranahan, 14 B. T. A. 1405; Parker v. United States, - Fed. Supp.- (U. S. Dist. Ct., E. Dist. Pa., Mar. 10, 1937). Under the views expressed by the court in the Parker case, we do not believe this petitioner could be held to know what the financial condition of the Asbury Bank was at the end of 1933.

We believe this proceeding comes within the scope of the principle set forth in Van Smith Building Material Co., 16 B. T. A. 875. In that case a bank that had been closed had reopened in the year in which the taxpayer claimed a loss for unpaid bank deposits. The facts showed that the bank there had slow accounts receivable and it was hoped that the financial condition of the bank would improve. We held that the taxpayer could not ascertain at the end of the taxable year what percentage of the bank deposits might be uncol-lectible and we denied the claimed loss. The facts in this proceeding are similar, in our opinion. Petitioner here claims that the debt of the bank to it was entirely worthless at the close of the taxable year! Petitioner has not urged nor offered proof to show that the debt was partially worthless. Cf. Boss v. Commissioner, 72 Fed. (2d) 122.

For the reasons given above, we conclude that the debt in question was not worthless at the close of 1933 and respondent’s determination is, therefore, sustained.

Decision will be entered for the respondent.


author: Smith:

text:
    Manhattan Mutual Life Insurance Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81821.
    Promulgated June 14, 1938.

      William R. Baker, Esq., and Philip M. Oviatt, O. P. A., for the petitioner.

      James E. Maddox, Esq., for the respondent.
   OPINION.

Smith:

This proceeding involves a deficiency of $365.45 in petitioner’s income tax for 1932. Several of the issues raised in the petition have been abandoned, as set forth in paragraph 3 of the written stipulation filed herein. The remaining issues involve the question of the inclusion in petitioner’s gross income of interest accrued on real estate loans at the time the properties were acquired by the petitioner and the question of the deductibility of an amount paid out by the petitioner during the taxable year to the holders of its surplus guaranty fund certificates and claimed as interest payments.

The petitioner was organized as a mutual legal reserve life insurance corporation under the laws of Kansas, 1907, chapter 227, and began doing business June 14,1918.

During the year 1932 the petitioner acquired title to four parcels of real estate on which it had made first mortgage loans. One of the parcels was acquired by foreclosure sale and the other three by voluntary warranty deeds from the mortgagors in lieu of foreclosure proceedings. The respondent has determined that the interest due and unpaid on these loans at the time the petitioner acquired title to the properties is includable in petitioner’s gross income.

The following facts relating to the several parcels and their acquisition by the petitioner are set forth in the stipulation of facts:

(a) Title to the parcel of real estate designated by the petitioner as No. 3, described as Lot 391, Block 2, Manhattan City, Kansas, mortgagor Y. B. Ingra-ham, was acquired by Sheriff’s deed at foreclosure sale. The principal of this loan was $3,000.00; the interest due and unpaid on April 25, 1931 (date of foreclosure judgment) was $360.00; the interest due and unpaid for the period between the date of judgment and June 9, 1931 (date of sheriff’s sale) was $40.05; the costs of foreclosure and sale were $32.61; taxes of $448.69 consisted of $128.75 due and payable November 1, 1929, $107.46 due and payable November 1, 1930, $119.38 due and payable November 1, 1931 and $93.10 due and payable November 1, 1932. Property insurance premiums paid during the redemption period by petitioner were $17.35. Tbe petitioner bid in tbe property at foreclosure sale for tbe sum of $3,668.87. Sucb bid was satisfied by off-set of the principal amount of tbe loan, $3,000.00; interest due arid unpaid to April 25, 1931 in tbe amount of $360.00; interest due and unpaid to June 9, 1931 in tbe amount of $40.05; tbe payment of $268.82 being tbe total of 1929 and 1930 taxes of $128.75 and $107.46 respectively and court costs of $32.61. In addition to the bid price of $3,668.87 petitioner paid the 1931 taxes in tbe amount of $119.38 and one-half of 1932 taxes in tbe amount of $46.55, total of $165.93 on December 31, 1932; tbe remaining one-balf of tbe 1932 taxes in tbe amount of $46.55 on June 6, 1933; attorney fees of $60.00 on June 9, 1931; recording fees and revenue stamps in tbe amount of $5.25 on December 31, 1932.
(b) Title to the parcel of real estate, designated by the petitioner as No. 19, described as South 100 feet, Lots 327 and 328, Ward 6, Manhattan, Kansas, mortgagor, O. W. Martin, was acquired by warranty deed from mortgagor, in lieu of foreclosure proceedings, on July 7, 1932. Tbe principal of this loan was $2,500.00; the accrued interest, at date of acquisition of title, was $100.00; taxes of $142.23 were due and payable November 1, 1931 and were paid by tbe petitioner on January 30,1933.
(e) Title to the parcel of real estate, designated by tbe petitioner as No. 20, described as Southeast quarter (%) and Lots 11, 12, 19 and 20 in section 7, township 9, range 8, Pottawatomie County, Kansas, mortgagor, J. D. Parry, was acquired by warranty deed from mortgagor, in lieu of foreclosure proceedings, on October 14, 1932. Tbe principal of this loan was $7,000.00; tbe accrued interest, at date of acquisition of title, was $256.67; tbe cost of abstracting and examination of title was $12.75; taxes of $65.97 were due and payable November 1, 1931 and were paid by tbe petitioner on October 14, 1932.
(d) Title to the parcel of real estate, designated by the petitioner as No. 24, described as Lot 280 and East 10 feet of Lot 281, Ward 2, Manhattan, Kansas, mortgagor, J. C. Lewis, was acquired by warranty deed from mortgagor, in lieu of foreclosure proceedings, on November 25, 1932. Tbe principal of this loan was $2,400.00; tbe accrued interest, at date of acquisition of title, was $168.00; the costs of abstracting and examination of title were $5.95; taxes of $146.17 consisted of $55.97 due and payable November 1, 1931 and $90.20 due and payable November 1, 1932, paid by tbe petitioner as follows: on January 28, 1933 tbe sum of $45.10, on January 30, 1933 tbe sum of $55.97 and oh June 6, 1933 tbe sum of $45.10.

In its brief tbe petitioner concedes that under tbe decision of tbe Supreme Court in Helvering v. Midland Mutual Life Insurance Co., 300 U. S. 688, the interest due and unpaid on tbe loan on the designated parcel No. 3, which was bid in at foreclosure sale for a price equal to or greater than the principal amount of the loan, plus accrued interest, is includable in its gross income. Petitioner contends, however, that the other three parcels, which were all acquired by voluntary deeds from the mortgagors, had values at the time of such acquisition not in excess of the principal amount of the loans, and that the due and unpaid interest on the mortgage notes on these properties is, therefore, not includable in its gross income.

In this contention the petitioner relies upon Helvering v. Missouri State Life Insurance Co., 78 Fed. (2d) 778. The court there held that, where a mortgagor surrenders the mortgaged real estate to the mortgagee in consideration of the cancellation of the indebtedness on the property, there is an exchange of the loan for the land, and if the value of the land at the time of the exchange is less than the amount of the loan, plus accrued interest, the mortgagee receives payment of the loan and interest only to the extent of such value. We think that this rule is sound and we adhere to it in the instant case. The respondent in his brief makes no argument on the law on this point, but contends that the evidence adduced fails to prove that the fair market value of the three parcels of real estate in question at the time of their conveyance to the petitioner was less than the principal amount of the loans thereon, plus the accrued interest.

On behalf of the petitioner two qualified witnesses testified that none of the three parcels in question had a value at the time acquired by the petitioner in excess of the principal amount of the mortgage loan on it. The respondent did not offer any proof of the value of any of the parcels. On the record before us we find as a fact that at the time they were acquired by the petitioner by voluntary deed from the mortgagors the properties described in paragraphs (b), (c), and (d) of the stipulated facts set forth did not have any value in excess of the principal amount of the loans thereon. We are therefore of the opinion that the petitioner did not receive any interest payment on the mortgage loans on those properties in the taxable year 1932.

The remaining issue involves the question of whether an amount paid by the petitioner during the taxable year to the holders of its surplus guaranty fund certificates is deductible as interest paid on its indebtedness.

During the years 1918, 1919, and 1920 petitioner issued a form of certificate designated as “Surplus Guaranty Fund Certificate”, in the aggregate face amount of $50,000. The certificate states on its face that:

This is to Certify, That_has paid and delivered to
The Manhattan Mutual Life Insurance Company, of Manhattan, Kansas
The sum of_Dollars, and in consideration thereof is hereby guaranteed a return of six per cent (6%) interest on the par value of this certificate, payable annually, and in addition thereto is guaranteed a pro rata share of a two and one-half per centum fund set aside each year out of all premiums other than first year premiums collected on insurance written by the said Company after the date hereof, which the said sum of_Dollars, bears to the special operating or Surplus Guaranty Fund of Fifty Thousand Dollars ($50,000) provided for and payable in the manner described by the resolutions duly adopted by the Board of Directors of said Company on the 18th day of January, 1918. A copy of said Resolution, which appears on the back of this certificate, is hereby referred to and made a part of this certificate.

The resolution of the board of directors referred to in the above quotation reads in part as follows:

Be it resolved, That in order to create a special fund for the further advancement of the business of the Company, and to create and maintain a Surplus Guaranty Fund as provided for in Chapter 227 of the Laws of 1907 of the State of Kansas and all amendments thereto, the Board of Directors of this Company hereby authorize the issuance of five hundred (500) certificates of the par value of One Hundred Dollars ($100) each, each of said certificates to represent one share in the fund of Fifty Thousand Dollars ($50,000) to be used for said purpose, and that there shall be paid an annual compensation to the holders of said fund of Fifty Thousand Dollars from the expense fund of the Company, for twenty years.
1st. Interest on the par value of said shares at six per cent (6%) payable annually.
2nd. Two and one-half per cent (2%%) of the total amount of renewal premiums received by the Company in cash on each and all of its policies issued after January 18th, 1918, payable annually in pro rata shares according to the number of certificates issued by the company and held by the purchasers or their assignees;
Provided, however, That no portion of the premium on any policy due the first policy year shall be used, set aside, or applied in any way in the formation of said special fund, nor any sums paid therefrom to the holders of said certificates.
The Surplus Guaranty Fund herein provided for shall remain the absolute property of the Company and shall be used as its Board of Directors may direct, but no part thereof shall be paid as a dividend to any holder of these certificates or to any other person.
Be it further resolved, That these certificates may be retired at any dividend period after ten years by paying the holders thereof a par value of One Hundred Dollars ($100) for each share of said fund of Fifty Thousand Dollars issued by said Company from the surplus funds of the Company.
But if any of such certificates shall be retired, the renewals as herein provided, for the full period of twenty years on all business written subsequent to the date and prior to the retirement of any certificate issued under this resolution, shall be paid annually to the holders thereof.
Be it further resolved, That said certificates shall be sold for One Hundred Dollars ($100) each and that the entire proceeds thereof, less cost and expense of sale, shall be paid into the treasury of the Company.
But such certificates shall constitute no primary liability against such Company, and the payment thereof as herein provided shall in no way hinder or have preference over the sums due policy holders of the Company.

The amounts of the certificates issued in the years 1918, 1919, and 1920 were, respectively, $32,900, $6,200, and $10,900. These amounts as received by the petitioner were credited on its books to surplus account and remained so credited at the close of the taxable year 1932.

The petitioner’s surplus as reported to the Commissioner of Insurance of the State of Kansas at the close of the years 1918 to 1932, inclusive, and the total amounts which the petitioner paid during those years to the holders of the certificates were as follows:

The amount of $7,100 which the petitioner paid to its certificate holders during the taxable year 1932 was 6 percent of the $50,000 of certificates outstanding, amounting to $3,000, plus 2y2 percent of the renewal premiums received by the petitioner during the calendar year 1931 amounting to $4,100. This amount of $7,100 was reported by the petitioner in its annual statement to the Commissioner of Insurance of the State of Kansas as “paid for dividends to the certificate holders.”

The petitioner did not claim in its 1932 return, or in any of its returns for prior years, the deduction of the amounts paid to its surplus guaranty fund certificate holders. However, a claim for the deduction of the amounts so paid in 1932 was made by the petitioner in a claim for refund of $1,206.97 which was filed on February 7, 1935. No part of this claim has been allowed by the Commissioner. The amount of tax reported by the petitioner on its return for 1932 and paid during the calendar year 1933 was $1,495.65.

Sections 202 (a) and 203 (a) (8) of the Kevenue Act of 1932 provide:

SEO. 202. GROSS INCOME OF LIFE INSURANCE COMPANIES.
(a) In the case of a life insurance company the term “gross income” means the gross amount of income received during the taxable year from interest, dividends, and rents.
SEC. 203. NET INCOME OF LIFE INSURANCE COMPANIES.
(a) General Rule. — In the case of a life insurance company the term “net income” means the gross income less—
* * * * * * *
(8) Interest. — All interest paid or accrued within the taxable year on its indebtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24., 1917, and originally subscribed for by the taxpayer) the Interest upon which is wholly exempt from taxation under this title.

The respondent contends that the surplus guaranty fund was not an indebtedness of the petitioner and that therefore the amount which the petitioner paid to the holders of the surplus guaranty fund certificates in 1932 was not interest on its indebtedness within the meaning of the statute, but was a distribution of profits.

This question has been considered by the Board and by the courts in a number of cases, some of which involved facts similar to but not identical with those in the instant case. See Proctor Shop, Inc., 30 B. T. A. 721; affd., 82 Fed. (2d) 792, and cases therein cited. In Richmond, Fredericksburg & Potomac Railroad Co., 33 B. T. A. 895; affd., 90 Fed. (2d) 971, it was held that the payments made by the taxpayer to the holders of its “guaranteed stock,” although denominated “dividends,” were in reality interest and were deductible as such from gross income. Also, in the still more recent case of Brush-Moore Newspapers, Inc., 37 B. T. A. 787, we held to be deductible, as interest, the payments made to the holder of guaranteed preferred stock which the taxpayer corporation had issued in exchange for its outstanding promissory notes. There, also, the payments of 7 percent were guaranteed. In our opinion in that case we said that the holder of the preferred stock “was entitled to receive, if he demanded it, $28,000 per annum, irrespective of the successful operation of the corporation, or its earnings.”

We held in Policyholder's National Life Insurance Co., 37 B. T. A. 60, that the amount which a mutual life insurance company paid during the taxable year to the holders of its “founder’s certificates”, representing 6 percent interest on the certificates, was not interest paid on an indebtedness, but was a distribution of profits or assets. We pointed out in our opinion in that case that the taxpayer was not obligated to pay interest to the holders of the “founder’s certificates”, but that the payments were to be made only if the financial condition of the company warranted and in the discretion of the directors. In the instant case • it was stated on the face of the certificate that the holder thereof “is hereby guaranteed a return of six percent (6%) interest on the par value of this certificate, payable annually.” The resolution authorizing the issue of the certificates likewise provides for the payment of 6 percent interest on the par value of the certificates.

With respect to the payments of the 6 percent interest, the facts here more nearly resemble those in Richmond, Fredericksburg & Potomac Railroad Co., supra, and Brush-Moore Newspapers, Inc., supra, and we determine accordingly that this amount is deductible from petitioner’s gross income as interest paid within the taxable year. .

In his brief the respondent makes the alternative contention that in any event the amounts paid to the certificate holders representing the 2y2 percent of renewal premiums were distributions of profits and therefore differ essentially from the fixed 6 percent payments, citing Richmond, Fredericksburg & Potomac Railroad Co., supra, and Penn Mutual Life Insurance Co., 32 B. T. A. 839; affirmed in part, 92 Fed. (2d) 962. We think that this contention is well made. The payment of this amount was clearly a distribution of earnings, gross earningsif not net earnings, as distinguished from a payment of interest. These payments were to continue for a period of 20 years whether the certificates were retired in the meantime or not. Certainly, there could be no “interest” after payment of the principal debt.

The amounts representing the payments of 2y2 percent of renewal premiums, in our opinion, were not interest payments and are therefore not deductible from gross income as such.

Judgment will be entered under Rule SO.