text:
    W. R. Ramsey, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 47228.
    Promulgated June 7, 1932.

      Charles H. Garnett, Esq., for the petitioner.

      Maxwell M. Mahcmy, Esq., for the respondent.
   OPINION.

Lansdon :

The respondent has asserted deficiencies in income tax for the years 1925 and 1926 in the respective amounts of $3,041.01 and $51,134.07, but the petitioner’s appeal is only from the determination for 1926.

The petitioner is an individual, residing at Oklahoma City in the State of Oklahoma, where he is engaged in the acquisition, development and exploitation of oil and gas leases. Prior to January 6, 1926, he acquired a group of oil leases in the State of California, which he thereafter developed. and sold to the Ramsey Petroleum Corporation. The first of such leases was acquired some time in 1920 and in the following year he began drilling and development thereon, subsequently purchasing others which were added to his holdings and which he likewise developed.

The actual drilling of the petitioner’s leases was done by a contractor who was paid upon a footage basis. In all cases, howevér, Ramsey furnished, among other equipment and supplies, all derricks and boilers, fuel and water sufficient to furnish the necessary steam for drilling, a certain amount of well casing and electric current and wiring, and lights and equipment for night work lighting. In addition to such equipment, supplies, etc., the petitioner employed a force of men and teams who divided their time in working in, around and upon the leases being developed and other producing properties which he was operating at the time. The wages paid to these employees were charged in petitioner’s books in part against the wells being drilled and in part against operation of his producing properties. Such charges, which included salaries paid to his general manager and bookkeepers at his main office and maintenance of that office, were arbitrarily allocated to the properties affected by an estimate based upon the relative time required for each. For instance, it was estimated that the supervision of the drilling of new wells consumed two-thirds of the time of the manager and the office force, as against one-third of such time for producing wells; therefore, two-thirds of the cost of all overhead was charged to cost of construction and one-third to production. Included in such overhead charges was a salary item of $1,500 a month paid to petitioner and his brother as managers. The portion of these expenditures which the petitioner charged in his books against development costs on such properties is shown in the following table:

In his income-tax return for 1922, 1923, 1924 and 1925 the petitioner respectively claimed and was allowed deductions from gross income of the several amounts shown in above columns to have been expended by him for such years, as current business expenses. He claimed and was allowed similar deductions in his income-tax return for 1926 and for his drilling expenditures made in that year, and at all times he has so classified and charged out like expenditures in his books and enjoyed the benefits and advantage of such deductions through diminution of his Federal income taxes for the period affected.

In 1926 the petitioner sold the leases here considered to the Ramsey Petroleum Corporation for a contract price in excess of $1,000,000, a greater part of which was paid to him in that year. In computing his taxable gain on that transaction for Federal income-tax purposes he took as a basis the initial cost of the properties increased by the expenditures hereinbefore mentioned, depreciated the total thereof to the date of sale, and concluded that he had sustained a loss in the deal. In auditing the petitioner’s return for such year the respondent eliminated, as lease cost factors, all development expenditures which had been taken as deductions in income-tax returns as operating expenses for prior years, and, after making certain other adjustments, determined the deficiency here in controversy. •In the original petition a number of alleged errors were assigned, but all were abandoned at the hearing except that set out in paragraph (5) (f) of the petition, which, as stated in the amended petition, is as follows:

The Commissioner has determined a capital net gain to the petitioner in 1926 of $409,072.55 npon the sale of certain oil and gas wells and the leases covering the land o!n which the same were situated. The petitioner says that the Commissioner has not taken the true cost of the property sold as the basis for determination of the gain on such sale, but has erroneously omitted to deduct $541,128.78 of the co'st of such property from the sale price thereof. The petitioner says that he is entitled to the deduction of this additional amount as cost of the property sold from the sale price thereof in determination of the gain.

The controlling issue for determination is one of law and limited to the direct question of whether or not the petitioner, having treated the disputed expenditures in his books as current expenses in and for the years made, and, having deducted them from income in diminution of his taxes in such years, as permitted by article 225 of Regulations 65, may now reverse his prior methods of accounting and deduct the same amounts from the sale price of his property to reduce his otherwise taxable profit from that transaction.

The applicable provisions of all revenue acts require that net income shall be computed “ in accordance with the methods of accounting regularly employed in keeping the books ” of the taxpayer, and to facilitate a practical application of their terms require the Commissioner of Internal Revenue, with the -approval of the Secretary of the Treasury, to prescribe clarifying rules and regulations which, when so made, if reasonable, have the full force and effect of law. Sterling Oil & Gas Co. v. Lucas, 51 Fed. (2d) 413; Fawcus Machine Co. v. United States, 282 U. S. 375; United States v. Grimaud, 220 U. S. 506; Brewster v. Gage, 280 U. S. 327; Boske v. Comingore, 177 U. S. 459. Pursuant to these laws, and as a guide to taxpayers, the respondent issued the regulations here considered containing the article hereinbefore cited, which provides as follows:

Charges to capital and to expense in the case of oil and gas wells. — Such incidental expenses as are paid for wages, fuel, repairs, hauling, etc., in connection with the exploration of the property, drilling of wells, building of pipe lines and development of the property may at the option of the taxpayer be deducted as a development expense or charged to capital account returnable through depletion. If in exercising this option the taxpayer charges these incidental expenses to capital account, in so far as such expense is represented by physical property it may be taken into account in determining a reasonable allowance for depreciation. The cost of drilling nonproductive wells may at the option of the operator be deducted from gross income ■ as a development expense or charged to capital account returnable through depletion and depreciation as in the case of nonproductive wells. An election once made under the provisions of this article will control the taxpayer’s returns for all subsequent years. Where deductions for depreciation or depletion have either on the books of the taxpayer or in his returns of net income been included in the past in expense or other accounts, rather than specifically as depreciation or depletion, or where capital expenditures have been charged to expense in lieu of depreciation or depletion, a statement indicating the extent to which this practice has been carried should accompany the return. [Italics supplied.]

In years prior to 1926 the petitioner considered it to his interest to treat the expenditures here in controversy as development expenses and elected, under the article quoted, to deduct them from his gross income for the respective year when made. The respondent contends that, having so elected under the regulation, he is bound to such election as provided for in its terms. In this contention we must sustain the respondent inasmuch as the regulation is reasonable and valid. Sterling Oil & Gas Co. v. Lucas, supra.

The petitioner is not seeking to correct an error made in ignorance of his rights, but to recall an election deliberately made which enabled him to reduce his taxes for the years affected. Without offering to amend his prior returns and restore to taxable income for such years the amounts which he now says were “ erroneously made and allowed,” he now claims a second deduction of the same items. The respondent has not attempted, nor is he now attempting, to change arbitrarily the status of the expenditures, but is asking that petitioner be held to the election which he himself made and through which he enjoyed a diminution of his taxes in the prior years. In Old Fanners Oil Co., 12 B. T. A. 203, cited by the petitioner, the expenditures considered were payments made for wells drilled by contract for which payment was made to the driller after completion and which, as pointed out by the Board in its opinion, constituted capital assets with useful lives. The regulation here considered was challenged in that case and, although the opinion of the Board included certain dicta which the petitioner claims is authority for his contentions, it was further pointed out that the issue here involved was not before it in that case, and in relation thereto we said:

Whether the provision of the regulation which permits a taxpayer to elect whether he will deduct or charge to capital account such incidental expenses as are paid for wages, fuel, repairs, hauling, etc., in connection with drilling of wells is a proper exercise by the Commissioner of his authority to make regulations is not before us. Petitioner made no such expenditures. What he did was to contact with third persons for completed wells and pay such persons the stipulated price therefor. By these contracts, petitioner received assets which were just as much capital assets as structures erected above ground. The payment for wells when completed bears no resemblance to payment for wages, fuel, repairs, hauling, etc. Payment for such items may be in the nature of ordinary and necessary expenses, but payments for completed wells are payments for capital assets.

It will thus be seen that the-petitioner is in error when he argues that the “ precise question ” was before the Board in that case.

Although we must find, as hereinabove indicated, in favor of the respondent in this controversy, there are other reasons, equally as potent, why the petitioner can not prevail which can not be overlooked. The petitioner took advantage of the liberal provisions of article 225, supra, and with the approval and consent of the respondent reduced his income-tax payments for each of the years 1922, 1923, 1924 and 1925 by classifying these expenditures currently as business expenses. . Having profited by such prior classification, at che expense of the Government, he now seeks again to profit by them in reduction of his taxes for 1926, without offering to do equity by paying the taxes he escaped in the prior years. Inasmuch as the respondent acquiesced and acted upon the petitioner’s classification in such prior years, and as the statute of limitations now prevents collection of such taxes, it is obvious that the petitioner has voluntarily waived his right to change his position, to the detriment and loss of respondent, and is therefore estopped from denying the correctness of his former assumed status. Swain v. Seamans, 9 Wall. 254; Shutte v. Thompson, 15 Wall. 151. Parties must take the consequences of the position they assume. Casey v. Galli, 94 U. S. 673. The procedure for which petitioner now contends would result in a very substantial distortion of his income for the taxable years unless adjustments which are now impossible could be made for the prior years in which the amounts in controversy were deducted from .income as ordinary and necessary expenses. This would enable petitioner, through a change in accounting method, to avoid taxation on a substantial amount of admitted income, a result repugnant to the law and the plain intent of Congress. The method of accounting now proposed does not reflect the true income of the petitioner in the circumstances herein and therefore does not comply with section 212 (b) of the Revenue Act of 1926. See Leslie H. Fawkes, 25 B. T. A. 366; Southern Abstract & Loan Co., 25 B. T. A. 1095; Lewis Werner Saw Mill Co., 26 B. T. A. 141.

In the deficiency letter which forms the basis of this appeal the respondent advised the petitioner of tax deficiencies for each of the years 1925 and 1926. The petitioner paid the deficiency asserted for 1925 and appealed in respect of the 1926 item. At the hearing the respondent amended his answer and asked us to assume jurisdiction over 1925 and to increase the deficiency asserted for that year, in case we should find in favor of the petitioner in respect to his contention for 1926. We are of opinion, in the absence of any appeal respecting 1925, that we are without jurisdiction over the tax for that year. However, in view of our conclusions on the issue raised in the appellant’s petition, that question need not be decided.

Decision will be entered for the respondent.


source: Caselaw Access Project

author: Trammell :

license: Public Domain

text:
    New Castle Leather Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 53437.
    Promulgated June 7, 1932.

      Joseph J. Klein, Esq., Myron A. Finke, Esq., and George W. New-gass, Esq., for the petitioner. '

      John D. Kiley, Esq., for the respondent.
   OPINION.

Trammell :

The petitioner and its subsidiary were affiliated during the year 1927, in which year each sustained a net loss, and they were also affiliated during the taxable year 1928, in which year the petitioner had net income and the subsidiary again sustained a net loss. In determining the deficiency the respondent allowed as a deduction, in computing the consolidated net income for the taxable year, the amount of the net loss sustained by the petitioner in 1927, and disallowed the net loss sustained in that year by the subsidiary. The correctness of the respondent’s action in this regard is the basis of the sole issue of law raised by the pleadings herein.

The question presented is governed by the following provisions of the Revenue Act of 1928, viz:

Sec. 23. deductions from GROSS income.
In computing net income there shall be allowed as deductions:
(i) Wet losses. — The special deduction for net losses of prior years, to the extent provided in section 117.
# * * * * * •
Sec. 117. net losses.
(а) Definition of “Wet loss." — -As used in this section the term “net loss” means the excess of the deductions allowed by this title over the gross income, with the following exceptions and limitations:
*******
(б) Net loss not to produce net loss. — In computing the net loss for any taxable year a net loss for a prior year shall not be allowed as a deduction.
(5) Wet loss as a deduction. — If, for any taxable year, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be allowed as a deduction in computing the net income of the taxpayer for the succeeding taxable year (hereinafter in this section called “second year”), and if such net loss is in excess of such net income (computed without such deduction), the amount of such excess shall be allowed as a deduction in computing the net Income for the next succeeding taxable year (hereinafter in this section called “ third year ”) ; * * *
*******
(e) Net loss for 1926 or 1927). — If for the taxable year 1926 or 1927 a taxpayer sustained a net loss within the provisions of the Revenue Act of 1926, the amount of such net loss shall be allowed as a deduction in computing net income for the two succeeding taxable years to the same extent and in the same manner as a net loss sustained for one taxable year is, under this Act, allowed as a deduction for the two succeeding taxable years.

Our decision of the issue here must be controlled, we think, by the principles stated in the opinion of the Supreme Court of the United States in Woolford Realty Co. v. Rose, 288 U. S. 319, and in Planter’s Cotton Oil Co. v. Hopkins, 286 U. S. 332.

In the Woolf'orcl Realty Go. case, the court said:

Under that section of the statute [Sec. 206 (b) of the Revenue Act of 1926], the losses suffered by the Piedmont Company in 1925 might have been deducted from its net income in 1926, and might thereafter if not extinguished, have been deducted to the extent of the excess from its net income in 1927, the year in which its shares were acquired by the petitioner. But the Piedmont Company did not have any net income in 1927. Its operations for that year resulted in a loss. There was therefore nothing from which earlier losses could be deducted, for the net income without any such deductions was still a minus quantity. The tax for the year was nothing, and) the losses of other years could not serve to make it less. The petitioner would have us hold that the minus quantities for all the years should be added together, and the total turned over by the company suffering the loss as an allowance to be made to the company realizing the gain. * * * the statute has given notice to the taxpayer that the aggregate of minus quantities is not to be turned over as a credit to an affiliated company, but is to be used in another way. If the loss for the first year is more than the income for the second, the excess is to be carried over to a third year, and deducted from the net income, if any, returnable for that year, at which time the process of carrying over is to end. * * * Obviously, the direction to apply the excess against the income of a later year is inconsistent with a purpose to allow it to an affiliated company as an immediate deduction from' income of the current year. Adherence to the one practice excludes adherence to the other.

The petitioner in this case contends that because the first net loss of the subsidiary was sustained during the period of affiliation, the aggregate of its net losses for both years should be allowed as a deduction from the petitioner’s income in computing the consolidated net income for the second or taxable year. However, if the net loss of a subsidiary corporation is allowable as a deduction only from the income of the subsidiary for the subsequent years and may not be added to a net loss of the same corporation for the second year and allowed as a deduction from the income of another affiliated corporation, then, under the decisions of the Supreme Court above cited, and under the provisions of the Revenue Act of 1928, above quoted, it is unimportant whether the first net loss of the subsidiary was suffered prior to the beginning of or during the period of affiliation, and the petitioner’s contention can not be sustained.

Judgment will be entered for the respondent.


author: Van Fossan:

text:
    Lucy Belle Dunham and Timothy F. Mullen, Executors of the Last Will of Mary Virginia Dunham, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46603.
    Promulgated June 7, 1932.

      Thomas B. Lantry, Esq., for the petitioner.

      Frank T. Horner, Esq., for the respondent.
   OPINION.

Van Fossan:

The respondent contends that, pursuant to section 302 (c) of the Revenue Act of 1926, the corpus of the trusts created by the two instruments set forth in the findings of fact should be included in the decedent’s gross estate for Federal estate-tax purposes, for the reason that the transfers of property were intended to take effect in possession or enjoyment at or after the decedent’s death.

Section 302 (c) of the Revenue Act of 1926 provides in part as follows:

Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
*******
(c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death * * * .

There is no contention or suggestion in this proceeding that either of the trust instruments was executed and delivered in contemplation of death.

The tax imposed by section 302 (c) of the Revenue Act of 1926 is an excise tax on the transfer of property by death. Y. M. C. A. v. Davis, 264 U. S. 47; Nichols v. Coolidge, 274 U. S. 531; May v. Heiner, 281 U. S. 238. The cited decisions discussed provisions of prior revenue acts substantially similar to the provisions of section 302 (c), above quoted. Therefore, in accordance with the principles enunciated in these decisions, if the decedent, by the execution and delivery of the trust instruments, divested herself fully, completely and irrevocably of all interest in the corpus of the trust which might inure to her benefit, no interest remained in her which was transferable because of her death. Lillian M. Wheeler, Executrix, 20 B. T. A. 695, and decisions therein cited.

In neither of the trust instruments is there any reservation to the settlor of the power to revoke or alter the trusts. It is true that in each of them the settlor reserved a certain power of management. In the one case the trustee was required, upon the written request of the trustor, to change the capital of the trust from real property to personal property. In the case of the other trust, the trustee could not sell or exchange the securities constituting the corpus of the trust or reinvest the proceeds of a sale thereof without the written approval of the settlor. These reserved powers of management did not, however, “save to the decedent any control over the economic benefits or the enjoyment of the property” the shifting of which is the subject of the tax. Reinecke v. Northern Trust Co., 278 U. S. 339; Lillian M. Wheeler, Executrix, supra.

Each trust instrument provided for the payment of the net income of the trust to the decedent during her life. A similar provision was included in the trust discussed in May v. Heiner, supra, in which the court held that the trust was not testamentary in character and that at the time of the trustor’s death no interest under the trust passed from the settlor to the living and that title to the property in trust had been definitely fixed by the trust deed. It is equally true that no interest under the trusts involved in this proceeding passed to the living from the decedent at the time of her death.

We are not impressed by the contention that the transfers effected by the execution and delivery of the trust instruments were contingent. It is unimportant that under one of the instruments the corpus of the estate transfered would revert to the settlor in the event that the named beneficiary predeceased her. It is also unimportant that the other of the two trusts provided for alternate beneficiaries in the event that the first named beneficiary predeceased the trustor. Prior to her death she had disposed of the corpus of the trusts completely and during her life no power which she could lawfully exercise under the trust instruments could have caused the properties thereby conveyed and transferred to revert to her.

In accordance with the foregoing, we are of the opinion that the corpus of the two trusts should not be included in the decedent’s gross estate for Federal estate-tax purposes.

Decision will be entered under Rule 50.


author: Van Fossan :

text:
    Florence McCall, Petitioner, v. Commissioner of Internal Revenue, Respondent. Elizabeth K. Newton, Petitioner, v. Commissioner of Internal Revenue, Respondent. Rachel S. Christopher, Petitioner, v. Commissioner of Internal Revenue, Respondent. Isabel K. J. Garron, Gordon A. Block and Woodbury Trust Company as Executors of the Estate of Joseph R. Newton, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 47702-47705.
    Promulgated June 7, 1932.

      A. E. James, Esq., for the petitioners.

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

Van Fossan :

In his brief counsel for the petitioners discusses only two of his allegations of error. He contends that the petitioners are not transferees within the intendment of section 316 of the Revenue Act of 1926 and, in the alternative, that the respondent erroneously included in the gross estate of Mahlon W. Newton, deceased, the value of certain real property situated in the State of New Jersey.

Though the petitioners have not abandoned their allegation that the statute of limitations has run against the assessment of estate taxes against the estate of Mahlon W. Newton, deceased, it is not deemed necessary to discuss the same, in view of our conclusion on the merits of the case.

We have held that the statute places a real burden of proof on the respondent and that he must establish the liability of the transferee against whom he proposes to proceed. Eliza J. Wray, 24 B. T. A. 94; Annie Temoyan et al., 16 B. T. A. 923. In the present proceedings, for the purpose of sustaining the burden of proof imposed on him, the respondent introduced in evidence the last will and testament of Mahlon W. Newton, together with a codicil thereto, and the “ first and final account ” filed by the executors as stated in the findings of fact, together with the adjudication thereof by the court dated April 6, 1927. The respondent offered no other evidence to sustain the burden of proof.

Thereupon the petitioners, by their counsel, moved for judgment on the ground that the respondent had failed in his proof for the reason that he had not proved whether or not subsequent to April 6, 1927, the date of the accounting and adjudication, the estate of Mahlon W. Newton had received funds not accounted for in the accounting, and also for the reason that the respondent had not proved that he had exhausted his legal remedies against the estate. The petitioners also moved for judgment on the ground that proceedings to collect the deficiency from the continuing estate in'the hands of the trustees should have been prosecuted by the respondent to no avail before proceeding to enforce liability against specific legatees as transferees. Decision of these motions was reserved.

The petitioners then offered evidence from which we have found as a fact that certain certificates of stock which Mahlon W. Newton had acquired and lost had been discovered after the date of the accounting and adjudication; that one of the executors had received on account of such stock and in cash the sum of $4,400; that from such sum and other after acquired property there remained in the estate at the time of the hearing herein a sum more than sufficient to satisfy the deficiency in estate tax asserted by the respondent against the petitioners as transferees.

It has been held that before proceedings may be brought against a transferee it must appear that the remedies against the transferor would be of no avail. Swan and Cattle Co. v. Frank, 148 U. S. 603; Phil Gleichman, 17 B. T. A. 147. It does not appear in these proceedings that such is the case. It is our opinion that the contrary appears.

It is a principle of law that the accounts of executors, administrators and trustees, when approved by courts of competent jurisdiction, are conclusive only as to the matters and things embraced within the accounts. The law vests in executors and administrators the legal ownership of the personal property belonging to a decedent at the date of his death and they must account for it. Powell v. Pennock, 181 Mich. 588; 148 N. W. 430; Joseph W. Herzig, 198 N. Y. 456; 92 N. E. 103; Matter of Heavy, 125 App. Div. (N. Y.) 619; In re Marstellar’s Estate, 76 Pa. Superior 377. In the last cited case the Pennsylvania court held that there is nothing to prevent a call upon the executors to file a supplemental account when goods, chattels and money have come into their hands after the accounting. “ The account is conclusive only as to those matters accounted for.” Cf. Schaeffer’s Appeal, 119 Pa. 640; 13 Atl. 212.

Here it appears that after the date of the accounting and the adjudication dated April 6, 1927, the estate of the decedent came into possession of funds in an amount sufficient to pay the deficiency ' in tax. It does not appear that such funds had been distributed to the beneficiaries or transferred to the trustees. They were still in the hands of the executrix and available for payment of the taxes in question. It also appears that even at the date of the hearing herein there were sufficient funds of the estate in the hands of the executrix with which to pay the deficiency. This sum was part of the proceeds of personal property discovered after the accounting and settlement hereinbefore referred to and ultimately must be accounted for by the executrix. The accounting referred to did not purport to be a final account in the sense that it was followed by discharge of the executrix. The estate has not been closed and there yet exists a duly qualified and acting executrix.

The transferees’ liability was not asserted against these petitioners until January, 1930, and so far as appears the respondent based his assertion of the petitioners’ liability as transferees solely on the accounting of April 6, 1927. The respondent made no attempt between April 6, 1927, and January, 1930, to enforce either at law or in equity any liability against the estate of Mahlon W. Newton or the executors thereof, although it is apparent from the facts that the fund hereinbefore referred to could have been reached by execution at and prior to the date of the attempted assertion of the transferee liability.

These proceedings are distinguishable from Lulu Vance Baumgartner, 21 B. T. A. 623; aff'd., 51 Fed. (2d) 452, since in that case it was stipulated that the estate had been distributed and there were no known additional assets.

It follows from the foregoing that the petitioners herein are not liable as transferees.

Reviewed by the Board.

Judgment of no transferee liability will be entered.


author: Lansdon :

text:
    The Southern California Rock and Gravel Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Pacific Rock and Gravel Company, W. L. Hodges, Trustee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 28776, 30898.
    Promulgated June 8, 1932.

      A. Galder Mackay, Esq., George M. Thompson, O. P. A., John, B. MUMJeen, Esq., and Dan J. Ghapin, Esq., fox' the petitioners.

      J. A. Lyon, Esq., and E. L. Updike, Esq., for the respondent.
   OPINION.

Lansdon :

The proceeding at Docket No. 28776 was brought by the Pacific Company through its statutory trustee, W. L. Hodges. At the hearing counsel for the respondent suggested the death of Hodges and moved to dismiss the appeal for lack of jurisdiction, on the ground that no successor trustee had been appointed. Counsel for the petitioner then moved to substitute Agnes Wiley Hodges, Executrix of the estate of W. L. Hodges.

The deficiency notice was addressed to the Pacific Company, W. L. Hodges, Trustee, and the petition was filed by Hodges, acting for the corporation. Upon filing of the petition with deficiency notice attached, the Board acquired jurisdiction over the proceeding. At the hearing, counsel for the taxpayer, who had been employed prior to Hodges’ death, appeared and offered evidence in support of allegations in the petition. In such circumstances, we think this Board has jurisdiction to hear the appeal and redetermine the deficiency. The petitioner, the Pacific Company, is still in existence for purposes of dissolution, and while there is a vacancy in the trusteeship, the Superior Court of California will doubtless appoint a successor upon proper application of any interested creditor or stockholder. Accordingly, both the respondent’s motion to dismiss and the petitioner’s motion to substitute the executrix of the estate of W. L. Hodges are denied. Cf. James Duggan, 18 B. T. A. 608.

The only controversy here relates to the basis for computing profit on the sale in 1922 of Union Bock Company stock by each of the petitioners. If the exchange by which the Union Bock Company stock was acquired occurred prior to December 31, 1920, the basis for valuing tbe stock in petitioner’s bands will be cost, wbicb is tbe fair market value of the property exchanged therefor. If tbe exchange occurred after December 31, 1920, tbe stock will be treated as taking the place of tbe property and tbe basis for computing-profit will be cost of the property exchanged for the stock. Section 202 (d) (1) of the Revenue Act of 1921.

The petitioners contend that the transfer of assets in exchange for stock actually occurred on November 2, 1919, and that only the legal formalities incident to such transfer and issue of stock remained to be done thereafter. The respondent contends that while physical possession of the assets was transferred on November 2, 1919, no title .passed under the laws of California until stockholders of the petitioners consented to the transaction, either in a meeting called for that .purpose, or by an instrument attached to each assignment or conveyance.

The facts disclose that for several years prior to 1919 the Pacific Company, the Southern Company and the Russell-Green-Foell Company were engaged in ruinous competition in the rock, sand and gravel business in Los Angeles. To eliminate such competition the three concerns organized the Union Rock Company in March, 1919, which thereafter marketed the products of all three. Apparently such arrangement did not prove satisfactory for on November 2, 1919, the two petitioners bought out the Russell-Green-Foell Company and transferred the combined assets of the three companies to the Union Rock Company under a contract providing that they should receive 4,000 shares of preferred stock and 16,000 shares of common stock in exchange therefor. Thereafter the Union Company operated the combined properties.

By December 24, 1920, possession of all of the property covered by the agreement of November 2, 1919, had been transferred by the petitioners to the Union Company and on that date the board of directors of each of the petitioners met and adopted a resolution directing that the terms of the agreement of November 2, 1919, be forwarded to the Union Rock Company as a formal - offer. On the same date the directors of the Union Rock Company met and accepted the offer. While there had been no meeting of stockholders of either petitioner on or before December 31, 1920, all of the stockholders were directors, and, having voted in favor of the sale as directors, they could not avoid the sale on the ground that the stockholders had not assented. In re Dromes, 175 N. Y. S. 628.

Tax liability resulting from sales of property is not determined by the date when legal title is transferred or the date on which certificates of stock are received in payment. Such liability is - fixed as of the date the real benefits and burdens of ownership are transferred. Brunton v. Commissioner, 42 Fed. (2d) 81; Grace Harbor Lumber Co., 14 B. T. A. 996; Ohio Brass Co., 17 B. T. A. 1199; and T. B. Hoffer, 24 B. T. A. 22. Ownership of corporate stock may vest prior to delivery of stock certificates. Richardson v. Shaw, 209 U. S. 365; Galbraith v. McDonald, 123 Minn. 208; 143 N. W. 353; and T. B. Hoffer, supra.

In our opinion the exchange was effected prior to December 31, 1920, and the basis for computing profit upon sale of the stock acquired in exchange for the business and assets of each of the petitioners is the fair market value of such property. The basis stipulated by the parties will be used in the recómputation under Rule 50.

Decision will be entered u/nder Rule 50.


author: Lansdon:

text:
    M. H. Graham, Petitioner, v. Commissioner of Internal Revenue, Respondent. Estate of H. C. Stone, Mrs. H. C. Stone, Executrix, Petitioner, v. Commissioner of Internal Revenue, Respondent. G. H. Moore, Petitioner, v. Commissioner of Internal Revenue, Respondent. H. C. Chenowith, Petitioner, v. Commissioner of Internal Revenue, Respondent. Estate of W. L. Hodges, Agnes Wiley Hodges, Executrix, Petitioner, v. Commissioner of Internal Revenue, Respondent. W. L. Hodges, Trustee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 38335-38337, 38349-38351.
    Promulgated June 8, 1932.

      A. Galder Mackay, Esq., George M. Thompson, G. P. A., and Dan J. Ghapin, Esq., for the petitioners.

      J. A. Lyon, Esq., and E. L. TJpdike, Esq., for the respondent.
   OPINION.

Lansdon:

The petitioner, W. L. Hodges, Trustee, is not a transferee within the meaning of section 280. He received assets amounting to $115,358.87, as trustee in liquidation, and if any of the assets remained in his hands the respondent may proceed against them to satisfy liability of the taxpayer. Eeceipt of such assets as trustee, however, does not establish an individual liability. Nathan Rolnick, 20 B. T. A. 989; Lillian Burke, 21 B. T. A. 45; and Ezra Gould, 21 B. T. A. 824.

The respondent contends that he has established transferee liability by showing that each stockholder received'a dividend of $700 per share in partial liquidation of the taxpayer. The facts show that the taxpayer was solvent at the date the dividend was declared and that it was not made insolvent by payment thereof. In such circumstances we have repeatedly held that no transferee liability has been established. We said in Samuel Keller, 21 B. T. A. 84, relying on McDonald v. Williams, 174 U. S. 397:

* * * If a corporation transfers a part of its assets to stockholders while it is solvent and is not made insolvent by the transfer, there is no liability either at law or in equity on the part of the stockholders who receive such distribution, even though the corporation subsequently becomes insolvent and is no longer able to pay its debts. * * *

See also United States v. Updike, 1 Fed. (2d) 550; 8 Fed. (2d) 913; United States v. Armstrong, 26 Fed. (2d) 227; Kinnett-Odom Co., 19 B. T. A. 1124; Eliza J. Wray, 24 B. T. A. 94; and Charles Havard, 25 B. T. A. 1061.

The record does not show what disposition was made of the corporate assets amounting to $115,358.87 which were transferred to Hodges as trustee in liquidation. The respondent shows that he issued a warrant of distraint against Hodges as trustee and that it was returned unsatisfied, with the report that he had no property or assets of the taxpayer. The petitioners,. Moore, Graham and Cheno-with, testified that they received no assets of the taxpayer after payment of the $700 dividend and that no dividend was later paid. We think that respondent has failed to establish liability of these petitioners as transferees.

The respondent contends that each of the stockholders of the taxpayer is liable under section 322 of the Civil Code of California, Deering, 1917, which provides in part as follows:

Liability of stoclohol&ers. Each stockholder of a corporation is individually and personally liable for such proportion of all its debts and liabilities contracted or incurred during the time he was a stockholder as the amount of stock or shares owned by him bears to the whole of the subscribed capita] stock or shares of the corporation.

Section 280 of the Bevenue Act of 1926 provides that the liability at law or in equity of a transferee of property of a taxpayer may be assessed, collected and paid in the same manner and subject to (¡he same provisions as in the case of a deficiency in tax. The liability under section 322 of the California Civil Code is a statutory remedy and is not based on any transfer of assets. It is not such, a liability as may be asserted under section 280 of the Revenue Act of 1926.

Decision will be entered for the petitioners.


author: McMahon :

text:
    Baron Brothers, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 40457.
    Promulgated June 8, 1932.

      'William, H. iSpohn, Esq., for the petitioner.

      W. Frank Gibbs, Esq., for tbe respondent.
   OPINION.

McMahon :

In the petition it is alleged that some of the taxes in controversy are for the month of January, 1927, but in the deficiency letter the Commissioner did not determine any deficiency for that month and, therefore, the petition, in so far as it purports to relate to that month, is hereby dismissed for lack of jurisdiction.

The petitioner contends that for the eight-month period ended December 31,1924, the respondent erred in deducting from the opening inventory for the period the sum of $32,191.13. In this regard the petitioner contends that the Revenue Act of 1921 is governing and that the basis to be used in the computation of gain derived upon the sale of the merchandise received from the partnership is the fair market value of such merchandise on April 25, 1924, the date it was acquired by the petitioner. The respondent, on the other hand, contends that the Revenue Act of 1924 is applicable and that the basis to be used for the inventory is the cost of the merchandise to the partnership.

There are set forth in the margin the appli cable provisions of the Revenue Act of 1924.

The Revenue Act of 1924, which was enacted. June 2, 1924, in section 1100(a) .specifically repealed Title II (called “Income Tax”) of the Revenue Act of 1921, as of January 1, 1924. By the provisions of section 200(a) of the Revenue Act of 1924, such act applies in determining tax liabilities for the calendar year 1924 or any fiscal year ending during such calendar year.

In the instant proceeding the partnership exchanged the merchandise and fixtures to the petitioner for stock of petitioner, the amount of stock which each partner received was exactly in proportion to his interest in the property prior to the exchange, and after the exchange the partners were in control of the petitioner. Thus the transaction in question answers the description in section 203(b) (4) and under the provisions of section 204(a) (8), the basis to be used for the determination of gain or loss upon the sale of such property is the same as it would be in the hands of the partnership, increased in the amount of gain or decreased in the amount of loss recognized to them under the law applicable to the year in which the transfer was made. We have already shown that the Revenue Act of 1924 is applicable to the year 1924 and under section 203(b) (4) of that act no gain or loss is recognized upon the transaction in question. Thus the basis in the hands of the petitioner is the same as it would be in the hands of the partnership, which is the cost to the partner-sbip. Section 204(a) of the Revenue Act of 1924. Thus the petitioner should include the merchandise in question in its inventory at cost to Baron Brothers, the partnership. The respondent’s determination in this regard is approved.

The petitioner also contends that for the eight-month period ended December 31, 1924, the year 1925 and the year 1926, the respondent erred in disallowing a portion of the claimed depreciation on fixtures which petitioner had acquired from the partnership, it being the position of the petitioner that the proper basis for depreciation is the fair market value of such fixtures on April 25, 1924, the date petitioner acquired the assets. The respondent contends that the 1924 Act is governing and that the proper basis for depreciation is the cost of the assets to the partnership.

By the specific provisions of section 204(c) of the Revenue Act,of 1924, the basis for the allowance for depreciation is the same as the basis for determination of gain or loss. The fixtures were acquired in the same manner and at the same time as the merchandise above referred to and since the basis for determining gain or loss upon their disposition would be the cost to Baron Brothers, as explained above in regard to the merchandise, the basis for the allowance of deductions for depreciation thereon for the period ended December 31, 1924, is also the cost to Baron Brothers. With regard to depreciation allowance for the years 1925 and 1926, we are governed by the Revenue Act of 1926. Section 200 of the Revenue Act of 1926. That revenue act in like numbered sections contains provisions identical with those of the Revenue Act of 1924 with which we have above dealt, and consequently the basis for the allowance of depreciation deductions in the years 1925 and 1926 is the cost of the fixtures to Baron Brothers. The respondent’s determination of the .depreciation deductions to which petitioner is entitled is approved.

For the eight-month period ended December 31, 1924, the respondent added to the income as reported by the petitioner an amount of $714.29, with the statement in the deficiency letter that this amount had been deposited in a bank to the credit of the taxpayer, and that it had been credited equally to each of the three stockholders’ accounts. Louis Baron, one of the three stockholders, testified at the hearing that it was his recollection that the amount represented what was left of a deposit made by the partnership with Coe to take care of bills for merchandise that were coming in during the period that Coe continued to run the business in conjunction with the partnership prior to the time the business was acquired by the petitioner. He testified that this balance was evidently returned to the partnership and that it has no relation whatever to the petitioner’s income.

The burden is upon the petitioner to show, that the item of $714.29 is not income to it. While an item of Taxes, $714.29,” appears in the settlement between Coe and the partnership, we have no evidence as to how it came into the hands of the petitioner. The testimony of Louis Baron was not positive and does not serve to throw any light upon the nature of the payment to the petitioner. In the contract between Coe and Baron Brothers there was no provision that Baron Brothers should pay or put up a deposit to care for any bills occurring during the period that the sale was being considered by the creditors. On the contrary, the contract provided that “ all proceeds from the sale of said stock shall be deposited daily in a separate and distinct account, and that all expenses during said period shall be paid from said account.”

In this situation we hold that petitioner has not met its burden of proving error in the respondent’s determination and such determination is approved.

The proceeding• in so far as it purports to relate to the month of January, 1927, is. Ms-missed for lacle of jurisdiction. As to the eight-month period9 ended December 31, 1924., anA the years 1925 and 1926, judgment will be entered for the respondent.

         Sec. 1100. (a) The following parts of the Revenue Act of 1921 are repealed, to take effect (except as otherwise provided in this Act) upon the enactment of this Act, subject to the limitations provided in subdivision (b) and (c) :
      Title II (called “Income Tax”) as of January 1, 1924;
      * # >ie # $ 4c *
      Sec. 200. (a) * * * The first taxable year, to bo called the taxable year 1924, shall be the calendar year 1924 or any fiscal year ending during the calendar year.
      Sec. 203. (b) (4) No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.
      Sec. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that—

        * * * * * * *
      (8) If the property (other than stock or securities in a corporation a party to a reorganization) was acquired after December 31, 1920, by a corporation by the issuance of its stock or securities in connection with a transaction described in paragraph (4) of subdivision (b) of section 203 (including, also, cases where part of the consideration for the transfer of such property to the corporation was property or money in addition to such stock or securities), then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made.
      Sec. 204. (c) The basis upon which depletion, exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the same as is provided in subdivision (a) or (b) for the purpose of determining the gain or loss upon the sale or other disposition of such property * * *.


author: Murdook:

text:
    Gladys T. Pitts, Petitioner, v. Commissioner of Internal Revenue, Respondent. G. Bryan Pitts, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 58778, 58879, 61266, 62201.
    Promulgated June 8, 1932.

      W. W. Boss, Esq., and Richard S. Doyle, Esq., on petition for intervention.

      Byron U. Graham, Esq., and Walter N. Tobriner, Esq., for the petitioners.

      G. H. Gurl, Esq., for the respondent.
   OPINION.

Murdook:

The Commissioner mailed two deficiency notices, each addressed to G. Bryan Pitts and Gladys T. Pitts. The one notified them of the determination of income tax, penalty and interest amounting to $1,578,600.82, for the taxable years 1926,1927, and 1928, and of the assessment of this amount. The other notified them of the determination of a deficiency of tax and penalty for the year 1929 amounting to $282,799.50. Each of.these individuals filed a separate petition based on each deficiency notice.

We are concerned for the time being in these proceedings with the motion of the F. H. Smith Company for leave to intervene, which is opposed by the petitioners and the respondent. The motion, based upon allegations of an intervening petition lodged with the Board, sets forth the following grounds:

1. The intervenor has an interest in the controversy contrary to the interests of the petitioners and the respondent.
2. The intervenor’s interest will not he protected unless this intervention is allowed.
3. The intervening petition offers no new issue, and the proceedings will be simplified by the evidence which only the intervenor can be expected to adduce.
4. The Board can not completely administer justice under the facts of the ease unless this motion is. granted.
5. The Board will not he able to determine the correct tax liability of the petitioners without the facts to be presented by the intervenor.
6. Multiplicity of proceedings will be avoided by the intervention.
7 Matters are involved in this proceeding which affect the tax liability of the intervenor in other proceedings recently filed and now pending before the Board.
8. Unless this intervention is granted irreparable loss and damage will result to the intervenor by a settlement between respondent and petitioners, which is now being negotiated.

The proposed intervening petition contains allegations that the F. H. Smith Company is a Delaware corporation, with its principal office at Wilmington; it has a direct interest in the subject matter in controversy contrary to the interests of the petitioners and the respondent, which will not be protected unless intervention is granted; the corporation was completely reorganized in September, 1931, but for some years prior to that date G. Bryan Pitts dominated and controlled it; between February, 1918, and January 18, 1930, G. Bryan Pitts was a director and officer of the corporation and embezzled from it large sums of money in excess of $2,000,000, and converted to his own use other property of the corporation consisting of stocks, bonds, other securities, and other personal property having a total value in excess of $1,000,000; the corporation did not discover these embezzlements or conversions until December, 1930; since reorganization the present officers of the company , have been, endeavoring to learn the true facts regarding Pitts’ manipulations of its funds; Pitts acquired various kinds of property with the money and property thus obtained, and transferred possession and apparent title to some of the property to his wife, Gladys T. Pitts, details of which transfers are unknown to the corporation; during each of the taxable years involved in these proceedings, Pitts had legitimate income not in excess of $5,000 per annum exclusive of his salary as an officer of the corporation, which salary amounted to $90,000 for the year 1926 and to $30,000 for each of the years 1927, 1928 and 1929, so his correct tax liability would be less than $2,000 for any one year; all other additions made to his income by the respondent consist of money embezzled from the corporation and property of the corporation unlawfully converted by Pitts, and as such is not income to Pitts or was income derived from property belonging to the corporation; Pitts was indicted, tried, convicted and sentenced for conspiring to embezzle more than $1,000,000 belonging to the corporation; he has perfected an appeal, but has been denied bail and is being held in jail in the District of Columbia; by reason of his illegal acts, practically all, if not all, of the funds and other property involved in these proceedings are trust property under a trust ex .maleficio, the corporation being the cestui que trust; the petitioner has stated in the record in this case, that he probably will not be a witness in the hearing of these cases on account of criminal matters now pending against him; but in any event he will not testify to the embezzlement or conversion, the real defense to the respondent’s claims, and the Board will be unable to truly and accurately determine the income-tax liability of either petitioner without intervention; the respondent has included money and property of the corporation in the petitioners’ incomes, has determined deficiencies based thereon, has made jeopardy assessments of taxes and penalty amounting to $1,723,190.88, has had his collectors dis-train upon and seize property in the possession of the petitioners, but belonging to the corporation, having a value of about $2,000,000, and claims these assessments are prima faoie liens in favor of the United States; unless intervention is permitted to disclose the actual facts of ownership of these properties, illegal deficiencies will be imposed by the Board and the respondent will assert liens against the property of the corporation based upon the findings and decision of the Board; and the corporation is informed and believes that the petitioners and the respondent are about to file a stipulation of facts, and any settlement in accordance with such a stipulation would in all probability cause irreparable loss and damage to the corporation by reason of the liens which the respondent would then assert against the corporation’s property based upon the judgment and findings of the Board. This petition also makes specific allegations in regard to various items included in the petitioners’ income by the respondent, and claims upon information and belief that they are not taxable income to the petitioners, but represent money or property belonging to the corporation and unlawfully in the possession of the petitioners, or were property purchased by Pitts with funds of the corporation. The prayer of the petition is that the inter-vener be permitted to file its petition and other pleadings, appear and submit evidence and be considered a party, and that the Board deny the right of the petitioners and the respondent to enter into an agreed stipulation or settlement without the consent of the intervener and grant such other relief as may be necessary or proper.

We permitted intervention in Central Union Trust Co. et al., Executors, 18 B. T. A. 300. The executors filed a petition contesting a deficiency in estate tax on the ground, among others, that the value of a claim against Emlen P. Frame had been erroneously determined by the Commissioner. Frame had agreed to pay any Federal estate tax resulting from the inclusion of this claim in the decedent’s gross estate. The executors suggested that Frame be heard. He was permitted to intervene upon a showing that he had an interest in the estate, had agreed to pay the tax, and was under the necessity of showing, contrary to the interests of the executors, that the claim had no value. In Louisiana Naval Stores, Inc., 18 B. T. A. 533, L. H. Williams was permitted to show that at the time the original petition, purporting to be that of the petitioner, was filed by D. J. Gay as president, the corporation had been dissolved and Williams was the duly authorized and qualified liquidator and the only person authorized to act on behalf of the corporation. The F. H. Smith Company has not agreed to pay the tax in this case nor could the tax be legally collected from any property belonging to or embezzled from the F. H. Smith Company or which had been wrongfully converted to the use of G. Bryan Pitts. Our affirmance of the Commissioner’s determination in this proceeding will take no property from the F. H. Smith Company nor affect its rights in any direct way, whereas our affirmance of the Commissioner’s determination would have directly affected Frame. Furthermore, the executors favored Frame’s intervention, whereas the petitioners here oppose the intervention of F. H. Smith Company. Cf. Leaver v. K. & L. Box & Lumber Co., 6 Fed. (2d) 666. Williams alleged and proved that he alone represented the petitioner, a situation which finds no parallel in this case. Obviously our decisions in those cases are no authority for permitting intervention in this case, except as they may indicate that the Board believes that it has power to permit intervention in some cases.

In the case of Smith v. Gale, 144 U. S. 509, we find the following in regard to intervention and the interest necessary to authorize intervention :

* * * In Horn v. Volcano Water Co., 13 California, 62, 69, the Supreme Court of California bad occasion to construe a similar provision of the code of that State, and held, speaking through Mr. Justice Field, now a member oí this court, that “ the interest mentioned in the statute which entitles a person to intervene in a suit between other parties must be in the matter in litigation, and oí such a direct and immediate character that the intervenor will either gain or lose by the direct legal operation and effect of the judgment. ... To authorize an intervention, therefore, the interest must be that created by a claim to the demand or some part thereof in suit, or lien upon the property, or some part thereof, in suit, or a claim to or lien upon the property, or some part thereof, which is the subject of litigation.” In Lewis v. Harwood, 28 Minnesota 428, the cases from Louisiana and California were cited with approval. In that case the persons who sought to intervene held attachments upon some property subsequent to those of the plaintiff in the suit. The suit was upon certain promissory notes executed to the plaintiff by the defendants, and the intervenors claimed that the notes were without consideration and fraudulent; that the plaintiff’s attachments were fraudulent; and that the suit and attachments were in execution of a collusive scheme between the plaintiff and defendant to defraud the intervenors, who were ■ lyona fide creditors of the defendant. It was held that the complaint of the intervenors did not disclose such an interest in the subject matter of the suit as to entitle thorn to intervene, and that the plaintiff’s motion to dismiss the same should be granted. The decision was put upon the ground that when the judgment was entered against the defendants, the whole subject matter of the suit was disposed of, and that the writ of attachment was a part of the remedy and had nothing to do with the cause of action. “ If property is seized by virtue of the writ to which another has a better right, the vindication of such right involves another and independent judicial inquiry.”
The intervention must be not only to protect the direct and immediate interest of the intervenor in a suit, but she is bound to make that interest appear by proper allegations in her petition. Coffey v. Greenfield, 62 California, 602.

The real interest of F. H. Smith Company is to see that its property is not taken to satisfy the petitioners’ tax liability. But this property is not the subject of the litigation before the Board and is not within our exclusive control. Cf. Foster Federal Practice, Sixth Edition, vol. 2, § 258g. Billings v. Aspen M. & S. Co., 51 Fed. 338. We have no jurisdiction over this or any other property. We determine the deficiencies, if any. Collection is another matter, with which we have nothing whatever to do. Our decision can not even remotely or indirectly affect the rights of F. H. Smith Company in specific property. It will give the Government no right to collect the deficiencies from the property of the F. H. Smith Company. Counsel confess their inability to state how the F. H. Smith Company will be adversely affected by our decision. If we should hold that there is no deficiency, the Government might then be required to release the seized property, and one claim adverse to that of the F. H. Smith Company would be dissolved. But such an interest is too indirect to justify intervention. Another result of our decision, not suggested by F. H. Smith Company, might be that the Government would take property legally owned by the petitioners which would otherwise be available for the satisfaction of any judgment which F. H. Smith Company might obtain against them. But this need not give us pause, for it is not urged, and the F. H. Smith Company is contending that the petitioners have no property of their own. Furthermore, it has been held that one creditor may not intervene to prevent another creditor from obtaining judgment against a common debtor. Horn v. Volcano Water Co., 13 Calif. 62. Thus, no interest of F. H. Smith Company could be conveniently settled in these proceedings. Our decision will not be res adjwdicata against the F. H. Smith Company (cf. Consolidated Gas Co. v. Newton, 256 Fed. 238, 245), and will not directly cause gain or loss to that company. The interest of the F. H. Smith Company in this proceeding is not a legal interest nor so immediate as to need protection in this proceeding or to justify intervention. Furthermore, means of obtaining relief outside these proceedings are available to the F. H. Smith Company. If intervention is discretionary, we refuse to encumber the main controversy with this collateral issue. United States Trust Co. v. Chicago Terminal Transfer Railway Co., 188 Fed. 292. Cf. Clephane on Equity Pleading and Practice, p. 351. The F. H. Smith Company has not alleged facts in support of the first two grounds of its motion sufficient to indicate that its presence as a party to this proceeding is necessary, or that the discretion of the Board should be exercised to permit it to intervene. It certainly has no real direct interest in the only question which we can determine, namely, the deficiencies due from these petitioners.

The third ground urged needs no discussion, and we fail to see where intervention will avoid multiplicity of proceedings over which we have jurisdiction. The seventh ground is not supported by any explanation, argument or allegation of fact. But in support of the fourth, fifth and eighth grounds, the F. H. Smith Company argues very strenuously that the purpose of each proceeding before the Board is to determine the true and correct liability of each petitioner for any deficiencies asserted by the Commissioner, and this purpose can only be accomplished in this proceeding through intervention. The above statement of the purpose of the Board needs certain qualifications. Our decision in each case must depend upon the evidence and upon our interpretation of the principles of law which wo feel apply in the light of the evidence. But we do not necessarily know all of the facts material in each case. We usually know only such facts as the proper parties to the proceedings have succeeded in proving. We have of course no desire to prevent the disclosure of the facts in any proceeding. But rules of evidence and other principles of law are deemed sufficient safeguards in this connection, and if we follow those principles to the best of our ability, we will have done our duty regardless of whether or not our decision results in the determination of the eternally correct deficiency. The adverse interests of the petitioners and the respondent are usually sufficient to bring out the true facts in proceedings before this Board, and it is the exceptional case where the intervention of an interested third party is necessary or even advisable for this purpose. An altruistic desire of an interested party to bring out facts within his knowledge is not fer se a sufficient ground for intervention. Here there appears to be no better ground to support the motion. Furthermore, we have no reason to be apprehensive that the Commissioner of Internal Revenue and the petitioners’ counsel, in good standing before the Board, will fail to bring out the facts or deliberately agree to and deceive the Board by a stipulation composed of falsehoods.

Taking as broad a view of the situation as the law will permit, we are satisfied that F. H. Smith Company should not be permitted to intervene under the circumstances which have been brought to our attention. Therefore, we have denied the motion.

Reviewed by the Board.


author: McMai-ion:

text:
    James William Everhart, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 26675.
    Promulgated June 8, 1932.

      Lincoln R. Glarh, Esq., for the petitioner.

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

McMai-ion:

This is a proceeding for the redetormination of an asserted deficiency in income tax for the year 1922 in the amount of $2,370.94.

The petitioner alleges that the respondent erred in taxing as income the amount of $162,078.77 as shown on Form 1099, information certificate, filed by H. F. Wilcox Oil & Gas Company for the calendar year 1922 instead of the amount of $153,580.48 reported by the petitioner in his income-tax return for the year 1922.

The petitioner is an individual residing at 920 Edgemere Court, in the City of Evanston, County of Cook, State of Illinois.

During the calendar year 1922, petitioner was engaged in the business of selling syndicate interests as a representative or financial agent of the Wilcox Oil & Gas Company. His father, William D. Everhart, and his brother, Thomas B. Everhart, now deceased, were associated with the petitioner.

The Wilcox & Gas Company organized various syndicates from time to time. It sold interests or participations in various drillings of test wells for the purpose of discovering oil or gas. It retained a half interest in these syndicates and sold undivided interests to various individuals to raise sufficient money to take care of the other half of the operation. The nature of the operation was the drilling of test wells in a number of different blocks of acreage varying in number from 10 to 25, in order that those participating might have the benefit of the law of averages. The blocks contained from 40 to 2,000 or 3,000 acres.

The petitioner, as representative of the Wilcox Oil & Gas Company, kept investors informed on developments of the company as a “ go-between ” between the company and its investors and from time to time as the syndicates were organized he represented (he company in his territory on finances.

The petitioner received a commission of 33% per cent on all sales of the interests in the syndicates.

Prior to 1922 there was in existence a firm called J. William Everhart & Company, which was dissolved in 1921. The financing was handled originally under the name of this company. Upon its dissolution in 1921, the petitioner took over all the stock as well as all the assets and assumed the liabilities of such company, and from that time on whatever agreements the company had were taken over by the petitioner and regarded as his personal business.

In the amount of $153,580.48 reported by him as income on his income-tax return, 'the petitioner included $1,501.11 representing commissions paid by Wilcox Oil & Gas Company to the J. William Everhart Company in 1922.

In 1922 the petitioner purchased from the Wilcox Oil & Gas Company an interest or participation in a syndicate for which he actually paid $20,000. The value of such interest or basis upon which the company sold such interest to other investors was $30,000. Although the petitioner treated this purchase as a personal transaction in so far as the company was concerned, he in fact purchased it on behalf of himself, his father and his brother, the basis of participation being 50 per cent, 25 per cent, and 25 per cent, respectively. This basis applied to everything -in which the petitioner, Iris father and his brother were jointly interested.

The petitioner, in his records, treated the $20,000 as the net cost of a personal investment in behalf of himself, his father and his brother, and regarded the $10,000 reduction of the selling price of $30,000 as a discount.

The Wilcox Oil & Gas Company filed an information certificate, Form 10Q9, and the statement attached to the deficiency letter dated February 18, 1927, contains the following relative thereto:

Information certificate, Form 1099, on file in tliis office discloses that you received salary, wages etc. amounting to $162,078.77 whereas you reported only $153,580.48 from this source. Adjustment of this item increases your net income by $8,498.29, which is subject to tax as follows:

The Wilcox Oil & Gas Company had its own method of handling its accounts, and from time to time sent the petitioner a memorandum covering his account with it.

The respondent, in the computation of the asserted deficiency, increased the net income of petitioner as shown in his income-tax report for 1922 by the amount of $8,498.29, being the difference between the amount of income reported by the petitioner and the amount reported by Wilcox Oil & Gas Company on Form 1099, information certificate. As heretofore stated, petitioner included as income in his income-tax return for the year 1922 the amount of $152,078.77 representing commissions from the Wilcox Oil & Gas Company, and the amount of $1,501.71 representing commissions paid by such company to J. William Everhart & Company, which company the petitioner had taken over in 1921, thus making a total income reported of $153,580.48. The Wilcox Oil & Gas Company filed an information certificate, Form 1099, and the difference between the amount of $162,078.77 reported thereon and the amount reported by the petitioner less the amount of $1,501.71 is $10,000.

The petitioner claims, that the amount of $10,000 represents a discount constituting a reduction of cost of an interest or participation in a syndicate purchased by him individually, but in fact purchased on behalf of himself, his father and his brother.

The respondent contends that such amount represents commissions or compensation for services rendered by the petitioner and, therefore, constitutes taxable income under section 213 (a) of the Revenue Act of 1921 and T. D. 3435.

Section 213 (a), supra, provides that the term “gross income” includes:

* * * gains, profits, and income derived from salaries, * * • for personal service * * * of whatever kind and in whatever form paid, * * * or gains or profits and income derived from any source whatever. The amount of all such items * * * shall be included in the gross income for the taxable year in which received by the taxpayer * * *.

T. D. 3435, C. B. II-l, p. 50, provides that where property is sold by an employer to an employee for an amount substantially less than its fair market value, such, employee shall include in gross income the difference between the amount paid for the property and the amount of its fair market value.

In George W. Van Vorst, Executor, 22 B. T. A. 632, wherein the question of the application of the rule laid down in Treasury Decision 3435 was involved, the Board in its opinion stated:

The rule laid clown in article 31 of Regulations 65 [Treasury Decision 3435] apparently is intended to interpret either section 213 (a) or section 201 (a) of the Revenue Act" of 1924, but it is too broad for tMs purpose. In neither section is there any specific reference to such transactions as are covered by the provision of the •article above referred to. By its terms it would cover situations which may easily be imagined in ivhich the stockholder purchaser would clearly have received no taxable income from the purchase. Under some circumstances a stockholder may be charged with the receipt of income from a transaction which has the form of a purchase (cf. Continental Insurance Co. v. United States, 259 U. S. 156), but normally income does not result from a purchase even though a great bargain is obtained. Morgan J. McMichael, 4 B. T. A. 266; W. L. Dunn, 14 B. T. A. 13; Rose v. Trust Co. of Georgia, 28 Fed. (2d) 767. * * * [Italics ours.]

The petitioner purchased an interest or participation and set up the investment on his own records as a personal investment of $20,000 in behalf of his father, his brother and himself. He testified that he did not raise any question about the propriety of the amount of $10,000 being treated as a commission on the memorandum sent to him by the company because he presumed he was only being charged for the amount he had paid for the interest.

We have no information as to whether or not the memorandum sent to the petitioner by the company, as well as the information certificate Form 1099, reflected the company’s book entries. However, even if so, b.ook entries are not conclusive and income is to be determined from actual facts. B. B. Jones, 18 B. T. A. 1225, and cases cited therein.

In Luther Elkins, 12 B. T. A. 1058, the petitioner, a member of a joint adventure in the development of certain oil wells, purchased 100 units, each unit representing an undivided 1/5000 interest in land. These units had been sold for $100 per unit to others, but the cost of selling was equal to 50 per cent of the selling price. The petitioner tendered his check for $5,000 in payment of the 100 units, but the bookkeeper advised him that it would be better to have the books show a purchase at $100 per unit and that the petitioner should offer his check for $10,000 and the bookkeeper would immediately return $5,000. This was done and reflected on the books as commission paid. The Board in that case held that such bookkeeping transaction did not give rise to income or change the true facts of the case.

We see nothing in Taplin v. Commissioner, 41 Fed. (2d) 454, cited by respondent, which leads to a different conclusion. On the contrary the court stated:

* * * It is sufficient to say that whatever effect Treasury Decision 3435 might be given in other situations, it cannot here be construed to create income or dividends in a case where none otherwise existed when the tacts are measured by the statute. Income cannot he created hy fiat alone. [Italics ours.}

In our opinion the facts in this case do not warrant the application of T. D. 3435, and we therefore hold that the respondent erred in increasing the taxable net income of the petitioner for the year 1922 by the addition thereto of the amount of $8,498.29.

Reviewed by the Board.

Judgment will be entered for the petitioner.

Tkammell dissents.


text:
    Wobbers, Incorporated, Petitioner, v. Commissioner of Internal Revenue, Respondent. Wobber Brothers, Petitioners, v. Commissioner of Internal Revenue, Respondent. Schwartz-Kasser Improvement Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 36874, 36875, 36876.
    Promulgated June 8, 1932.

      F. E. Youngman, Esq., for tbe petitioners.

      H. A. Cox, Esq., for tbe respondent.
   OPINION.

Lansdon:

In his brief petitioners’ counsel contends that profit from the sale of the, Monterey theatres was erroneously reported by the partnership on the installment basis. He alleges that any profit arising from the transaction was taxable to the partnership in 1922, when the sale was made. We think such an issue is not properly before us. Profit from the sale was reported by the partnership on the installment basis and returns on such basis were accepted by the respondent. The corporation acquired the contract in exchange for stock and the issue here is whether the petitioners were in receipt of income when payments were collected under the contract. The year of election to report on the installment basis is not before us and any adjustment as to prior years is barred by the statute of limitations. We think the corporation, which stands in the place of the partnership by virtue of section 204 (a) (8) of the Revenue Act of 1924, must abide by the basis for reporting income elected by the partnership and allowed by the respondent. Cf. Louis Werner Saw Mill Co., 26 B. T. A. 141.

The respondent has included in petitioners’ income for 1924 amounts determined to have been collected under contracts of sale acquired in exchange for stock from a predecessor partnership, profit from the sales having been reported on the installment basis by the partnership. He has determined that section 204 (a) (8) of the Revenue Act of 1924 is applicable and that the petitioners are taxable on the same basis as the predecessor partnership. It is clear from the facts that the transaction by which the corporation acquired the contracts from the partnership falls within the provisions of section 203 (a) (4) of the 1924 Act, which is a reenactment of section 202 (c) (3) of the Revenue Act of 1921.

The petitioners contend that the corporation purchased the contracts for stock and that no profit arises to them until the cost has been recovered. They contend that any profit from the sale was realized by the partnership and that the corporation has sold nothing from which profit could be realized.

Section 202 (c) (3) of the 1921 Act and section 203 (a) (4) of the Revenue Act of 1924 provide that where property is exchanged for stock in a corporation by persons who thereafter control the corporation, no gain or loss will be recognized from the transaction. Section 204 (a) (8) provides that in such cases the basis for computing gain or loss from a sale or other disposition of the property will be the same as it would have been in the hands of those transferring it to the corporation. Under such provisions only real profits .and losses are recognized. What would otherwise have been a taxable disposition of property is ignored, because the taxable entities are for all practical purposes the same. Individuals who did own the property now own stock of the corporation which owns it. In our opinion the above sections are applicable to installment contracts covering sales of property from which return of income was made on the installment basis. The new taxable entity acquires the uncollected contracts in a transaction from which no gain or loss is recognized and, applying the provisions of section 204 (a) (8), it is taxable on the basis determined for those from whom the contracts were acquired.

The petitioner contends that subsection (f) of section 202 excludes installment obligations from the purview of that section and makes the transferor partnership taxable on the unreported profit contained in future payments at the time the obligations were disposed of for stock. We do not see such a meaning in the provisions of section 202 (f). That section is merely a statutory authorization for reporting income on the installment basis, which had been permitted by the respondent’s regulations for some time.

We think the respondent has correctly determined that the corporation is taxable on profit contained in each collection under the contracts as computed for the transferor partnership.

The parties are in controversy over the dates on which payments were received under the Monterey and Imperial contracts. The respondent has determined that two annual payments were made in 1924 under the Imperial contract, one on January 2, 1924, in the amount of $67,428.57 and one on December 29, 1924, in the amount of $64,000. He has determined that three semiannual payments were received in 1924 under the Monterey contract, one on January 2,1924, in the amount of $4,480, one on June 30, 1924, in the amount of $4,360, and another on December 29, 1924, in the amount of $4,240. The petitioners contend that the payment of $64,000 under the Imperial contract was not received until January 2, 1925, and that the payment of $4,480 under the Monterey contract was received on December. 28, 1923. We are convinced from the evidence that the petitioners are correct in their contention and have found as a fact above that the payments in controversy were received on the dates alleged by the petitioner, which dates coincide with the due dates under the contracts.

The respondent contends that the petitioners are estopped to' deny that' the payments were received in 1924, since collection of such amounts was reported on the consolidated income-tax return for' 1924 and such information was relied upon by the respondent. He also alleges that, having stated in their original petitions that total collections under the contracts amounted to $144,508.57, the petitioners may not later change their position. The petitioners did hot directly report collection of the items on their income-tax return. Such fact was determined by the respondent from a comparative balance sheet attached to the return, where the balance due under each contract was shown as of December 31, 1923, and December 31, 1924. While the balance sheets were part of the information furnished by petitioners on tbeir income-tax return, they are for the general purpose of showing assets and liabilities of the business and in our opinion can not serve as a basis to estop petitioners from proving the facts as to collection of certain income. In our opinion the respondent was not justified in relying on such information as the basis for his deficiency letter. As to statements in the original petitions, which are mere allegations, the petitioners have the right of amendment at any time.

At the close of the hearing the respondent amended his answer and alleged that, if the Board should find that the amounts in controversy were not collected in 1924, as he had determined, then they should be added to income for 1923 and 1925. He moved that the deficiencies determined for those years be increased accordingly. The Board has jurisdiction to determine income of the affiliated group for 1923, 1924 and 1925. Deficiencies were asserted for those years based on adjustments to income of the group and error has been alleged as to all three years. The amounts of $4,480 and $64,000, which we have found were collected in 1923 and 1925, respectively, should be included in the group income for such years. The resulting deficiencies should be allocated on the basis of the respective net incomes and the deficiencies determined against Wob-bers, Incorporated, and the Schwartz-Kasser Improvement Company should be accordingly increased.

The petitioners contend that if collection of payments under the Imperial Theatre contract results in the receipt of taxable income, then they should be allowed to deduct from such income a proportionate part of the commissions paid for negotiating the sale. We have found that the partnership agreed to pay to two individuals commissions amounting to $69,771.09 for services in connection with the sale, one of whom was paid $25,000 in 1920 and 1921, while the other was to receive a percentage of each payment under the contract. In Mrs. E. A. Giffin, 19 B. T. A. 1243, we held that where real estate was sold and profit reported on the installment basis, the expenses incident to the sale served to reduce the selling price in determining the profit to be realized, thus being spread over the same period as the installment payments, and are not deductible in full in the year of sale. The facts of the instant case disclose, however, that on the partnership income-tax returns for 1920 and 1921 deductions wTere taken and allowed for the commissions paid in each of the years, which included all of the $25,000 commission. Since the petitioners must report profit from the contracts on the same basis as the predecessor partnership and since the corporation stands in the place of the partnership as to income from the contracts, the commissions which were allowed as deductions to the partnership in earlier years may not enter into a computation of profit for the taxable year. Such a result would in effect be to allow a double deduction. As to the commission paid by the corporation in the taxable year, however, which was a percentage of the payment collected, we think a deduction should be allowed. No deduction on account of such payment has been allowed and on the basis established by the partnership the petitioners are entitled thereto.

It remains for us to determine the basis for depreciation on the Pantages Theatre property. There is no controversy over cost to the partnership of the entire property and it is agreed that the buildings had a useful life of 13 years on March 14, 1923, when acquired. The only controversy between the parties relates to allocation of the total purchase price between land and buildings. The respondent has determined that the cost of $925,000 should be apportioned between land and buildings in the respective amounts of $625,000 and $300,000. The petitioners would allocate $560,000 as cost of the land and $365,000 as cost of the buildings.

In support of their contention the petitioners offered the testimony of a real estate expert who owned the Pantages property at one time, knew it when the buildings were constructed in 1912 and 1913 and acted as agent for the partnership in acquisition of the property in 1923. He testified that in his opinion the whole property had a value of $1,250,000 in March, 1923, and that the value of the buildings at that time was $365,000. In explanation of his answer he testified that his opinion was partially based on his knowledge that the buildings had cost $241,500 when built in 1912 and 1913 and that according to records of the American Appraisal Company cost of building had increased during the period from 1913 to 1923 by 108 per cent.

The basis for computing depreciation on the property now owned by the corporation is cost to the predecessor partnership. Section 204 (a) (8), supra. Value of the property as of the date purchased by the partnership is material to the issue only to assist in providing a basis upon which to allocate the purchase price between land and buildings. The testimony is that on March 14, 1923, the buildings were worth $365,000 and the whole property had a value of $1,-250,000. For property having such value the partnership paid $925,-000. Must we say that of such amount $365,000 was paid for' the buildings? We think not. When the values given by petitioners’ witness are proportionately reduced to conform to actual cost we get a figure for cost of the buildings of $270,100, which is less than the respondent’s determination.

In the circumstances we are of the opinion that respondent’s allocation of cost to land and buildings, which is in accordance with entries made on the partnership books, results in a reasonable allowance for depreciation. His determination of depreciation is approved.

Reviewed by the Board.

Decision will be entered under Rule 50.

MtjRdocic dissents.

       (8) If the property (other than stock or securities in a corporation a party to a reorganization) was acquired after December 31, 1920, by a corporation by the issuance of its stock or securities in connection with a transaction described in paragraph (4) of subdivision (b) of section 203 (including, also, eases where part of the consideration for the transfer of such property to the corporation was property or money in addition to such stock or securities), then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made; * * *

       (4) No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.

       Nothing in this section shall be construed to prevent (in the case of property sold under contract providing for payment in installments) the taxation of that portion of any installment payment representing gain or profit in the year in which such payment is received.