author: Seawell:

text:
    Gertrude D. Walker, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 41157, 49871, 55853, 62740.
    Promulgated January 30, 1935.

      Henry T. Dorrance, Esg., and J. G. Korner, Jr., Esg., for the petitioner. ,

      Harry F. Morton, Esg., for the respondent.
   OPINION.

Seawell:

These proceedings, consolidated for hearing and report, involve the redetermination of deficiencies in income tax for 1926, 1927,1928, and 1929 in the respective amounts of $3,663.62, $5,320.93, $5,128,31, and $3,596.38. The facts were stipulated.

It is agreed that the evidence introduced in Gertrude D. Walker, 20 B. T. A. 937; affd., 68 Fed. (2d) 351; certiorari denied, 289 U. S. 746, a case instituted by the petitioner for the redetermination of deficiencies for prior years, be considered as evidence in these proceedings. Our findings of fact in that case are incorporated herein by reference. Briefly stated, such facts are these:

Pursuant to the provisions of the will of the petitioner’s father, three trusts were created. All of the income from one of them, the corpus of which consisted of 700 shares of common stock of the Eastman Kodak Co., was to be paid to the petitioner. Another, known as the “ Brookside Trust ”, comprised real property, called “ Brookside ”, and personal property consisting almost entirely of shares of common stock of the Eastman Kodak Co. The petitioner and the decedent’s widow were to have the use of Brookside ” for life and the income from the personal property was to used for general maintenance of “ Brookside ”, any excess to be paid to the petitioner and the widow in equal shares for life. The remainder of decedent’s estate, consisting principally of common stock of the Eastman Kodak Co., constituted the corpus of the third trust, known as the residuary trust, income from which was to be paid to the petitioner and the widow, one half to each. The petitioner was not entitled to receive the corpus of any of the trusts. She kept her accounts and reported her income on the cash basis.

The trustees had power to invest and reinvest the personal property in the Brookside and residuary trusts. In about 1922 they sold or exchanged 6,234 shares of stock of the Eastman Kodak Co at less than the market price. In 1924 the petitioner, on advice o: counsel, petitioned the Surrogate’s Court of the County of New York, New York, to (1) surcharge the accounts of the trustees with in excess of $2,000,000 representing the difference between the amount received and what should have been received for the stock sold or exchanged in 1922; (2) direct that amounts set up by the trustee*’ in a sinking fund be distributed; (3) direct the trustees to reduce to. and maintain the Brookside trust at, $1,500,000, and transfer any excess to the residuary trust; and (4) grant such further relief as might be just and proper.

The referee to whom the proceedings were referred completed his hearings in August 1929 and rendered a report adversely to the petitioner’s contentions in October of that year. In July 1930 the court rendered an opinion that the referee’s report should be confirmed. Thereafter numerous hearings were had, with the result that in February 1931 the court entered and served a formal order confirming the referee’s report. All right of appeal from the order expired in March 1931.

In the earlier proceeding we held that the legal fees and expenses paid by the petitioner in 1922 to 1925, inclusive, in connection with the litigation, were not deductible as ordinary and necessary business expenses. In the respective taxable years the petitioner paid additional legal fees in the respective amounts of $11,122.87, $14,-968.67, $12,992.78, and $12,517.60. These amounts she claims are deductible in the years paid as losses sustained in a transaction entered into for profit.

In Merriman v. Commissioner, 55 Fed. (2d) 879, affirming 21 B. T. A. 67, the question was whether legal expenses incurred in an unsuccessful attempt to break a will by a proceeding in court were deductible as a loss sustained in a transaction entered into for profit. The petitioner instituted the suit “ with the hope that she would get something out of it in a monetary way if she were successful in breaking the will.” In denying the deduction, the court said:

* * * “ Profit and loss ” are well-known terms referable to business transactions. Profit is gain; loss more than wipes out all gain. It is unecessary to try to give a comprehensive definition of either term. As ordinarily understood, profit does not refer to what is already one’s own, but is an accretion to what one already possesses. Loss does not refer to what one has never had.
When the petitioner brought her suit to break her aunt’s will, it was to establish her right to what she must have claimed honestly belonged to her. To hold otherwise would be to impute to her dishonest motives. If the litigation had proved successful, she would have received only such part of the testator’s estate as justly belonged to her. That would not have been profit. The litigation was unsuccessful. Her anticipated share in the estate was denied her. It was not loss because she never possessed it. To hold that the expenses of litigation under the existing facts were a deductible loss because incurred in a transaction entered into for profit would be straining the meaning of “ profit ” beyond any ordinary or usual meaning of the word and beyond the sense in which it was used by Congress.

We think these observations of the court apply with equal force to the facts here. The purpose of all litigation is to preserve and enforce rights. Tyler v. Judges of the Court of Registration, 179 U. S. 405; Missouri, Kansas & Texas Railway Co. v. Missouri Railroad & Warehouse Commissioners, 183 U. S. 53. That was the object of the petitioner’s suit. Success would have resulted in the restoration of corpus to the trusts, but it would not have increased the petitioner’s 50 percent beneficial interest in the income of the trusts. If the addition to the corpus produced income distributable to the petitioner, the amount would not be a profit to the petitioner, but merely additional income. The effect of the court’s decision is that there had been no maladministration of the trusts and that the trusts had not lost anything by reason of the things complained of in the suit. Obviously, if the trusts lost nothing, this petitioner sustained no loss of rights or anything else.

In Seufert Bros. Co. v. Lucas, 44 Fed. (2d) 528, the sum was spent to protect and minimize damage to1 real property used for business purposes. Whether the transaction was one entered into for profit was not at issue in the case. The expense involved in S. Cupples Scudder, Executor, 22 B. T. A. 1294, related to a capital transaction. The attorney fees and other litigation expenses involved in Frederick McLean Bugher et al., Executors, 9 B. T. A. 1155, were incurred in connection with a business venture. In Commissioner v. Continental Screen Co., 58 Fed. (2d) 625, the attorney fees were held to be deductible as business expenses, not as losses. We do not regard any of these cases as controlling the question here.

We do not think the petitioner ever sustained a deductible loss, but if she did, it did not occur in the taxable years as the amounts in question were paid. Losses are deductible only in the year sustained. Sec. 214 (a) (5), Revenue Act of 1926; sec. 23 (e), Revenue Act of 1928; Burnet v. Huff, 288 U. S. 156. The institution of the suit did not make certain that any loss would occur. Except f’or the fact that it was in an advanced stage, the status of the proceeding was no different in any of the taxable years than prior thereto. It was not concluded until March 1931, when all right of appeal from the adverse opinion of the trial court expired. This event fixed the time when the loss, if any, occurred. At all times prior thereto there was only the possibility that a loss, as alleged by the petitioner, would be sustained.

In view of our conclusion that the amounts in question are not deductible as losses sustained by the petitioner in the respective taxable years in a transaction entered into for profit, it is unnecessary for us to pass upon the issue raised by the respondent as to whether the question is res judicata.

Decision will he entered for the respondent.


source: Caselaw Access Project

author: Arundell:

license: Public Domain

text:
    A. F. Mack, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 74111.
    Promulgated January 30, 1935.

      J. Nelson Anderson, Esq., for the petitioner.

      Stanley B. Anderson, Esq., for the respondent.
   OPINION.

Arundell:

The respondent’s determination of a deficiency in income tax in the amount of $868.73 for the year 1930 arises out of his application of the rule of first in, first out to sales of stock made by petitioner in the taxable year.

The facts have been stipulated by the parties and we set them forth herein so far as is necessary for a decision of the question raised.

It appears that on January 1, 1929, the petitioner owned 1,155 shares of stock of the U. S. Realty & Improvement Co. which had been acquired on the dates and at the prices stated below:

550 shares acquired January 12, 1926, in exchange for 220 shares on split of 2% for 1
The 220 shares had been acquired as follows:
May 1, 1923 — 100 shares — cost $10, 415. 00
July 3, 1923 — 100 shares — cost 9,115.00
20 shares — stock dividend
500 shares acquired March 29, 1926 — cost $25,087.50
105 shares acquired March 15, 1927 — stock dividend
1,155

On February 7, 1929, petitioner sold 200 shares of the stock for a price of $22,742.

Subsequent to February 7, 1929, petitioner purchased 718 additional shares of stock in the U. S. Realty & Improvement Co. on the dates and at the prices as follows:

During the taxable year 1930 petitioner sold 718 shares of stock in the U. S. Realty & Improvement Co. as follows:

The sales during the taxable year were made through Oliphant & Co., brokers. All of the stock certificates evidencing petitioner’s ownership of shares in the U. S. Realty & Improvement Co. were in the custody of Oliphant & Co., a part of the certificates having been turned over to Oliphant & Co. by another brokerage firm at or about the time of the sale of the shares during December 1930. No actual identification of the certificates sold was made by petitioner, nor was identification possible. In making the sale the brokers utilized a credit clearing house balance to the extent of 300 shares of U. S. Eealty & Improvement Co. stock.

At the time the sales were made petitioner instructed his bookkeeper to record them on a ledger sheet as sales of the stock acquired by him in 1929. They were so recorded.

Petitioner argues that it was his intention to sell the 718 shares of stock which he had more recently acquired and that, under the circumstances, he has done all in the way of identification that it was possible for him to do. He relies on Howbert v. Penrose, 38 Fed. (2d) 577, and on Merchants & Manufacturers' Fire Insurance Co. v. Commissioner, a memorandum decision by this Board dated April 20, 1933. This latter decision has since been reversed by the United States Circuit Court of Appeals for the Third Circuit, 72 Fed. (2d) 408.

The validity and applicability of the rule of first in, first out has been passed on by the courts and by this Board many times. The facts in the instant case are the usual ones present where certificates representing shares of stock purchased at various times are left with the broker and some of the shares are sold without any record being kept or attention paid to the particular certificate delivered. In fact the stipulation in this case states that, by reason of the fact that the certificates were not in the possession of petitioner, there was no way for him to identify them, and there is nothing in the record to indicate or suggest that the petitioner gave any instructions to his broker as to which shares or certificates he desired to sell. Even if we assume that such instructions 'would constitute a sufficient identification for the purposes under consideration, cf. Howbert v. Penrose, supra; Rankin, v. Commissioner, 73 Fed. (2d) 9, certainly the mere notation on petitioner’s ledger is not sufficient to establish the identity of the particular property he sold so as to take the case'out of the first in, first out rule.

The question here has been treated so exhaustively in prior decisions that we fee! no useful purpose would be served by a further and detailed review of the subject.

Decision will be entered for the respondent.

        Towne v. McElligott, 274 Fed. 960; Skinner v. Eaton, 45 Fed. (2d 568; Snyder v. Commissioner, 54 Fed. (2d) 57, affirming 20 B. T. A. 778; Commissioner v. Merchants & Manufacturers’ Fire Insurance Co., 72 Fed. (2d) 408; Snyder v. Commissioner, 73 Fed. (2d). 5 (C. C. A., 3d Cir., Sept. 18, 1934), affirming 29 B. T. A. 39; Burdett Stryker, 21 B. T. A. 561; George Vawter, 31 B. T. A. 884.


author: Aeundell: GoodRich,

text:
    Asiatic Petroleum Company (Delaware) Limited, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 72452.
    Promulgated January 31, 1935.

      M. T. Moore, Esq., and Joseph G. White, Esq., for the petitioner.

      Chester A. Gwinn,. Esq., and Hugh R. Dowling, Esq., for the respondent.
   OPINION.

Aeundell:

In addition to the facts stipulated, the parties have stipulated that, if the respondent erred in applying section 45 of the Bevenue Act of 1928, there is no deficiency determinable against the petitioner for 1929; if he did not err in so doing, the deficiency for that year is $303,083. Section 45 is set out in the margin.

Petitioner assails the determination of the respondent from two angles. First, that section 45 does not apply to the facts in this case, and, second, that if it does authorize the assessment proposed by the respondent it is unconstitutional.

Section 45 has no exact counterpart in prior revenue acts, but the three preceding acts contained provisions somewhat similar, and the provisions of section 45 are drawn from the earlier statutes, with modifications needed to meet new conditions brought about by changes in the provisions relating to affiliation and consolidated returns. The first of these several provisions was section 240 (d) of the Bevenue Act of 1921, in which it was provided that the Commissioner may consolidate the accounts of “ related trades or businesses, in any proper case, for the purpose of making an accurate distribution or apportionment of gains, profits, income, deductions, or capital * * * .” In explanation of this provision, introduced as section 249, the report of the House Ways and Means Committee stated (Report 350, 67th Congress, 1st Session, p. 14) :

Subsidiary corporations, particularly foreign subsidiaries, are sometimes employed to “milk” tbe parent corporation, or otherwise Improperly manipulate the financial accounts of the parent company. To prevent this abuse, section 249 (240) would give the Commissioner of Internal Revenue power to consolidate the accounts of two or more related trades or businesses solely for the purpose of making an accurate distribution of gains, profits, income, deductions, or capital, and not for the purpose of computing the tax on the basis of the consolidated returns.

In the report of the Senate Committee on Finance (Report 275, 67th Congress, 1st Session, p. 20) it was stated in reference to this section:

This is necessary to prevent the arbitrary shifting of profits among the related businesses, particularly in the case of subsidiary corporations organized, as foreign trade corporations.

In the Revenue Act of 1924 the provision relating to consolidation of accounts was originally proposed as it appeared in the 1921. Act. It was changed by the Senate Committee on Finance to provide that “ the Commissioner may and at the request of the taxpayer shall ” consolidate the accounts in the same situations specified in the 1921 Act, and, as so changed, was enacted and became section 240 (d) of the Revenue Act of 1924.

The provisions of section 240 (d) of the Revenue Act of 1924 were continued unchanged in section 240 (f) of the Revenue Act of 1926.

The House Ways and Means Committee, in drafting the bill which became the Revenue Act of 1928, omitted any provision for filing consolidated returns after the year 1928, and inserted section 45 and gave the following explanation (Report 2, 70th Congress, 1st Session, p. 16):

Section 45 is based upon section 240 (f) of the 1926 Act, broadened considerably in order to afford adequate protection to the Government made necessary by the elimination of the consolidated return provisions of the 1926 Act. The section of the new bill provides that the Commissioner may, in the-case of two or more trades or businesses owned or controlled by the same interests, apportion, allocate, or distribute the income or deductions between or among them, as may be necessary in order to prevent evasion (by the shifting of profits, the making of fictitious sales, and other methods frequently adopted for the purpose of “milking”), and in order clearly to reflect their true tax liability.

The Senate Finance Committee restored the right to file consolidated returns in the case of so-called class A affiliations, and retained section 45 with the explanation (Report 960, 70th Congress, 1st Session, p. 24) :

Section 45 is based upon section 240(f) of tbe 1926 act, broadened considerably in order to afford adequate protection to tbe Government. The section of the new bill provides that the Commissioner may, in the case of two or more trades or businesses owned or controlled by the same interests, apportion, allocate, or distribute the income or deductions between or among them, in such manner as may be necessary in order to prevent evasion (by the shifting of profits, the making of fictitious sales, and other methods frequently adopted for the purpose of “milking”), and in order to arrive at their true tax liability.

Section 45 as enacted into law is in the form originally proposed by the House Ways and Means Committee, and explained by the Committees of both House and Senate as above quoted.

The substance of the transaction before us was this: A domestic corporation owned property salable at a profit. Instead of taking the profit it sold the property at cost to a foreign corporation, the stock of which was owned by the same interests that owned its stock. The vendee immediately sold the property to a domestic corporation at a substantial profit. This profit the respondent has allocated to petitioner under section 45.

We think that such allocation was proper in order “ clearly to reflect the income ” of petitioner. Here we have a group of four corporations, the domestic member of the group owning property which increased in value while owned by it, and the property was salable and was sold at a profit. But for the fact that the domestic corporation was a member of a group related through stock ownership, the profit would have been directly realized by it. The profit belonged to it, and under any normal circumstances it would have realized it and ultimately the profit would go to the stockholders. As the deal was worked out, a more devious route was taken, but the same stockholders were still in position to obtain the benefit of the profit. The increment in the value of the property was converted into a realized profit within the group. Under these circumstances it was proper to allocate the profit to the domestic corporation which owned the property during the period that the increment occurred.

The situation here is not like that in Hoeper v. Tax Commission, 284 U. S. 206, upon which petitioner relies in arguing that section 45, if applied to this case, is unconstitutional. In the Hooper case the Supreme Court held invalid a state statute which required the income of the wife to be added to that of her husband and the aggregate taxed as the income of the husband. The decision rested largely on the circumstance that the laws of the state which thus sought to combine the two incomes had abolished all ownership and control of the wife’s property by the husband. The court pointed out that under the state law “ the wife’s income is in the fullest degree her separate property ”, and the husband “ never has any title to it, or controls any part of it.” Here we face no such statute. While corporations under the Federal taxing statute are separate taxpayers, the same statute and the Commissioner’s regulations have for many years recognized the necessity of commingling the accounts of corporate members of a group for the purpose of correctly reflecting income. Under the Revenue Act of 1918 affiliated corporations were required to file consolidated returns. In the case of a corporate group related through stock ownership a separate accounting would often result in a distortion of income ; in a situation like the Hoeper case distortion would result from a combined accounting and the combination of accounts could not be compelled. Congress has the power to tax to a donee income representing increment in the value of property while in the hands of the donor, Taft v. Bowers, 278 U. S. 470, Cooper v. United States, 280 U. S. 409, and the power to subject to death duties the value of property given away long before death if the gift was made in contemplation of death, Milliken v. United States, 283 U. S. 15. The section of the statute here involved, like those in the cases just cited, seems to us to be “ appropriate for enforcing a general scheme of lawful taxation.” Taft v. Bowers, supra. The present case aptly demonstrates the ease with which tax would be escaped on increment in value occurring while property having a situs in this country is owned by a domestic taxpayer, in the absence of some such provision as section 45.

The application qf section 45 to this case can be sustained on another ground. The statute authorizes the Commissioner to make an allocation of income or deductions “ if Tie determines that such * * * allocation is necessary * * (Italics supplied.) The italicized words made the allocation a matter of discretion with the Commissioner. In matters intrusted to the discretion of administrative officers there is a heavy burden on him who claims error in its exercise — “ a burden undoubtedly heavier than that of overthrowing a purely factual determination upon which the ultimate determination must depend.” Alfred E. Hamill, 30 B. T. A. 955, 959. That case involved the use of inventories, which the statute provides shall be taken Whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income * * In an earlier case involving the same statutory provisions, Finance & Guaranty Co. v. Commissioner, 50 Fed. (2d) 1061, it was said:

Where a statute commits to an executive department of the government a duty requiring the exercise of administrative discretion, the decision of the executive department, as to such questions, is final and conclusive, unless it is clearly proven arbitrary or capricious, or fraudulent, or involving a mistake of law.

As the statute involved here makes the allocation of income discretionary with the Commissioner, the rule invoked in the above cases is applicable here. Cf. Crossett Western Co. v. Commissioner, 73 Fed. (2d) 307; Remco Steamship Co., 30 B. T. A. 579. In the latter case we said that section 45 was not designed as a relief provision and the rule requiring liberal construction of relief provisions does not apply. The respondent having exercised the discretionary power vested in him and determined that allocation is necessary in this case, petitioner has the burden of showing that such determination was purely arbitrary and not made under any of the situations prescribed by the statute as a proper foundation for allocation of income.

One of the statutory situations warranting allocation is “ in order to prevent evasion.” The Commissioner does not charge evasion, but contends that the scheme was one for avoidance of taxes. We think it unnecessary to decide whether the taxpayer has overstepped the rather vague line that by judicial interpretation separates these terms, for attempted evasion is not the only situation described as proper for invoking section 45. Another is “ in order * * * clearly to reflect the income of any of such trades or businesses.” There was in this case a realized profit, constituting income, on the sale of the Norco stock. The proximate sale producing that profit was not the sale by petitioner, but by Bataafsche. The question at this point is whether petitioner has demonstrated that the Commissioner acted arbitrarily in allocating that income so as to reflect it in petitioner’s income. Having regard for the relation of the several corporations involved, the petitioner has not convinced us that the respondent’s action was arbitrary. The petitioner, it sho'uld be remembered, was a wholly owned subsidiary of the two corporations which owned all the stock of Bataafsche. The income which has been allocated within the group so as to tax it to petitioner was the realization of an increment in value which occurred while the property was owned by the petitioner. These facts, in our opinion, support the propriety of the respondent’s action and siiow the necessity of an allocation rather than demonstrate any abuse of discretion.

It is argued by petitioner that the profit realized by Bataafsche was not “ gross income ” because the sale of Norco stock took place outside of the United States, and in the case of a foreign corporation section 231 defines gross income as including only gross income from sources within the United States. Bearing in mind the purposes for which section 45 was enacted, we think that the phrase “ gross income ” is not susceptible of so narrow a construction. “ The intention of the lawmaker controls in the construction of taxing acts as it does in the construction of other statutes, and that intention is to be ascertained, not by taking the word or clause in question from its setting and viewing it apart, but by considering it in con-necton with the context, the general purposes of the statute in which it is found, the occasion and circumstances of its use, and other ap=-propriate tests for the ascertainment of the legislative will.” Helvering v. Stockholms Enskilda Bank, 293 U. S. 84. We have set out above the explanation of the responsible Congressional Committees for the enactment of section 45. One of the reasons given as prompting the enactment is the practice of “ shifting of profits, the making of fictitious sales.” We have that situation here. There was an arbitrary shifting to the foreign corporation of a profit which had accrued to a domestic taxpayer. And the sale from petitioner to Bataafsche, even if not open to the charge of “ fictitious ”, clearly was not an arm’s length transaction. If, as we view it, one of the púrposes of section 45 is to bring within the reach of the taxing authorities income earned by a domestic taxpayer but arbitrarily shifted beyond the borders of the United States, it would be a strange rule of construction which would permit the defeat of that purpose by restricting the meaning of a particular phrase to that which it has in some other part of the statute. Certainly the profit realized here was gross income within the popular concept of that term; it is such in so far as domestic taxpayers are concerned, and it is not to be presumed that Congress intended to treat foreign corporations more favorably. “The natural conclusion is that if any discrimination had been intended it would have been made in favor of, and not against the domestic corporation, which contributes in a much more substantial degree to the support of the people and the government of the United States.” Helvering v. Stockholms Enskilda Bank, supra. While the Commissioner is not here asserting the tax against the foreign corporations, they will be vitally affected, and the quoted observation of the Supreme Court is apropos of the subject under consideration.

It is also contended that petitioner is not engaged in a trade or business. This argument is based on the stipulation that petitioner “ is and always has been a holding company engaged in holding the stocks of various subsidiary companies.” Petitioner cites Zonne v. Minneapolis Syndicate, 220 U. S. 187; United States v. Emery, Bird, Thayer Realty Co., 237 U. S. 28, and similar cases.

In those cases the facts were that the. corporations were doing nothing more than holding title to property and collecting and distributing the rents. In the first cited case the Court says, “ The corporation had practically gone out of business in connection with the property, and had disqualified itself by the terms of reorganization from any activity in respect to it.” In the other case the only activity of the corporation “ was the bare receipt and distribution to its stockholders of rent from a specified parcel of land.” It was further pointed out in the Minneapolis Syndicate case that the corporation “ as originally organized and owning and renting an office building was doing business within the meaning of the statute.” There is nothing in the present case to establish that the activities were confined to the narrow scope that existed in the cited cases. The stipulation that it was engaged in holding the stock of various subsidiary companies does not establish either that that was its sole activity or that its activities as a holding company did not amount to a trade or business. Its charter is not in evidence and we know nothing of its powers. In the absence of evidence to the contrary we must take it that the petitioner was engaged in a trade or business. The stipulation does affirmatively establish that Bataafsche was engaged in business — that of “ producing and selling petroleum in various parts of the world.”

We accordingly sustain the respondent.

Reviewed by the Board.

Decision will he entered redetermining a deficiency in income tax for the year 1,929 in the amownt of $308,083.

GoodRich,

dissenting: Respondent has allocated to petitioner as its income a profit derived by a foreign corporation upon a sale consummated outside the United States. That is too great a stretch even for the apparently limitless discretionary powers granted by section 45.

His action results in taxing income realized by a foreign corporation from sources without this country, which may not lawfully be done. See sections 231, 119 (c), Revenue Abt of 1928.

No part of the profit on the second sale was received by petitioner. Consequently, to allocate that profit to it does not, in fact, clearly reflect its income.

To hold this profit the income of petitioner is to say that one may not sell except at a profit, if profit be possible. That is not good law. Taplin v. Commissioner, 41 Fed. (2d) 454; Commissioner v. Van Vorst, 59 Fed. (2d) 677; Iowa Bridge Co. v. Commissioner, 39 Fed. (2d) 777; United States v. Isham, 17 Wall. 496.

Moreover, I doubt whether section 45, at least so far as it serves as a basis for respondent’s action in this case, is constitutional, within the Fifth and Fourteenth Amendments. See Hoeper v. Tax Commission of Wisconsin, 284 U. S. 206; Heiner v. Donnan, 285 U. S. 312.

      SEC. 45. ALLOCATION OF. INCOME (AND DEDUCTIONS.
      In any ease of two or more trades or businesses (wlietiier or not incorporated, whether or not organized in the united States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion, or allocate gross income or deductions between or among such trades or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such trades or businesses.


author: Goodeich : McMahoN,

text:
    Cecil B. DeMille, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 52995; 52996, 61290, 61291, 65122, 65123, 71951, 71952.
    Promulgated January 31, 1935.

      A. Galder Machay, Esq., for the petitioners.

      M. B. Leming, Esq., R. J. Bopp, Esq., and J. II. Miller, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Cecil B. deMille Productions, Inc., and Constance A. deMille.

   OPINION.

Goodeich :

In view of the interpretative discussions as to the legislative history, and prohibitive purposes of section 220 of the Acts of 1924 and 1926, and section 104 of the Revenue Act of 1928 (the material provisions of which are almost identical) contained in prior decisions of cases arising under these provisions,' it is unnecessary to here attempt any further observations concerning the statute. Certainly, this case demands none for, as submitted, it requires us only to answer these very definite questions of fact: Was this company organized, or was it used for the purpose of preventing the imposition of surtaxes on its stockholders; did it accumulate, rather than distribute its earnings, so that surtaxes might be avoided ? There is, of course, considerable argument as to what may be the “ reasonable needs ” of the corporate petitioner’s business, and whether its accumulations exceeded that measure but, after all, that line of inquiry leads but to a rebuttable presumption granted by the statute as an aid to enforcement. The extensive record in this case would not justify the resting of it upon a presumption; the deeper question must be answered.

Respondent makes a strong case supporting his action in laying a tax under these sections, and maintaining his position under petitioner’s attack. But it is a case based upon circumstantial evidence. He points out that in the beginning, Cecil deMille, his wife and their associates, had little with which to do business beyond the intelligence, professional skill, and reputation of deMille as a director of motion pictures. He argues that the initial earnings of the partnership which preceded this company, and since then, the greater part of the income both of the partnership and the . corporation were garnered because of Cecil’s personal earning power, based upon his recognized talents as a director.

Respondent points out further that the creation of the partnership distributed (so far as taxability was concerned) amongst several people the salary theretófore earned by, and taxable alone to deMille, and that Cecil’s taxes thus were reduced. (Of course, the partners weie taxed on their distributable shares of the firm’s earnings.) The formation of the partnership, he argues, marked the first step in carrying out a conceived avoidance scheme.

Continuing, he calls attention to the fact that the corporation, this petitioner, was organized, took over the assets and the business of- the partnership, not long after the Revenue Act of 1921 had freed corporate incomes from the war-time levies laid upon them, so that the share of profits on pictures accruing to this group under the contracts could be received by a corporation subject to a lower tax than that levied upon individual recipients. That result, he argues, proves that the company was formed for purposes of avoidance. And as proof that it was availed of for that purpose thereafter, respondent deems sufficient the fact that a large part of the company’s earnings were from year to year accumulated as investments in securities, in real estate, and in numerous varied enterprises, many of which had little or no relation to the motion picture business.

There is weight to respondent’s argument. The facts are that substantial earnings which, at least in the beginning, arose mainly from the personal talents and efforts of one man, were turned in to a firm; that later, a corporation was formed, and those earnings, together with assets previously bought with prior accumulations of them, were transferred from the firm to the company; that this corporation, although it distributed substantial amounts as salaries, along with some dividends, withheld from distribution to its shareholders, a large part of its income. And, of course, the shareholders have not paid .the surtaxes for which they would have been liable had they received as dividends the amounts so' withheld.

But the. taxes under these statutory provisions are not imposed because of effects; avoidance per se is not prohibited. It is the purpose, the intention motivating a course of conduct, which is made controlling by the very words of the statute. Unless the purpose was to prevent the imposition of surtaxes, the tax may not be imposed. Admittedly, circumstances may evidence a purpose, and circumstances such as we find here, without a further showing, justify the finding of the prohibited purpose at which these provisions are aimed.

However, there is a further showing in this case — one which cannot be disregarded, and which overweighs the evidence of purpose presented by the circumstances. DeMille, McCarthy, and, Fisher, all connected with the first organization, the partnership, all having to do with the formation of the corporation, all serving thereafter as directors of the company (McCarthy until 1924; Fisher until 1926) testified. Under oath, each flatly denied that the company was formed for the purpose of preventing the imposition of sur-, tax upon its shareholders; or that it was availed of, or accumulated its profits for that purpose. They denied that the matter of surtax avoidance by the shareholders was ever discussed, or that the possibility of such avoidance was ever a consideration in determining the disposition of the company’s earnings. These denials remain unshaken by cross-examination. Of course, such denials are not entirely controlling. Perhaps they are to be expected, for without them there would be no controversy.

But the proof here goes well beyond mere denial of prohibited intent. It shows affirmatively a plan necessitating the accumulation of earnings and the end to which they might ultimately be used. The witnesses testified fully as to the purpose for which the company was formed — to create an organization for the independent production of pictures — and as to their purpose in accumulating, rather than distributing its earnings, and building a surplus — to enable that organization to finance its own productions.

There is extensive evidence concerning the needs of the business, the necessity for a large surplus to meet the cost of its own productions in event of cancellation of the company’s contracts, and concerning the friction and disputes which' pointed to imminent cancellation, against which the only protection was that independence assured by an ample reserve. The testimony concerning the purpose for which the corporation was formed and the purpose for which its surplus was accumulated is corroborated by the minutes of the meetings of the directors of the company — the contemporaneous record reflecting the company’s activities and the reasons, therefor.

We are not ready to disregard this testimony or to say that the recorded thoughts of the company’s guiding heads, the writing of which was begun more than a decade ago, was artfully drawn for self-service against the future day of trial. Those denials of wrongful intent, those declarations of a purpose other than the avoidance of taxes in the building of a surplus, we believe, as against the evidence of circumstance from which might be drawn inferences to opposite effect.

Nor are we ready to say that the plans for the company and the purpose for which its surplus was accumulated were too far-fetched to be within the limits of reasonable business ambition. From the record it is apparent that the company, when producing under contracts for others, was beset with controversies and difficulties and frequently, if not constantly, endangered by the possibility of cancellation of its contracts. The desire and determination of the stockholders to advance the activities of their company from those of a producer under contracts, to those of an independent producer, financed sufficiently to insure the making and marketing of its own pictures, seem not unreasonable.

Whether the money necessary to the realization of that determination is raised upon loans, by sale of stock, or by conservation of earnings seems immaterial, so long as the last plan does not result in an accumulation of profits unreasonable to the needs of the business. In view of the evidence as to the costs of picture production, and as to the marketing hazards of the business which involve the risk that the talent and taste of the ju’oducer may not satisfy the public fancy, we cannot say that the surplus accumulated by this corporate petitioner was beyond that necessary to its ends. Consequently, for these reasons, we have made our finding, and hold that respondent erred in imposing upon petitioner the taxes provided by these sections of the statutes.

Because of divergence of facts — and each case involving this issue must bottom on its own facts — the prior decisions cited give little support to respondent’s determination. In some of the cases, the principal shareholders transferred to the corporations substantial amounts of income-producing properties, permitting the corporations thereafter to receive and accumulate those revenues, and thus immediately reducing their individual incomes and the taxes thereon. Not so here. Neither Cecil nor Constance deMille stripped themselves of assets. On the contrary, each owned substantial properties beyond their stock of petitioner, and each individually received the income therefrom.

In other cases, the controlling stockholders enjoyed the profits of the corporations by means of large loans to themselves, which they did not repay. Again, not so here. Constance deMille borrowed nothing from petitioner; Cecil ran a small open account which in 1927 was overpaid, and in addition borrowed on note. His initial indebtedness to the company was discharged by the transfer of real estate. In 1924, the company owed deMille a net amount of $40,000. In 1925, Cecil owed it $10,000. The largest loan made him was in 1926 — $90,000 at one time, and in the same year about $18,000 more. By the end of the next year he had repaid $48,000; in 1928 he repaid about $40,000 more, and in the next year petitioner owed him about $72,000.

We cannot but comment upon the attempt made by petitioner on brief to take much of our time with criticisms of the design and effect of the statutory provisions here involved. Such efforts are wasted. The laws are enacted by the Congress, not by us, and “ arguments as to expediency, or of economic mistake or wrong in taxation ” are here immaterial and have no place. Brushaber v. Union Pacific R. R. Co., 240 U. S. 1. Our sole duty is to see to it that the mandates of the statutes are followed in the cases brought to us for decision. As to petitioner’s contentions respecting the unconstitutionality of the statute, these heretofore have been decided adversely.

Since Cecil and Constance deMille agreed, prior to 1924, that compensation for her personal services should be her separate income, respondent erred in including in Cecil’s income for the years 1924 to 1927, inclusive, the salaries paid Constance by Productions. Howard C. Hickman, 27 B. T. A. 807; affd., 70 Fed. (2d) 985.

Reviewed by the Board.

Judgment will be entered under Rule 50.

McMahoN,

dissenting: It appears from the findings of fact that, from the organization of Cecil B. deMille Productions, Inc., through the years before us, deMille and his- associates adhered to the “ purpose, which they had pursued as partners, namely, to save the company’s earnings, to accumulate a fund sufficient so that the company might be able to produce its own pictures ”; that “ the usual method by which independent producers financed their pictures at that time ” was by “ borrowing money from distributors ”; that “ its personnel most of the time was carried on the payrolls of concerns with which this company made contracts ”; that “ it made no pictures except under contracts, and into the productions of such pictures it put no money of its own, the funds being supplied by the other parties to the contracts. Most of its picture profits were from productions personally directed by deMille, although some income came from about 30. pictures produced under his supervision ”; and that “ while the greater part of Productions’ income was its share of picture profits received under its contracts, it dealt actively in securities, both listed and unlisted, and in real estate. It acquired a number of business properties which it let; it bought a theatre or two; it purchased several ranch properties, some used for purposes of picture-making, others operated to some small extent for- farming or fruit-growing. It sought to invest and lay aside -all the money it could, and took interests in varied enterprises — -Arizona' cotton lands,, oil development, a construction company, and others — -some successful, and some not.”

There is no showing that the accumulation of “ the gains or profits ” in question here was within “ the reasonable needs of the business ” activities of the corporation, numerous and diverse, as actually engaged in during the years before us; most of those business activities, all but one or two at best, were not germane to the production by it of pictures for others under contracts; and none of the other activities were essential to such production. In construing and applying the statute we are concerned with “ the business ”, not a business, which was actually carried on; and in the last analysis the vital question here presented, in this respect, is as to whether its accumulation of “ gains or profits ” in order that it “ might be able to produce its own pictures ” in the future, which it had never done, instead of producing pictures for others under contract as it had always done, is within or “ beyond the reasonable needs of the business ” of the corporation as thus carried on. If it is beyond such “ reasonable needs ”, then the respondent made out a prima facie case under the same subsection of the statute which is applicable and there arises another question as to whether petitioner has overcome the prima facie case made out by respondent.

In my opinion, as to the petitioner, Cecil B. deMille Productions, Inc., the facts establish “ that the gains or profits ” were permitted “ to accumulate beyond the reasonable needs of the business ”, within the .meaning of section 220 of the Revenue Acts of 1924 and 1926, and section 104 of the Revenue Act of 1928, applicable here. The words “ the business ” as there used mean the business as actually carried on at the time in question. These words do not mean business which the corporation is authorized to do but has not done. They do not mean business which the corporation merely wishes to do or even contemplates doing at some future time. They do not mean wholly new business or a wholly new phase of an old business which has never •been ■ actually engaged in. They do not mean a tj^pe of business activity which has- never been engaged in by the corporation but which may or may not be engaged in at some future time so that an effort may be made to realize the personal ambition of a stockholder, however laudable, even though he be the moving spirit and genius of the corporation. They do not permit saving up money or accumulating surplus to be used at some future time in an effort to satisfy such ambition. The statute deals with the realities of “ the business ”, as actually carried on, not with the hopes or aspirations of its stockholders. Any other construction of the statute would be unreasonable and beyond the ordinary meaning of its language. In the instant proceeding it affirmatively appears that the surplus in question was not necessary and was not accumulated to enable the corporation to carry on its business as carried on in the years before us, but it was “ permitted to accumulate ” to enable the corporation to do something different from that which was done in the years in question. During those years it did not produce pictures; it rendered services, personal in character, to others who did produce pictures; and it desired, thereafter, to produce its own pictures, something quite different from merely rendering services to others who did produce pictures. This contemplated a departure from carrying on its business as it had been carried on in the years in question. Such accumulation is “ beyond the reasonable needs of the business ”■ within the meaning of the statute. Hence, we have here, under the same subsection of these statutes, “ prima facie evidence of a purpose to escape the surtax.”

In my view this prima facie case made by the respondent has not been overcome. I appreciate that there is a finding of fact that “Cecil B. deMille Productions, Inc., was not formed, nor, during, the years 1924 to 1929, inclusive, was it availed of for the purpose of preventing the imposition of surtaxes upon its shareholders through the medium of permitting its gains and profits to accumulate, instead of being divided or distributed ”; and that it is in effect stated in the opinion that the witnesses testified that the purpose in accumulating the earnings of the corporation and building a surplus was “ to enable that organization to finance its own productions ”; but the majority opinion, in effect, holds, and in my opinion erroneously, that its “ gains or profits ” were “ not permitted to accumulate beyond the reasonable needs of the business.” I am unable to conclude that such finding would have been made if the majority had proceeded upon the theory that the corporation’s “ gains or profits ” were “ permitted to accumulate beyond the reasonable needs of the business.” On the contrary, the inescapable inference to be drawn is that the error of the Board in this respect induced the conclusion, of fact which is reflected by the finding as made. Accepting the premise that the facts establish a prima facie case for the respondent, and taking into consideration the entire record, there is, in my opinion, no adequate basis for the majority’s finding or conclusion to the effect that the corporation, during the years 1924 to 1929, inclusive, was not availed of for the purpose of preventing the imposition- of the surtax upon “ its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed.” Subsection (a) and (b) of section 220, supra.

Respondent has not only made out a prima facie case'under the-statute, but there is other evidence, some of which is circumstantial, which tends strongly to support his determination in this respect. Circumstantial evidence is often more convincing than categorical denials of purpose made long after the events occur, and so it is here. The majority opinion states that “ of course, such denials are not entirely controlling. Perhaps they are to be expected, for without them there would be no controversy.” The majority opinion does point out at full value in considerable detail many of th.e strong elements of the proof which tends to support respondent’s contention. It is not necessary to impute perjury to any witness in reaching the conclusion which I have reached and I do not do so. To the extent that their denials are, in effect, conclusions of fact, which we must form from all of the proof bearing upon the subject of purpose, they are not binding upon us. There is other proof upon the subject which is inconsistent with such conclusions of' the witnesses. The only material result of consequence accomplished during the years before us by the accumulations in question is that each stockholder of the corporation has been enabled to “ escape the surtax ” in question; this result followed inevitably from what was done. It is elementary that intent, which is synonymous with purpose, is to be inferred from acts or conduct; and that it is presumed that the natural and necessary or probable consequences of acts, intentionally performed, are intended. It is apparent that the accumulations of surplus in question were accomplished with a high degree of intelligence on the part of those responsible for them. Of course, accumulations of surxjlus for a purpose which carried them “ beyond the reasonable needs of the business ”, such as we have here as pointed out herein, which is the very thing, in view of the statute, which establishes the prima facie case made out by the respondent, can not serve to overcome such prima facie case; they are “ prima facie evidence of a purpose to escape the surtax.”

As heretofore pointed out herein, there are findings that “ the usual method by which independent producers financed their pictures at that time ”, was by “ borrowing money from distributors ”; and that “ its personnel, most of the time was carried on the pay rolls of concerns with which this company made contracts.” There is no showing that either of these methods cannot be adopted when, as and if the corporation actually engages in producing its own ■pictures independently, instead of producing pictures for others. The corporation, with deMille dominating it as he did, was apparently quite resourceful in financing all of its activities without disturbing any of the surplus in question here.

In my opinion the prima facie case made out by the respondent, coupled with the proof which supports his contentions, has not been overcome by the proof which tends to support the contentions of the petitioners upon the subjects of the “ reasonable ” financial needs of “ the business ” of the corporation, or its purposes or those of its stockholders “ to escape the surtax ”; and, for the reasons herein set forth, I cannot agree with the majority in so far as they hold that any of the “ additional ” taxes in question herein, as specified in subsection (a) of section 220, sufra, applicable here, are not to be imposed.

Smith and Adams agree with this dissent.

       Sec. 220. (a) I£ any corporation, however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there shall be levied, collected, and paid for each taxable year upon the net income of such corporation a tax equal to 50 per centum of the amount thereof, which shall bo in addition to the tax imposed by section 230 of this title and shall (except as provided in subdivision (d) of this section) be computed, collected, and paid upon the same basis and in the same manner and subject to the same provisions of law, including penalties, as that tax.
      (b) The fact that any corporation is a mere holding or investment company, or that the gains or profits are permitted to accumulate beyond the reasonable needs of the business, shall be prima facie evidence of a purpose to escape the surtax.
      [Subdivisions (e) and (d) here omitted.]

        French Mortgage & Bond Co., 38 Fed. (2d) 841; United Business Corporation of America, 19 B. T. A. 809 ; affd., 62 Fed. (2d) 754 ; certiorari denied, 290 U. S. 635 ; Tway Coal Sales Co. v. United States, 3 Fed. Supp. 668 ; Williams Investment Co. v. United States, S Fed. Supp. 224 : Keck Investment Co., 29 B. T. A. 143; William C. deMille Productions, Inc., 30 B. T. A. 826 (on review; C. C. A., 9th Cir.).


author: Leeoii:

text:
    Lawrence Fox and C. L. Berkey, Executors of the Estate of Emilie C. Fox, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 66240.
    Promulgated January 31, 1935.

      Seymour Wells, G. P. A., Walter G. Moyle, Esq., and Stanley Suydam, Esq., for the petitioners.

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

Leeoii:

Respondent has determined a deficiency of $1,44T.14 in income taxes against petitioners’ decedent for the calendar year 1929. Petitioners ask redetermination of this deficiency and a finding of overpayment of such taxes.

The facts are found as formally included in the stipulation of record. In the settlement of the pending deficiency under the decision herein, effect will be given to the concession of error by respondent, and the adjustments appearing in the stipulation.

Briefly stated, the facts are that Joab Lawrence died testate in Salt Lake City, Utah, on September 28, 1888. By his last will and testament he devised and bequeathed to Sarah M. Lawrence, his wife, all his estate. On March 5, 1890, Sarah M. Lawrence, having theretofore married George E. McKibbin, died testate in Salt Lake County, Utah. In her last will and testament she provided as follows:

I direct my executors to set apart such sums of money as shall be necessary to produce the several sums respectively to be paid as provided during the time o£ such payment, and to hold the same for these purposes. I direct them also to apply the net rent, interest and income of the rest, residue and remainder of my estate, both real and personal, to tire use of my daughter, Emily 0. Fox, during the term of her natural life. Upon her death, I give, devise and bequeath unto her children, share and share alike and to the issue of deceased children taking their parents share, their heirs and assigns forever, all the rest, residue and remainder of my estate including the principal sums so set apart for the purpose of producing the annuities above stated, subject however to the payment of such annuities and to the retention of the principal sums until the annuities cease respectively.

On May 4,1892, the estate of Sarah M. Lawrence (McKibbin) was distributed. The remainder of her estate, after payment of the pecuniary legacies, was distributed to Moylan C. Fox, in trust for Emilie C. Fox during her life, and at her death, remainder over for her children, as stated.

Moylan C. Fox died in 1927, and on April 1,1927, W. W. Trimmer was duly appointed successor trustee by order of the Probáte Court of Salt Lake County, Utah, which order, inter alia, provided:

That he shall from time to time, upon her request, pay to * *■ * Emilie O. Fox individually as the life beneficiary of the trust property aforesaid, all of the net rents, interest, income, increase and profits of the trust property now on hand and hereafter accumulated or accruing, remaining after retaining sufficient thereof to cover the necessary costs and expenses of • executing his trusts pro tempore.

Early in 1929 W. W. Trimmer died, and by court order of the same court dated August 27, 1929, and containing a similar provision to that quoted from the order of April 1, 1927, C. L. Berkey was duly appointed as the successor trustee.

On April 26,1929, pursuant to the petition filed by W. W. Trimmer, trustee, the court ordered the trustee to sell a certain piece of real estate belonging to the trust. After ordering the trustee to pay out of the purchase price a certain commission for making the sale, the court ordered:

the balance of said purchase price, when received by said trustee in substitution for the trust property so sold and conveyed, to be added to the trust property and accounted for by said Trustee as part thereof * * *

and further ordered:

that said Trustee, in the administration of his trust, do invest and reinvest so much of said balance of purchase price as belongs to the corpus of the trust property in bonds similar to those heretofore authorized by order of this Court for investment of funds belonging to the trust estate.

Shortly after the court issued the order to sell the real estate referred to above, W. W. Trimmer, the trustee, died. After his death, on September 6, 1929, the report giving an account of his trust was rendered to the same probate court for the deceased trustee. Such report gave an account of the trust for the period April 1 to September 3, 1929, during which period the real estate in question was sold-

. The net income of the trust included a net profit on the sale of the real estate mentioned, amounting to $46,059.34, as follows:

Profit on sale_$47,578.34
Expenses connected witli sale_ 1, 519.00
Net profit_$46, 059. 34

This net income of the trust, so computed, was credited during the taxable year in question to the account of Emilie C. Fox, petitioners’ decedent, as beneficiary. This credit was shown on the report to the court last mentioned. This net income of the trust, so computed, and credited to the account of petitioners’ decedent, was in fact paid by the trustee to petitioners’ decedent in cash, partly in 1929 and partly in 1930.

On September 20, 1929, an order of the Probate Court of Salt Lake County, Utah, was made, settling the deceased trustee’s account included in the report filed as mentioned on September 6, 1929, and that account and report were in that order approved. The March 1, 1913, value of the Second East Street property which was sold in 1929 was $54,475. Depreciation allowable on improvements on said property from March 1, 1913, to December 31, 1928, was $527.50 and the excess of the amount received over the value on March 1,1913, less depreciation allowable was $9,533.50, computed as follows:

Total sale price_$65, 000.00
Less:
Commission---$1,475.00
Abstract_ 44.00
- 1, 519.00
Net amount received_ 63,481. 00
Deduct:
March 1, 1913, value of property- 54, 475. 00
Less depreciation allowable_^ 527.50
- 53, 947. 50
Profit_ 9, 533..50

This $9,533.50 was reported as capital gain in the income tax return of Emilie C. Fox, petitioners’ decedent, for the year 1929. Petitioners now contest the propriety of respondent’s action in including this amount in decedent’s taxable income for that year. That contest presents the single issue for our attention.

The applicable statutory provision is the Revenue Act of 1928, section Í62, which provides, inter alia'.

The net income of the estate or trust shall be computed in the same manner and on -the same basis as in the ease of an individual, except that—
* * * # * * • *
(b) There shall be allowed as an additional deduction in computing- the net income of the estate or trust the amount of the income of the estate or trust for its taxable year wliich is to be distributed currently by the fiduciary to the beneficiaries, * * * but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not.

Petitioners argue that this fund was not distributable to petitioners’ decedent, as life beneficiary, because it was corpus of the trust estate and not income. They call our attention to the rule holding that mere conversion of a part of the corpus of an estate from real estate to personalty does not change the character of the personalty from corpus to income. They then cite two New York cases, Stewart v. Phelps, 71 N. Y. App. Div. 91; affd., 173 N. Y. 621; and Matter of Roberts (Surrogate Court), 40 Misc. (N.Y.) 512.

Respondent admits the possible soundness of this position as to the will creating the trust. But, he argues, all the interested parties, and the state court in construing this will in the orders appointing the several successive trustees and authorizing the sale of the real estate, treated the questioned fund as income and, therefore, distributable. Cf. Molly Netcher Newbury, 26 B. T. A. 101, and cases there cited. The disputed fund was not only credited to the beneficiary, petitioners’ decedent, on the trustees’ accounts, but was actually received and returned for income tax purposes by that decedent beneficiary. Aside from these conflicting positions, we think there is a conclusive reason why respondent should be sustained here. Assuming, with petitioners, that the resolution of the primary issue already stated depends upon whether or not the funds upon which the present deficiency is premised were legally “ distributable ” to petitioners during the taxable year, we think, for income tax purposes, they bore such designation. In Freuler v. Helvering, 291 U. S. 35, the Supreme Court held that a beneficiary of a trust was not taxable upon amounts distributed to that beneficiary where such amounts were improperly so distributed and their return to the trust was ordered by the state court of proper jurisdiction. In that case the Court said:

We think the order of the state court was the order governing the distribution within the meaning of the Act.
Moreover, the decision of that court, until reversed or overruled, establishes the law of California respecting distribution of the trust estate. It is none the less a declaration of the law of the State because not based on a statute, or earlier decisions. The rights of the beneficiaries are property rights and the court has adjudicated them. What the law as announced by that court adjudges distributable is, we think, to be so considered in applying section 219 of the Act of 1921.

It is true that section 219 of the Revenue Act of 1921 was there involved, but section 162 of the 1928 Act, here applicable, is similar, certainly for present purposes. See Helvering v. Butterworth, 290 U. S. 365; Guitar Trust Estate, 25 B. T. A. 1213; affirmed on this point, 72 Fed. (2d) 544.

This record presents the converse factual situation from that appearing in the Freuler case. The presently applicable statutory pro vision, above quoted, permits the trustee to deduct from its taxable income and taxes to the beneficiary, income which “ is to be distributed currently * * * whether distributed to them or not.”

The Utah state court of proper jurisdiction specifically approved the present distribution to petitioners’ decedent. That order, so far as this record discloses, stands undisturbed. Upon authority of Freuler v. Helvering, supra, that court order conclusively determined that the presently involved distribution to petitioners’ decedent was so distributable during the pending taxable year, within the quoted and here controlling statutory provision. Accordingly, respondent is affirmed on this issue.

Decision will he entered under Rule 50.


author: Van Fossan:

text:
    Winter Holding Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 63144.
    Promulgated January 31, 1935.

      R. M. O’Hara, Esq., for the petitioner.

      F. M. Thompson, Jr., Esq., for the respondent.
   OPINION.

Van Fossan:

The respondent determined that the petitioner was a holding or investment company and not a dealer in real estate. Accordingly, he held that no loss was deductible on a property known as 32 Union Square when exchanged for other property, under section 112 (e) of the Revenue Act of 1928. He also disallowed as an expense the commission paid on the sale of 1035 Fifth Avenue and held that it should be used to reduce the amount of profit in computing the percentage of profit on the installment sale. As a consequence the respondent determined a deficiency of $10,245.98 for the taxable year ended November 30, 1929. The petitioner alleges error in both respects.

The determination of the question here involved turns primarily on whether the property was held for productive use or investment.

Benjamin Winter, president and organizer of petitioner, was personally very active in the real estate field. He was also president and in control of several other similar companies, all of which were used in various ways in connection with his real estate transactions. Selling agencies dealing with any properties held by Winter or any of his companies never distinguished among the several companies.

Petitioner is a corporation, formed in 1920 for the following purposes:

Tlie erection of all kinds of buildings, the purchase and sale of real estate, the renting and leasing-of all kinds of real estate, to act as real estate brokers and agents, that is, to purchase and sell real estate for others and to have charge of (he management and control of all kinds of real estate in the city of New York.

The petitioner never acted as a broker, never had a license as such, and never bought or sold property for others.

In 1920 the petitioner acquired title to an office building at 32 Union Square, New York. The property was immediately listed for sale with a number of brokers. It was exchanged on October 15,1929, for another property and the payment by petitioner of $275,000, consisting of $50,000 in cash and $225,000 in the form of a purchase money mortgage. In 1920 the petitioner also acquired 182 West 58th Street and immediately listed it for sale. A sale was made in 1930. No other properties were acquired from 1920 .until 1928, during which year jaetitioner bought three other properties, making sale of one of such properties in the same year. In the taxable year it acquired two additional properties and disposed of two properties, one disposed of was the Union Square property acquired in 1920, referred to above, and disposed-of by exchange, and the other, 1035 Fifth Avenue, acquired in 1928, disposed of by sale. No other pertinent facts as to the Fifth Avenue property were produced.

- The Union Square property was operated profitably until 1929 when, due to" a change in the trend of business, location, it became unprofitable. During all the time it was held by petitioner, the petitioner endeavored to keep the office space rented. The same policy was followed with all properties, whether office or apartment buildings. In this connection it incurred large management and operating expenses. The petitioner’s tax return for 1929 showed receipts from interest $15,411.28, rents $647,032.84, profit on sale of real estate $144,885.69, and other income $16-,313.22. Deductions were claimed as follows: Interest, $202,025.29; taxes, $112,089.54; bad debts, $4,650.04; depreciation, $39,010.79; salaries and wages, $113,623.54; expenses, $138,125.17. The petitioner made no claim for loss on exchange of the Union Square property in its return.

In determining whether a corporation is engaged in a particular business, though consideration should be given to the purposes for which the corporation was organized, it is more important to determine what is actually done in pursuance of or departure from its announced purposes. In this inquiry the regularity or persistence with which the asserted business purpose is pursued is important. If the transactions are infrequent, casual or isolated, the consequence of occasional convenience rather than the result of persistent endeavor, the corporation can scarcely be said to be engaged in the business in question. In other words, the test is pragmatic rather than theoretical. In this connection attention is attracted to the fact that from 1920 to 1928 the company was inactive in the matter of purchases and sales and to the further fact that in 1929 only two properties were disposed of.

The petitioning company was but one of several corporations controlled by Winter and used as occasion arose in connection with his real estate business. From the fact that Winter was in the real estate business, or was a dealer in real estate, it does not necessarily follow that all of his companies were likewise so engaged. Some may have been used to hold title, others to operate as income producers. Nor does it follow that since petitioner’s president was always ready to sell property held by it at a reasonable profit, and declared resale to be the controlling consideration, the 'corporation was engaged as a dealer in real estate.

In a case such as this, we must look to all the evidence, of which the declarations of interested parties are but a part. ' The day-today operations, the business actually consummated, the amount and character of income, the number and relative importance, in the entire picture, of particular transactions — all these and other factors — are to be weighed. The Union Square property was held for nine years, during which it was profitable. In 1929 it became unprofitable and was disposed of. It is difficult to escape the conclusion that the primary reason for .the sale was the desire to get rid of a property that had ceased to be profitable, a reason which arose only in 1929. Such a disposition does not, of itself, establish that the property was held primarily for sale.

After a careful weighing of all factors deemed pertinent, we are of the opinion the petitioner has not proved respondent to be in error in his conclusion that petitioner was a holding or investment company and not a dealer in real estate. The evidence convinces us tbat the Union Square property was held for investment and that on disposition in 1929 it came squarely within the provisions of section 112 (b) of the Revenue Act of 1928, forbidding the recognition of loss. See Loughborough Development Corporation, 29 B. T. A. 95, and cases there cited and George E. Hamilton, 30 B. T. A. 160.

At the hearing it was agreed by counsel that if the petitioner be held to be a dealer in real estate there is no deficiency; if petitioner be held not to be a dealer in real estate, the deficiency is correct as determined. As a consequence of this agreement no details as to the sale of the Fifth Avenue property were presented. The conclusion above reached disposes of this issue also.

Reviewed by the Board.

Decision will he entered for the respondent.

       SKC. 112. RECOGNITION OF GAIN OR LOSS.
      (a) Q-eneral rule. — upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.
      (b) Exchanges solely in kind.—
      (1) Property held for productive use or investment.- — No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale, nor stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment.
      *******
      (e) Loss from exchanges not solely in kind. — If an exchange would be within the provisions of subsection (b) (1) to (5), inclusive, of this section if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain or loss, but also of other property or money, then no loss from the exchange shall be recognized.


author: Seawell :

text:
    Frederic H. Brendle, Petitioner, v. Commissioner of Internal Revenue, Respondent. Nathan Benjamin, Petitioner, v. Commissioner of Internal Revenue, Respondent. Henry C. Hagen, Petitioner, v. Commissioner of Internal Revenue, Respondent. F. Sherman Chipman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 56394-56397, 66821-66824.
    Promulgated January 31, 1935.

      Lawrence P. Mattingly, Esq., and Harvey L. Rabhitt, Esq., for the petitioners.

      R. W. Wilson, Esq., and Arthur Garnduff, Esq., for the respondent.
   OPINION.

Seawell :

Section 22 (c) of the Revenue Act of 1928 provides:

(c) Inventories. — Whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.

Pursuant to this legislative grant of authority the Commissioner, with the approval of the Secretary of the Treasury, promulgated the following respecting the use of inventories by dealers in securities :

A dealer in securities, who in his books of account regularly inventories unsold securities on hand either—
(а) At cost;
(б) At cost or market, whichever is lower; or
(c) At market value,
may make his return upon the basis upon which his accounts are kept; provided that a description of the method employed shall be included in or attached to the return, that all the securities must be inventoried by the same method, and that such method must be adhered to in subsequent years, unless another be authorized by the Commissioner. For the purpose of this rule a dealer in securities is a merchant of securities, whether an individual, partnership, or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers; that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom. * * * [Art. 105, Regulations 74.]

The question presented for decision is the narrow one of whether the petitioners were dealers in securities within tho meaning of the, quoted regulations. The burden of proof is on the petitioners, which, as we said in Alfred E. Hamill, 30 B. T. A. 955, and reiterated in Albert Fried, 31 B. T. A. 638, is “ undoubtedly heavier than that of overthrowing a purely factual determination upon which the ultimate determination must stand.”

The petitioners, operating as brokers on the floor of the exchange, dealt in odd lots of an undisclosed number and kind of stocks, and bought and sold their specialties in round lots for other members of the exchange when the market quotation reached the bid or asking price specified in the order. The income derived by the petitioners from their services was not computed the same way in each of the capacities in which they did business. Due to this fact and other results produced by each class of dealing, the branches of the petitioner’s business will be considered separately. .

As odd lot dealers the petitioners were compelled to deal, and always dealt, at a figure from one eighth to one quarter of a point under or above the price fixed by the next sale of a round lot, depending upon whether they were buying or selling. This differential constituted the petitioners’ commission for handling or other charge for executing orders received from other brokers on the floor of the exchange. It was the same irrespective of the quotation for the stock being dealt in. To what extent the petitioners were able to match orders each day does not appear. They were compelled by the rules of the exchange to maintain a market, which requirement forced them into short and long positions at times, how often and to what extent as to each kind of stock they specialized in, the record does not disclose. If they anticipated a buying market or a rise in the market, they would buy in round lots to meet the expected demand. The record is silent as to how frequently such bujdng was done and nothing is contrary to the fact that the petitioners generally relied upon their ability to match orders. The purchase of round lots in expectation of a rise in the market, as distinguished from a purchase to create a stock of securities to take care of future buying orders in excess of selling orders, is not within the activities of á dealer. See Albert Fried, supra.

We think these facts demonstrate the difference between the petitioners and a dealer or merchant in securities. A merchant is under no compulsion to buy or sell his wares at any fixed price, irrespective of market conditions, or limit his dealings to certain individuals. Neither does the ordinary merchant have a monopoly in all of the commodities in which he deals. He' can advertise and take, other measures to promote sales. Such was not the case with the petitioners. They merely' remained at one place and took such orders as the market produced without effort on their part.

The other branch of the business of the petitioners was, according to the proof, limited to the purchase and sale, for other members of the exchange, of round lots of the stocks in which they specialized in odd lots, when the market advanced or declined to the figure fixed by the order received for execution. For this service the petitioners were paid 40 percent of the commission received by the broker placing the order. Obviously such methods of earning income did not require the purchase of stock for resale, or involve sales from stocks on hand. There was never any occasion for the petitioners to buy or sell for their own account for any purpose.

We are of the opinion, and so hold, that the petitioners have failed to establish error on the part of the respondent in refusing to classify them as dealers in securities within the meaning of the regulations. See James B. Lowell, 30 B. T. A. 1297, and Albert Fried, supra, in which the same conclusion was reached respecting specialists in stocks listed on the New York Stock Exchange.

• Reviewed by the Board.

Decision will be entered under Bule 50.

McMahoN dissents.


author: McMahon :

text:
    Edward T. Blair, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 42313, 63741.
    Promulgated January 31, 1935.

      G. F. Selfridge, Esq., and J. F. Dammann, Esq., for the petitioner.

      Bruce A. Low, Esq., for the respondent.
   OPINION.

McMahon :

The principal question presented is whether the amounts of $30,000, $48,500, $57,000, and $57,000 paid by the trustees of the William Blair trust to the four children of the petitioner in the respective years 1924,1925,1926, and 1929, under the assignments referred to in our findings of fact, constituted taxable income to the petitioner in those years. The respondent held that the full amount of the net income of the trust was taxable to the petitioner in each year, since, under the terms of the will of William Blair, the petitioner’s father, the petitioner was entitled to the same as it arose or accrued. It is the position of the respondent that the assignments do not relieve petitioner of his liability for the tax.

In Edward T. Blair, 18 B. T. A. 69, we were concerned with the tax liability of the same petitioner as is here involved for the year 1923 and had under consideration the three assignments made by the petitioner on April 2, 1923, to Lucy Blair Linn, Edith Blair, and Edward Seymour Blair. We there held that such assignments were valid and effected conveyances of the petitioner’s interest in the trust to the extent indicated in each assignment and that the income accruing to such portion assigned was not taxable to the petitioner.

In Commissioner v. Blair, 60 Fed. (2d) 340; certiorari denied, 288 U. S. 602, the United States Circuit Court of Appeals for the Seventh Circuit reversed the decision of this Board in Edward T. Blair, supra, its holding being based upon its conclusion that under the law of Illinois the testamentary trust in question was a spendthrift trust and hence the petitioner could not make a valid assignment of his interest in the income from the trust prior to the time it was received by him. The Circuit Court there stated in part:

The only question presented for our determination is whether the law will permit the trust income devised to respondent by his father’s will to be assigned by him prior to his actual receipt of it. If this question be answered in the affirmative, the ruling of the Board, is correct; if it be answered in the negative, respondent is properly chargeable with the taxes assessed, and the cause must be reversed.
The citizenship of respondent and testator, the location of the trust property, and the creation and administration of the trust all being in Illinois, we we required to be guided by the laws of that state in determining the question presented. Spindle, Assignee, v. Shreve, 111 U. S. 542, 4 S. Ct. 522, 28 L. Ed. 512.
* * * * * <1 *
* * * However, toe are concerned only with the law-as the Illinois courts have interpreted it, and whether that interpretation be right or wrong is beside the question. [Emphasis supplied.]

At the time the Circuit Court of Appeals rendered its opinion quoted above the courts of Illinois had not, so far as we know, construed tlie will of the petitioner’s father or passed upon the validity of the particular assignments in question. However, subsequent thereto, the Appellate Court of Illinois, First District, held that the testamentary trust was not a spendthrift trust and further held that all the assignments made by the petitioner were valid.

A somewhat similar situation was presented in Hubbell v. Helvervng, 70 Fed. (2d) 668, decided bj the United States Circuit Court of Appeals for the Eighth Circuit. There the question presented was whether amounts retained by trustees from the gross receipts of a trust estate for the years 1924, 1925, 1926, and 1928 to maintain a reserve for depreciation of trust assets and to offset the undepreciated cost of obsolete buildings constituted distributable and taxable income to the beneficiaries of the trust. That court, in a prior proceeding, involving the same question and taxpayer for the years 1922 and 1923, had held that the trust instrument did not require or provide for such depreciation and obsolescence charges and that the amounts set aside therefor were distributable and taxable to the beneficiaries. Hubbell v. Burnet, 46 Fed. (2d) 446, affirming F. C. Hubbell, 14 B. T. A. 1040; certiorari denied, 283 U. S. 840. However, after such prior decision of the Circuit Court of Appeals for the Eighth Circuit, a court of competent original jurisdiction of the -State of Iowa, the District Court of Polk County, announced a contrary construction of the trust, and thereafter the Eighth Circuit held that despite its own prior decision it was required, under the decision of the Supreme Court in Freuler v. Helvering, infra, to follow the holding of the state court. The Circuit Court of Appeals for the Eighth Circuit stated in part :

If it were open, to us in this case to- construe this trust agreement, we would see no reason to change the views and conclusions stated in the earlier case. Petitioner contends that we have no such freedom, but are bound to accept a contrary construction announced by the District Court of the state of Iowa in and for Polk County, entered July 10, 1931 (since our opinion in the above case). We think this contention ruled in favor of petitioner by the above case of John Freuler, Adm., v. Guy T. Helvering, Commissioner, decided by the Supreme Court, since submission of this case. In respondent’s brief in this case is the statement: “ This identical question is now before the Supreme Court in John Freuler, Administrator of the Estate of Louise P. V. Whitcome, v. Guy T. Helvering, * * * " We are not able to distinguish the two cases.

In Hubbell v. Helvering, supra, the Circuit Court of Appeals for the Eighth Circuit reversed the decision of the Board in F. C. Hubbell, 27 B. T. A. 814, upon this very issue. The Board’s decision was based upon the case of Commissioner v. Freuler, 62 Fed. (2d) 733, which was reversed by the Supreme Court in Freuler v. Helvering, infra, prior to this decision of the Circuit Court of Appeals for the Eighth Circuit.

In Freuler v. Helvering, 291 U. S. 35, the Supreme Court held that, in determining the amount of the income taxable to beneficiaries of a trust under the provisions of section 219 of the Revenue Act of 1921, the decision of a court of the State of California having jurisdiction of the trust in an action brought by the trustee for approval of his account is binding. While the Supreme Court held that the holding of the California court constituted an “ order governing the distribution ” of the income within the meaning of section 219 of the Revenue Act of 1921, it also held that it constituted an adjudication of the property rights of the beneficiaries which must be considered in determining the Federal income tax liability of the beneficiaries. The Supreme Court stated in part:

Moreover, tlie decision of that court, until reversed or overruled, establishes the law of California respecting distribution of the trust estate. It is none the less a declaration of the law of the state because not based on a statute, or earlier decisions. The rights of the beneficiaries are property rights and the court has adjudicated them. What the law as announced by that court adjudges distributable is, we think, to be so considered in applying section 219 of the Revenue Act of 1921.

It is well settled that the decision of a state court of competent jurisdiction upon property rights, as between the parties to the proceeding in the state court, is conclusive upon the Federal courts until it is reversed or overruled, Freuler v. Helvering, supra; Utterhart v. United States, 240 U. S. 598; Hubbell v. Helvering, supra; and Commissioner v. Field, 42 Fed. (2d) 820, affirming Marshall Field, 15 B. T. A. 718, and in accordance with the above authorities, which are here closely in point, we hold that the decree of the Superior Court of Cook County, Illinois, entered pursuant to the decision of the Appellate Court of Illinois, First District, adjudicating that the testamentary trust in question herein is not a spendthrift trust and that the assignments in question are valid, is binding upon us.

As in the case of Freuler v. Helvering, supra, there is no showing in the instant proceeding that the proceedings in the state courts were collusive or that the decision or decree of the state courts was entered by consent.

Our holding is not inconsistent with the holding of the Seventh Circuit in Commissioner v. Blair, supra, for the reason, as stated above, that the situation is different here, there having been a subsequent decision of the Appellate Court of Illinois construing the subject matter involved. Hubbell v. Helvering, supra.

Our attention has been called tO' the following provision of the statutes of Illinois:

Opinions. See. 17. All opinions or decisions of said court [Appellate Court] upon the final hearing of any cause, shall be reduced to writing by the court, briefly giving therein the reasons for such opinion or decision, and he filed in the cause in which rendered: Provided, that such opinion shall not be of binding authority in any cause or proceeding, other than in that in which they may he filed. (Cahill’s Revised Statutes of Illinois, 1933, Ch. 37, ¶ 49.) [Emphasis supplied.]

As we interpret this statute it means that any opinion or decision of an Appellate Court of Illinois shall not be binding as a precedent in any other proceeding, but it does not mean that it shall not be binding upon the parties to the particular proceeding. It expressly contemplates that such opinion or decision shall be binding on such parties. See Chapman v. Northern Trust Co., 296 Ill. 253; 129 N. E. 836, decided February 15, 1926. This Illinois statute has been in effect since as early as 1885.

In passing, we observe that, under the decision of the Illinois Appellate Court and resultant decree of the. Superior Court, the petitioner can never recover the amounts paid under the assignment in question and the trustees must continue to pay the assignees; and, as will be hereinafter qjointed out, the amounts paid were never income to the petitioner.

We have not overlooked the decision of the District Court for the Eastern District of Illinois in Hall v. Main, 34 Fed. (2d) 528, wherein it was stated by way of dictum that since the statutes of Illinois provide that the decisions of the Appellate Court shall not be accepted as binding precedents they can not be accepted by the Federal courts as determinative of the law of the state. Hall v. Main, supra, grew out of a bankruptcy proceeding and it was properly held by the United States District Court that the decision of an Appellate Court of Illinois with respect to the sale of some of the assets of the bankrupt was not binding upon the bankruptcy court, since the trustee in bankruptcy was not a party to that proceeding. Hall v. Main, supra, was affirmed by the United States Circuit Court of Appeals for the Seventh Circuit in Main v. Hall, 41 Fed. (2d) 715, and such was the reason given by the Circuit Court for holding that the Illinois Appellate Court decision did not affect the determination of the bankruptcy court. The Circuit Court pointed out that the bankruptcy court had jurisdiction to pass on the question decided by the Appellate Court. It may be added that the Board’s jurisdiction is limited here to redetermining the correct deficiency in tax and does not embrace the authority to try or decide upon the title to property. This case is clearly distinguishable from tho instant proceedings.

We turn then to a consideration of the question of whether the petitioner, by the assignments in question, assigned future income or a present interest in property. This question was not passed upon by the Seventh Circuit in Commissioner v. Blair, supra. The court there specifically stated:

Inasmuch as we hold that respondent had no power to alienate the properly in controversy, it becomes unnecessary to decide whether the income attempted to be alienated is future income or a present interest in property.

In Edward T. Blair, supra, we held that the petitioner, by virtue of the three original assignments involved herein, assigned portions of his trust estate and held that the petitioner was not taxable upon the income accruing thereafter to the assignees. The remainder of the assignments involved in the instant proceedings are either merely supplemental to or substantially the same as those three. The Board has thus passed upon this very phase oí the question involved in the instant proceedings and we adhere to our holding therein that the assignments relieved the petitioner of tax liability upon the income accruing to the assignees under all of the assignments. As pointed out the Circuit Court of Appeals for the Seventh Circuit in Commissioner v. Blair, supra, did not pass upon- or reverse the Board on this phase of the question which was involved in Edward T. Blair, supra; it expressly left it open. The instant proceedings, in so far as this phase of our question is concerned, are quite similar to Marshall Field, supra, followed by the Board in Edward T. Blair, supra, and affirmed by the United States Circuit Court of Appeals for the Second Circuit in Commissioner v. Field, supra. The following cases, involving circumstances more or less similar, also sustain our conclusion herein in this respect. Eugene Siegel, Executor, 20 B. T. A. 563; petition to review dismissed by the United States Circuit Court of Appeals for the Sixth Circuit on October 6, 1931; Copland v. Commissioner, 41 Fed. (2d) 501; Rosenwald v. Commissioner, 33 Fed. (2d) 423; certiorari denied, 280 U. S. 599; Shellabarger v. Commissioner, 38 Fed. (2d) 566; Nelson v. Ferguson, 56 Fed. (2d) 121; certiorari denied, 286 U. S. 565; and Hall v. Burnet, 54 Fed. (2d) 443; certiorari denied, 285 U. S. 552.

It is contended by the petitioner that the respondent erred in computing the 1925 income of the trust distributable to the petitioner in not allowing to the trust a deduction in the amount of $11,619.46, being the total of the amounts paid in 1925 as commissions and legal fees in leasing certain properties belonging to the trust. It is alleged in the petition that the respondent allowed only $162.51 of this as a deduction in the year 1925. This action of the respondent was correct. It is well settled that such expenditures are capital expenditures, which are not deductible in their entirety in the year in which paid out but are deductible .pro rata over the term of the lease. Roby Realty Co., 19 B. T. A. 696; petition to review dismissed by the Eighth Circuit, 62 Fed. (2d) 1079; 950 Park Avenue Corporation, 20 B. T. A. 288; Mary C. Young, 20 B. T. A. 692; a fid., Young v. Commissioner, 60 Fed. (2d) 715; certiorari denied, 287 U. S. 652; and Bonwit Teller & Co., 17 B. T. A. 1019; affd., Bonwit Teller & Co. v. Commissioner, 53 Fed. (2d) 381; certiorari denied, 284 U. S. 690. The petitioner does not allege that the respondent failed to allow the proper deduction in this respect in the year 1926. The respondent’s determination in these respects as to the years 1925 and 1926 is approved. The petitioner does allege, however, that the respondent erred in failing to allow as a deduction from the amount distributable to him in 1929 frota the trust an amount of $762.57, being a part of the sum of $17,619.46 paid out by the trustees in 1925 as commissions and legal fees incident to the execution of the leases. From the record we can not determine that the respondent did not allow a proper deduction as to this in 1929. However, if such a proper deduction has not been allowed, adjustment will be made under Rule 50.

In computing the net income distributable to the petitioner from the trust in 1929 the respondent allowed as a deduction only a pro rata portion of the amount of $5,580 which was paid in that year as commissions to a real estate broker for the execution of a lease on property belonging to the trust. This the petitioner alleges was error. However, for the reason stated above, we sustain this holding of the respondent.

The parties have stipulated that of the amount of $10,000 paid by the trustees in 1929 upon the property at 608 South Michigan Avenue, the amount of $5,000 was for improvements to the building-having a probable useful life equal to the term of the 10-year lease, that such amount should be spread over the remaining period of the lease, and that the remaining $5,000 was payment for ordinary repairs to the building, which amount is deductible in 1929. Adjustment will be made accordingly under Bule 50.

Reviewed by the Board.

Decision, will be entered under Rule 50.

Sea well dissents.