author: MoRRis:

text:
    William B. Armstrong and Lawyers County Trust Company, Committee of the Property of William B. Armstrong, Incompetent, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 58603.
    Promulgated August 27, 1935.

      James L. Dohr, Esq., for the petitioners.

      George B. Sherriff, Esq., for the respondent.
   OPINION.

MoRRis:

The petitioner abandoned and expressly waived the matters complained of in (a) and (b), and (f) having been settled by stipulation of the parties, the remaining issues, (c), (d), and (e), present one major question for our determination, probably the sole question if we decide that question in favor of the petitioner, and that is whether or not the trust created by Armstrong under the indenture of May 31,1927, is revocable, as the respondent contends, and hence the grantor of the trust may at any time cause the distribution of the income thereof in the manner provided in section 219 of the Revenue Act of 1926 and similar sections (166 and 167) of the Revenue Act of 1928, or irrevocable, as the petitioner alleges and contends. Subsections (g) and (h) of section 219 of the Revenue Act of 1926 are as follows:

(g) Where the grantor of a trust has, at any time during the taxable year, either alone or in conjunction with any person not a beneficiary of the trust, the power to revest in himself title to any part of the corpus of the trust, then the income of such part of the trust for such taxable year shall be included in computing the net income of the grantor.
(h) Where any part of the income of a trust may, in the discretion of the grantor of the trust, either alone or in conjunction with any person not a beneficiary of the trust, be distributed to the grantor or be held or accumulated for future distribution to him, or where any part of the income of a trust is 01 may be applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in paragraph (10) of subdivision (a) of section 214), such part of the income of the trust shall be included in computing the net income of the grantor.

Both parties base their arguments upon section 23 of the New York Personal Property Law (McKinney, vol. 40 — Cahill, ch. 42), which provides as follows:

Upon the written consent of all the persons beneficially interested in a trust in personal property or any part thereof heretofore or hereafter created, the creator of such trust may revoke the same as to the whole or such part thereof, and thereupon the estate of the trustee shall cease in the whole or such part thereof.

The respondent’s argument is that the grantor is the only person “ beneficially interested ” within the meaning o,f section 23, supra, as interpreted by the courts of New York. He says:

* * * only those who take, under the trust agreement, a present vested interest which is descendible, devisable and alienable, as opposed to a mere expectancy or hope, and that while contingent beneficiaries may be persons “ beneficially interested ” under Section 23, the contingency must relate to time and not to person or class of persons who take.

Therefore, it is argued, the grantor had the sole power of revocation and termination of the trust estate in 1927 and 1928. Thus, he says, “the real question for determination is whether there was, during the years 1927 and 1928, any person other than petitioner who was beneficially interested, and whose consent to a revocation was therefore necessary.” He does not contend, as we grasp the significance of his argument, that there was “ any person not a beneficiary ” in conjunction with whom the grantor could have revested in himself the title to the trust corpus or the income therefrom. His contention strikes deeper at the very conception of the trust itself, it being, in effect, that the trust was declared for his benefit and subject to his sole domination and control.

While not essential to our conclusion, it should be said, at the outset, that the word “ beneficiary ” as used in section 219, supra, is all-inclusive and is not confined to “ vested ” interests, as distinguished from those that are “ contingent.” Bessie R. Jones, 27 B. T. A. 171; Iola Wise Stetson, 27 B. T. A. 173, and Smith v. Commissioner, 59 Fed. (2d) 56. In the latter case, the court, construing the word “ beneficiary ” as used in section 219, said:

Undoubtedly Congress could have drawn a line between beneficiaries bolding vested and contingent interests, or between those having contingent interests based on their respective degrees of remoteness, but it has done neither of these things. It is, therefore, far more reasonable to conclude that by the word “ beneficiary ” Congress intended to include persons or classes of persons designated, in the particular trust under consideration, entitled to take present or contingent interests thereunder.

A case strikingly similar, upon the facts, to the instant case — this the respondent concedes, but which he contends is contrary to the weight of authority in the State of New York — is Hammond v. Chemung Carnal Trust Co., 252 N. Y. S. 259, decided by the Supreme Court of New York July 23, 1931. In that case the plaintiff, Hammond, placed certain personalty with the defendant trust company, under a trust agreement providing for the payment of the income therefrom to him for life and of the principal upon his death “ to such persons as he should name in his will, and, if he should die intestate, to his next of kin.” ' Action having been brought to revoke the trust so created under the provisions of section 23, swpra, it was alleged and contended, as here, that there were no persons beneficially interested and therefore no written consent was necessary for the revocation of such trust. The court there alludes to the lack of harmony in the decisions handed down by the courts of New York since the enactment of section 23 in 1909, and refers, at the same time, to three groups of cases, most of which have been cited pro and con by the parties in this proceeding, (1) those where the grantor has reserved to himself the power to direct the disposition of the principal by his will with the remainder over to his next of kin — in which revocability without the consent of such next of kin was found—Stella v. New York Trust Co., 229 N. Y. S. 166; Cruger v. Union Trust Co. of New York, 160 N. Y. S. 480; Sperry v. Farmers' Loan & Trust Co., 139 N. Y. S. 192; and Goodwin v. Broadway Trust Co., 149 N. Y. S. 1033, though, the court pointed out, a contrary decision was reached in Crackanthorpe v. Sickles, 141 N. Y. S. 370; (2) where the grantor reserved no power to so will but provided that the remainder should go to his children or next of kin— in which irrevocability was found—Williams v. Sage, 167 N. Y. S. 179, Gage v. Irving Bank & Trust Co., 225 N. Y. S. 476; and (3) where the grantor reserved the right to use the principal if necessary with remainder, if any, to next of kin — in which revocability was found—Whittemore v. Equitable Trust Co., 147 N. Y. S. 1058, but, the latter of which was questioned in McKnight v. Bank of New York & Trust Co., 254 N. Y. 417; 173 N. E. 568. It then said:

Whatever uncertainty existed seems to have been clarified by the Court of Appeals in Henry Whittemore v. Equitable Trust Co. of New York, supra. The test there established is the intent of the settlor, the court saying: “ This is all a matter of intention * * *. To determine, therefore, whether the settlor of the trust * * * simply created a life interest and nothing more, reserving to himself the balance of the interest in the property, we looked' to his intention, as expressed in the instrument.” In that case, three settlors established a trust fund with two life beneficiaries. Each settlor provided: (1) That in the event of his death before the life beneficiaries, the trustee should pay his share of the principal as directed by his will; (2), that if he left no will, the trustee should pay it to the persons who would take under the statute of distributions, that is, to his next of kin; (3) he made no provision for paying the principal to his grantee or assignee; (4) he made full and formal disposition of the principal of the trust estate; (5) he reserved power of disposition “ only by will.” The settlors and the sole surviving life beneficiary consented to the revocation, but some of the settlors had children who were infants and could not consent. In the event of the death of a settlor before the life beneficiary, these children would take that settlor’s share in the principal, subject to the disposition of such share by such deceased settlor’s will. The interest of these children, in the words of the court, could not be “ conveyed away ” by the settlor in his lifetime, but “ could only be divested or cut off by a last will and testament. * * * That such an uncertain or variable interest of the next of kin is alienable. * * * ” The trust was held irrevocable.
In the present case, the settlor (plaintiff) provided for the payment of the income to himself as life beneficiary, and that upon his death the trustee should pay the principal (1) as directed by his will, and (2) if he left no will, the trustee should pay the principal to his next of kin, that is, those who would take under the statute of distributions (Decedent Estate Law, art. 3, §80 et seq.). (3) No provision was made for paying the principal .to any grantee or assignee of the settlor, in fact he expressly provided (though this provision is not controlling) that the trust was irrevocable, and expressly surrendered “all right and power to amend, modify or revoke” the trust during his lifetime. He not only expressed an intent that the agreement should be irrevocable, but he did that which was necessary in law to make it irrevocable, viz., he created beneficial interests in remainder which could be cut off only by his will. (4) He made a full and formal disposition of the principal; lie provided for every contingency, and in no event can there be any uncertainty upon his death as to who will take the principal. His daughter will take, if living, otherwise his other next of kin. (.5) He reserved only the power of disposition by will.
We think that his intention as expressed by the trust agreement was to entirely divest himself of any power or control over the principal except by his will, and that his next of kin are beneficially interested in the trust, and their consents, therefore, necessary to its revocation.
The Whittemore Case is distinguishable from the present case in only two respects; in that case, if any settlor survived the life beneficiaries, the principal reverted to the settlor. In this respect, the settlors in the WMttemore Case reserved more power and control than in the present case. In the present ease, the settlor is himself the life beneficiary, while in the WMttemore Case, parties other than the settlors were the life beneficiaries. We do not see that this is material. In the cases cited in the WMttemore Case the settlor was himself the life beneficiary. Crackanthorpe v. Sickles, supra, and Court v. Bankers Trust Co., supra.

The Henry Whittemore decision referred to in the foregoing quotation is Whittemore v. Equitable Trust Co. of New York, 250 N. Y. 298; 165 N. E. 454, handed down by the Court of Appeals of New York February 18, 1929, reversing the decision of the Appellate Division of the Supreme Court, 229 N. Y. S. 440. That case is relied upon by the petitioner and is designated by the parties as the “ Second Whittemore Case.”

It is the so-called “First Whittemore Case”, Whittemore v. Equitable Trust Co., 147 N. Y. S. 1058, handed down by the Appellate Division of the Supreme Court May 29, 1914, to which previous reference has been made, that the respondent relies upon. In that case the plaintiff, Whittemore, party of the first part, and the Yan Norden Trust Co., second party, executed a trust indenture by which the plaintiff transferred to that company certain securities, in trust, to pay the net income to the plaintiff, or for her use, for her lifetime, and to pay over to her, or for her use, such portion of the principal as in the opinion of the Trust Co. might be necessary for her support, in addition to the income and profits, and upon her death to distribute the principal of said fund among her next of kin. The deed of trust contained no express reservation of power of revocation. The defendant was the successor, by merger, of the Yan Norden Trust Co. The plaintiff attempted to revoke the trust, pursuant to section 23 of the Personal Property Laws of New York, by serving upon the defendant a formal notice in writing. The defendant declined to comply with the notice, resulting in this action. The submission was agreed upon, in which it was recited that “ £ the present next of kin of the plaintiff are ’ ” a brother and sister therein named. It was not contended there that the trust was “ irrevocable ” for the reason that it could not be determined until the death of the plaintiff who would be “ her next of kin ”, but it was contended that the consent of the brother and sister to the revocation was necessary, the theory being that the brother and sister “ now have a beneficial interest in the deed of trust ” and accordingly “ have a contingent interest in the remainder.” In giving judgment for the plaintiff, revoking the deed of trust and directing the delivery of the corpus, etc., the court said:

The determination of the question as to who are beneficially interested in a trust necessarily requires a construction of the deed of trust, and where the set-tlor of the trust and the trustee are the only parties thereto, the construction depends upon the intention of the settlor. It is quite evident, I think, that the plaintiff did not intend by this deed of trust to give those who will be her next of kin at the time of her death a present beneficial interest in the property. She merely intended to turn over the management of her securities to the trust company for her own benefit, and to relieve her of the responsibility of looking after them, collecting the income, selling when advisable, and reinvesting. She reserved to herself, with the consent of the trustee, the right to use the entire property if necessary. It is therefore manifest that her sole object in creating the trust was to provide for her own necessities and comfort during life. It is true the deed of trust contains the provision that the trustee shall upon her death distribute the principal of the trust fund then remaining among her next' of kin; but I think no particular significance is to be attached to that provision. It may have been thought that without some provision of the kind the trust company would take the remainder; and the provision, I think, was inserted merely as a direction to the trust company with respect to disposing of the property after her death, and she directed that it be distributed as the law provides for the distribution of the property of an intestate. Nor do I think any significance is to be attached to the fact that she did not direct that the trustee deliver it to her administrator. She probably had no intention of leaving debts, and supposed that her property could be distributed in this manner without other administration. There could be no purpose in directing the trustee to distribute it among her next of kin, rather than deliver it to her administrator, for if she left debts, property held under such a trust to the extent of her interest would be subject thereto (Personal Property Law, § 34-see, also, Schenck v. Barnes, 156 N. Y. 316, 50 N. E. 967, 41 L. R. A. 395), and I think she intended to retain an interest and had an interest in all of it.
[3] Moreover, a living person has no next of kin; and a- possible interest as an heir or one of the next of kin of a living person is not descendible, devisable or assignable, and therefore there is no one who has even a contingent interest in the property as the next of kin of the settlor of the trust. Robinson v. N. Y. Life Ins. & Trust Co. et al., 75 Misc. Rep. 361, 133, N. Y. Supp. 257; National Park Bank v. Billings, 144 App. Div. 536, at page 540, 129 N. Y. Supp. 846, affirmed 203 N. Y. 556, 96 N. E. 1122. See, also, Sperry v. Farmers’ Loan & Trust Co., 154 App. Div. 447, 139 N. Y. Supp. 192, and Hoskin v. L. I. Loan & Trust Co., 139 App. Div. 258, 123 N. Y. Supp. 994, affirmed 203 N. Y. 588, 96 N. E. 1116.

Hammond v. Chemung Canal Trust Co., supra, sets forth all of the material considerations and facts of the “ Second Whittemore Case ”, to obviate repetition here.

Our examination of all of the cases to which our attention has been directed, but which we need not discuss in detail, convinces us that the so-called “ Second Whittemore Case ” upon which the petitioner relies correctly interprets section 23 of the Personal Property Law of New York, and that the conclusion that the trust under consideration there was irrevocable should be adopted here. We believe there was a clear intention upon the part of the grantor to make an absolute disposition of his property in trust, he to receive its net income during his natural life and upon his death the corpus thereof to be paid to such person or persons as designated by his last will and testament, and in the default of the exercise of such appointment to pay such corpus in equal shares to his next of kin, being, of course, those who would take according to the statute of distributions of the State of New York. He reserved no power of revocation, expressly or otherwise. Therefore, the heirs at law were so “beneficially interested ” in this trust as to require their written consent thereunder before such trust, under section 23 of the Personal Property Law of New York, could be revoked. It follows, therefore, that the grantor did not have the absolute power of revocation as the respondent contends. See Corbett v. Bank of New York & Trust Co., 242 N. Y. S. 638; Cagliardi v. Bank of New York & Trust Co., 243 N. Y. S. 573; Meyer v. Bank of Manhattan Trust Co., 249 N. Y. S. 640; Berlenbach v. Chemical Bank & Trust Co., 256 N. Y. S. 563, in which “ intent ” was found lacking, thus distinguished from the “ Second Whittemore Case.” In re Brunswick’s Estate, 256 N. Y. S. 879 and others.

We are of the opinion that the trust in controversy was irrevocable and that the settlor could not “alone or in conjunction with any person not a beneficiary of' the trust ” effect a distribution of its corpus or any part of the income therefrom, other than as provided for in the indenture. •

Judgment will be entered under Rule 50.


source: Caselaw Access Project

author: Murdock:

license: Public Domain

text:
    Record Petroleum Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 50962.
    Promulgated August 27, 1935.

      Alger R. Syme, Esq., for the petitioner.

      Shelby S. Fmlkner, Esq., for the respondent.
   OPINION.

Murdock:

The Commissioner has proceeded upon the erroneous theory that the petitioner’s basis for gain or loss upon the sale of the properties involved herein is fixed by section 204 (a) (8) of the Revenue Act of 1924 at the same basis which the properties had in the hands of the transferors. That section only applies where property is acquired in connection with a transaction described in section 203 (b) (4). One of the requirements of the latter provision is that immediately after the exchange the transferors must be in control of the corporation and each must have received an amount of stock substantially in proportion to his interest in the property prior to the exchange. Here the latter requirement was not met. The Chisholm group, in order to induce Wallace to come in with them and thus assure themselves that later his greater experience would help the corporation, agreed, after much discussion, to give him and his associate Ryburn equal interests with each of the members of the Chisholm group. This was done despite the fact that the properties transferred to the corporation by Wallace and by Eyburn were much less valuable than the properties transferred by each member of the Chisholm group. Each took an interest in the corporation of 14.2 percent. Wallace’s interest in the properties was only 5.55 percent while that of each member of the Chisholm group was 17.72 percent. Consequently, the exception provided in section 203 (b) (4) does not apply, nor does the exception provided in section 204 (a) (8). Cf. Hillyer, Edwards, Fuller, Inc. v. United States, 52 Fed. (2d) 742. There is no contention that any other exception of section 204 (a) applies. Therefore the general rule of (a) applies and the petitioner’s basis is cost.

There is no dispute as to the cost. The corporation had no assets prior to the exchange. It paid for the properties in its stock. The cost of the properties was the value of the stock. The value of the stock is here measured by the stipulated value of the assets of the corporation. Swiss Oil Corporation, 32 B. T. A. 777.

Decision will be entered under Bule 50.


author: Artjndell :

text:
    August Buckhardt, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 76255.
    Promulgated August 29, 1935.

      Robert J. Deberle, Esq., for the petitioner.

      I. Graf, Esq., for the respondent.
   OPINION.

Artjndell :

The present proceeding arises on respondent’s determination of a deficiency of $3,276.02 in petitioner’s income tax for the year 1931. The principal issue is whether petitioner is entitled to the benefit of section 112 (f) of the Revenue Act of 1928 in computing taxable gain resulting from the involuntary conversion of his property. The facts were stipulated and we set them forth only in such detail as is necessary for a decision of the question presented.

On February 25, 1922, petitioner bought a farm of 5y2 acres with á frame residence on it in the County of Queens, New York, N. Y., paying $10,000 for it. The value of the house at this time was $4,000 and its rate of depreciation 4 percent per annum. On this property he carried on vegetable truck farming, he, his three sons, and his daughter doing the work. The three sons and daughter became of age, respectively, in 1923, 1925, 1927, and 1929. In 1922 and 1923 he installed an irrigation and sprinkler system at a cost of $1,000.

On July 2,1928, the city of New York condemned and took a strip of land covering 2% acres, running through the middle of petitioner’s farm, in order to open up a street. On March 26, 1931, petitioner received from the city $38,698.85, as an award under this condemnation, comprising $33,827.66 as principal and $4,871.19 as interest.

On receiving the award, petitioner paid each of his four children $1,000 in compromise of their claims for services on the farm. He also paid $1,197.20 as attorney fees and $260 to a surveyor, for services in the condemnation proceeding and, after deducting $441.65 for his own use, deposited the remaining $32,000 to his credit in savings banks.

In 1931 petitioner paid $2,681.53 to recover his residence from the condemned property taken by the city and move it on his own land. Because of the city’s work on the new street petitioner found it impossible to use his irrigation system or to farm the land as theretofore. He therefore spent the rest of 1931 and 1932 looking for a new farm. His counsel, who was connected with a mortgage company, helped him in this search, as did also a real estate broker and his own children.

Early in 1933 petitioner found a farm, of about 20 acres, suitable for his purpose of vegetable truck farming, near Hicksville, Long Island, and within 30 miles of his original farm. He acquired title to it on July 11, 1933, paying $12,000 therefor from his funds in the savings banks, and $119.22 for title search and $115 for counsel’s fees. About September 27, 1933, petitioner contracted for the modernization of the new farm house and in November of that year paid out for this purpose $3,365.25 from his savings bank funds. Petitioner in March 1934 installed, at a cost of $3,030 which was also withdrawn from his savings bank funds, an irrigation and sprinkler system on the new farm similar to that used on the old. Petitioner carries on the same type of farming on the new property as on the old.

In making his income tax return for the calendar year 1931 petitioner, on advice that the condemnation award received from New York City was not returnable, did not report any part of the $38,698.35 so received as part of his income.

Petitioner made no application to the Commissioner for permission to establish a replacement fund and received no permission to do sounder article 580 of Treasury Regulations 74,

In addition to the question concerning the application of section 112 (f) of the Revenue Act of 1928 to the gain, there is a question as to the computation of the amount of gain realized. The respondent concedes that the asserted deficiency is excessive, since no allowance was made in his computation for the cost of the property taken nor for expenses incurred in the condemnation proceedings. There is a difference of $4,305.14 between petitioner’s computation and respondent’s, the respondent’s being the higher. This difference results from (1) the manner of computation of gain on the house on the condemned property, and (2) the petitioner’s claim for a deduction of $4,000 paid to his children and the respondent’s failure to allow the deduction.

Petitioner uses as his basis for gain applicable to the house on the condemned property the depreciated cost in the amount of $2,986.67. The respondent allowed as a deduction from the principal of the award the amount of $2,681.53 paid by the petitioner to recover the house from the condemned portion of the land and move it to the land remaining to him. This difference results in $305.14 difference in the amount of gain. We think petitioner’s method the proper one. We take it that the city condemned and purchased petitioner’s house along with the land and the depreciated cost is the proper basis for determining gain or loss. The cost of repurchase from the city was a capital item and does not figure in gain or loss.

The amount of gain divided by petitioner among his four children in 1931 is claimed as a deduction from the amount of the condemnation award. We fail to see the connection between the two sums. We do think, however, that the $4,000 is allowable as an expense deduction from gross income for the taxable year. The three sons had come of age, respectively, in 1923, 1925, and 1927, and the daughter in 1929, and $1,000 to each for their services over those several years until 1931 does not appear excessive. Their assistance to petitioner on the farm after reaching their majority was no doubt material and payment for their services would constitute an ordinary and necessary expense of operating the petitioner’s farm.

Petitioner concedes that the interest of $4,871.19 on the principal of the award was income in 1931.

This brings us to the principal question of whether the net amount of the award for tax purposes, after these deductions and others set out in the stipulation and not disputed by respondent are made, may be further reduced under section 112 (f) of the act to the extent of that portion of the cash of the award which was reinvested by petitioner in another similar farm. The amount of this reinvestment is not in dispute.

In 1933 the petitioner bought a new farm at a cost of $12,000 and paid title fees and attorney fees of $234.22 in acquiring it. In the same year he paid $3,365.24 for remodeling the house on the new farm, which afterwards was similar to the house on the old farm. In 1934 he paid $3,030 for the installment of an irrigation and sprinkler system on the new farm. These amounts aggregate $18,629.47 and are not disputed by respondent. Furthermore, the respondent concedes that this amount was “ expended in the acquisition of other property similar or related in service or use ” to the property taken under the condemnation proceedings, within the meaning of the statute. But he contends that the amount was not spent “ forthwith ” by the petitioner after the receipt of the award, within the meaning of the same provision.

The award was made on March 26, 1931. The statute requires in the first place that the money received on the conversion-shall be expended in the acquisition of similar property “ in good faith.” No suggestion is made here that the petitioner did not withhold the return of the award money in good faith. He had received advice that money paid him by the city of New York was not taxable income, and, relying on that advice, as in the circumstances he might well do, he made no return of it in March 1932. He therefore made no application to the Commissioner under article 580 of the Treasury regulations for leave to establish a replacement fund. His intention to use the money for replacement, however, and his ultimate use of the money for that purpose are both abundantly clear. On receiving the award he deposited all that was not immediately necessary for settlement of claims against him in savings banks in New York City. The facts state unequivocally that in buying his new farm, and in paying for the improvements on the house and for the installation of the new irrigation system, petitioner used money withdrawn from his savings bank funds. The money used for the new property is thus unmistakably earmarked. Cf. Wilmore Steamship Co. v. Commissioner, 78 Fed. (2d) 667. And the good faith of petitioner in carrying out his original intention is amply demonstrated by the fact that he had already reinvested the disputed amounts in new property prior to March 2, 1934, when, according to respondent’s brief, the knowledge of petitioner’s receipt of the award first came to the respondent’s ears. In these circumstances, we can not listen to any suggestion that the conversion was pretended to avoid income tax.

The only question, then, is whether petitioner may avail himself of the benefit of the statute. To do so, he must show that he acted with due diligence in the circumstances. The statute uses the word “ forthwith ”, a word by judicial definition and decision much broader than the word “ immediately ”, used as an equivalent in respondent’s regulations. Bouvier thus defines the adverb “ forthwith”: “As soon as by reasonable exertion confined to the object it may be accomplished.” This definition received the Supreme Court’s approval in Dickerman v. Northern Trust Co., 176 U. S. 181.

About the time of the award the city broke ground and began to build a new street, which was 18 feet in elevation above the surrounding farm and made useless petitioner’s irrigation system and prevented his raising a vegetable crop. He spent the balance of 1931 and all of 1932 looking for a new farm which would be suitable for the purpose of raising vegetables and within 60 miles of New York City, his market. Petitioner was in touch with a mortgage corporation which had large interests in Long Island and with a real estate firm. He examined many farms called to his notice by these firms, and by his four children. But potatoes had been grown on most of the farms which he examined and this fact, in his opinion, rendered the soil unsuitable for his purposes. It was not until early in 1933 that he found a suitable farm of 20 acres near Hicksville, Long Island, which he bought on July 11 of the same year. The record shows beyond question that the petitioner exercised from the beginning due diligence in his search for a farm substantially like that which had been sold and suitable for the same purposes. He might reasonably have expected to find such a farm very soon, but at any rate his search was continuous and steady.

But the interval between the payment of the award and the reinvestment of the cash received therefrom was approximately two years. Was this too long for us to say that the award money was converted “ forthwith ” into like property? In the peculiar circumstances here present we are of the opinion that it was not.

In Paul Haberland, 25 B. T. A. 1370, the Alien Property Custodian seized and sold petitioner’s stock in a textile mill, paying- over to the petitioner the proceeds in October 1921. In November of that year the petitioner organized a corporation to manufacture materials relating to the textile industry. The corporation’s plant was completed in 1922 and it began operations on the first of November in that year. The petitioner invested substantial sums in the new corporation on its organization and continued to invest further sums through a period of nine years. It was apparent on the facts that a reasonable period of time must elapse after the sale of the old business and before the organization of the new. In such circumstances, we held that sums received from the forced sale of petitioner’s original mills and reinvested within 15 months of the involuntary conversion came within the meaning of the statute as constituting petitioner’s initial investment in the new business. The advances made after that date we thought too remote to come within the statute.

We think the present case may be brought within the same rule without wrenching the meaning of the statute. It is a relief provision which should be liberally construed. Washington Market Co., 25 B. T. A. 576. Cf. Wilmore Steamship Co. v. Commissioner, supra.

In view of our conclusion we think it unnecessary to discuss the alternative remedy offered by article 580 of Treasury Regulations 74, which requires the petitioner, if it is not practicable for him to make the replacement immediately, to obtain the Commissioner’s permission to create a replacement fund. Eastern Steamship Lines, Inc., 17 B. T. A. 787. But we agree with the respondent that the period for reinvestment allowable without the Commissioner’s consent, although necessarily indefinite in its duration and limited only by what in judicial discretion shall be deemed reasonable, should in each instance be closely scrutinized, so as to avoid jeopardizing the interests of the Government, while giving effect to a liberal interpretation of the remedial provision. We think the facts of the instant case will bear such an examination, with the result in petitioner’s favor.

We hold that petitioner is entitled to the benefit of section 112 (f) and his gain on the conversion should be computed accordingly.

Decision will be entered .wider Buie 50.

       Sec. 112. (i) Involuntary conversions. — If property (as a result of its destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation, or the threat or imminence thereof) is compulsorily or involuntarily converted into property similar or related in service or use to the property so converted, or into money which is forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, expended in the acquisition of other property similar or related in service or use to the property so converted, or in the acquisition of control of a corporation owning such other property, or in the establishment of a replacement fund, no gain or loss shall be recognized. If any part of the money is not so •expended, the gain, if any, shall be recognized, but in an amount not in excess of the money which is not so expended.


author: Black :

text:
    Thomas A. O’Donnell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 52987, 62979.
    Promulgated August 29, 1935.

      Thomas B. Dempsey, Esq., and A. Colder Maehay, Esq., for the petitioner.
    /. Graff, Esq., for the respondent.
   OPINION.

Black :

The respondent does not question the good faith of the parties, contending that it is merely a question of law as to which party is taxable upon the sums received. It is the contention of the respondent that the mere transfer or assignment of income to be acquired in the future without the transfer or assignment of the contract from which the right to the income arises is not sufficient to relieve the assignor (petitioner) from liability for income tax thereon.

On the other hand, the petitioner contends that the only beneficial interest arising under the contract after the sale of his interest in the San Gabriel Petroleum Co. properties was the right to receive one third of the net profits from the development and operation of those properties; that this right was a property right, which was assignable either with or without the contract itself; and that subsequent income therefrom was not taxable to the petitioner.

In the case of William Ernest Seatree, 25 B. T. A. 396, we said:

It is well settled that an assignment of income does not relieve the assignor of the tax thereon, but that if property or property rights are assigned the income subsequently arising therefrom is not taxable to the assignor, for the reason that the property no longer belongs to him and therefore the income from such property belongs, not to him, but to the new owner. [Citing cases.]

This is the general rule established by the decisions of this Board and the courts, but the difficulty arises in its application. Walter L. Ross, 30 B. T. A. 496. In the Seatree case, supra, the petitioner was entitled under articles of partnership to receive amounts equal to four shares of the firm’s profits for a period of three years after his retirement from the firm. He executed a written instrument under seal by which “ in consideration of the sum of one dollar, the receipt whereof is duly acknowledged and other good and valuable considerations ” he transferred and assigned to the Equitable Trust- Co. of New York, in trust for his two minor daughters, “ all my rights, title and interest in and to four undivided shares of the profits or income now due or which may hereafter become due and payable to me for three years ending June 30, 1924, under and by virtue of the partnership agreements.” On these facts we held that Seatree’s interest was in the nature of a capital asset; that the above quoted assignment transferred not merely future income, but a present property right; and that income subsequently arising therefrom was not taxable to the petitioner, William Ernest Seatree. Our decision was affirmed by the United States Court of Appeals for the District of Columbia, 72 Fed. (2d) 67.

So it is, we think, in the instant case. Looking to the testimony of petitioner, we find that it is replete with statements which show that it was his intention to give-to Mrs. O’Donnell not only the income itself, but also the right to receive the income, which right petitioner considered to be a valuable property.

Petitioner gave his wife the means of obtaining possession and control of the thing given in the only manner possible, by informing the California Petroleum Corporation that he had transferred the income accruing to him under said contract to his wife, and directing the company to make all future payments to her. The gift, having once been made, is irrevocable by the donor. Section 1148 of the Civil Code of California provides: “A gift, other than a gift in view of death, cannot be revoked by the giver.”

It is the well established rule that delivery of a gift can be made by the donor to a third person for the benefit of the donee, 22 A. L. B. 765, and cases therein cited. When the petitioner gave the company the letter informing it that all of petitioner’s rights were assigned to his wife and directed it to make all future pay-mente to Ms wife, he made a delivery of the corpus of the gift to her; he gave her the means of obtaining possession and control of the gift, and the gift was thereby completed. From the moment the company received that letter from the petitioner the petitioner could not direct the payment of such income to any person other than his wife; neither could he, by any legal action, compel the company to pay the income to him. Once the gift was completed, by enabling his wife to obtain possession and control of the right to receive the income, his dominion over the disposition of his former share of the profits terminated.

On this issue we hold for petitioner. Cf. Nelson v. Ferguson, 56 Fed. (2d) 121; Walter L. Ross, 30 B. T. A. 496; J. M. Kessler, 31 B. T. A. 849; Copland v. Commissioner, 41 Fed. (2d) 501; Lowery v. Helvering, 70 Fed. (2d) 713.

Whether petitioner is entitled to a depletion allowance against the amounts received by him in 1925 and 1926 under his contract with the Petroleum Midway Co. Ltd., depends upon whether he had an economic interest in the oil in place within the meaning of the decision of the Supreme Court in Palmer v. Bender, 287 U. S. 551. Petitioner relies upon this case in support of his claim for depletion.

As has been pointed out in our findings of fact, when petitioner sold his stock in the San Gabriel Petroleum Co. to the Petroleum Midway Co. Ltd., the consideration was that the San Gabriel Co. was to be dissolved and its oil properties were to be transferred to the Petroleum Midway Co. and operated by it, and petitioner was to receive one third of the profits from such operation. Also in our findings of fact we have found that all the payments here in question made to petitioner in 1925 and up to August 4, 1926, were made from profits derived from the production and sale of oil, gas, and other hydrocarbon substances produced from the properties formerly owned by the San Gabriel Co. In Signal Gasoline Corporation v. Commissioner, 66 Fed. (2d) 886, the court discussed the meaning and application of the Supreme Court’s decision in Palmer v. Bender, supra, and, among other things, said:

In that decision the court pointed out that the statute here involved permits a reasonable depletion allowance to be made “ in the ease of oil and gas wells * * * according to the peculiar conditions in each case”; that there is nothing in the statute or regulations to confine a depletion allowance to persons who are technical lessors; and that the concluding sentence of the section, to the effect that, in the case of leases, deductions shall be equitably apportioned between lessor and lessee, indicates that depletion deductions may be allowed in other cases. The court expressed the opinion that the language of the statute is broad enough to permit a depletion allowance in every case where a taxpayer had acquired, by investment, any interest in the oil in place, and acquires, by any form of legal relationship, income derived from the extraction of the oil, to which the taxpayer must look for a return of his capital. The court also stated that the right to a depletion allowance does not depend upon the retention of ownership or special form of legal interest in the mineral content of the land, but upon his right to share in the oil produced. In short, the court made it clear that the lessor, lessee, or any other person having or acquiring an interest in the oil in place or a right to share in the oil produced, has such an economic interest in the oil that he is entitled to a depletion allowance.
Accordingly, the right to a depletion allowance does not depend upon the nature or character of the legal estate retained or acquired by the parties to an original oil and gas lease or their successors, but depends entirely upon whether any such parties are entitled to share in the oil and gas produced from the properties. If any of such parties are entitled to a share of the oil and gas, he had the “ economic interest ” upon which the Supreme Court bases the right to a depletion allowance.

We think that petitioner, by virtue of his right to receive one third of the net profits from the oil produced from the San Gabriel properties, brings himself within the rules above announced and is entitled to the percentage depletion allowed by the applicable statute. On this issue we hold for petitioner. Cf. W. S. Green, 26 B. T. A. 1017; Chester Addison Jones, 31 B. T. A. 55; William Fleming, 31 B. T. A. 623.

Decision will be entered wider Rule 60.


author: TijeneR:

text:
    Fred L. Dickey, Kenneth McMullen Dickey and W. Laurence Dickey, Executors of the Estate of Walter S. Dickey, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 51643.
    Promulgated August 29, 1935.

      Mawrice H. Winger, Esq., for the petitioners.

      Shelby S. Faullcner, Esq., for the respondent.
   OPINION.

TijeneR:

The petitioners contend that the disposition by Dickey of the fixed assets and current assets and their acquisition by the W. S. Dickey Clay Manufacturing Co. were two separate transactions and that no gain or loss was realized in either case, on the ground that the exchange of fixed assets for capital stock falls within the provisions of section 203 (b) (4) of the Revenue Act of 1926. while the current assets were sold at cost.

The respondent argues that Dickey exchanged property for stock and cash, thereby bringing the transaction within the provisions of section 203 (d) (1) of that act, and, applying the provisions of that section, the gain, if any, is taxable to the extent of the cash received.

The petitioners’ theory, of the case completely ignores certain terms of the contracts entered into between Dickey and the banks, on the one hand, and Dickey and the company, on the other. The agreement of June 6, 1925, with the banks contemplated that the corporation to be organized would acquire “ assets of every nature ” relative to Dickey’s clay properties. It specified that current assets would always be maintained in a minimum amount of $1,000,000 and that the current assets would at least equal 200 percent of current liabilities. In the proposal of June 11, 1925, Dickey conditioned the transfer of his fixed assets for stock upon the company’s binding itself to purchase his current assets. In its acceptance the company specifically agreed to assume and perform all the obligations and conditions set up in the offer, and the agreements were carried out according to their terms.

Considering what was actually done, and not what the parties might have designed or proposed to do, United States v. Phellis, 257 U. S. 156, we must hold that the steps in this transaction were but parts of the whole whereby Dickey exchanged all his assets for cash and stock. Herman Adaskin, 8 B. T. A. 460, and W. A. Hoult, 23 B. T. A. 804, cited and relied on by petitioners, turn upon their own particular facts, which are different from those here existing. The exchange of property here was not solely for stock, but for stock and cash. The necessity for several related steps can not alter the ultimate results. Dickey’s intent, ascertained from a fair construction of his contracts, points to the related steps as parts of one transaction. First Seattle Dexter Horton National Bank et al., Executors, 27 B. T. A. 1242; affd., 77 Fed: (2d) 45. Section 203 (d) (1), supra, is accordingly applicable and the gain, if any, from the transaction is taxable to the extent of the cash received.

Section 202 (a) of the Revenue Act of 1926 provides that “ gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis provided in subdivision (a) or (b) of section 204 * * In this case there is no dispute as to the basis for determining the gain from the property so exchanged. It has been stipulated that the cost to Dickey of the fixed assets was $5,740,346.25, while the cost of the current assets was $2,428,944.48, or a total of $8,164,290.78. In section 202 (c) of the same act it is stated that “the amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received.” It is thus apparent that the amount realized by Dickey is the sum of the $2,423,944.48 in cash, the $2,000,000 liability which was assumed and paid by the W. S. Dickey Olay Manufacturing Co., and the fair market value of the capital stock received. The first two items-sire definite and fixed, leaving for determination the fair market value of the stock.

In valuing the stock of a closely owned corporation, no particular method of valuation or reasoning is controlling, but the value of stock in such cases must be arrived at by consideration of the facts and circumstances in each particular case. James Couzens, 11 B. T. A. 1040; George M. Wright, 19 B. T. A. 541; affd., 50 Fed. (2d) 727.

In this case there were no sales of stock on which a valuation might be based. The facts also show that the stock was never offered for sale and that no bids for it were received. The respondent has determined that the fair market value of the stock on the date received was $7,163,055.07, which amount was also its book value, which in turn was the net appraised value of the fixed assets as of December 31,1924, shown by the appraisal of the American Appraisal Co. dated May 4, 1925, with adjustments to June 30, 1925. The petitioners call attention to the fact that the amount shown by the appraisal referred to was not the fair market value of the assets in question, but was termed the sound value of the property to a going concern. It is also pointed out that the valuation of the plants and equipment was based on reproduction costs. Our attention is also called to the fact that the respondent’s valuation rests solely on the appraised value of the fixed assets without regard to other assets of the company or the increase from $2,000,000 to $4,500,000 in the indebtedness which constituted a first lien against those assets. It is also contended that the average earnings from the operation of the properties by Dickey for the 5-year period preceding their transfer to the W. S. Dickey Clay Manufacturing Co. will not support the value arrived at by the respondent. It is pointed out that a capitalization of average net earnings, after making allowance for an increase of the bonded indebtedness to $4,500,000, for a 2%-year period at 8 percent, would reflect a value of $6,330,083.88; that capitalization of average earnings for a 4-year period, subject to the same conditions and at the same rate, would reflect a value of $5,085,524.37; while a similar capitalization of the average net earnings for a 5-year period would reflect a value of $4,394,169.63, and if a capitalization rate of 10 percent for the 5-year period should be used, the value reflected would be $3,515,335.70. It is further suggested that these computations, indicating a value so much lower than that determined by the respondent, are based on average net earnings from operations, which utilized not only the fixed assets but the current assets as well.

Considering all of the facts presented, including the appraised value of the fixed assets, the cost of these assets to Dickey, the average net earnings from his operations for a period of five years prior to the organization of the W. S. Dickey Clay Manufacturing Co., the bonded indebtedness against the assets of the corporation, the restriction on the sale of Dickey’s stock, and the fact that there were no sales of stock or offers of or bids therefor, we are of the opinion that the value determined by the respondent is excessive and have found as a fact that the fair market value of the stock received by Dickey in connection with the transfer of his assets to the W. S. Dickey Clay Manufacturing Co. was $5,000,000.

Demisión will be entered under Bule 50.

       Sec. 203. (b) (4) No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.

       Sec. 203. (d)(1) I£ an exchange would be within the provisions of paragraph (1), (2), or (4) of subdivision (b) 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, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.


author: TURNER:

text:
    Grenada Bank, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 54900.
    Promulgated August 29, 1935.

      Nelson E. Taylor, Esq., for the petitioner.

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

TURNER:

A motion has been filed to amend the petition to conform to the proof offered at the hearing. The amendment proposed alleges that the principal amount embezzled in 1928 was $15,750, instead of $9,960, as originally alleged. The respondent has based the discussion in his brief on the figures shown in the proposed amendment and the motion to amend has been granted.

The petitioner contends, first, that the issue is one of bad debt deductible in full in the year 1928, and not a question of losses in the years in which the acts of embezzlement occurred. On the facts here this contention is resolved against the petitioner. A loss by embezzlement within the meaning of the statute and the regulations is not a bad debt, but is a loss sustained in the year of the embezzlement. First National Bank of Sharon v. Heiner, 66 Fed. (2d) 925; Gottlieb Realty Co., 28 B. T. A. 418; William S. Phillips, 24 B. T. A. 98; Peterson Linotyping Co., 10 B. T. A. 542; Parker Wire Goods Co., 8 B. T. A. 448. Some of the cases cited have been considered in the petitioner’s reply brief, in which care has been taken to point out that in the cases so cited there was no promise on the part of the embezzler to repay the amounts taken. In that respect, the facts in those cases are no different from the facts in this case. In several of the cases cited, the embezzler repaid some portions of the money taken, just as Leigh did here. It is alleged in the petition and suggested in the brief that Leigh did promise to repay. We have examined the record carefully and find no proof of any promise on Leigh’s part in that respect. It further appears that the petitioner at no time set up a charge on its books of any amount against Leigh personally. The petitioner’s cashier was specifically questioned on this point. On these facts this case is readily distinguishable from Douglas County Light & Water Co. v. Commissioner, 43 Fed. (2d) 904; and Ledger Co. v. United States, 37 Fed. (2d) 775. In each of those cases the taxpayer accepted the embezzler’s notes to cover the amounts embezzled and the notes were regularly entered on the taxpayer’s books of account. When it was determined that no further collection on the notes could be made, the unpaid amounts were charged off and the deductions claimed. Under those circumstances, the courts held that a deduction for bad debts was proper. The facts in this case are altogether different.

In arriving at the amount of the deduction in respect to these embezzlements, the petitioner seeks to include as a part thereof certain amounts paid as interest on the certificates of indebtedness which were utilized by Leigh in covering up his defalcations on the books of the company. The meré fact that Leigh failed to record the certificates of indebtedness on which the particular interest payments were made and this failure to so record the certificates served as the cloak to cover his defalcations for a time, can in no way change the interest payments on the petitioner’s obligations into losses or bad debts. The deduction of interest payments is governed by section 23 (b) of the Revenue Act of 1928, and the items paid as interest on the certificates here in question may not be included as a part of the losses sustained as a result of the embezzlements by Leigh.

The facts show that, beginning in 1927 and. continuing into 1928, Leigh embezzled various sums of money from the petitioner’s funds totaling $58,677.09. Of this amount, $42,927.09 was taken in 1927 and $15,750 in 1928. The facts further show that petitioner’s total recoveries amounted to $48,500, disclosing an actual loss to petitioner of $10,177.09. The petitioner takes the position that the income tax statute is silent with reference to the allocation of recoveries in such cases, and under those circumstances, by applying the law of Mississippi, the recoveries are to be applied as an offset against the amounts first embezzled, thereby making the total actual loss deductible in the year 1928.

In arriving at the loss deduction for 1928, the respondent has followed a ruling of long standing in the Bureau of Internal Revenue. In 1922, in such a case as this, the following ruling was made:

Held, that an amount ascertained to have been lost through embezzlement is allowable as a deduction from gross income for the year or years in which the funds were so converted, and that any sum recovered should be allocated to each year in which the funds were embezzled in the proportion that the sum so converted in a particular year boars to the total amount embezzled. The amount ascertained to have been lost is the amount embezzled, reduced by whatever sum has been recovered on account of the conversion or the reasonable value of the claim against the embezzler or his bondsmen at the time the conversion was discovered * * *. [I. T. 1470, published in Cumulative Bulletin 1-2, July-December, 1922, p. 60.]

Under section 234 (a) (4) of the Revenue Act of 1926 and section 23 (e) of the Revenue Act of 1928, losses sustained during a taxable year are deductible, but only to the extent that they are not compensated for by insurance or otherwise. The losses sustained by this petitioner were $42,927.09 in 1927 and $15,750 in 1928. The facts show that these losses were compensated for by recoveries to the extent of $48,500 and that the recoveries were made with reference to the total embezzlements for the two years and not with reference to specific items embezzled or the total items embezzled for either year. The apportionment of the recoveries in the manner shown discloses a loss deduction for the taxable year which is in direct proportion to the gross loss sustained in that year and, in our opinion, is the loss sustained during the year and not compensated for by insurance or otherwise, allowed by the statute as a deduction.

But even if the reasoning of the petitioner be adopted and it is said that the recoveries are properly applicable to the first amounts embezzled and we thereby conclude that the total loss not compensated by insurance or otherwise was sustained in 1928, we are still of the opinion that the action of the respondent in apportioning the net or actual loss between the two years is in keeping with provisions of the statute.

In section 214 (a) (6) of the Revenue Act of 1921 it was provided that losses such as we have here were to be deducted as of the taxable year in which sustained “unless, in order to clearly reflect income, tRe loss should, in the opinion of the Commissioner, be accounted for as of a different period.” In section 200 (d) of the Revenue Act of 1924, it was provided that “ the deductions and credits provided for in this title shall be taken for the taxable year in which paid or accrued, or paid or incurred * * * unless, in order to clearly reflect the income, the deductions or credits should be taken as of a different period.” With reference to this provision of the Revenue Act of 1924, the Committee on Ways and Means of the House of Representatives, in its report pointed out that the provision previously cited from the Revenue Act of 1921 had been omitted from the bill and the provision just quoted had been inserted for the purpose of extending that provision to all deductions and credits instead of leaving it as it was, applicable only to deductions in respect to losses. This same provision, which first appeared in the Revenue Act of 1924, under the explanation made by the Committee on Ways and Means, was continued in section 200 (d) of the Revenue Act of 1926 and section 43 of the Revenue Act of 1928. It is thus apparent that the statute authorizes the Commissioner to allocate the loss deduction between the years 1927 and 1928 if such action is necessary for a clear reflection of income.

It is our opinion that the respondent’s method of computing the loss deduction for 1928 in respect to Leigh’s defalcations is correct and proper, and is essential to a clear reflection of the petitioner’s income for that year.

Decision will be entered, wider Rule 50.


text:
    Lewis G. Carpenter, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 71617.
    Promulgated September 5, 1935.

      Archibald M. Johnson, Esq., and ArtTvwr B. Beohtold, O. P. A., for the petitioner.

      P. A. Sebastian, Esq., for the respondent.
   OPINION.

MoRRis:

This proceeding is for the redetermination of a deficiency in income tax of $655.43 for the calendar year 1930, presenting for consideration the sole question whether or not a loss of $148,355.65 is a “ net loss ” within the meaning of section 117 (a) of the Revenue Act of 1928 and may be brought forward and deducted in the computation of taxable net income for the calendar year 1930 under the facts and circumstances hereinafter set forth.

The petitioner, an individual, resident of San Francisco, California, was a general partner of the firm of Roberts, Carpenter & Co., members of the San Francisco Stock Exchange, engaged in the business of stock brokers and underwriters of stocks and other securities prior to the sale of his interest therein and his withdrawal therefrom on November 1, 1928. During the existence of the firm he was an active partner and not only his capital but his time and attention were devoted thereto.

Prior to the sale of his interest in the aforesaid partnership the petitioner, in August 1928, attempted to limit his liability therein by the formation of a limited partnership but, being denied the right to do so by the San Francisco Stock Exchange, he advised his attorney to sell his interest therein, whereby existing liabilities might be settled and, to that extent, relieve him. In other words, his withdrawal from the partnership was in order to save himself from further loss.

Accordingly, the petitioner disposed of his interest in the partnership on November 1, 1928, for $164,839.61, represented by individual notes of George D. Roberts and John L. Thomas, from whom he took assignments of their respective partnership interests as security for the notes, subject, however, to an agreement, enforced by the San Francisco Stock Exchange, that his claim against Roberts and Thomas should be subject to the claims of creditors.

Dissolution followed the aforesaid sale, as of November 1, 1928, and Roberts and Thomas immediately thereafter entered into a partnership with Howard G. Park and continued business under the same name as theretofore. All of the assets of the old partnership were transferred and its liabilities were assumed by the new partnership.

The loss which was allowed as a deduction from taxable net income for the year 1929, which is the basis of the present controversy, amounted to $148,355.65, computed as follows:

Cash contributed by petitioner to copartnership-$149, 740.88
1928 earnings not withdrawn irom business- 19, 068. 68
168,809.56
Deduct: 10% deduction which represents difference between previously agreed market value (90% of face value of notes received) at time of sale of partnership interest and allowed as deduction in 1928 in the determination of the loss resulting from sale of partnership interest November 1, 1928_ 16,483. 96
Total_ 152, 325. 60
Deduct: Loss on disposition of partnership interest determined upon the sale of said interest on November 1, 1928, and allowed as a deduction for the calendar year 1928 in arriving at the taxpayer’s net taxable income_ 3, 9691. 95
Loss allowed for the calendar year 1929 in arriving at the tax-
payer’s net taxable income_ 148,355. 65

After the sale of petitioner’s interest in Roberts, Carpenter & Co. he then engaged in the business of raising and selling polo ponies, under corporate form, of which business he is one of the principal stockholders. He is also a large stockholder and an active director in the American Radiator Co. He no longer engaged in the stock brokerage business after the sale of his interest therein.

In addition to the foregoing the parties have stipulated that, in the event the Board sustains the contention of the petitioner, the loss to be carried forward and allowed as a deduction in 1930 will be $53,863.10; that his net taxable income for the year 1930, excluding the loss of $53,863.10 in controversy, is $27,077.57; and that if he is sustained by the Board a loss will result and consequently no income tax will be due and payable for that year.

The parties have stipulated that a loss of $168,809.56 was suffered by the petitioner upon the sale of his interest in the partnership of Roberts, Carpenter & Co., $3,969.95 of which amount was allowed as a deduction in 1928 when the transaction was consummated and $148,355.65 ($164,839.61 minus 10 percent of the face value of the notes) in 1929 when the notes were ascertained to be worthless.

It is also stipulated that the only issue in this proceeding is whether the deduction allowed by the respondent in 1929 is a “ net loss ” within the meaning of section 111 (a) of the Revenue Act of 1928 — whether such loss was sustained in the operation of a trade or business.

Section 117 of the Revenue Act of 1928 provides in part as follows:

(a) Definition of “net loss." — As used in tliis section the term “net loss” means the excess of the deductions allowed by this title over the gross income, with the following exceptions and limitations:
(1) Non-business deductions. — Deductions otherwise allowed by law not attributable to the operation of a trade or business regularly carried on by the taxpayer shall be allowed only to the extent of the amount of the gross income not derived from such trade or business;
❖ * sH sfe * * *
(b) Net loss as a deduction. — If, for any taxable year it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be allowed as a deduction in computing the net income of the taxpayer for the succeeding taxable year (hereinafter in this section called “second year”), and if such net loss is in excess of such net income (computed without such deduction), the amount of such excess shall be allowed as a deduction in computing the net income for the next succeeding taxable year (hereinafter in this section called “third year”) ; the deduction in all cases to be made under regulations prescribed by the Commissioner with the approval of the Secretary.

The respondent’s position is that the petitioner, after leaving the partnership, was no longer engaged in the brokerage business, and therefore this loss was not sustained in the operation of a trade or business. In his view the loss must be attributable to the operation during the taxable year of a trade or business. This same contention was made in Edgar L. Marston, 18 B. T. A. 558; affd., Burnet v. Marston, 57 Fed. (2d) 611, in which the Board held that there is nothing in section 204 of the Revenue Act of 1921 which limits its application to a net loss resulting from the operation of a business within the year in which the loss was sustained, and that it is sufficient under the statute if the loss results from the operation of a business whether the taxpayer was so engaged during the particular year or not. As to the question here involved, the pertinent provision of the 1928 Act is similar to that of the 1921 Act. He further contends that the deduction for 1929 is for a bad debt ascertained to be worthless and charged off, and is not attributable to the operation of a trade or business regularly carried on by the taxpayer. The petitioner’s position is that the loss was attributable to the operation of a trade or business carried on by him during the prior taxable year.

An analysis of the facts leads us to the conclusion that the respondent’s determination is correct. The loss by the petitioner in the operation of his business was sustained in 1928 when he received notes aggregating $3,969.95 less than his capital contribution and the amount of his 1928 partnership profits. The notes were treated by the parties as property having a fair market value or as the equivalent of cash to the extent of 90 percent of their face value and the loss was allowed in 1928 on that basis. The subsequent loss on the notes was not attributable to the operation of a business regularly carried on by the petitioner, but was due to the failure of the purchasers to meet their obligations, either because of their unsuccessful operation of the business or for other personal financial reasons. Although the section in question is a relief provision and should be liberally construed, Burnet v. Marston, supra, that rule does not extend so far as to permit a deduction as a net loss of a loss sustained on property acquired in a transaction which may have given rise to a net loss.

Edgar L. Marston, supra, is clearly distinguishable upon the facts in that the loss there in question actually grew out of the operation of the business of the partnership.

Cf. Eli Strouse, 24 B. T. A. 748; affd., 59 Fed. (2d) 600.

Judgment will be entered for the respondent.


author: Aeundell:

text:
    John Milton, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 68344.
    Promulgated September 10, 1935.

      Thomas McNulty, Esq., for the petitioner.

      Harry F. Morton, Esq., and Fra/nle M. Thompson, Esq., for the respondent.
   OPINION.

Aeundell:

We confess to considerable difficulty in ascertaining what we are to decide in this case. The petition filed alleges three errors on the part of the respondent. The first deals with interest, the second with profit on the sale of securities, and the third with dividends. These alleged errors are denied and thereby the issues are framed. But neither side offered any evidence directly on these issues and they are not mentioned in the briefs.

In the facts alleged in the petition it is set forth that petitioner commenced the dissolution of the Margan corporation on or about December 28, 1929, but he is now advised and believes that the dissolution was not effective until some time in 1930. These facts are denied in respondent’s answer. By amended answer the respondent sets forth representations made by the petitioner concerning the dissolution of Margan and avers that the petitioner is now estopped from denying that Margan was in fact dissolved on December 28, 1929. To this petitioner replied, in substance, that the respondent’s agents had examined petitioner’s records prior to the running of the statute of limitations and that respondent was in possession of all the facts; that respondent did not rely on petitioner’s representations ; and that petitioner was under the erroneous belief that Margan was dissolved in 1929 until after October 8,1932.

The evidence was directed for the most part to the question of estoppel and that is the principal matter argued in the briefs. Counsel for the respondent questioned witnesses as to the cost to petitioner of the securities turned in to Margan and he argues that matter on brief. Clearly the pleadings frame no issue concerning petitioner’s cost. In view of the failure of the parties to offer evidence on the matters alleged in the petition to be erroneous, and their disregard of those matters in the briefs, we take it that those matters are abandoned. We will not decide them, but affirm the respondent’s determination in respect to them for lack of evidence to show error.

The question of estoppel is treated by both parties as the principal question at issue. In our view of the case, the facts are against the petitioner as to the time of liquidation, and we pass the question of estoppel for the time being.

The petitioner originally claimed that the Margan Co. was dissolved and completely liquidated within the year 1929. His claim in that respect was examined by respondent’s agents, was approved, and the tax liability of petitioner and the corporation settled on that basis. The respondent is now adhering to the facts so represented to him and further found to be true upon his investigation. The petitioner has the burden of showing the facts to be otherwise.

Margan filed its certificate of dissolution in 1929. Its stock was turned in in that year and canceled. Both petitioner and Margan reported dissolution and liquidation in that year. Thereafter Mar-gan kept no books and filed no tax returns, despite the requirement of the taxing statute that every corporation shall file a return. All of these facts, and petitioner’s subsequent representations in respect thereto, point to liquidation in 1929. None of these facts are now disputed by petitioner. Liquidation is a question of fact. W. E. Guild, 19 B. T. A. 1186. It has been repeatedly held that the nature of a distribution will not be determined by what it was called when made, but by the facts and circumstances in the case. In the Guild case, supra, we said:

Liquidation is not a technical status which can be assumed or discarded at will by a corporation by the adoption of a resolution by its stockholders, but an existing condition brought about by affirmative action, the normal and necessary result of which is the winding up of the corporate business.

See to the same effect, James P. Gossett, 22 B. T. A. 1279; affd., 59 Fed. (2d) 365; Fred T. Wood, 27 B. T. A. 162; Holmby Corporation, 28 B. T. A. 1092; Ward M. Canaday, Inc., 29 B. T. A. 355. If, as the cited cases hold, the ultimate fact is not to be determined solely on the basis of concurrent statements, much less is it to be decided on the subsequent self-serving statements of a stockholder.

In the face of the several facts indicating liquidation in 1929, petitioner maintains that it occurred in 1930, basing his claim on the facts that a bank held some of Morgan’s securities in the latter year as collateral for a loan and that a bank account was maintained in the name of Margan until in October 1930. But there is no showing that the securities held by the bank were not distributed to petitioner in 1929 subject to the loan. Most of the securities being in petitioner’s name, and petitioner being in control of Margan, that could readily be accomplished with very little formality. In fact, it appears more than likely that that is what occurred. It is stipulated that the securities pledged were either sold and the proceeds applied to the loan or were delivered to petitioner in 1930. There is no evidence of any formal distribution of any of the securities to petitioner in 1930 as would be the case if they were the property of the corporation.

The bank account, although maintained in the name of Margan, appears to have been used by the petitioner fully as much as by the corporation. There are numerous deposits from sources other than the securities held by the bank as collateral for Margan’s loans. Such other deposits were derived from securities which the evidence shows were held by Margan on December 28, 1929, and which presumably were received by petitioner in the liquidation in 1929.

Petitioner failed to bring in the minute book of the corporation, or to account for his failure, although counsel for the respondent specifically inquired concerning it. We may assume that it would show the steps authorized to be taken towards winding up the corporation, and what was actually distributed. No evidence was offered to show the actual condition of the corporation at the end of the year 1929. We accordingly hold that petitioner has failed to establish that Margan was not liquidated in 1929. Consequently his loss, if any, on liquidation was sustained in that year and not in 1930 as he now claims.

Having decided that in every practical sense the liquidation took place in 1929, it becomes unnecessary to pass on the question of estoppel. In a case of this character, however, it is not amiss to note the persuasive force of respondent’s argument that petitioner is estopped to deny that the liquidation took.place in 1929. The outstanding facts are that petitioner represented that liquidation occurred in 1929, that he persisted in that view until after the statute of limitations ran against the year 1929, that as a result thereof he obtained the benefit of a loss deduction and thereby escaped tax on income in excess of $170,000, and that he now seeks to change position and get the benefit of the same loss in 1930. Under similar circumstances the courts have held estoppel would apply. See Askin & Marine Co. v. Commissioner, 66 Fed. (2d) 776; Crane v. Commissioner, 68 Fed. (2d) 640; Edward G. Swartz, Inc. v. Commissioner, 69 Fed. (2d) 633.

Decision will be entered for the respondent.