author: Smith:

text:
    Appeal of J. S. Cullinan.
    Docket No. 5914.
    Promulgated January 5, 1927.
    1. The petitioner kept no itemized account of traveling expenses paid, but the amounts spent by him were in excess of the amounts repaid to him for traveling expenses. Held, that the petitioner derived no income from the repayments.
    2. The petitioner acquired land and platted it into twenty-four lots. He gave away one lot, kept three for himself and sold seventeen in 1919, one in 1920, one in 1921, and one in 1922, one-fifth of the sale price being received in cash and vendor’s lien notes being given for the balance. The Commissioner apportioned the total cost of the land and improvements to the twenty-four lots upon the basis of the assessed valuation of the lots and computed profits upon the sale of lots as being the difference between such allocated cost of each lot sold and the sale price. Held, that, in the absence of evidence as to a better method of determining the cost of each lot, the method used by the Commissioner is approved; held, further, that, in the absence of evidence that the cash value of the vendor’s lien notes was less than their face value, the Commissioner’s determination of profit is approved.

      John Walsh, Esq., for the petitioner.

      Ward Loveless, Esq., for the Commissioner.
    This is an appeal from the determination of deficiencies in income tax for the years 1919, 1920, and 1921, in the amounts of $79,364.67, $14,237.95, and $19,419.02, respectively, totaling $113,021.64. The petitioner alleges that the Commissioner erred (1) in adding to his taxable income for the years 1919, 1920, and 1921, $9,000, $12,000, and $12,000, respectively, representing reimbursements by certain corporations of certain business expenses incurred and paid by him while engaged in business matters for the interests of those corporations but of which expenditures the petitioner did not keep an itemized statement; and (2) in adding to his taxable income for the year 1919 the sum of $119,983.89, alleged by the Commissioner to represent profit on the sale of real estate during that year.
    FINDINGS OF FACT.
    The petitioner is a resident of Houston, Texi During the years 1919, 1920, and 1921, he was president of American Republics Corporation; from February 25, 1919, to February 24, 1920, president of Galena-Signal Oil Co.; and from February 24, 1920, to the end of the year 1921, chairman of the stockholders’ advisory committee of that company. He spent a large part of his time in performing executive duties for these companies. He received no salary. He made frequent trips from Houston to New York, lengthy stays in New York, and trips to other points, such as Washington, Franklin, Pa., and various other places. The corporation reimbursed him to the extent of $9,000 for the year 1919, and $12,000 for each of the years 1920 and 1921. The amounts of money which he spent on his trips were in excess of the amounts repaid. He attached to his returns a statement that he had received the repayments as reimbursements for expenses, but did not include the amounts as income or deduct the amounts from gross income as traveling expenses. The Commissioner has added the repayments to net income in determining the deficiencies.
    In the year 1916 the petitioner purchased 36.9 acres of unimproved land in or near Houston, Tex., and in the year 1919 he purchased two adjoining fractional blocks of unimproved land, all of which was included in and constituted the real estate contained in a certain real estate development designated as “ Shadyside,” designed and carried on by the petitioner during the years here involved. In pursuance of this design, certain improvement and development work was undertaken and was being carried on before and extended through to 1920. Such work included, among other things, landscaping, grading, construction of sewers, paving, sidewalks, street lights, and water mains and facilities. During the year 1919 the petitioner caused the land to be platted into twenty-four lots and into thoroughfares and spaces for utilities, etc. He conveyed to three trustees all of the property except the platted lots, the property so conveyed being for the use and benefit of owners of lots.

      During the year 1019 the petitioner “ granted, sold and conveyed ” seventeen of the lots to purchasers by written deeds in which there was' expressly retained by the petitioner a vendor’s lien. By the terms of such deeds the petitioner received in cash in the year 1919 one-fifth of the purchase price, the balance being represented in each instance by four promissory notes, bearing interest at the rate of 5 per centum per annum for equal principal amounts, maturing, respectively, in one, two, three, and four years after date. The seventeen lots were sold for a total consideration of $258,500. Lot J was conveyed to Craig Cullinan as a gift. Lots U, Y, and K were reserved by the petitioner, and on lot U he built a residence. The total cost of the house and lot improvements was $253,000. The three remaining lots were sold subsequently, one in 1920, one in 1921, and one in 1922.
    For the land the petitioner paid $135,030.05; the total cost of improvements was $93,353.79; and the total cost of land and improvements was $228,383.84 The Commissioner has computed a profit upon the sale of the lots in 1919 of $119,983.89, and has added this amount to net income of 1919 in determining the deficiency.
    The cost of the land and improvements composing Shadyside Addition and the sales of lots therein are shown in the following statement:

      Cost of land and improvements.

    Purchases:
    Land, Feb. 7, 1916_$119, 925. 00
    Land, Jul. 81, 1919_ 15, 000. 00
    Land, Nov. 29, 1919_ 105.05
    Improvements_ 93,353.79
    Total cost_ 228,383.84

      The petitioner’s books of account were kept on the cash receipts and disbursements basis.
   OPINION.

Smith:

In his income-tax returns for the years 1919, 1920, and 1921, the petitioner did not include as income $9,000, $12,000, and $12,000, respectively, representing a partial reimbursement for expenses paid by him in connection with his duties as chief executive of two large corporations. Neither did he deduct from gross income any amount for expenses paid in connection with his activities as chief executive of the corporations. During the years in question he was continually engaged in rendering services to the corporations which, together with their respective subsidiaries, had offices and places of business located in the States of New York, Delaware, Pennsylvania, Ohio, Texas, Louisiana, Arkansas, and Oklahoma; and had offices in various cities in those and other States throughout the country. The petitioner maintained offices in the cities of New York, and Houston, Tex. In the course of rendering such services the petitioner was required to travel extensively throughout the United States, and particularly between Houston, Tex., New York City, Washington, D. C., Chicago, Ill., and Franklin, Pa. He kept no detailed accounts of his expenses. We are convinced by the evidence, however, that the amounts spent by the petitioner for traveling expenses exceeded the amounts paid to him by the corporations and that the petitioner derived no income from the repayments, and it was error on the part of the Commissioner to add the amounts to the reported net income.

The second assignment of error stated in the petition reads as follows:

The Commissioner erred in adding to taxpayer’s taxable income for the year 1919 the sum of $119,983.89 alleged by the Commissioner to represent profit on' sale of real estate arising out of a closed and completed transaction, but which transaction in fact was still 'executory in 1919, and the profit or loss to arise therefrom was speculative, incapable of definite ascertainment, and not realized by the taxpayer. Further the taxpayer alleges that no profit arose out of such transactions and operations during the year 1919, such as was and is contemplated and warranted by law as a proper subject for taxation; that by reason of the peculiar nature of the transactions, taxable profit could exist thereon only if, as and when, cash receipts exceed cost paid on the project as a whole; and that the apportionment of costs made by the Commissioner was discriminatory and unwarranted by law.

It appears from the copy of the deficiency letter filed with the petition that it is the contention of the Commissioner that the amount of $119,983.89 is the correct profit returnable as income in 1919 from the sale of lots, “ for the reason that the cost of the lots was arrived at by taking the total amount assessed by the city and dividing that amount by the total cost obtaining the percentage of assessment of your cost and increasing each lot accordingly.”

The manner in which the petitioner’s books of account were kept is shown by the following excerpt from his deposition:

Q. Are they [boohs of account] on a basis of cash receipts and disbursements?
A. Yes.
Q. What plan have you followed with reference to accounting for any profits that might exist for purposes of income tax?
A. All expenditures have been charged, all receipts have been credited, and the balance has been r'eported as a profit in the annual return. I mean when the receipts had exceeded the total expenditures.
Q. Have you ever attempted to determine the total definite cost of any specific tract or part of the Shadyside property as subdivided — the home sites in that addition? The tracts sold, for instance, have you ever determined the cost of that particular tract sold in any case?
A. I have not and have denied the right of anybody else to do so.
Q. Is it possible to do so?
A. I am not prepared to say. I want that point very distinctly 'emphasized — I oppose the right of the Government or anyone else to make such allocation of value.
Q. Do you, or not, now own the title to lots U and V in Shadyside?
A. I do, and K as well.
Q. Which two of these lots are considered as a part of your homestead improvements?
A. I occupy by building lot U, and have enclosed under hedge lot V as well.

Considering first the question of the determination of the cost of each lot sold, it is to be noted that section 213 of the Bevenue Acts of 1918 and 1921 provide:

That for the purposes of this title (except as otherwise provided in section 233) the term “gross income”—
(a) Includes gains, profits, and income derived from * * * sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; * * * or gains or profits and income derived from any source whatever.

If we understand the contention of the petitioner correctly, it is that he derived no income from his investment in Shadyside until he had received in cash $228,383.84, the actual cost of the land and improvements thereto, and that he is liable to income tax only in respect of the excess of the amount received from sales of lots over that amount. This is without regard to the fact that he made a gift to an individual of lot «T, and retained for himself lots K, U, and V. Upon this reasoning, a person who purchased land for $1,000 and sold one-half of it for $1,000 obtained no profit from the transaction for the reason that he had not received anything in excess of the amount that he had paid for the land.

We think that the statute is not fairly susceptible of the construction placed upon it by the petitioner. If the petitioner sold a fractional part of the land purchased by him for more than the cost of the entire tract, including improvements, his actual gain or income was, in our opinion, more than the excess of the sale price of the part sold over the cost of the entire tract. The Commissioner’s regulations provide a method for determining the gain realized from the sale of a lot of land which is a part of a tract purchased for subdivision purposes. (Art. 43, Regulations 45 and Regulations 62.)

In this case the Commissioner has allocated the total cost of Shadyside Addition and improvements to the twenty-four lots carved out of the tract in accordance with the assessed value of the lots. The petitioner had advanced no method for determining the cost of the lots sold. In the absence of evidence as to a better allocation than that made by the Commissioner for the purpose of determining profit gained from the sale of the lots, the Commissioner’s allocation is approved.

The petitioner kept his books of account on a cash receipts and disbursements basis. In such books of account he has not shown as income of the tax years involved any profits computed upon the selling price of lots over the cost thereof, upon the ground that the cash received was not in excess of the cost thereof, and that the vendor’s lien notes were not to be regarded as having any cash value for income-tax purposes. In tax years subsequent to those invblved herein the petitioner has shown as income the amounts collected in cash over the total cost of the subdivision. The question presented is, therefore, whether the petitioner derived any income from the sale of lots in the years 1919, 1920, and 1921, in view of the fact that only one-fifth of the sales price was paid in cash and the balance was represented by promissory notes payable over a period of four years from the date of sale, the actual cash collections for the three years presumably aggregating less than the total cost of the tract and improvements.

Section 212 of the Revenue Act of 1918 provides in part:

(a) That in the case of an individual the terra “net income” means the gross income as defined in section 213, less the deductions allowed by section 214.
(b) The net income shall be computed * * * in accordance with the method of accounting regularly employed in keeping the hooks of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income. * * *

Section 213 of the Revenue Act of 1918 provides:

That for the purposes of this title (except as otherwise provided in section 233) the term “gross income”—
(a) Includes gains, profits and income * * * of whatever kind and in whatever form paid * * *,

Section 202 of the same Act provides:

(a) That for the purpose of ascertaining the gain derived or loss sustained from the sale or other disposition of property, real, personal, or mixed, the basis shall be—
* * * * * * *
(b) When property is exchanged for other property, the property received In exchange shall for the purpose of determining gain or loss be treated as the equivalent of cash to the amount of its fair market value, if any * * *.

The Commissioner has held that the petitioner’s books of account kept in the manner indicated above do not clearly reflect his income and we are of the opinion that such is the case. We can not doubt that if the lots in Shadyside had been sold for cash, the excess of the cash received over the cost of each lot would have constituted income. A part of the consideration received, however, was in the form of negotiable, interest-bearing promissory notes. The Commissioner has computed the deficiency upon the basis that the notes were the equivalent of cash to the extent of their face value. We have no evidence that they did not have such value. In Appeal of Aaron W. Wolfson, 1 B. T. A. 538, 541, we stated:

Tbe notes bere involved were unconditional and negotiable. That sueb notes are property needs no discussion. Negotiable promissory notes are generally regarded by all courts as property, especially those of a responsible and solvent maker. Citation of authorities on this point is unnecessary. It is admitted by taxpayer that the maker and indorsers of these notes were each responsible and solvent. We are clearly of the opinion from the facts that the notes amounting to $130,000 were received by taxpayer as part payment for his Interest in the partnership. The sale was a completed and closed transaction on September 20, 1919. This taxpayer completely and absolutely parted with every interest which he had in the partnership. There is no claim that the property (notes) received by taxpayer was not essentially different in character from the property parted with. The facts show there was an essential difference.
Since the statute specifically provides that property received in exchange for other property shall be regarded as the equivalent of cash to the extent of its fair market value, the Commissioner was correct in taking the notes into consideration in determining the gain or loss on the sale.

See also Appeals of S. B. Churchill, 1 B. T. A. 168; E. Alice James, 1 B. T. A. 548; Marchetti Roma Cafe Co., 2 B. T. A. 529; Sallie M. Wortham, 3 B. T. A. 1307.

We think that the above cited decisions are controlling in this case.

Since the hearing of this appeal the Revenue Act of 1926 has been enacted, which provides for the computation of tax liability in a case such as is here presented on the installment basis, such method of reporting being optional with the taxpayer. (Section 212(d) and section 1208.) The question as to the computation of tax liability upon an installment basis is not before us.

Judgment mil he entered on 15 dags’ notice, wader Bule, 50.


source: Caselaw Access Project

author: Millken:

license: Public Domain

text:
    J. R. Burns, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 12611.
    Promulgated January 8, 1927.

      M. A. Matlock, Esq., for the petitioner.

      J. Arthur Adams, Esq., for the respondent.
   Millken:

This proceeding results from the determination by respondent of a deficiency in income tax for the calendar year 1921 in the amount of $2,278.81. In the petition as filed two errors were assigned: (1) The failure of respondent to allow a proper fair market price or value as of March 1, 1918, for 520 acres of timberland sold in 1921; (2) the failure of respondent to make an adequate allowance for depreciation and obsolescence on property used in trade or business. At the hearing of this proceeding, counsel for the petitioner specifically waived the second assignment of error, leaving at issue only the March 1, 1913, value of 520 acres of land which were sold by the petitioner in the year 1921.

FINDINGS 03? FACT.

Petitioner is a resident of the State of Arkansas, domiciled at Stuttgart. In 1906 he purchased 520 acres of timberland situate 12 miles south of Eldorado, Ark., for $1,500, and sold the same in 1921 for $26,000. No part of the land purchased in 1906 was under cultivation, nor was any part of the same under cultivation on March 1, 1913. The land was purchased as timberland and the timber on the property was composed of 75 per cent pine, 10 per cent white oak, and the remaining 15 per cent mixed.

Petitioner bought and sold timberlands in the vicinity of Eldorado and had worked under contract with timber companies for the cutting and hauling of logs. During the period from 1906 to 1913, he made a careful forty-acre estimate of the amount of recoverable timber located on the land in question, and determined that the same contained not less than 5,000 feet per acre. Petitioner was offered $5 per thousand feet for the timber during the year 1912 or 1913, but declined the offer, believing his property to be more valuable. The fair market price or value of the land, apart from the timber, on March 1, 1913, did not exceed $1 per acre. The fair market price or value of the 520 acres of land and timber on March 1,1913, which petitioner sold in 1921, was $13,520.

Judgment wül be entered on 15 days'! notice, under Bule 50.


author: Arundell:

text:
    Appeal of Provident Trust Co. of Philadelphia and Charles Sinkler, Administrators, Estate of James K. Young.
    Docket No. 4976.
    Promulgated January 8, 1927.
    1. The common-law doctrine of estates by the entirety obtains in Pennsylvania, and as, under the common law, there was no transfer of such estate to the surviving spouse upon the death of the decedent, the value of such estate may not be included in the gross estate of the decedent.
    2. Ground rents being real estate, and title thereto being held by decedent and his wife as tenants by the entirety, the value of such rents may not be included in the gross estate.

      Charles Sinkler, Esq., for the petitioners.

      Johm. F. Greaney, Esq., for the Commissioner.
    This is an appeal from the determination of a deficiency in estate tax under the Revenue Act of 1921 in the amount of $1,244.43. The question involved is whether the value of ground rents and other real estate held by the decedent and his wife as tenants by the entirety, at the time of decedent’s death, may be included in the gross estate of decedent for estate-tax purposes.
    FINDINGS OF FACT.
    The petitioners are administrators of the estate of James K. Young, who died on August 28,1923.
    By deeds dated May 8, 1912, July 24, 1901, and September 16, 1903, the decedent and his wife acquired, as tenants by the entirety, premises numbered 220-222-224 South 16th Street, Philadelphia, Pa. On J une 19, 1923, they conveyed these premises to George W. Eyre, reserving a yearly ground rent of $6,000, title to which vested in the decedent and his wife as tenants by the entirety.
    By deed dated June 23, 1923, the decedent and his wife acquired, as tenants by the entirety, premises numbered 244 South 21st Street, Philadelphia.
    No part of the consideration for the above properties was furnished by the wife of the decedent.
    The Commissioner included in the gross estate of the decedent the value of the ground rents and the property at 244 South 21st Street.
   OPINION.

Arundell:

The only question involved is the right of the Commissioner to include in the gross estate of the decedent the value of property held by the decedent and his wife as tenants by the entirety. We have heretofore held in Appeals of Susie M. Root, 5 B. T. A. 696; George. R. Dyer, 5 B. T. A. 711; and James C. Murphy, 5 B. T. A. 952, that, in States where the doctrine of estates by the entirety obtains, in the case of the death of one spouse, there is no transfer of such estate to the survivor, and accordingly the Federal estate tax does not apply thereto.

The parties to the present appeal agree that title to the ground rent reserved by the conveyance of June 19, 1923, as well as the title to property taken by deed of June 23, 1923, vested in the decedent and his wife as tenants by the entirety.

The common-law doctrine of estates by the entirety is recognized in and applicable to property in Pennsylvania. By statute of January 28,1777, (Pa. St. 1920, sec. 42) the common law and statute laws of England, save for specified exceptions, were revived and placed in effect in the Commonwealth. In Beihl v. Martin, 236 Pa. 519; 84 Atl. 953, the court, referring to estafes by the entirety, says:

This estate is too well established and too well defined to be subject-to judicial impairment. Recognizing its very anomolous character, we have been careful, as all our cases show, to give effect to these peculiar incidents which naturally and logically attach, especially to its chief distinguishing incident, which exempts it from the ordinary legal process to which all other estates are subject. Fundamentally the estate rests on the legal unity of husband and wife. It is therefore a unit, not made up of divisible parts subsisting in different natural persons, but is an indivisible whole, vested in two persons actually distinct, yet to legal intendment one and the same. Each is seised of the whole estate from its inception, and upon the death of one, while the right of survivorship remains to the other, that other takes no new title or estate.

Later in the opinion in that case the court quotes from the leading case of Stuckey v. Keefe, 26 Pa. 397, as follows:

In the last case [that of a conveyance to husband and wife] although there are two natural persons, they are but one person in law, and upon the death of either the survivor takes no new estate. It is a mere change in the properties of the legal person holding, and not an alteration of the estate holden. The loss of an adjunct merely reduces the legal personage holding the estate to an individuality identical with the natural person. The whole estate continues in the survivor, the same as it would continue in a corporation after the death of one of the corporators. This has been the settled law for centuries. (Italics ours.)

Passing now to the subject of the ground rents involved, we find a disagreement between the parties as to when title to such rents vested in decedent and his wife. The petitioners contend that title to the ground rents reserved vested when the real estate was acquired, which was prior to the enactment of the Revenue Act of 1921. The Commissioner contends that the estate in the ground rents was created when the property was conveyed to Eyre in June, 1923. This contention is disposed of by the decision in Blount v. United States, 59 Ct. Cl. 328, and Appeal of Susie M. Root, 5 B. T. A. 696. In the former case the estate by the entii’eties was created prior to the enactment of the Revenue Act under which the tax was asserted, and in the latter case the estate was created subsequent to the enactment of the Act. In both cases it was held that the value of such estate could not properly be included in the gross estate of the deceased tenant.

The nature of a ground rent in Pennsylvania is considered in Wilson v. Iseminger, 185 U. S. 55, 59, where it is said:

It is defined to be a rent reserved to himself and his heirs by the grantor of land, out of the land itself. It is not granted like an annuity or rent charge, but is reserved out of a conveyance of the land in fee. It is a separate estate from the ownership of the ground, and is held to be real estate, with the usual characteristics of an estate in fee simple, descendible, devisable, alienable. Bosler v. Kuhn, 8 W. & S. 183, 185; Wallace v. Harmstad, 44 Penn. St. 492, 495; McQuigg v. Morton, 3 Wright, 31.

Other contentions advanced by the Commissioner as to the nature and measure of the Federal estate tax are the same as were made in the Appeal of Susie M. Root, supra. As our views of these contentions were fully set forth in that case, it is unnecessary to consider them here.

Our conclusions in this case, summarized, are, as titles to the ground rents and to the property taken by conveyance of June 23, 1923, were vested in the decedent and his wife as tenants by the entirety, there was no transfer of such estates to the wife upon the death of the decedent. Consequently, in so far as those estates are concerned, there was nothing to which the Federal estate tax could apply.

Judgment will he entered on 15 days' notice, under Bule 50.


author: Trussell:

text:
    Appeal of Mrs. W. A. Turner.
    Docket No. 4162.
    Promulgated January 8, 1927.
    Statute or limitations — Tbe petitioner’s husband, for each, of the years 1917, 1918, and 1919, made and filed joint returns for himself and his wife. Held, that the statute of limitations began to run against an assessment of a proposed deficiency against the wife on the day when such joint returns were filed. Appeal of Belle R. Weaver, 4 B. T. A. 15, followed.

      George S. AthinsOri, Esq., for the petitioner.

      B. P. Smith, Esq., for the Commissioner.
   Trussell:

On March 23, 1925, the Commissioner mailed to this petitioner a deficiency letter, asserting deficiencies in tax for the three years 1917, 1918, and 1919, aggregating $11,712.11, pins a penalty in the amount of $1,283.84, and referred to a preliminary letter dated January 21, 1925, in which these deficiencies were set forth and described as follows:

1917 deficiency in tax_ $174.17
191S deficiency in tax_ 6,419.22
1919 deficiency in tax_ 6, 402.58
Total_ 12, 995.95

In explaining part of such deficiencies, this last letter said:

Tour share of the joint income determined on community property basis is $80,466.86 subject to a tax of $5,185.38 and penalty of $1,283.84 for 1918.
* * * * * * *
Net income for 1919 has been computed as $40,209.49 subject to a tax of $6,402.56.

On May 11, 1925, the petitioner filed her appeal, alleging that she had no separate income during any of the years mentioned; that all the income of the marital community was produced by the business in which her husband was engaged; that he had made income-tax returns including all such income; and she further pleaded the statute of limitations as a complete defense against any proposed assessment.

In his answer the Commissioner admitted that the statute of limitations had run against the proposed deficiency for the year 1917, and alleged that the petitioner and her husband originally filed joint returns for the years 1917, 1918, and 1919, and that the husband later requested that the joint income be taxed equally to himself and his wife as community property and that the wife did not concur in this request.

BINDINGS or FACT.

During all the taxable years herein mentioned the petitioner was a married woman living with her husband and now resides at Dallas, Tex. During those years she had no separate income and no income other than her statutory interest in the gains, profits, and income arising from the businesses in which her husband was engaged. She filed no income-tax returns, separate from the joint returns made by her husband for each of said years. At no time did she sign any agreement consenting or requesting that the income received from the businesses carried on by her husband should be treated as community income and divided between her husband and herself for income-tax purposes.

The petitioner’s husband, W. A. Turner, was during the taxable years engaged in the business of oil well drilling contracting. For the year 1917 he made income and profits-tax returns on Forms 1040 and 1101, showing a net income in his contracting business of $7,080, subject to a tax, as computed in the return, of $139.20. These returns were filed with the collector of his district on March 31, 1918. For the year 1918 he made a return on Form 1040, showing a net income from his contracting business of $9,600, subject to a tax, as computed, of $600, and this return was filed with the collector of his district on March 27, 1919.

For the year 1919 he made an income-tax return on Form 1040-A, showing the net income from his contracting business and sales of property and oil leases in the amount of $3,891.95, and computed a tax thereon in the amount of $51.58. This return was filed in the office of the collector of his district on March 9, 1920.

Each of these returns was, and is, admitted by the Commissioner to have been a joint return of husband and wife. Thereafter, an examining agent making a field investigation reported finding that the said husband, W. A. Turner, had been interested in various transactions involving the purchase and sale of oil leases from which there had resulted considerable sums of gains and profits, and the Commissioner, on the basis of this investigation, asserted deficiencies in taxes which he allocated equally to husband and wife.

The five-year period within which assessments could have been made in respect to the joint return filed March 31, 1918, expired on March 31,1923. The five-year period within which assessments could have been made respecting the joint return filed March 27, 1919, expired on March 27, 1924. The five-year period within which assessments could have been made respecting the joint return filed March 9, 1920, expired on March 9, 1925. The deficiency letter of March 23, 1925, was mailed 13 days after the running of the statute of limitations respecting the last of the three years here under consideration. Appeal of Belle R. Weaver, 4 B. T. A. 15. There is no deficiency against this petitioner for any of those years.

Judgment will be entered for the 'petitioner in due course.


author: Milliken:

text:
    Mary L. Barton, Trustee under Will of Otis Barton, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 12934.
    Promulgated January 8, 1927.
    Where the entire income from property held in trust is distributed annually by the trustee to the beneficiaries of the trust pursuant to the discretion reposed in the trustee by the provisions of the trust instrument, held, that the income is distributed period!-eally within the meaning of section 219 (a) (4) of the Revenue Acts of 1918 and 1921, and the beneficiaries are liable for the tax on the amounts received.

      Lafayette R. Chamberlin, Esq., for the petitioner.

      A. George Bouchard, Esq., for the respondent.
    This proceeding results from the determination by respondent of deficiencies totaling $10,666.99 for the years 1920 to 1923, inclusive. The respondent determined the income of the trust was distributable at the petitioner’s discretion and was taxable to her as trustee, under the provisions of section 219 of the Revenue Acts of 1918 and 1921, as interpreted by him in article 342 of Regulations 45 and 62. The petitioner contends the income of the trust was taxable to the beneficiaries under section 219 (d), as income within the class specified in section 219 (a) (4) of the Revenue Acts of 1918 and 1921, and urges that the provisions of article 342 of Regulations 45 and 62 are inapplicable to the facts in this proceeding, or, if applicable, the article is not in accord with the statutory provisions it purports to interpret.
    FINDINGS OF FACT.
    Otis Barton, the father-in-law of the petitioner, died in 1913, leaving a will which was executed in 1904. The paragraph of the will material to this proceeding, reads:
    VIII. I give, bequeath and devise all the rest, residue and remainder of my estate, real, personal and mixed, wherever found and however described, to my said son, Frederick O. Barton, and his heirs.
    After the execution of this will, Frederick O. Barton died and Otis Barton executed a codicil in June, 1904, the pertinent part of which is as follows:
    VIL I direct that the rest, residue and remainder of my estate, given, bequeathed and devised to my son, Frederick O. Barton, and his heirs, and which will at my decease become the property of my grandchildren, Otis Barton, Jr., Francis Lowell Barton, Ellen Randolph Barton and Mary Lowell Barton, be held in trust for them by their mother, Mary L. Barton, until they reach the age of twenty-five years, and I direct said trustee to manage and improve said property, invest and reinvest the same, and pay over to them such part of the net interest and income thereof as in her discretion shall seem best.
    The will and codicil, together with another codicil not material here, were duly admitted to probate under the laws of New Hampshire and the estate committed to the named executor. The petitioner, the widow of Frederick O. Barton and the mother of the beneficiaries, was appointed trustee under the will of Otis Barton on or about April 9, 1913. In 1920 the ages of the grandchildren, beneficiaries under the will, were: Otis 19, Ellen 20, Mary 19, and Francis If. The assets placed in trust by the above-quoted paragraphs of the will and codicil were turned over to the petitioner as trustee during the year 1916. Thereafter, down to the date of hearing, the petitioner has paid over to the children all of the income that has annually accrued, or used it for their support, maintenance and education. During the years 1920 to 1923, inclusive, she distributed to the children or for their support, maintenance and education, all of the income that accrued during those respective years from the trust property. It was necessary for the petitioner during the years in question to distribute the entire income of the trust for the support, maintenance and education of the children. The same method of distribution which was followed by petitioner in 1920 to 1923, inclusive, had been followed by her in the previous years, 1916, 1917, 1918, and 1919.
    During 1922, Ellen, one of the beneficiaries, died, and petitioner, who as the mother of the deceased beneficiary was the sole heir, transferred the principal of the trust fund received by her as heir into the trust fund. Thereafter, down to the date of hearing, she continued to distribute the income from the trust fund to the remaining three beneficiaries.
    The petitioner reported the income from the trust fund on Form 1041, and the several beneficiaries returned their distributive shares of the income and paid the tax thereon. The respondent determined that the entire income of the trust was taxable to the fiduciary under article 342 of Regulations 46 and 62, issued certificates of over-assessment to the beneficiaries, and determined the deficiencies against the petitioner here under consideration.
   OPINION.

Milliken:

The question involved in this appeal relates to the proper interpretation and construction of section 219 of the Revenue Acts of 1918 and 1921, and whether article 342 of Regulations 46 and 62 is in conformity with the statutes of which it purports to be a fair and reasonable interpretation. Article 342 of Regulations 45 reads as follows:

Where, under the terms of the will or deed the trustee may in his discretion distribute the income or accumulate it, the income is taxed to the trustee, irrespective of the exercise of his discretion.

The pertinent part of article 342 of Regulations 62 is substantially similar.

This Board has considered article 342 in two previous cases, namely, Appeal of William E. Scripps, 1 B. T. A. 491, and Appeal of Brown & Ives, Trustees, 2 B. T. A. 936. The issues presented in those appeals were quite dissimilar. In the Brown <& Ives appeal, swpra, the trustees, in the exercise of their discretion, only distributed a portion of the income accruing. Accordingly, the question there was whether, in case of the actual exercise of discretionary power vested in the trustee and a partial distribution, the trustee should be taxed upon the income of the trust. Quite different facts entered into the Scripps appeal, supra. In the latter case there was a non-exercise of the discretionary power vested in the trustee and all of the trust income was in fact distributed, and we held that the income distributed was taxable to the beneficiary under section 219 (d) as income to be distributed within the meaning of section 219 (a) (4).

The material facts in the instant appeal are very similar to those involved in the Scripps appeal. In both cases all the income was distributed and had been so distributed over a considerable period of time. The reasons given in support of that decision are equally persuasive here. There may have been differences with respect to the extent of and the power to exercise the discretion reposing in the trustees in the two cases. However, to argue that such possible differences distinguish the two cases is to ignore the fundamental basis of the decision in the Scripps appeal. In that case the Board held that:

Whenever taxable income is to be determined, all tbe facts must be considered. It may be tbat some of tbe facts are creatures of tbe law * * * and are therefore not so readily apparent as physical or economic facts, * * * but all tbe facts of all kinds should be recognized and weighed. It is not sufficient to look only at tbe abstract legal facts or only at tbe more concreto and tangible facts. Hence we may not in applying tbe statute before us look only at tbe trust instrument and the - rights created thereby, and closing our eyes to what has happened in relation thereto, say whether the income in question is of one or the other class. The statute, it will be noted, wisely uses terms of actuality as the criteria of liability, and we must, therefore, look not alone to the bare language of the trust instrument but to the acts of the persons most interested in its correct enforcement.

In one of the closing paragraphs it was further held that:

* * * If discretion were to be thé test of liability of the trustee, Congress could easily have said so, as it did in the Revenue Act of 1924. “ We can not supply the omission in the earlier act * *

The respondent insists that the language used in section 219 (a) (4) “refers to income which is required to be distributed under the terms of the will or trust” It therefore is pertinent to examine the provisions of section 219 to determine if the contention is well founded and should prevail over the actualities of a given case as decided in the Scripps appeal. Section 219 (a) is identical under the two Acts and reads as follows:

Sec. 219. (a) That the tax imposed by sections 210 and 211 shall apply to the income of estates or of any kind of property held in trust, including—
(1) Income received by estates of deceased persons during the period of administration or settlement of the estate;
(2) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests;
(S) Income Reid for future distribution under the terms of the will or trust; and
(4) Income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals, and the income collected by a guardian of an infant to be held or distributed as the court may direct.

The additional subdivisions of section 219 of the Eevenue Act of 1918 are as follows:

(b) The fiduciary shall be responsible for making the return of income for the estate or trust for which he acts. The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212, except that there shall also be allowed as a deduction (in lieu of the deduction authorized by paragraph (11) of subdivision (a) of section 214) any part of the gross income which, pursuant to the terms of the will or deed creating the trust, is during the taxable year paid to or permanently set aside for the United States, any State, Territory, or any political subdivision thereof, or the District of Columbia, or any corporation organized and operated exclusively for religious, charitable, scientific, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual; and in cases under paragraph (4) of subdivision (a) of this section the fiduciary shall include in the return a statement of each beneficiary’s distributive share of such net income, whether or not distributed before the close of the taxable year for which the return is made.
(c) In cases under paragraph (1), (2), or (8) of subdivision (a) the tax shall be imposed upon the net income of the estate or trust and shall be paid by the fiduciary, except that in determining the net income of the estate of any deceased person during the period of administration or settlement there may be deducted the amount of any income properly paid or credited to any legatee, heir or other beneficiary. In such cases the estate or trust shall, for the purpose of the normal tax, be allowed the same credits as are allowed to single persons under section 216.
(d) In eases under paragraph (4) of subdivision (a), and in the case of any Income of an estate during the period of administration or settlement permitted by subdivision (c) to be deducted from the net income upon which tax is to be paid by the fiduciary, the tax shall not be paid by the fiduciary, but there shall be included in computing the net income of each beneficiary his distributive share, whether distributed or not, of the net income of the estate or trust for the taxable year, or, if his net income for such taxable year is computed upon the basis of a period different from that upon the basis of which the net income of the estate or trust is computed, then his distributive share of the net income of the estate or trust for any accounting period of such estate or trust ending within the fiscal or calendar year upon the basis of which such beneficiary’s net income is computed. In such cases the beneficiary shall, for the purpose of the normal tax, be allowed as credits in addition to the credits allowed to him under section 216, his proportionate share of such amounts specified in subdivisions (a) and (b) of section 216 as are received by the estate or trust.

TRe changes made in these subdivisions in the Eevenue Act of 1921 were made, professedly, in the interest of clarity. (Eeport of the Senate Committee on Finance.) The pertinent provisions, which remain essentially the same, are as follows:

(b) The fiduciary shall be responsible for making the return of income for the estate or trust for which he acts. The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212, except that (in lieu of the deduction authorized by paragraph (11) of subdivision (a) of section 214) there shall also be allowed as a deduction, without limitation, any part of the gross income which, pursuant to the terms of the will or deed creating the trust, is during the taxable year paid or permanently set aside for the purposes and in the manner specified in paragraph (11) of subdivision (a) of section 214. In cases in which there is any income of the class described in paragraph (4) of subdivision (a) of this section the fiduciary shall include in the return a statement of the income of the estate or trust which, pursuant to the instrument or order governing the distribution, is distributable to each beneficiary, whether or not distributed before the close of the taxable year for which the return is made.
(c) In eases under paragraphs (1), (2), or (3) of subdivision (a) or in any other case within subdivision (a) of this section except paragraph (4) thereof the tax shall bo imposed upon the net income of the estate or trust and shall be paid by the fiduciary, except that in determining the net income of the estate of any deceased person during the period of administration or settlement there may be deducted the amount of any income properly paid or credited to any legatee, heir, or other beneficiary. In such cases the estate or trust shall, for the purpose of the normal tax, be allowed the same credits as are allowed to single persons under section 216.
(d) In cases under paragraph (4) of subdivision (a), and in the case of any income of an estate during the period of administration or settlement permitted by subdivision (c) to be deducted from the net income upon which lax is to be paid by the fiduciary, the tax shall not be paid by the fiduciary, but there shall be included in computing the net income of each beneficiary that part of the income of the estate or trust for its taxable year which, pursuant to the instrument or order governing the distribution, is distributable to such beneficiary, whether distributed or not, or, if his taxable year is different from that of the estate or trust, then there shall be included in computing his net income his distributive share of the income of the estate or trust for its taxable year ending within the taxable year of the beneficiary. In such cases the beneficiary shall, for the purpose of the normal tax, be allowed as credits, in addition to the credits allowed to him under section 216, his proportionate share of such amounts specified in subdivisions (a) and (b) of section 216 as are received by the estate or trust.

Additional subdivisions added by the Revenue Act of 1921 are as follows:

(e) In the case of an estate or trust the income of which consists both of income of the class described in paragraph (4) of subdivision (a) of this section and other income, the net income of the estate or trust shall be computed and a return thereof made by the fiduciary in accordance with subdivision (b) and tho tax shall be imposed, and shall be paid by the fiduciary in accordance with subdivision (c), except that there shall be allowed as an additional deduction in computing the net income of the estate or trust that part of its income of the class described in paragraph (4) of subdivision (a) which, pursuant to the instrument or order governing the distribution, is distributable during its taxable year to the beneficiaries. In cases under this subdivision there shall be included, as provided in subdivision (d) of this section, in computing the net income of each beneficiary, that part of the income of the estate or trust which, pursuant to the instrument or order governing the distribution, is distributable during the taxable year to such beneficiary.
(f) A trust created by an employer as a part of a stock bonus or profit-sharing plan for the exclusive benefit of some or all of his employees, to which contributions are made by such employer, or employees, or both, for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, shall not be taxable under this section, but the amount actually distributed or made available to any distributee shall be taxable to him in the year in which so distributed or made available to the extent that it exceeds the amounts paid in by him. Such distributees shall for the purpose of the normal tax be allowed as credits that part of the amount so distributed or made available as represents the items specified in subdivisions (a) and (b) of section 216.

The purpose of Congress in enacting section 219 of the Revenue Acts of 1918 and 1921, as set forth in subdivision (a), was to tax the income of estates or of any kind of property held in trust. The all-inclusive term “ any kind of property held in trust ” clearly indicates that all such income was to be taxed, irrespective of the specific inclusions set forth in paragraphs (1) to (4) of that subdivision. If doubt should exist concerning the aforesaid proposition, the same is dispelled by the clause (underscored below) added to subdivision (c) of section 219 of the Revenue Act of 1921, to make the first part of that subdivision read as follows:

(c) In cases under paragraphs (1), (2), or (3) of subdivision (a) or in any other case withim subdivision (a) of this section except paragraph {4) thereof * * *.

It is also quite clear that the imposing clause contained in subdivision (a) provides that the tax shall be paid by the fiduciary unless otherwise provided. From the general imposing clause the statute turns to the specific classifications that are to be included within subdivision (a).

A variety of means are available to the trustor by which he may control the distribution or withholding of income from property placed by him in trust. The discretion of the fiduciary may be restricted or it may be absolute. Most certainly Congress had in mind the taxation problems incident to property held in trust. Whether Congress intended that the income resulting from property held in trust, as classified in paragraphs (1) to (4) of subdivision (a), should be considered in accordance with what is required by the terms of the trust instrument, as contended for by respondent, or in accordance with the actualities of the case, as held in the Serif ps appeal, supra, we can only determine by reference to the language used to express the legislative will.

A careful consideration of the provisions of section 219 leads away from rather than toward the position taken by the respondent. The intention of the statute is to let the tax be imposed in accordance with what actually transpired. Paragraph (1) of that subdivision, when read in connection with subdivisions (c) and (d), provides that, in determining the net income taxable to the estate, amounts properly paid or credited to any legatee, heir, or other beneficiary are deductible and are taxable to the latter. It matters not whether the payment or credit be pursuant to the terms of the law, an order of the court, or by the exercise of discretion by the personal representative who, it is generally recognized, may “ properly ” make such voluntary payments and is entitled to credit in his accounts therefor, so long as it does not exceed the recipient’s share or prejudice creditors. Here Congress was dealing with the class of income that might or might not be distributed. Though a distribution might be made at the discretion of the fiduciary, a deduction was expressly allowed in the event of a distribution. Paragraph (2) of subdivision (a) when read with subdivision (c), provides that where “ income [is] accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests * * * (c) * * * tax shall be * * * paid by the fiduciary.” This paragraph, dealing with what actually transpires, taxes income which is in fact accumulated. It says nothing about “ under the terms of a will or trust,” though the fact that such words were contained in the congressional vocabulary is evidenced by their use in the succeeding paragraph. Paragraph (3) treats of “ income held for future distribution under the terms of the will or trust.” It could hardly be contended under this paragraph that income actually distributed by a trustee, who had the discretion to distribute or hold for future distribution, was taxable to the trustee as income being “ held for future distribution.” Also, it is to be noted, in such a case, the terms of the will or trust would have been complied with, as the trustee had the discretionary power to so distribute. Thus, the intention again seems to be to let the tax be imposed in accordance with what actually occurred. Paragraph (4) reads in part: “ Income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals.” Had this paragraph read as follows: “ Income which is, or is to Toe, distributed to the beneficiaries periodically, whether or not at regular intervals,” it would not be open to doubt that, as in the case of the three preceding paragraphs, the tax would follow in accordance with what occurred. In subdivision (d) it is provided that in cases coming under paragraph (4) the beneficiaries shall include their distributive share of income “ whether distributed or not.” The question, therefore, arises whether the words “ is to be distributed,” appearing in paragraph (4), were not intended primarily to meet the situation of income distributable which had not actually been distributed. In any event, we do not think the words “ is to be distributed ” refer to the terms of the will or trust instrument. Had Congress so intended, it would, no doubt, have used the words “ the terms of the will or trust,” as it did in the preceding paragraph.

But grant for the moment that it does, and that it is discretionary with the fiduciary whether he will distribute, accumulate, or hold for future distribution, and suppose that he elects to distribute. In such a case is it not true that the income “ is to be distributed ” from the time he makes the election ? The word “ periodical ” means at stated or regular recurring intervals, but the statute itself changes the meaning by adding “ whether or not at regular intervals.” As so changed, its import presents latitude of thought and interpretation of no decisive result. By reason of the fact that in paragraphs (1), (2), and (3) the tax follows the income, though the destination of the income is determined by the exercise of discretion on the part of the fiduciary, we think much clearer and more explicit language would have to be found in paragraph (4) to justify a construction at variance with the principle applying to the income comprehended within any of the three preceding paragraphs.

Even were we to adopt the Commissioner’s interpretation that the statute refers to income which is “ required to be distributed under the terms of the will or trust,” it would not be conclusive against the petitioner. Since to her it did “ seem best ” to so distribute, she was required to do so by the terms of the will. Discretion such as is vested here must be honestly and intelligently exercised. If a court order required ” that she distribute the income, would that not be “ income required to be distributed under the' terms of the will or trust?” Is the situation changed by reason of a voluntary distribution being made without court order and being subsequently approved by a court order? In some particulars the facts in the case at bar resemble those under consideration in the case of Ordway v. Wilcutts, 12 Fed. (2d) 105, wherein it was held that income from a trust was taxable to the beneficiaries and not to the trustee under the Revenue Acts of 1918 and 1921.

We are of the opinion that, under the facts of this case, the income involved falls within the class of income specified in section 219 (a) (4) of the Revenue Acts of 1918 and 1921, which was intended to let the tax follow the income and making it taxable to the respective beneficiaries herein. Under our interpretation of section 219, it becomes unimportant further to consider the provisions of article 342 of Regulations 45 and 62. As was stated in the Scripps appeal, supra, article 342 “ can not serve to modify the statute so as to impose a tax upon the trustees which the statute itself does not impose.”

Judgment will be entered on 15 days' notice, wider Bule 60.


text:
    Pacific Novelty Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8162.
    Promulgated January 8, 1927.
    The amount by which a debt was reduced under the'terms of a composition agreement was a deductible loss in the year in which the agreement was made.

      Jamea 0. Peacoch, Esq., for the petitioner.

      Arthur H. Murray, Esq., for the respondent.
    This proceeding results from the determination of a deficiency in income and excess-profits taxes for the calendar year 1920 in the amount of $5,310.23. Only a part of the deficiency is in controversy. Error is assigned in that the respondent disallowed as a deduction a debt of $9,758.99 which the petitioner avers was ascertained to be worthless and charged off within the taxable year. The proceeding was submitted upon stipulation executed by counsel for respective parties.
    FINDINGS OF FACT.
    Petitioner is a New York corporation with principal offices at 41 East Eleventh Street, New York City.
    During the year 1920 the taxpayer charged off on its books as a bad debt $9,758.99, being 75 per cent of the total indebtedness of $13,011.93 owed to it by Samuel and Augusta Wolfson (trading under the name of and hereinafter referred to as the Globe Manufacturing Co.) of Worcester, Massachusetts. The taxpayer deducted the said $9,758.99 on its return for 1920 and the Commissioner disallowed it.
    The Fiberloid Corporation, E. I. DuPont DeNemours & Co., the Worcester Trust Co., and the taxpayer, were the principal creditors of the Globe Company. During the early part of 1920 the Fiberloid Company had attached certain assets of the Globe Company and in this way had already secured an advantage over the other creditors. In order to avoid having the advantage thus gained set aside by bankruptcy proceedings initiated by another creditor, within the four-month period allowed by the Bankruptcy Act for setting aside such a preference, the Fiberloid Company entered into a written agreement on July 1,1920, with the DuPont Company providing for a compromise arrangement with the debtor whereby the latter was also to pay over its entire income to be divided ratably between them.
    In order to avoid having their joint preference set aside by bankruptcy proceedings, these two creditors were in turn obliged to let in on the same basis the Worcester Trust Co. They also invited the taxpayer to join them, and the Globe Company, at the same time, endeavored to arrange a settlement with all four creditors at 25 cents on the dollar. The several creditors conferred among themselves, and in particular the president of the taxpayer and the attorney for the DuPont Company, at the request of the latter, had several conferences together at the latter’s office.
    After full investigation, it was found that under no conditions could the Globe Company possibly pay more than 25 per cent of its indebtedness and, after ascertaining this condition, the taxpayer, shortly after July 1, 1920, agreed to join the other creditors and accept 25 per cent in full payment of its claim.
    The taxpayer had agreed, as already set forth, to join the three other creditors in a composition agreement and to accept 25 per cent in full settlement, and, accordingly, having ascertained that no greater amount could, under any conditions, be recovered, charged off in 1920 the remaining 75 per cent of the debt owing to it.
    No written agreement with either the debtor or other creditors was signed by the taxpayer, it being its understanding that the attorney for the DuPont Company would take care of any formalities necessary to carry out this agreement, but, through a misunderstanding, he did not do so, having assumed that the attorney for the Fiberloid Company had already done so. As a result of this misunderstanding, which was not discovered until after the expiration of the four-month statutory period, the taxpayer was deprived of any share even in the 3½ cents on the dollar, which was all that was actually realized by the three other creditors, and has never recovered any part of the debt of $13,011.93.
    The Globe Manufacturing Co. ceased to do business about May, 1921, and its liquidation was completed in November, 1921. The taxpayer, on December 31,1921, charged off on its books the remaining $3,253 owed to it by the Globe Company.
   OPINION.

Milliken:

The question here presented is whether the deduction of $9,758.99, claimed by petitioner as a bad debt deduction for 1920, was an allowable deduction under section 234 of the Revenue Act of 1918. The respondent contends that the amount deducted was only a portion of a debt and as such is not deductible as a bad debt ascertained to be worthless and charged off within the year, under section 234 (a) (5). If the premise of such contention is correct, the conclusion is sound, for the reason that a part of a debt may not be claimed as a bad debt deduction, under the Revenue Act of 1918. The petitioner was one of the four principal creditors of a debtor involved in financial difficulties. One of the other creditors had secured an advantage by attaching the assets of the debtor. However, such advantage could not be maintained if the other creditors instituted bankruptcy proceedings. Accordingly, the attaching creditor entered into a written agreement with one of the other creditors, providing for a compromise with the debtor. These two creditors were in turn obliged to let the third creditor in on the agreement on a similar basis. This left only the petitioner to threaten the three-cornered agreement. After a full investigation, it was agreed that in no event could the creditors recover more than 25 per cent of the amounts due them. The petitioner thereupon entered into an oral composition agreement by which the creditors agreed to accept 25 per cent of the obligations due them in full settlement. By reason of the failure to take care of certain formalities, the petitioner was not entitled to share in the bankruptcy liquidation proceedings subsequently carried out. However, it was bound by the composition contract entered into in the taxable year in question, and in no event could it have recovered more than 25 per cent of its account with the debtor.

When the petitioner became a party to the composition agreement, it was agreed to accept 25 per cent in lieu of 100 per cent of the debt. In other words, it expressed its willingness to give up all possibility of recovering all, to increase- the probability of recovering a part. The 75 per cent of the original obligation, at the time it was charged off, did not represent a portion of a debt, but was more in the nature of a loss. Thereafter, the amount continued on petitioner’s books, did not represent a fractional part of a debt. It represented the total to which the petitioner was entitled. In the following year, 1921, the debtor only owed the petitioner 25 per cent of the original debt. The remainder was no longer in existence and could not have been claimed as a bad debt deduction in such later year. That is, in 1920, the debt was reduced from 100 per cent, or $13,011.93, to 25 per cent, or $3,253.

The composition agreement was similar to a compromise agreement, in that it reduced the total amount of the obligation. We have held that the amount by which a debt was reduced in compromise, was a deductible loss in the year in which such an agreement was made, Appeal of Russel Wheel & Foundry Co., 3 B. T. A. 1168; Appeal of Manville Jenckes Co., 4 B. T. A. 765. We think the principle applied in those cases is applicable here. The deduction of 75 per cent of the original debt in 1920 was proper, as it represented a loss sustained during that year, within the meaning of section 234 (a) (4) of the Revenue Act of 1918.

Judgment will be entered on 15 days' notice, under Rule 50.


text:
    Home Insurance Agency, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3288.
    Promulgated January 8, 1927.
    The petitioner was not a personal service corporation during the years 1918 and 1919, as its income could not be ascribed primarily to the activities of its principal owners or stockholders who were regularly engaged in the active conduct of its affairs.

      David A. Gates, Esq., for the petitioner.

      J. ArtJmv Adams, Esq., for the respondent.
    This proceeding results from the determination by respondent of deficiencies in the amounts of $1,674.37 and $2,827.52 for the taxable years 1918 and 1919, respectively. The deficiencies are due to the respondent’s determination that the petitioner was not a personal service corporation.
    FINDINGS OF FACT.
    The petitioner is an Arkansas corporation organized in 1905 to consolidate and continue the business of four insurance agencies then operating at Pine Bluff. Its original capital stock of $17,000, which was divided into 680 shares of the par value of $25, was issued for the so-called expiration lists of the four predecessors, in proportion to the amount of business done by each during the preceding year of 1904. The total commissions of the predecessors for such year amounted to $16,928.72. Cash totaling $71.28 was paid in by several of the incorporators to bring the capitalization up to the $17,000 par value of the stock issued, and to make necessary adjustments so that fractional shares need not be issued. The persons to whom stock was issued, the number of shares issued, and the name of the business taken over, were as follows:

    The expiration lists which formed the basis for the stock issue were entered on the books as a good will asset. The book value of this item was reduced from $16,982.72 to $13,000, in 1909, and in 1910 to $10,000, and continued to be carried at that value through the years in question.
    Prior to 1918, Bloom and Hollis had retired and sold their stock, held individually or as trustee, to the other stockholders. In 1917 the capital stock was reduced from $17,000 to $7,000, divided into 280 shares, each of the par value of $25. This change was effected by charging $10,000 to capital stock and crediting that amount to surplus. The holdings of each stockholder were reduced proportionately. The stockholdings during the years in question, as shown by the books, are as follows:

    In August of 1918, W. Z. Tankersly died and his stock was inherited by his widow, Mrs. Annie L. Tankersly, and his children. However, no changes were made on the stock books until March, 1919, when 60 of his shares were transferred to his widow, 20 to Mrs. Mary Adams, his daughter, and the remaining 27 of his shares to W. C. Reynolds, who had purchased them, together with 18 shares from other stockholders, for about $40 per share. Mrs. Annie L. Tankersly and Mrs. Mary Adams received no salaries and rendered no personal service to the corporation during the years 1918 or 1919. The certificate showing 40 shares issued to F. M. Rosenberg, trustee, was canceled in March, 1919, and the shares were reissued, 38 shares to F. M. Rosenberg, individually, and 2 shares to W. 0. Reynolds, who had purchased them as a part of the 40 shares acquired by him at that time. We are unable to determine from the record the terms or conditions under which F. M. Rosenberg, trustee, and George M. Wells, trustee, held stock in the corporation during the years in question. S. F. Rosenberg received no salary and did not render personal service to the corporation during the years 1918 and 1919.
    The officers and stockholders to whom salaries were paid during the years in question, and the salaries paid each, are as follows:

      Tankersly was in failing health during that portion of 1918 ending with his death in August of that year, and was able to give only a part of his time to the business. The other officers were actively engaged in the conduct of the business, devoting all their time to its affairs. The success of the business was largely due to their activities. At least 90 per cent of the business done in 1918 was acquired through the efforts of Tankersly, Wells and F. M. Rosenberg. The other stockholders listed above devoted no time to the petitioner’s affairs and drew no salary. There was an undisclosed number of non-stockholders employed in a clerical capacity who took no part in the solicitation of business.
    The petitioner’s business consisted almost entirely of acting as local agent for about thirty inshrance companies. The petitioner was authorized to issue insurance contracts on behalf of the companies it represented and it assumed responsibility for the collection of premiums. Bad debt deductions were claimed on account of uncollectible premium accounts. It was allowed 45 days in which to remit to the companies it represented. The practice of petitioner was to allow credit to policyholders for 30 days in addition to s'uch 45-day period. Due to the largest volume of business being placed in the last three months of the year when the cotton crop was harvested, there were occasions when additional time for credit was extended to policyholders. The credit relations between the petitioner and its policyholders on the one hand, and between the petitioner and the insurance companies represented on the other, as of December 31 of each year, may be set out as follows:

    The $12,239.62 given as premiums owing the home companies was stated to be less cash on hand (in amount now shown). Cash on hand (in the amount of $14,491.39) was not deducted from the corresponding figure due for 1919. The notes receivable for 1918 drew interest at a rate of from 7 per cent to 10 per cent, and those for 1919 from 7 per cent to 9 per cent. In years prior to those in question the petitioner, by indorsement, discounted some of the notes at the bank. The record is silent as to whether any of such notes were so discounted during the years in question.

      Assets in tlie business as of January 31, 1918, in addition to the good will item and the accounts and notes receivable, listed above, were:
    Liberty bonds and county warrants-$2, 337.50
    Furniture and fixtures_ 889.61
    Tax lands_ 84. 67
    Total_ 3,261.78
    The liabilities as of that time were not established, except for the $12,239.62 item owing to insurance companies and $7,000 representing capital stock. The total assets and liabilities as of December 31, 1919, are not in evidence.
    The petitioner borrowed money from time to time on the credit of its stockholders. These amounts were represented by bills payable and are shown month by month, as follows:

    The income of the petitioner was derived almost entirely from commissions on insurance policies written. During 1918, the only' other source was real estate and loan commissions totaling $289.86. About 75 per cent of its business was fire insurance. The remaining 25 per cent was approximately half tornado and half casualty insurance. The total premiums on policies for the years 1918 and 1919 were $131,154.66 and $143,596.92, respectively. The gross commissions earned were $22,644.62 in 1918, and $22,190.00 in 1919. The net earnings for 1918 were $6,961.46. Net earnings for 1919 can not be determined from the record. It was the practice of the petitioner to distribute the profits as dividends as soon after the close of the year as possible. The dividend distributing 1918 earnings in the amount of $6,300 was declared March 28, 1919.
   OPINION.

Milliken:

Section 200 of the Revenue Act of 1918 prescribes three requirements of a personal service corporation, to wit: (1) The income of the corporation must be ascribed primarily to the activities of the principal owners or stockholders. (2) Such principal owners or stockholders must themselves be regularly engaged in the active conduct of the aifairs of the corporation. (3) Capital (invested or borrowed) must not be a material income-producing factor.

Failure to comply with any one of these requirements is fatal to a claim that a corporation is a personal service corporation. In the case of Matteson Co. v. Willcuts, 12 Fed. (2d) 447, it was pointed out that this provision, permitting a certain class of corporations to be taxed on the same basis as a co-partnership, was in the nature of a concession to those corporations whose functions were primarily personal service in character, which service was rendered to its patrons in a manner similar to the way a partnership rendered the same kind of service, and where such corporation did not require any considerable amount of capital and such capital as was actually employed was not a material income-producing factor. The necessity for strict compliance with the requirements of the statute is aptly stated in the case of Matteson Co. v. Willcuts, supra, the court saying:

Every corporation Ras full control of its own activities. It knows what the requirements of a personal service corporation are. It may comply therewith and easily keep within the limits thereof if it so choose, or it may not if it otherwise prefers. If it does not fairly observe and keep within the requirements of the law, it should not claim the benefits which the law confers. To nearly comply with the law, or to come within hailing distance thereof, is not-enough.

And, in discussing the first requirement of personal service status, the court said:

It is not necessary under the law that each stockholder shall be engaged in rendering the personal service, but the letter and the spirit of the law both require that the great body of the stock shall be in the hands of those who are rendering this service.

In the case of Matteson Co. v. Willcuts, supra, some doubt was expressed whether 16 per cent of the stock being held by a stockholder, who rendered no personal service, would be sufficient to defeat personal service classification. However, after holding that an additional 20 per cent of the stock was owned by one not regularly engaged in the aifairs of the corporation, the court was clearly of the opinion that the condition was not met.

In the case at bar, during the year 1918 there was outstanding in the hands of stockholders, who rendered no personal service and received no salaries, 35 per cent of the stock of the corporation. F. M. Rosenberg, trustee, held for undisclosed persons 40 shares of stock, and we are not advised as to the terms or conditions under which the stock was held. S. F. Rosenberg held 42 shares of stock and rendered no service to the corporation. George M. Wells held, as trustee, 16 shares of stock. One witness testified that this stock was held for his wife, but we are not advised as to the terms or conditions upon which it was held. It should also be noted that W. Z. Tankersly, who was the owner of 107 shares of stock of the corporation, was in failing health during the year 1918 and unable to devote his entire time to the business of the corporation prior to his death in August, 1918, and upon his death his stock passed by inheritance to his widow and children, who rendered no service to the corporation. During the year 1919 there was outstanding in the hands of stockholders who rendered no personal service, 49-4/14 per cent of the corporate stock. S. F. Rosenberg held 42 shares, (same as in the year 1918); G. M. Wells, trustee, 16 shares, (same as in year 1918); Mrs. W. Z. Tankersly, 60 shares; and Mrs. Mary Adams, 20 shares. The latter two stockholders were the widow and daughter, respectively, of W. Z. Tankersly, and rendered no personal service to the corporation.

It is manifest that the non-active stockholders held too large a percentage of the total stock to justify a holding that there was a substantial compliance with the first prerequisite laid down by the statute. Such being the case, it becomes unnecessary to consider the remaining requirements of the statute as a prerequisite to personal service classification.

Judgment will be entered for the Commissioner.


text:
    Hannah D. Stratton, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7841.
    Promulgated January 10, 1927.
    A widow maintaining a residence for herself and her daughter, who is an adult and not dependent on her mother for support, is not entitled to the exemption granted the head of a family by section 216 (c), Revenue Act of 1921, though she in fact contributes to the support of her daughter.

      Hannah D. Stratton pro se.

      Brice Toole, Esq., for the respondent.
    This proceeding results from the determination by respondent of a deficiency in income tax for the calendar year 1921, in the amount of $80. The deficiency is due to the reduction of the personal exemption of petitioner from $2,000 to $1,000. The proceeding was submitted upon a stipulation of facts.

      FINDINGS OF FACT.
    Petitioner is a widow residing at Moylan, Pa., and maintains a residence for herself and unmarried daughter. The unmarried daughter is not a minor and is not dependent upon petitioner for support, although petitioner does contribute to her support.
   OPINION.

Milliken:

Section 216 of the Revenue Act of 1921 provides that certain credits shall be allowed individuals for the purpose of computing the normal tax:

(c) In case of a single person, a personal exemption of $1,000; or in the case of the head of family or a married person living with husband or wife, a personal exemption of $2,500, unless the net income is in excess of $5,000, in which ease the personal exemption shall be $2,000. * * *

The question to be decided is whether petitioner is entitled to an exemption as the head of a family in the amount of $2,000 or to an exemption of only $1,000.

Petitioner contends that she is entitled to the credit allowed the head of a family, for the reason that she maintains a home, her daughter lives with her, and she contributes to her support. The daughter is not a minor, nor does it appear that she depended for her chief support upon her mother. Apparently, she has income of her own sufficient in itself to constitute her chief support. In the absence of the daughter being in any material or legal degree dependent upon her mother for support, the petitioner does not support and maintain a dependent so that she may be classed as the head of a family within the purview of section 216 (c) of the Revenue Act of 1921.

Judgment will be entered for the Commissioner.


author: Green:

text:
    E. L. Harris, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8215.
    Promulgated January 10, 1927.
    The petitioner filed his return for the year 1928. Later, under the circumstances set forth in the findings of fact, he filed an amended return on which was shown an amount of tax in excess of the amount shown on the original return. The Commissioner determined a deficiency in the amount of the excess and the petitioner appealed. The Commissioner moved to dismiss upon the ground that he had not determined a deficiency and that therefore the Board had no jurisdiction. 3eld, that inasmuch as the Commissioner had determined a total tax liability in excess of the amount shown on the original return to be due, there was a deficiency and that the Board had jurisdiction.

      E. L. Harris pro se.

      B. H. Samders, Esq., for the respondent.
    This proceeding came on for hearing on the Comtaissioner’s motion to dismiss for lack of jurisdiction upon the ground that a deficiency has not been determined.
    FINDINGS OF FACT.
    The petitioner is an individual residing in Seminole County, Oklahoma, and doing business in the town of Wewoka. On March 15, 1924, he filed with the collector of internal revenue for the district of Oklahoma his income-tax return for 1923, showing a tax of $108.81. Subsequently, and in the same year, his books were examined by a Mr. Spralls, a revenue agent, working as a metaber of a group called “the oil squad.” Spralls prepared an amended return showing additional tax due in the amount of $6,227.77, and presented it to the petitioner for his signature. The petitioner consented to all of the adjustments shown on the form prepared by Spralls, except one which increased by the amount of $35,000 the profit previously reported from the sale of certain oil and gas leases. Spralls refused to recede from-his position, and the petitioner signed the form as requested, believing that there was no alternative and that it was necesary to sign in order to save himself frota a heavy penalty on that portion of the tax admitted by him to be due. He was under the impression that the only effect of his signing the form prepared by Spralls would be the transfer of his case to the office of the Commissioner in Washington.
    On August 28, 1925, a registered letter reading in part as follows was mailed to the petitioner:
    IT: PA: 2-60-D RO’B: 203
    August 28, 1925.
    Mr. E. h. Habéis,

      WewoJca, OMahoma.

    Sir: The determination of your income tax liability for the taxable year 1923, as set forth in office letter dated February 10, 1925, disclosed a deficiency in tax amounting to $6,227.77.
    In accordance with the provisions of Section 274 of the Revenue Act of 1924, you are allowed 60 days from the date of mailing of this letter within which to file an appeal to the United States Board of Tax Appeals contesting in whole or in part the correctness of this determination.
    Where a taxpayer has been given an opportunity to appeal to the United States Board of Tax Appeals and has not done so within the 60 days prescribed and an assessment has been made, or where a taxpayer has appealed and an assessment in accordance with the final decision on such appeal has been made, no claim in abatement in respect of any part of the deficiency will be entertained.

      If you acquiesce in this determination and do not desire to file an appeal, you are requested to sign the inclosed agreement consenting to the assessment of the deficiency and forward it to the Commissioner of Internal Revenue, Washington, D. C., for the attention of IT: PA: 2-60-D, RO’L: 203. In the event that you acquiesce in a part of the determination, the agreement should be executed with respect to the items agreed to.
    Respectfully,
    D. H. Blair, Commissioner.

    By:-),

      Deputy Commissioner.

    Inclosures: Statements. Agreement — Form A. Form 882.
    On October 10, 1925, the petitioner filed his appeal with the Board, alleging error on the part of the Commissioner in determining a deficiency by increasing his net income in the amount of $35,000, referred to above, and on December 11, 1925, the Commissioner filed an answer to the merits of the petition. Subsequently, on February 20, 1926, the motion now under consideration was filed.
   OPINION.

Green:

This appeal was heard on the Commissioner’s motion to withdraw his answer filed December 11, 1925, and to dismiss the appeal for lack of jurisdiction. It is the contention of the Commissioner that the petitioner on or about October 27, 1924, filed an amended return for 1923; that the tax of which the petitioner was notified by the letter of August 28, 1925, is admitted on the return as amended; and that the tax so admitted is not a deficiency within the meaning of section 273 of the Revenue Act of 1924.

We have heretofore held that the original return is the return required by law and that there is no statutory authority for the making or acceptance of an amended return. Appeal of National Refining Co., 1 B. T. A. 236; Appeal of Mabel Elevator Co., 2 B. T. A. 517. The return referred to in section 273 of the Revenue Act of 1924 is the original return — the return which starts the tolling of the statute.

On these facts, it appears that the Commissioner has determined that the correct amount of the tax is in excess of the tax admitted to be due by the taxpayer on his return, and under section 273 of the Revenue Act of 1924 such excess, no adjustments having been previously made, is a deficiency. The motion of the Commissioner is denied and the appeal is restored to the general calendar for hearing in due course.


author: Trammell:

text:
    R. Downes, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7889.
    Promulgated January 10, 1927.
    Where a man and wife living in Louisiana filed a joint return and included therein the income of both, they can not subsequently file a return under the community property law.

      W. 0. Rainey, O. P. A., for the petitioner.

      J. Arthur Adams, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficien'cy in income tax for 1923 in the amount of $354.98. The material allegations of fact are admitted by the respondent and the question presented is one of law.
    , The question is whether the petitioner who, together with his wife, filed a joint return for the year 1923, may subsequently file his income-tax return separately on the basis of the community property law of Louisiana.
    FINDINGS OF FACT.
    The petitioner, on March 15, 1924, filed his income-tax return for the calendar year 1923, and in answer to the question in paragraph 3 of the return, “ Is this a joint return of husband and wife?” answered “yes.” Gross income in the amount of $8,876.09 was shown in that return. Various deductions were claimed resulting in a net income of $2,331.20. In the return the taxpayer claimed a personal exemption of $2,500 and reported the sale of an undivided one-fifth interest in certain land which he exchanged for 80 shares of the capital stock of the Central Carbon Co., Inc., of the par value of $100, but reported no income from that transaction.
    Under date of April 30, 1925, the deputy collector prepared an amended return for the petitioner under the provisions of section 3176, Rev. Stats., as amended by section 1317 of the Revenue Act of 1918. In the amended return prepared by the deputy collector the only change made in the return as filed by the petitioner is that a net profit is shown of $7,150, representing income derived from the sale of the undivided one-fifth interest in land for the 80 shares of stock in the Central Carbon Co., Inc. The amount of income is not in dispute. The Income Tax Unit allowed a personal exemption of $2,000, as shown in the deputy collector’s return, in accordance with paragraph (c) of section 216 of the Revenue Act of 1921.
   OPINION.

Trammell:

The only issue involved in this appeal is whether the petitioner had the right to report his income under the community property laws of Louisiana after he had once elected to file a joint return with his wife for the same taxable year.

Section 223 of the Revenue Act of 1918 provides that “ If a husband and wife living together have an aggregate net income of $2,000 or over, each shall make a return unless the income of each is included in a single joint return.”

Section 223 of the Revenue Act of 1921 provides for joint returns and states the basis of the computation of the tax. With respect to the basis on which the tax shall be computed, the 1921 Act is different from the 1918 Act. Section 223 of the Revenue Act of 1921 provides in part as follows:

(b) If a husband and wife living together have an aggregate net income for the taxable year of $2,000 or over, or an aggregate gross income for such year of $5,000 or over—
(1) Each shall make such a return, or
(2) The net income of each shall be included in a single joint return, in which case the tax shall be computed on the aggregate income.

The return was for the calendar year 1923 and therefore the provisions of the Revenue Act of 1921 are applicable.

The statute provides two ways in which returns of husband and wife living together may be filed. Each has the right to file a separate return, or the income of each may be included in a single joint return. Either is a correct and proper return, but the return that is filed is the return and the only return recognized by law. It is the return of both husband and wife.

The petitioner complied with the statute when he filed a joint return. It purported to return all the income of husband and wife for the year involved. A second or amended return is not provided for in the statute. Appeal of National Refining Co., 1. B. T. A. 236. See also Appeal of Mabel Elevator Co., 2 B. T. A. 517. Taxpayers are not permitted or required by statute to file more than one return for a taxable year.

When a joint return is filed the statute provides that the tax shall be computed on the basis of that return. The tax liability then becomes fixed and can not be altered by filing another return on another basis.

In our opinion, a joint return filed pursuant to section 223 of the Revenue Act of 1921 constitutes a legal and proper return both of the husband and of the wife. If the return did not set forth all the taxable income of both husband and wife, that fact, when ascertained by the Commissioner or by either husband or wife, does not entitle either husband or wife to file another return on another basis.

Section 273 of tlie Eevenue Act of 1926 defines a deficiency as follows: “ The amount by which the tax imposed by this title exceeds the amount shown as the tax by the taxpayer upon his return * * When a joint return is filed, that is the return which must be considered to determine whether there is a deficiency.

The question here presented is in no way analogous to that presented in the Appeal of Union Metal Manufacturing Co., 1 B. T. A. 395, and Appeal of R. A. Bartley, 4 B. T. A. 874.

In the Appeal of Union Metal Manufacturing Co. the question was whether a taxpayer who had not taken deductions on account of the exhaustion of patents was precluded on that account from claiming such deductions. We said there that unless barred by the statute of limitations, a taxpayer is not precluded from demanding a correct computation of his tax for a past year on the facts as they existed, whether originally reported or not.” We based our decision in that case upon the provisions of the statute which specifically allowed deductions on account of the exhaustion, wear and tear of assets used in business. If a taxpayer did not claim the deduction to which he was entitled by statute when his return was filed, we held that he was not precluded from thereafter claiming it.

If a taxpayer had patents which were becoming exhausted and no deduction was claimed on that account, the return was not correct and the tax was erroneously computed; but in this case the joint return which was filed was a proper return and the tax was properly computed on the basis of that return. The fact that all the income was not reported does not show that the basis for the computation was not correct.

We held in the Appeal of Dallas Brass & Copper Co., 3 B. T. A. 856, that the Commissioner may make adjustments or changes in the tax liability of taxpayers from time to time within the period of the statute of limitations, and it may be argued that taxpayers should have the right to make changes which may alter their tax liability. Neither the Commissioner nor taxpayers, however, may change or alter a return that is correct and proper. It may be changed in order to make it correct and in compliance with the statute, but not otherwise. In this case, as we have said before, the return filed was on a correct basis. Where so filed it may not be changed and another return filed on another basis although equally correct.

In the Appeal of R. A. Bartley, supra, a husband filed a separate return but included therein the income arising from a partnership in which the Board found the wife was a partner. While he, in fact, reported the income of himself and wife, he reported it as his own income in his separate return and not as the income of both himself and wife in a joint return. The question there was whether any part of the income belonged to the wife. If so, it was improperly reported by the husband in his separate return. The Board properly held that a portion of the income belonged to the wife and that she had a right to report it in her separate return. It was not sought in that case to substitute separate returns for a joint return. The return of the husband was his separate return. The question of the right of filing joint or separate returns was not involved but only the question as to whether all the income of the partnership belonged to the husband — that is, whether husband and wife were partners. That case is not authority for the contention of the petitioner here that he has the right to file his return on another basis when it was correctly and properly filed on the basis of a joint return.

It is not necessary here to decide whether the community property basis was a correct method of reporting the income of husband and wife in Louisiana. In any event, the husband had the right to file a joint return which included all the income of both himself and wife. When he does so the statute provides that the tax shall be computed on that basis. While taxpayers are given the right to determine on which basis, as between joint returns and separate returns, the tax shall be computed as determined by the manner in which the income is reported, it does not give them the right to change such basis after the tax liability becomes fixed and is determined on the basis on which the income is reported.

Section 1212 of the Revenue Act of 1926 does not afford the petitioner relief in this case. That section does not afford taxpayers the privilege of fifing income-tax returns upon the basis of community property laws where they did not originally file returns on such basis.

Judgment will he entered for the Commissioner.

TRUSsell dissents.


author: Phillips:

text:
    Germain Cassiere, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9733.
    Promulgated January 10, 1927.
    Taxpayer, having filed a joint return of the income of himself and wife for 1923, is not entitled to have his tax computed on the basis of his separate income. Appeal of R. Downes, Jr., 5 B. T. A. 1029, followed.

      H. M. Snider, C. P. A., for the petitioner.

      A. H. Mv/rray, Esg., for the respondent.

      Taxpayer brings this proceeding for the redetermination of a deficiency of $587.37 in income tax for the calendar year 1928, and alleges as error the refusal to compute the tax upon the basis of a separate return of the income of the taxpayer, he having filed a single joint return for himself and wife.
    FINDINGS OF FACT.
    The taxpayer is an individual residing in Caddo Parish, State of Louisiana.
    Taxpayer filed, within the time limit allowed by law, a Federal income-tax return for the calendar year of 1923. Such return disclosed the taxpayer’s name and address as Germain Cassiere, Box 154, Route No. 2, Shreveport, La. It also stated that he was a citizen of the United States, that it was a joint return of husband and wife, that he was married and living with his wife, that he claimed one dependent under eighteen years of age, and that he claimed a personal exemption of $2,900. The return disclosed a net income of $4,008.73, which included capital gain of $3,120.75 from the sale of real estate held more than two years. The Commissioner increased such taxable gain from $3,120.75 to $12,483 and determined the deficiency here in issue upon the basis of a single joint return, rejecting taxpayer’s contention that he should be allowed to file community property returns, reporting one-half of the total income as his and one-half as income of his wife.
   OPINION.

Phillips:

The taxpayer, having filed a single joint return of the income of himself and his wife for 1923 under the provisions of section 223 (b) (2) of the Revenue Act of 1921, and the Commissioner having increased the net income as reported, now contends that the tax liability should be computed upon the basis of separate returns for himself and his wife upon the basis that the income was community income. Substantially all of the taxable income arises from the sale of real estate, and it might be sufficient to observe that there is nothing in the record from which we may determine whether the wife had any interest in such real estate, either as community property or as separate property, or whether the property sold was the separate property of the taxpayer. The Commissioner, however, refused taxpayer the right to have taxes computed upon the basis of separate returns, upon the ground that, since a single joint return was filed, the tax was required to be computed on the aggregate income, pursuant to the section of the statute cited above. We have this day, in the Appeal of R. Downes, Jr., 5 B. T. A. 1029, determined that the contention made by the taxpayer is contrary to the express provisions of the law, and this proceeding falls squarely within that decision.

Decision redetermining the deficiency for 1923 to be $587.37 will be entered.