text:
    George Hyman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 54674.
    Promulgated August 22, 1933.

      B. Kemp Slaughter, Esq., for the petitioner.

      J. M. Morawski, Esq., for the respondent.
   OPINION.

Sternhagen:

The Commissioner determined a deficiency in the petitioner’s income tax for 1928 of $17,357.74, by applying section 115 (g), Revenue Act of 1928 to the redemption and cancellation of shares of stock owned by the petitioner, and thus taxing a part of the amount received by the petitioner as an ordinary dividend. The petitioner contends that section 115 (g) does not apply, and the entire amount of $195,000 received by him by virtue of such redemption was a distribution in liquidation covered by section 115 (c), and that since it was no more than the cost of the stock redeemed, there is nothing to tax. All of the facts in the record are agreed upon in writing as follows:

1. The petitioner resides in the City of Washington, District of Columbia, with his business address at 1010 Vermont Avenue, Northwest. For the calendar year 1928 petitioner filed his income tax return with the Collector of Internal Revenue at Baltimore, Maryland, and included therein the income of his wife.
2. On February 12, 1931, the respondent mailed to the petitioner a notice of deficiency covering the calendar year 1928 which determined a deficiency against petitioner in the amount of $17,357.74. Against the aforesaid notice of deficiency petitioner duly filed his petition for a redetermination to which was attached as Exhibit A a copy of the notice which by reference is hereby made a part hereof.
3. The petitioner, at December 31, 1928, was President of George Hyman Construction Company and President of George Hyman Properties, Inc.
4. At December 12, 1928, the George Hyman Construction Company, a Maryland corporation with its principal offices in Washington, D.C., had outstanding 2,000 shares of capital stock at thejmr value _of_$200,000. Of this outstanding stock petitioner owned 1998 shares for which he had paid, prior to January 1, 1928, but subsequent to March 1, 1913, $199,800 in cash. The business of George Hyman Construction Company was that of general contractor in the construction of public and private buildings.
5. On December 11, 1928, George Hyman Properties, Inc. was incorporated under tbe laws of tbe State of Maryland with an authorized capital of 2,000 shares of common stock of the par value of $100 of which authorized stock 50 shares were immediately issued for cash at par. Of this issue the petitioner took 30 shares, his wife 5 shares, his attorney 5 shares, and the remaining 10 shares were taken in equal proportion by his sister and his mother-in-law. This corporation was organized as an investment company to take over certain real properties and stocks and bonds which petitioner, as principal stockholder of George Hyman Construction Company, considered were not necessary in the construction business and should not remain at the risk of that business.
6. On December 12, 1928, the George Hyman Construction Company paid petitioner by check No. 3522 the sum of $195,000 for 1950 shares of its stock held by petitioner as aforesaid, and the 1950 shares of stock so redeemed were retired and cancelled by tbe corporation. There was no change in the shareholdings of the other stockholders and the capital stock of the company then outstanding was $5,000.
7. On December 19, 1928, petitioner advanced to George Hyman Properties, Inc., the sum of $190,000. With the cash capital thus obtained and through the issue of its common stock as aforesaid, George Hyman Properties, Inc. acquired certain real properties and stocks and bonds from George Hyman Construction Company which petitioner, as aforesaid, considered were not necessary assets in the construction business and therefore should not remain at the risk of the construction company.
8. The books of account of the George Hyman Construction Company show that at December 31,1927, it had an earned surplus of $119,709.33; at December 31, 1928, an earned surplus of $109,729.54, and at December 31, 1929, this earned surplus had been reduced through operations to $55,270.85.
9. The respondent, in the aforesaid notice of deficiency, alleges that to the extent of the earned surplus of George Hyman Construction Company at December 31, 1928, to-wit, $109,729.54, petitioner received a taxable dividend in the payment to petitioner of $195,000 on December 12, 1928, when petitioner surrendered to the corporation 1950 shares of its capital stock which petitioner had acquired from the corporation at its incorporation for the sum of $195,000. No other exceptions were taken by the respondent to the income tax returns filed by petitioner for the year 1928.

We think that it cannot be said from these facts that the respondent was wrong. The petitioner was the sole shareholder of a corporation with a substantial surplus at the beginning of 1928. By causing the corporation to cancel 97% percent of its shares at par, he receives an amount greater than the entire surplus. Thus, as to the amount of the surplus, he is in no different situation from what he would have been in had there been an ordinary dividend; and the only difference to the corporation is that it has a reduced capital, which is now represented by an outstanding 50 shares instead of 2,000. From such facts it is just as conceivable that the redemption and cancellation were essentially equivalent to a dividend as it is that they were not; and, since the respondent has determined that they were, and the burden of proof is on petitioner, we cannot affirmatively find that it was not.

The petitioner argues that he had a proper motive, and that he properly used this means of having the real property, stocks and bonds which he considered unnecessary to the corporation’s construction business transferred to the newly organized corporation. This, we think, is beside the point. What was said in Pearl B. Brown, Executrix, 26 B.T.A. 901, to the effect that the section should not be applied to a stock redemption “ where the circumstances are free from artifice and beyond the terms and fair intendment of the provision,” did not mean that absence of moral obliquity or intent to evade tax would alone be a defense to the respondent’s determination under the section. The statute is concerned with imposing the tax where there is the essential equivalent of a dividend. This is not determinable alone by the use made of the distribution when received. The shareholder might intend to use it for a most laudable charitable purpose, and immediately put it to such use, and yet be subject to the tax as upon a dividend if it was essentially the equivalent of a dividend. If the respondent determines that the distribution is within section 115 (g), the taxpayer must point to something in the circumstances which requires the conclusion that it was substantially and essentially different. This we are unable to find in the facts, and so can find no error.

Judgment will he entered for the respondent.

       SEC. 115. DISTRIBUTIONS BY CORPORATIONS.

        * * * * * * *
      (g) Redemption of stock. — If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend. In the case of the cancellation or redemption of stock not issued as a stock dividend this subsection shall apply only if the cancellation or redemption is made after January 1, 1926.

       (c) Distributions in liquidation.- — Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112. In the case of amounts distributed in partial liquidation (other than a distribution within the provisions of section 112 (h) of stock or securities in connection with a reorganization) the part of such distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or profits within the meaning of subsection (b) of this section for the purpose of detez’mining the taxability of subsequent distributions by the corporation.


source: Caselaw Access Project

author: Sternhagen :

license: Public Domain

text:
    James McDonald, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 52329.
    Promulgated August 22, 1933.

      H. 0. Kilpatrick, Esq., for the petitioner.

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

Sternhagen :

The sole issue presented for decision is whether the amount of $25,000 paid to the petitioner’s wife in 1927 by the trustees of his father’s estate, pursuant to the agreements set forth in the findings of fact, was income of the petitioner. The petitioner says it was not, contending that under the will he was the owner of alienable property in the nature of an equitable estate for years, that the agreements with his wife constituted an irrevocable assignment of an undivided interest in that estate, and that amounts paid to her under such an assignment are not income to him.

The nature of petitioner’s interest in the estate is defined by the decree of the Court of Appeals of the District of Columbia, namely, a present vested interest in an undivided one half of the residuary estate, entitling the petitioner to receive one half of the cash income during the life of the trust, and one half of the corpus upon its termination when his oldest child living at the testator’s death reached the age of 30 years. McDonald v. Maxwell, 12 Fed. (2d) 822. His interest in the income — his right to the income — was an equitable estate for years and present property, alienable at common law like any other, in the absence of restraint on alienation. Commissioner v. Field, 42 Fed. (2d) 822; Edith R. Wood, 27 B.T.A. 1308; District of Columbia Code, secs. 1, 1017, 1030, 1032, 1036, 1640; Eisner v. Hughes, 49 App. D.C. 40. It does not appear that the will imposed any restraint on alienation.

If the agreements in question had the effect of divesting the petitioner absolutely and irrevocably of an undivided part of his equitable estate in the income, the petitioner should prevail. Commissioner v. Field, 42 Fed. (2d) 822; O'Malley-Keyes v. Eaton, 24 Fed. (2d) 820; Young v. Gnichtel, 28 Fed. (2d) 789; Edith H. Blaney, 13 B.T.A. 1315; Grace Scripps Clark, 16 B.T.A. 453. This is on the well settled principle that, while an assignment of income does not relieve the assignor of the tax thereon, an assignment of property or property rights does relieve the assignor of the tax on income subsequently arising therefrom, since both the property and the income no longer belong to him. William Ernest Seatree, 25 B.T.A. 396 Hazel T. Power, 23 B.T.A. 428; affd., 61 Fed. (2d) 625; certiorari denied, 288 U.S. 612; Bishop v. Commissioner, 54 Fed. (2d) 298.

No contention is made by the petitioner that he assigned any part of his interest in the corpus of the estate, and it is necessary to consider only whether the agreements divested him of part of his interest in the income.

In our opinion, the agreements do not disclose any transfer of the right to receive income. The first agreement of December 11, 1924, as well as the subsequent modifications, was primarily an agreement of the petitioner to pay his wife the fixed sum of $400,000 in full settlement of any claims on his property which she might have by reason of the marriage relation. When the promise was made the petitioner was assured of part of the estate, either as heir or under the will. The amount was payable only when he became “ entitled to his share of the estate ”, with the right to pay prior thereto if he so elected. To assure payment he in present terms assigned to his wife “ an interest in his share of the property of the estate ” in the amount of $400,000. Clearly, the latter provision was not an absolute and irrevocable assignment. If petitioner had elected to pay the full amount from his individual funds prior to settlement of the suit, or if he had paid out of property received from the trustees, the assignment would have become inoperative. Furthermore, the assignment is of part of petitioner’s share of the property, and this might be construed to include his share of the corpus rather than of the income.

However this may be, we believe the petitioner’s rights must be determined in the light of the 1925 and 1926 agreements. Those agreements were made on the condition, among others, that the court of appeals should adjudge the petitioner to be entitled to one half the accumulated and future income and that an arrangement should be made whereby petitioner should be paid his share of the then accumulated income and his share of the future income. The conditions happened and the agreements became operative. They provided for payment out of the accumulated income of $100,000, to be credited on the obligation of $400,000; “ that said Beulah Martin agree to accept the sum of * * * $25,000 per year, without interest, on said contract [of December 11, 1924] until the said total sum of * * * $400,000 shall have been fully paid ”; and that the payments of $25,000 per year shall be made for a period of 12 years, but in the event one half of the property or corpus of the estate should be delivered to petitioner within that period, a sum equal to the unpaid balance should be paid to her by the trustee. By express terms these agreements eliminated from the contract of the parties the provision of the December 11,1924, agreement, assigning an interest in petitioner’s “ share of the property of the estate ” to assure payment of the $400,000. There are no substituted words of assignment. In our opinion, the petitioner merely promised to make payments to his wife out of distributions to be received by him from the estate. With respect to the payment of $100,000, this was to be paid “ out of the accumulated income payable to James McDonald.” No direction was given the trustees to make this payment. They paid over $500,000 to petitioner, and he in turn paid the $100,000 to his wife. With respect to the payments of $25,000 per year, with which we are primarily concerned, there is no specific designation of the source, but it is clear that the parties intended that they should be made out of the petitioner’s share of the future income, or, if the trust should terminate within 12 years, that the unpaid balance be paid out of either income or corpus. The entire agreement discloses an intention to make the payments out of income (or property, if the trust terminated before 12 years), which first became income of the petitioner. There is nothing which indicates that petitioner made any transfer or assignment of his right to income. We perceive no material difference between the agreement and that involved in Marion Stone Burt Lansill, 17 B.T.A. 413; affd., 58 Fed. (2d) 572. As in that case, the order to the trustees to make the payment direct to petitioner’s wife, if it was in fact given, was but a convenient method of payment.

The petitioner urges that the assignment in Commissioner v. Field, supra, is almost identical with the agreements here in question. That case is obviously inapplicable. It involved a deed assigning a two-thirds interest “in all the income of [part] of the residuary estate * * * intending hereby to convey to and vest in [the assignee] an undivided two-thirds interest in all the net income adjudicated to belong to [the assignor].” In that case, as well as other authorities relied upon, the assignment was held to effect a complete divestiture of the property interest of the assignor and the income therefrom. This is not the effect of the instruments in question. We hold that the amount of $25,000 paid by the trustees in 1927 to petitioner’s wife was properly included in the income of the petitioner. Ormsby McKnight Mitchel, 1 B.T.A. 143, 149; Mitchell v. Bowers, 9 Fed. (2d) 414; affd., 15 Fed. (2d) 287; certiorari denied, 273 U.S. 759; Hazel T. Power, 23 B.T.A. 428; affd., 61 Fed. (2d) 625; certiorari denied, 288 U.S. 612, and authorities cited.

Judgment will be entered under Bule 50.


author: Sternhagbn :

text:
    Benjamin T. Burton, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 61055.
    Promulgated August 23, 1933.

      Cowrtland Kelsey, Esq., for the petitioner.

      Bernard D. Darnels, Esq., for the respondent.
   OPINION.

Sternhagbn :

The respondent determined a deficiency of $8,789.17 in the petitioner’s income tax for 1929. The only item which the petitioner contests is the disallowance of a deduction taken by him on his return for a loss resulting from the alleged sale of 1,000 shares of Continental Shares, Inc.

On September 30, 1929, the petitioner bought 1,000 shares of Continental Shares, Inc., at $68.50 a share, a cost of $68,500. The purchase was made through Otis & Co., by whom petitioner was employed. He financed the purchase by borrowing from two banks and pledging the shares as security upon his notes. On December 11, 1929, he sold the shares through Otis & Co. at 42 for $42,000, took up his notes and cleared his accounts at the banks, receiving from them $15,000. At the time of petitioner’s sale, his wife made a purchase of 1,000 shares of Continental Shares, Inc., through Otis & Co. at 42. The petitioner gave his wife $15,000 by making a payment of this amount to Otis & Co. for her account on the purchase. She financed the purchase by borrowing • at the same two banks, giving her own notes, and pledging the shares. New certificates were, issued to her.

The above facts are all beyond dispute, and in our opinion establish clearly a purchase and sale by the petitioner in 1929 with the resulting loss, and that since the loss was incurred in a transaction entered into for profit, it is a statutory deduction. It can not be denied merely because it was actuated by a motive of making the loss a real one and hence deductible. Nor can it be said that the sale was any less genuine because the wife contemporaneously purchased the same amount of similar shares. While such transactions involving members of the same family are always to be carefully scrutinized and clear evidence demanded to establish them fully, their recognition may not be denied when by proper evidence they are shown to be actual. From the evidence here, there is no reason to doubt the legitimacy of the loss. The respondent’s determination is in this respect reversed.

Judgment will he entered under Bule 50.


author: Arundell :

text:
    Francis J. Stokes, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 64193, 67209.
    Promulgated August 23, 1933.

      Henry Gross, Esq., for the petitioner.

      Francis S. Gettle, Esq., for the respondent.
   OPINION.

Arundell :

The deficiencies determined in these proceedings, $5,373.71 for 1929 and $1,775.31 for 1930, arise out of respondent’s inclusion of certain trust income in the income of petitioner. The respondent’s theory is that petitioner retained a practical control over the trust created by him so that the income is taxable to him under section 166 or 167 of the Revenue Act of 1928.

From the stipulated facts, which are incorporated herein by reference, it appears that by an instrument of trust dated January 11, 1928, petitioner transferred certain securities to the Germantown Trust Co. as trustee. The trust instrument directed the trustee to use income from the securities in trust for the maintenance, support, and education of petitioner’s five children during their respective minorities. Upon the attainment of majority or the death of any child a proportionate part of the trust corpus was to go to petitioner’s wife, Lelia W. Stokes, or if she was not then living, to petitioner. The trust instrument contained the following provisions :

Third : I direct tbat Lelia W. Stokes, during the continuation of this trust, may at any time by a written request to the Trustee, receive such securities or sums of money under said trust as she may desire.
Should, however, the said Lelia W. Stokes, die prior to the termination of this trust, then I reserve to myself the right to draw upon the principal of said trust as herein conferred upon her.

The trust was in full force and effect during the taxable years. No securities had been delivered and no money paid over to Lelia W. Stokes nor had she made any request therefor under the provisions of the trust instrument above quoted. At the end of the year 1930 none of petitioner’s five children named in the trust instrument had attained majority.

For the year 1929 the trust had a net taxable income of $47,433.32, of which $21,700.61 constituted profit on sale of securities and $25,732.71 was ordinary net income. For that year the trustee filed an income tax return showing $21,700.61 profit on sale of securities and paid the income tax thereon. The trust also filed a fiduciary return for 1929 showing therein the ordinary net income of $25,732.71 as having been distributed to petitioner’s five children in the proportion of one fifth to each. Income tax returns were filed on behalf of the beneficiaries, showing distribution to them as reported by the trustee.

For the year 1930 the trustee filed a fiduciary return showing ordinary net income of the trust in the amount of $20,445.81, all of which was stated to be distributed among petitioner’s five children. Income tax returns were filed on behalf of the beneficiaries showing the distribution to them of the amounts as shown by the fiduciary return. The petitioner filed income tax returns and included therein no part of the income of the trust for either year.

In Sydney R. Bliss, 26 B.T.A. 962, there were involved trusts in all respects like that in these proceedings. Counsel for respondent contends that there is a distinction in that in the Bliss case all the income was accumulated and held by the trustees for future distribution, whereas here the income was to be distributed currently and the ordinary net income was so distributed. The statute, however, does not make this the test in those situations where trust income is taxable to the grantor. It is where the grantor has a power of revocation (section 166), or where the income may be distributed to or accumulated for future distribution to him or used to pay for insurance on his life (séction 167), that the income is taxable to the grantor.

In the cases before us the grantor of the trusts had no power of revocation as specified in section 166. The fact that he might at some future time, namely, upon the death of his wife, have a power amounting to that of revocation does not confer such power on him during the taxable year. Nor could the income be used for his benefit in any of the ways described in section 167. Consequently the trust income was taxable to the trustee under section 161 (b) and not to the petitioner. Sydney B. Bliss, supra.

Decision will be entered under Bule 50.


author: Arundell:

text:
    Lelia W. Stokes, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 64197, 67210.
    Promulgated August 23, 1933.

      Henry Dross, Esq., for the petitioner.

      Francis Gettle, Esq., for the respondent.
   OPINION.

Arundell:

The portion of the trust deed which gives rise to the controversy here directs the trustee to pay the trust income “ to such person or persons or for such use or uses ” as petitioner “ may in writing from time to time direct.” Petitioner contends that the trust was one for the accumulation of income for the benefit of unascer-tained persons within the meaning of section 161 (a) (1) of the Revenue Act of 1928, hence the income is taxable to the fiduciary.

Undoubtedly tlie powers given in the trust to the petitioner to name the beneficiary not only as to income, but also as to corpus, were broad enough to include herself as a beneficiary if she so chose. Had the grantor of the trust directed annual distribution to petitioner or her nominees the case would unquestionably fall within sections 161 (a) (2) and 162 (b), which together provide that income which is to be distributed currently is taxable but in such cases the fiduciary may deduct the amount “ which is to be distributed currently ” and such amount shall be included in income of the beneficiaries “whether distributed to them or not.” Petitioner had the power to require the income to be distributed currently and thus the question is whether her failure to exercise that power changes the character of the income and converts it from that which is to be distributed currently to income accumulated for unascertained persons.

Reliance is placed largely on the case of Elizabeth S. Sprague, 8 B.T.A. 173, wherein we said:

The Commissioner held that because the petitioner could receive the income of the trust funds by making a written request therefor, the entire income is taxable to her, and determined the deficiency accordingly. This position can not be sustained. The trust instruments all provided that the income should be added to the principal. To this extent such income was accumulated for unascertained persons or persons with contingent interests. There was the further provision that upon written request (by the settlor in one ease and by the petitioner in the others) certain portions of the income were to be paid to the petitioner. Any such request constituted the exercise of a power which, to the extent that such power was validly exercised, removed such income from the provision for accumulation and made it distributable. Such distributable income was thereupon severed from the trust property and was taxable to the beneficiary under the provisions of section 219, quoted above. So much as was not distributable pursuant to the exercise of the power given by the trust instrument, remained a portion of the trust property, taxable to the fiduciary.

The Sprague case is distinguishable from the one before us in that there the income not used for the purposes specified was required to be added to and become part of the principal of the trust funds. The trust in these cases contains no such provision and apparently the income remained subject to petitioner’s command at all times.

The rule that we draw from the few decided cases touching on this question is that where beneficiaries are entitled absolutely to any or all of the trust income at such times as they shall specify, they are taxable upon the entire income and such income is deductible by the fiduciary whether distributed or not. But where the beneficiaries ai’e entitled only to the amounts which they claim and the surplus is to be accumulated for other purposes, they are subject to tax only on the amounts claimed under their power, and only such amounts are deductible by the fiduciary. Thus in Jobes v. Crooks, 33 Fed. (2d) 1016, the trust deed gave the trustee discretion to distribute income to the beneficiary and required the trustee to make distribution of the income on demand of a majority of beneficiaries and any income not so distributed was to be added to corpus. The beneficiaries made no demand for the income, but in one year the trustee distributed the sum of $800 to them. It was held that the beneficiaries were taxable on only the amount actually distributed, the court making reference to the provision for adding undistributed income to the corpus. In Esty v. United States, 63 Ct.Cls. 455, the trust instrument required the trustees to pay the income to the beneficiary (who was also the grantor) “ as requested.” The beneficiary requested and received only a part of the trust income and claimed that he was taxable on only the amount so requested and actually paid to him. The court referred to the fact that the trustees were not authorized to add any of the income not drawn by the beneficiary to the principal of the trust, and held that the beneficiary was taxable on the entire income (save a portion payable to the grantor’s daughter) saying that inasmuch as he alone had the disposition of the net income it was taxable to him under section 219 (d) of the Revenue Act of 1918, which required the beneficiary to include in income “his distributive share, whether distributed or not, of the net income of the trust.”

We think it clear that income need not actually be distributed to beneficiaries in order for it to be taxable to them, in view of the provisions of 162 (b) of the Revenue Act of 1928, which require that in the case of income which is to be distributed currently the beneficiaries shall include in their income their portion of the net income “ whether distributed to them or not.” See G. C. M. 8724, X-2 C.B. 197.

It is accordingly our opinion, and we so hold, that under the trust instrument here involved the entire net income of the trust was properly included by the respondent in the income of petitioner. Cf. Corliss v. Bowers, 281 U.S. 376.

Decision will be entered for the respondent.


author: Trammell:

text:
    Winston Brothers Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 59270.
    Promulgated August 23, 1933.

      Howe P. Oochrcmie, Esq., for tlie petitioner.

      Bruce A. Low, Esq., and T. G. Histon, Esq., for the respondent.
   OPINION.

Trammell:

The facts in this case were stipulated by the parties, but the stipulation consists largely of documents which record the transactions involved. From those documents and the pleadings we have found the facts above set forth, which we consider material to a decision of the issue presented, in addition to which the stipulation in full is by reference made a part hereof.

There is no disagreement with respect to the primary facts, or what actually transpired. The issue is one of law, and before attempting any discussion either of the facts or applicable statutes, a clear statement of the issue and the respective contentions of the parties seems desirable.

The pleadings, which are very meager, raise three issues, based upon the petitioner’s assignments of error designated (a), (b) and (c). At the hearing the petitioner waived assignments (b) and (c), which accordingly will not be considered here, leaving only assignment (a), which reads as follows: “ The Commissioner erred in computing a profit on stock or a liquidation of $147,114.72.” This allegation was denied by respondent in his answer.

On September 1, 1928, the petitioner owned 4,872 out of a total of 7,124 shares of common stock in the Winston-Dear Co. outstanding, and on the same date acquired, in exchange for shares of its own capital stock, all the assets of said company, subject to its liabilities. The sole asset of the Winston-Dear Co. then consisted of 1,803 shares of the petitioner’s common stock, which it distributed pro rata among its stockholders, including the petitioner, upon surrender of their stock.

The deficiency letter states that this transaction by which the petitioner acquired all the assets of the Winston-Dear Co. in exchange for shares of its capital stock constituted a reorganization as defined in section 112 (i) (1) (A) of the Revenue Act of 1928, and that the distribution by the Winston-Dear Co. of its sole asset, consisting of the petitioner’s common stock, constituted a complete liquidation within the meaning of section 115 (c) of the Revenue Act of 1928. Respondent further held in the deficiency letter that as a result of the liquidation of the Winston-Dear Co. taxable profit accrued to the petitioner in the amount of $147,114.72, representing the excess of the value of the 4,872 shares of the Winston-Dear Co. common stock owned by the petitioner at August 31, 1928, over its value at March 1, 1913, the stock having been acquired by the petitioner prior to the latter date. Respondent included the profit of $147,114.72 in the petitioner’s gross income, and computed the deficiency in controversy.

From tire foregoing we think it is clear that the deficiency, in the particular complained of, results from the respondent’s determination that the petitioner derived a profit in the amount stated by way of a liquidating dividend received September 1, 1928, on the stock it owned in the Winston-Dear Co., and that such profit is recognizable for tax purposes under the provisions of section 112 of the Revenue Act of 1928. Such is the respondent’s contention, and we think that the petitioner’s assignment of error, above quoted, fairly raises the issue of the correctness of the respondent’s action.

However, the petitioner in its brief states that the issue is whether or not it realized “ a taxable gain of $147,114.72 from the transaction when it obtained, the assets of the Winston-Dear Company in exchange for the issuance of its stock.” The petitioner then argues that it was the purchaser in the first step of this reorganization, and that it did not realize any taxable profit at the time of the acquisition of the assets of the Winston-Dear Co. We are in accord with this argument, but as above indicated, the respondent has not made such a determination, and such is not the issue raised by the pleadings.

The petitioner further contends that there is no issue before us in this proceeding as to whether or not it realized a gain or sustained a loss when, on September 1, 1928, in pursuance of the plan of reorganization, it exchanged its 4,872 shares of common stock in the Winston-Dear Co. for shares of its own common stock then owned by the WinstomDear Co.; but that if such issue were before us, there would be no recognizable gain or loss on the transaction, under the provisions of section 112 of the Revenue Act of 1928. We find ourselves unable to agree with either of these contentions of the petitioner.

Section 112 of the Revenue Act of 1928 in subdivision (a) lays down the general rule that upon the sale or exchange of property the entire amount of the gain or loss shall be recognized, except as thereinafter provided. The exception relied upon by the petitioner here is embodied in subdivision (b) (3) of that section, which reads as follows:

(3) Stock for stock on reorganization. — No gain or loss shall he recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.

The petitioner argues that the facts of this case bring it squarely within this provision, since the transaction admittedly was in pursuance of a plan of reorganization, to which both the petitioner and the Winston-Dear Co. were parties, and that petitioner exchanged stock in the Winston-Dear Co. for its own stock.

The fallacy of this argument lies in the fact that, within the meaning of the taxing statute, the petitioner did not exchange stock for stock in pursuance of a plan of reorganization as provided in section 112 (b) (8), supra, but surrendered its stock in the Winston-Dear Co. and received in full payment in exchange therefor its pro rata part of that company’s assets in final liquidation. In our opinion it is immaterial that the asset which it received as such liquidating dividend consisted of shares of its own capital stock.

Whatever profit the petitioner derived by way of the liquidating dividend, therefore, is taxable to it to the extent the same is recognized under the provisions of section 112, in accordance with the provisions of section 115 (c), which reads in material part as follows:

(c) Distributions in liquidation. — Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock * * *. The gain or loss to the distributee resulting from such exchange * * * shall be recognized only to the extent provided in section 112. * * *

This brings us back to the question of the extent to which the profit derived by the petitioner is recognized under section 112. In determining this question, subdivision (b) (3) of section 112, above referred to, must be construed in connection with subdivision (g) of the same section, which provides as follows:

(g) Distribution of stoclc on reorganization.- — If there is distributed, in pursuance of a plan of reorganization, to a shareholder in a corporation a party to the reorganization, stock or securities in such corporation or in another corporation a party to the reorganization, without the surrender by such shareholder of stoclc or securities in such a corporation, no gain to the distributee from the receipt of such stock or securities shall be recognized. [Italics supplied.]

By its plain terms, we think subdivision (g) of section 112 has no application to the question before us, since the Winston-Dear Co. did not distribute to the petitioner its own stock in pursuance of the plan of reorganization, without the surrender by the petitioner of the stock which it owned in the Winston-Dear Co.

The provisions of section 112 (g), supra, first appeared in the revenue laws as section 203 (c) of the Revenue Act of 1924, and was reenacted without change in the corresponding section of the 1926 Act. The legislative history of this section clearly indicates that it was the intention of Congress to permit the distribution of stock or securities to the stockholders of a corporation pursuant to a plan of reorganization without recognition of gain only where such distribution is effected without the surrender by the stockholders of their stock, that is to say, only where such distribution- does not constitute a liquidating dividend. See Kept. No. 179 of the House Committee on Ways and Means, 68th Cong., 1st sess., on the Revenue Bill of 1924, p. 14, and the report of the Senate Finance Committee on the same bill, p. 15.

To construe subdivision (b) (3) of section 112, supra, as demanded by the petitioner, to include tax free an exchange of stock for stock where such exchange constitutes a liquidation, would be to limit or nullify the clearly intended effect of subdivision (g) of the same section. Such a construction could not be adopted, therefore, if an equally reasonable construction will give effect to the provisions of both subdivisions of the section. This is a familiar rule of statutory construction which needs no citation of authority to justify its application.

The legislative history of section 112 (b) (3) supports the construction that it was never the congressional intent that its provisions should embrace an exchange of stock for stock in the case of a liquidation, whether or not in connection with a reorganization.

Section 112 (b) (3) in its present form was first enacted as section 203 (b) (2) of the Revenue Act of 1924, but substantially the same principle was adopted in section 202 (c) (2) of the Revenue Act of 1921, which provided that no gain or loss should be recognized, “ When in the reorganization of one or more corporations a person receives in place of stock or securities owned by him, stock or securities in a corporation a party to or resulting from such reorganization.”

In our opinion the manifest purpose of these provisions was and is to exempt from tax gain resulting from the exchange of stock or securities where, in the process of a reorganization of one or more corporations, a stockholder receives in place of stock or securities owned by him, other stock or securities in a corporation a party to such reorganization.

The motive which actuated Congress in adopting these provisions is not difficult to understand. Where a stockholder has made an investment in the stock or securities of the corporation which later becomes a party to a reorganization, and such stockholder in connection with such reorganization receives other stock or securities in exchange for or in place of his original holdings, his investment in the enterprise substantially is continued, although in a different form. In this situation, it is provided that no gain or loss shall be recognized for tax purposes. But where the stockholder surrenders his stock and receives his pro rata share of the corporation’s assets in full payment in exchange for his stock, the transaction involving his investment in that stock is terminated, and it becomes a completed transaction. Any gain derived or loss sustained must then be recognized in determining tax liability.

The petitioner’s contention that the gain derived by way of the liquidating dividend received by it upon the surrender of its stock in the Winston-Dear Co. on September 1, 1928, is exempt from tax by virtue of the provisions of section 112 (b) (3), supra, is denied.

This leaves only the question of the amount of the gain derived by the petitioner, and since no evidence was offered to show that the respondent’s computation in that respect was erroneous, his determination is approved.

Judgment will he entered for the respondent.


author: Marquette :

text:
    Willard Pope, Petitioner, v. Commissioner of Internal Revenue, Respondent. Francis C. McMath, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 42734, 42747, 43904, 44567, 51646, 52023.
    Promulgated August 23, 1933.

      Raymond K. Dyhema, Esq., for the petitioners.

      James K. Polk, Esq., for the respondent.
   OPINION.

Marquette :

The petitioners seek to have so much of their income as was derived from the sale of the lands belonging to the syndicate taxed under the provisions of section 208 of the Revenue Act of 1926 and section 101 of the Revenue Act of 1928. The only issue is whether these lands constituted “ capital assets ” within the meaning of these sections. By section 208 (a) (8) of the Revenue Act of 1926, it is provided:

The term “ capital assets ” means property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or businéss. * * *

Section 101 (c) (8) of the Revenue Act of 1928 is not materially different from the provision quoted above. It is conceded that with the exceptions set forth in our findings the lands had been held during the years in question by the taxpayers for more than two years. Real estate may not be included in inventory. Atlantic Coast Realty Co., 11 B.T.A. 416; Albert F. Keeney, 17 B.T.A. 560; E. H. Hay, 25 B.T.A. 96.

Whatever may have been the intention of the parties in 1919, it is clear that these lands were held during the period 1925 to 1928, inclusive, primarily for sale. They produced no rental income. It is not claimed that the owners ever intended to erect improvements on the land for rental purposes. The intention to sell is clearly indicated by the declaration of trust of Miller of December 1, 1919, and by the agreement of December 20, 1920. As early as August 1922, a part of the property had been subdivided. In subsequent years four additional blocks were subdivided. In this way the syndicate owned first and last 1,498 lots which they held for sale and no other purpose.

The one remaining question is whether these properties were held by each of the petitioners for sale “ in the course of his trade or business.” We may eliminate the word “ trade ”, since if a profession may be termed a trade, both petitioners were engineers. Whittled down, the issue is whether the activities of the petitioners set forth in our findings amounted to carrying on a business. In Flint v. Stone Tracy Co., 220 U.S. 107, the Court said:

“ Business ” is a very comprehensive term and embraces everything about which a person can be employed. Black’s Law Diet. 158, citing People ex rel. Hoyt v. Tax Comrs., 28 N. V. 242, 244. “ That which occupies the time, attention, and labor of men for the purpose of a livelihood or profit.” 1 Bouvier’s Law Dict. p. 273.

On the other hand, isolated transactions do not constitute the carrying on of a trade or business. Mente v. Eisner, 266 Fed. 161; Bedell v. Commissioner, 30 Fed. (2d) 622; Washburn v. Commissioner, 51 Fed. (2d) 949. It is often difficult to apply the general definitions, with the result that “ the decision in each instance must depend upon the particular facts before the court.” Von Baumbach v. Sargent Land Co., 242 U.S. 503.

In the case before us we have not isolated transactions, but continuity of effort. Two tracts were purchased in 1919, one in 1920, and one in 1923. The tracts were laid out in lots in August 1922 (before the last tract was purchased), May 1924, December 1924, June 1926, and April 1927. In the period 1923-1928, inclusive, 891 lots and 5 larger tracts were sold. All of this required time, attention and labor, and the purpose was gain. These transactions, taken as a whole, in our opinion constituted a business. The fact that no property was purchased during the years before us does not militate against this conclusion, since a business may consist of only the sale of assets acquired in previous years. John D. Roney, 26 B. T. A. 1213. Since these transactions constituted a business, the question is, Whose business was it? The properties purchased and sold belonged to the individual members of the syndicate, among whom were the petitioners. The Essex Co. held the bare legal title. Every act done by Miller or by the Essex Co. was authorized by these members. They conferred on that company the authority under which it acted; and all this “For greater convenience in dealing with said lands and rights * * In other words, the members of the syndicate, of whom the Essex Co. was one, operated through their chosen representative. It is axiomatic that one may confide the management of his business to another; but it still remains the business of the owner.

At this point the petitioners call attention to the fact that the appointment of the Essex Co. is irrevocable. It does not lie in the mouths of the petitioners to advance this contention. They, together with Miller, held the important executive offices of the company and they with Miller constituted a majority of its board of directors. Thus they, and the syndicate through them, were in absolute control of their agent.

We conclude that the petitioners held the properties in question primarily for sale in the course of their business. The petitioners rely on Phipps v. Commissioner, 54 Fed. (2d) 469. We do not think that case is controlling. The facts there differ materially from those presented in these proceedings. Cf. Von Baumbach v. Sargent Land Co., supra.

Judgment will be entered for the respondént.


author: Trammell :

text:
    Manufacturers Trust Company (Formerly Chatham Phenix National Bank & Trust Company), Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46073.
    Promulgated August 20, 1933.

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

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

Trammell :

The issue in this case is whether or not the respondent erred in refusing to allow the petitioner to deduct from its gross income for the year 1925 the sum of $36,991,17, representing the statutory net loss sustained by the Metropolitan National Bank & Trust Co. for the period January 1 to March 15, 1925. The Metropolitan Bank was merged or consolidated with the petitioner on the latter date, under the Act of Congress approved November 7, 1918 (40 Stat. 1043, 12 U.S.C.A., secs. 33, 34), and the consolidated bank continued under the petitioner’s charter.

The petitioner contends that the return filed by it for 1925, in which it reported the income and deductions of itself and its subsidiaries for the entire year, as well as the income and deductions of the Metropolitan Bank for the period January 1 to March 15, 1925, was a proper and sufficient return, upon the basis of which its tax liability should be computed. The respondent held that the Metropolitan Bank should have filed a separate return for that period, and determined the deficiency by eliminating from the petitioner’s return the income and deductions of the absorbed bank for the portion of the year preceding consolidation.

The petitioner, on brief, further contends in the alternative that the net loss of the Metropolitan Bank should be carried forward and offset against the income derived by it during the period from March 16 to December 31, 1925, from the properties transferred to the petitioner by the Metropolitan as a result of the consolidation. No separate account was made of the income subsequently produced by the assets of the merged banks, but it is shown that the Metropolitan contributed 21 percent of such assets and the petitioner proposes to allocate to the Metropolitan assets 21 percent of petitioner’s income. From the amount so computed as Metropolitan income, petitioner argues that the net loss in question should be deducted in determining its tax liability for 1925.

We are unable to agree with the petitioner’s contentions. In A. J. Siegel, 4 B.T.A. 186, where three banking associations united under the statute of 1918 cited above, and continued the consolidated business under the charter of one of the associations, we held that no new corporate entity was created, the effect of the statute being to merge the identity of two of the associations in the third, whose corporate existence continued. However, in such case the merged or consolidated corporation becomes liable for all obligations of its constituents (Nat. Bank of Commerce, 19 B.T.A. 1080, and authorities cited; affd., 55 Fed. (2d) 1073), and the merging corporation ceases to be a taxpayer. For income tax purposes, at least, there is but one corporation after the merger. Industrial Cotton Mills Co., 22 B.T.A. 648, 652. It follows that since the petitioner here is not the “ taxpayer ” which sustained the net loss in controversy, it is not entitled to deduct the same in computing net income for the taxable year. Woolford Realty Co. v. Rose, 286 U.S. 319; Overbrook Nat. Bank of Philadelphia, 23 B.T.A. 1390; Industriad Cotton Mills Co., supra; Athol Mfg. Co., 22 B.T.A. 105; Standard Silica Co., 22 B.T.A. 97; Alabama By-Products Corp., 18 B.T.A. 919; Swift & Co. v. United States, 38 Fed. (2d) 365.

In support of its argument that but one return was required for the taxable year, petitioner cites our decision to that effect in Grand Rapids Nat. Bank, 9 B.T.A. 1119. The cited case was overruled by us in Industrial Cotton Mills Co., supra, and while the latter decision was reversed by the Circuit Court of Appeals for the Fourth Circuit, 61 Fed. (2d) 291, such reversal was predicated upon facts which do not exist in the instant case. This is made clear by the following extract from the court’s opinion:

It is true that ordinarily the loss sustained by one of a number of affiliated corporations cannot be carried forward and deducted from the consolidated return, but must be deducted only from the income of the corporation which has sustained the loss (citing authorities). And on the same principle, loss sustained by one corporation prior to its merger with another cannot be availed of, we think, by the corporation resulting from the merger. This rule, however, is based upon the fact that the statute authorizes the carrying forward of the deduction only by the taxpayer who has sustained the loss; and a group of affiliated corporations, although a taxpaying unit, is not a taxpayer within the meaning of the section authorizing the deduction. To permit the deduction in the consolidated return of affiliates or in the return of a corporation succeeding to their rights by merger would open the door to tax evasion by permitting a corporation with taxable income to escape taxation by the simple expedient of acquiring a business which had sustained losses in past years.
But the rule has no application, we think, where there is in reality but one taxpayer, and the merger, as here, is with a mere holding company which owns no property except the stock and obligations of the company which produces the entire income * * *.

It is obvious that the principle upon which the court reversed our decision in the Industrial Cotton Mills case has no application under the facts of the present case, which comes well within our prior decisions and those of the courts hereinabove cited.

Judgment will he entered for the respondent.


text:
    Samuel L. Hoffman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 44833.
    Promulgated August 29, 1933.

      Harold Wisan, Esq., for the petitioner.

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

Trammell :

This proceeding is for the redetermination of a deficiency in income tax of $1,671.18 for 1926. The only question presented by the petition as amended is whether in the determination of the petitioner’s tax liability an amount of $45,233.75 alleged to represent losses sustained on the sale of certain corporate stock and machinery held for more than two years is to be allowed as a deduction against ordinary income under the provisions of section 214 (a) (4) or (5) of the Revenue Act of 1926, or is to be treated as a “ capital net loss ” within the meaning of the provisions of section 208 (a) (6) and (c) of the act, as was done by the respondent. In an amended answer the respondent alleged that he erred in determining that the sale of the above mentioned stock occurred in 1926 and that a loss thereon was sustained in that year. He moved for an increase of the deficiency accordingly.

In 1923 the petitioner acquired 750 shares or one half of the capital stock of the Dorman Commission Co. at a cost of $75,000. The other half of the stock was owned by Thomas B. Dorman and members of his family. The business of Dorman Commission Co., hereinafter referred to as the Commission Co., was that of selling merchandise, principally blankets, on a commission basis.

Some time prior to April 1926, the Phillips Blanket Mills, a corporation engaged in the manufacture of blankets at Parsons, West Yirginia, became indebted to the Commission Co., the latter holding four notes of the former secured by a mortgage on a mill belonging to the former. The mortgage stood in the name of Thomas B. Dorman, trustee, in which capacity he was acting for the Commission Co. The mortgage was foreclosed and the mill was sold at foreclosure on April 30, 1926, at which time Dorman, acting as trustee for the Commission Co., bid it in. The sale was confirmed on July 5, 1926, and title to the mill passed to Dorman as trustee for the Commission Co.

In 1925 the Commission Co. was carrying on business at a loss and in the latter part of the year the petitioner approached Dorman with respect to dissolving the company at the end of 1925 and distributing its assets. They subsequently had several conferences with respect to Dorman purchasing the petitioner’s stock in the company. Dorman finally suggested that the petitioner continue as a stockholder until July 1, 1926. The petitioner acquiesced in this suggestion. During this period the company continued to operate at a loss. About April 1926, when the foreclosure proceedings referred to above were taking place, it was agreed that Dorman would buy the petitioner’s stock in the Commission Co.

On July 9, 1926, the petitioner and Dorman held a conference in the office of the petitioner’s attorney, Jacob Schapiro, who held a power of attorney from the petitioner and had performed various legal services for him. Schapiro kept many of the petitioner’s papers and securities in Ms safe and also bad access to tbe petitioner’s vault.

The sale of the petitioner’s stock to Dorman was discussed further at this conference and it was verbally agreed that the petitioner would receive for his stock a one-half interest in the mill acquired by the Commission Co. under the foreclosure proceedings mentioned above and which was standing in the name of Dorman as trustee. This transaction was to be effective as of July 1, 1926. On that date and throughout the remainder of the year one half the value of the mill was $29,866.25. Also the petitioner was to receive $1,600 from Dorman “ to replace some losses that had occurred on some items ” relating to the activities of the Commission Co. Within a day or two after July 9, 1926, Dorman delivered to the petitioner a note in the amount of $1,600, bearing interest from July 1, 1926.

On July 9, 1926, the certificates for the petitioner’s 750 shares of stock in the Commission Co. were in the possession of Schapiro, his attorney, where they had been for some time. At the conference on that date the petitioner endorsed the certificates in blank and gave them back to Schapiro to be held by him pending the compliance by Dorman with “ certain formalities ” upon the completion of which they were to be delivered to Dorman. The “ formalities ” with which Dorman was to comply were: (1) Keduce the capital stock of the Commission Co., distribute the mill as an asset of the company and formally transfer a one-half interest in it to the petitioner; or (2) have the mill sold and pay the petitioner one half of the proceeds received therefrom; or (3) form a new corporation, and have the Commission Co. transfer the mill to it for stock, then have the Commission Co.’s capitalization reduced and a portion of the stock so received by the Commission Co. transferred to the petitioner, the amount to be transferred to be based on the asset value of the mill in the new corporation. On July 9, 1926, Dorman had not decided which of the foregoing steps he would take. However, about that date he and the petitioner discussed the formation of “ some sort of a new organization ” as soon as the mill could be rehabilitated or placed in an operating status. Thereafter the petitioner and Dorman, working together, sought to sell the mill until about November 1926, when one Ackerly sought to acquire an interest in it. Ackerly was a mill man and had his own mills. He had been operating the mill here involved since its acquisition by the Commission Co. at the foreclosure sale. He had put some new machinery in the mill and with the aid of the petitioner and Dorman had taken upon himself the work of rehabilitating it. It was agreed that a new corporation would be formed which would take over the rnDl and that Dorman y^ould receive one third qí the stock, the petitioner one third, and Ackerly and the interests associated with him, who were to contribute machinery and cash in the total amount of approximately $30,000, would receive one third. At some undisclosed date in 1926 or 1927, but on or before February 14, 1927, the new corporation, known as “ Dorman Mills, Incorporated ”, and hereinafter referred to as the Dorman Mills, was organized.

On or about February 14, 1927, the Commission Co. exchanged the mill it had acquired at the foreclosure sale for shares of stock in the Dorman Mills. The Commission Co. distributed these shares to its stockholders and accordingly reduced its own capital stock to $600. The one third of the stock in the Dorman Mills that the petitioner was to receive was delivered to him in the early part of 1927.

The certificates for the 750 shares of stock in the Commission Co. which the petitioner endorsed -in blank on July 9, 1926, and gave to Schapiro to be held by him pending the compliance with “ certain formalities ” by Dorman and upon the completion of which they were to be delivered to Dorman, were not delivered by Schapiro until some time after 1927, when they were turned in for final cancellation.

After July 1, 1926, the petitioner took no interest in and had nothing to do with the operation or control of the Commission Co.

In 1923 the petitioner purchased certain machinery at a cost of $11,077 and in 1926 sold it for $5,500. Depreciation sustained on the machinery during the period of the petitioner’s ownership amounted to $3,877. On the sale of the machinery the petitioner sustained a loss of $1,700.

In his income tax return for 1926 the petitioner took as a deduction against ordinary income the amount of $45,233.75: This amount was composed of $1,700 representing the loss sustained on the machinery sold in that year and $43,533.75 which was the amount computed by the petitioner as the loss on the 750 shares of the stock of the Commission Co. growing out of the transaction of July 9, 1926. The amount of $43,533.75 represents the difference between the cost of the stock, $75,000, and the total of the note for $1,600 and one half the value of the mill in July 1926, $29,866.25.

In determining the deficiency here involved the respondent disallowed the amount of $45,233.75 as a deduction against ordinary income, treated it as a capital net loss and allowed 12y2 percent thereof as a deduction against the petitioner’s total tax liability.

For 1926 the petitioner had no capital gains and no capital losses except the ones here in controversy.

The respondent contends that in determining the deficiency he erred in treating the transaction between the petitioner and Dorman on July 9, 1926, as a sale by the petitioner of his stock to Dorman and urges that the petitioner sustained no loss on the stock in 1926, since the transaction was not consummated until 1927. The petitioner contends that the transaction of July 9, 1926, represented a completed sale and that the loss on the stock was sustained in 1926. In support of his position the petitioner urges that the parties intended that title to the stock should pass to Dorman on July 9, 1926.

On July 9, 1926, the petitioner and Dorman had a lengthy conference in the office of the petitioner’s attorney respecting the sale of the stock. During this conference the petitioner endorsed the certificates representing the stock and handed them back to his attorney, in whose custody and possession they had been for some time. The certificates were not delivered to Dorman at that time, although he was present, nor is there anything in the record to indicate that the petitioner offered or was willing to deliver them to him at that time. The certificates were to be retained by the petitioner’s attorney and held by him pending the performance of one of the following by Dorman: (1) The formal transfer of a one-half interest in the mill to the petitioner, or (2) the sale of the mill and the payment of one half of the proceeds thereof to the petitioner, or (3) the formation of a new corporation, the transfer of the mill to it for stock and the issuance of a portion of such stock to the petitioner. Upon the compliance by Dorman with one of the foregoing requirements the attornej'- was to deliver the stock certificates to him. On July 9, 1926, the Commission Co. was the owner of the mill and legal title thereto stood in Dorman’s name as trustee for the company. Under these circumstances it is clear that some action on the part of the Commission Co., which was not a party to the transaction between the petitioner and Dorman, was necessary before Dorman could be in a position to demand delivery of the stock, which as a matter of fact was not delivered by the attorney until some time after 1927. The necessary corporate action was not taken until in February 1927, when the Commission Co. transferred the mill to the newly organized corporation, Dorman Mills, for capital stock therein, a portion of which was distributed to the petitioner at or about that time. While the petitioner testified that after July 9, 1926, he considered Dorman to be the owner of the stock, that he (petitioner) no longer had any interest in the Commission Co., and that he considered himself to be the owner of a one-half interest in the mills, we are unable, after giving due consideration to all of the other evidence, to conclude that the transaction entered into between petitioner and Dorman on that date constituted a sale. The evidence is clear that Dorman was not to receive the stock until he had complied with one of the three requirements heretofore set forth. Under such circumstances the mere endorsement of the stock certificates by the petitioner and their return to the place where he had theretofore kept them, with the understanding that upon tbe performance of one of three requirements by Dorman they would be delivered to him, does not, we think, operate to transfer title to the stock to Dorman prior to his performance. In Charles W. Dahlinger, 20 B.T.A. 176; affd., 51 Fed. (2d) 662; certiorari denied, 284 U.S. 673, we said:

The distinction between a contract to sell and a sale is fundamental in tbe law of sales, as is pointed out in Williston on Sales, 2d ed., vol. 1 cb. 1, where tbe following definitions are given:
A contract to sell goods is a contract whereby tbe seller agrees to transfer tbe property in goods to the buyer for a consideration called the price.
A sale of goods is an agreement whereby tbe seller transfers the property in goods to tbe buyer for a consideration called tbe price.
5}S # 55s
The distinction is some times expressed by the terms “ executory ” and “ executed ” sales. Whether a bargain between parties is a contract to sell or an actual sale, depends upon whether the property in the goods is transferred. . If it is transferred, there is a sale, an executed sale, even though the price be not paid.
Sales and contracts to sell may both be subject to conditions expressed or implied, and conditions may be conditions subsequent or conditions precedent. A condition precedent requires that something shall happen prior to the vesting of the property in the buyer. A condition subsequent divests by its happening a title which has already vested.
* * * * * * *
* * * Although a contract to sell is consummated when the parties execute it, a sale, even where the subject of a contract, is incomplete and imperfect until title passes. But a sale is complete when title passes. At that moment both parties to the sale achieve what they set out to accomplish by the sale. A seller who formerly had property which he desired to sell, thereafter had that property no longer. He thereupon exchanged his right and title to the property for the purchase price or the purchaser’s promise to pay it. The property thereafter belonged to the purchaser and he had what he did not have before, an obligation to pay for it. The passing of title irrevocably and finally changes the rights of the parties to a sale.

From the evidence before us we do not think it was the intention of the petitioner that the title to the stock should pass from him to Dorman prior to performance by Dorman. Consequently the agreement of July 9, 1926, was a contract to sell and not a sale. Dorman not having complied with any of the requirements in 1926 and title to the stock not having passed from the petitioner in 1926, there was no sale in that year; consequently, the petitioner did not sustain in that year any loss on the stock. The contention of the respondent as to this item is sustained.

During the taxable year the petitioner sold at a loss of $1,700 certain machinery acquired in 1923. He contends that this loss is deductible from ordinary income and is not to be treated as a capital net loss under the provisions of section 208 (c) of the Revenue Act of 1926, as was done by the respondent. The respondent contends that his action in treating the loss as a capital net loss is correct and should be sustained.

Section 208 of the Kevenue Act of 1926 provides in part as follows:

(a) For the purposes of this title—
******
(2) The term “ capital loss ” means deductible loss resulting from the sale or exchange of capital assets;
* * * * * * *
(6) The term “capital net loss” means the excess of the sum of the capital losses plus the capital deductions over the total amount of capital gain;
$ $ $ $ $ $ *
(b) In the case of any taxpayer (other than a corporation) who for any taxable year derives a capital net gain, there shall (at the election of the taxpayer) be levied, collected and paid, in lieu of the taxes imposed by sections 210 and 211 of this title, a tax determined as follows:
A partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner provided in sections 210 and 211, and the total tax shall be this amount plus 12% per centum of the capital net gain.
(c) In the case of any taxpayer (other than a corporation) who for any taxable year sustains a capital net loss, there shall be levied, collected, and paid, in lieu of the taxes imposed by sections 210 and 211 of this title, a tax determined as follows:
A partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner provided in sections 210 and 211, and the total tax shall be this amount minus 12% per centum of the capital net loss; but in no case shall the tax under this subdivision be less than the taxes imposed by sections 210 and 211 computed without regard to the provisions of this section.

The petitioner contends that since he had no capital gains during the taxable year, but only a loss, such loss is a capital loss and not a capital net loss ” within the meaning of that term as used in section 208 (c) of the act, and urges that the loss is allowable as a deduction in full against ordinary income and is not to be limited to 12% per centum as provided in section 208 (c).

In Piper v. Willcuts, 64 Fed. (2d) 813; affirming 55 Fed. (2d) 397, the essential facts were practically identical with those in the instant case. In that case the taxpayer sold certain capital assets at a loss and deducted the amount thereof from ordinary income. This was the only transaction involving capital assets that the taxpayer had during the year, hence he had no capital gains. The respondent there, as here, determined the taxpayer’s tax liability under the provisions of section 208 (c) of the Revenue Act of 1926. The taxpayer there contended that the capital net loss with which the statute dealt was where there had been sales or exchanges of capital assets at both gain and loss resulting in an amount of loss greater than the amount of gain; that where the transactions in capital assets all resulted in losses the statute was inapplicable and the taxpayer was entitled to deduct the amount of losses from ordinary income. The court, after reviewing the legislative history of subdivision (c) of section 208, found that the purpose of the subdivision was to limit the deduction allowable for capital losses to the amount of 12% per centum thereof and held that the loss in controversy was a capital net loss within the meaning of that term as used in subdivision (c). The court pointed out that while the term. capital net loss ” meant the excess of the sum of the capital losses plus the capital deductions over the total amount of capital gain, if any, the absence of any capital gain served to make greater the amount of the capital loss.

We think the holding of the court in the Piper case is sound and upon that authority the contention of the petitioner is denied.

The petitioner contends that if he had had only capital gains during the taxable year he would have had an option under subdivision (b) of section 208 of treating the amount thereof as subject to tax at 12% per centum or as treating it as ordinary gains or income, and that since he had only a capital loss he had an option as to how it should be treated. In Hallie D. Elkins, 24 B.T.A. 572, which involved subdivision (c) of section 208 of the Eevenue Act of 1924, the provisions of which are identical with those of section 208 (c) of the Eevenue Act of 1926, we held that the taxpayer was not given any election as to how capital net losses are to be treated in determining tax liability. We think our holding in that case is applicable here and the contention of the petitioner is accordingly denied.

Judgment will be entered under Rule 50.


author: Van Fossan:

text:
    Dolomite, Incorporated, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 60661.
    Promulgated August 29, 1933.

      George P. Bickford, Esq., for the petitioner.

      Dean Kimball, Esq., for the respondent.
   OPINION.

Van Fossan:

The sole issue in this proceeding is whether the proper basis for depletion of rock deposits formerly owned by the Stone Co. is their original cost to it or is their cost to the petitioner as measured by the fair market value of the preferred stock of the Sturgeon Bay Co. transferred to the Stone Co. in payment for all of the latter company’s stock, and hence for the control and possession of its assets, including such deposits.

Section 114 (b) (1) of the Revenue Act of 1928 provides:

The basis upon which depletion is to be allowed in respect oí any property shall be the same as is provided in section 113 for the purpose of determining the gain or loss upon the sale or other disposition of such property * * *.

Section 113 of the Revenue Act of 1928 provides:

SEC. 113. BASIS POE DETERMINING GAIN OR LOSS.
(a) Property acquired after February 28, 1918. — The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that—
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(7) Transfers to corporation where control or property remains in same persons. — If the property was acquired after December 31, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 80 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year, in which the transfer was made. * * *

Corresponding provisions of the Revenue Act of 1926 are similar.

The respondent maintains that the case at bar comes within the exception of section 113 (a) (7) and that the basis for depletion is the cost of the rock deposits to the Stone Co., or $30,000. The petitioner contends that the proper figure upon which depletion should be computed is $201,701.39, the actual price paid for the deposits in the transactions set forth in the findings of fact, as governed by section 113 (a).

The requirements established by section 113 (a) (7) are:

(1) The property must have been acquired after December 31. 1917;
(2) The property must have been acquired in connection with the reorganization;
(3) Immediately after the transfer of the property an interest or control in such property of 80 percent or more must have remained in the same persons or any of them.

All three requirements must be met in order that the case may come within the exception. Failure to meet any one of them renders the provisions inoperative.

It is obvious that the property was acquired after December 31, 1917.

The first issue, therefore, is whether or not under all the attendant circumstances a reorganization actually took place. The petitioner claims that the exchange of stock between the Stone Co. and the Sturgeon Bay Co. and the transfer of the assets from the Stone Co. to the Sturgeon Bay Co. were two entirely separate and distinct transactions. The respondent contends that they were merely successive steps in a “ reorganization ” as contemplated by the statute.

Section 112 of the Revenue Act of 1928 provides:

(a) General rule. — Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.
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(g) Distribution of stock on reorganisation. — If there is distributed, in pursuance of a plan of reorganization, to a shareholder in a corporation a party to the reorganization, stock or securities in such corporation or in another corporation a party to the reorganization, without the surrender by such shareholder of stock or securities in such a corporation, no gain to the dis-tributee from the receipt of such stock or securities shall be recognized. *******
(i) Definition of reorganisation. — As used in this section and sections 113 and 115—
(1) The term “reorganization” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the trans-feror or its stockholders or both are in control of the corporation to which the assets are transferred, or (O) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.
(2) The term “ a party to a reorganization ” includes a corporation resulting from a reorganization and includes both corporations in the case of an acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation.
(j) Definition of control. — As used in this section the term “control ” means the ownership of at least 80 per centum of the voting stock and at least .80 per centum of the total number of shares of all other classes of stock tof the corporation.

In this situation it is necessary to examine the facts to ascertain whether or not there was a reorganization as above defined. The petitioner desired to secure rock deposits of a certain character and in a convenient location. It found them in Door County, Wisconsin, together with a plant and equipment in active operation owned by the Leathern D. Smith Stone Co. It took steps to obtain control and possession of the property. That was accomplished by means of the organization of the new corporation, the Sturgeon Bay Co., the transfer to it of the stock of the Stone Co. in exchange for its preferred stock issued to the Stone Co.’s stockholders, the payment of the Stone Co.’s current liabilities, which amounted to $150,000 in excess of its current assets, and the agreement to purchase the preferred stock from the Stone Co.’s stockholders pursuant to a definite schedule. The Stone Co.’s stockholders likewise agreed to sell their preferred stock according to that contract. The petitioner owned all the common stock of its subsidiary, the Sturgeon Bay Co.

In Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937, the court said:

When subdivision (h) (1) (A) included in its definition oí “merger or consolidation ” the “ acquisition by one corporation of * * * substantially all the properties of another,” it did this so that the receipt of property by the corporation surviving the merger might serve to effect a reorganization as does an acquisition of stock. Each transaction presupposed a continuance of interest on the part of the transferor in the properties transferred. Such a limitation inheres in the conventional meaning of “ merger and consolidation ” and is implicit in almost every line of section 203 which we have quoted. * * * In defining “ reorganization ” section 203 of the Revenue Act gives the widest room for all kinds of changes in corporate structure but does not abandon the primary requisite that there must be some continuity of interest on the part of the transferor corporation or its stockholders in order to secure exemption. Reorganization presupposes continuance of business under modified corporate forms.

In Warner Co., 26 B.T.A. 1225, a case in some respects similar to the one under consideration, the petitioner agreed to repurchase at par and for cash $300,000 of its preferred stock at the rate of at least $50,000 per year. The Warner Co. was permitted to anticipate such payments and did so by repurchasing all of the preferred stock for cash during the taxable year. The companies whose stock was purchased by the Warner Co. were liquidated shortly thereafter.

In that case we held that the transaction did not constitute a reorganization, but a liquidation in which a gain was recognized and the Acquiring corporation might use the cost to it of the property so acquired as the basis for computing depreciation and depletion. There we said:

While it may be argued that there was a continuity of interest, inasmuch as the taxpayer owned all the stock of the two companies and after* liquidation it owned all the assets, we think that the statute, as construed in the cited cases, was not intended to apply to cases of mere liquidation, but was meant rather to comprehend those situations where there is a merger or consolidation and the stockholders of the old corporation receive for their holdings a substantially similar interest in the new or merged corporation. In construing the sections of the statute applicable to reorganizations it must be remembered that the fundamental purpose of the statute with respect to recognition of gain or loss from sales and exchanges is expressed in section 203 (a) as follows:. “Upon the sale or exchange of property the entire amount of gain or loss, determined under section 202, shall be recognized, except as hereinafter provided in this section.”

Under this provision of the statute it is necessary that the given transaction must come clearly within the exceptions set out in the statute if the gain realized is to escape tax. See Arctic Ice Machine Co., 23 B.T.A. 1223.

In the case at bar it was the obvious purpose of the Stone Co.’s stockholders to dispose of their stone plant, including the rock deposits, and to divest themselves of all interest in the enterprise. In order to do so they sold their common stock in the company, thereby losing control thereof and received in exchange the preferred stock of the Sturgeon Bay Co. But the preferred stock of the latter company was not at all similar to the common stock of the former. The preferred stock had no voting power (which was lodged in the 1,000 shares of common stock owned by the petitioner) except upon default. All the preferred stock was subject to repurchase according to a prescribed schedule. The preferred stock likewise was redeemable on any dividend date plus a stated premium. Repurchase was to begin immediately and to continue until the Stone Co.’s stockholders had disposed of all of such stock. The entire issue of preferred stock was so repurchased in accordance with the contract. The temporary possession of the preferred stock did not preserve in the Stone Co.’s stockholders that kind or degree of interest requisite to bring the transaction within the rule laid down in the Warner case. Under such circumstances we do not believe that the Stone Co.’s stockholders received for their holdings a substantially similar interest in the new corporation.

Furthermore, we are of the opinion that the transfer of the Stone Co.’s assets to the Sturgeon Bay Co. and its subsequent liquidation were not essentially a part of a “ reorganization ” as defined by the statute. The prime purpose of the entire plan was to transfer to the petitioner the control and disposition of an active stone plant. On October 26, 1927, it was immaterial to the purchaser how the plant was to be operated. While the agreement of that date provides: “It is contemplated that after the exchange of the stock herein provided for all of the property and assets of the Stone Company may hereafter be transferred to the new corporation ” (Italics ours), yet that same contract contains the significant statement:

Tbe New Corporation shall contract with the said Leathern D. Smith that it or the Stone Company whichever operates the present plant or any other purchaser of the Stone Company’s plant in operating the same will give Leathern D. Smith, or such company as he may designate, a preference * * * [Italics ours.]

It is apparent, therefore, that the determination to transfer the Stone Co.’s assets to the Sturgeon Bay Co. and to dissolve the former corporation was an action definitely decided upon after October 26, 1927, and was not an essential factor in the transaction initiated and controlled by the contract .of that date.

The statute relating to liquidation, section 115 (c) of the Revenue Act of 1928 (identical with section 201 (c) of the Revenue Act of 1926) must apply. The gain thereunder inures to the distributee. The value of the property sold in liquidation measures the gain to the distributee. It thereupon becomes cost to the purchaser and the basis for depletion, as provided by section 114 (b) (1) of the Revenue Act of 1928.

Likewise it is doubtful if the third requirement of section 113 (a) (7) has been met. The property in question was the rock deposits sold to the Sturgeon Bay Co. by the Stone Co. pursuant to the resolutions of the latter company adopted November 30, 1927. The actual transfer of the assets was made on December 2, 1927. Under the contract of October 26, 1927, between the petitioner and Leathern D. Smith, the petitioner agreed to purchase from Smith and others on or before November 7, 1927, 500 shares of the preferred stock of the Sturgeon Bay Co. and to purchase the remaining 4,500 shares of its preferred stock in annual installments. The facts show that such initial purchase was so made and that subsequent purchases of preferred stock were made in accordance with the contract until approximately $200,000 was so paid in cash. Notes were given for the balance.

Therefore, on November 7, 1927, the stockholders of the Stone Co. owned 4,500 shares of the preferred stock of the Sturgeon Bay Co. with no voting power, the petitioner owned 500 shares of such stock and also 1,000 shares of its common stock which had been purchased for cash. The record does not disclose the value of the shares of common stock but the respondent’s counsel states in his brief: We are entitled to assume that each share of preferred stock represented at least as large an interest in the company as each share of its common stock.” On that basis, at the time of the transfer of the property on December 2, 1927, the old stockholders of the Stone Co. owned only 75 percent of the stock of the Sturgeon Bay Co., obviously less than that required by the statute.

We conclude, therefore, that the petitioner is entitled to use as a basis of depletion the sum of $201,982.04, representing the cost (and fair market value) of the rock deposits to the Sturgeon Bay Co., the petitioner’s subsidiary.

Decision will he entered under Rule 50.