author: Murdock :

text:
    Juniper Hunting Club, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 40706.
    Promulgated June 23, 1933.

      Donald V. Hunter, Esq., for the petitioner.

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

Murdock :

The Commissioner determined a deficiency of $9,950.14 in the petitioner’s income tax for the fiscal year ended February 28, 1926. The petitioner contends that the Commissioner committed two errors:

(1) He failed to hold that the petitioner is exempt from tax under section 231 (9) of the Revenue Act of 1926 on the profit from the sale of real estate.

(2) He failed to reduce the profit from the sale by a broker’s commission of $20,117.90 and revenue stamps in the amount of $402.

The parties filed a stipulation as follows:

The Juniper Hunting Club is an organization which was incorporated on July 15, 1909, under the laws of the State of Kentucky.

The purposes for which the corporation was chartered were to maintain a social club, to acquire, establish, and maintain for the use and benefit of its members, in fee simple or otherwise, such lands for hunting and fishing privileges, within or without the State of Kentucky, as its members should authorize, with the power to make contracts, sell, convey, mortgage, transfer or assign any property or rights as acquired, to reinvest the proceeds of such sales or transfers, in whole or in part, for the same or similar purposes at the discretion of the members of the corporation. The corporation was not to be conducted for gain or profit, and had no capital stock.

The corporation, as originally chartered, was restricted to thirty-five members, and by an amendment of its charter on September 29, 1915, the authorized membership was changed to fifty memberships of two classes, to wit, corporate memberships, limited to thirty such memberships, and associate memberships, limited to twenty in number. Under the foregoing amended charter, only corporate memberships acquired any interest in Club property. By a further amendment to the corporate charter on June 7, 1924, the membership in the Club was limited to forty-three members and units of interest in the Club were provided for. Each member was required to own at least five hundred units of interest, and each member was limited in ownership to not to exceed 4,000 units of interest. The total number of authorized units was sixty thousand. These units were transferable only to duly elected members of the Club or to the Club itself.

The Club was maintained by dues and assessments paid by its members.

In 1909, the Juniper Hunting Club purchased a tract of 18,289 acres of land in Marion and Lake Counties in the State of Florida, to be used as a hunting and fishing preserve. The cost to the Club of this tract was $31,500. The Club subsequently acquired 300 additional acres of adjoining land for Club purposes.

On or about August 22, 1925, the Club made a sale of the 18,289 acres of its Florida land, mentioned above, retaining out of its Florida holdings only the 300 acres mentioned above, upon which its clubhouse was located. The sale price agreed upon was $22 per acre, or a total sale price of $402,358. Payment was to be made as follows: One fifth of the purchase price at the time of the sale and the remainder in four equal annual installments represented by four notes, each in the amount of $80,471.60.

In August of the year 1925, the Club received the first installment under its sale of the land, to wit, $80,471.60. A commission of $20,117.90 was paid by the Club for this sale and $402 was expended for revenue stamps upon the deed.

Out of the installment received by the Club, the sum of $48,353 was paid in September 1925, to the members of the Club, or to the representatives of deceased members, and $11,598.70 was retained for Club purposes.

The March 1,1913, value of the 18,289 acres, including the timber thereon, was $55,232.88.

In 1917, timber was sold from the property which produced a net return to the Club of $37,768.25.

The petitioner, in its return, computed its gain on the installment basis and the respondent has determined that the petitioner realized a profit, in the fiscal year ended February 28, 1926, of $76,052 on account of the sale of the Florida lands, which is arrived at as follows:

March 1, 1913 value of land sold in 1925_ $55,232.88
Deduct:
Timber sold in 1917_$40, 000. 00
Less:
Expense of sale_ 2,231.75
Proceeds of sale of timber_ 37, 768.25
Balance- 17, 464. 63
Add:
Improvements subsequent to March 1, 1913:
Labor and material for fencing_ $2, 732. 37
Signs_ 100. 00
Two Gates_ 25.00
Hoad to Wild Oat Lake___ 204.00
Planting fish and duck food_ 1, 572. 00
- 4, 633.37
Cost' of land sold in 1925_ 22,098.00
Sale price-$402, 358.00
Cost of land sold_ 22, 098.00
Net profit to be realized.
380,260. 00
Payment made August 22, 1925_ $80,471. 60
Note due August 22, 1926- 80,471. 60
Note due August 22, 1927- 80,471.60
Note due August 22, 1928- 80,471. 60
Note due August 22, 1929_ 80, 471. 60
Total sales price- 402,358.00
Percentage of profit to total sales price $380,260 divided by
$402,358 equals___ . 9450787
Profit realized during taxable year (80,471.60X.9450787)- $76, 052. 00

No deductions or adjustments other than those shown above in this paragraph were allowed to the petitioner, the deficiency being based upon a claimed net income of $76,052.

The return for the fiscal year ended February 28, 1926, was filed with the collector of internal revenue for the district of Kentucky.

The petitioner also offered the testimony of several witnesses. Much of their testimony relates to an issue no longer pressed. They testified, however, that the petitioner was incorporated under a law of Kentucky relating to religious, charitable, and social organizations not to be conducted for profit, it had no regular revenue-producing activities and never sold privileges, but once sold some timber, several times sold some fruit, and once grazed cattle and hogs on its property in order to reduce carrying charges. None of the money thus derived was paid to members. The sale in 1925 was made to take advantage of the attractive offer received during the Florida real estate boom, to avoid real property taxes on the expected increase in the assessed value of the land, and because the land was a game preserve which was then too valuable to be kept for that purpose and it was not needed as much as it had been needed formerly. There was no intention of discontinuing the Club. The purchaser defaulted on the next installment and the petitioner subsequently reacquired the property sold.

Section 231 provides:

TJie following organizations shall be exempt from taxation under this title—
* * $ s}s * * *
(9) Clubs organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, no part of the net earnings of which inures to the benefit of any private shareholder.

Article 520 of Regulations 69, relating to this provision, is as follows:

Social clubs. — The exemption granted by paragraph (9) of section 231 applies to practically all social and recreation clubs which are supported by membership fees, dues, and assessments. If a club, by reason of the comprehensive powers granted in its charter, engages in trafile, in agriculture or horticulture, or in the sale of real estate, timber, etc., for profit, such club is not organized and operated exclusively for pleasure, recreation, or social purposes, and any profit realized from such activities is subject to tax.

The statute and the regulations above quoted are identical in this respect with previous statutes and regulations. Thé implication is that Congress approved of the interpretation adopted by the Commissioner. The petitioner did not engage in the sale of real estate as a regular business but made only this isolated sale and it therefore contends that under the statute and the regulations it is exempt from tax on its profit.

Tax liability is determined upon an annual basis. The petitioner was not organized for profitable purposes. But during the year before us it not only engaged in a sale of real estate for a profit, but part of that profit was distributed in cash to the benefit of private shareholders. During this year the club was not “ operated exclusively for pleasure, recreation, and other nonprofitable purposes.” Nor did “ no part of the net earnings ” of the Club inure “ to the benefit of any private shareholder.” This sale was a violent departure from the regular activities of the Club. It was not a mere incident to the regular functions of the Club as were the sales of wine, chocolate and other articles referred to in Trinidad v. Sagrada Orden de Predicadores, 263 U.S. 578. Financial gain was the principal end to which the sale of the land was directed. The petitioner was not tax exempt on the profit from this sale.

It chose to report the profit on the installment plan. Neither party seeks to change from the method selected. Under that method the profit to be realized is first determined by deducting from the sales price, the basis and all expenses of the sale. A proportionate part of each payment is then reported as profit. The broker’s commission and the stamps were a part of the expenses of the sale. These two items are not deductible in their entirety in the year of sale. They should have been deducted in computing the profit to be realized. The proportionate part of the profit to be reported in the year before us must be recomputed.

Decision will be entered under Rule 60.


source: Caselaw Access Project

author: Smith:

license: Public Domain

text:
    John A. Nelson Company (Formerly Known as Rockford Milling Machine Company), Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 32986, 44700.
    Promulgated June 23, 1933.

      J. S. Seidman, C.P.A., and F. E. Seidman, C.P.A., for the petitioner.

      Brooks Fullerton, Esq., John D. Kiley, Esq., and J. E. Marshall, Esq., for the respondent.
   OPINION.

Smith:

The petitioner contests the respondent’s disallowance of the deductions claimed by reason of the payment of 5 percent of its net profits to the Sundstrands in each of the taxable years before us. The respondent has treated these amounts as capital expenditures, applying them to the several United States patents, and has allowed deductions for their amortization over the remaining term of the patents. The petitioner argues that the patents had been acquired prior to the payments now in question and that:

* * * Instead * * * of giving the Sundstrands a bonus in some fixed and perhaps arbitrary amount, petitioner and the Sundstrands agreed to have the extra compensation measured by the direct index of the effect of the services of the Sundstrands — petitioner’s profits. * * *

The Board has held that the cost of patents, legal expenses incident to procuring and protecting the patents, and experimental expenses in connection with their development are capital expenditures. See Beaumont Co., 3 B.T.A. 822; American Seating Co., 4 B.T.A. 649; aff'd. on this point, 50 Fed. (2d) 681; Buffalo Forge Co., 5 B.T.A. 947; Grand Rapids Show Case Co., 12 B.T.A. 1024. See also Dempster Mill Mfg. Co. v. Burnet, 46 Fed. (2d) 604. However, we also held in American Seating Co., supra, that an item of $15,000 representing royalty payments was not to be treated as a capital expenditure.

The agreement with the Sundstrands recited that the petitioner had been granted nine domestic and eight foreign patents on inventions made by the Sundstrands, who had also assigned to the petitioner their entire rights to eighteen domestic and eight foreign applications for letters patent. Apparently, if the amounts in question are to be treated as capital expenditures, the capitalization must be with respect to both foreign and domestic patents and applications therefor.

While the Sundstrands owned shares of stock in the petitioner, no point is made that the payments bore any relation to their stock-holdings. Their services were doubtless of value to the petitioner and, in recognition of the Sundstrands’ contributions to the success I of the enterprise, the petitioner agreed to pay them a percentage of ; its annual net profits. Whether we consider the payments based upon l a percentage of profits as compensation for services rendered (see Tyler & Hippach, Inc., 6 B.T.A. 636, 641), or as in the nature of a rental or royalty for the use of the product of their inventive genius (see Webb Press Co., Ltd., 3 B.T.A. 247; Office Decision 440, Oumu-lative Bulletin No. 2, p. 215), such payments were in satisfaction of an obligation relating directly to the business of the particular year for which they were paid. We can not see that these payments add anything to the petitioner’s capital investment, it having already acquired the patents and applications therefor. There are further practical difficulties in treating these payments, relating to the business of a particular year and measured by the success of that year’s operations, as capital expenditures. These difficulties are the changing base upon which to rest an amortization allowance, the variable terms of the several patents, and the term of the agreement as opposed to the term of the patents, requiring the payments to the Bund-strands even in the last year of the term of a patent or patents, but not requiring payments in a year when there were no profits, even though the cost of the patents would nevertheless be subject to amortization. In these circumstances, we hold that the respondent erred in capitalizing the expenditures involved and that the deductions claimed should be allowed. Cf. Jamison Coal & Coke Co., 24 B.T.A. 554; Hutchison Coal Co., 24 B.T.A. 973; affd., 64 Fed. (2d) 275; L. Schepp Co., 25 B.T.A. 419,430; In re General Film Corp., 274 Fed. 903.

The second issue is whether the amounts collected in the respective taxable years upon installment sales made prior to 1924 are to be included in the income of the year of collection. The petitioner relies upon the provisions of section 705 (a) (2) of the Revenue Act of 1928, which is as follows:

(a) IÍ any taxpayer by an original return made prior to February 26, 1926, changed the method, of reporting his net income for the taxable year 1924 or any prior taxable year to the installment basis, then, if his income for such year is properly to be computed on the installment basis—
Hs * * * * * *
(2) No deficiency shall be determined or found in respect of any such taxes unless the taxpayer has underpaid his taxes for such year, computed by excluding, in computing income, amounts received during such year on account of sales or other dispositions of property made in any year prior to the year in respect of which the change was made.

The facts are not in dispute, and, viewing the matter purely from the standpoint of the original installment sales returns for 1924 and subsequent years, the petitioner is within the letter of the statute. But, “A thing may be within the letter of a statute and not within its meaning, and within its meaning, though not within its letter. The intention of the lawmaker is the law.” Smythe v. Fiske, 23 Wall. 374, 380. We have held that where a taxpayer, by an original return filed within the time prescribed by statute, changes from the accrual to the installment basis of reporting its income, “no deficiency shall be determined on account of amounts received during the taxable year from sales made in years prior to that of the change to the installment basis.” Tull & Gibbs, Inc., 21 B.T.A. 1073, 1074. See also S. Davidson & Bros., Inc., 21 B.T.A. 638; Grand Rapids Show Case Co., supra.

In Jacob Bros. Co. v. Commissioner, 50 Fed. (2d) 394, 396, the Circuit Court of Appeals for the Second Circuit determined that uncollected profits upon installment sales which had been reported upon the accrual basis should be included in invested capital of the years following a change to the installment basis of reporting income. The court said, inter alia:

* * * Section 705 permits the taxpayer to exclude from the later year’s income cash collected on installment contracts reported on the accrual basis in years prior to the change of method. In other words, the accrual method was allowed to stand unaffected in respect to income for years prior to 1918. Hence the surplus and undistributed profits account obtained by the accrual method is likewise unaffected by the change. * * * [Italics supxfiied.]

Under section 212 (d) of the Eevenue Act of 1926, the Commissioner was given authority to prescribe regulations for reporting income upon the installment basis. Article 42, Kegulations 69, provides such regulations for reporting income from the sale of personal property on the installment plan, and further that:

. The provisions of this article shall be retroactively applied in computing income from the sale of personal property under the Revenue Acts of 1916, 1917, 1918, 1921, and 1924, or any such Acts as amended. (See section 1208). Any dealer in personal property on the installment plan whose hooks of account contain adequate information and were kept so that income can be accurately computed on the installment basis in accordance with the provisions of this article may file amended returns accordingly, and the excess of the amount of any tax previously paid over the tax as computed on the installment basis as herein provided shall, subject to the statutory period of limitations properly applicable thereto, be credited or refunded as provided in section 284 and articles 1301-1806.

The facts show that the respondent recomputed the petitioner’s tax liability for the years 1918 to 1923, inclusive, and refunded to the petitioner the excess of the tax paid for those years on the accrual basis above the amount of the tax computed upon the installment basis. The petitioner, having received the benefit of such readjustments to its income, insists that it should receive a further benefit by excluding the amount of the collections in 1924,1925, and 1926 upon installment sales prior to 1924 from its income for those years. We do not believe such dual benefits were intended by Congress. The accrual method used by this taxpayer was not allowed to stand and is affected by the adjustments made by the respondent, and the refunds accepted by the petitioner in accordance with article 42 of Kegula-tions 69. “ Men must turn square corners when they deal with the Government.” Rook Island, A. & L. R. Co. v. United, States, 254 U.S. 141. This petitioner, having received the benefit oí the change to the installment basis of reporting income, not only for the years following the change but also for the years prior to that change, should not be heard to complain because the respondent has included in its income for 1924, 1925, and 1926, amounts representing collections upon installment sales of prior years, which otherwise would go untaxed. Otherwise, this petitioner’s true income would not be properly returned for taxation. In these circumstances, the respondent is sustained.

The remaining issue is whether the respondent has erroneously included in income for 1926 an amount of $322,980.29, representing “ the reserve for unrealized profit on installment sales.” It appears that the petitioner disposed of the installment sales contracts to which this amount relates in 1926, and the respondent has treated the disposition as a realization of the profit. The petitioner contends that the disposition was a part of the transaction resulting in a reorganization to which it was a party, and therefore no gain is to be recognized thereon.

These proceedings were submitted upon a stipulation, in which appears the following statement: “ On December 31, 1926, petitioner was a party to a reorganization.” In Jamison Coal & Coke Co., supra, we said:

* * * Stipulations can relate only to facts. We can not recognize oi give effect to stipulations of law. * * *

On brief—

The respondent contend[s] that the $322,980.29 represented profits which the petitioner made at the time the merchmulise was solct. By virtue of Sections 212 (d) and 1208 of the Revenue Act of 1928, petitioner, because it had sold on the installment plan, was given a special privilege. That privilege was the right to defer payment of taxes on the profits on installment sales until the collection of the installment payments. * * *
When the petitioner disposed of those accounts receivable it, by its own voluntary act, terminated its right to the privilege of deferment, and since it received dollar for dollar in stock and cash for those accounts receivable, the portion of such accounts representing income became realized profit to the petitioner — not a profit resulting from or coming into existence on account of the reorganization [sic], but merely the collection of a profit earned prior to that time. * * *

In Packard Cleveland Motor Co., 14 B.T.A. 118, the Board held that the taxpayer realized income upon the sale of installment obligations in the taxable year. The provisions of section 44 (d) of the Revenue Act of 1928 lend color to the respondent’s contention, but that section of the statute is not retroactive in its effect. In Wallace Huntington, 15 B.T.A. 851, we held that the taxpayer realized no income from the gift of installment obligations. In Virginia Beach Golf Course Annew Corp., 23 B.T.A. 1170, we held that the taxpayer realized no income from the distribution of installment obligations to its stockholders.

Charles F. Meagher, 20 B.T.A. 68, involved a disposition of installment obligations in an exchange of property for stock. The syllabus of that case follows:

Gain ok Loss — Exchange—Installment Obligations. — Petitioner, doing business as a sole proprietor, to a large extent on the installment basis, organized a corporation to which he transferred in 1923 all of the assets of the business for all of its authorized capital stock. Included in the assets conveyed were $117,863.13 of uncollected installment obligations representing unrealized profits of $53,488.57. Held that the transfer of these installment obligations, being a transaction provided by section 202 (c) (3) of the Revenue Act of 1921 not giving rise to gain or loss, respondent erred in including in petitioner’s income for the year 1923 the sum of $53,488.57 as a profit realized by reason of petitioner’s disposition of them in this manner.

The facts of the Meagher case clearly established a nontaxable exchange within the purview of section 202 (c) (3) of the Revenue Act of 1921. In disposing of the respondent’s contention that the amount represented by the profit included in the installment obligations would escape tax ”, we said :

* * * that result does not necessarily follow, as this petitioner has received in the transaction stock of the corporation in exchange for the assets conveyed, and the realization as income of the value represented by the profit included in the amount of the installment obligations in question, is merely deferred until the sale by him of the stock received upon such sale, as his gain would be measured upon the basis of the cost to him of the transferred assets, which would not include the $53,488.57 of profit included in the $117,863.13 of installment obligations.

In the instant proceedings this corporate taxpayer transferred all of its assets, including the installment obligations, except $100,000 in cash, to the new corporation in exchange for $2,000,000 in cash and ; 14,060 shares of the new company’s preferred stock of the par value of $100 per share. The Elliott-Fisher Co. paid into the new corporation the $2,000,000 of cash and received all of the new corporation’s voting stock. The petitioner used a portion of the cash to retire its ,own preferred stock and distributed the balance of the cash and the 14,060 shares of preferred stock to its common stockholders. It does not appear that the petitioner corporation has ever been dissolved.

The petitioner contends that there was a reorganization to which it was a party and that no gain or loss is to be recognized upon the transfer of its property to the new corporation. Unlike the transfer in the Meagher case, this petitioner neither transferred all of its property nor received all of the stock of the transferee. The pertinent portions of the Revenue Act of 1926 are set out in the margin.

The petitioner was not a party to a reorganization within the meaning of the statute. Upon the transfer, pursuant to the terms of the contract of sale, the petitioner neither transferred all of its property nor received “ a majority of the voting stock and at least a majority of the total number of shares.of all other classes of stock ” of the new corporation. Nor does it appear that this petitioner was ever in control of the new corporation, or that the new corporation was in control of the petitioner. Furthermore, while the transferee may be said to have acquired substantially all the properties of this petitioner, disregarding, for the moment, the petitioner’s retention of $100,000 in cash, and thereby became the “ corporation resulting from a reorganization ”, and as such is “ a party to a reorganization ”, that does not make this petitioner “ a party to a reorganization ”, since that term includes both corporations (transferee and trans-feror) <6nhvUn the event that one acquires at least a majority of the Here, the petitioner acquired voting and other stock of the other.

only nonvoting stock in the new corporation, and that corporation acquired none of the petitioner’s stock. The petitioner has not brought the transactions within the provisions of section 203 (h). As the Supreme Court said in Pinellas lce & Cold Storage Co. v. Commissioner, 287 U.S. 462, “ Certainly, we think that to be within the exemption the seller must acquire an interest in the affairs of the purchasing company more definite than that incident to ownership of its short term purchase money notes.” Little more than that was acquired by this petitioner, since definite provision was made in] the agreement with Elliott-Fisher Co. for the retirement of the|T nonvoting preferred stock issued to the petitioner. See also Cort-land Specialty Co. v. Commissioner, 60 Fed. (2d) 937.

The exemption provided in section 203 (b) (3) relates to exchanges of property by “ a corporation a party to a reorganization ”, and is enlai’ged by section 203 (e) on condition that the transferee distribute the money and property received upon the exchange “ in pursuance of the plan of reorganization.” There is nothing in the agreement with Elliott-Fisher Co. directing the distributions that the petitioner made to its stockholders. That agreement apparently contemplated the continuance of the petitioner’s corporate existence, for provision was made, and later acted upon, whereby the corporate' identity of the petitioner was changed from Sundstrand Corporation to John A. Nelson Co. Furthermore, the petitioner’s stockholders authorized “ the sale and transfer ” of its property and assets, and the distribution of the consideration “ received from such sale.” In these circumstances, the transaction involved can not be said to have been a nontaxable exchange of property. Cf. Howard F. Burns, Executor, 28 B.T.A. 28; Connecticut Power Co., 28 B.T.A. 38.

The fact that the petitioner disposed of its installment obligations in a taxable transaction distinguishes this case from the Meagher case, supra, and we accordingly hold that the respondent properly determined that the petitioner realized the deferred profit upon installment obligations when it disposed of the obligations in 1926, there being nothing in the record to indicate that the petitioner did not receive the full face value of such obligations.

Eeviewed by the Board.

Judgment will be entered under Bule 50.

Trammell, Murdock, Goodrich, Leech and Adams concur in the result.

Van Fossan dissents.

L

       Sec. 203. (a) upon the sale or exchange of property the entire amount of the gain or loss, determined under section 202, shall be recognized, except as hereinafter provided in this section.
      *******
      (b) (3) No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.
      * * * * * * *
      (e) If an exchange would be within the provisions of paragraph (3) of subdivision (b) if it were not for the fact that the property received in exchange consists not only of stock or securities permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then—
      (1) If the corporation receiving such other property or money distributes it in pursuance of the plan of reorganization, no gain to the corporation shall be recognized from the exchange, but
      (2) If the corporation receiving such other property or money does not distribute it in pursuance of the plan of reorganization, the gain, if any, to the corporation shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property so received, which is not so distributed.
      *******
      (h) As used in this section and sections 201 and 204—
      (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 transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (C) 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(Tnclu3iT^j>otli corporations in the case of an acquisition by one corporation of at leasí~¡r"HrSJbrity of the^oting^rtoeE^andHTt^teast — a—maqt¡nff'''<T£~íhe total number of shares of all other classes of stock of another corporation.


author: Trammell:

text:
    Helen Dean Wright, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 53753-53755, 55505-55507, 57555, 57556.
    Promulgated June 23, 1933.

      Sidney J. Hayles, Esq., for the petitioners.

      George D. Brabson, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith : Mrs. H. H. Dean; H. H. Dean, Jr.; A. F. Dean; Dorothy Dean Harris; Coral Dean Spratlin; Frank M. Spratlin.

   OPINION.

Trammell:

The respondent determined a deficiency in estate tax against the estate of the decedent H. $6,233.92. Two issues are raised respecting the correctness of that determination. The first issue, namely, whether the respondent erred in increasing the value of a reversionary interest in a certain building from $14,577.60 to $21,866.40, is conceded by the petitioners, and it is now agreed that the respondent’s determination on that point is correct.

The second issue on the merits relates to the gift made by the decedent on December 3, 1926, to his son and daughter-in-law of certain real estate located in Atlanta, Georgia, having a value of $75,000. The respondent determined that this gift was made in contemplation of death, and included the value of the property in the gross estate. The petitioners contend that the gift was not made in contemplation of death, and assign said action of the respondent as error.

While it is a well recognized rule that contemplation of death need not be the sole cause of a gift in order to render the property taxable, nor immediate death be contemplated, we think the petitioners have sustained the burden of proving that the gift here in question was in no sense made in contemplation of death.

The estate left by the decedent had a value in excess of $1,000,000, and the value of the gift involved was only $75,000, or less than 7% percent of the whole estate. Similar gifts had been made by the decedent to his children over a period of six or seven years prior to his death, and the value of his estate, notwithstanding these gifts, continued to increase. The motive for making such gifts was to afford his children an opportunity to learn how to manage property and also to provide them with incomes independent of his personal contributions.

Prior to his death the decedent had not suffered from any serious illness, he had not been sick except for ordinary colds or other slight indispositions. He was strong and vigorous and in the active pursuit of his profession. Death occurred suddenly, without anticipation, as the result of swallowing a bone.

These facts, we think, indicate that contemplation of death was not the motivating cause which moved the decedent to make the gift in question. There is no more reason to say that this particular gift had death as its motivating cause, when the decedent was approximately 65 years of age, than to say that the first gift, made many years prior thereto, when the decedent was younger, was motivated by the same cause. It is our opinion, therefore, that the respondent was in error in including said gift in the decedent’s gross estate at a valuation of $75,000.

The deficiency against the estate will be redetermined in accordance with the foregoing conclusions.

The third and fourth issues relate to the liability of the petitioners for the deficiency in tax due from the decedent’s estate, either as transferees or fiduciaries, and will be considered together. The petitioners admit that each of them, with the exception of Frank M, Spratlin, received assets from the estate of a value greatly in excess of the deficiency asserted by the respondent.

But the petitioners contend that they are not liable either as transferees or as fiduciaries for the reason that the administration of the estate had been closed and the administrators discharged prior to the date on which the respondent asserted any deficiency against the estate. Except for this contention it is clear, and the petitioners concede, that each of them is liable as a transferee for the amount of any deficiency due, other than Frank M. Spratlin, who received nothing from the estate upon its distribution and against whom the respondent has asserted liability only as a fiduciary under the provisions of section 3467 of the Bevised Statutes, pursuant to section 316 (a) (2) of the Revenue Act of 1926.

Broadly speaking, the question thus raised by the petitioners is whether transferees are liable, at law or in equity, for a tax due from the transferor where the Commissioner did not determine the amount of the deficiency and notify the transferor thereof prior to the distribution of the assets to the transferees.

In United, States v. Garfunkel, 52 Fed. (2d) 727, this question was considered in connection with the liability of transferees of a dissolved corporation. In its opinion the court said:

The further point is made that, since the dissolution and transfer of assets to the defendants took place several months prior to the assessment of the 1920 tax, there was no debt for the tax at the time of the transfer. The error is in the assumption that the tax liability did not arise until the making of the assessment. There is no need that the assessment against the corporation must precede the dissolution and distribution of assets, or that the stockholders must have had notice of the unpaid tax before imnding up. * * * The defendants’ liability comes from the fact that corporate taxes and debts are prior to claims of stockholders. [Italics supplied.]

See also Leighton v. United States, 61 Fed. (2d) 530.

We see do reason why the principles above stated should not be equally applicable in the present case. The rights of the petitioners as heirs at law to receive the assets of the decedent’s estate upon distribution were subordinate to the right of the Government to subject those assets to the payment of the tax due from the estate. They took the assets as trustees for the Government to the extent of any deficiency in tax owing by the estate, and so are liable in equity as transferees. Such liability in no wise depends on a formal determination by the Commissioner of the amount due and the sending of notice to the estate or to the petitioners prior to distribution, but arises solely from the fact that the petitioners took the assets of the estate to which the Government had a prior right, and thus left the estate unable to pay the tax.

If the contention of the petitioners should be sustained, no liability on the part of the distributees of an estate as transferees, under section 316 (a), supra, could arise. If the Commissioner is required to determine the amount of tax due and send a notice of deficiency to the estate prior to the distribution of the assets and the termination of administration, as a condition precedent to the assertion of liability against the transferees of the estate’s assets, the Commissioner could collect the tax from the estate, and there would be no point in deferring a collection until the administration had been closed in order to assert transferee liability against the distributees. The mere statement of this proposition exposes its fallacy.

We have repeatedly held that a transfer of assets does not necessarily result in transferee liability, and indeed does not result in .such liability unless the taxpayer is thereby rendered insolvent and unable to pay the tax. Samuel Keller, 21 B.T.A. 84; affd., 59 Fed. (2d) 499; Charles Havard, 25 B.T.A. 1161; M. H. Graham, 26 B.T.A. 301. See also United States v. Armstrong, 26 Fed. (2d) 227. So long as the original taxpayer is in existence and solvent, collection of the tax may not be enforced from a transferee. The remedy against the transferee may be pursued only when there is no available remedy against the transferor. Wire Wheel Corporation of America, 16 B.T.A. 737; affd., 46 Fed. (2d) 1013.

There was no liability on the part of these petitioners as transferees until the assets of the decedent’s estate had been distributed to them and the estate left without means to pay its tax. Prior to the happening of that event there was no occasion for the respondent to send a, notice to the petitioners. It was by reason of that occurrence that they became liable as transferees, and when the assets had been distributed to them the administration was closed and the administrators discharged. On the theory of the petitioners, no effect could be given to section 316 (a), supra, and its enactment would have to be regarded as futile. We think such a construction of this statute cannot be sustained.

On the facts established by the record herein and the law applicable thereto, we hold that the petitioners, with the exception of Frank M. Spratlin, are each liable as transferees for the deficiency in estate tax due from the decedent’s estate.

This leaves for consideration the final question of personal liability of the petitioners H. H. Dean, Jr., and Frank M. Spratlin. These petitioners contend that they are not personally liable as fiduciaries for the same reason urged in bar of liability as transferees, that is to say, because the respondent did not assert any deficiency against the estate prior to the distribution of the assets and discharge of the administrators.

Precisely the same contention was made and was considered by us in the cases of Josefh Simon, Executor, 9 B.T.A. 84, El/na S. Evans, Administratrix, 12 B.T.A. 334; and Karl J. Kaufmann, Administrate tor, 15 B.T.A. 141, affirmed in part and reversed in part on another point, 44 Fed. (2d) 144.

In the Simon case, we held that the former executor was personally liable for a deficiency in estate tax, saying:

Petitioner questions the right of respondent to¡ enforce a deficiency in the estate tax of decedent against him after his discharge as executor.
The Revenue Act of 1921 places upon the executor of the estate of a decedent the duty of notifying the Federal Government of his appointment, of filing the estate tax return, and of paying the estate tax. * * * As far as the record shows the petitioner made no effort to secure a discharge of his liability for the tax * * * and it is inconceivable that an executor by hastening administration and ignoring the prescribed means of absolution from liability can evade any tax liability.

In the Evans case we held that the former administratrix was personally liable for the tax due from the estate, notwithstanding the estate had been administered, the assets distributed, and the administratrix discharged without knowledge of the existence of the deficiency. In our opinion we said:

When, therefore the petitioner became administratrix, one of the liabilities which existed was the liability to pay the Federal tax here in question. The correctness of the deficiency is not questioned. The tax that the Commissioner is claiming became due to the United States when the decedent filed his return for 1919 and was payable in that year upon the dates fixed for the payment of the installments. The fact that the Commissioner did not determine the existence of the liability prior to the discharge of the administratrix does not alter the fact that the liability of the estate to pay the tax existed prior to such discharge and that it was due to be satisfied from the assets of the estate.

In the Kaufmann case we held, on authority of the Evans decision, supra, that the petitioner was personally liable for an income tax due on the decedent’s estate, even though the deficiency notice was mailed after the estate had been fully administered, the petitioner discharged as administrator, and the assets distributed in accordance with a decree of the court having jurisdiction over the estate.

See also United States v. Rodenbough, 21 Fed. (2d) 781.

On authority of the above cited decisions, we hold in the present case that petitioners H. H. Dean, Jr., and Frank M. Spratlin, are, each, personally liable for the deficiency in controversy.

Reviewed by the Board.

Judgment toill be entered under Rule 50.

Van Fossan, Murdock, McMahon, Goodrich, Leech, and Adams concur in the result.


text:
    Vinton Petroleum Company of Texas, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 46744, 54650, 64156.
    Promulgated June 27, 1933.

      W. A. Bolinger, Esq., and L. J. Benckenstein, Esq., for the petitioner.

      F. B. Schlosser, Esq., for the respondent.
   OPINION.

Smith:

The principal issue is whether depletion allowance to be deducted by this taxpayer should be 27% per centum of the combined gross income from the several .properties (as the petitioner contends), or whether the depletion allowance should be computed separately for each property (as the respondent contends). Section 204 (c) (2) of the Revenue Act of 1926, and section 114 (b) (3) of the Revenue Act of 1928 are the same, and are as follows:

In the case of oil and gas wells the allowance for depletion shall be 27% per centum of the gross income from the property during the taxable year. Such allowance shall not exceed 59 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property, except that in no case shall the depletion allowance be less than it would be if computed without reference to this paragraph.

By section 234 (a) (8) of the Revenue Act of 1926, “ the Commissioner with the approval of the Secretary ” is authorized to prescribe rules and regulations under which the depletion allowance is to be made. Article 221 of Regulations 69 reads as follows:

Abt. 221. Depletion in the case of oil and gas wells. — Under section 204 (c) (2), in the case of oil and gas wells, a taxpayer may deduct for depletion an amount equal to 27% per cent of the gross income from the property during the taxable year, but such deduction shall not exceed 60 per cent of the net income of the taxpayer (computed without allowance for depletion) from the property. In no case shall the deduction computed under this paragraph be less than it would be if computed upon the basis of the cost of the property or its value at the basic date, as the case may be. In general, “ the property,” as the term is used in section 204 (c) (2) and this article, refers to the separate tracts or leases of the taxpayer. [Italics supplied.]

On brief the respondent points out that:

The Commissioner’s interpretation of the word “property” is first set forth in Article 221 of Regulations 69, supra, and is repeated in Article 241 of Regulations 74, supra, promulgated under the Revenue Act of 1928. If his interpretation in the first instance had not been expressive of the intent of Congress, it would seem that an appropriate change would have been made in the Revenue Act of 1928. None having been made, it must follow that Congress placed its stamp of approval on the Commissioner’s interpretation of the statute. National Lead Company v. United States, 40 Sup. Ct. 237 ; 252 U.S. 140.

The petitioner argues that the respondent interpreted the provisions of the Revenue Act of 1924 with respect to depletion and depreciation as embracing all the properties of the taxpayer, calling attention specifically to article 201 of Regulations 65. It is to be noted, however, that throughout this article the term “ property ” is used in the singular, and from a reading of that and subsequent articles of Regulations 65, interpreting the statute, the Board construes the article as treating each property separately. This construction is fully supported by article 219, which begins:

To each return made by a person owning or operating oil or gas properties there should be attached a statement showing for each property the following-information, which may be given in the form of a table, if desired, by taxpayers owning more than one property: * * *

Then follows an enumeration of the information required for each property.

In United States v. Dakota-Montana Oil Co., 288 U.S. 459, the Supreme Court said:

* * * The earlier acts provided that depletion should be allowed on the basis of cost unless the taxpayer was the discoverer of the well upon an unproven tract, in which case the basis was the “ value of the property ” at the time of the discovery or within 30 days thereafter. See No. 215, Palmer v. Bender, decided January 9, 1933. But the “ discovery value ” provision was eliminated from the Act of 1926, which is applicable here, and the taxpayer was permitted to calculate depletion on the basis of cost alone [§204 (c)] or else to deduct an arbitrary allowance, fixed by the statute, without reference to cost or discovery value, at 27%% of gross income from the well.

After reviewing the earlier statutes and the interpretative regulations, the Court said:

* * * The administrative construction must be deemed to have received legislative approval by the reenactment of the statutory provision, without material change. No. 80, Murphy Oil Co. v. Burnet, decided December 5, 1932; Brewster v. Gage, 280 U.S. 327, 337.

The facts show that the petitioner has consistently treated the several properties involved as separate and independent of each other in accounting for its operations on each property. The respondent computes the depletion allowance in accordance with the petitioner’s bookkeeping and his own regulations. We believe an analysis of the respondent’s computation for 1927 will show that he has properly applied the statute. The gross income from the 37 wells on the Gray leasehold was $755,292.52 and the respondent allowed depletion of $207,705.44, which is less than 50 percent of the net income from “ the property ” and greater than the allowance would have been upon the basis of cost. The gross income from the four producing wells on the Harmony leasehold was $25,584.81, but 27% percent of the gross income ($7,035.82) from that property being more than 50 percent of the net income of the taxpayer from the property, the allowance was restricted to 50 percent of the net income or $1,840.05. The gross income from the eight producing wells on the “ Rescue 40 ” leasehold was $75,181.53, but since there was no net income from that property the 27% percent rate cannot apply, however, “ in no case shall the depletion allowance be less than it would be if computed without reference to ” section 204 (c) (2), therefore the respondent has allowed depletion on the basis of cost (section 204 (c) and (a)). The allowances with respect to the Rescue and Gulf Coast properties were similarly computed. We believe the respondent has computed a reasonable allowance for depletion and his determination is sustained.

On brief the petitioner states that:

In view of the decision of the Supreme Court of the United States in the case of United States v. DaTcota-Montana Oil Co., 77 L. Ed. 585, decided March 13, 1933, the petitioner waives its second alternative contention, viz, that respondent erred in refusing to allow it depreciation of intangible well costs originally capitalized under its system of bookkeeping and for which it annually claimed and was allowed by respondent a deduction for all years previous to 1928.

That decision is dispositive of the question of depreciation of intangible well costs, where there has been an arbitrary allowance at the rate of 27% percent of the gross income from the property. But, as shown above, that arbitrary allowance cannot apply to some of the properties operated by this taxpayer. The petitioner has failed, however, to segregate the claimed depreciation of such intangible well costs, and we cannot determine what portion, if any, is not comprehended by the 27% percent depletion allowance with respect to some properties. In these circumstances, no allowance should be made for the depreciation of intangible well costs.

The remaining issue, in the alternative, is the petitioner’s claim to the deduction of the expenditures in the respective taxable years for the labor cost of drilling wells. Such expenditures have been consistently capitalized by the petitioner. We have held that such expenditures are capital expenditures and not deductible as ordinary and necessary business expenses. See Charles Christy, 23 B.T.A. 300; P-M-K Petroleum Co., 24 B.T.A. 360; California Coast Oil Co., 25 B.T.A. 902. That being the case, and in view of the fact that such capital expenditures are returnable through depletion, the petitioner’s alternative contention must fail.

Since the respondent erred in allowing the deduction, from gross income of 1927, of $31,363.09 representing the depreciation of intangible well costs (United States v. Dakota-Montana Oil Co., supra), the respondent’s motion for an increased deficiency for 1927 is granted, provided any such increase results on the redetermination of the deficiency.

Reviewed by the Board.

Judgment will be entered under Rule 50.


author: Smith : Adams,

text:
    E. A. Simpson, Petitioner, v. Commissioner of Internal Revenue, Respondent. Marybelle Simpson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 62015, 62016.
    Promulgated June 27, 1933.

      Geo. S. Atkinson, Esq., for the petitioners.

      F. B. Schlosser, Esq., for the respondent.
   OPINION.

Smith :

The petitioners contend that:

* * * E. A. Simpson, was an employé, or an officer, of tbe City of Amarillo; that the compensation paid to him and his law partners was paid by the City of Amarillo in the exercise of essential governmental functions.

There is no provision in the Revenue Act of 1928 comparable to section 1211 of the Revenue Act of 1926, which exempted from the tax imposed by the Revenue Act of 1924 and prior revenue acts the compensation of an officer or employee of a state or political subdivision thereof. See Leland Powers, Executor, 26 B.T.A. 1381.

The law firm of which Simpson was a member offered, and the city commission accepted the offer of, its services “ for a retainer of $300.00 per month, this to cover all consultations and office matters, but shall not include compensation for litigation in the various courts.” The term of the services of the petitioner’s law firm was at the pleasure of the city commission, and although an oath of office was prescribed, none was taken by a member of the firm until April 1931. No effort has been made to show the extent to which the compensation received by the law firm related to the exercise of essential governmental functions by tbe city of Amarillo. The conduct of the city’s legal business was left to the discretion of the members of the law firm. The city of Amarillo procured and retained at the pleasure of the city commission the professional services of the petitioner and his associates, paying therefor the fees charged in addition to the retainer agreed upon for routine services. We are of the opinion that the relationship of attorney and client existed between the law firm and the municipality, and that the compensation for the services rendered by the firm to the municipality is not exempt from Federal taxation. Walter G. Winne, 27 B.T.A. 369. See also Charles M. Haft, 20 B.T.A. 431; George H. Gabel, 25 B.T.A. 60.

Reviewed by the Board.

Judgment will be entered for the respondent.

Van Fossan concurs in the result.

Lansdon dissents.

Adams,

dissenting: I dissent from the views of the majority in this case. I believe that petitioner was engaged in an essential governmental function and that such income was properly excluded.


author: Smith :

text:
    H. F. Marie Clausen, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 51706.
    Promulgated June 28, 1933.

      Saul I. Radin, Esq., and Frederick L. Cramer, Esq., for the petitioner.

      W. F. Wattles, Esq., for the respondent.
   OPINION.

Smith :

By the interlocutory decree of the Supreme Court of the State of New York held in and for the County of New York, dated March 21, 1927, the petitioner is declared to be seized in fee simple and possessed of 92,340/427,680 parts of certain premises in the Borough of Manhattan and of 57/132 parts of certain premises in the Borough of Brooklyn, which were devised to her by her brother. The decedent owned a one-half interest in the first described premises. These premises were sold at a profit. No question is raised in this proceeding as to the amount of the profit realized upon the sale of the decedent’s interest therein. By virtue of the agreement which the petitioner had entered into with her sisters in 1924, the court decreed that the petitioner should receive only 4/22 of the proceeds from the sale of the property and that the balance of the proceeds should be distributed in accordance with the terms of the agreement. Petitioner therefore contends that she is taxable upon only 4/22 of the profits realized from the sales, while the respondent contends that the petitioner is taxable upon 92,340/213,840 of the profit realized upon the sale of decedent’s interest.

The petitioner was the owner in her own right of an undivided 92,340/427,680 interest in the Manhattan properties, for under the decree of the Supreme Court of New York her foreign sisters were alien enemies and incapable of inheriting or holding New York real estate and the provisions of the brother’s will for their benefit were void and of no effect. The interest of the deceased brother passed absolutely to the petitioner and her American sister, Elfriede Siebrecht. In the collateral agreement of 1924 between the sisters, after the official conclusion of peace between the United States and Germany on July 2, 1921, the petitioner agreed to keep 4/22 of the proceeds of the sale of her brother’s estate and further agreed that the balance of her share should be paid to her sisters in Germany, or their heirs. This agreement, so far as it concerns the profits subsequently realized on the sale of the particular properties in the Borough of Manhattan with which we are concerned, was but an attempt to assign the petitioner’s future profits. If it had been more than that deeds from the German sisters or their heirs would have been necessary when the properties were sold. There were none. The German sisters had no vestige of title. They held a contract, much as the mother in Bing v. Bowers, 22 Fed. (2d) 450; affd., 26 Fed. (2d) 1017, held assignments for love and affection from her son of specified entities “ out of my share of the rents, income, and profits from my interest in all the property, real and personal, conveyed or to be conveyed ” by a certain company named to another company. The court said:

* * * The deeds were assignments of or from future net income, and made without valuable consideration. * * * For the question presented is not whether, as between grantor and grantee, the assignment is effective and enforceable, but whether the assignment, even if enforceable as against the grantor * * * prevents the entire gross income from being income taxable as against the grantor.
* * * * * * *
To permit the assignor of future income from his own property to escape taxation thereon by a gift grant in advance of the receipt by him of such income would by indirection enlarge the limited class of deductions established by statute. As long as he remains the owner of the property, the income therefrom should be taxable to him as fully, when he grants it as a gift in advance of its receipt, as it clearly is despite a gift thereof immediately after its receipt.

In Battleson v. Commissioner, 62 Fed. (2d) 125, the court said:

* * * the mere equitable ownership of the wife in the partnership interest standing in the name of her husband by reason of an agreement on the part of her husband to transfer the property to her would not prevent the application of the rule recently announced by the Supreme Court in Burnet v. Leninger, 285 U.S. 136, 52 S. Ct. 345, 76 L. Ed. 665, where the husband transferred to his wife one-half his interest in the partnership, and the husband nevertheless remained the ostensible and active partner in the business.

See also Cohan v. Commissioner, 39 Fed. (2d) 540, and Harris v. Commissioner, 39 Fed. (2d) 546, both decided by the United States Circuit Court of Appeals for the Second Circuit; T. J. Rogers, 15 B.T.A. 638; affirmed and appeal dismissed without opinion, 41 Fed. (2d) 1012.

By the agreement of January 16, 1924, the petitioner did not make a valid gift of any portion of her interest in the property acquired by her from her deceased brother to her sisters residing in Germany. The effect of the agreement was simply that the petitioner’s interest in the properties should be sold and a portion of the proceeds distributed to her sisters in Germany. For reasons above stated, we are of the opinion that this did not have the effect of freeing the petitioner from tax upon the profit realized on the sale of her interests in the properties.

The assertion of the delinquency penalty for failure to file an income tax return for 1925 is sustained.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: Lansdon:

text:
    Marine Transport Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. William J. Norville, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. W. B. Bellingrath, Petitioner, v. Commissioner of Internal Revenue, Respondent. Peyton Norville, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 51492, 54015-54017.
    Promulgated June 28, 1933.

      Geo. E. H. Goodner, Esq., for the petitioners.

      De Witt M. Evans, Esq., for the respondent.
   OPINION.

Lansdon:

The petitioners contend, first, that the award of the Mixed Claims Commission should not be taxed since it does not fall within the statutory and judicial definitions of income. Petitioners argue that the loss was total and final in 1917 and that at that time and for some years thereafter, the taxpayer had no legal basis for recoupment since this country was at war with Germany, and that the final award was an act of grace due to the action of our Government and in the nature of a gift. In our opinion there is no merit in this contention. In 1917 the taxpayer used its capital in the amount of $32,200 to purchase and provision a ship that was later destroyed by a German submarine. In 1928 it received $61,589.25 on account of the loss of its investment in property which had been destroyed. This amount arose from petitioners’ investment of its capital for purposes of profit and in our opinion was income in the year in which it was received. Burnet v. Sanford & Brooks Co., 282 U.S. 359.

Petitioners’ second contention is that even if the award of the Mixed Claims Commission results in income, only that part thereof which is in excess of the cost of the destroyed property is taxable under the provisions of section 111 (a) and 113 (a) of the Revenue Act of 1928. The involuntary conversion of the property acquired in 1917 at a cost of $30,000 into cash by the destruction thereof and the subsequent award of the Mixed Claims Commission was, in our opinion, not a sale or other disposition that brings the facts here within the meaning of the statutory rules relied on by the petitioners. Mitchell v. Commissioner, 48 Fed. 697.

The taxpayer here sustained a loss in 1917 and reduced its tax liability for that high tax year by claiming and being allowed the amount thereof as a deduction from its gross income for that year. In Burnet v. Sanford & Brooks Co., supra), the principle was laid down that recoveries on losses previously claimed and allowed constitute income as and when received. See also Commissioner v. Liberty Bank & Trust Co., 59 Fed. (2d) 320. Under this decision and others of like tenor, it is clear to us that there is no basis for the petitioners’ contention that the income received in the taxable year should be reduced by the amount of the loss that taxpayer sustained in 1917 and that was allowed as a deduction from its income in that year.

As a third point, counsel argues that the interest received as a part of the award is not taxable income. In Theodate Pope Riddle, 27 B.T.A. 1339, this question was decided adversely to the contention of the petitioners.

Since each of the petitioners at Dockets 54015, 54016, and 54017 as a stockholder received assets of the taxpayer in excess of the deficiency, it follows that each is liable for the full amount thereof as redetermined. Grand Rapids Nat. Bank, 15 B.T.A. 1166.

Reviewed by the Board.

Decision will be entered for the respondent.

       SEC. 22, GROSS INCOME.
      (a) General Definition. — “ Gross income ” includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever.

       After full consideration the court declared that income may be defined as “ gain derived from capital * * * including profit gained through sale or conversion of capital. Bowers v. Kerbaugh-Empire Co., 271 U.S. 170, 46 S.Ct. 449.”

       [Sec. 111.] (a) Computation of gain or loss. — Except as hereinafter provided in this section, the gain from, the sale or other disposition of property shall he the excess of the amount realized therefrom over the basis provided in section 113, and the loss shall be the excess of such basis over the amount realized.
      [Sec. 113.] (a) The basis of 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; * * *


text:
    National Petroleum and Refining Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 45600.
    Promulgated June 28, 1933.

      Harry C. Weeks, Esq., for the petitioner.

      Frank B. Schlosser, Esq., for the respondent.
   OPINION.

Lansdon:

The petitioner contends (1) that the receipts of its well prior to 1924, impounded by a receiver appointed by the Supreme Court and received by it on order of such Court in 1924, should not be regarded as taxable income in that year; and (2) that for the years prior to 1924 depletion allowances should be computed under the Eevenue Act of 1921.

Since the petitioner has not proved and does not argue that all its property was in the hands of the Federal receiver, we think the proceeding here is completely controlled by the decision of the Supreme Court in North American Oil Co., Consolidated v. Burnet,, 286 U.S. 417. Cf. Trojan Oil Co., 26 B.T.A. 659. On this point the determination of the respondent is affirmed.

In support of its second point, petitioner argues that inasmuch as the actual production of oil from its property was for the most part in years in which the Eevenue Act of 1921 was effective, allowable depletion should be computed in conformity with the provisions of that act. We are unable to agree with this contention. Allowances for depletion represent the return of capital cost free from tax and are applicable to years in which income is derived from the property. As we have decided above that all the income in question was received in the taxable year, we think it is clear that deduction for depletion allowances must be taken under the Revenue Act of 1924, which was in effect when the income in question was realized.

Reviewed by the Board.

Decision will he entered for the respondent.


author: Van Fossan:

text:
    Edward S. Rothchild, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 51219.
    Promulgated June 28, 1933.

      Morris Barasch, Esq., for the petitioner.

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

Van Fossan:

Respondent determined a deficiency of $9,471.37 in income taxes for the year 1928.

The parties entered into a stipulation of facts, the pertinent parts of which are as follows:

On or about the 26th day of May 1926, the petitioner became a member of a syndicate formed for the purpose of dealing in the shares of capital stock of the Chelsea Exchange Bank of New York. The petitioner had a 25 percent interest in this syndicate.

On the 5th day of December 1927, petitioner became a member of a second syndicate formed for the purpose of dealing in the shares of capital stock of the Chelsea Exchange Bank of New York. The petitioner had an 18 percent interest in this second syndicate.

The syndicate agreement provided:

Thus»: Accurate books of account shall be kept under the direction of the syndicate manager and periodically, not less than quarter-yearly, a report shall he made to the syndicate members covering the operations of the syndicate during the preceding quarter.
Fotjeth: The syndicate manager will purchase for the syndicate, as soon as practicable after the execution of this agreement, approximately thirty-five hundred (3500) shares of the capital stock of the said Bank at the best price or prices obtainable, but not to exceed in any event three hundred and ten ($310.) dollars per share. The syndicate manager may thereafter, from time to time, purchase additional shares of the stock of said Bank in his discretion and at prices which he may deem fair and reasonable, the holdings of said stock by the syndicate not to exceed, however, at any one time five thousand (5,000) shares. The syndicate manager may from time to time in Ms discretion, sell all or any number of tbe shares of said stock in tbe syndicate at prices to be fixed by him.
*******
Sevbhth: To enable tbe syndicate manager to make tbe initial purchase of approximately thirty-five hundred (3000) shares of stock of said Bank, the parties hereto shall pay into the syndicate, in cash, upon the execution of this agreement, twenty-five per cent. (25%) of the estimated purchase price thereof, each party contributing in accordance with his respective interest or share in the syndicate. The syndicate manager will then pledge or hy-pothecate said stock at a bank or trust company to raise the funds necessary to complete such purchase, and each syndicate member, if required so to do, shall execute a guarantee of the payment of any collateral note evidencing such indebtedness to the amount of his proportionate interest or share in said syndicate. Any syndicate member may pay in cash his entire contribution to the syndicate fund, in which event no guarantee of any note shall be required of him.
*******
Ninth: Syndicate stock shall be registered in the name of the syndicate manager or his nominee or nominees, and the syndicate manager shall vote such stock as he shall deem to be for the best interests of said syndicate at the annual .meeting of stockholders of said Bank or at any special meeting called for any purpose, including authorization to increase the capital stock of said Bank or the merger of said Bank with another bank or trust company.
Tenth : The syndicate herein may be dissolved by the vote of a majority in interest of the members hereof at any time, and it shall be dissolved in any event twelve (12) months from the date hereof and on such dissolution there shall be a final accounting and distribution pro rata of the funds in the syndicate as hereinabove recited.

Upon the closing of the first syndicate petitioner received a call on 643 shares of the capital stock of the Chelsea Exchange Bank at $200 a share, which he exercised, and on or about the 6th day of January 1928, he transferred the 643 shares acquired at a cost of $128,600 to the second syndicate at $301 a share, receiving from the second syndicate a check for $193,517.28.

On or about the 6th day of January 1928, petitioner gave the second syndicate a check for $47,700 in accordance with the terms of the second syndicate agreement.

(A loan guarantee agreement, dated December 8,1927, was entered into by and between the members of the second syndicate.)

On January 6, 1928, the second syndicate had loans payable to the National City Bank of $789,975 secured by 3,511 shares of Chelsea Exchange Bank stock. Petitioner’s interest in the 3,511 shares, in accordance with the terms of the second syndicate agreement, was 18 percent, or 631.98 shares.

Of the 3,511 shares of Chelsea Exchange Bank stock hypothecated on the loan with the National City Bank, 56 shares were withdrawn during the year 1928 and sold by the second syndicate to outsiders.

The petitioner contends that of the 643 shares of Chelsea Exchange Bank stock acquired by him from the first syndicate and transferred to the second syndicate, the petitioner has realized a profit of $1,113.02 on 11.02 shares, being the difference between his 18 percent participation in the 3,511 shares of Chelsea Exchange Bank stock hypothecated by the second syndicate on loans from the National City Bank, or 631.98 shares, and the 643 shares acquired by him from the first syndicate; and that of the 56 shares of Chelsea Exchange Bank stock hypothecated with the National City Bank and withdrawn and sold by the second syndicate to outsiders, the petitioner realized a profit of $1,018.08 on 18 percent of said 56 shares or 10.08 shares; or a total profit of $2,131.10 on the 21.1 shares.

The Commissioner contends that the transaction in connection with the aforesaid 643 shares of Chelsea Exchange Bank stock is a sale on which the petitioner has realized a profit of $64,917.28.

Attached to the stipulation was a transcription of the transactions of the second syndicate, including January 6, 1928, in which appeared the following entries:

Jan. 6,1928 Received on account of Joan on
643 shares Chelsea Ex. Bank Stock (Mr. Rothchild)
700 (1st Syndicate)
178 (Mrs. Hardy)
69 (Mr. L. Hardy)
165 (Mr. T. Hardy)
1745 “ “ “ “ “ (Total) $392, 625. 00
Jan. 6,1928 Capital contribution from Mr. Rothchild--47, 700. 00
Jan. 6,1928 Paid to the following for shares of Chelsea Exchange Bank stock on which the above loan of $392,625.00 was made this day:
Mr. Rothchild-193, 517. 28

No evidence in addition to the stipulation was presented at the hearing.

In cases before the Board, excepting cases of fraud or those involving transferee liability, the burden of proof is on the taxpayer. He must prove the determination of respondent to be erroneous. In the instant case the question involves the determination of the nature of a “ transfer ” of stock. The word “ transfer ” is not self-defining. A stock transfer may be incident to a sale, a loan, a pledge, a gift, or innumerable other types of transactions. Here we know that the stock was transferred and that petitioner received a check for $193,517.28. This action suggests a sale. The book entries made the same day tend to corroborate the suggestion that the transfer was consequent on a sale. We are of the opinion, on such evidence as is before us, that petitioner has not proved respondent’s determination that a sale occurred to be incorrect.

We are wholly unimpressed by petitioner’s argument as to the nature of the transaction and the amount of gain realized. Nor do we deem it necessary to enter into a discussion of the same. The theory advanced is so obviously labored as to make it profitless to attempt an analysis of the same.

In our opinion the only question worthy of consideration is whether petitioner was correct in his original concept of liability for tax as indicated by liis return. The basis of petitioner’s tax return was that to the extent of 18 percent, his share in the syndicate, the sale by petitioner to the syndicate was a sale to himself and to that extent without profit. He reported as profit 82 percent of the difference between cost and sale price.

The formulation of an all-embracing definition of the term “ syndicate ” is difficult, perhaps impossible. We do not attempt it. This may be said however. The evidence as to the syndicate shows that it was, at the least, a business entity. The syndicate agreement set up an organization for the transaction of a definite business purpose, i.e., the purchase and sale of stock. A manager was designated to conduct the business activities, record the same and render accounts of his stewardship. Title to stocks acquired by the syndicate was held in the name of the manager and he was authorized to vote the same. The manager had full authority to buy, hold, sell, and deliver shares as he saw fit. He received contributions to the syndicate capital fund, borrowed and repaid money and managed all other aspects of its affairs.

Thus whether the syndicate was an association, a partnership, a joint venture, or some sort of agency, there was a business entity which it is impossible to ignore. Respondent has determined that on the sale of the stock to the syndicate there occurred a closed transaction in which profit was earned measured by the difference between the amount paid and the cost of the stock. The evidence does not convince us that this conclusion was incorrect.

Reviewed by the Board.

Decision will be entered for the respondent.


author: Lansdon :

text:
    R. C. Avent, Sr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 46405, 53550.
    Promulgated June 28, 1933.

      Geo. E. H. Goodner, Esq., and W. K. Smith, C. P. A., for the petitioner.

      Hartford, Allen, Esq., for the respondent.
   OPINION.

Lansdon :

Two appeals are consolidated for hearing in these proceedings and both challenge the respondent’s holding that during the years in review the business firm of E. C. Avent & Sons was a co-partnership. Income tax deficiencies for 1927 and 1928 are in dispute in the amounts of $6,313.84 and $298.29, respectively.

In 1923 the petitioner purchased a tract of timberland upon which, in 1924, he built a sawmill, and has since been engaged in the lumber-manufacturing business under the firm name of E. C. Avent & Sons. In the conduct of this business the petitioner has been associated with his sons, E. C. Avent, Jr., and O. B. Avent, both of whom drew salaries of $1,800 per annum from the business, which was charged against their interests, respectively, in the future earnings of the business.

For 1924 and 1925 the petitioner filed partnership income tax returns for the firm of E. C. Avent & Sons, in which he reported the relative interests of its members and their ratable shares in losses and income, as follows:

1924

In his individual income tax returns for 1924 and 1925, respectively, the petitioner reported loss and gain, in harmony with the above showing in the returns of E. C. Avent & Sons, which he described as a partnership firm doing business at Cottrell, Alabama. No return was filed for E. C. Avent & Sons in 1926; the petitioner, however, in his individual return for that year reported receipt of $8,650.98 as his distributive share of the earnings of that firm, which tie designated by name in the appropriate column for listing partnership income.

Respecting the operations of R. C. Avent & Sons, the petitioner claimed a loss deductible from his gross income in 1927, which he explained in his return filed for that year as follows:

Item 16 (B) Loss on Saw Mill.
The taxpayer acquired timber and constructed a saw mill at Fruitdale, Ala. He took into a partnership, his two sons, R. C. Avent, Jr., and O. B. Avent. The sons contributed no capital to the firm, but were to receive each 33 per cent of the profits. The operations resulted in a loss for 1927, as was also the case for 1926. Due to the fact that R. O. Avent, Jr., and O. B. Avent have nothing with which to pay their share of the losses, the taxpayer has become liable for all of the losses sustained. The loss for 1927 is shown in Schedule A. The Partners’ Accounts which the taxpayer has been forced to assume, were as follows:
It. 0. Avent, Jr_ $9,433.11
O. B. Avent_ 9, 433.11
$18, 866.22
All of the above amount represents actual operating losses from organization of the partnership to January 1, 1927.

Petitioner also claimed deduction for additional losses amounting to $18,855.63 sustained by him in operation of the business of R. C. Avent & Sons, in 1927, which he reported as a proprietorship business in that year. For the year 1928 the petitioner filed an individual income tax return in which he reported the business carried on by the firm of R. C. Avent & Sons as his sole business and claimed the right to deduct $19,726.38 as a loss sustained by him in its operations for that year.

The respondent has rejected the petitioner’s claim that the losses in question were sustained by him as an individual operator and has reduced his allowable share in them to correspond to his ratable share shown in the schedule of interest set out in the partnership returns, and as first claimed by him in his individual returns for 1924, 1925, and 1926.

Upon the record we think the holding of the respondent must be sustained. Clearly, from the returns filed by the petitioner for himself and for the firm for 1924, 1925, and 1926, the respondent was justified in taking him at his word and holding the firm of R. C. Avent & Sons to be a partnership in those years. Until the contrary is shown we must assume that such relationship continued throughout the years in review.

The evidence introduced by the petitioner at the hearing has not convinced us that the respondent erred in his holding respecting this partnership and we, therefore, deny the contentions of the petitioner in relation thereto.

The petitioner’s alternative claim, that he be allowed to deduct from his 1927 income his sons’ portions of the partnership losses, must fail for want of proof to establish that right. The bad debt theory, advanced by counsel, is contrary to the testimony of R. C. Avent, Jr., who stated, in substance, that under their agreement petitioner was to bear all expenses, in the first instance, and await reimbursement from the income before profits were distributed. Accordingly, this witness stated that he had at no time shared in profits or been called upon to pay any part of the losses of the business.

Decision will be entered for the respondent.


text:
    W. W. Cleveland, Petitioner, v. Commissioner of Internal Revenue, Respondent. E. D. Flynn, Petitioner, v. Commissioner of Internal Revenue, Respondent. McIntyre Lumber & Export Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 64585, 64586, 67860, 68238, 68239.
    Promulgated June 28, 1933.

      Geo. E. H. Goodner, Esq., and Walter K. Smith, C. P. A., for the petitioners.

      Warren F. Wattles, Esq., for the respondent.
   OPINION.

Lansdon :

The petitioners’ first contention is that as the respondent mailed no deficiency notices to the taxpayer for the years 1928 and 1929, no tax liability has been determined against the transferor and therefore none can be asserted against the transferees, and that even if the deficiencies in question existed, as a matter of fact and law, the statute of limitations had run as to any assessment against the taxpayer prior to the date at which the deficiency notices were mailed to the petitioners.

In our opinion the first point in petitioners’ contention, as above set out, is without merit. A deficiency is not created by any act of the respondent, but by the facts and the legal significance thereof as set out in the taxpayer’s income tax return. The so-called 60-day letter ” is no more than notice to the taxpayer that the amount of a deficiency disclosed by its return has been determined under the applicable statute. In our opinion no assessment, notice, or other act of the respondent is necessary to establish liability for income taxes. We think that any deficiency existing at the date of a transfer of assets is a liability against such assets under the trust fund theory. United States v. Garfunkel, 52 Fed. (2d) 727; Helen Dean Wright, 28 B.T.A. 543.

The question here raised by the petitioners is material only as to whether the respondent exhausted all means to collect the unpaid taxes from the taxpayer before he proceeded against its stockholders as transferees of assets impressed with a trust in favor of the revenue. The record shows that during the years under review the taxpayer had no assets other than its receipts from the Commission and that such receipts were distributed to the petitioner as and when received. At March 4,1932, the date at which respondent determined the liabilities of petitioner under section 311 of the Eevenue Act of 1928, the taxpayer had no assets, and the respondent was without any means to enforce the collection of the deficiencies in question. In these circumstances it is clear that liabilities against the petitioners were properly determined unless barred by the statute of limitations at the date of such determination.

The income tax returns of the taxpayer for the years 1928 and 1929 were timely filed not later than March 15 of the years 1929 and 1930, respectively. Under the Eevenue Act of 1928 the statute of limitations runs two years after the date of filing the return required by law. The exception in section 275 (a) relates to false returns or no returns and has no bearing on the issue here. It follows, therefore, that unless lawfully extended the periods of limitation expired against the taxpayer on March 15, 1931 and 1932, respectively. The liability notices were mailed on March 4, 1932, at which date the stal ate had run against the taxpayer for any deficiency due on account of its return for 1928, but not for the year 1929. The Eevenue Act of 1928 gives the respondent one year after the expiration of the period of limitations against the taxpayer to assert liability against a transferee. Since the notices of liability against the petitioners for the unpaid tax of the taxpayer for 1928 were mailed on March 4, 1932, which was within one year after the period of limitation had run against the taxpayer, the action of the respondent was timely as to that year.

Counsel for petitioners also contends that petitioners Flynn and Cleveland are not liable for the taxes of the taxpayer from the years 1928 and 1929 since in each of such years the taxpayer had assets sufficient to pay its own taxes. The record does not support this contention. The taxpayer’s only assets in all the taxable years here involved were its receipts from the Commission and its interest in the unpaid balance of the awards thereof at the end of each of such years. At January 1, 1931, the award was unpaid to the extent of $20,565.02, but this amount was a mere claim against the United States dependent upon an appropriation by Congress and can hardly be regarded as property subject to distraint for unpaid taxes. It is also clear that even this amount was received and distributed prior to the respondent’s determination of liability against the petitioner and that at the date of such determination the taxpayer had no assets. On this point the contention of the petitioners is overruled.

Petitioners’ final contention is that in no event can the award of the Commission be regarded as income. This issue was decided in Marine Transport Co., 28 B.T.A. 566 and that decision is controlling here. The destroyed properties cost $77,000 in 1917. In the same year all the loss sustained except $10,333.34 was recouped by insurance. In 1918 the remainder of the cost was deducted from income as a loss in that year and such deduction was allowed by the respondent. It follows in conformity with our decision in Marine Transport Co., supra, that the entire amounts realized from the awards of the Commission were taxable income as and when received.

The record discloses that petitioners Cleveland and Flynn, as stockholders of the taxpayer, each received assets thereof in excess of the liabilities asserted against the taxpayer. It follows that each is liable for the unpaid income taxes of the taxpayer for the years 1928, 1929, and 1930. Grand Rapids Nat. Bank, 15 B.T.A. 1166.

Reviewed by the Board.

Decision will he entered for the respondent.

       [Sec. 271 (a), Revenue Act of 1928.] As used in this title in respect of a tax imposed by this title “ deficiency ” means—
      (a) The amount by which the tax imposed by this title exceeds the amount shown as the tax by the taxpayer upon his return; but the amount so shown on the return shall first be increased by the amounts previously assessed (or collected without assessment) as a deficiency and decreased by the amounts previously abated, credited, refunded or otherwise repaid in respect of such tax * * *.

       [See. 275.] Except as provided in section 276—
      (a) General rule. — The amount of income taxes imposed by this title shall be assessed within two years after the return -was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period.

         [Sec. 311.] (b) Period, of limitation. — The period of limitation for assessment of
      any such liability of a transferee or fiduciary shall bo as follows:
      (1) In the case of the liability of an initial transferee of the property of the taxpayer, — within one year after the expiration of the period of limitation for assessment aganst the taxpayer;
      (2) In the case of the liability of a transferee of a transferee of the property of the taxpayer, — within one year after the expiration of the period of limitation for assessment against the preceding transferee, but only if within three years after the expiration of the period of limitation for assessment against the taxpayer;— except that if before the expiration of the period of limitation for the assessment of the lability of the transferee, a court proceeding for the collection of the tax or liability in respect thereof has been begun against the taxpayer or last preceding transferee, respectively, — then the period of limitation for assessment of the liability of the transferee shall expire one year after the return of execution in the court proceeding.


author: Black :

text:
    Willard H. Ashton, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 39148.
    Promulgated June 28, 1933.

      John E. Hughes, Esq., for the petitioner.

      Carl R. Perkins, Esq., for the respondent.
   OPINION.

Black :

This case involves a deficiency in tax liability of $1,248.78 for the year 1923 proposed for assessment against the petitioner as transferee of the assets of the Ashton Dry Goods Co., of Rockford, Illinois.

The statement accompanying the deficiency letter contains the following :

In re: Mr. Willard H. Ashton, Fort Collins, Colorado. Under authority of Section 280 of the Revenue Act of 1926, there is proposed for assessment against you the amount of $1,248.78 constituting your liability as transferee of the assets of the Ashton Dry Goods Company, Rockford, Illinois, for unpaid income tax in the above amount due from the corporation (plus any accrued penalty and interest) for the year 1923, as shown by the following statement. [Then follows computation of the tax.]

In his petition the petitioner alleges that the respondent erred in disallowing as a deduction for 1923, $9,851.21 for a net loss sustained by the Ashton Dry Goods Co. in 1922. In paragraph 5 (a) of the petition is the following:

5. The facts upon which the petitioner relies as the basis of this proceeding are as follows:
(a) Petitioner admits that he is the transferee of the Ashton Dry Goods Company. He alleges, however, that the Ashton Dry Goods Company does not owe the deficiency claimed for the reason that in the year 1922 it sustained a statutory net loss of $9,851.21 from the conduct of its business. Of this loss the respondent allowed only $1,675.20, leaving $8,176.01 more which he should have allowed.

In paragraph 5 of his answer the respondent pleaded:

5. Admits that the petitioner is the transferee of the Ashton Dry Goods Company.

When the case came on for hearing neither party introduced any evidence and both parties moved for judgment. Petitioner based his motion on the ground that under section 602, Revenue Act of 1928, the burden of proof was on the respondent to prove the liability of the petitioner as transferee, and as no evidence was introduced there was a failure of proof entitling him to judgment. On the other hand, respondent moved for judgment on the record and contends that petitioner admitted his liability as a transferee in paragraph 5 (a) of his petition as follows: “Petitioner admits that he is the transferee of the Ashton Dry Goods Company ”, and that this admission obviates the necessity of respondent introducing any proof as touching the liability of petitioner as transferee and casts the burden on the petitioner to establish his defense in avoidance of the tax liability, to wit, that the transferor did not owe the deficiency, and as he had not introduced any proof contesting the validity of the tax asserted against the transferor corporation, respondent must prevail.

Section 602 of the Revenue Act of 1928 provides in part:

Title IX of the Revenue Act of 1924, as amended, is further amended by adding at the ’end thereof two new sections to read as follows:
“ TBANSnSREE PROCEEDINGS.
“ Sec. 912. In proceedings before the Board the burden of proof shall be upon the Commissioner to show that a petitioner is liable as a transferee of property of a taxpayer, but not to show that the taxpayer was liable for the tax.”

We had a similar question to that presented here in the case of Ludwig Vogelstein, 16 B.T.A. 947, and we there held that notwithstanding the admission of Vogelstein that he had received assets of the dissolved corporation, the burden was on the respondent to establish the value of the assets received by the transferee, and if he failed to establish that value, judgment must go for the petitioner.

It has been frequently held by the Board and the courts that a transferee of assets within the meaning of section 280 of the Revenue Act of 1926 is not liable to any greater extent than the value of the assets which he receives. Therefore a bare admission, by one against whom the Commissioner has asserted a transferee liability under section 280, that he is a transferee would not relieve the Commissioner of the burden of proof of showing to what extent such one was liable, and one of the things which the Commissioner would necessarily have to prove would be the value of the assets which the transferee has received. Of course it will be conceded that if the petitioner in his pleadings had admitted his liability as transferee to the extent asserted by respondent in his deficiency notice, there would be nothing for respondent to prove as touching petitioner’s liability as transferee. Such an admission would relieve the Commissioner of the necessity of proof. But petitioner’s admission in the instant case did not go that far. He merely admitted he was transferee, but, to what extent and how far, he made no admission. It is not every transferee of assets who is liable for the tax under the provisions of section 280, Revenue Act of 1926, as amended. As we said in Samuel Keller, 21 B.T.A. 84; affd., 59 Fed. (2d) 499:

* * * Now it must be admitted at the outset that petitioners are transferees of assets of the corporation to the extent of a value of at least $30,000. The nature and detail of these assets are set out in our findings of fact. But not every transferee of capital assets of a corporation is liable at law or in equity to the creditors of a corporation under the trust-fund doctrine. This trust can only be impressed upon assets of the corporation which are distributed on dissolution, or during the insolvency of the corporation, or when such distribution creates a condition of insolvency. United States v. Armstrong, 26 Fed. (2d) 227. If a corporation transfers a part of its assets to stockholders while it is solvent and is not made insolvent by the transfer, there is no liability either at law or in equity on the part of the stockholders who receive such distribution, even though the corporation subsequently becomes insolvent and is no longer able to pay its debts. * * *

In the Keller case, from which the above quotation is taken, we held that respondent had failed to sustain the burden of proof required of him by law, because that, while the undisputed facts showed that Keller and Perbohner were the transferees of certain assets of the taxpayer corporation, the Commissioner had not proved that this distribution of assets to them rendered the corporation insolvent. Therefore there was no transferee liability. Cf. American Feature Film Co., 24 B.T.A. 18, at page 21; Eliza J. Wray, 24 B.T.A. 94; R. E. Burdick, 24 B.T.A. 1297, at page 1304.

In the instant case the Commissioner has made no showing of insolvency by evidence. Although the admission made by petitioner in his petition is sufficient to show that he received assets from the Ashton Dry Goods Co., it is not sufficient for the purpose of establishing the value of these assets, nor is it sufficient to show that the Ashton Dry Goods Co. was left insolvent by such distribution of assets. Again we say that the facts in the instant case are very similar to those in the Vogelstein case, supra, which has the following headnote in the printed report of the case:

Where a petitioner admits that he is the transferee of the assets of a dissolved corporation and the Commissioner introduces no evidence to show the value, if any, of those assets the Commissioner has not borne the burden of proof * * *.

In that case the respondent’s deficiency letter contained practically the same statement as that in the instant case. The petitioner admitted in his petition as follows:

5. The facts upon which the petitioner relies as the basis of this proceeding are as follows:
(a) Tile petitioner, Ludwig Yogelstein, during the year 1920 was tlie principal stockholder in the corporation, L. Vogelstein and Company, Incorporated (hereinafter referred to as the company) which company was legally dissolved in the year 1921 and its assets distributed in liquidation to the petitioner.

This was admitted by the respondent in his answer. There, as here, respondent contended that petitioner had admitted his liability as transferee, but in rejecting this we said:

All that the petitioner has admitted in his petition is that he was the principal stockholder in the corporation, L. Yogelstein & Co., Inc.; that that company was legally dissolved in 1921; and that its assets were distributed in liquidation to the petitioner. We have no knowledge as to whether those assets had any value. If they did not, the petitioner has no liability as a transferee.
We think that! the proper interpretation of section 912 of the Revenue Act of 1926, added by section 602 of the Revenue Act of 1928, is that the burden of showing the extent of the liability of a transferee of property of a taxpayer is upon the Commissioner and that the Commissioner has not borne that burden by merely showing that the petitioner, by his own admissions, has received in liquidation the assets of a dissolved corporation, which itself may have been liable for a tax, without showing what value, if any, the assets in question had at that time. See Annie Temoyan et al., Trustees, 16 B.T.A. 923.

There is no practical difference in the admission contained in the Vogelstein case and that of the petitioner. They both admit receiving assets from the transferor, but in neither case was there any proof or admission of the value of the assets received. We think this is fatal, as the amount of the liability of the transferee is fixed by the value of the assets received, and it is impossible for the Board to determine the amount of the liability unless there is proof or admission of the value of the assets received. In accord with the Vogelstein case, the motion of petitioner is sustained, and that of respondent is overruled.

Decision of no liability will be entered, for the petitioner.