author: Trammell :

text:
    Miller Saw-Trimmer Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 31820.
    Promulgated July 12, 1935.

      Frank iS. Bright, Esq., for the petitioner.

      E. O. Algire, Esq., for the respondent.
   OPINION.

Trammell :

The issue here is whether petitioner is entitled, under the facts above set forth, to have its tax liability determined on the installment basis of reporting its income for the taxable years, under the provisions of sections 212 (d) and 1208 of the Revenue Act of 1926. The facts were stipulated by the parties or established by undisputed testimony, and the question presented is purely one of law.

During the taxable years the petitioner sold printing machinery on the installment plan, taking a small cash payment and four negotiable promissory notes for the agreed sale price, under the circumstances detailed in our findings of fact.

Petitioner contends that under those facts it is entitled to have its tax liability determined on the installment basis,- according to the provisions of the quoted statute, while respondent asserts that petitioner is not entitled to such basis, but that in any event by converting the installment notes into cash petitioner received the entire profit from its sales in each year, and is taxable on the full amount thereof, whether or not the sales were originally made on the installment plan.

In Packard Cleveland Motor Co., 14 B. T. A. 118, we held that where the taxpayer sold automobile trucks on a basis of 25 percent cash and the balance in deferred payment notes and immediately transferred the notes to a finance company for their face value, the entire profit should be reported as income in the year of sale, and that, while the sales may have been on the installment basis, they became closed transactions and income arose upon receipt from the finance company of the full purchase price. . This decision, as well as our later decisions following it, was predicated upon the theory that the proceeds from the sales of the installment notes at face value effected realization of the taxpayer’s entire profit on the original sales. E. E. Chapman, 19 B. T. A. 878; Lucius H. Elmer, 22 B. T. A. 224; affd. (C. C. A., 2d Cir.), 65 Fed. (2d) 568; Duram Building Corporation, 23 B. T. A. 796; reversed (C. C. A., 2d Cir.), 66 Fed. (2d) 253; Alworth-Washburn Co., 25 B. T. A. 140; affd. (App. D. C.), 67 Fed. (2d) 694; E. G. Robinson, 28 B. T. A. 788; reversed (C. C. A., 9th Cir.), 73 Fed. (2d) 769.

In reversing our decisions in Duram Building Corporation, supra, and E. G. Robinson, supra, the courts took the view (1) that the taxpayer’s privilege of reporting upon the installment basis depends upon the transaction between the taxpayer and the purchaser, and is not in any wise conditional upon any subsequent disposition that may be made by the taxpayer of the installment notes; and (2) that the transactions by which the purchase notes are sold, discounted or otherwise disposed of are separate and independent, and themselves form the basis for a return of profit or loss.

In both cases, however, the courts held in effect that while the original transactions constituted installment sales and the taxpayers were entitled to report their profits on that basis, nevertheless to the extent that the installment notes were sold or disposed of at face value during the taxable period, profit was realized from such transactions in amounts equal to the profit represented by the notes so disposed of and must be included in the taxable income for that year. Accordingly, our decisions were reversed only to the extent of requiring that the profit represented by notes not sold or disposed of in the taxable period should be accounted for on the installment basis.

It would follow under the principle established by those decisions that where all the installment notes are disposed of at face value in the taxable year, such transactions give rise to profit in exactly the same amount as that derived from the original sale and represented by the installment notes.

In the case of Duram Building Corporation, supra, the court said:

Therefore, as we interpret section 212 (d), the privilege of reporting on the installment basis depends upon the transaction between the vendor and purchaser of the land during the taxable period; it is not made conditional upon what disposition the vendor may make of the purchaser’s evidences of indebtedness by transactions with third parties during the taxable period in which the land was sold. Such transactions are separate and independent and will themselves be the basis for a return of profit or loss.

In the case of E. G. Robinson, supra, the court said:

* * * We * * * therefore hold that even though petitioner remained liable as guarantor on the notes transferred, the gain included in the installment notes [transferred] for the real estate at their face value should have been included in petitioner’s income tax return for the year 1927.

Petitioner seeks to distinguish the case at bar from those above cited because of the fact that it remained contingently liable as endorser or guarantor on the notes, and because the notes were discounted or hypothecated for loans largely on the faith and credit of. petitioner’s principal stockholder, Nicola. This position, we think, is not well taken. More or less the same argument was advanced in. some or all of the cited cases. The principle is well established that “ a taxpayer should return income in the year in which it is received without regard to the fact that there may be claims against it not determinable until a subsequent year.” Alworth-Washburn Co. v. Helvering, 67 Fed. (2d) 694, supra, citing Burnet v. Sanford & Brooks Co., 282 U. S. 359; Burnet v. Thompson Oil & Gas Co., 283 U. S. 301; North American Oil Consolidated v. Burnet, 286 U. S. 417. And in the Alworth-Washburn Co. and Robinson cases, supra, it was specifically held that the contingent liability of the taxpayers on the transferred installment notes did not prevent the profits realized from being taxed in the years of receipt.

The present case is distinguishable from those above cited only by the fact that the four-month notes discounted at the banks were reacquired by the petitioner on or before the due dates for the purpose of renewal by the acceptance of a new series of notes, which new notes were immediately discounted at the baides. However, there is nothing to show that there was any different legal relationship between the petitioner and the banks than in the case of ordinary discounted notes. The petitioner received in money the full face value of all the notes, and was secondarily liable thereon as endorsen lb was legally liable to the banks with respect thereto only in the event the makers did not pay.

We think the distinction above referred to is insufficient to justify computation of the petitioner’s tax liability on the installment basis. The first three notes of each series were treated as ordinary discounted notes. The fourth note of each series, being for the remaining balance of the purchase price, was taken up and a new series of notes by the same maker substituted therefor. This process was repeated until final payment was made by the purchaser. In our opinion this method of handling the notes was no different in any material respect from ordinary discounted notes.

Hence, we held that as to the installment notes discounted by petitioner, and in respect of which it thereby derived gain equal to the entire profit from its sales in each year, petitioner is not entitled to have its tax liability determined on the installment basis.

Petitioner further contends that, whatever may be the decision as to the “ discounted ” installment notes, it is in any event entitled to report on the installment basis in respect of the notes on which it obtained “ loans.”

Whether or not petitioner’s contention on this point is sound, as a matter of law, it is unnecessary for us to decide here. Even if there be any legal distinction between loans and discounts materially affecting petitioner’s tax liability, we can afford it no relief on that account for the reason that the record does not disclose what amount of profits was represented by the notes on which it obtained “ loans ” from the banks and which remained unpaid at the end of the taxable years. The parties have stipulated that:

Of these notes deposited * * * with the Chase National Bank during the respective years, a considerable and unaseertainable number and' face amount thereof was paid by the makers prior to the close of said years. There was also, in many instances, a renewal of the four months’ notes by acceptance of a new series of notes, some of which were disposed of as set forth in paragraph 2 [discounted], and some of which were disposed of as set forth in this paragraph [deposited as collateral for loans] * * *.

As to those notes paid by the makers prior to the close of the respective years in which deposited as collateral for loans, or which were renewed by acceptance of a new series of notes which were thereupon discounted instead of being redeposited, petitioner received all of its profit in those years and is not entitled to the installment basis. And if we should hold that petitioner is entitled to report on the installment basis in respect of the notes deposited for loans and not paid by the makers or renewed and discounted during the taxable years, it is apparent that there is no basis for determining the number and face amount of such notes which remained as security for the payment of the “ loans.”

In the instant case, since the number and face amount of the notes deposited as security for loans which were paid or renewed and discounted prior to the close of the taxable years are not ascertainable, the facts necessary to establish what the true deficiency is are not susceptible of proof.

Conceding, for the sake of argument, that the respondent’s determination is erroneous in part with respect to the installment notes deposited as collateral security for loans, to the extent that such notes were not paid or renewed and discounted during the taxable years, it is stipulated that a basis for apportionment is unascertainable. We are then left to find that the entire deficiency is due, or that no deficiency is due, with respect to the notes deposited as collateral for loans. We know that there is some deficiency with respect thereto, and hence we can not say that there is no deficiency. Yet the deficiency determined by the respondent may not be correct, in that it may, to some unascertainable extent, be excessive.

By order of May 3,1935, this proceeding was set down for further hearing to enable the parties to submit further evidence to show the number and amount of notes deposited as collateral security which were paid during the respective taxable years, and on May 15, 1935, the parties filed a stipulation stating that it had been found that there is no evidence available tending to establish the facts in question. In this situation we uphold the deficiency. The fault lies more with the taxpayer than with the Commissioner. The Government should not be made to suffer because the taxpayer did not keep proper records to show its correct tax liability. On this principle, unexplained bank deposits are held taxable in the absence of proof of the actual net income. Pincus Brecher, 27 B. T. A. 1108; Baron Brothers, Inc., 26 B. T. A. 304; Robert Burd, 19 B. T. A. 734; Isadore Angel, 18 B. T. A. 39; I. Goldman, 12 B. T. A. 874. And in Renier Music House, Inc., 15 B. T. A. 241, we held that where a taxpayer failed to prove facts from which the true deficiency could be determined by the installment sales method, the Commissioner’s determination by another method must stand.

In Burnet v. Houston, 283 U. S. 223, the Court said with respect to a situation somewhat similar to the instant case:

We can not agree that the impossibility of establishing the specific fact, made essential by the statute as a prerequisite to the allowance of a loss, justifies a decision for the taxpayer based upon a consideration only of the remaining factors which the statute contemplates. * * * The impossibility of proving a material fact upon which the right to relief depends simply leaves the claimant upon whom the burden rests with an unenforceable claim, a misfortune to be borne by him, as it must be borne in other cases, as the result of a failure of proof.

Respondent’s action on the issue submitted for decision is approved.

The parties have stipulated that the consolidated net taxable income for the taxable years, computed on the accrual basis of accounting, is as set forth in the deficiency letter, which amounts will be reflected in the redetermination of the deficiencies.

In respect of the issue of special assessment, since it appears from the record that the parties agree that the- petitioner is entitled to have its profits tax determined as provided in section 328 of the Revenue Act of 1918, the only issue is as to the correct amount thereof.

Reviewed by the Board.

Further proceedings will he had under Bule 6B (d).

       Sec. 212. (cl) under regulations prescribed by the Commissioner with the approval of the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the total profit realized or to be realized when the payment is completed, bears to the total contract price. In the case (1) of a casual sale or other casual disposition of personal property for a price exceeding $1,000, or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed one-fourth of the purchase price, the income may, under regulations prescribed by the Commissioner with the approval of the Secretary, be returned on the basis and in the manner above prescribed in this subdivision. As used in this subdivision the term “ initial payments ” means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable year in which the sale or other disposition is made.
      Sec. 1208. The provisions of subdivision (d) of section 212 shall be retroactively applied in computing income under the provisions of the Revenue Act of 1916, the Revenue Act of 1917, the Revenue Act of 1918, the Revenue Act of 1921, or the Revenue Act of 1924, or any of such Acts as amended. Any tax that has been paid under such Acts prior to the enactment of this Act, if in excess of the tax imposed by such Acts, as retroactively modified by this section, shall, subject to the statutory period of limitations properly applicable thereto, be credited or refunded to the taxpayer as provided in section 284.


source: Caselaw Access Project

author: Leech:

license: Public Domain

text:
    William H. Stayton, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent. A. J. Townsend, Petitioner, v. Commissioner of Internal Revenue, Respondent. W. S. Townsend, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 71867, 73186, 74541.
    Promulgated July 12, 1935.

      Virgil Y. Moore, Esq., for petitioner W. S. Townsend; O. M. Cbarest, Esq., for petitioner A. J. Townsend; and William, E. Stayton, Jr., pro se.

      Elden McFon-land, Esq., for the respondent.
   OPINION.

Leech:

The respondent determined deficiencies in 1930 income taxes, of $1,391.19 as to Stayton, $6,011.53 as to A. J. Townsend, and $31,400.32 as to W. S. Townsend. These proceedings for rede-termination of those deficiencies have been formally consolidated. The controversy is common to all and1 involves the single question of fact as to whether certain sums received by petitioners from the National Pipe Products Corporation are income for 1930 or 1931.

In 1929, W. S. Townsend transferred all territorial rights vested in him by virtue of a certain contract with the Fairyland Manufacturing Co., for the manufacture and sale of “ Tom Thumb ” golf courses, to National Pipe Products, for 25 percent of the net profits arising from that source.

By resolution of the directors of National Pipe Products of March 21, 1930, there was to be paid to A. J. Townsend, president of the company, for 1930, a bonus equal to 10 percent of the net profits for that year.

During 1930, Stayton was employed by National Pipe Products as its general manager, under a prior arrangement whereby he was paid a salary and a bonus equal to 5 percent of the annual net profits of the company.

The selling agreement between W. S. Townsend and National Pipe Products under which those parties acted, though the written agreement was never executed, did not fix the time or manner of the payment to Townsend of the amounts due thereunder. By resolution of the directors of the company of March 21, 1930, the treasurer of the corporation was authorized to loan to each of the three petitioners an amount not exceeding 80 percent of their then accrued bonuses, taking their promissory notes to the corporation, at 6 percent interest, as security. In October 1930, the several notes of each petitioner for withdrawals to the end of September were consolidated in a single note and the three consolidated notes and those subsequently given for additional withdrawals were entered on the company’s books and treated as true bills receivable.

In February 1931, the books of National Pipe Products for 1930 were finally closed and the directors, by resolution, directed the treasurer “ to pay, without recourse, bonuses and divisions of profits for the year 1930” to these petitioners, among others, of certain specified amounts. The amounts directed to be paid to W. S. Townsend and Stayton were, in each instance, greater than their withdrawals in 1930, while the amount of A. J. Townsend’s withdrawals in that year exceeded the amount so directed to be paid him. A. J. Townsend then gave his note to the corporation for the amount of this excess, a part of which note has been paid, and the unpaid balance- is now carried as an asset by the corporation, payee, in receivership. The notes given by petitioners covering their withdrawals were then canceled and destroyed, and A. J. Townsend gave the company a new note for the amount of his excess withdrawals. In the cases of W. S. Townsend and Stayton it is the amounts which they actually withdrew during 1930 that are in controversy, while in the case of A. J. Townsend it is the amount directed to be paid by the resolution of February 1931, which is less than the amount of his withdrawals in 1980, that is in controversy. The corporation kept its accounts on the accrual system and accrued monthly these “ bonus accounts ” as well as Federal taxes. The petitioners, who filed their "1930 returns on a cash basis, treated the disputed amounts as income for 1931, and returned no part thereof in their 1930 returns. The respondent held that these amounts were income for 1930. These proceedings resulted.

The Kevenue Act of 1928, section 42, provides that all items of gross income are to be returned as gross income for the year in which received by the taxpayer, unless, under permitted methods ,of accounting, any such items are to be properly accounted for as of a different period. These petitioners computed net income in their returns on a cash basis, and, therefore, they were obliged to include all items of gross income in the gross income of the year in which received.

But the petitioners contend that the questioned amounts were received as loans and not as outright and unqualified payments of income, and that they received no income as such until the corporate resolution of February 1931 directed the payments of the amounts due them “ as bonuses ” and their promissory notes covering their 1930 withdrawals against anticipated bonuses ” were canceled and destroyed.

We agree with petitioners. The right of each petitioner to the bonus rested entirely on the corporate resolution of March 21, 1930. This resolution, though ambiguous, we have found, was intended to and did authorize the treasurer of the corporation to loan, during that year to each petitioner, not exceeding 80 percent of his agreed percentage of net profits of the company, then accrued.

The net profits, if any, upon which the bonuses were to be computed for 1930, the pending tax year, were not determinable until after the close of that year.

The monthly accrual of these bonuses on the corporate books were ■obviously merely estimates of that item, as were the similarly accrued Federal taxes. The accrual served here only as a means of measuring the amounts to be loaned to each petitioner, as authorized by the corporate resolution. The fact that Stayton, one of the petitioners, did not draw the amount to which he was entitled under that resolution, is significant of a loan.

The treatment of the disputed payments on the corporate books as loans in 1930, converted into absolute payments of income in 1931 upon the adoption of the corporate resolution in February of that year, authorizing the then payment of the bonuses without recourse, supports petitioners’ position. Likewise do petitioners’ income tax returns for both 1930 and 1931.

In the case of Lorenzo C. Dilks, 15 B. T. A. 1294, the petitioner, Dilks, was employed by the George A. Fuller Co. under a contract calling for a salary of $20,000 and a bonus of 10 percent of the “ net profits earned ” by the Wilmington office. In arriving at the net profits the value of the plant was to be ascertained by sale or otherwise and profit or loss on the same to be taken into account. The company kept accurate costs of all work, monthly computations being made of the progress of the work. During the year 1920, the George A. Fuller Co. paid Dilks various sums in addition to his annual compensation of $20,000. These sums were carried by the company as an account receivable. Profits were finally determined on December 30, 1921, and the company credited petitioner’s account with $87,500 ($82,000 had been advanced to him, $74,000 of this amount in 1920).

We held there that the payments to Dilks in 1920 constituted loans or advances.

The petitioners’ position here is stronger than that there presented. Petitioners here gave their promissory notes to the payor corporation for their 1930 withdrawals, and such withdrawals were authorized in the corporate minutes as loans.

We conclude the disputed payments were received by petitioners as loans and not income in 1930. Such payments did not become income to petitioners until the cancellation of those loans in 1931 by authority of the corporate resolution then adopted. Lorenzo C. Dilks, supra; Lorenzo C. Dilks, 19 B. T. A. 646; cf. United States v. Kirby Lumber Co., 284 U. S. 1.

Reviewed by the Board.

Decision will be entered for fetitioners William H. Stanton, Jr., Docket 71867, and A. J. Townsend, Docket 73186; and decision will be entered pursuant to Rule 50 in respect to the proceeding, W. S. Townsend, Docket 7JJ¡J¿1-


author: McMahon:

text:
    Emma W. Davis, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 68525.
    Promulgated July 12, 1935.

      Sears Lehmann, Esq., for the petitioner.

      T. M. Mather, Esq., for the respondent.
   OPINION.

McMahon:

This is a proceeding for the redetermination of a deficiency in income tax for the year 1930 in the amount of $4,739.93. It is alleged that, due to the basis used, the respondent' erred in holding that the petitioner derived a gain of $17.34 instead of a loss of $23,873.16 upon the sale of Houston Oil Co. stock in 1930.

The petitioner is an individual, with residence in St. Louis, Missouri. Edward Whitaker, father of the petitioner, died in the early part of April 1926, leaving a net estate of over $2,000,000. The petitioner was the residuary legatee and inherited the greater portion of the estate.

Much of the property was in stock located in eight or ten states. The stock in question, about 900 shares of stock of the Houston Oil Co., was subject to inheritance tax of the State of Missouri. Both the State of Arkansas and the State of Texas claimed the right to tax it, under their inheritance tax laws. The attorney for the estate was of the opinion that neither the-State of Texas nor the State of Arkansas had a right to any tax from-the estate. The Federal estate tax on this estate was large enough so that all the state taxes combined were less than 80 percent thereof, so that the estate had no financial interest in defeating a state inheritance tax. However, the attorney for the estate was under the firm conviction that no tax was owed to Arkansas or Texas.

As early as September 10, 1926, the attorney for the estate started writing to the transfer agent of the Houston Oil Co. in Baltimore, Maryland, in an attempt to get the stock transferred to this petitioner. On February 3, 1927, he wrote the inheritance tax department of the Comptroller of the State of Texas in this regard.

The will of Edward Whitaker was duly probated in the Probate Court at St. Louis, Missouri, pursuant to a petition for the distribution of the estate. The court ordered distribution of the estate, specifically including the stocks in question herein, on March 26, 1927. On April 27, 1927, the commissioner in charge of revenue of the State of Arkansas admitted that there" was no tax due to Arkansas. •

The executors of the estate were F. Lehmann, Sam Davis, and E. J. Costigan. The deceased had been a director in the Houston Oil Co. and after his death Sam Davis succeeded him on the board of directors of that corporation. The attorney for the estate instructed Davis, each time he attended a meeting of the Houston Oil Co. directors, to try to get the company to transfer the stock prior to payment of the tax. However, the Houston Oil Co. refused to transfer the stock unless the taxes claimed by the State of Texas were paid. The executors of the estate then, gave orders for the attorney for the estate to pay this tax, which he did with objections. The taxes, including taxes on other stock, were paid on June 14, 1928. All the taxes amounted to $5,036.60 and on June 27, 1928, the Comptroller’s Department of the State of Texas issued a receipt therefor and a waiver authorizing the transfer of the stock on the books of the corporation. The stock was transferred to the name of the petitioner on June 29, 1928, the date the receipt was received. The petitioner had been demanding this stock all the time as she wanted to sell it, but June 29, 1928, was the earliest date upon which she could obtain it, since the inheritance tax demanded by the State of Texas had not been paid.

Between March 26, 1927, and June 29, 1928, the value of this stock increased.

The respondent held that the date of distribution of the stock of the petitioner was March 26, 1927, the date on which the Probate Court ordered distribution thereof.

Upon the foregoing facts, which we find, the parties have presented to us for determination only one question: What was “ the time of the distribution ” of the stock in question to the petitioner within the meaning of section 113 (a) (5) of the Revenue Act of 1928? The respondent held that the date of distribution was March 27, 1927, the date on which the Probate Court ordered • distribution of the estate, specifically including the stock in question; and held that' the basis for determination of gain or loss upon its disposition is its value at that time. The petitioner contends that the time of distribution was June 29, 1928, the date the stock was transferred to her, since prior to that time the corporation refused to transfer the stock without authorization of the State of Texas and since such authorization was not given until June 27,1928, upon the payment of the inheritance taxes claimed by the State of Texas to be due; and contends that the proper basis is its value at that time. The values at those respective times are not in question.

In William R. Huntley, 30 B. T. A. 931, the surrogate, on May-22, 1929, had ordered a distribution of certain stock, but the certificates for the stock were not delivered to the beneficiaries until June 20, 1929, and July 12, 1929. The stock was sold in 1930. It was there held that the time of distribution was the time of the surrogate’s decree. We there stated in part:

* * 51 Here the surrogate’s decree did not direct distribution to be made at a future date, but the executors were ordered to make distribution without limitation as to time, and hence they were authorized to distribute immediately after the signing and entry of the decree. The effective date of the decree was, therefore, May 22, 1929. On and after that date the respective petitioners were the owners of the shares of stock set aside and distributed to them by the decree. Any increase in the value of the stocks thereafter would inure exclusively to their benefit, and they alone would suffer loss resulting from any decline in the value after that date.
A certificate of stock merely evidences ownership, it is not the stock itself. If certificates representing the shares of stock distributed to these petitioners had never been delivered to them by the executors, they would nevertheless have been the owners of interests in the respective corporations from May 22, 1929. Therefore, the dates on which the stock certificates were actually delivered to the petitioners are not the dates on which they became the owners of the property or interest rights in the corporations; they became owners of such property rights on the effective date of the decree of distribution, namely, May 22,1929.
Plainly, we think, to adopt the contention of the petitioners that “ the time of the distribution ” is the date on which actual delivery is made would throw open the door to tax evasion and lead to results not contemplated by Congress in adopting the statute in question. In such event, any taxpayer in the position of these petitioners could obtain an increased basis’for computing profit or loss by merely deferring acceptance of possession of the stock certificates on a rising market where the value of the stock was increasing.

The instant proceeding is in principle controlled by the Huntley case. Cf. First National Bank of Birmingham, Guardian, 31 B. T. A. 847; Carrie G. Cox, 31 B. T. A. 819; St. Louis Union Trust Co. et al., Co-trustees, 30 B. T. A. 370.

In Willcuts v. Ordway, 19 Fed. (2d) 917, a case involving a different statute but which we consider pertinent here, it was stated:

Distribution * * * does not necessarily mean passing into the uncontrolled possession and disposition of the beneficiary. It means separation or segregation from the trust estate so that it [the bequeathed property] no longer forms any part or parcel thereof.

See also Fidelity & Columbia Trust Co. v. Lucas, 66 Fed. (2d) 116.

The succession to the personal estate of a deceased person and the distribution thereof, wherever it may be situated, are governed by the law of his domicile at the time of his death. St. Louis v. Wiggins Ferry Co., 11 Wall. 423; Eidman v. Martinez, 184 U. S. 578; and Middleton v. Luckenbach S. S. Co., 5 Fed. Supp. 238, 241. Cf. First National Bank v. Maine, 284 U. S. 312. Here, so far as we are informed, the decedent at the time of his death was domiciled in Missouri, and it is not contended by the petitioner that the Probate Court of St. Louis, Missouri, did not have jurisdiction to grant her a valid title to the stock in question, and to order the distribution thereof to her.

We are not here concerned with the legality or illegality of the taxes exacted by the State of Texas; and it is not material here that that state refused to consent to a transfer of the stock on the books of the corporation until the taxes were paid. This is true even if we assume for the purposes of discussions that the Houston Oil Co. is a Texas corporation, as it probably is. Nor is it material that the petitioner or the executors of the estate, or the attorney representing the estate, chose to refuse to pay the taxes to the State of Texas and to contest that matter. Irrespective of all this the petitioner became the owner of the stock in question by virtue of the decree of the Probate Court and, so far as the evidence shows, acquired the right to have the stock distributed to her immediately upon the date of the decree. The decree of the Probate Court effected a distribution of the stock to the petitioner. The assets, by virtue of the decree, became assets of the petitioner instead of assets of the estate. The fact that the stock may have been subject to a lien for Texas inheritance taxes, whether legally or illegally asserted, does not affect the question of ownership of the stock of the right to a distribution thereof. In our opinion, the petitioner, any time after the decree of the Probate Court, could have required the executors to pay the tax claimed by the State of Texas and cause the stock to be issued in her name; or she, herself, could have paid the tax and demanded the stock.

We hold that the time of the decree of the Probate Court ordering distribution was “ the time of the distribution to the taxpayer within the meaning of section 113 (a) (5) of the Eevenue Act of 1928.

We do not consider the case of Brewster v. Gage, 280 U. S. 327, controlling. There the Court had under consideration the question of the time of “ acquisition ” of certain stocks by a residuary legatee, under the provisions of .section 202 of the Eevenue Acts of 1918 and 1921. The statute with which we are concerned is quite different. We are here concerned with the time of “ distribution.” In that case the Supreme Court referred to the provision of the Eevenue Act of 1928, with which we are concerned, and stated: “ The deliberate selection of language so differing from that used in the earlier acts indicates that a change of law was intended.” See Arthur E. Braun,, Trustee, 29 B. T. A. 1161, 1176, which similarly distinguished Brewster v. Gage, supra.

Decision will he entered for the respondent.

       (a) Proverty acquired* after February £8, 1918. — Tile basis for determining tlie gain, or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that—
      * * * * * *
      (5) Property transmitted at death. — If personal property was acquired by specific bequest, or if real property was acquired by general or specific devise or by intestacy, the basis shall be the fair market value of the property at the time of the death of the decedent. If the property was acquired by the decedent’s estate from the decedent, the basis in the hands of the estate shall be the fair market value of the property at the time of the death of the decedent. In all other cases if the property was acquired either by will or by intestacy, the basis shall be the fair market value of the property at the time of the distribution to the taxpayer. * * *


author: Smith :

text:
    Sewell L. Avery, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 76053, 78474.
    Promulgated July 16, 1935.

      Leland K. Neeves, Esq., for tlie petitioner.

      Chester A. Gwinn, Esq., for tbe respondent.
   OPINION.

Smith :

These proceedings involve deficiencies in petitioner’s income tax for the calendar years 1930 to 1932, inclusive, as follows:

The parties have submitted a written stipulation settling all but one of the issues raised in the petitions and answers and setting forth all of the material facts. The one remaining issue, which is common to all three years, is whether the statutory 15 percent limitation on charitable contributions is to be computed on the entire net income or on the ordinary net income without deduction of capital net losses.

The stipulated facts relevant to this issue may be summarized as follows:

During the years 1930 to 1932, inclusive, the petitioner’s total net income, exclusive of capital net losses, his capital net losses, and charitable contributions were as' follows:

The sole question here in issue has been determined by the Roard in James H. Lockhart, 32 B. T. A. 732, after the submission of these proceedings. We there held, upon authority of Helvering v. Bliss and Helvering v. Harbison, 293 U. S. 144, that capital net losses as well as capital net gains are to be included in ascertaining the net income upon which the 15 percent limitation on charitable contributions is to be computed. For reasons therein stated, we so hold in these proceedings.

Judgment will be entered wnder Bule 50.


author:
Smith :
      Seawell,

text:
    General Finance Company of Philadelphia, Pa., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 76539.
    Promulgated July 16, 1935.

      David 8. Malis, Esq., for the petitioner.

      O. G. Holmes, Esq., for the respondent.
   opinion.

Smith :

This proceeding is for the redetermination of deficiencies for the period January 20 to December 31,1930, and for the calendar year 1931 in the amounts of $811.63 and $1,690.93, respectively. The petition alleges:

4. The determination of the taxes as sot forth in said notice of deficiency is based upon the following errors:
A. In determining the taxable net income of the petitioner for the year 1930, the Commissioner erroneously disallowed a statutory net loss of $24,808.52 for the years 1928 and 1929. The Commissioner has erroneously disallowed this loss upon the basis that the domestication of the Delaware Corporation into a Pennsylvania Corporation prohibited the petitioner from carrying the loss of the two preceding years forward.
B. In determining the taxable net income of the petitioner for the year 1931, the Commissioner erroneously disallowed a statutory net loss of $8,228.25, balance of statutory net loss carried forward from the year 1929. The Commissioner has erroneously disallowed this loss upon the basis that the domestication of the Delaware Corporation into a Pennsylvania Corporation prohibited the petitioner from carrying the loss of the two preceding years forward.

On August 31, 1921, the General Finance Co. of Philadelphia, Pa., was organized as a Delaware corporation in accordance with the laws of that state. After its incorporation, it filed annual returns with the proper authorities of the Commonwealth of Pennsylvania as a foreign corporation, and regularly made such payment of taxes as a foreign corporation as it was required to do under the laws of the Commonwealth of Pennsylvania.

On December 30, 1929, by proper meeting of the stockholders of the corporation, held at the office of the corporation in Philadelphia, it was resolved that the necessary procedure in accordance with the laws of the Commonwealth of Pennsylvania be undertaken and adopted to domesticate this corporation under the laws of the Commonwealth of Pennsylvania in order to avoid the duplication of effort in filing corporate returns with the State of Delaware, and corporate returns as a foreign corporation with the Commonwealth of Pennsylvania. Accordingly, written application was addressed to the Governor of the Commonwealth of Pennsylvania, signed by the president and secretary of the corporation, and given under the seal thereof, in compliance with the provisions of the law of the Commonwealth of Pennsylvania, approved June 9, 1881, entitled “An Act to Authorize Foreign Corporations to become Corporations of Pennsylvania and to prescribe the method of their so doing ”, and, pursuant thereto, the Governor of the Commonwealth of Pennsylvania on January 20, 1930, approved the application for domestication of the corporation.

Up to the time of and following the domestication of this corporation, its sole office and! place of business remained at the comer of Broad and Vine Streets, Philadelphia, Pennsylvania, and the officers and directors remained the same after its domestication. The same stockholders who were the stockholders prior to the domestication continued to be the stockholders holding the same certificates and! shares of stock which they held prior to the domestication and the authorized capital stock and the whole financial structure of the Delaware corporation remained exactly the same after its domestication. After domestication the corporation made no further returns with any of the authorities of the State of Delaware. The powers granted the corporation under its domestication remained verbatim the same as they had been as a Delaware corporation.

For the year 1930 the petitioner claimed on its return a loss of $24,808.52 representing a net loss to be carried forward] under the applicable provisions of the statute. For the year 1931 the petitioner claimed on its return a loss of $8,228.25 representing a net loss to be carried forward under the applicable provisions of the statute. The claimed net losses of the Delaware corporation for 1928 and 1929 were disallowed as deductions from the petitioner’s income for the year 1930 upon the ground that the net losses of the Delaware corporation could not be carried forward and deducted from the gross income of the petitioner, a Pennsylvania corporation. The notice of deficiency upon which this proceeding was brought states: “ The Bureau holds that the net loss of the old corporation cannot be carried forward to the new company.”

Section 117 (b) of the Revenue Act of 1928 provides as follows:

(b) Net loss as a deduction.- — If, for any taxable year, it appears upon, the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be allowed as a deduction in computing the net income of the taxpayer for the succeeding taxable year (hereinafter in this section called “second year”), and if such net loss is in excess of such net income (computed without such deduction), the amount of such excess shall be allowed as a deduction in computing the net income for the next succeeding taxable year (hereinafter in this section called “ third year ”) ; the deduction in all cases to be made under regulations prescribed by the Commissioner with the approval of the Secretary.

The law is well settled that the net loss provisions of the revenue acts are not applicable to a corporation newly organized; or, in other words, that a corporation may not deduct from its gross income net losses sustained by a predecessor corporation. White House Milk Co., 2 B. T. A. 860; Maytag Co., 17 B. T. A. 182; West Point Marion Coal Co., 19 B. T. A. 945; Plumber's Supply Co., 20 B. T. A. 459; Standard Silica Co., 22 B. T. A. 97; Athol Manufacturing Co., 22 B. T. A. 105; affd., 54 Fed. (2d) 230; Clark Dredging Co., 23 B. T. A. 503; Overbrook National Bank of Philadelphia, 23 B. T. A. 1390; New Colonial Ice Co., 24 B. T. A. 886; affd., 66 Fed. (2d) 480; 292 U. S. 435; Hartford-Empire Co., 26 B. T. A. 134; Elliott-Granite Linen Corporation, 20 B. T. A. 936; Farmers Cotton Oil Co., 21 B. T. A. 105.

Petitioner contends, however, that it is the same corporation which sustained the net losses for the years 1928 and 1929; that under the statutes of the Commonwealth of Pennsylvania the domestication of a foreign corporation does not result in bringing a new corporation into being in such a manner as deprives it of the right to bring forward the net losses of the foreign corporation which has been domesticated.

Section 1 of the Act of June 9, 1881 (P. L. 89), provides what foreign corporations may become domestic, and prescribes the kind of application to be filed by a foreign corporation applying for a domestic charter. This section provides:

Said certificate shall be accompanied by a certificate, under the seal of the corporation, showing the consent óf a majority in interest of such corporation to such application for a charter, and to a renunciation of its original charter, and of all privileges not enjoyed by corporations of its class, under the laws of this commonwealth.

The application must be filed with the Secretary of the Commonwealth of Pennsylvania and advertised the same as an application for any corporate charter. At the termination of the advertisement period it is presented to the Governor, who, if he finds that all requirements have been complied with, directs letters patent to issue. Section 3 of the said Act of June 9, 1881, provides as follows:

From the date of said letters patent said corporation shall be and exist as a corporation of this commonwealth, under the provisions of law regulating corporations of its class and of its charter; and all of the rights, privileges, powers, immunities, lands, property and assets, of whatever kind or character the same may be, possessed and owned by the original corporation, shall vest in, and be owned and enjoyed by, the said corporation so created, as fully and with like effect, as if its original charter had remained in force, save as by general law and said certificate expressly stated otherwise; and all suits, claims and demands by said corporation, in existence at the date of said new charter, shall and may be sued, prosecuted and collected, under the laws governing the said corporation prior to its new charter, and claims and demands of every nature and character in existence at the date of said new charter may be collected from and of said new chartered corporation, as fully and with like effect as if no change had taken place.

Letters patent were issued to the petitioner on January 20, 1930. This instrument reads in part as follows;

Therefore, Know Ye, That under authority of the Constitution and laws of said Commonwealth in such case made and provided I Do bt These Presents, which I have caused to be made Patent and Sealed with the Great Seal of the State, create, erect and incorporate the stockholders of said corporation, their associates and successors, and also those who may thereafter become subscribers or holders of the stock of the said corporation, into a body politic and corporate in deed and in law by the name chosen and herein before specified, who shall have succession Perpetually and shall be invested with and have and enjoy all the powers, privileges and franchises incident to a corporation and be subject to all the duties, requirements and restrictions specified and enjoined in and by the said acts of the General Assembly and all other laws of this Commonwealth.

The minutes of a special meeting of the stockholders of the petitioner held December 30,1929, provide in part as follows:

The president stated that this meeting had been called pursuant to a written waiver, which waiver read [in part] as follows, to wit:
* * * and particularly do we consent to the holding of said meeting for the purpose of considering the advisability of domesticating this corporation so that it may become a corporation of the State of Pennsylvania, instead of a corporation of the State of Delaware; * * *
Upon motion duly made and seconded, it was
Resolved, that the proper officers of -this corporation be and they are hereby authorized and empowered to make an application to the Governor of the State of Pennsylvania, in accordance with the-provisions of the Act of June 9, 1881, entitled “An Act to authorize Foreign Corporations to become corporations in Pennsylvania,” to prescribe a mode for their so doing, so as to domesticate this said corporation in accordance with the terms of said act.
* * * * * * ’ *
Upon motion duly made and seconded, it was further
Resolved that the stockholders of this company do hereby agree and consent to the making of an application to the Governor of the State of Pennsylvania for a charter under the laws of the said State and to the renunciation by this corporation of its original charter and of any and all rights and privileges now enjoyed by it and which are not enjoyed by corporations of its class under the provisions of the laws of the State of Pennsylvania. [Italics supplied.]

In making its argument that the petitioner is the same corporation which was chartered by the State of Delaware on August 31, 1921, the petitioner relies strongly upon the decision of the Supreme Court in Weiss v. Stearn, 265 U. S. 241. The question presented in that proceeding was whether upon a reincorporation in the same state the stockholders received a gain upon the exchange of shares of the old company for the shares of the new. The Court held that there was no gain meeting the definition of “ income ” as given in Eisner v. Macomber, 252 U. S. 189; Towne v. Eisner, 245 TJ. S. 418, and others.

The petitioner also cites numerous cases involving the question of the status of a foreign corporation either licensed to do business in a given state or domesticated within that state. In Missouri Pac. Ry. Co. v. Meeh, 69 Fed. 753, 758, it was stated:

* * * Instead of merely licensing a foreign corporation to operate a railroad or to transact any other business within its borders, a state may, for reasons of its own, adopt the foreign corporation by creating it a domestic corporation with the same franchises and powers that it exercises in the state which originally created it, or with powers that are less or more extensive. When a state pursues the latter course, and adopts the foreign corporation as one of its own creation, it follows, we think, that all of its subsequent acts and transactions within the state of its adoption are the acts of a domestic corporation * * *.

In James v. St. Louis & S. F. Ry. Co., 46 Fed. 47, 49, it was stated:

* * * The principle is now settled by the courts that a corporation of one state may, by appropriate legislation, be made a citizen of another state: Whenever the effect of state legislation is to adopt a foreign corporation as one of its own, it becomes a citizen as well of the state adopting it as of that from which it obtained its original charter. Railroad Co. v. Wheeler, 1 Black, 286; Railway Co. v. Whitton, 13 Wall. 270; Railway Co. v. Vance, 96 U. S. 450; Railway Co. v. Alabama, 107 U. S. 581, 2 Sup. Ct. Rep. 432; Pennsylvania R. Co. v. St. Louis, A. & T. H. R. Co., 118 U. S. 290; * * *
This array of able decisions settles the question of the power of the state to make a foreign corporation a domestic one. As to whether a state has done so in a given case, or merely licenses a foreign corporation to do business in the state, is a simple question of legislative intent. * * *

In Adams v. Chattanooga Co., Ltd., 128 Tenn. 505; 161 S. W. 1131, it was stated:

The insistence of complainants is that, under these statutes and the decisions based thereon, a distinct and separate corporate entity was created in this state when the Chattanooga Company, Limited, complied with the law by filing its charter in the proper office in this state — a corporation so far dissociated from the British entity as that it may be wound up in a Tennessee court in all respects as could a corporation originally chartered under the laws of this state, without reference to the status or condition of the foreign unity.
The true concept, as indicated by our decisions, based upon the statutes referred to, appears to us to be that a corporation so domesticated becomes, not a new and distinct entity, but only a corporation of this state quo ad hoc any property and acts within its jurisdiction. Ohio & Miss. R. Co. v. Wheeler, 1 Black, 297, 17 L. Ed. 130; Young v. Iron Co., 85 Tenn. 189, 197, 2 S. W. 202, 4 Am. St. Rep. 762; 19 Cyc. 1204. * * *

In Railroad Co. v. Harris, 12 Wall. 65, 82, the Supreme Court of the United States stated:

* * * Nor do we see any reason why one State may not make a corporation of another State, as there organized and conducted, a corporation of its own, quo ad, hoc any property within its territorial jurisdiction. * * *

In petitioner’s brief in this proceeding it is stated:

It is respectfully submitted that, the sole question to be determined in this case is whether the Delaware corporation, as domesticated under the laws of Pennsylvania, is the same taxable entity or whether they are two separate and distinct corporate entities for the purposes of taxation. As this question is determined, so the decision must be in favor of the petitioner or the respondent.

We are of opinion that the above citations of cases are not in point in this proceeding. We think that they would be in point if the petitioner had continued in existence as a Delaware corporation. In such case the petitioner corporation would be both a Delaware corporation and a Pennsylvania corporation, and it could not be said that the corporation which filed its returns for the taxable periods here in question was a different corporation from that which filed returns for 1928 and 1929. Although the stipulated facts do not show any facts with reference to the dissolution of the Delaware corporation or to the transfer of assets from the Delaware corporation to the petitioner, the stockholders of the Delaware corporation were required, in making application for a Pennsylvania charter, to renounce the Delaware charter. In the absence of any evidence to the contrary, we conclude that the Delaware corporation ceased to exist on January 20, 1930. We likewise conclude that the assets of the Delaware corporation were transferred to the petitioner, a Pennsylvania corporation, on the same date by operation of law.

Counsel have not called to our attention, nor have we been able to find, any decision of the courts of Pennsylvania which has a distinct bearing upon the question in issue. In Pennsylvania Co. for Insurances on Lives & Granting Annuities v. Commissioner (C. C. A., 3d Cir.), 75 Fed. (2d) 719, affirming 29 B. T. A. 1285, it was held that the effect of the consolidation of two Pennsylvania corporations in 1929 was to create, under state law, a new corporation, which was not entitled to deduct a net loss sustained by one of its predecessor corporations. In the course of its opinion the court stated:

Deductions in calculating federal income taxes are not matters of personal right. “ Whether and to what extent deductions shall be allowed depends upon legislative grace; and only as there is clear provision therefor can any particular deduction be allowed.” New Colonial Ice Co. v. Helvering, 292 U. S. 435. And further, the right of deduction, when accorded by statute, is available only to the taxpayer who suffered the loss. New Colonial Ice Co. v. Helvering, supra; Busch v. Commissioner, 50 Fed. (2d) 800. * * *

The theory of the petitioner appears to be that it is the Delaware corporation which has simply stepped into a new pair' of shoes— the charter obtained from the Commonwealth of Pennsylvania. We do not think that this theory is sound. The Delaware corporation was a creation of the State of Delaware. It derived its life and being from the laws of that state. The Pennsylvania corporation was not the business conducted by the entity given life by the laws of Delaware. The Delaware charter was the vehicle that carried that business and the assets used in conducting it. When the Pennsylvania charter was obtained a new vehicle was obtained and the assets and the business formerly carried by the Delaware entity were transferred to a new vehicle — the Pennsylvania charter. The petitioner derives its life from the Commonwealth of Pennsylvania. As a Pennsylvania corporation it is subject to the laws of Pennsylvania and! not to the laws of Delaware. Its rights and liabilities are different from those which the Delaware corporation had.

As stated by the Supreme Court in New Colonial Ice Co. v. Helvering, supra:

We come then to an alternative contention that, even though the section be not as broad as claimed, the deduction should be allowed, because “for all practical purposes the new corporation was the same entity as the old one and therefore the same taxpayer.” This is not in accord with the view on which the stockholders and creditors proceeded when the new company was brought into being. They deserted the old company and turned to the new one because they regarded it as a distinct corporate entity and therefore free from difficulties attending the old one. Having sought and reaped the advantages incident to the change, it well may be that they would encounter some embarrassment in now objecting to an incidental and remote disadvantage such as is here in question. But, be this as it may, we are of opinion that in law and in fact the two corporations were not identical but distinct. This was plainly implied in the transfer of the assets and business from one to the other. That transaction was voluntary and contractual, not by operation of law. Thereafter neither corporation had any control over the other: the old corporation had no interest in the assets or business, and the chance of gain and the risk of loss were wholly with the new one. Thus the contention that the two corporations were practically the same entity and therefore the same taxpayer has no basis, unless, as the petitioner insists, the fact that the stockholders of the two corporations were substantially the same constitutes such a basis.

The action of the respondent in disallowing as deductions from the petitioner’s gross income for the period January 20 to December 31, 1930, and for the calendar year 1931, net losses of the Delaware corporation for the calendar years 1928 and 1929, was correct.

Reviewed by the Board.

Judgment will be entered for the respondent.

Seawell,

dissenting: I am persuaded that the petitioner was never two corporations. The laws of Pennsylvania “ authorize foreign corporations to become corporations of Pennsylvania.” The ambulatory process provided for doing so does not require the foreign corporation to change its identity any more than' the naturalization laws of the United States require a candidate for citizenship in this country to change his identity. The corporation and the individual must each renounce the old allegiance and acknowledge the new. But neither thereby becomes a new entity or can thereby procure release from debts or escape from crimes committed. Then, too, if petitioner had first to change its identity, make itself into a new corporation before or during the process of domestication, a “ foreign corporation ” would not become a corporation of Pennsylvania at all and the statute would belie its title.

A recital of what was done here negatives any idea of the organization or reorganization or creation of a new corporation or any metamorphosis of an old into another or new corporation. Petitioner was located in Philadelphia and did not move nor change its name. It had no election of a new president or of a board of directors, or of other officers; but all its officers remained, without new election or new designation, in their several stations. There were no new stockholders and no new stock or new certificates of stock issued, but every stockholder and his holdings of stock after domestication was the same as before. There was no change in its financial structure; its assets after domestication were identically the same as before, and this without any alteration, removal, transfer or conveyance of them. In short, its domestication was a change of allegiance only and was wrought without the creation of any new corporation.

SteRNhageN and Matthews agree with this dissent.


author: Murdock:

text:
    George P. Marshall, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75334.
    Promulgated July 17, 1935.

      Albert E. James, Esq., for the petitioner.

      W. Frank Gibbs, Esq., for the respondent.
   OPINION.

Murdock:

The Commissioner determined that the petitioner received $51,167.31 from the corporation during 1931 which was taxable to him as a dividend for 1931. His determination must be approved unless the presumption of its correctness has been overcome by proof. The Commissioner now concedes that the proof shows error on his part in including an item of $490.74 in the total. The petitioner contends that the remainder, consisting of $8,797.34 paid by the corporation on account of his income tax for 1930 and $41,879.23, the net amount of his withdrawals after deducting a salary adjustment of $7,933.34, represents loans which the corporation made to him with the understanding that they would be repaid “ in one way or another.”

The evidence fails to show that the amount now in controversy was not for all practical purposes and particularly for tax purposes a taxable dividend. No effort was made to show that the corporation had not accumulated sufficient earnings to pay dividends at the times and in the amounts withdrawn by or paid for the benefit of the petitioner. Therefore we must assume that sufficient earnings were available. The proof upon which the petitioner relies to show that the money was only loaned to him is weak and there is evidence to show that the transactions were not loans.

The charges to the account of the petitioner on the books of the corporation were made by the bookkeeper on his own initiative. He bad to account for them in some way. These entries are of little, if any, benefit to the petitioner in his contention that the items were loans. No interest was charged, paid, or contemplated. The petitioner was the sole stockholder. He “ was as completely and un-restrictedly in control and management of the company as if it had been his individual business.” Chattanooga Savings Bank v. Brewer, 9 Fed. (2d) 982; affd., 17 Fed. (2d) 79; certiorari denied, 274 U. S. 751. He made the withdrawals to suit his own convenience and consulted no one. He used the money for living and other personal expenses. He had no outside property or income from which to repay the amounts. The book charges could be and were balanced only by credit of the dividend later formally declared from the earnings of his own corporation. The taxability of these amounts as dividends need not await the formal declaration where, as here, the recipient was the sole stockholder using and enjoying the money as his own. Atherton v. Beamam,, 264 Fed. 878; Chattanooga Savings Bank v. Brewer, supra; Leo G. Hadley, 6 B. T. A. 1031; affd., 36 Fed. (2d) 543; Daniel Hunt, Sr., 6 B. T. A. 558. We conclude from all of the evidence, and particularly from the testimony of the petitioner, that he had no intention of repaying the amount in controversy. His return for 1932 tends to confirm this conclusion. The Commissioner did not err in taxing the petitioner on $50,676.57 as a dividend for 1931. Cf. L. J. Christopher, 13 B. T. A. 729; affd., 55 Fed. (2d) 527; W. A. Graeper, 27 B. T. A. 632; C. W. Murchison, 32 B. T. A. 32; M. Jackson Crispin, 32 B. T. A. 151.

Decision will he entered under Bule 50.


author: StbRniiagen : Leech,

text:
    Minnie L. Wolf, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 74670.
    Promulgated July 17, 1935.

      D. Benjamin Kresch, Esq., for the petitioner.

      Dean P. KimhaTl, Esq., for the respondent.
   opinion.

StbRniiagen :

The Commissioner determined a deficiency of $2,560.17 in petitioner’s individual income tax for 1931. The facts are stipulated and special findings are therefore not necessary.

Petitioner’s husband died February 16, 1931, leaving a will containing several bequests to his wife, to his children, and to others, and leaving his residuary estate in trust, the income thereof payable to his wife for life. Among the bequests was one of $600,000 to the petitioner. The will contained no provision in respect of interest upon this legacy. On September 9, 1931, the executors made a report to the Orphans’ Court headed “ First and Final Account ” showing income of the estate after death and to the said date of $20,974.10. On November 2, 1931, said First and Final Account of the executors was called for audit before Lamorelle, P. J., and in his adjudication dated November 17, 1931, appears the following:

The balance, income, $20,974.10, with any additional collections and interest, if any, on deposits, is awarded as follows: to the widow and four children, interest at six per cent on their respective pecuniary legacies from the date of death of testator to the time of payment, and likewise to the children on their pecuniary legacy of $400,000 which is given in trust; and the balance,, (if any), to the widow. Payment is so ordered. The income as shown in the account and as above awarded (excluding collections since the filing of the account, the amount of which is unknown to the Auditing Judge) is insufficient to pay in full the interest on the legacies. The Act of Assembly (Sec. 21 of the Fiduciaries’ Act of 1917) provides for the payment of such interest, and any deficiency will have to be made up out of corpus, unless the parties in interest so entitled to the interest waive their rights thereto, all of which may be affirmatively shown in the schedule of distribution hereinafter ordered.

The Court further directed that counsel prepare a schedule of distribution. Such schedule was filed and showed that subsequent to this report additional income was received bringing the total amount thereof to $46,718.13. In the schedule appears the following:

Balance for Distribution_$46, 718.18
Of which there is awarded—
To Minnie L. Wolf, interest on legacy of $600,000 to Dec. 9,1931_ 29, 300. 00
* sj* * * * * *

To this schedule is appended the signed, approval of the specific legatees and devisees, containing the statement:

We further approve the computation of interest due to us on our specific legacies, and under the trusts in which we are interested, and waive our right to the payment of any additional interest to which we may be entitled under the Acts of Assembly in so far as the above Schedule of Distribution is concerned.

This was approved by the Orphans’ Court.

It is stipulated that the $46,718.13 consisted of taxable income of $40,190.87 and nontaxable income of $6,627.26, and that during the same period a loss of $5,136.12 was sustained on the sale of certain securities. It is also stipulated that Pennsylvania inheritance taxes of $37,535.45 were paid on November 24, 1931.

The petitioner’s income tax return is not in evidence, but it is stipulated that she included therein no part of the $29,300 above described as a distribution to her of interest on her legacy. The Commissioner determined that her income should have included $25,-206.25, which was the proportion of the $29,300 which the amount of taxable income of the estate, $40,190.87, bore to the total of $46,718.18.

The petitioner urges that no part of the $29,300 is properly within her taxable income, and in support of this view she argues two points — first, that, since the income of the estate was otherwise used, it can not be regarded as having been distributed to her, and that the $29,300 was in fact received by her otherwise than out of income of the estate; and, second, that in view of the Pennsylvania Fiduciaries’ Act of 1917, section 21, the amount must be regarded not as interest, as it is called for all other purposes, but as a bequest or as maintenance by court order. The Revenue Act of 1928, section 22 (b) (3), provides, among the exclusions from gross income, “ the value of property acquired by gift, bequest, devise, or inheritance (but the income from such property shall be included in gross income).”

It is first suggested by the petitioner that the taxable income of the estate ($40,190.87), reduced by the loss on security sales ($5,136.12), leaving $35,054.75, must be regarded as exhausted by the payment of inheritance taxes of $37,535.45. This, however, is contrary to the fact that the income of the estate was used in actual distribution to the several legatees enumerated in the schedule by way of interest upon their legacies, and there is no rule of law which requires that this fact shall be disregarded and the payment of the inheritance tax legally presumed to be made from the income acquired after the taxpayer’s death. As to Federal estate taxes, the decisions are to the contrary. Walter S. Gurnee et al., Executors, 13 B. T. A. 262; Everett J. Esselstyn, Executor, 26 B. T. A. 181; affirmed per curiam, 65 Fed. (2d) 1015; certiorari denied, 290 U. S. 678; Agnes Sitterding, 32 B. T. A. 506; cf. Jackson v. Price, 74 Fed. (2d) 707.

Petitioner cites Freuler v. Helvering, 291 U. S. 35, but that decision lends no support to the contention. There it was held that an amount distributed to the beneficiary in excess of that properly distributable to her did not constitute taxable income to her under the provision of the statute which limited the tax upon income distributable and therefore excluded from the measure of the tax an amount held to have been improperly distributed. Here there is no question about the propriety of the distribution, but only a question as to its character.

We are thus brought to the petitioner’s second point, that the character of the $29,300 is not that of income, despite the fact that it was distributed to her as interest and was derived from the income of the estate. It was clearly not a part of the petitioner’s specific legacy of $600,000, or even of the life income upon the residuary estate. The latter is, of course, taxable in accordance with Irwin v. Gavit, 268 U. S. 161. The $29,300 was only received by her as derivative from the specific legacy of $600,000, and it would seem to be squarely within the parenthetical clause of sebtion 22 (b) (3)— income from property acquired by bequest.

But the petitioner insists that the $29,300 can not be called interest, but is rather itself a bequest for her maintenance and support, or else an amount paid by court order for her maintenance and support, and is therefore not income. This argument is rested upon several decisions of the courts of Pennsylvania, culminating in Vogt’s Estate, 297 Pa. 92; 146 Atl. 461 (1929), expounding the theory upon which such interest is allowable.

There is, in these cases, a clear recognition of the concept under both the Fiduciaries’ Act of 1917 and the earlier acts based upon the common law that the amount provided by law is interest. It is true that in all of such cases the underlying purpose of the provision for .interest was considered in determining whether it was at all allowable, or its amount, or the period for its computation, and that in cases involving a parental relation of the testator to the legatee the purpose of the interest was said to be to provide the maintenance which by a legal presumption was regarded as the intention of the testator. But such expressions amount only to justifications for the allowance of interest, and do not serve to stamp it as anything else. This would seem to be just as true whether the interest is allowed by virtue of section 21 of the Fiduciaries’ Act or by virtue of an express provision in the will. In either event it is income from the bequest, and by the Federal statute expressly made taxable.

The petitioner cites Burnet v. Whitehouse, 283 U. S. 148, in which the Supreme Court held that a testamentary annuity payable at all events, whether out of income or corpus, was not taxable as income. From this the petitioner argues that since likewise the $29,300 was payable without regard to the income of the estate, it may not be called income. Assuming it to be true that the present interest was payable if necessary out of corpus, it is still, unlike an annuity, no part of the legacy, but income derived from the legacy. Once the proposition is accepted that the amount is interest and received by the petitioner as such, it matters not what the source of the interest is; and, just as in the 'WMtehouse case it was said that annuities are tax free irrespective of the adventitious fact that they may in one year be paid from income and in another year from, corpus, so interest is taxable irrespective of whether it be paid from income or corpus. See also Buck v. McLaughlin, 48 Fed. (2d) 135, as to the family allowance paid to a widow under California law.

The Commissioner correctly included the $25,206.25 in the petitioner’s gross income for 1931.

Eeviewed by the Board.

Judgment will be entered under Bule 50.

.Teammeul dissents.

Leech,

dissenting: The majority opinion is premised upon two positions. These are: (1) The disputed payment was received by petitioner as “ interest ” and was, therefore, taxable as such, within section 22 (a) of the Eevenue Act of 1928, and, (2) if not received as “ interest ”, in any event, it was received as income from a bequest and taxable under section 22 (b) (3) of the same act.

In my opinion, neither position is sound.

(1) “ Interest ” can not be made such by mere designation. Johnson Locke Mercantile Co. v. Burnet, 51 Fed. (2d) 434. The term has a well recognized meaning in the law. That meaning is the compensation which is paid by the borrower of money to the lender for its use, or by a debtor to his creditor for the detention of a debt. Old Colony Railroad Co. v. Commissioner, 284 U. S. 552; Fall River Electric Light Co., 23 B. T. A. 168. The payment here in question does not come within such meaning. The specific bequest of $600,000, upon which the payment in controversy was computed, was not payable until one year after the testator’s death. There was no liability for, nor obligation to pay that sum, itself, during that year. The relationship of debtor and creditor between the estate and petitioner did not, therefore, arise until the expiration of that statutory period of administration. Since the present payment was made before the close of that period, that relationship never existed here. The estate did not detain or use petitioner’s funds. Thus, the payment here was not compensation for such use or detention. Though computed as interest, it was an additional charge placed by the testator upon his estate by making a bequest to his widow without a limitation denying her the additional sum. Because the testator refrained from limiting the bequest of $600,000, there arose a statutory conclusive presumption that petitioner’s husband, the testator, by- his will, intended that the petitioner receive the additional amount paid to her, as a bequest. Fiduciaries’ Act of 1917, section 21, quoted in the majority opinion; Todd’s Estate, 237 Pa. 466; 85 Atl. 845; Townsend’s Appeal, 106 Pa. 268; Vogt’s Estate, 297 Pa. 92; 146 Atl. 451.

The construction of Pennsylvania statutes by the Pennsylvania Supreme Court is controlling here, despite what may have been the action by the courts of any or all of the other states upon similar statutes. Hartford Fire Insurance Co. v. Chicago, Milwaukee & St. Paul Railway Co., 175 U. S. 91; Sioux City Terminal Railroad & Warehouse Co. v. Trust Co. of North America, 173 U. S. 99.

The Supreme Court of Pennsylvania, in the case of Todd’s Estate, supra, where the character of such a payment was directly involved under a provision of the Pennsylvania Act of February 24, 1934, P. L. 70, similar to the presently controlling section of the Pennsylvania Fiduciaries’ Act of 1917, supra, said that such a payment was made “not as interest but as maintenance.” See also Townsend’s Appeal, supra. This judicial characterization applies with equal force to the present payment, though made under the Fiduciaries’ Act of 1917. Vogt’s Estate, supra. Thus, the disputed payment here was not received as interest but as maintenance.

(2) Since such payment was not “ interest ”, the second and novel position of the majority, apparently, is, that the mere vesting of a bequest produces taxable income.

The specific bequest, which is said by the majority to have earned the questioned payment as income, was used, under the controlling Pennsylvania statute, merely to designate the legatee or payee, and to measure the additional bequest or statutory allowance for maintenance to be paid that person. It was payable from corpus or income of the estate, not only by the court order directing its payment, but by the controlling Pennsylvania statute. Vogt’s Estate, supra. It was payable whether the $600,000 specific bequest earned anything or not. In my judgment, it can no more be said that the payment here contested was taxable income, than that the specific bequest of $600,000 was such.

This present payment was for the maintenance of petitioner, decedent’s widow. It rested entirely upon the testator’s relationship to her. Vogt’s Estate, supra.

In my opinion, the $29,300, the subject of this discussion, was received by petitioner either in the nature of a bequest for maintenance, payable from corpus or income of the estate, and was, therefore, not subject to income tax (Burnet v. Whitehouse, 283 U. S. 148), or, as a statutory allowance for maintenance, and so exempt from such tax. Buck v. McLaughlin, 48 Fed. (2d) 135.

McMahoN agrees with this dissent.

       Legacies, if no time be limited by tbe will for tbe payment thereof, shall, in all cases, be deemed to be due and payable at tbe expiration of six months from tbe death of the testator. Interest on all pecuniary legacies, whether bequeathed directly or in trust, shall, unless a contrary intention appear by the will, begin to run from the expiration of one year from the death of the testator; except that, if the account of the executor be filed and confirmed and distribution awarded before the end of such year, then interest on such legacies shall run from the date of the award; Provided, that where a pecuniary legacy is bequeathed to or for the use of the widow of the testator or any child or descendant of the testator, or any person toward whom the testator, in his lifetime stood in loco parentis, or for the maintenance of any person, interest shall, unless a contrary intention appear bv the will, heein to run from the date of the death of the testator.

        Townsend’s Appeal, 106 Pa. 268; Koons’ and Wright’s Appeal, 113 Pa. St. 621; 6 Atl. 377; Phillips’ Estate, 133 Pa. St. 426; 19 Atl. 404; Todd’s Estate, 237 Pa. 466; 85 Atl. 845; Keech’s Estate, 240 Pa. 491; 87 Atl. 623.

       This characterization in Pennsylvania is in harmony with that generally applied, gep 69 Corpus Juris, “Willis” sec. 2640 et seq.


author: Leech :

text:
    Margaret P. Daly, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 65213.
    Promulgated July 17, 1935.

      G. J. McGuire, Esq., and J. Marvin Haynes, Esq., for the petitioner.

      T. M. Mather, Esq., for the respondent.
   OPINION.

Leech :

Respondent has determined a deficiency in income tax for the calendar year 1929 of $6,008.41. Petitioner contends that the tax for the year in question has been overpaid in the amount of $7,134.17.

Only two issues are submitted for our determination: (a) the inclusion by respondent in taxable income of an amount representing the market value of certain rights to subscribe to the bonds of the American Telephone & Telegraph Co., such rights having been received by petitioner as a stockholder of that company, and (b) the inclusion in income of $45,038.66 received by petitioner as a stockholder from the Cinco'Minas Co.

The facts are stipulated and are set out here only to the extent necessary to an understanding of the issues. The question raised with respect to stock rights received by petitioner requires little discussion. Petitioner exercised these rights and did not dispose of them. Under such circumstances the issue is controlled by our decision in T. I. Hare Powel, 27 B. T. A. 55, and Thomas W. White, 29 B. T. A. 1272. We hold that the value of these rights did not represent taxable income to petitioner.

The second issue arises from respondent’s including in petitioner’s taxable income for 1929, $45,038.66 of a total distribution of $56,666.66, made to petitioner by the Cinco Minas Co. in 1929 as the owner of 1,416% shares of the capital stock of that company. Respondent has determined that the payment was made from surplus to the extent included in income by him. Petitioner contends that the company had no surplus at the time of distribution and that it was made from a depletion reserve, based upon discovery value, set up out of earnings. The parties are in agreement as to the facts and figures. Their dispute is upon the correct method of computing the undistributed surplus of the company earned subsequent to March 1, 1913, and available for dividend distribution.

It is agreed that the company was entitled to discovery value upon certain of its mines, developed subsequent to March 1,1913, and that depletion was properly reserved from earnings in subsequent years. In years following those from the earnings of which depletion allowances were reserved, the company had certain losses and then in still later years earnings were realized.

Eespondent, in computing corporate surplus available for dividend distribution in 1929, has applied those corporate losses against existing surplus to the extent of that surplus and has applied the balance of such loss in each case to reduce the undistributed reserve for depletion. The net earnings of the later years he has treated as surplus without applying any portion of them to restore the depletion reserve. Petitioner computed existing surplus by charging to that account only the amount by which net earnings exceeded the undiminished reserve for depletion. It is her contention that the losses, incurred in excess of the surplus balance, should be used only to create a deficit in surplus or, if applied against the depletion reserve, the latter should be restored from later earnings and only the excess of such earnings over the amount used in such restoration, should be charged to earned surplus.

Stating the matter simply, it is petitioner’s contention that the reserve for depletion based upon discovery value constituted capital, whereas respondent contends that it represents merely an appreciation in value which Congress has permitted -the corporation to realize free of tax and the fact that under section 115 (d) of the Eevenue Act of 1928, it is permitted to be distributed free of tax to the corporate stockholders under certain conditions in no wise changes its basic character as earnings or profits.

Section 115 of the Eevenue Act of 1928 defines the term “ dividend ” as “ any distribution made by a corporation to its shareholders, whether in money or other property, out of its earnings or profits accumulated after February 28, 1913 ” and then provides:

Seo. 115. (b) Source of distributions. — For tbe purposes of this Act every distribution is made out of earnings or profits to tbe extent thereof, and from the most recently accumulated earnings or profits. Any earnings or profits accumulated, or increase in value of property accrued, before March 1, 1913, may be distributed exempt from tax, after the earnings and profits accumulated after February 28, 1913, have been distributed, but any such tax-free distribution shall be applied against and reduce the basis of the stoclr provided in section 113.

We have considered the question of whether a depletion reserve based on discovery value represents earnings or profits. In Oharles F. Ayer, 12 B. T. A. 284, arising under the 1921 Act, we held that such a reserve, substantially in excess of the cost or March 1, 1913, value, represented, to the extent of such excess, earnings or profits accumulated subsequent to 1913 and distributions therefrom represented taxable dividends.

The present question arises under the Revenue Act of 1928, section 115 (d) of which provides:

Sec. 115. (d) Other distributions from capital. — If any distribution (not in partial or complete liquidation) made by a corporation to its shareholders is not out of increase in value of property accrued before March 1, 1913, and is not out of earnings or profits, then the amount of such distribution shall be applied against and reduce the basis of the stock provided in section 113, and if in excess of such basis, such excess shall be taxable in the same manner as a gain from the sale or exchange of property. The provisions of this subsection shall also apply to distributions from depletion reserves based on the discovery value of mines.

-It is the contention of petitioner that this provision, which permits the distribution, free of tax in the hands of the stockholders, of so much of a depletion reserve of this character as is not in excess of the cost basis of the stock and taxes the excess as gain and not a dividend, has the effect of making such a depletion reserve, for all purposes, capital of the corporation. It is further urged that a reserve for depletion is, in fact, capital, being merely a return of the capital asset and not gain in the ordinary sense.

A question similar in many respects was presented in Helvering v. Canfield, 291 U. S. 163, involving distributions made in 1928, by a corporation having a substantial surplus at March 1, 1913. Subsequent to 1913 there were losses in two years, followed by yearly profits realized to the date of the distribution. In that case it was urged that the surplus existing at March 1, 1913, free of tax by legislative grace, should be considered as capital which, if reduced by subsequent losses, was entitled to restoration from later earnings and that only the excess of such earnings, after such restoration, constituted surplus accumulated subsequent to March 1, 1913, subject to distribution as dividends. The same argument is made here as to amounts set aside from earnings. In disposing of this contention in the Canfield case, the Court said:

The argument that the surplus of March 1, 1913, constituted capital is unavailing. We are not here concerned with capital in the sense of fixed or paid-in capital, which is not to be impaired, or with the restoration of such capital where there has been impairment. No case of impairment of capital is presented. We are dealing with a distribution of accumulated profits. Nor is it important that the accumulated profits, as they stood on March 1, 1913, constituted capital of the company as distinguished from the gains or income which the company subsequently realized. When a corporation continued in business after March 1, 1913, the dividends it later declared and paid to its stockholders, whether out of current earnings or from profits accumulated prior to that'date, constituted income to the stockholders, and not capital, and were taxable as income if the Congress saw fit to impose the tax. Lynch v. Hornby, 247 U. S. 339. The provision of the Act of Congress under consideration was a “ concession to the equity of stockholders ” with respect to receipts as to which they had no constitutional immunity. There is no question here of the receipt of “ capital.”

We think the reasoning of the opinion in the Canfield ease applies with equal, if not greater force, to the situation present here. There the question involved the surplus realized and existing at March 1, 1913, while here we have gains representing appreciation of properties after that date and realized subsequent thereto, taxable both to the corporation when realized and to the stockholder when distributed except for the fact that Congress has exempted them from tax by granting what is, in the language of the Court in the cited case, “ a ‘ concession to the equity of the stockholders ’ with respect to receipts as to which they had no constitutional immunity.”

As in the Canfield case, with respect to accumulations of surplus, we can see in the statutory provisions here exempting depletion allowances based on discovery value from tax to the corporation, no intent on the part of Congress to ascribe to such depletion, in excess of cost, the character of invested capital as a fixed basis upon which corporate net surplus is to be computed. As the Court said in that case:

* * * To attribute to the accumulated profits or surplus of March 1, 1913, embarked in a continued business, such a static condition is to ignore the course of business and to impute to the Congress an intention to consider, for tax purposes, the existence of that surplus as still continued notwithstanding its actual diminution or exhaustion. Such an intention to disregard realities so as to afford immunity from a tax is not lightly to be ascribed to the taxing authority. * * *

In our opinion, this rule is applicable to the situation now before us. The allowances for depletion, based upon discovery value and set aside out of the earnings, are, to the extent that they exceed cost, surplus of the corporation which has been accorded nothing more than tax exemption upon its realization. Charles F. Ayer, supra.

Respondent’s determination of corporate surplus available for distribution in 1929 is correct.

Reviewed by the Board.

Judgment will he entered under Rule 50.