author: Murdock:

text:
    The United Light and Power Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 77404.
    Promulgated September 8, 1938.

      Homer Hendricks, Esq., Park Chamberlain, Esq., and Thomas K. Humphrey, Esq., for the petitioner.

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

Murdock:

The parties are now in agreement as to all figures. The gain, if any is to be recognized, is $3,509,567.68 in the Detroit Edison Co. stock transactions and $6,824,892.47 in the Brooklyn Borough Gas Co. stock transactions. The petitioner contends that the transfer of the Detroit Edison shares to Dexter was a separate complete transaction; the transfer of the Dexter stock was another separate complete transaction; and the first was a nontaxable reorganization under the provisions of section 112(i) (1) (B), (b) (4), and (b) (5) of the Revenue Act of 1928, while the second was a nontaxable reorganization under the provisions of section 112 (i) (1) (A) and (b) (3). It makes similar contentions in regard to the transactions relating, to the disposition of the Brooklyn Borough Gas stock. The soundness of these arguments depends upon whether Railways ever had “control” of Dexter, or of American, and upon whether the stock of American received by Railways was stock of a corporation, a party to a reorganization, or was “other property” as that term is used in section 112. These questions, in turn, depend largely upon whether the transactions are to be regarded as independent exchanges or as interdependent steps in one integral plan or transaction.

The Commissioner first contends that these transactions were not separate and complete in themselves for income tax purposes, but were mere interdependent steps in carrying out an integral plan. He insists that the plan must be viewed as a whole. If it is so viewed, then Eailways never had control of the Dexter stock because Eailways received the stock subject to a preexisting binding contractual obligation to transfer that stock to American, and, furthermore, Eailways had not the necessary continuity of interest in the Detroit Edison Co. stock. That stock went to Dexter, in which Eailways, upon final consummation, had no direct interest, but only an indirect interest through the ownership of the stock in American. The result is that American was not a party to a reorganization and its stock received by Eailways was “other property”, the receipt of which was a recognized gain. The most recent court and Board decisions support this contention of the Commissioner.

The decision of this case need not depend upon whether the use of Dexter and the ten A to J corporations had some real business purpose, as the petitioner contends, or whether the use of those corporations was merely to avoid the tax consequences of more direct transfers. The former alternative may he assumed to be the correct one. Furthermore, the facts, which the Board deems material to a proper decision, are not subject to any serious dispute between the parties. The ownership of the Dexter stock by Eailways was transitory and incident to a plan which required its immediate transfer. That transfer was not an independent transaction but was an essential part of the plan. This circumstance distinguishes the present case from some others cited by the petitioner in which there was control immediately after the integral plan had been completed, but that control was then dissipated by a separate subsequent contract and transfer. Control is determined as of the completion of the integral plan. Eailways did not have control of Dexter when the interdependent transfers were completed, since it did not own a share of Dexter stock. Nor did it control American. The transfer of property (Detroit Edison Co. stock) by Eailways to the American group must be viewed as a whole. “For income tax purposes the component steps of a single transaction can not be treated separately”, Bassick v. Commissioner, 85 Fed. (2d) 8; certiorari denied, 299 U. S. 592, affirming 30 B. T. A. 163; Prairie Oil & Gas Co. v. Motter, 66 Fed. (2d) 309; West Texas Refining & Development Co. v. Commissioner, 68 Fed. (2d) 77, affirming on this point, 25 B. T. A. 1254; Ahles Realty Corporation v. Commissioner, 71 Fed. (2d) 150; certiorari denied, 293 U. S. 611; Hazeltine Corporation v. Commissioner, 89 Fed. (2d) 513, affirming 32 B. T. A. 110, on this point; Schumacher Wall Board Corporation, 33 B. T. A. 1211; affd., 93 Fed. (2d) 79; Helvering v. Bashford, 302 U. S. 454; Paul L. Case, 37 B. T. A. 365; George Whittel & Co., 34 B. T. A. 1070. Eailways parted with some of its property and came out with some American stock, while American received all of the stock of Dexter and Dexter received the property. American received none of the property originally owned by Railways. Although Railways owned some American stock, American owned all of the Dexter stock and Dexter owned the property formerly owned by Railways, nevertheless Railways did not maintain a sufficient continuity of interest in the property (Detroit Edison Co. stock). Railways and American did not merge or consolidate. Neither acquired a majority of the voting stock or substantially all of the assets of the other. Neither was in control of the other. American was not a party to any reorganization material to the decision of this case, and its stock received by Railways was “other property.” Thus the entire gain of Railways is recognized under section 112(a), since none of the exceptions apply. Helvering v. Bashford, supra; Groman v. Commissioner, 302 U. S. 82; A. W. Mellon, 36 B. T. A. 977; Gilbert D. Hedden, 37 B. T. A. 1082; Whitney Corporation, 38 B. T. A. 224.

The petitioner argues strenuously that the above cited cases are distinguishable on their facts and are not in point in principle. It also argues that the Whitney case was incorrectly decided and was not like the Bashford and Groman cases. These arguments might be difficult to answer were we not obliged to look at these transactions as all a part of one plan. Although the parent company in the Bashford and Groman cases received the stock of its subsidiary from the subsidiary, while here American received the stock of its new subsidiaries from Railways, still in the end the result was the same in all three cases in that the transferor had no direct interest in the corporation receiving the property which was transferred. If the continuity of interest test is to be applied upon the consummation of the integral plan, then the cited cases are in point.

The petitioner cites and relies upon Ballwood Co. v. Commissioner, 84 Fed. (2d) 733, and Independent Oil Co., 35 B. T. A. 32. Those cases were decided prior to the decisions of the Supreme Court in the Bashford and Groman cases and, in case of conflict, the latter are, of course, controlling. But it is not necessary to overrule the Independent Oil Co. case or to say that we will not follow the Ball-wood case, since there are important differences between the facts in those cases and the facts here which may serve to distinguish the cases. No general principle is stated in either of those cases which is contrary to the reasoning of this opinion.

The transactions whereby Railways disposed of Brooklyn Borough Gas Co. stock and ultimately received American stock are not more favorable to the petitioner but, if different, are less favorable to the petitioner. Under the principles and authorities above discussed, the full gain of Railways from those transactions was subject to tax. The difference is that here, when the plan was complete, Eailways bad a mucb less direct interest in tbe Brooklyn Borough stock (which went through the ten A to J New Jersey companies to ten Delaware companies owned by Hoppers) than it had in the Detroit Edison stock. Since the full gain of Eailways from both dispositions was subject to tax, the other arguments of the respondent need not be discussed.

Decision will loe entered under Bule 50.

       SEC. 112. RECOGNITION OE GAIN OR LOSS.
      (i) Definition of reorganization. — As used in this section and sections 113 and 115—
      (1) The term “reorganization” means * * * (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the trans-feror or its stockholders or both are in control of the corporation to which the assets are transferred, or * * *.

       (b) Exchanges solely in kind.—
      (4) Same — Gain of Corporation. — 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.

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

       SEC. 112. RECOGNITION OE GAIN OR LOSS.
      (i) Definition of reorganization. — As used in this section and sections 113 and 115 — • (1) The term “reorganization” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or * * *.

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

       “Control” is defined in section 112 (j) as the ownership of at least 80 per centum of voting stock and at least 80 per centum of all other classes of stock of a corporation.


source: Caselaw Access Project

author: ARNOLD:

license: Public Domain

text:
    Estate of Bavier C. Miller, by Northern Trust Company, a Corporation, and Mrs. Grace M. Haskins, Executors and Trustees under the Will of Bavier C. Miller, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 84444.
    Promulgated September 8, 1938.

      Jesse I. Miller, Esq., for the petitioner.

      Franh B. Sclüosser, Esq., for the respondent.
   OPINION.

ARNOLD:

The principal issue in this proceeding is whether the partnership agreement provided for a sale of the decedent’s partnership interest to his surviving partners, or whether that agreement contemplated a continuation of the partnership with decedent’s legal representatives sharing in the profits the same as decedent would have shared had he lived. All of the facts have been stipulated, including the amount of the partnership’s net income for the taxable year. In accordance with the terms of the partnership agreement the surviving partners paid the legal representatives of the decedent $17,882.16 during the taxable year, and we have to determine whether these payments represented a portion of the purchase price of decedent’s partnership interest by the surviving partners or whether it was income to petitioner’s estate as the estate’s proportionate part of the partnership earnings.

Petitioner contends that the transaction provided for in the partnership agreement and carried out as hereinabove set forth, constituted a sale; that the decisions of this Board and the Federal courts support this view; that the Illinois courts have held this identical transaction to be a sale in Northern Trust Co. v. Stewart, supra; and that the decision of the state court is binding upon this Board in so far as it states the local law applicable to partnership contracts.

The respondent’s brief concedes that the Government is taking an opposite position in this proceeding from the position which it has taken in the Lyman M. Drake and Clarence B. Pellet proceedings, Docket Nos. 79653, 85261, 79648, and 85262, which proceedings involve the same partnership agreement, the partnership net income for the years 1932 and 1933, and two of the surviving partners of this decedent. The respondent’s position is that the Government is entitled to its tax on the net income of the partnership, and that, in order to protect the Government’s revenues, it is necessary to include in the taxable income of this petitioner, and in the taxable incomes of the surviving partners, that portion of the partnership income attributable to the decedent’s interest. Whether petitioner or the surviving partners pay the tax on this portion (20.442 percent) of the partnership net income depends upon whether the partnership agreement provided for a sale, or a continuation of the partnership with the decedent’s legal representatives participating in the earnings.

The partnership agreement provides, inter alia, that upon the death of any partner his interest “then remaining in said business shall cease”; that the deceased partner’s interest should be “divided between said surviving co-partners per capita”; and that the profits to be paid to the decedent’s legal representatives should be borne “by the parties to whom such interest shall pass per capita.” These provisions definitely terminate the partner’s interest upon death and provide for a talcing over of that interest per capita by the surviving partners, binding each survivor, individually, to pay his proportionate part of the amount due the decedent for his interest in the partnership. The yardstick that the parties agreed to use in measuring the value of a deceased partner’s interest was the share of the profits which the decedent would have been entitled to had he lived an additional 30 months, and the deceased, while living, agreed for himself, his heirs, executors, administrators, and assigns that the payment of this determinable sum should extinguish all his interest in the partnership at the time of his death and all claims that he might have against the firm.

One indication that the partners recognized that their interests in the firm had value under the articles of copartnership is contained in the paragraphs dealing with the expulsion of a partner for breach of the partnership agreement. The partners agreed that the penalty for any such breach was the immediate dissolution of the partnership as to such member, a balancing of accounts as between the firm and the guilty party, and the forfeiture by the partner violating the agreement of “all claim or any other interest in and to the value of the business and good-will of said co-partnership as fixed and liquidated damages for his breach of this agreement.” As further evidence of the value of a partner’s interest, the parties agreed that, if the guilty partner refrained from engaging in the insurance business in Cook County in any capacity, directly or indirectly, in consideration thereof he should receive a sum equal to one-half of what would have been his share in the profits of the firm for a period of three years.

Another indication that the partners recognized that their interest in the firm had value was the right granted to buy a deceased partner’s interest by payment of a lump sum equal to his share of the firm’s profits for the 30 months preceding his death, thereby clearly indicating that the sum to be paid was determinable by the deceased partner’s interest in profits, not as such, but as a yardstick to value his interest in the partnership at the time of his death.

Furthermore, the provision for payment to the legal representatives of a deceased partner of his share in the partnership earnings up to the date of his dteath indicates that the partnership was not to be continued for a period of 30 months after death and that his right to share in the partnership earnings, as such, was to end when he became no longer active in behalf of the partnership.

Following the provisions for the payment of the pro rata share of earnings during a period of 30 months after death, to which a deceased partner would be entitled had he lived, it is provided that “in lieu of the provision here made for the payment of the interest of a deceased partner in said co-partnership” such interest may be acquired by paying within 60 days after death an amount equal to the deceased partner’s share of earnings during the 30 months next preceding death, at the option of the surviving partners. This paragraph of the agreement is clearly one for the purchase and sale of a deceased partner’s interest in the firm at the time of death. The expression in this paragraph, “in lieu of the provision here made for the payment of the interest of a deceased partner in said co-partnership”, evidently refers to the right given in the preceding paragraph to pay for a period of 30 months after death the share of the profits which would have accrued to a deceased partner had he lived, and shows that the parties to the agreement intended the money to be paid under either method was “for the payment of the interest” of a deceased partner, and was not a distribution of partnership earnings, as such.

While our own interpretation of the partnership agreement convinces us that the parties intended to realize on their interests in the case of the death of any one of them, by binding the survivors to purchase the interest of the deceased partner, we need not rely solely upon our personal convictions, as we have the benefit of a court interpretation of the agreement. Subsequent to the death of Bavier O. Miller the life tenants and the remaindermen under his will became involved in a dispute as to whether the payments under the partnership agreement represented income or corpus. The testamentary trustees under the decedent’s will filed a bill in equity in the Superior Court of Cook County requesting the court to construe the will and agreement, and to instruct them as to the distribution of the payments received. The trustees were joined in this request by the other parties in interest. By its decree of November 12, 1935, the court fully discussed the will and partnership agreement, and held that the agreement provided for a sale and that the payments represented corpus and not income distributable to the life beneficiaries. The court retained jurisdiction of the subject matter and the parties to the action for the purpose of passing upon any further question that might arise on petition of either party in carrying out the trust pursuant to the terms of the decree.

Thereafter, on November 30, 1935, a new petition was filed by parties interested in the prior action, which petition the Superior Court dismissed by its order of January 21, 1936. The appeal to the Appellate Court followed, and in 289 Ill. App. 286, the court, after reviewing the Superior Court’s decree of November 12, 1935, and the other facts, held that the decree of November 12, 1935, was final and binding, and affirmed the Superior Court in its action of January 21, 1936, upon the ground that the petition of November 30, 1935, presented a renewal of the same questions already decided. The Appellate Court set forth at length the earlier decree of the Superior Court in interpreting the partnership agreement now before us with respect to the provisions of Bavier C. Miller’s will. We quote the following findings of the Superior Court which were incorporated in the decision of the Appellate Court:

*******
That at the time of the making of said co-partnership agreement, it was the Intention of the parties thereto to acquire and purchase the interest of any deceased partner by the payment to his legal representatives of a sum of money, the amount of which should be equal to the amount of the profits which such deceased partner would have received had he lived and continued' to be a member of said firm.
That under the terms of said articles of co-partnership, the legal representatives of said Bavier C. Miller did not become partners in said firm and were not entitled to share in any profits nor were they required or obliged to pay or share in any losses which might be sustained in carrying on said business by the surviving members thereof.
That the legal representatives of said Bavier C. Miller did not have the right to participate and did not participate in the affairs of said business so carried on by the surviving members and were not required to nor did they contribute in any way to the success or operation of said business.
That said legal representatives did not contribute any money, property or other capital work or labor to the business carried on by said surviving members after the death of said Bavier O. Miller.
That prior to 1901 when the said Bavier 0. Miller became a member of said firm of Critchell, Miller, Whitney & Barbour, and for many years prior thereto, the said Bavier C. Miller had been associated with others in the insurance brokerage business in the said City of Chicago, and thereby became and was well and favorably known to many persons requiring the service of insurance agents and brokers.
That by reason of such prior experience and by reason of his membership in the firm of Critehell, Miller, Whitney & Barbour, and by reason of extensive advertising, the firm of which deceased was a member became well and favorably known to the insurance public and there was thereby created a large and' valuable good will by said firm in the insurance world in said city, and which good will existed and was of large value at the time of the death of said Bavier C. Miller.
That said firm of Critehell, Miller, Whitney & Barbour was at the time of the death of said Bavier C. Miller, one of the large and favorably well known insurance agents or brokers in said city, doing an annual business of between three and four million dollars in insurance premiums, and that byj reason thereof, said firm had created and established in the insurance field a large and valuable good will which enured [inured] to the benefit and advantage of the surviving members of said firm and which would have been of comparatively little value if the death of said Bavier C. Miller had worked a complete and final termination of the business formerly carried on by said firm.
That said Bavier C. Miller and his co-partners were men of large experience in the insurance field and each had built up during their partnership association an individual clientele; that the value of an insurance agency and brokerage business consists largely of the probability that insurance originally written as a result of the efforts of a member of the agency, will be renewed from year to year through the same agency; that the value of the tangible assets of the partnership existing at the time of the death of Bavier C. Miller was small in comparison with the value of its good will and that after the death of Bavier O. Miller, his personal clientele was solicited by the surviving members for a continuation of the business originally procured by Bavier O. Miller, and that the efforts of the surviving members in that respect for a limited period of time met with a substantial degree of success.
That it was the intention and purpose of all of the members of said firm, including said Bavier O. Miller in his lifetime, to keep and conserve said good will, whereby they provided and agreed that upon the death of iany partner the survivors should become entitled to the good will so created and established by paying to the legal representatives of a deceased partner, a sum of money, the exact amount of which would be an amount equal to the share of the profits received by or credited upon the books of the firm to the deceased partner during the period of thirty months next preceding his death; or a sum of money the exact amount of which should be ascertained and determined at the expiration of thirty months after the death of any partner and which amount would be equal to the profits to which such deceased partner would be entitled had he lived and continued as a partner in said firm.
And the court finds that the payment of said sum of Fifty-five Thousand Three Hundred Thirty-Eight Dollars and Ninety-Five Cents ($55,338.95), to the legal representatives of said decedent constituted a purchase by the surviving members of the interest which said decedent had in said firm at the time of his death, and was in extinguishment of any and all interest which decedent or his estate might have in the assets, good will or other property belonging to said co-partnership at the time of the death of said Bavier C. Miller.
That the death of said decedent dissolved the then existing partnership and that after the death of said decedent, his legal representatives had no right, title or interest in said co-partnership nor in any of its property or assets, other than a claim against the surviving members of said firm in their individual capacities, under their agreement for the purchase of the Interest of said decedent as specified, and set forth in said articles of co-partnership as extended.

In addition to the decision of the Illinois court we have been referred to the opinions of the Federal courts and this Board which have determined the principle here involved in petitioner’s favor. In Hill v. Commissioner, 38 Fed. (2d) 165, affirming 14 B. T. A. 572; certiorari denied, 281 U. S. 761, the First Circuit was asked by a surviving partner of an insurance agency and brokerage business to permit the deduction of payments, made to the estate of a deceased member in accordance with the terms of the partnership agreement, as ordinary and necessary expenses in arriving at the partnership net income and the distributive shares of the partners therein. The terms of the partnership agreement, as to Hill, were substantially the same as the partnership agreement here in question, except as to the period of time over which payments were to be made to the deceased partner’s estate. The court and this Board held that the payments made to the estate were not deductible as ordinary and necessary expenses because such payments were made by the surviving partners in the purchase of a capital asset. The court pointed out that, even if the new partnership agreed to pay the estate of the deceased member out of the net profits of the business of the new partnership, it would still be the purchase of a capital asset out of the earnings of the new partnership which belonged to and otherwise would have been distributed to the partners. See also Benedict v. Price (U. S. Dist. Ct.), 38 Fed. (2d) 309; Pope v. Commissioner (C. C. A., 1st Cir.), 39 Fed. (2d) 420, affirming on this point, 14 B. T. A. 584. Cf. Bull v. United States, 295 U. S. 247; W. Frank Carter, 36 B. T. A. 60; and City Bank Farmers Trust Co., Executor, 29 B. T. A. 190.

Although the Supreme Court held in Bull v. United States, supra, that the estate of a deceased partner was liable for income tax on its share of the firm’s profits for the agreed period after the partner’s death, it also recognized that situations might arise where such payments would not be taxable as income. In that case the articles of copartnership provided that a deceased partner’s estate should “receive the same interests, or participate in the losses to the same extent” as the deceased partner would if living. Here there is no such provision as to participation in losses. Furthermore, the Court stated that “Where the effect of the contract is that the deceased partner’s estate shall leave his interest in the business and the surviving partners shall acquire it by payments to the estate, the transaction is a sale, and payments made to the estate are for the account of the survivors. It results that the surviving partners are taxable upon firm profits and the estate is not.” In our opinion this is exactly what the partners of Critchell, Miller, Whitney & Barbour intended by their agreement of May 25, 1927, when they provided that the deceased partner’s interest should cease at death, his interest should be divided among the surviving partners per capita, and the profits to be paid the decedent’s estate should be borne by the parties to whom his interest had passed per capita.

In arriving at our conclusion we have examined the decisions in Walter T. Gudeon, 32 B. T. A. 100; Gussie K. Barth, 35 B. T. A. 546; Helvering v. Smith (C. C. A., 2d Cir.), 90 Fed. (2d) 590, and others, but find them distinguishable either as to the facts involved or as to the principle considered.

Considering all the facts and circumstances herein, together with the cited authorities, it is our opinion that the agreement of May 25, 1927, as extended, provided for a sale of the decedent’s interest in the partnership to the surviving partners, that the surviving partners individually obligated themselves to purchase the interest of any partner dying, that payments received pursuant thereto represented a part of the corpus of the decedent’s estate, and that no part of the profits of the partnership should be returned by petitioners as taxable income of the decedent’s estate.

In this view of the principal issue it becomes unnecessary to consider petitioner’s second allegation of error, which was in the nature of an alternative issue, although not specifically pleaded as such.

Decision will be entered for the petition&r.


author: Disney :

text:
    H. I. Josey, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88190.
    Promulgated September 8, 1938.

      B. W. Fowler, Esq., for the petitioner.

      Stanley B. Anderson, Esq., for the respondent.
   OPINION.

Disney :

This proceeding involves income tax liability for the taxable year 1934, as to which respondent determined a deficiency of $983.03, based on the receipt of $10,000 income by petitioner in consideration of cancellation of a sublease. Petitioner contends that he received no income from such source for the reason that the cancellation of the sublease caused him a loss greater than the amount received.

The facts have largely been stipulated, and such stipulation is adopted as findings of fact by reference, without incorporation herein except in so far as necessary for discussion of the issues; and we add findings not covered by the stipulation as follows: The highest annual rental that could have been obtained for a lease identical with the one held by D. A. Schulte, Inc., upon April 13, 1934, the date of cancellation of the Schulte lease, was $15,780. Petitioner canceled the Schulte lease because he needed the money very badly. The written stipulation was corrected by agreement during hearing in the following particular: The amount of $20,988.37 stated as rent income for 1934 was corrected to be $5,629.66 less (i. e., $15,358.71).

Petitioner received net income of $4,292.85 for the remainder of the year 1934, $4,865.72 for the year 1935, and $2,387.90 for the year 1936.

The issue here is whether cancellation by the lessee of a sublease under which he would not receive income until nearly three years in the future, caused a deductible loss, or whether cash received for such cancellation is income in full.

The facts necessary to an understanding of the issues herein may be briefly stated: Petitioner in 1928, purchased for $50,000 a half interest in a 99-year lease, executed in 1918, under which the lessees had in 1921 subleased the premises to D. A. Schulte, Inc., for the entire unexpired term of the lease. The annual rental to be paid by D. A. Schulte, Inc., was $22,500 in addition to paying taxes, charges, assessments, upkeep, reconstruction cost, and maintenance, the $22,500 per year to be net to the lessees, except that therefrom $9,000 per year was to be paid to the fee owners of the property, and $13,500 to the lessees subleasing (or their assignees, including petitioner). Prior to petitioner’s acquisition of the one-half interest in the lease, D. A. Schulte, Inc., had prepaid the rent up to December 31, 1936. Petitioner and one Perlstein (the owner of the other half interest in the lease) were therefore to receive no rents upon the property until after December 1, 1936. In April 1934 petitioner, badly needing money, with his coowner Perlstein, released D. A. Schulte, Inc., from the terms of the lease in consideration of $20,000 cash, the surrender of the property to them, and the payment by D. A. Schulte, Inc., of 1934 taxes in the amount of $5,629.66, and three-fourths of the $9,000 ground rent due for the year 1934 to the owners of the property. In April 1934 the highest annual rental which could have been obtained from a responsible tenant under a lease identical with the lease to D. A. Schulte, Inc., was $15,780. Petitioner received from the property, from cancellation of lease to January 1,1937, a total net income of $11,546.47.

Under these circumstances, petitioner contends, relying largely upon Commissioner v. Langwell Real Estate Corporation, 47 Fed. (2d) 841, that he had no income from the $10,000 received by him as consideration for cancellation of the lease because the cancellation resulted in a loss to him in a larger amount. In effect, he admits that he had $10,000 income, but seeks to establish an offsetting loss of a greater amount. He adduces evidence that an identical lease, at date of cancellation, would produce only $15,780 per year, and argues therefrom that the net rent payable by D. A. Schulte, Inc. (after December 31, 1936), being $22,500 per annum, the difference between $22,500 per year and $15,780 per year is the basis for computation of loss to him and his colessor, for a period of the 81 years the lease yet had to run from 1934. He makes it plain that he is claiming, not a loss of 1934 rent, but of “the April 1934 value of the entire 81-year sublease obligation”, which he says was greater than $50,000, the cost of the lease to petitioner. He admits on brief that the leasehold has increased in value since April 1934, and states that it is now returning petitioner about one-half of the amount that D. A. Schulte, Inc., would be paying him if no cancellation had taken place and that “It is also true that in the future petitioner may possibly recoup a part or even all of the loss which occurred in April 1934”, but argues that this does not change the fact that the loss has occurred. He cites also, among other cases, United States v. White Dental Manufacturing Co., 274 U. S. 398, to the effect that a taxpayer need not be an incorrigible optimist.

Although taking cognizance of the language of Commissioner v. Langwell Real Estate Corporation, supra, we think petitioner’s contention is not sound. He made a capital investment of $50,000 in a half interest in a lease; he still owns that interest in the lease. Had it been canceled by his own landlord, the fee owner, so that his rights had terminated, clearly loss would have been sustained. But, in the face of the fact that ordinarily a capital investment results in loss only when it is terminated by some definite event, such as sale, destruction or abandonment, can it be said that petitioner suffered a loss by the cancellation of the sublease contract, at a time when it could be duplicated only by accepting a lower rental? The lease had 81 years to run. He had lost a tenant, but was there such a closed transaction, that recoupment of loss was so impossible that the loss upon the entire life of the lease was realized in 1934? We think not. Cases such as United States v. White Dental Manufacturing Co., supra, do not assist us, for there is a wide difference between reliance upon the volition of a then hostile foreign government to make restitution of loss, and relying upon one’s own opportunities in the future to rerent property which is in the immediate possession of the petitioner. A loss must usually be established by a closed transaction, Ewing Thomas Converting Co. v. McCaughn, 43 Fed. (2d) 503; certiorari denied, 282 U. S. 897. It can not be taken because of disappointment in profits expected and mere loss of income does not usually give right to deductible loss. Henry C. Taylor, 34 B. T. A. 241; Frank F. Nicola, 1 B. T. A. 487; John F. Blanchard, 17 B. T. A. 1271. Here petitioner alleges at most loss of anticipated income and profits — which did not even begin until almost three years later, he having no right to receive current income from the sublease. To show a definite and closed event evidencing deductible loss, there must be absence of reasonable possibility of recoupment. W. H. Dail, Jr., 19 B. T. A. 1036. If future events may reduce the 'loss, it is not an identifiable event sufficient to establish deductible loss, John C. Shaffer, 28 B. T. A. 1294; and there should be demonstration that there is no reasonable possibility of such changed conditions in the future as will reimburse for loss, as otherwise obviously there is a mere diminution or depreciation in value shown. It seems to us not only that such reasonable possibility of recoupment or reimbursement has not been negatived by petitioner here, but that, on the contrary, the certainty of recoupment at least in part has been shown, since it is plain that the value of the sublease was not entirely destroyed, but only depreciated in part, since the benefit of tenancies from the sublessee to its tenants was assigned to petitioner and it is affirmatively shown that the future did bring partial re-coupment. The record shows that petitioner received total net income of $11,546.47 during 1934,1935, and 1936, in the interim between cancellation of the D. A. Schulte, Inc., sublease and December 31, 1936, the first date upon which under said sublease petitioner could have realized any income whatever. Under the Schulte lease, he would have received no part of this sum. In other words, on January 1, 1937, he had received, upon his $50,000 investment, $21,546.47 and had a lease with a life of over 77 years, which during 1935-1936 had yielded a net income to him of $3,626.81 per year. This demonstrates to a reasonable certainty not a deductible loss, but a profit upon his investment. It is impossible, we think, in the face of this record, to arrive at a definite or even a probable loss from the cancellation of the Schulte lease upon petitioner’s investment of $50,000. One needs only to capitalize the average net rents received by him after the cancellation of the lease to see that petitioner will not suffer loss on his investment, or, to say the least, has not so demonstrated.

This makes clear, we think, the error in petitioner’s approach to this problem; for he does not, in effect, claim loss upon his investment of $50,000 in a lease, but upon the difference between the expected or anticipated profit therefrom (under the Schulte sublease) and the amount to which that profit diminished (under the estimate of a future income of $15,780 per year instead of the $22,500 agreed to be paid by D. A. Schulte, Inc.). This makes it clear that what he is in fact claiming is a loss or disappointment in anticipated profits from the sublease, or otherwise viewed, a mere diminution in value, not a destruction or total loss, of his lease. He does not claim a total loss on the lease; yet his investment was in the lease, which he still owns, and not in the sublease. As owner of the lease, he plainly has not shown a loss taken; as proprietor of the sublease, he shows merely a possible failure to realize what he expected as income therefrom. When we add the plain possibility of recoupment, even of large profits, by future change of conditions, we must conclude that petitioner has demonstrated no deductible loss.

The cases relied upon do not, in our opinion, meet or solve the question here presented. The nearest approach, and that upon which petitioner apparently relies with most confidence, is Commissioner v. Langwell Real Estate Corporation, supra. Therein the owner of real estate, in effect, received $50,000 consideration for canceling a lease. Unlike the petitioner here, he had a right to receive current rents from the property. His investment was in the property, not, as herein, in the lease alone. There was no such showing, as herein made, of no present profit being possible and the definite postponement to the future of any such profits. Petitioner had a contingent liability to return to the lessee a deposit of $50,000, the contingency being the performance of conditions of the lease by lessee, which balanced the obligation to return the deposit. The Board held that the release of such deposit to petitioner, balanced as it was by release to the lessee of his liability to petitioner under the lease, was not shown to be income. Upon appeal, the Circuit Court held that it was income, and going further, held that the matter of loss was not an issue covered by the findings of the Board, and that a loss would be sustained by the petitioner if a lease as favorable as the one canceled could not be made by petitioner. It thus appears from the language of the court that the issue squarely presented herein was not an issue litigated and presented to the Board and the Circuit Court in the above case. Considering the differences in fact, in the two cases and the apparent lack of presentation in the cited case of the problem confronting us herein, we feel, with all respect to the court deciding the above case, that it does not resolve the question here, and we do not therefore follow the cited case. Here we find, in our opinion, a clear case of loss claimed upon profits anticipated or expected at a future time, and no showing of present loss upon investment.

We therefore hold that no deductible loss was sustained by petitioner in 1934 by cancellation of the sublease involved in this proceeding, and that the $10,000 admittedly received by petitioner in that year constituted income to him, and the deficiency determined by the respondent is accordingly approved.

Decision will ~be entered for the respondent.


author: Arnold :

text:
    Catharine D. Sharpe, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82530.
    Promulgated September 9, 1938.

      Paul F. Myers, Esq., for the petitioner.

      Ralph F. Staubly, Esq., for the respondent.
   OPINION.

Arnold :

Section. 302 of the Revenue Act of 1926 provides that the value of a decedent’s gross estate shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, to the extent of the interest therein of the decedent at the time of his death.

The respondent has determined that Fannie G. Dixon, at the time of her death, had a vested interest in the principal of her father’s estate valued at $147,353.54, and that she had a vested interest in coal properties of her father’s estate valued at $456,597. In accordance with his determination, respondent has increased Fannie G. Dixon’s gross estate by the value of these interests, and has found a deficiency of $46,970.63. Catharine D. Sharpe is the petitioner because she was the sole distributee of her mother’s estate, and respondent has asserted the deficiency against her as a transferee under section 316 of the 1926 Act.

There is no dispute as to the values determined. The dispute is whether Fannie G. Dixon had any interest in her father’s estate the value of which should be included in her own gross estate under section 302. Or, stated differently, did Catharine D. Sharpe acquire this property from her grandfather directly, or from her mother, Fannie G. Dixon? This is purely a question of law, which must be determined from an analysis of the will of John Gilbert and from the other facts of record. If Catharine D. Sharpe took the property under John Gilbert’s will there was no interest vested in Fannie G. Dixon which should be included in her gross estate. On the other hand, if Fannie G. Dixon acquired property rights under her father’s will, which property she passed on to petitioner, the value thereof should be included in Fannie G. Dixon’s gross estate.

Both parties rely upon the sanie proposition, which is stated by the decided cases as follows: “A gift of the income of a fund without a limitation as to time is a gift in perpetuity and carries the fund itself: Robert's Appeal, 9 P. F. Smith, 10; Parker's Appeal, 11 Id. 478; Appeal of the Pennsylvania Company, 2 Norris, 312.” Millard's Appeal, 87 Pa. 457. See also In re Tyson's Estate, 191 Pa. 218, 43 Atl. 131; In re Mifflin's Estate, 232 Pa. 25; 81 Atl. 129; In re Roger's Estate, 245 Pa. 206; 91 Atl. 351, and cases cited therein. While each of the opposing parties agrees with the rule, each of them seeks to apply the rule differently. For example, the respondent contends that the application of the rule shows that Gilbert intended giving his children fee estates in his property, while petitioner contends that the application of the rule demonstrates Gilbert’s intention of giving life estates to his children, with a gift over of income to his grandchildren, and that, in the absence of any further disposition of corpus or income, the rule then operated to pass the fund itself to the second generation. Petitioner asserts that the two opinions of the Orphans’ Court of Philadelphia County support this construction of Gilbert’s will.

Before proceeding with our examination of the opposing contentions we must point out that the one cardinal rule in construing wills is to ascertain the testator’s intention, and, unless forbidden by public policy, to give force to that intention. Smith v. Bell, 31 U. S. 68. The rule which both parties hereto are invoking is not a rule of law, but a rule of construction adopted by the courts as an aid in determining the testator’s intention, Tyson's Estate, supra. In order to determine what interest John Gilbert gave his daughter, and what interest, if any, he gave his granddaughter, the petitioner here, we must examine his will and ascertain from it his intentions in disposing of his property.

In May 1877, when John Gilbert executed his will, his immediate family consisted of his wife and five children, who were the natural objects of his bounty. He provided for them by dividing his property into two classes — his coal properties and his residuary estate. With exceptions not here material, everything he had, exclusive of his coal properties, was thrown into his residuary estate, which, after proper compliance with his instructions, consisted of first bonds and mortgages. Both his coal properties and his residuary estate were placed in trust and the income therefrom was to be distributed as provided for in his will.

The coal properties were charged with the payment of annuities to Gilbert’s wife and children, $15,000 per annum to his wife and $2,000 per annum to each of his children. Upon his wife’s death the payment of her annuity was to be continued and distributed pro rata, or “share and alike”, as provided under the intestate laws of Pennsylvania to his children and grandchildren. In the event of the death of any of his children the share of such deceased child was to be paid to the child or children of the deceased child. Any balance from the coal properties Gilbert gave to his wife and children share and share alike or to the child or children of any deceased child. These provisions indicate that Gilbert intended to provide for his wife and children by giving them the income from the coal properties. There was no intention of giving the income to his grandchildren unless one or more of his children predeceased him leaving issue. But since all of Gilbert’s children survived him, the provisions of his will giving the share of a child that predeceased him to the issue of such child are inapplicable.

In like manner Gilbert disposed of that portion of the trust income from his residuary estate. He gave his wife one-third and gave the other two-thirds to his child or children, or the lawful issue of any child or children then surviving. Gilbert certainly contemplated the possibility that one or more of his children might predecease him, and he provided for this contingency by giving the parent’s share to the lawful issue “then surviving.” No language in Gilbert’s will indicates that he intended to make a gift over of income to grandchildren as a class, but only an intent to provide for grandchildren who survived a child that had predeceased him.

In support of her contention that Fannie G. Dixon took only a life estate in the testamentary trust created by her father, petitioner points to the opinions of the Orphans’ Court handed down in May 1923 and in April 1931. Examining the first of these decisions in point of time, it appears that the court recognized the question we have to decide, but refused to pass upon it, stating that “even if it were held that the gift of income under this will be a gift of the principal it can not be absolutely determined, at this time whether all the parties who may be interested in the estate on final distribution are now before the court.” This language must mean that the court was unwilling at that time to decide the question of whether Gilbert died intestate as to the principal, and that it was unwilling to decide the question of whether the gift of income without limitation of time or gift over was a gift of the principal under Millard’s Appeal, supra; Mifflin’s Estate, supra, and cases therein cited, and Wood's Estate, 261 Pa. 480; 104 Atl. 673.

A further and, in our opinion, a more important reason for postponing the construction of Gilbert’s will in May 1923 was stated by the Orphans’ Court as follows: “It appears, moreover, from the petition for distribution annexed that the persons entitled to the estates of those of testator’s family now deceased, by devolution, will or conveyance, are * * *; and they all join in requesting that the principal be awarded to the Trustees pending the death of Fannie G. Dixon, and the construction of the will postponed until that time. Under the circumstances, it seems to the Auditing Judge that such award may properly be made.” And accordingly the account, as approved in writing by the persons entitled thereto, was awarded to the trustees.

During the interval between the Orphans’ Court opinions, the parties entitled to John Gilbert’s estate (namely, Fannie G. Dixon, Clayton G. Dixon, John Gilbert, and Gertrude Gilbert Loening), whether their interest was in principal or income, executed a trust agreement, dated August 18, 1924, wherein they recited that the entire right, title, and interest of Gilbert’s widow and his five children in Gilbert’s estate, whether under his will or by intestacy or otherwise, had vested in them, and they transferred thereby their right, title, and interests, however by them derived, to trustees, who were to take the coal lands upon the expiration of the trust created by John Gilbert’s will on the death of Fannie G. Dixon, or otherwise. This trust deed must be considered in the light of the opinion of the Orphans’ Court in May 1923 whereby the trust corpus was left in the hands of the trustees upon request of the parties in interest. By their trust agreement the parties transferred their interests in coal lands, which they stated had vested in them, to the trustees named therein, the transfers to be effective upon the termination of the then existing trust so that the coal lands “shall pass without hiatus to the Trustees herein named for the estate and on the trusts herein provided.”

Although the stated purpose of the trust deed of August 18, 1924, was to insure the continued administration of the coal lands as a unit, the fact remains that the parties in interest reserved to themselves the income for life and a power to appoint by will the income, which carried with it a corresponding share of the trust principal upon termination of the trust. If Fannie G. Dixon was given only a life estate by John Gilbert’s will she could not have reserved to herself a power of appointment by will. Considering, therefore, the facts which existed on August 18, 1924, it would appear that Fannie G. Dixon executed the trust deed as an owner of an absolute interest in the estate of John Gilbert.

The 1931 opinion of the Orphans’ Court supports our conclusion that that court did not determine the question in 1923, as the court said in the later opinion “the trust was kept alive until the death of the last surviving of testator’s five children (which has now occurred) by agreement of the parties in interest.” This, in our opinion, is a specific holding that the trust existed by agreement of the beneficiaries, and not by the provisions of Gilbert’s will. The sentence immediately following the court’s statement that the trust was kept alive by agreement, is a definite conclusion of law by the court that the trust consisted of a gift of income only, without limitation of time, or gift over of principal.

Giving effect therefore to the established rule of construction in Pennsylvania, In re Byrne's Estate, 181 Atl. 500, and cases cited, it is our opinion that Gilbert gave the income from the testamentary trust created by his will to his children, or to the child or children of any deceased child of his surviving at the date of his death. In our opinion Gilbert made no provision for a gift over of income to his grandchildren as a class, but only to such grandchildren who were surviving a deceased child of Gilbert at the time of the latter’s death, and, since Gilbert set up no limitation of time as to the gift of income and made no gift over of the corpus, the established rule requires a holding that it was Gilbert’s intention to give the trust corpus itself, postponing only the right of possession.

If there was doubt as to this matter it would have to be resolved against petitioner’s contention under the established rule adopted by the courts relative to the early vesting of estates. In Millard's Appeal, supra, the court quoted the rule as laid down in Amelia Smith's Appeal, 11 Harris, 9, as follows: “ in the construction of wills the law in doubtful cases, leans in favor of an absolute rather than a defeasible estate; of a vested rather than a contingent one; of the primary rather than the secondary intent; of the first rather than the second taker as the principal object of the testator’s bounty.’ ”

In view of the foregoing discussion we agree with respondent’s contention that as a matter of law Fannie G. Dixon had a vested interest in the corpus of her father’s estate, the value of which was includable in her gross estate under section 302 of the Eevenue Act of 1926. In so far as Fannie G. Dixon transferred a portion of her interest in her father’s estate by the deed of trust of August 18, 1924, that part of her interest should be included in her gross estate because at her death there was an outstanding power, reserved by her in the deed of August 18, 1924, the termination of which by her death effected a shifting of economic benefits which subjected the property involved to tax. Chase National Bank v. United States, 278 U. S. 327; Commissioner v. Chase National Bank, 82 Fed. (2d) 157; certiorari denied, 299 U. S. 552.

The second issue is whether respondent can lawfully assert a tax against petitioner as a transferee after having found and ruled that there was no tax liability on the part of the estate arising from the alleged vested interest of the decedent in the properties of her father’s estate. It is the duty of the Commissioner to determine the correct tax liability of each taxpayer, and he has authority to change any determination considered erroneous, Burnet v. Porter, 283 U. S. 230; Omaha Baum Iron Store, Inc. v. United States, 8 Fed. Supp. 703, and where the distribution of the assets of the estate to the sole devisee left the estate without assets and a determination against it would be entirely futile, the respondent may proceed directly against the transferee, Flynn v. Commissioner (C. C. A., 5th Cir.), 77 Fed. (2d) 180; Baumgartner v. Commissioner (C. C. A., 9th Cir.), 51 Fed. (2d) 472, affirming 21 B. T. A. 623; certiorari denied, 284 U. S. 674; City National Bank v. Commissioner (C. C. A., 5th Cir.), 55 Fed. (2d) 1073, affirming 19 B. T. A. 1080; certiorari denied, 286 U. S. 561. The Commissioner’s failure to determine a deficiency against the estate prior to distribution of its assets does not, therefore, preclude him from proceeding directly against the transferee, Helen Dean Wright, 28 B. T. A. 543, and cases cited.

In this proceeding all the assets of the estate of Fannie G. Dixon were distributed to petitioner in 1932, long prior to the issuance of the deficiency notice. However, the statute of limitations did not run against the executor of Fannie G. Dixon’s estate until October 9,1934, three years after the estate tax return was filed, sec. 310, Bev-enue Act of 1926. Under section 311 of the Bevenue Act of 1932 the period of limitation for assessment of the liability of a transferee is within one year after the expiration of the period of limitation for assessment against the taxpayer. The respondent therefore had until October 9,1935, to make an assessment against the petitioner as transferee of the assets of her mother’s estate. Since the deficiency notice was mailed to petitioner as transferee on September 25, 1935, it was within the statutory period of limitations.

In view of the foregoing discussion, it is our opinion that Fannie G. Dixon’s gross estate should include the value of-her interest in the property left her by John Gilbert, and we are further of the opinion that respondent properly proceeded against Catharine D. Sharpe as the transferee of her mother’s estate.

Decision will be entered for the respondent.


author: Hill :

text:
    W. P. Halliday and Carolyn W. Halliday, Petitioners, v. Commissioner of Internal Revenue, Respondent. Mrs. Anne R. Halliday, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 90378, 90379.
    Promulgated September 9, 1938.

      Jolm B. Soiowden, II, Esq., for the petitioners.

      Harry B. Horrow, Esq., for the respondent.
   OPINION.

Hill :

Substantially the only issue raised by the pleadings in these consolidated cases is whether or not respondent erred in disallowing deductions of $20,030.66 each claimed by petitioners from gross income for the taxable year, representing their respective proportionate shares of the total loss alleged to have been sustained by the W. P. Halliday estate trust, in which they owned beneficial interests.

The deductions were disallowed by the respondent for the reason that, as stated in the deficiency letter, the trust was held to be taxable as an association. Petitioners contend that the trust was not an “association” taxable as a corporation, within the meaning of section 801 (a) (2) of the Revenue Act of 1934, because it was a pure or liquidating trust and not a business trust; that, being a revocable trust, the income was taxable to the grantors under sections 166 and 16T of the Revenue Act of 1934, since power was vested in the grantors to revest in themselves title to the corpus of the trust and the income was distributable to them; that, inasmuch as the income of the trust was in such circumstances taxable to the grantors, it follows that they are entitled in computing net income to deduct their proportionate shares of any net loss sustained by the trust; and, since petitioners inherited the beneficial interest in the trust of one of the original grantors, they stand in his shoes and are entitled to deduct their respective proportionate parts of the loss which such original grantor would otherwise have been entitled to deduct.

Respondent contends that the deductions claimed must be disallowed not only because the trust is taxable as an association, but on the additional grounds: (1) That the petitioners have failed to prove the amount of the loss, if any, sustained by the trust in the taxable year; (2) that sections 166 and 167, supra, have no application here, since petitioners are not grantors of the trust within the meaning of those sections; and (3) that the quoted statute does not authorize deductions by either beneficiaries or grantors for losses sustained by a trust.

We shall confine our discussion in the first instance to the issue as raised in the pleadings, viz., whether respondent erred in denying the claimed deductions on the ground that the W. P. Halliday estate trust is taxable as an “association.” Obviously, a decision of this question in the affirmative would dispose of the case and render sections 166 and 167 inapplicable.

Petitioners urge the contention that the trust was merely a convenient device for the liquidation and distribution of the inherited assets among the beneficiaries, and, as indicating that such was the purpose in creating the trust, they point to the recital in the trust instrument that it was agreed to be for the best interests of all concerned that the various properties owned and controlled by W. P. Halliday, deceased, at the time of his death be kept intact and managed as a whole until such time as they could be disposed of advantageously.

In the light of other provisions of the trust agreement, and the facts and circumstances disclosed by the record, we are unable to accept the views of the petitioners as to the motivating purpose of the original grantors in establishing this trust. In determining such purpose, we must look to all pertinent provisions of the trust agreement and the practical interpretation of the parties as exemplified by the actions of the trustees thereunder. And, as stated by the Supreme Court in Helvering v. Coleman-Gilbert Associates, 296 U. S. 369:

The parties are not at liberty to say that their purpose was other or narrower than that which they formally set forth in the instrument under which their activities were conducted.

No doubt it was contemplated by the parties that the trustees under paragraph “8th” of their agreement might make distributions from time to time whenever they had funds in their hands from sales of personal or real property of the principal of the trust, not required to be used for other purposes specified in the trust agreement. But the making of such distributions was clearly left to the discretion of the trustees; they were authorized but not directed to make them. Furthermore, we think it fairly appears from the record that liquidation and distribution of the corpus did not constitute the primary purpose for which the trust was created.

By the second paragraph of the trust instrument the trustees were vested with exclusive authority to manage, operate, or lease all the real estate constituting a part of the trust premises, and were directed to pay the net income therefrom to the beneficiaries in stated proportions. By the fourth paragraph the trustees were permitted to retain out of net income from the estate such part as they might deem advisable for a working capital or for the development of the properties. In the fifth paragraph the trustees, subject to the instructions of the beneficiaries in certain matters, were given full control and disposition of the estate, and were specifically directed to “endeavor to manage said estate in such manner as to produce the greatest amount of income consistent with safety.” They were empowered to pay taxes and expenses, keep the property insured, represent the beneficiaries in all legal proceedings relating to the premises, with full power to compromise or settle any suits, and to make and execute all necessary agreements. The trustees were also authorized to set aside out of income a sinking fund to maintain the integrity of the principal. And they were given power to sell and convey any part of the property, real or personal, at public or private sale, either for cash or on credit; to make leases for terms not exceeding five years; to borrow money and mortgage the premises to raise funds for the development or extension of the various interests; to rebuild any building destroyed by fire, and to purchase real or personal property, except that the trustees agreed not to make any sales, purchases, or mortgages of $5,000 or over without the consent in writing of a majority in interest of the beneficiaries.

Pursuant to such delegated authority the trustees, during the period of 3-1 years prior to the taxable year, carried on varied and extensive business enterprises, including the operation for approximately 29 years of the Yellow Bayou Plantation in Arkansas, which comprised 10,000 acres devoted to the cultivation of rice, cotton, and com, and for such purpose borrowed large amounts of money in addition to the working capital of the trust; they bought and sold properties, including the acquisition of additional assets, not a part of the original corpus, in an amount in excess of $366,000, or more than one-third of the value of the original estate.

The properties and business affairs of the trust were so managed by the trustees that substantial profits were derived during the years 1900 to 1926, both inclusive, except that for the years 1914, 1920, and 1925 comparatively small losses were sustained. From 1900, when the trust began operations, through 1906, total profits of $652,617.71 were earned, or in excess of $93,000 annually, of which total profits the amount of $390,725.65 was distributed to the beneficiaries and the balance of $261,952.06 apparently was retained by the trustees as working capital. During the period from 1900 to 1926, both years inclusive, the trust, after deducting the losses sustained in the three years mentioned above, earned total net profits of $1,685,771.29, or an amount considerably in excess of the value of the original corpus. It sustained losses in the years 1927 to and including the taxable year, except that in 1931 it derived profits of $49,346.49.

At January 1, 1900, the net value of the trust corpus was $1,062,-921.88. From January 1, 1900, to the beginning of the taxable year the trustees distributed to the beneficiaries $1,767,100.65 and, despite the losses sustained in the years 1927 to 1934 (including a loss in the year 1930 of $446,611.99), the capital account still disclosed a credit balance at the beginning of the taxable year in the amount of $617,804.57.

From a consideration of the foregoing facts, in the light of the powers vested in and the directions given to the trustees by the grantors for the management and operation of the trust, we are unable to conclude that the primary purpose of the grantors was to establish a trust for the liquidation of the inherited properties and the distribution of the proceeds among the beneficiaries, in connection with which the earning of profits would have been merely incidental. In our opinion, this trust was intended to be and was in fact an organization for the carrying on of a business enterprise with centralized management, the principal purpose of which, as stated in the trust agreement, was “to produce the greatest amount of income consistent with safety.”

Such conclusion would seem to be supported by the further fact that at the beginning of the taxable year, more than 34 years after the trust was created, the trustees still retained undistributed capital assets of a value in excess of 50 percent of the value of the original corpus. That the trustees were unable, during such an extended period of time, to sell the assets advantageously and distribute the proceeds to the beneficiaries is incredible, if such had been the purpose of the grantors in establishing the trust and the trustees had made any serious efforts to carry out that purpose.

Petitioners argue that not only must a trust be engaged in business for profit but “it must take a quasi-corporate form” in order for it to be taxable as an association under the statute. And in support of their contention that the trust here in question was not quasi-corporate in nature, they point to the facts that the trustees are managers of the trust and do not hold their positions as officers of a corporation; that there has been no regular election of trustees and there is no provision for any regular meeting of the trustees like the meetings of a board of directors of a corporation; no minutes are kept of the actions of the trustees; there have been no meetings of the beneficiaries similar to meetings of the stockholders of a corporation; and no certificates of stock or other evidences of beneficial interests have ever been issued.

This contention can not be sustained. None of the factors mentioned is controlling. As pointed out by the Court in Morrissey v. Commissioner, 296 U. S. 344:

While the use of corporate forms may furnish persuasive evidence of the existence of an association, the absence of particular forms, or of the usual terminology of corporations, cannot he regarded as decisive.

In the cited case, the Court in its opinion further stated:

What, then, are the salient features of a trust — when created and maintained as a medium for the carrying on of a business enterprise and sharing its gains— which may be regarded as making it analogous to a corporate organization ? A corporation, as an entity, holds the title to the property embarked in the corporate undertaking. Trustees, as a continuing body with provision for succession, may afford a corresponding advantage during the existence of the trust. Corporate organization furnishes the opportunity for a centralized management through representatives of the members of the corporation. The designation of trustees, who are charged with the conduct of an enterprise, who act “in much the same manner as directors,” may provide a similar scheme, with corresponding effectiveness. Whether the trustees are named in the trust instrument with power to select successors, so as to constitute a self-perpetuating body, or are selected, by, or with the advice of, those beneficially interested in the undertaking, centralization of management analogous to that of corporate activities may be achieved. An enterprise carried on by means of a trust may be secure from termination or interruption by the death of owners of beneficial interests and in this respect their interests are distinguished from those of partners and are akin to the interests of members of a corporation. And the trust type of organization facilitates, as does corporate organization, the transfer of beneficial interests without affecting the continuity of the enterprise, and also the introduction of large numbers of participants. The trust method also permits the limitation of the personal liability of the participants to the property embarked in the undertaking.

All of tlie essential elements of an association, as stated in the foregoing extract from the Supreme Court’s opinion, namely, continuity, centralized management, limited liability, and facilitated transfer of beneficial interests, are present in the instant case. The fact that there was not a large number of participants in the trust involved here is immaterial. In Helvering v. Coleman-Gilbert Associates, supra, the Court remarked:

The small number of persons in the trust now before us does not present a difference in the legal aspect of their enterprise from the standpoint of the statutory classification. A few persons, as well as many, may form an association to conduct a business for their common profit.

The conclusions reached hereinabove render it unnecessary to discuss the additional grounds urged by respondent in support of his determinations. The deficiencies are approved.

Judgments will be entered for the respondent.

       SEC. 801. DEFINITIONS.
      (a) When used in this Act—
      * * * ⅛ * * $
      (2) Tlie term “corporation” includes associations, joint-stock companies, and insurance companies.

       SEC. 166. REVOCABLE TRUSTS.
      Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested—
      (1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or
      (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom,
      then the income of such part of the trust shall be included in computing the net income of the grantor.
      SEC. 167. INCOME FOR BENEFIT OF GRANTOR'.
      (a) Where any part of the income of a trust—
      (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor; or
      (2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor;
      * * * * * * *
      then such part of the income of the trust shall be included in computing the net income of the grantor.


author: Smith:

text:
    The Kent Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88743.
    Promulgated September 13, 1938.

      Ellis D. Sever, Esq., and Vincent A. Smith, G. P. A., for the petitioner.

      James G. Maddox, Esq., for the respondent.
   OPINION.

Smith:

It is the petitioner’s contention in this proceeding that the payment to it on January 31, 1934, of $15,267.21, representing the amount of the earned surplus of the Jayhawk Oil Co., was a taxable dividend, deductible by it from gross income under section 23 (p) of the Eevenue Act of 1934, which provides for the deduction from gross income of “the amount received as dividends from a domestic corporation which is subject to taxation under this title.”

The respondent, on the other hand, contends that there was a liquidation of the Jayhawk Oil Co. on or about January 31, 1934, and that the payment of the dividend above referred to was merely a step in effecting that liquidation. The provisions of the statute relied upon by the respondent are embodied in section 115 of the Eevenue Act of 1934, which provides in material part as follows:

(a) Definition op Dividend. — The term “dividend.” when used in this title (except in section 203 (a) (4) and section 207 (c) (1), relating to insurance companies) means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913.
(b) Source op Distributions. — For the purposes of this Act every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings or profits. * * *
(e) Distributions in Liquidation. — Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. * * *
* * * * * * *
(i) Definition of Partial Liquidation. — As used in this section the term “amounts distributed in partial liquidation” means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.

Article 115 (5) of Kegulations 86, promulgated under the provisions of the Kevenue Act of 1934, provides as follows:

Distributions in liquidation. — Amounts distributed in complete liquidation of a corporation are to be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation are to be treated as in part or full payment in exchange for the stock so canceled or redeemed. The phrase “amounts distributed in partial liquidation” means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock. A complete cancellation or redemption of a part of the corporate stock may be accomplished, for example, by the complete retirement of all the shares of a particular preference or series, or by taking up all the old shares of a particular preference or series and issuing new shares to replace a portion thereof, or by the complete retirement of any part of the stock, whether or not pro rata among the shareholders.

In Helvering v. General Utilities & Operating Co. (C. C. A., 4th Cir.), 74 Fed. (2d) 972, the court said: “Where a plan of action is proven the courts will consider it as a whole rather than divide it into independent steps.” A rule which is equally well established and is applicable to the facts in this case is that in matters of taxation the substance, rather than the form, will be regarded. See United States v. Phellis, 257 U. S. 156; Phelps v. Commissioner (C. C. A., 7th Cir.), 54 Fed. (2d) 289; certiorari denied, 285 U. S. 558; Labrot v. Burnet, 57 Fed. (2d) 413; Reed v. United States (C. C. A., 8th Cir.), 51 Fed. (2d) 941.

When the facts in this case are regarded in the light of the above rules, the real nature of what was done is immediately apparent. The petitioner liquidated the business of the Jayhawk Oil Co., receiving in exchange for its shares of stock all of the assets of that company. It turned over the corporate shell to third parties. The effect of the agreement of November 8,1933, and the acts done thereunder amounted to a liquidation of the Jayhawk Oil Co. The transactions had pursuant to the agreement merely camouflaged the picture. In Phelps v. Commissioner, supra, it was stated;

That taxing statutes cannot be intentionally circumvented by anticipatory arrangements and contracts is settled by tbe principle laid down in Lucas v. Earl, 281 U. S. 111, 50 S. Ct. 241, 74 L. Ed. 731. It is obvious that if the stockholders of the W. L. Phelps Company intended to, and in fact did, liquidate wholly or partially by distributing its assets to its stockholders and taking up their stock, the earnings and profits so received by them would be governed by section 201, supra. * * *

The petitioner contends that the dividend paid to it by the Jay-hawk Oil Co. on January 31, 1934, was a taxable dividend within the purview of section 23 (p) of the Revenue Act of 1934. It was not an ordinary dividend within the meaning of the rule laid down in Hellmich v. Hellman, 18 Fed. (2d) 239; affd., 276 U. S. 233.

In our opinion the proceeding at bar is ruled by Ward M. Canaday, Inc., 29 B. T. A. 355; affd. (C. C. A., 3d Cir.), 76 Fed. (2d) 278; certiorari denied, 296 U. S. 612. That case presented a situation very similar to the one here involved. There, as here, all the assets were turned over to the original stockholders. There, as here, the corporate shell was made the vehicle for a new business under new stockholders. The Board said in its opinion:

A full consideration of all of the facts in this case leads us, as it did the Commissioner, to the conclusion that all of the amounts distributed on December 26, 1928, were distributed in liquidation of the corporation. Although the Dealers Finance Co. was authorized to do a number of things under its charter, as theretofore amended, there can be no question as to the business in which,1 it was actually and regularly engaged prior to March 1928. In March 1928 it disposed of all of its assets with which it had carried on that business and never thereafter engaged in that business. Cf. James P. Gossett, 22 B. T. A. 1279; affd., 59 Fed. (2d) 365; Milton Tootle, Jr., 20 B. T. A. 892; affd., 58 Fed. (2d) 576. From that time until it made the distributions here in question, it carried on no business but limited its activities to the conversion into cash of some of the securities received in exchange for its former assets and to the retirement of its class B stock. Then came December 26, 1928, with the resolutions and distributions described above. Thereafter the corporation was dead so far as its old business was concerned, a mere empty shell without shareholders or property. Cf. Rochester Ry. Co. v. Rochester, 205 U. S. 236. Later, new stockholders refilled the shell with different property. The corporation then went into a new and totally different life. Its failure to dissolve is not inconsistent with our holding that the distributions were in liquidation of the corporation. Frelmort Realty Corp., supra. The facts here show that the corporation was in the course of liquidation at the time of the distribution and that it completed its liquidation on the same day. The distribution of the $500,509.69 was a step in that process. Tecla M. Straub, 29 B. T. A. 216. Cf. Fred T. Wood, 27 B. T. A. 162.

We are of the opinion that the respondent did not err in determining the deficiency in income tax for 1934 upon the basis that there was a liquidation of the Jayhawk Oil Co., and that the petitioner is taxable upon the gain realized therefrom.

Judgment will ~be entered wider Bule 50,


author: OppeR :

text:
    W. Z. Morton, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87836.
    Promulgated September 14, 1938.

      Geo. D. Brabson, Esq., for the petitioner.

      F. R. Shearer, Esq., and B. M. Brodsky, Esq., for the respondent.
   OPINION.

OppeR :

The issue in this proceeding may be briefly stated as follows : Did the pendency of certain litigation relating to the mortgage prevent a foreclosure sale held in a prior year from being the closed and completed transaction which fixes the time of loss ?

Counsel for both sides have cited numerous authorities, petitioner contending that this is similar to the cases holding that a foreclosure sale does not fix the event of loss until any redemption period has expired; and respondent urging as controlling those authorities establishing that the mere possibility of future recoupment, compensation, or deduction remaining to a taxpayer does not prevent or reduce his loss in the year the loss actually occurs.

It seems to us neither principle disposes of the contentions advanced in this case, the former because petitioner’s right to avoid the sale was at best doubtful and has in fact never been settled, whereas in the cases cited the right of redemption is clear and absolute while it remains; and the latter because petitioner urges this, not as a case of recoupment or compensation for a loss indisputably occurring in tire tax year, but rather as a situation where the loss of the property itself was uncertain and depended upon the result of the pending litigation. It is with this contention that we feel required to deal first, for, unless the facts warrant petitioner’s position in this respect, his entire claim is without foundation.

The first action commenced was one in which petitioner was plaintiff and the trustees under the deed of trust were defendants. The relief prayed was that the latter be enjoined from executing a deed to the mortgagee, which was the purchaser, and that the mortgagee account for sums already received. As to the second request for relief, it is apparent not only that it was purely ancillary to the first, but that it could not, by itself, be effective to avoid the sale, and that it was directed against a stranger to the action. The application to enjoin the delivery of the deed is in a different category and might have been sufficient to sustain petitioner’s contention. The difficulty is that a preliminary restraining order was almost immediately vacated, and the trustees proceeded to convey the property— all this prior to the fiscal year before us. After that had been done it is difficult to see what further effect the action could have had. True, the case is said to have taken its place on the calendar and could have been reached for trial. But, supposing it had, the plaintiff would have been in no position to benefit. Hot only will equity decline to do a vain thing, Galloway v. Board of Education (N. C.), 114 S. E. 165; Allen v. Town of Reidsville, 178 N. C. 513; 101 S. E. 267, but even if a decree were issued in accordance with the prayer for relief, it would merely mean that no deed could thereafter be made by the trustees. That was immaterial because, presumably, they had no intention of giving a further deed, and the mortgagee’s title was not there in litigation. So much is in effect conceded on petitioner’s brief and by the testimony of the attorney who represented petitioner at that time. We think this action did not and could not have the effect of casting doubt upon the finality of the sale.

The second suit was brought by the mortgagee against petitioner and his wife to recover the deficiency remaining after the proceeds of sale had been applied on the mortgage debt. In his answer in that litigation petitioner sets up certain affirmative allegations, and prays:

1. That the action be dismissed * * *.

2. That the purported sale of the lands by the Receivers [of the Trustee] be declared null and void.

Petitioner is on a fiscal year basis ending March 31. The summons in that suit was dated March 29, 1932, so that if the latter date is conclusive, the proceeding was pending at the end of the taxable year in which the sale took place. There is some doubt whether the service of the summons several days later, or the date of petitioner’s answer, would not more accurately fix the time of pendency. But whether that be true and, if true, whether it be material, we need not discuss, for in our view this action, like the first one, seems wholly insufficient to raise any real issue as to the validity of the sale. The suit was brought at law to recover a money judgment. Nothing characterized as a counterclaim or cross-bill appears in the answer, and the new matter to which we have already referred is merely set forth as “further answering the complaint.” But aside from this, petitioner’s answer would at most be a collateral assault upon a proceeding ostensibly conducted under due form of law, and an attempt to invoke, in a law action, the powers of a court of equity. Neither appears to be permissible in North Carolina. First Carolina’s Joint Stock Land Bank, Inc. v. Stewart, 208 N. C. 139; 179 S. E. 463. That this litigation was not regarded as affecting the sale, but only as a means of negotiation for repurchase or settlement, is borne out by the testimony of petitioner and by the form of the compromise agreement.

And we may not assume the possibility of later amendment or other alteration of petitioner’s position. For petitioner’s whole claim is founded upon the pendency of litigation which in and of itself has the effect of making uncertain what would otherwise appear to be certain, of keeping open and incomplete what would otherwise be closed and completed. Nor are we concerned with any right petitioner may have had to compensation in money damages, or by way of set-off or recoupment in the mortgagee’s action for a deficiency, for that would not impair the finality of the sale nor postpone the loss of the property. Petitioner’s brief states his position to be that a sale does not close a transaction “where the validity of the sale itself is in question, for if it should be determined later that the sale is invalid, then it is a nullity and being a nullity it can not be the identifiable or determinative event”; and at another point: “The purchase of the land, the sale and the law suits attacking its validity, involve the same property * * *. These things must of necessity all be determined before a loss can be ascertained and allowed.” The “validity of the sale itself was in question” if at all only by reason of “law suits attacking” it. The sale and the subsequent vesting of title were on their face closed and completed transactions fixing the time of loss. On petitioner’s own argument it must be the actual pendency of litigation capable of nullifying them which, if anything, would alter that apparent finality. As we have seen, no such litigation was actually pending on the evidence before us. Whether on more appropriate facts such a claim could ever be sustained we find it unnecessary to decide.

Decision will be entered for the respondent.

        Frederick Krauss, 30 B. T. A. 62; J. C. Hawkins, 34 B. T. A. 918. See also Derby Realty Corporation, 35 B. T. A. 335.

        United States v. White Dental Manifacturing Co., 274 U. S. 398; Lewellyn v. Electric Reduction Co., 275 U. S. 243; Lucas v. American Code Co., 280 U. S. 445; Burnet v. Sanford & Brooks Co., 282 U. S. 359; Burnet v. Huff, 288 U. S. 156; Newman & Carey Subway Construction Co., 37 B. T. A. 1163; National Contracting Co., 37 B. T. A. 689; South Dakota Concrete Products Co., 26 B. T. A. 1429; Carolina Contracting Co., 32 B. T. A. 1171; E. R. Hawke, 35 B. T. A. 784.

       “After the trustee had completed the conveyance of the land, as his formal duty, I may say then our cause of action would be against the bank for damages for having ordered this sale.”

         “Q. Did yon consider that you had a right to redeem the property?
      “A. Yes, sir. It was being done in eastern North Carolina at that time. A good many people lost their farms just like I did this, and they would go into court and the court would see that you got your farm back. In other words, pay whatever it was sold for and make the proper arrangements, and you could get back your land. There were a good many cases like that in eastern North Carolina.
      * * * * * - * *
      “Q. * * * In other words, such attempt at redemption as you made was simply through the medium of this suit against the Joint Stock Band Bank?
      “A. The fact that I went up to Durham and conferred with those people and made two trips up there, trying to come to some kind of trade so that we could get the land back, and failed in it. I could not borrow any money then. I needed money, and you could not borrow money then.”

       The attorney who represented petitioner at the time the litigation was pending, on being asked why the North Carolina Court in dissolving the temporary restraining order in the first action reached the conclusion that no irreparable injury would result to petitioner replied: “I could not say why he reached that conclusion. That is what he said, thinking that there was a money consideration that we could recover against the bank for any damages we had sustained.” And see footnote 3, supra.

       See footnote 2, supra.

       In J. C. Hawkins, supra, page 920, we said: * * where the loss is in reference to real estate, it has been held in a long line of cases that a sale of the real estate alone satisfies the requirement. * * * And, that conveyance must be absolute.”


author: Yan Fossan :

text:
    Simon Boekman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82185.
    Promulgated September 16, 1938.

      George S. Hills, Esq., and J. E. Lawlor, O. P. A., for the petitioner.

      Allen T. Aldn, Esq., for the respondent.
   OPINION.

Yan Fossan :

The controlling question in the case at bar is whether income to petitioner, a nonresident alien individual, is, within the applicable statute, gross income from a source within the United States.

Gross income from sources in the United States is defined in section 119 (a) of the Revenue Act of 1928 as follows:

* * * The following items of gross income shall be treated as income from sources within the United States:
(1) Iniekest. — Interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, not including—
(A) interest on deposits with persons carrying on the banking business paid to persons not engaged in business within the United States and not having an office or place of business therein, or
(B) interest received from a resident alien individual, a resident foreign corporation, or a domestic corporation, when it is shown to the satisfaction of the Commissioner that less than 20 per centum of the gross income of such resident payor or domestic corporation has been derived from sources within the United States, as determined under the provisions of this section, for the three-year period ending with the close of the taxable year of such payor preceding the payment of such interest, or for such part of such period as may be applicable, or
(0) income derived by a foreign central bank of issue from bankers’ acceptances;
(2) Dividends. — The amount received as dividends—
(A) from a domestic corporation other than a corporation entitled to the benefits of section 251, and other than a corporation less than 20 per centum of whose gross income is shown to the satisfaction of the Commissioner to have been derived from sources within the United States, as determined under the provisions of this section, for the three-year period ending with the close of the taxable year of such corporation preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence), or
(B) from a foreign corporation unless less than 50 per centum of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence) was derived from sources within the United States as determined under the provisions of this section;
(3) Personal services. — Compensation for labor or personal services performed in the United States;
(4) Rentals and royalties. — Rentals or royalties from property located in the United States or from any interest in such property, including rentals or royalties for the use of or for the privilege of using in the United States, patents, copyrights, secret processes and formulas, good will, trade-marks, trade brands, franchises, and other like property; and
(5) Sale of real property. — Gains, profits, and income from the sale of real property located in the United States.

Section 119 (c) defines gross income from sources without the United States as follows:

(1) Interest other than that derived from sources within the United States as provided in subsection (a) (1) of this section;
(2) Dividends other than those derived from sources within the United States as provided in subsection (a) (2) of this section;
(3) Compensation for labor or personal services performed without the United States;
(4) Rentals or royalties from property located without the United States or from any interest in such property, including rentals or royalties for the use of or for the privilege of using without the United States, patents, copyrights, secret processes and formulas, good will, trade-marks, trade brands, franchises, and other like properties; and
(5) Gains, profits, and income from the sale of real property located without the United States.

In N. V. Koninklijke Hollandische Lloyd, 34 B. T. A. 830, it was held that the income of a foreign corporation, in order to be taxable, must fall within the limited scope of the statute. The Board said:

Section 119 contains no definition of income of a general or all-inclusive nature such as is found in section 22 (a) and, therefore, the income shown to be taxed must come strictly within the limits of the statutory requirements.

The partnership of which petitioner was a member received no income during the taxable year from interest, dividends, rents or royalties, or sale of real estate.

The only source of income within the United States listed in the statute, under which the respondent could urge that petitioner is liable for tax is the one taxing personal services. Petitioner’s contention is that all the personal services giving rise to the income in question were performed in Amsterdam, Holland, or Hamburg, Germany. We are of the opinion that this conclusion is supported by the record. The transactions referred to in the findings of fact were all initiated and consummated in Europe. No service was performed by petitioner in the United States. The sole purpose of the New York office was the coding and decoding of cables and transmission thereof to the proper person or firm, all of which was done by a clerk. No money was handled, no contracts were entered into by the New York office.

The record makes it clear that petitioner was not in the United States during the taxable period, except for a short time in April 1931, when he was here for the sole purpose of seeking financial assistance for his business abroad. We conclude and hold that petitioner did not render personal services within the United States which are taxable under the statute.

There being no deficiency, there is no penalty.

Decision will be entered for the petitioner.

       Sec. 212 (a), Revenue Act of 1928.