author: Leech : Matthews,

text:
    Charles W. Bowring, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 41871, 54100.
    Promulgated December 29, 1932.

      J. H. Cohen, Esq., and Kenneth Dayton, Esq., for the petitioner.

      O. J. Tall, Esq., for the respondent.
   OXUNIOK.

Leech :

The allowance of the disputed credit involves the proper construction of the applicable sections of the Eevenue Acts of 1924 and 1926 which are identical and read as follows:

Sec. 222. (a) The tax computed under Parts I and II of this title shall be credited with:
»{s s}: & i-i
(3) In the case of an alien resident of the United States, the amount of any such taxes paid or accrued during the taxable year to any foreign country, if the foreign country of which such alien resident is a citizen or subject, in imposing such taxes, allows a similar credit to citizens of the United States residing in such country.

The facts are that petitioner’s national origin was Newfoundland, of which he became a subject and to which he owed and has continued to owe his permanent allegiance; that he had the additional status of subject of the British Crown, dependent upon his local status as a subject of Newfoundland; and that, although his domicile was at a different place and his residence at yet another, he was a subject of Newfoundland during the years in controversy.

What is the meaning of the phrase “ taxes paid or accrued * * * to any foreign country ” as used in the 1924 and 1926 Acts ? The original provision for the credit of foreign taxes, as first enacted in the Eevenue Act of 1918, section 222 (a) (3), definitely limited this credit to the amount of income and profits taxes paid to the foreign country of which the resident alien was a citizen or subject, upon income derived from sources therein, provided a similar credit was allowed to citizens of the United States residing in such country. There is a significant contrast in the wording of the quoted section of the 1918 Act and the corresponding sections of the later acts here involved. The change was made in the drafting of the Eevenue Act of 1921. Section 222 (a) (3) of that act is identical with the same sections of the 1924 and 1926 Acts, except for the words “ or accrued ” in the later acts, which difference is immaterial here. A diligent search of the House and Senate Committee Eeports on the Eevenue Act of 1921 reveals no statement of the purpose of the change in wording of section 222 (a) (3) from the form in which it appeared in the 1918 Act. However, the original House Bill 8245 was drafted in the form of specific amendments to the Revenue Act of 1918 and section 228 provided that section 222 (a) (3) of the 1918 Act be amended to read as above stated. The House Bill was amended by the Senate to take the form of a new revenue act and section 222 (a) (3), as altered, was enacted in the Revenue Act of 1921. While the reports of the hearings held by the Committees of the House and Senate on the 1921 Act do not disclose any effort by taxpayers to secure a change in this particular subdivision of section 222, they do disclose a decided effort to secure new legislation to relieve American citizens residing abroad from double taxation. Without doubt the primary purpose of this provision in the Revenue Acts of 1921, 1924, and 1926 was to mitigate the evils of double taxation upon American citizens, Burnet v. Chicago Portrait Co., 281 U. S. 1, through the medium of inducement, by the allowance of credits to any resident alien whose country allowed similar credits to American citizens resident there. A change in the phraseology of a statute, reenacted, creates a presumption of change in the intent of the legislative body from that expressed in the former statute. Crawford v. Burke, 195 U. S. 176, 190. The broadened scope apparent in the wording of the later acts shows clearly the intention of Congress to extend further and logically the double taxation relief first enacted in the 1918 Act.

We hold, therefore, that section 222 (a) (3) of the Revenue Acts of 1924 and 1926, sufra, provides for this credit of income taxes, paid or accrued by a resident alien to any foreign country, whether or not the taxpayer is a citizen or subject thereof, provided the other conditions of this subsection are met.

Our next consideration is the meaning of certain controverted terms in the expression “ if the foreign country of which such alien resident is a citizen or subject,” as used in section 222 (a) (3), supra.

The term “ foreign country ” means any foreign political entity, with or without international standing as a member of the family of nations, which has the power to and does levy and collect income taxes which may be the subject of the intended credit. Burnet v. Chicago Portrait Co., supra. Upon the facts in the instant case, Newfoundland is a foreign country within the meaning of section 222 (a) (3), supra.

The Commissioner in his reply brief has abandoned his original contention that petitioner acquired the local status of subject of Great Britain by establishing his domicile therein, and concedes that the laws of Great Britan do not provide for the acquisition of such status by the nationals of the various colonies and dominions of the British Empire. The Commissioner now contends that petitioner, being a British subject (subject of the Crown), domiciled in Great Britain, was a “subject” of Great Britain within the purview of section 222 (a) (3), supra. He contends that domicile controls the status of petitioner for this statutory purpose.

In construing statutes the legislative intent must be sought and is the all important factor, Wolsey v. Chapman, 101 U. S. 755; United States v. Stone & Donner Co., 274 U. S. 225. This intent must be ascertained from the words Congress has chosen to employ, interpreted according to their ordinary meaning; Dewey v. United States, 178 U. S., 510, 520.

The following quotation from the case of State v. Manuel (1834), 4 Dev. & Bat. 20, has been quoted with approval by the Supreme Court in United States v. Wong Kim Ark, 169 U. S. 649, 663, and Hennessy v. Richardson Drug Co., 189 U. S. 25:

The term “ citizen,” as understood in our law, is precisely analogous to the term “ subject ” in the common law, and the change of phrase has entirely resulted from the change of government. The sovereignty has been transferred from one man to the collective body of the people; and he who before was a “ subject of the King ” is now a “ citizen of the state.”

The term “ subject ” has been held, in exceptional circumstances, to include a person owing obedience and temporary allegiance to a particular government because of residence within its boundaries. Such a definition has been applied where the statute or treaty under discussion, directly or indirectly, so construed the term, The Pizarra, 2 Wheat. 227, or, where the sovereign right of the Federal Government to enforce obedience to its laws by those resident here was involved; Carlisle v. United States, 16 Wall. 147. Obviously, the facts do not bring the instant case within these exceptions. The word is more commonly and accurately used in its narrower sense and is limited in its meaning to one who, by birth or naturalization, owes permanent allegiance to a government. Nagle v. Loi Hoa, 275 U. S. 475; United States v. Karnuth, 30 Fed. (2d) 242; Hammerstein v. Lyne, 200 Fed. 165; Dicey, Conflict of Laws (2d Ed.), 164. The word “ subjects ” in section 2 of Article III of the Federal Constitution, extending the jurisdiction of the Federal courts to cases between a state or its citizens “ and foreign states, citizens or subjects,” has been held to refer to permanent allegiance to a foreign government. Hammerstein v. Lyne, supra.

Domicile has to do with civil status, upon the basis of which, the civil rights of the individual rest. In re Green’s Estates, 164 N. Y. S. 1063. It is important in determining state citizenship in the United States under the Fourteenth Amendment to the Federal Constitution, The Slaughter House cases, 16 Wall. 36. Domicile is wholly irrelevant to the issue of Federal citizenship or any alien political status, of which permanent allegiance, by birth or naturalization, is solely decisive. Hammerstein v. Lyne, supra; Nagle v. Loi Hoa, supra; United States v. Karnuth, supra.

We conclude that “ subject ” as used here means, exclusively, a person owing permanent allegiance to a government because of birth or naturalization alone, and, that petitioner was a subject of Newfoundland within the meaning of section 222 (a) (3), supra. Any other construction would produce absurd consequences, which should be avoided. In re Chapman, 166 U. S. 661; United States v. Katz, 271 U. S. 354. This subsection applies only to resident aliens. If domicile controls the status of petitioner for this statutory purpose, as contended by the Commissioner, and if, arguendo, petitioner were domiciled as well as resident in this country, he would not be an alien within the meaning of the subsection, but, on the contrary, would be a citizen and entitled to the credits provided in other subdivisions of section 222 of the Revenue Acts of 1924 and 1926.

The Commissioner contends that the question of whether petitioner is in fact a citizen or subject of Great Britain is res adjudícala by the decision in the case of Bowring v. Bowers, 24 Fed. (2d) 918; certiorari denied, 277 U. S. 608. That case was an action brought by this petitioner to recover income taxes for the years 1917 to 1921, inclusive, assessed and collected on the basis that he was a resident alien, whereas he had reported his income and paid a lesser tax on the basis of a nonresident alien. The record in that case has been submitted as a joint exhibit in this proceeding. The pleadings raised no issue as to the nationality of the petitioner. No evidence of his foreign allegiance was introduced, nor was the question of such status argued. After holding that residence, as used in the estate tax provisions of the revenue acts, is synonymous with domicile because the incidence of estate and succession taxes has been determined historically by domicile, the court held that there is a difference between the legal intendment of the terms “ residence ” and “ domicile ” and that, as to the income tax provisions of the revenue acts, the liability for tax was fixed by residence, a permanent abode of no transient character. The court then decided that petitioner was a resident alien and taxable as such. After noting that petitioner was required to pay an income tax to Great Britain, because domiciled there, and also to the United States upon the same income, stated:

* * * Moreover, the hardship of the double taxation would have been prevented by reason of section 222 (a) (3) of the Revenue Act * * * if Great Britain, the •country of which plaintiff is a citizen, had allowed to citizens of the United States residing there a credit of taxes paid by them in the United States upon their taxes paid in Great Britain, but there is no such reciprocal legislation. [Italics ours.]

In making this statement, the court was not deciding as a matter of fact or law that petitioner was a citizen of Great Britain, for there was no such issue presented to the court. It was not necessary for the court to determine the question of petitioner’s citizenship, i. e., the country to which he owed permanent allegiance, in deciding the issue which was before the court, namely, whether petitioner was a resident or a nonresMent alien of the United States for purposes of income taxation. We are of the opinion that the decision in the case of Bowring v. Bowers, supra, does not determine this issue. Cromwell v. County of Sac, 94 U. S. 351.

However, the stipulation of the parties as to Newfoundland satisfying the similar credit provision here in question, by allowing credit for income taxes paid to this country or by exempting income derived from this country by our citizens residing in Newfoundland, is not broad enough to include the instant case within the meaning of the term “similar credit,” as used in section 222 (a) (3), supra.

The word “ similar ” is defined as: “ nearly corresponding ”; “ resembling in many respects ”; “ somewhat alike ”; “ having a general likeness.” Of. Webster’s New International Dictionary; Fletcher v. Interstate Chemical Co., 110 Atl. 109; 94 N. J. Law, 332; Greenbaum v. DeJong, 166 N. Y. S. 1042, 1044; Fidelity & Deposit Co. v. Brown, 92 Vt. 390; 104 Atl. 234, 236; but “ similar ” does not mean “ identical,” In re Bonsall's Estate, 135 Atl. 724, 725, 228 Pa. 39. Bouvier’s Law Dictionary defines “ similar ” as follows: “ Denotes partial resemblance, and also sameness in all essential particulars.”

The sense in which Congress has employed the word “similar” must be determined in accordance with its ordinary meaning and in the light of all the circumstances that may fairly be regarded as having been within the knowledge of Congress at the time. Dewey v. United States, supra. We have stated the purpose of Congress in enacting section 222 of the Revenue Acts of 1921, 1924, and 1926 was to mitigate against the evils of double taxation of American citizens. This is the controlling factor in construing the provision, Wolsey v. Chapman, supra; United States v. Chapman, supra. Section 222 (a) (1), applicable to citizens of the United States, and section 238, applicable to domestic corporations, provide that taxes paid to any foreign country sliall be credited against income taxes due this country. Thus some relief against double taxation of American citizens and corporations by this country was secured by direct legislation. But this was only a part of the relief which Congress obviously intended to accomplish. What of our citizens residing abroad and engaged in the highly competitive foreign trade? How could they, so situated, be relieved of the burden of double taxation at the hands of foreign countries ? The only answer was, by encouraging these foreign countries to provide this desired relief by our proposed reciprocity. In the case of Burnet v. Chicago Portrait Co., supra, the Supreme Court referred to section 222 (a) (3) as a reciprocal provision.

The stipulation of the parties, and the Commissioner’s Regulations 65 and 69, art. 385, with which it is identical, pro tanto, merely sets out two conditions wherein certain countries meet the “ similar credit” requirement of this section, namely, that those countries, including Newfoundland, allow to American citizens resident there a credit for income taxes paid to this country, or exempt from tax income derived from this country. In the case of a foreign country whose tax laws contain either one of those two provisions and whose citizen or subject is resident in this country, section 222 (a) (3)-, supra, and the Commissioner’s regulations allow such resident alien a credit for taxes paid to such country. Either of the two provisions will suffice, for, while the type of credit or exemption may not be identical with that allowed by this country, the credits allowed by the two countries would be “ similar,” as above defined, and the result would be, practically, the corresponding and reciprocal relief from double taxation the legislation was intended to effect.

The instant case goes far beyond the provisions of the regulations, and the stipulation. The credit sought is not for taxes paid Newfoundland, which would fall squarely within the regulations and the stipulation, but is for taxes paid to Great Britain. Petitioner contends that “ similar credit ” in this section means that, if either type of credit above described is allowed to American citizens residing in Newfoundland, for instance a credit for taxes paid to this country, then the Newfoundland subject residing here may take credit for any income taxes paid, not only to Newfoundland, but also to any foreign country. We have held that a resident alien is entitled to credit for income taxes paid to any foreign country, provided the other conditions of the subsection are met. We have also stated that the provision is reciprocal. It was not enacted primarily for the benefit of aliens residing here, but as a means of inducing foreign countries to relieve American citizens residing abroad from double taxation. The clear intendment of the subsection, read as a whole, is that the credit must be a corresponding one. Applied here, petitioner must show that Newfoundland allows our citizens resident there a credit for taxes paid to Groat Britain or exempts from taxation income arising there. If we should construe this clause as petitioner contends, Congress would have accomplished the protection of the resident alien against double taxation, to a much greater extent than American citizens, and not only the intended purpose of the legislation would be largely thwarted, but the revenues of the Government would be depleted without justification or consideration. This is apparent in the instant case in the fact that petitioner’s income tax paid to Newfoundland is insignificant, in the words of petitioner’s counsel, whereas the British income taxes he seeks to credit are very substantial.

Petitioner has rested his case upon the stipulation that Newfoundland satisfies the similar credit provision in certain particulars and has argued strenuously that this is sufficient to entitle him to the credit sought. The petitioner, having failed to establish as a fact that Newfoundland allows to American citizens resident there a credit for income taxes paid to Great Britain, or an exemption from income tax of income arising there, we hold that he is not entitled to credit British income taxes against such taxes due the United States.

The parties having stipulated the correct amount of the deficiencies in the event the credits sought are not allowed in this proceeding, the deficiencies are redetermined to be in the amounts of $23,674.34, $4,055.35, and $3,942.59 for the years 1924, 1925, and 1927, respectively.

Reviewed by the Board.

Judgment will be entered accordingly.

Matthews,

dissenting: I agree with so much of the majority opinion as holds that the petitioner is a citizen of Newfoundland, but dissent from that portion of the opinion which denies petitioner the right to a credit for taxes paid to Great Britain.

Under all of the revenue acts, from 1913 to date, citizens of the United States and resident aliens have been subject to tax on total income from all sources and have been granted the same deductions and personal exemptions. When the Revenue Act of 1918 first introduced into the income tax system the principle of allowing a credit for taxes paid to foreign countries, the credit allowed was the amount of taxes paid to foreign countries on income from sources therein, and in the case of an alien resident of the United States the credit was limited to the amount of any income taxes paid to the country of which such alien was a citizen or subject, upon income derived from sources therein, but only if such country allowed a similar credit to citizens of the United States residing in such country. The effect of the 1918 credit for tax provision was in many instances to wipe out all tax liability due to the United States, notwithstanding the fact that such taxpayers had income from sources within the United States. This was because the rates imposed by foreign countries were higher than rates imposed by the United States. Consequently, a change was made in the 1921 Act which based the credit on the amount of any income and profits taxes paid to any foreign country, whether on incmne from sources therein or not, but limited the credit to an amount not in excess of the same proportion of the tax due the United States against which the credit was claimed, which the foreign net income bore to total net income. This limitation in the credit provision had the effect of relieving American citizens of only the amount of the United States tax on foreign income, or so much of such tax as was equal to the foreign tax paid. It did not relieve Americans of paying taxes to the United States on income from United States sources. An alien resident of the United States was granted the same credit for taxes paid to foreign countries as was allowed to a citizen if the country of which the alien was a citizen or subject, in imposing such taxes, allowed a similar credit to citizens of the United States residing therein. The same provision was contained in the Revenue Acts of 1924,1926, and 1928, with only slight changes not material to the question in issue.

The amount of the credit allowable to a resident alien under the provisions of section 222 (a) (3) can not be determined without taking into consideration paragraph (a) (5). Reading these two subsections together, it is clear that any income or profits taxes paid to any foreign country, regardless of the source of the income on which such taxes are computed, form the basis in determining the amount of credit allowable, such credit being limited to an amount not in excess of the same proportion of the tax due the United States against which the credit is claimed, which foreign net income is- to total net income.

Under the credit provision, in so far as it is granted to a resident alien on the basis of a similar credit being granted by the country of which such alien is a citizen or subject, the United States is primarily interested in obtaining an exemption of United States income from foreign income taxes imposed on such income received by the citizens or residents of the foreign country. The United States has the primary right to income tax on income from United States sources, whether it goes to a citizen, resident, or nonresident alien. The right of the Government to tax the nonresident citizen on his income from sources without the United States is based solely on his relation to the Government of the United States, and the right to tax the resident alien on his income from sources without the United States is based on the right to demand that all residents bear their share of the necessary expenses of government. In the case of the citizen and resident alien, the United States recognizes the primary right of the foreign government to tax income from sources therein and accordingly grants a credit, which, in effect, relieves the American taxpayer, whether a citizen or resident alien, of United States taxes on such foreign income. Secondarily, the purpose of the provision is to secure relief to United States citizens residing in foreign countries from paying income tax to the country of residence on income from sources in another foreign country which has also taxed such income. The nonresident alien must look to the country of residence for any relief from double taxation on income from United States sources.

Article 385 of Regulations 62, issued in February, 1922, under the 1921 Act, entitled “ Countries which do or do not satisfy the similar credit requirement,” as well as the corresponding article in the regulations issued under the 1924,1926 and 1928 Acts, have all contained Newfoundland in the “ incomplete list of countries which satisfy the similar credit requirement of section 222 (a) (3), * * * either by allowing to citizens of the United States residing in such countries a credit for the amount of income taxes paid to the United States, or in imposing such taxes, by exempting from taxation the incomes received from sources within the United States by citizens residing in such countries.” This same article, in all the regulations, also contains an incomplete list of the countries which do not satisfy the similar credit requirement, and further provides: “A resident of the United States, who is a citizen or subject of any country in the first list, is entitled, for the purpose of the total tax due the United States for 1921 [1924, 1926, and 1928, in regulations under later acts] and subsequent years, to a credit for the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country. If he is a citizen or subject of any country in the second list, he is not entitled to such credit. If he is a citizen or subject of a country which is in either list, then to secure the desired credit, he must prove to the satisfaction of the Commissioner that his country satisfies the similar credit requirement of the statute.”

The only difference between the article in the regulations issued under the 1921 Act and that in regulations issued under later acts is that more countries were added to each list in the later regulations.

Petitioner came to the trial of this case relying on the provision of the regulations that Newfoundland was a country which satisfied the similar credit requirement, and that income taxes paid by a citizen of Newfoundland residing in the United States to any foreign country could be used as a basis for the credit. In my opinion, the Commissioner, by the statement made in the latter part of the article in question, has in substance said that any citizen of a country named in the first list need not introduce any evidence to show what the taxing statutes of his country provide.

The effect of the majority decision is to hold that, inasmuch as Newfoundland allows a credit for taxes paid to the United States, or exempts income from sources within the United States when received by a citizen of the United States residing in Newfoundland, therefore, Newfoundland taxes an American citizen residing therein on income from sources in Great Britain. I do not think this conclusion can or should be drawn from the first sentence of article 385.

I agree with the majority opinion that the credit which a foreign country must grant to United States citizens residing therein must be similar to the credit which the United States grants to its citizens wherever resident. If Newfoundland, in imposing income and profits taxes on its residents, (1) requires total income from all sources to bo reported and, by means of deductions of foreign income or credits against Newfoundland tax of foreign taxes paid on foreign income, collects a tax only on income from Newfoundland sources, or, (2) imposes such taxes only on income from sources in Newfoundland, it certainly meets the similar credit requirement of section 222 (a) (3). And it would be true not only that Newfoundland allows “ citizens of the United States residing in such country a credit for the amount of income taxes paid to the United States, or in imposing such taxes exempts from taxation the income received from sources in the United States by citizens residing therein,” but would also be true that Newfoundland allows a credit for taxes paid to all foreign countries or exempts from tax income from all foreign countries.

It is wholly improbable that any country would, in its general income tax statutes, refer to citizens of the United States, resident therein, or income from sources in the United States, or taxes paid to the United States, or refer to any foreign country by name. In our income tax statutes we carefully refrain from so doing. We refer to aliens and classify them as resident and nonresident; to income as from sources within and without the United States, and classify income from without the United States as from sources within possessions of the United States and from sources within foreign countries. In the credit provision here under consideration, the reference is to income taxes paid to any foreign country and the credit is allowed to a resident alien who is a citizen of any foreign country which grants a similar credit to United States citizens residing therein. Because of the numerous treaties with foreign countries to which the United States is a party, and also for the purpose of classification, this Government does not, in its taxing statutes, name certain countries to whose citizens it grants exemptions and credits. The same compelling reasons would prevent other countries from naming the United States in their income tax laws. I think, therefore, that it is safe to assume that the statutes of Newfoundland do not refer in terms to citizens of the United States residing in Newfoundland, or to income taxes paid to the United States, or to income from sources within the United States, but that such statutes may refer to residents and resident aliens, income from foreign countries, or income taxes paid to foreign countries. In other words, the statutes of Newfoundland may well be assumed to be of broader application than the first sentence of article 385 indicates.

One of the foreign countries which is listed in the first sentence of article 385 as satisfying the similar credit requirement is The Netherlands. It is of interest to note that M. Sinninghe Damsté, Director-General of Direct Taxation, Customs and Excise of The Netherlands, in Memorandum F. 35, published by the League of Nations, points out that The Netherlands has sought to obviate double taxation in the following manner: The tax charged on the total income, including income derived from- abroad, is first calculated, then the tax which would be due on the income from abroad, if it were taken alone. This second sum is then deducted from the first. The actual rate of taxation abroad is not taken into consideration.

The Commissioner must have had before him the provisions of The Netherlands law when he added that country to the list of the countries which satisfy the similar credit requirement, “ either by allowing citizens of the United States residing therein a credit for taxes paid to the United States, or in imposing such taxes by exempting from taxation the incomes received from sources within the United States.” From the provisions of a statute which classifies income from sources without The Netherlands as income from abroad and which allows a credit equivalent to The Netherlands tax on such income, the Commissioner has only stated in his regulation the application of the law to the credit for taxes paid the United States or to United States income. The Netherlands statute is broader than the application made by the Commissioner. And it may well be that the Newfoundland statute is also broader than the application made in the regulations.

The petitioner had only a small income from Newfoundland sources and paid a very small tax there. Whether by means of a deduction of foreign income or credits for foreign taxes paid, or because the Newfoundland statute only taxes income from Newfoundland sources when paid to nonresidents, the petitioner, under the Newfoundland statute, in effect paid taxes to Newfoundland only on Newfoundland income. Citizens of the United States, wherever residing, under the letter of the law pay taxes to the United States on total net income from all sources, but where the foreign income is taxed at rates equal to or higher than our rates, citizens of the United States in effect pay tax to the United States only on United States income.

The basis for disallowing the credit for taxes claimed by the taxpayer was stated in the notice of deficiency in each case to be that petitioner was not entitled to any credit for taxes paid to foreign countries, inasmuch as it was held that he was a citizen of Great Britain and under article 385 of the Regulations Great Britain is one of the countries which does not satisfy the similar credit requirement of section 222 (a) (3)). Petitioner alleged that the Commissioner was in error in determining that he was a citizen of Great Britain, and further alleged that he was a citizen of Newfoundland.

In his brief, for the first time, the respondent takes the position that neither one of the methods in the first sentence of article 385 meets the similar credit requirement of the statute, and, therefore, petitioner is not entitled to the credits claimed, even though he is held to be a citizen of Newfoundland. At the hearing, counsel for respondent stated that he was willing to stipulate that article 385 was the Commissioner’s regulation and that he was bound by it, but was unwilling to stipulate what it meant. The parties then entered into a stipulation in the exact language of the first sentence of article 385 of Regulations 65 and 69. The Board takes judicial notice of the regulations, and the same article in a subsequent sentence unequivocally says: “A citizen of a country in the first list is entitled to a credit for income taxes paid to any foreign country.” In the light of counsel’s statement that the Commissioner was bound by his regulations and in view of the fact that such regulations unequivocally grant a citizen of Newfoundland the credit for taxes paid to any foreign country, I think it wholly unfair for the respondent to have raised the question in his brief as to the sufficiency of either method mentioned in the first sentence of article 385 to meet the similar credit requirement. For ten years the Commissioner, under four revenue acts, has been settling tax liabilities of resident aliens who prove that they are citizens of the countries listed in the first sentence of article 385, by allowing such resident aliens a credit for taxes paid to any foreign country. This petitioner proved that he was a citizen of Newfoundland. The time for the Commissioner to have repudiated his regulation, if that is what he is trying to do in his brief, wTas prior to or at the hearing, and the petitioner should be given the opportunity to show whether the taxing statutes of Newfoundland grant a similar credit to aliens residing therein.

       Sec. 222. (a) That the tax computed under Part II of this title shall be credited with:
      *******
      (3) In the case of an alien resident of the United States who is a citizen or subject of a foreign country, the amount of any such taxes paid during the taxable year to such country, upon income derived from sources therein, if such country, in imposing such taxes, allows a similar credit to citizens of the United States residing in such country.

       Section 1. All persons born or naturalized in tbe United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside. * * *


source: Caselaw Access Project

author: Van Fossan :

license: Public Domain

text:
    John H. Watson, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 53414.
    Promulgated December 29, 1932.

      Robert W. Wheeler, Esq., for the petitioner.

      Dean Kimball, Esq., and E. G. Adams, Esq., for the respondent.
   OPINION.

Van Fossan :

This proceeding was brought for the redetermination of a deficiency in income tax for the year 1928 amounting to $759.89. By his amended answer the respondent alleges that the deficiency is the sum of $1,243.51 instead of $759.89, shown in the notice of deficiency, and requests that the deficiency be so redetermined.

A stipulation of facts was entered into by the parties disposing of all the issues except two, stated as follows:

(a) Whether the loss of $984.38 sustained by the petitioner in the year 1928, as hereinafter set forth, is a capital loss or an ordinary loss.

(b) Whether or not a contribution of $25 made by the petitioner in the year 1928 to the Citizens League of Cleveland is deductible from gross income in computing the petitioner’s taxable net income.

The facts were stipulated substantially as follows:

In the year 1928 the United States of America paid at maturity to the petitioner the principal sum, aggregating $76,000, of certain United States Liberty Loan Bonds, for which the petitioner paid the sum of $76,984.38 and which had been held by the petitioner for more than two years prior to such payment, resulting in a loss to the petitioner of $984.38.

The petitioner in 1928 contributed the sum of $25 to the Citizens League of Cleveland.

In relation to the first issue the parties agree that the Liberty bonds were capital assets, but the petitioner contends that the loss sustained by him upon the payment of the bonds at their maturity was an ordinary loss, while the respondent contends that it was a capital loss within the provisions of section 101 of the Revenue Act of 1928. That section provides in part as follows:

(e) Definitions. — For the purposes of this title—
H: ‡ ‡ ^
(2) “ Capital loss ” means deductible loss resulting from the sale or exchange of capital assets.

The respondent relies on Henry P. Werner, 15 B. T. A. 482, where the Board held that gain realized when certain bonds were called and paid prior to maturity was a capital gain under provisions of law identical with those here under consideration.

Prior to the Werner case the Commissioner’s interpretation of section 206 of the Revenue Act of 1921 had read, “ when an obligation matures it is neither sold nor exchanged. Any taxable profit derived upon maturity of a non-interest bearing obligation is, therefore, not ‘ capital gain ’ derived from the sale or exchange of capital assets and section 206 does not apply.” (I. T. 1637.) After the promulgation of the Werner case the Commissioner, in I. T. 2488, revoked I. T. 1637 and provided, “ the net gain from bonds held for more than two years, whether received as the result of the maturity of the bonds or as the result of their redemption before maturity may, at the option of a taxpayer other than a corporation, be taxed under the provisions of section 206 of the Revenue Act of 1921.” The ruling was made applicable also to the provisions of the Revenue Acts of 1924, 1926 and 1928.

The Board, in Henry P. Werner, supra, held that the redemption of the bonds prior to maturity constituted a sale or exchange within the meaning of section 206 of the Revenue Act of 1921. This holding was predicated on the conclusion that such a redemption of bonds “ was in effect a compulsory sale thereof.” In the consideration of the matter the opinion indicates that resort was had to the Congressional Committee’s reports, in which it was stated that the provision was intended to apply to the “sale or other disposition of capital assets ” and we thereupon observed that “ certainly the transaction before us comes within these broad terms.”

On further consideration we are of the opinion that the Board erred in its holding in Henry P. Werner, supra. It is elemental that Avhere a statute is clear and unambiguous in its terms and provisions resort should not be had to legislative history to determine the limits of its compass. The statute in question is so simple in construction and so clear in meaning that it justifies no resort to the Congressional Committee’s'reports as an aid in the interpretation thereof.

The words “ sale or exchange ” are ordinary words of well established meaning. Taken in their context they are susceptible of no misconstruction. Payment of the amounts specified in the bonds, either at maturity or pursuant to an authorized call prior to maturity, is not a “ sale or exchange ” of such bonds. It is merely the payment of an obligation according to its fixed terms. For these reasons we believe the decision in Henry P. Werner, supra, was erroneous and it is accordingly overruled.

In the instant case there was neither a “ sale ” nor an “ exchange ” of a capital asset when the Liberty bonds were paid at maturity. There was the satisfaction of an obligation of the United States by payment. Loss incurred or gain realized in such a transaction is not a capital loss or a capital gain under the definition found in the statute.

Following the same thought further we are of the opinion that I. T. 1687 correctly interpreted section 206 of the Revenue Act of 1921 and corresponding provisions of the later acts and that I. T. 2488, which went even further than the Werner case, is an erroneous interpretation.

The second issue is whether or not a contribution made by the petitioner to the Citizens League of Cleveland is deductible from gross income.

The constitution of the Citizens League of Cleveland, which was introduced in evidence at the hearing, states the objects of the organization as follows:

To promote businesslike, honest and efficient conduct of local government;
To investigate the administration of local offices and the operation of local laws;
To collect and disseminate information relative to local and state government and the conduct of public officials;
To induce citizens to take a more active interest in the affairs of government;
To encourage competent men and women to stand for public office; and to support wholesome leadership in public affairs.

No part of the net earnings of the League inure to the benefit of any private stockholder or individual. In carrying out its objects the League made investigations and researches with respect to civic, social and economic problems, disseminating the results of the investigations among its contributors and the public. The League sent bulletins containing the results of its investigations to all its contributors and published them in the newspapers of Cleveland, sometimes as news and sometimes as paid advertisements. The League investigated candidates for office and classified such candidates as “ preferred ” or “ qualified ” or “ not recommended.” The League, when it was considered desirable, advocated the amendment of existing laws and its agents presented its recommendations in that respect to the proper Legislative body.

Section 23 of the Revenue Act of 1928 reads in part as follows:

In computing net income there shall be allowed as deductions:
*******
(n) Charitable and, other contributions. — In the case of an individual, contributions or gifts made wijthin the taxable year to or for the use of:
* * * * * * , *
(2) Any corporation or trust, or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual.

The statute grants the right of deduction of a contribution in a case where a cprporation is “ organized and operated exclusively for * * * educational purposes.” Though the statute employs no words which are not in common use, the drawing of the precise line of demarcation between activities which are exclusively educational and those which are not is a difficult task. The formulation of a self-executing definition of the word “ educational,” one patently applicable in all instances, is perhaps impossible.

The Circuit Court of Appeals for the Second Circuit, in Weyl v. Commissioner, 48 Fed. (2d) 811, observes that it is clear that * * * Congress did not intend to use the word ‘ educational ’ in the statute in any exceptional sense but [in] its plain ordinary meaning * * The court quoted with apparent approval a dictionary definition which rejected the older concept of education as limited to instruction and adopted one which embraces all forms of human experience, thereupon approving the deduction of a contribution to the League for Industrial Democracy, which “makes researches, gives lectures, holds debates and discussions, promoted by writing pamphlets, books and helping to distribute them, giving information concerning economic and social problems.”

The same court, in Leubscher v. Commissioner, 54 Fed. (2d) 998 (affirming 21 B. T. A. 1022), denied the deduction of a contribution to a club organized “to advocate the Henry George doctrine” and promote social intercourse “ among single tax people.” Here the court pointed to the accepted definition of the word “ advocate,” which reads, “ to plead in favor of, to defend by argument before a tribunal or the public, to support, vindicate or recommend publicly.” In the same case the court approved the deduction of a legacy to a foundation the money to be used in teaching, expounding and propagating the ideas of Henry George. The court observed “ the money was to be used for teaching, expounding and propagating, not for seeking the passage of legislation.”

In an earlier case, Slee v. Commissioner, 42 Fed. (2d) 184 (affirming 15 B. T. A. 710), the same court stated: “Political agitation as such is outside the statute, however innocent the aim * * *. Controversies of that sort must be conducted without public subvention * * *. Nevertheless there are many charitable, literary and scientific ventures that as an incident to their success require changes in the law. * * *. All such activities [instances cited] are mediate to the primary purpose, and would not, we should think, unclass the promoters. The agitation is ancillary to the end in chief, which remains the exclusive purpose of the association.”

Education in its proper sense is not the blind acceptance of fixed concepts. It implies the idea, of growth. Nor, as we view it, is it essential, in order to constitute an educational purpose, that the subject of interest be free from controversy. Indeed, it is possible that education often thrives best in an atmosphere of controversy.

It is difficult to conceive a field more subject to controversy than that of electoral and municipal reform. Every candidate who oilers himself has his enthusiastic friends and supporters who honestly think their candidate the best fitted for the office sought. Every philosophy and theory of government has its protagonists and attracts its followers. Yet we would not be heard to say that there may not be organizations exclusively devoted to the purposes of education in the electoral and municipal field. See Charles W. Dahlinger, 20 B. T. A. 176; affd., 51 Fed. (2d) 662; certiorari denied, 284 U. S. 673. Nor would we say that the popularity of a cause or the soundness of the philosophy of government proposed are proper tests of educational purpose.

In the instant case the members of the League would perhaps paraphrase the purpose of the League as “the bringing about of better local government and the election of better fitted men to office.” But in the very statement they assume the soundness of their conclusions and the accuracy of their judgment of fitness. Furthermore, they impute that those not in agreement with the League are mistaken in their philosophy and unsound in their judgment. "Any organization such as that under consideration is obviously partisan in the broad sense of that term. It has its own concept of what constitutes good government and its own criteria by which to judge candidates for office, and it suggests its conclusions to others. To this extent it is an advocate. And though advocacy may be but a natural expression of sincerity of belief, it also tends to indicate the point at which education ends and, in this case, political activity begins.

On the facts before us we are not convinced that the Citizens League of Cleveland was organized and operated exclusively for educational purposes. The classification of candidates and the pub^ lishing as paid advertisements of such classification went beyond the education of the public. The obvious purpose of such advertisements was to promote the election of “ preferred ” candidates. This / was a political activity, however laudable the aim in the opinion ojj the members of the League. Similarly, the League presented its') conclusions and, by proper inference, it recommended actions to the / legislative authority. Here again it assumed the role of an advocate j in political matters.

We conclude that a contribution to the League is not a deductible contribution under the statute. Herbert E. Fales, 9 B. T. A. 828; Joseph M. Price, 12 B. T. A. 1186, and cases above cited. The facts do not bring the case within the limits of I. T. 2654, promulgated by the respondent November 7, 1932, and cited by the petitioner.

It is stipulated, with relation to the issues in this proceeding which are not herein discussed but which were settled by stipulation, that the sum of $386.47 is to be added to the petitioner’s capital net gain as computed by the respondent and that the sum of $946.98 is to be deducted from the petitioner’s ordinary income as shown in the notice of deficiency herein involved.

Reviewed by the Board.

Decision will be entered wider Rule 50.


author: Smith:

text:
    J. T. Owens, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. J. T. Owens, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 63149, 63150.
    Promulgated December 29, 1932.

      Percy W. PMIUps, Esq., and Richard B. Barber, Esq., for the petitioners.

      B. M. Goon, Esq., and F. 8. Gettle, Esq., for the respondent.
   OPINION.

Smith:

These proceedings, consolidated for hearing, are for the redetermination of deficiencies in income tax asserted for 1929 in the amount of $552.66 in the case of each petitioner.

The petitioners are husband and wife, who during the taxable year 1929 were residents of the State of Texas. They filed separate income tax returns for 1929, each reporting one-half of the community income. In 1929 the petitioners owned 2,165 shares of stock of the North Texas National Bank of Dallas, Texas, which stock had been acquired by J. T. Owens in May, 1925, at the time of the organization of said bank, at a cost of $51,960.

On October 14, 1929, the North Texas National Bank of Dallas and the Republic National Bank & Trust Company of Dallas entered into the following “Agreement of Consolidation ” and “Agreement to Consolidate ”:

Agreement of Consolidation
Be it resolved by the Board of Directors of the Republic National Bank & Trust Company of Dallas, Texas, that in pursuance of a resolution passed by the Board of Directors of this Bank on the 14th day of October, 1929, the officers have submitted to the Board the following contracts and terms of consolidation concluded by them with the officers of the North Texas National Bank to be submitted to the Board of Directors of the several banks for their consideration and action:
This agreement made between the Republic National Bank and Trust Co., of Dallas, Texas, and the North Texas National Bank, Dallas, Texas, each located in Dallas, Dallas County, Texas, and each acting pursuant to a resolution of its board of directors and by a majority of said boards, pursuant to the authority given by and in accordance with the provisions of an act of the Congress of
the United States entitled “An act to provide for the consolidation of national banking associations,” approved on the 7th day of November, 1918, witnesseth as follows:
(1) Republic National Bank and Trust Company, of Dallas, hereafter referred to as the party of the first part, and the North Texas National Bank, Dallas, Texas, hereafter referred to as the party of the second part, are hereby consolidated under the charter of the first named association as hereby modified.
(2) The name of the consolidated association shall be “Republic National Bank & Trust Company, of Dallas.”
(3) The amount of the capital stock of the consolidated association shall be four million (4,000,000.00) dollars, divided into two hundred thousand (200,000) shares of twenty dollars ($20.00) each, subject to the right to change the amount of said capital hereafter as is now or shall hereafter be authorized by law. On the date of consolidation its surplus shall be-said capital, surplus and undivided profits at the date of consolidation shall then aggregate -. Of this capital one hundred seventy-five thousand (175,000) shares shall be allotted to the present shareholders of the Republic National Bank and Trust Company of Dallas, being one share for each share now held by them, and twenty-five thousand (25,000) shares shall be alloted to the present shareholders of the North Texas National Bank, Dallas, being one-half (%) share for each share now held by them. All of the assets of each association, whether ledger or nonledger, shall become the property of the consolidated association upon the effective date of consolidation, which consolidated association assumes all the liabilities of each association of said date.
(4) The board of directors of the consolidated bank shall consist of not less than five nor more than one hundred shareholders, the exact number of directors and individuals serving as such for the remainder of the year to be determined by the stockholders of the consolidated bank at their special meeting to be held on November 14, 1929.
(5) This consolidated [consolidation] shall become effective when it shall have been ratified and confirmed by the affirmative vote of the shareholders of each association owning at least two-thirds (%) of its capital stock outstanding, at a meeting to be held pursuant to a call by the directors heretofore made, and shall have been approved by the Comptroller of the Currency of the United States.
Witness the signatures and seals of said associations, this the 14th day of October, 1929, each hereunto set by the President and attested by its Cashier, pursuant to a resolution of its board of directors, acting by a majority thereof, and witness the signatures hereto of a majority of each of said boards of directors.
[Signatures omitted.]
Agreement to Consolidate
THE STATE OK TEXAS
COUNTY OF DALLAS
This agreement, made and entered into on this the 14th day of October, 1929, by and between the Republic National Bank and Trust Co., of Dallas, a corporation. organized under the laws of the United States, and hereinafter referred to as the party of the first part, and the North Texas National Bank, of Dallas, a corporation organized under the laws of the United States, hereinafter referred to as the party of the second part, each of said corporations being located in Dallas, Dallas County, Texas, each acting through its duly authorized officers and in pursuance of resolutions adopted by their respective board of directors, witnesseth—
Whereas, it is the desire of each of the parties hereto to consolidate the business and operations of the said corporations, and for the purpose of expediting, conserving, and protecting the interests of each of the parties while such consolidation is being consummated in accordance with the provisions of an act of the Congress of the United States entitled “ An act to provide for the consolidation of National Banking Associations,” approved on the 7th day of November, 1918, it is mutually agreed and contracted by and between the said parties as follows:
In consideration of the premises and covenants herein made, party of the second part does hereby sell, assign, transfer, set over and deliver to party of the first part, such of its property and assets, consisting of cash on hand and in its vaults, balances with correspondents, notes and other evidences of indebtedness, bonds, warrants and securities, or any other property of whatever kind or character and wherever situated and however evidenced, as will protect and compensate party of the first part for the liabilities herein and hereby assumed by it, and party of the second part 'does hereby agree to properly transfer such assets by endorsement, or by execution of any instrument necessary to make such conveyance effective; and
Whereas* in consideration of the transfer by the party of the second part of the assets above named, party of the first part has assumed and does hereby assume all of the liabilities of the party of the second part at the time of consummation of this agreement, save and except the liability of party of the second part to its shareholders on account of their capital stock investment; and
Whereas, after the acquisition of the assets and assumption of liabilities of party of the second part by party of the first part, the party of the second part will have remaining the liability due its shareholders on its capital stock, surplus and undivided profits, to offset which it will have a like amount of assets of various kinds and character, which liability, together with all other liabilities, shall and will be assumed by party of the first part, and which assets it is agreed shall and will be acquired by party of the first part on a basis to net the shareholders of the party of the second 'part the sum of forty-seven and 50-100ths dollars ($47.50) cash .per share for each and every share of stock owned by such shareholders in said party of the second part, but it is expressly understood and agreed that the shareholders of the party of the second part on or before November 25, 1929, shall and do have the right and privilege of subscribing to and purchasing the twenty-five thousand shares (25,000) (allotted to them in the consolidation contract) of the par value of twenty ($20.00) each, of the party of the first part, on a basis of sixty-five ($65.00) dollars per share, such right and privilege being allocated to said shareholders of party of the second part in paragraph three (3) of the consolidation agreement this day entered into by and between the respective parties hereto, which consolidation agreement is hereby referred to for further particulars, and which agreement of consolidation has been approved by a majority of the board of directors of each party, to the fulfillment and completion of which agreement the parties hereto, as well as the board of directors, thereof, obligate and pledge themselves to carry out by advertising the contemplated action, and submitting it to their respective shareholders
as speedily as possible, within the provisions of the laws governing consolidations of national banking associations.
In testimony whereof the parties hereto have caused these presents to be signed by their respective Presidents, and attested by their respective Cashiers, and their seals to be affixed hereto, this the 14th day of October, 1929.
[Signatures omitted.]

These agreements were subsequently ratified and approved in 1929 by the respective stockholders of the two banks.

Pursuant to the above agreements, the petitioners within the taxable year 1929 exchanged their stock in the North Texas National Bank of Dallas for 1,082 shares of the new stock of the Republic National Bank & Trust Company of Dallas, which at the time the petitioners received it had a value of $65 per share, and for $32,-507.50 in cash.

The North Texas National Bank of Dallas had on hand, at the time of the merger in 1929, surplus and undivided profits amounting to $6,086 per share, which had been earned by the bank since the time of its incorporation in May, 1925.

Respondent determined that the cash received from the exchange of capital stock was taxable as ordinary income at both normal and surtax rates. One-half of the $32,507.50 total cash received, or $16,253.75, was included by the respondent in each petitioner’s taxable income in the determination of the deficiencies.

The question presented by these proceedings is whether or not, when there has been a consolidation of banks and an exchange of stock for stock and cash, as in these proceedings, the cash, to the extent that it represents a distribution by the merging' bank to its stockholders of undistributed surplus and profits, is in effect a distribution of a dividend within the provisions of section 112 (c) (2) of the Revenue Act of 1928, so that it is taxable only at surtax rates rather than at both normal and surtax rates.

The Revenue Act of 1928 reads, so far as material, as follows:

SEC. 112. RECOGNITION OE GAIN OR LOSS.
(a) General rule. — Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.
* * * * * * *
(e) Gain from exchanges not solely in Mnd. — •
(1) If an exchange would be within the provisions of subsection (b) (1), (2), (3), or (5) of this section if it were not for the fact that the property received in exchange consists not only of property permitted by such pararaph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.

T

(2) If a distribution made in pursuance of a plan of reorganization is within the provisions of paragraph (1) of this subsection but has the effect of the distribution of a taxable dividend, then there shall be taxed as a dividend to each distributee such an amount of the gain recognized under paragraph (1) as is not in excess of his ratable share of the undistributed earnings and profits of the corporation accumulated after February 28, 1913. The remainder, if any, of the gain recognized under paragraph (1) shall be taxed as a gain from the exchange of property.
****** *
(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) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (O) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.
(2) The term “a party to a reorganization” includes a corporation resulting from a reorganization and includes both corporations in the case of an acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation.

Article 575 of Regulations 74, promulgated under the provisions of the Revenue Act of 1928, reads in part as follows:

Art. 575. Exchanges in reorganizations for siocJo or securities and, other property or money. — If stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged for stock or securities in such corporation or in another corporation a party to the reorganization and other property or money, the gain, if any, to the recipient will be recognized in an amount not in excess of the sum of the money and the fair market value of the other property. No loss from such an exchange will be recognized. (See section 113 (e).) If a distribution of property or money in the course of a reorganization is otherwise within the provisions of this paragraph, but has the effect of the distribution of a taxable dividend, there shall be taxed to each distributee (1) as a dividend, such an amount of the gain recognized under this paragraph as is not in excess of the distributee’s ratable share of the undistributed earnings and profits of the corporation accumulated after February 28, 1913, and (2) as a gain from the exchange of property, the remainder of the gain recognized under this paragraph.
V ***** *
Example (2): The X Corporation has a capital of $100,000 and earnings and profits of $50,000 accumulated since February 28, 1913. The X Corporation in 1928 transfers all its assets to the Y Corporation in exchange for the issuance of all of the stock of the Y Corporation and the payment of $50,000 in cash to the shareholders of the X Corporation. A, who owns one share of stock in the X Corporation, for which he paid $100, receives a share of stock in the Y Corporation worth $100 and in addition $50 in cash. A will be liable to the surtax on $50.

It is the contention of the petitioners that, inasmuch as the amount of cash received by them, in addition to shares of stock of the Republic National Bank & Trust Company of Dallas, was in excess of their pro rata shares of the surplus and undivided profits of the North Texas National Bank of Dallas, such portion of the cash received as represents their pro rata shares of the surplus and undivided profits is taxable at surtax rates only and not at both normal and surtax rates. In making this contention they rely upon the decision of the Board in Gedrge Woodward, 23 B. T. A. 1259, wherein we held that where, upon reorganization, merger and consolidation of one corporation with another, a stockholder in the absorbed corporation receives one-half share of stock and $45 in cash for each share of stock held in the absorbed corporation, such cash payment being substantially equal to the stockholder’s pro rata share in the surplus of said corporation, the cash payment has the effect of a distribution of a taxable dividend under section 203 (d) (2) of the Revenue Act of 1928. The section of the 1926 Act above referred to corresponds exactly with section 112 (c) (2) of the Revenue Act of 1928.

In the course of the Woodward opinion we stated:

* * * In our opinion the provisions of section 203 (d) (2) are not concerned with the mechanism of the distribution made in pursuance of a plan of reorganization or with the agency through which the distribution was effected. The question to be answered under section 203 (d) (2) is whether or not, in practical result, the distribution made in pursuance of the plan of reorganization “ has the effect of a distribution of a taxable dividend.”

The respondent contends on brief that the facts which obtain in the present proceedings “ show conclusively that it was not the intention that the stockholders of the merging bank were to receive their pro rata part of the surplus and undivided profits in cash and thus have the effect of the distribution of a taxable dividend.” He further contends that the decision in the Woodward case is not in point in these proceedings, for the reason that in that case the cash received approximated the shareholder’s pro rata share in the surplus of the merging corporation, whereas in the present proceedings the cash payment received by the petitioners was more than twice the amount of their pro rata share of the surplus and undivided profits of the North Texas National Bank of Dallas; further, that under the terms of the agreement to consolidate petitioners had an option to deceive a net sum of $47.50 per share of stock exchanged, or part cash and part stock, on the basis of $65 per share in the continuing corporation for the shares exchanged; and that from this fact it follows that under the terms of the agreement all shareholders would not participate alike in the reorganization and that thus the effect of the distribution as a taxable dividend was clearly wiped out.

We are of the opinion that the Woodward case is in point in these proceedings. For reasons stated in that opinion, it was not the intention of Congress to subject to the normal tax the earnings of a merged corporation which were in fact distributed to the stockholders of such corporation on a reorganization. No argument is made by the respondent that the definition of a reorganization, contained in section 112 (i) (1) of the Revenue Act of 1928, does not cover the situation here presented. We think it clearly does. We are furthermore of the opinion that the mere fact that the petitioners had the option to demand all cash for their shares of stock in the merged corporation rather than a certain number of shares plus an amount of cash in the continuing corporation does not differentiate these proceedings from the Woodward case. The portions of the cash received representing the petitioners’ pro rata portions of the surplus and undivided profits of the North Texas National Bank of Dallas are taxable at surtax rates only.

Judgment will be entered under Rule 50.


author: McMahon :

text:
    Marjorie G. Randall, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 38971.
    Promulgated December 30, 1932.

      Richard A. Tyrrell, Esq., for the petitioner.

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

McMahon :

The question here presented is whether the petitioner is entitled to deduct from gross income of 1924 the amount of a loss sustained upon the sale of certain residential property in Milwaukee. Section 214 of the Revenue Act of 1924 provides in part:

Sec. 214. (a) In computing net income there shall be allowed as deductions:
* * * * * * *
(5) Losses sustained during the taxable year, and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business; * * *

In Henry J. Gordon, 12 B. T. A. 1191, we stated:

A review of the cases bearing upon this question reveals to us that where a taxpayer acquires property with the intention of selling it at a profit, even though he may have resided thereon, if the predominating factor in its selection was the prospect of future profits, he is entitled to any loss sustained upon the sale thereof. See Helen Converse Thorpe, 3 B. T. A. 1006; Henry DeFord, 7 B. T. A. 630; Sidney W. Sinsheimer, 7 B. T. A. 1099; Walter J. Ball et al., Executors, 8 B. T. A. 180; and John N. Hughes, 8 B. T. A. 206.

To the same effect are John N. Hughes, 8 B. T. A. 206, and W. W. Holloway, Administrator, 19 B. T. A. 378.

In the instant proceeding we are satisfied from the evidence that the predominating factor in the petitioner’s purchase of the property in question was the prospect of profit. At the time of such purchase petitioner and her husband had definitely made up their minds to change their permanent residence from the City of Milwaukee to the Waukesha County Lake region. The property in question was represented to petitioner as being a very good bargain and she expected to make a profit from the transaction. In purchasing this property it was not her purpose, primarily, to use it as her residence. Petitioner only occupied the property during a short period each year, and for six months during 1922 she rented the property to C. H. Jackson.

The cases cited by respondent are not governing. In those cases the residential property purchased was not primarily, for the purpose of pecuniary profit. We hold that the petitioner is entitled to a deduction of $12,881.70, which is the difference between the purchase price and the selling price of the property.

The respondent contends that in computing the deductible loss to which the petitioner is entitled there must be taken into account the depreciation sustained upon the property during the time it was owned by the petitioner. However, we have held in Deposit Trust & Savings Bank, Executor, 11 B. T. A. 706, and J. A. Talbot, 23 B. T. A. 792, that in determining the gain or loss from the sale of property the basis should not be reduced by depreciation where the taxpayer was not privileged, under the statute, to take depreciation deductions thereon in computing net income during the time the property was held by the taxpayer.

During the years that petitioner owned this property the only provision of the revenue acts allowing deductions for depreciation was section 214 (a) (8) of the Revenue Acts of 1918, 1921 and 1924, which allowed the deduction of “ a reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence * * It is our opinion that the petitioner during the years which she held this property would not have been entitled to take depreciation deductions upon the property in question, for the reason that such property was not property used in a “ trade or business.” From the evidence it appears that the purchase in question was an isolated transaction. J. A. Talbot, supra. Consequently, in computing the loss which petitioner is entitled to deduct on account of the sale of the property in question the basis is not to be reduced by depreciation.

.Judgment will be entered under Bule 50.


author: Marquette :

text:
    Community Bond and Mortgage Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43784.
    Promulgated December 30, 1932.

      Dean Hill Stanley, Esq., and Alfred O. Frodel, Esq., for the petitioner.

      B. W. Wilson, Esq., and 8. B. Anderson, Esq., for the respondent.
   OPINION.

Marquette :

The petitioner rests its case upon the proposition that the $30,000 paid for the capital stock of Burns & Steta, Inc., is deductible either as an ordinary and necessary business expense, or as a loss. The respondent contends that the payment was a capital expenditure and not deductible.

The capital stock of Burns & Steta, Inc., had no value after it was purchased by the petitioner. There were no assets back of it, and, forthwith, the issuing corporation was dissolved. The preliminary certificate of dissolution was filed in December, 1926, and, in our opinion, the stock became worthless at that time, even though the final formalities of dissolution were not completed until 1927.

We conclude, therefore, that the cost of the stock in question resulted in a deductible loss for the year 1926. Any consequential net loss should be allowed as a deduction in computing the petitioner’s net income for the succeeding taxable year.

Decision will be entered wider Bule 50.


author: Maequette:

text:
    Salt Lake Hardware Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 46911, 56901.
    Promulgated December 30, 1932.

      Paul E. Shorb, Esq., and Harold 0. Anderson, O. P. A., for the petitioner.

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

Maequette:

The petitioner contends that the payment to it of $60,000 in 1926 and of $40,000 in 1927, in redemption of preferred stock issued as dividends, was “ essentially equivalent to the distribution of taxable dividends ” under section 201 (g) of the Revenue Act of 1926. If that contention is correct, then such dividends are not taxable income to the petitioner by virtue of section 234 (a) (6) of the act.

The respondent takes the position that, as dividends received by a corporation are not taxable as such, therefore the term “taxable dividend ” as used in section 201 (g) was not intended to apply to corporate stockholders. Respondent further contends that the pay-merits in question constitute “ amounts distributed in partial liquidation ” under section 201 (c) and (b) of the Revenue Act of 1926.

The statutes in question, so far as here applicable, read as follows:

Sec. 201. (c) * * * amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 202 * * *.
See. 201. (h) 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.
Sec. 201. (g) If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or h> part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend. * * *

Not all dividend distributions come within the purview of the section quoted. It applies only to “ taxable dividends,” that is, such dividends as are subject to income tax. It can not apply in the case before us, for the reason that both petitioner and the Strevell-Paterson Hardware Company are domestic corporations and dividends received by one from the other are not taxable, under section 234 (a) (6) of the Revenue Act of 1926.

Petitioner argues that, as there was never any intention to liquidate the Strevell-Paterson Company, payments by that company in redemption of part of its stock can not be considered as a partial liquidation under section 201 (c) and (h), supra. That argument can have persuasive force only by using the word “ liquidation ” in the sense of winding up the affairs of the company. Admittedly, that is the usual meaning given to the word. But here we can not ignore the fact that Congress has established a different meaning for income tax purposes. As set forth in the statute, section 201, supra, a partial liquidation takes place whenever a corporation distributes money or assets in complete cancellation or redemption of a part of its capital stock. No particular portion is mentioned, nor is the word “ part ” in any way limited. Whether the amount so redeemed be all of a series or class, or only a part thereof, apparently makes no difference under the definition adopted by Congress. Subdivision (h) is supplemental to subdivision (c) of section 201, which provides that amounts so distributed are to be considered as payments in exchange for the stock, upon which gain or loss to the stockholder is to be determined, It is our opinion that the payments here involved constitute distributions in partial liquidation within the meaning of the Eevenue Act of 1926. What, then, is the proper basis upon which to determine the amount of gain or loss resulting from those transactions ?

Section 204 (a) of the Eevenue Act of 1926 provides:

The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1918, shall be the cost of such property, * * *

Then follow a number of exceptions, none of which apply here. Subdivision (b) of the section reads:

The basis for determining the gain or loss from the sale or other disposition of property acquired before March 1, 1918, shall be (A) the cost of such property * * * or (B) the fair market value of such property as of March 1, 1918, whichever is greater. * * *

The parties agree that the fair market value as of March 1,1913, is the proper basis for determining gain or loss. Eespondent has taken, the book value of the common stock as of March 1,1913, as being the fair market value on that date. Although good will does not appear on the books as an asset item, respondent has considered it in his computations to the extent of offsetting probable shrinkage of asset values in the event of dissolution. Petitioner does not challenge the accuracy of the computations, but insists that the method is wrong and that Strevell-Paterson Company preferred stock, if issued March 1, 1913, would have been worth par on the market. To support that contention several witnesses testified that in their opinions the preferred stock would have been worth par if issued March 1, 1913. All of those witnesses, except two, are or have been officers of either the petitioner or the Strevell-Paterson Company. The other two were experienced bankers in Salt Lake City, but their opinions were in response to hypothetical questions which did not include any detail of assets nor of accounts respecting their fluid condition. With all due respect to their opinions, we do not consider them sufficient, under the circumstances, to overthrow the presumption that respondent’s determination is correct. But we are not impressed with his argument that the basic value of the preferred stock should be further depressed by using the surplus of December 31, 1916, and of December 31, 1919, to increase the value of the common stock. We therefore sustain that determination as set forth in the deficiency notices.

Eeviewed by the Board.

Decision will be entered for the respondent.


author: Black: Trammell :

text:
    Watab Paper Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 24773, 28082, 38685, 41733, 46076, 51387.
    Promulgated December 30, 1932.

      Richard 8. Doyle, Esq., and Charles D. Hamel, Esq., for the petitioner.

      Mason B. Leming, Esq., for the respondent.
   OPINION.

Invested Capital.

Black:

Petitioner’s first assignment of error is that respondent erred in computing petitioner’s invested capital for the period June 4, 1920, to December 31, 1920, and for the calendar year 1921, by failing and refusing to include in invested capital the actual value of the property paid in for stock or shares, but on the contrary gave effect to the limitations prescribed in section 331 of the Revenue Acts of 1918 to 1921, and computed petitioner’s invested capital on the basis of costs to the old company, the Watab Pulp & Paper Company, of assets transferred by it to petitioner. We think this assignment of error must be sustained. In our judgment, under the facts set out in our findings of fact, section 331 of the Revenue Acts of 1918 and 1921, printed in the margin, is not applicable in this proceeding. We think the situation which we have before us in the instant case is similar in many features to the facts in Leffingwell Rancho Co., 22 B. T. A. 1303, in which we held that section 331 was not applicable. In the Leffingwell Rancho Go. case, the contract which the Leffingwell Rancho Company had with the East Whittier Rancho, looking to the organization of a new company to be known as Leffingwell Rancho Company, and providing how and to whom the capital stock of the new company should be issued, was not essentially different in principle to the contract which Town had in the instant case with the Rational City Company, by which the Rational City Company advanced Town the money to purchase all the stock of the old company and by which Town agreed to organize a new company to acquire the assets of the old company, and agreed that all the first preferred stock and part of the common stock of the new company should be issued to the Rational City Company.

Also, the several other contracts made by Town in acquiring the stock of the old company did not impair his ownership of the stock of the old company when finally acquired on March 15, 1920. As an upshot of these several steps detailed in our findings of fact, Town became the owner on March 15, 1920, of all the stock of the old company. It is true he had to place the stock thus acquired as collateral with the National City Company to secure the payment of the money which the National City Company advanced him to buy the stock, but that did not constitute the National City Company a stockholder of the old company. The National City Company was never at any time a stockholder in the old company, as its contract rights related exclusively to stock in the new company, which it was seeking to acquire and this was issued to it promptly after the reorganization and thereupon Town’s note was canceled. The pledge of the stock in the old company as collateral to Town’s note did not deprive Town of his rights as a stockholder as to voting or otherwise. Citrus Soap Co., 14 B. T. A. 1155; Luton Mining Co., 12 B. T. A. 720.

Town, who owned all the stock of the old company when the transfer of the assets from the old company to the new company took place, owned only 22 per cent of the voting stock of the new company and none of the preferred stock when the transaction was completed, and hence we hold that under these circumstances section 331 does not apply and petitioner is entitled to have its invested capital computed under the provisions of section 326 of the Revenue Acts of 1918 and 1921, without reference to the limitations prescribed by section 331 of said acts. H. L. Neuman Co., 16 B. T. A. 533; Ground Gripper Shoe Co., 21 B. T. A. 646.

Respondent, as authorities for his contention that section 331 is applicable, cites Shipowners & Merchants Tugboat Co., 4 B. T. A. 403, and W. A. Sheaffer Pen Co,., 9 B. T. A. 842; affd., 41 Fed. (2d) 403. We think these cases are distinguishable on their facts from the instant case. In the Shipowners & Tugboat Co. case, the evidence showed that the common stock of the old company was bought up by Robert J. McGabie, not for himself, but for the associates whom he represented, and the stock which was issued in his name was held for the account of others. Therefore, we held that when the stock of the n,ew company was distributed to these others for whom McGabie held the stock of the old company, in the same proportion as was their beneficial interest in the stock of the old company, section 331 applied. In the instant case there is no evidence that Town was buying the common stock of the old company for the account of others. It is true that the Tribune Company, John C. Shaffer, and Carroll Shaffer had certain claims against Town which were to be satisfied with stock of the new company, upon the organization of the new company, but it seems to us that these claims did not impair Town’s ownership of the common stock of the old company when he finally acquired all of it in March 15, 1920, by paying off in full John 0. Shaffer’s notes with money which had been advanced him by the National City Company. These transactions did not make Town a mere nominee holder of the common stock of the old company such as was Robert J. McGabie in the Shipowners <& Merchants Tugboat Go. case. In the instant case John C. Shaffer completely assigned his rights in the stock of the old company to Town, and no longer held any claim on it. His claim was for reimbursement of the money which he had expended in the transaction, by having issued to him second preferred stock in the refinanced company.

In the Sheaffer Pen Co. case, supra, all the common stock at first issued was issued to the stockholders of the old company in proportion to their holdings of stock in the old company, and they were in complete control of the new company. Under such circumstances, we held that section 3B1 was applicable. Later on, other common stock Avas issued and sold to new stockholders, and we held that this later issued stock had nothing to do with determining whether or not section 331 was applicable. We have no such facts present in the instant case. For the reasons above stated, we think the Shipowners & Merchants Tugboat Co. and Sheaffer Pen Co. cases are not applicable, and on the issue of the applicability of section 331, we hold for petitioner.

Depreciation.

Petitioner’s next contention is that the basis for determining gain or loss, depreciation, exhaustion, and obsolescence of the properties acquired by petitioner on June 4, 1920, from the old company, is the fair market value thereof on that date and these allowances are not subject to the limitations prescribed by section 204 (a) (7) of the Revenue Acts of 1924 and 1926, and section 113 (a) (7) of the Revenue Act of 1928, and that respondent erred in using as a basis for computing depreciation, exhaustion and obsolescence, for the years 1924 and 1928, inclusive, the cost of such properties to the transferor corporation (old company). For the same reasons which Ave have already given as to why section 331 of the Revenue Acts of 1918 and 1921 is not applicable to the facts of this proceeding, we hold that section 204 (a) (7) of the Revenue Acts of 1924 and 1926, and section 113 (a) (7) of the Revenue Act of 1928, are not applicable. The latter provisions have to do with the determination of gains and losses, and depreciation, exhaustion -and obsolescence, whereas section 331 has to do with the determination of invested capital, but the language of the sections is very much the same, except as to the percentage of ownership of stock required to determine the question of control. In section 331, the amount of ownership of interest or control required to determine the applicability of the section is 50 per cent or more, whereas in the latter acts, having to do with determination of gains or losses, depreciation, etc., the amount of ownership of stock required to determine control is 80 per cent or more.

On the issue as to the applicability of section 204 (a) (7) of the 1924 and 1926 Acts, and section 113 (a) (I) of the 1928 Act, in the matter of the determination of depreciation and obsolescence, we held for petitioner.

Petitioner does not complain of the values used by respondent in computing depreciation for the years 1920 to 1923, inclusive. In fact petitioner concedes that these values were higher than those claimed by petitioner in this proceeding, but petitioner contends that the rates of depreciation, exhaustion and obsolescence used by respondent in computing the allowance for depreciation in said years were much too low.

In our findings of fact we have determined what would be reasonable rates of depreciation to apply to the different classes of depre-ciable property which petitioner acquired from its predecessor, plus subsequent additions made thereto by petitioner. These rates of depreciation should be used by respondent in redetermining the deficiencies for each of the taxable years involved in this proceeding and the basis of cost used in figuring depreciation should be the fair market value, in this case the actual cash value as found by us, of depreciable property at the time it was acquired by petitioner, June 4, 1920, increased by the additions made by petitioner since the date of acquisition, concerning which additions there seems to be no controversy between petitioner and respondent.

Valuation of Good Will.

Petitioner contends for a valuation of good will and contracts transferred by the old company to the new company of $750,000 and that this should be included in invested capital as provided in section 326 of the applicable revenue act.

The old company carried nothing on its books for good will and contracts, but, after the old company transferred its assets to the new company, petitioner set up on its books $750,000 as representing the value of good will and contracts acquired from the old company. There is no specific rule for the determination of the value of good will. Each case must be considered and determined in the light of its own particular facts. Otis Steel Co., 6 B. T. A. 358.

We have given petitioner a liberal valuation of the tangible assets transfei’red to it by the old company in June, 1920, based upon the fact that the business which petitioner took over was a prosperous, going concern. The testimony as to the value of these assets at the time of transfer was largely based upon the fact that the business was a prosperous, going concern. No doubt if it had not been for this fact the valuations fixed by the witnesses would have been considerably lower. We feel that the valuations which we have fixed on the tangible assets include adequate allowance for good will acquired with them, and that the evidence does not justify üs in separately valuing good will and contracts, as petitioner contends. We hold against petitioner on this issue.

Tentaime Tax.

Petitioner complains that respondent erred in reducing invested capital for 1921 by the amount of $41,559.57 for tentative tax, and cites L. S. Ayers & Co., 1 B. T. A. 1135; Commissioner v. Pittsburg Knife & Forge Co., 30 Fed. (2d) 522; and Independent Aetna Sprinkler Co., 15 B. T. A. 521. Respondent concedes that his action in this respect was error, but alleges, however, that in the same deficiency letter he applied $42,962.65 of current earnings of that year to the retirement of the capital stock in the same year, thereby increasing invested capital to that extent out of surplus earned during the taxable year. Respondent alleges that this was error on his part in petitioner’s favor. Fairmont & Cleveland Coal Co., 12 B. T. A. 1296; National Tea Co., 17 B. T. A. 1222. Respondent alleges that the first error, above cited made against petitioner is more than offset by the one made in its favor, and that the net result is essentially correct and ought not to be disturbed. James P. Gossett, 22 B. T. A. 1279.

An examination of the record sustains the respondent in the above contention, and we hold against petitioner on this assignment of error.

Eibel Royalty Claim.

For several years both the old company and petitioner used on paper machine No. 1 certain pitched wire attachments which infringed patent rights of the Eibel Process Company. After litigation which established the rights of the patentee, petitioner made a settlement March 1, 1923, by which it paid $6,636.24 to the patentee; $4,348.91 of this was paid for infringement by the old company and the balance for infringement by petitioner. The latter amount was allowed by the respondent as a deduction for 1923, but the $4,348.91 was disallowed. The action of respondent in this respect is approved as the amount disallowed was a liability of the old company assumed by the petitioner in the purchase of assets, and was in the nature of a capital expenditure. Caldwell & Co., 26 B. T. A. 790.

Loss on Sale of Assets.

Petitioner in its return for 1925 claimed a loss of $3,113.10 on the sale of plant assets. Respondent disallowed $1,918.50 of this claim and allowed the balance, which action petitioner alleges was erroneous. The difference between the amount claimed by petitioner and that allowed by respondent arises from the difference in the cost basis used in computing the loss. Petitioner claims as cost the appraised or fair market value of the property on June 4, 1920, at the time conveyed to petitioner, and respondent the actual cost to the old company. JSTo evidence on this point was introduced other than petitioner’s income tax return for 1925, which is insufficient to set aside the determination which has been made by the respondent. Petitioner’s income tax return is a self-serving declaration and may not be accepted as proof of the loss, merely because it is claimed. Sheen v. Commissioner, 6 B. T. A. 114. The petitioner has not sustained its burden of proof in respect to the amount of loss claimed on this item. Bu/met v. Houston, 283 TJ. S. 223.

Reviewed by the Board.

Decision will be entered wader Bule 50.

Trammell :

I agree, with the exception of the exclusion of good will.

       Sec. 331. In the case of the reorganization, consolidation, or change of ownership of a trade or business, or change of ownership of property, after March 3, 1917, if an interest or control in such trade or business or property of 50 per centum or more remains in the same persons, or any of them, then no asset transferred or received from the previous owner shall, for the purpose of determining invested capital, be allowed a greater value than would have been allowed under this title in computing the invested capital of such previous owner, if such asset had not been so transferred or received.


text:
    Mary Colgate, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 61882.
    Promulgated December 30, 1932.

      Oarlyle E. Yates, Esq., for the petitioner.

      I. Graff, Esq., for the respondent.
   OPINION.

Marquette :

The first issue is the proper basis for computing gain realized upon the sale of stock in 1929. Petitioner received the stock in 1919 from her father’s estate upon the termination of a testamentary trust which had existed since 1904.

This identical question was before us in Ralph W. Harbison, 26 B. T. A. 896. There, as here, the Revenue Act of 1928 controlled. We there held that under section 113 (a) (5) of that act the proper basis for determining gain or loss was the fair market value of the property at the time of its distribution to the taxpayer after termination of the testamentary trust. We adhere to that decision. At the time petitioner received the stock here involved its fair market value was $160 per share and that valuation should be the basis for computing the gain derived when the stock was sold in 1929.

The second issue relates to the proper basis for computing allowable deductions for contributions. During the year 1929 petitioner made contributions amounting to $78,712.50 to organizations within the scope of section 23 (n) of the Revenue Act of 1928. She claimed and was allowed a deduction of $59,985 on account thereof. She elected to have her capital net gain of $684,384.64 taxed under the provisions of section 101 (a) of the Revenue Act of 1928, but now contends that her capital net gain should be included in net income when computing the deduction for contributions. Respondent urges that such computation must be based solely upon petitioner’s ordinary net' income, amounting to $314,469.11. If so computed the deduction allowable by statute of “ 15 per centum of the taxpayer’s net income as computed without benefit of this subsection” would be only $47,170.87. By his amended answer respondent contends that petitioner has taken a greater deduction than is permissible and that the excess amount of $12,814.63 should be added to income and the deficiency proportionately increased.

This question also was before us in Ralph W. Harbison, supra, and in Hallie D. Elkins, 24 B. T. A. 572. In the former we held that:

* * * when a taxpayer avails himself of benefits- of section 101 (a), he elects, in effect, to have his tax liability determined in two parts; first, upon the ordinary net income exclusive of his capital net gain, and, second, upon his capital net gain at the 12% per cent rate; the sum of the two constituting the amount of his tax. Obviously, therefore, the amount of this petitioner’s capital net gain should be excluded from the amount of his net income upon which to compute the 15 per cent deduction for contributions within the purview of section 23 (n).

In Hallie D. Elkins, supra, we followed the same principal under reversed conditions. There the taxpayer had sustained a capital net loss. Respondent excluded the loss from consideration in computing ordinary net income, but refused to exclude it in computing deductions for contributions. As a result he found that the taxpayer had a net income subject to tax, but had no net income upon which to compute deductions for contributions. We held that the ordinary net income as computed for taxation also constituted a basis for computing the deduction claimed by the taxpayer.

We perceive no distinction between those cases and the present proceeding. It is our judgment, therefore, that petitioner may deduct on account of contributions only $47,110.37, which is the statutory 15 per cent of her ordinary net income for the year 1929.

Decision will be entered under Rule 50.