text:
    Marie Minor Sanborn, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91533.
    Promulgated April 7, 1939.

      Charles E. Whittaker, Esq., and Henry N. Ess, Esq., for the petitioner.

      Carroll Walker, Esq., and Elizabeth B. Fegan, Esq., for the respondent.
   OPINION.

Opper :

Petitioner contends that she is not within the reach of respondent’s determination on the ground that the statute of limitations has run.

Her argument may be summarized as follows: First, the executors, having been discharged on March 31, 1930, had no further concern or authority with respect to any Federal tax matters, even though they thereafter, on April 8, 1930, signed and verified and on April 9, 1930, filed a Federal income tax return describing themselves as executors; second, tbe proceeding instituted by them on behalf of the estate (the original taxpayer) in 1932 was consequently a nullity for every purpose and, even though it continued to be litigated for approximately five years, should be regarded as never having occurred and as being ineffectual to suspend the operation of the statute of limitations; and, third, that the statute has accordingly run since it expired one year after two years after the filing of the return.

This position appears at first glance to be so extreme and fantastic as not to be capable of support. Upon closer examination it becomes, if possible, even less engaging, and it develops that not one but all three of petitioner’s contentions are untenable.

First, while it may be conceded for present purposes that the discharge of petitioners as executors terminated their powers under the law of the State of Missouri, it does not follow that for purposes of Federal taxation they were without standing, particularly that their authority with respect to the institution on behalf of the estate of a proceeding before the Board was terminated. As we said in William B. Weigel et al., Trustees, 34 B. T. A. 237, 240; aff'd., 96 Fed. (2d) 387 (C. C. A., 7th Cir.):

The notice of their discharge, which the executors gave to the Commissioner, is immaterial for present purposes. It did not serve to shorten the two-year period for assessment of the deficiency against the estate as provided in section 275 (a) of the Revenue Act of 1928. * * *. The discharge of executors after a final accounting does not serve to shorten the period for assessment of a deficiency against the estate, nor to extinguish the liability of the estate, for Federal income tax, even though the executors exercised due diligence in determining whether or not any such liability existed.

Moreover:

Irrespective of their previous discharge by the probate court, the executors could have used the deficiency notice as the basis for an appeal before the Board and the period of limitation would have been stayed during the pendency of a petition before us even though we lacked jurisdiction to redetermine the deficiency. * * * [Puget Sound, National Bank of Takoma, Washington et al., Trustees, 36 B. T. A. 386, 390.]

And entirely beyond this the provisions of the Revenue Act of 1928, section 312, make it clear that the power under the revenue act of a fiduciary to represent and take the place of the taxpayer, upon notice of a fiduciary relationship, does not terminate until contrary notice. Petitioner’s signature, verification, and filing of an income tax return entitled “Mrs. Marie M. Sanborn, Executrix, Estate of Dr. W. E. Minor, Deceased” and executed “Marie M. Sanborn, John A. Minor, Executors” clearly gives the first type of notice. It was given on April 9, 1930, after the discharge on which petitioner relies as terminating her authority and as far as the record shows nothing happened thereafter to change the situation until after the filing of the petition in 1932. Even though it be conceded, as petitioner contends, that the petition was notice to the Commissioner of the termination of such fiduciary responsibility, that notice could not have been brought to the Commissioner’s attention until after the petition had actually been filed with the Board. This filing can thus by no remote inference be regarded as ineffectual, invalid, or void in so far as the provisions of the Federal revenue laws are concerned.

Second, the proceeding thus placed upon the docket of the Board, 'even though it had not been commenced under circumstances giving it every aspect of legality, would nevertheless have been sufficient to toll the running of the statute. And it would have had that effect until the decision of the Board therein became final, even though the circumstances had been such that they would eventually have required the dismissal of the petition. Eevenue Act of 1928, sec. 277. Both the express language of the section and the purpose to be served call for that interpretation. “Because the effect of the passage of time would be the same whether the Board made its decision on the merits or on some other ground, if the period stated in the statute of limitations meantime expired, it is reasonable to believe that Congress did not intend to have the time a proceeding was pending before the Board counted any more when the decision was a dismissal for want of jurisdiction than when it was not.” American Equitable Assurance Co. of New York v. Helvering, 68 Fed. (2d) 46 (C. C. A., 2d Cir.), affirming 27 B. T. A. 247. As we said in U S L Battery Corporation, 32 B. T. A. 810, 812; aff'd., 84 Fed. (2d) 1020 (C. C. A., 2d Cir.), on authority of American Equitable Assurance Co. of New York v. Helvering, supra, certiorari denied, 299 U. S. 593:

The clear intent of these sections of the acts is that if a petition is filed with the Board upon the basis of a deficiency notice the Commissioner shall not make an assessment of the deficiency until the decision of the Board becomes final. The prohibition goes into effect when a deficiency notice is mailed and “if a petition” is filed with the Board it continues until the decision of the Board in the proceeding becomes final. To continue the force of the prohibition it is not essential that the petitioner be the taxpayer to whom the deficiency notice was sent It is sufficient if a petition is filed on the basis of the notice of deficiency. In other words, the moving party in the petition filed from the notice must, for the purposes of the statute, be treated as the taxpayer until the decision of the Board has become final.

Emily King Parker et al.. Trustees, 30 B. T. A. 342; aff'd., 84 Fed. (2d) 838 (C. C. A., 8th Cir.); Olympic Refining Co., 32 B. T. A. 1056, 1063; see E. B. Teague, 32 B. T. A. 641, 643.

Of course, in the earlier proceeding involving the estate, the Board did not dismiss the proceeding nor determine that it was without jurisdiction. It held the case for disposition on the merits, was affirmed on appeal taken by this petitioner, and certiorari was denied by the Supreme Court. Instead of treating this as an aspect of the present proceeding less favorable to her than the cases cited, petitioner seeks to give it the opposite effect by making the further contention thatj even though the proceeding before the Board be regarded as suspending the operation of the statute, the Board’s decision became final when the time for appeal expired, in view of the fact that petitioners there were not authorized to appeal from the Board’s ruling. We are not favorably impressed by this argument, for the reasons stated in Liberman's Committee v. Commissioner, 54 Fed. (2d) 527, 530 (C. C. A., 2d Cir.):

* * * Although we hold that a correct application of section 281 to the facts did not give the petitioners the powers, rights, and privileges of a taxpayer, nevertheless, since the Board has assumed to consider the petitioners as subject to its jurisdiction, we think they may be deemed the taxpayer for purposes of appeal to this court. Otherwise the erroneous order could not be reviewed.

If more were needed, the statute is explicit as to the time when the Board’s decision becomes final. The Bevenue Act of 1928 makes the provisions of section 1005 of the Bevenue Act of 1926 applicable. The latter section lists four hypothetical situations, of which only the third is clearly applicable to the earlier proceeding. That is:

“* * * if the decision of the Board has been affirmed or the petition for review dismissed by the Circuit Court of Appeals.” In that event the decision of the Board becomes final “upon the denial of a petition for certiorari.” It appears to be inescapable that any suspension of the statute of limitations thus terminated sixty days after May 24, 1937, the date when certiorari was denied, and that the statute against this petitioner did not expire until a year thereafter, well beyond the date, September 22, 1937, of the deficiency letter addressed to her.

It does not follow from what has been said that petitioner’s contention that the Board and the courts were without jurisdiction of the earlier proceeding is to be accepted. While the question does not call for decision here, a reading of Waldemar R. Helmholz, 28 B. T. A. 165; aff'd., 75 Fed. (2d) 245; aff'd., 296 U. S. 93, and of William B. Weigel et al., Trustees, supra, suggests the possibility that, in a case where the executor has been discharged but the estate is properly served with a deficiency notice within the two-year period, the executor has an election whether to accept the jurisdiction of the Board and litigate the substantive question of estate liability, or to challenge the authority of the Commissioner to proceed further. If he does the latter by unmistakable assertion made in an appropriate and timely fashion, that election will be respected. Hulburd v. Commissioner, 296 U. S. 300. In the language of Mr. Justice Cardozo in that case, such a result would be consistent with “the thought of many judges” that “an executor discharged after a full and fair accounting is no longer to be vexed by the annoyance and expense of defending fruitless suits with assets no longer available for reimbursement or indemnity.” This is far from saying, and we do not so read the Hulburd case, that an executor may not if he chooses resort to procedure before the Board for determining the substantive question of liability. Upon this principle of an election in the executor the three cases last cited may be reconciled. The Weigel case decided the substantive question of estate liability after the executor’s discharge and was affirmed long after the decision in Hulburd v. Commissioner, supra. And in Waldemar R. Helmholz, supra, which was affirmed by the Supreme Court within a month of its decision in the Hulburd case, we said (p. 169):

* * * It appears that the petitioner duly administered the estate, made final settlement oí his accounts, and was discharged as administrator by the County Court of Milwaukee County in September 1928. It does not appear that the petitioner ever notified the Commissioner of such final settlement and discharge. The settlement of the estate and the final discharge of the administrator before the tax obligations were discharged neither extinguished the tax nor relieved the petitioner from his liability under the law to pay it. Petitioner has invoked the jurisdiction of this Board for a redetermination of the deficiency set forth in the notice addressed to him as executor of the decedent’s estate. No one has been misled as to the liability asserted. In these circumstances we accept jurisdiction of the proceeding.

For the reasons stated it is not now necessary to comment further upon this question, nor upon the somewhat related issue raised by respondent that petitioner is now estopped to deny the Board’s jurisdiction. Other distinctions from the Hulburd case are not difficult to find. That case was decided under the Revenue Act of 1926 and before the passage of section 312 of the 1928 Act referred to above. The Supreme Court expressly refrained from deciding what would be the result if that section had been applicable as it was found to be by the court below, 76 Fed. (2d) 736. Nor was the effect upon the statute of limitations involved or decided, although that is the only question we have to determine here. As we said in Puget Sound National Bank of Takoma, Washington et al., Trustees, 36 B. T. A. 386, (p. 390): “The question of whether the liability was barred by the statute of limitations was decided by us in a preliminary report (21 B. T. A. 23) and was not presented to the Supreme Court for decision.” It seems clear that the most that can be said for the Hulburd case is that it is authority for concluding that the Board and the Circuit Court of Appeals erroneously decided the earlier proceeding. As we have said, and for the further reason that certiorari was there denied by the Supreme Court, this conclusion is difficult in the extreme to assume; but, assuming it for purposes of argument, its correctness can not be collaterally attacked here, Jahncke Service, Inc., 20 B. T. A. 837; and in any event it was still a proceeding on the docket of the Board sufficient to toll the statute until the decision of the Board became final upon the denial of certiorari. That result follows inevitably from the language of the statute and from the logic of the circumstances. American Equitable Assurance Co. of New York v. Helvering, supra; U S L Battery Corporation, supra; Emily King Parker, supra; Olympic Refining Co., supra; and E. B. Teague, supra.

Third, and finally, if we accept the petitioner’s argument as to the status of the executors, no necessity appears for any tolling of the statute. To state her position as set forth in her brief, petitioner says: “An executor or administrator after final settlement and discharge becomes functus officio and can no longer act as such or as a representative of the estate for any purpose whatsoever.” If that be so, and it is from that premise that petitioner’s entire argument proceeds, the filing of the income tax return in April 1930, after the formal discharge, was an unauthorized act. It must be treated as a nullity, at least to the same extent — if again we accept the petitioner’s argument — as the filing of the petition or of the appeal. We are thus driven to conclude that no return was filed by the estate, and if no return was filed the statute of limitations never began to run. Revenue Act of 1928, sec. 276 (a). It thus becomes completely immaterial whether anything was effective to toll the statute, and the Commissioner’s assessment and any proceedings to collect would have been valid at any time. Amalgamated Sugar Co., 24 B. T. A. 143; Will T. Caswell, 36 B. T. A. 816, 827.

Decision will ~be entered for the respondent.

       See Hulburd v. Commissioner, 296 U. S. 300, 310, footnote 6.

       SEC. 312. NOTICE OF FIDUCIARY RELATIONSHIP.
      (a) Fiduciary of taxpayer. — Upon notice to the Commissioner that any person is acting in a fiduciary capacity such fiduciary shall assume the powers, rights, duties, and privileges of the taxpayer in respect of a tax imposed by this title (except as otherwise specifically provided and except that the tax shall be collected from the estate of the taxpayer), until notice is given that the fiduciary capacity has terminated.
      (b) Fiduciary of transferee. — Upon notice to the Commissioner that any person is acting in a fiduciary capacity for a person subject to the liability specified in section 311, the fiduciary shall assume, on behalf of such person, the powers, rights, duties, and privileges of such person under such section (except that the liability shall be collected from the estate of such person), until notice is given that the fiduciary capacity has terminated.
      (c) Manner of notice. — Notice under subsection (a) or (b) shall be given in accordance with regulations prescribed by the Commissioner with the approval of the Secretary.

       Rules of Practice before the U. S. Board of Tax Appeals, rules 6, 7, and 12.

       SEC. 277. SUSPENSION OF RUNNING OF STATUTE.
      The running of the statute of limitations provided in section 275 or 276 on the making of assessments and the beginning of distraint or a proceeding in court for collection, in respect of any deficiency, shall (after the mailing of a notice under section 272 (a)) be suspended for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or a proceeding in court (and in any event, if a proceeding in respect of the deficiency is placed on the docket of the Board, until the decision of the Board becomes final), and for 60 days thereafter.

       Sec. 272 (h).

       Sec. 1005. (a) The decision of the Board shall become final—
      (1) upon the expiration of the time allowed for filing a petition for review, if no such petition has been duly filed within such time; or
      (2) upon the expiration of the time allowed for filing a petition for certiorari, if the decision of the Board has been affirmed or the petition for review dismissed by the Circuit Court of Appeals and no petition for certiorari has been duly filed ; or
      (3) upon the denial of a petition for certiorari, if the decision of the Board has been affirmed or the petition for review dismissed by the Circuit Court of Appeals; or
      (4) Upon the expiration of 30 days from the date of issuance of the mandate of the Supreme Court, if such Court directs that the decision of the Board be affirmed or the petition for review dismissed. * * *

       Revenue Act of 1928, sec. 311.

       This appears to have involved an Illinois estate, like the Hulburd case. Cf. Oleen v. Helvering, 88 Fed. (2d) 650.

       A comparable comment applies with respect to United States v. Continental National Bank Trust Co., 805 U. S. 398.

       See Olsen v. Helvering, supra.


source: Caselaw Access Project

author: Mellott:

license: Public Domain

text:
    Des Moines Title Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 94349.
    Promulgated April 7, 1939.

      A. F. Schaeizle, Esq., for the petitioner.

      Hugh Brewster, Esq., and Curtis Bisley, Esq., for the respondent.
   OPINION.

Mellott:

Section 23 of the Revenue Act of 1934 provides that in computing net income there shall be allowed as a deduction, (1) “A reasonable allowance for the exhaustion, wear and tear of property used in a trade or business, including a reasonable allowance for obsolescence.” A similar provision is contained in the Revenue Act of 1936 (49 Stat. 1648, ch. 690). The question for determination is whether or not a deduction of $5,000 per year may be allowed for obsolescence of the J. W. Hillis books.

It has been held, and we believe correctly, that an abstract plant may be a proper subject of a claim for obsolescence. This was the early ruling of the department (cf. I. T. 1775, C. B. II-2, p. 45); the view of the District Court for the Western District of Missouri as expressed in Kansas City Title & Trust Co. v. Crooks, 35 Fed. (2d) 351; and the holding of the Circuit Court of Appeals for the Eighth Circuit in affirming the decision of the District Court in Crooks v. Kansas City Title & Trust Co., 46 Fed. (2d) 928. A similar holding was made by the District Court for the Eastern District of Pennsylvania in Real Estate-Land Title & Trust Co. v. United States (March 13, 1937), which the Circuit Court of Appeals for the Third Circuit reversed (United States v. Real Estate-Land Title & Trust Co., 102 Fed. (2d) 582).

In Rodeo-Vallejo Ferry Co., 24 B. T. A. 936, 940, it was said that there is nothing mysterious about obsolescence; that it is a factor widely present in all business; and that its existence is a fact to be established by evidence. It is a “state of becoming obsolete”, a more or less gradual process. Cf. Conley Tin Foil Corporation, 17 B. T. A. 65, 73.

No rule of thumb may, or should be, laid down for the allowance of obsolescence. V. Loewers Gambrinus Brewery Co. v. Anderson, 282 U. S. 638; Burnet v. Niagara Falls Brewing Co., 282 U. S. 648. The statute authorizes “a reasonable allowance” — such an amount as will, together with depreciation previously claimed and probable salvage value, be sufficient to replace at its original cost, the property which is becoming obsolete. Cf. City of Knoxville v. Knoxville Water Co., 212 U. S. 1; United States v. Ludey, 274 U. S. 295. Inasmuch as obsolescence is usually a more or less gradual process, it is proper that the allowance be spread over the years from the time the process begins until it is complete, Columbia Malting Co., 1 B. T. A. 999; Corsicana Gas & Electric Co., 6 B. T. A. 565. Complete obsolescence occurs when the property is no longer economically useful for the purpose for which it was acquired and can not be used for any other purpose. Frederick C. Renziehausen, 8 B. T. A. 87; aff'd., 31 Fed. (2d) 675; aff'd., 280 U. S. 387; Tennessee Fibre Co., 15 B. T. A. 133, 140.

The statute limits the deduction to “property used in the trade or business.” Neither depreciation nor obsolescence may be allowed if the plant, or the portion of the plant upon which the allowance is being claimed, has been abandoned. Gertrude D. Walker, 20 B. T. A. 937; aff'd., 63 Fed. (2d) 351; certiorari denied, 289 U. S. 746; Alexander Brothers Lumber Co., 22 B. T. A. 153; Buck v. Commissioner, 83 Fed. (2d) 627. United States v. Real Estate-Land Title & Trust Co., supra. In other words, if obsolescence is complete at the beginning of the taxable year, no allowance may be made under section 23 (1) supra, though it may be that a deduction in some amount may be allowed under some other section — e. g., section 23 (e), as a loss; but that question is not before us. Cf. Red Wing Malting Co. v. Willcuts, 15 Fed. (2d) 626; certiorari denied, 273 U. S. 763; Charles E. Kaltenbach v. United States, 66 Ct. Cls. 570.

At the hearing and upon brief petitioner relied solely upon Crooks v. Kansas City Title & Trust Co., supra. In that case the taxpayer, in 1914, had acquired several abstract plants. Four were found to be inefficient. Taxpayer’s officers, experienced abstract men, determined in 1921 that the four plants could not economically be kept up to date by making the daily postings and that by reason thereof the four plants would become obsolete within nine or ten years. Accordingly it deducted annually such a percentage of the cost of the plants as, spread over the years up to complete obsolescence, would amount to the total cost of the four plants. The holding of the court that this was proper accorded with the ruling of the department, quoted in the opinion (I. T. 1775, supra) and is clearly sound.

But the facts in the instant proceeding are not analogous to those in the Kansas City Title & Trust Co. case. This petitioner in 1918 acquired seven sets of abstract books. Three of them were immediately discarded and petitioner charged off $42,651. In 1922 it took the Hastie-Carrell set out of its workroom and during the years intervening between that date and 1933 charged off $55,000. It charged off another $5,000 on its books for the year 1933, making a total charge-off of $102,651 for obsolescence for the years 1918 to 1933, inclusive. No opinion is expressed as to whether any or all of the charge-offs were proper. Our duty is merely to determine whether or not the deductions claimed in the taxable years are proper. We hold that they are not.

The president and secretary of petitioner, both experienced ab-stracters, were called as witnesses. The former when asked what was done with the J. W. Hillis books in 1933, stated that “they were stored in a safe place.” When asked whether they had been kept up to date by daily postings he responded: “We have the material there in the office to make them current.” He testified, however, that the continuances were kept in a separate set of books and that no additions were made to the old ones. The secretary of the company— J. W. Hillis, from whom the particular set of books was acquired— testified that prior to 1933 they had been left “where we could have used them if we had wanted to.” When asked whether they had been in use during that time he said: “To a certain extent.” The testimony of all of the witnesses indicates, and it has been found as a fact, that the J. W. Hillis books were never used after, but were discarded in, 1933.

The ruling of the Department (I. T. 1775, supra), applied and followed in Crooks v. Kansas City Title & Trust Co., supra, is that the allowance for obsolescence “should be spread equally over the period from the date the permanent abandonment of the plant was foreseen to the date of the permanent abandonment.” The Supreme Court adopted the essence of this construction in Burnet v. Niagara Falls Brewing Co., supra, quoting Avith approval the definition of obsolescence as “the condition or process by which units gradually cease to be useful or profitable as a part of the property, on account of changed conditions,” and holding that a brewery was warranted “in concluding that the period of obsolescence [of its plant] commenced about 1918 [when prohibition was imminent] and would end upon the taking effect of prohibition.”

But petitioner is not claiming an allowance to be spread over the remaining useful life of a portion of its property. It merely determined that certain books, in which no postings had been made for approximately fifteen years, were no longer useful in its business. Accordingly it directed that they be “stored in a safe place.” The petition alleges that the books had been “kept up to date by daily postings”; but the evidence does not support this allegation. The evidence indicates that a set of books which has not been kept up to date by daily postings soon becomes worthless. Inasmuch as no postings had been made to the Hillis books for fifteen years and inasmuch as they were discarded prior to the taxable years and were not thereafter used in petitioner’s business, we are of the opinion and hold that the claimed deductions were properly disallowed.

Reviewed by the Board.

Judgment will he entered for the respondent.

Leech, TdRNeb, and ArNold concur only in the result.


author: Opper :

text:
    B. F. Edwards, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89944.
    Promulgated April 7, 1939.

      Arthur E. Simpson, Esq., and Lydia Lee, Esq., for the petitioner.

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

Opper :

The sole issue is whether stock sold by petitioner in 1935 was actually worthless in a prior year. To sustain his burden of proof that it was not, petitioner produced balance sheets of the corporation whose stock was Involved upon which the assets are given a substantial value. The assets of a corporation may be considered in arriving at tile value of its stock, Lillian G. McEwan, 26 B. T. A. 726, and in the absence of any different showing, the book value of those assets is some evidence of their actual value sufficient to shift the burden of going forward to the respondent. See Wessell v. United States, 49 Fed. (2d) 137; Commissioner v. Brier Hill Collieries, 50 Fed. (2d) 777.

In this proceeding, however, it is contended that other facts indicate that the book figures have no hearing whatever upon actual value. To establish this, petitioner was asked upon cross-examination at the hearing whether two years previous to the tax year, that is in 1933, he had sold 87 shares of the same stock. He professed to be unable to answer the question and no evidence on this subject was introduced either by petitioner or by respondent. We have since, however, been referred by respondent to the Board’s file in D'ocket No. 84634, a proceeding in which the same taxpayer was petitioner, for the true facts in this connection, and it is contended we may take what for want of a more precise term may be called judicial notice thereof.

The question thus presented has no bearing upon the weight or effect to be given to evidence appearing in the present record. Cf. Goodell-Pratt Co., 6 B. T. A. 1235, 1237. It relates solely to the propriety of dispensing with any proof whatever on the ground that the formality of evidence is unnecessary. 5 Wigmore on Evidence (2d Ed.) 567. See Goodell-Pratt Co., supra.

Matters of general knowledge may be the proper subject of our notice without the necessity of formal proof. Maraville Jenckes Co., 4 B. T. A. 765, 790 (inflation of basic commodities after April 1917); Safe Deposit & Trust Co. of Baltimore, Executor, 35 B. T. A. 259, 263 (existence of a general economic depression); Amtorg Trading Corporation, 25 B. T. A. 327, 333; 65 Fed. (2d) 583, 585 (early nonrecognition of the Soviet Government); Poinsett Mills, 1 B. T. A. 6, 8 (prevalence of welfare work among industrial employees); Woodley Petroleum Co., 16 B. T. A. 253, 258; National Products Co., 11 B. T. A. 511, 512 (existence and contents of published Board decisions). It does not follow that the facts of a particular situation, the subject of private, rather than public knowledge, even though in some manner referred to in documents in the files of the Board, may be similarly treated. United States v. Abilene & Southern Railway Co., 265 U. S. 274. Such material, if not part of the present record, would be beyond the scrutiny of the court on appeal. Ohio Bell Telephone Co. v. Public Utilities Commission of Ohio, 301 U. S. 292; see Capital Traction Co., 27 B. T. A. 926, 928. And orderly procedure requires that the parties to a dispute here be given every opportunity to meet adversary contentions. United States v. Abilene & Southern Railway Co., supra, p. 289.

George S. Groves, 38 B. T. A. 727, 735, may be thought to contain language laying down a broader rule. It is unnecessary here to discuss the extent to which that proceeding purported to rely upon the contents of documents in the Board’s files not formally introduced in evidence, or whether or to what extent such reliance was necessary to the conclusion there reached. Suffice it to say that, to the extent, if any, to which the Groves case sought to relax the requirement that evidence to be relied upon must be properly introduced and proved, it may not he said to represent the correct principle nor the one which will hereafter be applied.

There being no evidence in the record to sustain the burden of going forward which was shifted to the respondent by petitioner’s case, respondent’s determination must he reversed.

Reviewed by the Board.

Decision will he entered under Rule 50.


author: Hill :

text:
    District Bond Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mae Recor MacPherson, Petitioner v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 88970, 92083, 94486.
    Promulgated April 11, 1939.

      Dana Latham, Esq.., and I. Blair Evans, Esq., for the petitioners.

      Alva 0. Baird, Esq., for the respondent.
   OPINION.

Hill :

The principal issue for decision, involved in all three of the present proceedings, is whether or not interest on bonds issued by various California municipalities under the various California improvement acts set out in our findings of fact above is exempt from Federal income tax. We have heretofore considered and decided this question in respect of five of the seven California improvement acts involved.

In Milo W. Bekins et al., Executors, 38 B. T. A. 604, we held that interest on bonds issued under the California Improvement Act of 1911 and the California County Improvement Act of 1921 was subject to the tax, while interest on bonds issued under the California Acquisition and Improvement Act of 1925 and the California Improvement Bond Act of 1915 was held not subject to such tax. Also, in Harriet A. Heath, 38 B. T. A. 1127, we held that interest on bonds¡ issued under the California Eoad District Improvement Act of 1907 was exempt from the Federal income tax.

On authority of the cited decisions and for the reasons therein stated, we approve respondent’s action in including in the taxable income of the present petitioners interest received by them on bonds issued under the California Improvement Act of 1911 and the CaE-fornia County Improvement Act of 1921; on the same authority we hold that respondent erred, and accordingly disapprove his action, in including in the taxable income of petitioners interest received on bonds issued under the California Acquisition and Improvement Act of 1925, the California Road District Improvement Act of 1907, and the California Improvement Bond Act of 1915.

This leaves for consideration here only the question of the tax-ability of interest on bonds issued under the California Municipal Improvement District Act of 1915, approved April 20, 1915, California Stats. 1915, p. 99; Deering’s General Laws of California, Act No. 5184, and the California Street Opening Bond Act of 1911, approved April 27, 1911, California Stats. 1911, p. 1192; Deering’s General Laws of California, Act No. 855,

Section 22 (b) (4) of the Revenue Acts of 1934 and 1936 provides, among other things, that interest upon obligations of a state, or any political subdivision thereof, shall not be included in gross income and shall be exempt from income tax. The question presented here, then, is whether or not the bonds in controversy constituted obligations of the State of California, or its political subdivisions. The parties have stipulated that all of the bonds under consideration were issued by California municipalities under the various California improvement acts referred to, in accordance with the provisions of the act applicable to each type of bond, and were issued to provide funds for public purposes. Our further discussion will, therefore, prooeed upon the hypothesis that the terms of the bonds were in accordance with the provisions of the statute applicable to each type, and reference will be made only to the terms of the bonds, which, so far as material to the question under, consideration, are set out at length hereinabove.

Following the reasoning of the decisions above cited, we hold that petitioners’ bonds issued under the California Municipal Improvement District Act of 1915 were direct obligations of a political subdivision of the State of California, and so exempt from tax. These bonds contained the affirmative and unconditional promise of Municipal Improvement District No. 27 of the City of Los Angeles, by its governing body, the mayor and the council of that city, to pay to the bearer on a date specified the principal sum of each bond, together with interest as therein provided. The bonds recited that provision had been made for the collection of an annual tax upon the taxable property of the improvement district sufficient to pay the interest and constitute a sinking fund for payment of the principal. These bonds were nonetheless obligations of Municipal Improvement District hfo. 27 because principal and interest were payable exclusively out of taxes levied upon the taxable property of the district. Cf. Michael Pontarelli, 35 B. T. A. 872; aff'd., 97 Fed. (2d) 793; Commissioner v. Carey-Reed Co., 101 Fed. (2d) 602, affirming 36 B. T. A. 36. Respondent’s action in including in petitioners’ taxable income the interest received on bonds issued under the California Municipal Improvement District Act of 1915 is reversed.

The bonds of petitioners issued under the California Street Opening Bond Act of 1911 were materially different from those last above discussed. They resemble more closely, both in form and substance, the bonds issued under the California Improvement Act of 1911 and California County Improvement Act of 1921, interest on which, as we have before pointed out, was held in the Bekins case, supra, to be subject to tax.

These bonds were issued to represent unpaid assessments against the benefited property, and until paid with accrued interest were a first lien on the property affected. The bondholder was required to look to the property for payment, and in case of default was entitled to declare the whole unpaid amount due and payable, and to have the land advertised and sold forthwith in the manner provided by law. Certain specified penalties were to be added to the amount in default and paid to the holder of the bond along with and as a part of the defaulted payment.

Under the California Street Opening Bond Act of 1911, as under the California Improvement Act of 1911, considered in the Bekins case, the bondholder’s sole remedy was against the property benefited, neither the city nor any of its officials being liolden for payment. Such bonds, therefore, did not represent obligations of the city, and we hold respondent did not err in including in petitioners’ gross income the interest received by them in the taxable years from such bonds.

The second issue submitted for decision involves a deduction from gross income for 1935 claimed by petitioner in Docket Ro. 88970 and disallowed by respondent in the following circumstances: For the years 1932 and 1933 petitioner accrued on its books interest in the amount of $2,636.90 on bonds issued under the California Acquisition and Improvement Act of 1925, which was exempt from Federal income tax. Such amount was not included in determining taxable income for either year by petitioner or respondent. Petitioner also accrued on its books for 1934 interest on similar bonds in the sum of $1,795.27 which was not reported by petitioner in its return as taxable income but was included in income by respondent in computing the deficiency for 1934. The coupons on the particular bonds representing the interest referred to and here in controversy became wholly worthless in 1935 and were charged off its books by petitioner.

Respondent allowed the deduction of the $1,795.27 as a bad debt for 1935 because such amount had been included in taxable income for 1934. But respondent disallowed the deduction of $2,636.90 accrued for 1932 and 1933 from income for 1935 for the reason that such amount had not theretofore been included in taxable income. Respondent’s action on this issue must be approved. We have long adhered to the rule that a taxpayer can not take as a deduction the loss of a gain which has not been reflected in income. Charles A. Collin, 1 B. T. A. 305; Howard J. Simons, 1 B. T. A. 351; J. Noble Hayes, 7 B. T. A. 936; Henry V. Poor, 11 B. T. A. 781; aff'd., 30 Fed. (2d) 1019; J. E. Burke, 19 B. T. A. 743; Searles Real Estate Trust, 25 B. T. A. 1115, 1118; George N. Crouse, 26 B. T. A. 477, 482.

Petitioner insists that the deduction should be allowed in the instant case, notwithstanding the rule above referred to, for the reason that the amount in controversy was accrued by petitioner on its books and, it is argued, thus passed through the “tax mill.” We can not agree with this argument. So far as concerns tax liability, a taxpayer on an accrual basis who accrues an income item on his books but does not include the amount in taxable income is in no different position than the taxpayer on a cash basis who does not include a similar item in income because it has not been received. To allow the deduction in either of such events would result in reducing the amount of the taxable income received or accrued from other sources by an amount representing not a loss of capital or of actual income, but merely a loss of anticipated earnings. For a further discussion of this point, see Charles K. Beekman, 17 B. T. A. 643, at page 648.

The parties have stipulated that if we should hold that the interest accrued by petitioner in Docket No. 88970 on the bonds issued under the California Acquisition and Improvement Act of 1925 was not subject to the Federal income tax, and should further hold that a loss on account of accruals thereof in prior years was not deductible from petitioner’s income for 1935, then the income as computed by respondent for 1935 should be increased by the amount of $1,795.27. Having so held, the income computed by respondent may be increased, as stipulated, to the extent that the deficiency originally determined by respondent is not thereby increased, since respondent has made no claim for an increased deficiency.

The issues hereinabove discussed and decided have been stipulated by the parties to be the only issues submitted for decision. Accordingly, all other issues raised by the pleadings are assumed to have been abandoned, and respondent’s action thereon stands approved.

Decisions will be entered wnder Rule 50.


text:
    Yvonne C. Le Baron, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89856.
    Promulgated April 12, 1939.

      Rowe P. Oochran, Esq., and Margaret F. Luers, Esq., for the petitioner.

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

Hill :

The sole question presented for decision is whether the gain or loss resulting from the sale of 600 shares of Coty stock by Hentz & Co. for petitioner during 1934 should be determined upon the basis of the cost to petitioner of the 600 shares of Coty stock transferred to Hentz & Co. by the Chase Bank and Morgan & Co. in 1936, 300 shares of which had a cost basis of approximately 33 and the remainder a cost basis of 27; or whether such gain or loss should be determined on the basis of the cost of the Coty stock purchased for petitioner by Hentz & Co. in 1934, which cost varied from about 5.70 to 6.32. More briefly and simply stated, the question is whether the sales of Coty stock made in January and February 1934 by the brokerage firm of Hentz & Co. for petitioner were short sales transactions or sales of the shares of Coty stock delivered to the brokers by the Chase Bank and Morgan & Co. in 1936.

The parties agree that if the sales referred to are held to be short sales transactions, the Board shall approve the deficiency determined by respondent; but if it is held that the Coty stock sold in 1934 was the 600 shares transferred to the brokers by the Chase Bank and Morgan & Co., then the amount of the loss computed by petitioner, and shown in her amended return, is correct.

On January 9, 1934, Hentz & Co. purchased for petitioner 100 shares of Coty stock. On January 17 the brokers sold on petitioner’s order 100 shares and delivered in satisfaction of that sale the shares purchased on January 9, since petitioner had no other shares on deposit with the brokers and had not given instructions to sell other specific shares. On February 6 the brokers sold for petitioner 200 shares of the same stock, a like number of shares on February 9, and 100 shares on February 15, making a total of 500 shares so sold. Petitioner then had no Coty stock deposited with the brokers and again gave no instructions to sell specific shares, although she had a large number of shares deposited in custodian accounts with the Chase Bank and Morgan & Co. So far as shown, the brokers had no information concerning the stock in custodian accounts, but, in any event, treated the sales above mentioned as short sales transactions, recording the same in petitioner’s “Short or Delayed Delivery Account.” On February 9 the brokers borrowed 400 shares to make delivery on the short sales of February 6 and 9. Thereafter, on orders of petitioner the brokers purchased 200 shares of Coty stock on May 7, the same number on the 14th, and 100 shares on the 15th, making total purchases of 500 shares, which they applied to satisfy the 400 shares borrowed on February 9 and the sale of 100 shares on February 15.

The brokers mailed to petitioner each month a statement reflecting the transactions had with the firm in the preceding month. Such a statement was mailed in March 1934, showing the February short sales recorded in petitioner’s “Short or Delayed Delivery Account.” Yet petitioner did not advise the brokers of any objection to their method of treating the transactions or that she intended to sell shares of Coty stock which she had on deposit with either Chase or Morgan, nor did she direct either of the latter firms to deliver any shares of her stock to the brokers to be used in satisfying the 400 shares borrowed to make delivery on the short sales until approximately a year and a half thereafter.

Petitioner’s income tax return for 1934 was filed for her by the Chase bank on June 15, 1935, and on September 4, 1935, petitioner requested by cablegram a statement showing how the capital gain reported in such return had been computed. And it was not until December 28, 1935, that she directed the Chase Bank and Morgan & Co. to deliver the 600 shares of Coty stock to the brokers.

We can not conclude from the foregoing facts that it was petitioner’s intention to sell shares of stock on deposit with Chase Bank and Morgan & Co. at the time she gave instructions to Hentz & Co. in February 1934 to sell for her account 500 shares of Coty stock. She then well knew that she had no shares of such stock on deposit with the brokers, and, after being informed by the brokers that they had treated the transactions as short sales, she made no move to transfer to the brokers shares of Coty stock from her custodian accounts to replace the shares borrowed by the brokers, which were in fact replaced by the purchases made in May 1934, of which fact petitioner was promptly advised and to which she made no objection.

There is no suggestion in the record that the brokers acted without authority in treating the sales as short sales transactions, nor does petitioner now contend that they violated in any manner her instruction in so doing. But even if petitioner had instructed the brokers to sell shares out of her custodian accounts, the fact is she subsequently failed to direct Chase Bank or Morgan & Co. to deliver to the brokers the required number of shares to satisfy the short sales, and thereafter acquiesced in the action of the brokers in so applying shares purchased in May 1934; hence, she could not prevail in her present contentions. Petitioner undoubtedly had the right to deliver the shares purchased in May 1934 rather than those contained in her custodian accounts, if she desired to do so. Her acquiescence in such action of the brokers does not indicate an intention at that time to sell other shares. Tax liability must be determined not on a taxpayer’s intentions but on the basis of what was actually done. And the taxpayer may make short sales of stock in which he has at the same time a long account. Cf. Henry F. duPont, 38 B. T. A. 1317.

In Davidson v. Commissioner, 305 U. S. 44, affirming 94 Fed. (2d) 300, which had affirmed 34 B. T. A. 555, the taxpayer directed his broker to sell 1,000 shares of stock purchased earlier in the year at $49.90 per share. He directed the bank to deliver to the broker shares representing such purchase, but the bank actually delivered certificates representing a purchase at $4.42 per share, which shares the broker sold. In its opinion, the Supreme Court said:

* * * Undoubtedly, petitioner sufficiently indicated to tbe broker and to tbe bank tbe shares be intended to sell. He plainly allocated tbe lots to be sold to the 1,000 shares be bought in 1929. But it does not follow that they were the shares sold. His intention to sell, even when coupled with his order to the broker and direction to the bank, cannot bo held to constitute sale. Snyder v. Commissioner, 295 U. S. 134, 137. Notwithstanding his order to the broker to sell shares in the 1929 lot, petitioner was free later to direct that shares from the other lot be used for final consummation of the sale. And so, when the bank delivered him certificates of stock not designated in his order to sell, the broker may well have assumed that petitioner’s final purpose was to sell the shares covered by the certificates that the bank sent him. He had no reason to suppose that the bank did not act in accordance with instructions given it by petitioner. The case is not different from what it would have been, if petitioner himself had delivered to the broker the certificates sent by the bank. Plainly, petitioner’s contention that the certificates used to complete the sale did not cover the shares sold cannot be upheld. Commissioner v. Rankin, 295 U. S. 123, 128. The commissioner rightly computed gain on the basis of what was done rather than on what petitioner intended to do. * * *

On brief petitioner cites, among others, in support of her contention that the transactions in question were not short sales, Commissioner v. Ferree, 84 Fed. (2d) 124, affirming 32 B. T. A. 725, and Dee Furey Mott, 35 B. T. A. 195. The cited cases are not in point. In distinguishing the Mott, Ferree, and other decisions, we said in Henry F. duPont, supra:

In all of the above eases where it was held that the sales were not short sales the evidence showed that at the time of the transaction the taxpayer had a clear intention to sell the specific shares which he then held, and so instructed his broker. No such facts obtain in the proceeding at bar.

The language above quoted is equally applicable here.

For the reasons indicated, we hold that the sales in controversy were short sales transactions, and approve the deficiency determined by respondent.

Decision will be entered for the respondent.


author: Murdock : TURNER,

text:
    National Home Owners Service Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91445.
    Promulgated April 12, 1939.

      Robert F. Shutoh, Jr., Esq., and Herbert O. Moore, Esq., for the petitioner.

      Clay Holmes, Esq., for the respondent.
   OPINION.

Murdock :

The first question is whether the petitioner realized any gain from the transactions in 1934 and 1935 whereby it received $100 per unit for units consisting of one class A share and seven class B shares of its own stock. The Supreme Court recently reviewed this question in Commissioner v. Reynolds Tobacco Co., 306 U. S. 110, affirming 97 Fed. (2d) 302, which reversed 35 B. T. A. 949. See also First Chrold Corporation v. Commissioner, 306 U. S. 117, reversing 97 Fed. (2d) 22, which had affirmed an unpublished decision of the Board. The Court stated in the Reynolds case that the statutory provisions of section 22 (a) were so general in their terms as to render an interpretative regulation appropriate. The regulations of the Treasury Department up to May 2, 1934, had uniformly held that a corporation realized no gain and sustained no loss from purchases and sales of its own stock. The Board had consistently followed those regulations, but on April 7, 1932, the Circuit Court of Appeals for the First Circuit reversed the decision of the Board in Commissioner v. Woods Machine Co., 57 Fed. (2d) 635, reversing 21 B. T. A. 818. Certiorari was denied, 287 U. S. 613. The Commissioner thereafter issued T. D. 4430, approved May 2, 1934, reported in C. B. XIII-1, p. 36. That Treasury decision amended the regulations to provide that gain or loss might result from the acquisition or disposition by a corporation of its own shares, depending “upon the real nature of the transaction”; no gain or loss Avas to result from the original issuance of stock, “But if a corporation deals in its own shares as it might in the shares of another corporation, the resulting gain or loss is to be computed in the same manner as though the corporation Avere dealing in the shares of another.” Although there might be some question whether this petitioner was dealing in its own stock as to all of the shares involved within the meaning of the language just quoted, nevertheless, the Treasury decision seems clearly to cover some of the transactions. The Court in the Reynolds case pointed out that the administrative construction embodied in the regulation had been uniform for a great many years during which Congress had reenacted without alteration the definition of gross income, and the Court said:

* * * Under the established rule Congress must be taken to have approved the administrative construction and thereby to have given it the force of law.

It held that the tax liability for the year 1929 was to be determined in conformity to the regulation then in force.

The transactions involved in the present case took place in 1934 and 1935, some of them before and others after the change in the regulation of May 2, 1934. The bill which formed the basis of the Revenue Act of 1934 passed the House on February 21. The Senate made some changes and passed the bill on March 28. The final changes were agreed to by both Houses on May 3, 1934. The act was approved on May 10, 1934. The legislative history does not indicate that the change in the regulation of May 2 was ever brought to the attention of Congress. Congress, in enacting that act, can not be presumed to have had in mind the regulation as amended. Since Congress had given the old administrative construction the force of law, the question arises whether the Commissioner could change the law by amending his regulation or whether a change in the law would have to come from the legislature. Cf. Squibb & Sons v. Helvering, 98 Fed. (2d) 69. The following is from the opinion of the Court in the Reynolds case:

Section 605 of the Revenue Act of 1928 provides that “In case a regulation or Treasury decision relating to the internal-revenue laws is amended by a subsequent regulation or Treasury decision made by the Secretary or by the Commissioner with the approval of the Secretary, such subsequent regulation or Treasury decision may, with the approval of the Secretary, be applied without retroactive effect”. It is clear from this provision that Congress intended to give to the Treasury power to correct misinterpretations, inaccuracies, or omissions in the regulations and thereby to affect cases in which the taxpayer’s liability had not been finally determined, unless, in the judgment of the Treasury, some good reason required that such alterations operate only prospectively. The question is whether the granted power may be exercised in an instance where, by repeated reenactment of the statute, Congress has given its sanction to the existing regulation.
Since the legislative approval of existing regulations by reenactment of the statutory provision to which they appertain gives such regulations the force of law, we think that Congress did not intend to authorize the Treasury to repeal the rule of law that existed during the period for which the tax is imposed. We need not now determine whether, as has been suggested, the alteration of the existing rule, even for the future, requires a legislative declaration or may be shown by reenactment of the statutory provision unaltered after a change in the axjplicable regulation. As the petitioner points out, Congress has, in the Revenue Acts of 1936 and 1938, retained Section 22 (a) of the 1928 Act hi haec verba. From this it is argued that Congress has approved the amended regulation. It may be that by the passage of the Revenue Act of 1936 the Treasury was authorized thereafter to apply the regulation in its amended form. But we have no occasion to decide this question since we are of opinion that the reenactment of the section, without more, does not amount to sanction of retroactive enforcement of the amendment, in the teeth of the former regulation which received Congressional approval, by the passage of successive Revenue Acts including that of 1928.

The above quotation rather indicates that the Supreme Court agreed with Judge Learned Hand who said in the Squibb case that only legislative enactment could change the well established rule of law, and that there was no change, at least until 1936. Even then the Commissioner could not point back to consistent regulations on the suhject. We hold that the Treasury Decision of May 2, 1934, is not applicable in the present case and the petitioner realized no gain from the transactions of 1934 and 1935. Squibb & Sons v. Helvering, supra. This makes unnecessary any decision as to the amount of the gain.

Reviewed by the Board.

Decision will he entered for. the petitioner.

TURNER,

concurring: While I agree with the conclusion reached by majority of the Board, I am unable to agree with the reasons éxpressed therefor.

As I read the facts, the petitioner was not dealing in its own Shares “as it might in the shares of another corporation” but, to the contrary, the only purpose sought and accomplished was thé adjustment of its capital. In my opinion, therefore, the conclusion readied falls within the wording and spirit of the regulation ahd there is no occasion here for declaring the regulation invalid. I am further of the opinion that we may not conclude, nor even presume, that, at the time the bill which became the Revenue Act of 1934 was drafted and considered by Congress and enacted into law, both houses of Congress through their committees were not fully aware of the impending regulation which became Treasury Decision No. 4430 and of its actual promulgation prior to the enactment of the Revenue Act of 1934.

Smith, Van Fossan, Leech, Harron, Kern, and Oeper agree with the above.

      The second opinion of the Circuit Court of Appeals for the Second Circuit in the Squibb case (decided March 27, 1939) changes only the final paragraph of the first opinion, which was not relied upon by the Board in the present proceeding.


author: Hill: Black,

text:
    Paul R. G. Horst, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 90819, 93220.
    Promulgated April 12, 1939.

      Harry H. Wiggins, Esq., for the petitioner.

      J. R. Johnston, Esq., for the respondent.
   OPINION.

Hill:

There is only one question for determination, namely, whether the amounts collected in the respective years 1934 and 1935 on the coupons involved are taxable as income to petitioner. We think they are. It is true that we were reversed on a similar point in our decision in Julius Rosenwald, 12 B. T. A. 350, by the United States Circuit Court of Appeals for the Seventh Circuit, 33 Fed. (2d) 423. The court assigned as the basis for such reversal that the severance and delivery of the coupons before maturity constituted a completed gift and hence the coupons were not taxable to the owners of the bonds from which they had been severed. We think our decision in that case was right and respectfully decline to follow the decision of the Circuit Court of Appeals on the point stated. Unquestionably the gift of the coupons in that case, as well as in the instant case, was a completed one, but it was, nevertheless, a gift of income. The severance and negotiation of an interest coupon does not change the character of the thing which it evidences and represents. That thing is interest on the bond from which the coupon was severed. Such interest is income derived from the bond, whether it be paid to the owner of the bond or to his donee or assignee. The owner of property which produces income is chargeable with such income for tax purposes regardless of whether he receives or enjoys the income. Van Meter v. Commissioner, 61 Fed. (2d) 817; Bing v. Bowers, 22 Fed. (2d) 450; affirmed per curiam (C. C. A., 2d Cir.), 26 Fed. (2d) 1017; Ward v. Commissioner (C. C. A., 9th Cir.), 58 Fed. (2d) 757.

In the Van Meter case, supra, the court said:

The Supreme Court has definitely determined that Congress has the power to tax the earner of income therefore, irrespective of whether it is paid to someone else. [Citing a number of cases.]
The “earner” of income is one whose personal efforts have produced it; who owns property which produced it or a combination of the two. Decisions of the Supreme Court have declared that the income statutes require taxation to the earner in each of the three above sources of income where the income was actually realized but never came to beneficial enjoyment by the earner. * * *
In determining who is taxable for an income, there are three considerations which may be of importance, to wit, who earns the income, who receives it, and who enjoys it. Where the same person earns, receives, and enjoys the income (the normal and usual situation), there is no difficulty. Where different persons earn, receive and/or enjoy the income, disputes occur. In determining such disputes, the vital matter is always the relation of the earner (whether a person, owner of property or combination of the two) of the income to the income so earned. The rule and intent of the taxing statutes is that the earner of income which he might and, normally, would receive and enjoy for himself is not relieved because he chooses not to receive or not to enjoy it, and this is not necessarily changed by such deprivation taking the form of an obligation legally binding him thereto. * * * but where the earner of the income does nothing more than transfer the income earned in his own right to another, even though such disposal be in advance of the earning thereof (Burnet v. Leininger and Lucas v. Earl, supra), or where lie retains any power of control over the income éarning property or the income therefrom (Corliss v. Bowers, 281 U. S. 376, 50 S. Ct. 336, 74 L. Ed, 916, and analogous as to transfer tax Chase Nat. Bank v. U. S., 278 U. S. 327, 49 S. Ct. 126, 73 L. Ed. 405, 63 A. L. R. 388; Reinecke v. Northern Trust Co., 278 U. S. 339, 49 S. Ct. 123, 73 L. Ed. 410, 66 A. L. R. 397, and as to State succession tax, Saltonstall v. Salton-stall, 276 U. S. 260, 48 S. Ct. 225, 72 L. Ed. 565), such income is taxable to him within the intent of the statute (Burnet v. Leininger, Lucas v. Earl and Corliss v. Bowers, supra).
* * * It may be true that income already entirely earned is transferable as a species of property, but that has no effect upon the power and intention of Congress to tax income to the earner. The earner may, in a legally binding way, dispose of his earnings, whether they are already earned or áre to be earned, Without affecting in the slightest manner his status as earner thereof and his resulting liability for taxation thereon as income.

In tlie case of Bing v. Bowers, supra, the court said :

To permit the assignor of future income from his own property to escape taxation thereon by a gift grant in advance of the receipt by him of such income would by indirection enlarge the limited class of deductions established by statute. As long as he remains the owner of the property, the income therefrom should be taxable to him as fully, when he grants it as a gift in advance of its receipt, as it clearly is despite a gift thereof immediately after its receipt.

The Ward case, supra, affirming 22 B. T. A. 352, supports the proposition that the owner of income producing property is chargeable, for tax purposes, with the income therefrom even though he may have transferred such income by gift or other assignment to another. The court, in the Ward case, quoted with approval from Rosenwald v. Commissioner (C. C. A., 7th Cir.), 33 Fed, (2d) 423, 426, as follows:

“Petitioner’s chief contention is that there was a completed gift, arid that petitioner never received thé income.
“It is doubtful whether a holder of securities may separate the income thereafter to accrue from the principal, and make a gift by way of assignment of the income, without assigning or trusteeing the thing out of which the income arises, where tfte effect would l)e to relieve the donor from a tax he would otherwise be required to pay.”

The court, in the Ward case, further said:

Numerous other cases also hold that assigned income is taxable to the assignor, unless the corpus producing the income is also assigned, gee Appeal of Fred W. Warner, 5 B. T. A. 963, and Irene McFadden Winder, Executrix, v. Commissioner, 17 B. T. A. 303, and cases cited therein. See, algo, Porter v. United States (Ct. Cl.), 52 Fed. (2d) 1056; Bishop v. Commissioner (C. C. A., 7), 54 Fed. (2d) 298.

Petitioner contends that he is not taxable on the items here involved for the reason that the coupons in question when severed and negotiated before maturity of the interest they represented became separate and independent instruments. Conceding that upon severance the coupons became separate and independent instruments, the fact remains that the proceeds of the coupons when collected constituted income derived from the bojids from which they were severed. It is stipulated that the ownership of the bonds remained at all times during the taxable years in petitioner.

The facts in the instant case clearly distinguish it from the case of Rebekah C. Schoonmaker, 39 B. T. A, 498. In the latter case the gift was of bonds with unmatured interest coupons attached. In other words, the gift in that case was of income producing property, the income from which for the taxable year had not at the time of the gift been received, either actually or constructively, by the donor, whose books and income tax returns were on the cash receipts and disbursements basis. We held in that case that the accrued but unmatured interest represented by the interest coupons was not includable as taxable income, to the donor. In the instant case the income producing property was retained by the donor and only the accruing income therefrom in the taxable years was transferred as a gift to another prior to the time of its maturity.

We hold that petitioner is chargeable with income, for tax purposes, in the full amounts collected from the coupons in question in the respective years 1934 and 1935. However, respondent based his determination of deficiency for the year 1935 on the addition to petitioner’s income in such year of only $22,380, instead of $25,495, the amount actually collected from the coupons in that year, and has not asked for an increased deficiency, Accordingly, we approve the respondent’s determinations.

Reviewed by the Board,

Decision will be entered for the respondent.

Black,

dissenting: When negotiable coupons attached to coupon bonds are detached it seems to me they become separate and distinct property from the bonds and are subject to be sold separately or to be the subject of a completed gift, inter vivos. If a gift of such detached coupons is made by the owner prior to their maturity there would be no realization of income thereby to the donor. Cf. Rebekah. C. Schoomaker, 39 B. T. A. 496. There would likewise be no income to the donee by reason of the gift itself. See section 22 (b) (3) of the Revenue Act of 1934, which reads:

(b) Exclusions from Gross Income. — The following items shall not be included in gross income and shall be exempt from taxation under this title:
* * * * * * *
(3) Guts, bequests, and devices. — The value of property acquired by gift, bequest, devise, or inheritance (but the income from such property shall be included in gross income).

However, when the coupons matured in the hands of the donee and he collected them the amount collected was income to him as interest. See section 22 (a) of the Revenue Act of 1934. The entire amount collected, even if it be not proper to call all of it interest, would be income to the donee, if the coupons had no cost basis to the donor, as indeed in most cases they would not have unless the donor purchased the bonds with some accrued but unmatured interest coupons attached. The donee has the same basis of cost as the donor. See section 113 (a) (2) of the Revenue Act of 1934.

The findings of fact in the majority opinion show that in each of the taxable years Robert P. K. Horst, the donee of the unmatured coupons, collected the interest due thereon when it matured and returned the entire amount for taxation in the year the interest was collected. This, I think, was proper because the coupons had no cost basis to the donor and hence none to the donee.

I think the court was right in holding in Rosenwald v. Commissioner, 33 Fed. (2d) 423, that Rosenwald’s delivery to a charitable fund of negotiable Third Liberty Loan bond coupons before their maturity constituted a completed gift and the interest thereafter collected by the charitable fund from such bond coupons was not income to the donor. The evidence upon which the court based its decision in the Rosenwald case as to the Liberty bond coupons is stated in the court’s opinion as follows: “There is evidence that petitioner clipped and delivered to the fund, before their maturity, interest coupons from Third Liberty Loan Bonds.”

The facts in the instant case seem clearly to bring it within the rule announced by the court in the Rosenwald case. I, therefore, respectfully dissent from the majority opinion.

Leech and Disney agree with this dissent.


author: TuRNee:

text:
    T. J. Bosquett, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88117.
    Promulgated April 14, 1939.

      J. Lee Boothe, G. P. A., for the petitioner.

      V. F. WeeMey, Esq., for the respondent.
   OPINION.

TuRNee:

The petitioner is an individual and his address is 2074 National Bank Building, Detroit, Michigan. Disallowing certain deductions claimed by petitioner on his income tax return for 1934, the respondent has determined a deficiency for that year in the amount of $2,543.96. The petitioner makes no claim that the respondent erred in the disallowance of the deductions which resulted in the determination of the deficiency but has alleged in his petition that a deduction of $43,813.56 should be allowed as a loss sustained during the taxable year by reason of the seizure of certain “vacant real estate, by the proper governmental authority, for the nonpayment of local property taxes.”

All of the facts appearing in the record were stipulated as follows:

1. On December 8, 1928, petitioner acquired 376 vacant lots situated in a municipality of Ontario, Canada. He made no improvement on the lots. He did execute deeds to 24 of the lots considered most valuable to his brother. The cost to'petitioner of the remaining 352 lots was $43,813.56.
2. Petitioner failed to pay all of the taxes assessed against the 352 lots; and on February 14, 1934, taxes thereon remained due and unpaid.
3. On February 14, 1934, in accordance with the provisions of the Ontario Municipal Board Act (1932), being Chapter 27, Statutes of Ontario for that year (a copy of which is annexed hereto and marked petitioner’s “Exhibit A”), the treasurer executed a tax arrears certificate, setting forth therein a description of the 352 lots, and he duly registered the certificate in the registry office on February 15, 1934.
4. Petitioner did not avail himself of his right of redemption under the Act referred to in Paragraph 3 hereof.
5. Petitioner filed his Federal income tax return for the year 1934 with the Collector at Detroit, Michigan.

The pertinent provisions of the Ontario statutes, sections 109 and 110, chapter 27 of the Ontario Municipal Board Act (1932), made a part of the above stipulation as petitioner’s Exhibit A, read as follows:

109-(3) Where any part of the taxes on any vacant land within the municipality remains unpaid on the 31st day of December in the year next following that in which the taxes were levied, such vacant land shall be vested in and become the property of the corporation upon registration by the treasurer of a tax arrears certificate, subject to the right of redemption hereinafter provided and to the provisions of subsection 5.
*******
(3) The treasurer, with respect to vacant land upon which any part of the taxes remain unpaid after the time mentioned in subsection 1 and with respect to improved land upon which any part of the taxes remains unpaid after the time mentioned in subsection 2, may register in the registry office a certificate to be known as a tax arrears certificate, Form 1 to this Act, setting forth therein a description of such vacant land or improved land, as the case may be, and the amount of such unpaid taxes, with the amount of all penalties, interest and costs added thereto, and thereupon the land described in the certificate shall be vested in and become tbe property of the corporation, its successors and assigns, in fee simple or otherwise according to the nature of the estate right, title and interest whatsoever of the owners thereof at the time of such vesting, and clear of and free from all such estate right, title and interest, and all charges and encumbrances thereon and dower therein, subject only to tbe said right of redemption hereinafter provided and to the provisions of subsection 5.
(4) Immediately upon registration of a tax arrears certificate, the treasurer shall cause to be sent by registered mail to tbe last known address of the assessed owner of the land therein described and to all persons appearing by tbe records of the registry office to have an interest therein a written notice, Form 2 to this Act, of the registration of such certificate and of the last day for redemption of such land.
* * * * * # *
130. The owner of or any person appearing by tbe records of the registry office to have an interest in any vacant land or improved land in respect of which a tax arrears certificate has been registered may redeem tbe same at any time within one year after the date of registration of the certificate by paying to the corporation the amount set fortli in such certificate in respect of the land to be redeemed, together with the amount of all expenses incurred by tbe corporation and the treasurer in registering the certificates and for searches and postage and $1 for each certificate and for each notice sent under subsection 4 of section 109, and also by paying to the corporation all taxes including the local improvements rates and interest thereon which would have accrued against the land if it had remained the property of the former owner ahd had been liable for ordinary taxation ánd if the valúe thereof is not shown upon the assessment roll, such taxes shall be computed at the rate fixed by by-law for each year for which such taxes are payable upou the value placed thereon upon the assessment roll for the last preceding year in Which it was assessed and the local improvement rates shall be computed at the rate fixed in the by-law by which tbe same were rated or imposed and upon the frontage as shown upon the list of properties and the frontages thereof as settled by tbe court of revision for such local improvement, and a certificate of the treasurer as to the total amount payable in order to redeem the land shall be final and conclusive.
(2) Upon redemption being made under this section, the treasurer shall forthwith register in the registry office a certificate to be known as a redemption certificate. Form 3 to this Act, setting forth therein a description of the land redeemed, and a redemption certificate shall, subject to sub-section 3, when registered, be as valid and effective in law as a conveyance of the land described therein to the registered owner at the time of registration of the tax arrears certificate, his heirs or assigns, of the original estate of such registered owner and a valid and effectual cancellation of the tax arrears certificate registered with respect to such land.
* * * * * * *

Sinee the petitioner at all times during 1934 retained and held the right to redeem the said lots upon the payment of the taxes in arrears and the charges incident to redemption, the respondent rests his claim that no deductible loss was sustained in the taxable year on the decisions of the Board in Frederick Krauss, 30 B, T. A, 62; Herman M. Rhodes, 34 B. T. A, 212; and Derby Readty Corporation, 35 B. T. A. 335. In the Krauss and Rhodes cases, the State of Florida had acquired the particular properties in the taxable years for the taxes due against them, while in the Derby Realty Corporation case the property was sold under mortgage foreclosure proceedings. In each case, however, the period within which the property might have been redeemed did not expire until some subsequent year and it was held that the taxpayer did not sustain a deductible loss of his investment in the property in the year of the tax or mortgage sale.

The petitioner claims that the instant case is distinguishable from the cases cited because of certain differences between the statutes of Ontario, where his property was located, and the statutes of the states involved in the above cases. His principal argument, as disclosed by his brief, seems to be that under the provisions of the Ontario statute the municipality acquires title to the property in fee and immediately thereafter the owner is ousted from possession and enjoyment of the property, while under the cases cited the owner had the right to remain in possession of the property until his right of redemption expired. Petitioner’s conclusion that the taxing authority acquires right to possession is apparently inferred, since an examination of the statute cited by him fails to disclose any provision dealing directly with the right, during the period of redemption, to possession of property against which a tax arrears certificate has been issued. In our opinion the right to possession or the lack of such right, while it may throw some light on the matter, is not determinative of the issue. Our question here is whether the filing of the tax arrears certificate and the vesting of title to the real estate in the taxing authority divested petitioner of his ownership or rights in the property so as to justify or merit the conclusion that a loss of his investment had been sustained, or whether under his right of redemption he retained substantial rights of ownership in the property so that it may not be said that he sustained a loss of his investment so long as he had the right to redeem the said property by payment of the taxes and charges incident to redemption.

Paragraph 3 of section 109 of the statute quoted above does contain language which, standing alone, might be taken to indicate the passage of all substantial interests of ownership to the taxing authority upon the filing of the tax arrears certificate. That paragraph concludes, however, with a provision to the effect that the rights which vest in the taxing authority are subject to the right of redemption thereinafter provided. Thereafter in section 110 of the statute it is provided that “The owner of * * * any vacant land or improved land in respect of which a tax arrears certificate has been registered may redeem the same at any time within one year after the date of registration of the certificate”, by paying the taxes in arrears and the charges incident to such redemption, whereupon the treasurer of the taxing authority is required to “register in the registry office a certificate known as a redemption certificate”, and the registration of such certificate effects the cancellation of the tax arrears certificate and the owner of the property is restored to his original status. It seems to us apparent that under the Ontario statute a landowner retains very definite and substantial rights in the property throughout the period in which it may be redeemed. We are therefore unable to conclude, as the petitioner requests, that the instant case is outside the rule pronounced in the cases cited above.

Subsequent to the filing of the briefs in this case, our decision in Herman M. Rhodes, supra, was reversed, 100 Fed. (2d) 966. The court said: “Standing alone, a tax sale of property is not an identifiable event showing its worthlessness to the owner the year of the sale, but if the taxpayer is financially able to pay the taxes and refuses to do so, the tax sale is of weight along with other events as to the time the loss became fixed.” The court had previously stated, however, that the “identifiable events showing a loss” on the property were the same as those applicable to a loss claimed on another piece of property which had been written off petitioner’s books as worthless. In allowing that loss the court had stressed the fact that during the taxable year there had been a collapse of land speculation in Florida; that a hurricane had damaged the property in the year next preceding and like damage had recurred in the taxable year; that the petitioner had made an unsuccessful effort in the prior year to sell the property and, after deciding upon complete abandonment, had charged the amount of his investment therein off his books; and that those acts and circumstances constituted a sufficient basis for the allowance of the loss deduction claimed by him. In the instant case we have only the fact of petitioner’s failure to pay the taxes and the filing of the tax arrears certificate, and none of the circumstances denominated by the court as the “identifiable events showing a loss.” It is accordingly unnecessary to consider whether the court intended to limit the application of its pronouncements to the particular case under consideration or to narrow the scope of the cases previously decided. Cf. J. C. Hawkins, 34 B. T. A. 918; A. J. Schwarzler Co., 3 B. T. A. 535; Greenleaf Textile Corporation., 26 B. T. A. 737; aff'd., 65 Fed. (2d) 1017; Coalinga-Mohawk Oil Co., 25 B. T. A. 261; aff'd., 64 Fed. (2d) 262; certiorari denied, 290 U. S. 637.

Decision will be entered for the respondent.


author: Van Fossan :

text:
    Denholm and McKay Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.

      Docket No. 89606.
    Promulgated April 14, 1939.

      Howe P. Cochran, Esq., for the petitioner.

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

Van Fossan :

The first issue involves the deductibility of payments of the preferred dividends of the Realty Co. made by the petitioner under the guarantee contained in its lease agreement with that company.

The petitioner contends that the payment of such dividends was in performance of its promise incurred in 1916 as a part of the rent consideration and was the primary obligation of the petitioner, with no right of subrogation against anyone.

The respondent’s position is that the expenditure was in the nature of a capital investment enhancing the value of the petitioner’s stock and thus not deductible.

The Realty Co. was organized in 1916 to hold and operate the real estate in which the petitioner’s store was situated. The lease from the Realty Co. to the petitioner contained a clause providing that the petitioner would guarantee the payments of dividends on the preferred stock of the Realty Co. and would redeem such stock upon the liquidation of the Realty Co.

It is clear on examination of the stipulated facts that article 24-2 of Regulations 86 (restating the same principle contained in prior regulations), cited by the respondent, does not apply. Petitioner was not a holding company and did not guarantee the dividends for the purposes stated in the article. In fact, the respondent does not attempt to bring the relationship within the language of the regulation. He assumes to make the principle therein set forth generally applicable, regardless of the fact that the petitioner was not a holding company. This position is wholly unwarranted.

The guarantee provision was incorporated in the lease to secure more favorable terms for the petitioner. There was no agreement that the petitioner could have recourse on the Realty Co. for reimbursement if the former paid the dividends. It was an outright promise to pay, not made for the purpose of increasing the value of the petitioner’s stock or of securing new capital.

The terms of the 1916 lease were modified by the .lease agreement covering the taxable year, but the dividend guarantee provision was retained and such dividends, amounting to $36,150.50, were paid by the petitioner. That sum was specifically made a part of the petitioner’s rent and was charged off on the petitioner’s books.

The respondent cites several cases to support his theory, but all of those cases contain such vital differences in facts that it would serve no purpose to discuss them. However, his following quotation from Daniel Gimhel, 36 B. T. A. 539, is pertinent to the case at bar:

There is no general rule that a payment by a shareholder to his corporation or to One of its obligees to relieve it of an existing obligation is per se a contribution by him to its capital which augments the cost of his shares. The question is controlled by the circumstances in which the payment is made. If there is intent that the payment shall enlarge tile stock investment, the Shareholder may not for tax purposes treat it otherwise to support a loss or a bad debt deduction Whether there is such intent, actual or to be implied, is determinable upon evidence which may vary in different cases. Cf. J. S. Maubaules, 20 B. T. A. 359; W. F. Bavinger, 22 B. T. A. 1239.

The following excerpt from the same case is equally apt:

The evidence here is clear. When petitioner madé his payments, both on his endorsements and his guarantees, hé had no illusions about the condition of the corporation and no intention to invest more capital. He paid only because be was legally obligated to do so, and the obligation was not an incident of his being a shareholder but was incurred with the intention of creating a potential debtor ahd creditor relation. To attribute to him an intention to invest more money in the corporation’s shares is contrary to the express evidence and not a fair inference from the circumstances. And it is equally clear that there was no intention to make a gift.

The petitioner’s obligation to pay the preferred dividends of the Realty Co. was originally incurred and continued to exist in 1934 only as a part of its rental. There is nothing in the record that justifies the inference that the guarantee was made for capital purposes.

In Charles B. Holden, 27 B. T. A. 530, the petitioner paid the interest and taxes chargeable to the lessor under his lease of an apartment. Such expenditures were specifically designated ‘-not as rent.” He sought to deduct them under section 23 (b) and (c) of the Revenue Act of 1928, but there we said:

* * * we think no argument or citation of authority is necessary to support the elemental proposition that, if the circumstances of the case establish that the payments of interest and taxes were made as part of the consideration for the lease of the apartment, then they constituted additional rent, and such fact is not changed and can not be disregarded because of a contrary statement contained in the lease contract between the petitioner and his lessor. However, notwithstanding said statement in the lease contract, we think a fair construction of the provisions of that contract clearly indicates that the interest and taxes paid by the petitioner constituted nothing more nor less than additional rental. * * *

In that case the petitioner did not attempt to show that the payments were deductible as a business expense or “otherwise than interest and taxes.” Here, however, the petitioner does claim that they are deductible as rent and, hence, are an allowable business expense. We agree with the petitioner’s contention and allow the deduction.

The second issue has been settled by stipulation. The sum of $7,429.57, representing insurance premium overpayments, is not taxable to the petitioner.

The third, issue relates to the deductibility of property taxes, amounting to $56,222.08, assessed to the Realty Co. on January 1, 1935, and payable one-half on July 1, 1935, and one-half on October 1, 1935. The respondent concedes that taxes of this character accrue when assessed (H. H. Brown Co.. 8 B. T. A. 112). He states that ordinarily the petitioner, on an accrual basis, would be entitled to deduct the total amount of accrued taxes but places such accrual in the same category as the payment of the guaranteed dividends. He insists that the taxes so paid should be added to the cost of the petitioner’s stock and that the deduction should be denied.

The same reasons for allowing the deduction under the first issue are applicable to the allowance of accrued taxes. Article 23 (a)-10 of Regulations 86 contains the following rule:

* * * Taxes paid by a tenant to or for a landlord for business property are additional rent and constitute a deductible item to the tenant and taxable income to the landlord, the amount of the tax being deductible by the latter. * * *

According to the stipulated facts the taxes were paid as a portion of the rental and the taxes assessed on April 1, 1934, were included in the petitioner’s deductions on its return. 17o objection was made by the respondent to the deduction of the taxes assessed on April 1, 1934, and, therefore, such taxes have been allowed by the respondent. These stipulated facts are inconsistent with the respondent’s present position.

The respondent’s contention can not be sustained. Otherwise, we would be lead to the untenable situation in which the cost of the petitioner’s stock in the Realty Co. would be increased as each successive installment of taxes and other rental equivalent might be paid. The item of $56,222.08, representing taxes accrued on January 1,1935, is deductible from the petitioner’s gross income.

Decision will he entered under Rule 50.

       * * * A holding company which guarantees dividends at a specified rate on the stock of a subsidiary corporation for the purpose of securing new capital for the subsidiary and increasing the value of its stock holdings in the subsidiary may not deduct amounts paid in carrying out this guaranty in computing its net income, but such payments may be added to the cost of its stock in the subsidiary.