author: Aenold : AhtjNdell,

text:
    Gladstone Company, Limited, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 79155.
    Promulgated March 30, 1937.

      Frank W. Chambers, Esq., for the petitioner.

      W. Frank Gibbs, Esq., and Bernard D. Daniels, Esq., for the respondent.
   OPINION.

Aenold :

This proceeding involves a deficiency in income tax in the amount of $15,765.12 for the calendar year 1931 and a delinquency penalty of $3,941.28.

Two questions are presented — (1) whether under the facts of this case in the computation of petitioner’s net income it is entitled to deductions allowed under section 23 (p) of the Revenue Act of 1928, (2) whether the item of $99,960 received by petitioner in 1931 from the Brady Realty & Securities Co. was in fact a dividend received by petitioner on tlie stock of a domestic corporation within the United States, or whether it represented a capital transaction.

The petitioner is a corporation, organized under the laws of the Colony of Newfoundland, with its principal office at Columbus Hall, St. Johns, Newfoundland. It was organized in December 1930. The only assets owned by petitioner were 1,428 shares of stock of the Brady Bealty & Securities Co., a domestic corporation located within the United States, and petitioner’s only source of income was the dividends received on that stock.

The Brady Bealty & Securities Co. was organized by James Cox Brady in 1923. The total stock issued by the corporation was issued to James Cox Brady in his name in trust for his wife and five children, one of whom was Buth Brady Scott. James Cox Brady died in 1930 and each of the children received one-seventh of the stock so held and Mrs. Brady received two-sevenths.

During the year 1929 Buth Brady married Michael F. Scott, a citizen of England. Shortly after the marriage they went to England, where they have continuously resided except for visits to the United States.

The Brady Bealty & Securities Co. paid no dividends during the lifetime of James Cox Brady, the earnings of the company being-allowed to accumulate. On August 20, 1930, after the death of James Cox Brady, the company declared an initial dividend of $70 per share, payable December 31, 1930, to stockholders of record September 2, 1930.

On December 30, 1930, Buth Brady Scott transferred 1,428 shares of stock of the Brady Bealty & Securities Co. to petitioner, receiving for-the stock $492,000 in bonds of the petitioner and $5,000 of its capital stock. The bonds were payable serially, $12,000 at a time, over a period of years. At the same time Buth Brady Scott assigned and transferred to petitioner the dividends payable to her on December 31, 1930, on the 1,428 shares of Brady Bealty & Securities Co. stock, for which she received one bond having a face value of $100,000. This was designated as an “A” bond and was not a part of the series received for the stock. The dividend check in the sum of $99,960 was paid to the petitioner pursuant to the assignment order on or about January 7, 1931. When the $100,000 bond was issued in payment for the dividend check it was understood that the bond was to be retired with the dividend. Upon receipt of the dividend petitioner immediately paid to Buth Brady Scott the $100,000 face value of the “A” bond.

The petitioner received dividends on the 1,428 shares of Brady Bealty & Securities Co. stock during the calendar year 1931 as follows: March 30, $7,140; May 29, $7,854; September 1, $7,854; and December 12, $8,568.

During the summer of 1933 a revenue agent investigated the records of the Brady Realty & Securities Co. During the course of the investigation the agent inquired of the assistant secretary of petitioner, one John Cox, whether he had filed a return for the petitioner, to which Cox answered, “No.” The investigating agent prepared and filed a return for petitioner on August 7,1933, pursuant to section 3176 of the Revised Statutes. On November 13, 1933, the Commissioner mailed to petitioner a preliminary audit letter proposing a deficiency in tax. Thereafter, on December 7, 1933, petitioner filed with the collector of internal revenue for the second district of New York, a corporation income tax return on form 1120, signed by John Cox, assistant secretary, in which $131,376 was reported as dividends on stocks of domestic corporations and on line 19 of page 1 a similar amount was deducted as dividends. No net income was reported, nor were there any schedules or information of any description attached to the return.

John Cox, who signed and filed the return for petitioner, was not familiar with the requirements and the law of making returns for foreign corporations. It was his understanding that unless a foreign corporation had taxable income it was not required to file a return and that dividends were a returnable deduction of either foreign or domestic corporations and not taxable.

In determining the deficiency here in question the respondent disallowed the deductions claimed on line 19 of petitioner’s return (dividends of corporations from schedule H) under section 233 of the Revenue Act of 1928, on the ground that petitioner’s return filed December 7,1933, did not comply with the requirement of the statute and therefore did not entitle it to the deduction claimed.

The petitioner contends that, although its return was filed late, it has complied with the provisions of section 233 and is entitled to the deduction claimed. It further contends that the item of $99,960 received by it on January 7, 1931, was purchased by it and did not constitute income, being a return on a capital transaction.

Section 23 of the Revenue Act of 1928, provides among other things, that:

In computing net income there shall be allowed as deductions:
* 5* * * * * *
(p) Dividends received T)ij corporations.— * * *
(1) from a domestic corporation, * * *
# * * * * ❖ #
The deduction allowed by this subsection shall not be allowed in respect of dividends received from a corporation organized under the China Trade Act, 1922, or from a corporation which -under section 251 is taxable only on its gross income from sources within the United States by reason of its receiving a large percentage of its gross income from sources within a possession of the United States.

Section 235 of the Revenue Act of 1928 provides that in the case of a foreign corporation the return shall be made on or before the fifteenth day of the sixth month following the close of the fiscal or calendar year as the case might be.

Petitioner argues that the requirement of section 233 that the return shall be filed “in the manner prescribed in this title” does not include the element of time, and that the purpose of the section is administrative and not penal in character.

The Commissioner' argues that under section 233 the filing of a timely return is a necessary prerequisite to any deductions and credits to which a foreign corporation may be entitled, but insists that regardless of the late filing of the return petitioner should be denied the benefits of the deduction claimed because it has failed to include in its return “all the information which the Commissioner may deem necessary for the calculation of such deductions and credits.”

The Revenue Act of 1928 authorizes the Commissioner, with the approval of the Secretary of the Treasury, to prescribe and publish all needful rules and regulations, and under that authority the regulations provide that corporations must make returns of form 1120 prescribed by the Commissioner. This form is furnished the taxpayer for use in making up the return. Attached to and as a part of the return prescribed are certain instructions for the guidance of the taxpayer in making up the return.

An examination of the return filed by petitioner discloses that it did not include any information whatever concerning the deduction claimed except that it consisted of dividends in the amount of $131,376.

Section 233 provides that a foreign corporation is entitled to the deduction of dividends from domestic corporations “only by filing, or causing to be filed, * * * a true and accurate return of its total income received from all sources in the United States, including therein all the information which the Commissioner may deem necessary for the calculation of such deductions and credits.” In corporation return form 1120 is “Schedule H — Dividends Deductible”, in which the name of the corporation paying the dividend sought to be deducted is required, together with the amount received as dividends, for the information of the Commissioner. Evidently this information was deemed necessary by the Commissioner to enable him to determine upon investigation whether or not dividends from the corporation, for which deduction is claimed, are in fact deductible under section 23 (p), and make proper calculation of such deductions.

Schedule H refers the taxpayer to instruction 19, which is ■ as follows:

19. Dividends. — Enter as Item 19 the dividends described in instruction 9 which were reported as income in Item 9.
Describe in Schedule H any dividends claimed as a deduction.

Instructioii 9 provides as follows:

9. Dividends. — Enter as Item 9 the amount received as dividends (a) from a domestic corporation other than a corporation entitled to the benefits of section 251 of the Revenue Act of 1928 and other than a corporation organized under the China Trade Act, 1922, or (b) * * *.

Petitioner did not fill in schedule H, nor give the information there sought. Deductions are not a matter of right but of legislative grace and statutory grant, and the taxpayer must bring himself strictly within the provisions of the statute to be entitled to them. Petitioner here, we think, ignored the very purpose of section 233, which provides that the return shall include information deemed necessary by the Commissioner, and not having given such information, did not bring itself within the requirements of the statute and the deduction must be denied. To hold otherwise would render the entire provisions of the statute a nullity. This conclusion renders it unnecessary for us to decide the effect of the late filing of the return under section 233.

This brings us to the second issue, namely, should the item of $99,960 received by petitioner on or about January 7, 1931, be included in income as dividends from a domestic corporation. Under the facts before us we think this issue must be resolved in favor of the petitioner. December 30, 1930, the right to receive the dividend was assigned to petitioner by Ruth Brady Scott, the stockholder of record on September 2, 1930, in exchange for an “A” bond of the face value of $100,000. This bond was subsequently paid by petitioner at its face value. Cf. Matchette v. Helvering, 81 Fed. (2d) 73. Petitioner had no right to the dividend as a stockholder of Brady Realty & Securities Co., as it did not become the owner of the stock on which the dividend was declared until after Ruth Brady Scott’s right to the dividend had become fixed, see Fletcher Cyclopedia Corporations, sec. 3700. All petitioner had was an assignment of the right to receive the $99,960 — an asset in the form of an account receivable for which it had paid. The receipt of the monéy by petitioner was, as to it, return on a capital transaction and not payment of a dividend on stock owned by it.

The case of Eugenia B. Jamison, 28 B. T. A. 514, may appear to be in conflict with the conclusions here reached from the meager facts appearing in the report. An examination of the record in that case, however, discloses that the dividends in question were on preferred stock and the resolution of the board of directors authorized payment of tlxe dividends as provided in the stock certificates, but fixed no other date upon which stockholders of record would be entitled to receive them. The certificates provided fixed semiannual dividend dates. There the vendee became owner of the stock prior to the date fixed on the stock certificates for dividend payment and petitioner as vendee was held taxable on the dividend when received.

Here petitioner as vendee became the owner of the stock subsequent to September 2, 1930, the time fixed in the declaration for payment of the $99,960 dividend to stockholders of record of that date.

Section 291 of the Revenue Act of 1928 provides that “In case of any failure to make and file a return required by this title, within the time prescribed by law or prescribed by the Commissioner in pursuance of law, 25 per- centum of the tax shall be added to the tax, except that when a return is filed after such time and it is shown that the failure to file it was due to reasonable cause and not due to willful neglect no such addition shall be made to the tax.”

No reasonable cause appearing why the return was not made and filed within the time prescribed by section 235, petitioner is liable for the penalty provided in section 291.

[Reviewed by the Board.

Decision will be entered under Rule 50.

AhtjNdell,

dissenting: I disagree with the majority opinion in so far as it disallows the deduction of dividends of a domestic corporation. The effect of this disallowance is to tax as income an item which the statute intended to exempt. London & Lancashire Insurance Co., Ltd., 34 B. T. A. 295, 298. This anomolous result is spelled out of the taxpayer’s failure to comply with a formality — a formality not prescribed by statute, nor the regulations, nor the face of the return, but buried deep in the schedules on the back of the return and the numerous instructions accompanying it.

The fact here is that not only was a return filed, but two returns were made and filed. A return was made and filed in August 1933 by a deputy collector under section 3176 of the Revised Statutes, which contained on its face a report of dividends from domestic corporations. Schedule H was not filled out in that return. After receiving a 30-day notice from the Commissioner, the taxpayer in December 1933 prepared and filed a return showing income from “Dividends on Stock of Domestic Corporations”, in a larger amount than reported by the deputy collector, and deducting an equivalent amount under the heading of “Dividends (From Schedule H).” Schedule H was not filled out in this return.

According to the majority, it is the. omission to fill in schedule H in the return that prompts the disallowance of a deduction permitted by statute and results in the imposition of a tax on income which the statute did not intend to tax. The only information called for by schedule H that was not on the face of the return was the name of the corporation that paid the dividend. This information was furnished to the deputy collector and probably was given by the payor corporation on information returns.

The word “return” as used in the taxing statutes is not a technical word of art. Florsheim Bros. Drygoods Co. v. United States, 280 U. S. 453. We have held a “substantial compliance” with the provisions of law. for the filing of returns is sufficient to put the statute of limitations in motion. See Stetson & Ellison, 11 B. T. A. 397; affd., 43 Fed. (2d) 553. In that case the statute itself required “a return stating specifically the items of * * * gross income and the deductions”, and the regulations contained requirements for detailed figures in the case of consolidated returns. The details so called for were not given, but the totals only were set forth and the return was-held to be sufficient. An administrative'requirement of a second return where the law changed the credit allowable to a corporation does not need to be complied with where the first return gave sufficient data to permit the calculation of tax to be made. See Zellerbach Paper Co. v. Helvering, 293 U. S. 172, wherein it is said, “Perfect accuracy or completeness is not necessary to rescue a return from nullity, if it purports to be a return, is sworn to as such (Lucas v. Pilliod Lumber Co., 281 U. S. 245), and evinces an honest and genuine endeavor to satisfy the law.”

The return filed in this case is said by the majority to be a nullity solely, as I read the report, because it omitted to fill in schedule H. That is the only charge laid at the taxpayer’s door. In my opinion that charge can not stand in the face of the fact of the actual filing of a return which meets the requirements of a return as laid down in the cases cited.

VAN FossaN and Mellott agree with this dissent.

       SEC. 233. ALLOWANCE OF DEDUCTIONS AND CREDITS.
      A foreign corporation shall receive the benefit of the deductions and credits allowed to it in this title only by filing or causing to be filed with the collector a true and accurate return of its total income received from all sources in the united States, in the manner prescribed in this title; including therein all the information which the Commissioner may deem necessary for the calculation of such deductions and credits.


source: Caselaw Access Project

author: Hill:

license: Public Domain

text:
    Garden City Feeder Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 24423.
    Promulgated March 30, 1937.

      Arnold F. Schaetzle, Esq., and H. M. limner, Esq., for the petitioner.

      Harold Allen, Esq., and Brooks Fullerton,t Esq., for the respondent.
   OPINION.

Hill:

This proceeding was first heard at St. Paul, Minnesota, in June 1929, and the adjourned hearing was concluded at the same place on October 16, 1931. Thereafter, on motion of the respondent, the St. Paul record was suppressed and a new hearing or trial de novo was had at Washington, commenced on June 27 and concluded on July 1, 1932. The Board’s report, based solely on the record of the Washington hearing, is published at 27 B. T. A. 1132. The case was taken on review to the United States Circuit Court of Appeals for the Eighth Circuit, which reversed the Board’s decision and remanded the cause for further proceedings, 75 Fed. (2d) 804..

On September 20, 1935, petitioner filed a motion requesting the Board to redetermine the issues, under the Circuit Court’s mandate, solely on the record made at St. Paul. Bespondent opposed this motion, and the motion was denied by order of the Board dated August 3, 1936. In its brief, petitioner assigns the Board’s action as error, 'and argues the point at length. Bespondent later withdrew opposition to petitioner’s motion, and the Board, upon reconsideration of the matter, vacated its prior order of August 3, 1936, and granted petitioner’s motion, as well as a similar motion of the respondent. Hence, further discussion of the question thus raised by iietitioner has become unnecessary here, since our decision will be based solely on the record of the St. Paul hearing.

Bespondent has determined fraud penalties, aiid in respect thereof has the burden of proof. However, petitioner has conceded that the percentage fraud penalty should attach to the additional tax from any source over and above that reported on its original returns for the taxable years. The record also clearly establishes fraud with intent to evade tax, and we have so found. Accordingly, the amounts of the fraud penalties will be recomputed as provided in section 250 (b) of the Bevenue Acts of 1918 and 1921, on the basis of deficiencies finally redetermined hereunder.

Bespondent alleged understatements of income for the taxable years arising from the manipulation of a so-called “Kitty Fund.” The parties have since stipulated the amount of understatement of income on that account for each taxable year, which amounts are set forth in our findings of fact above, and will be reflected in the final recomputations of tax liability.

Other issues raised by the parties have been abandoned or otherwise eliminated, leaving for consideration here only three questions, which concern (a) the value of a certain patent at March 1, 1913, for purposes of depreciation or exhaustion; (b) adjustments to inventories; and (c) special assessment of profits taxes for the years 1918, 1919, and 1920.

Value of Patent at March 1,1913.

Petitioner contends that a March 1, 1913, value for its United States Patent No. 985,478 should be determined at from $350,000 to $500,000, and annual depreciation deductions thereon allowed in each of the taxable years based upon a remaining life of 15 years from the basic date. Respondent concedes the allowance of depreciation deductions on a patent value not in excess of $25,000.

At the hearing voluminous testimony was adduced by both parties bearing on the question of patent value. Petitioner introduced six expert witnesses who expressed opinions fixing the value of the patent in amounts ranging from $350,000 to $600,000 at the basic date. Respondent offered four witnesses, one of whom testified that in his opinion the maximum value was $25,000, another thought the value was not greater than $15,000, and two expressed the view that the patent was of doubtful or very little value.

Value of property at a given date can seldom, if ever, be determined Avith mathematical accuracy ^ in the absence of an established current market embracing a concourse of buyers and sellers. It is a matter of opinion and evidence. May Rogers, 31 B. T. A. 994, 1004. We are not bound to adopt the opinion of an expert witness, particularly where it is in conflict with other facts disclosed. Such testimony must be viewed in the light of all the evidence of record. Old Mission Portland Clement Co. v. Commissioner, 69 Fed. (2d) 676; Stiles v. Commissioner, 69 Fed. (2d) 951; Gloyd v. Commissioner, 63 Fed. (2d) 649; certiorari denied, 290 U. S. 633; Uncasville Manufacturing Co. v. Commissioner, 55 Fed. (2d) 893, 897; Tracy v. Commissioner, 53 Fed. (2d) 575, 577; certiorari denied, 287 U. S. 632; Anchor v. Commissioner, 42 Fed. (2d) 99, 100.

The values expressed in the opinions of petitioner’s witnesses in the present case are not only out of line with the other evidence, but to a material extent were based upon an erroneous assumption of factors which do not exist here, or were arrived at without knowledge of the true facts involved. Such opinions are entitled to but little, if any, weight and can not be accepted as compelling evidence of value. Cf. Keystone Wood Products Co., 19 B. T. A. 1116; affd., 66 Fed. (2d) 258; H. H. Blumenthal, 21 B. T. A. 901; First National Bank of Birmingham, Trustee, 29 B. T. A. 352.

Petitioner’s patent was not a broad basic patent, conferring a monopoly of commercial importance. It covered, at most, only an improvement to the existing art, of very narrow application. Its principal feature consisted of the particular arrangement of a retarder comb and tilting finger, for use in a threshing feeder. Both of these devices were known to the prior art, and later were used without infringement in machines manufactured under other patents. In 1923 petitioner brought an infringement suit against the J. I. Case Manufacturing Co., and notwithstanding that company had theretofore manufactured and sold more than 20,000 feeders under the Crandall and Krause patent, using a combination of retarder comb and tilting tooth, the results of the litigation v7ere that the first decree entered finding no infringement was set aside and petitioner’s bill dismissed; petitioner did not recover any damages, but paid the costs and granted a free license to the Case Co. to manufacture under its patent.

These facts, in our opinion, tend to support the views expressed by respondent’s witnesses, and to negative the idea that the patent had the high value attributed to it by petitioner’s witnesses. Other factors disclosed by the record, such as the value computed on a royalty basis, or a value determined by capitalizing the net earnings in excess of a reasonable allocation to tangibles, which we deem it unnecessary to discuss in detail here, all lead to the same conclusion.

From a careful consideration of all the evidence before us, we have found that petitioner’s patent had a fair market value at March 1, 1913, of $25,000. The proof, we think, does not justify a higher valuation for the patent at the basic date.

Adjustments to Inventories.

Petitioner took inventory in each of the taxable years, during the slack season, usually in September. A physical count was made under the direction of the shop foreman and recorded in shop books. Summary books were prepared from the shop books, and the total inventory computed and recorded in the former. The results were transferred to petitioner’s books of account, which agreed with the entries in the summary books, but the summary books did not reflect the true physical count as shown by the shop books. The entries in the summary books as to many items were substantially less than those recorded in the shop books, the reduction in some instances amounting to 50 percent. Petitioner bad no system of cost accounting, and could not accurately determine the cost of many items.

In 1925 a revenue agent investigated petitioners’ books, and requested access to its inventory records. He was told that the original records had been destroyed, and that no data were available as to inventories for the taxable years. At the hearing in 1929 respondent discovered that the original inventory records or shop books had not been destroyed, and they were then produced for the first time.

In addition to the omission from the inventories of materials on hand ás shown by the physical count recorded in the shop books, petitioner charged to.expense and omitted from the valuation of its inventories such items of cost as labor, freight, and manufacturing expenses from the date of taking the inventories to the end of the year.

The record clearly and convincingly establishes, we think, that petitioner fraudulently manipulated its inventories so as to understate income with intent to evade tax. In its brief petitioner concedes that it omitted “portions from the inventory of stock on hand” and agrees that the omitted items “as determined by the respondent should be restored and added to the inventory as submitted in the original returns.” As to the omission of items of cost, above referred to, which are essential to a determination of inventory valuation, petitioner’s brief is silent. Thus, it appears, there is no controversy between the parties respecting the inclusion of omitted items, nor is the correctness of respondent’s allegations on this point assailed. The disagreement pertains to the matter of valuation.

Petitioner’s .principal contentions are (1) that “for the year 1920, ending December 31,1920, an adjustment should be allowed for market value of not less than 25% to 40%” on account of an alleged general decline in the market, and (2) “in the case of scrap iron the amount should be determined on a basis of $20 per ton.”

The first contention, that the prices at which all items were valued, except scrap iron, should be reduced from 25 to 40 percent on account of a decline in the market, obviously can not be sustained. The decline referred to was from a prior market price, which may or may not have been the cost or invoice price to petitioner of the various items involved. In other words, to reduce the cost or invoice price by the percentages mentioned would n.ot necessarily reflect the decline in the market. Furthermore, the general statement that the market declined 25 to 40 percent is too vague and indefinite to form any reasonable basis for valuation of a specific inventory.

In respect of petitioner’s second contention, that the scrap iron listed in the 1920 inventory should be valued at $20 per ton, it appears that respondent has used this figure in his proposed adjustment.

We find no basis of support in the record for petitioner’s objections. On the other hand, the evidence supports the adjustments to inventories as set out in our findings of fact for all years involved.

Petitioner complains in general terms respecting the methods of determining the inventory adjustments, alleging inconsistency and approximation of amounts in some instances. Such argument is not impressive. If absolute accuracy in determining the amount of petitioner’s inventories is not now attainable, it is the direct result of petitioner’s own failure to take its inventories in a proper manner and to maintain proper records. In our opinion, the adjustments reflect petitioner’s true income, as affected by inventories, as accurately as may be in the present circumstances. Petitioner is complaining in effect of the results of its own wrongful actions, “The Government should not be made to suffer because the taxpayer did not keep proper records to show its correct tax liability.” Miller Saw-Trimmer Co., 32 B. T. A. 931, 939.

Special Assessment.

Petitioner contends that under the provisions of section 327 (d) of the Revenue Act of 1918 it is entitled to have its profits tax for the years 1918, 1919, and 1920 determined as provided in section 328 of said act.

The statute, in part pertinent here, reads as follows:

Seo. 327. That in the following cases, the tax shall be determined as provided in section 32S:
*******
(d) Where upon application by the corporation the Commissioner finds and so declares of record that the tax if determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in section 328. * * *

The sole question for consideration at this time is whether the record discloses abnormal conditions affecting the capital or income of petitioner. If so, petitioner has made a prima facie showing, indicating the probability that subdivision (d) is applicable, notwithstanding it can not be determined, in the absence of comparative data whether there is gross disproportion between the tax of this petitioner and comparable taxpayers, or whether petitioner, in the light of such comparison, would be subject to exceptional hardship. These are matters for later determination under the provisions of section 328. Pierce Oil Corporation, 32 B. T. A. 403, 416.

Petitioner points to two factors which it asserts constitute abnormalities affecting capital and income, namely, the use of large amounts of borrowed capital, and a patent alleged to have a value of $350,000 to $600,000, neither of which items enters into the computation of statutory invested capital. Sec. 326, Revenue Act of 1918; art. 1561, Regulations 45; La Belle Iron Works v. United States, 256 U. S. 377, 389; Stephens-Adamson Manufacturing Co., 16 B. T. A. 41; affd., 51 Fed. (2d) 681.

Since we have found that the patent in question had a value of only $25,000, its importance as a factor indicating Special assessment is greatly diminished. And this is particularly' true in the light of the uncertainty respecting the extent to which the patent was an income-producing factor. The use of this intangible asset in petitioner’s business, under all- the circumstances shown, is insufficient, we think, to justify the granting of special assessment.

Does the, fact that petitioner borrowed considerable amounts of money during the respective taxable years constitute an abnormal condition affecting its capital or income, entitling it to special assessment? Abnormality is a fact that must be determined in each case, and the burden of proof in this respect is upon the petitioner. B. Hayman Co., 25 B. T. A. 736, 744.

The only evidence adduced by petitioner concerning borrowed capital is the stipulation of the parties showing the average daily borrowings for each of the years 1918,1919, and 1920, which amounts are set out in our findings of fact hereinabove.

Petitioner offered no evidence to show that the borrowed money Avas actually used in the operation of its business, or that it contributed to any extent to the production of the taxable income, These are essential elements of proof. Robert Wise Co., 16 B. T. A. 494; Peck Coal Corporation, 15 B. T. A. 189. Nor did petitioner show that the use of borrowed money in the amounts stated was usual or unusual, normal or abnormal, in' the industry or business in which it was engaged. If we should assume that the money borrowed by petitioner was used in its business and was an income-producing factor, nevertheless, if it was customary for corporations engaged in similar businesses to operate upon borrowed money to an extent comparable to that of this petitioner, the borrowed capital used by petitioner could not be said to constitute an abnormal condition. Mere proof of borrowings does not establish abnormality, and, in the absence of evidence respecting the use generally of borrowed ¡ capital in • the particular line of business, there is no basis upon! Avhich we may predicate an opinion that the use of borrowed money in this case created an abnormality. Higginbotham-Bailey-Logan Co., 8 B. T. A. 566; Camden Woolen Co., 12 B. T. A. 1277; Peck Coal Corporation, supra; Western Indiana Gravel Co., 25 B. T. A. 654, 664.

Petitioner’s average daily borrowings approximated 48, 54, and 71 percent of its statutory invested capital for the respective taxable years, and its net income as computed by respondent amounted to 35, 35, and 47 percent of invested capital for the respective years. However, neither the fact that its percentages of profits were high, nor the fact that its borrowed capital constituted a large percentage of invested capital, alone would entitle petitioner to special assessment. Ferdinand Buedingen Co., 13 B. T. A. 1065; C. A. Dahl Co., 10 B. T. A. 915; Deline Manufacturing Co., 6 B. T. A. 711. See also B. Hayman Co., supra; Moses-Rosenthal Co., 17 B. T. A. 622.

Petitioner has wholly failed to bring itself within the purview of section 327 (d), supra, and, on authority of the decisions cited, its plea for special assessment of its profits taxes in accordance with the prolusions of section 328 is denied.

(Reviewed by the Board.

Judgment will be entered under Bule 50.


author: Smith :

text:
    E. R. Hawke, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 76507, 76508.
    Promulgated March 31, 1937.

      Alan W. Davidson, Esq., and D. A. Sargent, G. P. A., for the petitioner.

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

Smith :

The first question for our determination in these proceedings is whether, in computing petitioner’s gain or loss on the sales in 1930 and 1931 of shares of stock of the J. C. Penney Co. which he had acquired in 1928 and 1929 under his contracts with the company, the basis is the amount of cash which he paid to the company for the shares, or their fair market value on the dates of acquisition. Section 113 (a) of the Revenue Act of 1928 provides the basis for determining gain or loss as follows:

(a) Property acquired after February 88, 1913. — The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28,1913, shall be the cost of such property; except that * * *.

The exceptions stated are not applicable in these proceedings. The basis is “cost.”

We must assume that Congress used the term “cost” in its commonly understood meaning as the amount of money which a man pays out in the acquisition of property. This is especially true where a man keeps his accounts and makes, his returns, as did the petitioner, on a cash receipts and disbursements basis.

That the term “cost” ordinarily has this meaning is instanced by a supplemental stipulation of facts filed with this Board in these proceedings on July 21, 1936, a few days after hearing evidence in the case. Such supplemental stipulation reads as follows:

It is hereby stipulated by and between the parties hereto by their respective counsel, that if the Board finds that the petitioner is entitled to use values at dates of acquisition instead of cost for such of the stocks of J. C. Penney Company, sold in 1930 and 1931 as are involved herein, there is a loss from the sales of J. C. Penney Company stocks, including the shares herein involved, of $2,924.34 for the year 1930, and for 1931 there is a profit of $20,101.73, instead of profits of $79,584.34 and $214,774.25 for said years respectively, as determined by the respondent on the basis of cost; and if the Board finds that the basis to be used for the stocks of J. C. Penney Company involved herein is cost, then the profits from the sales of all J. C. Penney Company stocks, including the shares herein involved, are in the amounts determined by the Commissioner.

Of course, the Board in these proceedings must use “cost” as the basis; for that is the basis laid down by the statute. What the parties intended to stipulate as cost in the above stipulation was the amount paid by the petitioner to the J. C. Penney Co. for the shares. This amount was different from the fair market value.

Where property is acquired at a bargain price the amount paid therefor, nevertheless, represents the cost. Taplin v. Commissioner (C. C. A., 6th Cir.), 41 Fed. (2d) 454; Commissioner v. Van Vorst (C. C. A., 9th Cir.), 59 Fed. (2d) 677; Bothwell v. Commissioner (C. C. A., 10th Cir.), 77 Fed. (2d) 35; Commissioner v. Farren (C. C. A., 10th Cir.), 82 Fed. (2d) 141.

Where shares of stock are received as compensation for services they must be included in gross income at their fair market value in the year when received; for the statute requires that there shall be included in gross income: “gains, profits, and income derived from salaries, wages, or compensation for personal services, of whatever kind and in whatever form paid.” (Sec. 22 (a), Revenue Act of 1928.) Old Colony Trust Co. v. Commissioner (C. C. A., 1st Cir.), 59 Fed. (2d) 168; Crowell v. Commissioner (C. C. A., 6th Cir.), 62 Fed. (2d) 51; Olson v. Commissioner (C. C. A., 7th Cir.), 67 Fed. (2d) 726; certiorari denied, 292 U. S. 637. It has also been held that, where a man as a part of his compensation is permitted to purchase stock from his employer at a price below the market and the employer takes as a deduction from gross income as an ordinary and necessary expense the differential between the fair market value of the stock and the cost of the stock to the employer, the amount of the differential is income to the petitioner in the year in which the stock was acquired. Albert Russel Erskine, 26 B. T. A. 147, and cases cited therein. In all such cases the cost to the taxpayer of the shares acquired is the fair market value of the shares. The taxpayer, being in such a case taxed upon the differential in the year of the acquisition of the stock, is not to be taxed again upon the differential in the year of sale; for it must be assumed that it was not the intention of Congress that the taxpayer should be taxed twice in respect of the same income. This is in accordance with the Commissioner’s regulations. Thus, in article 51 of Regulations 74, promulgated under the provisions of the Revenue Act of 1928, the respondent has made the following regulation under “What included in gross income”:

Where property is sold hy a corporation to a shareholder, or by an employer to an employee, for an amount substantially less than its fair market value, such shareholder of the corporation or such employee shall include in gross income the difference between the amount paid for the property and the amount of its fair market value. In computing the gain or loss from the subsequent sale of such property its cost shall be deemed to be its fair market value at the date of acquisition by the shareholder or the employee. * * *

From the position of this article in Regulations 74 there can be no doubt that it was the intention of the Commissioner to permit the addition to the cost basis prescribed by the statute of the differential only in a case where the taxpayer was taxed upon the differential in the year in which the shares were acquired. This is the interpretation placed upon the regulation in Commissioner v. Farren, supra, which we think is the correct interpretation.

The contentions of the petitioner upon this point derive some support from Robinson v. Commissioner (C. C. A., 6th Cir.), 59 Fed. (2d) 1008, and Salvage v. Commissioner (C. C. A., 2d Cir.), 76 Fed. (2d) 112. In both of these cases the taxpayers were permitted to purchase shares of stock at less than their fair market value. In the years in which they acquired the shares they did not report as income and were not taxed upon the differential between the amounts paid for the shares and their fair mai'ket value. Both courts held, however, reversing the Board, that upon a sale of their shares in later years the cost basis prescribed by the statute was not merely the outlay of cash made by the taxpayers in acquiring the stocks, but such amounts plus the differential. In the Salvage case it appeared that Salvage was permitted to acquire shares of Viscose Co. stock at a price of $100 per share when the fair market value of each share was $1,164.70. Under the contract by which he was permitted to acquire such shares the taxpayer agreed that he would not engage at any time throughout his life in any competing business without the company’s consent. The court held that that was a valuable consideration and served to enhance the cost basis prescribed by the statute. The court relied upon article 31 of Regulations 65, which is identical with article 51 of Regulations 74 to the extent quoted above, and interpreted that regulation to give the taxpayer a stepped-up basis regardless of whether the taxpayer was taxed upon the differential in the year when the shares were acquired or not. In this particular the court’s opinion is in conflict with the opinion of the United States Circuit Court of Appeals for the Tenth Circuit in the Farren case.

The Government argued before the Circuit Court of Appeals for the Second Circuit in the Salvage case that the taxpayer was estopped to use a stepped-up basis upon the sale of the shares in 1929 because he had not returned as income the amount of the differential in his income tax return for-1922, the year in which the shares were acquired. In its opinion the Board did not base its holding upon the ground of estoppel and, indeed, did not refer to it. The court’s decision in the Salvage case was affirmed by the Supreme Court in 297 U. S. 106. Apparently the only question before the Supreme Court on the Government’s application for a writ of certiorari was whether the taxpayer was estopped to claim that the difference between the fair market value of the shares acquired in 1922 and the amount paid for the shares should be added to the cash paid by Salvage for the shares in determining the cost basis. Upon this point the Supreme Court stated:

We find no reason to disagree with the judgment of the court.
The defense of estoppel was not before the Board. Under what we regard as the correct practice, General Utilities & Operating Co. v. Helvering, 296 U. S. -, 56 S. Ct. 185, 80 L. Ed. —, decided December 9, 1935, the court should have passed the point. Furthermore, the facts disclosed give it no support.

Manifestly, the Supreme Court did not pass upon the question as to whether the cost to Salvage of his shares ivas the amount of cash which he paid for them or their fair market value at the date of acquisition.

In Commissioner v. Farren, supra, the respondent pleaded estoppel as he has done in these proceedings and the plea was sustained upon the authority of Bothwell v. Commissioner, supra; Larkin v. United States (C. C. A., 8th Cir.), 78 Fed. (2d) 951; Fordyce v. Helvering (C. C. A., 8th Cir.), 78 Fed. (2d) 525; Crane v. Commissioner (C. C. A., 1st Cir.), 68 Fed. (2d) 640; Raleigh v. United States (Ct. Cls.), 5 Fed. Supp. 622; and Stearns v. United States, 291 U. S. 54, 61. A writ of certiorari was granted by the Supreme Court in the Farren case, but the proceeding was dismissed by the Supreme Court on stipulation of counsel on October 26, 1986, 299 U. S. 617. In view of the statement made by the Supreme Court in the Salvage case that the facts disclosed by that case gave no support to the doctrine of estoppel, it is doubtful whether the plea is good in these proceedings.

The Board is of the opinion, however, that the cost to the petitioner of the J. C. Penney Co. shares sold during the taxable year, but purchased in 1928 and 1929, was the amounts of cash paid for the shares, and that the petitioner is not entitled to any stepped-up basis on the theory that the differential between the amount paid for the shares and their fair market value was paid to him as compensation for services. They were not so understood either by the J. C. Penney Co. or the petitioner. The interpretation placed upon the contracts by the parties thereto is of great importance.

The facts in these proceedings clearly show that the petitioner had an option to purchase the shares of stock at prices to be fixed by the company. He was under no compulsion to exercise the option. The actual amount he paid for the shares is not open to dispute. His out-of-pocket cost of the shares was the amounts of cash which he paid for them and nothing more. If the term “cost” is to be given the connotation which we believe was intended by Congress and by the Commissioner’s regulations, the amounts of cash paid out for the shares is the total cost basis.

In Omaha National Bank v. Commissioner (C. C. A., 8th Cir.), 75 Fed. (2d) 434, it was held that where the company’s contract entitled the employee to buy 500 shares of stock at an agreed price and obligated the company to allow credits on the purchase price equal to dividends on 500 shares, and if after seven years the credits did not equal the purchase price, the company was nevertheless to deliver 100 shares, and if three years thereafter the credit still did not equal ihe purchase price of the remaining stock the company would deliver 150 additional shares, and did deliver the 150 shares during the taxable year, the taxable gain realized by the employee upon the receipt of such 150 shares was the amount of the credits made to the employee on the agreed purchase price of the 150 shares, and that the difference between the agreed purchase price and the fair market value of those shares was not income of the taxpayer because it was not a realized gain. Upon the principle announced in that case we think it would have to be held in this case that the excess of the fair market value over the agreed price was not compensation paid for services in the year when the shares were acquired. The determination in a given case must be made upon the facts present in the case. We are of the opinion that the facts which obtain in these proceedings do not warrant a conclusion that the cost basis laid down by the statute is any other than the amount of cash which the petitioner paid for his shares in 1928 and 1929. The second question presented is whether the petitioner sustained a deductible loss in either 1930 or 1931 by reason of his transactions with E. E. Pratt. The certificate which the decedent received from the Master Holding Corporation, Ltd., in 1930, was void, since it was not issued in accordance with the permit which had been granted to the company for the sale of stock by the Department of Investment, Division of Corporations of the State of California. See People v. Stewart, 115 Cal. App. 681; 2 Pac. (2d) 195; Randall v. California Land Buyers’ Syndicate, 217 Cal. 594; 20 Pac. (2d) 381. In McKinnie v. Guardian Holding Corporation, 57 Pac. (2d) 209, it was stated:

* * * tlie shares of stock of Master Holding Corporation that had been issued to her [plaintiff] were null and void, [the lower court] finding that they had been issued in violation of the terms of the permit, in that no sale of "Master” stock had taken place, but merely a transfer of stock of Guardian Holding Corporation.

The petitioner’s tax returns for 1930 and 1931 were made upon a cash receipts and disbursements basis. Although he gave a promissory note to Pratt in 1930 in the amount of $50,000, he made no payment upon the note in that year. He can not, therefore, claim that he sustained any deductible loss in 1930.

Although in his income tax return for 1931 the petitioner did not claim any loss in respect of his payments of $30,803 on the note to Pratt in that year, he has made such claim in his petition in Docket No. 76507. The respondent contends that the petitioner is not entitled to claim a deduction for this loss in 1931, upon the ground that the petitioner did not learn that his certificate for the shares of stock was worthless until 1932 and that shortly thereafter he brought suit against Pratt and others for the recovery of the amount paid and the return of the promissory note, upon which a balance was still owing. His contention is that the petitioner can not take a loss until he can prove that he can not recover from Pratt.

We are of the opinion that there is no merit in this contention. The possibility of recovery from Pratt is too remote to warrant the postponement of the taking of the claimed loss. See Commissioner v. Thatcher & Co. (C. C. A., 2d Cir.), 76 Fed. (2d) 900, where the court held that a general building contractor’s claim against defaulting subcontractors, for damages in the amount by which the cost of completing their work exceeded the amount received by the general contractor was too contingent to be considered compensation for loss already realized by the taxpayer within the statute authorizing the deduction of losses not “compensated for by insurance or otherwise.” Cf. Carolina Contracting Co., 32 B. T. A. 1171, and cases therein relied upon.

The question of when a loss is sustained by a taxpayer is a question of fact. Because a taxpayer may in a subsequent year recoup a part of the loss is no ground for denying the deduction of the loss in a year when all the surrounding and attendant circumstances indicate a loss has been sustained. United States v. S. S. White Dental Manufacturing Co. of Pennsylvania, 274 U. S. 398. The plain facts are that the petitioner in 1931 paid $30,803 for shares of stock that were unlawfully issued and had no legal status. The amount paid was lost, we think, in 1931.

The facts in these proceedings upon the point in issue are similar to those which obtained in Miniger v. Denman, — Fed. Supp. — (U. S. Dist. Ct. No. Dist. Ohio). There the plaintiff owned stock which he had paid for in part by giving his demand note payable in 60 days. The court held “that to the extent that the purchase price of said stock is represented by said note, the loss thereon is properly deductible not at the time the stock became worthless, but at the time of payment of said note, if, when and to the extent that said note shall be paid.” See also Page v. Rhode Island Hospital Trust Co., 88 Fed. (2d) 192.

In Burnet v. Huff, 288 U. S. 156, it was held that, where one party had to make good the defalcation of another party, he was entitled to the deduction only in the year in which he actually paid the money, and not in the year when he discovered the loss.

In Commissioner v. Highway Trailer Co. (C. C. A., 7th Cir.), 72 Fed. (2d) 918, it was held that a taxpayer who in 1921 suffered a loss by fire which was not covered by insurance and recovered judgment for damages for a part of the loss, which judgment was reversed by the State Supreme Court in 1925, was not entitled to deduct such loss for 1925, since the entire deduction occurred in the year 1921, which was' the only year in which the loss could be taken.

The petitioner is entitled to the deduction from gross income of 1931 of $30,803 representing the payment made on his note in that year. Any amount recovered by him in subsequent years will be taxable in the year in which the recovery is made.

Reviewed by the Board.

Judgment will be entered under Rule 50.

AruNdell, VaN FossaN, TURNER, Arnold, and Disney concur only in the result.

Leech dissents on the first point.


author: Miller :

text:
    Anderson-Clayton Securities Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78340.
    Promulgated March 31, 1937.

      John G. White, Esq., for the petitioner.

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

Miller :

The Commissioner determined a deficiency in income tax of the petitioner and afiiliated companies for the fiscal year ended July 81,1931, in the amount of $17,837.44.

The petitioner contends that the respondent erred (1) in holding that the Abilene Cotton Oil Co., the Lockney Cotton Oil Co., Munday Cotton Oil Co., Plainview Cotton Oil Co., Slaten Cotton Oil Co., and Winters Cotton Oil Co. were not affiliated during the fiscal year ended July 31, 1931, with the affiliated group of which the petitioner is the parent corporation; (2) in failing to allow as a credit the amount of $19,989.53 paid to British India by a member of the affiliated group; and (3) in failing to allow as a deduction accrued claims and expenses in the amount of $70,976.57. The petitioner claims that as a result of such alleged errors it is entitled to a refund for overpayment of taxes in the amount of $28,506.72 with interest.

The facts were stipulated. We adopt them as our findings, and set out here only those necessary for an understanding of the questions presented.

The first question to be determined is whether the six companies included in the amended consolidated return for the fiscal year ended July 31, 1931, were, during that year, affiliated with the petitioner, within the meaning of section 141 (d) of the Revenue Act of 1928. In answering this question consideration must be given, not only to the common stock, but to the preferred stock of the six companies, because, under the facts stipulated, such preferred stock in each case had acquired voting rights. See Vermont Hydro-Electric Corporation, 29 B. T. A. 1006; Pantlind Hotel Co., 23 B. T. A. 1207; Atlantic City Electric Co. v. Commissioner, 288 U. S. 152.

Anderson-Clayton Industries, Inc., a member' of the affiliated group, owned 100 percent of the preferred stock of all six companies. It also owned 64 percent of the common stock of each of the six companies; measured in number of shares. The preferred stock of each of the six companies had a voting power of 50 votes per share and a par value of $100 per share. The common stock of each of the six companies had a voting power of one vote per share and a par value of $2 per share. Thus, using the Abilene Cotton Oil Co. as an example, we see that Anderson-Clayton Industries, Inc., owned all of the 4,800 shares of preferred stock, which had' a par value of $480,000 and a voting power of 240,000 votes. Of the 10,000 shares of common, the 6,400 shares owned by Anderson-Clayton Industries, Inc., had a par value of $12,800 and a voting power of 6,400 votes. The 3,600 shares of common stock remaining had a par value of $7,200 and a voting power of 3,600 votes. Petitioner contends that, calculating the stock ownership by the amount invested and voting strength, Anderson-Clayton Industries, Inc., owned 98.56 percent of the total Abilene stock. Respondent contends that the only basis for calculation of stock ownership is by shares, and, consequently, since petitioner owned only 64 percent of the shares of common stock, it owned only 75.67 .percent of the combined classes of stock. This amount, obviously, is far below the 95 percent required by the statute.

We can not agree with respondent’s contention. If Congress had wished to make ownership of a certain percentage of shares determinative, it could easily have done so by using the word shares as it has done in other instances; for example, in the Revenue Act of 1928, section 112 (i) (1), relating to reorganization, to which reference is hereinafter made. Here, the language of the statute is ownership of stock.

It is quite true, as urged by respondent, that the words “stock” and “shares” are sometimes used interchangeably and synonymously. Wright v. Georgia Railroad & Banking Co., 216 U. S. 420, 425; Eisner v. Macomber, 252 U. S. 189. Respondent refers also, in his brief, to similar usage in decisions of this Board, interpreting the terms “majority of stock” and “majority of shares of. stock”, as those terms are found in the statutes. Thomas W. White (1928 Act) 29 B. T. A. 1272; affirmed in Fordyce v. Helvering, 76 Fed. (2d) 431; Von Weise v. Commissioner, 69 Fed. (2d) 439, affirming Philip D. C. Ball (sec. 203 (h) (1), 1926 Act), 27 B. T. A. 388; Federal Grain Corporation (sec. 203 (i), 1924 Act), 18 B. T. A. 242, 248. In none of them was any question raised concerning the interchangeable use of the words; and in none of them does it appear that there was any difference in par value or voting power of the different types of stock.

That the words are not always used interchangeably or synonymously is equally certain. Thus, in Ray Copper Co. v. United States, 268 U. S. 373, the Court said: “The capital stock of a corporation, its net assets and its shares of stock are entirely different things.” In Trask v. Maguire, 18 Wall. 391, 402, the Court said: “The term(s) ‘stock of the company’ imported the capital stock of such company, the subscribed fund which the company held, as distinguished from the separate interests of the individual stockholders.” Again, in Wright v. Georgia Railroad & Banking Co., supra, the Court said:

There is an obvious distinction between the capital stock of an incorporated, company and the “shares” of the company. The one is the capital upon which the business is to be undertaken, and is represented by the property of every kind acquired by the company. Shares are the mere certificates which represent a subscriber’s contribution to the capital stock and measure his interest in the company.

See also Powers v. Detroit & Grand Haven Railway, 201 U. S. 543, 559, and cases there cited.

Where synonymous usage does occur it results, no doubt, from the assumption, frequently made, that each share represents an equal interest in the stock of the company; Continental Securities Co. v. Interborough Rapid Transit Co., 165 Fed. 945, 963, quoting from the Century Dictionary; and that each share of stock is entitled to one vote. III Cook on Corporations (8th ed.) 2123, §609. Where corporate organization follows such a simple and conventional form, then the method of calculation suggested by respondent will produce a normal result. Where, as in this case, different types of shares represent different proportionate interests and different voting-powers, such a method of calculation may produce results contrary to the clear purpose of the statute.

The terms. “share”, “stock”, “capital”, and “capital stock” are of frequent but not uniform use. Powers v. Detroit & Grand Haven Railway, supra. The Supreme Court of the United States has said that the term “capital stock” has no fixed meaning or significance in taxing statutes. Ray Copper Co. v. United States, supra. In the absence of definition or fixed meaning, it is necessary to construe these words as they may be found in a particular statute “by reference to the context, the nature and purpose of the statute, its history and other aids to construction.” Ray Copper Co. v. United States, supra. See also Wright v. Georgia Railroad & Banking Co., supra; Powers v. Detroit & Grand Raven Railway, supra.

As regards the nature and purpose of the statute the Supreme Court has said:

The purpose of section 240 was, by means of consolidated returns, to require taxes to be levied according to the true net income and invested capital resulting from and employed in a single business enterprise, even though it was conducted by means of more than one corporation. [Handy and Harmon v. Burnet, 284 U. S. 136, 140.]

Following this statement in the opinion, article 631 of Regulations 45, is set out in a note. That article contains the following statement of purpose:

Where such branches or units of a business are owned and controlled through the medium of separate corporations, it is necessary to require a consolidated return in order that the invested capital and net income of the entire group may be accurately determined.

See also Atlantic City Electric Co. v. Commissioner, 288 U. S. 152; Commissioner v. Aluminum Goods Manufacturing Co., 287 U. S. 544.

There can be no doubt that Anderson-Clayton Industries, Inc., owned shares of stock in each of the six companies, representing more than 95 percent of the capital stock. This being true, the purpose of the section can be best achieved by holding that affiliation existed.

The context in which the word is used may well be considered in connection with the history of the section. The Revenue Act of 1918, section 240 (b), allowed affiliation or the making of consolidated returns by á group of corporations Avhere one corporation “owns directly or controls * * * substantially all the stock.” An identical provision occurs in the Act of 1921, section 240 (c). The Revenue Act of 1924, section 240 (c), provided that two or more domestic corporations should be deemed affiliated “(1) if one corporation owns at least 95 per centum of the voting stock of the other or others or (2) if at least 95 per centum of the voting stock of two or more corporations is owned by the same interests.” The Revenue Act of 1926, section 240 (c), reproduced the quoted provision of the Act of 1924, but confined its application to affiliation during the year 1925; and added in section 240 (d), for application' in the year 1926 and thereafter, the same provision except for the omission of the word “voting” and with this qualification: “As used in this subdivision the term ‘stock’ does not include nonvoting stock which is limited and preferred as to dividends.” This, then, is the prototype of section 142 (c) of the Revenue Act of 1928, now before us. This historical analysis of the provision reveals that in the later acts the words “substantially all” were eliminated, probably because they were too indefinite; and that although the word “controls” was also eliminated, the idea of control, as well as ownership of the stock is retained in part, at least, by inserting, in the 1924 Act, the word “voting” before the word “stock” and by adding, in the 1926 and subsequent acts, the provision relating to nonvoting stock.

In Atlantic City Electric Co. v. Commissioner, supra, the Supreme Court said (p. 384) : “The requirement of control, in the absence of legal title or beneficial ownership, is not satisfied by acquiescence or by business considerations without binding force. There must be a control that is legally enforceable.” Whether we think of control in terms of “substantially all” of the stock or in terms of 95 per centum of the stock, the result is the same. Anderson-Clayton Industries, Inc., held legal title to stock possessing more than 95 per centum of the total voting power and enjoyed a beneficial ownership of more than 95 per centum of the capital stock. There was certainly a control which was legally enforceable.

In Palgrore Co. v. Commissioner, 63 Fed. (2d) 810, the court said:

The only question in this c¿se is whether' the petitioner was affiliated with A. Klipstein & Co. We may ignore the other two parties to the affiliation. We regard the case as ruled by Harman v. Burnet, 284 U. S. 136, 52 S. Ct. 51, 76 L. Ed. 207. The change in the act of 1918 limits, rather than extends, affiliation. The original act (section 240 (b), 40 Stat. 1082) read “owned or controlled”; the Revenue Act of 1926, under which this case arises (section 240 (c), 26 USCA § 993 and note) uses only the word, “owned”. It is plain that the “same interests” did not' own 95 per cent of both companies. August Klipstein, Jr., owned 98 per cent of the petitioner and 25 per cent of A. Klipstein & Co. The other three owners (we omit August Klipstein, Sr’s., insignificant holding), also each owned 25 per cent. It is true that these three were members of the same family as August Klipstein, Jr., and we may assume that in practice they acted in concert with him, but they had neither beneficial nor legal ownership of any shares in the Palgrove Company, and it is this alone which counts.

It will be noted that the court, while expressly recognizing the change in statutory language from “owned or controlled” to “owned”, pointed out, in denying affiliation, that the same interests “did not own 95 per cent of both companies. August Klipstein, Jr. owned 98 per cent of the petitioner and 25 per cent of A. Klipstein & Co.”

In the same sense, it is clearly apparent that Anderson-Clayton Industries, Inc., owned more than 95 percent of the six companies. Our conclusion is that they were affiliated with the petitioner during the taxable period. '

Petitioner claims credit for $19,985.53 taxes paid to British India, for the British Indian tax year April 1, 1932, to March 31, 1933, upon income received by petitioner for its fiscal year, which ended July 31, 1931. There is no dispute as to the character of the tax, credit for which is claimed, or as to the amount thereof. Respondent concedes that petitioner is entitled to an additional credit; less, however, than $19,985.53, on the theory that the tax exceeds the net Indian income, and that credit can not be allowed for income taxes paid to a foreign country in excess of the net income derived from that country.

Section 131 of the Revenue Act of 1928, in so far as applicable here, provides as follows:

(a) Allowance of credit. — 1Tlie tax imposed by this title shall be credited with:
(1) Citizen and domestic corporation. — In the case of a citizen of the United States and of a domestic corporation, the amount of any income, war-profits, and excess-profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States;
*******
(b) Limit on credit. — In no case shall the amount of credit taken under this section exceed the same proportion of the tax (computed on the basis of the taxpayer’s net income without the deduction of any income, war-profits, or excess-profits tax any part of which may be allowed to him as a credit by this section), against which such credit is taken, which the taxpayer’s net income (computed without the deduction of any such income, war-profits, or excess-profits tax) from sources without the United States bears to his entire net income (computed without such deduction) for the same taxable year.
*******

Tlie operation of tbe limitation provided for in the section set forth above, is illustrated in article 696 of Regulations 74 as follows:

Income from sources within the United States_$50, 000. 00
Income from sources without the United States_ 25, 000. 00
Total net income (without deduction of - income and profits taxes paid or accrued to foreign countries or possessions of the United
States_ 75, 000. 00 United States income tax on $75,000_ 10,183.75
Foreign income and profits taxes upon $25,000_ 5, 000. 00 Amount which may be credited against the United States tax
25000/ 7500of $10,183.75_ 3,394.58

Subsection (b) of the section quoted above contains the only limitation upon the amount of the credit deductible for foreign taxes paid or accrued during the taxable year involved. That limitation is based upon the ratio of net income derived from all sources without the United States to the total net income of the taxpayer, and not, as respondent contends, upon the ratio of net income derived from the country to which the tax was paid. Although the point is not argued in his brief, its submission to the Board suggests that respondent seeks to construe section 131 (b) of the 1928 Act in such manner as to read into it the new limitation which appeared for the first time in section 131 (b) (1) and (2) of the 1932 Act. Such a construction is clearly unjustified. The language of the House Reports on section 131 of the Revenue Bill of 1932 clearly indicates an intention on the part of Congress to amend the existing law and not merely to establish or impose a construction of the earlier statute. See House Report, pp. 23, 24, and Senate Report, p. 32. If any doubt exists as to the intention of Congress on the point, it should be resolved in favor of the taxpayer, Gould v. Gould, 245 U. S. 151. See also, Lewellyn v. Frick, 268 U. S. 238; Smietanka v. First Trust Savings Bank, 251 U. S. 602; United States v. Field, 255 U. S. 257. Our decision is that an additional credit shall be allowed.

The last issue to be considered involves the question whether Anderson, Clayton & Co., a member of the affiliated group, is entitled to deduct the amount of $70,976.57, consisting of two items of $68,440.41, supplemental cost of cotton purchased under patronage contracts, and $2,536.16, office expense. At the end of the fiscal year here involved the Los Angeles office of Anderson, Clayton & Co. calculated its net profits in accordance with its so-called patronage contracts with Arizona and California cotton growers. The amount owing as supplemental prices payable to cotton growers under such contracts as of July 31, 1931, consisted of one-half of the net profits earned during the taxable year by the sale during that year, of cotton so purchased, and was estimated to be $124,926.75. Of this amount $39,926.75 had been paid during the fiscal year ended July 31, 1931, and this amount was allowed as a deduction by the respondent. The remainder, or $85,000, was set up on its books as a liability in an account entitled “Reserve for Patronage Contracts.” In the succeeding year the company paid, under such contracts for account of the Arizona and California cotton growers, the amount of $68,440.41. Petitioner contends that it is entitled to this further deduction.

Reserves as. such are not deductible, except such reserves as are specifically provided for in the revenue acts, “but when an item is without question within the realm of ordinary and necessary business expenses, it may be deducted in the case of a taxpayer on an accrual basis, in the year in which incurred, regardless of the style of accounting nomenclature by which it may be called.” Rogers, Brown & Crocker Brothers, Inc., 32 B. T. A. 307. It was stipulated that petitioner observed an accrual method of accounting and filed its returns on the accrual basis.

The liability of Anderson, Clayton & Co. for supplemental payments made to the growers, accrued, under the patronage contracts, for cotton purchased and sold during that year. Although the actual amount of the liability was not definitely established in the fiscal year which ended July 31, 1931, it arose out of business transacted, and represented a part of the cost of the cotton purchased and sold during that year. Where all events have occurred within the taxable year which determined the liability of the taxpayer, that liability properly may be said to be accrued, although the amount thereof has not been definitely ascertained during the year. In the words of Mr. Justice Hand “It was unknown not unknowable.” Uncasville Manufacturing Co. v. Commissioner, 55 Fed. (2d) 893, 895. See also Brown v. Helvering, 291 U. S. 193; United States v. Anderson, 269 U. S. 422; Helvering v. Russian Finance Co., 77 Fed. (2d) 324.

To compute correctly the profit earned on cotton sold during the taxable year, the entire cost of such cotton should be taken into consideration. The liability for such supplemental cost set up on the books of account was definitely established to the extent of $68,-440.41 in the succeeding fiscal year. Under the circumstances, therefore, we hold that this item is deductible. See Home Builders Shipping Association, 8 B. T. A. 903; Anamosa Farmers Creamery Co., 13 B. T. A. 907; Farmers' Union Co-Operative Association, 13 B. T. A. 969; cf. Farmers Union State Exchange, 30 B. T. A. 1051, 1066.

One final point remains for consideration, namely, the disallowance by the Commissioner of expenses in the amount of $2,536.16. It was stipulated that:

xxxv
Petitioner incurred other expenses of $10,068.13 during the year involved on account of the Los Angeles office and has thus far been allowed by the Commission as a deduction only $7,581.97 of said amount.

In petitioner’s brief (p. 29) the following statement is made:

During the following year taxpayer paid out $68,440.41 on account of such liabilities, and in addition wrote down the reserve $2,536.16 which due to the method of handling by the revenue agent resulted in an unintentional disal-lowance of $2,536.16 of other accrued expenses. (Stipulation paragraph XXXV.)

As respondent does not argue — or even mention — the point in his brief, we assume that the parties intended to stipulate that these expenses were ordinary and necessary expenses paid or incurred during the taxable year in carrying on petitioner’s business pursuant to the terms of section 23 (a) of the Revenue Act of 1928, and we hold that the petitioner is entitled to this deduction.

Reviewed by the Board.

Decision will he entered, under Bule 50.

       (a) Definition of “affiliated group”. — As used in this section an “affiliated group" means one or more chains of corporations connected through stock ownership with a common parent corporation if—
      (1) At least 95 per centum of the stock of each of the corporations (except the common parent corporation) is owned directly by one or more of the other corporations; and
      (2) The common parent corporation owns directly at least 95 per centum of the stock of at least one of the other corporations.
      As used in this subsection the term “stock” does not include nonvoting stock which is limited and preferred as to dividends.

        Subsection (b). Under section 331 (b) of the existing law the credit allowed for taxes paid to foreign countries is subjected to a limitation in order to prevent foreign taxes from absorbing the tax on income from sources within the United States. This limitation being based1 upon the ratio of net income derived from all sources without the United States to the total net income, gives preferential treatment to some taxpayers deriving income from more than one foreign country. * * *
      Accordingly, a further limitation has been placed upon the credit so that in the case of any one country the credit for taxes paid thereto may not exceed an amount which bears the same relation to the total tax as the net income from the country imposing such tax bears to the total net income.

       In addition to the limitation contained in the existing law, by reason of which the credit for foreign taxes may not exceed the same proportion of the tax against which the credit is taken which the amount of net income from foreign sources bears to the total net income, the House bill added the limitation that the credit for taxes paid to any country should not exceed the same proportion of the tax as the income from that country bears to the total income. In the judgment of your committee, this additional limitation imposes undue restrictions upon our citizens doing business in foreign countries, and it has therefore been eliminated.


author: Mellott: ÁRundell,

text:
    Robert C. Winmill, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 79036.
    Promulgated March 31, 1937.

      Thomas M. Wilkins, Esq., for the petitioner.

      John H. Pigg, Esq., for the respondent.
   OPINION.

Mellott:

Petitioner seeks redetermination of a deficiency in income tax for the calendar year 1932 in the amount of $5,508.14. In his income tax return for said year he reported as income and claimed as deductions items as follows:

Income
Line -8. Interest on Bank Deposits, Notes, Corporation Bonds, etc. (except interest on tax-free covenant bonds)-$29, 876. 34
Line 5. Income from partnerships, Syndicates, Pools, etc. Gude-Winmill & Co., No. 1 Wall Street,
New York, New York_ 27,984.15
Line 8. Loss on Sale of Stocks, Bonds, etc. (Prom Schedule C) In connection with business-$172, 771.02
Line 10. Dividends on: (a) Stock of Domestic Corporations subject to taxation under Title I of 1932 Act_$11,785. 00
Line 12. Deficit in Items 1 to 11-$103,125. 53
Deductions
Line 14. Taxes paid (Explain in Schedule P)- 10, 860. 86
Line 18. Other Deductions not Reported above (Explain in Schedule P) Capital loss held over
2 years_ 22, 560.05
Line 19. Total Deductions in Items 13 to 18_ 33,420. 91
Line 20. Net Loss (Item 12 plus Item 19)_ 136, 546. 44
Line 22. Net Deficit for Tax Computation_ 136, 546.44

At the hearing before us the following facts were stipulated:

(1) During the calendar year 1932 and for several years prior thereto the petitioner, Robert C. Winmill, was a member of the partnership of Gude, Win-mill & Co., with offices at No. 1 Wall Street, New York, New York, which said partnership was engaged in the stock brokerage business.
(2) During 1932 petitioner operated three separate securities trading accounts the entire interest in each of which was his own. During that year he sold 61,992 shares of stock through said three accounts in 419 separate sales transactions representing stock purchases of 61,992 shares made through the said three accounts in 353 separate purchases, the cost of which to the petitioner was $2,884,531.14, exclusive of purchase commissions, which amounted to $8,911.00. Of these commissions $1,417.50 were paid by petitioner in 1931 and $7,493.50 were paid by petitioner in 1932. The said 61,992 shares of stock were sold in 1932 by petitioner for $2,722,904.37. During 1932 petitioner paid broEers commissions on said sales in the amount of $9,574.00. During 1932 petitioner also paid sales taxes on said sales in the amount of $5,072.95.
(3) During 1932 petitioner operated jointly with other persons four securities trading accounts in each of which he had a fractional interest, and which accounts were operated as joint ventures. Each of these accounts was operated at a profit. During that year there were sold 2,525 shares of stock through said four accounts in 22 separate sales transactions representing stock purchases of 2,525 shares made through the said three accounts in 22 separate purchases. Petitioner’s share in the cost of the said 2,525 shares of stock was $68,300.00. Petitioner’s share of the buying commissions paid by him on said purchases during 1932 amounted to an additional $270.00. The said 2,525 shares of stock were sold through the said four accounts during 1032 for an amount of which petitioner’s share was $71,687.88. .Petitioner’s share of the selling commissions paid by him during 1932 amounted to $273.75. Petitioner’s share of the sales taxes paid by him during 1982 on said sales amounted to $66.83. Petitioner’s share of the gains from these said four joint accounts during 1932 amounted to $2,267.80, after payment of all costs and expenses.
(4) None of the shares sold through any of the above described seven accounts was held for two years or more.
(5)On his 1932 return petitioner claimed a loss deduction of $172,771.02, on account of the 419 sales transactions and the 22 sales transactions described in paragraphs (2) and (3), above. 1 In his determination of the deficiency involved, the Commissioner disallowed the deduction so claimed on the petitioner’s return, and increased the petitioner’s income for the year 1932 by the following amounts:
Stock profit joint accounts_ $2, 247. 65
Stock losses_ 172,771. 02
Total- $175,018.67
(6) The taxes above referred to in the amount of $5,072.95 were claimed as a deduction by petitioner in his 1932 return and were allowed by the Commissioner.
(7) At the end of the year 1932 petitioner had on hand in his said three individual trading accounts, shares of stock on which commissions in the amount of $403.00 were paid by him in 1932, which is not included in any of the amounts of commissions hereinabove described and set forth.
(8) No part of the broker’s commissions, above referred to, in the amounts of $8,911.00, $9',574.00 and $403.00 have been allowed by the Commissioner as deductions.
(9) Except as to broker’s commissions, as shown herein above, the petitioner kept his records and filed his returns, including his records and return for the year 1932, on the cash receipts and disbursements basis.

Petitioner’s and respondent’s joint exhibit A-l shows in detail the result of the operations of the seven trading accounts. It discloses a total loss on the sales made through the three individual accounts in the amount of $115,038.82, said amount including commissions but not tax (the taxes having been claimed and allowed as deductions). It shows also the petitioner’s share of the net gain from the operations of the four joint stock trading accounts in which he had an interest and which accounts were operated as joint ventures, such distributive share of the net gain being $2,261.80.

In addition to the stipulated facts petitioner testified, and we find as a fact, that he devoted a portion of his time to the operation of the seven trading accounts.

The controversy between the parties is chiefly because the respondent applied section 23 (r) of the Revenue Act of 1932 and disallowed, as a deduction from petitioner’s gross income, the losses sustained by him in the several trading accounts. Upon brief, petitioner argues that the section is unconstitutional and void. The pleadings apparently raise no such issue and perhaps it should not be considered. Frederick N. Dillon, 20 B. T. A. 690; Coca-Cola Bottling Co., 22 B. T. A. 686. But inasmuch as the section merely places a limitation upon the deduction of losses, we are satisfied that it is constitutional. “Unquestionably, Congress has power to condition, limit, or deny deductions from gross income in order to arrive at the net that it chooses to tax.” Burnet v. Thompson Oil & Gas Co., 283 U. S. 301, 304. Stanton v. Baltic Mining Co., 240 U. S. 103; Brushaber v. Union Pacific Railroad Co., 240 U. S. 1, 23, 24. Helvering v. Independent Life Insurance Co., 292 U. S. 371-381; Commissioner v. Lafayette Life Insurance Co., 67 Fed. (2d) 209; Lloyd v. Commissioner, 55 Fed. (2d) 842. Any doubt which may have existed as to the constitutionality of the section is completely dispelled by the opinion of the Court of Appeals for the Second Circuit in the recent case of Davis v. United States, 87 Fed. (2d) 323. Nothing more need be said on this point.

Section 23 (r) being constitutional and valid, may petitioner offset his gains from the partnership of Gude, Winmill & Co. and from the four joint accounts by his losses on the three accounts owned and operated by him individually ? We think not.

Section 1111 (a) (3) of the Revenue Act of 1932 defines “partnership” as follows:

<3) The term “partnership” includes a syndicate, group, pool, joint venture, or ■other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this Act, a trust or estate or a corporation; and the term “partner” includes a member in such a syndicate, group, pool, joint venture, or organization.

It is clear that if petitioner and his associates were not partners in the generally accepted sense of the term, they were nevertheless engaged in a joint venture in conducting the four joint accounts and dividing the profits and losses, and, at least for present purposes, such joint ventures must be considered as partnerships. This brings us, then, to the question decided in Percy H. Johnston, 34 B. T. A. 276. It was there held that a partner, entitled as such to a share of the profits of a partnership upon its sale of noncapital assets, could not, in computing his individual taxable income, reduce his share of profits therefrom by the amount of his loss upon the sale of similar assets owned by him individually. Our decision was recently affirmed by the Circuit Court of Appeals for the Second Circuit (Johnston v. Commissioner, 86 Fed. (2d) 732. The court in its opinion says: “* * * the petitioner must treat his share of the partnership gain as ordinary income in his return since he cannot sustain the claimed right to have it retain there its status as a gain derived from the sale of non-capital assets by bringing it within one of the exceptions to the general rule which Congress has created.” This conclusion was reached upon a consideration by the court of the various sections of the revenue act relating to partnerships, which, the court said, disclosed a scheme providing, “in general for the carrying over into his own return of a partner’s distributive share of partnership income as computed in the partnership information return as so much ordinary income without noticing its source as shown by the partnership return except in those instances for which especial provision has been made.” (Johnston v. Commissioner, supra.) We accordingly hold that the proposed offset can not be made.

The remaining contention of petitioner is that even if section 23 (r) is constitutional and applicable, nevertheless the commissions paid to brokers in connection with the buying and selling of speculative securities are deductible from gross income either as ordinary and necessary business expenses under the provisions of section 23 (a) of the Revenue Act of 1932, or as losses, under the provisions of section 23 (e) of the same act.

All of the revenue acts have allowed, as deductions from gross income, the ordinary and necessary expenses of carrying on a trade or business and losses incurred in trade or business or in transactions entered into for profit; but commissions paid in purchasing and selling speculative securities have never been held to be deductible either as business expenses or as losses. Prior to 1932, the Treasury regulations consistently provided that commissions paid in purchasing securities are a part of the cost price of such securities and commissions paid in selling securities are an offset against the selling price. Art. 108, Regulations 33 (Revised) (1916); art. 293, Regulations 45 (1918); art. 293, Regulations 62 (1921); art. 292, Regulations 65 (1924); art. 292, Regulations 69 (1926); and art. 282, Regulations 74 (1928). This regulation has been upheld by the courts and by this Board in a number of decisions. E. P. Greenwood, 34 B. T. A. 1209; Florence G. Baldwin, 23 B. T. A. 512; I. N. Burman, 23 B. T. A. 639; Frank Cavanaugh, 19 B. T. A. 1251; and Hutton v. Commissioner, 39 Fed. (2d) 459, affirming 12 B. T. A. 265.

In Hutton v. Commissioner, supra, the Circuit Court of Appeals for the Fifth Circuit said:

It is clear that the taxpayer suffers no hardship by the rule, as the commission paid in purchasing the securities may be deducted from the profits or added to the losses when the securities are eventually sold.

The regulation was tacitly approved by the Supreme Court in Helvering v. Union Pacific Railroad Co., 293 U. S. 282. In that case the Court, holding that commissions paid by a taxpayer for the sale of its own bonds were not deductible as ordinary and necessary expenses, said:

In this respect the commissions do not differ from brokerage commissions paid upon the purchase or sale of property. The regulations have consistently treated such commissions, not as items of current expense but as additions to the cost of the property or deductions from the proceeds of sale, in arriving at net capital profit or loss for purposes of computing the tax.

Does section 23 (r) require a modification of, or a departure from, the consistent treatment which has always been accorded to brokerage commissions paid upon the purchase or sale of speculative securities ? We think not. The section merely places a limitation upon the deductions from gross income which may be taken as “losses from sales or exchanges” of noncapital assets by providing that they “shall be allowed only to the extent of the gains from such sales or exchanges.”

Petitioner argues that if Congress had intended to include commissions within such losses, it would have made specific reference to them either in section 23 (r) or in section 23 (t). He refers to the familiar rule enunciated by the Supreme Court in Gould v. Gould, 245 U. S. 151, and oft applied by this Board, that tax-leving statutes are not to be extended by implication and doubt is to be resolved in favor of the taxpayer. But the rule is not applicable here. Congress did not define “losses” and we must presume that the term was used in the section in question as it had been construed by the courts and by this Board. “Unless the contrary appears, statutory words are presumed to be used in their ordinary and usual sense, and with the meaning commonly attributable to them.” DeGanay v. Lederer, 250 U. S. 316.

But, says petitioner, unless the commissions are allowed as ordinary and necessary business expenses or as losses they will never be reflected against taxable income in any year. We do not agree with this contention. The effect of adding the commissions to the cost of the stock purchased in 1932 and offsetting them against the selling price of the stock sold in that year was to increase the amount of the losses for that year. Under the provisions of section 23 (r) (2) losses, disallowed as a deduction by paragraph (1) of the same section, to an amount not in excess of the taxpayer’s net income for the taxable year, were to be considered for the purpose of computing his income as losses sustained in the succeeding taxable year from sales or exchanges of stocks or bonds which were not capital assets. Such losses, under the construction of the Department, approved by the courts and by this Board, included the commissions. It is clear that if petitioner had sufficient gains from the sale of noncapital assets in 1933 to absorb the losses disallowed in 1932, he suffered no hardship by the treatment accorded to the commissions. The mere fact, if it is a fact, that he did not have sufficient gains in 1933 to enable him to so utilize all of the 1932 losses, does not justify overturning or setting aside the rule theretofore consistently followed by the Department for the computation of such losses.

The regulation as amended in 1932 has not been considered by the courts or by this Board. So far as pertinent herein it reads:

Commissions paid in purchasing securities are a part of the cost price of such securities. Commissions paid in selling securities when such commissions are not an ordinary, and necessary lousiness expense, are an offset against the selling price. [Art. 282, Regulations 77.]

The italicized portion was added in 1932.

Petitioner contends that the regulation as amended authorizes the deduction of the selling commissions from the gross income of a trader in securities as ordinary and necessary expenses of carrying on a trade or business. Having reached this conclusion he takes the next step and contends that if the selling commissions are deductible then no good reason exists for treating otherwise the buying commissions. But did the amendment to the regulations have such a far-reaching effect? We think not. A clue to what was intended by it may be gleaned from a memorandum of the general counsel of the Department issued about the time that it was made. Therein (G. C. M. 15430, XIV-2 C. B. 59) it is stated, in effect, that the Department had undertaken, by the amendment in question, to create an exception to the general rule, which was to be applicable only to dealers in securities. We need not decide whether such exception was valid or not, nor do we pass upon it. But we do decide that the amendment did not have the effect of making the brokerage commissions, paid by a trader in securities, deductible either as ordinary and necessary expenses of carrying on a trade or business or as losses.

It follows that the deficiency determined by the respondent should be, and it is, approved.

Reviewed by the Board.

Judgment will be entered under Bule 50.

Smith and Disney concur only in the result.

ÁRundell,

dissenting: I disagree on the last point — the treatment of brokers’ commissions. In my opinion the majority report errs in failing to allow the commissions to be deducted as ordinary and necessary expenses.

The facts stipulated abundantly establish that the taxpayer’s activities in buying and selling securities amounted to a trade or business. Being engaged in a trade or business, it would seem that his expenses would be deductible under that section of the statute which allows the deduction of “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” Sec. 23 (a). It is difficult to see why commissions, particularly selling commissions, are not ordinary and necessary expenses. They are a part of the cost of selling goods, treated as such generally in business, and are allowed by the Commissioner’s regulations to dealers in securities as distinguished from traders in that class of goods without expressed reason for the distinction. The statute makes no such distinction.

Earlier decisions are pointed to as establishing that commissions are not treated as expenses. Under the statutes in force when those decisions were rendered it mattered little what designation was given to them as long as they went into the computation of gain or loss. The practice of treating buying commissions as part of the cost and selling commissions as a reduction of selling price was in the interest of simplification of accounting for gains or losses and was without direct statutory sanction. Now that statutes have been enacted under which the taxpayer, following the former practice, can not deduct a sustained loss, it seems to me that he should be permitted to call his expenditures by their true name — expenses of trade or business — and bring them within the statutory provision directly dealing with such expenditures. It is to be noted that section 23 (r), which is applied by the majority report to this case, does not deal with expenses at all, and, if there is any conflict between it and section 23 (a), then it should give way to the section directly dealing with expenses.

It is not a sound answer to the taxpayer’s argument to say to him that possibly he may have the benefit of his expenses in a future year on other sales or exchanges. The taxing statutes have consistently assessed income taxes on the basis of annual accounting periods (Helvering v. Morgan's, Inc., 293 U. S. 121) and in order to achieve this end it is necessary to account in each year for the profits or losses on the sale or exchange of all property dealt in within the year. This requires that all profit on the property and all deductions allowed with respect to it be reported as occurring within the year. It is only when the deductions allowed for the year are exhausted that there is resort to the exception of carrying over to a succeeding year. Here, if we follow the plain wording of the statute and allow as expenses what are generally regarded as such, the taxpayer’s operations within the year will be accounted for within that same year and thus meet the primary intent of Congress to levy taxes on an annual basis.

So far I have discussed mainly commissions on sales, for they are to my mind clearly business expenses. Commissions on purchases are a bit more difficult to classify, perhaps because we have fallen into the habit of speaking of them as “capital expenditures.” Yet upon analysis they are little if any different from selling expenses. To one engaged in the business of buying and selling they are ordinary and necessary expenses. A merchant employing a buyer on salary would unquestionably deduct the salary as a current business expense rather than allocate it as part of the cost of goods, and in substance a commission paid to a buyer is no different.

Leech, Arnold, and LIarron agree with this dissent.

Black agrees with this dissent in so far as it relates to selling commissions.

      (r) Limitation on Stock Losses.—
      (1) Losses from sales or exchanges of stocks and bonds (as defined In subsection (t) of this section) which are not capital assets (as defined in section 101) shall be allowed only to the extent of the gains from such sales or exchanges (including gains which may be derived by a taxpayer from the retirement of his own obligations).

        (2) Losses disallowed' as a deduction by paragraph (1), computed without regard to any losses sustained during the preceding taxable year, shall, to an amount not in excess -of the taxpayer’s net income for the taxable year, be considered for the purposes of this title as losses sustained in the succeeding taxable year from sales or exchanges of stocks or bonds which are not capital, assets.