text:
    Fidelity Union Trust Company and Melvin Spencer, Executors of the Estate of George Frinck Spencer, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 72236.
    Promulgated September 14, 1934.

      John A. Oonlin, O.P.A., for the petitioners.

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

Arundell:

The respondent has included in decedent’s estate the value of trust property, the transfer of which he has held was one to take effect at death, and thereby determined a deficiency in estate tax in the amount of $847.83. This inclusion is alleged as error. There is no issue as to the value of the property. The facts were stipulated.

By instrument of December 4, 1923, set forth in full in the stipulation, the decedent transferred certain securities to the Fidelity Union Trust Co. of Newark, New Jersey, in trust to pay the income to him for life, and upon his death to pay from the principal $25,000 to his daughter, Glena S. Roberts, and a like sum to his son, Melvin Spencer, and to add the balance of the principal in equal parts to trusts theretofore created by decedent for said daughter and son. It was further provided that, if either child should predecease the grantor, one half of the trust property should be paid to the grantor’s executor or administrator to be distributed as part of his estate, or, if both predeceased him, the entire principal of the trust was to go to his executor or administrator for distribution as part of his estate. The grantor reserved the right to be consulted before any change in the investments constituting the principal of the trust. The trust instrument does not contain any provision reserving to the grantor power to alter, amend, or revoke the trust. Both of the grantor’s children were living at the time of his death on February 25, 1931.

Upon authority of decided cases we hold that under the trust instrument above described there was a completed transfer of the trust property at December 4, 1923, and not one to take effect at or after death; that the grantor’s children took vested interests in the property by virtue of the trust deed; and that there was no transfer at death upon which an estate tax may be levied under either subsection (a) or (c) of section 302 of the Revenue Act of 1926. See McCormick v. Burnet, 283 U.S. 784; Elizabeth B. Wallace, Executrix, 27 B.T.A. 902; Flora M. Bornney et al., Executrices, 29 B.T.A. 45. The present case is more favorable to petitioners than those cited. In the cited cases there were provisions for reversion to the grantors if they survived the beneficiaries. Here there is no provision for a direct reversion.

Decision will be entered for the -petitioners.


source: Caselaw Access Project

author: Trammell:

license: Public Domain

text:
    C. M. Peterson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 70223.
    Promulgated September 14, 1934.

      Maxwell M. Mahoney, Esq., and George H. Abbott, G.P.A., for the petitioner.

      W. R. Lansford, Esq., for the respondent.
   OPINION.

Trammell:

This proceeding is for the redetermination of a deficiency in income tax of $8,851.14 for 1931. The only matter in con: troversy is the correctness of the respondent’s action in refusing to allow as a credit against the petitioner’s tax liability an amount of $11,801.52 which it is alleged represents income tax of the petitioner paid to the Government of Newfoundland. The proceeding was submitted upon a stipulation of facts and certain documentary evidence.

Pertinent portions of the stipulation are as follows:

The petitioner is a citizen of the United States who at all times during the period from January 1, 1931 up to and including the present date, has maintained his domicile and residence in the City of Tulsa, County of Tulsa, State of Oklahoma, United States of America.
During the year 1931 and prior to May 12, 1931, the petitioner became a subscriber to the Charity Subscription Fund of the Army and Navy Veterans in Canada, Quebec Unit No. 33, by the purchase of Ticket No. TV 10136.
This ticket carried the right of participation in the drawings in the Derby Charity Sweeps conducted under the auspices of the Great War Veterans of Newfoundland.
As a result of the Derby Charity Sweeps held at Epsom, England, the petitioner during the year 1931 became entitled to one-half of the winnings of a horse known as Cameronian entered in said race.
The petitioner’s prize money amounted to $147,519.02 (in Newfoundland money $148,260.32.) and out of the foregoing sum there was paid to the petitioner by the Army and Navy Veterans in. Canada, Quebec Unit No. 33, on or about June 8, 1931 the sum of $135,717.50 (in Newfoundland money $136,399.49). * * *
The difference between the foregoing sums, namely $11,801.52 (in Newfoundland money $11,860.83) was deducted by the Army and Navy Veterans in Canada from the prize money and the net sum of $135,717.50 (in Newfoundland money $136,399.49) only was paid to and received by the petitioner.
* * * * * # *
The petitioner, when filing his Federal Income Tax Return for the year 1981 reported as income the sum of $147,519.02 and took as a credit the sum of $11,801.52. The respondent Commissioner, in arriving at the deficiency involved in this appeal, reduced the $147,519.02 by $11,801.52, and included as gross income the difference of $135,717.50, the “ net amount received ”, but eliminated entirely As a Credit the sum of $11,801.52. That is, the respondent has in substance allowed as a Deduction and Not As a Credit the sum of $11,801.52.
The petitioner contends that the sum of $11,801.52 is properly allowable as a Credit under the applicable provisions of the 1928 Revenue Act, and that this sum represents Income taxes paid by or on behalf of the petitioner to the taxing authorities of Newfoundland.
Newfoundland is. a self-governing member of the British Commonwealth of Nations, and, as such, had the power to and did assess and collect income taxes during the year 1931. Newfoundland was during the year 1931 a “foreign country” within the purview of Sec. 131 (a) (1) Revenue Act of 1928.
It is agreed that if the Board should find that the sum of $11,801.52 may be taken by the petitioner as a Credit for the year 1931, then there is no deficiency in tax due from the petitioner for that year, and that if the Board should hold with the respondent and decide that such amount is not allowable as a Credit, then the deficiency to be found by the Board shall be the sum of $8,851.14 * * *.
It is agreed that, if the amount of $11,801.52 is otherwise properly allowable as a credit under Section 131 Revenue Act of 1928, then this credit does not exceed the same proportion of the tax for the year 1931 (computed on tlie basis of tbe 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 under said,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 year 1931.

The notice of assessment by the Newfoundland assessor of the tax here in controversy reads as follows:

NEWFOUNDLAND
INCOME Tax
Assessment Notice
June 2nd, 1931.
To Aiímy & Navy Veterans in Canada,
Quebec Unit No. 33,
St. John’s Nfld.
Under the provisions' of the Income Tax Act, 1929, notice is hereby given that for the 1931 taxation period the amount of tax assessed and levied upon your income [italics ours] for that period is as follows:
Income
Gross_$1,140,464. 00
Deductions_ $433,376.30
Net_-_ $707, 087.70
Less Credit—
Statutory Exemption-1- fgyOOOrOe
Taxable Income_,- $707, 087. 70
Tax at 8% Payable_ $56, 567. 01
Penalties under Section 11, (4) (6) (7)-$_
Interest-$-
Amount op Tax_'_1_ $56, 567. 01
Checques must be made payable to the Minister of Finance and must have been previously accepted and marked by the Bank on which drawn. ,
[Signed] John J. Sinnott Assessor
Pro: Minister op- Finance
Kespecting the failure to allow the statutory credit of $5,000 in making the assessment a statement attached to the notice reads as follows:
Credit:—
Statutory-$5, 000 this was allowed in the February 1931 Lottery conducted by the Army & Navy Veterans in Canada — it is allowed once, i.e. from the first lottery in the year of taxation.!

A computation of the part of the tax allocable to one half of the first prize made in a letter written by the assessor in April 1934 to certain accountants is as follows:

Admy and Navy Veterans
Derby Charity Sweepstakes, June 3rd, 1931.
(1) Collections or Subscriptions from Subscribers_$1,140,464.00
(2) Expenses including Veteran charity_ 433,376.30
(3) Amount Taxed_ $707,087.70
(4) Income Tax at 8%, paid_ 56, 567. 01
(5)___ $650,520.69
(4) is the Income tax on (3) and (5) is the remainder:
$136,399.49 v m _ Equals tax apportioned to % first i>rize 650,520.69X $56,567.0 $11,860.83

The petitioner contends that the amount deducted by the Army and Navy Veterans in Canada from his prize money represented an income tax imposed upon him under the laws of Newfoundland and,'having been paid in the year of its imposition, 1931, it constitutes an allowable credit against his tax liability to the United States for that year. The respondent contends that the tax in controversy was not imposed upon and paid by the petitioner but was imposed upon and paid by the Army and Navy Veterans in Canada, and the petitioner therefore is not entitled to the credit sought. • .

A copy of the Income Tax Act of 1929 of Newfoundland as annotated, apparently by the assessor, and,a copy of the Income Tax Act of 1932 were put in evidence by the parties.

Section 2 (j) of the Act of 1929, after making provision for a deduction on account of dependents in determining net income, contains the following:

Provided that where any person liable to taxation, under this Act is not resident in Newfoundland and not a British subject he shall not be entitled to the exemption * * * and * * * he shall pay a Normal tax of eight [changed to twelve by the Act of 1932 which was retroactive to January 1, 1931] per centum upon all income in excess of one thousand dollars.

Section 2 (k) provides:

Dividends received by or credited to shareholders whether resident or nonresident of a Corporation or Joint Stock Company which dividends' are liable to taxation under the provisions of this Act shall not b’6 liable to the Normal Tax in the hands of the shareholders, but shall be liable to the Supertax provisions of this Act. .

Section 4 (2) provides:

Corporations and Joint Stock Companies, no matter Row created or organized, liable to be taxed, under this Act, shall pay eight [changed to twelve by Act of 1932 which was retroactive to January 1, 1931] per centum on income exceeding $5,000 [this exemption eliminated after January 1, 1931 by the Act of 1932] but shall not be liable to any Supertax * * *.

Section 7 provides:

The following incomes shall not be liable to taxation hereunder:
* * * * * * *
(f) The income of Clubs, Societies, and Associations organized and operated solely for social welfare, civic improvement, pleasure, recreation or other nonprofitable purposes, no part of the income of which enures to the profit of any stockholder or member.

An annotation to the foregoing provision of section 7 states that incorporated bodies or associations conducting lotteries are taxed under section 4 (2), a quotation from which is set forth above. It is stated that lotteries are taxed at the date of drawing. It is further stated that the portion of lotteries which is devoted to charity is not taxed, but that prizes are taxed.

In this connection it might be stated that section 4 of the Act of 1929 was amended by the Act of 1932 by adding a new subsection (8), to be effective from March 2,1932, which reads as follows:

Where permission has been granted to persons conducting or operating Lotteries, such persons shall pay to the Assessor 12 per centum on the amount declared to be prizes or such like distributions, and such tax shall be due and payable by such persons immediately at the time when drawing takes place and before any prizes are paid.

The record furnishes no explanation as to why the amendment was made. It may well be that the amendment was for clarifying purposes, as against whom the tax should be levied. At any rate it does not appear to change the 1929 Act as construed by the taxing authorities with respect to who was liable for the tax.

Section 12 (3) of the Act of 1929 provides as follows:

Every agent, trustee or person who collects or receives, or is in any way in possession or control of, income for or on behalf of a person who is resident outside of Newfoundland, shall make a return of such income, and in ease of default by such non-resident of the payment of any tax payable shall, on being so notified by the Minister, deduct the amount of such tax from either the income or other assets of such non-resident in his hands and pay the same to the Minister.

The notice of the assessment of the tax, a portion of which the petitioner is here claiming as a credit, shows that it was directed to the Army and Navy Veterans in Canada, Quebec Unit No. 33. It contains the statement that the tax shown therein was assessed and levied upon the income of that organization.. While section 4 (2) of the 1929 Act provided for an’exemption or credit of $5,000 in determining taxable income, a statement attached to the notice explained that such credit was not being allowed because it had been allowed with respect to a lottery conducted earlier in that taxable year. From the foregoing it appears that the assessor, acting on the behalf of the Minister of Finance, who was charged with the enforcement of the law, determined that under the law the income from the lottery, a portion of which was received by the petitioner, was income of the Army and Navy Veterans in Canada, Quebec Unit No. 33, and was taxable to it. The computation set out in a letter written by the assessor in April 1934 of the portion of the tax assessed against the organization allocable to one half of the first prize in no wise indicates that such portion was tax due from or payable by the petitioner. The computation having been made in a letter written almost three years after the lottery was held and the tax assessed, we fail to see that it has any special significance.

Under section 2 (j), supra, if the tax here in controversy was a tax against the petitioner he was entitled to a credit, exemption, or deduction of $1,000 in computing the amount of his income subject to the normal tax at 8 percent. No such credit or any part thereof was allowed in computing the tax shown in the assessment notice, nor is there anything in the record to indicate that the assessor acted under this section or that the petitioner ever sought to have him do so. Furthermore, the petitioner does not contend here that the assessor should have doné so. If the amount had been dividends it would not have been subject to normal tax, but to the supertax at graduated rates, resulting in a much greater tax than that assessed. There is nothing to indicate that the assessor acted under this section and there is no contention that he should have. Section 12 (3) provides for the making of a return by a person who is in possession or control of income of a person residing outside of Newfoundland, and where such nonresident defaults in the payment of the tax the person in possession or control of such income is, upon notification by the Minister of Finance, to deduct the amount of such tax from either the income or the assets of the nonresident in his hands and make payment to the Minister. The facts fail to. show any such procedure to have been involved or followed in this case. So far as we can determine, no tax was ever levied or assessed by the Newfoundland authorities against the petitioner or against anyone else on his behalf with respect to income belonging to him. The tax, a portion of which the petitioner seeks as a credit, was levied and assessed by the Newfoundland authorities upon what they determined to be income of the organization conducting the lottery. The tax was collected by them from that organization as tax of that organization. In thus assessing and collecting the tax they presumably acted in accordance with the income tax act as it was interpreted and understood in that jurisdiction. If the organization had considered such determination erroneous it had, under the provisions of that act, the privilege of appealing the matter directly to the Supreme Court of Newfoundland. The record does not show that any appeal was ever taken. From an examination of the evidence before us we are not able to find that the tax, a portion of which is here sought as a credit, was a tax against the petitioner.

The imposition upon and the payment of the tax by the organization conducting the lottery would necessarily reduce the proceeds from the lottery out of which prizes could be paid. This in turn would reduce the amount that would be received by winning ticket holders. But these facts in and of themselves would not make the tax paid by the organization a tax upon the winning ticket holders. For a foreign tax paid to be allowable as a credit against a taxpayer’s Federal income tax liability, such foreign tax must have been a tax against the taxpayer and not a tax imposed upon and paid by another on its own account, as was the situation in the instant case. Elgin National Watch Co., 11 B.T.A. 339; Basil Robillard, Executor, 20 B.T.A. 685; Duckworth Co., 24 B.T.A. 304. The contention of the petitioner is therefore denied.

In accordance with the stipulation of the parties,

Judgment will be entered determining a deficiency of $8,851.1]f,. for 1931.. .


author: Morris :

text:
    Gouverneur Morris, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 70483.
    Promulgated September 18, 1934.

      Homer H. Tooley, G.P.A., for the petitioner.

      E. L. Oorbin, Esq., for the respondent.
   OPINION.

Morris :

The respondent having determined a deficiency in income tax of $2,556.56 for the calendar year 1930, the petitioner brings this proceeding for the redetermination thereof, alleging that the respondent erred in holding that an amount of $33,500 received dur-mg the taxable year from the sale of certain motion picture rights did not constitute community income, taxable one half to the petitioner and the other one half to his wife.

The petitioner is an individual who during the year 1930 was married and living with his wife, Ruth Wightman Morris, in Monte-rey, California, and was engaged in the writing of magazine stories and motion picture scenarios. For the year 1930 the petitioner and his wife filed separate income tax returns.

Prior to July 29, 1927, and prior to his marriage to Ruth Wight-man Morris the petitioner wrote two stories entitled “ The Penalty ” and “The Better Wife”, both of which were protected by copy-, rights and the story rights to both were assigned prior to said date, but no assignment had ever been made to the talking motion picture rights previous to that date.

On March 31, 1930, the petitioner assigned to the Paramount-Famous-Lasky Corporation the talking motion picture rights to “ The Better Wife ” for the total sum of $15,000, the sale being consummated through a literary broker or agency to whom a commission of $1,500 was paid, making the net proceeds received by petitioner $13,500. •

On September 17, 1930, the petitioner assigned to the Metro-Goldwyn-Mayer Co. the talking motion picture rights to “ The Penalty ” for the total sum of $25,000, the sale being consummated through a literary broker or agency to whom a commission of $5,000 was paid, making the net proceeds received by petitioner $20,000.

In his income tax return for the year 1930 the petitioner reported one half of the sum of the amounts mentioned above (one half of $33,500), or $16,750, the balance being reported by his wife, upon the theory that these sums constituted community income. In the audit of the petitioner’s return the respondent transferred the amount reported on the return of the petitioner’s wife to the income of the petitioner, increasing his income accordingly, and eliminated a similar amount from the wife’s income.

This proceeding falls squarely within the principle of Hirsch v. United States, 62 Fed. (2d) 128, and the Board’s decision in Helen N. Winchester, Administratrix, 27 B.T.A. 798. In the former proceeding the court held that dividends received by the husband subsequent to July 29, 1927, the effective date of the amendment to the California statute relating to the community property interests of husband and wife, upon stock acquired and owned by him prior to such date, were taxable to him as his separate property. In the latter proceeding the Board held, following Hirsch v. United States, supra, that where, prior to July 29, 1927, the decedent had made applications for patents and notwithstanding the patents were granted after such date, the entire profit from the sale thereof in 1928 was taxable to him and could not be treated, as community property for income tax purposes.

No argument is needed to show that copyrighted stories are “ property ” in every sense of the word. The stories in question were written by the petitioner prior to July 29, 1927, and prior to his marriage. Both of them were protected by copyrights and the story rights were assigned prior to the date aforesaid. Although the petitioner had made no assignment of the talking motion picture rights prior to July 29, 1927, those stories were his sole and separate property and, therefore, income subsequently derived therefrom became his separate income and taxable as such under the foregoing decisions.

Judgment will be entered for the respondent.


text:
    Nunn-Stubblefield Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 66085.
    Promulgated September 18, 1934.

      L. E. Cahill, Esq., for the petitioner.

      O. W. JS'weaker, Esq., for the respondent.
   OPINION.

Trammell:

This proceeding is for the redetermination of a deficiency in income tax of $1,543.38 for 1929. The only issue presented for determination is whether the petitioner- is entitled to a deduction from gross income of an amount of $17,282.06 represent-, ing expenditures for drilling-made during the taxable year in connection with a certain oil lease.

The petitioner is a Texas corporation, organized February 12,1927, with its principal place of business at Amarillo. The business of the petitioner is that of producing and selling oil and gas.

On June 7, 1924, the Roxana Petroleum Corporation (name subsequently changed to Shell Petroleum Corporation) acquired from W. D. Jordan and others an oil and gas lease on certain lands situated in Carson County, Texas, described as the southeast quarter, of section 104, block 4,1. & G. N. Railway Co. survey, and containing 160 acres, more or less. The consideration paid for the lease was $4,000 and the covenants and agreements contained therein.

The lease, which was assignable in whole or in part, was for a period of five years from the date thereof and as much longer thereafter as oil and gas should be produced from the land or royalties paid thereunder or as the lessee in good faith should conduct operations for obtaining oil or gas thereon. The lease provided for the payment as royalty by the lessee of one eighth of the oil and gas produced.

The minutes of a special meeting of the directors of the petitioner held on May 1, 1929, are in part as follows:

Director E. M. Pittman stated that J. E. Stubblefield [secretary and treasurer of petitioner], O. R. Austin [vice president of petitioner] and E. M. Pittman were negotiating with the Shell Petroleum Corporation for the drilling of a well in the southeast quarter of Section 104, Block 4, I&GN Ry. survey, Carson County, Texas, on a basis of a s^nd overriding royalty for a well producing less than 50 barrels daily in any calendar month, and a %th overriding royalty for the gas and casing gas; that a good gas well was drilled on the northeast quarter of said section, which had a good showing of oil and probably would have made a commercial oil well if properly completed; that the southeast quarter of section 104 has good geology and probably could not have been obtained except for the fact that the lease on same is about to expire and same cannot be renewed except at what the Shell Petroleum Corporation considers an exorbitant price, and that said J. E. Stubblefield, O. R. Austin and E. M. Pittman, in the event the contract is made for the drilling of this acreage, are agreeable to letting the Nunn-Stubblefield Oil Company finance same and own the lease, if the board of directors thought it desirable.
After a discussion of the matter it was the unanimous opinion of the directors present that the deal would be a good one for the Nunn-Stubblefield Oil Company and that the offer of the parties mentioned should be accepted, whereupon director E. M. Pittman made the following motion:
“ I move that the Nunn-Stubblefield Oil Company finance the drilling of the well in' the S.E. quarter of Section 104, Block 4, I&GN Ry. survey, Carson . County, Texas, on the basis of a l/32nd overriding royalty for a well producing Jess than 50 barrels, and a l/16th overriding royalty for a well producing. 50 barrels and over daily in any calendar month, and an overriding royalty of l/8th on the gas and casing head gas, and that when the terms of the contract between said J. E. Stubblefield, C. R. Austin and E. M. Pittman and the Shell Petroleum Corporation relative to the drilling of the well have been complied with that a request be made by the contracting parties that the assignment to- said lease be made direct to the Nunn-Stubblefield Oil Company, and title to same vested in said company; that the drilling of the well be in the name and under the supervision of said J. E. Stubblefield, C. R. Austin, and E. M. Pittman and when completed assignment to the lease be taken in the name of the Nunn-Stubblefield Oil Company.”
Which said motion being, duly seconded by director C. R. Austin was put to a vote and unanimously carried and adopted and ordered spread on the minutes of the corporation as a permanent record.

On May 11,1929, an agreement was entered into between the Shell Petroleum Corporation, as first party, and petitioner’s directors, Stubblefield, Pittman, and Austin, as second parties. This agreement, after reciting that the Shell Petroleum Corporation was the owner of an oil and gas lease on the southeast quarter of section 104 heretofore referred to and also on a certain other quarter section not involved herein, provided in part as follows:

Whereas, Shell desires to nave said lands developed for oil and gas, and Second Parties are willing to develop said lands under the terms and provisions and for the considerations hereinafter set forth.
Now, Therefore, in consideration of the premises and of the mutual covenants, agreements and obligations hereinafter contained and to he paid, kept and performed, it is hereby agreed by and between the parties hereto as follows:
First: Shell agrees to sell and assign to Second Parties and Second Parties agree to purchase from Shell the oil and gas leases hereinabove described, in so far as they cover the lands described * * * above, upon acceptance and approval of titles and.subject to the overriding royalty reservations to Shell, and to all of the other terms and provisions hereinafter set forth.
# * * * . * * *
Third : Second Parties agree that for the considerations herein recited, they will on or before June 5, 1929, commence the actual drilling of a well for oil and gas, at a location to be selected by them in the Southeast Quarter of Section 104 described * * * above, and will drill said well with due diligence at their sole cost and expense, to a depth sufficient in the opinion of Shell to satisfactorily test the Granite Wash found below the Panhandle big line, unless oil or gas is found in paying quantities to the satisfaction of Shell at a lesser depth. In the event said well results in a producing well, Second Parties agree to complete the same as such producer at their sole cost,and expense.
* # * * * . Hi *
Fifth : Shell agrees that upon completion of the well required in Paragraph Third hereof, to the depth therein specified, and upon being furnished with a satisfactory showing that there are no amounts unpaid for labor performed or material furnished in connection,with the drilling and completion of said well, it will execute and deliver to Second Parties its assignment without warranty of title of said oil and gas lease, in so far as it covers the Southeast Quarter .of Section 104, described * * * above, reserving-to itself, however, by the terms of said assignment, an overriding royalty interest in the production therefrom, as provided in Paragraph Sixth hereof.
* H* * * * H*'
Sixth : As a further consideration for the assignment of said leases, Second Parties agree to deliver to Shell free and clear of all expenses to development and operation of said premises, an overriding royalty interest in all oil produced and saved (without deducting royalty oil) from each well drilled on the above described lands, the amount of royalty oil delivered to be determined' monthly, on the basis of the average daily production of oil from each well for each calendar month as follows :
A. The overriding royalty interest in the ptoduction of oil from the Southeast Quarter of Section' 104 shall be determined monthly by the following schedule: '
1. An overriding royalty of I/32nd of all oil produced and saved from each well having an average daily production for the calendar month for which the royalty is paid, of not more than 50 barrels per day.
2. An overriding royalty of l/16th of all oil produced and saved from eacli well having an average daily production for the calendar month for which the royalty is paid, of more than 50 barrels per day.
***»**.#
Sheix shall also have and reserve to itself an overriding royalty of l/8th of the gross amount received by Sebond Pasties from the sale of all gas and casinghead gas produced from said tracts.
* * * * * * *
Eighth: Second Parties shall carry on all operations of every kind and character on said premises at their sole cost and expense, and Sheix shall not be liable for any part thereof. Second Parties agree to promptly pay all indebtedness incurred, and to keep said premises free and clear of liens of every kind and character.
* sfs * * * *
Fourteenth : Upon the failure of Second Parties to perform any of the terms and provisions herein required, within the time herein specified, Second Parties shall forfeit their rights hereunder and Sheix shall be under no obligation thereafter to comply with the terms hereof, but Second Parties shall not thereby be relieved of any liability for damages occasioned to Sheix by reason of such breach.

The leasehold estate acquired by petitioner’s directors under the agreement between them and the Shell Petroleum Corporation of May 11, 1929, was acquired by the petitioner pursuant to agreement of its board of directors entered into on May 1, 1929. The assignment to the petitioner of the leasehold, which was subject to the terms of the agreement between petitioner’s directors and the Shell Petroleum Corporation of May 11, 1929, was made by the Shell Petroleum Corporation on March 4, 1930-

The agreements referred to above were not placed in escrow and .no escrow agreement was entered into by the parties affecting the title to the oil and gas leasehold here involved.

During 1929 the petitioner expended $17,282.06 for labor, teaming, hauling, supplies, fuel, water, repairs, and other ordinary and necessary business expenses in connection with the development and operation of the property above referred to. No part of this amount included any sums for equipment.

Under the authority granted by the respondent in article 243 of ^Regulations 74, the petitioner has elected to charge all items such as labor, teaming, hauling, supplies, fuel, water, repairs, and other ordinary and necessary business, expenses in connection with the development of its oil and gas properties to expense and not charge the same to capital items. The election referred to in the preceding sentence does not apply to development expenses incurred by petitioner in connection with the drilling of a well or wells contracted for as consideration in connection with the acquisition of a lease. ■

In determining the deficiency the respondent has disallowed the deduction taken by the petitioner of $17,282.06 and has added it to the petitioner’s investment in the property to be returned to petitioner through annual depletion charges.

The petitioner contends that, since it elected to charge expenditures for development to expense as authorized in article 243 of Regulations 74, the respondent erred in disallowing as a deduction the amount of $17,282.06. The respondent contends that the amount was properly disallowed for the reason that, although it was expended in connection with the drilling of an oil well, the petitioner in return for drilling such well was to receive and did receive an interest in an oil and gas lease. The petitioner denies that it contracted to pay the expense of drilling the oil well in return for an interest in the oil and gas lease.

The first question to be decided is whether the amount in controversy was expended by petitioner to acquire an interest in an oil and gas lease. According to the minutes of the meeting of the petitioner’s board of directors held on May 1, 1929, its directors, Stub-blefield, Pittman, and Austin, in entering into the agreement of May 11,1929, with the Shell Petroleum Corporation and in carrying out its terms, were acting for and in behalf of the petitioner, and in a determination of the question before us the agreement between them and the Shell Petroleum Corporation we think is to be considered in substance as one between the petitioner' and that corporation. The agreement of Ma,y 11, 1929, does not purport to be one by which the Shell Petroleum Corporation sold, transferred, assigned, or conveyed its interest in the lease in controversy, but by its terms was one in which that corporation agreed to sell and assign the lease upon the consideration stated therein. One of the considerations as stated in the third paragraph of the agreement was that the three directors of the petitioner would on or before June 5, 1929, begin the actual drilling of a well for oil and gas on the land involved, would drill such well with due diligence, at their sole cost and expense, to a depth satisfactory to the Shell Petroleum Corporation and, in event the well resulted in a producing well, would complete it at their sole cost and expense. By the terms of paragraph five of the agreement the Shell Petroleum Corporation, upon completion of the well according to the terms contained in paragraph three and upon being furnished with a satisfactory showing that there were no amounts unpaid for labor performed and material furnished in connection with the drilling and completion of the well, was to execute and deliver to the three directors of petitioner its assignment of the lease, without warranty of title, reserving to itself, however, by the terms of such assignment a certain overriding royalty interest in the production from the land covered by the lease. By the terms of paragraph eight of the agreement the three directors of the petitioner were to carry on all operations on the land at their sole cost and expense and were to pay promptly all indebtedness incurred and to keep the premises free and clear of liens. Paragraph 14 of the agreement provided that upon the failure of the three directors of petitioner to perform any of the terms and provisions of the agreement within the. time specified they should forfeit their rights thereunder, that the Shell Petroleum Corporation should be under no obligation thereafter to comply with the terms thereof, and that the directors should not thereby be relieved of any liability for damages occasioned to the Shell Petroleum Corporation by reason of such breach.

On March 4, 1930, the Shell Petroleum Corporation executed an instrument reading as follows:

Whereas, on the 7th day of June, 1924, a certain oil and gas ’mining lease was made and entered into between W. D. Jorden, et al., as Lessors, and Roxana Petroleum Corporation (now Shell Petroleum Corporation) as Lessee, covering the following described land situated in Carson County, Texas, towit: Southeast Quarter (SE%) Section 104, Block 4, I. & G.N. Railroad Company Survey, said lease being recorded in Volume 29, Page 405, Deed Records of Carson County, Texas; and
Whereas, under date of May 11, 1929, Shell Petroleum Corporation, J. E. Stubblefield, E. M. Pittman, and C. R. Austin entered into an agreement affecting the above described lease, which contract is made a part hereof by reference.
Now, Therefore, for and in consideration of One Dollar ($1.00) and other good and valuable considerations, the receipt of which is hereby acknowledged, the undersigned, the present owner of said lease and all rights thereunder or incident thereto, does hereby bargain, sell, transfer, assign and convey (subject to the reservations hereinafter set forth) unto Nunn-Stubblebteld Oil Company, its successors and assigns, all of the right, title, and interest of the original Lessee and present owner in and to said lease and rights thereunder.
This assignment is made in accordance with and subject to all the terms and conditions of said contract dated May 11, 1929, between said Shell Petroleum Corporation, J. E. Stubblefield, E. M. Pittman, and C. R. Austin, and reserves to Shell Petroleum Corporation overriding royalty as provided in Paragraph Sixth of said contract. [Italics supplied.]

Considering the provisions of the agreement of May 11, 1929, between the petitioner’s three directors and the Shell Petroleum Corporation in connection with the provisions of the assignment of March 4, 1930, by that corporation to the petitioner, we are of the opinion that the expenditures made by the petitioner in developing a well on the land in controversy were for the interest actually transferred on March 4, 1930, in the lease theretofore owned by the Shell Petroleum Corporation. The provisions of the agreement of May 11, 1929, heretofore considered indicate that the interest thus acquired was a consideration that moved to the petitioner as a result of its drilling the well. The right of the petitioner to receive an assignment of an interest in the lease was dependent upon the drilling of a well in conformity with the agreement of May 11, 1929. It seems clear that if it had not done so it would not have been in any position to have demanded the assignment to it of any right in the lease. It was only after the well had been drilled to the satisfaction of the Shell Petroleum Corporation that that corporation was bound to assign an interest in the lease. We do not have here the sale by the Shell Petroleum Corporation of a lease for a stated amount with a condition subsequent as to drilling of a well or wells. Here the well had' to be drilled to the satisfaction of the Shell Petroleum Corporation before it was required to make any assignment respecting the lease.

The amount here in controversy was expended by the petitioner in drilling a well. This was a consideration paid by petitioner for the interest it received in the lease that was assigned to it by the Shell Petroleum Corporation. Do the provisions of article 243 of Regulations 14 permitting taxpayers to elect whether they will capitalize or will charge to expense certain development expenses of the nature here incurred by petitioner permit a taxpayer to charge such expenditures to expense in determining taxable net income where they were incurred in drilling a well which constituted a consideration for the transfer to the taxpayer of an interest in an oil and gas lease?

In State Consolidated Oil Co., 19 B.T.A. 86; affirmed on a point similar to that here in controversy, 66 Fed. (2d) 648; certiorari denied, 290 U.S. 704, a taxpayer pursuant to a contract with the owners of certain lands made expenditures for drilling wells on the lands. Under the contract the taxpayer was to receive, at a date subsequent to their completion and as a part of the consideration for drilling the wells, an undivided one-half interest in the lands. The taxpayer urged upon the court that, under article 223 of Regulations 62, the pertinent parts of which are identical with the part of article 243 of Regulations 74 applicable here, it was authorized to treat the expenditures made in drilling the wells as deductible operating expenses. In denying the contention the court said:

Tile commissioner contends, however, that the Regulations were not intended to apply to one who drills a well upon land in performance of a contract to purchase an interest therein. In this contention we concur. The expenditures in controversy were merely to be exchanged for a capital asset or to be recouped out of the land. Nothing in the Regulations requires their application to such a case and the burden is upon the petitioner to show that the commissioner erred in denying their application here. In this, petitioner has failed. The argument that the expenditures are similar in principle to expenditures made in drilling on one’s own or leased land, a situation concededly within the Regulations, is without merit.

Where, as in the instant case, the consideration to be received by a taxpayer for drilling an oil and gas well is an interest in a lease owned by another, we think what the conrt said in State Consolidated Oil Co., supra, is applicable and controlling as to the question of whether the expenditures incurred in drilling such well are deductible as expenses: We accordingly sustain the action of the respondent in disallowing the deduction in controversy.

Judgment will be entered for the respondent.


author: TURNER:

text:
    Ralph W. Crews, Petitioner, v. Commissioner of Internal Revenue, Respondent. Robert E. Crews, Petitioner, v. Commissioner of Internal Revenue, Respondent. Amy Tresner, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mary Willis, Petitioner, v. Commissioner of Internal Revenue, Respondent. Charles Crews, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 66701-66703, 66718, 66766.
    Promulgated September 19, 1934.

      Albert A. McBill, Esq., for the petitioners.

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

TURNER:

These proceedings are now before us on the motion of the respondent and the response of the petitioners thereto. Findings of fact and an opinion were promulgated May 2, 1934, and decisions were entered July 10, 1934. The respondent’s motion alleges error therein and prays that the findings of fact and opinion be reconsidered and the decisions be vacated and set aside.

A review of the opinion discloses that the depletion allowance in the case of oil wells owned by the petitioners was limited to an amount not in excess of 50 percent of the petitioners’ net income, computed without regard to depletion, from all sources, instead of “ 50 per centum of the net income * * * (computed without allowance for depletion) from the property ” as provided by section 114 (b) (3) of the Revenue Act of 1928. The opinion is accordingly revised and corrected to require the computation of the depletion allowance in accordance with the terms of the statute as set forth herein. The findings of fact and the remainder of the opinion are found and held to be correct. The decisions entered on July 10, 1934, will be vacated and set aside and further proceedings will be had under Rule 50 in accordance with this opinion.

Decision will be entered under Rule 50.


author: MoeRis :

text:
    Albert J. Houston, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 63338.
    Promulgated September 19, 1934.

      Homer H. Tooley, G.P.A., for the petitioner.

      P. A. Sebastian, Esq., for the respondent.
   OPINION.

MoeRis :

The respondent having determined a deficiency in income tax of $1,148.79 for the calendar year 1929, the petitioner brings this proceeding for the redetermination thereof, alleging error in such determination by reason of the inclusion of $4,678.64 in his taxable income which was reported by his wife as a part of her share of the community income derived from the partnership of Houston, McClelland & Martin, of which partnership he was a member.

The petitioner is an individual who throughout the year 1929 was a resident of and domiciled within the State of California, where during the taxable year he was a member of the partnership of Houston, McClelland & Martin, physicians and surgeons specializing in diseases of the ear, nose, and throat.

The books of the aforesaid partnership were kept on the cash receipts and disbursements basis. The petitioner’s distributive share of the earnings of the partnership was $65,341.46 and his deductible expenses in connection with these earnings were $1,961.81, each partner paying his own automobile expenses.

■ The petitioner was married on August 1, 1929, prior to that date having the status of a single person. Of the petitioner’s share of the partnership earnings (after deduction of allowable automobile expenses), i.e., $63,379.65, an amount equal to $49,435.32 was for services rendered prior to August 1, 1929. The remainder, or $13,944133, was for services rendered between August 1 and December 31, 1929.

The petitioner and bis wife filed separate income tax returns for the year 1929. On his income tax return the petitioner reported nineteen twenty-fourths of his distributive share of the partnership earnings, his wife reporting on her return five twenty-fourths of said earnings. The respondent holds that only the petitioner’s share of amounts collected by the partnership for services rendered subsequent to August 1, 1929, was community income, this amount being $13,944.33, as heretofore stated.

There is no dispute between the parties over the right of the petitioner and his wife to report his earnings subsequent to August 1, 1929, upon the community property basis. The entire controversy is with respect to his earnings prior to marriage which were not collected until thereafter, the petitioner contending that because he was upon a cash receipts and disbursements basis of accounting the taxable status of his said earnings for community property purposes was determined not by the time when the services therefor were rendered, but by the time of receipt. With this contention we cannot agree. While the basis of accounting employed may, and usually does, determine the period within which income may fall for tax purposes, it cannot alter the vested property rights of the parties, nor may it shift the burden of taxation thereon. The petitioner’s property rights in the income earned prior to his marriage were effected when the services were performed therefor and it was then that the taxable status was determined, notwithstanding a later receipt.

The principle involved here is the same as that laid down in K. E. Merren, 18 B.T.A. 156; affirmed at 51 Fed. (2d) 44, where the petitioner sold property prior to his marriage but did not receive the consideration therefor until subsequent thereto. In holding such consideration to be the separate property of the petitioner under the community property laws of Louisiana, which, for our purposes, we find, are no different from the community property laws of California, we said:

* * * The property which was sold and which gave rise to the money, the income now under consideration, was the separate property of the husband. He had sold it and had completely divested himself of title thereto and dominion thereover prior to his marriage. At the time of the sale the amount to be received by the petitioner was definitely fixed and constituted an obligation due him. The right to receive the purchase price was itself property; it became vested in the petitioner prior to his marriage and could not, therefore, become community property under the Louisiana statute.
The fact that the petitioner’s right to receive money was satisfied by payments made to him after his marriage does not, in our opinion, change the situation. The controlling principle is that, as between husband and wife, “ when a right, legal or equitable, is acquired^ whether before or during marriage, all things of value into which the initial right develops by the performance of conditions, the running of time or the like, or if the initial right rests in obligation, all that which is obtained through the performance, discharge, satisfaction, enforcement, or assignment of the obligation, are deemed in law to have been acquired as of the date of the acquisition of the initial right, and take the character, separate or common, of that right.” McKay on Community Property, secs. 517 and 533. * * *

The services having béen rendered prior to marriage, the right to receive compensation therefor originated prior thereto. The character of the property is determined as of that time and not as of the date of payment. See John, M. King, 26 B.T.A. 1158, affd., 69 Fed. (2d) 639.

For the above and foregoing reasons we are of the opinion that the respondent’s determination must be approved.

Judgment will be entered for the respondent.


author: Murdock :

text:
    C. H. Mead Coal Company, Corporation (Parent), Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 69951.
    Promulgated September 19, 1934.

      Frederick L. Thomas, Esq., and Jackson Dj Altizer, Esq., for the petitioner.

      Arthur, Oamduf, Esq., and Stanley B. Pierson, Esq., for the respondent.
   OPINION.

Murdock :

The Commissioner determined a deficiency of $6,196.37 in the petitioner’s income tax for 1930. The parties are now prepared to settle four of the five issues raised. They agree that a depreciation question and a loss question are settled by a recent decision of the Circuit Court in the case of this same taxpayer. The only question for decision is whether or not the Commissioner erred in including in income for 1930, $25,000 received in that year from the Lillybrook Coal Co. under a written agreement for the mining of coal. There is no dispute about the facts relating to this issue.

The petitioner and the Mead Smokeless Coal Co. are affiliated corporations and as such filed a consolidated return for 1930. The Mead Smokeless Coal Co. had leased certain coal land situate in Raleigh County, "West Virginia. The Mead Smokeless Coal Co., on April 7, 1930, with the consent of the owner, subleased a portion of the coal land to the Lillybrook Coal Co. The latter was operating adjoining property and intended to place no property upon the leased premises but to mine from its adjoining property. The leased premises contained about 850,000 net tons of coal. The Lillybrook Coal Co. was required to mine at least 500,000 tons of coal from the property within 10 years. It agreed to pay to the owner the royalties per ton specified in the original lease “ and in addition thereto to pay to Mead Smokeless Coal Co. a tonnage royalty of five cents (50) per ton for each and every net ton of two thousand (2,000) pounds of coal mined by Lillybrook Coal Co. from the ” premises. The contract further provided:

Lillybrook Coal Company bas tbis day paid unto Mead Smokeless Coal Company as an advance on account of tbe tonnage royalty of five cents (50) per net ton herein provided to be paid by Lillybrook Coal Company to Mead Smokeless Coal Company tbe sum of Twenty Thousand Dollars ($20,000.00) the receipt whereof is hereby acknowledged, the said Lillybrook Coal Company further agrees to pay unto the said Mead Smokeless Coal Company as a further advance on such tonnage royalty the additional sum of Five Thousand Dollars ($5,000.00) on the 15th day of April, 1930, but the lessee, Lillybrook Coal Company, is hereby given and granted the right and privilege of mining from said Fire Greek seam or vein of coal free from the payment of such tonnage royalty of five cents (50) per net ton to' Mead Smokeless Coal Company a sufficient amount of coal, to-wit, 500,000 net tons, to reimburse Lillybrook Coal Company for the payment of the said sums of Twenty Thousand Dollars ($20,000.00) and Five Thousand Dollars ($5,000.00) respectively, in advance on account of the said tonnage royalty of five cents (50) per net ton, and after it shall have mined said 500,000 net tons of coal to reimburse itself as aforesaid to further pay five cents (50) per net ton to Mead Smokeless Coal Company for any additional coal mined m excess of the said 500,000 net tons of coal.

The Mead Smokeless Coal Co. was relieved of all payments to the owner with respect to the portion of the property leased to the Lilly-brook Coal Co.

The Lillybrook Coal Co. paid to the Mead Smokeless Coal Co. in 1930, $25,000, as provided in the lease, but mined no coal from the property during that year. The Mead Smokeless Coal Co., which keeps its books and reports its income On an accrual basis, credited the payment to advanced royalties and reported no part of the $25,000 as income for 1930. In later years, as coal was mined, it charged 5 cents per ton against the advanced royalties account and reported the total charges for each year as income. The Commissioner added the $25,000 to the income reported for 1930.

The petitioner contends that the payment of $25,000 made in 1930 to its subsidiary, the Mead Smokeless Coal Co., was not income to a taxpayer on an accrual basis until earned at the rate of 5 cents per ton as the coal was removed, no coal was removed in 1930, no part of- the payment representing advanced royalties was earned in 1930, and consequently no part of the payment was income for that year. A cash method of bookkeeping takes items into income as the cash is received, whereas in an accrual method items are sometimes taken into income prior to their actual receipt. It does not follow, however, that on an accrual method receipt is never important and accrual, as income can be delayed after actual receipt. If there are occasions for such a delay, this is not one of them. Here the Mead Smokeless Coal Co. received the cash in 1930. Its right to the money was absolute. “ It was under no restriction, contractual or otherwise, as to its disposition, use or enjoyment.” Brown v. Helvering, 291 U.S. 193. The amount was over and above the amount payable to the owner. Thus it was like the overriding commissions in the Brown case, supra, which the Court held were income when received. But unlike the commissions in the Brown case, no part of .this $25,000 would ever have to be returned under any circumstances. This income was realized in 1930 and there was no reason to delay reporting it for income tax purposes. Cf. Thomas D. Taylor, 17 B.T.A. 1107; affd., 51 Fed. (2d) 915; certiorari denied, 284 U.S. 689. Actual mining of the coal was not necessary to render this item accruable as income. Cf. Morris-Poston Coal Co. v. Commissioner, 42 Fed. (2d) 620. The Commissioner did not accept the bookkeeping method of reporting this payment. That method was not conclusive and in this instance failed to clearly reflect income. Cf. Automobile Underwriters, Ine., 19 B.T.A. 1160.

Decision will be entered wider Bule 50.


author: MuRdook:

text:
    William W. Miller, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 64861.
    Promulgated September 19, 1934.

      Henry Brach, G.P.A., and Redmond Reman,-Jr., Esq., for the petitioner.

      J. M. Leinenhugel, Esq., for the respondent.
   OPINION.

MuRdook:

The Commissioner determined a deficiency of '$1,547.83 for the calendar year 1929. The facts have been stipulated:

' The petitioner sold 500 shares of Otis Elevator Co. common stock through his broker on, or Shortly after, February 25, 1929. The broker delivered five certificates, each for 100 shares, from a number of certificates in his hands for Otis Elevator Co. common stock belonging to the petitioner. The Commissioner, in computing the profit on this sale, used as a basis the adjusted cost of the»purchases represented by the specific certificates delivered. The petitioner contends that as to 300 of the 500 shares the Commissioner took an incorrect basis. The petitioner relies principally upon the fact that he intended to make the sale of 300 shares from lots purchased at certain times and so notified his broker in a letter confirming his order to sell. He argues that he sold stock, not certificates, and the lots sold are sufficiently identified by his records and letter. He cites Howbert v. Penrose, 38 Fed. (2d) 577.

The practice of the Commissioner for many years has been to apply his “ first in, first out ” rule (see Regulations 74, art. 58) only where he could not identify or distinguish the lot sold from other lots of the same stock held by the taxpayer. This case does not involve the first in, first out ” rule. Both parties contend that the lots sold can be identified. They disagree as to the method of identification and consequently disagree as to the identity of: 300 of the shares sold. The petitioner says that there are two methods of identifying stock which has been sold; one is by the certificates delivered, and the other is by the intent of the seller. He argues that where the intent is properly shown by records and other evidence, it is the superior method. A share of stock in a corporation, aside from the paper evidence of the unit of interest, cannot be distinguished from any other similar share. The certificates, however, can be distinguished and identified.

The Commissioner has recognized this fact and has relied upon it in determining the deficiency. See discussion of the importance of certificates in Burnet v. Brooks, 288 U.S. 378. Some of the certificates belonging to this taxpayer had’ been mixed, mingled, and changed. It was perhaps impossible for the broker to deliver certificates to tally accurately and completely with the purchases mentioned in the letter. But, however that may be, he delivered certain certificates as the petitioner’s agent. Consequently the petitioner actually sold the stock represented by those certificates. The sale was not recalled and it is the profit on that sale that is being taxed. The Commissioner did not err in computing a profit on the shares actually sold, as opposed to the profit which would have resulted had the petitioner sold the shares which he had intended to sell. Cf. United States v. Phellis, 257 U.S. 156, 172; James Cunningham,, 29 B.T.A. 717; Homer v. Commissioner, 72 Fed. (2d) 407; affirming Mary E. Horner, 28 B.T.A. 360; A. D. Geoghegan, 31 B.T.A. 93; Louis G. Neville, 29 B.T.A. 450; Mickler Holding Co., 29 B.T.A. 300; Henry C. Heinz, 28 B.T.A. 276, 284.

Decision will be entered for the respondent.


author: Arundell:

text:
    Estate of Caroline R. Rowland, National City Bank of New York, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 65787.
    Promulgated September 21, 1934.

      George W. Plitt, Esq., for the petitioner.

      George D. Brabson, Esq., for the respondent.
   opinion. .

Arundell:

A deficiency in income tax for the period January 22 to December 31, 1929, in the amount of $5,804.32 has been asserted by. the respondent. The entire amount is in controversy. The issue is the propriety of deductions claimed by petitioner from income of the estate of Caroline R. Rowland, deceased, and disallowed by the respondent. We adopt as our findings of fact the stipulation of facts filed by the parties, and set forth here only a summary of them.

On October 29, 1924, petitioner’s decedent, Caroline R. Rowland, was declared an incompetent by the Supreme Court of the State of New York, and a committee of her property was appointed. The committee consisted of Aaron L. Reid and Wilson Tipple.

Caroline R. Rowland died on January 22, 1929, leaving a will, and on February 5, 1929, letters testamentary ,on the estate were issued to the petitioner herein.

The committee of the decedent’s property continued to function after her death, and by orders of the Supreme Court of the. State of New York dated January 21, January 29, February 21, and February 26, 1929, the committee was authorized to make certain disbursements, to sell securities, and to exercise stock subscription rights. On March 13,- 1929, the committee filed its final account with the aforesaid court, which on. the same day by order approved the account, directed certain disbursements to be made by the committee, including commissions to the committee and a fee and expenses of the committee’s attorney, and further directed the committee to turn over to the executor the balance of the estate on hand and discharged the committee and its surety.

The petitioner, as executor of decedent’s estate, filed two income tax returns for 1929, one for the period January 1 to January 22,

1929, and the other for the period January 22 to December 31, 1929, In the latter return it claimed the following deductions:

Fees and expenses of the attorney for the committee_$5, 363. IS
Commissions of the committee_ 20,176. 60
Fee of referee for services in accounting of incompetent’s property__ 500. 00
Total_ 26,039. 75

All of the listed items were paid by the committee pursuant to orders of the Supreme Court issued after the date of decedent’s death.

The value of the estate of decedent which was turned over by the committee to the executor on March 13, 1929, was $1,019,677.91. The executor filed a Federal estate tax return, listing therein the gross estate of decedent at a value of $1,078,793.03- as of January 22, 1929.

Both parties cite to us the ruling published in I.T. 2238, CB-IV-2, p. 49, in which it is held that compensation of committees for incompetents, and expenses properly incurred by such committees, are allowable deductions if paid or incurred with respect to the management or conservation of income-producing property of the incompetent or with respect to the collection or securing of income inuring to such incompetent. That ruling was issued in connection with income tax returns filed by a committee for an incompetent. Respondent concedes the applicability of the ruling during the lifetime of the decedent, and says that deductions for fees and commissions paid to the committee and attorneys during that time have been allowed. The deductions here claimed, argues counsel for the respondent, have to do with the settlement of a decedent’s estate and not with the production of income.

Section 1383 of the New York Civil Practice Act provides that upon the death of an incompetent “the power of the committee ceases; and the property of the decedent must be administered and disposed of as if. a committee had not been appointed.” Counsel for petitioner contend that in this case the orders of the Supreme Court of New York continued the estate of the incompetent as such until March 13, 1929, and that the expenses of the committee in managing the property up to that time are allowable deductions .under I.T, 2238, swpra.

It is difficult to see under what provision of the statute the deductions here claimed are allowable. The return in which claim was made was filed by the executor of a decedent’s estate, but the payments claimed were not made by it. In fact the payments were made by an entirely separate entity, the committee, at a time when — as petitioner argues — the committee- was still actively in charge of the property. If the conlmittee continued to function as such and managed the property and collected income and made disbursements, it would- appear to have been liable for income tax as a fiduciary until discharged. But see Liberman's Committee v. Commissioner, 54 Fed. (2d) 527, holding that the power of such a committee ceases upon death of the incompetent, and thereafter the committee is not “ the taxpayer ” to whom the respondent is directed by statute to send a notice of deficiency. However, the committee is not before us here and we need not decide the suggested questions. Assuming that the executor was the proper party to' make a return for the period January 22 to December 31, 1929, the question persists as to the statutory provision under which the deduction is allowable. Petitioner’s claim, as we understand it, is that the amounts disbursed were “ expenses.” The expense deductions permitted under section 23 of the Bevenue Act of 1928 are “the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * There is no evidence in this case that the petitioner, in administering the estate of the decedent, carried on any trade or business. It would appear rather that it engaged solely in the customary functions of an executor, collected the assets, paid debts and claims, and distributed the corpus according to the direction of the will. This was accomplished with considerable dispatch, as it is stipulated that petitioner rendered its final report to the Surrogate’s Court on November 9,1929. Consequently, even if we close our eyes to the fact that the disbursements under consideration were made by some one other than the petitioner, we are still unable to find any authority to allow the deduction claimed. These disbursements were in the nature of expenses of administration which reduce the corpus and are not allowable deductions from income. Art. 282, Regulations 74; James C. Ayer et al., Trustees, 26 B.T.A. 9.

The effect of the payments made by the committee after the death of decedent and while the property was still in its hands was to reduce by that much the value of the property turned over to petitioner for administration. We fail to see wherein this had any effect on the income of the estate while under administration by the executor.

Reviewed by the Board.

Decision will be entered for the respondent.


author: MoRRis:

text:
    James H. Anderson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 59989.
    Promulgated September 26, 1934.

      Frederick E. King', Esq., and Edward L. Blackman, Esq., for ithe petitioner.

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

MoRRis:

The respondent having determined a deficiency in income tax of $28,792.96 for the year 1929, the petitioner brings this proceeding for the redetermination thereof, alleging error in the determination by reason of adding to his gross income for that year $135,000 received from the United Yerde Copper Co. on July 1,1929, the contention being that the amount so received was a gift.

The petitioner first entered the employ of the United Verde Copper Co., a corporation — which was substantially owned by the late William A. Clark, former United States Senator from Montana, and his family — in 1901, as a stenographer. Shortly thereafter he was employed by the Senator himself, whom he served in Washington as private secretary.

In or about 1912 the petitioner was made secretary of the Copper Co. at a salary of $50 a month. His duties then were “ nominal ”, requiring the sending out of notices of meetings, keeping of records of proceedings, signing of checks, and the employing of clerical help, etc. In addition to his position with the company he served the Senator in a secretarial capacity until the latter’s death in 1925, at which time he was receiving a salary of $900 a month from the Copper Co., $1,100 a month from the Senator, and $500 a month from the Senator’s son, Charles W. Clark. That compensation continued until December 1928, when the Senator’s estate was settled and closed, at which time Charles W. Clark, president of the Copper Co., informed him that the company would thereafter pay him the amount of compensation lost to him by reason of the death of the Senator and the settlement of his estate, so that in 1929 his compensation from the Copper Co. was $2,700 per month. His compensation from Charles W. Clark was for the rendition of services of a confidential and private nature.

Considerable friction having grown up within the organization between the petitioner and others in the employ of the Copper Co., the petitioner threatened to resign but was twice dissuaded by the president of the company. The situation having grown worse in 1929, he' renewed his threat to resign and acceptance thereof followed.

The petitioner, as secretary of the Copper Co., received written instructions from Charles W. Clark, its president, under date of May 20, 1929, instructing him to call a special meeting of the board of directors on May 28, 1929, for the purpose of taking appropriate action upon the following matters:

(a) The question ol making an allowance as a retirement fund for Mr. J. H. Anderson, resigned;
(b) The filling of the vacancy on the board caused by the resignation of Mr. Anderson;
(c) The election of a successor to Mr. Anderson as secretary, to be effective July 1, 1929.

The meeting was duly held on the date stated, when the resignation of the petitioner was accepted with regret ” and the following resolution adopted:

Whereas, James H. Anderson has rendered long, valuable and faithful service as an employee of the United Verde Copper Company, a corporation, covering a period of approximately 28 years;
And whereas, he has now placed in the hands of the board of directors his resignation:
Now, therefore, be it resolved, that his resignation be and the same is hereby accepted and it is further resolved that in recognition of such long, valuable and faithful service and the matters hereinbefore set forth he be and is hereby granted a lump sum of $135,000.
In connection with said above resolution, the chairman stated that the amount set out therein, after payment of taxes, etc., by Mr. Anderson would yield him approximately $100,000, and such amount has been based upon precedent established by his father many years ago.

Following tbe foregoing meeting of the board of directors the petitioner was informed by Charles W. Clark that the board had voted him the sum of $185,000 and instructed him to prepare a check for that amount, which he did.

The company’s general auditor, a certified public accountant, caused the amount to be charged to salary expense account of the company, and it was deducted as an expense in the company’s tax return for the year 1929.

The petitioner having failed to include the said sum of $135,000 in his gross income for the taxable year 1929, the respondent increased his income by that amount and determined the deficiency of $28,792.96 here under consideration.

Our question, therefore, is whether, under the foregoing facts and the testimony of record, the amount which the petitioner received was intended as a gift, as the petitioner contends, or as additional compensation as the respondent has determined.

The petitioner’s counsel argues that any inferences that might be drawn from the resolution of the board of directors itself that the payment was intended to be compensation for services rendered is contradicted by the established facts. In this connection he points, among other things, to the language of the written instructions from the president of the company stating that the purpose of the meeting was to make “ an allowance as a retirement fund for Mr. James H. Anderson, resigned ”, the words “ paid ” and “ granted ”, and the use of the word “ gift ” by the president of the company when he announced to the petitioner that the directors had voted him the sum in question.

The resolution unmistakably shows, by the language used therein, that the amount voted the petitioner was not intended as a gift but was for and in consideration of “ valuable and faithful service ” rendered by him to the company over a long period of years. That the board of directors in the preparation of that resolution did not use the language which it did in any loose sense and that it fully realized what it was doing and that it did not intend making a gift .is strongly evidenced by the fact that the taxable status of the subject matter received careful consideration, the conclusion having been reached that after the payment of taxes there would remain a net to him of approximately $100,000. It seems to us that any effort to show that the resolution did not mean exactly what it said should certainly include the testimony of its authors. The only member of the board of directors to testify was H. H. St. Clair, but his testimony threw very little, if any, light upon the subject. He said that there was no discussion as to why the amount was voted to the petitioner.

Another argument advanced by the petitioner is that the services rendered to the Copper Co. were not such as to constitute any possible basis for the payment of the $135,000 as additional compensation. Considerable testimony was offered in an effort to minimize the value of the services performed by the petitioner for the company and to show that he had already been amply compensated. For instance, the testimony is to the effect that his services were merely nominal ” in 1921, and that there had been practically no change in the nature of his services between that time and 1925, although, it will be observed, his- compensation had increased from $50 a month to $900 a month during that time, which facts are difficult of reconciliation unless we are to impute a gross misapplication of corporate funds to the company’s officers and directors, which we can not do. Noel v. Parrott, 15 Fed. (2d) 669; 273 U.S. 754.

Nor is the fact that he devoted only about two hours a day to the company’s affairs any indication of his value to it. If that fact indicates anything at all it is that the company regarded him as a most valuable employee because it considered his services to be worth at least $2,700 a month in 1929. His long period of service with the company, the fact that on several occasions he attempted to resign because of conditions beyond his control, but was not permitted to do so, the fact that he had grown to a position of importance, not only in the affairs of the corporation itself, but in the affairs of the ■principal owners thereof, and the fact that his compensation had grown tremendously since the beginning, indicate to us that the board of directors meant exactly what .it said in its resolution, that his services were both “ valuable ” and “ faithful.”

In Willis L. Garey, 16 B.T.A. 274, we pointed out, as had theretofore been done in Noel v. Parrott, 15 Fed. (2d) 669; certiorari denied, 273 U.S. 754, that not only must the element of consideration be absent in order to constitute a valid gift, but that the essential elements of “ intention ” and “ competency ” of the donor must be present. We are not convinced that a gift was intended. Respecting the question of competency, the Board said:

It will be observed that the board of directors and not the stockholders voted this payment to the petitioner. In view of the fact that the only evidence flowing from the company itself shows that the money paid' the petitioner was regarded by it as a salary or compensation, it is pertinent to determine whether we should, because of the contra testimony of the petitioner, impute an intention to make a gift. Again quoting from Noel v. Parrott, supra, the court said, “ It needs neither argument nor citation of authority to establish the proposition that the directors were without authority to give away the corporate assets, and that for them to make to several of their members and other persons a gift of a large sum of money from the corporation assets would be neither ‘ wise ’ nor ‘ proper,’ and would amount to an illegal misapplication of corporate funds. We must assume that the directors did not intend' such a flagrant violation of their trust.”
Applying the test of competency in the light of the language just quoted, we feel that we cannot impute an intention to do that which if done would constitute an illegal misapplication of corporate funds, but must assume that everything done was regular and according to law.

Here, as in Willis L. Garey, and Noel v. Parrott, supra, the board of directors, as such, voted this payment to the petitioner. Therefore, notwithstanding the members of the board were substantial stockholders, there were other stockholders who were not members of the board and it cannot be said that it was, in effect, the action of the stockholders.

The board of directors having granted this payment, which, according to its own resolution, was in consideration of past services to it; the company’s accountant, whose duty it was to know for what the payment was made, having classified it at the time as salary, for accounting purposes; a deduction having been claimed therefor by the company in the computation of its net taxable income; the respondent having found that there was no gift, but that there was a receipt of taxable income, and such finding, in our opinion, not having been overcome by evidence to the contrary, we are constrained to approve his determination. Cf. Willis L. Garey, supra; Chauncey L. Landon, 16 B.T.A. 907; Noel v. Parrott, supra; and Arthur L. Lougee, 26 B.T.A. 23; affd., 63 Fed. (2d) 112.

Decision will l)e entered for the respondent.


author: Smith :

text:
    William Rhinelander Stewart, Jr., and Spotswood D. Bowers, Executors under the Will of William Rhinelander Stewart, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67776.
    Promulgated September 27, 1934.

      Spotswood D. Bowers, Esq., for the petitioners.

      Eldon MeFctrland, Esq., for the respondent.
   OPINION.

Smith :

This proceeding is for the redetermination of a deficiency in estate tax in the amount of $72,131.64. The questions for the determination of the Board relate to (1) the fair value of 3,639 shares of stock of the Rhinelander Real Estate Co. at the date of the death of the decedent on September 4, 1929; (2) what percentage of deduction, if any, should be allowed from the mathematical fraction in determining the value of one-fifth and one-third undivided interests in real estate constituting a part of the estate of the decedent; (3) the right to deduct from the gross estate $10,000 attorneys’ fees beyond the amount of $20,000 already actually paid!

The petitioners are the executors of the estate of William Rhine-lander Stewart, who died a resident of New York on September 4, 1929.

The first question relates to the value of 3,639 shares of capital stock of the Rhinelander Real Estate Co. owned by the decedent at the date of his death. These were returned for estate tax purposes at a value of $126.61 per share, which was the value at which the stock was distributed to certain legatees of one Julia Rhine-lander under date of February 24, 1928. The respondent has raised the value to $191.31 per share in the determination of the deficiency.

The Rhinelander Real Estate Co. was incorporated in 1901. It was formed to hold real estate of the then Rhinelander family with the idea of avoiding partition suits in the case of deaths in the families of the stockholders who turned in their property in exchange for capital stock. The stock has always been closely held and there have been no sales from which the fair market value might be determined at any time. During the 33 years of the corporation’s existence it has been its policy never to sell its real estate, no matter how high a price was offered, and there has never been a sale of any property except one small piece 23 feet by 80 feet. It has also been the policy of the company to pay out all its earnings in dividends, with the result that its cash surplus has never been large. Much of the real estate owned has increased in value from the date acquired, but such appreciation in value is not reflected upon the corporation’s books of account. The book value of its real estate on December 31,1928, was approximately $8,750,000, against which there were mortgages of $3,267,460; the book value of its real estate on December 31, 1929, was approximately the same amount and the mortgages thereon were $3,517,500. The parties have stipulated, however, that the fair market value of the real estate held by the company at the date of the death of the decedent on September 4, 1929, was $14,919,500. In the determination of the fair value of shares of the capital stock on that date the respondent has used the market value of the real estate at the date of death, less mortgages on the property, and has then divided that figure by the number of shares of stock outstanding.

The petitioner contends that the value determined by the Commissioner is far in excess of the fair value; that the earnings upon the stock and the dividends paid should be taken into account, and that by doing so a value of approximately $125 per share is obtained.

From 1923 to 1929, inclusive, the capital stock of the company remained at $6,000,000 divided into 60,000 shares. The net income of the corporation, the percentage of dividends earned on the outstanding stock, and the percentage of dividends paid were as follows:

The securities and properties of the estate of William Rhinelander Stewart were distributed to the legatees on June 12, 1930. At that time the shares of stock were distributed at a value of $165.39 per share. The distribution based upon this valuation was approved by the Surrogate’s Court for New York County on or about October 28, 1930. The only purpose of setting a value on the stock was to permit the figuring of executors’ commissions. In William R. Stewart et al., Executors and Trustees, 27 B.T.A. 593, it was stipulated before the Board that the fair value of shares of this stock on October 15, 1927, the date of the death of Lispenard Stewart, was $171.82 per share. This stipulation was entered into by the petitioners in consideration of the respondent’s waiving his contention that certain assets of the estate were transferred in contemplation of death.

In support of their contention that the fair value of the shares of stock on September 4, 1929, was not in excess of $126.61 per share the petitioners offered as a witness H. C. Kranich, who was a member of a firm which was a member of the New York Real Estate Securities Exchange, Inc. Kranich testified that in his opinion the fair market value of the shares of stock on the date named was not in excess of $125 per share. He based the valuation upon a consideration of the selling price of the shares of stock of other companies similarly circumstanced, upon the earnings and dividend record of the Rhinelander Real Estate Co., and upon the admitted value of its assets.

In Ray Consolidated Copper Co. v. United States, 268 U.S. 373, the Supreme Court pointed out that, “ The capital stock of a corporation, its net assets, and its shares of stock are entirely different things. * * * The value of one bears no fixed or necessary relation to the value of the other.”

We are of opinion that the admitted fair value of the assets of the corporation is not necessarily controlling with respect to the fair value of its shares. The assets of the corporation are at the risk of the business.

On consideration of all of the evidence we are of the opinion that the fair value of the shares at the date of death of the decedent was $165.39 per share, the value at which they were distributed to the legatees in 1930.

The second question relates to the value of fractional interests in 44 parcels of real estate owned by the decedent at the date of his death. The evidence shows that the decedent owned one-fifth undivided interests in 30 parcels of real estate; that upon the death of Lispenard Stewart on October 15,1927, the decedent acquired an additional one-tenth interest in the same parcels of real estate. Consequently, upon his death, he owned undivided three-tenths interests in 30 parcels of real estate and undivided one-third interests in 14 parcels. The petitioners and the respondent are in agreement as to the value at the date of death of the decedent of the entire parcels of real estate in question.

These fractional interests were returned by the executors at a discount of 40 percent from the like fractional part of the admitted value of the entire parcel. The respondent in the determination of the deficiencies has disallowed such discount upon the theory that minority fractional undivided interests in real estate have the same value as the proportionate part of the admitted value of the entire parcel.

In support of their contention that fractional undivided interests in real estate in New York have not a value equal to a like fraction of the fair value of the entire parcel the petitioners have offered the testimony of two qualified experts in New York real estate. One of these testified that in his experience it was hard to find a buyer for minority fractional undivided interests in real estate in New York City. He testified that ordinarily fractional interests were sold in connection with other fractional interests; in other words, that a purchaser of property was not interested in purchasing fractional interests, but that where he was interested in purchasing a parcel of real estate and could purchase several undivided interests making up the total he would make the purchase; and that where the owner of a fractional interest tried to sell it, he found he could not secure a purchaser except at a substantial discount. Another of the petitioners’ witnesses testified that he and his firm had made a number of sales of fractional interests in real estate over a period of more than 20 years and that in practically every case a purchaser could be found for the fractional interest only at a discount. He cited one particular case where a person desiring to purchase a given piece of property was willing to pay $55,000 for the total parcel but would pay and did pay only $16,000 for a one-third undivided interest. He further testified that the owner of an undivided interest of a parcel of real estate is limited in the control, management, operating, and renting of the building; that he is limited by the wishes and whims of the other coowners; that it is a consideration of these factors that makes it very difficult to find a purchaser for minority fractional interests. He admitted that under the New York law the owner of an undivided interest could bring a partition proceeding for the sale of the property, but testified that some such proceedings were long drawn out and that often a prospective purchaser for the entire property was not interested in acquiring the property after the partition proceedings had been completed.

' The respondent pointed out that in some cases a minority interest had’a.nuisance value which more than offset the disadvantages possessed by the owner of the fractional interest; that in some cases a prospective purchaser of a parcel of real estate had to pay the owner of a minority interest a bonus in order to get him to agree to a sale.

That fractional interests should be given a valuation below the mathematical fraction of the value of the entire property has been held in a number of New York cases. In Matter of Gibert, 176 App.Div. 851, it was held that a transfer tax appraiser should make a deduction in valuing an undivided fractional interest in real property because of the diminution in value which results from the fact that it is an undivided fractional interest only. In the course of its opinion the court stated:

This deduction is due in part to cover the expenses incident to a partition action, but is chiefly due to the fact that the owner (of such an undivided interest, particularly if, as in the ease at bar, it be a minority interest only, cannot control it, ,but holds it practically at the mercy of the owners of the other interests. For such an interest there is only a limited market, the proof being, that experience shows that the purchasers of undivided interests. are usually speculators and operators. This restrictive market for such interests lowers their market value. '

Testimony as to the proper deduction for; the one-third interest iii the real property given before the appraiser was 25 percent, but nevertheless he found a deduction of only 15 percent. The state appealed on the ground that there should be no allowance for fractional interest, and the estate appealed on the ground that the deduction should have been 25 percent. The order, so far as appealed from by the state, was affirmed, but so far as appealed from by the estate was reversed.

In In re Lobes Estate, 164 N.Y.S. 592, it is said:

It appeared from the evidence of this expert that the value of the one-half interest is less than one-half of the .value of the entire plot. The appraiser disregarded this evidence and ascertained the value of decedent’s one-half interest to be one-half the value of the entire plot as appraised ,by the state comptroller’s expert. This was incorrect, as the only evidence before him was to the effect that the one-half interest is worth less than one-half the value of the entire plot.

In Matter of Turner, 221 App. Div. 116, it was held that, in fixing the transfer tax on a power of appointment exercised by the testator in the disposition of a fractional undivided interest in real property, the customary allowance should be made by reason of the fact that the interest in the real property was fractional. The court stated:

* * * If this donee had owned this fractional interest and devised it by will the allowance would concededly have been proper. Therefore it must be granted in the case at bar.

In Emilie Baer et al., Executors, 3 B.T.A. 881, the Board refused to discount the value of the fractional interest in real estate from a like fraction of the value of the entire parcel, since the evidence presented in that case was to the effect that sales of fractional interests were ordinarily made without discount. Such is not the evidence in the case at bar. The only material evidence shows that fractional interests sold separately from the sale of the entire property are ordinarily sold at a discount.

One of the petitioners’ witnesses was of the opinion that three-tenths and one-third undivided fractional interests should be reduced by about 40 percent in order to arrive at fair value; another was of the opinion, based upon his experience, that the sale of fractional one-fifth and one-third interests should be discounted by 30 percent and 25 percent, respectively. A witness for the Government testified that in his opinion no discount should be allowed in the determination of the value of fractional interests. He was not able, however, to support his testimony with a record of actual sales.

From a consideration of all of the testimony, we are of the opinion that the fractional interests owned by decedent at the date of his death should be discounted to the extent of 15 percent of the mathematical equivalent of the admitted value of the entire parcel. This is practically in accord with the amount of discount suffered in the comparable sale of a fractional interest adverted to above and with the decision of the court in Matter of Gibert, supra, and in our opinion represents the proper discount to be applied to the fractional interests involved.

The third point in issue relates to the deduction from the gross estate of $10,000 counsel fees which have not yet been paid by the estate but have been agreed upon and will be paid in the settlement of the estate. The contentions of the petitioners upon this point are sustained. Estate of Wm. H. Larkin, 1 B.T.A. 1045; John A. Loetscher et al., Executors, 14 B.T.A. 228; Irving Bank-Columbia Trust Co. et al., Executors, 16 B.T.A. 897; Arthur M. Lamport et al., Executors, 28 B.T.A. 862.

Reviewed by the Board.

Judgment will be entered under Rule 50.