author: Seawell:

text:
    Western Industries Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 42794.
    Promulgated May 31, 1934.

      Joseph G. Meyer stem, Esq., and W. W. Spalding, Esq., for the petitioner.

      Bruce A. Low, Esq., and T. G. Misión, Esq., for the respondent.
   OPINION.

Seawell:

The theory of the respondent’s determination is that the transaction between the petitioner and the Chemical Corporation was nothing more than a sale, and therefore not one falling within section 203 of the Revenue Act of 1926, the material portions of which are set forth in the margin. The petitioner, in contending that a reorganization, not a sale, took place, claims that the question turns upon whether the petitioner transferred substantially all of its properties to the Chemical Corporation, bio issue was raised as to the fair market value of the notes and common stock received in the sale, or the basis used by the respondent in computing the taxable gain realized from the transaction. If the petitioner is to escape tax on the full amount of profit realized from the transaction, it must be because of a clear showing that it is within the exceptions set forth in section 203 of the statute. Pinellas Ice & Cold Storage Co., 21 B.T.A. 425; aff'd., 57 Fed. (2d) 188; 287 U.S. 462; Arctic Ice Machine Co., 23 B.T.A. 1223.

The petitioner transferred assets of a book value of $479,835.75 for cash, notes, and stock, of an aggregate value, as reported, of $1,123,537.26, and retained net assets of a book value of $194,575.09. Computing it on the basis of book value, the petitioner transferred about 71.2 percent of its assets to the Chemical Corporation and retained about 28.8 percent. If we use as a factor the value of property received for the assets transferred, including the value placed upon the common stock by the petitioner, as the court did in Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937; certiorari denied, 288 U.S. 599; affirming 22 B.T.A. 808, we find that about 85.2 percent of the petitioner’s assets was transferred and about 14.8 percent was retained. Thus the petitioner did not divest itself of more than approximately 85.2 percent of its assets. This does not constitute substantially all of petitioner’s properties within the meaning of the statute. Gulf Coast Irrigation Co., 24 B.T.A. 958; Good Mfg. Co. v. Burnet, 58 Fed. (2d) 685; Bank of Italy v. Burnet, 46 Fed. (2d) 629; certiorari denied, 283 U.S. 846; New England Power Co., 25 B.T.A. 195; United States v. Cleveland P. & E. R. Co., 42 Fed. (2d) 418; Wadhams & Co. v. United States, 67 Ct. Cls. 235.

It is not necessary to rest the decision on this point. A taxpayer claiming the benefits of the statute must show that the parties to the transaction had a plan of reorganization. Arctic Ice Machine Co., supra; J. M. Harrison, Inc., 30 B.T.A. 455. The negotiations resulting in the transfer of the assets extended over a period of about six months and were conducted by Roger Bacqueraz, vice president and manager of the petitioner, and Henry I. Peffer, organizer of the Chemical Corporation, through an exchange of letters and telegrams and by verbal conversations. We have not been advised of any understanding reached during such negotiations respecting a plan of reorganization, and it appears that no formal agreement was entered into covering the transfer of petitioner’s assets. No attempt was made to offer in evidence any resolution the petitioner may have adopted on the subject. Peffer testified that “ It was essentially necessary to acquire the assets of the Western Industries in order to bring about the organization of the new corporation.” This testimony of Peffer proves nothing more than that the Chemical Corporation had some plan for the acquisition of the assets of the petitioner. This constitutes all of the evidence on the question and is insufficient to show that the petitioner or any of the other parties to the transaction had a plan of reorganization.

The petitioner distributed most of the cash to the stockholders and continued to hold the stock received in the transfer. Instead of dissolving it continued as a going concern, apparently without any change in the ownership of its stock. Under similar facts we have held that the statute does not apply. Minnesota Tea Co., 28 B.T.A. 591. The respondent did not err in computing the taxable gain realized in the transfer on the basis of a sale.

The petitioner returned the preference stock received in the sale at a value of $30 per share, with the statement that “ The actual value of the preferred stock was probably less than $30.00 pel share, but it does not appear that the net gain to be recognized would be affected thereby.” The respondent found a value for the stock equal to the amount returned. The petitioner’s present contention is that the stock should be valued at its book value of $4.05 per share.

We think the evidence supports rather than overcomes the presumption existing in favor of the respondent’s determination of value. The agreement of the petitioner to refrain from selling its block of the stock until after the completion of the syndicate operations did not leave the securities without fair market value. Minnesota Tea Co., supra; Tex-Penn Oil Co., 28 B.T.A. 917. Frederick O. Lage, of the firm of Lage & Co., one of the members of the syndicate which underwrote about 35,000 shares of the stock in April 1926 at $31 per unit, testified on behalf of the petitioner that he considered such purchase price a fair market value of the stock at that time. The record does not show the price at which the syndicate offered the stock to the public, but it was acquired for the purpose of placing it on the market at a price of $35 per unit, consisting of one share of preference stock, and one half share of common stock having no fair market value. The record does show, however, that all of the stock was sold by November 1, 1926, without loss to the syndicate, and the testimony of Lage is that the members of the syndicate considered the price at which the stock was being offered a fair price for the securities. After the completion of the syndicate operations the stock sold for as high as $32.50 per share.

The petitioner relies upon Wallis Tractor Co., 3 B.T.A. 981, in support of its method of determining the fair market value of the stock. In that case there was proof of the fair market value of the assets behind the stock. That is lacking here. The respondent’s finding of a fair market value for the stock of $30 per share has not been overcome and is sustained.

Decision will he entered for the respondent.

       Seo. 203. (a) Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 202, shall be recognized, except as hereinafter provided in this section.

        *******

      (b) (3) No gain or loss shall he recognized if a corporation a party to a reorganization exchanges property, in pursuance iof the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.

        *******

      (e) If an exchange would he within the provisions of paragraph (3) of subdivision (b) if it were not for the fact that the property received in exchange consists not only of stock or securities permitted by such paragraph to he received without the recognition of gain, but also of other property or money, then — -
      (1) If the corporation receiving such other property or money distributes it in pursuance of the plan of reorganization, no gain to the corporation shall be recognized from the exchange, but
      (2) If the corporation receiving such other property or money does not distribute it in pursuance of the plan of reorganization, the gain, if any, to the corporation shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property so received, which is not so distributed.

        * * * * * * *
      (h) As used in this section and sections 201 and 20A—
      (1) The term “ reorganization ” means (A) a merger or consolidation (including the acquisition by one corporation of * * * substantially all the properties of another corporation) * * *.


source: Caselaw Access Project

author: Lansdon:

license: Public Domain

text:
    Higgins Estate, Incorporated, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 42682.
    Promulgated May 31, 1934.

      A. Galder Machay, Esq., for the petitioner.

      Elden McFarland, Esq., for the respondent.
   OPINION.

Lansdon:

On the facts as above set out the respondent has held that the agreement to sell petitioner’s mine was not an executed contract of sale on July 2, 1922, and that there is no basis in law upon which the profits realized from such sale may be accrued on that date. He has determined a cost of the property in the amount of $601,417.50 and a profit of $648,582.50. Holding that at every payment date there was doubt as to whether any future payments would be made, he has applied the successive payments first to the recovery of cost and has determined tax liability on amounts received after such recovery. On this basis he has held that petitioner is taxable on income realized in 1923 and 1924 in the respective amounts of $398,582.50 and $250,000, and has determined the deficiencies here in controversy.

The petitioner contends that the contract of sale was executed on July 2, 1922, and that, being on the accrual basis of accounting, under the provisions of section 213 (a) of the Revenue Act of 1927 it was required to accrue in that year and return as income all profit realized from the transaction. In its return for 1922 petitioner reported $250,000 in its gross income as profit realized from the sale. Upon audit the respondent increased such reported profit to $648,-582.50, which the petitioner now agrees is the amount of gain realized from the sale.

The parties have tried and briefed this proceeding on the assumption that the main issue is whether the agreement in question is a contract of a sale executed on July 2, 1922, or an option to purchase which resulted in an executed sale on the date of the last payment in 1924. The agreement contains no provision under which the purchaser could be required to convert it into an executed contract of sale. The payment of $249,000 on July 2, 1922, was conditioned on a favorable report as to petitioner’s power to transfer title. The payment of $500,000 on February 1, 1923, was to be made only after the purchaser had entered and explored the mine. The payments of $250,000 each on August 1, 1923, and February 1, 1924, depended entirely on decisions which could be made only by the purchaser, who had executed no obligations in the form of notes or mortgages. The agreement provided for all contingencies that might result from the failure of the purchaser to observe all its terms and mate all the deferred payments. In these circumstances, we think it immaterial whether the instrument in question was a continuing option or contract of sale finally executed at the date of the last payment. In any event it was not a contract of sale executed on July 2, 1922. The real question relates to the date or dates at which the payments became taxable income to the petitioner.

It is now well settled that deductions contingent on future events may not be accrued for income tax purposes. Commissioner v. Old Dominion S.S. Co., 47 Fed. (2d) 148; Acme Coal Co. v. United States, 44 Fed. (2d) 195; S. Naitove & Co., 8 B.T.A. 589; aff'd., 32 Fed. (2d) 949; certiorari denied, 280 U.S. 582. The courts have generally applied the same rule to the’accrual of income. In Schoellkopf Analine & Chemical Works v. United States, 3 Fed. Supp. 417, it was held that, “An item accrues when all events have occurred necessary to fix the liabilities of the parties concerned therewith and to determine the amount of such liabilities.” In Burnet v. Logan, 283 U.S. 404, the Court said:

In order to determine whether there has been gain or loss, and the amount of the gain, if any, we must withdraw from the gross proceeds an amount sufficient to restore the capital value that existed at the commencement of the period under consideration. Doyle v. Mitchell Bros. Co., 247 U.S. 179, 184, 185, 38 S. Ct. 467, 469, 62 L. Ed. 1054. Revenue Act 1916 § 2, 39 Stat. 757, 758; Revenue Act 1918, c. 18, 40 Stat. 1057. Ordinarily, at least, a taxpayer may not deduct from gross receipts a supposed loss which in fact is represented by his outstanding note. Eckert v. Burnet, 283 U.S. 140, 51 S. Ct. 373, 75 L. Ed. — (April 13, 1931). And, conversely, a promise to pay indeterminate sums of money is not necessarily taxable income. Generally speaking, the income tax law is concerned only with realized losses, as with realized gains. Lucas v. American Code Co., 280 U.S. 445, 449, 50 S. Ct. 202, 203, 74 U. Ed. 538.

On the above cited authorities and in the light of the facts herein, we think it clear that the profit realized from the sale of petitioner’s mine was not accruable as income in 1922. The petitioner contends that as it kept its accounts on the accrual basis, it was required to accrue its profit from the sale of its mine as and when received. The Commissioner, however, is authorized to reject the accounting method of any taxpayer if income is not truly reflected thereby. In this proceeding he has determined that there was no income in 1922 and we think that determination and his further finding that income was realized only after cost had been recovered must be affirmed.

Reviewed by the Board.

Deoision will be entered for the respondent.


author: Tkammell :

text:
    Augustus H. Eustis, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 71637.
    Promulgated May 31, 1934.

      Kermeth Howes, Esq., for the petitioner.

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

Tkammell :

This proceeding is for the redetermination of a deficiency in income tax for the calendar year 1930 in the amount of $398.56. The only error assigned is the action of the respondent in including in taxable income for the year certain income of a trust from December 15 to December 31, 1930. The facts were stipulated and we set forth herein only those we deem to be material for a decision of the case.

The petitioner is the grandson of Augustus Hemenway, who died on June 16, 1876, a resident of Massachusetts. Since the death of his mother, Edith Hemenway Eustis, in 1904, the petitioner has been one of the beneficiaries entitled to receive income under the provisions of the trust established under article seventh of the will of Augustus Hemenway. The trust is still in existence.

The will oí: Augustus Hemenway was admitted to probate in Norfolk County, Massachusetts, on July 26, 1876.

The trustees of the trust established under article seventh of the will of Augustus Hemenway have always made their Federal income tax returns on the basis' of the. calendar year, and on the basis of casli receipts and disbursements.

During the calendar year 1930 the trustees made income distributions to the petitioner, as one of the income beneficiaries of the trust, on June 15 and December 15,1930. The petitioner in his individual Federal income tax return for the calendar year 1930 reported such part of the distributions made to him by the trustees on June 15 and December 15,1930, as representing taxable income and paid the taxes shown to be due thereon.

The petitioner has always kept his books and made his Federal income tax returns on the basis of the calendar year and on the basis of cash receipts and disbursements.

During the period from December 16 to December 31, 1930, inclusive, the trustees received certain taxable income! They reported this income in their Federal income tax entity return (Form 1040) for the calendar year 1930, and paid the taxes shown to be due thereon. The petitioner’s share of said income, as an income beneficiary of the trust, amounted to $1,285.99, consisting of $550.73 of dividends from domestic corporations and $735.26 of other income. The $1,285.99 was not in fact distributed to the petitioner by the trustees until June 15, 1931, and no part of it was reported in the petitioner’s individual Federal income tax return for the calendar year 1930. The respondent determined that the $1,285.99 was income taxable to the petitioner for the calendar year 1930.

Article seventh of the will of Augustus Hemenway, after creating a trust with respect to certain property, provided as follows:

To pay all the remaining net rents and income, during the continuance of this trust, by semi-annual payments in every year, in equal shares, to such of the said four persons, namely, my wife and three children, as may be living at the time of payment, and to the lawful issue then living of any my child who has then deceased, (whether such my child have died before or after me) such issue taking by representation, according to the stocks, the share whicli such my deceased child would have taken, if living. All payments of net rents and income made under the trusts created for the benefit of my wife, children and issue, (shall he made either into the hand of the person named, or upon Ms, or her, written order or receipt, given at or after the time and not hy anticipation or in compliance with any assignment; * * * [Italics supplied.]

Mary Hemenway, widow of the creator of the trust, and a beneficiary with the three children of such trust, died testate on March 6, 1894, leaving the three children surviving her. The Supreme Judicial Court of Massachusetts, in the case of Hemenway v. Hemenway, 171 Mass. 42, was asked by the trustees to determine whether any income collected by them after December 15, 1893, the date of the last semiannual payment to Mrs. Hemenway, should be paid to the executors of her will, and, if so, how the shares of the income should be apportioned as between her estate and the three children, whether as of December 16, 1893, or as of March 6, 1894. The court there said:

The language of the seventh article of the will seems to us carefully to provide for the effect of the death of the testator’s widow, or of any one of his children, upon the distribution of the net rents and income. The payments are to be made from time to time out of the rents and income collected by the trustees, semiannually, reckoning from the death of the testator, and each payment is to be made “ to such of the said four persons, namely, my wife and three children, as may be living at the time of payment, and to the lawful issue then living of any my child who has then deceased,” etc., and “ shall he made either into the hand of the person named, or upon his or her written order, or receipt, given at or after the time, and not by anticipation or in compliance with any assignment.” These four persons are not given by the will any interest in the rents and income, except the right to receive these semiannual payments in the manner directed. If any one of them is not alive at the time when the payment should be made, only those living at that time are to receive the payment, and they are to receive all that is then payable. The language used seems to us necessarily to exclude any apportionment between the estate of the widow and the three children. The trustees should be instructed that there should be no apportionment of the net rents and income of the trust property received by them after December 15, 1893.

The petitioner contends that the income of the trust from December 15 to December 31, 1930, was taxable to the trustees and that the respondent erred in determining that the part thereof which is here in controversy was to be included in his income for 1930 and as taxable to him.

The Revenue Act of 1928 provides as follows:

SEO. 161. IMPOSITION OF TAX.
(a) Application of tax. — The taxes imposed by this title upon individuals shall apply to the income of estates or of any kind of property held in trust, including—
(1) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust;
(2) Income which is to be distributed currently by the fiduciary to the beneficiaries, * * *
***#**:*:
(b) Computation and payment. — The tax shall be computed upon the net income of the estate or trust, and shall be paid by the fiduciary, except as provided in section 166 (relating to revocable trusts) and section 167 (relating to income for benefit of the grantor). Dor return made by beneficiary, see section 143.
SEC. 162. NET INCOME.
The net income ol the estate or trust shall be computed in the same manner and on the same basis as in the case oí an individual, except that—
* * * * - $ * *
(b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for. its taxable year which is to be distributed currently by the fiduciary to the beneficiaries * * * but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year.

The petitioner, relying on the decision of the Supreme Judicial Court of Massachusetts mentioned above, urges that ho part of the income of the trust for the period in controversy was on December 31,1930, distributable to him and that it was not known on that date whether any portion of it would become distributable to him, since his right to receive any part of it was contingent upon his being alive on the date for the next semiannual payment, June 15, 1931. He insists that on December 31,1930, the person or persons who would be entitled to receive the income from December 15 down to that date were neither ascertained nor ascertainable. The respondent contends that the income for the period was “to be distributed currently,” that therefore it was an allowable deduction to the trustees in computing the net income of the trust and consequently the portion thereof here in controversy constituted taxable income to the petitioner.

While the case relied on by the petitioner appears to have involved only the rights of the estate of the widow of the grantor of the trust and their three children and the petitioner here is the son of one of the children, we think, nevertheless, what the court said is equally applicable to the case of the petitioner, since his right to a share of the income from the trust is controlled by the same provisions of the will that were construed by the court. The will provided and the court so held that only those beneficiaries who were alive on the dates of the semiannual payments were entitled to receive any part of the income of the trust for the preceding period. December 31,1930, was not a semiannual payment date and therefore we think it is clear that because the petitioner was alive on that date he was not entitled to a part of the trust income for the period since December 15,1930. No one knew on December 31,1930, whether the petitioner would be alive on June 15, 1931, or what persons would be entitled on such date to receive the income of the trust arising after December 15, 1930. Under the will and the court decision, if the petitioner died prior to June 15, 1931, the portion that he would have been entitled to on that date, if he were alive, would not have gone to his estate, but would have gone to others. The petitioner’s right to receive the income in controversy being dependent upon his being alive on some date in the future, and the continuance of life until any particular date in the future being one of the most uncertain things known to human experience, we think the petitioner’s interest in the income was highly contingent and at most constituted only a posibility.

The will provided and the court likewise construed it that the payments by the trustees were to be made either into the hands of the persons entitled thereto or upon their written order or receipt given at or after the time for payment and not by anticipation or in compliance with any assignment. In view of that we think it follows that on December 31, 1930, the petitioner did not have even an assignable or a disposable interest in the income which the respondent here seeks to tax to him.

Under the circumstances here presented we are unable to reach any other conclusion than that the income of the trust from December 15 to December 31, 1930, constituted income accumulated in trust for the benefit of unascertained persons or persons with contingent interests within the meaning of the provisions of section 161 (a)(1).

Ferguson v. Forstmann, 25 Fed. (2d) 47, arose under the Revenue Acts of 1918 and 1921, the pertinent provisions of section 219 (a) (2) of which are substantially identical with those quoted above from section 161 (a) (1) of the Revenue Act of 1928. In that case the court held that dividends declared by a corporation and retained and accumulated in its treasury pursuant to court order pending determination of the true ownership of stock in litigation between the stockholders and the Alien Property Custodian constituted income accumulated “ for the benefit of * * * unascertained persons ” on which the corporation was required to pay tax as fiduciary. The same conclusion was reached in Ida Wolf Schick, 22 B.T.A. 1067, where there was involved the question as. to whom certain rents and other income, impounded in the hands of a receiver by order of the court during litigation to determine the true owner thereof, were taxable. The case of Hart v. Commissioner, 54 Fed. (2d) 848, arose under section 219 (a) (1) of the Revenue Act of 1926 the provisions of which are identical with those of section 161 (a) (1) of the Act of 1928. In that case Hart in 1926, pursuant to an order of a state court for the segregation of his assets pending his appeal from a judgment against him in favor of a receiver of a corporation, turned over to the receiver certain Liberty bonds. Some time in 1927, after reversal of the judgment on appeal, the bonds with the accumulated income therefrom were restored to Hart. The Commissioner sought to tax to Hart the income from the bonds during the time they were held by the receiver. The court held that the income was taxable to the receiver as income accumulated in trust for the benefit of an unascertained person. In O. O. Owens, 26 B.T.A. 1147, which involved the Acts of 1916, 1918, and 1921, it was held that income from royalties impounded in the custody of a court receiver during litigation to determine the unknown heirs of the original owner was taxable to the receiver as income accumulated in trust for the benefit of unascertained persons. Edward J. Flynn, Trustee, 21 B.T.A. 1329; aff'd., 66 Fed. (2d) 394; certiorari denied, 290 U.S. 698, arose under the Acts of 1916, 1918, 1921, 1924 and 1926. There the Chamberlain of the City of New York, pursuant to court orders, was holding and investing a fund until such time as the court could determine those who were entitled to such fund, which had been awarded as compensation for a remainder interest in land taken by the right of eminent domain. It was held that the income from the fund was taxable to the chamberlain as income accumulated in trust for the benefit of unascertained persons or persons with contingent interests.

The foregoing cases establish the rule that, where income is being accumulated pending a court determination of the party finally entitled to receive it, such income is taxable to the receiver or other custodian. The reason underlying the rule is that the party who will finally become entitled to receive it is and remains unascertained until a determination by the court. Until that time the right of any person finally to receive the income is contingent upon the action of the court. Considering the facts in the instant case in the light of the above decisions, we think that the contingency here involved, the petitioner’s survival from December 31, 1930, to June 15, 1931, was equally as uncertain as the contingencies involved in those decisions. Wo therefore conclude that the income in controversy was not taxable to the petitioner, but to the trustees, who, according to the stipulated facts, reported it in their return and paid the tax on it. The contention of the petitioner is therefore sustained.

The respondent has urged that, since under the will the income of the trust was to be distributed semiannually, it therefore was income to be distributed currently and under the provisions of section 162(b) was an allowable deduction to the trust and the amount in controversy was taxable to the petitioner. Giving the provisions of section 162(b) the construction impliedly contended for by the respondent and applying such construction to the facts in the infant case leads to the conclusion that because the petitioner was a beneficiary of the trust he was taxable on a portion of its income even though he had no present right to receive or demand it, and even though it was not known and could not be determined at the end of his taxable year whether either he or his estate would ever receive it. Assuming that the respondent’s contention is correct and that on the day following the close of the petitioner’s taxable year the petitioner had died, the tax on the income in controversy would have been payable by the petitioner’s estate, notwithstanding the fact that neither he during his lifetime nor the estate after his death had received or ever could receive the income. It clearly was not contemplated that a beneficiary would be required to pay a tax on income in the hands of a fiduciary when it was not known and could not be known whether he or his estate would ever receive it or ever be entitled to receive it. In the instant case it could not be ascertained on December SI whether the petitioner or his estate would ever be entitled to receive the income for the period from December 15 to December 31. Some one else may have become entitled to receive it and in our opinion under such circumstances the statute does not require this beneficiary to pay a tax on such income. The contention of the respondent must be denied.

Reviewed by the Board.

Judgment will ~be entered under Hule 50.


author: Van Fossan:

text:
    William C. deMille Productions, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 53108, 61321.
    Promulgated May 31, 1934.

      A. Gadder Maehay, Esq., for the petitioner.

      Mason B. Leming, Esq., and B. J. Bopp, Esq., for the respondent.
   OPINION.

Van Fossan:

In this case it is necessary to peer into the mind of the taxpayer to determine its intent. In this process the declaration of the owning stockholder is important, but it is neither conclusive in its character nor exclusive of other evidence. In our search for corroboration or negation of the declarations, we may properly consider all other pertinent facts, the attendant circumstances and the normal inferences to be drawn therefrom. In short, though intent is a state of mind, it is nevertheless a fact to be proved and found as are other facts.

Section 220 of the Revenue Act of 1924 provides, in part, as follows:

Sec. 220. (a) If any corporation, however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there shall be levied, collected, and paid for each taxable year upon the net income of such corporation a tax equal to 50 per centum of the amount thereof, which shall be in addition to the tax imposed by section 230 of this title and shall (except as provided in subdivision (d) of this section) be computed, collected, and paid upon the same basis and in the same manner and subject to the same provisions of law, including penalties, as that tax.

Section 220 of the Revenue Act of 1926 and section 104 of the Revenue Act of 1928 are substantially identical.

To be subject to the additional tax the corporation must be formed or availed of for the purpose of avoiding surtaxes on its stockholders. The record throws little light on the circumstances surrounding the formation of the corporation in 1923, but from such evidence as we have we would not be justified in concluding that it was specifically formed for the prohibited purpose. We must, therefore, examine the record to determine whether, in the taxable years, it was availed of for such purpose.

The year 1924 was the first year of substantial corporate operation. At the end of this year a surplus of $77,000 had been accumulated. DeMille testified that his sole purpose in accumulating a surplus was to strengthen the financial position of the company with a view to expanding activities and achieving independent production. It requires no argument to support the premise that the cited sections do not contemplate that a business should remain static; it must be assumed that any business shall have the right to grow. Necessarily incident to the exercise of this right are the making and pursuit of plans both as to organization and as to finances which will permit the accomplishment of the contemplated development.

Thus, with petitioner’s ambition no fault is to be found. Nor is the election of the means of accomplishment, of itself, to be categorically condemned. If such purpose be truly sole and the amount so built up not in excess of the reasonable requirements of the business it would seem that a corporation was within its rights and does not violate the statute. The word reasonable ” is a relative term. What would be reasonable in one situation or for one business might be clearly unreasonable in another.

After carefully studying the entire picture, testing the declaration of intent by the rule of conduct and weighing the surplus accumulations by the scales of reasonableness, we are of the opinion that as to the years 1924 and 1925 the facts and inferences therefrom do not justify a conclusion that in these years the taxpayer corporation wasi availed of for the purpose interdicted by the statute.

In the year 1926 a new factor enters and demands our consideration. Previous thereto petitioner had loaned relatively small sums to its principal stockholder. Though these loans are suggestive, we do not deem them conclusive. In 1926, however, deMille had need of approximately $200,000 to effect a divorce settlement with his wife. Here again he turned to the corporation. Instead of distributing its surplus to himself as dividends, he caused the corporation to borrow $100,000 on a mortgage of its property and then in turn borrowed $195,000 from the corporation. This transaction we believe marked the crystallization of a new attitude toward the corporation and its utilization for the very purpose proscribed by the statute. Since the company belonged to deMille it was open to him to have distributed the earnings to himself instead of borrowing in the manner indicated. Except for taxes, the practical net result both to the corporation and to deMille would have been substantially the same in both cases. He chose to borrow the surplus.

As stated by the court in United Business Corp. v. Commissioner, 62 Fed. (2d) 754, “ these loans are incompatible with a purpose to strengthen the financial position of the petitioner but entirely accord with a desire to get the equivalent of his dividends under another guise.”

Assuming that the accumulations during 1924 and 1925 were for a legitimate purpose, the loaning of this large sum marks the definite abandonment of that purpose and leaves us no alternative as to intent. The loan to deMille was made without security. Any repayment by deMille would have to be made chiefly out of his salary. That it was not seriously intended that the loan should ever be repaid may be deduced from the fact that although deMille received from petitioner between 1927 and 1932 payments of salary aggregating $200,000 his loan has not been reduced.

Furthermore, with the abandonment of any serious purpose to expand the business, the surplus, even if theretofore wholly reasonable, became definitely unreasonable for the needs of petitioner’s business. We conclude that for the years 1926, 1927 and 1928 petitioner was availed of for the purpose of avoiding surtaxes on its stockholders.

Petitioner advances the Constitution as a bar. This defense has been fully considered in previous cases and the statute adjudged to be constitutional. United Business Corp. v. Commissioner, supra; Williams Investment Co. v. United States, 3 Fed. Supp. 225.

As to the minor issues of deduction, we sustain the respondent. As to some of the allegations of error no evidence was produced. As to the remainder, the evidence fails to overcome the presumption of correctness attaching to respondent’s findings.

Reviewed by the Board.

Decision will be entered under Bule 50.

MoRbts and Matthews dissent.


author: Smith :

text:
    Grace H. Crawford, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 73216.
    Promulgated May 31, 1934.

      Jolm T. Kennedy, Esq., for the petitioner.

      Arthur Oarndwff, Esq., and James H. Yeatman, Esq., for the respondent.
   OPINION.

Smith :

The respondent has determined a deficiency in petitioner’s income tax liability for 1930 of $1,540.99. The only question in issue is whether the petitioner is taxable upon all or only one half of the income from a certain trust created by the petitioner’s mother on January 22, 1923. The trust provided that the settlor should turn over to the National City Bank of New York as trustee certain securities, the income from which was to go one half to the petitioner and one half to the petitioner’s brother, John B. Hower. The trust was to continue for the respective lives of the beneficiaries. The settlor retained the power in the fourth section of the trust agreement to alter or revoke the trust at any time by an instrument in writing. On December 30,1924, the settlor amended the trust agreement as follows:

That the undersigned, Blanche E. Hower, does hereby alter and modify said instrument by adding at the end of Section Fourth of said Agreement, a second proviso in the words following, to wit:
“And, provided further, that the Settlor shall not have the power at any time during any taxable year within the meaning of the revenue laws of the United States to revest in herself title to any part of the corpus of the trust hereby created except upon written notice delivered to the Trustee during the preceding taxable year, or except with the consent of the beneficiary entitled to the income of each share affected, and provided still further, that no part of the income of said trust may, in the discretion of the Settlor, be distributed to her or held or accumulated for future distribution to her, except with the consent of the beneficiary entitled to the income of each share affected, and also that no part of the income of said trust, may be applied by the Trustee to the payment of premiums upon policies of insurance on the life of the Settlor.”

In 1927 the petitioner’s brother, who was married and had two children, became involved in marital difficulties and divorce proceedings were imminent, In view of this situation and for the purpose of protecting the brother’s share of the trust income, which his wife had threatened to have attached, it was agreed between the settlor, the petitioner, and her brother that the trust agreement should be altered so as to make all the income thereof payable to the petitioner, who would pay over one half thereof to her brother. Pursuant to the aforesaid agreement between the parties, the petitioner, on April 28, 1927, executed the following agreement before a notary public:

Tbis is to certify tliat the Trust Fund which my Mother has established in my name, I agree to share equally with my brother, John Bruot Hower. And in case of my passing on before my brother my share in this fund is to go entirely to my brother. And it is further agreed between my Mother and brother and I that on my brother’s passing on this fund is to go to his two children, John Bruot and Jean Eloise, to remain intact until they each arrive at the age of thirty.
[Signed] Grace Howe® Crawford.

April 28th, 1927.

The above agreement was not sent to the trustee, but was kept in a safe-deposit box to which the petitioner and her brother had access.

The trust agreement of January 22, 1923, as amended on December 30, 1924, was further amended as per the following agreement dated April 30, 1927:

I, Blanche Euoenia Hower, of Akron, Ohio, designated as the Settlor in an Agreement with The National City Bank of New York, therein designated as Trustee, dated January 22, 1923, pursuant to power reserved to me by Article Fourth of the said Agreement as modified by an instrument in writing executed December 31, 1924, Herjoby Alte® and Modify the said Agreement as follows:
FIRST
I hereby apply and annul Paragraphs I and II of Article First of the said Agreement, and in lieu thereof, I direct that there be inserted the following:
“ I. To apply the income thereof to 1 he use of the daughter of the Settlor, Grace Hower Crawford, during her life.”
“Upon the death of the said Grace Hower Crawford, to convey, transfer and pay over the principal thereof to the persons and in the shares designated in her Bast Will and Testament, or in default of such designation, in equal shares, per stripes and not per capita, to her lineal descendants then surviving.”
SECOND
This amendment shall take effect upon acknowledgment by the Trustee of its consent hereto and all income which shall accrue after the date of such consent shall be payable in accordance with the terms hereof.

The above instrument was consented to by the National City Bank of New York on May 2, 1927.

In accordance with instructions the trustee had for many years deposited the trust income in a joint bank account in the National City Bank of New York in the name of the petitioner and her brother. Each had authority to draw upon the bank account and in 1930 each withdrew his or her portion of the income.

Prior to June 17, 1931, and after the divorce proceedings had terminated, the trust agreement was again altered so that the income was payable one half to petitioner and one half to her brother as it was originally.

The petitioner’s brother prepared income tax returns for himself and the petitioner for 1929 and 1930. In the petitioner’s income tax return for 1929 there was included the entire income of the trust fund and the brother returned no portion of it as his own, although actually receiving one half thereof. In the petitioner’s return for 1930 there was included only one half of the income from the trust fund. The brother in his return did not report the balance. He testified that upon the advice of accountants a claim had been filed in the name of the petitioner for the refund of a portion of the tax paid by her for 1929 upon the ground that one half of the income of the trust fund was his own income. In making out returns for 1930 the brother included in the petitioner’s return only one half of the trust income, expecting to file an amended return for himself for 1930 if it should be determined by the respondent that the petitioner was taxable upon only one half thereof. The evidence does not show that the brother ever filed an amended return for 1930 or that one half of the trust income has ever been returned for tax.

The respondent has determined that after the amendment of the trust instrument in 1928 the petitioner was taxable upon all of the trust income, notwithstanding the fact that one half of such income was drawn by her brother; that the assignment was merely an assignment of future income which did not relieve the petitioner of tax liability therefor.

The applicable taxing statute is the Revenue Act of 1928. Under that act fiduciaries are required to file tax returns. Section 1G1 of the act requires:

(a) Application of tax.- — The taxes imposed by this title upon individuals shall apply to the income oí estates or of any kind of property held in trust, including—
* * * * * * *
(2) Income which is to he distributed currently by tho fiduciary to the beneficiaries, * * *

Section 162 provides:

Tlie net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that—
♦ ¥ & * % * Hr
(b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, * * * but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. * * *

The trustee in this case, the National City Bank of New York; filed a fiduciary return for 1930 showing the payment of the entire net income of the trust to the petitioner herein. She was the only beneficiary known to the trustee. The income was deposited by the trustee to the credit of the joint account of the petitioner and her brother. It is admitted that the petitioner could have drawn against the entire amount of the income deposited in such joint account. In other words, the income was all made available to the petitioner.

We think it is clear that under the taxing statute there must be a correlation between the amount of the income paid over to the beneficiary, allowed as a deduction to the fiduciary, and the amount of the income for which such beneficiary is taxable. Otherwise, there is no possibility of a checking of the beneficiary returns against the fiduciary returns.

The petitioner makes an elaborate argument to the effect that by the document executed by her on April 28,1927, she divested herself of one half of the income payable to her and that by reason of such fact she is not liable to income tax upon the one half of the income which was received by her for the benefit of her brother. We are of the opinion that it is not necessary to pass upon the validity of this assignment, which, so far as the record shows, was not communicated to the trustee. It certainly had no binding force upon the trustee.

In Hazel T. Power, 23 B.T.A. 428, the facts were that the petitioner, the beneficiary of a trust fund, made an assignment of the portion of the income of the fund for the benefit of her husband. Under the facts in that case wo held that the assignment of future income by the petitioner did not divest her of the liability for the payment of income tax thereon. In affirming our decision, 61 Fed. (2d) 625, the Circuit Court of Appeals for the Eighth Circuit stated:

* * * Thus petitioner never lost control of this income as [a] matter of fact, and it never became the separate property of the assignee. As to actualities, the assignment might have been a blank page. The record is silent even as to whether the joint bank account resulted from the assignment, although that would not be controlling. * * * The facts are that tills entire matter starts with a trust estate in which petitioner has a right to one-half the annual income, and ends with that income paid by the trustees, at her direction, to a joint bank account of herself and her husband. Whatever her intentions and whatever she did concerning the disposition of her income or interest in the trust estate, the net result was that her entire income under the trust was deposited directly to an account over which she had entire control.

We think that the observation of the court quoted above is equally applicable in the proceeding at bar, for here, as there, the entire net income of the trust estate was deposited in a joint account upon which the petitioner had a right to draw the full amount.

It is further to be observed that if the petitioner was a trustee for her brother of one half of the income she should have acted accordingly. She should at least have filed a fiduciary return showing that one half of the income was received for the benefit of her brother. She did nothing of the kind. From the returns filed the respondent could not determine that the petitioner’s brother was liable for tax upon any portion of the income deposited to her credit in the joint account. The brother did not return any portion of the income as his own. The statute of limitations has now operated to bar the collection of any deficiency from the brother. At least there is no evidence in the record that by any waiver filed the tolling of the statute of limitations has been stayed. In this situation we think that the petitioner is estopped to deny liability upon one half of the income of the trust fund.

In Swartz, Inc. v. Commissioner, 69 Fed. (2d) 633, it was stated:

Tliis view makes it unnecessary for us to consider in detail respondent’s position advanced as its sole defense before tbe Board and in the alternative here, that petitioner and Swartz, its sole owners, have by returning the income as petitioner’s and not Swartz’s estopped themselves from now claiming the contrary. We think, however, that this position is sound and that limitation having now run against taxing it to Swartz, it is too late for him now to assert that he, and not his creature, whom for years, he has induced the Government to accept as the owner, is the real owner of the income. Planters' Cotton Oil Co. v. Hopkins, 53 Fed. (2) 825; Walker v. Commr., 63 Fed. (2) 346; Commissioner v. Garder, 48 Red. (2) 526; Lucas v. Hunt, 45 Red. (2) 781; Hartwell Mills v. Rose, - Fed. (2) -.

For reasons above stated we sustain the respondent’s determination.

Judgment will be entered for the respondent.


author: MaRquette :

text:
    William M. Davey, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 48550.
    Promulgated May 31, 1934.

      Frank Mergenthaler, Esg., and G. O. Carlson, C.P.A., for the petitioner.

      G. H. Curl, Esg., for the respondent.
   OPINION.

MaRquette :

The petitioner relies upon four points to support his position: (1) That the arrangement entered into between himself, on the one hand, and Bryson and others, on the other, established, in fact, the relationship of debtor and creditor; (2) that the alleged profit derived from the transactions was deferrable for income tax purposes; (3) that where a taxpayer consistently reports his income in accordance with a particular plan which reflects the true income, lie should be permitted to continue to report it upon that basis; and (4) that where a doubt arises in the application of a taxing statute, the doubt should be resolved in favor of the taxpayer. Given facts which would warrant the application of points (8) and (4), we would have no quarrel as to the correctness of the points stated herein, but we are of opinion that the facts herein do not warrant the conclusions stated in those points. The decision of the case rests primarily upon points (1) and (2).

As appears from the findings of fact, petitioner purchased mortgage securities at a discount which he later sold to the Brysons and others at a discount which would net him a profit. As a condition of the sales, petitioner agreed, in case of default in payments due or trouble with collections, either to replace the securities sold with other securities of equal value, or to repurchase the same at the same rate of discount at which they were sold to his vendees. Upon 90 days’ notice the vendees could require petitioner to repurchase all securities sold to them, and, upon like notice, petitioner could repurchase from his vendees. We see nothing in this situation which at all resembles the relation of debtor and creditor. The agreement purports to sell and the conditions therein are all conditions subsequent. Whether the contingencies provided for will ever occur is problematical. Upon the sale of the securities the purchase price becomes the property of the petitioner, without restriction upon its use, and any gain derived in the transaction is income at that time. The petitioner claims the right to report this gain as amounts are paid to his vendees upon the security sold. This, in effect, is not different from a reserve to take care of the contingent liability to repurchase. While such a reserve may be good accounting practice, it is not permitted by the taxing statute, and such income may not be deferred to await the possibility of the happening of the contingency. Uvalde Co., 1 B.T.A. 932. Nor do we think the method of accounting adopted by petitioner reflects true income. Income taxes are laid upon an annual basis, and here the petitioner derived the gain from his capital which constituted gross income in the year in which received, and income is not truly reflected by deferring a part thereof to future years. This proceeding does not differ in principle from that of Browne v. Commissioner, 22 B.T.A. 678; aff'd., 63 Fed. (2d) 66; 291 U.S. 193. In that case Edward Browne & Sons acted as Pacific Coast general agent for fire insurance companies. The general agent received as compensation a so-called “ overriding commission ” on the net premiums derived from business written through local agents. The Commissioner held that in determining income the gross overriding commissions on business written during the year should not be subjected to any deductions on account of cancellations subject to occur in later years. The petitioner contended that either the gross overriding commissions should be subjected to such a deduction or that parts of gross overriding commissions should be allocated as earnings of future years. The Supreme Court stated:

The overriding commissions were gross income of the year in which they were receivable. As to each such commission there arose the obligation — a contingent liability — to return a proportionate part in case of cancellation. But the mere fact that some portion of it might have to be refunded in some future year in the event of cancellation or reinsurance did not affect its quality as income. Compare American National Co. v. United States, 274 U.S. 99. When received, the general agent’s right to it was absolute. It was under no restriction, contractual or otherwise, as to its disposition, use or enjoyment. Compare North American Oil Consolidated v. Burnet, 286 U.S. 417, 424. The’ refunds during the tax year of those portions of the overriding commissions which represented cancellations during the tax , year had, prior to the tax return for 1923, always been claimed as deductions; and they were apparently allowed as “ necessary expenses paid or incurred during the taxable year.” The right to such deductions is not now questioned. Those which the taxpayer claims now are of a very different character. They are obviously not “ expenses paid during the taxable year.” They are bookkeeping charges representing credits to a reserve account.

We think this case is decisive of the proceeding before us and we therefore hold that no part of the gain derived from the sale of securities herein may be deferred to future years but is income in the year of its receipt by the petitioner.

Judgment mil be entered for the respondent.


author: Sternhagen :

text:
    Steele-Wedeles Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43068.
    Promulgated May 31, 1934.

      Harry Thom,, Esq., and Freeman Day, Esq., for the petitioner.

      Eldon McFarland, Esq., for the respondent.
   opinion.

Sternhagen :

The Commissioner determined a deficiency of $18,-667.15 in petitioner’s income tax for 1924. The only item contested is the disallowance of a deduction of $150,000 paid by petitioner to its sublessee for the cancellation, of the sublease. There is no dispute about the facts.

The petitioner, an Illinois corporation, was engaged in the wholesale grocery business and kept its accounts and made its 1924 return on an accrual basis.

On April 1, 1895, a lease of certain land in Chicago was made by the fee owners to Sibley Warehouse & Storage Co. for 98 years for a total rent of $490,000, payable $410.66 per month, plus taxes, etc., the lessee to erect a building. The lessee could sublet or assign.

On August 1, 1907, the petitioner acquired by assignment the lessee’s rights under the aforesaid lease for the full term. Only a nominal consideration was stated in the assignment, although petitioner agreed immediately to erect an eight-story fireproof building, to cost $200,000. The petitioner thereupon as “ lessor ” leased for the full term a part of the basement and first floor and tunnel level to the Chicago Warehouse & Terminal Co. for $639,375 at the rate of $7,500 a year, payable $1,875 quarterly.

In 1924, while petitioner occupied part of this building and also another building close by, it was required through condemnation to vacate the other building. The most convenient and least expensive thing for petitioner to do was to secure from its sublessee the surrender and cancellation of its sublease so that it could occupy the subleased premises for its own business purposes, and this it did on April 29, 1924, in consideration of its payment to the sublessee of $150,000, the cancellation being effective December 31, 1924. Certain sub-basement and tunnel level occupancy for shorter terms was excepted from the surrender and cancellation.

In its income tax return for 1924 it deducted the $150,000 as an ordinary and necessary business expense, and the Commissioner disallowed the deduction, holding the amount to be amortizable ratably over the period of the petitioner’s leasehold, and that since the cancellation was not effective in 1924 no amount was deductible in that year as such amortization.

The Commissioner’s disallowance is in accordance with Home Trust Co. v. Commissioner, 65 Fed. (2d) 532, affirming, 21 B.T.A. 1255. In that opinion Higginbotham-Bailey-Logan Co., 8 B.T.A. 566, was distinguished with a reservation as to its soundness. The same distinction exists here. The petitioner’s payment was not for the unlimited possession of premises which it owned in fee, as in the Higginbotham case, but for the possession during the limited term until 1993. The fact that this term was being acquired by way of surrender of a sublease rather than by an assignment or a new lease leaves it none the less true that $150,000 was being invested in a leasehold for a limited term for the purpose of conducting business and that the payment was not an ordinary current business expense which should be charged against the income of the year. The determination is sustained.

Reviewed by the Board.

Judgment will be entered u/nder Bule 50.


author: Lansdon :

text:
    The Pittsburgh & West Virginia Railway Company, as Successor to Wabash-Pittsburgh Terminal Railway Company and West Side Belt Railroad Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 72157, 72158.
    Promulgated May 31, 1934.

      O. F. Taplin, Esq., and Leo H. Hoffman, Esq., for the petitioner.

      Allin H. Pierce, Esq., and Irving M. TuTlar, Esq., for the respondent.
   OPINION.

Lansdon :

The petitioner contends that the respondent erroneously determined that the West Side Belt Eailroad Co., the Wabash-Pittsburgh Terminal Eailway Co., and the Pittsburgh Terminal Eailroad & Coal Co. were members of an affiliated group during the taxable period; that each was a separate corporation in existence during the entire year 1917, and entitled to make a separate income tax return; and that if such facts are established by the record the deficiency notice relating to tax liability from January 1 to March 31 is not a notice of deficiency for any taxable period of the two companies and, therefore, fails to establish jurisdiction in this Board to redetermine the deficiencies thus asserted in error. On the basis of these contentions, petitioner requests the Board to dismiss both proceedings and render decisions of no deficiencies.

The respondent has determined that th¿ two corporations here involved were members of an affiliated group that should have made a consolidated return for the period under review. The facts show stock ownership sufficient to sustain the respondent’s determination that a class A affiliation existed at least until January 24, 1917. At the hearing counsel for petitioners asserted that on that date all the stock of the Pittsburgh Railway Terminal & Coal Co. was sold at auction to a stranger to the affiliated group. On this contention the respondent demanded strict proof. The only evidence of such sale consisted of certain oral statements by the receiver of the Wabash-Pittsburgh Terminal Railway Co. and an offer of notice that the stock would be sold at public auction on such date. Since transfer of title to stock is evidenced either by endorsement of stock certificates or by transfer entries on stock records, neither of which was proved for the record, we conclude that petitioners have failed to prove any change in stock ownership as of January 24, 1917.

Counsel for petitioner also argues that the facts show that the several corporations were not engaged in a closely related business, as provided in section 1331 of the Revenue Act of 1921. The Revenue Act of 1917 contains no provision requiring or authorizing affiliation and counsel for petitioner argues that section 1331 is not retroactive. The language of this section disposes of the argument on this contention. In this connection petitioner also argues that if section 1331 of the Revenue Act of 1921 is retroactive, the Board should hold that the provisions thereof are unconstitutional. This question has been decided adversely to the contention of the petitioner. National Candy Co. v. United States, 67 Ct. Cls. 74; certiorari denied, 280 U. S. 582.

In conformity with our conclusion above, it remains only to determine whether the corporations involved were engaged in a closely related business. It is not disputed that as to ownership of stock this was true, at least prior to January 24, 1917. The two railway companies were engaged in transporting freight and passengers as common carriers. The coal company produced and marketed coal, all of which was shipped over the lines of the railroad companies whose tracks traversed its properties. Much of the coal was purchased by the railroad companies for their own use as fuel, but at the prevailing market prices. Even so, the situation was favorable to such, companies, since they were able to secure their fuel supplies from a corporation owned by the same interests, without payment of freight charges other than to themselves. In these circumstances, we think, the determination of the respondent must be affirmed. The motion to dismiss because the deficiency letters were issued for the wrong period is denied.

The petitioner also contends that the Pittsburgh & West Virginia Railway Co. is not a successor to the Wabash-Pittsburgh Terminal Railway Co. and the West Side Belt Railroad Co., and, therefore, not liable for the debts of such corporations. Without any examination of the alleged facts upon which this contention is based, it is enough to point out that the deficiency notices were mailed in care of the Pittsburgh & West Virginia Railway Co., that service of such notices was accepted, and that appeals were filed by it as successor to the two corporations involved. In these circumstances it cannot now be heard to argue that it is not a successor corporation, liable for the obligations of its predecessors, as determined by the respondent. Burnet v. San Joaquin Fruit & Investment Co., 52 Fed. (2d) 123; Commissioner v. New York Trust Co., 54 Fed. (2d) 463; Pittsburgh Terminal Coal Corp. v. Heiner, 56 Fed. (2d) 1072; Shamrock Oil Co., 29 B.T.A. 910. This motion to dismiss is likewise denied.

Petitioner claims that the Wabash-Pittsburgh Terminal Railway Co. is entitled to depreciation allowances for the taxable period in respect of bridges, masonry, buildings, and machinery in the amount of $34,880.04. Depreciation is a question of fact. The first element in the computation of any allowance therefor is the cost or the 1913 value of the assets used in a trade or business. The property here involved was acquired over a period of nearly 20 years and to a great extent from prior corporations. The record contains no facts upon which we can find the cost at acquisition of the assets as to which depreciation allowances are now claimed. Even if the merger or consolidation of the prior companies into the petitioner corporation was effected in such a way that the successor became entitled to use the predecessor’s bases for computing depreciation, the evidence of cost is still quite unsatisfactory.

A valuation as of January 1, 1917, made by the Interstate Commerce Commission, presumably for rate-making purposes, is somewhat lower than the book costs of all the tangible properties of the Wabash-Pittsburgh Railway Co., and it breaks down the whole valuation into separate categories, which include the groups in question. Petitioner undertakes to determine the cost of each group by multiplying the Interstate Commerce valuation thereof by 1.09, a factor which is developed by dividing the whole book cost by the valuation as a whole. The infirmity of this evidence is obvious. The valuations of the Interstate Commerce Commission are admittedly the reproductive cost based on the prices of labor and material prevailing in 1910 to 1914, and cannot be regarded as persuasive evidence of actual cost. The same infirmity is inherent in the evidence offered in support of the claim of the West Side Belt Railroad Co. That the petitioners owned and used some part or all of the assets in their business in the taxable year may be admitted. The denial of any depreciation allowances by the Commissioner may have been a harsh ruling, but it was based on the fact that the petitioners had no records to support their claims. Even if the respondent is proved wrong, the petitioners have not established the correct bases for depreciation and their claims must be disallowed.

Petitioners contend that the respondent has erroneously computed the invested capital of the affiliated group in the taxable period. They argue that their entire invested capital should be used as an element in the computation of the excess profits deduction for the (,hree-month period under review, instead of one fourth thereof. It is perfectly clear that the method contended for by the petitioner would result in a computation applicable to income for an entire year. As the capital here involved was used for only three months, the deduction is only one fourth of Avhat it would be for an entire year. Petitioners also contend that in the computation of their invested capital the respondent erroneously offset the surpluses of some of the affiliated corporations by the deficits of others. No evidence on this question is in the record; therefore, any finding of fact in regard thereto is impossible.

The respondent originally allocated all the tax due by the consolidated group to the Pittsburgh Terminal Railroad & Coal Co. That corporation afterwards became' insolvent and its tax liability was compromised for an amount much less than that determined by the respondent. As a condition precedent to his acceptance of the compromise, he required all the members of the affiliated group to sign a written stipulation to the effect that the compromise related only to the tax liability of the Pittsburgh Terminal Railroad & Coal Co., and that the excess profits taxes determined as to the group of affiliated corporations might be reallocated and determined as if no allocation had been previously made. This stipulation is in evidence. It indicates that the petitioners agreed to ignore the original allocation of all taxes due in the taxable period. At any rate there is no evidence that the affiliated companies had any allocation agreement. There is no such agreement in the files of the respondent and the petitioners have failed to show that one ever existed. Tf there was no agreement, the fact that the Commissioner originally erroneously allocated all the tax to one of the members of the group does not preclude him from allocating the deficiencies in proportion to the income of the several corporations as required by law. James Couzens, 11 B.T.A. 1040. The respondent’s motion for increased deficiencies is granted.

Decision will be entered under Rule 50.

       Sec. 1331. (a) That Title II of the Revenue Act of 1917 shall be construed to impose the taxes therein mentioned upon the basis of consolidated returns of net income and invested capital in the case of domestic corporations and domestic partnerships that were affiliated during the calendar year 1917.
      (b) For the purpose of this section a corporation or partnership was affiliated with one or more corporations or partnerships (1) when such corporation or partnership owned directly or controlled through closely affiliated interests or by a nominee or nominees all or substantially all tlie stock of the other or others, or (2) when substantially all the stock of two or more corporations or the business of two or more partnerships was owned by the same interests: Provided, That such corporations or partnerships were engaged in the same or a closely related business, or one corporation or partnership bought from or sold to another corporation or partnership products or services at prices above or below the current market, thus effecting an artificial distribution of profits, or one corporation or partnership in any way so arranged its financial relationships with another corporation or partnership as to assign to it a disproportionate share of net income or invested capital. For the purposes of this section, public service corporations which (1) were operated independently, (2) were not physically connected or merged and (3) did not receive special permission to make a consolidated return, shall not be construed to have been affiliated; but a railroad or other public utility which was owned by an industrial corporation and was operated as a plant facility or as an integral part of a group organization of affiliated corporations which were required to file a consolidated return, shall be construed to have been affiliated.
      (c) The provisions of this section are declaratory of the provisions of Title II of the Revenue Act of 1917.


author: Adams:

text:
    Eva Lavino Griffiths, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 63354.
    Promulgated May 31, 1934.

      Wm. H. Flip pen, Esq., for the petitioner.

      P. A. Bayer, Esq., and R. B. Gannon, Esq., for the respondent.
   OPINION.

Adams:

The respondent has asserted a deficiency in income taxes for the year 1929 in the amount of $2,957.64. It is alleged that the Commissioner erred (1) in treating income from a trust as the separate, property of petitioner; (2) in failing to allow petitioner credit for tax paid at the source in the sum of $90.77.

The respondent admits that the petitioner is entitled to a credit of $45.38 for tax paid at the source, to be allowed as a credit in the final computation.

The facts are stipulated and are substantially as follows: The petitioner and her husband, T. W. Griffiths, were married on April 24, 1909, and have continuously lived together in Dallas, Dallas County, Texas, as residents of that city, county, and state. Petitioner and her husband each filed income tax returns for the calendar year 1929. The petitioner’s return filed for that year included gross income of $11,643.36. Included in the total gross income for the taxable year 1929, imputed to the petitioner in the notice of deficiency dated January 27, 1932, from which this appeal was taken, was the sum of $105,000 which represented the amounts paid to petitioner in the taxable year 1929 under certain indentures, certified copies of which, marked Exhibits A and B, are attached to the stipulation and included herein by reference. It appears from these indentures that on June 20, 1924, Edward J. Lavino created a trust, to which certain shares of stock were assigned and transferred, and provision was made for the transfer of “ such other additional securities as the settlor may from time to time assign and transfer to the trustees.” Under this provision additional securities were assigned and transferred to the trust by an indenture made March 1, 1926.

The indenture provides in part as follows:

A. To divide the principal of the said trust estate into four as nearly equal shares as possible and to allot one of said shares to each of the daughters of the Settlor, to wit: Elfrida Jane Elliott, Marian Agnes Hager, Julia Mathilda Dubois and Eva Dermine Griffiths;
B. To collect the dividends, interest and other income arising from the trust estate and to pay all charges incident to the management thereof;
0. To pay the net income from one of such shares to each of the said daughters of the Settlor during the term of her life, said payments to be made at such times, in such manner and in such amounts as the Trustees hereunder shall deem most prudent;
D. Upon the death of said daughters of the Settlor to grant and transfer the share of the principal allotted to her descendants then living, distribution being made among them per stirpes upon the principal of representation; or in the event of such daughter dying without leaving a descendant to survive her then to apply the said share of the trust estate to increasing the other shares into which the said trust estate shall have been divided.
E. In the event of the death of all of the said daughters of the Settlor without leaving any descendants to survive them, then upon the death of the last surviving daughter to grant and transfer the said trust estate to such persons as may then be entitled to receive the estate of the Settlor under the Intestate Laws of the State of New Jersey as they shall then exist.
Any income payable to any beneficiary hereunder shall be paid to her free from liability for her debts, contracts or engagements and neither the said income nor the principal of the trust estate shall be subject to alienation or to execution, attachment, sequestration or other process.

Of the total gross income reported by petitioner in the return filed by her for the taxable year 1929, $105,000 represented income received by her as beneficiary under the trust created by her father, Edward J. Lavino. No change in this item was made by the Commissioner in determining the deficiency from which this appeal was taken.

The respondent ruled that since there were separate returns filed by the husband and wife all community income must be divided equally between husband and wife, and in accordance with this ruling certain minor adjustments were made which increased petitioner’s net taxable income by the sum of $12,241.28 by adding thereto one half of the husband’s net income as adjusted. It is conceded by the petitioner that this adjustment is correct.

The petitioner contends that the sum of $105,000 received from the trust of Edward J. Lavino and included in petitioner’s taxable income is community income and, under the laws of the State of Texas, should be taxed as such for the reason that petitioner and her husband originally filed separate income tax returns for the calendar year 1929, and urges that it should be determined to be community property and allocated one half each to herself and her husband, and her tax liability computed in accordance therewith.

The sole question before us is whether the sum of $105,000 received by petitioner as beneficiary of the Edward J. Lavino trust is the community property of herself and husband under the laws of the State of Texas, or the separate property of the petitioner.

Under the Constitution and laws of the State of Texas the separate property of the wife comprises all property, both real and personal, of the wife, owned or claimed by her before marriage, and that acquired afterwards by gift, devise, or descent, including the increase of all lands thus acquired. All other property acquired by her during marriage, including the income derived from her separate property, is community property. See Texas Constitution, Art. XVI, sec. 15; Vernon’s Annotated Texas Statutes, art. 4614, as amended, 1929, and art. 4619; Arnold v. Leonard, 114 Tex. 535; 273 S.W. 799; Gohlman, Lester & Co. v. Whittle, 114 Tex. 548; 273 S.W. 808.

Clearly, under the terms of the trust instrument petitioner was given a life interest in a one-fourth share of the trust estate, the trustee being empowered to collect and pay over to her the net income from such share. The gift to her was not of income, but a definite and determined portion of the corpus for life.

This is not a case of an annuity chargeable against the whole estate, Burnet v. Whitehouse, 283 U.S. 148, or payable out of both the corpus of a fund and the income from it, Warner v. Commissioner, 66 Fed. (2d) 403, where it is held to be property acquired by bequest. Here the amount received by petitioner from the trust was payable out of the income from her share of the trust fund alone, and is not, therefore, property acquired by gift, but income from a life interest in the fund so acquired. Cf. Irwin v. Gavit, 268 U.S. 161.

In Irwin v. Gavit, supra, there was an annuity payable out of the trust fund alone. The Court said: “Apart from technicalities we can perceive no distinction relevant to the question before us between a gift of the fund for life and a gift of the income from it.” It was there held that the annuity was not a bequest, but taxable income to the beneficiary.

In Anna Davis Terry, 26 B.T.A. 1418; aff'd., Commissioner v. Terry, 69 Fed. (2d) 969, we held that income received by a wife, in Texas, as beneficiary of a trust created by will, is community income, and taxable one half each to the wife and the husband. We see no material difference in the character of the income between the case before us, where the trust was created during the lifetime of tbe donor, and where it is created by will. In view of the Texas laws and the authorities cited, we hold that the sum received by petitioner from the Edward J. Lavino trust during the taxable year before ns was community income of herself and husband, and taxable one half to each of them. Hopkins v. Bacon, 282 U.S. 122.

Decision will he entered under Rule 50.


author: Trammell:

text:
    Harry G. Haskell, Petitioner v. Commissioner of Internal Revenue, Respondent.
    Docket No. 72662.
    Promulgated May 31, 1934.

      William S. Gregg, Esq., for the petitioner.

      S. L. Young, Esq., for the respondent.
   OPINION.

Trammell:

The petitioner contends that the 7,000 shares of the common stock of E. I. du Pont de Nemours & Co. were acquired by specific bequest and that, since he was the sole legatee and entitled to the entire estate under the will, he acquired substantial ownership of the entire estate, including the shares of stock, at the date of the death of his wife, May 12, 1929, and that the value on that date is to be used in determining the loss on the sale thereof. The respondent contends that the petitioner acquired the shares of stock by general bequest and that the value thereof on the date they were actually transferred to him, April 14, 1930, is to be used in determining the loss on the sale.

Section 113 (a) of the Eevenue Act of 1928 provides in part as follows:

(5) Peopertt transmitted at death. — If personal property was acquired by specific bequest, or if real property was acquired by general or specific devise or by intestacy, the basis shall be the fair market value of the property at the time of the death of the decedent. If the property was acquired by the decedent’s estate from the decedent, the basis in the hands of the estate shall be the fair market value of the property at the time of the death of the decedent. In all other cases if the property was acquired either by will or by intestacy, the basis shall be the fair market value of the property at the time of the distribution to the taxpayer.

If as the petitioner contends the shares of stock were acquired by specific bequest, the basis for determining the profit or loss from the sale thereof is their fair market value at the time of the death of the petitioner’s wife. If as the respondent contends they were acquired by general bequest, the basis is the fair market value at the time they were distributed to the petitioner.

With respect to the characteristics of general and special legacies, the Supreme Court, in Kenaday v. Sinnott, 179 U.S. 606, said:

Williams says in reference to the different kinds of legacies that: “A legacy is general when it is so given as not to amount to a bequest of a particular thing or money of the testator, distinguished from all others of the same kind. A legacy is specific when it is a bequest of a specified part of the testator’s personal estate, which is so distinguished ... A legacy of quantity is ordinarily a general legacy; but there are legacies of quantity m the nature of specific legacies, as of such money, with reference to a particular fund for payment. This kind of legacy is called by the civilians a demonstrative legacy; and it is so far general, and differs so much in effect from one properly specific, that if the fund be called in or fail, the legatee will not be deprived of his legacy, but be permitted to receive it out of the general assets; yet the legacy is so far specific, that it will not be liable to abate with general legacies upon a deficiency of assets.” Vol. 2, p. 1158. And lie adds: “ Tlie courts in general are averse from construing legacies to be specific; and the intention of the testator, with reference to the thing bequeathed, must be clear.”

Bouvier’s Law Dictionary contains the following with respect to general and specific legacies:

A general legacy is one so given as not to amount to a bequest of a particular thing or money, of a particular fund, distinguished from all others of the same hind; 1 Hop. Leg. 170; Tifft v. Porter, 8 N.Y. 516; 6 Madd. 92. It is a gift of quantity, merely, and embraces all bequests, not specific or demonstrative; Kelly v. Richardson, 100 Ala. 584, 13 South. 785.
A specific legacy is a bequest of a specified part of the testator’s personal estate, distinguished from all others of the same kind; 3 Beav. 349; Bradford v. Haynes, 20 Me. 105; In re Walter’s Estate, 3 Rawle (Pa.) 237; Perkins v. Mathes, 49 N. H. 107; L. R. 20 Eq. 304; Kahl v. Schober, 35 N. J. Eq. 461; Johnson v. Goss, 128 Mass. 433. * * * A specific legacy may be of animals or inanimate things, provided they are specified and separated from all other things, as money in a bag, or money marked and so described: as, I give two eagles to A. B. on which are engraved the initials of my name. Such a legacy may also be given out of a general fund; 4 Ves. 565.

By provisions set forth in the most general language the wife of the petitioner in her will, .after providing for the payment of her debts and funeral expenses, gave, devised, and bequeathed to the petitioner “ all the estate, real and personal, wherever situated,” which she owned or in which she had an interest at the time of her death. The will was made by her in June 1923, or approximately six years prior to her death in May 1929. The record does not disclose what property she owned or contemplated acquiring at the time of making her will, nor is there anything to indicate when she acquired the shares of stock in controversy. So far as the evidence shows she might have acquired them only a few days prior to her death and as the result of a decision reached at or about that time. Under such circumstances it would be far-fetched to hold that they constituted a specific legacy. No particular or specific property owned by the petitioner’s wife at the time of her death was, by the terms of the will, left to the petitioner. He was to take all that remained after payment of debts and funeral expenses and there was no limitation or restriction respecting what property or the order in which any of the property should be used in the payment of these. That was left entirely in the hands of the petitioner as sole executor of her will. If for any cause the petitioner had resigned or had been removed as executor of the will there was no particular or specific property which, as sole legatee, he could have made demand for upon settlement of the estate. In our opinion what the petitioner received under the terms of the will of his wife was a general legacy and not a specific legacy.

The petitioner urges that, since he was the sole executor of the will and the sole legatee thereunder, property distributed to him upon the settlement of the estate is to be considered and treated as property received by special bequest just as if it had been enumerated as such in the will of the decedent, since as a matter of substance and for all practical purposes the property had vested in him immediately upon the death of the wife. In support of this contention the petitioner relies on the following statements contained in the report of the Senate Finance Committee on the Revenue Bill of 1928:

Accordingly, the committee has revised section 113 (a) (5) and certain related sections, so as to provide that in the case of a specific bequest of personalty or a general or specific devise of realty, or the transmission of realty by intestacy, the basis shall bo the fair market value at the time of the death of the decedent. In these cases it may be said, as a matter of substance, that the property for all practical purposes vests in the beneficiary immediately upon the decedent’s death, and therefore the value at the date of death is a proper basis for the determination of gain or loss to the beneficiary. The same rule is applied to real and personal property transmitted by the decedent, where the sale is made by the executor. In all other cases the basis is the fair market value of the property at the time of the distribution to the taxpayer. The latter rule would obtain, for example, in the case of personal property not transmitted to the beneficiary by specific bequest, but by general bequest or by intestacy. It would also apply in eases where the executor purchases property and distributes it to the beneficiary.

While the foregoing statements may give the reason prompting the enactment of the provisions of the act here involved, we do not think they warrant an extension of the provisions to matters not covered therein. The shares of stock here in controversy constitute personal property received by the petitioner under a general bequest and not under a specific bequest. Under the specific terms of section 113 (a) (5) the profit or loss from the sale thereof is to be determined upon the basis of their fair market value at the time of distribution to the petitioner. We do not think that the particular circumstances here involved, under which no one except the petitioner was to share in the estate of the petitioner’s wife, afford a basis for holding that the shares of stock are to be considered and treated as having been acquired by specific bequest and that the fair market value thereof at the time of the death of the decedent is to be used as the basis for determining the profit or loss from the sale thereof. While the statements contained in the committee report might have justified the enactment of a provision that in case of property acquired by a sole legatee the basis for determining profit or loss from the sale thereof should be the fair market value of such property at the time of the death of the decedent, the fact remains that such provision was not enacted. The absence of such enactment affords no basis for construing some other provision of the act which is clearly to the contrary as meaning what such enactment would mean. In view of the foregoing the action of the respondent is sustained.

The petitioner contends that if we hold that under section 113 (a) (5) the contention of the respondent should be sustained then the provisions of the section must be held to be unconstitutional and void because of an arbitrary, unreasonable, and unjust discrimination between taxpayers.

In section 113 (a) (5) Congress provided with respect to personal property acquired by specific devise that the basis for determining-gain or loss ¡on the sale thereof should be its fair market value at the time of the death of the decedent, and that with respect to personal property in all other cases the basis should be its fair market value at the time of distribution to the taxpayer. In his brief the petitioner states that he is not contending that the distinction in treatment thus made between specific and general bequests is unconstitutional in those cases where there are two or more legatees under a will, but does contend that, if the provisions of section 113 (a) (5) are construed as requiring, under the will and facts here involved, that the shares of stock were not acquired by specific bequest and that the date for determining the fair market value of such shares was not the date of the death of the decedent, then such construction or interpretation of the section renders it unconstitutional as to the present case.

Section 113 (a) (5) does not in any wise attempt to define either specific or general bequests. It only lays down certain rules that are to be applied in cases involving these classes of bequests. So far as we are able to determine, Congress intended that the terms specific bequest and general bequest or devise were to be given their ordinary and commonly accepted meaning, and it is such meaning that we have considered in determining that the shares of stock here involved were received by the petitioner as a general bequest. As the petitioner is not attacking the classification contained in the section, but argues that since in the instant case the decedent made him the sole legatee of her will the shares of stock, under the circumstances, should be held to be property that was acquired by specific bequest, we fail to see where the question of constitutionality is involved. Congress has the power to provide that in determining gain or loss from the sale of property acquired by gift the basis shall be the cost of the property to the preceding donor. Taft v. Bowers, 278 U.S. 470; Richard T. Keeley, 15 B.T.A. 804; Magdeline McKinney, 16 B.T.A. 804. We therefore see no valid reason why Congress may not provide that in determining gain or loss from the sale of property acquired under a will the basis shall be its fair market value at the time of its distribution to the taxpayer, as was proposed by the respondent in this case and as has been sustained by us. As was pointed out in Ralph W. Harbison, 26 B.T.A. 896, the classification established in section 113 (a) (5.) was for the purpose of making definite and certain the basis to be used in ascertaining gain or loss and to avoid doubt as to what was meant by the date of acquisition.

If the decedent’s will had been worded differently by specifically providing that the shares of stock in controversy were to go to the petitioner, the contention of the petitioner for the relief here sought would have to be sustained. But as indicated above the will did not so provide. Congress has made different provisions to cover situations arising from wills with different wordings and effects. This we think Congress had the power to do. Because the petitioner finds himself in a situation resulting from the language used in his wife’s will which is not as advantageous as if different language had been used does not in our opinion warrant a holding that the operation of the act is unconstitutional. We fail to see anything arbitrary or capricious in the classifications made by Congress in section 113 (a) (5) and find in them nothing that works unreasonable or unjust discriminations between taxpayers.

Judgment will be entered v/nder Rule 50.