author: Disney :

text:
    Walter H. Field, Petitioner, v. Commissioner of Internal Revenue, Respondent. Viola W. Field, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 92355, 92453.
    Promulgated January 25, 1940.

      Vernon F. Gant, Esq., for the petitioners.

      Arthur L. Murray, Esq., for the respondent.
   OPINION.

Disney :

These proceedings, duly consolidated, involve income taxes for the year 1935. The Commissioner determined deficiencies as follows: In Docket No. 92355, deficiency of $656.96, all of which is in controversy, petitioner claiming refund of $11.37; and in Docket No. 92453, a deficiency of $288.35, all of which is in controversy, petitioner claiming a refund of $59.37. The facts have been stipulated, including the submission as a joint exhibit of a copy of the deficiency notice in Docket No. 92355. As stipulated the facts are found by us, and will be referred to herein only so far as necessary to discussion of the issue involved. The stipulation also disposes of one issue, leaving for our consideration only the question, identical in each proceeding, as to whether gain or loss is recognized, under section 112, Revenue Act of 1934, where bonds are exchanged for bonds of the same corporation.

Petitioners are husband and wife, residing at all times material in California. In 1934, prior to September 1, 1934, petitioner Walter H. Field, with community funds purchased 5 percent bonds of the Imperial Irrigation District of California, maturing January 1, 1983. The cost was $15,790 for bonds of $34,000 par value; likewise on June 12, 1935, with community funds he purchased, at a cost of $617.50, 5 percent bonds of the same irrigation district, having a par value of $1,000. Later in 1935, and after October 13, 1935, he exchanged the $35,000 par value 5 percent bonds for $35,000 par value 6 percent bonds of the same irrigation district, maturing January 1, 1983, and paid $1,451.02 cash as “boot.” At that date the $35,000 par value 5 percent bonds had a fair market value of $23,786.48, and the $35,000 par value 6 percent bonds had a fair market value of $25,237.50. Respondent in computation of the deficiency took the position that there was gain of $7,378.98, being the difference between $16,407.50 total cost of the 5 percent bonds, and $25,237.50, the fair market value at date of exchange of the 6 percent bonds received, less the cash payment of $1,451.02; and taxed $7,319.08 at 80 percent and the balance of $59.90 at 100 percent, and allocated the gain to petitioners in equal parts. Petitioners contend that the transaction was a tax-free exchange. No issue is made as to the percentage at which tax is computed; nor as to allocation between the parties.

In short, the petitioners argue that there is no difference in principle between the nontaxable exchange of stock for stock in the same corporation under section 112 (b) (2) and exchange of bonds for bonds of the same corporation; further, that the bonds exchanged were “substantially identical” under the thought of Marie Hanlin et al., Executors, 38 B. T. A. 811; affd., 108 Fed. (2d) 429. Such substantial identity does not appear. The bonds transferred in exchange differed from those received by 1 percent in interest rate. We are not informed as to maturity date of $1,000 par value of the 5 percent bonds, and the provisions of the bonds are otherwise not disclosed, and of course may essentially differ. We therefore pass consideration of any argument based upon substantial identity of bonds. This leaves only the question as to whether the provisions of section 112 (a) and (b) (1) apply.

Respondent suggests that under section 112 (a) gain or loss is recognized in general, unless otherwise excluded, that the only provision for exclusion is section 112 (b) (1) and that it specifically does not include bonds. Petitioners call attention to and rely heavily upon the language of the report of the Committee on Ways- and Means as to section 112, Revenue Act of 1934, as indicating intent not to tax where a taxpayer’s money remains “tied up in the same kind of property as that in which it was originally invested.” Perhaps some of the petitioners’ difficulty is caused by misreading the committee report, for it is erroneously quoted in petitioners’ brief as reading, “The law has provided for twelve years that no gain or loss is recognized on exchange of property”, etc., whereas the word “no” does not appear in the report, which reads, “The law has provided for 12 years that gain or loss .is recognized on exchanges of property”, etc. However that may be, we think petitioners’ theory calls for an addition to, and not a justifiable interpretation of, the statute. “Bonds” are specifically excepted from the classes of property the exchange of which does not entail recognition of gain or loss by section 112 (b) (1).

The fact that in section 112 (b) (2) exchange of stock for stock entails no recognition of gain or loss is not the argument petitioners consider it for their position; on the contrary, we think it an indication that bonds were definitely not placed in the same category with stock. The doctrine of incbusio unius exclusio alterius impels us to such a conclusion. Moreover, we think the committee report relied upon by petitioners contradicts their contention, for, after suggesting that for twelve years gain or loss has been “recognized, on exchange of property having a fair market value, such as * * * bonds” it then emphasizes: “but not on other exchanges of property solely for like kind.” (Italics supplied.) Petitioners argue, in effect, that if there are “exchanges of property solely for like kind” which do not give rise to profit or loss, an exchange of bonds is included under the latter expression; whereas we think the word “other” modifying “exchanges” definitely delimits them to those other than those previously described, and that an exchange of “property having a fair market value, such as * * * bonds”, even though the properties are of like kind, calls nevertheless for recognition of gain or loss. The general reason is obviously found in the idea “having a fair market value.” Such property offers no difficulties in computation of gain or loss and appreciation or depreciation in value is plainly ascertainable, whereas other exchanges of property of like kind, e. g., real property, offer more difficulty. Stocks were, to a limited extent, taken out of that category, but it required a special statute, with apparently some basis of distinction between stocks and bonds. It would be judicial legislation for us to add to the statute what it does not contain. That task is for the Congress.

Kenneth Walsh, 38 B. T. A. 368, relied upon by petitioners, did not present the question here involved. We therefore hold that the exchange of bonds for bonds here considered was a transaction in which gain is to be recognized.

The parties having stipulated that “in the event, the Board should find for the respondent on the issue here presented, it may enter judgment for the full amount set forth in the deficiency notice in each of the cases concerned”,

Decision will be entered in both 'proceedings for the respondent.

       (a) General Rule.- — upon the sale or exchange of property the entire amount of the gain or loss, determined under section HI, shall be recognized, except as hereinafter provided in this section.
      (b) Exchanges Solely in Kind.—
      (1) Property held for productive use or investment.' — No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale, nor stoclcs, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment.
      (2) Stock for stock of same corporation. — No gain or loss shall be recognized if common stock in a corporation is exchanged solely for common stock in the same corporation, or if preferred stock in a corporation is exchanged solely for preferred stock in the same corporation.


source: Caselaw Access Project

author: Aktjndell : Black,

license: Public Domain

text:
    J. M. Richardson Lyeth, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96956.
    Promulgated January 25, 1940.

      Allim, E. Pierce, Esq., for the petitioner.

      L. 8. Pendleton, Esq., for the respondent.
   OPINION.

Aktjndell :

This proceeding is before us on two motions, one by the respondent to dismiss for want of jurisdiction, and one by the petitioner for a decision in bis favor on the pleadings and admission of counsel for the respondent.

The petition filed is based on a letter, signed by the Commissioner and sent to the petitioner by registered mail, reading in material part as follows:

TBEASUBY DEPARTMENT
Washington.
Office of Commissioner
of Internal Revenue Dee 291938.
MT-ET-9609-Massacbusetts
Estate of Mary Beecher Longyear
Date of death — March 14, 1931
J. M. Richardson Lyeth, Jr., Transferee,
2 Wall Street,
New York, New York
Sir:
It is hereby determined that a deficiency in Federal estate tax in the sum of $43,275.67 (plus interest thereon) is due from the above-named estate, and that the said sum is also due from you, the said J. M. Richardson Lyeth, Jr., as transferee of said estate, and as the holder of property subject to a lien for Federal estate tax.
The deficiency is due to the following adjustment:
* * * * * * *
However, as the periods allowed by the statute for the assessment of, or proceedings in court to collect, such deficiency, against the estate, the executors and the transferees, have all expired, no such assessment is proposed or will be made, and no such court proceedings will be brought.

The petition alleges error in the respondent’s determination of transferee liability and in the respondent’s failure to determine that the statute of limitations had run as to both the estate of Mary Beecher Longyear and any transferee. The respondent’s motion to dismiss is based on the last paragraph of his letter, above quoted. He says that in view of that paragraph, .there has been no proposal on his part to assess or collect any deficiency from the petitioner, and we are without jurisdiction to make any redetermination.

It is our opinion that the facts in this proceeding bring it within the 'statutory provisions defining the jurisdiction of the Board. Section 316 (a) of the Revenue Act of 1926 provides that the liability of a transferee (which includes heir, legatee, devisee, and distributee) shall be assessed, collected, and paid in the same maimer and subject to the same provisions and limitations as in the case of a deficiency in tax imposed by Title III, which is the title imposing estate tax. Section 808 (a), a part of Title III, as amended by section 501, Revenue Act of 1984, provides:

If the Commissioner determines tliat there is a deficiency in respect of the tax imposed by this title, the Commissioner is authorized to send notice of such deficiency to the executor by registered mail. Within 90 days after such notice is mailed (not counting Sunday or a legal holiday in the District of Columbia as the ninetieth day), the executor may file a petition with the Board of Tax Appeals for a redetermination of the deficiency. * * *

Section 308 (e) provides:

The Board shall have jurisdiction to redetermine the correct amount of the deficiency * * *.

Both parties have complied with the statutory prerequisites to bringing a proceeding within the jurisdiction of the Board. The Commissioner has determined that there is a deficiency in estate tax. This plainly appears from the first sentence in the letter quoted above, wherein he says, “It is hereby determined that a deficiency in Federal estate tax * * * is due * * The notice of this determination was sent by registered mail to the transferee. Within ninety days after the notice was mailed the transferee petitioned the Board for a redetermination. These facts fit precisely within the terms of section 808 (a), supra, and where such facts exist, then under section 308 (e) the Board has jurisdiction.

The Commissioner says that the effect of the statements in the last paragraph of the notice is to demonstrate that it is not a notice of determination of a deficiency. In that paragraph it is said that in view of the running of the statute of limitations no assessment of the deficiency will be made and no proceedings in court will be brought to collect it. These statements, the Commissioner says, bring this proceeding within the decision in Tyson v. Commissioner, 66 Fed. (2d) 160, wherein the Circuit Court of Appeals for the Seventh Circuit sustained the Board’s dismissal of a proceeding for lack of jurisdiction. The letter upon which that proceeding was based spoke of a deficiency of $5,301.50 and said that the assessment thereof was barred, and also spoke of an erroneous refund of $2,063.29 and threatened suit for recovery under section 610 of the Revenue Act of 1928. The letters in the two cases are thus similar in that both refer to barred deficiencies. But there the similarity ceases. The essential matter in Tyson’s case was not the determination of a deficiency in tax, but the collection of an erroneous refund. This is plain from the statement in the opinion:

That the Commissioner was not determining a deficiency tax, but was making a claim of an amount erroneously refunded is made certain by the succeeding paragraph:
“If check is not received in a reasonable length of time, the case will be referred to the General Counsel * * * for the institution of suit for recovery of the amount involved, as provided by section 610 of the Revende Act of 1928.”

The opinion further reads:

Either it [the letter] was a notice of determination of a deficiency tax or it was a statement of the Government’s position respecting a claim it asserted under Section 610.

The letter in the present case contains no language upon which we may say that it had any purpose alternative to the determination of a deficiency. The plain language of the letter in this case is beyond question a notice of the determination of a deficiency, without alternative, and so the decision in Tyson’s case is not controlling.

We are of the opinion that the notice sent to this petitioner meets the statutory requirements of a notice of the determination of a deficiency, and, as a timely petition was filed, the proceeding is within our jurisdiction. It follows that the motion to dismiss must be denied.

The motion of the petitioner for a decision requires little comment. The parties are in agreement that the statute of limitations for assessment and collection has run in favor of the estate, the executors, and the transferees. We so hold, and the petitioner is entitled to a decision that there is no deficiency in estate tax and that there is no liability on his part as transferee of the estate of Mary Beecher Longyear, deceased.

Reviewed by the Board.

Order will be entered denying respondent's motion to dismiss; decision will be entered for the petitioner\

Offer dissents.

Black,

dissenting: I do not think that the Commissioner has determined a deficiency within the meaning of the applicable statute quoted in the majority opinion. Undoubtedly the first part of the Commissioner’s letter of December 29, 1938, to the taxpayer would have been a valid determination of a deficiency, if it had stopped there. But it seems to me that the first part of the letter is completely nullified, in so far as a deficiency in estate tax is concerned by the concluding paragraph of the letter, which reads as follows: “However, as the periods allowed by the statute for the assessment of, or proceedings in court to collect, such deficiency, against the estate, the executors and the transferees, have all expired, no such assessment is proposed or will be made, and no such court proceedings will be brought.”

Section 906 (e), Revenue Act of 1926, reads as follows:

(e) If the assessment or collection of any tax is barred by any statute of limitations, the decision of the Board to that effect shall, for the purposes of this title and of the Revenue Act of 1926, be considered as its decision that there is no deficiency in respect of such tax.

Of course the above quoted language of the statute is intended to apply to cases which have been appealed to the Board from valid determinations of deficiencies by the Commissioner and where subsequently the Commissioner either concedes that the statute of limitations has run or the Board finds from the evidence that it has run.

Here the Commissioner conceded beforehand that the statute of limitations has run, and therefore he proposes no assessment or collection of the so-called deficiency. What he has done is a mere futility in so far as any deficiency is concerned. It would, in my opinion, be an idle thing for us to take jurisdiction of such a proceeding because there is nothing for us to decide. Certainly the law does not require us to do a futile thing.

I think in the instant case that Tyson v. Commissioner, supra, quoted in the majority opinion, affirming the Board’s dismissal of that proceeding, is controlling.

It is true of course, as pointed out in the majority opinion, that there were some differences in the purpose of the Commissioner’s letter in the Tyson case from those present in the instant case, but I do not think those differences are substantial enough to justify a distinction in the Board’s action in the two cases. The court in the Tyson case, after stating that it was in no way passing upon the Commissioner’s claim that Tyson had been paid an erroneous refund, said:

* * * We are merely bolding that the Board of Tax Appeals is an administrative body with limited jurisdiction; that its powers are prescribed by Congressional enactment; that before its jurisdiction may be invoked, the Commissioner must have given the required notice of a determination of a deficiency tax. In other words, unless the Commissioner makes a reviewable order (in this case a determination of a deficiency) no review from the order of the Board of Tax Appeals lies. [Italics supplied.]

It seems to me that the letter of the Commissioner to the taxpayer in the instant case, set out in the majority opinion, does not present any “reviewable order,” to use the language of the court in the Tyson case. Therefore, there is nothing for us to hear and decide and we should dismiss the proceeding for lack of jurisdiction. For the reasons which I have herein stated, I respectfully dissent from the majority opinion.

TURNER and Mellott agree with this dissent.


author: Leech:

text:
    The Bridgeport City Trust Company and Arthur E. Alling, Executors of the Estate of Noyes E. Alling, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87136.
    Promulgated January 26, 1940.
    • Válentime B. Ha/oens, Esq., for the petitioners.

      John B. Wheeler, Esq., for the respondent.
   OPINION.

Leech:

Section 302 (c) of the Revenue Act of 1926, as originally enacted, and so far as material, reads as follows:

The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
*******
(c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. * * *

By joint resolution, Congress amended 302 (c) on March. 3,1931, to read as follows:

(e) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money’s worth.

There can be no doubt that the foregoing amendment covers the trust in this case, and petitioners concede as much. The decedent’s reserved power to reallocate the disposition of the income among the beneficiaries falls precisely within the statutory language respecting “the right * * * to designate the persons who shall possess or enjoy the property or the income therefrom.”

But, petitioners argue, this trust was created in 1929, and the amendment can have no application to transfers made before its enactment. We agree with petitioners. The effect of the joint resolution is prospective only. Hassett v. Welch, 303 U. S. 303; Thomas C. Boswell et al., Executors, 37 B. T. A. 970.

Eliminating the amendment from consideration, it is settled law that the retention of a power to alter the disposition of trust income does not make the trust a transfer to take effect at or after death; it is only a power to alter the disposition of corpus that has such estate tax consequence. Waldemar R. Helmholz, Executor, 28 B. T. A. 165; affd., 75 Fed. (2d) 245; affd., 296 U. S. 93; Charles H. W. Foster et al., Executors, 26 B. T. A. 708; affirmed without opinion, First Circuit Court of Appeals, March 20, 1933. The value of the corpus of this trust may not be included in decedent’s gross estate under section 302 (c).

Section 302 (d) of the Bevenue Act of 1926 requires the inclusion of the value of the corpus of a trust in a decedent’s gross estate where “the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke.” Here again, it is settled that the value of the corpus is not includable in the gross estate unless the power to alter, amend, or revoke extends to corpus. Waldemar R. Helmholz, Executor, supra. See also McFadden v. United States, 20 Fed. Supp. 625.

Respondent has cited a number of cases in support of his position, with particular reliance on Commissioner v. Chase National Bank, 82 Fed. (2d) 157; certiorari denied, 299 U. S. 552. However, in each of these, including the Chase National Bank case, the retained power extended to corpus, enabling the settlor, as was said in Porter v. Commissioner, 288 U. S. 436, “to make a complete revision of all he has done.” That is not the situation here, where the power to alter by appointment is not only limited but is restricted to income. In affirming the Board in its decision on this issue raised upon substantially similar facts, in Waldemar R. Helmholz, Executor, supra, the Circuit Court for the District of Columbia said:

* * * we think it perfectly obvious, as the Board found, that in the trust agreement Mrs. Helmholz divested herself completely of legal title to the shares contributed by her to the trust estate and merely reserved a life interest in the income and a limited power of appointment respecting it; and if we are correct in this conclusion, it follows that the value of the shares of stock which she transferred to the trust some nine or ten years before her death could not legally he included in determining the amount of her estate. * * * [Emphasis supplied.]

There is no ground, consequently, for inclusion of the value of the corpus of this trust in decedent’s gross estate under either section 302 (c) or section 302 (d) of the Revenue Act of 1926. In order to take care of the issues conceded by the parties, •

Decision will be entered u/nder Rule SO.


author: Hill:

text:
    M. P. Klyce, Administrator, Estate of A. S. Klyce, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 90174.
    Promulgated January 26, 1940.

      William S. Pritchard, Esq., and Winston B. McCall, Esq., for the petitioner.

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

Hill:

The first issue for decision in this case is whether or not petitioner is entitled to deduct from gross income for the taxable year 1934 the amount of Alabama real estate taxes .paid during such year for the fiscal year begun October 1, 1932, and ended September 30, 1933. Section 23 (c) of the Revenue Act of 1934 allows the deduction of “taxes paid or accrued within the taxable year”, with exceptions not material here, and we have held that under such statutory authority a taxpayer on a cash receipts and disbursements basis, as was this petitioner, is entitled to deduct the taxes “paid” within the taxable year. Edward Hagelin, 37 B. T. A. 8, 11.

However, respondent contends that the taxes in question “were accrued on the date of the death of A. S. Klyce; represent taxes imposed on the property and on him during his life; constituted a claim against the corpus of the estate and, even though paid by the administrator in the year 1934, are not deductible in determining the income tax liability of the estate for such year.” If the taxes were accrued on or prior to the date of decedent’s death, respondent must be sustained. Roy J. O'Neil et al., Administrators, 31 B. T. A. 727.

Our primary inquiry, therefore, is to determine when the taxes in controversy accrued under the laws of the State of Alabama, which imposed them. This involves consideration and interpretation of the statutes of Alabama, and suggests the question of whether or not, where the precise point has been decided by the highest court of the state, we should follow its decision.

As we pointed out in G. M. Standifer Construction Corporation, 30 B. T. A. 184, 186, “Local statutes are not decisive of what constitutes income, Burnet v. Harmel, 287 U. S. 103, nor what deductions may be taken, Weiss v. Wiener, 279 U. S. 333.” But we must follow the state decisions respecting rules of property, Warburton v. White, 176 U. S. 484. Again we said in Susan B. Armstrong, 38 B. T. A. 658, 666:

It is a well recognized rule that where the question involved is the meaning of a revenue law the will of Congress controls over local law. * * * Where applicable, this principle is controlling, but when the legislative will is dependent upon facts which can be interpreted only in accordance with a state rule of property, the state rule must then prevail.

The point under consideration here does not involve the meaning of any Federal income law nor what constitutes income or an allowable deduction. The revenue act before referred to plainly allows the deduction in controversy to the taxpayer who owned the property at the time the state tax accrued. The ownership of the property is not in dispute, but only the date of accrual of the state tax. If this question can not be said to involve directly a state rule of property it is directly related to the ownership of property and concededly must be determined under the state law. We think, therefore, a decision of the highest court of the state interpreting the state statutes and determining the date of accrual of the taxes imposed under such statutes should be followed by us in determining Federal income liability to the extent that such liability is dependent upon the date of accrual of the state tax.

The point involved in this proceeding, that is, the date of accrual of the Alabama tax, was considered at length by the Supreme Court of the State of Alabama in Union Bank & Trust Co. v. Phelps (March 15, 1934), 153 So. 644, where it was said:

Tax on the shares of appellant corporation attempted to be released or remitted was for tbe tax year 1932, and wbicb was assessable as of October 1, 1931. Tbe tax became due and payable on October 1, 1932, but, by legislative grace, tbe taxpayer was given until January 1, 1933 to pay tbe same. Tbe tax bad been levied and assessed and therefore became a fixed and ascertained amount due from tbe taxpayer to the state. Tbe tax may be said to accrue when it is due and payable [citing authorities].
This court has held that tbe tax year commences on October tbe first, and ends on September the thirtieth, and taxes are due and payable on tbe first day of October of each year.

The taxes involved in the present case were for the tax year 1933, and under the cited decision of the Supreme Court of Alabama, did not accrue or “become a fixed and ascertained amount due from the taxpayer to the state” prior to October 1, 1933. Decedent died on June 30, 1933, and hence at the date of his death the taxes in controversy had not accrued.

Respondent's action on the first issue is reversed. The deficiency will be recomputed by allowing as a deduction the amount of taxes set out in our findings of fact above.

The second issue involves a deduction claimed by petitioner in the amount of $1,800 representing commission paid during 1934 for securing the extension of a loan for $60,000 on property of decedent’s estate. Respondent prorated the amount of the commission over the period of the loan, allocating to the taxable year the sum of $15, and disallowing the balance as a deduction from gross income for that year. Respondent’s determination on this point is approved. Expenses incident to securing a loan or renewal of a loan are not deductible in full when paid, irrespective of whether the taxpayer reports his income on an accrual or cash receipts and disbursements basis. Such an item should be spread ratably over the period of the loan. Julia Stow Lovejoy, 18 B. T. A. 1179; Sigmund Spitzer, 23 B. T. A. 776; Emil W. Carlson, 24 B. T. A. 868. And compare Harriet B. Borland, 27 B. T. A. 538.

Decision will be entered u/nder Rule SO.


author: Keen: Harron,

text:
    Seavey & Flarsheim Brokerage Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91618.
    Promulgated January 26, 1940.

      Alton Gwmbiner, Esq., for the petitioner.

      William A. Schmitt, Esq., for the respondent.
   OPINION.

Keen:

The sole question before us is whether respondent erred in disallowing as a deduction from -petitioner’s gross income the $12,000 paid to Jennie Flarsheim in the taxable year.

Petitioner contends that the $12,000 in question should not be included in its gross income, but if so included it should be deducted in computing its net income, either as an expense or as exhaustion of the cost of the contract for Milton’s services. The respondent contends that it is income to petitioner and is not deductible either as an ordinary and necessary expense, or as exhaustion of a capital asset. The applicable statutes are set out in the margin.

It appears from the record that Milton Flarsheim had been employed by petitioner since 1901. He was manager of its St. Louis office and performed extremely valuable services of an executive nature in relation to the whole business of petitioner. He was a man of exceptional ability and wide acquaintance in the merchandising field and brought valuable business to petitioner. Prior to 1916 he had received a salary for his services, but beginning in 1916 he received the entire net earnings of the St. Louis office, which he conducted as his own. He did not, however, have any interest in petitioner which would survive his death. In 1928 he became dissatisfied with the arrangement under which he was working and considered going into business for himself in order to accumulate an estate which could be passed on to his wife after his death. Petitioner then became faced with the possibility of losing its most valuable employee, and at the same time acquiring a most formidable competitor who was thoroughly familiar with its business methods and enjoyed a close business relationship and the confidence of some of its most valuable clients.

In this situation petitioner sought to retain Milton’s services if possible, and in order to meet his requirements agreed, in addition to the compensation which he was then receiving for his services, to pay to his wife, if she survived him, $12,000 a year during her lifetime. Obviously, this was additional compensation for his services. There is no contention that the $12,000 was a gift by petitioner or that it was in excess of what Milton’s services were reasonably worth. The fact that petitioner might have had other reasons for wanting to keep Milton in its employ does not affect the value of his services. That it was contingent upon Jennie outliving Milton is not material, nor is the fact that it was to be paid to Milton’s nominee. The provision in the contract that it was to be paid out of the net earnings of the St. Louis office was merely a limitation on petitioner’s liability and the amount payable in a particular year. It in no way changed the character of the payment when made.

There is no question here of the assignment of income by the earner as in Lucas v. Earl, 281 U. S. 111, and Burnet v. Leininger, 285 U. S. 136, nor is there a question of assignment of income from a trust by the beneficiary thereof, Blair v. Commissioner, 300 U. S. 5. Here the petitioner in the taxable year was engaged in the operation of a business and received the profits therefrom. It was, however, obligated under its contract with Milton to pay from these profits $12,000 to Jennie Flarsheim. Obviously, it was intended by the parties to the contract of September 13, 1928, to increase the compensation for Milton’s services, and the $12,000 paid to his nominee in the taxable year was additional compensation for the services rendered by him to petitioner in prior years. The obligation to pay was incurred from year to year after the death of Milton and when net income was earned by petitioner from the operation of the St. Louis office, and not previously. The expense, therefore, can not be attributed to earlier years for it was neither paid nor incurred in those years. The liability accrued in 1934. “The statute does not require that the services should be actually rendered during the taxable year, but that the payments therefor shall be proper expenses paid or incurred during the taxable year.” Lucas v. Ox Fibre Brush Co., 281 U. S. 115; Green Oil Soap Co. v. Reinecke, 36 Fed. (2d) 599; Edwards v. Keith, 231 Fed. 110.

We hold that the $12,000 here in question was an ordinary and necessary expense, paid or incurred by petitioner during the taxable year in connection with its business and is deductible from gross income. Lucas v. Ox Fibre Brush Co., supra; Alfred Le Blanc, 7 B. T. A. 256; Jerecki Manufacturing Co., 12 B. T. A. 1165. Cf. First National Bank of Skowhegan, Maine, 35 B. T. A. 876; Kornhauser v. United States, 276 U. S. 145. See article 23 (a) (9) of Regulations 86, which provides:

Amounts paid by a taxpayer for pensions to retired employees or to their families or others dependent upon them, or on account of injuries received by employees, and lump-sum amounts paid or accrued as compensation for injuries, are proper deductions as ordinary and necessary expenses. Such deductions are limited to the amount not compensated for by insurance or otherwise. When the amount of the salary of an officer or employee is paid for a limited period after his death to his widow or heirs, in recognition of the services rendered by the individual, such payments may be deducted. * * *

Reviewed by the Board.

Decision will be entered under Rule SO.

Mellott dissents.

Harron,

concurring: The petitioner appears to have included in its gross income, on its return, the earnings of the St. Louis office, inclusive of the sum paid to Jennie Flarsheim. The sole question is whether petitioner is entitled to deduct in 1934 the $12,000 paid to Jennie, as a business expense.

The pleadings and the briefs submitted in this proceeding represent greatly belabored straining at theories conceived in confusion. One misdirected argument after another from counsel for one party has brought forth equally misdirected reply arguments from counsel for the other party. Counsel for each party verily misses the forest for the trees. Determination of the question turns upon the proper classification, for tax purposes, of the payment made to Jennie. Flarsheim. While I concur in the result reached, I reach that result on a different ground than does the majority opinion.

The answer to the question in this case is to be found by analysis of the agreement of September 13, 1928. It is clearly a contract entered into for the purpose of retaining the services of Milton Flarsheim in the employ of petitioner. Milton agreed to remain in petitioner’s employ in consideration for petitioner’s agreement to pay some sum annually to Milton’s widow upon his death. The liability and the amount to be paid to the widow was made contingent upon the existence of net earnings in any year of the St. Louis office; and upon the amount thereof per year; and upon whether in any prior year less than $12,000 was paid to the widow. By its specific terms, the agreement does not state that petitioner agreed to pay to Milton any extra compensation for his services at any time. It is not accurate to conclude that the sums paid to Jennie Flarsheim represented additional compensation for the past services of Milton. However, from the terms of the agreement, it is close to reality to conclude that the payments to Milton’s widow represented a pension to her for the duration of her life. Under the facts, such is a reasonable description of the nature of the payments to the widow of an employee of petitioner. It does not affect the nature of the payments, considered as pension payments, that the amount payable per annum to Jennie was made contingent upon the amount of the net earnings of the St. Louis office. The payment of a pension and the amount thereof can be the subject of a contract.

Once the nature of the payment to Milton’s widow is established to be in the nature of a pension, the matter of petitioner’s right to deduct the amount paid in the taxable year pursuant to the contract is not difficult. The liability to pay the sum in question accrued in the taxable year because petitioner’s liability to make the payment was contingent in each year, and in 1934 the facts determinative of the liability occurred. The expenditure was proximately connected with petitioner’s business, having been made in fulfillment of an obligation under a contract entered into in connection with petitioner’s business. Further, the Commissioner, by his own regulations, has ruled that amounts paid by a taxpayer for pensions to retired employees or to their families or others dependent upon them, are proper deductions as ordinary and necessary expenses. Regulations 86, article 28 (a)-9, Act of 1934. It is reasonable to hold that the above regulation applies to amounts paid as a pension to the widow of an employee. The deduction is allowable as a business expense in the taxable year, upon the above stated grounds.

       Revenue Act of 1934—
      Section 22 (a) provides in part:
      “ ‘Gross income’ includes gains, profits, and income derived from * * * trades, businesses, commerce * * * ; or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever.”
      Section 23 (a) provides in part as follows :
      “In computing net income there shall be allowed as deductions:
      ■“(a) Expenses. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; * *


author: SteRniiagen : HaeRon,

text:
    John W. Egan, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100587.
    Promulgated January 30, 1940.

      E. M. Woolf, Esq., for the respondent.
   OPINION.

SteRniiagen :

The petitioner received three separate notices of deficiency, each for a different year — 1936, 1937, 1938 — and within the statutory period of 90 days after the mailing of the earliest notice he filed a single petition assailing all deficiencies upon the same ground, viz., that they improperly denied him the statutory credit or exemption as head of a family. The total of the three deficiencies is $110, and with his petition the taxpayer paid the filing fee of $10 required by Rule 8. Under Rule 11, the proceeding was docketed; and three separate docket numbers were assigned to it. It was assumed that each notice of deficiency called for a separate petition, and the filing fee was attributed to the proceeding assigned the lowest docket number. An order was then issued upon the petitioner to show cause why the other two proceedings should not be dismissed for failure to pay the filing fee in each. There was no return to the order to show cause, and the respondent moves to dismiss.

The motion must be denied. The respondent cites Percy N. Powers, 20 B. T. A. 753; Jacob Held, Jr., 20 B. T. A. 863; Margaret B. Sparrow, 20 B. T. A. 865; and Ethel Weisser, 32 B. T. A. 755. These decisions are quite different in that in each an attempt was made to file one petition for several persons, each of whom had received a separate notice of deficiency or transferee liability. This was held to be an unauthorized joinder of parties at variance with the language and intendment of the statute.

But there is no language touching the combining by a single individual taxpayer of his contest of several deficiencies in one petition. Of course, the petition must as to each year be seasonably filed after the mailing of the notice of deficiency, and must otherwise satisfy the statute and the rules. But there is no reason why a single petition of a single individual taxpayer may not contain several proper counts against several deficiencies. From the standpoint of convenience and expediency, such a petition is no different from one which assails separate deficiencies determined by the Commissioner for several years the notice of which is given in a single deficiency notice, and the trial is no different from the ordinary hearing of several proceedings involving the same parties and issues. From the standpoint of the taxpayer, however, whose convenience and expense are the subjects of express legislative concern (I. B,. C., sec. 1105), it may be a matter of substantial importance whether in order to contest a deficiency of $110 he must pay $30 fees for filing three petitions or $10 for filing one petition. His rights should not be circumscribed by mere clerical considerations of the Board in the absence of express or clearly implied statutory' warrant.

The treatment of the petition as the initiation of three separate proceedings, the demand for additional filing fees, and the orders to show cause were improvident. They are vacated and set aside. The original petition, Docket No. 100587, was sufficient to assail the three deficiencies. Dockets 100588 and 100589 are merged into Docket 100587.

Reviewed by the Board.

Th& motion to dismiss is denied.

Disney concurs only in the result.

Murdock and Leech dissent.

HaeRon,

concurring: The situation in this case is unusual in that three notices of deficiency relating to three different tax periods were mailed to petitioner by the Commissioner on or about the same date. Consequently, petitioner was in a position to file one petition with this Board for redetermination of each deficiency within 90 days after the earliest and after each notice was mailed. See section 274 (a) of the Revenue Act of 1926, as amended by section 501 of the Revenue Act of 1934. The situation is not likely to occur with any real frequency because the Commissioner ordinarily does not mail several separate notices of deficiency in the tax liability of an individual taxpayer, for different tax years or tax periods, in such close sequence of time for it to be possible for an individual taxpayer to timely file one petition, within the statutory period, to contest several determinations noticed by several, separate notices of deficiency.

The petitioner, an individual taxpayer, filed one petition timely, thereby initiating one proceeding before the Board. He paid the filing fes required by Rule 8 of the Board’s Rules of Practice, and allowed by law. It should be noted that the Board, in the first instance, by its own procedure, treated the one petition as instituting three proceedings, and the Board, accordingly, in effect, directed the payment of filing fees for two additional proceedings. Now the Board concedes error in its own treatment of the one petition. The entire matter could have been rectified simply by issuance of appropriate orders of the Board, without promulgation of an opinion, the question having been raised by the Board itself.

I agree that, under the special facts present in this case, a single taxpayer may contest several deficiencies, noticed by several notices of deficiency, by filing one petition, where the dates of the mailing of each notice of deficiency are such that one petition may be timely filed under the statute. I also agree that the filing of one petition with the Board, in such circumstances as are present here, initiates only one proceeding before the Board, for which only one filing fee need be paid. The modern rules of courts sanction the joining of several causes in one proceeding.


text:
    Bona Allen, Jr., and Evelyn Hembree Allen, Petitioners, v. Commissioner of Internal Revenue, Respondent. Victor H. Allen and Lucile Gaston Allen, Petitioners, v. Commissioner of Internal Revenue, Respondent. Estate of H. Wadleigh Allen, Deceased, Bona Allen, Jr., John Q. Allen and Victor H. Allen, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent. John Q. Allen, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 93809, 93810, 93811, 93812.
    Promulgated January 30, 1940.

      Ellsworth G. AVoord, Esq., and Floyd F. Toomey, Esq., for the petitioners.

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

Disney :

The above proceedings, consolidated for hearing, all involve income tax for the year 1934, as follows:

Although error as to disallowance of deduction for depreciation on certain buildings was alleged by the petitioners in Docket Nos. 93810 and 93812, such error is denied by respondent’s answer and no evidence was adduced in that respect, and that issue is therefore considered abandoned. The only remaining issue is common to all proceedings and is as to whether, as respondent determined, section 115 (g) of the Eevenue Act of 1934 applies and there was essential equivalence to the distribution of a taxable dividend in certain transactions on May 31, 1934, whereby capital stock in Bona Allen Inc. (hereinafter called the corporation) was transferred by four stockholders to the corporation, and a partnership, in which three of the four stockholders were members, and the fourth stockholder separately were credited with certain sums upon indebtedness to the corporation. The greater part of the facts were stipulated, and the facts therein set forth are adopted by reference and found by us. In addition to the stipulation certain evidence was adduced and therefrom we make additional findings, as set forth and referred to hereinafter.

The facts stipulated will be set forth only so far as necessary to discussion of the issues involved. They may be summarized as follows: Bona Allen and his four sons were prior to 1909 in the leather business as partners. From that date the business was continued by Bona Allen Inc., of which they were sole stockholders. The only cash dividends paid were: $160,000 on July 9, 1909, $75,000 on September 30,1918, and $75,000 on June 19,1922. From 1918 each held 200 shares. One son, H. Wadleigh Allen, died in 1920, and the three brothers are executors of his estate, which continued to hold his stock. In 1925 the charter was amended to authorize 10,000 shares of stock of $100 par value instead of 1,000, and a resolution was passed, reciting that, inasmuch as the entire surplus of the company was needed for permanent operating capital, a stock dividend of $900,000 was declared in stock, out of the surplus. There was legitimate reason for the stock dividend. The stock continued to be owned equally by the father, sons, and the estate of the deceased son, each holding 2,000 shares. In May 1925 the sons individually, and the estate through them as executors, transferred to the corporation in equal parts 1,200 shares of stock and each received credit for $80,000, though no minutes of stockholders or directors refer to the transaction. The stock surrendered was retained in the company treasury until November 20,1930. Bona Allen, Sr., died testate October 18,1925, and his stock was purchased in equal shares of 500 shares each by the three sons and the estate of the deceased son. On November 20, 1930, the corporation purchased certain real estate from the three sons and the estate of the deceased son, paid therefor with the 1,200 shares of treasury stock issued, in equal amounts to the vendors, and $100,000 wras placed to the surplus of the corporation, as provided by corporate resolution.

In 1930 the three brothers individually incorporated the Allen Investment Co., the stock of which was paid for by transfer by each brother of 2,500 shares of stock of Bona Allen Inc. The Allen Investment Co., which never engaged in business, was dissolved in 1932, and stock of Bona Allen Inc. was returned to the brothers.

A partnership consisting of the three brothers had been formed in 1923 under the name of V. H. Allen & Brothers. Its business was the ownership and operation of an office building in Atlanta, Georgia, known as the Bona Allen Building. The partners considered the building the corporation’s investment, and intended to transfer it to the corporation. The partnership had received at various times advances from Bona Allen Inc. These had from time to time been partly repaid, and on May 31,1934, the partnership owed the corporation $154,760.53.

The leather business carried on by Bona Allen Inc. required extensive short term borrowing, because of purchase of hides throughout the world. The corporation ordinarily borrowed from banks and through a brokerage house in Boston, through which it obtained loans on commercial paper, at extremely low rates, from % of 1 percent to 1 percent. To obtain such loans highest credit standing was required, and an item of prime importance was absence of debts to the corporation from its officers or stockholders, and absence of ownership of encumbered real estate. In 1930 the stockholders of the corporation owed to it about $144,000 and the brokerage house informed the corporation of the adverse effect upon its credit. Again late in 1931, when the indebtedness stood at about $165,000, the undesirable aspects of the situation were called to the attention of the corporation by the brokerage house, which reported refusal of a St. Louis bank to buy the corporation’s paper because of the debt by officers to the corporation and suggested that temporary cessation of offer of the corporation’s paper in the market would be to its best interest. In 1932 the indebtedness increased and the brokerage house handled less paper for the corporation, upon an understanding there would be no increase in the indebtedness. In 1933 it decreased slightly and the brokers handled more paper. In 1934 the brokerage house suggested the elimination of the indebtedness by application thereto of proceeds of a surrender of capital stock by stockholders. The major part of the indebtedness was due to advances by the corporation because of the Bona Allen Building, operated, under mortgage, by the partnership. The brokerage house advised against transfer of the encumbered building to the corporation, and the mortgage company would not allow payment until date of maturity, about 18 months later. On May 21, 1984, the brokerage house wrote the corporation with reference to plans under consideration to reduce capital stock $300,000 at par and to clean up or reduce indebtedness from stockholders, to eliminate permanently items due from officers and stockholders and the permanent financing of the Bona Allen Building without further advances by the corporation to stockholders. All was considered by the brokers from the standpoint of the best credit interests of the corporation.

On May 31, 1934, the estate of the deceased brother was indebted to Bona Allen Inc. in the amount of $75,628.12, principally for advancements to provide support for his wife and children. At that date the executors transferred to the corporation 500 shares of stock and the corporation credited the account with $50,000. The stock certificate has never been canceled and is still held in the treasury of the company. Likewise on May 31,1934, the three brothers individually each transferred 500 shares of stock to the corporation, and the corporation credited with $150,000 the $154,760.53 account owing to it by V. H. Allen & Brothers partnership. On May 31, 1934, the corporation had a surplus of $928,809.46 and cash of $116,919.53.

No reference was made on the minutes of stockholders or directors of the corporation, as to the matters transacted on May 31, 1934, but journal entries thereof were made upon the corporate books, and upon the books of the partnership, showing surrender of 1,500 shares of stock by the partnership, 500 shares by the estate of the deceased son, and credit of $200,000. The stock certificates surrendered have never been marked canceled and are still retained in the treasury of the corporation.

On May 31, 1935, the partnership owed the corporation $194,194.92, and on that date the partnership conveyed to Bona Allen Inc. the Bona Allen Building, and its account was credited with $300,000.

In addition to the facts stipulated, and above summarized, we find from the evidence the following additional facts: Bona Allen Inc. needed money in large amounts for short periods because of purchasing hides, its principal raw material, in a world wide market, which required cash to take advantage of lowest prices in different markets over the world, the time of purchase depending upon favorable price trends in different countries. The Bona Allen Building was encumbered by a mortgage of about $150,000 to $200,000, which did not mature until about one and one-half years after May 31, 1934, and the mortgagee refused to allow payment until maturity. That was the reason the building was not transferred earlier to Bona Allen Inc., in connection with the opposition of the corporation’s brokers to the transfer, because of the bad effect upon credit. They did not wish the corporation to have the building, with the mortgage. John Q. Allen, vice president of the corporation, was always ambitious to have his name classed as entitled to prime credit. By May 31,1935, the earnings of the corporation had become satisfactory and the mortgage was paid off, with earnings of the corporation.

Under all of the above circumstances, does section 115 (g) of the Revenue Act of 1934, apply? Was there redemption of stock at such time and in such manner as to make the redemption essential to the distribution of a taxable dividend? The respondent having determined that the retirement entailed a taxable dividend, the petitioner has the burden to show otherwise.

We think such showing has been made. Numerous cases have laid down the rule that the statute must be interpreted in the light of the facts in each situation. Decisions are varied, some finding and others denying equivalence to distribution of a taxable dividend. They need not be enumerated. The crux of the matter here is that stockholders were indebted to the corporation, that the corporation’s business was such that it required large amounts of money on short term notes and had for several years been in the habit of borrowing, through brokers, such money at extremely low rates of interest, that in order to secure such low interest rates it was necessary to maintain a high credit standard, and that the brokers objected to loans to the stockholders or officers of the corporation. They vigorously urged the elimination of such loans even to the extent of suggesting a cessation of borrowing after one bank, which had been in the habit of lending to the corporation through the brokers, had declined to do so because of the indebtedness of the stockholders. At the brokers’ suggestion the indebtedness from stockholders was largely eliminated by the redemption of stock in equal amounts from each stockholder. The corporation had always been closely owned, and for nine years there had only been four stockholders, and never more than five. Though the stock redeemed had been issued as a stock dividend, this had been nine years before and for legitimate business purposes. No contention to the contrary seems advanced. Because of the close ownership of the corporate stock by the four stockholders, there seems to have been no great advantage to the stockholders as individuals in the redemption of stock. They continued to own the stock in the same equal proportions. The principal advantage to them was the advantage to the corporation in obtaining a better credit rating because of the elimination of indebtedness from stockholders or officers. No reason for the redemption appears except to affect credit relations. No extraordinary profits were present for distribution, such as have in some cases caused conclusion that there was essentially a taxable dividend. The reasons advanced for the redemption of stock are not met by any contrary evidence. We think that the reason given for the transaction is a legitimate business reason. Certainly the obtaining of loans at as low as less than 1 percent per annum was an important consideration to the corporation and to the stockholders thereof. Although respondent suggests that the same result might have been obtained by a cash dividend to the stockholders and the payment of their indebtedness to the corporation, the corporation had on hand cash sufficient to pay little more than one-half of the amount of indebtedness eliminated by the redemption of stock, and the record throughout indicates the necessity for the retention of cash at all times by the corporation so that obviously the corporation could not with safety to its business pay out all of its cash to the stockholders. There is no proof in the record of intent to evade tax. The situation, we think, is much like that appearing in Harry A. Koch, 26 B. T. A. 1025, wherein it was held that a redemption was not violative of section 115 (g) of the Revenue Act of 1928. Therein the petitioner, president and holder of most of the stock of a corporation, was endorser upon notes given by it to a bank. The bank was not satisfied with the financial statement of the corporation and stated that a more healthy condition would have to be shown and that it would suffice if there were reduction of capital stock. The reduction was accomplished by purchase of shares from the petitioner and smaller amounts from others, and the purchase price of the stock acquired from petitioner was credited to his personal account on the corporate books. This satisfied the bank and it continued to extend credit to the corporation. Here the suggestion of reduction of capital stock, in essentially the same manner as it was carried out, came not from the stockholders but from the loan brokers who were interested in borrowing money from banks and others for the corporation, just as in Harry A. Koch, supra, it came from the bank. We there held, in effect, that the reason was valid and based upon business needs, and we think the same applies here.

In George A. Lembcke, 33 B. T. A. 700, we again approved a situation similar to that herein. There, as stated in the headnote:

* * * The evidence disclosed that the increases were made not to disguise later distributions of cash dividends, but for legitimate business purposes, namely, in order to satisfy the demand of banks for a larger capitalization in order to obtain unsecured short term loans necessary for the operation of the business, and in order to satisfy the request of a stockholder anticipating retirement from active participation in the business that the larger portion of the stockholders’ investments be placed in preferred stock. Held, that amounts distributed in redemption of the preferred stock were not to be treated as taxable dividends under section 115 (g), Revenue Act of 1928.

In the body of the opinion we said:

* * * The corporation was forced by the necessities of its business to borrow a considerable amount of money from banks on its short term unsecured paper. The banks making these loans preferred that the corporation should have a larger capitalization and felt that the credit which they extended to the corporation would be better secured if such an increase were made. The witness stated that this was one of the reasons for the increase in 1927 and also one of the reasons for the increase in 1929. * * *

We said that such reasons could not be disregarded and that neither the time nor the manner of the redemption indicated an ordinary dividend.

We think the situation here is definitely distinguishable from that in J. Natwick, 36 B. T. A. 866. Although there the indebtedness of the principal stockholder in a corporation was canceled in consideration of delivery of a part of his stock, we found:

* * * The banks apparently regarded unfavorably petitioner’s indebtedness to the company, but there was no suggestion or insistence on the part of the banks that any alteration be made in the capital structure of the company. * * *

We said also that the only evidence of pressure being brought to bear by banks was that one called petitioner up several times and regarded unfavorably his large debt to the company, but that “There is no evidence of any demand for the reduction of capital, nor is it shown how the company’s financial condition .would be bettered by such a reduction.” The situation we therefore distinguished from that in Harry A. Koch, supra. It seems to us that our language above indicates well that where there is decided pressure in a financial way and a suggestion from others that there be reduction of capital stock, the situation presents legitimate business, purpose and negatives the mere desire to avoid dividends. We therefore conclude and hold that the surrender 'of stock by the petitioners in Bona Allen Inc. was not made at such /time or in such manner as to be essentially equivalent to the distribution of a taxable dividend:

Such conclusion renders it unnecessary for us to pass upon the other propositions presented by the petitioner, that is, as to whether under the thought of Patty v. Helvering, 98 Fed. (2d) 717, the good faith of the original issuance of the stock retired renders unnecessary examination of circumstances surrounding redemption; and whether under Parker v. United States, 88 Fed. (2d) 907, purchase of the stock redeemed from other stockholders father than the corporation itself obviates consideration of section 115 (g).

Decision will be entered under Bule 50.

        (g) Redemption op Stock. — If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equiva-. lent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend.


author: Smith :

text:
    Estate of Lorenzo W. Swope, Deceased, The Colonial Trust Company and Blanche A. Swope, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 93648.
    Promulgated January 30, 1940.

      Allin H. Pierce, Esq., and John 0. Wicks, Esq., for the petitioners.

      William A. Schmitt, Esq., and J. Harrison Miller, Esq., for the respondent.
   OPINION.

Smith :

The question for our determination is whether the decedent made a completed gift of all of his shares of stock of the International Petroleum Co., Ltd., to his wife and children prior to the taxable year 1934.

A statement frequently found in the decisions is: “To constitute a valid gift inter vivos, there must be a gratuitous and absolute transfer of the property from the donor to the donee, talcing effect immediately and fully executed by a delivery of the property by the donor, and an acceptance thereof by the donee.”

The requisites of a valid gift inter vivos are: (1) A donor competent to make the gift; (2) a donee capable of accepting the gift; (3) a clear and unmistakable intention on the part of the donor to divest himself of title, dominion, and control over the subject matter of the gift; (4) an irrevocable transfer by the donor to the donee, or to someone acting as trustee or agent for the donee; and (5) an acceptance of the gift by or on behalf of the donee. See Adolph Weil, 31 B. T. A. 899, and cases therein cited. See also In re Kaufmann's Estate, 127 Atl. 133; Sullivan v. Hess, 241 Pa. 407; 88 Atl. 544.

In Edson v. Lucas, 40 Fed. (2d) 398, the court said that:

The respondent’s contentions are that the decedent did not intend to make completed gifts of the shares of stock in question; that there was no delivery of the shares to decedent’s wife and children; and that decedent did not divest himself of all dominion and control over the shares.

The decedent’s intention to make completed gifts of the shares in question to his wife and children is clearly established by the evidence. The decedent himself testified that such was his intention and his testimony was corroborated by other witnesses to whom he had divulged his intention before the gifts were made. Subsequent events likewise bear evidence of decedent’s intention to make absolute gifts of the shares to his wife and children. He gave notice to the International Petroleum Co.’s agent, to his bank, and to the tax authorities that he had made such gifts. He asked and obtained the consent of his wife and children before making use of the shares for collateral deposit on his indebtedness. Although the dividends on the shares were deposited in decedent’s and his wife’s joint bank account and some of them used by the decedent, this was done with the full knowledge and consent of the wife and children and the decedent gave them his promissory notes for the amounts of the dividends to which each was entitled, less the amounts which they had received personally on their shares.

In Essie Irene Gaffney, Executrix, 36 B. T. A. 610, we said:

If a valid gift inter vivos lias been made, it is of no importance wbat the donee thereafter does with the income from the property. In the ease of a bona fide gift by a husband to his wife, the wife may thereafter dispose of the income as she chooses. She may lend it to her husband, or may indeed make a gift of it to him, without invalidating the gift to her of the res. * * *

The gifts were complete when the decedent with the intention to make the gifts placed the shares in the envelopes of each of the donees, informing the donees of what he had done, and the donees accepted the gifts. There was a delivery of the shares when the donor, with the intention of making the gifts, placed the shares in the envelopes of each of the donees in the safe deposit boxes to which they all had access, except possibly Karl, who could enter the safe deposit boxes only when in the company of one of the other members of the family. Each of the donees kept other personal belongings in these envelopes. See Blanche S. Ross, 28 B. T. A. 39; Beaumont v. Beaumont, 152 Fed. 55; Smith v. Commissioner, 59 Fed. (2d) 533.

On facts somewhat similar to those in the instant case the Board determined in Adolph Weil, supra; affd., 82 Fed. (2d) 561; certiorari denied, 299 U. S. 552; that there was not a completed gift of shares of stock by a father to his minor children. There, the father placed the shares in envelopes bearing the names of each of the children, with the declared intention of making gifts of such shares, but he retained exclusive possession and control of the stock for the purpose of selling it in accordance with a predetermined plan. We held that the father intended to make gifts not of the shares of stock themselves but of the proceeds from the sale of the stock. In final analysis that case is distinguishable from the instant case, since here the donor had the intention to make completed gifts in praesmü of the shares of stock which he placed in the envelopes of the donees.

Among other cases relied upon by the respondent are Charles S. Hempstead, 18 B. T. A. 204; Theodore C. Jackson et al., Administrators, 32 B. T. A. 470; Oscar G. Joseph, 32 B. T. A. 1192; Arthur M. Godwin, 34 B. T. A. 485; and Lunsford Richardson, 39 B. T. A. 927. All of those cases are distinguishable from the instant case in one or more of their essential features. For instance, in the Joseph case the husband who purportedly made a gift of stock to his wife thereafter used the stock for his own purposes without consulting his wife; sold some of the shares and reported the gains in his income tax returns as his own; and received all of the dividends on the shares without any restrictions as to their use. The Richardson case also involved an alleged gift from husband to wife. There, however, we found that the husband:

* * * made no effort to place the stock within the dominion and control of his wife. * * * Neither did he make any constructive or symbolic delivery of the subject matter of the gift. He was content to let the stock remain under his dominion and control in his safe deposit box, to which his wife had no access. * * *

In the Commonwealth of Pennsylvania the courts require a “less quantum of evidence” to establish a gift where a relationship such as that of parent and child exists than where such relationship does not exist. See Theodore C. Jackson et al., Administrators, supra; Northern Trust Co. v. Huber, 274 Pa. 329; 118 Atl. 217; In re Yeager's Estate, 273 Pa. 359; 117 Atl. 67.

On the evidence of record we determine that the decedent made completed gifts of all of his shares of stock of the International Petroleum Co., Ltd., to his wife and son and daughter in 1927 and 1929. It follows that the dividends on such shares in the years 1934, 1935, and 1936, the years involved in this proceeding, were not income of the decedent.

The issue as to the validity of the gifts being determined in petitioners’ favor, it is not necessary to consider the alternative issue pertaining to the credit for taxes paid to the Dominion of Canada on the dividends in question.

Decision will be entered wider Rule 50.


author: Mellott:

text:
    Wilton Rubinstein, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 95922.
    Promulgated January 30, 1940.

      Edward Greensfelder, Esq., for the petitioner.

      R. N. McMillan, Esq., for the respondent.
   OPINION.

Mellott:

The Commissioner determined a deficiency in gift tax in the amount of $1,395 ($300 for 1936 and $1,095 for 1937). The sole issue is whether there should be four $5,000 exclusions under section 504 (b) of the Revenue Act of 1932, or whether there should he but one.

All of the facts were stipulated. Stated briefly, the petitioner, in 1936, conveyed to a trust notes having a value of $48,000. On January 5, 1937, he conveyed other notes having a value of $43,000. The trust was set up for the purpose of “providing an independent income for his wife, Blanche Rubinstein, and his daughters, Ann Rubinstein, Peggy Rubinstein and Louise Rubinstein.” In addition to authorizing the trustees to manage and control the trust estate, the trust instrument provided that the net income should be divided into equal parts to be paid over to the settlor’s wife and children so long as the wife should live. Provision was made for ultimate payment to the children of the principal when they should reach the age of 35 years, if the wife should then be deceased. In the event any of the children should die before receiving her share in the trust estate, then the property was to be paid over to her descendants per stirpes.

In determining the deficiency for each of the years the Commissioner stated in his notice: “Only one exclusion is allowed in connection with the gifts in trust * * * in accordance with the decisions in the cases of Commissioner v. Wells, 88 Fed. (2d) 339, and Commissioner v. Krebs, 90 Fed. (2d) 880, holding a trust to be a person.” He also cited Seymour H. Knox, 36 B. T. A. 630.

At the time the deficiency was determined the whole question was somewhat in flux. The District Court of Massachusetts had held in Davidson v. Welch, 22 Fed. Supp. 726, that the measure of the number of exclusions was the number of beneficiaries under the trust instrument, it being the opinion of that court that the beneficiary was the “person” within the meaning of the statute.

The Commissioner was cognizant of the above holding; for in his deficiency letter he stated that it could not be considered to be “a final adjudication of the question of exclusions.” He was justified in so holding; for this Board had held in Seymour H. Knox, supra, that where the petitioner had created one trust for the benefit of two individuals, he was entitled to but one exclusion, the trust being the “person” constituting the donee within the meaning of the statute. This decision was followed in Katherine S. Rheinstrom, 37 B. T. A. 308, and Edwin B. Cox, 38 B. T. A. 865. In the latter case it was pointed out that trusts, though abstractions, have long been treated, for income tax purposes, as entities having a separate existence. We, therefore, declined to follow the rule enunciated by the court in Davidson v. Welch, supra. In Mary M. Hutchings, 40 B. T. A. 27 (appeal pending, C. C. A., 5th Cir.), we made a similar holding.

The Circuit Court of Appeals for the First Circuit on March 2, 1939, affirmed the decision of the District Court in the case of Welch v. Davidson, 102 Fed. (2d) 100, and criticised the decision of this Board in Edwin B. Cox, supra. The Circuit Court of Appeals for the Eighth Circuit, in Robertson v. Nee, handed down an opinion on March 6,1939 (not officially reported), holding that but one exclusion could be allowed, regardless of the number of beneficiaries. Following reargument, the opposite conclusion was reached (105 Fed. (2d) 651), the same question in the meantime having been raised in that circuit in the case of Rheinstrom v. Commissioner, 105 Fed. (2d) 642, and the two cases having been argued together. In the latter case the court reversed the decision of this Board in Katherine S. Rheinstrom, supra, upon the issue involving the $5,000 exclusion, and held that the taxpayer, in creating a trust for the'benefit of her four children, had “made four gifts — one to each of her children — and that she made no gift or gifts to the trust or to the trustees.” It, therefore, allowed exclusions aggregating $20,000. Under date of December 19, 1939, the Circuit Court of Appeals for the Third Circuit reversed an unreported memorandum decision of this Board (Docket No. 92719) in McBrier v. Commissioner, 108 Fed. (2d) 967, following Welch v. Davidson and Rheinstrom v. Commissioner, supra.

In the recent case of Edith Pulitzer Moore, 40 B. T. A. 1018, the question was, whether the beneficial interests of the children, who were to take only in the event that they outlived their father, the principal beneficiary under the trust, were, or were not “future interests in property.” Holding that they were, we denied the grantor’s contention that she was entitled to four exclusions of $5,000 each; but we have no such question here. The children of this settlor clearly had present, vested interests. He, like the settlor in the Rheinstrom case, “made four gifts” — one to his wife and one to each of his three daughters. Applying the rule enunicated by the three Circuit Courts of Appeal in the cases cited, we hold that the respondent erred in limiting petitioner to one $5,000 exclusion.

Reviewed by the Board.

Judgment will be entered for the petitioner.

       SEC. 504. NET GIFTS.
      * * * * * * *
      (b) Gifts Less Than $5,000. — In the case of gifts (other than of future interests in property) made to any person by the donor during the calendar year, the first $5,000 of such gifts to such person shall not, for the purposes of subsection (a), be included in the total amount of gifts made during such year.


author: Opper:

text:
    G. U. R. Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 93372.
    Promulgated January 30, 1940.

      Harvey W. Peters, Esq., for the petitioner.

      F. P. Shearer, Esq., John H. Pigg, Esq., and Jonas M. Smith, Esq., for the respondent..
   OPINION.

Opper:

Respondent seeks to apply to petitioner’s income for the year 1934 the following provision of the Revenue Act' of 1934:

SEO. 45. ALLOCATION OF INCOME AND DEDUCTIONS.
In any ease of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion, or allocate gross income or deductions between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the' income of any of such organizations, trades, or businesses.

The action which respondent asks to have approved involves a loss resulting from the sale of SO0 shares of the stock of American Superpower Co. This was sold in 1934 for $263.99, resulting in a deduction on petitioner’s return for that year of $7,159.51, being the difference between petitioner’s claimed basis of $7,423.50 and the amount received. The stock was transferred to petitioner in 1931 by a corporation wholly owned by petitioner’s sole stockholder at the price adopted as its basis by petitioner. The fair market value of the stock at the time of such transfer was $1,068.75, as shown by the stipulated stock exchange figures. It is this amount which respondent seeks to apply as' petitioner’s basis, thus allocating to petitioner, under section 45, $804.76 of the loss as opposed to the larger figure deducted on petitioner’s return, on the ground ais contended by respondent that this allocation is necessary in order properly to reflect petitioner’s income for the taxable year.

Since the loss in question would serve to reduce petitioner’s admitted gross income, there seems little doubt that, if erroneous, its proper adjustment is necessary in order that taxable net income be truly reflected. The question is whether respondent’s action in attributing to petitioner only that portion of the loss measured by the difference between the fair market value of the stock when acquired by it and the sale price is so arbitrary, unreasonable, or capricious as to require that it be overruled. Asiatic Petroleum Co. (Delaware), Ltd., 31 B. T. A. 1152, 1157.

We are of the opinion that the present proceeding is controlled by that case and Wellworth, Realty Co., 40 B. T. A. 97. In Asiatic Petroleum Co., supra, the sale to an affiliated foreign corporation was claimed by petitioner to have had the effect of relieving it from payment of tax on the profit. The allocation to it of the entire gain was sustained under section 45. In the opinion the legislative history of the applicable section is carefully detailed. It need not be repeated here. The Board said (pp. 1156, 1159):

* * * The increment in the value of the property was converted into a realized profit within the group. Under these circumstances it was proper to allocate the profit to the domestic corporation which owned the property during the period that the increment occurred.
*******
* * * One of the reasons given as prompting the enactment is the practice of “shifting of profits, the making of fictitious sales.” * * * And the sale from petitioner to Bataafsehe, even if not open to the charge of “fictitious”, clearly was not an arm’s length transaction.

On review, 79 Fed. (2d) 234 (C. C. A., 2d Cir.), the court said:

* * * By selling to Bataafsehe at cost what it might have sold toi Shell Union at a profit, Asiatic avoided the receipt of income * * *. The phrase “evasion of taxes” is broad enough toi include the avoidance of the realization for taxation of such a profit through its transfer to another branch of the same business enterprise in a way which only changes its place in the business set up.

It is readily apparent that a slight paraphrase of the) quoted language is apposite to the present facts. Here, by buying from its'! affiliate at an inflated price what it might have bought on the market ; for a small fraction of the same figure, petitioner avoided, or claims j to have avoided, the payment of tax on a part of its true income through offsetting a capital loss largely acquired from its affiliate. It attempted to obtain “the realization for taxation” of such a loss by transfer to it from “another branch of the same business enterprise in a way which only changed its place in the business set-up.”

That this was no arm’s length transaction is manifest. Petitioner “paid” $7,423.50 for stock which admittedly it could have purchased on the open market for $1,068.75. It is inconceivable that a purchaser dealing at arm’s length would thus have presented his vendor with a seven-fold windfall. It is only the fact that the beneficiary of this openhanded generosity was a member of petitioner’s corporate family that reduces the transaction to terms of ordinary or prudent business conduct.

Having thus discarded as the minuend of petitioner’s loss computation the inflated figure proposed by petitioner, it became necessary for respondent to substitute one not subject to a similar criticism. This he has, as we think, properly accomplished by attributing to the stock its fair market value at the time it was acquired by petitioner. Similar action in determining and applying the, fair rental value of property was approved in Welworth Realty Co., supra, p. 101, and use of fair market value by the petitioner resulted in our unwillingness to apply the section in General Industries Corporation, 35 B. T. A. 615, and constitutes the distinction between that proceeding and this one.

Petitioner’s principal objections to respondent’s action are that the section in question confers upon him no power to disallow a deduction completely but only to “distribute, apportion or allocate”; that the acquisition by petitioner having taken place in a prior year, respondent is seeking to apply the section retroactively; that the transaction in question had a legitimate business purpose; and that since a similar result would have been reached by the filing of a consolidated return, section 45 has no application.

The first contention is apparently based upon a misconception, even if it is otherwise sound. Respondent is not seeking to deprive petitioner of the entire deduction but has allocated to it $804.76 of a deduction which petitioner claims to amount to $7,159.51. This is all that the most technical construction of the language could be said to require. The provision refers specifically to the allocation of a deduction, and if this can not be done so as to result in depriving the instant taxpayer of the balance of the deduction not thus allocated, it is difficult to see how the statute could have any practical application in that field.

Nor, in our opinion, is there any retroactive application as a result of respondent’s action. The deduction is claimed as of the present year. He is concerned with the present taxpayer. No method suggests itself to us whereby the action he has taken would) have been appropriate at any other time than the present. And certainly it can not be supposed that section 45 loses its effect because the taxpayers upon whom it was designed to operate have divided tbeir transaction so that its various phases cover different taxable periods. So to construe the provision would amount to charting an obvious course for its avoidance and would suggest that in the Asiatic Petroleum Co. proceeding a contrary result would have been reached had the foreign affiliate sold the stock in a later year. No such inference can be drawn from that case and the opposite is apparent from its language.

The facts indicate that there may have been, a reasonable business motive for the transfer of the securities from petitioner’s affiliate to it. It does not follow, however, that the price attributed to the securities transferred needed to be so widely divergent from their contemporaneous value, nor does any inference from the evidence justify such a finding. For all that appears petitioner could have acquired the securities and could have pledged them as additional collateral without “paying” seven times what they were worth. And we may add that if the result of such a transaction is to distort petitioner’s income, it is at least doubtful whether section 45 must fail of application, even Assuming the price itself was supportable on some hypothesis. A purpose to evade taxes might evidence the absence of legitimate purpose, Gregory v. Helvering, 293 U. S. 465; but evasion of taxes is not the sole justification for resort to section 45. Asiatic Petroleum Co., supra, p. 1158.

Finally, petitioner’s suggestion that a consolidated return might have had the same effect avails it nothing. Not only was the right to file consolidated returns withheld from it in the year before us, although section 45 remained in operation, but the reason for the withdrawal of the privilege was cognate to that upon which section 45 itself is based. Repeal of the consolidated returns provision was the result of an amendment to the 1934 Bill proposed on the floor of the Senate. The Committee Reports are thus irrelevant. The repeal was supported, among others, by Senators Borah, Couzens, and Norris. Their arguments show that the design of the repeal was in part to remove from affiliated organizations, theretofore permitted to consolidate their returns, the opportunity to offset against the actual income of various corporations the losses sustained by others. For example, Senator Borah read from the report of a House Subcommittee: “This is especially true in the depression years, for the effect of the consolidated return is to allow the loss of one corporation to reduce the net income and tax of another, and during a depression more losses occur.” Thus petitioner’s inability to file a consolidated return with its affiliate, and thereby to obtain the benefit of the latter’s loss, was due to one of the identical! purposes embodied in section 45, namely, to avoid the transfer of losses so as to offset and thus distort income. We think it is apparent that respondent’s action was neither capricious, arbitrary nor unreasonable. It it sustained.

Reviewed by the Board.

Decision will be entered, for the respondent.

       “* * * The standard to be applied in every case is that of an uncontrolled taxpayer dealing at arm’s length with another uncontrolled taxpayer.” Regulations 86, Art. 45-1 (6) (b).

       Revenue Act of 1934, sec. 141.

       78 Congressional Record, 6304-6307, 6463-6466, 6555-6561.

       78 Congressional Record, 6557.

       “Mr. Gifford. And this is a new law. What worries us is that any two of these corporations can get together and juggle transactions and take advantage of questionable sales to each other to get deductions. Should it be made possible or at least encourage one corporation to purposely sell to another to show a loss?
      “Mr. Green of Iowa. That is stopped by the bill. It is simply a fraud.” 69 Congressional Record, 605.