text:
    Commercial Trust Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8760
    Promulgated October 31, 1927.
    1. In the absence of evidence it is impossible to determine whether a reorganization of a railway corporation resulted in gain or loss.
    2. A determination by the Commissioner of gain or loss arising from the sale of stock acquired in the reorganization of a corporation is sustained in the absence of evidence that error was committed.
    3. The determination by the Commissioner of a loss arising from a sale of stock in 1921, which was acquired prior to March 1, 1913, is sustained in the absence of evidence of its value on the latter date.

      John K. Hulse, G. P. A., and K. N. Parl&imon, Esq., for the petitioner.

      G. G. Holmes, Esq., and Philip M. Glark, Esq., for the respondent.
    In this proceeding petitioner appeals from the determination by respondent of its income taxes for the years 1911, 1918, 1919, 1920, and 1921, as set forth in a notice dated September 5, 1925. In that notice respondent determined the following overassessments: for the year 1911, $5,060.12; for the year 1918, $3,845.67; and for the year 1919, $2,846.90, and the following deficiencies: for the year 1920, $14,995.41, and for the year 1921, $30,697.25.
    Petitioner contends respondent erred (1) in refusing to permit the deduction of a loss of $106,929.50 incurred in 1917, by reason of the sale of 2,300 shares of the preferred stock of the Chicago, Rock Island & Pacific Railway Co.; (2) by refusing to permit petitioner to take as deductions in the years 1919, 1920, and 1921, rather than in the year 1917, certain losses arising from the reorganization of the Pere Marquette Railroad Co.; (3) that in event the Board holds that respondent did not err in attributing losses arising from such reorganization to the year 1917, then the respondent erred in computing the losses arising from sales made in 1919, 1920, and 1921 of securities acquired through such reorganization; (4) that respondent erred in computing a loss incurred in 1921 from the sale of bonds of the Chicago & Alton; (5) in computing a loss incurred in 1921 arising from the sale of preferred stock of the Consolidated Traction Co. of New Jersey, and (6) in computing a loss incurred in 1921 arising from the sale of bonds of the Portland Railway Light & Power Co.
    Respondent, in his answer, admits error with respect to error (1) and at the hearing petitioner waived errors (5) and (6).

      FINDINGS OF FACT.
    Petitioner is a corporation organized under the laws of the State of Pennsylvania and is engaged in the business of banking, handling trusts, and the buying and selling of securities.
    In 1911, petitioner purchased $100,000 face value of collateral trust short-term 6 per cent notes, of the Pere Marquette Railroad Co., and paid therefor, in cash, $99,000.
    On March 12, 1915, petitioner received as part payment for said collateral trust notes, $44,000 face value of refunding mortgage 4’s of the same railroad, and on said date there was assessed against petitioner by the bondholders’ committee, the sum of $5,340, which was paid by the petitioner.
    On October 30, 1916, a reorganization agreement was entered into between certain parties termed “ reorganization managers,” and the holders of securities of the Pere Marquette Railroad Co. and other railroad lines of the Pere Marquette Railroad System. A plan of reorganization was made a part of the reorganization agreement. The material parts of the reorganization agreement read:
    Agreement, dated the 30th day of October, 1916, between J. & W. Seligman & Co., Robert Winthrop & Co., respectively copartnerships, and Eugene V. R. Thayer, hereinafter called the reorganization managers, parties of the first part, and Holders op the Securities hereinafter mentioned who shall become parties to this Agreement as hereinafter provided, their successors and assigns, and the Holders op Certificates op Deposit issued under or subject to the Plan, hereinafter collectively called Depositors, parties of the second part.
    In consideration of the mutual benefits to be derived from the performance hereof and of the conditions and promises herein contained and for other valuable considerations, the parties hereto agree, each of the Depositors agreeing with each of the other Depositors, as follows:
    First: The accompanying Plan is and shall be taken to be as a part of this Agreement with the same effect as though each and every provision thereof had been embodied herein and said Plan and this Agreement shall be read as parts of one and the same paper.
    Second: The following bonds and coupons may be deposited under the Plan and this Agreement on the terms stated herein and in the Plan:
    Flint & Pere Marquette Railroad Company, First Mortgage Sis Per Cent Gold Bonds, with coupons maturing April 1, 1914, and subsequent coupons.
    Flint & Pere Marquette Railroad Company, First Mortgage Four Per Cent Gold Bonds, with coupons maturing April 1, 1914, and subsequent coupons.
    Flint & Pere Marquette Railroad Company (Toledo Division) First Mortgage Five Per Cent Gold Bonds, with coupons maturing July 1, 1914, and subsequent coupons.
    Flint & Pere Marquette Railroad Company (Port Huron Division), First Mortgage Five Per Cent Gold Bonds, with coupons maturing April 1, 1914, and subsequent coupons.
    Flint & Pere Marquette Railroad Company, First Consolidated Mortgage Five Per Cent Gold Bonds, with coupons maturing May 1, 1914, and subsequent coupons.

      Chicago and West Michigan Railway Company, First Mortgage Five Per Cent Bonds, with coupons maturing June 1, 1914, and subsequent coupons.
    Chicago & North Michigan Railroad Company, First Mortgage Five Per Cent Bonds, with coupons maturing May 1, 1914, and subsequent coupons.
    Detroit, Grand Rapids & Western Railroad Company, First Consolidated Mortgage Four Per Cent Bonds, with coupons maturing April 1, 1914, and subsequent coupons.
    Saginaw, Tuscola & Huron Railroad Company, First Mortgage Four Per Cent Gold Bonds, with coupons maturing August 1,1914, and subsequent coupons.
    Grand Rapids, Belding & Saginaw Railroad Company, First Mortgage Five Per Cent Gold Bonds, with coupons maturing March 1, 1914, and subsequent coupons.
    Pere Marquette Railroad Company of Indiana, First Mortgage Four Per Cent Gold Bonds, with coupons maturing May 1, 1914, and subsequent coupons.
    (The several kinds of bonds above enumerated are hereinafter collectively termed “ Divisional Bonds.”)
    Pere Marquette Railroad Company, Consolidated Mortgage Four Per Cent Gold Bonds, with coupons maturing July 1, 1914, and subsequent coupons (herein termed “Consolidated Bonds.”)
    Pere Marquette Railroad Company, Refunding Mortgage Four Per Cent Gold ■Bonds, with coupons maturing July 1, 1914, and subsequent coupons (herein termed “Refunding Mortgage Bonds.”)
    Pere Marquette Railroad Company, Short Term Sis Per Cent Notes daied February 9, 1912, and February 26, 1912, due October 8, 1912, in favor of Old Colony Trust Company, (herein termed “ Old Colony Notes.”)
    ■ Detached Coupons due April 1, 1912, pertaining to Flint & Pere Marquette Railroad Company First Mortgage Six Per Cent Gold Bonds.
    Detached Coupons due April 1, 1912, pertaining to Flint & Pere Marquette Railroad Company First Mortgage Four Per Cent Gold Bonds.
    Detached Coupons due April 1, 1912, pertaining to Detroit, Grand Rapids & Western Railroad Company First Consolidated Mortgage Four Per Cent Gold Bonds.
    Detached Coupons due July 1,1912, January 1,1913, July 1, 1913, and January 1, 1914, pertaining to Pere Marquette Railroad Company Refunding Mortgage. Bonds.
    The following notes, debentures and stock may be deposited under the Plan and this Agreement on the terms stated herein and in the Plan in case the holders desire to accept the offer of the Purchase Syndicate referred to in the Plan and this Agreement:
    Pere Marquette Railroad Company, Six Per Cent Collateral Trust Gold Notes (herein termed “Collateral Trust Notes”), with coupons maturing September 1, 1912, and subsequent coupons.
    Pere Marquette Railroad Company, Six Per Cent, Five Year Gold Debentures (herein termed “debentures”), with coupons maturing July 1, 1912.
    Pere Marquette Railroad Company, First Preferred Stock. Pere Marquette Railroad Company, Second Preferred Stock. Pere Marquette Railroad Company, Common Stock.
    The.Plan of Reorganization contains the following:
    New Railboad Company
    It is contemplated that the various properties will be sold under foreclosure of the Divisional Mortgages, the Consolidated Mortgage, the Refunding Mortgage, and the Improvement Mortgage, or any one or more of them and/or under the general creditors’ bill, or otherwise dealt with, and a new company or companies will be organized under the laws of such state or states as the Reorganization Managers in their discretion may determine.
    The term “ New Company ” wherever used in this Plan or in the accompanying Agreement, is intended to mean such company or companies as the Reorganization Managers may determine to utilize for the purposes of the Plan. It is intended ultimately to vest in the New Company, free from prior mortgage lien, the lines of railroad now covered by the Divisional Mortgages, the Consolidated Mortgages, the Refunding Mortgage and Improvement Mortgage (excluding such lines or parts thereof or branches as the Reorganization Managers may determine that it is inexpedient to vest in the New Company), and, subject to the existing liens thereon (see page 26), all interests acquired in the reorganization in securities representative of the Canadian Lines. It is intended that as far as practicable the First Mortgage shall he a direct lien on physical properties, hut in ease delay should occur in acquiring any of the lines of railroad or branches, or if for any other cause the Reorganization Managers shall deem it advisable, the existing bonds upon such lines deposited under the Plan or other securities representative of such lines, may be pledged under the First Mortgage as security for the bonds issued thereunder.
    It is contemplated that, as a consideration for the property to be conveyed and delivered to the New Company, or which it shall acquire pursuant to the Plan, the New Company shall deliver its bonds and stock, excepting any final amounts thereof as shall, in the discretion of the Reorganization Managers, be reserved for the future use of the New Company.
    The collateral trust notes and refunding mortgage 4’s held by petitioner were not included in the existing liens referred to on page 26 of the plan.
    The new company, as above defined, was to be authorized to issue the following securities: First mortgage bonds, prior preference stock, preferred stock and common stock. The holders of refunding mortgage 4’s of the Pere Marquette Railroad Co. were permitted to deposit their bonds and receive in exchange therefor, deposit certificates which would be exchangeable for common stock of the new company at $1,104 par value of stock for $1,000 face value of bonds.
    The plan of reorganization provided for raising $16,000,000 to carry into effect the reorganization. There was to be formed a purchase syndicate which was to purchase for $16,000,000, the following securities of the new company: $6,000,000 first mortgage bonds; $11,200,000 prior preference stock (the whole issue) and $25,675,400 common stock. These securities were to be resold to the depositors of the securities of the Pere Marquette Railroad Co. and of the other lines of the Pere Marquette Railroad System, on the terms hereinafter stated.
    The only rights which the holders of the collateral trust notes of the old company had under the plan were to purchase securities from the purchase syndicate. The following are the material parts of the plan of reorganization with reference to such rights of purchase:
    The Purchase Syndicate hereinafter stated, having made the offer hereinafter set forth, Holders of Collateral Trust Notes, Debentures, First Preferred Stock, Second Preferred Stock and Common Stock of Pere Marquette Railroad Company, accepting said offer and complying with the terms and conditions thereof as set forth in the Plan and Agreement, may, to the extent and on the terms hereinafter stated, acquire from the Purchase Syndicate 5% Prior Preference Stock-Cumulative (trust certificates), and Common Stock (trust certificates) at the price and on the terms hereinafter prescribed (see page 19). Holders of said securities, in order to obtain such rights of purchase, must deposit the same with Central Trust Company of New York, the Depositary for that purpose, on or before December 4, 1916, and shall receive therefor certificates of deposit of said Depositary. At the time of deposit there must be paid for account of the Purchase Syndicate, in respect of each $1000 principal or par amount deposited, in the case of (a) Collateral Trust Notes, the sum of $70; (b) Debentures, the sum of $66.50; and (c) First Preferred Stock, Second Preferred Stock and Common Stock, the sum of $17.50; and at the same rates for other principal or par amounts. Collateral Trust Notes must be accompanied by the coupons of September 1, 1912, and subsequent coupons and also the following securities to the extent respectively received by the holders thereof in the distribution of securities by the committee constituted under the agreement dated May 3,1912, of holders of Collateral Trust Notes upon the termination of the affairs of said committee, viz: Participation Certificates of Bankers Trust Company, Depositary, for interests in Improvement Mortgage Bonds and Certificates of Interest of Bankers Trust Company, Depositary, for interests in Refunding Mortgage Bonds subject to prior lien of Equipment Trust Agreements. (See Note 2.) Debentures must be accompanied by the coupons of July 1, 1912.
    * # * * >j! 5¡!
    The Purchase Syndicate, on the terms and subject to the conditions herein stated, offers to the depositors of Divisional Bonds, Consolidated Mortgage Bonds, Refunding Mortgage Bonds, Collateral Trust Notes, Debentures, First Preferred Stock, Second Preferred Stock and Common Stock, the opportunity to acquire $11,200,000 5% Prior Preference Stock-Cumulative (trust certificates) and $22,400,000 Common Stock (trust certificates) at the following rate, viz:
    $1,000 par value Prior Preference Stock (trust certificates)
    $2,000 par value Common Stock (trust certificates) (for the sum of $975 in cash.)
    This offer may be availed of in the manner herein provided by depositors of said securities up to any amount, but in case applications be made to acquire Prior Preference Stock (trust certificates) and Common Stock (trust certificates) in excess of the amounts offered, an allotment will, if applied for within the time limited and otherwise as provided in this Plan and the accompanying agreement, be made to the depositors of the following securities, to the extent indicated in the following table, and allotment will be made of any balance substantially in proportion to the additional amounts applied for.

      Table of minimum amount of new securities which may be acquired by depositors of each $1,000 principal or pa/r amount of existing securities set forth.

      Tlie aforesaid offer of the Purchase Syndicate, if not availed of within the time limited or otherwise in accordance therewith as set forth in the Plan, is not open to acceptance by depositors under the Plan of securities of any class, and depositors of Collateral Trust Notes, Debentures and Stock acquire no rights under the Plan other than such opportunity to acquire such new securities as they may obtain through the acceptance of said offer of the Purchase Syndicate, within the time limited, and upon compliance with the terms and conditions thereof.
    Holders of certificates of deposit for Refunding Mortgage Bonds stamped as assenting to the Plan and Agreement, upon presentation thereof to Central Trust Company of New York before the close of business on December 4, 1916, for appropriate stamping, and upon payment for account of the Purchase Syndicate at the rate of $43.75 for each $1,000 principal amount of Refunding Mortgage Bonds represented by their certificates of deposit (as a part of the required payments set forth in the table on page 19, of minimum amounts in respect of the securities therein designated), and depositors of Collateral Trust Notes, Debentures, First Preferred Stock, Second Preferred Stock and Common Stock who at the time of the deposit thereof shall have made the payments required by the plan (see page 7), will be entitled to receive Subscription Warrants specifying the minimum amount of new securities set forth in the foregoing table and shall also be entitled to receive Application Certificates. The amounts paid at the time of deposit of Collateral Trust Notes, Debentures, First Preferred Stock, Second Preferred Stock and Common Stock, will be taken as part of the required payments set forth in the foregoing table of minimum amounts in respect of the securities therein designated.
    Holders of certificates of deposit for Divisional Bonds and Consolidated Mortgage Bonds stamped as assenting to the Plan and Agreement, upon presentation thereof to Central Trust Company of New York before the close of business on December 4, 1916, for appropriate stamping, will be entitled to receive Application Certificates only.
    Attached to Application Certificates will be forms of application for subscription to Prior Preference Stock (trust certificates) and Common Stock (trust certificates) at the prescribed rate, which forms must be properly filled out, signed, detached and filed with Central Trust Company of New York before the close of business on December 18, 1916, and must be accompanied by a payment in cash equal in amount to $17.50 in respect of each share of Prior Preference Stock applied for. Application Certificates in case of allotment, and as soon as practicable thereafter, will be exchangeable for Subscription Warrants. The cash accompanying applications exceeding in amount of $17.50 in respect of each share of new Prior Preference Stock (trust certificates) allotted will be returned (but without interest) to registered holders of Application Certificates at the time of the exchange thereof for Subscription Warrants.
    Subscription Warrants will be issued in two series, Series A and Series B, and will acknowledge the receipt of an amount equal to $17.50 in respect of each share of new Prior Preference Stock therein specified.
    On the consummation of the reorganization the registered holders of Subscription Warrants, Series A, will be entitled to exchange the same for Purchase Warrants.
    The registered holders of Subscription Warrants, Series B, on the consummation of the reorganization, will be entitled to the delivery of the Prior Preference Stock (trust certificates) and Common Stock (trust certificates) to the amount therein specified upon making payment in cash of an amount equal to $80 (being balance of cost) in respect of each share of the new Prior Preference Stock specified in such Subscription Warrants, Series B. Failure to make such payment at the time fixed by the Reorganization Managers will forfeit all rights to purchase such stock trust certificates and all'rights of purchase under the Plan, and the Subscription Warrants, Series B, in respect of which such failure shall be made, will forthwith become void.
    At the time of making the required payments to obtain Subscription Warrants, depositors must respectively elect whether the Subscription Warrants shall be of Series A or Series B, and the registered holders of Application Certificates must similarly elect at the time of filing their application forms.
    Purchase Warrants will be issued by Guaranty Trust Company of New York, and will be delivered on behalf of the Purchase Syndicate. The Purchase Warrants will specify the amounts of Prior Preference Stock and Common Stock specified in the corresponding Subscription Warrants Series A surrendered therefor, and will certify that on payment on the date therein specified, which is to be the date of maturity of the loan to be made by the Loan Syndicate (see page 23) of the sums specified in such Purchase Warrants, which shall be at the rate of $80 in respect of each share of Prior Preference Stock therein specified (being balance of cost) said Trust Company, on surrender of such Purchase Warrants, will deliver to the registered holders thereof the Prior Preference Stock (trust certificates) and Common Stock (trust certificates) therein specified, or will in lieu of the delivery of any part or all of such Prior Preference Stock (trust certificates) pay in cash at 70 per cent flat for Prior Preference Stock (trust certificates) or fractional interests not .delivered. Holders of Purchase Warrants will not be entitled to dividends received in respect of the stock therein specified.
    Failure to pay the sums payable as specified in the Purchase Warrants when due will forfeit all rights in respect of stock (trust certificates) specified in the Purchase Warrants and all rights under the Purchase Warrants, and the Purchase Warrants in respect of which such failure shall be made, will forthwith become void.
    For fractional interests in stock (trust certificates) deliverable under Purchase Warrants or Subscription Warrants Series B script may be delivered.
    *******
    During December 1916, petitioner paid the Central Union Trust Company of New York, $122.50 in cash and deposited the $100,000 face value of collateral trust notes and $44,000 face value of refunding mortgage bonds which were acquired as heretofore stated. On April 28, 1917, petitioner paid a further sum of $41,435.78. On April 28,1917, petitioner received 510.9472 shares of prior preference stock in the new company (it having received prior thereto 7 shares of the same stock,) and 1,617.3423 shares of common stock in the same company.
    On December 5, 1917, petitioner paid $8,941.58 which was its share of an assessment for the expenses of the bondholders’ committee.
    In December 1916, both classes of stock were traded in on exchange on the basis of “ when, if and as issued.” In that month, the common stock sold at 38% high and 29 low. The prior preference stock sold in that month at 74% high and 70 low. The high prices were when first traded in and the prices of both issues gradually receded through the years 1917 and 1918.
    In 1919, petitioner sold 1,600 shares of the common stock for $39,371. In 1920, it sold 17.3423 shares of common for $516.70. In 1921, it sold 517.9472 shares of prior preference stock for $28,672.36.
    Respondent determined that the transactions whereby petitioner acquired the common stock of the new company in exchange for its refunding mortgage bonds and by purchase, and acquired its prior preference stock by purchase in the exercise of its rights under the plan, resulted in a loss to petitioner in 1917 of $84,429.42; that petitioner made the following gains from its sale of common stock to wit: $2,571 in 1919 and $117.83 in 1920; and that it incurred in 1921 a loss of $4,539.21 from its sale of prior preference stock. In computing petitioner’s losses for 1917 and 1921, and its gains for 1919 and 1920, respondent valued the prior preference stock at $65 per share and the common stock at $23 per share as of date of acquisition.
    In the year 1921, petitioner sold 102M Chicago and Alton Refunding 3’s for $46,027.50. These securities cost petitioner in 1909, $68,850.00.
   OPINION.

Milliken :

The respondent has determined overassessments for the years 1917, 1918, and 1919. Since these overassessments did not result upon the denial of a claim in abatement, the Board is without jurisdiction in this proceeding insofar as it relates to these years, and this appeal, insofar as it involves the taxes for these years, is dismissed. Appeal of Cornelius Cotton Mills, 4 B. T. A. 255. We have, however, the right to determine the facts relating to the transactions in these years or in prior years insofar as such facts affect the deficiencies of the years 1920 and 1921.

The burden of proof rests on petitioner, and, therefore, it was incumbent on it to introduce evidence sufficient to show that respondent erred. This evidence must be competent evidence. The only evidence introduced by the petitioner at the hearing was a printed copy of the agreement of reorganization and the accompanying plan of reorganization of the Pere Marquette Railroad Co.; a pamphlet entitled “ Investor’s Pocket Manual ”; testimony that this book and another entitled “ Standard Statistics ” are used and relied upon in the banking and security trading world; and a proposed stipulation of facts. This stipulation gives the authority for each statement of fact contained therein. Thus it states “ That as of October 30, 1916, there was issued a plan for the reorganization of the company (Pere Marquette Railroad Company, a corporation of the States of Michigan and Indiana) to form the present Pere Marquette Railway Company, under the laws of Michigan,” and cites as authority for this statement Standard Statistics. The stipulation makes reference to judicial sales, to orders of courts and findings of state commerce commissions and gives the same authority for each statement. Respondent at the hearing admitted that the book in question contains such statements but objected to their admission on the ground that such statements were incompetent to prove the facts in issue. The fact of the incorporation of both the old and new corporations was material and especially was the fact whether the new company was-incorporated under the laws of the same State in which the old corporation was organized. See Marr v. United States, 236 U. S. 536; 5 Am. Fed. Tax Rep. 5393.

No authority has been cited and in our research we have found none which permits the proof of incorporation, of an order of court or of an order of a state commission by statements in trade publications, it matters not how trustworthy such publication may be. It is true, that in a few cases, among which are prices paid and pedigree, trade publications whose integrity have been proven, have been admitted in evidence. In section 1702 of Wigmore on Evidence, the general rule relative to the admission of this secondary evidence is thus stated:

In a few narrow and usually well-defined classes of cases, recognition has been given, by way of exception to the Hearsay rule, to certain commercial and professional lists, registers, and reports. Their admissibility in some instances is placed upon judicial principle, in others arises solely from statutory innovation; but in most of the classes statute has carried out hints originally given judicially.
The necessity in all of these cases lies in part on the usual inaccessibility of the authors, compilers, or publishers in other jurisdictions; but chiefly in the great practical inconvenience that would be caused if the law required the summoning of each individual whose personal knowledge has gone to make up the final result. The necessity therefore is of the sort that is recognized in the preceding two Exceptions, i. e. a practical inconvenience existing generally for the statements as a class; and hence it is not required that the death, insanity, absence from the jurisdiction, or the like, of the author shall be shown before the statement can be used.

We are of the opinion that we should not extend the exception to the hearsay rule beyond the adjudged cases, especially as the necessity, which is the foundation of this exception, is not present in this case. Certified copies of the articles of incorporation, of the orders of the court, and of the order of the state commerce commission could have been easily obtained.

Admitting for the purpose of this opinion that there was but one new corporation and that such entity was in fact incorporated, and that such incorporation was pursuant to the plan of reorganization, the copy of which is in evidence, it does not follow that we should hold that respondent erred in determining that the reorganization of the Pere Marquette Railroad Co. was a completed transaction resulting in a deductible loss sustained at the time the reorganization was effected.

Petitioner held bonds and notes of the Pere Marquette Railroad Co. After the reorganization it held prior preference stock and common stock of the new company, some of which it acquired in exchange for bonds and the larger part of which it acquired from the purchase syndicate for cash. The rights which petitioner possessed by reason of the ownership of the bonds and notes of the old company were materially different from its rights under the stock of the new company which it acquired. In Appeal of A. J. Siegel, 4 B. T. A. 186, we had before us the question whether taxable gain resulted to certain stockholders on the merger of three national banks. We there said:

Tlie two most recent decisions of the Supreme Court which appear to have a bearing upon the case are Weiss v. Stearn, 265 U. S. 242, and Marr v. United States, 268 U. S. 536. Both of these arose out of reorganizations by which the assets of a corporation were transferred intact to a new corporation. In Weiss v. Stearn, it was held that no taxable transaction took place. In the course of its opinion the court says:
“ We cannot conclude that mere change for purposes of reorganization in the technical ownership of an enterprise, under circumstances like those here disclosed, followed by issuance of new certificates, constitutes gain separated from the original capital interest. Something more is necessary — something which gives the stockholder a thing really different from what he theretofore had.”
In Marr v. United States, the court, holding that a taxable transaction resulted from the reorganization under consideration, said:
“In Weiss v. Stearn, as in Eisner v. Macomber, the transaction was considered, in essence, an exchange of certificates representing the same interest, not an exchange of interests.
“ In the case at bar the new corporation is essentially different from the old.”
Considering these two decisions, it appears that the determining point is not whether the corporate existence continues, but whether the interest of the stockholder changes. In the instant case the interests of the stockholder before the merger and after the merger differed more radically than did the interests of the stockholders in Marr v. United States. What the taxpayer now has is essentially different from that which he had and an exchange has taken place which is properly subject to tax.

In the above proceeding the stockholders of the old company remained stockholders in the merged institution. Here the petitioner, which was a creditor of the Pere Marquette Railroad Co., did not become a creditor of the new company but a stockholder therein. Eespondent did not err in determining that the reorganization proceedings constituted, insofar as petitioner is concerned, a closed transaction which resulted at the time the reorganization was completed in a deductible loss.

This leaves open petitioner’s alternative complaint to the effect that respondent erred in computing the gain and loss resulting from the sale of its stock in 1920 and 1921. The only error which petitioner now insists upon is that respondent, for the purpose of computing petitioner’s loss in 1917, and in this way fixing the basis for future gain and loss, valued the prior preference stock at $65 per share and the common stock at $23 per share, whereas petitioner asserts that the prior preference stock was worth $74.50 a share and the common stock $38.12% a share.

It is to be observed that respondent determined these valuations as of the year 1917, while the values given in evidence for petitioner were the high and low prices for December, 1916. Petitioner has not shown that respondent erred in treating the reorganization as a closed and completed transaction in the year 1917. It is not shown when the new company was reorganized.

In fact, the copy of Investor’s Pocket Manual filed in evidence indicates that the new company was organized in March, 1917. We refer to this publication merely for the purpose of pointing out that petitioner has not brought into the record any evidence as to when the prospective plan of October 30, 1916, was carried into effect or when the new corporation proposed by that plan was in fact organized. Much less has it shown that these things occurred in the year 1916. Petitioner acquired all its prior preference stock and, it appears, a large amount of its common stock by purchase and the remainder of its common stock by exchange for its refunding mortgage 4’s. There could have been no completed transaction until the new company was organized and capable of issuing the stock. Since petitioner has failed to show that respondent was in error in determining that the transaction was closed and completed in 1917, and since we have no evidence before us other than the findings of the Commissioner as to the value of the common and prior preference stock in that year, we can not hold that respondent erred in his determination of petitioner’s gain and loss resulting from sales made in 1920 and 1921.

The only remaining question is whether respondent erred in the determination of petitioner’s losses in 1921 arising from its sale of bonds of the Chicago & Alton. Petitioner introduced no evidence on this issue. While its counsel, in his opening statement quoted prices bid and asked on March 1, 1913, from Standard Statistics, it did not introduce that publication in evidence, neither did it introduce the testimony of any witnesses relative thereto. The March 1, 1913, value is absent. Without this information we can not determine petitioner’s deductible loss. See Chas. H. Sachs, 6 B. T. A. 68; J. W. Kelly, 6 B. T. A. 1221.

In petition filed it is alleged tbat tbe bonds when purchased in 1909 cost petitioner $80,070. This averment is denied in the answer of respondent in the following words, “ but denies that the cost of said bonds was $80,070 or any sum in excess of $68,850.00.” Petitioner introduced no evidence to support the averment that the bonds cost $80,070 or any other sum. . '

Judgment will be entered for the respondent.

Considered by Maequette, Phillips, and Van Fossan.


source: Caselaw Access Project

author: Murdock:

license: Public Domain

text:
    Palatine Aniline and Chemical Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8691.
    Promulgated October 31, 1927.
    Commissioner’s determination approved for lack of evidence.

      Sarrwel Freedman, Esq., for the petitioner.

      Bruce A. Low, Esq., for the respondent.
   Murdock:

The petition alleges that the Commissioner in determining the deficiencies in controversy was in error (1) when he decreased the net worth of the corporation at January 1, 1920, by increasing the reserve for depreciation by $6,144.76; (2) when he disallowed depreciation on machinery for the year 1920 in the amount of $609.01 and for the year 1921 in the amount of $899.44, and (3) when he disallowed losses on assets discarded during the two years in the amounts of $550 for 1920, and $2,437.50 for 1921.

The answer denied all of the allegations of the petition, except those alleging that the deficiency letter was mailed September 21, 1925, that the taxes in controversy are income and profits taxes for the calendar years 1920 and 1921 in the total amount of $2,402.76, and that the petitioner is a New York corporation with its principal office at Poughkeepsie, N. Y.

The only evidence offered was the deposition of an internal revenue agent who made an examination of the petitioner’s books and records for the years 1920 and 1921, on or about October 15, 1924. A copy of his report was offered in evidence. It gave certain data, schedules and computations to show that additional tax was due for these two years in the amount of $2,479.70, $538.47 being for 1920 and $1,941.23, the balance, being for 1921. The witness then stated that this - report contained certain errors and he indicated what corrections should be made in the figures as shown by the report, but he gave no reason for these changes which increased the loss from obsolescence on machinery and changed the amount of accrued depreciation at December 31, 1918, as shown by his report.

It does not appear that the Commissioner based his determination on the report of this revenue agent. Until this is shown, it is immaterial that errors were made in the report. We, therefore, have not sufficient proof in this case to overcome the presumption of the correctness of the Commissioner’s determination.

Judgment will be entered on notice of 15 days, under Rule 50.

Considered by TRAmmell, Morris, and Siefkin.


author: Milliken :

text:
    Anna L. Stark Lavelle, Executrix, Estate of Arthur L. Stark, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10587.
    Promulgated October 31, 1927.
    1. Certain transfers made by decedent held not made in contemplation of death.
    2. Value of certain real estate determined.

      Guy Mason, Esq., and Robert A. Littleton, Esq., for the petitioner.

      R. E. (Jopes, Esq., for the respondent.
    This proceeding involves a deficiency of estate tax in the amount of $28,521.97. Petitioner contends that respondent erred in increasing the value of real estate for estate-tax purposes from $69,460 to $145,270.20, and by including in the gross estate transfers of property made by the decedent of the value of $414,003.23.
    FINDINGS OF FACT.
    Arthur L. Stark died testate on October 17, 1923, and was at the time of his death an inhabitant of the State of Ohio. Anna L. Stark Lavelle is the executrix of his estate and was, duripg the taxable year of 1923, and on the date of the filing of this appeal, an inhabitant of the city of Elyria, State of Ohio. Anna L. Stark Lavelle, as such executrix, made the return involved in this proceeding to the collector of internal revenue whose office is located at Cleveland, Ohio.
    Arthur L. Stark was born in December, 1868. He and petitioner were married July 3, 1900, at which time she was 22 years of age. No children were born to this marriage. After the death of Arthur L. Stark, petitioner married Martin A. Lavelle. The cause of . the death of Arthur L. Stark was myocarditis, accompanied by a luetic infection.

      Arthur L. Stark was a chemist by profession and from about 1900 was a stockholder and officer in the Harshaw, Fuller & Goodwin Co. He was the largest stockholder, vice president, and general manager of this company. It grew up under his management from a small concern in 1900 to quite a large one in 1922, at which time it had factories in three cities. He devoted all of his energies to the building up of this company, often working through the whole night; his wife spending many nights with him at the factory. From the time he became connected with the company up the year 1922, he took but one vacation. It was intended that this vacation should last two weeks but after three days Stark became restless, because of separation from his work, and returned.
    Arthur L. Stark was a large, robust man. His height was 5 feet 10%th inches and his normal weight was 233 pounds. He was a hard worker and a man of untiring energy. He always wanted to be on the go. He owned several automobiles, and when not at work took great delight in driving them. He was of a restless disposition and resented control. For many years prior to his death, he suffered from shortness of breath and wheezing whenever he overexerted himself. This condition grew gradually worse, and in May, 1922, the officers of the company became concerned about his health and requested him to take a vacation of six months in order that he might recuperate. - About this time he was examined by his family physician, Dr. Cushing, who diagnosed the trouble as myocarditis with a luetic infection. He told Stark to stay at home, take a complete rest and diet. He was therefore treated by Dr. Cushing, and also in his absence by Dr. Hubbell, each of whom was a personal friend. From this time forward he was visited frequently by both physicians. Often the calls were of a social rather than a professional nature.
    On the advice of Dr. Cushing, Stark, accompanied by his wife, went to Chicago in October, 1922, and submitted to an examination by Dr. Robert A. Babcock, a heart specialist. Dr. Babcock diagnosed the trouble as heart disease (myocarditis) and obesity. He told Stark that he was much too fat and that he would have to reduce, also that he had an enlarged heart. He advised him that his improvement depended upon his own good sense, his care of himself and that if he followed instructions he would be all right. Stark’s weight on this date had fallen to 210 pounds. In a letter to Dr. Cushing, Dr. Bab-cock stated that the first thing that struck him was Stark’s weight and an undue abdominal development and that he had a greatly enlarged heart with a systolic pressure of 160 over a diastolic of 105. Dr. Babcock, in the letter, recommended the usual treatment for such cases, especially dieting, that Stark could exercise cautiously and that it would be well, as it would take the patient’s mind off himself, if he could attend to business a portion of each day. He further stated that Stark would be benefited if be followed instructions, though his restoration to complete health was impossible. Dr. Cushing died in 1924.
    After leaving his desk in May, 1922, Stark never returned to it, although he did return to the factory at times on social visits. Ho resigned as an officer of the Harshaw, Fuller & Goodwin Co., to take effect July 1, 1923, and in June, 1923, sold, effective July 1, 1923, all his common stock to a fellow stockholder. This sale was made pursuant to an agreement which will be referred to later.
    From May, 1922, until his death Stark lived either in his town house in Elyria, Ohio, or at his country home in Lorain, Ohio, which is about nine miles from Elyria. During all this time he was up and down and in and out of his bed and house. On New Year’s day, 1923, he and his wife, who had been spending some time at their country home at Lorain, moved to their town residence. They used their own cars and those of relatives to bring in various things such as silverware, etc. None of the party thought Stark looked any worse than usual. All they noticed was his short breathing and wheezing when overexercised, and his loss of flesh. He, himself, drove one of the cars. During the summer of 1923, Stark talked frequently of going to Europe. During the latter part of August, 1923, he purchased an open Packard car, although at that time he had other cars. He desired an open car for touring purposes. He stated he intended to take a trip to the mountains and for this reason wanted special equipment. On the day the car was delivered, he drove it to Lorain, Ohio,- and back. He drove it often thereafter. The last time he drove it was the Thursday before his death. His relatives and friends could not, until the very last, detect from his manner or conversation, that he, in any way, realized the seriousness of his condition, or that he thought that death was impending. The only change in his appearance they noticed was his loss of flesh, which they attributed to his dieting.
    Up to 1913, the capital stock of the Harshaw, Fuller & Goodwin Co. was represented only by shares of common stock. On September 23, 1919, the stockholders of the company entered into an agreement to the general effect that the holdings of any stockholder should be sold to no outside party but should be offered to the other stockholders at prices fixed by the agreement and that in the event of the retirement from the company by death or resignation of any common stockholder, the option could be exercised by the remaining stockholders. About the same time the corporation issued shares of preferred stock, of which Stark acquired 438 shares. There was an understanding between the stockholders that this stock would be transferred to their respective wives or families. Three of the officers made such transfers to their respective wives within about two years from date of issuance of this stock. When Stark received his certificate for the preferred stock, he handed the certificates to his wife, Anna L. Stark, and said: “ This is your stock. I want you to have the preferred stock in the Harshaw, Fuller & Goodwin Company.” This certificate was placed in a safety deposit vault to which both Stark and his wife had a key. The corporation continued to issue preferred stock, the last issuance being in 1922. Stark first and last acquired 1,841 shares of preferred stock and as each certificate was acquired, he handed it to his wife with words of gift similar to those used in the first instance, and each certificate was thereafter placed in the lock box to which both had a key. The 1,841 shares were transferred on the books of the company to Anna L. Stark in August, 1928.
    Prior to 1920, Stark subscribed for and acquired preferred stock of the Elyria Telephone Co. in the amount of $100,000. It was the policy of the company to sell this character of stock to its telephone subscribers, and upon the request of the president of the company, Stark sold from time to time, part of his holdings to the telephone subscribers. In 1920, Stark refused to sell any more of his stock. At that time he held 889 shares. On July 11, 1921, which was Mrs. Stark’s birthday, Stark handed to her the certificate representing this stock, saying at the time: “ I have been providing a nest egg for you,” an.d “ It is a good investment and I want you to have it.” This certificate Mrs. Stark placed in the lock box to which we have referred. The dividends on this stock were delivered by the president of the company every quarter to Stark in person, either at his office or his residence. This stock was transferred to Mrs. Stark on the books of the company in January, 1923.
    In 1917, and again in 1921 or 1922, Stark purchased shares of stock in the Union Trust Co. of Cleveland, the total number of shares purchased being 471. As each purchase was made, Stark handed the certificate to Mrs. Stark telling her it was a nest egg for her future. Mrs. Stark placed the certificates in the lock box to which we have referred. These shares were transferred on the books of the company to Mrs. Stark on August 20,1923.
    At a time not shown, Stark opened a savings account with the Union Trust Company in Cleveland, Ohio. In the latter part of 1922 or the early part of 1923, he subscribed through a bank of which he was a director, for 500 shares of stock of the Cleveland Electric Illuminating Co. and requested that the stock be issued in Mrs. Stark’s name. It appears that at the same time he subscribed for bonds in the same company for Mrs. Stark’s benefit. In January, 1923, the stocks and bonds were delivered by the bank to Mrs. Stark. She paid for the stock and bonds with the proceeds of Stark’s savings account in the Union Trust Co., which she withdrew on an order given to her by her husband.
    Arthur L. Stark, at the time of his death, was the owner of real estate in the township of Sheffield, County of Lorain, State of Ohio. This real estate may be roughly described as comprising two parcels — (1) lake front property which had a frontage of 960 feet, and (2) the Lane property, which contained 2.85 acres. On this property were situated a large house and five small houses. The lake front property, exclusive of buildings, at the date of Stark’s death, was worth $60 per front foot or the total sum of $57,600. The Lane property was worth $1,000 per acre, or $2,850. The large building was worth $10,000 and the five small buildings were worth $2,000 each. The total value of both tracts, including the value of buildings thereon, at the date of Stark’s death, was $80,450.
   OPINION.

Milliken :

There are two issues involved in this proceeding. The first is whether the gifts made by Arthur L. Stark, hereafter referred to as decedent, to his wife of his preferred stock in the Harshaw, Fuller & Goodwin Co., his preferred stock in the Elyria Telephone Co., his stock in the Union Trust Co. of Cleveland, and of his savings account in the Union Trust Co., were made in contemplation of death as that phrase is used in section 402(c) of the Revenue Act of 1921. The other issue is, What was the value as of the date of decedent’s death of certain real estate which he then owned?

Section 402 of the Revenue Act of 1921 provides in part:

That 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—
*******
(e) To the extent of any interest therein of which the decedent has at any time made a transfer, or with respect to which he has at any time created a trust, in contemplation of or intended to take effect in possession or enjoyment at or after his death (whether such transfer or trust is made or created before or after the passage of this Act), except in case of a bona fide sale for a fair consideration in money or money’s worth. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such a consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title.

It is vigorously contended that when decedent handed to his wife certificates of stock in Harshaw, Fuller & Goodwin Co., in the Elyria Telephone Co., and in the Union Trust Co., a gift was consummated in each case, and since a large part of these gifts were made long before decedent was afflicted with the malady which caused Ms death, such gifts fall outside of the provisions of the statute.

On the one hand, the testimony of the donee is unequivocal on the question of the delivery of each gift and the intention of the decedent to make a gift. On the other hand, there is no testimony indicating that decedent assigned the shares to her or that he even indorsed them in blank, nor is it clear who received the dividends. The checks were, of course, payable to decedent until the stocks were transferred on the books of the various corporations. What became of these checks or their proceeds is by no means clear. It would seem that they were deposited in bank to credit of decedent. Whether his wife had the right to draw upon these bank credits is uncertain. When she purchased the stocks and bonds of the Cleveland Electric Illuminating Co. she used an order given her by decedent in order to withdraw the money from the.bank. On this point the petitioner contends that a valid gift of corporate stock can be effectuated even when the stock has not been transferred on the books of the corporation, where it was not indorsed even in blank, and where the donor collected the dividends. She cites in support of this contention, Grissom v. Sternberger (C. C. A.) 10 Fed. (2d) 764; 5 Am. Fed. Tax Rep. 5812. In this proceeding no one has testified as to the delivery of the stocks except the donee. We find in the record testimony given by the presidents of the Harshaw, Fuller & Goodwin Co. and the Elyria Telephone Co. relative to conversations had with the decedent subsequent to the date on which the donee testified the stocks were delivered to her. In these conversations it would seem that the decedent spoke of the transfers of the stocks to his wife as something to be done rather than something accomplished. It may be true, as'contended by petitioner, that the word “ transfer ” as used by decedent referred to transfer on the books of the corporations. In view of the conclusions we have reached, we do not decide whether the gifts were in fact consummated at the dates the stocks were delivered.

Conceding, for the purpose of this opinion, that the various stocks were not given to decedent’s wife until they were transferred on the books of the corporations, the question remains whether they were given in contemplation of death.

Since all the transfers were made on the books of the corporations in 1923, and decedent’s savings account was transferred to his wife the same year, and since decedent died on October 17 th of the same year, we are met at the outset with the provision of the statute to the effect that all gratuitous transfers made within two years prior to a decedent’s death shall be deemed to have been made in contemplation of death, unless the contrary is shown. The Court of Claims construed this provision in Meyer v. United States, 60 Ct. Cls. 474. After referring to the difficulty of establishing the mental state at the time of the transfer of one who is dead and after quoting section 402(c) of the Revenue Act of 1918, which is in the same words as the corresponding provision of the Revenue Act of 1921, the court said:

But what is the result? Can it go further than to shift the burden of proof, leaving the presumption to prevail in the Government’s favor in the absence of a reasonable showing to the contrary? Taxing statutes, when of doubtful interpretation, are always to be construed in favor of the taxpayer, and the spirit of this rule must be completely ignored if, in determining a question of fact as between the Government and the taxpayer, rigorous rules as to the proof required to overcome the presumption of the law are to he applied. For if the Government was deemed entitled to a presumption in its favor because of the difficulties of proof, it is to be borne in mind that even though a conveyance was in fact not in any degree made in contemplation of death, the personal representatives might and frequently would be beset by many difficulties in proving that negative fact. Circumstances must largely be relied upon, and these should be fairly — indeed, we think liberally — construed in favor of the taxpayer.

We concur in this construction and applying it to the facts of this proceeding, the question for decision is whether at the time the stocks were transferred to decedent’s wife on the books of the various corporations, and at the time decedent gave her the order on his savings account, did decedent have a then present apprehension arising from his physical condition, which created a reasonable fear that death was near at hand, and was such apprehension the direct and animating cause of the transfers? See Rea v. Heiner, 6 Fed. (2d) 389; 5 Am. Fed. Tax Rep. 5470; Shwab v. Doyle, 269 Fed. 321; Spreckels v. State, 30 Cal. App. 363; 158 Pac. 549; Philip T. Starck, Executor, 3 B. T. A. 514; Spencer Borden, Executor, 6 B. T. A. 255.

We know decedent was suffering from a mortal disease. We know that he gave up his business and sold his stock in the concern he had helped to make successful. Respondent contends that not only was he mortally ill, but that he knew that death was impending and that this knowledge was the motivating cause of the gifts. We have before us a typical case, one side asserting that decedent had one leg in the grave and knew it, and the other side contending that he believed, and had reasonable grounds to believe that he would live his life’s allotted span and that his gifts were made as a result of a plan which he had made long before he was a sick man. He is dead and can not now reveal to us his thoughts and motives. We can only look back to what he said and did during the period involved and to his general conduct and demeanor.

Decedent’s wife and his family connections were not alarmed. His family physician is dead, but Dr. W. B. Hubbell, the physician who was called in his stead from time to time, has testified. We make the following excerpt from his testimony:

Q. And what was hls general mental attitude from your observation toward his own condition?
A. Well, he never discussed that with me as to how sick he was. He never asked — he never questioned me about how the outcome might be. Not being his family physician he didn’t discuss that with me.
Q. Did he seem to be depressed about it at all?
A. Not particularly; no.
Q. Did he talk to you at all like he expected to get well?
A. Well, I think he did. He seemed to as far as I could judge even at the last.
Q. You mean the last week of his illness?
A. I don’t remember how many days I saw him before he died, now, I can hardly — I don’t know as I can state. During the last few days that I saw him he never talked as though he realized that he wasn’t going to get well.

J. A. McGean who is president of the Harshaw, Fuller & Goodwin Co., and who had known decedent since 1912, testified:

Q. Did he at any time in either ’22 or ’23, particularly ’23, say anything to you in regard to how seriously ill he was?
A. He never would admit that he was seriously ill. He never talked about his condition as being anything but a temporary one and that he was going to get over it right away.
Q. Was that right up to the last?
A. Yes; always anxious to talk about business. If he had any discussion about the future it was always what he was going to do when he got around again in a business way.
Q. In other words, he was looking forward to that time when he would get back to business?
A. Oh, yes; yes.
* * * * ad * *
Charles H. Price, who knew decedent intimately, testified:
Q. Did Mr. Stark discuss with you at any time during 1923 the condition of his health?
A. Why, of course, during Mr. Stark’s illness I always inquired about his health, but at any time he never gave me the idea that he considered himself seriously ill and at various times talked about his returning to business.
*******

During the summer of 1923, decedent contemplated a trip to Europe and often talked about it. Less than two months before his death, he purchased a new Packard car. He bought an open car with special equipment in order that he might take a journey. He, himself, often drove this car. He drove it on the Thursday preceding his death. If we are to adopt respondent’s theory of this case, which is that decedent knew that he was constantly in danger not only of imminent but even of sudden death, then his activities were those of a demented person. However, no one testifies that decedent did not, at this time, possess the same strong, vigorous mind which made his company a success. From the evidence before us, we reach the conclusion that petitioner has fully rebutted the presumption relative to transfers made within two years prior to death.

But not only must decedent have lived in fear that death was near at hand, but such fear must have been the direct and moving cause of the gifts. While we have not decided whether the gifts of stock made in 1913 and other years were completed gifts, we have found as a fact that decedent did deliver the certificates to his wife with words of gift. This action showed that long prior to his illness, decedent had resolved to give these stocks to his wife. Why the stocks were not transferred on the books of the corporation we do not know, but it clearly appears that fear of impending death was not the animating, much less the sole cause of the transfers. This same purpose runs through all his gifts, the earlier as well as the later ones.

Looking at all the facts, as found in the testimony, and judging this man’s intention by his words and deeds, and giving full credence to the testimony of his wife, we are of the opinion that respondent erred in including these transfers in the gross estate of decedent.

The only remaining question is what was the value as of decedent’s death, of certain real estate then owned by him. We have found that the value of decedent’s property at the date of his death, in the 'Township of Sheffield, County of Lorain, State of Ohio, consisting of the lake front property having a frontage of 960 feet, and the Lane property which contained 2.85 acres, was $80,450. This is the value fixed upon this property by three experienced real estate dealers who testified in behalf of the petitioner. Respondent introduced no testimony whatever on the value of these properties.

The only other piece of property relative to the value of which testimony lias been adduced is No. 232 East Avenue, Elyria, Ohio. This was the residence of decedent in his lifetime. After the marriage of decedent’s widow to Lavelle, they purchased a home in Cleveland, and therefore desired to sell the Elyria residence. The only witness introduced relative to the value of this residence was Lavelle. He does not attempt to testify as to the value of this property as of the date of decedent’s death or at any other time. He testified merely that certain offers were made to him for the property, which he refused, and that he offered to sell at a higher price which he could not obtain. He does not state when these offers were made. They may have been made long after the death of decedent when property values may have changed. We have no competent testimony from which to determine, and therefore, we do not determine the value as of the date of decedent’s death of the residence in Elyria.

Judgment will be entered upon %0 days’ notice, wider Rule 50.

Considered by MaRQtjette, Phillips, and Van Fossaht.


author: Trammell :

text:
    Lena G. Hill, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5800.
    Promulgated October 31, 1927.
    1. Action of respondent in disallowing for 1921 and 1923 deductions taken for interest paid, bis action in increasing petitioner’s distributive share of partnership profits for 1921 and in reducing the amount of depreciation taken in 1921 and 1923 approved because of insufficient evidence.
    2. Action of respondent in determining that the petitioner made a profit in 1923 on the sale of a one-half interest in the furniture, fixtures and equipment of a hotel approved for lack of sufficient evidence.
    3. Petitioner in a prior year paid a contractor the amount due for materials furnished in making improvements and additions to a building. In the taxable year she was required to pay liens of material men for the same materials. Held, not allowable as deductions as loss because of lack of evidence of uncollectibility of the amounts from contractor.
    4. Expenditures in payment of material men’s liens filed against property for material used in making the improvements thereon held not to be a net loss within the provisions of section 204 of the Revenue Act of 1921, for lack of evidence.
    5. Attorney’s fees paid in 1921 for defending foreclosure suits brought by lienors to obtain payment for material used in improving petitioner’s property held to be deductible as ordinary and necessary expenses.

      G. W. /Stubbs, Esq., for the petitioner.

      John D. Foley, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income tax of $420.83, $752.64, and $1,031.91 for 1920, 1921, and 1923, respectively, and a delinquency penalty of $188.16 for 1921. At the hearing the petitioner stated that the tax for 1920 was not contested.
    The deficiency for 1921 results from the respondent (1) having disallowed as deductions $1,284 representing interest paid, $1,000 for attorney’s fees, and $1,500 for depreciation, and (2) having increased petitioner’s distributive interest in the profits of a partnership of which she was a member by $2,504.
    The deficiency for 1923 results (1) from the respondent’s refusal to allow as deductions depreciation amounting to $1,500, interest paid of $8,575, and a loss of $25,080.90 brought forward from 1922, and (2) from increasing petitioner’s income by $6,600, representing the profit from the sale of her one-half interest in the furniture, fixtures, and equipment of a hotel.

      BINDINGS OP PACT.
    The petitioner is a resident of Kansas City, Mo.
    In the summer of 1912 the petitioner made a contract with George Huggins, a building contractor, by which he was to remodel and construct an addition to her hotel property known as the Royal Hotel, located at Excelsior Springs, Mo. The consideration to be paid by petitioner under the contract was $57,500 plus certain other amounts to be determined. During the course of the construction it developed that the amount of work required to complete the undertaking would greatly exceed that contemplated by Huggins. About January 15, 1913, the petitioner paid Huggins $14,000, which represented the amount of his unpaid bills for material at that time and other estimated expenses then owing by him, on condition that he would complete the work called for by the contract. Huggins kept the money and on the following day abandoned the work undertaken by him. The petitioner completed the work in July or August, 1913. Thereafter about 24 material men’s liens, totaling $17,000 were filed against the property by those who had sold Huggins material which he had used in the building, but for which he had not paid. The lienors filed foreclosure suits which were contested by the petitioner. The petitioner lost the suits and in 1922 was required to pay the liens, which with costs amounted to over $25,080.90. In 1921 the petitioner paid to the attorney who had represented her in the above mentioned litigation, which had extended from 1913, an amount of $1,000 for services in connection with this litigation. In 1923 the petitioner paid her attorney $500 which was for his services in connection with matters other than the litigation relating to the hotel property. The petitioner still owns the Royal Hotel.
    In the fall of 1916 the petitioner took a 15-year lease on the Frederick Hotel at Kansas City, Mo., and furnished it throughout at a cost of more than $17,000. A few months later she gave a one-half interest in the furniture, fixtures, and equipment which she had placed in the hotel to her son, who had previously been assisting her in the operation of another hotel and who thereafter operated the Frederick Hotel. In 1923 the petitioner sold to her son her remaining one-half interest in the furniture, fixtures, and equipment in the hotel for $10,000 and took his note for that amount. No payments, either as principal or interest, have been made on the note which the petitioner has provided in her will shall be canceled at her death. The petitioner had never charged off any depreciation in her personal return on her one-half interest in the furniture, fixtures, and equipment which she sold to her son. However, the correct amount of depreciation on this property was charged off in returns filed by the Frederick Hotel partnership, of which she was a member. At no time has the petitioner transferred to her son an interest in the lease which she acquired in 1916 and which she still holds.
   OPINION.

Trammell :

Inasmuch as the petitioner stated at the hearing that the deficiency for 1920 was not being contested and as no evidence was submitted in regard thereto, the deficiency of $420.83 as determined by the respondent for that year is approved.

With respect to the deficiency for 1921, the petitioner contends that the respondent erred (1) in disallowing deductions claimed by the petitioner in her return of $1,284 representing interest paid on indebtedness and $1,000 for attorney’s fees in connection with litigation • concerning the liens filed against the Royal Hotel property, (2) in reducing by $1,500 the amount of $5,900 taken as a deduction for depreciation on the Royal Hotel property, and (3) by increasing the amount of the petitioner’s distributive income from the Frederick Hotel partnership by $2,504. In regard to the deficiency for 1923, the petitioner contends that the action of the respondent was erroneous (1) in disallowing a deduction taken of $8,575 representing interest paid on indebtedness, (2) in reducing by $1,500 the amount of $5,900 taken as a deduction for depreciation on the Royal Hotel property, (3) in determining that the petitioner made a profit of $6,600 from the sale of her one-half interest in the furniture, fixtures, and equipment in the Frederick Hotel, and (4) in disallowing a loss of $25,080.90 carried forward from the year 1922, and resulting from the payment by the petitioner of liens filed against the Royal Hotel property together with court costs and interest.

The respondent denies that any error was made in taking the action complained of by the petitioner.

The petitioner did not submit any evidence in support of her contention that the amounts of $1,284 and $8,575 should be allowed as deductions for interest paid on indebtedness for the years 1921 and 1923, respectively, or any evidence to show that the respondent erred in increasing her share of income from the Frederick Hotel partnership by $2,504, for the year 1921. The respondent’s action with respect to these items must therefore be approved.

With respect to the amount of depreciation claimed on the Royal Hotel for 1921, no evidence was submitted as to the value on March 1, 1913, of the building on which the improvements were made, the kind of material of which the building was constructed and its probable useful life on that date, or any other evidence which would enable us to determine whether the action of the respondent was erroneous.

In the absence of such evidence, we have no basis for revising or modifying the action of the respondent in regard to this item. His action, therefore, is accordingly approved.

In the fall of 1916 the petitioner took a lease on the Frederick Hotel and furnished it throughout at a cost of more than $11,000. A few months later she gave her son a one-half interest in the furniture, fixtures, and equipment that she had placed in the hotel. In 1923 she sold to him the other one-half interest in this property for $10,000, taking in payment therefor his note for the same amount, on which nothing has ever been paid, either as principal or interest, and which she has provided in her will shall be canceled at her death. The evidence does not show whether the note was a time note or a demand note, or whether demand has ever been made for payment. The evidence does not disclose whether the maker was solvent and able to pay the note when given or when due, nor does it show that the note was worth or had a market value less than its face value. The evidence is insufficient to warrant any change in the determination made by the respondent, and the contention of the petitioner in regard to this item must therefore be disapproved.

The remaining two contentions of the petitioner, one relative to the disallowance for 1921 of attorney’s fees amounting to $1,000 paid in that year and the other relating to the disallowance for the year 1923 of a loss of $25,080.90 carried forward from the year 1922, result from the payment of material men’s liens for material furnished the contractor in connection with remodeling and construction of an addition to the Royal Hotel building during the years 1912 and 1913, and the subsequent litigation relative thereto.

The petitioner does not deny that the remodeling of the Royal Hotel constituted an improvement or betterment or that the addition comes within the class of new buildings, but contends that by having to make payment of the liens with costs and interest she was paying the debts of Huggins, the contractor, and thereby sustained a loss which was properly deducted in her income-tax returns for 1922 and 1923. The evidence shows, and it is not otherwise contended, that the payments made by the petitioner were to satisfy liens for material furnished to Huggins and used in making the addition and improvements to the Royal Hotel which the petitioner then owned and has since continued to own. The petitioner, however, had already paid to the contractor all amounts due for this material. While she was liable to the material men to the extent that they retained a lien on her property for the amounts, the contractor was primarily responsible and liable. The debts, when the petitioner paid them, were his liabilities. No part of any of the payments made by the petitioner was in fact a part of the cost of the building. In Appeal of Leichner & Jordan Co., 4 B. T. A. 133, we had substantially the same state of facts before us. There we said:

Tlie Commissioner has disallowed the deduction upon the ground that the amount paid to subcontractors was a part of the cost of the building. . We are of the opinion, however, that in no proper sense was this so. The taxpayer had neglected to take a proper business precaution and had paid the general contractor without receiving a release from persons who had furnished material and performed labor upon the building. By reason thereof it was compelled to pay a sum of money in settlement of liens filed and judgments obtained by subcontractors and material men. The general contractor was insolvent and the taxpayer had no way of recovering its loss. The loss sustained was deductible from gross income.

In that case we held that the amounts were deductible as it was shown that the contractor, to whom the amounts for material and for subcontractors’ labor were paid, was insolvent and that the taxpayer had no way of recovering its loss. In this case we agree with the petitioner that the amounts were not capital expenditures. The amounts for the material had already been paid and the amounts paid to satisfy the liens were the obligations of the contractor and added nothing to the cost or the value of property. In order, however, for the amounts to be deductible, it must be shown by evidence that the petitioner could not collect from the contractor. The contractor became liable to the petitioner for the amounts. There was no evidence introduced as to the financial ability of the contractor to reimburse the petitioner. The petitioner was not entitled to a deduction on this account until or unless it is shown that the amount was uncollectible from the contractor. In view of our holding, there is no “ net loss ” sustained in 1922 to be deducted from the 1923 net income.

The attorney’s fee of $1,000 was paid, not in connection with the defending, protecting or establishing of the petitioner’s title or right to the possession of the property, but in connection with the litigation to establish the petitioner’s legal liability to pay the debts for material incurred by the contractor. We think that this amount, as well as the $500 attorney’s fee paid in 1923 in connection with other matters, constitutes ordinary and necessary business expense.

Judgment will be entered on 15 days' notice, under Rule 50.

Considered by Moehis, Mtjkdock, and Siefkin.


author: Love:

text:
    Maro Brownfield, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10995.
    Promulgated November 3, 1927.
    Where petitioner, on the cash receipts and disbursements basis, In December, 1922, assigned an interest in an oil and gas lease, receiving therefor $7,500, the purchaser to pay an additional $7,500 upon the happening of specified contingencies, and the additional amount was paid in January, 1923, held, that petitioner should return for 1922 the amount of $7,500 as the sale price of his interest in the lease.

      Louis B. Montfort, Esq., and Spaulding F. Glass, G. P. A., for the petitioner.

      W. F. Wattles, Esq., for the respondent.
    This proceeding is for the redetermination of deficiencies in income tax for the calendar years 1921 and 1922 in the amounts of $41.20 and $688.80, respectively. Only the deficiency for the year 1922 is in dispute as the petitioner did not challenge the Commissioner’s determination for 1921. The sole question presented with respect to the year 1922 relates to the amount received by the petitioner from the sale of an interest in an oil and gas lease.
    FINDINGS OF FACT.
    The petitioner is an individual who is, and was during the year 1922, a resident of lola, Kans.
    About May, 1922, with Messrs. Davis, Sleeper, and Leavell, as coowners, the petitioner acquired an undivided one-fourth interest in a certain oil and gas lease. In July of the same year, the petitioner and the other owners assigned an undivided one-half of their individual interests to the Syndicate Oil Co. in consideration for the drilling of a well on the property, equipment for which was furnished by petitioner and coowners. The cost of petitioner’s share in the lease and of the agreed development expenses was $1,825.66.
    On December 23,1922, petitioner executed and delivered an assignment of his remaining interest in the lease, at that time an undivided one-eighth, to one Bowlus and received therefor $7,500. It was understood and agreed between the petitioner and Bowlus that the petitioner would be paid an additional sum of $7,500 provided three conditions were complied with, to wit, that the lease should continue to be satisfactory to the purchaser; that the petitioner should show a clear title; that the lease be free and clear from all incumbrances. The petitioner did not receive any evidence of indebtedness for the additional $7,500 and there was no time specified in which payment was to be made, if at all.
    On January 5, 1928, the additional $7,500 was paid to the petitioner, who kept his books on a cash receipts and disbursements basis, and who in his return for 1922 reported as income, with certain adjustments thereto, the amount of $7,500.
    Upon audit of the return, the Commissioner determined that the transaction in question was completed in 1922 and that the amount of $15,000 should have been returned as the sale price of the lease and profit computed thereon.
   OPINION.

Love:

The petitioner1 takes the position that, being on the cash receipts and disbursements basis, and the payment of the additional $7,500 being contingent upon the happening of further events, he is required to report only the amount actually received in 1922.

The respondent, on the other hand, contends that the transaction in question was completed in 1922, and that the purchase price was $15,000, which should be reported in that year.

We think that the conditions attached to the payment of the additional $7,500, by agreement of the parties, are such as to preclude us from holding that the petitioner should return in 1922 the amount of $15,000. The conditions agreed upon by the parties were such that payment of the additional amount might never have been made, and, if the parties to the transaction wish to annex such conditions thereto, it seems that it is within their province to do so. In any event petitioner received nothing in the year 1922 in excess of $7,500 which could be treated as income on the cash basis under the statute.

We conclude, therefore, that the Commissioner erred in determining that the $7,500 of the amount of $15,000 received in 1923 should be returned in 1922 as a part of the sale price of the petitioner’s interest in the lease in question. A copy of the notice of deficiency with the Commissioner’s computations is not before us, and consequently we are unable to compute the deficiency, if any, as to the year 1922.

For the year 1921 there is a deficiency of $lf,130. For the year 1922 judgment roill he entered on 15 days' notice, wider Bule 50.

Considered by Smith, Trtjssell, and Littleton.


author: Smith:

text:
    George E. Graft, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 24631.
    Promulgated November 3, 1927.
    A notice of deficiency in tax was sent to a person other than the taxpayer and without street address. This was returned to the Commissioner and remailed to the correct address after the statute of limitations had tolled. Held, that the collection of the deficiency is barred by the statute of limitations.

      Frederick R. Gibbs, Fsq., for the petitioner.

      James A. O'1 Callaghan, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for the year 1921 in the amount of $1,550.32. The petitioner moves for an order of no deficiency, alleging that the respondent has failed to assess the tax within the time required by the statute and has failed to send notice of the deficiency in accordance with section 274(a) of the Revenue Act of 1926.
    FINDINGS OF FACT.
    The petitioner resides at San Jose, Calif. He filed his income-tax return for the year 1921 on or about March 15, 1922, showing his address thereon as 34 E. San Antonio Street, San Jose, Calif. On December 14, 1925, he executed a waiver extending the time within which the Commissioner might make assessment of additional tax for the year 1921 to December 31, 1926.
    On December 29, 1926, the Commissioner sent by registered mail a letter addressed to “George E. Craft, San Jose, California,” proposing an assessment of additional tax for the year 1921 in the amount of $1,550.32. This letter was returned undelivered to the office of the Commissioner of Internal Revenue at Washington, D. C., on or about January 28, 1927. On January 28, 1927, the letter of December 29, 1926, was remailed by registered mail to “ George E. Craft, 34 E. San Antonio Street, San Jose, California.” The letter was delivered to petitioner at the above address in due course of mail and the petitioner made his appeal to the Board within the prescribed 60-day period. The street address given on the letter at the second mailing was the one appearing upon the original return filed by the petitioner.
   OPINION.

Smith:

Upon the facts above stated, which are admitted in the pleadings, the petitioner moves for a judgment of no deficiency in tax for the year 1921. Paragraph four of the petition alleges errors on the part of the Commissioner as follows:

(a) Failure to assess the taxes involved in this appeal within four years after the return is filed as prescribed by Section 277(a) (2) of the Eevenue Act of 1926, or before December 31, 1926, the date of the expiration of the waiver heretofore filed by petitioner.
(b) Failure to mail to petitioner a 60 day letter in accordance with Section 274(a) of the Eevenue Act of 1926, prior to December 31, 1926, the date of the expiration of the waiver filed by petitioner with the Bureau.

Paragraph four of respondent’s answer reads as follows:

It is denied that the notice mailed the petitioner on December 29, 1926, by registered mail, has not been received by him, and it is denied that said notice was not mailed within the time an assessment of deficiency in tax proposed could be made.

The answer neither admits nor denies specifically that the taxes were not assessed within the four-year period following the filing of the return or prior to the date of the expiration of the waiver filed by the petitioner. Paragraph nine of the answer makes the customary general and specific denial of each and every allegation of the petition not theretofore admitted, qualified or denied.

We are of the opinion that the mailing of the letter on December 29, 1926, was not a compliance with the provisions of section 274(a) of the Revenue Act of 1926. The section in question reads as follows:

If in the case of any taxpayer, the Oommissioner determines that there is a deficiency in respect of the tax imposed by this title, the Oommissioner is authorized to send notice of such deficiency to the taxpayer by registered mail. Within 60 days after such notice is mailed (not counting Sunday as the sixtieth day), the taxpayer may file a petition with the Board of Tax Appeals for a redetermination of the deficiency. Except as otherwise provided in subdivision (d) or (f) of this section or in section 279, 282, or 1001, no assessment of a deficiency in respect of the tax imposed by this title and no distraint or proceeding in court for its collection shall be made, begun, or prosecuted until such notice has been mailed to the taxpayer, nor until the expiration of such 60-day period, nor, if a petition has been filed with the Board, until the decision of the Board has become final. Notwithstanding the provisions of section 3224 of the Eevised Statutes the making of such assessment or the beginning of such proceeding or distraint during the time such prohibition is in force may be enjoined by a proceeding in the proper court.

The letter that was forwarded from the Commissioner’s office on December 29, 1926, was not directed to the petitioner but to “ George E. Craft,” and bore no street address whatever. This letter did not notify the petitioner of any deficiency in tax but was in fact returned undelivered to the office of the Commissioner of Internal Revenue at Washington, D. C. On January 28, 1927, the letter was remailed, this time with the correct street address and was in due course delivered to the petitioner, notwithstanding that the addressee’s name was misspelled. The petitioner’s correct street address appeared at all times upon his return for the year 1921 and presumably was omitted from the address on the letter of December 29,1926, through an inadvertence.

The situation here is similar to that in Utah Orpheum Co. v. Commissioner, 6 B. T. A. 343, where notice of a deficiency was forwarded to an incorrect address and on being returned undelivered was mailed to the taxpayer at the correct address. We held that the latter mailing was the one required by the statute, section 274 (a) of the Revenue Act of 1926, and was the one from which lay an appeal to the Board.

It does not follow, however, that the failure of the Commissioner to send notice of the deficiency by registered mail within the statutory four-year period or before the date of expiration of the waiver filed by the petitioner invokes the statute of limitations as a bar to the assessment and collection of the tax. Section 277 (a) (2) of the act provides that:

The amount of income, excess-profits, and war-profits taxes imposed by the Revenue Act of 1921, and by such act as amended, for the taxable year 1921 and succeeding taxable years, and the amount of income taxes imposed by the Revenue Act of 1924, shall be assessed within four years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period.

The statute of limitations runs not against the sending of the deficiency notice but against the assessment and collection of the tax. Section 274 (a), while prohibiting generally the assessment and collection of the tax until such deficiency notice has been sent to the taxpayer, specifically provides by reference to section 279 of the act that in certain cases the assessment may be made without notice of the deficiency having been sent. The petitioner alleges that no assessment was made within the statutory period and the respondent has categorically denied the allegation. Neither party has adduced any direct evidence upon the point. We believe, however, that the facts before us clearly show that no assessment of the tax here involved was made prior to the mailing of the deficiency letter on January 28, 1927. The deficiency letter dated December 29, 1926, which was mailed to the petitioner on January 28, 1927, refers to an “ attached statement ” showing the adjustment of the petitioner’s tax liability. This statement reads as follows:

IT: PA: PYA: 60D
December 29, 1928.
In re: Mr. George E. Craft,
San Jose, California.
Year Deficiency in Tax
1921 $1,550.32
The report of the Supervising Internal Revenue Agent at San Francisco, California, a copy of which was furnished you has been reviewed and approved by this office.
Payment of the tax should not be made until a bill is received from the Collector of Internal Revenue for your district and remittance should then be made to him.
In the event that you forward to this office a protest against the adjustment set forth in this communication, the statement of fact upon which you base your protest must be signed and sworn to by you.
This letter is being written in order to protect the Governments interests inasmuch as the statute of limitations will operate on December 81, 1926, to bar the assessment of any deficiency for the year 1920.

The statement, although dated December 29, 1926, was not mailed to the petitioner until January 28,1927. The tax in question not having been collected at that time, and the statutory period oí four years, which was extended by waiver to December 31, 1926, having expired, the collection thereafter of any additional tax for the year 1921 is barred by the statute. See Bowers v. New York & Albany Lighterage Co., 273 U. S. 346, and Appeal of Ocean Accident & Guarantee Corporation, Ltd., 6 B. T. A. 1045.

Judgment of no deficiency will be entered.

Considered by Littleton, TRIjssell, and Love.


author: Smith :

text:
    Eastern Shoe Manufacturing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 12163.
    Promulgated November 3, 1927.
    The cost of moving and resetting machinery in a new location helé to be an ordinary and necessary business expense and deductible from gross income.

      Samuel J. Stone, Esq., for the petitioner.

      L. C. Mitchell, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for the year 1921 in the amount of $258.86.
    FINDINGS OF FACT.
    Prior to 1921 the petitioner, a Massachusetts corporation, had its plant in rented quarters on Washington Street, in the city of Lynn, Mass. In 1921 it moved to new quarters on Broad Street in the same city, where it had obtained a lease for a period of 3 years and 3 months. The cost of moving its machinery and benches from the old location and of setting them up in the new location amounted to $2,589.63, which it deducted from gross income in its income-tax return for 1921, as an ordinary and necessary expense, explaining that it represented the cost of rearrangements and replacements. There were, however, no replacements of the machinery and no replacements of moment of lumber, etc. The Commissioner disallowed the deduction from gross income of $2,589.68, representing the cost of moving and resetting machinery.
   OPINION.

Smith :

The taxing act permits a corporate taxpayer to deduct from gross income in its income-tax returns ordinary and necessary expenses. Section 234(a)(1), Revenue Act of 1921. The respondent disallowed the deduction of the cost of moving and resetting machines upon the supposition that it represented the cost of improvements and betterments. The evidence clearly shows, however, that such was not the case. The amount was a legal deduction from gross income.

Judgment will be entered on 16 days’ notice, under Rule 60.

Considered by Littleton, Trussell, and Love.