author: Matthews:

text:
    James Kay, Petitioner, v. Commissioner of Internal Revenue, Respondent. James Kay, G. E. Thomas, and J. F. Kay, Trustees, James Kay Trust, Petitioners, v. Commissioner of Internal Revenue, Respondent. William A. Ohley, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 53450, 53451, 54467.
    Promulgated June 8, 1933.

      Theodore B. Benson, Esq., for the petitioners.

      T. M. Mather, Esq., for the respondent.
   OPINION.

Matthews:

It is the position of the respondent that the 1,762 shares of stock which were purchased from M. T. Davis and his associates under the circumstances set out in our findings were distributed by the Cabin Creek Consolidated Coal Co. as a stock dividend, and that the shares received by the petitioners James Kay and William A. Ohley as a result of this distribution were acquired at no cost to them. The shares of stock held by the James Kay Trust were valued upon the same basis as they would have been if they had remained in the hands of the grantor, James Kay.

It is earnestly contended by the petitioners that in determining the taxable gain from the sale in 1928 of the stock owned by the petitioners the 344 shares distributed to James Kay and the 92 shares distributed to William A. Ohley should be valued upon the basis that they purchased the stock at a cost of $85 per share, which is the purchase price paid for the stock by the corporation. The petitioners urge that the 1,762 shares of stock were purchased by Ford, Kay and Puckett on behalf of the majority stockholders, that the corporation paid for this stock out of earnings or surplus, and that the payments made by the corporation were made on behalf of the stockholders and were the equivalent of cash dividends.

We have found that Ford, Kay and Puckett agreed to buy from the minority stockholders 1,762 shares of the stock of the Cabin Creek Consolidated Coal Co. at $85 per share, that the corporation took over the purchase and assumed the payment of the notes given to secure the purchase money and that the corporation did actually pay the entire amount of the purchase price. We can not agree with the petitioners’ claim that this stock did not become the property of the corporation. It is admitted that the 1,762 shares were never transferred to the name of the corporation, but this is not conclusive that the corporation did not own the stock. The directors’ resolution dated April 21, 1917, refers to “the 1,762 shares of stock held), by the company in the name of Azel Ford, James Kay and W. M. Puckett, Trustees.” No dividends were paid on these 1,762 shares in 1915 and 1916, during which years the corporation was making payments on the purchase price thereof. These payments were charged to “ Stock Purchase Account ” and the stock purchase account was closed to surplus under date of June 30, 1917, in the sum of .$149,770, the full amount of the purchase price of the stock. There is nothing in the record to indicate that either the corporation or the stockholders treated these payments as cash dividends.

We hold that the 1,762 shares of stock were purchased by the corporation in 1914 for its own account and were distributed as a stock dividend in 1917 among the remaining shareholders in proportion to their holdings. A corporation which has acquired its own stock may cancel the same, or hold it as treasury stock, or distribute it among the shareholders, without changing its financial situation. During the period the corporation owned the 1,762 shares and after their distribution to the shareholders each shareholder’s proportionate in terest in the total outstanding shares was exactly the same. Th distribution added nothing to the interests of these shareholders, the additional shares so received were acquired by them without cost.

After a careful consideration of all the evidence adduced by the petitioners we have reached the conclusion that the petitioners have shown no greater basis for determining gain than was used by the respondent in asserting the deficiencies.

Judgment will be entered for the respondent.


source: Caselaw Access Project

author: Black:

license: Public Domain

text:
    Monrovia Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 37912, 45200.
    Promulgated June 9, 1933.

      Thomas R. Dempsey, Esq., A. Calder Mackay, Esq., and Arthur McGregor, Esq., for the petitioner.

      J. M. Leinenkugel, Esq., and D. H. Flagg, Esq., for the respondent.
   OPINION.

Black:

The issues raised by petitioner may be summarized as follows:

1. Is the Monrovia Oil Co. taxable as a trust or as a corporation ?

2. Do the amounts which were required, under the participating oil agreements, to be distributed to the agreement holders constitute taxable income to petitioner, or deductions in the determination of its net taxable income?

3. What was the value, for depletion purposes, of the sublease at the time acquired by petitioner ?

4. Do drilling costs of an oil well paid under a turnkey drilling contract constitute a capital item to be added to the depreciable base returnable as depreciation, or should a portion thereof be allocated to the capital sum returnable through depletion ?

5. Is the cost of deepening petitioner’s well under a contract a capital item, or does it constitute an operating expense during the year expended ?

6. If the deepening costs are proper deductions, then in that event a loss will be shown for the year 1923 for the Monrovia Oil Co. Is such a loss a proper one to be carried forward as a deduction in determining the 1924 income ?

We will discuss these issues in their order.

1.

One of the years involved in this proceeding is 1923, and section 704 of the Revenue Act of 1928 would be applicable if the facts were such as to bring petitioner within the terms of it, but they are not. Petitioner did not file a return as a trust, but for the year 1923 first filed a return as an individual on Form 1040 and later filed as an amended return an ordinary corporation income tax return on Form 1120. This makes section 704, Revenue Act of 1928, inapplicable. Jaokson-Wermich Trust, 24 B.T.A. 150; Russell Tyson et al., Trustees, 20 B.T.A. 597. So, for both the years 1923 and 1924 we have before us for decision the question whether petitioner should be adjudged an association, taxable as a corporation, or should be taxed as a trust.

This Board and the courts have held in a number of cases that if the purpose of the trust is to carry on a continuing business operation for profit, under quasi-corporate form, that it is an association taxable as a corporation. Hecht v. Malley, 265 U.S. 144; Little Four Oil & Gas Co. v. Lewellyn, 35 Fed. (2d) 149; certiorari denied, 280 U.S. 613; White v. Hornblower, 27 Fed. (2d) 777; E. A. Landreth Co., 11 B.T.A. 1; Alexander Trust Property, 12 B.T.A. 1226; Durfee Mineral Co., 7 B.T.A. 231; J. W. Pritchett et al., Trustees, 17 B.T.A. 1064; Rochester Theater Trust Estate, 16 B.T.A. 1275; G. F. Sloan,, 24 B.T.A. 61; affd., 63 Fed. (2d) 666; Trust 5833, Security First National Bank v. Welch, 54 Fed. (2d) 323; cer-tiorari denied, 286 U.S. 544; Lloyd M. Willis et al., Trustees, 22 B.T.A. 564; affd., 58 Fed. (2d) 121. But, on the other hand, if the trust is formed merely for convenience for the purpose of preserving or distributing proj)erty among beneficiaries or to liquidate and wind up a business and not for the purpose of engaging in business for a profit, it is not an association taxable as a corporation. Blair v. Wilson Syndicate Trust, 39 Fed. (2d) 43; Wilson Trust, 20 B.T.A. 549; Gonzolus Creek Oil Co., 12 B.T.A. 310; Termincd Properties Co., 19 B.T.A. 584; Dauphin Deposit Trust Co., Trustee, 21 B.T.A. 1214. The effect of the foregoing decisions is to draw substantially the same distinction as the Commissioner has drawn in his regulations. Eecently, these regulations were fully discussed and approved by the court in Trust No. 5833, Security First National Bank v. Welch, supra. The regulations applicable in that case were articles 1312 and 1314 of Eegulations 74 (Eevenue Act of 1928), but the court in discussing these articles mentioned the fact that they were substantially the same as articles 1502 and 1504 of Eegulations 65 (Eevenue Act of 1924) and corresponding articles of Eegulations 69 (Eevenue Act of 1926). Articles 1502 and 1504 of Eegulations 65 (Eevenue Act of 1924), read as follows:

ART. 1502. Association. — Associations and joint-stock companies include associations, common law trusts, and organizations by whatever name known, which act or do business in an organized capacity, whether created under and pursuant to State laws, agreements, declarations of trust, or otherwise, the net income of which, if any, is distributed or distributable among the shareholders on the basis of the capital stock which each holds, or, where there is no capital stock, on the basis of the proportionate share or capital which each has or has invested in the business or property of the organization. A corporation which has ceased to exist in contemplation of law but continues its business in corporate form is an association or corporation within the meaning of section 2, but if it continues its business in the form of a trust, it becomes subject to the provisions of section 219.
Art. 1504. Association distinguished from trust. — Holding trusts, in which the trustees are merely holding property for the collection of the income and its distribution among the beneficiaries, and are not engaged, either by themselves or in connection with the beneficiaries, in the carrying on of any business, are not associations within the meaning of the law. The trust and the beneficiaries thereof will be subject to tax as provided in articles 341-347. Operating trusts, whether or not of the Massachusetts type, in which the trustees are not restricted to the mere collection of funds and their payments to the beneficiaries, but are associated together in much the same manner as directors in a corporation for the purpose of carrying on some business enterprise, are to be deemed associations within the meaning of the Act, regardless of the control exercised by the beneficiaries.

In construing these regulations the court, in Trust No. 5833, Security First National Bank v. Welch, supra, said:

If we accept, as we think we should, the interpretation placed upon the word “ association ” by the Commissioner of Internal Revenue, inferentially approved and adopted by Congress in subsequent legislation, based upon the decision of the Supreme Court in Secht v. Malley, supra * * *.

Then the court went on to hold that, measured by these regulations, Trust No. 5833, Security First National Bank, was an association taxable as a corporation. The trust involved in that case was organized to subdivide and put on the market and sell for profit a tract of land located in the city of Los Angeles, California. In the instant case the trust was organized to develop an oil well in Signal Hill Oil Field, one of the largest oil fields in the world, near the city of Los Angeles, California, and to operate the oil well after it should be brought into production and to market the oil and gas obtained therefrom at a profit and distribute the profits to the holders of participating oil agreements. The form of organization was very similar to that involved in Trust No. 5833, Security First National Bank v. Welch, supra, and while in the one case the trust dealt in oil and gas and in the other the trust dealt in real estate, we do not think that fact furnishes any basis for a distinction. If the court was right, as we think it was, in holding Trust No. 5838, Security First National Bank, an association taxable as a corporation, then we must hold petitioner in the instant case an association taxable as a corporation.

In Little Four Oil & Gas Co. v. Lewellyn, 35 Fed. (2d) 149; certiorari denied, 280 U.S. 613, the Court drew substantially the same distinction between a trust and an association as is drawn by the Commissioner’s regulations, quoted above, and discussed in Trust No. 5833, etc. v. Welch, supra, except the court said that the theory that the distinction between trusts of the Massachusetts type, and their consequent liability for taxes, is based on the powers exercised by the shareholders, great or little, is no longer seriously regarded. Said the court in discussing that point:

The real test is whether the shareholders or trustees, or both combined, carry on business for profit, and if they do, they constitute a business trust, in legal effect an association or a joint stock company, with liability for taxes * * *. We hold on these facts that the collectors were right in regarding this organization, however named, as an unincorporated association conducting a business for profit in quasi corporate form, liable for taxes at the corporation rate by force of the provisions of the applicable Revenue Act.

So, without taking time to review the many decisions of the Board and the courts which deal with the issue here involved, we think it is safe to say that the weight of authority is to the effect that, where the trust organization is carrying on a business for profit under quasi-corporate form, it is taxable at corporation rates. Petitioner urges, as its principal authorities in support of its contention that we should hold it taxable as a fiduciary under section 219 of the applicable revenue acts instead of taxable as a corporation, Julius Blum, Trustee, 25 B.T.A. 119, and Lucas v. Extension Oil Co., 47 Fed. (2d) 65; affirming 16 B.T.A. 1028. We do not consider that the views expressed in either of these cases are in conflict with the views expressed herein.

In the Blum case ten persons purchased an oil lease and for convenience executed only a limited deed of trust to Blum, who had authority merely to collect the rent from the lease and after payment of expenses distribute the proceeds among the ten beneficiaries. There was no authority to engage in business, own or dispose of property, and no stock or sale of beneficial interests provided for. In the Extension Oil Co. case, the trust was created to sell the oil well, which was done in a few months’ time. The money raised by the medium of the trust was merely for exploration purposes.

In Twin Bell Oil Syndicate, 26 B.T.A. 112, we pointed out the distinction in the situation which existed in the Extension Oil Oo. ease from tbe situation which exists in a case such as we are now discussing, in the following language:

Petitioner relies strongly upon Extension Oil Co., 16 B.T.A. 1028, (aftcl., C.O.A., 5tli Cir., 47 Fed. (2d) 65), in which under facts somewhat similar to those of the instant case we held a body to be a trust and not an association. But that case can be easily distinguished. There, the organizers combined for the sole and restricted purpose of drilling a single oil well for test purposes, and as soon as the value of the leased land was thus learned, of selling the lease. This purpose was promptly carried through in eleven months time. Here, the original trust agreement ran for twenty years and as amended for fifty, and the trustees were given full powers to develop the lease as they saw fit. They did, it is true, distribute the profits when made, but this fact of distribution does not, in our opinion, negative the petitioner’s obvious business purpose. * * *

On the strength of the authorities already cited, as applied to the facts stated in detail in our findings of fact, we hold that petitioner during both of the years involved in this proceeding was an association, taxable as a corporation.

2.

It is petitioner’s contention that the amounts which were required under the terms of the participating oil agreements to be distributed to the holders of said agreements constitute either deductions to petitioner or are nontaxable income to it. Petitioner contends that the amounts were deductible under section 219 (b) (2) of the applicable revenue acts, which reads as follows:

There shall be allowed as an additional deduction in computing net income of tbe estate or trust, tbe amount of the income of tbe estate or trust for its taxable year which is to be distributed currently by tbe fiduciary to the beneficiaries.

It is enough to say as to this particular phase of petitioner’s contention that since we have held petitioner taxable as an association and not as a fiduciary, the provisions of section 219 are not applicable.

Petitioner contends in the alternative that the amounts distributed to the holders of participating oil agreements were never the income of petitioner, but belonged to the distributees at all times. This contention must be denied. Petitioner was the owner of the oil lease and the oil well drilled thereon, and of the oil and gas produced and of the proceeds resulting from the sale thereof. Whatever profits resulted from the oil and gas production and sale were its profits and taxable to it, just the same as a corporation’s profits are taxable to the corporation. Even if the proof in the instant case showed that the purchasers of the oil and gas from petitioner did not pay the money direct to petitioner but on the contrary disbursed it direct to the holders of the oil participating agreements, that would make no difference. The profits, being those of petitioner, would be taxable to it, even although paid direct to the certificate holders. Cf. Gold & Stock Telegraph Co., 26 B.T.A. 914; Marquette Oil Distribution Co., 27 B.T.A. 960. However, the facts do not show that the proceeds from the sale of the oil and gas production were paid direct to the holders of the participating oil agreements. Petitioner kept books during the taxable years in question and presumably these books showed all receipts and disbursements, and we have nothing on which to base a conclusion that the distributions in question were not made by the petitioner itself. These distributions were comparable to the distribution by a corporation of dividends and certainly a corporation does not secure a deduction from income by reason of dividends paid to its stockholders. We hold against petitioner on this issue.

3.

Under assignment of error 3, petitioner contends that the value of the oil lease at the time assigned to petitioner in exchange for 800 common participating oil agreements was at least $80,000, which should be added to petitioner’s depletable base returnable through depletion as to both taxable years in question. Respondent contends that the basis for depletion is cost to the transferors, in this case not more than $15,100, by reason of section 204, subdivisions (a) (8) and (c), Revenue Act of 1924, and section 202 (c) (3), Revenue Act of 1921.

These sections provide in effect that when property is acquired in exchange for stock (without money or other property as consideration) from persons who immediately after the transfer are in control of the corporation, the basis for gain or loss is the cost to the predecessor. Section 204 (c), Revenue Act of 1924, provides that the basis for depletion and depreciation shall be the same as the basis for determining gain .or loss. The Revenue Act of 1921 contains no such provision. This fact was fully discussed in Fifth Street Building, 24 B.T.A. 876, in which the taxpayer was allowed exhaustion on its leasehold for the years which came under the 1921 Act, based on cost to the corporation which was $640,000, but for the year 1926 was allowed no exhaustion of the leasehold because the 1926 Act provides, as does the 1924 Act, that the basis for depletion, exhaustion and depreciation shall be the same basis as that for determining gain or loss, and in the Fifth Street Building, supra, the basis for gain or loss, by reason of sections 203 and 204 of the Revenue Act of 1926, was cost to the transferors (which in that particular case was nothing). Cf. Ben T. Wright, Inc., 12 B.T.A. 1149; Lúeas v. Daniel, 45 Fed. (2d) 58.

As has been detailed in our findings of fact, the cost to petitioner of the oil lease in question was 800 common oil participating agreements of a par value of $100 each ($80,000) and the fair market value of the lease at the time of transfer was $80,000. The cost to petitioner of the lease was therefore $80,000 and it is entitled to have that amount added to its depletable base, returnable through depletion, so far as the year 1923 is concerned. This right is not restricted by the provisions of section 202 (c) (3), Revenue Act of 1921, which has nothing to do with the determination of depletion and depreciation. The situation however as to the year 1924 is different. For that year the basis for depletion and depreciation is made the same as the basis for gain or loss and by reason of section 204 (a) (8) of such act the basis of gain or loss in such circumstances as we have in the instant case is cost to the transferors. It seems clear to us in the instant case that immediately after the transfer of the lease by Casner, acting for himself, His wife and Lawler, these parties were in control of the association, coming within the terms of section 203 (b) (4), Revenue Act of 1924. The cost to the transferors of the lease was $15,100, and this is the amount which should be added to the depletable base recoverable through depletion, so far as the year 1924 is concerned.

4.

The issue involved in assignment of error 4 was recently decided by the Supreme Court in United States v. Dakota Montana Oil Co., 288 U.S. 459; Petroleum, Exploration v. Burnet, 288 U.S. 467 and Burnet v. Jergins Trust, 288 U.S. 508. In all of these decisions the Supreme Court approved the Commissioners’ regulations, which in substance provide that such incidental expenses as are paid for wages, fuel, repairs, hauling, etc., in connection with the exploration of property, drilling of oil wells, building of pipe lines and development of the property may at the option of the taxpayer be deducted as a development expense or charged to the capital account returnable through depletion.

The Commissioner’s regulations contained in article 221, Regulations 65, and article 225. Regulations 69, further provide that “ Both owners and lessees operating oil and/or gas properties will, in addition to and apart from the deduction allowable for depletion as here-inbefore provided, be permitted to deduct a reasonable allowance for depreciation of physical property, such as machinery, tools, equipment, pipes, etc., so far as not in conflict with, the option exercised by the taxpayer under article 225 [article 223 in Regulations 69].” Cf. Graham-Loftus Oil Co., 27 B.T.A. 1301. In accordance with the Commissioner’s regulations approved in the above cases, and the stipulation herein filed, 50 percent of the $90,000 original cost of the well is allocated to petitioner’s depletabl'e base returnable through depletion and the balance thereof is allocated to tangibles, returnable through depreciation.

5.

With reference to this issue, the facts show that the well was first drilled to a depth of 3,900 feet, but it was unsatisfactory because of water. It was then deepened at an additional expense of $45,000, which petitioner claims as a deductible expense. This was disallowed by respondent. The deepening of the well was as much a part of the well as the upper 3,900 feet; it added to the value of the lease, and it logically follows that if one part of the well is capitalized, the other should be also. Sunburst Oil & Refining Co., 23 B.T.A. 829; Consolidated Mutual Oil Co., 2 B.T.A. 1067. The stipulation shows that petitioner capitalized the $90,000 representing the cost of drilling the well to 3,900 feet, as it had the right to do under article 223, Regulations 62 (Revenue Act of 1921). This same regulation provides that an election once made under the option which it provides will control the taxpayer’s returns for all subsequent years. Therefore the petitioner, having elected in 1922 to capitalize this $90,000 cost of drilling the well to a depth of 3,900 feet, cannot in 1923 abandon the election thus made and treat the $45,000 paid for deepening and completing the well in 1923 as a deductible expense. This $45,000 must be added to the clepletable base, recoverable by depletion as provided in the Commissioner’s regulations, approved in United States v. Dakota Montana Oil Co., supra.

6.

Issue six is stated by petitioner to depend upon whether or not the $45,000 paid for deepening the well is allowed as a deductible expense. If so, petitioner claims there is a net loss for 1923 which it is entitled to carry forward and use as a deduction in computing net income for 1924. We have held that the $45,000 in question under the circumstances of this case must be capitalized and added to the depletable base, returnable through depletion. Under these circumstances, there will be no net loss for 1923.

Decision will be entered under Rule 50.


author: McMahon:

text:
    Garland Coal & Mining Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 57534.
    Promulgated June 9, 1933.

      William R. Spofford, Esq., for the petitioner.

      William E. Davis, Esq., for the respondent.
   OPINION.

McMahon:

This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1928 in the amount of $9,234.96.

It is alleged that the respondent erred (1) in increasing petitioner’s net income by the amount of $52,960.20 representing the difference between the issuance price, $100,000, of certain of its own bonds, and $47,039.80, the amount paid by the petitioner in 1928 for the acquisition of such bonds; (2) in disallowing as a deduction the amount of $16,120.80 representing the amount of repairs accrued on petitioner’s stripping shovel in 1928; and (3) in failing to allow as a deduction a reasonable allowance for depreciation sustained on property used in petitioner’s business.

At the hearing petitioner abandoned the second assignment of error.

The parties entered into the following stipulation of facts:

1. The petitioner is a corporation organized under the laws of Delaware with its principal office at 135 Independence Square, Philadelphia, Pa.
2. On February 15, 1926 the petitioner executed and delivered a mortgage upon its properties located in the States of Arkansas and Oklahoma to the First National Bank of Muskogee, Oklahoma, as trustee, to secure an issue of Seven Per cent. Gold Bonds to the amount of $175,000. A copy of said mortgage, including description of the mortgaged premises, is attached hereto as Exhibit “A” and made part hereof.
3. The aggregate amount of bonds secured by said mortgage, to wit, $175,000, were issued in 1926 at par.
4. On January 1, 1928 petitioner had outstanding A Bonds in the principal amount of $60,000 and B Bonds in the principal amount of $100,000.
5. During 1928 petitioner paid off $20,000 principal amount of A Bonds at par. The A Bonds so paid off were retired and canceled by the trustee.
6. In 1928 the petitioner acquired $100,000 principal amount of B Bonds by purchase at a cost of $47,039.80. The B Bonds were all acquired in one transaction and the purchase price was a lump sum for the lot. The petitioner held these bonds in its treasury throughout 1928.
7. Tlie balance sheets attached as Schedule K to petitioner’s income tax return filed for 1928 are attached hereto as Exhibit “B” and made part hereof.
8. In February 1929 the petitioner delivered the B Bonds purchased in 1928 to the First National Bank of Muskogee, Oklahoma, trustee under the mortgage, and the trustee thereupon canceled and retired said bonds and caused the mortgage to be satisfied of record. In February 1929 the balance of the A Bonds were paid off at par.
9. Petitioner did not report the difference between the issuance price of the B Bonds, $100,000, and the purchase price, $47,039.80, as taxable income. Respondent has included $52,960.20 in taxable income.
10. It is agreed that the petitioner sustained depreciation in the operation of its Oklahoma property during 1928 in the amount of $24,629.70, which said amount should be allowed as a deduction in determining petitioner’s net income for 1928.

The mortgage referred to in the stipulation as exhibit A is incorporated herein by reference. It provides for the issuance of $75,000 face value of class A bonds, and $100,000 face value of class B bonds, and contains, among others, the following provision:

12. The company [the petitioner] covenants that no funds or credits of the company will be used for the purchase, redemption or discharge, prior to maturity, of any bond or coupon of Class B so long as any bond of Class A is outstanding, or for the payment of any matured principal or interest on any bond of Class B so long as any matured principal or interest of any bond of Class A is outstanding and unpaid, or for the payment in any one year, so long as any bond of Class A is outstanding) of any amount on account of principal or interest of the bonds of Class B, other than the items maturing within such year according to such bonds and coupons as now executed; and that it will not accept, directly or indirectly, any bonds or coupons secured hereby as payment on account of any coal purchased from it.

The balance sheets referred to in the stipulation as exhibit B are as follows:

GARLAND COAL & MINING COMPANY
Schedule K — Balance Sheet
GARLAND COAL & MINING COMPANY

The $100,000 item representing bonds purchased by the petitioner in the year 1928 is not included in the above figure of $542,834.50, representing the total assets of the petitioner at the end of the year 1928. However, in the balance sheet the liabilities were reduced by the amount of $100,000, representing bonds which were purchased. It is to be noted that on the balance sheets under “ corporate surplus ” there is shown a profit and loss credit balance of $115,555.58 at the end of the year 1928, whereas such credit balance was $17,888.13 at the beginning of the year. For aught we know the item of $52,960.20, representing the difference between the issuing price of the bonds and the amount petitioner paid to purchase the bonds, is included in the item of $115,555.58, representing surplus. If so, then the petitioner itself must have considered the $52,960.20 as a profit. That that was not so has not been established by the proof.

The petitioner contends .that the action of the respondent in including the amount of $52,960.20, representing the difference between the issuing price of the B bonds and the amount paid by petitioner to purchase them, in petitioner’s taxable income for the year 1928, was erroneous. The petitioner’s position is that these bonds, not having been surrendered to the trustee for cancellation, should be treated as any other corporate security and that no taxable income results until the bonds are “retired.” It points out that article 68 (1) (c) of Regulations 74 under the Revenue Act of 1928 provides that gain or income is recognized if bonds are 'purchased and retired in the taxable year. Petitioner points out that such provision has been in all regulations promulgated by the respondent since 1918, and that in United States v. Kirby Lumber Co., 284 U.S. 1, the Supreme Court stated, with regard to the same provision of Regulations 62 under the Revenue Act of 1921, “We see no reason why the regulations should not be accepted as a correct statement of the law.” In that case the taxpayer issued certain of its bonds at par and later in the same year purchased in the open market some of the same bonds at less than par. The Supreme Court there held that the difference between the amount which petitioner originally received for the bonds and the amount which it paid in the purchase of them constituted taxable income. The petitioner points to the fact that in that case the bonds were “ retired ” and claims that that fact distinguishes that case from the instant proceeding. See opinion of the Court of Claims in Kirby Lumber Co. v. United States, 44 Fed. (2d) 885; affirmed in United States v. Kirby Lumber Co., supra, wherein it appears that the bonds were “ retired.”

In the instant proceeding it is our opinion that the bonds in question were “ retired ” in 1928 within the meaning of the regulations, despite the fact that they were not actually turned over to the trustee and canceled until 1929.

The word “ retire ” is defined in Webster’s New International Dictionary, 1929, as “ To withdraw from circulation, or from the market; to take up or pay; as, to retire bonds; to retire a note.”

In the instant proceeding the bonds in question were, in 1928, certainly withdrawn from circulation and taken up and paid for all practical purposes as between the holders of the bonds and the petitioner. If the regulations were construed to mean that bonds must be completely canceled before gain or loss is recognized, then, in our opinion, such regulations would not correctly interpret the law.

In United States v. Kirby Lumber Co., supra, the Supreme Court referred to the provisions of the Revenue Act of 1921, which state that gross income includes “ gains or profits and income derived from any source whatever ” and stated:

We see nothing to be gained by the discussion of judicial definitions. The defendant in error has realized within the year an accession to income, if we take words in their plain, proper meaning, as they should be taken here. * * *

The Revenue Act of 1928, in section 22, contains provisions identical with those of the Revenue Act of 1921 with which the Supreme Court was concerned in the Kirby Lumber Co. case. It is true, as pointed out by the petitioner, that the purchase by the petitioner of the bonds in question was in violation of clause 12 of the mortgage and fhaf under the terms of sqch mortgage the trustee could not be required to cancel such, bonds if petitioner had presented them for that purpose. Petitioner further states in its brief that the trustee could have required the petitioner to dispose of the 'bonds. Assuming, but not deciding, that the trustee or the holders of A bonds could have challenged the action of petitioner in purchasing the B bonds, the fact remains that they did not do so. Furthermore, that is a matter between those parties with which we are not concerned. Here the ultimate fact is that in the year 1928 the petitioner did discharge its obligation to pay $100,000 by paying $47,039.80 and did not resell the bonds. The difference of $52,960.20 constituted a gain or profit or income under the statute and within the rule of United States v. Kirby Lumber Co., supra. See also Twin Ports Bridge Co., 27 B.T.A. 346. The purchase of the bonds by the petitioner constituted such a closed transaction as gives rise to recognizable gain or loss under the revenue act. The fact that the petitioner had such bonds available for resale is not controlling. Such a resale would be an entirely new transaction.

We held that the respondent properly held that the amount in question is taxable income in the year 1928.

It has been stipulated that the petitioner sustained depreciation in the operation of its Oklahoma properties during the year 1928 in the amount of $24,629.76, and that that amount should be allowed as a deduction in determining petitioner’s net income for 1928. Adjustment will be made accordingly under Bule 50.

Beviewed by the Board.

Decision will be entered' under Rule 50.

       Art. 68. (1) (c) If, however, the corporation purchases and retires any of such Bonds at a price less than the issuing price or face value, the excess of the issuing price or face value over the purchase price is gain or income for the taxable year.


author: Goodrich:

text:
    Standard Lumber Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46423.
    Promulgated June 13, 1933.

      Addison, L. Gardner, Jr., Esq., and Laurence Graves, Esq., for the petitioner.

      Prew Savoy, Esq., for the respondent.
   OPINION.

Goodrich:

The sole issue before us is whether there should be included in petitioner’s income for 1925 the profit, determined by respondent to be $461,746.19, derived from the sale of its lands to the Florida Industrial Co. in part payment for the timber located on Industrial’s south Florida lands. Petitioner disputes neither respondent’s determination of the basic value of its lands nor his determination of the amount of profit, but contends that the profit should not be included in income for 1925 for two reasons; first, because the sale of its properties was not consummated in 1925 but, at the earliest, in 1926 when it delivered its deed, and, second, because it received nothing of value in consideration for its properties. With neither contention can we agree.

Under the contract of March 19, 1925, petitioner assumed an obligation, the exact amount of which was not then determined, but which was not less than $3,575,000. Against that obligation it was allowed an immediate credit for the total acreage of its lands at $3 per acre, and it passed its notes to make up the shortage of that credit from the minimum obligation. To avoid delay, it was assumed that its title was good to the entire tract and Industrial came into immediate possession and beneficial ownership of the north Florida lands and was itself to bear any damage suffered by the properties by casualty thereafter. True, the amount of petitioner’s obligations remained to be finally determined by a timber cruise, but that did not alter the fact that petitioner had disposed of its lands and received a credit as the consideration therefor. True also, the amount of that credit as first allowed might be subsequently changed by discovery of title defects, but that did not affect Industrial’s rights to possession and ownership. Any part of the credit already allowed petitioner for its lands which might subsequently be lost by the return of certain tracts to petitioner because of imperfect title was to be made up by additional notes, but such an adjustment would not affect the transfer of the accepted acreage. However, this contingency need not concern us, for the record contains no evidence respecting any title defects, and, since the contract provides that unless exceptions to title were filed within a time certain, Industrial would “ be conclusively presumed to have approved titles to all ” of petitioner’s lands, it clearly appears that petitioner received its credit at the same time it assumed its obligation, which was in 1925, and that Industrial had immediate right to full and complete possession of the lands. Under the decisions of the Florida courts, including the decision in the suit between petitioner and Industrial wherein the contract now before us was under consideration, in such circumstances the sale is regarded as consummated; consequently, in 1925 Industrial became the beneficial owner of the north Florida lands, having acquired equitable title thereto, and petitioner thereafter held the bare legal title in trust for Industrial. Aycock Bros. v. First National Bank of Dothan, 54 Fla. 604; 45 So. 501; Insurance Co. of North America v. Erickson, 50 Fla. 419; 39 So. 495; 2 L.R.A. (N.S.) 512; 111 Am. St. Rep. 121; 7 Ann. Cas. 495; Felt v. Morse, 80 Fla. 154; 85 So. 656; Miami Bond & Mortgage Co. v. Bell, 101 Fla. 1291; 133 So. 547; Standard Lumber Co. v. Florida Industrial Co., 141 So. 729.

Therefore we do not regard as controlling the fact, so strongly relied on by petitioner, that its deed was not delivered until 1926, for the consummation of a sale is not dependent upon delivery of a deed where, as here, the consideration was received and the benefits and burdens of ownership were transferred previously. Nibley-Mimnaugh Lumber Co., 26 B.T.A. 978; Davidson & Case Lumber Co. v. Motter, 14 Fed. (2d) 137. Nor is it material that petitioner continued to pay the taxes on the north Florida lands. Grace Harbor Lumber Co., 14 B.T.A. 996. We are not told why it did so; perhaps its notes were credited with the amounts so paid.

Petitioner’s second argument may be disposed of summarily, for the Supreme Court of Florida in its decision in Standard Lumber Co. v. Florida Industrial Co., supra, held that petitioner did receive something of value under this contract. Moreover, we are not concerned with petitioner’s bargain, and the fact that the properties it purchased may have been worth less than it paid for them is not material to the issue before us. The point here is that petitioner sold its own lands and received the consideration therefor. It is with the profit arising from that sale — the difference between the cost basis to petitioner and the amount received — that we are concerned. We conclude that this profit arose in the year 1925 and that respondent was not in error when he included it in petitioner’s income for that year.

Judgment will be entered for the respondent.


text:
    Mary E. Cappon, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 51042.
    Promulgated June 13, 1933.

      R. F. Witte, Esq., for the petitioner.

      F. A. Surine, Esq., for the respondent.
   OPINION.

McMahon:

This is a proceeding for the redetermination of an asserted deficiency in income tax for the year 1928 in the amount of $263.24.

It is alleged by the petitioner that the respondent erred in disallowing as a deduction from gross income the sum of $2,036.75 representing an insurance premium paid by the petitioner on a policy covering the life of the president and manager of a corporation.

The petitioner is an individual, residing in Milwaukee, Wisconsin.

The parties entered into a stipulation as follows:

1. Mary E. Cappon, the petitioner, is the widow of Jesse Cappon, who at the time of his death several years ago had been president, director and principal stockholder of the West Side Mfg. Co.
2. The West Side Mfg. Co. manufactures sash, doors and other millwork.
3. Shortly after the death of her husband, Jesse Cappon, the petitioner was elected a member of the board of directors and vice-president of the corporation, and thereafter took an active part in the affairs of the West Side Mfg. Co. Mr. Ed. Schildknecht, a stockholder who had been connected with the management of the company for many years, was elected president and manager.
4. The petitioner decided that $100,000 life insurance policy should be taken out on the life of Mr. Schildknecht, with the corporation as a beneficiary. Mr. Schildknecht was unwilling to burden the corporation with a total insurance premium on $100,000 policy. It was agreed that two policies of insurance $50,000 each should be taken out, the corporation being the beneficiary, the premium on one of said policies to be paid by the corporation and the premium on the other to be paid by the petitioner. Under this arrangement the petitioner paid in 1028 a premium of $2,036.75 on one of said $50,000 policies.
5. In the petitioner’s individual tax return for the calendar year 1928, the petitioner deducted the said item of $2,036.75 as an ordinary and necessary expense, explaining the deduction in her return as follows:
“ Insurance premium paid on policy taken out on life of the president of the West Side Mfg. Co., the corporation being the beneficiary, to protect taxpayer’s stockholdings in said company, $2,036.75.”
6. In determining the deficiency here in controversy, the respondent disallowed the deduction of said item of $2,036.75.
7. At all times since the death of petitioner’s husband, and during the year 1928, petitioner owned 164 shares, or 82% and Mr. Schildknecht owned 24 shares, or 12%, of the total outstanding capital stock of the West Side Mfg. Co. The total outstanding capital stock of the West Side Mfg. Co. during the year 1928 amounted to 200 shares.
8. A true copy of the deficiency letter dated September 30, 1930 from which the present appeal was taken is attached hereto as Exhibit A.
9. The income tax return filed by the petitioner for the year 1928 is attached hereto as Exhibit B.
10. The petitioner received $49,200.00 from the West Side Mfg. Oo. during the year 1928 as dividends.

The petitioner’s income tax return for the year 1928 discloses the

following income:

Interest-$12, 713. 64
Interest on tax free bonds_ 75.00
Rents_ 5,145.57
Dividends- 63,400.00.
Capital net gain_ 900.00
Gross income- 82,234.21

The petitioner contends that she is entitled to deduct from gross income such insurance premium paid by her under section 23 (a) of the Revenue Act of 1928, which provides that in computing net income “All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business ” shall be allowed as deductions.

It is our opinion that, under the facts as disclosed by the stipulation, it does not appear that the petitioner was engaged in any trade or business within the meaning of this section.

In Burnet v. Clark, 287 U.S. 410, the United States Supreme Court stated as follows:

The respondent was employed as an officer of the corporation; the business which he conducted for it was not his own. There were other stockholders. And in no sense can the corporation be regarded as his alter ego, or agent. He treated it as a separate entity for taxation; made his own personal return and claimed losses through dealings with it. He was not regularly engaged in endorsing notes, or buying and selling corporate securities. The unfortunate endorsements were no part of his ordinary business, tut occasional transactions intended, to preserve the value of his investment in capital shares. [Latter italics ours.]

Again, in the case of Dalton v. Bowers, 287 U.S. 404, the United States Supreme Court stated:

* * * Dalton was not regularly engaged in the business of buying and selling corporate stocks. He organized the Manufacturing Corporation and took over all its shares with the intention of selling them at a profit. He treated it as something apart from his ordinary affairs, accepted credits for salaries as an officer, claimed loss to himself because of loans to it which had become worthless, and caused it to make returns for taxation distinct from his own. Nothing indicates that he regarded the corporation as his agent with authority to contract or act in his behalf. Ownership of all the stock is not enough to show that creation and management of the corporation was a part of his ordinary business. Certainly, under the general rule for tax purposes a corporation is an entity distinct from its stockholders, and the circumstances here are not so unusual as to create an exception. [Italics ours.]

See also Benjamin I. Powell, 26 B.T.A. 509, in which, the Board, at page 514, stated:

There is nothing in the record to indicate that the petitioner ever carried on any furniture business on his own behalf. His activities were in the conduct of the furniture business carried on by the various corporations. Although the petitioner owned five-sixths of the stock of the Powell Furniture Company and devoted practically all of his time to its affairs, the corporation was, nevertheless, a separate and distinct entity and the business transacted in its name was not the business of the petitioner, but of the corporation, and as such was separate and distinct from the affairs of the petitioner. We think the respondent’s action in refusing to allow the deduction of $12,658.09 taken by the petitioner for a net loss was correct. See Louis M. Goldberg, 9 B.T.A. 1355; affd., 36 Fed. (2d) 551; Wyatt C. Hedrick, 20 B.T.A. 258; Ida A. Van Dyke et al., 23 B.T.A. 946.

Although the “ net loss ” provisions of the applicable revenue acts were involved in the Clark, Dalton and Powell cases, supra, it was necessary to determine whether or not the losses resulted “ from the operation of any trade or business regularly carried on by the taxpayer ”, and hence such decisions are persuasive, if not controlling.

Caroline T. Kissel, 15 B.T.A. 1270, cited by petitioner, is distinguishable from the instant proceeding. There the Board held certain claimed deductions allowable upon the ground that they were connected with taxpayer’s trade or business within the meaning of section 214 (a) (1) of the Revenue Act of 1921, which contains the same language quoted above, and pointed out that the taxpayer was “ a woman of substantial means and that she invests rather heavily in stocks, bonds, and other securities, and in real estate, and that her son is employed regularly to manage her affairs and maintains an office and employs two assistants for that purpose.”

Although the stipulation states that the petitioner, after her election as a member of the board of directors and as vice president of the West Side Mfg. Co., “took an active part in the affairs” of such company, it does not disclose just what her activities in this respect consisted of or even the time devoted to the affairs of such company, nor does it disclose any business activity on the part of the petitioner with respect to her other investments, the income from which was nearly equal to that which she derived as stockholder in dividends from the West Side Mfg. Co. The stipulation does not disclose in what, if any, trade or business the petitioner was engaged.

The insured was president, stockholder and employee of the West Side Mfg. Co. and not an employee of the petitioner. The stipulation does not disclose, except as may be inferred from the statement in the stipulation that “ petitioner decided that $100,000 life insurance policy should be taken out on ” his life, that he was necessary to the continued or future success and prosperity of such company or that he could not be replaced by an equally competent person. It does not appear that his services were necessary to the protection of the investments of petitioner. It does not appear that he was even concerned, except as president, manager and stockholder of such company, in the investment of the petitioner in the company. He was in fact, averse to the protection of the petitioner’s stockholdings at the expense of the company, as is disclosed by the stipulation, in that he “ was unwilling to burden the corporation with a total insurance premium on $100,000 policy.” It does not appear that he was interested in other financial affairs or investments of the petitioner.

Since we have held that the life insurance premium paid by the petitioner is not deductible under section 23, supra, it is not necessary for us to pass upon the other contention of the respondent that the deduction of such premium is prohibited by section 24 (a) (4) of the Revenue Act of 1928.

Decision will be entered for the respondent.

       Sec. 24. ITEMS NOT DEDUCTIBLE.
      (a) General rule. — In computing net income no deduction shall in any case be allowed in respect of—
      *******
      (4) Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer when the taxpayer is directly or indirectly a beneficiary under such policy.


author: Goodrich :

text:
    Mary E. Horner, Petitioner, v. Commissioner of Internal Revenue, Respondent. Vaughan Horner, Petitioner, v. Commissioner of Internal Revenue, Respondent. W. S. Horner, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 53128-53130.
    Promulgated June 13, 1933.

      Thos. D. McCloskey, Esq., and Fred C. Houston, Esq., for the petitioners.

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

Goodrich :

Deficiencies in income tax against Mary E. Horner for tbe year 1927 amounting to $4,190.39; against W. S. Horner for 1928 of $6,193.95; and against Vaughan Horner for 1928 of $1,762.05, are contested in these proceedings which, upon motion, were consolidated. Most of the material facts were stipulated and, although considerable testimony was put in also, we need not, for the purposes of this report, set out a detailed recital of facts. There is no dispute of fact as to the acts done by petitioners; the dispute is as to the effect of those acts, and the whole issue for our determination is, Which stock was disposed of by the several petitioners in the sales giving rise to these deficiencies; old stock, previously owned, or new stock, to be purchased in the future?

Prior to 1927 these petitioners, who are residents of Pittsburgh, Pennsylvania, each owned, and had in his custody, certain shares of stock of the American Rolling Mill Co. In December of that year the company advised its stockholders that it would issue rights to subscribe to additional stock, on the basis of one share of new stock for each six shares of old stock then held, at $75 a share. The rights were issued on or about January 10, 1928, and expired at the end of that month, when the certificates were to be delivered. Each of petitioners subscribed for new stock under the rights, but before new stock was issued, believing that the market was then more favorable than it would be later, each sold, through a broker, and upon the Exchange, stock of this company. Mary E. Horner sold 500 shares in December 1927; Vaughan Horner sold 300 shares, and W. S. Horner sold 1,550 shares in January 1928. It appears beyond dispute that these sales were made by petitioners in anticipation of the exercise by them of their rights to subscribe to new stock, and that it was their intention and purpose to sell the stock. However, when they ordered their broker to make these sales they each delivered to him certificates representing an equal amount of the old stock then owned and held by them. These shares were sold by the broker; they were not returned to petitioners. On the sales memo-randa sent to them by the broker, petitioners, immediately upon receipt, caused to be written: “ Sold on account of rights to subscribe for stock at $75.00 a share. Profit to be calculated on this basis.” On their books of account reflecting these sales petitioners made entries to the same effect, for instance: “ Stock sold was against that received February 1, 1928 at $75.00.”

Relying chiefly upon Howbert v. Penrose, 38 Fed. (2d) 577, petitioners contend that the real transaction here was, in accordance with tbeir intention, the sale of the new stock to be thereafter acquired by them through the exercise of their rights to subscribe, and, in reporting on their returns the profit derived from the sales, computed it on the cost basis of $75 a share. Respondent maintains that, regardless of their intention, what petitioners actually did was to sell old stock and in determining the deficiencies here in controversy he computed the profit from the sales upon the cost basis of the old stock, which is less than $75 a share. Moreover, he determined that the identity of the lots of stock sold could be ascertained and therefore, in computing the profit, used as the basis in each sale the cost of the particular lot of stock sold. Petitioners do not deny that respondent has properly identified the lots delivered to the broker, but contend that they did not represent the stock sold.

We sustain respondent. Upon analysis, we think the case of Howbert v. Penrose, supra, relied on by petitioners, supports our view. In that case the stockholders decided to sell shares acquired by him after 1913, gave an order to his broker to sell a certain amount of the stock and ordered the depositary having custody of all his stock to make delivery to the broker. The certificates delivered represented, for the most part, shares purchased prior to 1913. In affirming, because it was supported by the evidence and could not be disturbed, the finding of the trial court to the effect that the stockholder intended to and did sell stock acquired after 1913, the court said:

In our opinion, proof of the certificates delivered does not conclusively determine what transaction did in fact take place. It is evidence, but not exclusive evidence. So it is of the question of intent of the seller, a point much labored at the trial and here; it is some evidence as to what was done, but not conclusive. The ultimate question is, what was done?

Applying that test here, it seems clear that what petitioners did was to make sales of certain shares of their old stock. In the Howbert case, the taxpayer owned all the stock; he had it all within his control, and the confusion arose only in the matter of the specific certificates delivered. As the court points out, there was no restriction on his choice of which shares he should sell. Here, petitioners did.not yet own the shares they purported to sell; indeed, with respect to a part of it, they had not yet received even the rights to subscribe under which they expected to acquire the stock they purported to sell. Perhaps they could have sold those rights, even in anticipation of their issuance, but they did not. Perhaps they could have ordered their broker to make a short sale of the new stock for them, making a deposit with the broker, either of cash or of old stock to the value of the amount required, and later making delivery to him of the new stock to cover, but that they did not do. Each of these petitioners, purporting to sell something which he did not yet own, and saying to himself (but not to the broker or the purchaser), “ I am now selling stock which I shall buy next month for $75 a share ”, delivered to the broker certificates representing shares which he then owned. But petitioners’ bare intention to do something else does not alter the fact of what was done. They were old shares which were delivered; they were old shares which were sold, and for which petitioners received payment, and we regard those sales as completed transactions — ordinary sales of stock which required neither a later covering purchase, a delay of the recognition of gain arising from them, nor the use of a basis other than the cost of the property sold in computing that gain. It is upon the basis of what actually occurred that respondent has determined his deficiencies; therefore, we sustain him. Cf. Towne v. McElligott, 274 Fed. 960; Estate of Richard B. Turner, 26 B.T.A. 1204; Robert W. Bingham, 27 B.T.A. 186.

Judgment will be entered for the respondent.


author: Seawell:

text:
    Frederick A. Koch, Jr., Executor of the Estate of Frederick A. Koch, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 66302.
    Promulgated June 13, 1933.

      Alfred L. Geiger, Esq., for the petitioner.

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

Seawell:

The respondent determined a deficiency in estate tax herein of $4,689.24, of which amount the petitioner in his petition concedes that $4,109.74 is due and payable. The balance of the determined deficiency, $529.50, petitioner contests in this proceeding on the grounds set out in the stipulation of facts filed by the parties.

Frederick A. Koch, a resident of New York, died testate April 26, 1929, possessed of 25 shares of the capital stock of the Builders Holding Corporation (and other property not here involved), which shares were included in .the Federal estate tax return of petitioner at the valuation of $100 per share, a total of $2,500. Upon audit of the return the Commissioner valued said shares at $453 per share, a total of $11,325, and determined a deficiency in tax of $529.50 (part of total deficiency of $4,639.24), resulting therefrom. This revaluation of the 25 shares of stock by the Commissioner is the sole error alleged by the petitioner in this proceeding.

The facts were stipulated and are adopted by reference, the salient facts only being herein repeated.

The Builders Holding Corporation, organized under the laws of the State of New York for the purpose of erecting a bank building for use of Flatbush Savings Bank, issued stock of a par value of $100 per share, and adopted bylaws containing section 3 of article 1, reading as follows:

No stockholder shall sell any share of stock of the Company without first offering in writing to sell same to the Company at $100. per share, and waiting 30 days thereafter for the Company to accept the offer and pay for the stock. No stock sold in violation of the by-laws shall be transferred upon the books of the Company or be entitled to dividends thereafter.

The only sale of stock of the Builders Holding Corporation at any time near the date of the death of the decedent (and the only sale at any time mentioned in the stipulations) was that of 22 shares sold June 13, 1929, by the personal representative of one Keeney, deceased, to the Builders Holding Corporation at $100 per share, a total of $2,200. There were no further facts stipulated or evidence offered as to the value of the 25 shares of stock at the time of the death of the decedent, except it was stipulated as follows:

Seventh: That the net assets of the Builders Holding Corporation, at the time of the decedent’s death, show a book value in excess of Four hundred ($400.) Dollars per share, and it is hereby stipulated that the valuation placed "upon the said stock by the Commissioner, namely Eleven thousand three hundred and twenty-five ($11,325.) Dollars, shall, for the purposes of this case, be accepted as the book value of said stock.

Under this stipulation it would seem that the sale of the Keeney stock affords no criterion of the fair market value or the real value of the stock sold. Moreover, we are not advised as to all the circumstances connected with the sale of the Keeney stock, and we hesitate to infer from what does appear that it was an ordinary open market transaction by persons under no compulsion dealing at arm’s length. We do not ignore the fact of the Keeney stock sale, but do not consider it sufficient, standing alone, to show the fair market value, or the intrinsic value of the stock in question. We do not understand that petitioner contends that the Keeney stock sale proves his case. But as we do understand it, the petitioner contends, and relies solely upon the contention, that under the applicable statute and regulations the “ fair market value ” of the shares of stock in question at the time of the death of decedent is the issue here, and that the bylaws of the Builders Holding Corporation quoted above show that “ fair market value ” to have been not more than $100 per share, at which sum the shares were returned for taxation by petitioner; and that the presumption favoring the Commissioner’s determination has been met and overcome by the. stipulated fact.

The statute and regulations, applicable and being those referred to, are as follows:

[Sec. 302, Revenue Act of 1926.] The value of the gross estate of tire 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—
(a) To the extent of the interest therein of the decedent at the time' of his death.
[Regulations 70, art. 13.] Valuations. — (1) General. — The value of all property includable in the gross estate is the fair market value thereof at the time of decedent’s death. The fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell. * * *
* * . * * * * *
Stock in a close corporation should be valued upon the basis of the company’s net worth, earning and dividend-paying capacity, and all other factors having a bearing upon the value of the stock. * * *

The petitioner cites as authority sustaining his contention the case of Wilson v. Bowers, 51 Fed. (2d) 261. In this case the United States District Judge for the Southern District of New York held that shares of corporate stock upon which an option to purchase at a specified sum had been granted in the lifetime of the owner, which option extended beyond testator’s death, were taken cum onere by the executors of decedent’s estate and were limited as to their fair market value by the amount specified in the “ binding option.” The Circuit Court of Appeals for the Second Circuit affirmed the district court (57 Fed. (2d) 682), saying in part:

* * * So long as tbe option here involved was outstanding tbe property could not be sold for more than tbe option price.
*******
* * * To be taxable at its full value the interest of tbe testator must also be subject to distribution as part of his estate. These shares were not. Had the testator attempted to bequeath them to a stranger, the option-holders could have taken them away from the legatee upon paying him $20,000 [the option price] within the time limited by the contract.

The shares of stock involved in the proceeding before us were not subject to any option contract. They were subject to distribution as part of the testator’s estate! They were bequeathed by the testaT*”i tor to his son, the petitioning executor herein, who is under no obli- .3 gation to sell -or otherwise to dispose of them. See City Bank Farmers Trust Co., Executor, 28 B.T.A. 668. Power of unrestricted alienation is a usual concomitant of ownership of property. When such power is separated from the ownership the value of the property, certainly as a trading commodity, is usually lessened; but not necessarily, of course, destroyed. Power of alienation, or its absence, would not affect the value of property in the hands of one who wished not to sell. The Builders Holding Corporation had no option, or any right, to purchase from the testator the shares of stock in question. As the corporation appears to- have been formed for a single purpose, that is, to build a single building, it is not altogether improbable that it was considered advisable that the stock should be held closely and not sold in the relatively short while until the building contract should be finished and the price paid and expenses settled and the corporation dissolved and its assets distributed.

Whatever was the purpose of the bylaw giving the right of refusal to purchase the stock offered for sale in the first instance to the corporation, it is not shown that either the testator or his legatee has desired to sell the stock, or to what extent, if any, the value of the stock has been depressed by the bylaw. Cf. Estate of Louise N. Schulz, 14 B.T.A. 419; affd., (C.C.A., 1st Cir., March 29, 1980). We are not advised as to the number of stockholders, or how close their holdings of stock were maintained; but it would seem from the name and purpose of the corporation and the failure to show any activity in the sale of the stock that the stock was probably closely held and not dealt in on the market. The burden is upon the petitioner to show facts which will prove error on the part of the Commissioner. Where stock is closely held and not dealt in on the market, its value for taxation purposes may be shown by resorting to the proof or admissions as to the intrinsic or book value. Cartier v. Commissioner, 37 Fed. (2d) 894; Oxford Paper Co. v. United States, 52 Fed. (2d) 1008; S. L. Meyer, Executor, 23 B.T.A. 1201. ,

In a case involving the value of stock paid as compensation xo employees of a corporation, it was argued that the stock so received was taxable to recipients only if (1) it had a market value, and (2) if that market value was readily realizable and that if no market existed, or if the fair market value was not readily realizable, no taxable income resulted from its receipt. The court said:

We think this position can not be sustained. * * * Readily realizable market value may well be considered the best, if not a conclusive, measure of value. If such standard of value exists, it is, under the regulation, to be applied. It is not, however, an exclusive standard, the non-existence of which compels a determination of no value. * * * Evidence of intrinsic value, of market value, or of readily realizable market value, might well constitute such contrary evidence, challenging the presumption. * * * The measure of compensation received in stock is its market value, whether readily realizable or not.
* * * * * Jjr *
We do not understand that market value is to he determined only by proof of actual sales. It may exist independent of such sales * * * intrinsic value may be resorted to for the purpose of establishing market value where from proven facts and circumstances there could be no doubt of the existence of a market if the same were offered for sale. Crowell v. Commissioner, 62 Fed. (2d) 51.

Upon authority of the courts and upon reason we can not agree that the value of corporate stocks for estate tax purposes, in the absence of actual sales of the stock, can be limited by the fiat of a corporation’s bylaws to a sum less than the intrinsic value of the stock. It having been stipulated that the Commissioner’s determination of the value of the stock is the book value thereof, we hold that the existence of the bylaw of the corporation referred to is not sufficient to overcome the presumption of the correctness of the Commissioner’s determination, and we approve that determination.

Judgment will be entered for the respondent.


author: Trammell :

text:
    Sidney F. Tyler, William M. Elkins, George D. Widener and The Real Estate-Land Title and Trust Company, Surviving and Succeeding Trustees under the Last Will and Testament of William L. Elkins, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 56449.
    Promulgated June 13, 1933.

      William R. Spofford, Esq., for the petitioners.

      Paul E. Waring, Esq., for the respondent.
   OPINION.

Trammell :

The respondent determined the deficiency in controversy by including in the gross income of the petitioners for the taxable year 1927 a profit of $59,400 derived from the sale of 66 shares of stock of the Delaware Co., and a profit of $500 realized on the retirement of bonds of the Westmoreland Water Co. The petitioners make no objections to the amount of the profit computed by the respondent in either instance, but contend that both items were received by them in 1928, and that hence neither is taxable as a part of the gross income for 1927.

In his brief the respondent concedes that the profit resulting from the retirement of the water company bonds “ represented taxable income to the petitioners in 1928 and not in 1927.” The issue remaining for consideration, therefore, is whether or not the petitioners received the profit from the sale of the stock of the Delaware Co. in 1927. This is purely an issue of law, all material facts having been stipulated by the parties.

On or before November 25, 1927, the petitioners transmitted their 66 shares of the Delaware Co.’s stock to the Safe Deposit & Trust Co., the depositary, with the printed assignment executed in blank. On or before December 1, 1927, more than 80 percent of the stock of the Delaware Co. had been so deposited and on or before December 17, 1927, the purchaser turned over the purchase price thereof to the depositary. The depositary mailed its check to the petitioners for their stock on January 5, 1928, which check was received by the petitioners on the following day.

The respondent argues that the depositary was the agent of the petitioners, and that receipt of the proceeds of sale by their agent on December 17, 1927, constituted constructive receipt by them. In support of his contention the respondent cites our decisions in Julia A. Strauss, 2 B.T.A. 598; L. & M. Holding Co., 8 B.T.A. 601; Estate of C. W. Crews, 8 B.T.A. 301; F. H. Wilson, 12 B.T.A. 403, and others, in which we held that receipt by an agent was receipt by the principal; but in all of the cases cited the agent was acting in such capacity exclusively for the taxpayer, and immediately upon receipt by the agent the fund was subject to the unqualified demand of the taxpayer.

In the instant case a wholly different situation is presented. The depositary was not the exclusive agent of the petitioners, and upon receipt of the proceeds of sale by the depositary the amount due petitioners was not immediately available to them. The depositary acted for the petitioners and the other stockholders only incidentally. It was bound under the agreement to hold the stock certificates until $0 percent or more of the stock was received by it for transfer to, the purchaser, and in the event the required percentage of stock was not obtained, to return the initial payment to the purchaser and the certificates to the respective owners. The depositary also had the duty of disbursing the amount of $32 per share for expenses and as compensation to the officers of the Delaware Co. for services rendered in negotiating the deal.

Furthermore, the depositary agreed to represent these petitioners and the other minority stockholders in the transaction upon certain specifically stated conditions, namely, (1) that it would promptly send its receipt for all stock certificates received; (2) that in the event the sale was consummated, it would remit the net proceeds of sale by cashier’s check shortly after January 1, 19&8; and (3) that in the event the sale was not consummated, the certificates would be returned.

The foregoing facts, in our opinion, indicate that the depositary was acting in a fiduciary capacity under the terms of the contract, with the duty, which it voluntarily assumed, of safeguarding the interests of all parties concerned, rather than acting as an agent of any of them. However, we think it is not material to determine the precise relationship of the depositary to these petitioners, for the reason that it clearly appears that the .petitioners had no right to demand proceeds of the sale of their stock prior to January 1, 1928. By sending in their stock certificates, with the printed assignment thereon executed in blank pursuant to the letter from the depositary dated November 14,1927, they evidenced their acceptance of the conditions recited therein in accordance with the express provisions of that letter, one of which was that remittance of proceeds of sale would not be made until subsequent to January 1, 1928.

In John A. Brander, 3 B.T.A. 231, 235, we said:

This doctrine (of constructive receipt), as we have made clear in several appeals, is not to be applied lightly, but only in situations where it is clearly justifiable. When taxable income is consistently computed by a citizen on the basis of actual receipts, a method which the law expressly gives him the right to use, he is not to be defeated in his bona, fide selection of this method by “ construing ” that to be received of which in truth he has not had the use and enjoyment. Constructive receipt is an artificial concept which must be sparingly applied, lest it become a means for taxing something other than income and thus violate the Constitution itself.

To the same effect see Hal E. Roach, 20 B.T.A. 919, 924.

The present case, in our opinion, does not justify invoking the doctrine of constructive receipt, and respondent’s action is reversed. Since the deficiency results solely from the inclusion in gross income of the two items hereinabove mentioned, neither of which was received during the taxable year,

Judgment will be entered for the petitioners.


text:
    G. E. Jordan, Trustee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 63656.
    Promulgated June 13, 1933.

      W. W. Spalding, Esq., for the petitioner.

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

Trammell :

The sole issue in this case is whether or not the petitioner is an association taxable as a corporation. If so taxable, it is agreed that the deficiency asserted by the respondent is correct; if not so taxable, there is no deficiency due.

The petitioner contends that it is a partnership or joint venture, and in support of such contention cites the statutes of Louisiana and the decisions of the supreme court of that state.

Assuming without deciding that under the laws of Louisiana the petitioner is a partnership, yet that fact is not controlling here. In Burk-Waggoner Oil Assn. v. Hopkins, 269 U.S. 110, it was held that an unincorporated association taking the form of a Massachusetts trust ”, while technically a partnership, not possessed of legal entity under Texas law, although permitted by the laws of that state to sue in its own name, was an “ association ” subject to the income and excess profits tax imposed by the Revenue Act of 1918. In the cited case, the association made the same contention that is urged upon us here, namely, that it was a partnership by state law, not subject to tax, and the Supreme Court disposed of that contention by saying:

It is true that Congress cannot convert into a corporation an organization which by the law of its state is deemed to be a partnership. But nothing in the Constitution precludes Congress from taxing as a corporation an association which, although unincorporated, transacts its business as if it were incorporated. The power of Congress so to tax associations is not affected by the fact that, under the law of a particular state, the association cannot hold title to property, or that its shareholders are individually liable for the association's debts, or that it is not recognizeij as a legal entity. Neither thq
conception of unincorporated associations prevailing under the local law, nor the relation under that law of the association to its shareholders, nor their relation to each other and to outsiders, is of legal significance as bearing upon the power of Congress to determine how and at what rate the income of the joint enterprise shall be taxed.

For 1929, the year before ns, corporations were taxable at the rate specified in section 13 (a) of the Revenne Act of 1928, and section 701 (a) (2) of that act further provides that: “The term ‘ corporation ’ includes associations, joint-stock companies, and insurance companies.” Admittedly the petitioner is neither a joint-stock company nor an insurance company, and hence it is not taxable as a corporation unless it is an “ association ” within the meaning of the above quoted statute. Each of the Revenue Acts of 1918 to 1926, both inclusive, contains in section 1 of Title I substantially the same provision as section 701 (a) (2) of the 1928 Act, supra.

Neither party to this proceeding suggests that the petitioner is a trust and taxable as such, nor do we think the facts would support such a conclusion. It is either a nontaxable partnership or an association taxable as a corporation.

The stipulated facts herein show that certain individuals associated themselves together to develop for gas, oil and other minerals ” and to sell such as might be found, on certain lands described in the agreement, and that during the taxable year it was actively engaged in such undertaking. Thus, during the taxable year a group of persons associated together was engaged in a business enterprise for profit. Their interests were transferable. The business was carried on in many respects as if it had been incorporated. It had a president and general manager, and a treasurer; it had power and authority to sue and to be sued in its own name, to own property, and to make contractual obligations through its president and general manager, approved by the treasurer. The organization was to continue for a period of ten years or longer, but might be dissolved or liquidated at any time upon the vote of those owning 51 percent or more of the beneficial interests. While it was further provided that the owners of interests should share in the profits and losses in proportion to their respective interests, the liability of each Was limited to the extent of his interests. We think a business enterprise so organized and operated meets the test of an association taxable as a corporation. Burk-Waggoner Oil Assn. v. Hopkins, supra; Little Four Oil & Gas Co., 35 Fed. (2d) 149; Pryor & Lockhart Development Co., 26 B.T.A. 1054; Twin Bell Oil Syndicate, 26 B.T.A,. 172.

Even if the enterprise did meet the tests of a partnership under local law, it may still be taxed as if it were a corporation, when it is organized and operated as shown by the facts here. See Burk-Waggoner Oil Assn. v. Hopkins, supra.

The burden is upon the petitioner here to show that the respondent erred in determining that it is a taxable association. On the record presented, it is our. opinion that the petitioner has failed in this respect, and the respondent’s determination is, therefore, approved.

Judgment will be entered for the respondent.


author: Lansdon :

text:
    Bertha H. Saenger, Petitioner, v. Commissioner of Internal Revenue, Respondent. A. D. Saenger, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 65334, 69400.
    Promulgated June 15, 1933.

      S. L. Herold, Esq., for the petitioners.

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

Lansdon :

In the circumstances set out in our findings of fact we are of the opinion that the cash value of the two insurance policies paid to A. D. Saenger in the taxable year as additional compensation for services rendered to Saenger Theatres, Inc., was income to Saen-ger in that year. The terms of the partnership agreement between the Saenger brothers have no bearing on this issue. Upon the organization of A. & J., Inc., petitioner A. D. Saenger transferred to that enterprise all his interest in Saenger Brothers partnership and, in addition, agreed to pay to such corporation the full amount of all salaries and fees received as compensation for services rendered to others and received 7,499 shares of the capital stock of the corporation which had a par value of $100 per share in consideration of such transfer and agreement. In these circumstances it is obvious that any amounts which Saenger later paid to the corporation in conformity with his agreement must be regarded as additional capital contributions to the corporation.

On brief petitioner relies on James S. Muir, 3 B.T.A. 165. Since Muir was not a stockholder of the concern which received his salary by virtue of agreement to that effect, that proceeding varies so widely as to its facts that it has no bearing on the issue in this controversy.

Decision will be entered for the respondent.