author: Disnex :

text:
    Lelia S. Kirby, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 73753.
    Promulgated March 9, 1937.

      J. L. Lockett, Esq., for the petitioner.

      Dean P. Kimball, Esq., and Hunter B. Linton, Esq., for the respondent.
   OPINION.

Disnex :

1. The record indicates that prior to 1927 the prospect of realizing something on the claim for damages filed with the Mexican Government was not hopeless or without reason. Not until in that year did prosecution of said claim and all operations of the Buena Fe Mining Co. cease. Not until then did the company stop paying taxes on its Mexican property and abandon it. Then and not till then did its stock become worthless.

It is shown by the agreed stipulation that prior to May 26, 1912, the date when insurrectos damaged properties of Buena Fe M-miug Co., John H. Kirby had loaned and advanced to the company sums aggregating at that date in ■ excess of repayments the sum of $'77,447.63 and that net advances made by Kirby to the company after May 26, 1912, to and including December 22, 1926, amounted to the sum of 69,737.11, making total net advances of $147,184.74. This amount Kirby charged off in 1927 as a bad or worthless debt and the respondent in determining petitioner’s taxable income for 1927 disallowed any deduction for the account so charged off.

In the light of the record herein, we are of the opinion and hold that John H. Kirby was justified in charging off as a bad debt in 1927 said sum of $147,184.74 and the respondent in determining petitioner’s taxable income for 1927 erred in not allowing as a deduction one-half of that amount.

It is agreed and stipulated that prior to May 26, 1912, John H. Kirby had loaned and advanced to the Kirby Development Co. sums aggregating at that date' a net balance of $18,166.23 and thereafter, to and including March 14, 1927, made additional advances amounting to $436.44, or a total at March 14, 1927, of $18,602.67, which amount Kirby charged off in 1927 as a bad debt or account.

In determining petitioner’s taxable income for 1927, the respondent disallowed any deduction for said account, and in our opinion, and we so hold, he did not commit any error.

The evidence relative to the property in Mexico of the Kirby Development Co. is not the same as that concerning the Buena Fe Mining Co. What damage, if any, was done its property by Mexican insurrectos on May 26, 1912, or any other time is not alleged nor shown. Its property is not shown to have been abandoned or become of little or no value, nor its stock to have become worthless in 1927, and the evidence as presented in the record does not warrant a charge-off as a worthless account or debt of the $18,602.67 as such. The respondent is sustained as to the Kirby Development Co. stock.

The agreed stipulation shows that the Buena Fe Mining Co. stock involved was acquired prior to May 26, 1912, by John H. Kirby at a cost of $82,393.30 and that the Kirby Development Co. stock was also acquired by Kirby prior to that date and at a cost of $25,000, and that both stocks were at all times material in this proceeding community property of petitioner and her husband, John H. Kirby.

As above indicated, the record shows that the stock of the Buena Fe Mining Co. became worthless in 1927, but fails, in our opinion, to show that the stock of the Kirby Development Co. also became worthless in that year. We, therefore, hold that the petitioner, in her 1927 income tax return, is entitled tó a deduction of one-half the cost of the Buena Fe Mining Co. stock, but that in her 1927 income tax return she is not entitled to any deduction on account of the cost of the Kirby Development Co. stock, the record not showing that it became worthless in 1927.

2. The Southern Tariff Association was a voluntary association, the purposes and efforts of which are duly set forth in our findings of fact.

The advances made to the association by John H, Kirby and disallowed as deductions by the respondent were made without promise of repayment and with knowledge on his. part of the financial condition of the association. No evidence indicates that he was requested by the association to advance or loan money or pay expenses, except that the advances by payment of bills in 1928 were at the request of officers of the association. The association never authorized the procurement of loans from him. We can discern no obligation to repay in these transactions. Therefore, they are not deductible as bad debts. J. S. Cullinan, 19 B. T. A. 930. They partake of the nature of contributions or donations rather than of debt. The amounts claimed included unnamed amounts of voluntary contributions by Kirby. Viewed as contributions, the amounts are not within any statutory classification of allowable deductions.

The activities of the association were for the purpose of procuring the repeal of a statute of the United States and contributions for such a purpose are not allowable as deductions from gross income. Mrs. William P. Kyne, 35 B. T. A. 202; Adler Co., 10 B. T. A. 849; Sunset Scavenger Co. v. Helvering, 84 Fed. (2d) 453. We therefore conclude and hold that, whether regarded as advances or as contributions, the amounts in question are not deductible.

3. Whether the petitioner realized a taxable gain in each of the years 1927,1928, and 1929 as a result of sales in those years of bonds of the Kirby Lumber Co., is submitted for our determination on facts which have been stipulated and are set out in our findings of fact.

It is shown that the Kirby Lumber Co.’s preferred stock had a March 1, 1913, value of not less than $100 per share (exclusive of unpaid dividends and premium) which was its cost to Kirby when acquired by him prior to 1913.

The accumulated unpaid dividends in 1923 of $126 a share plus a $5 per share premium aggregated $6,550,000, and the undistributed earnings accumulated since February 28, 1913, aggregated only $2,064,373.54, or the equivalent of a dividend of $41.28 a share, and in their returns for 1923 John H. Kirby and petitioner included as taxable dividends $41.28 of each $231 (face value) of bonds received by Kirby in exchange for preferred stock, dividends, and premiums thereon. The retirement of the preferred stock and receipt of bonds therefor in 1923, as stated, were pursuant to a plan adopted by the stockholders and directors of the Kirby Lumber Co. The payment of the dividend of $126 per share had been duly ordered and authorized by the directors of the company.

The respondent in his deficiency notice determined that the value of the bonds in question in 1923 was 83 percent of par and that on such basis a profit, rather than a loss, resulted from the sale of said bonds in each of the years in issue. But in our opinion, and we so hold, this exchange of stock for bonds was an exchange, to the extent that the bonds at face value were received to balance the par value of the preferred stock, in a recapitalization and therefore a reorganization, in which neither gain nor loss was recognized, within the provisions of the Revenue Act of 1926, section 203 (b) (2) (and section 112 (b) (3) of the 1928 Act, identical therewith), and section 203 (h) (1) (C), Act of 1926 (identical with section 112 (i) (1) (C) of the 1928 Act). Clearly, the Kirby Lumber Co. was a party to a reorganization under section 203 (h) (2), Act of 1926, and section 112 (i) (2) of the 1928 Act. In this connection, see 375 Park Avenue Corporation, 23 B. T. A. 969; H. E. Muchnic, Administrator, 29 B. T. A. 163; Walter F. Haass, 29 B. T. A. 900; affirmed by mandate, January 14, 1936 (not reported) ; H. Y. McCord, 31 B. T. A. 342. Therefore, as to each $100 face value of bonds (of each $231) the basis to be used is “the same as in the case of the property exchanged * * Section 204 (a) (6), Act of 1926 (identical with section 113 (a) (6), Act of 1928). The parties have stipulated that the basis of the property exchanged, namely, the preferred stock, was $100 per share.

Regarding each $126 face value of bonds (of each $231) the basis to be used is “cost.” Sec. 204 (a), Act of 1926, and sec. 113 (a), Act of 1928. That portion of the bonds that was acquired by petitioner and her husband as payment for the dividends declared does not come within any of the exceptions mentioned in section .204 (a) and 113 (a), respectively. What was this cost? The cost, in our opinion, was the fair market value of each $126 (of each $231) of face value of bonds when received in 1923 in payment of the dividends declared on the preferred stock. Cf. United States v. Fuller, 42 Fed. (2d) 471. The petitioner having offered no evidence of such fair market value, none being stipulated, and respondent having determined that all of the bonds had a fair market value of 83 percent of par, we hold that such was their fair market value and therefore that the $126 face value of bonds had a fair market value in 1923, and a basis herein, of $104.58.

Kirby received, however, $231 face value of bonds in connection with each share of preferred stock, $5 face value of bonds being added because of the right to premium. As to this $5 worth' of bonds, it can not.be said that there was any basis, in cost or otherwise, aside from the basis of the stock. The original investment of $100 in the stock was the consideration not only for the stock itself, but, as shown by the contract embodied in the stock certificate, was consideration for the right to receive a $5 premium. Therefore, when in 1923 Kirby received, in addition to $100 in bonds for the stock certificate, $5 in bonds for the premium right, it is apparent, and we hold, that the cost of stock is also the cost of the premium right, that is, that the $100 cost basis is the basis for $105 face value of bonds. Therefore each $231 worth of bonds has a basis of $204.58, being $100 for stock and premium right, and $104.58 value of right to dividend. This applies equally to all of the bonds acquired by Kirby and sold in 1927, 1928, and 1929; and, all the bonds being upon the same basis, there is no distinction to be made between the sales in the different years. We hold that the basis of the Kirby Lumber Co. bonds sold in each of the taxable years is 204.58/231 of face value, and should be. so computed. This fraction reduced to a decimal is .885627705, and we determine gain computed as follows:

4. The question for our determination under this issue is entirely one of fact. We are of the opinion and hold that the average fair market value per acre of the aforesaid two tracts of land, 218.04 acres and 193.53 acres, at March 1, 1913, was $350 per acre and the profit, arising from their sale in 1929 and from the sale of the three small tracts — the cost of which is stated in our findings of fact — to the Curtis Airport Corporation, all for the sum of $546,600, should be recomputed on the bases of values herein found or stipulated.

5. In view of the facts disclosed by the record with respect to this issue, we are of the opinion and hold that the respondent did not err in disallowing the deduction claimed by petitioner. While the record shows that the $25,000 T. H. Bass note, and the 250,000 shares of the capital stock of the Texas-Arizona Copper Co. as security were worthless in 1929 when Bass died, leaving no assets, it does not show that both the note and security became worthless only in 1929 and that it was not until then that Kirby so knew. The provisions in the note relative to action that might be taken by Kirby in the event Bass defaulted in the payment of the note when due; the date of the note, November 21, .1917; and the fact that no effort is shown to have been made to collect note or any interest thereon or to sell the security, stock attached as collateral, although even prior to 1928 Bass’ financial condition was “up and down”, considered in connection with entire record, convince us that the note and stock were worthless and so considered by Kirby prior to 1929, though not charged off until then.

6. The petitioner contends that the capital stock of the Braeswood Corporation became worthless in 1929 and that she is entitled to a deduction in the determination of her taxable income for that year on account thereof. In her income tax return for 1929 petitioner claimed one-half of a 95 percent loss on said stock, which respondent disallowed.

The record shows that there were mortgages on the property of the Braeswood Corporation at the time it was purchased and that thereafter, though at what dates it is not shown, some were foreclosed and satisfied. It is shown that there was also some unsecured indebtedness against the corporation in 1929. What was the amount of the secured and unsecured indebtedness and what the value of the assets of the corporation either before or after the foreclosure and satisfaction of some of the mortgages are not shown. The record does not disclose when the corporation went into liquidation and was formally dissolved, though such had taken place at the time of the hearing herein in 1935. In our opinion, and we so hold, the competent evidence adduced is not sufficient for us to determine that the stock of the Braeswood Corporation became worthless; fails to establish that it became absolutely worthless in 1929 as contended by petitioner. Therefore, we determine this issue in favor of the respondent.

7. On this issue — whether or not the stock of Vancouver Lumber Co. held by John H. Kirby on a cost basis of $184,904.19 became worthless in 1929 and was disposed of by a bona fide sale for $10 in that year — we are of the opinion and hold 'that the evidence establishes that' said stock became worthless in 1929 and the sale of the same for $10 was a bona fide sale, the loss on the stock being the difference between cost and the $10 for which sold as contended by petitioner. Therefore, this issue is determined in favor of the petitioner.

8. That stock of Link Oil Corporation, costing John H. Kirby $67,900, was disposed of by bona fide sale for $500, thereby causing him and petitioner a loss of $67,400, is, in our opinion, established by the evidence. We determine this issue in favor of the petitioner.

9. The charter of the Texas Banking & Investment Co. expired by lapse of time on February 1,1925, and its assets on that date consisted largely of capital stock of other corporations. At that time John H. Kirby was one of the directors of the company and under the law became one of the trustees in liquidation. No receiver was ever appointed.

The Kevised Statutes of Texas in force in 1925 (see' articles 1205 and 1206, Kevised Statutes of Texas, 1911, as amended, and articles 1387-1391, Kevised Statutes of Texas, 1925) provide, in part, that a corporation is dissolved by expiration of the time limited in its charter; that upon the dissolution, unless a receiver is appointed by some court of competent jurisdiction, the president and directors or managers of the affairs of the corporation at the time of its dissolution shall be trustees of the creditors and stockholders, with power to settle the affairs, collect debts, and divide the moneys and other property among the stockholders after paying the ’ debts; that the existence of every corporation may be continued for three years after its dissolution from whatever cause, for the purpose of enabling those charged with the duty to settle up its affairs; that, in case a receiver is appointed by the court, the existence of the corporation may be continued so long as may be necessary to settle suitably the affairs of the corporation; that, when no receiver has been appointed for said corporation, suit may be instituted on any claim against the corporation as though the same were not dissolved and judgment may be rendered accordingly, the assets of the corporation being liable for its payment.

The record shows that Mrs. Zelie L. Willson claimed to be the beneficial owner of all the outstanding shares of capital stock of the Texas Banking & Investment Co. and that on or about June 6, 1927, she disposed of the same and all interest she had in the assets of that company to John H. Kirby upon the terms and conditions set out in our findings of fact.

In behalf of the respondent it is contended that the Texas Banking & Investment Co. ceased to be a going corporation on February 1, 1925, on account of the expiration of its charter; that, under the express terms of the Texas statutes, the legal entity of the corporation in process of dissolution was continued for the purpose of distributing its assets among creditors and stockholders and for purposes of suit (citing Waggoner v. Edwards, 68 S. W. (2d) 655), and that the trustees should have concluded the liquidation on or before February 1, 1928, asserted to be the basic date for determination of gain or loss in the liquidation.

Briefly stated, it is insisted for respondent that John H. Kirby, on February 1, 1928 — three years after the expiration of the charter of the Texas Banking & Investment Co. — constructively received the assets then remaining in the hands of the liquidating trustees, which assets consisted of cash and shares of corporate stock, the value of such stock, with one exception, being stipulated.

In petitioner’s behalf said insistence is denied. The record shows that the liquidating assets of the Texas Banking & Investment Co. (involved in the litigation hereafter mentioned) prior to 1929 were not actually reduced to possession of John H. Kirby nor set apart for him without substantial limitation or restriction as to’time or manner of payment or use or enjoyment by him. The assets in question were, until well into 1929, in the control of the liquidating trustees, subject to restrictions on their handling, resulting from various claims and lawsuits instituted by various persons and in-junctive writs issued in connection therewith. By stipulation it is shown that as late as February 1929 there were in effect injunctions restraining transfer of any of the Gladys City Oil, Gas & Manufacturing Co. stock or partition of its assets involved in said litigation. The adverse claims of Carroll, Gaddy, Collier, Gray, and others and the suits instituted by them to enforce their claims, as set forth in stipulations, negative receipt, either actual or constructive, of said assets (except as hereinafter indicated) by John H. Kirby prior to 1929. See Revenue Act of 1928, Regulations 74, arts. 332, 333; Grass Creek Oil & Gas Co. v. M. S. Reynolds, —- Fed. Supp. - (U. S. Dist. Ct., Wyoming, Sept. 13, 1933); cf. C. H. Mead Coal Co., 31 B. T. A. 190, and authorities therein cited.

Although in Gamer v. Gamage, 241 S. W. 736, 738, 739, it was held that after the lapse of three years from the date of dissolution of the corporation suits by or against the corporation could no longer be maintained, such ruling does not, in our opinion, cover or apply to the prosecution or defense by the liquidating trustees of suits based on claims by or against the corporation or its assets in tbe circumstances shown herein, for in Burkburnett Refining Co. v. Ilseng, 292 S. W. 179, it was said:

In Texas, our courts have long adhered to the doctrine that the assets of a dissolved corporation will be protected in equity as a trust fund for creditors and stockholders. In 1907 our Legislature began the enactment of remedial statutes. In 1919 other articles were added. As we construe our statutes, the Legislature has given to creditors and stockholders of a dissolved corporation the same broad measure of relief which equity would have afforded in the absence of legislation. Article 1888, without any time limitation, authorizes these trustees to defend and maintain suits and generally settle up the affairs of the dissolved corporation. Under this article the assets pass into the hands of these trustees, and they are charged with definite duties and responsibilities. This very article authorizes the substitution of these trustees as parties plaintiff in the further prosecution of the case at bar.
Article 1389 is merely cumulative of article 1388. It but provides that, as an aid to the trustees in performing their duties as prescribed in article 1388, the corporation itself, for limited purposes only, may continue for three years, and even longer, under a receivership, if the court thinks it necessary. But, even if such continuance of the corporation itself for limited purposes is not had at the option of the trustees, they still have the right, and are charged with the duty, of defending and maintaining suits in the protection of the assets of the corporation.

The right of the trustees to carry on the litigation after the lapse of three years, affirmed by the Texas Commission of Appeals, was adopted by the Supreme Court of the state, as the above citation shows.

We conclude and hold that John H. Kirby did not constructively receive the assets of the Texas Banking & Investment Co. at the end of three years from the expiration of its charter, but at the time of actual receipt of the properties and moneys distributed. Edward S. Harkness, 31 B. T. A. 1100; Mrs. Grant Smith, 26 B. T. A. 1178; Harry A. Dockum, 11 B. T. A. 39; Wells Fargo Bank & Union Trust Co. v. Blair, 26 Fed. (2d) 532. We hold that, with the exception of the $400,000 distributed on October 1, 1928, he received said assets after February 1, 1929; we hold further that all of said assets, including dividends, wrere received by him as liquidating dividends, ■and not as ordinary dividends, for they were all received through the liquidating trustees and, although the Gladys City Oil, Gas & Manufacturing Co. dividends were ordinary dividends so far as distribution by it was concerned, nevertheless they were paid to the liquidating trustees of the Texas Banking & Investment Co., who distributed same by way of liquidation. Therefore when received by John H. Kirby, these were liquidating dividends. He was as-signee of the rights of Mrs. Willson and all of her rights and assumed her status. She would, if she had not assigned to Kirby, have received these liquidating dividends, and whether Kirby be considered a stockholder or no, we conclude that he, with her status, received these assets by way of liquidation dividends, and in exchange therefor, under section 115 (c) of the 1928 Act. The valuations which we have above found determine the amount of the liquidation dividends received by Kirby. We reject.petitioner’s contention that the contractual arrangement between Kirby and Mrs. Willson affects the value of the assets distributed in liquidation, for manifestly such contract goes only to the cost of the assets, to Kirby, and does not affect the value of the liquidation distribution. The liquidating trustees were not parties to the contract between Mrs. Willson and Kirby. It was their duty to distribute the assets of the Texas Banting & Investment Co. to those entitled thereto — primarily the stockholders, but, after Kirby’s acquisition of the stock, to him as as-signee of the rights of the former stockholders. This distribution the trustees made. What the acquisition of the rights of such assignee cost him was of no interest to the distribution trustees, but was of interest only to the assignee, Kirby, by way of proper basis to be set up with reference to the taxation of the liquidation distribution. We therefore hold that the total basis to petitioner, in the taxable years here in issue, as to the amounts received as liquidating dividends is the cost to Kirby of the assignment from Mrs. Willson, to wit, $883,025, which is the total of $100,000 down payment in cash and notes from Kirby to Mrs. Willson, and $211,275 later paid her by Kirby, pursuant to contract, from the dividends paid by the Gladys City Oil, Gas & Manufacturing Co., together with $71,750 paid to the other parties shown by the record to have been claiming interests in the Texas Banking & Investment Co. stock, for assignments from them. These amounts, of course, are to be divided, as affecting petitioner’s interest. This liquidation distribution was received partly in 1928 ($400,000 received October 1, 1928) and the balance in 1929. We hold this to be taxable in 1928 to the extent that it exceeds the entire basis in the taxable years, which basis, as above seen, is $383,025, and the balance to be taxable in 1929. Any further payments to Mrs. Willson from receipts in years later than the taxable years here involved from the oil and gas production designated by the contract between her and Kirby are so contingent upon the possibility of oil and gas production, and upon the length of life of Mrs. Willson, that we hold that they had no market value during the taxable years here involved, and were not shown to have such value. Therefore such future payments can not properly be set up as a part of the basis for the taxable years herein involved.

We consider and hold that Kirby was not a mere trustee or agent for Mrs. Willson as to one-fourth of the total dividends paid by the Gladys City Oil, Gas & Manufacturing Co., and did not receive any money for her benefit, and therefore hold that the amounts received by him were income. The obligation to pay Mrs. Willson was personal. She did not retain any lien or interest in the dividends themselves', nor did she warrant the title to them. Kirby was owner of the dividends by assignment from her. She reserved no one-fourth interest therein. Moreover, the consideration to be paid by Kirby for Mrs. Willson’s rights was not to be abated or reduced in consequence of any judgment obtained against the Texas Banking & Investment Co. The payments to her were merely a part of a purchase, enforceable as a personal obligation. Kirby was not a mere conduit for the passing of the dividends to Mrs. Willson. He was to pay her, not the dividends themselves, but “amounts equal to one-fourth (%) of the total dividends.” The difference is important, and, considering the desire,, of Mrs. Willson that the payment not be abated or reduced in consequence of any judgment obtained, this difference between dividends and amounts equal to dividends appears to have been an intentional one. We find in these circumstances neither mere agency nor trusteeship.

We conclude and hold, therefore, that petitioner’s gain should be computed on the basis of values as heretofore herein determined, or stipulated, subject to the mutual concessions made by the parties in the stipulations, and subject also to the provision that the same gain on liquidation of the Texas Banking & Investment Co. should not be taxed twice, but only in the particular year in which actually received as shown by the findings of fact and stipulations, after allowing for proper basis as above indicated.

Decision will be entered under Rule 50.

       Sec. 203. (a) Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 202, shall he recognized, except as hereinafter provided in this section.
      * * * * * *
      (b) (2) No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
      *******

      (h) As used in this section and sections 201 and 204—
      (1) the term “reorganization” means * * * (C) a recapitalization, * * *

       (2) The term “a party to a reorganization” includes a corporation resulting from a reorganization and includes both corporations in the case of an acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation.

       Sec. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that—
      * * * * * * *
      (6) If the property was acquired upon an exchange described in subdivision (b), (d), (e), or (f) of section 203, the basis shall be the same as in the case of the property exchanged, decreased in the amount of any money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized upon such exchange under the law applicable to the year in which the exchange was made. If the property so acquired consisted in part of the type of property permitted by paragraph (1), (2), (3), or (4) of subdivision (b) of section 203 to be received without the recognition of gain or loss, and in part of other property, the basis provided in this paragraph shall be allocated between the properties (other than money) received, and for the purpose of the allocation there shall be assigned to such other property an amount equivalent to its fair market value' at the date of the exchange. This paragraph shall not apply to property acquired by a corporation by the issuance of its stock or securities as the consideration in whole or in part for the transfer of the property to it.

       Sec. 115. (c) Distributions in liquidation. — Amounts distributed in complete liquidation of a corporation shall be treated as in full payment .in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. * * *


source: Caselaw Access Project

author: ARUndell:

license: Public Domain

text:
    Albert W. Russel, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 73423.
    Promulgated March 10, 1937.

      Benjamin J. Manley, Esq., and Raymond K. Dyhema, Esq., for the petitioner.

      Hugh Brewster, Esq., for the respondent.
   OPINION.

ARUndell:

This proceeding involves a deficiency in income taxes for 1930 in the amount of $3,532.16. Various errors in the computation of such deficiency -were assigned by the petitioner, but upon hearing all except two thereof were withdrawn. The questions in controversy are whether the Commissioner erred in increasing the taxable income of the petitioner by adding thereto (l)'the amount of $1,200 claimed to represent salary received by the petitioner during 1930 from the Detroit' Bevel Gear Co., and (2) the amount of $18,021.35 claimed to represent a part of petitioner’s distributive share from the Sarita Oglebay Russel trust. The facts were stipulated.

The petitioner, formerly a resident of Detroit, Michigan, now resides in Cleveland, Ohio.

During 1930 the petitioner was president and director of the Detroit Bevel Gear Co. and his salary had been fixed by the board of directors early in 1930 at $8,400 per annum, which amount was paid to him in monthly installments during the year. On December 24, 1930, the petitioner discussed the amount of his salary with E. H. Jenks, vice president and director of the company, and with T. R. Ravin, its secretary, treasurer, and director. These three men constituted a majority of the board of directors of the company. The petitioner suggested that, in view of the showing which had been made by the company during the year 1930, his salary was excessive and should be reduced to $4,200 per year, which was agreed to by Jenks and Ravin. Thereupon, the petitioner delivered to the company his check dated December 23, 1930, payable to the order of the company in the amount of $4,800, which amount included one-half of the salary previously received by him and $600 representing one-half of the amount previously withdrawn by him to cover his traveling expenses. The check was accepted by the company.

The petitioner in his return for 1930 reported salaries received, in that year in the aggregate amount of $25,441.88, which included the amount of $4,200 as salary received from the Detroit Bevel Gear Co. The respondent in recomputing the petitioner’s tax liability increased the amount of salaries reported by adding thereto $4,200, thus making the salary received by the petitioner from the Detroit Bevel Gear Co. $8,400 instead of $4,200 as reported by the petitioner.

“A readjustment during the year of the amounts of salaries is not unusual in corporation procedure. The amounts incurred, are those finally agreed upon during the year.” Arcadia Amusement Co., 14 B. T. A. 1335, 1337; Stern-Slegman-Prins Co. v. Commissioner, 79 Fed. (2d) 289; Charles M. Howell, Administrator, 21 B. T. A. 757; Verndale Garage, Inc., 15 B. T. A. 57, 61; Guy Fulton, 11 B. T. A. 641; Whitney Coal Mining Co., 4 B. T. A. 310; H. B. Hill, 3 B. T. A. 761; H. C. Couch, 1 B. T. A. 103. Since the 1930 salary of the petitioner was reduced by agreement in 1930 and the petitioner in that year returned one-half of the $8,400 to the company, he actually received in the taxable year only $4,200 as salary from the Detroit Bevel Gear Co. The action of the respondent in increasing the petitioner’s 1930 salary from $4,200 to $8,400 in 1930 is, therefore, disapproved.

The second issue covers the correctness of respondent’s action in increasing petitioner’s distributive share of a trust fund.

It appears that on July 6, 1927, Sarita Oglebay Russel, the wife of the petitioner, executed a revocable trust indenture or declaration of trust in writing, made a part of these findings by reference, naming the Central United Bank of Cleveland, Ohio, and certain individuals as trustees, wherein and whereby she created a trust for the benefit of herself, the petitioner, Crispin Oglebay, her cousin, and Courtney Burton, her son, and wherein it was provided, among other things, as follows:

Abticle XVIII.
After the decease of the Grantor, the Trust Estate shall be held and disposed of as follows:
(a) The Trustee shall pay all taxes and assessments that may from time to time be levied or imposed upon the principal or income of said Trust Estate, including any inheritance, succession and estate taxes that may be levied or assessed in respect of the Trust Estate or any part thereof, and all proper expenses and obligations incurred by the Trustees in respect to the Trust Estate, and also compensation of the Trustees at the rate hereinafter provided.
(b) Subject to the payments in this Article above provided for, and subject to the termination of this Trust as hereinafter provided, from the time of the death of the Grantor, Fifteen Per Gent. (15%) of the net income of the Trust Estate shall be paid to Albert W. Russel, husband of the Grantor, in monthly installments, so long as he shall live, * * *

Upon execution of the trust indenture Sarita Oglebay Russel transferred to the trustees named 5,000 shares of no par value capital stock of the E. W. Oglebay Co., a corporation. The trustees named in the trust indenture accepted the trust thereby created and at all times thereafter acted as trustees and performed the duties and obligations imposed upon them as such.

Sarita Oglebay Russel died July 10, 1930, without having revoked the trust indenture and while it was in full force and effect.

On November 6, 1930, the Probate Court of Cuyahoga County, Ohio, in a proceeding had in the estate of Sarita Oglebay Russel for the determination of inheritance tax determined the “values of the successions in said estate, the amounts of the exemptions, and the amounts of the taxes in which the successions are liable.” Accordingly, there was assessed for and in behalf of the State of Ohio against the estate of Sarita Oglebay Russel, deceased, a tax in the aggregate amount of $149,633.22, of which $19,043.78 was assessed on the values of 15 successions passing by virtue of the will of Sarita Oglebay Russel, deceased. The remaining $130,589.44 was assessed on the values of the successions passing by virtue of the trust indenture, which was subject to a discount of 8 percent for prompt payment, as follows:

On November 10, 1930, the trustees paid the net amount of the tax of $120,142.29. In order to make such payment the trustees borrowed $120,142.29 on their demand note from the Central United National Bank of Cleveland, which amount Avith interest at 5 percent was repaid on December 26, 1930, from income of the trust. During the period from July 10 to December 31, 1930, the trustees incurred expenses and obligations, which, together with the compensation of the trustees, aggregated $9,367.82, leaAÚng a net amount of $41,989.89 to be distributed to the beneficiaries pursuant to article XVIII of the trust indenture.

The trustees filed a fiduciary information return in which they disclosed a gross income of $171,500, consisting of dividends of the E. W. Oglebay Co., from which were deducted the sum of $120,142.29, being the net amount of taxes paid, and the sum of $9,367.82, other expenses of the trustees, leaving a residue of $41,989.89, of which 15 percent, or $6,298.49, was distributed and paid by the trustees to the petitioner in 1930. This amount was reported by the petitioner in his return for the year 1930 as dividends received.

The respondent in recomputing the tax liability of the petitioner increased the amount of dividends reported by the petitioner by adding thereto 15 percent of the net amount of the taxes of $120,-142.29, or $18,021.35.

The petitioner concedes that under the Revenue Act of 1928 Re is not entitled to a deduction for any part of the state inheritance tax paid by the trustees out of the income of the trust in 1930. Elmon C. Gillette, 29 B. T. A. 561; affirmed in Gillette v. Commissioner, 76 Fed. (2d) 6; Martz v. Commissioner, 82 Fed. (2d) 110.

He, however, advances two arguments, the acceptance of either of which would call for disapproval of the respondent’s action in this respect. His first contention is that the tax paid the State of Ohio is allowable to the trustees as a deduction. On this point we think he is wrong. Section 28 (c) of the Revenue Act of 1928 limits the deduction to the decedent’s estate. A testamentary trust has been held to be an “estate” within the meaning of this section, Pennsylvania Co. for Insurances on Lives and Granting Annuities, Executor and Trustee, 32 B. T. A. 449; Junius Beebe, Trustee, 26 B. T. A. 190; affirmed in Commissioner v. Beebe, 67 Fed. (2d) 662. On the other hand, an inter vivos trust, as is here involved, has been held not to be an “estate” within the meaning of this section. Blanch A. Bagnall, 35 B. T. A. 1; Robert P. Scripps, 33 B. T. A. 963, 967-969.

However, it does not necessarily follow that, because such taxes are not allowable as a deduction to the trustees, they constitute taxable income to the beneficiary. Thus we come to the petitioner’s second point. He contends in substance that the amount of trust income taxable to him under section 162 (b) of the Revenue Act of 1928 is to be determined from the provisions of the trust indenture.

“The deductions which a trustee may take in computing its taxable income are controlled by the applicable provisions of the revenue act. In determining the income currently distributable to beneficiaries of a trust, however, we must be guided by the terms of the trust agreements.” Jack M. Pranks, 32 B. T. A. 260, 264. The test of taxability of income to the beneficiaries is “the present right to receive it.” Freuler v. Helvering, 291 U. S. 35.

It appears from the trust indenture that for the purpose of safeguarding her investments inherited from her father, consisting largely of shares of capital stock of various corporations, the businesses of all of which were more or less interdependent, the grantor caused the E. W. Oglebay Co. to be formed, ,to which she transferred such capital stock and also other properties in exchange for its capital stock, and that the trust here involved was thereafter created for the purpose of safeguarding the capital stock of the E. ,W. Oglebay Co. and for the benefit of the grantor during her life and other beneficiaries named therein. The trust indenture expressly provided that after the death of the grantor the trustees should pay certain taxes and expenses, including “inheritance, succession and estate taxes that may be levied or assessed in respect of the Trust Estate or. any part thereof,” and that, subject to the payment of such taxes and other payments authorized therein to be made by the trustees, 15 percent of the net income of the trust estate should be paid to the petitioner in monthly installments. The petitioner, under the provisions of the trust indenture, had no present right to any part of the trust income required for the payment of such estate and inheritance taxes and could not have compelled the trustees to pay any part of such income to him. It is apparent from the trust indenture that it was the purpose of the trust to safeguard and keep intact the corpus thereof, consisting of the 5,000 shares of the E. W. Oglebay Co., and to use the income and not the corpus for the payment of estate and inheritance taxes. The petitioner was entitled thereunder to only 15 percent of the income remaining after the payment and deduction of such taxes, together with other taxes and expenses authorized therein to be paid out of income.

It is immaterial here whether the Ohio inheritance tax is a transfer tax deductible from the legacy and a charge against the corpus and not against the income or that it has no relation to the income of the trust and is not incidental to the earning of the income, as argued by the respondent. As stated in Jack M. Franks, supra:

* * * We do not have the trust before us in this proceeding. The “trust” is a taxpayer within the meaning of Title I of the Revenue Act of 1928, Anderson v. Wilson, 289 U. S. 20, affirming 60 Fed. (2d) 52, and a separate taxable person from the beneficiary, Merchants Loan & Trust Co. v. Smietanka, 255 U. S. 509.

Blanch A. Bagnall, supra, wherein the Board held that the sole beneficiary "of a trust made in contemplation of death is properly taxed on the trust income unreduced by a deduction of a proportionate part of estate and inheritance taxes paid by the 'trustee, is not controlling here. It appears from the opinion of the Board in that case that all the income of the trust was distributable to the taxpayer and that the evidence therein did not disclose whether the taxpayer in fact received from the trustee only the remainder of the trust income after the deduction of such taxes, it being impossible therefore to say that she was being taxed, upon more than she actually enjoyed. Restein v. Commissioner, 83 Fed. (2d) 818, is also distinguishable. Therein it appears that by the express terms of the testator’s will the inheritance tax on the taxpayer’s interest was a charge upon and was paid not out of the income, but out of the principal of "the decedent’s’residuary estate, and that she received the income undiminished by any tax payment.

Nor is the principle applied in Bergan v. Commissioner, 80 Fed. (2d) 89, controlling here. The court therein held that income tax payments which were made by trustees on income paid by them to the taxpayer as beneficiary, under a trust directing distribution of income to the beneficiary free from such tax, represented “currently distributable income.” Such holding is based upon the doctrine that the discharge of an obligátion of a taxpayer is considered the equivalent of the receipt of income or that the payment by a third party of a tax obligation constitutes income realized by the party benefited by the payment. The trustees herein did not pay an obligation of the petitioner. The primary obligation for the payment of state inheritance taxes rested upon the trustees and was a general charge upon the trust estate. Sec. 5336, General Code of Ohio; Keith v. Johnson, 271 U. S. 1, involving New York inheritance tax; United States v. Mitchell, 271 U. S. 9, involving Texas inheritance tax; Gillette v. Commissioner, 76 Fed. (2d) 6, involving California inheritance tax. In the latter case, holding that a beneficiary of a trust is not entitled to a deduction of state inheritance taxes which he was forced to pay on his interest transferred to him under a trust deed, the court stated:

* * * Under the inheritance tax laws of all three states [New Tork, Texas and California] the estate is primarily responsible for the payment of the tax. The judgment against the taxpayer [beneficiary of a trust made, in contemplation of death] in the California superior court did not relieve the estate of Lina Gillette [the grantor] from a primary duty to pay the tax. The state only obtained a judgment against the petitioner herein because the trustees had not paid the tax as they were in the first instance bound to do.

It is conceded by the respondent that the Ohio statute covering the inheritance and succession taxes is for all practical purposes the same as that of New York.

We therefore hold that no part of the state inheritance taxes paid by the trustees in the amount of $120,142.29 constituted income taxable to the petitioner, and the action of the respondent in this respect is disapproved.

Decision will be entered wider Rule 50.

       SEC. 23. DEDUCTIONS PROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      ****** *
      (c) Taxes generally. — Taxes paid or accrued within the taxable year, except — [Exception not material]
      * * * * * * *
      Por the purpose of this subsection, estate, inheritance, legacy, and succession taxes accrue on the due date thereof, except as otherwise provided by the law of the Jurisdiction imposing such taxes, and shall be allowed as a deduction only to the estate.

       SEC. 162. NET INCOME.
      The net income of the estate or trust shall be computed in the same manner and on the same basis as in the ease of an individual, except that—
      ****** *
      (b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, * * * but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. * * *

         Sec. 5336.

        Tam a lien upon property. Such taxes shall be and remain a lien upon the property passing until paid and the successor and the executors or administrators of the general estate of the decedent, and the trustees of such property shall be personally liable for all such taxes, with interest as hereinafter provided, until they shall have been paid as hereinafter directed.

        Duties of executor, administrator or trustee. Such an administrator, executor or trustee, having in charge or in trust for distribution any property the succession to which is subject to such taxes, shall deduct the taxes therefrom, or collect the same from the person entitled thereto. He shall not deliver, or be compelled to deliver, any specific legacy or property, the succession to which is subject to said taxes, to any person, until he shall have collected the taxes thereon. He may sell so much of the estate of the decedent as .will enable him to pay said taxes in like manner as he would be empowered to do for the payment of the debts of the decedent.


author: Black:

text:
    Alvin Mercer Parker and Joseph Brooks Bloodgood Parker, Executors of the Estate of Annie C. B. Parker, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 80651.
    Promulgated March 10, 1937.

      Alfred 8. Weill, Esq., Hugh Satterlee, Esq., Walter O. Blakely, Esq., William, R. Green, Jr., Esq., and Albert 8. Lisenby, Esq., for the petitioners.

      Lewis Pendleton, Esq., for the respondent.
   OPINION.

Black:

This proceeding involves respondent’s determination of a gift tax deficiency of $898.46 against the estate of Annie C. B. Parker, deceased, for the calendar year 1924. The entire deficiency is in controversy.

The issue is whether, upon the facts, certain personal property, of the value of $120,535.75, given by Annie C. B. Parker on September 23, 1924, was “received” by her from prior decedents within five years prior thereto within the meaning of the words “received by the donor * * * from a decedent by gift, bequest, devise, or inheritance” as used in section 321 (a) (4) of the Revenue Act of 1924. Submission was made upon the pleadings.

The facts alleged in the petition are all admitted in the answer and are as follows:

(a) Annie C. B. Parker died testate on August 18, 1931, naming as Executors under her Will Alvin Mercer Parker and Joseph Brooks Bloodgood Parker, the petitioners hereinbefore named, who duly qualified and now are acting as such.
(b) The Will of Annie C. B. Parker’s sister, Mary Frances Bloodgood, who died December 19, 1918, was probated in the office of the Register of Wills in Philadelphia, Pa., where the decedent resided. Under the residuary clause of her Will, the residue of her estate was bequeathed in equal portions to Joseph Bloodgood, Jr., and Annie O. B. Parker, the petitioners’ donor as follows:
“All the rest, residue and remainder of my estate of whatsoever kind and wheresoever situate I give and devise and bequeath in equal shares to my said brother the said Joseph B. Bloodgood, Jr., and my said sister the said Annie O. B. Parker absolutely and in fee simple and to the survivor should either predecease me.”
On October 8, 1919, the account of the Executors of the Estate of Mary Frances Bloodgood was confirmed by the Orphans’ Court of Philadelphia County, Pennsylvania, and in accordance with that account there was distributed to Annie C. B. Parker on October 19, 1919, 22 shares of common stock of Lehigh Valley Railroad Company, and, on November 15, 1919, 341 shares of common stock of said company.
(e) The Will of Annie C. B. Parker’s brother, Joseph B. Bloodgood, Jr., who died January 22, 1919, was probated in the office of the Register of Wills in Philadelphia, Pa., where the decedent resided. Upon the residuary clause of his Will, the residue of his estate was bequeathed to Annie C. B. Parker, the petitioners’ donor, as follows:
“All the rest and residue of my estate I give devise and bequeath to my said sister Annie C. B. Parker absolutely and in fee.”
On December 24, 1919, the account of the Executors of the Estate of Joseph 3- Bloodgood, Jr. was confirmed by the Orphans’ Court of Philadelphia County, Pa., and in accordance with that account, there was distributed to Annie C. B. Parker on June 7, 1920, 400 shares of common stock of United States Steel Corporation, and on October 20, 1920, 717 shares of common stock of Lehigh Valley Railroad Company, which shares were owned by Joseph B. Bloodgood, Jr., at the date of his death, and 459 shares of the stock of that company which had been awarded to the executor of the Estate of Joseph B. Bloodgood, Jr., under the Will of his sister, Mary Frances Bloodgood.
(d) Returns for Federal Estate Tax were filed by the executors of the above referred to decedents’ estates and in the case of the Estate of Mary Frances Bloodgood the Lehigh Valley Railroad Company common stock was valued at $57.50 per share and in the ease of the Estate of Joseph B. Bloodgood, Jr., the Lehigh Valley Railroad Company common stock was valued at $54.50 per share and the United States Steel Corporation common stock at $90.0625 per share and Federal Estate Tax was determined and paid upon the basis of such valuations.
(e) On September 23, 1924, the petitioners’ donor, Annie C. B. Parker, created two deeds of trust and conveyed and delivered to the trustees named in said deeds of trust the above referred to 400 shares of United States Steel Corporation common stock and 1,539 shares of Lehigh Valley Railroad Company common stock, all of which stock had been acquired by the petitioners’ donor in the manner hereinabove set forth.
(f) The trusts, hereinabove referred to in subparagraph (e) hereof, made by the petitioners’ donor, Annie C. B. Parker, on September 23,1924, were created, and the conveyance and delivery of said 400 shares of United States Steel Corporation common stock and 1,539 shares of Lehigh Valley Railroad Company common stock were made less than five years after said stocks were received by her, though more than five years after the death of the decedents from the executors of whose estates said stocks were received by petitioners’ donor, Annie O. B. Parker.
(g) A Federal Gift Tax Return in which the value of the above referred to shares of stock at the time of the conveyance and delivery to the trustees was reported, was filed with the Collector of Internal Revenue at Philadelphia, Pa. Under Schedule (d) of said return a deduction was claimed for the $120,535.75, value of the aforesaid 400 shares of United States Steel Corporation common stock and the 1,539 shares of Lehigh Valley Railroad Company common stock as property identified as previously taxed in accordance with the provisions of Section 321 (a) (4) of the Revenue Act of 1924.
(h) In determining the net gifts subject to tax, the respondent allowed no deduction for the $120,535.75 claimed on account of property identified as previously taxed.

The question involved arises under the provisions of section 321 (a) (4) of the Revenue Act of 1924, which provides that, in computing the amount of the gifts subject to the tax imposed by section 319, as amended by section 324 (a) of the Revenue Act of 1926, there shall be allowed as a deduction:

An amount equal to the value of any property transferred by gift within the calendar year, which can be identified (A) as having been received by the donor within five years prior to the time of his making such gift, either from another person by gift or from a decedent by gift, bequest, devise, or inheritance * * *.

There is here no question of identification. The parties agree that the 400 shares of United States Steel Corporation stock and the 1,539 shares of Lehigh Valley Railroad Co. stock were received by Annie C. B. Parker from two decedents (her sister Mary and her brother Joseph) by bequest. They disagree only on whether those shares were so received “within five years” prior to September 23, 1924, the date she gave them away. Petitioners contend that Annie C. B. Parker did not receive the shares until actually distributed to her by the executors of the estates of her brother and sister, respectively. If petitioners are correct in this contention, the shares were received by Annie C. B. Parker within the five-year period, and petitioners would be entitled to the deduction of $120,535.75 claimed under section 321 (a) (4), supra. Respondent contends that, within the meaning of the above cited statute, Annie C. B. Parker received said shares at the dates of death of her brother and sister, respectively. If, therefore, respondent’s contention is correct, petitioners would not be entitled to the deduction claimed for the reason that both Mary and Joseph died more than five years prior to September 23, 1924.

The respondent’s determination was based upon his ruling in G. C. M. 674 (V-2 C. B. 237). In his statement attached to the deficiency notice he also referred to Brewster v. Gage, 280 U. S. 327, ag * * presenting facts which are in certain important particulars similar to those in the instant case.” In his brief counsel for respondent argues that as applied to bequests the word “received” has the same meaning in the gift tax provisions relating to prior taxed property as it has in the estate tax provisions relating to such property (citing section 303 (a) (2) of the Revenue Act of 1924, Burnet v. Guggenheim, 288 U. S. 280, and Second National Bank & Trust Co. et al., Executors, 23 B. T. A. 370; affd., 63 Fed. (2d) 815) ; and that in both the estate and gift tax statutes, which were enacted as Part I and Part II, respectively, of Title III of the 1924 Act, the word “received” should be construed as meaning the acquisition of the right in property rather than the actual physical possession thereof.

Petitioners’ contention, reduced to its simplest form, is that the plain, ordinary, and commonly understood meaning of the word “received” comprehends an actual reduction to physical possession of the property in the hands of the recipient. They rely principally upon the case of Avery v. Commissioner, 292 U. S. 210.

We do not think it is necessary at this time to decide whether the word “received” has the same meaning in section 321 (a) (4) of the Revenue Act of 1924 as it has in section 303 (a) (2) of that act. As far as we know there is no decision construing this word as used in the estate tax part of the statute. It was not construed in the Second National Bank & Trust Co. et al., Executors, supra. We think, therefore, it will suffice if we determine its meaning as used in the gift tax part of the statute.

If we were to construe the word “received” by itself alone without any consideration of the context in which it was used, there would be force in petitioners’ argument. We think, however, that the word “received” can not be so construed, but must be interpreted in the light of the context in which it was used, namely, “received by the donor * * * from a decedent by gift, bequest, devise, or inheritance * * Cf. Helvering v. Stockholms Enskilda Bank, 293 U. S. 84.

Annie C. B. Parker was a residuary legatee. She received the property in question from two prior decedents by bequest. Under general rules of law, does a residuary legatee “receive” property from a decedent by bequest at the time the decedent dies, or when the property is distributed to the residuary legatee by the personal representative of the decedent’s estate?

In Brewster v. Gage, supra, the petitioner was a residuary legatee under the will of his father, who died on May 20, 1918. On April 19, 1920, the Surrogate’s Court at Rochester, New York, entered a final decree pursuant to which certain stocks were distributed to petitioner, who sold some of them in 1921 and 1922. The statutory basis for purposes of determining gain or loss in such a case was the value of the stock “at the time of such acquisition.” The Supreme Court held that “the time of such acquisition” was the date of decedent’s death and not the date of distribution made pursuant to the court’s decree.

McFeely v. Commissioner, 296 U. S. 102, was also a case where the taxpayers were residuary legatees who had received property from a decedent by bequest. The case turned on whether the legatees had “held” the property for more than two years. In deciding that the legatees commenced to hold the property from the date of decedent’s death rather than from the date of distribution, the Supreme Court said:

In common understanding to bold property is to own it. In order to own or hold one must acquire. The date of acquisition is, then, that from which to compute the duration of ownership or the length of holding. Whether under local law title to personal property passes from a decedent to the legatee or next of kin at death subject to a withholding of possession for purposes of administration, or passes to the personal representative for the purposes of administration, — the title of the beneficiary, though derived through the executor, relating back to the date of death, — is for present purposes immaterial. In either ease, the date of acquisition within the intent of the Reventre Act is the date of death.

In Cook v. McDowell, 52 N. J. E. 351; 30 Atl. 24, three surviving executors of the estate of Lewis D. Cook, who died in 1891, brought a bill for the construction of the latter’s will, the sixth paragraph of which was as follows:

I give, devise, and bequéath all the rest and residue of my property, both real and personal, to my six children [named] to be divided equally among them, share and share alike to them, their heirs and assigns forever. In ease any of my said children die before receiving their share, leaving issue, then I give, devise, and bequeath to such issue the share the parent would have taken if living. [Italics supplied.]

On May 3, 1893, before there was any distribution of the father’s estate, one of the children (Frederick) died testate without issue. In his will, among other things, he gave and devised a certain part of all the residue of his estate to the defendant, McDowell. In instructing the complainants what disposition was to be made of the share apportioned to Frederick in his father’s will, the court said:

The rule in such cases is that the legacy vests at the death of the testator. Bonnell’s Ex'rs. v. Bonnell, 47 N. J. Eq. 540, 20 Atl. 895, where the leading cases of this state supporting this rule are cited. I am of opinion that Frederick H. Cook took a vested estate in the whole residue at his father’s death, which he could lawfully dispose of by his will. The complainants will be instructed accordingly.

In In re Werner’s Estate, 256 N. Y. S. 372, the decedent’s will provided for the division of the residue of his estate among his children after his wife’s death, with a further provision that “Should any of my said children die without leaving issue before he or she receives Ms or her full share of my estate, as above provided, I give, devise and bequeath the share of such child to the survivors * * (Italics supplied.) One of the children died testate after her mother but before there was any distribution. The court held that the word “received” should be construed as meaning entitled to receive rather than actual physical possession, and that, since the daughter was so entitled, she had a right to dispose of her share by will. The daughter’s share was therefore distributed in accordance with the daughter’s will rather than to the surviving children under the will of the first decedent.

We believe that when the word “received” is interpreted in the light of the context in which it was used, namely, “received by the donor * * * from a decedent-by gift, bequest, devise, or inheritance * * it must be construed as meaning the acquisition of the right in property rather than the actual physical possession thereof. Brewster v. Gage, McFeely v. Commissioner, Cook v. McDowell, and In re Werner’s Estate, all supra. Cf. Whittell v. McLaughlin, 31 Fed. (2d) 30.

We do not think that Avery v. Commissioner, supra, requires the construction contended for by petitioners. The statute involved in the Avery case provided that “The amount of all such items [including dividends] shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under subdivision (b) of section 212 [1924 Act] any such amounts are to be properly accounted for as of a different period.” The two methods of accounting generally recognized are the cash receipts and disbursements basis and the accrual basis. Avery kept his accounts under the first method. He was a large stockholder and president of a corporation which during November 1924 declared a dividend payable on or before December 31, 1924. Avery’s check was made out during 1924, was dated December 31, 1924, but was held in the treasurer’s office until January 2,1925, when it was distributed to Avery through the office mail. The question before the Supreme Court was when, within the intendment of the statute, the dividend was “received” by Avery. It held that the time, of receipt was not until January 2, 1925. If Avery had kept his accounts under the accrual method, a different result would have obtained. This indicates to us that Congress intended that the word “received”, as used in section 213 (a) of the Revenue Act of 1924, meant something more tangible than the mere acquisition of a right in property. As soon as the dividend was declared Avery had a right thereto, which, under the accrual method, would have been income to him in 1924; but, being on the cash receipts and disbursements basis, this mere right to the dividend was not enough to make it income to him in 1924. The context of section 213 (a), wherein the word “received” is but a part, is quite different from the context of section 321 (a) (4), and it is our opinion that the word “received” should be construed according to the context in which it is used. Cf. Helvering v. Stockholms Enskilda Bank, supra, wherein the Supreme Court held that the word “obligations”, as used in one part of a taxing statute could and did have an entirely different meaning when used in a different context in another part of the same statute.

We hold, therefore, that Annie C. B. Parker received by bequest 363 shares of Lehigh Yalley Railroad Co. common stock on December T9, 1918, the date of death of her sister Mary, and 1,176 shares of Lehigh Valley Railroad Co. common stock and 400 shares of common stock of the United States Steel Corporation on January 22,1919, the date of death of her brother Joseph. Since more than five years elapsed between the dates she so received the shares in question and the date of gift, September 23, 1924, it follows that the respondent was correct in disallowing the deduction of $120,535.75 claimed under section 321 (a) (4) of the Revenue Act of 1924.

Reviewed by the Board.

Decision will be entered for respondent.


author: Disney :

text:
    General Industries Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 79069.
    Promulgated March 10, 1937.

      A. G. Elder, Esq., and Cyril D. Hill, Esq., for the petitioner.

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

Disney :

This proceeding involves deficiencies in income taxes for the years 1931 and 1932 in the respective amounts of $1,468.53 and $867.55.

The facts are stipulated. In 1931 and 1932 the petitioner, a corporation, sustained losses of $22,452.50 and $14,850, respectively, in the sale to the Parsons Investment Co., a corporation, of certain bonds at the market price. The deficiencies herein resulted from the respondent’s disallowance of. the losses as deductions. All stock having voting rights in the petitioner was legally or equitably owned by Reginald H. Parsons and Maude B. Parsons, husband and wife. Parsons and his wife also owned all of the stock of the Parsons Investment Co.

We have here a situation wherein a corporation controlled by a family sold stocks and bonds at market price to a corporation completely owned by the same family. There is involved no question of fraud or of resale to the vendor, nor any showing of lack of bona fides, unless it is assumed from the fact of sale (and loss claimed) between two corporations with a common family ownership or control.

The respondent has not .briefed the question herein, apparently relying upon the citations of authority set forth by the Commissioner in the statement attached to the deficiency notice. The petitioner cites, and we have considered, a large number of cases to the effect that corporate entity is to be recognized in tax matters. Among such cases are Marjory Taylor Hardwick, 33 B. T. A. 249, citing Commissioner v. Van Vorst, 59 Fed. (2d) 677; Jones v. Helvering, 71 Fed. (2d) 214; certiorari denied, 293 U. S. 583, and other cases; also A. S. Eldridge, 30 B. T. A. 1322; affd., 79 Fed. (2d) 629; and Commissioner v. McCreery, 83 Fed. (2d) 817.

We have also considered section 45 of the Revenue Act of 1932, which, if applicable at all, would also apply to 1931, being the same as the 1928 Act on that subject. In connection therewith we have examined the principles discussed in Asiatic Petroleum Co. (Delaware), Ltd., 31 B. T. A. 1152, and the opinion of the Circuit Court affirming same, reported in 79 Fed. (2d) 234; certiorari denied, 296 U. S. 645. In that case a corporation sold to a foreign corporation, haying the same ownership, certain properties at cost. The vendee immediately resold the property at a profit. The Board and the Circuit Court applied.section 45 of the 1932 Act as authority for holding that the profit made was that of the first corporation, and sustained the Commissioner’s determination of deficiency accordingly. Does this statute, so construed, indicate that herein the Commissioner may disallow the deduction of an alleged loss taken by a corporation in selling stocks and bonds at market price to a corporation having the same ownership or control?

After considering the principle of corporate entity, and the effect of section 45 thereon, we are forced to the conclusion that that section was not intended to permit such a violation of corporate entity; as disallowance of the deductions sought herein would entail. We can not believe that the intent of the statute goes to the extent of allowing the respondent the control over corporations with common ownership which the disallowance of deductions herein would require. Section 45 permits distribution, apportionment, or allocation of a deduction, but it nowhere permits disallowance thereof — which is the action herein taken by the Commissioner. We therefore hold that the losses in question (the amounts of which are not in dispute) were properly deducted by the petitioner in the taxable years here in question.

Reviewed by the Board.

Decision will be entered for the petitioner.

Smith and Hill dissent.

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


author: MuRdock:

text:
    Russell C. Mauch and Bessie Mauch, Petitioners, v. Commissioner of Internal Revenue, Repondent.
    Docket No. 72269.
    Promulgated March 10, 1937.

      Everett. Kent, Esq., and Milton J. Goodman, Esq., for the petitioners.

      I. Graf, Esq., for the respondent.
   OPINION.

MuRdock:

The evidence shows that the petitioner, Bessie Mauch, had no income for 1929 and 1930 and took no part in filing the returns. The respondent no longer contends that she is liable for any part of the deficiencies or penalties; therefore, decisions will be entered holding that there are no deficiencies or penalties for either year as to her.

Russell C. Mauch, herein referred to as the petitioner, contended in his petition that the determination of the deficiency for the year 1929 was barred by the statute of limitations. However, consents were duly executed extending the statutory period so that the statute of limitations in no way bars the Commissioner in respect of deficiencies or penalties due from Russell C. Mauch for the years 1929 and 1930. The petitioner no longer argues this point and it needs no further discussion.

The petitioner contends that, since he was indicted in the United States District Court for willfully attempting to evade or defeat taxes upon his net income for the years 1929 and 1930 in violation of section 146 (b) of the Revenue Act of 1928 and was found not guilty by a directed verdict, the imposition of the fraud penalties here is barred. A similar question was considered and decided adversely to the contention of the petitioner in Charles E. Mitchell, 32 B. T. A. 1093. The Board here adheres to the position which it took in the Mitchell case. See also William R. Scharton, 32 B. T. A. 459.

The principal issue in this case is the one relating to fraud. The petitioner made no assignment of error relating to fraud in his amended petition, but sought to avoid the effect of the Commissioner’s determination solely on the ground that the additions to income were improper and, consequently, no deficiencies could exist. He failed to reply to the allegations of fraud contained in the Commissioner’s answer. Long after the time to reply liad passed, he asked leave to file a reply at the time of the hearing. He gave no valid reason for being permitted to file a reply at that late date denying the Commissioner’s allegations, and his request was denied. Thus, he came to trial with the allegations of fraud contained in the answer deemed to be admitted. See Board’s Rules 14, 15, and 18. F. O. Stabler, 27 B. T. A. 342. There is a strong intimation in the pleadings that the petitioner does not contest the fraud penalties except by way of defending against the deficiencies. But, however that may be, the allegations of fr^iud in the Commissioner’s answer which are deemed to be admitted, together with the evidence in the case, establish in a clear and convincing fashion that a part of each of the deficiencies is due to fraud with intent to evade tax.

Moreover, the Commissioner does not have to rely in this case upon the petitioner’s failure to reply. The statute imposes the penalty where any part of the deficiency is due to fraud with intent to evade tax. Sec. 293 (b), Bevenue Act of 1928. The Commissioner has the burden of proof (sec. 907 (a), Bevenue Act of 1924, amended by sec. 601), but does not have to prove that all of the understatements were fraudulent. It can be assumed that the petitioner has denied all of the facts relating to fraud and that the Commissioner has not been relieved in the slightest in his burden of proof on the fraud issue by the petitioner’s failure to plead properly; nevertheless, the evidence establishes affirmatively that a part of each deficiency is due to fraud with intent to evade tax. Thus the Commissioner did not err in determining that the fraud penalties are due.

The petitioner’s failure to keep adequate books and records from which his correct income tax liability for these years could be determined forced the Commissioner to resort in his investigation to bank records and other available sources of information. The petitioner received and deposited in his general account at various times during both of these years large sums of money which he did not report in his income tax returns, and the receipt of which he has repeatedly refused to explain. The petitioner admits that he received most of these amounts in cash and commingled them with his own funds by depositing them in his bank account. He says that these amounts were received from clients, and, when he was confronted with the evidence and was asked whether he had not used the funds for his own purposes, he replied that it looked that way. There is, for the purpose of deciding the fraud issue, no material difference between the parties in regard to the purposes for which withdrawals from the petitioner’s accounts were made or in regard to the deductions to which he is entitled. That is, their differences are slight compared with the amounts here involved. The evidence clearly shows that the petitioner freely used all of the funds now under discussion as his own property. The real question in the case is to determine whether or not the evidence shows that these funds were income to the petitioner. If it does not, then the Commissioner has failed to prove fraud. But if the evidence shows that these sums were income to the petitioner, then the only serious challenge to the Commissioner’s determination of the fraud penalties has been successfully met.

The Commissioner has been unable to determine the exact source from which the petitioner obtained the funds or the precise purpose for which they were paid to the petitioner. The petitioner was a witness in the case and was asked to explain their receipt and to show, if he could, that they were not income to him for these years. He refused to make any explanation except to say that they were trust funds, and a confidential relationship between himself and his clients prevented him from making further disclosures. He did not refer to any trust instrument, grantor, or beneficiary. A proper fiduciary relationship may be sufficiently disclosed for the purpose of a case like the present without violating any confidence placed in the fiduciary. 5 Wigmore on Evidence, §§2286, 2296. If the petitioner meant to use the phrase “trust funds” in a straightforward manner and to say that the funds were received by him in a fiduciary capacity rather than in an individual capacity for his own uses and purposes, then, speaking bluntly as the necessity of the case requires, we do not believe the petitioner on his oath. He has not told “the truth, the whole truth, and nothing but the truth” as he was sworn to do. We have not failed to believe him in this respect without good reason, but have been led to the conclusion by observing him on the stand, by considering the manner in which he gave his testimony, and by considering his testimony in the light of the uncontroverted evidence in the case. He did not keep separate account of the funds, as a fiduciary would be required to do, and he used the funds for his own purposes, which a fiduciary could not do without violating his trust. Nor do we believe that his failure to testify fully in regard to these matters was due to any pure or altruistic motive springing from a proper confidence placed in him as an attorney by a client. Cf. 5 Wigmore on Evidence, §2292; Alexander v. United States, 138 U. S. 353. If, however, when he used the phrase “trust funds”, he meant to give it some subtle meaning, such, for example, as ill-gotten gains which he was not lawfully entitled to receive, nevertheless, his position would be no better for gains of that kind, retained without adverse claim, represent income. Cf. United States v. Sullivan, 274 U. S. 259.

The taxpayer, of course, did not have to make out a case of fraud against himself. His refusal to explain and his failure to make any valid affirmative defense does nothing to support the Commissioner’s burden of affirmatively proving fraud, except, perhaps, in one respect. The fact that large unexplained amounts passed through the petitioner’s accounts in these years is not alone sufficient to justify the conclusion that the funds were all income, yet it is substantial evidence to be considered in determining the question. Oliver v. United States, 54 Fed. (2d) 48. The fact that he used the funds for his own private purposes is likewise important. Robert Burd, 19 B. T. A. 734. In such cases the conclusion that the receipts were income is sometimes drawn from the evidence as a whole because no other conclusion seems reasonable. Pincus Brecher, 27 B. T. A. 1108. If the receipt by the petitioner of the funds in question did not represent either a gift to him or a return to him of his capital, then their receipt must represent income to him. Not only has the petitioner never contended that the- receipt of the funds represented a gift to him or a return of his capital, but he has made an explanation which is wholly inconsistent with the funds being either a gift or a return of capital. The defense of a gift or a return of capital would have been so simple and so effective that the failure of the petitioner to raise it and the fact that he has given another and wholly inconsistent explanation of the receipt of the funds may be taken as a concession on his part that the funds were neither a gift nor a return of capital. The foregoing conclusion may be logically drawn even though we do not believe the petitioner’s testimony that the funds were trust funds. The rule that a statement of a witness may not be disbelieved for one purpose and believed for another is not being violated. We are not believing his statement for any purpose, but are simply reasoning that, since he gave one explanation, it is fair to assume that the factual basis for a wholly inconsistent and yet effective explanation did not exist. The evidence is that at the beginning of these taxable years the petitioner’s estate did not include these funds in any form whatsoever. The fair deduction from all of the evidence is that the petitioner did not receive the funds either as a gift or as a return of capital.

Thus the respondent has made out this case on the fraud issue; the petitioner received substantial sums in each year from unnamed clients; these sums were not the return of capital or a gift to the petitioner; they were deposited by the petitioner in his bank account along and commingled with other funds belonging to him; and they were used freely by him for his own benefit and enjoyment. The statutory definition of income clearly includes items such as these. The petitioner not only failed to keep proper records of the receipt of these funds, but he failed to report them as income. The evidence of fraud is clear and convincing in respect of these items.

There is other evidence entirely separate from that above discussed suflicient to establish fraud in this case. The Commissioner not only alleges that there was fraud in failing to report the amounts discussed above, but he also alleges that attorney fees were fraudulently omitted. The petitioner reported attorney fees for 1929 in the amount of $6,622.71 and for 1930 in the amount of $13,178.96. The evidence clearly establishes that the petitioner received fees of $11,507.38 in 1929 and of $15,745.10 in 1930. These are entirely separate from his salary as district attorney which is in no way involved in this proceeding. The petitioner said that the figures shown in his return were prepared by his stenographer and a man whom he had employed to make his returns. He said that these two went over all his records, including his check books and deposit slips, and he signed the returns without going over them “with any degree of care.” The petitioner’s witness Margolis, a certified public accountant, went over these same records in 1933 and found fees of $11,-507.38 for 1929 and $15,745.10 for 1930. He testified that generally the items were designated as fees on the deposit slips or original records. The petitioner was on a cash receipts and disbursements basis. After due allowance for deductible expenses of his business, a gross understatement of attorney fees remains. His failure to report these fees is not relieved of its force as proof of fraud by a showing on the part of the petitioner of any ameliorating circumstances. Cf. Harry Feldman, 34 B. T. A. 517; Frank A. Weinstein, 33 B. T. A. 105; Charles J. Delone, 34 B. T. A. 1139; Liberty Hosiery Mills, 31 B. T. A. 64. Other understatements not discussed have not been considered in deciding the fraud issue.

The issue relating to the deficiencies is quite different from that relating to fraud in this respect; the Commissioner’s determination of the deficiencies is presumed to be correct and the taxpayer has the burden of showing that it is incorrect. Here again the principal items in controversy are the unexplained amounts deposited in his bank accounts. Obviously he can not avoid the effect of the Commissioner’s determination by refusing to explain how he obtained the amounts or the purposes for which he received them. As has been stated, we do not believe his statement that they were trust funds. Consequently, it has not been shown that the Commissioner committed any error in including these amounts in income for the purpose of determining the deficiencies. On the contrary, the evidence supports the determination of the Commissioner, as already appears from the foregoing discussion. The petitioner has failed to show that other additions made by the Commissioner were not income, such as the amounts paid in cash for stock and mortgages. The petitioner received $520.26 in 1929 and $332.78 in 1930 from Northampton County to reimburse him for part of his office expenses. The reason for this was that the county failed to supply him with an office for his work as district attorney and, therefore, made this adjustment. The petitioner, however, got at least a part of his office space rent free, as compensation for representing the owner of the building. The Commissioner has adjusted the petitioner’s income for each year by reducing the petitioner’s business expenses by the above amounts. The petitioner does not contest these adjustments and they are proper, despite the fact that the money was received from the county. If the petitioner had paid the owner of the building the portion of the rent borne by the county and had been paid a like amount by the owner of the building for legal services, the result would be exactly the same. The findings of fact indicate the correct treatment of other items. The determination of the Commissioner has been modified or changed in some minor respects, in several instances by concessions of the respondent’s counsel. The petitioner has been given the benefit of every adjustment which the evidence justifies.

Reviewed by the Board.

Decision will be entered under Rule 50.

Black, Arundell, Yak Fossan, and Arnold concur only in the result.


author: TURNER:

text:
    Oscar Leroy Mills, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 72345.
    Promulgated March 11, 1937.

      Philip Grey Smith, Esq., and-¿7. F. Rothenberg, Esq., for the petitioner.

      J. G. Maddox, Esq., for the respondent.
   OPINION.

TURNER:

The first claim made by the petitioner is that a portion of the Mills Process stock disposed of was community property and that the gain derived and the dividends received on the stock of Mills Alloys, Inc., which replaced the stock claimed to have been community stock, should be treated as community income and not as the individual income of the petitioner. It is not contended that any portion of the 5,000 shares of Mills Process stock issued to the petitioner' in exchange for patents, nor stock purchased by him before bis marriage was community property. Further, the petitioner concedes that the shares purchased after marriage were petitioner’s separate property to the extent that they were purchased with proceeds of a loan upon his separate property. It is contended, however, that 638.3665 shares of the 1,654 shares purchased after marriage were community property, leaving the remaining 1,015.6335 shares to be classified as the separate property of the petitioner. These amounts are arrived at by applying to the 1,654 shares purchased, the same ratios that 1,154 shares, the amount of shares purchased with the first loan, all of which were deposited as collateral, and 1,836 shares deposited as collateral out of petitioner’s separate property, bear to the total 2,990 shares of collateral. Examination of the petitioner’s method of computing the number of shares belonging to the community discloses at once the weakness of his position on the facts of this case. If the number of community shares purchased is in the same ratio to the total number of shares purchased as the number of community shares deposited as collateral is to the total number of shares of collateral, then by the petitioner’s own conclusion only 638.3665 of the total collateral shares were community shares and the remaining collateral, 2,351.6335 shares, was the separate property of the petitioner. It then follows that a recomputation of the ratios would be required. The result of such a second computation would obviously disclose a correspondingly smaller portion of the total number of shares purchased as the number of community shares. On each recomputation the number of community shares would dwindle until substantially no amount would be indicated as community property.

The answer to our problem is to be found in the facts and the law, however, and not in the strength or weakness of some method of computation. As we understand the law of California, property purchased partly with the separate funds of a spouse and partly with community funds is separate property and community property in the same proportion that the purchase price is made up of separate

and community funds, In re Bauer’s Estate, 79 Cal. 304; 21 Pac. 759; Heney v. Pesoli, 109 Cal. 53; 41 Pac. 819, and property purchased with borrowed money is separate and community property to the extent that the loans are based upon the credit of the individual spouse or upon the credit of the community. Carle v. Heller, 18 Cal. Ap. 577; 123 Pac. 815; Schuyler v. Broughton, 70 Cal. 282; 11 Pac. 719; Dyment v. Nelson, 166 Cal. 38; 134 Pac. 988. In this case the facts warrant only one conclusion, and that is that the loans procured for the purchase of the stock in question were made upon the sole and individual credit of the petitioner. As a preliminary detail before the loans were made, the petitioner established his personal credit with the California Bank by submitting an individual financial statement. No claim is made that the community owned any Mills Process stock prior to the purchases in December 1928. The only stock deposited as collateral, except the stock purchased from the proceeds of the first loam, belonged to the petitioner individually. Furthermore, each of the notes recited on its face that the petitioner, the maker of the note, was the sole owner of the stock pledged as collateral. The community risked nothing at any stage of the transaction and we find that it furnished no part of the credit upon which either loan was made. On the first issue the respondent is sustained.

In reaching the above conclusion we have not overlooked our opinion in Alanson Weeks, 31 B. T. A. 627. In that case the property in question was purchased with the proceeds of a loan made by the husband on his personal note. The- only collateral posted was the property purchased. There was nothing further to show that the funds were borrowed on the faith and credit of his separate property, nor was there any evidence that he was not in fact acting on behalf of the community. Under those facts wTe there held that the presumption that property purchased after marriage was to be treated as community property had not been overcome by extrinsic evidence. In this case, as we have pointed out, the facts do show that the loan, out of the proceeds of which the stock in question was purchased, was intended to be, and was in fact, made upon the faith and credit of the husband’s separate property, and not upon the faith and credit of the community.

Our first problem in deciding the remaining issues is to determine the exact nature of the transaction whereby the petitioner disposed of his Mills Process stock. The respondent, in determining the deficiency, treated the disposition by Mills Process of its assets for the stock of Mills Alloys, Inc., as a reorganization within the meaning of section 112 (i) (1) (A) of the Revenue Act of 1928. He also assumed the exchange by the stockholders of Mills Process for the stock of Mills Alloys, Inc., in accordance with the provisions of section 112 (b) (3) of the act and thereafter a sale by the stockholders of a portion of the stock of Mills Alloys, Inc., so received. In connection with that sale he applied the first in, first out rule and treated the major portion of the stock sold by the petitioner as being! held in place of the 5,000 shares of Mills Process stock acquired by him in exchange for patents which had no cost basis. This stock, having been acquired at the time the patents were turned in to Mills Process in 1925, more than two years prior to the disposition of Mills Alloys, Inc., stock in 1929, was treated as capital assets. So far as the record shows, the petitioner in making his return also treated the sale of stock of Mills Alloys, Inc., as a sale by the stockholders of Mills Process rather than a sale by the corporation prior to liquidation, and no exception to the determination of the respondent in that respect was taken in the petition filed. The petitioner did allege, however, that the respondent erred in applying the first in, first out rule, claiming that the stock of Mills Alloys, Inc., was received in exchange for the entire block of his stock in Mills Process and that the cost of the latter stock should be averaged to determine the cost basis of the stock of Mills Alloys, Inc., received therefor and sold to the syndicate. Christian W. Von Gunten, 28 B. T. A. 702; affd., 76 Fed.(2d) 670; Olive Hume Oliver, 30 B. T. A. 1381; affd., 78 Fed. (2d) 561.

At the time of filing his brief the respondent also filed a motion requesting leave to file an amended answer to conform the pleadings to the proof offered at the hearing. In the proposed amendment to his answer, the respondent alleged in the alternative that, according to the proof, the sale of 30,000 shares of class A stock and 30,000 shares of class B stock of Mills Alloys, Inc., which had been received by Mills Process in reorganization, had been sold by that corporation prior to dissolution and that the stockholders of Mills Process in fact exchanged their Mills Process stock for stock of Mills Alloys, Inc., and cash. On these facts it was argued that the petitioner is taxable on the gain realized from the exchange, but only to the extent of the cash received.

The petitioner opposed the motion to amend, first, on the ground that it was not timely and did not meet the requirements of the rules of the Board, and, second, that under the theory advanced by the respondent it would be necessary for the petitioner to present additional proof, particularly with reference to the fair market value of the stock of Mills Alloys, Inc., in order to show the amount of gain realized. By order entered on March 28, 1936, the motion of the respondent was granted, Pierce Oil Corporation, 30 B. T. A. 469, and the petitioner was allowed a period of 45 days for the filing of a reply and a request for further hearing, if further hearing was desired. No reply was filed and no request for further hearing has been made.

The evidence in this case clearly shows and we have found as a fact that upon the receipt by Mills Process of the stock of Mills Alloys, Inc., Mills Process sold 30,000 shares of class A stock, and 30,000 shares of class B stock of Mills Alloys, Inc., for $660,000 in cash, and a right to share in a pool created from 20,000 shares of the class B stock sold, to the extent of 50 percent of the net proceeds therefrom. Mills Process was then dissolved and the stockholders of that company surrendered their stock in liquidation, receiving for each share of Mills Process stock, one share of class A stock and 5 shares of class B stock of Mills Alloys, Inc., $66 in cash, and a further right to share pro rata in the proceeds from the pool which had been created with 20,000 shares of class B stock. The proceeds from the pool were distributed in the taxable year, and for his 6,555 shares of Mills Process stock the petitioner received 6,555 shares of class A stock and 32,175 shares of class B stock of Mills Alloys, Inc., and $473,-159.01 in cash.

There is no question that Mills Process exchanged all of its assets for stock of Mills Alloys, Inc., and that this transaction constituted a reorganization within the meaning of section 112 (i) (1) (A), supra. It is also clear that the petitioner exchanged his Mills Process stock in accordance with the plan of reorganization for stock of Mills Alloys, Inc., and cash. This transaction falls squarely within the provisions of section 112 (b) (3), supra, and section 112 (c) (1) of the act, under which the gain realized on such an exchange is taxable, but in an amount not in excess of the sum of money received. The entire holdings of the petitioner in Mills Process, including the 100 shares sold in January prior to the reorganization, had a cost basis of only $16,550. The gain realized on the exchange was the difference between the cost of the petitioner’s Mills Process stock exchanged and the fair market value of the stock of Mills Alloys, Inc., received in exchange, plus $473,159.01 in cash. No proof was specifically directed to the question of the fair market value of the stock of Mills Alloys, Inc., but the facts show that the syndicate paid $660,000 for 30,000 shares of class A stock and 30,000 shares of class B stock just prior to the date on which the petitioner made his exchange. Furthermore, according to the agreement the 20,000 shares of class B stock placed in the pool for safe to the public could not be sold for an amount less than $7.50 per share, and, although we do not know the exact price at which that stock was' sold, we do know that it was sold in accordance with the terms of tlie agreement, and the proceeds were distributed in the dissolution of Mills Process along with the cash previously received from the syndicate. On the record there can be no doubt that the fair market value of the 6,555 shares of class A stock and 32,775 shares of class B stock of Mills Alloys, Inc., received by the petitioner in exchange for his. Mills Process stock, was greatly in excess of his cost basis for the Mills Process stock. It follows that the gain realized on the transaction exceeded the amount of cash received, and, under section 112 (c) (1), supra, the gain so realized is recognized and taxable to the extent of $473,159.01, the amount of cash received.

Since it appears that the taxable transaction here was a disposition by the petitioner of his Mills Process stock and not a disposition by him of the stock of Mills Alloys, Inc., after it was received in exchange for his Mills Process stock, there is no occasion for any confusion or difference on the capital gain issue. The dates on which the various shares of Mills Process stock were acquired by the petitioner are not in dispute and the amount of gain which constitutes capital gain and that which constitutes ordinary gain can be worked out on recomputation.

Reviewed by the Board.

Decision will be entered under Rule 50.

      (i) Definition of reorganization. — As used in this section and sections 113 and 115—
      (1) The term “reorganization” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), * * *

       SEC. 112. RECOGNITION OF GAIN OR LOSS.
      * * * * * * 4
      (b) Exchanges "solely in hind.— ■
      * * * * * * 4
      (3) Stock fok stock on eeobganization. — No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.

       Sec. 112. (e) Gain from exchanges not solely in kind.—
      (1) If an exchange would be within the provisions of subsection (b) (1), (2), (3), or (5) of this section if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.