author: HaeRon :

text:
    David Bruckheimer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102343.
    Promulgated February 3, 1942.

      Andrew B. Trudgian, Esq., and Sidney I. Roberts, Esq., for the petitioner.

      Allen T. Akin, Esq., for the respondent.
   OPINION.

HaeRon :

The basic question is whether on the distribution to him of the 72.51 shares of the corporation’s stock in the taxable year petitioner received taxable income in the amount of $13,587.65, the fair market value of the shares. On his return for the taxable year petitioner did not include any amount in taxable income on account of the receipt of the 72.51 shares. Eespondent included the fair market value of the 72.51 shares in taxable income for the taxable year, with the explanation that the shares constituted taxable income under section 115 (f) of the Revenue Act of 1936, the pertinent provisions of which are set forth in the margin. In his brief respondent contends that the distribution of the 72.51 shares was either a taxable dividend in property or a taxable stock dividend, and, consequently, the fair market value of the 72.51 shares of stock was includable in taxable income. The respondent included in petitioner’s taxable income $13,587.65.

Respondent argues that the stock dividend in question was income because it was paid in treasury stock which the corporation had purchased out of its surplus. Respondent says in his brief:

The Commissioner’s position in this ease is based on the proposition that the petitioner received a portion of the corporation’s surplus for his own use and benefit when the 72.51 shares of stock were received by him, that he received something of exchangeable value, severed from his investment, and that he had been given an interest in the corporation different from that which hie former stock holding represented.

Respondent’s theory is founded upon the broad proposition that a stock dividend paid in treasury stock should not be treated differently, for income tax purposes, from any dividend paid in property of the corporation. Respondent contends that the stock dividend in question constituted income to the petitioner within the reasoning of Koshland v. Helvering, 298 U. S. 441.

It should be pointed out that the Commissioner does not question the bona fides of the transaction. Cf. Ruphane B. Iverson, 29 B. T. A. 863. He recognizes the transaction, in all the steps which were taken, and he agrees that the stock dividend was paid out of treasury stock. However, he regards the stock in question as having been acquired by the corporation as an “investment in treasury stock.”

The taxable year is 1937. The Commissioner promulgated Regulations 94 relating to the Revenue Act of 1936. Respondent cites Article 27 (c)-1 of Regulations 94. The Commissioner has ruled that if a dividend is paid in “property”, other than money, constituting its corporate assets, then the dividend is a taxable dividend. The term “property” is broadly defined to include shares of capital stock of the corporation “if such shares of stock are held by it as-an investment.” The regulation then injects a presumption to the effect that shares of capital stock once issued but later reacquired in any manner, but not retired, “shall be deemed to be held by the corporation as an investment.” Respondent, applying this regulation here, has determined that the stock which the corporation reacquired by purchase from the Bruckheimer estate was “property” of the corporation constituting part of its corporate assets.

In commenting upon the above ruling, the following is stated in Paul & Mertens, Law of Federal Income Taxation, Cum. Supp. 1939, p. 294, par. 8.82:

Wbetber this regulation is of constitutional validity in its application to distributions of Treasury common stock, to holders of common stock, would seem to depend on whether Treasury shares are truly assets of the corporation in such sense as to be accorded like treatment with shares of another corporation held by the issuing corporation.

The comment indicates the importance of the question.

In James Kay, 28 B. T. A. 331, involving similar facts, except that the corporation there did not treat its own stock which it purchased as treasury stock, we held that stock distributed out of stock purchased by a corporation for its own account constituted a stock dividend. In the result reached in that case the stock dividend in question was a nontaxable stock dividend. That opinion was promulgated on June 8, 1933, which was prior to the decision in the Koshland case, supra, the revision in the Commissioner’s regulations, and the elimination from the statute of the broad provision exempting stock dividends from tax. See section 115 (f), (1) and section 27 (c) of the Revenue Act of 1936. Cf. section 115 (f) of the Revenue Act of 1934. It appears, therefore, that we should reexamine the question, under the facts of this case.

The corporation involved here had only one kind of stock outstanding, common stock. The stock which was distributed, the treasury stock, was distributed to all of the stockholders in proportion to their stockholdings in December of 1937. In Eisner v. Macomber, 252 U. S. 189, it was held that a distribution of common stock as a dividend on common stock did not constitute income. Is not that holding applicable here? Does it make a material difference that the stock distributed here was treasury stock? It is clear that the distribution of the stock in question did not confer any different rights or interests than did the stock already held by the stockholders. The new certificates, plus the old, represented the same proportionate interest in the net assets of the corporation as did the old. Cf. Koshland v. Helvering, supra. In our opinion it makes no difference that the stock which was distributed was treasury stock.

The argument of respondent is based largely upon an assumption that the reacquired stock was an asset, property, of the corporation. That assumption appears to be against the weight of authority. Treasury stock is usually regarded as “retired” in the sense that it no longer constitutes a liability of the corporation because a corporation can have no right of action against itself. See Borg v. International Silver Co., 11 Fed. (2d) 147, 150, where it was said by the Circuit Court of Appeals for the Second Circuit:

Indeed, tbe only difference between a share held in the treasury and one retired is that the first may be resold for what it will fetch on the market, while the second has disappeared altogether. * * * They (Treasury stock) are not a present asset, because, as they stand, the defendant (the corporation) cannot collect upon them. What in fact they are is an opportunity to acquire new assets for the corporate Treasury by creating new obligations.

Most authorities lead to the view that treasury stock is not stock at all. See Virginia Law Eeview, vol. 15, pp. 637, 638, where it is said:

* * * Whenever a corporation gives anything for its own stock, the corporation is out an asset. Against that it has left only the possibility that some day, under some circumstances, it may succeed in getting value back into the treasury to replace the value it has lost, by the process of again selling this “treasury stock” which meanwhile, in actual truth, represents a void.

See also Model Corporation Act, Harvard- Law. Review,- vol. 48, p. 1373: “Treasury shares shall not be considered or carried as an asset for any purpose.”

In our opinion it is an exceedingly doubtful theory that reacquired stock such as is involved here is to be treated as “property” in the way that stock of another corporation held in a. corporation’s assets is-property. Unless it can be held that the stock which was distributed to petitioner was “property”, as in the latter instance, we can not hold that the petitioner realized “income” upon receipt of the stock in question. To whatever extent article 27 (c)-l of Eegu-lations 94 is appropriately applicable here, it must be concluded that the stock dividend in question was not paid in “property” of the corporation.

It is held that the stock dividend in question did not constitute income to the petitioner.

Decision will be entered for the petitioner.

       SEC. 115. distributions BY CORPORATIONS.
      * * * ¡! * * *
      (f) Stock Dividends—
      (1) General rule. — A distribution made by a corporation to its shareholders in its stock or in rights to acquire its stock shall not be treated as a dividend to the extent that it does not constitute income to the shareholder within the meaning of the Sixteenth Amendment to the Constitution.
      * * * * * * *

       Art. 27 (c)-1. Dividends in Mnd.- — Section 27 (c) imposes limitations upon the extent to which dividends paid in assets (other than money) may be recognized for purposes of determining the amount of the dividends paid credit. Irrespective of the form of the corporate resolution by which a dividend is declared, if the dividend is ultimately and actually paid by the corporation in any property other than money, constituting its corporate assets, the amount of the dividends paid credit to which the corporation is entitled with respect thereto can not exceed the lesser of the two following amounts determined as of the time of payment:
      (1) The adjusted basis of such property in the hands of the corporation as provided for in section 113 ; or
      (2) The fair market value of such property.
      As used in this article the term “property” includes shares of capital stock of the corporation making the dividend distribution if such shares of stock are held by it as an investment, unless shown to the contrary, shares of capital stock once issued but thereafter acquired by the corporation in any manner whatsoever, but not retired, shall be deemed to be held by the corporation as an investment. * * *


source: Caselaw Access Project

author: Sternhagen :

license: Public Domain

text:
    Furniture Finance Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 104891.
    Promulgated February 3, 1942.

      S. J. Graham, Esq., and H. A. HoTlopeter, O. P. A., for the petitioner.

      Alva G. Baird, Esq., for the respondent.
   OPINION.

Sternhagen :

The Commissioner determined a deficiency for 1937 of $3,162.80 in personal holding company surtax, and a penalty of $790.70 for failure to file a personal holding company surtax return. The facts are stipulated and the stipulation is hereby adopted as the findings of fact.

The petitioner was organized on or about February 19, 1936, under the laws of Oregon, and its return was filed in Portland, Oregon. Its shares were owned by David Light and Harry W. Zavin. Its income for the taxable year was derived from rent of a building which it owned and leased to a copartnership of Light and Zavin.

By section 354 (a) (2), Bevenue Act of 1936, as amended by Revenue Act of 1937, each of the two partners shall be considered as owning the stock owned by his partner. As a result, more than 50 percent in value of petitioner’s outstanding stock is owned, directly or indirectly, by or for two individuals, as covered by section 352 (a) (2), and the petitioner is a “personal hplding company.” Since all of petitioner’s income is rent received from the partnership for the use of petitioner’s property, and each partner is deemed to own all the outstanding stock, such rent is “personal holding company income” under section 353 (f). The determination of deficiency is sustained.

Petitioner’s argument as to the intended scope of the personal holding company surtax title is answered in Olean Times Publishing Co., 42 B. T. A. 1277; dismissed, C. C. A., 2d Cir.

The petitioner failed, without reasonable cause, to file a personal holding company return, and it is therefore liable for the penalty imposed bv section 291, Revenue Act of 1936. Lane-Wells Co., 43 B. T. A. 463.

Decision will be entered for the respondent.


author: Keen :

text:
    Consolidated Chollar Gould & Savage Mining Co., a Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 104195, 105095.
    Promulgated February 4, 1942.

      Jiohn D. GaTlaiher, Esq., and William A. Boehel, Esq., for the petitioner.

      Harry R. Horrow, Esq., for the respondent.
   OPINION.

Keen :

The question which is here presented for decision is whether the “dumps” which were deposited upon petitioner’s premises from adjacent mines and from which ore was extracted can be considered as a mine within the meaning of section 114 (b) (4), set out above, and section 23 (m) , which sections appear as quoted in the Revenue Acts for both 1936 and 1938.

In Atlas Milling Co. v. Jones, 115 Fed. (2d) 61 (certiorari denied, 312 U. S. 686), the taxpayer, pursuant to its rights under a lease contract, went upon certain lands and removed crushed rock which constituted the residue from mining and milling operations carried on by the owners of the premises. By reason of a new extraction process it had become profitable to remill and retreat such “tailings” or residue. This the taxpayer did. It was held that taxpayer was not entitled to percentage depletion. In its opinion the court said in part:

A “mine” is an excavation in the earth from which ores, coal, or other mineral substances are removed by digging or other mining methods. In its broader sense it denotes the vein, lode, or deposit of minerals. Mining connotes the removal of minerals from a natural deposit. It does not embrace the reworking of mineral dumps artificially deposited from the residue remaining after the ore has been milled and concentrates removed therefrom. So. Utah Mines & Smelters v. Beaver County, 262 U. S. 325, 332. In the case last cited the court said:
The tailings severed and removed from the mining claims, changed in character, placed on other and separate lands and having an ascertained and adjudicated value of their own, in our opinion, constituted a unit of property entirely apart from the mine from which they had been taken. See Forbes v. Gracey, 94 U. S. 762, 765.
Ores when severed from their natural deposit beeome personal property. Trover and conversion will lie for their wrongful taking.
While tailings deposited on the surface of land may become appurtenant to the land, they in no true sense become a mine.
We are of the opinion that the word “mines” as used in, § 23, supra, is limited to natural deposits and does not include a tailings dump deposited on the surface of land, consisting of the residue of ore that has been severed and milled.
*******
* * * Here, Atlas [the taxpayer] owns no economic interest in the mine from which the minerals were severed. To entitle it to depletion we would have to hold that the tailings, not a natural deposit but ore-bearing rock artificially deposited on the surface of the ground, constitutes a mine within the meaning of § 23, supra. We are of the opinion that it may not be so regarded. * * *

Petitioner here seeks to distinguish this proceeding from that case. It argues that there the court had before it a problem having to do with “tailings” made up of the residue of rock left after it had once been milled, whereas here the dumps were made up of broken rock which had never been milled and within which the ore was still deposited.

We consider this difference to be immaterial. The dumps of petitioner were of “ore-bearing rock artifically deposited on the surface of the ground”, and the petitioner had no economic interest in the mines from which such rock was severed. These are the determinative facts which bring this proceeding within the reasoning of Atlas Milling Co. v. Jones, supra. See also Carl M. Britt, 43 B. T. A. 254.

The distinction between this proceeding and Kennedy Mining & Milling Co., 43 B. T. A. 617, is obvious. In that case the “tailings” were from ore-bearing rock severed from mines owned and operated by the taxpayer. Under those circumstances, we said:

* * * The economic interest of this petitioner in the tailings and in the minerals to be extracted therefrom was identical with the interest it had maintained through its ownership of the mine from beginning to end of the extractive process; and when it finally received the proceeds of the minerals contained in the tailings it received income from the contents of the mine to exactly the same 'extent as the income it had previously received from the earlier and more rudimentary refining process. * * *

Deductions for depletion are matters of legislative grace, Ozark Chemical Co. v. Jones, 245 Fed. (2d) 1, and none more so than deductions on account of percentage depletion. Since the petitioner has not brought itself clearly within the act, he can not claim the deduction sought.

At the hearing herein the parties entered into certain stipulations with regard to petitioner’s income for the years in question to which consideration shall be given by counsel in preparing recomputations of petitioner’s tax liability in accordance with this opinion.

Decision will he entered pursuant to Rule 50.

       SEC. 23. DEDUCTIONS FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions :
      # * * * * * *

      (m) Depletion. — In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case; such reasonable allowance in all cases to be made under rules and regulations to be prescribed by the Commissioner, with the approval of the Secretary. In any case in which it is ascertained as a result of operations or of development work that the recoverable units are greater or less than the prior estimate thereof, then such prior estimate (but not the basis for depletion) shall be revised and the allowance under this subsection for subsequent taxable years shall be based upon such revised estimate. In the case of leases the deductions shall be equitably apportioned between the lessor and lessee. In the ease of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust the allowable deduction shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income allocable to each. For percentage depletion allowable under this subsection, see section 114 (b), (3) and (4).)


text:
    James Irvine, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 104587.
    Promulgated February 4, 1942.

      Arthur H. Kent, Esq., for the petitioner.

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

Trust Income Issue.

Keen :

The first issue for our consideration is whether the amount of $18,000 representing income of an antenuptial trust set up by petitioner for his second wife, which amount was paid to her by the trustee in the taxable year, is properly includible in petitioner’s taxable income.

Eespondent argues, first, that the income is taxable to the petitioner under the provisions of section 167 of the Revenue Act of 1936. Our findings of fact, supra, disclose that, although the petitioner did possess during the taxable year the power to revoke, alter, amend, or modify the trust agreement, nevertheless, this power was effective only if the wife, the sole beneficiary of the trust, joined with petitioner in the exercise of the power. We are not concerned with -any income in excess of $18,000 which may have been earned by the trust corpus in the taxable year, but merely with the $18,000 which the instrument made subject to the wife’s demand and which she, in fact, received during the taxable year. If section 167 is applicable, then it must be held that the $18,000, or some part of it, could have been distributed to or was held or accumulated for future distribution to the petitioner in the discretion of petitioner alone, or in conjunction with a person not having a substantial adverse interest. That petitioner alone could not revoke or amend the instrument we have found as a fact. The question, then, narrows down to whether the wife had a substantial adverse interest. If so, then section 167 is inapplicable, since her consent was necessary to any modification, alteration, or revocation of the instrument, without which none of the $18,000 could have been either distributed to or held for the petitioner. It is difficult to conceive how the wife’s interest under the trust could be considered as not being a substantially adverse one. She relinquished all of her community rights as part of the quid fro quo for the execution of the trust instrument. If she consented to receive less in any year than the $18,000 made subject to her command by the instrument, she would be cutting off her principal source of income. It is possible to visualize a situation where a wife might be willing to turn over her life interest in a trust to her husband because she knows that under state law governing maintenance and support and dower rights she will have equivalent or greater rights enforceable against her husband and his property. Here, however, the trust instrument together with the agreement between petitioner and his wife, specifically provided that the trust income was to be in addition to necessary support, except for clothes allowance and pin money, and by the same instrument the wife relinquished her community property rights. Clearly, here the wife had an adverse interest. Consequently, section 167 is inapplicable. See Jane B. Shiverick, 37 B. T. A. 454, and cases therein cited; Commissioner v. Betts, 123 Fed. (2d) 534.

We are aware that in Altmaier v. Commissioner, 116 Fed. (2d) 162, the Circuit Court of Appeals for the Sixth Circuit held that under the facts presented therein the wife of the settlor was not a person having a substantial adverse interest. The court, in reaching this conclusion, relied upon the doctrine of “the normal consequences of family solidarity” which the court felt was the basis of the decision in Helvering v. Clifford, 309 U. S. 331, which we discuss at greater length infra. The facts in that case, however, differed substantially from those present here. There the husband and wife had been married for some time prior to the creation of the trusts involved and three children had been born to the union. The picture there presented was one of “family solidarity.” In the instant proceeding the trust was created before the marriage of the parties and as part of an antenuptial agreement entered into by a widow and widower of mature age, each of whom had a child or children by a former marriage. It can not be said with any sense of realism that there was such a family solidarity existing between the parties to this contract at the time it was executed and prior to their marriage as to have as one of its normal consequences at that time a unity of economic interests resulting in the beneficiary’s interests being identical rather than adverse to those of the settlor.

Respondent’s nest argument is that the provisions of section 166 of the Revenue Act of 1936 cover the situation. For the reasons set out above, however, we judge this section to be inapplicable, also. The first supplementary agreement did give to the petitioner the option of revoking the supplementary agreement which, by its terms, added certain securities to the corpus of the trust. But this option was esercisable only if the Commissioner’s office asserted that the whole or any part of the addition to corpus was subject to the Federal gift tax. Thus there was a condition precedent to exercise of the option, a condition over which petitioner had no control. Since the Commissioner’s office did not assert a gift tax liability until after the taxable year, this option was never exercisable within the taxable year. And, as to the rest of the trust corpus, the consent of the wife was necessary to any revocation.

The next argument of respondent is based upon the rationale of Helvering v. Clifford, supra, and cases thereunder. As we have already indicated, we do not consider that doctrine herein applicable because of the great variance of the factual situation. Here the trust was not set up as a method of tax evasion. It is not a short term trust; nor is it gratuitous. Thé wife-to-be renounced her community interest by acceptance of the provisions of the trust. The petitioner, as settlor, although he could direct reinvestments and could, with his wife’s consent, substitute trustees, did not have at his command the use of the trust corpus. And this was not a “temporary reallocation of income within an intimate family group.” At the time this trust was created there was as yet no such “intimate family group” and the facts disclose that one of the reasons for setting up this trust was the fear that the subsequent family relations might not be intimate. It is apparent that the petitioner did not intend this diversion of income to be temporary; everything about the preliminary negotiations and the agreement itself points to permanency. The trust was created prior to marriage and was to last until the marriage was dissolved by death.

The fourth argument of respondent is that the trust income here in controversy was used to pay a legal obligation of the petitioner and is, therefore, taxable in its entirety to petitioner under the rule of Douglas v. Willcuts, 296 U. S. 1. Neither that case nor any cases subsequently decided on the same basis covers this situation, however, in the mamier urged by respondent. In most of that line of cases the settlors created the trusts to completely discharge continuing personal legal obligations to support, and the divorce courts approved and confirmed the trusts in their decree on that basis, subject to powers of modification. Here the petitioner’s legal obligation to support his wife was not discharged by the execution of the trust, nor was it attempted to be. The trust instrument specifically points this out. As originally written there was, indeed, a self imposed and continuing personal obligation to see that petitioner’s wife received $1,500 monthly for clothes, pin money, and the like. But the first supplemental agreement of 1935 put an end to petitioner’s personal obligation on this score by the addition to corpus and the specific provision that the wife accepted the addition in full discharge of the promises and obligations of the petitioner in the antenuptial agreement with respect to monthly payments. Thus, the rule of Helvering v. Leonard, 310 U. S. 80, is not applicable.

The mere fact that the preamble to the antenuptial agreement states that “it has been deemed by each fair, just, equitable and adequate to make the provisions hereinafter set forth for the support and maintenance of the party of the second part” does not if so facto make the trust a maintenance trust. This was pointed out by the Board in Herbert G. Goulder, 39 B. T. A. 670; reversed on another point, 123 Fed. (2d) 686. See Fidelity Union Trust Co. v. Kelly, 102 Fed. (2d) 333. Any ambiguity on this score is adequately cleared up by the later provisions of the agreement. Nor can it be concluded, as respondent urges, that the terms of the agreement restricted the wife’s application of the income to such an extent that petitioner is taxable thereon. The agreement states it is to be “for her sole and individual use as she may see fit, without the necessity of accounting therefor to anyone, said sum to cover her requirements for pin money and the like, including her personal expenses for clothing and the like, but not including * *

The 1931 antenuptial agreement could not and did not change the subsequent marital status of petitioner and his present wife, although it could and did maintain the status of petitioner’s future earnings as separate property instead of community. Van Dyke v. Commissioner, 120 Fed. (2d) 945.

Petitioner has submitted in evidence a showing of the wife’s use of this money in the taxable year. With the exception of the expenditures for clothing, perfume, and jewelry, and those denominated “miscellaneous”, there are no expenditures therein which could normally be considered within the scope of support due a wife from her husband. Most of the income of the trust was spent by the beneficiary on her son by a prior marriage, for whose support petitioner was under no obligation.

Petitioner concedes that the continuing obligation to support a wife, arising by operation of law as an incident to the marital status, could not be discharged under California law by an inter vivos agreement. Civil Code of California, secs. 174, 175. Petitioner submits that the measure of petitioner’s liability herein is the amount of trust income actually applied by the wife for purposes which fall within the scope of petitioner’s continuing marital obligation of support, citing Hudson v. Jones, 22 Fed. Supp. 938; M. F. Tiernan, Trustee, 37 B. T. A. 1048; Meredith Wood, 37 B. T. A. 1065; and Ingraham v. Commissioner, 119 Fed. (2d) 223.

Since there is an express provision in the trust deed requiring the beneficiary to apply part of the income of the trust to the satisfaction of an obligation of the settlor, that part of the income of the trust which is applied to such a purpose is taxable to the settlor. In view of the respondent’s determination herein, the burden of showing what part of the trust income was not so applied is upon petitioner. Commissioner v. Grosvenor, 85 Fed. (2d) 2; Stuart v. Commissioner, 124 Fed. (2d) 772. To the extent that the wife spent the trust income for clothing and other personal items ($4,807.98) and for perfume and jewelry ($439.46), the husband’s duty to supply money for these items was lessened. The agreement specifically provided that the wife should buy these things out of trust income, and it may, therefore, be concluded that the trust was an attempt to relieve petitioner of his legal obligation to this extent. There may be some difference of opinion as to whether perfume and jewelry are such necessary items as to be included within the scope of “support and maintenance.” Considering the means and the station in life of the parties hereto, we feel justified by custom and social usage to consider these items, under the facts of this case, to be “necessaries.” To the extent that the trust income was used for these purposes, the petitioner is taxable for the income of the trust. The item of expenditure denominated “miscellaneous” was not fully explained by petitioner’s witness, an accountant. He testified that to the best of his knowledge it did not include sums relating to the beneficiary’s personal apparel, but that it included “a number of checks to ‘cash’, which may or may not have been spent for apparel.” We can not conclude on the record that this item did not include sums spent in satisfaction of petitioner’s legal obligations, and, therefore, the amount thereof ($870.19) should also be taxable to petitioner. Since there is no showing that any of the $5,000 gift made by petitioner to his wife in the taxable year actually went for this purpose, we, therefore, must consider that these expenditures were made wholly from trust income.

Charitable Contribution Issue.

The deduction of $3,300 here claimed was disallowed because the contribution was deemed by the Commissioner not to have been made to the type or class of organization specifically referred to in section 23 (o) of the Revenue Act of 1936. To meet the test provided by that section, it must appear that:

(a) The donee is a corporation, or trust, or community chest, fund or foundation;
(b) The donee was organized exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals;
(e) The donee is operated exclusively for the purposes set forth in (b) supra;
(d) No part of the net earnings of donee inures to the benefit of any private shareholder or individual; and
(e) No substantial part of the donee’s activities is carrying on propaganda, or otherwise attempting to influence legislation.

Unless all of the conditions set forth above can be met by the donee, taxpayers may not deduct contributions made thereto from gross income pursuant to section 23 (o) (2).

The crucial question of this issue is whether the Society of California Pioneers meets requirements (b) and (c) of the test set forth above, or, in other words, whether it was “organized exclusively for * * * charitable, scientific, literary, or educational purposes” and was operated exclusively for such purposes.

Respondent contends that the society can not meet these requirements because of its social aspects and relies upon the fact that one of the purposes expressed in its certificate of incorporation and constitution was “to cultivate social intercourse and form a more perfect union among its members”, and also upon the fact that section 23 of the bylaws of the society, as revised January 1, 1926, makes reference to card playing, a billiard room, a card room, and the issuance of visitors’ cards.

Testimony on this issue was given by two witnesses — the petitioner and the secretary of the society. The secretary testified that the main purpose of the society was “to gather and collect material pertaining to the history of California. That means maps and books and pictures and prints and diaries and memoirs and everything pertaining under the general head of Calif orniani.” These were housed in the library and gallery of the society, which were always open free to the public. She further testified that the society had no social activities other than monthly meetings of the directors and an annual meeting of the members, who also met at other times at the call of the directors. These were “short meetings, usually to hear reports of members of committees and the directors and to have ordinarily one short talk from some member, usually on some subject pertaining to California history.” She further testified that no portion of the funds of the society were spent for social activities. There was no cross-examination of this witness.

The petitioner testified that he had been a member of the society for 50 years, that the meetings were such as described by the secretary, and that there had not been any social activities in connection with the meetings. He was not cross-examined upon this issue.

In George E. Turnure, 9 B. T. A. 871, 874, we said:

Practically all religious and educational associations and some charitable organizations ma&e use of social or athletic features, hut only as means to an end. Unless the social feature predominates such organizations are none the less exclusively religious, educational or charitable. The general or predominant purpose is principally to be considered.

In that case it was held that the social aspects did not predominate in the organization in question. In the case of Alfred T. Davison, 21 B. T. A. 251, it was held that, where members of a college fraternity were also members of a literary society which maintained a hall for literary exercises connected with the dwelling house of the fraternity, the literary society was predominated by the social aspects of the fraternity and therefore the rule in the Turnure case did not apply.

On the record presented in this proceeding we are of the opinion that the social aspects of the society were incidental and subordinate to the predominant scientific, literary, and educational purposes of the organization, i. e., the collection and exhibition of material having to do with the early history of the State of California and research in that history by members of the society. Therefore, on the authority of George E. Turnure, supra, we decide this issue, in favor of petitioner.

Stoeh Redemption Issue.

Respondent argues that the gain of $4,253.97 realized on the redemption of petitioner’s stock by the Tidewater Associated Oil Co. is taxable under section 115 (c) of the Revenue Act of 1936 as a gam realized on partial liquidation. Petitioner, on the other hand, asserts that it is a gain on the sale or exchange of a capital asset, subject to the provisions of section 117 of the same act.

The crucial question to be considered is whether the stock of petitioner was retired and completely canceled. If so, there was a statutory partial liquidation, as that term is defined in section 115 (i), for purposes of the application of section 115 (c). All the preferred stock in the instant proceeding was either received by the company pursuant to the exchange offer or the later redemption. And it was specifically provided that this stock was not subject to reissue. These being the material facts, we must decide the issue in favor of respondent. Amelia Cohen Trust v. Commissioner, 121 Fed. (2d) 689; Benjamin R. Britt, 40 B. T. A. 790; Salt Lake Hardware Co., 27 B. T. A., 482.

Petitioner argues that a distinction should be drawn between a situation wherein a certain class of stock is retired and no further stock issued in its place, and the instant situation where the retirement of all the 6 percent preferred stock was an integral part of a refinancing plan which actually contemplated and resulted in a substantial expansion of the company’s capital. We do not believe a valid distinction on these lines can be made for the present purposes. L. B. Coley, 45 B. T. A. 405.

Convm/umity Property Issue.

It is undisputed that the antenuptial agreement entered into in 1981 is binding on the parties. By this agreement the status of any future salaries earned by the petitioner was, in advance, decided by the parties to be the separate property of petitioner, free from any claim thereto as community income which might otherwise be made by the wife-to-be. Such agreements are recognized as valid and binding by the California courts. Wren v. Wren, 100 Cal. 276; and, accordingly, it is obvious that salary earned subsequent to the ante-nuptional agreement is petitioner’s separate property and therefore is taxable to him alone. W. S. Van Dyke, supra; Helvering v. Hickman, 70 Fed. (2d) 985. We, accordingly, affirm the Commissioner’s determination on this issue.

Decision will be entered u/nder Rule 50.

       SEC. 167. INCOME FOR BENEFIT OF GRANTOR.
      (a) Where any part of the income of a trust—
      (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor; or
      (2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or
      (3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, applied to the payment of premiums upon policies of insurance on the life of the grantor (except * * *) ;
      then such part of the income of the trust shall be included in computing the net income of the grantor.
      (b) As used in this section, the term “in the discretion of the grantor” means “in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question,”

       It is interesting to note that the Congress, in considering the Revenue Act of 1941, did not require the filing of a joint return by husband and wife and thus recognized, by legislation, such a doctrine of “family solidarity.” We do not discuss the imputation implicit in any holding that a wife is not a person having an interest substantially adverse to her husband, to the effect that by reason of economic subserviency or other considerations a married woman does not have full legal independence.

       SEC. 166. REVOCABLE TRUSTS.
      Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested—
      (1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or
      (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom,
      then the income of such part of the trust shall be included in computing the net income of the grantor.

       SEC. 115. DISTRIBUTIONS BY CORPORATIONS.
      *******
      (i) Definition of Partial Diquidation. — As used in this section the term “amounts distributed in partial liquidation” means a distribution by a corporation in complete cancellation or redemption of a part of its stock, * * *


author: ARUNdell:

text:
    Morgan W. Jopling, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 105579.
    Promulgated February 4, 1942.

      William E. Bardusch, Esq., for the petitioner.

      ETlyne E. Strickland, Esq., for the respondent.
   OPINION.

ARUNdell:

It can not be questioned that the securities of petitioner which were sold in 1937 constitute “capital assets” as that term is defined in section 117 (b) of the Revenue Act of 1936. Nor is it longer considered material whether such sale be a voluntary or involuntary one. Helvering v. Hammel, 311 U. S. 504. In the instant case petitioner’s contention that the sales were involuntary might well be questioned if the point be material, for every sale of shares by the trust company was directly authorized by petitioner and no sale was made except after he had been consulted and approved the transaction.

As stated by the Second Circuit Court of Appeals in Commissioner v. Electro-Chemical Engraving Co., 110 Fed. (2d) 614; affd., 311 U. S. 513, “We should be surprised if a taxpayer who had pledged securities with a broker and had them sold out on the Stock Exchange could obtain a deduction of more than $2,000 for a capital loss incurred through such a liquidation.” Nor does it seem to us material that the shares were used as collateral to secure the indebtedness of some one other than the taxpayer. The sale was no less a sale of capital assets whether it was made directly by the taxpayer, for him, or as an incident to carrying out a transaction into which he had entered. It is the sale of the capital assets which measures the loss rather than the circumstances which prompted the sale. The limitation on losses was a deliberate act of Congress and had its genesis in the great depression which brought about a tax consequence where current income was being offset to such an extent as seriously to impair the revenue.

Petitioner on brief urges that the loss is one sustained in a transaction entered into for profit and measures the loss by the difference between the fair market value of the securities at the date they were pledged and the price received for them on their sale. We know of no reason, however, why this transaction should not be treated for what it was, viz., a sale of securities. If petitioner’s guarantee of the corporate notes had not been accompanied by the deposit of the securities as collateral and he had personally sold these shares to make good the guarantee, we do not think he would have ventured the argument that the capital loss provisions would not be applicable Sec. 117 (d), Revenue Act of 1936. We find no reason for a different treatment where a sale is made under the circumstances here present. The respondent is sustained.

Decision will he entered under Bule 50.


author: Mellott :

text:
    Donald P. Oak and Louise Argue Oak, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 106253.
    Promulgated February 4, 1942.

      Hilary D. Mahin, Esq,, and L. Karlton Hosteller, Esq., for the petitioner.

      W. H. Payne, Esq., for the respondent.
   OPINION.

Mellott :

The Commissioner determined a deficiency in the income tax of Donald P. Oak for the calendar year 1937 in the amount of $1,362.96 and joint deficiencies in the income tax of Oak and his wife, Louise Argue Oak, for the years 1938 and 1939 in the respective amounts of $210.92 and $376.94. The instant proceeding, contesting all of the deficiencies, was submitted' upon a stipulation of facts. The issues, stated generally, involve claimed deductions from gross income of 10 percent of the excess of expenditures over receipts from oil and gas properties, the expenditures having been made by the owners of the properties, who, in consideration of services rendered by Oak, had agreed to “carry” him for an undivided one-tenth interest in the properties, as set out in a trust and in an agreement attached to the stipulation. We find the facts to be as stipulated; but the following summary will suffice for present purposes.

. Petitioners filed their income tax returns on the cash receipts and disbursements basis with the collector of internal revenue for the district of Oklahoma. Separate returns were filed for the year 1937 and joint returns for the years 1938 and 1939. Inasmuch as the transactions giving rise to the present controversy were carried out by Donald P. Oak, he, for convenience, will hereinafter be referred to as petitioner.

In 1936 petitioner, with funds advanced by H. J. Walter, obtained and caused to be assigned to Walter certain oil and gas leases in Oklahoma. As consideration for petitioner’s services in connection therewith Walter executed a declaration of trust in favor of petitioner as to an undivided one-tenth interest in the leases and the equipment thereon. The declaration of trust provides, inter alia, as follows:

* * * that for and in consideration of services heretofore rendered to me by Donald P. Oak * * * in the acquisition of the foregoing leases * * * I * * * do hold an undivided one-tenth (%o) interest of all of my right, title and interest in and to the above described oil and gas mining leases * * * together with all equipment * * * now located thereupon or which may hereafter be located thereupon and an undivided one-tenth (%>) interest in all facilities, including water rights and other easements, upon lands * * * in’ trust for the use and benefit of said Donald P. Oak * * * subject (a) to a lien in my favor for an amount equal to one-tenth (%o) of the cost of the acquisi-lion of said leases * * » plus one-tenth (Yio) of all sums of money heretofore advanced and hereafter to be advanced by me in connection with the development and operation of said leases and plus one-tenth (Yio) of any and all sums of money advanced by me in making up any deficiencies in connection with the over-riding one-eighth (%) royalties provided for in the various contracts * * * plus six per cent (6%) interest pen annum upon one-tenth (Yio) of all said sums or the balance of said sums for which * * * I have not been reimbursed, and subject (b) to the right to receive all of the proceeds from all of said leases * * * and the material and equipment used in connection therewith * * * until the lien aforesaid shall have been discharged.
I do hereby declare that the true intent and purpose of this instrument is that, when there has been returned to me, out of the proceeds of said leases or interests * * * all sums of money expended by me in the acquisition of said leases * * * for the operation and development of the same and for'facilities used in connection therewith * * * and in making up any deficiencies in connection with the one-eighth (%) over-riding royalties * * * plus six per cent (6%) interest per annum on one-tenth (Yio) of the sums of money or the balance thereof remaining from time to time unreturned to me; or when one-tenth (Yio) of said sums have been paid to me by the said Donald P. Oak, plus six per cent (6%) interest per annum thereon (he to have the option to pay the same at any time, or from time to time any part thereof, as he may elect) the above lien shall be discharged.
When the said lien is discharged, * * * Oak shall be entitled to receive from me an assignment * * * of an undivided one-tenth (Yio) interest in * * * [the] leases * * * and all material and equipment then located thereupon and of an undivided one-tenth 0/io) interest in and to all other facilities, * * * used in connection with the operation and development of said leases * * * , excepting leases or interests in leases and other property which may have been disposed of with the consent of said Donald P. Oak, said assignments to be subject to the terms and conditions of each and all of the contracts hereinbefore referred to.

The leases and interests covered by the trust were operated and developed in accordance with the provisions of the trust instrument. Petitioner, during the taxable years, did not become entitled to receive, nor did he receive, assignment of an interest in any of the properties.

During the calendar year 1937 the total gross receipts from the properties amounted to $53,523.34. The expenditures for intangible development costs, labor, supplies, insurance, taxes, depreciation, etc., totaled $96,932.52, or $43,409.18 in excess of the receipts. Petitioner, in his 1937 income tax return, claimed as a deduction $4,340.92, this amount being 10 percent of the $43,409.18 referred to above. “In arriving at this $4,340.92, there was used $785.78 representing 10% of the depreciation sustained during 1937 upon the equipment used on these properties, and $4,313.75 representing 10% of the intangible development costs expended during 1937 upon these properties.” Upon the books of Walter there was charged during the calendar year 1937, to the account of petitioner, the sum of $1,008.64 representing interest at 6 percent as provided for in the declaration of trust. This sum petitioner claimed as a deduction in his 1937 income tax return. (In 1938 and 1939 the expenditures also exceeded the gross receipts. Deductions, computed in the same manner that the deductions for 1937 were computed, were claimed, the particulars being set out in the stipulation.)

In January 1937, petitioner entered into two option agreements to purchase oil and gas leases in Kansas. In July 1937, petitioner assigned the option agreements to H. J. Walter and the Darby-Lynde Co. The oil and gas leases covered by the two option agreements were acquired with funds advanced by Walter and the Darby-Lynde Co. The written agreement, signed by petitioner, Walter and the Darby-Lynde Co. (the two latter being referred to as Associates) provides, inter alia:

3. Associates agree to carry Oak for an undivided 10% interest in and to the properties herein agreed to be conveyed * * * to the Associates. That is to say, that Oak shall be entitled to receive 10% of the net profits accruing to Associates from the acquisition, development and operation or sale of said leases. Provided, however, that in the event Oak should become incapacitated or die within one year from September 1, 1937, his net interest in said leases shall be reduced to 2% percent. * * * within two years * * * his net interest shall be reduced to five percent, and * * * within three years * * * his interest shall be reduced to 7% percent, and * * * the said Oak * * * shall [not] be entitled to make any claim for any greater percentage than is herein limited, and Provided further, that the net profits accruing to Oak shall be first used and applied to reimburse Associates for Oak’s proportion of all disbursements made * * * under the provisions or recitations of this agreement * * *. That is to say, the same percentage of all thereof, that Oak is carried for in the leases. Provided that at all times, the Associates shall be entitled to receive all of the gross earnings and proceeds arising from the sale of oil [etc.] produced from the * * * properties acquired hereunder, and shall, after they have received a re-payment of all their disbursements * * *, development and operating expenses, pay to Oak, the percentage of the monthly net profits to which he is entitled, * * *. It is further provided that until after the Associates shall have received a return of all of their disbursements aforesaid, Oak shall not be entitled to have any written assignment of any interest in said leases, but thereafter, the said Oak may at his option, require Associates to execute to him a written assignment of his interest in said leases, and it is further provided that if by reason of the execution of any such assignment, any percentage of the earnings * * * is paid to Oak, then Oak shall immediately pay to the Associates, his proportionate percentage of the operating cost and further development cost of the leases, and he shall be liable for any losses to the full extent of any of his said receipts.
4. Oak agrees to devote his best efforts, and such of his time as is necessary, as shall be directed by Associates, to the end that the property may be properly operated and developed, and subject to the pleasure of Associates, and for the period of time they shall see fit, Oak shall have general supervision and management of the development and operation of the leases. In consideration for his time and efforts, Associates shall pay to the said Oak, as an item of development and operating expense, his actual personal, automobile and traveling expenses, while engaged in such supervision or management work, not to exceed the sum of One Hundred ($100.00) Dollars per month. Provided however, that said consideration shall be subject to adjustment by mutual agreement each six months, if found to be inequitable. The accounts of Oak, with reference to his actual personal, automobile and traveling expenses while engaged in the work of supervising and managing the development and operation of the leases, shall be subject to reasonable auditing and cheeking by Associates.

Under the agreement Associates were to have uncontrolled discretion as to the management and operations of the properties and the right to dispense with the services of petitioner at any time, with or without cause. Petitioner was to continue to use his best efforts to acquire, in the name of Associates, other leases in the same vicinity and was to be “carried for the same percentage interest therein on the same terms and conditions” as shown above. The leases were to be “considered as a complete whole” and disbursements were to be borne proportionately, but “Associates shall look solely to Oak’s interest for the payment of his share thereof.” Petitioner was to “be considered a non-operator”, could not “control the activities or expenditures of Associates”, and could not be required to advance any money for operation, development, or acquisition “except from monies actually received by him representing * * * earnings * * * but his percentage interest in the leases shall at all times be liable for the same percentage of all disbursements, costs and development operating expenses.”

Operations of the properties mider the above agreement were started on September 15,1937. From such date to December 31,1937, the total gross receipts from the properties aggregated $6,874.02 and the expenditures for intangible development costs, labor, supplies, insurance, taxes, including depreciation, etc., totaled $56,583.32, resulting in an excess of expenditures for 1937 of $49,709.30. Petitioner, in his 1937 income tax return, claimed as a deduction 10 percent of such $49,709.30, or $4,970.93. In this $4,970.93 was included $237.24 representing 10 percent of the depreciation sustained during 1937 upon the equipment used on the properties, and $4,088.58 representing 10 percent of the intangible development costs expended during 1937 upon the properties. (In 1938 and 1939 the expenditures also exceeded the gross receipts. Deductions, computed in the same manner that the deductions for 1937 were computed, were claimed, the particulars being set out in the stipulation.)

Despondent determined that petitioner is not entitled to deduct a proportionate part of the excess of expenditures over receipts, either under the trust instrument or under the operating agreement between petitioner and his associates; that the so-called interest is not in fact interest since there was no obligation on the part of the petitioner to make repayment of money advanced for, or loaned to, him; and that petitioner’s earned income credit claimed on the return in the amount of $1,202.49 should be redu&ed to $959.16 (10 percent of the total earned income of $9,591.64 as recomputed). Petitioner contends that the declaration of trust and the agreement of July 1937 each constitutes a joint venture; that he, as a joint venture participant, is required to report for income tax purposes the gains or losses attributable to his pro rata part of the partnership property and therefore that he is entitled to deduct the necessary expenses of operation, including depreciation, and, so far as the trust is concerned, the interest charged to his account. In the alternative he contends that if he is not entitled to deduct the losses as claimed then he should be permitted to capitalize them, as well as the other expenditures for capital improvements, as the cost of his interest in the properties. Respondent, by an amendment to his answer, avers that even if petitioner owned such an interest in the properties operated under the trust or under the agreement that he should be required to include in his income a portion of the gross receipts and be permitted to deduct depletion and depreciation, still, in so far as such expenditures represent costs of development, they must be capitalized. He also contends that, under such circumstances, the allowance to petitioner for depreciation and depletion, together with operating expenses, may not, in any event, exceed the gross receipts derived by him from his interests in the properties.-

The parties seem to agree that the claimed losses and interest are not deductible in computing petitioner’s net income unless he was a joint adventurer; for he was on the cash basis, the transactions were not completely closed, no loss had been “fixed by an identifiable event”, no interest had actually been paid, and his obligation to pay interest was contingent upon acquisition of a portion of the property, either by actual payment in cash or by the use of an aliquot part of the excess of the earnings over the expenditures. Then, too, his right to claim depreciation rests primarily upon ownership of the property which is being depreciated by use or lapse of time. Joint ventures, however, are classified as “partnerships” under the revenue act (sec. 1001 (a) (3), Revenue Act of 1936) and, in computing the net income of each partner there is included, “whether or not distribution is made to him, * * * (c) his distributive share of the ordinary net income or the ordinary net loss of the partnership * * (Sec. 182, Revenue Act of 1938.) Cf. sec. 182, Revenue Act of 1936, and art. 182-1, Regulations 94. The first question to be determined, therefore, is whether petitioner was a joint adventurer.

Petitioner contends that the “arrangements represent typical joint ventures as they exist in the oil industry and that his interest in each joint venture is characterized as á ‘carried interest’.” He relies chiefly upon Shoemake v. Davis, 146 Kans. 909; 73 Pac. (2d) 1043; and Dike v. Martin, 85 Okla. 103; 204 Pac. 1106, citing also Motter v. Smyth, 77 Fed. (2d) 77. The cited cases do not attempt to lay down any general rule to the effect that every one having a “carried interest” is a joint adventurer. Dike v. Martin primarily involved subsequent dealings between parties who had originally been joint adventurers. The court held that, since the relation between joint adventurers is fiduciary in character and demands “the utmost good faith”, the refusal of the defendant to permit the plaintiff to pay his share of the development expenses and thereby become entitled to his share of the profits would not be countenanced. While Shoemake v. Davis did involve a “carried interest”, neither the lower court nor the appellate court placed any particular significance upon the term. “The parties adduced their evidence on what the language ‘carry me for a quarter interest’ did mean and the trial court’s finding on the controverted fact [to the effect that the plaintiff is the owner of an undivided one-fourth interest in the lease] is conclusive.” The court specifically refused to accept the view, urged upon it by the defendant, that the courts of Oklahoma take “judicial notice that in the acquisition and sale of oil and gas leases such language as the parties here used ‘carry me for a quarter interest’ means the specified interest of a broker of leases * * Motter v. Smyth involved a joint attempt of father and son to effectuate a sale to one railroad of the controlling stock in another which the court held constituted a joint adventure.

The cases, including those discussed in the preceding paragraph, seem to hold that whether a joint adventure exists is a mixed question of law and fact, depending, in no small degree, upon the intention of the parties. First Mechanics Bank of Trenton v. Commissioner, 91 Fed. (2d) 275. In resolving it the instruments signed by the parties, if unambiguous, are entitled to great weight; but consideration may also be given to the circumstances under which they were executed, the objects sought to be accomplished, and any and all facts showing or tending to show what their actual intention was. Since all of the facts were stipulated in the instant proceeding, the question is essentially one of law. Succinctly stated, it is: Were the parties joint adventurers in the development and operation of the oil properties?

The trust instrument does not purport to be a contract between the parties. It was not signed by petitioner, though for present purposes it may be assumed it was accepted by him. ISTo evidence was adduced showing the circumstances under which it was executed, the stipulation showing merely that petitioner had “obtained for and caused to be assigned to * * * Walter * * * certain oil and gas leases * * *. As consideration for the services of Donald P. Oak, in connection with the acquisition of the leases and as a part of this deal * * * Walter * * * executed” the trust. The oil and gas leases “were acquired with funds advanced by H. J. Walter and were developed and operated in accordance with the provisions of this Declaration of Trust with funds advanced by H. J. Walter.” Do these facts collectively show that petitioner was a joint adventurer? We think not. The properties belonged to Walter and he could do with them as he saw fit. He could develop them or let them stand fallow. Petitioner had no voice in determining whether or where a well should be drilled or when it or any of the properties should be abandoned. He could not bind Walter, or any “joint venture” composed of him and Walter, upon any contract with third parties, nor could Walter bind him. Walter individually took all of the risks and the losses were his, not petitioner’s. Petitioner, at best, acquired no more than a contingent right to obtain something of value at some uncertain time in the future in the event the operation of the properties by Walter should produce sufficient revenue to exceed the cost of acquisition, development and operation, plus interest at 6 percent upon one-tenth of all sums expended by Walter for which he had not been reimbursed. Whether such right be characterized as additional compensation for services, a bonus, a gift, or an agreement under which a contingent, possible, future, joint venture is to be brought into being is immaterial. As we interpret the stipulated facts petitioner was not, during the taxable years, a joint adventurer under the trust instrument.

The agreement differs in some particulars from the trust. It was signed by all parties and petitioner turned over to his “associates” the options to acquire the oil and gas leases which he, at that time, owned. These facts make it necessary to examine the rule of law applied by the Circuit Court of Appeals for the Tenth Circuit in Reynolds v. McMurray, 60 Fed. (2d) 843; certiorari denied, 287 U. S. 664, and in a second appeal of the same case, the opinion in the latter instance being reported in 77 Fed. (2d) 740. The Circuit Court of Appeals for the Ninth Circuit adopted the same view in Helvering v. Armstrong, 69 Fed. (2d) 370. The cited cases hold that co-owners of oil property, who turn it over to another to operate under an agreement providing that the costs incident thereto shall be charged to the undivided interest of the owner, accounting to be made to him for his proportionate part of the oil produced, and the operator to be reimbursed by crediting the coowners’ account with the operator with the proceeds from the sale of oil, thereby become joint adventurers and are taxable upon their proportion of the income. Assuming for the purposes of this proceeding that the rule is sound, the inquiry must be whether it is applicable.

In the cited cases Armstrong and the Ohio Co. owned the oil leases. Petitioner, however, had mere options to acquire oil leases upon the terms stated therein. Under one he was required to pay $97,500 and under the other $108,000 within comparatively short periods. The property from which the oil was to be produced — the oil leases — was to be acquired, developed, and operated by Associates. That was done and Associates paid the amounts due under the options. They thereby acquired the oil leases. As we interpret the stipulated facts, including the agreement and the options, the petitioner is in essentially the same situation in so far as the agreement is concerned as he is under the trust — having assisted in the acquisition of the property he is to be remunerated by being “carried” for an undivided 10 percent interest, or, as succinctly stated in the agreement, is to be “entitled to receive 10% of the net profits accruing to Associates from the acquisition, development and operation or sale of said leases.” Much that has been said above with reference to the trust is, therefore, apposite to the agreement. It may also be pointed out that petitioner is somewhat like the commercial geologist in Schermerhorn Oil Corporation, 46 B. T. A. 151; he merely had an interest in the net profits which it was hoped would be derived from the property. In any event, no such finding can be made under the stipulated facts as was made by the court in Shoemahe v. Davis, supra, that petitioner had an interest in the oil and gas leases. It is evident the parties did not intend petitioner to have any interest in the properties until such time as his associates received a return of all their disbursements — an event which had not occurred at the end of the taxable years. The conclusion is therefore inescapable that petitioner was not a joint adventurer, either under the trust or under the agreement of July 1937.

The holding which has been made is. determinative of most of the issues. In our opinion petitioner is not entitled to deduct from gross income any of the items in controversy. They did not, individually or collectively, constitute ordinary and necessary expenses of carrying on any trade or business of petitioner (sec. 23 (a), Revenue Acts of 1936 and 1938; cf. Deputy v. DuPont, 308 U. S. 488 and cases cited); nor did he sustain any loss in his trade or business or in a completed transaction entered into for profit (sec. 23 (e), Revenue Acts of 1936 and 1938). The portion representing depreciation may not be deducted as such by petitioner; for, so far as this record shows, he had no determinable cost basis (sec. 114 (a) and 113 (b), Revenue Acts of 1936 and 1938). Intangible drilling and development costs may be charged to capital or to expense at the taxpayer’s option (art. 23 (m) — 16, Regulations 94 and Regulations 101); but generally such items must be paid (by a taxpayer upon the cash basis) before any option may be exercised. Where the drilling and development are done by another under an agreement payment will be made in the future out of the oil and gas to be produced, the one for whom the drilling is done has no capital improvement until a commercial well is completed. When a commercial well is completed under a contract which is, in effect, a “turn-key” contract, no option to charge drilling and development costs to expense exists, C. W. Titus, Inc., 32 B. T. A. 1222, and they must be capitalized. T. K. Harris Co., 38 B. T. A. 383; affd., 112 Fed. (2d) 76. This rule applies where a well is completed upon property (leasehold or otherwise) owned by the one for whom the drilling is done. It probably has no pertinency here; for in the view which we have taken, petitioner owned no property or interest in property until and unless an assignment was made to him upon fulfillment of the conditions set out in the trust and agreement.

The so-called interest charged to petitioner’s account in connection with the trust is not deductible by him. It was neither paid nor incurred on indebtedness (sec. 23 (b), Revenue Acts of 1936 and 1938). It was no more than a bookkeeping entry, to be considered in determining when, if ever, petitioner would become entitled to receive the capital asset. He had borrowed no money and had made no agreement to make repayment or to pay interest. No debt existed. The obligation to pay any amount rested upon the contingency that the total earnings would exceed the total expenditures or that petitioner should see fit to acquire, by purchase, an interest in the producing wells. Neither event occurred during, or prior to, the taxable years.

Petitioner’s argument upon his alternative contention is substantially as follows: If the excess of receipts over expenditures is regarded as taxable income to .a joint adventurer, even though the venture may not ultimately pay out, then he should be permitted to capitalize the excess of his share of the expenses in each year over his share of the income and thus be in a position to recover ultimately the losses he will sustain through having his share of the income used to pay his share of the losses. The question is moot in this proceeding and must be passed, since petitioner was not a joint adventurer. If urged as an alternative under the stipulated facts as interpreted by us, then it may not be sustained. Petitioner had no economic interest during the taxable years in the property producing the income. At most he had an economic advantage under a contract rather than an interest in the oil in place. Such a right does not entitle him to recover, through depletion, a percentage of the drilling and development costs expended by the owner. Palmer v. Bender, 287 U. S. 551; Helvering v. Bankline Oil Co., 303 U. S. 362; and Anderson v. Helvering, 310 U. S. 404.

In the petition it is alleged the respondent erred in reducing the earned income credit. The charge is apparently abandoned; for no mention is made of it in the stipulation or briefs.

We are of the opinion the Commissioner committed no error in determining the deficiencies in tax. They are accordingly approved.

Decision will be entered for the respondent.

       The respondent has recently expressed the opinion the rule is “out of harmony” with what he believes to be the true test of ownership of income from production. G. C. M. 22730, C. B. 1941-1, p. 214, 223.


author: Hill:

text:
    American Steamship Owners Mutual Protection and Indemnity Association, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102924.
    Promulgated February 6, 1942.

      E. Q. Kullman, Esq., for the petitioner.

      Walt Mandry, Esq., for the respondent.
   OPINION.

Hill:

The Commissioner determined income tax deficiencies of $284.12, $1,458.11, and $668.26 for the calendar years 1986, 1937, and 1988, respectively. The petitioner claims overpayments in the amounts of $3,857.52, $2,244.91, and $2,459.04, the amounts of tax paid by petitioner in the respective years. Petitioner filed its return with the collector of internal revenue for the second district of New York.

This proceeding was submitted upon a stipulation of facts which incorporated certain attached exhibits. We find the facts as stipulated and set forth only those necessary to an understanding of the issues raised by the parties.

Petitioner is a nonstock protection and indemnity insurance company which was incorporated in New York during 1917. Petitioner furnishes its members, who are shipowners, with protection and indemnity insurance on a mutual assessment basis. The assessments are determined upon tonnage of each member and are payable in advance for each insurance year (February 20 to February 20). If the advance assessment is insufficient to pay the losses and expenses, a deficiency assessment is made; and if there is an excess over losses and expenses, that excess is refundable to the members. No policies are issued and none other than members are insured. The insurance does not cover any risk which is covered by marine or hull insurance. The risks which are covered are set forth in the charter as follows:

Aoticlb 3.
The kinds of business to be undertaken by this corporation and the insurance it shall have authority to make are as follows: Insurance upon the mutual assessment plan, in connection with vessels, (a) against liability for loss or damage resulting from personal injury to any person, (b) against liability for loss of or damage to or in connection with cargo or other property provided that sueh liability insured against by this association shall not exceed that which would be imposed by law in the absence of contract, (c) against liability for damage to other vessels or craft or to other property of any kind, (d) against loss by reason of general average sacrifices, allowances or liabilities, (e) against expense incident to quarantine detention, (f) against expenses in resisting claims or .defending law suits growing out of any risk insured, and (g) against loss or liability incidental to or in respect of the ownership, operation or chartering of vessels, including legal expenses; but nothing herein contained shall be deemed to authorize or permit this corporation to make insurances upon the hull, machinery, freight moneys or disbursements of any vessel or upon cargo or other-property transported. The corporation shall have power to reinsure any risks insured by it.

The bylaws are substantially similar except that the provisions are more detailed. They provide in part:

Sub-Sec. 6. Costs or expenses of or incidental to the removal of the wreck of an entered steamship; provided, however, that:
(a) Nothing is insured hereunder which is covered by the member’s hull insurance, or if the steamship is uninsured such as would have been covered under customary form of hull insurance;
(b) From such costs and expenses shall be deducted the value of any salvage from or which might have been recovered from the wreck inuring, or which might have inured, to the benefit of the member.
*******
Sub-Sec. 7. Expenses (other than wages) reasonably incurred in necessarily repatriating any member of the crew or any other person employed on board an entered steamship; provided, however, that no member shall be entitled to recover any such expenses incurred by reason of the expiration of the shipping agreement, other than by sea perils, or by the voluntary termination of the agreement.
*******

Petitioner filed its return under section 116 (g) oí the Revenue Acts of 1936 and 1938. The deficiencies were determined by the respondent because of numerous adjustments, but the only adjustment in issue in this proceeding is the disallowance of a portion of the claimed deductions. Respondent classified certain deductions as indirect expenses. The amounts which were so classified and the sums allowed as deductions and disallowed by the respondent are as follows:

The respondent failed to allow the amounts set forth in (c) above on the ground that the expenses should be prorated in accordance with the provisions of section 24 (a) (5) of the Revenue Acts of 1986 and 1938 and the regulations thereunder, as follows:

Petitioner’s capital losses were as follows: 1936, $4,391.06; 1937, $10,606.25; and 1938, $2,793.42.

The petitioner contends that it is exempt from tax by section 101 (11), or, if not so exempt, section 24 (a) (5) does not require any expenses to be allocated to the assessments, since the assessments are not income. If both of these issues are decided against the petitioner, then it contends that section 207 (c) (3) grants a deduction to the amount of advance premiums held for repayment to the members and for payment of losses and expenses, thereby leaving no taxable income.

The first issue which we shall discuss is whether section 101 (11), which is substantially a reenactment of section 2B1 (11) of the Revenue Act of 1918, will exempt petitioner from all tax. Congress chose to legislate specifically for this petitioner. Sec. 116 (g). The legislative history bears out this conclusion. Congressional Record, vol. 61, p. 7182. Since section 101 (11) is a general statute, it must give way to the specific. Rawlings Manufacturing Co., 44 B. T. A. 161. Furthermore, the business of petitioner was not limited to casualty insurance as defined by article 101 (11) of Regulations 94 and 101. See also Cooley, Briefs on the Law of Insurance, vol. 1, p. 6, for similar definition. Article IX of the bylaws, which is set forth in part above, gives the members various protections which can not be construed to be casualty insurance. Art. 101 (11), Regulations 94 and 101; Cooley, Briefs on the Law of Insurance, vol. 1, p. 6. We hold that petitioner is not exempt under section 101 (11).

The second issue appears to be simple and we would treat it peremptorily except for the strenuous argument of the petitioner on brief. Petitioner contends that section 24 (a) (5) does not bar the deduction of expenses allocable to the assessments because the assessments are not “income wholly exempt from taxes imposed by this title.” He quotes the remarks of Senator Sutherland set forth in the Congressional Record, supra, with particular emphasis on the following:

* * * the amounts paid by these companies [petitioner specifically] are in no sense profits, and could not be considered as profits; * * *. This amendment simply makes clear what is very doubtful now, and declares that these assessments paid by these companies into this common fund for their mutual protection and not for profit are not income, and are therefore not taxable. * * *

Petitioner also cites the language from several cases as showing that the assessments are not income. Helvering v. Oregon Mutual Life Insurance Co., 311 U. S. 267; Valley Waste Disposal Co., 38 B. T. A. 452; Board of Fire Underwriters of the City of Duluth, 26 B. T. A. 860; Growers Cold Storage Co., 17 B. T. A. 1279. We believe that in those cases the word “income” is used in the sense of “taxable income” and not as “something which comes in by way of addition or increment.” Webster’s New International Dictionary. Moreover, the placement of the provision which exempts the assessments made by petitioner from tax was in a section which exempts items which are income. Sec. 116 (a) and (b). We hold that the assessments are income “wholly exempt from the taxes imposed by this title” and that expenses al-locable to that income are not deductible. Sec. 24 (a) (5). The formula employed by respondent for the allocation of expenses between income wholly exempt from tax and that not exempt from tax should have included net capital gains instead of gross capital gains. With this modification, the formula provides a proper basis for such allocation. The inclusion of capital gains without a deduction for capital losses would result in allocating part of the expenses to the capital gains, but no part of the expenses to the capital losses. This would not be true in the case of an ordinary taxpayer and we do not believe that Congress intended to place a taxpayer with part of his income exempt in any worse position. Therefore, we hold that the capital losses should be deducted from the capital gains before inclusion in the formula to determine the amount of expenses allocable to the taxable and to the exempt income.

The final issue is whether petitioner is entitled to the deductions allowed by section 207 (c) (3). We think not. Congress expressly stated in section 116 (g) that this petitioner was to be taxable upon its net income from interest, dividends, and rents. The application of section 207 (c) (8) would make petitioner taxable upon the net income from interest and dividends, less the amount of premium deposits retained for the purposes specified in that section. The result would be a complete wiping out of taxable income contrary to the intent of Congress manifested in section'116 (g). Moreover, section 207 (c) (3) is a general provision which must give way to the specific provision of section-116 (g). Rawlings Manufacturing Co., supra.

Decision will he entered, umder Rule 60.

       SEC. 116. EXCLUSIONS FROM GROSS INCOME.
      In addition to the items specified in section 22 (b), the following items shall not be included in gross income and shall be exempt from taxation under this title:
      <c * * * at: * *
      (g) Shipowners’ Protection and Indemnity Associations. — -The receipts of shipowners’ mutual protection and indemnity associations not organized for profit, and no part of the net earnings of which inures to the benefit of any private shareholder; but such corporations shall be subject as other persons to the tax upon their net income from interest, dividends, and rents.

       SEC. 207. MUTUAL INSURANCE COMPANIES OTHER THAN LIFE.
      *******
      (c) Deductions. — -In addition to tbe deductions allowed to corporations by section 23 tbe following deductions to insurance companies shall also be allowed, unless otherwise allowed—
      *******
      (3) Mutual insurance companies other than life and mabine. — In the case of mutual Insurance companies (including interinsurers and reciprocal underwriters, but not including mutual life or mutual marine insurance companies) requiring their members to make premium deposits to provide for losses and expenses, tbe amount of premium deposits returned to their policyholders and the amount of' premium deposits retained for the payment of losses, expenses, and reinsurance reserves.


author: OppeR :

text:
    Renton Investment Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102109.
    Promulgated February 10, 1942.

      W. A. Seifert, Esq., W. W. Booth, Esq., and A. G. Wallerstedt, O. P. A., for the petitioner.

      Bernard D. Daniels, Esq., for the respondent.
   OPINION.

OppeR :

Petitioner’s liability to tas as a personal holding company under Bevenue Act of 1936, Title I A, is litigated here not on account of the character of petitioner’s income, but solely on the question whether 50 percent of petitioner’s stock was “owned directly or indirectly by or for not more than five individuals.”

An affirmative conclusion is resisted on two grounds: That while record ownership of well over 50 percent of petitioner’s stock was ultimately and through intervening titles held in the names of not more than five individuals, considering as one those within the family relationship definition of section 354, nevertheless, due to various circumstances, these individuals were not collectively the real owners of the requisite amount of stock within the meaning of the stock ownership requirement of section 352; and, second, because the title of these individuals was not direct but stemmed through several corporations, including an operating company, a situation to which the statute is said to be inapplicable at least in the absence of a motive to escape surtaxes.

The latter contention can perhaps best be summarized in the language of petitioner’s brief: “Petitioner contends that the applicable sections of the Revenue Act are penal in nature being expressly designed for the purpose of penalizing corporations which permitted their earnings to accumulate, thus avoiding imposition of a surtax upon their shareholders; that petitioner was not formed for any such purpose and no tax has been lost to respondent through the formation and operation of petitioner; that the act does not specifically authorize respondent to go or look through an operating parent to its stockholders to determine whether a subsidiary is a so-called personal holding company; and being a penal section it is not to be extended to any degree beyond its expressed purpose or intent.” We may note in passing that there is not the slightest evidence but that petitioner was in fact availed of to avoid surtax upon its shareholders or the shareholders of another corporation. All that petitioner says on this subject is “even if Union [the parent] had made a taxable distribution to Bessemer [its controlling stockholder] and Bessemer had made a taxable distribution to its stockholders [the Loves], where on this record could the respondent have collected any surtax? All the Loves [the individuals determined by respondent to constitute the controlling group] were hopelessly insolvent and it can safely be assumed that their interest deductions would have exceeded their dividend income.” In the absence of evidence, and there is none, that is a violently unsafe assumption for the Board to make regardless of what it may be for petitioner; and the whole contention thus narrows to an attempt on petitioner’s part to profit by a failure of proof where it has the burden. But in any event, we think that the legislative history of Title I A, as quoted in petitioner’s brief, contains statements which demonstrate that this position may not be sustained. One of the purposes of enacting section 351, which was the forerunner of Title I A, was “to provide for a tax which will be automatically levied upon the holding company without any necessity for proving a purpose of avoiding surtaxes.” Report, Revenue Act of 1934, Ways and Means Committee, H. R. No. 704,73d Cong., 2d sess., p. 12. Since section 354 (a) (1) requires that stock be traced through intervening corporations if necessary, but makes no distinction between holding and operating companies in that tracing process, and since the history of the legislation denies the necessity of scrutinizing motives, we must reject petitioner’s argument on this point.

The contention that the individuals did not,' in fact, own the stock within the meaning of Title IA is predicated generally upon the proposition that they or their estates were insolvent, that some of the Bessemer stock was pledged, and that hence the true owners of the stock were the pledgees and creditors and not the record owners. We may well agree with petitioner that the aim of the statute was to reach beyond mere naked legal title and to come to grips with the real beneficial owners. This is suggested at least by the provisions of section 354 (a) (1) requiring the penetration of such impersonal entities as corporations and trusts to find the real parties in interest. It does not follow, however, that a person is not the beneficial as well as the legal owner of his property merely because it is pledged, or even because of insolvency. Such circumstances may provide the means by which the debtor can be deprived of both legal and equitable ownership. But until some action has been taken by the creditors, we can not say that a future possibility is so nearly the equivalent of a present fact that the mere potentiality of tomorrow’s foreclosure or bankruptcy destroys the ownership that certainly and indisputably exists today. See City Bank Farmers’ Trust Co. v. Bowers (C. C. A., 2d Cir.), 68 Fed. (2d) 909; certiorari denied, 292 U. S. 644; Frank Kuhn, 34 B. T. A. 274; Lavenstein Corporation v. Commissioner (C. C. A., 4th Cir.), 25 Fed. (2d) 375. Petitioner is asking us to add to the provisions of 354 (a) (1) attributing to the interested individuals the ownership of stock held by corporations, trusts, and the like, a command that the property of debtors shall be considered that of their creditors. This would be a clearly unwarranted extension if we were being asked to hold a mere creditor to be a present owner in computing the 50 percent ownership required to apply the statute; we think it equally out of the question to give the statute such a construction in order for its application to be avoided.

In the case of J. K. Love and Russell C. Love, that is the full extent of petitioner’s contention. The estate of F. S. Love is also asserted to be insolvent. Its residue was bequeathed to the testator’s wife and daughter, after specific legacies to other relatives. Petitioner contends that these people were not “beneficiaries” of the estate within the meaning of section 354 (a) (1) and did not, therefore, proportionally own the stock of the estate since the latter was insolvent and the creditors would take the stock to the exclusion of the legatees. To the extent that this is a further argument related to the definition of “beneficiaries” in the statute, we think it must also be rejected. “Beneficiaries” is obviously used as in pari materia with “stockholders” and “partners.” A partner or a shareholder is none the less so because the partnership or corporation may happen to be insolvent; and we think the same mu'st be said as to the beneficiary of an estate or trust. As long as the stock was held by the estate, those having the beneficial interest therein are necessarily to be viewed as the owners under the plain terms of the statute. It is also urged that since the financial condition of the estate was so unfavorable, efforts to allocate the stock.between specific and residuary legatees would be hopeless, with the consequence that we can not tell who were in fact the beneficiaries as far as this stock ownership is concerned. But under the family ownership provisions of 354 (a) (2), that is a matter of no consequence insofar as concerns our present problem. Precisely who would take the stock upon the termination of administration, so long as all are within the group which is considered as one person, is immaterial, for it can have no effect upon the result.

The same applies to a contention with respect to a trust created by Frank S. Love during his lifetime for the benefit of his daughter. Since she is included with her mother as a single person, it is of no moment whether the stock be considered as belonging to the estate on the one hand or to the inter vimos trust on the other.

Still another contention requires consideration as to a considerable block of stock pledged with a bank as security for the fulfillment of an indemnity agreement by several of the Loves. The argument is that, since the indemnity was admittedly due, all the pledgors’ interest had in effect been forfeited to the pledgee and the former were no longer the owners of the stock. The difficulty is that the original agreement permitted the Loves to vote the stock and receive the dividends thereon until it should be seized and sold by the pledgee, and this had not happened at any time during the period decisive here. The stock was in fact voted by the Loves and for all that this record shows any dividends paid by Bessemer on that stock were received by them. Under the circumstances it is impossible to reach the conclusion that their interest included so little of the rights attributable to stockholders that they can be disregarded as owners of the stock.

Finally, there is the stock which E. M. Love had pledged with two national banks and which, to the extent of 2,150 shares, is said to have been transferred outright to the Comptroller of the Currency and the receivers of the banks during the first half of the year 1937. This is the most persuasive of any of the situations upon which petitioner relies. But, even if we were to hold, as we would be inclined to do, that as to this block of stock not one of the five persons concerned .was the owner at any time during the period to which the statute makes reference, that would still leave more than the requisite number of shares in the ownership of the statutory stockholding group and such a determination in petitioner’s favor would be of no benefit to it. ' No matter how this point is decided, therefore, the conclusion oh the whole case must be that at all times “during the last half of the.taxable year more than 50 per centum of the value” of petitioner’s outstanding stock was “owned directly or indirectly by or for not more than five individuals” and, since the other requirements of the title are conceded, that petitioner is a personal holding company under Title I A, Kevenue Act of 1937.

As far as we can see there is nothing unreasonable or pointless in such an application of this provision. If petitioner had distributed its income the object of the legislation would have been achieved, at least to the extent that the intervening companies likewise made distributions so that the ultimate receipt by an individual stockholder possibly liable to surtax would have been accomplished. For all that this record shows, such a course of events, necessarily dependent upon petitioner’s initiative, would have resulted in the collection of increased surtaxes from at least some of the individuals to whom the stock belonged. This is the very core and kernel of the end for which these provisions were designed. It is certainly not unreasonable that a failure to bring about the object contemplated by the statute should result in an application of the penalty devised to discourage that failure. Such a result can scarcely justify a charge of unconstitutionality. Helvering v. National Grocery Co., 304 U. S. 282; Foley Securities Corporation v. Commissioner, 106 Fed. (2d) 731 (C. C. A., 8th Cir.).

As to the penalty for delinquent filing, there is no evidence of the" cause for the original default. We have been told why the overdue return was ultimately filed. If that is to be construed as a backhanded showing of the reason it was not filed sooner, the implied excuse is still insufficient. Mere misapprehension as to the scope of petitioner’s obligation is no exculpation for the failure to perform it, at least where the statutory compulsion has reached so respectable an age. R. Simpson & Co., 44 B. T. A. 498.

Decision will he entered wader Bride 50.

       SEC. 352. [As amended by Revenue Act of 1937.] DEFINITION OF PERSONAE HOLDING COMPANY.
      (a) General Rule. — For the purposes of this title and of Title I the term “personal holding company” means any corporation if—
      (!>*.*
      (2) Stock ownership requirement. — At any time during the last half of the taxable year more than 50 per centum in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals.

       SEC. 354. STOCK OWNERSHIP.
      (a) Constructive Ownership. — For the purpose of determining whether a corporation is a personal holding company, insofar as such determination is based on stock ownership under section 352 (a) (2), section 353 (o), or section 353 (f)—
      (1) Stock not owned ex individual. — Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by its shareholders, partners, or beneficiaries.
      (2) Family and partnership ownership. — An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family or by or for his partner. For the purposes of this paragraph the family of an individual includes only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants.
      (3) Options. — If any person has an option to acquire stock such stock shall be considered as owned by such person. For the purposes of this paragraph an option to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such stock.
      (4) Application op family-partnership and option rules. — Paragraphs (2) and (3) shall be applied—
      (A) For the purposes of the stock ownership requirement provided in section 352 (a) (2), if, but only if, the effect is to make the corporation a personal holding company;
      (B) For the purposes of section 353 (e) (relating to personal service contracts), or of section 353 (f) (relating to use of property by shareholders), if, but only if, the effect is to make the amounts therein referred to includible under such subsection as personal holding company income.
      (5) Constructive ownership as actual ownership. — Stock constructively owned by a person by reason of the application of paragraph (1) or (3) shall, for the purpose of applying paragraph (1) or (2), be treated as actually owned by such person; but stock constructively owned by an individual by reason of the application of paragraph (2) shall not be treated as owned by him for the purpose of again applying such paragraph in order to make another the constructive owner of such stock.

       See Revenue Act of 1936, sec. 102.

        Supra, note 2.