author: TRAmmell:

text:
    R. S. Goforth and Mary B. Goforth, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 52316.
    Promulgated August 13, 1935.

      Charles H. Garnett, Esq., for the petitioners.

      Willis B. Lmsford, Esq., for the respondent.
   OPINION.

TRAmmell:

The principal issue in this proceeding relates to the proper method of computing the profit derived by petitioners in 1928 from the sale to Morrison of an undivided 30-acre interest in the mineral rights in their land. Petitioners contend that the taxable gain derived by them was $24,399. By a radically different method of computation respondent has determined the profit at $48,192.87.

Respondent approved the revenue agent’s report in which the profit was computed bj assuming that, upon settlement on January 80, 1928, of the litigation involving title to the lands, petitioners thereby acqmred title to 45 acres having a royalty value of $90,000. The impounded oil attributable to the 45 acres was $53,517.45. The cost of acquiring title, comprising $45,000 paid to the Indian heirs, plus the litigation costs, in the total amount of $58,681.50, was allocated as follows: To the royalty from 45 acres, $36,799.25, and to the impounded oil, $21,882.25. On the basis of the proportion allocable to 30 acres, respondent determined a profit on the sale of the royalty interest to Morrison in the amount of $27,735.25, and a profit on the impounded oil of $20,457.12, making an aggregate gain on the Morrison sale of $48,192.37.

In his brief respondent concedes that the report of the revenue agent is erroneous to the extent it allots the cost and sale price between the fee and oil interest, on the ground that there is. no evidence that petitioners paid anything for the oil rights sold Morrison, and seeks approval of his computation because the petitioners “ have not presented to the Board any more correct method than used in the sixty-day letter.” We can not agree with respondent’s proposition.

The basic error lies in respondent’s determination that petitioners acqmred the mineral rights in 45 acres m 1928 at a cost in the amount paid to settle the litigation. Since the court held petitioners had a good title to 60 acres before settlement of the litigation, it follows that the mineral rights were acquired by them in 1912 as part of the fee title. The amount paid to settle the litigation is merely additional cost of the title, and by the stipulation is applicable only to the mineral rights.

The petitioners did not sell to Morrison an interest in the fee for $60,000, and in addition the impounded royalty at the face value of the fund. What petitioner sold to Morrison was an undivided interest in the mineral rights, which constituted part of the fee title to the land, as of the date of the contract and deed, namely, December 11, 1926, with the right in Morrison specifically granted to receive his proportionate part of the royalties accruing from oil produced from the land subsequent to December 11, 1926, in the event the sale was finally consummated. The sale was finally consummated in 1928 and Morrison thereupon became entitled to and did receive a deed to a 30-acre undivided interest in the mineral rights in the land, together with his share of the impounded royalties, for all of which he paid to the petitioners $60,000.

By the judgment of July 10, 1927, the District Court of Seminole County held that the petitioner, Mary B. Goforth, owned an undivided one-half or 60-acre fee simple interest in the land. The effect of the dismissal on January 80, 1928, of the appeal then pending in the Supreme Court of Oklahoma was to cause the judgment of the district court to become final. The title thus confirmed in petitioners was acquired by them in 1912 at a cost of $3,000, which it is stipulated represented the agricultural value. The land had no mineral value prior to 1923. Thus, prior to January 30, 1928, the mineral rights in the land had cost the petitioners nothing. On that date they paid $58,681.50, to settle the litigation. This amount, being ascribable entirely to the mineral rights, represents the cost to the'petitioner of the mineral rights in the 60 acres. However, six acres went to Pryor for attorney fees, which constitutes additional cost of title, leaving petitioners with a net 54-acre interest at a cost in the amount above stated. This gives a cost of $1,086,694 per acre, or a total cost basis to the petitioners of the 30-acre interest sold to Morrison in the amount of $32,600.82. Having received a total cash consideration of $60,000 from Morrison, the petitioners realized taxable profit of $27,399.18.

This conchzsion is substantially in agreement with the petitioners’ computation, except that they contend that the initial payment of $3,000 made by Morrison in 1926, since it became at that time their property unconditionally, constituted taxable income to them in that year and should not be included as part of the consideration in computing the profit realized in 1928. The argument we think is unsound. What the taxable status of the initial payment would have been if the sale to Morrison had not been consummated we need not consider here, for the reason that the sale was in fact fully consummated in 1928, and the $3,000 so paid clearly represents a part of the total consideration paid by Morrison for his 30-acre interest. The amount should, in our opinion, be included in computing the profit derived in 1928.

In this connection petitioners further assert that they are entitled at this time to elect to have the profit realized from the Morrison sale taxed as capital net gain, if it is to their advantage to do so, which can not be determined prior to our decision on the other issues herein. Respondent resists petitioners’ contention on this point only on the ground that the 30-acre mineral interest sold Morrison was acquired by the petitioners as a result of the settlement of the litigation in 1928, and so did not constitute “ property held by the taxpayer for more than two years ”, as the term “ capital assets ” is defined in section 101 of the Revenue Act of 1928.

Respondent’s position can not be sustained on the ground stated, but we have held in Forest Anderson, 30 B. T. A. 597, that amounts received as consideration for mineral deeds in Oklahoma constitute ordinary income and not capital gain. On authority of that decision, the contention of the petitioners is denied.

The remaining issue is whether the royalty from oil produced and impounded in 1927 and received by the petitioners in 1928 is taxable to them as a part of their gross income for that year, as contended by the respondent. The parties have stipulated, and we have so found, that the petitioners’ lessee and the pipe line companies to which it sold oil from the lease declined to pay the disputed oil royalty to the petitioners or any other claimant, but, pending the outcome of the litigation over the fee title, impounded the proceeds thereof and held them in trust for the persons who should thereafter be ascertained to be their rightful owners. Subsequent to the settlement of the litigation on January 30, 1928, the impounded royalty was distributed to those persons ascertained to be the owners under the judgment of the court, and the petitioners received the sum of $29,848.12, which was impounded in 1927.

The Revenue Act of 1928, in section 161, provides among other things that income accumulated in trust for the benefit of un-ascertained persons shall be subject to the taxes imposed upon individuals, but that the tax shall be paid by the fiduciary. Section 701 of the same act defines the term “ fiduciary ” as including a trustee, and section 143 provides that every fiduciary, except a receiver appointed by authority of law, who is in possession of part only of the property of an individual, shall make a return under oath for any trust for which he acts.

In O. O. Owens, 26 B. T. A. 1147, we held that where income from royalties was impounded in the custody of a court receiver during litigation to determine the unknown heirs of the original owner, the receiver was a fiduciary and under the provisions of the Revenue Acts of 1916, 1918, and 1921, which are substantially the same as those contained in the Revenue Act of 1928, supra, the fiduciary should have filed returns and paid the income taxes thereon. We further held that, when the funds were released and paid to the beneficiary determined by the court to be entitled to receive them, they were not income taxable to the beneficiary in that year. In our opinion we reviewed at some length the history of the provisions of the revenue acts applicable to receivers and other fiduciaries for individuals, for corporations, and for “ unascertained persons.” We also reviewed and distinguished the facts in North American Oil Consolidated v. Burnet, 286 U. S. 417, upon which respondent relies in the instant case.

The Circuit Court of Appeals, at - Fed. (2d) - (C. C. A., 10th Cir., July 3, 1935), affirmed our decision in the Owens case, so far as material here. In that case, the court held that the portion of the income accumulated in the hands of the receiver up to July 9, 1911, on which date Owens and Brazell acquired the interest of the heir of the original Indian allottee in the allotment, was received by them by virtue of their contract of purchase, and that they were taxable only to the extent the amount received by each exceeded the cost to him of the estates and interests acquired under the contracts of July 9, 1917. But the income accumulated by the receiver after that date, the court held, was “ income accumulated in trust for the benefit of * * * unascertained persons ”, and it held that it was the duty of the receiver to return such income for taxation and to pay the tax thereon to and including March 25, 1922, the date on which the persons entitled to receive the funds were finally determined by judicial decision.

In the Owens case, the land in question was allotted to Barney Thlocco, a Creek Indian, who died about the time the allotment was made, and after the discovery of oil and gas in 1913, the United States brought suit against persons claiming to be the heirs of Thlocco to cancel the allotment and recover the land for the benefit of the Creek Nation. In 1915 the court entered a decree against the United States, adjudging that the allotment was valid, which decree was affirmed by the Supreme Court of the United States in 1917. Thereafter, the only question left for determination was the heirship of Thlocco.

In the present case, the land in question was allotted to “ Ida ” a Seminole Indian, whose correct name was “ Eddie.” He died intestate and without issue in 1914. So far as the record discloses the validity of the allotment to Ida was not in controversy. The only question for determination in this case, as in the Owens case subsequent to 1917, was the heirship of the original allottee. In the cited case some 225 persons claimed to be such heirs, or assignees or ven-dees of heirs. In the instant case some 75 persons, including the petitioners, claimed to be such heirs, or assignees or vendees. In distinguishing the Owens case from North American Oil Consolidated, supra, the court said:

There, the equitable title was in fact in the North American, an ascertained person, and its title was challenged by the suit brought by the government. It simply was a controversy respecting the title between two ascertained persons. Here, the title was admittedly in a person occupying a particular status, to-wit, the heir to Thlocco, but the identity of the person occupying that status was not determined. He was an unascertained person. There, either the land belonged to the North American and the income therefrom was a part of its gross income, or it belonged to the United States and was exempt.

The same facts, we think, also distinguish our decision in Aubrey Umsted, 28 B. T. A. 176; affd., 72 Fed. (2d) 828.

In the case at bar the litigation was not a controversy respecting the title between two or more “ ascertained ” persons. There was no claim of defect in the title. The validity of the allotment was not questioned. Admittedly the title was in a person or persons occupying a particular status, to wit, the heir or heirs of “ Ida ”, the original Indian allottee, or in the assignees or vendees of such heirs. Only the identity of the persons occupying that status was in controversy. They were “ unascertained persons ” and prior to the settlement of the litigation on January 30, 1928, when the appeal was dismissed and the judgment of the trial court became final, the income consisting of the oil royalties was being accumulated for the benefit of such “ unascertained persons.” This income should have been reported and the tax thereon paid by the several fiduciaries, and it is not thereafter taxable to the beneficiaries. .We do not know, and it is immaterial, whether the fiduciaries did in fact return such income and pay the tax. That question is not presented here.

On authority oí the cited! decisions, we hold that the royalty received by the petitioners in 1928 from oil produced in 1927, to the extent that the amount so received constituted income accumulated for the benefit of unascertained persons, is not taxable to the petitioners as a part of their gross income for 1928. See also Ferguson v. Forstmann (C. C. A., 3d Cir.), 25 Fed. (2d) 47; Hart v. Commissioner (C. C. A., 1st Cir.), 54 Fed. (2d) 848; and Buckley v. Commissioner (C. C. A., 2d Cir.), 66 Fed. (2d) 394.

Petitioners received in 1928 the amount of $29,848.12 as royalty from oil produced and impounded in 1927. This entire amouht, however, does not represent income accumulated for the benefit of unascertained persons. The parties stipulated and we have found as a fact that in the litigation involving the land herein referred' to there was no basis for disputing the title of the petitioners to an undivided one-eighth, or 15 acres, interest in the whole 120 acres, and it was conceded in any- event that petitioners would be entitled to a final judgment for at least that much. Thus petitioners acquired the 15 acres by purchase in 1912. Under the decisions of the Circuit Court in the Owens case, supra, it would follow that so much of the impounded royalty received by the petitioners from the trustee in 1928 as was allocable to the 15 acres, or one fourth of $29,-848.12, was not accumulated for unascertained persons, but was received by the petitioners by virtue of their ownership of the 15-acre interest acquired by purchase in 1912. Under the decision of the Supreme Court in the North American case, supra, the amount allocable to the 15-acre interest would be taxable to the petitioners in 1928, the year in which it was received by them upon termination of the litigation, if the amount represents taxable income. But, as the Circuit Court of Appeals points out in its decision in the Owens case, impounded royalty acquired by purchase is-taxable income only to the extent that the amount received exceeds the cost basis.

Here, the royalty - or mineral rights in the land cost petitioner $58,681.50, but of this amount $32,600.82 has been allocated to the 30 acres sold to Morrison, and this leaves $26,080.68 unrecovered of the $58,681.50 expended by the petitioners in the compromise settlement. As has already been pointed out, petitioners received in 1928, in addition to anything received from Morrison, the sum of $29,848.12 from oil produced and impounded in 1927 and $21,753.13 from oil produced in 1928, making a total of $51,601.25. From this should be deducted the $26,080.68 unrecovered cost of the compromise settlement, which leaves a taxable profit of $25,520.57 from oil royalties to be taxed to petitioners in 1928. This $25,520.57 should of course be reduced by the depletion allowance to which petitioners are entitled under the applicable statute. While it is true that none of the $29,848.12 received in 1928 from oil produced and impounded in 1927, except that produced from the 15 acres which it was certain petitioners would retain, would be taxable to petitioners under the doctrine of the Owens case here followed, nevertheless the money when received would go to reduce the remaining basis of cost, and that is the way we have applied it in the foregoing statement and so to treat it does not in our opinion in any way do violence to the doctrine of the Owens case.

Judgment will ~be entered under Bule 50.


source: Caselaw Access Project

author: Murdock:

license: Public Domain

text:
    Northwest Bancorporation, a Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 71302.
    Promulgated August 14, 1935.

      Peter 8. Bash, Esq., and P. J. Coffey, Esq., for the petitioner.

      Shelby 8. Faulkner, Esq., for the respondent.
   OPINION.

Murdock:

The petitioner claims a loss on its investment in the stock of Metropolitan. A loss from an investment in stock is the difference between the cost of the stock and the amount realized. Sec. Ill, Revenue Act of 1928. It is sustained when the transaction is closed for tax purposes either by a sale, exchange, or disposition of the stock, by the stock becoming worthless, or by a liquidation of the corporation in which the stockholder receives less than the cost of his stock. Here the loss is claimed by reason of a liquidation. See section 115 (c). The parties have stipulated that had Metropolitan liquidated in 1930 the amount of the loss would have amounted to $654,461.15. The Commissioner did not intend to stipulate that the petitioner actually sustained any loss in 1930. He contends that there was ho liquidation in 1930 and no loss in that year for tax purposes. He apparently intended to agree that the cost of the petitioner’s stock exceeded, by the stipulated amount, the sum which the petitioner might have expected to receive had the corporation been liquidated in 1930 by the sale of its assets at their then value and the distribution of the proceeds to the stockholders. But Metropolitan was not liquidated in 1930. It had a great wealth of assets which were not to be disposed of in a hurry. The record does not show how or when the assets were actually disposed of or how much the petitioner eventually received. There is good reason to believe that the liquidation took place after 1930. Not only does the record fail to show that the petitioner sustained a loss in 1930,- but it fails to show that a loss of any particular amount was ever sustained. The petitioner’s theory seems to be that it can balance its prospective share of the net assets of Metropolitan against the cost of its stock and take a deduction of the difference. It cites no authority for that contention. No sufficient reason for such an anticipation of a loss has been shown. The petitioner in brief states that it also owned the stock of Northwestern. That fact was not proven and would not have aided the petitioner had it been proven. Cases were cited to show that a loss on stock need not always await dissolution of the corporation. That is, of course, true but here there was not only no dissolution but no liquidation and consequently no fixing of the amount of the loss. We can not say that the Commissioner erred in denying the deduction.

Decision will be entered wider Ride SO.


author: Trammell:

text:
    C. W. Titus, Incorporated, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 42268.
    Promulgated August 20, 1935.

      W. Leo Austin, Esq., and L. E. Oahill, Esq., for the petitioner.

      P. P. Hertzog, Esq., for the respondent.
   OPINION.

Trammell:

This proceeding is for the redetermination of a deficiency in income tax of $73,834.19 for 1926. Errors assigned by the petition as amended are, that the respondent erred (1) in computing the amount of allowable depletion and (2) in computing the amount of profit for 1926 arising from the sale of oil and gas leases. The proceeding was submitted upon oral and documentary evidence and a stipulation of facts.

The petitioner is an Oklahoma corporation, organized January lt 1926, with its principal place of business at Tulsa. During 1926 it was engaged in the production and sale of oil and gas and in the investment business.

Upon organization the petitioner acquired the oil and gas leaseholds theretofore belonging to C. W. Titus on property situated in Oklahoma and Kansas, giving in exchange therefor its entire issue of authorized capital stock. The organization of the petitioner and its acquisition of the leaseholds from Titus was considered by the petitioner and the respondent to constitute a nontaxable exchange within the meaning of section 203 of the Revenue Act of 1926.

The leaseholds thus acquired by the petitioner had been developed by Titus. This development had been done by him under oral contracts with drilling contractors. Under these contracts the contractors drilled the wells to specified producing sands at an agreed amount per foot, with the understanding that they would drill as far into the sands as Titus desired at the same rate per foot. Titus furnished all fuel for drilling the wells and also all the casing for them. Where water was not easily available to the contractor, Titus furnished it. The contractors furnished all else that was necessary for drilling the wells, including labor and drilling tools and machinery. In drilling the wells the contracts assumed all responsibility until the wells were completed to the desired depth with the hole in good shape and straight. In event the contractor lost the hole or drilled a crooked one the loss was his. Titus had no responsibility with respect to the wells until they were completed and were accepted by him. The cleaning out of the wells after reaching the desired depth was done by the contractors on a day labor basis. The contractors were not paid for the drilling until the wells were completed and in some instances not until several weeks afterwards. In some instances Titus advanced money to the contractors as loans to pay their employees. If a desired sand did not produce oil in the locality in which a well was drilled, Titus paid for the dry hole at the price originally agreed upon per foot. Drilling was done in proven and “ wildcat ” territory. Due to the fact that the depth at which a particular sand lay was generally known, the approximate depth to which any given well would have to be drilled was usually known at the time drilling was begun.

During the period of his ownership and prior to the transfer of the leaseholds to the petitioner Titus expended the amount of $160,-022.89 for drilling producing wells and the amount of $28,518.40 for drilling dry holes on the properties. These amounts were paid by Titus to the drilling contractors solely for drilling oil and gas wells, and no portion of the amounts was for well casing or equipment of any character. Titus charged the above amounts to expense on his books and records. He claimed them as deductions from gross income in his returns and in the determination of his individual income tax liability they were allowed as such by the respondent. Subsequent to its organization the petitioner followed the same practice of charging drilling costs to expense and deducting them on its income tax returns.

On February 2?, 1926, the petitioner entered into a written agreement with the Tidal Oil Co. whereby it sold its oil and gas leases to that company for $2,000,000, payable as follows: $500,000 in cash upon approval of titles and delivery of assignments, conveyances, orders, etc.; $500,000 on or before September 1, 1926; $500,000 on or before March 1, 1927; and $500,000 on or before September 1, 1927; all of the deferred payments to draw interest at the rate of 6 percent per annum from March 1,1926, until paid. All payments were made to the petitioner promptly on the dates they became due.

The petitioner did not receive any notes- from the Tidal Oil Co. and, aside from the written agreement wherein it agreed to make the payments in the amounts and on the dates therein specified, the petitioner did not receive any other evidence of indebtedness from the Tidal Oil Co. with respect to the unpaid portion of the sale price, nor did it retain any lien on the property transferred. The petitioner could have received the Tidal Oil Co.’s notes for such portion of the sale price if demand had been made therefor. The Tidal Oil Co. had a good reputation and the petitioner’s president, Titus, had implicit faith in the company.

The petitioner kept its books and filed its income tax return on the accrual basis.

In determining the profit realized by the petitioner from the sale of the leases the respondent did not include as a part of the cost thereof to the petitioner the amounts of $160,022.89 and $28,578.40 expended by Titus for drilling during the period of his ownership. In determining the income of the petitioner for the taxable year in controversy the respondent did not compute the profit from the .sale of the leases on the basis of an installment sale.

In its petition as amended the petitioner alleges that the respondent erred in computing the amount of allowable depletion. This was denied by the respondent. The pleadings show that the petitioner took a depletion deduction in its return of $585,009.91, and that the respondent disallowed $551,483.69 of the amount taken and allowed $33,526.22. The pleadings further show that the depletion allowed by the respondent was determined on the percentage basis provided for in section 204 (c) (2) of the Revenue Act of 1926. Aside from these facts and the fact that the respondent did not include in the cost to the petitioner of the leases the amounts expended by Titus for drilling on the leases during his period of ownership, we have no facts upon which to make a determination of the correctness of the respondent’s action in disallowing a portion of the depletion deduction. The petitioner does not mention or discuss this allegation of error in either of its briefs and apparently has abandoned it. Anyway, the facts before us clearly are insufficient to show error on the part of the respondent and on this issue his action is sustained for lack of evidence.

The petitioner contends that in determining the profit from the sale of the leases it is entitled to include as a part of the cost thereof the amounts of $160,022.89 and $28,578.40 expended by Titus during the period of his ownership of them for the drilling of producing wells and dry holes respectively, notwithstanding the fact that Titus deducted and was allowed such amounts as expenses in his income tax returns. The respondent contends that, since the petitioner acquired the leases from Titus in exchange for all of its capital stock and Titus had deducted and had been allowed the amounts as expenses, the petitioner is not entitled to have them treated as a part of the cost in determining the profit from the sale of the leases.

Titus in 1926 transferred the leases to the petitioner for the entire issue of its authorized capital stock. He therefore was in control of the petitioner immediately after the exchange. Under these circumstances there was no recognizable gain or loss to him upon the exchange. The petitioner having acquired the leases under the foregoing circumstances, its basis for determining gain or loss on the sale of them is the same as it would be in the hands of Titus. Secs. 203 (b) (4) and (i) and 204 (a) (8), Eevenue Act of 1926. This presents the question of whether if Titus had been the owner selling the leases instead of the petitioner he would have been entitled to add to his cost thereof the amounts which the petitioner seeks to have added.

W. R. Ramsey, 26 B. T. A. 277; affd., 66 Fed. (2d) 316; certiorari denied, 290 U. S. 673, arose under the Eevenue Act of 1926, which is that involved here. There the taxpayer was engaged in the development and exploitation of oil and gas leases. The drilling on the leases was done by a contractor who was paid upon a footage basis. In all cases the taxpayer furnished, among other equipment and supplies, all derricks and boilers, fuel and water sufficient' to furnish the necessary steam for drilling, a certain amount of well casing and electric current and wiring and lights and equipment for night work lighting. In addition the taxpayer employed a force of men and teams who divided their time in working in, around and upon the leases being developed and other properties which the taxpayer was operating at the time and which were producing. The wages paid these persons as well as the salaries of the taxpayer’s general manager and bookkeepers he had at his main office were charged upon the taxpayer’s books in part against wells being drilled and in part against operation of his producing properties. The part thus charged against wells being drilled as well as the amounts paid the contractor for drilling on a footage basis were deducted by the taxpayer as current business expenses in his income tax returns for the years in which expended, namely 1922 through 1925. The amounts thus deducted were allowed by the respondent in determining the taxpayer’s tax liability for the respective years. In 1926 the taxpayer sold the leases and in computing the gain thereon sought to have included as a part of the cost to him of the leases the amounts that he had deducted and had been allowed in his returns for the prior years. We there held that the taxpayer, having exercised the option granted to him under the regulations to charge these development costs to expense, could not capitalize them and treat them as a part of the cost of the leases in determining the gain from the sale thereof. See to like effect C. E. Wentz, Trustee, 26 B. T. A. 868; C. B. Shaffer, 29 B. T. A. 1315, and Fort Ring Oil & Gas Co., 30 B. T. A. 307.

In Mrs. R. L. Wheelock, 28 B. T. A. 611, the taxpayer and a corporation were joint owners of an interest in an oil and gas lease, each owning one half of such interest. It was agreed that the corporation would have full charge of the operations respecting the lease, that it would receive all income therefrom, that it would pay all bills with respect thereto, that it would charge the taxpayer with one half of such bills and that it would credit taxpayer with one half of the income and remit the difference. During the taxable year the corporation developed the property and charged the taxpayer, among other things, with one half of the development costs. During the year it also remitted to the taxpayer a substantial amount after taking out of taxpayer’s share of the income his share of all cost. In an income tax return for the taxable year the taxpayer deducted as an expense his share of the development costs and this was allowed by the respondent. The respondent contended that he had erroneously allowed the deduction and that the taxpayer should be required to capitalize the amount of it. We there held that the taxpayer had a right to do what was done and that the respondent could not require that the amount be capitalized.

The petitioner contends that the rule laid down in the above mentioned cases is not to be applied here, since the wells for which the amounts in controversy were expended were drilled under the contracts for completed wells, and urges that our decision in Old Farmers Oil Co., 12 B. T. A. 203, is applicable. In that case certain oil wells were drilled for the taxpayer by contractors under “ turn.key” contracts; that is, the “contractors furnished all casing, fuel, and materials and turned over the completed wells to petitioner for a stipulated price.” The amount paid by the taxpayer for such wells was deducted by it as an expense in its income tax return for the year in which paid. In a subsequent year the taxpayer sold the leases. The respondent contended that in determining the profit from the sale the cost of drilling the wells should not be treated as a part of the cost of the leases, since the taxpayer had deducted the amount as an expense in its return for the prior year and thus exercised the option granted under the regulations. In holding that the cost of the wells represented a capital asset and constituted a part of the cost of the leases sold, we said:

Whether the provision of the regulation which permits a taxpayer to elect whether he will deduct or charge to capital account, “ Such incidental expenses as are paid for wages, fuel, repairs, hauling, etc., in connection with * * * drilling wells * * * ” is a proper exercise hy the Commissioner of his authority to make regulations is not before us. Petitioner made no such expenditures. What he did was to contract with third persons for completed wells and pay such persons the stipulated price therefor. By these contracts, petitioner received assets which were Just as much capital assets as structures above the ground. The payment for wells when completed bears no resemblance to payments for wages, fuel, repairs, hauling, etc. Payments for such items may be in the nature of ordinary and necessary expenses, but payments for completed wells are payments for capital assets.

In Fort Ring Oil & Gas Co., supra, the taxpayer in prior years had had wells drilled on its leases under two types of contracts. Some of the wells were drilled under contracts requiring a completed well, with equipment furnished by the contracting driller, in place and ready for production ”, such drilling being designated as “ turnkey drilling.” The taxpayer had caused other wells to be drilled for which it paid “ at so much per foot of well drilled, plus the cost of equipment ”, such drilling being designated as “ footage drilling.” In its returns for 1925 through 1928 the taxpayer deducted the cost of drilling all wells whether drilled under a “ turnkey ” contract or under a “ footage ” contract. In 1929 the taxpayer filed amended returns for 1925 through 1928 in which it treated as capital items the drilling costs which it had deducted in its original returns for the respective years. In its return for 1929 it capitalized all drilling costs incurred in that year. During its taxable year 1929 the taxpayer sold its leases. In determining the profit on the sale the respondent restored to capital the costs for “ turnkey drilling ” which the taxpayer had deducted but refused to restore to capital the costs for “ footage drilling.” The taxpayer contended that no reasonable distinction existed between expenditures for “ turnkey drilling ” and those for “ footage drilling ” and that its expenditures for the latter were capital expenditures to be included in the basis for determining the cost deductible from the sale price in ascertaining gain or loss on the sale of the leases. After pointing out that the Boai'd and the courts make a distinction between “ turnkey drilling ” costs and “footage drilling” costs and that they hold that the former are not within the incidental costs covered by the respondent’s regulation allowing the taxpayer an option to capitalize or to charge to expense certain drilling costs, we held that the respondent had properly restored to capital the “turnkey drilling” costs. Wo further held that “ footage drilling ” costs stand upon a different basis and that under the respondent’s regulations a taxpayer may elect whether such cost shall be deducted as an expense or charged to capital account and that since the taxpayer had made such election by deducting such costs as expense in its returns for four successive years it would not be permitted to capitalize them and treat them as a part of the cost of the leases sold.

This brings us to the question of whether the drilling costs incurred by Titus and here in controversy come within the purview of the rule applying to “ turnkey drilling ” cost or come within the rule applying to “ footage drilling ” costs. If they come within the former they are to be treated as a part of the cost of the leases sold by the petitioner in determining the profit therefrom and if they come within the latter they are not so to be treated. Under the “ turnkey ” contracts involved in Old Farmers Oil Co., supra, the contractors furnished all casing, fuel, and materials and turned over the completed wells to the taxpayer for a stipulated price. Under the turnkey contracts in Fort Ring Oil & Gas Co., supra, the contractors furnished completed wells with equipment furnished by them in place and ready for production. Hughes Oil Co. v. Bass, 62 Fed. (2d) 176; certiorari denied, 289 U. S. 726, involved the question of whether the cost of wells drilled under “ turnkey ” contracts was deductible as expense within the purview of the respondent’s regulation granting the taxpayer an option to treat as an expense or to capitalize intangible drilling expenses paid in connection with the exploration and development of oil and gas properties. Under the “ turnkey ” contracts there involved the drilling contractor was obligated “ to furnish all derricks, all necessary drilling equipment, machinery, casing, cement and labor, in fact, everything necessary to complete said well in a first class, workmanlike manner, including fuel and water, the owner not being obligated to furnish anything w'hatever in the way of labor, fuel, drilling supplies, or anything necessary for the completion of the well.” The contractor was obligated to drill the wells to a stated depth in feet and for a specified amount.

The evidence in the instant case discloses that only a very small percentage of wells are drilled under “turnkey” contracts, that there is not any uniform contract with respect to “ turnkey drilling ”, but that ordinarily “ turnkey ” contracts mean those under which the drilling contractor is to drill and complete a well not to exceed a specified depth, the contractor furnishing everything, and for which he is to receive a specified amount of money.

Examining the facts in the instant case in the light of the “ turnkey ” contracts involved in the Old Farmers Oil Co., Fort Ring Oil & Gas Co., and Hughes Oil Co. cases and in the light of what the evidence shows are ordinarily considered to be turnkey contracts, we find that the wells in the instant case were drilled on a purely footage basis, all casing and all fuel having been furnished by Titus, and where water was not readily available it too was furnished by him. A witness for petitioner who had drilled wells for Titus for about six years stated that during this time Titus furnished all the water. From the facts before us we are unable to find that the wells here involved come within the class of those drilled under “ turnkey ” contracts. So far as we can determine they come within the classification of footage drilling.” If the wells had been drilled under “ turnkey ” contracts the cost thereof would not have constituted deductions as to which Titus could have exercised an option under the respondent’s regulations and thereby obtain the benefit of them as deductions in his income tax returns. In filing his returns he apparently considered that the expenditures incurred in drilling the wells were of such a character that he had an option under the respondent’s regulations to deduct them as an expense. The respondent in determining the tax liability of Titus for the years in which such deductions were taken considered them in the same light and allowed them. On the showing here made we are unable to find that the action of Titus in taking such expenditures as deductions in his returns for the years in which paid was so erroneous as to warrant a holding that he would now be entitled to have them treated as capital expenditures and thus obtain the benefit of them twice. W. R. Ramsey, supra; C. E. Wentz, Trustee, supra; C. B. Shaffer, supra; and Fort Ring Oil & Gas Co., supra. The contention of the petitioner that the amounts of $160,022.89 and $28,518.40 should be treated as a part of the cost of the leases in determining the profit on the sale thereof is accordingly denied.

In its petition as amended the petitioner alleged that “ The respondent Commissioner of Internal Revenue erred in computing the amount of profit for the year 1926 arising from the sale of oil and gas leases.” In the statement of facts in the petition relied on in support of the allegation of error the petitioner stated:

In computing tlie profit realized in the year 1926 on account oí the sale of the producing properties the sale price thereof as determined hy the respondent, should he decreased by the sum of $1,000,000.00. This sum represents the portion of the sale price of the properties which was not received by this petitioner during the year 1926, and which amount was unsecured and not represented by notes or other evidences of indebtedness of the purchaser to the petitioner. Contract of sale is attached hereto and made a part hereof, and for identification marked Exhibit “B”.

Both the assignment of error and the statement of facts in support thereof were denied by the respondent in his answer.

In its brief, under the head of “ Issues ”, the petitioner restated the errors assigned in the petition and there restated the above-quoted assignment of error as follows: “ That the respondent erred in refusing to compute the amount of profit arising from the sale of oil and gas leases in 1926 on the installment basis.” In his brief the respondent stated the issue as follows: “ Is the petitioner entitled to return on the installment basis the profit realized from the sale in 1926 of certain oil and gas leases?”

Considering the error assigned in the petition in connection with the statement of facts relied on in support thereof, it would appear that the petitioner was seeking to have reduced by $1,000,000 the sale price as determined by the respondent. In its brief, however, it stated the issue raised by its assignment of error as being whether the respondent erred in refusing to compute on the installment basis the amount of profit arising from the sale of the leases. In his brief the respondent took the same view of the issue as the petitioner. Since there is nothing in the record to indicate that the respondent determined the selling price of the leases to be any amount other than what they were sold for, which is the amount shown in the contract of sale, and since the parties are in agreement that the issue presented is whether the respondent erred in not determining the profit from the sale on the installment basis, we will regard the issue thus agreed upon by the parties, namely the applicability of the installment provisions of the statute to the transaction, as the one presented to us for decision.

Section 212 (d) of the Revenue Act of 1926 provides for the reporting of income on that basis in the case of (1) the casual sale or other casual disposition of personal property for a price exceeding $1,000, or (2) a sale or other disposition of real property, if in either case the initial payments do not exceed one fourth of the purchase price. The term initial payments is defined as meaning the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale is made. The petitioner sold the leases for $2,000,000, of which it received $1,000,000 during the taxable year. Since the total of the cash payments received by the petitioner during the taxable year was in excess of 25 percent of the selling price, it is clear that the sale was not one coming within the installment provisions of the act.

In the arguments presented in its brief in support of its contention that the installment provisions of the statute are applicable the petitioner urges that it received no note or evidence of indebtedness of the Tidal Oil Co. for the unpaid portion of the purchase price; that it retained no lien on the property sold; that it was only a general creditor of the purchaser; that under these circumstances it could not have sold, transferred or assigned its claim against the purchaser; that, if it could have done so, such would have been possible only at a substantial discount; and that this situation warrants a determination that the profit from the sale should be computed on the “ installment or deferred income basis.”

The installment sale basis is not applicable, as shown above. Nor do we think the deferred payment sale basis is applicable. The implication of the petitioner’s argument is that, if it had notes or some other form of evidence of indebtedness from the purchaser, the basis contended for here might not be applicable. While the petitioner did not receive any notes, mortgages, or other evidences of indebtedness of that type, it nevertheless had the agreement of sale which contained the written promise of the purchaser to make payment on specified future dates of stated amounts of the unpaid consideration, with interest at 6 percent per annum from March 1, 1926, until paid. The petitioner’s president testified that the petitioner could have received the purchaser’s notes for the unpaid portion of the selling price if he had asked for them. The purchaser must have offered to give such evidences of indebtedness; otherwise, petitioner’s president would not have known that petitioner could have received them.

The petitioner submitted no evidence bearing on the salability or the assignability of the promise of the purchaser to make payment as evidenced by the agreement of sale, nor was any evidence offered as to the possible salability of notes of the purchaser if they had been requested by the petitioner. The record shows that the financial reputation of the purchaser was good, that the president of the petitioner, who was probably its only stockholder, had such confidence in the integrity and ability of the purchaser with respect to payment that he never looked up its financial rating, but willingly sold the leases without even asking for a note or notes, and that the indebtedness was fully and promptly paid according to the terms of the agreement as it came due.

Under the deferred payment sale basis the obligations of the purchaser received by the vendor are to be considered the equivalent of cash to the amount of the fair market value in ascertaining the profit or loss from a sale. This basis is applicable not only to cases where evidences of indebtedness other than the sales contract are received, but also to cases where the obligation of the purchaser is represented solely by the sales contract, as was the situation in the instant case. This basis contemplates that the obligation of the purchaser, by whatever form represented, has either no fair market value or a fair market value which is less in amount than the face of the obligation. Whether the obligation has or has not á fair market value is dependent on the facts in each particular case. The effect of the petitioner’s contention is that the obligation of the purchaser to make the future payments had no fair market value. From the evidence before us we are unable to find that such was the case. The petitioner having failed to show that the obligation in controversy had no fair market value or a fair market value less in amount than the face thereof, we find no ground for holding the deferred payment sale basis applicable to the transaction. .

To a taxpayer keeping his books of account and reporting his income on the accrual basis, as the petitioner did, the right to receive income, even though not until some date in the future, constitutes income. Clarence Schock, 1 B. T. A. 528; Owen-Ames-Kimball Co., 5 B. T. A. 921; Helvering v. Nibley-Mimnaugh Lumber Co., 70 Fed. (2d) 843. The facts here presented amply indicate that the amount of the sales price remaining unpaid in the taxable year was nevertheless properly accruable in that year as income the petitioner was entitled to receive in the future. Under its system of accounting the full amount of the sale price of the property is to be accrued in the taxable year and the profit from the sale is to be determined accordingly. So far as we can determine this is what the respondent did. His action is therefore sustained.

Decision will be entered for the respondent.


author: Mtjkdock:

text:
    Frank T. Heffelfinger, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 41145, 44852, 53881, 63407, 69694, 73479.
    Promulgated August 20, 1935.

      James B. Templeton, 'Esg., for the petitioner.

      E. L. Corbin, Esg., for the respondent.
   OPINION.

Mtjkdock:

The deficiencies determined by the Commissioner and the appropriate docket numbers are shown in the following table:

The cases were consolidated for hearing and a stipulation was filed which settled some of the original issues and set forth the facts upon which others were to be decided. The petitioner has stated that the issues raised by him have been settled except for the question of whether or not any part of the income of a trust created by the petitioner on December 80, 1922 is taxable to the petitioner.” Since all of the facts relating to that issue have been stipulated, no findings of fact are necessary in that connection.

The petitioner, an individual residing in Minneapolis, Minnesota, created an irrevocable trust on December 30, 1922, and transferred to it 1,700 shares of the preferred stock of a domestic corporation. A bank was named trustee. The income from the trust was to be used to pay the annual premiums on a 10-year endowment policy of insurance on the life of the petitioner. His daughter was the beneficiary of the trust and of the policy of insurance. The income of the trust in excess of the premiums and expenses was to be accumulated and added to the corpus of the trust. The petitioner reserved to himself no rights under the trust or under the policy of insurance.

The following table shows the annual income received and the premiums and expenses paid by the trust:

The Commissioner, in computing the deficiencies for 1924, 1925, 1926,1927, and 1931, included in the petitioner’s income the premiums paid on the insurance policy. He included the net income of the trust in the petitioner’s income for 1928, 1929, and 1930.

Section 219 (b) of tbe Revenue Act of 1924 provides in part as follows:

* * * where any part of the income of a trust is or may be applied to the payment of premiums upon policies of insurance on the life of the grantor * * * such part of the income of the trust shall be included in computing the net income of the grantor.

Section 219 (h) of the Revenue Act of 1926 and section 167 of the Revenue Act of 1928 contain substantially similar provisions. Clearly the Commissioner erred as to 1928, 1929, and 1930 in including in the petitioner’s income more than the part of the income of the trust applicable to the payment of the premiums on the policy. But the part of the income of the trust for each year applicable to the payment of the premium for that year upon the policy of insurance on the life of the grantor must be included in computing the net income of the grantor. Although the policy was an endowment policy, it was nevertheless a policy of insurance upon the life of the grantor. Briggs v. McCullough, 36 Cal. 542; Endowment & Benevolent Association v. State, 35 Kan. 253; 10 Pac. 872; State v. Federal Investment Co., 48 Minn. 110; 50 N. W. 1028; Carr v. Hamilton, 129 U. S. 252; Cooley — Briefs on the Law of Insurance,'vol. 1, p. 19. The statute makes no distinction between endowment policies and other kinds of policies, such as ordinary life policies. Nor does it make any distinction between that part of a particular premium which equals the cost of protection and the excess paid over that amount, which excess may represent an investment. The annual premium on a •“ straight life ” policy contains similar elements (Standard Brewing Co., 6 B. T. A. 980), yet the Supreme Court in a case similar to this one held that such premiums were properly included in the income of the grantor. Burnet v. Wells, 289 U. S. 670. The Court there held the statutory provision constitutional as applied to such premiums. This case does not present an exception requiring a special rule.

The Commissioner by amended answers makes claim for penalties under section 275 (a) of the Revenue Acts of 1924 and 1926 and section 293(a) of the Revenue Act of 1928, which provide that “if any part of any deficiency is due to * * * intentional disregard of rules and regulations but without intent to defraud, 5 per centum of the total amount of the deficiency (in addition to such deficiency) shall be assessed, collected, and paid * * He filed no brief. The burden of proof was upon him. The stipulated facts show that the petitioner did not include any amount in computing his net income to represent the amounts of trust income of two trusts applicable to the payment of premiums on policies of insurance on his life. All of the income of the two trusts was reported upon a separate fiduciary return. It was so reported because the petitioner honestly believed that was the proper way to report it. His view was apparently shared by members of the Circuit Court of Appeals for the Eighth Circuit and by four members of the Supreme Court of the United States. See Wells v. Commissioner, 63 Fed. (2d) 425, and Burnet v. Wells, supra. An explanation was given of why the income was not reported by the petitioner. We find as a fact from the entire record that no part of any deficiency was due to intentional disregard of the rules and regulations. The respondent’s claim of a penalty is denied.

Decision will he entered wnder Rule 50.


author: Akundell:

text:
    R. A. Shillinglaw, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 54507, 54573, 54576-54581, 54591.
    Promulgated August 22, 1935.

      L. A. Luce, Esq., and John S. Glenm,, Esq., for petitioners in Docket Nos. 54573, 54577-54581.

      Eugene Meachaan, Esq., for petitioners in Docket Nos. 54507, 54576, 54591. *

      B. M. Coon, Esq., and John W. Smith, Esq., for the respondent.

       By agreement of counsel for the parties the proceedings of the following petitioners were consolidated with the above entitled case for hearing and report: H. H. Campbell; W. T. Hale; P. D. Houston; George A. Shwab; Whitefoord R. Cole; H. G. Hill, Sr.; J. J. Gray, Jr., and R. W. Hale.

   OPINION.

Akundell:

In 1926 the petitioners in these proceedings paid in certain sums to the American National Co. for the purpose of participating in the acquisition of stock of the Missouri State Life Insurance Co. On February 1, 1928, they sold out their interests in the venture for sums in excess of the amounts paid in. The only matter in dispute is whether the gain realized on the sale in 1928 is capital gain or ordinary income.

The applicable statute is section 101 of the Revenue Act of 1928, which, in brief, permits the computation of tax on capital gains at 12y¿ percent, and defines “ capital gain ” as the “ taxable gain from the sale or exchange of capital assets consummated after December 31,1921.” Further, subsection (c) (8) provides that: “ £ Capital assets ’ means property held by the taxpayer for more than two years * * *.”

In these cases there is no dispute as to the time of sale or the amount of gain realized. The question is whether or not the property was held for more than two years, and as the date of sale is agreed on, the question resolves itself into the narrow one of the date of acquisition.

It is not clear just what the petitioners here acquired and sold. The cases were tried; on the theory that they bought and sold stock of the Missouri State Life Insurance Co., yet it is conceded that they never received stock certificates. They did receive “ Certificates of Interest ” in the, purchase of the stock which were issued by the American National Co., and it appears from a revenue agent’s report in evidence that in 1927 a holding company Was formed and its stock issued to the participants in the venture. However this may be, the asset here involved is the stock of the Missouri State Life Insurance Co., and, whether acquired by petitioners directly or through others as their agents, the date of its purchase from Singleton is the fact to be decided.

It is the position of the petitioners that the signing of the contract by Singleton and Rogers Caldwell on January 29,1926, coupled with delivery of the stock to the First National Bank in St. Louis and the definite commitment of the Davis group to Caldwell, definitely fixed the rights of the parties and constituted a sale of the shares of stock on that date. The so-called contract of January 29 is the letter of that date to the Guaranty Trust Co. of New York. We take it that petitioners mean that that constituted a contract of sale. The respondent’s view is that title did not pass until February 13,1926, when the initial payment of $2,000,000 was made.

Much of the testimony in these cases was directed to the negotiations and conferences preceding the acquisition of the stock, and to showing the practice of the petitioners and their associates in making up stock pools or syndicates. The purpose of this testimony was to establish that even though the promises of the petitioners to participate were oral, they were nevertheless regarded as binding commitments under their method of operation. Whatever may have been their views as to the binding effect of their agreements to participate, it is obvious that the petitioners’ interests in the insurance company stock can not antedate the acquisition of the stock by Rogers Caldwell, for their interests were derived from his.

The letter of January 29, 1926, contained a clause stating that “ The stock contained in both Schedules £A’ and ‘ B ’ has been purchased by the £ Buyer ’ from the £ Seller ’ * * That is all that there is in the letter indicating a sale as of that date. Other provisions indicate that' it was not the intent of the parties that title should pass at that time. “ * * * the rule has become clearly recognized that * * * the transfer of the property depends upon the intention of the parties * * Williston on Sales, 2d Ed., § 261. “As between the parties * * * the question of whether or not title has passed to the buyer, and, if so, when, depends on the intentions of the parties manifested at the time of the transaction or the making of the bargain.” 55 C. J. § 531; Charles C. Hanson, 23 B. T. A. 590, 601. The letter of January 29 contained in paragraph 10 the provision quoted in the findings that the agreement was to become effective upon deposit of at least 100,540 shares of stock “ and upon payment * * * by the Buyer of the sum of Two Million Dollars * * Unless and until both of those acts were performed the agreement was not effective and there was no sale. Had Caldwell failed to make the required deposit there would have been no question as to the right of Singleton to withdraw the stock from the depositary. The payment of the initial deposit of $2,000,000 was a condition precedent to the vesting of title under both the contract of January 2 and the depositary agreement of January 29, 1926. The parties were careful to withhold transfer of title until Caldwell had time to investigate the condition of the insurance company. The contract of January 2 allowed 30 days to make an examination and, if needed, 15 days more. Under that agreement Caldwell was to certify to the trustee that he had found Singleton’s representations of fact to be true, otherwise the trustee was not to accept payment. This certification was not filed until February 12, when drafts for the $2,000,000 were delivered. There is evidence that the investigation of the insurance company being made on behalf of Caldwell and Davis was not completed until some time after January 29. Until the investigation was completed Caldwell withheld both certification and payment of any money, both of which were essential to a consummation of the sale. We are of the opinion that the depositary agreement contained in the letter of January 29, 1926, was not intended to and did not transfer title to the stock to Caldwell. Transfer of title did not take place until February 12, when the conditions precedent were complied with by the purchaser.

It follows that the petitioners here did not acquire an interest in the insurance company stock until after February 1, 1926, and it was not a capital asset in their hands when sold on February 1, 1928.

Decision will he entered for the respondent.


author: Black:

text:
    J. P. Schumacher, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 59612.
    Promulgated August 22, 1935.

      Ernest H. Emery, O. P. A., for the petitioner.

      Bruce A. Low, Esq., for the respondent.
   OPINION.

Black:

There is no dispute here as to the amount of income. That has been stipulated. The income was originally reported as community income, petitioner and his wife each returning one half. The respondent added to petitioner’s income the portion returned by the wife and in the notice of deficiency stated as his reason therefor that “ a non-resident alien is not entitled to report income on the community basis.” Petitioner says he was a resident alien, his residence being in the State of Texas. Respondent, assuming domestic residence for the purpose of argument, counters with two propositions. First, that a partner’s distributive share of partnership income is taxable in whole to the partner and is not divisible between husband and wife on a community property basis. Second, that under the provisions of Texas statutes it is necessary that petitioner prove that the country of which he was a subject, Holland, grants community property rights to citizens of the United States resident in that country. If either of the latter propositions is correct it will not matter whether petitioner was a resident or nonresident during the taxable years.

To sustain his contention that partnership income may not in any event be divided, counsel for the respondent cites a number of cases. Upon examination these do not seem to us to be in point. For instance, Lucas v. Earl, 281 U. S. 111, and Burnet v. Leininger, 285 U. S. 136, are not community property cases. In Larsen v. Burnet, 50 Fed. (2d) 308, the taxpayer was a member of a partnership organized in Oregon, a noncommunity state. He originally claimed the right to report his income as community income but later conceded error in that respect, and the case was decided on another point. The respondent’s contention here is contrary to the holding of Rucker v. Blair, 32 Fed. (2d) 222, which arose in the State of Washington, a community property state. There the husband was a member of a partnership and the court held that his “ distributive share [of the partnership income] was community income, and was properly returned as such.” To the same effect are the published rulings of the Bureau of Internal Revenue. See I. T. 1576, C. B. II-1, p. 144; G. C. M. 9422, C. B. X-1, p. 245; G. C. M. 9825, C. B. X-2, p. 146. In accordance with these holdings, we are of the opinion that petitioner was entitled to treat as community income his distributive share of the partnership' income if it is shown that his status was such as to make him subject to the community property laws of Texas. ’

The provisions of the Texas statutes which respondent says make it necessary for petitioner to prove that Holland extends community property rights to citizens of the United States are as follows:

Aet. 4627. (46290 (2975) (2859) Bights of persons married elsewhere. — ■ TRe marital rights of persons married in other countries who may remove to this State shall, in regard to property acquired in this State, during the marriage, bo regulated by the laws of this State.
Abt. 177. (15) (9) Personal property. — Aliens shall have and enjoy in this State such rights as to personal property as are or shall be accorded to citizens of the United States by the laws of the Nation to which such alien shall belong or by the treaties of such Nation with the United States.

The first provision quoted, article 4627, would seem to make petitioner’s acquisition of property in the State of Texas subject to the community property statutes. There seems to be no question but that the income here involved was acquired during the residence of petitioner and his wife in Texas, and was not acquired as the separate income of either, hence under article 4619 of Vernon’s Civil Statutes it would be “ the common property of the husband and wife.” But respondent says that article 177 quoted above makes it necessary for petitioner to prove that citizens of the United States residing in Holland are accorded communal rights in property and the privilege of reporting income on the community property basis under the laws of that Nation. The courts of Texas do not take that view. In Southwestern Surety Ins. Co. v. Vickstrom, 203 S. W. 389, under similar provisions of earlier statutes it was contended that certain claimants of workmens’ compensation could not be beneficiaries by reason of their being aliens and had not proved that the foreign country where they lived accorded like privileges to citizens of the United States. The court held that statute to be “ an enlarging and not a restricting act ”, and stated as follows:

* * * In other words, the provisions of our law must first be looked to in determining the rights which would in any event accrue to an alien, regardless of whether or not his own country granted reciprocal ones to our citizens: but if it did, and then went further and accorded more than we had first provided for, our law, in the absence of restrictive provisions, express or implied, would ipso facto become expanded until it comprehended the additional benefits allowed by that of the foreigner’s domicile.

Under the rule of the above case, as we understand it, an alien in Texas is accorded at least rights equal to those of a citizen. If he seeks more, then, and only then, must he prove his rights thereto under the laws of the foreign nation. In the case before us the petitioner asks only that he be granted the same rights as citizens of Texas. He does not ask more and consequently there is no necessity for him to prove either the law of Holland or make claim under any treaty with that nation.

As indicated above, the parties differ as to whether petitioner was a resident or nonresident alien in the taxable years. Article 1022 of Regulations 74 provides in part as follows:

An alien actually present in the United States who is not a mere transient or sojourner is a resident of the United States for purposes of the income tax. Whether he is a transient or not is determined by his intentions with regard to the length and nature of his stay. A mere floating intention, indefinite as to time, to return to another country is not sufficient to constitute him a transient. If he lives in the United States and has no definite intention as to his stay, he is a resident. One who comes 'to the United States for a definite purpose which in its nature may be promptly accomplished is a transient; but if his purpose is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his home temporarily in the United States, he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned. An alien whose stay in the United States is limited to a definite period by the immigration laws is not a resident of the United States within the meaning of this article.

There are expressions in the above quotation, which, taken alone, are favorable to either side of the question. The respondent places stress on the last sentence of the quoted provision and says that that rules the question here. We do not believe that that is decisive. In the first place there is some degree of inconsistency between that sentence and the latter part of the preceding one in that a stay may be “ limited to a definite period ” but may nevertheless be “ an extended stay ”, as was true in this case. Moreover, we are inclined to doubt the validity of the last sentence in so far as it purports to establish conclusively the ultimate fact of nonresidence based entirely on the one fact of limitation of stay and regardless of other facts. Irrebuttable presumptions are not favored. Cf. Heiner v. Donnan, 285 U. S. 312. In view of the varying definitions of the term “ residence ” the question is one to be determined by all the facts and circumstances in each case. Cf. L. B. Peebles, 27 B. T. A. 879. The petitioner in this case came to the United States in 1925 and engaged in business in Texas. He was joined by his family in the same year. His business headquarters and his home have been in Texas ever since 1925. During his several temporary absences from the United States he maintained his business connections and headquarters in Texas, left personal property there, and each time he returned there, manifestly regarding it as his home.

Even though it might be held that petitioner had not established a domicile in Texas during the taxable years in question, nevertheless it seems clear that he had established a residence there and such fact made him a resident alien.

As to the Federal income tax in the United States, it seems to be definitely settled by the case of Bowring v. Bowers, 24 Fed. (2d) 918; writ of certiorari denied in 277 U. S. 608, that residence alone would make one liable to the tax even though he had an established domicile in a foreign country. The case was the rather extreme one. of a man who had a domicile in England but was engaged in business and lived with his family in New York most of the time for more than twenty years. The court said: “ It is true that residence is ordinarily used as the equivalent of domicile in statutes relating to probate administration and succession taxes. So, as might be expected in the Revenue Acts, the word resident ’, when employed in the portion of these acts dealing with the Estate Tax law, means £ domiciled ’ and has been so construed by the practice and regulations of the Department * * *. Rut in personal and income taxes domicile has played no necessary part and residence at a fixed date has determined the liability for the tax.”

Petitioner’s testimony is that he came to this country as a so-called “ visitor ” under the immigration laws rather than as a quota immigrant, for the reason that the nature of his business made it necessary for him to be able to leave and reenter the United States without delay. He adopted the course of entering on a visitor’s visa on consular advice, and his explanation of the reason therefor seems reasonable. Petitioner’s conduct in establishing business and domestic headquarters in Texas and his maintenance of them over a period of years convince us that he should'be classified as a resident alien during the taxable years.

It follows from what we have thus far held that petitioner was entitled to return his income on a community basis. Counsel for petitioner concedes that in the event of such holding the assessments were timely under the Joint Resolution of Congress (H. J. Res. 340) approved June 16,1930, which extends the statutory period in certain community property cases. Upon the issue of the statute of limitations, the Commissioner is sustained.

Decision will he entered, under Rule 50.


author: Tuener:

text:
    E. A. Hughes, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67335.
    Promulgated August 23, 1935.

      'William Mitchell, Esq., for the petitioner.

      Shelby S. Faulkner, Esq., for the respondent.
   OPINION.

Tuener:

The first assignment of error is based on the inclusion in 1928 income of the sum of $207,383.85, received by the petitioner in 1929 as a reimbursement by the United Public Service Co. of income taxes paid by the petitioner on profits realized from the sale to that company of stock in the Hughes Electric Co. and the Knife Kiver Coal Mining Co. In his notice of deficiency, the respondent explained his action in this respect as follows:

(1) While it appears that the amount received representing a reimbursement of income taxes due and payable on the profit from the sale of stock was reported in the 1929 return, it is clear from a reading of the contract that it represents a part of the sale price of the stock and is taxable in the year the sale was made. The tax assessed and paid for 1929 on such profit is therefore subject to credit or refund.

The petitioner makes no point that the payments in issue were not a part of the price received for the stock of the two companies previously mentioned, but does contend that, since the payments were not actually received until the year 1929 and his books of account were kept and his income reported on the cash receipts and disbursements basis, such payments constituted income in 1929, when received, and not in 1928, when the sale was made.

We had this specific question before us in the case of C. B. Shaffer, 29 B. T. A. 1315. Shaffer was a member of a partnership which sold its assets to a corporation in 1919. The contract of sale contained a provision with reference to the payment of the income tax on any profit derived from the sale, substantially similar to the provision contained in the contract of sale in this case. The tax became due and was paid in 1920. We there held that the tax so paid in 1920 did not constitute income to Shaffer and his partner in 1919, the year of the sale, on the ground that the obligation to pay the tax had no fair market value at the time the sale was consummated. We said:

At the time of the receipt of the promise to pay the taxes in May 1919, it could not be determined whether any amount would ever be paid. The taxes to be paid were those on the income of the partners, including certain surtaxes for the calendar year 1919. They were extensively engaged in many enterprises, certain transactions giving rise to gains and others to losses. On the one hand the net result of such operations might be losses, resulting therefore in no tax liability for the year, while again such operations might have resulted in such large profits as to produce a much greater tax than the amount finally paid by the vendee. In view of the highly speculative and contingent nature of the right acquired from the vendee, we do not think it can be said to have had a fair market value at the time of its receipt.

Some of the members of the Board were of the opinion in C. B. Shaffer, supra, that the amount paid by the purchaser as income taxes for the vendor did not constitute income in the year of the sale, in view of the fact that the vendor was on a cash basis. This view is supported by our decisions in W. A. Hoult, 23 B. T. A. 804; A. W. Henn, 20 B. T. A. 1133; and Charles C. Ruprecht, 16 B. T. A. 919; affd., 39 Fed. (2d) 458.

Under either theory the result is the same. In section 202 (a) of the Bevenue Act of 1928, it is provided that gain from the sale of property is the excess of “ the amount realized ” over the basis. It is a matter of fact that the money did not become due and was not paid until the year following the sale. It is equally true that even though the obligation to pay the income tax for which the vendee might become liable was a valid and binding obligation, which arose at the time of the sale, the facts show that the ultimate liability of the purchaser was so highly speculative and contingent that it could not be said that the amount which subsequently became due and payable in the following year was realized, within the meaning of the statute, in the year of the sale. Teck Hobbs, 26 B. T. A. 241. Cf. Old Colony Trust Co., 279 U. S. 116, affirming 7 B. T. A. 648; Charles Bispham Levey, 26 B. T. A. 889; affd., 68 Fed. (2d) 401; Providence & Worcester Railroad Co., 5 B. T. A. 1186; Norwich & Worcester Railroad Co., 2 B. T. A. 215; and United States v. Norwich & Worcester Railroad Co., 16 Fed. (2d) 944. On this issue the petitioner is sustained.

On the remaining assignment of error the petitioner contends that the decision in Edmond A. Hughes, 21 B. T. A. 1022, establishes the cost base for his stock in the Knife Fiver Coal Mining Co. He contends that our findings were, that he and Little acquired the stock and bonds of that company in a tax free exchange, and, starting from that premise, argues that in effect we held that $224,375.10, the full amount of the advances made by him and Little to the Beulah Co., constituted a part of the cost basis of his Knife Kiver Coal Mining Co. stock and bonds. Belying on that decision, he takes the position that the issue now under discussion is res judicata.

It seems obvious that the petitioner has erroneously interpreted the issues and decision in Edmond A. Hughes, supra. In that case there was no issue which called for a finding as to the basis for determining the gain or loss from a subsequent sale or disposition of Knife Biver Coal Mining Co. stock, and we made no such finding. The only issue raised by the pleadings, in so far as there might be any applicability to this case, was one of bad debts. The petitioner sought to deduct from income the difference between sums advanced to the Beulah Co. during its existence and the value at which the assets which had formerly belonged to the Beulah Co. were paid in for stock of the Knife Biver Coal Mining Co. Our holding was that the petitioner and Little were not entitled to the bad debt deduction claimed, since they had failed to show that they had lost in 1924 any part of the advances which had been made to the Beulah Co. in prior years. It was pointed out that, if the Beulah Co. obligations had become worthless, that worthlessness had occurred prior to 1924. On petition for review, filed by Little, the United States Circuit Court of Appeals for the Eighth Circuit, in Little v. Helvering, 75 Fed. (2d) 436, affirmed the decision of the Board holding that losses claimed by the petitioner and Little in respect of their advances to the Beulah Co. were sustained in 1928, prior to the acquisition of the assets by the Knife Liver Coal Mining Co. in 1924. Clearly the claim of res judicata is not sustained.

The evidence in the record before us does not show that the basis for determining petitioner’s gain from the sale of his Knife Liver Coal Mining Co. stock was greater than that determined by the respondent.

Decision will be entered wider Bule 50.


author: Arttndell :

text:
    Herbert L. Dillon, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 58025, 59280.
    Promulgated August 23, 1935.

      W. G. Magathan, Esg., Thomas G. Haight, Esq., and J. 0. Wynn, Esq., for the petitioner.

      DeWitt M. Evans, Esq., and John MorawsM, Esq., for the respondent.
   OPINION.

Arttndell :

Petitioner claims that by opening brokerage accounts in the names of his minor children he created valid and irrevocable trusts for them, or, in the alternative, made valid gifts to them, and in either event the income attributable to those accounts was not his income and not taxable to him. The respondent argues against both propositions. He contends that the alleged trusts were too indefinite to be valid, and the margin accounts are not a proper subject of trusts; further, that there was no gift because petitioner made no delivery and did not divest himself of dominion and control.

There appears to be some confusion of thought on the part of counsel’for the respondent as to what petitioner claims was given to the children. He argues that margin accounts may not be the subject of trusts. We do not understand this to be involved in the question submitted. Petitioner made contributions of money to accounts for his children, and if such contributions were gifts absolute or in trust the proceeds would belong to the beneficiaries and be taxable either to them or the trustee. We do not understand that petitioner contributed a “ margin account ” as such. He paid in money and then directed the use of that money to operate a margin account. If local law disapproved of use of trust funds in that way, it would not affect the validity of the trust or tax liability, but would simply be a matter for the petitioner to settle with the beneficiaries if and when called to account.

Counsel for the respondent calls our attention to the so-called “ pass book ” cases, of which there are many in the New York reports. The gift of a bank account is said in Webb v. Commissioner, 67 Fed. (2d) 859, to be somewhat analogous to the opening of a brokerage account in the name of another. The rule in the pass book cases, at least since the decision in Beaver v. Beaver (1889), 117 N. Y. 421; 22 N. E. 940, is that the deposit by one person of his own money either in his own name as trustee for another, as in Matter of Totten, 179 N. Y. 112; 71 N. E. 748, or in the name of another, Beaver v. Beaver, supra, without more, “ does not establish an irrevocable trust during the lifetime of the depositor. It is a tentative trust merely, revocable at will, until the depositor dies or completes the gift in his lifetime by some unequivocal act or declaration, such as delivery of the pass book or notice to the beneficiary. In case the depositor dies before the beneficiary without revocation, or some decisive act or declaration of disaffirmance, the presumption arises that an absolute trust was created as to the balance on hand at the death of the depositor. ” Matter of Totten, supra. See In re Vaughan's Estate, 145 Misc. 332; 260 N. Y. S. 197, for a collection and discussion of the cases on this subject. The rule of: the cases is that a deposit in the name of another will constitute the creation of a trust if accompanied by an “ unequivocal act or declara; tion ” of the depositor that he holds the amount of the account on a present trust for a named beneficiary. In re Vaughan's Estate, supra.

In the present case the evidence is that petitioner declared to all who might be interested that the accounts were established for the benefit of his children. It is his testimony that that was the purpose of the accounts and in this he is corroborated by his wife, the office manager of the firm, and the accountant of the firm. True, he did not notify the beneficiaries, but, as they were minors and of very tender years, that would have been useless. Lilian K. Blake, 23 B. T. A. 554, 564. The statements made by petitioner to all who had any connection with the accounts, his scrupulous maintenance of them as separate accounts in the names of the beneficiaries, and his representations of trusteeship in Federal tax returns, in our opinion, amount to the “ unequivocal acts or declarations ” which under the decisions above cited will convert what would otherwise be a tentative trust into a present trust.

These trusts were irrevocable under the rule that there may be no revocation without the consent of the beneficiary in the absence of express reservation of power to revoke. Perry on Trusts (6th Ed.), sec. 104; Title Guarantee & Trust Co. v. Haven, 214 N. Y. 468.

There is little, if any, distinction between these cases and that of Emil Frank, 27 B. T. A. 1158. In that case the taxpayer in 1925 opened trading accounts with a broker for his three minor daughters. At the time the accounts were opened the taxpayer explained to the brokers that his plan was to create a separate estate for each of the girls and that the accounts belonged to them. The taxpayer managed the accounts, buying and selling stocks, until 1929, when the securities in the trading accounts were transferred to an investment trust. In that case we concluded that the brokerage accounts “ belonged in fact to the daughters ” and that the respondent erred in taxing the income to the father. About the only distinction between the Frank case and this is that there the children were somewhat older, 8, 14, and 16 years of age, when the accounts were opened, and the father discussed the handling of the accounts with them and from time to time took delivery of purchased securities issued in their names. These differences do not affect the result. The essential facts are the same. It is our opinion that here, as in the Frank case, the accounts belonged to the children and the income from them was not the income of thé petitioner.

Decision will l>e entered under Rule 50.


author: Smiti-i:

text:
    Herman Gessner, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 77506.
    Promulgated August 23, 1935.

      William J. Murray, Esq., for the petitioner.

      T. G. Histon, Esq., for the respondent.
   OPINION.

Smiti-i:

This is a proceeding for the redetermination of a deficiency in income tax for 1931 of $424.90. The point in issue is whether the petitioner is liable for income tax upon all of the income from property held by himself and his wife as tenants by the entireties or is liable for income tax upon only one half of such income.

The facts were stipulated as follows:

1. Petitioner was during the taxable year 1981 living with his wife, Anna Gessner, and both spouses elected to file and did file separate income tax returns for that year.
2. Petitioner and his wife owned, in fee simple, as tenants by the entireties, certain real estate known and described as: “ Lots 9 and 10 of Block 32; West 100 feet of Block 38; West half of lot 10, east 45 feet of lot 11, and entire lot 12 of block 75 of the original plat of the village (now City) of Escanaba, Michigan.”
And hereinafter known as:
Store building — Pair Store,
Store building — Kinney Store,
Store building — Kresge Store.
3. The gross rental income of the aforementioned properties amounted to $21,600 for the year 1931.
4. The petitioner included in his separate return for the year 1931 one-half of such rentals as follows:
5.Petitioner’s wife reported on her separate return for the year 1931 one-half of such rentals as follows:
6.The Commissioner, in his notice of deficiency has added to petitioner’s income the sum of $8,929.88, representing the portion of the aforesaid rentals-returned by petitioner’s wife less the expense deducted therefrom upon her return.

The respondent contends that the entire amount of income from realty held by husband and wife as tenants by the entireties ip the State of Michigan is taxable to the husband.

In Commissioner v. Hart, 16 Fed. (2d) 864, affirming 27 B. T. A. 528, it was held that where husband and wife sold on “ land contract ” real estate held by them as tenants by the entirety under the laws of Michigan, interest payments on deferred installments under such contract received by them in 1928-1929 were taxable one half' to the husband and one half to the wife. In the course of its opinion the court stated:

In a previous consideration of Act 212 (Hiller v. Olmstead, 54 Fed. [2d] 5), we expressed the view that it in effect created an estate by the entirety in “ all bonds, certificates of stock, mortgages, promissory notes, debentures, or other evidences of indebtedness, hereafter made payable to persons who are husband and wife.” While decision did not require an interpretation of the act, the view there expressed reinforces our present conclusion.
It having been apparently conceded both before the Board and here that if the Board’s interpretation of Act 212 was erroneous, and if the income liere involved was derived from an estate by the entirety, it was all taxable as the income of the respondent, we announced an opinion on January 8, 1934, setting aside the Board’s decision. This was on the ground that one of the incidents of an estate by entirety under Michigan law is that the husband has control of the property and the right to receive and dispose of income therefrom, citing Morrill v. Morrill, 138 Mich. 112. We are now convinced by a study of the Michigan cases discussed in the brief supporting the petition for rehearing, and in the brief of amicus curiae, submitted to us at our request, that the rule apparently announced in Morrill v. Morrill is no longer the law of Michigan, if ever it was. Battjes Fuel & Buildmig Material Co. v. Milanowski, 236 Mich. 622; Peoples State Bank of Pontiac v. Reckling, 252 Mich. 833; American State Trust Co. v. Rosenthal, 255 Mich. 157; Bankers Trust Co. v. Humber, 264 Mich. 71. It is clearly the holding of these cases that payments due upon a contract for the sale of land held by husband and wife as tenants by the entireties cannot be reached in garnishment by the husband’s creditors, that rent from property so held is not subject to garnishment by creditors of the husband, and that the rents, profits, or income of such property is not subject to process under a judgment creditor’s bill in equity at the instance of the husband’s creditors. The holding by the entireties in Michigan is therefore entirely analogous to the community holding involved in Poe, Collector of Internal Revenue, v. Seaborn, 282 U. S. 101, and income thereform is not taxable to the husband alone. Cooley v. Commissioner, - Fed. 2d — (C. C. A. 1), decided Jan. 31, 1935, being based on a rule of property in Massachusetts does not persuade us to the contrary. It follows that even though the Board applied an erroneous construction of the Michigan statute, its decision is right. Our former opinion is therefore withdrawn, and the order of the Board of Tax Appeals is sustained.

We are of opinion that the decision of the court in the above cited case is dispositive of the issue herein presented. The petitioner is not liable for income tax for 1931 upon $8,929.88 representing a portion of the rentals from the entirety property returned by petitioner’s wife less the expense deducted therefrom upon her return.

Judgment will l>e entered wider Bule 50,