author: Smith : Sternhagen,

text:
    Chicago Stock Yards Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83797.
    Promulgated March 20, 1940.

      Joseph N. Welch, Esq., Edward Jt Keelan, Jr., Esq., Lawrence E. Green, Esq., Joseph K. Moyer, Esq., and Francis B. Keeney, Esq., for the petitioner.

      Philip M. Clark, Esq., and /Stanley B. Pierson, Esq., for the respondent.
   OPINION.

Smith :

The only issue for decision in this case is whether in 1930, 1932, and 1933 the petitioner was taxable under section 104 of the Revenue Acts of 1928 and 1932, that section being identical in both revenue acts.

Section 104 (a) subjects any corporation to a tax equal to 50 percent of its net income, in addition to the tax imposed by section 13, if it “is formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains or profits to accumulate instead of being divided or distributed.” Subdivision (b) provides that “the fact that any corporation is a mere holding or investment company, or that the gains or profits are permitted to accumulate beyond the reasonable needs of the business, shall be prima facie evidence of a purpose to escape the surtax.” Subdivision (d) provides that “the tax imposed by this section shall not apply if all the shareholders of the corporation include (at the time of filing their returns) in their gross income their entire distributive shares, whether distributed or not, of the net income of the corporation for such year.”

In his deficiency notice the respondent held that the petitioner was liable to the tax under section 104, saying:

After a careful consideration of your Federal income tax returns, the protests mentioned above, and all other available information, the Bureau holds that your corporation is subject to taxation under section 104 of the Revenue Acts of 1928 and 1932.

The petitioner in its brief calls attention to the fact that the respondent in his deficiency notice has not determined that the petitioner was either formed or availed of for the interdicted purpose, implying thereby that the Government’s case would be stronger if he had made such a categorical determination in his deficiency notice.

We do not think that this is true. The respondent has determined, and has stated in his deficiency notice, that the petitioner is “subject to taxation under section 104 of the Eevenue Acts of 1928 and 1929.” The only possible factual basis upon which such a determination could rest is that the petitioner was either “formed” or “availed of” or that it was both formed and availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains or profits to accumulate instead of being divided or distributed. The necessary implication, we think, carries all the force of a specific determination that such were the facts. The petitioner apparently so understood, for it has adduced a mass of evidence directed towards disproval of those very facts.

In C. H. Spitzner & Son, Inc., 37 B. T. A. 511, and Mellbank Corporation, 38 B. T. A. 1108, the respondent sent deficiency notices stating that the taxpayers were “subject to taxation under the provisions of section 104 of the Eevenue Act of 1932,” without stating or indicating whether such determination was based upon the premise that the taxpayers were “formed” or “availed of” for the prohibited purpose, or that the taxpayers were mere holding or investment companies or that their gains and profits had been permitted to accumulate beyond the reasonable needs of the business. Nevertheless, we proceeded to determine the issue raised in the light of the evidence bearing upon the various factors essential to the respondent’s determinations.

We think that the respondent’s determination that the petitioner here is subject to tax under section 104 placed the burden squarely upon the petitioner of proving that it was neither formed nor availed of for the interdicted purpose.

The petitioner makes the further contention that section 104 of the Revenue Acts of 1928 and 1932 is unconstitutional. This point must be decided against the petitioner’s contention, in accordance with Helvering v. National Grocery Co., 304 U. S. 282; rehearing denied, 305 U. S. 669.

The petitioner was formed in 1911. It clearly was not formed for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains or profits to accumulate instead of being divided or distributed, and the respondent does not so contend.

There remains for consideration only the question whether the petitioner was “availed of” during the taxable years for the interdicted purpose. The petitioner contends that it was not. The question must be answered in the light of all of the evidence. If the evidence establishes the fact either that the petitioner was a “mere holding or investment company” or that the gains or profits have been “permitted to accumulate beyond the reasonable needs of the business,” a prima facie presumption arises of a purpose on the part of the stockholders to escape the surtax.

We consider first the question whether the evidence establishes the fact that the petitioner is a “mere holding or investment company.” Petitioner admits that it is a holding company, but denies that it is a “mere” holding or investment company. It submits that it supervises and directs the policies and business operations, other than the daily routine, of all the companies constituting the stockyards enterprise, and acts as banker for them. It further submits that a “mere holding or investment company” is one that holds securities, collects, and possibly invests and reinvests income therefrom, and does nothing more. We think that this definition overemphasizes the importance of the word “mere” in the phrase above quoted. It was apparently the intention of Congress in using the phrase to differentiate a holding or investment company actively engaged in a trade or business from one which has income only from interest and dividends and profits from the sale of securities, and limits its activities to those incident to an ordinary holding or investment company. Cf. C. H. Spitzner & Son, Inc., supra.

In Rands, Inc., 34 B. T. A. 1094, the Board said:

* * * The term “holding company” does not exclude one which actively deals with the funds contributed by its principal and almost sole shareholder, instead of being a passive repository or “holder” of the funds or assets. Cf. Keck Investment Co. v. Commissioner, supra, R. & L., Inc. v. Commissioner, supra. An investment company is not to be defined as one restricted to long term investments for regular income and excluding one which trades in the market and buys and sells speculative stocks or real estate. * * *

In Reynard Corporation, 37 B. T. A. 552, the facts were that an individual engaged in the creation of cartoons, whose income therefrom was $1,500 to $2,000 a week, caused a corporation to be organized, to which he transferred the greater part of his property for its capital stock. He became its president and contracted with the corporation to work for it at a salary of $2,500 a month. The corporation, through him as president, entered into a contract for three years with a syndicate for a guaranteed minimum payment of $1,500 a week for the use of cartoons to be created by the president during the three-year period. The activity of the corporation was that of entering into a contract pursuant to which it had a definite and fixed obligation. The Board held, nevertheless, that it was a “mere holding or investment company.”

In R. & L., Inc., 33 B. T. A. 857; affd. (C. C. A., 5th Cir.), 84 Fed. (2d) 721; certiorari denied, 299 U. S. 588, the taxpayer contended that it was an operating company, engaged in the management of its properties, conducting a film-booking business, and managing a chain of suburban motion picture theaters. We held that it was a “mere personal holding or investment company.”

In Almours Securities, Inc., 35 B. T. A. 61; affd., 91 Fed. (2d) 427; certiorari denied, 302 U. S. 765, the taxpayer invested a portion of its large income in real estate and in the acquisition of shares of stock of a number of banks and of other corporations whose operations it actively supervised, and also operated a concession at Mt. Vernon, Virginia. We held that those activities were inconsequential when the size of the corporation was taken into consideration. Without finding that the corporation was a “mere holding or investment company,” we said: “The evidence conclusively shows that the petitioner was primarily a ‘holding or investment company.5 ” In affirming our decision in that case the Circuit Court of Appeals said:

Petitioner’s operations were contacted largely through subsidiaries, which were looked after by Mr. du Pont and his brother-in-law, Mr. Ball. After a portion of its cash net earnings was distributed, the remainder was permitted to accumulate beyond the reasonable needs of its business, and reinvested, thereby saving a large amount of income tax which the stockholder would have been obliged to pay for the years in controversy.

In all of its income tax returns for the years 1930 to 1933, inclusive, the petitioner described its business as that of “acquiring and guaranteeing securities.” So far as the evidence shows the petitioner guaranteed no securities after the execution of its agreement of October 1, 1914. Since under that agreement it was to receive all of the earnings of the Jersey Co. and its subsidiaries, after the payment of interest and expenses, it guaranteed the payment by the Jersey Co. of interest on the bonds of the Jersey Co. and its subsidiaries, and of dividends of 9 percent upon the stamped certificates of common stock of the Jersey Co. and of 6 percent upon the preferred shares of that company. It did not, however, guarantee the payment of the principal of the bonds above referred to. They were fully secured. The petitioner has never been required to pay out a dollar under its guaranty. During the tax years before us the petitioner collected its income, sold certain securities, made loans to Prince and to the Pau Corporation, wholly owned by Prince, and to the District, and purchased shares of stocks and bonds.

The petitioner’s 'income during the years 1930 to 1933 consisted exclusively of interest, dividends, and profits from the sale of securities. It received no fees for the management and supervision of other corporations. Its office was Prince’s office at 1 Court Street, Boston, Massachusetts. An inspection of its income tax returns shows that it had practically no office expenses. It paid no rent except vault rent. It paid its president a salary of $50,000 per annum, its treasurer a salary of $500 per annum, and “wages” of $2,000 per annum. It paid no other salaries or wages. McDonough was Prince’s secretary and was also vice president of the petitioner. He did not, however, receive any salary from the petitioner.

On brief the petitioner submits:

We do not see how the fact that a company had small expenditures is of any real materiality in determining whether or not it is a mere holding company when the only functions claimed for it to bring it out of the category of “mere” is that it supervises and directs the policies and business operations, other than daily routine, of other companies, and finances these companies, acting as sort of a bank for the enterprise. These are functions which require more brain than brawn, so to speak, and do not require any physical expenditure of funds. No large office or office force is needed. As was testified to, the work consisted of mental operations on the part of Mr. Prince and his assistant, Mr. MeDonough. * * *

It is true, of course, that Prince supervised the operations of the Jersey Co. and all of its subsidiaries as well as of the subsidiaries of the petitioner. He was enabled to do this through ownership of all the stock of the petitioner, which had virtual control through stock ownership of the other corporations. He was president of the Jersey Co., from which he received an annual salary of $17,500. He was also chairman of the board of directors of the Transit Co., from which he received a like salary, and chairman of the board of directors of the Railway Co., from which he received a salary of $12,499.92. He dictated the policies of the petitioner and of all of the other companies. It does not appear, however, that the petitioner supervised and managed the.operations of its subsidiaries and those of the Jersey Co. and its subsidiaries. Prince did this himself. So far as appears, there were no meetings of the board of directors of the petitioner for the determination of any acts to be done by any of the companies. The returns of the Transit Co. and the Railway Co. report Prince as devoting 58 percent of his time to the affairs of the former and 42 percent to the latter. When directing the affairs of those companies Prince was acting as a paid employee of those companies and not of the petitioner.

A corporation which is a mere holding or investment company is subject to the tax imposed by section 104 (a) in the absence of a showing that it was not availed of for the interdicted purpose or that the stockholders included in their individual returns the company’s earnings in accordance with section 104 (d). The evidence shows that the stockholders of the petitioner did not return the undistributed earnings and we think that it fails to show that the corporation was not availed of to prevent the imposition of the surtax upon its stockholders.

Section 104 was not leveled solely against holding and investment companies. Any corporation which permits its gains or profits to accumulate beyond the reasonable needs of the business is presumably availed of for the condemned purpose. We next consider the evidence bearing on the accumulation of gains or profits beyond the reasonable needs of the business.

Up to December 31,1929, the petitioner had accumulated an earned surplus of $19,615,905.69. It had outstanding 5 percent bonds maturing in 1961 of a par value of $3,227,000. It had on hand cash in the amount of $6,689,304.26. It had notes receivable from F. H. Prince, its sole stockholder, in the amount of $3,104,400. Its principal investments consisted of Jersey Co. common shares, $10,993,-551.74; Jersey Co. preferred shares, $45,821.50; and other investments at cost, some of which were not related to the Chicago stockyards enterprise, of $1,467,338.35. The character of some of these investments is shown by an analysis of petitioner’s dividend receipts for 1929 as follows:

Chicago Janet. Kys. & Union Stock Yards Co_ $200, 000.00
Chicago Janet. Kys. & Union Stock Yards Co. common_ 247, 272. 75
Union Stock Yards & Transit Co_ 420, 702. 00
Union Stock Yards & Transit Co. investment account_ 128, 521. 74
Chicago Junction Railway Co_ 1,427, 500.00
Produce Terminal Co_ 200, 000. 00
Old Colony Trust Associates_ 2, 000. 00
Stock Yards National Bank_ 9, 760. 00
First National Bank of Chicago_ 2,413. 00
U. S. Cold Storage common_ 4, 333.50
U. S. Cold Storage preferred_ ' 1, 750. 00
Central Mfg. District Bank_ 4, 000. 00
Midland Warehouse common_ 2, 796. 00
National Shawmut Bank_._ 350. 25
Westland Oil_ 340. 00
2,651, 739.24

During the four years 1930 to 1933 the petitioner had a net income of $10,243,373.01. During the same period it paid out in dividends $1,600,000; reduced its liabilities in the amount of $574,298.65; added to its cash on hand $2,755,931.71, $1,800,000 of which was subordinated to the claims of other depositors in a Chicago bank; loaned to the District (Central Manufacturing District), a common law trust beneficially owned by the Jersey Co., $1,625,000 to enable it to pay off some of its bonds and to make improvements to its properties; increased its loans to Prince in the amount of $1,743,600; loaned $236,536.51 to the Pau Corporation (wholly owned by Prince) upon, which, no interest was ever received; and spent $1,500,000 in the acquisition of shares of stock of Western Associates, Inc., $245,800.45 for 1,584 shares of common stock and $173,111.88 for 1,905 shares of preferred stock of the Jersey Co., $423,107.25 in the purchase of $609,000 par value of its 5 percent bonds of 1961, and various amounts in the purchase of other securities.

As a holding company, the petitioner had no need for the accumulation of gains and profits. In the ordinary holding or investment company the excess of income over expenses is either paid out in dividends or invested in additional income-producing assets. That is the use which the petitioner made of its excess income. That use can not be regarded within the reasonable needs of the business.

The petitioner contends, however, that it was more than a holding or investment company — that it was engaged in the business of managing the Chicago stockyards enterprise through subsidiary companies in which it owned an interest and that it was necessary for it to finance those companies. It claims that for that purpose it had need of a large surplus.

But even as a management company, we can not see that the petitioner had need for the accumulation of a large surplus. The only expenses connected with the management were the payment of salaries and wages in the amount of $52,500 per year, and the annual income amply provided that revenue.

We do not see either that the petitioner had any need of an accumulation of gains and profits for the purpose of financing other corporations. It was not obligated on the principal of any bonds other than its own which were outstanding at December 31, 1929, in the amount of $3,227,000. It had guaranteed the interest on the bonds of the Jersey Co. and its subsidiaries and dividends on the Jersey Co. common and preferred shares outstanding. But the evidence is to the effect that the petitioner had never been required to pay out a dollar under its guaranty. If it might be assumed that the petitioner needed some accumulation of gains and profits to provide for its guaranty, it should be noted that upon a paid-in capital of $1,000,000 it had accumulated gains and profits up to December 31,1929, of almost $20,000,000. Certainly there is no indication of the need for any further accumulation in the years 1930, 1932, and 1933.

The evidence shows the manner in which the petitioner has used its earnings from the date of incorporation. It has been free to use them in any manner it saw fit. It has used a large part of them in the purchase of shares of stock of the Jersey Co. The next most important item is loans made to Prince. During the years 1930 to 1933 the petitioner loaned $1,625,000 to District and $236,536.51 to the Pau Corporation. It had no financial interest in the latter. The necessity for these loans, if any existed, is not shown.

It is the claim of the petitioner that Prince, its principal stockholder, and during most of the years its sole stockholder, contemplated the liquidation of the Jersey Co. upon the expiration of its charter on June 10, 1940; that for such purpose Prince desired to acquire as many shares of Jersey Co. common stock as he could purchase at a reasonable price before 1940; that he was not so much interested in the purchase of preferred stock because that could all be; acquired at par upon the liquidation of the Jersey Co. in 1940; that he also desired to accumulate in the treasury of the petitioner sufficient assets to pay off all the bonds of the petitioner and of the Jersey Co. and its subsidiaries by 1940.

The plan as at the close of the year 1929 contemplated an accumulation of cash and liquid assets in the treasury of the petitioner, its subsidiary, produce Terminal, and the Jersey Co. and its subsidiaries of approximately $36,000,000, divided as follows :

Total bonded indebtedness — _$23, 963,000. 00
Preferred stock Jersey Co. (64,543 shares)_ 6,454,300.00
Common stock Jersey Co. (6,258 shares)-,_ 1,034,134.50
Working capital- 5,000,000. 00
Total- 36,451,434.50

The bonds and debenture notes of the petitioner and the Jersey Co. and its subsidiaries outstanding on December 31, 1929, were as follows:

Petitioner
5% bonds maturing 1961_ $3, 227, 000
Jersey Oo.
5% bonds maturing April 1, 1940_ 10,000,000
4% bonds maturing April 1, 1940_ 4,000,000
Transit Co.
Debenture notes maturing 1930_ 500, 000
Elevated Co.
4% bonds maturing March 1, 1945___ 2, 327,000
District maturing various dates to 1941_¿_ 3, 909, 000
Total--- 23, 963, 000

We do not think that an accumulation of surplus for the purposes above indicated was within the reasonable needs of the petitioner’s business. As above indicated, the petitioner was obligated to pay off only $3,227,000 of the $23,963,000 bonds outstanding at the end of 1929. It had on hand more than twice as much cash as was necessary to redeem those bonds and they did not become due until 1961.

Clearly, there was no reasonable need for the petitioner to acquire the balance of the common stock and the outstanding preferred shares of the Jersey Co. Amounts spent in the acquisition of those shares simply represented investments by the petitioner. The same also is true of any amounts that it might expend in acquiring the bonds of the Jersey Co. and its subsidiaries.

The bonds of the Jersey Co. and of its subsidiaries were well secured by deposit of collateral. The Jersey Co. had $14,000,000 of bonds outstanding since about 1890. In 1915 $10,000,000 of its bonds matured and were refunded without any assistance from the petitioner. The evidence shows that the real estate of the District has increased greatly in value since purchased. The earnings of the Jersey Co. have likewise increased greatly and that company is assured of the receipt of $2,000,000 annual rental of the Belt Line railway. This lease does not terminate until 2021. Prince testified to the great value of this lease to the New York Central and that he had nothing to fear from a receivership of that company, since the lease was desired by other railroads.

The bonds of the Elevated Co. outstanding in the amount of $2,327,000 appear not to be well secured except through the guaranty by the Jersey Co. But the Jersey Co. is amply able to take care of both its own bonded indebtedness, and that of the Elevated Co.

The petitioner submits that on December 31, 1929, all of the companies constituting what it regards as the Chicago stockyards enterprise had cash and assets readily convertible into cash, without selling any of the shares of stock of the companies of the enterprise of a value of $19,691,666.52. However, that does not take into account the fixed assets of the companies representing the investment in the stockyards, in the railroad, and in other properties. Those assets are income-producing assets of great value. The net consolidated assets of the Jersey Co. and its subsidiaries, as shown by its consolidated return at December 31, 1929, was approximately $40,000,000 in excess of all liabilities and the evidence is to the effect that the book values of some of the assets are much less than their real value. For instance, the book value of $2,500,000 Indiana Harbor Belt Railroad Co. bonds maturing in 1957 and bearing 4 percent interest and guaranteed principal and interest by the Lake Shore & Michigan Southern Railway Co. and the Michigan Central Railroad Co., is only $50,000.

Under his program Prince, through the instrumentality of the petitioner, would own in 1940 all of the assets of the Jersey Co. and its subsidiaries, of a value of more than $60,000,000, free of debt.

In Keck Investment Co., 29 B. T. A. 143; affd. (C. C. A., 9th Cir.), 77 Fed. (2d) 244; certiorari denied, 296 U. S. 633; the taxpayer contended “that it was necessary for it to finance the Superior Oil Co., which had little bank credit, and that if it had not financed that company its investment in it would have been lost by forfeiture of leases.” In our opinion we stated that we were not impressed by this argument; that “The business of the Superior Oil Co., was not the business of this company.”

In the proceeding at bar we do not think that the evidence shows a reasonable need of the petitioner for any further accumulation of gains and profits during any of the years 1930, 1932, and 1933.

We have found on the evidence before us (1) that the petitioner is a “mere holding or investment company”, and (2) that its gains or profits have been permitted to “accumulate beyond the reasonable needs of the business.” The existence of these facts raises the statutory presumption that the corporation was “availed of” for the interdicted purposes, and we think that the evidence has not overcome the presumption.

Even without the benefit of - the statutory presumptions, we think there is sufficient evidence in the record to show the existence of the condemned purpose. The bare recital of the undisputed facts relating to the organization of the petitioner, the balance sheets, the source of earnings, the nature of the investments, the large accumulations of cash and surplus, the loans of cash and securities to the petitioner’s sole stockholder, and the continued reinvestment of its gains and profits in securities, present, in our opinion, a situation typical of situations which Congress intended to cover by section 104 of the Eevenue Acts of 1928 and 1932.

It should be borne in mind that the petitioner was solely owned by Prince from 1922 to June 1, 1932, and, for all practicable purposes, thereafter. The petitioner was the alter ego of Prince. It was Prince in corporate clothes. It was of no moment to Prince whether the earnings of the petitioner were carried in his individual pocketbook or in his corporate pocketbook, except that if they had been received in the first instance in his individual pocketbook or, distributed to him by the petitioner he would have been subjected to heavy surtaxes upon them, while he avoided such surtaxes by retaining them in the corporation. The situation is analogous to that which obtained in Helvering v. National Grocery Co., supra, where an operating company organized in 1908 had accumulated a surplus of approximately $8,000,000 and had cash and securities on hand aggregating approximately $4,250,000, which represented four-fifths of the total accumulation of surplus profits during the last ten years. The Supreme Court said:

Since Kohl was the sole owner of the corporation, the business would have been as well protected against unexpected demands for capital, and assured of capital for the purpose of any possible expansion, by his personal ownership of the securities as by the corporation’s owning them. * * *

The petitioner was the means by which Prince had succeeded in accumulating up to 1929 a personal fortune of between $15,000,000 and $20,000,000 practically immune from taxation; for the income of the petitioner consisted almost exclusively of dividends received from domestic corporations ‘which were a legal deduction from its own gross income. The result was that the petitioner had in many years no taxable income, and in other years only a small taxable income.

The evidence shows that the petitioner was availed of by Prince for the purpose of reducing his own tax liabilities. Over a number of years Prince had accumulated more than 17,000 shares of Jersey Co. common stock upon which he was receiving an annual dividend of $9 per share. These were his own shares of stock. The dividends on them were taxable to him. In 1918 he transferred all of those shares of stock to the petitioner at cost and was thereafter relieved from the payment of surtax upon the dividends thereon.

Prince started borrowing money from the petitioner in 1911. The amount of his borrowings increased irregularly from year to year. He was indebted to the corporation at December 31, 1929, in the amount of $3,104,000 and at the end of 1933 in the amount of $4,848,000. The amount of the debt increased in subsequent years. The borrowed funds were used for various purposes. It is true that he paid interest to the petitioner of 4 percent upon the money borrowed, the payment of which interest was deducted from his gross income in his individual tax returns. He also borrowed securities of large value from the petitioner, which he used as collateral to obtain loans at banks.

There is no satisfactory explanation of why the petitioner did not make a dividend distribution to Prince of the funds which he needed.

In the case of Helvering v. National Grocery Co., supra, the Supreme Court said:

* * * As was stated in United Business Corporation v. Commissioner, supra, 62 F. 2d page 755: “These loans are incompatible with a purpose to strengthen the financial position of the petitioner, but entirely accord with a desire to get the equivalent of Ms dividends under another guise.”

To the same effect see William C. deMille Productions, Inc., 30 B. T. A. 826, and Mead Corporation, 38 B. T. A. 687.

It furthermore appears that in 1931, 1932, and 1933 Prince sold securities to the petitioner for $120,193.21, $138,108.35, and $59,664, respectively, which enabled him to deduct from gross income in his income tax returns for those years losses of $196,124.68, $221,629.08, and $93,102.22, respectively, and in 1932 the petitioner sold to F, H. Prince & Co., Inc., which was organized by Prince on June 1, 1932, shares of the capital stock of the Stock Yards National Bank and of the Central Manufacturing District Bank, which enabled the petitioner to claim a deductible loss of $221,202.03. The shifting-of these securities from Prince to the petitioner and from the petitioner to Prince really meant no economic loss to Prince and the investment by the corporation of the amounts of money spent in acquiring the securities from Prince was not in furtherance of the program which Prince claims to have had for the corporation.

It is agreed that if all of the net income of the petitioner for the taxable years 1930, 1982, and 1933 had been paid out as dividends the additional surtaxes payable by Prince would have amounted to $572,234.91 for 1930; $386,582.23 for 1932; and $377,706.61 for 1933, or a total for the three years of $1,336,523.85. This does not take into account any tax liabilities which might have been incurred by the other, stockholder after January 1, 1932, or the tax which would have been payable by the F. H. Prince Trust if it had received and passed on the dividends. By the failure of the petitioner to distribute its profits during the three years before us Prince has avoided the payment of surtaxes in the amount of at least $1,336,523.85.

Section 104 (d) of the Revenue Acts of 1928 and 1932 provides a means by which a holding or investment company which accumulates its gains or profits beyond the reasonable needs of the business may avoid the payment of the tax imposed by section 104 (a). Subdivision (d) provides that the tax shall not apply if all the shareholders of the corporation include (at the time of filing their returns) in their gross income their entire distributive shares, whether distributed or not, of the net income of the corporation for such year. It has been stipulated in this proceeding that the stockholders of the petitioner did not so report the earnings of the petitioner during the years before us.

Although Prince testified that under his program it was contemplated that the Jersey Co. would be liquidated in 1940, there appears to be no necessity for its liquidation and many reasons why it probably will not be liquidated. When the petitioner was organized in 1911, an issue of $14,000,000 bonds was provided for. The petitioner covenanted with the trustee that it would do all that was necessary for it to do to continue the existence of the Jersey Co. The outstanding bonds of the petitioner are callable at 105, but if they are not called and paid off the petitioner is under obligation to continue the existence of the Jersey Co.

McDonough, petitioner’s vice president, testified that either he or Prince had consulted counsel as to the possibility of obtaining an extension or renewal of the Jersey Co.’s charter. Counsel advised that such an extension or renewal could undoubtedly be obtained under the New Jersey statutes. They simply require a consent of two-thirds of each class of stock of the old corporation. It is inconceivable that the petitioner can not obtain such a consent. It owns more than two-thirds of the common shares, and the preferred shares bearing a 6 percent dividend are well secured by assets and earnings.

Upon a liquidation of the Jersey Co. in 1940 the petitioner would apparently be subject to heavy income taxes; for its investment in the common and preferred shares and in the bonds of the Jersey Co. and its subsidiaries would amount to not more than $35,000,000 and the assets acquired would apparently have a value, based upon cost, book values, and earnings, of more than $60,000,000. Although it may be desirable to merge or consolidate the petitioner and the Jersey Co., it seems doubtful whether the Jersey Co. will be liquidated in 1940.

In its brief petitioner calls attention to our opinion in Mellbank Corporation, supra. It states that its situation is in no great respect different from the situation which existed in that case and that, since we reached a conclusion that the taxpayer was not subject to tax under section 104, the same conclusion is warranted here.

Each case involving the application of section 104 must be decided upon its own facts. In the Mellbank case the Board said in its opinion:

* * * Obviously, petitioner was not a mere bolding or investment company. It bad no investments in, and was not bolding any corporate stocks, other than stocks of its member banks, which was necessary to enable it to carry on its business of managing, supervising, and operating those banks. * * *

The only year before us was 1982. The taxpayer had no taxable income for that year, after the deduction of dividends received upon certain shares of stock. Its net accumulation of gains and profits for the taxable year was only $98,444.32. We held upon the evidence as a whole that the corporation had not been availed of for the interdicted purpose stated in section 104 of the Revenue Act of 1932.

In our opinion the evidence in the proceeding at bar establishes that the petitioner is a mere holding or investment company; that its gains and profits were permitted to accumulate beyond the reasonable needs of the business; that the petitioner had no reasonable need to add to the earned surplus on hand at December 31, 1929, any part of the gains and profits of the years 1930, 1932, and 1933; and that it fails to show that such accumulation was not for the purpose of preventing the imposition of the surtax upon its shareholders.

Reviewed by the Board.

Decision will be entered under Rule 50.

Sternhagen,

dissenting: In my opinion, the evidence requires a finding that the petitioner was not availed of for the purpose of enabling its shareholder to escape surtax. The accumulation of earnings and profits was not for the purpose of reducing or preventing-taxes but for the purpose of meeting the forthcoming demands occasioned by the termination of the Jersey Co.’s charter in 1940. This positive business purpose appears not alone from the testimony of Prince, but also from the testimony of others who have been intimately associated with the business for many years. These witnesses were entitled to belief and their testimony is credible and in no respect impugned or otherwise weakened either by cross-examination or countervailing testimony.

Throughout the existence of the corporation since 1911, the dominant objective has been to accumulate a surplus with which to acquire all of the Jersey Co.’s common and preferred shares by 1940 and liquidate its indebtedness and the outstanding indebtednesses of other companies which the liquidation would entail. There is no reason why the Board should be incredulous of the several statements of that continuous purpose. It would be reasonable to infer such a purpose even if there were no direct testimony that it existed. Furthermore, opinion witnesses for both the petitioner and the Government all testified that such a purpose would be reasonable. The only witnesses for the Government were three analysts who, after a study of the history and the probable future, agreed that the liquidation of the Jersey Co. in 1940 was a desirable objective and that it would not be unreasonable to build up a fund to provide for it.

Despite this evidence, however, the Board holds from the circumstances that it will not be necessary to liquidate the Jersey Co. or the several indebtednesses which will then and soon thereafter become due, and concludes that the accumulation for that purpose is unnecessary and unreasonable. Upon these rationalized postulates, the Board, contrary to the only direct evidence in the record, holds that there was a purpose to prevent the imposition of the surtax upon the shareholder. Thus the single ultimate finding of fact upon which the imposition of the additional tax is expressly required by the statute to be conditioned is built up from circumstances many of which are beside the point of the statute. The purpose which the Board finds to exist is not an actual purpose but is a sort of constructive purpose, as if from the circumstances one must inevitably conclude that the conduct of the corporation and its officers could not reasonably have occurred unless the tax-saving purpose existed. Section 104, however, clearly requires the actual existence of the tax-saving purpose to support the 50 percent additional tax; and where the taxpayer by a fair preponderance of the evidence establishes that the purpose did not in fact exist, there is no justification for fabricating it by construction.

The corporation began its life as a vehicle to facilitate the reorganization which would be required in 1940. This is not questioned. Never throughout its history has there been a departure from this plan. It began in 1911 before there was any substantial corporation tax, before there was any constitutional power to impose an income tax, and many years before there was any thought of an individual surtax. There has been a uniform policy since 1923 to distribute a dividend of 5 percent on the capital stock and accumulate the remaining earnings. There was no change in this policy in 1930 to denote a tax-saving purpose. This plan persisted without question throughout the years after the 1918 Act, when there was first imposed an additional tax upon the corporation by reason of the nondistribution of earnings.

During all the years since such a tax was first enacted it has been predicated on the purpose to prevent shareholders’ surtax. Always this factor has been known to be a difficult one for the Government and a serious impediment to the collection of such taxes. Purpose has always been recognized as something hard for the Government to prove and easy for the taxpayer to disprove. Yet the tax with this condition was deliberately reenacted time and time again. It still exists in section 102 of the 1938 Act. Not until the enactment, after vigorous legislative debate, of the Bevenue Act of 1934 was a tax imposed on undistributed net income irrespective of purpose. This was in the personal holding company tax of Title I A. It was new and prospective legislation. Later, in section 14 of the 1936 Act, the undistributed profits tax was added. It is improper, therefore, for the Board, in 1940, to apply the 1928 and 1932 statutes as if they imposed the high additional tax upon all the corporation’s net income although it had no purpose of preventing surtax on its shareholders. This is in effect to apply the later type of tax retroactively to a period when it was expressly and knowingly rejected by Congress. It is treating the language of the controlling statute as if it were a mere figure of speech.

If I understand the Board correctly, they say that the accumulation of $19,615,905.69 by December 31, 1929, was enough for the forthcoming needs of 1940, and that the profits added in 1930, 1932, and 1933 were therefore beyond the reasonable needs of the business and enrgo only explicable as a means of tax avoidance for the shareholder. No doubt the Board has the power and the duty to determine whether gains or profits have been permitted to accumulate beyond the reasonable needs of the business; but the determination should be more than a substitution of the Board’s judgment for that of the managers of the business — particularly when the Commissioner has made no determination on the subject. For myself, I am unable to draw a line at December 31, 1929, between the limit of reasonable accumulation and additions to it, label the latter as excessive and unreasonable, and, so labeled, regard the additions in the taxable years as a manifestation of the disapproved purpose.

To point to the fact that Prince began his stockyards venture with a comparatively small investment which has grown into a large fortune, and that in the intervening years his personal taxes and those of the petitioner have been relatively small, is to disclose a type of reasoning which, in my opinion, should have no place in tax adjudication. Nothing in the record discloses any actual or attempted escape from taxes imposed by law. This drastic additional tax can not be justified for the years in question by pointing to the extent to which the taxpayer and its shareholder have paid less than it is thought, by some nonlegal yardstick, that they should have paid. The tax, to be sure, was intended as a penalty; but that is the more reason why it should be applied with a careful regard for its terms and not sentimentally.

The loans which petitioner made to Prince were consistently used by him and his brokerage firm to buy the securities of stockyards corporations. Only once does it appear that he used any of the borrowed funds for a private purpose. This was in 1982, when he used $160,000 for a short period to finance the construction of his Newport house until he could sell his North Shore place. The securities which petitioner loaned to Prince were used by him as collateral to secure .loans from banks for the purchase of stockyards securities, and the cash which petitioner loaned to Prince was used for the purchase of similar securities. Prince paid interest to the petitioner at the going rate on the cash loans and the petitioner received the income upon the securities which it loaned to Prince for purposes of collateral. In view of the evidence that the loans were made to Prince because as a broker he was in good position to buy stockyards securities whenever they were available, and that this was, throughout the entire history of the company, an incident to its general plan, it is misleading to find, as the Board does, that “the loans were used by Prince for any purpose desired by him.” There is a clear distinction between these loans to Prince in carrying out the petitioner’s business plan and the loans to the president in Helvering v. National Grocery Co., 304 U. S. 282. In that case the loans were used by the corporate officer to invest in wholly unrelated securities for a profit, just as they might have been used by him if they had been distributed to him in dividends. The amounts loaned to Prince during the taxable years did not serve the purpose of disguised dividends. In 1930 the loans actually decreased by $916,250. Over the four years, 1930-1933, the net amount loaned to Prince was $886,070. Included in this net was the loan in 1933 of $1,000,000 which Prince used in the purchase, for $1,067,000, of the Armour shares. This purchase was made to acquire control of the Armour stock so that the profitable Armour business would be kept in the stockyards enterprise. I think, therefore, that when the circumstances of all the loans by petitioner to Prince are given , consideration they lose force as indicating any purpose to enable him to have the personal use of petitioner’s earnings and yet escape surtax.

It is said that Prince sold securities to the petitioner at a loss, which gave him a personal income tax deduction, and the petitioner took similar loss deductions on sales to Prince. Aside from the fact that the amounts were comparatively too small to be indicative of a purpose under section 104, the decision in W. S. Farish & Co., 38 B. T. A. 150; affd., 104 Fed. (2d) 833, establishes that this has no place under that section. Such transactions in themselves have no significance in determining whether the corporation was availed of to prevent surtax on the shareholder “through the medium of permitting its gains or profits to accumulate instead of being divided or distributed.”

I am, therefore, of opinion that the reasoning of the Board in reaching its conclusion is unsound. The taxpayer has shown affirmatively an absence of actual purpose to prevent the imposition of surtax upon its shareholder, and, since this is the crux of the case, the determination of the Commissioner that the case is one under section 104 should be reversed and the resulting deficiency set aside.

Murdock, Leech, and Keek agree with this dissent.

       Section 102 of the 1938 Act stiU fixes purpose as a necessary condition of the tax but the presumption that an unreasonable accumulation evidences the disapproved purpose is made more difficult to overcome since the taxpayer must prove its absence of purpose by a clear preponderance of the evidence and not merely by enough evidence to overcome a prima facie case.


source: Caselaw Access Project

author: Smith:

license: Public Domain

text:
    Estate of C. R. Hubbard, Deceased, National Bank of West Virginia and Stella Cracraft, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 95691.
    Promulgated March 21, 1940.

      Robert P. Smith, Esq., for the petitioners.

      Chester A. Gwirni, Esq., for the respondent.
   OPINION.

Smith:

The petitioners claim tbe deduction from the gross income of the estate for 1935 of $19,748.80 representing credits made to tbe beneficiaries of tbe estate. The deduction has been disallowed by tbe respondent.

The applicable provisions of tbe Revenue Act of 1934 are as follows :

SEC. 162. NET INCOME.
Tbe net income of tbe. estate or trust shall be computed in tbe same manner and on tbe same basis as in tbe case of an individual, except that—
‡ Sfc *
(c) In tbe ease of income received by estates of deceased persons during tbe period of administration or settlement of tbe estate, and in tbe ease of income wbieb, in the discretion of tbe fiduciary, may be either distributed to tbe beneficiary or accumulated, there shall be allowed as an additional deduction in computing tbe net income of the estate or trust the amount of tbe income of the estate or trust for its taxable year, which i's properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary. [I. R. O., 1939, pp. 66-67.]
SEC. 23. DEDUCTIONS PROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
*******
(e) Taxes Genbiiajxy. — Taxes paid or accrued within the taxable year, except—
*******
(3) estate, inheritance, legacy, succession, and gift taxes; * * *

The Revenue Act of 1932 (I. R. C., sec. 813 (b), p. 125) provides as follows:

SEO. 802. 80 PER CENTUM CREDIT.
(a) Section 301 (b) of the Revenue Act of 1926 is amended to read as follows:
“(e) The tax imposed by subdivision (a) of this section shall be credited with the amount of any estate, inheritance, legacy, or succession taxes actually paid to any State or Territory or the District of Columbia, in respect of any property included in the gross estate (not including any such taxes paid with respect to the estate of a person other than the decedent). The credit allowed by this subdivision shall not exceed 80 per centum of the tax imposed by subdivision (a) (after deducting from such tax the credits provided by subdivision (b)), and shall include only such taxes as were actually paid and credit therefor claimed within four years after the filing of the return required by section 304, * * *”

Article 24-2 of Regulations 86 provides, in part, as follows:

* * * Expenses of the administration of an estate, such as court costs, attofneys’ fees, and executors’ commissions, are chargeable against the corpus of the estate and are not allowable deductions. * * *

It will be noted that under section 162 (c) of the Revenue Act of 1934, quoted above, amounts which are “properly paid or credited” to legatees, heirs, or beneficiaries are legal deductions from gross income and the amounts so paid or credited are required to be taken up in the income tax returns of the legatees, heirs, or beneficiaries. The petitioners contend in this case that the amount of $19,748.80 was properly credited to the beneficiaries and that therefore the estate is entitled to deduct that amount from the gross income.

The estate of C. R. Hubbard was in process of administration or settlement during the year 1935. Although the evidence is to the effect that it was the practice of the National Bank of West Virginia at Wheeling to keep an account of the income of an estate in process of administration or settlement separate from the principal, payments of expenses and distributions to the legatees here were from one common fund. The will of the decedent did not provide for a distribution of income separate from a distribution of principal. It was the duty of the executors to pay all administration expenses and the inheritance taxes payable to the State of West Virginia and then to distribute to the beneficiaries the residue of the estate in accordance with the directions of the will.

As shown by the estate’s income tax return for 1935, the gross income was in the amount of $41,491.40. It was not this amount which was allocated to the beneficiaries’ • shares of income, but a far less amount. The credit which was made to the beneficiaries’ shares was not made with any expectation that the amount would ever be paid over to the beneficiaries. At the time the credit was made it was known that the money would be needed and would be used for the payment of West Virginia inheritance taxes. The executors are charged with the duty of paying those taxes before the estate is distributed. The books of account of the executors show that on April 19, 1935, there was debited to the account of the estate “Income Available” $16,506.13 and on the same day there was paid inheritance tax in the amount of $19,095.20. This shows that at the time the credit was made to the beneficiaries there was no expectation that it would ever be paid over to the beneficiaries. In this situation we do not think that the income of the estate was “properly” credited to the beneficiaries within the meaning of subdivision (c) of section 162 of the applicable statute. The purpose of that subdivision is that where income is credited to a beneficiary to be paid to him at a later date the amount may be claimed as a deduction by the estate or trust for the year in which the credit is made, and the beneficiary will be required to include in his or her return the income credited. It is obvious that the credits here were made to the beneficiaries for the purpose of reducing the net income of the estate taxable as an entity. We think that the respondent did not err in disallowing the deduction from gross income of the credits made to the beneficiaries in the amount of $19,748.80.

The second question is whether the estate is entitled to deduct from gross income executors’ commissions in the amount of $1,731.16. The estate was in process of administration during 1935 and clearly the executors’ commissions are a legal deduction from the gross estate in the estate tax return for purposes of estate tax. It appears that the executors deducted $10,000 of executors’ commissions, which amount represented their commissions chargeable against the corpus of the estate, but failed to deduct $1,731.16 which represented a charge of 5 percent made upon the collection of income. The $1,731.16 was paid to the executors on December 31,1935.

The point in issue in this case was given careful consideration by the Board in George W. Oldham, et al., Executors, 36 B. T. A. 523. We there said:

Ordinarily the fees and commissions of executors, administrators, attorneys, and other representatives of estates are regarded as administration expenses and are applied against the gross estate in determining the estate tax. Ordinarily such fees and commissions are not allowable as deductions in determining the net income of tbe estate. William W. Mead et al., Executors, 6 B. T. A. 752, 757; Leonard Holden Vaughan, Coexecutor, 10 B. T. A. 140; Charles B. Power et al., Executors, 11 B. T. A. 1313; Ethel P. Hunt et al., Executrices, 12 B. T. A. 396; James C. Ayer et al., Trustees, 26 B. T. A. 9, 12; John A. Loetscher et al., Executors, 14 B. T. A. 228.
Where, however, such fees or commissions are paid for services rendered exclusively in carrying on the affairs of the estate as a business, rather than in preparing it for settlement and distribution, such payments constitute ordinary and necessary expenses and may be deducted for income tax purposes. Grace M. Knox et al., Executors, 3 B. T. A. 143; William W. Mead et al., Executors, supra; George W. Seligman, Executor, 10 B. T. A. 840; Henrietta Bendheim, 8 B. T. A. 158; Charles Lesley Ames, Executor, 14 B. T. A. 1067; Margaret B. Sparrow, 18 B. T. A. 1; Florence Grandin, 16 B. T. A. 515; Estate of William G. Peckham, 19 B. T. A. 1020, 1023; Chicago Title & Trust Co. et al., Trustees, 18 B. T. A. 395; H. Alfred Hansen, Executor, 6 B. T. A. 860.

In Lewis v. Bowers (U. S. Dist. Ct., S. Dist. New York), 19 Fed. Supp. 745, the question before the court was whether commissions paid a New York executor for receiving and paying out income of the property during administration are deductible from the gross estate for Federal estate tax purposes. The court held that they were not deductible from the gross estate in the estate tax return since such commissions are not part of the administration expenses chargeable on corpus of the estate under the New York law. The court said:

What has been said had no bearing on the commissions taken for receiving and paying out income on the property during administration. By New York law commissions on income are calculated separately and are not part of the administration expenses chargeable on the corpus of the estate. They are chargeable only against income. Such commissions are a proper deduction from gross income received by the executors in paying the income tax, but they have no place as a deduction for purposes of the estate tax.

The executors’ commissions here in question are provided for by section 4195 of the West Virginia Code of 1932. The commissions are such an amount as the court may award. Commissions of 5 percent upon income collected in addition to other charges have in many cases been approved. Neither the petitioner nor the respondent has called our attention to any West Virginia court decision bearing particularly upon the point and we have been unable to find any.

An estate in process of administration or settlement is taxable the same as an individual. An individual is not permitted to deduct from gross income ordinary and necessary expenses unless they are incurred in a trade or business. We think it clear from the evidence in this case that the estate as such was not engaged in a trade or business during the calendar year 1935. The executors simply collected the interest and dividends and paid the debts of the estate. Cf. Kane v. Commissioner, 100 Fed. (2d) 382. Most, if not all, of the $1,731.16 commissions here in issue were upon income collected during the first year of the administration of the estate. We see no reason why they did not constitute a legal deduction from the gross estate as administration expenses. We are of the opinion that the respondent did not err in disallowing the deduction of the amount from the gross income of the estate in the income tax return.

Decision will he entered for the respondent.


author: Tyson:

text:
    Anna Rosenstock, Individually, and as Executrix of the Estate of Isaac M. Rosenstock, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91686.
    Promulgated March 21, 1940.

      Isidor Weis, Esq., for the petitioner..

      B. M. Brodsky, Esq., for the respondent.
   OPINION.

Tyson:

The respondent determined a deficiency in decedent’s estate tax of $6,028.92.

In the estate tax return of petitioner’s decedent there was reported as a portion of the decedent’s estate the amount of $3,904.15 as representing part of the proceeds of certain policies of insurance upon decedent’s life. The respondent’s determination resulted in increasing such reported amount to $47,808.30 and petitioner assigns error only as to such increase.

The questions presented are: (1) Were the three insurance policies here involved assigned to the decedent’s wife prior to decedent’s death? and (2) In the event there was no such assignment was one-half of the premiums on the three policies paid by decedent’s wife, and if so, was only one-half of the proceeds of such policies, less a $40,000 exclusion, includible in decedent’s gross estate'by reason thereof?

The decedent, Isaac M. Rosenstock, and his wife, Anna Rosenstock, were married July 31,1917, in New York, New York, and have since continuously resided there until the death of decedent on March 7, 1936. Anna Rosenstock is the executrix of decedent’s estate. The three policies of insurance taken out on the life of decedent, here involved, are as follows:

Each of these policies was issued on written application of the decedent. The beneficiary named in each of the policies was Anna Rosenstock, the wife of decedent, and each of the policies contained a clause reserving the right of the insured to change the beneficiary.

At the time of the issuance of the policy in 1918 and until about 1922, the decedent was engaged in businesses in New York City, New York, in which his wife was in no way financially interested. Also, during that time, and for several years prior thereto, decedent’s wife was engaged in a lucrative business for herself in the same city.

By 1922 the businesses in which decedent had been engaged had failed and decedent was left without any property or financial means whatsoever. In that year his wife took decedent in as an equal partner in the business in which she was then engaged without decedent’s contributing any capital whatsoever. Since the death of decedent his widow has continued to operate the business alone.

When each of the three policies was issued decedent delivered it to his wife, stating that it was hers and telling her to put it in her vault. This she did, and since such delivery of the policies to her she has retained sole and exclusive possession thereof, with the exception of a time, or times, when money was borrowed on one or more of the policies to be used in the partnership business in which she and decedent were engaged. Such borrowed moneys were repaid by the partnership and the policies thereupon returned to the possession of decedent’s wife, where they remained until decedent’s death. The proceeds of the policies were thereafter collected by decedent’s wife.

The wife of decedent paid all the premiums upon the policy issued in 1918 until the end of 1922. Thereafter, the premiums on that policy, as well as the premiums on the other two policies issued in 1924, were paid by checks of the partnership firm, some of which were signed by deceased and some by his wife, as a member of that firm. Those payments were equalized on the partnership’s books in such a manner that the decedent paid one-half thereof and his wife the other one-half.

In May Billings et al., Executors, 35 B. T. A. 1147, this Board expressed the view that the phrase “all other beneficiaries”, used in section 302 (g) of the Revenue Act of 1926, embraces an assignee where an insurance policy is assigned to a designated person without a valuable consideration. In the instant case, the assignment of the three policies was made by gift and thus the assignee, insured’s wife, falls in the class above referred to of “all other beneficiaries.” However, it is well settled that the proceeds of insurance policies irrevocably belonging to and receivable by “beneficiaries” other than the insured’s estate may not be included in his estate, under section 302 (g), supra, where the insured, at date of his death, had no incidents of ownership of the policies (that is, control, possession or enjoyment of the privileges contained in the policies, or the proceeds thereof), the termination of which by reason of his death would constitute an appropriate subject of the estate tax. Levy’s Estate v. Commissioner, 65 Fed. (2d) 412; Pennsylvania Co. for Insurances on Lives & Granting Annuities et al., Executors v. Commissioner, 79 Fed. (2d) 295; certiorari denied, 296 U. S. 651; Edith Huggard Sharp et al., Executors, 33 B. T. A. 290; petition for review on this question dismissed, 91 Fed. (2d) 804; and May Billings et al., Executors, supra (p. 1152).

The property interest of the insured (decedent) and his wife, respectively, in the insurance policies here involved is determined by the laws of New York. Lang v. Commissioner, 304 U. S. 264. Cf. New York Life Insurance Co. v. Dodge, 246 U. S. 357. When the insured orally made an unconditional and absolute transfer of the three policies to his wife, accompanied by actual delivery, he thereby made a completed, valid and effectual assignment thereof to her. McGlynn v. Curry, 82 App. Div. 431; 81 N. Y. S. 855; Grems v. Traver, 87 Misc. Rep. 644; 148 N. Y. S. 200; affd., 149 N. Y. S. 1085; Mutual Life Ins. Co. of New York v. Holley, 8 N. Y. S. (2d) 429; 255 App. Div. 338; Considine v. Connecticut Mutual Life Insurance Co., 255 App. Div. 876; 7 N. Y. S. (2d) 834. See also, First National Bank of Cumberland v. Liberty Trust Co., 47 A. L. R. 730, and notes. By such unconditional assignment the insured was divested of all legal interest in those policies. Also, by such act, insured’s right, reserved in the policies, to change the beneficiary was abrogated. Jacobs v. Strumwasser, 145 N. Y. S. 916. The entire beneficial interest in those policies passed to the assignee, the insured’s wife, including the right to the proceeds thereof, and, under the laws of New York, her consent was necessary to his exercise of any control, possession, or enjoyment of any of the privileges contained in the policies, such as loan or cash surrender Values and the right of assignment. Levy's Estate v. Commissioner, supra; Anderson v. Northwestern Mutual Life Insurance Co., 261 N. Y. 450; 185 N. E. 696; Guaranty Trust Co. of New York et al., Executors, 33 B. T. A. 1225, and authorities cited therein.

We therefore hold that respondent erred, as alleged by petitioner, in increasing the amount of $3,904.15 reported in the estate tax return of petitioner’s decedent as representing part of the proceeds of the three policies of life insurance here involved to $47,808.30.

Having concluded that there was a complete, valid transfer and assignment of all the three policies of insurance by decedent to his wife it becomes unnecessary to decide the second question.

Decision will be entered under Rule 50.

       Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
      *******
      (g) To the extent of the amount receivable by the executor as insurance under policies taken out by the decedent upon his own life; and to the extent of the excess over $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life.


author: OppeR:

text:
    The Lone Pine Lawn Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 94298.
    Promulgated March 21, 1940.

      Geo. E. R. Goodner, Esq., and Paul E. Schaub, C. P. A., for the petitioner.

      Frank B. Schlosser, Esq., E. O. Hanson, Esq., and Conway N. Kitchen, Esq., for the respondent.
   OPINION.

OppeR:

Petitioner, a personal holding company, claims to be entitled to deductions for taxes, fire insurance, and depreciation on real property acquired by it in exchange for a part of its capital stock. A further question is the liability for a delinquency penalty resulting from petitioner’s failure to file a personal holding company return within the time prescribed.

The primary issues would be simple of solution were it not for the fact that petitioner’s interest in the real property in question is limited to a remainder over after one, or possibly two, intervening life estates. These were reserved by the grantor at the time of conveyance, and payment of the expenses in question was the result, not of petitioner’s contemporaneous use of the property, but of provisions of the contract of conveyance.

Petitioner is entitled to the deductions for the taxes in question only if it can be said that they were imposed upon it; for, otherwise, even though their payment by petitioner was proper or in fact obligatory under the contract, they would not be permissible deductions from current income, Eugene W. Small, 27 B. T. A. 1219; Caroline T. Kissel, 15 B. T. A. 1270; Gatens Investment Co., 36 B. T. A. 309; but should be treated as capital expenditures incurred in the acquisition of the property, Falk Corporation, 23 B. T. A. 883; affd., 60 Fed. (2d) 204 (C. C. A., 7th Cir.).

On this question authorities dealing with the law of Connecticut, in which state the property was located, are of less help than might be hoped. The statute apparently covering the subject is not free from ambiguity. And the Connecticut cases cited by the parties throw no light upon the present question. Considering all the circumstances, we conclude that these were not the taxes of petitioner within the meaning of the revenue act. They were annual or periodic charges arising out of or resulting from the beneficial use, ownership or enjoyment of the property. In the current years it was the life tenants and not the petitioner to whom those beneficial rights inured. It seems not unreasonable to assume that such a distinction is the purpose of the provision in the Connecticut statute referring to the “use” of real estate “for life * * ‡ by gift or devise and not by contract.” These words may well be the result of an attempt to emphasize situations where one enjoying the immediate use and possession of property does so in his own right, not through or under the remainderman, and hence without consideration or compensation to the holder of the remainder. There would then be an absence of rent or other available return from the property out of which the taxes could be expected to flow. The interest in the property reasonably subject to the burden of periodic taxation imposed by public authority would then seem to be the estate carrying the present use and enjoyment thereof. On that analysis it is clear that the taxes in question should be regarded as imposed upon the holders of the life estates and not upon this petitioner. The life tenants held their interests, if not by “gift or devise”, certainly by a right more analogous thereto than to “contract.” For the grantor retained her interest by way of reservation or exclusion from the conveyance, and therefore as a result of the original acquisition by her, .the source of which does not appear; and her sister presumably acquired her estate as a gift from petitioner’s grantor. Neither owed to the remainderman any “contract” or other duty such as the payment of rent in return for her right of occupancy. That being so, the taxes are not to be treated as imposed upon petitioner or as deductible by it but are in the nature of capital expenditures involved in the acquisition of a capital asset.

Similar considerations dispose of the small item of fire insurance. Here, again, there is no evidence that such expenditures were the current outcome of any trade or business. For the reasons stated in St. Louis Union Trust Co. et al., Trustees, 40 B. T. A. 165, 176, they should be disallowed, leaving the opportunity to petitioner of course to deal with them as a capital item in accordance with the principles already discussed. Falk Corporation, supra.

As to depreciation, respondent must be sustained primarily on the ground that such deduction is specifically denied to petitioner. And see Caroline T. Kissel, supra. It so happens that petitioner also fell short of sustaining its burden of proof, since it entirely failed to produce admissible evidence of the fair market value of the property at the time of acquisition, of its cost, or of the cost to its transferor. See Revenue Act of 1934, sec. 113 (a) (8). The only proffer was the local assessment lists, which were excluded, as we think they had to be. William A. Daly, Administrator, 1 B. T. A. 993; Helen Barclay, Executrix, 4 B. T. A. 1139. In any event their exclusion was not prejudicial here, since the point must be decided against petitioner for the reason first noted.

As to the delinquency penalty, respondent must be sustained. The delinquency penalty is applicable to a personal holding company return. Rotorite Corporation, 40 B. T. A. 1304, 1313; Collateral Mortgage & Investment Co., 37 B. T. A. 630, 634. And the failure of petitioner’s fiscal agent to acquaint itself with petitioner’s responsibility under the law is not that “reasonable cause” which will preclude application of the penalty section. T. H. Symington & Son, Inc., 35 B. T. A. 711; West Side Tennis Club, 39 B. T. A. 149 (appeal pending, C. C. A., 2d Cir.).

Eeviewed by the Board.

Decision will be entered for the respondent.

       Sec. 1132. Tenant fob Life oe Tears to List Propeety. When one is entitled to the ultimate enjoyment o£ money at interest, real or personal estate, and another is entitled to the use of the same as an estate for life or for a term of years by gift or devise and not by contract, such estate shall be set in the list of the party in the immediate possession or use thereof, except when it is specially provided otherwise; and real estate so held shall be charged with the payment of any tax laid upon it, and the community laying such tax, or the tax collector or other authorized officer thereof, may collect or secure such tax in any manner provided by law for collection or securing of taxes on real estate; provided, upon the failure of the life tenant or person in immediate possession or use of such real estate to pay any tax laid upon it, the person or persons entitled to the ultimate enjoyment of such real estate may pay such tax and shall be subrogated to all the rights and remedies of the community laying the same for the collection or securing of such tax. [Connecticut General Statutes, Revised 1930.]'

       “* * * That is taxation which compels one to pay for the support of the government from his own gains and of his own property. * * *” [United States v. Railroad Company, 84 U. S. 322, 326.]

       This would also be the rule as to the obligation owed by life tenant to remainderman were it not for petitioner's specific agreement. Restatement of the Law, Property, vol. I, secs. 129, 130.

       Revenue Act of 1934—
      SEC. 23. DEDUCTIONS PROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      « , * * * * • •
      (1) Depreciation. — * * * In the case 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. * * *

       Petitioner’s counsel stated: “I might say that this is not offered for the purpose of proving value, but to prove assessed value * * *”; and shortly thereafter: “The assessed value is not in issue.”


author: Opper : Black,

text:
    Estate of Daniel C. Bleser, Deceased, Daniel B. Bleser and Myrtle S. Bleser, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96062.
    Promulgated March 21, 1940.

      A. L. Nash, Esq., and A. F. Rankin, Esq., for tbe petitioners.

      Jonas M. Smith, Esq., and F. R. Shearer, Esq., for tbe respondent.
   OPINION.

Opper :

This proceeding presents two questions. The first is a somewhat complicated variation of the problem dealt with in Zaida Clay, 40 B. T. A. 562. Here the decedent, controlling stockholder of an “investment” corporation, included in his return an item reporting a dividend of that corporation. Upon examination of the corporation’s return, respondent concluded that this item was not actually received by decedent; that it represented an attempt under the Revenue Act of 1932, section 104 (d), to report a “distributive share” of the corporation’s income, even though not distributed, thus exonerating the corporation under that section; and that decedent was accordingly chargeable, regardless of receipt, with his entire distributive share. This was considerably in excess of what he had reported and the proposed deficiency resulted.

A preliminary issue is whether the corporation was formed or availed of for the purpose described’ in that section. Jennie King Mellon et al., Executors, 38 B. T. A. 1259. We have found that it was. The circumstances of its formation the year before and its use in the present year are insufficient to overcome the presumptive existence of that purpose resulting from its admitted character as a mere investment company. Only decedent’s general statement that he did not intend to escape Federal taxes tends in the opposite direction. And the absence of supporting evidence and of other convincing motives which exclude such an intent, as well as the unspecific nature of that testimony, deprive it of sufficient weight to overcome the presumption. See R. L. Blaffer & Co., 37 B. T. A. 851; affd., 103 Fed. (2d) 487 (C. C. A., 5th Cir.) ; certiorari denied, 308 U. S. 576. Similarly, the conduct of the corporation in the present year is not so unequivocal as to disturb the presumption. True, it claims to have distributed all of its dividend income, and to that extent the individual surtax was not avoided. But the corporate return discloses that an item of tax-exempt interest was not distributed. If that was exempt only from normal tax, and the record does not indicate otherwise, then the corporation was also availed of in the present year, at least in that respect, to relieve its stockholders of surtax.

That being so, respondent’s conclusion is warranted if there was an election of the alternative proffered by section 104 (d). Zaida Clay, supra. The difficulty is that petitioners deny that decedent intended to elect, and contend that 'the distributions in question were actually made by the corporation and received by decedent in cash as dividends. In this aspect the situation is not so clear as it was in the Clay proceeding, where the original intention to elect was uncontested. On this controversial question of fact, however, we have made no determination since, in our view, no finding as to decedent’s undisclosed intent could alter tlie effect of Ms explicit statement, which was of such a nature as by itself to demonstrate an exercise of the election.

The corporation return referred to a “distribution” in the proper amount but carried it not on the line marked “dividends”, but as “other debits to surplus.” Nevertheless, it appeared that it was not debited to surplus. The return expressly referred to section 104 (d). It called attention, presumably as confirmation, to decedent’s individual return, where the item is included in his gross income as a dividend without any explanatory matter. Thus, the necessary inference from a specific reference to that portion of the act granting the right of election was nowhere contradicted or in fact seriously questioned.

These circumstances seem to us to supply the requirements of an “election.” There was “a manifestation of choice”; exercise of the option was “shown by an overt act.” See Bierce, Ltd. v. Hutchins, 205 U. S. 340, 346; Schenck v. State Line Telephone Co., 238 N. Y. 308, 144 N. E. 592, 593; Snow v. Alley, 156 Mass. 193; 30 N. E. 691, 692. The decision to elect was communicated to respondent, as it must have been intended that it should be, as a part of the respective income tax returns. And the fact that the assertion upon which respondent’s position is founded appeared originally in the corporation’s return rather than in decedent’s need not be significant in the view that decedent dominated the corporation, and in fact executed its return as its president. See Higgins v. Smith, 308 U. S. 473. The advantage which the corporation derived from the statements in its return in avoiding the possibility of application of the penalty tax makes it all the more necessary that there should be no double benefit where these statements can be attributed, as they can here, to the alternative taxpayer. Stone v. White, 301 U. S. 532.

While this Board may be without power to treat the equities as decisive, it need not refrain from noting that petitioners have not been harmed by respondent’s action. On the contrary, if respondent had declined to treat the two returns as an election, which petitioners now contend he should have done, and had assessed the section 104 tax against the corporation, the combined taxes of decedent and the corporation would have been greater than they will be, even including the entire amount of the present deficiency. And it was decedent who would have borne the' economic burden of the, corporation’s tax since he was to all intents and purposes its sole stockholder. This corporation being subject to section 104, the tax was clearly payable by corporation or stockholder. Certainly the latter is not the victim of inequity if his total burden is less than if his action had been construed as petitioners now contend it should have been.

It is, of course, inescapable, that if we sustain petitioners’ contention here they will be materially benefited. But that is only because the statute has since run against resort to the corporation. That should be an added reason, if one were needed, for holding petitioners to the position decedent originally' assumed. No attempt has ever been made to correct the asserted error by way of amended returns, and it is clearly too late now for such action to be considered timely. See Wm. B. Scaife & Sons Co., 41 B. T. A. 278. To place upon respondent in such circumstances the responsibility of discovering at the peril of the revenue whether a return means what it fairly appears to say seems to us to create an unbearable administrative burden. See Rose v. Grant, 39 Fed. (2d) 340 (C. C. A., 5th Cir.) ; Moran v. Commissioner, 67 Fed. (2d) 601 (C. C. A., 1st Cir.); Wm. B. Scaife & Sons Co., supra. We are accordingly of the opinion that decedent must be held to have exercised an election the consequences of which his personal representatives can not now be permitted to avoid.

The second issue relates to a claimed loss by reason of the worthlessness of certain bank stock. Clark, one of petitioners’ witnesses, who fortuitously is also a member of the law firm representing petitioners, testified in effect that it was apparent in 1933 that an assessment upon stockholders would have to be levied. He went further and explained his statement by pointing out that the superficial solvency of the bank indicated on its books was overcome by a report made by the Federal Deposit Insurance Corporation showing that book values were excessive. No other contrary evidence is to be. found. Petitioners contend that the failure of the bank to reopen on January 2, 1934, is the identifiable event demonstrating worthlessness,- and that 1934 is therefore the proper year. But if a single identifiable event is necessary it seems evident that it is furnished, not by tbe failure to reopen, but by the closing of the bank’s doors on the last day of 1933, which, by prearrangement, was to be the end of the bank’s operation. If the stock was worthless on that day, as it clearly was, this termination of the bank’s business life put an end to all possibility of improvement in the future. The evidence is susceptible of only one interpretation, and that is that the stock became worthless in the year 1933 and not in 1934.

Reviewed by the Board.

Decision will he entered for the respondent.

Black,

dissenting: I dissent from the majority opinion because I do not think the facts in the instant case show that the stockholders of the Bleser Investment Corporation elected to return the net income of the corporation on their own individual income tax returns and thus comply with section 104 (d) of the Revenue Act of 1932 and thereby relieve the corporation from the imposition of the 50 percent surtax imposed by section 104 (a).

There were three stockholders of the corporation, Daniel C. Bleser, his wife, and his son-in-law. The latter two shareholders only owned five shares each. The facts do not show that they made any attempt whatever to comply with section 104 (d). Whether it be assumed that the small amount of shares which each of these two owned were qualifying shares and were in reality beneficially owned by decedent, or whether it be assumed that the wife and son-in-law, in their own right, did own five shares each of the corporation’s stock but that their interest may be disregarded under the maxim, de minimis non curat lew, I still don’t think the facts show an attempt at compliance with section 104 (d). In Zaida Clay, 40 B. T. A. 562, cited in the majority opinion in support of the conclusion reached, there was a conceded intent to comply with this particular section of the statute and we properly held that the deficiency was chargeable to the taxpayer in that case. Here we have no such clear intent to comply with section 104 (d), but on the contrary the facts which are in evidence when viewed as a whole seem to me to negative any such intention. Therefore, in my judgment, if there is a deficiency because of the application of the 50 percent surtax to the corporation’s income under section 104 (a), it exists against the corporation and not against the petitioners.

Also, it seems to me that there are no facts which would estop petitioners from making the defense which is now sought to be made. The Commissioner had the income tax returns of both the corporation arid the decedent before him and he was bound to have seen that decedent returned only $44,501.84 as income received from the corporation, whereas, the findings of fact show that “The adjusted net income of the corporation for its fiscal year ended June 30, 1934, as originally reported, was in excess of $200,000, and decedent’s entire pro rata share of such adjusted net income would have amounted to a sum in excess of $195,000.”

Under such circumstances, I am unable to see where there is anything kin to estoppel in this case. Cf. Salvage v. Helvering, 297 U. S. 106.

Aéundbll, Mxjbdook, Leech, and Tyson agree with this dissent.

       SEC. 104. ACCUMULATION OP SURPLUS TO EVADE SURTAXES.
      *******
      (d) The tax imposed by this section shall not apply if all the shareholders of the corporation include (at the time of filing their returns) in their gross income their entire distributive shares, whether distributed or not, of the net income of the corporation for such year. Any amount so included in the gross income of a shareholder shall be treated as a dividend received. Any subsequent distribution made by the corporation out of the earnings or profits for such taxable year shall, if distributed to any shareholder who has so included in his gross income his distributive share, be exempt from tax in the amount of the share so included.

       Decedent’s testimony as to his purposes in forming the corporation was as follows:
      “Well, I heard of these family corporations and I thought that it was a wise thing to do, to incorporate under Delaware, — under the laws of Delaware, it would be a whole lot easier to divide the stock of the corporation and the stock, the other holdings that I held with the Bleser Investment Company.

        *******

        “* * * the publicity of the income tax returns in Wisconsin, I didn’t like that, and then, of course, there was the Kingsbury Breweries Company deal on at the time, I anticipated a profit, which I didn’t feel as though I wanted to pay the Wisconsin tax on it.”
      If there were other purposes, decedent did not recall them.

       It is impossible to draw satisfactory inferences as to the corporation’s operations and condition. The only evidence is the corporation’s tax returns, concerning which decedent’s tax consulant testified:
      “* * * I will have to ask your indulgence on the balance sheet. * * * I might state as a fact that probably none of the items on the balance sheet are correct.
      ****** *
      “Q. Why is that?
      “A. Well, it is a tentative balance sheet submitted because the regulations require one, and as a matter of fact it would be impossible to furnish a correct balance sheet.
      “Q. Why it that?
      “A. I didn’t have enough information to get up a balance sheet.”

       Decedent’s tax consultant testified that this was the result of mistake, that the reference intended was to section 104 (c), and that the error was one of transcription.

       Petitioner urges that the respondent should not have relied on these returns, pointing out that a protest against the proposed deficiency was filed with the respondent in October, 1936, which “discussed in detail all matters here involved”; and that the statute of limitations still permitted recourse against the corporation. If such an attempt to avoid the result of an election could ever be successful, a point we need not decide, it must fail here because the fact is that the statute of limitations had already run in favor of the corporation. Its return covered a fiscal year beginning prior to January 1, 1934, and was thus governed not by the Revenue Act of 1934 (see section 1) but by that of 1932. The two-year statute of limitations there provided (section 275 (a)) expired in September 1936, the return having been filed in September 1934.

       The corporation’s section 104 income was $235,054.53. Fifty percent tax thereon would be about $117,500. The total deficiency determined against petitioners is $104,247:66 and the total surtax paid by decedent as a result of his original return was $10,317.66, or an aggregate amount of tax of $114,565.32, which of course is demonstrably less than the section 104 tax above noted. Neither the deficiency nor the original surtax was confined to Bleser Investment Co. items, but no adjustment downward on that account has been made since even without any adjustment the result is clear.


author: Disney:

text:
    Florence H. Ehrman, Petitioner, v. Commissioner of Internal Revenue, Respondent. Clara Hellman Heller, Petitioner, v. Commissioner of Internal Revenue, Respondent. I. W. Hellman, Jr., Deceased, Frances J. Hellman and Wells Fargo Bank & Union Trust Co., Trustees under the Last Will and Testament, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 92448, 92449, 92450.
    Promulgated March 22, 1940.

      Sidney M. Ehrman, Esq., and Lloyd W. Dinkelspiel, Esq., for the petitioners.

      Harry B. Harrow, Esq., and H. G. Potthoff, Esq., for the respondent.
   OPINION.

Disney:

Petitioners on their income tax returns for 1935 included in income 30 percent of net gains reported from sales of real estate in the Repetto Ranch subdivision. Respondent held that the income was from sales of property held primarily for sale to customers in the ordinary course of the trade or business of petitioners and therefore included in their taxable-income the entire amount, under section 117 (b), Revenue Act of 1934.

Our question is, Was the property disposed of during 1935 from Repetto, and from which income was realized, “property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business” under the above statute? We have our attention directed to various cases upon the subject. However, we think that those really contributing in any essential way to the solution of .our problem, or greatly similar in fact, are limited to Phipps v. Commissioner, 54 Fed. (2d) 469; Pope v. Commissioner, 77 Fed. (2d) 599; Richards v. Commissioner, 81 Fed. (2d) 369; Welch v. Solomon, 99 Fed. (2d) 41; and Commissioner v. Boeing, 106 Fed. (2d) 305. Other citations reflect light upon the question only indirectly. After reviewing the above cases and others less helpful, we come to the conclusion that the lands involved must be considered within the above quoted language of the statute.

We are unable to distinguish this case in principle and in determinative fact from the Richards, Solomon, and Boeing cases above. Phipps v. Commissioner rests upon the conclusion that the transactions in the taxable year were not sufficient to constitute doing business, and Pope v. Commissioner merely decides that the officers and chief stockholders of a corporation were not engaged, merely because of that relation, in the business conducted by the corporation, the court assuming the corporation to be in business and passing only upon the position of its principal officers and stockholders. That is, of course, not the present case.

It seems to us that the question here is controlled particularly by the Richards and Boeing cases. The latter was invoked by petitioners as decided by the Board, but has since been reversed. The petitioners here urge that the land herein involved was originally acquired and held for investment. We agree. But the same is true in both of the cases last above named. In the Boeing case, as herein, much of the land had been inherited years ago and held for investment. It is likewise true, we think and we have found, that the petitioners were not in the real estate business, aside from the activities in connection with Repetto Ranch; but neither was Richards, and Boeing was a retired airplane manufacturer. Both simply devoted lands previously held for investment, or for another purpose, to a business purpose, in a manner remarkably parallel to that involved here.

Petitioners urge the stress of necessity which forced the petitioners to carry on the subdivision started by Ransom. Yet the stress seems no greater than it was in the case of Richards, supra, whose property had become so valuable as to be unprofitably devoted to intensive truck farming and packing and had become encumbered by assessments for public improvements. This is essentially the situation facing the petitioners. The only way a profit satisfactory to them could be obtained was by carrying on a subdivision business. It is obvious, we think, that Richards and the petitioners might have sold the property, as a whole, without going into business with it. The price desired might not have been secured in that way, it is true, but that only accentuates the idea that they went into a business to obtain a better price than was obtainable by selling the property as investment property as a whole, or at least without going into the real estate business.

Keller testified in effect that petitioners did better than most sub-dividers “in that bracket” as to landscaping and improving. The subdivision obviously therefore was comparatively attractive, yet he also testified that he made no particular effort to sell the whole or any part of the’ property as acreage, though there were offers to buy the Repetto Ranch. Asked whether after 1934 the petitioners ever instructed him to sell any property as acreage, he could recall only three cases of about 3 acres, 5 acres and II% acres, respectively, with only the last positively after 1934. He also said that he did not solicit offers of purchase of any of the property as acreage, though he had been approached, that some sales pending at the time of hearing came unsolicited, that there were subdivisions adjacent to the Repetto Ranch, which continued through 1934 and 1935 and still continue, but that the persons conducting such real estate subdivisions were not approached for the purpose of acquiring the Repetto property, that on the contrary approach came from the other side. “We have a good subdivision; people come to us wishing to buy.” From all of this we must conclude that it was not impossible for this property to be sold as acreage or investment property, not unreasonable to think it could have been so sold for some price not wholly unfair, in spite of Keller’s further statement to the effect that there was no way of disposing of the property other than carrying on with the subdivision unless it was given away. This he modified by saying that subdividing was the “only practical manner in which it could be sold.”

It thus appears that the property was desirable to others in its subdivided state, that no particular effort was made to sell it as acreage, that approaches were made, that a “practical way” in the mind of Keller included and meant a way not disadvantageous, and that therefore the reason for carrying on the subdivision was a desire for a greater price than could have been obtained by sale as acreage.

Assuming that necessity could under any circumstances decide this question, one relying upon necessity as forcing him to go into business in order to liquidate an investment must logically demonstrate that he could not sell at all, or at least not for any substantial amount, without going into business. Here we think the contrary has been indicated. The amount of the liens for improvements, assessments, etc., does not appear large in comparison with, the price set upon the property. On May 16, 1932, upon the final agreement with Hansom, the purchase price set was $1,299,978.25. The liability for public improvements under the Improvement Bond Act of 1911, the Mattoon Act, and under drainage was only $256,000 and from August 1, 1933, to December 31, 1935, approximately $70,000 was spent on improvements, except houses erected. Even if a sharp decrease in value of the property is considered, as we do because lots decreased about half in value, yet it still appears that the property was not encumbered for its full fair value. Certainly no contrary showing has been made. We are not convinced that sale as acreage, as investment property, without going into business with it, would have been disastrous, but rather, on the contrary, that it could have been so sold in some reasonable transaction. A better financial result, and not necessity, thus appears as the reason for carrying on with the subdivision.

But however that may be, Commissioner v. Boeing, supra, refused, and we think properly, to apply the test of liquidation of investment property, saying: “This court has heretofore, in the case of Richards v. Commissioner, supra, rejected the liquidation test in determining the question here involved.” This was in spite of the fact that the Board had found as a fact that the taxpayer-seller’s motive in selling was to liquidate his investment. Such cases as Girard Trust Co., Trustee, 34 B. T. A. 1066, determining the question of a trust as against an association taxable as a corporation, are not controlling upon this question. We therefore conclude that the desire to liquidate an original investment, even under some necessity to secure a profitable return, as in the Richards and Boeing cases and here, does not alter the fact of business actually entered into. It is business none the less. These cases dispose also of the petitioners’ contentions they were not personally selling the property. Engagement in business through an agency is equally as effective as personal participation. Welch v. Solomon, supra. The Richards case involved a selling agency in much the same manner as here, and contracts of employment by Boeing were held sufficient to put him in business without personal participation. The numerous authorities need not be cited in order to hold that the business need not be petitioner’s only or principal business. There is no place, under the facts here, for any contention that the sales made were “isolated” or “casual.” Beyond argument, we think they show the continuity and frequency characteristic of business transacted. That they were made to customers and in the ordinary course is equally obvious.

We do not overlook the fact that in Richards v. Commissioner, supra, the taxpayer conceded that he held the subdivided property previously for sale. No such concession appears in the Boeing case, nor in Welch v. Solomon, supra, cited and relied upon therein, and Richards’ concession did not detract from his further contention as to “sale to customers in the ordinary course of his trade or business”, which is, of course, the pivotal question. Petitioners affirm, rather than deny, that the property was held primarily for sale. In effect, it had always been for sale, but not in a subdivision. Keller said: “My understanding was that I was to offer most anything that was in southern California and refer it to the executors.” Sidney M. Ehrman said: “They wanted to sell the land and realize on it” and “They wanted to make an outright sale either for cash or for a substantial cash payment”, but they were opposed to subdivision schemes. It thus appears that the case in this respect is in no different position from that conceded in the Richards case.

We are unable to distinguish the situation here from that in the Richards and Boeing cases. The petitioners prior to reversal strongly relied upon the latter as parallel. We conclude on their authority that the property was held by petitioners primarily for sale to customers in the ordinary course of their trade or business and that gains therefrom are ordinary and not capital gains. See also Welch v. Solomon, supra.

Decision will be entered under Rule 50.

       SEC. 117. CAPITAL GAINS AND LOSSES.
      (a) Generad Rule. — In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized npon the sale or exchange of a capital asset shall be taken into account in computing net income:
      * fit * * * * *
      30 per centum if the capital asset has been held for more than 10 years.
      (b) Definition of Capital Assets. — For the purposes of this title, “capital assets" means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.