author: Van Fossan : TURNER,

text:
    The Daily Telegram Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 52500.
    Promulgated March 17, 1936.

      A. Colder Maclcay, Esq., and Arthw McGregor, Esq., for the petitioner.

      Eugene Ear yole, Esq., for the respondent.
   OPINION.

Van Fossan :

It is the contention of the petitioner that the trans-

action, whereby the petitioner transferred certain of its assets to the Press-Telegram Publishing Co., was a nontaxable transaction within the meaning of section 203 of the Revenue Act of 1924. If the petitioner is to be sustained, this case must be brought within the provisions of subsections (b) (3) and (e) (2), or subsections (b) (4) and (cl) (l) of that section.

On the facts it is apparent that subsections (b) (4) and (d) (1) are not applicable. The stock of the Press-Telegram Publishing Co. received by the petitioner and the Long Beach Press Building Co. in exchange for property was not substantially in proportion to the interest of each of these companies in the property prior to the exchange.

Subsections (b) (3) and (e) (2) are applicable only if it appears that the exchange was made by a corporation, a party to a reorganization and in pursuance of the plan of reorganization. The term “reorganization” is defined in subsection (h) (l) of section 203, and the petitioner rests its case upon the applicability of clause (A) of that subsection, which provides that the term “reorganization” means “a merger or consolidation (including the acquisition by one corporation of * * * substantially all the properties of another corporation).” No contention is made that either of the remaining clauses, (B), (C) or (D), is applicable in this case.

The facts show that the Press-Telegram Publishing Co., in return for 32 percent of its own stock, 32 percent of the stock of the Long Beach Press Building Co., the assumption of certain liabilities, and cash, acquired all of the petitioner’s assets except certain real estate and some worthless bonds and the right to any amount collected on advertising accounts receivable in excess of $100,000. If the properties so transferred constituted substantially all of the petitioner’s properties, the transaction was a reorganization as contended by the petitioner.

Of the assets retained, the right to any amount collected on advertising accounts receivable in excess of $100,000 needs no consideration since the proof shows that the advertising accounts did not produce $100,000 and indicates that no excess was in fact anticipated when the assets were transferred.

The term “substantially all” is a relative term, dependent on the facts of any given situation. It is obvious that what might in one case, with a certain total of property involved, constitute substantially all of such property, might be but a small part of the total property involved in another case. In the present case a reading of the instrument in question leaves one with the impression that petitioner undertook to transfer substantially all of its properties. The evidence is that the agreement was substantially carried out and that thereafter petitioner had only “a few thousand dollars in real estate properties and some worthless bonds.” This was the testimony of one of the two owners of petitioner, who was also a party to the agreement. Giving this expression its normal meaning and considering the total amount of property involved, we have concluded and found as a fact that the new corporation acquired substantially all of the properties of petitioner. Accordingly the transaction constituted a “reorganization” under the definition contained in section 203 (h) (1) (A). It follows that the transaction falls under the provisions of section 203 (b) (3) and (e) (2) and gain is to be recognized in an amount not in excess of the sum of money and the fair market value of “such other property” received.

Of the consideration received by petitioner, the cash amounted to $41,058.56. The “other property” consisted of (1) 341 shares of the common capital stock of the Long Beach Press Building Co., (2) the assumption of petitioner’s accounts payable in the amount of $103,-662.65, and (3) the assumption of notes of two of petitioner’s stockholders in the sum of $100,000.

We have found as a fact from the evidence that the 1,600 shares of stock of the Press-Telegram Publishing Co. had a fair market value on September 1, 1924, of $230,000 and that the 341 shares of stock of the Long Beach Press Building Co. had no fair masket value on that date. As to the accounts assumed, it is contended by the respondent that in addition to the sum of $103,662.65 the petitioner’s note for $20,000 was also assumed by the Press-Telegram Publishing Co. This contention is not supported by the proof. Although such a note was specifically mentioned in the contract of August 27, 1924, on the record it must be concluded that this item was included in the sum of $78,913.34, which is designated as notes payable and which constitutes a portion of the sum of $103,662.65 previously mentioned. The last mentioned amount constituted part of the consideration received by petitioner.

Under the terms of the agreement, the Press-Telegram Publishing Co. assumed responsibility for the payment of notes of stockholders of the petitioner in the amount of $100,000. Petitioner’s counsel argues that it received nothing from such assumption and that this amount should not be included in the ascertainment of the consideration for its assets. This argument is not persuasive. The sum of $100,000 representing notes of petitioner’s stockholders, which were assumed, was clearly made a part of the consideration paid by the Press-Telegram Publishing Co., in the acquisition of petitioner’s newspaper and constituted a part of the consideration received by the petitioner. The record is almost bare of any evidence as to this item. It is not explained how the note came into existence or what interest petitioner had in it. Petitioner had the burden and opportunity of proving that the Commissioner erred. This it has failed to do. We are unable to say as a matter of law that the assumption of this note did not constitute gain to petitioner. Frank G. Warden, 23 B. T. A. 24.

In determining petitioner’s gain respondent found a basic value on March 1,1913, for the assets transferred by petitioner of $193,261.46. In so doing he made no allowance for petitioner’s library, circulation list, and good will. The evidence does not justify any revision of the values found by respondent for the several items included in his computation. We have found, however, that the fair market value on March 1, 1913, of petitioner’s library, circulation list, and good will which respondent omitted was $140,000. The sum of $140,000, therefore, should be added to the basic figure of $193,261.46 as determined by respondent, making a total of $333,261.46 as the March 1, 1913, basis for determining gain on the transfer on September 1, 1924.

The remaining issue involves a bad debt deduction. In the agreement of August 27, 1924, the petitioner guaranteed the accounts receivable which it transferred to the Press-Telegram Publishing Co. up to the amount of $106,000. Assuming that some of such accounts could not be collected, it at once set up on its boohs a reserve for bad debts in the amount of $42,808.34, and in the year 1924, charged against the reserve the sum of $10,671.96, representing the excess of the advertising accounts receivable over the $100,000 guaranteed and the amount to which the petitioner would have been entitled if all of the accounts could have been collected. In 1925 a further charge of $27,548.13 was made against the reserve. The whole amount of the reserve was deducted by the petitioner on its return and was disallowed in full by the respondent in his determination of the deficiency. The record shows that the accounting practice of the petitioner theretofore had been to charge off bad debts as and when worthlessness was ascertained and, further, that the excess of advertising accounts receivable over $100,000 was ascertained to be worthless in 1924. The deduction claimed by the petitioner is allowed as to the sum of $10,671.96, which was charged off in the taxable year.

Reviewed by the Board.

Decision will be entered under Rule 50.

TURNER,

dissenting: The petitioner rests its claim of reorganization on the allegation that substantially all of its assets were acquired by the Press-Telegram Publishing Co. within the meaning of clause (A) of section 203 (h) (1) of the Revenue Act of 1924. In my opinion, however, it has failed to prove that substantially all of its assets were so acquired. The essential facts, if known at all, are necessarily within the knowledge of petitioner, its officers, and stockholders, but the proof on this point is limited entirely to the statement of S. S. Conklin that the property retained consisted of “a few thousand dollars in real estate properties and some worthless bonds.” It is said that Conklin was one of the two owners of petitioner and was also a party to the agreement. From this it is inferred that it was competent for him to express an opinion as to value. While that may be true, it is also to be remembered that Conklin, being one of the parties in interest, is seeking to invoke one of the exempting clauses of the income tax statute to his own benefit. If he was sufficiently informed to determine the value of the real estate and bonds, it would have been a simple matter to have supplied the facts from which we could have formed an opinion as to whether the properties were substantial or negligible.

It is stated in the majority opinion that the “term ‘substantially all’ is a relative term, dependent on the facts of any given situation” and that “what might in one case, with a certain total of property involved, constitute substantially all of such property, might be a small part of the total property involved in another case.” With this statement I am heartily in accord. It gives the strongest support to the view here expressed, that the petitioner has not given us “facts” in this “given situation” which will show on which side of the equation this case falls. If the petitioner is to receive the benefit sought, which is the nonrecognition of the gain from the exchange of property, it has the burden and duty to give us sufficient facts to show that the transaction in question meets the test of the statute. “A few thousand dollars in real estate” is indefinite and that expression used by one individual and in connection with one transaction rather than another might well indicate a very substantial amount. We have no way of knowing what the situation would be in this case if we had the facts before us which the petitioner had the burden of presenting if it expected to prevail in its contention that substantially all of its properties were acquired by the Press-Telegram Publishing Co.

In my opinion, any finding in this case that substantially all of petitioner’s assets were acquired by the Press-Telegram Publishing Co. must be based entirely upon an assumption as toi what was in the mind of the witness rather than upon facts presented and from which a conclusion might be drawn.

McMaiioN and Leech; agree with this dissent.

       Sue. 203. (b) (3) No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.

       (e) If an exchange would be within the provisions of paragraph (3) of subdivision (b) if it were not for the fact that the property received in exchange consists not only of stock or securities permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then—
      *******
      (2) If the corporation receiving such other property or money does not distribute it in pursuance of the plan of reorganization, the gain, if any, to the corporation shall be recognized, but in an amount not in excess of the sum pf such money and the fair market value of such other property so received, which is not so distributed.

       Sec. 203. (b) (4) No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.

       Sec. 203. (d) (1) If an exchange would be within the provisions of paragraph (1), (2), or (4) of subdivision (b) if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.

       Sec. 203. (h) (1) The term “reorganization” means (A) a merger or consolidation {including the acquisition, by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (C) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.


source: Caselaw Access Project

author: Sternhagbn:

license: Public Domain

text:
    Thurlow E. McFall, Petitioner, v. Commissioner of Internal Revenue, Respondent. The Michigan Trust Company and Grace A. McGowan, Co-Executors of the Estate of Irvin E. McGowan, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 61951, 62127.
    Promulgated March 17, 1936.

      Frank E. Seidman, O. P. A., and Jacob S. Seidman, G. P. A., for the petitioners.

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

Sternhagbn:

The Commissioner first thought, when determining the deficiency, that what petitioners received from Clutter & Co. was by way of damages for a supposed breach of the contract of employment. But there is nothing to support such a hypothesis either as to breach or damage, and this contention is not now made.

The petitioners’ contention is that they sold their contracts in 1929, that the contracts were property, that they had owned the contracts since 1926, more than two years, and that the resulting gain, admitted to be $175,000 each, was a capital net gain under the Revenue Act of 1928, section 101, and not ordinary income. The Government argues, (1) that there is nothing to bring the 1929 transaction within section 101, Revenue Act of 1928, as a sale or exchange of capital assets, for there was no property transferred; (2) that there was only a termination by the parties of their contracts as a part of a wider plan, the effect of which was an anticipation by petitioners of their contractual compensation for services; and (3) if petitioners could be regarded as selling anything of their contracts, it was nothing they had held for two years but only a contingent right to receive compensation in the future.

The determination of deficiencies must, we think, be sustained. Petitioners did not sell their contracts, for inherently this they could not do. The contracts bound them to perform services of skill. Arkansas Valley Smelting Co. v. Belden Mining Co., 127 U. S. 379. Before they had any contractual rights which they could sell, they were obligated to perform services for the company. All past services had been fully paid for and there was no due and unpaid amount to constitute a chose in action subject to assignment. On April 2, 1929, there was a right of petitioners to continue to perform service and then to be paid — to persist in their contractual relation for its agreed term. While this right is property in the constitutional sense in that it could not be arbitrarily legislated away, it is not capital. Beals v. Commissioner, 82 Fed. (2d) 268. It is a continuing right which goes hand in hand with performance. Before performance it is in embryo, and after payment it is exhausted. Obviously it is not the sort of property which is susceptible of ownership for a length of time as is a share of stock, a bond, or a thing. If services were performed and payment withheld for two years thereafter, there might be another question. Cf. Chicago Title & Trust Co., Executor, 33 B. T. A. 65 (on review, C. C. A., 7th Cir.); Duluth, S. S. & A. Ry. Co v. Wilson, 200 Mich. 313; 167 N. W. 55.

There is, we think, no need to attempt a discussion of the various meanings in law of the word “property”, or to define the term as used in section 101. The purpose of the statute, whether it be liberal or strict, is not served by including within it the contractual expectation of receiving pay for services not yet performed. The petitioners argue that they are like a lessor having a lease more than two years old, for a term still to run, who “sells” his remaining leasehold interest — the right to rent — for a lump sum. But this does not help their case, for if the analogy holds good, such a transfer is of the right to what is to come; and, like this case, is not the basis of a statutory capital gain. Nothing owned for two years has been sold, but only a potential right to be paid contemporaneously with performance.

Holding, for this reason, that the amount received was not a statutory capital gain, it is not necessary to agree with respondent’s argument that petitioners were receiving in advance the pay which they would have received and for that reason the amount was ordinary income; or that petitioners were parties to a general plan to.readjust the business and this was the price to them of ending their contract, and not of selling it. Our decision is sufficiently founded, we think, upon the transactions as they were stated by the parties themselves. It may be, however, that the anomalous sale by petitioners of their rights in a personal contract which they had yet to perform, to another, not in position to perform it, for cash, straightens out in the subsequent treatment of the contract. For notwithstanding the legal forms which were employed or the artificial conception that the contract was sold for cash, ultimately the parties to it abrogated it in the full light of the earlier transactions. It is not, therefore, a stretch of reason to say that this is what, in a layman’s way, the petitioners had intended throughout their negotiations and agreement with Clutter & Co. to be understood as promising to do — to hold themselves bound, for a price, to terminate their employment contracts. Clearly, if the agreement with Clutter & Co. had been thus stated, the cash consideration received would have had no semblance of sale of property held for over two years.

Judgment will be entered for the respondent..


author: McMahon :

text:
    C. F. Martin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 61735.
    Promulgated March 17, 1936.

      Jay 0. Allen, Esq., for the petitioner.

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

McMahon :

This ⅛ a proceeding for the redetermination of a deficiency in income tax for the year 1929 in the amount of $3,588.74.

The issues raised by the pleadings, and our findings of fact and our opinion as to each, are set forth separately.

I.

It is alleged in the petition that the respondent erred in including the gain arising from a-building contract in the 1929 gross income of the petitioner.

Findings of Fact. — The petitioner for about 25 years was engaged in the general contracting business with his office in Seattle, Washington.

Under date of November 17, 1928, he entered into a written contract with the 45th & Brooklyn Investment Co., a corporation, hereinafter called the Investment Co., for the construction of “An 8 story and basement Office Building and 2 story and basement Annex”, hereinafter referred to as the Brooklyn Building. The contract provided that the work to be performed under the agreement should be commenced as soon as possible and should be “substantially completed” July 1, 1929, that the petitioner should receive for the performance of the contract, “subject to additions and deductions provided therein”, $350,000, payable as follows:

On or about the First day of each month Ninety (90) per cent of the value, based on the Contract prices, of labor and materials incorporated in the work and of materials suitably stored at the site thereof up to the-day of that month, as estimated by the Architect, less the aggregate of previous payments; and upon substantial completion of the entire work, a sum sufficient to increase the total payments to Ninety-five per cent of the contract price Three Hundred, Fifty Thousand Hollars ($350,000.00)
Payments to- be made by owner and accepted by Contractor as follows: $220,000.00 from loan funds and secured from the Seattle Title Trust Company — $90,000.00 as second mortgage or second mortgage bonds bearing 7% interest per annum, due and payable in five years — and the balance of $40,000.00 in preferred stock of said corporation issued by owner of a total issue of $80,000.00 and bearing interest at 7% per annum.
* * * Final payment shall be due 30 days after substantial completion of the wort provided the work be then fully completed and the Contract fully performed.
Upon receipt of written notice that the work is ready for final inspection and acceptance, the Architect shall promptly make such inspection, and when he finds the work acceptable under the Contract and the contract fully performed he shall promptly issue a final certificate, over his signature, stating that the work provided for in this Contract has been completed and is accepted by him under the terms and conditions thereof, and that the entire balance found to be due the Contractor, and noted in said final certificate, is due and payable.
Before issuance of final certificate the Contractor shall submit evidence satisfactory to the Architect that all payrolls, material bills, and other indebtedness connected with the work has been paid.
If after the work has been substantially completed, full completion thereof is materially delayed through no fault of the Contractor, and the Architect so certifies, the Owner shall, upon certificate of the Architect, and without terminating the Contract, make payment of the balance due for that portion of the work fully completed and accepted. Such payment shall be made under the terms and conditions governing final payment, except that it shall not constitute a waiver of claims.

The Seattle Title Trust Co. held the first mortgage on the Brooklyn Building in the principal amount of $250,000 and payments of a part of the contract price were paid by it on approval of the architect. Before the building was completed, the Investment Co. was unable to meet its obligations, and the Seattle Title Trust Co. informed the petitioner that the Investment Co. was delinquent in payments required to be made under the mortgage, such as taxes and interest, and that it would proceed to foreclose the mortgage immediately. In October 1929, the Brooklyn Building was sold to the Metropolitan Building Co., which company at that time purchased the second mortgage on the Brooklyn Building in the principal sum of $90,000, from the petitioner.

It was the practice of petitioner to report gain or loss on construction contracts in his income tax returns upon the completed contract basis. The books of account of petitioner were kept and his income tax returns were made on an accrual basis. The Brooklyn Building contract was closed on the books and reflected in profit and loss therein as of January 31, 1930, and reported in the 1930 income tax of petitioner.

The contract heretofore described was not completed in 1929.

Opinion. — No question was raised as to the correctness of the respondent’s computation of the amount of the gain realized on such contract. The only question to be determined on this issue is whether the contract was completed in 1929 as determined by the respondent so as to require the return in 1929 of the gain realized therefrom.

The petitioner and his accountant both testified that it had been the practice of petitioner to report gains or losses on construction or building contracts on the completed contract basis, that the Brooklyn Building contract was not completed until 1930, and that the gain thereof was reported in the petitioner’s 1930 income tax return.

The Brooklyn Building contract is a long-term contract within the definition contained in article 334 of Regulations 71, and, being such, the petitioner is entitled, under the provisions of that article, to return the profit thereof in the year the contract is completed. R. G. Bent Co., 26 B. T. A. 1369.

On brief the respondent concedes that some work was done on the building during 1930, but does not concede that the work in 1930 was work required under the contract in evidence, and contends that the work done on the building in 1930 was entirely in the nature of extra work.

It appears from the evidence that, after the petitioner commenced the construction of the Brooklyn Building and before it was completed, the Investment Co. was unable to meet its obligations, that the holder of the first mortgage threatened foreclosure, and that the petitioner, to protect his interest in such contract and his second mortgage on the building, brought about the sale of the building to the Metropolitan Building Co. The testimony of the petitioner, of the sheet metal and roofing subcontractor, together with one of his employees, the ornamental iron subcontractor, to which subcontractors the petitioner had sublet the sheet metal and ornamental iron work on the Brooklyn Building, respectively, and also of three employees of the petitioner, is to the effect that the Brooklyn Building was not completed until February or March of 1930, that, while some of the work done during 1930 was in the nature of repair and replacement, the work done during 1930 was substantial and not the usual gathering up of loose ends about a completed building; and all of the work was done in fulfillment of the contract and such contracts thereunder. The evidence shows that this work included the installation of vents, in which dampers with fusible links for fire protection had to be installed; attaching expansion bolts in the coping on the two-story annex; putting the mitres around the penthouse; completing and finishing the fire escapes, including the attaching of parapet ladders and railing; installing fireproof doors and a gate in the main entrance; affixing various hardware and also plates for the electrical work; reraking the gravel on the roof and removing considerable gravel therefrom; and various other work. It appears from the testimony that considerable work necessary to the construction of the building was done in 1930 and was subject to the approval of an inspector of the Metropolitan Co. The petitioner testified that he received some payments in 1929, and in the early part of January 1930, that he could not remember what payments he received in 1929, but that all the payments were entered in his books. The accountant had the books with him at the hearing and testified, in part, from them that the amount of $408,477.28 shown as the.gross income of petitioner’s business in schedule A of the 1930 income tax return represented “all the entries of receipts for three years” on the Brooklyn Building contract and the Le Sourd contract, and that both were completed in 1930. The completion of the Le Sourd contract in 1930 is not in question here. The Brooklyn Building contract was entered into in 1928, and since the entries for receipts covered three years, some payment or payments were entered in 1930. As provided in the contract the last payment thereunder was due 30 days after substantial completion provided “the work be then fully completed and the Contract fully performed”, which was to be evidenced by the issuance of a final certificate of the architect upon his final inspection and acceptance of the work. Hence, under the general contract itself, final payment was to be made only upon full completion of the contract, final inspection, and acceptance. While we do not know the details of the arrangements made with the Metropolitan Building Co., it does appear, as heretofore stated, that they purchased the building before it was completed and that the work was subject to the approval of its inspector. The construction manager of petitioner at the time, who left the employ of petitioner at the end of February 1930 to go into business for himself, testified that in 1930 he tried to wind up the different subcontracts on this building, endeavored to get “final acceptance from the new owners” and to “see that they were satisfied and that they would release us.” The form of contract or contracts entered into between the Metropolitan Building 'Co., the Investment Co., and the petitioner at the time the contract and building were taken over by the Metropolitan Building Co. is not disclosed by the evidence. However, it is conceded on brief by respondent that “there is ample justification for believing there was some sort of an agreement.” The inference that such agreement grew out of the original general contract and the failure of one of the original parties thereto' to meet its obligations thereunder is unavoidable. It appears from the evidence the Metropolitan Building Co. was in effect substituted under' the contract for the Investment Co. Furthermore, contracts of such a character are apt not to be completed without some change in the details. Such changes in the details are merely modifications or amendments of the original contract and as such are a part of the original contract as changed and necessarily have to be complied with in order to complete the contract as amended. Furthermore, the contract provides that the contract price of $350,000 is “subject to additions and deductions provided therein” indicating that probable modifications thereof were contemplated.

In computing the gain on this transaction it appears that the respondent took into consideration the receipt by the petitioner from the Metropolitan Building Co. of a leasehold interest in the realty valued at $74,000 in consideration of the satisfaction and discharge of his second mortgage of $90,000 and also the substitution of short notes in the amount of $42,000 for the deferred payments in the amount of $47,000 provided for in the agreement covering the leasehold interest. It seems to us that if the transactions and agreements between the Metropolitan Building Co. growing out of the original contract are to be recognized for the purpose of determining the gain realized by the petitioner from the original contract, the subsequent agreements and transactions in modification thereof, as to the construction and completion of the building as disclosed by the evidence, should also be recognized. It appears from the evidence that substantial work was done on the building in 1930 and that the Metropolitan Building Co. had not accepted and approved of all the work in 1929. Upon the whole record, therefore, we have found as a fact and now hold that the Brooklyn Building contract was not completed in 1929; hence the gain realized therefrom by the petitioner is not properly includable in his taxable income for 1929. The action of the respondent in this respect is disapproved. The respondent, on brief, contends that the petitioner has failed to overcome the presumption of the correctness of his determination and directs attention to the fact that the petitioner’s books were available at the hearing but were not placed in evidence. It appears from the record that the accountant who prepared the petitioner’s returns for 1929 and 1930 and kept the books had the books before him as he testified. He testified that the contract was completed in the spring of 1930, that he made the closing entries therein as of January 31, 1930, and that the contract was not finished at the time but nothing that would be done would be any expense to petitioner or any cost, so it was closed. It seems to us that if the books failed to substantiate the testimony of petitioner and his accountant and showed that no payments on this contract were entered therein in 1930, it was encumbent upon counsel for respondent to offer them in evidence, and having failed to avail himself of such opportunity he is not now in a position to contend that “the record as made is sadly lacking of proof sufficient to overcome the Commissioner’s presumption of correctness.”

II.

It is alleged in the petition that, in the event that the gain realized from the Brooklyn Building contract is held to be properly returnable in 1929, the commission in the amount of $10,000 should be allowed as a deduction in 1929, as the judgment therefor was inherent in and arose out of such contract.

Findings of Fact. — George C. Lemke, J. E. Dalk, and T. F. Adams claimed that the sale of the Brooklyn Building to the Metropolitan Building Co. was made through their efforts upon agreement with the petitioner and demanded a commission therefor of the petitioner which he refused to pay. This agreement was separate from the construction contract as modified in question here. Suit was brought against the petitioner in February 1930 to recover the claimed commission, which he contested. After a hearing, judgment was entered December 23, 1930, against the petitioner in the sum of $10,000, together with interest from October 15, 1929, until paid, and for costs and disbursements in the amount of $123.20, which judgment was paid in 1930.

Opinion. — Since we have held that the gain realized from the construction contract here involved was not includable in petitioner’s 1929 income, it is not necessary for us to consider this question; but see Lucas v. American Code Co., 280 U. S. 445; Consolidated Tea Co., 19 Fed. (2d) 382; Lehigh & Hudson River Railway Co., 13 B. T. A. 1154; affd., Lehigh & Hudson River Railway Co. v. Commissioner, 38 Fed. (2d) 1015; certiorari denied, 281 U. S. 748.

III.

The next question to be determined is whether the respondent erred in increasing the 1929 gross income by petitioner by adding thereto three items in the amount of $858, $37.50, and $67.81.

Findings of Fact. — Left-over lumber and other materials were stored in petitioner’s warehouse. Each year an inventory was taken of the material which was considered salable. Some of such material was sold occasionally or withdrawn and used on jobs. On the so-called Lyndale Apartment job some of such material was withdrawn from the warehouse, and included in cost of construc-lion thereof. In computing profit from sales the respondent disallowed the items here in question as a part of construction cost, or cost of material sold, and thereby increased taxable income by the following items referred to as: Lyndale Apartments — $858, Sale to Turtellette-Bradley, Inc., $37.50, and Le Sourd Apartments — $67.81.

Opinion. — The petitioner contends that the items of $858, $37.50, and $67.81 represent items of building cost and material withdrawn from petitioner’s warehouse and do not represent profit. The revenue agent’s report discloses that the amount of $858 was disallowed as a part of the construction cost in computing the profit on the sale in 1920 of the Lyndale Apartments. The other two items represent either sales of material or deliveries to jobs in progress of construction. The evidence pertaining to these items is very unsatisfactory, it appearing therefrom in substance that the petitioner withdrew from his warehouse left-over materials either for purpose of sale or use on jobs in progress at the “going” prices. If we may assume from the term “left-over” that these materials were materials not used on prior jobs, there is no testimony to show whether these materials were credited on such jobs and actually paid for by the petitioner or whether he acquired them at no cost to himself. The burden of proof rests upon him. As we are unable to find from the evidence presented that the respondent erred in this respect we must approve his action in restoring such items to taxable income.

IY.

The last question to be determined is whether the respondent, in computing the gain realized on the sale of a launch, erred in reducing the cost basis by deducting therefrom depreciation in the amount of $728.57.

Findings of Fact. — The petitioner took in a boat on a trade. The boat was not used except on one trip, to test the engine. It was decided that the boat needed a new clutch, new planking above the water line, caulking, and painting. The boat was rebuilt and sold.

Opinion. — The petitioner contends that the cost basis of the boat sold should not be decreased by the deduction of depreciation. It appears from the statement attached to the notice of deficiency that the respondent added to income reported on return $182.14, representing “Gain on sale of launch.”

Section 111 of the Revenue Act of 1928 provides that in determining the gain or loss from the sale or other disposition of property, the basis “shall be diminished by the amount of the deductions for exhaustion, wear and tear, obsolescence, amortization, and depletion which have since the acquisition of the property teen allowable in respect of such property under this Act or prior income tax laws.” (Emphasis supplied.) Section 23 (k) of the same act provides that in computing net income there shall be allowed as a deduction a reasonable allowance for the exhaustion, wear and tear “of property-used in the trade or business.” The boat was not used in the petitioner’s trade or business or for his pleasure. The uncontradicted testimony of petitioner is that such boat was not used at all except for testing purposes, that it needed considerable repairs, that it was repaired or rebuilt, and then sold. Under the circumstances, no depreciation would have been allowable on such boat under section 23 (k), supra, and hence the basis should not be diminished by any depreciation in computing loss or gain on the sale thereof under section 111, supra. J. A. Talbot, 23 B. T. A. 792; Marjorie G. Randall, 27 B. T. A. 475. There is no dispute about the cost basis or sale price of such boat as used by the respondent in his computation. The action of the respondent in adjusting the basis by the deduction of depreciation is not approved and accordingly, the gain or loss on the sale of this boat will be recomputed under Bule 50 without such adjustment.

Decision will be entered under Rule 50.

      Ajit. 334. Long-term contracts. — Income from long-term contracts is taxable for the period in which the income is determined, such determination depending upon the nature and terms of the particular contract. As used herein the term “long-term contracts” means building, installation, or construction contracts covering a period in excess of one year. Persons whose income is derived in whole or in part from such contracts may, as to such income, prepare their returns upon the following bases:
      ***** *
      (b) Gross income may be reported in the taxable year in which the contract is finally completed and accepted if the taxpayer elects as a consistent practice so to treat such income, provided such method clearly reflects the net income. If this method is adopted there should be deducted from gross income all expenditures during the life of the contract which are properly allocated thereto, taking into consideration any material and supplies charged to the work under the contract but remaining on hand at the time of completion.


author: McMahon:

text:
    National Bank of Commerce and Norris Building Company, Successor Trustees of the Trust Created Under the Deed of Trust Bearing Date of March 24, 1906, By and Between the Trustee Company and the Washington Trust Company of Seattle, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 64761, 66836.
    Promulgated March 17, 1936.

      H. B. Jones, Esq., for the petitioner.

      Elden McFarland, Esq., and S. B. Anderson, Esq., for the respondent.
   OPINION.

McMahon:

These proceedings, duly consolidated for hearing and decision, are for the redetermination of deficiencies in income taxes in the amounts of $935.34 and $366.18 for the years 1929 and 1930, respectively.

Under date of March 24, 1906, the Trustee Co., a Washington corporation, of Seattle, Washington, entered into a “Deed of Trust” with the Washington Trust Co. of Seattle, a Washington corporation, which agreement (petitioner’s Exhibit No. 1) is made a part of these findings of fact by reference. Under the deed of trust, the Trustee Co., as owner of the property therein fully described and designated as “Trustee Property No. 4”, conveyed the same to the Washington Trust Co. and to its successors and assigns in trust “for the purpose of creating a Trust to sell the property * * * and apply the proceeds in accordance with this Deed of Trust, and for the purpose of creating Units to represent income and proceeds of said property * * *, and for the purpose of securing the performance and accomplishment of all and singular the things mentioned * * * to be done or accomplished”, all as set forth in the deed of trust, subject to all the rights, interests, and powers reserved therein to the Trustee Co. and to the trusts therein declared by it and assumed on its part, and to the rights, interests, and powers herein reserved or granted to the “Investment Bond Owners and their successors”, and to the powers and trusts of the Washington Trust Co., therein granted and imposed, all such reservations, trusts, and powers being subject to such limitations and conditions as thereinafter expressed or implied, “all subject, however, to the Trust to sell said property and apply the proceeds thereof as hereinafter set forth, such trust to sell and apply proceeds being paramount to all other provisions of this instrument.” The deed of trust, in substance, further provided for and created 330 “equal Units” represented by 330 “Business Property Investment-Bonds”, each representing one unit, with coupons attached covering a period of five years from date, providing for the payment of “quarterly dividends” and “annual surplus dividend” during such period, the terms of the investment bonds and coupons to be substantially as set forth in the deed of trust. The investment bonds were transferable by delivery unless registered in the name of the holder by entry in the books of the Trustee Co. or a duly qualified registry agent. The Trustee Co. in substance therein agreed, among other things, to manage, care for, and preserve the property with care and prudence according to its best judgment; to keep the same insured, such insurance to be made payable to the Washington Trust Co.; to collect all rents and earnings, distribute, and pay the same in the following order of priority: (a) Expenses of insurance, taxes, special assessments, operating expenses and repairs, (b) quarterly dividends up to $12.50 per quarter on each unit outstanding, (c) annual surplus dividend or net income remaining after payment of expenses and quarterly dividends, two thirds of which to be paid pro rata on the 10th of December of each year to the owners of the units then outstanding and one third thereof to the Trustee Co.; to keep accounts of the property and the investment bond register separate and apart from all others and at any time permit any investment bond owner or the Washington Trust Co. to examine the same; and to mail annual statements of earnings and expenses of the property to the investment bond owners. The deed of trust further provides in substance that the Trustee Co. shall have the sole power to manage, lease, and operate the property; that the Trustee Co. upon the written approval of the Washington Trust Co. and 51 percent of the units outstanding may add to such property and make improvements thereon and issue and sell additional investment bonds at the rate of $1000 per unit to provide the funds therefor, all as more particularly provided for in such deed of trust; that the Washington Trust Co. and the Trustee Co. shall jointly have irrevocable power to sell and convey the property “at such time, in such manner, for such consideration and upon such terms, as they shall deem best, such consideration to be paid to the Washington Trust Company alone”, the sale not to be complete nor shall a conveyance under any such sale be made until the owners of the investment bond representing not less than 51 percent of the units outstanding shall file their written approval thereof and deposit with the Washington Trust Co. not less than 51 percent) of such units for cancellation and payment; that not less than 67 percent of the units outstanding may at any time direct the Washington Trust Co. and the Trustee Co. to sell the property as provided in the deed of trust; that the Washington Trust Co. “must sell the property as an entirety in one lot or parcel prior to the termination of the existence of the Trustee Company, but not more than one year prior thereto, for such price, upon such terms and in such manner as said Washington Trust Company shall deem best, such powers to be exercised by the Washington Trust Company alone”; that the Washington Trust Co. or the Trustee Co. shall not either jointly or separately mortgage the property; that no assessments shall ever be made upon any unit or investment bond owner for any purpose and no investment bond owner shall ever be or become liable personally in relation to any matters pertaining to the trust; that the Washington Trust Co. may resign or be removed by not less than 75 percent of the units and a successor thereto may be appointed by not less than 51 percent of the units; that the Trustee Co. may be removed and a successor appointed by not less than 67 percent of the units; that the Washington Trust Co. or its successor shall be liable only for a willful breach of trust; and that the Trustee Co. and its successors shall be liable only for the exercise of reasonable care and shall not be liable for the consequences of any act, omission, or default of any agent or attorney selected by it with reasonable care.

Subsequent to the creation of such trust the Washington Trust Co. was succeeded as trustee under the above deed of trust by Dexter Horton Trust & Savings Bank, a Washington corporation, which was succeeded in or about February 1914 by the Northwest Trust & Safe Deposit Co., a Washington corporation, which changed its name to Northwest Trust & State Bank, and sold and transferred all its assets to the Marine National Bank of Seattle, a Washington corporation, which thereafter merged with the National Bank of Commerce, created and existing under the laws of the United States, which has ever since been and now is the trustee under the above deed of trust.

Under date of December 5, 1912, the Trustee Co. conveyed to the Norris Building Co., a Washington corporation, all its right, title, and interest in and to the property described in the above trust deed and designated as “Trustee Property No. 4” subject to the above deed of trust, and the Norris Building Co. thereupon succeeded the Trustee Co. under the deed of trust in the management and operation of this property.

The Norris Building Co. in 1912 had acquired 51 percent of the outstanding units. In 1929 and 1930 it owned 265.9 units of Trustee Property No. 4 and the Norris Safe & Lock Co. owned 56.8 units out of a total of 330 outstanding units. Both of these corporations were owned by William G. Norris, principal stockholder and president of both of them. There were about six or eight other unit holders.

The property described in the deed of trust xvas located in the city of Seattle, Washington, and had a frontage of 120 feet on Third Avenue South, a frontage of 204.77 feet on Washington Street, and a frontage of 142.46 feet on Prefontaine Place. The building thereon was a three-story concrete building with a basement under a small part of it. The building was named “The Exchange Building.” Since 1912, the Norris Building Co., through William G. Norris, managed at its ofhce the property here involved. It secured the tenants and made the leases. The number of tenants varied from year to year. Although there are only a few tenants in the building now, there have been a considerable number in the past. The Norris Building Co. has collected the rents since 1912, paid all the expenses, and made distribution of the net income to the unit holders. It kept separate books of account for such property and a list of the unit holders. It also kept a separate bank account in the name of “Norris Building Co. Trustee” with the National Bank of Commerce, in which the rents or income from the property were deposited, and against which checks were drawn for the payment of taxes and all other expenses. The Norris Building Co. carried its own bank account in the First National Bank. The principal place of business of the trust is Norris Building Co., 114 Third Avenue South, Seattle, Washington.

The National Bank of Commerce merely held title to the property and took no part in the management or operation of the property.

The trust created by such deed of trust was in 1929 and 1930 an association taxable as a corporation.

The notices of deficiency were addressed to “Trustee Property #4, % Norris Building Co., 114 Third Avenue South, Seattle, Washington.” In the original petitions filed with the Board the petitioner is designated therein as “Trustee Property #4.” In such petitions it is alleged that the petitioner is a trust under the trust agreement of March 24, 1906. The petitions were verified by W. G. Norris, and it is stated in the verifications that W. G. Norris is the president of Norris Building Co., a Washington corporation, that such company is the manager of Trustee Property #4, the petitioner, that by reason of such relationship he is more closely associated with the affairs of the petitioner than any other individual, and that he is authorized to make the verification. The respondent moved for the dismissal of the petitions filed herein for the reason that they did not conform to Rule 5 (g) of the rules of the Board in that the petitions were verified by W. G. Norris, president of the Norris Building Co., and failed to show that the Norris Building Co. had been substituted as a fiduciary in the place of the original trustee under the deed of trust by virtue of which the petitioner was created a trust. Upon motion of petitioner to amend its petitions, the respondent’s motions to dismiss were denied and the petitioner was granted leave to file amended petitions. Amended petitions were filed. Therein the petitioner was designated as “Trustee Property #4”, and the petitions were verified by R. W. Sprague as trust officer of the National Bank of Commerce, a corporation organized and existing under the laws of the United States, the successor trustee referred to in the amended petitions, and states that as such trust officer he was authorized to verify them. The amended petitions in substance allege that the petitioner is a trust created under the deed of trust and that the National Bank of Commerce is the successor in trust of the Washington Trust Co.

Upon the foregoing facts, which we find, two questions are presented by the record. Although the parties seem to- agree that the only question to be determined herein, as between them, is whether the petitioner was, in the years in question, an association taxable as a corporation, the question of the Board’s jurisdiction was suggested by the parties upon the hearing. Both parties on brief maintain that the Board has jurisdiction. As jurisdiction can not be conferred on the Board by the consent of the parties, Accessories Manufacturing Co., 12 B. T. A. 467, it is necessary therefore, before considering the second question, to consider the question of our jurisdiction.

The deed of trust created a trust but it did not expressly provide a name therefor. It did, however, expressly designate the property conveyed in trust as “Trustee Property No. 4.” The notices of deficiency addressed to Trustee Property #4 were received at the office of the Norris Building Co., the active trustee, where all the affairs of the trust were taken care of. No one was misled thereby. The record clearly shows that it was understood, by all parties, that the notices of deficiency dealt with the liability of the trust created by the deed of trust for income taxes. While not so expressly designated, both the Trustee Co. and the Washington Trust Co. of Seattle became trustees under the deed of trust, the former in effect the active or managing trustee in general and the latter the passive or holding trustee, as conceded in petitioner’s brief. The National Bank of Commerce and the Norris Building Co. succeeded the original trustees, the former as holding trustee and the latter as active or managing trustee. The original petitions were verified by W. G. Norris, who managed the business and affairs of the trust as an officer of the Norris Building Co. The amended petitions were verified by B. W. Sprague, who, as officer or employee of the National Bank of Commerce or its predecessor in trust, had charge for it of the trust since 1918 in so far as action on its part was required under the deed of trust. Both appeared as witnesses and testified in behalf of the petitioner. There was no question on the part of anyone as to who the taxpayer was or would be if the Board approved the determination of the respondent.

In Commissioner v. New York Trust Co., 54 Fed. (2d) 463; certiorari denied, 285 U. S. 556, the court stated that “the taxpayer”, as referred to in the taxing statutes, has not a narrow or restricted meaning and that where the notice of deficiency, although addressed to a beneficiary, a minor, in care of a trustee, was received by the trustee and it apparently was fully understood as referring to the liability of the trust company as trustee, the method of addressing the notice of deficiency was a harmless error on the part of respondent where no one was misled by such method. It has been held by the Board that, where the person filing the petition has actual authority to represent the taxpayer against whom the deficiency has been determined and no one has been misled as to the liability asserted, the Board has jurisdiction even though the proceedings were instituted by persons other than those whose names appear in the notices of deficiency. Corinne Porter Scruggs, Administratrix, 29 B. T. A. 1102, and cases cited. See also Edwin W. Eisendrath et al., Executors, 28 B. T. A. 744. In Bankers Realty Syndicate 20 B. T. A. 612, the Board held that the right of a taxpayer who has received a notice of deficiency to file his petition with the Board should not be defeated by reason of an improper caption, where, reading the petition as a whole, it is clear that it is the taxpayer who has petitioned. It is obvious here that the National Bank of Commerce and the Norris Building Co., or It. W. Sprague and W. G. Norris, representatives thereof respectively, understood that the designation, Trustee Property #4, embraced the trust created under the deed of trust,, and that in instituting these proceedings they did so as officers of the trustees of such trust. The method of addressing the trust employed by respondent and the caption used in the petitions are harmless errors. The latter is subject to correction under our Bule 37 and has accordingly been corrected.

Whether both trustees should have either signed or verified the amended petitions need not be considered since it has been held that the verification of a petition is not a matter of jurisdiction. Gibson Amusement Co., 22 B. T. A. 1212; Monitor Amusement Co., 22 B. T. A. 1214; Burnet v. First National Bank of Fresno, 46 Fed. (2d) 631.

We hold that the Board has jurisdiction of the instant proceedings.

The second question to be considered is whether the trust in question is an association taxable as a corporation. The evidence discloses that no meetings of the certificate or unit holders were held, that the trust was without official name, that it kept no books in its own name, carried no bank account in its own name, had no employees and no officers, and carried on no business activities of any kind as a separate organization in corporate form. In Helvering v. Combs, 296 U. S. 365, wherein a similar question was involved, the United States Supreme Court held that, although the beneficiaries held no meetings and the trust had no office or place of business, no seal, bylaws, or official name, and the operations of the trustees were confined to the one lease they acquired, the trust therein involved was an association taxable as a corporation. In Swanson v. Commissioner, 296 U. S. 362, the United States Supreme Court held that the trust there involved constituted an association notwithstanding that the management and entire operation of the trust property, consisting of an apartment building, was committed to a firm engaged in the real estate business, which transacted all the business for the trustees or trust, including the distribution of the income to the beneficiaries. Here it is apparent that the plan set forth in the deed of trust was to provide a “medium for the conduct of a business and sharing its gains” and as such medium the trust created thereby constituted an association taxable as a corporation. Morrissey v. Commissioner, 296 U. S. 344; Helvering v. Coleman-Gilbert Associates, 296 U. S. 369; Helvering v. Combs, supra; and Swanson v. Commissioner, supra.

While the trust deed provides that the “trust to sell and apply proceeds being paramount to all other provisions of this instrument”, the trust in fact was not a mere liquidating trust as in Dolese & Shepherd Co., Syndicate No. 3, 30 B. T. A. 1171, cited by petitioner. There is no evidence that any attempts were made to sell the property from the time of the creation of the trust in 1906 to 1929 and 1930, the years involved herein. R. W. Sprague, who had charge of the trust as an officer of the National Bank of Commerce or its predecessor in trust since 1918 and was somewhat familiar with such trust prior to that time through clerical work, testified that he had made no effort to sell the property and that he did not know of any efforts at all having been made by anyone to sell the property. As stated in Gardiner v. United States, 49 Fed. (2d) 992, “the crucial test must be found in what the trustees actually do, and not in the mere existence of long unused broad powers” under the trust instrument.

We conclude that the petitioner was an association taxable as a corporation in the years here involved and the determination of the respondent is therefore approved.

Decision will be entered for the respondent.


author: Seawell:

text:
    The Christian Ganahl Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 66488.
    Promulgated March 18, 1936.

      Claude I. Pa/rher, Esg., John B. Millilcen, Esq., and Llewellyn A. Luce, Esq., for the petitioner.

      Eugene G. Smith, Esq., for the respondent.
   OPINION.

Seawell:

This proceeding concerns a deficiency of $9,980.69 in income tax of the petitioner for 1929. The facts were stipulated and briefly stated are as follows:

The petitioner, a California corporation, owned four lots in the city of Los Angeles, two of which,' known as lots B and C, fronted on Grand Avenue, and the remaining lots, known as lots D and E, which were adjoining and considered as one lot, had a frontage on Washington Street and adjoined the rear of lots B and C.

In 1926, pursuant to ordinances adopted by it, the city of Los Angeles instituted court proceedings under the “Street Opening Act of 1903,” California Statutes, 1903, p. 376, to condemn a strip 79.86 feet wide, on the east side of lot D and the west side of lot E, including improvements thereon, as part of a street extension project. In 1927 the court rendered an interlocutory judgment in which it awarded damages to the petitioner in the amount of $206,280.13, of which $148,864.54 was for land, $32,663 for buildings, and $24,752.59 for severance damages. As part of the condemnation proceedings and under authority of the same state statute, the city of Los Angeles levied assessments totaling $75,413.93 against the four lots, as follows:

Lot D_$10,149. 30
Lot E__ 41,075.62
Lots B and C__ 24,189.01
75,413. 93

The assessments were made entirely for the payment of the property condemned and became a lien upon the petitioner’s property. The petitioner satisfied the assessments in 1928 by giving the city of Los Angeles receipts for payments on the awards equal to the amount of the assessments. In January 1929 the petitioner received the remainder of $130,866.20 of the awards from the city of Los Angeles.

In its income tax return for 1929 the petitioner reported taxable gain of $31,147.99 from the condemnation by deducting from the net award of $130,866.20 (gross awards, less special assessments) a basis of $88,318.21 for the land and $11,400 for the buildings. In his determination of the deficiency the respondent increased the gain to $127,823.24. He reached the amount by deducting from the awards, aggregating $181,527.54 for the land and buildings, a basis of $53,704.30, $42,304.30 for the land and $11,400 for the buildings.

The parties are agreed that both used an erroneous cost basis for the land. It is stipulated that the correct combined cost basis of lots D and E is $118,767.86, of which 51.1923 percent, or $60,800, is the basis of the portion taken. The buildings condemned had a cost basis of $11,400.

The tax of $4,295.93 shown to be due in the petitioner’s return for 1929 was paid within three years prior to the filing of the petition with the Board.

On brief the parties insist that their respective methods for determining the taxable gain, with an adjustment for the correct cost basis of the land, are correct. None of the cases decided by this Board or the courts appear to approve the computation used by the petitioner. The method employed by the respondent is in accordance with his rulings, which have been indirectly approved by this Board. I. T. 2599, X-2 C. B. 170; G. C. M. 12632, XIII-1 C. B. 104; G. C. M. 12657, XIII-1 C. B. 80; L. H. Wolf, 29 B. T. A. 702.

The methods proposed by the respective parties and the results they produce are shown in the following tabulation:

It will be observed that under the petitioner’s computation the special assessments levied against all of its property in the assessment district is recovered by deducting it from the awards. The same result would have been reached by adding the amount to the cost of the land taken. It also treats the severance damages as an amount realized from a disposition of the property condemned. The respondent does not take into the reckoning the special assessments or the severance damages. He regards the former as an additional investment in the land remaining and the latter as a partial recovery of the basis of the portion of lots D and E not condemned.

It has been held that, where special assessments are offset against an award for land taken under condemnation proceedings, the whole award should be regarded as having been received by the property owner. Carrano v. Commissioner, 70 Fed. (2d) 319, reversing a memorandum opinion of this Board on other grounds. A like conclusion was reached by us in Washington Market Co., 25 B. T. A. 576, where money was withheld to satisfy bonds, taxes, and other liens against the property.

Special assessments of the kind involved here are levied against property in a district upon the theory that the property charged is enhanced in value, “the enhancement of value being the consideration for the charge, * * Illinois Central Railroad Co. v. Decatur, 147 U. S. 190. Assessments of this nature are not deductible from gross income. Sec. 23 (c) (3), Revenue Act of 1928; Caldwell Milling Co., 3 B. T. A. 1232; Carrano v. Commissioner, supra. They constitute an additional investment in the property assessed. Champion Coated Paper Co., 10 B. T. A. 433. See F. M. Hubbell Son & Co., 19 B. T. A. 612; aff'd., 61 Fed. (2d) 644; certiorari denied, 284 U. S. 664. The regulations promulgated under acts prior to the 1928 Act classified assessments for local benefits as “in the nature of capital expenditures.” Art. 133, Regulations 45, 62, 65, and 69. Regulations 74, covering the 1928 Act, omit the classification. Art 153.

In the Carrano case, supra, there was an award for severance damages, but the record did not disclose the amount thereof. No figures were available from which the basis for the whole tract could be apportioned between the part taken and the part remaining. The special assessment levied against the remaining part of the parcel condemned was offset against the awards, as here, and the difference was paid to the landowner. The court regarded the special assessment as having been paid before the awards, and computed the gain by deducting the original basis for the whole parcel, increased by the amount of the special assessment, from the awards, including the one made for severance damages. This left no basis for the remaining portion of the lot, with the result that if the property were ever sold, the entire selling price would represent taxable gain. Under the prevailing facts no other course was open to the court.

In L. E. Wolf, supra, awards were made for improvements, land taken, and severance damages to the remaining parcel. A special assessment was levied against the portion of the lot not taken. The evidence did not disclose whether Wolf had other property in the assessment district. No gain was realized from the disposition of the improvements. The Commissioner computed the gain on the part taken by the same method he used here, namely, by deducting from the award for the land taken the cost of such portion plus attorneys’ fees incurred in the transaction. The question submitted to the Board was the narrow one of whether or not there was a closed transaction. On appeal the Circuit Court of Appeals held that “it is clear that the entire proceeding for the opening of a street is one proceeding and the result should be treated as an entirety.” 77 Fed. (2d) 455. The special assessment made against the portion of the parcel not taken exceeded the awards by $831.60, which the landowner paid the city, and consequently there was no taxable gain under the court’s decision.

Several obstacles stand in the way of accepting the petitioner’s method of computing the profit. It completely ignores the rule that the whole of the amount awarded for property seized under condemnation proceedings is to be considered as received even though a lesser amount is actually received because of an offset for an assessment levied to pay the cost of the property condemned. The just compensation which the petitioner was entitled to receive under the eminent domain proceedings was the value of the land and improvements taken, plus damage to the land not taken. City of Los Angeles v. Oliver, 102 Cal. App. 299; 283 Pac. 298. The amount thus established is entered as a judgment in favor of the property owner. Secs. 12 and 31, Street Opening Act, 1903. The property owner may pay any special assessment levied against his land by offsetting it against the award. Such a procedure, however, does not reduce the amount of the award; it merely operates to satisfy the assessment and reduce a liability of the city. Sec. 21.

While not contesting the receipt of benefits equal in value to the amount of the assessments, the petitioner determines the gain without regard to enhancement of value of the property assessed. In the absence of any evidence on the point we are justified in assuming that the petitioner received a consideration for the assessments equal in value to the amount of the charges. The computation also treats the severance damages as recovery for the land taken. Such award has no direct relation to the one made for the portion of the lot taken. It constitutes damages sustained by reason of the taking of another part of the lot, for which just compensation was allowed. Inclusion of the severance damages in the reckoning increases the gain and indirectly results in a tax on property not disposed of.

The parties are in agreement that only the basis for the land actually taken should be recovered. With this we agree. We have frequently held that where a large tract is acquired to divide into lots and is subsequently divided, the basis for the land should be allocated to the several parcels on an equitable basis. J. S. Cullinan, 5 B. T. A. 996; Thomas J. Avery, 11 B. T. A. 958; D. C. Clarke, 22 B. T. A. 314. See Biscayne Bay Islands Co., 23 B. T. A. 731; Searles Beal Estate Trust, 25 B. T. A. 1115. The rule is applicable even though the tract was not acquired for division into lots. Frederika Skinner, 20 B. T. A. 491. Begulations and rulings of the Commissioner are in accordance with decisions of this Board. Art. 48, Regulations 45, 62, 65, 69; art. 61, Regulations 74; O. D. 1072, 5 C. B. 89. We think the rule is applicable when a parcel, as here, is involuntarily divided.

The case of Carrano v. Commissioner, supra, suggests that, in a case having the facts from which to do it, it might be necessary in order to reach a proper result to apportion the special assessment to the part taken and the part remaining. To increase the cost basis of the portion of lots D and E condemned by some part of the assessments made against the remaining portion would be contrary to the theory of such charges. Here, as we understand the stipulation, there was a disposition of fee simple title, as distinguished from an easement or right of way. The statute under which the assessments were made provides that after the entry of an interlocutory judgment fixing the amounts of the awards, the street superintendent “shall proceed to assess the total expense of the proposed improvement * * * upon and against the lands, including the property of any railroad or street railroad, within said assessment district, except the land to be taken for such improvement, in proportion to the benefits to be derived from said improvement.” Obviously, under the statute there could be no assessment against the whole of the original lot, since the city had taken a part of it for public use. The lien given the city for the amount of the assessments did not attach to the entire tract but only so much thereof as remained in the hands of the petitioner. The petitioner paid the charges to free from a lien the parts of the lots remaining. No part of the assessments may be considered as an additional investment in the property condemned.

The respondent’s method of computing the gain is approved and will be followed in this proceeding. In his computation of the gain the respondent made an allowance of $5,941.68 for expenditures to replace the buildings condemned. A like allowance will be reflected in the recomputation to be made under Bule 50.

The petitioner contends that the portion of the award used to pay the assessments of $75,413.93 was expended in the acquisition of property similar or related in service and use to the property taken and no gain should be recognized to that extent.

Section 112 (f) of the Bevenue Act of 1928 provides, in part:

If property (as a result 0f ⅜ * * an exercise of the power of requisition or condemnation, * * *) is compulsorily or involuntarily converted into property1 similar or related in service or use to the property so converted, or into money which is forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, expended in the acquisition of other property similar or related in service or use to the property so converted, * * * no gain or loss shall be recognized.

Here the property was involuntarily converted into money by condemnation proceedings and the second clause of the section governs the question. Washington Market Co., supra; John, J. Bliss, 27 B. T. A. 803; Bandes v. Commissioner, 69 Fed. (2d) 812, affirming 28 B. T. A. 99; certiorari denied, 293 U. S. 568. The clause provides in clear language that it is to apply only when there is an expenditure of all or a portion of the proceeds in acquiring other property. It contemplates the acquisition of property to replace, or as a substitution for, the property converted into money by condemnation. John J. Bliss, supra; Wilmore Steamship Co., 30 B. T. A. 866; reversed on other grounds, 78 Fed. (2d) 667; Bandes v. Commissioner, supra. Offsetting the benefit assessments against the award did not result in the acquisition of any new property — it merely discharged an existing lien on property already owned. The claim is denied. See L. H. Wolf, supra.

The petitioner also contends that the gain derived from the proceedings was taxable in 1927, and if not in that year, the sum of 875,413.93, an amount equal to the benefit assessments offset against the awards, was taxable in 1928. The respondent argues that no such issues are raised by the pleadings. With this we agree.

The petitioner relies upon its allegation in the petition that “In determining the net income for the year 1929, the Commissioner erroneously included in the computation of said net income the sum of $75,413.93, which said sum did not represent net income and should not be included in the computation thereof” as raising the questions. The facts alleged as a basis for the error complained of are confined to the ownership of lots D and E; the condemnation of a part thereof; the awards and special assessments made respecting petitioner’s property; and that “The offset to the award of $75,413.93 was not an assessment for improvements * * * to defray the cost of actual improvements, such as sidewalks, curbs, * * * , but was a sum arbitrarily assessed against petitioner to defray the cost of the condemned property taken by the City.”

We see nothing in the allegation of error relied upon directly or indirectly raising the issue of whether the whole or any part of the award is taxable in a year other than the taxable year 1929. The allegation seems to raise the question of whether any actual benefit resulted from the assessments.

“Always a taxpayer is entitled to know with fair certainty the basis of the claim against him. Stipulations concerning facts and any other evidence properly are accommodated to issues adequately raised.” General Utilities & Operating Co. v. Helvering, 296 U. S. 200. The rule applies with equal force to the Commissioner. •- Being of the opinion that the questions have not been properly raised, we need not enter into a discussion of the grounds relied upon by the petitioner to support its claims.

Reviewed 'by the Board.

Decision will he entered v/nder Bule 50.

Matthews, Leech, and Aiínold dissent.


author: Matthews :

text:
    James W. Arrott, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 73870.
    Promulgated March 18, 1936.

      William A. Wilson, Esq., for the petitioner.

      James 0. Maddox, Esq., for the respondent.
   OPINION.

Matthews :

The respondent determined a deficiency in petitioner’s income tax for the calendar year 1931 of $5,917.48. Three assignments of error are set out in the petition but, one of these having been disposed of by stipulation of the parties, only the two following-issues remain :

1. Whether respondent erred in applying the first in, first out rule in determining gain or loss on sale of certain stock by petitioner;

2. Whether respondent erred in taking the date of distribution as the date of petitioner’s acquisition of a legacy for the purpose of valuation in determining gain or loss on a later sale.

The facts which were stipulated are as follows:

The petitioner is a resident of Pittsburgh, Pennsylvania.

In April 1929 petitioner held three lots of American Radiator & Standard Sanitary Corporation stock, as follows: (1) 77,856 shares upon which the basis for determining gain or loss on sale or other disposition is $3.05875 a share; (2) 109 shares upon which the basis is $34.99 a share; and (3) 109 shares upon which the basis is $33.02 a share, or a total of 78,074 shares.

On May 2, 1929, stock rights were issued to petitioner on his 78,074 shares, entitling him to acquire 7,807.4 shares of new stock at $25 per share. He exercised these rights, together with six additional rights acquired by purchase, and on May 29, 1929, 7,808 shares of American Radiator & Standard Sanitary Corporation stock were purchased for petitioner’s account by the Union Trust Co. of Pittsburgh (hereafter referred to as the Trust Co.) and were held by it as collateral for a loan made by the Trust Co. to petitioner to finance the purchase. These shares are hereinafter referred to as the “fourth lot.”

On June 19, 1929, petitioner gave away 21,799 shares from the “first lot” and sold 1,000 from the “fourth lot.” The first three lots were thereafter mingled, part being pledged with the Monongahela National Bank, but the remaining 6,808 shares of the fourth lot, here in question, were kept intact as collateral at the Trust Co.

Petitioner on December 2, 1929, therefore, owned in all 63,083 shares of American Radiator & Standard Sanitary Corporation stock, the certificates for which were in temporary form, distributed as follows:

On that day the Monongahela National Bank exchanged the temporary certificates for 6,542 shares which were pledged with it impermanent certificates. On December 4, 1929, petitioner sent the temporary certificates for 49,738 shares which were in his possession to the Trust Co. and that company sent those certificates together with the temporary certificates for the 6,808 shares, held by it as collateral, to the transfer agent of the American Radiator & Standard Sanitary Corporation to be exchanged for permanent certificates. The Trust Co. received from the transfer agent permanent certificates which were in such denominations that the Trust Co. found it impossible to extract the 6,808 shares to be held in its collateral account. It therefore returned them to the transfer agent and received permanent certificates again, but in form as follows:

8 certificates for 5,000 shares each.
15 certificates for 1,000 shares each.
15 certificates for 100 shares each.
1 certificate for 83 shares.
1 certificate for 8 shares.

Of these certificates, the Trust Co. retained as collateral to petitioner’s loan the six lowest numbered certificates for 1,000 shares each, the eight lowest numbered certificates for 100 shares each, and the certificate for 8 shares. These certificates were numbered as follows:

CB-1188 to 1193 for 1,000 shares each, C-43658 to 43665 for 100 shares each and CO-24870 for 8 shares. The certificates for the remaining 49,733 shares were sent to petitioner.

On December 14, 1931, petitioner wrote to the Trust Co., as follows:

Sell for my account and risk at $5.00 per share or better, 6,808 shares American Radiator common stock, Certificates Nos. said stock held' as collateral under my loan, crediting the proceeds thereof to the account of my son, Mr. James W. Arrott, with your institution.
In the meantime, I will authorize your Trust Department to hand you in substitution for the stock sold an equal number of shares of American Radiator common stock.

In a letter dated December 17, 1931, the Trust Co. advised petitioner that it had sold for his account from the collateral on his loan 6,808 shares “represented by certificate numbers CB-1188 to 1198, inclusive, for 1,000 shares each, C-43658 to 43665, inclusive, for 100 shares each, and 00-24870 for 8 shares”, and had received in payment $34,510.08, which had been credited to the checking account of petitioner’s son. It also acknowledged receipt from its trust department of 6,800 shares of the same common stock and a due bill for 8 shares yet to be delivered.

On December 15, 1931, the Trust Co. held as collateral for the •aforesaid loan of petitioner the following number of shares of American Radiator & Standard Sanitary Corporation stock:

6,S08 shares common, received as above set forth.
3,000 shares common, received November 10, 1930.
13,000 shares common, received October 27, 1931.
971 shares preferred, received October 27, 1931.

The certificates delivered upon the sale of 6,808 shares of American Radiator & Standard Sanitary Corporation stock in December 1931 were the same which had originally been retained by the Trust Co. in the collateral account after the exchange of temporary for permanent certificates, as set forth above.

The 6,808 shares- of American Radiator & Standard Sanitary Corporation stock sold by the Trust Co. for petitioner’s account realized the sum of $35,293, less tax and commission of $782.92, or a net amount of $34,510.08.

None of the permanent certificates issued to petitioner by the American Radiator & Standard Sanitary Corporation were issued with respect to any particular temporary certificate surrendered by petitioner or his agent to that company.

The respondent determined that the 6,808 shares sold were not identifiable with those purchased at any particular date, and applying the first in, first out rule, computed a profit, as follows:

Sale price December 15, 1931_$34, 510. 08
Basis for determining gain or loss on “first lot”
$3.05875 per share_ 20, 823. 97
Capital net gain- 13, 6S6.11

Annie M. Arrott, wife of petitioner, died December 27, 1930, and her will of one sentence read, as follows:

To my beloved husband, James W. Arrott, Jr. I leave all that I possess at the time of my death.

Annie M. Arrott owned at the time of her death, inter alia, 5,348 shares of American Radiator & Standard Sanitary Corporation common stock having a fair market value on December 27, 1930, of $85,568; 100 shares of the same corporation’s preferred stock having a fair market value on December 27, 1930, of $14,100; and a $100 Fourth Liberty Loan bond having a fair market value on this date of $103.56, or a total of $99,771.56.

The 5,348 shares of the American Radiator & Standard Sanitary Corporation common stock had a fair market value on October 26, 1931, of $48,132; the 100 shares of the American Radiator & Standard Sanitary Corporation preferred stock had a fair market value on October 26, 1931, of $11,700; the $100 Fourth Liberty Loan bond had a fair market value on October 26, 1931, of $101.19, or a total for all of $59,933.19.

These securities were distributed in kind to petitioner under decree of the Orphans’ Court of Allegheny County, Pennsylvania, dated October 26, 1931, and after this date they were sold by petitioner in 1931 through a broker for $55,013.38, as follows:

5,348 shares common stock American Radiator & Stand-
ard Sanitary Corporation_$43,362. 98
100 shares preferred stock American Radiator & Standard Sanitary Corporation..'- 11, 550. 50
$100 Fourth Liberty Loan bond_ 99. 90
55,013. 38

The respondent allowed a loss of $4,919.81, computed as follows:

Fair market value, as of October 26, 1931, of the securities specified above_$59,933.19
Sale price_ 55, 013.38
Loss_ 4,919. 81

The estate tax return of Annie M. Arrott filed by petitioner as her administrator c. t. a., reported funeral expenses, attorneys’ fees, and debts of decedent in the amount of $8,918.48, which were paid by the administrator during the administration of the estate.

1. The first question involves the correctness of the respondent’s action in applying the first in, first out rule of article 58, Regulations 74, in determining the loss on the sale by the petitioner on December 16, 1931, of 6,808 shares of common stock of the American Radiator & Standard Sanitary Corporation. This question is resolved by whether such «took was sufficiently identified as from a particular lot purchased so that the cost of the shares from that particular lot may be used as the basis for determining the petitioner’s loss on the stock sold.

The facts are clear and undisputed. There is no question that the petitioner intended to sell a particular lot of shares, being the fourth lot of 6,808 shares which he had acquired in May 1929 upon the exercise of stock rights, which had been continuously held by the Trust Co. in the petitioner’s collateral account to secure the loan made to the petitioner to enable him to purchase these shares.

In support of his action in applying the first in, first out rule it is pointed out by the respondent that 16,000 shares of the same stock, in addition to the 6,808 shares originally pledged as collateral by the petitioner, were held in the petitioner’s collateral account when the sale was made and it is argued that, regardless of the petitioner’s intention, the certificates were inextricably confused and commingled so that identification of any particular lot can not be made under the circumstances of this case.

We do not agree with the respondent’s position on this point. In Commissioner v. Rankin, 295 U. S. 123, it was held that certificates did not constitute the only possible means of identifying stock and that shares of stock held on margin and sold might be identified by “designation” at the time of sale of what lots should be sold and what held. In Fuller v. Commissioner, 81 Fed. (2d) 176, reversing this Board’s decision reported at 31 B. T. A. 154, the court pointed out that the identity of lots of stock need not necessarily be lost when the old certificates are surrendered for the purpose of a stock split-up, and upheld the taxpayer’s claimed identification of the shares sold as representing his most recent purchases prior to the split-up.

The facts of the instant case are quite similar to those of Miller v. Commissioner, 80 Fed. (2d) 219, reversing, 31 B. T. A. 192, which involved the question of identification of shares where instructions were given a broker to sell from designated purchases and delivery was made from shares held by the broker in a safekeeping account. An order for the sale of 100 shares was fulfilled by delivery from a block of stock which had been commingled with other shares so that no certificates were traceable to any particular purchase. The Circuit Court of Appeals for the Second Circuit decided in favor of the taxpayer and held that the first in, first out rule was applicable only where there was neither identification by a certificate nor by designation of the taxpayer. See also Robert E. Ford, 33 B. T. A. 1229, which is to the same effect.

We are of the opinion that the petitioner herein sufficiently identified by lot the shares which he directed the Trust Co. to sell. In December 1931, when the sale was made, the Trust Co. held as collateral for the petitioner’s account three lots of common stock of the American Radiator & Standard Sanitary Corporation, as follows : the 6,808 shares which were received in May 1929 under the circumstances set out above; 3,000 shares received on November 10, 1930; and 13,000 shares received on October 27, 1931. The holding by the Trust Co. in the collateral account of the particular lot of 6,808 shares, originally represented by temporary certificates, was not broken by receipt of the permanent certificates for the same number of shares. It is not important that no particular permanent certificates were issued for any particular temporary certificates. When the petitioner instructed the Trust Co. to sell 6,808 shares of this stock and designated the lot to be sold as the stock held as collateral under his loan, the only lot of 6,808 shares in the petitioner’s collateral account was the above described fourth lot, acquired by the petitioner in May 1929 upon the exercise of stock rights. It may be noted also that when the Trust Co. informed the petitioner that it had sold 6,808 shares from the collateral on his loan, as directed, the certificate numbers of the stock sold were listed by the Trust Co. and they were the same certificates which the Trust Co. had placed in the collateral account in December 1929, when the permanent certificates were received from the transfer agent. At that time these 6,808 shares were the only shares in the petitioner’s collateral account and it was not until some months later that there were added to this account 16,000 additional shares, in lots of 3,000 and 13,000 shares, respectively. Had the petitioner been indifferent as to which shares should be sold it would have been much simpler to sell stock belonging to him, which was held by the trust department, instead of selling stock held as collateral and advising the trust department to hand over an equal number of shares in substitution for the stock sold. But the petitioner desired to dispose of this particular lot of shares and identified them by designation rather than by certificate numbers; the Trust Co. followed his instructions and sold the shares designated.

For the reasons stated above and upon authority of the cases cited we hold that the petitioner’s designation of the shares to be sold was sufficient under the circumstances to preserve their identity as shares from a particular lot and avoid the effect of the first in, first out rule. We hold for the petitioner, therefore, on the first issue.

2. The second question is the amount of deductible loss petitioner sustained on the sale of certain securities received as a bequest from his wife, which depends upon whether the basis to be used is their valuation at the time of his wife’s death on December 27, 1930, or at the date of distribution on October 26, 1931. That is determined by whether the bequest under which petitioner acquired the securities, was general or specific. Section 113 (a) (5), Revenue Act of 1928, set out in the margin, controls.

The disputed bequest by petitoner’s wife was as follows:

To my beloved husband, James W. Arrott, Jr., I leave all that I possess at the time of my death.

A specific legacy has been defined to be:

A specific legacy is a bequest of specified goods, distinguished from all other goods or property of the testator, which the legatee could point to and claim as his own. A mere bequest of “all my personal property”, or a fractional part thereof, is not a specific legacy. The bequest of all the personal estate generally is not specific. A gift to a widow of one-third part of the personal estate of the testator in lieu of dower is not specific. Appeal of Crone, 103 Pa. 571, 576.

We conclude the present bequest was general and not specific. Harry G. Haskell, 30 B. T. A. 855, 860; aff'd., 78 Fed. (2d) 869; certiorari denied, 296 U. S. 652.

Accordingly, we sustain the action of respondent in using the value of the securities at the date of distribution as the basis for determining the petitioner’s loss on the sale of those securities.

Reviewed by the Board.

Judgrmnt will be entered wider Rule 50.

       SEC. 113. BASIS FOR DETERMINING GAIN OR LOSS.—
      (a) Property acquired after February 28, ISIS. — The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that—
      *******
      (5) Pkopebtt tkansmitted at death... — If personal property was acquired by specific bequest, or if real property was acquired by general or specific devise or by intestacy, the basis shall be the fair market value of the property at the time of the death of the decedent. If the property was acquired by the decedent’s estate from the decedent, the basis in the hands of the estate shall bo the fair market value of the property at the time of the death of the decedent. In all other cases if the property was acquired either by will or by intestacy, the basis shall be the fair market value of the property at the time of the distribution to the taxpayer. In the case of property transferred in trust to pay the income for life to or upon the order or direction of the grantor, with the right reserved to the grantor at all times prior to his death to revoke the trust, the basis of such property in the hands of the persons entitled under the terms of the trust instrument to the property after the grantor’s death shall, after such death, be the same as if the trust instrument had been a will executed on the day of the grantor’s death.


author: TURNER:

text:
    Citizens National Trust & Savings Bank of Los Angeles, Executor of the Estate of Mira Hershey, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 68018.
    Promulgated March 18, 1936.

      P. D. Johnston, Esq., for the petitioner.

      E. O. Algire, Esq., for the respondent.
   OPINION.

TURNER:

The only issue for determination is whether or not the installment obligations arising from the sales of the Hershey Arms property, Toberman-Hay Canyon property, and the La Crescenta Canada property, which were unpaid at the date of Mira Hershey’s death, were transmitted by reason of her death within the meaning of section 44 (d) of the Revenue Act of 1928, so as to require the inclusion in income for the period here in question of the excess of the fair market value of the obligations on that date over the basis prescribed therefor in the said section; and, further, if section 44 (d) is applicable, whether or not it is constitutional.

The constitutionality of section 44 (d), supra, and its applicability to cases such as we have here have already been considered and determined adversely to the petitioner. Crane v. Helvering, 76 Fed. (2d) 99, affirming 30 B. T. A. 29; Lowler v. Commissioner, 78 Fed. (2d) 557, affirming on this point 29 B. T. A. 227; Nuckolls v. United States, 76 Fed. (2d) 357; Provident Trust Co. of Philadelphia, Executor v. Helvering, 76 Fed. (2d) 810, affirming 29 B. T. A. 374. Under authority of these cases the issue stated above is decided for the respondent.

In the petitioner’s brief, contention is made that the transactions disposing of the Toberman-Hay Canyon property and the La Cres-centa Canada property were not sales but options to purchase under subdividing agreements. As a basis for this contention the petitioner relies on the declarations of trust execute^ by the Title Insurance & Trust Co. in respect of the two propertiés.

This contention does not come within any of the issues raised by the petition and is not supported by the facts disclosed by the record. In the petition it is alleged that the sales of the properties in question were made in 1923 and 1924, and the taxpayer elected to report the income therefrom on an installment basis, and that the deficiency herein resulted from the inclusion in income by the respondent of unreported profits on installment obligations transmitted by the death of the taxpayer. In short, the petition alleges sales of the properties on an installment basis and contains no allegation whatever raising an issue that the contracts covering the disposition of the Toberman-Hay Canyon property and the La Crescenta Canada property were option contracts rather than agreements of sale.

Certain provisions of the trust instruments closely resemble the provisions contained in the instrument considered in Lawler v. Commissioner, supra, which was held to be an option agreement rather than a contract of sale. In this case, however, it is to be noted that the instrument relied on is not an agreement between the parties at all, but is a declaration of trust executed by the Title Insurance & Trust Co. on March 20, 1923, for the benefit of Toberman and to secure payment of the debt owing to Mira Hershey. Further, it is stipulated here that on or prior to March 20, 1923, the date of the declaration of trust, Mira Hershey entered into an agreement of sale with one C. E. Toberman, whereby she agreed to sell Toberman the property here referred to as the Toberman-Hay Canyon property and there is nothing whatever in the trust instrument that in any way negatives the stipulated fact that an agreement of sale was entered into between Mira Hershey and C. E. Toberman on or prior to the date of the declaration of trust. In this respect the facts with reference to the La Crescenta Canada property are the same. It is thus apparent that regardless of the fact that no issue was made that the agreements in respect of the two properties were option agreements rather than sales, the facts in the record would not support such an issue if it had been raised.

Long after the filing of the brief herein and subsequent to the decision of the Circuit Court of Appeals for the Ninth Circuit in Lawler v. Commissioner, supra, the petitioner filed a motion to restore this proceeding to the trial calendar for the purpose of presenting proof to show that the transactions mentioned were option transactions and not sales. After hearing on the motion and consideration of the arguments advanced, the'motion was denied for the reason that it was not timely and sought to present proof outside of the issues contained in the petition, which had never been amended and in respect of which no motion to amend has at any time been made.

Consideration will not be given to issues not raised by the pleadings. Ned Wayburn, 32 B. T. A. 813; Coosa Land Co., 29 B. T. A. 389; Hanby v. Commissioner, 67 Fed. (2d) 125; Boggs & Buhl, Inc. v. Commissioner, 34 Fed. (2d) 859; Popular Price Tailoring Co. v. Commissioner, 33 Fed. (2d) 464; North American Coal Corporation, 28 B. T. A. 807, 831; Gould-Mersereau Co., 21 B. T. A. 1316, 1323.

Decision will be entered for the respondent.