author: GoodRioh :

text:
    Oscar F. C. Kunau and Liberty Bank of Buffalo, Trustees, Oscar F. C. Kunau Trust for Gladys Olga Kunau and Thomas Whittick Kunau, Petitioners, v. Commissioner of Internal Bevenue, Respondent.
    Docket No. 64816.
    Promulgated January 4, 1933.

      Arthur Garfield Hays, Esq., for the petitioner.

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

GoodRioh :

The question for our determination is largely one of

fact — whether the trust actually sold its stocks to Mrs. Kunau, and, if so, whether the sale was made without any understanding or agreement concerning repurchase or other incident such as would prevent it from being a fully consummated and bona fide transaction between the parties. Respondent points out that we must also determine another question of fact, namely, whether the trust was engaged in buying and selling securities as a trade or business, for, unless it was, the loss claimed is not deductible under section 23 (e) (2) of the Revenue Act of 1928, because of the provisions of section 118 of the same act, prohibiting the deduction of losses sustained upon sales of securities in cases where the same or similar property is acquired by the seller within thirty days of such sale. If the trust was so engaged the loss is deductible as one incurred in its trade or business, notwithstanding the fact that the same amount of identical securities was repurchased a few days after the sale. (I. T. 2523, IX-1 C. B. 145.) From the evidence we have determined and found as a fact that the trust at the time here material was engaged in business as a trader in securities. (See Harriet Pullman Schermerhorn, 26 B. T. A. 1031, and cases there cited.) Consequently, we revert to our inquiry concerning the bona lides of the sale.

We fully recognize the necessity for close scrutiny of transactions between persons related by blood, marriage, or community of interest in order to be sure that their dealings are in fact what they, on face, purport to be as to their validity, effect and finality. Such scrutiny here shows us nothing to indicate that the sale by the trust to Mrs. Kunau was other than an arm’s-length, valid, transaction, bona fide in all respects. The trustees were trading for profit; their purchases were selected with a view to immediate market activity; their sales were made to realize a profit; they were trading as rapidly as possible for those ends. The fact that they believed the Simmons stock offered a better possibility for a quick, profitable turnover was a sufficient and compelling reason for their disposal of the Niles and United stocks, and the probabilities of adversely affecting the market by offering such large blocks of these latter stocks was sufficient reason for seeking a private purchaser. We are convinced that Mrs. Kunau’s trading activities were carried on upon her own initiative, free from the domination of her husband, and that her purchase of these securities was upon her own volition and unaccompanied by any agreement or understanding concerning the reacquisition of the stocks by the trust. Her decision to sell back the stocks to the trust we think was likewise the result of her independent judgment. The transactions were carried out not privately, but through ordinary business channels, and, in view of the testimony before us concerning the prevalence of the practice, particularly during the year 1929, of private trading in listed securities at prices varying widely from market quotations, we can not but be convinced that the consideration for which these securities were sold was fair and adequate.

Respondent, relying mainly upon Harold B. Clark, 2 B. T. A. 555, urges that Mrs. Kunau should be regarded as an accommodation purchaser, rather than a bona fide purchaser. In the cited case it was admitted that securities were sold solely to establish a loss thereon to be taken as a deduction from income and, in the circumstances of that case, there were ample grounds for the inference that the purchaser bought with the expectation of later being called upon to resell the stock and that there was lacking the mutual intention of completing a bona fide sale. Here, we have no such circumstances; indeed, the evidence is to the contrary and convinces us that Mrs. Kunau bought not as an accommodation purchaser with the expectation of later reselling the stocks to the trust, but for her own account and purposes, and that both she and the trustees intended that the transaction should be a valid and bona fide sale. Cf. Harold F. Seymour, 27 B. T. A. 403.

We hold, therefore, that respondent erred in refusing to deduct from petitioner’s income for the year 1929 the loss sustained upon the sale of 10,000 shares of stock of the Niles-Bement-Pond Company and a like amount of stock of United Aircraft and Transport Corporation.

Judgment will be entered wnder Rule 50.


source: Caselaw Access Project

author: Smith:

license: Public Domain

text:
    Charles F. Mosser, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 55399.
    Promulgated January 6, 1933.

      Fred A. Woodis, Esg., for the petitioner.

      G. O. Holmes, Esg., for the respondent.
   OPINION.

Smith:

The petitioner claims that the expenditure of $15,000 is deductible either as a loss or as an ordinary and necessary expense of carrying on business. Obviously, the amount is not deductible as a loss, blit the record shows that the payment to Bogert had a direct relation to and was made to preserve the copartnership business; it was not made in payment for Bogert’s interest in the copartnership. Bogert demanded the payment of $15,000 in addition to his capital investment before he would consent to the dissolution of the copart-nership. The petitioner testified as to the activities of Bogert which were directly injuring the business of the firm and it was in order to be relieved of the possible consequences of Bogert’s activities that the petitioner procured his withdrawal from the copartnership.

A payment in excess of a retiring partner’s investment was allowed as a deductible expense in A. King Aitkin, 12 B. T. A. 692, where the retiring partner demanded a similar payment before he would consent to the dissolution of the firm. We there said:

The payment which, these petitioners made to protect themselves against the future actions of Dippy was directly connected with and proximately resulted from their business. No capital asset was acquired. The situation is not unlike that presented to the Supreme Court in Kornhauser v. United, States, 276 U. S. 145; 48 S. C. 219; 6 Am. Fed. Tax Hep. 7358, where expenses of defending an action for an accounting, instituted by a former partner, were allowed as a deduction from income as ordinary and necessary business expenses. We are of the opinion that the Commissioner erred in refusing to allow the deductions claimed.

That case is not distinguishable from the instant proceeding, and the $15,000 here involved should be allowed as an expense deduction, since it directly benefited this petitioner’s business. See also H. M. Howard, 22 B. T. A. 375; North American Investment Co., 24 B. T. A. 419; A. Harris & Co. v. Lucas, 48 Fed. (2d) 187. Cf. Bert L. Davis, 26 B. T. A. 218.

Judgment will be entered for the petitioner.


author: Van Fossan:

text:
    Ganson Depew, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 50860.
    Promulgated January 6, 1933.

      Ralph M. Andrews, Esq., and W. W. Grimes, Esq., for the petitioner.

      George D. Brdbson, Esq., for the respondent.
   OPINION.

Van Fossan:

The primary issue in this proceeding is whether or not the transaction relating to the sale of the petitioner’s stock in the Bogers-Brown Iron Company (hereinafter called the company) to the Central Securities Company was consummated in 1925 or 1926. The petitioner contends that such transaction resulted in a loss and that the loss was sustained in 1926. After challenging the fact that a loss actually occurred, the respondent asserts that the terms of the contract by which the petitioner disposed of his stock were performed within the year 1925.

In order to arrive at a proper conclusion as to both issues it is pertinent to review briefly the circumstances giving rise to the sale of the petitioner’s stock. Prior to 1920 the Bogers-Brown Iron Company was a prosperous manufacturer of pig iron. Beginning with that year, however, the industry suffered a serious depression. The company’s outlook was further limited by increased freight rates and taxes. It owned a large Minnesota ore property, the capacity of which far exceeded the reduced demand of the company’s business. The operating and carrying charges of the mine rapidly absorbed the company’s earnings and made inroads on its surplus, so that in 1925 the company was confronted with its inability to pay interest on its bonded indebtedness. Under such threatening circumstances it became imperative that the company should be refinanced.

The M. A. Hanna Company, an iron company of Cleveland, Ohio, desired to secure the mine property and made certain proposals to the company’s stockholders which resulted in a multilateral agreement dated September 24, 1925, and executed by the holders of more than 80 per cent of the outstanding stock of the company; by the company itself; by the Hanna Company; by certain banks to which the company was indebted; by The Marine Trust Company as escrow agent of the stockholders and the Central Trust Company; and by the last named company and the Central Securities Company, the corporations through which the refinancing was to be accomplished. By the terms of that agreement the stockholders were to deposit with the escrow agent their duly endorsed certificates of stock in the company, to be delivered to the Securities Company upon payment of the purchase price therefor and also upon the fulfillment of certain other provisions of the contract, but such stock was “ to be returned to said respective stockholders if, without default on the part of the Bogers stockholders or the Bogers Company, the transactions provided for in this Agreement shall not be consummated on or before February 1, 1926.”

About October 15, 1925, the stockholders and the Securities Company, through their representatives, agreed to advance the date of closing the transaction as to certain stockholders, including the petitioner, from February 1, 1926, to January 2, 1926, and to that end all stock of the company subject to the agreement was to be deposited with the escrow agent on or before the close of business on December 30, 1925, and likewise the checks dated January 2, 1926, issued by the Securities Company in payment for certain of the stock, including that of the petitioner, were also to be so deposited. Pursuant to the agreement the petitioner deposited his stock certificates with the escrow agent on December 28, 1925. On December 30,1925, the Securities Company notified the escrow agent to deliver the former’s checks to the stockholders, a part on that date and a part on January 2,1926. On January 4,1926, the petitioner received the check of the Securities Company from the escrow agent.

If the petitioner did not receive payment for his stock either actually or constructively during the year 1925, it is obvious that he is not subject to tax for that year. • It is stipulated that he did not receive it actually. The question then arises whether or not delivery of the check to the escrow agent under the conditions set forth constituted constructive receipt by the petitioner. We think not.

An escrow agent is not a general agent. His powers and duties are limited strictly by the terms of the escrow agreement. Citizens Nat. Bank of Roswell v. Davisson, 229 U. S. 212. Thus delivery to The Marine Trust Company of the Securities Company check was delivery to its principal, the petitioner, only when all the terms and conditions of that agreement were completely and explicitly fulfilled. In that portion of the “ Principal Agreement ” relating to escrow, it was specifically agreed that no delivery of either the stock certificates or check should be made until January 2,1926. Thus, in so far as the petitioner was concerned, the escrow agent was prohibited from completing the transaction before that date.

It is entirely conceivable that something might have happened in the interval between December 30, 1925, and January 2, 1926, that would have prevented final consummation of the transaction.

The facts in this case do not bring it within the rule of constructive receipt as defined by the respondent in article 51 of Regulations 65 and 69, which is as follows:

Am. 51. Income not reduced to possession. — Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. To constitute receipt in such a case the income must be credited to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made. A book entry, if made, should indicate an absolute transfer from one account to another. If the income is not credited, but is set apart, such income must be unqualifiedly subject to the demand of the taxpayer. * * *

The case at bar is clearly distinguishable from William Holden, 6 B. T. A. 605, upon which the respondent relies. There the sale in question was completed in 1919, and the purchase price was on deposit in the bank and available to the petitioner in that year. We said in that case:

* * * It was only because of instructions which had been issued to the bank at the instance of the petitioner that it was not paid. Had such instructions been a part of the contract there might have been some basis for a determination that the money was not received in 1919 by the petitioner, who reported his income upon a cash receipts basis. As to this we express no opinion. Here, however, was no contract or enforceable modification of the original contract; nothing more than an instruction (without consideration) at the request of the petitioner that payment be withheld.

In the above case the terms of the escrow agreement were performed in 1919. The instructions to defer payment until January 1, 1920, were given subsequent to the completion of the contract.

Here the authority to pay to the petitioner was contained in the contract itself dated September 24, 1925, and modified October 15, 1925. The consummation date of the original contract was set at February 1, 1926. As to the petitioner that date was advanced to January 2, 1926, under the supplemental agreement. We are not concerned with those stockholders who received their checks from the escrow agent on December 30,1925. But in the case of all stockholders the escrow agent was directed not to deliver either the certificates of stock or the checks in payment thereof until all the transactions covered by the contract had been completed. In the Holden case, supra; Glam Bnmton, Executrix, 15 B. T. A. 348, and in other cases cited by the respondent, the attempt to avoid or evade taxation was obvious. In the case at bar there is no such suggestion or suspicion. If the conditions of the agreement had not been met by January 2, 1926, the date fixed, it was the duty of the escrow agent to retain both the certificates of stock and the checks until the contract was complied with or to return them to their respective owners upon the demand of either party. By reason of the actual delivery on January 2, 1926, of the stock certificates and the check dated that day, we may assume that all conditions imposed in the contract had been fulfilled and the transactions therein provided for had been consummated, but we have no ground for concluding that such a situation existed prior to January 2, 1926.

The respondent contends further that the petitioner was not entitled to a deduction for a loss because there is no evidence that his stock became worthless in 1926. Petitioner’s claim is not based on an alleged worthlessness of the stock. On the contrary, it is shown that it had a considerable book value during 1925 and 1926. However, if heroic measures were not taken, the condition of the industry, and the business outlook of the Rogers-Brown Company, made it exceedingly doubtful that any of the stock would long continue to possess a value. The impending foreclosure of mortgages and the consequent liquidation of the corporation would soon have consumed the remaining surplus and dissipated any value, actual or potential, which the stock might have. Not infrequently the owners of the majority holdings in a corporation are compelled to sacrifice part of their holdings and relinquish majority control to save the balance of their investment. That is what was done here. The refinancing of the Rogers-Brown Iron Company was an emergency measure undertaken in order to save the company from bankruptcy and to salvage some value from the remaining 20 per cent of the stock still held by the petitioner and other stockholders. Respondent suggests in his brief that the sale was nominal and not actual. The evidence fails to support this position. The stipulated facts show that the 2401 shares of stock in controversy were sold for one cent a share and that they cost the petitioner $24,000 prior to March 1, 1913. The petitioner never reacquired any part of the stock so sold and acquired no other stock or interest in the Rogers-Brown Iron Company. There is no evidence of lack of good faith. The fact that can not be gainsaid is that upon the completion of the transaction on January 2, 1926, the petitioner had suffered a loss. The amount of this loss was $23,997.60 and, as we have held, that loss is deductible from his gross income for 1926.

Decision will be entered under Bule 50.


author: Lansdon :

text:
    Northwest Utilities Securities Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 54758, 59366.
    Promulgated January 9, 1933.

      Leland W. SedU, Esq., for the petitioner.

      J. A. Lyons, Esq., for the respondent.
   OPINION.

Lansdon :

The petitioner argues that it ceased to exist as a body corporate in 1929, in virtue of its failure to pay the state corporation tax, which omission, under the state laws, subjected its charter to forfeiture. It introduced no evidence at the hearing to establish either that its corporation tax for 1929 was not paid, or, if not, that a forfeiture of its charter rights was invoked by the state of its creation. In the absence of any evidence to support this contention, we sustain the act of the respondent in denying the loss claimed for 1929.

Petitioner contends that the conveyance in trust of its assets on May 14, 1927, amounted, in eifect, to a distribution of them “in kind ” to its stockholders, who thereafter sold them through the trustees. The respondent’s basic contention respecting the other tax items here disputed is that the transfer of the corporation’s assets to the trustees in 1927, in the circumstances, did not change its taxable status as owner of the profits from their sale, under its contract with Thompson, Ross & Company, or the earnings of the converted assets, pending their distribution to the stockholders.

The record does not support any theory of a sale made by the trustees, or that they acquired any rights in the trust corpus which they could have sold other than in accordance with the directions of the trust instrument, which they were bound to obey. It does show, however, that the corporation made a sale of its assets to Thompson, Ross & Company on March 8,1927, and received a binding-payment of $50,000 in “ earnest money.” This was not an option contract, as contended for by the petitioner, but an executed sale which gave the purchaser vested property rights in the assets. Morgan v. Forbes, 236 Mass. 480; 128 N. E. 792; O'Brien v. Boland, 166 Mass. 481; 44 N. E. 602; Howe v. Hayward, 108 Mass. 54; Hunt v. Weir, 100 Ind. 501. The purchaser’s contingent option to rescind did not postpone the vesting of its rights in the property. Monarch Portland Cement Co. v. Washburn, 89 Kan. 874; 133 Pac. 156. That right of election expired March 20, 1927; and after that date the contract of sale was without a condition to either party. All conditions being removed, the assets being in a deliverable condition, the property in them passed to the buyer. Sec. 8394 (Rule 1) Mason’s Minn. Stats. (Conditional Sales Acts); American Sugar Refining Co. v. Newnan Grocery Co., 284 Fed. 835; Rhynas v. Keck, 179 Ia. 422; 161 N. W. 486; Olin Co. v. Lambach, 35 Idaho 767; 209 Pac. 277.

That the stockholders intended this sale to stand is shown by their action at their meeting of May 10, 1927, when, by resolution, they directed as follows:

Be it further resolved that the proper officers of this corporation be and they hereby are authorized to carry out and perform, or cause to be carried out and performed, all of the obligations of this corporation under and pursuant to said contract of March 8th, 1927.

The board of directors entrusted that duty to the trustees, who accepted the trust and complied with the mandate. In so doing the trustees acted for and in behalf of the corporation. Taylor Oil & Gas Co., 15 B. T. A. 609; James Duggan, 18 B. T. A. 608; and Fred A. Hellebush, 24 B. T. A. 660.

The cases cited in petitioner’s brief are not applicable to the facts here. Several of them show a transfer of corporation assets to a trustee or stockholder, which we recognized as valid to pass title to the transferee, but in none of them was there a closed contract of sale to a third party which had intervened to prevent the passing of title to the trustees, or stockholders. Of the cases cited, the nearest approach to one in point with the situation here considered is found in Fruit Belt Telephone Co., 22 B. T. A. 440, where a prior sale of the corporation’s assets had been negotiated but not consummated by its officials. Thereafter, the officials sold the corporation’s assets for cash, to one of the stockholders as trustee, who renewed the negotiations and sold them to the Bell Telephone Company. Inasmuch as the property was not otherwise encumbered, this Board sustained that sale. In Iowa Bridge Co. v. Commissioner, 39 Fed. (2d) 777. the issue was controlled by facts in no respect similar to these here considered. In that case the corporation had transferred construction contracts to its president, and the Board held that, to all intents and purposes, they had been completed and the profits on them earned by the corporation before the transfer. Accordingly, the Board held that such profits constituted income to the corporation. The United States Circuit Court of Appeals reversed the decision of the Board for the reason, as stated in its opinion, that the counsel for the Commissioner conceded at the hearing that there was no basis for the Board’s findings that the profits had been earned before the transfer.

In the case at bar we sustain the sale to Thompson, Ross & Company, as well as the subsequent transfer to the trustees. The first of these, however, passed the property rights in the assets to the purchaser as of March 8, 1927, when the deal was closed and the earnest money paid.

Decision will be entered, for the respondent.


author: Leech:

text:
    John H. Hart, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 52795, 60115.
    Promulgated January 9, 1933.

      J. H. Amide, Esq., for the petitioner.

      Edward O. Adams, Esq., for the respondent.
   OPINION.

Leech:

Estates by the entirety exist only in real property under the common law, and such estates are recognized in Michigan, the common law being in effect where not in conflict with the constitution or laws of the state. Morrill v. Morrill, 138 Mich. 112; 101 N. W. 209. The execution of the land contract by petitioner and his wife converted their estate from real property into personal property. Bowen v. Lansing, 129 Mich. 117; 88 N. W. 384; Detroit Trust Co. v. Baker, 230 Mich. 551; 203 1ST. W. 154; Mollie Shaffran, 18 B. T. A. 91. Respondent contends that under the law of Michigan an estate by the entirety in petitioner and his wife was created by statute, under the conditions existing here, in the personal property represented by the contract of sale, and that the interest payments on deferred installments of the purchase price, representing income from such property, being subject under the common law rule to the unrestricted dominion of the husband, are taxable to him alone. In support of this contention respondent cites section 1 of Act 126 of the Michigan Legislature, approved April 30, 1925, as follows:

Seo. 1. In all cases wliere a husband and wife shall sell land held as a tenancy by the entirety and accept in part payment for the purchase price the note or other obligation of said purchaser payable to said husband and wife, secured by a mortgage on said land payable to husband and wife, the said debt together with all interest thereon, unless otherwise expressly stated in said mortgage, after the death of either shall be payable to the survivor, and the title to' said mortgage shall vest in the survivor, and in case a contract for sale of property owned by husband and wife as tenants by the entirety is entered into by them as vendors, the same provisions herein applying to the rights of the survivor in mortgages as above set forth, shall apply to the survivor of the contract.

Respondent cites Battjes Fuel & Building Material Co. v. Milanowshi, 236 Mich. 622; 211 N. W. 27, construing the quoted act as sustaining his position.

Regardless of this argument, the soundness of which may, at least, be questioned, in view of the doubtful effect of the cited case, we believe the present issue is decided by Act 212 of Public Acts of Michigan, 1927, approved May 20, 1927, which provides:

All bonds, certificates of stock, mortgages, promissory notes, debentures, or other evidence of indebtedness hereafter made payable to persons who are husband and wife, or made payable to them as endorsees or assignees, or otherwise, shall be held by such husband and wife in joint tenancy unless otherwise therein expressly provided, in the same manner and subject to the same restrictions, consequences and conditions as are incident to the ownership of real estate held jointly by husband and wife under the laws of this State, with full right of ownership by survivorship in case of the death of either.

This act was passed subsequent to Act 126 relied upon by respondent and prior to the execution of the land contract under which the payments here in question were made. We have found no case construing this statute. However, the present contract did not create a particular estate in petitioner and his wife in the specified consideration. Nothing was expressly provided therein describing the character of estate taken by petitioner and his wife in the contract or the payments thereunder, except that the payments were to be made to petitioner and wife jointly. The “ land contract ” was an “ evidence of indebtedness,” upon which collection could have been enforced. Fitzhugh v. Maxwell, 34 Mich. 138; Walker v. Gasgrain, 101 Mich. 604; 60 N. W. 291. We conclude that the instrument is clearly one of the character to which Act 212 refers and the interest of petitioner and his wife therein must be held to be that of joint tenants.

It follows that only one-half of the interest payments received in each of the taxable years in question should have been included in the gross income of petitioner. Frederick J. Haynes, 7 B. T. A. 465.

Judgment will be entered umder Bule 50.


author: Trammell :

text:
    Charles R. Holden, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 55486, 62198.
    Promulgated January 9, 1933.

      Julius F. Smietanka, Esq., and Willis D. Nance, Esq., for the petitioner.

      B. M. Coon, Esq., and F. S. Gettle, Esq., for the respondent.
   OPINION.

Trammell :

The sole issue in this case is whether the petitioner is entitled to deduct from his gross income for the taxable years certain amounts paid by him during said years on account of interest and taxes accruing on the cooperative apartment building in which the petitioner had leased a residential apartment under the terms of the lease contract referred to in our findings of fact hereinabove.

The facts were stipulated by the parties, and the issue of law presented may be resolved into the question of whether or not the payments made by the petitioner were so made on account of his liability for interest and taxes as such. This question in turn depends upon the ownership of the apartment building, since the interest accrued and the taxes were levied upon the building and real estate.

There can be no doubt that interest and taxes of the kind here involved, when liability is incurred and they are in fact paid as such by the taxpayer in the taxable year, constitute allowable deductions from gross income. Sec. 23 (b) and (c), Revenue Act of 1928. However, where a taxpayer pays the interest and taxes of his creditor, or makes such payments in behalf of another person, either individual or corporate, they do not represent interest and tax obligations of the taxpayer and are not deductible as such by him.

In paragraph 4 of the stipulation of the parties, above set out, it is stated that the “ title to the land and building ” here involved “ is in the 1320 North State Street Building Corporation, an Illinois corporation,” and in paragraph 5 of the same stipulation it is stated that “ during the years 1928 and 1929 the petitioner owned and maintained his co-operative apartment under the terms of a certain proprietary lease between himself and 1320 North State Street Building Corporation.” These are conflicting and contradictory stipulations, since the petitioner could not have “ owned and maintained ” his cooperative apartment if the title to the land and building was in the corporation; and the designation of the lease contract as a*“proprietary lease ” is a contradiction in terms, because a proprietor or owner can not at the same time be a lessee of his own property.

However, disregarding these apparent conflicts in the stipulation, we think it is clear that under the lease contract the petitioner was in no sense the proprietor or owner of the apartment which he had leased. The apartment was leased to him by the owner, the building corporation, for a period of 100 years from 1925, or until the year 2025, in consideration, among other things, of the payment by the petitioner to the corporation of certain monthly payments as rental, and other payments stated not to be rent, and also additional capital contributions, to all of which further reference will be made. Furthermore, the lease of the apartment to the petitioner was expressly conditioned upon the right of the building corporation, the owner, to sell the entire building and premises at any time, in which event the lease contract provides, in paragraph 1 (a) of Title IV, that “ this lease and all the right, title and interest of the Lessee hereunder shall terminate at the expiration of ninety (90) days from and after written notice thereof.”

The petitioner, in consideration of the demise and lease of said apartment, agreed to pay, specifically as rental, the sum of one dollar per year, and, specifically as additional rental, his proportionate part of the cost of maintenance and operation of the building upon the basis of his stock ownership in the corporation.

The lease contract, in paragraph 2 of Title I, provides that “ In further consideration of said demise the Lessee covenants and agrees to pay to the Lessor or for its account (but not as rent), the following There is then set out in subparagraph (a) of said paragraph a detailed description of the interest and taxes which the petitioner agreed to pay and which are the subject matter of the controversy herein.

The petitioner in his brief lays stress upon the fact that it is provided in the lease contract that the interest and taxes were not payments of additional rent. But we think no argument or citation of authority is necessary to support the elemental proposition that, if the circumstances of the case establish that the payments of interest and taxes were made as part of the consideration for the lease of the apartment, then they constituted additional rent, and such fact is not changed and can not be disregarded because of a contrary statement contained in the lease contract between the petitioner and his lessor. However, notwithstanding said statement in the lease contract, we think a fair construction of the provisions of that contract clearly indicates that the interest and taxes paid by the petitioner constituted nothing more nor less than additional rental. The very language used in the paragraph above quoted describes the payments as “in further consideration of said demise,” that is to say, as further consideration for the lease of the apartment, which is the equivalent of additional rental. The only items of rental or consideration for the demise theretofore stated in the contract consists of the cash rental of one dollar per year and the petitioner’s proportionate part of the operating expenses. Subdivision (b) of paragraph 2 of the lease contract provides for the payment by the petitioner of his proportionate part of the principal amount of the funded indebtedness of the lessor, special assessments for local improvements, and the cost of improvements to the building, all of which it is provided should constitute additional capital paid to the lessor by the lessee as a stockholder. Thus it would appear that the interest and taxes in question were not intended by the parties as additional capital contributions.

If we should be in error in viewing these payments of interest and taxes as additional rental under our construction of the lease contract, they would nevertheless not constitute allowable deductions from the petitioner’s gross income, for the reason that interest and taxes were the direct obligations of the building corporation which owned the apartment house, and were merely paid by the petitioner for and in its behalf. The petitioner does not contend and has not attempted to show that the payments are deductible as a business expense, or otherwise than as interest and taxes. In the circumstances disclosed, the payments are not allowable deductions from the gross income of the petitioner. Caroline T. Kissel, 15 B. T. A. 1210, 1274; William Ainslee Colston, 21 B. T. A. 396, 399; affd., 59 Fed. (2d) 867; certiorari denied, 287 U. S. 640.

Judgments will be entered for the respondent.


text:
    Harriet B. Borland, Petitioner, v. Commissioner of Internal Revenue, Respondent. Chauncey B. Borland, Petitioner, v. Commissioner of Internal Revenue, Respondent. Bruce Borland, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 31288, 31289, 31290.
    Promulgated January 9, 1933.

      Calvin F. Selfridge, Esq., for the petitioners.

      Arthur Camduff, Esq., for the respondent.
   OPINION.

Trammell :

The first issue here, which is common to all three of the present consolidated cases, is whether the aggregate amount paid by the petitioners in 1923 to secure cancellation of the lease to the Chicago Surface Lines on a portion of the Borland Building constituted business expense deductible from gross income for that year, or whether the amount should be treated as a capital expenditure, to be returned through deductions prorated over the unexpired term of the canceled lease. Each of the petitioners deducted his or her proportionate part of the payment from 1923 income, and contends that the action of the respondent in disallowing these deductions was erroneous, citing in support of such contention our decision in Higginbotham-Bailey-Logan Go., 8 B. T. A. 566.

In Henry B. Miller, 10 B. T. A. 383, we specifically held that an amount paid by a lessor to his lessee as consideration for the cancellation of a lease was a capital expenditure, recoverable through deductions spread over the unexpired term of the lease, and in effect overruled our prior contrary decision in Higginbotham-Bailey-Logan Co., supra. In Charles B. Bretzfelder et al., Executors, 21 B. T. A. 789, we cited with approval and followed the Miller decision in holding that an amount paid by a lessee to his sublessee for cancellation of a sublease constituted a capital expenditure, and therefore was not deductible as a business expense.

An amount paid by a lessor as consideration for the cancellation of a lease represents the cost to the lessor of acquiring a valuable property right, namely, the right to the possession, enjoyment and use of his property for the remaining unexpired term of the lease, and the cost of such a capital asset should be returned through deductions spread over the life of the asset, that is, the unexpired term of the canceled lease. In its nature such an expenditure is not fundamentally different from the payment of a sum of money as a commission or other expense to procure a lease. This principle was stated by us in Julia Stow Lovejoy, 18 B. T. A. 1179, where we said at page 1182:

In its essence sucli a disbursement is not unlike bond discount, prepaid rent, cost of acquiring or disposing of a leasehold or term contract and many other transactions. They should be spread over the definite period of the loan, the lease, or contract. [Citing authorities.] This is on the theory that they result in property of a sort and its cost is being exhausted proportionately over a period of years * * *.

For the reasons indicated and on authority of the decisions above cited, the respondent’s action on the first issue is approved.

The second issue, which is also common to all three of the present cases, concerns the proper method of treating the expenditures made by the petitioners in 1923 for installing new partitions in the space formerly occupied by the Chicago Surface Lines in the Borland Building. These partitions were constructed of building tile and plaster, securely fastened to the building, and were intended generally to remain in use at least during the life of the leases. They were not temporary or removable partitions, but did not increase the value of the building as a whole. The petitioners deducted from 1923 income as a business expense their respective shares of these expenditures, which deductions were disallowed by the respondent and the amounts spread over the remaining life of the building as capital expenditures. We have repeatedly held that such expenditures are capital and are not deductible as a business expense', whether or not they increase the value of the property. Popular Dry Goods Co., 6 B. T. A. 78, 83; Borrnit Teller & Co., 17 B. T. A. 1019, 1026; Charles B. Bretzfelder et al., Executors, supra, at page 793. On the second issue, the action of the respondent is affirmed.

The third issue, which pertains only to the cases of Chauncey B. Borland, Docket No. 31289, and Bruce Borland, Docket No. 31290, is whether petitioners are entitled to deduct from gross income for 1924 as a business expense the amount of $38,000 paid by them in that year to a real estate broker as a commission for securing two leases on property owned in part and held under lease in part by petitioners, for a term of 64 years and 4 months. These petitioners kept their books and reported their income for tax purposes on the cash basis.

It is our settled opinion that a commission paid for negotiating a long-term lease is not a business expense, deductible entirely from income of the year in which paid or accrued, but is a capital expenditure, recoverable through deductions spread ratably over the life of the lease; and this rule is applicable whether the lessor keeps his books and reports his income by the accrual method or on the basis of cash receipts and disbursements. Bonwit Teller & Co., supra, p. 1024; Gentral Bank Block Assn., 19 B. T. A. 1183; affd., 57 Fed. (2d) 5; Sigmund Spitzer, 23 B. T. A. 776, 778; Starr Piorno Co., 26 B. T. A. 835. Cf. Julia Stow Lovejoy, supra; Rickard G. Babbage et al., Executors, 27 B. T. A. 57.

27 B. T. A.

The respondent disallowed the deductions claimed by the petitioners as business expense and prorated the commission in question over the life of the lease contracts. The respondent’s action on this point is approved.

Judgments will be entered for the respondent


author: Goodkich :

text:
    Gilbert B. Goff, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46359.
    Promulgated January 9, 1933.

      Theodore B. Benson, Esq., for the petitioner.

      E. L. Corbin, Esq., for the respondent.
   opinion.

Goodkich :

Respondent determined deficiencies in income taxes for the years 1925 and 1926 totaling $4,781.95. Of that amount, approximately $3,600 is here in controversy. The sole issue in the case is whether respondent erred in refusing to permit petitioner to deduct from his income, as depletion allowances, $12,646.45 for 1925 and $12,278.96 for 1926. As our findings of fact, we adopt the stipulation submitted by the parties. It is unnecessary to here recite those facts, for this same issue has been presented previously to this Board and decided adversely to petitioner, the case being reported in 18 B. T. A. 283. The facts there set out with respect to this issue are identical with the facts in the case now at bar except as to the taxable years and the amounts involved. For the purposes of this report a brief statement will suffice.

Petitioner is one of the beneficiaries under a trust created by his father, who conveyed to a trustee certain mineral lands, the income from which he retained to himself for life. Upon the grantor’s death, one-half the income was to be paid to petitioner, one-fourth thereof to petitioner’s wife, and the remaining one-fourth was to be retained in a separate trust fund for their children. The trustee was directed to make distribution when the youngest of the children attained the age of twenty-one, then conveying to petitioner, if living, one-half of the corpus of the trust, and to the wife, if living and not married to another, one-fourth thereof. In the event of the death of both petitioner and his wife before the termination of the trust, the corpus was to be distributed to the children, or their surviving issue. In the event his wife, their children and their issue should predecease him, the corpus was to be conveyed to petitioner.

In the prior case (18 B. T. A. 283) the Board, relying upon, among other decisions, those of Kate Fowler Merle-Smith, 11 B. T. A. 254, and Margaret B. Fowler, 11 B. T. A. 265, held that petitioner could not deduct from his income any amount as depletion allowance, for the reason that he was a beneficiary of a trust. That principle, restricting the class of taxpayers to whom a deduction for depletion may be allowed, having been rejected upon appeal of the cases cited (Merle-Smith v. Commissioner, 42 Fed. (2d) 837; certiorari denied, 282 U. S. 897), petitioner urges that a deduction for depletion must now be allowed to him, and that our prior decision should be overruled. That result does not necessarily follow. A deduction for depletion was permitted to the beneficiaries in the Merle-Smith case because the court found that they had present vested interests in the corpus of the trust and, consequently, the exhaustion of the property resulted in a diminution of the value of their capital assets of the character for which the Congress provided an offset by means of the statutory allowances for depletion. Here, petitioner has no property interest in the corpus which is being depleted. Under the terms of the trust instrument, as we read it, he got no more than a contingent interest in the corpus; one which might never vest. He had no power of disposition over the trust property; he had no present, vested equitable interest in it, and therefore it is our opinion that he had no property subject to an exhaustion for which depletion should be allowed him. True, the income which he was to enjoy for a term of years, or throughout his life should he die before the trust terminated, perhaps would be reduced by the exhaustion of the property, but that loss can not be made up by allowances for depletion. True it is also that, because of exhaustion, the property would be less valuable at the time his contingent interest would vest at the end of the term of years than it was at the time the trust was created, but that difference can not be made up to him by allowances for depletion, for he received no present interest in the property in its then condition.

Therefore, we sustain respondent’s action in denying to petitioner deductions from his income on account of depletion in the case at bar and, for the reasons given, reaffirm our decision in the proceeding previously brought by this petitioner, though the basis there given for our action has since been rejected. Cf. Rita M. Kohler White, 23 B. T. A. 391; Otto H. Falk et al, Executors, 24 B. T. A. 299.

Judgment will be entered for the respondent.


author: Akündell :

text:
    Graves, Cox and Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 63015.
    Promulgated January 31, 1933.

      W. A. Hifner, Jr., G. P. A., for the petitioner.

      F. L. Van Haaften, Esq., for the respondent.
   OPINION.

Akündell :

The deficiency for redetermination in this proceeding is in income tax in the amount of $102.46 for 1929. The facts were stipulated.

At various times in 1919 the petitioner, a Kentucky corporation engaged in the general retail clothing business in Lexington of that State, purchased some furniture and fixtures and charged the costs thereof to its furniture and fixtures account. For the years 1919 to 1928, inclusive, it claimed and was allowed depreciation on the assets so acquired at the rate of 10 per cent per annum. In its return for 1929, the petitioner claimed depreciation at the rate of 5 per cent on the additions made to the account in 1919. The respondent disallowed the claimed deduction, which action the petitioner alleges to be error. The petitioner contends that the basis for depreciation in 1919 should have been one-half of the cost of the assets, in view of the fact that the property was purchased at various times during the year. In addition to contending that the petitioner has received all of the depreciation to which it is entitled, the respondent pleads estoppel.

The petitioner admits that it has fully recovered the cost of the assets through depreciation allowances. What it seeks to do is to obtain an allowance for depreciation in excess of the basis therefor because of an alleged error committed by the respondent in 1919, a year for which no liability exists for additional taxes on account of the running of the statute of limitations.

“ The amount of the allowance for depreciation is the sum which should be set aside for the taxable year, in order that, at the end of the useful life of the plant in the business, the aggregate of the sums set aside will (with the salvage value) suffice to provide an amount equal to the original cost.” United States v. Ludey, 274 U. S. 295. In determining whether a taxpayer is entitled to depreciation, allowances made in prior years for exhaustion of the same assets must be considered. Lake Charles Naval Stores, 25 B. T. A. 173; Alpin J, Cameron, 8 B. T. A. 120. Here we find that the petitioner has already recovered the cost of the assets by deductions allowed for years prior to 1929. Any further allowance would result in a double deduction for the same capital assets, which the statute does not authorize. Cameron v. Commissioner, 56 Fed. (2d) 1021, affirming 20 B. T. A. 305; Lake Charles Naval Stores, supra.

In addition to the reason given for the conclusion announced, we are of the opinion that at a time when the respondent is precluded by the statute from making an additional assessment for 1919 the petitioner ought not to be heard to say that the allowance made for depreciation in that year, based upon its own claim, was excessive so as to enable it to get the benefit of a double deduction in a later year. See Alpin J. Cameron, supra.

The respondent’s refusal to allow the deduction is sustained.

The other issue relates to the deductibility of a loss alleged to have been sustained on an old truck in connection with the acquisition of a new one.

In 1927 the petitioner purchased an automobile truck at a cost of $1,043.77. In the acquisition of a new truck in 1929, an allowance of $187.55 was made for the old truck. The parties valued the new truck at $788.35. The difference of $600.80 between the value placed on the new truck and the allowance made for the old one was paid in cash. The depreciation sustained on the old truck was allowed as a deduction for income tax purposes down to the date of exchange, leaving an undepreciated balance of $326.14. In its return for 1929 the petitioner claimed the sum of $138.59 as a loss sustained on the old truck. The respondent disallowed the deduction and added the amount of the alleged loss to the cost of the new truck. •

The alleged loss is being claimed as a deduction on the ground that there was a sale of the old truck. The respondent held, and still maintains, that the transaction was not a sale, but an exchange which did not give rise to a deductible loss. We have only the stipulation of the parties. This recites that “ In 1929 the petitioner exchanged the truck purchased in 1927 for a new automobile truck ” and that “ In this exchange an allowance was made for the old truck * * We can not say from the meager facts of record that the respondent erred in treating the transaction as an exchange. Sec. 112 (b) (1) (e), Revenue Act of 1928; cf. W. H. Hartman Co., 20 B. T. A. 302.

Decision will be entered, for the respondent.


text:
    Wishnick-Tumpeer, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 59892.
    Promulgated January 31, 1933.

      J. B. Little, Esq., for the petitioner.

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

GoodRioh :

The sole question presented for our decision is whether the Pioneer Asphalt Company is entitled to deduct from its income for the period November 1, 1928, to June 80, 1929, a net loss sustained by it in 1927.

In computing the taxable net income of the consolidated group for the taxable year 1929 the respondent has included therein the net income of the Pioneer Asphalt Company for the period January 1 to June 80, 1929, and has refused to deduct from its income for such period any part of the net loss sustained by it in 1927, on the ground that a return was required of the Pioneer Asphalt Company for the period November 1 to December 31, 1928, which period constituted the “ third taxable year ” in the application of the net loss sustained in 1927. We agree with this action.

Under section 141 (a) of the Eevenue Act of 1928 the petitioner and its subsidiaries had the right to file a consolidated return and the filing of such return constituted an election and a consent to comply with the regulations of the Commissioner under section 141 (b). The petitioner here is the parent corporation, and before filing its return for the year 1929, it asked for and obtained permission to change its accounting period from a calendar year to a fiscal year ending June 30. This permission dated June 11, 1929, contained the provision that in order to effect the change the petitioner would be required to file a return covering the period January 1, 1929, to June 30, 1929. Thereafter, on September 16, 1929, the Pioneer Asphalt Company authorized and consented to the filing of a consolidated return on its behalf for the taxable year 1929. In this consent it specifically agreed “ to be bound by tbe provisions of regulations 75 prescribed prior to the making of this return.” It is, therefore, apparent that at the time of filing a consolidated return for itself and subsidiaries for 1929 the petitioner knew that its return for the taxable year 1929 was limited to the period January 1 to June 30, 1929. It also knew that in electing to file a consolidated return both it and its subsidiaries consented to be bound by the Commissioner’s Regulations 75, prescribed prior to the making of such return. Article 14 of Regulations 75 was so prescribed. It provides as follows:

The taxable year of the parent corporation shall be considered as the taxable year of an affiliated group which makes a consolidated return, and the consolidated net income must be computed on the basis of the taxable year of the parent corporation.

We think the consolidated return of petitioner and its affiliated corporations was limited to the period January 1 to June 30, 1929. There was, therefore, a return required of the Pioneer Asphalt Company for the period November 1, 1928, to December 31, 1928. This period constituted the “ third taxable year ” in the application of the net loss sustained by that company in 1927. Cf. Weissberger Moving & Storage Co., 26 B. T. A. 1375; Joseph & Feiss Co., 26 B. T. A. 1424; Arnold Constable Corp., 26 B. T. A. 1427.

The determination of the respondent is sustained.

Judgment will be entered for the respondent.


author: Murdock :

text:
    Guaranty Trust Company of New York, Beckie Florence Bloch, Linda B. Hiller and Ludwig Scholem, As Executors of the Estate of Arthur Bloch, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 45500.
    Promulgated January 31, 1933.

      Harry A. Y erkes, Jr., Esq., for the petitioners.

      O. J. Tall, Esq., and W. Frank Gibbs, Esq., for the respondent.
   OPINION.

Murdock :

The Commissioner determined a deficiency of $1,050.11

in estate tax. The errors assigned are (a) the failure of the Commissioner to include as an allowance for inheritance taxes paid to the various states the sum of $4,509.10, being the amount of transfer tax paid to the State of New York; (&) the disallowance of a deduction for bequests to charities amounting to $200,388. In determining the deficiency the Commissioner assumed that only $8,486.02 had been paid as inheritance taxes to the States of New York and Pennsylvania. The parties have now stipulated that, in addition to the amount allowed by the Commissioner, the estate paid transfer tax to the State of New York in the amount of $4,509.10, making the total tax $12,995.12. Proper adjustment for this item will therefore be made in the recomputation under Rule 50.

The parties have stipulated a number of facts relating to the second assignment of error. Arthur Bloch, the decedent, died on February I, 1928. His will was duly probated and letters testamentary were granted to the petitioners. The will provided that the residuary estate be held in trust and the income therefrom divided between the decedent’s widow, Beckie Florence Bloch, and his daughter by a former marriage, Linda B. Hiller, during their joint lives. It also provided how this income should be divided in case the widow remarried, or in case the widow predeceased the daughter, leaving issue of her marriage with the testator, or in case the daughter predeceased the widow, leaving issue of her body surviving her. If neither had such issue, then upon the death of the one the other took all of the income for life. Upon the death of both the trust was to terminate and thereupon all of the residuary estate was to go to “ the issue, if any, of my marriage with Beckie Florence Bloch and to the issue, if any, of my said daughter Linda in equal shares.” The will further provided that the residuary estate should go to certain charities “ should my wife die without leaving issue of her marriage with me her surviving, and should my daughter Linda die without leaving issue of her body her surviving.” No issue of his marriage with Beckie Florence Bloch survived the decedent. Linda B. Hiller, who was younger than Beckie Florence Bloch, was born on September 23, 1886. At the time of the testator’s death she was forty-two years of age. She is a widow and has no living issue. The stipulation contains a paragraph as follows:

Subject to the respondent’s objection that evidence of the facts in this paragraph is inadmissible upon grounds of a sound public policy, and subject to the further objection that the facts in this paragraph are irrelevant and immaterial to the issue in this ease, it is admitted that if Dr. Charles Huber, who resides at 131 East 80th Street, New York City, should be called as a witness in this case he would testify that on or about the 17th day of April, 1926, he performed a major operation on said Linda B. Hiller known as hysterectomy; that hysterectomy renders a woman forever wholly incapable of bearing children.

A value for the bequest to charity would have to be determined before the petitioners could succeed in any event. The record does not contain sufficient evidence from which we could determine that value but apparently the parties are in agreement as to the amount to be deducted, if any deduction is proper.

The question which the parties argue is whether or not the petitioners are entitled to a deduction under section 303 (a) (3) of the Revenue Act of 1926. This section allows a deduction of the amount of all bequests, legacies, devises, or transfers to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary or educational purposes. The petitioners contend for a deduction of the value of the remainder at the date of death. Since the daughter was incapable of having issue they claim the designated charities received a vested remainder under the testator’s will. The respondent contends that the petitioners are not entitled to any deduction because, in the eyes of the law, children may be bom to the daughter in which event the charities will get nothing. Thus, at death the charities took nothing substantial by way of bequest or devise.

The petitioners concede that there is a well recognized rule of law in this country that a woman is capable of bearing children irrespective of her age. But they contend that that rule has no application here, where a surgical operation has rendered Linda B. Hiller incapable of bearing children and has thus completely destroyed the possibility of issue. On this difference they would distinguish all cases where courts were considering only inability resulting from natural causes incident to advancing age. They consider the precise question presented in this case a novel one and cite no authority in support of their petition.

In jRicards v. Safe Deposit & Trust Co. of Baltimore, 97 Md. 608; 55 Atl. 384, the court was considering the question of the admissibility of medical testimony that Mrs. Ricards was incapable of bearing children. The details of the testimony are not set out in the report but it appears that medical witnesses had testified to physical conditions and expressed opinions that there was no possibility of Mrs. Ricards being the mother of children. The court said:

If proof like that now under consideration were admitted, upon what principle could evidence showing that an operation of the kind indicated had been performed be excluded? And, if not excluded, what would prevent interested parties from resorting to such or similar operations, if by a resort to them a mere equitable life estate could be converted into an absolute interest? It is wholly immaterial whether the inability to bear children arises from natural or from artificial causes. It is not the cause, but the fact, that alone controls the question, and the single fact to which the law looks is death.

The following is from List v. Rodney, 83 Pa. 483:

Whether the rule rests upon the indelicacy of the acts to which such an inquiry might lead or to the great uncertainty of arriving at an accurate conclusion, we know not; but certain it is the rule has stood the test of time and received the sanction of ages.

See also In Re Dougan, 139 Ga. 351; 17 S. E. 158.

In George E. Farrington, Executor, 13 B. T. A. 274, we stated that the decisions support the view that the law presumes conclusively, irrespective of the views of the witnesses, that children may be born to the daughter,” and further, that “ the courts have refused to recognize the possibility that no further issue would be born to claim the remainder. This rule has become uniform and well established. It has been founded on the practical necessity for maintaining the title to property free from confusion and also upon social considerations. The cases cited by the petitioner to indicate that the rule is not universal do not in our opinion affect the general doctrine. The intendment of the revenue act is to be read in the light of the well recognized rule rather than of the minor exception, and we see no reason to assume that Congress intended to ignore the rule in order to allow a deduction for the contingent interest of a municipality or charity. The testator intended the bequest to be contingent and the deduction of the revenue act goes no further.” In affirming this case (Farrington v. Commissioner, 30 Fed. (2d) 915), the court quoted from Hill v. Sangamon Loan & Trust Co., 295 Ill. 619; 129 N. E. 554, in part as follows:

If it can be determined that the possibility of issue is extinct in a woman in one case it may in another. * * * We think this rule of law sound on moral grounds and on grounds of public policy. If the rule were otherwise, surgical operations might be resorted to to make it absolutely certain that no issue could be born. * * * The law recognizes the possibility of issue in all adult women, and the single fact that terminates the ability to bear children is death.

The court then held that in the interests of good morals and public policy the universal rule should be followed in the determination of the estate tax. Certiorari was denied, 279 U. S. 873.

The petitioners argue that the language of the court in Hill v. Sangamon Loan & Trust Co. quoted in the Farrington, case, supra, to the effect that in law the single fact which terminates the ability to bear children is death, is dictum. No case can be found, they say, holding that a similar rule should apply in the face of uncontra-dicted medical testimony that a surgical operation has rendered a woman forever wholly incapable of bearing children. And, further, no question of public policy is involved in this case, since the operation was performed before the testator’s death and was not resorted to to make certain that no issue could be born, nor has the daughter any interest in the remainder. With these contentions of the petitioners we can not agree. It may be that the cases on this subject presented no more than an alleged inability to bear children due to natural causes, but nevertheless the discussions of operations in the above quotations do not constitute dicta. They express one of the reasons for the rule. The application of the rule may not depend upon when the woman underwent the operation, nor upon whether that woman is to share in the remainder. The present case falls within the rule and does not form an exception to it. Our judgment on this point is for the respondent.

Decision, will he entered wider Bule 50.


text:
    Floyd L. Musgrove, Petitioner, v. Commissioner of Internal Revenue, Respondent. Jennie Southard, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 42591, 42592.
    Promulgated January 31, 1933.

      Paul Ferguson, Esq., for the petitioners.

      J. B. Johnston, Esq., for the respondent.
   opinion.

Lansdon :

The respondent has asserted deficiencies against Floyd L. Musgrove for 1923 and 1924 in the respective amounts of $96.05 and $3,906.34, and against Jennie Southard in the amounts of $130.88 and $3,747.62. The deficiencies arise from the respondent’s determination that income of the partnership composed of the petitioners should be computed on an accrual basis.

All of the material facts are contained in a written stipulation which is incorporated by reference as a part of this report and will be referred to in recomputing the petitioner’s tax liability.

The petitioners are individuals, residing at Shenandoah, Iowa. During the taxable years they were partners operating under the name of the Shenandoah Flag & Decorating Company and engaged in assembling and marketing flag outfits for street decoration. Each flag outfit consisted of an American flag on a wooden pole which could be placed in a special sidewalk socket. Sales were made through local American Legion posts, commercial clubs and other local patriotic organizations, which, with the assistance of representatives of the partnership, secured subscriptions from business firms in each city and town in the following form:

The American Legion Post #102 of Palls City, Nebraska, agrees to furnish to the undersigned subscribers, one complete American Flag Decorating outfit installed in an iron housing placed in the cement sidewalk or other sidewalk material as is specified and now approved by the city. JEaeh American Flag Outfit is to consist of one 4 x 6 ft. United States American Flag, guaranteed fast color, cotton material, clamp dyed stars, sewed stripes, double stitched, with canvas heading and grommets, one 12 ft. x 1% in. staff varnished complete with wooden knob, together with housing above mentioned, rope and metal plug for hole in sidewalk. The undersigned subscribers agree to pay to the American Legion Post when delivered, the sum of $3.95 for each outfit as indicated opposite each respective name. It is understood that this subscription is null and void should there not be a majority of business firms subscribe for these outfits. It is understood further that these outfits become the property of each individual concern when paid for.

After the local organization had secured a sufficient number of subscribers it signed and delivered to the partnership an instrument as follows:

I do hereby agree to deliver and remit for the Flag Outfit within ten days after arrival of same, freight to be prepaid by the Shenandoah Flag & Decorating Company. I further agree to see that the holes are placed in sidewalks with iron pipe according to instructions, before paying for same, at the rate of 50 cents per hole, this amount to be deducted from the proceeds of the collections.

The required number of flag outfits were shipped from Shenandoah to the local organization, upon receipt of the above agreement, and a memorandum was sent to the local organization, as follows:

100 complete outfits — ___$3.95 $395.00
Less:
Drilling 100 holes at 50 cents_$50.00
Com. on 100 outfits at 50 cents_ 50.00 100.00
Amt, to be remitted to us_$295.00
Remittance to be made within ten days after arrival of goods.
Shipped by freight.

Approximately one-third of the net sales price of each flag outfit was credited to the partnership salesman as his commission, one-half of which he was permitted to draw upon the execution of the agreement between the partnership and the local organization. The remaining one-half was paid to him when the sales price of the flag outfit was received.

During the taxable years the partnership kept single entry books. Until some time in 1924 the customer’s name was entered in a book, followed by the price of the flag outfit to be delivered. Payments were entered in a second column as received. In 1924 the partnership adopted a loose leaf memorandum file in which it filed copies of the above memorandum sent to the local organization. Such duplicates were kept in chronological order according to the date of shipment. Upon payment for the flag outfits, entry thereof was made on the duplicate memorandum. In addition to the memorandum filed, the partnership kept a consecutive record of cash receipts. A cash disbursement record was maintained which classified expenditures and showed the total for certain periods.

On their income tax returns for the taxable years the petitioners computed distributable partnership net income by including as sales only the cash received. All shipments not paid for were included in the inventory at cost. Upon audit of the returns the respondent determined that sales were made when the merchandise was shipped and that the total thereof should be included in gross income, with a corresponding adjustment to the inventory.

The last sentence of the subscription list set forth above states that the flag outfit should become the property of each purchaser when paid for. The agreement between the petitioner and the local organizations provides that the latter shall deliver the flags, drill the necessary holes in the sidewalk and collect for the flag outfit. Each local organization was allowed 50 cents per flag for drilling the hole and 50 cents commission for the sale of the flag outfit. We think it is clear that the local organizations acted as agent for the partnership and that the flag outfits were sent by the partnership on consignment. No sale occurred until the flag outfit had been delivered to the purchaser and collection had been made by the local organization. The latter then held the amount collected as agent for the partnership.

In computing petitioners’ tax liability there should be included in sales only those shipments which had been paid for prior to the close of the taxable year. Shipments which had not been paid for should be included in inventory.

Decision will he entered under Rule 50.


author: Matthews :

text:
    The Michigan Trust Company, Roy C. Fuller, Maurice A. Lambie and Emil Tyden, Co-executors of the Estate of Richard B. Messer, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 42513.
    Promulgated January 31, 1933.

      Oscar E. Waer, Esq.,- for the petitioners.

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

Matthews :

Two issues are presented: (1) Whether the respondent erred in his determination of the values of certain stocks owned by the decedent; and (2) whether the respondent erred in refusing to deduct from the gross estate as a bequest to charity the value of the remainder interest in one-third of the residuary estate.

1. It is the petitioners’ contention that the values of the stocks are limited to the prices fixed by the trust agreements, and that even if the respondent is not bound to recognize such prices the evidence establishes that these prices did in fact represent the fair market values of the respective stocks at the date of the decedent’s death.

The material portions of the trust agreements are quoted in the findings. Under their provisions if any stockholder wishes to dispose of his holdings, or if the representatives of any deceased stockholder desire to sell their stock, but not. otherwise, the remaining stockholder's are to be given an opportunity to purchase the stock at the price agreed upon before it shall be offered to others. If the stock is offered and no sale is made to any remaining stockholder during a period of three months after notice of desire to sell, there is no prohibition against the sale of the stock to anyone other than a stockholder at any price which the holder may be able to get. Iff will be seen that in case of the death of any stockholder his repre-f sentatives are under no obligation to offer his stock to the remaining! stockholders, except that if they desire to sell they can not sell to an outsider until after the expiration of the period specified within which the optionees have the right to purchase the stock at the,, agreed price.

We are of the opinion that the instant case is distinguishable from the case of Wilson v. Bowers, 51 Fed. (2d) 261; affd., 57 Fed. (2d) 682, which is cited and relied upon by the petitioners. In that case it was held that the value of shares of corporate stock to be included in the gross estate could not exceed the amount fixed by purchase options which are irrevocable so far as the estate was concerned. The contract involved therein was specifically enforceable by the op-tionees, it being expressly provided that within a stated period the two remaining stockholders should have the right to purchase the stock from the estate at the agreed price, so that the executors of the estate took the stock cum onere, that is, with the burden of the option, which option was irrevocable on the part of the executors. In other words, the executors had no choice in the Wilson case but to offer the stock successively to the two optionees, and not until both had refused the offer was the burden removed and the stock sellable at its market price. As stated above, the facts of the instant case are materially different, and we therefore hold that the values of the stocks are not limited to the price fixed by the trust agreements. In this connection reference is made to the case of City Bank Farmers Trust Co., Executor, 23 B. T. A. 663, where it was said:

Although the parties can restrict the sale price of the stock as between themselves they cannot, by such a contract, restrict the right of the Government to collect taxes upon the actual value of the stock.

In that case a contract was signed by all the stockholders of a closely held corporation in which the decedent owned stock which provided that any stockholder desiring to sell his stock should first offer it for sale to the other stockholders at a price represented by the “ book value ” of the shares. It was held that the evidence was insufficient to establish that the Commissioner’s valuation was erroneous.

It remains to consider whether the petitioners in this proceeding have proved that the values of the stocks at the date of the decedent’s death were less than the values determined by the respondent. It is to be remembered that the companies are all close corporations and there are no “ quoted ” market values. It was testified that at the time of the hearing the stock owned by the decedent was still held by his executors and that no actual sales of stock had ever been made under the trust agreements. The prices of the stocks for the ensuing year were fixed between January 1 and March 1. The supplemental agreements fixing the prices were entered into on January 12, 1926, and the decedent died on December 29, 1926, or exactly fifty weeks thereafter. It may be supposed that the prices varied from year to year. For example, in the original trust agreements executed August 28,1923, the stocks were listed at the respective values of $35, $70 and $200 per share, and for the year 1926 they were listed at $25, $80 and $250 per share. The petitioners must have recognized that the prices fixed by the trust agreements did not represent the actual values of the stocks, because in the estate tax return filed by them the stocks were valued at $20, $80 and $400 per share instead of at $25, $80 and $250 per share.

Apart from the provisions of the trust agreements, the only evidence relative to the values of the stocks is contained in the depositions of Maurice A. Lambie, A. E. Johnson and C. W. Clarke. Lambie is one of the petitioners and each of these witnesses owned stock in one or more of the corporations. They testified that the prices were based upon the assets and earnings of the respective corporations, and that in their opinion these prices represented the fair market values of the stocks; in the words of Johnson, “ they tried to arrive at as fair a price as possible, because the stockholders were all represented and no one knew which one would drop out or which one might have to sell.” ISTo evidence was introduced with respect to the assets of the corporations, their earnings, the dividends paid, etc. As was said in American Chemical Paint Co., 25 B. T. A. 1208, 1213:

We must assume that the petitioner produced all of the evidence which was available or at least all that it cared to present. Since the evidence produced is not reasonably convincing of the value contended for, the loss must fall upon the petitioner. Cf. Burnet v. Houston, 283 U. S. 223; Jankowski v. Commissioner, 66 Fed. (2d) 1006.

Upon the entire record, we must hold that the petitioners have introduced insufficient evidence to overcome the presumption of correctness of the respondent’s determination of the values of the stocks, and the respondent’s determination is, therefore, approved. See Estate of Marcus D. Fairchild, 9 B. T. A. 416; Melville Hanscom, Executor, 24 B. T. A. 173; Emma C. Hopkins, Executrix, 24 B. T. A. 805; Uncasville Mfg. Co. v. Commissioner, 55 Fed. (2d) 893, affirming, in part, 19 B. T. A. 920.

2. With respect to the issue whether the value of the remainder interest in the trust created for the decedent’s daughter constitutes an allowable deduction as a bequest to charity, we are of the opinion that the respondent erred in failing to allow the deduction claimed. It is not questioned that the institutions to which bequests were made by the decedent are corporations which come under the provisions of the act.

The petitioners claim a deduction in the sum of $4,770.70, representing the value of the remainder interest in the trust created for Walter Frost, and the respondent allowed $4,670.71 on account of this item. No point is made by the petitioners that this amount should be larger, but it is earnestly contended that the respondent erred in wholly disallowing the deduction claimed in the sum of $38,994.65, representing the value of the remainder interest in the trust created for Grace Anderson.

In the 30-day letter dated August 17, 1929, the respondent states:

No deduction is made under this heading of the remainder value of one-third of the residue for the reason that the life tenant is given the right to invade the principal and therefore the charitable bequests have no ascertainable value as of the date of decedent’s death.

In the case of Ithaca Trust Co. v. United States, 279 U. S. 151, the decedent bequeathed the residue of his estate to his wife for life, with authority to use from the principal any sum “ that may be necessary to suitably maintain her in as much comfort as she now enjoys.” After the death of the wife there were bequests in trust for admitted charities. It was held that inasmuch as the principal that could be used was only so much as might be necessary to continue the comfort then enjoyed, the standard was fixed in fact and capable of being stated in definite terms of money, and that the provision for the maintenance of the wife did not make the gifts to charity so uncertain as to preyent their deduction from gross income in computing estate tax. As Mr. Justice Holmes so aptly expressed it, “ there was no uncertainty appreciably greater than the general uncertainty that attends human affairs.” See also Hartford-Connecticut Trust Co. v. Eaton, 36 Fed. (2d) 710; First Nat. Bank of Birmingham v. Snead, 24 Fed. (2d) 186; Herron v. Heiner, 24 Fed. (2d) 745; Mercantile Trust Co., Executor, 13 B. T. A. 85.

The facts of the case last cited are very similar to those of the instant case. After reviewing several cases, this Board held:

It is clear that the testator intended that his widow should have every possible comfort and that her maintenance and support should be the first consideration, but his intention is also clearly and unmistakably expressed with respect to the charitable institutions therein provided for. There is no doubt but that he considered the amount of his estate sufficient to yield his wife ample means for her proper maintenance and that his further provision for her was merely a protective measure. It was not designed to permit her, at her election, to defeat the terms of the will and deprive the charitable institu-lions of the bequests made to them. * * *

This decision was affirmed by the Circuit Court of Appeals for the Eighth Circuit in 43 Fed. (2d) 39.

In the instant case the evidence disclosed that the decedent’s estate amounted to more than $300,000 and that the income accruing to the decedent’s daughter, Grace Anderson, from her one-third of the estate had run about $6,000 per year. Lambie, one of the executors of the decedent’s will, further testified that he had known the decedent’s daughter, Grace Anderson, for twenty-five years and was acquainted with her husband and knew their mode of living and their financial circumstances. He stated that in his opinion the amount of $6,000 would be sufficient to maintain the decedent’s daughter in the condition in which she had been living for the past eight or ten years. It may be noted that the will provides that “ in the event that such a net income, together with her individual means, is insufficient to provide for her support, care and maintenance,” etc. It was testified that Grace Anderson’s husband was a prosperous business man, having a sufficient income to maintain Ms family, and also having a very substantial net worth. Grace Anderson was fifty-four years of age at the time of the decedent’s death and had only one child, a married daughter, Josephine Anderson Todd, who is also provided for in the decedent’s will.

Under these circumstances we conclude that the legacies to the charitable institutions named in the will became vested upon the death of the testator. We, therefore, hold that the present values of these bequests at the date of the death of the testator are deductible from the gross estate in determining the net estate subject to taxation, and that the respondent erred in failing to allow the deduction claimed in the amount of $38,994.65.

Judgment will be entered under Rule 50.


author: Leech : Murdock,

text:
    Theodore R. Gerlach, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 38042, 41641.
    Promulgated January 31, 1933.

      Paul E. Bhorb, Esq., and M. P. Wormhoudt, Esq., for the petitioner.

      George D. Brabson, Esq., for the respondent.
   OPINION.

Leech :

A stipulation of the parties discloses that the sum of $268 included by respondent in petitioner’s income for each of the years involved represented dividends paid his wife on 67 shares of stock acquired by her independently of the contract of November 15, 1919. It is apparent that these amounts did not represent income to petitioner and respondent is therefore in error as to this item.

This leaves the question as to whether the dividend payments made by the Gerlach-Barklow Company of $15,184 in each of the years 1923 and 1924 to petitioner’s wife on 3,796 shares of stock acquired by her under the contract of November 15, 1919, represented income to her or to petitioner.

Petitioner clearly acquired the beneficial title to this stock by his purchase from Lambert and Thompson on November 11, even though the stock register of the company did not show the actual transfer. Holden v. WUUams, 65 Ill. App. 466; Allen v. Williams, 212 Ill. App. 114. Petitioner was entitled thereafter to the dividends thereon though the stock was placed in escrow to secure payment of the purchase price. Long v. United States, 66 Ct. Cls. 475.

The taxable status of the dividends in question is determined not only by the intention of the petitioner and his wife in reference thereto, which is evidenced by the contracts of November 11 and November 15, but by what was done thereunder.

It is fundamental that in construing a written instrument, it must be considered as a whole, and, if possible, effect be given to each provision. O'Brien v. Miller, 168 U. S. 287; Olaude H. Birdsall, 2 B. T. A. 1169; 6 Ruling Case Law, 837, 888. The contract between petitioner and his wife provides that petitioner shall have the right:

* * * to vote such stock at all meetings of the stockholders and to collect and to receive all dividends paid thereon, it being agreed by him that all dividends so received upon said stock shall be applied by him toward the payment of the principal of the notes evidencing the various installments of the purchase price of said stock as they mature, and it being further understood that the party of the first part will himself pay the interest on said notes according to the terms thereof and the balance of the principal after applying the dividends received as aforesaid. * * *.

Respondent argues that this provision constitutes a specific reservation of the income from the stock for petitioner’s use and benefit. Even if the quoted provision stood alone, it would be difficult to accept this view, as it provides that petitioner will, in addition to the application of the dividends, “ himself ” pay the interest and the balance of the principal. This language would naturally indicate that the latter payments were the only ones made by petitioner in his individual capacity. However, the quoted portion of the assignment does not stand alone, but must be considered in connection with other sections of the agreement, just as specific, which we would have to disregard to apply the construction for which respondent contends. One of these is the provision that it should be “ expressly understood and agreed that all dividends hereafter paid on the stock * * * whether paid by the respective company to the party of the second part or the party of the first part shall be treated as the property of the second part, but if paid direct to the party of the first part they are to be applied by him for the benefit of the party of the second part toward the payment of the purchase price of said stock * *

In our opinion, it is impossible to reconcile this last provision with the one first quoted, if that provision constitutes a reservation of the income on the stock to petitioner for his use and benefit. On the other hand, it is possible to reconcile it with the foregoing provision if the latter merely provides for the receipt of the income by petitioner for his wife and solely for the purpose of its application by him in her interest.

Assuming the contract of assignment is impossible of such a construction as will give effect to each provision contained therein, we' may obtain the general intent of the parties to the writing from the language employed in the entire instrument, as applied to its subject matter, even if such intent is apparently in conflict with some word or clause in the writing. Green County, Ky. v. Quinlan, 211 U. S. 582; Uinta Twnnel Mining & Transportation Co. v. Ajax Gold Mining Co., 141 Fed. 563. In proceeding to such a determination, the interpretation placed on the contract in question by the parties thereto, evidenced by what they actually did thereunder, is important, if not controlling: Lowrey v. Hawaii, 206 U. S. 206; District of Columbia v. Gallagher, 124 U. S. 505; Insurance Co. v. Butcher, 95 U. S. 269. Taxation is a highly practical matter, and, in any event, what we are called upon to decide is not an intention, upon which no tax is imposed, but the legal status of what actually occurred: Doyle v. Mitchell Bros. Co., 247 U. S. 179; United States v. Phellis, 257 U. S. 156; Anna M. Darkness, 1 B. T. A. 127; Gladys Bilicke, 20 B. T. A. 784. What does the record disclose actually occurred here? Immediately following the assignment by petitioner to his wife, the petitioner notified officials of the company and others that he had transferred his entire interest in the stock to his wife. Nobody, including petitioner, ever thereafter asserted by word or act any claim or right to ownership in the stock or the dividends therefrom, except the wife of the petitioner. The minute book of the company proclaimed her the owner. The stock was voted on her proxy— not by petitioner alone, but by three individuals, including petitioner, who actively directed the affairs of the company. The dividends were actually paid to the wife in every instance.

The contract of assignment of November 15 by Gerlach to his wife was certainly sufficient to vest in her all his transferable “ right, title and interest in the contract (with Lambert and Thompson) and the stock,” itself, which carried with it the right to dividends thereon, unless reserved. Long v. United States, supra. The stock was encumbered with the balance due on the purchase price, evidenced by the petitioner’s notes and the escrow agreement of November 11. Although Gerlach could not assign his personal liability on the notes without the acquiescence of Lambert and Thompson, he could assign his interest in the stock subject to the encumbrance thereon, effective as between him and his assignee, Mrs. Gerlach, in passing this obligation to her. We conclude that this was accomplished, as to a part of the encumbrance, by his assignment on November 15 of “ all his right, title and interest in and to the contracts above mentioned and the shares of stock ” to Mrs. Gerlach. In accepting this assignment and signing the contract, she assumed, as between the petitioner and herself, the obligation of paying the amount of the dividends she received on the stock on account of the balance due on the origina] purchase price, during the period covered by the contract.

Mrs. Gerlach actually received all the dividends in question. She applied them to the payment of the encumbrance on the stock. Her primary interest was to pay the obligation she assumed in the contract of November 15 and such dividends were therefore income to Mrs. Gerlach within the definition of the court in Bettendorf v. Commissioner, 49 Fed. (2d) 173.

It can not be said that petitioner’s wife was a purchaser from him of the stock in question in consideration of the dividends to be received and that these dividends represented income first to her and, then were taxable again to petitioner when paid over to him as part of the purchase price. Such theory could be based only upon the premise that the transaction was one giving rise to gain, whereas, in fact, it was one from which no gain could possibly accrue to petitioner. If the dividends, when paid, represented income to petitioner’s wife, they could in no event be taxable income to petitioner when paid by her to him, as they would represent merely a return of petitioner’s capital outlay to that extent, and this, being in excess of any possible payment to be received from his wife, no portion of any of such payment could represent gain to him.

We can not agree that, because petitioner had executed his promissory notes for the unpaid portion of the purchase price, the use of the dividends in payment of these notes was one primarily in his interest as reducing his obligation, for the evidence shows that a failure to pay the notes would have resulted in liability of the stock to sale. This stock was the property of his wife and its fair market value was at no time less than the amount of the notes. In fact, in 1923, when the first of the dividends here in question was paid to petitioner’s wife, 60 per cent of the purchase price of the stock had been paid and the stock had a substantially higher market value at that time than its cost to petitioner. Petitioner’s wife, and not petitioner, would have been the loser had the notes not been paid. The application of the dividends for their payment was a use of them in her interest, and they were income to her. Cf. Bettendorf v. Commissioner, supra,’ Paul Akers Bowden, 26 B. T. A. 1410.

Respondent cites Bettendorf v. Commissioner, supra, as controlling. That case is clearly distinguishable upon the facts, for there title to stock was transferred by a mother to her son, with reservation of the income to her for life for her personal and unrestricted use. However, the reasoning of the court as to the situation presented in that case seems to sustain our present conclusion upon the facts presented here.

We hold that the dividends of $15,184 paid in each of the years 1923 and 1924 to petitioner’s wife represented income to Mrs. Ger-lach and not to petitioner.

Reviewed by the Board.

Judgment will be entered under Rule SO.

Murdock,

dissenting: The petitioner retained the right to collect and receive the dividends pending the payment of his notes. The dividends were actually used to pay the petitioner’s notes. There fore, the dividends were income to. him.

Smith and Van Fossan agree with this dissent.