author: Trammell:

text:
    D. H. Byrd, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75830.
    Promulgated May 7, 1935.

      Harry G. Weeks, Esq., for the petitioner.

      B. W. Wilson, Esq., and B. B. Gannon, Esq., for the respondent.
   OPINION.

Trammell:

This is a proceeding for the redetermination of a deficiency in income tax for the year 1931 in the amount of $9,576.56. The issues framed by the pleadings are, (a) whether respondent erred in including in petitioner’s gross income the amount of $39,-510.65 in connection with the Byrd-Owen-Sloan transaction, and (b) whether respondent erroneously disallowed a loss claimed by the petitioner in the amount of $7,095.99 arising on account of lapsed oil and gas lease.s. The material facts, except for those stipulated and certain documentary evidence, were alleged in the petition and admitted by the respondent in an amended answer.

The petitioner is an individual, with his principal office in Dallas, Texas.

On or about February 15, 1930, petitioner entered into a written agreement with the Owen-Sloan Oil Co., the substance of which was that the company was to advance approximately $40,000 with which to buy oil properties in Texas. The money so advanced was to be repaid, with interest, from sales of the properties, after which the petitioner was to receive certain expenses, with interest. Thereafter “ all money received from the leases and royalties sold or retained by the parties ” was to be divided equally between them.

Under and by virtue of the agreement mentioned the Owen-Sloan Oil Co., at or about the time of the execution of the agreement, advanced substantial sums of money to the petitioner for use in accordance with the terms thereof, and various oil and gas leases, royalty interests, and mineral interests were acquired with the funds so advanced.

The petitioner in good faith believed that the arrangement evidenced by the agreement with the oil company was terminated prior to the transactions hereinafter referred to, and in the year 1931 he and one Jack Frost, as partners or joint venturers, engaged in the business of dealing in oil and gas leases and/or mineral interests and in developing such oil properties chiefly, but not entirely, in the East Texas oil fields. From these dealings the petitioner and Frost received gross a considerable amount of money and made a substantial profit.

In arriving at the deficiency here involved the respondent has determined that the operations of the partnership or joint venture resulted in a taxable profit of $158,042.58, one half of which was taxable to the petitioner and one half to Frost.

In making his tax report for the year 1931 the petitioner reported as a part of his income the entire sum of $79,021.29, but deducted therefrom one half, or $39,510.65, for the reasons hereinafter set forth, which deduction was disallowed by the respondent in arriving at the deficiency.

On or about March 15, 1931, the petitioner and Frost had transferred to Byrd-Frost, Inc., the oil properties then owned by them jointly in connection with the venture above mentioned, and at the same time, or shortly thereafter, the Owen-Sloan Oil Oo. instituted a suit in. the District Court of the United States for the Eastern District of Texas against petitioner, Frost, and Byrd-Frost, Inc., the substance of the claim being that the arrangement created by the contract hereinbefore referred to had not been terminated and that, in so acquiring the properties from which the petitioner and Frost derived the profit above mentioned, as well as the property transferred to Byrd-Frost, Inc., the petitioner was acting under and by virtue of that contract, and that the Owen-Sloan Oil Co. was entitled not only to the return of the money advanced under the contract, but to one half of the remaining profits and the properties so transferred to Byrd-Frost, Inc.

These claims were denied by the defendants in the suit, which was vigorously contested, but at the close of the year 1931 the suit had not been tried and was still pending. The suit was tried in the year 1933, and at the conclusion of the trial the court announced final judgment, in substance, that the plaintiff was not entitled to recover from Frost, or from any profits or properties received by or coming through him, but that the plaintiff was entitled to recover from petitioner to the extent of one half of the properties which came by or through him, or the profits derived by him after accounting for the advances made by the Owen-Sloan Oil Co., although no formal judgment was entered, and the amount of the recovery was not definitely fixed by the court.

Pending a hearing on the amount of the recovery and other details, the controversy was settled by an agreed payment made and to be made of $500,000 by petitioner and Byrd-Frost, Inc., approximately one half of that amount being paid when the controversy was settled, to wit, on or about October 20, 1933, and the remainder being payable in deferred payments, all of which have been paid.

In the year 1931 various oil and gas leases and royalties which had been acquired under and by virtue of the contract with Owen-Sloan Oil Co. lapsed and terminated and became worthless. These properties had been acquired in 1930 at a cost of $14,191.98.

Petitioner’s actual withdrawals from the partnership or joint venture of Byrd & Frost were as follows: in 1930, $7,496.18, and in 1931, $26,230.95, or a total of $33,727.13.

The advances made by the Owen-Sloan Oil Co. to D. H. Byrd under the contract exceeded $40,000, no part of which had been repaid until the payment under the judgment in the suit in the Eastern District of Texas. At the date the properties of Byrd & Frost, the partnership or joint venture, were transferred to Byrd-Frost, Inc., the liabilities of the partnership or joint venture were approximately $20,000, which liabilities were assumed by the corporation upon the transfer of the properties.

The first error assigned by the petitioner is that the respondent erred in including in gross income the amount of $79,021.29 representing petitioner’s full one-half interest in the profits of the joint venture or partnership of Byrd & Frost. In his return for the taxable year petitioner included that amount in gross income and then deducted one half thereof, or $39,510.65, with the following explanation:

Claim for one lialf interest in my one half of properties owned by Byrd & Frost as well as one half of my profits from this venture have been attacked by Owen-Sloan Oil Company, Inc. of Philadelphia, Penn.
Suit has been filed against me in the Federal Court for the Eastern District of Texas, seeking to recover the interest above mentioned.
It is my opinion therefore that this profit is in jeopardy and should not be taxed by the Internal Revenue Department until the case is decided.

Respondent disallowed the deduction claimed, thus including in gross income petitioner’s full one-half interest in the profits of the partnership or joint venture of Byrd & Frost.

The partnership or joint venture received the profits of $158,042.58. If it were a partnership (and we are without sufficient evidence on which to base a decision whether it was or not) the petitioner’s pro rata share of the profits, whether distributed or not, is taxable to him, unless he is entitled to the deduction claimed. If it were a joint venture, which is not a taxable entity, each member was a coowner of the assets and the receipt of the income by the joint venture was receipt by the coowners, Walter S. Dickey, 14 B. T. A. 1295, 1306, affd., 56 Fed. (2d) 917; certiorari denied, 287 U. S. 606, unless the income earned by the joint venture was to be retained for use in the business or otherwise was not subject to the demands of the members, Wild v. Commissioner, 62 Fed. (2d) 777; Glenmore, Securities Corporation v. Commissioner, 62 Fed. (2d) 780. And see Henry C. Heinz, 28 B. T. A. 276, 280.

Petitioner does not contend, and offered no evidence to show, that his share of the profits of the joint venture or partnership of Byrd & Frost was not available to him, and we can not therefore indulge the assumption that his share was not unqualifiedly subject to his demand. On the other hand, petitioner’s affirmative contention is that his pro rata share of the profits received by Byrd & Frost should he reduced by one half on account of the claim of the Owen-Sloan Oil Co.; that the claim afterwards in a later year, being recognized in the judicial proceeding and by the petitioner in his settlement, was just as valid a claim in the taxable year; or that the Owen-Sloan Oil Co. under the contract with petitioner was either a partner or joint venturer with petitioner and was entitled from the beginning to one half of any profits earned by petitioner as a result of his activities, or one half of the profits of the Byrd & Frost venture.

The question here, then, is whether petitioner is entitled to have his tax liability determined upon the basis of one fourth of the profits in controversy, or one half of his interest therein, notwithstanding the entire amount was received by or distributable to him, subject only to the unliquidated claim which had been asserted against such portion thereof in the pending litigation. Petitioner vigorously resisted the claim, asserting his right to the whole amount of his interest in the profits, and up to the close of the taxable year, in fact until October 1933, the final result of the litigation was undetermined. Obviously, it was not then known whether petitioner’s right to receive the money would ever be disturbed, or whether he would ever be required to pay over any part of it to the Owen-Sloan Oil Co.

In these circumstances, petitioner is taxable on the entire amount, notwithstanding his contingent liability to the oil company. North American Oil Consolidated v. Burnet, 286 U. S. 417; Burnet v. Sanford & Brooks Co., 282 U. S. 359; Lucas v. North Texas Co., 281 U. S. 11; Board v. Commissioner (C. C. A., 6th Cir.), 51 Fed. (2d) 73, affirming in part 14 B. T. A. 374; Vang v. Lewellyn (C. C. A., 3d Cir.), 35 Fed. (2d) 283; Highland Milk Condensing Co. v. Phillips (C. C. A., 3d Cir.), 34 Fed. (2d) 777.

The rule as announced and applied in the above cited cases was summarized in Commissioner v. Darnell, Inc. (C. C. A., 6th Cir.), 60 Fed. (2d) 82, as follows:

It must be conceded, that if a corporate taxpayer receives, or accrues upon its books, definitely ascertained earnings, under a claim of right and without restriction as to future disposition, it is taxable thereon even though it may still be claimed that the taxpayer was not then lawfully entitled to receive the money, and even though it may thereafter be adjudged liable to restore the whole or a part of the amount received. North American Oil Consolidated v. Burnet, Commissioner, 286 U. S. 417 * * *; Board v. Commissioner, 61 Fed. (2d) 73 * * *. Such also were the cases of Vang v. Lewellyn and Highland Milk Condensing Co. v. Phillips, supra. Income taxes are properly assessed upon the basis of annual returns * * * and if income has neither actually been received during the taxable year, nor the right to its receipt been definitely fixed during that year, as to both the existence of an obligation on the part of the payor and the amount to be paid, such income is properly to be allocated only to that year in which it was in fact received or in which the right to receipt became fixed and liquidated. This is the true and full effect of the decisions in Lucas v. North Texas Co., supra, Burnet v. Sanford & Brooks Co., supra; and North American Oil Consolidated v. Burnet, supra.
The same general rule applies, we think, to losses or expenses claimed as deductions.

It is unimportant that the litigation in the instant case was decided against the petitioner, or that final decree was forestalled by a compromise settlement. Cf. J. H. Tippett, Administrator, 25 B. T. A. 69; C. C. Harris Oil Co., 13 B. T. A. 937.

The petitioner actually received, or became entitled to have distributed to him, during the taxable year the income in controversy, under a claim of right and without restriction as to disposition, subject only to an unliquidated contingent liability. On authority of the above cited decisions, respondent’s action, based upon the inclusion of the full amount in gross income, is approved.

Petitioner’s second assignment alleges that respondent erred in disallowing a claimed loss in the amount of $7,095.99. During the taxable year 1931 various oil and gas leases and royalties acquired under the terms of the contract between petitioner and the Owen-Sloan Oil Co. lapsed and became worthless. These properties were acquired in 1930 at a cost of $14,191.98, with funds furnished by the oil company. Petitioner claimed one half of that amount as a deduction from gross income reported in his individual return, which deduction respondent disallowed on the ground that the “ entire cost was being borne by Owen-Sloan.”

The contract between the Owen-Sloan Oil Co., as party of the first part, and the petitioner, as party of the second part provided among other things that the party of the first part should advance approximately $40,000 for the purchase of leases and royalties in Texas, and that:

The money so advanced only to be used in the way of actual purchase money paid for said leases and royalties and said money, with interest, shall be returned to said party of the first part from time to time as any of said leases and royalties may have been sold, until all of said advancement, with interest, has been returned to said party of the first part.
The party of the second part shall be at all expenses and furnish the money to pay such expenses. However, no office overhead shall he charged and after the first party shall have received the amount of money and interest paid to it then the said second party shall be reimbursed with interest, the actual expenses of taking up and purchasing of said leases and thereafter all money received from the leases and royalties sold or retained by the parties hereto shall be divided equally, one-half to the party of the first part and one-half to the party of the second part. [Italics supplied.]

Petitioner contends tbat this contract created a partnership. We think it is unnecessary to decide this point, but, giving full effect to the terms of the contract, it was stipulated that the advances were not repaid until the compromise settlement subsequent to the decision of the court, in connection with which settlement it must be assumed that the losses sustained were taken into consideration. It was only after the cost of the leases had been paid for that petitioner was entitled to any share in the profits. If there were sufficient earnings to overcome all losses and leave net profits, the losses now claimed had already been used to offset income. However, if there were not sufficient profits arising from the venture to repay the cost of the leases to the Owen-Sloan Oil Co., petitioner would have no capital investment or cost as a basis on which to predicate a claim for loss. The leases were bought with money furnished by the Owen-Sloan Oil Co., not with petitioner’s money, and petitioner only had an interest after the profits or income had fully paid for the leases. His interest at most was an interest in all money received from the leases and royalty sold or retained. It was the money received which was to be divided equally, not the leases themselves. Petitioner, therefore, has not shown any basis on which he might be entitled to the deduction claimed on account of the lapsed leases. Respondent’s determination on this issue is approved.

Judgment will be entered for the respondent.


source: Caselaw Access Project

author: Smith:

license: Public Domain

text:
    Willoughby H. Stuart, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 73869.
    Promulgated May 7, 1935.

      Abbot P. Mills, Esq., for the petitioner.

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

Smith:

Section 23 of the Revenue Act of 1928 permits an individual to deduct from gross income, among other items:

(a) Expenses. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * *
*******
(e) Losses T)y individuals.- — In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise—
(1) if incurred in trade or business; or
(2) if incurred in any transaction entered into for profit, though not connected with the trade or business; or
(3) of property not connected with the trade or business, if the loss arises from fires, storms, shipwreck, or other casualty, or from theft.

The petitioner claims deduction of the payment of $35,633.55 as a loss under section 23 (e) of the Revenue Act of 1928, and of the payment of the $7,411.26 as an expense under section 23 (a) of the statute. The respondent has disallowed these deductions upon the ground (1) that the $35,633.55 was not a loss incurred in business; and (2) that the attorneys’ and accountants’ fees in the amount of $7,411.26 were not ordinary and necessary expenses paid during the taxable year in carrying on any trade or business.

With regard to the payment of the $35,633.55, it is pertinent to consider whether this' represented a loss to the petitioner. The Arioch Wentworth trust had sustained a loss of $71,267.10 upon its loan in 1914 of $75,000 to the Quigley Furnace & Foundry Co. Since 1926 the petitioner and his cotrustee have been equal life beneficiaries of the income of the trust. Upon the death of either trustee his half of the income is payable to his children and upon the ultimate dissolution of the trust, that is, upon the death of the other trustee, the corpus and accumulations of the trust are to be divided per capita among the children of the above trustees. At the hearing of this proceeding the petitioner had four living children and his cotrustee three. By the payment of $35,633.55 by each trustee to the corpus of the trust their immediate estates were reduced by that amount, but the corpus of the trust was increased by the total and their estates (including therein their interests in the trust) were not diminished. Assuming, however, that an actual loss was sustained by the petitioner from the payment into the trust, we are of opinion, for reasons stated hereinafter, that the amount is not a legal deduction from gross income.

At the hearing of this proceeding the petitioner testified that when in 1914 he consented to the loan by the trust of $75,000 to the Quigley Furnace & Foundry Co., and also when in 1930 he reimbursed the trust to the extent of $35,633.55, he never expected personally to profit therefrom. See Burrows McNeir, 30 B. T. A. 418. The loss, if any, was not therefore one “ incurred in any transaction entered into for profit” within the meaning of section 23 (e)(2) of the Revenue Act of 1928. It follows that if the amount is a legal deduction from gross income it must be by reason of having been “ incurred in trade or business.”

The term “ business ” has been defined as “ that which occupies the time, attention and labor of men for the purpose of livelihood or profit ” (Bouvier’s Law Dictionary), and this definition was adopted by the United States Supreme Court in Flint v. Stone Tracy Co., 220 U. S. 107; Von Baumbach v. Sargent Land Co., 242 U. S. 503. The respondent contends that the petitioner’s activities as trustee did not constitute a business within the meaning of the taxing statute. He points to the fact that the petitioner’s return for 1930 did not show any income from the receipt of commissions for acting as trustee.

The evidence indicates that the petitioner’s activities as trustee were not “ for the purpose of livelihood or profit.” Although the petitioner testified that his only business during the tax year 1930 and for many years prior thereto was acting as trustee, the evidence does not show how much of his time was devoted to such activities. He testified that he was at his office “ day after day ”, but it is apparent from the entire testimony that his income was from one or more trusts and from interest and dividends and profits from the sale of securities which he owned individually. In Dalton v. Bowers, 287 U. S. 404, and Burnet v. Clark, 287 U. S. 410, the question was whether a net loss was sustained under section 206 (a) and (b) of the Revenue Act of 1924 and section 204 (a) and (b) of the Revenue Act of 1921, which permit the carrying forward of a net loss “ attributable to the operation of a trade or business regularly carried on by the taxpayer.” In its opinion in Dalton v. Bowers, supra, the Supreme Court quoted with approval the following language from the opinion of the Circuit Court of Appeals for the Second Circuit in the same case, 56 Fed. (2d) 16:

By the statute, allowing the deductions and carrying over the loss for two years, Congress intended to give relief to persons engaged in an estab-lislied business ior losses incurred during a year of depression in order to equalize taxation in the two succeeding and more profitable years. It was not intended to apply to occasional or isolated losses. * * *

Although the decisions of the Court in the above cited cases are not strictly in point, inasmuch as the question there was whether the business was “ regularly carried on by the taxpayer ”, they stand for the proposition that the term “ business ” means an established business, and we think that the term “ trade or business ” used in section 23 (e) (1) of the Eevenue Act of 1928 likewise refers to an “ established ” trade or business; otherwise, there would be no reason for section 23 (e) (2). Where a taxpayer seeks to deduct from income an amount claimed as a loss incurred in trade or business it must be shown that such loss was sustained in the actual business of the taxpayer as distinguished from isolated personal transactions. This principle was upheld by the Court of Claims in Rogers v. United States, 41 Fed. (2d) 865, in which it was stated:

* * * A single isolated activity or transaction is not sufficient to constitute a business or trade. J. J. Harrington, 1 B. T. A. 11; Fridolin Pabst, 6 B. T. A. 843; Harry J. Gutman, 7 B. T. A. 500.
In Mente v. Eisner (C. C. A.) 266 F. 161, 162, 11 A. L. R. 496, the court said:
“ We think that the language ‘ losses incurred in trade ’ are correctly construed by the Treasury Department as meaning in the actual business of the taxpayer, as distinguished from isolated transactions. If it had been intended to permit all losses to be deducted, it would have been easy to say so. Some effect must be given to the words ‘ in trade.’ ”

See Philip D. C. Ball, 27 B. T. A. 388. Cf. Chaloner v. Helvering, 69 Fed. (2d) 571; Philip Rhinelander, 30 B. T. A. 121.

We are of the opinion that the respondent correctly disallowed the deduction of the claimed loss in the amount of $35,633.55.

We are also of the opinion that the petitioner’s claim for the deduction of $7,411.26 paid as attorneys’ and accountants’ fees in 1930 stands on no better ground. This amount, if deductible at all, must be an “ordinary and necessary ” expense “ paid or incurred during the taxable year in carrying on any trade or business.” In view of our conclusion that the petitioner was not engaged in carrying on a trade or business, the amount is not a legal deduction from gross income.

The remaining issue relates to the .failure of the respondent to treat as a capital gain in computing the deficiency an amount of $1,649 representing the profits realized by the petitioner from the sale in 1930 of 14 shares of preferred and 52 shares of common stock of the Multibestos Co. which he acquired in 1920. The evidence shows that the amount for which the respondent held the petitioner liable to income tax on this count was $1,558.25 and not $1,649. The evidence further shows that the revenue agent who examined the petitioner’s books of account for the purpose of verifying his income tax return for 1930 assumed that the petitioner acquired the Multi-bestos stock in 1930. It was, however, acquired in 1920. In view of this fact the petitioner is entitled to be taxed upon the profit of $1,558.25 as from a sale of capital assets, along with other gains from the sale of capital assets.

Reviewed by the Board.

Judgment will be entered under Rule 50.

Black and Leech dissent, being of the opinion that the disputed expense and loss items were deductible under section 23 (a) and (e) (1) of the Revenue Act of 1928.


author: Muedock:

text:
    Frederick S. Buggie, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 41164.
    Promulgated May 9, 1935.

      Albert E. James, Esq., and G. H. Mote, Esq., for the petitioner.

      James H. Yeatman, Esq., for the respondent.
   OPINION.

Muedock:

Counsel for the petitioner argue in their brief, first, that the petitioner realized no gain whatsoever from the disposition of the shares because the shares did not belong to him, but were the corpus of a constructive trust; second, the petitioner was guilty of a breach of trust and the realization of income in such case should be deferred until the rights of the various parties were finally determined; and, third, if the gain is to be taxed as income of 1926, it should be computed by deducting $125,000, the additional cost of the property paid in 1929. The Commissioner contends, with respect to the first two arguments, that the existence of a constructive trust and the fact that the shares did not belong absolutely to the petitioner, have not been pleaded. However, decision of the case need not turn upon the question of pleadings, since the evidence does not show that the petitioner ever occupied any position of trust which would affect his purchase of the stock.

Throughout this proceeding the petitioner’s counsel have said repeatedly that the petitioner was at fault in his dealings with the Wrights, while the petitioner has consistently maintained that he was not at fault in the slightest. The petitioner was the only witness in the case. He testified that all of his transactions with Nathaniel C. Wright and with Etha Wright were open and honorable, he took no advantage of either of them in these transactions, and the 750 shares, as well as the cash which he received from the sale of the shares, were his property absolutely. Not only does his testimony fail to indicate that his conduct was in any way reprehensible, but, on the contrary, it tends to prove that he took no advantage whatsoever of the Wrights, he held no position of trust which would affect his purchase of the stock, and his purchases were fair, valid, and not subject to question.

If any constructive trust existed which affected the petitioner’s income tax for 1926, its existence should have been proved. Unless his fault is to be inferred from the fact that he settled the suits, there is no evidence to support the constructive trust theory of his counsel. He denied all of the allegations made by the Wrights in the suits against him which cast any reflection upon his prior actions or which were inconsistent with his absolute ownership of the shares of stock at the time he sold them to Block. He has always felt that Block deliberately stirred up this trouble for him and that there was nothing to support the claims of the plaintiffs in those cases. The suits never came to trial and the issues were never judicially determined. The amount he paid in settlement was less than his profit from the sale. The cases were settled by the petitioner upon the advice of a majority of the attorneys whom he had consulted. But a poll of his attorneys in those cases does not constitute evidence establishing a constructive trust for the purpose of this case. Furthermore, other matters were settled at that time and payments were made to the petitioner. Neither fault nor liability on the part of the petitioner need be inferred from the fact that he settled the lawsuits. That settlement is not analagous to a plea of guilty in a criminal proceeding, as his counsel suggests. He mentioned a power of attorney from Wright which enabled him to transact some business on Wright’s behalf. But the record does not show the exact nature, purpose, or scope of that power of attorney and does not show that it had any connection whatever with the transactions involved herein. The existence of a constructive trust should not be inferred from the fact that the petitioner had close business and social relations with the Wrights. Wright suggested the sale and fixed the price for the stock. He seems to have been thoroughly familiar with the entire transaction. The evidence does not show that the price fixed was other than a fair one. Etha Wright may have known as much about the business, prospects, and stock of the Newark Star Publishing Co. as the petitioner did, for all this record shows.

The petitioner not only received the proceeds of the sale in cash in 1926 under claim and color of title and without restriction as to the disposition thereof, but at that time and for some time thereafter there was no indication, so far as this record shows, that anyone was disposed or in position to dispute his absolute title to the proceeds of the sale. These proceeds included profits. There was no uncertainty at that time about his right to retain the profits. The Supremo Court said in North American Oil Consolidated v. Burnet, 286 U. S. 417:

If a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to return, even though it may still be claimed that he is not entitled to retain the money, and oven though he may still be adjudged liable to restore its equivalent.

Cf. R. V. Board, 14 B. T. A. 374; affd., 51 Fed. (2d) 73; certiorari denied, 284 U. S. 658; Burnet v. Sanford & Brooks, 282 U. S. 359. The difference between the amount which he paid for the stock and the amount which he received in 1926 in cash was income for 1926. The settlement and the payment which he made in 1929 do not affect his 1926 income. Whatever effect they have upon his income should be reflected in a correct return of his income for 1929. Cf. North American Oil Consolidated v. Burnet, supra; Burnet v. Sanford & Brooks, supra; Lucas v. American Code Co., 280 U. S. 445; South Dakota Concrete Products Co., 26 B. T. A. 1429.

One further point should not be overlooked, although it does not affect the decision. The evidence clearly establishes that the petitioner acquired 750 shares from the Wrights for a total consideration of about $99,997.50, and it further establishes that all of those shares were sold to Block in 1926 for a total consideration of about $525,000. Thus the amount realized from the disposition of these shares exceeded their cost to the petitioner by about $425,000. Furthermore, it appears that the petitioner joined with two of his associates in purchasing 750 shares from Block in the latter part of 1925 at a cost not shown in the record. The return does not disclose how many shares were involved in the transactions therein reported, but the total profit shown on the return from the disposition of stock of the Newark Star Publishing Co. was only about $260,000. The record contains no satisfactory explanation of why the petitioner did not report a total profit of at least $425,000 from his sale of 750 shares of the stock of the Newark Star Publishing Co. in 1926. Counsel for the petitioner in a reply brief state that in the joint return for 1926 a profit was reported from the disposition of 450 shares and the remaining 300 shares of the original 750 belonged to a trust for the petitioner’s daughter. They further concede that only $75,000 of the $125,000 paid in settlement would apply to the 450 shares. The petitioner testified that he gave 449 shares to his wife and 300 shares to his wife in trust for his daughter. However, he further testified that no transfers of these shares were made upon the books of the company, the certificates were endorsed by his wife, and he subsequently reacquired the 449 shares and the 300 shares by simply recalling his gifts. Thus he appears to have been the owner of at least 750 shares at the time of the sale to Block. The Commissioner is making no claim for an increased deficiency and hence the Board has no authority to add anything to the petitioner’s income. However,- these circumstances certainly indicate that the petitioner’s profit from the sale in 1926 was not overstated on his return.

Decision will he entered for the respondent.


author: Black : Smith,

text:
    Metropolitan Ice Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 53936, 69525.
    Promulgated May 10, 1935.

      Ralph E. Tibbetts, Esq., for the petitioner.

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

Black :

What is the statutory basis to petitioner, for the purposes of computing depreciation and gain or loss, of the assets which it acquired at the time of its organization in 1923 ? Petitioner contends it is “ cost ” to it. [Respondent contends that under the facts stated the basis is the same as it would be in the hands of the several transferors.

The applicable statutory provisions are section 204 (a) (7) and (c) of the [Revenue Act of 1926 and sections 114 (a) and 113 (a) (7) of the Revenue Act of 1928. These provisions of both acts are substantially alike. Those of the 1928 Act read as follows:

SEC. 114. BASIS POR DEPRECIATION AND DEPLETION.
(a) JBasis for depreciation. — The basis upon which exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the same as is provided in section 113 for the purpose of determining the gain or loss upon the sale or other disposition of such property.
SEC. 113. BASIS POR DETERMINING GAIN OR LOSS.
(a) Property acquired after February 28, J.91S.- — The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that—
* ***** *
(7) TRANSFERS TO CORPORATION WHERE CONTROL OF PROPERTY REMAINS IN SAME persons. — If the property was acquired after December 31, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 80 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor * * *.

It is clear from the above provisions that petitioner’s contention must be sustained, unless paragraph (7), swpra, applies, in which event the decision would be for the respondent.

Both parties to these proceedings agree that there was a statutory reorganization within the meaning of section 203 (h) (1) (A) of the Revenue Act of 1926 and section 112 (i) (1) (A) of the Revenue Act of 1928. The question as to whether or not under a given state of facts there has been a statutory reorganization is a question of law for the Board to determine and we are not bound by the agreement of the parties on that issue of law. Cf. Nelson v. Commissioner, 75 Fed. (2d) 696, affirming 28 B. T. A. 529. As we view the transaction, however, it is unnecessary to determine whether a statutory reorganization was affected. The additional limitation that a control of the transferred property of 80 per centum or more remain in the same persons or any of them is also necessary in order that the basis shall be the same as in the hands of the transferor. The interest or control referred to in section 113 (a) (7), Revenue Act of 1928, which wre have quoted above, means beneficial ownership. Section 204 (a) (7), Revenue Act of 1926 is the same. Cf. Federal Grain Corporation, 18 B. T. A. 242.

It is our opinion in the instant case that “ immediately after the transfer” the stockholders of the old corporations owned only the common stock of petitioner and did not own any of its preferred stock, which had equal voting rights with the common stock. The common stock amounted to only 66% percent of the total stock issued, which, of course, is less than the 80 percent provided for in the statute. It is our opinion that “ immediately after the transfer ” petitioner’s preferred stock was owned by Parker & Co. It was issued to Parker & Co. and voted by Parker & Co. It was placed in the hands of the escrow agent solely for the protection of the old stockholders, who were to receive the proceeds from the sale to Parker & Co. The old stockholders majr have had and probably did have an equitable lien on both the preferred stock and the bonds and their proceeds, to secure the part of the purchase price which was to be paid them in cash. It was not intended, however, that they should own the bonds and preferred stock except in case of default of Parker & Co. to carry out its part of the agreement. Parker & Co. had agreed to pay $1,800,000 for the preferred stock and bonds— $270,000 on or before January 21, 1924, and $180,000 on or before the 21st of each month thereafter “until the time when all said bonds, and stock are paid for * * *.” Of course, Parker & Co. was selling the preferred stock and bonds to the public at par and had planned on realizing for itself a profit of $200,000 on the deal. The fact that the stock was not paid for immediately by Parker & Co. would not detract from their ownership of it “ immediately after the transfer ” if that was, as we think it was, the intention of the parties. There was a condition that if Parker & Co. should fail to pay for the preferred stock within the specified time, the shares still in the possession of the escrow agent would be delivered to the old stockholders. But this condition never arose. Parker & Co. met each installment in accordance with its agreement, the last payment in full being made on October 17,1924. Under these conditions we think there would be no basis to hold that the 10,000 shares of preferred stock issued the same day as the 20,000 shares of common stock were owned by the stockholders of the old corporation. Cf. H. L. Neuman Co., 16 B. T. A. 538; Ground Gripper Shoe Co., 21 B. T. A. 646; affirmed on another point at 62 Fed. (2d) 654; Leffingwell Rancho Co., 22 B. T. A. 1303, and Hazeltine Corporation, 32 B. T. A. 4. In each of these cases the facts show that the new stock, the ownership of which immediately after the transfer was there in question, was first actually issued by the new corporation to the old stockholders, but because the old stockholders were, at the time of receipt of the new shares, under contractual obligation to sell a substantial block of such new shares to outsiders, we held that immediately after the transfer such block of stock could not be considered as owned by the stockholders of the old corporation or corporations, and, that, therefore, an interest or control in the property transferred did not remain in the same persons or any of them. In the instant case the preferred stock was never issued, even for a brief period of time, to the old stockholders. It was issued to C. D. Parker & Co., the investment bankers, who subsequently sold it to the general public. When the transactions were all completed the old stockholders owned 20,000 shares of the common stock and 2,842 shares of the preferred stock, representing an investment of something more than $1,000,000, and the general public had purchased all the bonds and the remainder of the preferred stock, having voting rights equal to the common stock, representing an investment of nearly $2,000,000. In this sort of a situation it seems clear that the statute intends that the corporation receiving the assets shall get a new basis, based on cost.

We are therefore of the opinion and so hold that immediately after the transfer of the properties of the old corporation to petitioner an interest or control in such properties of less than 80 per centum remained in the same persons or any of them, and that the basis to petitioner is the “ cost ” to it of the properties acquired. Cf. West Texas Refining & Development Co. v. Commissioner, 68 Fed. (2d) 77; Charles Hall, 31 B. T. A. 125; Spang, Chalfant & Co., 31 B. T. A. 121.

Reviewed by the Board.

Decision will he entered wider Rule 50.

Smith,

dissenting: The question presented by these proceedings is whether the petitioner is entitled to a stepped-up basis in computing depreciation allowances and profit or loss on the sale of assets acquired. The petitioner is not entitled to such stepped-up basis provided it acquired the assets in question in connection with a reorganization and immediately thereafter an interest or control in such property of 80 per centum or more remained in the same persons as before. The parties have stipulated that the assets were acquired by the petitioner in connection with a reorganization. This means that the former owners were not subjected to income tax in respect of any profits accruing to them as a result of the transfer. The real question then is whether immediately after the transfer an interest or control in the property of 80 per centum or more remained in the same persons or any of them.

The law is well settled that until the performance of a condition laid down in an escrow agreement, the legal title to the escrowed property remains in the grantor. County of Calhoun v. American Emigrant Co., 93 U. S. 124. The escrowed property in the proceed-mgs at bar consisted of the bonds and of all the shares of stock of the petitioner corporation. Who was the owner of those bonds and shares while held by the escrow agent? Manifestly, it was not Parker & Co. Under the terms of the escrow agreement Parker & Co. was not to become the owner of any of them until it deposited cash with the escrow agent for their purchase and it was under no binding obligation to make such deposit. If Parker & Co. did not purchase them they were eventually to be turned back to the former stockholders of the consolidating companies. The real owners therefor were such stockholders.

I do not think that the words “ immediately after the transfer ” refer to a time long after the petitioner corporation acquired the assets. The principle invoked by the court and by the Board in West Texas Refining & Development Co. v. Commissioner, 68 Fed. (2d) 77; Charles Hall, 31 B. T. A. 125; and Spang Chalfant & Co., 31 B. T. A. 721, is not applicable here. The principle which is applicable is that invoked in Monarch Electric & Wire Co. v. Commissioner, 38 Fed. (2d) 417, affirming 12 B. T. A. 158; and Durand-McNeil-Horner Co., 30 B. T. A. 769. In my opinion the petitioner is not entitled to compute depreciation and profit or loss on the sale of the assets upon a stepped-up basis.


author: MuRdock :

text:
    B. Paul Mossman, Executor of the Estate of William E. Mossman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 59747.
    Promulgated May 10, 1935.

      F. B. Shoaff, Esq., and William J. Vesey, Esq., for the petitioner.

      J. R. Johnston, Esq., for the respondent.
   OPINION.

MuRdock :

The decision does not depend upon whether the transfers were made within two years of the decedent’s death or whether they were made prior to that period. The petitioner starts in either case with a presumption against him. But that presumption can be overcome by proof. Heiner v. Donnan, 285 U. S. 312. It has been overcome by proof which shows that decedent’s purposes in making the transfers were associated with life rather than with death and were to attain objects desirable to him during his life, as distinguished from the distribution of his estate at death.” Cf. United States v. Wells, 283 U. S. 102. The case must be decided upon the evidence and not by a too close comparison with some other case. The ultimate finding of fact above is decisive of all isues, so that the values need not be determined. In the following paragraphs some of the evidence is briefly reviewed.

The decedent seems to have been an unusually vigorous and healthy man up to the time of the accident which caused his death. He had never been sick or confined to his bed for even a day within the memory of witnesses who had known him intimately for many years. He took regular exercises and could kick higher than his head, bend forward to touch the floor without bending his knees, and put his foot back of his head. He was always active, lively, cheerful, and optimistic. He enjoyed life and had plans for the future. His father had lived to be 95 and other members of his family had also lived to be very old. He expected to reach 100 years and thus live longer than any of them. His mental faculties were in no way impaired. He personally attended to his business affairs each day. On the day preceding the accident he had gone to his office as usual and had attended two bank directors’ meetings. He had just completed the sale of a carload of lumber.

He lived very simply in his own home. He had a capable housekeeper, a good automobile, and a chauffeur. He was very fond of his children and saw each of them almost every day. He preferred to give his accumulated property to them rather than to keep it himself. Prior to 1926 he had distributed among them, from time to time, gifts having a total value in excess of a million dollars. He derived great pleasure from making substantial gifts to them. He never gave any indication that any of his gifts were impelled by any thought of death. He had been considering making a gift of his Dudlo stock for several years. Many of the large gifts to his children were made at Christmas. After his grandson was married in September 1927, the decedent wrote to him stating that the $150,000 par value of General Cable Corporation preferred stock which he would shortly receive would be a wedding present from his grandfather. He wanted his son to have a large interest in Dudlo. He wanted his children to enjoy and manage the property, for which he had no use in his simple mode of enjoying life.

The decedent was disposing of all but a relatively small part of his property when well advanced in years. He had defective eyesight. His prostate gland was enlarged. Shortly before the accident a doctor became convinced that the decedent had pernicious anemia but did not so inform the decedent. There is uncertainty in the record in regard to 270 shares of preferred, $38,700 of bonds, and two items purchased with cash. The profit from the exchange of the Dudlo stock was reported by the decedent and the tax paid from the proceeds of the exchange, although the petitioner contends that the decedent gave away the Dudlo stock before the exchange. The decedent also used or retained other property received in the exchange. These and all other facts in the record which may be unfavorable to the petitioner have been carefully considered. Yet it is clear that the decedent made transfers either of the Dudlo stock or of the proceeds of the exchange, so that the property which the Commissioner has added to the gross estate did not belong to the decedent and had not been transferred in contemplation of death.

Decision will be entered under Rule <10.


author: Leech :

text:
    Edmund S. Twining, Petitioner, v. Commissioner of Internal Revenue, Respondent. Theodore E. Stewart, Petitioner, v. Commissioner of Internal Revenue, Respondent. Charles P. Berdell, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 70296-70298.
    Promulgated May 14, 1935.

      Watson Washburn, Esq., for petitioners.

      G. R. Eherrif, Esq., H. B. Linton, Esq., and G. T. Nash, Esq., for respondent.
   OPINION.

Leech :

These consolidated proceedings involve income tax deficiencies determined by respondent for the calendar year 1930 in the amounts of $1,259.38 against Edmund S. Twining, $1,469.82 against Theodore E. Stewart, and $4,958.27 against Charles P. Berdell, Jr. Each petitioner claims an overpayment of income taxes for that year. The three issues involved will be subsequently stated as each is separately discussed.

The issue common to all three proceedings involves the question of whether the partnership of Berdell Brothers was a dealer in securities and thus entitled to inventory certain securities on hand at the beginning and end of 1930, for the purpose of determining the partnership income and the distributive share of each petitioner.

Throughout the year 1930 each petitioner was a member of the partnership of Berdell Brothers which maintained its principal office in New York City with branch offices in other cities. The firm of Berdell Brothers, as constituted from time to time since 1908 to and including 1930, has been engaged in the business of buying and selling securities as a dealer, specializing in the stocks and bonds of public utility companies, particularly those not listed on the exchanges. By 1922, many public utility securities had been listed on the exchanges and it became necessary for one of the partners to own a seat on the New York Stock and Curb Exchanges. Since then the firm has also engaged in the brokerage business. The two branches of business activities have been operated through separate departments and the partnership’s activities as a dealer constituted its principal business.

Prior to and during 1930, the partnership issued sheets of specific offerings of securities for sale and bids. Securities were purchased in the firm’s name, not for investment or speculation, but for immediate resale at a profit to its customers comprised of individual investors, but chiefly the so-called professional buyers such as investment trusts and other investment institutions, banks, insurance companies, and other dealers. Sales by the partnership were made “ over the counter ”, usually by telephone, and negotiated by the partners and the five employed salesmen. In making such sales they did not act in the capacity of brokers on commission. The volume of security sales of that character during 1930 amounted to about $10,000,000. In 1930 the partnership, as required by law, filed with the State of New York its notice as dealer in securities. For many years, including 1930, the partnership of Berdell Brothers has been listed as “ Brokers and dealers in public utility securities ” in the book, Security Dealers of North America, a statistical service widely used by security dealers.

On January 2, 1930, a new partnership was formed. It took over, at their then market value, all the securities owned by the former partnership. The fair market value of such securities on January 2, 1930, together with the cost ■ of securities acquired during 1930, totaled $325,262.72. The fair market'value of all securities owned on December 31, 1930, was $247,918.55 or a difference of $77,344.17. All of such securities were purchased by the partnership for resale to customers, including relatively small amounts of securities carried due to the failure of a dealer in Arkansas, to whom they had been sold, and those taken over because of bad accounts and errors.

The inventory loss of $77,344.17 was claimed as a deduction by the partnership on its return for 1930. The respondent determined that the partnership was not entitled to use inventories in computing its net income and disallowed the deduction thereby increasing each petitioner’s distributive share of the partnership’s net earnings as follows:

Edmund S. Twining..___$6,039.20
Theodore E. Stewart_ 12, 968.45
Charles P. Berdell, Jr_■_ 28,182.96

As to that separate branch of Berdell Brothers’ business in which, as a merchant, it bought securities and sold them over the counter to customers, we conclude that the partnership was a “ dealer in securities ” within the meaning of article 105, Regulations 74, and section 22 (c) of the Revenue Act of 1928. Accordingly, for the purpose of computing its net income, the partnership was entitled to inventory, at market, the securities in question carried for resale to customers and was entitled to a deduction of the inventory loss amounting to $77,344.17. Harriman National Bank v. Commissioner, 43 Fed. (2d) 950; Estate of Harry E. R. Hall, 29 B. T. A. 1255. Cf. Algernon S. Schafer, 32 B. T. A. 289.

Upon recomputation, tlie partnership net income will be redetermined in accordance with the foregoing conclusion for the purpose of determining each petitioner’s distributive share and the individual tax liability of each petitioner.

The next issue pertains solely to the tax liability of Charles P. Berdell, Jr., whose petition assigns, as error, the respondent’s dis-allowance of a deduction of $13,291.79 as a loss upon the sale of certain securities.

In December 1930 Charles P. Berdell, Jr., sold, at a loss, the following securities owned by him individually:

Amount of loss
100 General Electric Oo-$2,053. 75
50 Westing-house Elec. & Mfg_ 1, 270. 50
1 United States Trust Oo_ 1, 825.04
100 United Light & Power “A”_ 1,156. 50
12 R. H. Macy & Co--- 894.01
50 American Gas & Electric_ 1,190.44
100 United Gas Corp_ 849.00
50 American Power & Lt. Oo_ 1,155. 75
100 New York, Honduras & Rosario_ 650.40
100 Irving Trust Co_ 2, 747.40
Total loss_13, 291.79

Those sales were made through the firm of Berdell Brothers on the stock exchange. Petitioner received the full sales price thereof less taxes, brokers’ commissions, and charges. He had no direct or indirect interest in those securities after the sales and had no agreement with anyone for their repurchase by him. He did not acquire any amount of any of those securities within 30 days prior to or after such sales. The sales were made for the purpose of establishing a loss.

A few days prior to such sales by petitioner, he discussed with his wife the advisability of her purchasing similar securities because he considered them good investments. Immediately after petitioner’s sales (made through Berdell Brothers to others than his wife) he, on behalf of his wife, gave orders to Berdell Brothers to purchase the same quantities of the same securities in his wife’s name. She paid the market price (within a fraction of the prices at which petitioner sold) plus taxes, commissions, and charges. She paid for the securities with a portion of the proceeds derived from the sale of her house at Stonybrook in 1927 for $32,000. Petitioner had made gifts of money and property to his wife prior to 1930, but made none during 1930. He did not furnish the funds with which his wife paid for the securities and she did not agree to resell them-to petitioner. Petitioner did not reacquire any of such securities from his wife.

For the year 1930 petitioner and his wife filed a joint income tax return on which they reported a net income of $14,564.67 after deduct-mg, inter alia, the amount of $26,762.94 as the loss sustained upon all sales of securities in 1930. The latter amount included the losses on the sale of all of the above itemized securities except 100 General Electric Co. sold at a loss of $2,052.75 but which was inadvertently reported as a profit.

In determining the deficiency asserted against Charles P. Berdell, Jr-., the respondent eliminated from income the item of $2,052.75 inadvertently reported as a profit and disallowed as a deduction the amount of $13,291.79 as a loss sustained upon the 10 itemized sales in controversy. Respondent contends that such sales were not bona fide and, further, that where husband and wife file a joint return they constitute a single taxpayer and are not entitled to a loss deduction, under section 118 of the Revenue Act of 1928, where the husband sells and, within 30 days, the wife acquires substantially identical property.

This issue must be determined upon what was done, apart from petitioner’s motive of establishing a loss for the purpose of decreasing the amount which would otherwise have been his tax liability for 1930. Gregory v. Helvering, 293 U. S. 465. While transactions involving husband and wife should be carefully scrutinized because of their confidential relationship, the test is whether the disputed transactions were real as distinguished from mere form without substance. Joseph E. Uihlein, 30 B. T. A. 399.

The uncontradicted .facts are that petitioner actually sold, at market, and his wife, with her own funds, actually bought, at market, the securities in question through a broker. There was no reacquisition by petitioner. On such sales, petitioner sustained, in 1930, deductible losses aggregating $13,291.79, even though the loss is claimed as a deduction from gross income reported on a joint return. Frank M. Arguimbau, 31 B. T. A. 604; Charles F. Fawsett, 31 B. T. A. 139; Joseph E. Uihlein, supra; Benjamin T. Button, 28 B. T. A. 1242.

The remaining issue involves only the tax liability of Edmund S'. Twining. His petition assigns, as error, the respondent’s determination that, upon the sale of land, buildings, and furniture at Southampton, New York, petitioner realized a gain of $35,525, instead of $34,375 as reported on his return. He now claims a loss on the transaction of $18,327.88.

This petitioner is a son of E. S. Twining, who died testate June 24, 1923, survived by his widow, Frances Georgina Twining, and his two sons, Edmund and John. After making certain specific bequests of money and a bequest of all jewelry, silver, household furniture, personal effects, etc., to Frances Georgina Twining, the decedent’s will provided, in part, as follows:

Sixth. All the rest, residue and remainder of my estate, real and personal, of which I shall die seized or possessed and including any and all lapsed legacies I give, devise and bequeath to said Giraud F. Thompson and Edmund Stairs Twining or such one of them as may undertake the execution of this trust, and to their or his survivor and successor or successors, in trust, nevertheless, to hold, invest and reinvest the same and to collect and receive the rents, issues, profits and income thereof and to apply the net rents, issues, profits and income thereof to the use of my wife Frances Geobgina Twining during her life, and on her death if she shall survive me or on my death if I survive her, I give, devise and bequeath one-half of my said residuary estate so directed to be held in trust to my son Edmund Stairs Twining, and if he shall then be dead leaving issue then surviving I give, devise and bequeath the same in equal shares to such issue of his then surviving per stirpes and not per capita, and if there shall be no such issue of his then surviving I give, devise and bequeath the said one-half of my said residuary estate to my son John Halifax Twining, and if he also shall then be dead leaving issue then surviving to such issue then surviving in equal shares per stirpes and not per capita.

The remaining one half of decedent’s residuary estate was bequeathed and devised in trust for John with limitations over upon certain events.

Included in the decedent’s residuary estate were nine and one half acres of land situated at Southampton, Long Island, New York, together with improvements thereon consisting of a 20-room residence, garage, greenhouse, tool house, and chicken house. Such realty was included in the decedent’s gross estate at a value of $50,000 for Federal estate tax purposes.

The decedent’s widow, Frances Georgina Twining, died, testate, March 15, 1926, survived by her two sons, Edmund and John. Her will bequeathed the residue of her estate, including the furniture and fixtures in the house at Southampton, to Edmund and John in equal shares. The furniture and fixtures were included in her gross estate at a value of $4,480.75 for Federal estate tax purposes.

Neither petitioner nor his brother John ever resided in the house at Southampton subsequent to March 15, 1926, but rented the property, furnished, each year until its sale on October 1, 1980, for an aggregate rental of $39,500. During the same period- they expended a total of $11,355.89 for maintenance, repairs, and renewals on both the buildings and household furnishings. Their purpose was to maintain the property in perfect condition with a view to its sale.

On October 1, 1930, petitioner and his brother sold their jointly owned land, buildings, furniture and fixtures at Southampton, for $125,000 less a commission of $6,250.

In his return for 1930, Edmund S. Twining reported that he acquired a one-half interest in the Southampton land and buildings on June 24, 1923, the date of his father’s death, that his basis was $25,000 and that his profit from the sale was $34,375. He failed to include in his basis, for determining gain, any value for the furniture and fixtures included in the sale. The respondent increased the reported gain by $1,150, representing depreciation at the rate of 3 percent for three and five sixths years on the buildings valued by respondent at $20,000.

Petitioner contends that he did not acquire a vested interest in the real estate at Southampton until March 15, 1926, the date of his mother’s death, that the value of the realty, in tato, was $150,000 on that date and that the expenditures for repairs and replacements offset any depreciation thereon.

Neither party disputes petitioner’s acquisition of-a one-half interest in the furniture and fixtures at Southampton, on the date of his mother’s death pursuant to the terms of her will, namely, on March 15, 1926, on which date such personal property, in tato, had a value of $4,480.75. We are satisfied that, because of repairs and replacements, such personal property sustained no actual depreciation from March 15,1926, to date of the sale. Thus, in determining petitioner’s gain or loss from the sale of both realty and personalty at Southampton, his basis should include the amount of $2,240.36 for the personal property.

The principal issue is petitioner’s basis, for determining gain or loss, as to the real estate included in the above mentioned sale. The applicable provision of the Revenue Act of 1928 provides:

SEC. 113. BASIS FOR DETERMINING GAIN OR LOSS.
(a) Property aoquwed after February 2S, 1913. — The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1918, shall be the cost of such property; except that—
¡i, * * * * * *
(5) Property transmitted at death. — If personal property was acquired by specific bequest, or if real property was acquired by general or specific devise or by intestacy, the basis shall be the fair market value of the property at the time of the death of the decedent. If the property was acquired by the decedent’s estate from the decedent, the basis in the hands of the estate shall be the fair market value of the property at the time of the death of the decedent. In all other cases if the property was acquired either by will or by intestacy, the basis shall be the fair market value of the property at the time of the distribution to the taxpayer. '* * *

Under prior revenue acts the basis, as to property acquired by bequest or devise, was determined by its market value “ at the time of such acquisition.” The time of acquisition was the basic date, but, in the 1928 Act, Congress substituted the date of decedent's death as that date, and then, to cover situations to which the date of death seemed inapplicable, added the provision as to time of distribution. Lane v. Corwin, 63 Fed. (2d) 767; certiorari denied, 290 U. S. 644. In that case, the court construed the testatrix’s will to mean that ascertainment of the ultimate remaindermen depended entirely upon the persons in esse at the termination of the trust (created for the benefit of the same persons who might become remaindermen if living at the time of distribution). The court held that since the taxpayers’ interest in the realty was contingent, the will did not make a specific or general devise of the remainder interest to the taxpayers and they should not be considered as having acquired the property at the testatrix’s death. It followed that the value of the realty at the date of distribution was the basis for determining gain or loss, upon its later disposition by the taxpayer. Thus, even though the 1928 Act changed the rule fixing the basic date, the application of that rule still requires determination of whether the estate passing by will or intestacy is vested or contingent. The word “ acquired ” as used in section 113 (a) (5) of the 1928 Act had the same meaning as had the word “ acquired ” when used in the corresponding sections of the earlier acts. Daniel Tracy Beers, 31 B. T. A. 117. This meaning was the acquisition of a vested, right in property, which right is directly related to such property and would increase or decrease in value correspondingly with the value of that property. Brewster v. Gage, 280 U. S. 327.

Pursuant to the laws of the State of New York, controlling here as to petitioner’s property rights (Crooks v. Harrelson, 282 U. S. 55; Poe v. Seaborn, 282 U. S. 101, 110, and, as fully discussed in United States Trust Co., Trustee, 31 B. T. A. 473), we conclude that, under the will of E. S. Twining, petitioner acquired a vested remainder interest in the residue of the testator’s estate both real and personal, at the time of the testator’s death. He was designated by name, was in esse at date of decedent’s death, and had an immediate right to the possession of the property upon the expiration of the precedent life estate. The will did not provide for future distribution to persons then to be ascertained. Possession and not the right to possession was contingent and that only upon survivorship. The vesting of legal title in trustees for purposes of the life estate did not prevent vesting of the petitioner’s remainder interest. A temporary estate vested in trustees does not interfere with or prevent the vesting of a remainder or future estate entirely separate from the trust estate. Craver v. Jermain, 40 N. Y. S. 1056.

The Southampton property which petitioner owned jointly with his brother John and which was sold by them in 1930, formed a part of the residue of the testator’s estate. Petitioner’s interest therein having vested at date of the testator’s death on June 24, 1923, was acquired by a general devise within the meaning of section 113 (a) (5) of the Revenue Act of 1928. Cf. United States Trust Co., Trustee, supra; Lane v. Corwin, supra. Although possession and enjoyment were postponed until March 15, 1926, his interest increased or decreased in value correspondingly with the value of the property during that interval. The fair market value of the property was $50,000 on the date of testator’s death. Petitioner’s basis, for determining gain or loss on sale of such realty, is $25,000. Due to replacements and repairs, the buildings sustained no actual depreciation during 1926 to 1930, inclusive. This determination renders unnecessary a finding as to the fair market value of the Southampton realty on March 15, 1926.

Decision will be entered pursuant to Rule 50.


author: Black :

text:
    Eastern Shares Corporation (formerly Passwall Corporation), Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 69219.
    Promulgated May 14, 1935.

      A. G. Newlm, Esq., for the petitioner.

      Nathan Gammon, Esq., and Vernon F. WeeJdy, Esq., for the respondent.
   OPINION.

Black :

In this proceeding respondent has determined a deficiency of $4,303.46 for the year 1929.

Petitioner assigns one error, as follows:

(a) Respondent has erroneously disallowed a deduction of $38,622.40, being petitioner’s basis for certain rights to subscribe to stock, which rights were neither exercised nor disposed of, and which expired in the taxable year.

The facts were all stipulated and are a part of the record. We relate only such facts here as we deem necessary to a clear understanding of the issue involved in this proceeding.

Petitioner, a corporation organized under the laws of the State of Delaware, was originally named Passwall Corporation. The name was later changed to Eastern Shares Corporation.

On October 8, 1929, petitioner owned 5,000 shares of class B common stock of the American Cyanamid Co., a Maine corporation, which had cost $241,390. On that date the outstanding stock of the American Cyanamid Co. consisted of 65,943 shares of no par class A common and 1,550,776 shares no par class B common. The B stock had no voting power; otherwise there was no difference between the two classes of stock.

On September 30, 1929, the board of directors of the American Cyanamid Co. adopted a plan of offering additional of its authorized but unissued class B common stock to its class A and class B stockholders at the rate of one new share for each two old shares held, and at a subscription price of $30 per share, such right to accrue to stockholders of record October 8, 1929, and to expire at 3 p. m., November 4,1929. The stockholders were advised of the plan on or about September 30, 1929. The offer of new stock was underwritten by bankers who agreed to take, at a price of $30 per share, any of such B stock as to which the right to subscribe was not exercised by stockholders.

Warrants evidencing the right to subscribe were mailed to stockholders on October 8, 1929. Petitioner duly received on account of its 5,000 shares of old stock warrants entitling it to subscribe to 2,500 additional shares of class B stock.

Throughout 1929 American Cyanamid Co. class B stock was listed on the New York Curb Exchange and the rights were also traded in on that exchange. In paragraph 9 of the stipulation of facts there is set forth a table showing the dealings during the period September 30 to November 4. As indicated, there was an active market in both the stock and the rights. On the record date, October 8, the stock was selling at about 50 and the rights at about 9. From then on the market value of the stock declined until on November 4, when the rights expired, it was selling at slightly above the subscription price of 30. The selling price of the rights declined accordingly, although trading in rights was active every day the exchange was open, except November 4.

Because of the decline in the market price of the stock the possibility of extending the subscription period was considered, but decided against, since it would have rendered necessary modification of the underwriting contracts. Later the stock rose to 37.

Stockholders holding stock entitling them to subscribe to 683,212 shares of new class B common duly exercised their rights. Stockholders holding stock entitling them to subscribe to 125,147 shares did not exercise their rights, and the stock with respect to which such rights were issued was duly subscribed and paid for by the underwriters at $30 per share.

Petitioner did not exercise its rights and did not sell or otherwise dispose of them, and they expired at 3 p. m., November 4, 1929.

In its Federal income tax return for 1929 petitioner took as a deduction a loss of $38,622.40 on account of its rights, and did not report any income from the receipt of stock rights. This loss was computed by taking that proportion of its cost of the 5,000 shares of class B stock of the American Cyanamid Co. which the value of the rights on October 8, 1929, the record date, bore to the value of stock plus rights on that date. Respondent disallowed the deduction.

During 1929 petitioner did not sell any of the stock with respect to which it received the rights.

Petitioner duly filed its Federal income tax return for 1929 with the collector of internal revenue for the second district of New York. Petitioner kept its books and prepared its income tax return on the cash receipts and disbursements basis.

In Bradley W. Palmer, 32 B. T. A. 550, the taxpayer, by virtue of his ownership of shares of stock of the American Super-power Corporation, received purchase certificates entitling him to purchase shares of stock in the United Corporation and the Commonwealth Southern at what the Commissioner determined to be bargain prices. On the facts of that case the Board held that a taxpayer was not in receipt of income because stock purchase rights, having a market value at the time of issuance, were issued to him. To the same effect is Ramapo, Inc., 32 B. T. A. 561. See also T. I. Hare Powel, 27 B. T. A. 55; Edward S. Harkness, 31 B. T. A. 1100.

It has been held that where stock rights are sold, the gain is recognized, and in computing the gain the taxpayer is given the option to report the entire sale price of the rights as gain and therefore not diminish his basis of the stock upon which such rights are issued, or he can allocate the cost of the original stock between such stock and the rights received and compute his gain on the stock rights sold in that manner. See Regulations 74, article 58, Revenue Act of 1928.

The petitioner in the instant case did not sell the stock rights issued to it to purchase class B stock of the American Cyanamid Co. It allowed them to lapse and thereby become completely worthless. Did it have a deductible loss? Section 23 (f) of the Revenue Act of 1928 reads as follows:

In computing net income there shall be allowed as deductions:
* * * * Hi H-
(f) Losses by corporations. — In the ease of a corporation, losses sustained during the taxable year and not compensated for by insurance or otherwise.

It is petitioner’s contention, as we understand it, that the receipt of stock rights is in the nature of the receipt of income, but that the gain thereby is not to be recognized for income tax purposes because of the following provisions of the Revenue Act of 1928:

Sho. 113 (a) (9). Tax-free distributions. — If the property consists of stock or securities distributed after December 31, 1923, to a taxpayer in connection with a transaction described in section 112 (g), the basis in the case of the stock in respect of which the distribution was made shall be apportioned, under rules and regulations prescribed by the Commissioner with the approval of the Secretary, between such stock and the stock or securities distributed.
Sec. 112 (g). Distribution of stooJo on reorganization. — If there is distributed in pursuance of a plan of reorganization, to a shareholder in a corporation a party to the reorganization, stock or securities in such corporation or in another corporation a party to the reorganization, without the surrender by such shareholder of stock or securities in such a corporation, no gain to the distributee from the receipt of such stock or securities shall be recognized.

If petitioner’s premise that receipt of stock rights is in the nature of income could be accepted as true, then the above quoted sections of the statute relating* to tax-free distributions would probably be applicable. But petitioner is not relieved from reporting stock rights as income because of the above quoted sections of the statute, but he is relieved from reporting such a transaction as income because the receipt of stock rights is not income, taxable or otherwise.

In Miles v. Safe Deposit & Trust Co. of Baltimore, 259 U. S. 247, the Supreme Court held that the distribution to its stockholders by a corporation of rights entitling them to subscribe for new shares of its own stock “ in and of itself constituted no division of any part of the accumulated profits or surplus of the company, or even of its capital ”, and that the privilege to subscribe to the new stock “ of itself was not a fruit of stock ownership in the nature of a profit; nor was it a division of any part of the assets of the company.”

Article 58 of Regulations 74 contains, among other things, this provision:

Where a corporation issues to its stockholders rights to subscribe to its stock, the value of the rights does not constitute taxable income to the shareholder, although gain may be derived or loss sustained by the shareholder from the sale of such rights.

In Bradley W. Palaner, supra, the Commissioner contended that the purchase rights there distributed to a stockholder were taxable income because they were rights to purchase stock of an entirely different corporation from the one issuing such rights to purchase. However the Board held that even in that kind of a case, the receipt of a mere right to make an advantageous purchase was not income, unless it was an artifice used for the purpose of disguising a taxable dividend. If the receipt of rights to purchase stock in an entirely different corporation from the one issuing such purchase rights is not income, then a fortiori the issuance by a corporation to a stockholder of rights to subscribe to its own stock is not income.

It is difficult to see upon what ground petitioner would be entitled to the loss which it claims by reason of the expiration of the rights if the rights themselves are not income or the distribution of capital. Petitioner has no cost basis for these rights upon which to predicate a deductible loss, such as was present in Sidney Z. Mitchell, 18 B. T. A. 994; affd., 48 Fed. (2d) 697. Neither the applicable statutes nor the Commissioner’s regulations authorize petitioner to alio-cate part of the cost of his original shares of stock to the stock rights received, except in cases where such rights are either exercised or sold.

The Board has already decided the point here involved and held that where a stockholder has received rights to purchase shares of stock in the issuing corporation and those rights become worthless in his hands, the stockholder does not have a legal claim of loss of the value of the rights. St. Louis Union Trust Co. et al., Co-trustees, 30 B. T. A. 370.

Petitioner in its brief draws a distinction in the facts of the St. Louis Union Trust Go. case and the instant case. Petitioner says that in the St. Louis Union Trust Go. case, because of the fall in the market price of the stock after the issuance of the rights, the corporation undertook to rescind the arrangement, refunded subscriptions received, and issued only 1,542 new shares out of a total of 560,322.4 shares for which rights were distributed. “ Consequently [says petitioner] the taxpayer held substantially the same interest in the corporation after the rights expired which he held before and the basis for the rights was reflected in the stock retained. In other words, the situation was comparable to where stockholders contribute stock, pro rata, to the corporation.” Petitioner further says in his brief:

* * * In the instant case all of the rights were exercised, 84%% by stockholders and 15%% by underwriters.
Issued stock was increased from 1,616,719 shares to 2,425,078 shares, and the proportionate interest of the taxpayers was materially changed. Unlike the Beggs case, whatever was the allowable basis to this taxpayer was not reflected in the stock which it retained. The privilege represented by the warrants was Irrevocably lost to this taxpayer and, in fact, was exercised by another. Whatever was the cost of that privilege was therefore a deductible loss.

For reasons we have already stated, we can not agree to this contention. It often happens that a corporation is recapitalized by increasing its capital stock and the new stockholders are outsiders and manifestly the old stockholders do not then own the same proportionate interest in the corporation as they did before the recapitalization. But can it be said that they have realized a taxable gain if the value of their stock is increased by the recapitalization or that they have suffered a deductible loss if the value of their stock is decreased by the recapitalization ? Manifestly not. Taxable gains do not arise from the mere appreciation of shares of stock and deductible losses do not result from their mere depreciation. Gains or losses arise when the stock is finally disposed of. The income tax law is concerned only with realized gains and realized losses. This proposition is so well supported by authorities that it is unnecessary to cite any cases.

In the instant case when petitioner allowed its stock rights to expire without exercising them, it still owned all of its shares of stock upon which such rights were issued and the cost basis of that stock remained just the same as it was before the stock rights were issued. It will have gain or loss on this stock when it finally disposes of it.

On the authority of St. Louis Union Trust Co. et al., Co-trustees, supra, we hold that petitioner suffered no deductible loss when it allowed the stock rights in question to lapse without their being exercised.

Decision will be entered under Bule 50.


author: Murdock:

text:
    Edwin D. Axton, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 56160-56163, 56348, 56438-56442.
    Promulgated May 14, 1935.

      Elwood Hamilton, Esq., and J. G. W. Bechham, Jr., Esq., for the petitioners.

      Arthur Fast, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated and decided herewith: Edwin J. Helck; Robert L. Axton; A. S. Lewis, Sr.; I. B. Baker; Charles E. Erancke; A. C. Wolf; Henry H. Barnes; Wood E. Axton; 'G. G. Wedding.

   OPINION.

Murdock:

The Commissioner determined deficiencies in the petitioners’ income taxes for the year 1928 as follows:

The proceedings were consolidated. A single common issue is involved. That issue relates to the amount of profit realized by the petitioners in 1928 at the time they received shares of class A and class B stock of a new corporation in exchange for their shares of stock in an old corporation and immediately sold the class A shares for cash. The parties have entered into a stipulation of facts. The only other evidence in the record is the testimony of witnesses bearing upon the question of the value of the class B stock at the time it was received by the petitioners.

The petitioners are all individuals. I. B. Baker resides at Hayward, California. Henry H. Barnes resides at St. Louis, Missouri. The other petitioners reside in or near Louisville, Kentucky. Each petitioner at the beginning of 1928 owned common stock in the Axton-Eisher Tobacco Co. (hereinafter called the old corporation). The stipulation shows the number of shares owned by each petitioner, the number of shares acquired prior to March 1, 1913, the fair market value of a share on March 1, 1913, the number and cost of shares acquired after February 28, 1913, and the number of shares acquired as a stock dividend in 1920. The old corporation had been engaged in the tobacco business from the date of its incorporation in 1905. Its board of directors decided on February 22, 1928, to incorporate a new corporation, to be known as “ The Axton-Fisher Tobacco Company ” (hereinafter referred to as the new corporation), and to transfer the entire business, assets, and good will of the old corporation as a going concern to the new corporation in exchange for 100,000 shares of class B common stock of the new corporation and 40,000 shares of its class A common stock. The stockholders of the old corporation met and agreed to this plan. The new corporation was promptly incorporated. Its capital stock consisted of 20,000 shares of $100 par value 6 percent preferred stock, 50,000 shares $10 par value class A common stock, and 200,000 shares of $10 par value class B common stock. Only one half of the preferred and one half of the class B shares were issued. The new corporation sold 10,000 shares of its preferred stock and 10,000 shares of its class A common stock to bankers and issued 40,000 shares of class A common stock and 100,000 shares of class B common stock to the old corporation in exchange for the latter’s entire business, assets, and good will. The stockholders of the old corporation exchanged their old stock for the class A and class B stock of the new corporation which the old corporation had received for its assets. However, this class A stock was not distributed to those stockholders; instead, it was sold to the bankers and the stockholders actually received for each share of stock of the old corporation about $349.98 in cash and 22 shares of class B stock. The sale of this class A stock to the bankers had been prearranged as a part of the whole plan. The old corporation was then dissolved. The stipulation shows the number of shares of B stock received by each of the petitioners, the number of shares of A stock which each was entitled to receive, and the amount of cash which each received from the sale of the A stock. Each of the petitioners reported in his income tax return for 1928 a profit equal to the excess of the amount of cash which he received from the sale of the class A common stock of the new corporation over an amount which, in his opinion, represented the entire basis applicable to his shares in the old corporation. The Commissioner, in determining the deficiencies, included in the income of each petitioner the entire amount of cash which he had received, on the theory that the gain was the excess of the cash and the fair market value of the class B shares over the basis of the old shares and the cash received did not exceed the gain from the transaction. He held that the provisions of section 112(c)(1) of the Revenue Act of 1928 were applicable. He determined that the value of the class B stock was $20 a share at the time received by these petitioners.

We find as a fact from a consideration of all of the evidence in this case that the class B stock had no fair market value and had no value, at the time itl was received by these petitioners, on) which a practicable allocation of the basis of the old shares could be made.

The above finding of fact for all practical purposes determines the real issue in the case. It will enable the parties to compute the tax liability of each petitioner under Rule 50. The fair market value of the class A shares at the time received is clearly shown and is conceded to have been the price at which they were immediately sold. The gain which the petitioners realized upon the receipt of the class A and class B stock is the excess of the fair market value of the class A stock over the basis of the old shares surrendered in the exchange. If that was a transaction from which no gain or loss was recognized for tax purposes, then the petitioners realized a gain from the subsequent sale of the class A shares equal to the excess of the cash received over the basis of the old shares. Thus, no matter which gain is recognized, the amount of gain is exactly the same.

Not only is there no evidence to support the Commissioner’s determination of a fair market value of $20 a share for the class B stock at the time it was received by these petitioners, but the evidence clearly shows that determination to have been erroneous. In order to hold that the class B stock had no fair market value upon which a profit could be computed and no value upon which a practicable allocation of the old basis could be made, it is not necessary to believe that the class B stock was worthless. If anything is ever realized from the disposition of it, the entire amount realized will be income to these petitioners. Cf. art. 58, Regulations 74. The class B stock in question probably had some value. It was all held by a small group of individuals who had been connected with the old corporation and who were expected to continue with the new corporation. None of this stock was bought or sold until long after the date in question, when conditions had materially changed. If the assets of the corporation could have been liquidated at their book value, about $8 would have been paid on each share of class B stock. About 16 cents per share per year would be available for dividends on this class of stock if average earnings of the past were maintained. This stock had exclusive voting privileges so long as dividends on the other stock were not far in default. The parties agree that if a certain broker had been present to testify, he would have said he was familiar with the fair market value of the class B stock of the new corporation and that in his opinion it had a fair market value in 1928 in excess of $15 a share. There is some other evidence from which the respondent might argue that this stock had some fair market value. On the other hand, however, there is the fact that none of it was sold; there was strong probability that the large earnings of 1927 would not be repeated; before any dividends would be available to the class B stockholders, earnings had to be used to pay $60,000 as dividends on preferred stock, to pay $160,000 as dividends on class A stock and to set aside $50,000 annually as a sinking fund; several officers of the corporation testified that in their opinion the class B stock had no fair market value at the time it was received by these petitioners; and there is other evidence to show that whatever small value the class B stock had in 1928 was most uncertain and highly speculative. The respondent sought witnesses to testify that the stock had a fair market value. Two of these witnesses, when called, failed to express an opinion that the stock had any fair market value. Consideration has been given to all of the evidence and it indicates with reasonable certainty that no figure can be satisfactorily fixed upon to represent the value of the class B stock at the time it was received by these petitioners. Under such circumstances the entire old basis should be recovered out of the proceeds and the excess taxed as income as received. Cf. art. 58, Regulations 74.

Reviewed by the Board.

Decision will ~be entered under Rule 50.

Black dissents.


author: SteRNhagen:

text:
    Richard Coulter, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 71402.
    Promulgated May 14, 1935.

      Samuel L. Yowng, Esq., for the respondent.
   OPINION.

SteRNhagen:

The Commissioner, by disallowing a deduction for loss on the sale of shares, determined a deficiency of $3,085.27 in petitioner’s income tax for 1930. The facts are submitted in a written stipulation which it is unnecessary to set forth. Section 118, Revenue Act of 1928, is the controlling statute.

The petitioner, on his return for 1930, described himself as a banker, and his principal income was shown to be derived from salaries and executor’s fees. His first contention is that the loss was incurred in his trade or business of buying and selling securities, and therefore is deductible despite the wash sale provision. There is no support for this either in law or in the evidence. There is no statutory exception as to individuals, and the exception as to corporations is limited to a “dealer.” This term has been held to mean the same in section 118 as in section 22 (c), regarding inventories. Donander Co., 29 B. T. A. 312. The Commissioner, however, in article 661 of Regulations 74, has excluded from the restriction of the wash sale provision an individual taxpayer engaged “ in the trade or business of buying and selling securities.” Assuming this to be a permissible qualification of the statute, it is not sufficient that a taxpayer can show a series of individual transactions, whether speculative or for investment. Bedell v. Commissioner, 30 Fed. (2d) 622; Taylor v. Commissioner, 76 Fed. (2d) 904. The evidence here indicates only that the petitioner had a brokerage account upon which, in 1930, he bought and sold securities, including shares in the American Water Works & Electric Co. of which he was a director. This evidence is not enough to establish a trade or business not subject to the restrictions of the wash sale provision.

The deduction here in question is claimed in respect of a loss upon the sale, on December 18, 1930, of 500 shares of American Water Works stock, and the disallowance by the Commissioner is based upon the fact that on the preceding November 28 the petitioner purchased 200 shares. The Commissioner applied the first in, first out rule of [Regulations 74, article 58, and disallowed so much of the loss, so computed, as was applicable to 200 shares. The taxpayer complains that this is an inconsistent method of combining the wash sale provision and the first in, first out rule, arguing' that the Commissioner can not consistently hold that the shares sold December 18 are to be identified with those purchased on November 30, and at the same time that their cost is to be found by the first in, first out rule in the earliest purchases. The fallacy, however, of the petitioner’s position is in the idea that the wash sale disallowance connotes an identity in the shares sold and those purchased within the preceding 30 days. The wash sale statute is not concerned with the identity of the shares sold, but only provides categorically that the deduction shall be disallowed if any substantially identical property is acquired within 30 days. For the purpose of the wash sale provision, therefore, it is only necessary that the Commissioner should disallow so much of the loss as is proportionately applicable to 200 shares. In determining the measure of the loss sustained on the sale of the 500 shares on December 18, the first in, first out rule is no less applicable because part of the loss is precluded from deduction under the wash sale statute.

In view of the decision that both the wash sale provision and the first in, first out rule may properly be used, the petitioner makes no complaint of the mathematical computation of the disallowed portion of the loss.

Judgment will be entered for the respondent.