author: Seawell :

text:
    Mary Katherine Dulin, Petitioner, v. Commissioner of Internal Revenue, Respondent. H. L. Dulin, Petitioner, v. Commissioner of Internal Revenue, Respondent. Eugenia Belle Dulin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 41264, 41265, 41266.
    Promulgated April 25, 1932.

      Mabel Walker Willebrandt, Esq., and Wm. Montgomery Smith, Esq., for the petitioners.

      O. J. Tall, Esq., for the respondent.
   OPINION.

Seawell :

In determining the issues here involved it is necessary to construe and apply the following statutes and regulations:

Section 212 (b) of the Revenue Acts of 1924 and 1926:

(b) Tbe net income shall be computed upon the basis of the taxpayer’s annual accounting period (fiscal year or calendar year as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Oommissioner does clearly reflect the income. If the taxpayer’s annual accounting period is other than a fiscal year as defined in section 200 or if the taxpayer has no annual accounting period or does not keep books, the net income shall be computed on the basis of the calendar year.

Article 50, Regulations 65 and 69 (substantially the same):

Abt. 50. When included in gross income. — Gains, profits and income are to be included in the gross income for the taxable year in which they are received by the taxpayer, unless they are included when they accrue to him in accordance with the approved method of accounting followed by him. * * * [Beg. 65.]

Section 204 of the Revenue Acts of 1924 and 1926:

(a) 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—
*******
(2) If the property was acquired by gift after December 31, 1920, the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift. * * *
*******
(4) If the property was acquired by gift or transfer in trust on or before December 31, 1920, the basis shall be the fair market value of such property at the time of such acquisition.

The petitioners adopted and consistently followed the method of reporting in each annual tax return all dividends received up to the time of filing their returns and all dividends received prior to March 15, of any year, appear in the schedule of dividends attached to the tax returns for the prior years. The dividends received prior to March 15, 1924, were reported in the tax returns for the calendar year 1923 and the dividends received prior to March 15, 1925, were reported in the tax returns for the calendar year 1924. Their returns were prepared on calendar year forms by L. H. Petree and there is no evidence indicating that it made any difference to them whether the returns were made on a fiscal year basis or on a calendar year basis. The testimony shows Petree was influenced in including in the calendar year returns dividends received after December 31 and prior to the filing of the returns the following year by a ruling that dividends paid during the first 60 days of any calendar year should be deemed to have been paid out of surplus for the previous year in computation of the corporation’s invested capital.

The record shows that the dividends received by Mrs. Dulin and here daughter were their only income and were paid as' or when declared. It follows therefore that their returns would have been the same whether prepared on the cash receipts and disbusements basis or on the accrual basis.

In the face of the return of Mrs. Dulin for the calendar year 1922— filed and in evidence as an exhibit by her, though taxes for that year are not in issue — it is stated that the return is “ for period begun Dec. 31st, 1921 and ended Dec. 31st, 1922.” All the returns of petitioners are made on the calendar year forms of similar character, with no mention of returns being from March 15 to March 15, and no notation accompanying the returns so indicating until 1926, when the returns for the calendar year 1925 were filed.

The record shows no books were kept by Mrs. Dulin and fails to show that any of the petitioners kept any books or had any annual accounting period on a fiscal year basis as defined in section 200 of the Revenue Acts of 1924 and 1926. The net income, therefore, in our opinion, should be computed on the basis of the calendar year, as provided in section 212 (b), sufra. The record shows it was so computed by the respondent, who restored the dividends in question to taxable net income for the calendar years in which they were received, in accordance with the law and regulations heretofore mentioned, and in so doing he committed no error and his action is accordingly approved.

The contention in behalf of petitioners that they adopted a fiscal year basis for 1924 and prior years in making their returns, that their method clearly reflected income, and that under such circumstances the respondent had no right to change such method as indicated by his deficiency notice, appears to be based on the assumption that the petitioners’ method of returning dividends as income for the period March 15 to March 15 constituted a fiscal year within the meaning of the revenue law. This is erroneous. We quote what we said in Clara A. McKee, Administratrix, 11 B. T. A. 1381, as applicable and controlling here:

* * * The taxing statute specifically requires that net income shall be computed upon the basis oí a twelve-month period “ending on the last day of any month other than December ” or on the basis of the calendar year. A twelve-month period ending April 17 is not a “ fiscal year ” as defined in the statute and is not an accounting period which the respondent has authority under the statute to accept as a basis for an income-tax return.

See also Fred R. Drake, 1 B. T. A. 1235; The Duriron Co., 18 B. T. A. 554.

For the purpose of determining the basis to be used in the computation of the gain or profit on the sale in 1926 by Mrs. Dulin and her daughter, Mary Katherine Dulin, of 250 shares, each, of the Anderson-Dulin-Varnell Company stock, it is necessary for us to first determine whether there was in December, 1920, or not until January, 1921, a completed and valid gift of the 510 shares (mentioned in our findings of fact and of which that sold was a part) to Mrs. Dulin by her husband, H. L. Dulin. As this Board has said:

* * * To constitute a gift in contemplation of law, there must be (1) an intention on the part of the donor to give — that is, to surrender complete control and dominion over the property to the donee; (2) there must be an acceptance of the gift by the donee; and (3) there must be a transfer of title accompanied by delivery of the property. Charles Greenblatt, 2 B. T. A. 77; Estate of David R. Daly, 3 B. T. A. 1042; F. J. Vlchek, 7 B. T. A. 1244; J. T. Lupton, 19 B. T. A. 166. [See J. T. Hedrick, 24 B. T. A. 444, 453.]

See also Allen-West Commission Co. v. Grumbles, 129 Fed. 287-290; Edson v. Lucas, 40 Fed. (2d) 398, 404.

The record shows very clearly the intention of H. L. Dulin to give his wife the aforesaid 510 shares and this intention was so expressed on December 28, 1920, when he told her he gave her the stock. Mrs. Dulin then indicated her acceptance of the alleged gift of the stock.

The question remaining for our determination is whether the third requisite entering into the making of a completed and valid gift— the transfer of title, accompanied by delivery — was complied with in December, 1920, as contended by Mrs. Dulin, or not until January 4-, 1921, insisted upon by the respondent.

The record shows that Mrs. Dulin never saw nor had in her personal possession in 1920 the original stock certificate calling for the 510 shares of stock which her husband told her in December, 1920, he was giving her and which he delivered to L. H. Petree, the office manager, with instructions to have a new certificate for the same number of shares prepared in the name of Mrs. Dulin. When the certificate was handed Petree for the purpose indicated it was not endorsed by H. L. Dulin and was not endorsed by him until Petree on January 4, 1921, presented it to him for endorsement so proper entries might be made on the books of the Anderson-Dulin-Varnell Company and a new certificate might be issued in the name of Mrs. Eugenia Belle Dulin. Such a certificate was so issued and delivered to H. L. Dulin for his wife, Eugenia Belle Dulin, but the record does not disclose whether ever actually delivered to her. Numerous authorities are cited and plausible arguments presented by counsel for each of the parties in support of their respective contentions.

In the circumstances of the instant case, it is not necessary to discuss many of the authorities cited, as the Anderson-Dulin-Varnell Company is a Tennessee corporation and the question now under consideration is a Tennessee transaction and, in our opinion, controlled by Tennessee law. The Tennessee decisions are, however, in accord with the law as stated in Bowen v. Kutzer, 167 Fed. 281, in which the court said:

Gifts inter vivos of personal property, to be effective, must be accompanied by tbe delivery of tbe possession, tbe donor parting with all present and future dominion over it; tbe donor must be divested of, and the donee invested with, tbe right of property in the subject of the gift; it must be absolute, irrevocable, without any reference to its taking effect at some future time; and without such proof, clear and explicit, the gift fails. No mere promise or declaration of intention to give will suffice, however clearly the same may be established. Nothing short of a complete and unconditional delivery is sufficient to constitute a valid gift and, until delivery, the gift is inchoate and revocable.

In Marshall v. Russell, 93 Tenn. 261 (25 S. W. 1070), the court said:

* * * The settled rule is that a parol gift of a chattel or chose in action, whether it be a gift inter vivos or causa mortis, does not pass the title to the donee without delivery and transfer of the possession. The effect of a valid delivery is to place the subject of the gift under the control and dominion of the donee, and his title and right of possession, by such gift and delivery, become absolute and irrevocable. McEwen v. Troost, 1 Sneed, 185. It is therefore essential to the validity of such a gift that the transaction be fully completed. While anything essential remains to be done, there exists a loons poenitentiae, and what has been done may be revoked. An absolute gift, which will divest the donor’s title, requires a complete renunciation on his part, and acquisition on the part of the donee, of all the title to and interest in the subject of the gift. It is, however, settled that the delivery need not be directly to the donee, but may be made to a third party for the donee. If the delivery to the third party is simply for the purpose of delivery to the donee as agent or messenger of the donor, the gift is not completed until the subject of the gift is actually delivered to the donee. The donor can revoke the agent’s authority, and resume possession of the article. When the delivery to the third person is to him in the capacity of a trustee for the donee, and not as agent of the donor, such delivery completes the gift. To constitute such a case, the circumstances should show a full relinquishment of dominion over the property to the trustee, for the purpose of the trust, so that the trustee shall not be the agent of the donor, but shall act for the donee, instead. Minchin v. Merrill 2 Edw. Ch. 333; Neufville v. Thomson, 3 Edw. Ch. 92; Dresser v. Dresser, 46 Me. 48; Scott v. Lauman, 104 Pa. St. 593.

See also the later case of Cates v. Baxter, 97 Tenn. 443; 37 S. W. 219.

In Chandler v. Roddy (Supreme Court of Tennessee), 43 S. W. (2d) 397, is a very recent, full and satisfactory discussion of what is necessary to constitute a completed and valid gift. In it the learned Chief Justice of the Supreme Court of Tennessee reviews numerous prior decisions of that court and his opinion therein expressed is controlling and conclusive of the issue we are now considering. In that case the complainant, Eugenia Williams Chandler, instituted suit to establish her right and title to certain personal property, various certificates of deposit, shares of stock and the like, which she claimed her father, D. H. Williams, gave her prior to his death. Her father in 1920, prior to her marriage, called her into his office, where there was a small iron safe, the contents of which he showed her, the securities of the character above indicated being therein, inclosed in envelopes which he had endorsed as containing the property of his daughter, Eugenia Williams, and there and then told her that he gave her all the securities therein, that they were all hers. In the opinion it is further stated that he taught her the combination of the safe and that some time later, after she had forgotten the combination of the safe, she was in the office and he again taught her the combination and repeated that he had given her the contents of the safe. About 1926 her father and her husband removed the securities, etc., mentioned from the safe to a safe-deposit box in a bank, her husband testifying that his father-in-law stated at the time that all that property he had given to his daughter, that it was hers, and the son-in-law further testified that the securities were inclosed in envelopes which his father-in-law had endorsed as containing the property Of Eugenia Williams Chandler, “ Chandler ” appearing to have been added in most cases to the original endorsements. All the securities mentioned stood in the name of D. H. Williams and none was endorsed by him to his daughter except one certificate for 732 shares of a certain stock. The court in its opinion said:

* * * There seems to be no doubt but that D. H. Williams repeatedly declared that he had given all the property here in controversy to his daughter. We think the clear preponderance of proof is that Williams indorsed the envelopes containing the securities involved as the property or personal property of his daughter and that these securities were found in these envelopes in the bank box after his death. Likewise the testimony of the bank officials shows that Williams authorized her entry into this box in 1928. Williams died October 1, 1929.
The question here is whether there had been any such delivery of the property by the father to the daughter as to complete a gift to her. A surrender of dominion and control by the donor is, of course, essential to a gift. The father here retained possession of the property until his death, but the argument of counsel for the daughter is that his possession was as her agent.

D. H. Williams, however, after making the declarations of the gift to his daughter of all said securities and doing other things detailed in the opinion tending to show he gave them to her, after-wards dealt with some of them as being still owned by himself. The court decided that the only completed and valid gift by D. H. Williams to his daughter was of the 732 shares of stock called for by the certificate which he had specifically endorsed to her and which he thereafter held as agent for her, his failure to transfer manual possession to her of same doubtless being an oversight.

The law never presumes a gift, the burden being on the claimant to establish it. Bolton v. Bolton, 138 N. E. 158; Allen-West Commission Co. v. Grumbles, supra. Furthermore, the general rule of law is that the burden is on the donee to establish all the facts essential to the validity of a gift. Walker v.Welsh, 11 N. E. 727; In re Housman’s Estate, 121 N. E. 357; Chambers v. McCreery, 98 Fed. 783; affd., 106 Fed. 364.

In the instant case, the mere declaration of Dulin to his wife, Eugenia Belle Dulin, and to Petree that he gave the 510 shares of stock to her — without endorsing or delivering the certificate to her— left him, H. L. Dulin, in complete control of the situation, with the power to revoke the gift, endorse the certificate and transfer the stock to any one he might wish, just as D. H. Williams did or might have done in reference to the securities not endorsed nor delivered to his daughter and held in Chandler v. Roddy, supra, not to have been a completed and valid gift to his daughter, although he had told her and others he gave them to her. All the requisites to make a completed and valid gift to Mrs. Dulin of the said 510 shares were not in our opinion complied with prior to January 4, 1921, when the certificate was endorsed and a new certificate issued in her name and held for her by her husband.

In order for this Board to hold that the gift of the 510 shares to Mrs. Dulin was a completed and valid gift in December, 1920, it would be necessary for us to find that L. H. Petree was the agent of or trustee for Mrs. Dulin at the time her husband handed the certificate to Petree, with instructions as heretofore stated in our findings of fact. In our opinion, the record does not warrant such conclusion, but shows Petree to have then been the agent of H. L. Dulin in the carrying out of his instruction relative to the transfer of the stock in order that the absolute title to the same might pass to Mrs. Dulin. Petree, after the issuance of the new certificate, did not hold the same as agent or trustee for Mrs. Dulin as he would naturally have done had he so considered himself, but delivered it to H. L. Dulin without, so far as the record shows, any instructions from Mrs. Dulin to that effect.

In view of our decision that there was not in 1920 a completed and valid gift of the 510 shares to Mrs. Dulin, there is no occasion for arriving at the fair market value of the 510 shares of stock as at December 23,1920, inasmuch as the value to be used, according to the respondent’s determination and contention, is the value at March 1, 1913, which has not been contested.

In the circumstances shown by the record herein, the respondent did not, in our opinion, commit error in treating the returns of the petitioners as on a calendar year basis instead of on an alleged fiscal year basis as contended by petitioners and the evidence, in our opinion, is not sufficient to overcome the presumption of the correctness of the respondent’s determination of deficiency in tax in any of the cases, except in Docket No. 41266, in which respondent admits that he erred by increasing taxable net income for the year 1926 by the full amount of $3,750 in dividends received by the petitioner during the year 1926 from the Holston National Bank, inasmuch as 46.53 per cent of such dividends represent a return of capital and taxable net income should, therefore, be reduced by the amount of $1,744.88.

Judgment will be entered for respondent in Docket Nos. ¡¡MOf and I¡.1^65, and u/nder Rule 50 in Docket No. Jf.1266.


source: Caselaw Access Project

author: Trammell:

license: Public Domain

text:
    Fairmount Cemetery Association, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 30925, 42811.
    Promulgated April 25, 1932.

      John A. Stolp, O. P. A., and Julius H. Grdbom, G. P. A., for the petitioner.

      Bruce A. Lorn, Esq., 0. 0. Holmes, Esq., and F. H. Gettle, Esq., for the respondent.
   OPINION.

Trammell:

The sole error assigned by the petitioner is that, in computing the deficiencies, “ the Commissioner erred in not including in the cost of the land sold the correct fair market value as of March 1, 1913, of said land.”

Evidence was offered by both parties respecting the March 1, 1913, value of the petitioner’s cemetery property, and for that purpose, the petitioner classified its land as (1) improved and (2) unimproved, while the respondent classified the land as (1) improved, (2) semi-improved, or that portion which lay immediately contiguous to the improved area at March 1, 1913, and (3) the portion used for farming which was wholly unimproved for cemetery purposes.

Much of the testimony of the witnesses was directed to the question of the value of the unimproved farm land, none of which was sold during the taxable years, and for that reason we have not attempted to fix the value of the latter class at March 1, 1913, nor have we given consideration to the testimony on that point, since it affords no basis for determining the value of the other classes of land sold in the taxable years.

The petitioner offered in evidence, without objection from the respondent, schedules showing the block numbers, area in square feet and sale price of all lands sold in the taxable years. From other evidence of record, we have determined the block numbers which were improved at March 1, 1913, and those which were contiguous or semiimproved. We have accordingly set out in our findings of fact the area in square feet of improved and semiimproved land sold in each taxable year, together with the sale price. It remains only to determine the fair market value of these two classes of land at the basic date.

The petitioner contends that its land fully improved for cemetery purposes had an average fair value on March 1, 1913, of 88 cents per square foot, and submitted evidence in support thereof. We have found that the improved land had a fair market value at the basic date as contended for by the petitioner.

The semiimproved land offers more difficulty in determining its fair value at March 1, 1913, the evidence varying widely on this point. However, from a careful consideration of all the evidence of record we have reached the conclusion, and so found, that this class of the petitioner’s land, sold in the taxable years, had a fair value at the basic date of 40 cents per square foot.

It is shown that during the taxable year 1925 the petitioner made sales of “ special repurchases ” in the amount of $5,425, and in the taxable year 1926 made sales of “ special repurchases ” in the amount of $2,503, no block numbers of the said repurchases being designated, and no evidence being offered to show the state of improvement on March 1,1913, of the land so repurchased and resold. If these lands were originally sold and repurchased prior to March 1, 1913, the basis for computing gain or loss upon their resale in the taxable years would be the March 1,1913, value, but if they were repurchased subsequent to March 1, 1913, the basis would be cost. On this point we have no evidence, and we will therefore not disturb the action of the respondent.

The deficiencies will be redetermined accordingly.

Judgment will be entered under Bule 50.


author: Arundell:

text:
    Allied American Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 31704.
    Promulgated April 26, 1932.

      Harold Wisan, Esq., and Jacob 8 chápiro, Esq., for the petitioner.

      G. A. Bay, Esq., for the respondent.
   OPINION.

Arundell:

From the course that this case took at the trial it becomes desirable for its better understanding that we relate something of its historical background. It appears that in its original return for the year 1928 petitioner sought to deduct $11,120.36, which amount it designated as “license tax to Russian Government.” Thereafter in 1927 the respondent issued a notice of deficiency, and in said notice stated that the deduction claimed was disallowed, “ * * * for the reason that the evidence submitted indicates the item to be distribution of profits and is disallowed in accordance with Article 1541, Regulations 62.” Thereupon the petitioner instituted these proceedings. In 1928 and during the pendency of these proceedings petitioner filed with the Commissioner an amended return for the year 1923 in which it sought to deduct in lieu of the $11,120.36 the sum of $30,327.59, which amount it claimed as that paid to the Soviet Republics. The following errors were cited by petitioner:

(a) The payment to the Russian Government, which the Commissioner claims is a taxable distribution of profits to a shareholder, was an absolute fixed minimum license fee for the privilege of doing business in territory controlled by the payee (Russian Government).
(b) The payment was not from profits, nor based thereon, but was based on the value of goods imported and exported by the petitioner during a fixed period.
(c) Regardless of the presence or absence of profits, the payment had to be made by the petitioner, and was not refundable.
(d) The payee (Russian Government) was neither a shareholder nor a stockholder in the petitioner.

Respondent’s answer was a general denial.

The testimony offered by the petitioner clearly established the payment by it to the Soviet Republics in December, 1923, of gold rubles of the value in American money of $30,327.59; that the amount so paid was an absolute fixed minimum license fee for the privilege of doing business in Russia and was based on the value of goods imported and exported by the petitioner during a fixed period and no part of it was refundable; and, further, that the payee, the Soviet Republics, was not a stockholder of petitioner. On these undisputed facts petitioner claims that it is entitled to deduct the $30,327.59 either as a tax or as an ordinary and necessary expense of carrying on a trade or business.

The petitioner had been carrying on business in Russia for some time prior to 1923, when apparently there were no trade restrictions. In 1923 the Soviet Republics enjoyed a monopoly of buying and selling within its territory as well as the importation into and exportation of goods out of the country and forbade others under penalty of death to engage in such trade without first entering into an agreement with the Peoples Commissariat of Foreign Trade of the form executed by the petitioner. Petitioner’s president in 1923 commenced negotiations with the proper officials of the Soviet Republics for a trading permit or concession, and, after discussing the subject for a “ few months,” reached an understanding, the terms of which were embodied in the agreement of July 14, 1928. Thus, it appears that the concession agreement was reached only after prolonged negotiations carried on at arm’s length between parties each striving for the best possible bargain. Had petitioner been able to negotiate a more advantageous contract we have no doubt that it would have done so. Then it was confronted with the problem of either paying for the privilege of doing business in the Soviet Republics or remaining out. We have no reason for questioning its motives for electing to do the former.

In this respect the instant case is unlike Amtorg Trading Corporation, 25 B. T. A. 327. That case was submitted on a stipulation of facts which failed to show the necessity of the agreement as a prerequisite to doing business. There the holder of the concession was shown to have been indirectly owned by the Soviet Republics.

On the issue as directly framed it would seem that the petitioner should prevail and that the amount of $30,327.59 paid to the Soviet Republics is properly deductible as an ordinary and necessary expense under section 234(a) (1) of the Revenue Act of 1921.

While it was not entirely clear until the conclusion of the trial and the receipt of respondent’s brief exactly what his position was, it now appears that he no longer contests the fact of payment or contends that the amount paid constituted a distribution of profits within the meaning of the revenue act. He advances, however, two grounds for sustaining the deficiency determined by him; first, that the goods were sold to the Allied American Fur Sales Agency, Inc., in 1923 under an agreement whereby petitioner was to be reimbursed for its entire cost in securing the furs, including the amount paid to the Soviet Republics, and that the right to receive payment from the Agency would serve as an offset against the payment made to the Soviet Republics; and, secondly, in the alternative, that the amount paid to the Soviet Republics constituted a part of the cost of the furs, and as these goods were still owned by petitioner at the end of 1923 they would properly be carried in its inventory and consequently no deduction would be allowed. Thus it will be seen that the grounds on which the proceedings first started have been materially shifted by the respondent.

To properly understand the grounds relied upon by respondent, a brief discussion of petitioner’s relations with the Allied American Fur Sales Agency, Inc., is necessary.

Shortly after petitioner was granted the concession, Sutta &' Fuchs, large fur dealers, who were unable to obtain a trading permit with the Soviet Republics, approached petitioner with a proposition to acquire the fur rights under its license. Subsequent discussions of the question led to the organization of the Agency to exploit the concession in so far as it related to furs, and to the execution of an agreement on October 10, 1923. This agreement provided for the issuance to petitioner of one-half of the Agency’s stock for the assignment to it of the fur rights under the concession; for the purchase of furs in Russia by petitioner for the Agency with funds supplied by the latter; for payment of $200,000 by Sutta & Fuchs to the Agency for shares of its stock; that upon application of the Agency, Sutta & Fuchs should maintain irrevocable letters of credit in the minimum amount of $300,000 for the purchase of furs by petitioner; that the Agency would pay to petitioner for the account of the NKVT such amounts as petitioner would have been required to pay the Soviet Republics had it transacted the fur business instead of the Agency; that all losses should be borne equally by petitioner and Sutta & Fuchs; that neither of them should sell its stock of the Agency without obtaining the consent of the other, and that' the rights assigned were subject to the terms and conditions of the concession agreement.

Thereafter within the month petitioner made a purchase of furs under the contract at a cost of $171,124.71 and promptly shipped them to the Agency in care of the New York Auction Company, which sold the consignment at auction sales conducted during the early part of 1924, and in February of that year rendered a statement to petitioner of the transaction. The original cost of the furs was charged to the Agency on the New York books of petitioner in November, 1923. During the same month the Agency paid to petitioner in Moscow on account of the transaction the sum of $138,000 in the form of a letter of credit obtained by the New York Auction Company for that purpose. The balance of the purchase price was paid during the early part of 1924.

The first point is based entirely on paragraph 9 of the contract between petitioner and the Allied American Fur Sales Agency, Inc., et al., wherein it is provided that “ The Agency agrees with the corporation that it will pay over to the corporation for the account of the Peoples Commissariat for Foreign Trade such amounts at such times as the corporation would be required by the concession to pay to said Peoples Commissariat had it transacted the fur business instead of the Agency.” There is no doubt that this provision of the contract tends to support the respondent’s position. Unexplained, the language is, in our judgment, sufficient to indicate that petitioner was to be reimbursed for the fee paid by it incident to the shipment of furs. There is, however, in the case the positive testimony of petitioner’s president who had negotiated both contracts, namely, the one with the NKYT and the Agency contract, to the-effect that petitioner was neither directly nor indirectly reimbursed by the Agency or anyone else for the fee paid by it; that the goods were to be and actually were sold and billed to the Agency at the first cost of $171,124.71; and that any amount payable to the ISTKVT for the privilege of exporting furs from Russia was to be an expense of petitioner alone. We think that this direct testimony must prevail over the implications to the contrary that may be drawn from the language of the Agency contract. It would, no doubt, have been helpful if the other parties to the Agency agreement had been called and perhaps their books and returns produced. The respondent did not produce them, but rested his case solely on the implications to be drawn from the contract. The petitioner could hardly have been expected to be prepared in more detail on this point when neither the notice of deficiency, the pleadings, nor • the respondent’s opening statement gave any hint of the contention now being discussed.

We can find no basis in fact' for respondent’s alternative argument. It is clear that the furs had been disposed of by petitioner before the end of the year 192B and they formed no part of its inventory. They were delivered to the New York Auction Company for the account of the Agency in 1923, and the books of petitioner show a charge to the Agency of $171,124.71 on November 30, 1923, for the goods.

We think the petitioner is entitled to deduct the item of $30,327.59 as an ordinary and necessary business expense. Having reached such a conclusion, we need not decide whether the payment is deductible as a tax under section 234(a) (3) of the taxing act.

Decision will be entered Wider Rule SO.


author: Smith:

text:
    W. R. Hervey, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46806.
    Promulgated April 26, 1932.

      John B. Milliken, Esq., and George H. Roster, Esq., for the petitioner.

      Philip M. Clark, Esq., for the respondent.
   OPINION.

Smith:

The petitioner contends, in effect, that he realized no income by reason of the cash and stock distributions by the syndicate or pool manager in 1926 and 1927, but that in the event it is held that he did realize income from such distributions, he sustained a deductible loss in an equivalent amount in 1927. The respondent takes the position that the taxpayer realized income in 1926 in the amount of the cash distributions- in that year, and realized income in 1927 to the extent that the cash received in that year exceeded his contribution to the pool, plus the 2,150 shares of the preferred stock valued at $9 per share. Respondent further contends that the amount paid to the receivers by the petitioner in settlement of their claim is nob deductible, since it was a personal loss and not a loss growing out of the petitioner’s investment in the stock pool.

Our problem is, therefore, to determine whether the transactions set forth in our findings constitute one continuing transaction, the result of which was neither gain nor loss, or whether they were separate and distinguishable transactions, the result of which in each instance was either gain or loss. The practical effect may be the same in either case, but the resulting tax liability may be quite different. Cf. Anna M. Harkness, 1 B. T. A. 127; United States v. Isham, 17 Wall. 496. The nature of each transaction is determinable from the facts relating to it, and is not changed because of its association with other transactions in a larger and more comprehensive plan. Cf. William H. Mullins, 14 B. T. A. 426. To carry the petitioner’s contention to its logical conclusion would be to treat the payments to the receivers as being comprehended by the general plan of the syndicate or pool, and hold that the plan and purpose of the pool was not to make a profit for the petitioner and his associates.

In the case of J. D. Bigger, 19 B. T. A. 797, the Board held that the taxpayer’s capital contribution to a syndicate for the acquisition of certain oil and gas leases constituted a closed transaction and that he realized a taxable gain upon the exchange of his interest in the syndicate for shares of stock- in the operating corporation to which the leases were transferred. Had there been but one distribution in the instant proceeding, and that in 1927, in the amount of $158,064.40 in cash and 2,150 shares of stock, no one would seriously contend that petitioner, having recovered the full amount of his capital investment in cash, did not realize a taxable gain to the extent of the amount of the excess of the distribution over the amount of his investment. In the circumstances, we hold that for tax purposes the transactions here involved are separate and distinguishable. J. D. Bigger, supra, and cases there cited.

On September 22, 1926, the petitioner contributed $100,000 to the syndicate or pool for the purchase of stock of the Julian Petroleum Corporation at a specified price. In this manner he made his capital investment by which he acquired either an undivided interest in the syndicate (see J. D. Bigger, supra) or a proportionate amount of the stock purchased by the syndicate or pool (see William K. Dick et al., Executors, 20 B. T. A. 637). The syndicate bought 61,517 shares of the stock at $15.50 per share, which Lewis and A. C. Wagy & Company, Inc., agreed to repurchase, and, as a guaranty to the syndicate against loss, deposited with the syndicate a like number of shares of this stock. On December 9, 1926, Lewis and A. C. Wagy & Company, Inc., being unable to carry out their agreements to repurchase the stock at $18.50 per share, made a further agreement for the repurchase of the stock and paid over to the syndicate $3 per share as a “ present profit * * * in the transaction.” The new agreement provided for the repurchase of the stock at prices that advanced $1 per share for each period of 10 days that elapsed before the repurchase. After December 30, 1926, the repurchase price was not less than $18.50 per share. At the close of the taxable year 1926, petitioner had received a cash distribution of $19,354.80 upon his interest in the pool. The 64,517 shares of the stock purchased at $15.50 were subject to an agreement to sell at $18.50, and this agreement was guaranteed by the deposit of the same amount of the stock. In other words, the parties to these transactions at the close of the year 1926 were in the same position that they were in prior to the payment of $3 per share to the pool, which in substance was In the nature of a forfeit for failure to carry out the agreement to repurchase. Upon the distribution to the petitioner, he realized a gain which was segregated from his capital investment — he had neither parted with nor diminished his interest in the syndicate or the stock. See Cullinan v. Walker, 262 U. S. 134, 137. In the circumstances, there being no sale of the stock in 1926 such as would entail the return of the capital investment before there could be a realized gain (cf. Burnet v. Logan, 283 U. S. 404), we believe that the cash distribution in 1926 was just what the parties said it was, viz., a present profit upon the transaction. The respondent’s determination that the amount so received in 1926 is taxable income of 1926 is sustained.

In much the same manner petitioner received in 1927 cash distributions prior to the liquidation of the pool in that year. The pool was completely liquidated in 1927 and the petitioner received cash in the amount of' $138,709.60 and 2,150 shares of preferred stock of the Julian Petroleum Corporation, which the respondent has valued at $9 per share. The net result of the distributions prior to and in liquidation of the pool was that the petitioner realized income to the extent that these distributions exceeded his capital investment. The respondent’s inclusion of the amount of this gain in petitioner’s income for 1927 is sustained.

However, later in the taxable year 1927, the petitioner was required to turn over all of his profits to the receivers of the Julian Petroleum Corporation or be prosecuted for violation of the usury laws of the State of California. Although admitting no violation of the statute, the petitioner chose to surrender the cash and stock to the receivers upon the condition that they would forego suit against him. This was the aftermath of the stock pool transaction, entered into for profit, and having found that petitioner realized income in the taxable years from his interest in the pool or the stock, he, as a result of turning over to the receivers in 1927 cash in the amount of $58,064.40 and 2,150 shares of stock valued at $9 per share, sustained a deductible loss.

The statute permits the deduction of “ losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business.” (Section 214 (a) (5) of the Revenue Act of 1926.) Admittedly, the petitioner’s investment in the pool was a transaction entered into for profit. It seems to us, too, that the compromise settlement with the trustees was directly related to this transaction. Certainly, the loss was not a personal loss in the sense that it was disassociated from any business transaction, nor did it result from any patently wrongful and extrinsic act on the part of the petitioner such as perjury (see Sarah Backer et al., Executors, 1 B. T. A. 214). The petitioner’s payment to the trustees was in settlement of an alleged civil liability which was predicated upon the very substance of the transaction upon which the profits were computed. It was not in the nature of a fine for violation of a criminal statute as in Columbus Bread Co., 4 B. T. A. 1126. No criminal action against the petition had been proposed.

The discussion in Kornhauser v. United States, 276 U. S. 145, of proximity of cause as related to business expense deductions is pertinent. The court said:

In the Appeal of F. Meyer & Brother Co., 4 B. T. A. 481, the Board of Tax Appeals held that a legal expenditure made in defending a suit for an accounting and damages resulting from an alleged patent infringement was deductible as a business expense.
The basis of these holdings seems to be that where a suit or action against a taxpayer is directly connected with, or, as otherwise stated (Appeal of Backer, 1 B. T. A. 214, 216), proximately resulted from, his business, the expense incurred is a business expense within the meaning of section 214 (a), subd. 1, of the act. These rulings seem to us to be sound and the principle upon which they rest covers the present case. * * *

This principle would seem to apply with equal effect in the case of losses, the evident purpose of the statute being to allow the deduction of both the ordinary and necessary expenses and the losses incident to the business or transaction which has yielded the profits to be taxed.

In a number of cases we have denied the deduction as business expenses of fines, penalties, and legal expenses arising from violations of various regulatory and criminal laws. See Sarah Backer et al., Executors, supra; John Stephens, 2 B. T. A. 724; Columbus Bread Co., supra; Great Northern Railway Co., 8 B. T. A. 225; affd., 40 Fed. (2d) 372; Atlantic Terra Cotta Co., 13 B. T. A. 1289; Burroughs Building Material Co., 18 B. T. A. 101; affd., 47 Fed. (2d) 178. The necessity for the rule is laid to the statutory limitation of deductible expenses to the “ ordinary ” and “ necessary ” expenses, which terms are said to exclude the expenses arising from unlawful acts. The statute, however, does not use these restricting terms in providing for the deduction of losses. With exceptions not here material, it authorizes the deduction of all losses incurred in trade or business (section 214 (a) (4), Revenue Act of 1926), or incurred in any transaction entered into for profit (section 214 (a) (5), Revenue Act of 1926). The term “loss” is said to be a comprehensive one. Ernest E. Lloyd, 8 B. T. A. 1029. In Electric Reduction Co. v. Lewellyn, 11 Fed. (2d) 493, the court described a loss as a “ failure to keep that which one has.”

In Burroughs Building Material Co. v. Commissioner, supra, the court said that “ the disallowance may properly rest on a refusal to sanction expenditures of such a character as we have here on grounds of public policy.” The expenditures referred to were fines and attorneys’ fees paid in connection with prosecution or indictment for participating in a price-fixing agreement in violation of the laws of New York. We do not understand, however, that the laws of California prohibit the operation of or the participation in stock pools of the character under consideration in this proceeding, nor do we think that it can be said that such a transaction is malum in se or contrary to public policy.

In the cases cited, where the deductions have been disallowed, the transactions involved were all illegal. In other cases, where the illegality of the transactions was not established, similar deductions have been allowed, as in Huff, Andrews & Thomas, 1 B. T. A. 542, where the taxpayer, although denying his guilt, was accused of violating the United States Food Control Act and required to pay a fine of $5,000 to the Bed Cross or have its license canceled. See also Superheater Co., 12 B. T. A. 5; Continental Screen Co., 19 B. T. A. 1095; H. M. Howard, 22 B. T. A. 375; Matson Navigation Co., 24 B. T. A. 14.

We have reached the above conclusions in the manner stated because the tax liability for each taxable year must be determined upon the basis of the transactions occurring within the year (see Florence B. Fawsett, 23 B. T. A. 1147), and although we have both taxable years before us, we do not deem it proper, for tax purposes, to hold that the net result of the transactions was neither gain nor loss to the petitioner. He realized gains in both taxable years, and sustained a loss in 1927; he should be taxed accordingly.

Reviewed by the Board.

Judgment will he entered under Rule 50.


author: Seawell:

text:
    George W. Griffiths, Petitioner, v. Commissioner of Internal Revenue, Respondent. John Griffiths, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 42498, 43074.
    Promulgated April 26, 1932.

      Pays off Tinhoff, Esq., David Munson, Esq., and Fay W. Johnson, Esq., for the petitioners.

      J. E. Marshall, Esq., G. R. Marshall, Esq., Arthur Garnduff, Esq., and W. S. Delaney, Esq., for the respondent.
   OPINION.

Seawell:

Collateral issues have been so magnified in the voluminous record presented for consideration in these proceedings that we deem it pertinent to state the two major issues involved, namely: (1) What capital net gain, if any, was realized by the petitioners in 1923 when in a reorganization they exchanged their stock in the Illinois corporation for stock of the Delaware corporation and cash ? and (2) What capital net gain, if any, was realized by the petitioners in 1925 when the Delaware corporation redeemed its preferred stock ? Both issues are closely related in that the parties are agreed that the starting point for the determination of gain in each instance is the March 1,1913, value of the stock of the Illinois corporation. A great part of the petitioners’ proof and argument deals with the proposition whether certain profits on the Boston Store contract were profits of the partnership or profits of the Illinois corporation; in fact, so much is this point emphasized that it would seem that petitioners are convinced that an answer to this question is decisive as to both of the principal issues involved. We disagree. We are not seeking to determine a tax on such profits, nor are we concerned with a tax on either the partnership or the Illinois corporation. It is of course true that earnings of a corporation prior to a given date are often used as a basis of values on that date, but we know of no rule of law from which it would follow that because the average earnings of a corporation prior to a given date were in a certain amount a valuation of its stock could necessarily be predicated thereon. The main purpose of the petitioners in urging that the profits from the Boston Store contract be considered as earnings of the Illinois corporation prior to March 1, 1913, is to arrive at the value of its intangible assets on that date under the method employed by the Commissioner in his ruling referred to as A. B.. M. 34, but, as we said in James Couzens, 11 B. T. A. 1040, 1162, “ since it is the stock we are considering and not the corporation’s tangible or intangible assets, we are not directly concerned with a method, like, for instance, that set forth in A. R. M. 34, 2 C. B. (1920) 31, for arriving at the value of good will or other intangibles separately from the tangible or other assets, or a method for classifying or segregating the constituent parts which are reflected in the value of the stock representing the .whole.”

And, further, we are not particularly concerned with recommendations relied upon by petitioners which were made by various subordinates in the Bureau, but which were not accepted or acted upon by the Commissioner in determining the deficiencies here involved. Much is said by the petitioners with respect to conferences held in the Income Tax Unit and investigations made by revenue agents after the deficiency notices were issued; but suffice it to say that whatever conclusions were reached or recommendations made, they were not accepted by the Commissioner.

1. In short, the situation presented as to the first issue may be summarized as follows: For some 86 years prior to December 31, 1911, John Griffiths had been engaged in business as a contractor and builder, and during the seven or eight years immediately preceding December 31, 1911, he had associated with him in a partnership his son, George W. Griffiths, the two aforementioned individuals being the petitioners in these proceedings. On January 1, 1912, the partnership was succeeded by an Illinois corporation and stock of a par value of $35,000 was issued to the petitioners for the assets of the partnership and the remainder of the corporation’s stock, $65,000, was paid for in cash by the petitioners. In 1922 a stock dividend was declared, which increased the outstanding stock to $1,000,000 and all of the stock continued to be held by the petitioners until September 5, 1923, though after March 1,1913, certain gifts of stock were made by the father to the son. On September 5,1923, the Illinois corporation was succeeded by a Delaware corporation in a reorganization through which the petitioners received preferred stock of a par value of $1,000,000 and common stock of a par value of $150,000 and $500,000 in cash for the stock held by them in the Illinois corporation. The Commissioner held that the foregoing transaction is governed by that part of section 202 (e) of the Revenue Act of 1921 as amended by the Revenue Act of March 4, 1923, which reads as follows:

* * * when property is exchanged for property specified in paragraphs (1), (2), and (3) of subdivision (c) as received in exchange, together with money or other property of a readily realizable market value other than that specified in such paragraphs, the amount of the gain resulting from such exchange shall be computed in accordance with subdivisions (a) and (b) of this' section, but in no such case shall the taxable gain exceed the amount of the money and the fair market value of such other property received in exchange.

That is, as we understand the situation, the Commissioner determined that the aggregate readily realizable market value of the common and preferred stock of the Delaware corporation received by the petitioners on September 5,1923, was in excess of the March 1, 1913, value of the stock of the Illinois corporation held by them on that date, and that accordingly the gain to them, under the above-quoted provision, would be limited to the cash received by them, namely, $93,000 in the case of George W. Griffiths and $407,000 in the case of John Griffiths.

In the first place, it is contended by the petitioners that the stock received did not have a readily realizable market value because of an alleged agreement existing between the father and son as to the sale of the stock. Conceding for the purpose of discussion that the instrument set out under paragraph numbered 19 of our findings together with certain ambiguous statements appearing in the record establishes that an oral agreement existed at the time of the reorganization of the nature set out in the written instrument, we fail to see why that would have any effect on the market value of the stock at that time. The agreement would not become operative until the death of John Griffiths and he was not only alive at the date of the reorganization, but also at the time of the hearing in these proceedings. Such agreement did not restrict sales of stock by John Griffiths and George W. Griffiths only agreed to buy whatever stock may be owned by John Griffiths at the time of his death.” When the reorganization occurred John Griffiths could have sold his stock without legal cause for complaint on the part of George W. Griffiths by virtue of the agreement and a similar freedom of action existed on the part of George W. Griffiths, who owned the remainder of the stock.

In the next place, the petitioners contend with much earnestness that a valuation of the stock of the Illinois corporation at March 1, 1913, based upon the five-year period prior thereto (including the operations of the partnership from March 1,1908, to December 31,1911, and those of the corporation from January 1,1912, to March 1,1913), shows a value for such stock in excess of a value for the stock of the Delaware corporation on September 5, 1923, and $500,000 in cash when such value is arrived at in a similar manner by taking the five-year period of operations immediately preceding September 5, 1923. The following computation is used by the petitioners in arriving at the average earnings for the five-year period ended March 1, 1913:

Total earnings of partnership from March 1,1908, to December 31, - 1911 (stipulated)_ $428,530.74
Combined earnings of partnership and corporation for the calendar year 1912_ 107,875.26
Earnings of corporation — January 1, 1913, to March 1, 1913- 898, 655.37
Total_ 1, 435,061.37
Average for the five-year period- 466,690.35

While denying the materiality of the aboye earnings as a basis for valuing the stock at March 1, 1913, the Commissioner questions their accuracy, particularly for the period January 1, 1913, to March 1, 1913, and much of the evidence before us has to do with that feature. Specifically, what the petitioners contend in this connection is that no income is to be attributed to the partnership after the formation of the corporation, whereas the Commissioner maintains that the earnings for the period January 1, 1913, to March 1, 1913, are overstated to the extent of at least $475,578.18, which he considers as income of the partnership and therefore, even if we should adopt the method urged by the petitioners for valuing the stock, the earnings shown by the petitioners for that period should be reduced by the aforementioned amount. In further pursuance of the same method of valuation the Commisioner objects to the average net tangibles used by the petitioners for the five-year period in the amount of $466,690.35 on similar grounds. We have set forth in our findings the capital of the partnership at the beginning and end of the years October 31, 1907, to October 31, 1911, as stipulated by the parties, and as we understand the situation the parties are agreed that by the use of the foregoing stipulated amounts and taking into consideration the combined operations and assets of the qtartnership and corporation from October 31, 1911, to March 1, 1913, with appropriate adjustments, the average net tangible assets are as stated by the petitioners. Broadly speaking, the parties differ as to the continuing interest of the partnership in earnings and assets after it was succeeded by the Illinois corporation. We think it clear from the resolutions adopted at the time such succession took place that it was intended that all assets of the partnership would pass to the corporation and that all business thereafter would be carried on by the corporation, but we are likewise convinced that subsequent developments prevented the carrying out of the plan in all of its details. At the time of the formation of the corporation, the partnership had entered into a contract with the Netcher Estate for the construction of a section of the Boston Store. Prior to that time the partnership had constructed other parts of the same building and in awarding these contracts to the partnership the Netcher Estate relied much on the financial responsibility and reputation of the petitioners. Subsequent to the organization of the corporation, namely, March 21, 1912, supplemental contracts were entered into for another section to the Boston Store and certain other additions and the Netcher Estate insisted that these further contracts be executed by the partnership. In such work the Netcher Estate recognized only the partnership and looked to it for carrying out the terms of the contract. Slightly more than two-thirds of the cost of completing the contracts executed in 1911 and 1912 applied to the 1912 contracts. The total profit on the projects was $610,055.22. The work under the contracts was practically completed in 1912 or at least prior to March 1, 1913. In 1914 John Griffiths withdrew $475,578.78 from the corporation, which was shown on its books as the partnership’s share of the profit on the Boston Store contracts.

Much evidence was introduced by the petitioners for the purpose of showing that all profits under the Boston Store contracts as well as all other contracts completed by the corporation after its organization. belonged exclusively to the corporation, but we are not convinced from what appears in the preceding paragraph and other evidence in the record that such is the case. From the maze of exhibits offered, including ledgers, journals, contract records, journal entries and adjusted journal entries, balance sheets and adjusted balance sheets, and other similar data, it is difficult to reach any conclusion other than that a very confused state of affairs existed and.that certainly to some extent the partnership or the petitioners apart from the corporation were directly concerned in the activities carried on after the formation of the corporation. Whether the amount by which the corporation profits should be reduced in arriving at the average profits for the five-year period ended March 1, 1913, was $475,578.78, the amount contended for by the Commissioner, we do not find it necessary to determine. Suffice it to say that with a condition thus existing we see little that is helpful in the earnings presented as a basis for valuing even the assets of the corporation, much less the stock, which is our immediate concern. In this connection, it should be observed that approximately two-thirds of the earnings for the five-year period contended for as a basis of valuation by the petitioners fall within the two-month period ended March 1, 1913, thus indicating an abnormal situation as to earnings. What the petitioners seem to be trying to establish is a value of good will or intangibles in addition to the tangible assets and from these combined assets arrive at a value for the stock, but when we consider the very irregular earnings here presented, the confused state of affairs existing from January 1, 1912, to March 1, 1913, and the personal element involved on the part of the petitioners in earning the income, we think it open to serious question whether such earnings afford any guide as to a valuation of the good will of the business here involved. Cf. White & Wells Co. v. Commissioner, 50 Fed. (2d) 120. Much of any excess earnings over a fair return on tangible assets is certainly attributable to the efforts and reputation of the petitioners themselves, who were the sole stockholders of the corporation. An example of this personal element is shown in connection ivith the Boston Store contracts to which we have referred and we think a fair conclusion from the record to be that other large contracts came to the corporation in a similar manner. A purchaser of the stock, particularly if the petitioners thereby became dissociated from the business, would therefore certainly not pay a price for the stock based upon prior earnings when an important element in the production of such earnings would, after acquisition of the stock, be no longer present in the corporation.

We have considered the question of earnings as indicative of value at some length, not only because of the earnestness with which it has been urged upon us by the petitioners as a method of valuing the stock in question, but also because the average earnings and average net tangible assets form the basis of the so-called expert testimony produced. There were no sales of the stock of either corporation in 1913 or 1923 and therefore the petitioners sought to value the stock not only on the basis of earnings (A. R. M. 34, supra), but also presented the testimony of three witnesses who testified as to the value of the stock of the Illinois corporation at March 1, 1913, and that of the Delaware corporation on September 5, 1923. However, when we come to analyze their testimony we find little in their qualifications or knowledge of stock values either in general or with reference to the particular stock here involved which would help us in solving the problem before us. As we said in Keystone Wood Products Co., 19 B. T. A. 1116, the “ force of the opinion is derived from the care and ability used in forming it,” and “ opinions as to value are in each instance not arbitrarily to be either rejected or accepted entirely, but are reasonably to be weighed with all the other evidence in accordance with the demonstrated qualifications of each witness to form an opinion.” And, as the court said in the recent case of Uncasville Manufacturing Co. v. Commissioner, 55 Fed. (2d) 893; certiorari denied, 286 U.S. 545:

A jury need not accept the opinions of even a bevy of disinterested witnesses (Head v. Hargrave, 105 U. S. 45); nor need a judge, (The Conquerer, 166 U. S. 110, 131). It is hard to see why the Board should be more constrained ; it acts as a judicial body. * * *

The first witness offered was Myron D. Goldberg, bank cashier, who had been in the banking business for some 25 years and had had some experience in valuing stock, though the extent is not shown. His valuations were based on what is referred to as a banker’s or “ rule of thumb ” method by which the value of a business would be determined by taking ten times the average annual earnings over a five-year period. In answer to a hypothetical question in which it was considered that the average annual earnings for the five-year period ended March 1, 1913, were approximately $287,000 and that for the five-year period ended September 5, 1923, were $230,000, he stated that in his opinion the value of the business on March 1, 1913, was $2,870,000, and on September 5, 1923, $2,300,000. The average earnings used at March 1, 1913, were those heretofore referred to as being contended for by the petitioners and which we have indicated our unwillingness to accept in their entirety, and the witness admitted that the personal element on the part of the petitioners was a factor to be considered in such valuation. While he testified that he knew the general reputation of the petitioners and the concerns with which they are or had been associated as contractors and builders, the knowledge seems to have been of the most general character. He knew nothing of the capital structure of any of the concerns and apparently did not consider such knowledge essential to a stock valuation; in other words, ten times the average annual earnings would show the value of a going business and the stock value would follow therefrom.

The next witness, O. P. Decker, was even less satisfactory than Goldberg. He was a young man 28 years of age, who had had a very limited experience in work which would qualify him to testify to the values with which we are concerned, and he had little knowledge of the petitioners’ businesses here involved. His method was similar to that of Goldberg, namely, ten times the average earnings over a five-year period, and of course he reached a similar conclusion. He further stated that “ the value of the business would not be influenced by the quantity of the tangible assets ”; in other words, it would seem that giving to this witness the average earnings of a concern for a given period, the value of the business and its stock could be computed without difficulty. Simple, but how dependable and to what extent would a prospective purchaser invest funds therein on that basis?

The last witness offered in this connection was David Wyland, an accountant in the employment of Paysoff Tinkoff and Son Company, but we do not understand that it was purported to qualify him as an expert on stock values other than in the sense that an accountant might make a computation based upon a given statement of average earnings and net tangible assets — certainly, his experience as stenographer, auditor, and revenue agent in the Bureau of Internal Bevenue and accountant for the period of two years since leaving the Government service would not seem to qualify him further. The factors used by him were the earnings and assets to which we have already referred and it is unnecessary to refer to the infirmities therein previously mentioned.

What the petitioners were seeking to establish by the above witnesses was that the stock of the Illinois corporation had a greater value on March 1, 1913, than the stock of the Delaware corporation on September 5, 1923, when received by the petitioners, and in further support of that contention each of the witnesses was asked the following, or a similar, question:

Would the fact that there was a restrictive agreement existing between the sole stockholders, who were father and son, whereby the father had contracted not to sell the stock to anyone except the son during his lifetime, and in case of death, the son should purchase the same; would that affect your valuation, Mr. Wyland?

The purpose of the question was to show that since only a negligible intangible value appeared on the books of the corporations and since the agreement referred to contemplated the acquisition of the stock at book value, no intangible value or at least none of a substantial amount could exist after the agreement was entered into, which was subsequent to March 1, 1913. But even if we should concede that the existence of such an agreement would seriously impair intangible values otherwise existing and stock values based thereon (cf. James Couzens, 11 B. T. A. 1040, 1163), we fail to see the materiality of questions as to the effect of an agreement when it is not shown to have existed. The instrument which the petitioners presented related to an agreement whereby George W. Griffiths agreed to purchase whatever stock John Griffiths might own at the latter’s death, and nowhere do we find any provision “ whereby the father had contracted not to sell the stock to anyone except the son during his' lifetime.” John Griffiths was still living at the date of the hearing in these proceedings.

In view of the foregoing and a careful consideration of all evidence presented on this issue, we are of the opinion that the action of the Commissioner in considering that the stock of the Delaware corporation received by the petitioners on September 5, 1923, had a readily realizable market value at least equal to the fair market value of the stock of the Illinois corporation on March 1,1913, should be sustained and that accordingly the cash received represents taxable gain to them. The determination of the Commissioner is prima facie correct and the burden of proving higher values or different values from those shown by the Commissioner is on the petitioners. Avery v. Commissioner, 22 Fed. (2d) 6. We do not think such burden is met by the character of evidence here presented; in fact, the record tends to favor rather than discredit the Commissioner’s determination. The amounts included by the Commissioner as taxable gain to the petitioners of $93,000 and $407,000 are the amounts reported by them in their returns, and we think such a determination is amply supported by the record. A small number of shares of stock were received by George W. Griffiths in 1914 and 1915 as gifts from John Griffiths, which would be valued as of the date of acquisition (section 202 (a) (2) of the Revenue Act of 1921), but from the meager evidence submitted on this point we are not convinced that a value different from that used by the Commissioner may be applied. Some shares were also received by George W. Griffiths in 1923 as gifts from John Griffiths, but since these acquisitions took place after December 31, 1920, the basis would be the same as in the hands of the donor, who held the stock on March 1, 1913 (section 202 (a) (2), supra), and therefore what we have heretofore said as to the value of the stock on March 1, 1913, would be applicable to this stock.

2. The next issue is whether the Commissioner properly computed capital net gains for the year 1925 in the respective amounts of $155,-157.28 and $679,021.64 in the cases of George W. Griffiths and John Griffiths on account of the redemption in that year of prefererd stock owned by them in the Delaware corporation. The entire issue of cumulative preferred stock of the Deleware corporation was called and retired on December 5,1925, at $105 per share plus accumulated dividends. As a result cash was distributed to the preferred stockholders (petitioners in these proceedings) in the amount of $1,200,-600, divided as follows:

Redemption of stock_$1,049,905. 55
Accumulated dividends_ 150,694.45
1,200, 600.00

The preferred stock was acquired in 1923 at the time of the reorganization of the Illinois corporation, when $1,000,000 of common stock of that corporation was exchanged for $1,000,000 of preferred stock and $750,000 of common stock in the Delaware corporation plus $500,000 in cash. We held under the previous issue that the readily realizable market value of the stock of the Delaware corporation received by the petitioners was at least equal to the fair market value of the stock of the Illinois corporation held by them on March 1, 1913, and that therefore the entire amount of cash received was taxable to the petitioners. It was then unnecessary to determine the specific March 1, 1913, value of the stock, but in order to dispose of the present issue it becomes necessary to compare the March 1, 1913, value of the stock then held with the amount received in the retirement of the preferred stock in 1925, since the stock exchange in 1923 was considered nontaxable. The Illinois corporation had only common stock outstanding and therefore we must determine not only the value of that stock on March 1,1913, but also what part of such value may be considered as allocable to the preferred stock which was issued by the Delaware corporation in 1923 and retired in 1925.

In computing the gain in question the Commissioner first determined stock values as follows:

March 1, 1913, value of all stock of the Illinois corporation_ $579, 073. 31
Value on September 5, 1923, of the common stock of the Delaware corporation-$1, 684, 292.24
Value on September 5, 1923, of the preferred stock of the Delaware corporation- 1, 000, 000. 00
Total value of all stock of the Delaware corporation_ 2, 684,292.24

In the above determination, the preferred stock of the Delaware corporation was assigned its par value, and the common stock of the Delaware corporation was given a value based upon the following computation:

Average earnings for five-year period as set forth in supplemental protest_ $261, 786. 53
Deduct preferred stock dividend_ 70,000. 00
$191,786. 53
Deduct earnings sufficient to give common stock a par value on basis of $10 per share_ 75, 000. 00
$116, 786. 53
Capitalize balance at 12%%, gives an additional value of_ 934, 292. 24
Add par value_ 750, 000.00
Total value_ 1, 684, 292. 24

The March 1, 1913, value of the stock of the Illinois corporation as shown above is the same as the book value of assets of that corporation as set out in one of the numerous protests filed by or on behalf of the petitioners.

After determining the above values for the respective issues of stock, the Commissioner computed the amount of the March 1, 1913, value of the stock of the Illinois corporation allocable to the preferred stock of the Delaware corporation and the taxable gain to the petitioners on account of the redemption of the preferred stock as follows:

$1, 000, 000. 00
-of $579,073.31=Amount of March 1, 1913, value of
$2, 684,292.24
the stock of the Illinois corporation allocable to the preferred stock of the Delaware corporation_ $215, 726. 63
Distribution on Preferred (Exclusive of dividend)_ 1, 049, 905. 55
Less: Basis (above)_: — —¿.— $215,726.63
Total gain_ $834,178. 92
John Griffiths_81.40%— 679,021. 64
George W. Griffiths_18.60%— $155,157.28

Under the previous issue we pointed out some of the reasons why the evidence offered as to the value of the stock of the Illinois corporation on March 1, 1913, and that of the Delaware corporation on September 5,1923, was not acceptable as showing that the former stock did not have a greater value than the latter on the respective dates mentioned. The same evidence is relied upon in connection with the present issue and it is, of course, unnecessary to repeat what has been said. However, when we consider the record before us in all of its ramifications (including the aforementioned evidence of value offered by the petitioners), we find ourselves unable to agree with the determination of the Commissioner on this point. In the first place, it appears that the Commissioner in order to reach the results obtained by him found that the total value of the stock'of the Delaware corporation on September 5, 1923, was $2,684,292.24, whereas he found a total value for the stock of the Illinois corporation on March 1, 1913, of only $579,073.31, that is, approximately one-fifth of the former value. And when we come to examine the method by which these results were reached, we find that the 1913 valuation purports to be based upon book values, whereas the 1923 valuation is arrived at through a capitalization of average annual earnings over the five-year preceding period and thereby adding approximately $1,000,000 in the form of an intangible value to existing book values. The methods used are not only very different, but also, in the light of the record presented, we do not think the results may be supported. The stock of both corporations was closely held and we have no sales to serve as a guide to values. The corporations in which the petitioners held stock were a continuation of a business which has been in operation for 55 years. The books of the corporation showed good will on March 1, 1913, in the amount of $17,717.16 and at September 5,1923, of $135,318.99. Apparently, both amounts were merely balancing figures and did not purport to represent actual values. How much good will or intangible value may attach to a business of this kind, or at least might be considered in determining the fair market value of the stock where so much of a personal element is involved, it is difficult to determine.

However, when we consider that the business had been in operation many years prior to March 1,1913, and that practically the same organization existed on September 5, 1923, as on March 1,1913, we are unwilling to accept a valuation which places a value on such intangibles of approximately $1,000,000 at September 5, 1928, and practically leaves out of consideration intangibles at March 1, 1913. The net tangibles at August 19,1923, were in the amount of $1,773,177.89, and we have already indicated our difficulty in arriving at the net tangibles at March 1, 1913, because of the mixed corporate and partnership relations on that date. As indicated above, the Commissioner used a net book value on March 1, 1913, of $579,073.31 which apparently included a good will value of $17,717.16, whereas the petitioners contend for net tangibles on that date of $900,944.17. Asset values back of stock are of course no infallible guide to. the value of the stock itself, but, in closely held corporations where we have no sales, the values back of the stock may be used as an aid in determining fair market, value. Cf. George M. 'Wright, 19 B. T. A. 541 (affd., 50 Fed. (2d) 727, and certiorari denied, Oct. 26, 1931). When we consider the earnings of the business prior to March 1, 1913, as well as prior to, September 5,1923, and the history of the business, we are convinced that some intangible value attached to the business and that it is unreasonable to find, as the Commissioner has found, that the intangible value was negligible at March 1, 1913, but had a value of approximately $1,000,000 on September 5, 1923.

After considering all the evidence of record, including the opinion evidence offered by the petitioner, the earnings prior to the two dates in question, the asset values, and the determination as made by the Commissioner, we have reached the conclusion that the fair market value of the stock of the Illinois corporation on March 1, 1913, was $1,000,000 and that of the Delaware corporation (including both common and preferred stock) on September 5, 1923, was $2,000,000, one-half of which should be allocated to common and one-half to preferred stock.' Since one-half of the total value of both the common and preferred stock of the Delaware corporation on September 5, 1923, is attributable to the preferred stock, we think a reasonable allocation of the total March 1,1913, value of the stock of the Illinois corporation of $1,000,000 would be in the same proportion, that is, $500,000 to the preferred stock, and $500,000 to the common stock. (Cf. David B. Gann, 23 B. T. A. 999.) John Griffiths held 81.4 per cent of the stock and George W. Griffiths, 18.6 per cent and therefore the part of the March 1, 1913, value allocable to the preferred stock which would be attributable to their respective interests would be $407,000 and $93,000. As shown in our findings, the total cash of $1,200,600 distributed in the redemption of the preferred stock was paid to the petitioners on the basis of their respective interests, John Griffiths receiving $977,288.40 and George W. Griffiths, $223,-311.60. The capital gain realized is therefore $570,288.40 ($977,-288.40 less $407,000) in the case of John Griffiths and $130,311.60 ($223,311.60 less $93,000) in the case of George W. Griffiths.

3. The third issue is the claim of petitioner John Griffiths that he is entitled to a deduction in 1925 of $100,000 on account of a loan in that amount to his son-in-law, Betancourt, in 1921, which petitioner says became worthless in 1925. The contention of the petitioner is that the transaction by which Betancourt received the $100,000 was entirely of a business character, that this petitioner determined in 1925 that he could never hope to recover any of it, and that therefore a deduction should be allowed as a worthless debt. We are not convinced that either premise upon which the conclusion is based is sound. In the first place, we can not overlook the relationship of the parties and the circumstances surrounding the advancing of the money. Of course, a man may make a loan to his son-in-law in the same business sense as to a stranger, but where the loan is made at the instigation of his daughter, where the son-in-law was without means to secure the loan and where the father made little or no investigation of the practicability or soundness of the scheme in which the funds would be used, we question the correctness of saying that a loss should be allowed when the scheme in which the funds are invested fails and the son-in-law fails to make repayment. An advance to the son-in-law or daughter would not be an allowable deduction when made, and likewise we think that a deduction may not be allowed on account of such advance when it is found that it can not be returned, even though it was hoped that it might be returned when made.

But even if we should say that there was a bona fide loan, we fail to see the justification for saying that it or any part of it became worthless in 1925. The loan was made in 1921 and the evidence indicates that Betancourt lost it long before 1925 and had no other assets from which recovery might have been had. The daughter had an annual income of $15,000 and had signed the note, but there is no indication that the father sought to have her make payment on the note. In fact, the endorsement on the note (“ Pay to the order of Margaret G. Betancourt without recourse upon me. [Signed] John Griffiths.”), which was explained by the father as being placed thereon “ So that my daughter would not be annoyed by it in case of my death or harassed to be paid,” would indicate that the father was unwilling to seek payment from one of the parties shown on the note as liable regardless of her financial condition. The observations of the Court of Appeals of the District of Columbia in the recent case of Thom v. Commissioner, 55 Fed. (2d) 1039, and which involved a somewhat similar situation, are here pertinent:

And our consideration of the record leads us to the same conclusion, for the taxpayer is neither required to be an incorrigible optimist and ignore the worthlessness of a debt that stares him in the face, nor to throw good money after bad to get the judgment of a court and the failure of a sheriff to demonstrate a fact he already knows. United States v. White Dental Co., 274 U. S. 398; Selden v. Heiner, 12 Fed. 2nd, 474.
But where the taxpayer, because of family ties or personal relations between himself and his debtor, is not willing to enforce payment of his debt, in whole or in part, he is not thereby entitled to deduct it from his income tax as worthless.

On the whole record, we are of the opinion that the deduction claimed may not be allowed either in whole or in part.

4. With respect to the deduction claimed by John Griffiths in 1925 on account of a loan of $5,000 to Thomas P. Shean in 1921, we are not convinced that the debt was ascertained to be worthless in 1925. The most we know is that the Shean Steel Window Company, of which the debtor and his son were the principal stockholders, was in bad financial condition in 1925, but it was apparently still in existence. Petitioner George W. Griffiths, who gave us the only information we have on this issue, was sure that the Shean corporation was in bad financial condition in 1925 and that Shean himself was not a man of financial responsibility, but he did not know whether the corporation’s liabilities exceeded its assets. He further testified that the note with collateral attached was practically worthless in 1922 and 1923, stating that he might have given a hundred dollars for it in. those years. The action of the Commissioner in disallowing the deduction is sustained.

5. A deduction is claimed by John Griffiths for each of the years involved on account of an automobile which he used partly for business and partly for pleasure. From the meager evidence submitted on this point, we are unwilling to say that the deductions allowed by the Commissioner are not sufficient to cover the amount allowable, and therefore his action is sustained.

6. With respect to the contentions of the petitioners that each of them is entitled to a deduction of $5,000 in 1925 on account of stock of the Espenhain Dry Goods Company, determined to be worthless in that year, and the further contention that George W. Griffiths is entitled to a deduction in 1925 on account of club dues, the evidence is either so unsatisfactory or so deficient that we are unable to make any findings on these issues or to reach any conclusion contrary to that followed by the Commissioner, and his action is accordingly sustained.

7. The final issue is whether the amounts expended by John Griffiths in 1924 in negotiating a lease on property owned by him should be allowed as a deduction in that year or should be allocated over the term of the lease and a pro rata part allowed as a deduction in each year. The Commissioner pursued the latter course, which, is in accordance with the decisions of the Board. Central Bank Block Association, 19 B. T. A. 1183; affd., 57 Fed. (2d) 5, and cases therein cited. The action of the Commissioner is accordingly sustained.

Judgment will be entered under Rule 50.

Teammell did not participate in the consideration of or decision in this report.

       The Commissioner conceded in his brief that in accordance with the provisions of section 201 (c) and (g) of the Revenue Act of 1926 the accumulated dividends on the preferred stock paid at the time of its retirement should be considered as part of the full amount received in computing the capital net gain.


author: Murdock:

text:
    Juliet P. Hamilton, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 45790.
    Promulgated April 27, 1932.

      L. A. Keyes, Esq., for the petitioner.

      N. Gammon, Esq., for the respondent.
   opinion.

Murdock:

The present controversy arises over an alleged loss sustained upon the sale of a picture painted in oil by the famous English artist of the eighteenth century, Thomas Gainsborough. The petitioner, on her return, had computed her tax upon the basis of ordinary net income and deducted therefrom, to comply with the provisions of section 208(c), $3,337.50 representing 12% per cent of an alleged capital net loss amounting to $26,700. The Commissioner decided that section 208 did not apply, since there was no deductible loss under section 214(a), and determined a deficiency of $3,337.50.

The parties filed a stipulation of facts as follows:

It is hereby stipulated and agreed by and between the parties to the above-entitled proceeding, through their respective attorneys of record, that the following are the facts which form the basis for the above-entitled proceeding:
That petitioner is an individual residing at Sterlington, New York. That on March 31, 1916 petitioner acquired a Gainsborough Painting as a personal, specific bequest from her father, the late J. Pierpont Morgan, and that said painting was listed on the inventory of the estate of said J. Pierpont Morgan at a value of $100,000.00. That thereafter this painting was kept by petitioner in her home, except that, on several occasions, without pecuniary profit to petitioner, it was placed on exhibition where it was made available for inspection by art students and lovers of art; and while in petitioner’s home it was, by specific arrangement, in certain instances, made available for free inspection. That petitioner kept said painting until April 28, 1926 on which date it was sold for $73,300.00. That in her income tax return for 1926, petitioner subtracted $3,337.50 from the total tax for that year, which amount is 12% per cent of $26,700.00 which is claimed as a capital loss on the sale of said painting. That said deduction was disallowed by the Commissioner of Internal Revenue.
The facts hereinbefore stipulated constitute the entire evidence to be submitted to the Board of Tax Appeals by the parties hereto.

Despite the last sentence of the stipulation, we take cognizance of certain other facts important to the petitioner’s case which are in evidence through the respondent’s admissions and concessions. The fair market value of the painting in question, at the date of the death of J. Pierpont Morgan, was $100,000. The price obtained for it on April 28, 1926, was a fair price obtained in an arm’s length transaction. If the petitioner is entitled to deduct, under section 208 (c), 121/2 per cent of the loss on the sale of the picture, her tax liability was properly computed on her return and was not less than the taxes imposed by sections 210 and 211 computed without regard to the provisions of section 208.

The Commissioner has denied that the loss was a “ capital loss ” within the meaning of the Revenue Act of 1926. The rational of his brief is that the words of the statute are ambiguous, but similar words in previous acts have been interpreted by him as applying only to losses in transactions entered into for profit, and since Congress has continuously reenacted the provision without substantial change, the departmental construction has received the Congressional stamp of approval and is controlling. This argument does not carry conviction in the present case. It is opposed by the rule that doubts in a revenue statute are to be resolved in favor of the taxpayers. Furthermore, there has been no long continued executive construction of a provision reenacted by Congress without substantial change. There was substantial change in the Revenue Act of 1924, and the executive construction relied upon may not be considered to antedate the regulations first published under that act in October, 1924.

His determination, however, is correct. The Revenue Act of 1921, in section 206, had given the taxpayer an election to have capital net gain taxed under the special method therein provided. It made no provision for capital net loss. In defining capital-assets it required that they be property acquired and held by the taxpayer for profit or investment. The Revenue Act of 1924, in section 208, contained a somewhat similar provision for taxing a capital net gain, but also contained a new provision limiting the amount by which the tax might be reduced on account of a capital net loss. In the definition of capital assets contained in this section, that part of the definition contained in the 1921 Act above referred to was dropped. The reason for this change was to permit taxpayers, at their election, to have a gain from the sale of residence property taxed under the capital net gain provision. The definition of capital loss is the same in the 1921 Act, 1924 Act, and 1926 Act.

There is nothing in the legislative history of the 1924 and 1926 Acts which would indicate that Congress intended to be any more generous in allowing deductions for losses than it had been in the past. A contrary intent appears, since the mandatory provisions relating to capital net loss restricted rather than enlarged the benefits granted taxpayers. See Piper v. Willcuts, 55 Fed. (2d) 397.

In our opinion there is no ambiguity in the statute. Section 208 deals with capital gain and losses. The term in controversy “ capital loss ” is defined in section 208 (a) (2) as follows: “ The term ‘ capital loss ’ means deductible loss resulting from the sale or exchange of’ capital assets.” This definition requires three things: (1) There must be a loss; (2) it must be a deductible loss; and (3) it must result from the sale or exchange of capital assets. In the present case there has been a loss. This loss resulted from the sale of a capital asset. But was the loss a deductible one? Had the statute read “ ‘ capital loss ’ means loss resulting from the sale or exchange of capital assets,” her case would have come within the definition. But Congress used the adjective “ deductible ” to modify the noun “ loss,” and the adjective may not be disregarded. Its presence in the definition indicates that Congress intended the capital loss provisions to apply only where the loss is the kind of a loss which would otherwise be deductible under the other provisions of the statute. This is the position taken by the Commissioner in his notice of deficiency.

Section 214 allows individuals to deduct three kinds of losses, but one kind could have no relation to section 208, since it consists of losses arising from fires, storms, shipwrecks or other casualty, or from theft, whereas section 208 (a) (2) is concerned only with loss resulting from a sale or an exchange. The petitioner does not contend that her loss was incurred in any trade or business; therefore, section 214(a) (4) has no relation to this case.

This brings us to section 214(a)(5), which allows the deduction, under certain circumstances, of losses incurred in any transaction entered into for profit. The petitioner makes the contention that “ the ownership of an object of art representing an investment of $100,000 which is a ‘ capital asset ’ even though acquired by gift, is nevertheless a transaction entered into for profit.” We do not agree that there is any general rule of this kind. Furthermore, what facts are there in this case which indicate that in acquiring the picture this petitioner was entering into a transaction for profit or that the possibility of future profit or loss was of any significance in the transaction? We know that she acquired this picture worth $100,000 from her father at his death, ino accordance with a specific direction of his will. Why it was given or what the petitioner had in mind in accepting it we do not know. We have not heard that she then had any thought of the ultimate disposition of the painting. She retained the picture for about ten years without ever attempting to derive any money profit from it. Then she sold it for less than its former value. The acquisition of a work of art by an individual is usually for the purpose of realizing benefits of ownership not measurable in money. A probability of money loss may be of little or no importance. No deduction is allowed for loss on property acquired primarily for personal use or enjoyment unless the loss arises from casualty or theft.

We need not concern ourselves with its reason for limiting the deduction for losses; the fact is that Congress has not permitted all losses to be deducted from income. Here, there may be no deduction under the law, for the record does not show a loss in a transaction entered into for profit.

Judgment will be entered for the respondent.


author: Matthews :

text:
    Elizabeth M. Coombs, Petitioner, v. Commissioner of Internal Revenue, Respondent. J. Howard Coombs, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 44768, 44769.
    Promulgated April 27, 1932.

      8. R. Leap, Esq., for the petitioners.

      T. M. Mather, Esq., for the respondent.
   OPINION.

Matthews :

In the earlier proceeding brought by one of the petitioners here upon the same issue as to the years 1922, 1923 and 1924, we held that a partnership did not exist between this husband and wife for those years, saying:

The evidence here fails to establish any agreement to share the losses of the business; or that a relation of mutual agency existed between the parties; or that the petitioner’s wife had any authority to act, or did act, in the name of the partnership. The written agreement came too late to affect the years before us. In any event, it contains at the most a recital of the conclusion that a previous oral contract of partnership was entered into, which conclusion was the subject of proof. It has not been substantiated by evidence sufficient to overcome the presumptive correctness of the Commissioner’s determination. * * * [at 20 B. T. A., pp. 1025, 1026.]

A different situation exists for the years 1925 and 1926 now before us. Prior to the taxable years the two petitioners had entered into a written agreement of partnership, by the terms of which they agreed to engage as partners in the lumber business, and that at the end of each calendar year the net profits or net loss of the business should be determined and they would divide the net profits or net loss of the business between them equally. During the taxable years the net profits were credited or the net loss was debited at the end of each taxable period to these parties’ capital accounts in equal amounts. The parties held themselves out to the public and traded as partners. Suits on debts owing to the lumber company were brought in the name of - “ J. Howard Coombs and Elizabeth M. Coombs, partners trading as J. Howard Coombs Lumber Company.” On their income-tax returns they each reported one-half of the profits or deducted one-half of the loss. A part of the wife’s money which had originally been invested in the business and carried as a loan became under the written agreement a part of the capital of the enterprise, subject to the risks of the business and entitled to share in the profits. Upon the incorporation of the company stock was issued to the husband and wife in equal shares, which is corroborative of the fact that the wife had owned a one-half interest in the business.

The petitioner argues that the written agreement and the acts of the parties constituted the parties members of a partnership under the New Jersey law, and that a partnership between husband and wife is valid. In our view of the matter it is unnecessary to determine whether a partnership between a husband and wife can exist in New Jersey. The New Jersey statutes provide that the property of a married woman is her sole and separate property as though she were a single woman. 3 Comp. Stat. N. J. (1911, p. 3225). In the case of Arthur Stryker, 17 B. T. A. 1033, we held that where the evidence showed that the wife owned a one-third interest in a business in New Jersey, operated by her husband, she was taxable on one-third of the profits of such business and that it was unnecessary to decide in such a case whether a partnership between a husband and wife could exist in New Jersey. In the case of Pugh v. United States, 48 Fed. (2d) 600, where it was clear that under the West Virginia law a partnership between husband and wife is not recognized at law, the court held, nevertheless, that where the evidence showed a partnership relation between a husband and wife the partnership is not void, but that rights arising thereunder can be enforced in equity. It followed, therefore, in that court’s opinion, that each of the members of the purported partnership was taxable on only his or her proportionate share of the profits. See also J. E. Biggs, Sr., 15 B. T. A. 1092; Albert G. Dickinson, 23 B. T. A. 1211; and J. W. Brackman, 24 B. T. A. 259.

In the instant proceeding it is clear that the petitioner, Elizabeth M. Coombs, owned a one-half interest in the company’s assets. We are, therefore, of the opinion that for the year 1925 each of the petitioners is taxable on only one-half of the profits earned by the lumber company and that for the year 1926 they are each entitled to deduct one-half of the loss sustained by the lumber company in that year.

Judgment will be entered under Rule 50.