author: Goodrich : VaN Fossan, Teammell,

text:
    Weissberger Moving & Storage Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 42780.
    Promulgated October 27, 1932.

      Morley 8. Wolfe, O. P. A., for the petitioner.

      Dean P. Kimball, Esq., and E. G. Adams, Esq., for the respondent.
   OPINION.

Goodrich :

In this proceeding, which involves the redetermination of a deficiency of $228.49 for the year 1924, but one issue is involved, namely, whether petitioner may deduct from its income for the calendar year 1924 a net loss in the amount of $1,452.90 which it sustained in 1922. We must determine whether the calendar year 1924 is the “ next succeeding taxable year ” within the meaning of the statute, or whether, under the provisions of section 200 (a) of the Revenue Act of 1924, that calendar year must be divided into two “ taxable years ” because of an affiliation which occurred on July 1, 1924. The facts were stipulated, and that stipulation we incorporate herein by reference as our findings of fact. For the purposes of this report the following statement will suffice.

Petitioner was in existence and carrying on its business prior to and during the whole of the year 1924. Its accounts were kept and its returns filed on a calendar year basis. From its operations in 1922 it sustained a net loss of $1,452.90. The Victory Moving & Storage Company likewise was in existence prior to and during the whole of the year 1924. Its accounts were kept and its returns filed on a basis of a fiscal year ending June 30. On July 1, 1924, |oetitioner acquired the outstanding cajfital stock of the Victorjr Company. Thereafter the two companies were affiliated and each continued its operations during the balance of the year 1924. Petitioner filed a consolidated return covering its business for the whole of the year 1924, together with the income of the Victory Company for the period July 1 to December 31, and deducted thereon the net loss it sustained in 1922 and a net loss sustained by the Victory Company for its fiscal year ended June 30, 1924.

Respondent has allowed the latter deduction,, but denied the first beyond the amount of petitioner’s income for the period January 1 to June 30, on the ground that the periods before and after affiliation on July 1, each constituted a separate taxable year, within'the meaning of section 200 (a), Revenue Act of 1924, and that the net loss of 1922 can not be applied to petitioner’s income for the period July 1 to December 31, 1924, regarding that period as the third “ succeeding taxable year.” Petitioner contends that, so far as its own business was concerned, there was no change requiring it to file .a separate return for the period January 1 to June 30, 1924, and that even if it should have filed two returns, the calendar year 1924 is still one taxable year to which the 1922 loss may be applied, citing a number of decisions of this Board and the appellate courts in support of its position.

But the cases relied upon by petitioner arose under revenue acts prior to that of 1924 and were decided in view of the provisions of those prior acts respecting the definition of “ a taxable year.” The Congress wrote into the Revenue Act of 1924 (section 200 (a)) the following definition respecting the meaning of the term:

Tlie terra “ taxable year ” includes, in the case oí a return made for a fractional part of a year under this title or under regulations prescribed by the Commissioner, with the approval of the Secretary, the period for which the return is made * * *.

See Strain Bros., Inc., 19 B. T. A. 601; Pennsylvania Electric Steel Casting Co., 20 B. T. A. 602; A. S. Siracusa Sons, Inc., 23 B. T. A. 53.

Here no separate return for the period January 1 to June 30, 1924. was filed by petitioner, but it seems clear that such a separate return was required of it, since both corporations were in existence prior to affiliation. American La Dentelle, Inc., 1 B. T. A. 575; American Steel Co., 7 B. T. A. 641; American Paper Exports, Inc. v. Bowers, 54 Fed. (2d) 508. Cf. Automatic Fire Alarm Co., 13 B. T. A. 1195; Suit Cattle Co., 17 B. T. A. 818; Margay Oil Corp., 26 B. T. A. 199; H. S. & M. W. Snyder, Inc., 26 B. T. A. 692.

The fact that petitioner failed to file a separate return covering that portion of 1924 prior to affiliation will not serve to defeat the plain intendment of the statute. A return for that period was required and, under section 200 (a) of the Revenue Act of 1924, that period constituted a taxable year for the purposes of applying to petitioner’s income a net loss sustained in 1922. Tolerton & Warfield Co., 23 B. T. A. 692.

Respondent has correctly applied to the separate incomes of these corporations after affiliation the net losses sustained by them prior thereto in accordance with Woolford Realty Co. v. Rose, 286 U. S. 319. (Joseph & Feiss, 27 B. T. A. 852, overruled.)

Reviewed by the Board.

Judgment will he entered for the respondent.

VaN Fossan,

dissenting: I am unable to agree with the majority of the Board in this case. The question presented may be briefly stated: Does each fraction of a year for which a separate return may be required because of a change in the affiliated status during a calendar or fiscal year constitute a “ taxable year ” in applying the net loss provisions of the statute?

The “ net loss ” concept first made its appearance in the Revenue Act of 1918 (section 204 (b)). It was enacted as a relief measure to cure the injustice occasioned by a strict application of the theory that each year was to be viewed separately and apart for tax purposes. Prior to this time there was no means afforded a taxpayer whereby heavy losses occasioned in one year might be equalized by offsetting against large profits in other years. The provision allowed a taxpayer to deduct a net loss sustained for any taxable year beginning after October 31, 1918, and ending prior to January 1, 1920, from net income for the preceding taxable year and to have taxes for the preceding year redetermined accordingly. If this application fell short of affording relief, the taxpayer might apply the remaining excess as a deduction in computing net income for the succeeding taxable year.

The Revenue Act of 1921 made the principle of allowing net losses a permanent policy and provided for the deduction of a net loss for any taxable year beginning after December 31,1920, from net income of the next succeeding (second) taxable year, and if the net loss be not thus absorbed, the excess remaining was to be allowed as a deduction in computing net income for the next succeeding (third) taxable year.

The Revenue Act of 1924 (section 206) authorized the deduction of a net loss in computing net income for the succeeding (second) taxable year, and, if not absorbed, allowed a similar deduction in computing net income for the next succeeding (third) taxable year. Similar provisions appear in the Revenue Acts of 1926 (section 206) and 1928 (section 117).

I believe this question to be one that requires a consideration of certain basic principles in income accounting. We start with the concept recognized by the revenue acts in application of the Sixteenth Amendment and often announced by the courts and the Board that the income-tax laws are based on the theory of an annual accounting. (Sec. 212 (b), Revenue Act of 1918, and similar provisions in other acts; Burnet v. Sanford & Brooks Co., 282 U. S. 859; Woolford Realty Co. v. Rose, 286 U. S. 319; 52 S. Ct. 568.) Similar evidences may be found elsewhere in the revenue acts. (Sec. 200 of the Revenue Act of 1918; sec. 200 (1), 1921 Act.) By parallelism of reasoning it follows that when in 1918 the net loss concept was introduced it was based on the principle of a taxable year of twelve months.

In section 200 (a) of the Revenue Act of 1924 first appears the language that has given rise to the present controversy. After defining a taxable year substantially as it was defined in the 1918 and 1921 Acts, i. e., as a calendar year or a fiscal year of twelve months, the Act of 1924 added the following: “ The term ‘ taxable year ’ includes, in the case of a return made for a fractional part of a year under the provisions of this title or under regulations prescribed by the Commissioner with the approval of the Secretary, the period for which such return is made.” The section then concludes with the provision similar to former acts: “ The first taxable year, to be called the taxable year 1924, shall be the calendar year 1924 or any fiscal year ending during the calendar year 1924.” The provisions of the Eevenue Acts of 1926 and 1928 are substantially identical.

When we inquire the reason for the new provision appearing first in the 1924 Act we find the following statement by the Ways and Means Committee:

In subdivision (a) of tbis section tbe term “taxable year” is defined to include a period of less tlian a year when a return is made for sucIl period. Under the existing law the use of the term “ taxable year ” in the “ net loss ” section and other sections has been construed not to cover the ease of a return made by a taxpayer for a fractional part of a year with the result that the benefits of such sections are' denied the taxpayers who are required by law to make a return for a fractional part of a year.

Similar language in explanation was used by the Finance Committee in its report. It is thus apparent that the provision of the act giving rise to the present controversy was enacted solely as a measure of relief for taxpayers required by whatever circumstance to make a return for a period of less than a full year. And it is this very relief provision which is so construed in the instant case as to deny taxpayers the relief they claim, i. e., the application of net losses to taxable years of twelve months each. The question confronting us is, Did Congress intend and do the revenue acts require such a construction ? I think not.

I have indicated that the revenue acts in application of the Sixteenth Amendment contemplate an annual accounting. We have next the pronouncement of the Supreme Court in the "Woolf or d Realty Go. case that an affiliated group is not a taxpayer. It is but a convenient device for computing the tax liability of the separate corporations, each of which remains a taxpayer in its own right, regardless of the affiliation. Since the constituent corporations remain as taxpayers throughout affiliation, it would seem to follow that the accounting practice of the corporations may not be ignored, and to do so will violate both the spirit and the letter of section 212 (b) of the Eevenue Act of 1926 and similar sections. The fact that the several corporations may be required to make separate returns for periods of less than a year because of changes in the affiliation status seems to raise no insuperable barrier to recognition of the taxpayer’s true accounting period in determining real income. Since the corporation and not the affiliated group is the taxpayer and is entitled to its own deductions, including its net loss deductions (Delaware & Hudson Co., 26 B. T. A. 520), it is difficult to understand why the filing of two, or even, ten, returns should affect the actual net income of the taxpayer for the calendar year, which, as provided by section 212 (b), is based on an annual accounting. In the Delaware & Hudson case we expressed the thought that the Supreme Court has indicated that the statutory net loss provisions are to be applied separately to each member of the affiliated group and that the net loss of a corporation sustained prior to affiliation may not be applied to any extent against the net income of another corporation with which the former becomes affiliated. Nor can I detect any reason why a corporation which is otherwise entitled to the benefit of a net loss application should be deprived of the. intended relief by reason of its association as an affiliate during part of the time. Certainly this would not have been true prior to the 1924 Revenue Act and I believe it to be a strained construction of the 1924 and later acts that has brought about such a result. If it be said that this ignores the period of affiliation, it may be rejoined that that is what the Supreme Court indicates should be done in determining income of the constituent corporations.

There are conceivable situations in which the provisions of section 200 (a) of the Revenue Act of 1926 and similar provisions in other acts would be properly applicable — for example, where a company is incorporated and begins operations within the year, or where a corporation discontinues or is dissolved, or, again, where it changes its accounting period. See Pennsylvania Electric Steel Castings Co., 20 B. T. A. 602; Corno Mills Co., 21 B. T. A. 712; Sunburst Refining Co., 23 B. T. A. 824. Instances such as these are the fractional parts of a year that Congress had in mind and intended to include in the term “ taxable year ” as defined in the 1924 Revenue Act. I believe the cited cases were correctly decided. It is, however, á far. stretch of Congressional intention to hold that this somewhat parenthetical relief clause first found in the 1924 Revenue Act, and actually intended to broaden the definition of a “ taxable year,” was designed to work a revolution in the fundamental concept of an annual accounting and fasten on the law the fictional concept resorted to by respondent in this case, that each period for which a return may be filed, however short the period or however many there may be in a calendar year, is a “ taxable year ” for all purposes under the revenue act.

An examination of the cases on this point that have come before the Board reveals that prior to the Revenue Act of 1924 the Board held that a “ taxable year ” was a full year of twelve months. See Tacoma Grocery Co., 1 B. T. A. 1062; Arthur Walker & Co., 4 B. T. A. 151; Strain Bros., 19 B. T. A. 601; General Box Corporation, 22 B. T. A. 725.

However, in Tolerton & Warfield Co., 23 B. T. A. 892, there was involved the precise question now before us, arising under the 1924 Act. We there held that a period of less than a year, due to a change in the affiliated status, is a taxable year in applying the net loss provisions of the act. This decision preceded the decision of the Supreme Court in the "Woolf or cl Realty case, in the light of which decision I now believe our position to have been in error. In that decision the Supreme Court clarified the meaning and status of affiliated corporations and reconciled the concept of an affiliated group with that of the continuing independent existence of the constituent corporations. It also indicated the adherence of the Supreme Court to the underlying principle of an annual accounting. Accepting the principle of an annual accounting and recognizing the statutory right to consider net losses in computing income, and associating therewith the established rule that the corporation remains as the taxpayer, regardless of affiliation, we are loci logically to the conclusion that in applying net losses the “ taxable year ” contemplated by the statute for such a purpose is, except in unusual situations such as have been indicated, a taxable year of twelve months.

Smith and Seawell agree with this dissent.

Teammell,

dissenting: I dissent on the grounds set forth in my dissenting opinion in the case of Joseph & Feiss Go., 26 B. T. A. 852.

       Sec. 212. (b) The 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 upon such basis and in such manner as in the opinion of the Commissioner 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.

       Sec. 200. That when used in this title—
      The term “ taxable year ” means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under section 212 or section 232. The term ** fiscal year ” means an accounting period of twelve months ending on the last day of any month other than December. The first taxable year, to be called the taxable year 1918, shall be the calendar year 1918 or any fiscal year ending during the calendar year 1918; * * *.


source: Caselaw Access Project

author: Smith:

license: Public Domain

text:
    Leland Powers, Executor of the Estate of Samuel L. Powers, Petitioner, v. Commissioner of Internal Revenue, Respondent. Stanley R. Miller, Petitioner, v. Commissioner of Internal Revenue, Respondent. Winthrop Coffin, Petitioner, v. Commissioner of Internal Revenue, Respondent. Henry I. Harriman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 47836, 48007, 50575, 51029, 61846.
    Promulgated October 27, 1932.

      Melville F. Weston, Esq., and Stanley R. Miller, Esq., for the petitioners.

      Harold Allen, Esq., for the respondent.
   ORINION.

Smith:

In Wmthrop Coffin, 12 B. T. A. 702, this Board held that compensation paid to trustees of the Boston Elevated Railway Company in the years 1920 to 1923, inclusive, was exempt from the Federal income tax-. We there considered this issue solely from the standpoint of whether the taxpayers were officers of the Commonwealth of Massachusetts. After a full consideration of the legislation creating the board of trustees for the operation of the Boston Elevated Railway Company and pertinent court decisions relating thereto, we said: ,. ..

We are led to the inescapable conclusion that the petitioners are officers of the Commonwealth of Massachusetts. In view of section 1211 of the Revenue Act of 1926, which makes that the test of exemption, we do not deem it necessary to discuss the question as to whether the services performed by the trustees are essentially governmental or not. As we construe section 1211, that question need not be answered if the petitioners are receiving amounts “ as compensation for personal services as an officer or employee of any State.” We see no escape from holding that the salaries of the petitioners were so received and we, therefore, hold that such salaries are exempt from tax.

The respondent now contends that although the petitioners were officers of the Commonwealth of Massachusetts, the compensation they received as members of the board of trustees of the Boston Elevated Railway Company is, nevertheless, subject to the Federal income tax, since their duties did “not involve the exercise of an essentially governmental function,” citing Flint v. Stone Tracy Co., 220 U. S. 107. See also article 88 of Regulations 69, and article 643 of Regulations 74.

On brief, the petitioners call attention to the fact that neither the Revenue Act of 1926 nor the Revenue Act of 1928 contains an express provision with respect to this type of exemption, which the Commissioner’s regulations purport to limit to the compensation for services rendered “ in connection with the exercise of an essential governmental function.”

The petitioners contend that the public operation of the Boston Elevated Railway Company was not the exercise of a proprietary right, but of an essential governmental function; that in any event the board of trustees was a special public service commission for that railway, and, as such, engaged in an essential governmental function; and, further, that the taxation of the compensation here involved “ constitutes an undue interference with the workings of the State Government.”

The Supreme Court recently considered the question of tax exemption of instrumentalities of the Federal Government and, in Fox Film Corp. v. Doyal, 286 U. S. 126, said:

TRe principal of the immunity from state taxation of instrumentalities of the Federal Government, and of the corresponding immunity of state instru-mentalities from Federal taxation — essential to the maintenance of our dual system — has its inherent limitations. It is aimed at the protection of the operations of government (McCulloch v. Maryland, 4 Wheat. 316, 436), and the immunity does not extend “ to anything lying outside or beyond governmental functions and their exertions.” Indian Motorcycle Co. v. United States, 283 U. S. 670, 676, 679. Where the immunity exists, it is absolute, resting upon an “entire absence of power” (Johnson v. Maryland, 254 U. S. 51, 55, 56), but it does not exist “ where no direct burden is laid upon the governmental .instrumentality, and there is only a remote, if any, influence upon the exercise of the functions of government.” Willcuts v. Bunn, 282 U. S. 216, 225.

In Group No. 1 Oil Corp. v. Bass, 283 U. S. 279; 51 Sup. Ct. 432, 433, the Supreme Court pointed out that the immunity there contended for and applicable here did not extend to a “ nondiscriminatory tax ” imposed by one government that remotely and indirectly affects another government.

The principle of immunity referred to in Fox Film Corp. v. Doyal, supra, had its genesis in McCulloch v. State of Maryland, 4 Wheat. 316, wherein the Supreme Court held unconstitutional a discriminatory tax laid by the State of Maryland “ on all Banks or Branches thereof in the State of Maryland, not chartered by the Legislature.” The facts of that case are too familiar to require further recital here. The principle there established has received elucidation by the Supreme Court in recent tax cases in which it has reconsidered the principle of immunity and the nature of “ its inherent limitations.” See Fox Film Corp. v. Royal, supra; Group No. 1 Oil Corp. v. Bass, supra; Indian Motorcycle Co. v. United States, 283 U. S. 570; 51 Sup. Ct. 601; Burnet v. Coronado Oil & Gas Co., 285 U. S. 393; 52 Sup. Ct. 443.

There is no discrimination in the imposition of the tax in controversy, which is laid upon the net income of individuals, determined after certain credits and deductions from gross income, which. includes “ gains, profits, and income derived from salaries, wages, or compensation for personal service * * * o,f whatever kind and in whatever form paid.” Sections 210 to 213 of the Revenue Act of 1926, and sections 11, 12, 21, and 22 of the Revenue Act of 1928. And, as the Supreme Court said in Willcuts v. Bunn, 282 U. S. 216; 51 Sup. Ct. 125, 129:

* * * It must be remembered tliat we are dealing, not with, any express constitutional restriction, but only with an asserted implication. The constitutional provisions authorizing the Congress to lay taxes (article' 1, § 8, Sixteenth Amendment) are certainly broad enough to cover the tax in question * * *.

Tax exemptions are never lightly to be inferred (Heiner v. Colonial Trust Co., 275 U. S. 232), must be given a practical construction such as will not unduly impair the taxing power ” of the Federal Government “ or the appropriate exercise of its functions ” by the State government (Susquehanna Co. v. Tax Commission, 283 U. S. 291, 294); and the constitutional exemption, if any, must be construed strictly against the taxpayer (Pacific Co. v. Johnson, 285 U. S. 480). The exemption claimed in the instant proceedings, since there is no express statutory provision therefor, can not be determined “ apart from the purpose and character of the legislation ” by which the Commonwealth of Massachusetts undertook the operation of the Boston Elevated Railway Company through a board of trustees, of which the petitioners were members. Cf. Shaw v. Oil Corporation, 276 U. S. 575, 578.

In 'Winthrop Coffin, supra, we found that the trustees of the Boston Elevated Railway Company were officers of the Commonwealth of Massachusetts, despite the provisions' of section 1 of chapter 159 of the Special Acts of 1918, which declared that the trustees “ shall not be considered public officers.” This conclusion was based upon other provisions of the act than section 7, and upon the interpretations placed thereon by the Supreme Court of Massachusetts. That determination is not dispositive of the issue now before us, since there the exemption claimed was found to be within section 1211 of the Revenue Act of 1926, which has no application to the years now in controversy. In section 2 of chapter 159 of the Special Acts of 1918, it is provided that the trustees “ shall be deemed to be acting as agents of the company and not of the Commonwealth ” and that the company remained liable for their acts just as if they were in the immediate employ of the company. In the opinion of the justices of the Supreme Judicial Court of Massachusetts, rendered April 2, 1919, and reported at 231 Mass. 603; 122 N. E. 763, 765, is the following:

* * * In essence Special Acts 191S, c. 159, was a legislative agreement for the lease to the commonwealth of a public utility to be operated for a limited time by public officers upon the payment of fair rental on an investment made under public supervision and under laws prohibiting stock watering or other means of inflation.
We are led to the conclusion that said chapter 159 was within the constitutional power of the Legislature.

In interpreting the provision of chapter 159 under which the trustees apportioned the amount to be assessed against certain cities and towns served by the railway and collected from such cities and towns as an addition to the state tax assessed, the Supreme Court of Massachusetts, in City of Boston v. Treasurer and Receiver General, 237 Mass. 403; 130 N. E. 390, affirmed its earlier opinion regarding chapter 159 of the Special Acts of 1918, and held constitutional section 14 of the act by which the deficiency in the earnings under sections 11 and 13 were assessed against the cities and towns served by the railway. In the course of that opinion the court said :

Some analysis of the provisions of Sp. St. 1918, c. 159, is necessary in order to deal with the contentions that it is unconstitutional. Its general scope is indicated by its title, which is, “ an act to provide for the public operation of the Boston Elevated Railway Company.” The accuracy of the title is confirmed by the substance of the act throughout. Its purpose is operation through public officers and not public ownership. * * *

The court also stated that the Commonwealth had the constitutional power to assume the management and operation of the Boston Elevated Railway Company. But nowhere does the court undertake to say that the Commonwealth of Massachusetts was thereby engaged in an essential governmental function, although it upheld the tax levied under section 14 of the act on the grounds that the tax' was levied for a public purpose. See also City of Ghelsea v. Treasurer and Receiver General, 237 Mass. 422; 130 N. E. 397; Boston v. Jackson, 260 U. S. 309. In the opinion of the justices, rendered November 22, 1927, and reported at 159 N. E. 70', it appears that the corporate entity remained intact and that the property remained the property of the Boston Elevated Railway Company.

In January, 1925, the justices of the Supreme Judicial Court of Massachusetts rendered an opinion, reported at 148 N. E. 889, 891, pointing out that the Commonwealth or local government had the power to acquire or construct instrumentalities for public travel and to charge toll, rental, or other recompense therefor (citing Commonwealth v. Wilkinson, 16 Pick. 175) ; such powers resting on the rights of the Commonwealth as proprietor of the instrumentalities used. Thus, it appears that in the opinion of the justices, rendered in connection with a question involving certain tunnels constructed by the city of Boston and leased to the Boston Elevated Railway Company, such instrumentalities are constructed and operated in the exercise of a proprietary right. Furthermore, regardless of the operation of the railway by the Commonwealth, the Supreme Court of Massachusetts has held the Boston Elevated Railway Company liable for damages during this period of operation. See Harter v. Boston Elevated Ry. Co., 156 N. E. 543.

From a consideration of the above opinions pertaining to the legislation by which the Commonwealth of Massachusetts took over the operation of the Boston Elevated Railway, we conclude that chapter 159 of the Special Acts of 1918 was for a “ public purpose ” (which term is not synonymous with “ governmental purpose,” see T. P. 'Wittsehen, 25 B. T. A. 46, 52), and for the time provided deprived the private corporation of the exercise of its proprietary rights and gave them to the board of trustees.

In Flint v. Stone Tracy Co., supra, the question of tax exemption was reviewed at length and governmental agencies and functions fully discussed. The Supreme Court, in considering the question of exemption as it related to public service corporations, to wit, two rapid transit corporations comparable to the Boston Elevated Railway Company, said:

* * * In the case of South Carolina v. United States, 139 U. S. 437, 50 L. ed. 261, 26 Sup. Ct. Rep. 110, 4 A. & E. Ann. Cas. 737, this court held that when a state, acting within its lawful authority, undertook to carry on the *liquor business, it did not withdraw the agencies of the state, carrying on the .traffic, from the operation of the internal revenue laws of the United States. If »a state may not thus withdraw from the operation of a Federal taxing law a ; subject-matter of such taxation, it is difficult to see how the incorporation of ^companies whose service, though of a public nature, is nevertheless, with a view to private profit, can have the effect of denying the Federal right to reach such properties and activities for the purposes of revenue.
It is no part of the essential governmental functions of a state to provide means of transportation, supply artificial light, water, and the like. These objects are often accomplished through the medium of private corporations, and though the public may derive a benefit from such operations, the companies carrying on such enterprises are nevertheless private companies, whose business is prosecuted for private emolument and advantage. For the purpose of taxation they stand upon the same footing as other private corporations upon which special franchises have been conferred.
The true distinction is between the attempted taxation of those operations of- the states essential to the execution of its governmental functions, and which the state can only do itself, and those activities which are of a private character. The former, the United States may not interfere with by taxing the agencies of the state in carrying out its purposes; the latter, although regulated by the state, and exercising delegated authority, such as the right of eminent domain, are not removed from the field of legitimate Federal taxation. [Italics supplied.]

The petitioners rely upon the decision of the Circuit Court of Appeals for the First Circuit in Jamestown & Newport Ferry Co. v. Commissioner, 41 Fed. (2d) 920, wherein the Ferry Company was held to be an instrumentality of government and not subject to the Federal, income tax. That case is distinguishable from the proceedings at bar in that there the income from a public utility (the ferry), accrued to a political subdivision of a state and was specifically exempted from Federal taxation by section 213 (b) (7) of the Eevenue Acts of 1921 and 1924. There, the ferry corporation was owned and operated by a town located on an island. Likewise, the decision of the Circuit Court of Appeals for the Ninth Circuit in United States v. King County, Wash., 281 Fed. 686, is cited and relied upon. There, the county owned and operated a ferry, which the court held exempt from the transportation tax imposed by section 500 of the Eevenue Act of 1917. In both cases, there was a direct burden upon or interference with a political subdivision of a state. Likewise, the decision of the District Court for the Eastern District of Michigan in Frey v. Woodworth. 2 Fed. (2d) 725, is distinguishable in that the exemption granted applied to the income of an employee of a municipally owned and operated street railway. The District Court relied upon the earlier decision in United States v. King County, Wash., supra, from which it construed the ownership and operation of the street railway system by the city of Detroit to be the exercise of a strictly governmental function. The record discloses that the Boston Elevated Eailway continued to be owned by the private corporation and that at no time did the Commonwealth of Massachusetts own the railway; thus, in this particular, if in no other, the instant proceedings are distinguishable from those cases relied upon by the petitioners.

Contrasted to the decisions cited by the petitioners, involving ferries and street railways owned and operated by political subdivisions of a state, are the decisions of the District Court, District of Massachusetts, involving the Boston Elevated Railway Company. That court held, in Boston Elevated Ry. Co. v. Malley, 288 Fed. 864 (1928), that the railway was subject to the 3 per cent transportation tax imposed by section 500 of the Eevenue Act of October 3, 1917; and, in Boston Elevarted By. Go. v. Malley, 24 Fed. (2d) 758 (1928), that it was subject to the capital-stock tax imposed by section 1000 (a) (1) of the Revenue Act of 1918, while being operated under chapter 159, Special Acts of 1918, by the board of trustees therein provided. In the first case, the court pointed out that the tax was not paid by the Commonwealth of Massachusetts, and in the latter it said:

It should perhaps be noticed that the special act reserved to the commonwealth and its subdivisions the right “ to tax the company or its stockholders in the same manner and to the same extent as if the company had continued to manage and operate its own property.” Section 2. It would be a curious arrangement under which the corporation continued to be fully taxable as such for the benefit of the commonwealth, while it escaped taxation by the federal government.

The petitioners further argue that in substance the board of trustees of the Boston Elevated Railway Company constituted a special public service commission for the Boston Elevated Railway, and, as such, they were engaged in an essential governmental function, to wit, regulating the operations of such railway, citing Burnet v. Livezey, 48 Fed. (2d) 159. After the enactment of chapter 159 of Special Acts of 1918, the Public Service Commission of the Commonwealth of Massachusetts continued its functions and duties with respect to public utilities other than the Boston Elevated Railway; thereafter, pursuant to the statute, that railway was operated by the trustees, who at all times acted as “ agents of the company and not of the Commonwealth ” (section 2, chapter 159, Special Acts of 1918); public regulation abdicated in favor of public operation, and thereafter public regulation was restricted in the manner provided in section 15 of chapter 159, which perhaps was an inducement to the private corporation to subject its property to public operation, during and after which the stockholders of the private corporation were assured a fixed return upon their investment. Burnet v. Livezey, supra, held that an attorney for the Public Service Commission of the State of West Yirginia was employed by an agency of the state performing governmental functions and that his income was exempt from Federal taxation. Here, these petitioners were not members of the Public Service Commission of Massachusetts, nor were they employed by such Commission. The functions of regulation that they exercised were incidental to the public operation. Furthermore, Bwrnet v. Livezey arose under section 1211 of the Revenue Act of 1926 as applied to the taxable year 1923. Contrast with that decision the holdings in Blair v. Byers, 35 Fed. (2d) 326, and T. P. Wittschen, supra.

In Leon B. Moissevff, 21 B. T. A. 515, this Board held that the Delaware River Bridge Joint Commission created by legislative enactments of the States of Delaware and Pennsylvania, and the Port of New York Authority, similarly created by legislative enactments of the States of New York and New Jersey, were governmental instrumentalities and that the compensation paid to an employee thereof was exempt from Federal income tax. In that case, the instrumentalities employed by the states concerned were engaged in providing bridge facilities in furtherance of commerce, and making harbor improvements in aid of navigation, and in so doing did not merely take over and operate a private corporation, as in the instant proceedings. In the case of the States of New York and New Jersey, the legislatures thereof expressly provided that the Port Authority be regarded as performing a governmental function (see page 526); the same inference is drawn from the legislation creating the Delaware River Bridge Joint Commission. Neither enterprise was carried out by the public operation of private property, as in the instant proceedings. Obviously, therefore, that case is not authority for holding tax exempt the income of these petitioners.

The record discloses that the compensation of these petitioners as trustees was paid neither directly nor indirectly by the Commonwealth of Massachusetts. The salaries in question were paid by the Boston Elevated Railway Company, and it was only in the event of the unsuccessful operation of the railway that the Commonwealth would be called upon to contribute any sum toward the expense of the railway. It appears that over $3,000,000 was advanced by the Commonwealth of Massachusetts in 1919 for this purpose, but that the operations of subsequent years, and particularly the taxable years under consideration, were successful and in some measure the Commonwealth was reimbursed for the amount advanced in 1919. In this particular, the instant proceedings are distinguishable from the situation involved in Biscoe v. Tax Commissioner, 236 Mass. 201; 128 N. E. 16, wherein there was no decision on the question of an essential governmental function, but where the Supreme Court of Massachusetts held that compensation received by a Federal manager and a solicitor of railways, under the supervision of the Director General of Railroads during the period of Federal control, was exempt from the Massachusetts State income tax imposed by chapter 269 of the Statutes of 1916, which in section 5 (b) specifically exempted the salaries of employees and officers of the United States Government. It appears that the monies out of which the compensation was paid were so handled as to become the monies of the United States Government and that the taxpayers’ compensation was paid by voucher drawn either directly or indirectly upon the Federal Government. The facts in the instant prQQ§qcUugs are vitally different. The test applied by the Massachusetts statute was met in Biscoe v. Tax Commissioner, supra, whereas the test applicable in the instant proceedings has not been met.

From a full consideration of the facts of record in the light of the recent decisions of the Supreme Court, we are of the opinion that the compensation received by these petitioners, as trustees of the Boston Elevated Bailway Company, from the company in the years 1926 to 1929, inclusive, is subject to the Federal income tax asserted by the respondent. These petitioners were engaged in the public operation of private property, as agents of a private corporation, the stockholders of which were assured a fixed return upon their investment during and after public operation, and the railway at all times continued subject to taxation and liable for the acts of its agents. Although public officials, as that term has been liberally interpreted, they were not exercising essential governmental functions in the performance of their duties. The taxation of the compensation in question places no burden upon the Commonwealth of Massachusetts and there is no interference with any essential governmental function of that Commonwealth.

Beviewed by the Board.

Judgment will be entered for the respondent.

Murdock, and Goodeich concur in the result.


author: Mukdock:

text:
    B. F. Avery & Sons, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent. B. F. Avery & Sons Plow Company (Subsidiary of B. F. Avery & Sons, Inc.), Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 45636, 45638.
    Promulgated October 28, 1932.

      Donald V. Hunter, Esq., for the petitioners.

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

Mukdock:

The petitioner argues, and we agree, that the adjustment on the notes was not made in settlement of damages for breach of contract. Thus, Farmers ds Merchants Bank of Catlettsburg v. Commissioner, 59 Fed. (2d) 912, does not apply. Neither was it a gift. Cf. Rice, Barton & Fates v. Commissioner, 41 Fed. (2d) 339. Counsel for the petitioner has ably and forcefully set forth the arguments and authorities in support of the petitioner’s contentions. Yet, no case is cited which is directly in point. Many cases are cited where cancellation of debts was held not to result in income to the debtor. But it is a significant fact that in each the debtor was insolvent. The petitioner was solvent. Cf. Commissioner v. Simmons Gin Co., 43 Fed. (2d) 327. Furthermore, we can not say, as was said in Bowers v. Kerbaugh Empire Co., 271 U. S. 170, that the result of .the entire transaction was a loss. If it appeared that the $300,000 was compensation for loss, then of course the petitioner would not be entitled to the deduction of $51,723.29 which the Commissioner has allowed for 1927 on account of loss on machinery and equipment purchased from the International Harvester Company. A loss may be deducted only where not compensated for by insurance or otherwise. Under that view of the case the petitioner would have been compensated for the loss and not entitled to the deduction.

The petitioner did not segregate on its books the business of manufacturing, selling and servicing the Champion machines from its other business. Consequently, it must resort to various estimates to show the amount it was required to spend as a result of receiving defective equipment and machines from International Harvester Company. Extra expense in the pattern shop, consisting of labor and material, was estimated to have amounted to $80,000 or $90,000. A witness estimated that 80 per cent of the machines sold in the Argentine required servicing at $25 each and about 4,000 machines were sold. Another estimate was that the petitioner had lost $323,991 on the sale and servicing of the Champion line. This estimate was arrived at by multiplying the known number of each kind of machine by a cost price and a selling price. The difference, gross profit, was reduced by 25 per cent of sales price, representing administration and selling expense, and by extra servicing, arrived at by multiplying $15 by 80 per cent of the number of machines sold. However, more than one-third of the machines were manufactured by the petitioner. The cost of these was not shown. Instead, their cost was assumed to be the same as those purchased from the International Harvester Company. The evidence does not show that normal selling and administration expenses were 25 per cent of the sales price. Furthermore, the cost of servicing and the number serviced were estimated in an offhand fashion, without reference to any records. Thus, we can have no confidence in the estimate made, and can not find that the petitioner suffered an actual loss from its Champion business. The most shown by the record is that profits were less than they would have been had the manufacturing equipment and finished goods obtained from the International Harvester Company been up to expectations.

We are satisfied that the petitioner was put to considerable expense on account of the defects in machines and equipment purchased, and we feel reasonably sure that the additional expense to which it was put exceeded the amount of the canceled notes. It has deducted in past years most, if not all, of these expenditures from income through cost of goods sold, ordinary and necessary expenses and other means. Deductions for depreciation and loss, the latter allowed for the year before us, have permitted the petitioner to offset the entire cost of the manufacturing machinery against income. These deductions were based upon the assumption that the company would actually pay the costs accrued as liabilities.

The cost of this machinery and the cost of goods manufactured for the petitioner by the International Harvester Company, as originally agreed upon, were accrued on the petitioner’s books in an open account. At a time when this account showed a large amount owing from the petitioner to the International Harvester Company, the petitioner gave its notes for the balance due. This transaction had no significance from an income standpoint. Later, some of the notes, having a total face value of $300,000, were canceled by the International Harvester Company. The cancellation took place in the taxable year before us. If all of the petitioner’s transactions with the International Harvester Company had taken place in one year, the adjustment necessitated by the note cancellation probably would have been accomplished by eliminating the basis for depreciation and loss on the manufacturing machinery and reducing inventory and cost of goods sold. Cf. Des Moines Improvement Co., 7 B. T. A. 279. The effect of this would have been to increase net income for that year and perhaps for some later years. The total increase in net income would have amounted to $300,000.

But the various transactions did not take place in one year. Instead, they were spread out over ten years. Income or loss of the first nine years has been computed on an accrual basis on facts known in those years, as was proper. In the tenth year it was known for the first time that $300,000 theretofore accrued as cost liability and offset against income would not have to be paid. It is not proper or possible to go back over prior years and adjust income in the light of this new development. Cf. Highland Milk Condensing Co. v. Phillips, 34 Fed. (2d) 777; Cleveland Woolen Mills, 8 B. T. A. 49; Helvetia Milk Condensing Co., 5 B. T. A. 271; Burnet v. Sanford & Brooks Co., 282 U. S. 359. Does the fact that the cancellation occurred in the tenth year after almost all of the cost had been offset against income, and after it was too late to change the tax situation for prior years, deprive the cancellation of income-tax significance?

In United States v. Kirby Lumber Co., 284 U. S. 1, the Court said :

Here there was no shrinkage oí assets and the taxpayer made a clear gain. As a result of its dealings it made available $137,521.30 assets previously offset by the obligation of bonds now extinct. * * * The defendant in error has realized within the year an accession to income, if we take words in their plain popular meaning, as they should be taken here.

In the present case there was no shrinkage of assets. The whole transaction was of a business nature, entered into for profit. As a result of its dealings resulting in cancellation, not only was there an improvement in the balace sheet and a bookkeeping profit, but also $300,000 of assets, previously offset by the obligation of the notes now extinct, were made available to the petitioner. Why was this not an accession to income in plain popular terms, whether a forgiveness of indebtedness or a revision of the original contract? While in a sense it was a return of expenditures made in purchasing its machinery and producing and selling its merchandise, still these expenditures were made in conducting its business for the purpose of making profits. The use of fixed accounting periods requires that the amount by which expenses, once deducted because paid or accrued, are reduced by later adjustments must be taken into income in the year of the adjustment. Only in this way can the amount of the taxpajrer’s reported income be made to agree with its actual income. We, therefore, hold that the amount in question was income to the petitioner for the year 1927. Cf. Burnet v. Sanford & Brooks Co., supra; Great Northern Ry. Co. v. Lynch, 292 Fed. 903; Chicago, Rock Island & Pacific Railway Co., 13 B. T. A. 988; affirmed on this point, 47 Fed. (2d) 990; certiorari denied, 284 U. S. 618; Charleston & Western Carolina Ry. Co., 17 B. T. A. 569; aff'd., 50 Fed. (2d) 342; Chicago & North Western Ry. Co., 22 B. T. A. 1407, 1436; Atlantic Coast, Line R. R. Co., 23 B. T. A. 888; S. & L. Building Corp., 19 B. T. A. 788 (this point not passed on by Circuit Court of Appeals).

Judgment will be entered for the respondent.


author: Stbknhagbn:

text:
    Howard W. Raymond, Petitioner, et. al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 58544, 58545, 58774-58777, 58793-58801.
    Promulgated October 31, 1932.

      Randolph E. Paul, Esq., Charles B. Melnnis, Esq., and Simon Brett, Esq., for the petitioners.

      A. H. Fast, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Jerome C. Cuppia; Frederick Housman; Juliet C. White; Sidney J. White; Edward K. Cone; Robert Cassels; Arthur L. Kerrigan ; Edward L. Bun-ill; Edward A. Pierce; J. H. Goadby Mills; Clarence J. Housman; William Mitchell; Latham R. Reed; Simon J. Shlenker.

   OPINION.

Stbknhagbn:

The entire dispute between the parties in this controversy is in respect of the proper treatment of the $50,000 a year paid by Pierce & Company to Swartwout and to Appenzellar. The petitioners treated the amounts as salaries or compensation paid by the partnership to Swartwout and Appenzellar for their individual services. The respondent held that these amounts were partial payments of the total of $300,000 which was a capital expenditure for the business, or more specifically the good will of the former partnership, and that it is therefore not deductible. He made no determination that the payments, if compensation, were more than reasonable for the services.

The evidence is to some extent conflicting, but the conflict is not in veracity, but in the conception of Pierce, on the one hand, and Swartwout, on the other, as to what their transaction actually was. There is plenty of room for their difference of opinion as to the proper characterization, but there is no conflict as to what took place. Both wanted a transfer of the accounts, a discontinuance of the firm and business of Swartwout & Appenzellar, and the employment by Pierce & Company of everybody in the organization. This could no doubt have been achieved in a variety of ways to the satisfaction of all. The way, however, that was chosen was that of- having everyone employed by Pierce & Company at agreeable fixed salaries, and of having Pierce & Company take over the willing accounts and assume their benefits and burdens. The agreement expressly provided .that nothing was to be paid for good will, and there is enough in the record to explain this as attributable to Pierce’s opinion that in the nature of the brokerage business good will is too elusive to command a substantial price. We need not express an opinion as to the soundness of this view, cf. In re Brown, 242 N. Y. 1; 150 N. E. 581, in order to recognize that the parties to the agreement expressly excluded good will from the subject matter of their transaction. In order to override this express provision of the agreement, it would be necessary to hold either that as a matter of law every such transaction perforce embodies the sale of good will for some part or all of the money consideration, or that the fact is contrary to the agreement. Clearly there is no such principle of law. While good will in such a partnership is within judicial recognition, and dealings in respect of it are likewise cognizable, the law does not force the postulate that any disposition of the partnership business embraces' a sale of good will. In re Brown, supra; Pfleghar Hardware Specialty Co. v. Commissioner, 30 Fed. (2d) 614. The trier of the facts must determine from the evidence whether the writing is in accordance with the actual agreement, and whether in fact a price was paid for good will. Here we find no reason to believe that the parties did other than their contract provided. Cf. Rotan v. United States, 43 Fed. (2d) 232. By employing Swartwout and Appenzellar individually and agreeing to pay them $50,000 each for each of three years, Pierce & Company were getting all they sought, and the fact that this carried with it the increased business is not enough to justify treating the transaction as a purchase of good will. In the face of the express provision of the written agreement, it may at least be doubted whether either Swartwout or Appen-zellar could in his lifetime have demanded any part of the $300,000 in payment for good will irrespective of his service.

The respondent cites several decisions of the Board holding that no part of the amount expressly paid by a bank for the deposit accounts of another bank is deductible as an ordinary and necessary expense. See People’s National Banlc, 23 B. T. A. 815. There is no conflict between those decisions and this, because the transaction was different, in that the banks did nothing more than purchase valuable deposit accounts with no contract of employment at a specified compensation. The respondent also urges that if any part of the $100,000 paid in each year by Pierce & Company was in payment for the business or good will, the Board is required to determine from the evidence how much is so assignable and to this extent affirm the disallowance of the deduction. We are, however, unable from the evidence to find that any part of the $300,000 was other than reasonable compensation paid for the services of Swartwout and Appen-zellar, and there is therefore no support for an allocation.

Upon this issue the respondent’s determination is reversed. Other matters originally involved have been adjusted by agreement.

Judgment will be entered under Bule 50.


author: Steenhagen:

text:
    William C. Squier, Frederick C. Squier, Jr., Harold M. Searles, and Augustus S. Houghton, Executors of the Last Will and Testament of Edwin N. Squier, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 39529.
    Promulgated October 31, 1932.

      John E. Joyce, Esq., for the petitioners.

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

Steenhagen:

The petitioners have in effect stipulated, and unequivocally adopt as a premise for their argument, the fact that the death of decedent was the occasion of worthlessness of the shares and the debts. They assert that if the decedent had attempted to establish a fiscal period ending prior to his death and to take these deductions on the return for such period, he would have failed because the worthlessness could not have been demonstrated. Cf. Patrick J. Shouvlin, 3 B. T. A. 499; Henry W. Cushman, 13 B. T. A. 41; Simon Sherman, 18 B. T. A. 969; J. Harvey Ladew, 22 B. T. A. 443. The respondent agrees with this both in the stipulation and his argument. Upon such an uncontested factual basis there seems to be no room for doubt that the worthlessness did not occur until after the decedent’s death, and hence whatever deductions there may be in respect thereof are assignable to the later period of the estate and not to the period of the individual before his death. This is the only period which we are permitted in this proceeding to consider. For such period, therefore, the respondent’s determination must be sustained.

Judgment will be entered under Rule 50.


author: Lansdon :

text:
    Paul Akers Bowden, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 54923.
    Promulgated October 31, 1932.

      J. Richard Bowden, Esq., for the petitioner.

      Bernard D. Hatheoch, Esq., for the respondent.
   OPINION.

Lansdon :

As against the respondent’s contention the petitioner has filed a lengthy petition, containing many assignments of error which he alleges the respondent committed in his determination of the tax. The real and only point at issue, however, relates to the ownership of the corporate stock which petitioner bought and caused to be transferred to his wife, as hereinbefore described. The respondent contends that the petitioner was the real owner of that stock when the dividends were declared and the owner in law of the dividends paid to his wife. The petitioner claims that he bought the stock for his wife in accordance with prearranged plans pursuant to which he caused the same to be transferred to her and that he was at all times acting as the agent of his wife, and that the promissory note given to him by her following the issuance of the stock certificate to her was to evidence his expenditures in such connection, for future accounting between them. Both parties to this appeal have argued a number of collateral issues which, in the view we take of the law which must control our decision, need not be discussed in this opinion.

The only person who testified at the hearing was the petitioner, who gave his version of the transaction as above stated. In connection with his testimony the petitioner put in evidence the stock certificate issued directly to his wife for the 450 shares of stock and her promissory note for the sum of $45,000, with the credits shown. Without going into the involved recitals of the petitioner’s story, or discussing his motives in doing what he did with the stock; or his exact status while doing it, we think the record before us shows that he succeeded in vesting the legal title to the stock in his wife and that her ownership of it at the time the dividends were paid was complete and unassailable. In this connection we consider it immaterial whether, in the first instance, the petitioner purchased the several shares of stock for himself, or for his wife as her agent. The certificate, being the sole muniment of title to the stock when issued to her by the secretary of the corporation, made her a stockholder and the only person, respecting this particular stock, to whom the corporation could legally pay the dividends. Bank of Culloden v. Bank of Forsyth, 120 Ga. 575; 48 S. E. 226; Thornton v. Martin, 116 Ga. 115; 42 S. E. 348; Hendrick v. Daniel, 119 Ga. 358; 46 S. E. 438; Kramer v. Spradlin, 148 Ga. 805; 98 S. E. 487; Fulgam v. Macon, etc., R. R. Co., 44 Ga. 597; Hudson Trust Co. v. American Linseed Co., 180 N. Y. S. 17; McNiel v. Tenth National Bank, 46 N. Y. 325; Knox v. Eden Musee Co., 148 N. Y. 441; 42 N. E. 988; Baker v. Davis, 211 Mass. 429; Turnbull v. Payson, 95 U. S. 418; Hawley v. Upton, 102 U. S. 314; Johnson v. Lafin, 103 U. S. 800; Cecil National Bank v. Watsontown Bank, 105 U. S. 217; O'Neil v. Wolcott Mining Co., 174 Fed. 527. Whether the transaction was a sale, or simply a gift from husband to wife, the substitution in stockholders became complete and title vested in her upon delivery and acceptance of the certificate. Mack v. Pardee, 39 Ga. App. 310; 147 N. E. 147; Williams v. Everett (Mo. Sup. Ct.), 200 S. W. 1045. Sylvaniads G. R. Co. v. Hoge, 129 Ga. 734; 59 S. E. 806. From the facts shown it follows that the dividends here considered belonged to petitioner’s wife at the time paid to her and that the respondent erred in including them in petitioner’s taxable income. The whole amount of income here disputed is $43,968. The record accounts only for the two credits paid to petitioner on the note, which aggregate slightly less than that amount, and we are unable to say whether or not the respondent erred in respect to the excess. We therefore hold that the respondent erred only in respect to so much of the amount in dispute as is shown to have been paid to the petitioner by his wife upon the note shown.

Decision will be entered under Rule 50.


text:
    Gertrude B. May, et al., Trustees under a Certain Agreement Designated as “ The 1917 Edwin C. May Declaration of Trust,” Petitioners, v. Commissioner of Internal Revenue, Respondent. Walter A. May, et al., Trustees under a Certain Agreement Designated as “ The 1917 Herbert L. May Declaration of Trust,” Petitioners, v. Commissioner of Internal Revenue, Respondent. Mollie B. May, et al., Trustees under a Certain Agreement Designated as “The 1917 Walter A. May Declaration of Trust,” Petitioners, v. Commissioner of Internal Revenue, Respondent. Edwin C. May, et al., Trustees under a Certain Agreement Designated as “ The 1917 Barney May Declaration of Trust,” Petitioners, v. Commissioner of Internal Revenue, Respondent. Estelle May Affelder, Petitioner, v. Commissioner of Internal Revenue, Respondent. Herbert L. May, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 55805-55810.
    Promulgated October 31, 1932.

      Charles H. Sachs, Esq., for the petitioners.

      Isador Graf, Esq., Boy N. McMUlam,, Esq., and E. L. Gorbin, Esq., for the respondent.
   OPINION.

Smith:

In their brief the petitioners rely upon the following points as supported by the evidence introduced at the hearing.

1. $2,522 per share of the amount realized from the sale of the shares of the preferred stock of the May Drug Company represented a distribution of earnings of the company accumulated prior to March 1, 1913, and should be deducted from the amount realized through the sale in determining the gain incurred in said sale.
2. The base or cost value of the property which came to taxpayers, Herbert L. May and Estelle May Affelder, from the estate of their father, Barney May, deceased, should be the value as of the date of the actual distribution to them, and, particularly, on the preferred stock dividend of the May Drug Company which was not declared or created until two years after the death of their father.

As we understand the pleadings in these proceedings the petitioners do not question the accuracy of the respondent’s computations, provided the principles invoked by him are correct. The petitioners contend that they are not correct in the two particulars above pointed out, namely, that inasmuch as the May Drug Company had a surplus of $134,857.10 on March 1, 1913, and the declaration of the stock dividend in December, 1922, impinged upon that surplus to the extent of $126,108, a portion of the profit realized upon the sales of the preferred stock in 1927 must be held to be tax-exempt income; secondly, that the respondent has used as the value of stock inherited from the father of the two petitioners last named the value thereof on the date of the death of their father, rather than the value of those shares at the time actually received by them.

The contention of the petitioners that a stock dividend distributes any part of the assets of a corporation to the stockholders is without foundation. The point was settled by the Supreme Court in Gibbons v. Mahon, 136 U. S. 549, in which the court said: “A stock dividend really takes nothing from the property of the corporation, and adds nothing to the interest of the stockholders. Its property is not diminished and their interests are not increased. The proportional interest of each stockholder remains the same.” This observation is fundamental and was the basis of the decision of the court in Towne v. Eisner, 245 U. S. 418, in which it was held that the declaration of a stock dividend which represents surplus profits transferred to the capital account is not taxable income within the meaning of the Income Tax Act o.f 1913. In Hugh R. Wilson, 3 B. T. A. 957, we held that where a corporation in 1920 declared and paid a stock dividend, the par value of which exceeded the earnings or profits of such corporation accumulated since February 28, 1913, and thereafter in 1920 declared and paid a cash dividend in an amount less than the amount of such earnings or profits, the cash dividend is deemed to have been made from earnings or profits accumulated subsequent to February 28, 1913. This decision was predicated upon the determination that the stock dividend distributed nothing to the stockholders. The assets of the corporation remained the same after the payment of the stock dividend as before. All that happens by the declaration and payment of a stock dividend is that the stockholder’s interest in the corporation, not increased or diminished thereby, is represented by a larger number of shares. The basis of the Supreme Court’s holding that the recipient of the stock dividend receives no net income is that the stock dividend distributes nothing to the stockholder.

Applying the above mentioned, well established principle to the proceedings at bar, it must be held that the stock dividend declared in December, 1922, did not serve to distribute anything to the stockholders and did not render any part of the profit received on the sale of shares tax-exempt income. Cf. Case et al., 26 B. T. A. 1044. So far as appears, the Commissioner has applied the principles for the computation of the gain in accordance with Safe Deposit & Trust Co. of Baltimore v. Miles, 259 U. S. 247. He has treated the stock dividend simply as a dilution of the shares of stock held by each of the petitioners and has reduced the base in accordance with the above mentioned case and his regulations. The respondent’s method of computing profits upon the sales of the securities is therefore approved.

The only other question in issue in the last two docket numbers is whether the respondent has correctly used the date of the death of Barney May (February 12, 1921) as the basic date for determining the fair market value of the securities sold. The petitioners contend that this is not the correct date, at least on the preferred stock sold, since the preferred stock sold was declared as a stock dividend subsequent to the death of Barney May.

It must be held, in accordance with the decision of the Supreme Court in Brewster v. Gage, 280 U. S. 327, that the date of acquisition of the petitioners’ interests in the shares of stock acquired from their father’s estate was the date of the death of the decedent. That case is decisive of the issue involved. So far as appears the respondent correctly determined the deficiencies of the petitioners in accordance with Safe Deposit & Trust Co. of Baltimore v. Kites, supra.

Judgment will he entered for the respondent.


author: Sterni-iagen :

text:
    Anna Davis Terry, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 45446.
    Promulgated October 31, 1932.

      Lawrence H. Cake, Esq., for the petitioner.

      Dean P. Kimball, Esq., and Edward 0. Adams, Esq., for the respondent.
   OPINION.

Sterni-iagen :

The respondent determined a deficiency of $3,194.56 in petitioner’s income tax for 1926. She and her husband were residents of Texas, a community property state, and filed separate returns, each including in gross income one-half of the community income. This they had the right to do, Hopkins v. Bacon, 282 U. S. 122.

The petitioner was the beneficiary of a trust created by the will of her cousin, John Sealy, the instrument providing in paragraph eleventh, subdivision (d), that “the trustees shall pay over or deliver at such periods as they may deem best, not longer than annually, one-sixth (1/6) of the net interest, income and revenue arising from the property bequeathed to them in trust by this clause eleventh of this will to my cousin, Anna D. Terry, during her lifetime.” It is stipulated by the parties that during 1926 the petitioner received from the trustee “ $32,434 on account of dividends of United States corporations and $8,186.05 on account of interest.” In their separate individual income-tax returns, the petitioner and her husband each included one-half of these amounts in his half of the community income. The respondent, citing G. C. M. 5741, C. B. YIII-1, p. 160, held that “ these amounts are * * * income from your separate estate,” and that the entire amount should be included in petitioner’s separate gross income.

By the Texas Constitution, Article XVI, section 15, all property acquired by a wife after marriage by gift, devise or descent is her separate property. All other property acquired after marriage is community property. See Lee v. Lee, 112 Tex. 392, 247 S. W. 832; Arnold v. Leonard, 114 Tex. 535; 273 S. W. 799. The community is the more important of the two estates, and doubts are resolved in its favor, Spear’s Law of Marital Rights in Texas, p. 389. In Irvin v. Gavit, 268 U. S. 161, the Supreme Court held that the income paid by a trustee under a will to one who was given no other interest in the corpus was income to the recipient and was not a bequest exempt from income tax by the revenue act. See George D. Widener, 8 B. T. A. 651; aff'd., 33 Fed. (2d) 833. The respondent accepts the authority of that decision, but contends that, although not a bequest within the exemption of the revenue act, the petitioner’s receipts from the trustee are such a bequest as the Texas law calls her separate property. While for local purposes Texas may treat as a bequest an acquisition which the Government may tax as income, the rule of Irvin v. Gavit, supra, must be applied for Federal income-tax purposes to similar acquisitions throughout the United States. The reasoning of that case, which led to the conclusion that such income was not an exempt bequest, must lead also to the conclusion that it is not a bequest under the Texas constitution; and until the Texas courts construe the term incompatibly with such a concept, there is no need to construe an exception into the rule of Irvin v. Gavit, supra. Arnold v. Leonard, supra, the leading case on Texas community property law, suggests no such exception and no inconsistency.

The respondent cites McClelland v. McClelland, 37 S. W. 350, but we find that decision not controlling in the light of its facts and of Arnold v. Leonard, supra, which came later. It held that the divorced wife of the beneficiary of a spendthrift trust could not reach the accumulated income in the hands of the trustee before the beneficiary’s definite right in such income had accrued. Apparently while in the hands of the trustees such undistributed income was neither separate income of the spouse nor community income. The court went further and said that the periodic, payments to the beneficiary were his separate property principally because this was necessary to preserve the spendthrift character of the trust. There is nothing in the trust before us here to suggest such a character, and no reason to believe that the provision made for the petitioner was other than a means of distributing income to her and the marital community of which she was a member. Unless the McClelland case is confined to a spendthrift trust, it would seem to conflict with Arnold v. Leonard, supra; and in that event the more recent case must be regarded as the more compelling authority. But it is still more important that, however McClelland v. McClelland, supra, may be interpreted within the realm of Texas marital law, it must yield to Irvin v. Gavit, supra, when Federal taxes are at issue. What the Supreme Court has called income may not in Texas escape tax through a local decision that it is a bequest. Eisner v. Macomber, 252 U. S. 189; Weiss v. Wiener, 279 U. S. 383.

In our opinion, therefore, the petitioner correctly regarded the distributions by the trustee as income of the community, and she is therefore entitled to have but one-half included in the gross income shown on her separate return. The respondent’s determination is reversed.

Reviewed by the Board.

Judgment will be entered wader Rule SO.

Lansdon dissents.


author: Ahundell:

text:
    Houghton & Dutton Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 24883.
    Promulgated October 31, 1932.

      J. Robert Sherrod, Esg., for the petitioner.

      F. R. Shearer, Esg., for the respondent.
   OPINION.

Ahundell:

This proceeding involves income and profits taxes for the years 1919 and 1920. At the hearing on the merits the issues relating to 1919 were disposed of by the parties by waiver and stipulation, but the matter oí recomputation for that year was left open. We decided the issues concerning 1920 in our report promulgated at 26 B. T. A. 52. Upon recomputation it developed that there was a slight difference between the parties concerning minor adjustments to inadmissible assets for invested capital purposes, but as to these counsel for petitioner recedes, and the respondent’s figures in this respect will be approved on the further computation that will need be made.

A substantial controversy exists as to the manner of giving effect to the items which we held constituted allowable deductions for the year 1920. There were three of these items: (1) Loss on stock of petitioner’s wholly owned subsidiary; (2) bad debts consisting of indebtedness of the subsidiary to petitioner; (3) accrued expense which arose out of petitioner’s obligation to redeem trading stamps issued by its subsidiary. These deductions we held were allowable by reason of the facts that at the end of the year 1920 the subsidiary was out of business and was hopelessly insolvent, and that, under the decision in Aluminum Goods Manufacturing Co. v. Commissioner, 56 Fed. (2d) 568, the affiliation was broken as effectively as though there had been a sale of the subsidiary’s stock.

On recomputation under Bule 50, the petitioner claims the several deductions in their full amounts from its income for the entire year. Respondent takes the position that the deductions are allowable from petitioner’s income only for the period within the year that is outside the period of affiliation, and that as the only period of this kind was the brief interval between the close of business on the last day of the year and the end of the year, during which petitioner had no income, there is nothing from which the several deductions may be taken.

We think that respondent’s position in this respect is erroneous. Deeply rooted in the Federal tax system is the fundamental idea of computation of taxes on an annual basis. Burnet v. Sanford & Brooks Co., 282 U. S. 359; Burnet v. Thompson Oil & Gas Co., 283 U. S. 301. Even though affiliated with others, each corporation is still a taxpayer (Woolford Realty Co. v. Rose, 286 U. S. 319), and as such is entitled to have its taxes computed on the basis of its taxable year, which requires that it report all income received within the year as yearly, and not daily, income, and carries with it the correlative right to all the statutory deductions growing out of transactions within the year without regard to the particular day on which they occurred.

It is argued by respondent that his position here is in accordance with article 634 of Regulations 45, as amended by T. D. 4022 (O. B. VI-1, p. 258) Avhich provides that, where two corporations are affiliated at the beginning of the year, but, due to a change in stock ownership or control ¿hiring the year, affiliation is terminated, a consolidated return shall be filed for the period of affiliation, and a separate return should be filed for each for the remainder of the year. The respondent’s theory, if carried into practice, would require the filing of a separate return in cases like this for the fractional part of a day between the close of business on the last day and the end of the year.

The same provisions appear in subsequent regulations (art. 634, Reg. 62 and 65), but these later regulations provide further that, “ in any case in which the consolidated status is for a period so short as to be negligible, a consolidated return or separate returns for the entire period, as the case may be, may be filed.” The respondent’s position as asserted here is contrary to the quoted provision, which has now been long established.

We are unable to perceive the necessity of a separate return by the parent company for the period within the year following the termination of affiliation. The decisions are uniform in holding that where a corporate taxpayer affiliates during the year with a newly organized corporation which has had no separate existence, a single return containing the income of both during affiliation and the separate income of the one prior to affiliation is all that need be filed. Automatic Fire Alarm Co., 13 B. T. A. 1195; Hutt Contracting Co., 17 B. T. A. 818; Margay Oil Corporation, 26 B. T. A. 199; American Paper Exports, Inc. v. Bowers, 54 Fed. (2d) 508. The decision in the last cited case is based on the premise that, under the circumstances there present, the filing of two returns for the one year would be “ contrary to the general theory of an income tax, which does not allow the splitting of years.” The law being thus established by the decided cases, is there any sound reason why the same rule should not apply where, during the year, affiliation is broken by reason of the factual death of the subsidiary corporation ? In such a case there was no period within the year during which the subsidiary had a separate existence; hence, there was no period for which it would be required to file a separate return. And the reasons which support the propriety of a single consolidated return by the parent where a newly organized corporation comes into the group, as in the cases cited, are sufficient to permit the filing of a similar return where a subsidiary leaves the group and has no further existence. It is true under both situations that there is a period in which the parent may be said to have a “ separate ” existence in one sense of the word. But under what we conceive to be the proper view, the absence of another corporation from which the parent’s income must be separated for any part of the year is an important and distinguishing feature. In the situations we are discussing here there is, properly speaking, no period of “ separate ” existence for either corporation. During all of the time that both were in being they were affiliated. Under such circumstances we are of the opinion that a consolidated return for the entire year is the only return required and that it should include all the parent’s income and deductions for the year.

There is no conflict between our holding on this question and the decisions in Remington Band, Inc. v. Commissioner, 33 Fed. (2d) 77, and Riggs National Bank, 17 B. T. A. 615; aff'd. 57 Fed. (2d) 980. In those two cases the essential question was to determine the parent companies’ net incomes for the year as affected by disposition of stock of subsidiaries, in the one case through sale, and the other through liquidation. It was held that the gain or loss occurred outside the period of affiliation, thus distinguishing the cases from those where there was a question of gain or loss from dealing in stock of an affiliate during the period of affiliation. In both the cited cases the gain or loss was reflected in the income of the parent company on the basis of its operations for the entire year. One case appears to be contrary to our holding here. In Canal-Commercial National Bank, 22 B. T. A. 541, a liquidating dividend paid by a subsidiary on December 30, 1920, was held to be income of the parent, and not of the group, and not includable in consolidated income of the two companies. In the recomputation filed pursuant to the opinion rendered and in the decision thereafter entered, the gain realized on liquidation was treated as income of one day— December 31, 1920. In view of what we have said above, we now think that treatment was erroneous and it will not be followed in the future.

The proposed recomputations of the parties raise the question of the extent to which the allowable deductions for 1920 should be reduced by the operating losses of the subsidiary company. The respondent reduces the deductions by the operating losses of the subsidiary which were allowed on consolidated returns for the years 1918, 1919 and 1920. Petitioner, on the other hand, contends that the deductions should be allowed in full and that operating losses should not be taken into consideration. In Riggs National Bank, supra, it was held that the loss sustained on liquidation should be reduced by the operating loss sustained during the period of affiliation within the year which had been reflected in consolidated income for that period. The result of this was to give effect to the entire year’s operation. The loss sustained during the period of affiliation was reflected in a shrinkage of assets, so that the allowance of the operating loss in one period within the year and the capital loss in the next period of the same year gave effect to the entire loss sustained. We think the rule announced in the Biggs National BanJe case in this respect is sound and should be followed here.

No adequate reason is given by respondent in support of his claim that the operating losses of prior years should be carried forward to the current year. The prior years, as far as we are concerned here, are closed and we are not disposed to bring forward the results of their operations, at least without a better showing of the propriety of such action than is made in this case. Cf. United Publisher's Corporation v. Anderson, 42 Fed. (2d) 781.

The parties are requested to file further computations within thirty days of the promulgation of this opinion, and in the event of any differences between them a further hearing will be granted,

Reviewed by the Board.

Trammell dissents.


author: GoodRICh : Trammell,

text:
    The Joseph & Feiss Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46465.
    Promulgated October 31, 1932.

      A. E. James, Esq., for the petitioner.

      J. M. Leinenkugel, Esq., for the respondent.
   OPINION.

GoodRICh :

Petitioner contends that the calendar year 1926 is the “ succeeding taxable year ” and the calendar year 1927 is the “ next succeeding taxable year ” designated in section 206 (a) of the Revenue Act of 1926, and that against the income derived by itself and its affiliate during those years should be applied, to the extent permitted under the decision in Woolford Realty Co. v. Rose, 286 U. S. 319, its net loss sustained in 1925.

Upon facts presenting a situation similar to that here obtaining and raising this same issue under section 200 (b) of the Revenue Act of 1924, the pertinent provisions of which are identical with those of the same section of the 1926 Act, we have heretofore decided adversely to petitioner’s contention. Weissberger Moving & Storage Co., 26 B. T. A. 1375.

Reviewed by the Board.

Judgment will be entered for the respondent.

Van Fossan dissents.

Trammell,

dissenting: I dissent on the following grounds. First, upon the reasoning of the Circuit Court of Appeals in the case of United States v. Hoffman, 61 Fed. (2d) 294. Second, even under the Commissioner’s regulations no short period return was required under the facts of this case. Third, section 200 defines “ taxable year ” as follows:

The term “ taxable year ” includes in the case of the return made for a fractional part of a year under the provisions of this title or under regulations prescribed by the Commissioner with the approval of the Secretary, the period for which such return is made.

It is to be observed that the statute does not define the taxable year as being a period for which a return is required for a period less than a year, but “ the period for which such return is made.” The taxpayer did not make any return for a fractional part of a year; therefore, under the definition contained in the statute the fractional years for which, as contended by the respondent, returns should have been made are not fractional year returns. The only taxable years here are periods of twelve months. It is only when the returns are made for fractional parts of years, not when required to be made, that the statute provides that the term “ taxable year ” shall include a fractional part of a year.

Smith and Sea well agree with this dissent.


author: GoodRich: Van Fossan,

text:
    Arnold, Constable Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 47847.
    Promulgated October 31, 1932.

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

      J. M. Morawshi, Esq., for the respondent.
   OPINION.

GoodRich:

We have held heretofore that, for the purpose of applying a net loss sustained by a corporation prior to affiliation to income earned thereafter, the periods of the calendar or fiscal year before and after the affiliation of previously existing corporations occurs, under the provisions of section 200 (a) of the Revenue A-ct of 1924, each constitute a “taxable year.” Weissberger Moving & Storage Co., 26 B. T. A. 1375. The pertinent parts of that section have been unchanged by the Revenue Acts of 1926 and 1928 which are applicable to this case.

Reviewed by the Board.

Judgment will be entered for the respondent.

Van Fossan,

dissenting: The reasons which impel me to dissent in this case are fully elaborated in my dissenting opinion in Weiss-berger Moving & Storage Co., supra. I believe the construction placed by the Board on the term “ taxable year ” in the Weissberger case, cited as authority for the instant decision, is contrary to the clear intention of Congress and violative of the basic theory of income-tax accounting.

Smith, Trammell, and Sea well agree with this dissent.


author: MuRdook:

text:
    South Dakota Concrete Products Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 39830.
    Promulgated October 31, 1932.

      H. A. Mihills, G. P. A., for the petitioner.

      John D. Kiley, Esq., for the respondent.
   OPINION.

MuRdook:

The Commissioner determined a deficiency of $710.07 in the income-tax liability of the petitioner for the year 1926. The petitioner waived an assignment of error to the effect that two notes were not worth face value when received in 1926, and the only question presented for our consideration is whether or not the Commissioner erred in including in gross income of the year 1926, $5,259.74 representing amounts embezzled in prior years and recovered in 1926.

The following allegations of the petition were admitted in the answer:

That for a period extending from the year 1921 until about June 5, 1926, the petitioner employed one Lola Root, as a confidential office assistant and bookkeeper, at its principal place of business in Watertown, South Dakota.
That the said Lola Root left the employ of petitioner on or about the 5th day of June, 1926.
That after the 6th day of June, 1926, and prior to the 2nd day of August, 1926, petitioner determined, as a result of an audit of its books of account and record, that said Lola Root, while in petitioner’s employ and between October 10, 1922 and May 29, 1926, without the knowledge or upon authority of the petitioner or any of its agents, misappropriated to herself and embezzled various and sundry sums of money belonging to the petitioner, aggregating $6,082.20.
That said sum of $6,082.20, was misappropriated and embezzled during the calendar years 1922 to 1926, inclusive, in the amounts hereinafter set opposite the respective years.
That the sums so misappropriated and embezzled were charged, on petitioner’s books of account and record, to various and sundry operating and expense accounts and were, therefore, unbeknownst to petitioner, deducted from the gross income in petitioner’s returns of income filed for such years.
Upon discovery of the misappropriation and embezzlement, S. L. Root and his wife, Martha E. Root, father and mother, respectively, of Lola Root, voluntarily tendered to petitioner, a note dated July 20, 1926 for the principal •sum of $4,000.00 and a note dated August 2, 1926, for the principal sum of $2,500.00, both of said notes being secured by second mortgages of like principal sums.

The Commissioner added $5,259.74 to the income reported by the petitioner for the year 1926. In the notice of deficiency he explained that the addition represented “ a restoration to income on account of the recovery by taxpayer in 1926 of amounts embezzled during the years 1923, 1924 and 1925. It appears that the various amounts embezzled by the bookkeeper were charged to expense by him [sic] ; hence, the recovery of such amounts is considered income in 1926, the year in which recovered. See Article 50 of Regulations 69.” He further explained: “ Income Tax 1470, Cumulative Bulletin 1-2, Page 60 and Solicitor’s Law Opinion 845, Cumulative Bulletin 1, Page 118 * * * contemplate a condition where the taxpayer had not received the benefit of the deductions.”

The amount embezzled in 1926 was recovered in that year and apparently the loss and recovery were not reflected in the return for the year. Consequently, the only change which the. Commissioner made from the income reported was the addition of the losses previously deducted by the petitioner for the years 1922 to 1925, inclusive, as expenses. We note that the total amount embezzled was $6,082.20, whereas the notes given in restitution had a face value of $6,500 and the Commissioner only included in income the amount deducted in prior years instead of $5,677.54, the amount of the notes less the amount embezzled in 1926. We do not know why there are these discrepancies in the figures, but since there is no question raised in this connection we will disregard them.

The amounts misappropriated and embezzled during the years 1922 to 1925, inclusive, were charged to expense accounts on the books of the petitioner and were deducted from gross income on its income-tax returns as ordinary- and necessary expenses. Obviously the petitioner sustained a loss in each of these years in the amount embezzled in that year. Deductions for losses to which it was entitled were secured through deductions for ordinary and necessary expenses to which it was not entitled, with the result that, so far as these items are concerned, its income-tax liability for these years has been correctly determined. Since the question of the value of the notes has been waived, we must assume that they were the equivalent of cash. Therefore, in 1926 the petitioner recovered the money embezzled and the question is whether or not, under such circumstances, it should return as income in the year of recovery the amount previously deducted.

The Commissioner has added no more to income than has been deducted previously, thus bringing the amount of income reported! over the period in balance with the actual income of the taxpayer ' for this period. In the year 1926 the petitioner actually received in cash, for its own use and benefit, income earned in previous years, but unlawfully taken from it. It is true that these earnings have heretofore been included in gross income. But deductions have been taken and allowed which exactly offset each original inclusion. That these deductions were taken under an improper heading is beside the point. The fact is that the petitioner was entitled to the deductions so far as the amount was concerned and it received the benefit of them. It has frequently been held that when recovery is made on debts once deducted as bad, the amount recovered is properly to be reported in income(for the year of recovery. Putnam National Bank, 20 B. T. A. 45; aff'd, 50 Fed. (2d) 158; First National Bank of Key West, 26 B. T. A. 870; Askin & Marine Co., 26 B. T. A. 409; Nott-Atwater Co. v. Poe, 38 Fed. (2d) 1000; Commissioner v. Liberty Bank & Trust Co., 59 Fed. (2d) 320. Expenses once deducted but reduced by la.ter adjustments require similar treatment. Chicago, Bock Island, & Pacific Ry. Co., 13 B. T. A. 988; aff'd. on this point, 47 Fed. (2d) 990; certiorari denied, 284 U. S. 618; Charleston & Western Carolina Ry. Co., 17 B. T. A. 569; aff'd., 50 Fed. (2d) 342; Chicago & North Western Ry. Co., 22 B. T. A. 1407, 1436; Atlantic Coast Line R. R. Co., 23 B. T. A. 888; S. & L. Building Corp., 19 B. T. A. 788 (this point not passed on by Circuit Court of Appeals); Avery & Sons, Inc., et al., 26 B. T. A. 1393; Burnet v. Sanford & Brooks Co., 282 U. S. 359, reversing 35 Fed. (2d) 312, which reversed 11 B. T. A. 452. Furthermore, these cases hold that income-tax liability under the Federal revenue acts is to be determined on annual periods on the basis of facts as they existed in each period, and when an adjustment occurs -which is inconsistent with what has been done in the past in the determination of tax liability, the adjustment should be reflected in reporting income for the year in which it occurs. That any other system would be so uncertain and unsatisfactory as to require its rejection is apparent if one considers the effect of the statutes of limitation, the obvious administrative difficulties involved, together with, the lack of finality which would exist as to all income-tax liability. In laying down these rules the courts and this Board have been fully conscious of the fact that losses will some times be deducted where the future will eventually disclose compensation, and there will be reported as income that which is in fact only compensation for loss. But the deductions are practical necessities due to our inability to read the future, and the inclusion of the recovery in income is necessary to offset the deduction. Where, as here, a taxpayer has received the benefit through an offset against income of amounts embezzled from it, we perceive no distinction in principle from the rule laid down in the above cases. Therefore, we hold that when the taxpayer recovers the amounts previously embezzled and offset against income, it must report the amount as income for the year of. the recovery.

Reviewed by the Board.

Judgment will be entered for the respondent.

GoodRioh dissents.