author: Smith:

text:
    C. J. Phillips, Petitioner, v. Commissioner of Internal Revenue, Respondent. A. A. Gambill, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 47901, 47902.
    Promulgated September 16, 1932.

      H. 0. Kilpatrick, Esq., for the petitioners.

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

Smith:

It is now well settled that when the stockholders of a corporation distribute its assets, leaving the corporation without means for paying income taxes due from it, they become liable as transferees for the unpaid taxes of the corporation, under section 280 of the Revenue Act of 1926, and that the taxes for any year, although not determined or assessed at the time of the distribution of the assets to the stockholders, must be taken into account in determining the question of the taxpayer’s ability to pay the taxes at that time. United States v. Armstrong, 26 Fed. (2d) 227; Samuel Keller, 21 B. T. A. 84; aff'd., Commissioner v. Keller, 59 Fed. (2d) 499; Edward H. Garcin, 22 B. T. A. 1027.

In these proceedings the respondent contends that the petitioners as stockholders of the taxpayer corporation received the distribution of its assets in 1925, which left the taxpayer without assets from which the tax could be collected.

The petitioners contend, on the other hand, that the Land Company had assets from which the deficiency in taxes for 1925 might have been collected.

From a careful consideration of the evidence, we are of the opinion that the petitioners are liable as transferees under section 280 of the Revenue Act of 1926. So far as appears, the only assets of value of the Land Company in 1925 had been distributed to the petitioners. These assets consisted of $35,000 in cash and a farm which had an admitted value of $24,000. The Land Company had certain liabilities and the petitioners agreed to transfer their stock in the Land Company to the Vizard Investment Company, the purchaser, upon that company agreeing to pay the liabilities of the Land Company, not including any income-tax liability. We can not find from the evidence that the assets of the Land Company after the sale of the 164 lots to the Vizard Investment Company had anything more than a negligible value. A warrant of distraint issued in 1929 was returned nulla tona. There is no evidence that the Land Company had any less assets in 1929 than in July, 1925, after the sale of the 164 lots above referred to. We accordingly find that the petitioners are liable as transferees for the amount of the unpaid tax. The asserted liability of $1,101.84, plus interest, should be reduced by the amount of $207.67, which has since been collected and applied to such liability.

Judgment will be entered under Rule 50.


source: Caselaw Access Project

author: Lansdon:

license: Public Domain

text:
    Marvin H. Gates, Trustee, Estate of Jemuel C. Gates, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46181.
    Promulgated September 16, 1932. .

      Claude W. Dudley, Esq., and Henry W. Fox, Esq., for the petitioner.

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

Lansdon:

The respondent has asserted deficiencies in income tax for the calendar year 1924 and the period from January 1, 1925, to August 3,1925, in the respective amounts of $1,252.38 and $37,562.12. The following three issues are raised by the pleadings: (1) Did the petitioner sell a certain building in April, 1925, and receive therefor $186,269.46, or was such amount received as a bonus for the execution of a 99-year lease? (2) Are amounts paid in 1924 and 1925 by the petitioner as lessor to secure long-term leases on property owned by the estate deductible as ordinary and necessary business expenses in the years in which paid ? (3) If the Board finds that the amount of $186,269.46 represents a bonus received for the 99-year léase, should the full amount be included in income where $86,269.46 thereof was represented by several promissory notes payable at fixed future dates ?

The parties have stipulated that, if the Board finds there was a sale of the building in 1925, the respondent erred in allowing a deduction for depreciation on the Gates building for 1925 in the amount of $1,138.81. They have also stipulated that, if the Board allows the deductions claimed under issue (2) above, the respondent erred in allowing deductions of $101.01 and $112.49 in 1924 and 1925', respectively, as amortization of the commissions and fees paid.

During the taxable year the petitioner was the sole trustee of the estate of Jemuel C. Gates, who died testate on August 2, 1915.

On April 20, 1925, the petitioner and beneficiaries of the trust entered into an agreement with De Yere Dierks, whereby the former leased certain real estate to the latter for a term of 99 years at an annual rental of $40,000 until January 1, 1930, and $50,000 thereafter. Contemporaneously therewith the parties entered into another agreement, whereby those named lessors in the lease granted, sold and conveyed to Dierks a seven-story and basement business building located on the land covered by the 99-year lease. The consideration stated in the amount of $186,269.46 was paid in cash to the extent of $100,000, the balance being paid by.four promissory notes, each in the amount of $21,567.39, due in 1, 2, 3 and 4 years, respectively. The notes, which drew interest at 5 per cent, were secured by a deed of trust to the building. The instrument of conveyance to Dierks, which was in the form of a warranty deed, provides that he shall take the building “ subject, however, to a certain lease of even date ” and subject toi all of the terms, provisions, covenants, liens and encumbrances provided in said lease. The lease referred to provides, inter alia:

During the term of this lease the Lessee may at all times * * * demolish, rebuild, remodel, alter and repair all improvements now or hereafter on the demised premises in such reasonable mánner as the Lessee shall choose, and may add additional stories, subject to the following conditions:
(1) Nothing shall be done which will unduly weaken the structural support of any building on the premises, .diminish the value of any such building or make any such, building structurally dependent on any building on adjacent property. . .
(2) As a condition precedent to the right to demolish any improvements * * * and as a condition precedent to the making of any alterations or additions to any such improvements * * * the Lessee shall furnish to the Lessors a good and sufficient bond executed by the Lessee as principal and with a surety or sureties satisfactory to the Lessors. * * *
(3) Any building built now or remodeled as herein authorized shall cover substantially the entire leased land and shall be so built that it can be used separately from any building on any adjacent property, and shall, when completed, be of a value at least as great as the value of the building now on said premises, and in any event not less than Two Hundred and Twenty-five Thousand Dollars ($225,000). Any new building shall be at least seven (7) stories high, in addition to basement, and shall be of fireproof construction. * * *
‡ ‡ ‡ $ # $ $
The Lessee agrees that during the entire time that the tenancy hereunder shall continue, it will, at its own cost keep any and all buildings now standing or which may hereafter be erected upon the demised land and all the appurte nances thereto belonging in good condition of repair and preservation, and will keep all' exposed wood and metal work well painted so as to prevent deterioration and keep all brick and stone work well pointed * * *
$ ‡ iji ‡ ‡ ‡
The Lessee covenants and agrees to carry at its own expense at all times during the term of this lease, if obtainable, rent insurance protecting the Lessors against loss of rents on account of untenantability due to fire in a sum equal to the annual rent reserved in this lease, the policies therefor to be delivered to and kept by Lessors. * * * In the event any improvement on the premises shall be partially or wholly destroyed by fire or otherwise, the rent payable hereunder shall be abated to th'e extent (but no more) of the amount of money that the Lessors shall receive upon such policy or policies of rent insurance.
*******
If any such damage or destruction should occur during the last five (5) years of this term, the Lessee, at its option, may elect not to rebuild by giving unto Lessors written notice of its intention within thirty (80) days after such damage or destruction; and upon such notice being given to Lessors, this lease shall terminate and all insurance moneys payable to the Trustee as hereinabove provided shall be and become the property of the Lessors * * *.
*******
The Lessors concurrently herewith have severed from the realty and sold, conveyed and transferred to the Lessee the building known as the Gates Building, now upon the said premises. Said building, though owned by the Lessee, is subject to a mortgage or deed of trust securing notes for a part of the purchase price thereof made by the Lessee and payable to the Lessors for an aggregate amount of Eighty-six Thousand Two Hundred Sixty-nine and 46/100 Dollars ($86,269.46). The conveyance and transfer of said building to the Lessee is subject to this lease, and said building and any additions or betterments thereto are and shall be security for the faithful performance by the Lessee of all of the terms and conditions of this lease. * * * Upon the forfeiture or termination of this lease for any cause under the provisions of Article XII hereof, the said Gates Building and any additions and betterments thereto and/or all other buildings or improvements upon the said premises owned by the Lessee (if the Lessee shall have any title or interest therein) shall forthwith be re-attached to the realty and shall revert to and become the property of the Lessors free and clear of any claim of the Lessee whatsoever, and shall be taken as liquidated damages for the breach of the covenant on account of which this lease shall have been so forfeited or terminated.
*******
Upon the termination of this lease in any manner, whether by expiration or otherwise, all buildings, improvements, and fixtures (except trade fixtures) then standing upon the demised premises shall belong to and be the property of the Lessors free from any lien, mortgage or encumbrance made by the Lessee * * *.
*******
At the end of the term of this lease, the Lessee and the tenants and subtenants under the Lessee will surrender possession of the demised premises and all buildings and improvements thereon (except trade fixtures) to the Lessors.

Prior to the transaction of April 20, 1925, on April 2, 1919, the Gates property, including the land and buildings, had been leased by the petitioner to J. H. Hettinger for a term of 10 years, beginning December 20, 1920. Under the terms of the will of decedent the trust estate was to be closed on August 3, 1925, and the trust property was to be distributed to the beneficiaries. In order that the estate might more easily be divided, the petitioner entered into the alleged sale of the building. The Hettinger lease was purchased by Dierks for the remainder of the 10-year term and thereafter, on July 7, 1927, the Hettinger lease, the Dierks lease and the Gates Building were transferred to the Dierks Investment Company. By instrument dated December 1, 1929, the Dierks Investment Company executed a deed of trust covering its interest in the Gates Building and the lot upon which it is erected to secure a bond issue of $775,000, the proceeds of which were used along with an additional amount to add several stories to the Gates Building.

The value of the Gates Building on August 3, 1915, when it was acquired by the petitioner, was $200,000. The expected life of the building at that date was 50 years. The depreciated cost of the building on April 20, 1925, was $161,150.69..

In connection with the above transactions whereby the petitioner leased the land upon which the Gates Building was situated for 99 years and purported to sell the Gates Building, he paid $18,592 as commissions to real estate men for services rendered in negotiating and consummating the transactions and $500 to attorneys for services rendered in drawing up the legal instruments.

During the taxable year 1924 the petitioner leased certain property belonging to the estate, known as the Hayes Building, for a period of 99 years. For services rendered in connection therewith he paid commissions in the amount of $10,000.

On his income-tax return for 1924 the petitioner deducted the $10,000 paid as commissions in connection with the Hayes lease as ordinary and necessary business expense. The respondent disallowed the deduction and prorated the amount over the 99-year term of the lease. On his income-tax return for the period from January 1,1925, to August 3, 1925, the petitioner deducted as an ordinary and necessary business expense the amounts of $18,592 and $500 representing commissions paid real estate agents and attorney fees. The petitioner did not report any profit from the alleged sale of the Gates Building. Upon audit of the return the respondent disallowed the deduction for commissions and attorney fees paid and prorated the amounts thereof over the term of the 99-year lease. He added to petitioner’s income the entire amount of $186,269.46, determining that it was a bonus received for the execution of the 99-year lease.

The facts disclosed relative to the first issue are similar to those presented in George W. Crile, 18 B. T. A. 588; aff'd., 55 Fed. (2d) 804; and Minneapolis Syndicate, 13 B. T. A. 1303. In the former case the petitioner entered into an agreement whereby he purported to sell a building and lease the land on which it was situated.. The petitioner claimed a loss upon the sale of the building which the Commissioner disallowed. In approving the Commissioner’s determination, the Board stated:

We think that the respondent’s contention must prevail to the extent that the sale of the buildings was not a separate transaction resulting in a loss to the petitioner. * * * '
* * * * * * *
* * * The lease referred to, parts of which are shown above, provided that the- lessor should have a lien on the buildings for the payment of rents and that the lessee would keep the buildings insured for the benefit of the lessor, and that at the expiration of the lease the buildings would revert to the lessor. The lessee was not privileged to remove the buildings without giving bond to the lessor in the amount of $160,000' to guarantee the construction of ether buildings upon the premises at a cost of not less than $200,000. * * *
* * * - * * *
In the instant case the petitioner’s beneficial interest resulting from the transaction was substantially the same as if he had executed a similar lease of the entire property for a term of 99 years for a cash consideration of $100,000 and yearly rentals as stipulated- in the lease. We conclude, therefore, that the petitioner did not sustain a deductible loss upon the sale of his interest in the buildings in question in the taxable year 1923. •

In affirming the decision of the Board, the court used the following language:

The lease, and the lease alone, became the declaration and embodiment of the agreement of the parties, and under it the payment can be classified only as a bonus paid for the leasehold estate, as a consideration in the nature of rental.

In Minneapolis Syndicate, supra, the petitioner purported to sell a building for $250,000 in cash and to lease the land on which the building was located for a period of 130 years. A deed to the building was executed and delivered contemporaneously with the execution of the lease to the land. The respondent contended that the sale of the building and the lease were separate transactions and that by reason of the sale of the building the taxpayer’s invested capital should be reduced. The Board held that the instruments must be considered together as a long-term lease and that the respondent erred in reducing the petitioner’s invested capital. In our opinion we stated:

It is an unquestioned rule of construction that two instruments executed in carrying out tbe same transaction must be read and construed together in determining the intent of the- parties, and that such intent will be given effect irrespective of the particular names given the individual instruments by the parties or the particular form in which they are drawn. Fidelity Trust Co. v. McKeithan Lumber Co., 212 Fed. 229; O’Neil v. Caples, 257 Ill. 528; 101 N. E. 50; Huylers v. Ritz Carlton Restaurant & Hotel Co., 1 Fed. (2d) 491; Lewis v. Curnutt, 130 Iowa 423; 106 N. W. 914; Crabtree v. Crabtree, 136 Iowa 430; 113 N. W. 923; Jacobs v. All Persons, etc., 12 Cal. App. 103; 106 Pac. 896; Metropolitan Securities Co. v. Ladd, 173 Fed. 269.
* * * * * *
In the case before .us it can not be questioned that these two instruments were executed as parts of one single transaction. Both instruments by express recital bear witness to this fact. Tbe execution of tbe deed and tbe payment of $230,000 cash is expressly stated by tbe lease to be one of tbe considerations for its execution. We must, under tbe rule of construction laid down, construe these instruments as if they were one, and tbe ultimate interest received by tbe grantees under both, so construed, must be considered as represented by tbe total of tbe considerations received under each by petitioner.
* * « * # 41 *
Tbe form of the conveyance of tbe building is that of a warranty deed, but the reservations noted result in tbe grantees taking no greater beneficial interest in that property than they would bad tbe instrument been a lease for 130 years.
* . * * * * * *
By this transaction petitioner has, in fact, only surrendered, tbe use and occupancy of its property, for a term of 130 years, at tbe end of which time it will stand possessed of it again. The total consideration to it for this transaction was $250,000 cash and a yearly rental of $61,000. Tbe identical result in so far as benefits and ultimate interest received are concerned, would have been effected by tbe execution of a lease to land and buildings, with the same privileges and restrictions stated, for a cash bonus of $250,000 and a yearly rental of $61,000 * * *.

We must reach the same conclusion in the instant case that we reached in the 6'rile and the Minneapolis Syndicate cases. We think the two instruments constitute a lease of the .property for 99 years in consideration of a bonus of $186,269.46 and an annual rental of from $40,000 to $50,000.

The fact that $86,269.46 was paid by giving promissory notes secured by a deed of trust on the building does not eliminate that amount from taxable income. So far as the record discloses the notes were worth their face value. We think the total amount of $186,269.46 should be included as income in the taxable year.

We have repeatedly held that commissions paid by a lessor to secure a lease on property owned by him constitute capital expenditures, which must be amortized over the term of the lease. Bonwit Teller & Co., 17 B. T. A. 1019; aff'd., 53 Fed. (2d) 381; certiorari denied, 284 U. S. 690. Mary C. Young, 20 B. T. A. 692; Spinks Realty Co., 21 B. T. A. 674; Home Trust Co., 21 B. T. A. 1255; Sigmund Spitzer, 23 B. T. A. 776; Geo. W. Griffiths, 25 B. T. A. 1292; aff'd., 53 Fed. (2d) 381; Centred Bank Block Ass'n., 19 B. T. A. 1183; aff'd., 57 Fed. (2d) 5. In accordance with our holdings in those decisions the commissions, and attorney fees paid by the petitioner to secure a lease on his property were properly amortized oyer the life of the lease by the respondent.

Decision will be entered for the respondent.


author: Lansdon :

text:
    Leamington Hotel Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 48413.
    Promulgated September 16, 1932.

      J. K. Raglan, C. P. A., G. 8. Davidson, O. P. A., and L. A. Gravelle, Esq., for the petitioner.

      James K. Polk, Jr., Esq., for the respondent.
   OPINION.

Lansdon :

The respondent bas asserted a deficiency in income tax for 1927 in the amount of $4,030.66. Two issues are presented by the pleadings, namely, whether a taxpayer on the accrual basis may deduct the amount of certain property taxes in 1927 where the property was acquired on June 11, 1927, and what amount, if any, may be deducted as accrued charges for water service in 1927 where payment was not made until 1928. All of the facts are stipulated.

The petitioner is a Delaware corporation, organized on June 4,1927, with its principal office in Minneapolis, Minnesota. On June 11, 1927, it purchased certain real estate and personal property located in Minneapolis, Imown as the Leamington Hotel, which it owned and operated throughout the remainder of the taxable year.

The vendors of the Leamington Hotel had acquired such property after May 1 and before June 11, 1927. In connection with the purchase by petitioner no mention was made as to payment of 1927 Minnesota property taxes. Taxes were assessed against the hotel property in 1927 in the total amount of $32,634.19, of which $30,762 was taxes on the real estate, $1,846.61 represented taxes on the personal property, and $25.58 was taxes on moneys and credits. The above amount was paid by petitioner to the State of Minnesota in 1928.

Since its organization the petitioner has kept its books and filed its income-tax returns on an accrual basis. As of December 31, 1927, it accrued the 1927 Minnesota property taxes on its books and made deduction therefor on its income-tax return for 1927. Upon audit the respondent disallowed the deduction, holding that the amount paid by petitioner represented taxes of a prior owner and constituted an additional payment for the property.

As of December 31, 192T, the petitioner accrued on its books an amount of $320 which it estimated as the cost of water service furnished by the city of Minneapolis for the months of November and December. In the early part of 1928 it paid $233.34 to the city of Minneapolis for water service during November and December, 1927, and January, 1928.

On its income-tax return for 1927 the petitioner deducted the amount of $320 which it had accrued as an expense. The respondent disallowed the entire amount.

In Minnesota real property subject to taxation is listed and assessed every even numbered year with reference to its value on May 1 preceding the assessment. Personal property is listed annually with reference to its value on May 1. The assessors must turn in the assessment books not later than the first Monday in July following the assessment. 'The county board of equalization must complete equalization of the assessments not later than four weeks from the third Monday in July. The state tax which is levied by the legislature must be certified by the state auditor to the county auditor on or before October 1, annually. The county tax is levied by the county board at its meeting in July of each year. Taxes voted by cities, villages, towns and school districts must be certified to the county auditor on or before October 10 of each year. The county auditors then calculate and fix the rate of tax. Levy of the tax is made thereafter and payment is due on the first Monday in January of the following year.

We have heretofore held that a taxpayer on the accrual basis may accrue Minnesota property taxes as of December 31 of the taxable year. Cloquet Co-operative Society, 21 B. T. A. 744. Cf. Ira L. Henry Co., 9 B. T. A. 540; and Crown Willamette Paper Co., 14 B. T. A. 133. The controversy here is as to the date on which the Minnesota taxes accrued. If they accrued prior to June 11, 1927, when the petitioner bought the property, then the amount subsequently levied and paid represents taxes of a prior owner and, as the respondent contends, constitutes additional cost of the property to petitioner. Falk Corporation, 23 B. T. A. 883; aff'd., 60 Fed. (2d) 204. Cf. Mechanics Bank of Brooklyn, 9 B. T. A. 1; S. & L. Building Corporation, 60 Fed. (2d) 719. If, on the other hand, the taxes accrued after petitioner acquired the property, the amount paid is deductible in computing net income.

Sections 2191 and 2199 of Mason’s Minnesota Statutes (1927) provide in part as follows:

§2191 — lAen of real estate taxes — The taxes assessed upon real property shall be a perpetual lien thereon, * * * from and including- May 1 in the
year in which they, are levied, until they are paid; but, as between grantor and grantee, such lien shall not attach until the first Monday of January of the year next thereafter. (975) [2171]
* * * * * * v
§2199 — 1. Lien of taxes on personal property — Nature, extent and priority— The taxes assessed upon personal property * * * shall be a first and perpetual lien, * * * upon all of the personal property of the person assessed from and including- May 1 in the year in which they are levied, until they are paid; provided such lien shall not continue on items of personal property sold at wholesale or retail in the ordinary course of business. (’27, c. 318, §1)

- The Superior Court of Minnesota has held that, under the above quoted statutes, May 1 is the date on which taxability, ownership, and value of property is determined. Martin County v. Drake, 40 Minn. 137; 41 N. W. 942; State v. Bellin, 79 Minn. 131; 81 N. W. 763; and State v. Northwestern Telephone Exchange Co., 80 Minn. 17; 82 N. W. 1090. In Martin County v. Drake, supra, the court stated:

* * * All tax laws have to fix upon some particular date in the year at which to determine the taxability, as well as the ownership and value, of property, for purposes of assessment and taxation. Our revenue laws have fixed this at the 1st of May. Gen. St. 1878, c. 11 §§ 6, 24, 105. Personal property is assessed and taxed with regard to both its value and ownership at that date. Real estate is assessed according to its value at that date, and the state has a lien for the tax from that date. Every man must pay taxes on what he then owns, and at its then value no matter how short a time he may have owned it, or how soon thereafter it is lost. * * *

In State v. Northwestern Telephone Exchange Co., supra, which adheres to the rule announced in Martin, County v. Drake, supra, the court said:

* * * And it seems to us that, if the consequences of double taxation follow, it arises from the voluntary act of the purchaser, — the telephone company in. this case — who-, with a knowledge of the law providing for the lien, purchased the land, and presumably considered the lien as a part of the consideration in such purchase. * * *

A similar question to that presented in the instant proceeding was decided by the District Court for the Third District of Minnesota in Thompson v. United States, 8 Fed. (2d) 175. The court held that taxes which became a lien on May 1 against realty of the decedent who died on May 1 were deductible in computing the net estate subject to the estate tax. The court found that the tax was a legal claim against the decedent at the date of his death.

We conclude that in Minnesota liability for taxes is determined on May 1 of each year. The petitioner acquired the Leamington Hotel property thereafter, on July 11, knowing that the lien for taxes had attached to the real estate and that pursuant to section 2191 of the Minnesota Statutes it must pay the real property tax. It also knew that there was a lien on the personal property. We think it is clear that petitioner has paid another’s tax. The respondent’s determination is approved. See Bull, Exec., 7 B. T. A. 993; H. H. Brown Co., 8 B. T. A. 112; and Arcade Department Store, Inc., 18 B. T. A. 1172.

The amount accrued by petitioner for water service was an estimate. After the close of the taxable year and before petitioner’s income-tax return was filed the exact charge for such service was determined and paid in the amount of $233.34 for three months beginning November 1. The petitioner is entitled to accrue two-thirds of that amount, or $155.56. Beacon Coal Co., 9 B. T. A. 280.

Decision will be entered wider Rule 60.


author: Black :

text:
    Carl Newman Davie, Petitioner, v. Commissioner of Internal Revenue, Respondent. Orville A. Park, Petitioner, v. Commissioner of Internal Revenue, Respondent. Charles Simpson Reid, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 48980, 48982, 48983, 51460, 62995.
    Promulgated September 16, 1932.

      Orville A. Bark, Esq., and G. N. Davie, Esq., for the petitioners.

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

Black :

It is not the contention of the respondent that the Department of Banking of the State of Georgia is not an agency or instrumentality of the state engaged in an essential governmental function or that the compensation for personal services of its officers and employees is subject to Federal income tax. But the respondent-contends that petitioners were neither officers nor employees of the Department of Banking of the State of Georgia, but were independent contractors, and hence their compensation is not exempt from Federal taxation. In this contention we think respondent’s holding on the facts is correct.

Under the laws of Georgia, the superintendent of banking has supervisory power over all state banking institutions, and in cases of insolvency is authorized to take charge of such insolvent banks in the character of a quasi receiver, and liquidate the same under the supervision of the proper court. He is expressly empowered to. employ such agents and attorneys as may be necessary. Parks Code, supp. 1922-6, section 2268, provides as follows:

The Superintendent may employ such attorneys * * * as may be necessary in the liquidation and distribution of the assets of such bank.
The compensation of the attorneys, all expenses of liquidation and distribution of a bank whose assets and business shall be taken possession of by the Superintendent, shall be fixed by the Superintendent but subject to be approved by the judge of the Superior Court of the county in which the bank is located, on notice to the bank. When compensation shall have been so fixed and approved and the service rendered the same shall be paid out of the funds of such bank in the hands of the Superintendent and shall be a proper charge and lien on the assets of such bank.

Petitioners do not contend that they were officers of the State of Georgia, but do contend that they were employees of the state and that they were. “ instrumentalities ” of the state engaged in a governmental function and that their incomes derived from that source are exempt from tax.

Petitioners rely on section 1211 of the Revenue Act of 1926, which is as follows:

Any taxes imposed by the Revenue Act of 1924 or prior Revenue Acts upon any individual in respect of amounts received by him as compensation for personal services as an officer or employee of any State or political subdivision thereof (except to the extent that such compensation is paid by the United States Government directly or indirectly), shall, subject to the statutory period of limitations properly applicable thereto, be abated, credited, or refunded.

No hard and fast rule can be laid down defining employees of a state or a political subdivision thereof. The question has been frequently passed on by this Board and by the courts, and each case must depend on its own facts. Many cases have been cited by counsel on both sides, which have been carefully considered, but it will serve no useful purpose to undertake to review them all. We think the facts of the instant case bring it within the rule laid down in Burnet v. McDonough, 46 Fed. (2d) 944; Burnet v. Jones, 50 Fed. (2d) 14; J. F. Roberts, 13 B. T. A. 438; aff'd., 44 Fed. (2d) 168; H. O. Underwood, 20 B. T. A. 1117; aff'd. on this point, 56 Fed. (2d) 67.

These cases hold on the facts that the taxpayer claiming the exemption was not entitled to it.because he was not an employee of the state or political subdivision thereof, but was an independent contractor.

Pétitioners urge, among other cases, in support of their contention, Burnet v. Livezey, 48 Fed. (2d) 159, and United States v. Butler, 49 Fed. (2d) 52. In the Livezey case the Governor of West Virginia appointed Livezey as counsel for the Public Service Commission of West Virginia, without specifying his term of office, but providing that his salary should be $5,000 a year payable monthly. In the Butler case, Butler was employed by the board of commissioners of Duval County, Florida, to represent it as its legal advisor. His salary was fixed by resolutions of the board and covered compensation for attendance at all meetings of the board, preparation of resolutions and contracts, and legal advice and services in litigated matters of an ordinary nature. He was carried on the pay roll of the board and was paid his salary monthly. On the facts in both of the foregoing cases the court held that the taxpayer was an employee of the state.

In United States v. Butler, supra, Judge Hutcheson, in a concurring opinion, gave an illuminating discussion of the distinction between an employee and an independent contractor, in which he said:

Nor does the question whether one is an employee or a contractor depend upon the nature of the work performed, or the character of the person performing it; rather it is determined by the conditions under which the work is performed; that is, whether it has regularity and continuity, and is performed under the control and direction, though general,' of the employer. If the employment is for a single act, or for a series of isolated acts the employ- • ment being specific as to each act, the person employed, whether an attorney m legal matters or a lawman im others, is not am employee, but am independent contractor. Hang, v. Cook, 29 Nev. 518, 92 P. 3; Clark v. Renninger, 89 Md. 66, 42 A. 928, 44 L. R. A. 413; Louisville, E. & St. L. R. Co. v. Wilson, 138 U. S. 505, 11 S. Ct. 405, 407, 34 L. Ed. 1023.
Perhaps the best statement of the distinction is found in the Wilson case, supra, where it is said: “ The terms ‘ officers ’ and ‘ employees ’ both alike refer to those in regular and continual service. Within the ordinary acceptation of the terms, one who is engaged to render service in a particular transaction is neither an officer nor an employee. They imply continuity of service, and exclude those employed for a special and single transaction.” [Italics supplied.]

In the instant case, the petitioners were employed for a series of isolated acts, the employment being specific as to each act. “ Each isolated act ” as above referred to was the legal work in connection with the liquidation of a particular insolvent bank. The compensation was to be not less than $100 nor more than $300 for each particular bank, and in addition to this they were to receive commissions for collections of the banks’ receivables — 5 per cent if collection was made without suit, 10 per cent if suit had to be brought, and 15 per cent if collection was made after appeal taken. These commissions, it seems to us, are not very different in character from those we had before us in J. F. Roberts, 13 B. T. A. 438; aff'd. 44 Fed. (2d) 168. In the Roberts case the petitioner had a contract with the tax commissioner of the State of Georgia and boards of commissioners of several counties of Georgia for the collection of delinquent state and county taxes on commission. The taxpayer claimed exemption on the commissions paid him and we denied it and were affirmed by the Circuit Court of Appeals for the Fifth Circuit.

We see no distinction in principle in that case and in the instant case. It is true that in the instant case the petitioners rendered services for the superintendent of banking of the State of Georgia other than those rendered in connection with insolvent banks and collecting the receivables due such insolvent banks, but for the other services they received no compensation. The contracts as evidenced by the letters show that fact. The compensation which they claim to be exempt is that which was paid them as retainers for looking after the legal work in connection with the liquidation of each particular insolvent bank and for making collections of paper due such banks. The only part of this which they claim to be exempt is that which remained after they had paid their assistant attorneys in office, office rent, and other office expenses.

But, for reasons which we have already stated, we hold that none of the income was exempt. Inasmuch as there is no issue relating to allowance of office expenses incurred in connection with the earning of the income, respondent having allowed all that petitioners p.T aim on that score, and the only issue is as to whether or not a certain part of the net income was exempt from taxation,

Decision will be entered for the respondent.


author: Aetjndell :

text:
    W. S. Green, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 43786, 46373, 63487.
    Promulgated September 21, 1932.

      Walter Boling er, Esq., for the petitioner.

      Harold Noneman, Esq., for the respondent.
   OPINION.

Aetjndell :

The respondent has determined deficiencies of $4,800.08, $3,194.99, $1,798.39 and $436.81 in income taxes for the respective years 1925, 1926, 1927 and 1929.

In granting a lease on certain land the petitioner retained a 3/32 oil royalty and also contracted with the lessee to receive one-third of the net profits derived from operations under the lease. The issue is whether the petitioner is entitled to percentage depletion on the amounts received as his share of the net profits in addition to allowances made for depletion on his royalty income. The facts were stipulated. The stipulation of facts is incorporated herein by reference.

As far as material here it appears that petitioner and one Sanborn in 1910 acquired jointly the fee simple title to a one-acre tract of land in Louisiana. Petitioner owned a three-fourths undivided interest in the land, and Sanborn owned the remaining fourth. In May, 1921, Sanborn leased his interest to petitioner, retaining a 1/32 royalty. There had been a mesne lease to a concern known as the Gum Cove Oil Company, but that had terminated by reason of non-operation of the property by the lessee. On May 25, 1921, petitioner leased his three-fourths interest in the property to J. E. Ratliff for a 3/32 royalty and by the same instrument assigned his interest under the Sanborn lease to lessee Ratliff, who assumed payment of the 1/32 royalty to Sanborn. On May 28, 1921, petitioner entered into another contract with lessee Ratliff and with L. Siess, who was interested with Ratliff in the lease, which contract, after reciting the fact of the lease to Ratliff, the acquisition by Siess of an interest, and that it was understood that petitioner was to receive additional consideration for the lease, provided as follows:

After deducting from the oil or other mineral produced from the said land under said leases, a sum sufficient to reimburse first parties [Ratliff and" Siess] for the costs of drilling, cleaning out and equipping and operating wells on said land, and after payment from said funds of the attorney’s fees above provided for, said second party [petitioner] in addition to the royalties provided for in said leases shall be paid and own a one-third part of the net profits of said business or of any sale thereof.

Other provisions of the contract dealing with the acquisition of certain property of the prior lessee and the payment of attorney fees are immaterial to these proceedings.

Ratliff, Siess, and another individual formed a syndicate for the operation of the property. This concern, known as the L. Siess Oil Syndicate, was later incorporated under the name of “ L. Siess Oil Syndicate, Incorporated.” The two will be referred to herein indiscriminately as “ the syndicate,” or “ the lessee.” Shortly after June 6, 1921, the syndicate commenced operations on the property and thereafter through the year 1929 it carried on operations continuously. During that period the lease and contract entered into in May, 1921, remained in full force and effect.

Under the contract of May 28, 1921, the syndicate paid over to petitioner monthly certain sums (the amounts are stipulated) as representing one-third of the profits realized from its operations. In computing the amounts so ¡caid, the syndicate deducted, from the gross revenues realized from the sale of seven-eighths of the oil produced, all sums expended or expenses incurred by it in the actual development and operation of the property, including all capital expenditures incurred in the drilling of new wells and the purchase of machinery, tools and other equipment, but excluding depreciation of the physical properties used in developing and operating said property, and depletion of the mineral reserves.

In the several taxable years the respondent allowed petitioner deductions for depletion on his 3/82 royalty interest, but allowed no deductions on account of his interest in the profits of the syndicate..

The respondent has allowed a deduction in each year to the syndicate in an amount equal to 50 per cent of the net income from its seven-eighths working interest in the lease. In computing the net income he included in the deductions from gross income the sumspaid to petitioner as representing his one-third of the net profits as provided for by the contract. Depletion deductions computed at the rate of 27y2 per cent of the gross income from the seven-eighths working interest, without deduction for the sums paid to petitioner, exceeded the amounts computed at 50 per cent of net income. As stated above, the respondent has refused to allow petitioner to take deductions for depletion based on his share of the net profits of .the syndicate from the operation of the leased property. Counsel for respondent argues that the petitioner’s contractual right to one-third of the net income of the operating lessee is something too remote to be considered a part of his “ gross income from the property ” upon which depletion deductions are based under the Revenue Acts of 1926 and 1928.

The applicable provisions of the revenue acts, section 204(c) (2) of the Revenue Act of 1926 and section 114(b) (3) of the 1928 Act, are identical and provide as follows:

In the case of oil and gas wells the allowance for depletion shall be 27% per centum of the gross income from the property during the taxable year. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property * * *.

It has been decided that a cash bonus, in addition to royalty from the sale of oil and gas, is income from the property within the meaning of the Revenue Act of 1921,, which allowed depletion on the discovery basis with a limitation that the allowance should not exceed the “net income, computed without allowance for depletion, from the property.”, Samuel Kraemer, 25 B. T. A. 686. In that case we quoted from Work v. Mosier, 261 U. S. 352, in which it was held that a bonus received from auctioning leases was “ income from the use of the mineral resources of the land.” We see no difference in substance between the payments to which petitioner became entitled as his share of the syndicate profits from' the operation of the leased property and a cash bonus paid by a lessee. The provision in the contract that the payment was to be a percentage of the lessee’s income was nothing more than a means of determining the amount of the bonus. We accordingly hold that the amounts paid by the lessee to petitioner as his share of profits constituted income from the property upon which he is entitled to percentage depletion.

Under petitioner’s contract with the lessee the amount he was to receive in addition to the royalty was limited to a share of the profits from the operation of the property owned by him and Sanborn, and the figures stipulated by the parties upon which their respective computations are based are likewise limited to income from that property. Consequently we have no occasion to decide whether the result might be different if the lessee’s income were derived from sources other than the operation of the leased property, as suggested by counsel for the respondent.

Decision will Toe entered under Rule SO.


author: GoodRich:

text:
    Grace McBride Crile, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43136.
    Promulgated September 22, 1932.

      John B. F'adder, Esq., for the petitioner.

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

GoodRich:

Petitioner contends that $7,336.15 should not be included in her 1924 income, first, because she did not, in fact, receive it and, nest, because it was not distributable to her from the trust. In tbe alternative she contends that, if it was distributable to her and a part of her income, tbe amount should be treated as a capital expenditure made to acquire and retain the right to income of the trust estate and she should be allowed to recoup this capital expenditure from the income thereafter so received by her from the trust estate.

In view of section 219 (b) (2), Revenue Act of 1924, which contains special provisions relating to the determination of the taxable income of a trust, it is clear that there must be included in petitioner’s income the amount of income of the trust which is concurrently distributable to her. The issue before us is, therefore, resolved into the question of whether the amount here in question was income of the trust which was currently distributable to the beneficiaries.

This trust was subjected to serious attack, both as to' its validity and as to a claim against its assets, and the respondent concedes that the trustee acted under authority of the law of Ohio in filing a petition for the purpose of determining under the trust instrument the liability of the beneficiaries for the payment of the estate tax (sec. 10857, General Code of Ohio), and we think it was not only the right, but the duty of the trustee to defend the trust from the attack upon its validity which, if successful, would have destroyed it.

Of the $29,344.60 paid out by the trustee in connection with this suit, the trustee paid its attorney $1,635.60, and in settlement thereof, $11,671, a total of $13,306.60. By this settlement the entire controversy was ended. This was a necessary expense incurred by the trustee in connection with the trust property, and, under the terms of the trust instrument and the decisions of the Ohio courts (cf. Weir v. Weir, 18 O. C. D. 199; Ingham v. Lindeman, 37 O. S. 218; Merrick v. Merrick, 37 O. S. 127; Jackson v. O'Brannon, 14 O. S. 177), was properly payable by the trustee from the income of the trust before any income was distributed to the beneficiaries, and, since only the “ net income ” from the trust was distributable to the beneficiaries, this amount was never income distributable to the beneficiaries.

The fact that the beneficiaries authorized the payment of the compromise sum and the expense of trustee’s counsel is not controlling. The trustee had authority to make such payments without their acquiescence, which served merely to indicate that the parties interested deemed the settlement necessary and to protect the trustee from any future question about the matter.

In determining the distributable net income of the trust for 1924 there should be deducted the items of $11,671 and $1,635.60, totaling $13,306.60, and from petitioner’s gross income, one-fourth thereof, or $3,326.65.

In the disallowance of the fees totaling $16,038 paid to counsel employed by the individual beneficiaries, we sustain respondent. This expense was incurred, not by the trustee, but by the individuals. It was not a charge against nor a necessary expense of the trust. The fact is that these attorneys were employed not by the trustee which had other counsel, but by two beneficiaries of the trust to look after their personal interests. No doubt their services were valuable, and very likely were-of benefit to the trustee and its counsel as well as to the beneficiaries, but that does not make them representatives of the trustee. Consequently, the charges for their services can not be classed as necessary expenses in connection with the trust, nor deducted in determining the distributable net income of the trust. They were personal expenditures of the individual beneficiaries, made in an effort to protect their rights to income from the trust, and, as such, have no place in the provisions of the statute setting-out specifically allowable deductions from the gross income of an individual and therefore must be classed as a nondeductible personal expense. The fact that the charges were paid, upon authorization of the beneficiaries, by the trustee from their shares of the distributable income of the trust is not material. In this situation the trust income may be said to have been constructively distributed to them, cf. Marion Stone Burt Lansill, 17 B. T. A. 413; Emma Burt Hutchins, 20 B. T. A. 1227; and, under section 219 (b) (2) of the Revenue Act of 1924, the amounts should be included in computing their individual net incomes whether distributed or not.

Nor do we agree with petitioner’s contention that these payments may be classed as capital expenditures to be thereafter recouped, in support of which counsel cites, among other cases, Allen v. Brandeis, 29 Fed. (2d) 363; Dobbins v. Commissioner, 31 Fed. (2d) 935; Frederick McLean Bugher, 9 B. T. A. 1155. The two decisions first cited are clearly distinguishable from the case at bar and have no bearing here. In the Bugker case the taxpayers were engaged in carrying on a trade or business, in connection with which the expenditures were made for the purpose of acquiring or enlarging the rights to income or in property. Here, even should we regard the operation of the trust as a business, the beneficiaries were not so engaged, but were merely passive recipients of income from the trust, and expenditures made to retain such income must be regarded as a personal cost of protecting one’s property, for which the statute makes no allowance. The payments did not serve to create, change, or acquire any rights to the income, for these were granted by the trust instrument, and the relinquishment of these sums by the beneficiaries served merely to remove the threat to take away the rights which they had.

The issue before us is similar in principle to that which was before the Circuit Court of Appeals in Commissioner v. Field, 42 Fed. (2d) 820, reversing, on this point, Marshall Field, 15 B. T. A. 718. In disposing of the question, L. Hand, Judge, said:

* * * All that happened was that Field and the trustees got into a dispute about the meaning of the will; and Field succeeded in getting the court to take his view. We cannot for that reason say that the court’s action changed what had all along been his rights; it did not create them; he had them already. We do not of course forget that a disputed right is not for practical purposes an available right at all; or that in fact Field was helpless until the decree passed. Nevertheless, we cannot take the judgments of a court as creating property without confusing their function, and substituting juristic' metaphysics for these conventions on which in the end most of the law stands. For instance, precisely as good an argument might be made in favor of fees paid in the defense of property in possession, a freehold or a share of stock. Without them the possessor’s rights would succumb to the attack; it would follow that any subsequent income is acquired at that cost. Again, if the property be a leasehold or an annuity, it is a “ wasting asset,” and the fees must be somehow prorated; if it be not “ wasting,” they will be part of the cost upon a sale. So put, we should suppose that nobody would be hardy enough to maintain that an attorney’s fee was a “ capital expenditure.” We cannot make over fundamental notions in the interest of a more searching theoretic analysis.

Cf. Clara A. McKee, 19 B. T. A. 430; Bliss v. Commissioner, 57 Fed. (2d) 984; Clara Hill Lindley, 26 B. T. A. 741.

Judgment) will be entered under Rule 50.


author: Art undell :

text:
    Harry A. Koch, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 55318.
    Promulgated September 26, 1932.

      George E. H. Goodner, Esq., for the petitioner.

      Lloyd W. Oreason, Esq., for the respondent.
   OPINION.

Art undell :

The petitioner contends that the transaction giving rise to the controversy is essentially a capital transaction and, accordingly, only the gain realized by him on the stock sale should be taxed. This profit of $1,504.20 he reported as taxable income. The respondent determined in his audit of the return, and still maintains, that the circumstances of the deal are within the provisions of section 115(g) of the Revenue Act of 1928 and a tax should be paid on the whole amount of $14,350 credited to the petitioner’s account as a dividend. The petitioner is not making any point of the fact that he did not receive the amount within the taxable year.

Section 115(g) of the 1928 Act reads:

(if) Redemption of stoefo. — If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to tlie extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend. In the case of the cancellation or redemption of stock not issued as a stock dividend this subsection shall apply only if the cancellation or redemption is made after January 1, 1926.

The purpose of this provision of the statute is to make futile the employment of a roundabout plan of distributing corporate earnings which, if made as dividends are ordinarily paid, would be taxable. Pearl B. Brown, 26 B. T. A. 901.

The stock disposed of by petitioner was acquired in 1921, not as a stock dividend, but by an assignment of his interest in a partnership. After a lapse of almost eight years the corporation saw fit to redeem part of its outstanding capital stock. The purpose is made clear by the evidence. In 1928 the corporation owed the First National Bank of Omaha about $149,000 on loans. The bank was dissatisfied with the financial statement rendered to support the loan and insisted that it be improved by a reduction of the corporation’s outstanding, capital stock by $38,000. To comply with this demand, and for no other reason, the corporation adjusted its capital structure in the manner set forth in our findings, which change satisfied the bank in every particular and enabled the corporation to continue its line of credit with the bank.

Only the petitioner, Friedel, and several of the minority stockholders participated in the stock redemption. About 11 other stockholders, holding 50 shares, were not parties to the deal. The basis for the redemption was not uniform, the stock of the minority stockholders having been canceled at par, while the credits given the principal stockholders were on the basis of about $65 per share.

The financial condition of the corporation at the time of the stock retirement precluded payment of the agreed purchase price of petitioner’s stock in cash. The obligation was liquidated two years later by depreciated securities on the basis of cost to the corporation. Hence, there was neither a stock dividend in the first instance, nor a cash dividend payment in the taxable year.

We find nothing in the evidence to bring the transaction within the provisions of section 115(g) of the governing statute. Accordingly, we hold that the petitioner correctly reported the gain realized on the transaction.

Decision will he entered under Bule 50.


author: Marquette :

text:
    Kathryn M. Wood, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 53879.
    Promulgated September 26, 1932.

      Harry S. Earned, Esq., for the petitioner.

      James K. Polls, Jr., Esq., and Harold F. Noneman, Esq., for the respondent.
   OPINION.

Marquette :

The respondent’s theory is that the petitioner and her husband each took the entire estate in the property they jointly purchased in 192B. It is admitted that tenancies by the entirety have not been recognized in Illinois since 1881, and that the property was acquired in joint tenancy. But the respondent contends that where, as here, one cotenant does not exercise his right to convey his interest in the joint tenancy, the quantum of interest held is the same as in a tenancy by the entirety.

We can not agree with that contention. The estate of tenants by the entirety is a unit, made up of indivisible parts, while the estate of joint tenants is a unit made up of divisible parts. In the latter there are two or more holders of different moieties or portions. Upon the death of a cotenant a new estate is taken by the surviving cotenants, who thus acquire the moiety of the deceased person. Beihl v. Martin, 236 Pa. 519; 84 Atl. 953; United States v. Provident Trust Co. of Pennsylvania, 35 Fed. (2d) 339; Getty v. Hupfel's Sons, 299 Fed. 939. The same distinction was made by the Circuit Court of Appeals for the Seventh Circuit in United States v. Robertson, 183 Fed. 711, respecting property in Illinois.

When petitioner’s cotenant died the Revenue Act of 1924 was in force with respect to estate taxes. That act declares:

Sec. 301. (a) * * * a tax * * * is hereby imposed upon the transfer of the net estate of every decedent * * *.
Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property * * *.
* . * # * * * 4e
(é) To the extent of the interest therein held as joint tenants by the decedent and any other person, or as tenants by the entirety by the decedent and spouse * * * except such part thereof as may be shown to have originally belonged to such other person and never to have been received or acquired by the latter from the decedent for less than a fair consideration in money or money’s worth: * * *

Under that statute the incidence of tax attaches upon the transfer of a decedent’s estate. In the present case the estate tax was paid with respect to the transfer of one-half interest in the real property of which petitioner and the decedent had been joint tenants. It is undisputed that each had paid one-half the purchase price and there is no contention that petitioner received, any part of the property from her cotenant during his life “ for less than a fair consideration in money or money’s worth.” Hence, in levying an estate tax upon the decedent’s interest in the jointly held property, the respondent recognized that a transfer of property took place upon decedent’s death. Then, but not until then, petitioner acquired the one-half interest subject to the estate tax. It is quite evident that if property was first acquired in 1926 upon, and by reason of, the death of a cotenant, the recipient had not acquired the same property in 1923 by purchase.

The Revenue Act of 1928, section 113, provides that the general basis for determining gain or loss from the sale of property acquired after February 28, 1913, shall be the cost of such property. Exceptions are made in respect of gifts, transfers in trust, tax-free exchanges, and property transmitted at death. The latter exception provides that where property is received by bequest or devise, or by intestacy, its fair market value at the time of decedent’s death or, in certain instances, at the time of distribution to the taxpayer, shall be the basis. In the section referred to there is no specific mention of property acquired, as here, by right of survivorship. The exception, however, deals in general with property -transmitted at death. Her.e, death of the cotenant was the generating source from which sprang petitioner’s full rights in one-half the propert3'. Or, as it was stated in Saltonstall v. Saltonstall, 276 U. S. 260, the coten-ant’s death brought about “a shifting of the economic benefits and burdens of propertyout of which arises the incidence of tax. The purpose of the statute was to provide a fair and proper basis upon which to compute gain or loss arising from the sale of property acquired at or because of the death of another. In our opinion the present case falls fairly within the scope of the provision that the fair market value at the time of the decedent’s death, the date of petitioner’s acquisition of one-half the property, is the basis to be used. We áre not unmindful of the rule “ expressio unius est exclusio alteriusBut, as one writer says, that rule “ is not to be taken as establishing a Procrustean standard to which all statutory language must be made to conform. On the contrary, it is useful only as a guide in determining the probable intention of the legislature * * Black on Interpretation of Laws, p. 146.

It is our judgment that petitioner adopted the correct basis for computing gain upon the sale of the property.

Decision will be entered wider Rule 50.


author: GoodRIch:

text:
    Harriet Pullman Schermerhorn, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43145.
    Promulgated September 26, 1932.

      Claude A. Hope, Esq., for the petitioner.

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

GoodRIch:

The fact that this petitioner in 1923 sustained losses which in the aggregate exceeded her income by the amount of $74,082.60 is not in dispute, but, before she may offset that amount against her income for the year 1924 as a statutory net loss under the provisions of section 206 (f) of the Revenue Act of 1924 and section 204 (a) and (b) of the Bevenue Act of 1921, it must appear clearly that the claimed net loss resulted “ from the operation of any trade or business regularly carried on by the taxpayer.” Part of the losses sustained by petitioner in 1923 which she claims were in connection with her business resulted from sales of various stocks and the remainder resulted from the transaction with Lenz and was designated upon her return as “ loss on oil investment.”

We are satisfied that in 1923 and prior thereto petitioner was engaged with some regularity in trading in securities. She devoted considerable time to investigation, followed market reports, borrowed money with which to carry on her activities, consummated numerous transactions of purchase and sale, and maintained an office for these purposes. While the evidence discloses that she was the recipient of substantial income of certain trusts established for her benefit, from which we may infer that she did not engage in trading as a means of livelihood, it is not denied that petitioner carried on these activities in the hope of profit, and, under the circumstances of this case, that is sufficient to constitute a trade or business. E. M. Elliott, 15 B. T. A. 494; Ostenberg et al., Admrs., 17 B. T. A. 738; Leigh Carroll, 20 B. T. A. 1029; Glenn M. Averill, 20 B. T. A. 1196; George P. Sacks, 25 B. T. A. 415.

We conclude that the losses sustained in 1923 upon stock sales resulted from the operation of a trade or business regularly carried on by the taxpayer.

- With respect to the loss sustained from the transaction with Lenz, we reach the opposite view. We regard that venture not as one entered into in the course of, or incidental to, petitioner’s business, but as an isolated transaction accurately described upon her return as,.^ “loss, on oil investment.” Petitioner urges that during the years 1919 to 1923, inclusive, she was regularly engaged in (a) business as a trader and promoter, (b) the oil business, or (c) the oil-development business in partnership with Lenz. We have concluded that petitioner was engaged iñ the business of buying and selling securities, but we do not find that her business included trading in leases or other interests in oil lands. In the Lenz transaction she bought, or thought she was buying, an interest in certain leases. There is no evidence here that she purchased her interest with the expectation of selling it within a reasonable time thereafter, and thus derive a profit from trading in the lease interest. On the contrary, the inference is that she made her purchase with the expectation of retaining her interest and subsequently receiving her share of the profits to be derived from the development of the properties under Lenz’s management. As we see it, her intention was to make an investment, not a trade. She was buying to hold, not to sell. Nor had she been trading in oil leases. In 1920 she purchased the Langston lease, the Pugh lease, and an interest in a royalty trust. A part of her interest in the Langston lease she sold later in the same year at a profit, retaining the balance of her interest until 1922. So far as this record discloses she still owns the Pugh lease, from which she derived income annually up to and including the year here involved, and the interest in the royalty trust. Clearly, her activities in connection with oil leases were isolated and occasional and did not assume a continuity and importance which would characterize them as incidental to a business in which she was regularly engaged. (See Glenn M. Averill, supra.) In other words, the fact that she purchased four oil leases, or interests in them, and sold one, in our opinion, does not adequately support her contention that she was regularly engaged in the business of buying and selling them.

Nor do we find in the facts before us any support for her contention that she was engaged in business as a promoter. Even should we regard her as the promoter of the oil developments planned by Lenz, this one isolated attempt to promote such an enterprise would not warrant our finding that her promoting activities constituted a business regularly carried on. Her dealings in oil properties, or corporations, were not so broad' that it may be said that they constituted her trade or business (see Glenn M. Averill, supra). The distinction between petitioner’s activities in connection with the Lenz proposition, which, she contends, made her a promoter of oil developments, and the activities of those taxpayers who have, been held to be engaged in the business of organizing, developing, financing, or promoting business enterprises, appears so . clearly from the decisions as to make discussion here unnecessary. See Harry F. Harper, 20 B. T. A. 143; E. D. Anthony, 20 B. T. A. 5; T. I. Crane, 17 B. T. A. 720; Edward H. Baker, 17 B. T. A. 733.

We are not impressed with petitioner’s claim that she was in the oil business. She was not engaged in producing, transporting, refining, buying, or selling oil. The fact that she owned leases, or interests therein, embracing oil lands and deceived upon one of them a return of some sort (we presume royalties paid by an operating company) does not put her in the oil business, nor does the fact that, as a trader in securities, she bought and sold stocks (the majority of them listed on the exchange) of various corporations engaged in one or more of the several enterprises included in the “ oil business,” as the term is commonly used. True, as pointed out by counsel upon brief, she devoted considerable time to conferences and examinations of maps and reports, but that was in connection with supplying money to Lenz to be used, according to his statements, in the purchase and development of oil leases.- But, so far as this record shows, she was not in the business, planning or directing the development or the acquisition of territory. She was examining maps and reports and holding conferences in connection with Lenz’s, representations that more money was needed, and she was supplying more money to assure, if possible, the success of the venture and, consequently, the safety óf her original investment and the realization of her hoped-for profit thereon. Again, the distinction between the situation of this petitioner and that of those taxpayers who have been held to be engaged in various lines of enterprises, because of their control, management, or participation in the activities .of corporations or businesses, is clearly shown by the decisions. See Oscar K. Eysenbach, 10 B. T. A. 716; Washburn v. Commissioner, 51 Fed. (2d) 949, reversing J. L. Washburn, 16 B. T. A. 1091; Elmore L. Potter, 20 B. T. A. 252; Glenn M. Averill, supra; Garnet W. Coen, 18 B. T. A. 1274; Eli Strouse, 24 B. T. A. 748; Charles S. McCain, 25 B. T. A. 364; George P. Sacks, supra.

Finally, petitioner contends that she was in the oil-development business in partnership with Lenz and that the loss of $187,000 arose from the operations of that partnership. Even conceding that petitioner’s agreement with Lenz constituted a contract of partnership, we have no direct proof that the partnership was regularly engaged in the oil-development business. We have before us little more than a recital of the representations made by Lenz upon which he induced petitioner to advance money to him. We may infer that Lenz, or even that the partnership, owned an interest in leases upon oil lands and some drilling equipment, but we have no proof of any development, or attempts at development by Lenz himself or by the partnership, either by contract or through the use of Lenz’s own equipment. No oil had been produced before the end of 1922 — that fact appears— but as to any unsuccessful attempts to develop the lands and produce oil we have no facts. In short, the record as stipulated does not show that either Lenz or the alleged partnership was in any way engaged in the business of developing oil properties and under the circumstances in this case, we are not justified in finding, by inference, that such development was carried on. A fortiori, we can not, by inference, find that the assumed partnership, or petitioner as a member thereof, was regularly engaged in the oil-development business, and that the loss claimed resulted from the operation of that business. Moreover, the loss may have resulted directly from Lenz’s “irregularities,” which were discovered by petitioner in 1923, and as to the nature of which we are not advised.

We conclude that petitioner, either individually or as a member of a partnership, was not regularly engaged in the business of buying and selling, or promoting or developing leases of oil lands, nor in the oil business; that her participation in the transáctions with Lenz was as an investor, not as a trader, and that it was an isolated transaction, not connected with any trade or business regularly carried on by her. Consequently, the loss sustained by her upon her transaction with Lenz is not a net loss within the meaning of the statute.

Judgment will be entered under Bule 50,


text:
    Mary Lincoln Isham, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 54694.
    Promulgated September 28, 1932.

      Harry J. Campaign, Esq., George L. Shearer, Esq., and John A. Kratz, Esq., for the petitioner.

      C. A. Bay, Esq., for the respondent.
   opinion.

Smith:

This is a proceeding for the redetermination of a deficiency in income tax for 1921 of $810.98 and results from increasing the taxable income by an amount of $1,295.52, trustees’ commissions received by the petitioner, which adjustment is not disputed. The petitioner claims, however, that the tax for the year has been overpaid by reason of the fact that there was erroneously included in her return for that year an amount of $21,555.46 interest on an award made by the city of New York in condemnation proceedings.

The petitioner is a resident of the city of New York and the widow of Charles Isham, who died June 9, 1919. His will was duly admitted to probate in New York and Vermont and by the terms thereof United States Trust Company of New York and the petitioner were duly appointed trustees of his residuary estate. The will provides in part, as follows:

Third. All the rest, residue and remainder of my estate, real and personal, I give, devise and bequeath unto my wife, Mary Lincoln Isham and United States Trust Company of New York, in trust, nevertheless, to invest the same and keep the same invested: to collect and receive the income and profits arising therefrom, and to pay over the net income and profits to my said wife as long as she shall live, and upon her death I direct my said trustees to pay over said net income and profits to my son Lincoln Isham, as long as he shall live.

A portion of the real property belonging to the estate was situated in New York City and this property was condemned in 1925 by the city of New York for park purposes, the city taking title thereto as of April 21, 1925. Thereafter, an award for said property was made by the city and the award with interest thereon was paid by checks. On January 31, 1927, the total of these checks made payable to the trustees of the estate of Charles Isham amounted to $223,682.18. Of this amount, $202,126.72 represented the principal amount of the award for the property and $21,555.46 represented interest from the date of the taking of title on April 21, 1925, to the date of payment, January 31, 1927.

The trustees, considering that the interest belonged to the petitioner as life beneficiary, paid the same over to her in 1927. The petitioner returned the same on her income-tax return as taxable income received in the year 1927. The respondent has likewise treated the interest in question as taxable income in the determination of the deficiency of $310.93.

The sole question presented by this proceeding is whether the amount of the interest received by the petitioner as life beneficiary in the year 1927 from the trustees of the estate of her deceased husband constitutes taxable income within the meaning of the taxing statute. The petitioner contends that it represents interest paid to her upon an obligation of the city of New York and that as such it is exempt from income tax under section 213 (b) of the Revenue Act of 1926 which provides, so far as pertinent, as follows:

(b) The term “gross income” does not include the following items, which shall be exempt from taxation under this title:
* # * :{s * * #
(4) Interest upon (A) the obligations of a State, Territory, or any political subdivision thereof, or the District of Columbia; or (B) securities issued under the provisions of the Federal Farm Loan Act, or under the provisions cf such Act as amended; or (C) the obligations of the United States or its possessions. Every person owning any of the obligations or securities enumerated in clause (A), (B), or (C), shall, in the return required by this title, submit a statement showing the number and amount of such obligations and securities owned by him and the income received therefrom, in such form and with such information as the Commissioner may require. In the case of obligations of the United States issued after September 1,1917 (other than postal savings certificates of deposit), the interest shall be exempt only if and to the extent provided in the respective .^iits authorizing the issue thereof as amended and supplemented, and shall be excluded from gross income only if and to' the extent it is wholly exempt to the taxpayer from income taxes.

The interest in question was computed and paid under the provisions of section 976 of the charter of Greater New York City, which deals with the vesting of title in the city to real property taken for streets or parks or other purposes, and, so far as material, provides as follows:

* * * Upon the date of the entry of the order granting the application to condemn, or upon the date of the filing of such oaths, as the case may be, or upon such subsequent date as may be specified by said board, the city of New York shall become and be seized in fee cf, or of the easement in, over, upon or under, the said real property described in said resolution, as the board of estimate and apportionment may determine, the same to be held, appropriated, converted and used to and for such purpose accordingly. In such eases interest at the legal rate upon the sum or sums to which the owners are justly entitled upon the date of the vesting of title in the city of New York, as aforesaid, from ¡said date to the date of the final decree of the court or to the date of the report of the commissioners cf estimate, as the case may be, shall be awarded by the court or by the commissioners, as the case may be, as part of the compensation to which such owners are entitled. * * *

The property here involved was taken over by the city of New York on April 21, 1925.- Its value as of that date was determined to be $202,126.12, which amount was awarded by the court on January 13, 1927, together with interest, amounting to $20,886.43, on that sum from the date of taking to the date of the court’s decree. Payment of the award was made by check dated January 31, 1927, and included $669.03 as interest for the period January 13 to January 31, 1927.

Interest on the value of the property taken, down to the date of the confirmation of the report, is therefore part of the due compensation to which the owner is entitled under the Constitution. [Article 1, § 6 of the Constitution of the State of New York.]
But interest on the award after the date of confirmation is no part of the due compensation required to be made to the owner in fulfilment of the constitutional requirement. That is a penalty imposed for failure to pay promptly on proper demand, after the confirmation of the report, and is regulated by section 11, c. 1006, Laws of 1895, dealing with street-closing proceedings * * *. [In re Westchester Ave. in Borough of Bronx, 216 N. Y. S. 780, 732, decided July 6, 1926.]

See also In re West 151st Street in City of New York, 222 N. Y. 370; 118 N. E. 807.

The question for our consideration in this proceeding is whether the phrase “ obligations of a State, Territory, or any political subdivision thereof ” includes every obligation of a state or political subdivision thereof upon which interest is paid, or only those obligations where a tax upon the interest might be assumed to impose a burden upon the state or political subdivision thereof, or be a substantial interference with their governmental operations. A somewhat cognate question was before the Supreme Court in Hibernia Savings & Loan Society v. San Francisco, 200 U. S. 310. In that case the city of San Francisco sought to collect a general property tax upon warrants for the payment of interest upon United States bonds owned by the plaintiff. Section 3701 of the Revised Statutes declared that “ all stocks, bonds, treasury notes, and other obligations of the United States, shall be exempt from taxation by or under state or municipal or local authority.” The petitioner claimed that under this statute the warrants in question were exempt from taxation by the city of San Francisco. The court in its opinion stated:

* * * The basis of this exemption is the fact that a tax upon the obligations of the United States is virtually a tax upon the credit of the Government, and upon its power to raise money for the purpose of carrying on its civil and military operations. The efficiency of the Government service cannot be impaired by a taxation of the agencies which it employs for sucij service, and, as one of the most valuable and best known of these agencies is the borrowing of money, a tax which diminishes in the slightest degree the value of the obligations issued by the Government for that purpose impairs pro tanto their market value.

The court held that while the warrants were obligations of the United States, and within the letter of section 3701, they were not within its spirit and therefore were proper subjects of taxation by the city of San Francisco.

Consonant with the Hibernia Savings & Loan Society case, it must be held that the basis for the exemption from Federal income tax of interest upon the obligations of a state or political subdivision thereof is that a tax upon the interest of such obligations is virtually a tax upon the credit of the state government or a political subdivision thereof and upon its power to raise money for the purpose of carrying on its operations.

We can not see how a tax upon the interest paid on a condemnation award is any burden upon the state or political subdivision thereof. This was the view taken by the District Court for the Southern District of New York in the case of United States Trust Co. v. Anderson, 60 Fed. (2d) 291, and has been followed by this Board in Klein et al., 26 B. T. A. 745. Those decisions must be held determinative of the issue presented in the proceeding at bar.

The petitioner further contends in this proceeding that if the interest received upon the condemnation award is taxable, she should not be taxed at a rate of more than 12% per cent of the amount of the interest received, upon the ground that the interest is in reality a part of the compensation received from the property and that inasmuch as the trustee paid a tax of only 12% per cent upon the profit realized from the sale of the property she, as life beneficiary, should not be required to pay a greater amount upon the portion of the compensation received by her.

We are of the opinion that the contentions of the petitioner upon this point are not well founded. As life beneficiary she was entitled to receive the income from the trust property and the trustees treated the amount of interest received as income and paid the same to her. As life beneficiary she was not the owner of the property. She only received from the trustee the income upon the property. We can see no reason for treating the interest income differently from the other income of the trust in the hands of the petitioner. Finding no error in the computation of the deficiency by the respondent,

Judgment will be entered for the resfondent.


author: Smith :

text:
    Theodore W. Case and John Taber, Trustees, Item IV. u/w of Willard E. Case (Deceased) Benefit of Dorothy Case Whitehouse, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 49394, 57601.
    Promulgated September 28, 1932.

      John Taber, Esq., for tlie petitioners.

      James K. Polk, Esq., for the respondent.
   OPINION.

Smith :

There is no dispute as to the amounts to be used as the original cost or basis for the shares of stock involved in these proceedings at the time the stocks were placed in trust. The petitioners contend that the distribution of the stock dividends to the life beneficiary did not affect the basis and that such distributed stock should be ignored in computing the profit realized by the petitioners upon the sales in question, since under New York law the “ stock dividends which represent earnings of the corporation subsequent to the creation of the trust are the property of the life tenant, while those that were earned prior to the creation of the trust are the property of the corpus of the trust fund,” citing decisions of the New York courts, and arguing that this Board is bound thereby.

While the property rights of individuals within the jurisdiction of the State of New York are determined by its laws, such laws “ are not ultimately decisive in Federal income-tax matters.” Phelps v. Commissioner, 54 Fed. (2d) 289, 292. See also Burk-Waggoner Oil Ass'n v. Hopkins, 269 U. S. 110; Rosenberger v. McCaughn, 25 Fed. (2d) 699; California, Iron Yards Co. v. Commissioner, 47 Fed. (2d) 514; Edward D. Untermyer, 24 B. T. A. 906; aff'd., 59 Fed. (2d) 1004.

The stock dividends were numerical readjustments of evidences of the same ownership of the petitioners’ interest in the corporations which the old shares indicated immediately before the declaration of the stock dividends. See Eisner v. Macomber, 252 U. S. 189. The stock dividends effected a dilution of the shares outstanding. George T. Smith, 21 B. T. A. 782. Thereafter the cost basis per share was proportionately reduced, and subsequent dispositions of the stock reduced the petitioners’ capital interest in the corporations. To illustrate — the petitioners originally held 217 shares of the American Gas & Electric Company stock, the basis upon which to determine gain or loss is agreed at $15,100.16; stock dividends in 1920 and 1922 increased the number of shares to 288, which then had a basis of $15,100.16, or $52.43 per share. The petitioners delivered 71 of these shares to Mrs. Whitehouse, thereby reducing the capital interest of the trust by the basis allocable to the 71 shares, or $3,722.53, and thereafter its capital interest was represented by 217 shares having a basis of $11,377.63, or $52.43 per share. The 1923 exchange of one share of old stock for five shares of new stock did not reduce the total basis for the petitioners’ capital interest in the corporation, but did reduce the per share basis to $10.49 for the 1,085 shares then held. Subsequent stock dividends increased the number of shares held to 1,821 and proportionately decreased the per share basis to $6.25. The delivery to Mrs. Whitehouse of 669 of the shares held in 1926 reduced the basis of the total capital interest of the trust by the amount of the basis allocable to the 669 shares, or $4,181.25, and thereafter that capital interest had a basis of $7,196.38, represented by 1,152 shares of stock with a per share basis of $6.25. The delivery in 1927 of 44 shares of this stock further reduced the basis of the petitioners’ capital interest to $6,921.38, which was then represented by 1,108 shares of stock. The total basis was not affected by the 1927 stock dividend of 517 shares, which increased the number of the petitioners’ shares to 1,625, but the per share basis was reduced to $4.26. The petitioner thereafter sold 800 shares, which had a basis of $4.26 per share, or a total basis of $3,408, for $77,193. The realized profit is manifestly the difference between these two sums. The respondent has computed the profits upon the several sales in like manner and his determinations are sustained. See Miles v. Safe Deposit & Trust Co., 259 U. S. 247; Frederick Ayer, 6 B. T. A. 152; Edward Stephen Harkness, 21 B. T. A. 1068.

Judgment will be entered for the respondent.


author: Van Fossan:

text:
    The Warner Collieries Company of Delaware, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 34679.
    Promulgated September 29, 1932.

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

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

Van Fossan:

The first issue relates to the statute of limitations. The petitioner asserts that the waivers of April 25, 1924, April 7, 1925, December 7, 1925, and October 29, 1926, executed on behalf of The Crawford Hill Coal Company were not valid. But as a condition precedent to the question of validity of the waivers we must determine whether or not such an income-tax return was made by The Crawford Hill Coal Company as started the tolling of the statute.

The respondent contends that the consolidated return filed by “ The Crawford Hill Coal Co., consolidated with The Crabapple Coal Co.” for the fiscal year ending March 31, 1919, did not set forth separately the income and deductions of the two corporations, or either of them, as required by section 239 of the Revenue Act of 1918, which provided that every corporation should “make a return, stating specifically the items of its gross income and the deductions and credits allowed by this Title.” Every return must show facts upon which an assessment for the taxable period can be made. Florsheim Brothers Co. v. United States, 280 U. S. 453; Willingham Loan & Trust Co. v. Commissioner, 36 Fed. (2d) 49; Myles Salt Co. v. Commissioner, 49 Fed. (2d) 232. Where such information is given the statute begins to run. In the case of consolidated returns we have held that they must be filed in good faith and must make a substantial revelation of the gross income and deductions separately for the constituent members of the affiliated group. F. A. Hall Co., 3 B. T. A. 1172; Stetson & Ellison, 11 B. T. A. 397; aff'd, 43 Fed. (2d) 553; Continental Oil Co., 23 B. T. A. 311; New England Power Co., 25 B. T. A. 195. If they do not do so they are not the returns contemplated by the statute and hence do not start the running of the statute of limitations. United States v. National Tank & Export Co., 45 Fed. (2d) 1005; Lucas v. Colmer-Green Lumber Co., 49 Fed. (2d) 234, reversing 12 B. T. A. 256.

The return in question sets forth only the income, deductions and credits of both corporations combined. Only the balance sheets reflecting the assets and liabilities of each corporation as of March 31, 1919, were included in the return. Such information is not sufficient basis for the assessment of tax. Therefore, the statute of limitations does not bar the assessment of the tax against The Crawford Hill Coal Company.

The second issue presents the question of the liability of the petitioner as transferee of the assets of The Crawford Hill Coal Company. Section 602 of the Revenue Act of 1928 imposes upon the respondent the burden of proof of showing that the petitioner is liable as such transferee.

The assets of The Crawford Hill Coal Company were transferred to petitioner under the terms of the agreement of October 30, 1919, as of Jwne 30,1919. The record contains no enumeration or proof of the value of either the assets conveyed to petitioner nor of the liabilities assumed by it at June 30, 1919, the time of transfer. There is evidence that on March 31, 1919, the transferor possessed Liberty bonds in amount of $80,000 and had liabilities in the amount of $11,503.02, but there is no evidence that at June 30, 1919, it still owned such bonds and transferred them to petitioner; nor is there any evidence whether the amount of its liabilities increased or diminished between March 31 and June 30. We know only that petitioner received assets of an unproved value and assumed liabilities of an unproved amount. On this state of the record we must hold that respondent has not sustained the burden of proof placed on him by the statute. See Fostoria Milling & Grain Co., 11 B. T. A. 1401; G. C. Barkley, 19 B. T. A. 855. Cf. Wayne Body Corporation, 22 B. T. A. 401.

It becomes unnecessary to consider the issue of affiliation, but we are constrained to say that the case of Handy & Harmon v. Burnet, 284 U. S. 136, is determinative thereof. Under the decision of the United States Supreme Court in that case it is apparent that the petitioner and The Crawford Hill Coal Company are not entitled to affiliation.

Under our decision above the question of special assessment becomes moot.

Decision will be entered for the petitioner.


text:
    Pryor and Lockhart Development Company, by Ralph J. Pryor, Trustee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 38872, 45668, 51326.
    Promulgated September 29, 1932.

      Alien E. Gardner, Esq., for the petitioner.

      R. N. MeMillm, Esq., for the respondent.
   OPINION.

Smith:

The principal issue is whether the petitioner is an association taxable as a corporation. If it is, there is an issue as to proper deductions for depreciation; if it is not, the parties have stipulated that there is no net income subject to income tax in the years before us and consequently no deficiencies.

The petitioner contends that its organization is merely a trust, with a single trustee, lacking the forms and methods of incorporated bodies — indicia necessary to characterize it as an association taxable as a corporation, citing Myers, Long & Co., 14 B. T. A. 460; Royal Syndicate, 20 B. T. A. 255; Jachson-Wermich Trust, 24 B. T. A. 150. The respondent contends that the petitioner was organized for the purpose of carrying on a business enterprise, the activities of which were as extensive as its nature required, and is an association taxable as a corporation, citing Little Four Oil & Gas Co. v. Lewellyn, 35 Fed. (2d) 149, 150; certiorari denied, 280 U. S. 613; White v. Hornblower, 27 Fed. (2d) 777; United States v. Neal, 28 Fed. (2d) 1022; certiorari denied, 278 U. S. 659; Trust No. 5833, Security-First Nat. Bank of Los Angeles v. Welch, 50 Fed. (2d) 613. In Little Four Oil & Gas Co. v. Lewellyn, supra, the Circuit Court of Appeals for the Third Circuit said:

* * * The theory that the distinction between trusts of these classes and their consequent liability for taxes is based on the powers exercised by the shareholders — great or little — -is no longer seriously regarded. The real test is whether the shareholders or trustees, or both combined, carry on business for profit, and, if they do, they constitute a business trust — in legal effect an association or a joint-stock company — with liability for taxes. * * *

The court there concluded that the Little Four Oil & Gas Company was “ an unincorporated association conducting a business for profit in quasi-corporate form, liable for taxes at the corporation rate.” Thus, in that case, as in others cited by both parties, the presence or absence of “ quasi-corporate ” forms were factors considered in the determination of such- controversies.

In Jackson-Wermich Trust, supra, we said:

•* * * that the really significant tests for determining whether an alleged trust is to be treated as an association for tax purposes or not are [1] whether the certificate holders have voluntarily associated themselves together in “ the general form and mode of procedure of a corporation ” and [2] are organized to and in fact are engaged in the active conduct of a business for profit, or [3] whether the trustees are merely holding the property and collecting the income therefrom and distributing it to those beneficially interested. * * *

The facts of record show that the partnership, not having funds sufficient to develop the Derbyshire lease, decided to invite some friends to contribute the necessary funds and share in the profits, leaving the operations exclusively in the hands of the single trustee. Admittedly, the trustee conducted the business for the purpose of making profits for the beneficiaries of the trust, but he engaged only in activities essential to the development and operation of the Derbyshire lease and the full utilization of the equipment acquired for that purpose; he conducted the affairs of the petitioner without a guasi-corporate organization. The partnership contributed the lease, the other individuals contributed the capital, and Pryor rendered the services. Thus, we have a situation involving a single trustee, independent of the beneficiaries, acting without corporate form, holding no meetings, and consulting no one except his partner, carrying on a business, which the respondent asserts is an association, which is an unincorporated body of persons organized in the general form of a corporation and employing usual corporate methods in carrying on a business for profit.” See Lucas v. Extension Oil Co., 47 Fed. (2d) 65. Murphy et al., Trustees, 25 B. T. A. 724, 726; Hecht v. Malley, 265 U. S. 144; Burk-Waggoner Oil Assn. v. Hopkins, 269 U. S. 110. Counsel for petitioner insists that its affairs were conducted “ as though the venture was the partnership affair of Pryor & Lockhart,” and as such should not be treated as an association taxable as a corporation, calling attention to the partnership relation in the Myers, Long & Co. case, supra.

In Blum, Trustee, 25 B. T. A. 119, a case involving a trust with a single trustee, we said that the respondent:

* * * argues that the several beneficiaries and the trustees were engaged in the oil business, and, considered collectively, that the trust agreement tied them together in an association which gave corporate form and effect to their operation within the law. The same contention was raised in Crocker v. Malley, supra, respecting which the court said:
<i * * * We perceive no ground for grouping the two — beneficiaries and trustees — together, in order to turn them into an association by uniting their contrasted functions and powers, although they are in no proper sense associated. It seems to be an unnatural perversion of a well known institution of the law.”

That contention is equally untenable in the instant proceedings.

The petitioner does not meet the tests set forth in Jackson-Wermich Trust, supra (see also McGlone et al., 22 B. T. A. 358; E. B. Galbreath, 24 B. T. A. 1107), for an association taxable as a corporation, and we accordingly hold that the respondent erred ih his determination. See also Myers, Long & Co., supra; Extension Oil Co., 16 B. T. A. 1028; aff'd., 47 Fed. (2d) 65; Royal Syndicate, supra; Murphy et al., Trustees, supra; Blum, Trustee, supra. Cf. Twin Bell Oil Syndicate, 26 B. T. A. 172. Having decided that the petitioner is not an association taxable as a corporation, it is unnecessary to determine the applicability of section 704 (b) of the Revenue Act of 1928 (E. B. Galbreath, supra), or to discuss the secondary issues. Pursuant to the stipulation,

Judgment will be entered under Rule 50.


text:
    Shepherd Syndicate, by Ralph J. Pryor and Henry Rosenthal, Trustees, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 48332, 51327.
    Promulgated September 29, 1932.

      Allen H. Gardner, Esq., for the petitioner.

      R. N. McMillan, Esq., and W. H. Payne, Esq., for the respondent.
   OPINION.

Smith :

The petitioner was organized to enable some friends of the members of two partnerships to participate in the profits from the latter’s interest in the Shepherd lease. Although there were two trustees, only one conducted the affairs of the petitioner, and his activities were few, as shown by the record, being limited practically to the receipt and disbursement of the income from the lease. The petitioner’s organization lacks the indicia of incorporated bodies necessary to classify it as an association taxable as a corporation. The facts here involved are analogous to those considered in Pryor & Lockhart Development Co., 26 B. T. A. 1054, and the principles of law discussed and applied there are applicable here. For the reasons more fully stated in that decision, we hold that the petitioner is not an association taxable as a corporation.

Having concluded that the petitioner is a trust, the secondary issues raised by the pleadings need not be decided. Pursuant to the stipulation of the parties,

Judgment will he entered imder Bule 50.