author: Black:

text:
    William B. Aull, Jr., and Eugenia Louise Aull, Executors of the Estate of William B. S. Aull, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent. Cema S. Chrietzberg, Petitioner, v. Commissioner of Internal Revenue, Respondent. E. N. Sitton, Petitioner, v. Commissioner of Internal Revenue, Respondent. Henrietta S. Aull, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 55303-55305, 55325.
    Promulgated August 18, 1932.

      O. O. Wyche, Esq., for the petitioners.

      W. R. Lansford, Esq., for the respondent.
   OPINION.

Black:

We sustain the respondent in his action in treating the $103,919.40 in question as a part of the payment of the purchase price of petitioners’ stock and not as a dividend taxable only at surtax rates. Petitioners in their brief lay much stress on the fact that the contract of February 2, 1928, was a mere executory contract to sell certain shares of stock and that title to said shares did not pass by the contract to La France Textile Industries, the proposed purchasers, but remained in petitioners until June 25, 1928, when the final contract was signed and the transfer completed.

We agree with this contention, but do not agree that such fact is determinative of the main issue in petitioners’ favor as they seemingly contend. The main issue is whether or not the disbursement of the $103,919.40 was an ordinary dividend. If it was, then petitioners are taxable on the amounts so received at surtax rates only. If it was not the disbursement of an ordinary dividend, but was, as respondent contends, the payment of part of the purchase price of certain shares of stock which petitioners had contracted to sell for an agreed price, then it is clear that the profits from such transaction are taxable as other ordinary income, at both normal and surtax rates.

The applicable revenue act is the 1928 Act. Section 115(a) of that act reads:

The term “ dividend ” when used in this title * * * means any distribution made by a corporation to its stockholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913. [Italics supplied.]

The evidence clearly shows that the Pendleton Manufacturing Company had sufficient accumulated surplus on June 25, 1928, to have paid a dividend of $103,919.40, but this dividend would have had to have been paid in kind because the company did not have sufficient cash funds on hand to have paid it. If any such dividend in kind had been declared and paid, doubtless the proposed purchasers of the stock would have required a corresponding reduction in its price. But, be that as it may, the Pendleton Manufacturing Company did not pay a dividend of $103,919.40, either in cash or in kind, “ out of its earnings and profits,” within the meaning of the language of the revenue act quoted above. What happened, as shown by the evidence, was that the purchaser of the stock of the Pendleton Manufacturing Company was ready to pay petitioners’ part of the agreed purchase price of the stock, and petitioners induced it to pay $103,919.40 of said sum over to the Pendleton Manufacturing Company to be immediately disbursed by it to petitioners in the form of a dividend.

The La France Textile Industries had bought nothing from the Pendleton Manufacturing Company and owed it nothing and it is clear that this payment of $103,919.40 to the Pendleton Manufacturing Company was a payment of part of the purchase price of the stock from petitioners and not a payment for assets purchased from the Pendleton Manufacturing Company. This fact is conclusively established by the written agreement signed at the time such payment was made (set out in the concluding part of our findings of fact), which contained the following clause: “And we do further acknowledge that said payment to Pendleton Manufacturing Company shall be constituted a performance of that part of said agreement, which calls for the payment to said parties of the first part of said aggregate sum of $103,919.40.”

The use of the Pendleton Manufacturing Company in this manner — as the conduit through which part of the purchase price for the stock was made — could not convert such payment into an ordinary dividend as claimed by petitioners. Cf. Charles L. Coughlin, 15 B. T. A. 515.

Decision will he entere A for the rcsfondent.


source: Caselaw Access Project

author: Arundeli. :

license: Public Domain

text:
    C. E. Wentz, Sole Surviving Trustee of “ McCaskey & Wentz, Trustees of Oklahoma Oil Property,” Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 35312.
    Promulgated August 18, 1932.

      George S. Ramsey, Esq., diaries P. Swindler, Esq., and YiTlard Martin, Esq., for the petitioner.

      Prew Savoy, Esq., for the respondent.
   OPINION.

Arundeli. :

Section 202(b) of the Revenue Act of 1924 provides, in part, that in computing the amount of gain realized or loss sustained from the sale of property “ proper adjustment shall be made for * * * depletion, previously allowed with respect to such property.”

The parties are in agreement that allowances made on discovery value play no part in the computation. Their disagreement has to do with the amount previously allowed on cost. The petitioner contends that because in the audit of his returns for 1917 to 1924, inclusive, the respondent designated sums aggregating $252,175.02 as allowed on cost, he should be held to that figure in adjusting the cost basis for computing profit made on the sale, even though such allowances, so far as they applied to the assets acquired on April 14, 1917, were computed on an erroneous basis. The respondent, on the other hand, insists that he is entitled to reduce the basis by $1,077,-797.67 for allowances previously made on cost. Which of the two figures is correct, is the only point in controversy under the issue.

The Revenue Act of 1917 contained no provision for the allowance of depletion on the basis of discovery value.

The amount of $7,703.32 allowed on cost is retained in the recom-putation of the respondent, even though the amount of depletion sustained on cost was $291,552.72. For this reason there can be no difference of opinion as to the proper adjustment to be made for depletion allowed for 1917.

In auditing the returns for 1917 to 1924, inclusive, the respondent allowed $7,131,016.55 for depletion. Of this amount he designated $252,175.02, the amount contended for by petitioner, as “ allowed on cost ” and the remainder as “ allowed on discovery appreciation.” This figure, except in so far as it applies to 1923 and 1924, when the correct bases were used, was computed on the basis of the cost to the Southwestern Oil Company of the property acquired on April 14, 1917, instead of fair market value at the time of acquisition by the trust. In 1927, when the respondent determined the deficiency, he increased the amount previously allowed on cost from $252,175.02 to $1,532,102.31 to compensate for his error in using cost to the assignor instead of fair market value on April 14, 1917, as the basis for the leases acquired from the Southwestern Oil Company. He now concedes this to be wrong and proposes to use the sum of $1,077,797.67 as a reduction of the base, in accordance with a recomputation made in February, 1932. A few examples will be sufficient to illustrate the method he employed in arriving at the amount. In 1918 the respondent allowed $56,411.45 as depletion on the West Simmons lease, $258.23 being designated as allowed on cost and the remainder on discovery appreciation. Although the sum of $68,802.89 was allowable on cost, in his recomputation he limited the figure to the amount of $56,411.45, the sum actually allowed in his audit of the 1918 return. For the same year he allowed depletion amounting to $323,377.02 on the J. Welsh lease. Of this sum $449.64 was designated as allowed on cost. The depletion sustained on the proper basis (fair market value on April 14, 1917) was $75,464.81; hence he uses this figure as the depletion previously allowed on cost. In that year the West Herman lease had no discovery value and sustained depletion of $11,987.67 based on its fair market value at April 14, 1917. Having allowed but $336.25 for depletion on cost, the respondent did not increase the sum. The same rules were followed for all of the leases in all years in which the incorrect cost basis was used for the assets acquired from the Southwestern Oil Company.

The petitioner has presented an elaborate brief in which he reasons that, the respondent must be held to what at the time the latter designated as depletion on cost. We quite agree that the statute limits depletion to be considered in computing gain or loss to what was actually allowed. But if the taxpayer gets a deduction for depletion in fact — and that is what he got here — the amount of the depletion in fact allowed must be taken into consideration in determining the gain or loss, regardless of respondent’s designaion of what he did. Beginning with the Revenue Act of 1918, the law permitted depletion to be taken, in specified circumstances, on the basis of the value of the property at the time of discovery or within thirty days thereafter, instead of on cost. It was only when discovery value was greater than cost that it formed a basis for depletion and consequently in allowing depletion on discovery value the taxpayer received a deduction which was not only ample to restore his capital, but something additional. The statute did not provide for two kinds of depletion in the same circumstances, but the one — discovery value — took the place of the other. It is only when property is disposed of as in the instant case that it becomes necessary to “ break down ” the computation as made by the respondent. As the petitioner in this case is not being charged with a single dollar of depletion that in fact was not allowed to him in the several years during which he operated the property, we are of the opinion he has no just complaint against the respondent’s action.

Under this method of computing the depletion previously allowed on cost the respondent gets no advantage of errors made due to the use of an improper basis, but in the final analysis is merely making corrections for improper designations without in any instance actually increasing the sum allowed on cost. In those cases where the present amount exceeds the sum designated as allowed on cost, the increased sum was, in fact, allowed, it having been included in the allowance made on discovery appreciation, as the parties have stipulated.

. We think the respondent’s recomputation reflects the amount previously allowed for depletion, and hold the proper adjustment under section 202(b) of the governing statute for depletion to be $1,077,-797.67, as proposed by the respondent.

Under the remaining issue we are asked to increase the cost basis by $2,157,430.09, less an amount for exhaustion and depletion, and the cost of any dry holes and producing wells on leases abandoned, which were charged off in the year drilled, for certain items claimed by the petitioner and allowed by the respondent in and prior to 1924 as development expenses under the option granted by T. D. 2447, article 223 of Regulations 45 and 62, and article 225 of Regulations 65. The same question, on facts not materially different from those here, was before us in W. R. Ramsey, 26 B. T. A. 277. We there reached the conclusion that the regulations were not only reasonable and valid, but that the petitioner was estopped from denying the correctness of his election. The question here is governed by the conclusion reached in that case. Accordingly, it is decided in favor of the respondent.

There should be deducted from the gain realized on the sale the sum of $100,794.14, as a net loss from business operations, in accordance with paragraph 20 of the stipulations.

Decision will be entered under Rule 60.


author: Murdoch:

text:
    Eva Follett Warner, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 52147.
    Promulgated August 18, 1932.

      Harold Alim, Esq., for the respondent. ?
   OPINION.

Murdoch:

The Commissioner determined deficiencies in the petitioner’s income-tax liability as follows: 1927, $4,740.69; and 1928, $4,339.53.

The error assigned is that for each year the Commissioner included $50,000 in the petitioner’s taxable income, being the amount of an annuity payment made to her in each year under the will of her deceased husband.

The following facts were either stipulated or admitted:

The petitioner is an individual residing at Fairfield, Connecticut and the widow of I. DeVer Warner, who died a resident of Bridgeport, Connecticut on January 11, 1913.
The latter, by his will and codicils thereto, placed certain property in trust and provided that from the income or, if necessary, from the principal of the trust, $50,000 should be paid annually to his wife, the petitioner, during the term of her natural life. This provision was referred to elsewhere in the will and codicils as an “ annuity ”. The will and codicils also provided that the provisions therein for the petitioner were in lieu of her share in his estate both as his wife and by virtue of any statute.
Other property was devised and bequeathed to the petitioner by her husband.
The petitioner elected to take and took under the will and codicils in lieu of her statutory share in the estate. She was born on September 4, 1871.
The trustee paid the petitioner $37,000 for the year 1913 and $50,000 for each of the years 1914 to 1928, inclusive, in accordance with the provision first referred to above.
The petitioner did not report any part of the above payments in her income tax returns for 1927 or 1925. The Commissioner increased her income for each year by $50,000, properly divided between dividends and other income. He explained that he had computed the value of her dower right under the laws of Connecticut, found that prior to the years 1927 and 1928 she had received payments from the trustees in excess of that value, and therefore held that the payments received in these years were taxable income. He set forth his computation in detail.

Some reference is made in the petition to the year 1926, but we have no jurisdiction as to that year.

The petitioner attacks neither the Commissioner’s method of valuing her dower, nor the amount he has determined that she received prior to the years in question. She has not proven any error in the figures used. Thus, the only question for our decision is whether or not a widow, who under the laws of the State of Connecticut, elected to take under the will of her husband in lieu of her dower, is taxable on annuity payments received under the will when those payments in the aggregate exceed the value of her dower interest at the date of her husband’s death.

The courts and this Board have held that the payments are not income to the widow so long as they do not exceed the value mentioned. Warner v. Walsh, 15 Fed. (2d) 367; United States v. Bols ter, 26 Fed. (2d) 760; Warner v. Walsh, 27 Fed. (2d.) 952; Allen v. Brandeis, 29 Fed. (2d) 363; Butterworth et al., Trustees, 23 B. T. A. 838. But in these cases the courts were not required to decide the question before us. The petitioner relies upon two cases which held that annuities are charges upon the corpus of an estate and are therefore exempt from tax as bequests. Burnet v. Whitehouse, 283 U. S. 148 (affirming DeReuter et al., 7 B. T. A. 600); James McDonald, 6 B. T. A. 163. There is, however, an important distinction between those cases and the present case in that in those cases the annuitants relinquished nothing in order to receive, while here the petitioner relinquished her valuable dower rights. In those cases there were clearly bequests, the annuitants were the objects of the testators’ bounty, while the Circuit Court has said that in this case there was “in fact and legal effect, the purchase of an annuity, in no way differing from an annuity purchasable by the widow from an insurance company.” Warner v. Walsh, supra. The following is from the same opinion:

That such a relinquishment of dower rights is a purchase of the will provision is well and long established. Burridge v. Beabyl, 1 Pere Wms. 127 (1710) ; Isenhart v. Brown, 1 Edw. Ch. (N. Y.) 413 (1832) ; BeQua v. Graham, 187 Ill. 67 * * * (1900). That a purchased annuity, even if income, is exempt as and to the extent that it is a return of premiums paid therefor; that is, until the purchase price shall have been returned, is determined by the express provisions of the acts above cited, as construed by the Bureau of Internal and acquires the .legal status of “ a purchaser for a valuable consideration ”.

In the Bolster case the court said:

When the surviving husband or wife accepts the provisions of the will * * * the survivor is in the position of one who sells property to the estate, and acquires the legal status of ‘ a purchaser for a valuable consideration ’.

The court then quoted a Massachusetts case to the effect that a widow is a purchaser for value and may take her share in full in preference to other legatees who have no legal claim on the estate.

Allen v. Brandeis, supra, is to the same effect. The court said that the widow was entitled to a certain sum out of the husband’s estate; he proposed to her by the will the annuity which she could accept or reject; but, accepting, she became a purchaser for value. (Lord v. Lord, 23 Conn. 327, and Security Co. v. Bryant, 52 Conn. 311.) The opinion continues as follows:

That is to -say, her invested capital was the value of her interest in her husband’s estate * * *. By the expenditure of this sum, the same being her own money, she purchased an annuity of fifty thousand dollars per annum from those representing her husband’s estate to be paid out of that estate. Clearly, in such case, under the law, she would not be required to pay income tax on the annual payments received until her capital invested in the annuities shall have been returned to her. After that time, it is conceded she should pay tax.

See Butterworth, et al., Trustees, supra, where this subject is discussed, and additional cases cited to show that a widow is not a beneficiary but a purchaser for value. The Connecticut cases are in accord. Lord v. Lord, 23 Conn. 327; Security Co. v. Bryant, supra; Leake v. Watson, 60 Conn. 498.

Since the widow is not a beneficiary, but a purchaser for value, then like any other purchaser for value she is taxable with her profit. The payments in question, whether made from income or corpus, represent profit, being in excess of the purchase price. This conclusion follows inevitably from the principles adhered to in the cases quoted above. The payments, therefore, do not represent the value of property acquired by bequest within the meaning of section 213 (b) (3) of the Revenue Act of 1926 or section 22 (b) (3) of the Revenue Act of 1928. Compare sections 213 (b) (2) and 22 (b) (2) of these acts.

Judgment will he entered for the respondent.


author: Marquette :

text:
    Screven Oil Mill, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46263.
    Promulgated August 18, 1932.

      Jamies L. Fort, Esq., for the petitioner.

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

Marquette :

Petitioner contends that it was on a cash receipts and disbursements basis prior to June 30, 1922, and therefore was unable to set up a reserve for bad debts until after that date. It argues that its first opportunity to elect between two methods of accounting occurred in 1923, and hence it is entitled to its deductions for additions to the reserve.

Section 23 (j) of the Revenue Act of 1928 provides that there shall be allowed as a deduction from gross income: “ Debts ascertained to be worthless and charged off during the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts) * *

Regulations 74, promulgated by the respondent under the provisions of the Revenue Act of 1928, in article 191 provides in part:

* * * Taxpayers were given an option for 1921 to select either of the methods mentioned for treating such debts. The method used in the return for 1921 must be used in returns for subsequent years and in returns under the Revenue Act of 1928 unless permission is granted by the Commissioner to change to the other method. A taxpayer filing a first return of income may select either of the two methods subject to approval of the Commissioner upon examination of the return.

Manifestly, petitioner’s return for the fiscal year was not a “first return of income ” entitling petitioner to a choice of methods, for it had filed several returns for previous years.

The statute vests in the Commissioner discretionary power over the use of the reserve method of treating bad debts. In the exercise of that discretion he has promulgated the regulations above quoted. In so far as they affect the present proceeding those regulations are identical in wording with the Commissioner’s regulations concerning the bad debts provision of the Revenue Act of 1921. Since the passage of that act and the promulgation of regulations for its administration, the Congress has enacted three further revenue statutes, in each of which the Commissioner has been given discretionary power respecting the reserve for bad debts.

Reading the statute and the administrative regulations together, it is evident from the facts before us that the petitioner has not taken the necessary and proper steps to place itself upon the reserve basis for bad debts. It followed the method of charging off debts ascertained to be worthless in its income-tax return for the fiscal year 1921 and was therefore required to continue that method until it received permission to change. The petitioner’s argument that, as it was selling its products for cash prior to 1923 it had no opportunity to exercise any choice of methods prior to that year, is not convincing. The statute informed every taxpayer that use of the reserve method for bad debts was discretionary with the Commissioner. We think that warning sufficiently advised petitioner of the necessity of ascertaining what the Commissioner’s discretion might require and complying therewith. Having failed to do so, petitioner is restricted to the method it first used. Kay Mfg. Co., 18 B. T. A. 753; aff'd., 53 Fed. (2d) 1083; Gustave Rader Co., 19 B. T. A. 12; Stanford Paper Co., 20 B. T. A. 319.

Decision will be entered for the respondent.


author: Aeundell :

text:
    Joseph H. Bromley, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent. Charles S. Bromley, Petitioner, v. Commissioner of Internal Revenue, Respondent. Henry S. Bromley, Petitioner, v. Commissioner of Internal Revenue, Respondent. John Bromley, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 42400, 42401, 45291, 45293, 45294, 53749, 53750, 53765, 53877, 57523, 57524, 57535, 57768.
    Promulgated August 18, 1932.

      Murray H. Spahr, Jr., Esq., for the petitioners.

      John H. Pigg, Esq., and G. O. Holmes, Esq., for the respondent.
   OPINION.

Aeundell :

These proceedings, duly consolidated are brought for the redetermination of proposed deficiencies in income taxes as follows:

In each proceeding a stipulation of facts was filed, which we incorporate herein by reference and adopt as our findings of fact.

The four petitioners are brothers. On December 19, 1921, each of the four petitioners executed a deed of trust, and in each trust the grantor and the three other petitioners were constituted trustees. Under the terms of each trust certain securities were transferred by the grantor to the trustees for the purpose of holding, managing, investing and reinvesting the securities, collecting the income therefrom, paying expenses, taxes, and charges, and accumulating the income for a period of 20 years for the benefit of the children of the grantors in each trust. Provision was made for distribution of the income to the children at certain ages, which provision is not material here. It was further provided in each trust that:

The parties hereto agree to and with each other that this trust shall be irrevocable for the period of twenty (20) years from its date, unless the second parties hereto [being all of the four trustees, one of whom was also the grantor] or their respective successors in interest concur in a decision to terminate the trust as to the principal sum thereof set forth in Schedule “A,” continuing the trust, however, for the management and distribution, in the manner herein provided, of the income accumulated to the date of such termination.

Upon the expiration of the 20 years or the sooner termination of ' the trust, the principal of each trust was to revert to the grantor, but the income was to be distributed to the children in the manner specified.

None of the trusts was altered or amended during the several years here involved, and all were administered according to their terms. The income of each trust has been included by the respondent in the taxable net income of the respective grantors who are the petitioners here.

The question of whether the trust income is taxable to the grantor depends upon whether the trusts come within the provisions of section 219 (g) of the Revenue Acts of 1924 and 1926, and section 166 of the Revenue Act of 1928, which are identical, and provide as follows:

* * * Where the grantor of a trust has, at any time during the taxable year, either alone or in conjunction with any person not a beneficiary of the trust, the power to revest in himself title to any part of the corpus of the trust, then the income of such part of the trust for such taxable year shall bo included in computing the net income of the grantor.

The principal question is whether the phrase “ any person ” is applicable to these cases, inasmuch as under each trust it was necessary that the four trustees concur in order to revest the corpus in the grantor. The same arguments made by petitioners here were advanced in Emma Louise Smith, 23 B. T. A. 631, in which we reached the conclusion that the singular noun “ person ” should be construed to include the plural, and that the taxing statute was intended to apply to cases where the revesting could be accomplished only by the action of the grantor and more than one other person not a beneficiary. Our decision in the Smith case was reversed on appeal by the Circuit Court of Appeals for the First Circuit (Smith v. Commissioner, 59 Fed. (2d) 56), not on the ground of statutory construction adopted by the Board, but on the ground that among the five persons designated in the trust as having power to alter the trust, any three of whom could exercise the power given to the five, there was no group of three which did not include a “ beneficiary ” within the meaning of the taxing act. The construction of the phrase any person ” is not discussed in the court’s opinion.

We think it clear that none of the trustees in these cases were beneficiaries and no contention is made that they were. Upon careful consideration of the arguments of the parties we are of the opinion that the construction we placed on the term “ any person ” in our opinion in the Smith case, supra, is sound, and we adhere to it in these proceedings.

Other arguments of petitioners are directed to the constitutionality of the statute. It is contended that the income here was not received by petitioners and any attempt to tax it to them constitutes a taking of property without due process. It is definitively decided in Corliss v. Bowers, 281 U. S. 316, that actual receipt of income is not necessary to sustain an income tax. It may be sustained on the theory of power over income rather than enjoyment of it. Clapp v. Heiner, 51 Fed. (2d) 224. The purpose of the statute here involved, as disclosed by reports of Congressional Committees, is to prevent evasion of tax by means of trusts. See Frederick B. Wells, 19 B. T. A. 1213; Clapp v. Heiner, supra; Corliss v. Bowers, 30 Fed. (2d) 135; 34 Fed. (2d) 656. To effect this end, Congress enacted that where the creator of a trust reserves the right of revesting the property in himself — acting either alone or in conjunction with anyone not a beneficiary — the income shall be considered to be his income. We see nothing unreasonable in this when its purpose is considered. “If the taxation involves reasonableness to meet the desired ends of fair play, it is valid.” Corliss v. Bowers, 34 Fed. (2d) 656.

It is also argued that section 219(g) and (h) of the Revenue Acts of 1924 and 1926 can not be applied to these trusts because the statutes were enacted after the creating of the trusts. The statute deals with cases within its scope, not in terms of the date of creation of the trusts, but on the basis of whether the power of revesting existed during the taxable year. As it is the existence of this power that supports the taxation of the income to the grantor, the statute can not be said to be retroactive when applied to the power outstanding in any year. A similar argument was made in Reinecke v. Northern Trust Co., 278 U. S. 339, as to the two trusts which were held to be subject to the estate tax. The court held that, inasmuch as the powers of revocation were outstanding at the time of death, the statute as applied to them was not retroactive. The statute with which we are concerned is similar in that its application depends upon the existence of a power outstanding in the taxable years, and, viewing it in the light of the reasoning in the Northern Trust Co. case, it is not applied retroactively in the present cases.

Decision will he entered for the respondent m each proceeding.


author: Arundell :

text:
    Samuel D. Leidesdorf, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 48305.
    Promulgated August 19, 1932.

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

      B. M. Goon, Esq., for the respondent.
   OPINION.

Arundell :

The respondent disallowed as a deduction the sum of $22,636.52 expended by the petitioner for attorney fees in 1926, and determined a deficiency in income tax in the amount of $5,659.14. The petitioner claims such action to be error, on the ground that the amount was paid in connection with the conduct of a trade or business in which he was engaged.

Since about 1917 the petitioner, in addition to his work as a certified public accountant, has devoted a great deal of his time participating in real estate projects. His activities in that line consisted of determining whether a particular site was suitable for improvement, and, if so, the character of the improvement, the cost thereof and the probable return on any investment made. If a decision was made to acquire and improve the site, a corporation with a nominal capital would be formed for that purpose, and its stock sold to the participants on an agreed basis. The funds for financing the project in excess of loans secured by mortgages were furnished by the parties to the project in proportions agreed upon. The petitioner also conferred with architects and builders while the improvements were being made, and assisted in the management of the properties after the construction work was completed. During 1925 and 1926 the petitioner had an interest in a great many of these corporations.

Since 1917 the petitioner has participated in about seventy of such ventures involving expenditures of at least $50,000,000. The petitioner’s participation in these projects ranged from 38% per cent to 50 per cent. The corporations were formed for the purpose of avoiding difficulties in subsequent transfers of the property and personal liability.

The venture giving rise to the litigation in which the sum in controversy was expended for counsel fees involved the acquisition of a site and the erection thereon of an office building known as the Pershing Square Building. The site was purchased at public auction and after selling a portion thereof the remainder was improved. The stock of the Pershing Square Building Corporation, the corporation organized by the petitioner and others for holding title, was purchased by the organizers. The portion acquired by the petitioner was 27 per cent. A like percentage of the stock was purchased by Louis Frankel, and the balance was issued to Henry Mandel. The amount the stockholders were obliged to contribute to retain title to the site was about $478,000.

Louis Frankel was not financially able to participate further in the venture, and during the early part of 1922 he sold his stock to S. W. Straus in consideration of Straus’ agreement to pay or cause to be paid to him sums theretofore loaned to the corporation; the original purchase price of his stock, together with a profit thereon of $50,000 and an agreement on the part of petitioner and Mandel to pay him an additional profit of $25,000 for the sale of the stock out of the first profits they earned under their stock. All of the sums agreed to be paid, except the $25,000 payment, were paid, and on February 11, 1922, Frankel transferred his stock to Straus.

In 1925, after the building was completed, Frankel filed suit against petitioner, claiming that he had sold his stock to enable the corporation to obtain funds with which to complete the project, and that the petitioner had agreed to hold his stock in trust for their equal benefit. He demanded, among other things, that a trust be impressed upon the stock held by petitioner; that the stock be delivered to him in accordance with their agreement, and that an accounting be made for profits received on the stock. In its decision rendered May 18, 1926, the court found that the petitioner had never agreed with Frankel that he was to have an interest in his stock; that Frankel sold his stock to Straus without being made subject to such a right, and that after assignment of the stock to Straus, Frankel had no rights of any bind in stock of the Pershing Square Building Corporation.

The petitioner did not receive any profits or dividends on his stock of the Pershing Square Building Corporation prior to the entry of judgment in the suit filed by Frankel.

In support of his contention that the attorney fees are not deductible as ordinary and necessary business expenses, the respondent relies on Dalton v. Bowers, 56 Fed. (2d) 16; certiorari granted, 286 U. S. 541. In that case Dalton, an inventor, organized a corporation which engaged in the manufacture of articles of his invention only, but sold some small tools incidental to the articles manufactured. He owned all of the corporation’s stock, and was its president and treasurer, and also a director. He does not appear to have been engaged in any other activities and the court held that the loss claimed upon dissolution of the corporation resulted from an investment rather than the operation of a trade or business within the meaning of the net loss provisions of the statute. The present case is readily distinguishable. Here, the petitioner’s activities in the real estate business were not confined to a single enterprise, but extended to many transactions over a period of years. To each venture he devoted part of his time and money with the hope of realizing gains. The petitioner’s interest did not stop with preliminary work incident to the acquisition, and improvement of a site, but continued in the management of the improved property. In 1925 and 1926 he still had an interest in many of the corporations that he and others had organized to carry out their ventures. The petitioner’s income from his projects came to him in several ways. He received (a) interest on his loans of large sums to the various corporations to make improvements on sites; (b) dividends on his investments in stock of the corporations, and (c) gains on sales of such stock. His participation in projects of the nature described above was sufficiently regular and frequent to constitute a trade or business. See Richard Croker, Jr., 12 B. T. A. 408; Elmore L. Potter, 18 B. T. A. 549; H. M. Howard, 22 B. T. A. 375.

As the result of the petitioner’s participation in the venture taken over by the Pershing Square Building Corporation, he was obliged to defend a suit brought by one of the original parties to the venture. The proceeding instituted was an attack on his right to full enjoyment of his stock and was the direct result of a transaction forming a part of one of petitioner’s business ventures. The expense involved in defending the action is one within the rule announced in Kornhauser v. United States, 276 U. S. 145, and is deductible as an expense paid in carrying on a trade or business. See Lena G. Hill, 8 B. T. A. 1159.

Decision will ~bé entered under Rule 50.


author: Aeundell:

text:
    Marlin-Rockwell Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent. The M. R. C. Bearings Service Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Standard Steel and Bearings, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 47038-47040.
    Promulgated August 19, 1932.

      H. A. Mihills, C. P. A., for the petitioners.

      Chester A. Gwirm, Esq., and Charles E. Lowery, Esq., for the respondent.
   OPINION.

Aeundell:

These proceedings, duly consolidated for hearing and report, were brought for the redetermination of deficiencies' in income tax for the year 1925 as follows: Marlin-Rockwell Corporation, $21,044.90; M. R. C. Bearings Service Company, $1,329.84; and Standard Steel and Bearings, Inc., $18,259.47.

The petitioners contest only so much of the deficiency in each case as results from the respondent’s disallowance as a net loss item of a loss sustained in 1923 by the Marlin-Rockwell Corporation on the sale of a subsidiary’s stock. Income for 1925 is affected by reason of the 1923 net loss being carried forward.

The respondent now concedes that the Marlin-Rockwell Corporation sustained a deductible loss of $241,280.10 in 1923 on the sale of the entire capital stock of its subsidiary, the Rockbestos Products Corporation, and that such loss was sustained in a business regularly carried on by the taxpayer. The parties have further agreed that losses sustained by the subsidiary during 1921 and 1922, when its stock was owned by the Marlin-Rockwell Corporation, were not used to offset or reduce income of any other member of the consolidated group, thus removing this phase of the case from the operation of the rule in Riggs National Bank, 17 B. T. A. 615; aff'd., 57 Fed. (2d) 980, under which losses of this kind must be reduced by operating losses sustained during the period of affiliation.

Petitioners herein, and the other companies hereinafter listed, were affiliated in the years 1923 and 1925, constituting a so-called Class A affiliation, of which the Marlin-Rockwell Corporation was the parent. Consolidated returns were filed for 1923 and 1925.

In computing consolidated net income for 1925 the respondent allowed as a deduction a 1923 consolidated net loss of $1,212,481.14. By amended answers duly filed, the respondent now alleges that he erred in allowing that deduction, and that there should be allowed as deductions only the respective net losses of the companies for 1923 not in excess of respective net incomes for 1925. By reason of this alleged error the respondent claims increased deficiencies.

The parties have stipulated that the taxable net income of the affiliated group for the year 1924 was entirely absorbed by the consolidated net loss sustained by the same group for the year 1922. The income and losses of the group for the years 1923 and 1925, as computed by the respondent, were as follows:

It is obvious from this computation that, under the decided cases, the respondent erred in allowing the 1923 net loss of $1,272,487.14 as a deduction in computing consolidated net income for 1925. Woolford Realty Co. v. Rose, 286 U. S. 319; New Castle Leather Co., 26 B. T. A. 282; Delaware & Hudson Co., 26 B. T. A. 520; Sailors Brothers Co., 26 B. T. A. 700; Pilgrim Laundry Co., 26 B. T. A. 788. In Sailors Brothers Co., supra, we said:

We are of the opinion that * * * a net loss sustained by a member of an affiliated group, whether before or after becoming a member of such group, is individual to the member sustaining such net loss and may not be availed of in a subsequent year for a greater amount than the income realized in such year.

In accordance with the above decisions, we hold that respondent erred as alleged and that he is entitled to the increased deficiencies that may result from the correction of the error. In the recomputa-tions that will be necessary, effect will be given to the respondent’s confession of error in disallowing the loss sustained on the sale of stock in 1923.

Decision will be entered in each proceeding under Rule 50.


author: Lansdon:

text:
    Bankers Dairy Credit Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 48329.
    Promulgated August 24, 1932.

      R. T. Schneider, Esq., and John D. Loeffler, Esq., for the petitioner.

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

Lansdon:

The principal question here is whether the payments made by the petitioner to its field representatives as set forth in our findings of fact were commissions on stock sales or on the volume of loans secured by the services of the recipients thereof. In every instance the amount of the commission paid was a percentage of the business obtained. The sale of stock equal to 10 per cent of the face of the loan was only an incident in the transaction. If the client was already a shareholder to the extent of 10 per cent of the loan involved, no additional stock subscription was required, since the sole purpose of stock sales to borrowers was to enable the petitioner to purchase sound securities equal in amount at all times to 10 per cent of its rediscounts with the Intermediate Credit Banks.

Petitioner concedes that for several years it accounted on its own books for all commissions paid as organization expenses. This procedure does not now bar it from claiming that such payments were operating expenses if they were such in fact. In our opinion the petitioner is not now attempting to vary facts for the purpose of reducing its Federal taxes, but is asking us to consider actual facts instead of bookkeeping entries. “ Tax liability must be determined by what in fact was done.” Remington-Rand, Inc. v. Commissioner, 33 Fed. (2d) 77. Cf. United States v. Phellis, 257 U. S. 156. In our opinion the evidence is convincing that the entire commission paid in each instance by the petitioner in the circumstances herein was in fact compensation for services rendered in securing loans. On this issue the determination of the respondent is reversed.

The evidence is clear that the delay in filing petitioner’s return for the fiscal year ended February 29, 1928, was due to reasonable cause and not due to willful neglect. The return was filed later and was accompanied by an affidavit which, we think, is a satisfactory explanation.

Decision will loe entered under Bule 50.


author: Black :

text:
    Charles Bispham Levey, Petitioner, v. Commissioner of Internal Revenue, Respondent. James P. Shea, Petitioner, v. Commissioner of Internal Revenue, Respondent. C. E. Newton, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent. George A. Smith, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 55184, 55268-55271.
    Promulgated August 24, 1932.

      Albert L. Clothier, Esq., and W. W. Boss, Esq., for the petitioners.

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

Black :

We think our decision on the sole issue involved in these proceedings is controlled by the decision of the Supreme Court in Old Colony Trust Co. v. Commissioner, 279 U. S. 716. In that case the resolution adopted August 3, 1916, under which the income-tax payments for 1919 and 1920 were made by the American Woolen Company for its president, William M. Wood, read as follows:

Voted: That this company pay any and all income taxes, State and Federal, that may hereafter become due and payable upon the salaries of all the officers of the company, including the president, William M. Wood; the comptroller, Parry 0. Wiggin; the auditor, George R. Lawton; and the following members of the staff, to-wit: Frank H. Carpenter, Ed.win L. Heath, Samuel R. Haines, and William M. Lasbury, to the end that said persons and officers shall receive their salaries or other compensation in full without deduction on account of income taxes, State or Federal, which taxes are to be paid out of the treasury of this corporation.

This resolution was amended on March 25, 1918, as follows:

Voted: That, referring to the vote passed by this board on August 3, 1916, in reference to income taxes, State and Federal, payable upon the salaries or compensation of the officers and certain employees of this company, the method of computing said taxes shall be as follows, viz:
The difference between what the total amount of his tax would be, including his income from all sources, and the amount of his tax when computed upon his income excluding such compensation or salaries paid by this company.

The only difference of any note, so far as we can see, between the foregoing resolution under which the payments were made by the American Woolen Company of state and Federal income taxes of its officers and the resolution involved in the instant case under which the Frederick TI. Levey Company made payments to its officers to reimburse them for state and Federal income taxes paid on their salaries, is that the resolution involved in the instant case contains this language: “ This as a gift from the company and not as an extra compensation for services rendered.” This language the resolution in Old Colony Trust Co., supra,, did not contain. But we do not regard this circumstance as of controlling importance.

In Lincoln National Bank, Exec., 23 B. T. A. 1304, in which was involved a determination of whether a certain distribution to the principal stockholders, not in proportion to holdings, was a dividend or a gift, we said:

Obviously, it will not do to say that a corporate distribution to its principal stockholder may be taken free from tax because the directors choose to call it a gift and explain it by their gratitude for services and devotion of one of them. This would enable the taxpayers to determine their own tax liability by the mere use of words * * *.

And so in the instant case we do not think the mere nse of words is controlling. We do not think the circumstances surrounding the payments made to the petitioners in the instant case are sufficient to sustain petitioners’ contention that the payments made were gifts, although denominated “ gifts ” in the resolution. These payments were made every year for a period of seven years covering the period 1924 to 1930, inclusive. Gifts are usually not made in that systematic manner and covering that long a period of time, especially by corporations, for, as said by the court in Noel v. Parrott, 15 Fed. (2d) 669; certiorari denied, 273 U. S. 754:

It needs neither argument nor citation of authority to establish the proposition that the directors were without authority to give away the corporate assets, and that for them to make several of their members and other persons a gift of a large sum of money from the corporate assets would be neither “ wise ” nor “ proper ” and would amount to an illegal misapplication of corporate funds. We must assume that the directors did not intend such a flagrant violation of their trust.

It is a very significant circumstance, we think, that each year when the directors of the Frederick H. Levey Company, fixed the salaries of the officers for the ensuing year by resolution, they also provided for the payment by the corporation of state and Federal income taxes on the salaries of the prior year, and, although it was provided in said resolutions that such payments were gifts from the company and not as extra compensation for services rendered, nevertheless, in view of the decision of the Supreme Court in Old Colony Trust Co., supra, we think we must hold that the payments were in the nature of extra compensation and therefore taxable. Said the Supreme Court in Old Colony Trust Co., supra:

Coming now to the merits of this case, we think the question presented is whether a taxpayer having induced a third person to pay his income tax or having acquiesced in such payment as made in discharge of an obligation to him, may avoid the making of a return thereof and the payment of a corresponding tax. We think he may not do so. The payment of the tax by the employer was in consideration of the services rendered by the employee and was a gain derived by the employee from his labor. * * * The certificate shows that the taxes were imposed upon the employee, that the taxes were actually paid by him and that the employee entered upon his duties in the years in question under the express agreement that his income taxes would be paid by his employer. This is evidenced by the terms of the resolution passed August 8, 1916, more than one year prior to the year in which the taxes were imposed. The taxes were paid upon a valuable consideration, namely, the services rendered by the employee and as part of the compensation therefor. We think therefore that the payment constituted income to the employee. * * *

Cf. Boston & Providence R. R. Corporation, 23 B. T. A. 1136.

Petitioners cite several Board and court cases in support of their contention that the payments in question were gifts and not taxable as income, but we think those cases can be distinguished on the facts from those of the instant case and are not controlling.

Decision will be entered for the respondent.


author: Artjndell :

text:
    Frank B. Gummey, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 61056.
    Promulgated August 29, 1932.

      E. Stanley1 Richardson, Esq., for the petitioner.

      Frank A. Surine, Esq., for the respondent.
   opinion.

Artjndell :

The respondent has redetermined a deficiency of $1,313.10 in income tax against petitioner for 1929.

From the stipulation of facts filed by the parties it appears that in 1929 petitioner was married and living with his wife. At various times during the taxable year each purchased and sold through brokers on the stock exchange shares of stock of corporations, the sales occurring within thirty days before or after the purchase by the other of stock of the same corporation. They kept separate accounts with their brokers, for which separate funds of each were used.

In the joint return filed by petitioner and his wife for 1929, a deduction of $2,624 was claimed for a loss on the sale of certain stock by petitioner, and deductions amounting to $8,624.44 were taken for losses on sales of stock made by his wife. The tax under the return was computed on the aggregate income. The tax, so computed, was paid by the petitioner.

In his audit of the joint return the respondent disallowed the claimed stock losses of $11,248.44, on the theory that the purchases and sales should be regarded as though they were made by one individual and as purchases of stock were made within thirty days before or after sales of like stock, the statute precluded allowance of the deductions.

The issue has been stipulated to be whether where within thirty days before or after the date of sale by a husband or wife filing a joint return, the other buys shares of stock of the same corporation, the provisions of section 118 of the Revenue Act of 1928 are against the allowance of losses sustained upon the sales. The amount of the losses is not in dispute, and the issue as framed removes any question about the bona fides of the transaction.

The respondent advances the theory that, having elected to file a joint return, for the purpose of applying the provisions of section 118 of the 1928 Act, the petitioner and his wife became a single taxing entity, and as such, “ the taxpayer.” We do not so interpret the statute.

Where husband and wife exercise the statutory right to file a single joint return, “the tax shall be computed on the aggregate income.” Sec. 51 (b), 1928 Act. The statute provides for the allowance of losses sustained by individuals. Sec. 23 (e). Section 118 of the same statute provides against the allowance of stock losses “ where it appears that within thirty days before or after the date of such sale or other disposition the taxpayer has acquired * * * substantially identical property.” The term “ taxpayer ” means any person subject to a tax imposed by the act, and the term “person ” includes an individual. Sec. 701 (a) (13) and (a) (1).

There is nothing in section 118 of the 1928 Act to the effect that the transactions of husband and wife who file a single joint return should be regarded as the dealings of the reporting spoiise in the application of its provisions. Where a husband and wife exercise the statutory right to file a single joint return gross income and deductions are listed as though they belonged to the one making the return, but in reality they represent the combined receipts and deductions of each. To reach the aggregate net income, on which the tax is computed, consideration must be given to the transactions of each. In no other way can the combined taxable income be determined. The respondent has recognized this condition by the promulgation of regulations under section 51 of the 1928 Act providing that where husband and wife file a single joint return “ all deductions to which either is entitled shall be taken from such aggregate income.” A like regulation was in force under prior acts containing provisions similar to section 118 of the 1928 Act. Art. 401, Regulations 62, 65, and 69.

If the theory being advanced by the respondent here were carried out to its logical conclusion, a loss sustained by a husband or wife in a transaction between them would not be deductible under the statute oil the ground that a person can not enter into a transaction with himself. A loss sustained by the husband in a transaction with his wife has been allowed as a deduction from gross income reported in their single joint return. Fleitmann, et al., 22 B. T. A. 1291. The acquiescence of the respondent in the decision is shown in C. B. X-2, 214.

Had the petitioner and his wife filed separate returns, there would be no question about the deductibility of the losses sustained by each. In filing a single joint return they lost none of such rights; each remained an individual, and as such, a taxpayer, within the meaning of section 118 of the statute.

The respondent erred in disallowing the deductions.

Decision will he entered under Bule 50.


author: Smith:

text:
    Ralph W. Harbison, Petitioner, v. Commissioner of Internal Revenue, Respondent. William Albert Harbison, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 64346, 54347.
    Promulgated August 29, 1932.

      J. E. MacOloshey, Jr., Esq., for the petitioners.

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

Smith:

The first issue, common to both dockets, is the proper basis for computing the gain upon the sale of certain stock in the taxable year. This stock was distributed to the petitioners on May 11, 1925, after the termination of the trust created under the will of the petitioners’ father, who died May 11, 1905. The respondent contends that the basis is the March 1, 1913, value of the stock, whereas the petitioners contend that its value when distributed to them in 1925 is the proper basis. The basis for determining gain or loss from the sale or other disposition of property is prescribed by section 113 of the Revenue Act of 1928, which, in so far as material to our determination, is as follows:

(a) (5) Property transmitted, at death — It personal property was acquired by specific bequest, or if real property was acquired by general or specific devise or by intestacy, tbe basis shall be tbe fair market value of tbe property at tbe time of tbe death of the decedent. If tbe property was acquired by tbe decedent’s estate from the decedent, tbe basis in the bands of tbe estate shall be the fair market value of tbe property at the time of tbe death of the decedent. In all other eases if the property was acquired, either by will or 6y intestacy, the basis shall be the fair market value of the property at the time of the distribution to the taxpayer. * * * [Italics supplied.]

In comparable cases arising under prior revenue acts the basis for computing gain or loss was the value of property when “acquired ” or at the “time of acquisition,” which terms have been interpreted to mean the value at the date of the decedent’s death. See Brewster v. Gage, 280 U. S. 321; 50 Sup. Ct. 115, 117. In noting the change in the wording of section 113 (a) (5) of the Revenue Act of 1928, the Supreme Court said:

The Revenue Act of 1928, § 113 (a) (5), expressly established value at tbe time of the death of the decedent as the basis .of calculation in respect of sales of personal property acquired by specific bequest and of real estate acquired by general or specific devise or by intestacy, and in all other cases fixed fair market value at the time of distribution to the taxpayer as the basis. 45 Stat. 819 (26 USOA § 2113). The deliberate selection of language so differing from that used in tbe earlier acts indicates that a change of law was intended. Ordinarily, statutes establish rules for the future, and they will not be applied retrospectively unless that purpose plainly appears. United States v. Magnolia Co., 276 U. S. 160, 162, 48 S. Ct. 236, 72 L. Ed. 509, and cases cited. There is no support for the suggestion that subdivision (5) expressed tbe meaning, or was intended to govern or affect the construction, of the earlier statutes.

The original change in the Revenue Act of 1928 was recommended to Congress by the Joint Committee on Internal Revenue Taxation in order “ to make the basis certain and definite ” and avoid the doubt as to what is meant by the date of acquisition. See Report of Joint Committee, vol. 1, pp. II, 74, 75. The Ways and Means Committee Report JSTo. 2, p. 18, 70th Cong., 1st sess., indicates that it accepted the Joint Committee’s recommendation and states that “ the value on the date of death affords an equitable and more readily determinable basis.”

The Senate Finance Committee Report No. 960, p. 28, 70th Cong., 1st sess., contains the following explanation respecting section 113 (a) (5), which was enacted as changed by the Senate:

The decision by the Court of Claims in McKinney v. United States has caused confusion in the existing law as to the basis on which an executor must determine gain or loss on tbe sale by him of property of the estate. The House bill in section 113 (a) (5) provides that in such casos the basis shall be tbe fair market value of the property at the time of the death of the decedent. In the same section tbe House bill provides tbe same basis shall be used where the property is sold by the beneficiary.
It appears that the House bill is inadequate to take care of a number of situations which frequently arise. For example, the executor, pursuant to the terms of the will, may purchase property and distribute it to the beneficiaries, in which case it is impossible to use the value at the decedent’s death as the basis for determining subsequent gain or loss, for the decedent never owned the property. Moreover, the fair market value of the property at the decedent’s death can not properly be used as the basis, in the case of property transferred in contemplation of death where the donee sells the property while the donor is living.
Accordingly, the committee has revised section 113 (a) (S) and certain related sections, so as to provide that in the case of a specific bequest of personalty or a general or specific devise of realty, or the transmission of realty by intestacy, the basis shall be the fair market value at the time of the death of the decedent. In these cases it may be said, as a matter of substance, that the property for all practical purposes vests in the beneficiary immediately upon the decedent’s death, and therefore the value at the date of death is a proper basis for the determination of gain or loss to the beneficiary. The same rule is applied to real and personal property transmitted by the decedent, where the sale is made by the executor. In all other cases the basis is the fair market value of the property at the time of the distribution to the taxpayer. The latter rule would obtain, for example, in the ease of personal property not transmitted to the beneficiary by specific bequest, but by general bequest or by intestacy. It would also apply in cases where the executor purchases property and distributes it to the beneficiary.

The legislative history of this provision indicates that Congress intended to apply the provision: “in all other cases if the property was acquired either by will or by intestacy, the basis shall be the fair market value of the property at the time of distribution to the taxpayer,” to personal property not acquired by specific bequest, but either under the will of the decedent or by reason of intestacy when sold by a taxpayer.

The petitioners acquired the stock in question under the terms of their father’s will, after the termination of the trust. There was no specific bequest of this stock, which was a portion of the decedent’s personal property. The basis with which we are concerned is not “ the basis in the hands of the estate,” but the basis to these taxpayers, which is the fair market value of the stock at the time of distribution to them on May 11, 1925. This value, properly adjusted to reflect the subsequent stock dividends, is stipulated to be $105 per share. The petitioners’ gain upon the sale of the shares of stock in 1928 should be computed accordingly. Cf. Lane v. Corwin, 1 Fed. Supp. 151.

The petitioner in Docket No. 54347 elected to have his capital net gain upon the sale of the above stock taxed at the 12% per cent rate provided in section 101 (a) of the Revenue Act of 1928. During the taxable year he made contributions in the amount of $27,996.83 to organizations within the purview of section 23 (n) of the Revenue Act of 1928. The second issue concerns only that petitioner and the computation of the allowable deduction for these contributions, which is limited to “ 15 per centum of the taxpayer’s net income as computed without the benefit of this subsection.” Sec. 23 (n). By an amended answer the respondent alleges that he erroneously allowed the deduction of the total amount of these contributions, whereas the allowance should have been.limited to 15 per cent of this petitioner’s net income, other than capital gains. The respondent duly asserts claim for the increased deficiency that may result from the recomputation of this deduction.

This petitioner, having elected to have his profit upon the stock sold taxed under the provisions of section 101 (a) of the Revenue Act of 1928, is subject to the tax imposed by that provision, which is determined as follows:

* * * a partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner as if this section had not been enacted and the total tax shall be this amount plus 12% per centum of the capital net gain.

“ Ordinary net income,” as used in connection with this provision a means the net income, computed in accordance with the provisions of this title, after excluding all items of capital gain, capital loss, and capital deductions.” Sec. 101 (c) (7). In other words, when a taxpayer avails himself of the benefits of section 101 (a), he elects, in effect, to have his tax liability determined in two parts — first, upon the ordinary net income exclusive of his capital net gain, and, second, upon his capital net gain at the 12y2 per cent rate, — the sum of the two constituting the amount of his tax. Obviously, therefore, the amount of this petitioner’s capital net gain should be excluded from the amount of his net income upon which to compute the 15 per cent deduction for contributions within the purview of section 23 (n). This last amount, stipulated as $66,634.87, is petitioner’s “ ordinary net income ” as prescribed by sections 101 (a) and 21, computed without the benefit of subsection 23 (n), upon which to compute the 15 per cent deduction. Cf. Hallie D. Elkins, 24 B. T. A. 572.

Judgment utill be entered under Rule SO.


author: Sterniiagen:

text:
    Pearl B. Brown, Executrix of the Estate of Frank A. Brown, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent. Harry A. Brown, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 47677, 48136.
    Promulgated August 29, 1932.

      Herbert Pope, Esq., Benjamin M. Price, Esq., and Thomas G. Strachan, Jr., Esq., for the petitioners.

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

Sterniiagen:

The respondent determined deficiencies in income taxes for 1925 against the petitioners in the amounts of $15,976.18 and $13/105.73, respectively, by treating as dividends taxable under section 201(g), Revenue Act of 1926, amounts received in 1925 by the petitioner’s decedent in Docket No. 47677, and the petitioner in Docket No. 48136, (both being herein called petitioner), upon the cancellation or redemption of shares of preferred stock of the Squire Dingee Company, which were received by them in 1922 by virtue of an increase in the capital stock of that company. The facts were stipulated as follows:

1. The taxes in controversy are income taxes for the year 1925 in the amounts of $13,405.73 and $15,976.18.
2. On May 21, 1925, Squire Dingee Company redeemed at $37,325 per share its entire issue of 5,000 shares of 7% preferred stock having a par value of $100 per share by paying to petitioner Harry A. Brown $91,446.25 on the surrender of 2,450 shares of said preferred stock then held by him, and by paying to petitioner Drank A. Brown, $95,178.75 on the surrender of 2,550 shares of said preferred stock then held by him.
3. The deficiencies claimed by respondent are for the amount of income tax payable by petitioners in event the sums of $91,446.25 and $95,178.75 were received by them in payment of a dividend representing a distribution of earnings or profits accumulated by Squire Dingee Company after February 28, 1913.
4. Squire Dingee Company was at all times herein mentioned and now is an Illinois corporation. At all times prior to December 31, 1922, said company was authorized to issue and had issued as its only capital stock 1,000 shares of common stock having a par value of $100 per share. Prior to December 31, 1922, said company was authorized by its corporate charter to conduct and did conduct the business of preserving, packing and selling pickles.
5. Prior to March 1, 1913, petitioners acquired the capital stock of Squire Dingee Company at a cost to them that was not in excess of the value of said stock on March 1, 1913. At all times after the acquisition by them of the entire .capital stock of said company to and including the calendar year 1925, petitioners owned, and they or their appointees held, the entire capital stock of said company.
6. At all times material to this cause Frank A. Brown owned 51% and Harry A. Brown owned 49% of the capital stock of Squire Dingee Company.
7. On December 31, 1922, the value of the assets as shown on the books of the company was increased to $1,500,000 by writing up in accordance with an appraisal the physical assets of the company in the amount of $398,855.50 and by showing as an asset of the company trade names and brands at a value of $146,328.79. Prior to said increase the aggregate value of the assets of Squire Dingee Company as shown by its boohs was in excess of the liabilities and capital stoch of said company by the amount of $854,815.71.
8. At a meeting of the Board of Directors of Squire Dingee Company held December 15, 1922, the following resolutions were adopted:
“Whereas the aggregate value of the assets of this corporation, as shown by the boohs, is in excess of all its liabilities and of the par value of the stoch of the corporation, all of which is fully paid, by at least $1,400,000;
“ Now therefore, be it eesolved, that the surplus consisting of said sum be distributed in the form of a stoeh dividend.
“ Resolve» that a special meeting of the stockholders of the Squire Dingee Company be and the same is hereby called to be held at the hour of 11:00 o’cloch A. M. at 1309 Stoch Exchange Building, 30 North La Salle Street, Chicago, Illinois, for the purpose of acting upon proposition to increase the authorized capital stoch of said corporation from one thousand shares of a total par value of $100,000, to five thousand.shares of preferred stoch of a par value of $100 each, or a total par value of $500,000, and ten thousand shares of common stoch of a par value of $100 each, or a total par value of $1,000,000, to enlarge the object of the corporation, and to increase the number of directors from four to five; and for the transaction of any other business that may properly come before said meeting;
“ Be it further resolved that in case said proposition to increase the capital stoch shall be carried at said stockholders’ meeting, the officers of the company are hereby authorized and directed to take all steps required by law to complete and make effectual and valid such increase, and to issue stoeh of the company in exchange for existing stoch and in distribution of surplus up to the limit and according to the plan which may be prescribed at said meeting of the stockholders.”
9. At a meeting of the stockholders of Squire Dingee Company held December 15, 1922, the following resolutions were adopted:
“ Resolve®, that the capital stoch is hereby increased from $100,000, consisting of 1,000 shares of the par value of $100 each to $1,500,000 consisting of 5,000 shares of preferred stoch of the par value of $100 each, or a total par value of $500,000 and 10,000 shares of common stock of the par value of $100 each or a total par value of $1,000,000;
“ Be it further resolve® that the number of directors of the corporation is hereby increased from four to five;
“Be it further resolved that the object for which this corporation was formed as set forth in the statement of incorporation filed with the Secretary of State upon the organization of the Company, be enlarged to include the following powers in addition to the powers therein set forth: the production, manufacture, packing and sale of preserves, jams, jellies, fruit and nut butters, condiments, articles of food in cans, packages or containers of any kind, and food products generally, and barrels, kegs, casks, bottles, cans, caps, and containers of every kind, and raw materials and supplies useful for the production, packing, shipment, storage, or marketing of any of the foregoing commodities.
“ Resolve® that the president of the company be instructed to file in the office ■ of the Secretary of State of the State of Illinois, a statement in duplicate of the foregoing increase of the capital stock of this company, enlargement of the object of the company, and increase of the number of directors, and also immediately upon receipt from the Secretary of State of the certificate of said increase of capital stock, enlargement of object and increase of the number of directors, to file the same for record in the office of the Recorder of Deeds of Cook County, Illinois.
“ Bbsolved that the preferred stock of the corporation to be issued in accordance with the increase of capital stock heretofore authorized shall be entitled to draw annual dividends when earned at the rate of but not to exceed seven per cent per annum in priority to the declaration of any dividends on any other stock of the corporation, such dividends to be cumulative. All or any part of said preferred stock may be retired ratably among the several holders thereof at any time with the approval of the Board of Directors out of accumulated earnings and surplus upon the payment of $102 for each share of preferred stock so retired, plus dividends thereon;
“ Ba it further resolved that the stock of this company authorized under the foregoing increase of the capital stock shall be paid for by the exchange of the present stock of the corporation and the distribution of the existing surplus of $1,400,000;
“ Be it further resolved that all of the stock of the company in accordance with the increase of capital stock heretofore authorized shall be issued in the proportion of five shares of preferred stock and ten shares of common stock for every share of the present stock of the company upon the surrender thereof.”
10. On December 31, 1922, the articles of incorporation of Squire Dingee Company were amended in accordance with the resolutions in paragraph 9 above and the new stock authorized therein was issued pursuant thereto.
11. At the time of the increase of the company’s capital stock, Harry A. Brown received 2,450 shares of preferred stock and JTrank A. Brown received 2,550 shares of preferred stock which was the preferred stock redeemed by Squire Dingee Company as in paragraph 2 hereof stated.
12. At a meeting of the Board of Directors of Squire Dingee Company held May 21, 1925, the following resolution was adopted:
“ Whereas, there is now issued and outstanding 5,000 shares of the preferred stock of this corporation which shares are, at the option of the Board of Directors, subject to redemption and retirement; and
“ Whereas, the holders thereof have waived all notice of a call for redemption or of intent to redeem and all requirements as to such notice and have tendered the entire 5,000 shares of said stock for redemption and retirement forthwith at the price of $37.3214 per share, exclusive of any accrued dividends, all such accruals being waived by each of said stockholders, and have agreed to accept in full payment for such shares the said sum, of $37.32% per share; and
Whereas, the fixed assets of this company are carried on its books and in its balance sheet at a value which includes appreciation of the plant and equipment written up on the books by virtue of an appraisal made in 1922; -and
“ Whereas, the item of trade names and brands is carried on the books of this corporation and in its balance sheet at a valuation of $145,656.14; and
“ Whereas, in the opinion of the Board of Directors it is desirable to materially reduce the appreciated values of plant and equipment taken up in 1922 and to eliminate entirely the valuation carried for trade names and brands;
“ Now, therefore, be it eesolved, that this corporation does hereby call for redemption the entire 5,000 shares of its issued and outstanding preferred stock at the price of $37.32% per share, exclusive of any accrued dividends, and that it do forthwith redeem all of said shares at said price of $37.32% per sharp, and that upon surrender to this corporation of the certificates therefor, duly endorsed, tlie Treasurer of this corporation be and he is hereby authorized and directed to pay to the respective holders thereof the redemption price as aforesaid; and
“ Be it further resolved, that the difference between the par value of said shares so redeemed and the redemption price thereof be applied on the books of the company in writing off entirely the item of trade names and brands in the sum of $145,656.14 and in reduction of the appreciated values of- the plant and equipment; and
“ Be it further,' KEsonvmD, that a special meeting of the stockholders of this corporation be and the same is hereby called to be held forthwith pursuant to waivers of notice and consent to be signed by each and every stockholder, or if such waivers of notice and consent cannot be procured from all of the stockholders then that such special meeting of the stockholders be held pursuant to due and proper notice to be given by the Secretary of the corporation in accordance with the laws of the State of Illinois and the By-laws of the corporation, for the purpose of submitting to a vote of the stockholders a proposal to ratify and confirm the action of the Board of Directors as hereinabove set forth, and a proposal to amend the charter of the corporation by reducing its authorized capital stock from 5,000 shares of preferred stock of the par value of $100 per share, and 10,000 shares of common stock of the par value of $100 per share, to 10,000 shares of common stock of the par value of $100 per share.”
13. At a meeting of the stockholders of Squire Dingee Company held May 21, 1925, the following resolution was adopted:
“ Be it resolved, that the action of the Board of Directors taken at the special meeting of said Board held on the 21st day of May, 1925, pursuant to which 5,000 shares of the outstanding preferred stock' of this corporation was called for redemption and has been redeemed at the price of $37.32*4 per share, exclusive of accrued dividends, and pursuant to which the Board ordered and directed that the difference between the par value of said shares so redeemed and the redemption price thereof (such difference amounting to the sum of $313,375) be applied on the books of the corporation in writing off entirely the item of trade names and brands now carried at a valuation of $145,656.14, and in reduction of the appreciated values of plant and equipment placed on the books by virtue of an appraisal had in 1922, be and the same is hereby in all respects ratified, approved and confirmed.
“ Be it resolved, that the authorized capital stock of this corporation be and the same is hereby decreased from $1,500,000 consisting of 5,000 shares of preferred stock of the par value of $100 per share and 10,000 shares of common stock of the par value of $100 per share to $1,000,000 consisting of 10,000 shares of common stock of the par value of $100 per share.”
14. On May 21, 1925, the articles of incorporation of Squire Dingee Company were amended in accordance with the resolution in paragraph 13 above and the 5,000 shares of preferred stock were redeemed and cancelled as provided in said resolutions. The value of the assets of the company were on said date written down on the books of the company in accordance with the said resolutions.
15. The sum of $37,325 paid for each share of preferred stock upon the redemption thereof was equal to one-fifteenth of the value per share of the capital stock of the Squire Dingee Company as of March 1, 1913.
16. The accumulated undistributed earnings of Squire Dingee Company from March 1, 1913, to May 21, 1925, were in excess of the sum of $186,625.

The respondent determined that the facts constituted a situation described in section 201 (g), Revenue Act of 1926 (made effective January 1, 1925, by section 286). He held, (1) that in 1922 there was a stock dividend, and (2) that in 1925 the company canceled or redeemed its preferred stock “ at such time and in such manner as to make the distribution and cancellation or redemption essentially equivalent to the distribution of a taxable dividend.” The petitioners assail this determination, challenging both propositions.

Section 201 (g) is as follows:

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 the 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 subdivision shall apply only if the cancellation or redemption is made after January 1, 1926.

Since the cancellation or redemption was not made after January 1, 1926, the subdivision only applies if there was a stock dividend in 1922. If, therefore, what was done in 1922 was not the issue of a stock dividend, the determination can not be sustained and there is no need to pursue the inquiry into the second proposition that the time and manner of the redemption were such as to make it essentially the equivalent of a taxable dividend. Conversely, if the redemption in 1925 was not essentially equivalent to a dividend, it matters not whether there was a stock dividend in 1922. The respondent’s determination requires both propositions to support it, and if the stipulated facts are contrary to either, the determination must fall.

The ordinary intendment and purpose of the statute is plain enough. A. stock dividend being constitutionally free from tax, Eisner v. Macomber, 252 U. S. 189, and a stock redemption being a fro tanto liquidation of investment, the two could easily be used in a common plan so as to circumvent the tax which would be imposed if the distribution were made directly by way of ordinary dividend. To bar such circumvention, the Revenue Act of 1921 taxed the distribution as a dividend whether it was made directly as a dividend or by the more roundabout course, and the subsequent statutes have carried the same provisions with such refinements of expression as were found necessary by experience to fulfill the purpose. Revenue Act of 1921, sec.. 201 (d) ; 1924, sec. 201 (f); 1926, sec. 201 (g); 1928, sec. 115 (g). See H. Rept. 1, 69th Cong., 1st sess., p. 5; S. Rept. 52, 69th Cong., 1st sess., p. 15. While the obvious device, by a close corporation having a surplus, consisting of an expansion of capitalization, a stock issue and stock redemption, all within a short time pursuant to a unified plan, is plainly within the statute (see C. B. VIII-2, p. 133), the flexible language of the provision, makes it clear also that its burdens were not to be imposed arbitrarily (see C. B. VI-2, p. 14). As the taxpayer may not, in view of this statute, avoid the tax by an artificial device of empty forms, cf. W. '0. Hmtoon, 14 B. T. A. 459, so the Government may not, under this statute, impose a tax merely because there has been a stock redemption, where the circumstances are free from artifice and beyond the terms and fair intendment of the provision. Of course, where the language of the statute is specific and inelastic there is no room for avoiding its effect, whatever the inconsistency with the general purpose as disclosed by later enactments, cf. John Stewart Bryan, 20 B. T. A. 573; but, generally speaking, the provisions should be treated as special and applied to promote its special purpose (see Lawn et at., 26 B. T. A. 764).

First. — Judged by its purpose and operation, and laying aside the directors’ designation of a stock dividend in the resolution of December 15, 1922, the issue of 1922 was, in our opinion, a stock dividend. It was an increase of capitalization and a proportionate distribution among existing shareholders of new certificates reflecting their unchanged interests in the corporation — a mere proliferation of existing interests. At the moment of change, each shareholder’s proportionate rights were absolutely and relatively the same, except that each in the same ratio had preferred as well as common shares, a difference without significance here. These are the essential characteristics of a stock dividend — those which have always given point to the cases in which the question has arisen, Gibbons v. Mahon, 136 U. S. 549; Towne v. Eisner, 245 U. S. 418; Eisner v. Macomber, 252 U. S. 189; La Belle Iron Works v. United States, 256 U. S. 377; see also Graves v. Graves, 120 Atl. 420; Kaufman v. Charlottesville Co., 23 S. E. 1003; United States v. Siegel, 52 Fed. (2d) 63. We find no support for petitioners’ contention that the surrender of old certificates in exchange for new is inconsistent with a stock, dividend, which is said to connote a retention of the old shares and addition of the new, rather than an exchange. The decisions establish that such difference in the mode of effecting the new capitalization is of no consequence if the essential characteristics of a stock dividend exist. Michaels v. McLaughlin, 20 Fed. (2d) 959; In re Norton's Will, 224 N. Y. S. 77; J. F. Carlston, 22 B. T. A. 217. In Marr v. United States, 268 U. S. 536, the court said of the stock dividend in Eisner v. Macomber: “ It was as if the par value of the stock had been reduced, and three shares of reduced par value stock had been issued in place of every two old shares. That is, there was an exchange of certificates but not of interests.”

Hellmich v. Hellman, 276 U. S. 233, throws no light on the present question, for what was there said in comparing an ordinary cash dividend with a liquidation distribution is entirely apart from the consideration of a stock dividend.

It is not necessary to analyze the statute to determine whether the 1922 issue involved an exchange of property in reorganization, for this could not be definitively determined in this proceeding. Since reorganization is defined to include recapitalization, it is possible that the statutory provisions literally overlap; but this construction would probably be avoided in resolution of the apparent confusion thus created. For a stock dividend is constitutionally free from tax, and there would be much to consider before applying the exchange provisions to its substantial equivalent, either to tax it thereby or to find it doubly free.

Second. — Since the preferred shares were issued in 1922 as a stock dividend, the limitation of the second sentence of subdivision 201 (g) is not applicable, and it is necessary to determine whether the corporation canceled or redeemed (in this case, both) its preferred shares at such time and in such manner as to make the distribution and cancellation or redemption essentially equivalent to the distribution of a taxable dividend. It is stipulated that the amount received by petitioners was not in excess of the earnings or profits accumulated after February 28, 1913, so that if the redemption was substantially equivalent to a dividend, there is no denial that it is taxable.

The facts are devoid of circumstances to indicate artifice, and there is nothing besides the redemption itself to fortify an interpretation of it as the essential equivalent of a dividend. There was in 1922 an expansion of policy which included not merely a stock dividend, within the existing authorized capital, out of surplus, but a capitalization of new values as well as surplus, a new charter authorization of shares including new preferred redeemable at 102, with their issuance, and a new charter authorization of objects of incorporation. Cf. O. B. VI-2, p. 14. After the lapse of over two years, with no evidence of any continuing plan, .the preferred shares were redeemed at $37.32%, canceled, and eliminated from the charter, the common remaining as expanded, and the new objects being unaffected. Unless it can be said that the cash redemption itself, irrespective of the lapse of time and the absence of direct or circumstantial interrelation and of any special manner, imports a time and manner such as to constitute the substantial equivalent of a dividend, the evidence affords no reason for such a decision. The statute does not provide that every cash redemption of shares shall be treated per se as a dividend, but only those which because of some circumstance of time and manner are in fact the essential equivalent of a dividend. Whether this means a preconceived plan to distribute earnings, an approximation of contemporaneous conduct, a substantial restoration of the capital structure to its status quo ante the issue, need not be decided now, because the evidence here arouses none of these questions. The only equivalence to a dividend is that the shareholders received a cash distribution from the corporation, as they would have done if a dividend had been declared and paid. But it would be stretching the legislative assimilation beyond its clear limits to regard this as decisive. It would practically delete from the provision its principal qualifications and imply a waste of words in a section of the statute which purports to be precise.

There is nothing helpful in Phelps v. Commissioner, 54 Fed. (2d) 289, for here there is no anticipatory arrangement to circumvent the tax or other circumstance to show that the substance was at variance with the form.

Since, therefore, the stipulated facts show simply a redemption of part of the shares received as a previous unrelated stock dividend, and there is nothing in time and manner to give it the character of a cash dividend, we hold it not taxable as a dividend, and reverse the respondent’s determination.

Judgment will he entered for the petitioners.


author: Van Fossan :

text:
    Franklin J. Matchette, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 40710.
    Promulgated August 29, 1932.

      R. Kemp Slaughter, Esq., Hugh O. Bide,ford, Esq., and 'William P. MeC'ool, Esq., for the petitioner.

      W. F. Gibhs, Esq., for the respondent.
   OBINION.

Van Fossan :

The first alleged error now at issue in this case is the respondent’s determination that a dividend of $127,750 received by the petitioner from the Hotel Company on February 16, 1923, and paid over by him to the Investment Company on February 20, 1923, constituted income to the petitioner.

Briefly reviewing the facts, we find that on January 23, 1923, the Hotel Company declared a dividend payable on February 10, 1923, to stockholders of record on January 26, 1923. On February 3, 1923, petitioner sold 3,650 shares of the Hotel Company stock to the Investment Company, together with any dividend which may be paid hereafter upon said stock prior to the certificates therefor being transferred upon the books of said company.” The stock certificates were assigned and delivered to the Investment Company. They were transferred of record on the corporate books of the Hotel Company on February 13,1923. The dividend was paid February 16,1923.

It is fundamental that a dividend belongs to the owner of the stock at the time of declaration. Fletcher Cyc. Corp., sec. 3700; Hopper v. Sage, 112 N. Y. 530; 20 N. E. 350. And this is true of dividends declared to stockholders of record on a certain date but payable at a future date — such a dividend belongs to the owner of the stock when declared. Nor, in the absence of agreement to the contrary, will a sale of the stock afterwards carry the dividend with it though it may not be payable or paid until after the date of the sale. Hopper v. Sage, supra. On the other hand, it is also fundamental that in the absence of a contrary agreement, the vendee gets all dividends declared after a sale of the stock.

Applying these principles to the facts, it is clear that, unless the terms of the agreement of sale provided otherwise, the dividend declared January 23 to stockholders of record January 26 belonged to petitioner, Matchette, the stockholder of record until February 13, 1923. When the stock was sold on February 3 it did not ipso facto carry with it the dividend previously declared to stockholders of record on January 26, 1923. That the parties to the sale recognized this principle of law is evident from the fact that they made specific provision as to the disposition of the dividends. They provided that the stock was to carry with it “ any dividend which may be paid hereafter upon said stock prior to the certificates therefor being transferred upon the books of said company.” The certificates were transferred of record on February 13, 1923. The dividend was paid February 16 by check to petitioner’s order. Therefore, the dividend was not paid prior to the transfer of the certificates of record. It follows that neither by the operation of the law of corporations nor by the terms of the contract of sale of the stock did petitioner sell the dividend to the Investment Company. Petitioner was entitled to receive the dividend by the terms of the resolution of declaration; he did not part with the same when he sold the stock; he actually received the dividend from the declaring corporation; it became income to him on receipt and his subsequent disposition of the same is immaterial to the question at issue.

The principles underlying Mason v. Routzahn, 275 U. S. 175, relied on by petitioner are not in conflict with the above. In fact, so far as applicable that decision supports the above conclusion. There the question was whether the date of declaration or the date of payment fixed the time of distribution. The Supreme Court held the date of payment was the date of distribution. Here the basic question is the ownership of the dividend. Other cases cited by petitioner are either not pertinent to this question or are plainly distinguishable.

The respondent is sustained in respect to the taxability of the dividend.

The second issue involves the taxability in 1924 or 1925 of dividends declared by the Hotel Company on December 20, 1924, payable December 31, 1924, to stockholders of record on December 15, 1924. Under our recent decision in Effie B. Shearman, 26 B. T. A. 716, promulgated July 26, 1932, and the reasoning thereof, such dividends constitute gross income to the petitioner for 1924. See also Mary Miller Braxton, 22 B. T. A. 128. In the case at bar the facts supporting that conclusion are even stronger than in the Shear-man case, since the dividends were payable on December 31, 1924, to stockholders of record on December 15,1924. At any time on December 31, 1924, the petitioner could have demanded and received his dividends from the Hotel Company. There was no limiting circumstance such as existed in Cecil Q. Adams, 20 B. T. A. 243; affd., 54 Fed. (2d) 228. The mailing of a check to him was a voluntary act on the part of the corporation having no special legal significance.

Decision will he entered under Rule 50.