author: Arnold:

text:
    Securities-Allied Corporation (Formerly Chatham Phenix Allied Corporation), Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78577.
    Promulgated June 18, 1937.

      Mabel Walker Willebrandt, Esq., and C. J. McGuire, Esq., for the petitioner.

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

Arnold:

This proceeding comes before us on respondent’s determination of a deficiency in petitioner’s income tax for the year 1930 in the amount of $313,012.41. Two issues are presented: First, whether petitioner is a dealer in securities within the meaning of Treasury Regulations 74, article 105, so as to allow it the privilege of returning its income on the basis of inventory, and second, whether petitioner is entitled to deduct any part of the cost of a certain corporation’s debentures held by it as a debt ascertained to be worthless in the year. Another issue raised was conceded by respondent.

The essential facts were all stipulated, a supplemental stipulation being filed on May 14, 1937, for the purpose of clarifying a seeming ambiguity in the original stipulation. Petitioner at the hearing produced two expect witnesses merely to establish the correctness of its method under general accounting practice. Since as to the primary issue the instant case raises the same question as that presented, in respect of its next preceding tax year 1929, by its prior proceeding before this Board, Docket No. 67847, which was decided September 5, 1934 (the opinion being unreported), the parties here have stipulated that the evidence adduced in that case shall be also considered here.

The petitioner corporation was organized on September 28, 1929, under the laws of the State of Delaware. At the time of its incorporation its name was Chatham Phenix Allied Corporation. This name was later changed to Securities-Allied Corporation, the change being a change in name only. By its charter petitioner in general was empowered to buy, sell, and trade in equities, stocks and securities of any kind, to participate in underwritings and syndicates, and to engage in such other investment activities as its board of directors might determine. A copy of the charter and bylaws of the corporaton were put in evidence.

Pursuant to article III of the bylaws of the petitioner the executive committee, composed of five members of the board of directors, was formed. Each morning this committee had a meeting for the purpose of determining what securities should be bought or sold. The corporation had a stock ticker in its office and the members of the executive committee were available for informal consultation during each day. In addition to having general statistical and ticker information at its command, petitioner employed experts to make studies of the financial conditions of various corporations and, based upon their studies, to make recommendations as to the desirability of purchasing securities of the corporations in respect of which the studies were made. Although some investigations were made in 1929 after the petitioner was organized, because of the stock market crash of that year actual purchases of securities in such corporations were not made until the year 1930.

At the time of its organization petitioner issued 1,900,000 shares of nonvoting common stock without par value at the price of $25 per share and 100,000 shares of voting common stock also at the price of $25 per share. This was accomplished by an agreement with a corporation named Chatham Phenix Corporation, under which the latter corporation agreed to subscribe to the entire issue of voting common stock and to purchase or procure purchasers for the 1,900,000 shares of nonvoting common stock. The Chatham Phenix Corporation was an affiliate of the Chatham Phenix National Bank & Trust Co. and the latter company acted as transfer agent of the stock in New York City. The Old Colony Trust Co. of Boston, Massachusetts, was appointed transfer agent in Boston, Massachusetts.

During the calendar year 1930 petitioner was engaged in the business of buying and selling securities. All transactions, except the purchase of bonds of Empire State, Inc., having a par value of $6,750,000, were made through the Chatham Phenix Corporation or through brokers. No purchases or sales were made for the accounts of customers. Among its other activities petitioner financed and underwrote the stock or securities of other corporations. Petitioner had no selling organization of its own, but had available to it the facilities and sales organization of the Chatham Phenix Corporation, which maintained offices in several of the principal cities of the United States. Purchases and sales were made with a view to the gains and profits that might be derived therefrom. Petitioner is what is commonly known as a “management investment trust.”

During the calendar year 1980 petitioner made purchases and sales of stocks and bonds as follows:

Included in the purchases of bonds were $6,750,000, par value of the second mortgage 7 percent, sinking fund gold debentures of Empire State, Inc., which the petitioner acquired directly from Empire State, Inc., for $6,075,000 on April 8, 1930, for the purpose of resale direct to the public. None of these debentures’ was offered for sale and none was sold by the petitioner.

All purchases made by petitioner during the calendar year 1930 were recorded on its books at cost. In closing its books for the calendar year 1930 petitioner followed the method adopted at its organization in 1929 of inventorying its securities on the basis of cost or market, whichever was lower. In many instances at December 31, 1930, market was lower than cost.

The cost of securities owned by petitioner on December 31, 1930, was $31,881,952.68. The value of the inventory exclusive of Empire State debentures on December 31, 1930, valued at cost or market, whichever was lower, was $16,988,557.51. In closing its books for the year ended December 31, 1930, petitioner made an adjustment to reflect a decline in the market value of its inventory by writing off under profit and loss the amount of $8,818,395.17, which, however, did not include any adjustment for the decline in the value of the Empire State debentures which had cost $6,075,000. It was stipulated that on December 31, 1930, the Empire State debentures had declined in value and were worthless to an extent sufficient to eliminate any remaining taxable income, provided (a) petitioner- is entitled to inventory its securities at cost or market, whichever was lower, or (b) is entitled to a deduction on account of the partial worthlessness of such debentures as a bad debt. By supplemental stipulation filed May 14, 1937, the parties agreed that this should not be construed as an admission by respondent that debentures of Empire State, Inc., will be partially worthless to any extent at maturity.

On its books at December 31, 1929, petitioner inventoried securities on hand on the basis of cost or market, whichever was lower. The respondent denied petitioner the right to inventory its securities and was sustained by this Board in the proceeding in Docket No. 67847. A petition for review of the Board’s determination is now pending in the United States Circuit Court of Appeals for the Second Circuit.

The cost of securities owned by petitioner on December 31, 1929, was $16,825,490.84. The value of such inventory on December 31, 1929, valued at cost or market, whichever was lower, was $15,864,066.25. In closing its books for the year ended December 31, 1929, petitioner made an adjustment to reflect this decline in inventory value by writing off against profit and loss the difference of $961,424.59.

During the year 1930 petitioner purchased, for resale in the ordinary course of its business, 171,623 shares of its own common capital stock at a cost of $3,807,561.20. In the year 1930 petitioner sold these shares for $3,372,938.11, thus sustaining a loss of $434,623.09. In its income tax return for 1930 petitioner reported a net profit of $1,810,136.99 on sales of securities. This amount did not reflect the aforesaid loss of $434,623.09, and that loss was not allowed as a deduction from gross income in computing the tax liability of petitioner as shown by the deficiency notice. Respondent now concedes that the amount of $434,623.09 constitutes an allowable deduction pursuant to the provisions of T. D. 4430, C. B. XIII-l, p. 36.

In its income tax return for the calendar year 1930, petitioner reported a loss of $5,735,302.82. The loss as shown by its books for that period is $4,492,047.27. The excess of the loss shown on the tax return over that shown on the books ($1,243,255.55) represents nontaxable dividends ($1,244,221.96) minus depreciation of $966.41. In arriving at the loss shown on its return and the loss shown on its books, petitioner deducted from its gross income the inventory adjustment of $8,818,395.17, referred to above. Respondent denied petitioner the right to inventory its securities at December 31, 1930, on the basis of cost or market, whichever was lower. In his determination of taxable income for the calendar-year 1930, respondent has given effect to a net deduction of $574,080.29, which represents the excess of the cost over the market value at December 31, 1929, of securities on hand at December 31, 1929, which were sold during 1930.

Petitioner kept its books of account and made its income tax return on the accrual basis.

Respondent, in his deficiency notice from which the instant appeal was taken, determined that petitioner’s net income for the calendar year 1930 (without employment of inventories) was $2,608,436.75.

The issues were formulated and their outcome, as applied to the facts stipulated, were stipulated as follows:

(a) If petitioner is entitled to inventory toe securities which it had on hand at the beginning and those which it had at the end of the year 1930, it sustained a loss in that year and there is no deficiency.
(b) In the alternative, if petitioner is entitled at December 31, 1930, only to inventory the debentures of Empire State, Inc., it sustained a loss in the year 1930 and there is no deficiency.
(c) In the alternative, if petitioner is entitled to deduct, as a debt worthless in part, the loss which it suffered on the said debentures of Empire State, Inc., there is no deficiency. [Amended by the supplemental stipulation to indicate that “nothing in [this paragraph] . . . shall be construed as an admission by the Respondent that debentures of Empire State Inc. will be partially worthless to any extent at maturity.”]
(d) The loss of $434,623.09 sustained by petitioner in the year 1930, through trading in its own stock, as determined by respondent in the Notice of Deficiency, reduces petitioner’s' income to $2,173,813.66. This adjustment would reduce the deficiency to $260,857.64.

1. The first question is whether petitioner is a dealer in securities.

The Commissioner, in article 105 of Treasury Regulations 74, defines a dealer in securities as a merchant of securities with an established place of business regularly engaged in the purchase of securities and their resale to customers, as one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom. Taxpayers who buy and sell or hold securities for investment or speculation and not in the course of an established business are not dealers in securities.

We held in the earlier case that petitioner did not fall within this category in 1929 and so was not entitled to claim the privilege of inventory, relying on Adirondack Securities Corporation, 28 B. T. A. 61; Northeastern Surety Co., 29 B. T. A. 297; James B. Lowell, 80 B. T. A. 1297; Alfred E. Hamill, 30 B. T. A. 955. In 1929 the petitioner carried on investigations of certain corporations with a view to purchase of their securities, but, because of the stock market crash of that October, made no actual purchases in that year. Its purchases and sales of stock and securities in the instant year, 1930, were, however, extensive, as the stipulated facts show. The character of petitioner as a management investment trust remained the same for both years.

Petitioner produced at the hearing of the instant case two expert witnesses of high qualifications and standing in their profession of public accountancy, Hughes and Auld. They testified, subject to objections which are now overruled. They stated that recognition of the shrinkage in value of securities at the close of the taxable year, by taking cost or market, whichever was lower, would most clearly reflect income. This was the method followed by petitioner in 1929 and 1930. But the latter witness admitted on cross-examination that the inventory method would most clearly reflect the income of any taxpayer engaged in buying and selling any commodity or merchandise, provided there was fluctuation of value and the means of readily ascertaining the degree of that fluctuation. Upon this expert testimony, however, petitioner rests the contention that the respondent has no discretion under section 41 of the Revenue Act of 1928, set out in the margin, to require the petitioner to compute its income otherwise than by inventories. The invalidity of this argument is apparent on its face, for the very section upon which petitioner relies refers at its close to the inventories section 22 (c), set out in the margin, which expressly leaves to the Commissioner, and not to the taxpayer, the determination of the conditions under which inventories may be employed—“Whenever in the opinion of the Commissioner the use of inventories is necessary * * (Italics supplied.)

The inventory method is entirely exceptional, and as an exceptional method its employment is closely confined by the statute to exceptional circumstances which are to be determined by the Commissioner in his discretion.

As to the Commissioner’s discretion, we said in the Hamill case, supra (p. 958) :

The method of determining taxable income by the use of inventories has always been recognized as special and as involving problems of general administration peculiarly cognizable by the Commissioner. ⅜ * ⅜ [Quoting sec. 22 (c), Rev. Act 1928.] Fortified with such a clear sanction in the statutory grant of power, the administrative determination in such’ a case must survive all but the strongest attack. Short of being arbitrary or capricious or based on a clear demonstration of error, the determination in any single instance ought not to be disturbed. This is not a matter of jurisdiction, for the Board clearly has the power of review, Blair v. Oesterlein Machine Co., 275 U. S. 220, but is rather an attitude of the Board in the exercise of its jurisdiction not to interfere lightly with general administrative matters which the Congress has entrusted to the Commissioner’s discretion. * * *

And we further pointed out in that case that proof that the respondent has erred in denying use of this method puts a heavier burden on the taxpayer than the overthrowing of a purely factual determination. Respondent’s determination may not be arbitrary, Reynolds Cattle Co., 31 B. T. A. 206, but it can be disputed in the courts only if it is “plainly arbitrary”, Lucas v. Kansas City Structural Steel Co., 281 U. S. 264; Finance & Guaranty Co. v. Commissioner, 50 Fed. (2d) 1061. Here petitioner has put in no evidence to show a distortion of income resulting from the denial of inventories; the testimony of its witnesses stops far short of this. It is not shown that the Commissioner’s action does not properly reflect the income or that it is arbitrary or capricious.

Petitioner relies on the recent cases of Commissioner v. Stevens, 78 Fed. (2d) 713 (C. C. A., 2d Cir.), affirming Harry E. R. Hall, Estate, 29 B. T. A. 1255; and Commissioner v. Charavay, 79 Fed. (2d) 406 (C. C. A., 3d Cir.), affirming 29 B. T. A. 1255.

In the Stevens case (sub nom. Hall) we pointed out that the partnership clearly dealt in the stocks involved “primarily as a merchant.” And the Circuit Court in its affirming opinion also called attention to the same'fact, saying:

The dealings of the respondent’s firm may not be said to be speculative only. The firm held at all times large blocks of stock which it sold in small lots to its various customers, numbering at least one hundred, at different times, and it sold at different prices. It bought additional blocks of stock with which to replenish its supply. At all times it had shares of the stock to be sold for profit or loss, as the case may he, on resale. This was its wares or stock in trade. While Seeley was a speculator, or trader, in the sense of speculation, this firm, as merchants, bought stock to keep on sale for its customers’ supply and demand.

The Circuit Court thought, as we did, that the fact that petitioner’s customers were brokers was immaterial, but the essential fact was clearly established, that the firm bought stock primarily for resale to its customers. The Charavay case arose out of the same state of facts as the Stevens case and was disposed of on the same ground. Petitioner here was buying and selling for the gains and profits to be derived, according to the stipulated facts, but any shift-in its securities made by an investment trust might well be done with a view to gain. That fact .does not establish petitioner’s status as a “merchant.” Merchants and speculators alike hope for gain on their turnover, but this is not, enough. The taxpayer must be “regularly engaged in the purchase of securities and their resale to customers.” It must hold itself out as a merchant to any who would buy, and would thus presumably acquire in time regular customers. Oil Shares, Inc., 29 B. T. A. 664; Schafer v. Helvering, 299 U. S. 171, affirming 32 B. T. A. 289.

Learned Hand, J., in Seeley v. Helvering, 77 Fed. (2d) 323, drew the essential distinction between a merchant and a speculator in these words:

* * * Article 105 meant by a “merchant” a dealer who bought securities for himself and sold them to investors who might or might not rely upon his advice. While the security business is usually conducted by brokers who act only as agents, such merchants are by no means unknown; they do a business exactly like any other merchant. Besides, a merchant, ordinarily at least, does not resell to the same class of persons from whom he buys; he is a middleman in distributing the goods. Seeley was a speculator.

The Supreme Court, affirming the Circuit Court in Schafer v. Helvering, supra, quotes with approval the language of the Board as follows:

The Board of Tax Appeals found: “The stocks in dispute were purchased for the firm’s own account solely on expectation of a rise in the market, for sale to any one at a profit, ‘as distinguished from a purchase to create a stock of securities to take care of future buying orders in excess of selling orders.’ ” “They were purchased solely in expectation of a rise in the market, for the partnership’s own account of resale, to any buyer, at a profit. The meaning of ‘dealer in securities’, as defined in the controlling regulation, has been considered many times by the courts, and this Board. It is limited to one who, as a merchant, buys and sells securities to customers for the profit thereon.”

And in the companion case, Helvering v. Fried, 299 U. S. 175, decided by the Supreme Court on the same day, the Court sustained the contention of the taxpayer, a “specialist” in certain stocks on the New York Stock Exchange, that it was a “dealer in securities”, on the ground that it “had an established place of business; that it regularly-engaged in the purchase of certain specified securities and their resale to customers; that as a merchant it bought securities and sold them to customers with a view to the gains and profits that might be derived therefrom.”

We have carefully considered all the evidence in the record and conclude that it is not sufficient to overcome Commissioner’s determination that petitioner was not a dealer in securities within the meaning of Treasury Regulations 74, article 105, so as to allow it the privilege of returning its income on the basis of inventory for the year 1930.

Petitioner alternatively contends that if it was not a dealer in securities in general, it was at least so in respect to the Empire State debentures which it held on December 31, 1930, the stipulated decline in the value of which from cost would, if allowed, -wipe out the deficiency. This contention rests on the stipulated facts that these debentures were bought by petitioner directly from Empire State, Inc., “for the purpose of resale direct to the public.” There immediately follows in the stipulation, however, this fact: “None of these debentures were offered for sale and none were sold by the petitioner.” We think that any claim of right of inventory that might be founded on the first statement is negatived by the second. Petitioner acquired these debentures on April 8, 1930, and had not offered them for sale by December 31 of that year. A bare intention to sell, even if “the public” be taken as the equivalent of “customers” in the regulations, without more can not convert the petitioner into a “merchant * * * regularly engaged” in buying and selling securities to customers. It -was held, in an analogous situation in Vaughan v. Commissioner, 85 Fed. (2d) 497, that something more ought to be shown than a mere statement by the taxpayer that he held particular bonds “for the purpose of * * * supplying customers when they wanted to buy them.” As we have already said, the privilege of inventory is an exceptional one under the statute, and to claim its benefit the petitioner should clearly bring himself within the privileged class as defined by the regulations.

We are of the opinion that the privilege of inventory in respect of the Empire State debentures must likewise be denied.

2. We now pass to petitioner’s second alternative contention; that petitioner is entitled to deduct as a debt worthless in part, under section 23 (j), Revenue Act of 1928, the difference between the cost to petitioner of the Empire State debentures and their stipulated value on December 31, 1930. Such a deduction would wipe out the deficiency. This claim rests on Regulations 74, article 194, set out in the margin. A careful reading of the regulations makes it clear that a deduction on bonds is to be taken only under strictly limited conditions, none of which petitioner has met.

But in its original brief petitioner contended that respondent had admitted the partial worthlessness of these debentures in his stipulation. The precise words quoted from paragraph 5 are as follows: “On December 31, 1930, the Empire State debentures had declined in value and were worthless to an extent sufficient to eliminate any remaining taxable income, provided petitioner is entitled to inventory its securities at cost or market, whichever was lower, or entitled to a deduction on account of the partial worthlessness of such debentures.” The supplemental stipulation provides:

* * * that nothing contained in paragraph 5 * * * shall be construed as an admission by the respondent that debentures of Empire State Inc., will be partially worthless to any extent at maturity.

Obviously the decline in value and partial worthlessness, as stipulated, means nothing more than a decline in fair market value of the debentures on the date mentioned. It goes no further, therefore, than to relieve the petitioner of proving that fact. Other requirements provided by the regulations cited must be established by petitioner before it is entitled to the deduction, among which is that obligor’s financial status is such that there is no reasonable expectation of greater recovery upon maturity of the obligations. Admission of a decline in value of securities prior to maturity by no means implies an admission as to the obligor’s ultimate condition or that its obligations will not be paid or paid only in part upon maturity. We may take judicial notice of the fact that after October 1929 there was a general decline of many stocks and bonds on the market, regardless of the issuing corporation’s assets, and this may account for the decline in these bonds. The regulations cited provide that the taxpayer must “demonstrate to the satisfaction of the Commissioner” that the “financial condition of the debtor, or conditions other than market fluctuations” are such that he, the bondholder, will “recover upon maturity none or only a part of the debt evidenced by the bonds”, and then and then only, may he deduct the uncollectible part of the debt evidenced by the bonds. ' We know nothing of the Empire Co.’s assets. We know nothing of its liabilities except as to the bonds here involved. We do not even know when the bonds will mature. Petitioner has presented no evidence upon this point or upon the financial condition of Empire State, Inc., in December 1930, or upon its probable state at the time of the bonds’ maturity. Without such evidence we can not be expected to overthrow the respondent’s determination. Citizens National Bank of Orange, 33 B. T. A. 758. In the circumstances, the deduction must be denied.

The issue of the loss claimed on the sale by petitioner, of certain shares of its own capital stock purchased in the market has been stipulated in petitioner’s favor.

Reviewed by the Board.

Judgment will be entered wider Rule 50.

Leech and Disney concur only in the result.

       SEC. 41. GENERAL RULE.
      The net income shall be computes upon the basis of the taxpayer’s annual accounting period (fiscal year or calendar year, as the case may be) in accordance -with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. If the taxpayer’s annual accounting period is other than a fiscal year as defined in section 48 or if the taxpayer has no annual accounting period or does not keep books, the net income shall be computed on the basis of the calendar year. (For use of inventories, see section 22 (c).)

       Sec. 22. (c) Inventories.—Whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.

       Art. 194. Worthless securities.—Where bonds purchased before March 1, 1913, depreciated in value between the date of purchase and that date, and were in a later year ascertained to be worthless and charged off, the owner is entitled to a deduction in that year equal to the cost of the bonds. Bonds purchased since February 28, 1913, when ascertained to be worthless, may be treated as bad debts to the amount actually paid for them. Bonds of an insolvent corporation secured only by a mortgage from which on foreclosure nothing is realized for the bondholders are regarded as ascertained to be worthless not later than the year of the foreclosure sale, and no deduction for a bad debt is allowable in computing a bondholder’s income for a subsequent year. A deduction for a bad debt based upon the value of the debt on March 1, 1913, is allowable only when such value is established to the satisfaction of the Commissioner.
      A taxpayer (other than a dealer in securities) possessing debts evidenced by bonds or other similar obligations can not deduct from gross income any amount merely on account of market fluctuations. Where a taxpayer ascertains, however, that due, for instance, to the financial condition of the debtor, or conditions other than market fluctuations, he will recover upon maturity none or only a part of the debt evidenced by the bonds or other similar obligations and so demonstrates to the satisfaction of the Commissioner, he may deduct in computing net income the uncollectible part of the debt evidenced by the bonds or other similar obligations.


source: Caselaw Access Project

author: Black:

license: Public Domain

text:
    Ernest W. Brown, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75962.
    Promulgated June 18, 1937.

      David I. Mackie, Jr., Esq., for the petitioner.

      John H. Pigg, Esq., for the respondent.
   OPINION.

Black:

The Commissioner has determined that the transactions enumerated in the foregoing findings of fact did not constitute a “sale or exchange” of capital assets by petitioner to Ernest W. Brown, Inc.,- and therefore petitioner is not entitled to have the gain resulting from such transactions taxed at capital gain rates. There is no dispute that petitioner had owned and held the debentures for more than two years prior to the date of their redemption by the corporation. But the Commissioner contends that the facts connected with the transactions show that the $35,000 debentures were redeemed by the corporation rather than acquired by purchase and exchange and therefore the rule announced by the Board in John H. Watson, Jr., 27 B. T. A. 463, and Arthur E. Braun, Trustee, 29 B. T. A. 1161, is applicable.

Petitioner contends that those cases are distinguishable on their facts. Petitioner says in his brief that:

Each of those eases involved ail actual payment, discharge and cancellation of the obligations there in controversy, and that here the obligor had no legal right to demand that payment of the face value of the debentures be accepted on January 23 and July 2, 1931. On the contrary as a result of a purely voluntary agreement between the parties, one group of debentures was exchanged for securities and a small amount of cash and the other group was sold to the corporation for cash. The obligation of the indebtedness was never cancelled or discharged but on the contrary the debentures were kept alive in the corporate treasury for such proper uses as the corporation might see fit to make of them. A redemption of the debentures was never intended either by the corporation or the petitioner.

We can not agree to the validity of the distinction which the petitioner seeks to draw. It is true that in both the Watson case and the Brawn, case there was a formal call of bonds for redemption in accordance with the terms of the bonds. Here there was no formal call of the bonds for redemption, but in each instance there was a resolution adopted by the board of directors of the corporation authorizing and directing the treasurer of the corporation to apply to the retirement of debenture bonds the sum named in the resolution as being available for that purpose. The bonds themselves contained a provision that they were redeemable at par at any time before maturity on any interest date in multiples of $1,000 at the option of the company.

It is true that the redemption of the $35,000 bonds in question appears to have been in accordance with a voluntary agreement between petitioner and Ernest W. Brown, Inc., the obligor of the bonds, but it seems to us that, viewing all the facts in the case, the bonds were being redeemed in much the same manner as had originally been contemplated and that there is nothing in the facts which we have here which would serve to distinguish this case from the Watson and Brawn cases referred to above. We do not think that the fact that, in the redemption on January 23, 1931, of $20,000 of the debentures petitioner there was paid only $612.50 in cash and the balance was paid in marketable securities at their fair market value, would serve as a valid distinctiton.

Petitioner, contends in the alternative that if we hold that the facts of the instant case do not distinguish it from the Watson and Brawn cases, we should overrule those cases and go back to the rule announced by the Board in Henry P. Werner, 15 B. T. A. 482, which was itself overruled by the Watson case.

One of petitioner’s arguments as to why we should do this is that Congress in the 1934 Act, section 117 (f), has dealt with the very situation which we have here and has provided that sums received in the retirement of bonds shall be considered as amounts received in exchange therefor.

Section 117 of the Revenue Act of 1934 deals with capital gains and losses and subsection (f) of that section reads as follows:

(f) Retirement of Bonds, Etc.—For the purpose of this title, amounts received by the holder upon the retirement of bonds, debentures, notes, or certificates or other evidences of indebtedness issued by any corporation (including those issued by a government or political subdivision thereof), with interest coupons or in registered form, shall be considered as amounts received in exchange therefor.

There is nothing to indicate that it was the intent of Congress that the provisions of this subsection should be retroactive or that Congress considered the subsection as being declaratory of what was already existing law. We have examined the House Ways and Means Committee Report which accompanied H. R. 7835, which with certain changes became the Revenue Act of 1934, and this report does not shed any light on the reasons for the enactment of subsection (f) of section 117, of the Revenue Act of 1934. The Report of the Senate Finance Committee is likewise silent upon the subject.

We see no reason to give retroactive application to the provisions of said subsection or to hold that it was merely declaratory of existing law and by reason thereof we should overrule the Watson and Brawn cases. Therefore for the reasons above stated, we sustain the determination of the Commissioner on the only issue submitted to us for decision.

Reviewed by the Board.

Judgment will be entered for the respondent..


author: Sternhagen :

text:
    William H. Simon, Petitioner, v. Commissioner of Internal Revenue, Respondent. Fanchon Simon, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 82173, 82174.
    Promulgated June 18, 1937.

      Elias J. Aye, Esq., and Gerald Bridges, Esq., for the petitioners.

      Byron M. Coon, Esq., for the respondent.
   OPINION.

Sternhagen :

The petitioners, husband and wife, residing in California, contest deficiencies determined in respect of their community income for 1933, amounting to $265.81 each. Of three items of adjustment, two have been amicably settled and only one remains to be decided. This is the correctness of a deduction of $1,125 on each' return, or $2,250 in all, taken as interest paid, which the Commissioner disallowed:

* * * for the reason that the obligation on which the interest was paid was the obligation of the Namyl Company. It is held that, as the obligation is not your obligation and was paid in behalf of another, the amount paid is not deductible from your income. [Citing P. P. Griffin, 7 B. T. A. 1094.)

The facts were stipulated and need not be set forth in detail.

In April 1932 petitioner was president and a director of the Namyl Co. That corporation had become the owner of realty subject to a deed of trust to secure a note given by the preceding purchaser for $37,500, with interest at 7 percent. The last interest had not been paid. By agreement with the Title Insurance & Trust Co., which held the note, the maturity of the note was extended from September 28, 1932, to September 28, 1935, and the rate of interest reduced to 6 percent. Petitioner was individually a party to this agreement, and the provision relating to him is as follows:

4th. Simon hereby undertakes and agrees with the Trust Co. that he will pay for and on behalf of The Namyl-Co., before the same become delinquent, the following designated taxes on said real property, to-wit:
(a) the second installment of the taxes for the fiscal year 1931-1932;
(b) both installments of the taxes for the fiscal year 1932-1933; and
(c) the first installment of the taxes for the fiscal year 1933-1934,
and Simon also undertakes and agrees with the Trust Co. to pay to the Trust Co. on behalf of The Namyl Co. when due each installment of the interest which accrues on said Thirty-seven Thousand Five Hundred Dollar note during the period of the two years next succeeding the date of this agreement, and Simon pays upon the execution hereof Five Hundred Sixty-two and 50/100 Dollars ($562.50), being the quarterly installment of interest on said Thirty-seven Thousand Five Hundred Dollar note which fell due on the 28th day of March, 1932, at, however, the reduced rate of six per cent effected hereby.

The Namyl Co. became insolvent in 1933, and petitioner, in 1933, “pursuant to the agreement”, paid the interest, amounting to $2,250.

In 1934 the Namyl Co. reconveyed the property, its only asset, to the holder of the note in lieu of foreclosure, and the note was canceled.

The statutory deduction for interest is in the following language:

All interest paid or accrued .within the taxable year on indebtedness, * * *. {Revenue Act of 1932, sec. 23 (b).]

So far as the stipulation shows, the principal indebtedness on the note was solely that of the Namyl Co., and the interest which petitioner undertook to pay was not interest on his indebtedness, and properly speaking may not as to him be called interest at all. See Morris Plan Co. of Binghamton, 26 B. T. A. 772, 777; Helen B. Sulzberger, 33 B. T. A. 1093, 1099; Harvey M. Toy, 34 B. T. A. 877, 881. Indeed, the nature of his payment can not, from the facts in evidence,, be described except generally as the consideration for the noteholder’s extension to the principal obligor of the maturity of the note and the reduction of the rate of interest. Although these considerations operated more directly to the Namyl Co., the obligor on the note, they also were enough to support the petitioner’s promise. Still his promise was not one to pay interest on his indebtedness. See Sand Springs Railway Co., 21 B. T. A. 1291, 1310.

Congress meant to provide a deduction not of any payment that a taxpayer may choose to label interest, but only of such as is interest in truth. Baltimore & Ohio Railroad Co. v. Commissioner, 78 Fed. (2d) 460. It used the term in its ordinary meaning. Old Colony Railroad Co. v. Commissioner, 284 U. S. 552; Corbett Investment Co. v. Helvering, 75 Fed. (2d) 525. The assumption by a third person to pay an obligor’s interest directly to the obligee may be a gift or support and maintenance, Colston v. Burnet, 59 Fed. (2d) 867; certiorari denied, 287 U. S. 640; or alimony, Longyear v. Helvering, 77 Fed. (2d) 116; or rent, Charles R. Holden, 27 B. T. A. 530; or the purchase price of assets, Automatic Sprinkler Co. of America, 27 B. T. A. 160, deductible or not, as the case may be. But since the statute expressly classifies the deductions which are allowable, it is important that the classification be kept clear and not be clouded by specious use of its terms.

The petitioner’s argument treats Simon’s obligation as one of guaranty of the Namyl Co.’s obligation for interest, and shows that under California law “a guarantor is directly and primarily liable for the payment of the debt guaranteed.” Even if this be correct, and the words of the agreement, “on behalf of The Namyl Company”, are to be treated as words of guaranty, this still does not demonstrate that Simon’s obligation is as to him one for interest. See Eugene W. Small, 27 B. T. A. 1219.

The Commissioner correctly disallowed the deduction taken as interest. Whether there are other grounds to support a deduction by petitioner in either 1933 or later years can not be decided upon the present record, since the issue was plainly stated and the stipulation adjusted to it. General Utilities & Operating Co. v. Helvering, 296 U. S. 200.

Judgment will be entered under Rule 50.

       Whether he was a shareholder does not appear from the stipulation.

         Law of Federal Income Taxation, Paul and Mertens, § 24.10.


author: Murdock :

text:
    International Mortgage and Investment Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78741.
    Promulgated June 18, 1937.

      Clarence Castimore, Esq., and Walter B. Schoenberg, Esq., for the petitioner.

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

Murdock :

The Commissioner filed no brief but stated in a memorandum filed at the hearing that he relied upon the cases of T. W. Henritze, 28 B. T. A. 1173, and Wilbur F. Burns, 30 B. T. A. 163; affd., 85 Fed. (2d) 8; certiorari denied, 299 U. S. 592, in which it was held that restrictions on the sales of stock did not establish the absence of fair market value of the shares. Since the hearing, however, the Supreme Court has decided the case of Helvering v. Tex-Penn Oil Co., 300 U. S. 481, in which the Court held that certain shares of stock restricted as to sale had no fair market value, saying: “In the peculiar circumstances of this case, the shares of Transcontinental stock, regard being had to their highly speculative quality and to the terms of a restrictive agreement making a sale thereof impossible, did not have a fair market value, capable of being ascertained with reasonable certainty, when they are acquired by the taxpayers.” The petitioner’s contention is that the repayments of mortgages received by its agents in Germany from July 13 to the end of the year were not unqualifiedly available and were not constructively received by it for Federal income tax purposes, thus, the excess in marks over the cost of the mortgages in. marks, was not income received by the petitioner in 1931.

The petitioner in years prior to 1931 took dollars into Germany. The rate of exchange at that time was 4.198 marks to the dollar. It used the money to purchase German mortgages at less than their face value. Some of those mortgages were paid off during the taxable year between July 12 and December 31, and the petitioner’s agents received from the mortgagors more marks than the mortgages had cost the petitioner. Measured in marks, the petitioner had' income from its business in Germany, but income for our Federal income tax purposes is measured only in terms of dollars. James A. Wheatley, 8 B. T. A. 1246; North American Mortgage Co., 18 B. T. A. 418; Frederick Vietor & Achelis v. Salt's Textile Manufacturing Co., 26 Fed. (2d) 249; New York Life Insurance Co., 24 B. T. A. 1217; affd., 65 Fed. (2d) 845; certiorari denied, 290 U. S. 682. The excess of amount realized over cost of the mortgages during that period was not measurable in terms of dollars. None of ¿/the marks received by the petitioner’s agents representing repayment of mortgage principal could be removed from Germany either physically or by way of credit during the remainder of the taxable year. The dollar equivalent of those marks could not be obtained. ,/The petitioner did not have unrestricted use and enjoyment of the marks. It had á claim against its agents for the amount of the marks but it could not remove the credit or the marks from Germany. It could not use the marks to retire its bonds as it desired to do. Just at the end of the year there was a regulation passed */ which permitted reinvestment under certain circumstances. But proceeds of such reinvestment would likewise be blocked arid the regulation in no way benefited the petitioner during 1931. The petitioner had no way of obtaining these funds during 1931. It tried to have the funds released, but was unable to have any of them released until a number of years later. Thus it appears that these particular marks during 1931 were subject to a very serious restriction and were in no sense the equivalent of free marks. It was, therefore, improper to compute a gain to the petitioner from the .repayment of the mortgages by translating the excess marks received ^ into dollars at the rate of exchange applicable to free marks. The petitioner had no gain during 1931 from the receipt of the blocked marks.

The situation in regard to the funds received prior to July 13. representing repayment of mortgages, is entirely different. The marks received in payment of those mortgages were not restricted at the time received, but were freely negotiable, convertible, and transferable. The petitioner could have removed them from Germany had it so desired. The transactions were complete, the gain was actually realized by the taxpayer, and it properly reported that gain. After the gain was realized, some of the marks were apparently allowed to remain in German banks until they became blocked on July 13, but that is no reason for holding that the gains were not realized. Once income is earned and realized, it must be reported as income. Money deposited in a bank may be lost. If it is lost, a deduction is allowed for loss. But the owner of the deposit can not go back and claim that income deposited in the account was not income in the first place because it was subsequently lost. The blocking of the marks on deposit on July 13 might have resulted in a loss to the taxpayer. But the evidence before the Board does not show that there was any loss to the taxpayer in 1931 from the blocking of its deposit accounts in the German banks. The pleadings on this point are not satisfactory, but even if they were, it appears that the petitioner properly reported its income from payments made prior to July 13 and is not..entitled to any deduction on account of deposits in the banks on July 13.

Reviewed by the Board.

Decision will be entered under Rule 50.


author: Black : Harron,

text:
    Thomas DeC. Ruth, Sally W. Ruth, and Walter N. Ruth, Executors of the Estate of Frederick S. Ruth, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 80840.
    Promulgated June 22, 1937.

      O. H. Chmillon, Esq., Robert N. Miller, Esq., Ewing Everett, Esq., for the petitioners.

      L. S. Pendleton, Esq., for the respondent.
   OPINION.

Black :

The issue in this proceeding requires that this Board construe the meaning of section 303 (a) (1) of the Revenue Act of 1926 and how it is to be applied where an estate in probate is insolvent and where the gross estate for Federal estate tax purposes, as determined under the provisions of section 302, is greater than the estate in probate under the laws of the jurisdiction of the domicile of the decedent.

The issue as to the application of section 303 (a) (1) under the facts here arises in the following way. Under the laws of Florida, the proceeds of life insurance policies taken out on his own life by a decedent, made payable to beneficiaries other than his estate and not taken out for the benefit of creditors, are exempt from the claims of creditors and do not go into the hands of the executor of an estate. Compiled General Laws of Florida, 1927, section 7065; Bradford v. Watson, 65 Fla. 461; 62 So. 484; Milam v. Davis, 97 Fla. 916; 123 So. 668. Although such life insurance policy proceeds are not part of the decedent’s estate for purposes of probate, they are part of the gross estate for purposes of Federal estate taxation. Congress, in the Revenue Act of 1919, added the provision (section 302 (g) of the Revenue Act of 1926) requiring that proceeds of insurance in excess of $40,000 received by beneficiaries should be included in the gross estate. Congress intended an estate tax on such proceeds. An anomalous situation results, for the gross estate for Federal estate taxis greater than the decedent’s estate subject to the payment of claims of creditors and expenses incident to death and administration and the literal application of section 303 (a) (1), permitting deduction of the amount of the claims of creditors against the decedent’s estate to the extent allowed by the laws of the jurisdiction under which the estate is being administered, results in claims for deductions in an amount that may not be received by creditors where the estate is insolvent. So, in this proceeding, the estate is valued at $1,157,127.11; the claims of creditors exceed $1,342,119.89. These are valid bona fide claims which the laws of Florida allow; i. e., they are entitled to payment in full and would be paid out of the estate if it were solvent. The claims may not be paid in full out of the decedent’s estate that we are concerned with here. But the arithmetical calculations in computing net estate for Federal estate tax are such that there is no estate tax. In our opinion this is the proper' result of applying section 303 (a) (1) under the facts before us, and the respondent is in error in limiting the deductions for claims of creditors to a sum no greater than the value of the probated estate subject to the payment of the claims.

The pertinent statutory provision does not limit deductions for valid claims of creditors to those which are both allowed by local probate laws and paid or payable. The statute specifically states that deductions may be made for the amount of claims that are allowed. Congress was aware of the fact that proceeds of insurance policies are, in some states, exempt from claims of creditors. But Congress has not provided that deductions for claims of creditors may not be allowed from a gross estate including the proceeds of life insurance in excess of the amount which is payable from the estate in probate. Congress has provided in section 303 (a) (1) that all claims which were incurred or contracted bona fide and for an adequate and full consideration in money or money’s worth and are allowed by the laws of the jurisdiction under which the estate is being administered, shall be deducted from the gross estate.

The Report of the House Committee on Ways and Means (64th Cong., 1st sess., Report No. 922, Estate Tax), in discussing the provision of the law here involved, among other things, says:

* * * In determining the value of the net or taxable estate, deductions for all valid claims against the estate are allowed from the gross value of the estate * * * *.

See also Report of the Senate Finance Committee, 64th Cong., 1st sess., Report No. 793, part 1.

We believe the wording of section 303 (a) (1) requires application as the petitioner contends and that any other application and construction would require us to supply that which the respondent contends is an omission in the statute by construing section 303 (a) (1) to allow deductions only to the extent of the value of the estate available to pay them. We may not undertake legislative functions. See Edith M. O'Donnell, 35 B. T. A. 251.

This issue, under similar facts, has been before this Board and the courts several times. In each instance it has been held that the full amount of valid claims incurred or contracted bona fide and for an adequate and full consideration in money or money’s worth, and which are allowed by the laws of the jurisdiction under which the estate is being administered, is deductible from the gross estate. See Union Guardian Trust Co., 32 B. T. A. 996; Mary Q. Hallock, 34 B. T. A. 575; Edna F. Hays et al., Executors, 34 B. T. A. 808; Edith M. O'Donnell, supra; Commissioner v. Strauss, 77 Fed. (2d) 401; Commissioner v. Ames, 88 Fed. (2d) 388; Commissioner v. Windrow, 89 Fed. (2d) 69; Helvering v. Northwestern National Bank, 89 Fed. (2d) 553.

On the authority of the decisions cited above, the action of the respondent in this case is reversed.

Reviewed by the Board.

Decision will be entered- for the petitioner.

Harron,

dissenting: I respectfully dissent from the majority opinion.

The petitioner contends that since the valid claims against the estate, plus the $100,000 statutory exemption, are in excess of $1,342,119.89, there is no taxable net estate. The respondent contends in substance that, since the laws of Florida do not allow claims against the proceeds of life insurance policies which are not imposed with a trust for the benefit of creditors, the decedent’s net estate for Federal estate tax purposes can not be less than the proceeds of the insurance policies less the statutory exemptions totaling $140,000, or the net amount of $84,992.78.

The respondent’s contention may be stated in another way, as follows: the value of decedent’s estate in process of administration in Florida is $1,157,127.11. The proceeds of the insurance policies are not part of the estate in administration. The valid claims against the estate exceed $1,157,127.11. Since the estate is insolvent the laws of Florida allow claims only to the extent of the value of the estate. Under the facts the claims “allowed” can not total more than $1,157,127.11. Therefore, this amount is all that may be allowed for deductions from gross estate determined under section 302 pursuant to section 303 (a) (1). The result of respondent’s determination is that the total of deductions allowed under the Federal estate tax law is $1,157,127.11, leaving a net taxable estate of $84,992.78.

Upon the facts, the respondent’s determination is correct. In making this determination the provisions of section 303 (a) (1) have been followed in accordance with the wording of that section, which is quoted with italics supplied and to the extent that it is pertinent:

Sec. 303. For the purpose of the tax the value of the net estate shall be determined—
(a) In the case of a resident, by deducting from the value of the gross estate--
(1) Such amounts for funeral expenses, administration expenses, claims against the estate * * * as are allowed by the laws of the jurisdiction * * * under which the estate is being administered * * *.

(It is conceded that all the claims against the estate were contracted bona fide and for full consideration in money’s worth.)

The word “estate” in section 303 (a) (1) means the estate in process of administration under a jurisdiction other than Federal jurisdiction. The term is not the same as “gross estate” appearing in section 302 of the Federal taxing act. This is obvious for Congress has prescribed by section 302 that the values of all properties and interests in property, to the extent specified, must be included in a decedent’s gross estate for estate tax purposes. It is a fact that the value of an estate of a decedent under administration under state law may be less than the value of the gross estate of the same decedent under Federal estate tax law, because, under state law, the proceeds of insurance policies payable to beneficiaries other than the estate may not be part of the estate subject to local laws of probate administration, whereas, under the Federal estate tax law, such proceeds in excess of $40,000 are specifically made part of the gross estate. For example: Section 7065, Compiled General Laws of Florida, 1927, quoted in the margin, provides for the disposition of proceeds of life insurance policies. The statute may be paraphrased as follows: Whenever any person shall die in this state leaving insurance on his life, the said insurance shall inure exclusively to the benefit of * * * any person or persons for whose use and benefit such insurance is declared in the policy. (This is the part of the statutory provision applicable under the facts in this proceeding.) It is apparent that the proceeds of life insurance policies payable to beneficiaries other than an estate and not effected for the benefit of creditors are not part of a decedents estate subject to administration under the laws of Florida and executors of the estate of the insured exercise no control over such proceeds. Such proceeds are not assets under the control of the executors. See Bradford v. Watson, 65 Fla. 461; 62 So. 484; Milam v. Davis, 97 Fla. 916; 123 So. 668. (The latter case discusses the significance of this statutory provision although in relation to the effect on dower rights of a wife when a decedent has bequeathed insurance by will. In such case the insurance is part of the decedent’s estate. In this proceeding the decedent did not bequeath the insurance on his life by will.) Reference to Cooley’s Briefs on Insurance will show that in many instances, in general,, insurance is not part of the estate of a decedent subject to control of executors or administrators; for example, insurance paid to an executrix, who is named as beneficiary therein, is not subject to administration and the probate court has no right to order the executrix to file an inventory of it; White v. White, 11 Tex. Civ. App. 113; 32 S. W. 48; the proceeds of a policy payable to the insured’s widow belongs to her and not to the estate and if the fund is paid to the administrator he holds it in trust for the widow. In re Van Permoor’s Estate, 42 Hun. (N. Y.) 326; Kimball v. Gilman, 60 N. H. 54. See Cooley’s Briefs on Insurance (Second edition) vol. 7, “Rights to proceeds in life and accident insurance”, pp. 6335, 6343, 6345, 6352, 6353, 6363, 6367, 6368. On the other hand, when insurance is payable to the insured himself, or his executors, administrators, or assigns (which is not the case here) the proceeds become part of decedent’s estate. See Cooley, supra, p. 6835, 6378.

Congress was aware of the above as well as that insurance payable to beneficiaries in many states is not liable for expenses of administration and debts of the decedent. This is evident in the following quotation from a report of the Committee on Finance, in regard to section 402 (f) of the Revenue Act of 1918, which was reenacted in section 302 (g), Revenue Act of 1926:

The provision with respect to specific beneficiaries has been included for the reason that insurance payable to such beneficiaries usually passes under a contract to which the insurance company and the individual beneficiaries are the parties in interest and over which the executor exercises no control. Amounts passing in this way are not liable for expenses of administration or debts of the decedent and therefore do not fall within the existing provisions defining the gross estate. It has been brought to the attention of the Committee that wealthy persons have and now anticipate resorting to this method of defeating the estate tax. Agents of insurance companies have openly urged persons of wealth to take out additional insurance payable to specific beneficiaries for the reason that such insurance would not be included in the gross estate. A liberal exemption of $40,000 has been included and it seems not unreasonable to require the inclusion of amounts in excess of this sum. [Revenue Bill of 1918, Report No. 617, 65th Con. 3d sess., p. 42.]

Having it in mind therefore, that a “gross estate” under section 302 may be greater than an “estate” in probate under a state law, we may turn to a discussion of section 303 (a) (1). The petitioner’s argument here is that the deductions allowed by section 303 (a) (1) from “gross estate” as determined under section 302 must be the total of all claims against the decedent's estate as are allowed by the local laws, interpreting the word “allowed” to mean the total of all valid claims at their face amounts, assuming all such claims are based on bona fide indebtedness for full consideration, that is, before any pro-ration to creditors if payment is made out of an insolvent estate. Thus, if a decedent has an estate in probate of a value of $200,000, valid debts of $300,000 and $140,000 of life insurance payable to beneficiaries other than his estate, there will be no estate tax even though the total value of the estate in administration is only $200,-000. The construction of section 303 (a) (1) thus advanced would permit deductions from the gross estate under Federal estate tax law in excess of the total deductions “allowed” by state probate law and would defeat the intent of Congress as set forth in section 302 (g) to tax proceeds of life insurance paid to beneficiaries as expressed in the Committee report quoted above. Such construction is not required by any literal reading of section 303 (a) (1). That section only allows, as deductions from gross income determined under section 302, the total amount of claims against the estate (the emphasis falling on these words), as are allowed by the laws of the local jurisdiction. Under such facts as are before us here, it is not necessary to determine whether the words “as are allowed” mean, either claims which can be proved and may be paid by an executor or claims which are proved and are paid by the executor. Here the estate of decedent under administration in Florida had a total value of $1,157,127.11. Claims against the estate exceed that total amount and the estate is insolvent. Automatically, the amount of claims against the estate plus funeral, administration, and other expenses, is $1,157,127.11. That is all that is allowed by the law of Florida for the simple reason that the proceeds of the insurance policies are both not part of the estate and are exempt from the claims of creditors. Under the facts the only possible deduction which the respondent may allow under section 303 (a) (1)’, as written, is the total of expenses and claims against the estate. He may not allow as deductions under this section the surplus of the claims of creditors over $1,157,127.11 because the estate has been exhausted in payment of claims up to that amount and there is no estate to charge the surplus to. To sustain the petitioner’s contention would be to change section 303 (a) (1) to read:

* * * by deducting from the value of the gross estate^-such amounts for funeral expenses, administration expenses, claims against the decedent, unpaid mortgages upon, or any indebtedness in respect thereto, etc., as are allowed by the laws of the jurisdiction, * * *, under which the estate is being administered * * *.

Congress has not found it necessary to provide how section 303 (a) (1) is to be applied in the case of insolvent estates but it is perfectly plain that Congress intended by this section that the gross estate of a decedent under the Federal estate taxing statute should be reduced by at least as much as an estate under probate under state law is reduced by the expenses and claims allowed by state law. The word “allowed” has a general meaning as well as the technical meaning derived from probate administration. It is a reasonable construction of section 303 (a) (1) that Congress did not intend that the gross estate of a decedent, as determined under the Federal estate tax law, should be reduced (in the process of arriving at a net taxable estate under Federal law) by more than the decedent’s estate is reduced in administration of the estate under state law. We do know that the Federal estate tax law recommended by the Ways and Means Committee of the Sixty-fourth Congress substantially the same law as the 1926 estate tax law, was designed to form “a well balanced system of inheritance taxation as between the Federal Government and the various States.” There is no basis in logic for allowing a deduction for claims from gross estate under Federal state tax law in excess of that which is “allowed” under state law. In the matter of arithmetic “allowed” represents a different figure when an estate in administration under state law is insolvent than when it is solvent. It would certainly be out of harmony with state probate administration to determine in effect that the estate of a decedent, as determined under Federal estate tax law, is solvent whereas the estate in administration under state probate law is insolvent. Such determination departs from reality. There is nothing in section 303 (a) (1) which requires arriving at an unreal result.

An estate under state probate administration may be entirely offset by the total amount of expenses and valid claims; nevertheless, there may be a taxable net estate under Federal estate tax law subject to an estate tax, for Congress has seen fit to tax proceeds of insurance policies on the life of a decedent which have passed directly to beneficiaries named in the policies and which have not been a part of the decedent’s estate under state probate laws. This is because “gross estate” as determined under section 302 of the Federal law may be greater than a decedent’s estate in probate under a state law.

Congress has specifically enumerated the exemptions from Federal estate tax law. In so far as the issue before us here is concerned the exemptions are limited to two; namely, an exemption from gross estate of $40,000 of the proceeds from a decedent’s life insurance paid to beneficiaries, and an exemption of $100,000 from taxable net estate. I do not think Congress intended, to allow deduction from gross estate, as determined under section 302, of an amount of claims of creditors of a decedent in excess of the value of his estate in administration under state probate law, which neither the estate nor the legatees and beneficiaries of a decedent are legally bound to pay. I do not think Congress intended that gross estate should be reduced by an amount which can never be received by creditors. To sustain the petitioner’s contention here would result in granting by judicial process an exemption from Federal estate tax not provided for by statute, and to give one class of taxpayers, insolvent estates, a special benefit. Such excess of claims where an estate is insolvent are not real deductions and under petitioner’s theory would come to be exemptions. Section 303 (a) (1) must be construed in relation to the entire Federal estate tax statute and should not be construed so as to defeat the intent of Congress as expressed in section 302 (g). Reality is not served by such construction.

Reference is made to the dissenting opinion in Commissioner v. Windrow, 89 Fed. (2d) 69, with which I agree.

        Disposition of proceeds.—Whenever any person shall die in this State leaving insurance on his life, the said insurance shall inure exclusively to the benefit of the child or children and husband or wife of such person in equal portions, or to any person or persons for whose use and benefit such insurance is declared in the policy; and the proceeds thereof shall in no case be liable to attachment, garnishment or any legal process in favor of any creditor or creditors of the person whose life is so insured, unless the insurance policy declares that the policy was effected for the benefit of such creditor or creditors: Provided, however, that whenever the insurance is for the benefit of the estate of the insured or is payable to the estate or to the insured, his or her executors, administrators or assigns, the proceeds of the insurance may be bequeathed by the insured to any person or persons whatsoever or for any uses in like manner as he or she may bequeath or devise any other property or effects of which he or she may be possessed, and which shall be subject to disposition by last will and testament. (Ch. 1864, Acts 1872, § 1, amended by ch. 4655, Acts 1897, 8 1, and by eh. 6165, Acts 1903, § 1.)

       Section 302 of the Revenue Act of 1926 is as follows:
      “That the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated:
      “(a) To the extent of the interest therein of the decedent at the time of his death which after his death is subject to the payment of the charges against his estate and the expenses of its administration and is not subject to distribution as part of his estate.”

       Report oí the House Committee on Ways and Means (64th Cong., 1st sess.) Report No. 922, Estate Tax:
      “Thirty states have laws imposing inheritance or share taxes both upon direct and collateral heirs. Twelve other states have laws imposing inheritance taxes on collateral heirs. Your Committee deemed it advisable to recommend a Federal estate tax upon the transfer of the net estate rather than upon the shares passing to heirs and distributees or devisees and legatees.
      “The Federal estate tax recommended forms a well balanced system of inheritance taxation as between the Federal Government and the various States, and the same can be readily administered with less conflict than a tax based upon shares.
      “In determining the value of the net or taxable estate, deductions for all valid claims against the estate are allowed from the gross value of the estate and in addition an exemption of $50,000.”
      See also, Report of the Senate Finance Committee, 64th Cong., 1st sess., Report No. 793, part 1.


author: Arundell :

text:
    Howard J. Hamershlag, Petitioner v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83970.
    Promulgated June 22, 1937.

      Harry Silverman, Esq., and Henry Brach, C. P. A., for the petitioner.

      Dean P. Kimball, Esq., for the respondent.
   OPINION.

Arundell :

The deficiency in income tax of $793.71 for the year 1932 results principally from the respondent’s disallowance of a claimed loss on noncapital assets and his disallowance of a deduction for commissions on the purchase and sale of securities. The facts were stipulated and we adopt the stipulation as our findings of fact. A summary is set forth in the following paragraph.

In the year 1932 both, the petitioner and the brokerage firm of Hamershlag, Borg & Co., in which the petitioner is a partner, bought and sold securities which they had held for less than two years. Neither the petitioner nor the firm was a dealer in securities; the petitioner was a trader in securities. The petitioner’s distributive share of the partnership profits on the sale of noncapital assets amounted to $1,381.75; his losses, exclusive of commissions, on his individual sales of noncapital assets were $2,966.06. In the taxable year the petitioner paid brokerage commissions of $3,253.53 on purchases and $3,376.50 on sales of his individual securities. In petitioner’s individual income tax return for 1932 he deducted from his distributive share of partnership income the amount of $1,381.75, that being a part of the loss sustained on his individual sales of securities as a trader. He also claimed, as an expense deduction, the commissions paid on the purchase and sale of his individual securities. (The total of commissions paid was $6,630.03; he claimed as a deduction $6,630.) The deductions so claimed were disallowed by the respondent.

The petitioner’s several arguments to sustain the claimed deductions for his loss on the sale of securities and the commissions paid on the purchase and sale of securities were fully considered and discussed in the recent case of Robert C. Winmill, 35 B. T. A. 804, in which we decided against the taxpayer on the same issues as are raised here. No useful purpose would be served in again discussing the argument on both sides, save in one particular which it now appears was not presented in the Winmill case. In the Winmill opinion reference was made to the provisions of section 23 (r) (2) of the Revenue Act of 1932, which, in brief, allows a carry-over of losses disallowed under section 23 (r) (1) and permits their deduction in the succeeding taxable year to the extent of income from sales of noncapital assets. Our attention has since been called to the fact that section 23 (r) (2) was repealed, effective as of January 1, 1933, by section 218 (b) of the National Industrial Recovery Act (48 Stat. 209). The repeal of section 23 (r) (2) does not affect the result reached in view of the broad powers of Congress in respect of allowing or denying deductions. Helvering v. Independent Life Insurance Co., 292 U. S. 371; New Colonial Ice Co. v. Helvering, 292 U. S. 435. Accordingly, on authority of the Winmill case, supra, we sustain the respondent in this case.

Decision will be entered for the respondent.


author: Harron:

text:
    Arthur B. Hyman, Petitioner, v. Commissioner of Internal Revenue, Respondent. William S. Gordon, Petitioner, v. Commissioner of Internal Revenue, Respondent. Bertha M. Gordon, Petitioner, v. Commissioner of Internal Revenue, Respondent.

      Docket Nos. 79557, 81080, 81081.
    Promulgated June 22, 1937.

      Arthur B. Hyman, Esq., pro se, and Charles H. Lieb, Esq., for the petitioners.

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

Harron:

There are three issues in these proceedings. The first is involved only in Docket Ho. 79557 in which the petitioner is Arthur B. Hyman, and concerns the deductibility of losses from alleged sales of securities. The other two issues are common to all three docket numbers and concern the deductibility from the distributive shares of partnership income of a certain alleged bad debt and a certain alleged loss -of the partnership.

Issue (1).—The respondent has disallowed claimed capital losses in the amount of $36,664.15 from the sale of securities by the petitioner in the taxable year upon the ground that the transactions through which such losses were allegedly sustained did not constitute bona fide sales. If the petitioner gave to his wife the securities upon which he claims losses, he could not take deductions under section. 23 (e) (2) of the Revenue Act of 1932. If the “purchases” in the name of Mrs. Hyman were in fact repurchases by the petitioner, he would not be entitled to a deduction-under the wash sales provision of the statute, section 118 of the Revenue Act of 1932. The burden of proof is on the petitioner to show that the claimed deduction is allowable.

It is admitted that the petitioner’s motive in disposing, of the securities involved was to establish a loss for tax purposes. Such transactions as here involved have been viewed unfavorably. Congress, in the Revenue Acts of 1934 and 1936, section 24 (a) (6), has expressly provided that no deductions shall be allowed in respect of losses from sales or exchanges of property, directly or indirectly, between members of a family. However, the Revenue Act of 1932 did not contain such provision and this issue must be determined upon the facts and upon the decisions of this Board and the courts under the Revenue Act of 1932.

With respect to the disposition of the securities listed in group 1 of the findings of fact, it is clear that Hyman sold these securities indirectly to his wife. There was a bid to buy for her account at the market placed by Hyman as his wife’s agent, and an offer to sell from his account at the market placed with the same broker in each instance. Mrs. Hyman borrowed almost all the necessary money from the petitioner and gave her note to him. She has since made substantial payments on her note. There are no facts before us to show that the note was not bona fide. Therefore, it is held that Hyman sold indirectly to his wife the securities listed in group 1. The transaction relating to the securities in group 1 is distinguishable from the transactions in D. A. Belden, 30 B. T. A. 601; Joseph Blumenthal, 30 B. T. A. 125; and George E. Morse, 34 B. T. A. 943, since, in this case, the wife gave her note for the money advanced by her husband and has made substantial repayments on the note by her personal checks so that we are persuaded she did purchase the securities. The wife here did possess sufficient independent means to make such purchases or to get loan of money to enable such purchases. This proceeding with respect to the group 1 transactions is not distinguishable from Charles F. Fawsett, 31 B. T. A. 139, and Thomas W. Behan, 32 B. T. A. 1088; affd., 90 Fed. (2d) 609.

With respect to the group 2 securities the facts show that Hyman sold these to Ladenburg, Thalmann & Co.; his account was credited with the proceeds and they were not transferred to Mrs. Hyman’S account. Mrs. Hyman had a separate account with Ladenburg, Thalmann & Co., which shows that she held other securities in it besides the group 2 securities she acquired. She had credit with this broker, who carried her personal account on margin. At the end of 1932 are owed this broker over $6,000, considerably in excess of what she owed for the group 2 securities. Cf. George E. Morse, supra.

The petitioner is entitled to deduction for loss from the sale of group 1 and group 2 securities and the respondent is reversed in disallowing the deduction claimed under this issue.

Issue (2).—From the facts we have found it appears that the Nungesser debt was ascertained to be worthless and charged off in 1932, and from the uncontradicted evidence before us the ascertainment seems to have been made in good faith and to be justified by the facts. Although the note had been held for a long period, we do not think, in view of the partnership’s belief in the debtor’s ability to pay, that they should have written the debt off in an earlier year. We therefore hold the deduction for this bad debt allowable in the year 1932.

Issue (3).—The record does not establish in what year the Dietrich loss actually occurred. The money was invested in the invention of Dietrich’s in 1925 and 1926, but before 1930 the contract with the Pathe Moving Picture Co. for exploitation of the invention was abrogated. In 1930 the partnership learned that Dietrich had left New York to go to California. In 1930 and in 1931 the partnership attempted to ascertain the status of the invention from Dietrich’s former attorney and by writing Dietrich himself but could get no information. In 1932 the partnership again inquired into the matter from Dietrich’s former attorney in New York and although so far as the record shows he had received no communication from Dietrich, he expressed it as his opinion that the invention was unsuccessful, that there were no future possibilities in it, and that the partnership might as well write off its investment as a loss. On the basis of these facts the partnership claims that it incurred the loss of its investment in 1932. The Commissioner has determined the fact to the contrary and the burden is on the petitioners to show that his determination is incorrect. We think they have failed to sustain their burden of proof on this point. It .has been pointed out often that the statute makes a difference in the time for deduction of a bad debt and for the deduction of a loss. A bad debt is deductible in the year in which it is “ascertained” to be bad, which means the year in which the taxpayer exercising the judgment of a reasonably prudent business man determines that the debt is worthless. On the other hand a loss is deductible only in the year in which it is sustained, which means the year in which the loss occurs, irrespective of when the taxpayer actually ascertains or learns of its occurrence. Here the petitioners clearly confess their lack of knowledge of the status of their investment from 1930 on. They were unable to establish any communication, either directly or indirectly, with the inventor, who alone could inform them of the progress of his work. Even in 1932 the sole information on which they based their claim of loss was an opinion expressed by the inventor’s former attorney, apparently without any factual basis except that the Pathe contract had been abrogated before 1930 and that so far as he knew no other company had taken up the invention. The loss may have occurred in 1930 or 1931, or if the inventor was still working on the invention in good faith and had prospects of selling it, no loss may have occurred at all. The respondent has determined that no loss occurred in 1932 and his determination is sustained for failure of proof to the contrary.

Bertha Gordon and William S. Gordon filed a joint income tax return for the year 1932 and a deficiency notice was addressed to them jointly. Mrs. Gordon filed a separate petition with this Board, Docket No. 81081. The deficiency set forth in the deficiency notice arises out of an increase in the income of William S. Gordon from his law partnership asserted by the respondent. Mrs. Gordon is not a member of the law partnership and the deficiency determined by the respondent does not arise out of her income. It has been held that “spouses are not jointly and severally liable for a deficiency arising entirely out of the separate income of one of them.” Cole v. Commissioner, 81 Fed. (2d) 485; Frank W. Darling, 34 B. T. A. 1062. Since none of the deficiency is attributable to the income of Bertha Gordon, she is not individually liable for any part of the deficiency and it is held that there is no deficiency in the petition of Bertha Gordon.

Decision will be entered under Rule 50, in Docket Nos. 79557 and 81080. Decision of no deficiency will be entered in Docket No. 81081,


author: Mellott:

text:
    The Cleveland Railway Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 84943.
    Promulgated June 22, 1937.

      Paul L. Holden, Esq., for the petitioner.

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

Mellott:

The Commissioner disallowed the deduction claimed by petitioner from its gross income for the year 1933 as amortization of the March 1, 1913, value of its franchise in the amount of $65,138.47, and determined a deficiency in its income tax for said year in the amount of $8,956.54. The sole issue is whether he erred in doing so. The facts were stipulated as follows:

The petitioner was organized under the laws of Ohio on February 26, 1893, to operate a system of street railways in the City of Cleveland, Ohio. Its right to operate its properties in the City of Cleveland is derived from franchises embodied in ordinances adopted by the Council of the City of Cleveland.
Since March 1,1910, it has operated its properties under a franchise commonly known as the “Tayler-Plan Grant.” For some time prior to the granting of the first Tayler Plan Grant franchise in 1909, there were four distinct street railway companies operating in the City of Cleveland under franchises granted for varying lengths of time by the City Council, one of which companies was the petitioner. In 1908 the petitioner acquired by absorption, purchase or consolidation all of the other railway properties in the City of Cleveland. The acquisition and consolidation of these properties was done under supervision of the United States District Court for the Northern District of Ohio, Eastern Division, as a part of the plan developed by Judge R. W. Tayler, then Judge of the United States District Court for the Northern District of Ohio, Eastern Division, under which the properties of all of the separate railway companies operating in Cleveland were to be acquired and operated by The Cleveland Railway Company on what was referred to as “a service at cost basis”.
The plan contemplated that upon acquisition of the several properties, the entire assets of the petitioner would be revalued to eliminate from the capital account of the company alleged excessive values, whereupon a new franchise was to be granted the petitioner to replace the numerous franchises of various lives theretofore granted to petitioner and its constituent companies under which it was then operating. Judge Tayler acted as arbitrator in this revaluation and fixed the value of the total properties of the company at $22,933,300, included in which were the various franchises held by the company upon which he fixed a value of $3,615,843.89, which was thereupon set up as an asset on the books of the petitioner, and has so remained except for write-downs taken from time to time. Against the valuation fixed by Judge Tayler the company was permitted and did issue its capital stock at par to the extent of the excess over the bonded and floating indebtedness of the company, amounting to $9,416,000.
At the suggestion of Judge Tayler, and as a part of the so-called “Tayler Plan”, the City Council of Cleveland then passed an ordinance granting the petitioner a new franchise which became effective March 1, 1910, which was commonly known as the “Tayler Plan Grant”. The franchise was embodied in Ordinance No. 16238-A and was for the period ending May 1, 1934. Under that franchise and subsequent renewals, the petitioner has continuously operated the entire street railway system in the City of Cleveland. The franchise had a fair value remaining as of March 1, 1913, of $3,181,932.31.
The franchise granted by Ordinance 16238-A was superseded by Ordinance 48845-A passed by the City Council of the City of Cleveland on April 7, 1919, effective May 18, 1919, renewing the franchise of the company for a period ending May 1, 1944. Ordinance 48845-A was superseded by Ordinance' 70561-A passed by the Council of the City of Cleveland on April 26, 1926, effective July 1, 1926, renewing the franchise for a period ending July 1, 1951, under which petitioner operated its properties during 1933. Each of the franchises embodied in the said Ordinances was accepted by the petitioner and required that all pre-existing franchises be surrendered by the petitioner in consideration of the granting of the new franchise embodied in the respective Ordinances. Printed copies of Ordinances 16238-A, 48845-A and 70561-A are submitted herewith as exhibits.
In Cleveland Railway Company v. Commissioner, 33 B. T. A. 114, involving petitioner’s income taxes for the years 1922 to 1928, tie Commissioner agreed to an annual allowance for amortization of the petitioner’s franchise value for each of the years involved.
If the Board shall find that petitioner is entitled to amortize the March 1, 1913 value of its franchise, then it is agreed that the amount allowable for the tax year 1933 is $65,138.47 as deducted by petitioner in its return for that year, and the Board may enter an order of no deficiency in petitioner’s taxes for said year.

The ordinances referred to in the stipulation were introduced in evidence, but we deem it unnecessary to set them out in detail herein. Brief reference will, however, be made to several sections of them.

It is conceded that the franchise is property (see Wilmington Railroad v. Reid, 13 Wall. 264; New York Electric Lines Co. v. Empire City Subway Co., 235 U. S. 179), and that it. was used in the taxpayer’s business during the taxable year. If its use in petitioner’s trade or business “is definitely limited in duration” it may be the subject of a depreciation allowance. (See article 203 of Regulations 77.)

.But, says the Commissioner, “the franchise is, in effect, perpetual and therefore, not subject to amortization.” (The quotation is from his notice of deficiency.) This the petitioner expressly denies and thus arises the sole issue for decision. We do not understand that petitioner contends it would be entitled to depreciation if the franchise is perpetual, but in this connection see Coca-Cola Bottling Co., 6 B. T. A. 1333; and Taylor v. Commissioner, 51 Fed. (2d) 915; certiorari denied, 284 U. S. 689.

It is agreed that the statutes of Ohio (sec. 3177, General Code) prohibit and make invalid a grant for the construction and operation of a street railroad for a greater period than 25 years from the date of such grant or renewal. The Commissioner argues, however, that “the experience of the petitioner, in having had two renewals of the franchise prior to the taxable year, shows that the original franchise and each subsequent renewal did hot definitely limit the franchise to a certain period, but rather that each renewal only extended the franchise for a period at a time. Had the franchise been definitely limited, it is quite obvious that it could not have been renewed.” He also relies upon a prior decision of this Board (Cleveland Railway Co., 10 B. T. A. 310, 320) wherein it is said:

The ordinance placed a valuation on the assets as of the date of the acceptance of the franchise and provided that additional assets could only be acquired with the consent of the city. , The franchise is in effect perpetual but .the city may, by giving proper notice, acquire the assets of the petitioner at the valuation, plus 10%. In the event of forfeiture the city takes them over at cost.

The quoted language appears in that part of the opinion in which was recounted a brief history of petitioner together with a summation of the circumstances under which the franchise was granted. The issues in that proceeding, however, did not require the Board to decide whether the franchise was perpetual or not, the major issue being, as expressed by the Board, “what constitutes petitioner’s income in a taxable year”, minor issues being whether the imposition of the tax violated the implied constitutional inhibition against the Federal Government taxing the means and instrumentalities of the city of Cleveland and whether the company’s treasury stock should be included in its invested capital. Under the circumstances it must be held that the decision is not res judicata of the issue now raised.

It is generally recognized that a franchise is the subject of contract between the state and the grantee and a contract thus created has the same status as any other contract recognized by the law. (Cf. Blair v. Chicago, 201 U. S. 400.) In so far as the grantee is concerned, it has a right not unlike that which a lessee under a lease contract acquires. Petitioner contends that such an analogy exists and that the method of determining the amount of the amortization under its franchise and the various extensions or renewals, should be the same as that frequently approved by the courts and by this Board in cases involving leases. ,,A typical illustration of this method is found in William, Penn Hotel Co., 23 B. T. A. 566, a decision in which the Commissioner acquiesced. Therein the taxpayer acquired a lease in 1920 for $50,000. It was due to run for a period of -10 years, but in 1923, by the payment of an additional $1,000, the taxpayer secured a 10-year extension, viz., until 1940. This Board held that petitioner was entitled to a deduction as amortization during the fiscal year ending June 30,1924, of one-seventeenth of the unexhausted cost of the lease as extended. To the same effect see also Harris-Emery Co., 10 B. T. A. 297; Pig & Whistle Co., 9 B. T. A. 668; E. M. Diebold, 19 B. T. A. 438; Bonwit Teller & Co. v. Commissioner, 53 Fed. (2d) 381; certiorari denied, 286 U. S. 690. Apparently the respondent does not deny the, correctness of the method, for he has stipulated that if the franchise is not perpetual, the computation of the petitioner, which was made by the same method as approved by the Board in the cases cited, supra, is correct.

Respondent's contention that if the franchise had been definitely limited by its terms, it could not have been renewed, is not sound. Of course it could have been renewed and as a matter of fact it was renewed twice. Here again it is analogous to the extension or renewal of a lease; and the fact that such renewals or extensions have been made is, in itself, substantial evidence that such renewals or extensions were necessary in order to keep it in force.

We hold that the franchise is not perpetual, and, unless respondent’s alternative contention be sustained, it must be held that petitioner is entitled to amortize the adjusted March 1, 1918, value of the franchise at the rate of one twenty-fifth per annum from the date of the last renewal, July 1, 1926 (Exhibit 8), until the first day of July 1951, the date of its expiration.

The alternative, or possibly it may be more accurate to say the supplemental, contention of the respondent is that it would be improper to allow any amortization of the value of the present franchise to petitioner because the franchise, by its terms, provides for the ultimate recovery by petitioner of the cost thereof from the city or a succeeding grantee unless it is renewed in perpetuity to it. In this connection he relies upon the provisions of sections 33, 34, 36, 37, 40, and 44 of Exhibit 3 and their prototypes in Exhibits 1 and 2.

The sections provide, in substance, that petitioner grants to the city and the city reserves to itself the right, at any time during the life of the franchise or any renewal of it, to purchase and take over the entire system, upon giving at least six months previous notice in writing, and paying therefor its capital value, plus 10 percent, if taken over prior to the expiration of the franchise, or its capital value, if taken over after the expiration of the franchise. The capital value, as defined by the ordinance granting the franchise, includes a franchise value of $3,615,843.89. “Accordingly”—says the respondent—“if the property were taken over by the city, the taxpayer would be reimbursed to the full extent of its franchise and, accordingly, amortization in anticipation of the expiration of the franchise would not be proper.” The fallacy in this argument lies in the fact that the city does not obligate itself to take over the property at any time but merely reserves an option to do so if it chooses. If petitioner had the option of selling the property to the city on the basis set out above—or possibly on any other basis—the situation might be different. As to whether under such circumstances it would be entitled to amortize the value of its franchise we express no opinion. We do hold, however, that the mere right of the city to exercise such option does not, in itself, deprive petitioner of its right to amortization. In addition, the mere fact that a taxpayer may be able to sell a capital asset for the amount of its cost, or even at a profit, does not deprive it of its right under the revenue act to an allowance for depreciation of such asset in determining its net taxable income during years prior to such sale or disposition. As a matter of fact, if an asset is depreciable, or if amortization should have been taken, the taxpayer, upon sale, is required to reduce its basis, for the purpose of computing his gain or loss, by the amount which should have been claimed. Kittredge v. Commissioner, 88 Fed. (2d) 632.

One of the sections referred to, supra, (i. e. sec. 37) provides, in substance, that if the city does not exercise its option to purchase the property at the expiration of the franchise, any person to whom a franchise may be granted “to operate a street railway and motor coach system over the then existing lines, or any of them, or any part of them” shall be under obligation “to purchase said property or such portion thereof” upon the terms provided for purchase by the city. Respondent argues that under this provision the petitioner will, in any event, be fully reimbursed for its capital investment. This presupposes many things—that in 1951 a person will be found who is willing and able to assume what may then be an onerous contract obligation—that the “existing lines” will be desired rather than new routes—and that the use of street railways will not be superseded by buses or some other form of transportation. While the section gives a distinct advantage to petitioner we are of the opinion that it is not sufficient, even in conjunction with the other sections, to provide for reimbursement in full to petitioner for its capital investment or to deprive it of its right to amortize the remaining March 1,1913, value of its franchise.

Judgment will be entered for the petitioner.

       Aet. 203. Depreciation of intangible property.—Intangibles, the use of which in the trade or business is definitely limited in duration, may be the subject of a depreciation allowance. Examples are patents and copyrights, licenses, and franchises. Intangibles, the use of which in the business or trade is not so limited, will not usually be a proper subject of such an allowance. If, however, an intangible asset acquired through capital outlay is known from experience to be of value in the business for only a limited period, the length of which can be estimated from experience with reasonable certainty, such intangible asset may be the subject of a depreciation allowance, provided the facts are fully shown in the return or prior thereto to the satisfaction of the Commissioner. No deduction for depreciation, including obsolescence, is allowable in respect of good will.