author: McMahon:

text:
    John T. Wilson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 47775.

    Promulgated January 15, 1935.

      Stanley Suydam, Esq., for the petitioner.

      P. A. Buyer, Esq., for the respondent.
   OPINION.

McMahon:

This is a proceeding for the redetermination of a deficiency in income taxes determined by the respondent for the year 1926 in the amount of $1,008.21. The issue presented in this proceeding is whether the respondent erred in including in the petitioner’s taxable income dividends paid to petitioner by the Dry Fork Colliery Co. during the year 1926.

The petitioner is an individual, with principal office at Bluefield, West Yirginia. He is a civil engineer.

The Dry Fork Colliery Co., hereinafter referred to as the company, was organized in 1907 under the laws of the State of West Virginia. Its capitalization was $25,000, consisting of 250 shares of stock. The petitioner had, at all times from 1907 through 1926, owned 26% percent of the stock of the company, for which he paid the company $100 in cash per share. He was its secretary and treasurer and one of its directors, and has been familiar with the fiscal affairs of the company ever since its organization.

On July 1, 1907, certain individuals entered into an agreement leasing to the petitioner and other individuals a tract of coal land comprising about 130 acres situated in McDowell County, West Virginia. The lease'provided for the payment of royalties of 10 cents per ton of coal mined and used for any other purpose than the manufacture of coke, and of 15 cents per ton of coke manufactured. It also provided for a minimum rental of $2,000 annually whether the amount of coal mined and coke manufactured produced that amount of rental or not. The lease was for a term of 30 years. On June 19, 1908, the lessees assigned the lease to the company for $1 and “other good and valuable considerations.” The lease has been in the physical possession of the company ever since. From 1908 through 1926 the company removed coal from the property covered by the lease and paid royalties to the lessors.

In 1908, when the company started to extract coal from the land covered by the lease, the vein of coal was believed to be about 4*4 feet thick. However, as the mining continued it developed that the vein had an average thickness of about 5% feet. The company also removed coal from other land owned by it in fee which was contiguous to the land covered by this lease. All this land was operated as one property. About seven ninths of the mineable coal available to the company was leased, while the remainder was owned in fee. Royalty was paid on seven ninths of all the coal mined.

. In 1920 rock faults were encountered in both the upper and lower coal seams, which indicated that it would be impossible to continue to mine the coal for the term of the lease. Attempts were made in 1920 and 1921 to cut through the rock faults but these were unsuc- . cessful and a substantial area of coal was left unmined. Of the total of 130 acres covered by the lease, about 90 acres of the lower seam were mined and about 15 acres of the upper seam were mined. The mining operations on the property covered by the lease ceased about the last of November 1928. In 1922 the company purchased in fee the land covered by the lease and thereafter continued to operate it. The books of the company do not show any leaseholds owned in 1922.

There was never any reserve set up for depletion of the coal property of the company, as revealed by the books. No figure was ever set up on the books as representing the value of the lease, and the books carry no depletion on account of the leasehold. The books of the company reveal that the only depletion ever taken by the company was taken upon land owned in fee which had cost $8,600.

The “ net earnings ” and net loss of the company as shown by the books after a subsequent adjustment made by a revenue agent to reflect additional depreciation, for the year 1913, after March 1, and for subsequent years up to and including 1926, together with other income, the dividends paid during that period and other charges as shown by the books, are as follows:

The net earnings or losses by months for the year 1926, as shown by the books after a subsequent adjustment made by a revenue agent, and the dividends paid by months during the year 1926 by the company, as shown by the books, are as follows:

The figure $22,696.96 in the above tabulations representing net earnings of the company for the year 1926 is not the income for that year as shown by. the books, but is the income for such year as shown by the revenue agent’s report. That figure was obtained after reducing the income of the company for that year as shown by its books by an amount of approximately $10,000 additional depletion and depreciation. The. tax liability of the company for that year was adjusted accordingly.

The income tax return of the company for the year 1913 shows net income of $46,894.46. The return of the company for the year 1915 shows net income of $53,754.50.

The books of the company showed surplus at March 1, 1913, in the amount of $97,314.25.

During 1926 the company paid to its stockholders dividends in the amount of $33,750. Of this amount, $9,000.01 was paid to the petitioner. The respondent held that this dividend paid to the petitioner was a dividend paid from earnings subsequent to March 1, 1913, and that it was not a liquidating dividend. He therefore increased the reported taxable income of the petitioner for 1926 accordingly.

The sole question presented is whether the aggregate of $9,000.01 paid by the company to the petitioner in 1926 is taxable as dividends. In his petition the petitioner alleged that this amount was not taxable for the reason that it was a liquidating dividend. However, there is no evidence in the record which indicates that it was a liquidating dividend, and we so hold. Furthermore, at the hearing and on brief the petitioner apparently 'abandoned this contention and, on the other hand, took the position that the amount is not taxable for the reason that it constituted a distribution of earnings or surplus accumulated by the company prior to March 1, 1913. We will, therefore, further consider only the question of whether this was a dividend from earnings or profits accumulated, or increase in value of property accrued, before March 1, 1913, or was a distribution out of earnings or profits accumulated after February 28, 1913, within the meaning of section 201 of the Revenue Act of 1926. There are set forth in the margin applicable provisions of sections 201 and 213 of the Revenue Act of 1926.

The petitioner contends that the company was entitled to take depletion deductions, over the years from March 1, 1913, to 1926, inclusive, upon the leasehold heretofore described, upon the basis of the value of the leasehold at March 1, 1913', which, petitioner contends, was $280,666.45. The evidence shows that the company did not take any depletion throughout this period, and it is the petitioner’s contention that we should now allow this depletion for present purposes and that such allowance would absorb all the net earnings and profits of the company accumulated after February 28, 1913, as shown by the books, so that there would be, in 1926, no net earnings available for taxable dividends. The petitioner refers to depletion of the leasehold upon the basis of its value at March 1, 1913. A lessee is entitled to deductions for depletion of its leasehold interest in coal covered by a lease, based upon the value of such interest at March 1, 1913, if the proof establishes all the factors essential to the allowance of such deductions. Lynch v. Alworth-Stephens Co., 267 U. S. 364; and Palmer v. Bender, 287 U. S. 551. The petitioner introduced certain evidence, based upon earnings of the company, intended to prove the value at March 1, 1913, of the leasehold, as well as evidence intended to prove the value at such time of all the coal in all of the coal properties of the company, exclusive of equipment. However, whether this evidence is sufficient to prove the values of the leasehold and of the coal or whether either of these values, even if correct, would constitute the basis for the calculation of depletion, we find it unnecessary to determine, since petitioner has not shown other factors necessary to establish the amount of the depletion deductions to which the company was entitled from March. 1, 1913, through 1926. The deduction in any year for depletion of mineral deposits held under lease, as well as for those owned in fee, is computed by ascertaining the original quantity of the mineral contained in the mine and then applying to the basis the proportion which the amount mined bears to the amount of coal originally ascertained to be contained in the mine. In United States v. Ludey, 274 U. S. 295, the Supreme Court stated in part:

The depletion charge permitted as a deduction from the gross income in determining the taxable income 'of mines for any year represents the reduction in the mineral contents of the reserves from which the product is taken. The reserves are recognized as wasting assets. The depletion effected by operation is likened to the using up of raw material in making the product of a manufacturing establishment. As the cost of the raw material must be deducted from the gross income before the net income can be determined, so the estimated cost of the part of the reserve used up is allowed. The fact that the reserve is hidden from sight presents difficulties in making an estimate of the amount of the deposits. The actual quantity can rarely be measured. It must be approximated. And because the quantity originally in the reserve is not actually known the percentage of the whole withdrawn in any year, and hence the appropriate depletion charge, is necessarily a rough estimate. But Congress concluded, in the light of experience, that it was better to act upon a rough estimate than to ignore the fact of depletion.

In Lynch v. Alworth-Stephens Co., supra, the Supreme Court stated in part:

The general provision in section 12 (a), Second, is that the deduction from gross income shall include a reasonable allowance for the “ exhaustion * * * of property.” There is nothing to suggest that the word “ property ” is used in any restricted sense. In the case of mines, a specific kind of property, the exhaustion is described as depletion, and is limited to an amount not exceeding the market value in the mine of the product mined and sold during the year. The interest of respondent under its leases in the mines being property, its right to deduct a reasonable allowance for exhaustion of such property, if there be any, during the taxable year results from the plain terms of the statute, such deduction, since the property is an interest in mines, to be limited to the amount of the exhaustion of respondent’s interest caused by the depletion of the mines during the taxable year. * * *
It is said that the depletion allowance applies to the physical exhaustion of the ore deposits, and since the title thereto is in the lessor, he alone is entitled to make the deduction. But the fallacy in the syllogism is plain. The deduction for depletion in the case of mines is a special application of the general rule of the statute allowing a deduction for exhaustion of property. While respondent does not own the ore deposits, its right to mine and remove the ore and reduce it to possession and ownership is property within the meaning of the general provision. Obviously, as the process goes on, this property interest of the lessee in the mines is lessened from year to year, as the owner’s property interest in the same mines is likewise lessened. There is an exhaustion of property in the one ease as in the other; and the extent of it, with the consequent deduction to be made, in each case is to be arrived at in the same way, namely, by determining the aggregate amount of'the depletion of the mines in which the several interests inhere, based upon the market value of the product and allocating that amount in proportion to the interest of each severally considered.

See also Bankers-Pocahontas Coal Co., 18 B. T. A. 901; affirmed upon this point in Bankers-Pocahontas Coal Co. v. Commissioner, 55 Fed. (2d) 626; affirmed in Bankers-Pocahontas Coal Co. v. Burnet, 287 U. S. 308; Ajax Coal Co., 7 B. T. A. 305; McAlester-Edwards Coal Co., 10 B. T. A. 1368; and North American Coal Corporation, 28 B. T. A. 807, 847.

In the instant proceeding there is no evidence to show the estimated quantity of coal covered by the lease at March 1, 1913, or af-ilie end of 1926, or the amount mined each year. In this situation it would be impossible for us to determine the amount of depletion sustained by the company for each year from March 1, 1913, through 1926, or for any or all of these years. It appears that in 1922 the company purchased the land covered by the lease. Thereafter, the company’s depletion deductions would be entirely different from the deductions to which it would have been entitled prior to that time. The basis would then and thereafter include the cost of the interest which the company purchased, which is not shown. Furthermore, under the Revenue Act of 1913 the deduction for exhaustion or depletion of mines was limited to 5 percent of the gross value at the mine of the output in any particular year (sec. II G (b), Revenue Act of 1913), and under the Revenue Acts of 1916 and 1917 the depletion allowance in any year was limited to the market value, in the mines, of the coal mined and sold in the particular year. (Sec. 12 (a) Second, Revenue Act of 1916 and sec. 203, Revenue Act of 1917.) Here we not only do not know how much coal was contained in the mine on March 1,1913, and the amount extracted in the years from March 1, 1913, through 1926, but we do not have any evidence of the value in the mine of the coal mined during the years coming under the Revenue Acts of 1913, 1916, and 1917. In all these respects the record is so incomplete that it is impossible for us to determine the amount of the depletion which the company sustained from March 1, 1913, through 1926.

The petitioner’s theory, gathered from his brief, that the company was entitled to deduct the March 1, 1913, value of the lease pro rata each year over the term of the lease, without reference to the actual physical depletion sustained, is clearly erroneous. Whether the deductions to which the company was entitled during the period March 1, 1913, through 1926 be called exhaustion of the lease or depletion of the company’s interest in the coal under the lease, the deduction would still be determined by the rate of extraction of the coal. Lynch v. Alworth- Stephens Co., supra. See also Royal Collieries Co., 1 B. T. A. 369.

Even though the petitioner had shown the amount of the depletion to which the company was entitled, there would still remain for consideration the question, which in view of the conclusions arrived at herein it is unnecessary to decide, as to whether there is acceptable evidence in the record as to the earnings or dividends of the company subsequent to March 1, 1913. It is elementary that the respondent’s holding that the dividends in question are taxable to the petitioner is prima facie correct, and the burden is upon the petitioner to overcome the presumption in favor of the respondent’s holding. Evidence submitted by the petitioner touching upon the amount of earnings or profits of the company accumulated after February 28, 1913, consists primarily of proof of what the books of the company show, as adjusted in some respects by a revenue agent, without any proof that the book entries are correct. Cf. Doyle v. Mitchell Bros. Co., 247 U. S. 179; Chatham & Phenix National Bank, 1 B. T. A. 460; Mandel Brothers, 4 B. T. A. 341; Ledbetter Manufacturing Co., 12 B. T. A. 145; Pacific Coast Pipe Co., 11 B. T. A. 1329; Sterling & Welch Co., 15 B. T. A. 925; and Georgia, Florida & Alabama Railroad Co., 31 B. T. A. 1.

Were we to assume that the evidence submitted by the petitioner as to net earnings from March 1, 1913, through 1926, as well as to the net losses for 1921, dividends paid, etc., as shown by the books, and as adjusted in some respects by the revenue agent, is correct, there would still be sufficient earnings or profits accumulated after February 28, 1913, available in 1926, to cover the dividends in question herein, in view of our holding that the petitioner has not shown that the net earnings should be reduced during this period for depletion. On the basis of the book figures as adjusted submitted in evidence, the distributions made in 1913, 1915, and 1917 were in excess of the earnings or profits accumulated after February 28, 1913. However, these distributions, to the extent that they exceeded the earnings or profits accumulated subsequent to February 28, 1913, were paid out of March 1,1913, surplus, but can not be applied to reduce 'earnings accumulated subsequent to the time of such distributions in computing the earnings or profits thereafter available for taxable dividends. F. W. Henninger, 21 B. T. A. 1235, and Stanley M. Bolster, Executor, 23 B. T. A. 347. See also Helvering v. Canfield, 291 U. S. 163. A careful analysis of the figures submitted by the petitioner as to earnings, dividends, taxes paid, sundry charges, and loss sustained throughout the period from March 1, 1913, through 1926, discloses that in 1913, $18,956 of the distribution made was out of March 1, 1913, surplus; that in 1915 $4,229.85 of the distribution was out of March 1, 1913, surplus; that in 1917, $4,197.87 of the distribution was out of March 1, 1913, surplus; that thereafter there were at all times sufficient earnings or profits accumulated subsequent to February 28, 1913, to cover any loss or dividend paid; and that the aggregate distributions made in the year 1926 were out of earnings or profits accumulated after February 28, 1913. Interest received by the company on United States obligations can not be excluded in the calculation of earnings available for taxable dividends. Sec. 213 (a) and (b) (4), Revenue Acts of 1924 and 1926. See Arthur Curtiss James, 13 B. T. A. 764; affirmed on other grounds in Commissioner v. James, 49 Fed. (2d) 707; and Hitner v. Lederer, 63 Fed. (2d) 877.

Decision will be entered for the respondent.

       Sec. 213. For the purpose of this title, except as otherwise provided in section 223—
      (a) The term “ gross income ” includes gains, profits, and income derived from * * * dividends * » *. The amount of all such items shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under subdivision (b) of section 212, any such amounts are to be properly accounted for as of a different period.
      Sec. 201. (a) The term “ dividend ” when used in this title (except in paragraph (9) of subdivision (a) of section 234 and paragraph (4) of subdivision (a) of section 245) means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913.
      (b) For the purposes of this Act every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings or profits. Any earnings or profits accumulated, -or increase in value of property accrued, before March 1, 1913, may be distributed exempt from tax, after the earnings and profits accumulated after February 28, 1913, have been distributed, but any such tax-free distribution shall be applied against and reduce the basis of the stock provided in section 204.

       Five-sixths of year.

       Net loss.

       Interest, U. S. A.

       Denotes loss.


source: Caselaw Access Project

license: Public Domain

text:
    Melvin L. Griffith, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46358.
    Promulgated January 15, 1935.

      Melvin L. Griffith, Esq., pro se.

      Isadore Graff, Esq., for the respondent.
   OPINION.

McMahon:

This is a proceeding for the redetermination of asserted deficiencies in income tax for the years 1926 and 1927 in the amounts of $11.44 and $50.32, respectively.

The only issue raised is whether the respondent erred in determining that the amounts of $2,381 and $5,612.46 were not received by the petitioner in 1926 and 1927, respectively, as compensation for services performed in the exercise of essential governmental functions as an officer or employee of the village of Homewood, Illinois, and therefore are subject to taxation.

The petitioner is a resident of the village of Homewood, Illinois. He is an attorney at law and in 1926 and 1927 was the junior member of the law firm of Winters, Stevens, Risk & Griffith.

On or about May 1, 1926, the president of the board of trustees of the village of Homewood asked petitioner if he would accept the village attorneyship for the ensuing year. The president stated that the compensation of that position would be $150 a year, payable out of the general fund and a percentage of the special assessment work and that any court work other than special assessment work would be paid for upon a per diem basis. The village of Homewood, like other similar small villages, has meager general funds and, in order to procure the services of a competent attorney, a small fixed compensation is allowed out of the general fund together with a percentage on special assessments and an amount per diem for other special services.

- On May 4, 1926, petitioner was appointed village attorney for the village of Homewood for the year beginning May 1, 1926, and ending April .30, 1927, and on May 3, 1927, the petitioner was again appointed village attorney for the year beginning May 1, 1927, and ending April 30,1928. The petitioner took an oath of office required by statute.

The minutes of the meetings of the board of trustees during 1926 and 1927 contain no reference to the compensation to be paid to the petitioner under his appointment. The president of the board of trustees alone had no authority to fix the compensation. JSTo written agreement was entered into between the board and the petitioner. No ordinance or resolution was ever passed or adopted by the board creating any law department, appointing the petitioner as village attorney, or defining his duties or fixing his compensation.

The petitioner accepted the work as it was handed or sent to him by the board of trustees or the board of local improvements of Homewood. He attended all meetings of the board of trustees, of the board of local improvements, and of the zoning commission. He advised the board of trustees on matters coming before it at its meetings. He prepared all ordinances passed by the board. If and when any matters requiring attention in court or in reference to special assessment arose, they were referred to petitioner by the board of trustees at its meetings, regular or special. During 1926 and 1927 the procedure relating to special assessments was as follows: The village engineers prepared upon request an estimate of the cost of a proposed improvement. This estimate was turned over to the petitioner to prepare the necessary resolutions, orders, and other papers. Petitioner prepared a so-called first resolution fixing the time for public hearing. The petitioner attended all public hearings. After such public hearing, if the improvement was determined upon, a second resolution was prepared by the petitioner and also an ordinance to be adopted by the board of trustees. Thereafter petitioner prepared and filed a petition in the court. Notices were sent to property owners that the matter would be up for confirmation on a fixed date. The petitioner appeared at court upon the day fixed and prepared an order, either confirming the assessment, or, if objections had been filed, a trial might result. If an appeal was taken to the Supreme Court petitioner represented the village therein.

A state statute required the appointment of a commissioner, who resided in the village but owned no property in the area affected by the special assessment, whose duty it was to spread the cost of the approved special assessment over the property benefited. There Was no one in Homewood who could qualify. However, a local man was appointed. All he did was to sign his name to the assessment roll and any other papers necessary for him to sign. He received compensation from the village as such commissioner. The special assessment rolls were spread in petitioner’s office under his direction. This work was in part performed by one Mitchell, who had an office in the suite of offices of petitioner’s law partnership, and in part by another member of the firm, the employees at petitioner’s office assisting. The petitioner did not do any of the work of spreading the assessment roll. This work required someone good at figures and detail work. Because there was no one in the village to do such work, petitioner was requested by the board of trustees to do it.

Any work referred to petitioner by the village was given priority in his office. Homewood was the only village which he represented during 1926 and 1927. He handled other matters when he had no village work to do and had a private legal practice in addition to his work as village attorney. During 1926 and 1927 petitioner was the only attorney who represented the village of Homewood.

The petitioner sent to the village bills for his annual compensation of $150 and for any work which he had completed. The village clerk received the bills and presented them to the board of trustees at its meetings. The board approved such bills and referred them to the village treasurer, with authority to prepare vouchers in payment thereof. The petitioner submitted bills and was paid at.the rate of $75 per day for court work other than special assessments. On special assessment work he at first billed the village on the basis of 3% percent of the gross amount paid to contractors. Later this rate was changed to 3 percent of the amount of the special assessment as confirmed by the court.

From the statement attached to the notice of deficiency, it appears that the respondent increased the net income reported by petitioner for the year 1926 in the amount of $3,181.34 by adding thereto the amount of $2,381.81 as “Attorney’s fees not included”, with the following explanation:

1. The amount of $2,381.81, representing 20% of the fees received by the law firm of Winters, Stevens, Risk and Griffith, for work done by the partnership for the Board of Local Improvements of the Village of Homewood, which was distributed to you in proportion to your interest and which you excluded from taxable income on the ground that, as income from a municipality, it was exempt, has been included as taxable income.
It is the opinion of this office that, as village attorney, your salary of $150.09 per year as such was exempt from Article 88 of Regulations 69; however, fees received in the capacity of special assessment attorney are for services ren-dei'ecl by agreement and are not services established by law or regulations and may not be considered as rendered in connection with the exercise oí essentially governmental functions.
The evidence in the file shows that the services were actually rendered by the partnership and the fees in question were included in the income of the partnership and later divided among the respective partners in the following proportion:
George M. Stevens_47%%
J. C. Risk_32%%
Melvin Griffith_20%
The evidence also shows that the partnership also acts as special attorney for other villages.
It is the opinion of the office that the relations between the village and the partnership were contractual as between attorney and client and that the partnership may not be considered an officer or employee of the municipality within the meaning of Article 88 of Regulations 69.

From such, statement it also appears that the respondent increased the net income reported by petitioner for the year 1927 in the amount of $3,060.24 bjr adding thereto the amount of $5,612.46 as attorney fees not included in reported income with the following explanation:

1. This represents 25% of fees from the Village of Homewood received through the partnership. For details, see comments under Explanation of Change for 1926.

The income tax returns of petitioner for the years 1926 and 1927 disclose that petitioner received a gross income from his legal practice other than that received from the village in the amounts of $8,451.55 and $7,073.06, respectively.

The petitioner and counsel for respondent stipulated that the petitioner was appointed village attorney on May 4, 1926, for a year beginning May 1, 1926, and ending April 30, 1927, and again on May 3, 1927, for a year beginning May 1, 1927, and ending April 30, 1928.

On brief the respondent contends, first, that the petitioner in the years involved was not an officer of the village of Homewood as the office of village attorney was not created by village ordinance as required by chapter 24, article XI, section 11, Cahill’s Illinois Revised Statutes, 1925, and, second, that even though he may be held to be an officer of such village, the amounts received by him were not received in his capacity as an officer for the reason that there was no ordinance definitely fixing the amount of compensation as required by chapter 24, article YI, section 15, Cahill’s Illinois Revised Statutes, 1925. The petitioner contends that he is either an officer or an employee of the village.

Section 11 of chapter 24, article XI of the Cities and Villages Act empowers the president and board of trustees to appoint certain named officers and “ such other officers as may be necessary to carry into effect the powers conferred upon villages.” The office of village attorney is not specifically named in such section.

The petitioner testified that the village president asked him in May 1926 if he would accept the village attorneyship for the ensuing year, stating that the compensation of the position would be $150 a year and a percentage of the special assessment work and a per diem basis for any court work other than special assessment work. No ordinance or resolution creating the office of village attorney or defining his duties, or fixing his term of office and compensation, was adduced in evidence. In fact petitioner testified that “there was no ordinance, or resolution that was ever passed by the Board in Homewood creating any law department or having anything to do with the appointment of Village Attorney, or his duties, or his compensation.”

In Metcalf & Eddy v. Mitchell, 269 U. S. 514, the Court stated:

An office is a public station conferred by the appointment of government. The term embraces the idea of tenure, duration, emolument and duties fixed by law. Where an office is created, the law usually fixes its incidents, including its term, Its duties and its compensation. * * * The term “ officer ” is one inseparably connected with an office; * * *.

To the same effect see City of Pekin v. Industrial Commission, 173 N. E. (Ill.) 339.

In Ferguson v. Russel, 110 N. E. (Ill.) 130, 138, the Supreme Court of Illinois stated as follows:

* * * This definition [of “ office ” contained in section 24 of article 5 of the Constitution of Illinois] contains two essential elements, both of which must be present in determining any given position to be an office: (1) The position must be a public one, created either by the Constitution or by law; and (2) it must be a permanent position, with continuing duties. To determine whether the first element is present, we have but to look to our Constitution and our statutes to see whether the particular position under consideration has been created by the Constitution or by law. An office is created by law only as a result of an act passed for that purpose.

In Peabody v. Sanitary District of Chicago, 161 N. E. (Ill.) 519, the Illinois Supreme Court stated:

* * * The same rule of distinction between “ office ” and “ employment ” laid down in Ferguson v. Russel [supra] applies to local government as well as to state government.

Since the office of village attorney was not created by law, as required by the laws of Illinois and the above cases, we hold the petitioner was not an officer of the village of Homewood in 1926 and 1927 so as to exempt from Federal taxation any compensation for services received by him from such village.

In support of his contention that he was an employee of the village, the petitioner testified that all the work he did was handled under the direction of the village board or of some officer or of some committee ¡of, the board. However, there is no evidence in the record showing that the. board, or some officer, or some committee of the board, “exercised any detailed control as to what should be done, and how it should be done, which is essential to the relationship of employer and employee.” (Emphasis supplied.) Haight v. Commissioner, 52 Fed. (2d) 779, affirming George I. Haight, 14 B. T. A. 844.

Furthermore, in Burnet v. Jones, 50 Fed. (2d) 14, the court stated:

' * * '* The lawyer who is retained in the affairs of his client is not properly designated an employee. He is an officer of the court. As counselor and advisor to his clients and as an advocate before the court, whatever action he takes is upon independent judgment, illuminated by his learning, his skill, his experience, and his ethics. The relationship of attorney and client is entered into and maintained with regard to these considerations, and is not that'of employer and employee.
' Hs H* ❖ Hi Hs *

To the same effect see Lucas v. Howard, 280 U. S. 526; Lucas v. Reed, 281 U. S. 699; Burnet v. McDonough, 45 Fed. (2d) 944; George H. Gabel, 25 B. T. A. 60; Register v. Commissioner, 69 Fed. (2d) 607; Richard F. Burgess, 69 Fed. (2d) 609.

We conclude that the petitioner was not an employee of the village in 1926 and 1927 and the compensation received from the village is not exempt from Federal taxation.

In our opinion no useful purpose would be served by discussing all the cases cited by petitioner and respondent, especially as the conclusion reached in each case obviously must rest upon the peculiar- facts presented therein.

As heretofore stated, the respondent determined that the annual salary of $150 was exempt from taxation, but on brief contends that petitioner was neither an officer nor employee of the village so as to exempt any compensation received by him from Federal taxation. However, the respondent made no claim, “ at or before the hearing ”, pursuant to section 274 (e) of the Revenue Act of 1926, for ail increase in the deficiencies asserted by him, the computation of which apparently did not include the annual compensation of $150. Therefore the liability of petitioner for deficiencies in income tax is limited to the amounts asserted by the respondent in the notice of deficiency of $11.04 and $50.32 for 1926 and 1927, respectively. Lucinda Pitmcm, 24 B. T. A. 244, 256.

Decision will be entered/ for the respondent.


author: McMahon :

text:
    George M. Stevens, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46342.
    Promulgated January 15, 1935.

      George M. Stevens, Esq., pro se.

      Isad)ore Graf, Esq., for the respondent.
   OPINION.

McMahon :

This is a proceeding for the redetermination of an asserted deficiency in income tax in the amount of $233.99 for the year 1926.

The only issue raised herein is whether the respondent erred in determining that the amount of $1,119.61 was not received by the petitioner in 1926 as compensation'for services rendered as ah'officer or employee of the village of La Grange, Illinois, in the exercise of essential- governmental functions and therefore is subject- to income tax.

The petitioner is, and since 1913 has been, a resident -of the village of La Grange, Cook County, Illinois. The petitioner is a practicing attorney at law and associated in the general practice of law as senior member of the law firm of Winters, Stevens, Risk & Griffith. . The offices of the firm and petitioner are in Chicago, Illinois, about 14 miles from La Grange. Winters was not an active member of the firm. The law firm at no time employed more than two law clerks, who were paid out of partnership funds. Melvin L. Griffith, member of petitioner’s law firm, acted as village attorney for the village of Homewood, Illinois, and, among other things, did special assessment work for that village.

In the spring of 1919 petitioner was appointed attorney'for the village of La Grange by the president and board of trustees of such village. He took the oath of office prescribed by statute and gave bond in the sum of $500 as required by the ordinances of La Grange. Each year thereafter, up to the present time, .he was in like manner¡ after the annual election in the spring, appointed as attorney for such village, taking the prescribed oath and giving bond. ' :

Chapter II of the village ordinances of La Grange provides, as far as applicable herein, that the “ officers of the Village' of La Grange shall consist of A President, A Board of six Trustees * * * A Village Attorney * * * ”; that the village attorney shall be appointed by the president with the approval of the board of trustees; that all officers shall hold their offices during the municipal or fiscal year in which they are appointed and until their successors are appointed and qualified; that all officers whether elected or appointed shall before entering upon the duties of their respective offices take and subscribe to the oath or affirmation set forth therein; and that the village attorney shall be required to give bond payable to the village of La Grange in an amount not less than $500.

Chapter III of the ordinances of La Grange is as follows:

10. The Law Department shall consist of the Village Attorney.
11. It shall be the duty of the Village Attorney to give the necessary attention to all suits in every court of record in which the Village of La Grange is a party or directly interested. He shall appear as the attorney in, behalf of any officer of the village in any suit, prosecution or other judicial proceeding, brought by or against such officer in his official character, and, as the case may require, shall prosecute or defend to the termination thereof.
12. He shall give his legal opinions in writing to the Board of Trustees or any committee thereof, or the President, when requested, on legal questions arising under or concerning any ordinance of the village, and on legal questions and subjects in which the village shall be legally interested.'
13. He shall keep in proper books, provided for the purpose, a docket of all suits prosecuted or defended by him, in which shall be briefly entered all steps taken in each cause.
14. He shall attend the meetings o'f the Board of Trustees, and on orl before its first meeting in April, of each year, make a report in writing to said Board, of all suits, prosecutions, or actions, prosecuted or defended by him, during the preceding year, of the names of the parties thereto, of the titles of the courts in which they were commenced, of their progress and final disposition and other information concerning, the legal interests of the village which he may deem necessary or proper.
15. He shall execute a bond with sureties satisfactory to the Board of Trustees in the sum of $500 for the faithful discharge of his duties.
16. The Village Attorney shall receive such compensation as the President and Board of Trustees shall from time to time direct..

Since his appointment in 1919, the petitioner represented the village of La Grange in all of its routine legal matters, in matters before courts and commissions, including proceedings against village officers and in all special .assessment proceedings and cases instituted by or on behalf of such village, including taking estimates in regard to special assessments as they came from the village engineer; preparing legal parts of resolutions and ordinances; preparing exhibits; keeping a record of the meetings of the board of local improvements; preparing and mailing all notices of public hearings; preparing and presenting recommendations and ordinances necessary for the initiation of public improvements; preparing and filing the necessary petitions in special assessment proceedings in court; preparing and submitting for the .approval of the engineer the assessment rolls in connection with local improvements; preparing formal reports, affidavits, etc., necessary to be presented as a part of assessment rolls; representing the village in all hearings in court up to the time of the confirmation of the assessment roll and thereafter taking all necessary steps and doing all necessary work to procure the approval of the court; preparing notices for the letting of contracts and the award of contracts; preparing contracts with contractors; keeping a record showing moneys due and paid to contractors in connection with all public improvements; and preparing all necessary certificates, vouchers, and bonds concerning the payment of money in connection with local improvements. He attended all the meetings of the board and committees held at La Grange. All other legal work was performed in the offices of petitioner in Chicago by petitioner or under his direction. Ever since May 1919 petitioner has been the only village attorney appointed by the president and board of trustees.

While petitioner maintained his law office in Chicago and conducted an independent practice when time permitted, he gave priority to all of the village work as it came to his attention.

The spreading of the special assessment rolls was done by one Mitchell, a resident of La Grange, who had an office in petitioner’s suite of offices and who during 1926 was designated as commissioner to spread the rolls by the president and board of trustees of La Grange. He received 1 percent of the amount confirmed. The petitioner personalty never assisted in the spreading of assessment rolls.

No ordinance was adopted by the board of trustees in 1926 fixing definitely the salary, fees, or compensation of village attorney. During the year 1926 the petitioner was paid by the village of La Grange $75 per month for routine work, such as attending board meetings and drawing ordinances, other than appearances in court and before commissions and special assessment proceedings; $75 per day for appearances before courts of - record and commissions, other than special assessment proceedings; and 2 percent on the amount confirmed on all assessments handled by him for the village. Originally he received 8 percent on the amount of the contract price of special improvements.

The petitioner’s compensation for services rendered as village attorney was fixed by the president and the board of trustees. No negotiations were had at any time between petitioner and the board as to his compensation. It has been the same since his first appointment in 1919, excepting the change in the compensation for special assessment work, which was changed not by negotiations, but by direction of the village board because of criticism to the effect that the percentage paid the engineer and the attorney was based on an estimate which was higher than the actual award. The consent of petitioner was not required to effect any change in the amount of his compensation.

The village was billed either by petitioner as an individual or by the partnership or on a partnership billhead, for the services rendered on a $75 per diem basis. With regard to his services in special assessment proceedings the compensation was set up in the record of the proceeding itself and village vouchers were issued for the amounts so set up.

In 1926 the petitioner received $12,951.83 as his share of the partnership fees in addition to the fees received from the village of La Grange. The petitioner deducted for the year 1926 only the 47.5 percent of the amount of the fees received by him from the village of La Grange as exempt from taxation and not the entire amount.

From the statement attached to the notice of deficiency, copies of both of which are appended to the petition herein, it appears that the petitioner reported in his 1926 income tax return a net income of $7,883.30, to which amount the respondent added $7,119.61 as unreported attorney fees, with the following explanation:

Tlie amount of $7,119-61, representing your share of fees received by the law firm of Winters, Stevens, Rislr & Griffith for work done by the partnership for the Board of Local Improvements of the Village of Homewood, [La Grange] which was distributed to you and which you excluded from taxable income on the ground that, as income from municipality it was exempt, has been included as taxable income.
The evidence in the file shows that the services are rendered by the partnership and the fees in question were included in the income of the partnership and later divided among the respective partners in the following proportion:
George M. Stevens-47%%
Melvin L. Griffith_20%
J. 0. Risk_32%%
The evidence also shows that the partnership also acts as spécial attorney for other villages.
- It is the opinion of this office that the relations between the village and the partnership were contractual as between attorney and client and that the partnership may not be considered an officer or employee of the municipality within the meaning of Article 88 of Regulations 69.
The services were rendered by agreement, they were not of continuous tenure, they were not services established by law and regulations and may not be considered as rendered in connection with the exercise of essentially governmental functions.

From the briefs, statements of counsel, and copy of notice of deficiency appended to the petition herein, we gather that the respondent determined that the monthly salary of $75, or $900 per year, paid by the village of La Grange to petitioner in 1926 was exempt from Federal taxation and that respondent increased petitioner’s reported net income by the addition thereto of $7,119-61 representing petitioner’s partnership share or 47% percent of the compensation received from such village for services, other than routine services, rendered by petitioner or under his direction.

The respondent, on brief, concedes that, by virtue of section 11, article XI, chapter 24, Cahill’s Illinois Revised Statutes, 1925, providing that:

* * * The president and board of trustees may appoint * * * such other officers as may be necessary to carry into effect the powers conferred on villages, to prescribe their duties and fees * * *.

and chapters II and III of the village ordinances, one creating the office of village attorney and the other prescribing his duties, the petitioner was an officer of the village of La Grange in 1926. The respondent contends, however, that the amount of $7,119.61, constituting 47% percent of the compensation which the petitioner received from the village of La Grange in 1926 and which respondent-added to petitioner’s reported income was not paid to him pursuant to any ordinance definitely fixing the amount of his compensation as required by chapter 24, article VI, section 15 of Cahill’s Illinois Revised'Statutes, 1925, and that he therefore can not claim he received such compensation as a village officer, citing Koons v. Richardson, 227 Ill. App. 477; Koons v. City of Mt. Vernon, 245 Ill. App. 165; McGovney v. Village of Melrose, 145 Ill. App. 329. The question in issue therefore relates only to the amount of $7,119.61.

In the latter case it appears that McGovney was appointed village attorney in May 1904. The office of village attorney .had therefore, in 1900, been created by ordinance, providing for the appointment of such officer annually and prescribing his duties. Section 8 of such ordinance fixed the compensation of the village attorne}- at $450 per annum and provided that in all special tax or assessment cases carried into courts of record and in all cases in state courts of record and the courts of the United States in which the village might be a party, such village attorney should be allowed the usual and customary fee of attorneys practicing in such courts over and above the annual compensation of $450. The Appellate Court of Illinois reversed the judgment rendered by the trial court, which held that McGovney was entitled to recover compensation other than the annual salary, stating in part as follows:

By this section [section 15, article 6, Hurd’s Rev. Stat. 1905, p. 807] the board of trustees is limited to fixing the salary of the village attorney by ordinance. “Fixing ”, as used in the seetion, can only mea/n making definite and certain. This is apparent from the words following, “ such fees or compensation shall not be increased or diminished, to take effect during the term for which any such officer was elected or appointed.” Manifestly, unless the compensation be a sum certain, it cannot be told whether it has been increased or diminished.
By section 8 of the village ordinance, appellee’s compensation or salary was fixed at $450 per annum. By section 15 of article 6 of appellant’s charter, quoted supra, that salary could not be increased so as to take effect during appellee’s official term; but, by the provision of section 8 of the ordinance, it is provided that the compensation may be increased an indefinite amount. In other words, section 8 of the ordinance provides for the doing of that which appellant’s charter expressly prohibits. The provision is illegal and void. The charter provision prohibiting increase of an officer’s compensation, to take effect during his official term, is so important that it is incorporated in the constitution in respect to the compensation of state and county officers. * * * [Emphasis ours.]

The Supreme Court of Illinois affirmed the judgment of the appellate court holding that the village attorney could not recover compensation in excess of the fixed annual salary for services during the year of his appointment in the absence of any entry in the proceedings of the village board showing a special employment, although there was a record of his appointment as village attorney. McGovney v. Village of Melrose Park, 89 N. E. (Ill.) 264. This case is cited with approval in Koons v. Richardson, supra, and Koons v. City of Mt. Vernon, supra.

In this proceeding it appears that the village of. La Grange, by chapter II of its ordinances created the office of village attorney and by chapter III thereof prescribed his duties, which provisions are broad enough to cover services in special assessment cases and others as well. Therefore, under the laws and above cited cases the village could not be compelled to pay and the petitioner would not be entitled to recover any compensation in excess of the salary fixed by the president and board of trustees without a showing of special employment. It is, therefore, not unreasonable to assume that any compensation in excess of $75 per month was paid to and received by petitioner under special employment and as an independent contractor and not as an officer of the village.

We, therefore, hold that anything in excess of that amount paid to petitioner is not exempt from Federal taxation under the implied constitutional prohibition against Federal taxation of the compensation of an officer of a political subdivision of a state for services rendered in the exercise of governmental functions.

The petitioner contends that in any event he was an employee of the village. In that connection he testified that all the work performed by him as village attorney was done either under the direction of the. board as a whole or the regularly constituted committees of the board. However, there is no evidence showing that the board or any committee “ exercised any detailed control as to what should he done, and how it should he done, which is essential to the relationship of employer and employee.” (Emphasis supplied.) Haight v. Commissioner, 52 Fed. (2d) 779, affirming George I. Haight, 14 B. T. A. 844.

See also Lucas v. Howard, 280 U. S. 526; Lucas v. Reed, 281 U. S. 699; Burnet v. Jones, 50 Fed. (2d) 14; Burnet v. McDonough, 45 Fed. (2d) 944; George H. Gabel, 25 B. T. A. 60; Register v. Commissioner, 69 Fed. (2d) 607; Richard F. Burgess, 69 Fed. (2d) 609.

In our opinion petitioner was not a village employee in the year involved and in particular in rendering services in special assessment matters which usually involve statutory proceedings and are quite technical in scope.

Decisions involving questions similar to the questions here raised necessarily rest upon the facts presented in each case and therefore no useful purpose would be served by discussing all the cases cited by counsel.

In view of our holding, we deem it unnecessary to consider whether some of the services rendered by the petitioner in special assessment matters were not rendered in the performance of an essential governmental function as contended by respondent.

Decision will be rendered for the respondent.


text:
    Homer S. Warren and Charlotte V. H. Warren, Administrators, of the Estate of B. T. Van Housen, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent. Mrs. C. V. H. Warren, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 49319, 50634.
    Promulgated January 15, 1935.

      Leo M. Hirschtritt, Esq., for the petitioners.

      Isadore Graff, Esq., for the respondent.
   opinion.

McMahon :

These are proceedings, duly consolidated for hearing and other disposition, for the redetermination of the liability of the petitioners, as transferees, for the income and profits taxes owing from the Steuben County Wine Co. for the year 1919, determined by the respondent to be $58,633.95, plus interest.

The petitioners allege that they are not liable as transferees; that the tax as assessed against the Steuben County Wine Co. is incorrect in that the assessment was made without the benefit of sections 327 and 328 of the Revenue Act of 1918; and that the assessment against the Steuben County Wine Co. was made after the legal date for such assessment and no legal waiver was on file.

In his amended answer in each proceeding, the respondent alleged that in Steuben County Wine Co., 14 B. T. A. 746, and by its decision entered on December 19, 1928, the Board found and held that there is a deficiency of $58,633.95 against the Steuben County Wine Co. for the year 1919, that respondent duly and regularly assessed additional Federal income tax in such amount against the Steuben County Wine Co. for the calendar year 1919; that such assessment has not been paid; that on or about December 30, 1922, the assets of the Steuben County Wine Co. were distributed to the stockholders of the company in liquidation; that ever since that time the Steuben County Wine Co. has been insolvent and unable to meet its liabilities, including its tax liability for the year 1919; that the petitioner was a stockholder in the Steuben County Wine Co. at the time of such distribution, and received from the company as a stockholder, and not as a bona fide purchaser or creditor for value, assets of such company having a value of at least $58,633.95; and that as a result of this distribution the petitioner became liable within the meaning of section 280 of the Revenue Act of 1926 for the entire amount of the additional tax assessed against the Steuben County Wine Co. for the year 1919, plus interest as provided by law. The respondent then further alleged that the prior decision of the Board determining the additional tax liability of the Steuben County Wine Co. for the year 1919 (Steuben County Wine Co., supra) is final and binding upon the petitioner.

In the reply in each docket it is denied that the petitioners became liable as transferees within the meaning of section 280 of the Revenue Act of 1926. However, in the reply in each docket- it is admitted that the prior decision of the Board determining the additional tax liability of the Steuben County Wine Co. to be $58,633.95 is final and binding upon the petitioners and that they are precluded from raising such issues or any other issues affecting the tax liability of the Steuben County Wine Co. At the hearing the petitioners specifically waived the question of the statute of limitations as to the transferor’s liability. The petitioners do not claim that assessment and collection of their liabilities as transferees are barred by the statute of limitations.

The parties entered into the following stipulation:

Steuben County Wine Company was incorporated in 1885, under the laws of the State of Illinois, and had its principal office at Chicago, Illinois. Prior to the advent of prohibition, said company was engaged in the business of selling wines and liquors. It ceased doing business in the latter part of June, 1919, due to the adoption of national prohibition.
On or about May 15, 1920, Steuben County Wine Company filed a corporation income tax return for the year 1919, which return disclosed a tax liability of $25,800.88, and which tax liability was duly assessed and paid.
On or about February 10, 1925, an income and profits tax waiver was filed whereby the statutory period for making an additional assessment against Steuben County Wine Company was extended to December 31, 1925, except said waiver provided that if a notice of deficiency in tax is sent to said company before December 31, 1925 and an appeal therefrom filed with the United States Board of Tax Appeals, then said date for making additional assessment is extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board.
On November 19, 1925, the Commissioner of Internal Revenue mailed a notice of deficiency to Steuben County Wine Company in which said company was notified of an additional tax liability for the year 1919 in the amount of $58,633.95.
On January 16, 1926, said company filed a petition with the United States Board of Tax Appeals appealing from the determination of the Commissioner of Internal Revenue as set forth in said deficiency notice, which petition was docketed as No. 11035.
On July 19, 1928, a hearing of said appeal was had before a Division of the Board at Chicago, Illinois. On December 17, 1928, the Board promulgated its findings of fact and opinion (reported in 14 B. T. A. 746). On December 19, 1928, the Board entered an Order of Redetermination in which it was ordered and decided that there was a deficiency due from the Steuben County Wine Company of $58,633.95, for the year 1919.
In June, 1929, said additional tax, together with interest thereon, in the amount of $11,755.70, or a total sum of $70,389.65, was duly assessed against Steuben County Wine Company. Notice and demand for payment of said tax and interest were duly made by the Collector of Internal Revenue upon said company, but said company failed to pay said tax and interest within the time provided by said notice and demand. Thereupon, in due course, a warrant for distraint was issued by the Collector of Internal Revenue commanding a Deputy Collector to levy upon, by distraint, and to sell so much of the goods, chattels, effects or other property of said company as may be necessary to satisfy the said tax and interest. Due return was made of said warrant by the Deputy Collector, advising the Collector of Internal Revenue that Steuben County Wine Company had no property of any kind or nature upon which to levy for the satisfaction of all or any part of said tax and interest, it having disposed of its property of every nature in 1922 or 1923, and was, therefore, insolvent. At the time said warrant of distraint was served upon Steuben County Wine Company, which was in 1930, said company had no property of any kind or description upon which the Collector of Internal Revenue could levy, for the satisfaction and payment of said tax and interest, and has had no property at any time since the service of said warrant for distraint from which payment of said tax and interest could be satisfied. The Collector of Internal Revenue exhausted every remedy at his command to collect said tax and interest from said Steuben County Wine Company.
On April 21, 1930, the Commissioner of Internal Revenue mailed a formal notice of deficiency to Mrs. C. V. H. Warren and B. T. Van Housen, advising each of them of their liability as transferees of Steuben County Wine Company for the said additional tax and interest theretofore determined and assessed for the year 1919 against Steuben County Wine Company.
At all times prior to May 29, 1922, Steuben County Wine Company had an authorized and outstanding capital stock of 2,000 shares of common stock, of a par value of $100 each, which stock was owned as follows:
B. T. Yan Housen, 1,300 shares.
Mrs.- C. V. H. Warren, 500 shares.
A. R. Martin, 200 shares.
At all times material to- these proceedings, B. T. Van Housen was president of Steuben County Wine Company and A. R. Martin was secretary and treasurer of said company.
On May 29, 1922, A. R. Martin sold his 200 shares of stock of said company to the said company, and the company thereafter retained the same as treasury stock. Thereafter the stock of said company was held as follows:
B. T. Van Housen, 1,229 shares.
Mrs. C. V. H. Warren, 500 shares.
A. R. Martin, 1 share.
The said one share of stock stood in the name of A. R. Martin for qualifying purposes; said share of stock was endorsed in blank and held by B. T. Van Housen.
Pursuant to the resolution of stockholders at the meeting held by them on July 18, 1922, the Secretary of the State of Illinois approved a change in the name of Steuben County Wine Company to Steuben County Company and approved an enlargement of the objects and purposes of the Steuben County Company as provided in said resolution.
Pursuant to the resolution of the stockholders at the meeting held by them on December 23, 1922, the Secretary of the State of Illinois approved an increase in the authorized capital stock of the Steuben County Company from $200,000 to $800,000. No additional stock, however, was actually issued by Steuben County Company and the outstanding capital stock remained as 1,800 shares.
Pursuant to the resolution of the stockholders at the meeting held by them on June 19, 1923, the outstanding capital stock of the Steuben County Company was decreased from 1,800 shares to 100 shares, and was reissued as follows:
B. T. Van Housen-71 shares.
Mrs. C. V. H. Warren-28 shares.
A. R. Martin_ 1 share.
The one share issued to A. R. Martin was for qualifying purposes. It was endorsed in blank and held by B. T. Van Housen.
The entries in the books of account of Steuben County Wine Company show a distribution in liquidation of all the corporate assets of the company to its then two stockholders, B. T. Van Housen and Mrs. C. V. H. Warren. This distribution in liquidation is shown on the records of the Steuben County Wine Company to have been made on December 30, 1922.
The distributive share of B. T. Van Housen was shown on said records to be 13/18 of the total value of the property and of Mrs. C. V. H. Warren, 5/18 of the total value of the property. The fair market value of the assets of Steuben County Wine Company as of December 30, 1922 was not less than $500,000. If the Board holds that said B. T. Van Housen and Mrs. C. V. H. Warren were the transferees of Steuben County Wine Company, within the meaning of the Revenue statute, then it is agreed that the value of the assets which each received was 13/18 and 5/18, respectively, of the amount of $500,000.
Pursuant to the resolution of the Board of Directors of Steuben County Company, at a meeting' of said Board held on December 29, 1922, Steuben County Company deposited with the Port Dearborn National Bank of Chicago, United States Liberty Bonds, having a face value of $125,000, as security for the payment of $83,106.76 additional income taxes assessed against Steuben County Wine Company by the Commissioner of Internal Revenue for the year 1918, a claim for abatement of which had been filed by said company. In December, 1923, the Commissioner of Internal Revenue abated all of said additional assessment, except $21,496.33. The latter sum, together with, interest thereon in the amount of $3,170.71, or a total of $24,667.04, was paid by the Steuben County Company. On or about December 17, 1923, Steuben County Company, pursuant to the agreement theretofore made between said company and B. T. Van Housen and Mrs. C. V. H. Warren, true copies of which are set forth in the minutes of the Board of Directors held December 29, 1922, and which have been received in evidence, distributed to B. T. Van Housen and Mrs. C. V. H. Warren, 13/18 and 5/18, respectively, of the Liberty Bonds, remaining, or the proceeds thereof after the payment of said taxes for the year 1918. The fair market value of the Liberty Bonds, or the. proceeds thereof remaining after payment of said income taxes at said date of distribution was $102,799.66, of which $74,015.78, or 72 per cent, was received by B. T. Van Housen and $28,783.88, or 28 per cent, was received by Mrs. C. V. II. Warren.
The Beacharmar Company was organized July 9, 1923, under the laws of the State of Illinois. Total authorized capital consisted of 5,000 shares of common stock, of a par value of $100 each, which was subscribed to as follows:
B. T. Van Housen-3,189 shares.
Mrs. C. V. H. Warren-1,810 shares.
Robert M. Todd_ 1 share.
The share of stock issued to Robert M. Todd was for qualifying purposes. The original stock certificates were issued to said subscribing stockholders on November 24, 1924.
The entries on the books of account of the Beacharmar Company show that the said 3,189 shares of Beacharmar Company stock were issued to B. T. Van Housen in consideration of the transfer by him of investment securities and other property having a fair market value of $318,900, and that the said 1,810 shares of stock were issued to Mrs. C. V. II. Warren in consideration of the transfer by her of investment securities and other property having a fair market value of $181,000.
The securities and property shown by the records of the Beacharmar Company to have been received by it from B. T. Van Housen and Mrs. C. V. H. Warren in consideration of the issuance to them of the capital stock of the Beacharmar Company were the'same securities and property which were previously owned by the Steuben County Company. Said securities and property were never in the physical possession of B. T. Van Housen and Mrs. C. V. H. Warren, the transfer to Beacharmar Company having been made direct from Steuben County Company pursuant to the consent of B. T. Van Housen and Mrs. C. V. H. Warren.
The first tax return of Beacharmar Company was filed for the period January 1, to December 31, 1923, which tax return reflected the taxable income including interest and dividends received during the entire year from 1923 from securities aggregating approximately $500,000 and owned by Steuben County Company prior to December 30, 1922.
The fair market value o£ 3,189 shares of common stock of Beacharmar Company received by B. T. Van Housen was not less than $318,900 on July 9', 1923, and on November 24, 1924.
The fair market value of the 1,810 shares of common stock of Beacharmar Company received by Mrs. C. V. H. Warren was not less than $181,900 on July 9, 1923, and on November 24, 1924.
The fair market value of the assets of Beacharmar Company on July 9, 1923 and November 24, 1924 was not less than $500,000.
B. T. Van Housen died on or about August 1, 1921 [1931], Homer S. Warren and Charlotte V. H. Warren, as administrators of his estate, were on motion of respondent, and granted by the Board, substituted in place and stead of B. T. Van Housen to prosecute the appeal originally filed by B. T. Van Housen.

There were also received in evidence certain joint exhibits and other exhibits. These consisted of portions of the minute book of the Steuben County Wine Co., portions of the minute book of the Beacharmar Co., the corporation income tax returns of the Steuben County Co. for 1922 and 1923, and a copy of the notice of deficiency mailed to Mrs. C. V. H. Warren. All these exhibits we incorporate herein by reference.

The petitioners admit that the decision of the Board in Steuben County Wine Co., 14 B. T. A. 746, that there are additional taxes due from the Steuben County Wine Co. for the year 1919 in the amount of $58,633.95, is binding upon them. To the effect that such prior decision is binding upon them, see Jahncke Service, Inc., 20 B. T. A. 837, the appeal from which to the United States Circuit Court of Appeals for the Fifth Circuit was dismissed for lack of prosecution on February 10,1933; and J. E. Duval, 21 B. T. A. 1357; affirmed on another issue in Duval v. Commissioner, 57 Fed. (2d) 496.

The stipulated facts show that on or about December 17, 1923, the Steuben County Co. distributed to B. T. Van Housen, whose estate is prosecuting the appeal, Liberty bonds of a value of $74,015.78, and to the petitioner, Mrs. C. V. H. Warren, Liberty bonds of the value of $28,783.88. The petitioners admit their liability to the extent of these respective amounts. The respondent, in his notices of deficiency, seeks to hold each petitioner, Mrs. C. V. H. Warren and the estate of B. T. Van Housen, liable for the full amount of the additional tax of the Steuben County Wine Co., $58,633.95, plus interest. It will be seen that by the admission of the estate of B. T. Van Housen, such estate is liable for the full ampunt asserted by the respondent, with the probable exception of some of the interest. However, in his brief the respondent states that since it is not known to what extent the Government will succeed in collecting the tax and interest from the estate of B. T. Van Housen, the Government is desirous of securing a determination as to whether there is any liability of the petitioner, Mrs. O. V. H. Warren, as a transferee of the assets of the Steuben County Wine Co. in excess of her admitted liability, $28,783.88. Under the pleadings it remains to be determined whether this is the full extent of her liability as a transferee, and whether $74,015.78 is the full extent of the liability of B. T. Yan Housen as transferee for which his estate is now liable.

It is the contention of the respondent that as of December 30, 1922, the petitioner, Mrs. C. Y. H. Warren, received assets of the Steuben County Co. of a value of five eighteenths of $500,000, or approximately $138,000. She, on the other hand, contends that the assets of such company were not transferred to the stockholders, of which she was one, but were transferred to a new company, the Beacharmar Co., and that such company is the transferee which is liable for the tax. At the outset it must be clearly understood that the Beacharmar Co. is not a party to this proceeding, and we have no jurisdiction to determine whether or not it is liable as a transferee.

A brief resume of the facts is helpful in understanding this issue. On December 29, 1922, the stockholders of the Steuben County Co. (the former name being Steuben County Wine Co.), who were B. T. Yan Housen, Mrs. C. Y. H. Warren, and A. R. Martin (the last named finally holding one qualifying share), held a meeting at which it was resolved that the business be discontinued and fully liquidated at the close of business on December 30, 1922. It was resolved further that the stockholders request and recommend to the board of directors that such board of directors declare a final liquidating dividend, under and by virtue of which all the remaining assets of the corporation of every kind and nature would be distributed and turned over to the stockholders in proportion to their stock-holdings. At a special meeting of the directors of the company held December 29,1922, the directors being B. T. Yan Housen, Mrs. C. Y. H. Warren, and A. R. Martin, it was resolved that the business should be permanently discontinued and fully liquidated, and that all the assets of every kind and nature be distributed to the stockholders. It was therein provided, however, that the corporation should remain in existence for the purpose of settling its income, excess and war profits tax matters. In its return filed for the year 1922 the Steuben County Co. stated that its business had been liquidated. It was further stated that its capital and surplus had been liquidated in full. It was shown therein that all the corporate assets of the company in the amount of $661,459.95 had been distributed at December 30,1922. .The books of account of the Steuben County Co. show a distribution in liquidation of all the corporate assets of the company to its two stockholders, B. T. Van Housen and Mrs. C. Y. H. Warren, on December 30,1922. The fair market value of the total assets of the Steuben County Co. as of December 30, 1922, was not less than $500,000. The records of the Steuben County Co. show that B. T. Van Housen was to receive thirteen eighteenths thereof, and that Mrs. C. V. H. Warren was to receive five eighteenths. The stipulated facts show, however, that neither petitioner Mrs. C. Y. H. Warren nor petitioner B. T. Yan Housen ever had physical possession of these assets with the exception of the Liberty bonds referred to hereinabove.

The Beacharmar Co. was organized July 9, 1923, the incorporators being B. T. Yan Housen, Mrs. C. V. H. Warren, and Kobert M. Todd. B. T. Van Housen owned 3,189 shares, Mrs. C. Y. H. Warren owned 1,810 shares, and Robert M. Todd owned one share, which was a qualifying share. The stock certificates were issued to them on November 24, 1924. The directors were the same as the stockholders. The books of account of the Beacharmar Co. show that 3,189 shares of stock of the company were issued to B. T. Yan Housen in consideration of the transfer by him of) investment securities and other property having a fair market value of $318,900, and that 1,810 shares of stock of the company were issued to Mrs. C. V. H. Warren in consideration of the transfer by her of investment securities and other property having a fair market value of $181,000. The stipulated facts show that this property was the property which was previously owned by the Steuben County Co. and that it was transferred direct to the Beacharmar Co. by the Steuben County Co. pursuant to the consent of B. T. Yan Housen and Mrs. C. Y. H. Warren.

It is the contention of the respondent that the fact that the petitioners did not actually physically receive the properties is not conclusive of the question, it being sufficient that they were entitled to receive the same.

The petitioners, as stated, contend that the party liable as transferee is the Beacharmar Co., contending that the minutes covering the declaration of the liquidating dividends were inconsistent with the procedure which was actually followed in organizing the Beach-armar Co. and transferring to it the assets of the Steuben County Co. The petitioners point to the fact that the first corporation income tax return of the Beacharmar Co. was filed for the period January 1 to December 31, 1923, and that such tax return reflects the taxable income, including interest and dividends received during the entire year 1923 from securities aggregating approximately $500,000, which were owned by the Steuben County Co. prior to December 30, 1922, and contend that this substantiates, the fact that the securities were never distributed to the stockholders of the Steuben County Co. The petitioners also point to the fact that the stockholders of the Steuben County Co., on June 19, 1923, held a meeting at which it was resolved to decrease the capital stock from $800,000 to $10,000. Petitioners contend that the fact that this stock was not surrendered prior to this date further proves that there was no distribution of assets to the stockholders.

The petitioners contend that where one corporation transfers its assets to a new corporation in exchange for stock of the latter which is issued directly to the stockholders, leaving the transferor without assets to satisfy its creditors, the new corporation is liable to the creditors of the old to the extent of the value of the property received, citing Woodley Petroleum Co., 16 B. T. A. 253; Concrete Industries Co., 19 B. T. A. 655; Gideon-Anderson Co., 20 B. T. A. 106; and Wayne Body Corporation, 22 B. T. A. 401. Petitioners also contend that the new corporation is also liable in the case where it delivered stock to the old corporation which later distributed the same to its stockholders, the reason being that creditors of the old corporation can not be required to look alone for satisfaction to the stock and bonds which were substituted for the real tangible assets of the old corporation. However, as stated hereinabove, the Beach-armar Co. is not before us and we have no jurisdiction of it, and specifically do not decide whether or not it is liable as a transferee. Furthermore, whether or not it is liable is not determinative of the question here presented as to whether the petitioners are liable as transferees.

In E. H. Dobrin, 27 B. T. A. 611, we held liable, as a transferee, a stockholder of the transferor corporation. There the old corporation had sold its assets to another corporation for shares of the latter’s capital stock, which shares were issued directly to the stockholders of the old corporation. There, as here, the shares had a value in excess of the deficiency in question. We there stated in part:

* * * That procedure was nothing more nor less than a distribution, by-shortcut methods, of the assets received by the Arcade Company in exchange for the property which it sold. It is well settled that where a corporation leases its property and the rental price is paid directly to its stockholders, such payment constitutes taxable income to the corporation. United States v. Western Union Telegraph Co., 19 Fed. (2d) 157; affd., 50 Fed. (2d) 102; Rensselaer & S. Ry. Co. v. Irwin, 249 Fed. 726; certiorari denied, 246 U. S. 671. The same principle was upheld in Old Colony Trust Co. v. Commissioner, 7 B. T. A. 648; affd., 279 U. S. 716.
We think that principle apxjlies in the present proceeding. The decision cited by petitioner in support of his view, Signal Gasoline Corp., 25 B. T. A. 532, is not in point, for the question here raised was not in issue in that case. We conclude, therefore, that the stock issued by the Burroughs Company in exchange for the stock in trade of the Arcade Company constituted assets of the latter, and petitioner, as a distributee of those assets, became a transferee in respect to them.

To similar effect are Fairless v. Commissioner, 67 Fed. (2d) 475, affirming B. F. Fairless, 19 B. T. A. 304; Estate of John W. Rapp, 24 B. T. A. 1061; Fifty-Three West Seventy-Second Street, Inc., 23 B. T. A. 164; and Grand Rapids National Bank, 15 B. T. A. 1166.

The stipulated facts show that the fair market value of the 3,189 shares of common stock of the Beacharmar Co. received by B. T. Van Housen was not less than $318,900 on July 9, 1923, the date of organization of the Beacharmar Co. and November 24,1924, the date when its stock certificates were issued, and that the fair mlarket value of the 1,810 shares of common stock of the Beacharmar Co. received by Mrs. C. Y. H. Warren was not less than $181,000 on the same dates.

Whether there was here a transfer by the Steuben County Co. of its assets direct to the Beacharmar Co., or whether there was a transfer of the assets first to the stockholders of the Steuben County Co. and thence to the Beacharmar Co., is immaterial and we therefore find it unnecessary to determine this question. In any event the stockholders, having received property of a value in excess of the liability herein in question, are severally liable in equity to the foil extent of the amount asserted against them. Phillips v. Commissioner, 283 U. S. 589.

We hold that Mrs. C. Y. H. Warren and the estate of B. T. Yan Housen are each liable for the full amount of the .liability asserted by the respondent.

Decision will be entered for the respondent.