author: Tyson :

text:
    Illinois Agricultural Holding Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 104247.
    Promulgated January 2, 1942.

      O. G. Ohafélle, Esq., for the petitioner.

      Gerald W. Brooks, Esq., for the respondent.
   OPINION.

Tyson :

Petitioner herein raises no issue and makes no contention as to the propriety of including in its gross income, subject to the credit provided for in section 26 (b) of the Revenue Act of 1936, the amounts received by it in 1936 and 1937, respectively, as dividends declared and paid by the Insurance Co. on the latter’s outstanding capital stock owned by petitioner.

The issue here is whether the petitioner’s disbursements of $58,-122.09 in 1936 and $69,667.27 in 1937 to persons other than its stockholders and pursuant to its obligation under a contract to which such persons were not parties, but which contract was entered into by petitioner with its principal stockholder, constituted distributions of profits, as determined by respondent, or, constituted ordinary and necessary business expenses deductible from gross income under section 23 (a) of the Revenue Act of 1936, as contended by petitioner.

The Association, the petitioner, and the Insurance Co., although affiliated through stock ownership, were each incorporated as a separate legal entity, with separate rights and powers to carry on the particular business operations for which it was organized. The Association was organized as a nonprofit corporation for the benefit of its members. The Insurance Co. and the petitioner were each organized for profit and, in fact, realized profits in which their respective stockholders participated by way of dividends.

The facts show that the petitioner, as a separate corporate entity and as the owner of the capital stock of the Insurance Co., received dividends on such stock as its gross income for each of the taxable years in question. Out of such gross income petitioner paid its operating expenses and declared and paid regular annual dividends, amounting to $8,750 for each of the taxable years, to the holders of its own outstanding capital stock. Also, out of such gross income or earnings, petitioner, under its contract with the Association, made the distributions here in question to persons who had no contractual or business relations with and rendered no services to petitioner. While the petitioner’s distributees purchased insurance from and paid premiums to the Insurance Co., which in turn paid dividends to petitioner, it can not be said that such distributees were doing business with or rendering services to petitioner in the production of income realized by it. The petitioner’s income was produced through dividends declared by the Insurance Co. out of the latter’s net profits realized from its business operations.

In each of the taxable years the petitioner was in receipt of taxable income out of which it made the distributions in question claimed as deductions from gross income. The extent to which deductions from gross income are allowable depends upon legislative grace and the taxpayer seeking a deduction must be able to point to and show that he comes within the terms of an applicable statute. White v. United States, 305 U. S. 281, 292. The petitioner points to section 23 (a), swpra, which deals with ordinary and necessary business expenses, but, in our opinion, fails to bring itself within the terms of that section because the distributions in question were not necessary charges upon the continued operation of petitioner’s business nor an outlay as a consideration for producing its income, and thus were not ordinary and necessary business expenses of petitioner.

The facts in the instant case distinguish it from Louis C. Rollo, 20 B. T. A. 799, and American National Co. v. United States, 274 U. S. 99, solely relied upon by petitioner. In those two cases and also in Monroe Sand & Gravel Co., 36 B. T. A. 747; Buffalo Eagle Mines, Inc., 37 B. T. A. 843 (the latter two cases not cited by petitioner), wherein amounts paid by the taxpayers under contractual obligations were allowed as deductible business expenses, the payments were made to the party, or parties, to the contracts who had business relations with the taxpayer, through which relations (a) the business of the taxpayer was continued or (b) income was produced for the taxpayer, so that in either event the payments made under the contracts were directly connected with the production of the taxpayer’s income and constituted a charge upon the operation of its business.

Sand Springs Railway Co., 21 B. T. A. 1291, 1307, 1309, is also distinguished from the instant case in that there the payments made under a contractual obligation and allowed as a business expense were necessary in order to avoid forfeiture of the taxpayer’s fran-cliise to carry on its business and thus constituted an ordinary and necessary charge upon the continued operation of that business.

The sole common stockholder of the petitioner was the Association, which, after the payment made by petitioner of all dividends due on its preferred stock in each taxable year, was entitled to receive all further distributions made out of petitioner’s earnings in each such years, but by the Association’s contract with petitioner the Association directed the petitioner to make such further distributions (those here in question) which would otherwise have been made to it, to other persons, and the distributions were made as so directed. We are of the opinion that the Association as sole owner of the common stock of petitioner thus constructively received the distributions from profits here in question, and hold that, since such distributions did not constitute ordinary and necessary expenses, they are not deductible in computing petitioner’s net income. Cf. Gray Processes Corporation, 43 B. T. A. 624, 640, 642; affirmed per curiam, 122 Fed. (2d) 1021.

Respondent's determination is sustained.

Decision will be entered for the respondent.

       SEC. 26. CREDITS OE CORPORATIONS.
      In the case of a corporation the following credits shall he allowed to the extent provided in the various sections imposing tax—
      * * * * * $ *
      (b) Dividends Received. — 85 per centum of the amount received as dividends from a domestic corporation which is subject to taxation under this title. * * *

       SEC. 28. DEDUCTIONS FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      (a) Expenses. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *


source: Caselaw Access Project

author: Black:

license: Public Domain

text:
    Gus T. Dodd, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99323.
    Promulgated January 6, 1942.

      John E. McClure, Esq., Pope F. Brock, Esq., Granger Hansell, Esq., and G. Baxter Jones, Esq., for the petitioner.

      F. L. Van Haaften, Esq., for the respondent.
   OPINION.

Black:

The principal difference between the instant proceeding and the case of L. B. Coley, 45 B. T. A. 405, is that during the taxable year 1935 Coley was a direct stockholder of Coca-Cola, whereas petitioner Dodd was a stockholder of International, which in turn was a stockholder of Coca-Cola. Both Coley and Dodd were parties to the same plan under which Coca-Cola during 1935 desired to obtain and did obtain for retirement a balance of 71,755 shares of its class A stock at the redemption price of $52.50 per share plus $1.30 per share for accrued dividends. Coley, being a direct stockholder of Coca-Cola, participated in the plan by delivering 1,000 shares of class A stock of Coca-Cola to Equitable, as agent, which in turn delivered the shares to the Trust Co. of Georgia as escrow agent, which in turn delivered the shares (as a part of the 71,755 shares) to Coca-Cola for retirement and for cash, which cash the escrow agent then paid over to Coley. In our report in the Coley case, we held that the cash thus received by Coley was an amount distributed in partial liquidation of a corporation as the term “amounts distributed in partial liquidation” is used in section 115 (c) and defined in section 115 (i) of the Revenue Act of 1934, and that there should be taken into account in computing Coley’s net income 100 percent of Coley’s gain in the transaction. Dodd, being a stockholder of International, participated in the plan by delivering 600 shares of class A stock of International direct to the Trust Co. of Georgia as escrow agent, who in turn delivered the shares to International for retirement and in exchange for 1,200 shares of class A stock of Coca-Cola, which 1,200 shares (as a part of the 11,755 shares) the escrow agent then delivered to Coca-Cola for cash, which cash the escrow agent then paid over to Dodd. The question involved in the present case is whether the gain Dodd realized from participating in the plan should be taxed any differently than the gain Coley realized from participating in the plan. The parties are in agreement as to the amount of the gain, since they have now agreed upon the cost basis, but differ only as to the percentage thereof to be taken into account in computing net income. Petitioner contends that the amount he received from the escrow agent was merely the consideration for á “sale” by him of his 600 shares of International class A stock and that he is entitled to the benefits of section 117 (a) of the Revenue Act of 1934, whereas the respondent contends that the amount so received represents “amounts distributed in partial liquidation” as that term is used in section 115 (c) and defined in section 115 (i) of the Revenue Act of 1934, so that as provided in section 115 (c) “Despite the provisions of section 117 (a), 100 per centum of the gain so recognized shall be taken into account in computing net income.” These sections of the statute are printed in the margin of the Coley case and need not be repeated here.

Petitioner in support of his contention argues that he actually sold the 600 shares of International stock and not the 1,200 shares of Coca-Cola stock; that neither Equitable nor any other person or corporation was empowered by petitioner to exchange petitioner’s International stock for Coca-Cola stock; that the petitioner can not be held accountable for the exchange which was made; and that, if petitioner is legally responsible for the exchange, then the exchange was an intermediate and transitory transaction, and the taxable transaction would be the net result, namely, a sale by petitioner of his 600 shares of International class A stock for cash from Coca-Cola.

Petitioner has requested the Board to find the facts as stipulated and also to make four additional findings as follows:

1. The Taxpayer disposed of his 600 shares of Coea-Oola International Class A upon a sale thereof as the term “sale” is used in Section 112 (a) of the Revenue Act of 1934.
2. The act of the Trust Company of Georgia, The Equitable Company, or The Coca-Cola Company in having Taxpayer’s 600 shares of Coca-Cola International A exchanged for 1200 shares of Coca-Cola Company Class A was not authorized by the Taxpayer, nor is it to be attributed to the Taxpayer.
3. If such exchange is, for tax purposes, attributable to Petitioner, it was merely a transitory transaction carried through to effectuate the ultimate objective of selling Petitioner’s stock for cash, and the exchange is not in and of itself a separate, independent taxable transaction, but is one step only in an entire transaction wherein taxpayer sold his Coca-Cola International A for cash.
4. The Petitioner is entitled to the benefit of the Capital Gains Section.

We found the facts as stipulated, but we are unable to make the special findings requested by petitioner, for reasons which we shall presently state.

The primary question for determination in our opinion is, For whom did the Trust Co. of Georgia act when it delivered the 12,616 shares (including the 600 shares here in question) of International class A to International’s transfer agent for retirement and in exchange for 25,232 shares of Coca-Cola class A stock? Petitioner contends that the Trust Co. of Georgia was acting for the account of Coca-Cola, whereas the respondent contends that it was acting for petitioner’s account. From an examination of the facts set out in our findings, we hold that the respondent’s contention must prevail.

In order to reach a decision on the issue involved in this case a careful analysis of the facts must be made. We have endeavored to make such an analysis. A very important document to consider, of course, is the contract which was signed on October 8, 1935, between petitioner Dodd, as owner, and the Equitable Co., as agent. Clause 3 of that contract reads in part as follows:

3. The Owner authorizes the Agent to sell to The Coca-Cola Company, for the Owner’s account, on or before December 12, 1985, 1200 shares of Coca-Cola Class “A” Stock at Fifty-two and 50/100 ($52.50) Dollars a share, plus accrued dividends. * * *

If that had been the only clause of the contract which described and controlled the kind of stock which was to be sold and delivered, it seems to us that the inevitable result of the whole series of transactions in the instant case would come out the same as in the Coley case. The petitioner concedes in his brief that this would be true. But petitioner points to clause 6 of the contract, which reads as follows:

6. For the purposes of this agreement, one (1) share of Coca-Cola International Corporation Class “A” stock and the exchange fee will be considered as the equivalent to two (2) shares of Coca-Cola Company Class “A” stock.

After quoting this clause of the contract and pointing out that it was under it that petitioner deposited his 600 shares International class A stock with the Trust Co. of Georgia for subsequent sale and delivery to Coca-Cola, petitioner says in his brief:

* * * This can mean nothing less than that Mr. Dodd signed a contract under which he had the option of delivering either 600 shares of International A or 1200 shares of Coca-Cola A, and he elected to take the former. As Mr. Dodd complied with the terms of the contract in delivering 600 shares of International A, then there can be no implied authority in any one to exchange the GOO shares of International A for 1200 shares of Coca-Cola A, and the Taxpayer had done everything that he agreed to do in his contract. * * *

From this premise petitioner argues that if the transaction, in so far as petitioner was a party to it as actually carried out, was a purchase by Coca-Cola of International A, from petitioner, the investigation comes to an end in favor of the taxpayer. We agree to the soundness of this latter proposition if the facts are as therein stated. But we think petitioner errs in his construction of the facts. There can be no doubt, we think, that a group of stockholders óf Coca-Cola and o'f International started out with the purpose in view of avoiding a call for redemption by Coca-Cola of a part of its class A stock. They were, of course, well within their legal rights to do this. In order to accomplish this purpose they drew up a contract with Equitable as their agent. This contract contemplated that either Coca-Cola class A stock or International class A stock would be deposited under the contract, and that Equitable would sell and deliver to Coca-Cola both classes of the stock. There can be no doubt, we think, that, when petitioner Dodd signed the contract with Equitable and later deposited his 600 shares International A stock with the Trust Co. of Georgia, he fully expected that these identical shares would be sold and delivered to Coca-Cola. He so testified at the hearing and we have no reason to doubt his testimony.

However, at that particular time Coca-Cola had not agreed to purchase any shares of stock either of Coca-Cola class A stock or of International class A stock. What Coca-Cola had under consideration was a call for redemption of a certain number of shares of its class A stock

After certain stockholders of Coca-Cola and International, including petitioner, had signed the agreement with Equitable as agent, and had assembled blocks of both classes of stock for sale, one of the attorneys representing the interested stockholders and Equitable attended a directors’ meeting of Coca-Cola held in Wilmington, Delaware. This Avas on or about November 1,1935. The attorney took along with him the contracts authorizing Equitable to sell to Coca-Cola both stocks, namely Coca-Cola class A stock and International class A stock. The board of directors, acting for Coca-Cola, refused to buy any International class A stock. The attorney described the situation in his testimony as follows:

* * * AVell, I went ahead with the matter and drew up these contracts for them and took them up there, and we offered to sell to the Ooea-Cola Company, by contract of sale, so many shares of Coca-Cola and so many shares of International, and I did not have quite the number, and they would not accept the contract, they said they were going to buy nothing but Coca-Cola.
* * * It was our intention, as you see, to sell International to the Coca-Cola Company, and it was on this trip, about the first of November, when I was in Wilmington, that they told us definitely they would not buy International * * *.

Following this refusal of Coca-Cola to buy International A stock, on November 2, 1935, Equitable and Coca-Cola entered into the agreement, incorporated in our findings of fact, relative to the 11,755 shares of Coca-Cola A in which nothing was said about International A, and in which it was provided that “Title to the shares to be sold and delivered hereunder shall not pass to the purchaser until the date the shares are delivered by the Escrow Agent to the purchaser.” On the same day, November 2,1935, Equitable entered into an agreement with the Trust Co. of Georgia which provided in part that:

Prior to December 6th, 1935 you [Trust Company of Georgia]' will cause the Class “A” International stock to be converted into Class “A” of The Coca-Cola Company, billing us for the expense, including the exchange fee. On December 6th, 1935 you will deliver the said shares to The Coca-Cola Company upon payment to you of the purchase price mentioned in the attached contract.

Thereafter, the Trust Co. of Georgia delivered the International A to International’s authorized transfer agent for retirement and in exchange for double the number of shares of Coca-Cola A which it then delivered to Coca-Cola as a part of the 71,755 shares mentioned in the agreement between that company and Equitable dated November 2, 1935. On December 9, 1935, it issued its check to petitioner, stating it to be in payment for 600 shares of International A at $105 less “Cost of exchanging stock for Coca-Cola stock 19$ per sh. $114.00.” Petitioner accepted the check. From these facts we think there can be no doubt that when the Trust Co. of Georgia delivered International A to International’s authorized transfer agent for retirement and in exchange for double the shares of Coca-Cola A, it definitely was not acting for the account of Coca-Cola, which had expressly refused to purchase any International A stock, but was acting for Equitable, which was petitioner’s agent. We hold, therefore, that the exchange is accountable to petitioner.

Petitioner contends that the contract of October 8, 1935, which he signed with Equitable was not broad enough to authorize Equitable to exchange the 600 shares International class A stock which he deposited for 1,200 shares Coca-Cola class A stock and then sell the 1,200 shares Coca-Cola class A stock to Coca-Cola for his account. We think differently-

Clause 7 of the contract of October 8,1935, which petitioner signed with Equitable, reads:

7. The Owner hereby ratifies and confirms all acts of the Agent and of said Advisers, and neither the Agent nor the Advisers shall be liable to the Owner for any act taken pursuant to the terms of this agreement except for a wilful tort or for an act done in the absence of good faith.

We think this clause of the contract is sufficient to give Equitable the authority to make the exchange and sale in question for petitioner’s account and that he is bound thereby. We so hold.

The respondent determined the deficiency on the basis of two separate transactions, namely, (1) an exchange of the 600 shares of International A for 1,200 shares of Coca-Cola A, resulting in a gain of $66,576, and (2) a sale of the 1,200 shares of Coca-Cola A, resulting in a loss of $3,870. As a result of the stipulation that petitioner’s cost basis of the 600 shares is $13,017.97, the respondent concedes .that' the gain from the exchange is $53,558.03 and that the net gain from both transactions is that amount less $3,870 or $49,688.03, instead of the $62,706 determined in his deficiency notice.

Petitioner contends that, should the Board hold, as we have aboye, that petitioner must be regarded as having exchanged his International A for Coca-Cola A, then the transaction must be viewed as a whole; and that the separate steps in a single transaction can not be regarded as separate transactions. But in order to do this petitioner' argues that we must “disregard the transitory exchange of the International stock for Coca-Cola stock and regard the transaction in its true light, namely, that the Taxpayer sold his International stock for cash.” In support of this contention petitioner cites Prairie Oil & Gas Co. v. Motter, 66 Fed. (2d) 309; Tulsa Tribune Co. v. Commissioner, 58 Fed. (2d) 937; Muskegon Motor Specialties Co., 35 B. T. A. 851; Helvering v. Security Savings & Commercial Bank, 72 Fed. (2d) 874; Helvering v. General Utilities & Operating Co., 74 Fed. (2d) 972; Ahles Realty Corporation v. Commissioner, 71 Fed. (2d) 150; Bassick v. Commissioner, 85 Fed. (2d) 8; American Security & Trust Co. v. Tait, 5 Fed. Supp. 337; Helvering v. Bashford, 302 U. S. 454; and Carter Publications, Inc., 28 B. T. A. 160.

In the instant proceeding it will not, in our opinion, make any difference in the result of petitioner’s tax liability whether it be determined on the basis of a single transaction with several steps viewed as a whole, or whether it be determined on the basis of two separate transactions.

If petitioner’s tax liability be determined on the basis of two separate transactions, as the respondent has done, the gain on the first transaction, namely, on the exchange of 600 shares of International A for 1,200 shares of Coca-Cola A is the amount of $53,558.03. Since the 600 shares were retired, this transaction would be regarded as a distribution in partial liquidation of International under the decisions of W. R. Prescott, 31 B. T. A. 17; petition for review denied, 76 Fed. (2d) 3; rehearing denied, April 20, 1935, and Rose v. Trust Co. of Georgia, 77 Fed. (2d) 355, and under the principles enunciated in L. B. Ooley, supra, 100 percent of such gain would be taken into account in computing petitioner’s net income. The second transaction, namely, the sale of the 1,200 shares of Coca-Cola A to Coca-Cola for retirement would be on all fours with the transaction involved in the Coley case, except that here petitioner would have a loss of $3,870 instead of a gain, and under section 117(a) and (d) of the Revenue Act of 1934, all of this loss would be allowed. The net result of the two transactions, therefore, would be a $49,688.03 gain, 100 percent of which would be taken into account in computing petitioner’s net income.

This method it seems to us is treating the transaction as a whole and the respondent has arrived at the correct tax consequences thereof. Of course if we could treat as petitioner’s only part of the transaction his delivery of the 600 shares of International class A stock to the Trust Co. of Georgia for sale to Coca-Cola, and that all steps thereafter were taken for Coca-Cola and not for petitioner Dodd, we would hold that petitioner had simply made a sale of his International A stock to Coca-Cola and would be accountable for the gain thereon at capital gain rates, and we would need to go no further. For reasons we have already stated, we can not treat the transactions, as carried out, in that maimer. Petitioner asks us to “disregard the transitory exchange of the International stock for Coca-Cola stock.” This we can not do. It is one of the material facts of the case. We know of no law or court or Board decision which would warrant us in disregarding it. We do not think that any of the cases cited by petitioner are any warrant for such treatment. We, therefore, approve the treatment which the Commissioner has accorded the transactions in his deficiency notice, except as to the basis of cost of petitioner’s International class A stock. The basis which the parties have agreed upon will be used in a recomputation of the deficiency.

Decision will be entered under Rule SO.


author: Mellott:

text:
    Hales-Mullaly, Inc., a Corporation, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100853.
    Promulgated January 6, 1942.

      Charles H. Garnett, Esq., for the petitioner.

      Franh B. Schlosser, Esq., for the respondent.
   OPINION.

Mellott:

The applicable statute is section 23 (a) of the Revenue Act of 1936. Respondent also cites section 24 (a) (2) of the same act and the corresponding article of Regulations 94.

The facts are not seriously in dispute. The findings show the circumstances under which the payments were made. Respondent determined that they were not ordinary and necessary expenses of carrying on petitioner’s .business. He does not seriously contend they were not necessary, directing his argument upon brief chiefly to the question whether they were ordinary. Without abandoning the. theory upon which he disallowed the deduction, he advances an alternative one — that the payments were in the nature of capital expenditures.

The decided cases establish certain general principles: Expenses incurred in connection with a suit or action against a taxpayer directly connected with or approximately resulting from his business, whether to secure payment of the earnings of the business or to retain them after receipt, are deductible as ordinary and necessary business expenses. Kornhauser v. United States, 276 U. S. 145. Expenses incurred in the settlement of a criminal liability or to avoid criminal prosecution, are not deductible, B. E. Levinstein, 19 B. T. A. 99; Sanitary Earthenware Specialty Co., 19 B. T. A. 641; Estate of John W. Thompson, 21 B. T. A. 568; Burroughs Building Material Co. v. Commissioner, 47 Fed. (2d) 178; nor are those paid in connection with lobbying or propaganda, Textile Mills Securities Corporation v. Commissioner, 314 U. S. 326; those which are “beyond the norm of general and accepted business practice” and “so extraordinary as to occur in the lives of ordinary business men not at all”, Deputy v. du Pont, 308 U. S. 488; capital expenditures, including those made in defending or perfecting title to property, Aluminum Products Co., 24 B. T. A. 420; Morgan Jones, Estate, 43 B. T. A. 691 (on appeal, C. C. A., 5th Cir.); amounts paid by a corporation in settlement of a suit brought against its officers on account of their alleged wrongdoing, Blackwell Oil & Gas Co. v. Commissioner, 60 Fed. (2d) 257; or payments which are made to discharge the liabilities of others, even though they are made for the purpose of insuring future profits, Welch v. Helvering, 290 U. S. 111; A. Giurlani & Bros. v. Commissioner, 119 Fed. (2d) 852, affirming 41 B. T. A. 403. Expenditures made in securing an acquittal on a criminal charge, Commissioner v. Peoples-Pittsburgh Trust Co., 60 Fed. (2d) 187, affirming 21 B. T. A. 588; in successfully defending against a complaint before the Federal Trade Commission, Continental Screen Co., 19 B. T. A. 1095; affd., 58 Fed. (2d) 625; to compromise a tax or abate a proposed penalty, H. E. Bullock, 16 B. T. A. 451; in prosecuting a claim for refund of taxes, Florence Grandin, 16 B. T. A. 515; to settle a dispute arising from “business dealings between the parties”, H. M. Howard, 22 B. T. A. 375; in compromise of a civil suit for damages even though the suit was also against others, Interrational Shoe Co., 38 B. T. A. 81; in resisting an assessment for widening a street or an illegal attempt by a city to condemn property, Commissioner v. Chicago Dock Canal Co., 84 Fed. (2d) 288; L. B. Reakirt, 29 B. T. A. 1296; affd., 84 Fed. (2d) 996; in defending against litigation which was an outgrowth of a taxpayer’s connection with the business of a corporation, Foss v. Commissioner, 75 Fed. (2d) 326; to recover, in a proceeding before the Mixed Claims Commission, balances in the taxpayer’s accounts with German banks, Commissioner v. Speyer, 77 Fed. (2d) 824; and in making restitution for a wrong committed in a business transaction, Helvering v. Hampton, 79 Fed. (2d) 358; W. R. Hervey, 25 B. T. A. 1282, have been held to be ordinary and necessary business expenses paid or incurred in carrying on a trade or business.

The cited cases are but a few of the legion in which the courts or this Board have been called upon to determine the difficult and vexing question. Collectively, they “fail to provide ‘any verbal formula that will supply a ready touchstone’. Welch v. Helvering * * *." A. Giurlani & Bros. v. Commissioner, supra. “To attempt to harmonize [the cases] would be a futile task. They involve the application of particular situations, at times with borderline conclusions.” Welch v. Helvering, supra. “Review of the many decided cases is of little aid since each turns on its own special facts.” Deputy v. du Pont, supra. “The words ‘ordinary and necessary’ are not so clear and unambiguous in their meaning and application as to leave no room for an interpretative regulation.” Textile Mills Security Corporation v. Commissioner, supra. No interpretative regulation, other than article 24-2 is cited and, while it has some pertinency, the question whether the expenditures were ordinary is primarily a question of fact. The facts will be briefly summarized.

In 1934 a number of the officers and employees of Harbour-Long-mire Co., including W. T. Hales, its president, became dissatisfied with the way the business was being conducted. Those who were stockholders sold their stock to the company in May or June of 1935. In August of that year they left the company with the idea of forming a corporation to engage in business in competition with Harbour-Longmire Co. The necessary funds were to be advanced by W. T. Hales, who was possessed of considerable means. By letter dated September 5 or 6, 1935, Harbour-Longmire Co. agreed to sell its wholesale division, good will and certain franchises to George A. Hales and Mullaly, son and son-in-law, respectively, of W. T. Hales. In pursuance of this agreement a contract of sale was entered into by the parties on September 12, 1935. Between those dates petitioner was organized and on October 12, 1935, Hales and Mullaly executed an assignment to petitioner as set out in our findings, drawing its checks payable to the order of Harbour-Longmire Co. in payment for the properties.

On December 16, 1935, five salesmen formerly in the employ of Harbour-Longmire Co. but then in petitioner’s employ, filed suits against Harbour-Longmire Co. for commissions. It countered by filing a suit against W. T. Hales, his son, son-in-law, McBrayer, the five salesmen, and petitioner, charging that the individual defendants bad conspired to ruin its business and, through fraudulent means, had acquired its wholesale department, good will and franchises. It alleged that because of the false and fraudulent representations of the individuals it had been forced to enter into a contract for the sale of its properties in order to avoid further losses, all to its damage in a sum, including exemplary damages, totaling $1,096,739.53. The sole allegation of the petition pertaining to petitioner herein is in paragraph 37, which recites that petitioner was organized for the purpose of taking over the property and that it acquired it merely as an instrument or means designed by the individual defendants to operate and hold it. W. T. Hales was the only defendant in a position to respond in damages.

The genesis of the litigation was schism or dissension between two groups of stockholders of Harbour-Longmire Co. and the major portion, if not all, of the acts relied upon in the petition for damages took place prior to the organization of petitioner. All of the suits were settled by petitioner paying the five salesmen 60 percent of the amounts which they were claiming as commissions due from Har-bour-Longmire Co. and petitioner paid what appears to be, so far as this record shows, the total attorney fees and costs in connection with the conspiracy action.

Petitioner insists that the kind of action it is required to defend is immaterial unless the transaction out of which it arose is of a class in which deductions may not be allowed as a matter of public policy (e. g., crimes, lobbying, and propaganda) ; that it makes no difference whether it participated in the conspiracy or, if it did participate, whether its action was, or was not, in the ordinary course of its business ; that the extent of petitioner’s culpability, liability, or unethical and unmoral conduct may not be inquired into in this collateral proceeding; that the petition stated a cause of action against it for more than a million dollars and its officers deemed it wise to settle it rather than hazard a trial; that “lawsuits are of common or frequent occurrence in the type of business in which the taxpayer was engaged”; that the expenditures in question were ordinary in the sense that they were normal and usual; and that the respondent erred in denying the claimed deduction. Its contentions are more or less summarized in its reply brief in the following sentence:

The question here is whether, when a merchandising business corporation is sued for damages on account of any kind of a transaction, it is the ordinary and necessary thing to defend against such lawsuit and to incur expense for attorney’s fees in such defense, and, if its directors and officers in good faith believe it for the best interest of the corporation to settle such lawsuit, even though it be regarded as having only a nuisance value, such attorney’s fees and the settlement sum are ordinary and necessary expenses of such corporation’s business.

It is unnecessary to pass upon each of petitioner’s contentions. Suffice it to point out “the fact an. obligation to pay has arisen is not sufficient.” Deputy v. duPont, supra. The transaction which gives rise to it must be of common or frequent occurrence in the type of business involved, Welch v. Helvering, supra — “normal, usual or customary” — “and its normalcy in the particular business” is “crucial and controlling.” Deputy v. du Pont, supra. If petitioner had been sued upon an account, or for damages sustained through the negligent operation of one of its delivery trucks, for example, there would be but slight question of normalcy; but it is far from “normal, usual or customary” for a mercantile corporation to be sued for acts committed by its incorporators prior to its organization. Moreover, we think it is also material, and incumbent upon petitioner to show, that the suit resulted, at least in part, from some action of the corporation either in, or incidental to, its ordinary business. Cf. Wolf Manufacturing Co., 10 B. T. A. 1161; W. S. Dickason, 20 B. T. A. 496. No such showing, however, has been made. Petitioner’s contention that expenditures made by a mercantile business in defending a suit for damages on account of any kind of a transaction is clearly contrary to the decisions, especially Deputy v. du Pont. This case is controlling and, since, in our judgment, petitioner- has failed to prove that the expenditures were “ordinary”, respondent’s determination must be upheld.

While decision may be rested wholly upon the ground set out above, it is not amiss to refer to the fact that the record does not disclose why all of the expenses were borne by petitioner while the gravamen of the action was an unlawful conspiracy by the individual defendants. This Board has allowed the deduction by a corporation of its share of the legal expenses where it was a codefendant with some of its stockholders, Matson Navigation Co., 24 B. T. A. 14, and has allowed the deduction of the amount paid in settlement by a corporation which had been charged as a coconspirator with its officers in a transaction arising out of and in connection with its business subsequent to its organization. International Shoe Co., supra. No case has been cited, and we know of none, in which deduction has been allowed for the full amount of a fee paid by one defendant for the benefit of several, and the general rule, certainly in the absence of an agreement to the contrary, would seem to be’ that deduction should be allowed only for an aliquot portion of the-total fee. Cf. Blackwell Oil & Gas Co., supra; Walter S. Dickey, 14 B. T. A. 1295; affirmed on another issue, 56 Fed. (2d) 917; cer-tiorari denied, 287 U. S. 606.

Respondent’s alternative contention, though not indicated in his original determination, is properly before us (Standard Oil Co., 43 B. T. A. 973 (on appeal, C. C. A., 7th Cir.), and cases cited) and, if necessary, could be considered. Briefly it is, that the expenditures were made in connection with the acquisition of the property, franchises, and good will of Harbour-Longmire Co. and represented a capital investment. Sec. 24 (a) (2) and art, 24-2, Regulations 94, supra. This contention seems to be sound; but in view of the conclusion reached upon the main issue it may be passed without decision or further discussion.

The parties cite and discuss at considerable length an opinion by the Supreme Court of Oklahoma, Hales-Mullaly, Inc. v. Oklahoma Tax Commission, 100 Pac. (2d) 274, handed down January 23, 1940, and involving the identical expenditures in controversy here. The majority of the court held that the expenditures were ordinary and necessary expenses of carrying on the taxpayer’s business, under a state statute almost identical with section 23 (a) of the revenue act, supra. Neither party contends that the cited case is binding upon us, though of course it is entitled to considerable weight because of the high standing of the court. The fact that the decision was not unanimous and that we find ourselves more nearly in accord with the views expressed by the dissenting judges, indicates that the question is not an easy one to answer. As Mr. Justice Cardozo remarked, in Welch v. Helvering, supra: “The standard set up by the statute is not a rule of law; it is rather a' way of life. Life in all its fullness must supply the answer to the riddle.”

Decision will be entered for the respondent.

       SEC. 28. DEDUCTIONS FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      (a) Expenses. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or Is not taking title or in which he has no equity.

       SEC. 24. ITEMS NOT DEDUCTIBLE.
      (a) General Rule. — In computing net income no deduction shall in any case be allowed in respect of—

        if * ifc >> ^ s*t #
      (2) Any amount paid out for new buildings or for permanent improvements or better-ments made to increase the value of any property or estate.
      Art. 24 — 2. Capital expenditures.- — * * *

      The cost of defending or perfecting title to property constitutes a part of the cost of the property and is not a deductible expense. * * *

       That Hales-Mullaly, Inc. is an Oklahoma Corporation organized by the defendants W. T. Hales, Carter Mullaly, J. R. McBrayer, George A. Hales and one W. T. Hales, Jr., for the purpose of taking over the franchises and plaintiff’s wholesale business when the same should be procured by the defendants pursuant to said conspiracy; that said corporation did acquire and take over and now owns and operates all of the same, and was, and is, merely an instrument and means designed by the defendants to operate the said wholesale business and hold the franchises, good-will and merchandise, the incorporators, directors and officers of said corporation and the persons having the management and control thereof being the defendants and conspirators, W. T. Hales, Carter Mullaly, J. R. McBrayer and George A. Hales.


author: Disney: SteuNhageN,

text:
    Estate of George R. Nutter, Edward F. McClennen, E. Louise Malloch and Alfred L. Fish, Executors Under the Will of George R. Nutter, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent. Charles R. Nutter and Medora A. Nutter, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 99701, 104422.
    Promulgated January 7, 1942.

      Allison L. Newton, Esq., for the petitioners.

      Davis Hqshin, Esq., for the respondent.
   OPINION.

Disney:

The Commissioner added $24,533.19 to the gross estate of the decedent because of the fact, alleged in the petition and admitted in the answer, that the petitioners duly elected to have the property includable in gross estate valued in accordance with the method authorized by subdivision (j) of section 302 of the Kevenue Act of 1926, as added by section 202 of the Eevenue Act of 1935, that is, because the property was to be valued as of one year after the death of the decedent and the respondent had included in such value amounts of interest and dividends received by the petitioners between the date of death and the optional date of valuation. Following the decision in Maass v. Higgins, 312 U. S. 443, the respondent concedes error on this issue. A related issue suggested in the stipulation, but not in the pleadings, arises as to whether there should be included in decedent’s gross estate $3,038.89 interest and dividends accrued but not received on February 21, 1937, the date of decedent’s death, or on the other hand $2,073.75 interest and dividends accrued but not received on February 21, 1938, the optional valuation date. Under the Maass case we hold that only the amount of $3,038.89 accrued but not received at the date of decedent’s death should, as to this issue, be included in the gross estate, and that the $2,073.75 should not.

The Commissioner also added $34,069.99 to the decedent’s gross estate. The explanation of the item in the notice of deficiency is “Interest in partnership Nutter, McClennen & Fish.” The figure is the amount of 8 percent of the profit of the firm from March 1, 1937, to August 31, 1938. Upon brief the respondent takes the position that the amount represents the value of the decedent’s interest in the partnership of which, he was a member at the time of his death, and under the agreement of partnership.

The petitioners, relying upon Bull v. United States, 295 U. S. 247, and language therein as to partnerships with no capital investment and no tangible assets, contend in substance that the partnership was one for the practice of law, that no capital was invested, that there were no more than negligible tangible assets, that receipt of the percentage by the estate aftfer the death was contingent upon continuance of the partnership and the earning of profits, that therefore amounts derived from or growing out of the partnership can be included in the gross estate only to the extent of partnership income prior to the decedent’s death, and that amounts paid to the estate based upon partnership earnings after the decedent’s death constitute -xjnot gross estate, but income to the estate. In our opinion, this view disregards the fact that there were in this case capital and tangible assets in amounts not negligible, and further neglects the specific agreement between the partners and the language of the Bull case as to just such an agreement. First: In this matter there appear to have been both an investment of capital in, and tangible property owned by, the partnership and a clear recognition by the partnership in the partnership agreement that each partner had a capital interest; whereas in the Bull case there was neither capital interest nor tangible property owned by the partnership. In the instant proceeding, the partnership balance sheet on February 28, 1937, the date nearest the death of the decedent, sets up for the partnership a “Capital Account” of $12,875, a “Plant Account” of $8,932.44, and “Undistributed Profits” $73,634.50, and as to George E. Nutter, “Plant Account” $744.37 and “Capital Account” $1,031.25. Such items can not be called negligible. The capital account represented the interest of the partnership in a working cash balance and the plant account represented the interest of the partnership in such items as books, furniture, and fixtures in the law office. The partnership owned a lease upon its offices ending February 28, 1939, the value of which does not appear in the record. It seems apparent, therefore, that the partnership of which the decedent was a member at the time of his death possessed both capital and tangible assets as distinguished from the partnership in the Bull case. The partnership agreement recognized the capital interest of each partner, for therein reference is made to “cash capital”, “capital”, and “capital items”, and provision is made for disposition of a member’s interest in “capital, assets, receivables”, etc. Second: The Bull case in fact strongly supports the respondent’s view herein, for the Court says:

* * * Where the effect of the contract is that the deceased partner’s estate shall leave his interest in the business and the surviving partners shall acquire it by payments to the estate, the transaction is a sale, and payments made to the estate are for the account of the survivors. It results that the surviving partners are taxable upon firm profits and the estate is not. * * *

In this proceeding we have just the kind of contract referred to by the Court, for it is clearly true that “the effect of the contract is that the deceased partner’s estate shall leave his interest in the business and the surviving partners shall acquire it by payments to the estate”, for the partnership agreement specifically provides that in case of the death of a partner his estate shall receive the usual percentage of net profits for 18 months “and this shall be in full of the retiring or deceasing member’s interest in the capital, the assets, the receivables, the possibilities and the good will of the Firm.” This is an un-^ ambiguous provision for the “s£¿e” of the deceased partner’s interest in the capital, assets, etc., in consideration of the percentage of net profits for 18 months by which “the surviving partners shall acquire it”, in the language of the Bull case. It is not only a plain recognition by all of the partners signing such agreement of the fact of partnership capital and assets, but a careful provision for disposition thereof for a consideration. We can not and should not disregard such agreement and are by the -above language from the Bull case forbidden so to do. In Pope v. Commissioner, 39 Fed. (2d) 420, cited in the Bull case, the Court said that whether there was a sale “depends largely upon what the parties intended”, and the agreement was regarded as evidence of sale.

We think that the reliance of the petitioners upon the Bull case is not well placed, for not only were there no physical assets and no capital in that case, but there, as the Court points out, the Government contended that the amounts were both income and corpus, and strenuously asserted, in supporting the treatment of the payments to the estate as income, that the estate sold nothing to the surviving partners. The Court agrees with that assertion and points out that the Commissioner assessed the identical money and “not a right to receive the amount on the one hand, and actual receipt resulting from that right on the other” and that the Commissioner did not view the item “as the measure of value of a right passing from the decedent at death.” Plainly, since in the Bull case the respondent did not assert the view which he takes herein, that is, that there was sale of an interest in a partnership, the agreement by the Court in such view that there was no sale is not indicative that there was none here. The language of the Court pointedly suggests the absence of the view taken in the instant proceeding. That in that case there was no attempt at valuation as of death of the contractual right is shown by the fact that the contract provided for sharing profits or losses for one year from death; yet the case involved only the amounts accrued from date of death, February 13, 1920, to the end of 1920. Such amounts were asserted to be both income and corpus. In addition, it is to be noted that the Court in that case finds that there was a /"“mere right of continuance of the partnership relation inuring to Bull’s estate” and that, “By the terms of the agreement his estate was to sustain precisely the same status quoad the firm as he had, in "•"-respect of profits and losses”; also that under the stipulation the survivors were “in the same relation with the deceased partner’s estate as if it were in fact the decedent himself still alive and a member of the firm.” The estate had the optio’n, 30 days after the death, of withdrawing from the partnership and adjusting then the profits or losses. Such a situation, particularly in the absence of any view or assertion of valuation of a contractual right at the date of death, is in our opinion foreign to the facts here being interpreted. This -4s no, case of continuation of the partnership with the estate as a partner. No basis whatever exists herein for charging the estate with partnership losses. We think it clear that the conclusion in the Bull case was not intended to be applied to a case where the partnership contract provided for a sale or transfer of a partner’s interest, for a valuable consideration.

The decedent here died at a time when the above quoted contractual provisions were in full force and effect. There was consideration for the agreement to pay, in tangible assets, and intangibles, including the lease, and “receivables” upon completed and uncompleted services rendered prior to the death. The right to the decedent’s name, which did not pass to the surviving partners, was only one element among several. Though one member of the firm expressed the view, in testimony at the hearing, that there was no good will, we accept rather the view of all the partners (including the witness) in the agreement, that there was. All of the valuable trusteeships carried on by the decedent were carried on by the partners after his demise. The decedent had and there passed to his estate the right to the enforcement of the contract, which comprised his interest in the partnership at the instant of death. The value of such contract was therefore a part of his gross estate.

In M. W. Dobrzensky, Executor, 34 B. T. A. 305, we considered a situation where a partnership of attorneys paid insurance premiums on the life of a member under a contract that the proceeds should be received by his estate, in case of his death, in consideration of certain interests of deceased in the firm, including good will, and right to participation in partnership profits, as well as right to use his name; and we held that the insurance proceeds were properly included in gross estate, on the theory that the partnership agreement effected an assignment, upon death, of the interests of the deceased in the law partnership, and that in consideration thereof and in lieu thereof his estate included the insurance policy.

The above quoted language from the Bull case cites Hill v. Commissioner, 38 Fed. (2d) 165; and Pope v. Commissioner, supra, in each of which it was held, affirming in that respect the Board, that a partnership contract and the acquisition thereunder by the survivors of the interest of the deceased partner and the receipt by his estate of a percentage of the profits for á certain period, constituted sale of the interest of the deceased partner, and that net profit paid therefor was paid in purchase of a capital asset and was not expense deductible by the new partnership. The petitioners herein, however, in substance seek to distinguish a law partnership as a “personal service partnership” from situations where, as in the Hill and Pope cases of insurance brokerage partnerships, there were capital investment and an interest in tangible and intangible assets. Passing the question whether the law partnership is any more of a personal service partnership than that of an insurance brokerage business (the Pope case says that insurance brokerage depends for success largely upon personal solicitation of business by members), the answer to such contention is that in the instant situation capital interest was recognized and disposed of by the partnership agreement, and further that the principle has been applied in several cases to law partnerships. In W. Frank Carter, 36 B. T. A. 60, the partnership agreement was that the estate should receive in full payment of the deceased partner’s interest in the firm and its assets a sum equal to one-half of the last two years’ receipts by the partner, payment to be made in twelve monthly installments. Though there were no firm assets (other than fees received subsequent to the death), except the law library and office equipment, we held that there was a sale and that the surviving partners were taxable upon the income out of which payment was made and that it was not income of the estate. United States v. Carter, 19 Fed. (2d) 121; City Bank Farmers Trust Co., Executor, 29 B. T. A. 190, as well as M. W. Dobrzensky, Executor, supra, all involved law partnerships and the present question, and in each it was held that the amounts received by the estate of the deceased law partner were a part of the corpus of the estate. Helvering v. Smith, 90 Fed. (2d) 590, involved a law partnership and it was held that the partnership agreement gave the retiring member no interest in future earnings as consideration for his withdrawal; that a cash payment received was not taxable as capital net gain from sale of capital assets; but the court points out that, “It is of course possible to measure the purchase price of a partner’s interest by his former proportion of future profits for a period of years,” citing Hill v. Commissioner, supra, and Bull v. United States, supra. Degener v. Anderson, 77 Fed. (2d) 859, interprets a partnership agreement providing for continuance of the partnership to the end of the fiscal year, notwithstanding the death of a partner, though holding that there the estate of the deceased was taxable upon the income received under such contract. The court says:

The Bull Case, in line with earlier decisions in the lower courts, recognized that there is a distinction between measuring the value of a contract right which accrued for the decedent at the date of death and taxing income which arises in the future by virtue of the contract. * * *

Such language indicates clearly, we think, what took place in the instant case. The Commissioner did “measure the value of a contract right which accrued for the decedent at the date of death” and did not merely tax income. He explained the item as “interest in partnership” in the deficiency notice. At trial he offered evidence of past "^partnership earnings to show what would “constitute a fair value of 8 percent of what is expected to be received in the succeeding 18 months”; on brief he contends that “the amount actually received by A the estate of the decedent by reason of the terms of the partnership agreement represents a fair measure for the value of the decedent’s v. interest in the partnership * * Though the Commissioner uses the figure $34,069.99, the amount of payments after death as provided by the partnership agreement, that agreement considers the payments as purchase price for decedent’s “contract right”, and effect is to be given to the contract under the Bull case.

In Estate of Bavier C. Miller, 38 B. T. A. 487, we considered an insurance partnership agreement under which a deceased partner’s estate was by the surviving members paid, for 30 months after death, the share of income which the partner would have received if he had lived. Although the amount added by the Commissioner to gross estate was in the deficiency notice described as “partnership income”, we considered the partnership contract as recognition by the partners that their interest in the firm had value, and said that the contract indicated “that the sum to be paid' was determinable by the deceased partner’s interest in profits, not as such, but as a measure by which to value his interest in the partnership at the time of his death.” We therefore held that such payments, though measured by the partnership earnings, as agreed to by the partners, constituted purchase price of the deceased partner’s interest in the firm, and did not constitute taxable income to the deceased partner’s estate. We said:

* * * The yardstick that the parties agreed to use in measuring the value of a deceased partner’s interest was the share of the profits which the decedent would have been entitled to had he lived an additional 30 months * * *

We referred elsewhere to the recognition by the partners that their interest in the firm had value. Certainly the partners in the instant proceeding likewise recognized such value, and provided for its transfer, for a consideration, at death.

Upon brief the petitioner argues that the expression “ — the others continuing the business — ” appearing in the partnership agreement, as above quoted, indicates that the whole contract and provision for payment to the estate for 18 months was conditional upon the other partners continuing the business, and therefore nothing of value passed to the estate at death. To us the above-quoted language indicates rather an agreement to continue the business and we can not believe that there was any thought in the minds of the partners that death of one partner would cause the discontinuance of a lucrative law practice. The income tax returns filed for the partnership from 1930 to 1935, inclusive, are in evidence, and none indicates a net yearly income of less than $235,000. We decline to view the expression last above quoted as the expression of condition as to whether such a business should continue. If there was condition, it was fulfilled, for the business was not discontinued.

Having concluded that there should be included in decedent’s gross estate the value of the contract between him and the partnership, we next inquire whether $34,069.99, the amount set by the respondent,^ represents the fair value thereof. The presumption is that the Commissioner’s determination is correct. Obviously it was not arbitrary.* Under petitioners’ election, we are required to consider the value of the estate as of one year after death. At that date the 8 percent amounted to $28,069.46, and the contract still had six months to run. Charles R. Nutter had actually received during 1937, $23,279.73 representing and out of the 8 percent profits. Though under the Maass case income in these amounts is not fer se a part of the gross estate, they indicate value in the contract which produced such amount in those periods. Certainly at the end of one year the contract was worth, at least, the amount it had already produced. At the rate the contract had produced at the end of either 10 or 12 months, much more than $34,089.99 would have been produced in 18 months. Moreover, the figure used by the Commissioner is wholly consistent with the partnership earnings for several years previous to the death, which for 18 months during that period would on the average have produced considerably more than $34,069.99. We conclude and hold that the respondent did not err in adding to gross estate $34,069.99.

It follows that petitioners Charles It. Nutter and Medora A. Nutter, his wife, are not taxable upon the $23,219.13, which as sole heir and devisee of the estate he was entitled to receive and did receive during the year 1937 from the executors out of the $34,069.99 above held to be gross estate. When received by Charles ft. Nutter, the amount was not income, 'but principal received as sole heir and under the will of George R. Nutter, and therefore was properly excluded from gross income. Sec. 22 (b), Revenue Act of 1936.

Reviewed by the Board.

Decisions will be entered under Rule 50.

Aeundell concurs only in the result.

SteuNhageN,

dissenting: The essence of the Commissioner’s determination is that the decedent’s gross estate includes his share of the partnership income for the 18 months after his death. This is contrary to the decision of Bull v. United States, 295 U. S. 247, that “the sums paid his estate as profits earned after his death were not corpus but income received by his executor and to be reckoned in computing income tax.”

When it appears that the so-called “interest in partnership” is but a misnomer for the percentage of posthumous earnings, the taxpayer has demonstrated the Commissioner’s error. The Board, however, postulates the decedent’s interest in an assumed good will of the law firm with an assumed but unknown value and in a lease of unknown value, and adding this to decedent’s percentage interest in furniture, library, and current operating fund, finds that the decedent at the time of his death owned, and by his death transferred to his estate, this percentage interest, the value of which is taken to be not less than the percentage of later profits. .1 think the decision is incorrect.

HaRRON agrees with this dissent.


author: Aeundell :

text:
    Bouvelt Realty, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent. Clinron Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 105212, 105213.
    Promulgated January 7, 1942.

      Sydney S. Snyder, Esq., for the petitioners.

      WilUam G. Buymann, Esq., for the respondent.
   opinion. .

Aeundell :

Section 291 of the Revenue Act of 1936 imposes a delinquency penalty for failure to file returns within the time required by law or within the time prescribed by the Commissioner “unless it is shown that such failure is due to reasonable cause and not due to willful neglect * * The evidence establishes beyond question that there was no willful neglect, if that term means, as we think it does, that the failure to file was intentional or designed. The securing of an extension of time to file the final returns, the prompt filing of tentative returns, the early making out of the final returns by the petitioners’ tax accountant, followed by the prompt execution of those returns by the proper corporate officers, and the turning over of the returns for filing to petitioners’ employee who was charged with the duty of personally seeing that they were filed, are all facts which point to the absence of any willful neglect by petitioners.

Grace Gaghan, whose duty it was to file the returns, takes the blame for the delay. Some 20 to 25 different corporate returns were prepared under the direction of the office in which she was employed and it appears that in all other instances the returns of the several corporations were timely filed. The returns of petitioners for prior and subsequent years had been timely filed and the reason for the delay in this case, as pointed out in the findings, results from the fact that the returns in question became mixed with the retained copies of the returns of the several other corporations and thus were not sent in due course to the collector. It was not until the collector wrote petitioners asking why the final returns had not been filed that a search through the office copies disclosed that the completed returns had not been filed. The returns were then immediately forwarded to the collector and duly filed.

Both corporations were real estate companies and it appears from the returns in evidence that in the case of Bouvelt there was only one transaction within the year and in the case of Olinron two transactions. The tentative and final returns of both companies had reported no tax due, although the transactions apparently were set forth fully in the final returns. Thus the fact that no tax was paid would not place the officers of petitioners on notice that the returns had not been filed, as might be the case where a return shows a tax due. In the circumstances we think it may be said that there was a reasonable cause for the failure to file on time. Carnie-Goudie Manufacturing Co., 18 B. T. A. 893. We are not unmindful of the grave necessity for the timely filing of tax returns, but the imposition of the penalty is not made mandatory by the statute. Congress was fully alive to the fact that there would be occasions where responsible officers of corporations had taken every safeguard for filing their returns and yet something went wrong. We are of the opinion that on these facts the penalty should not be imposed.

Decision will be entered for the 'petitioners.


author: HaReon :

text:
    Citizens Mutual Investment Association, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 108572.
    Promulgated January 7, 1942.

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

      R. G. Whitley, Esq., for the respondent.
   OPINION.

HaReon :

On June 10, 1941, the respondent mailed to the petitioner a notice of deficiency for the fiscal year ended March 31, 1938. The notice sets forth that there is a deficiency in income tax in the amount of $1,300.11, and a deficiency in the surtax on petitioner, as a personal holding company, in the amount of $4,546.86, and a 25 percent penalty of $1,186.72.

On September 8, 1941, petitioner filed a petition with this Board. In the petition, petitioner set forth as its pleadings as follows:

(1) That the taxes in controversy are personal holding company surtaxes for the fiscal year 1988 in the amount of $4,546.86, and the 25 percent statutory penalty in the amount of $1,136.72.
(2) That the Commissioner erred in his determination that petitioner was a personal holding company within the meaning of section 351 (b) (1) of the Revenue Act of 1936 as amended by section 352 of the Revenue Act of 1937.

The only issue raised by the pleadings relates to petitioner’s liability for surtax as a personal holding company. The penalty was imposed for the failure to file, or, for the late filing of a personal holding company return on Form 1120H. The petition did not set forth any pleading denying or relating to, in any way, the liability for a deficiency in income tax.

On October 29,1941, before the respondent had filed, or was required to file, an answer to the petition, petitioner filed an amended petition. At that date the statutory ninety-day period within which petitioner could file a petition with the Board had expired. Petitioner set forth in the amended petition new matter, namely, the allegations that the taxes involved included additional income taxes in the amount of $1,800.11, and that the Commissioner had erred in disallowing deductions for ordinary and necessary business expense, reserves for bad debts, and certain losses. These items are three out of four of the adjustments made by the respondent in determining the deficiency in income tax.

[Respondent thereupon filed a motion with the Board moving that the petition should be dismissed for lack of jurisdiction in so far as it related to a deficiency in petitioner’s income tax, upon the ground that an appeal from the Commissioner’s determination of a deficiency in income tax for the taxable year was not made within ninety days following the mailing of the notice of deficiency. Respondent contends that the Board lacks jurisdiction to receive the amended petition filed on October 29,1941, in so far as it relates to income tax liability.

In our opinion respondent’s motion must be granted. With respect to income tax deficiencies, the Board’s jurisdiction over appeals from a determination of the Commissioner that there is a deficiency in respect of the tax imposed by Title I of the Revenue Act arises from the filing of a petition within ninety days after such notice is mailed. Sec. 274 (a), Revenue Act of 1924, as amended by sec. 501, Revenue Act of 1934. The income tax is a tax imposed by Title I of the Revenue Act of 1936. Other titles of the revenue act impose other taxes. Title IA imposes additional income taxes, the surtax on personal holding companies. Title II imposes the excess profits tax (in addition to the capital stock tax). Title III imposes a tax on unjust enrichment. (Eeference is made to the Revenue Act of 1936.) Under each of these titles, all the administrative provisions of law applicable in respect of taxes imposed by Title I, in so far as not inconsistent, are made applicable in respect of the tax imposed by the separate title. See sec. 351 (c), Revenue Act of 1936; sec. 106 (c), Revenue Act of 1935; sec. 503, Revenue Act of 1936.

The Board has held that a taxpayer may amend his petition, introducing new assignments of error by an amendment to the petition filed after the expiration of the ninety-day period, where the original petition, timely filed, has raised issues relating to a, deficiency, and the new assignments of error relate to such deficiency. See American Smelting & Refining Co., 44 B. T. A. 131, and cases cited therein. The theory is that the amendment relates back to the date of the filing of the original petition; that the “cause of action” is the general liability for a deficiency which is denied in the original petition. In that case the Commissioner determined a deficiency in income tax for the year 1936 in the amount of $227,492.55, and $80,436.43 for the year 1937. The deficiency resulted from various additions to taxable income, but none of the adjustments related to any item covering a dividends paid credit. In the original petition, petitioner did not make any allegation of error with respect to computation of undistributed net income. In the amended petition, petitioner alleged that for the year 1936 undistributed net income had been understated by the amount of $770,000 and that for the year 1937 undistributed net income had been understated in the amount of $640,995.11. In the petition, petitioner set forth that it had made an error in its return for 1936 by allocating $770,000 out of dividends paid in the amount of $13,163,826.75 to the earnings of certain subsidiaries which were liquidated in 1936.. Petitioner did this under article 27(f)-l(c) of Regulations 94. In the amended petition for the first time petitioner claimed that the dividends paid credit which it had taken in its return for 1936 should be increased by $770,000. The item for 1937 was taken up in a similar way, excepting that petitioner claimed a dividends carry-over from 1936 of $640,995.11 under section 27(b) (2), and so for the first time, in the amended petition, petitioner claimed that it was entitled to an increase in the dividends paid credit for 1937 so as to increase the credit from $15,567,923.25 to $16,208,918.36. However, the question of whether or not the dividends paid credit taken in the returns for the taxable years should be increased related to the question over which the Board had jurisdiction under the original petition, namely, the liability of the petitioner for additional income taxes, and the correct amount thereof, imposed under Title I of the applicable revenue acts. Section 27 of the Revenue Act of 1936, relating to corporation credits for dividends paid, is a section under Title I — Income Tax.

The Board has recognized and has pointed out the differences in taxes imposed under different provisions of the statute. See Will County Title Co., 38 B. T. A. 1396, and Hobbs Western Co., 43 B. T. A. 5. In the latter case it was said:

The Board has held heretofore that a determination in regard to income tax and a determination in regard to excess profits tax are separate so far as jurisdiction of the Board is concerned. * * *

In Union Telephone Co., 41 B. T. A. 152, the Board pointed out that although the income tax and the undistributed profits tax were related, nevertheless, excess profits taxes were imposed by a different title and, therefore, were separate for jurisdictional purposes of the Board. Hobbs Western Co., supra; Lane-Wells Co., 43 B. T. A. 463, 480.

Applying that principle here, it is necessary to point out that the income tax and the personal holding company surtax are imposed by different titles and, therefore, are separate for jurisdictional purposes of the Board. Here, two deficiencies were determined, a deficiency in income tax and a deficiency in personal holding company surtax. A determination of a deficiency is vital to the jurisdiction of the Board. Elmer S. B. Sutton, Executor, 1 B. T. A. 101. But, the original petition filed timely on September 8, 1941, did not make any assignment of error with respect to the Commissioner’s determinations giving rise to the deficiency in income tax. It did not deny liability for a deficiency in income tax. It denied only liability for the personal holding company surtax and the penalty assessed with respect thereto. Since the two taxes are separate for jurisdictional purposes, the Board’s jurisdiction in the matter of the surtax deficiency does not extend to the income tax deficiency. When petitioner sought to invoke the Board’s jurisdiction over the income tax deficiency by raising issues about it in the amended petition filed dn October 29, 1941, the statutory period had expired within which the Board’s jurisdiction could be invoked. Furthermore, the pleadings in the original petition did not set forth a “cause of action” which in broad aspects embraced the new issues raised for the first time in the amendment to the petition. Consequently the amendment could not relate back to the original petition.

Accordingly, it is held that the Board has no jurisdiction in this proceeding over the income tax deficiency for the taxable year.

An order will be entered granting the respondent’s motion.


author: Tyson : Hill,

text:
    Pressed Steel Tank Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101099.
    Promulgated January 8, 1942.

      Malcolm K. Whyte, Esq., and John /S'. Best, Esq., for the petitioner.

      D. A. Taylor, Esq., for the respondent.
   OPINION.

Tyson :

The Act of March 27, 1934, 48 Stat. 503, commonly known as the Vinson Act or the Vinson-Trammel Act, authorizes the President to undertake the construction of certain naval vessels and naval aircraft. Section 3 thereof provides, in part, as follows:

The Secretary of the Navy is hereby directed to submit annually to the Bureau of the Budget estimates for the construction of the foregoing vessels and aircraft; and there is hereby authorized to be appropriated such sums as may be necessary to carry into effect the provisions of this Act: Provided, That no contract shall be made by the Secretary of the Navy for the construction and/or manufacture of any complete naval vessel or aircraft, or any portion (hereof, herein, heretofore, or hereafter authorized unless the contractor agrees—
(a) To make a report * * * under oath, to the Secretary of the Navy upon the completion of the contract.
(b) To pay into the Treasury profit, as hereinafter provided shall be determined by the Treasury Department, in excess of 10 per centum of the total contract price, such amount to become the property of the United States: Provided, That if such amount is not voluntarily paid the Secretary of the Treasury may collect the same under the usual methods employed under the internal revenue laws to collect Federal income taxes.

Section 3 limits the contracts referred to therein to those where the award exceeds $10,000 and subdivision (b) thereof, as amended by the Act of June 25, 1936, 49 Stat. 1926, further provides that if the amount to be paid into the Treasury is not voluntarily paid:

* * * the Secretary of the Treasury shall collect the same under the usual methods employed under the internal-revenue laws to collect Federal income taxes: Provided, further, That all provisions of law (including penalties) applicable with respect to the taxes imposed by Title I of the Revenue Act of 1934, and not inconsistent with this section, shall be applicable with l’espect to the assessment, collection, or payment of excess profits to the Treasury as provided by this section, and to refunds by the Treasury of overpayments of excess profits into the Treasury: * * * And provided further, That * * * the above provisos relating to the assessment, collection, payment, or refunding of excess profit to or by the Treasury shall be retroactive to March 27, 1934.

The petitioner in the contract involved agreed to comply with all of the provisions of the above mentioned section 3 and about a year after completion of the contract it filed a report of its profit, showing no excess payable to the collector. The Commissioner made a computation of the profit, and on the basis thereof, determined a liability for excess profit in the amount of $4,356.13. The petitioner does not question the correctness of such computation.

The petitioner denies liability under the statute for excess profit in any amount upon the ground that the contract was not one for the manufacture of a portion of a complete naval vessel and that, therefore, it is not within the scope of section 3, supra, and can not be brought within that scope merely because of provisions of the Vinson Act being inserted therein.

The petitioner points out that the Vinson Act was passed for the purpose of building the Navy up to treaty strength under the limitations of naval armament treaties of 1922 and 1930 and it urges that, since those treaties do not limit the number and size of torpedoes, the application of section 3 should be confined to the construction of vessels and aircraft and not extended to materials and supplies which are not limited by the treaties and which do not affect the size of the Navy or the tonnage of vessels. We must reject this Anew. Section 3 is not limited in its scope to carrying out the purpose of the treaties. It is primarily directed to the limitation of the profits of private persons making contracts with the United States for the construction of naval vessels and it extends to any naval vessel, whether authorized by the Vinson Act or by any previous or subsequent act. In our opinion the question whether section 3 applies to materials of the kind here involved is to be determined upon a consideration of the language used therein rather than of the purposes sought to be accomplished by the treaties.

The principal argument made by the petitioner is that the shells involved are designed to form parts of projectiles suitable for propulsion from a naval vessel, that they are ammunition which, when fired in war time or lost in practice, is consumed in the same manner as other consumable supplies and stores customarily carried on board the vessel, and that therefore they do not constitute a part of a complete naval vessel.

The respondent contends that a “complete naval vessel”, as used in the statute, means the new naval vessel itself and all the items of equipment and outfit which are necessary for the performance by it of military service and that the initial supplies of shells are essential portions of a complete new naval vessel and constitute permanent parts thereof until they are lost or destroyed.

A complete new naval vessel, as the evidence shows, consists not only of the hull and machinery, but also of the armor and armament and a wide variety of equipment or “outfit”, as it is called in naval circles. It is a custom of the Navy Department, prevailing since 1883, in the construction of a new naval vessel to furnish and equip it, before it is commissioned and placed in service, with all the necessary ammunition, powder, torpedoes, and shells, which are known as the “original outfit” or “first fill” of such supplies. The shells manufactured by the petitioner were ordered specifically for that purpose. The evidence further shows that after a vessel has been commissioned and placed in service the ammunition or torpedoes required to replace the original outfit of such items are supplied from the general stock of the naval establishment, which is purchased out of appropriations provided for the maintenance of the Navy and not out of appropriations in connection with the construction of a new vessel.

The question for determination is whether shells such as those covered by the contract here involved manufactured for the original outfit of a new destroyer constitute a “portion” of a “complete” destroyer constructed for the Navy within the meaning of section 3, supra.

In construing the statute little aid is to be obtained from the application of the ordinary meaning of the words “complete” and “portion” as applied to a new naval vessel. The word “complete” means entire, or with no part, item, or element lacking; and the word “portion” means a part, either separated from a whole, or merely considered by itself without actual separation. Webster’s New International Dictionary. The shell comprising a part of a torpedo is an article which is not attached to the vessel, but the question remains whether it is an essential item, element, or portion of a complete new naval vessel. It is obvious that “the purpose of, the language used is, therefore, not so plainly apparent as to preclude resort to judicial interpretation” and that “if effect is to be given to the true intent of Congress, we must avail ourselves of sources of information other than the language of the Act in order to aid us in the disclosure of that intention.” United States v. Jackson, 280 U. S. 183, 193.

There are familiar and approved sources of information from which light may be obtained upon the proper construction to be given to section 3, supra. As stated in the Jackson case:

It is a familiar rule of statutory construction that great weight is properly to be given to the construction consistently given to a statute by the Executive Department charged with its administration. United States v. Cerecedo Hermanos y Compania, 209 U. S. 337; Robertson v. Downing, 127 U. S. 607; United States v. Healey, 160 U. S. 136; and such construction is not to be overturned unless clearly wrong, or unless a different construction is plainly required. United States v. Johnston, 124 U. S. 236, 253; Hawley v. Diller, 178 U. S. 476, 488.

See also Universal Battery Co. v. United States, 281 U. S. 580; Walker Manufacturing Co. v. United States, 65 Ct. Cls. 394; certiorari denied, 278 U. S. 617.

The construction of naval vessels has been delegated by Congress to the Navy Department and has been for many years carried out by that department, subject to the direction of Congress as to the number and classes of vessels to be built and the total amount to be expended upon each vessel. Under the organization of the Navy Department, the function of procuring the materials which enter into the construction and equipment of a new vessel was, at all times material here, divided between the Bureau of Construction and Repair and the Bureau of Engineering, on the one part, and the Bureau of Ordnance, on the other, and, in recognition of the separate functions of these bureaus, and for convenience, Congress, in appropriating funds for construction of new naval vessels, has earmarked the amounts to be expended for “Construction and Machinery”, which are within the supervision of the two bureaus first above mentioned, and the amounts to be expended for “Armor, Armaments, and Ammunition”, which are within the supervision of the Bureau of Ordnance. Thus Congress has provided for the purchase of ammunition, including torpedoes for new vessels, out of funds specifically appropriated for construction purposes, and it appears that both long before (from 1883) and since the enactment of the Yinson Act it has been the practice of the Navy Department to provide the new vessel, before it is commissioned, with an initial supply of ammunition, which uniformly has been charged against the construction funds for a complete new naval vessel and that such practice has been followed with the knowledge of Congress and has been approved by it in the consideration of the budget estimates and the authorization of expenditures from year to year for such vessels. The initial supply of ammunition has, during all this time, been treated by the officials of the Navy Department as a proper item of cost of a complete new naval vessel for the reason that ammunition is essential to the performance by the vessel of its primary function — to fire ammunition.

When the Vinson Act was passed, the Navy Department and its Bureau of Supplies and Accounts, which is charged with making contracts for all ammunition, including that purchased for new vessels, interpreted the profit-limiting provisions of section 3 as applicable to all contracts for furnishing ammunition intended for the initial supply of new naval vessels, including torpedoes, powder, and shells. In making such contracts, including the one here involved, the Navy Department has consistently included in the contracts provisions requiring the contractor to comply with section 3, supra.

After the Vinson Act had been in force for about a year the Navy Department sought to have it amended so as to exempt from its profits-bearing provisions contracts for certain scientific equipment used on new naval vessels. In the course of the hearings on this proposed amendment before the Committee on Naval Affairs of the House of Representatives (Hearings on Sundry Legislation Affecting the Naval Establishment, 1935,74th Cong., 1st sess.) the then chief of the Bureau of Construction and Repair explained the scope of section 3, supra, as it up to that time had been interpreted and administered by the Navy Department. He testified (pp. 1518,1524) :

The Vinson-Trammel bill as it finally passed the Congress contains certain restrictive clauses which vitiates the value of the bill as a piece of legislation. I refer specifically to the restrictions and requirements placed around the 10-pereent profit clause. In my judgment, the 10-percent profit clause should be applied and applied only to the ship contract itself, that is, to the contracts made by the Navy Department through the Judge Advocate General for ships; or in case the hull of the ship and the propelling machinery are purchased separately then this clause should apply to both of them. It should, however, not apply to contracts, for material, made by the Bureau of Supplies and Accounts. * * *
That [the portion of the contract made through the Judge Advocate General’s office] consists of the ship and everything that you gentlemen appropriate for known as “construction and machinery”. In some cases, as submarines, we buy ships from one firm and engines from another. It would apply to both. What I want to get is “construction and machinery” of the ship under the 10-percent clause and nothing else.

In the Act of June 25, 1936, Congress provided for the exemption from the profit limiting provisions of the Vinson Act contracts for scientific equipment used on new naval vessels, but made no change affecting the departmental interpretation of the Act of 1934 as to ammunition and torpedoes being included within the provisions of section 3, supra, and that interpretation has continuously been applied up to the present time.

In a somewhat similar situation, presented in United States v. Jackson, supra, the Supreme Court said:

* * * If there were any doubt on the question, the silence qf Congress in the face of the long continued practice of the Department of the Interior in construing statutes which refer only to Indian “allottees” or Indian “allot-meats,” as applicable also to Indians claiming under the homestead laws, must be considered as “equivalent to consent to continue the practice until the power was revoked by some subsequent action by Congress.” United States v. Midwest Oil Co., 236 U. S. 459, 481.

The language found in section 3, supra, does not, in our opinion, require a different construction from that placed thereon by the Navy Department and sanctioned by Congress through a long period of years and we, therefore, hold that its provisions are applicable to the contract of the petitioner of June 8, 1935.

Moreover, in our opinion, we must hold that section 3 of the Vinson Act is applicable to the contract of the petitioner for a further reason.

The Vinson Act is not a separate and isolated piece of legislation, so far as it relates to the construction of complete naval vessels, or portions thereof, but is one of many acts constituting part of a uniform system consistently followed since 1883 for the purpose of providing new vessels for the Navy. Under that system it has been the practice of Congress, in the first instance, to provide, through authorization acts, for the construction of new naval vessels, and thereafter to supplement the authorization acts by providing in appropriation acts for the funds necessary for such construction. The subject matter dealt with by all of these acts is identical — complete new naval vessels and their construction. Therefore, the appropriation acts- passed to carry out the provisions of the Vinson Act are (as were the appropriation acts and authorization acts passed prior to the Vinson Act for the same purpose) in pari materia with the Vinson Act and, there being doubt as to what is embraced within the words “a complete naval vessel * * * or any portion thereof”, as used in section 3 of that act, it is proper, for the purpose of ascertaining the meaning which Congress attached to those words, to consider the language of the appropriation acts and to read them as if they, together with the Vinson Act, constituted one law. United States v. Freeman, 3 How. 556, 564, 565; Ryan v. Carter, 93 U. S. 78; Tiger v. Western Investment Co., 221 U. S. 286, 309; Commissioner v. Gottlieb, 265 U. S. 310; Lewis Sutherland Stat. Constr., 2d ed., ¶ 443; 59 C. J. 1042, 1048; 25 R. C. L. 1060, 1064. The principle is applicable where appropriation acts are involved. Converse v. United States, 21 How. 463, 467; see also State v. Hackney, 275 Mo. 47; 204 S. W. 513.

The appropriation acts, including those made under the authorization contained in the Vinson Act, have uniformly provided for the expenditure of funds under the headings, “Construction and Machinery” and “Armor, Armament, and Ammunition” for complete new naval vessels authorized to be constructed under authorization acts. By this specific reference to “ammunition” Congress ha¡s clearly mani* fested an intention to include that class of items in the amounts to be expended on complete new naval vessels; and ammunition without question embraces shells or torpedo heads of the kind here involved. When such a provision in the appropriation acts applicable to the vessels to be constructed under the Vinson Act is considered as in pari materia with section 3 of that act, “authorizing to be appropriated such sums as may be necessary to carry into effect the provisions” of the act, the conclusion is inescapable that Congress intended that the profit-limiting provisions of the Vinson Act should apply to contracts for furnishing ammunition, including shells such as those here in question, required for outfitting newly constructed complete naval vessels. This construction leads to consistency in all parts of the system for providing complete new naval vessels and to uniformity in its operation.

In view of our conclusion that the provisions of section 3, supra, are applicable to the contract in question, it becomes unnecessary for us to consider the petitioner’s contention that the provisions of the Vinson Act which were incorporated in the written contract should be disregarded as surplusage, or to consider the Commissioner’s contentions that the petitioner is bound by its voluntary agreement as evidenced by its contract to pay the excess profit and that it is, under the circumstances presented by this record, estopped to deny liability for the deficiency.

Reviewed by the Board.

Decision will be entered for the respondent.

Smith dissents.

Hill,

dissenting: I assume, for this discussion, that the petitioner by virtue of contract is obligated to pay into the Treasury the amount of its net profit, if any, in excess of 10 percent of the contract price for the manufacturing operation herein involved. It is only in the event such contract obligation was required by section 3 of the Vinson Act that respondent is authorized to enforce it “under the usual methods employed under the internal revenue laws to collect Federal income taxes.” We are not here concerned with the enforcement of an obligation other than one created'under the requirements of the Vinson Act.

Section 3 of that act is or is not applicable herein solely by virtue of its own provisions. If the facts in a given case do not make the provisions of the act applicable, application thereof can not be invoked by contract. Specifically, if the facts in the instant proceeding are not covered by the Vinson Act, the contract involved herein did not invest the respondent with authority to collect the amount claimed to be due “under the methods employed under the internal revenue laws to collect Federal income taxes.” That authority can be conferred only by a statute.

The determinative question is whether the shells here involved constituted a portion of a complete naval vessel. If so the Yinson Act is applicable; otherwise it is not. The fact that funds for the initial supply of ammunition for newly constructed naval vessels are provided by Congressional appropriations under the heading “Increase of the Navy” does not constitute such ammunition a “portion” of a “complete” naval vessel. It is or is not such a portion regardless of the language of the appropriations act providing funds for its purchase.

It is my view that a supply of ammunition is not necessary in order that there be a complete naval vessel, and that the contract obligation herein sought to be enforced is not one required by the provisions of the Yinson Act. If a naval vessel is incomplete within the purview of the Vinson Act until it is provided with the initial supply of ammunition, it would also be incomplete upon the exhaustion of such initial or a subsequent supply of ammunition. Consistently with such interpretation, every recurring subsequent supply of ammunition for a naval vessel would be a “portion” of the complete vessel and its procurement would have to be made in compliance with the Yinson Act. It appears to be conceded that renewals of ammunition supplies for naval vessels are made from the general stock of ammunition in the Naval establishment and that the ammunition in such general stock is not required to be procured or supplied under the provisions of the Vinson Act. It is readily conceivable that the initial supply of ammunition for a newly constructed naval vessel might be drawn from such general stock instead of being procured directly from a manufacturer or distributor specifically for such vessel. In such event the Yinson Act would concededly have no application thereto. Yet if such initial supply of ammunition received from a manufacturer or vendor for the specific purpose of equipping a certain newly constructed naval vessel is a “portion” of the complete naval vessel, then the initial supply of such ammunition for such vessel taken from the general stock of the Navy Department would also be a “portion” of a complete naval vessel. However, it appears that in the former-case the Navy Department and the appropriations committees of Congress regard the expense of such ammunition as cost and in the latter case as maintenance of the naval vessel. It is not apparent to me why in the illustration given the expense of supplying such ammunition should be cost in the one instance and maintenance in the other or why the initial supply of ammunition for a naval vessel should represent cost thereof and that subsequent or renewal supplies of such ammunition should represent maintenance. It is my opinion that a complete naval vessel within the purview of the Yinson Act does not include either the initial or a subsequent supply of ammunition such as is involved in this proceeding or at all and that, therefore, there is no warrant in law for the remedy here pursued for the collection of the amount due, if any, under the alleged contract obligation herein involved. In other words, the obligation, if any, of petitioner is not enforceable “under the usual methods employed under the internal revenue laws to collect Federal income taxes.”