author: Disney: Sternhagen,

text:
    The Carling Holding Company, Now Dissolved, by Thomas M. Johnson, John W. Martin, and J. C. Bradford, Trustees to Settle Its Affairs, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 86776, 87378, 88616.
    Promulgated March 1, 1940.

      John W. Townsend, Esq., and M. H. Barnes, O. P. A., for the petitioner.

      L. TP. Greason, Esq., and A. H. Monacelli, Esq., for the respondent.
   OPINION.

Disney:

The deficiencies in question are due, chiefly, to respondent’s disallowance for each year of claimed depreciation deductions, on the ground that petitioner did not own a hotel in respect of which the depreciation was claimed. The respondent denied petitioner the right to deduct from gross income for the year 1933 accrued real estate taxes, because its books were not kept, in the opinion of the respondent, on the accrual basis. For the year 1935 respondent denied petitioner the right to a deduction for interest accrued under a foreclosure decree, constituting a lien on hotel property, asserting that petitioner did not assume liability for the interest.

In each proceeding an amended petition was filed, wherein petitioner claimed that respondent erred in holding that it was taxable upon the moneys received or receivable by it in respect of rent for the hotel property, and, in the alternative, claims that, if so taxable, respondent erred in failing to allow it deductions for depreciation, for interest on the foreclosure decree constituting a lien against the property, for accrued taxes on the property, and for some operating expenses in amounts set forth in the respective petitions.

Obviously the first question for consideration is whether petitioner was taxable upon the moneys involved. They were received from the operation of a hotel. Petitioner contends that respondent’s view, when denying claim for depreciation, that it did not own the hotel, is a confession that the income from the hotel was not that of petitioner. We think such conclusion does not follow.. Petitioner obviously might have income from property not owned by it, such as under some sort of contractual arrangement. On the other hand, the respondent is, we think, likewise in error in his contention that because petitioner is admittedly a corporate entity it follows that it is taxable upon the moneys received. Corporate entity in fact, that is, incorporation in due form of law, has often appeared in cases where the entity was ignored for tax purposes, e. g., Southern Pacific Co. v. Lowe, 247 U. S. 330; Gulf Oil Corporation v. Lewellyn, 248 U. S. 71; and the very recent decision in Higgins v. Smith, 308 U. S. 473. We must therefore ascertain whether the situation here presented requires recognition, or disregard, of corporate entity. In general, corporate entity is and must be respected. “Only in cases where there are exceptional circumstances may the separate entity of the corporation be disregarded and the courts look through form to the substance.” Consumers Construction Co. v. Commissioner, 94 Fed. (2d) 731, citing Burnet v. Commonwealth Improvement Co., 287 U. S. 415, and other cases. Is this such an exceptional case? In sum, we have here a default upon nearly $1,000,000 in bonds issued by a hotel company; the formation of a bondholders’ protective committee of three; inability of the committee to raise about $75,000 necessary for taxes, attorneys’ fees, trustee’s fees and other 'expenses before foreclosure could be completed and title obtained for the bondholders; demand by the committee upon the hotel company for either a receiver or title to the property hi order that the income could be utilized to cut down the money required and eventually permit foreclosure; acquiescence by the hotel company in a transfer of title provided an operating lease be given to a company formed by the hotel people; disinclination of the committee to having title in their individual names; the formation of petitioner with the three members of the committee as sole stockholders with no capital paid in; a small amount of stock issued in one certificate and deposited with the bank serving as bond depositary; the passage of title to petitioner and an operating lease to those interested in the hotel company; financial assistance rendered petitioner by the committee and use of the major part of all receipts of petitioner to the discharge of taxes and expenses of the committee in the foreclosure, such as attorneys’ and trustee’s fees; the default of the operating company after about one and one-half years; the completion of foreclosure purchase of the property with bonds by the committee through a member; assignment of bid to a corporation formed to take title and to issue its stock in exchange for bondholders’ rights; and the dissolution of petitioner.

In 112 West 59th Street Corporation v. Helvering, 68 Fed. (2d) 397, a corporation was duly organized with powers not dissimilar to those of petitioner, to hold title to real estate for an investment trust because of the absence from the country of the principal person concerned. As herein, the issuance of a small amount of stock was apparently perfunctory. Though there was no definite agreement that the corporation was agent or trustee for the real owner, the investment trust, the court held the corporation to be a mere conduit of profit made on' resale, and not taxable thereon. The court pointed out that if the contest had been between the corporation and the investment trust, instead of a tax question, no court would have permitted the corporation to retain from the investment trust the property or the profits.

So here we think it is wholly obvious that if the petitioner, with its three stockholder-directors the same as the three members of the bondholders’ protective committee, had by some good fortune, such as discovery of oil upon the hotel grounds, been able to sell the property for $2,000,000, for example, sufficient to discharge the bonds of about $1,000,000, the three committeemen, as the petitioner corporation, could not have contended that the $1,000,000 surplus above debts belonged to petitioner and to them as its stockholders. The former hotel company-owner was held by the local court having jurisdiction to have no further interest, its contention that its deed was by way of further security being denied. Such a profit as above supposed would therefore belong either to the bondholders whose committee had formed petitioner, or to petitioner, with the members of such committee as its stockholders. To hold the latter would be a travesty upon the law of agency or trusteeship; yet the example serves to emphasize the fact that the committee, and the petitioner corporation set up by it, was the servant of the bondholders. The local court in Florida, though apparently the committee was not a formal party to the foreclosure litigation, held that petitioner was a “creature of the Bondholders Protective Committee and that said Bondholders Protective Committee is a party to this suit and subject to the jurisdiction of this court.” That the petitioner corporation was hardly more than a formality is indicated also by the fact that the three incorporators seem to disappear, receive no stock, and are immediately supplanted by the committee, the members of which receive stock certificate No. 1 and deposit it with the bond depositary. Though not holding that we are bound by the decision of the local court above mentioned, we think its pronouncement is enlightening in the situation. The petitioner corporation was in truth very plainly a mere creature of the bondholders’ protective committee. Had some stranger hotel company, perhaps already organized and operating elsewhere, taken a deed to the hotel property under agreement to apply rents upon taxes, etc., as did petitioner, the situation would patently have involved no status of agency or trust, and the stranger company would have been entitled to any profits made. But that reflection only serves to show a different situation, and a different result, here.

In North Jersey Title Insurance Co. v. Commissioner, 84 Fed. (2d) 898, a corporation was formed to hold title to property, because a title insurance company feared disastrous results of any publicity upon the fact that it had taken a great loss upon loans made upon the property through fraud of the mortgagors and others. The court called the corporation “a vehicle wherewith it [the executive committee, and officers of the insurance company mortgagee] should acquire and deal with the said properties for the insurance company”, pointed out that the 14 shares of stock in the corporation were all, except a qualifying share, held by stockholders of the insurance company, that the stock was deposited with the insurance company (much as was the small amount of stock in petitioner herein deposited with the bondholders’ depositary bank) and later transferred to the insurance company, that the insurance company provided money needed by the corporation (as was done by petitioner herein to the extent of $12,500), that separate books were kept for the corporation, and that there was no thought in the minds of the stockholders of the corporation to profit by their holdings in the company. Herein, the petitioner’s three stockholder-committeemen deposited the single certificate of stock issued to all with the bond depositary, because they “felt that anything in the way of security, and so forth, should be held by the depositary for the Bondholders.” In the cited case the Board had recognized the corporate entity and its receipts as income to it. The court said that “It is difficult to reconcile this decision with the facts that gave rise to the birth of the Belhall Company [the corporation]” and pointed out that the insurance company-mortgagee, to prevent disaster, had incorporated the company “in which no third party had any stock or interest”; that substance and not form should govern; that no purpose of evading tax appeared; that the case presented the “peculiar circumstances” mentioned by Southern Pacific Co. v. Lowe, supra; and that, while in form there were two entities, in substance there was but one enterprise. The situation of the bondholders here is in no essential particular different from the mortgageholder insurance company in the North Jersey Title Insurance Co. case, supra. Other cases presenting strongly analogous situations which need not be analyzed are Commissioner v. Moro Realty Holding Corporation, 65 Fed. (2d) 1013, and Central Life Assurance Society Mutual v. Commissioner, 51 Fed. (2d) 939; also, Mark A. Mayer, 36 B. T. A. 117; Kaspare Cohn Co. Ltd., 35 B. T. A. 646, 669. Each case on the question rests peculiarly upon its own facts. We do not in this respect find helpful Consumers Construction Co. v. Commissioner, supra, where unusual circumstances justifying disregard of corporate entity were negatived rather than demonstrated; and in Erving V. Dwyer, 18 B. T. A. 349, the corporation, sought to be considered as the same entity as a partnership, had business and earnings in which the partnership in nowise participated. Other facts, not considered necessary of discussion, contribute to our conclusion that we have here a markedly peculiar situation requiring placing this proceeding in that category of decisions where corporate entity is subordinated to substance. We therefore conclude and hold that the sums received by petitioner and involved herein were received by it as a mere conduit or agent, and do not comprise income to petitioner.

In the light of this conclusion, it is unnecessary to pass upon the alternative questions presented. However, it is plain that the formation of petitioner and transfer of its stock to the committee did not effect a reorganization. The bondholders did not surrender anything to petitioner. On the contrary, they retained their bonds, purchased the property at the foreclosure sale with them, and apparently participated in a reorganization, since after the foreclosure sale it appears, though the evidence is incomplete, that a new corporation, the North Florida Hotel Co., was formed on August 10, 1936, to take title to the property, and issued all its stock to the committee for the benefit of the depositing bondholders. It thus appears that there was no reorganization at any earlier date.

Reviewed by the Board.

Decisioni of no deficiency will be entered.

Sternhagen,

dissenting: This decision is a strange anomaly. The petitioner is recognized as a taxpayer who may file a petition based upon a deficiency notice arising from its own return, but it may not be required to pay the tax upon its properly computed income. Why not ? It was voluntarily conceived and organized and no doubt paid taxes to the state. It owned property, collected rents, and later conveyed the property. These facts denote vitality as a landlord ; why not as a taxpayer ? See People ex rel. Waclark Realty Co. v. Williams, 198 N. Y. 54; 91 N. E. 266. To characterize the corporation as a conduit or an agency or an instrument does not affect its status under the tax law, for every corporation is essentially that. The significant question under the revenue act is whether the corporation has income for the year. If there is income, the United States taxes it and the Board can offer no sanctuary.

Mellott and Offer agree with this dissent.


source: Caselaw Access Project

author: Smith :

license: Public Domain

text:
    W. P. Henritze, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97113.
    Promulgated March 1, 1940.

      Theodore B. Benson, Esq., for the petitioner.

      Chester A. Gwiwn, Esq., and E. L. Corbin, Esq., for the respondent.
   OPINION.

Smith :

This is a proceeding for the redetermination of deficiencies in income tax for 1935 and 1936 of $1,293.83 and $363.46, respectively. The petitioner has waived all allegations of error with respect to the determination of the deficiency for 1936. He has likewise waived all allegations of error with respect to the determination of the deficiency for 1935 except that “The respondent erroneously overstated the amount of rent received by the petitioner and he erroneously included the overstatement in income.”

His allegation of facts relating to this issue is as follows:

The respondent included in income [for 1935] the sum of $9,375, being rent due the petitioner for the months of October, November and December of 1934, which was not actually paid to the petitioner’s assignee in bankruptcy until February 11, 1935 but the lessee was at all times willing and ready to pay and the rent for the said months could have been demanded and was constructively received by the petitioner during the year 1934.

The facts have been stipulated by the parties as follows:

1. The petitioner is an individual and resides in Roanoke, Virginia. The tax in controversy is for the year 1935. An income tax return, on a cash receipts and disbursement basis, for said year was filed by the petitioner with the Collector of Internal Revenue at Richmond, Virginia.
2. The petitioner is and was at all times referred to herein the owner-of a building in the City of Roanoke known as Roanoke Theater which was rented by him to the National Theater Company, a Virginia corporation.
3. On August 2, 1932, the petitioner was heavily -indebted to Roanoke College and to other creditors and on that date he made an assignment for the benefit of creditors of all the rents to be received from the National Theater Company to one W. E. Mann, Bursar of Roanoke College, up to and including the rent for the month ending October 16, 1934.
4. On the expiration of the assignment to W. E. Mann, the petitioner was still financially involved and judgment creditors and other creditors made demand on the National Theater Company for the rent due the petitioner on the expiration of the said assignment.
5. On January 24, 1935, the petitioner, with the consent of his creditors, assigned to one John Strickler, the rent then due and owing by the National Theater Company for the month beginning October 16, November 16, and December 16, 1934, and January 16, 1935, at $3,125 a month, in the total amount of $12,500 which was paid by the Theater Company to the said Strickler February 12,- 1935.
6. The National Theater Company was at all times financially able to pay the said monthly rental in advance on October 16, November 16, and December 16, 1934, and January 16, 1935.
7. All assignments of error are waived-by the petitioner, except the alleged error set forth in the petition on page 2, paragraph 4 (a), the alleged facts concerning which are set forth on page 3, paragraph 5 (a) ; and this alleged error is claimed in the amount of $9,375, as set forth in the petition, rather than in the amount of $11,298.57 as shown in the notice of deficiency.

Both parties are agreed that the only question in issue is whether the $9,375 rent due for the months of October, November, and December, 1934, is includable in the petitioner’s taxable income for 1935. The respondent has determined that they are. The petitioner claims that they were “constructively received” by him in 1934 and that therefore the respondent erred in including them in the taxable income for 1935.

Nothing is said in the Revenue Act of 1934 relative to the doctrine of constructive receipt. A taxpayer keeping his books of account and making his income tax returns on the basis of cash receipts and disbursements is required to include in gross income the cash received.

Income tax Regulations 86, promulgated under the provisions of the Revenue Act of 1934, provide in part as follows:

Art. 42-2. Income not reduced to possession.- — Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. To constitute receipt in such a case the income must be credited or set apart to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made, and must be made available to him so that it may be drawn at any time, and its receipt brought within his own • control and disposition. A book entry, if made, should indicate an absolute transfer from one account to another. If a corporation contingently credits its employees with bonus - stock, but the stock is not available to such employees until some future date, the mere crediting on the books of the corporation does not constitute receipt.

Article 42-3 of Regulations 86 cites as examples of constructive receipt the following:

(1) Interest coupons not collected when due and payable, unless it can be shown that there are no funds available for payment of interest during the year in which it became due.

(2) Dividends on corporate stockholdings when unqualifiedly made subject to the demands of the stockholder.

(3) Interest on savings bank deposits, even though the bank nominally has a rule, seldom enforced, that it may require notice, before withdrawals are permitted.

As was stated by the Circuit Court of Appeals for the Third Circuit in Foley v. Commissioner, 94 Fed. (2d) 958:

* * * The test is the availability of the sum credited to the account of the taxpayer. If available, it is_ taxable as income. Eisner v. Macomber, 252 U. S. 189, 207, 40 S. Ct. 189, 64 L. Ed. 521, 9 A. L. R. 1570; Commissioner v. R. J. Darnell, Inc., 6 Cir., 60 F. 2d 82, 85; Mutual Benefit Life Insurance Company v. Herold, D. C., 198 F. 199, 215.

From the stipulated facts in this case it appears that, although the National Theater Co. was able and ready to pay the monthly rent in accordance with its lease, there were several claimants to whom the payments should be made. It was not until January 24,1935, that the petitioner reached an agreement with the several creditors that the payment of the rents due on the 16th day of each month from October 1934 to January 1935 should be paid to John Strickler. They were paid to him by the lessee on February 12, 1935. By the agreement of January 24, 1935, Strickler was made the petitioner’s agent for the receipt of the rents. The receipt by the petitioner’s agent was receipt by the principal. Julia A. Strauss, 2 B. T. A. 598; F. H. Wilson, 12 B. T. A. 403; A. W. Henn, 20 B. T. A. 1133; Margaret Wilson Baker, 30 B. T. A. 188; affd., 81 Fed. (2d) 741; Huntington National Bank, Trustee, 32 B. T. A. 342; affd. (C. C. A., 6th Cir.), 90 Fed. (2d) 876; Catherine La Brum et al., Executors, 34 B. T. A. 258; affd. (C. C. A., 3d Cir.), 94 Fed. (2d) 958; certiorari denied, 305 U. S. 615.

Relative to the doctrine of constructive receipt, the clear import of the regulations of the Commissioner and decisions of the Board and of the courts is that if there is any limitation or restriction as to the time or manner of payment, or if the payment is subject to any condition, there is no constructive receipt of income until the limitations, restrictions, or conditions are removed. Lyle H. Olson, 24 B. T. A. 702; affd., 67 Fed. (2d) 726; certiorari denied, 292 U. S. 637; Reginald Denny, 33 B. T. A. 738; C. E. Gullett, 31 B. T. A. 1067.

A taxpayer on the receipts and disbursements basis is ordinarily required to include in gross income only the amount of cash or cash equivalent received by the taxpayer during the taxable year. In Avery v. Commissioner, 292 U. S. 210, the question was whether a stockholder of a corporation which had declared a dividend payable on or before December 31, 1924, was taxable upon the dividend in 1924 or in 1925. He did not receive his dividend check until January 2, 1925. The Supreme Court held that the amount of the dividend check constituted taxable income of 1925 and not of 1924.

In the proceeding at bar the National Theater Co. was indebted to the petitioner at the close of 1934 in the amount of $9,375 representing rents due for the months of October, November, and December, 1934. It did not, however, pay those amounts to the petitioner or to his agent until 1935. We think that the respondent correctly ruled that the $9,375 in question constituted taxable income of the petitioner for 1935.

Decision will be entered u/nder Rule 50.


author: Steenhagen:

text:
    Edward Rayne McComb Herzog, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91581.
    Promulgated March 5, 1940.

      William Byrd, Esq., for the petitioner.

      Harold D. Thomas, Esq., for the respondent.
   OPINION.

Steenhagen:

The petitioner concededly made a transfer by gift in trust. He contends that only the remainder interest in the corpus may he used to measure the gift tax. The income, he says, was not the subject of the gift. Apparently he has been taxed under the income tax upon the income which by virtue of the trustee’s direction was distributed to him.

There would be no doubt of his nonliability for gift tax upon the value of the income if he had reserved to himself the absolute right to the income for his life. Cf. Porter v. Commissioner, 288 U. S. 436; Rasquin v. Humphreys, 308 U. S. 60. But he made no such reservation. He transferred the entire property. Whether he would enjoy any of its income depended entirely on the trustee, who, in his uncontrolled discretion, could deprive him of it completely. It Avas only by virtue of the trustee’s direction, which on this record must be regarded as entirely voluntary, that the donor received any of the income; and this direction might be terminated whenever the trustee deemed it proper that the wife should receive the income. Such a hope or passive expectancy is not a right. It is not enough to lessen the value of the property transferred. Rheinstrom v. Commissioner, 105 Fed. (2d) 642.

Since the transfer by the petitioner was complete, the gift tax is, by its own terms, applicable to the value of the entire property transferred. There is, however, always the necessity of not overlooking the interrelation of the gift tax and the estate tax, Estate of Sanford v. Commissioner, 308 U. S. 39. While in this proceeding-no decision may be made as to the inclusion of the trust property in the donor’s gross estate at the time of his death, nothing which can now be foreseen as to a possible estate tax would be at variance with the present decision.

Decision will ~be entered for the respondent.


author: Leech :

text:
    Michigan Silica Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96786.
    Promulgated March 5, 1940.

      Benjamin E. Ja¶e, Esq., and B. M. O'Hara, Esq., for the petitioner.

      W. W. Kerr, Esq., for the respondent.
   OPINION.

Leech :

This is a proceeding to redetermine a deficiency in income tax of $8,965.21 for the calendar year 1936. The only issue submitted is whether petitioner is entitled to a credit, under section 26 (c) (2) of the Revenue Act of 1936, because of a contract requiring it to deposit a certain monthly sum in a sinking fund for the retirement of bonds.

The facts were stipulated and are so found.

Petitioner is a corporation organized under the laws of Michigan. It is engaged in the production and sale of sand. On January 1, 1936, it was obligated on outstanding first mortgage, 1 percent sinking fund gold bonds in the amount of $140,700.

These bonds were originally issued and dated August 1, 1925, and were to mature August 1, 1935. The issue -was at all times secured by a trust indenture originally executed in favor of the Security Trust Co. of Detroit, Michigan. Prior to November 14, 1934, the Detroit Trust Co. of Detroit, Michigan, had become the successor trustee under the trust indenture.

On November 14, 1934, the maturity date of the outstanding bonds was extended to August 1, 1939, under the terms of a written agreement between petitioner and the successor trustee.

Article III of the trust indenture provided as follows:

AKnctE III
Sinking Fund.
Section 1. The Company covenants and agrees that on or before the 10th of each month commencing with August, 1926, it will pay to the Trustee twenty-five cents (250) for each ton of sand produced and sold by it during the previous month. In case the company has not received payment for sand so sold, it may defer payment to the Trustee of said sum of twenty-five cents (250) per top until it has received payment, but not for more than, sixty (60) days after such sale. The Company shall, at such times as the Trustee requests, render an account to the Trustee of all sand sold and payments received therefor. The moneys so paid shall be accumulated by the Trustee into a sinking fund, and at least once during each fiscal year of the Company the money in said sinking fund shall be exhausted to One Thousand ($1,000.00) Dollars or less by the redemption of bonds as herein provided. The Company, however, is given the option of purchasing bonds upon the open market, if they can be obtained for par or less, and upon delivery of such bonds to the Trustee for cancellation, the Company shall be entitled to be paid out of the sinking fund the amount paid by it for said bonds, but not more than par and accrued interest.

Pursuant to the above provision, petitioner, during 1986, made monthly payments to the trustee aggregating $26,576.98. These payments represented the aggregate amount due under the above provision for sand produced and sold by petitioner during the months of December 1935 to November 1936, inclusive. The amounts which petitioner was obligated to pay into the sinking fund for sand produced and sold during the twelve months of 1936, and which were so paid in the months from February 1936 to January 1937, inclusive, totaled $26,828.88. The monthly payments made to the trustee for the sinking fund were in all instances based upon the tons of sand produced and sold by petitioner during the preceding month.

Petitioner’s net income for 1936, as reported on its return, was $42,857.94. Respondent, in his notice of deficiency, redetermined petitioner’s income as being $52,338.59. Petitioner’s net income, after giving effect to the stipulation filed in this proceeding, is $43,492.27. During 1936 petitioner paid a dividend of $4,576.

Petitioner, in computing its liability for surtax on undistributed profits in its return for 1936, claimed the payments aggregating $26,828.88 as a credit to which it was entitled under the provisions of section 26 (c) (2) of the Revenue Act of 1936. Respondent, in his determination of a deficiency, disallowed this credit.

The cited statutory provision is as follows:

In the case of a corporation the following credits shall be allowed to the extent provided in the various sections imposing tax—
*******
(e) Contract® Restricting Payment oe Dividends.—
*******
(2) Disposition of peoitts of taxable tear. — An amount equal to the portion of the earnings and profits of the taxable year which is required (by a provision of a written contract executed by the corporation prior to May 1, 1936. which provision expressly deals with the disposition of earnings and profits of the taxable year) to be paid within the taxable year in discharge of a debt, or to be irrevocably set aside within the taxable year for the discharge of a debt; to the extent that such amount has been so paid or set aside. For the purposes of this paragraph, a requirement to pay or set aside an amount equal to a percentage of earnings and profits shall be considered a requirement to pay or set aside such percentage of earnings and profits. As used in this paragraph, the word “debt” does not include a debt incurred after April 30, 1936.

The bonds involved here evidence a debt within the meaning of the quoted section. Le Tulle v. Scofield, 308 U. S. 415; Commonwealth Commercial State Bank v. Lucas, 41 Fed. (2d) 111. Cf. Haffenrefer Brewing Corporation, 41 B. T. A. 443. And that debt, of course, arose when the bonds were issued in 1925.

The trust indenture under which these bonds were issued “required” that ascertainable amounts of money “be irrevocably set aside within the taxable year [1936] in. discharge of * * * [that] debt.” The fact that petitioner had the option of redeeming bonds or purchasing them does not affect that result. United States v. Kirby Lumber Co., 284 U. S. 1; Garland Coal & Mining Co. v. Helvering, 75 Fed. (2d) 663. Purchased bonds were to be canceled and the debt evidenced thereby thus paid and extinguished. Cf. Transylvania Railroad Co., 36 B. T. A. 333; reversed, 99 Fed. (2d) 69. That is our only concern on this branch of the case.

Was the provision of the trust indenture which “required” the payment of ascertainable amounts into the sinking fund a “provision [which] expressly deals with the disposition of earnings and profits of the taxable year”? We think it was.

The pertinent paragraph in the trust indenture required, among other things, that petitioner pay to the trustee 25 cents for each ton of sand produced and sold by it. These payments were to be made currently by reason of the requirement that on the 10th of each month, payments should be made, based upon the sand produced and sold during the preceding month. As showing that the payments were to be made out of the proceeds of sale, it was provided that in case the company had not received payment for the sand sold, it might defer payment to the trustee until it had received such payment, but for not more than 60 days. It further provided that at such times as the trustee requested, petitioner must render an account of all sand sold and payments received therefor. It was further provided that the trustee must, at least once during the fiscal year of the company, use the money in the sinking fund in excess of $1,000 for the redemption of bonds.

It is true that this provision of the trust indenture does not “expressly” use the term “earnings and profits.” The statute, however, does not require that such terms be used in the written contract but only that the written contract contain a provision which “expressly deals with the distribution of earnings and profits of the taxable year.” Applying that test, we submit that article III of the trust indenture does expressly deal with the disposition of earnings and profits of the taxable year. It makes the payment contingent not only upon production, but upon sale. It requires an accounting to the trustee, not only of the tons of sand produced, but of the payments received therefor. It permits the petitioner to defer payments into the sinking fund for sand sold and not paid for.

It seems apparent from the above considerations, that the contract does expressly deal with the disposition of the gross income of the petitioner, and, that being so, it necessarily deals with the disposition of the earnings and profits of the year.

In G. B. R. Oil Corporation, 40 B. T. A. 738, a bank had loaned petitioner money to purchase certain oil and gas leases. Petitioner, by written assignments, authorized the bank to receive and collect all sums of money derived from the property, to apply on the indebtedness. There was a further agreement with the bank, which resulted in the bank advancing, out of receipts or through new loans, all the expenses of operation plus certain development costs. Nowhere in the written assignments was there express mention of “earnings and profits”, and respondent placed reliance on that fact in support of his contention that the contracts did not contain any provision expressly dealing with the disposition of petitioner’s earnings and profits. The Board rejected the respondent’s theory, however, saying:

The general purpose of section 26 (c) (2), it seems to us, is to give a credit where a dividend paid credit can not be secured. In other words, the basic intent of Congress seems to have been to include in the provision only contracts which inevitably require in their performance a drawing on current earnings, thus removing current earnings as a source of dividend payments. See Paul and Mertens, par. 32 A. 46, 1938 cumulative supplement.
Respondent in his brief cites no authority in support of his contention, hut, after quoting the language of the assignments from petitioner to the hank, says:
“We are unable to find in these contracts or assignments any provision which expressly deals with the disposition of petitioner’s earnings and profits of the taxable year.”
It is true, as we have already said, that the assignments in question do not expressly refer to “earnings and profits” as such, hut they certainly do require that all of petitioner’s gross receipts from these properties be paid to the bank and that would certainly include all “earnings and profits” from them.

The theory supporting that opinion of the Board is that gross receipts of petitioner necessarily include “earnings and profits.” The petitioner here was in the business of producing and selling sand. That business was a source of its “earnings and profits.” Thus, although the trust indenture did not expressly use the term “earnings and profits”, it did expressly deal “with the disposition of earnings and profits of the taxable year”, since the amounts which were re-rquired to be paid into the sinking fund in tbe taxable year were based upon the receipts of the petitioner from the sale of its sand.

Upon the authority of G. B. R. Oil Corporation, supra, we reverse the respondent’s determination on this issue. See also Chesapeake Ferry Co. v. Early, - Fed. Supp. - (Nov. 28, 1939).

Since it would be impossible to compute any monthly payment due the sinking fund here until after the close of the' month, the. contested credit shall include the payment for sand sold during December of the taxable year, 1936, even though that payment was not physically made until January 1937. This seems proper on the theory that such payment was made as of December, 1936. Cf. Mason Machine Works Co., 3 B. T. A. 745. Moreover, respondent makes no issue as to the amount of the credit.

Decision will be entered under Bule 50.


author:
Van Fossan: SteRnhagen,
      Disney,

text:
    Alice H. Lester, an Incompetent Person, A. Crawford Greene, Guardian of the Estate of Alice H. Lester, an Incompetent Person, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 93404, 96315.
    Promulgated March 5, 1940.

      Morris M. Doyle, Esq., for the petitioner.

      Arthur Murray, Esq., and Frank T. Horner, Esq., for the respondent.
   OPINION.

Van Fossan:

In these cases we have the question whether payments made from the income of the estate of an incompetent woman, pursuant to order of a California court having jurisdiction of the estate, the payments being for the maintenance and support of the husband of the incompetent and her two daughters, are subject to gift tax under the provisions of section 501 of the Revenue Act of 1932, as amended by the Revenue Acts of 1934 and 1935. There is also involved the status of payments made in 1937 by way of distribution of the surplus income of the estate. Deficiencies for the years 1936 and 1937 only are in contest but computation of the deficiencies involves consideration of prior years and the extent to which the statutory exemption was exhausted in such years.

In support of the contention that none of the payments were gifts, petitioner urges that the incompetent was incapable of forming a donative intent; that the payments were obligatory under California law; that the action of the California court of jurisdiction is binding and can not be questioned by this Board.

We can not agree with petitioner’s first argument, based on the inability of the incompetent to form a donative intent. When the property of an incompetent is placed in the hands of the court, the court acts for, and in the place and stead of the incompetent. In such a situation the incompetent, acting through the court, could make a valid gift. City Bank-Farmers Trust Co. v. Hoey, 23 Fed. Supp. 831; affd. (C. C. A., 2d Cir.), 101 Fed. (2d) 9; Farwell v. Commissioner, 38 Fed. (2d) 791; In re Farmers' Loan & Trust Co., 168 N. Y. S. 952.

We agree, however, with petitioner’s position, and respondent does not seriously contend otherwise, that, in so far as the court of jurisdiction in the matter decreed the payments to be necessary for the support and maintenance of the dependents of the incompetent and so ordered, this Board is powerless to review such action. Freuler v. Helvering, 291 U. S. 35; Blair v. Commissioner, 300 U. S. 5; Susan B. Armstrong, 38 B. T. A. 658; Estate of Frederick R. Shepherd, 39 B. T. A. 38. There is no claim by respondent that the payments were procured by collusion. It matters not that we might, on the evidence, have acted differently. The orders of the court have become final and are conclusive.

It is stipulated, in effect, that the husband and two daughters were at all times dependent on the estate for maintenance and support and that except for the support so received they “have at all times since prior to June 6,1932, been poor persons unable to maintain themselves by work”, thus satisfying the requirements of section 206 of the California Civil Code. See also section 1502, California Probate Code and cases cited below.

Thus all payments specifically allowed and ordered by the court as necessary for the maintenance and support of the three dependents take their character from such orders, and, being in satisfaction of an obligation imposed by law, are not to be classed as gifts.

The above conclusion eliminates from discussion all items except the payment of $1,500 to each of the daughters pursuant to the court order of October 19, 1931. These payments were authorized by the court after receipt of a petition of the daughters, dated September 18, 1931, in which a partial account of the income and expenses of the estate was incorporated. The petition recites the fact of the allowance of $1,250 per month to each daughter for maintenance and support; informs the court of the impossibility of the incompetent returning to competency; states that “no purpose is served by further accumulations of income in said estate”, and asks distribution of “all or so much of the aforesaid surplus income” as the court shall deem proper. The order of the court decreed as follows: “That the sum of $7,500 be and it is hereby allowed and distributed to each of the said Carolyn L. Loan and Beatrice L. Pauli out of the aforesaid surplus income of said ward.” The order did not purport to authorize additional payments for maintenance and support. The question is, Were they gifts?

Light is thrown on the situation by examination of the order of the court dated May 13, 1937, denying an application of the guardian dated March 18, 1937, for authority to make a similar distribution of all or part of the surplus income to the children. It was stated “that this court is not convinced that said Alice H. Lester, if she were competent and able to act for herself, would at this time make to each of her said daughters a gift of income as frayed for in said, fetiUon?" After the above observation the court “ordered, adjudged and decreed as follows: That said petition be and it is hereby denied in so far as an allowance or distribution in the nature of a gift to said daughters of said Alice H. Lester of the aforesaid income of said ward, or any part thereof, is concerned.” (Emphasis supplied.) The court thereupon made a special additional allowance to each daughter specifically for maintenance and support.

The payments of $7,500 were exactly such payments as would have been made in response to the petition of the guardian had] the court then been convinced that it should authorize the payments. Although the characterization by the court of the payments as gifts in denying a previous application is not in the same category and of the same legal effect here as the characterization of payments for maintenance and support, at the least it ist persuasive. If distributions of surplus income, not specifically for maintenance and support, were, in the court order denying the application of the guardian to distribute surplus income, properly characterized as “a gift of income” or “in the nature of a gift”, it would seem to follow that such distributions of income, when authorized on the petition of the daughters,, constituted gifts. In our opinion the payments of $7,500 to the daughters in 1937, not being for maintenance and support and thus not being in satisfaction of an obligation imposed by law, were gifts. Albeit it is stipulated that the payments were made by virtue of section 1558 of the California Probate Code providing for distribution of surplus income to the next of Mn whom the ward would, in the judgment of the court, have aided if said ward had been of sound mind, we are convinced that in authorizing such payments the court considered that it was authorizing gifts in the amounts specified, City Bank-Farmers Trust Co. v. Hoey, supra; Farwell v. Commissioner, supra, and cases there cited. We hold these payments taxable as gifts.

Certain minor adjustments arising from concessions of the parties will be taken into account in the recomputation consequent hereon.

Reviewed by the Board.

Decisions will be entered wnder Bule 50.

Mellott dissents.

SteRnhagen,

dissenting: The amounts distributed by the guardian to the husband and the daughters were transfers without “an adequate and full consideration in money or money’s worth” and, therefore, by reason of section 503 of the Revenue Act of 1932, they should “be deemed a gift.” Furthermore, I think the order of the state court does not per se establish that the transfer was in discharge of an obligation or that it was other than a gift under the revenue act.

Murdock: and Harron agree with this dissent.

Disney,

dissenting: I must dissent. If this was a transfer for less than full and adequate consideration it was fro tanto a gift. Sec. 503, Revenue Act of 1932. Assuming, without holding, that the discharge of a legal obligation would be such consideration, there is nothing in this procéeding which justifies the assumption that any legal obligation of the incompetent was commensurate with the payments in question. I do not believe that section 206 of the California Civil Code should be construed to require the father or mother of an adult child, not physically nor mentally incompetent, to maintain such child to an extent fully commensurate with the financial ability of the parent. I think the statute means that such parent should provide the' reasonable necessities, if he is able and to the extent that he is able, but not that he should do more and supply luxuries or beyond the point of necessities merely because he is financially able so to do. Other California statutes, I think, indicate this to be sound construction, for Act 5814, California Criminal Code, provides that a parent is liable for the support of a poor person to the amount determined upon by the supervisors of the poor and for clothes and other supplies furnished such poor person; while ¶ 270, page 176, of the California Criminal Code makes a father guilty of misdemeanor for failure to supply “necessary food, clothing, shelter or medical attendance”, for a minor child. Therefore, I think it is not only out of line with the general law upon the subject, but out of line with the California law, to hold as the majority opinion holds that a parent must maintain adult children, not physically nor mentally incapacitated, upon a scale of living measured by the wealth of the parent, even though such scale is far beyond ordinary necessities. Furthermore, it seems to me that the statute construed by the California Probate Court was section 1502, California Probate Code, and that therefore the decision of the court is of no further or broader effect and is not binding upon us under the principles of Freuler v. Helvering, 291 U. S. 35.

Offer agrees with this dissent.

       It is the duty of the father, the mother and the children of any poor person who is unable to maintain himself by work, to maintain such person to the extent of their ability. [Sec. 206, California Civil Code.]

       Every guardian of an estate must manage it frugally and without waste, and apply the income, as far as may be necessary, to the comfortable and suitable support, maintenance and education of the ward and his family, if any; and if the income is insufficient for that purpose, he may sell or mortgage or give a deed of trust upon any of the property, as hereinafter provided^ [Sec. 1502, California Probate Code.]

         Tuller v. Superior Court, 10 Pac. (2d) 43 (Cal.) ; Janes v. Edwards, 41 Pac. (2d) 370 (Cal.) ; 20 California Jurisprudence 416; Gamble v. Leva, 102 So. 120 (Ala.).


author: Van Fossan:

text:
    Estate of Ida A. White, Deceased, Maud K. Bell, Executrix, and Edgar S. Byers, Executor, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 93575.
    Promulgated March 5, 1940.

      Edgar S. Byers, Esq., for the petitioners.

      W. W. Kerr, Esq., for the respondent.
   OPINION.

Van Fossan:

The petitioners contend that the income in question, $72,290.57, being that part of the total sum of $108,369.88 received by them during 1936 as interest and dividends on securities delivered to the trustees, and returned by the latter for taxation as income, belonged to the trustees and that the executors were legally obligated to pay over such income to the trustees under section 162 (c) of the Revenue Act of 1936.

The respondent’s position is that the income does not meet the requirements of section 162 (c). He argues that there was no proper distribution of the income as such, but that it was received by the trustees as a part of the corpus of the residuum of the decedent’s estate. He also asserts that the trustees were not a “legatee, heir or beneficiary” as contemplated by the statute.

We have no doubt that a trust, and hence its controlling trustees, can be a legatee within the contemplation of the statute. Crawford v. Mound Grove Cemetery Association, 218 Ill. 399; 75 N. E. 998; In re Logan, 131 N. Y. 456; 30 N. E. 485. The word “legatee” connotes the recipient or object of a legacy. The trustees, being such recipient here, became the “legatee” under the direction of the will. The trust was a taxable entity and returned the income received for taxation. Here the securities not needed to pay the debts of the estate were specifically bequeathed to the trustees by the codicil to Mrs. White’s will. They were thus made legatees by force of its testamentary language.

The second point urged by respondent raises the question whether or not the facts bring the case within the purview of the statute. The record is clear that the income fund under discussion was. received by the petitioners as income, was so treated by the depository bank, and was so paid over to the trustees under a proper order of the Probate Court. Its character and identity as income were thus established and maintained by all persons connected with the transactions. The stipulation itself so brands it.

The conduct of the petitioners is in harmony with this view. The will reposed in them, as executors, the discretion and judgment to determine what securities were not required to pay the bequests and the debts of the estate. In the exercise of that discretion, they segregated such assets and, in the course of their administration of the decedent’s estate, transferred them to the trustees. They also separated from their total income all dividends and interest arising from the assets turned over to the trusts and paid such segregated income to the trustees. That income followed the securities and was transferred as such pursuant to the purpose of item III of the codicil to the will dated September 20,1927.

The action of the petitioners was in strict accord with the provisions and directions of the will and thus the income was “properly paid” as required by the statute. The order of the Probate Court also directed the payment for the purpose of enabling the petitioners “to pay to said trustees the income now due them.”

The will provided that the trustees might, in their discretion, pay to Henry Packard White any part or all of the trust income if such should be needed, for his reasonable support and maintenance. Heneé, the entire amount of the income derived from the securities transferred by court order to the trust corpus might have been required for that purpose and the trustees unquestionably were entitled to the possession of all income derived from such securities.

There is no controversy as to the $20,000 which the petitioners paid to the trustees and the trustees in turn paid to Henry Packard White. The respondent allowed that deduction. The deductibility of that item differs in no basic respect from the deductibility of the remainder of the income. It arose from the same source, it was treated similarly by the petitioners, the banks, and the trustees, and the trustees accepted it as income and so paid it over to the beneficiary. The trustees retained the $72,290.57 for future distribution as income to Henry Packard White if and when they should determine that his reasonable needs should so require.

The trustees complied with the provisions of section 162 (c) by returning as income all the amounts received by them as such. The underlying provisions of the will and the actions of the petitioners and the trustees pursuant thereto fully comport with the language and purpose of the statute. The sum of $72,290.57, therefore, is deductible from the petitioners’ income for the year 1936.

The respondent cites Weigel v. Commissioner, 96 Fed. (2d) 387, affirming 34 B. T. A. 237. The facts in that case are readily distinguishable from those in the case at bar. There the question involved was the gain realized from the sale of corpus. By the terms of the will all estate income became part of the corpus of the trust estate. That situation does not exist here. We find that the income in question preserved its identity from its receipt by the petitioners to its payment to the legatee. It was paid as income. See Weigel v. Commissioner, supra. Henry Packard White did not receive the $20,000 as the res of a testamentary trust, nor was the remainder of the income to which he was potentially entitled transformed into corpus by the provisions of the will. It was properly paid as income and is entitled to be deducted by the petitioners.

Reviewed by the Board.

Decision will be entered under Rule 50l

       SEC. 162. NET INCOME.
      The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that—
      * * * * * * *
      (c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year, which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary.


author: Mellott :

text:
    Schweitzer & Conrad, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 93464.
    Promulgated March 5, 1940.

      Paul E. Short, Esq., W. P. Wormhoudt, Esq., O. M. Burlmgame, G. P. A., and Howard Kroehl, O. P. A., for the petitioner.

      Dan Taylor, Esq., for the respondent.
   OPINION.

Mellott :

The question is, What basis shall be used by petitioner in computing amortization and depreciation on the assets acquired by petitioner in 1930 from Illinois under the stipulated facts (summarized in our findings) ? Petitioner contends that it is the “cost” to it of the assets; that in any event it is entitled to use Illinois’ basis, increased by the gain recognized or taxed to Illinois or its stockholders; and that unless the applicable sections of the revenue acts allow it a basis equal to the predecessor’s (Illinois) cost, plus the cash paid by it (petitioner) for the assets, the sections are unconstitutional. Respondent contends, and determined the deficiency upon the theory, that petitioner’s basis is the cost of the assets to Illinois.

An examination of the applicable section of the Revenue Acts of 1934 and 1936 (section 114) discloses that the present question can not be determined merely by a reference to those acts. Section 114 states that the basis “upon which exhaustion, wear and tear and obsolescence are to be allowed * * * shall be the adjusted basis provided in section 113 (b) * * Section 113 (b), by its terms, refers to subsection (a) of the same section. Paragraph (12) of subsection (a) provides that if the property was acquired after February 28, 1913, in any taxable year beginning prior to January 1, 1934, and the basis thereof for the purposes of the Revenue Act of 1932 was prescribed by section 113 (a) (6), (7), or (9) of such act, then for the purposes of section 113 the basis shall be the same as the basis therein prescribed in the Revenue Act of 1932. Respondent contends that section 113 (a) (7) of the Revenue Act of 1932 is thus made applicable and it appears to be. It refers to the acquisition of property by a corporation after December 31, 1917, in connection with a reorganization. Inasmuch as the acquisition in question occurred during the time the Revenue Act of 1928 was in effect, it is necessary to determine first whether or not it was in connection with a reorganization and, if so, whether immediately after the transfer an interest or control in the property acquired of 50 per centum or more remained in the same persons. We therefore go to the Kevenue Act of 1928 for the purpose of determining whether or not there was a reorganization as defined in said section. The portion of the section relied upon by the respondent is 112 (i) (1) (A). The pertinent provisions of all sections to which reference has been made are shown- in the margin.

Were the assets acquired in connection with a reorganization? In Nelson Co. v. Helvering, 296 U. S. 374, the facts were substantially the same as in the instant proceeding. In that case the Elliott Fisher Corporation organized a new Delaware corporation with 12,500 shares of nonvoting preferred stock and 30,000 shares of common stock. The Elliott Fisher Corporation acquired all of the 30,000 shares of common stock in the new corporation for $2,000,000 in cash. The new corporation then acquired substantially all of the properties of the John A. Nelson Co., paying therefor $2,000,000 cash and the entire 12,500 shares of preferred stock issued by it. The John A. Nelson Co. used part of the cash to redeem its own preferred stock and distributed the remainder, together with the 12,500 shares of preferred stock of the new corporation, to its stockholders. The John A. Nelson Co. did not dissolve. The Supreme Court held that there was a statutory reorganization, and, among other things, said:

True, the mere acquisition of the assets of one corporation by another does not amount to reorganization within the statutory definition. Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U. S. 462, 53 S. Ct. 257, 77 L. Ed. 428, so affirmed. But where, as here, the seller acquires a definite and substantial interest in the affairs of the purchasing corporation, a wholly different situation arises. The owner of preferred stock is not without substantial interest in the affairs of the issuing corporation, although denied voting rights. The statute does not require participation in the management of the purchaser; nor does it demand that the conveying corporation be dissolved. A controlling interest in the transferee corporation is not made a requisite by section 203 (h) (1) . (A) (26 U. S. C. A. § 112 note). This must not be confused with paragraph (h) (2) (26 U. S. C. A. § 112 note).

Petitioner attempts to distinguish the instant proceeding from the cited case on the ground that “the preferred stock in that case was sufficiently different from that in the present case to distinguish the two cases.” The only difference, however, appears to be that in the Nelson case the preferred stockholder was expressly given the right to vote in the event of default in the payment of dividends and his stock was to be retired at stated intervals, whereas the preferred stockholders in the petitioner corporation had no voting rights and their stock could be redeemed upon 30 days’ notice; but the fact that they had no voting rights does not mean that they did not have a substantial interest in its affairs. While petitioner’s preferred stock was redeemable upon 30 days’ notice, or sooner if the notice were waived, the agreement of July 1, 1930, contained no absolute requirement that the preferred stock need ever be redeemed in the absence of sufficient earnings. The differences between the preferred stock in the Nelson case and the preferred stock in the instant proceeding are not substantial enough to distinguish the two cases. It must be held that the acquisition of the assets was in connection with a reorganization. Cf. Helvering v. Minnesota Tea Co., 296 U. S. 378, and Helvering v. Watts, 296 U. S. 387.

The next question is, Did an interest or control in the property of 50 percent or more remain in the same persons when the reorganization was consummated ? If it did, petitioner must use the basis which the assets it acquired had in the hands of its transferor, Bickford's Inc. v. Helvering, 98 Fed. (2d) 568, unless it may be relieved from doing so upon some ground not heretofore discussed.

We agree with petitioner that, since the preferred stock had no voting rights of any kind, neither Illinois nor its stockholders had the 50 percent control in the transferred assets required by the statute. We do not agree with its contention, however, that neither Illinois nor its stockholders upon the completion of the transaction held a 50 percent interest in the transferred property. Petitioner’s argu-meat in support of this contention is that the value of the new corporation is established by the total consideration of $2,340,127.69 paid by the petitioner for the assets of Illinois; that the 12,500 shares of preferred stock (par value of $100 per share) issued to Schweitzer and Conrad must be reduced (a) by the 625 shares issued to Cassatt & Co., brokers, and (b) by the 2,375 shares redeemed two and one-half months after the date of the execution of the reorganization agreement and approximately two months after the date on which the reorganization was consummated; and that upon completion of the transaction, therefore, Schweitzer and Conrad, as individuals, owned only 9,500 shares, which gave them an interest of $950,000 in assets having a value of $2,340,127.69, or less than 50 percent. In other words, petitioner insists that the issuance of 625 shares to Cassatt & Co. and the redemption of the 2,375 shares be treated as part of the reorganization plan and as separate steps in a single transaction.

Whether or not the 12,500 shares issued to Schweitzer and Conrad should be reduced by the 625 shares issued to the brokers need not be discussed or decided; for, as we interpret the stipulated facts, the stockholders of Illinois owned a 50 percent interest in petitioner immediately after the transfer of the assets of the former if the redemption of the 2,375 shares be determined to have been a separate and distinct transaction, as respondent contends. It will be assumed, therefore, for the purposes of this decision that the 12,500 shares should be reduced by the 625 shares, leaving Schweitzer and Conrad owning 11,875 shares and an interest in the transferred assets of $1,187,-500 or more than 50 percent, unless petitioner’s contention, that their ownership should be further reduced by the 2,375 shares redeemed, is sustained.

On brief petitioner urges that the redemption of 2,500 shares of the preferred stock (2,375 of which were owned by Schweitzer and Conrad) for cash, followed the acquisition of the Illinois assets so closely that, when considered with the provisions of the contract permitting redemption of all or part of the preferred stock on 30 days’ notice, it is apparent the parties contemplated immediate redemption of these shares; that the slight difference in time between the transfer of Illinois assets and the redemption of the 2,500 shares of preferred stock does not control or demonstrate that the transactions were separate and distinct, citing Portland Oil Co., 38 B. T. A. 757, 775; that the temporary holding of 2,375 shares of redeemed preferred stock by the Illinois stockholders was nothing more than a transitory ownership; and that, since the ownership was transitory, a 50 percent interest in the assets did not “remain” in Illinois or its stockholders within the contemplation and meaning of section 113 (a) (7) of the Revenue Act of 1932, supra. Omaha Coca-Cola Bottling Co., 26 B. T. A. 1123; Paul L. Case, 37 B. T. A. 365, 372; affd., 103 Fed. (2d) 283; Helvering v. Bashford, 302 U. S. 454, 458.

An examination of the reorganization plan or contract of July 1, 1930, discloses that the redemption of the transferred stock over an indefinite future period was provided for; but the provisions of the contract do not justify petitioner’s statement that “immediate” redemption was contemplated. In this connection the following provisions of the contract with reference to the preferred stock are significant:

(c) * * * the Preferred stock shall be entitled to receive eumnlative dividends at the rate of six per cent (6%) per annum from and after July 1, 1930, payable in quarterly installments of one and one-half per cent (1%%) on the fifteenth days of March, June, September and December of each year, beginning September 15, 1930, * * *: the Preferred stock shall be redeemable, in whole or in part, at any time on thirty (30) days’ notice, at par, plus dividends accumulated and unpaid, and accrued to the date of redemption, and shall be entitled to be paid, on liquidation or dissolution, One hundred dollars ($100.00) per share, plus dividends accumulated and unpaid and accrued to the date of such payment, before any of the assets of the New Company shall be distributable to the holders of the Common Stock. * * * Second parties [Edmund O. Schweitzer and Nicholas J. Conrad], and each of them shall be elected members of the Board of Directors of the New Company and shall be entitled to remain as directors so long as they, or either of them, own any shares of the preferred stock. * * * The charter of the New Company shall further provide, with respect to such Preferred Stock, that, beginning with the earnings of the business for the calendar year 1931 and for each calendar year thereafter while any of said Preferred stock remains outstanding, the entire net earnings remaining after payment of taxes and Preferred dividends, hut before deduction for exhaustion on patents, patent rights and other intangibles, shall be disposed of as follows: Ten per cent (10%) thereof may, at the option of its board of directors, be retained by the New Company for use as and for additional working capital; next there may be paid cash dividends of One hundred thousand dollars ($100,000.00) upon the Common stock, and all the remaining net earnings, determined as aforesaid, shall be applied to the redemption of the Preferred stock, but no fractional shares shall be redeemed. * * * The charter of the New Company shall further provide that the consent of the holders of at least two thirds (%) in interest of the Preferred stock then outstanding, given in person or by proxy, either in writing, or at an annual meeting or at a special meeting called for that purpose, shall be necessary for effecting the increase of the authorized amount of Preferred stock herein provided for, or the creation or issue of any stock having any preference or priority which is or would be superior to or on an equality with any preference or priority of the Preferred stock provided for herein.

The above quoted provision for the application of the 1931 earnings to the redemption of the preferred stock after making the specified deductions and payments indicates that at the time the contract of July 1,1930, was executed it was the intention of the parties that the first redemption of preferred stock would occur either at the end of 1931 or sometime in 1932. Moreover, as of July 15, 1930, the stipulated and agreed closing date of the reorganization, there was no obligation on the part of the preferred stockholders to surrender their stock for redemption, and no obligation on tbe part of petitioner to redeem its preferred stock within the taxable year 1980. Petitioner merely had, at the most, an option to redeem the preferred stock which it could exercise only by giving the required 30 days’ notice to the preferred stockholders unless they waived their right to such notice. In other words, there was no contract requiring or entitling the petitioner, on the one hand, to redeem its preferred stock, or, on the other hand, requiring or entitling the preferred stockholders to surrender any part of the preferred stock for redemption. Cf. Helvering v. San Joaquin Fruit & Investment Co., 297 U. S. 496.

The “transitory” ownership of stock, recognized by the courts and this Board in the cases cited and relied upon by petitioner, has no application in a situation such as the one under consideration in the instant proceeding. In the cited cases the “transitory ownership” of stock was in individuals or corporations which acted merely as conduits for the passage of title to persons or corporations entitled to receive it by virtue of an arrangement or contract executed prior to, or constituting a part of, the reorganization. Most reorganization plans contemplate the retirement, sooner or later, of preferred stock of any new company provided for in the reorganization plan; but such retirement, occurring months or years later, is not, and never has been held to be, part of the reorganization plan. Cf. Nelson Co. v. Helvering, supra. If it were, the execution of the reorganization plan would be delayed indefinitely in most instances.

An examination of the contract of July 1, 1930, indicates that the parties intended that all of the steps essential to the execution of the reorganization plan should be executed on or before the “closing date.” The closing date which they set and agreed upon was July 15, 1930.-The situation of the parties on that date, rather than some subsequent date when part of the preferred stock was redeemed, is the important factor to be considered in determining whether or not Illinois or its stockholders owned 11,815 shares of the preferred stock of petitioner and therefore held more than the 50 percent interest in its property specified in section 113 (a) (7), supra. Under the provisions of this section petitioner’s basis for amortization and depreciation of the patents and other assets acquired by Illinois must be held to be the same as it would be in the hands of Illinois, the transferor, unless the stipulated facts disclose that under the law applicable to the year in which the transfer was made gain was recognized to the transferor.

Petitioner next contends that, even though it be held that the assets of Illinois were acquired in connection with a statutory reorganization and that an interest of 50 percent or more in the transferred assets remained in Illinois and its stockholders, nevertheless under section 113 (a) (7) of the Revenue Act of 1932, supra, it is not limited to the basis of Illinois, since that basis must be increased by the gain recognized to Illinois or its stockholders.

Illinois transferred assets to petitioner which had a cost or other basis to it of $588,012.91. In consideration for this transfer petitioner assumed liabilities amoimting to $90,127.69, paid $1,000,000 in cash to the stockholders of Illinois, and issued to these stockholders 12,500 shares of its preferred stock (par value $100 per share), or a total consideration of $2,840,127.69. It is apparent, therefore, that, except for the reorganization provisions of the Eevenue Act of 1928, the taxable gain to Illinois would have been $1,752,114.78. Under the provisions of section 112 (d) of the Eevenue Act of 1928, if a corporation, in pursuance of a plan of reorganization, receives other property or money in addition to stock and distributes such property or money to its stockholders, no gain is recognized to the corporation. Illinois authorized the distribution of the $1,000,000 to its stockholders, and was thus relieved of any taxable gain on the exchange unless the assumption of liabilities of $90,127.69 must be treated as “other property or money” received, in which event the $90,127.69 would constitute taxable gain.

Petitioner takes the position that the amount of the assumed liabilities and the $1,000,000 in cash should be added to the basis of the assets in the hands of Illinois in determining its basis for amortization and depreciation of the assets it acquired from that corporation.

Prior to the passage of the Eevenue Act of 1939 a conflict existed as to the treatment to be accorded the assumed liabilities in determining the basis of the transferee corporation in situations such as the one here under consideration. In Corpus Christi Terminal Co., 38 B. T. A. 944 (on appeal, C. C. A., 5th Cir.), this Board treated the assumption of a transferor’s indebtedness by a transferee in consideration for the transfer of assets as the equivalent of the payment of cash in the amount of the indebtedness assumed, following United States v. Hendler, 303 U. S. 564, and held that the amount of the assumed indebtedness should be included in computing the recognizable gain to the transferor under section 112 (d) of the Eevenue Act of 1928. In Bickford's Inc. v. Helvering, supra, the Circuit Court of Appeals for tbe Second Circuit beld that the assumption of liabilities of an old corporation by a new corporation in connection with the acquisition of assets was not a paymtent of “property or money” which could be added to the basis of the old corporation’s property, in the absence of a showing that such assumed debts were paid during the taxable year. Since these decisions were rendered Congress has provided, in section 218 (f) of the Revenue Act of 1939, that the assumption of indebtedness shall not be considered as “other property or money” received by the taxpayer within the meaning of subsection (c), (d), or (e) of section 112 of the Revenue Act of 1938, or the corresponding provisions of the Revenue Act of 1924 or subsequent revenue acts, unless, in the determination of the tax liability of the taxpayer for the taxable year in which the exchange occurred, by a decision of this Board or of a court, or by a closing agreement, gain was recognized to the taxpayer by reason of such assumption. Section 213 (f) must be applied here; and, inasmuch as it does not appear from the record that any gain was recognized to Illinois by reason of the assumption of its indebtedness in the amount of $90,127.69 by the petitioner, petitioner is not entitled to have this amount added to the basis of the assets in the hands of Illinois.

Petitioner’s contention that the $1,000,000 should be added to its basis is predicated largely upon the fact that Schweitzer and Conrad, Illinois’ stockholders, paid a tax upon the cash received by them. The stock bad cost them $33,447.22 and they received cash and preferred stock of the petitioner totaling not less than $2,237,500, so their gain amounted to over $2,200,000. The amount of their taxable gain, however, was limited, under the provisions of section 112 (c) of the Revenue Act of 1928, to the amount of the cash received. While petitioner’s argument at first blush seemsl to be quite persuasive, its contention is not tenable.

Section 113 (a) (7) of the Revenue Act of 1932, supra, provides that the basis of the transferee corporation “shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the trans-feror * * Petitioner urges that the word “transferor” should be construed to mean “transferor or its stockholders”, and has attempted to show by reference to the legislative history of the section that Congress intended, when it used the word “transferor”, to cover both the transferor corporation and its stockholders.

The courts and this Board have frequently held that, where the language of a statute is plain and susceptible of but one meaning there is no justification for resort to judicial construction. Caminetti v. United States, 242 U. S. 470, 485; Swarts v. Siegel, 117 Fed. 13, 18, 19; John H. Watson, Jr., 27 B. T. A. 463. The word “trans-feror” is an ordinary word of well established meaning. It is generally defined to be “one who makes a transfer.” Article 1 of the reorganization agreement of July 1, 1930, is replete with expressed warranties and representations that Illinois (not its stockholders) owned the patents and the other assets free and clear of all liens and encumbrances, except as therein stated. In article II it is stated that, upon payment of the $1,000,000 to the stockholders of Illinois, the “first party [Illinois] will surrender to the third party [Cutler-Hammer, Inc.] and third party will accept and take possession, control and management of the assets, property and business of the first party.” The contracting parties apparently recognized that the real transferor of the property was Illinois and not its stockholders; and the fact that Illinois authorized the payment of all or part of the consideration which it was entitled to receive for its assets direct to its stockholders does not justify treating them as transferors of the assets. They were taxable to the extent of the cash received by them, not because they were transferors of the assets acquired by petitioner, but because they exchanged stock of one corporation for stock of another corporation and cash, pursuant to a plan of reorganization, both corporations being parties to the reorganization. Cf. Royal Marcher, 32 B. T. A. 76.

Section 112 (b) (4) of the Revenue. Act of 1928 provides that “no gain, or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.”

Petitioner points out that under section 112 (d) (1) and (2), supra, if Illinois had retained the cash and had not directed the distribution of it to its stockholders, it, under the provisions of section 118 (a) (7), supra, would be entitled to increase its basis by the amount of cash paid. It urges that it would require “an amazing construction of the taxing act” to make the petitioner’s basis depend on whether the cash was retained by Illinois or distributed to its stockholders.

An examination of petitioner’s argument upon brief indicates that it is of the opinion, that Congress intended that the gain to the trans-feror corporation should go untaxed where, as in the instant proceeding, the receiving corporation immediately distributed or ordered the distribution of the cash it was entitled to receive for its assets to its stockholders. But we do not believe Congress had any such intention. It is true that in subdivision (1) of section 112 (d) Congress provided that no gain should be recognized to the transferor corporation where cash or other property was received in an exchange in addition to stock, and distributed in pursuance of the plan of reorganization; but the fact that Congress provided for the nonrecognition of gain to the transferor corporation under such circumstances does not mean that it intended that such gain should go untaxed. Nonrecognition of gain to the transferor corporation and nonrecognition of gain to both the transferor or transferee corporations are two different things. When the reorganization provisions of the statute provide for the nonrecognition of gain to the transferor, they usually provide a method by which the Government will realize a tax from the transferee. In other words, these provisions merely result in a postponement or deferment of the tax, and not its forfeiture by the Government. Cf. Portland Oil Co. v. Commissioner, 109 Fed. (2d) 479, affirming 38 B. T. A. 757. Provisions relating to the basis of the transferee, such as section 113 (a) (7), supra, must be read in this light; and in providing that the basis of the transferee is to be the basis in the hands of the transferor it is apparent that Congress intended that the transferee should take the assets subject to the income tax which might properly have been assessed to the transferor corporation but for the provisions of section 112 (d) (1), supra.

The final contention of petitioner is that unless the applicable sections of the Revenue Acts of 1934 and 1936 allow it a basis for the acquired assets and patents equal to its predecessor’s cost plus the cash paid by it for the assets, they are unconstitutional. It argues: “It is elemental that under the Sixteenth Amendment to the Constitution, Congress may only impose a tax upon income, and that if it imposes a tax on capital, it is violating that amendment, as well as the Fifth Amendment to the Constitution, and Article I, Section 2, Clause 3, and Article I, Section 9, Clause 4 of the Constitution.” It also states: “The courts have repeatedly held that the Sixteenth Amendment does not permit a tax on the return of capital.” Petitioner cites in this connection Doyle v. Mitchell Brothers Co., 247 U. S. 179, 185; Southern Pacific Co. v. Lowe, 247 U. S. 330, 335; Burnet v. Sanford & Brooks Co., 282 U. S. 359, 364; and Davis v. United States, 87 Fed. (2d) 323.

Respondent concedes that Congress may not tax a return of capital as income, but contends that in requiring petitioner to use the basis of Illinois there is involved no tax on return of capital. His argument is that petitioner acquired the assets from Illinois pursuant to a plan of reorganization and took “the assets for which it exchanged its stock, subject to the portion of the income tax which might properly be assessed in the ultimate disposition of such assets.” Haas Building Co., 22 B. T. A. 528.

In Taft v. Bowers, 278 U. S. 470, the Supreme Court of the United States said: “The power of Congress to require a succeeding owner, in respect of taxation, to assume the place of his predecessor is pointed out by United States v. Phellis, 257 U. S. 156, 171, * * and “There is nothing in the Constitution which lends support to the theory that gain actually resulting from the increased value of - capital can be treated as taxable income in the hands of the recipient only so far as the increase occurred while he owned the property. And Irwin v. Gavit, 268 U. S. 161, 167, is to the contrary.”

On brief petitioner urges that, “while it is true that section 113 (a) (7), Revenue Acts of 1928 and 1932, and similar provisions of other revenue acts, have been held constitutional, it is likewise true that in none of the cases passing upon its constitutionality was the question of cash payments and resulting gain involved.” Petitioner’s statement is correct. See Consolidated Utilities Co. v. Commissioner, 84 Fed. (2d) 548; T. W. Phillips, Jr., Inc., 23 B. T. A. 1272; affd., 63 Fed. (2d) 101; Barnett Anchor Oil Co., 25 B. T. A. 746; Perthur Holding Corporation v. Commissioner, 61 Fed. (2d) 785; certiorari denied, 288 U. S. 616; Newman, Saunders & Co. v. United States, 36 Fed. (2d) 1009; certiorari denied, 281 U. S. 760; Osburn California Corporation v. Welch, 39 Fed. (2d) 41; Sconset Oil Co., 26 B. T. A. 419; Kay Finance Corporation, 25 B. T. A. 913; Haas Building Co., supra. But we are unable to agree with its contention that the payment of cash in addition to stock renders the statute unconstitutional when the payment of stock alone does not have that effect. In each instance, assuming that the basis of the transferor is less than the value of the assets acquired, the acquiring corporation gives up property having a value in excess of the basis prescribed by the statute; and, if the courts and this Board are correct in holding that Congress has the power to limit the basis to the basis of the transferor in one instance, we see no justification for holding that it has overstepped its power when .it makes a similar limitation in the other.

It is our conclusion that petitioner took the assets of Illinois subject to the portion of the income tax which might properly have been assessed against the latter but for the provisions of section 112 (d) (1) of the Revenue Act of 1928, supra, and that the restriction of its basis under the provisions of section 118 (a) (7) of the Revenue Act of 1932 to the basis in the hands of Illinois did not result jn a tax on capital, but was a deferred tax on profits which it was within the power of Congress to levy. We are of the opinion, therefore, that sections 113 (a) (12) of the Revenue Acts of 1934 and 1936, and section 113 (a) (7) of the Revenue Act of 1932, are not unconstitutional.

The respondent did not err in determining the deficiencies in tax.

Reviewed by the Board.

Judgment will be entered for the respondent.

       Section 114, Revenue Acts of 1934 and 1936.—
      (a) Basis fob Depreciation. — 'The basis upon which exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the adjusted basis provided in section 113 (b) for the purpose of determining the gain upon the sale or other disposition of such property.
      Section 113, Revenue Acts of 1934 and 1936.—
      (b) Adjusted Basis. — The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis determined under subsection (a), adjusted as hereinafter provided.
      (a) Basis (Unadjusted) of Property. — The basis of property shall be the cost of such property; except that—
      • * * * * * *
      (12) Basis established by Revenue Act of 1932. — -If the property was acquired, after February 28, 1913, in any taxable year beginning prior to January 1, 1934, and the basis thereof, for the purposes of the Revenue Act of 1932 was prescribed by section 113 (a) (6), (7), or (9) of such Act, then for the purposes of this Act the basis shall be the same as the basis therein prescribed in the Revenue Act of 1932.
      Section 113 (a) (7), Revenue Act of 1932.—
      (7) TltANSFBES TO COEPOBATION WHEKK CONTItOL OF PBOPEBTY REMAINS IN SAME PERSONS. — If the property was acquired after December 31, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 60 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made. This paragraph shall not apply if the property acquired consists of stock or securities in a corporation a party to the reorganization, unless acquired by the issuance of stock or securities of the transferee as the consideration in whole or in part for the transfer.
      Section 112 (i). Revenue Acts of 1928 and 1932.—
      (i) Definition of Reorganization. — As used in this section and sections 113 and 115—
      (1) The term “reorganization” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or'substantially all the properties of another corporation), or * * »

       SEC. 112. RECOGNITION OF GAIN OR LOSS.
      * * * ft * * *
      (d) Same — 'Gain of Corporation. — if an exchange would be within the provisions oij subsection (b) (4) of this section if it were not for the fact that the property received in exchange consists not only of stock or securities permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then—
      (1) If the corporation receiving such other property or money distributes it in pursuance of the plan of reorganization, no gain to the corporation shall be recognized from the exchange, but
      (2) If the corporation receiving such other property or money does not distribute it in pursuance of the plan of reorganization, the gain, if any, to the corporation shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property so received, which is not so distributed.

       SEC. 213. ASSUMPTION OP INDEBTEDNESS.
      *******
      (f) Assumption op Liability Not Recognized undeb Prior Acts.—
      (1) Where upon an exchange occurring in a taxable year ending after December 31, 1923, and beginning before January 1, 1939, the taxpayer received as part of the consideration property which would be permitted by subsection (b) (4) or (5) of section 112 of the Revenue Act of 1938, or the corresponding provisions of the Revenue Act of 1924 or subsequent revenue Acts, to be received without the recognition of gain if it were the sole consideration, and as part of the consideration another party to the exchange assumed a liability of the taxpayer or acquired from the taxpayer property subject to a liability, such assumption or acquisition shall not be considered as “other property or money” received by the taxpayer within the meaning of subsection (e), (d), or (e) of section 112 of the Revenue Act of 1938, or the corresponding pz'ovisions of the Revenue Act of 1924 or subsequent revenue Acts, and shall not prevent the exchange from being within the provisions of subsection (b) (4) or (5) of section 112 of the Revenue Act of 1938, or the corresponding provisions of the Revenue Act of 1924 or subsequent revenue Acts; except that if, in the determination of the tax liability of such taxpayer for the taxable year in which the exchange occurred, by a decision of the Board of Tax Appeals or of a court which became final before the ninetieth day after the date of enactment of the Revenue Act of 1939, or by a closing agreement, gain was recognized to such taxpayer by reason of such assumption or acquisition of property, then for the purposes of section 112 of the Revenue Act of 1938, and corresponding provisions of the Revenue Act of 1924 or subsequent revenue Acts, such assumption or acquisition (in the amount of the liability considered in computing the gain) shall be considered as money received by the taxpayer upon the exchange.
      (2) Paragraph (1) shall be effective with respect to the Revenue Act of 1924 and subsequent revenue Acts as of the date of the enactment of such Act.