author: Seawell:

text:
    James Speyer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 56435.
    Promulgated April 27, 1934.

      Henry W. Taft, Esq., and O. W. McConaughy, Esq., for the petitioner.

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

Seawell:

This proceeding was instituted to redetermine a deficiency of $48,643.92 in income tax for 1928. The primar}? facts are set forth in a voluminous stipulation of facts. Only sq much of the agreed facts will be stated as is necessary for a clear understanding of the several issues raised by the pleadings, which are whether the respondent erred:

(1) In increasing gross income by $181,535.45 on account of payments received on awards of the Mixed Claims Commission;
(2) In refusing to. allow as a deduction losses sustained on the accounts which formed the basis of the awards;
(3) In disallowing a deduction of $48,591.24 for attorney fees paid for services rendered in connection with the awards;
(4) In disallowing a credit of $59,805.31 for income tax paid to the German Government; and
(5) In allowing too large an amount as a deduction for contributions.

I.

The petitioner is and was, at all times important here, a citizen of the United States, a resident of New York, and a member of the firm of Speyer & Co., a copartnership conducting a banking business in New York City. Prior to April 4, 1917, he was also a member of the firm of Lazard Speyer-Ellisson, a copartnership conducting a banking business at Frankfort-am-Main, Germany, hereinafter referred to as the German partnership.

On April 6, 1917, there were owing to the petitioner and Speyer & Co. amounts represented by deposits and balances in accounts with banks and bankers in Germany, including the German partnership. Excepting four items belonging to clients of Speyer & Co., since December 31, 1923, the petitioner bas been the sole owner of said deposits and accounts and of the awards made by the Mixed Claims Commission, hereinafter referred to as the Commission, with respect thereto.

On or about December 31, 1922, the petitioner and Speyer & Co. filed 10 claims with the Commission respecting the deposits and accounts with German bants and bankers. Upon these claims the Commission entered awards in favor of the petitioner as follows:

The principal amount of some of the awards included an allowance for interest to April 6, 1917, as claimed by the claimants. Each award was made with interest at the rate of 5 percent per year from designated dates, in most cases January 1, 1920.

Pursuant to the provisions of the Settlement of War Claims Act of 1928, 45 Stat. 254, the Secretary of the Treasury on September 26, 1928, made two payments to the petitioner on account of the sums due him under the six awards, one in the amount of $99,500 and the other in the amount of $386,412.43, a total of $485,912.43, after deducting $2,441.77 as reimbursement for expenses incurred by the United States as allowed by section (2) (e) of that act. The respondent first included one half of this sum in petitioner’s taxable income on the theory that the payments were made for the equal benefit of the petitioner and a former member of Speyer & Go. In his answer to the petition he asserted a claim to tax on the whole amount. In his answer to the amended petition the respondent admitted error in asserting a tax on more than $181,535.45 of the payment.

The respondent pursued the following method in determining that $181,535.45 of the amount received in 1928 constituted taxable income of the petitioner. He first made an analysis of each item of each award and allocated the amount thereof to return of capital and income. For instance, of the amount of award No. 5958, he determined that $411.69, the principal of the bank deposits, was a return of capital, and the balance of $3.95, representing interest on the deposits from dates set forth in the stipulation to April 6, 1917, none of which was credited to the accounts by the respective banks, was income. The two items of bank deposits, without interest, constituting award No. 6256, have no basis within the meaning of section 113 of the Revenue Act of 1928, and, accordingly, the respondent treated the entire award of $6,843.47 as income. Under award No. 6583 he found that a loan of 41,121.27 marks, deducted as a loss in petitioner’s return for 1913, together with interest thereon for 1916 in the amount of 7,764.76 marks, constituted income. In award No. 7293 he determined that dividends credited to one of petitioner’s accounts with the German partnership prior to December 31, 1920, and certain depository fees, no part of either of which credits the petitioner ever reported as income for tax purposes, constituted taxable income. By this process he determined that of the aggregate principal amount of $996,738.47 awarded by the Commission, $852, 660.31 represented a return of capital and $144,077.78, income. [Respondent’s figures are short 38 cents.] He then computed interest on the awards from the dates allowed by the Commission to January 1, 1928, in the amount of $391,936.78, which he calls income to the petitioner. He then reached the figure of $181,535.45 by the following computation:

Capital to be returned ($852,660.31 less $14,597.79 belonging to clients)_$838, 062.52
Income as of Jan. 1, 1928 ($144,077.78 plus $391,936.78)_ 536, 014. 56
Percentage of payments — Return of capital_ 61%
Income__ 39'%
Payments in 1928 ($485,912.43 less $20,436.91 received for the account of clients)_¡$465,475.52
Return of capital 61%_ 283, 940. 07
Taxable income 39%_ 181, 535.45

This method of allocating payments is in accordance with G.C.M. 9210, C.B. X-1, p. 129, applicable to taxpayers, such as the petitioner, reporting income on the cash basis, and G.C.M. 9466, C.B. X-1, p. 133, relating to taxpayers on the accrual basis. The respondent adheres to this theory of prorating the payments, and the petitioner insists that he is entitled under the rule stated in Burnet v. Logan, 283 U.S. 404, to a return of his capital before being taxed on any payments made under the awards.

Under the respondent’s method of allocating the payments the petitioner is taxed on but a part, instead of all, of the payment allocable to awards, such as No. 6256, where the parties are agreed there is no investment to recover. In other awards where the amount assigned to income is less than the average, he is called upon to pay a tax on an amount in excess of his real income. The interest on the awards prior to January 1, 1928, represents about 70 percent of the whole of the income items determined by the respondent, yet by September 30, 1932, only about 2 percent of the amount paid to claimants of petitioner’s class, was applicable to such interest. It does not appear, and it is not claimed, that any part of the payments made in 1928 included interest on the awards prior to 1928. These few illustrations serve, we think, to show the inequity of the respondent’s method. Under it there will not be a recovery of the petitioner’s cost or other basis until the last installment is paid, irrespective of when that occurs.

The respondent cites no authority to support his method of taxing the payments and there appears to be none in point. Taxation is eminently practical, Tyler v. United States, 281 U.S. 497, and “ Generally speaking, the income tax law is concerned only with realized losses, as with realized gains.” Lucas v. American Code Co., 280 U.S. 445. In Doyle v. Mitchell Bros. Co., 241 U.S. 179, the Court said: In order to determine whether there has been gain or loss, and the amount of the gain if any, we must withdraw from the gross proceeds an amount sufficient to restore the capital value that existed at the commencement of the period under consideration.”

In Burnet v. Logan, supra, the respondent, with other stockholders of a corporation, sold their stock for a cash consideration and an agreement of the buyer to pay the additional amount of 60 cents per ton for ore removed from a certain mine. Thereafter she received sums purusant to the agreement. The Commissioner treated the obligation of the buyer as having a cash value and regarded the sale as a closed transaction in the year made. The respondent maintained that the sale did not give rise to taxable gain until she had recovered her basis for the stock. In holding for the respondent, the Supreme Court said:

The 1916 transaction was a sale of stock — not an exchange of property. We are not dealing with royalties or deductions from gross income because of depletion of mining property. Nor does the situation demand that an effort be made to place according to the best available data some approximate value upon the contract for future payments. This probably was necessary in order to assess the mother’s estate. As annual payments on account of extracted ore come in, they can be readily apportioned first as return of capital and later as profit. . The liability for income tax ultimately can be fairly determined without resort to mere estimates, assumptions, and speculation. When the profit, if any, is actually realized, the taxpayer will be required to respond. The consideration for the sale was $2,200,000 in cash and the promise of future money payments wholly contingent upon facts and circumstances not possible to foretell with anything like fair certainty. The promise was in no proper sense equivalent to cash. It had no ascertainable fair market value. The transaction was not a closed one. Respondent might never recoup her capital investment from payments only conditionally promised. Prior to 1921, all receipts from the sale of her shares amounted to less than their value on March 1, 1913. She properly demanded the return of her capital investment before assessment of any taxable profit based on conjecture.

As a condition precedent to the entry of awards in his favor by the Commission, the petitioner waived whatever right he had to proceed further against his German debtors, except through liens based upon possession prior to October 6, 1917, of assets of the debtors within the United States, or property seized under the Trading with the Enemy Act of October 6, 1917. On May 15, 1923, the German Government accepted primary liability for all claims and debts within the jurisdiction of the Commission. Accordingly, the awards made in favor of the petitioner were made obligations of the Government of Germany to the United States for the benefit of the petitioner.

Until the passage of the Settlement of War Claims Act of 1928 on March 10, 1928, no provision was made for payment of the awards. Section 4 (a) of the act created a special deposit account in the Treasury Department and directed the deposit therein of:

1. All sums invested or transferred by the Alien Property Custodian, under the provisions of section 25 of the Trading with the Enemy Act, as amended;
2. Amounts, not exceeding $100,000,000, appropriated in respect to awards of the War Claims Arbiter;
3. Money paid by Germany on account of claims of the Commission.

Subsections 2 (b), (c), and (d) read as follows:

(b) The Secretary of the Treasury is authorized and directed to pay an amount equal to the principal of each award so certified plus the interest thereon, in accordance with the award, accruing before January 1, 1928.
(c) The Secretary of the Treasury is authorized and directed to pay annually (as nearly as may be) simple interest, at the rate of 5 per centum per annum, upon the amounts payable under subsection (b) and remaining unpaid, beginning January 1, 1928, until paid.
(d) The payments authorized by subsection (b) or (c) shall be made in accordance with such regulations as the Secretary of the Treasury may prescribe, but only out of the German special deposit account created by section 4, within the limitations hereinafter prescribed, and in the order of priority provided in subsection (e) of section 4.

Section 4 (c) (1), (2), and (3) of the act provides for the payment of administrative expenses, awards on account of death or personal injury, and awards of less than $100,000, as first, second, and third in order of priority. The provisions relating to the classes of awards next in order of priority, and pursuant to which the payments were made to the petitioner in September 1928, read as follows:

(4) To pay the amount of $100,000 in respect of each payment authorized by subsection (h) of section 2 (relating to awards of the Mixed Claims Commission), if the amount of such authorized payment is in excess of $100,000 and is not payable in full under paragraph (2) of this subsection. No person shall be paid under this paragraph and paragraph (3) an amount in excess of $100,000 (exclusive of interest beginning January 1, 1928), irrespective of the number of awards made on behalf of such person.
(5) To make additional payments authorized .by subsection (b) of section 2 (relating to awards of the Mixed Claims Commission), in such amounts as will make the aggregate payments (authorized by such subsect'on) under this paragraph and paragraphs (2), (S), and (4) of this subsection equal to 80 per centum of the aggregate amount of all payments authorized by subsection (b) of section 2. Payments under this paragraph shall be prorated on the basis of the amount of the respective payments authorized by subsection (b) of section 2 and remaining unpaid. Pending the completion of the work of the Mixed Claims Commission, the Secretary of the Treasury is authorized to pay such installments of the payments authorized by this paragraph as he determines to be consistent with prompt payment under this paragraph to all persons on behalf of whom claims have been presented to the Commission.

The final two items on the list of priorities, applicable to the petitioner, relate, respectively, to (1) interest due on the unpaid portion of the amount due January 1, 1928, on awards of the Commission, and (2) certain amounts invested by the Alien Property Custodian and the balances due on awards of the War Claims Arbiter and Commission, payable on a pro rata basis.

At the close of 1928 about $900,000 principal and interest was still due the petitioner under the awards stated as of January 1, 1928. Of this balance $576,000 in round numbers was paid during the next three years. On September 30, 1932, when the total amount payable from the special deposit account was around $110,000,000, there was due claimants of petitioner’s class about $53,000,000. To meet this obligation the account had a balance on September 30, 1932, of about $5,000,000 and was entitled to be credited with approximately $22,000,000 (but might not exceed $15,000,000) from the Alien Property Custodian, and 40,800,000 reichsmarks payable annually from Germany until 1981 under a debt agreement of June 23, 1930.

Restrictions in the Settlement of War Claims Act against their assignment robs the awards of any market value. The United States disclaimed liability for payment of the awards, and the rights under the awards were held to have been assigned to the United States, to be enforced by it against Germany. Section (2) (h).

Under present arrangements for payment of awards of the Commission, whether the petitioner ever receives the balance due him depends entirely upon the amount of funds received for deposit in the special deposit account, and these receipts in turn depend to a large extent upon not only the ability and willingness of Germany to pay, as agreed, but the course of conduct of the United States in case Germany defaults under the debt agreement. It has been estimated that all of the awards of the Commission will not be paid before 1955. Senate Report No. 273, 70th Cong., 1st sess., Committee on Finance, Settlement of War Claims Bill of 1928, p. 37. The debt agreement of June 23, 1930, extends this time to 1981. Thus, on the basis of existing arrangements for the payment of the awards, there is no prospect of final liquidation of petitioner’s awards prior to 1981. The history of debts against Germany growing out of the war, commencing with the Treaty of Versailles and continuing through the so-called Hoover moratorium, is one of promises, lack of capacity to pay, failure to pay, moratoriums, postponements, revision of obligations, etc. If the future is judged by this series of events it is exceedingly doubtful whether the awards ever will be paid in full.

It is apparent that there is not only a lack of certainty of future payments, but it is highly probable that the petitioner will never receive a substantial part of what is still due him. Under the circumstances, following the rule announced in Burnet v. Logan, supra, we hold that the petitioner is entitled to recover his cost or other basis for each award before being called upon to pay a tax on sums received under the awards.

The parties have stipulated the petitioner’s cost or other basis, if any, for items of each award. The aggregate capital investment to be recovered is about $1,125,000, which is more than the amount of the awards, and the amount of the payments received by the petitioner in 1928. The payments received in the taxable year should be allocated to the several awards in the ratio that the amount of each award, stated as of January 1, 1928, bears to the total of all the awards, plus interest to that date. All of the amount thus applied to awards for which there is no basis constitutes taxable income, and as to the awards for which there is a cost or other basis to recover, only the excess over the petitioner’s basis is taxable. As we understand the facts, there will be no income to tax in 1928 under the awards having a capital investment to recover. Proper adjustments should be made for the amount received under award No. 7293 for the account of clients of Speyer & Co. This distribution of the payments will be reflected in the computation to be filed under Rule 50.

II.

Under the second issue the petitioner is claiming as a loss an amount equal to the difference between his basis for the several awards and the principal amount of the awards. The discrepancy between the figures is due to the fact that the items comprising the awards were acquired with German marks of a value of about 23 cents and the awards of the Commission were, in practically every case, based upon a mark value of 16 cents.

The petitioner insists that the enactment of the Settlement of War Claims Act in 1928 “ was the culminating event of the long series of events involving the bank accounts which brought the transaction to a close.” The respondent, on the other hand, contends that the loss occurred in 1918, or, in the alternative, in 1925, 1926, and 1927, when the several awards were made by the Commission.

In United States v. White Dental Mfg. Co., 274 U.S. 398, involving the deductibility in 1918 of a loss on the seizure of property by the German Government, the Court remarked that the transaction which evidenced the loss was the act of seizure of the assets. In a later case, Lucas v. American Code Co., supra, the Court, after stating that generally the law is concerned only with realized losses, as with realized gains, said:

* * * Exception is made, however, in the case of losses which are so reasonably certain in fact and ascertainable in amount as to justify their deduction, in certain circumstances, before they are absolutely realized * * * The general requirement that losses be deducted in the year in which they are sustained calls for a practical, not a legal, test. * * *

The petitioner argues that there was no loss sustained by reason of confiscation or seizure of the accounts during the war. With the view of establishing such a fact, he introduced a witness as an expert on German law and decrees affecting the accounts. His testimony is, in effect, that there was no seizure or administration of the property at any time by the German Government. The orders and decrees from which he reached such a conclusion are in evidence, and we are not bound to accept the witness’ interpretation of the various orders and decrees affecting the property rights of the petitioner in the accounts. Havana Electric Ry., Light & Power Co., 29 B.T.A. 1151. A proper consideration of the question does not call for a determination of whether the accounts were actually seized or administered by Germany.

By a decree of September 30, 1914, the German Government made it unlawful to make payments to Great Britain and other countries “ whether in cash or by means of bills or cheques or by transfer or in any other manner whatsoever, or to remove or transfer money or securities directly or indirectly to the aforementioned countries.” A decree of October I, 1915, prohibited property situated in Germany of nationals of enemy states, or claims appertaining thereto, from being sold, transferred, or charged without consent of the Custodian of Enemy Property. The same decree made it unlawful “ to remove abroad, either directly or indirectly, property belonging to nationals of enemy States, in particular securities and money, without the authority of the Imperial Chancellor * * These provisions of the decree were made applicable to the United States and property of its citizens by a decree issued August 9, 1917, and an order of the Imperial Chancellor promulgated November 10, 1917. A decree of October 10, 1915, required persons managing or having the custody of property belonging, or owing money to, nationals of enemy states to make notification thereof to the proper German authority. Another decree, issued April 19,1917, authorized the Custodian of Enemy Property to “ take under his administration the property in Germany of enemies” and provided for the payment to the custodian of interest as from April 1, 1917, on money claims of citizens of enemy countries, “ even if the Custodian has not taken the claim under his jurisdiction.”

In 1918 some of the banks and bankers in Germany having funds of Speyer & Co. notified the German custodian of the deposits being held by them to the credit of Speyer & Co. No part of such credits or interest thereon was paid to or for the account of the German custodian. In March 1918 the Custodian of Enemy Property, pursuant to the request of the, German partnership, released it “ for the time being ” from accounting for interest on the amounts owing the petitioner and Speyer & Co., on the basis of the German partnership’s contention that the amounts claimed by it exceeded the credits owing to the petitioner and Speyer & Co. In March 1922 the banks and bankers were notified by the German custodian that the extraordinary war measures adopted respecting the deposits had been annulled in so far as the measures affected citizens of the United States.

It is apparent from these quotations from the war measures enacted by Germany respecting property within its borders belonging to citizens of enemy countries that creditors such as the petitioner had few property rights in the accounts which they could exercise with any great degree of freedom. As we interpret the various German decrees and orders, aided by the testimony, transfer of ownership under all circumstances was subject to the approval of the Custodian of Enemy Property. The effect was to make any attempt to sell or assign conditional upon the final approval of the custodian. Such interference on the part of the German Government very seriously impaired the property rights of the petitioner and Speyer & Co. The restrictions, we think, were such as to amount, from a practical viewpoint, to an absolute seizure. The interference with the owners’ property rights would have justified a deduction of any loss sustained in a year long before 1928.

In April and October 1917 the German partnership had on deposit with Speyer & Co. a large amount of cash and securities. During October 1917 Speyer & Co. debited the account with several matured installments of. loan accounts with the German partnership. The debits were sufficient in amount to convert the credit balance in favor of the German partnership into a debit balance in favor of Speyer & Co. The Alien Property Custodian, who was duly advised of the account following the passage of the Trading with the Enemy Act on October 6, 1917, permitted Speyer & Co. to retain securities of a market value of $550,000 as security for the then balance of “ in excess of $450,000 ” in the account. Thereafter entries were made in the account for other installments of the loan accounts, interest, and claims of clients of the German partnership, but on February 11, 1929, it still had a balance of $655,980.73 in favor of Speyer & Co., and Speyer & Co. held as a lien securities of the market value of $116,911. At all times prior to May 1926 the market value of the securities was not less than the debit balance in the account. The security thus held by Speyer & Co. was in no wise released by the waivers it gave the Commission in connection with claims filed with it, and was ample to satisfy a large part of the sum due from the German partnership under the loan accounts.

If we were to assume that the yarious war measures adopted by Germany respecting the status of the deposits and accounts did not give rise to a deductible loss at that time, the losses occurred in 1925, 1926, and 1927, when the awards of the Commission were entered. These awards fixed the maximum amounts recoverable through the Commission on all the claims and definitely fixed the loss on the awards for which the petitioner had no lien. The Settlement of War Claims Act only provided a means of realizing something on the awards and did not in any way affect the question with which we are concerned. On this issue we sustain the respondent.

III.

In 1928 the petitioner paid to counsel for services rendered in preparing and filing claims with the Commission the sum of $48,-591.24, an amount equal to 10 percent of the payments made on the awards in that year. No part of the amount was allowed as a deduction in the determination of the deficiency. The petitioner concedes that the amount of the deduction should be reduced to $46,557.77 for a portion of the expense borne by his clients. The respondent concedes that $18,153.55 of the amount paid is deductible as an ordinary and necessary business expense in case we should hold, as contended by him, that $181,535.35 of the payments received in 1928 on the awards is taxable income.

The respondent argues that in so far as the fees were expended for the return of capital, they are not deductible, citing Murphy Oil Co. v. Burnet, 55 Fed. (2d) 17; affirmed on other points, 287 U.S. 299, and says that the case of Kornhauser v. United States, 276 U.S. 145, applies to the portion of the expense relating to income. No contention is being made that the expense was not incurred in a trade or business of the petitioner.

The attorney fees in controversy in Murphy Oil Co. v. Burnet, supra, were expended in defending title to oil property. Here the fees were expended in an effort to recover, by the procedure set up by the Commission, bank deposits and other accounts created in the conduct of the petitioner’s business. They are like charges made for collecting accounts receivable, some part of which may represent cost of goods sold. We hold that $46,557.77 of the amount paid is deductible from gross income as an ordinary and necessary business expense. Kornhauser v. United States, supra.

IY.

In 1917, 1918, 1919, and 1920 the German partnership, without petitioner’s consent or knowledge, paid to Germany, and charged to the personal account of the petitioner on its books, amounts aggregating $59,805.31 for income taxes assessed against the petitioner on his German income for 1916. The account had a debit balance at the times the several payments were charged to the account. The petitioner is claiming the amounts so paid as a credit against his 1928 income tax. See section 131, Revenue Act of 1928.

In the claim he filed in 1922 with the Commission the petitioner asked for an award for the mark balance in his capital account on December 31, 1916, with the German partnership, plus interest thereon to April 6, 1917. The Commission on February 3, 1926, entered an award for that amount, stated in dollars, less the amount owing by the petitioner to the German partnership, which included the aforementioned sum of $59,805.31. The petitioner says that this balancing of the accounts with the German partnership had the effect of forcing him to pay the taxes in 1928. We can not agree with such reasoning.

As a condition precedent to the entry of the award the petitioner waived whatever rights he had to proceed further against the German partnership involved in the claim, and he knew not later than the time he received notice of the award that his debts to the partnership had been used as an offset against his claim. There is no denial of acceptance of the award prior to 1928, as entered, and it does not appear that the petitioner ever filed a protest with the Commission on account of the offset it made or with the German partnership on account of the unauthorized payments it made. Nothing appears to have occurred in 1928 having any relation to payment of the tax in that year. Under the circumstances, we think that the petitioner acquiesced in the payment prior to 1928. This assent on the part of the petitioner constitutes payment. On this issue we sustain the respondent.

V.

In accordance with the request made in the respondent’s answer to the amended petition, the amount deductible from gross income for contributions will be redetermined under Rule 50 on the basis of petitioner’s net income as reflected therein.

Reviewed by the Board.

Decision will 5c entered umder Rule 50.


source: Caselaw Access Project

author: McMahon :

license: Public Domain

text:
    American Ideal Cleaning Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 49205.
    Promulgated April 27, 1934.

      Arthur Garndujf, Esq., for the respondent.
   OPINION.

McMahon :

The petitioner is a corporation, with its principal office at Chicago, Illinois.

The respondent determined that the following- deficiencies in income tax and penalties are due from the petitioner:

In the petition the petitioner alleges that the respondent erred in asserting 50 percent fraud penalities as above stated. In the petition it is stated, however, that the tax is not disputed and that the appeal pertains solely to the fraud penalties. In his original answer the respondent denied all the allegations of the petitioner except the preliminary allegations.

This proceeding came on for hearing at Chicago, Illinois, on August 28, 1938. The petitioner had no counsel at the hearing but was represented by its secretary, Vandervlue. The petitioner offered no proof at the hearing. At such hearing counsel for the respondent moved to amend his answer and, there being no objection on the part of the representative of tbe petitioner, the motion was granted. In the amended answer the respondent admits certain allegations contained in the petition, including the allegation that the deficiencies in tax determined by the respondent are not disputed by the petitioner. Therein the respondent prayed that the Board redetermine the deficiencies in income taxes and add thereto such penalty as is provided by law.

At the hearing counsel for the respondent stated that he would not present any evidence as to the alleged fraud, and he did not present such evidence. He stated that the petition admits negligence and that he has amended his answer to agree as to negligence. But petitioner entered into no such agreement. The proceeding was sub-mittted on the pleadings. The representative of the petitioner stated that he had no objection to that. The respondent then moved for judgment in accordance with the pleadings. The motion was taken under consideration.

The petitioner having raised no issue as to the correctness of the deficiencies in tax as asserted by the respondent in the notice of deficiency, such deficiencies are hereby approved.

The respondent, upon whom rested the burden of proving fraud, having failed to adduce proof to sustain the fraud penalties, such fraud penalties hereinabove listed are disallowed. See Henry S. Kerbaugh, 29 B.T.A. 1014.

There remains then only the question as to whether the petitioner is liable for any penalty for negligence. We are concerned with the Revenue Acts of 1921, 1924, and 1926. There is set forth in the margin section 275 of the Revenue Act of 1926, which for our purpose is the same as section 275 of the Revenue Act of 1924 and section 250 (b) of the Revenue Act of 1921.

In Duffin v. Lucas, 55 Fed. (2d) 786; certiorari denied, 287 U.S. 611, the United States Circuit Court of Appeals for the Sixth Circuit, in reviewing a decision of a United States District Court (W. Dist. Ky.) stated in part:

* * * We at once meet the question whether if, in any year, the fraud penalty is set aside by the court, and it seems to the court upon the proofs that the commissioner might rightly have imposed the negligence penalty, .the court may sustain the assessment to the lesser amount. We think not. The assessment of the negligence penalty is an administrative act, involving a zone of judgment akin to discretion. It does not follow, on the principie that the greater includes the less, that a finding of fraud necessarily involves a finding of negligence. In some cases, proofs develop one from the other, but in many cases they are entirely distinct. Upon given proofs of understatement, negligence is not the necessary alternative to the conclusion of no fraud. If the charge of fraud fails, there may he no fault whatever appearing. We think the taxpayer is entitled to have the judgment of the commissioner exercised specifically upon the issue of negligence, and entitled to whatever administrative review of that conclusion the law at the time may provide. It fellows that if the fraud penalty is not to he sustained in its entirety hy the court, it must he entirely set aside. [Emphasis ours.]

Here the respondent in the notice of deficiency asserted no penalty for negligence. Under the principles of the above cited case there is, in the instant proceeding, no presumption that any part of the deficiencies in question was due to negligence on the part of the petitioner.

Rule 14 requires respondent to affirmatively plead “ a statement of any facts upon which the Commissioner relies * * * for affirmative relief * * This is in addition to another specific requirement imposed upon him by the same rule, which is to the effect that he must either admit or deny “ each material allegation of fact contained in the petition.” Respondent complied with that latter requirement; hut wholly failed to comply with the former requirement. Negligence is a basis for affirmative relief if pleaded as required by Rule 14. It was not thus pleaded by respondent. Neither was the subject of negligence touched upon by the petitioner. There is nothing in the pleadings to advise the petitioner or the Board that respondent relied on negligence as a defense or for affirmative relief, all of which is required by Rule 14. Furthermore, no proof was offered by either party upon the subject of negligence. The burden of proof upon the subject of negligence, if pleaded by respondent, would, in this proceeding, be upon respondent, under Rule 30.

We do not agree with statement made at the hearing by counsel for the respondent, that negligence is admited by the petitioner in its petition. In the petition it is merely alleged, and in the amended answer it is admitted, that one Yander Meer gave only a part of his time to the business and took no active part in the operation of the business; that the discrepancies in the officers’ salaries account comes about from the loose way in which the business was conducted and the inefficient way in which the books were kept; that the men concerned are not highly educated men; and that S. Kohn stated that they did not want to pay any more tax than was necessary. There were, as heretofore pointed out, no statements of fact of this character contained in the answer as required by Rule 14; and no proof was offered in this respect.

The foregoing, which is all that has been presented to us, is insufficient to sustain the respondent’s contention, made at the hearing, that the petitioner is liable for negligence penalties.

Reviewed by the board.

Decision will be entered that there are deficiencies in income taxes for the yea/rs 1933 to 1937, inclusive, in the respective amov/nts of $90135, $1,013.75, $1,510737, $1,093.88, <md $909.7^.

Smith, TRAmmell, and Leech dissent.

       Sec. 275. (a) If any part of any deficiency is due to negligence, or intentional disregard of rules and regulations but without intent to defraud, 5 per centum of the total amount of the deficiency (in addition to such deficiency) shall he assessed, collected, and paid in the same manner as if it were a deficiency, except that the provisions of subdivisions (i) and (j) of section 274 shall not be applicable.
      (b) If any part of any deficiency is due to fraud with intent to evade tax, then 50 per centum of the total amount of the deficiency (in addition to such deficiency) shall be so assessed, collected, and paid, in lieu of the 50 per centum addition to the tax provided in section 3176 of the Revised Statutes, as amended.


author:
Seawell. Van Fossan,
      Matthews,

text:
    Edith Huggard Sharp, Charles C. Norris, Jr., and Fidelity-Philadelphia Trust Company, Executors, Estate of Walter P. Sharp, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 48317.
    Promulgated April 27, 1934.

      W. B. Lex, Esq., for the petitioners.

      R. F. iStavibly, Esq., for the respondent.
   OPINION.

Seawell.

1. At the time of his death decedent had 5,012 shares of the Stephen F. Whitman & Son, Inc., class A stock. Under a stockholder’s pooling agreement outstanding, certain parties to the agreement had the right to purchase the stock at its book value, which was ascertained to be $123.11 per share. At this value it was sold by petitioners and included by them in the estate tax return. This value, however, did not include an 8 percent dividend declared on the stock on March 1, 1926, payable March 15, 1926. The right to the dividend was a property right and belonged to decedent’s estate and was taxable as such. Sec. 302 (a), Revenue Act of 1926. John F. Degener, Jr., et al., Executors, 26 B.T.A. 185, and cases therein cited. We sustain the respondent’s ruling on this point.

2. Petitioners contest the inclusion in the gross estate of the proceeds of two of the insurance policies only, as shown in our findings of fact. The beneficiary named in these two policies is the widow of the deceased. There was no reservation of a right to substitute beneficiaries. The insurance was payable to “ Edith Huggard Sharp, wife of the insured ” if living at the time of the death of the insured, “otherwise to the executors,” etc., of the insured. Each policy was issued and accepted ” subject to certain “ benefits, privileges and conditions,” among which were the right to receive a certain sum of money at the maturity of the policy, the right to surrender the policy before maturity and receive the cash surrender value thereof as set forth in the table of values attached to each policy, and, if the policy was not so surrendered, the right to pledge it before maturity for a loan or loans in amounts depending on the cash surrender value thereof. Each policy had been so pledged and at the time of the death of decedent was “ legally assigned ” to and held by the insurance company. It was recently held in cases wherein no power of substitution of beneficiaries was reserved that the proceeds of insurance policies “ should be included in decedent’s gross estate under section 302 (g), since the decedent specifically reserved to himself the proceeds of the cash surrender value of this policy at maturity or upon surrender during his lifetime.” Bessie M. Ballinger, Executrix, 23 B.T.A. 1312, 1318, and Pennsylvania Co. for Insurance on Lives, etc., Executors, 29 B.T.A. 1306.

While the decedent lived there was always the possibility that the named beneficiary might predecease him, or that the policy by reason of nonpayment of premiums might lapse and become void, or it might be surrendered for its cash surrender value by the insured. In any such case the beneficiary would receive nothing. The insured might borrow money and pledge the policy, in which event the beneficiary’s interest would be lessened to the extent of the loan. The death of the insured put an end to these possibilities and made complete the “ shifting of the economical benefits of the property ”, and is the “ identifiable event ” which points to the transfer which is taxable. Chase Nat. Bank v. United States, 278 U.S. 327; Sampson v. United States, 1 Fed. Supp. 95. Cf. Sally S. Levy et al., Executors, 25 B.T.A. 1174 (reversed in part, 65 Fed. (2d) 412).

We conclude, under the conditions attached to the two contested policies, that they also should be included with those uncontested policies in the gross estate; and we accordingly sustain respondent’s determination on this point. This ruling in no way conflicts with the court’s decision in Anthracite Trust Co. v. Phillips, 49 Fed. (2d) 910, or other authorities cited and relied on by petitioners.

3. Petitioners having abandoned, rightfully under the law, all allegations of error as to the third issue, the respondent is sustained as to that issue. . ■

4. The determination of respondent that decedent transferred to five certain trusts property which, after the -deduction of the value of $5,000 allowed in respect to each trust, aggregated the sum of $178,220.50, is prima facie correct. The witness Norris testified that there were six trusts made and executed March 12, 1926, one for Mrs. Sharp and one each for the fire children. It is not difficult to understand, and it seems to be agreed, that the transfers here involved were those in the five trusts for the children. At least they were not the transfers by the trust copied, in the equity suit as Exhibit 0, referred to in the findings of fact, which purported to include only one item of property and that not of the value here involved, and in that instrument Mrs. Sharp was the primary beneficiary alone. The failure to introduce the trust instruments, or any of them, in evidence, may be immaterial, since the controversy under this issue was confined by the parties on the hearing and in the briefs to the sole question as to whether the transfers by the trusts were made in contemplation of or intended to take effect in possession or enjoyment at or after death. Sec. 302 (c) of-the Revenue Act of 1926, amended March 3, 1931.

The trusts were made only one day before the death of the grantor. At the time the trusts were made decedent also made his last will and testament. These facts point to, but do not necessarily answer the issue. While the will necessarily falls within the provisions of the statute, since it takes effect at death, nowhere in the evidence was any other connection between the execution of the trusts and the will shown except in the point of time and the further fact that the same lawyer prepared them all. This incident of time and the circumstance of the execution of the will and trusts on the same day are not sufficient, we think, to overcome the other evidence in the case. The evidence was at considerable length, and it all pointed to the fact that motives and purposes other than the .contemplation of death actuated the execution of the instruments, as shown succinctly in our findings of fact. Decedent was not then sick; he had not been seriously sick in years; he was busily engaged about his business and in making plans for business activity for the years ahead; for the immediate future he was to attend'that evening a supper party. In the midst of life he was in the midst of death and knew it not. Even after the fatal malady seized him he signed the payroll checks of his business and expired before he could return to his bed, a victim of a first attack of angina pectoris. When decedent signed the trust deeds we are of the opinion he had reason to believe and did believe that he would not die until some fairly remote time thereafter. We are further of the opinion that decedent’s motive in executing the trust instruments and making the transfers in question was not in contemplation of death and was not testamentary in nature. United States v. Wells, 283 U. S. 102. Upon this issue we overrule respondent and sustain petitioners.

5. With reference to the items under this head in the amounts of $19,926.80 Pennsylvania Power & Light 1st 5 percent bonds and Baltimore & Ohio R. R. ref. bonds due in 2000, and $15,093.75 bonds of the Metropolitan Edison Co., 5’s 1953, respondent in his brief concedes that they are not taxable unless the transfers were made in contemplation of death. We hold that the gifts were not made in contemplation of death, and that these items should not be included in the gross estate.

As to the other items under this head, they were never included in any trust and never delivered by way of gift to any person, but they remained the property of decedent at the time of his death and should be included in the gross estate, and the respondent is sustained as to them. Marshall v. Commissioner, 57 Fed. (2d) 633; certiorari denied, 287 U.S. 621. The action of the Court of Equity of Pennsylvania in adjudging certain bonds (assumed to be those here involved) to belong to Edith Huggard Sharp as surviving trustee of a trust of Walter P. Sharp, grantor, to Walter P. Sharp and Edith Huggard Sharp, trustees, is in no sense binding on the Board of Tax Appeals in the controversy here present. As said in Joseph Walker Wear et al., Executors, 26 B.T.A. 682, 685; aff'd., 65 Fed. (2d) 665, “ in determining whether or not there has been a transfer under the Federal statute we must look to the interpretations adopted by the Federal courts and tribunals.” See Edward J. Haney, Executor, 17 B.T.A. 464; Chase Nat. Bank v. United States, supra.

Reviewed by the Board.

Judgment %tiül be entered under Bule 50.

Van Fossan,

dissenting: I can not agree with the majority ruling that the transfer of property to the trusts was not made in contemplation of death as defined in United States v. Wells, 283 U.S. 102. On the same day the trust deeds were executed petitioner executed his will. The trusts were for the benefit of the wife and children, the natural objects of the decedent’s bounty in a testamentary disposition. The only conclusion I can draw from such a situation is that decedent was putting his house in order in contemplation of his ultimate death. The fact that he did not contemplate early death is immaterial. He was doing those things normally done in a testamentary disposition by one desiring to control the disposition of his property at his death. Edgar A. Igleheart et al., Executors, 28 B.T.A. 888.

The burden of proof was on the taxpayers. The failure to produce the deeds of trust in evidence gives rise to a proper inference that the language of the deeds would not have supported their contention.

Smith, Leech, and Adams agree with this dissent.

Matthews,

dissenting: I concur in the above dissent, that the gift was made in contemplation of death.

I agree with the result reached as to the insurance policies, but not for the reasons stated. Both policies at the time of decedent’s death had been assigned to the insurance company for loans. Decedent’s wife was named beneficiary in each policy and there was no right to change the beneficiary. She had a vested interest in the policy, of which she could not be divested without her consent. Entwistle v. Traveler's Ins. Co., 202 Pa. 141; 51 Atl. 759; Bank v. Hume, 128 U.S. 195.

The fact that the policy also provided that in case of beneficiary’s death prior to that of insured, the insurance was to be, paid to the executors of the insured, did not prevent the vesting in the beneficiary from being complete. In James B. Duke Estate, 23 B.T.A. 1104, in which the settlor of a trust provided in the trust deed that, if the beneficiary should predecease him, the trust res should revert to him, we said “ such possibility of reversion did not prevent the gift from being complete,” citing McCormick v. Commissioner, 283 U.S. 184. Our decision in the Duke case was affirmed by the Circuit Court of Appeals, 62 Fed. (2d) 1057, and affirmed per curiam by the Supreme Court (divided), 290 U.S. 591. .The Duke case was cited and followed in Emily King Parker et al., Trustees, 30 B.T.A. 342, with respect to an insurance policy having a similar provision in the case of an irrevocable beneficiary.

Under the terms of each policy, which are set forth in the statement of facts, loans would be made only upon legal assignment of the policy. The terms do not provide, that the insured could secure a loan upon assignment of the policy by him. It must be assumed, therefore, that the beneficiary, who had a vested interest in the policies of which she could not be divested without her consent, joined in the assignment, and for aught the record shows her consent may well have been sufficiently broad to permit the insured to surrender the policies for their cash surrender value. Until his death, therefore, the insured had control over the policies and their proceeds, and for this reason I think the proceeds are includable in gross estate.

The majority opinion interprets the provision of the policy to provide that it might be surrendered for its cash surrender value by the insured, and that the insured might borrow money and pledge, the policy. Under the terms of the policy no such powers are left in the insured alone. If such could be done at the date of his death, it was by virtue of the consent of the beneficiary to the assignment of the policies to the company for a loan, which consent, as stated above, might, for all the record shows, be broad enough to permit the insured to surrender the policy. The Ballinger case, 23 B.T.A. 1312, cited in the majority opinion, is not in point, since under the policy there in question the insured specifically reserved to himself the proceeds of the cash surrender value at maturity or upon surrender during his lifetime. In the instant case, the insured did not specifically reserve such right and a loan or the. cash surrender value would be made only “ upon a legal assignment and delivery of the policy.”


author: Moeris:

text:
    Palmetto Quarries Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 65683.
    Promulgated April 27, 1934.

      N. E. Derrick, O. P. A., for the petitioner.

      W. F. Gibbs, Esq., and Paul D. Page, Jr., Esq., for the respondent.
   OPINION.

Moeris:

The respondent has determined a deficiency in income tax of $1,980 for the taxable year 1929, and it is for the redetermination thereof that this proceeding is brought.

' The petitioner alleges and contends that error was committed by the respondent in that he failed to classify a distribution of $27,-782.68, made by the South Carolina Granite Corporation, as an ordinary dividend, it having been so classified in the return filed for the taxable year 1929.

The petitioner is a corporation, organized and incorporated under the laws of South Carolina in 1923, and has. its principal office at Columbia, where it is engaged in the manufacture of coarse aggregate for concrete.

On July 15, 1928, the petitioner transferred all of its physical assets, exclusive of accounts receivable, notes receivable, cash, and other similar assets, to the South Carolina Granite Corporation and received therefor 2,500 shares of no par value 7 percent preferred and 25,000 shares of no par value common stock of that company. The South Carolina Granite Corporation operated with the assets so transferred, together with other assets acquired from another source, for a period of 13% months, earning approximately $107,000, after which, or about August 31,1929, such assets were retransferred to the petitioner in exchange for the stock originally issued therefor, together with a percentage of the profits earned by the South Carolina Granite Corporation during the period of its ownership.

When the foregoing retransfer took place the physical assets were recorded in their respective accounts in the books of the petitioner and its portion of the profit so received, after Federal and state taxes had been deducted, was recorded as a dividend by the bookkeeper.

The South Carolina Granite Corporation continued in business after the exchange on August 31 and is still in existence.

The petitioner treated the distribution of profits received by it from the South Carolina Granite Corporation as an ordinary dividend in its tax return for the year under consideration. The respondent held, and he still contends, that such distribution was in partial liquidation and therefore governed by the provisions of subdivisions (c), (g), and (h) of section 115 of the Revenue Act of 1928, providing in part as follows r

'(e) * * * Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain- or loss to the distributee resulting from such exchange shall be determined under section Ill, but shall be recognized only to the extent provided in section 112. * * *
* * * * * * *
(g) Redemption of stoclc. — If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1918, shall be treated as a taxable dividend. In the case of the cancellation or redemption of a stock not issued as a stock dividend this subsection shall apply only if the cancellation or redemption is made after January 1, 1926.
(h) Definition of partial liquidation. — As used in this section the term “ amounts distributed in partial liquidation ” means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.

There appears to be no dispute between the parties about the amount involved, so that our sole question is whether or not the distribution falls within the foregoing provisions of the act.

The petitioner does not contend that subdivision (g) above is applicable. However, any doubt as to its applicability is immediately dispelled by Salt Lake Hardware Co., 27 B.T.A. 482, wherein we held that the provisions of that subdivision applied only to “taxable dividends” and not to distributions between two domestic corporations which are, under tbie act, nóntaxable.

The respondent having held that the amount in question was not a dividend, but a distribution in partial liquidation, the burden is upon the petitioner to show otherwise. In an attempted discharge of this burden the petitioner introduced one witness, a former employee of the South Carolina Granite Corporation, who testified that he was called upon just prior to this distribution to prepare statistics customarily compiled for the declaration of dividends; that such figures were based upon the ownership of stock; and, in effect, that he interpreted the meeting for which the information was prepared and the purpose for which it was,prepared to constitute, in form, the declaration of a dividend. Such testimony, founded entirely upon the witness’s personal opinion, is of very little assistance in arriving at a favorable conclusion for the petitioner. Especially is this true in view of the fact that there was no formal declaration of a dividend and not the slightest intimation that a dividend, as such, was even intended. In fact the corporate minutes of the South Carolina Granite Corporation indicate very clearly that the transaction was considered a purchase by this [that] corporation [of its own capital stock] with certain of its assets.”

The petitioner has wholly failed to overcome the presumptive correctness of the respondent’s determination that the distribution was in partial liquidation within the meaning of the act. Certainly there was a “ distribution ” and in so far as we are informed it was just as certainly “ in complete cancellation or redemption ” of a portion of the capital stock of the South Carolina Granite Corporation. Cf. Salt Lake Hardware Co., supra.

Judgment will be entered for the respondent.


author: Smith:

text:
    Federico Stallforth, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 47200, 50287.
    Promulgated April 27, 1934.

      Ohairlton Ogbwm, Esg., and G. Kibby Munson, Esq., for the petitioner.

      Mason B. Leming, Esq., for the respondent.
   OPINION.

Smith:

The deficiencies involved herein arose principally from the disallowance of deductions from gross income of claimed losses sustained by tbe petitioner upon bis investments. At tbe bearing of this proceeding counsel for tbe petitioner stated that it was impossible or impracticable to attempt to prove tbe claimed deductions for losses. Tbe sole defense of tbe petitioner to tbe deficiencies determined by the respondent is that during the taxable years in question tbe petitioner was a nonresident alien (while absent from the United States) and derived his income from sources without tbe United States. In support of this contention tbe petitioner relies upon section 213 of the, Bevenue Act of 1926, which, so far as material, provides:

Sec. 213. For the purposes of this title, except as otherwise provided, in section 233—
* * * * * * *
(e) In the case of a nonresident alien individual, gross income means only the gross income from sources within the United States, determined under the provisions of section 217.

Section 211 of tbe Bevenue Act of 1926, so far as material, provides:

(c) The following items of gross income shall be treated as income from sources without the United States:
* * * * Jjc # sis
(3) Compensation for labor or personal services performed without the United States.

The position of tbe respondent in this proceeding is that during the taxable years the petitioner was a resident alien and as such is liable to income tax upon his gross income for services performed in Europe. The respondent relies upon article 3 of Begulations 69, promulgated under the provisions of the Bevenue Act of 1926, which, so far as material, provides:

Art. 3. * * * Every resident alien individual is liable to the tax, even though his income is wholly from sources outside the United States, * * *

The incidence of the income tax is upon “ the entire net income received * * * from all sources by every individual, a citizen or resident of the United States * * (See sec. 1, Bevenue Act of 1916.)

Article 311 of Begulations 69 provides:

Art. 311. * * * A “nonresident alien-individual’'means an individual—
(a) Whose residence is not within the United States; and
(b) Who is not a citizen of the United States.
An alien actually present in the United States who is not a mere transient or sojourner is a resident of the United States for purposes of the income tax. Whether he is a transient or not is determined by his intentions with regard to the length and nature of his stay. A mere floating intention, indefinite as to time, to return to another country is not sufficient to constitute him a transient. If he lives in the United States and has no definite intention as to his stay, he is a resident. One who comes to the United States for a definite purpose which in its nature may be promptly accomplished is a transient; but if his purpose is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his home temporarily in the United States, he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned. * * *

The domicile of the petitioner in the United States during the taxable years involved is admitted by the petitioner. His residence in the United States while absent from the United States during the taxable years in question is not admitted.

That the terms “ domicile ” and “ residence ” have different connotations is well established. A man may have a domicile in one place and a residence in another. It is equally well established that a man may be absent from his place of residence for a long period of time. Clearly, if a resident of the city of New York takes a trip around the world he does not lose his residence in New York thereby. A traveling man who is long absent from his place of residence does not lose his place of residence. He is not regarded as a resident of the place where he temporarily stops.

The question here is whether the petitioner, who had a residence in the State of New York, became a resident of some other place or country while he was temporarily absent from his regular place of abode. The petitioner claims that while he was away from New York he was a nonresident alien within the meaning of the statute.

We are of the opinion that the petitioner’s claim upon this point is not well founded. The evidence all goes to show that it was never the petitioner’s intention to establish a residence outside of the United States while he was absent from his home in New York. He stopped at hotels in various countries of Europe in which he traveled and he made the Hotel Bristol in Berlin his headquarters while abroad. But we do not think that within the fair intent of the statute the petitioner was a resident of Berlin or of any other place in Europe while absent from the United States. The evidence is conclusive that while abroad the petitioner always had the intention of returning to his home in New York. He never established any residence in any other place.

The petitioner calls attention to the provisions of section 213 of the Eevenue Act of 1926, which provides in part:

Seo. 213. For the purposes of this title, except as otherwise provided in section 233—
* * * * * * *
(b) The term “gross income” does not include the following items, which shall be exempt from taxation under this title:
*******
(14) In the case of an individual citizen of the United States a bona fide nonresident of the United States for more than six months during the taxable year, amounts received from sources without the United States if such amounts constitute earned income as .defined in section 209; but such individual shall not be allowed as a deduction from his gross income any deductions properly allocable to or chargeable against amounts excluded from gross income under this paragraph.

Attention is then called to some of the rulings made by the respondent with respect to the question of what constitutes the bona fide nonresidence of an individual citizen under this provision. Thus in General Counsel Memorandum 9848, Cumulative Bulletin X-2, pp. 178,179, it is said:

In construing the phrase “ a bona fide nonresident of the United States for more than six months during the taxable year,” the Bureau has held that it applies to any American citizen who is actually outside the United States for more than six months during the taxable year. The absence need not be continuous, but may be made up of several trips where the periods of absence from the United States amount in the aggregate to more than six months during the taxable year. It has also been held that the citizen is not required to be a resident of any foreign country, but is only required to be a nonresident of the United States for more than six months. * * *

Hence it is argued that.if such an interpretation of the statute applies to a nonresident individual citizen of the United States, a like ruling must be applied in the case of a taxpayer who, although not a citizen of the United States in the taxable years, was nevertheless absent from the United States.

Without passing upon the correctness of the respondent’s rulings under the above quoted provision of the statute, we are of the opinion that they have no application to this case. The petitioner was not an individual citizen of the United States ” during the years 1925, 1926, and 1927. His only proven residence during those years was in the State of New York. He was only temporarily absent from the United States during the period. We sustain the respondent’s determination that he was a resident alien of the United States during the tax years involved, and he is liable to income tax upon his entire net income.

At the hearing of these proceedings the respondent moved to increase the deficiencies for the years 1925 and 1926 by reason of the fact that the petitioner had a larger income from Harris Forbes & Co., during those years than the respondent took into account in computing the deficiencies. After a conference between counsel it was stipulated that the net income of the petitioner for 1925 should be increased to the extent of $7,200 over the amount used by the respondent in the determination of the deficiency for 1925 and that the deficiency should be increased accordingly, but that no increase should be made in the deficiency determined for 1926.

Reviewed by the Board.

Judgment will be entered under Rule 50.,


author: Van Fossan:

text:
    Conservative Gas Company, a Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 72391.
    Promulgated April 27, 1934.

      Howard L. Eóbmson, Esq., for the petitioner.

      Arthur Oamdwff, Esq., for the respondent.
   OPINION.

Van Fossan:

In this case we are asked to relieve taxpayer of a deficiency of $6,633.07 for the year 1930.' The question is whether respondent was correct in holding that a profit of $71,000 consequent on a sale of assets was taxable to the corporation rather than to its stockholders. There is no dispute over the amount of the profit. The proceeding was submitted on stipulated facts.

Taxpayer is a West Virginia corporation, with authorized capital stock of $50,000, the shares being $100 par value, organized for the purpose of exploring and drilling for, producing, and marketing oil and natural gas. After its creation taxpayer acquired developed and undeveloped leases and leasehold estates in oil and gas, drilled other jiroducing wells, and was the owner in 1930 of valuable oil and gas producing properties.

By deed dated May 12, 1930, taxpayer conveyed a part of its leases, leasehold estates in oil and gas, producing oil and gas wells, and certain of its gas sale contracts and rights of way to Taney Harrison, trustee. The deed is silent as to its purpose and does not name any beneficiary, but it contains the following statement: “ This deed is executed pursuant to authority given by the Board of Directors and the Stockholders of said Conservative Gas Company.”

The parties stipulated that:

The transfer of said property by said Conservative Gas Company to said Taney Harrison, Trustee, for tlie stockholders of said Gas Company was made pursuant to authority contained, in a resolution passed and adopted at a meeting of the stockholders of said Company held on the 2nd day of May, 1930, and which said resolution is in words and figures following:
Whereas, all the properties owned by the Company have been fully paid for out of moneys contributed by the stockholders and the net earnings of the company and fairly belong to the stockholders of the company,
Therefore, Resolved, that the directors of the Company be, and they are hereby, authorized and requested to declare and cause to he distributed among the stockholders a liquidating dividend in kind and, to that end, that they do cause to be transferred, granted and conveyed to Taney Harrison, Trustee, for the stockholders, by apt deeds of conveyance, all of the following described properties, to be by said trustee reduced to cash as soon, as may be and distributed among the stockholders in proportion to their holdings of stock: [There follow a list and description of the properties.]

The parties further stipulated:

On the 2nd day of May, 1930, at a meeting of the directors of said Conservative Gas Company, a resolution was passed and adopted directing the Vice-. President and Secretary of said ■ Conservative Gas Company to transfer to said Taney Harrison, Trustee, by apt deeds of conveyance, for the benefit of the stockholders of said Company in proportion to their holdings of stock, the said'leases, leasehold estates in oil and gas, producing gas wells and other property therein mentioned, and which said resolution is in words and figures following:
Whereas, the stockholders of this Company, at a meeting this day regularly held in the office of the Company, by resolution adopted by the affirmative vote of 286 shares of stock of the Company, authorized and requested the Board of Directors to declare a liquidating dividend in kind of certain properties owned by the company and therein described, and to cause the same to be conveyed to Taney Harrison, Trustee, for the benefit of the stockholders in proportion to their holdings of stock.
Therefore, Resolved, that the Board of Directors do hereby declare a liquidating dividend in kind out of the properties of the company and do hereby authorize and direct the Vice-President and Secretary of the company to transfer, grant and convey to Taney Harrison, Trustee, by apt deeds of conveyance for the benefit of the stockholders of this company in proportion to their holdings of stock, all of the following described properties belonging to the Company: [The properties are listed.]

Thereafter, by deed bearing date the 23d day of May 1930, said Taney Harrison, as such trustee, granted and conveyed to the Midland Natural Gas Co., a corporation, all of the said leases, leasehold estates in oil and gas, producing gas wells, contracts, and rights of way theretofore granted to him as such trustee by said Conservative Gas Co., for the consideration of $71,000, of which amount $41,000 was paid in cash and the residue thereof in the sum of $30,000 was payable on or before 15 months from the date thereof, and which deferred purchase price was secured by a purchase money deed of trust.

On the same date the. Midland Natural Gas Co., a corporation, granted and conveyed said property to Charles W. Lochery, trustee, to secure the payment of the deferred purchase price of the property in the amount of $30,000, evidenced by three certain negotiable promissory notes of even date therewith, in the principal sum of $10,000 each, executed by the Midland Natural Gas Go., its maker, and payable to the order of Taney Harrison, trustee, at the Union National Bank of Clarksburg, West Virginia, on or before 15 months after the date thereof, with interest at 6 percent payable quarterly.

On May 2, 1930, the date on which the stockholders and directors, respectively, of said Conservative Gas Co., authorized a transfer and assignment of a part of its property to Taney Harrison, trustee, as aforesaid, the petitioner retained property aggregating the sum of $8,629.60, and thereafter, on or about the 9th day of June 1930, Edward Hart and others made an oífer to the petitioner for the purchase of the Harbert well and Mason Well No. 1, and all materials, equipment, and supplies used in connection with the said two wells (being a part of the property retained by the petitioner), whereby Hart and others offered to pay the petitioner the sum of $7,600 for the property. The offer made by Hart and others was rejected and petitioner continued to own, use, and operate the property.

The petitioner has never been disssolved, and is still in existence.

The consideration of $71,000 for the sale of the property to the Midland Natural Gas Co. was paid to Taney Harrison, trustee, by the Midland Natural Gas Co. The consideration was distributed by the trustee to the several stockholders in proportion to their several holdings of stock promptly after the sums were received by the trustee, as follows: $40,998.40 on June 5, 1930, and $30,000 on December 31, 1931.

In this case we are concerned with determining whether, in making the sale to the Midland Natural Gas Co., Harrison, trustee, acted for and on behalf of the corporation which deeded the property to him, or on behalf of the stockholders, who, under the authorizing resolution, were to be recipients of a liquidating dividend in kind.

Respondent cited Taylor Oil & Gas Co., 15 B.T.A. 609; aff'd., 47 Fed. (2d) 108; Commissioner v. Lexington Ice & Coal Co., 62 Fed. (2d) 906; Fred A. Hellebush et al., Trustees, 24 B.T.A. 660; aff'd., 65 Fed. (2d) 902; S. A. McQueen Co., 26 B.T.A., 1337; aff'd., 67 Fed. (2d) 857; Nace Realty Co., 28 B.T.A. 467; and Whitney Realty Co., 29 B.T.A. 453. All of these cases, with the exception of Whitney Realty Go., are found, on examination, to differ from the instant case in one vital essential. In each case the corporation had negotiated the sale of the assets prior to the creation of the trust or assignment for the benefit of stockholders. In each we held that the trustee or assignee merely acted for the corporation in consummating a transaction initiated by it. In Nace Realty Co., supra, we pointed to this fact as controlling and distinguished Fruit Belt Telephone Co., 22 B.T.A. 440, on this ground, observing: “ So far as appears, the corporation [Fruit Belt Telephone Co.] had made no contract for the sale of its assets prior to their transfer to the individual. That fact alone is sufficient to distinguish the case from the case now at bar.”

The facts in Whitney Realty Co., supra, also cited by respondent, are so totally dissimilar to those in the instant case that it is clearly not in point. In that'base there was no sale, no reduction of assets into money, and no distribution to the stockholders. The question there before us was whether the substitution of trust certificates for shares of stock accomplished a complete liquidation. We held it did not.

The facts in the instant case are much more favorable to petitioner’s position than those appearing in Fruit Belt Telephone Co., supra, where we held that the sale of the assets by two stockholders of a corporation on the same day they acquired them from the corporation, the proceeds being distributed to the two stockholders, did not result in taxable gain to the corporation. In that case the ultimate purchaser had previously appraised the assets with a view to purchasing. The assets were sold to its sole stockholders and resold by them the same day. The reasoning in the case of Iowa Bridge Co. v. Commissioner, 37 Fed. (2d) 777, is also in point.

The instant case was submitted on a stipulation of facts and we must limit our consideration to the facts so presented and make only such inferences as appear reasonably justified. There is no suggestion in the facts that a purchaser had been found or a sale considered prior to the transfer to the trustee. To make such a finding would require us to go beyond the proper realm of inference into that of speculation. The trustee was not the sole stockholder. An interval of two weeks intervened between the transfer from the corporation to Harrison, trustee, and the sale to the Midland Natural Gas Co. Though the deed to Harrison, trustee, is silent as to its purposes and does not name the beneficiaries, the authorizing resolution to which reference is made in the deed supplies its lack in both respects. In interpreting the trust deed in this case we must consult the resolution which authorized it. That the deed to Harrison, trustee, was deemed complete and sufficient is evidenced by the fact that Harrison made the later deed to the Midland Co.

On the facts before us we find that the deed to Harrison, trustee, accomplished a complete transfer of the corporation’s interest in the property indicated, such transfer being for the benefit of the stockholders of the corporation. There is no evidence of a commitment by the corporation to sell the property to the Midland Co. We find, further, that the sale by Harrison, trustee, was for the account and benefit of the stockholders, to whom he distributed the cash realized.

In this situation we conclude that respondent was, in error in taxing the profit on the sale to the corporation.

Reviewed by the Board.

Decision 'will be entered for the petitioner.

Leech dissents.


text:
    The Bank of California, National Association, a corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 55537, 60699.
    Promulgated April 27, 1934.

      V. K. Butler, Jr., Esq., for the petitioner.

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

Van Fossan:

These proceedings were brought to redetermine deficiencies in the income taxes of the petitioner for the years 1928 and 1929 in the sums of $2,439.76 and $1,620.62, respectively.

The petitioner alleges that the respondent erred in including in its taxable income interest aggregating $20,331.40 and $14,731.98 accrued to the petitioner on tax-exempt securities during the years 1928 and 1929, respectively. .

The petitioner is a national banking association, organized and existing under the National Bank Act of the United States, with its principal banking office in San Francisco, California. R. H. Moulton & Co. was engaged in the investment banking business in that city and specialized in municipal bonds. Practically all of the securities in which it dealt were tax-exempt.

During 1928 and 1929 the petitioner purchased from R. H. Moulton & Co. and other investment dealers certain tax-exempt state, Federal, and municipal bonds and obligations of other political subdivisions. The purchases were made either upon the application of the investment bankers, who held or had commitments for large blocks of bonds which they could not carry themselves, or upon the request of the petitioner, which had available surplus funds desirable for use in obtaining short-term investments. The purchase price was based on, but usually under, the market price plus accrued interest to the date of sale at the coupon rate. Upon the payment of the agreed price, the securities were delivered to the petitioner under a bill or memorandum of sale. Simultaneously, the petitioner and the “ seller ” entered into the following standard form of agreement (the blanks being filled in to constitute a typical case) :

Repurchase 'Agreement
The Bank of California, N. A., San Francisco, California, a National Banking Association, hereinafter termed “ Seller,” agrees to sell, and R. H. Moulton & Company, hereinafter termed “Buyer,” agrees to buy the following bonds, namely:
$7,000 CITY OF HANFORD MUNICIPAL IMPROVEMENT 5 % BONDS
Numbers and denominations as follows:
$2, 000 Aug. 1, 1958 Nos. 173/T4
4,000 “ 1961 “ 186/89
1,000 “ 1963 “ 199
The purchase price of each bond is as follows: (Plus accrued interest)
August 1, 1958 maturity @ 95
“ 1961 “ @ 95
“ 1963 “ @ 95
payable in United States gold coin of the present standard of weight and fineness, which sum Buyer hereby agrees to pay on or before ninety days from date hereof. Maturing coupons to be the property of The Bank of California, N. A.
And The Bank of California, N. A., hereby agrees on tender of said purchase price of such bonds and interest as aforesaid to deliver to R. H. Moulton & Company or its' nominee, the bonds as above, at any time hereafter, prior 1 o any default on the part of the Buyer.
It is further understood between the two parties hereto that partial sales and deliveries may be made a.t the rates stated above.
In the event of any failure on the part of the Buyer to accept and pay for any one or more of said bonds at the time the same is tendered, the Seller shall be released from all obligation in law or equity hereunder and may sell all bonds remaining in its hands without notice and for the best price obtainable, charging the loss, if any, to the account of the Buyer.
Executed in duplicate this 11th day of July 1929.
R. H. Moulton & Company ' The Bank of California, N. A.
[Signed] By Elmer Booth Stuart E. Smith
Vice-President.

The transactions under discussion were entered on the petitioner’s books as a credit to the seller at the full amount of the purchase price plus accrued interest and were listed and carired in an account called “ Bond Account No. 2,” to facilitate their expeditious handling. The petitioner treated its bonds held under the repurchase agreements exactly as it did .all its bonds and other investments. Upon the maturity óf a coupon attached to a bond it was collected by the petitioner and the proceeds credited to the account “ Interest on Investments ” on its general ledger. In that account all interest from bonds of whatever nature owned by the petitioner was entered. In its call and semiannual statements the bonds subject to repurchase were included in its list of bonds and other investments owned by it. The long-term investments carried by the petitioner in its “ Bond Account No. 1 ” and its short-term investments entered in its “ Bond Account No. 2 ” were treated exactly alike from an accounting viewpoint. Likewise, the interest derived from both classes of investments was so treated. The practice was not challenged by the Comptroller of the Currency.

The sale price set in the repurchase agreement was always exactly the same as the original purchase price. The petitioner and the investment dealer adhered strictly to the terms of the repurchase agreement. No supplementary agreement was made to enlarge, modify, or in any way to affect the original agreement or the acts of the parties thereunder. If the bonds were not repurchased at the expiration of the period named in the agreement no extension was given, but occasionally an entirely new agreement was executed, accompanied by a new bill of sale at a price based on the current market. At times the petitioner did not agree to a new contract and the bonds would be repurchased by the dealer and sold to another bank. Often the investment banker repurchased at intervals portions of the bonds held by the petitioner under the repurchase agreement.

The yield to the petitioner under the repurchase agreements was less than that received from collateral loans. The. petitioner often made loans to customers with tax-exempt securities as collateral.

The petitioner kept its books on the accrual basis.

The amount of interest in controversy, aggregating $20,831.40 and $14,731.98, respectively, during the years 1928 and 1929, was computed by adding the amount of the matured coupons actually cashed by the petitioner, the amount of the accrued interest received by it upon resale, and the amount of interest accrued on the bonds held by the petitioner at the close of the year, and subtracting therefrom the amount of accrued interest paid by the petitioner upon the original purchases from the investment dealers.

The petitioner contends that the transactions described constituted an outright sale from the investment dealers to it and that, hence, the interest accrued and received while the bonds were so owned and held by it was exempt from taxation under section 22 (b) (4) of the Revenue Act of 1928. The respondent’s position is that, in substance, the transactions represented loans made by the petitioner to the dealers with the tax-exempt bonds hypothecated therefor and that, therefore, the interest on such bonds belonged to the dealers and not to the petitioner. Consequent on this position respondent added the amounts of the interest to petitioner’s income as interest received on loans.

In his brief respondent’s counsel asks us to disregard entirely the form of the sale, the repurchase agreement, and the whole transaction and to read into it a “ substance ” consonant with his theory that it was merely a loan. To do so, we would be compelled not only to disregard the contractual relation established by documentary proof and the practical treatment of the interest received, but also to ignore the testimony of witnesses, some of whom were the respondent’s own. It is true that from the Moulton Co.’s viewpoint the financial support of the petitioner was useful in obtaining and placing tax-free securities, such as municipal, district, county, and State bonds, but petitioner’s primary object was plainly to benefit itself by securing an attractive investment for its idle funds. It is obvious that when a financial institution finds itself overburdened with an excessive amount of cash which it can not lend through ordinary channels, it must seek and obtain short-term investments which will yield some returns, usually at less than the current interest rate, yet will permit a prompt conversion into cash when needed. Such short-term investments were bankers’ acceptances, commercial paper, and tax-exempt securities. All were bought by the petitioner as it found opportunities to do so.'

The respondent stresses the fact that the Moulton Co. could repurchase at any time and in any number of units the bonds transferred to the petitioner. We attach no particular significance to this privilege other than that it indicates the flexibility of the repurchase contract. However, the contract also contains this paragraph:

In tlie event of any failure on the part of the Buyer to accept and pay for any one or more of said bonds at the time the same is tendered, the Seller shall be released from all obligation in law or equity hereunder and may sell all bonds remaining in its hands without notice and for the best price obtainable, charging the loss, if any, to the account of the Buyer.

Thus, whenever the petitioner needed to convert its short-term investment into cash for use in the normal course of business, it had the right to tender such bonds as it desired to resell and if the Moul-ton Co. were unable to purchase any or all of such bonds, petitioner could dispose of them on the market. This provision is inconsistent with the theory that the transaction was a loan.

Counsel for both the petitioner and the respondent rely on our decision in First Nat. Bank in Wichita, 19 B.T.A. 744; aff'd., 57 Fed. (2d) 7. A careful analysis of the facts of that case shows clearly that it supports the petitioner’s position rather..than that of the respondent. There we said:

It seems clear that at the time the petitioner solicited this business from the Brown-Crummer Co. it had on hand a large surplus of unemployed funds and that that company was in the market for loans. The maximum amount of credit the petitioner could extend to this company by way of a direct loan, under the law, was $200,000; this credit it readily gave to the company upon its collateral note. The company, however, required amounts greatly in excess of this; and, since it was dealing in large issues of municipal securities which constituted approved banking investments, the sale with repurchase agreement was evolved and brought into play. The petitioner contends that through this process it acquired a complete title to these bonds which the repurchase agreement in no way impaired, and that, because of. that fact, the interest payments were its income, and being tax-exempt, it was entitled to exclude them from its income-tax returns. We think there could be no question as to the soundness of the petitioner’s contention had it taken title to these securities subject to no conditions other than is evidenced by the repurchase agreements; however, other established facts show that other considerations formed the motives of the parties to the transactions.
The question here, as we view it, is not dependent upon who held the bare legal title to the bonds during the dates of sale and repurchase, but rather upon the broader issue as to who, under the understanding between the bank and its customers, was entitled to receive, and who, as carried out, did receive the interest payments made by the issuing authorities of such bonds when collected and paid. The record shows that the true relationship between the petitioner and its customers, in these transactions, was that of a lender of money in consideration for the legal rate of interest payable on the amount advanced, and not that of an investor in the securities assigned to it-by such customers. The history of these transactions and the manner in which they were carried out can lead to no other conclusion.

In reviewing the case, the Circuit Court of Appeals commented thus:

There is no doubt of the exemption from income taxes of the interest on these securities in favor of the person or persons who were entitled to receive it and did receive it. So, the issue is one of fact.
♦ * * 3ft !(( * #
It is contended that the written contract made by the parties when the bonds were delivered passed legal title to the bonds in the bank, and by force thereof interest on them was the bank’s property. There is no doubt that the form of contract might have been carried out in that way, but the blanks in the contract submitted to the comptroller left an opportunity to the bank of which it availed itself, and the practice as carried on by the parties clearly shows that it was never intended that the bank should be entitled to the interest accruing on the bonds. Conceding that under the contract the legal title to the bonds was in the bank, the uniform conduct and practice of the parties was a joint admission that the interest coupons and their proceeds when collected did not belong to the bank, but were the property of Brown-Crummer Company. They were collected by Brown-Crummer Company and applied to its use and benefit.
*• * * The bank got none of the interest that accrued on the bonds. It was not entitled to it. Brown-Crummer Company paid the bank all its interest charges.

The facts in the cited case are very different from those in the case at bar. There the bank paid par, not market valne, for the bonds, and was guaranteed against loss. The interest was the current loan rate — not the coupon rate. There, upon the maturity of the interest coupon, the bank clipped the coupon and delivered it to its customer; here, the petitioner collected the coupon and credited the proceeds thereof to its own interest account. In the 'Wichita case the customer made monthly interest adjustments on its loans without reference to the coupons collected or interest due from the tax-exempt securities. In the instant case no such method was employed. There, unlimited withdrawals and substitutions of bonds were permitted and made. Here, the same securities were made the subject of resale and no substitutions, withdrawals, or renewals were contemplated or allowed.

Furthermore, in the repurchase contract under consideration the petitioner was not required to account to the Moulton Co. for any surplus upon a sale, but could hold that company for any deficiency. Under California law the petitioner would be required to account for the surplus from the sale of collateral or under a chattel mortgage. (Code of Civil Procedure, sec. 3008.)

Moreover, the record shows that no special considerations or conditions other than those set forth in the contract motivated the actions of the parties. In this respect the case at bar differs basically from the First Nat. Bank in Wichita case. As we view the repurchase agreement, it granted to the Moulton Co. the right to purchase upon stated terms certain securities which were the property of the petitioner and to which petitioner had title. At most, the agreement might have restricted petitioner’s ability to sell to a third person with knowledge, but that possibility could have no effect on its ownership of the property. The right to collect the interest coupons and the benefit of the accrued interest on the bonds were natural incidents to that ownership. The treatment of interest by the parties is corroborative of this conclusion.

There is no evidence that the repurchase plan was a device contrived for the purpose of tax evasion or even tax avoidance. On the contrary, the record indicates that the arrangement was .a well established custom in San Francisco banking circles, resulting from the bank’s need to put its surplus funds to work, but in such form as to be liquid and constantly available.

In view of the facts in the case before us, we are of the opinion that the tax-free securities belonged to petitioner and that the interest received by and accrued to the petitioner from such securities as were covered by the repurchase agreements as above set forth is exempt from taxation under the provisions of section 22 (b) (4) of the Revenue Act of 1928.

Reviewed by the Board.

Decision will be entered under Rule 50.

TRAmmell dissents.

      (b) Maolusions from gross income. — The following items shall not be included in gross income and shall be exempt from taxation under this title':
      * # # 4c •): * *
      (4) Tax-musis interest. — Interest upon (A) the obligations of a State, Territory, or any political subdivision thereof, or the District of Columbia; or (B) securities issued under the provisions of the Federal Barm Loan Act, or under the provisions of such Act as amended; or (C) the obligations of the United States or its possessions. * * *