author: Seawell:

text:
    Day Kimball, Lawrence Kimball and Hartford-Connecticut Trust Company, as Administrators with the Will Annexed of Jeanie L. Kimball, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 49282.
    Promulgated October 3, 1933.

      Watson Washburn, Esq., for the petitioners.

      Ralph F. Staubly, Esq., for the respondent.
   OPINION.

Seawell:

In 1892 the decedent, in contemplation of marriage, transferred in trust certain stocks and bonds, with directions to pay the income thereof to herself for life and upon her death to transfer the corpus equally among her children, if any, the children of any deceased child to receive the share their parent would have received thereunder if living. In case the settlor died without issue living at the time of her death, then the corpus was to go to such person or persons as would be entitled to receive it under the statute of distributions of the State of New York. The trust indenture contained a clause reading as follows:

The party of the first part [decedent] hereby specifically reserves to herself an absolute right to dispose of the principal of said trust property, or any portion of it, by her last Will and Testament, and in case she leaves a last Will and Testament, the parties of the second part [trustees] shall pay over, transfer and distribute the said principal to the person or persons and in the manner directed in and by such last Will and Testament, even though such provisions exclude any or all of her children or grandchildren.

The settlor died December 25, 1927, a resident of Pomfret, Connecticut, leaving two children, Day Kimball and Lawrence Kim-ball, born, respectively, January 16, 1893, and October 25, 1900.

The value of the cash and securities representing the corpus of the trust fund at the date of the decedent’s death is stipulated to have been $314,318.75, which amount was distributed in equal shares to the decedent’s surviving children in accordance with the provisions of the trust deed.

In her last will and testament, executed January 2, 1923, the decedent recited that she was not exercising the right reserved to her in the trust deed to dispose of all or any portion of the property in trust.

In his audit of the estate tax return filed by the petitioners for the decedent’s estate, the respondent included the value of the trust fund in the gross estate on the ground that the decedent did not relinquish any economic rights or benefits in the property until the time of her death. This, with other adjustments, resulted in a deficiency in estate tax of $14,473.57, forming the basis of this proceeding. The only adjustment alleged by the petitioners as error is the inclusion of the value of the trust fund in the gross estate.

Section 302 of the Revenue Act of 1926 provides in part:

The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
(a) To the extent of the interest therein of the decedent at the time of his death;
* * ⅜ ⅜ ⅜ * *
(c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. * ⅞ *
(d) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. * * *

The substantial difference between the parties appears to be on the question of whether the trust was revocable or irrevocable. The point must turn upon the power reserved by the decedent to divest by will the remainders granted in the trust instrument.

In Bank of New York & Trust Co., Executor, 21 B.T.A. 197, where the decedent, as here, reserved power to finally dispose of the property by will, and did exercise the right but not contrary to the provisions of the trust, we held that the trust was revocable and, following Edward J. Hancy, Executor, 17 B.T.A. 464, held the transfer taxable as part of the gross estate. In the case of Luis James Phelps et al., Executors, 27 B.T.A. 1224, decided since the submission of this proceeding, the decedent created a trust for the benefit of his wife and retained the right to transfer the property at his death to such person or persons as he might designate in his last will and testament. We held such retention of control rendered the transfer incomplete and subject to tax, citing Saltonstall v. Saltonstall, 276 U.S. 260, and Chase National Bank v. Commissioner, 278 U.S. 327.

It is apparent from the clear wording of the trust involved here that the decedent divested herself of all interest in the stocks and bonds except the absolute right to dispose of the property by will as freely as if she had fee simple title. This reservation of power to herself alone gave her the right, exercisable by will, to designate other transferees of the corpus, create another trust, with beneficiaries other than her children, grandchildren or other heirs, or otherwise dispose of or deal with the property as she saw fit, effective , at her death. The transfers to the decedent’s sons under the trust were merely tentative and incqmplete until the moment the decedent died without otherwise disposing of the property by will. At no time prior to the decedent’s death did her children have any control or dominion over the property, or interest therein that was not subject to divestiture by the decedent’s will. There was no gift inter vivos of the securities, Burnet v. Guggenheim, 288 U.S. 280; Union Trust Co. v. United States, 54 Fed. (2d) 152; certiorari denied, 286 U.S. 547, and the trust was revocable. Bank of New York da Trust Co., Executor, supra.

The recent case of Porter v. Commissioner, 288 U.S. 436, not discussed in the Phelps case, supra, is in point. There trusts were created with power in the settlor alone to alter or modify the instruments otherwise than in favor of himself or his estate. In holding that the transfers were undoubtedly covered by section 302 (d) of the Revenue Act of 1926, the Court said :

The net estate upon the transfer of which the tax is imposed, is not limited to property that passes from decedent at death. Subdivision (d) requires to be included in the calculation all property previously transferred -by decedent, the enjoyment of which remains at the time of his death subject to any change by the exertion of a power by himself alone or in conjunction with another. *' * * Here the donor retained until his death power enough to enable him to make a complete revision of all that he had done in respect of the creation of the trusts even to the extent of taking the property from the trustees and beneficiaries named and transferring it absolutely or in trust for the benefit of others. So far as concerns the tax here involved, there is no difference in principle between a transfer subject to such changes and one that is revocable. * * *

Here, as already pointed out, the decedent had no power to alter the indenture so as to bring about a change effective during her lifetime, but until terminated by her death she had the unrestricted right to dispose of the property by will. The change in the power at death was, as respecting title to the property, “ the source of valuable assurance passing from the dead to the living ” and justified the imposition of the tax here in question. Reinecke v. Northern Trust Co., 287 U.S. 339; Chase National Bank v. Commissioner, supra; Klein v. United States, 283 U. S. 231; Porter v. Commissioner, supra.

The conclusion reached is not contrary to Nichols v. Coolidge, 274 U.S. 531, since the transfers in question did not become effective until after the passage of the 1926 Act. Milliken v. United States, 283 U.S. 15; Porter v. Commissioner, supra.

In their stipulation of facts the parties agreed that the net estate should be reduced by allowing as deductions amounts for trustees’ commissions and attorney fees. These adjustments will be reflected in the recomputation to be made under Hule 50.

Decision will loe entered under Rule 60.


source: Caselaw Access Project

author: MuedocK:

license: Public Domain

text:
    The Hamilton National Bank of Chattanooga, as Administrator of the Estate of S. Strang Nicklin, Deceased, Petitioner v. Commissioner of Internal Revenue, Respondent.
    Docket No. 66833.
    Promulgated October 3, 1933.

      Albert W. Taber, Esq., for the petitioner.

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

MuedocK:

Both parties agree that the use of the installment method of reporting the profit from the sale in 1927 is proper. There is no difference between them as to any figures. The sole question is, When was the decedent in receipt of the principal and interest on the note for income tax purposes? He died before this proceeding was instituted and his testimony is not available. The note was not produced and we do not know its precise terms or the date of cancellation. However, the petitioner concedes that it was payable “ on or before ” July 7, 1930. The petitioner makes several arguments based upon an absence of proof, apparently forgetful of the fact that the proof is its burden. It must show that there is no basis for the Commissioner’s action, if the latter is to be reversed.

The petitioner argues that the savings account was not unquali-fiedly subject to the decedent’s demands upon the bank in 1929, that the account was not that of his agent, and that it was not in trust or in escrow for the decedent. We need not decide any of these questions. There was an unqualified tender of payment before the money was placed in the bank. The total amount which he accepted from the bank on January 10, 1930, was not the equivalent of the principal of the note with interest thereon to January 10, 1930. It was the principal of the note with interest thereon to October 7, 1929, plus bank interest on that total sum from October 10, 1929, to January 10, 1930. Thus, he finally accepted $68.44 less than would have been due on the note had it remained unpaid until January 10, 1930. Nicklin had no right to refuse payment in 1929. The debtor was not only willing, but it wished to pay. Apparently it was desirous of paying at all times during the remainder of 1929. At least the contrary does not appear. That which was done in lieu of actual payment into the hands of the decedent in 1929 was done without objection from Nicklin in an effort to accommodate him and to have the cash available for him pending the time when he chose to accept it. Thus it seems clear that had he changed his mind at any time during the latter part of 1929 and asked for the cash, he could have had it. Furthermore, if the account in the bank belonged to him as a principal, or if he was a cestui que trust, there was obviously receipt for income tax purposes in 1929. Nor is the petitioner aided by its argument that the fund was not in escrow and could have been withdrawn by the debtor. If the debtor could have withdrawn the money, we must assume that it would have done so in order to comply with any demand of Nicklin for payment. It was not that the corporation would not pay, but rather that he would not receive.” John A. Brander, 3 B.T.A. 231. Thus, upon any theory that has been suggested, there was receipt in 1929 of the principal of the note with interest thereon to October 7, 1929. A taxpayer may not deliberately turn his back upon income and thus select the year for which he will report it. Cf. John A. Brander, supra; I. M. Cowell, 18 B.T.A. 997; Ella C. Loose, Executrix, 15 B.T.A. 169; William Holden, 6 B.T.A. 605; William Parris, 20 B.T.A. 320; John I. Chipley, 25 B.T.A. 1103; Security First National Bank of Los Angeles, Executor, 28 B.T.A. 289; Loose v. United States, 4 Fed. Supp. 375; Schoenheit v. Commissioner, 44 Fed. (2d) 476; affirming, on this point, 14 B.T.A. 33; Corliss v. Bowers, 281 U.S. 376, 378. Yet, that is exactly what this decedent tried to do.

Decision will he entered for the respondent.


author: Matthews:

text:
    J. W. McCulloch, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 29266, 36943.
    Promulgated October 6, 1933.

      Villard Martin, Esq., for the petitioner.

      Maxwell M. Mahany, Esq., for the respondent.
   OPINION.

Matthews:

These proceedings, consolidated for hearing and decision, arise upon deficiencies in petitioner’s income taxes for the calendar year 1924 of $13,138.33, and for 1925 of $8,899.97. Three issues are raised, only the first of which applies to both years, the second and third being limited to 1925: (1) The respondent’s inclusion as income of cash dividends of a corporation of which petitioner was a stockholder, paid in 1924 and 1925, petitioner contending that a previous stock dividend declared by the corporation made the subsequent cash dividends a return of capital which should have been credited to the cost of the stock; (2) respondent’s disallowance in 1925 of a loss which petitioner contends was sustained in that year as the result of a contract then signed; and (3) respondent’s refusal to allow petitioner to apportion 1925 profits, properly returnable under the capital gains provision, between that basis and the ordinary basis provided.

The cases were submitted on a written stipulation of facts signed by counsel for the parties, which is as follows:

Issue 7.
During the years 1924 and 1925 the petitioner, then a stockholder in the Independent Oil & Gas Company, and by virtue of his ownership of such stock, received from said company cash distributions in the amounts of $57,415.87 and $10,000.00 respectively, which amounts were not reported by the petitioner on his income tax returns of 1924 and 1925 as taxable dividends or as ordinary taxable income. In determining the deficiencies against the petitioner for the years 1924 and 1925 the respondent Commissioner included the above amounts as being taxable dividends. The petitioner contends in the petition filed herein that the $57,415.87 and $10,000.00 cash distributions of 1924 and 1925 were not taxable dividends of the Independent Oil and Gas Company, but instead represented a non-taxable return of capital, which should be applied against and reduce the basis of his stock for the alleged reason that “ * ⅜ * at the time these dividends (distributions) were paid to the petitioner the surplus account cf the said Independent Oil & Gas Company had a deficit.”
An analysis of earned surplus of the Independent Oil & Gas Company from date of organization to December 31, 1925, as disclosed by the books of the company, and unaffected by any reserve for discovery depletion, or by the adjustments of cost depletion made by the Bureau of Internal Revenue for income tax purposes, as more fully explained infra, is as follows:
In arriving at the Earned Surplus figures, supra, cost depletion was deducted in the amounts set forth below. In the audit of the income tax returns of the Independent Oil and Gas Company, and for the purpose of determining the income tax liability of said company for the years indicated., adjustments of cost' depletion allowable were made as indicated below:
The balances of earned surplus, resulting after making the adjustments on account of cost depletion, are as follows:
No reserve for discovery or percentage depletion was set up on the books of the company but in arriving at the taxable net income of the Independent Oil & Gas Company for income tax purposes the Bureau- of Internal Revenue allowed for the years 1919 to 1925, discovery and percentage depletion in excess of cost depletion in the following amounts:
Discovery depletion
1919- None
1920- None
1921- $58, 497. 73
1922- 1,437,122.15
1923- 171,180.20
1924- 387, 035. 68
1925 (Percentage Depletion)- 1,145,896.80
Total_ 3,194,732. 56
The Independent Oil & Gas Company stock had a par value of $1.00 per share. The analysis of earned surplus for the years 1919 to 1925 above set out, and as appearing on the books of the company, and as computed under the Bureau’s computation after adjustments for cost depletion corrections, did not take into consideration certain stock dividends authorized and made by the Independent Oil & Gas Company as follows:
1920- $43, 824.29 par value of stock
1922- 2, 000, 000. 00 par value of stock
On the books of the corporation the $2,043,824.29 par value stock dividends were charged against and served to reduce on the books the Surplus from Appreciation Account which had been set up as a liability to offset a corresponding appreciation asset account, representing increase in value of producing oil and gas leases.
Issue 2.
During the year 1925 and for some time prior thereto the petitioner was a member of and owned 80% of the interest in a partnership, designated for convenience as the McCulloch partnership.
On September 9, 1925 the petitioner organized under the laws of the State of Delaware a corporation known as the J. W. McCulloch, Inc., with authorized capital stock of 200,000 shares of no-par value common stock.
During the month of November 1925 the petitioner entered into an oral agreement or contract with one S. J. Leonard of New York, the agreement providing that Leonard would induce a certain Róndale corporation, controlled by him, to invest a certain amount of cash in the stock of the J. W. McCulloch, Inc. corporation or its successor. The petitioner agreed that if Leonard was successful in so doing, and if the Róndale corporation did so invest in the stock of the corporation controlled by McCulloch, he, the petitioner, would sell to Leonard at 2½⅜ per share 20,000 shares of the J. W. McCulloch, Inc. or the McCulloch Oil Company.
On December 21, 1925 the J. W. McCulloch, Inc. company adopted a resolution authorizing an increase in capital stock from 200,000 to 500,000 shares no-par value common stock, and a further resolution that the name of the company should be changed to “ McCulloch Oil Company.”
During tire period September 9, 1925 to January 23, 1926 neither the J. W. McCulloch, Inc. nor the McCulloch Oil Company owned any assets, and had outstanding only qualifying shares of the directors.
On January 23, 1926 the McCulloch OH Company directors adopted the following resolution:
WHEREAS, on the 23rd day of January, 1926, J. W. McCulloch for and on behalf of this corporation entered into a contract with Róndale Corporation for the sale of 50,000 shares of the capital stock of this company, upon the terms and conditions set out in said contract, and,
Whereas, it is to the best interest of this corporation that said contract be approved.
Therefore, Be It Resolved, that the said agreement entered into by and between the said Róndale Corporation and McCulloch Oil Company, on the 23rd day of January 1926, be and the same is hereby approved.
On January 23, 1926 the McCulloch Oil Company, then having no assets, in exchange for the assets of the McCulloch partnership, agreed to purchase those assets for an agreed 100,000 shares of stock, the stock to be issued in proportion to the ownership in the partnership, and the transfer of the partnership assets was shortly thereafter made and the stock issued, the stock being issued to the partnership owners or their nominees. Pursuant to this transaction J. W. McCulloch, the petitioner, was issued 58,900 shares and Ocie McCulloch, his wife, was issued 20,000 shares.
On January 23, 1926 the McCulloch Oil Company and the Róndale Corporation entered into an agreement for the purchase by the Róndale Corporation of a certain number of shares of McCulloch Oil Company, the purchase to be made direct from the corporation, the McCulloch Oil Company agreeing to acquire certain assets from the McCulloch partnership as above stated.
Notwithstanding the Róndale Corporation had not entirely completed its contract of January 23, 1926 with the McCulloch Oil Company, the petitioner during May 1926 directed his wife, Ocie McCulloch, to transfer to Mr. Leonard the 20,000 shares of stock then in her name, the 20,000 shares being the same number provided for in the November 1925 agreement between petitioner and Leonard. The shares were so transferred and delivered to Leonard shortly thereafter, subject only to the qualification that petitioner would expect Leonard to see that the Róndale corporation entirely fulfilled and completed its January 23, 1926 agreement with the McCulloch Oil Company. The petitioner, when filing his Federal income tax return for 1925, deducted as a loss on this transaction the sum of $114,577.41 less $57,415.87 and $10,000.00, and claimed a net loss of $47,161.54, which loss he now claims should be the $114,577.41 without reduction of the $57,161.54. The respondent, ⅛ arriving at the d'eficiency for the year 1925 has not allowed any deduction on account of the $114,577.41 loss alleged by the petitioner to have been sustained on this transaction.
Issue S.
During the year 1925, the petitioner realized a profit upon sale of certain stocks, and reported same in substance as follows:
51,100 Independent Oil & Gas Oo. stock (held over two years)_ $921,987.72
Miscellaneous Stocks (held less than two years)_ 107, 025.35
$1, 029, 013. 07
Less: McOulloch Oil Co. stock sale (discussed infra)_ 47,161.54
Net profit_ $981, 851. 53
This $1,029,013.07 profit less the alleged $47,161.54 loss, balance $981,851.53, the petitioner reported on his return as follows:
As ordinary gain (about 28% of total)_$267,546.17
As capital net gain (about 72% of total)_ 714,305.36
$981,851.53
The respondent Commissioner, in computing the deficiency for 1925, after eliminating the $47,161.54 McCulloch stock loss, discussed supra, apportioned the $1,029,013.07 profit as follows:
Taxable as ordinary gain — profit on sale of stock held less than 2 years— $107,025.35.
Taxable as capital net gain — profit on sale of stock held over two years— $921,987.72.
That is, the respondent has held that if the petitioner elects to have taxed as capital net gain any part of the profit from the sale of the stock held for more than two years, all of the profit so realized on such stock must be so taxed, regardless of the circumstance that all of said stock may not have been sold at the same time in 1925.
The petitioner, on the other hand, contends that under the controlling statutory provisions he may elect to have taxed as ordinary gain such proportion of the profit on sale of the stock held for more than two years as will result in the minimum tax.
Certain adjustments made by the respondent in arriving at the deficiencies for the years in question were not appealed from, and accordingly, no facts are stipulated with respect thereto. It is agreed that there may be introduced in evidence by the respondent the Federal income tax returns filed by the petitioner for the years 1924 and 1925, and the Revenue Agents’ reports and notices of deficiencies issued with respect thereto.

The documents referred to in the last paragraph of the stipulation were offered and received in evidence.

1. The first issue, whether the cash distributions of $57,415.87 and $10,000, respectively, made to petitioner in 1924 and 1925 by the Independent Oil & Gas Co. were taxable dividends, involves section 201 (a), (b), and (d) of the Revenue Acts of 1924 and 1926 (which provisions are identical in the two Acts), set out in the margin. Tlie petitioner contends that the stock dividends paid in 1920 and 1922 should have been deducted from the earned surplus in arriving at the balance available for distribution as dividends and points out that such deduction would result in a deficit in 1924 and 1925 in earned surplus so that cash distributions in those years must necessarily be said to come from the cost depletion reserve and as such under the statute (section 201 (d)) and regulations (65 and 69, article 1546) are not taxable as dividends. Before considering this argument it may properly be pointed out that the respondent allowed petitioner discovery and percentage depletion for 1919 to 1925, inclusive, aggregating $3,194,732.56 in excess of depletion on cost, and that since this reserve for airy year in question could more than have absorbed the cash distributions, and presumably such distributions would have been made first from it, the distributions in question would have been taxable under the regulations. Such a reserve in excess of cost is not treated as capital under the regulations and distributions from it are taxable as dividends.

In Hugh R. Wilson, 3 B.T.A. 957, and J. T. Hedrick, 24 B.T.A. 444, we reviewed the whole question of whether a stock dividend is a “ distribution ” which reduces the surplus or earnings available for dividends. See also Edward D. Untermyer, 24 B.T.A. 906; affd., 59 Fed. (2d) 1004; certiorari denied, 287 U.S. 647. Cf. Walker v. Hopkins, 12 Fed. (2d) 262; certiorari denied, 271 U.S. 687. In the Wilson case we held that under section 201 (b) of the Revenue Act of 1918 a stock dividend was not a “ distribution.” In the Hedrick case we extended the same view to the corresponding section of the 1924 Act, here considered. On the authority of these decisions, this issue is decided for respondent.

Taking the earned surplus, however, as set up in petitioner’s books, after allowing for adjustments by respondent of only cost depletion, we are unable to accept petitioner’s contention that stock dividends would diminish in any way this surplus. Furthermore, it is stipulated that the stock dividends were charged against the “ Surplus from Appreciation Account,” which had been set up as a liability to offset a corresponding appreciation asset account representing increase in value of producing oil and gas leases.

2. The second issue relates to the loss claimed by petitioner in 1925 in the amount of $114,577.41. On the basis of the facts stipulated, petitioner sustained no loss in 1925. He did not in that year own the 20,000 shares of stock in the McCulloch Oil Corporation, which were sold to Leonard in 1926 for 2½ cents per share. It was not known in 1925 whether petitioner would ever have to sell Leonard any stock in the corporation. Furthermore, there is no evidence as to the cost of the stock sold to Leonard in 1926. This issue is also decided in favor of respondent.

3. The final issue is simply whether petitioner may, with respect to the capital net gain of $921,987.72 derived in 1925 from a sale of stock which he had then held more than two years, avail himself of the benefit of the capital gain provisions (sec. 208, Revenue Act of 1926) by returning a part of such gain at the rate of 12½ percent and the rest at the ordinary rate, so as to minimize the aggregate amount of tax payable. There is nothing in the statute which would authorize such an apportionment at the will of the taxpayer. Section 208 (b) gives to any taxpayer who derives a “ capital net gain ” in the taxable year the right to elect whether his taxes shall be computed as provided in sections 210 and 211 of the statute, or as follows:

A partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner provided in sections 210 and 211, and the total tax shall be this amount plus 12½ per centum of the capital net gain.

The statute defines the term “ capital net gain ” as being the excess of the total amount of the capital gain over the sum of (A) the capital deductions and capital losses, plus (B) the amount, if any, by which the ordinary deductions exceed the gross income without including capital gain. The term “ capital gain ” is defined as meaning the gain from sale or exchange of capital assets consummated after December 31, 1921, and the term “ capital assets ” is defined as being property held by the taxpayer for more than two years. The term “ ordinary net income ” is defined as meaning the net income computed in accordance with the statute after excluding all items of capital gain, capital loss and capital deductions. If the taxpayer elects to have his taxes computed as provided in section 208, no part of his “ capital net gain ” may be included in “ ordinary net income ” in determining the tax payable. On this issue we find for the respondent also.

Judgment will he entered umder Rule 50.

       Sec. 201. (a) The term “ dividend ” when used in this title (except in paragraph (9) of subdivision (a) of section 234 and paragraph (4) of subdivision (a) of section 245) means any distribution made by a corporation to its shareholders, whether in money or in other property, out oí its earnings or profits accumulated after February 28, 1913.
      (b) For the purposes of this Act every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings or profits. Any earnings or profits accumulated, or increase in value of property accrued, before March 1, 1913, may be distributed exempt from tax, after the earnings and profits accumulated after February 28, 1913, have been distributed, but any such tax-free distribution shall be applied against and reduce the basis of the stock provided in section 204.
      *******
      (d) If any distribution (not in partial or complete liquidation) made by a corporation to its shareholders is not out of increase in value of property accrued before March 1, 1913, and is not out of earnings or profits, then the amount of such distribution shall be applied against and reduce the basis of the stock provided in section 204, and if in excess of such basis, such excess shall be taxable in the same manner as a gain from the sale or exchange of property. The provisions of this paragraph shall also apply to distributions !rom depletion reserves based on the discovery value of mines.


author: Smith:

text:
    Ruby Y. Lloyd, Petitioner, v. Commissioner of Internal Revenue, Respondent. Addavale Y. Costlette, Petitioner, v. Commissioner of Internal Revenue, Respondent. Hattie B. Young, Petitioner, v. Commissioner of Internal Revenue, Respondent. W. F. Young, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 52501, 52543-52545.
    Promulgated October 6, 1933.

      Thos. D. Meares, Esq., for the petitioners.

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

Smith:

These proceedings involve the liability of the petitioners as transferees of the assets of the Wilson Investment Co. for unpaid income taxes of the company for the year 1924 in the amount of $2,158.33. The proceedings were consolidated for hearing. The essential facts and the question at issue are clearly set forth in the following stipulation filed by the parties:

1. The Wilson Investment Company, hereinafter referred to as the Company, was incorporated under the laws of the State of North Carolina on March 15, 1924.
2. The Company on October 27, 1925, duly filed in the office of the Secretary of State of the State of North Carolina an affidavit of the publication of the preliminary certificate of its dissolution and was thereafter duly dissolved.
3. The Company filed its income tax return for the period beginning March 15, 1924, and ending December 31, 1924, on March 15, 1925. No return was filed by the Company for any other period.
4. On or about March C, 1929, a consent in writing purporting to extend the period of limitations within which assessment and collection of tax here in controversy could be made was executed. A copy of said consent' is attached hereto and marked Exhibit I and made a part hereof. Said consent was signed by the persons whose signatures appear thereon or about the date shown thereon.
5. At the time said consent in writing was executed the respondent had no express notice of the dissolution of the Company. Accordingly, he accepted the said consent and delayed his action with respect to making assessment of 1924 income taxes dne from the Company.
6. W. B. Young who signed the consent as president of the Company, was at the time of dissolution of the Company, its duly authorized and acting president. H. B. Young who attested the consent as secretary of the Company and placed thereon its corporate seal, was at the time of dissolution of the Company, its duly authorized and acting secretary. Said H. B. Young is the Mrs. Hattie B. Young who is one of the petitioners in this proceeding, Docket No. 52544.
7. Subject to the right of the petitioners to contest the validity of said consent, it is stipulated and agreed that there is now due and owing to the United States, from the Company, corporation income taxes for the period beginning March 15, 1924, and ending December 31, 1924, in the amount of $2,158.33 plus interest thereon as provided by law.
8. It is further stipulated and agreed, subject to the right of the petitioners or any of them to contest the validity of said consent, that the petitioners are liable jointly and/or severally as transferees of the Company within the meaning of Section 280 of the Revenue Act of 1926 and as such are liable for a deficiency in the amount of $2,158.33 income taxes for the year 1924 plus interest thereon as provided by law.

As appears from the above stipulation, the liability as transferees of the petitioners in these proceedings depends upon the validity of the income tax waiver executed on behalf of the dissolved corporation on March 2G, 1929. It is stipulated that each petitioner is liable as a transferee of the assets of the corporation for the full amount of the deficiency determined against the corporation if the waiver is held to be valid.

In his brief the respondent concedes that as to the petitioners Ruby Y. Lloyd, Addavale Y. Costlette and W. F. Young, the waiver is invalid because at the time it was executed the statutory three-year period following the dissolution of the corporation, during which the officers were authorized to act for it under the provisions of sections 1182 and 1193, North Carolina Code, 1927, had elapsed and the officers were without authority to bind the corporation. The respondent submits, however, that the waiver is valid as to the petitioner Hattie B. Young, who is estopped from denying its validity because as an officer of the corporation she was a party to its execution. The respondent has filed an amended answer affirmatively pleading the estoppel.

As authority for his position the respondent cites Lucas v. Hunt, 45 Fed. (2d) 781, in which the Circuit Court of Appeals for the Fifth Circuit held, reversing 15 B.T.A. 1388, that where a liquidator for a dissolved corporation, formerly president of the corporation, signed a waiver extending the time for assessment of taxes against the corporation after the expiration of the statutory three-year period during which the officers could legally act for the corporation under the laws of Texas, he, the president, was estopped from denying the validity of the waiver and was liable as a transferee for the unpaid taxes. In its opinion the court said:

If the waiver was valid, then it is rightly conceded by counsel for Hunt that the assessment was not barred; but it is contended on h's behalf that, the time within which he was authorized to act as liquidator having expired, the waiver had no binding force or effect. We are of opinion that Hunt by signing the waiver estopped himself to question its val dity, with the result that he was bound to respond to the assessment to the extent of funds in his hands which belonged to the dissolved corporation taxpayer. The circumstances all show that the commissioner relied on the waiver and is therefore entitled to claim the equitable estoppel asserted by counsel in his behalf.
The waiver was executed before the assessment was barred; without it the commissioner in the performance of his duty would have made the assessment within the statutory period. The very purpose he had in mind in requiring an extension of time was to make an assessment after the statutory period of limitation had run. It manifestly would be asking too much to requ re the commissioner in every case of waiver to testify positively from memory that he relied on the taxpayer’s agreement.

The facts in that case are identical with those in the instant proceeding, Docket No. 52544, except that the petitioner here signed and executed the waiver, placing the corporate seal thereon, as secretary of the dissolved corporation rather than as president, the president having also signed on behalf of the corporation. It is our opinion that this is not a material difference and that the same principle followed in that case should apply here. The petitioner Hattie B. Young, who signed and attested the waiver as secretary of the corporation, was as much a party to its execution, we think, as was the president, who also signed it. In Bowers v. Hechtman, 45 Minn. 238; 47 N.W. 792, the court, commenting on the attestation of a corporate instrument by the secretary of the corporation, said:

The secretary who attested the execution of the instrument, and affixed the corporate seal to it, was not a mere subscribing witness, as respondent assumes. He, as much or more than the vice-president, executed the instrument in behalf of the corporation. In fact, the officer or agent who, in behalf of the corporation, affixes the common seal to an instrument, is, in the absence of any statutory provision, deemed the party executing it. He also stands in the relation of a subscribing witness to the execution of the deed by the corporation, and is the proper party to be examined or to make affidavit to prove that the seal affixed by him was the corporate seal, and that it was affixed by authority of the board of directors. Lovett v. Association, 6 Paige, 60; Kelly v. Calhoun, 95 U.S. 710. * * *

It is to be noted that the waiver in the instant case expressly provides on its face that:

If this consent is executed on behalf of a corporation, it shall be signed with the corporate name, followed by the signature and title of such officer or officers of the corporation as are empowered under the laws of the State in which the corporation is located to sign for the corporation, in addition to which, the seal, if any, of the corporation must be affixed. Where the corporation has no seal, the consent must be accompanied by a certified copy of the resolution passed by the board of directors, giving the officer authority to sign the consent.

IVe are of the opinion that the petitioner Hattie B. Young having signed the waiver and affixed the corporate seal as secretary, is estopped to deny the validity of the waiver on the grounds set forth; viz., that the subscribing officers were without authority to act for the corporation. In accordance with the matters stipulated, petitioner Hattie B. Young is liable as transferee for the unpaid taxes of the corporation in the amount asserted by the respondent. The other petitioners herein, Ruby Y. Lloyd, Addavale Y. Cost-lette and W. F. Young, are not liable as transferees for any of the amounts asserted against them.

Judgment will be entered for the petitioners in Docket Nos. 52501, 52545 and 52545, and for the respondent in Docket No. 52544•


author: GoodRICi-i :

text:
    Summerfield Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 58711.
    Promulgated October 6, 1933.

      Frederick L. Pearce, Esg., for the petitioner.

      John D. Kiley, Esg., for the respondent.
   OPINION.

GoodRICi-i :

Respondent has determined and maintains that petitioner and the Taylor Co. were affiliated during the period between February 1 and September 13, 1928; that this period should be covered by a consolidated return and th'e remainder of the fiscal year by a separate return, and that the liquidation of the Taylor Co. as of February 1, 1928, from which arose the losses claimed by petitioner, was an intercompany transaction and the losses therefore are not allowable. His determination that the companies were affiliated he bases upon two grounds; first, that petitioner owned all of the stock of the Taylor Co., regarding as petitioner’s property the shares, amounting to 10 per centum, standing in the name of Stern as guardian; and, second, that petitioner, having elected under section 141 (a), Revenue Act of 1928, to file a consolidated return covering the year 1929, is bound by Regulations 75, art. 37 (a), providing that distributions during consolidation by one member of the affiliated group in cancellation or redemption of its stock shall be regarded as an intercompany transaction on which neither gain nor loss is to be recognized. In the alternative, respondent maintains that, even though petitioner did not itself own all of the stock of the Taylor Co. under section 142 (c), Revenue Act of 1928, these companies were affiliated from February 1 to September 13, 1928, because all the Taylor stock was owned “ by the same interests ” and, petitioner having previously so represented, is now estopped to deny that fact, and the affiliation resulting.

Upon examination of the statutory provisions mentioned it is readily apparent that section 141 and Regulations 75 promulgated thereunder apply to the taxable year 1929 and subsequent years, while section 142 applies to the taxable year 1928. Upon brief, the parties agree that petitioner’s fiscal year ending January 31, 1929, was a “ taxable year 1929.” Section 141 is explicit in its requirements as to the stock ownership necessary to constitute an affiliated group of corporations. At least 95 per centum of the stock of each of the corporations, except the parent, must be owned by one or more of the other corporations, or the parent must own directly at least 95 per centum of the stock of at least one of the other corporations. No provision is made for affiliation based upon an ownership “ by the same interests.” Here, petitioner owned 90 per centum of the stock of the' Taylor Co. Consequently, the question determinative of the issue of affiliation is one of fact — Who owned the other 10 per centum? Respondent argues it was owned by petitioner, pointing out that apparently the minority stockholders were not consulted concerning the liquidation of the Taylor Co. and that, although worthless, their stock was bought up by petitioner at par plus an amount equivalent to interest on the. investment, thus showing that the investment by Stern as guardian was in reality a loan to petitioner, which, therefore, in fact owned the stock. We do not agree with that argument. The evidence is that the stock was bought by Stern as guardian, with the legacy left his sons. The stock was issued to him as fiduciary, and was retained by him in his personal possession until purchased by petitioner. There is nothing in the record to indicate that the transaction was a loan to petitioner; no evidence of indebtedness was issued, no arrangement concerning repayment appears. We cannot reject the direct evidence to the contrary to adopt the inferences which respondent would have us make. We can understand how Stern, who was not only guardian for his sons, but president of petitioner and its largest stockholder, might successfully insist that the company protect the investment which he had made' on behalf of his wards by purchasing the stock. It was to his interest to bring that about, not only for the benefit of his sons, but possibly to protect himself against a charge of mismanagement of his trust. We are of opinion that, so far as petitioner is concerned, its purchase of the stock of the Taylor Co. from Stern as guardian must be regarded as a gift. We conclude also that the 10 per centum of the Taylor stock was owned, not by petitioner, but by Stern, as guardian. Consequently, under the provisions of section 141, there could be no affiliation between petitioner and the Taylor Co. during their taxable year 1929.

This view of the case makes unnecessary prolonged discussion of respondent’s alternative contention, but he has urged so vigorously that because of representations made in connection with its affairs for prior years petitioner is now estopped to deny affiliation in 1929, that it becomes incumbent on us to give our view as to that argument. What representations were made by petitioner which caused respondent to change his ruling as to the status of affiliation in prior years, we are not told. We assume that the facts concerning the stockholdings and the personal relationships between the OAvners were presented. But, as we see it, those matters are immaterial. Respondent’s ruling that these corporations were affiliated because of ownership of their stocks by the same interests, under the decision in Handy & Harman v. Burnet, 284 U.S. 136, became an error in law. See also Palgrove Co., 26 B.T.A. 404. Where-both parties have knowledge of the facts, an expression of opinion by one of them on a question of law creates no estoppel. Daub v. Northern Pacific Ry. Co., 18 Fed. 625; Ward v. Ward, 145 Fed. 1023. Nor will a mistake in law in a prior decision work an estoppel to prevent a correct decision, even for the same year, Stein-Bloch Co., 23 B.T.A. 1162; nor in a later year, Houston Baseball Association, 24 B.T.A. 69. The fact that petitioner previously successfully contended it was affiliated for prior years upon a basis since judicially declared fallacious does not serve to estop it from now demanding that its status be determined under the later applicable statutory provisions.

It remains to determine the deductibility of the losses sustained by petitioner upon the liquidation of the Taylor Co., which the parties agree occurred as of February 1, 1928, although the company was not formally dissolved until September of that year. The amount of the losses is not in dispute. The investment in the stock of the Taylor Co. totaled $135,000; the excess of the liabilities assumed over the assets received amounted to $156,693.03. Respondent contends that no loss upon the liquidation may be recognized under article 37 (a) of Regulations 75, which reads as follows:

(a) During Consolidated Return Period.
Gain or loss shall not be recognized upon a distribution during a consolidated return period, by a member of an affiliated group to another member of such group, in cancellation or redemption of all or a portion of its stock; and any such distribution shall be considered an intercompany transaction.

There are several answers to that argument. One is that, as we have pointed out, these corporations were not affiliated during the fiscal year in which the liquidation occurred; consequently, there was no transaction between members of an affiliated group during a consolidated return period. Under article 18 (b) and (e) of Regulations 75, both companies must be treated as if separate returns had been filed for the year 1929. Moreover, there Avas no distribution upon the stock of the Taylor Co.; petitioner assumed its liabilities and took over its assets, and the stock became worthless. But, even had the companies been affiliated, that relationship was terminated by the liquidation and consequently the losses were not intercompany transactions, but were sustained outside of affiliation and therefore are deductible. Carey Salt Co., 26 B.T.A. 675. The loss sustained upon the stock investment should be allowed in full.

But that view does not completely dispose o,f the loss -sustained upon the advances made to the Taylor Co, During the previous period of affiliation the consolidated income wa,s offset by operating losses of the Taylor Co. totaling $155,581.19. Respondent maintains that the loss sustained at liquidation upon open account must be reduced by that amount, citing Riggs Natl. Bank, 17 B.T.A. 615; affd., 57 Fed. (2d) 980; Burnet v. Aluminum Goods Co., 287 U.S. 544; Hernandez v. Ilfeld, 66 Fed. (2d) 236. With that we agree. Petitioner cannot deny that during these prior years it was treated as affiliated — whether rightly or not we need not decide — and that it obtained a benefit from that affiliation through the reduction of its taxable income on account of the operating losses of its then subsidiary. To hold that it may now deduct the advances in their entirety would be to allow a second time the amounts deducted during the period of affiliation. That is contrary to our understanding of the view expressed in the cases above cited. Cf. McLaughlin v. Pacific Lumber Co., 66 Fed. (2d) 895. Accordingly, the loss on open account should be reduced by the amount of the Taylor Co.’s operating losses previously included in the consolidated returns during affiliation, leaving á balance of $1,111.84, which may now be deducted.

Judgment will be entered under Rule 50.


author: Goodkicii :

text:
    Sam Weisberger, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 56195.
    Promulgated October 6, 1933.

      Louis E. Spiegler, Esq., and N. Norman Mayer, Esq., for the petitioner.

      Frank A. Surine, Esq., for the respondent.
   OPINION.

Goodkicii :

The issue here is one of fact — whether the distributions by the company to petitioner and the other stockholders were loans, or distributions in liquidation. Petitioner contends that they were bona fide loans; that the corporation was not in liquidation in either 1926 or 1927, and therefore, that no distributions in liquidation were made in those years. In the alternative he contends that if his withdrawals in 1927 were liquidating dividends, only $41,250 should be included in his income, since that is the amount he received in cash that year. We reject both these contentions. It may be that the amounts withdrawn by petitioner prior to July 1,1926, were intended as loans, but it is quite apparent that thereafter their character changed, and the company entered upon a pro rata distribution to its stockholders. Cf. Moses Cohen, 28 B.T.A. 190.

Before that time interest on his withdrawals had been charged against him; thereafter it was not. The amounts paid to stockholders other than petitioner on that date and on February 28, 1927— the two distribution dates when he received no cash — total $78,750, including a reduction in cash distributed to Sunshine, offsetting the $500 previously advanced to him. Petitioner’s indebtedness then amounted to $96,250; these figures total $175,000, of which the distributions to the other stockholders amount to 45 per centum — the exact ratio of their stockholdings. Petitioner’s 55 jser centum of the total would amount to $96,250 — exactly the amount he owed. Distributions in exact ratio of stockholdings do not occur by accident, and we think it plain that here they evidence an agreement among the stockholders to liquidate the company. Obviously, petitioner’s existing indebtedness to the company was offset by omitting cash distributions to him, and after that was done he shared in the cash distributions pro rata. Moreover, no part of these distributions was ever repaid by the recipients to the company, nor is there any evidence of any intention so to do, or of any demand by the company that it be done. We are satisfied that these distributions were not loans — see L. J. Christopher, 13 B.T.A. 729; affd., 55 Fed. (2d) 527; S. Schulein Co., 20 B.T.A. 264; Daniel Hunt, Sr., 6 B.T.A. 558, and it remains to be determined whether they were made in liquidation of the company within the meaning of section 201, Revenue Act of 1926.

It is clear that the company was in liquidation in 1927. Upon its returns for that year it so declared; in that year it sold its physical assets, ceased operations except for the collection of its few accounts, distributed practically all its funds, and shortly afterwards dissolved. It is likely that it began its liquidation in 1926, for it then disposed of its real estate, permitted its business to contract sharply and its inventory to decline, and distributed cash to the amount of 45 per centum of its capitalization. But whether the company was in liquidation in 1926 is immaterial here. Respondent has determined •that petitioner received $137,500 upon liquidation of the company in 1927, made up of his debt of $96,250 and $41,250 cash received in that year. Of that amount respondent has treated $55,000 as return of capital — the cost of the stock — and has included the balance in income and taxed it as a liquidating dividend. Petitioner, upon whom lies the burden of proof, has failed to show that determination erroneous. He has not disclosed when his indebtedness was canceled by the company, thus making the sum thereof a receipt by petitioner, and his property. It may be that $55,000 of the indebtedness was canceled on July 1, 1926, but petitioner has not so proved. On the contrary, the figures disclosing the cash distributions indicate that the entire indebtedness was canceled on February 28, 1927. It was then that the $500 previously advanced to Sunshine was offset against a cash distribution to him, and it was then that the cash distributions to the other stockholders totaled the pro rata equivalent of the withdrawals previously made by petitioner. No attack is made on respondent’s treatment as capital net gain of the amount received in excess of the cost of petitioner’s stock; nor does the record disclose any corporate action supporting petitioner in reporting the amounts received as dividends in 1929 and 1930.

Judgment will he entered for the respondent.


text:
    The Travelers Bank & Trust Company, Executor under the Will of John H. Nolan, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46686.
    Promulgated October 10, 1933.

      George H. Day, Esq., for the petitioner.

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

Seawell:

The issue relates only to the question of whether the gifts of stock made by the decedent on or about May 27, 1926, were made in contemplation of death within the meaning of section 302 (c) of the Revenue Act of 1926, set forth in the margin. We are not concerned with the gifts made prior thereto, but the respondent points out in his brief that they are of the same class.

It does not appear of record that the respondent ever determined from an investigation of the circumstances surrounding the transfers that the gifts were, in fact, made in contemplation of death. From the fact that he allowed an exemption of $5,000 for each gift it seems that he relied altogether on the conclusive presumption provision of section 302 (c). The petitioner points to this condition of the record and argues that, by showing that the clause seemingly followed by the respondent is unconstitutional (Heiner v. Donnan, 285 U.S. 312), its burden of proof has been met. It argues further that under the circumstances the respondent’s determination is not prima facie correct. In the case of J. Bertram Lippincott et al., Executors, 27 B.T.A. 735, we held, on the basis of similar facts, that the burden of proof did not shift from the petitioner to the respondent. In the case of First Natl. Bank of Boston v. Commissioner, 63 Fed. (2d) 685 (reversing in part 25 B.T.A. 612), the court, based upon a lack of showing that the Commissioner had, in fact, determined that the transfers in question were made in contemplation of death, held that the action of the Commissioner did not make out a prima facie case. This holding of that court, to which an appeal lies from our decision in this proceeding, would doubtless be followed if it were called upon to consider the question raised here. We need not pause, however, to attempt to reconcile the two decisions or pass upon the preliminary question raised by the petitioner, for we are convinced that there is affirmative proof in the record that the transfers made by decedent in this proceeding were in contemplation of death.

The intent and meaning of the phrase “ contemplation of death ” is set forth in United States v. Wells, 283 U.S. 102, in which the court said :

» * ⅞ Transfers in contemplation of death are included within the same category, for the purpose of taxation, with transfers intended to take effect at or after the death of the transferor. The dominant purpose is to reach substitutes for testamentary dispositions and thus to prevent the evasion of the estate tax. * * * As the transfer may otherwise have all the indicia of a valid gift inter vivos, the differentiating factor must be found in the transferor’s motive. Death must be “ contemplated,” that is, the motive which induces the transfer must be of the sort which leads to testamentary disposition. * * *

The dominant motive of the decedent for the transfers in question here could not have been the carrying out of a policy of long standing to make substantial gifts to his children during his lifetime, for the record discloses no gifts of any kind prior to April 1923, when he gave to or for the benefit of each child 150 shares of stock of the Travelers Insurance Co. These were followed by like gifts of cash, aggregating $60,000, over a period of about two and one half years, and the large gift in question a little over three years later. It does not appear that any of the donees required the last gift to meet their individual needs. The gifts made prior thereto were substantial in amount and doubtless made the donees financially independent of the decedent if they were not already in that position. All of the gifts were made after the decedent retired from business and at a time when the annuity of $600 per month he was receiving was adequate to meet his personal needs. He was then past 80 years of age and had for several years been suffering from a heart disease from which there was no hope of recovery. While he might not have known that the disease would cause his death, he must have fully realized its seriousness because it had confined him to one floor the winter preceding the gift in question and was otherwise brought home to him in a forceful way.

The first gifts were made on the day the decedent executed his will and were in the same proportions as the donees were to receive the decedent’s residuary property under the will. The 1926 gifts were under consideration prior to and at the time the second codicil was written and indicate in a forceful way that the decedent regarded the two acts as part of one plan to dispose of his entire estate in contemplation of death. The net estate of the decedent five months after the completion of the gifts was about $88,000, an amount less than the specific exemption allowed by the statute. This indicates that the gifts left the decedent with a small estate in comparison with what it had been. On similar facts present in the case of Anneke v. Willcuts, 1 Fed. Supp. 662, the court said “ the fact that the transfers here involved were practically contemporaneous and closely connected with, the execution of Mr. Anneke’s will, makes it difficult, if not impossible, to reach any other conclusion than that, taken together, they were all of a testamentary character.” See Estate of George A. Wheelock, 13 B.T.A. 828.

The frame of mind of the decedent at the time the gifts in controversy were made is also shown by the contents of the letter of May 27, 1926, to his children notifying them of the transfers. In his letter the decedent acknowledged his extreme old age and endeavored to impress upon the donees the fullness and success of his life and the real value of his gifts.

The petitioner points to the decedent’s correspondence and expressions during the later years of his life, together with an expenditure of about $10,000 in the spring of 1926 for an addition to his daughter’s summer home for his own convenience, as negativing any idea that he contemplated death. Answering a similar contention made in Clarence A. Neal et al., Executors, 16 B.T.A. 1058; affd., 53 Fed. (2d) 806, we said: <£ * * * but we do not regard them as conclusive of the issue before us, since man sometimes exudes optimism and courage when pessimism and fear exist within.”

From a consideration of all of the facts we are of the opinion that the gifts in question were made in contemplation of death.

Decision will be entered for the respondent.

       Sec. 302. (c) To tile extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his deatn, except in ease of a bona fide sale for an adequate and full consideration in money or money’s worth. Where within two years prior to his death but after the enactment of this Act and without such a consideration the decedent has made a transfer or transfers, by trust or otherwise, of any of his property, or an interest therein, not admitted or shown to have been made in contemplation of or intended to take effect in possession or enjoyment at or after his death, and the value or aggregate value, at the time of such death, of the property or interest so transferred to any one person is in excess of $5,000, then, to the extent of such excess, such transfer or transfers shall be deemed and held to have been made in contemplation of death within the meaning of this title. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death but prior to the enactment of this Act, without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title.


author: Seaavell:

text:
    Loughborough Development Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 51064.
    Promulgated October 12, 1933.

      W. A. Bolinger, Esq., and Cecil J. Dowd, Esq., for the petitioner.

      E. L. Corbin, Esq., for the respondent.
   OPINION.

Seaavell:

The Commissioner determined a deficiency in income tax for the year 1927 in the amount of $9,173.54. The only question in issue is whether the facts connected with an exchange of real estate made by the petitioner during the year 1927 for other real estate, plus cash of $53,786.90, were such that under the provisions of section 203 (b) (1) and (d) (1) of the Revenue Act of 1926 the petitioner realized no taxable income therefrom in excess of the cash received.

The testimony of the president of the petitioner and a stipulation signed by counsel of the respective parties show the facts connected with the aforementioned transaction and are in substance as hereinafter stated.

The petitioner is a Delaware corporation, organized in 1923, with its principal office and place of business in Washington, D.'C. Its charter gives it the power to operate generally in the real estate business, but it has not in its regular course of business bought and sold real estate with a view to quick profits. It handles no rents, does no commission business, no loan business and, strictly speaking, no purely speculative business in real estate.

On varying dates, but principally in 1925, the petitioner acquired certain real estate tying south of Massachusetts Avenue in the District of Columbia. On March 11, 1927, the petitioner exchanged a part of this real estate with the W. C. and A. Ñ. Miller Development Co. for $53,786.90 cash and certain other real estate located in the vicinity of Twenty-second Street and Pennsylvania Avenue, KW., District of Columbia, which other real estate at the time of the exchange had a fair market value that was $75,000 in excess of the sum of the total cost of the property exchanged by petitioner and the $53,786.90 cash it received in the exchange. In its 1927 return the petitioner included as taxable profit from the exchange the total cash received in the amount of $53,786.90, but included nothing more, on the theory that the exchange was of a kind contemplated by section 203 (b) (1) and (d) (1), supra. In the deficiency notice for 1927 the Commissioner denied that the exchange was of a kind contemplated by that section and added to petitioner’s taxable income for that year the amount of $71,268.05, making a total taxable profit from the exchange of $53,786.90, plus $71,268.05, or $125,054.95.

It is further stipulated that if petitioner’s assumption that the exchange of properties was of the kind contemplated by the provisions of the section of the 1926 Revenue Act mentioned and relied on, then no part of the $71,268.05 added by the Commissioner should be included in petitioner’s income for 1927, and, on the other hand, if the petitioner was not correct in its assumption, then the full amount of $75,000 should be added to its taxable income for the year 1927. The petitioner held the real estate located at Twenty-second Street and Pennsylvania Avenue from the date of its acquisition in 1927 until the year 1931, during which year it disposed of same, part for cash and part for other property.

It is contended for the petitioner that the real estate involved in exchange, that given up and that received, was acquired solely for investment and that in the transaction there resulted no taxable income in excess of the cash amount of $53,786.90.

The respondent insists that, as petitioner was in the real estate business, it was a dealer in such and real estate was, therefore, its stock in trade and that stock in trade is specifically excepted from the provisions of section 203 (b) (1) of the Revenue Act of 1926. It is further argued in behalf of the respondent that the real estate here involved and exchanged constituted “ property held primarily for sale,” and hence was excepted from the provisions of that section.

The testimony of the president of petitioner throws much light upon the subject. The record shows that Allan E. Walker, father of Albert W. Walker, the president of petitioner, had been engaged in the real estate business in the city of Washington for1 many years and only after his death on May 14, 1925, did Albert W. Walker become president of petitioner. As early as 1902 Allan E. Walker, under the laws of the District of Columbia, organized Allan E. Walker & Co., which was purely a brokerage company and never dealt in real estate as a principal, all business being a commission business, handling rents, loans, insurance and so forth. Allan E. Walker, however, as an individual, was at that time a speculator in real estate, buying and selling same. About 1917 he organized a company known as the Allan E. Walker Investment Co., which was a company speculating in real estate and handled no brokerage of any kind. The company took over or acquired almost everything in the way of real estate owned by Allan E. Walker.

In 1923 Allan E. Walker organized the petitioner, primarily to buy and accumulate real estate in a particular section which it was thought would later become very valuable, and which was in a section of the city which included the real estate herein involved. As early as 1912 he bought a small tract of ground of about four acres in that section, not for speculation, and the same is still held by his estate.

Other tracts of land were bought in the same section or neighborhood by Allan E. Walker, in connection with others, which tracts were later acquired by the petitioner.

The petitioner acquired in all about 642 acres in the aforesaid section, which lands were being accumulated not for immediate sale, but to be held as an investment, in the carrying out of the ideas of Allan E. Walker that such would prove a good investment as the city developed in that direction, which it has done. The contracts for the acquisition of such lands were made prior to Allan E. Walker’s death, though the transfers were not all made until 1925. Most of the lands were contracted for in 1924. Before his death, approximately $350,000 worth of stock of petitioner had been sold for the purchase of the 642 acres. After his death, stock subscriptions in the amount of $150,000 failed to come in, resulting in financial difficulties in closing up contracts for the purchase of the lands and taking care of the very heavy carrying charges. In 1927 the petitioner corporation was so badly in need of funds that it became necessary for it to dispose of some of its property, which it did by exchanging 118 acres of its lands with the W. G. and A. N. Miller Development Co. for the real estate in the vicinity of Twenty-second Street and Pennsylvania Avenue, NW., on the terms heretofore stated, and the latter property was held for investment until disposed of in 1931, as heretofore indicated. The petitioner has never made any other sale or disposition of any of the 642 acres except a sale for cash of one block of 48 acres, which was again occasioned by the petitioner’s necessity for cash.

While the record shows that the petitioner under its charter possessed the power to do any character of real estate business desired, it also shows, in our opinion, that the particular real estate here involved was not acquired and held for immediate or early sale, but was in the nature of a real estate investment to be held as such to await future growth and development of the city of Washington in or towards such property before it would be placed on the market for immediate sale and no longer held as an investment.

The respondent cites and relies on the case of John M. Welch, Sr., 19 B.T.A. 394, and the interpretation therein given of the clause “ property held by the taxpayer primarily for sale in the course of his trade or business,” as used in section 208 of the Revenue Acts of 1924 and 1926. That is not only a different section from the one here involved, but the facts in that case are quite different from those in the present case. In that case the petitioner was engaged actively in the real estate brokerage business. He was an active member of the Detroit Real Estate Board for approximately 30 years; was listed as a realtor and advertised as engaged for many years in selling property, and his property was being sold and actively offered for sale by a partnership of which he was a member. In the instant case the petitioner, while possessing certain powers under its charter, has never — as indicated by the evidence — exercised certain of them; has never engaged in the real estate brokerage business, or any loan, insurance or collection business, and did not speculate generally in the buying and selling of real estate. The issue here is how the particular property involved in the exchange herein was held by the petitioner. Was it held primarily for sale? If so, it was not excepted from the provisions of section 203 (b) (1), supra. The respondent insists that the real estate was petitioner’s “stock in trade” and as such was excepted from the provisions of that section. In order to be so excepted, however, it would have to be held, as other property, “ primarily for sale ” and, in our opinion, the property in question was not — as indicated by the evidence — so held. Furthermore, “ stock in trade,” in the income tax point of view, is property that may be inventoried, and real estate is not property to be included in the inventory. Atlantic Coast Realty Co., 11 B.T.A. 416; Albert F. Keeney, 17 B.T.A. 560; John M. Welch, Sr., supra.

The fact that the petitioner operated under a charter which gave it the power to act as a dealer, broker or speculator in real estate, in our opinion, did not prevent it from acquiring and holding real estate “ for investment ” and not “ primarily for sale,” although such property may have been acquired with the intention of selling or disposing of the same at some subsequent, though not early, date and would not otherwise have been acquired.

In the instant case, we are of the opinion and hold that the real property involved in the exchange, what was given and what was received, was of like kind and was held “ for investment ” within the meaning of section 203 (b) (1) and (d) (1) of the 1926 Revenue Act; that the exchange resulted in no taxable gain or income to petitioner in excess of the cash amount of $53,786.90; and that the Commissioner erred in including $71,268.05 in petitioner’s taxable income for the year 1927. Cf. Biscayne Trust Co., Executor, 18 B.T.A. 1015; Clinton Gilbert, Jr., Executor, 20 B.T.A. 765, 771; Ben L. Carroll, 21 B.T.A. 724, 728.

Judgment will be entered for the fetitioner.


text:
    John F. Canning, Petitioner, v. Commissioner of Internar Revenue, Respondent.
    Docket No. 41482.
    Promulgated October 12, 1933.

      Hugh Batterlee, Esq., I. Herman Sher, Esq., and Henderson Mathews, Esq., for the petitioner.

      Frank Surine, Esq., for the respondent.
   OPINION.

Seawell:

The respondent contends that the entire monthly payments made by checks to the petitioner by the Boyce & Veeder Co. during the year 1924 represent taxable income of the petitioner for that year. The petitioner insists that only one half of the amount of such payments constitutes taxable income to him. Which contention is correct, is the main issue for our determination.

The record shows that it was the intention and desire of petitioner that his wife should have an undivided one-half interest in his invention and receive one half of whatever was realized from it, which invention or formula would be secured to him through letters patent, and it also shows that she did in fact receive as her own or there was appropriated to her use and benefit about one half of the amount of money paid by the Boyce & Veeder Co. under the contract made by it with the petitioner on December 4, 1922.

The assignment by the petitioner to his wife, dated June 8, 1923, was of “an undivided one-half interest of all the right, title and interest ” which he had in an invention which was to be secured to him by letters patent and for which he, at the time of executing the assignment, thought application had been made, though application was not actually made until June 16, 1923. No notice of the assignment appears from the evidence to have been given to the Boyce & Veeder Co., with which petitioner had contracted as heretofore stated, and no notice taken of the same by that company. The assignment did not mention the contract made by the petitioner with the company nor any royalties or payments to be made to petitioner by the company by reason of the exclusive right and license granted it by the petitioner. Such failure or omission on the part of the petitioner to notify the company of the assignment or make any mention therein of the royalties and payments to be made in accordance with the contract is not in our opinion material. What was assigned was, in our opinion, clearly in the nature of property or property rights as the same existed in petitioner’s invention, not an attempted assignment of the royalties or income to be derived from such property, though the assignment carried with it an undivided half interest in such income. William Ernest Seatree, 25 B.T.A. 396, 400.

The record shows very plainly that all the parties concerned in the transaction, the assignment of June 8, 1923, were acting without legal advice, resort by the draftsman (Anthony lanuzzi) of the assignment being had to a book containing forms, with a view to adopting or adapting one found therein as suitable for the purpose desired. The instrument as drawn and executed in duplicate, taken in connection with the conduct of the petitioner and his wife at the time and subsequent thereto, in our opinion, shows conclusively that it was the intent and desire of petitioner that his wife should receive as her own one half of the royalties or monthly payments made under the petitioner’s contract with or license given to Boyce <& Yeeder Co., and it had that effect although such was not specifically stated in the assignment.

Tire sale or transfer of an invention before the issuance of a patent is governed by the general principles of law relating to contracts and sales. Indiana Mfg. Co. v. Swift, 185 Ind. 616; 114 N.E. 214, and authorities cited therein; Cook v. Sterling Electric Co., 118 Fed. 45, 46; affd., 150 Fed. 766; Shelby Steel Tube Co. v. Delaware Seamless Tube Co., 151 Fed. 64; affd., 160 Fed. 928; certiorari denied, 212 U.S. 580; In re Meyers-Wolf Mfg. Co., 205 Fed. 289. The fact that letters patent had not at the date of the assignment by petitioner to his wife been granted or applied for is, in our opinion, in view of authorities cited, immaterial.

The fact that the nominal consideration of $1 mentioned in the assignment is not shown by the record to have been actually paid is not important or material in the light of the circumstances and facts shown herein — the marital relation existing between the parties to the assignment and no question as to petitioner’s creditors being involved. Nelson v. Ferguson, 56 Fed. (2d) 121, 123, and authorities therein cited; William Ernest Seatree, supra.

The respondent insists in his brief that the petitioner was, under his contract with the Boyce & Veeder Co., required to render certain services and that it must be assumed that the payments in question represented in part compensation for services so rendered and that, therefore, the monthly payments made by the company were taxable income to petitioner, regardless of any assignment. An inspection of the terms of the contract shows that petitioner was not “ bound ” to do the things referred to in respondent’s brief except upon the company or its successors making a “ reasonable request in writing ” of him and advancing “ the amount of the expense necessary to such investigation and experiments.” The record does not disclose that petitioner received any such request from the company to do any of the things for which he incurred expenses shown in our findings of fact, or that any money was advanced by it to cover or pay the expenses incurred and claimed as a deduction by the petitioner. What was required of the petitioner, as above indicated in the contract, was merely incidental; such as he might “ find himself reasonably able to do, with due regard to other engagements ” and then only in the event necessary expenses were advanced him. What he actually did in incurring the expenses may have increased the income received, though to what extent, if at all, is not disclosed by the record and in any event does not appear to Rave been required of him or necessary under the terms of the contract.

After carefully considering all the facts and circumstances in connection with the assignment by the petitioner to his wife and the contract of petitioner with the company, as heretofore set forth in our findings of fact, we are of the opinion and hold that the assignment was valid and effective to transfer to petitioner’s wife “ an undivided one-half interest” in the invention or secret formula of the petitioner, which one-half interest was property or property rights, and only one half of the monthly payments or royalties derived from the formula or invention belonged to petitioner and was taxable income to him. William Ernest Seatree, supra.

The fact that the monthly payments were made to petitioner by checks which were endorsed, deposited in a bank and the proceeds appropriated as shown in our findings of fact does not affect our opinion or effect a different result as regards ownership of the invention or formula and income arising from it. The manner in which the checks were handled and their proceeds appropriated shows that the petitioner recognized the validity of the assignment to his wife and her right and title to one half of the income. Cf. Blanche S. Ross, 28 B.T.A. 39, 45.

The petitioner’s second assignment of error, that the respondent in determining net income for 1924 erroneously added to taxable income the amount of $6,675.20 as excessive deductions claimed by petitioner, is not in our opinion, and we so hold, sustained by evidence sufficient to overcome the presumption of the correctness of the respondent’s determination in respect thereto. The amount is shown to have been merely an estimate of the petitioner and is so recognized in brief filed in his behalf, wherein it is said: “For six or seven years prior to 1924 the petitioner incurred expenses in developing- his formula to the state it was in when he licensed it to the Boyce & Veeder Co. He estimated that he had expended for such purpose about $100 a month over that period, a minimum of $6,000.” The estimated expense, if it were satisfactorily established by the petitioner, was to develop his secret formula and would be a capital expenditure and not deductible as an ordinary and necessary expense from the 1924 income of petitioner. Gilliam Mfg. Co., 1 B.T.A. 967; Goodell-Pratt Co., 3 B.T.A. 30; Beaumont Co., 3 B.T.A. 822.

The claim that the aforesaid amount, if not allowable as a deductible ordinary and necessary expense, should be allowed as a loss incurred in trade or business in 1924 and not compensated for by insurance or otherwise, on the ground -that the formula became worthless in that year, is not, in our opinion and we so hold, borne out by the record, which shows that the formula was a continued source of revenue! during each month of the year 1924, all of 1925, and part of 1926. The evidence shows that the manufacture of the compound under the formula was stopped during 1924, but the Boyce & Veeder Co. did not surrender the right to resume its manufacture until 1926, and during the entire time continued to pay the minimum royalties and petitioner’s formula in fact remained unchanged. We are of the opinion and hold, therefore, that the respondent did not err in adding the amount of $6,675.20 to petitioner’s taxable income for the year 1924.

The third and last assignment of error is that respondent erroneously added to taxable income for 1924 the amount of $6,500, “ as representing alleged excessive deductions claimed by the petitioner for the cost of developing patents which became worthless in 1924 ” and for which he was not compensated for by insurance or otherwise.

The contention that the expenses incurred in 1924 in developing petitioner’s formula are deductible because of the worthlessness of such formula during that year is not tenable, as the evidence shows the formula was still good and income or royalty was realized therefrom, pursuant to petitioner’s contract with the Boyce & Veeder Co. We are also of the opinion and hold that such expenses disallowed as a deductible loss in 1924 are not deductible as ordinary and necessary expenses in that year, having been incurred for the purpose of testing petitioner’s formula, to prove its efficiency and usefulness, and being in the nature of capital expenditures.

Judgment mil he entered under Rule 50.


author: Muedock:

text:
    Manchester Board & Paper Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 54423.
    Promulgated October 12, 1933.

      Henry 0. Riely, Esq., for the petitioner.

      James K. Polk, Esq., for the respondent.
   OPINION.

Muedock:

The question in this case is to determine whether all, some part, or none of the $58,000 received by the petitioner in 1928 for the cancellation of its lease, was gain or profit and properly a part of gross income subject to tax. The Commissioner claims that the entire amount was gain, since there was no basis to be subtracted from the amount received. The petitioner contends that it is entitled to deduct from the proceeds as a basis the March 1, 1913, value of its rights under the renewal of the lease then in effect. There was opinion evidence of value on March 1, 1913, introduced by both parties and we know of the sale in 1910. But we agree with the respondent that that evidence is immaterial in the decision of the case. Consequently, we have made no finding of fact on the question of value.

Section 111 of the Revenue Act of 1928 provides that the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis provided in section 113, and the loss shall be the excess of such basis over the amount realized. The parties agree that this section applies. Section 113 provides that the basis for determining gain or loss from, the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property. It also provides that the basis for property acquired before March .1, 1913, shall be the cost, or fair market value of such property as of March 1, 1913, whichever is greater. The petitioner does not contend that the property for which it received $58,000 had any cost at any time. It argues only for the use of the March 1, 1913, value as a basis. Thus it becomes important to determine whether the property disposed of was acquired before or after March 1, 1918.

The petitioner contends that the lease had a value to it on March 1, 1918, over and above the amount of the annual rental which it was required to pay. We will assume that this was true. It is also true that the lessor could never refuse to renew the lease. However, the evidence does not show the separate value of the renewal privilege nor of the right in the lessee to require the lessor to take and pay for its plant in case a renewal failed because of a demand for an increase in rent. Bonwit Teller & Co. v. Commissioner., 53 Fed. (2d) 381, certiorari denied, 284 U.S. 690. We do not know that these privileges had any value. They gave the lessee no undue advantage over the lessor in dealing for a renewal at an increased rental. They merely tended to* prevent a demand for an excessive rental, not to restrict the lessor to less than a fair rental. Furthermore, the plant value was apparently not great enough to make this provision a very heavy restraint upon the lessor.

We do not agree with the petitioner that the award of the board of arbitration indicates value in the lease as of any other date. In our opinion the value of the lease to the lessee fluctuated, depending upon changing economic conditions and the unexpired portion of the current 15-year period. At times the lease may have been more favorable to the lessor than to the lessee. We are not bound by all of the findings of the board of arbitration, which, we are told by counsel for the petitioner, consisted of three engineers. We do not know what evidence was before that board, what prompted it to find as it did, nor what was the meaning, purpose, or effect of some of its findings. We have been told of the lease and the various renewals and must reach our own conclusions as to the effect of these agreements.

The March 1,1913, value was due principally, if not entirely, to the then excess of present worth of the annual benefits to the lessee over the amount which it had to pay to the lessor. This value resulted from then existing economic conditions which made the rental, as fixed by the renewal agreement then in effect, favorable to the lessee. The value on March 1, 1913, which was due to these causes would have completely disappeared by October 1, 1923, the end of the period covered by the renewal agreement in effect on March 1, 1913, and would have been returned tax-free through annual deductions for exhaustion of the leasehold. Cf. Bonwit Teller & Co. v. Commissioner, supra; 353 Lexington Ave. Corp., 27 B.T.A. 762; sec. 111 (b) (2), Revenue Act of 1928. When the period of 15 years covered by the current renewal agreement had expired, the parties would either let the lease lapse or deal for a new lease. The lessor would be expected to demand what its property was worth as a rental for the next period. Neither the original lease nor the renewal agreement which had just expired would have any money value to either party at that time, so far as this record shows. Any valuable rights or property which the lessee had in the leased premises after October 1, 1923, did not carry over from the prior agreements. If the lessee had refused to renew on October 1, 1923, because of the lessor’s demand for an increase in rent, there would have been a settlement under the agreement then in effect. The lessee would have received nothing for its lease and only the fair value of its plant. But there was a new agreement entered into on that date and the prior agreements became ineffective. This new agreement adopted most of the provisions of the original lease, but it was nevertheless a completely new contract resulting from arm’s length dealing between the parties. The lessor was not under compulsion to lease for any less than a fair rental. If, as the settlement in 1928 may indicate, the petitioner, as lessee, had valuable property rights under the lease after October 1, 1923, that value was an incident of the renewal agreement. It must have been primarily due to an excess of value in the annual privileges of the lessee over the annual rental of $4,000. The value depended upon economic conditions existing at the time as of which it was determined. The value and the rights were also dependent upon and secured to the petitioner by the renewal agreement of October 1, 1923. They could not have been anticipated nor could they have antedated that agreement. We have not been shown that anything which was disposed of by the petitioner in 1928 for the $58,000 was in existence or valuable on March 1, 1913. The renewal cost the petitioner nothing. The $58,000 was clear gain. The petitioner’s property under the renewal agreement had a basis of zero for gain or loss upon sale or disposition.

Decision will ~be entered wider Rule 50.