author: Murdoch :

text:
    Peoples Life Insurance Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 66969, 71744.
    Promulgated November 23, 1934.

      R. 0. Kilpatrick, Esq., for the petitioner.

      Jamies Yeatmam, Esq., for the respondent.
   SUPPLEMENTAL OPINION.

Murdoch :

The Board, on August 31, 1934, promulgated a memorandum opinion in these proceedings in which, inter alia, it cited the decision of the Supreme Court of the United States in Commissioner v. Independent Life Insurance Co., 292 U. S. 371, as authority for the statement that the petitioner “ is not entitled to any deductions for taxes, expenses, or depreciation on its home office building ”, and ordered that decision be entered under Rule 50. The parties have submitted proposed recomputations under Rule 50 which differ only in this respect — that the respondent would compute taxable net income without including any value of rental space in income and without allowing any deductions for real estate taxes, expenses, and depreciation on the petitioner’s home office building, whereas the petitioner would include in gross income the equivalent of the rental value of the space occupied by it in the building and would also take deductions for taxes, expenses, and depreciation on this building. Counsel argued orally and each submitted a memorandum to support his position.

The Board, in its opinion in the case of Independent Life Insurance Co. of America, promulgated on October 4, 1929, and reported in 1-7 B. T. A. 757, held unconstitutional the provision of section 245 (b) of the Revenue Act of 1921 and the same provision in section 245 (b) of the Revenue Act of 1924, requiring the inclusion in taxable income of a life insurance company of the rental value of space which it occupied in its own building. It further held that the taxpayer was entitled to the full deduction for taxes, expenses, and depreciation relating to its building. Section 203 (b) of tbe Bevenue Act of 1928 is like section 245 (b) of the acts above mentioned.

The petitioner, a life insurance company, was the owner and one of the occupants of an office building during the years 1929 and 1930. The rental value of the space occupied, the amount of taxes, expenses, and depreciation have been stipulated. The petitioner filed returns for the years 1929 and 1930 in which it claimed deductions for real estate taxes, expenses, and depreciation, in connection with its building, without including in gross income the rental value of the space which it occupied. Each of these returns was filed after the Board had promulgated its opinion in the Independent Life Insurance Co. case. The Commissioner, in determining the deficiencies for the years in question, allowed the deductions without adjustment for 1929, and for 1930 allowed the deductions but added the rental value of the space occupied by the petitioner to its reported gross income. However, he filed amended answers in these proceedings in April 1934, claiming increased deficiencies on the ground that he had erred in allowing the deductions and alleging, as an alternative, that if the deductions were to be allowed, the rental value of the space should be included in income. The Supreme Court, on May 21,1934, reversed the Sixth Circuit Court of Appeals, which had affirmed the decision of the Board in the Independent Life Insurance Co. case.

The Board, in its memorandum opinion in the present case, merely intended to follow the decision of the Supreme Court in the Independent Life Insurance Co. case. In certain other cases cited by the Commissioner in his memorandum, the Board said in effect that the taxpayer could not have the deductions claimed for taxes, expenses, and depreciation on its home office building because it had failed to include in gross income the rental value of the space occupied by it. The language used by the Board in following the Independent Life Insurance Co. case was unfortunate. However, the attention of the Board was never brought to the question now presented and it did not intend to decide that question in any of the cases referred to. The Independent Life Insurance Co. had not included in its gross income the rental value of the space occupied by it in its home office building, but it claimed deductions for taxes, expenses, and depreciation on that building. The Commissioner did not disallow the deductions, but added to income an amount representing the value of the space occupied by the taxpayer. The Supreme Court held, in effect, that the action of the Commissioner was proper. It did not even intimate that the deductions were to be disallowed because the rental value had not been included in the gross income reported by the taxpayer on its return.

The respondent argues that the question which has arisen under Eule 50 is not properly before the Board because the petitioner did not raise it as an alternative contention. But this argument has nothing whatever to recommend it when the deficiency notices and the respondent’s amended pleadings, above referred to, are taken into consideration. The respondent also argues that the petitioner has made an election which now prevents it from-getting the deductions which it claims. The argument seems to be that at the time the petitioner filed its return two courses were open to it, from which it was required to elect one. It could either report the rental value of its space occupied and claim the deductions, or report no rental value and claim no deductions. Inferentially, at least, the Supreme Court seems to have held in the Independent Life Insurance Co. case that no election is involved. However, it is not necessary to decide whether the statute gave taxpayers an election which would be binding upon them thereafter. The taxpayer now before the Board, like the Independent Life Insurance Co., claimed the deductions on its returns. These returns were filed after the Board had held that the rental space did not have to be included in gross income. Obviously, it has never elected to waive the deductions.

The Commissioner has not advanced any sound argument in support of his recomputation. The Supreme Court in the Independent Life Insurance Co. case, in order to hold that the rental value of the space occupied was not included in income and taxed, said, inter alia:

The company is not required to include in gross any amount to cover rental value of space used by it, but in order that, subject to tbe specified limitation, it may have the advantage of deducting a part of the expenses chargeable to the building, it is permitted to make calculations by means of such an addition. The statute does not prescribe any basis for the apportionment of expenses between space used by the company and that for which it receives rents. The calculation indicated operates as such an apportionment where the rents received are more than four per cent of book value, but less than that amount plus expenses. That, as is clearly shown in the dissenting opinion, supra, p. 473, is the arithmetical equivalent of lessening the deduction by the amount of the so-called rental value. * * *
* * * As shown above, the prescribed calculation, section 245(b), is in substance a diminution or apportionment of expenses to be deducted from gross income under the circumstances specified.

The opinion seems to indicate that section 245 (b) merely prescribes a method of computing a net deduction. The petitioner in the present case is entitled to such a net deduction, that is, it is entitled to the deductions claimed for real estate taxes, expenses, and depreciation on its home office building, but, in order to compute the net benefit which it is entitled to, the rental value of the space occupied by it must be included in its gross income. This is in accordance with the recomputation submitted by it.

Eeviewed by the Board.


source: Caselaw Access Project

author: Trammell :

license: Public Domain

text:
    Jasper Sipes, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 72605.
    Promulgated November 23, 1934.

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

      Willis R. Lansford, Esq., for the respondent.
   OPINION.

Trammell :

This is a proceeding for the redetermination of a deficiency in income tax for the year 1930 in the amount of $7,413.87. Respondent determined the deficiency in part by adding to the petitioner’s gross income the amount of $16,485.77 representing partnership profits included as income of the petitioner’s wife on a separate return filed by her. The original petition raised nine issues, all of which were abandoned at the hearing except the first issue, namely, whether petitioner’s wife, during the taxable year, was a member of the partnership known as the Jasper Sipes Book Co. and entitled to 22y2 percent of the net earnings of that company.

The petitioner is an individual, residing in Oklahoma City, Oklahoma. Since 1914 the petitioner and one W. T. Russell have been engaged as partners in the school book depository business in Oklahoma under the name of Jasper Sipes Book Co. The business consisted of the handling and distribution of school books for the pubfic schools of the State of Oklahoma as consignee of certain publishers of school books having contracts with the Oklahoma Text Book Commission to supply them for said schools. The business was substantially a wholesale jobbing and marketing of merchandise handled on consignment.

An essential feature of the business was contracts with publishing houses for handling and distributing books on consignment. The petitioner was the member of the partnership who negotiated these contracts, some of which were executed in the name of the partnership and some by petitioner personally, but all were for the benefit of the partnership and were used in its business. Bonds were required by the publishing houses, and these generally were executed in the name of the partnership, and also by the petitioner individually as surety.

Russell was in charge of the office at Oklahoma City and of the receiving, handling, and forwarding of merchandise, the keeping of the books, the correspondence, collection of accounts, and the making of remittances. Petitioner’s services were mainly outside of the office work and management of the business.

During 1929 it was agreed between the petitioner and his wife that she should have an interest of 22% percent in the partnership, to come out of petitioner’s interest, as a gift to her effective January 1, 1930. This was also agreed to by the other partner, Bussell, and she became a partner to the extent above stated. At the time petitioner and his wife discussed the matter of her entering the partnership, they also discussed giving a percentage of the partnership earnings to their children.

Petitioner’s wife did not draw any of her share of the partnership profits during 1930, but received the entire amount of her distributable share during 1931 in three checks paid to her by the partnership. She maintained a bank account separate from that of her husband, and deposited these checks in her own account.

On December 31, 1929, petitioner addressed a letter to Bussell, reading as follows:

I am desirous of taking the members of my family into partnership with me in the business known as the Jasper Sipes Book Co. Also it has become necessary to make use in the book business of part time service of the stockholders of the Jasper Sipes Co. Therefore, beginning with the calendar year 1930, you will please distribute the earnings from the sale of school books as follows:
45% to the above parties, divided as follows:
To Mrs. Jasper Sipes-- 22% %
To my son, Glen J. Sipes- 7%%
To my daughter, Mrs. Curtis Wright- 7%%
To stockholders, Jasper Sipes Go- 7%%
45
55% will then be divided between us:
18%_ To W. T. Russell_
37%_55 To Jasper Sipes-
100
Please make your accounting accordingly in the distribution of earnings from the sale of school books until further notice.

Mrs. Sipes reported the amount of her distributable share of the partnership net income in her separate return for the taxable year. Bespondent' added that amount to petitioner’s income in computing the deficiency, holding that petitioner did not give his wife an interest in the partnership, but only a percentage of the partnership earnings to come out of his part, and that therefore the entire amount represented his distributable share of the partnership income, taxable to him.

The question thus presented is whether or not petitioner gave his wife an interest in the partnership known as the Jasper Sipes Book Co. under such circumstances as to make her a member of the partnership at the beginning of the taxable year.

The elements essential to the creation of a partnership have been many times the subject of judicial consideration, and many definitions of the term have been laid down. The Compiled Statutes of Oklahoma in section 8103 define a partnership as the “ association of two or more persons for the purpose of carrying on business together, and dividing its profits between them.” The respondent in his brief quotes the following definition of a partnership from the opinion of the Court in Meehan v. Valentine, 145 U. S. 611:

The requisites of a partnership are that the parties must have joined together to carry on a trade or adventure for their common benefit, each contributing property or services, and having a community of interest in the profits. Ward v. Thompson, 22 How. 330, 334.

To constitute a partnership under the quoted definitions, there must be (1) an association or joining together of the parties to carry on a business enterprise, which requires of course express or implied consent to the arrangement by all the parties who are to be partners; (2) a contribution by each of property or services; and (3) a community of interest in the profits. An express agreement to share losses is not essential. Section 8108 of the Oklahoma Statutes provides that “ an agreement to divide the profits of a business implies an agreement for a corresponding division of its losses, unless it is otherwise expressly stipulated.” This is also the rule in the absence of statutory provision. N. H. Hazlewood, 29 B. T. A. 595.

The intention of the parties and their agreement to form a partnership are affirmatively established by the evidence in the instant case.

In addition to the services rendered, petitioner’s wife contributed to the new partnership property consisting of the 22y2 percent interest in the assets of the old partnership, which was the subject matter of the gift to her by her husband.

In the notice of deficiency, respondent bases his action in holding that the agreement between petitioner and his wife did not make her a member of the partnership on authority of the Supreme Court’s decision in Burnet v. Leininger, 285 U. S. 136 (also cited on brief), where it was held that the agreement between Leininger and his wife did not make her a member of the partnership for the reason, among others, that such result could not be achieved without the consent of the other partner or partners.

In Rose v. Commissioner, 65 Fed. (2d) 616, the controlling facts are similar to the present proceeding, and in distinguishing the Leininger case, the court said:

In tbe Levninper case there was an agreement between husband and wife that the latter was to be an equal partner with her husband in his interest in a certain partnership. The court held that the agreement did not make the wife a member of the firm because there was no consent by the other partners to the wife’s admission to the partnership, and no attempt to change the ownership of the partnership assets or control of the partnership enterprise; because the firm’s income tax returns failed to show the wife a partner, because the husband’s undivided partnership interest remained on the firm’s books; and because all profits went to the husband and no cheeks were drawn on the firm to the wife. None of these tests applies to the situation here involved. While no express consent to the transfer of partnership interest was given by decedent’s copartners, there was clearly acquiescence by them, with full knowledge of the facts, in the reorganization of the firm.

In tbe case at bar the other partners expressly consented to the admission of petitioner’s wife to the partnership, as well as to the transfer of an interest in the partnership to her, and a corresponding change was made in the ownership and control of the enterprise; the partnership’s return showed Mrs. Sipes as a member thereof, and her distributable share of the net income was paid directly to her by the partnership. The Leini/rtger decision, we think, does not support respondent’s position.

Respondent’s action on this issue is disapproved.

Reviewed by the Board.

Judgment will be entered under Rule 50.


author: Black :

text:
    Arthur Curtiss James, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 18395.
    Promulgated November 23, 1934.

      Robert E. Goulson, Esq., Osear W. Underwood, Jr., Esq., and H. G. Kilpatrick, Esq., for the petitioner.

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

Black :

In his'determination of the deficiency, respondent allowed petitioner a deduction of $618,161.24 as contributions made to religious, charitable, and educational institutions. Petitioner in his return had claimed a deduction of $703,442.37 for this purpose. At the hearing, petitioner announced his acceptance of respondent’s adjustment of this item. The agreement of the parties as to this item will be observed in a determination under Eule 50.

The same situation prevails as to the $302,750 par value Liberty bonds distributed to petitioner as a dividend January 2,1919. Petitioner admits that this was a taxable distribution to the extent that earnings were available for its distribution, but insists that the fair market value of the bonds at the date of distribution rather than their par value should govern in determining the amount of dividend received. Eespondent concedes that the fair market value of the bonds should govern rather than their par value, as used in his deficiency notice, and effect will be given to this concession in a determination under Eule 50.

We summarize below the points of law urged by the petitioner in this proceeding':

(1) The findings of fact and the determination of the Board and the Circuit Court of Appeals in the 1918 case are conclusive upon the parties hereto as to earnings and profits of the Phelps Dodge Corporation, and its distributions therefrom, during the period from February 28, 1913, to January 1, 1919, and the doctrine of estoppel by judgment applies thereto.

But if this Board shall hold to the contrary on this point, nevertheless—

(2) Such findings of fact and determination of the Board and the Circuit Court of Appeals in the 1918 case make a prima facie case as to the earnings and profits of the Phelps Dodge Corporation and its distributions therefrom during the period from February 28,1913, to January 1,1919, and that prima facie showing is not impaired by the proof introduced by the respondent at the hearing, as to either—

(a) The failure on the part of the Government’s accountant, in preparing data used by counsel as a basis for a stipulation filed in the 1918 case, to compute such prior earnings and profits under the so-called proration rule; or

(b) The failure of the Government’s accountant, in preparing such data, to include an amount representing the undistributed earnings and profits of Phelps Dodge & Co., Inc., as shown by its books of account, at the time of its dissolution, March 31, .1917; or

(c) The failure of the Government’s accountant, in preparing such data, to include an amount representing the undistributed earnings and profits of the Detroit Copper Mining Co. of" Arizona, Burro Mountain Copper Co., and Stag Canon Fuel Co. at the time of the transfer of their assets to the Phelps Dodge Corporation on or about March 20, 1917.

(1) From a reading of the foregoing enumeration of petitioner’s contentions, it will be seen that the first issue that we have to decide is whether or not the findings of fact and the determination of the Board in the prior proceedings of Arthur Curtiss James v. Commissioner, for the year 1918, reported at 13 B. T. A. 764, affirmed by the United States Circuit Court of Appeals for the Second Circuit (reported at 49 Fed. (2d) 707), are conclusive upon the parties hereto as to earnings and profits of the Phelps Dodge Corporation and its distributions therefrom, during the period from February 28, 1913, to January 1, 1919, and the doctrine of estoppel by judgment applies thereto.

At the time of the hearing of this proceeding, the case of Tait v. Western Maryland Railway Co., 289 U. S. 620, had not been decided and the presiding Member ruled from the bench as follows:

There can be no question, of course, that a deficiency for 1919 is a different cause of action from a deficiency for 1918; and, therefore, unless the issue was actually litigated between the same parties in the former hearing, it would not be precluded. But, at this time, I am not going to take, the responsibility of ruling from the bench that this former hearing is res judicata as to the amount available for dividends from earnings after February 28, 1913, and prior to January 1, 1918. But the record of the prior proceeding will be admitted and then, if the respondent has other evidence, it will be received, with the right of the Board to hold that the record in the former ease is res judicata.

At this point it would be well to emphasize that the only contro- - versy in the instant case between petitioner and respondent is as to the amount of earnings accumulated since February 28, 1913, and on January 1, 1918, available for distribution by the Phelps Dodge Corporation. There is no dispute by the parties as to the earnings of the corporation for the years 1918 and 1919.

At page 767 of our report in Arthur Curtiss James, supra, affirmed in Commissioner v. James, supra, we found:

The earnings and profits accumulated since February 28, 1913, and on hand January 1, 1918, of each of the following corporations, were as follows: Phelps Dodge Corporation $838,503.14 * * *.

The above finding was based upon a stipulation of facts filed by the parties in the prior proceeding. In that proceeding respondent was contending that the earnings and profits of the subsidiaries of Phelps Dodge Corporation not paid over to the parent corporation were nevertheless available for distribution by the parent corporation within the contemplations of section 201 of the Revenue Act of 1918, and should, therefore, be added to the amount of $838,503.14, for the purpose of determining the source of the distributions there in question. That contention was decided adversely to the respondent.

The respondent now contends that he erred in the prior proceeding in stipulating the earnings and profits as being $838,508.14; that the correct amount should have been $4,549,554.62; and that this error was due (1) in part to his failure to include as a part of the earnings of the Phelps Dodge Corporation the earnings of four other corporations whose assets the Phelps Dodge Corporation acquired in March 1917, viz., Phelps Dodge & Co., Inc., Burro Mountain Copper Co., Stag Canon Fuel Co., and Detroit Copper Mining Co.; and (2) in part to the theory of prorating earnings in the years prior to the taxable year.

In our opinion the question as to the amount of earnings or profits of the Phelps Dodge Corporation accumulated since February 28, 1913, on hand and available for dividends on January 1, 1918, is no longer a question that is open to determination between respondent and this petitioner. The question was conclusively established in the prior proceeding. Cromwell v. County of Sac, 94 U. S. 351; Southern Pacific Railroad Co. v. United States, 168 U. S. 1, 48; Tait v. Western Maryland Railway Co., supra; Donald v. J. J. White Lumber Co., 68 Fed. (2d) 441.

In the latter case, the court succinctly stated the rule which we think governs here, in the following language:

A prior judgment is conclusive evidence as to all matters in issue and thereby determined, in a subsequent suit upon a different cause of action between the same parties or their privies.

Cf. Portage Silica Co., 29 B. T. A. 881; Wobber Bros., 31 B. T. A. 133; Sand Springs Railway Co., 31 B. T. A. 392; Second National Bank of Saginaw v. Woodworth, 66 Fed. (2d) 170; Edwin J. Marshall, 29 B. T. A. 1075.

In determining what portion of the distributions received by petitioner in 1919 was distributed from “ earnings or profits accumulated since February 28, 1913 ” and what portion was not so distributed, the computation should start with earnings and profits accumulated since February 28, 1913, on hand and available for dividends on January 1, 1918, of $838,503.14. The earnings for 1918 and 1919 are not in dispute. Having decided in favor of petitioner on the issue of estoppel by judgment, it will be unnecessary to-discuss his alternative contentions.

Beviewed by the Board.

Decision will he entered under Rule 50.


author: MoeRis :

text:
    Spang, Chalfant & Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 58790.
    Promulgated November 23, 1934.

      Edward H. Green, Esq., and Norris Da/rrell, Esq., for the petitioner.

      Won. E. Davis, Esq., for the respondent.
   OPINION.

MoeRis :

The respondent having determined a deficiency in income tax of $6,718.91 for the year 1928, the petitioner brings this proceeding for the redetermination thereof, alleging error in the computation of the amount of loss sustained by the petitioner upon the disposal of assets acquired by it from the Standard Seamless Tube Co., through his refusal to allow the petitioner a basis of cost in excess of the cost to the Standard Seamless Tube Co. and the failure of the respondent to allow full depreciation upon property acquired from that company.

The petitioner is and at all times herein referred to was a corporation incorporated under the laws of the State of Pennsylvania, engaged in the business of manufacturing steel tubes, pipes, and other articles. It duly filed, on Form 1120, a consolidated Federal income tax return for the calendar year 1928 on behalf of itself and its affiliated corporations.

On January 13, 1928, the petitioner entered into a written agreement with the owners of all of the outstanding capital stock of the Standard Seamless Tube Co. for the acquisition of their stock in consideration of the payment of $8,500,000 cash, $3,000,000 of its bonds, carrying interest from January 1, 1928, $2,000,000 par value of preferred stock, carrying dividends from January 1, 1928, and 50,000 shares of its common stock. At the time of the signing of the agreement, the petitioner paid to the parties of the second part to said contract the sum of $2,000,000 in accordance with its terms.

On February 27 and 28, 1928, the agreement was closed. On February 27,1928, there was transferred to petitioner all of the stock of the Standard Seamless Tube Co. On the same day, immediately following said transfer, the Standard Seamless Tube Co. conveyed and transferred all of its assets to petitioner, and the deed of conveyance was duly recorded on that day in Allegheny County and Beaver County, Pennsylvania. On the same day, petitioner executed and recorded a mortgage on the property theretofore owned by it and on the property so conveyed to it by the Standard Seamless Tube Co. to secure an issue of first mortgage 5 percent bonds as provided in said agreement. On the following day, to wit, on February 28, 1928, petitioner delivered to the parties to the agreement the consideration payable by it thereunder, to wit:

Cash ($8,500,000 less adjustments and down payment of
$2,000,000)_$6,396,058.40
First mortgage 5 percent bonds, principal amount-$3,190, 000. 00
Preferred stock (20,000 shares of the par value of $100 each)
Common stock (50,000 shares without par value)

Upon the completion of the foregoing transaction, petitioner had outstanding a total of 117,500 shares of preferred stock of the par value of $100 each, and a total of 750,000 shares of common stock without par value. Immediately after the foregoing transaction, the stockholders of the Standard Seamless Tube Co. did not own or control 80 percent of the stock of the petitioner.

During the year 1928 petitioner disposed of certain of the physical property which it had acquired from the Standard Seamless Tube Co. under the circumstances set forth. Petitioner in its income tax return for the year 1928 computed a loss on such sale, taking as- a basis the cost to it of said assets. Respondent has reduced the loss by the sum of $41,461.81, on the ground that in determining the loss to petitioner on said sale it was required to take the cost of the assets to the Standard Seamless Tube Co.

In addition to the foregoing stipulated facts, it was further agreed between the parties as follows:

If respondent is correct in requiring petitioner to use the cost basis of the assets to the Standard Seamless Tube Co. for determining the loss from the sale of said assets by petitioner in 1928, then the adjustment of $41,461.81 is correct and shall stand; otherwise said adjustment is erroneous, and petitioner is entitled to have its taxable income corrected by the elimination of the adjustment by the respondent and its tax redetermined under Rule 50.

Since petitioner filed its income tax return for 1928, respondent has changed the method whereby petitioner determines its annual deduction for amortization of bond discount and expense. The new method was communicated to petitioner early in the year 1933, and petitioner has accepted that new method. In accordance therewith, petitioner is entitled to an additional deduction for 1928 on account of amortization of bond discount and expense and discount on bonds purchased, in the sum of $13,692.93; and the recomputation of petitioner’s tax for 1928 as a result thereof shall be made under Rule 50. The petition shall be deemed to be amended to set forth the item contained in this paragraph.

The question for determination is whether or not the cost to this petitioner, under section 113 (a) of the Revenue Act of 1928, or the basis to which the Standard Seamless Tube Co. would have been entitled under subdivision (7) of that section, should be used in the determination of gain or loss upon the sale of certain of the physical assets which it acquired from that company.

The respondent’s position is that the transfer of the assets to the petitioner constituted the acquisition by one corporation of sub-santially all the properties of another and therefore a reorganization within the meaning of section 112(i)(l)(A) of the Revenue Act of 1928; that immediately before the transfer petitioner acquired 100 percent of the capital stock of the Standard Seamless Tube Co. and immediately thereafter an interest in such property of 100 percent remained in the petitioner, and therefore the basis for gain or loss is determined under section 113 (a) (7) of said act.

The applicable provisions of the Revenue Act of 1928 read as follows:

Seo. 113. (a) Property acquired after February 88, 1913. — The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that—
*******
(7) Transfers to corporation where control of property remains in same persons. — If the property was acquired after December 31, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 80 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor * * *.

As we view the transaction, it is unnecessary to determine whether a statutory reorganization was effected. The additional limitation that a control in the transferred property of 80 per centum or more remain in the same persons or any of them is also necessary in order that the basis shall be the same as in the hands of the transferor. The respondent meets that requirement by considering certain phases of the transaction separately rather than viewing it as a whole. The purpose of the transaction was that the petitioner might acquire the assets of the Standard Seamless Tube Co. The plan was perfected to accomplish that result. The assets were actually transferred to the petitioner and a mortgage recorded thereon to secure a bond issue before the total consideration was paid for the stock. To treat two steps in this transaction as two separate transactions is unwarranted. Prairie Oil & Gas Co. v. Hotter, 66 Fed. (2d) 309; Carter Publications, Inc., 28 B. T. A. 160. After the transfer of the assets to the petitioner the stockholders of the transferor did not own or control 80 percent of petitioner’s stock. The exception therefore found in section 113 (a) (7) to the use of cost as a basis does not apply and the respondent was in error in that determination. Depreciation should also be computed upon the basis of cost. Sec. 114 (a), Revenue Act of 1928.

Judgment will he entered under Bule 50.


author: Matthews:

text:
    Frances Marshall Canfield, George Dana Canfield, Robert W. Canfield and Franklin O. Canfield, Executors of the Estate of George F. Canfield, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 68415.
    Promulgated November 23, 1934.

      Barham R. Gary, Esq., for the petitioners.

      E. B. Linton, Esq., for the respondent.
   OPINION.

Matthews:

This proceeding is for the redetermination of a deficiency in income tax for the year 1930 in the amount of $929.52. It is alleged in the petition that the respondent erred in adding to the petitioner’s income for the taxable year interest in the amount of $750 and dividends in the amount of $4,770. A minor adjustment in the income received from a partnership is not contested by the petitioner.

On suggestion of death of the petitioner, George F. Canfield, and notice of the appointment of executors, an appropriate order was entered substituting as petitioners in the place and stead of George F. Canfield, deceased, the above named persons as executors of the decedent’s estate.

The facts were stipulated by the parties. George F. Canfield resided in New York City and was an attorney, a member of the firm of Satterlee & Canfield, with offices at 49 Wall Street. On June 26, 1930, he executed the following instrument:

Know All Men ev These Pbesents that I, George F. Canfield, hereby declare that I have set apart the securities enumerated in the list hereto attached and signed by me, and that I hold the said securities upon trust to pay out of the income therefrom, or from the proceeds thereof in whatever form invested, including all dividends and interest received after the date of this instrument and prior to the termination of the trust, as follows:
To my son, Robert W. Canfield, during the calendar year
1930_$2, 000
On January 1, 1931- $300
To my son, Franklin O. Canfield, during the calendar year
1930_ 2, 000
On January 1, 1931- 300
To my daughter, Mary M. Canfield, during the calendar year
1930_ 1,520
On January 1, 1931_ 285
$5,520 $885
In the event that I sell any of these investments, I may invest the money in any securities as I may deem best, without reg'ard to any rule of law with respect to the investment of trust funds, and I shall not be accountable for anything but wilful wrongdoing on my part.
This trust shall terminate on the 3rd day of January, 1931, or, as to any one of the above-named beneficiaries, upon his or her death prior thereto.

During the year 1980, George F. Canfield received from the securities enumerated in the list attached to the above quoted instrument interest in the sum of $750 and dividends in the sum of $4,770, and prior to December 31, 1930, he distributed these amounts to his three children, Robert W. Canfield, Franklin O. Canfield, and Mary M. Canfield, who were at that time 23, 20, and 17 years of age, respectively. Each of the children filed individual income tax returns for the year 1930 and reported as income only the interest and dividends thus received from the father, each return disclosing no tax liability. George F. Canfield did not include these amounts in his income tax return for the year 1930. Upon audit of the petitioner’s income tax return for the taxable year the respondent added these items to the income reported.

In the notice of deficiency the respondent stated that this addition to income represented the income from a trust account which was set up for the taxpayer’s three children and that such income was treated as income to the taxpayer as maker of the trust for the reason .that “ said trust is not an irrevocable trust but terminates one year after date, and all power over said trust is retained by the donor of the trust.”

• The trust instrument quoted above created a valid trust. Under the terms thereof the decedent had no power to revest in himself title to any part of the corpus of the trust at any time prior to January 3, 1931, on which date the trust terminated. Inasmuch as the trust instrument contained no power of revocation, and the trust did not ter-mínate until after the expiration of the taxable year involved herein, the trust was irrevocable within the taxable year.

Section 166 of the Revenue Act of 1928, which is identical with the provisions of section 219 (g) of the Revenue Act of 1926, reads as follows:

Where the grantor of a trust has, at any time during the taxable year, either alone or in conjunction with any person not a beneficiary of the trust, the power to revest in himself title to any part of the corpus of the trust, then the income of such part of the trust for such taxable year shall be included in computing the net income of the grantor.

In Lewis v. White, 56 Fed. (2d) 390, appeal dismissed October 21, 1932 (C. C. A., 1st Cir.), the District Court for the District of Massachusetts reviewed the legislative history of this provision of the statute and said:

These proceedings indicate that the words “ at any time during the taxable year ” were inserted for a definite purpose. They limited the application of the statute to those cases where the grantor had reserved in the trust agreement an unconditional power by the exercise of which during any taxable year he could control or appropriate the income derived from the trust during that year and which was payable to another. According to the section, as originally proposed, the mere reservation of the power of revocation was sufficient to render the income from the trust taxable to the grantor, and it was deemed wise to add provisions excepting from the operation of the law income of a trust as to which the grantor’s power of revocation was subject to a condition that had not happened. It is this power to reach and apply the income at the grantor’s option that renders it subject to the tax, regardless of whether or not he exercised the power. It was the reservation of this power, control, or “ command over the property taxed ” that was advanced in Corliss v. Bowers, supra, as adequate grounds upon which to base the constitutionality of section 219 (g).
The scope of the statute, as the Commissioner construed it, would be as wide as the scope of the section originally proposed by the House. Under such a construction it would make no difference when the power of revocation could be exercised, whether during the taxable year or prior to the taxable year; if the power of revocation is there, it fe sufficient. To accept this interpretation of the act is to impart no significance whatever to the words of limitation introduced into the law by the Senate amendment.

In that case the trust instrument could be revoked on or after January 1, in any year “ only upon condition that and provided the Trustor shall in the preceding calendar year have notified in writing the trustees of his intention so to revoke, alter and/or amend this instrument.” The court held that the grantor could not during the taxable year “ by any amendment or revocation, revest in himself title to any part of the corpus of the trust ” and the income thereof was not taxable to him. The opposite conclusion was reached in the case of Elida B. Langley, 24 B. T. A. 1156, although the facts are not distinguishable, but this latter case was expressly overruled by the Board in Mabel A. Ashforth et al., Executors, 26 B. T. A. 1188, and was reversed by the Circuit Court of Appeals for the Second Circuit, 61 Fed. (2d) 796.

Although the purpose of section 166 of the Revenue Act of 1928 is to prevent a taxpayer from evading the surtax rates by distributing his income among his family or otherwise attempting to have it taxable to distributees, Langley v. Commissioner, supra, the device employed by the petitioner herein enabled him to keep outside of the taxing statute. Congress has the power to prevent this practice, but, as was aptly said in Lewis v. White, supra:

If Congress, in adopting the language in which section 166 is couched, left the door open for the evasion of surtaxes, the door may not be closed by departmental or judicial construction; nor does the fact that such possibility of evasion exists operate to extend the taxing powers of Congress to the point where they can tax one person on the income of another when that income is wholly and completely acquired and beyond any power or right in the taxpayer to reach or control its disposition in any manner whatsoever.

In this connection it may be noted that Congress has closed the door for the evasion of surtaxes in this particular manner by providing, in section 166 of the Kevenue Act of 1934, that if at any time (instead of at any time during the taxable year) the grantor has the power to revest in himself title to any part of the corpus of the trust, the income thereof shall be included in computing the net income of the grantor.

Upon authority of the decisions herein discussed we hold that the. income of the trust here involved is not taxable to the grantor.

Reviewed by the Board.

Judgment will be entered under Rule 50.

Van Fossan, Goodeich, and Adams dissent.


author: Arundell :

text:
    Roy J. O’Neil and Susan H. Burns, Administrators of the Estate of M. J. O’Neil, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 71706.
    Promulgated November 23, 1934.

      Baldwin Schroeder, Esq., for the petitioners.

      E. L. Corbin, Esq., and J. L. Deveney, Esq., for the respondent.
   OPINION.

Arundell :

The respondent has determined a deficiency in income tax for the period June 10, to December 31, 1931, in the amount of $2,828.52. The greater part of the deficiency results from the dis-allowance of a claimed deduction for real estate taxes paid, and this disallowance is the only matter in controversy. The facts were stipulated.

M. J. O’Neil died on June 10, 1931, a resident of Minnesota, and owning real estate in the state. Under Minnesota statutes there were accrued against his real estate, on the first Monday in January 1931, taxes for the calendar year 1930 in the amount of $47,216.60. Under Minnesota statutes such taxes were payable, without penalty for delinquency, in two installments — one half before June 1, 1931, and the other half before November 1, 1931. Decedent paid one half of the taxes, $23,608.30, on May 1, 1931. Deduction for the remaining one half was claimed and allowed in determining the value of the estate for Federal estate tax purposes.

The remaining one half of the real estate taxes, $23,608.30, was paid by petitioners between June 10 and November 1, 1931. A deduction for the taxes paid by the decedent was claimed in an income tax return filed for the period January 1 to June 10, 1931, and a deduction for the taxes paid by petitioners was claimed in an income tax return filed for the period June 11 to December 31,1931. Both returns were made on the cash receipts and disbursements basis.

On the facts above outlined we are of the opinion that the taxes paid in 1931 after the death of the decedent may not be deducted from gross income of the estate. Under the Minnesota statutes real property subject to taxation is listed and assessed every even numbered year with reference to its value on May 1 (sec. 1984, Mason’s Minnesota Statutes), and taxes assessed on real property are a lien thereon from May 1 in the year in which they are levied until paid. Sec. 2191. Taxes voted by the legislature and the counties, cities, and other subdivisions of the state are thereafter certified to the several county auditors, who calculate and fix the tax rates and are required to deliver the tax lists to the county treasurers on or before the first Monday in January following the listing of the property. Sec. 2074. Upon delivery of the lists to the county treasurer it becomes his duty to collect the taxes listed, which become “ due on the first Monday in January after assessment.” Hoyt v. Chapin, 85 Minn. 524; 89 N. Y. 850. Under section 2104 the taxes may be paid in two installments, one prior to June 1 and the other prior to November 1, without penalty for delinquency.

There have been several cases involving the question of the date on which property taxes accrued under Minnesota statutes. In Cloquet Co-operative Society, 21 B. T. A. 744, and Leamington Hotel Co., 26 B. T. A. 1004, it was held that for Federal income tax purposes the tax accrued on May 1 of the year of levy. To the same effect is G. C. M. 7285, C. B. VIII-2, p. 197. In Thompson v. United States, 8 Fed. (2d) 175, an estate tax case, the decedent died on May 1, 1919, and it was held that taxes on the land for 1918 and also the 1919 taxes were deductible from gross estate. The 1919 taxes, it was held, “ became a lien against the estate as of May 1, 1919, and as such were a claim against the estate of the decedent on May 1, 1919.”

Applying the above cited statutes and cases to the facts here, it appears that the taxes levied against decedent’s property for 1930 became a lien thereon on May 1, 1930, and became due on the first Monday in January 1931. Whether we take the view that they accrued when the lien attached or when they became due is immaterial, for both dates are prior to the date of death of decedent. Clearly, on one of those dates all events had occurred which fixed the amount of the tax and determined the liability to pay it, United States v. Anderson, 269 U. S. 422, hence the amount was a claim against the estate. Thompson v. United States, supra. Claims against the estate are deductible from the corpus and not from income of the estate. Cf. John M. Brown, Executor, 11 B. T. A. 1203, holding that salary owing to decedent’s employee for services rendered to the decedent, and paid by the executor, was not a proper charge against income. To allow claims against the estate as deductions from corpus and again from income would amount to a double deduction. “In the absence of a provision of the Act definitely requiring it, a purpose so opposed to precedent and equality of treatment of taxpayers will not be attributed to lawmakers.” Ilfeld Co. v. Hernandez, 292 U. S. 62.

Some argument is made that under the Minnesota statute taxes on realty are not a personal liability but are merely a claim against the land. We fail to see wherein this is decisive of the question. Even if the taxes were not a personal obligation, the owner of the land was bound to discharge it if he wanted to l*eep title to the land. If the contention made is sound it would seem all the more clear that the liability was one which reduced the corpus of the estate rather than income of the administrators, inasmuch as the land formed part of the estate.

Decision will be entered for the respondent.