text:
    American Sulphur Royalty Company of Texas, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 76615.
    Promulgated April 24, 1936.

      R. G. FuTbright, Esq., for the petitioner.

      L. W. Greason, Esq., for the respondent.
   OPINION.

Seawell:

Respondent’s determination of the depletion sustained in 1930 and 1931 by petitioner is reached by the following computation on the agreed facts:

Pair market value of sulphur reserves, March 1, 1913_$2, 000,000. 00 Less:
Total depletion deducted and allowed prior to January 1, 1930_ 1, 939, 834. 83
Value of sulphur reserves remaining for depletion at January 1, 1930_ $60,165.17
Total estimated recoverable tonnage at March 1, 1913- 5, 000, 000
Less: Production to January 1, 1930_ 3, 841, 534
Number of tons remaining in reserve at January 1, 1930_ 1,158, 466
Unit value for depletion: $60,165.17-⅛,158,466=_ $0,051
Tons produced and sold in 1930_ 242, 280
Tons produced and sold in 1931_ 187,045
Depletion sustained in 1930 (242,280X$0.051)_ $12,356.28
Depletion sustained in 1931 (187,045 X $0.051)_ 9,539.30

Petitioner objects to this result reached by respondent in the following language in his reply brief:

The step at which petitioner and respondent are in disagreement is whether the “Total depletion deducted and allowed prior to January 1, 1930,” as stated by respondent (i. e. the total depletion allowed by the Commissioner prior to January 1, 1930, as stated in the stipulation) is to be deducted from the March 1, 1913, value of the royalties, or whether the “depletion * * * sustained, whether legally allowable or not” in the sum of $1,536,613.60 is to be deducted in determining “the amount remaining in any year returnable through depletion.”

The main issue, therefore, is whether $1,536,613.60 or $1,939,834.83 should be used in ascertaining the capital remaining on January 1, 1930, to be depleted. Petitioner says and contends that as of March 1, 1913, the estimated depletable sulphur content of the mine was 5,000,000 tons; that the fair market value thereof was $2,000,000 and, therefore, the unit rate per ton for depletion was 40 cents; that 8,841,534 tons were mined; and that hence the depletion sustained by it calculated at the 40-cent unit rate was $1,536,613.60, and not $1,939,834.83 as contended by respondent.

If this contention of petitioner is correct, there would seem to be nothing to prevent it, under fortuitous circumstances, from receiving deductions for depletion far in excess of the value of its capital asset, the royalty interest in the sulphur mine. This we do not think was intended to be allowed by the statutes or regulations or by both combined. During the years 1913, 1914, and 1915 depletion deduction was limited to 5 percent of the gross value, at the mine, of the output of the mine for the taxable year. The word “depletion”, however, was not used in the applicable statute for those years. It was first used in the Revenue Act of 1916, which provided for “a reasonable allowance for depletion * * * not to exceed the market value, in the mine, of the product thereof * * * mined and sold during the taxable year.” In subsequent statutes a “reasonable allowance for depletion” is provided for. In all cases the “reasonable allowance” is to be made under rules and regulations approved by the Secretary of the Treasury.

Prior to the Revenue Act of 1916 this subject was not without confusion. See Stratton's Independence v. Howbert, 231 U. S. 399; United States v. Biwabik & Mining Co., 247 U. S. 116. Thereafter, under the rules and regulations of the Commissioner, it has been well understood that the basic concept and purpose in both depletion and depreciation is the avoidance of tax on capital.

The regulations following are pertinent.

Article 201 of Regulations 45, under the 1918 Act, provides in part:

The essence of these provisions of the statute [secs. 214 (a) (10) and 234 (a) (9) permitting depletion deductions] is that the owner of mineral deposits ⅜ ⅜ ⅜ shall within the limitations prescribed, secure through an aggregate of annual depletion and depreciation deductions the return of either (a) his capital invested in the property, or (b) the value of his property on the basic date, ⅜ * *.

By article 228 of Regulations 74 it is provided:

No revaluation of a property whose value as of the basic date has been determined and approved will be made or allowed during the continuance of the ownership under which the value was so determined and approved.

Article 229 of Regulations 74 (under tlie 1928 Act) provides:

Every taxpayer claiming a deduction for depletion of mines for a given year will be required to estimate or determine * * * the total units (tons * * *) of mineral products reasonably known, or on good evidence believed to have existed in the ground on the basic date, according to the method current in the industry and in the light of the most accurate and reliable information obtainable. ⅜ ⅜ *
* * * * * ⅞: *
When information subsequently obtained clearly shows the estimate to have been materially erroneous, it may be revised with the approval of the Commissioner.

In the case of Kehota Mining Co. v. Lewellyn, 28 Fed. (2d) 995; aff'd., 30 Fed. (2d) 817; certiorari denied, 279 U. S. 864, the court construed article 208 of Regulations 45 in practical effect the same as article 229 of Regulations 74. The tonnage in a coal mine of the taxpayer in that case had been estimated in 1916, and the estimate revised in 1922 when it was discovered the tonnage was less than estimated in 1916 and insufficient for the depletion allowances to secure the return of the taxpayer’s capital. The court said:

Under the language of this regulation, it is perfectly plain that the new estimate is only to be applied to “the capital remaining to be recovered.” * * *
The taxpayer is entitled to recover, by way of depletion, the cost of his property. A part of this cost has already been allowed to him in a computation based on the estimated quantity of mineral products in the property. On the making of a new or corrected estimate, thereafter the annual depletion allowance will be computed on the basis of the new estimate and allowed to the taxpayer, until the entire cost of the property has been recovered by way of depletion allowances. There can be no misunderstanding of the language of the regulation. The new estimate is only to be used in determining the allowances to be distributed annually to the capital remaining to 6e recovered.

In the case of McCahill v. Helvering, 75 Fed. (2d) 725, which affirmed the Board, 29 B. T. A. 1080, the court said:

Where the right to have the estimate of mineral content of a mine revised arises under the provisions of article 229 because “information subsequently-obtained clearly shows the estimate to have been materially erroneous,” the information and new estimate based thereon cannot justify going back to preceding tax years and changing the depletion allowances lawfully arrived at for those years. In this case the taxpayer has caused the Shenango mine to be valued for basis of depletion at $206,662.24 upon “the best information obtainable” and had, on account of such valuation, deducted from gross income over a period of seven years some thousands of dollars more than would have been deductible if the valuation had been on the basis of the later information. But where revision is made on account of “information subsequently obtained,” the government cannot go back into the prior years and recover the excessive deductions, and neither can the taxpayer go back to the years 1929 and 1930, before the error was known, and, by obtaining deductions for those years, upset the basis for depletion as it stood in those years.

The Board said in Stouts Mountain Coal Co., 4 B. T. A. 1292, 1294:

* * * At the time the petitioner started operations, and during the year 1920, it believed that the recoverable tons of coal in its property were 400,000. It developed, however, prior to the close of its fiscal year ended October 31, 1921, that the recoverable tons were in all not in excess of 75,000. The depletion deduction for such year is the undepleted cost of the coal in place at the beginning of such year; in other words, the undepleted cost on November 1, 1920, should be spread over the number of tons of coal removed during the fiscal year ended October 31, 1921. * * *

Unfortunately for petitioner’s contention, there is no evidence of any estimate having been made at any time of the total units (tons) of sulphur in the mine as article 229, supra, requires petitioner to make. It is alleged in the petition that, (at some undisclosed time) the “Mines and Mineral Section of the Commissioner of Internal Revenue” valued the interest of petitioner in said Bryan Mound, as of March 1,1913; and made an estimate of 3,459,000 recoverable tons of sulphur of the value of $1,963,135.93. But it is further alleged in the petition that these “estimates were revised from time to time * * * » These allegations were denied in the answer. What estimates of the sulphur content of the mine were being used during the years prior to 1930 in calculating the depletion deduction is in no way shown.

Under the circumstances here present, we must reject the petitioner’s contention that in ascertaining the capital remaining on January 1, 1930, to be depleted, the sum. of $1,536,613.60 should be used, and hold, with respondent, that the sum of $1,939,834.83, the amount allowed, should be used. It follows that petitioner’s capital remaining for depletion on January 1, 1930, was $60,165.17.

Respondent’s computation as above set forth in this opinion complies with article 231 (b) of Regulations 74, and is approved.

Judgment will be entered imder Bule 50.


source: Caselaw Access Project

author: McMahon :

license: Public Domain

text:
    Sara A. Twohy, Petitioner, v. Commissioner of Internal Revenue, Respondent. Daniel W. Twohy, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 62605, 62907.
    Promulgated April 24, 1936.

      H. E. Fraser, Esq., for the petitioners.

      8. B. Anderson, Esq., for the respondent.
   opinion.

McMahon :

The petitioners contend that the so-called dividend of $140,000 was such only in name and should not be regarded as a taxable dividend, being but a single step in a series of transactions not entered into for profit, not enriching any of the stockholders, and merely being a matter of bookkeeping. The respondent, however, contends that such dividend is taxable and that the facts herein are similar to those in John G. Lonsdale, 11 B. T. A. 659; aff'd, Lonsdale v. Commissioner, 32 Fed. (2d) 537; certiorari denied, 280 U. S. 575; in which case a national bank declared a dividend which was applied to purchase stock in a trust company organized to transact business in which the national bank could not engage. The petitioners contend that the Lonsdale case, supra, is distinguishable as no subscription for stock was involved in the distribution herein, and that such distribution was not for the purpose of forming a new corporation, but an attempt to save a serious banking situation.

The evidence discloses that in February 1929 the Exchange Bank, one of the oldest banks of Spokane, failed; that thereafter the Brotherhood Bank, located near the Fidelty Bank, after a run upon it, closed, which caused a run on the Fidelity Bank and the failure of several smaller banks; that it was decided to nationalize the Union Trust and merge the Fidelity Bank with the Union Trust; that there were some assets which the examiners did not want in the bank, amounting to $140,000, and the only way to raise the $140,000 was to take it out of the surplus of the Old National; and that the special dividend was declared and the Union Trust nationalized and merged with the Fidelity Bank, not only to relieve the threatened financial difficulties of the Fidelity Bank and such as might result from its threatened failure, but also as a part of a comprehensive plan which involved the creation of a holding company, known as the Old National Corporation, for the purpose of taking over the Old National and the First National Bank. Whatever causes or reasons prompted the issuance of the dividend of $140,000, the evidence shows that the dividend was issued out of the undivided profits of the Old National, and there is no evidence showing that it received anything in return therefor. The evidence further shows that pursuant to the agreement with the stockholders the $140,000 was turned over to the three trustees and by them turned over to the Investment Co., which in turn paid it to the First National Bank, together with the $220,000 capital and surplus of the Union Trust, and that the Investment Co. received therefor stock of the First National Bank. These facts show that the provisions of the resolution were substantially carried out. While the resolution stated that “the Union Trust & Savings Bank will obtain a national charter, then purchase a certain amount of the capital stock of the Fidelity National Bank”, which quoted provision is open to the construction that the Union Trust after being nationalized would buy the stock of the Fidelity Bank, it however stated, following the quoted provision, “as per agreement” of the stockholders, which provided for a merger of the two banks. As stated on brief by petitioners, First National Bank of Concord v. Hawkins, 174 U. S. 364, is authority for the principle that a national bank can not lawfully purchase stock in another national bank. It was known that neither the Old National nor the First National Bank could take over the Fidelity Bank by a purchase of its stock. The purchase of its good will and stock was accomplished by merger with the First National Bank as expressly provided in the stockholders’ agreement. The language of the resolution proper must be construed in the light of the stockholders’ agreement which is a part of the resolution. In our opinion the proof does not disclose an abandonment of the plan as outlined in the resolution as claimed by the petitioners.

Although the capital and surplus of the Union Trust and the dividend, in both of which the stockholders of the Old National had a prior interest, was used in these transactions, a new and different entity, with different rights and powers and subject to other laws, was created by the merger of the Union Trust, changed from a state trust company to a national bank under Federal laws, and an entirely theretofore unconnected and unaffiliated national bank. The dividend was declared by the Old National and its stockholders consented to have such dividend applied to the purchase of the stock of the First National Bank, a new entity, separate and distinct from the Union Trust and possessing new and different assets from those theretofore possessed by the Union Trust. It is to be noted that the Fidelity Bank was not taken over under the so-called Spokane plan, as were the Exchange Bank and the Brotherhood Bank. As far as we know no dividend was declared and paid by the Old National to take over such banks. The case of Mrs. Frank Andrews, 26 B. T. A. 642, is also controlling here. It involved a similar question and the facts therein are more similar to those in the instant proceedings than the facts in the Lonsdale case, supra, in that there the plan involved no subscriptions for stock and the stockholders did not receive stock in exchange for the dividend; the plan called for the unanimous consent of the stockholders in advance of the dividend declaration, the stockholders having no other alternative than to apply the dividend in the manner proposed; the dividend was paid to trustees, and the certificates of stock of the parent company were endorsed to show that they carried with them a pro rata share in the new corporation. The Board therein held that a dividend declared by a national bank, which pursuant to an agreement with its stockholders was paid to trustees for their account for the purpose of organizing a subsidiary corporation and acquiring its capital stock, is taxable income to the stockholders though not actually received by them. Under the agreement of the stockholders, the stockholders expressly authorized and empowered the person or persons to be designated by the Old National to receive on their behalf and as their agent the special dividend declared by such bank, and under that agreement the bank turned over the check covering the dividend to the three trustees, who thereby became the agents of the stockholders to receive the dividend in their behalf. The receipt of income by an agent is receipt by the principal. Fremont C. Peck et al., Executors, 31 B. T. A. 87; aff'd., 77 Fed. (2d) 867; certiorari denied, 296 U. S. 625; J. L. McInerney, 29 B. T. A. 1; Frank E. Best, 26 B. T. A. 1070. The facts here are not so different as to justify a conclusion other than that reached in the Lonsdcde case and the Andrews case.

It was testified by the chief counsel of the Old National that no “profit was contemplated out of the transaction”; that the “$140,000 was really a loss” and that it was not expected that the stockholders of the Old National would be benefited by the transaction. Daniel W. Twohy, petitioner, testified that there was no thought of profit in the declaration of the dividend and that “In fact, we knew it would entail a loss.” However, there is no evidence showing that the $140,000 was lost to the stockholders in 1929. It was invested in the new First National Bank and as far as we know it remained in that bank during 1929. We are not concerned here with the question of whether or not the investment of the dividend was intended to be or proved to be profitable to the stockholders or to the companies involved. The question before us is whether under all the circumstances present here the special dividend of 1929 is taxable to these petitioners.

The respondent, in effect, determined that the special dividend herein constituted taxable income to the petitioners under section 22 of the Revenue Act of 1928, which provides that gross income includes, among other things, “gains or profits and income from any source whatever.” Furthermore, section 25 of the 1928 Act provides that there shall be allowed as a credit against net income, for the purpose of the normal tax, but not for the surtax, the amount received as dividends from a domestic corporation, and section 115 (a) of the same act defines “dividend” as “any distribution made by a corporation to its shareholders, whether in money or other property, out of its earnings or profits accumulated after February 28, 1913.” (Emphasis supplied.) These provisions contemplate that dividends are a part of taxable net income and that they are allowable as a credit for the purpose of computing the normal tax only. The dividend here is also within the definition of section 115 (a), since, as heretofore stated, it was distributed out of the undivided profits of the Old National to the trustees acting on behalf of its stockholders and as their agents.

The burden of proof that their prorata shares of such dividend was not income to them rested upon the petitioners. Welch v. Helvering, 290 U. S. 111. In our opinion they have failed to discharge such burden.

We are of the opinion that the dividend of $140,000 distributed by the Old National Bank is taxable as such, and the action of the respondent herein is approved.

Decision will be entered for the respondent.


author: Mellott :

text:
    Edgar Stanton and Joseph C. Belden, Executors of the Estate of George Campbell Rew, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 41404.
    Promulgated April 28, 1936.

      Charles R. Watson, Esq., and Joseph McCormack, Esq., for the petitioners.

      Elden McFarland, Esq., and Mawrice Parshall, Esq., for the respondent.
   OPINION.

Mellott :

Petitioners contend that their decedent, Eew, consummated an exchange on December 31, 1923, of his preferred stock for bonds and securities having no readily realizable market value; that the exchange was not completed in 1924, and that respondent erred in determining that Eew realized a taxable gain in that year. In the alternative they contend that even should we decide that the exchange was completed in 1924, Eew did not realize a taxable gain as the transaction was completed before the passage of the Eevenue Act of 1924 and the bonds and securities acquired did not have a readily realizable market value.

The Eevenue Act of 1921 provides that on an exchange of property for other property no gain shall be recognized unless the property received in exchange has a readily realizable market value. Subsequent acts, including the 1924 Act, require the recognition of gain where the property acquired in the exchange had a fair market value at the time of the exchange. We show in the margin the pertinent provisions of the Eevenue Acts of 1921 and 1924 and the regula-sions thereunder.

The first question we must decide is whether or not Eew, on December 31, 1923, consummated an exchange of his stock for bonds or securities haring no readily realizable market ralue. Petitioners argue that Hew, by endorsing and delivering his certificate of stock to Peabody, performed every act required of him under the terms of the agreement entered into on December 31, 1923, and that it necessarily follows that the exchange was complete on that date. We do not agree with this contention. It is not clear whether petitioners are claiming that Eew received in the exchange the three blocks of Garland, Orrington, and Conn bonds or the 30 different securities listed in the schedule attached to the exchange agreement. Upon brief they argue the former, while the petition indicates an evident reliance upon the latter. It is obvious that Peabody did not give, or intend to give, Eew both blocks of bonds in exchange for his stock, and apparently petitioners make no such contention. In order to determine the above question, we must decide which, if either, of the blocks of bonds were received in the exchange. We shall discuss first petitioner’s contention with reference to the three blocks of bonds.

The evidence discloses that Eew desired to exchange his stock on December 31, 1923, for a diversified group of seeui’ities having no readily realizable market value, which would give him a 7 percent return upon the amount invested. His attorney assured him that such a transaction would not be subject to Federal income tax in 1923 but might be taxable in 1924. When he attempted to consummate the exchange on December 31, 1923, he learned that the mechanics incident to the delivery of such a large group of securities could not be completed on that day, which was practically a holiday. Having endorsed his certificate of stock in blank and turned it over to Peabody, he desired to be put in a protected position, and Peabody, therefore, to secure the performance of its part of the agreement, which contemplated that it should ultimately transfer to him the diversified group of bonds, agreed to transfer to his safekeeping account the three blocks of bonds.

The transaction was entered on the books of Peabody as an exchange of Eew’s stock for the three blocks of Garland, Orrington, and Conn bonds, and he was given a copy of an invoice or journal voucher listing both the stock and bonds and containing the phrase that it was “to record the transfer to George Campbell Eew of [three blocks of bonds, listing them] in exchange for 6,150 shares of Calumet Baking Powder Company first preferred stock.” But bookkeeping entries are only evidential and are not conclusive. Doyle v. Mitchell Brothers Co., 247 U. S. 179. Our decision must rest upon the actual facts as shown by all the evidence. We shall briefly allude to some of such facts, in addition to those just mentioned.

An examination of the amended petition discloses that no mention is made in it of any exchange of Rew’s stock for the three blocks of bonds. Petitioners assign as error “the failure of the Commissioner to find that George Campbell Rew on December 31, 1923, received in exchange for 6,150 shares of preferred stock of Calumet Baking Powder Company the securities named hereinbelow, * * (The securities named are the 30 different blocks of bonds received by decedent on January 15, 1924.) Moreover, the record fails to disclose any agreement between Rew and Peabody providing for the exchange of his stock for the three blocks of bonds. On the contrary, it discloses that such bonds were intended merely as security for the performance by Peabody of its part of the agreement of December 31, and there was a definite understanding that Rew could not retain such bonds but was bound to return them to Peabody when he received the diversified group of bonds designated in the original schedule, or those which it was found necessary to substitute therefor.

No manual delivery of the three blocks of bonds was made to Rew during the period between December 31, 1923, and January 15, 1924, and none were actually set aside or deposited in a separate compartment in safekeeping for him. However, during such period, Peabody had in its inventory a number of the bonds or interim certificates of each of said issues in excess of the amount which it agreed to deposit in safekeeping for Rew.

We are convinced that there was not an exchange of Rew’s stock for the three blocks of bonds on December 31, 1923. There "was no “reciprocal conveyance of the thing given, and of the thing received in exchange”; (Preston v. Keene, 39 U. S. (14 Pet.) 132, 137); no “mutual transfer of * * ⅜ property for property other than money.” (23 C. J. 184, et sequa, and cases cited.) Nor did the parties intend that title should pass (55 C. J. 529, et sequa) and that each should be both a vendor and a vendee. The evidence referred to above indicates that the transaction was more in the nature of a pledge, Rew having constructive possession, but not title, of property owned by Peabody, as security for the performance of its obligation to make delivery of the 30 blocks of bonds.

Even if we should hold that an exchange of the stock for the three blocks of bonds was consummated on December 31, 1923, we could not set aside the deficiency. Had such an exchange taken place, the three blocks of bonds, having no readily realizable market value, would have had in Rew’s hands, the same basis for determining gain or loss upon sale or other disposition that the shares of stock had, viz., $57,370.27. If they were exchanged, on January 15, 1924 — and under this theory we would of necessity have to give full force and effect to Exhibit D which shows such exchange — for the diversified group of 30 blocks of securities having a fair market value of $660,-272.50, a tax upon the difference between such basis and such fair market value would have been due.

We shall now consider the question of whether or not the decedent on December 31, 1923, exchanged his stock for the securities listed on the schedule attached to the original agreement.

It is unnecessary to repeat the facts in detail. Schedule A now attached to petitioners’ Exhibit 1, lists the 30 securities which were delivered to Rew on or about January 15, 1924. This schedule, however, was not identified as being the schedule originally attached to the agreement at the time it was signed. It can not be determined from the evidence just what bonds or securities were listed on the original schedule, for neither it nor a copy could be located. Apparently, however, the original schedule contained block designations of approximately 30 different kinds of securities which Rew would accept in exchange for his stock. No details as to numbers, maturities, and amounts of these securities were included therein. Between December 31 and January 15 the list contained on the original schedule was modified in accordance with negotiations carried on between Rew and Peabody. The evidence clearly indicates that Rew did not know on December 31 exactly what securities he was to receive, and they were not distinguishable on that date from other securities in the vaults of Peabody. In Preston v. Keene, supra, the Supreme Court defined an exchange in the following language:

An exchange is an executed contract; it operates, per se, as a reciprocal conveyance of tlie thing given, and oí the thing received in exchange. * * * It enters into the very idea of the exchange, that the thing given or taken in exchange shall be specific, and so distinguishable from other things of the like kind as to be clearly known and identifiable.

We are convinced that on December 31, 1923, the diversified group of securities Rew was to receive for his stock could not be identified either by the decedent or Peabody. Under such circumstances, there could be no “reciprocal conveyance of the thing given, and of the thing received in exchange.” We therefore conclude that the contract remained executory; title to the securities was not transferred to the decedent; and the exchange was not completed on that date. Cf. Ellis & Myers Lumber Co. v. Hubbard, 123 Va. 481, 493; 96 S. E. 754; sec. 17, Uniform Sales Act (enacted in Illinois in 1915); Williston on Sales, 2d Ed., vol. 1, p. 520; 55 C. J. 541, 532.

Even assuming, but not admitting, that the securities the decedent was to receive in exchange for his stock were identifiable and distinguishable from other securities of a like kind in the possession of Peabody on December 31, 1923, we would still have to decide that no exchange was completed for tax purposes until 1924. The respondent determined that the exchange was completed in 1924 when the decedent actually received the group of 30 securities. In order to overcome the prima facie correctness of this determination, the burden was on petitioners to show either that the securities were received in 1923, or that decedent was on the accrual basis and his right to receive them accrued in 1923. The evidence clearly shows that the securities were actually received in 1924, but no evidence was introduced showing that decedent kept his books on the accrual basis, even though this matter was called to the attention of petitioners’ counsel at the hearing. We must therefore uphold respondent’s determination that the exchange was completed, and taxable, if at all, in the year 1924 when the securities were received, as petitioners failed to sustain their burden of proving that decedent kept his books and filed his returns on the accrual basis. Helvering v. Nibley-Mimnaugh Lumber Co., 70 Fed. (2d) 843.

In support of their contentions that an exchange was completed on December 31, 1923, petitioners cite and rely upon the following cases, among others: Brunton v. Commissioner, 42 Fed. (2d) 81, affirming 15 B. T. A. 348; certiorari denied, 282 U. S. 889; Dahlinger v. Commissioner, 51 Fed. (2d) 662, affirming 20 B. T. A. 176; certiorari denied, 284 U. S. 673; Eavenson v. Commissioner, 51 Fed. (2d) 664, affirming 20 B. T. A. 238; certiorari denied, 284 U. S. 672; Commissioner v. Swift, 54 Fed. (2d) 746, affirming 20 B. T. A. 1099; Davidson & Case Lumber Co. v. Motter, 14 Fed. (2d) 137 (Dist. Ct. Kan.); Southern California Rock & Gravel Co., 26 B. T. A. 296; Dakota Creek Lumber & Shingle Co., 26 B. T. A. 940; Nibley-Mimnaugh Lumber Co., 26 B. T. A. 978; aff'd., 70 Fed. (2d) 843; Standard Lumber Co., 28 B. T. A. 352. We have carefully examined these cases. Most of them involve sales of property, in which the subject matter was sufficiently specified and identified and the purchase price agreed upon in the years in which the sales were held to be completed for tax purposes. In determining the question presented, this Board and the courts took into consideration the time when the dominion, control, burdens and benefits of ownership passed to the purchasers and the methods of accounting used by the taxpayers. The cases cited are in our opinion distinguishable from the instant case on their facts, and do not support petitioners’ conclusion that the exchange here involved was consummated on December 31, 1923.

Having determined that the exchange was completed on or about January 15,1924, when the decedent received the group of 30 securities from Peabody, it becomes necessary to decide petitioners’ alternative contention that the amount of the taxable gain, if any, realized by tlie decedent is governed by the Revenue Act of 1921 (Section 202 (c), supra), and not by the Revenue Act of 1924 (sections 202 (a) and (c), supra). This contention is predicated upon the fact that the Revenue Act of 1924 was not approved until June 2,1924. Section 283 of the act, however, provides that those sections with which we are here concerned shall take effect as of January 1, 1924. The taxable gain to be recognized in the instant proceeding is therefore governed by the provisions of the Revenue Act of 1924.

There is no merit in the argument made by petitioners in their reply brief that a statute approved on June 2, 1924, and retroactively taxing a transaction which occurred in January of that year is unconstitutional and in conflict with the Fifth Amendment. The cited cases (Dobbins v. Los Angeles, 195 U. S. 223; Blodgett v. Holden, 275 U. S. 142; Untermyer v. Anderson, 276 U. S. 440; and Nichols v. Coolidge, 274 U. S. 531) are not applicable here. With the exception of Dobbins v. Los Angeles, supra, in which the retroactive application of a taxing statute is not involved, they merely enunciate the rule that Congress does not have the power to impose a charge upon a donor because of gifts fully consummated before a taxing statute was enacted. This rule does not apply to income taxes. The revenue acts, beginning with the Act of 1913, and including the War Revenue Act of 1918, have consistently provided for the taxation of income realized from transactions which took place prior to their passage. John S. Garvan, 23 B. T. A. 817. It is now well settled that such provisions, although retroactive in scope, are constitutional. Brushaber v. Union Pacific Railroad Co., 240 U. S. 1; Fesler v. Commissioner, 38 Fed. (2d) 155; Phipps v. Bowers, 49 Fed. (2d) 996, affirming 46 Fed. (2d) 164; certiorari denied, 284 U. S. 641.

The Revenue Act of 1924 provides that the gain from the sale or other disposition of property acquired prior to March 1, 1913, shall be the excess of the amount realized, over the cost or March 1, 1913, value, whichever is greater. (Secs. 202 (a) and 204 (b) of the 1924 Act.) It also provides that the amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received. (Sec. 202 (c), 1924 Act.) No money having been received in the exchange here under consideration, the amount realized by the decedent was the fair market value of the securities which he received on January 15, 1924.

We have found as a fact that the fair market value of the securities received by the decedent on January 15, 1924, including accrued interest to that date, was $660,272.50. While Lawrence Gr. Wilson, an auditor of Peabody, testified as a witness for the petitioners that the securities received by decedent on January 15, 1924, were generally sold to the public by Peabody at par, plus accrued interest, or $678,030.70, and that this price represented their fair value, we have found the fair market value to be the amount Peabody charged the decedent for them.

The respondent determined the basis for gain or loss on decedent’s preferred stock was $57,370.27, its March 1,1913, value. No evidence was introduced by petitioners which would warrant our disturbing this determination. In return for the securities received, decedent gave Peabody his stock and accrued dividends in the amount of $10,762.50. We find therefore that the taxable gain realized by the decedent was the difference between $660,272.50 and $68,132.77 ($57,370.27+$10,762.50). We approve the respondent’s determination that the decedent received during the period January 1, 1924, to January 10, 1924, unreported dividends on his preferred stock aggregating $10,762.50.

Judgment will be entered under Rule 50.

       The term “gross income’’ includes gains, profits and income derived from * * * sales or dealings in property. [See. 213 (a) of 1921 and 1924 Acts.]
      The time as of which any item of gross income or any deduction is to he accounted for must be determined in the light of the fundamental rule that the computation shall be made in such a manner as clearly reflects the taxpayer’s income. [Regulations 62, art. 22, Act of 1921; Regulations 65, art. 22, Act of 1924.]
      Gains, profits and income are to be included in the gross income for the taxable year in which they are received by the taxpayer, unless they are included when they accrue to him in accordance with the approved method of accounting followed by him. [Regulations 62, art. 51, Act of 1921; Regulations 65, art. 50, Act of 1924.]
      For the purposes of this title, on an exchange of property, real, personal or mixed, for any other such property, no gain or loss shall he recognized unless the property received in exchange has a readily realizable market value; * * * [See. 202 (c), Act of 1921.]
      Except as hereinafter provided in this section, the gain from the sale or other disposition of property shall he the excess of the amount realized therefrom over the basis provided in subdivision (a) or (h) of section 204, and the loss shall he the excess of such basis over the amount realized. [Sec. 202 (a), Act of 1924.]
      The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received. [Sec. 202 (c), Act of 1924.]
      This title [Title II, which includes section 202] shall take effect as of Jan. 1, 1924. [Sec. 283, Act of 1924.]


author: McMahon:

text:
    Walter M. Bickford, Petitioner, v. Commissioner of Internal Revenue, Respondent. C. H. Christensen, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 54583, 55005.
    Promulgated April 28, 1936.

      A. N. WMtloelc, Esq., for the petitioners.
    /S'. B. Anderson, Esq., for the respondent.
   OPINION.

McMahon:

The sole question for determination is whether the amounts of $4,500 and $6,000 received respectively by Bickford and Christensen in 1928 constituted taxable income, or constituted gifts which are exempt from income taxation. There are set forth in the margin applicable provisions of the Revenue Act of 1928.

In Thomas M. Schumacher, 27 B. T. A. 895, we declined to follow our holding in William C. Barnes, 17 B. T. A. 1002, but instead followed the decision of the Court of Claims in Schumacher v. United States, 55 Fed. (2d) 1007, and the decision of the United States Circuit Court of Appeals for the Fifth Circuit in Bass v. Hawley, 62 Fed. (2d) 721, and held that a payment made to the taxpayer president of a railroad company, in addition to his regular compensation, constituted taxable income and was not exempt from tax as a gift. All those cases involved payments made under the same circumstances to officers or employees of the same railroad company. The essential facts involved were, in substance, as follows: Such employees had been paid their full salaries; the stock of the railroad company, which was the operating company, was owned by a holding company; the holding company transferred the stock of the operating company to another railroad company in exchange for certain stocks and bonds of the latter company; after the exchange the stockholders of the holding company authorized the directors to pay “additional compensation” to officers and employees “in recognition of long and faithful service of the officers and employees of the Railroad”; and each payment was accompanied by a card stating “with appreciation and best wishes of El Paso & Southwestern Company from committee appointed November 18, 1924.”

Whether a payment in a given case is taxable compensation or a gift exempt from tax depends upon the intention of the parties and particularly the intention of the payer, to be determined from the attending facts and circumstances. Bass v. Hawley, supra, and Schumacher v. United States, supra. While it is true that the intent in every case must be decided upon the particular attending facts and circumstances, and while the above cited cases are not exactly the same, factually, as the instant proceedings, yet we believe that those cases are sufficiently in point to be controlling.

In Schumacher v. United States, supra, it was stated in part:

It is an essential characteristic of a gift that it he a transfer without consideration. * * * The payment was made to the plaintiff as additional compensation in consideration of former services rendered the railroad company and not as a gift or gratuity. * * *

In Bass v. Hawley, supra, it was stated in part:

* * * That only is a gift which is purely such, not intended as a return of value or made because of any intent to repay another what is his due, but bestowed only because of personal affection or regard or pity, or from general motives of philanthropy or charity. * * *

See also Theodore C. Jackson et al., Administrators, 32 B. T. A. 470, as to legal requirements of a valid gift.

In the instant proceedings we believe it is sufficiently clear that the payments were additional compensation for past services. In the letter accompanying the checks it is stated: “Your services have not been without appreciation, but, on the contrary, the loyalty and sincerity which you have shown have always been realized and have been reciprocated. No set form of words and no honorarium can truly express our realization of your loyalty, but the enclosed check to your order is herewith tendered as a concrete evidence of our regard and of our very best wishes for your future.” Furthermore, the evidence discloses and we have found as a fact that the stockholders of the Missoula Public Service Co. recognized the obligation of the company to establish retirement funds. The evidence further shows that these payments in question were from a fund intended to be in the nature of, or in lieu of, a retirement fund. Retirement payments are subject to Federal income tax. P. H. Marcum, 10 B. T. A. 1192. There is no doubt in owr minds that the payments would not have been made to Bickford and Christensen except for their prior service to the Missoula Public Service Co. See Irving D. Rossheim, 31 B. T. A. 857, 867. We can not find or hold upon the record that there w,as an intention on the part of the stockholders of the Missoula Public Service Co. to make gifts in these amounts to Bickford and Christensen, within the meaning of the revenue act and within the legal requirements of a gift as above set forth. There is no showing that the payments were made “because of personal affection or regard or pity, or from general motives of philanthropy or charity.” Even if the payments bad been denominated “gifts”, it would not necessarily justify a different result here. Levey v. Helvering, supra.

The fact that the payments were not made by the Missoula Public Service Co., the employer, but were made by the stockholders thereof, is not determinative. Thomas M. Schumacher, supra; Schumacher v. United States, supra; and Bass v. Hawley, supra.

We have found as facts that all of the stockholders of the Missoula Public Service Co. claimed deductions of their proportionate shares of the retirement .fund paid by them, and that they contended before the Bureau of Internal Revenue that the retirement fund was a part of the expense of the sale and that the selling price of the stock for tax purposes was the net amount received from the Clark Montana Realty Co. after deduction of all expenses, including the amount of the retirement fund; and the undisputed evidence shows that this contention was overruled and the deductions were disallowed by the Bureau on the ground that the fund was created by donation from the stockholders and was not a fund provided by the Missoula Public Service Co. Those stockholders and the issue as to whether the respondent erred in failing to permit the stockholders o.f the Missoula Public Service Co. to deduct their proportionate shares of the retirement fund as a part of the expense of sale are not before us and we expressly do not decide that question. In any event, the action in that respect cannot be determinative here. However, it should be noted that in the instant proceeding the stockholders attempted to deduct the amount paid as expenses of the sale and to that extent did not treat the payments as gifts. This action on their part negatives an intention to make gifts. In Thomas M. Schumacher, supra; Schumacher v. United States, supra; and Bass v. Hawley, supra, payments were held not to be gifts, even though it appeared that the payer did not claim them as deductions.

Counsel for petitioners relies upon Jones v. Commissioner, 31 Fed. (2d) 755, and Blair v. Rosseter, 33 Fed. (2d) 286. Those cases are not controlling here for the same reason that they were not controlling in Bass v. Hawley, supra, as pointed out by the court in the latter case.

The case of Lunsford v. Commissioner, 62 Fed. (2d) 741, cited by counsel for petitioners, is distinguishable. There the taxpayer was never an employee of the payer, the payer expressly represented the payment to be a gift, and “the record is entirely barren of any proof of services performed by the taxpayer for the donor, either concurrently * * * or in previous years, and there is no promise * * * for future services.”

David B. Daly, Estate, 3 B. T. A. 1042, and Herman T. Dietrick, 6 B. T. A. 1371, relied upon by counsel for the petitioners, are distinguishable. The facts in those cases are quite different from those in the instant proceeding and establish that the transfers there in question constituted gifts.

The determination of the respondent is approved.

Counsel for the petitioners cites Cunningham v. Commissioner, 67 Fed. (2d) 205. The resolution of the payer- in that case recited that the payment was an “honorarium” which the court, under all the facts and circumstances there presented, construed to be a gift. In the instant proceedings neither payment is specifically called an “honorarium” although that term is used in the letter accompanying each payment. The use of the term honorarium is not determinative. Arthur L. Lougee, supra. The resolution in the Cunningham case was somewhat ambiguous in that it was also stated that the payment was “in appreciation of Mr. Cunningham’s excellent guidance of this Corporation through times of difficulty and depression.” Under all the facts and circumstances of the instant proceeding, as disclosed by the record, the Cunningham case does not justify a different result herein, in view of the weight of clear authority heretofore pointed out in support of our conclusions.

Decision will he entered for the respondent.

       SEC. 22. GROSS INCOME.
      (a) General definition. — “Gross income” includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever.
      (b) Exclusions from gross income. — The following items shall not be included in gross income and shall be exempt from taxation under this title:
      *******
      (3) Gifts, bequests and devises. — The value of property acquired by gift, bequest, devise, or inheritance (but the income from such property shall be included in gross income).

       See also Arthur L. Lougee, 26 B. T. A. 23; Levey v. Helvering, 68 Fed. (2d) 401; Weagant v. Bowers, 57 Fed. (2d) 679; Fitch v. Helvering, 70 Fed. (2d) 583; and Fisher v. Commissioner, 59 Fed. (2d) 193.

       In Bass v. Hawley, supra, it was stated in part as follows:
      ii* * * Hawley relies strongly on Jones v. Commissioner (C. C. A.) 31 F. (2d) 755, and Blair, Commissioner, v. Rosseter (C. C. A.) 33 F. (2d) 286. Bach of these cases in holding payments to employees to be nontaxable gifts relies on the fact that there was no obligation to pay and the payments were over and aboye the wages and salaries due. The controlling importance of that fact has since been denied by the Supreme Court in Old Colony Trust Co. v. Commissioner, 279 U. S. at page 730, 49 S. Ct. 499, 504, 73 L. Ed. 918, where the question was whether the litigant owed a tax, saying: ‘The payment for services, even though entirely voluntary, was nevertheless compensation within the statute.’ Again in Lucas, Commr. v. Ox Fibre Brush Co., 281 U. S. 115, 50 S. Ct. 273, 74 L. Ed. 733, where the question was whether the litigant could deduct the payment as an expense of business, a like result was reached. Noel v. Parrott (C. C. A.) 15 F. (2d) 669, was approved. In Fisher v. Commissioner (C. C. A.) 59 F. (2d) 192, it was ruled that absence of legal duty to pay is not conclusive of a gift. * * *”


author: Smith :

text:
    Alex Harjo, Beneficiary and Transferee, Estate of Nitey, Seminole Roll #1446, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 77020.
    Promulgated April 30, 1936.

      H. Stanley Hinrichs, Esq., for the petitioner.

      L. S. Pendleton, Esq., for the respondent.

      Talma L. Smith, Esq., as amicus curiae.

   OPINION.

Smith :

This is a proceeding for the determination of the liability of the petitioner as transferee for an estate tax due from the estate of Nitey, a restricted full-blood Seminole Indian.

The respondent determined a deficiency against the estate of Nitey in the amount of $29,216.55. No tax has been paid by the estate. The respondent issued notices of deficiency to the petitioner herein, who was the husband of the decedent, to each of her five children, and to the Superintendent of the Five Civilized Tribes. So far as the record appears the petitioner is the only one who has appealed to this Board from the determination of the respondent that he is liable for the tax as transferee. The petition was signed by George H. Zeutzius as counsel for the petitioner. The petition alleges:

The petitioner Alex Harjo is a restricted ¾⅛ blood Seminole Indian and widower of tbe decedent Nitey who was a restricted full-blood Seminole Indian; petitioner is also a beneficiary and transferee of part of decedent’s estate, having received or having had transferred to his credit under a settlement approved by the Secretary of the Interior $126,000, less certain claims and expenses of approximately $40,000. Petitioner resides at Sasakwa, Oklahoma.

The petition is verified as follows:

William Zimmerman, Jr., being duly sworn, says that he is the duly appointed and qualified Assistant Commissioner of Indian Affairs and has under his supervision and jurisdiction the affairs of the Five Civilized Tribes in Oklahoma, including the Seminole Tribe; that as such Commissioner he is the representative of the Secretary of the Interior; that under the law, as he is informed and believes, it is the duty of the Secretary of the Interior to supervise and pay, as well as make report, of any taxes which may be due and owing by restricted members of the Seminole tribe of Indians; that the above named petitioner is a member of the Seminole tribe of Indians and is restricted; that decedent was also a restricted Seminole Indian, of full-blood; that he has read the foregoing petition and is familiar with the facts therein stated and that said statements and facts are true as he verily believes.

The facts necessary to the determination of the issues have been stipulated before the Board as follows:

1. It is agreed that the decedent, Nitey, was a full-blooded Seminole Indian, enrolled opposite Seminole No. 1446, and at the time of her death, August 17, 1930, was under full restrictions as to all of her real estate and personal property ; that she was incompetent, and by decree of a competent court of the State of Oklahoma, her guardian was Lynn Adams.
2. That during her lifetime decedent Nitey was allotted, in Seminole County, Oklahoma, 240 acres of land under the Seminole Agreement dated October 7, 1899, and confirmed by an Act of Congress dated June 2, 1900 (81 Stat. 250), which lands are described as
The NE/4 of Section 2, Township 7 North, Range 6 East, containing 160 acres, and
The E/2 of the SE/4 of Section 35, Township 8 North, Range 6 East, containing 80 acres;
of which Lot 1, or the northeast quarter of the northeast quarter of said Section 2 (a part of said tract of land) was allotted to decedent Nitey as her homestead. All of said tract of 240 acres of land was, at the time of decedent Nitey’s death, and still is, restricted as to sale, lease or other encumbrance without the approval of the Secretary of the Interior, under the Acts of Congress dated April 26, 1906 (34 Stat. 137) and May 27, 1908 (35 Stat. 312).
3. That during the year 1922 an oil and gas lease was entered into between said Nitey and Guy M. Buckner, under date of January 28, 1922, and approved by the Secretary of the Interior on March 31, 1922, for a period of ten years, or as long as oil and gas is found in paying quantities, covering the northeast quarter of Section 2, Township 7 North, Range 6 East, which is now owned by the Indian Territory Illuminating Oil Company, Bartlesville, Oklahoma, as to the N/2 of the NE/4 and SW/4 of NE/4 of Section 2-7N-6E, designated on the records of the office as lease No. 45164; Lease No. 44999' to the Gladys Belle Oil Company as to the E/2 SE/4 of Sec. 35, Township 8 North, Range 6 East, now owned by the Blackwell Oil & Gas Company, dated January 28, 1922, and approved March 18, 1922; Lease No. 45164 was further assigned to the Amerada Petroleum Corporation as to the SE/4 of NE/4 of Section 2-7N-6E. The whole area was leased in 1922. Production was had in 1927, and the land is still producing oil and gas in paying quantities.
4. That at the time of her death the receipts that were credited to her account and held by the Secretary of the Interior in trust for her were as follows:
Transfers_ $328.15
Pipe Line Damages_ 184. 25
Redeposits and refunds_ 4, 356.49
Interest:
Open account_$37,133. 09
Treasury Bonds_ 10,125.00
Rentals, surface- 262. 50
A ½ inherited interest in her husband’s allotment, oil and gas royalties_ 55, 629. 51
Surplus, derived from Section 35_ 324, 922.19
Surplus and Homestead in Section 2, Surplus from NW NE Sec. 2_ 34,103. 89
Homestead_1_102, 311. 68
Surplus, SE NE of Section 2_ 197, 937.21
Total receipts to date of death_ 767, 294.21
Interest_ 2, 502. 40
769, 796. 61
Less Disbursements_ 255, 565. 21
Balance on hand at time of death-514, 231.40
Nitey inherited an undivided ⅜ interest in the estate of her husband, John Hayecha, Seminole No. 1445, and the interest in oil and gas derived and produced from this allotment has been credited to her account. The description is the E/2 SE and SW SE of Section 26, Township 8/N., Range 6 East. SE SE being the homestead.
The following table shows the amount of the receipts and the balance left after applying the ratio or percentage of the total receipts bore to the total disbursements.
Pipe Line Damages_ 184.26 65. 88 118.37
Rentals, surface- 262.50 S3.68 168.82
John Hayecha- 55, 629. 51 19, 891. 94 35, 737. 57
Surplus, Sec. 35_ 324, 922.19 116,185. 64 208, 736. 55
Surplus, NW NE- 34,103.89 12,194. 87 21, 909.02
NE NE Homestead- 102, 311. 68 36, 584. 52 65,727.16
Surplus SE NE- 197, 937. 46 70, 548. 68 127,388.78
Totals_ 715,351. 48 255, 565. 21 459', 786.27
From the above tabulation it is shown that after deducting the ratio applicable to the homestead from the disbursements that there is a balance of $65,727.16 left in the estate of the decedent. The disbursement of $255,565.21 includes an item of $200,000.00 used for the purchase of bonds which are a part of the estate.
5. That at the time of her death the said decedent Nitey left surviving her, her husband Alex Harjo, the petitioner herein, who is a three-quarter blood Seminole Indian and enrolled of>posite Seminole No. 176, together with five (5) children, who are all full blooded Seminole Indians, of whom at least three (3) were born after March 4, 1906.
6. That all of the funds belonging to the decedent, Nitey, at the time of her death were then, and have been at all times since then retained by the Superintendent for the Five Civilized Tribes under the supervision of the Secretary of the Interior in trust for the heirs of the said Nitey, and inasmuch as said heirs, including the petitioner herein, are fully restricted under the Acts of Congress, no distribution has been made of the property and estate of the said Nitey, deceased, and any and all allotments to the heirs of said Nitey, deceased, from the funds of said Nitey’s estate, are made in the sole discretion of the Secretary of the Interior without the appointment of any administrator or executor.
7. That following the death of the deceased, Nitey, there has been allotted to Alex Harjo, the petitioner herein, as his share of the estate of the said decedent, Nitey, the sum of $125,000.00 less certain claims and expenses of approximately $40,000.00, but all of said funds are retained by the Secretary of the Interior in trust for the petitioner herein, except such payments as are made to him from time to time for his maintenance and support, which payments are made in the sole discretion of the Secretary of the Interior.

In Helen Dean Wright, 28 B. T. A. 543, we said:

We have repeatedly held that a transfer of assets does not necessarily result in transferee liability, and indeed does not result in such liability unless the taxpayer is thereby rendered insolvent and unable to pay the tax. Samuel Keller, 21 B. T. A. 84; aff'd., 59 Fed. (2d) 499; Charles Havard, 25 B. T. A. 1161; M. K. Graham, 26 B. T. A. 301. See also United States v. Armstrong, 26 Fed. (2d) 227. So long as the original taxpayer is in existence and solvent, collection of the tax may not be enforced from a transferee. The remedy against the transferee may be pursued only when there is no available remedy against the transferor. Wire Wheel Corporation of America, 16 B. T. A. 737; aff'd., 46 Fed. (2d) 1013.
There was no liability on the part of these petitioners as transferees until the assets of the decedent’s estate had been distributed to them and the estate left without means to pay its tax.

At the hearing of this proceeding counsel for the respondent stated:

* * * in order to establish the transferee liability, I would have to show that the estate of this deceased Indian is insolvent; and I am unable to maintain that burden because the facts show that there is in the hands of the Secretary of the Interior over half a million dollars in cash alone that belongs, which was a part of and belonged to this decedent prior to her death.

He then called attention to the verification of the petition by the Assistant Commissioner of Indian Affairs and stated:

In view of the fact that the petition has been verified by an agent of the Secretary of the Interior, who admits or states under oath the Secretary of the Interior is the proper agent and is the person to pay this tax, it seems to me that the person primarily liable for the tax here is before the Board.

We will consider this last contention of the respondent first. The respondent sent his deficiency notice to “Alex Harjo, beneficiary and transferee, Sasakwa, Oklahoma.” The respondent proposed to collect the tax from Alex Harjo and from no one else. If it could be collected upon the basis of the deficiency notice referred to it would have to be collected out of the portion of the estate that had been transferred to Alex Harjo. The petition plainly states that Alex Harjo and no one else is the petitioner. The mere fact that it was verified by the Assistant Commissioner of Indian Affairs, who stated that he was the representative of the Secretary of the Interior and that under the law “as he is informed and believes, it is the duty of the Secretary of the Interior to supervise and pay, as well as make report, of any taxes which may be due and owing by restricted members of the Seminole tribe of Indians” does not make either the Assistant Commissioner of Indian Affairs or the Secretary of the Interior the petitioner before this Board in this proceeding. The contention of the respondent- upon this point is without merit.

We next consider the question whether the petitioner is liable for the tax as transferee. It is to be noted as shown by the stipulated facts that the estate is intact and in the hands of the Secretary of the Interior, who is the executor or administrator of the estate of Nit-ey. Since it is not shown that the tax can not be collected from the person acting as the executor or administrator, it must be held that the petitioner is not liable as transferee.

Judgment of no transferee liability will be entered.


author: Seawell :

text:
    Houston Oil Company of Texas, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 24075, 32525.
    Promulgated April 30, 1936.

      Irl F. Kennerhj, Esq., for the petitioner.

      A. H. Fast, Esq., E. L. Young, Esq., and R. B. Gannon, Esq., for the respondent.
   OPINION.

Seawell :

In determining the deficiencies the respondent included all of the amounts received under the stumpage contract and agreement of May 27, 1921, in petitioner’s gross income and allowed as a deduction therefrom depletion at the rate of $3.31516 per thousand feet. The transactions were treated in that manner on the theory that the relationship of lessor and lessee existed between the petitioner and the Lumber Co. Such contention has been abandoned and his present view is that the amount includable in gross income is the selling price,, less the petitioner’s basis, which, he contends, is the value on March 1, 1913, of its interest in the timber covered by the stumpage contract and decree. He thinks the value of such interest should be determined by what the right to receive $5 in the taxable periods was worth in 1913. Such a theory could not be applied to the 1921 sale, since the agreement therefor was not entered into until that year. It is claimed by the respondent that the testimony of his sole witness supports a valuation of such interest equal to the amount he allowed for depletion. The witness testified to a valuation of $3.81 per thousand, based upon the contract price of $5 per thousand existing on March 1,1913, discounted for a period of eight years, without any allowance for storm damage, etc. The respondent thinks that the valuation should be reduced to $3.31516 per thousand for storm damage, etc., without any proof of the extent of such damages, if any. By such methods he seeks to justify a March 1, 1913, basis for the timber equal to his allowance for depletion.

The position of the petitioner is that the subject for valuation as of March 1, 1913, is the timber, the thing owned at that time and sold in the taxable periods. It contends that such value should be determined without reference to the terms of the stumpage contract.

The respondent properly abandoned his theory that the stumpage contract created the relationship of lessor and lessee. Clearly it was an agreement for the purchase and sale of timber. During each of the taxable periods the Lumber Co. paid for more timber than it cut and removed, and the sales contract fixed no definite time for cutting and removing timber paid for. Under the circumstances, title to the timber paid for remained in petitioner until the timber was cut and removed. Houston Oil Co. of Texas v. Boykin, 109 Tex. 276; 206 S. W. 815; Florence A. Foster, 18 B. T. A. 819; affirmed on this point, Foster v. Commissioner, 57 Fed. (2d) 516; Carrie Lutcher Brown, 26 B. T. A. 781; aff'd., 69 Fed. (2d) 863; certiorari denied, 293 U. S. 579.

In Florence A. Foster, supra, the petitioner acquired under the will of her husband an interest in a contract for the sale of timber located in Texas. Title to the timber did not pass until the property was cut, removed, and paid for. The primary question was whether the petitioner acquired timber under her husband’s will, burdened with the contract, or rights to receive payments in the future. We held that the thing she acquired was timber, and, in computing loss from storm damage and gains from sales, used as a basis the fail-market value of the timber as of the date of acquisition by the petitioner. The appellate court modified the Board’s finding of value, but sustained the conclusion of the Board that the property for valuation was the timber rather than an interest in a contract. It held that such value should be fixed without reference to the contract for the sale of the timber. In so holding it said, among other things:

* * * Does the fact that, though the timber was in 1913 worth $5 per thousand, there was an option against it requiring the owner, if the purchasers proceeded in accordance with the contract minimum, to carry it until 1921, to receive then $5 without interest, authorize its valuation in 1913 for income tax purposes, at $3.50, roughly $5, discounted for the time? * * *
We do not think the existence of the contract affects the valuation at all. We find no warrant in the statutes or the regulations governing the fixing of values for income tax purposes for this time discounting theory. They fix as the basis for determining loss or gain “the fair market price or value of the property at the time of its acquisition.” We think there is no more ■warrant for fixing the value in 1913 for income tax purposes at $3.50 by discounting forwards and thus establishing a gain in 1921 than there would be for fixing the amount received in 1921 at $3.50 by discounting backwards; that is, allowing, the taxpayer a credit on the $5 value existing in 1913 for carrying charges, and thus establishing a loss. The question for decision here is not the value of the payments which Mrs. Foster might or might not, according to whether and how it was performed, receive at one time or another under the option contract. It is not whether she may have the benefit of the carrying charge to show a loss, nor whether, as here claimed, it may be used against her to depress the value of the base. The question simply is, What was the value in 1913 of the timber which she lost, and of that which she sold in 1920 and 1921? and we think the answer to it as simple, is that it was $5 per thousand.

We find nothing in Reinecke v. Spalding, 280 U. S. 227, contrary to the Foster case. There the question was the amount of depletion the taxpayer was entitled to as the owner of an interest in a lease giving the lessor the right to a royalty of 25 cents per ton for ore removed from mines. No sale of property, as here, was involved. The court refused to accept the suggestion that market value of the taxpayer’s rights on March 1, 1913, was equivalent to the amount of the royalty, discounted to the time paid. No depletion was allowed because of failure to establish the fair market value of the taxpayer’s interest in the mines on the basic date. Here, as in the Foster case, the question is simply the fair market value of the timber on the basic date.

The expert testimony offered by the parties to establish the fair market value of the timber on March 1, 1913, is conflicting. One of the petitioner’s witnesses testified to a value of $6.35 per thousand feet, a figure based upon an estimate that of the timber 85 percent was long leaf and the remainder short leaf. The other witness expressed an opinion that the fair market value of the timber was $7 per thousand feet. The respondent’s witness, whose knowledge of the timber was limited to a small part thereof, placed a valuation of $4 per thousand feet on the property. The evidence discloses a sale of 275,000,000 feet of timber in 1908 at $5 per thousand feet, with no explanation of the circumstances surrounding the transaction. There was no testimony to show the fluctuation, if any, of the values from 1908 to 1913, but the proof is that they were about the same from 1910 to 1913. The Lumber Co. made some sales in 1912 and 1913 at from $6 to $6.50 per thousand feet, and at about that time it made a sale at the price of $5.50 per thousand feet. While these sales of the Lumber Co. were characterized as “sacrifice sales” to raise funds to meet semiannual payments under the stumpage contract, without proof that the timber so sold did not bring its fair market value, we think the sales are entitled to weight. From all the evidence on the point we find that the timber covered by the stumpage contract and decree had a fair market value on March 1, 1913, of $6 per thousand feet.

Since the selling price of the timber was less than the March 1, 1913, fair market value thereof, but in excess of cost, the sales made thereof by the petitioner did not result in taxable gain or a deductible loss in any of the taxable periods. United States v. Flannery, 268 U. S. 98; section 202 (b), Revenue Act of 1921; William H. Haywood, 12 B. T. A. 407.

In computing gain realized by the Development Co. in 1920 and 1921 from the sale of timber the respondent allowed amounts as a deduction from the selling price which he designated as “value.” The record furnishes no explanation of how he determined the amounts, $4,879.82 in the case of the small sales made in 1920, and $900,000 in the case of the sales in 1921, or why he used value on an undisclosed date rather than cost. The revenue agent used cost, $2.50 per thousand for the hardwood timber and $5 per thousand for the yellow pine. Such action was proper. The proof here is that the timber was acquired in 1916 from the petitioner at the costs used by the revenue agent. It was located on the same land as the timber under sale of the Lumber Co., but was different timber from that covered by the stumpage contract and decree. The gain realized or loss sustained will be recomputed on the basis of cost of $2.50 per thousand feet for the hardwood timber and $5 per thousand feet for the yellow pine.

The petitioner alleges that the respondent erred in not increasing its invested capital in 1920 for the value of the land and options received from Kirby for $20,000,000 par value of its stock, claiming that such property had a value of not less than $30,000,000. While the issue is referred to in petitioner’s brief as one of the questions present for decision, it is not discussed therein or in petitioner’s reply brief.

The stock was issued in 1901 for tangible and intangible property, but no testimony was offered on the cash value of the property. Lacking any basis for increasing invested capital for the property received for stock, we must sustain the respondent.

The remaining issue relates to a net loss deduction in 1920 under the provisions of section 204 (b) of the Revenue Act of 1918. Pursuant to agreement of counsel the amount of the net loss, if any, will be settled under Rule 50.

Decision will be entered wnder Bule 50.


author: Murdock:

text:
    Adam H. Davidson, Petitioner, v. Commissioner of Internal Revenue, Respondent. Clifford Drake Davidson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 60670, 60671.
    Promulgated April 30, 1936.

      George S. Atkinson, Esq., and E. B. Burnett, G. P. A., for the petitioners.

      James L. Baokstrom, Esq., Carroll Walker, Esq., B. B. Gannon, Esq., and L. S. Mitchell, Esq., for the respondent.
   OPINION.

Murdock:

The period of limitations for assessment of taxes im* posed by the Revenue 'Act, of 1926 was “three years after the return was filed.” Sec. 277 (a) (1). That period .had expired before the deficiency notices involved in these, proceedings were mailed. However, that three-year period was “extended for a period of one year in the case of any married -individual where such individual or his or her spouse filed a separate income-tax return for such taxable year and included therein income which under the laws of the State upon receipt became community property,” Joint Resolution No. 88, 71st Cong., 2d sess., approved June 16, 1930, ch. 495, 46 Stat. 589. The four-year period provided by the joint resolution had not expired when the notices of deficiency involved herein were mailed. The petitioners contend “that the joint resolution is unconstitutional and void because it violates Article 5 of the Constitution of the United States in that it purports to deprive certain specific taxpayers of property without due process of law.” They fail, however, to cite any authorities which are really in point. The statute is presumed to be valid. It took away no vested rights. The petitioners argue that the statute is arbitrary and capricious in its classification of the persons affected. There was some question at the time of the enactment of the joint resolution whether married persons living in community property states had a right to file separate income tax returns reporting thereon one-half of the community income. The question was settled, in so far as it affected persons living in Texas, by the decision of the Supreme Court on November 24, 1930, in the case of Hopkins v. Bacon, 282 U. S. 122. The purpose of the joint resolution was to protect the interests of both the Government and the taxpayers pending the final decision of the question. See Committee Reports on the resolution in the Congressional Record, June 11,1930, pp. 10923-10925. There was no reason to extend the period of limitations as to other classes of taxpayers. Other taxpayers would not be affected by decision of the test cases then pending before the courts. The classification was neither arbitrary nor capricious, and the resolution is not unconstitutional. Cf. Poe v. Seaborn, 282 U. S. 101; Graham, v. Goodcell, 282 U. S. 409.

Davidson received 20,000 shares of Oklahoma Natural Gas Corporation stock in 1926 as part of his compensation for bringing the business to the attention of the investment bankers and for performing whatever other services he may have performed- in connection with the organization of the Oklahoma Natural Gas Corporation. All of the 20,000 shares thus received belonged to him. - The same 20,000 shares were sold in the taxable year now before the Board, and,, at the time of the sale, all of' the 20,000 .shares still belonged to Davidson. Between the date when he received the shares in 1926 and the date when he sold them in 1927, he had parted with possession of certificates for 6,000 shares. But it is clear from the present record that those shares still belonged to Davidson. He always insisted that he was at all times the owner of the 6,000 shares. Sib-ley may have made some claim that some of the 6,000 shares belonged to him. But Davidson entered suit against Sibley, contending that the shares had always belonged to him and demanding full restitution from Sibley, and all parties to that suit agreed, in the final settlement, that the shares had at all times belonged to Davidson and Davidson was to receive certain compensation for permitting the proceeds of the sale to be used to pay the debts of Sibley and another. The evidence clearly indicates that none of the 6,000 shares belonged to Sibley at the date of the sale.

The petitioners on their return deducted $110,780 from the proceeds of the sale for the alleged reason that that portion of the proceeds of the sale went to Sibley as his share of the profit from the transaction. They now claim that the correct amount is $122,780. The record not only fails to sustain the petitioners in this contention, but it proves conclusively that a substantial part of the amount should not be used to reduce the petitioners’ profit from the sale of the 20,000 shares. The increase of $12,000 is alleged to have something to do with a note for $8,500 given by Davidson and one for $3,500 given by his wife. But we are unable to make any relative finding of fact from the record in regard to the $12,000. Sibley testified that he had advanced some money to Davidson to cover some expenses in connection with Davidson’s participation in the organization of the Oklahoma Natural Gas Corporation. He never stated just how much he had advanced, but once said it was about $20,000. He also testified that at the time the 20,000 shares were sold Davidson owed him $40,000 or $50,000 and the debts due him from Davidson were to be canceled by reason of the fact that the proceeds of the sale of some of the stock were to be received by banks and credited against Sib-ley’s indebtednesses to the banks. At least $76,000 of the $144,000 received by the Seaboard Bank out of the proceeds of the sale were used for this purpose. Davidson got full benefit from the proceeds of the sale thus used. The record is not clear as to what became of the rest of the proceeds of the sale which were paid to the Seaboard Bank, but it allows the inference that the entire amount received by the Seaboard Bank directly benefited Davidson. There is, therefore, no reason to reduce the amount realized from the sale of the stock by any amount, except the uncontested amount used to pay taxes and expenses of the sale.

The next argument advanced on behalf of the petitioners is that the 20,000 shares received by Davidson in 1926 had a fair market value of $15 a share or $300,000 at the time he received them in 1926; he, therefore, received taxable income of $300,000 in 1926 through receipt of the shares; each share thereafter had a basis of $15 for the computation of gain or loss to Davidson; therefore, the amount realized in 1927 from the sale of the shares should be reduced by this basis of $300,000. The contention thus made is inconsistent with the determination of the Commissioner. The petitioners had the burden of proof. They have called no witness to testify before the Board that the shares had a fair market value of any particular amount at the time they were received by Davidson in 1926. The petitioners’ counsel would infer that the shares were worth $15 in 1926 because Sibley was able to obtain some loans from banks in 1926 and 1927 in connection with which he pledged some of these shares as collateral. They would also draw inferences of value from certain statements appearing in exhibits. Not only is the evidence upon which they rely extremely weak, but there are other reasons for holding that the stock had no fair market value at the time it was received by Davidson in 1926. Davidson had been engaged for a number of years in the business of selling securities. If the 20,000 shares of stock which he received had had a fair market value in 1926, he would have known that fact and should have returned as income for that year the total fair market value of tlie shares which he received. He did not report any income in 1926 from receipt of the shares, which in itself is an indication that, in his opinion, the shares had no fair market value at that time. If the shares had had a fair market valué at the time received, they would have had a basis of that amount in the hands of Davidson for the purpose of computing gain or loss from the sale or disposition of the shares by him. He sold the shares in 1927 and reported a gain from the transaction in his income tax return for that year. But he claimed no basis in computing his profit on his return. That is another indication that in his opinion the shares had no fair market value at the time he received them in 1926. The question of the fair market value of the shares was raised thereafter by a revenue agent, and Davidson stated to the revenue agent that, in his opinion, the shares had no fair market value- at the time he received them in 1926. Davidson swore to the original petition in the proceeding now pending. That petition contained a statement that the shares of stock which he received in 1926 were evidenced by temporary certificates, had no par value, no market value, and no ascertainable value of any kind, represented secondary issues of a corporation which had only recently been financed, and, hence, were not returnable as income in the year 1926. The claim that these shares had a fair market value in 1926 was first advanced on behalf of the petitioners in an amended petition brought forward for the first time when the case was on for hearing. New counsel had been but recently employed and was apparently responsible for the new contention. Davidson was a witness in this proceeding. But he did not testify that, in his opinion, the shares had any fair market value at the time he received them in 1926. The determination of the Commissioner is to the effect that the shares had no fair market value in 1926, and we hold, after considering all of the evidence in the case, that the shares had no fair market value when received by Davidson in 1926 and, therefore, the petitioners are not entitled to reduce the amount realized in the sale in 1927 by any basis.

Reviewed by the Board.

Decision will be entered for the respondent.