author: Sea well : Black,

text:
    The Huntington National Bank, Trustee of Janet and Jean Runkle, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 53535.
    Promulgated April 5, 1935.

      James I. Boulger, Esq., for the petitioner.

      Philip M. Clark, Esq., for the respondent.
   OPINION.

Sea well :

The deficiency in controversy in this proceeding relates to income tax for 1927 in the amount of $18,397. The facts as stipulated are incorporated herein by reference as our findings of fact.

On August 15, 1924, Joseph H. Frantz executed an instrument transferring to the petitioner, in trust, 2,000 shares of common stock of the American Rolling Mill Co., the principal of 1,000 shares of which to be for the “ sole use and benefit ” of each of his granddaughters, Janet and Jean Runkle, then 7 and 5 years old, respectively, and all cash dividends or their equivalent on the whole to be paid to his daughter, Gretchen Janet Runkle, mother of Janet and Jean Runkle, without restrictions during the life of the trust. Provision is made in the instrument for the payment of dividends paid on the stock to another in case of the daughter’s death; investment of stock dividends; reinvestment of the corpus in securities of the United States; and distribution of the corpus to persons other than the grandchildren in case of their death before becoming 30 years of age.

The petitioner was on the cash receipts and disbursements basis and maintained only one account for the trust estate.

The petitioner filed a fiduciary return of income for 1927 showing profit of $48,790 from the sale of stock, dividends of $4,000, and a deduction of $120 for compensation to the trustee. It reported that each grandchild, Gretchen J. Runkle, guardian, was entitled to one half of the dividends, less the deduction taken, and that the stock profit had been added to the principal of trusts for the grandchildren, one half to each. It also filed an income tax return for each grandchild showing' taxable profit of $24,395 realized from the sale of stock not in controversy here. In his computation of the deficiency the respondent held that the trust indenture created a single trust. This action the petitioner alleges as error, claiming that the instrument created two separate and distinct trusts, one for each grandchild.

More than one trust may be established by the same instrument. Whether more than one was intended here depends upon a construction of the instrument itself, there being no other evidence of intention. Examination of all of its provisions discloses that the settlor used the singular number twenty times in referring to the trusteed property. For instance, in the habendum clause the trustee is empowered to execute, with the approval of Gretchen J. Runkle, such instruments as are deemed necessary “in administering this trust ”, subject, however, to “ the provisions herein made with reference to said trust.” Clause 3 (a) provides that “During the life of this trust ” cash dividends are to be paid to Gretchen J. Runkle, with the sole right to use the funds without accounting to anyone “ during or after the continuance of this trust.” Clause 4 directs that income from investments in Federal securities be invested in like securities and be “ added to the principal of this trust.” Another clause makes provision for the retention of the “ principal of the trust ” for the benefit of the surviving grandchild in case of the death of one before arriving at the age of thirty years. In case of the death of both before attaining that age, the “ whole of the principal of said trust ” and accumulations is to go to the settlor’s daughter.

Without any discussion of the purport of these terms pointing directly to intent to create a single trust, on brief counsel for the petitioner calls our attention to several provisions of the indenture, which he says clearly demonstrate the creation of two trusts. These provisions read as follows:

1st: One thousand (1,000) shares of said stock to be held by said The Huntington National Bank, of Columbus, the principal of which shall be for the sole use and benefit of my granddaughter, Janet Runkle, now aged seven years;
2nd: One thousand (1,000) shares of said stock to be held by said The Huntington National Bank, of Columbus, the principal of which shall be for the sole use and benefit of my granddaughter, Jean Runkle, now aged five years;
4th: All stock dividends which may be declared upon said two thousand (2,000) shares of stock as and when they may be declared and paid, shall be divided equally and added to the principal of the trust herein provided for my said granddaughters, Janet and Jean Runkle, and the certificates therefor delivered to said Trustee, The Huntington National Bank, of Columbus, and, upon approval of said Gretchen Janet Runkle, or her successor in interest, within a reasonable time, with due regard to market conditions, to be sold, and the proceeds of such sale or sales to be invested by said Trustee, The Huntington National Bank, of Columbus, in securities of the Federal Government of the United States, and in case of the maturity of any such securities, the proceeds thereof are to be re-invested in other similar securities, said investments to be made after advice and with approval of said Gretchen Janet Runkle or her successor in interest.
The income from said investments in Federal Government securities shall be re-invested in Federal Government securities, and be added to the principal of this trust.
5th: * * *
In case of the marriage and death of either or both of my said granddaughters, Janet Runkle and Jean Runkle, before arriving at the age of thirty (30) years, and leaving lawful issue, the trust fund herein provided for such granddaughter, or granddaughters, and subject to all of the conditions herein, is, by my said Trustee, The Huntington National Bank, of Columbus, to be held for the benefit of the issue of said deceased granddaughter or granddaughters, share and share alike, in the interest of the mother of said issue, and the Trustee herein, The Huntington National Bank, of Columbus, is to continue as Trustee, managing and administering the funds in accordance with the provisions of this trust, until such child or children of such deceased granddaughter or granddaughters become of age.
# * :!< * * * *
This trust is to continue until each of my said granddaughters, Janet Runkle and Jean Runkle, respectively, shall arrive at the age of thirty (30) years, upon which event, in each case, and as soon as practicable thereafter, the trust fund with all accrued interest and accumulations herein provided for each of my said granddaughters shall be paid over by my said Trustee, The Huntington National Bank, of Columbus, or its successors, to my said granddaughters Janet Runkle and Jean Runkle, .as and when each of said granddaughters becomes of that age, respectively.

In the construction of a trust instrument to arrive at the intent of the settlor all of the provisions of the document must be considered, not a few isolated provisions. Fidelity & Columbia Trust Co. v. Lucas, 66 Fed. (2d) 116. Clause 4 is clearly ambiguous to the extent that it provides for an equal division of stock dividends for addition to “ the principal of the trust.” There is language in the quoted provisions of the fifth clause of the instrument indicating an intent to create a separate trust for each grandchild. When read, however, in connection with other directions of the settlor, it becomes apparent that no such intention was meant. Another provision appearing in the fifth clause is that in case of the death of either grandchild, without lawful issue, before attaining the age of thirty, the “ principal of the trust herein provided for my granddaughters ” is to be retained by the trustee for the benefit of the survivor or her issue. The same clause directs that in the event of the death of both grandchildren before reaching thirty years of age and without lawful issue, the “ whole of the principal of said trust ” shall be at once paid to the settlor’s daughter, and in case of the death of all three without issue, the “ principal of said trust ” is to go to six designated persons in equal proportions.

There is nothing in the instrument expressly declaring an intent to create two trusts or that in case either grandchild died before reaching the age of 30 years the trust set up for her should terminate and the corpus thereof be transferred to the survivor. Terms such as “ trusts ” and “ these trusts ”, commonly appearing in an instrument creating more than one trust, are absent in the document. The word “ funds ” appears only twice in the instrument. In one instance it is used with reference to administration of corpus and in the other it is employed in prescribing the manner of raising money to pay taxes in case earnings of the trust estate are insufficient to meet such expenses.

As we construe the instrument, the settlor intended to create one trust in which each grandchild was to have an equal beneficial interest in the corpus. Commissioner v. United States Trust Co. of New York, 75 Fed. (2d) 973. It follows that the respondent did not err in determining the deficiency on the basis of a single trust. Cf. Johnson, v. United States, 65 Ct. Cls. 285; State Savings Loan & Trust Co., Trustee, 25 B. T. A. 228; affd., 63 Fed. (2d) 482; John J. Rauels et al., Trustees, 28 B. T. A. 516; Gertrude McGinley, Trustee, 31 B. T. A. 81.

On December 28, 1927, at the request of the petitioner, Otis & Co., brokers, sold through its New York office for delivery the same day, 1,000 shares, consisting of blocks of 700, 200, and 100, of stock of the American Rolling Mill Co. On the same day the New York office of Otis & Co. delivered to brokers for the purchaser 1,000 shares of the stock, and as of that date the account of the petitioner with Otis & Co. was credited with $104,790 on account of the sale. On December 29, 1927, the Columbus, Ohio, office of Otis & Co. received from the petitioner, and forwarded to its Cincinnati, Ohio, office for transfer to Otis & Co., New York, New York, 1,000 shares of American Rolling Mill Co. stock. On the following day (1) the certificates were received by the Cincinnati office of Otis & Co. and delivered to the transfer office of the American Rolling Mill Co.; (2) the certificates were canceled and new ones issued in the name of Otis & Co., New York, New York; and (3) notice of the transfer was mailed to the Columbus office of Otis & Co. The Columbus office of Otis & Co. closed at noon December 31, 1927. January 1, 1928, fell on a Sunday and January 2, 1928, was a legal holiday. On January 3, 1928, the Columbus office of Otis & Co. received notice of the transfer and issued and delivered to the petitioner a check for $104,790 in payment for the stock. The petitioner recorded the payment on its books as of January 3, 1928.

The petitioner reported the profit on the sale as income taxable in 1928. The respondent included the profit in petitioner’s 1927 income. Whether the gain is taxable in 1927 or in 1928 is the only question presented for decision.

The stock which the petitioner directed its broker to sell was owned by the seller at the time and the transaction was an ordinary sale of stock, not, as the petitioner contends, a “ short sale.” Provost v. United States, 269 U. S. 443; Robert W. Bingham, 27 B. T. A. 186; James Cunningham, 29 B. T. A. 717. Had the broker treated the transaction as a short sale, it would have charged the petitioner with the price of the stock delivered instead of crediting the petitioner with the selling price of the securities. Brown v. Carpenter, 182 N. Y. 650; 169 N. Y. S. 921. That Otis & Co., for reasons not disclosed by the stipulation, saw fit to deliver to the broker for the buyer on the day of the sale certificates other than those held by the petitioner is not regarded as material.

The buyer of the stock was not Otis & Co., but the customer of the broker with whom Otis & Co. dealt in New York. With respect to the sale of the shares of stock owned by the petitioner, Otis & Co. was acting as the agent of the seller. Brown v. Carpenter, supra; James Cunningham, supra; William W. Miller, 31 33. T. A. 192. There is no suggestion in the agreed facts or briefs that the amount credited to the account of petitioner on the date of sale was not actually received by the broker in 1927. Neither is there anything in the stipulation contrary to the fact that the selling price was un-qualifiedly subject to the demands of the petitioner certainly on and after December 29,1927, when it delivered the stock certificates, presumably properly endorsed, to the Columbus office of the broker, where the selling order was placed. Title to the stock then passed and nothing remained for the petitioner to do to fully consummate the transaction except demand the selling price received by the broker for the stock. Under the circumstances, receipt by the agent was receipt by the principal, and the profit realized on the sale became taxable income to the petitioner at that time. Frank E. Best, 26 B. T. A. 1070, and Fremont C. Peck et al., Executors, 31 B. T. A. 87, and cases cited therein.

But the petitioner argues that the broker was not satisfied to accept the sale as a closed transaction until the stock certificates had been reissued in favor of “ Otis & Company, New York, New York.” There is nothing in the agreed facts that payment of the selling price of the stock by the broker was to await the reissuance of the stock in favor of Otis & Co., New York, New York. Granting for purposes of discussion that delivery of the consideration received for the stock was conditional upon such action, it was complied with on December 30, 1927, when the stock certificates were so reissued and delivered to the broker at its Cincinnati office, delivery to that office being equivalent to delivery to the Columbus office of the broker.

Avery v. Commissioner, 292 U. S. 210, involved distinguishable facts, and is not regarded as controlling the question here.

The respondent committed no error in including the profit realized in the sale of the stock in petitioner’s income for 1927.

The petition raised an additional question involving the basis for the stock. On brief the petitioner concedes that the respondent was correct in using as a basis cost of $30 per share.

Reviewed by the Board.

Decision will be entered for the respondent.

Black,

dissenting: I dissent from the majority opinion on the second point. The facts clearly show that petitioner did not actually receive the check for the stocks which it had sold on December 28, 1927, until January 3, 1928. There appears to have been no unusual postponement in the mailing of this check by the brokers to petitioner. It appears to have been done in the regular course of business and on account of the particular facts stated in the majority opinion, the check did not reach petitioner until January 3, 1928. It appears from the facts stated in the majority opinion that it was not until January 3, 1928, that petitioner became unqualifiedly entitled to receive the money. The majority opinion states in substance as follows: On January 3,1928, the Columbus office of Otis & Co. received notice of the transfer of the stock to Otis & Co. and issued and delivered to the petitioner a check for $104,190 in payment for the stock.

While it is true that Otis & Co. acted as agent for petitioner in the sale of the stock, and, as a general rule, income when paid to an agent is income to the principal, there are exceptions to this doctrine of constructive receipt by the principal. Generally, a receipt will not be taxed to the principal when it comes to the agent unless the agent is acting exclusively for the taxpayer and the fund is in the hands of the agent, unqualifiedly subject to the demand of the taxpayer principal. Sydney F. Tyler et al., Trustees, 28 B. T. A. 367.

It seems clear that in the instant case Otis & Co., petitioner’s agent in the sale of the stock in question, was not willing to turn over the money which it had received from the sale until its Columbus office had received notice that petitioner had duly transferred the 1,000 shares of stock in question to Otis & Co. This information was received at Otis & Co.’s Columbus office on January 3, 1928, and thereupon Otis & Co. promptly issued its check to petitioner. Thereupon the $104,190 became unqualifiedly subject to petitioner’s disposal.

Section 42 of the Revenue Act of 1928, reads: “ The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless under methods of accounting permitted under section 41, any such amounts are to be properly accounted for as of a different period.” (Italics supplied.) Section 213(a) of the Revenue Act of 1926, referred to by the Supreme Court in Avery v. Commissioner, 292 U. S. 210, contains the same language.

The majority opinion finds “ the petitioner was on the cash receipts and disbursements basis.” For reasons I have already stated, it seems to me that in the instant case there is no occasion to apply the doctrine of constructive receipt and that the $104,190 in question should be taken into petitioner’s gross income in the year 1928. Cf. Avery v. Commissioner, supra.


source: Caselaw Access Project

author: Black :

license: Public Domain

text:
    Herff & Dittmar Land Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Emmy Dittmar, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 60729, 63931, 68821.
    Promulgated April 5, 1935.

      George 8. Atkinson, Esq., and M. S. Oarneiro, Esq., for the petitioners.

      John D. Kiley, Esq., B. B. Gannon, Esq., and B. A. Bow', Esq., for the respondent.
   OPINION.

Black :

We have already stated the issues in this proceeding. The first and principal issue is whether the conveyance to the corporation of the Olmos Park Tract of land by the owners thereof, who were also stockholders of the corporation, was a sale to the corporation for $617,500 net to the owners, or whether, as respondent contends, the land was conveyed to the corporation in payment of its capital stock, or as paid-in surplus to the corporation. In either of the latter events the respondent contends that the corporation would take the same basis for computing gain or loss as the transferors, which has been stipulated to be $750 per acre.

As pointed out in our findings of fact, the land was conveyed to the corporation by general warranty deed and the consideration stated in the deed was $10 and other valuable considerations. It is clear that the other valuable considerations mentioned in the deed were not shares of the corporation. The evidence shows clearly that the entire capital stock of the corporation, 3,000 shares of no par value, was issued in payment for the Camarillo Tract of 305 acres. The affidavits required by the State of Texas showing payment for the capital stock as a condition precedent to issuing the corporation’s charter, show that the Camarillo Tract was paid in for the corporation’s capital stock and that the Camarillo Tract was worth $30,000.

There is no evidence whatever that the Olmos Park Tract figured in any way as payment for stock. There is likewise no evidence that the owners of this tract of land intended to make a gift of the land to the corporation or intended to pay it in to the corporation as “ paid-in surplus.”

The facts in the instant case are not like those present in Rosenbloom Finance Corporation, 24 B. T. A. 763, where Sol Bosenbloom was the owner of a large stock of barrel whiskies which was stored in warehouses and had greatly appreciated in value, and Bosenbloom, in order to escape tax on their sale, transferred them to the Bosen-bloom Finance Corporation, of which he was majority stockholder, as paid-in surplus, the corporation then claiming a stepped-up basis for gain or loss based on the market value of the whiskies at the time transferred to it by Bosenbloom. The Board sustained the contention of the taxpayer corporation in that case and held that by reason of the fact that the warehouse certificates were transferred to the corporation as “ paid-in surplus ” the corporation got a new basis and did not take the basis of cost of the transferor.

The court, however, in Commissioner v. Rosenbloom Finance Corporation., 66 Fed. (2d) 556, reversed the Board and held that the transfer of the warehouse certificates by Bosenbloom to the Bosen-bloom Finance Corporation amounted to a gift, notwithstanding the forms adopted to show “ paid-in surplus ”, and that the corporation on a future sale of the warehouse certificates took the same basis as the transferor. On that point the court said:

The taxpayer paid Bosenbloom no money, stock, or other consideration therefor. It was a voluntary transfer of property without consideration or compensation therefor, and the form it took involved no ownership by any third party, and, whatever form or semblance it took, in substance and reality it was a transfer with the aim of avoiding tax. In our judgment it was a gift.

In the instant case it is clear that there was neither a gift of the Olmos Park Tract nor a paying of it in as surplus to the corporation. There was a sale of the land to the corporation by the stockholders for which they were to be paid and were in fact paid $617,500. We do not think it is of any controlling significance that some of the payments were denominated dividends ” in the corporate resolutions directing their payment and some were denominated “ distributions of capital.” The significant fact is that all such payments were understood by the parties to be payment of indebtedness which the corporation owed the stockholders and were treated as such by the stockholders in their income tax returns and by the corporation on its books. We think the facts of the instant case are very similar to those present in Curran v. Commissioner, 49 Fed. (2d) 129. In that case a majority stockholder, Curran, had deeded a building to the Con. P. Curran Printing Co., the deed reciting a consideration of $100, but the real consideration being an agreement by the corporation to pay Curran $150,000 for the building. Subsequently, the corporation declared a so-called dividend of $150,000, although providing specifically that none of the money could be withdrawn by the stockholders and that $76,500 of it should be credited to Curran on an open account of indebtedness which he owed the corporation. The Commissioner held that the $76,500 which was credited to Curran on the books of the corporation was a dividend and should have been included in his return for taxation at surtax rates. Curran contended that, notwithstanding the payment was denominated a dividend on the books of the corporation, it was nevertheless a payment on the sale price of the building which he had sold to the corporation and that, since he had sold the building to the corporation for less than it had cost him, there with no taxable gain in the receipt of the payment of $76,500.

The court sustained Curran’s contention and in doing so, among other things, said:

The form of a transaction is unquestionably pertinent evidence as to what the transaction really is, yet it is not always controlling. This is illustrated by the well-recognized rule that a deed, absolute in form, may be shown to be a mortgage. This same principle is true in applying the revenue statutes unless there is some forbidding expression or necessary implication in the particular statute. When this statute seeks to tax income as derived from corporate dividends, obviously, it means income derived from corporate earnings which accrue to the stockholder solely because of his relation as such to the corporation. It has no design to so tax money paid to the taxpayer as the purchase price of property. The form is not conclusive evidence that the payment really and essentially and solely was a corporate dividend. Doyle v. Mitchell Bros. Co., 247 U. S. 179, 183, et seq., 38 S. Ct. 467, 62 L. Ed. 1054. Even the evidentiary force of form is weakened where, as here, the transaction includes elements unusual or opposed to a transaction which the form would ordinarily or necessarily represent.

So, giving effect to all the evidence in this case, we hold that the transfer of the Olmos Park Tract to the corporation was a sale and that the price agreed to be paid by the corporation to the owners of the land was $617,500 net to them. Cf. Georgetown Water Gas & Electric Co., 28 B. T. A. 321; Abe Ackerman, 27 B. T. A. 413. The second issue is whether the payments made to Emmy Dittmar in the taxable year in question are taxable as dividends, as determined by the Commissioner, or were payments to her as a part of the purchase price of the Olmos Park Tract and taxable, to the extent of profits thereon, as capital net gain. This issue is necessarily determined by what we have already held on issue 1.

Therefore on issue 2, we hold in favor of the taxpayer.

Decision will be entered wider Rude 50.


author: Arundell:

text:
    R. W. Hale, Petitioner, v. Commissioner of Internal Revenue, Respondent. W. T. Hale, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 67750, 67751.
    Promulgated April 9, 1935.

      Euffene Meachann, Esq., and Knox B. Phagan, G. P. A., for the petitioners.

      B. M. Goon, Esq., and J. W. Smith, Esq., for the respondent.
   OPINION.

Arundell:

These proceedings, consolidated for trial, involve deficiencies in income tax for 1929. In the case of It. W. Hale, the deficiency determined by the respondent is in the amount of $1,166.72, and in the case of W. T. Hale, Jr., $4,802.15.

The petitioners allege error in the respondent’s refusal to allow a deduction for a claimed loss in connection with the sale of stock and in his refusal to allow as a capital loss the amount of loss sustained in connection with the sale of land. A stipulation of facts and certain exhibits were offered at the trial as the entire evidence of the parties.

The petitioners are brothers and for many years have been engaged in the grain business in Nashville, Tennessee, as partners in the firm of J. R. Hale & Sons. On June 6, 1929, petitioners each purchased 500 shares of North American Aviation Corporation stock at a cost of $16.50 per share. On June 29, 1929, they sold the entire block of stock consisting of 1,000 shares to their sister, Lura Hale, for $16,500, which was the cost price to them, subject however, to a written guarantee evidenced in a letter addressed to her and signed by petitioners. The pertinent parts of the letter read as follows:

We agree to protect you against any loss which may result when you sell this stock, this guarantee to include the interest on the money while the stock is being held by you, with the understanding, however, that any cash dividends received by you are to be credited against any loss sustained. In ease of loss we each agree to assume one half of said loss. Your account on the books of J. B. Hale & Sons has been charged this date with $16,500.00 representing the cost to you of this stock. This guarantee is good only for a period of one year from this date.

Lura Hale paid for the stock by having her account with J. B. Hale & Sons charged with the sum of $16,500. At that time she had a credit balance with the firm of $42,066.42. The respondent concedes that the sale was bona fide in every way. On December 13 and 14, 1929, Lura Hale sold the shares of North American Aviation Corporation stock for $4,897.50, thereby suffering a loss. Upon written demand being made by Lura Hale each petitioner paid to her, pursuant to the terms of the guarantee, one half of the loss plus interest in the amount of $470.26, a total in each case of $6,036.38. Payment was made by appropriate credit entries during the year 1929 to Lura Hale’s account in the books of J. B. Hale & Sons.

The reason advanced by respondent for disallowing the deductions is that the transactions were not entered into for profit, as required by the revenue act. As we understand respondent’s reasoning it is this: The sale of the shares of Aviation stock being at cost, there could be no possibility of profit, and as the sister would get the benefit of any advance in the market the brothers only stood to lose if the stock went down. Kespondent’s position is based on the theory that the transaction which resulted in the loss in each case was the sale to Lura Hale. That was only one of several steps, all of which can and must be retraced to find the origin of the transaction. We thus go back to June 6, 1929, when the stock was acquired by petitioners. That acquisition marked the inception of a “transaction entered into for profit ” within the meaning of the statute. The principle of relation back to inception is fundamental in the tax statutes. In order to determine gain or loss the amount realized is compared with the basis, and the basis is a figure determined as of the time of acquisition — with a few exceptions, as, for instance, acquisition prior to March 1,1913. Following a transaction through, it is ordinarily ended and gain or loss computed when property is sold. But there are exceptions to that rule. Under the statute the amount of gain is the amount realized ” in excess of the basis and the amount of loss is excess of the basis over the “ amount realized.” Sec. Ill, Bevenue Act of 1928. In the present case, when at the end of the year the taxpayers cast up their accounts they found that the amount realized after making good this guaranty was less than the basis. Consequently they suffered a loss in 1929 arising out of a transaction entered into for profit, which loss is an allowable deduction. We need not, and do not, decide what the answer would be had the guaranty been satisfied in a later year. These cases are distinguishable from Phillips Lee Goldsborough, 18 B. T. A. 181; affd., 46 Fed. (2d) 432, and similar cases cited by respondent. In the Goldsborough case the taxpayer merely guaranteed another against loss on a transaction in which the taxpayer himself took no part. The taxpayer there did not enter into a transaction for profit.

The second issue grew out of the following transaction. During the year 1925 the petitioners sold an orange grove in Polk County, Florida, for the sum of $60,000. Full fee title was transferred to the purchaser upon the payment of $20,000 in cash and $40,000 in notes secured by a first mortgage. The respective petitioners each reported their pro rata share of their profit upon this transaction in 1925, and paid the tax thereon. Upon maturity of the notes in 1927 the maker, although financially able to pay, refused to do so. During the year 1929, suit to collect in the amount of $22,418.24 was instituted in the Federal District Court for the Northern District of Ohio, Eastern Division. Prior to judgment and during the taxable year 1929, a settlement was agreed upon which resulted in a loss to each petitioner in the amount of $7,497.22.

The respondent concedes the deductibility of the loss suffered by each petitioner, but asserts that it is allowable only as a bad debt. Petitioners now ask that the deduction be allowed as a capital net loss. Section 101 (c) (2) of the Bevenue Act of 1928 provides: “ ‘ Capital Loss ’ means deductible loss resulting from the sale or exchange of capital assets.” The petitioners did not sell or exchange the mortgage notes, and consequently an essential condition expressly required by the statute has not been met and no capital loss has been suffered. Cf. Mont S. Echols, 24 B. T. A. 1127; affd., 61 Fed. (2d) 191; John H. Watson, Jr., 27 B. T. A. 463. The sale of the orange grove property was a deferred payment sale within the meaning of article 354 of Begulations 74, and the loss sustained by reason of the failure to collect the notes given- is a bad debt under the provisions of article 193 of the same regulations. The respondent has so allowed it and we think his action is correct.

Decision will be entered under Bule 50.


author: Turner:

text:
    Central Co-operative Oil Association, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 70290.
    Promulgated April 9, 1935.

      Robert GaTin, O. P. A., for the petitioner.

      James K. Polk, Jr., Esq., and ArtTrnr Olark, Esq., for the respondent.
   OPINION.

Turner:

The respondent determined an income tax deficiency amounting to $612.73 against the petitioner for the year 1930. The issue is whether or not the petitioner, being a cooperative association, otherwise exempt from paying income tax in virtue of section 103 of the Revenue Act of 1928, is nevertheless taxable for income derived from sales made to nonmember customers and to whom no patronage dividends were paid.

The petitioner was organized as a cooperative association under the laws of the State of Minnesota in March 1924, to buy, sell, and otherwise deal in gasoline and petroleum products for its members. In such connection it maintained two filling stations, on public highways, where it sold these' products to its members and the public generally, on equal terms, in the regular retail trade. It also operated six tank wagon trucks, through which it carried on a sales business in the territory immediately surrounding its filling stations. These tanks were operated by agents who were paid commissions on the sales made.

The provisions of the taxing statutes under which the petitioner claims the right to carry on a tax-exempt business are contained in subdivision (12) of section 103, supra, which describe and limit its cooperative functions to transactions as follows:

(12) * * * for the purpose of purchasing supplies and equipment for the use of members or other persons, and timing over such supplies and equipment to them at actual cost, plus necessary expenses * * * provided the value of the purchases made for persons who are neither members nor producers does not exceed 15 per centum of the value of all its purchases. [Italics ours.]

The petitioner did not make specific purchases of equipment or supplies for its patrons, but merely supplied their needs through retail sales from its filling stations and tank trucks. These transactions were of the regular commercial character, in which petitioner realized a retailer’s profit. The net of its profits, determined at the end of each year, was distributed among the patrons in the form of so-called “ patronage dividends ”; the dividend unit being determined upon a patronage basis.

To entitle a patron to share in distribution of the profits of a year’s transactions, he was required to prove the amount of his purchases within six months after its close and, in default of such proof, the petitioner’s charter provided the following:

* * * Failure to furnish satisfactory proof of the amount of patronage for the year within the subsequent six months shall release the association from any further liability thereof, and any part of the reserve for patronage refund remaining unpaid at the end of the following fiscal year shall be designated and accounted for as undivided profits.

The petitioner’s gross sales during the taxable year amounted to approximately $380,000, of which $255,000 was to its members and the balance to nonmembers. The amount of patronage dividends accrued by petitioner for its Owatonna Station in 1930 was $44,088.32 and the patronage dividend refund accrued for its Blooming Prairie Station for 1930 was $16,130.68, or a total of $60,219, which represented a 20 percent purchase refund for that year. Petitioner, on its income tax return, only claimed and was allowed by respondent a deduction of $57,847.54 of purchase dividend refunds. Petitioner kept its books and made its income tax returns on the accrual basis, and in a recomputation of the deficiency it should be allowed a deduction of $60,219 for purchase dividend refunds accrued on petitioner’s books for the year 1930, instead of the $57,847.54 deducted on its return and allowed by respondent. During the taxable year petitioner made sales of approximately $30,000 to nonmembers and nonproducers to whom no patronage dividends were paid or credited. Respondent has computed a profit on these sales and has taxed petitioner thereon, and it is this profit which results in the deficiency here involved.

The respondent contends that this profit, under the conditions shown, is subject to income tax under authority of Fruit Growers Supply Co. v. Commissioner, 56 Fed. (2d) 90.

The position of petitioner seems to be that in no event are cooperative associations liable to income tax so long as their transactions with nonmembers are kept within the 15 percent limit prescribed by section 103 (12) of the 1928 Act. In our opinion the respondent must prevail.

The exemption claimed by petitioner, like other special privileges granted by statute, is available only to those who comply strictly with the terms of the statute creating it. Waynesboro Manufacturing Association, 1 B. T. A. 911; Farmers’ Co-operative Milk Co., 9 B. T. A. 696; Northwestern Drug Co., 14 B. T. A. 222; Riverdale Co-operative Creamery Association, 18 B. T. A. 1159; affd., 48 Fed. (2d) 711; Fruit Growers Supply Co. v. Commissioner, supra.

We do not think the petitioner’s business was conducted in a manner to eliminate the nonprofit requirement of the statute, and this is essential if the special exemption provided for cooperative associations is extended. Burr Creamery Corporation v. Commissioner, 62 Fed. (2d) 407.

The petitioner sold its products to the public generally, including transients and tourists. At the end of each year it divided among such of its patrons as could prove the amount of their purchases during the year the share in its profits attributable to their business. The petitioner’s bookkeeper, in testifying at the hearing and explaining how the dividends were determined, said:

At the end of the year, when our books are closed and the profit is acquired, the figure is acquired, why the tickets are all added up, each individual one is added up, and then the amount of sales that we have accumulated are divided by the profits, to get the amount of dividend to be paid. Then that, I would say, is paid to all, regardless of whether they earned it, or whether some one else earned it.

If we could accept the petitioner’s agency fiction and hold that, in purchasing its stock in trade, it merely anticipated the requirements of its patrons and thus purchased it subject to their use, it would still be impossible for us to find that the scheme followed met the statutory requirements. Obviously some patrons, local as well as tourists and transients, paid a profit to petitioner, which, under the scheme, was not returned to them, while other members and patrons received the benefits of such profit.

In Fruit Growers’ Supply Co. v. Commissioner, supra, which the respondent has cited as authority for this action, the court held that earnings derived by a cooperative association in selling surplus supplies to nonmembers constituted taxable gain. We think that decision is in point with these issues and that it sustains the respondent’s position.

The contention of the petitioner that the Act of 1921, under consideration in the case cited, was narrower than our 1928 Act, is without force and not supported by fact. The same rights of cooperative associations, as was pointed out by that decision, to deal with nonmembers was recognized and was extended through regulations promulgated by the Secretary of the Treasury. These Treasury interpretations were : carried forward into the text of ouSr present law through amendments to the 1926 Act, the purpose being, as stated by the Senate Finance Committee in its report, not to broaden its scope, but to make clear that which was then recognized as the existing law.

For the reasons stated the respondent is sustained in taxing profits from sales on which no patronage dividends were paid.

Decision will l)e entered u/nder Rule 50.


text:
    Mary Louise Bok, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75711.
    Promulgated April 9, 1935.

      Trmrum Henson,■ Esq., for the petitioner.

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

Black :

In this proceeding respondent has determined a deficiency of $100,974.10 against the petitioner, Mary Louise Bok, for the year 1931.

Only one error is assigned in the petition, IV (a), which reads as follows:

The Commissioner erred in adding to your petitioner’s income for the calendar year 1931 the sum of $603,378.61, dividends received by your petitioner during said year from the estate of her late husband.

The proceeding was submitted on the pleadings of the parties. The facts upon which petitioner relies in support of her assignment of error are stated in the petition as .follows:

(a) Your petitioner is the widow of the late Edward W. Bok, who died testate a resident of the County of Montgomery, Commonwealth of Pennsylvania, on the 9th day of January, 1930.
(b) Pursuant to the laws of the Commonwealth of Pennsylvania, your petitioner, had she so elected, would have been entitled to take against the will of said Edward W. Bok, and had she so taken, she would have been entitled to a distribution in excess of $6,470,000.
(c) Your petitioner, however, elected to take under the will of said Edward W. Bok, in lieu of taking against the same, and your petitioner has received, under the provisions of said will, certain dividends from time to time upon stocks held, by the trustees named in- said will, in trust to pay the income to your petitioner; and your petitioner received, during the year 1931, the sum of $603,378.61 as such dividends. The total amounts received by your petitioner from said estate, up to and through the year 1931, were less than $6,470,000.
(d) Your petitioner alleges that, pursuant to the rule laid down in Warner v. Walsh, 15 Fed. (2d) 367, United States v. Bolster, 26 Fed. (2d) 760, and Allen v. Brandeis, 29 Fed. (2d) 363, said distribution of $603,378.61 does not constitute taxable income, and that the same is not a part of her gross income for the year 1931.
(e) Your petitioner is aware of the recent decision of the Supreme Court of the United States in Helvering v. Butterworth, 54 S. Ct. 221; 78 L. Ed. 239 (not yet officially reported), decided December 11, 1933, but alleges that the decision of the Supreme Oourt in that case is not a decision upon the question here at issue; that the question here at issue was not involved in that case; and that the language used by the Supreme Court, which would be contrary to the relief herein requested, not being related to the matter before the Supreme Court, is obiter dicta, and not conclusive. The taxpayer is also cognizant of the decision of this Board in Annie C. Atwood, v. Commissioner, 29 B. T. A. 740, Docket No. 57390, decided January 11, 1934, but your petitioner contends that the three decisions above referred to, Warner v. Walsh, United States v. Bolster, and Alien v. Brandeis, being decisions of the United States Circuit Courts of Appeals, unreversed by any decision of the Supreme Court of the United States, state the law; and that said dividends, so received, are not taxable to your petitioner.

Respondent’s answer, among other things, contains the following:

IV. Denies the error alleged in paragraph IV.
V. Admits the averments contained in paragraphs V (a), (b), and (c) ; denies the averments contained in paragraph V (d) ; admits that petitioner is aware of the rule laid down in Warner v. Walsh, U. S. v. Bolster, Atwood v. Commissioner; denies the remaining averments contained in paragraph V.

Thus we have the issue made by the pleadings.

In Helvering v. Butterworth, 290 U. S. 365, the question was whether a widow, in circumstances such as those in the instant case, was a “ beneficiary ” within the ambit of the statutory provision. The Supreme Court held that such a widow is a beneficiary of a trust, and not an annuitant, and said: “ In no proper sense does she purchase an annuity. For reasons satisfactory to herself, she expresses a desire to occupy the position of a beneficiary and we think she should be so treated * * And the Court held that such distributions by trustees, being to a “ beneficiary ” are deductible from the income of the trust.

It is the contention of petitioner that no question of taxability to the widow was raised in the Butterworth case, nor was an answer to that question necessary to the decision of the point which was involved: and that if it be thought that the language of the Court expressing disapproval of Warner v. Walsh, 15 Fed. (2d) 367; United States v. Bolster, 26 Fed. (2d) 760; and Allen v. Brandeis, 29 Fed. (2d) 363, and stating that the amount which the trustee may deduct is taxable to the beneficiary, means any more than, in the one instance, that the widow was a beneficiary, and, in the other, a paraphrase of the statute, in any event it is obiter dicta.

Substantially the same question as that here raised by petitioner has been raised by other taxpayers before the Board since the decision of the Supreme Court in Helvering v. Butterworth, supra. These contentions have been denied. See Annie C. Atwood, 29 B. T. A. 740; Frances Ernest Drake, Executor, 30 B. T. A. 461. In the latter case, among other things, we quoted from Helvering v. Butterworth as follows:

When she mates her election the widow decides to get the benefits of the will with the accompanying rights and liabilities. In no proper sense does she purchase an annuity. For reasons satisfactory to herself, she expresses a desire to occupy the position of a beneficiary and we think she should be so treated.

To the same effect is the United States Circuit Court of Appeals case, decided since Helvering v. Butterworth, supra, of Helvering v. Schaupp, 71 Fed. (2d) 736, in which the court reversed its prior holding in Allen v. Brandeis, 29 Fed. (2d) 363, and said:

We are of the view that this decision (Helvering v. Butterworth) in effect overrules the doctrine announced in Allen v. Brandeis, supra, and the other cases relied upon by the Board of Tax Appeals.

Cf. Brooks v. United States, 6 Fed. Supp. 844; Connell v. Phillips, decided by the United States District Court for the Middle District of Pennsylvania, August 3, 1934.

On the authorities above cited, we sustain the respondent.

Decision will be entered for the respondent.


author: MoRRis:

text:
    Carroll E. Donner and the Marine Trust Company of Buffalo, Guardians of the Property of Joseph W. Donner, Jr., Petitioners, v. Commissioner of Internal Revenue, Respondent. Carroll E. Donner and The Marine Trust Company of Buffalo, Executors of the Estate of Joseph W. Donner, Petitioners, v. Commissioner of Internal Revenue, Respondent. Carroll E. Donner, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 60235-60237.
    Promulgated April 16, 1935.

      Ralph M. Andrews, Esq., for the petitioners.

      W. Frank Gibbs, Esq., and Frank M. Thompson, Jr., Esq., for the respondent.
   OPINION.

MoRRis:

The major question for our determination is the proper basis for computing gain or loss upon the securities transferred to the partnership, Rennod Co., upon the sale of such securities by that company in the taxable year. The respondent contends that the basis should be the cost to the contributing partners and that the fair market value thereof at the date of such contributions should not be used, as the petitioners contend. Edward B. Archbald., 27 B. T. A. 837; affirmed at 70 Fed. (2d) 720; certiorari denied, 293 U. S. 594, so completely disposes of this issue in favor of the petitioners that further discussion is useless. See also Helvering v. Walbridge, 70 Fed. (2d) 683; certiorari denied, October 8, 1934.

The respondent’s answer places in issue the question of whether or not the partnership income attributable to the interest of Joseph W. Donner, which he assigned as of February 1, 1929, to the Marine Trust Co. of Buffalo, as trustee, to collect the profits and income therefrom and pay the same to his wife, Carroll E. Donner, during her lifetime is, notwithstanding such assignment, taxable to him or, in his stead, his estate. The respondent contends that, in effect, this was merely an assignment of “ future income ” and that therefore for tax purposes the income must be taxed to the assignor. The petitioner relies mainly upon William W. Parshall, 7 B. T. A. 318, and John Barnes, Jr., Estate, 7 B. T. A. 924, affd., 30 Fed. (2d) 289, both of which held that there was an assignment of a partnership interest, and that thereafter the profits accruing to that interest were taxable to the assignee. These cases were decided, however, prior to the decision of the United States Supreme Court in Burnet v. Leininger, 285 U. S. 136. In that case the Court said:

Tlie statute dealt explicitly with the liability of partners as such. Applying to this case, the statute provided that there should be included in computing the net income of Leininger his distributive share of the net income of the partnership. That distributive share * * * was one half. In view of the clear provision of the statute, it can not be said that Leininger was required to pay tax upon only a part of this distributive share because of the assignment to his wife. * * *
* * * The Congress could thus tax the distributive share of each partner as such, as in Lucas v. Earl, supra, it taxed the salary and fees of the person who earned them. * * * In the Instant case, the right of the wife was derived from' the agreement with her husband and rested upon the distributive share which he had, and continued to have, as a member of the partnership.

Sections 181 and 182 (a) of tbe Revenue Act of 1928 are practically identical with section 218 (a) of the Revenue Acts of 1918 and 1921, which were involved in the Leininger case.

In the instant proceeding the trustee’s rights rested upon Donner’s distributive share, and were derived from the trust agreement. That agreement specifically provided that the trustee was not to become a member of the partnership. There was no change therefore in the membership of the partnership by virtue of the agreement. Accordingly, under the statute as construed by the Supreme Court in the above opinion, Joseph W. Donner is taxable upon the distributive share of his limited partnership interest whether distributed or not.

Several other questions were raised by the pleadings, which it is unnecessary to decide, either due to concessions made by the parties or to our conclusion on the first issue.

Reviewed by the Board.

Decision will Toe entered under Bule 50.


author: Arundell :

text:
    Leon S. Herbert, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 72949.
    Promulgated April 16, 1935.

      O. J. McGuire, Esq., for the petitioner.

      Roy N. McMillan, Esq., and Wilford E. Payne, Esq., for the respondent.
   OPINION.

Arundell :

It is petitioner’s view that he could not have constructively received the dividend declared on December 9, 1930, prior to the time that he could have legally demanded its payment which was on January 10, 1931. He reasons that it takes more than a book credit by a debtor corporation to the creditor’s account on its books to make him the recipient of taxable income. Respondent, on the other hand, argues that the declaration of the dividend on December 9, 1930, served to create the relationship of debtor and creditor between the corporation and the petitioner, and that, when the money so owing was used to pay an obligation of petitioner, it was the same as if the money had been in fact paid directly to petitioner, citing Old Colony Trust Co. v. Commissioner, 279 U. S. 716; United States v. Boston & Maine Railroad Co., 279 U. S. 732.

We think on the facts here present the respondent is right. We start with the fact that petitioner was indebted to the Herbert Hosiery Mills, Inc., in the sum of $51,165.23. Whether this sum represented cash advances to the petitioner does not appear. Petitioner owned substantially all of the stock of the Herbert Hosiery Mills, and, in the absence of a showing to the contrary, it may be assumed he completely dominated and controlled its operations. Thus when on December 31,1930, the corporation credited to petitioner’s account on its books the amount of the dividend declared on December 9, 1930, in the sum of $32,830 and the corporation’s books showed that the personal indebtedness of the petitioner to the corporation was thereby reduced to $18,335.23, it is only fair to assume that this action was taken, not only with the acquiescence of petitioner, but under his direction. At least there is not one iota of evidence offered in this case to the contrary, and it does not appear that petitioner ever objected to the corporation’s action in using the dividends to reduce his personal indebtedness. That the corporation thought that it had paid petitioner the dividend in 1930 appears from the fact that it so reported to the Bureau of Internal Revenue. It is evident that the sum of $65,660 listed on the information return represents the two dividends, the one in question here, and the one paid in January 1930.

While it is entirely true that one on a cash basis is not to be taxed on a dividend until its receipt, either actual or constructive, and in the ordinary case a dividend is not to be regarded as income to a stockholder before its due date, there is nothing inconsistent with this view in taxing one on the receipt of income, if in fact it is received, before its due date, which is the effect of what occurred here. The dividend was never received in possession, and no check was ever sent covering it, and the only action ever taken by the Herbert Hosiery Mills in the way of payment was by crediting petitioner’s account on its books on December 31, 1930. This constituted payment and respondent’s action is accordingly approved.

Decision will be entered for the respondent.


author: McMahon:

text:
    Edward Securities Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 46874, 58941.
    Promulgated April 16, 1935.

      Marry N. Wyatt, Esq., for the petitioner.

      Bruce A. Low, Esq., for the respondent.
   OPINION.

McMahon:

These are proceedings, duly consolidated, for the re-determination of asserted deficiencies in income tax as follows:

The issue presented is that of the constitutionality of section 204 (a) (8) of the Eevenue Acts of 1924 and 1926 and section 118 (a) (8) of the Eevenue Act of 1928 in so far as they require, in determining gain or loss upon the sale of property acquired by a corporation in exchange for its own stock, the use of the cost of said property to transferor when such property was acquired by the corporation prior to the enactment of the 1924 Act.

The parties entered into and submitted in evidence a written stipulation of facts, which we adopt as our findings of fact by reference, setting forth here only those facts necessary to an understanding of the question presented.

The petitioner is a corporation, organized in 1928 under the laws of the State of Illinois. On December 26, 1923, E. N. D’Ancona, pursuant to due action of petitioner, assigned, transferred, and delivered to petitioner certain securities then owned by E. N. D’Ancona, and received in exchange therefor 9,972 fully paid and nonassessable shares of the 10,000 shares of the authorized capital stock of petitioner of the par value of $100 a share, or an aggregate of $997,200 par value of such stock. Immediately following such transfer the petitioner had 9,982 shares of its capital stock of 10,000 shares of the par value of $100 a share outstanding, which stock was owned by the following persons:

E. N. D’Ancona_ 9,980 shares
Alfred E. D’Ancona_ 1 share
Maurice Marwick- 1 share

The two shares owned by Alfred E. D’Ancona and Maurice Mar-wick were directors’ qualifying shares.

Pursuant to resolutions duly adopted by the stockholders of petitioner at a special meeting held June 17, 1927, the authorized capital stock of petitioner was changed and decreased from $1,000,-000, consisting of 10,000 shares of the par value of $100, to $500,000 consisting of 10,000 shares of the par value of $50, and the outstanding capital stock of petitioner was changed and decreased from $998,200, consisting of 9,982 shares of the par value of $100, to $499,100, consisting of 9,982 shares of the par value of $50 per share, and such change and decrease in the authorized capital stock of petitioner was effected by the surrender by the stockholders of petitioner of 9,982 shares of the par value of $100 then outstanding and the issuance to them, in lieu thereof, of 9,982 shares of the par value of $50 per share.

E. N. D’Ancona owned 9,980 shares of the capital stock of petitioner out of a total of 9,982 shares outstanding throughout the calendar years 1924 to 1929, inclusive, the years under consideration in the above entitled petitions.

During 1924 to 1929, inclusive, the petitioner sold securities as follows:

All these securities were acquired by the petitioner on December 26,1923, from E. N. D’Ancona, as heretofore set forth, with the following exceptions: (1) 425 shares of preferred stock of the Yellow Cab Manufacturing Co., which were received by the petitioner October 10, 1925, as a stock dividend on the 1,700 shares of class B stock of the same company acquired from E. N. D’Ancona, and (2) 1,000 shares .of the capital stock of the Chicago Yellow Cab Co., which were received by the petitioner December 27, 1923, as a stock dividend on 1,000 shares of the same company acquired from E. N. D’Ancona. In computing the cost basis of such 1,700 shares and 1,000 shares, set forth in the above schedule, effect was given to the acquisition of these dividends, and a part of the original cost was allocated to the dividend shares.

The respondent determined that the petitioner realized as a taxable gain the difference between the cost of the securities involved to E. N. D’Ancona, the transferor thereof, and the price at which such securities were sold by the petitioner.

Upon the foregoing facts, the petitioner contends that section 204 (a) (8) of the Eevenue Acts of 1924 and 1926 and section 113 (a) (8) of the Eevenue Act of, 1928 are unconstitutional and invalid in so far as they are retrospective in operation and purport to require, in the determination of gain or loss upon the sale of property acquired by a corporation in exchange for its own stock, the use of cost thereof to the transferor where such property was acquired prior to the enactment of the 1924 Act, or June 2,1924.

The petitioner concedes that the constitutionality of the retroactive features of the above sections has been upheld in Osburn California Corporation v. Welch, 39 Fed. (2d) 41 (certiorari denied, 282 U. S. 860); Newman Saunders & Co. v. United States, 36 Fed. (2d) 1009 (certiorari denied, 281 U. S. 760); Haas Building Co., 22 B. T. A. 528; T. W. Phillips, Jr., Inc., 23 B. T. A. 1272 (affd., Phillips, Jr., Inc. v. Commissioner, 63 Fed. (2d) 101); and Kay Finance Corporation, 25 B. T. A. 913, cited upon oral argument by respondent, but contends that in none of the above cases was the precise argument here presented advanced or considered. Its position is that “ where the nature and the amount of a particular tax burden imposed could not have been understood and foreseen by the taxpayer at the time of a particular voluntary act, the law which attempts to make such voluntary act the occasion for a tax is so arbitrary, burdensome and capricious as to amount to a confiscation of property and to be offensive to the provisions of the Fifth Amendment to the United States Constitution prohibiting the taking of property without due process of law”, citing Nichols v. Coolidge, 274 U. S. 531; Coolidge v. Long, 282 U. S. 582; Blodgett v. Holden, 275 U. S. 142; and Untermyer v. Anderson, 276 U. S. 440.

Nichols v. Coolidge, supra, involved estate tax under the Eevenue Act of 1919. The question there considered by the Court was whether Congress had the power to require executors to pay an excise tax ostensibly laid upon transfer of property by death, reckoned upon its value “ plus the value of other property conveyed before the enactment in entire good faith and without contemplation of death.” In Coolidge v. Long, supra, the constitutionality of a state statute imposing an excise tax on the succession to property by death was involved. In both cases it was held in substance that neither Congress nor a state legislature has the power to exact a tax, under the guise of an excise tax on the succession to or transfer of property by death, based upon the value of property at the time of death, the succession to or the transfer of which property had been effected prior to the enactment of the statute and without contemplation of death. As stated in Nichols v. Coolidge, supra, an excise, the amount of which is “ made to depend upon past lawful transactions not testamentary in character and beyond recall ” is so arbitrary and capricious as to amount to confiscation and offend the Fifth Amendment.” (Emphasis supplied.)

In Blodgett v. Holden, supra, and Untermyer v. Anderson, supra, the constitutionality of the tax imposed by section 319 of the Kevenue Act of 1924 upon gifts made during the calendar year 1924 was in question. The Court held that in so far as the statute imposed a tax upon the donors upon gifts made prior to June 2, 1924, its effective date, it was invalid. The Court, in Blodgett v. Holden, supra, stated that:

It seems wholly unreasonable that one who, in entire good faith and without the slightest premonition of such consequence, made absolute disposition of his property by gifts should thereafter be required to pay a charge for so doing. [Emphasis supplied.]

Nichols v. Coolidge, supra; Coolidge v. Long, supra; Blodgett v. Holden, supra; and Untermyer v. Anderson, supra, are distinguishable from the instant proceeding upon the facts, and the principles of these cases are not, therefore, applicable here. Here the taxes are not taxes laid upon the transferor in the years 1924 to 1929, inclusive, upon the transfer of securities by the transferor completed on December 26, 1923, prior to the enactment of the 1924 Act. The taxes here are laid upon the petitioner, an entity wholly separate and distinct from the transferor, upon transactions made in 1924 to 1929, inclusive.

In Nichols v. Coolidge, supra, the Commissioner sought to tax in 1921 transfers made and completed in 1917 and prior thereto. Untermyer v. Anderson, supra, and Blodgett v. Holden, supra, involved a tax laid upon donors of gifts fully consummated prior to the passage of the statute and did not involve sales by the donees. In the instant proceedings the profits from the transactions or sales were included in taxable income of petitioner, the transferee, and in the year in which such sales were completed, the first of the sales in question having been made in 1924. Congress has the power “ to require that taxable income should include profits from transactions consummated within the year.” Cooper v. United States, 280 U. S. 409.

In that case, discussed on brief by petitioner, taxpayer acquired securities by gift from her husband on November 1, 1921, which she sold on November 1,1921, all before the effective date (November 23, 1921) of the Eevenue Act of 1921, and claimed that (1) section 202 (a) (2) of the 1921 Act should not be construed as applicable to transactions fully completed before the enactment of the statute, and (2) that, if construed to apply where both gift and sale were consummated before such enactment, the section is arbitrary and capricious and therefore invalid under the due process clause of the Fifth Amendment. The facts in that case are somewhat analogous to the facts in this proceeding. There the taxpayer was the donee and the tax involved was laid upon the profits of a sale made by her. In this proceeding the taxpayer, the petitioner, is the transferee and the tax involved is sought to be laid upon the profits of sales made by it. Furthermore, the sections involved in that case and in this proceeding are similar in that the gift statute requires that the cost to the donor be used as the cost basis to the donee, and the statutes here involved require that the cost to the transferor be used as the cost basis to the transferee corporation. That case, therefore, does not support the position of petitioner here. On the contrary, in principle it supports the position of the respondent here. The United States Supreme Court there held the gift statute valid, and stated:

* * * None of these cases [Nichols v. Coolidge, supra; Untermyer v. Anderson, supra; Blodgett v. Holden, supra] is in point; they gave no consideration to the power of Congress to require that taxable income should include profits from transactions consummated within the year. [Emphasis supplied.]

In Milliken v. United States, 283 U. S. 15 (cited on brief by petitioner as restating the principle enunciated in Nichols v. Coolidge, supra, and Untermyer v. Anderson, supra), as in Nichols v. Coolidge, supra, section 402 (c) of the Eevenue Act of 1918 was involved. However, in the Milliken casé, the gift was concededly made in contemplation of death, while in the Ooolidge case, the gifts were not made in contemplation of death. The taxpayer in the Milliken case contended that section 402 (c) of the 1918 Act was invalid because (1) it reached a gift made in contemplation of death before its enactment and because (2) it measured the tax by rates not in force when the gift was made, applied to the value of the property, not when given, but at the uncertain later time of the death of the donor. The Court, in the Milliken case, while approving the principle of the Nichols and Untermyer cases, did not, however, apply it because it was obviously based upon different facts, and it held the statute valid as to gifts made in contemplation of death, stating in part as follows:

[4] But a tax is not necessarily and certainly arbitrary avid therefore invalid because retroacti/oely applied, and taxing acts having retroactive features have been upheld in view of the particular circumstances disclosed and considered by the court, See Stockdale v. Atlantic Insurance Co., 20 Wall. 323, 331, 22 L. Ed. 348; Railroad Co. v. Rose, 95 U. S. 80, 24 L. Ed. 376; Western Union Railroad Co. v. United States, 101 U. S. 543, 549, 25 L. Ed. 1068; Flint v. Stone Tracy Co., 220 U. S. 107, 31 S. Ct. 342, 55 L. Ed. 389, Ann. Cas. 1912B, 1312; Billings v. United States, 232 U. S. 261, 282, 34 L. St. 421, 58 L. Ed. 596; Brushaber v. Union Pacific R. R. Co., 240 U. S. 1, 20, 36 S. Ct. 236, 60 L. Ed. 493, L. R. A. 1917D, 414, Ann. Cas. 1917B, 713; Lynch v. Hornby, 247 U. S. 339, 343, 38 S. Ct. 543, 62 L. Ed. 1149, Hecht v. Malley, 265 U. S. 144, 164, 44 S. Ct. 462, 68 L. Ed. 949; Cooper v. United States, 280 U. S. 409, 50 S. Ct. 164, 74 L. Ed. 516. See Taft v. Bowers, supra, United States v. Heinszen, 206 U. S. 370, 27 S. Ct. 742, 51 L. Ed. 1098, 11 Ann. Cas. 688; Graham v. Goodcell, 282 U. S. 409, 51 S. Ct. 186, 75 L. Ed.— decided January 26, 1931.
Hence, in challenging the present tase it does not suffice to say that the gift antedated the statute. It is necessary to consider the nature of the tax and of the decedent’s gift. * * * [Emphasis supplied.]

The petitioner, on brief, overlooks the foregoing quoted language and quotes from the Milliken case language which precedes it therein as follows:

* * * It was held [in Untermyer v. Anderson, supra] that the retroactive provision of the novel gift tax of the Revenue Act of 1924 was invalid as applied to gifts antedating the act. In both (cases) [Nichols v. Coolidge, supra, and Untermyer v. Anderson, supra] the point was stressed, as the basis of decision, that the nature and amount of the taw burden imposed could not have been understood and foreseen by the taxpayer at the time of the particular voluntary act which was made the occasion of the taw. [Emphasis supplied.]

The situation indicated by the language in italics was found by the Court not to be analogous to the situation presented in the Mil-liken case, and, in our opinion, is not analogous to the situation presented by the facts here. At the time petitioner acquired the stock from E. N. D’Ancona any profits made prior to the enactment of the 1924 Act on the sale of any of the securities acquired by it from E. N. D’Ancona would have been taxable under the Revenue Act of 1921 and the transfer from E. N. D’Ancona to petitioner was a nontaxable transfer under section 202 (c) (3) of the Revenue Act of 1921. That the 1924 Act may have changed the amount of tax to be paid because it provided that the basis shall be cost to transferor, instead of cost to petitioner as provided in the 1921 Act, does not invalidate the sections involved. The petitioner, because of such change in basis, is required under the facts of this case to pay a tax on the gain accruing while the securities were held by E. N. D’An-cona, the transferor, plus the gain accruing while the securities were held by petitioner until sale thereof. Had the market value of the securities at the time of transfer to petitioner been less than cost to E. N. D’Ancona, such change in basis would have been to the advantage of petitioner, as it would have decreased the profit. As the market value was higher at the time of transfer than cost to E. N. D’Ancona, such change in basis increased the profit. However, the statutes here involved can not be declared in conflict with the Federal Constitution merely because they require subsequent gains referable to prior nontaxable transactions to be treated as a part of the taxpayer’s gross income. Cooper v. United States, supra, and cases cited therein.

Nor can they be declared unconstitutional because they, in certain situations, increase the tax. The change in basis in effect here is similar to an increase in the rate of tax, as to which the Court stated in the Millihen case as follows:

* * * The present gift was subject to the excise when made; and, for reasons already indicated, we think a mere increase in the tax, pursuant to a policy of which the donor was forewarned at the time he elected to exercise the privilege, did not change its character. See Hecht v. Malley, supra, page 104 of 265 U. S., 44 S. Ct. 462. * * *

See also Perthur Holding Corporation, 61 Fed. (2d) 785, affirming 23 B. T. A. 1129, wherein the validity of section 204 (a) (8) of the 1926 Act wras in question upon the ground that- it resulted in double taxation, the court stating as follows:

* * » we assume that he [Kuttroff] too will pay a tax upon the same amount. That may be unfair, but it is not unconstitutional; again, it was a matter for Kuttroff to consider when he put on a corporate dress. * * * No doubt there are limits to what Congress may do under the guise of taxation * * *. But in general it is free to depress one kind of activity and' promote another, for the incidence of taxation inevitably has direct social and economic effects, and with them courts do not and must not, concern themselves. If these sections unduly discourage incorporation of such enterprises, Congress may have intended it, and was within its powers if it did. It is hard' to conceive greater chaos than if judges were to upset fiscal policies of which they disapprove.

It appears in Newman Saunders & Co. v. United States, supra; Osburn California Corporation v. Welch, supra; Kay Finance Corporation, supra; and Haas Building Co., supra, that the property involved in those cases was acquired by the taxpayer prior to the enactment of the 1924 Act. Hence the fact that the securities here involved were acquired by the petitioner prior to the enactment of the 1924 Act, upon which petitioner bases its claim of unconstitutionality of the sections involved, was present in each of those cases. However, the petitioner argues, in effect, that such cases, in which the retroactive provisions of the statutes in question were considered, presented no consideration of the possible effect of such provisions upon a minority stockholder before the transfer, a stockholder who became such after the transfer, or a creditor of the corporation, as well as upon the transferee corporation itself. While it may not expressly appear from the opinions of the courts and the Board that consideration was given to every possible effect of such retroactive provisions upon all those above enumerated, in our opinion, we would not be justified in saying that these phases of the questions were not considered, whether or not argued or presented by counsel. In any event, we believe the doctrines of those cases to be sufficiently broad to govern the instant proceeding; and in Haas Building Co., supra, the Board gave consideration to the effect of the sections involved upon minority stockholders, as appears from the following:

* * * The use of the transferor basis as set out in section 204 (a)(8) has heretofore been upheld as not in violation of the Constitution. Newman Saunders & Co. v. United States, 36 Fed. (2d) 1009 (certiorari denied, 281 U. S. 760), and Osburn California Corporation v. Welch, 39 Fed. (2d) 41. In both of the above cases it was pointed out that it was within the power of Congress to prescribe the use of the transferor basis where no tax was imposed on the profit resulting from the exchange by which the property was transferred to the corporation. While the question of the effect of a minority interest was apparently not raised, for reasons heretofore stated, we are of the opinion that this does not change the situation. * * *

For the foregoing reasons we hold that section 204 (a) (8) of the Revenue Acts of 1924 and 1926, and section 118 (a) (8) of the Revenue Act of 1928 are constitutional. The determination of the respondent is approved.

Reviewed by the Board.

Decision will be entered for the respondent.

       Sec. 204. (a) 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 — :
      *******
      (8) If the property (other than stock or securities in a corporation a party to a reorganization) was acquired after December 31, 1920, by a corporation by the issuance of its stock or securities in connection with a transaction described in paragraph (4) of subdivision (b) of section 203 * * *, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made.
      Sec. 203. (b) (4) No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons, this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.
      *******
      (i) As used in this section the term “ control ” means the ownership of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation.

       SEC. 113. BASIS FOR DETERMINING GAIN OR LOSS.
      (a) Property acquired after February 28, 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—
      *******
      (8) Same — Corporation controlled by transferor. — If the property was acquired after December 31, 1920, by a corporation by the issuance of its stock or securities in connection with a transaction described in section 112 (b) (5) * * *, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the laws applicable to the year in which the transfer was made.
      Sec. 112 (b) (5), same as sec. 203 (b) (41, 1924 and 1926 Acts.