author: McMahon:

text:
    Ethel H. Hoge, Dietrich Schmitz and Hamilton C. Rolfe, Executors of the Estate of James D. Hoge, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 58118, 58119.
    Promulgated December 13, 1935.

      Lowell P. Mielcelwaib, Esq., and Elmer E. Todd, Esq., for the petitioners.

      Elden McFarland, Esq., for the respondent.
   opinion.

McMahon:

Each of these proceedings involves decedent’s tax liability for 1927. Two petitions were filed, one by the two executors of decedent’s estate to whom the deficiency letter was addressed, and one by all three executors of decedent’s estate. One of the three executors, George Donworth, having resigned, and Dietrich Schmitz having been appointed by the court to succeed him, the Board, upon motion of the petitioners and without objection from the respondent, ordered that the executor thus appointed be substituted for his predecessor. The proceedings were consolidated for hearing and disposition.

The deficiency asserted amounts to $18,707.57. The issues presented are, first, whether respondent erred in setting aside a closing agreement, and, second, whether he erred in increasing petitioner’s income for 1927 in the sum of $96,390, representing the redemption of certain preferred stock. The grounds for setting aside the closing agreement, as alleged by respondent, are decedent’s willful failure and neglect to disclose the receipt of $96,390 of dividends during 1927 as distributions from the American Encaustic Tiling Co., tnat such distributions were essentially equivalent to- taxable dividends, and that failure to disclose the receipt thereof constituted misrepresentation of a material fact which justified respondent in setting aside the closing agreement and asserting the deficiency here in question.

The stipulations, oral testimony, and documentary evidence disclose the following facts:

James D. Hoge signed and verified his income tax return for 1927 on March 9, 1928, reporting thereon a net income of $63,463.63. His return was prepared from his personal books of account and records by his secretary and a public accountant experienced in income tax matters. In preparing his return, Hoge’s secretary and the accountant discussed an entry of $42,840 appearing on his books, but did not include the amount in the return because they understood it was a return of capital from stock inherited by Hoge in 1917, his secretary having been so informed by him. Hoge instructed his secretary to be sure to put everything in his return; and he instructed his accountant to make his returns correctly.

In September 1928 one of respondent’s auditors visited Hoge’s office, talked with him, and, after being by him referred to his secretary, examined to some extent his books and records relative to his 1927 tax return. Hoge’s books and records were placed before the auditor, who was assisted in the examination by the decedent’s secretary, who was also his bookkeeper. As a result of this examination respondent made several adjustments in Hoge’s' 1927 return, particularly with respect to a $500 profit realized on the sale of shares of Proctor & Gamble corporate stock, and determined a deficiency of $84.43, which was duly paid.

Immediately following such examination respondent and Hoge entered into a formal closing agreement pursuant to section 606 of the Eevenue Act of 1928, wherein it was agreed that Hoge’s tax liability for 1927 was fixed and determined to be $7,200.19. Hoge executed the closing agreement — Exhibit 2, which is incorporated herein by reference — on September 13, 1928, and the respondent-executed it on November 21, 1928. The respondent’s action was approved by the Secretary of the Treasury on November 21, 1928.

In 1926 a medical clinic found that Hoge was suffering from cirrhosis of the liver, which was continually poisoning his system. His 'physical condition became progressively worse as auto-intoxica-t-ion increased. He was confined to a hospital a number of times in 1927 and in 1928, and made trips abroad in both years for his health. For two or three years prior to his death he was under the care of a nurse, and for practically all of the last year of his life he was confined to his bed. He paid very little attention to the details of his business during the last two or three years of his life. Hoge died November 25, 1929.

Investigations by respondent’s auditors of decedent’s tax liability subsequent to 1927 disclosed certain facts affecting his 1927 tax liability. Thereupon the respondent, with the approval of the Secretary of the Treasury, set aside the closing agreement with respect to decedent’s 1927 tax liability and asserted the deficiency herein against the petitioners as executors of Hoge’s estate. The basis for this action by respondent is essentially as follows: In 1917 the decedent inherited from his uncle 1,050 shares of the common stock of the American Encaustic Tiling Co., an Ohio corporation having at that time an authorized capital stock of 15,000 shares of common stock, par value $100 each. Stock dividends in 1922 and in the early part of 1927 increased decedent’s holdings from such 1,050 shares of common to 6,125 shares of no par value common and 1,225 shares of $100 par value preferred stock, the preferred stock being acquired in 1927. After these changes in its capitalization the American En-caustic Tiling Co. had 18,000 shares of preferred stock authorized, with 17,594 shares outstanding, and 126,000 shares of common stock authorized, with 87,970 shares outstanding.

In May 1927 the American Encaustic Tiling Co. sold 20.000 shares of its authorized but unissued no par value common stock, receiving therefor the sum of approximately $620,000. As of June 30, 1927, the American Encaustic Tiling Co. used the proceeds of the aforesaid sale for the redemption of 5,866 shares of its preferred stock, a pro rata amount being redeemed from each stockholder, with the result that 408 shares of preferred stock owned by the decedent were redeemed, and on account thereof he received the sum of $42,840, or $105 per share.

The dededent informed his secretary about the receipt of the $42,840 from the American Encaustic Tiling Co. and she made the following entries in his personal books of account: Cash book, p. 14, under date of June 30, 1927, “ Stocks 408 shares A. E. Tile Co. called — $42,840 ”; in an account in decedent’s general ledger entitled “American Encaustic Tiling Co.” a credit entry “ June —, 1927, 408 shares preferred — $42,840 ”; in another account in decedent’s general ledger entitled “Stocks (Control Account)” a credit entry “June 30, 1927, 408 Sh. A. E. Tile Pfd. — $42,840 ”; in decedent’s duplicate deposit book, a deposit slip dated June 30,1927, showing a deposit of $42,840 with the explanation “ 408 sh. A. E. Tile at 105 (called) ”; in decedent’s check stub account with the Dexter Horton National Bank, a deposit entry on check stub #2452 dated June 30,1927, for $42,840.

Thereafter, as of October 1 and December 31, 1927, the American Encaustic Tiling Co. made further redemptions of its preferred stock to the extent of 7,318 shares. As a result thereof 510 shares of preferred stock owned by the decedent were redeemed and he received $21,420 therefrom in October 1927 and $32,130 therefrom in December 1927, making $53,550 on these two redemptions, and a total of $96,390 on the three redemptions.

The decedent personally deposited the funds received in October with his brokers in New York City, A. M. Kidder & Co., and personally deposited the funds received in December in his personal account with the Com Exchange Bank in New York City. The decedent’s secretary had no knowledge of these latter redemptions and made no entries with respect thereto in decedent’s books of account. The decedent’s accountant had no knowledge of such redemptions.

On June 30, October 1, and December 31, 1927, the American Encaustic Tiling Co. had on hand earnings or profits accumulated after February 28, 1913, in excess of the amounts distributed in redemption of its preferred stock.

At the time respondent’s auditor examined decedent’s books in September 1928 relative to his 1927 tax liability, the entries in decedent’s books and records regarding the $42,840 redemption here-inabove set forth were available and open to her, but were overlooked or ignored by her. No other disclosure of the redemption was made by decedent’s secretary to respondent’s auditor. The decedent considered the redemption a return of capital, and so informed his secretary who, in turn, informed his accountant when the decedent’s 1927 return was being prepared.

Two issues are presented by the foregoing facts, which we find, and such issues are, first, whether respondent is justified in setting aside a formal closing agreement executed under section 606 of the Revenue Act of 1928 because decedent willfully misrepresented a material fact by failing to include $96,390 in his tax return and by failing to disclose the receipt thereof prior to the execution of the closing agreement; and, second, whether the $96,390 received by decedent from the American Encaustic Tiling Co. during 1927 is taxable as income.

The statute provides that, where the taxpayer and the respondent have entered into a closing agreement, this determination “ shall be final and conclusive ”, and the case shall not be reopened or the determination annulled, modified, set aside, or disregarded except upon a showing of fraud or malfeasance, or misrepresentation of a material fact. In his amended answers respondent has alleged that decedent willfully failed and neglected to disclose the receipt of this $96,390 and that such failure constituted a misrepresentation of a material fact within the meaning of section 606, supra. The burden of proof rests upon the respondent to show by convincing evidence that decedent misrepresented a material fact. Holmes & Janes, Inc., 30 B. T. A. 74, 79.

The parties have stipulated many of the facts. Other facts were testified to at the hearing that were not disputed. But two witnesses, one called by each party, differ somewhat in their recollections of the details pertaining to respondent’s examination in September 1928 of decedent’s books and records for 1927, which, comparatively, were not complex or extensive. Respondent’s auditor testified that she merely verified separate items on the return, that while decedent’s books were available for inspection she made no detailed examination thereof, that she questioned decedent’s secretary as to items on the return, that her attention was drawn to the $500 profit on Proctor & Gamble corporate stock that was not reported on decedent’s return, that she concluded her examination and made her report upon the basis of a one-half day’s examination, and that she did not know of nor was she informed of any redemption of decedent’s preferred stock in the American Encaustic Tiling Co.

The decedent’s secretary testified that respondent’s auditor consumed two or three days in her investigation; that decedent’s deposit book, check stub book, cash book and general ledger (which constitute all of his books of account) were placed on a desk for the auditor’s use; that as far as she knew respondent’s auditor examined the books thoroughly; that she was asked for and gave information to respondent’s auditor; that respondent’s auditor went through the ledger, which at the time of the examination had entries in two accounts relating to the redemption of preferred stock; that in preparing Iíog'e’s return for 1927 she and the public accountant used his books and records and discussed the item of $42,840; that she was told by Hoge that the $42,840 was a return of capital upon corporate stock which he had inherited from his uncle and she so informed Hoge’s accountant; that she had no knowledge of the redemptions on October 1 and December 31, 1927, and that she made no effort to determine whether decedent realized a gain on the redemption. A comparison of the testimony of one with that of the other discloses no serious conflict sufficient to be determinative of these proceedings.

The examination was, at decedent’s request, made at the office of decedent where his books of account and also other records were kept and readily produced.

Hoge’s accountant testified that he was a deputy collector and field auditor for the Federal Bureau of Internal Revenue from 1909 to 1918; that he was employed by decedent in income tax matters and instructed to make out the latter’s returns correctly; that he prepared decedent’s return for 1927 with the assistance of decedent’s secretary, using Hoge’s personal books and records; that he and the secretary discussed the $42,840 received by decedent upon redemption of the American Encaustic Tiling Co. preferred stock; that he was informed by the secretary that this amount was a return of capital by redemption of inherited stock; that he thought it was a nontaxable item and therefore, through an oversight, he did not include it in the return; that had he realized the importance of it he would have reported the redemption of the preferred stock; and that it was not impressed on his mind that the redemption might have resulted in a profit.

We are satisfied from the record that there was a failure to disclose on decedent’s return all the facts relative to his 1927 gross income. This is not equivalent, however, to holding that decedent misrepresented the facts as to his 1927 income willfully or otherwise. There was no act of commission looking toward concealment and no positive act or wrord indicating intentional misrepresentation, and no such acts or words have been alleged or established by respondent. The only act which respondent urges as constituting misrepresentation is the. failure to disclose. Under all the facts and circumstances of these proceedings, some more positive or deliberate act of misrepresentation is required to justify setting aside the closing agreement. See Thomas J. Ingram, 32 B. T. A. 1063. In that case the Board stated as follows: .

* * * But the respondent argues that this still leaves the omission in the return and the nondisclosure at the time of the closing agreement within the statutory term of “ misrepresentation of a material fact.” His argument would treat misrepresentation as synonymous with mistake. While there is a subtle question of language in the distinction between a mistake or erroneous statement and a misrepresentation, this must be resolved to promote the purpose of the statute. Obviously the use of the word misrepresentation denotes something more deliberate or more conscious than mere error or mistake. Otherwise the entire rationale of a closing agreement would be lost. Congress intended that innocent mistakes should be buried in a closing agreement. * * '*

Furthermore, we have here some proof which negatives a holding of willful misrepresentation. It is undisputed that decedent’s books and records contain entries showing the receipt of the first redemption of $42,840. Had there been an intent to conceal or misrepresent the facts, we doubt that these entries would have been made. We also have proof to the effect that decedent, his secretary and his accountant considered the $42,840 a return of capital. That they or any of them were mistaken in this respect does not establish willful misrepresentation. Mistakes of fact or law are insufficient grounds to set aside the finality which the statutes give the closing-agreement. Wolverine Petroleum, Corporation v. Commissioner, 75 Fed. (2d) 593, affirming Wolverine Petroleum Corporation, 29 B. T. A. 1236. There the court stated:

The purpose of the statute authorizing closing agreements is to enable the taxpayer and the government finally and completely to settle all controversies in respect of the tax liability for any previous taxable period, and to protect the taxpayer against the reopening of the matter at a later date, and to prevent the filing of additional claims for refund or the institution of suit for the same purpose by the taxpayer. Perry v. Page (CCA 1) 67 F. (2d) 635; Hering v. Tait (CCA 4) 65 F. (2d) 703; Bankers’ Reserve Life Co. v. United States (Ct. Cl.) 42 F. (2d) 313; Aetna Life Ins. Co. v. Eaton (CCA 2) 43 F. (2d) 711; Parish & Bingham Corp. v. United States, (Ct. Cl.) 44 F. (2d) 903.
****** *
The statute excludes mistakes of fact as well as of law as grounds for the rescission of closing agreements. Only fraud, malfeasance, or misrepresentation are mentioned as bases for attacking them. In recognition of their conclusive character on all matters agreed upon, it has been held that, where the tax covered by the agreement has been assessed under a section of the Revenue Act later declared to be unconstitutional, the closing agreement, nevertheless, was binding and conclusive upon the parties. [Citing eases.]

Furthermore, two credible, intelligent, disinterested witnesses testified unqualifiedly that his reputation for honesty, integrity and fair dealing was good; his widow testified that he was conscientious in making his tax returns; and, as heretofore stated, his secretary and accountant testified to decedent’s insistence on making full and correct returns of his income for 1927.

T,oo, respondent had made an examination of decedent’s books and • records prior to the execution of the closing agreement. He would now set aside his own act in determining decedent’s tax liability at $7,200.19, despite the fact that he had ample opportunity to catch the discrepancy as to the item of $42,840. The undisputed proof shows that the sale of the Proctor & Gamble corporate stock, which the auditor discovered, was recorded in decedent’s books with and in the same manner as the item of $42,840. It would be error to say that respondent relied on decedent’s return wholly to his detriment, since his examination resulted in an increase in decedent’s tax liability for 1927, which was paid. We can not but feel that in this proceeding respondent relied to a considerable extent, at least, upon the results of his own examination rather than altogether on decedent’s return as filed.

While each proceeding involving willful misrepresentation must turn from necessity upon its own particular facts, there are analogous cases which are persuasive as to the conclusion which should be reached. In Phoenix Insurance Co., 29 B. T. A. 291, the Board held that the petitioner unintentionally neglected to eliminate all Federal income taxes from the amount of taxes deducted on its return, but that no misrepresentation occurred sufficient to justify setting aside a closing agreement under section 606. In the Phoenix case there was no field examination of the taxpayer’s books, such as occurred in the instant proceedings before the closing agreement was executed.

We think it is well established by applicable precedents that a valid and binding closing agreement can not be set aside by either party except upon clear and convincing proof that fraud,- malfeasance or misrepresentation is present; and, since the evidence herein fails to convince us that decedent has misrepresented, willfully or otherwise, material facts sufficient to set aside the closing agreement, we must sustain the finality and conclusiveness of that agreement, there being no other claim or showing of fraud and there being none whatever of malfeasance. ■

In view of this disposition of the first issue, it is unnecessary to decide the second issue.

Decision will be entered? for the fetitioner.

       SEC. 606. CLOSING AGREEMENTS.
      (a) Authorisation. — The Commissioner (or any officer or employee of the Bureau of Internal Revenue, including the field service, authorized in writing by the Commissioner) is authorized to enter into an agreement in writing with any person relating to the liability of such person (or of the person or estate for whom he acts) in respect of any internal-revenue tax for any taxable period ending prior to the date of the agreement.
      (b) Finality of agreements. — If such agreement is approved by the Secretary, or the undersecretary, within such time as may be stated in such agreement, or later agreed to, such agreement shall be final and conclusive, and, except upon a showing of fraud or malfeasance, or misrepresentation of a material fact—
      (1) The case shall not be reopened as to the matters agreed upon or the agreement modified, by any officer, employee, or agent of the united States, and
      (2) in any suit, action, or proceeding, such agreement, or any determination, assessment, collection, payment, abatement, refund, or credit made in accordance therewith, shall not be annulled, modified, set aside, or disregarded.
      * * * * * * *


source: Caselaw Access Project

author: Teammell:

license: Public Domain

text:
    L. E. L. Thomas, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 77746.
    Promulgated December 13, 1935.

      E. H. McDermott, Esq., for the petitioner.

      G. W. Broohs, Esq., for the respondent.
   OPINION.

Teammell:

The petitioner states that there is no doubt but that he was a resident of the United States when he filed his income tax return in April 1929, prior to his departure to Eussia, where he was to render services in that country under a two-year contract. He, however, contends that under the facts in the case he was a resident of Eussia and not of the United States from May 1929 to May 1933, and that therefore the salary received by him from the Freyn Engineering Co. in 1931 is not subject to tax in the United States. The respondent contends that his action in determining that the petitioner was an alien resident in the United States in 1931 and that the salary in question was taxable was correct and should be sustained.

Pertinent portions of the Eevenue Act of 1928 are as follows:

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, * * * and income derived from any source whatever.
(9) Miscellaneous items. — The following items, to the extent provided in section 116:
Earned income from sources without the United States;
****** *
SEO. 31. EARNED INCOME CREDIT.
(ft) Definitions. — For thf purpose of this section—
(1) “Earned income” means wages, salaries, professional fees and other amounts received as compensation for personal services actually rendered,
SEC. 116. EXCLUSIONS FROM GROSS INCOME.
In addition to the items specified in section 22 (b), the following items shall not be included in gross income and shall be exempt from taxation under this title:
(a) Earned income from sources without United States. — In the case of an individual citizen of the United States, a bona fide nonresident of the United States for more than six months during the taxable year, amounts received from sources without the United States if such amounts constitute earned income as defined in section 31; * * *
SEC. 119. INCOME FROM SOURCES WITHIN UNITED STATES.
*******
(c) Gross income from sources without United States. — The following items of gross income shall be treated as income from sources without the United States:
*******
(3) Compensation for labor or personal services performed without the United States;
* * * * * * *

Regulations 74, relating to the Revenue Act of 1928, provide as follows:

Art. 1022. Definition. — A “nonresident alien individual” means an individual—
(a) Whose residence is not within the United States; and
(b) Who is not a citizen of the United States.
An alien actually present in the United States who is not a mere transient or sojourner is a resident of the United States for purposes of the income tax. Whether he is a transient or not is determined by his intentions with regard to the length and nature of his stay. A mere floating intention, indefinite as to time, to return to another country is not sufficient to constitute him a transient. If he lives in the United States and has no definite intention as to his stay, he is a resident. One who comes to the United States for a definite purpose which in its nature may be promptly accomplished is a transient; but if his purpose is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his home temporarily in the United States, he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned. An alien whose stay in the United States is limited to a definite period by the immigration laws is not a resident of the United States within the meaning of this article.
Abt. 1025. Loss of residence hy alien. — An alien who lias acquired residence in tlie United States retains his status as a resident until lie abandons the same and actually departs from the United States. An intention to change his residence does not change his status as a resident alien to that of a nonresident alien. Thus an alien who has acquired a residence in the United States is taxable as a resident for the remainder of his stay in the United States.

In support of his contention that he was a resident of Russia from May 1929 to May 1933 and not a resident of the United States during this period, the petitioner relies in part on certain portions of his testimony as to his intentions and state of mind prior to and during this period. The petitioner testified that when he left the United States in April 1929 he considered that he was closing his affairs here, that he abandoned his residence here and took up his residence in Russia, and that while he anticipated at that time that if he did not return to the United States to live he probably would return to look after the securities held in the agency account with the Harris Trust & Savings Bank and certain real estate loans. He also testified that in 1931 he regarded his home as being in Russia and that he was not in such a frame of mind then that he could have said as to what country or place he would go in event his work in Russia terminated.

The two-year contract under which the petitioner went to Russia in April 1929 expired about May 1, 1931. Immediately prior to the expiration of that contract an arrangement was marie to extend the time of his service for another year. The permit to enter the United States issued to the petitioner on October 30. 1930. was due to expire on October 30, 1931. The evidence shows that on October 9, 1931, the petitioner made and swore to a request for an extension of this permit reciting that he resided at the Southmoor Hotel, 6646 Stony Island Avenue, Chicago, Illinois, and that the status of his business in Russia made it desirable for him to remain in Russia until the latter part of July 1932, when it was his intention to return to the United States. This indicates that in 1931 the petitioner still considered his residence was in Chicago, Illinois, and that it was his intention to return to the United States as soon as the status of his business in Russia would permit.

The regularity with which the petitioner made application for reentry permits when departing from the United States, the representations made in such permits, his action in returning to the United States just as soon as and just as often as his business engagements in Russia permitted, and his continued residence here since the final termination of his activities in Russia in our opinion do not indicate that the petitioner abandoned his residence in the United States when he went to Russia in 1929 or that he thereafter intended to or did make Russia bis borne. If the petitioner intended to abandon his residence in the United States in April 1929 and thereafter take up his residence in and make his home in Russia, as he now testifies, it would seem that he would have informed his employer and his agent in the United States of such intention. The record fails to disclose that he gave them such information. As far as his employer was concerned, the petitioner left it under a contrary impression and left his agent wholly in doubt, as is evidenced by the incident relating to the filing of petitioner’s 1929 income tax return by his agent. The statement as to his future whereabouts made by the petitioner at a party in October 1930 to one who was then only a casual acquaintance but who later became his wife is without any particular significance. Neither appears to have attached any importance to their meeting or their conversation. In fact they never communicated with each other nor met again until in January 1934, when petitioner’s wife would not have known who he was if she had not been told. The statement itself fails to indicate that the petitioner then had any definite intention of staying in Russia any ionger than his business engagement required.

So far as we can determine the petitioner’s absence from the United States during the time he was in Russia was purely temporary and made necessary by his business engagement. Always prior to each of his departures the petitioner availed himself of the provisions of the immigration laws to obtain a reentry into the United States when his business engagement in Russia permitted his return here.

The Immigration Act of 1924, secs. 3, 4, and 10 (8 U. S. C. A. §§ 203, 204, and 210) provides in part as follows:

§ 203. “ Immigrant defined. — When used in this subchapter the term “ immigrant ” means any alien departing from any place outside the United States destined for the United States * * *
§ 204. “Nonquota immigrant” defined. — When used in this subchapter the term “nonquota immigrant” means—
* * * * * * *
(b) An immigrant previously lawfully admitted to the United States, who is returning from a temporary visit abroad;
(e) An. immigrant who was born in the Dominion of Canada * * *
§ 210. (a) Reentry permits; persons entitled to; application for; form and contents; verification; photograph accompanying. — Any alien about to depart temporarily from the United States may make application to the Commissioner General for a permit to reenter the United States, stating the length of his intended absence, and the reasons therefor. Such applications shall be made under oath, and shall be in such form and contain such information as may be by regulations prescribed, and shall be accompanied by two copies of the applicant’s photograph.
(b) Issue by Commissioner General with approval of Secretary of Labor; life of permit; form and contents of permit; photograph attached. If the Commissioner General finds that the alien has been legally admitted toI the United States, and that the application is made in good faith, he shall, with the approval of the Secretary of Labor, issue the permit, specifying therein the length of time, not exceeding one year, during which it shall be valid. The permit shall be in such formi as shall be by regulations prescribed and shall have permanently attached thereto the photograph of the alien to whom issued, together with such other matter as may be deemed necessary for the complete identification of the alien.
(c) Extension, of life of permit. — On good cause shown the validity of the permit may be extended for such period or periods, not exceeding six months each, and under such conditions, as shall be by regulations prescribed.
* * * * * * *
(e) Surrender of permit on return to United States. — Upon the return of the alien to the United States the permit shall be surrendered to the immigration officer at the port of inspection.
(f) Effect of permit on rights of alien.. — A permit issued under this section shall have no effect under the immigration laws, except to show that the alien to whom it is issued is returning from a temporary visit abroad; but nothing in this section shall be construed as making such permit the exclusive means of establishing that the alien is so returning.

The phrase “ lawfully admitted ” as used in § 204 (b) means lawfully admitted for permanent residence, as was stated in International Mercantile Marine Co. v. Elting, 67 Fed. (2d) 886. In construing the meaning- of the word “ temporary ”■ in the phrase “ returning from a temporary visit abroad ” as used in §§ 204 (b) and 210, it was said in United States ex rel. Lesto v. Day, 21 Fed. (2d) 307:

The word “ temporary,” in the phrase “ returning from a temporary visit abroad,” means more than the mere retention of domicile; that is, an intention to keep the United States as a home, to which one will ultimately return. * * * Without attempting a complete definition of “ a temporary visit,” we may say that we think the intention of the departing immigrant must be to return within a period relatively short, fixed by some early event.

The length of time an alien is absent from the United States is not alone determinative of the question upon his return as to whether he is returning from a temporary visit abroad. In Serpico v. Truedell, 46 Fed. (2d) 669, an alien went abroad in 1914 to complete his education, leaving his parents' and other members of his family in the' United States. In 1925, after the completion of his education, he sought to return to the United States. It was held that although he had been absent 11 years he was returning from a temporary visit abroad and was entitled to be admitted to the United States.

In order to avail himself of the provisions of the immigration laws and obtain an easy reentry into the United States the petitioner held himself out to the immigration authorities as one who had been admitted to the United States for permanent residence and represented that in going abroad he was not abandoning the residence and domicile established here, but was going abroad temporarily and would return just as early as his business engagement, the duration of which was fairly definitely fixed, would permit. Having thus held himself out and satisfied the immigration officials that his absence was to be only temporary and thereby having obtained the benefits of his action, we think he is to be bound by it. Little weight is to be given statements that he now makes to the effect that his intentions then were contrary to what his acts purported them to be.

In our opinion the facts in the case establish that the petitioner never acquired residence in Eussia, but retained his residence in the United States. The respondent’s action in determining that the petitioner was a resident of the United States during the taxable year and that the salary received for services rendered in Eussia is subject to tax is sustained. Cf. Frederico Stallforth, 30 B. T. A. 546; affd., 77 Fed. (2d) 548.

The petitioner urges that, should we hold that he was a resident alien of the United States during the taxable year, the salary received by him in that year for services in Eussia is nevertheless not taxable because of being excluded from gross income under section 116 (a) of the Eevenue Act of 1928. That section provides that, in the case of an individual citizen of the United States who is a bona fide nonresident thereof for more than six months during the taxable year, the amounts of earned income received from sources without the United States shall not be included in gross income and shall be exempt from taxation. The petitioner, while recognizing that the provisions of the section specifically apply to the case of an individual citizen of the United States, nevertheless urges that Congress, by providing in the other sections of the act the same deductions, credits and rates of tax for residents of the United States irrespective of whether they are citizens or aliens, has indicated an intention to treat citizens and resident aliens upon the same basis, and that we should therefore hold the provisions of section 116 (a) to be applicable to the salary in controversy. Statutes providing for exemptions from tax are to be strictly construed and are to be applied only to cases falling clearly within their intendment. Congress having expressly limited the provisions of section 116 (a) to the cases of citizens of the United States, such provisions may not be applied to the case of one not a citizen of the United States. Frederico Stallforth, supra.

Decision will 'he entered for the respondent.


author: ÁRUndell:

text:
    Reginald Denny, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 49516.
    Promulgated December 17, 1935.

      Phillip D. Johnston, Esq., for tbe petitioner.

      Olay O. Holmes, Esq., for the respondent.
   OPINION.

ÁRUndell:

The first question is whether the sum of $11,000 received by petitioner from Universal Pictures Corporation was income, and, if so, in what year. The petitioner claims that it was a gift, but that if it was income, it was income in 1925 rather than 1926.

The claim that the sum was a gift needs but a short statement.' It is elementary that if there is. consideration for a transaction, it is not a gift. Noel v. Parrott, 15 Fed. (2d) 669. Here there was a consideration. The transaction was in connection with the .contract of employment and the money ivas to become the property of the petitioner only in'the event that he continued in the employ of the lender upon exercise of the option to retain petitioner’s services after a designated date. The option was exercised and- petitioner continued in the service of the company. This ivas ample consideration to remove the transaction from the category of gifts.

We are of the opinion that the item was properly reported by the petitioner and taxed by the respondent as income in 1926. Although the money was received by the petitioner in 1925, it was then a loan. It was neither paid nor received as income in that year. Not until the happening of an event in 1926 did the money become the-petitioner’s. It then ripened into a bonus, as it was described in petitioner’s return. The situation here is distinguishable from those where money is received subject to the possibility of repayment upon the happening of a subsequent event. See North American Oil Co. v. Burnet, 286 U. S. 417. Here the.money was received not “under any claim of right and without restriction as to its disposition ”, as in the North American Oil Co. case, but subject from the first to the definite obligation to repay. That obligation remained in effect until in 1926.- The case here is -much like that where one receives as compensation property encumbered by a mortgage to the full value of the- property. In that situation there would be no income in tbe year of the receipt. Upon .cancellation of the mortgage by the- transferor in a subsequent year- there would be income to the recipient, and the result would be the same whether the cancellation be regarded as the forgiving of indebtedness or as property then freed for the first time from restriction on use. This question is decided for the respondent.

The petitioner has established that in 1925 he expended $400 for dental bridge work to take the place of teeth lost in making a prize fight picture, and that the making of that picture was in line with his duties under his contract of .employment. We hold that the amount so expended is deductible as an ordinary and necessary expense incurred in the petitioner’s business. The situation here is analogous to that in Charles Hutchison, 13 B. T. A. 1187, where we allowed a “ stunt actor ” to deduct the cost of clothing destroyed in performing the feats required of him in the making of pictures. It is distinguishable from the case of Louis M. Bourne, 23 B. T. A. 1288, where we disallowed a deduction claimed by a lawyer for hospital and medical charges occasioned by an attack of arthritis. While the deduction there-was sought as a loss item, rather than as a business expense as here, the important distinction is that in the Bourne case there was no showing of any connection between the expenditure and the taxpayer’s occupation. In this case the connection is direct. The expense was directly attributable to the petitioner’s performance of services under his contract of employment. We hold that he is entitled to deduct the $400 expended as a business expense.

The airplane that petitioner purchased in 1924 for his personal use was converted to commercial use in February 1925, and was used in a purely commercial venture during the last ten months of 1925. The expenses of operation and depreciation after February 1925, and the loss on disposition a,re allowable under the decision in Heiner v. Tindle, 276 U. S. 582. We have set out in the findings of fact the amount of the established expenses. As to the basis for depreciation, it appears that the petitioner had completed remodeling of the plane just shortly before devoting it to commercial use. Original cost, plus remodeling cost, was $5,000. That sum, we believe from the evidence, was the value when it was placed in commercial service and is the proper basis for depreciation. The rate used by petitioner, 40 percent, does not appear to be warranted by the evidence. From the petitioner’s testimony, we gather that he regarded shrinkage of market value as synonomous with loss of useful value. The two are rarely, if ever, the same. We are. of the opinion that a 20 percent rate will give the reasonable allowance for depreciation allowed by the statute. . No depreciation deduction is sought for 1926. This is immaterial to a correct determination of income for that year, inasmuch as the petitioner disposed of the plane within the year. What he would gain by depreciation he would lose in the reduction of basis. He turned the plane over to Nomis in 1926 in satisfaction of bills of around $500, which amount should be treated as sale price and loss computed accordingly.

Deductions are claimed for club dues and cost of operating a motor boat. These are claimed to be “ publicity expenses ” and allowable as ordinary and necessary business expenses. The evidence is insufficient to support any finding that these expenditures were made with a view to directly benefiting the petitioner in his occupation. He testified that he is not a clubman and that he rarely made any use of the clubs to which he belonged. It is difficult to see how the mere payment of dues can be regarded as an ordinary and necessary expense. According to petitioner’s testimony, not more than 25 percent of the usage of his motor boat was for publicity purposes. This, of course, must be regarded an as outside figure, and requires the support of evidence to establish the business character of that portion of the cost of maintaining and operating the boat. The petitioner’s efforts to obtain publicity seem to have been directed toward the matter of building up good will rather than the development or increase of a business enterprise. In the years before us he was under contract whereby he was to receive stated weekly salaries for a period of five years, and he has failed to show wherein his business of carrying out his contract would be affected by his so-called publicity expenses. The respondent is sustained in the dis-allowance of these items.

The petitioner’s household expenses amounted to $20,465.27. He claims 40 percent of that amount as an advertising expense, that percentage he .says being attributable to the cost of entertaining in his home for publicity purposes. What we have said above on the subject of petitioner’s motor boat is in point here. In addition to the failure to show a direct connection between expenditures and the petitioner’s business, and the difficulty of showing the cost of entertaining separately from maintenance for personal and family use, there is the difficulty of segregating purely social entertainments from those staged with a business objective. Entertainments in the home may be prompted by either social or commercial motives or they may partake of both characteristics, with either element predominating. There is a wide gap between entertaining for purely business purposes at public places, where even though exact costs are not known they may be estimated with some degree of accuracy, cf. Blackmer v. Commissioner, 70 Fed. (2d) 225, and entertaining in the home, where not only the family is maintained but where, if the general standard of social conduct obtains, there are at least some personal or social guests. Having due regard for the norm of conduct of the average home, we should have very clear evidence on the point before we say that any particular percentage of its activities are purely commercial. We do not have that evidence here.

The facts in this case distinguish it from the case of Ned Wayburn, 32 B. T. A. 813. In that, case the taxpayer, the president of a corporation, used corporate funds for entertaining, partly in his home, parents and others who might send children to the dancing studio conducted by the corporation. The evidence in that case showed the numbers of people entertained at different functions, the occupations or professions of some of the guests, and that business was brought to the corporation as the result of the entertainments. On the evidence in that case we held that .so much of the corporate funds as the taxpayer expended for entertainment to further the corporate business was not income to him. As above pointed out, we have no evidence here of any connection between petitioner’s outlay and the furtherance of his business. The respondent’s disallowance of deductions is presumptively correct, Old Mission Portland Cement Co. v. Helvering, 293 U. S. 289, and the evidence here fails to rebut that presumption.

The petitioner was compelled to keep himself in first-class physical condition, and to train as though for a prize fight. For such training he expended $254 in the year 1925. This expenditure should be allowed as a deduction. Charles Hutchison, supra.

Petitioner is not entitled to the deduction of $675 from his gross income for 1925. This amount represents the cost of an automobile presented by the petitioner to one Torrillo, who was in the employ of Universal and who, it appears, never was in the employ of the petitioner. It appears that he ran errands for the petitioner and did other small services. Not only did petitioner give him the automobile, but he also made him presents of sums of money, the amount of which is not given. Gifts of such large amounts to persons not in one’s employ can not be considered either an ordinary or necessary expense, at least without a showing that the services were in some way commensurate with the outlay. Welch v. Helvering, 290 U. S. 111.

Petitioner was required to furnish all of his costumes and make-up except what were termed period and character costumes. Wigs and other make-up for which the petitioner claims a deduction of $2,288.59 were not included in the exception. Petitioner is entitled to the deduction. Charles Hutchison, supra.

Decision %oill be entered v/nder Rule 50.


author: Seawell:

text:
    Bankers Trust Company and Hazel B. Fellner, as Executors of the Will of Irving S. Fellner, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 76910.
    Promulgated December 19, 1935.

      Robert D. Gerstenlauer, Esq., for the petitioners.

      Eugene G. Smith, Esq., for the respondent.
   OPINION.

Seawell:

The decedent, a veteran of the United States Army, died October 30,1932, leaving a policy of life insurance in the amount of $10,000 issued by the Bureau of War Risk Insurance, now known as the Veterans’ Administration. The decedent’s wife, Hazel B. Fellner, was the beneficiary named in the policy and she received the amount of the policy less an outstanding loan thereon of $1,300. While the stipulation of facts contains nothing respecting other policies of insurance-left by the decedent, it appears from the briefs filed on behalf of the parties that he left in excess of $40,000 of insurance payable to beneficiaries. In his determination of a deficiency of $518.38 in estate tax, the respondent included the face amount of the policy in gross estate and deducted therefrom the outstanding loan of $1,300 as a debt of the decedent. The sole issue is whether the face amount of the policy is includable in gross estate of the decedent for estate tax purposes.

Section 302 (g) of the Revenue Act of 1926, the applicable statute, (section 401 (c), Revenue Act of 1932), provides that “ The value of the gross estate of the decedent shall be determined by including-the value at the time of his death of all property * * * to the extent of the excess over $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life.” Like provisions appeared in prior acts. Sec. 402 (f), 1918 and 1921 Acts; sec. 302 (g), 1924 Act.

The Commissioner has always construed the statutes as embracing all forms of life, insurance, without any exceptions. Art. 32, Regulations 37; art. 27, Regulations 63; art. 25, Regulations 68 and 70. The reenactment of the provision in later acts in the light of such administrative interpretation is strong evidence that Congress approved the regulation. Brewster v. Gage, 280 U. S. 327.

The petitioners contend that this general provision of the statute has no application to the insurance policy in question on the ground that the proceeds of such insurance are exempt from Federal estate tax under the provisions of section 22 of the World War Veterans’ Act, enacted June 7, 1924, 43 Stat. 613, providing, in part, that:

The compensation, insurance, and maintenance and support allowance payable under Titles II, III, and IV, respectively, shall not be- assignable; shall not be subject to the claims of creditors of any person to whom, an award is made under Titles II, III, and IV; and shall be exempt from all taxation. * * *

- A like provision appeáred in a prior act, as amended June 25,1918. 40 Stat. 609. Since the submission of this proceeding the provision has been repealed by amendments to the act, approved August 12, 1935. The substituted provision reads:

Sec. 3. Payments of benefits due or to become due shall not be assignable, and such payments made to, or on account of, a beneficiary under any of the laws relating to veterans shall be exempt from taxation, shall be exempt from the claims of creditors, and shall not be liable to attachment, levy or seizure by or under any legal or equitable process whatever, either before or after receipt by the beneficiary. Such provisions shall not attach to claims of the United States arising under such laws nor shall the exemption herein contained as to taxation extend to any property purchased in part or wholly out of such payments. * * *
* * * * * * ■ *
Sec. 5. That this Act shall take effect and be in force from and after its passage, but the provisions hereof shall apply to payments made heretofore under any of the Acts mentioned herein.

In Trotter v. Tennessee, 290 U. S. 354, the Court said: “Exemptions from taxation are not to be enlarged by implication if doubts are nicely balanced. Chicago Theological Seminary v. Illinois, 188 U. S. 662. On the other hand, they are not to be read so grudgingly as to thwart the purpose of the lawmakers.” See Waynesboro Manufacturers Association, 1 B. T. A. 911; Garden Homes Co., 26 B. T. A. 441.

The precise question involved here has never been passed upon by this Board or the courts. Cases involving state inheritance and Federal estate tax on tax-exempt securities, however, appear to announce a rule leading to the answer to the question.

In Plummer v. Coler, 178 U. S. 115, the decedent left a will in which he bequeathed certain Uinited States bonds issued pursuant to a Federal statute providing that the “ bonds and interest thereon shall be exempt from the payment of all taxes or duties of the United States, as well as from taxation in any form by of under state, municipal or local authority.” Pursuant to such statute, the exemption was set forth on the face of each bond. In holding that the bonds were subject to inheritance taxes imposed by the laws of New York, the Court, from a review of many state and Federal cases relating to the question, said in substance that the state may properly impose a tax upon the right to take property by will or descent, measured by the value of the property passing, regardless of the fact that the estate may include Federal bonds. Such a tax, it said, “ is a tax not upon United, States bonds if they happen to compose a part of the capital of a corporation or a part of the property of a decedent, but upon the rights and privileges created and regulated by the State.”

In Murdock v. Ward, 178 U. S. 139, the decedent’s estate consisted, in part, of Government bonds and interest-bearing evidences of debt of the United States, which were made subject to inheritance and legacy taxes imposed by the Revenue Act of June 13, 1898. The bonds were issued under statutes exempting them from state and Federal taxation and such an exemption was incorporated into the bonds. The Court stated that it was unable to distinguish the case from Plummer v. Coler, supra, and held, under the reasoning of that case, that the tax was properly imposed.

The case of Greiner v. Lewellyn, 258 U. S. 384, involved the question of whether in determining the net value of the estate of a decedent under the Revenue Act of 1916 it was proper to include in gross estate bonds issued by political subdivisions of the State of Pennsylvania. In holding that such property may be included in arriving at the net estate, the Court said:

* * * A State may impose a legacy tax on a bequest to the United States, United States v. Perkins, 163 U. S. 625, or on a bequest which consists wholly of United States bonds, Plummer v. Coler, 178 U. S. 115; Orr v. Gilman, 183 U. S. 278. Likewise the Federal Government may impose a succession tax upon a bequest to a municipal corporation of a State, Snyder v. Bettman, 190 U. S. 249, or may, in determining the amount for which the estate tax is assessable, under the Act of 1916, include sums required to be paid to a state as inheritance tax, for the estate tax is the antithesis of a direct tax, New York Trust Co. v. Eisner, supra. Municipal bonds of a State stand in this respect in no different position from money payable to it. The transfer upon death is taxable, whatsoever the character of the property transferred and to whomsoever the transfer is made. It follows that in determining the amount of decedent’s net estate municipal bonds were properly included.

Federal Farm Loan bonds issued under a statute (39 Stat. 360), providing that they and the income derived therefrom shall be exempt from Federal, State, municipal and local taxation ”, are includable in gross estate for estate tax purposes under the Revenue Act of 1926. Edgar A. Igleheart et al., Executors, 28 B. T. A. 888; affd., 77 Fed. (2d) 704. In sustaining the Board’s conclusion, the court pointed out the well established principle that:

* * * The estate tax is not a tax on property. It is an excise on the privilege of transmitting property of a decedent upon his death, the amount of the tax being measured by the value of the property transmitted. Chase National Bank v. United States, 278 U. S. 327; New York Trust Co. v. Eisner, 256 U. S. 345; Knowlton v. Moore, 178 U. S. 41.

If, as the authorities hold, a state may impose an inheritance tax or succession tax measured by the value of the legacy even though it may include tax-exempt Federal bonds, and the United States may impose an estate tax on the transmission of property at death, including tax-exempt municipal and Federal securities, it seems to follow by the same reasoning that the United States may include, as part of the decedent’s gross estate, the proceeds of policies of life insurance issued by the Veterans’ Administration, irrespective of a statute providing that the payments shall be exempt from taxation.

The petitioners cite decisions of state courts as supporting their view that the proceeds of the policy of insurance in question are exempt from Federal estate tax. In re Cross’ Estate, 152 Wash. 459; 278 Pac. 414, one of the cases relied upon, the soldier died intestate in 1918, leaving a father, mother, brothers and sisters and a policy of War Bisk insurance in which his mother was named beneficiary. The mother died in 1926 leaving her estate to her sons and daughters. The statute under which the policy was issued limited the beneficiaries to a class of persons closely related to the insured, and provided that in case the beneficiary designated in the policy died before receiving all of the monthly installment payments of the proceeds of the policy, the reserve value of the policy should be paid to the estate of the insured. In holding that the proceeds of the insurance were free from state inheritance tax, the court relied more upon its ruling that the money should go to the permitted class in the order of their priority under the laws of the state, who took not as heirs at law, but as beneficiaries, than upon the provision in the Federal statute exempting the insurance “ from all taxation.” In other words, the court held that the right to take did not arise under the statutes of descent and distribution of the state, but under the contract of insurance with the Federal Government, hence nothing passed under the laws of the state. The other cases cited in which like conclusions were reached follow the same reasoning. Watkins v. Hall, 147 S. E. 876 (W. Va.); Tax Commission of Ohio v. Rife, 27 Ohio App. 516; 162 N. E. 398; Succession of Geier, 155 La. 167; 99 So. 26; In re Harris’ Estate, 179 Minn. 450; 229 N. W. 781. In New York the contrary has been held. In re Schaeffer's Estate, 224 N. Y. S. 305.

The case of Trotter v. Tennessee, supra, establishes only that real estate purchased by a guardian of a disabled veteran out of compensation and disability insurance money received from the Government under the World War Veterans’ Act of 1924 is subject to county and state real property taxes, a question now settled by the act itself.

We find nothing disclosing legislative purpose to give the proceeds of policies of Government life insurance a status for estate tax purposes different from tax-exempt Federal bonds and securities. In our opinion the provisions of section 302 (g) of the 1926 Act are controlling. It follows that the respondent did not err. in including the insurance in question in the decedent’s gross estate.

Reviewed by the Board.

Decision will be entered for the respondent.


author: Steenhagen :

text:
    The Second National Bank of Philadelphia, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 76825.
    Promulgated December 19, 1935.

      B. Lester Moore, Esq., and J. W. Rhine, Esq., for the petitioner.

      Eugene G. Smith, Esq., for the respondent.
   OPINION.

Steenhagen :

The petitioner, by resolution of its board of directors of March 18, 1931, authorized its officers to “ charge $10,000 of the depreciation in the bond account ”, and in the journal of March 18, 1931, is an entry, “ Bonds & Securities, Reduction in book value of securities by order of Board 3/18/31 $10,000 ”, and in the ledger account, “ Bonds & Securities ”, are the following credit entries of March 18, 1931:

Credit
Erie K. E. Eefund. & Improv. 5’s, 5/1/67_2, 000
Florida East Coast Ey. First & Eefund. Mtge. 5’s, 9/1/74_3, 000
Lehigh. Valley Transit Co. Eefund. & Improv. 5’s 6/1/60_2, 000
E. Hoe & Co. Inc. First Mtge. 6%’s, 10/1/34_1, 000
Seaboard All-Florida Ey. First Mtge. 6’s, 8/1/35_1,000
Wisconsin Central Ey. First Gen’l. Mtge. 4’s, 7/1/49_1, 000

By resolution of the board of directors of September 9, 1931, “ the officers were authorized to reduce the book value of bonds and securities $40,000”, a general journal entry to that eifect was made, and the following credit entry was made in the ledger account. “ Bonds & Securities ”:

Credit
Florida East Coast Ey. 5’s, 1974_'_5, 000
Midland Valley E. E. 5’s, 1943_1, 000
Minneapolis, St. P. & S. S. M. Ey. 5’s, 1938_1, 000
Wisconsin Cent. Ey. 4’s, 1949_1, 000
Missouri Pac. E. E. 5’s, 1977_1, 000
Buffalo, Boeh. & Pittsb. Ey. 4%’s, 1957_1, 000
Illinois Cent. E. E. & Chgo. St. L. & N. O. E. E. 4y2’s, 1963_1, 000
Erie E. E. 5’s, 1967__ 1, 000
Wisconsin Cent. Ey. 4’s, 1936- 1, 000
Erie E. E. 5’s, 1967 — 1_1, 000
St. Louis Sthwstn. Ey. 5’s, 1952-_1, 000
St. Louis-San Fran. Ey. 4^’s, 1978_2,000
Kansas, Oída. & Gulf Ey. 5’s, 1978_1, 000
Lehigh Valley Transit 5’s, 1960- 1, 000
Associated Gas & Elec. Co. 5’s, 1968--- 1,000
Phila. Eapid Transit 6’s, 1962_2, 000
Scranton Ey. 5’s, 1932- — — 8, 950
Seaboard-All-Florida Ey. 6’s, 1935_8, OOi)
Hidalgo County, Tex. 7’s, 1940- 1,050
Eastern Michigan Bys. 6’s, 1958---- 8, 000

Upon its income tax return for 1931, among the deductions for bad debts, aggregating $122,436.68, is the following:

Amounts charged oft on defaulted bonds which were considered partially worthless. The charge offs do not write off the hooks, entirely, the bonds listed.
$15M Florida East Coast Ey. 5-74- $8,000
$10M Seaboard All Fla. Ey. 6-35- 9,000
$10M Hidalgo County, Texas 7-40- 1,050
$8, 200 Eastern Mich. Eys. 6-1958- 8,000
Total_ 20,050

This deduction of $26,050 the Commissioner disallowed, with the following statement:

This deduction comprising the write-down of the following bonds in the amounts listed * * * has been disallowed under the provisions of article 191 of Eegulations 74 and Office Decision (I. T.) 2612 published in Cumulative Bulletin XI-1, page 30, of the Internal Eevenue Bulletin Service.

The bank, in its original petition, assailed the disallowance, and in an amended petition now claims to be entitled to a deduction of the entire $50,000 charge-off, relying largely upon the force of a bank examiner’s direction. The Commissioner admits that the $50,000 was charged off, but traverses the averment that the debts represented by the bonds were ascertained to be worthless or that they were recoverable only in part. The controversy is entirely controlled by section 23 (j), Revenue Act of 1928.

The evidence shows that the charge-off was made at the direction of a national bank examiner pursuant to his examinations and reports made in March and August 1931. As to the specific items listed, the evidence shows that the four which make up the $26,050 deducted on the return were all bonds which in 1931 were in default as to interest, and the debtor was, as to each, in receivership. In these circumstances, the national bank examiner, finding also that the bonds were quoted on the market at a small value, directed that they be written down, and in compliance with his direction the charge-off was made. The Government offered no countervailing evidence. We think this is sufficient to establish that the debts were, at least to the extent of the charge-off, beyond recovery, and that it requires the finding of fact which has been made. It follows, as a matter of law, that the deduction taken on the return was valid and that the Commissioner erred in disallowing it. Since the entire deficiency determined by the Commissioner is the result of this dis-allowance, it must be set aside and a judgment of no deficiency entered.

As to the remaining $23,950, the evidence does not establish that in 1931 the debts represented by the bonds above listed were either worthless or recoverable only in part. As to none of these bonds was there in 1931 evidence of a default or receivership, or, so far as this record shows, any reason to believe that they would not at maturity be paid in their entirety. Some of them became in default in 1932. As to all of them, the bank examiner in 1931 determined from his investigation that the market value was substantially lower than the value at which they were carried on the books. Thereupon he computed the aggregate diminution in value and, in accordance with a general policy of the Comptroller of the Currency, directed the bank to charge off an amount representing 25 percent of the drop in market value and to apply this charge-off against those bonds which had fallen in value to the greatest extent. In compliance with these two directions of March and August, the bank made the entries of $10,000 in March and $40,000 in September, these being round figures which approximated the more exact figures found in the bank examiner’s reports. From this evidence we have been unable to find as a fact that any of the bonds, other than the four groups involved in the original deduction, were either worthless or recoverable only in part, and we have therefore omitted such a finding. Without it there is no support for the the deduction and hence no foundation for the judgment of overpayment which the petitioner seeks by its amended petition.

The petitioner argues that as a matter of law it is entitled to this additional deduction because the charge-off was required by the national bank examiner, despite the judgment of its own officers that the amount should, instead of being finally charged off, be set up in a reserve in view of the possibility of ultimate recovery, which the president thought was not unlikely. In other words, the petitioner argues that the mere official direction of a bank examiner is fer se-conclusive of the taxpayer’s right to deduct the amount thus charged off. In this the petitioner is supported by Citizens National Bank of Orange v. Commissioner, 74 Fed. (2d) 604, in which the court said:

It is immaterial as to what reason the bank examiner gave for ordering the charge off. His determination that the bonds were worthless in part was sufficient. The bank was under the necessity of complying with the instructions given, and it seems only reasonable that the bank should be allowed, in its return for the purposes of taxation, a deduction, corresponding in amount to the charge off made under compulsion.

In Lebanon National Bank v. Commissioner, 76 Fed. (2d) 792, this appears:

* * * when tile department which had supervisory control required the bank to charge oft the bonds entirely, then the bonds were officially declared worthless and should “for income tax purposes, be considered prima facie worthless.” However, this prima facie worthlessness might be overcome if the bonds were “ recoverable only in part,” and that they were recoverable in part is shown by the fact that their recoverable value by sale at that time was $1,400. We think these figures and facts officially fixed the loss the bank was entitled to deduct in that year as $8,700. the difference between the original cost of $10,100 and recoverable value of $1,400.

These decisions, if given the force and scope which the petitioner claims for them, would have the effect of overthrowing a consistent line of decisions of the Board, in which a bank examiner’s direction to charge off has been held to be not controlling, but is to be weighed with all the other evidence. None of these decisions of the Board, listed in the margin, was appealed upon this point, and they would provide controlling precedents for the present proceeding unless they are now to be regarded as overthrown. The question involves an important principle of administrative law, and justifies a more thorough exposition than appears in any of the Board decisions.

A national bank examiner’s direction to charge off is made for the supervisory or administrative purposes of the Comptroller of the Currency. The determination of the Commissioner of Internal Revenue is made for administrative purposes in the collection of the revenue. The two stand on a footing of independence and equality, and have disparate functions. But when the determinations of both appear in a proceeding before the Board, the Board has no freedom of choice between them — the determination of the Commissioner of Internal Revenue must, as a. matter of law, be regarded as prima facie correct. Burnet v. Houston, 283 U. S. 223; Wickwire v. Reinecke, 275 U. S. 101; Stiles v. Commissioner, 69 Fed. (2d) 951; Williams v. Commissioner, 44 Fed. (2d) 467; Green's Advertising Agency v. Blair, 31 Fed. (2d) 96; Bishoff v. Commissioner, 27 Fed. (2d) 91; Brown v. Commissioner, 22 Fed. (2d) 797; Avery v. Commissioner, 22 Fed. (2d) 6. In addition to that general presumption of correctness, there is an especially strong presumption in respect to debts recoverable only in part, because the statute conditions such a deduction only upon the permissible allowance by the Commissioner when he, the Commissioner, is “ satisfied that a debt is recoverable only in part.” This statutory provision prohibits the view that the determination of a bank examiner is controlling, and where the two determinations conflict in a tax proceeding, the Commissioner’s must stand until it is otherwise proven to be erroneous. In a case, not hard to imagine, where the taxpayer bank seeks such a deduction in a year different from that used by the bank examiner, the bank too would be entitled to prove facts in refutation of the bank examiner’s determination.

Article 191 of Regulations 74 is to the effect that a debt which a bank examiner has ordered partially charged off shall be presumed to be recoverable only in part in the absence of affirmative evidence establishing the contrary. Such a regulation, however effectively it may bind the Bureau of Internal Revenue, can not prescribe rules of evidence in proceedings before the Board. By statute such proceedings are conducted in accordance with rules of evidence applicable in courts of equity, and rules of practice and procedure prescribed by the Board. Manifestly they are not subject to the regulations of either of the parties to the proceeding; and the Commissioner is always a party. To this general proposition the Board has long and consistently adhered, Community Water Service Co., 32 B. T. A. 164; Cape Henry Syndicate, 30 B. T. A. 794, 797; Grace Scripps Clark, 1 B. T. A. 491.

But giving full respect to the Commissioner’s regulation upon the assumption that it was not aimed at controversies with taxpayers after they reach the Board, we should, in a particular case where the Commissioner has not acted in accordance with the bank examiner’s direction, suppose, not that the Commissioner has violated his own regulation, but rather that, conscious of his regulation, he has found reason to disallow the deduction and to put the taxpayer to his proof before the Board. Such proof may not be confined to the examiner’s determination which the Commissioner has rejected, but must be direct evidence of the fact of ascertained worthlessness or the extent of nonrecoverability.

Frequently the Commissioner of Internal Revenue has had to pass upon questions which have been the subject of determination by another governmental agency. Such determinations made by the Interstate Commerce Commission, Kansas City Southern Ry. Co. v. Commissioner, 52 Fed. (2d) 372; certiorari denied, 284 U. S. 676; by the Federal Trade Commission, Fraser Brick Co., 10 B. T. A. 1252; by a surrogate’s court, Edgar M. Carnrick, 21 B. T. A. 12; by local tax appraisers, Bessemer Investment Co. v. Commissioner, 31 Fed. (2d) 248; Barbara Konold, 9 B. T. A. 1194; Helen Barclay, Executrix, 4 B. T. A. 1139; by a state banking commissioner, Guaranty State Bank of Greenville, Texas, 12 B. T. A. 543; and by a clearing house examiner, Broadway Savings Trust Co. v. United States, 66 Ct. Cls. 429, have not been treated as binding on the Commissioner. The Board expressed this view in Kansas City Southern Railway Co., 22 B. T. A. 949:

* * * The Commissioner of Internal Revenue is charged with the single duty of determining and collecting taxes on annual income. * * * It is quite unlikely that the Interstate Commerce Commission would take judicial notice <>f any finding of the Commissioner or of this Board as to the invested capital of any railroad as the basis for compensatory service rates. On the other hand, there is no reason why the taxing authorities should be bound in income-tax determinations by any Interstate Commerce regulations or rules relating to the capital of carriers. Each, in its own domain, must discharge its duties as presented by the statutes.

and was supported by the Circuit Court of Appeals for the Eighth Circuit in Kansas City Southern Ry. Co. v. Commissioner, supra.

In Citizens National Bank of Orange v. Commissioner, supra, the Circuit Court of Appeals for the Fourth Circuit stressed the principle that consistency in governmental determinations is highly desirable and should be furthered wherever the ends of justice permit. This can not be challenged. But to' treat the finding of another agency as conclusive would in effect deny to the parties the right of any judicial review, of the fact in controversy; for if the Board is required to make a finding in conformity with the prior determination of the bank examiner, such finding would be controlling upon the courts on review. Phillips v. Commissioner, 283 U. S. 589; Helvering v. Rankin, 295 U. S. 123. We may not impose upon the Commissioner of Internal Bovenue the finding of an independent agency over which he has no control. As a principle of administrative law, we should hesitate to say that, as a matter of expediency, consistency of governmental determinations should be furthered by an unquestioning adoption of the conclusion reached by the first agency to act.

The bank examiner’s finding may be based on ample evidence brought to his attention, and on his personal knowledge of circumstances and his competence to form an opinion that a specific portion of a debt is not recoverable; and these may warrant an acceptance of his finding. But they are not properly in evidence merely by proof of his direction to the bank. The Board would have the duty to consider and weigh his testimony as a witness, and is not bound by proof of his categorical direction. American Trust Co. v. Commissioner, 31 Fed. (2d) 47.

The petitioner, although urging that the direction of the bank examiner was in itself sufficient to establish its right to the deduction, did not rest on this alone, but called the bank examiner as a witness. The bank examiner testified as to the nature of his examination and the practice and policy of the Comptroller of the Currency in regard to such matters. From his testimony it appears that he regards his function as principally to appraise the loans, real estate and other assets of the bank at a fair valuation and to see that the books show the bank’s true financial condition in accordance with such fair valuation. His concern is to protect depositors and prospective shareholders. To arrive at what he regards as a fair valuation, he uses information from all available sources, more frequently that which is found in financial and statistical publications. Under the customary practice, a bank would be permitted on its books to restore a bond when its market value went up, as well as required to write it down when its market value diminished. The practice was to require a bank to charge off the total drop from book value to market value on all bonds in default, and to charge off approximately 25 percent of the drop in other securities not in default. The 25 per cent was not taken off the list as a whole but applied to those particular bonds which were regarded as of the weakest character.” “I went over the list in respect of depreciation. In some cases the depreciation was very slight; in other cases it was anywhere from 20 to 40 per cent; and the items I gave the bank covered those particular bonds which showed the greater depreciation. In my view they were the weaker bonds.”

Thus it is demonstrated that the bank examiner’s instructions are not related to the question raised by the revenue act as to whether the debts are worthless or recoverable only in part, and if so to what extent, but that they are concerned with the correct valuation of assets from time to time, a public purpose quite different from that in charge of the Commissioner of Internal Revenue. While it is perhaps not fair to say that the bank examiner’s directions follow fluctuations in the market, as if his instructions changed from day to day, it is nevertheless true that when given at semiannual intervals they are primarily concerned with market values and not with the determination of the extent to which the debt will ultimately be paid. We should say, therefore, that the determination of the Comptroller of the Currency made for his administrative' purposes is no more significant in the determination to be made by the Commissioner of Internal Revenue than are the official accounting requirements imposed upon carriers by the Interstate Commerce Commission. As to this the Supreme Court has said:

* * * the rules of accounting enforced upon a carrier by the Interstate Commerce Commission are not binding upon tbe Commissioner; nor may be resort to the rules of that body, made for other purposes, for the determination of tax liability under the Revenue Acts. [Old Colony R. R. Co. v. Commissioner, 284 U. S. 552.]

See also Kansas City Southern Ry. Co. v. Commissioner, supra; Union Pacific R. R. Co., 26 B. T. A. 1126, 1143 (reversed on other point, 69 Fed. (2d) 67).

We find ourselves led by these several considerations to the proposition of law that the direction of a national bank examiner requiring a bank to write down the value of bonds is not of itself enough to establish that the amount of the write-down is deductible under the revenue act. Such a direction of a bank examiner may be received in evidence and is to be weighed in accordance with the data upon which the direction is based. In this proceeding such data shows that the write-off was, to the extent of $26,050, deductible in accordance with the revenue act, and to the extent of $23,950 not deductible. While, therefore, the petitioner is entitled to a judgment of no deficiency, it may not have a judgment of overpayment.

Reviewed by the Board.

Judgment will be entered for the petitioner.

Leech concurs in the result.

       SEC. 23. deductions PROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      $******
      (j) Bad debts. — Debts ascertained to be worthless and charged oil within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts) ; and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part.

        Farmers & Traders Bank, 4 B. T. A. 753; Continental Trust Co. et al., 7 B. T. A. 539, 554; Prescott State Bank, 11 B. T. A. 147; Guaranty State Bank of Greenville, Texas, 12 B. T. A., 543; West Lafayette Bank, 12 B. T. A. 1356; First National Bank, Parkers Landing, Pa., 12 B. T. A. 1387; American National Bank of St. Paul, 14 B. T. A. 476; South Hills Trust Co., 19 B. T. A. 674; First National Bank of Huntingdon, Pa., 23 B. T. A. 7; Crocker First National Bank of San Francisco, 26 B. T. A. 1078; Chemical National Bank of New York, 30 B. T. A. 178.


author: SteRnhagen :

text:
    Citizens National Bank of Orange, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 76993.
    Promulgated December 20, 1935.

      Theodore B. Benson, Esq., for the petitioner.

      Elmer L. Oorbin, Esq., for the respondent.
   OPINION.

SteRnhagen :

The Commissioner determined a deficiency of $1,521.86 in the petitioner’s income tax for 1931, arising from several adjustments. The only one which the petitioner assails is the dis-allowance of a deduction of $11,567.13 which, as shown by the deficiency notice, is described on the petitioner’s return as follows:

Mortgage Bank of Chile 5 m_$4, 500.00
Present market price_ 700. 00
-- $3,800. 00
Appalachian Gas Co. B’45 — 10 m_$8,800.00
Present market value- 1,032.87
- 7,767.13
The above issues are defaulted in interest (principal not yet due) and the charge-off represents the difference between market value and the amount carried on books as, which amount was charged to Surplus during 1931.

The Commissioner, in the notice of deficiency, made a full explanation of his disallowance, dealing with both the facts and the law, and concluded that the write-offs must be disallowed because there was nothing to show that the bonds were unlikely to be recovered at maturity, and because the instruction of a national bank examiner to charge off the amount was merely predicated upon an adjustment of bond values to quoted market figures rather than with regard to a determination of the amount ultimately recoverable.

The proceeding was submitted upon an “Agreed Stipulation of Facts ”, which is as follows:

1. The petitioner is a national bank organized under the laws of the United States and engaged in business at Orange, Virginia.
2. The tax in controversy is the corporation income tax for the calendar year 1831 in the amount of $1,521.88.
3. Throughout the calendar year 1931 the petitioner carried in an account entitled “ Bonds to Secure Trust Deposits ” bonds in the following names and at the following costs:
Appalachian Gas Corp. “ B ”-$9', 500
Mortgage Bank of Chile_ 4, 750
4.At the close of the calendar year 1931 the petitioner charged off on its books as a bad debt determined to be worthless in part $1,360 of the bonds of the Mortgage Bank of Chile and of the bonds of the Appalachian Gas Corporation the petitioner likewise charged off $4,984.26.
After the end of the calendar year 1931 and during the month of February 1932 the records of the petitioner were examined by a national bank examiner and the said examiner instructed the petitioner to make further write-offs as of December 31, 1931, of the said bonds of the Mortgage Bank of Chile in the amount of $2,150 and of the said bonds of Appalachian Gas Corporation in the amount of $2,782.89*.
The following is an itemized statement of the remaining cost of the bonds on the books at January 1, 1931, the charge-off on the books, the charge-off ordered by the bank examiner and the total charge-off.
5. There were no actual sales of the Appalachian Gas Corporation bonds on December 31, 1931, but the bid price was 6% and the asked price was 8. The sales price of the Mortgage Bank of Chile bonds was 11.
6. In 1931 the Appalachian Gas Corporation and the Mortgage Bank of Chile defaulted in payments of interest on their bonds.

It will be noted from this stipulation that the bank made two charge-offs against each of the items in question, one voluntarily at the end of 1931, and the other during February 1932, at the direction of a bank examiner. Nothing is stipulated from which it could be determined whether either of the bonds was in 1931 worthless or recoverable only in part, and unless the Board is required as a matter of law to regard the direction of a national bank examiner as a conclusive equivalent of the statutory condition of section 23 (j), Revenue Act of 1928, no finding of fact can be made to support the deduction claimed.

The taxpayer’s own voluntary charge-off at the end of 1931 proves, against the Commissioner’s determination, nothing as to worthlessness or nonrecoverability; and the default in interest adds but little. As to the Mortgage Bank of Chile bonds, the Commissioner in his notice of deficiency said that “ The Chile bonds mature in 1961 and the Chilean Government is guarantor of the bonds. A moratorium as to interest is now in effect but the Chilean Government declares that the moratorium is temporary.” From the stipulation it may be inferred that there were actual sales of these bonds at 11. As to the Gas Corporation bonds, the Commissioner said: “The Gas Corporation bonds mature in 1945 and no evidence is before the Bureau tending to show that the bonds will not be paid in full at maturity.” The only additional evidence is that there were no actual sales of the bonds on December 31, 1931, and that the bid and asked quotations were 6y2 and 8.

It is stipulated that the write-off made during February 1932 was made “ as of December 31, 1931 ” by direction of a national bank examiner. So far as appears, no one made an effort in 1931 to ascertain worthlessness or the extent of recoverability; and the amounts were not charged off in 1931. Nor is it shown, as it has been in some prior cases, when the books were closed, so that the write-off of February 1932 could be regarded as a delayed incident of the annual closing of the books as of the end of 1931. Thus, as to the second write-off, the Board could not find as a fact that the amounts were in the taxable year ascertained to be worthless or partially nonrecoverable, and could not find as a fact that they were charged off in the taxable year. In the absence of such findings properly supported by evidence, it can not be held, as the taxpayer contends, that the Commissioner erred in disallowing the deduction claimed. See Peyton Du-Pont Securities Co. v. Commissioner, 66 Fed. (2d) 718 (C. C. A., 2d Cir.); Fairless v. Commissioner, 67 Fed. (2d) 475 (C. C. A., 6th Cir.).

The petitioner relies without argument upon the proposition that the write-down made by the bank under the compulsion of a direction by a national bank examiner is per se deductible, citing Citizens National Bank of Orange v. Commissioner, 74 Fed. (2d) 604. We have, with all due respect for that decision, recently discussed this proposition in Second National Bank of Philadelphia, 33 B. T. A. 750, and were compelled to reach the conclusion that the bank examiner’s mere categorical direction that book value of bonds be written down to market value does not fulfill the express condition of the revenue act. The nature and theory of the bank examiner’s direction were described in the evidence in that proceeding and preclude the assumption, as a matter of law, that the Commissioner’s determination and the bank examiner’s direction are at cross purposes, and that one or the other must give away.

But there is no need in the present proceeding to be concerned with a situation where the bank examiner’s direction and the Commissioner’s determination are in conflict in the same year. The evidence in this proceeding shows that the write-off which was made in 1931 was voluntary and not directed by the bank examiner, and that the second write-off, although made at the direction of a bank examiner, was not a “ charge-off within the taxable year ” as the revenue act requires.

Reviewed by the Board.

Judgment will he entered for the respondent.

Teammell dissents.

       This amount is $10,000 cost less $500 written off in 1930 by a national bank examiner.

       SEC. 23. DEDUCTIONS FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      * * #. * # * *
      (.1) Bad debts. — Debts ascertained to be worthless and charged off within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts) ; and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part.


author: Smith:

text:
    James L. Rankin, Executor of the Estate of Richard B. Turner, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 53554.
    Promulgated December 20, 1935.

      John W. Townsend, Esq., for the petitioner.

      B. M. Coon, Esq., and JoJm W. Smith, Esq., for the respondent.
   OPINION.

Smith:

In the above entitled proceeding the Board, on June 21, 1935, issued the following order:

On June 5, 1935, this Board received from the Circuit Court of Appeals for the Third Circuit an order in the above-entitled proceeding reading as follows:

“Upon consideration of the mandate of the Supreme Court of the United States filed herein on the 27th day of May, 1935, and upon the agreement in open court by counsel for both parties hereto, the decision of the United States Board of Tax Appeals is reversed and the proceeding remanded; to said Board for a rehearing and findings with respect to what, if any, shares were designated to the broker as those to- be sold or those to be held, and with directions to enter its decision in conformity with the opinion of the Supreme Court of the United States.”

Pursuant to such mandate, it is

Obdekgd that this proceeding be and the same hereby is restored to the Day Calendar of October 1, 1935, for presentation of such evidence as the petitioner and the respondent desire to present for the purpose of enabling the Board to determine “ what, if any, shares were designated to the broker as those to be sold or those to be held ”, pursuant to the mandate.

At the rehearing on October 1, 1935, the petitioner presented the same witnesses as at the first hearing on April 27, 1932, viz., James L. Rankin and Thomas McDougal. The respondent in his behalf presented as witnesses, John V. Carey, customers’ man for West & Co., brokers, from 1926 to 1930, inclusive, and Frederick D. Bendler, a revenue agent.

In our former report in this case, 26 B. T. A. 1204, we made the following finding of fact:

* * * In giving orders to his broker to sell 1,300 shares of the stock in 1928, the decedent did not specify any particular shares to be sold'. An employee of the broker understood, however, that the decedent desired to retain 1,200 shares to take the place of the bonds which he had received from his father. * * *

This finding was based upon the testimony of James L. Rankin at the hearing on April 27, 1932, that in giving orders for sales of Turner’s stock he did not specify any particular shares to be sold, and that:

So far as Mr. Turner was concerned and West & Company were concerned they knew his desires and feelings about the 1,200 shares of U. G-. I. For myself I had discussed it with Mr. Carey of West & Company, and he knew Mr. Turner’s feelings about that, the 1,200 shares.

There was no other evidence before the Board which warranted the finding. The case was originally tried upon the proposition that a mere intention on the part of a margin trader to sell lots of stock purchased at different dates and carried in the margin trading account was all that was necessary to take the transaction out' of the so-called “ first in, first out ” rule.

The Supreme Court, in Helvering v. Rankin, 295 U. S. 123, reversing the decision of the Circuit Court of Appeals for the Third Circuit in Rankin v. Commissioner, 73 Fed. (2d) 9, said:

* * * The required identification is satisfied, if the margin trader has, through his broker, designated the securities to be sold as those purchased on a particular date and at a particular price. It is only when such a designation was not made at the time of the sale, or is not shown, that the “ First-in, first-out” rule is to be applied.
*******
Third. If the facts found by the Board of Tax Appeals had been what the Court of Appeals assumed them to be, there would have been such an identification of shares sold with shares purchased as to preclude the Commissioner from applying the “First-in, first-out” rule. The Court of Appeals assumed that, “ What Turner did in this case, acting and speaking through his attorney, was to communicate to his broker his intention to hold for investment the shares of U. G. I. he originally purchased.” The facts found by the Board of Tax Appeals do not bear out this assumption of the court. The Board’s findings were that, “The decedent [Turner] always intended to retain the ownership on margin of 1,200 shares of the United Gas Improvement Co. stock ”; and that, “An employee of the broker understood * * * that the decedent desired to retain 1,200 shares to take the place of the bonds which he had received from his father.” The difference between the Board’s findings and the court’s statement of the facts is obviously vital. The court held that Turner’s communication of his intention “ was in effect an order to his broker not to sell those shares ”; that “ When, two years later, he ordered the broker to make two sales in lots of 500 shares each, they were, conformably to the original instructions, the 1,000 shares last purchased.” But if the employee was told, as the Board found, merely that Turner “ desired to retain 1,200 shares [of the U. G. I. fetock] to take the place of the bonds which he had received from his father ”, he would naturally believe that so long as any 1,200 shares of the stock were retained, it was immaterial to which of the lots the sales in 1928 were attributed; and hence there was no identification. Thus it was only by departing from the facts as found by the Board of Tax Appeals that the court found justification for reversing the Board’s decision.

At the rehearing of this proceeding. James L. Rankin testified more explicitly concerning his instructions to Mr. Carey, saying:

When Mr. Turner told me definitely that he was going to take an active position in the stocks, I called up Mr. Carey at West & Company. I reminded him of the prior purchases on Mr. Turner’s behalf that had been made through me by telephone, and said that Mr. Turner had decided, against my advice, to take an active part in the stock market; that he wanted me to say to Mr. Carey that he had no intention of selling the 1,200 shares that had been purchased using those bonds, but he thought he probably would sell the 300 shares received as dividends. I further said to Mr. Carey that Mr. Turner may from time to time buy and sell U. G. I. shares, but for sentimental reasons it is his intention at all times to keep those 1,200 shares. Mr. Carey said he understood.

The alleged conversation between Rankin and Carey took place in the early part of 1928.

Carey testified that if he had received any such instructions he “ would have taken the matter up with the cashier in the office, and explained his [decedent’s] wishes in the matter ”; but that he had no recollection of having received any such instructions from Rankin or Turner, the decedent, or anyone else, concerning Turner’s margin account. Bendler, the revenue agent, testified that in the audit of Turner’s tax return for 1928 he called upon Rankin, who apparently was the only person conversant with Turner’s marginal trading in 1928. He stated:

Then I asked him could he identify the stock sold? And he said no, that he did not have the number of the certificates. West & Company handled the transaction. I then made a recheck of West & Company’s records on all of the account, and could find no notation on West & Company’s account of any notation when they sold that stock of what stock it applied to. I then asked Mr. Carey would it be possible to identify that stock. Mr. Carey told me it would be physically impossible to identify that stock sold.

At the earlier hearing of this case on April 27, 1932, Rankin testified:

Neither Mr. Turner nor myself knew until this question was raised by the Government how West & Company handled it, and the only brokerage accounts that I ever had contact with, was with this concern, and neither Mr. Turner nor myself knew how the transaction was handled by West & Company until the question was raised, and I went to West & Company two years after the transaction to find out from them a record of the certificates they had representing this 1200' shares. I went there expecting they could tell me the number of certain certificates for 1200 shares, and for the first time I knew they could not do that. * * *

Rankin also testified at the earlier hearing:

Q. You' just gave an order to the broker to sell 300 shares of the ü. G. I., or 500 shares of ü. G. X., and you received the notice the following day that so many shares were bought or sold?
A. That is right, yes.

On brief counsel for the petitioner points out that Rankin testified that Turner wanted him “ to say to Mr. Carey that he had no intention of selling the 1,200 shares that had been purchased with those bonds, * * * but for sentimental reasons it is his intention at all times to keep those 1,200 shares.” It is argued that this testimony of Rankin warrants the Board in now finding as a fact, even if the fact could not be found upon the previous record, that Turner always had it in mind to keep the 1,200 shares and that in giving orders to the broker to sell the excess over 1,200 shares of U. G. I. stock, those shares were reserved. We do not think that the entire evidence of record warrants such a finding. Even if Turner had had that intention in the early part of 1928, there is nothing to show that he had not abandoned it before the sales of the U. G. I. stock in question were ordered. The evidence on the rehearing brings out the fact that at some time after 1928 Turner sold through his broker the 1,200 shares of which he was long at the close of 1928.

If, when Turner gave orders to sell lots of U. G. I. stock in 1928, he had indicated to the broker that he was to sell “ those purchased on a particular date and at a particular price ” or had otherwise clearly instructed the broker as to what particular shares should be sold, he would be entitled to have the profits or losses from the sale computed upon the basis of the cost of the shares designated. This was made plain by the decision of the Supreme Court in this case. But the Supreme Court observed it is only when such a designation was not made at the time of the sale, or is not shown, that the ‘ First-in, first-out ’ rule is to be applied.” Quite clearly, in this case, neither Turner nor Rankin designated at the time of the sale the securities to be sold as those purchased on a particular date or at a particular price. We are furthermore of the opinion that the evidence does not warrant a finding that the instruction given by Rankin to the broker in the early part of 1928 amounted to anything more than a communication to the broker of an intention on the part of Turner to continue his long position in U. G. I. stock to the extent of 1,200 shares.

Reviewed by the Board.

Judgment will be entered for the respondent.