author: TRAMMeul i

text:
    The Texas Land & Mortgage Company, Ltd., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67521.
    Promulgated June 7, 1934.

      W. M. Smith, Esq., for the petitioner.

      O. A. Ray, Esq., for the respondent.
   OPINION.

TRAMMeul i

This proceeding is for the redetermination of deficiencies in income tax of $250.66 and $984.19 for the fiscal years ended March 31, 1930, and March 31, 1931, respectively. The only matter in controversy is whether in determining the petitioner’s taxable income for each of the years in question the respondent correctly determined the proportion of petitioner’s expenses, losses, and other deductions which could not definitely be allocated to some item or class of gross income for the respective years. All other issues were conceded by the respondent. The proceeding was submitted upon a stipulation of facts and certain documentary evidence.

The petitioner is a foreign corporation, with its principal office in London, England, and its domestic office in Dallas, Texas. Most of. its income is derived from interest on mortgage loans, while only a minor part arises from dividends, interest on bank deposits and corporation bonds, rents, and dealings in securities.

For the fiscal year ended March 81, 1980, the petitioner’s gross income from all sources was $391,981.91, its gross income from sources within the United States was $320,102.36, its total losses on sales of securities was $28,802.99, and its losses on sales of securities made in the United States was $2,203.27. The amount of its expenses, losses, or other deductions which could not definitely be allocated to some item or class of gross income was $170,469.28.

In determining the deficiency for the fiscal year ended March 31, 1930, the respondent determined that $139,205.38, or 81.66 percent of the $170,469.28 representing expenses, losses, or other deductions not definitely allocable to some item or class of gross income, was the ratable part of the latter amount to be allowed as a deduction from gross income from sources within the United States. The percentage of 81.66 used by the respondent represents the proportion that the gross income from sources within the United States, $320,102.36, without deduction for losses of $2,203.27 on the sales of securities in the United States, bears to the gross income from all sources, $391,981.91, without deduction for total losses on the sales of securities of $28,802.99.

For the fiscal year ended March 31, 1931, the petitioner’s gross income from all sources was $345,097.89, its gross income from sources within the United States was $282,632.68, its total losses on the sale of securities was $52,775.15 and its losses on the sale of securities in the United States was $8,238.26. The amount of its expenses, losses, or other deductions which could not definitely be allocated to some item or class of gross income was $167,265.97.

In determining the deficiency for the fiscal year ended March 31, 1931, the respondent determined that $136,990.83, or 81.90 percent of the $167,265.97 representing expenses, losses, or other deductions not definitely allocable to some item or class of gross income, was the ratable part of the latter amount to be allowed as a deduction from gross income from sources within the United States. The percentage of 81.90 used by the respondent represents the proportion that the gross income from sources within the United States, $282,632.68, without deduction for losses of $8,238.26 on the sale of securities in the United States, bears to the gross income from all sources, $345,097.89, without deduction for total losses on the sale of securities of $52,775.15.

With respect to the fiscal year 1930 the petitioner asks that we determine that the proper deduction from gross income from sources within the United States on account of expenses, losses, or other deductions which could not definitely be allocated to some item or class of gross income was $149,215.79, or 87.53 percent of the unallocable deductions of $170,469.28, instead of $139,205.38 as determined by the respondent. With respect to the fiscal year 1931 the petitioner asks that we determine the corresponding deduction for that year to be $157,012.57, or 93.87 percent of the unallocable deductions of $167,265.97, instead of $136,990.83 as determined by the respondent. The petitioner’s requests are based upon the contention that in determining the ratable part of expenses, losses, or other deductions to be allowed the gross income from all sources should be reduced by the total amount of the losses on all sales of securities and the gross income from sources within the United States should be reduced by the losses on the sales of securities in the United States. The respondent denies that this should be done and contends that his determination should be sustained.

The Revenue Act of 1928 provides as follows:

SEC. 22. GROSS INCOME.
(a) General definition. — “Gross income” includes gains, profits ¿nd income derived from * * * businesses, commerce, or sales or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever.
SEO. 21. NET INCOME.
“ Net income ” means the gross income computed under section 22, less the deductions allowed by section 23.
SEC. 2 3. deductions EROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
# $ $ $ ‡ ‡ $
(f) Losses by corporations. — In the case of a corporation, losses sustained during the taxable year and not compensated for by insurance or otherwise.
SEC. 231. GROSS INCOME.
(a) General Rule. — In the case of a foreign corporation gross income includes only the gross income from sources within the United States.
SEC. 232. DEDUCTIONS.
In the case of a foreign corporation the deductions shall be allowed only it and to the extent that they are connected with income from sources within the United States; and the proper apportionment and allocation of the deductions with respect to sources within and without the United States shall be determined as provided in section 119, under rules and regulations prescribed by the Commissioner with the approval of the Secretary.

Section 119, after stating in subsection (a) what items shall be treated as income from sources within the United States, provides:

(b) Net income from sources in United States. — From the items of gross income specified in subsection (a) of this section there shall be deducted the expenses, losses and other deductions properly apportioned or allocated thereto and .a ratable part of any expenses, losses, or other deductions which can not definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as net income from sources within the United States.

The same section, after stating in subsection (c) what items are to be treated as income from sources without the United States, further provides as follows:

(d) Net income from sources without United States. — From the items of gross income specified in subsection (c) of this section there shall be deducted the expenses, losses and other deductions properly apportioned or allocated thereto, and a ratable part of any expenses, losses, or other deductions which can not definitely be allocated to some item or class of gross income. The remainder, if any, shall be treated in full as income from sources without the United States.
(e) Income from sources partly within and partly without United States.— Items of gross income, expenses, losses and deductions, other than those specified in subsections (a) and (c) of this section, shall be allocated or apportioned to sources within or without the United States, under rules and regulations prescribed by the Commissioner with the approval of the Secretary. * * *

Article 680 of Regulations 74, relating to the Revenue Act of 1928, provides as follows:

Ap.t. 680. Apportionment of deductions. — From the items specified in articles 671-676 as being derived specifically from sources within the United States there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any other expenses, losses, or deductions which can not definitely be allocated to some item or class of gross income. The remainder shall be included in full as net income from sources within the United States. The ratable part is based upon the ratio of gross income from sources within the United States to the total gross income.

The question here presented for determination is whether losses on the sale of securities constitute a reduction in gross income or a deduction from gross income. In other words, in determining gross income under the statutory definition, are losses on the sale of securities in a business in which such sales are only incidental to its main business deductible from gross income in determining the amount of gross income, or are they only deductible from gross income m determining net income ? If the first of these alternatives is correct the petitioner must prevail; otherwise, the action of the respondent must be sustained. Our consideration of the question will be based on the assumption, as is indicated by the stipulation of the parties, that the losses from the sale of securities for the respective years, which the petitioner seeks to have applied in reduction of gross income for such years, represent the net result of all dealings in securities and not the amount of losses from transactions resulting in losses as distinguished from transactions in which gains were realized.

In our opinion the above quoted provisions of the statute clearly indicate that the losses in controversy are not to be used as a reduction in determining gross income. Section 22 (a) states what items are to be included in gross income but contains no provision with respect to the application of losses to such items in order to determine the amount thereof. Section 21 provides that net income shall be the gross income computed under section 22 less the deductions allowed by section 23. The last section provides with respect to the computation of the net income of corporations that there shall be allowed as a deduction losses sustained during the taxable year and not compensated for by insurance or otherwise. These sections of the act show that losses are items to be considered in computing net income and not gross income. If losses were properly allowable as offsets or reductions in computing gross income they could, under sections 22 and 23 of the act, be allowed again as a deduction in determining net income, therefore resulting in their allowance twice, which is something that was not intended by the statute. Sections 231, 232, and 119, relating more specifically to the income, gross and net, of foreign corporations, follow the same general plan set out in sections 21, 22, and 23. The foregoing sections of the act do not furnish, nor are we able to find elsewhere in the act, authorization for the method here sought by the petitioner. Consequently its contention is denied.

In providing in article 680 of Regulations 74 that from the items of income derived specifically from sources within the United States there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any other expenses, losses, or other deductions which can not definitely be allocated to some item or class of gross income, and that the remainder shall be included in full as net income from sources within the United States, we think the respondent has given a fair and reasonable construction to the pertinent portions of the statute. We also think that the provision that the ratable part of any expenses, losses, or deductions which can not definitely be allocated to some item or class of gross income is to be based upon the ratio of gross income from sources within the United States to the total gross income from all sources is likewise a fair and reasonable construction.

The pertinent provisions of the act relating to the apportionment of deductions in determining net income from sources within and without the United States first appeared in section 217 of the Revenue Act of 1921 and have been reenacted in substantially the same language in all subsequent acts. The-above mentioned provisions of article 680 of Regulations 74 as to the apportionment of deductions for the purpose of determining net income from sources within the United States first appeared in article 325 of Regulations 62 under the Act of 1921. They have appeared in practically identical language in the later regulations promulgated under all the subsequent acts. Under these circumstances we think they are entitled to be considered as having legislative adoption and any doubt as to their correctness as having been eliminated by legislative action. See United States v. Falk, 204 U.S. 143; National Lead Co. v. United States, 252 U.S. 140; Commonwealth Commercial State Bank v. Lucas, 41 Fed. (2d) 111; Oil Shares, Inc., 29 B.T.A. 664.

Since we perceive no error in the respondent’s determination with respect to the question in controversy, his action is sustained.

Reviewed by the Board.

Judgment will be entered under Bule 50.


source: Caselaw Access Project

author: Van Fossan: Tbammell,

license: Public Domain

text:
    Wilmore Steamship Company, Inc., Petitioner v. Commissioner of Internal Revenue, Respondent.
    Docket No. 53297.
    Promulgated June 7, 1934.

      John B. Sullivan, Jr., Esg., for the petitioner.

      Brew Savoy, Esg., for tbe respondent.
   OPINION.

Van Fossan:

The respondent determined a deficiency of $113,-864.60 in petitioner’s tax for the year 1928. Of the errors alleged there remains only one — whether petitioner is taxable on certain sums received in 1928 on account of an award of the Mixed Claims Commission because of the sinking by a German submarine of a vessel owned by petitioner. The respondent on brief concedes that the amount originally determined was in error and that only amounts received in 1928 should be included. He also concedes the deducti-bility of the sum of $40,184.17 paid by petitioner in 1928 for legal services in connection with obtaining the award and payment thereunder.

The facts were stipulated by the parties, only so much of the stipulated facts as are deemed pertinent being here set forth in connection with our discussion of the issue.

The petitioner, a New York corporation with its principal office in New York City, on or about July 12, 1916, acquired by purchase a steamer known as S.S. Wilmore at a cost price of $1,742,340. On or about September 12, 1917, the Wilmore was torpedoed and sunk by a German submarine, and became a total loss. In 1917 the petitioner recovered the sum of $1,750,000 insurance on the Wilmore, and reported in its tax return for that year as a part of its gross income the amount of $377,241.06, being the difference between the cost of the steamer, less depreciation to the date of destruction, and the amount recovered under the insurance contract.

On or about February 17, 1926, the Mixed Claims Commission, United States and Germany, entered an award on behalf of the petitioner in the sum of $650,000, together with interest at the rate of 5 percent per year from November 11,1918, to date of payment, based upon the fair market value of the Wilmore on September 12, 1917, less the amount of insurance recovered by the petitioner.

In accordance with the Settlement of War Claims Act of 1928, the Secfetary of the Treasury computed interest on the sum of $650,000 from November 11,1918 to January 1,1928, and the principal amount of the award, plus the interest so computed thereon, amounting in the aggregate to $947,041.10, became the principal upon which interest at the rate of 5 percent per year was payable thereafter, under the Settlement of War Claims Act of 1928.

In August 1928 the petitioner received $352,341.77 as payments on account of the award of the Mixed Claims Commission. In 1928 the petitioner paid the sum of $40,184.17 for legal services under an agreement whereby a percentage would be paid out of and on receipt of payment on account of the award. In its income tax return for 1928 the petitioner did not deduct the said sum of $40,184.17.

On June 30, 1928, the petitioner entered, into contracts for the construction in an American shipyard of two coal-carrying, oceangoing steamships, with a coal-carrying capacity of substantially 8,500 tons each, named Berwindglen and Berwindvale, to replace the S.S. Wibnore, which had been an ocean-going vessel having a coal-carrying capacity of approximately 10,000 tons, intending to apply to such construction all sums to be received as payments on account of the award of the Mixed Claims Commission.

The total contract price of the new steamships was $1,496,800, payable in installments as the work progressed, and, including extras and additions, the total cost of these steamers to December 31, 1931, was $1,683,018.34. Payments by the petitioner under the contracts during the year 1928 amounted to $484,652.57. The new steamships have since been completed and are now in service and owned by the petitioner.

The petitioner kept its books of account and made its tax returns on the accrual basis, and its return for the calendar year 1928 was so made. In the return filed for the year 1928 petitioner recited that the reason payments on account of the award of the Mixed Claims Commission were not included in gross income was because it believed that they were not to be included therein under section 112 (f) of the Revenue Act of 1928.

Petitioner, after deducting the fees paid for obtaining the award and for obtaining payment on account thereof, applied the balance of the payments to the cost of the new steamers on its books, claiming that this was the proper way to treat the amounts so recovered, by application of section 112 (f) of the Revenue Act of 1928.

The respondent computed the deficiency here in controversy by including in the petitioner’s gross income for 1928 the entire principal of the award of the Mixed Claims Commission in the amount of $650,000,. plus accrued interest to January 1, 1928, in the amount of $297,041.10, and plus interest accrued for the taxable year of $40,785.33, less miscellaneous expenses of $1,770.56 and legal expenses in the amount of $40,184.17.

The petitioner having recovered insurance in 1917 in excess of the cost to it of the 1Wilmore, it follows that the entire- amount of the payments made in 1928 on account of the award of the Mixed Claims Commission, less the expenses incurred in that connection, represents gain derived by the petitioner in that year from the involuntary conversion of its property in the steamer and is accordingly taxable on the full amount unless petitioner comes within the exceptions of section 112 (f) of the Revenue Act of 1928.

Section 112 (f) of the Revenue Act of 1928 provides as follows:

SEO. 112. RECOGNITION OF GAIN OR LOSS.
(a) General rule. — Upon the sale or exchange of property Hie entire amount of th.e gain or loss * * * shall he recognized, except as hereafter provided in this section.
*******
(f) InvoMmtary eonversions. — If property (as a result of its destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation, or the threat or imminence thereof) is compulsorily or involuntarily converted into property similar or related in service or use to the property so converted, or into money which is forthwith in-good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, expended in the acquisition of other property similar or related in service or use to the property so converted, or in the acquisition of control of a corporation owning such other property, or in the establishment of a replacement fund, no gain or loss shall be recognized. If any part of the money is not so expended, the gain, if any, shall be recognized, but in an amount not in excess of the money which is not so expended.

No legislation granting special consideration to the owner of property involuntarily destroyed or sold appeared in the taxing statutes prior to the Revenue Act of 1921. However, on April 25, 1918, the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury, issued a treasury decision (No. 2706) revising article 94 of Regulations 33 so as to provide for instances where property was destroyed, authorizing the establishment of a “ replacement fund ”, and making other appropriate provisions.

Section 112 (f) clearly specifies that replacement expenditures made from money received as the result of involuntary conversion must be devoted forthwith to the acquisition of other property similar or related in service or use to the property so converted, in order to entitle the taxpayer to the benefit of that section. In 1917 the petitioner received $1,750,000 in cash as compensation, through insurance, for the loss of its steamer. That amount was more than the original cost and more than was required to construct two new steamers in 1928. The petitioner took no steps “ forthwith ” or at any time to apply that sum or any part of it to the acquisition of a steamer to replace the one lost. The record discloses no intent on the part of the petitioner, at the time of the loss or within a reasonable time thereafter, to replace the torpedoed ship. That the construction of two new ships in 1928 was not a compliance with the statute as to the insurance money seems too clear to require argument in support. The. petitioner established no replacement fund, nor did it, during a period of over 10 years, indicate in any manner its purpose to replace the lost ship.

The statute required, as a condition precedent to coming within the exception to the general rule stated in section 112 (a), that the petitioner must comply with the regulations established by the Commissioner with, the approval of the Secretary. This the petitioner failed to do. Eastern Steamship Lines, Inc., 17 B.T.A. 787.

The petitioner’s counsel contends that the destruction of its ship by Germany resulted in two separate and distinct transactions of conversion, i.e., the collection of the insurance money and the payment of damages by the Mixed Claims Commission. He asks us to disregard the receipt of $1,750,000 proceeds of insurance and permit the petitioner to receive the full benefit of the statute as to the award made 10 years thereafter. We find ourselves wholly unimpressed by this contention. The ship was destroyed in 1917. At that time petitioner’s property was converted into money in the form of insurance proceeds. The full cost of the ship and more was received. No steps were taken to replace the ship out of the money so received. Ten years pass and in 1928 an award is made by the Mixed Claims Commission. Before the award is paid petitioner contracts for two new ships at a cost less than the insurance proceeds. Petitioner asks us to ignore the earlier transaction and hold that there has been forthwith an expenditure in the acquisition of property similar or related in service or use. This we are unable to do. Both sums of money received had their origin in the destruction of the vessel in 1917. To get an accurate picture, the entire story must.be told and taken into account. When this is done the fallacy of petitioner’s reasoning is plain.

But, assuming the correctness of petitioner’s theory, the record does not clearly identify the payments on the petitioner’s contracts of June 30, 1928, with the amounts received under the award in August 1928. It is not stipulated as a fact that the payments received from the award were actually applied to the installments due under the contracts. The stipulation merely recites that the petitioner “ intended to apply to such construction all sums to be received as payments on account of the award.” The stipulation further states that “ after deducting said fees paid for obtaining the award and for obtaining payment on account of said award, the petitioner applied the balance of the payments to the cost of the new steamers on its boohs, claiming that this was the proper way to treat the amounts so recovered by application of section 112 (f) of the Revenue Act of 1928.” (Italics ours.)

In this situation it is impossible to determine whether the petitioner paid such installments to the shipbuilding concern out of its own funds and replaced the payments with the proceeds of the award, or applied the award directly. The natural inference supports the first view. Petitioner’s contract for the new ships antedated the receipt of any payment on account of the award. Thus were there no other obstacle we could not say that the petitioner expended the proceeds of the award in the acquisition of other property similar or related in service or use. Louis Bandes, 28 B.T.A. 99; aff'd., 69 Fed. (2d) 812.

We hold that petitioner has not established that it comes within the favor of section 112 (f) of the Revenue Act of 1928 or any prior similar provision.

The petitioner is entitled to deduct the sum of $40,184.17 paid in 1928 for legal services in connection with prosecuting its claim before the Mixed Claims Commission. Only the sums actually paid in that year under the award may be included in the petitioner’s gross income.

Reviewed by the Board.

Decision will Toe entered under Rule 50.

Tbammell,

dissenting: I am unable to concur in the conclusions reached by a majority of the Board in this case for two principal reasons. In the first place, the prevailing opinion treats the incidents occurring in 1917 as not constituting a completed transaction for tax purposes, and takes into consideration the proceeds of insurance collected in that year in determining the amount of the gain to be included in gross income for 1928.

In the second place, the majority view is based upon the theory that only one conversion of the petitioner’s property in the S.S. Wil-more occurred. Neither of these propositions, in my opinion, can be sustained.

In 1917, when the petitioner’s steamer was destroyed by the German submarine and petitioner collected proceeds of insurance in the amount of $1,750,000, it was not then known nor could it have been known with reasonable certainty how the World War would terminate, or whether the petitioner would ever be able to collect damages from Germany on account of that incident. In these circumstances the transaction then became closed and completed, in so far as concerned the recognition of gain or loss for tax purposes, under the doctrine proclaimed by the Supreme Court in United States v. White Dental Mfg. Co., 274 U.S. 398. In that case the sole question presented was the right of the taxpayer to deduct from its gross income for 1918 the amount of its investment in a subsidiary German corporation whose entire property was seized in that year by the German Government as enemy property. The Commissioner contended that the transaction was not closed and completed in 1918, since an award was made by the Mixed Claims Commission in 1924 in part compensation for such loss. In holding that the transaction was closed and completed for tax purposes in 1918 and the entire loss deductible in 1918, the Supreme Court said:

* * * a loss may become complete enough ior deduction without the taxpayer’s establishing that there is no possibility of an eventual recoupment. It would require a high degree of optimism to discern in the seizure of enemy property by the German government in 1918 more than a remote hope of ultimate salvage from the wreck of the war. The taxing act does not require the taxpayer to be an incorrigible optimist.

The transaction of 1917, involved herein, consisting of the destruction of petitioner’s steamer and the recovery of proceeds of insurance in excess of the cost of the steamer, constituted a closed and completed transaction, and in reporting in its return for 1917 the taxable profit derived, the petitioner was not only within its legal rights, but was required by the existing law to do that very thing. Neither in 1917 nor in 1918 prior to the date on which returns were required to be filed for 1917 was there any provision in the tax laws or regulations then in effect by which gain or loss from the involuntary conversion of jnoperty could escape recognition for tax purposes-Such regulations were first approved by the Commissioner on April 25, 1918, in TJX 2706, and the respondent now argues that the petitioner could have availed itself of those provisions by filing an amended return. I think this is immaterial. Even under the present law a taxpayer is not required to replace property involuntarily converted into cash, but may at his option include in taxable income any gain derived or deduct from gross income any loss sustained.

In my opinion also the facts of this case established two separate and distinct conversions into cash of the petitioner’s property in the S.S. Wilmore, although resulting from a single act of destruction. In 1917 a part of its property rights in the steamer was converted into cash, measured by the proceeds recovered under the insurance contract. The cash acquired by this conversion the petitioner did not elect to use for the purpose of replacing the destroyed steamer, but treated the transaction as closed and completed, and reported the profit derived in its return for 1917. There is no controversy respecting the amount of the profit so reported, nor the correctness of the petitioner’s act in so doing.

In 1928 the remainder of the petitioner’s property rights in the S.S. Wibnore was converted into cash to the extent of the payments received in that year on account of the award of the Mixed Claims Commission. The cash received from this conversion the petitioner forthwith in good faith expended in the acquisition of other property admittedly similar or related in service and use to the property so converted.

If the petitioner had owned two steamships, one of which was involuntarily converted into cash in 1917 and not replaced, and the other involuntarily converted into cash in 1928 and forthwith replaced, it would hardly be contended that any profit realized on the latter transaction would be recognized for tax purposes under the statute.

Obviously such would be the rule if a taxpayer owned a building equipped with machinery, having a policy of insurance on the building and a separate policy on the machinery. Upon destruction by fire, the taxpayer might elect to take his loss or report his profit on the involuntary conversion of the building, and forthwith replace the machinery with the proceeds of the other policy of insurance. On the latter transaction no profit or loss would be recognizable.

In the supposed case, two separate conversions of the taxpayer’s property occurred, both resulting from the same casualty, and with only one replacement. So here there were two wholly separate and distinct involutary conversions into cash of the taxpayer’s property in the steamship, and in my opinion the petitioner has the right of election under the statute to treat them separately.

In International Boiler Works Co., 3 B.T.A. 283, a situation was presented similar in principle to the instant case, and the respondent there urged substantially the same argument as here. That case involved section 234 (a) (14) of the Revenue Act of 1921, which, with the exception of minor differences unimportant here, is comparable to section 112 (f) of the 1928 Act. In our opinion, at p. 291, we said:

The Commissioner urges that, if section 234 (a) (14) is to be applied, the taxpayer must treat all the amounts received as insurance for the destruction of its property as a single sum, and that it may not segregate the amounts received under different policies for different properties and select those which it desires to subject to the general gain or loss provisions and those to which it desires to apply the provisions as to involuntary conversion.
We see nothing in the statute to require treatment of the proceeds as a unit. If a taxpayer, for example, has two separate plants, on each of which it received a specified amount upon destruction or condemnation, there is no reason why it may not apply the one specific amount to the reconstruction of the one plant, claiming under section 234 (a) (14), and determine its gain or loss upon the other without reconstruction. The provisions of section 234 (a) (14) are relief provisions by which a taxpayer may postpone the taxation of so much of the gain derived from an involuntary conversion as it uses in replacement. It may not be permitted to postpone the taxation of gain derived from the conversion of one piece of property merely because it elects to use the proceeds in replacing another piece of property. On the other hand, the Commissioner may not deny it the deduction of a loss in the one case if the taxpayer elects to keep the two funds separate.

In the instant case the majority opinion in effect treats as a unit the proceeds of insurance, received in 1917, and the proceeds of the award of the Mixed Claims Commission, received in 1928, notwithstanding the taxpayer elected to keep the two funds separate.

Since the deficiency determined by the respondent in this case results wholly from the inclusion in petitioner’s gross income for 1928 of gain derived from an involuntary conversion of property, not recognizable for tax purposes under section 112 (f), supra, in my opinion the respondent’s action should be reversed and we should hold there is no deficiency.


author: Adams :

text:
    Southland Life Insurance Company, Petitioner v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 28702, 31565, 41258, 55658, 63709.
    Promulgated June 7, 1934.

      Robert Ash, Esq., for the petitioner.

      P. A. Bayer, Esq., for the respondent.
   OPINION.

Adams :

These proceedings, which were consolidated, involve deficiencies in income taxes for the years and amounts as follows:

The petitioner is a Texas corporation, having its principal place of business and its home office in Dallas, Texas.

The facts are stipulated and included herein by reference.

The stipulation of facts disposes of all the questions involved in these proceedings, except the following:

1. Should the rental value of space occupied by the petitioner in its home office building be included in income of the petitioner for income tax purposes ?

2. In the event that such rental value should not be included in petitioner’s income, should the expenses relating to the home office building be allowed as a deduction from income?

3. Is petitioner entitled to a deduction for depreciation on furniture and fixtures that were not used in its investment department?

4. Is the petitioner entitled to a deduction for the year 1928 of moneys advanced by it in prior years to tenants farming land owned by petitioner, which advances petitioner was unable to collect in the amount of $4,448.59?

For the taxable years 1925 to 1928, inclusive, petitioner included in taxable income the rental value of space occupied by it in its home office building, computed in accordance with section 245 (b) of the Revenue Act of 1926 and section 203 (b) of the Revenue Act of 1928. It now contends that the sums representing the rental value of space occupied by it in its office building were erroneously included in income for the respective years, since they do not represent income within the meaning of the Sixteenth Amendment. While the “ rental value ” of space occupied by petitioner does not constitute income within the meaning of the Sixteenth Amendment, Eisner v. Macomber, 252 U.S. 189; Stratton's Independence v. Howbert, 231 U.S. 399, 415, 417; Doyle v. Mitchell Bros. Co., 247 U.S. 179; McLaughlin v. Alliance Ins. Co., 286 U.S. 244, 249, 250, that fact does not dispose of the question before us.

This issue is controlled by the decision of the Supreme Court in Helvering v. Independent Life Ins. Co., 292 U.S. 371, and must be decided adversely to petitioner’s contention. There, it was contended that a tax on the “ rental value ” of the space occupied by the insurance company was a direct tax and void for lack of apportionment.In holding that the statute did not tax as income the rental value of the building used by the owner, or lay a direct tax thereon requiring apportionment, the Supreme Court said:

The company is not required to include in gross any amount to cover rental value of space used by it, but in order that, subject to the specified limitation, it may have the advantage of deducting a part of the expenses chargeable to the building, it is permitted to make calculations by means of such an addition.
* * * * * * *
Unquestionably Congress has power to condition, limit or deny deductions from gross income in order to arrive at the net that it chooses to tax. Burnet v. Thompson Oil & Gas Co., 283 U.S. 301, 304. Stanton v. Baltic Mining Co., 240 U.S. 103. Brushaber v. Union Pacific R.R., supra, 23-24. It is clear that the provisions under consideration do not lay a tax upon respondent’s building or the rental value of the space occupied by it or upon any part of either.

The petitioner, having claimed deductions for the years 1925 to 1928 for taxes, depreciation, and other expenses incident to its home office building, correctly included in income for those years the rental value of the space occupied by it. Cf. Rockford Life Ins. Co. v. Commissioner, 292 U.S. 382. The petitioner agrees that the rental value of the space which it occupied for 1928 was $46,052, as determined by the respondent.

In its return for 1929 the petitioner did not include in income the rental value of the space which it occupied in its home office building, but did deduct from income depreciation, $8,626.52; taxes, $8,063.01; and expenses, $27,273.68. These deductions were properly disallowed by the respondent, since petitioner could not claim such deductions under the statute unless it included in income the rental value of the space it occupied in its office building. Helvering v. Independent Life Ins. Co., supra; Rockford Life Ins. Co. v. Commissioner, supra.

In its income tax returns for the years 1927, 1928, and 1929 petitioner deducted depreciation on furniture and fixtures. This was allowed by the respondent in the notice of deficiency for the year 1927, and allowed only to the extent the assets were used in the investment department for the years 1928 and 1929. The respondent contends that depreciation is allowable only to the extent that the assets were used in the investment department, and that the net income for 1927 should be so adjusted. The method used by the respondent in computing depreciation- on the assets used in the investment department is not in dispute, nor is the amount of the depreciation computed. This same question was before the Supreme Court in Rockford Life Ins. Co. v. Commissioner, supra. In holding that deductions for depreciation in the case of life insurance companies are limited to the depreciation of the assets used in the investment department, the Court said:

In reason the cost of depreciation, like other items of expense to be deducted, ought to be limited to that related to- the income taxed. Allowance of deduction of expenses incurred for the collection of premiums or in respect of other income not taxed would be hard to justify. In absence of specific declaration of that purpose, Congress may not reasonably be held to have intended by that means further to reduce taxable income of life insurance companies.
There is adequate evidence that Congress intended to limit deductions of expenses to those related to the taxed income. Helvering v. Independent Life Insurance Co., supra, In the reports of committees having in charge the Act of 1921 in which first appeared the language under consideration, § 203(a) (7), it is said: “ The proposed plan would tax life insurance companies on the basis of their investment income from interest, dividends, and rents, with suitable deductions for expenses fairly chargeable against such investment income” (67th Congress, 1st Session, Senate Report No. 275, p. 20. See also House Report No. 350, p. 14). Section 203 (a) (5), by restricting deductions to investment expenses, indicates purpose to exclude those not related to investment income. Section 203 (b), by condition imposed, similarly restricts deductions of real estate expenses The language under consideration opposes deduction of unrelated expenses and is in harmony with the construction for which the Commissioner contends.

On tbe authority of that case the contention of the respondent is sustained as to this issue.

Section 203 (a) (6) of the Revenue Act of 1928 provides for the deduction from gross income of “ taxes and other expenses paid during the taxable year exclusively upon or with respect to the real estate owned by the company ” in determining the “ net income ” of a life insurance company. Petitioner contends that the losses incurred by it from advances made to tenant farmers prior to the taxable year 1928 for living expenses, seed, plowing, etc., are deductible under this section of the statute as real estate expenses. With this contention we cannot agree. The facts as to these expenditures are not in dispute, and it is stipulated that they were made from time to time prior to January 1, 1928. It clearly appears that they were not expenses incurred in 1928, and, even if they were expenses incurred by petitioner on its farm lands, they could not be deducted in 1928.

Under the facts in the record it appears that these advances were in the nature of secured loans and petitioner foreclosed on its liens in 1928. The amount which it here seeks to deduct is the difference between the amount of the advances and the amount received on foreclosure. This amount represents a loss from advances and not real estate expenditures.

In Midland Nat. Life Ins. Co., 18 B.T.A. 1240, we had before us the question as to whether a life insurance company could deduct losses resulting from the failure and insolvency of a bank. We there held that, since under the applicable sections of the Revenue Act of 1924 there was no provision for deductions on account of either bad debts or losses, the claim for such deductions must be rejected. See also Jefferson Standard Life Ins. Co., 25 B.T.A. 1335.

The applicable sections of the Revenue Act of 1928 (sections 201-203, inclusive) are substantially the same as the corresponding sections of the Revenue Act of 1924, and contain no provision for the deduction of losses or bad debts. Because of the peculiar character of the life insurance business, Congress has provided a method of taxation different from that applied to other corporations; Helvering v. Independent Life Ins. Co., supra, and since it has made no provision for the deduction of losses or bad debts in computing the net income of life insurance companies, the contention of petitioner must be denied as to this issue.

Reviewed by the Board.

Decision u>ill he entered under Hule ¿¡0,


author: Artjndell:

text:
    Portland Furniture Manufacturing Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. C. B. Van Vorst & Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Furniture Corporation of America, Ltd., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 61809, 70366, 70367, 72800, 72801.
    Promulgated June 7, 1934.

      O. A. Neal, Esq., for the petitioners.

      W. B. Lansford, Esq., for the respondent.
   OPINION.

Artjndell:

We have but two questions for decision. First, whether the Portland Co. is entitled to a deduction of the amount paid in 1929 as its share of the expenses of investigating the feasibility of a proposed merger in 1929. Petitioner claims, and lias offered evidence to establish, its claim, that the proposed merger was abandoned in 1929. Eespondent resists the allowance on the ground that petitioner made use of some of the information gathered in 1929 when it entered into the combination in 1930 headed by the Furniture Corporation.

The evidence establishes that the 1929 merger proposal was definitely abandoned in that year. If nothing more were shown petitioner would unquestionably be entitled to the deduction claimed. See Robert Buedingen, 6 B.T.A. 335; Tom (Fayette T.) Moore, 19 B.T.A. 140, allowing deductions for architects’ fees where building plans were discarded and the building projects abandoned. We fail to see why the deduction should be denied because of petitioner’s subsequent participation in a different combination from that proposed in 1929. True, it appears that some of the reports prepared in 1929 were used as a starting point in the 1930 negotiations, but that does not change the fact that the project in connection with which the reports were prepared was abandoned in 1929 and in that year petitioner had suffered a loss of the amount paid. We are of the opinion that the amount paid by petitioner in 1929 should be allowed as a loss.

The other question is whether the income of the Portland Co. and Van Yorst Co. should be combined with and taxed to the Furniture Corporation for the period January 1 to September 30, 1930. The respondent has allowed affiliation and the filing of a consolidated return from October 1 to the end of the year 1930 and his action in that respect is not- in issue. Affiliation is not now claimed by petitioners prior to October 1; apparently the requisite amount of stock was not owned by the Furniture Corporation prior to that date. In the absence of affiliation, we know of no provision in the statute which would permit the taxing of the income of the Portland Co. and Van Vorst Co. to the Furniture Corporation. Clearly the options to purchase the assets and assume the liabilities of those companies, which were exercised sometime subsequent to June 23, 1930, were not sufficient to relieve petitioners of tax liability on their income, even though their operations were taken over as of the first of the year and the income was paid over to the purchaser of their assets. Throughout the period here involved petitioners retained their identities and the income they earned was taxable to them. Decision on this issue is for respondent.

The stipulation as to the transferee liability of the Furniture Corporation obviates any need for discussion of that point.

Decision will be entered wider Rule 50.


author: Marquette:

text:
    Henry Boos, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 54788.
    Promulgated June 7, 1934.

      Claude I. Parker, Esq., and Bayley KoKlmeier, Esq., for the petitioner.

      James H. Yeatman, Esq., for the respondent.
   OPINION.

Marquette:

The respondent has determined a deficiency herein for the year 1928 of $2,053.47, resulting from his disallowance of a deduction from gross income claimed by petitioner in the amount of $24,747.47, representing the unamortized cost of a leasehold. The proceeding was submitted upon a stipulation of facts and certain exhibits which were made a part thereof.

The petitioner is a resident of Los Angeles, California. On October 25, 1927, petitioner acquired.a 99-year lease, commencing November 1, 1927, on certain real property situated in the city of Los Angeles and known as the Hope Street Garage. At the time of the execution of the lease, and as a part of the consideration therefor, petitioner paid' to the lessor the sum of $25,000. In his income tax return for the year 1927 petitioner deducted the sum of $252.53 as amortization of the $25,000 paid for the lease. The lease contained an option to purchase the demised premises during the first ten years of the lease, the purchase price during the first two years to be $55,000 in cash; during the following three years $75,000 cash; and during the following five years $100,000 cash.

On May 21, 1928, and during the first two years of the term, the petitioner exercised the option and purchased the fee to the property for $55,000. In his income tax return for the year 1928 petitioner deducted as a loss the difference between the $25,000 paid for the leasehold and the $252.53 theretofore deducted as amortization of the leasehold, or $24,747.47. The respondent disallowed such deduction on the ground that the amount was part of the cost of the property.

It was further stipulated by the parties that if the petitioner was called as a witness he would testify to the facts set forth in his affidavit attached to the stipulation as Exhibit “ B These facts are that it was understood by petitioner and the other parties to the transaction that the $25,000 paid at the time of making the lease was paid entirely for the lease, and no part was paid for the option to purchase; that there was no understanding that any part of the $25,000 should be applied to the purchase price of the property in the event the option to purchase was exercised; that the prices fixed in the option for the purchase of the property were in no way affected by the $25,000 payment, and that at the time the lease was acquired he had no definite intention of purchasing the property; that his primary object was to acquire the lease, and the option to purchase was included to protect him in case he later decided to use the property for some purpose for which the fee title would be necessary. To all of these matters the respondent reserved objection that they are immaterial.

It is well settled that the cost of acquiring a leasehold is an exhaustible capital investment, returnable by annual deductions spread over the term of the lease. Davison v. Commissioner, 60 Fed. (2d) 50; Baton Coal Co., 19 B.T.A. 169; aff'd., 51 Fed. (2d) 469; certiorari denied, 284 U.S. 674; King Amusement Co., 15 B.T.A. 566; aff'd., 44 Fed. (2d) 709; certiorari denied, 282 U.S. 900; United States v. Boston & Providence R.R. Co., 37 Fed. (2d) 670; Alland & Bros., Inc. v. United States, 28 Fed. (2d) 792; Galatoire Bros. v. Lines, 23 Fed. (2d) 676.

The fact that the leased property contained an option to purchase does not alter this principle. Robert C. Coffey, 21 B.T.A. 1242.

It is likewise well settled that, when a lease is terminated prior to the expiration of its term as by abandonment or forfeiture, the un-amortized portion of the capital cost is deductible as a loss sustained in the year of such termination. Henry C. Rowe, 19 B.T.A. 906; Boggs Oil Corp., 19 B.T.A. 940; A. H. Fell, 7 B.T.A. 263; Guelph Hotel Corp., 7 B.T.A. 1043; A. L. Huey, 4 B.T.A. 370.

In the instant case the petitioner acquired a 99-year lease for which be paid the sum of $25,000. In the following year he acquired the remainder interest by acquisition of the fee. Prior to his acquisition of the fee he was allowed to amortize the cost of the leasehold over the term of the lease. He now claims that since he has acquired the fee to the leased property the lease is terminated and he is entitled to deduct the difference between the cost and the amortization deducted as a loss in a transaction entered into' for profit.

We are of opinion that the claimed loss must be disallowed. The amount expended to .acquire the leasehold was a capital expenditure subject to a pro rata deduction, each year over the term of the lease. When petitioner acquired the remainder interest or fee, the leasehold interest, being a lesser interest, necessarily became merged in the fee or larger interest, and the cost of the property to him became the sum of the unamortized cost of the leasehold plus the amount expended to acquire the lessor’s remainder interest. This treatment of like transactions has been consistently followed by respondent for a number of years and we think that in principle it is correct. See C.B. IY-1, p. 33; C.B. IX-2, p. 178. We therefore hold that petitioner’s claim of a loss for the unamortized portion of the amount paid for the leasehold must be denied.

Judgment will J)e entered for the respondent.


author: Trammell :

text:
    George S. Macdonald, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 55905, 64264.
    Promulgated June 8, 1934.

      Frederick Sohwertner, Esq., for the petitioners.

      T. M. Mather, Esq., for the respondent.
   opinion.

Trammell :

These are proceedings for the redetermination of deficiencies in income tax for 1928 in the amount of $4,023.88 and for 1929 in the amount of $2,334.68. The errors assigned in each of the petitions are (1) the failure of the Commissioner to allow as deductions losses claimed in each of the years from the sale of stock and (2) the failure of the Commissioner to allow as deductions interest alleged to have been paid by the petitioner during the taxable years. The proceedings were consolidated for hearing.

The petitioner is an individual, residing at New Rochelle, New York.

In January of 1928 the petitioner, owning all the common stock c>f the Rockwood Trade Journal Co., consisting of 1,500 shares of the par value of $100 each, entered into negotiations with one Jerome D. Maley, as trustee, for the purchase of 1,425 shares of the preferred stock of the company of the par value of $100 each, and on July 10, 1928, the petitioner entered into an agreement with Maley, the pertinent portions of which are as follows:

Whereas, said Maley, as Trustee under an agreement dated June 1924, between Dorothy Martyn Freeman, Jocelyn Maley Stedman, Katheryn Maley, and Elizabeth Maley Shoughrue (parties of the first part, therein and herein called “granddaughters”), Edith Hagner, Eleanor V. Neal and Stephanie Dufuur (parties of the second part) and Jerome D. Maley (Party of the third part), is the owner of fourteen hundred and twenty-five (1,425) shares of the preferred stock of said Lockwood Trade Journal Company, Inc., of the par value of One Hundred Dollars ($100.) a share; and
Whereas, Macdonald has agreed to purchase said preferred stock from said Maley on the terms and conditions set forth in this contract; and
Whereas, simultaneously with the delivery hereof, said Granddaughters and said Maley, as such Trustee, have by instrument in writing dated July 10th, 1928, a copy of which is hereto attached and marked Exhibit B, sold, assigned and transferred to Jerome D. Maley and Bankers Trust Company, of the City of New York, and the survivor of them, as Trustees, hereinafter called Trustees, all their rights and interest in this contract and in the proceeds hereof, and everything to which they may become entitled hereunder, and have appointed said Trustees and the survivor of them as the persons who shall have the right to exercise any and all of the rights and options given to said Maley under this contract.
Now Therefore, the parties hereto agree as follows:
First : Said Maley hereby sells to Macdonald and Macdonald hereby purchases from said Maley said fourteen hundred and twenty-five (1,425) shares of preferred stock of said Lockwood Trade Journal Company, Inc., of the par value of One Hundred Dollars ($100.) per share, which fourteen hundred and twenty-five (1,425) shares are hereinafter referred to as the preferred stock, and Macdonald agrees to pay for said preferred stock the sum of Three Hundred and twenty-two thousand, two hundred and fifty Dollars ($822,250.00) as follows:

Sixty-two thousand, seven hundred ($62,700.) Dollars in cash, the receipt whereof by said Maley is hereby acknowledged;

One hundred and twenty-eight thousand, two hundred and fifty Dollars ($128,250), to be evidenced by nine (9) promissory notes of Fourteen thousand, two hundred and fifty Dollars ($14,250.00) each, the first note to be payable on January 1st, 1929, and one note to be payable on the first day of each July and January thereafter, to and including January 1st, 1933. Said nine notes shall be marked, and shall be hereinafter referred to as Series A. Notes, the first which shall be in the following form; and each succeeding note shall be in the same form, with each date (except the date on which the note is executed) advanced six months beyond the corresponding date in the preceding note:

“ SERIES A NOTE ”
No.-Payable January 1st, 1929 $14,250.
For Value Received, Georg® S. Macdonald promises to pay to the order of Jerome D. Maley and Bankers Trust Company as Trustees under an agreement July 10, 1928, between themselves and Dorothy Martyn Freeman, Jocelyn Maley Stedman, Katheryn Maley Smith, and Elizabeth Maley Shouglirue, at the Harriman National Bank, No. 527 Fifth Avenue, Borough of Manhattan, New York City, the sum of Fourteen Thousand, two hundred and fifty dollars ($14,250.00) on January 1st, 1929. If this note is not paid on January 1st, 1929, then as long as said George S. Macdonald pays interest thereon from January 1st, 1929, at the rate of six per cent. (6%) per annum, in equal monthly installments, and pays such interest for each month beginning with the month of January 1929 on or before the last day of the following month, the time for the payment of such principal of this note shall be extended, but the time for the payment of such principal shall not in any event be extended beyond January 1st, 1930. Said George S. Macdonald shall have the right to pay all or any part of the principal of this note, with the interest if any then accrued thereon, at any time before maturity, upon giving at least ten days’ prior notice by mail addressed to said Jerome D. Maley at 312 Second Avenue, Daytona, Florida, and to Bankers Trust Company at 10 Wall Street, New York City, New York.
Dated, New York, July 10, 1928.
Eighty thousand ('$S0,000.00) to be evidenced by one promissory note for Eighty thousand Dollars ($80,000.00) Payable January 1st, 1938, and drawing interest from January 1st, 1933, at the rate of six per cent. (6%) per annum, such interest to be payable in monthly installments of four hundred Dollars ($400.) each on the last day of each month beginning on the last day of January 1933. Said note shall be marked arid shall be hereinafter referred to as Series B Note, and shall be in the following form:
“ SERIES B NOTE ”
Payable January 1st, 1938 $80,000.00
For Vaetje Received, George S. Macdqnabd promises to pay to the order of Jerome D. Maley and Bankers Trust Company as trustees under an agreement dated July 10,1928, between themselves and Dorothy Martyn Freeman, Joselyn Maley Stedman, Katheryn Maley Smith, and Elizabeth Maley Shoughrue, at the Harriman National Bank, 527 Fifth Avenue, Borough of Manhattan, New York City, the sum of Eighty thousand Dollars ($80,000.00) on or before January 1st, 1938, with interest at the rate of six per cent (6%) per annum from January 1st 1933, such interest to be payable in monthly installments of Four hundred Dollars ($400.) each on the last day of each month beginning on the last day of January 1933. Said Macdonald shall have the right to pay the whole or any part of the principal of this note, with interest if any then accrued thereon, at any time before maturity upon giving teri days’ prior notice by mail addressed to said Jerome D. Maley at 312 Second Avenue, Daytona, Florida, and to Bankers Trust Company at 16 Wall Street, New York City, New York, and in the event of such prepayment the amount of the monthly interest payments shall be reduced accordingly. In the event of the failure of George S. Macdoriald to pay any installment of interest within thirty days from the date the same becomes payable, this entire note shall become due and payable at the option of the holders thereof.
Dated, New York, July 10, 1928.
IGfty-one thousand, three hundred Dollars ($51,300.) to be evidenced by fifty-four notes each for Nine hundred and fifty Dollars ($950.), the first note to be payable on the 15th day of July, 1928, and one note to be payable on the 15th day of each month thereafter to and including December 15th, 1932. Said notes shall be marked and shall be hereinafter referred to as Series C Notes, and shall be in the following form;
“ SERIES C NOTE ”
No.-Payable- $950.00
For Value Received, George S. Macdonald hereby promises to pay to the order of Jerome D. Maley and Bankers Trust Company, as Trustees under an agreement dated July 10, 1928, between themselves and Dorothy Martyn Freeman, Joselsm Maley Stedman, Katheryn Maley Smith and Elizabeth Maley Shoughrue, at the Harriman National Bank, 527 Fifth Avenue, Borough of Manhattan, New York City, the sum of Nine hundred and fifty Dollars ($950.) on the 15th day of- — — , 19 — .
Said George S. Macdonald shall have the right to pay this note at any time before maturity upon giving ten days’ prior notice by mail addressed to Jerome D. Maley at 312 Second Avenue, Daytona, Florida, and to Bankers Trust Company at 16 Wall Street, New York City, New York. Dated, New York, July 10, 1928.
Macdonald shall have the right to pay any of said notes before the day on which they respectively become payable, provided that he shall give at least ten days’ prior notice by mail to Jerome D. Maley at 312 Second Avenue, Daytona, Florida, and Bankers Trust Company at 16 Wall Street, New York City, New York, specifying the notes that he will take up and the date on which he will take them up, and upon the giving of such notice, the notes specified in such notice shall become due and payable on the date specified in such notice, unless they shall have become due at an earlier date by their terms or under the terms of this agreement.
Second : Simultaneously with the execution hereof, said Maley has delivered said fourteen hundred and twenty-five (1,425) shares of preferred .stock to Macdonald, and new certificates for fourteen hundred and twenty-five (1,425 > shares of such preferred stock, issued in the name of George S. Macdonald and duly endorsed by him in blank, so that the same may be transferred and delivered, and also Fifty-seven Dollars ($57.00) to cover the cost of stock transfer stamps, have been deposited with the depositary, as collateral security for the payment by Macdonald of said notes and of the amounts that Macdonald has agreed to pay as above set forth.

Petitioner paid the sum of $62,700 in cash and executed the nine series A notes in the sum of $14,250 each, totaling $128,250, the series B note in the sum of $80,000, and 54 series C notes in the sum of $950 each, totaling $51,300, as specified in the agreement.

A new stock certificate for 1,425 shares of preferred stock of the Lockwood Trade Journal was issued in the name of George A. Mac-donald. The petitioner endorsed the certificate in blank and it was deposited with the Harriman National Bank, to be held in escrow as security pending final payment for the stock. The series A notes were paid as they became due, except the last three, which fell due, respectively, January 1, 1932, July 1, 1932, and January 1, 1933, and were extended to January 1, 1935, July 1, 1935, and January 1, 1936, respectively. The series B note in the sum of $80,000 was extended to January 1, 1940.

The petitioner paid all of the 54 of the series C notes in the sum of $950 each on the due dates thereof.

The petitioner in the years 1928 and 1929 entered into contracts to sell some of the 1,425 shares of preferred stock of the Lockwood Trade Journal Co. as follows:

In the separate contracts of sale for each of the sales of the preferred stock by the petitioner there was recited and incorporated by reference the agreement under which petitioner acquired the stock. These contracts referred to the fact that the purchase price of all of the stock was $3’22,250 and that $51,300 thereof, represented by 54 series C notes of $950 each, were given in lieu of interest on the series A notes referred to in the contract of purchase under which Macdonald purchased the stock. The total cost of the stock to the petitioner was $322,250, or $226.14 per share. The agreement between Macdonald and the purchaser, entered into as a separate agreement with each purchaser, provided as follows:

This Ageeement, made this 17th day of July, 1928, by and between Geo. S. Macdonald, residing at 79 Sutton Manor, New Rochelle, New York, hereinafter referred to as “ Macdonald ” of the first part, and Samuel Mayer, residing at New York City, hereinafter referred to as the “ Purchaser ” of the second part, is to record the sale bj' Macdonald to said Purchaser of certain shares of preferred stock of the Lockwood Trade Journal Co., Inc., delivery of said shares to be made in accordance with the provisions hereof to the Purchaser by Macdonald either when all of the terms of a contract between Macdonald and one Jerome D. Maley (said contract being more fully hereinafter described) have been completed and Macdonald has become possessed of said shares, or at such other time as it is hereinafter described, this agreement being supplementary and subordinate to said contract with Maley, it being the full intent of this agreement that the Purchaser shall have no claim upon Macdonald or his estate by reason of any loss to the Purchaser other than that contingent upon the failure by Macdonald or his estate, for any reason, to pay to Maley (in the procedure more fully hereinafter described) all income received and/or earned and/or collected upon said preferred stock unless by the operation of said contract with Maley, Macdonald shall for any reason be relieved of the necessity of making such or any payments: Now This Ageeement Witnesseth :
Whereas, heretofore Macdonald has, under and according to a certain agreement dated July 10, 1928 hereto attached marked “ Exhibit A” and made a part hereof as completely as though set forth at length, made and entered into by and between the said Macdonald and one Jerome D. Maley as Trustee, and Harriman National Bank of New York, N. Y., as Depository purchased an aggregate of 1425 shares of preferred stock of Lockwood Trade Journal Co., Inc., a New York corporation out of a total authorized and outstanding issue of 1500 shares of said preferred stock, for and at a price of $822,250.00, payable as follows:
$62,700.00 in cash on July 10, 1928;
$128,250.00 by a series of nine (9) non-interest bearing notes, denominated “ Series A” each in the sum of $14,250.00; payable as to the first thereof on January 1, 1929, and one of the remaining eight (8) thereof respectively maturing on the first day of July and January of each calendar year next thereafter ensuing, until all are fully paid;
$80,000.00 by one (1) note due January 1, 1938, denominated “ Series B,” with interest to begin on January 1, 1983, to be computed thereafter at the rate of six per cent (6%) per annum, such interest being payable in monthly installments of $400.00 each on the last day of each month beginning January 1, 1933;
$51,300.00 by a series of fifty-four notes (54), denominated “Series C,"’ given in lieu of interest on the “ Series A” notes above mentioned, aggregating $128,250.00; each of said series of 54 notes being in the sum of $950.00, payable as to the first thereof on July 15, 1928, one of the remaining 53 respectively being payable on the 15th day of each succeeding calendar month thereafter ensuing until all are fully paid.
# * * * * # *
Now, Theeefoee, in consideration of the premises, of the payment made by the Purchaser in the sum hereinafter stated, of the mutual promises hereinafter set forth, and of other good and valuable considerations, the receipt whereof is acknowledged, it is mutually agreed, as follows:
First; Subject always to each and all of the terms and conditions of this agreement and the Maley contract dated July 10, 1928 hereinabove in the preambles hereof referred to, the Purchaser has paid Macdonald at or prior to the execution hereof $15,000.00 in full for 106% shares of the 1425 shares of the aforesaid preferred stock of the Lockwood Trade Journal Co., Inc., and in consideration of said payment, Macdonald hereby sells, assigns and transfers to the Purchaser, the aforesaid number of shares, and agrees to make delivery thereof (a) when the Maley agreement hereinbefore referred to shall have been fully performed by him; or (b) in the event that prior to such full performance by him Macdonald shall have received from said Lockwood Trade Journal Co., Inc., as and for cash dividends and/or cash distribution on said shares, an amount sufficient to pay the aforesaid notes in full with interest as required by the terms of such of said notos as bear interest, then and in any such event Macdonald agrees that notwithstanding the time for delivery fixed by Clause “(a)” of this Article, he will forthwith on the receipt by him of said 1425 shares, deliver to the Purchaser the number of shares together with all increase thereof comprehended by and included in this sale, and hereinabove designated.
Second : It is mutually agreed that during the life of this agreement each and all of the said shares of said preferred stock sold to the Purchaser shall remain in the name of Geo. S. Macdonald on the stock books of the corporation and that all cash dividends thereon or cash distributed on account thereof shall accrue to Macdonald and be applied by him to the payment of the notes hereinabove mentioned, inclusive of the interest, if any, thereon, and further; that Macdonald shall possess, and the Purchaser hereby for himself and his heirs, executors, administrators and assigns, hereby grants to Macdonald the right at any time to sell all of said preferred stock, (including any and all stock that may hereafter be received by him as a result of any stock dividend! declared by said Lockwood Trade Journal Co., Inc.) at and for such price and upon such terms as he may in his sole and uncontrolled discretion deem suitable, applying the proceeds thereof to the payment of all or any one or more of said notes in accordance with the terms thereof and/or as may be permitted thereby or by the holder thereof; and to exercise, in person or by proxy, all voting rights on any and all shares of stock at any time held by him hereunder, in such manner as he (or his proxy, whenever he shall delegate the power to vote the same to another) shall in his (or his proxy’s) sole and uncontrolled discretion deem wise, and to execute as the holder of record thereof all such waivers, consents, legal documents and papers as he may approve, and that said agreement dated July 10, 1928 may permit, for any and all corporate purposes and objects, of whatsoever nature and description, provided always that it is of the essence of this agreement, and Macdonald hereby agrees that no lien or pledge of that portion of the 1425 shares of said preferred stock hereby sold to the Purchaser, including all increase thereof and all rights thereto appertaining, shall at any time be made, permitted, or suffered by him for any reason whatsoever (other than the above mentioned agreement dated July 10, 1928, and the escrow therein mentioned) ; and provided further that if said 1425 shares of said preferred stock and the increase thereof, and all rights thereto appertaining (except cash dividends and/or cash distributions) shall be sold or otherwise disposed of, Macdonald hereby specifically agrees to pay the Purchaser, and the Purchaser hereby agrees to accept in full payment and discharge of all liability of Macdonald to him under this agreement, the greater of the following sums:
(a) The amount hereinabove in article numbered “ Ferst” hereof designated, paid by the Purchaser to Macdonald, together with interest thereon from the date hereof at the rate of six per cent (6%) per annum to the date of payment.
(b) An amount equal to 7% per cent (7%%) of the net proceeds realized by Macdonald from the sale or other disposition of said shares of said preferred stock and the increase thereof and all rights thereto appertaining and remaining after deducting from said proceeds an amount equal to all moneys due and unpaid, or thereafter to grow due on the aforesaid notes together with interest to the date of payment, in accordance with the terms thereof.
s|s J»« sj: $ # * *
Fourth: Macdonald agrees that if and whenever he shall for any reason be or become apprehensive that he may suffer or be compelled to suffer default in respect of the payments of any one of the aforesaid notes, he will forthwith advise the Purchaser of the possibility of such default by word of mouth, telephone or telegraph or by mailing to the Purchaser by registered mail, postage prepaid, a letter addressed to the Purchaser at his address as hereinabove stated, a notice stating the date fixed for payment, the total amount of money required to be paid, the amount of the Purchaser’s pro-rata share of such payment, and will call a meeting of the Purchaser and such other Purchasers if any, with whom Macdonald may have made contracts similar to this, to convene on a day and at an hour designated in such notice, at the office of said Lockwood Trade Journal Co., Inc. in the Borough of Manhattan, City, County and State of New York, for the purpose of considering the requirements of the situation. In each and every such case Macdonald agrees in good faith to co-operate with the Purchaser to avoid the incidence of -such default; and hereby authorizes and empowers the Purchaser or Pur'chasers in each and every such case, either jointly or such one or more of ¡them as so elect, or their respective nominees and agents to pay, (though ¡they shall be under no obligation to do so) as and when the same matures, ¡the note about to be defaulted upon, and to pay Macdonald, or any other person ■'designated by them, additional moneys to be applied to the due and timely (payment thereof, to the end that there may be no default, and/or to conduct ••such negotiations and to make such provisions as may be necessary or in •their opinion best calculated to avoid the incidence of such default. In any ease, and whenever, and if from time to time, some one or more of said Purchasers shall desire to avoid the incidence of any default and others shall not so desire, then it is mutually agreed by and between Macdonald and the Purchaser that those desiring and electing to avoid default shall in such case possess and they are hereby accorded the right (though they shall be under no obligation so to do) to advance additional moneys and to pay, as and when the note then about to become due matures, and that in every such instance, upon making such payment as may be immediately required in order to avoid default, the proportionate interest of such Purchaser who in such event shall so elect and shall advance additional moneys hereunder, shall in each and every such case be increased in the aforesaid 1425 shares of said preferred stock and the increase thereof, in the proportion that the aggregate of such additional payments so made by any Purchaser shall bear to the total purchase price paid by Macdonald for the said 1425 shares, including interest, if any, paid thereon; and neither Macdonald nor such Purchaser shall in any such event thereby or hereby incur any liability of any nature whatsoever; nor shall the Purchaser in any instance from time to time not so electing, thereby incur to any other purchasers or to Macdonald or to anyone else, and he hereby expressly releases and remises those in every such case advancing additional moneys from all such liability, but without prejudice nevertheless, to their respective rights to participate in the benefits of this joint venture to the extent of their several and proportionate rights theretofore acquired herein, or to increase their participation herein by advancing additional moneys in the event of any threatened default which may,, from time to time, subsequently occur.
•I* v v ‡
Sixth: In the event that Macdonald shall elect to pay that proportion of the balance of entire sum of §322,250.00 (with interest thereon) to Jerome D. Maley at any time, it is mutually understood and agreed that the date of delivery of the stock to the Purchaser shall not thereby be accelerated (1) unless and except the purchaser shall participate in any measures taken to avoid default, as provided in article “ Fourth ” hereof, in which event said date of delivery shall be thereby accelerated to any date when the purchase price provided by the aforesaid agreement dated July 10th, 1928, shall have been fully paid, and (2) except as otherwise provided in subdivision “(h)” of article “ First ” hereof.
% *
Twelfth : It is mutually agreed that separate counterparts of this agreement shall be executed and delivered by Macdonald to other purchasers of parts of the aforesaid 1425 shares of the Preferred Stock of the Lockwood Trade Journal Go., Inc. and it is mutually agreed that said counterparts taken together shall constitute but one and the same instrument with the same form and effect as though each had been signed by Macdonald and each of said purchasers. And the Purchaser by the execution and delivery hereof mutually agrees with Macdonald and, wifh tho remaining purchasers if any,, that in any case where Macdonald shall seek, or desire or possess the right to be under any obligation by any of the provisions of this agreement to demand any determination or counsel of said Purchaser, that he, the said Purchaser will observe and be bound by the determination, wishes and resolves of a majority of such of the Purchasers as participate therein; and, further that in any such event, where and whenever the participating Purchasers shall be equally divided on a per share basis or in opinion, Macdonald’s view shall be final and conclusive and binding on all of the purchasers jointly and severally.

The first question is whether the purchase price of these 1,425 shares of stock was $322,250, or that amount less the series C notes of $51,300. The contract of sale, which was on an installment basis, referred to the purchase price as being $322,250 and stated how that purchase price should be paid. While there was some testimony to the effect that the $51,300 was interest, we can not accept this testimony as changing the written instrument executed by the parties.

In the case of Daniel Brothers Co., 7 B.T.A. 1086, we had somewhat the same question before us. In that case the petitioner contended that each of certain monthly payments made on the purchase price of the property should be considered as including interest. In that case we said:

Tbe same question here presented was considered by this Board in Appeal of Marsh & Marsh, Inc., 5 B.T.A. 902, and Appeal of Anderson & Co., 6 B.T.A. 713, in which it was held that where sales are made on the deferred payment plan, interest not being provided for in the contract of sale, no part of the deferred payment will be considered as interest.

The Circuit Court of Appeals for the Fifth Circuit, in affirming our decision (28 Fed. (2d) 761), said:

Under the transaction between the petitioner and the seller of the property dealt with petitioner did not receive or have the use of any money of the seller prior to an installment of the price becoming due. Petitioner’s promise to pay stated installments of the purchase price were not promises to pay money which the seller owned or would be entitled to prior to the installments becoming payable. Before the installments were payable petitioner did not use or withhold any money to which the seller was entitled. An obligation to pay the agreed price of property in installments falling due in the future cannot properly be regarded as including an obligation to pay interest. There would be an obvious lack of plausibility in a contention that in the case of any contract of sale under which the agreed price is payable, not when the sale takes effect but thereafter, the buyer’s compliance with his obligation to pay the agreed price involves the payment of interest. To sustain such a contention would amount to saying that under the quoted provision of -the statute every credit purchase of property by the taxpayer gives rise to a right to a deduction for interest paid or accrued, on the theory that the credit price includes what the cash price would have been and interest on the amount of the cash price.

In the case of Henrietta Mills, Inc., 20 B.T.A. 651, the taxpayer contended that the excess over the price immediately payable for the stock and the price agreed to be paid and actually paid at a future date represented interest. We adhered to our previous decision and held that no part of the purchase price represented interest. No interest was provided for in the contract. The Circuit Court of Appeals for the Fourth Circuit, in affirming our decision (52 Fed. (2d) 931), said:

It is contended by the petitioner that the purchase price of all the stock was $650 per share as of April 1, 1020, and that the total purchase price was to be paid in four installments, and that the excess of the later over the first price amounted to what would have been 6 per cent, interest and was in fact interest. It is further contended on behalf of the petitioner that to give the contract any other interpretation would be illogical and utterly ridiculous from a business standpoint.
We cannot agree with petitioner’s contention. The courts will not disregard the plain language of a contract or interpolate something not contained in it. Here the language used by the parties is clear and unambiguous, and cannot be ignored however plausible the reasons advanced. The courts will not write contracts for the parties to them nor construe them other than in accordance with the plain and literal meaning of the language used. * * *
The fact that the later installments exceeded the first by amounts that equaled 6 per cent, does not of itself prove that the excess was interest. In this transaction there was no element of lending or borrowing, and the excess price paid for the stock later purchased is not to be considered interest but all principal. In re Bibbey (D.C.) 9 F. (2d) 944, and cases there cited.
* * * V * # *

Tax liabilities must be determined by what in fact was done. In this case the contract of sale made no reference to interest payments, but recited the fact that $322,250 was the purchase price for the stock. We do not believe that the oral testimony to the effect that $51,300 of the total purchase price represented interest should have the effect of overcoming the purchase price mutually agreed upon in the contract.

The next question is, Did he sell it? In determining this question we must consider the contract of sale made by the petitioner with his vendees. One of the contracts was set out in evidence as being typical of all the other contracts of sale. It contained the same provisions except the name of the purchaser and the number of shares and purchase price. The contracts of sale between Mac-donald and his purchasers recite the payment in full of the consideration payable by the purchaser, and also contain the statement hereby sells, assigns and transfers to the purchaser ” the number of shares included in the particular contract.

We must analyze the contract as a whole and determine what the real transaction was instead of taking any particular expression in it. We find that the contracts Macdonald made with his purchasers incorporated by reference the contract which he had with Maley, under which he acquired the stock, and in addition thereto referred specifically to certain provisions of that contract. Mac-donald’s contract with his purchasers was dependent upon carrying out his contract with Maley. The contract with Maley provided that certain payments were to lie made at certain stated times. All of the stock acquired by the petitioner under the Maley contract was deposited in escrow as security and to assure the carrying out of that contract by petitioner. Macdonald’s contract with his purchaser was contingent and conditional upon his carrying out the contract with Maley. In addition to this contingent and conditional provision, Macdonald retained the title to the stock, with all the rights of ownership thereof. He could sell it to others if he desired. He ietained the dividends on it. He had all the voting rights. If he had seen fit to sell it to others, as he had the unlimited discretion to do, he could have done so. If Macdonald had sold the stock to others he could have discharged his full liability to his purchasers by paying the greater of the following sums: The amount paid by the purchaser to Macdonald with interest at 6 percent, or the amount equal to 7y2 percent of the net proceeds realized by Macdonald from the sale or other disposition of the shares and the increase thereof and all rights thereto appertaining and remaining after taking over said proceeds, an amount equal to all moneys due and unpaid or thereafter to become due on the notes referred to, together with, interest to date of payment.

In the event Macdonald should not complete his payments to> Maley in accordance with the terms of his contract, or was apprehensive that he could not meet such payments, his purchasers were-given the right to participate in the payments to be made by Macdonald to his vendor for the purpose of preventing default.. If they did so they were entitled to the pro rata share of other-stock included within the 1,425 shares involved in the Macdonald contract. Paragraph fourth refers to the respective rights of' Macdonald’s purchasers to participate in the benefits of this “joint: venture to the extent of their several and proportionate rights: theretofore acquired herein, or to increase their participation herein by advancing additional moneys in the event of any threatened! default which may, from time to time, subsequently occur.”

We think, considering all the facts in the case, that Macdonald-did not sell to his so-called purchasers the stocks herein referred to other than contingently and conditionally. His purchasers were more in the nature of participants in a joint venture with him and consequently he is not entitled to deduct any loss connected with the so-called sales by him of portions of the 1,425 shares of preferred stock acquired by him. There was no delivery of the stock to his purchasers, either actually or constructively.

In any event, even if it should be conceded for the sake of argument that Macdonald did make sales of the stock, the purchase price received by him would be the amount paid by the so-called purchaser plus the dividends over the period of the Maley contract. See Albert Russel Erskine, 26 B.T.A. 147.

The memorandum opinion in this proceeding, entered under date of April 13, 1934, is modified by certain verbal changes, as set forth herein.

Reviewed by the Board.

Judgment will be entered under Rule SO.

Leegii concurs in the result.


author: Arundell:

text:
    The Canister Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 69579.
    Promulgated June 8, 1934.

      Fred A. Woodis, Esq., and Luther F. Speer, Esg., for the petitioner.

      Harold Allen, Esq., and Paul A. Sebastian, Esq., for the respondent.
   OPINION.

Arundell:

A deficiency in income tax for the fiscal year ended April 30, 1931, has been determined in the sum of $4,385.20 by reason of the disallowance by the respondent of a claimed loss from the disposition of certain shares of stock on the ground that the 'alleged sale of the stock was not bona fide. The petitioner is a New Jersey corporation, all of the shares of which, other than qualifying shares, were owned by R. T. Garfein. On March 17,1931, it owned the following shares of stock, which had cost it $80,215.53:

200 shares of Certainteed Products Corporation
262 shares of WiUys-Overland Co.
100 shares of Fairbanks, Morse & Co.
100 shares of Calumet & Hecla Co.
100 shares of Chesapeake Corporation
200 shares of Associated Gas & Electric Co.
50 shares of Empire Trust Co.
100 shares of American Telephone & Telegraph Co.

These shares had suffered a great shrinkage in market value since their purchase and petitioner had a large income for the taxable period ended April 30, 1931, against which it wished to secure a deduction for income tax purposes. To that end petitioner’s president, Garfein, discussed with John It. Chidsey the transaction oyer which this controversy arises. Chidsey was an alderman of Easton, Pennsylvania, which is across the Delaware River from Phillipsbnrg, New Jersey, where petitioner’s office is located. The two towns constitute a single community. Chidsey had no interest in petitioner’s corporation, and he and Garfein had had no previous business relations. They were, however, members of the same clubs and had been friends for a number of years. On March 17, 1931, Gar-fein agreed to transfer to Chidsey the above listed stocks at the closing quotations on that day, which amounted to $36,857.75 for the entire block. The following day Garfein took the certificates to the Easton office of E. W. Clark & Co., brokers, and directed that the certificates be transferred to Chidsey. He received a receipt for the certificates which he delivered to Chidsey and which Chidsey redelivered to him when the certificates were issued in Chidsey’s name. Upon receipt of the certificates Chidsey gave his note to petitioner in the amount of $36,857.75 which note was placed in petitioner’s safe-deposit box.

Seven days after the close of petitioner’s fiscal year and 51 days after the above described transaction, the identical number of shares in the several described corporations, plus four shares of Associated Gas & Electric stock which had been received by Chidsey as a stock dividend, were retransferred to petitioner and Chidsey’s note was returned to him. The transfer back to petitioner was on the basis of the closing stock prices on May 7, 1931. The total price of the shares at the time of this last transaction was $3,026 less than the price at the time of the transfer to Chidsey. No loss was claimed by Chidsey on this transaction in his 1931 return. The note given by Chidsey called for interest, but no interest was ever paid by him. and none had been paid to the date of trial of this case. The difference in market value of the shares between the first and second transactions was $3,026, but no part of this sum has been paid and petitioner’s books do not carry the item as an account receivable due from Chidsey.

Petitioner had other transactions involving the sale of securities during the taxable period under review, but these sales were in every instance transacted through brokers on the exchange.

The only witness to testify, other than the bookkeeper who identified book entries, was petitioner’s president, and his explanation for this unusual performance was that it might become known that the company was selling some of its securities if they were sold in the the usual manner on the exchange. This reason is not convincing. Tbe securities were all of well known companies enjoying a wide market and could have been sold through any one of a large number of brokers in Philadelphia or other nearby places if it were not desirable to sell them through a broker in or near petitioner’s home town.

The evidence does not overcome the presumption of correctness attaching to the respondent’s determination, but indeed supports it. Cf. J. R. Young, 6 B.T.A. 656.

Decision will Toe entered under Rule 50.