author: Smith:

text:
    HERBERT KAHN et al., Heirs-at-Law of MERVINE KAHN, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 7864.
    Decided September 30, 1926.
    Where there is no evidence that property transferred within three months prior to the date of death was not transferred in contemplation of death, held, that the transfer was made in contemplation of death within the meaning of the statute.

      Victor Canfield, C. P. A., for the petitioners.

      J. Arthur Adams, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in estate tax in the amount of $1,061.90, arising from the inclusion in the gross estate of the value of certain shares of stock transferred by the decedent within approximately ten weeks prior to the date of his death.
    FINDINGS OF FACT.
    Mervine Kahn died March 6, 1924, a resident of Rayne,.La., at the age of 69 years. The cause of death noted on the certificate of death made to the Louisiana State Board of Health was angina pectoris.
    The decedent at one time owned all the shares in the Mervine Kahn Co. This corporation was organized in 1914 with a capital stock of $75,000, divided into 750 shares of the par value of $100 each. In the year of its organization the decedent gave to each of his six children five shares of stock of the corporation, and about five years later he gave each child ten additional shares, leaving 660 shares standing in his own name. On December 22, 1923, the corporation declared a stock dividend of 100 per cent, and thereupon the decedent directed the corporation to issue the 660 additional shares of stock declared as a dividend upon his shares to his wife. The value of these shares on December 22, 1923, was $43,543.50. The petitioners did not include the value of these shares as a part of the gross estate of the decedent in the estate-tax return made to the Federal Government. The Commissioner amended the estate-tax return by including such value, and the deficiency results therefrom.

      The decedent was a prominent business man of Rayne, La. He apparently enjoyed good health until about 1921, when an examination by his family physician, made at his request, reflected a condition of high blood pressure, due probably to the existence of certain digestive disorders. The physician advised the decedent of his high blood pressure and prescribed diet and medicines for such condition. A little later the physician went with decedent to New Orleans for an X-ray examination. The decedent’s entire intestinal tract and his heart and lungs were X-rayed and thoroughly examined. The doctor making the examination informed the family physician that there was an enlargement of the heart, that there was some intestinal disturbance, and that decedent’s food did not go through his stomach in the proper length of time. During the year 1922 or 1923, the decedent, apparently of his own volition, went to New Orleans and consulted a specialist in diseases of the heart and lungs. This specialist communicated with the decedent’s family physician in Rayne and advised him of the enlargement of the heart and high blood pressure. The family physician did not consider that the decedent’s condition was very serious — the blood vessels were normal and there was no evidence of diabetes or arteriosclerosis. In 1921, the decedent had an operation for double hernia. A local anaesthetic instead of a general anaesthetic was used in the performance of this operation. The decedent apparently fully recovered from such operation.
    Near the latter part of 1923 the decedent suffered a violent heart attack. A physician, hastily summoned, found him in an unconscious condition and administered a hypodermic injection of atropine followed by other stimulants. The trouble was diagnosed as angina pectoris, but this physician was not the family physician and did not inform the decedent of the nature of the attack. There was another similar attack that occurred near the time of this one.
    The decedent had always been a very active man and was engaged in many businesses. In addition to his activities in connection with the Mervine Kahn Co., he was president of the Rayne State Bank, which position he resigned in 1922. The decedent was not given to talking about his health, although he had stated to neighbors and to a physician at different times during the later years of his life that he did not feel well. In the opinion of this physician, who knew him intimately, he was in declining health during the last three or four years of his life. He did, however, keep up his activities in connection with the Mervine Kahn Co., and shortly prior to his death contemplated and discussed with his sons the expansion of the business and the opening of a branch at Crowley, La. He was at his place of business on the day before his death.

      In addition to gifts of shares of stock in the Mervine Kahn Co. to his sons at the date of incorporation of that company and in 1918 or 1919, he had made a gift of stock in the Bayne State Bank to his wife. When he instructed the secretary and treasurer of the Mervine Kahn Co. to issue to his wife the additional shares of stock to which he became entitled through the stock dividend declared on December 22, 1928, he stated that his wife should have been interested in the company from the beginning and he wanted her to have the 660 shares coming to him. The stock dividend was declared only after the decedent had been advised by a tax consultant as to the effect such stock dividend would have upon tax liability.
    The decedent died intestate.
   OPINION.

Smith:

The taxing statute requires the inclusion in the gross estate of a decedent of the value of property transferred in contemplation of death, and further provides that:

Any transfer of a material part of Ms [decedent’s] property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such a consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title. Revenue Act of 1921, section 402(c).

The only question here is whether the transfer of the right to receive the shares of stock payable to the decedent as a stock dividend was made in contemplation of death. The following definition of the statutory phrase “ in contemplation of death,” frequently quoted by State and Federal courts, is given in the case of Rosenthal v. People, 211 Ill. 306; 71 N. E. 1121:

A gift is made in contemplation of an event when it is made in expectation of that event and having it in view; and a gift made when the donor is looking forward to his death as impending, and in view of that event, is within the language of the statute.

The New York courts, in In re Baker’s Estate, 82 N. Y. S. 390; affd. 70 N. E. 1094, said :

This court has held that the words in contemplation of death ” do not refer to a general expectation which every mortal entertains, but rather the apprehension which arises from some existing condition of body or some impending peril; * * * and this we believe is now the generally accepted definition of the phrase.

In State v. Pabst, 139 Wis. 561; 121 N. W. 351, the court said:

The words [in contemplation of death] are evidently intended to refer to an expectation of death which arises from such a bodily or mental condition as prompts persons to dispose of their property and bestow it on those whom they regard as entitled to their bounty.

Whether a gift has been made in contemplation of death is almost uniformly treated in the administration of tax laws as a question of fact. Spreckels v. State, 30 Cal. App. 363; 158 Pac. 549; People v. Kelley, 218 Ill. 509; 75 N. E. 1038; Shwab v. Doyle, 269 Fed. 321. It is proper that the presumption of fact afforded by the statute be taken into account in determining whether the gift was made in contemplation of death. Shwab v. Doyle, supra.

In the instant case the facts not only fail to overcome the presumption provided by the statute, but they show in themselves that the decedent must have been aware of impending death at or about the time of the transfer. He had been in declining health for several years prior to his death. He knew that he had high blood pressure-He consulted a specialist in New Orleans of his own volition. On at least two occasions a few months before his death he had suffered violent heart attacks. Those attacks occurred at some time near the date of the transfer, the evidence not disclosing whether before or after that date.

Judgment for the Commissioner.


source: Caselaw Access Project

license: Public Domain

text:
    STOUTS MOUNTAIN COAL CO., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 6542.
    Decided September 30, 1926.
    A corporation owning and operating a mine and claiming a deduction from gross income of an amount for depletion based upon an estimated tonnage of coal in place, and the mine becoming completely exhausted during one of the taxable years under review, thereby proving that the number of tons of coal in place was substantially less than the estimated number of tons upon which the claim for depletion for earlier years was based, is entitled to have its claim for depletion for the year in which the mine was exhausted revised and to have the undepleted cost of the coal in place at the beginning of the taxable year taken as a deduction for depletion for such year.

      G. B. Harris, G. P. A., for the petitioner.

      Ward Loveless, Esq., for the respondent
    Proceeding for the redetermination of deficiencies in income and profits taxes for the years ended October 31, 1920, and October 31, 1921, in the respective amounts of $69.34 and $811.77. The question in issue is the proper amount of depletion which the petitioner is entitled to deduct from gross income in its tax returns for the fiscal years involved.

      FINDINGS OF FACT.
    The petitioner is an Alabama corporation, incorporated November, 1917, with $2,000 capital stock. The stockholders were five brothers and a brother-in-law. It was organized to acquire an abandoned coal mine in which it was estimated there were still 400,000 tons of recoverable coal. The father of the five brothers agreed to advance money to the corporation to enable it to acquire the property and to build a spur line from the mine to the main tracks of the Louisville & Nashville R. R. Co. The exact amount paid by the petitioner corporation for the coal rights in the mine is not in evidence but is admitted by the petitioner and by the Commissioner to have been at least $14,500. In 1919 the petitioner acquired the surface rights of the mining lands, together with an adjoining tract covering several hundred acres of land, for $10,040. The number of tons of coal mined for the fiscal years ended October 31, 1920, and October 31, 1921, was 32,438 and 14,017, respectively. Prior to the close of the last named fiscal year the vein of coal “ pinched out ” and a wall of stone prevented any further mining operations. Exploratory drilling failed to reveal any other recoverable coal. The petitioner recovered less than 75,000 tons of coal from the mine. The entire assets of the company were sold and disposed of at great loss to the petitioner in years subsequent to 1921.
    The income-tax return filed by the petitioner for the fiscal year ended October 31, 1920, showed a loss of $4,375.55. On this return the petitioner claimed a deduction for depletion of $8,244.80. The Commissioner allowed a deduction for depletion of only $1,175.88 and disallowed the deduction of $7,068.92, thereby determining a net income of $2,693.37 instead of a loss of $4,375.55 as shown by the return. The return filed for the succeeding fiscal year showed a loss of $477.25. On this return the petitioner claimed a depletion allowance of $6,527.40. In the audit of the return the Commissioner computed a depletion allowance of $508.12 and disallowed $6,019.28 of the amount claimed, thereby determining a net income for the fiscal year of $5,542.03 instead of a loss of $477.25.
    The depletion allowed by the Commissioner for both taxable years was based on a cost of $14,500 applicable to 400,000 tons of removable coal, resulting in a depletion unit rate of $.03625 per ton.
   OPINION.

Smith:

The taxing statute permits a taxpayer to deduct from gross income—

In the case of mines, * * * a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case, based upon cost including cost of development not otherwise deducted: * * * Section 234 (a) (9), Revenue Act of 1918.

A reasonable allowance must be made for depletion in accordance with the facts in a given case. At the time the petitioner started operations, and during the year 1920, it believed that the recoverable tons of coal in its property were 400,000. It developed, however, prior to the close of its fiscal year ended October 31, 1921, that the recoverable tons were in all not in excess of 75,000. The depletion deduction for such year is the undepleted cost of the coal in place at the beginning of such year; in other words, the undepleted cost on November 1, 1920, should be spread over the number of tons of coal removed during the fiscal year ended October 31, 1921. Only in this way will the petitioner be allowed to recover from gross income, as a depletion deduction during the life of the mine, the undepleted cost of the coal in place at the beginning of the taxable year.

Order of redetermmation will he entered on 15 days’ notice, under Bule 50.


text:
    KILBY CAR & FOUNDRY CO., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 6931.
    Decided September 30, 1926.
    A corporation which, through a change of business conditions, has no use for a building erected for a particular purpose and abandons the building, is entitled to deduct from gross income in the year of abandonment the loss sustained by reason of such abandonment.

      Niel P. Sterne, Esq., for the petitioner.

      Ward Loveless, Esq., for the respondent.
    This is a proceeding for the redetermination of a net deficiency in income and profits taxes for the years 1919, 1920 and 1921, in the amount of $5,536.89, the deficiency letter from which the appeal is taken showing a deficiency in tax for 1920 of $5,801.27 and over-assessments of tax for the years 1919 and 1921 of $138.61 and $325.77, respectively. The questions at issue are (1) the rate of depreciation to be applied on certain buildings and equipment; (2) the deducti-bility of an amount claimed to represent a loss sustained as a result of the rusting away and complete destruction of iron sheets and a definite abandonment of a certain building in 1920; and (3) the de-ductibility of an amount claimed to represent a loss on a certain rolling-mill building. There is the further question as to the jurisdiction of the Board to determine the correct amount of the over-assessments determined for the years 1919 and 1921.

      FINDINGS OF FACT.
    1. The petitioner is an Alabama corporation engaged in the manufacture of small cars for the use of logging and sugar cane business, a small part of its business also consisting of the production of bar iron on ten-inch rolls.
    2. For the years 1919, 1920 and 1921, the petitioner, on its books of account and in its income-tax returns, charged off on the former and claimed as deductions from gross income in the latter a rate of depreciation upon its machinery and on a locomotive of 10 per cent, and on its frame manufacturing buildings and tenant houses a rate of 7% per cent. It was stipulated between the parties that for depreciation purposes the following assets were owned by the petitioner and that the rates of depreciation claimed by the petitioner and allowed by the Commissioner were as follows:

    It was further stipulated that depreciation upon additions to the assets should be allowed for one-half of the year during which the additions were made.
    The tenant houses, 11 in number, were built about 1905 and were later purchased by the petitioner. They were constructed of an inferior grade of lumber, with shingle roofs. All of the houses are still in use, but they are in bad condition and must soon be repaired or abandoned.
    The other frame buildings used in connection with the manufacturing were erected by the petitioner from time to time since 1912 to meet the expanding needs of its business. They were also constructed of an inferior grade of lumber and are covered with composition and metal roofs. Owing to the damaging effects of fumes from the plant and heat conditions, the average life of the roofing of these buildings was about three or four years. The buildings generally were subjected to exceptionally hard usage.
    The locomotive was described as a 40-ton, mogul type. It was purchased about 1914 and scrapped in 1924, at which time it was worn out.

      Approximately 90 per cent of the machinery was acquired secondhand. The life of such of the machinery was from 7 to 8 years. Some of the machinery, especially the wood-working machinery, had a life up to 12 years.
    3. During the year 1918 the petitioner purchased, at a cost of $6.10 per square, approximately 235 squares of black sheet-iron, which was placed upon a certain building known as the 10-inch rolling-mill building and upon a building known as the bar-iron storage shed. During the year 1918 the petitioner erected the storage building above referred to and intended to use it for the storage of bar-iron for the retail trade. Most of the black sheet-iron was placed upon the storage shed. At the time the shed was erected, bar-iron was selling at unusually high prices and the petitioner believed that it could profitably enter into the business of manufacturing and selling this product. During the year 1920 the sheet-iron had rusted out and had become utterly worthless. During the same year the use of the storage shed was permanently abandoned on account of changes in business conditions, a drop in the prices of bar-iron resulting in the discontinuance of the bar-iron business. The uprights and boarding on the storage shed stood for a number of years, but no use was made of it and it was finally torn down in 1925 or 1926. The cost of the erection of the bar-iron shed had been charged to capital, but no separate account had been kept to show the exact cost. When the shed was abandoned in 1920, the petitioner charged off $3,000 as the estimated cost of the building. The concrete foundation of the shed had cost $872. It was estimated that the wooden framework cost $600, and that the black sheet-iron used on the building cost $1,528. The petitioner claimed as a deduction from gross income, in its income-tax returns for 1918 and 1919, certain amounts for depreciation iii respect of the cost of the shed. The unextinguished cost of the shed as of December 31, 1919, was $2,865.
    4. During the year 1918 the petitioner began the construction of a building which it is intended to use for the manufacture of bar-iron on 20-inch rolls, to be sold to the wholesale trade. Work on this building was in progress during the years 1918'and 1919 and during a part of the year 1920. The manufacture of bar-iron on 20-inch rolls required a building equipped for the handling of heavy weights in respect of raw material, material in process, and finished product. The foundations were made of concrete and the walls, to a height of six feet from the floor, were exceptionally thick. The building was equipped with apparatus such as crane-ways, hoists, etc., for the handling and- conveying of heavy materials. The floors were on different levels, with drops of five or six feet from one level to another. During the year 1920 a severe business depression caused the price of bar-iron, such as was being manufactured in the 20-inch rolling mill, to decline 50 per cent or more in the space of a few months. This unforeseen decrease in the price of bar-iron, unaccompanied by a proportionate decrease in the costs of labor and raw materials, caused the petitioner permanently to abandon all thought of manufacturing bar-iron for the wholesale trade.
    The petitioner’s executive officers in 1920 ordered work on the building to be abandoned and the machinery previously installed to be scrapped. The machinery and equipment were scrapped and the petitioner claimed on its books as a loss for 1920 the difference between the cost of the machinery and equipment and the salvage received from such scrapping. In its income-tax return for 1920 the petitioner claimed as a deduction from gross income a loss resulting from the scrapping of the machinery, which loss was allowed by the Commissioner. The petitioner, during the year 1920, broke with hammers such parts of the building as could easily be broken to show that it had permanently abandoned the use of the building as a rolling mill. The remainder of the building was left standing in the belief that it might later be utilized for some purpose.
    The cost of the building as of December 31, 1919, as shown on the petitioner’s books of account, was $20,129.16, less $802.34 theretofore taken as depreciation on the building. The unextinguished cost of the building at. December 31, 1919, was $19,326.82. In 1923 and 1924 the petitioner decided to make certain additions to its factory that would include the site of the abandoned rolling-mill building. The rolling-mill building was offered to anyone who would salvage it, but the offer was not accepted. Finally, such portion of the building as was left standing was incorporated in the extensions as a part of the car shop, known as the fabricating shed, and it is still used as such. In the conversion it was necessary to make many changes. The concrete floor was broken up by the use of heavy weights and cranes. The converted building did not conform very well to the extension plans.
    The petitioner estimated the residual value of -the old building at the time of its conversion into the new shed at $8,324.54. This amount it deducted from the December 31, 1919, unextinguished cost of $19,326.82, and it charged off the remainder, $11,002.28, as a loss in its 1920 return. The estimated residual value of the building was arrived at by computing the cost of replacement of the parts utilizéd with steel construction. The Commissioner disallowed the deduction of the claimed amount of $11,002.28 as obsolescence for the year 1920.
   OPINION.

Smith:

1. On the part of the Commissioner it is contended that the Board has no jurisdiction to consider the correctness of his determination of overassessments for the years 1919 and 1921. The question herein involved is ruled by the decisions of the Board in the Appeal of Cornelius Cotton Mills, 4 B. T. A. 255, and Appeal of Jay N. Darling, 4 B. T. A. 499. It must therefore be held that the Board has no jurisdiction to consider the correctness of the overassessments for the years 1919 and 1921.

2. From a consideration of the entire evidence, the Board is of the opinion that depreciation of tenant frame buildings and of other frame buildings for the year 1920 should be computed at the rate of 5 per cent, rather than at the rate of 7% per cent, and that depreciation on machinery and the locomotive should be computed at the rate of 10 per cent instead of at the rates determined by the Commissioner.

3. The petitioner definitely abandoned the use of its storage shed for bar-iron in 1920. The taxing statute permits the petitioner to deduct from gross income “ losses sustained during the taxable year and not compensated for by insurance or otherwise.” Section 234 (a)(4), Revenue Act of 1918. All the evidence in this case goes to show that the bar-iron shed became obsolete and that its further use was abandoned in 1920. The books of account of the petitioner-do not show the cost of the shed separately from other buildings. We are satisfied, however, from a consideration of the entire evidence, that the unextinguished cost at December 31, 1919, was $2,771 and that the petitioner is entitled to deduct this amount from the gross income of 1920.

4. The high prices obtaining for bar-iron during the years 1918 and 1919 induced the petitioner to attempt the manufacture and sale of bar-iron, although it was not particularly advantageously located for such business. It therefore started the completion of a 20-inch rolling mill for bar-iron to be sold to the wholesale trade. Owing to the business depression in 1920, it became convinced that it could never manufacture bar-iron profitably, and it immediately dismantled the rolling mill, which at that time had not been entirely completed, and broke up certain parts of the building to indicate that it was its intention then permanently to abandon it. The petitioner was not certain whether it could at any time make any use of the building. It made no use of it during the next two or three years, but in 1923 or 1924 it decided to extend its car manufacturing plant, and, although the building was not adapted for such purposes, it was converted into a fabrication shed and made a part of the main building. We can not doubt from the entire evidence that the petitioner suffered a loss in 1920 by reason of its rolling mill becoming obsolete. The taxing statute permits the deduction of such a loss. The evidence warrants a finding that the amount of the loss sustained in that year on its rolling-mill building was the amount claimed by the petitioner, namely $11,002.28.

Order of redetermination will.be entered on 15 days’ notice, under Rule 50.


author: Milliken:

text:
    THOMAS F. SHERIDAN, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 13698.
    Decided September 30, 1926.
    Losses sustained in farming, when engaged in as a business, are deductible.

      Thomas F. Sheridan, Esq., pro se.

      A. George Bouchard, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for the year 1921 in the amount of $1,629.43. The question involved is whether or not the petitioner, in computing his net income for the year 1921, is entitled to deduct a loss sustained by him in that year from the operation of his farm.
    FINDINGS OF FACT.
    Petitioner is an individual residing at Red Hill Farm which is situated near the town of Moultonboro, N. H. Petitioner formerly practiced law in Chicago, Ill., for a period of approximately forty years. Being a victim of hay fever, the petitioner decided to purchase a farm in New Hampshire, where he would be relieved from the severity of his ailment, and in 1907 he purchased the Red Hill Farm. Since the purchase of Red Hill Farm petitioner and his wife have made the farm their permanent home. His original intention in purchasing the farm was for the reason aforesaid, but, after a short residence on the farm, he decided to put the same on a commercial basis, for profit, and in 1910 he employed, and has had in his employ continually thereafter, a capable and practical farm superintendent. The farm superintendent, with the active assistance and advice of the petitioner, stocked the farm with Jersey cattle and planted the necessary crops for feeding purposes. It became apparent in 1917 that Jersey cattle could not be profitably raised in New Hampshire and petitioner changed over to Guernsey cattle. The operations of the farm during the year 1921 consisted of mixed farming, with the principal purpose in view of raising pure-brecl Guernsey cattle for sale. A large quantity of butter was also sold during the year. There were from 21 to 48 pure-bred Guernsey cattle on the farm during the year 1921. Hogs and chickens were also raised and sold in the market. The farm -is completely equipped with a farmhouse, hay, feed, cow and calf barns, tool houses and tool sheds. Petitioner was in charge of and constantly consulted by the farm superintendent as to the purchase and sale of cattle, crops to be planted, and all matters having to do with the expansion and improvement of the farm. One. intention of the petitioner was to so profitably and efficiently operate his farm that same might serve as an incentive to better farming and better stock-raising in the State of New Plampshire. The wife of the petitioner has resided at the farm since its purchase in 1907, performing the domestic duties about the farmhouse, employing no outside help except the wife of the superintendent, and has charge of the raising of chickens. Accurate and detailed records are maintained of all receipts and disbursements. Petitioner realized during the year 1921 from the sale of cows, calves, hogs, chickens, eggs, butter and maple syrup, the sum of $3,622.64, and the expenses of the farm during the year 1921 were $14,746.46. The farm was operated at a loss during the years prior to 1921, but diversification of crops and other economies have caused the losses to decrease for the years subsequent to 1921. The farm was not used as a place of entertainment or amusement.
   OPINION.

Milliken:

Section 214 of the Revenue Act of 1921 enumerates the deductions allowed individuals in computing net income and provides in paragraph (4) for the deduction of losses sustained during the taxable year and not compensated for by insurance or otherwise if incurred in a trade or business. There is no dispute that the petitioner suffered a loss of $11,123.82 during the year 1921 in the operation of Red Hill Farm, but the controversy relates to whether the petitioner operated the farm during the year 1921 as a business for profit or merely for recreation or pleasure.

In the Corporation Tax Case (Flint v. Stone Tracy Co., 220 U. S. 107) the Supreme Court has defined business as follows:

“ Business ” is a very comprehensive term and embraces everything about which a person can be employed. Black’s Law Diet., 108. * * * “ That which occupies the time, attention and labor of men for the purpose of a livelihood or profit.” Bouvier’s Law Dictionary, Vol. 1, p. 273.

This definition is also followed in the later case of Von Baumbach v. Sargent Land Co., 242 U. S. 503, 515.

It seems to us that the essentials of business are present in the enterprise carried on by this petitioner. The place of the business was the Ked Hill Farm, consisting of some 800 acres, completely equipped with farmhouses, barns, tools and equipment; stocked with pure-bred Guernsey cattle; crops grown to supply feed for the cattle; cattle, hogs and chickens raised for sale, and a competent farm superintendent, together with laborers, to manage and care for the farm. The petitioner and his wife made the farm their place of permanent residence and received income from the sale of the products of the farm. The petitioner gave his personal attention to the supervision of the farm and its expansion and development. That farming is an enterprise that may be entered into as a business for profit is not open to question. The thoroughness with which the petitioner entered into the enterprise convinces us that he entered into it as a business for profit, and, such being the case, the losses which he sustained are allowable deductions in computing net income to the same extent that losses are allowable deductions in other businesses.

Counsel for the respondent has emphasized the fact that the petitioner conducted his farm at a loss for the years prior to the year 1921, and cites the case of Thacher v. Lowe, 288 Fed. 994, in support of the proposition that the relation of receipts to expenditures may determine the intent of the petitioner. We are of the opinion that the relation of receipts to expenditures may be an evidentiary fact to be taken into consideration, but the inference to be drawn therefrom may be overcome by the sworn testimony of the petitioner as to his intent, and the facts of record heretofore related, which may and do in this case corroborate the intent of the petitioner-to engage in farming as a business for profit.

Petitioner did not occupy the role of a theoretical farmer. He gave his time and attention to it — every important step that was taken, the planting and diversification of crops and the cattle to be bred or sold, were all the subject of his personal supervision. His wife performed the duties of a farmer’s wife in truth and in fact, doing her own domestic work without outside assistance, and personally attending to the raising of the chickens. The farmhouse was not equipped for, nor was it used as a place of entertainment of guests or for pleasure. Frugality and close attention to the farm duties were practiced by the petitioner and the fact that losses occurred can be attributed to the fact that the farm was gradually being placed on a sound basis. Petitioner testified that losses in years subsequent to 1921 were being reduced so that the farm would soon be placed on a paying basis.

In the case of Plant v. Walsh, 280 Fed. 722, Judge Thomas considered the fact of a taxpayer engaging in farming with resultant heavy losses and stated:

I think, however, that the evidence establishes clearly that Mr. Plant’s farm was conducted as a business enterprise and with the expectation that it would eventually become profitable. The mere fact that a heavy loss was incurred in the initial stages of so large an enterprise does not necessarily show the contrary- But, even though this is not so, I do not believe that farming, when engaged in as a regular occupation and in accordance with recognized business principles and practices, is any the less a business within the meaning of the statute, because the person engaging in it is willing to do so without regard to its profitableness, because of the pleasure derived from it.

It has been suggested that the petitioner operated the farm for pleasure or as a hobby. We have no doubt that the petitioner has a fondness for farming and derives pleasure from his undertaking. But this can not change the character of his undertaking from a business earried on for profit to one carried on for pleasure or recreation. The Circuit Court of Appeals for the Second Circuit, in the case of Wilson v. Eisner, 282 Fed. 38, had before it somewhat the same question and held that the pleasure or fondness which one may have for the enterprise entered into does not destroy the business aspect of the enterprise.

Judgment for the petitioner.


author: Arundell :

text:
    Foster Wheeler Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96610.
    Promulgated June 1, 1939.

      3. M. Meyer, Esq., for the petitioner.

      Walt Mamdry, Esq., for the respondent.
   opinion.

Arundell :

This proceeding is before us on a motion of the Commissioner to dismiss for lack of jurisdiction. The motion raises the single and precise question of whether this Board has jurisdiction to redetermine deficiencies determined by the Commissioner in respect of excess profits liability on Navy contracts under the provisions of the so-called Vinson Act.

The foundation for this proceeding is a letter from the Commissioner to the petitioner, dated November 26,1938, reading:

You are advised that the determination of your excess profits liability on Navy Contracts for the taxable year ended December 31, 1936, discloses a deficiency of $883.63 as shown in the statement attached.
In accordance with the provisions of section 272 (A) of the revenue act of 1934 and section 3 of the Vinson Act of March 27, 1934, as amended by the Act of June 25, 1936, notice is hereby given of the deficiency mentioned.
Within 90 days (not counting Sunday or a legal holiday in the District of Columbia as the 90th day) from the date of the mailing of this letter, you may file a petition with the United States Board of Tax Appeals for a redetermination of the deficiency.
Should you not desire to file a petition, you are requested to execute the enclosed form and forward it to the Revenue Agent in Charge, 90 Church Street, New York, N. Y., for the attention of LAL-90D. The signing and filing of this form, will expedite the closing of your returns by permitting an early assessment of the deficiency, and will prevent the accumulation of interest, since the interest period terminates 30 days after filing the form, or on the date assessment is made, whichever is earlier.

1

A petition for redetermination of tbe $888.63 deficiency in excess profits liability was filed with the Board within 90 days of the date of the Commissioner’s letter. According to the material facts alleged therein, taken as true for present purposes, the petitioner entered into two contracts with the United States Navy, one in 1934 and one in 1936. The 1934 contract resulted in a loss. A profit was realized on the 1936 contract, which as computed by the Commissioner, was $883.63 in excess of 10 percent of the contract price. The Commissioner refused to allow the loss on the 1934 contract to be offset against the excess profit on the 1936 contract on the ground that the 1934 contract was completed in 1935, and not in 1936 as contended by the petitioner. The Commissioner’s determination as to the year of completion of the 1934 contract is alleged to be erroneous in the petition filed herein, but the matter is not at issue at this stage of the proceeding.

The Commissioner’s argument against jurisdiction, summarized, is that two fundamental prerequisites to invoking the Board’s jurisdiction are (1) the determination of a deficiency in tax, and (2) the sending of a notice thereof; that the Vinson Act does not purport to impose a tax and the Commissioner’s determination of an excess profits liability is not a determination of a deficiency m tax, wherefore such determination does not meet the first prerequisite to jurisdiction.

The statute known as the Vinson Act, 48 Stat. 503, as amended by 49 Stat. 1926 (Title 34, U. S. C. A., §§ 494-497), authorizes, in section 2, the President of the United States to undertake the construction of certain vessels and aircraft. Section 3 (Title 34, U. S. C. A., § 496) directs the Secretary of the Navy to submit construction estimates and authorizes appropriation therefor, and continues, in material part as follows:

Provided, that no contract shall be made by the Secretary of the Navy for the construction and/or manufacture of any complete naval vessel or aircraft, or any portion thereof, herein, heretofore, or hereafter authorized unless the contractor agrees—
(b) To pay into the Treasury profit, as hereinafter provided shall be determined by the Treasury Department, in excess of 10 per centum of the total contract prices, of such contracts within the scope of this section as are completed by the particular contracting party within the income taxable year, such amount to become the property of the United States, but the surety under such contracts shall not be liable for the payment of such excess profit: Provided, That if there is a net loss on all such contracts or subcontracts completed by the particular contractor or subcontractor within any income taxable year, such net loss shall be allowed as a credit in determining the excess profit, if any, for the next succeeding income taxable year: Provided further, That if such amount is not voluntarily paid the Secretary of the Treasury shall collect the same under the usual methods employed under the internal revenue laws to collect Federal income taxes: Provided further, That all provisions of law (including penalties) applicable with respect to the taxes imposed by Title I of the Revenue Act of 1934, and not inconsistent with this section, shall be applicable with respect to the assessment, collection, or payment of excess profits to the Treasury as provided by this section, and to refunds by the Treasury of over-payments of excess profits into the Treasury; * * * And provided further, That the income taxable years shall be such taxable years beginning after December 31, 1935, except that the above provisos relating to the assessment, collection, payment, or refunding of excess profit to or by the Treasury shall be retroactive to March 27, 1934.

Title I of the Revenue Act of 1934, referred to in the Yinson Act, imposes Federal income taxes. Section 271, a part of Title I, defines a deficiency, and section 272, also a part of Title I, prescribes the procedure to be followed after determination of a deficiency. As far as concerns our present question, section 271 may be said to define a deficiency as the amount by which the correct income tax exceeds the amount reported by the taxpayer, and section 272 authorizes the Commissioner to send a notice of his determination of a deficiency in income tax to the taxpayer, and permits the taxpayer to petition the Board for a redetermination of such deficiency. The Commissioner points out that the liability under Title I of the Revenue Act of 1934 is a tax liability, whereas the liability of a contractor under the Yin-son Act is a contractual liability, and that the Board was created and is authorized to redetermine tax liabilities and not contract liabilities.

The original function of the Board was to hear and determine cases between taxpayers and the Commissioner, based on deficiencies in taxes. The Board, as originally created, was specifically given jurisdiction only in cases of deficiencies in income, estate, and gift taxes imposed by the Revenue Act of 1924, and by implication in cases involving income, profits, and estate taxes under earlier statutes. In succeeding statutes Congress has added to the matters originally justiciable by the Board not only the power to redetermine deficiencies in other taxes, but other powers. By the Revenue Act of 1926 there was added jurisdiction to determine overpayments, and jurisdiction to hear and decide transferee cases. Transferee liability, while considered in a practical aspect as a tax liability, is by statute provided for as a separate liability, namely, the liability at law or in equity of a transferee of property of a taxpayer. Our jurisdiction in transferee cases is firmly established. Thus it is seen that the Board’s jurisdiction has not been static. It has changed as Congress has seen fit from time to time to add to it, and this, in view of the Board’s being a creature of Congress, is undoubtedly within the Congressional power. Historical precedent for change of powers exists in the Court of Claims, which at first was “merely an auditing board”, but whose powers and jurisdiction have been added to by numerous Congressional acts. Assuming, but not deciding, that liability for excess profits under the Vinson Act is not a tax liability, no reason has been advanced why Congress may not require the Board to hear and redetermine deficiencies in such liability. The question then is whether Congress has manifested such intention.

The language of section 3 of the Vinson Act is strikingly like that of other legislation which in recent years has brought within the jurisdiction of the Board proceedings other than those relating to taxes originally justiciable by the Board. Examples are section 702 (b) of the Revenue Act of 1934, relating to excess profits tax, and section 503 (a) of the Revenue Act of 1936, relating to tax on unjust enrichment. These are compared with section 3 of the Vinson Act in the footnote.

In Will Comity Title Co., 38 B. T. A. 1396, we said that the effect of section 702 (b), Revenue Act of 1934, “is to permit the filing of petitions for redetermination of deficiencies in excess profits tax in the same manner as deficiencies in income tax.” In John A. Gebelein, Inc., 37 B. T. A. 605, involving section 503 (a), Revenue Act of 1936, we said that “there is no suggestion by either side that such taxes are not justiciable by the Board * * While in both cited cases we declined to take jurisdiction, the refusal was on grounds other than our power to redetermine the kinds of taxes involved in those proceedings.

The recently enacted Internal Revenue Code carries conviction that Congress intended to place the redetermination of excess profits liability within the jurisdiction of the Board. The internal revenue title of the code is divided into subtitles A to F. Subtitle A bears the caption “Taxes Subject to the Jurisdiction of the Board of Tax Appeals.” It contains five numbered chapters, of which chapter 1 relates to “Income Tax,” and chapter 2 deals with “Additional Income Taxes.” The additional income taxes that are the subject of chapter 2 are listed in four subchapters, as follows:

Subchapter A — Personal Holding Companies.
Subchapter B — -Excess Profits Tax.
Subchapter C — Excess Profits on Navy Contracts.
Subchapter D — Unjust Enrichment.

Subchapter C, set out in full below, contains all the presently material provisions of the Vinson Act relating to determination and collection of excess profits liability, with only such changes in phraseology as necessitated by transfer of the provisions from the original enactment into the code, and the change in the years affected. The application of section 650 to the years beginning after December 31, 1938, simply brings that section into harmony with the purpose of making the code effective, generally, beginning with the year 1939. See code sections 4 and 5. The code does not purport to be new legislation, but as set forth in section 4 “is intended to include all general laws * * * relating exclusively to internal revenue, in force on the 2d of Jannuary, 1939 (1) of a permanent nature or (2) of a temporary nature if embraced in said Internal Revenue Title.” Subchapter C contains no substantive provisions that were not in the Vinson Act. The inclusion of subchapter C in the code among the matters that are subject to the jurisdiction of the Board is, in our opinion, an unmistakable mandate of Congress for us to hear proceedings based on the Commissioner’s determination of deficiencies in excess profits on Navy contracts under the provisions of the Vinson Act.

The Commissioner’s motion to dismiss will be denied.

Reviewed by the Board.

Order denying motion to dismiss will he entered.

       Further amended by the National Defense Act of April 3, 1939, in respects not material to this proceeding.

       See. 900 (e), Revenue Act of 1924.

       Secs. 280 and 316, Revenue Act of 1924.

         Secs. 284 (e), 319 (c), Revenue Act of 1926.

       Secs. 280, 1000, Revenue Act of 1926.

        United States v. Updike, 281 U. S. 489.

        Phillips v. Commissioner, 283 U. S. 589.

        Langford v. United States, 101 U. S. 341, 344.

       [See. 3, Vinson Act.] * * * all provisions of law (including penalties) applicable with respect to the taxes imposed by Title I of the Revenue Act of 1934, and not inconsistent with this section, shall be applicable with respect to the assessment, collection, or payment of excess profits to the Treasury as provided by this section, and to refunds by the Treasury of overpayments of excess profits into the Treasury.
      [Sec. 702 (b), Revenue Act of 1934.] All provisions of law (including penalties) applicable in respect of the taxes imposed by Title I of this Act, shall, insofar as not inconsistent with this section, be applicable in respect of the tax imposed by this section, except that the provisions of section 131 of that title shall not be applicable.
      [Sec. 503 (a), Revenue Act of 1936.] All provisions of law (including penalties) applicable with respect to taxes imposed by Title I of this Act, shall, insofar as not inconsistent with this title, be applicable with respect to the taxes imposed by this title, except that the provisions of sections 101, 131, 251, and 252 shall not be applicable.

       Approved February 10, 1939.

       [Subchapter C — Excess Profits on Navy Contracts.]
      Sec. 650. Method of Collection. — If the amount of profit required to be paid into the Treasury under section 3 of the Act of March 27, 1934, c. 95, 48 Stat. 505, as amended by the Act of June 25, 1936, c. 812, 49 Stat. 1926 (U. S. C., Supp. Ill, Title 34, § 496), -with respect to contracts completed within income-tax taxable years beginning after December 31, 1938, is not voluntarily paid, the Secretary shall collect the same under the usual methods employed under the internal revenue laws to collect federal income taxes.
      Sec. 651. Laws Applicable. — All provisions of law (including penalties) applicable with respect to the taxes imposed by Title I of the Revenue Act of 1934, 48 Stat. 683, and not inconsistent with section 3 of said Act of March 27, 1934, shall be applicable with respect to the assessment, collection, or payment of excess profits to the Treasury as provided by section 650, and to refunds by the Treasury of overpayments of excess profits into the Treasury.


author: Van Fossan :

text:
    Albert J. Gould, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91193.
    Promulgated June 1, 1939.

      George T. Evans, Esq., for tbe petitioner.

      Joe D. Hughes, Esq., for the respondent.
   OPINION.

Van Fossan :

The respondent determined deficiencies of $308 and $885.64 for the taxable years 1934 and 1935, respectively, consequent on his holding that income received by petitioner as public administrator of the City and County of Denver, State of Colorado, was taxable. Taxpayer duly filed his petition under date of November 1, 1937, alleging the above holding to be error. Issue was joined and the case came on for hearing on November 14, 1938, at which time a stipulation of facts was filed, agreeing that petitioner, during 1934 and 1935, was the duly appointed, qualified, and acting public administrator in and for the City and County of Denver, State of Colorado, under and by virtue of the Constitution and laws of the State of Colorado, and an order of the County Court of said City and County of Denver, dated July 31, 1933. The parties also stipulated the appropriate portions of the Constitution of Colorado and of the statutes of said state dealing with the appointment, qualifications, duties, removal, and compensation of public administrators. The case was duly submitted and petitioner filed a brief.

On March 14, 1939, respondent by his Chief Counsel addressed a letter to the Board in which the following paragraph appeared:

In this ease there is involved the validity of tbe Commissioner’s attempt to tax the compensation of a public administrator in the State of Colorado during the years 1934 and 1935. It is not denied that the petitioner was either an officer or an employee of the State of Colorado. There is now pending in the Senate a bill (H. R. 3790) to be citable as the “Public Salary Tax Act of 1939”, designed, inter aUa, to grant relief from such taxation for taxable years beginning prior to January 1, 1939. The provisions of the bill, if enacted into law, will prevent the Commissioner from proceeding any further in the instant case with respect to the compensation involved.

The statute referred to in the quoted paragraph was duly passed by the Congress and was approved by the President April 12, 1939. The pertinent part of the statute appears below.

A public administrator, being an “officer of a court” undoubtedly comes within the scope of the statute. In fact, the parties are in agreement that taxpayer was an officer or an employee of the State of Colorado and that the quoted statute is applicable and bars the Commissioner from ever assessing or collecting the deficiency.

The only question remaining is the nature of the decision to be entered in this proceeding. Specifically, shall we pursue a wholly futile and purposeless procedure and redetermine the deficiency which would have been due and collectible if the statute had not been passed and “the doctrines in the cases of Helvering against Therrell (303 U. S. 218), Helvering against Gerhardt (304 U. S. 405), and Graves et al. against New York ex rel. O’Keefe (306 U. S. 466), extending the classes of officers and employees subject to Federal taxation” were applied? Or shall we give practical implementation to the intention of Congress underlying the statute and hold that the deficiency is extinguished ?

In National Refining Co. of Ohio, 1 B. T. A. 236, the Board faced a comparable situation arising out of the application of the statute of limitations. In the cited case the Government contended that the Board had no jurisdiction to entertain a proceeding which went only to the remedy of collection of taxes and not to the amount of the deficiency proposed by the Commissioner. The Board observed :

It appears to be clearly evident that the plea of limitation raises a distinct question as to the liability of the taxpayer for the tax. It is also evident that Congress intended this Board to determine an.y liability and any taxpayer appealing to it regarding a deficiency imposed prior to payment of the tax. Such being the situation, we do not hesitate to assume jurisdiction in this appeal.

After considering the case on its merits the Board ruled:

In view of these considerations the special defense of the Commissioner must fall. Therefore, we hold that the taxpayer is protected by the statute of limitations, the liability determined by the Commissioner was barred on July 21, 1923, and the deficiency for the year 1917 is disallowed.

In West Town State Bank, 32 B. T. A. 531, where the Commissioner was urging that the Board adopt a restricted view of its functions, the Board said:

* * * we must reject the Commissioner’s argument. It would restrict the Board to a merely academic function having no regard for substantial rights and liabilities. We may not so far close our eyes to the law as to adjudicate as a deficiency or a transferee liability an amount which by the Constitution or a supervening statute or decision may not legally be imposed or exacted. This was held at the beginning of the Board’s existence and has since been consistently adhered to, National Refining Co. of Ohio, 1 B. T. A. 236; New York, Ontario & Western Railway Co., 1 B. T. A. 1172, 1182; Leah Brunt, 5 B. T. A. 134; Independent Life Insurance Co. of America, 17 B. T. A. 757; American Security & Trust Co. et al., Executors, 34 B. T. A. 334, 346. See W. P. Brown & Sons Lumber Co. v. Burnet, 282 U. S. 283; Relvering v. Independent Life Insurance Co., 292 U. S. 371. For the Board to pass upon a computation of a hypothetical amount which is without substance and which may not be assessed or collected is analogous to the determination by the Court of Claims of nominal damages; and it has been held by the Supreme Court, with no more express statutory support than is here, that the Court of Claims has no such jurisdiction. Nortz v. United States, 295 U. S. 317; Grant v. United States, 7 Wall. 311, 338; Marion & Rye Valley Ry. Co. v. United States, 270 U. S. 280.

So it is here — a broad view of the duty of the Board in the premises requires that we interpret the intention of Congress in passing the Public Salary Tax Act and so far as lies within our powers make that statute practically effective. We do not believe it incumbent on the Board to be a participant in the doing of a vain and futile thing.

Accordingly, believing it to accord with Congressional intention, we hold that in cases such as the present, where the deficiency is solely attributable to compensation received as an officer or employee of the State and where the Public Salary Tax Act of 1939 is by its terms applicable, the effect of the act is to extinguish the deficiency.

Decision of no deficiency will be entered.

       Sec. 201. Any amount of income tax (including interest, additions to tax, and additional amounts) for any taxable year beginning prior to January 1, 1938, to the extent attributable to compensation for personal service as an officer or employee of a State, or any political subdivision thereof, or any agency or instrumentality of any one or more of the foregoing—
      (a) shall not be assessed, and no proceeding in court for the collection thereof shall be bégun or prosecuted (unless pursuant to an assessment made prior to January 1, 1939) ;
      (b) if assessed after December 31, 1938, the assessment shall be abated, and any amount collected in pursuance of such assessment shall be credited or refunded in the same manner as in- the case of an income tax erroneously collected; and
      (c) shall, if collected on or before the date of the enactment of this Act, be credited or refunded in the same manner as in the case of an income tax erroneously collected, in the following cases—
      (1) Where a claim for refund of such amount was filed before January 19, 1939, and was not disallowed on or before the date of the enactment of this Act;
      (2) Where such claim was so filed but has been disallowed and the time for beginning suit with respect thereto has not expired on the date of the enactment of this Act;
      (3) Where a suit for the recovery of such amount is pending on the áate of the enactment of this Act; and
      (4) Where a petition to the Board of Tax Appeals has been filed with respect to such amount and the Board’s decision has not become final before the date of the enactment of this Act,

      Sue. 210. For the purposes of this Act, the term “officer or employee” includes a member of a legislative body and a judge or officer of a court'.

       Sec. 203, Public Salary Tax Act of 1939.


author: Smith :

text:
    J. E. Huckabay and Sybil S. Huckabay, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91824.
    Promulgated June 1, 1939.

      J. E. Huclcabay, for tbe petitioners.

      Wilford H. Payne, Esg>., for tbe respondent.
   OPINION.

Smith :

Tbis is a proceeding for tbe redetermination of deficiencies in income tax for 1934 and 1935 of $56.97 and $92.66, respectively. The only question in issue is whether tbe petitioners are liable for income tax upon tbe salary received by J. E. Huckabay during tbe years 1934 and 1935 as attorney for the Louisiana Highway Commission.

Tbe petitioners are husband and wife, residing in the Parish of East Baton Rouge, Louisiana, who filed joint income tax returns for 1934 and 1935.

The material facts in this case have been stipulated as follows:

1. The only question presented for decision in this case is whether the compensation received by J. Elton Huckabay, one of the petitioners herein, for the taxable years 1934 and 1935, in the respective amounts of $2,809.00 and $4,200.00, as attorney for the Louisiana Highway Commission of the State of Louisiana, is subject to the Federal Income Tax.
2. On May 1, 1934, J. Elton Huckabay, one of “the petitioners herein, who is sometimes referred to hereinafter for convenience as petitioner, was engaged by the Louisiana Highway Commission as an attorney at a monthly salary of $350.00. No oath of office was required of petitioner. There was no stipulation as to the duration of petitioner’s services other than that he was to continue from month to month. The engagement of the said J. Elton Huckabay as an attorney was, as to duration, within the exclusive discretion of the Louisiana Highway Commission. Petitioner is still engaged as attorney for the said Louisiana Highway Commission at the same rate of salary and under the same terms and conditions as existed during the taxable years of 1934 and 1935.
3. The said J. Elton Huckabay continued to serve as attorney, in connection with the Louisiana Highway Commission, from May 1, 1934, throughout the year 1935, for which he received as compensation the sum of $2,800.00 for the year 1934 and $4,200.00 for the year 1935. The services rendered by petitioner as attorney for said Commission consisted of attending to such indiscriminate legal matters as arose from time to time. Such services consisted largely of the defense of damage suits growing out of the construction and erection of bridges and highways and the acquisition, by condemnation proceedings or otherwise, of rights of way for the construction of State highways and bridges throughout the State of Louisiana. Petitioner devoted approximately 40% of his time to the work in connection with the Highway Commission during the year 1934, and approximately 30% of his time thereto during the year 1935.
4. The formation of policies in the handling of suits and other legal matters was not delegated to petitioner but was retained by the Louisiana Highway Commission. The said Commission did not exercise control over the details of the petitioner’s performance of his services. Upon any difference of opinion the will, as to policy or procedure, of the Commission ultimately controlled. The amount of petitioner’s monthly compensation was not directly regulated or determined by the amount of work actually done or the value of the particular services performed during the month.
5. The Louisiana Highway Commission maintains a Legal Department for which it has provided suitably equipped offices. Petitioner, J. Elton Huckabay, was not required to keep any specific office hours or to spend any specific time in the offices of the Legal Department. Petitioner’s private office, which was maintained for the practice of law, was located within five (5) blocks of the general offices and the offices of the Legal Department of the Louisiana Highway Commission, and petitioner was readily accessible to the officers and employees of said Commission when in his private office. The office hours customarily adhered to by petitioner in his own private law office were equally as long as those required by the Louisiana Highway Commission.
6. Petitioner was not prohibited by the said Commission from the acceptance of private law practice, and petitioner in fact maintained his private law offices for the practice of his profession on his own account, throughout the taxable years 1934 and 1935. During the taxable year 1934 petitioner, J. Elton Huckabay, realized gross income from the private practice of law in the amount of $5,114.24 from which rent and other related expenses aggregating $558.70 were deducted, leaving a net income from private practice for that year of $4,555.54. This income' does not include the compensation received by petitioner as attorney for the Louisiana Highway Commission.
7. During the taxable year 1935 the said J. Elton Huckabay realized gross income from his private practice of law amounting to $6,778.26 against which expenses of $1,158.00 were deducted, leaving a net income from that source of $5,620.26, which was in addition to petitioner’s compensation received for that year as attorney for the Louisiana Highway Commission.
8. Petitioner, J. Elton Huckabay, is subject to call by the said Louisiana Highway Commission at any time and it was understood that the business of said Commission would be given preference and priority over private practice.
9. Petitioner’s salary from the said Louisiana Highway Commission for the years 1934 and 1935 was paid from the General Highway Fund.

There can be no question but that the compensation received by J. E. Huckabay from the Louisiana Highway Commission is subject to income tax under the decisions of the Supreme Court in Helvering v. Gerhardt, 304 U. S. 405, and Graves v. New York ex rel. O’Keefe, 306 U. S. 466, unless the petitioners are relieved from income tax in respect of such compensation by the “Public Salary Tax Act of 1939”, approved April 12, 1939.

The Public Salary Tax Act of 1939 provides for the abatement, credit, or refund of income tax upon “compensation for personal service as an officer or employee of a State, or any political subdivision thereof, or any agency or instrumentality of any one or more of the foregoing” for all years prior to 1938, with certain exceptions not here material. (Title II, secs. 201 and 208.) In the report of the Senate Finance Committee on the Public Salary Tax Act is is stated:

Title II applies only to State and local officers and employees and not to other persons having dealings with State and local governments, since the taxability of the compensation of such other persons has long been recognized. Such persons are generally held to be independent contractors for purposes of Federal income taxation. Their liability for such tax has been clearly established since the case of Metcalf & Eddy v. Mitchell (1926) 269 U. S. 614, and they are not officers and employees within the meaning of this bill.

In this proceeding the respondent contends that the petitioner, J. E. Huckabay, was not an officer or employee of the State of Louisiana or any political subdivision thereof, or instrumentality thereof, but an independent contractor, and that accordingly his salary is not exempt from tax.

This contention of the respondent is sustained upon the authority of Metcalf & Eddy v. Mitchell, 269 U. S. 514; Eric E. Hall, 33 B. T. A. 953; Commissioner v. Modjeski, 75 Fed. (2d) 468; certiorari denied, 295 U. S. 764; Haight v. Commissioner, 52 Fed. (2d) 779, affirming 14 B. T. A. 844; certiorari denied, 285 U. S. 537; Blair v. Byers (C. C. A., 8th Cir.), 35 Fed. (2d) 326, affirming 8 B. T. A. 1191; Burnet v. McDonough, 46 Fed. (2d) 944; Register v. Commissioner (C. C. A., 5th Cir.), 69 Fed. (2d) 607; and Burges v. Commissioner (C. C. A., 5th Cir.), 69 Fed. (2d) 609.

Judgment will he entered for the respondent.


text:
    John T. Rowland, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 85332, 88435.
    Promulgated June 6, 1939.

      Robert Carey, Esq., for the petitioner.

      Benjamin M. Brodsky, Esq., for the respondent.
   OPINION.

Smith :

In the light of the opinions of the United States Supreme Court in Helvering v. Gerhart, 304 U. S. 405, and Graves v. New York, ex rel. O'Keefe, 306 U. S. 466, there can be no question but that the petitioner’s compensation received from the city of Jersey City, New Jersey, as supervising architect, is subject to tax, although the petitioner may be relieved from the burden of the tax by the Public Salary Tax Act of 1939, approved April 12, 1939. That act provides for the abatement, credit, or refund of the income tax assessed or collected from officers and employees of a state or political subdivision thereof for years prior to 1938 in certain cases. The relief granted, however, applies only to “compensation for personal service as an officer or employee of a State, or any political subdivision thereof, or any agency or instrumentality of any one or more of the foregoing.” (Title II, § 201.) The question for consideration by the Board at the present-time is therefore whether the petitioner was an “officer or employee” within the meaning of that act.

In the report of the Senate Finance Committee on the Public Salary Tax Act it is stated:

Title II [Public Salary Tax Act of 1939] applies only to State and local officers and employees and not to other persons having dealings with State and local governments, since the taxability of the compensation of such other persons has long been recognized. Such persons are generally held to be independent contractors for purposes of Federal income taxation. Their liability for such tax has been clearly established since the case of Metcalf & Eddy v. Mitchell (1926) 269 U. S. 514, and they are not officers and employees within the meaning of this bill.

In Metcalf & Eddy v. Mitchell, 269 U. S. 514, it is stated as follows:

An office is a public station conferred by the appointment of government. The term embraces the idea of tenure, duration, emolument and duties fixed by law. Where an office is created, the law usually fixes its incidents, including its term, its duties and its compensation. * * * The term “officer” is one inseparably connected with an office; but there was no office of sewage or water supply expert or sanitary engineer, to which either of the plaintiffs was appointed. The contracts with them, although entered into by authority of law and prescribing their duties, could not operate to create an office or give to plaintiffs the status of officers. * * * There were lacking in each instance the essential elements of a public station, permanent in character, created by law, whose incidents and duties were prescribed by law. * * *

In 1900, just prior to the petitioner’s designation as supervising architect, an amendment was made to the school laws of New Jersey as they then existed, reading as follows:

Hereafter Boards of Education in cities of the first class shall have power and authority by the vote of a majority of its members, to appoint its superintendents of erection and repairs for said Board, prescribe their duties, determine their compensation and fix their terms of office, not to exceed five years, and by a like vote may remove them during their term for cause.

In the revision of 1903, see Compiled Statutes, 1910, page 4741, section 50, is the following paragraph:

Every such board shall have the supervision, control and management of the public schools and public school property in its district, and shall keep such property insured. It shall appoint a person to be its secretary, and may appoint a superintendent of schools, a business manager and other officers, agents and employees as may be needed, and may fix their compensation and terms of employment, but no such appointee, officer, agent or employee, other than the secretary, shall be a member of said board. [P. L. 1903 (2d. sp. sess.) p. 21.]

There has just been completed a complete new revision of the school law of the State of New Jersey, known as Title #18, chapter 6, section 18, of the Revised Statutes of 1937. The pertinent provisions of the revision of 1937 read:

The board shall have the supervision, control, and management of the public schools and public school property in its district, and shall keep such property insured. [Bev. of 1937-18:6-18.]
The board shall appoint a person to be its secretary, and may appoint a superintendent of schools, a business manager, and other officers, agents, and employees as may be needed, and may fix tbeir compensation and terms of employment, but no sucb appointee, officer, agent, or employee, other than the secretary, shall be a member of the board. [Key. of 1937, 18: 6-27.]

The office of “business manager” which the Court of Errors and Appeals of New Jersey has found synonymous with the title “supervising architect” in Jersey City, is defined pretty generally in sections 70, 71, and 72 of the Compiled Statutes of 1910, beginning at page 4745. The sections applicable read as follows:

§ 70. Whenever a business manager shall be appointed it shall be by a majority vote of all the members of the board of education.
He shall receive such salary as said board shall determine. He shall, before entering upon the duties of his office, execute and deliver to the board of education a bond in a sum to be fixed by said board, but not less than two thousand dollars, with surety or sureties to be approved by said board, conditioned for the faithful performance of the duties of his office. Said board may accept the bond or undertaking of a trust company, surety or indemnity company and may pay the annual premium or fee therefor as a current expense of said board. Said business manager may, by a majority vote of all the members of the board of education, be removed from office. He shall have a seat in said board, and the right to speak on all matters relating to his department, but shall not have the right to vote. [P. L. 1903 (2d sp. sess.) p. 25.]
71. The business manager shall have charge and care of the public school buildings, and all other property belonging to the school district. He may appoint and remove clerks in his office, but the number and salaries of such clerks shall be determined by the board of education. [P. L. 1903 (2d sp. sess.) p. 26.]
72. All plans and specifications for the erection, improvement or repair of public school houses shall be drawn by or under the supervision of the business manager, if there be one, and shall be approved by the board of education. Said business manager, if there be one, shall supervise the construction and repair of all school-buildings, and shall report monthly to the board of education the progress of the work; provided, that repairs not exceeding the sum of one hundred dollars may be ordered by the business manager, and repairs not exceeding the sum of five hundred dollars may be ordered by the committee of the board having charge of the repair of school property, without the previous order of the board and without advertisement. The business manager, if there be one, shall superintend all advertisements for bids and the letting of all contracts. He shall inspect all work done and materials or supplies furnished under contract, and shall, subject to the approval of the board of education, condemn any work and reject any material or supplies which, in his judgment, do not conform to the specifications contained in the contract therefor, and shall perform such other duties as may be required by the board of education. [P. L. 1903 (2d sp. sess.) p. 26.]

These provisions are now found in Title 18, chapter 6, sections 45, 46, and 47, of the Revised Statutes of 1937.

There can be no question as to the power of the Board to have made the appointment of Rowland. Incidentally, Jersey City is one of the two cities of the first class in New Jersey, which is fixed by population and statute. Jersey City was a city of the first class in 1900 at the time of the appointment of Rowland.

The case of Frank v. Board, of Education of Jersey City, 90 N. J. L. 273, was decided by the New Jersey Court of Errors and Appeals in 1916. In this case it appeared that “the plaintiff furnished certain work and materials to the City at the request of one John T. Rowland, Jr., supervising architect of said City.” The evidence showed that Rowland had been permitted to order work and materials for a number of years and that the city had paid for same. It was shown that the wTork was done in an emergency before the board could meet to pass upon it. The plaintiff showed that he had been doing such work and furnishing such materials for a number of years and had also been paid. The lower court found for the plaintiff and, on appeal, the Court of Errors and Appeals affirmed. At page 277 the court said:

In the case under discussion, tiie Scliool Law of the state, session of 1903, found in Pamph. L. 1904, p. 6, section 47; 4 Comp. Stat. p. 4740 et seq., provides that the board of education in a city school district such as Jersey City is vested with the power of making contracts in and by its corporate name, and by section 50 every such board shall have the supervision, control and management of the public schools and public school property in its district. It may appoint a superintendent of schools, a business manager and other officers, agents and employes as may be needed. Section 52 provides the board may at any time order repairs to school buildings to an amount not exceeding $500, may authorize the purchase of supplies to an amount not exceeding $250, without advertisement. Section 72 provides for a business manager, who shall supervise, if there be one, the construction and repair of all school buildings, and shall report monthly to the board of education the progress of the work; that repairs not exceeding the sum of $100 may be ordered by the business manager; and repairs not exceeding the sum of $500 may be ordered by the committee of the board having charge of the repair of school property, without the previous order of the board and without advertisement. In this statute, as will be seen, there is express authority for the appointment of an agent — a business manager. The term is immaterial. A supervising architect or vice principal might just as well be called an agent or business manager. There is also the recognition by the legislature of the fact that the board of education probably could not act in many cases without appointing such agents, since the very necessity of some cases requires that such a board should act through agents.

Although the above cited case stands for the proposition that the petitioner was at least an agent of the board of education of Jersey City, there is no evidence in these proceedings that the petitioner was “business manager” for the board or that he was an officer thereof.

It has been testified that Rowland took an oath of office. Nothing has been found in the New Jersey Statutes to indicate that he was required by law to do so. It was testified that every person employed by the board of education was required to take an oath of office. We do not "think that this had the effect of establishing every employee an officer within the meaning of the law. It is well established that the taking of an oath or the giving of a bond does not make one ipso facto an officer. Commissioner v. Murphy (C. C. A., 2d Cir.), 70 Fed. (2d) 790; certiorari denied, 298 U. S. 596; Buckner v. Commissioner (C. C. A., 2d Cir.), 77 Fed. (2d) 297; Watson v. Commissioner (C. C. A., 3d Cir.), 81 Fed. (2d) 626; Strauss v. Commissioner (C. C. A., 9th Cir.), 97 Fed. (2d) 549. We are of the opinion that petitioner was not an officer of the State of New Jersey or a political subdivision thereof.

The next question for consideration is whether the petitioner was an employee of the board of education. An important consideration in the determination of this question is whether the board of education exercised the detailed control and direction over what the petitioner did and how he did it that characterizes the employer-employee relationship. See Haight v. Commissioner (C. C. A., 7th Cir.), 52 Fed. (2d) 779, 781; certiorari denied, 285 U. S. 537; J. E. Houston, 33 B. T. A. 237.

In Metcalf & Eddy v. Mitchell, supra, it was said:

Nor do the facts stated in the bill of exceptions establish that the plaintiffs were “employees” within the meaning of the statute. So far as appears, they were in the position of independent contractors. The record does not reveal to what extent, if at all, their services were subject to the direction or control of the public boards or officers engaging them. In each instance the performance of their contract involved the use of judgment and discretion on their part and they were required to use their best professional skill to bring about the desired result This permitted to them liberty of action which excludes the idea that control or right of control by the employer which characterizes the relation of employer and employee and differentiates the employee or servant from the independent contractor. * * *

In Burnet v. McDonough (C. C. A., 8th Cir.), 46 Fed. (2d) 944, the question was presented as to whether an attorney who had agreed to act as counsel for a bridge district for a specified yearly compensation was an employee of the bridge district. The court held that he was not, citing numerous authorities therefor.

In Mesce v. United States, 64 Ct. Cls. 481, it was held (syllabus) as follows:

The services of the plaintiff were engaged by the board of local improvements, an adjunct of the municipal government of the city of Chicago, as a building expert in connection with the valuation of buildings affected by certain local improvements in widening and opening streets. His service was not regular and continuous, but was for a particular transaction or transactions. Helé, that the plaintiff’s relation was that of an independent contractor, and not that of an officer or employee of the city, and that compensation received for his service was taxable income.

See Kreipke v. Commissioner, 32 Fed. (2d) 594; Roberts v. Commissioner, 44 Fed. (2d) 168; Reed v. Commissioner, 34 Fed. (2d) 263.

In Blair v. Byers, 35 Fed. (2d) 326, the facts were that Byers was counsel for the board of waterworks trustees of the city of Des Moines at a salary of $2,500 per annum. It was held that he was not an employee of the municipality, but an independent contractor. The court, in referring to the fact that during a long period Byers was a lawyer engaged in the practice of his profession in the city of Des Moines, said:

* * * We think this is sufficient to establish that he was free to engage, and was engaged, in other business for other clients; that he was a free professional agent as to the nature of his services and the advice that he would give. Nowhere in the record is it revealed to what extent, if at all, his services were subject to the control of the board of trustees. Furthermore, we are of opinion that an attorney who is engaged in this manner, who has not contracted to give to such a client his entire and exclusive services, does not thereby become an officer or employee in the sense of this statute. It is our judgment that Mr. Byers did not become such an employee of this political subdivision of the state of Iowa, and that the compensation which he received for services was therefore not exempt from income taxes.

In Commissioner v. Modjeski, 75 Fed. (2d) 468; certiorari denied, 295 U. S. 764, the court held that the compensation paid to the chief engineer of a joint bridge commission created by the State of New Jersey and the Commonwealth of Pennsylvania was not immune from taxation. The court said:

The performance of the duties of the respondent’s engagement here involved the use of his judgment and discretion; in fact it was using such that constituted the services for which he received compensation. The result to be accomplished by his engagement was through his best professional efforts. * * *

To the same effect see A. Ten Eyck Brown, 19 B. T. A. 568; petition for review denied (C. C. A., 5th Cir.), 55 Fed. (2d) 1076; certiorari denied, 287 U. S. 602. The court further said in Commissioner v. ModjesJd, supra: “In the cases where the taxpayer was free to and did accept concurrent employment, the courts have generally regarded the taxpayer as an independent contractor.”

In Martin P. O'Connor, 35 B. T. A. 402, the Board held that counsel for the board of education of Elizabeth, New Jersey, was an “employee” of the board and exempt from tax. Our decision in that case was not appealed to the courts.

In Howard Ewart, 35 B. T. A. 692, the Board held that Ewart’s compensation received by him as counsel for 10 municipalities of New Jersey was taxable upon the ground that he was an independent contractor. In Sigurd A. Emerson, 35 B. T. A. 901, the Board held that Emerson was a township attorney appointed to the statutory office pursuant to statute and that his compensation was exempt from taxation, since it was received for the performance of ordinary duties as a township attorney. Both of these cases were appealed to the Circuit Court of Appeals for the Third Circuit, which, on July 22, 1938, affirmed our decision in the Ewart case, 98 Fed. (2d) 649, but reversed our decision in the Emerson case, 98 Fed. (2d) 650, upon tbe ground that Emerson was an independent contractor whose compensation was taxable. A petition for certiorari in the Emerson case was denied by the Supreme Court, 305 U. S. 642. Although the facts in the proceeding at bar bear a close resemblance to those in the case of Martin P. O^Gonnor, supra, the Boatd is of the opinion that its decision in that case is not decisive of the present proceeding in the light of the decision of the Circuit Court of Appeals for the Third Circuit in Sigurd A. Emerson, supra.

During the taxable years the petitioner served the board of education of Jersey City as “supervising architect.” The title aptly describes his position. While attending to such duties he was free to and did accept other employment than that of supervising architect. His services to the board of education of Jersey City were not prescribed by law or definitely defined. At the hearing of this proceeding the petitioner was asked:

At the time you were appointed, was there any statement made to you as to the duties you would have to perform?
A. No. I think that as I worked along, that X had a general knowledge of what I was to do. Really, X created the work that I did in taking care of the schools!

From a careful study of all of the evidence, the Board reaches the conclusion that the petitioner was not an officer or employee of the board of education of the city of Jersey City, New Jersey, but was an independent contractor. The petitioner is not therefore relieved from tax upon his compensation as supervising architect for the years 1933 and 1934.

Judgments will be entered under Rule 50-


text:
    F. Carter Johnson, Jr., and Josephine M. Johnson, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89287.
    Promulgated June 6, 1939.

      F. Garter Johnson, Jr., for the petitioners.

      Wilford H. Payne, Esq., for the respondent.
   OPINION.

Smith :

This is a proceeding for the redetermination of a deficiency of $44.76 in income tax for 1934, The only question in issue is whether the petitioners are liable to income tax upon fees received by F. Carter Johnson, Jr., during the year 1934 as notary public.

The facts have been stipulated as follows:

1. That petitioners are individuals, husband and wife, and residents of New Orleans, State of Louisiana. For the taxable year 1934, petitioners filed a joint Federal income tax return, reporting their income and deductions for said year.
2. F. Carter Johnson, Jr., one of the petitioners herein, who is sometimes referred to hereinafter for convenience as petitioner, was appointed a Notary Public for the Parish of Orleans, State of Louisiana, on May 29, 1930, by the Honorable Huey P. Long, then Governor of the State of Louisiana, by and with the advice and consent of the Senate of Louisiana, pursuant to and by virtue of the authority conferred by the Statutes of said State.
3. During the taxable year 1934, the said F. Carter Johnson, Jr. received as fees, commissions and compensation as a Notary Public of the State of Louisiana, the sum of $398.72, which was deducted from gross income by petitioner, on his return for said year, as being exempt from the Federal income tax.
4. In redetermining the taxable income of the petitioners for the year 1934, the Commissioner disallowed as a deduction the said item of $398.72 representing compensation and fees as a Notary Public, which adjustment, together with other minor adjustments not contested by petitioners herein, resulted in a proposed deficiency for said year 1934 amounting to $44.76.
5. The only issue to be determined by the Board is whether the said item of Notary fees and compensation amounting to $398.72 is properly subject to the Federal income tax as determined by the Commissioner.

There can be no question but that under the decisions of the United States Supreme Court in Helvering v. Gerhardt, 304 U. S. 405, and Graves v. New York ex rel. O'Keefe, 306 U. S. 466, the petitioners are taxable on the notary public fees in question unless they are given relief from tax by the Public Salary Tax Act of 1939, approved April 12,1939.

Section 201 of the act referred to provides in part:

Any amount of income tax * * * for any taxable year beginning prior to January 1, 1938, to the extent attributable to compensation for personal service as an officer or employee of a State, or any political subdivision thereof, or any agency or instrumentality of any one or more of the foregoing—
(a) shall not be assessed, and no proceeding in court for the collection thereof shall be begun or prosecuted (unless pursuant to an assessment made prior to January 1, 1939) ;
(c) shall, if collected on or before the date of the enactment of this Act, be credited or refunded in the same manner as in the case of an income tax erroneously collected, in the following cases—
(4) Where a petition to the Board of Tax Appeals has been filed with respect to such amount and the Board’s decision has not become final before the date of the enactment of this Act.

Although the act referred to above does not specifically provide that in cases pending before the Board at the date of its enactment the Board stall reduce the deficiency determined by the respondent by excluding from the gross income of the taxpayer the amount of compensation received by him as an officer or employee of a state, it would be a futile act for the Board to determine a deficiency including in taxable income such compensation; for in such case the respondent would not be authorized to assess the deficiency determined by the Board and if the deficiency were to be collected the amount would have to be refunded.

There is no question but that F. Carter Johnson, Jr., was an officer of the State of Louisiana. His compensation consisted of fees paid to him not by the State of Louisiana, but by persons for whom he performed his notarial services. Section 205 of the Public Salary Tax Act of 1939 provides that “Compensation shall not be considered as compensation within the meaning of sections 201, 202, and 203 to the extent that it is paid directly or indirectly by the United States or any agency or instrumentality thereof.” Referring to this section the Conference Report on the Public Salary Tax Act states: “The effect of this definition is to grant relief not only in the ordinary case in which the compensation of the officer or employee is paid in the form of a salary but also in cases where compensation is derived from fees.”

In this proceeding the Board holds that by virtue of the Public Salary Tax Act of 1939 the petitioners are not taxable upon the notarial fees of $398.72 received by F. Carter Johnson, Jr., in 1934.

Judgment will be entered v/nder Rule 50.


author: SteRnhagen :

text:
    Julius Goodman, Petitioner, v. Commissioner of Internal Revenue, Respondent. Louis H. Harrison, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 87552, 87553.
    Promulgated June 6, 1939.

      Harry Thom, Esq., and Benjamin A. Ragir, Esq., for the petitioners.

      Gerald W. Brooks, Esq., for the respondent.
   OPINION.

SteRnhagen :

The petitioners, upon the theory that their partnership had sustained a loss, each deducted a distributive share of the loss upon his individual return. The Commissioner determined a deficiency as to each, saying:

You reported a less of $42,036.89 as your pro rata share from the Goodman and Harrison partnership. As the result of an investigation of the boohs and records of the partnership, it has been determined that your share of the taxable income from the partnership is $703.46 [$703.47].

He thus adopted the partnership theory but disallowed the proportionate losses of the individual members.

Although the pleadings were not clear, the parties agreed at the opening of the trial that the issue was whether the undisputed loss on the 175th Street property in 1934 was deductible as a capital loss under the Kevenue Act of 1934, section 117 (b), or as an ordinary loss. Upon this issue, it is not of primary importance whether these petitioners carried on all of their activities in partnership, as they contend, or whether their interest in the Harrison Trust, which held the Niles Center property, was that of individual members or of the partnership. These are but evidentiary questions. The loss here in question occurred in 1934 from the transfer to the mortgagee of the 175th Street property to discharge the mortgage and the petitioners’ obligation thereon, and the only question is whether this loss was a capital loss. This in turn depends upon whether the 175th Street property was held by the taxpayers “primarily for sale to customers in the ordinary course of their trade or business.”

If the holding of this property were an isolated holding dissimilar from any other transaction and unrelated to the history of the petitioners’ activities, it might be questionable whether the mere purchase of the property, subjecting it to a mortgage, holding it for nine years, and then, without more, transferring it to the mortgagee for the acquittance of the mortgage, would be sufficient to constitute a statutory capital loss. It might be still more unfavorable to the petitioners if the only circumstances were that they had bought another tract which within six months they had sold en bloc at a gain. These two transactions by themselves would fall short of establishing that the properties or either of them had been held by the owners for sale to customers in the ordinary course of their business. Compare Phipps v. Commissioner, 54 Fed. (2d) 469; but see Snell v. Commissioner, 97 Fed. (2d) 891.

But the petitioners have established that they bought this property as the Harrison Trust had bought the Niles Center property, for subdivision and sale in lots to customers as they could be found. The evidence leaves little room for doubt that this was the primary purpose of the petitioners with regard to the 175th Street property, as it demonstrably was with regard to the Niles Center property. It is true that the 175th Street property remained inactive. This was due first to the activity at Niles Center which took so much time and attention that the 175th Street property was for the time being neglected, and then to the slump in the real estate market which reasonably compelled suspense. The original purpose, however, remained. It can not be that business adversity of itself converted it into a purpose of investment, nor did the. demand of the mortgagee. Those seem to us to have been disappointing incidents of the primary purpose of ordinary business — no less so than a failure to succeed in the grocery business.

The fact has been found, therefore, from the evidence, that the property was held, as the statute prescribes, primarily for sale to customers in the ordinary course of the taxpayers’ business. The loss is, therefore, deductible as an ordinary loss, and the Commissioner’s determination is reversed.

Decisions will he entered vmder Bule 60.


author: Sternhagen :

text:
    Continental Illinois National Bank and Trust Company of Chicago, Marshall Field and George Richardson, as Trustees under the Will of Marshall Field, Deceased, Two-fifths Non-cumulative Trust Fund, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83341.
    Promulgated June 6, 1939.

      William B. Mollvaine, Esq., and J. Francis Dammann, Esq., for the petitioners.

      D. A. Taylor, Esq., for the respondent.
   OPINION.

Sternhagen :

The Commissioner determined deficiencies in the fiduciary income tax of petitioner of $21,059.90 for 1930, $21,250 for 1931, and $8,851.38 for 1932. He disallowed a deduction taken each year by the fiduciary of amounts distributed to a beneficiary, holding that the distribution was not to be regarded as a distribution of income. The facts are all stipulated, and a state court decree and the petitioners’ returns were also received in evidence. It is not necessary to make findings of fact.

Marshall Field died testate, January 16, 1906. In his will he left the residue of his estate to two grandsons and their issue. Henry Field, one of the grandsons, died July 8, 1917, leaving a widow, Nancy, who later married Tree. She claimed dower in Henry’s share under the will and insisted upon it throughout litigation which was carried on to get a judicial construction of the will, so it was essential that her rights be fixed in the litigation. The state court recognized her right to dower in the real estate, which was not opposed, and on July 13, 1920, decreed that “the amount payable to said Nancy Perkins Field for her said dower shall be paid by the said Trustees wholly out of the income of Henry Field’s share (or two-fifths) of the said residuary estate.” An agreement previously made by Nancy Field Tree and Marshall Field and dated July 14, 1920, provided for an annual payment of $75,000, but not in satisfaction of dower. Later a decree of February 26, 1921, provided that the payments to Nancy Perkins Field for dower “shall be paid wholly out of the net income of the properties”, etc. The earlier decree was affirmed on April 21, 1921, by the Illinois Supreme Court, 297 Ill. 301, and 297 Ill. 251. Then on May 24,1921, the trustees were given notice of an agreement between Marshall Field and Nancy Field Tree that she should be paid $85,000 a year “in full satisfaction of all her claims and right of dower.” This amount was annually paid to her out of the income of the two-fifths non-cumulative trust fund.

The trustees deducted this $85,000 on their fiduciary return for each of the years in question, and the Commissioner disallowed the deduction.

The question involves section 162 (b), Revenue Act of 1928 and Revenue Act of 1932. Is the $85,000 an amount of the income of the trust which is to be distributed currently by the fiduciary to a beneficiary? If so, the fiduciary may deduct it and it shall be included in the taxable net income of the beneficiary. The answer is authoritatively found in the state court’s decree, which expressly directs that Nancy Field Tree shall be paid out of the income of the trust, Blair v. Commissioner, 300 U. S. 5. There is no qualification of this. Whether the amount be regarded as dower or in lieu of dower seems to us to be beside the point of the revenue act. The trustees are bound by the decree to pay Nancy Field Tree only out of trust income, and if that income should not be sufficient there is no duty to pay her from corpus. The amount was not payable to her at all events, Helvering v. Butterworth, 290 TJ. S. 365. We need not consider whether Marshall Field would, in view of his agreement, have acquiesced in a payment from corpus if the trustees had attempted to make one beyond the court’s decree, for his acquiescence would not enlarge their powers or affect the character of the distributions made under the decree. The decree enforcing the original will was the source of authority upon which the trustees acted and not the voluntary agreement of two of the beneficiaries.

We hold, therefore, that the amount of $85,000 was deductible by the fiduciary, and reverse the Commissioner’s determination.

Decision will be entered wnder Rule SO.