author: Black:

text:
    J. K. McAlpine Land & Development Company, Ltd., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99599.
    Promulgated February 4, 1941.

      Arthur O. Fisher, Esq., for tbe petitioner.

      E. A. Tonyes, Esq.. Alva Q. Bavrd, Esq., and Frank T. Homer, Esq., for tbe respondent.
   OPINION.

Black:

The first of petitioner’s principal contentions, as noted in our preliminary statement, is that under the Corporate Securities Act of California the issue of the 8,000 shares of class B stock of Bakersfield Memorial Park, Inc., a Nevada corporation, was void because no permit for the issue thereof had been obtained from the Commissioner of Corporations of California. In support of this contention petitioner cites and relies upon the two cases of Boteler v. Conway, 23 Cal. App. (2d) 35, and Pollak v. Staunton, 210 Cal. 656; 293 Pac. 26. Petitioner argues that, if correct in this contention, it necessarily follows that when it received the 8,000 shares in question it could not as a matter of law have received anything of value and that the respondent’s entire determination of the deficiencies and penalties in question must be disapproved. Petitioner also makes two other points in connection with this argument. The first is that, if correct in its contention that the 8,000 shares issued were void, then petitioner in delivering 5,044 of the 8,000 shares to the holders of the notes of the face amount of $21,198.38 did not deliver to them anything of value and could not, therefore, liquidate such obligations. The second is that the documents (agreements and options) executed in connection with the notes were also void by reason of petitioner’s right to liquidate such notes with the stock in question, and that the sole recourse of the parties holding such documents was limited to a recovery of the cash advanced ($9,173.38) and the property transferred (valued when received at $12,025) or, in the event that such property had been sold by petitioner, to the consideration received ($4,367.47) on the sale thereof. Petitioner’s remaining principal contentions are as noted in our preliminary statement.

The respondent simply asks for the affirmance of his determination on the ground that petitioner has failed to prove it wrong in any particular.

We do not wholly agree with either petitioner or the respondent. We do not think petitioner may be heard to contend that the issue of the 8,000 shares was void under the Corporate Securities Act of California. Petitioner caused the Bakersfield Memorial Park, Inc., to be organized and caused it to issue the 8,000 shares without securing the necessary permit from the Commissioner of Corporations of California. Were we now to permit petitioner to contend that the issue of the 8,000 shares was void, we would be permitting petitioner to take advantage of its own wrong, a result which the law disfavors. See Domestic & Foreign Petroleum Co. v. Long, 4 Cal. (2d) 547; 51 Pac. (2d) 73; Laugharn v. Bank of America National Trust & Savings Association, 88 Fed. (2d) 551. In Eberhard v. Pacific Southwest Loan & Mortgage Corporation, 215 Cal. 226; 9 Pac. (2d) 302, the Supreme Court of California in its opinion said:

The inhibitions of the Corporate Securities Act (Deering’s Gen. Laws, 1923, Supp. 1927, 1929, p. 3287, Act 3814) against sales of securities to the public without permits are meant to protect the public from imposition and deception— not primarily to benefit the seller. The seller and the purchaser are therefore in no sense in pari delicto where this provision is violated. The fact that the transaction may be void at the behest of the purchaser is not to allow a premium for real wrong done by the seller. The fundamental maxim that “no one can take advantage of his own wrong” (section 3517, Civ. Code), and other kindred principles, immediately recur to the mind. The above is but a recast of the doctrine abundantly supported by authority and applied in cases involving this very act done under similar circumstances. [Citations.]

Tbe record before us does not sbow that any of the recipients of the stock in question ever at any time contended that it was void and of no value. A security may have value even if it be issued without a permit. This was the situation in Western Oil & Refining Co. v. Venago Oil Corporation, 218 Cal. 733; 24 Pac. (2d) 971, wherein the court said, “In the case herein the units proved to be valuable, notwithstanding they were issued without a permit.” See also Julian v. Schwartz, 16 Cal. App. (2d) 310; 60 Pac. (2d) 887. The cases cited by petitioner would be authority in favor of any of the note holders if such holders had elected to contest the validity of the stock, which they did not do. So far as the records show, the stock which was transferred to them by petitioner in 1933 is still valid and outstanding. In fact so far as the record shows the entire block of 8,000 shares is still valid and outstanding. The cases cited by petitioner can not be used as authority in favor of petitioner in this proceeding, for the reasons already stated. Petitioner offered no evidence whatever as to the fair market value of these shares. We hold, therefore, that petitioner has failed to prove that the 8,000 shares received by petitioner during the taxable year did not have a fair market value of $27,040 when received, as determined by the respondent.

The respondent determined that the entire value of the shares was income to petitioner, on the ground that they were received for services rendered by petitioner in organizing the new corporation. But the shares were not received entirely for services rendered, but in part for the liquidation of the advancements of $9,594.53 which petitioner made for the account of the Bakersfield Memorial Park, Inc. We think it follows that only the excess of the value of the shares over such advancements may be considered as income to petitioner for services rendered. It is true petitioner deducted $4,283.53 of the advancements of $9,594.53 in its 1932 return. It did not, however, for the reasons stated in our findings, receive any tax benefit on account of such erroneous deduction in 1932. That being the case, we do not think petitioner should be charged with-income in 1933 when it was reimbursed for the expenditures which it made in 1932 for the account of another. As a matter of fact a taxpayer is not entitled to a deduction as business expenses for amounts which it pays out for another and for which it has a contract of reimbursement. Petitioner was reimbursed for what it paid out for the Bakersfield Memorial Park, Inc., in the form of stock issued to petitioner and a part of the cost of that stock to petitioner is what it paid out in both 1932 and 1933.

Upon receipt of the 8,000 shares petitioner used 5,044 of such shares, having a cost basis of $17,048.72, to liquidate its own indebtedness of the face amount of $21,198.38. This unquestionably represented a gain to petitioner of the difference in the amount of $4,149.66. Petitioner suggests in its brief that any such difference would be equivalent to a forgiveness of indebtedness by the note holders and would not be income to petitioner, since it had requested us to find that petitioner was insolvent both at the beginning and end of the taxable year. The record does not support such a finding of insolvency and, even if it did, it would be of no help to petitioner, as the transaction was not one involving the forgiveness of indebtedness but one involving the payment of a debt by petitioner in accordance with a contract previously entered into wherein petitioner had the option of making payment either in cash or stock. It elected to make payment in stock which had a cost basis to petitioner of $3.38 per share. We hold that the above difference of $4,149.66 was income to petitioner during the taxable year 1933.

During the taxable year 1933 petitioner also used 1,210 of the 8,000 shares for the purposes set out in our findings. We think that petitioner should be permitted to deduct the cost of such shares in the amount of $4,089.80 as an ordinary and necessary business expense.

We hold, therefore, that the additional income from the Bakersfield Memorial Park, Inc., not reported by petitioner in its return was $9,929.45 instead of $19,464.12 as determined by the respondent, which amount of $9,929.45 is arrived at as follows:

Fail* market value of 8,000 shares_$27, 040.00
Less advancements made by petitioner_ 9, 594. 53
Income to petitioner for services rendered_ 17,445.47
Add gain to petitioner in disposition by petitioner of the 5,044 shares in liquidation of petitioner’s indebtedness of the face amount of $21,198.38_ 4,149. 66
Total_,_ 21, 595.13
Deduct expense to petitioner in disposition by petitioner of 1,210 shares'- 4,089.80
Correct gain from transaction_ 17, 505.33
Gain reported by petitioner_ 7,575. 88
Additional income not reported_ 9,929.45

The petitioner has offered no evidence to excuse the delinquent filing of its income and excess profits tax return for the taxable year. Hence, in a computation of the deficiency under Rule 50 a 25 percent penalty will be added. On the imposition of delinquency penalties the Commissioner must be sustained.

It may be noted in passing that the losses allowed under respondent’s adjustment (c) in the amount of $3,190.36, of which $936.62 was claimed by petitioner on its income tax return and $2,253.74 was allowed in addition in the deficiency notice, cover the losses sustained during the taxable year 1933 on the property disposed of during that year as set out in the schedule in our findings showing the realization of $4,367.47 from the real estate acquired at a cost of $12,025.

The deficiencies and penalties should be recomputed upon the basis of an adjusted net income of $7,846.20 instead of the $17,380.87 adjusted net income used by the Commissioner in his deficiency notice.

Decision will be entered wider Rule 50.


source: Caselaw Access Project

author: Leech :

license: Public Domain

text:
    Edward F. C. McLaughlin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 97634, 97635.
    Promulgated February 4, 1941.

      Howe P. Cochran, Esq., and Edward Orenge, C. P. A., for the petitioner.

      Arthur W. Carndujf, Esq., for the respondent.
   OPINION.

Leech :

These consolidated proceedings are brought to seek redeter-mination of deficiencies in income tax of $395.75 and $566.06 for the respective calendar years of 1936 and 1937. The common issue is whether losses suffered through the foreclosures of certain properties are allowable only to the extent of $2,000 under section 117 of the Revenue Act of 1936, or in full as ordinary losses. The facts were stipulated and are so found.

Petitioner purchased nine parcels of business property located in Hoboken, New Jersey, more than ten years prior to 1936. He owned them subject to mortgages totaling $72,135.28L The mortgages were foreclosed on November 19, 1936. At the time -of foreclosure, petitioner’s e^uity-imthe properties amounted to $54,224.72.

On June 5,1927, petitioner bought improved property at 917 Hudson Street, Hoboken, New Jersey, subject to a mortgage of $12,000. In 1933 he converted said property from residential purposes to rental purposes. The fair market value of the property when converted to rental property was $25,500. Petitioner lost the property by foreclosure on June 30, 1937. At that time .the property was encumbered by the aforesaid mortgage and by liens for taxes and other items in the amount of $5,871.64. On June 30, 1937, petitioner had sustained depreciation of $2,295 on the property. His basis for the property at the time of foreclosure was theref ore.$23,205 less encumbrances.

It is stipulated that petitioner took the properties subject to mortgages, in other words, that he was not personally liable on these encumbrances. But whether he was personally liable or not makes no difference, in our judgment, so long as the properties were taken from him by foreclosure. A foreclosure necessarily involves a sale of the mortgaged property. See Tiffany on Real Property, section 1522.

The fact that the sale is involuntary does not change its character as such, and any loss thereon is a loss arising from the sale of a capital asset and is limited to $2,000 by section 117 (d) of the Revenue Act of 1986. Helvering v. Hammel, 311 U. S. 504; Electro-Chemical Engraving Co. v. Commissioner, 311 U. S. 513. Any intimations to the contrary that may appear in Commissioner v. Freihofer, 102 Fed. (2d) 787, must be regarded, since the decision of the Hammel and Electro-Chemical Engraving Co. cases, as no longer the law. Petitioner’s reliance on Commonwealth, Inc., 36 B. T. A. 850, is, moreover, erroneous, since in that case it was held there was no sale, but a mere abandonment of title.

We conclude, therefore, that petitioner’s loss is limited to $2,000.

Decision will he entered for the respondent.


author: KeRN :

text:
    Kenneth Drummond, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100767.
    Promulgated February 7, 1941.

      James C. Thompson, C. P. A., for the petitioner.

      B. L. Bird, Esg., for the respondent.
   OPINION.

KeRN :

Until 1934 petitioner was compensated for his services by his employer by the payment of commissions. In that year, for the reasons set out in our findings, the contract between petitioner and Ms employer relating to petitioner’s compensation was modified in that his compensation was to consist of minimum monthly payments of $625, with provisos that if he earned commissions in excess of that sum but under $1,000 per month such commissions should be paid to him in full, but if he earned commissions in excess of $1,000 he should be entitled to such excess only to the extent that the accumulated excess itself exceeded the amount by which the minimum payments were in excess of commissions payable pursuant to his contract of employment prior to its modification. In other words, petitioner by virtue of the modified contract relinquished Ms unconditioned right to the payment in full of commissions in excess of $1,000 per month in order to obtain a minimum payment of $625 per month, regardless of whether his commissions due under the unmodified contract equaled this sum. It therefore follows that petitioner was entitled to receive during the taxable year only the sum of the commissions which would have been earned by him according to the original contract of employment, decreased by the amount thereof which his employer was entitled to retain by virtue of the modifications of the contract made by the parties in 1984.

We make this interpretation of the contract between petitioner and Bullock, as modified in 1934, not without difficulty, because it was an oral contract and the testimony of petitioner with regard to it was not as clear as might be wished, and because it is not consistent with the interpretation placed upon it by petitioner’s employer as reflected on the latter’s books. There the minimum payments were treated, as respondent insists they should be treated, as advances to be repaid to Bullock out of any commissions earned by petitioner in excess of $1,000 per' month. It is respondent’s contention that such excess during the taxable year in the amount of $8,319.10, retained by the employer on account of advances made in prior years, was constructively received by petitioner and should be included in his income during the taxable year.

Even if we should interpret the contract as respondent contends we should, our ultimate result must be the same. There was no unconditional personal obligation on the part of petitioner to repay any “advances”, assuming that any part of the minimum monthly payments were in the nature of advances. Not only was the repayment of such advances not a personal obligation of petitioner, but it was also doubly contingent; contingent.upon his remaining in the employ of Bullock and upon his commissions calculated under the original contract being in excess of $1,000 per month. Only from such excess would the “advances” ever be repayable. In this respect the instant proceeding difiers decisively from the situation covered by I. T. 2043, C. B. IXI-2, p. 94, cited by respondent. Here the “advances” were made to petitioner in payment for his services, with a right reserved to the employer to make certain adjustments upon certain contingencies in the payment of his compensation in the future. The petitioner received them as a matter of right, with no restrictions as to their use and with any condition as to future adjustments thereof being only contingent. Begardless of the happening of the contingencies, petitioner will always be entitled to retain the “advances” paid to him. Under these circumstances petitioner, being on the cash receipts basis, correctly reported these “advances” as income for the years in which received. Cf. North American Oil Consolidated v. Burnet, 286 U. S. 417, 424. To hold otherwise would be to offer encouragement to schemes whereby large sums could be paid as remuneration to taxpayers by way of “advancements”, with remote contingencies as to future adjustments attached thereto, which would unduly postpone the collection of taxes as well as result in an ultimate distortion of income.

Since petitioner properly reported these minimum monthly payments as income in the years when they were received, it follows that he is not properly taxable in a later year on sums withheld from him by his employer which would otherwise have been payable to him. In 1937 Drummond had no control over the $8,319.10 credited to him but held back by the employer.

We conclude that petitioner is not taxable in 1937 on the $8,319.10 withheld by his employer.

Another question is presented by the $459.53 credited to Drum-mond on his employer’s books as of December 31, 1937. Here is a case where petitioner has earned certain commissions but will not get them until a later year.

Under our interpretation of the agreement, commissions were only to be withheld when there was an existing credit balance in favor of the employer. Once petitioner had erased this balance, the agreement no longer sanctioned the withholding of commissions. The fact that petitioner actually received over $15,000 in the taxable year, $3,000 in excess of the $12,000 which would have been the maximum amount payable under a contrary interpretation of the agreement, adds factual support to our conclusion. Notwithstanding, the petitioner asserts that the $459.53 was withheld and credited to him pursuant to the agreement which Drummond claims required all excesses over $1,000 to be withheld and, in this case, set aside for future use in case his future earned commissions did not amount to $625 per month. It is not easy to paraphrase this agreement, since it was oral and the only evidence thereof in this proceeding was that elicited from petitioner himself by way of oral testimony. The following testimony of Drummond is the basis of our conclusion:

A. * * * Above the thousand went back in the account.
<). But, you received more than $1,000.00 a month in 1937?
A. That is right, therefore what was in excess of $1,000.00 went back in the account.
Q. But, it didn’t — you actually got and kept?
A. That is right. As I say, above $1,000.00 went back.

And at a further stage of the examination Drummond stated: “A. * * * and over $1000.00 was to go back, for any so-called differences * *

On redirect examination petitioner’s counsel propounded the following questions:

Q. Mr. Drummond, in 1937, when you received $15,678.87 from your employer, you have also made the statement that any income in excess of $1000.00 was returned back or withheld by your employer to apply to any debit balances which might be existing in your account. Now, due to the fact that there is a difference there between $15,678.87 and $12,000.00, wasn’t that due to the fact that in that year, towards the end of 1937, that you had started to show a credit balance in that account and they began to pay you out in cash each month?
A. That is right.
Q. In excess of $1000.00, to account for that difference?
A. That is correct.

The witness’s last answer appears to contradict his former answers, but, since it is on redirect examination, it is apparently his final decision on the matter.

Since the agreement did not prevent petitioner from taking this $459.53 he earned in 1937, there is no apparent reason for not concluding that Drummond had full power and eontrol over the money and merely elected to allow it to remain to his credit on the employer’s books. This, of course, is the basis of the Commissioner’s determination. Petitioner has not introduced any conclusive proof in rebuttal. There is no showing that petitioner ever made demand upon Bullock for the money. Upon th e facts it appears that petitioner had a right to the $459.53 in the taxable year and at any time he chose could have made demand upon and received from the employer this money. Upon these facts we have no alternative but to hold petitioner taxable on the $459.53 on the theory of constructive receipt set forth in John A. Brunder, 3 B. T. A. 231, and followed by this Board in John I. Chipley, 25 B. T. A. 1103.

Decision will be entered under Bule SO.


author: Keen:

text:
    Archibald G. Bush, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97815.
    Promulgated February 11, 1941.

      John L. Connolly, Esq., for the petitioner.

      luoien W. Shaw, Esq., for the respondent.
   OPINION.

Keen:

Respondent contends that his determination of deficiency should be affirmed on two grounds. He asserts that the entire income of the two trusts is taxable to petitioner not only by virtue of section 22 (a) of the Revenue Acts of 1934 and 1936, but also under the theory of Douglas v. Willcuts, 296 U. S. 1. It will be unnecessary for us to consider this latter ground, however, since our decision is controlled by section 22 (a).

The lack of importance of the trustee’s role and the small degree of power held by him make manifest to us the unwillingness of the petitioner to part with the substantial ownership of the corpus during the lives of the trusts. In the case of Helvering v. Clifford, 309 U. S. 331, the Court set forth the real issue to be discussed in cases which involve trusts the income of which has been determined taxable to the settlor under section 22 (a), as follows :

Technical considerations, niceties of the law of trusts or conveyances, or the legal paraphernalia which inventive genius may construct as a refuge from surtaxes should not obscure the basic issue. That issue is whether the grantor after the trust has been established may still be treated, under this statutory scheme, as the owner of the corpus.

In the instant proceeding the trusts were for short terms, the beneficiaries were the settlor’s wife, whose income was used to defray the household expenses of the settlor, and his sister, for whose support he felt responsible; the trustee was a close business associate and personal friend of the settlor, who would, as a practical matter, conform to his wishes with regard to the voting of the stock forming the corpus of the trusts; the trustee did, in fact, execute proxies covering the stock to a group which included the settlor; and the trustee had no power to change the corpus of the trusts without the consent of the settlor. Since the facts point toward the conclusion that petitioner desired to hold on to all his stock in the Minnesota Mining & Manufacturing Co., petitioner was not inconvenienced by having the shares held by a trustee for a short term without power to dispose of them except upon receiving authority so to do from petitioner. As it turned out, he took active part in voting the shares under the proxy. The trustee was no more than a friendly middle man in the family negotiations.

Although we have found no cases involving exactly similar facts, we have no hesitancy, after a thorough study of the Clifford case, supra, and the decisions of the courts and this Board decided after the opinion in that case was handed down, in concluding that the income from both trusts for the years 1935, 1936, and 1937 is taxable to the petitioner by virtue of section 22 (a) of the Revenue Acts of 1934 and 1936. Cf. George H. Double, 42 B. T. A. 277; Herbert W. Hoover, 42 B. T. A. 289; Benjamin F. Wollman, 31 B. T. A. 37.

Decision will be entered for the respondent.


author: Sternhagen :

text:
    Crown Zellerbach Corporation, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 101161, 101162, 101163, 101164, 101165, 101166, 101167, 101168, 101169, 101170.
    Promulgated February 11, 1941.

      Douglas Ershine, Esq., for the petitioners.

      Arthur L. Murray, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Avalon Paper Company; Washington Pulp & Paper Corporation, and J. D. Zellerbach, I. Zellerbach, M. M. Baruh, Philip S. Ehrlich, D. J. Goldsmith and H. L. Zellerbach, as Trustees; National Paper Products Company; Western Waxed Paper Company of California; The Sanitary Products Corporation, and J. D. Zellerbach, H. L. Zellerbach, R. A. MacDonald,. E. A. Breyman and D. J. Goldsmith, as Trustees.

   OPINION.

Sternhagen :

The Commissioner determined deficiencies in income tax for the taxable year ended April 30,1937, as follows:

Avalon Paper Co- $443.80
The Sanitary Products Corporation_ 1,690.06
National Paper Products Co_ 100,160.43
Western Waxed Paper Co. of California- 13,245. 66
Washington Pulp & Paper Corporation- 70, 692. 34

He also determined the liability of Crown Zellerbach Corporation for each deficiency as a transferee of the taxpayer.

The proceeding raises two questions. The Commissioner disallowed (1) any dividends paid credits in respect of amounts distributed in complete liquidation; (2) deductions claimed by three of the petitioners for real and personal property tases. The facts have been stipulated.

1. During the fiscal year ended April 30, 1937, each of the five transferor petitioners was completely liquidated and delivered all its assets, including its entire earnings and profits for the fiscal year, to a corporation which owned all its stock. The Crown Zellerbach Corporation owned all the stock of the Avalon Paper Co., Sanitary Products Corporation, and National Paper Products Co. It owned all the stock of Crown Willamette Paper Co., which in turn owned all the stock of the Western Waxed Paper Co. of California, and it owned all the stock of the Olympic Paper & Power Co., which in turn owned all the stock of the Washington Pulp & Paper Corporation. The liquidating corporations during the fiscal year authorized or made no other distributions than the transfers in liquidation. The corporations which received the assets and surrendered the entire issued and outstanding shares treated the transfers in liquidation as distributions in respect of which no gain or loss was to be recognized (Revenue Act of 1936, sec. 112 (b) (6)), and they so accounted for the transfers on their books and in their Federal income tax returns.

Each of the liquidating corporations, in its Federal income tax return, claimed a dividends paid credit to the full extent of its adjusted net income for the fiscal year, and the respondent has refused any credit.

At the time of the liquidation, April 30, 1937, the earnings or profits of the Avalon Paper Co. accumulated after February 28, 1913, were $5,615.34, and the Sanitary Products Corporation showed a deficit of $177,346.40. At the time, July 31, 1936, of the liquidation of the National Paper Products Co., Washington Pulp & Paper Corporation, and Western Waxed Paper Co. of California, the earnings or .profits of each accumulated after February 28, 1913, were not less than its adjusted net income for the fiscal year ended April 30, 1937.

The parties have agreed that the Crown Zellerbach Corporation is liable as transferee of each of the five transferor petitioners for any unpaid Federal income tax, with interest, due for the fiscal year.

The first question is whether, in the determination of their undistributed net incomes for the fiscal year, the five transferor petitioners are entitled to dividends paid credits under section 27, Revenue Act of 1936, in connection with their distributions in complete liquidation.

The same question was decided favorably to the taxpayer in Credit Alliance Corporation, 42 B. T. A. 1020. Here each of the five corporations claimed a dividends paid credit to the full extent of its adjusted net income for the fiscal year. In' the case of the National Paper Products Co., Washington Pulp & Paper Corporation, and Western Waxed Paper Co. of California, they had the requisite accumulated earnings and profits under the statute. The earnings or profits of the Avalon Paper Co. accumulated after February 28, 1913, at the time of its distribution in liquidation, were $5,615.34. Its adjusted net income for the fiscal year ended April 30, 1937, was $5,709.11. The dividends paid credit of that corporation must, under section 27 (f), be limited to $5,615.34.

The Sanitary Products Corporation at the time of its liquidation had no earnings or profits accumulated after February 28, 1913, but a deficit of $177,346.40, and is, therefore, under section 27 (f), entitled to no credit.

2. For the calendar year 1936, the State of Washington imposed $34,106.16 real and personal property taxes on the National Paper Products Co. and $57,722.78 on the Washington Pulp & Paper Corporation, and the State of Oregon imposed $1,725.89 such taxes on the Western Waxed Paper Co. of California. The State of California imposed on the Western Waxed Paper Co. of California $6,449.56 real and personal property taxes for the fiscal year ended June 30, 1936, and $7,453.05 such taxes for the fiscal year ended June 30, 1937.

All three corporations kept their books of account on the basis of a fiscal year ending April 30 and used an accrual method of accounting.

The taxes imposed by Oregon and Washington became a lien on the first of March of the calendar year in respect of which they were imposed. The taxes imposed by California became a lien on) the first Monday of March preceding the fiscal year in respect of which they were imposed.

The question is, which is the proper year for the deduction of real and personal property taxes paid by these three petitioners. They contend that they are entitled to deduct the taxes in accordance with their own accounting; which means that in) their fiscal year ended April 30, 1937, they may deduct so much (one-third) of the Oregon and Washington taxes of the calendar year 1937 as is proportionately attributable to the first four months of that year, since those four months fall in petitioners’ fiscal year, and so much (ten-twelfths) of the California taxes of the state fiscal year ended July 1,1937, as is proportionately attributable to the first ten months of that year, since those ten months fall in petitioners’ fiscal year. The respondent takes the lien date of each state — March 1, 1937, in Oregon and Washington, and the first Monday in March 1937, ini California — and, treating the taxes as accrued on that date, requires the deduction in petitioners’ fiscal year ended April 30, 1937, of the year’s taxes which accrued on those lien dates in the respective states.

Petitioners regularly accrued their property taxes on a monthly basis. Such a method of accrual was upheld in Godfrey L. Cabot, Inc., 40 B. T. A. 366, but that case is distinguishable, since under the law of West Virginia there was no lien. Carondelet Building Co. v. Fontenot, 111 Fed. (2d) 267, reversing 28 Fed. Supp. 656, involves taxes of Louisiana, where there was no lien. S. E. and M. E. Bernheimer Co., 41 B. T. A. 249 (on review, C. C. A., 2d Cir.), involved New York taxes and the lien date was held not controlling. See also Lowell H. Chamberlain, 43 B. T. A. 259, involving Iowa real property taxes paid by a devisee on the cash basis.

Taxes in Oregon have been held to accrue on March 1, when the lien attaches, Grown Willamette Paper Co., 14 B. T. A. 133; Gatens Investment Co., 36 B. T. A. 309; T. H. Banfield, 42 B. T. A. 769, and taxes in California have been held to accrue on the first Monday in March, when the lien attaches, California Sanitary Co., Ltd., 32 B. T. A. 122. Following those decisions, the petitioners’ contention as to Oregon and California must be rejected.

In Grand Hotel Co., 21 B. T. A. 890, it was held, following Crown Willamette Paper Co., supra, that property taxes in Washington accrue on March 1, when the lien attaches. In Theodore Plestcheeff, 35 B. T. A. 508; affd., 100 Fed. (2d) 62, it was held that taxpayers on a cash basis, acquiring property by devise on April 5, 1931, were entitled on their income tax returns for 1932 to deduct taxes paid on the property in 1932. The Board relied on Washington cases holding that there could be no valid or effective lien for a tax until there is a valid tax in some specific amount. The Board stated:

In our opinion, the taxes assessed on real estate for the year 1931 did not, under the statutes of Washington as construed by its courts, attach and become a perfected lien on said realty prior to October 1931, in which month the tax levy is made in that state.

Grand Hotel Co., supra, and Crown Willamette Paper Co., supra, were distinguished on the ground that in them it was not necessary to determine when, in the year of assessment and levy, the taxes became a lien. In Arcade Department Store, Inc., 18 B. T. A. 1172, taxes paid in 1919 and 1920 were held to have accrued in 1918 and 1919, and the case was distinguished, on the ground that it involved, as did the Grown Willamette case, personal property taxes.

The Circuit Court of Appeals for the Ninth Circuit, in affirming the Board’s decision in the Plestcheeff case, emphasized the Washington statutory provision that as between grantor and grantee the lien should not attach until the following February. The court held that the terms grantor and grantee might properly be applied to a devisor and devisee. One judge dissented on the ground that the principal Washington case relied upon by the Board involved property which was in private ownership on March 1, but in public ownership when the taxes were levied. He also disagreed with the conclusion that the term grant includes a devise.

In Carl K. Lifson, 36 B. T. A. 593; affd., 98 Fed. (2d) 508; certiorari denied, 305 U. S. 662, involving a Minnesota statute similar to that of Washington, the Board distinguished the Plesteheeff case on the ground that the Washington statutes had been construed by Washington courts to different effect from the Minnesota law, since under Washington law the lien became perfect at a date later than the one corresponding to May 1 in the Minnesota law.

In T. H. Banfield, supra, involving Oregon law, the Plesteheeff case was distinguished on the ground that the Washington statute provided that “as between a grantor and a grantee such lien shall not attach until the first Monday in Feburary of the succeeding year,” whereas the Oregon statute set no date for the tax lien in the case of a grantor and grantee. The Board in the Banfield case said nothing of the October levy date which had been emphasized in the Plesteheeff case, but relied on Gatens Investment Co., supra, and Carl K. Lifson, supra. The Banfield opinion indicates that in Washington the February date is the important one in a grantor-grantee situation, and this includes the case of a devise.

The instant case does not involve a grantor-grantee situation and must be distinguished from the Plesteheeff case on that ground. Grand Hotel Co., supra, and Crown Willamette Paper Co., supras, holding that in Washington, for Federal income tax purposes, the accrual date is March 1, when the lien attaches, must be followed.

The respondent’s disallowance of deductions for taxes paid to all three states is sustained.

Decision will he entered umder Rule 50.


text:
    Howard Paper Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100557.
    Promulgated February 11, 1941.

      Samuel M. Sax, Esq., for the petitioner.

      Timothy G. Histon, Esq., for the respondent.
   opinion.

Black:

Petitioner, in resisting the Commissioner’s determination that the $3,750 in question was income to it in 1936 the year in which the stockholders canceled the indebtedness, relies upon the decision of the Second Circuit in Auto Strop Safety Razor Co. v. Commissioner, 74 Fed. (2d) 226, and the recent case of In re Triple Z Products, Inc., Bankrupt, decided by the United States District Court for the Southern District of New York on September 9, 1940.

The respondent relies upon Helvering v. Jane Holding Corporation, 109 Fed. (2d) 933; certiorari denied, 310 U. S. 653, and Beacon Auto Stores, Inc., 42 B. T. A. 703, which followed Helvering v. Jane Holding Corporation. The decision of the court in the Jane Holding Corporation case reversed the decision of the Board reported in 38 B. T. A. 960. An examination of the Board’s opinion in that case shows that we relied for our holding upon our decision in AutoStrop Safety Razor Co., 28 B. T. A. 621; affd., 74 Fed. (2d) 226.

The petitioner, in insisting that our decision in AutoStrop Safety Razor Co., supra, was sound, and that the decision of the Second Circuit in affirming us was sound and should be followed in the instant case, points out that the court in the Jane Holding Corporation case, supra, distinguished the facts in that case from those present in the AutoStrop Safety Razor Co. case on the ground that in the latter the forgiveness of indebtedness by the stockholder was gratuitous, whereas in the Jane Holding Corporation case it was for a consideration and was not gratuitous.

In Beacon Auto Stores, Inc., supra, we discussed briefly the holding of the court in the Jane Holding Corporation case and in that connection we said:

* * * Furthermore, the court in the recent case of Helvering v. Jane Holding Corporation * * regarded as of primary importance the fact that, as here, the corporation had received the benefit of a deduction to which, in the light of latér events, it was not entitled.

That was the point which the Board emphasized as of controlling importance. It is true, as petitioner points out, there are some differences in the facts of Beacon Auto Stores, Inc., supra, from those which are present in the instant case, but we do not regard those differences as of sufficient importance to justify us in making a distinction between the two cases. In the Beacon Auto Stores, Inc., case the taxpayer was on the accrual basis and accrued on its books as liabilities certain salaries to three of its officers and stockholders and took these accruals as deductions on its income tax return, but not all of the salaries were paid in the year when accrued. In the following year the unpaid portions of the salaries were canceled by debits to the individuals and credits to the surplus of the corporation. This same procedure took place in three different years. On these facts we held as to the two taxable years which were before us that the sums canceled in the taxable years which had been deducted in the prior years for income tax purposes were income to the corporation in the years when canceled.

We think we must so hold as to the $3,150 canceled by the officers' and stockholders in the instant case. Petitioner, on an accrual basis, took $3,750 as a deduction in 1935 and received the benefit of that deduction for an amount which it has never been called upon to pay and which in 1936 it became certain it would never be called upon to pay. It seems only reasonable that this should be taxable income to petitioner in 1936, the year in which it was determined that petitioner would never have to pay that which it had previously accrued and deducted. On this issue we hold in favor of the Commissioner.

Decision will be entered for respondent.


author: Steenhagen :

text:
    E. P. Madigan, Petitioner, v. Commissioner of Internal Revenue, Respondent. Charlotte Madigan, Petitioner,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 101308, 101309.
    Promulgated February 11, 1941.

      Clyde C. Sherwood, Esq., and Albert H. Damidson, Esq., for the petitioners.

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

       Charlotte Madigan is the wife of E. P. Madigan in a community property state, and for convenience the term petitioner will be used in this report to mean only E. P. Madigan.

   OPINION.

Steenhagen :

The Commissioner’s determination is based on the view that the receipt and deposit by the petitioner of the entire Fordham check in 1936 was a receipt by him not only of the 1934 and 1935 commissions, as he admits, but also of the 1936 commission. The evidence is clear, however, that the amount in excess of the 1934 and 1935 commissions, while actually taken into petitioner’s possession, was received by him not for his own use or subject to his dominion and control but subject to the express instructions of the president of the college when he endorsed and delivered the check, that petitioner “was to hold the balance in trust until the accounting could be completed for the 1936 season.” These were not empty words, for there were circumstances which gave them sound reason. No one could tell until after the 1936 accounting whether petitioner would be entitled to any commission for the season, and certainly not what the amount, if any, would be. Prior to the accounting determination of the amount, petitioner had and claimed no right to use or enjoy any of the check except the amount of his 1934 and 1935 commissions which had been fixed and determined. This much he returned for tax in his 1936 income. The Commissioner was in error in adding any additional amount of the Fordham check. Sara R. Preston, 35 B. T. A. 312; cf. North American Oil Consolidated v. Burnet, 286 U. S. 417; Doyle v. Commissioner, 110 Fed. (2d) 157; certiorari denied, 311 U. S. 658; Commissioner v. Alamitos Land Co., 112 Fed. (2d) 648.

Decision will he entered for the petitioner.


author: Oppek:

text:
    Estate of Millie Langley Wright, Deceased, Jeannette Wright Torney, Administratrix, With the Will Annexed, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99579.
    Promulgated February 11, 1941.

      Edward J. Torney, Esq., Darwin Bryan, Esq., Richard E. Doyle, Jr., Esq., and Myrtüe Cerf, C. P. A., for the petitioner.

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

Oppek:

Our findings of fact dispose of the first issue by the ultimate determination that the property in question was transferred in contemplation of death. We have arrived at that result because of our belief that petitioner has failed to produce convincing evidence that decedent’s compelling motive was associated with life rather than death. The transfers were made shortly after decedent’s will was executed and disposed of her property similarly and to the natural objects of her bounty. Rengsdorff v. McLaughlin (Dist. Ct., N. Dist. Calif., S. D.), 21 Fed. (2d) 177; Travelers Bank & Trust Co., Executor, 29 B. T. A. 88. Decedent was at the time suffering from the physical infirmity which later carried her off. She had been confined to the hospital for some time, earlier in the same year in which the gifts were made, and had hardly dismissed the attendant employed following that illness before the death of her brother resulted in what is described as a “mental upset.” Even if her physician did not warn her, and there is no evidence that he did not, it is hardly probable that the sequence of events could have failed to impress upon her the seriousness of her condition. See Travelers Bank & Trust Co., Executor, supra; Rebecca Luscomb et al., Executors, 9 B. T. A. 1070; affd. (C. C. A., 2d Cir.), 30 Fed. (2d) 818. She was again striken a few months after the execution of the will and the transfer of the property and death occurred about six months later.

The only suggestion of a motive not describable as contemplation of death is testimony to the effect that decedent expressed a desire to relieve the financial distress of one of her two daughters. But this condition is shown to have been of long standing and no effort is made to account for the bestowal of so large and unusual a generosity at that particular time. Moreover, although only the pecuniary straits of one of the daughters is shown, the gift was made equally to both. And, while decedent was evidently in the habit of making comparatively small contributions to both of her daughters from time to time, this one was many times larger than anything that had been given to the daughter in question on any previous occasion. It was quite the opposite, therefore, of a mere continuation of decedent’s previous practice. Wendell W. Fish et al., Executors, 27 B. T. A. 1002; affd. (App. D. C.), 75 Fed. (2d) 769. Taking the evidence as a whole, we remain unconvinced that the transfers were not made in contemplation of death. The respondent must, therefore, be sustained.

The second issue involves the valuation for estate tax purposes of preferred and common shares of McKesson & Robbins, Inc. Although the provision of the statute which we are here required to apply uses the single word “value”, it is apparently agreed by both parties that its meaning is “fair market value.” Ithaca Trust Co. v. United States, 279 U. S. 151. And such is the purport of respondent’s regulations. Regulations 80, art. 10 (a).

The stock in question was traded on the New York Stock Exchange and there is no dispute that respondent’s valuation is proper if, under the circumstances, such quotations are the appropriate measure of fair market value. Petitioner, however, advances the apparently novel contention that these prices were the result of misrepresentations and concealments of which purchasers and sellers on the Exchange were at that time unaware. For this reason we are urged to find a value for the stock entirely independent of the figures at which it was actually bought and sold during the critical period.

If we were seeking to fix a fair value, rather than a market value which is fair, such considerations would not be without appeal. Cf. Boyd v. Wyly, 124 U. S. 98, 106; Buck v. Commissioner (C. C. A., 9th Cir.), 83 Fed. (2d) 786. That this stock, however, had a market value is conceded, and it must be further recognized that the very shares owned by this estate could have been sold at the quoted prices. Indeed, the only market prices shown are those employed by respondent. Petitioner insists that the market value could not have been fair if based upon general misconception as to the underlying facts. But this goes beyond what we conceive to be the significance of the aspect of fairness as it modifies the existence of market value. It may be that a showing of general market prices is not a demonstration of the fair market value of a particular block of stock where it can be shown that general conditions or those affecting particularly the sales which have actually transpired do not “fairly” reflect the circumstances surrounding the specific property to be valued. Such a thought is expressed in Heiner v. Crosby (C. C. A., 3d Cir.), 24 Fed. (2d) 191, a case cited by petitioner, as follows:

* * * Sales are always evidence of a market price, but the statute requires that, in “ascertaining the gain derived from the sale,” there must be not simply a “market price,” but a “fair market price”. * * * Sales made under peculiar and unusual circumstances, such as sales of small lots, forced sales, and sales in a restricted market, may neither signify a fair market price or value * * *.

Of this the familiar “blockage” rule is another example. Estate of Leonard B. McKitterick, 42 B. T. A. 130.

But here there was nothing “peculiar” or “unusual” about either the actual transactions on the Exchange or the situation in which the estate found itself. Its securities could have been sold, and would have been had they been offered, under identical circumstances and at a comparable price with all of the stock which actually was traded in. What petitioner’s position would require us to hold, therefore, is that a universally accepted market price, thei result of numerous transactions in which the general public freely participated, should be disregarded because more than two years later concealed facts were disclosed which, had they been known, might have created a different market from that which the facts show actually existed. This does not prove that the market did not exist or that the sales did not take place. Nor does it show that they did not fairly evaluate petitioner’s stock at the time. We think it unnecessary to proceed so far in applying the phrase “fair market value.” And the administrative and judicial difficulties which would be involved! in the adoption of any different rule convince us that petitioner’s position is untenable. If it were always necessary to discover whether every material fact was known to the public! before stock exchange prices could be relied upon in fixing fair market value, and indeed to determine what factors are and what are not material in the operations of the whole body of the trading public, it would, we think, be impossible for administrative officers or taxpayers to make an intelligent approximation of their own situation. Nothing in the position of petitioner or others similarly situated requires any such result.

If, in fact, our determination were to be affected by equitable considerations, we think the same result would be required. Suppose, for example, that petitioner had actually sold the securities within a reasonable time after her decedent’s death. Assuming a very much lower “true” value for the stock at the date of death, would petitioner be liable for the staggering capital gain which would then result from the difference between the actual market and the valuation adopted for estate tax purposes? And would this be so, even though, as would then be the fact, the actual market was unchanged between the two dates ? We think it could never have been intended that an article which could fairly and honestly be sold on an open and public market at a price reasonably constant for a long period of time should be given a different value by reason of any such circumstances as those shown here to exist. See Estate of Leonard B. McKitterick, supra. Respondent’s determination is approved.

On the final issue it is shown that petitioner has become obligated for attorneys’ fees and other expenses in connection with the settlement of the estate. There is no countervailing proof on behalf of respondent. Petitioner is sustained on this point. Otis Weld Richardson et al., Executors, 1 B. T. A. 1196.

Decision will he entered under Rule 50.

       The cause of death, and length of last illness, as given on the estate tas return, was “Arterio-scelerosis and myo-carditis Approximately 18 months.”

       Sec. 302, Revenue Act of 1926.

       The only case relied on as a precedent is one construing’ a California statute, In re Spitly’s Estate, 124 Cal. App. 642; 13 Pac. (2d) 385.

       Sea Hughes, Federal Death Taxes, p. 270 :
      ii* * * If a farmer died leaving valuable farm lands, and oil, which was unknown to exist on it at the time of his death, should be subsequently discovered, that could not be used to increase the known value at the time of his death. Similarly, if at the time of a taxpayer’s death, the quoted market prices were at a depression low, it would be as logical for the Treasury to claim that they were not fair prices as it would be for a taxpayer to claim that inflated quotations were not fair prices.”


author: Akundell :

text:
    Wilgard Realty Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101534.
    Promulgated February 12, 1941.

      David A. Fraser, Esq., for tbe petitioner.

      J. P. Wenchel, Esq., for tbe respondent.
   OPINION.

Akundell :

The issue for decision is whether on the sale of the property described above on February 18, 1937, the petitioner realized gain in the amount of $15,075.02, as determined by respondent, or sustained a capital loss, as claimed' by petitioner, in the sum of $51,-450.04. The difference in these positions springs’ from their opposed vieiws on the method by which the basis of the property in petitioner’s hands is to be determined. The respondent contends that the transfer of the property by Chamberlin on August 6, 1932, in return for more than 80 percent of petitioner’s stock was an exchange under section 112 (b) (5) of the Eevenue Act of 1932, the property in such case retaining the transferor’s basis in the transferee’s hands, as directed by section 113 (a) (8) of that act. The parties; agree that the transferor’s basis, the fair market value on March 1, 1913, was $65,041.67 after adjustment for depreciation. Respondent computes capital gain by first adding to this base improvements costing $11,398.59 and deducting from that total depreciation allowed and allowable from March 1, 1913, to February 17, 1937, reaching a basis on the later date of $34,999.94, adjusted for depreciation. From the sale price of $19,000 and the $35,000 mortgage assumption he deducts selling expense of $3,925.04 to determine a net realization on the property of $50,074.96. The difference, $15,075.02, he contends is the measure of petitioner’s gain-.

Petitioner’s argument is that the transfer of the property on August 6, 1932, in return for petitioner’s stock was not an exchange within section 112 (b) (5) of the Revenue Act of 1932, since the transaction, viewed as a whole, resulted in the control of the corporation greatly disproportionate to the contributions of the holders of interests in that company. Alternatively, it argues that its assumption on August 6, 1932, of the $35,000 mortgage indebtedness as part consideration for the transfer of the property was equivalent to the payment of money, thus taking the transaction out of section 112 (b) (5), which applies only to the transfer of property “solely in! exchange for stock or securities.” Section 213 (f) (1) of the Revenue Act of 1939, which brings transfers of this sort within section 112 (b) (5), it contends is unconstitutional because of its great retroactive application. On either argument petitioner contends that thei basis of the property in its hands is its fair market value on August 6, 1932, which the parties agree to have been $110,000. Petitioner computes loss by deducting from this basis $8,475 for depreciation to reach an adjusted basis of $101,525. From a sales price of $19,000 cash plus the $35,000 mortgage debt assumed by the purchaser, petitioner deducts selling costs of $3,925.04 to reach a net return on the property of $50,074.96. The difference, $51,450.04, petitioner argues to be the measure of its loss.

The issue thus framed requires the determination of whether the transfer of August 6, 1932, falls outside the orbit of section 112 (b) (5.) of the Revenue Act of 1932 either (1) because the transaction viewed as a whole did not vest control of the transferee corporation in the transferor and created interests disproportionate to the contributions to the company, or (2) because a portion of the consideration passing in the exchange, the assumption of the mortgage, was the equivalent of money and nullifies the applicability of section 112 (b) (5), which is restricted to exchanges where only stock passes from the transferee corporation. This latter issue involves the question of the constitutionality of section 213 (f) (1) and (2) of the Revenue Act of 1939, which by specific provision brings exchanges of property for stock and the assumption of indebtedness within section 112 (b) (5). In the event petitioner is sustained in either argument it is agreed that on the transfer of August 6, 1932, the property acquired a new basis in petitioner’s hands equal to the fair market value of the property on that date. The petitioner’s arguments will be considered in the order in which they are enumerated.

(1) The solution of the first contention lies in the determination of whether the transfer of petitioner’s stock by Chamberlin to his brother and children was a part of the transaction by which the petitioner acquired the property in question in exchange for its stock. In certain instances the exchange contemplated by section 112 (b) (5) has been held to include portions of the transaction which took place after the bare exchange between the parties when they constituted an integral part of a preconceived plan of corporate exchange or adjustment, Von's Investment Co. Ltd. v. Commissioner, 92 Fed. (2d) 861; 111 Fed. (2d) 440; Diescher v. Commissioner, 110 Fed. (2d) 90; Portland Oil Co. v. Commissioner, 109 Fed. (2d) 479. Thus in Bassick v. Commissioner, 85 Fed. (2d) 8; certiorari denied, 299 U. S. 592; Heberlein Patent Corporation v. United States, 105 Fed. (2d) 965; and Columbia Oil & Gas Co., 41 B. T. A. 38, where the transferors of property, who received in return from the transferee more than 80 percent of its stock, were obligated by a contract, entered into previously for the development and promotion of the properties transferred, to turn over a substantial portion of the stock received to third parties, the courts, viewing the whole of these dealings as “component steps in a single transaction”, have declined to treat them separately. In consequence such a series of transactions ultimately vesting control of the transferee corporation in parties who transferred no property to that company have been held outside section 112 (b) (5). See also Hazeltine Corporation v. Commissioner, 89 Fed. (2d) 513.

In each of the cases cited above control of the transferee corporation through ownership of 80 percent of its stock, at some point in the dealings involved, rested in the transferor of the property, who was nevertheless obligated by contract to set over a portion of the stock to outsiders. But this control was held insufficient to satisfy the statute under the principles made plain in Commissioner v. Schumacher Wall Board Corporation, 93 Fed. (2d) 19, 81:

The statute is obviously intended to reach those cases where unfettered, substantial control of a corporation survives a reorganization, regardless of the subsequent disposition of that control. We do not believe it was intended to apply to a situation where there is a binding contract simultaneously performed, by which the stock merely passes through intermediate holders to those to whom the contract compels immediate delivery.

Petitioner contends that the situation here is akin to these cases and that the result should be the same. The conveyance of petitioner’s stock to Chamberlin’s brother and children, it is argued, was a component part of the exchange and the complete transaction therefore vested control in persons other than the transferor, defeating the applicability of section 112 (b) (6). This argument misses the significance of the cases cited. Here there was no plan of exchange or readjustment of which the conveyance to Chamberlin’s children was a part. Here the control vested in Chamberlin after the bare exchange was “unfettered”, “substantial”, and free of any obligation resting on the transferee to share that control with others. His immediate conveyance of the stock as a gift was a transaction in no way that has been shown to us connected with the exchange between petitioner and Chamberlin.

In these circumstances there is no basis for holding that the exchange and the conveyance cohere as steps in a plan of corporate exchange or adjustment, and the applicability of the cases relied on by the petitioner must be denied. The exchange here in question therefore must be viewed as completed with the issuance of 197 shares of petitioner’s stock to the transferor of the property. Control was thus vested in him through an ownership substantially commensurate with his contribution. The transaction therefore clearly falls within section 112 (b) (5) unless objections raised by petitioner under the second head of his argument are sustained.

(2) Petitioner’s second argument is that section 213 (f) of the Revenue Act of 1939 is unconstitutional because of its retroactive operation which results in denying to it a loss deduction sustained on a transaction completed in 1937. The effect of the 1939 statute, says the petitioner, is to reach back more than two years and tax a transaction on which at the time it was consummated there was not only no income but a loss.

The petitioner is in a rather poor position to complain against the effect of the section 213 of the Revenue Act of 1939. When the petitioner acquired the property in 1932 neither it nor its controlling stockholder regarded the assumption of indebtedness as giving rise to gain or loss or as affecting the basis. By the enactment of section 213 in the 1939 Act Congress has, in effect, merely validated the method used by the parties to the 1932 exchange in reporting the effect of that transaction, and now requires that they accept the consequences of the method of reporting they then chose.

The purpose of section 213 is simply to effect what had always been the intent back of the exchange and reorganization provisions in the several revenue statutes, beginning with the Act of 1918. That intent has always been not to exempt a gain from tax, but to effect “a postponement of tax until the gain is realized by a pure sale or by such an exchange as amounts to a pure sale.” David B. Gann, 23 B. T. A. 999; affd., 61 Fed. (2d) 201. The original exchange was regarded by the parties thereto as one postponing the taxation of gain to either party until actual realization through sale. Perhaps they were wrong in so regarding it, but there was reasonable ground for that view. It was not until 1936, in Brons Hotels, Inc., 34 B. T. A. 376, that this Board held that the assumption of indebtedness must be treated as money. We thereby overruled earlier cases holding the other way. Even after United States v. Hendler, 303 U. S. 564, there was doubt as to the effect of assumption alone. In Bickford's, Inc. v. Commissioner, 98 Fed. (2d) 568, the Circuit Court of Appeals for the Second Circuit took the view that assumption alone, without a showing of payment of the assumed debt, was not equivalent to payment of property or money so as to increase basis. The effect of the 1939 Act is merely to bring order out of this chaos and to establish a uniformly applicable basis which would result in taxation of gains to all alike at the time of actual realization. We see no difference in principle between the situation here and one wherein Congress taxes all gains realized in one year, even though a part of such gain was attributable to a period when such gain was not taxable. See MacLaughlin v. Alliance Insurance Co. of Philadelphia, 286 U. S. 244. In that case the Court said:

* * * Congress, Laving constitutional power to tax the gain, and having established a policy of taxing it, see Milliken v. United States, 283 U. S. 15, 22, 23; 51 S. Ct. 324; 75 L. Ed. 809, may choose the moment of its realization and the amount realized, for the incidence and the measurement of the tax. Its failure to imitóse a tax upon the increase in value in the earlier years, assuming without deciding that it had the power, cannot preclude it from taxing the gain in the year when realized, any more than in any other case, where the tax imposed is upon realized, as distinguished from accrued, gain.

In this case, the effect of section 213 (f) is merely to make certain, by fixing a definite basis, the taxation of gains in the year of actual realization. In this view, the retroactivity of which the petitioner complains is not fatal to the legislation.

The final argument which is made, that the act was not intended to apply to sales completed before 1939, is without merit. Plainly on its face the statute is made to apply to all exchanges completed during the period 1923-1939, with minor exceptions, and there is no basis for reading into it the limitation claimed by petitioner.

Decision will be entered for the respondent.

       SEC. 213. ASSUMPTION OF INDEBTEDNESS.
      ***** * *
      (f) Assumption of Liability Not Recognized Under Prior Acts.—
      (1) Where upon an exchange occurring in a taxable year ending after December 31, 1923, and beginning before January 1, 1939, the taxpayer received as part of the consideration property which would be permitted by subsection (b) (4) or (5) of section 112 of the Revenue Act of 1938, or the corresponding provisions of the Revenue Act of 1924 or subsequent revenue Acts, to be received without the recognition of gain if it were the sole consideration, and as part of the consideration another party to the exchange assumed a liability of the taxpayer or acquired from the taxpayer property subject to a liability, such assumption or acquisition shall not be considered as “other property or money” received by the taxpayer within the meaning of subsection (c), (d), or (e) of section 112 of the Revenue Act of 1924 or subsequent revenue Acts, and shall not prevent the exchange from being within the provisions of subsection (b) (4) or (5) of section, 112 of the Revenue Act of 1938, or the corresponding provisions of the Revenue Act of 1924 or subsequent revenue Acts; except that if, in the determination of the tax liability of such taxpayer for the taxable year in which the exchange occurred, by a decision of the Board of Tax Appeals or of a court which became final before the ninetieth day after the date of enactment of the Revenue Act of 1939, or by a closing agreement, gain was recognized to such taxpaper by reason of such assumption or acquisition of property, then for the purposes of section 112 of the Revenue Act of 1938, and corresponding provisions of the Revenue Act of 1924 or subsequent revenue Acts, such assumption or acquisition (in the amount of the liability considered in computing the gain) shall be considered as money received by the taxpayer upon the exchange.
      (2) Paragraph (1) shall be effective with respect to the Revenue Act of 1924 and subsequent revenue Acts as of the date of enactment of each such Act.


author: Murdock :

text:
    Harden F. Taylor and Ella W. Taylor, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99262.
    Promulgated February 12, 1941.

      Oharles Kurz, O. P A., for the petitioners.

      Allen T. Akin, Esq., for the respondent.
   OPINION.

Murdock :

The Commissioner determined a deficiency of $3,785.47 in the income tax of these petitioners for the calendar year 1936. The Board adopts the stipulation of the parties as a part of its findings of fact.

The first issue is whether the exchange by Taylor in 1936 of 600 shares of Pressed Steel Car Co. 7 percent preferred stock for shares of stock and rights in the Pressed Steel Car Co., resulted in a recognized gain.

The Pressed Steel Car Co., hereinafter called the old company, was placed in the hands of receivers in 1933 after default on its 5 percent debenture bonds due in that year. A plan of reorganization was filed with the court on October 14, 1935, and was amended on December 23,1935. The court approved the plan on July 27,1936.

The stock of the old company consisted of 136,015 shares of 7 percent preferred stock and 411,204 shares of common stock. Its indebtedness included, inter alia, $3,000,000 face amount of 10-year 5 percent convertible debenture bonds due January 1, 1933, and accrued interest of $525,000, and $387,500 face amount of 15-year 5 percent convertible debenture bonds due January 1, 1943, and accrued interest of $58,125.

The plan contemplated that a new company, the “Pressed Steel Car Company, Inc.,” hereinafter called the new company, would be organized and the stock and debentures of the old company mentioned in the preceding paragraph would be exchanged by the holders thereof for stock and debentures of the new company. The new company was organized and the properties of the old company were transferred to it by the trustees of the old company on July 29, 1936. The new company at the same time transferred to the trustees $4,274,256.83 principal amount of its 15-year 5 percent debentures, 81,602.04 shares of its convertible 5 percent second preferred stock, and 268,706.9 shares of its common stock. The new company also agreed to assume some remaining obligations and liabilities of the old company.

The plan of reorganization contemplated that at least $1,750,000, but not more than $2,150,000, of new money would be raised by the sale of the first preferred stock of the new company at $5 per share.. A new interest, the General American Transportation Corporation, had agreed to purchase 350,000 shares of that stock at $5 per share and was to receive 30,000 shares of common stock of the new company as a bonus.

The old stockholders were given the right to subscribe for the new first preferred stock. Their rights to subscribe had to be exercised prior to February 24,1936, under options which were stated as follows:

(c) Any stockholder may subscribe under Option I or Option II or both. Under Option I, 430,000 shares of First Preferred Stock will be available for subscription, but unless at least 350,000 shares are subscribed for no subscriptions under Option I will be accepted, and deposits in respect of such subscriptions will be refunded, but without interest. Under Option II, not less than 350,000 shares of First Preferred Stock are to be purchased by General American and its associates and 80,000 shares will be available for subscription by stockholders. Subscriptions under Option II will not be accepted if subscriptions under Option I are accepted nor will subscriptions under Option I be accepted if subscriptions under Option II are accepted.

The court, in approving the plan on July 27,1936, stated that only 113,365.8 shares had been subscribed for under option I and, therefore, it was not effective, so that General American was required to purchase the 350,000 shares of the new preferred stock. It further found that the subscriptions for the new preferred stock by the old stockholders would be effective under option II for 80,000 shares.

The securities received by the trustees of the old company (except-. 30,000 shares of common stock) were delivered by them on October 14,, 1936, for distribution to the security holders of the old company pursuant to the plan. The 30,000 shares of common stock of the new company were at the same time delivered to General American. All: of the second preferred stock was issued to the holders of the old 7' percent preferred stock. The 238,706.9 shares of common stock were, issued to the holders of the old 7 percent preferred stock and to the-holders of the old common stock, and the $4,274,256.83 principal amount of bonds of the new company were distributed to the holders. of the bonds of the old company and to some general creditors of the-old company. The old securities were taken in exchange for the new.

Certificates for 350,000 shares of the new first preferred were issued on October 14,1936, to General American, which in turn made available somewhat in excess of 80,000 of those shares to stockholders of the. old company who had subscribed for those shares.

The petitioner owned 600 shares of the old 7 percent preferred stock.. He exchanged those shares pursuant to the plan on October 19, 1936, for 360 shares of the new 5 percent second preferred, 600 shares of' the new common, and 600 rights to purchase the new first preferred at $5 per share. He thereby realized a gain in an amount which is not. in dispute. The Commissioner has held that his gain must be recognized for income tax purposes.

All of the three classes of stock of the new company were voting stock.

The decision depends upon whether or not there was a reorganization within the definitions given in section 112 (g) (1) of the Revenue Act of 1934, as amended by section 213 (g) of the Revenue Act of 1939. The petitioner exchanged his stock in the old company solely for stock and securities in the new company pursuant to the plan and thus, if there was a reorganization, section 112 (b) (3) applies and the petitioner’s gain is not recognized.

The change from the old company to the new company was for a business purpose and not to avoid taxes. Gregory v. Helvering, 293 U. S. 465. There was complete continuity of interests. All of the old stockholders and even all of the old creditors had an interest in the new corporation. Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U. S. 462; Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937. The change was made necessary because the old bonds were past due and in default. The change was largely one of form. Thus, the transition was within the spirit and general purpose of the nonrecognition provisions. Of course, the transaction must come also within the letter of the definitions before any one of the nonrecognition provisions applies.

The petitioner contends that the transition from the old company to the new company was within two of the definitions given, one in the first part of (B) and the other in (O). They are as follows:

(B) the acquisition by one corporation, in exchange solely for all or part of its voting stock, of substantially all the properties of another corporation, but in determining whether the exchange is solely for voting stock the assumption by the acquiring corporation of a liability of the other, or the fact that property acquired is subject to a liability, shall be disregarded; * * * (0) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its shareholders or both are in control of the corporation to which the assets are transferred.

Control here means 80 percent of the stock.

The first contention of the petitioner is that the new company acquired all of the properties of the old company solely in exchange for its stock within the meaning of (B). The real question is whether the issuance of its bonds by the new company in exchange for the bonds of the old company may be regarded as the assumption of the liability of the old company within the meaning of (B) rather than an exchange of those bonds for the properties of the old company. The agreement expressly provided that the new company would assume some of the debts of the old company, but did not use the word “assume” in connection with the two outstanding bond issues. The proceeding under 77B of the Bankruptcy Act was necessitated by default on tbe past due bonds of the old company. A mere statement by the new company that it assumed the obligation of the old company on its bonds would have been insufficient because they would have remained in default. Thus, a new bond issue had to be substituted for the old issue. That was one of the chief purposes and one of the chief accomplishments of the plan. The new company in effect did assume the bonded indebtedness of the old company, since it put itself in the place of the old company and agreed to pay the amount of principal and interest owed by the old company to the very same creditors, the holders of the old bonds. Thus, unless there is some magic in the use of the word “assume”, the present case comes within the statute.

The 1939 amendment made a change in the language of (B) relating to this kind of reorganization. The purpose of the change was explained as follows in the report of the Ways and Means Committee, 76th Congress, 1st session, Kept. No. 855, p. 19:

* * * The recent Supreme Court case of United States v. Hendler (303 U. S. 564 (1938)) has been broadly interpreted to require that, if a taxpayer’s liabilities are assumed by another party in what is otherwise a tax-free reorganization, gain is recognized to the extent of .the assumption. In tyiñeal transactions changing the form or entity of a business it is not customary to liquidate the liabilities of the business and such liabilities are almost invariably assumed by the corporation which continues the business. Your Committee therefore believes that such a broad interpretation as is indicated above will largely nullify the provisions of existing law which postpone the recognition of gain in such cases. To enable bona fide transactions of this type to be carried on without the recognition of gain, the committee has recommended Section 213 of the bill.

Tbe present transaction would seem to come witbin tbe intent of Congress. Tbe new company acquired substantially all of the properties of tbe old company solely in exchange for its stock and at tbe same time substituted its bonds for tbe liability of tbe old company on tbe old bonds.

We have not overlooked tbe argument of the respondent that a substantial part of tbe assets of tbe old company were not acquired. He refers to a provision of tbe plan whereby tbe trustees retained $750,000 of cash in their bands to be applied pursuant to tbe order of tbe court to tbe payment of principal and interest on trustees’ certificates, taxes, other obligations of tbe trustees, costs of administration, and tbe expenses of reorganization. Any amount not required from the fund for those purposes was to be paid over to tbe new company in a final accounting. Tbe properties of tbe old company, as indicated by' tbe Commissioner’s own valuation of the stock of tbe new company, were worth more than ten times as much as tbe amount retained. This fact, and tbe purposes for which tbe amount was retained by the trustees, leaves no doubt that the new company acquired substantially all of the properties of the old company within the meaning of section 112 (g) (1) (B). We need not pass upon the alternative contention made by the petitioner that 112 (g) (1) (0) applies. However, it seems obvious to us that the control in the old stockholders required by (C) was lacking at the conclusion of this plan. The petitioner’s argument that there was a time when the old stockholders were entitled to the new common, the new second preferred, and to rights to purchase all of the new first preferred, is not supported by the facts.

The next issue is whether the petitioner’s loss from the disposition of a piece of real estate was an ordinary or a capital loss. The amount of the loss is not in dispute. The petitioner purchased the property in 1932, paying $10,500 in cash and executing his notes and a mortgage for the balance of $22,000. He later paid $2,000 on the mortgage. A foreclosure suit was threatened when he defaulted on the interest due in 1935. He thereafter in 1936 reconveyed the property to the mortgagees. There was no actual consideration in cash paid to Taylor in connection with the reconveyance.1 But the mortgagees surrendered the bonds and mortgage and canceled the remaining unpaid indebtedness. Thus, the petitioner gained something in the deal and did not merely abandon his interest in the land. The transaction was a “sale or exchange” and the loss was a capital loss. Helvering v. Hammel, 311 U. S. 504; Commissioner v. Electro-Chemical Engraving Co., 110 Fed. (2d) 614; affd., 311 U. S. 513; Rogers v. Commissioner, 103 Fed. (2d) 790; certiorari denied, 308 U. S. 580; rehearing denied, 308 U. S. 635; Pender v. Commissioner, 110 Fed. (2d) 477.

The final issue is raised by the Commissioner. It is whether gains were realized in 1936 or in 1931 from sales made on the last two days of December 1936. Each resulted in a profit. The securities were not delivered until January 4 and 5, the settlement dates, and thereafter Taylor received the proceeds of the sales. He was on a cash basis. The gains were not income to him in 1936. He did not realize his gains until he was paid the selling price in 1937. This is unlike cases wherein it was held that losses were sustained at the time a binding agreement to sell was entered into, e. g., Dee Furey Mott, 35 B. T. A. 195; C. R. Dashiell, 36 B. T. A. 313; affd., 100 Fed. (2d) 625. A loss is sustained by reason of the agreement, but income is received only when the cash comes to hand or is constructively received in some way. Section 42.

Reviewed by the Board.

Decision will be entered wnder Rule 50.
      This is a finding of fact made from testimony.


author: MtjRdock :

text:
    Snowden A. Fahnestock, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92388.
    Promulgated February 12, 1941.

      T. F. Davies Hames, Esq., for the petitioner.

      L. A. Spalding, Jr., Esq., for the respondent.
   OPINION.

MtjRdock :

The Commissioner relies entirely upon section 22 (a) of the Revenue Act of 1934 and cites Helvering v. Clifford, 309 U. S. 331, and Morton Stein, 41 B. T. A. 994. There is some uncertainty as to the extent of the applicability of section 22 (a) under the decision in the Clifford case. White v. Higgins, 116 Fed. (2d) 312; Commissioner v. Berolzheimer, 116 Fed. (2d) 628. Cf. Commissioner v. Branch, 114 Fed. (2d) 985; Helvering v. Achelis, 112 Fed. (2d) 929. However, the Court in the Clifford case said that Congress intended to exercise its taxing powers to the limit in section 22 (a). The Circuit Court of Appeals for the Second Circuit in the Berolzheimer case interprets the Clifford case as holding “that a grantor of a short term trust, under which he is to be the trustee and to have such broad powers over the disposal of the principal as to approximate those of a owner and under which the income is to remain in his family and the reversion in himself, will be subjected to income taxes as owner.” The terms of the particular trust and all the circumstances attendant upon its creation and operation must be analyzed in order to determine whether the grantor has retained such substantial control over the trust property that he may be treated for tax purposes as the owner of the corpus taxable with the income under section 22 (a).

The present trust is similar to the trust in the Clifford case in many respects. The petitioner has pointed out some of the differences between the two trusts in an effort to distinguish this case from the Clifford case. The maximum limit of the present trust was ten years whereas that of the Clifford trust was five years. This does not distinguish the Berolzheimer case, however, where the maximum limit of the trust was also ten years. Furthermore, the trusts in the Higgins case and in the Stein case were for life at least. The present trust might have lasted beyond the life of the grantor, but the same was true in the Higgins trusts. The petitioner, as trustee, was required to pay over all of the net income of the trust to his wife. Berolzheimer was likewise required to pay all of the income to his wife. The powers which the petitioner had as trustee in regard to voting and managing the trust property are substantially the same as those retained by the grantor in the Clifford case. He argues that he had no power to reinvest the trust property except in investments approved by law for trusts. He cites in support of this contention a number of New York cases, which seem to be inapplicable in view of the fact that the laws of Rhode Island govern. Furthermore, he not only retained the trust property invested in bank stock, which was probably not a legal investment for trust property, but he invested the $8,000 realized from the liquidation of the First Security Co. in bank stock and gold mining stock. We are unable to distinguish this case from the Clifford case in the light of the Berolzheimer and Riggins decisions. The trust in the Branch case was for the life of the wife of the grantor and might continue longer and the corpus might never revest in the grantor.

Reviewed by the Board.

Decision will be entered for the respondent.


author: Van Fossan:

text:
    The Winterbottom Book Cloth Company, Limited, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97416.
    Promulgated February 12, 1941.

      William A. Graham, Esq., for the petitioner.

      W. Frank Gibbs, Esq., for the respondent.
   OPINION.

Van Fossan:

The purpose of the revenue acts is to raise money for the support of government. By section 231 (a) of the Revenue Act of 1936 Congress intended to provide that amounts received by every foreign corporation, not engaged in trade or business within the United States and not having an office or place of business therein, from sources within the United States as interest and dividends and from various other categories should be taxed for the year 1936 at the rates therein provided. Section 1 of the act provides that the provisions of Title I (which covers income tax and includes section 231 (a)) “shall apply only to taxable years beginning after December 31, 1935.” Clearly the act applies to any taxable year beginning thereafter. Petitioner was on the calendar year basis. Thus the act in terms covered any designated income received by it in 1936. Albeit, the act was not approved until June 22, 1936, there is nothing unusual in the fact that the provisions of the act and its taxing scope dated back to the beginning of the year 1936. It seems clear to us that petitioner corporation was explicitly within the intendment of section 231 (a).

Petitioner places chief reliance on the argument, developed at length, that under decided cases the United States is without jurisdiction to impose a tax in personam and under the facts is impotent to impose a tax in rem. These principles, in their application to the present case, are not as formidable to us as apparently they are to petitioner. The statute purports to tax this foreign corporation. The Commissioner of Internal Revenue has determined that it owes additional taxes by virtue of section 231 of the Revenue Act of 1936. There is no question that the petitioner actually received the income in controversy from sources in the United States. The prayer of the taxpayer’s petition is as follows: “Wherefore the petitioner prays that this Board may hear this proceeding and determine that the alleged deficiency in the amount of Fifteen Thousand Forty Five Dollars ($15,045) is not legally collectible and that the legal contentions of the taxpayer be sustained.”

The Board of Tax Appeals is an independent agency in the executive branch of the Government. Although it has judicial powers, it also has certain specific duties and functions. In Capital Building & Loan Association, 12 B. T. A. 349, it was stated:

Section 907 (b) of tbe Revenue Act of 1924, as amended by section 1000 of the Revenue Act of 1926, mates it the duty of the Board to make a decision in each case before it. It contemplates a decision on the merits except where the proceeding is dismissed, in which ease the Board is required to enter a decision that the deficiency is the amount determined by the Commissioner. * * * When, however, we read the provisions of the Act as a whole, it seems clear to us that either party has the right to insist that the Board shall enter an order redetermining the deficiency, either on the merits or on default.

The Board is not concerned with the difficulties that may beset the Commissioner in collecting a deficiency in tax after redetermination. Our primary function is to determine the correct deficiency, if any, leaving to the Commissioner the enforcement or collection thereof. Here petitioner filed a return and Commissioner, on audit, determined a deficiency. Petitioner filed a petition invoking our jurisdiction. The Commissioner duly answered. The proceeding came on for hearing and was submitted on stipulated facts, admitting receipt of the dividends in question. In this posture of the proceeding it seems clear to us that our first duty is to redetermine the deficiency. This we do by holding that the Eevenue Act of 1936 applied to any income received after December 31, 1935, and that, accordingly, it applied to the two dividends received by petitioner.

Petitioner also stresses the argument that under the facts here present, i. e., the payment of the dividends prior to July 2, 1936, (that being the tenth day after the enactment of the Eevenue Act of 1936) and the transmission of the dividends abroad, the United States is impotent under section 144 to enforce collection. Wherefore, the tenor of its prayer above quoted. In our opinion, petitioner’s counsel overlooks certain basic considerations. Section 144 is not a tax-levying- section but a tax-collecting section. The provisions for withholding income at the source were inserted to facilitate and implement collection. Section 231 levies a tax on foreign corporations receiving income from sources within the United States in 1936 and section 144 provides a convenient and practical means of collecting the same. It is not exclusive of any other means of collection available to the Commissioner.

The reason behind section 144 (b) is obvious. It was intended by this section to release the withholding agent from liability for failing to withhold at the new rate income due a foreign corporation during the period prior to 10 days after the enactment of the act. The injustice of a contrary provision requires neither demonstration nor example. But this provision for the protection of the withholding agent was not a limitation of the provisions of section 231, which levied the tax on the foreign corporation itself. Petitioner was liable for the tax on all amounts received from the specified sources during the entire year, irrespective of the release of the withholding agent.

Respondent’s regulation (art. 235-2, Regulations 94), that the foreign corporation “shall pay the balance of the tax shown to be due” is fair and reasonably interprets the Congressional mind.

Reviewed by the Board.

Decisionwill be entered for the respondent.

Leech concurs only in the result.

       SEC. 231, TAX ON FOREIGN CORPORATIONS.
      (a) Nonresident Corporations. — There shall be levied, collected, and paid for each taxable year, in lieu of the tax imposed by sections 13 and 14, upon the amount received by every foreign corporation not engaged in trade or business within the United States and not having an office or place of business therein, from sources within the United States as interest (except interest on deposits with persons carrying on the banking business), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income, a tax of 15 per centum of such amount, except that in the case of dividends the rate shall be 10 per centum, and except that in the case of corporations organized under the laws of a contiguous country such rate of 10 per centum with respect to dividends shall be reduced to such rate (not less than 5 per centum) as may be provided by treaty with such country.

         SEC. 144. PAYMENT OE CORPORATION INCOME TAX AT SOURCE.
      (a) General Rule. — In the case of foreign corporations subject to taxation under this title not engaged in trade or. business within the United States and not having any office or place of business therein, there shall be deducted and withheld at the source in the same manner and upon the same items of income as is provided in section 143 a tax equal to Iff per centum thereof, except that in the case of dividends the rate shall be 10 per centum, and except that in the ease of corporations organized under the laws of a contiguous country such rate of 10 per centum with respect to dividends chalí be reduced to such rate (not less than 5 per centum) as may be provided by treaty with such country; and such tax shall be returned and paid in the same manner and subject to the same conditions as provided in that section; Provided, That in the case of interest described in subsection (a) of that section (relating to tax-free covenant bonds) the deduction and withholding shall be at the rate specified in such subsection.
      (b) Withholding Before Enactment of Act. — Notwithstanding the provisions of subsection (a), the deduction and withholding for any period prior to the tenth day after the date of the enactment of this Act shall be upon the items of income and at the rates prescribed in section 144 of the Revenue Act of 1934, as amended, in lieu of the items and rates prescribed in such subsection.