author: Black :

text:
    Mildred Kienbusch and City Bank Farmers Trust Company, as Executors of the Last Will and Testament and Codich Thereto, of Mabel L. Pressinger, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 80550.
    Promulgated October 28, 1936.

      Roswell O. Fish, Esq., for the petitioner.

      Frank T. Horner, Esq., for the respondent.
   OPINION.

Black :

The respondent has determined a deficiency in estate tax against the estate of Mabel L. Pressinger, who died on August 3,1933. Petitioners, who are the executors of decedent’s last will and testament, assign one error, which is stated in their petition as follows:

In determining the taxable net estate of the decedent for tax purposes, the Commissioner erroneously included two-thirds of the corpus of a $50,000 irrevocable trust fund set up by the decedent on January 30, 1928, which said two-thirds interest amounts to the sum of $33,333.33, by reason of the fact that in accordance with the terms of the trust instrument setting up said fund, the decedent retained a life income from two-thirds of the principal thereof, which the Commissioner asserts thereby makes two-thirds of the principal of said trust fund taxable under the provisions of section 302 (c) of the Revenue Act of 1928 as amended.

This proceeding has been submitted on the pleadings and a brief stipulation of facts, to which is attached a copy of the trust deed of January 30, 1928. These are a part of the record and no separate findings of fact are necessary.

A brief statement of the facts will suffice for the purpose of a discussion of the one issue which we are called upon to decide.

The decedent on January 30,1928, as grantor, entered into an agreement with John D. Beals, one of her attorneys, as trustee, whereunder she paid, assigned, transferred, and set over unto the trustee the sum of $50,000 to invest and reinvest and to receive the income therefrom, and after paying all expenses in caring for said trust, to pay two-thirds of the net income thereof to the said grantor during the term of her natural life, and to pay the remaining one-third of the income thereof to Mildred Kienbusch, the daughter of the grantor, for and during the natural life of the grantor. If the said Mildred Kien-busch died during the lifetime of the grantor, then the entire net income was thereafter to be paid to the grantor during her lifetime.

Upon the death of the grantor, the trustee was to pay, transfer, and set over the principal of the trust outright and free from any trust to the daughter, Mildred Kienbusch, if she should be then living, and if she should not be living at the time of the death of the grantor, then the principal of the trust was to be distributed as the daughter by her last will and testament should appoint, any part thereof not so appointed to be distributed among the descendants of the daughter, then living, per stirpes and not per capita, or, failing such descendants, then as if the daughter had died the owner thereof and intestate, in accordance with the then laws of the State of New York. The deed of trust was by its terms irrevocable, the grantor reserving to herself no power whatsoever with respect to the revocation, alteration, modification, or change of the provisions of the trust instrument, and she retained no reversionary rights whatsoever therein as to the corpus. The trust was not executed in contemplation of death or to take effect in possession or enjoyment at or after decedent’s death. Mildred Kienbusch survived the grantor and is one of the petitioners herein.

The trustee, John D. Beals, died on August 11, 1928, and Roswell O. Fish was appointed as substitute trustee and was duly acting as such at the time of decedent’s death on August 3,1933.

Respondent in his brief states the issue thus:

Where the decedent, subsequent to the effective date of the Revenue Act of 1916, transferred property in trust to pay two-thirds of the income to herself for life, and the remaining one-third to her daughter for the trustor’s life, with remainders over, is the value of two-thirds of the corpus of the trust subject to be included in the value of the decedent’s gross estate, for the purpose of the tax, pursuant to the provisions of section 302 (c) of the Revenue Act of 1926, as a transfer intended to take effect in possession or enjoyment at or after the decedent’s death?

Respondent in his brief does not contend that section 302 (c) of the Revenue Act of 1926, as amended by section 803 (a) of the Revenue Act of 1932, is applicable. As has been stated, the trust deed was executed January 30,1928, and was by its terms irrevocable. The Revenue Act of 1932, which contains section 803 (a) amending section 302 (c) of the Revenue Act of 1926, became effective June 6, 1932. Decedent died August 3, 1933. Therefore it will be seen that the Revenue Act of 1932 was in effect at the time of decedent’s death. However, Treasury Decision 4314, C. B. X-l, p. 450, was promulgated May 22,1931. It reads in part as follows:

Section 302 (c) of the Revenue Act of 1926 was amended by a joint resolution (Pub. 131), approved 10:30 p. m., Washington, D. C., time, March 3, 1931, to read as follows (the portion added by the amendment is in italic) :
(c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, including a transfer under wMch the transferor has retained, for Ms Ufe or any period not ending before Ms death (1) the possession or enjoyment of, or the income from, the property or (⅞) the right to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money’s worth.
In view of tlie decisions of the Supreme Court of the United States in Nichols v. Coolidge (274 U. S., 531 (T. D. 4072, C. B. VI-2, 351)), May v. Heiner (281 U. S., 238 (Ct. D. 186, C. B. IX-1, 382)), Coolidge v. Long (282 U. S., 582), Burnel v. Northern Trust Co. (51 S. Ct., 342), Edgar M. Morsman, jr., v. Burnet (51 S. Ct., 343) and Gyrus S. McGonnick v. Burnet (51 St. Ct., 343), the portion added by the amendment to section 302 (c) of the Revenue Act of 1926, as set forth above in italic, will, notwithstanding the provisions of section 302 (h) of that Act, be applied prospectively only, i. e., to such transfers coming within the amendment as were made after 10:30 p. m., Washington, D. C., time, March 3, 1931.

Section 302 (c) of the Revenue Act of 1926 was further amended by section 803 (a) of the Revenue Act of 1932. The amendment carried in the 1932 Act preserved the essential features of the amendment of March 3, 1931, referred to in the above Treasury decision. Of course if the above quoted Treasury decision is an incorrect interpretation of the law, it should not be followed by the Board and the courts. However we think it is a correct interpretation of the I.aw.

We do not think that section 302 (c) of the Revenue Act of 1926, as amended by section 803 (a) of the Revenue Act of 1932, should be applied to irrevocable trusts created prior to the effective date of the Kevenue Act of 1932. Smith v. United States, - Fed. Supp. - (Dist. Ct. Mass., Aug. 3, 1936); Charles H. W. Foster et al., Executors, 26 B. T. A. 708; petition for review dismissed, C. C. A., 1st Cir., March 20, 1933. Cf. Bingham v. United States, 296 U. S. 211; Industrial Trust Co. v. United States, 296 U. S. 220; Helvering v. City Bank Farmers Trust Co., 296 U. S. 85; Helvering v. Helmholz, 296 U. S. 93; Nichols v. Coolidge, 274 U. S. 531.

So we think respondent is correct in making no contention that the amendment to section 302 (c) of the Kevenue Act of 1926 contained in section 803 (a) of the Kevenue Act of 1932 has any effect in the present proceeding.

Kespondent does contend however that two-thirds of the value of the property conveyed by the trust deed of January 30, 1928, should be included as a part of decedent’s gross estate under the provisions of. section 302 (c) of the Kevenue Act of 1926, which reads in part as follows:

Seo. 302. (c) To the extent of any interest therein of which the decedent has at' any time nuide a transfer, by trust or otherwise in contemplation of or intended to take effect in possession or enjoyment at or after his death, except in case of a bona fide sale for' an adequate and full consideration in money or money’s worth * * *.

Kespondent does not contend that the trust deed involved in the instant case was executed in contemplation of death. He does contend that, by reason of the fact that the grantor of the trust reserved to herself for life two-thirds of the income from the property conveyed in trust, the conveyance of the remainder interest in two-thirds of the property was intended to take effect in possession or enjoyment at or after decedent’s death and therefore the value of this two-thirds of the property should be included as a part of decedent’s gross estate. Kespondent’s counsel supports this contention by an able brief which we have carefully considered.

We think however that, as to irrevocable trusts created prior to the effective dates of the amendments to section 302 (c) of the Kev-enue Act of 1926, above referred to, the Supreme Court of the United States has settled the question adversely to the contention made by respondent. May v. Heiner, 281 U. S. 238; McCormick v. Burnet, 283 U. S. 784; Reinecke v. Northern Trust Co., 278 U. S. 339; Morsman v. Burnet, 283 U. S. 783; Helvering v. St. Louis Trust Co., 296 U. S. 39; Becker v. St. Louis Trust Co., 296 U. S. 48. Cf. Elizabeth B. Wallace, Executrix, 27 B. T. A. 902; aff'd., 71 Fed. (2d) 1002; certiorari denied, 293 U. S. 600; Flora M. Bonney et al., Executrices, 29 B. T. A. 45; aff'd., 75 Fed. (2d) 1008; Robert Taft, Executor, 33 B. T. A. 671 (on appeal C. C. A., 6th Cir.).

On the only issue presented to us for decision we hold in favor of petitioners.

Decision will be entered wnder Bule 60.


source: Caselaw Access Project

author: Haeron:

license: Public Domain

text:
    Frederick H. Wood, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 77694.
    Promulgated October 28, 1936.

      Joseph G. White, Esq., for tbe petitioner.

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

Haeron:

Tbis proceeding is for tbe redetermination of a deficiency in income tax for 1931 in the sum of $707.17, not all of which is in dispute. Petitioner assigns as error tbe action of the respondent in adding to the petitioner’s net income, for the taxable year the amount of $1,370.44, which amount is alleged by the petitioner to constitute a deductible loss resulting from the sale of stocks and bonds which formed the corpus of a certain trust, hereinafter described.

The case was submitted upon a stipulation of facts entered into by the parties, which may be summarized as follows:

Petitioner is an individual, a resident of the city of New York.

The petitioner, with others, entered into a trust agreement on December 12, 1929, whereby each subscriber to the agreement agreed to deposit money or securities taken at their market value at the date of deposit, aggregating the amounts set forth opposite their respective names. A copy of this agreement was attached to the stipulation of facts as an exhibit and is incorporated herein by reference. This trust agreement will be referred to hereinafter as the Deane trust. The object of this agreement was to provide an annual income of about $3,000 for life for the widow of Joseph G. Deane, a friend of the subscribers to the trust. The agreement provided that the trustee, the Equitable Trust Co., should hold in trust, invest, and keep invested during the life of the beneficiary the money or securities deposited with the trustee pursuant to the agreement; collect and receive income and profits therefrom; and pay to the beneficiary a net income, after deducting expenses, in quarterly installments each year for life. It was further provided that upon the death of the beneficiary “the said securities then-in the estate-shall., be .sold by The Equitable Trust Company-at public or. private, sale in, such manner as the said Trust Company shall cleem advisable, and the proceeds thereof paid to the undersigned- or their estates in proportion to the respective amounts of their subscriptions.” . ,

On January 16, 1930, the petitioner paid to the trustee the sum of .$4,000 in cash, pursuant to the aboye trust agreement. The other signers of the agreement each subscribed and paid.the sum,of $4,00Q, with the exception of-two who paid the sum of $2,000. All of The sums so subscribed and paid, aggregating $52,000, were invested by the trustee in stocks and bonds.

Op-October 30, 1931, the beneficiary, of the trust died. Between November 6 and November 11, 1931, the trustee sold the,stocks and bonds which constituted, the corpus of the trust, in accordance with the provisions of the trust agreement. The proceeds of the sale were distributed, on or before December 10, 1931, to the subscribers proportionally. The petitioner received the sum of $2,629.56 as his proportionate share of the proceeds. This amount was $1,370.44 less than the amount he had paid into the trust fund. In his income tax return for the year 1931 the petitioner sought to deduct $1,370.44 as a loss from the sale of stocks. Respondent disallowed this deduction and in the notice of deficiencjr stated as follows:

The stock loss claimed on your return has been; reduced by $1,370.44, this amount being a loss sustained by the Deane Trust. Since the Trust was irrevocable, the loss is deductible by the trustee.

The respondent also contends that the, petitioner could not deduct this loss because it was not incurred in a transaction entered into for profit.

The petitioner takes the position that the trust terminated upon the death of the beneficiary; that thereafter the trustee held the stocks and bonds for the account of the subscribers to the trust fund, including the petitioner, and that the sale thereof with resulting losses was for their account; that the petitioner is entitled to deduct as a loss the difference between the amount of his subscription and the amount he received as his proportionate part of the proceeds from their sale.

The question is whether the loss involved herein constitutes an allowable deduction to the petitioner under .the provisions of the applicable statute.. . - ■ -

A taxpayer seeking a deduction must be able to point to an applicable statute and show that- he comes within its terms. (New Colonial Ice Co., v. Helvering, 292 U. S. 453.) In the instant proceeding the petitioner can sustain his claim for a deduction only by showing that the loss in question was a business loss or that it was a loss incurred in a transaction entered into by the petitioner for profit. (Sec. 23(e), Revenue Act of 1928.)

Clearly, the loss sustained was not incurred in trade or business. The question is narrowed to consideration of whether it was incurred in a transaction entered into for profit. The petitioner argues that the purchase by the trustee of income-producing securities, under the provisions of the Deane trust, was a transaction entered into for profit by the trustee and that the petitioner at all times had a proportionate remainder interest in the securities in the trust estate which would entitle him to deduct the loss in question. Petitioner points out that if the securities had been disposed of at a profit so that his proportionate share of the proceeds would have exceeded his subscription, he would have had to include such profit in his gross income. This is true, but this argument does not assist the petitioner because taxpayers are required by section 23(a) of the statute to report “gains or profits and income derived from any source whatever”, but there is no corresponding statutory provision for allowing as a deduction any loss sustained by an individual taxpayer. (Italics ours.)

The position of the petitioner is untenable. The petitioner only subscribed $4,000 to a trust fund. This constituted one-thirteenth of the total fund. A valid, irrevocable trust was created with power in the trustee to purchase securities with the entire fund so as to yield an annual income of $3,000 to a named beneficiary. Upon the death of the beneficiary, the trustee was required to liquidate the corpus and return the proceeds to the original subscribers. There are no facts in the instant proceeding which would allow us to conclude that transactions entered into by the trustee were in fact transactions entered into by the petitioner. The trustee was not an agent of the petitioner. The purchases and sales of securities by the trustee were solely in its own discretion. The subscribers to the trust fund reserved no powers with respect to directing, limiting, approving, or disapproving the purchases or sales. The petitioner did not purchase stocks and bonds, nor were any securities purchased for his account. He had no interest in the trust other than an interest in money to be received on liquidation of the trust corpus. He put money in and he was to receive money back, but, since the total subscribed funds were to be used for the purchase of securities, he agreed to take back his proportionate share of the proceeds of the sale on liquidation. Each subscriber to the fund stood to gain or lose on the sum voluntarily deposited in the trust fund to aid the widow of a friend. It is difficult to read into these facts any transaction entered into for profit. This was nothing more than a transaction entered into for charity.

Petitioner relies on two decisions of this Board to sustain his contention: James W. Arrott, Jr., 23 B. T. A. 478, and Francis Francis, Guardian, 15 B. T. A. 1332.

Examination of the Arrott case shows that the decision there was based upon the -finding-that James W. Arrott, Sr., decedent, did not under the laws of Pennsylvania create a legal trust in respect of his residuary estate devised to his sons, but that the executors and trustees were merely agents of the devisees. Under these circumstances the sons were held to be the legal owners of the real estate and, as such, were entitled to the deductions claimed on account of losses on the sale of capital assets. We do not agree that the decision or the reasoning in the Arrott case is applicable to the instant proceeding. The Deane trust was in fact a trust, the trustee had legal title to securities in the trust, and the sale of securities by the trustee was explicitly directed by the terms of the trust. This was no mere power of sale exercised by a “quondam trustee” for the benefit of remainder-men. The argument of petitioner addressed to this theory is not applicable to the facts of the instant case. There was no provision in the trust agreement giving to each of the subscribers a proportionate interest in the securities held in the trust in ratio to his subscription. The terms are plain that each subscriber had an interest only in his proportionate share of the proceeds of the sale thereof.

In the Francis case the petitioners were remaindermen under a declaration of trust of personalty, which trust was created in 1892 for the life of the daughter of the grantor, with the remainder to her issue or to the survivors of the issue. This Board decided that upon the death of the life tenant the remaindermen became at once entitled to sell the securities in the trust fund and distribute the proceeds despite the nominal power of the .trustee. The issue related to the proper basis to be used in determining gain or loss to the petitioners, and it was held that the basis was the value of the property sold when legally acquired by the petitioners upon the death of the life tenant.

A very different situation is here presented, as above set out, and we conclude that the decision in the Francis case has no application.

Under the circumstances surrounding the creation of the Deane trust and upon consideration of the terms of the trust, it is held that the loss involved herein was not a loss incurred in a transaction entered into for profit within the provisions of section 23 (e) of the Revenue Act of 1928 and that the respondent did not err in disallowing the claimed deduction.

Judgment will be entered for the respondent.


author: Sterniiagen: Leech, TvjsoN,

text:
    Edward Barron Estate Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82356.
    Promulgated October 30, 1936.

      Charles 8. Wheeler, Jr., for the petitioner.

      A. H. Fast, Esq., and Paul E. Waring, Esq., for the respondent.
   OPINION.

Sterniiagen:

On September 4, 1935, the Commissioner sent the petitioner, a California corporation, 'a notice of deficiency of $43,-279.67 in its 1932 income tax. At 5:10 p. m. of the ninetieth day thereafter, the last day of the period within which a petition could be filed with the Board, a telegram comprising the skeleton of a petition was addressed by the petitioner’s president in San Francisco to the Chairman of the Board in Washington, D. C. The address included the direction to “phone and deliver” to the Chairman at his home. This telegram was received in Washington too late for delivery at the Board’s headquarters during business hours. At 9 o’clock in the evening the telegram was telephoned by the telegraph company to the Chairman, and at his direction the telegram was delivered at the office of the Board the next day. At the Chairman’s direction, it was marked filed under the above docket number as on 'the ninetieth day.

The respondent moves to dismiss the proceeding on the ground that the petition was not filed within the time provided by statute and the rules. The petitioner urges that the communication of a telegraphic petition by telephone to a Member of the Board within the 90rday period and its delivery the next day is a statutory filing. While conceding, as it must, that a telephone communication of a petition is of itself not sufficient, and that a sending is not a filing it argues for an exception as to telegrams. But the telegraph employee is its agent, and his telephone communication of the petition has no more force than that of his principal, the petitioner, would have. ■ ' ’

The Board has always been liberally disposed toward the recognition of petitions irregularly filed, compare Continental Petroleum Co. v. United States, - Fed. Supp. - (April 14, 1936); F. O. Statler, 27 B. T. A. 342; Krueger Broughton Lumber Co., 18 B. T. A. 1270; Peruna Co., 11 B. T. A. 1180; but the petitioner’s contention here requires' a stretch beyond any conceivable notion of a filing. Beginning with Sam Satovsky, 1 B. T. A. 22, it has been''consistently held that a petition is-not filed until it is officially deposited with the Board. This means at its office. Lewis-Hall Iron Works v. Blair, 23 Fed. (2d) 972; certiorari denied, 277 U. S. 592. Anything else would be impossible .to administer. Here, for example, it is thought important that the Chairman testified that when he heard the' message “he fully understood the entire contents of the telegraphic petition, and received it in his official capacity as Chairman of the'Board.” Such a concept of filing must be-.rejected. ' By nothing less than a physical deposit of a: petition with a 'proper person in the office of the Board at Washington will it be recognized as properly filed under the rules.. See Poyner v. Commissioner, 81 Fed. (2d) 521.

Reviewed by the Board.'

The proceeding will he dismissed.

Leech,

concurring: This Board has decided that a telegram can be effective as a petition. ’ F. O. Statler, 27 B. T. A. 342. I think ■that case is'wrong. .Upon'that premise; alone, I concur in the result reached in the majority opinion.

TvjsoN,

concurring: In view of former decisions of this Board to the effect that telegrams of the nature- of the one involved here are entitled to be filed as a petition- with, this 'Board, the sole question presented here is whether or no.t the telephonic communication. to the Chairman of the Board of the contents of the telegram involved constituted a proper filing with this Board of .such telegram. , I agree with the result reached in the -majority opinion in so far only as it is to the effect that the telephonic communication did not constitute a proper filing of the telegram with the Board.

. I disagree with that conclusion rea'ched in the opinion that a petition, which is here the - telegram -in question, must be filed within the time limit by a physical deposit of same with a proper person in the office of the Board in Washington in order to be recognized as having been properly filed. Louis Hall Iron Works v. Blair, 23 Fed. (2d) 972, and Poyner v. Commissioner, 81 Fed. (2d) 521, are cited to sustain this conclusion. Neither does so in my opinion.

In Louis Hall Iron Works v. Blair, supra, and in Poyner v. Commissioner, supra, it is said: “A paper is'said to be filed when it is delivered to the proper officer and by him received to be kept on file.” I agree that in order for the petition to be properly filed it must be filed with the proper person by its physical deposit with him within the statutory time limit. I am, however, of the opinion that such deposit would be timely and sufficient to comply with the requirement of the statute without regard to whether such deposit was made in or out of the office of the Board in Washington.

Turner,

dissenting: Lewis-Hall Iron Works v. Blair, 23 Fed. (2d) 972, is cited in the majority opinion to sustain the conclusion that a petition must be filed with a proper person at the offices of the Board in Washington, D. C. In my opinion that case does not sustain the conclusion reached, but is authority only for a conclusion that the mere deposit of a petition at the offices of the Board after office hours is not the filing of a petition within the meaning of the statute where it is not actually received by an official or an employee of the Board until after the expiration of the statutory period. In other words, it is not the taking of the petition to a particular place that is determinative, but the delivery of the petition to a proper person. No one has suggested that the Chairman of the Board is not a proper person to receive a petition.

Furthermore, on the facts in this case, the effect of the majority ruling is a reduction of the period allowed by statuté for filing petitions. The statutory period begins at midnight of the day on which the notice of deficiency is mailed and ends at midnight of the ninetieth day. United Telephone Co., 1 B. T. A. 450. Under the ruling here the statutory period is reduced from midnight to the end of office hours on the ninetieth day unless some member or employee of the Board happens to be at the office of the Board or makes a special trip there to receive petitions after office hours. We have no power to legislate by decision or through the promulgation of rules.

In F. O. Stabler, 27 B. T. A. 342, we held that the delivery and receipt of a telegram was a proper filing of a petition within the meaning of the statute, and, in my opinion, it logically follows that if we accept telegrams as petitions, we must also accept the usual and customary methods of sending and delivering telegrams. Otherwise F. O. Stabler, supra, should be overruled. The petitioner took every precaution to see that the telegram, which was directed to the Chairman of the Board, was delivered prior to midnight on the date it was sent and the telegraph company undertook to comply with all of the instructions of the petitioner. The telegram was received by the Chairman by one of the usual and customary methods of delivering telegrams. The actual delivery of the paper on which it was written was postponed by direction of the Chairman himself, and it seems apparent on these facts that the telegraph company was thereafter holding the paper for the Chairman and not for the petitioner.

Black, Morris, McMahon, and Harron agree with this dissent.


author: Steenhagen :

text:
    Blanch A. Bagnall, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 76521.
    Promulgated November 3, 1936.

      Harry W. Elliott, Esq., for tbe petitioner.

      Francis L. Van Haaften, Esq., for tbe respondent.
   OPINION.

Steenhagen :

Tbe Commissioner determined a deficiency of $1,957.90 in petitioner’s income tax for 1930. The petitioner assails tbe increase of her reported individual income from a trust, which increase was the result of the disallowance of a deduction taken by the trust of the amount of inheritance and estate taxes paid by the trust. The facts are stipulated, and only a question of law is involved.

Petitioner’s husband, before his death in 1929, made a trust in contemplation of death, the corpus of which was included in the estate upon which Federal estate tax and California inheritance tax were imposed. The trustee of the trust was a different person from the administrator of the estate, and each filed a separate income tax return for 1930. Between them, they apportioned the estate and inheritance taxes upon the ratio of their portions of the property included in the taxable estate, and each paid his share. The petitioner was the sole beneficiary of the trust, and all its income was distributable to her. The trustee on the fiduciary return took a deduction of the amount ($26,547.31) paid by it as its share of estate and inheritance taxes, and thus it reduced its net income. On its return, it showed all of such net income to be distributed to petitioner as beneficiary, and it is stipulated that on her individual return she included this net amount in her taxable income. On the separate fiduciary return of the administrator of the estate, the deduction for taxes was limited to the amount actually paid by him, that is, the proportionate share aforesaid. Even with this limited deduction, its net income was reduced to nil, and hence it is plain to be seen that if it had deducted the entire tax imposed upon the estate it would have reduced its income tax no further. This adventitious circumstance perhaps accounts for the method of the three returns and the present controversy, for if the decedent had not made his trust, the entire income would have come to the administrator, returnable in his gross income, and the deduction of the entire estate and inheritance tax would have operated upon the amount of his income tax.

Section 23 (c) of the Revenue Act of 1928 provides for the deduction of taxes, and includes the following:

* * * For the purpose of this subsection, estate, inheritance, legacy, and succession taxes accrue on the due date thereof, except as otherwise provided by the law of the jurisdiction imposing such taxes, and shall be allowed as a deduction only to the estate.

Words could not be plainer to confine the use of the deduction to the decedent’s estate. In cases where the beneficiary of the decedent’s estate sought the deduction, its disallowance has been sustained under this statute. Gillette v. Commissioner, 76 Fed. (2d) 6; Martz v. Commissioner, 82 Fed. (2d) 110. This the petitioner admits, and disclaims any right to the deduction qua deduction on her individual return. She claims, however, that she may have an equivalent benefit by including in her gross only the remainder of the trust income after its deduction of the tax. Thus the argument turns upon whether the trustee of the inter vivos trust was entitled to take the deduction.

Clearly the taxpayers may not by their own choice circumvent the express restriction of the statute. If petitioner had been the direct recipient of her husband’s gift in anticipation of death, she ^would have no right to deduct the estate tax on her income tax return, even though she paid it all. Gillette v. Commissioner, supra; Martz v. Commissioner, supra. The trustee has no greater right, even if by the trust instrument he was required to bear the tax or given the right to bear it. While it is true that the trust corpus is used to measure the estate tax, the fiduciary of one may not be confused with the fiduciary of the other by calling than- both the “estate.” In this they are wholly unlike the single fiduciary of an estate and a testamentary trust arising from the same will. Cf. Commissioner v. Beebe, 67 Fed. (2d) 662; Commissioner v. Pennsylvania Co. for Insurances, etc., 83 Fed. (2d) 545. The latter is indeed a fiduciary under the decedent’s will of part of the property within his estate. But the fiduciary of an inter vivos trust is not administering testamentary property. The fact that the Federal revenue act treats the property, because the trust was made in contemplation of death, as if it were part of the decedent’s estate, is not sufficient to give a new or special meaning to the word estate as a taxpayer. As used in section 23 (c), the word estate is a word of personification, meaning a taxpayer. See section 701 (a) (1). It may include several persons who carry out the decedent’s will, Commissioner v. Beebe, supra, but it is not at the same time to be used as meaning the property being administered.

The evidence does not disclose whether in fact the petitioner actually received from the trustee only the amount shown as net income upon the fiduciary’s return, and therefore even if equitable consideration were germane it would be impossible to say that she is being taxed upon more than she enjoyed. There is also no occasion to consider Avhether the trust fiduciary was by law required to-bear any part of the estate tax.

Judgment will be entered for the respondent.


author: Leech:

text:
    Macdonald Engineering Company (Illinois) Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 61148, 62319.
    Promulgated November 3, 1936.

      George Ciarle, Esq., for the petitioner.

      G. W. Brooks, Esq., for the respondent.
   opinion.

Leech:

The only question left for our determination is whether the debt of the Western Milling Co. to Macdonald Engineering Co. of California is deductible in computing the present deficiency.

The applicable Eevenue Act of 1928, in section 23 (j), allows the deduction of “Debts ascertained to be worthless and charged off within the taxable year * *

It may well be that the disputed deduction would -not be allowable here if petitioner had filed a separate return for 1929, on the ground that the debt was worthless when petitioner received it in that year. Eckert v. Commissioner, 283 U. S. 140.

But that is not the situation here.

Petitioner, the parent company, filed a consolidated return of income for 1929, which included the taxable income of a subsidiary, Macdonald Engineering Co. of California. That consolidated income is the basis for the pending deficiency. Thus, here, though we may not have jurisdiction to determine the tax liability of the Macdonald Engineering Co. of California for 1929, as such, we do have the authority and duty to decide what that consolidated income was. That fact is necessarily premised partially upon the net income of Macdonald Engineering Co. of California for that year. The validity of the present deduction to that company in 1929 is clearly required in that computation. See Burnet v. Aluminum Goods Manufacturing Co., 287 U. S. 544.

Did Macdonald Engineering iCo. of California “ascertain” the debt to be worthless and “charge it off” in 1929? We think it did.

Here was a debt of approximately $95,000, secured by real estate of a value exceeding $600,000. The only indebtedness against such property prior to the debt in question was a first mortgage of $210,-000 and an underlying mortgage of $90,000. It is true that in 1926 the holder of a third trust for $200,000 sued upon the debt, secured judgment, and sold the property under execution. But the title transferred under such sale was apparently subject to the prior mortgage and did not diminish the security for the debt in dispute. But, whether that conclusion is correct or not, in view of the value of the security and the litigation involving the title to the property constituting that security, which was not terminated until 1929, we think Macdonald Engineering Co. of California had a right, and, in fact, a duty, to wait until the termination of that litigation before it could be said to have ascertained the debt to be worthless and charged it off. Burnet v. Huff, 288 U. S. 156.

The taxpayer in such cases may not be an incorrigible optimist, nor yet a confirmed pessimist. He must follow the middle course, and exercise only the judgment of the ordinary person under the circumstances. As this Board said in Clara Burdette, 25 B. T. A. 692; affd., 69 Fed. (2d) 410:

It is obvious that the statute here applicable intended that the taxpayer, and not the law, should determine when bad debts were to be considered worthless in his hands, requiring only that good faith be shown. The provision here discussed has been many times construed by the courts and this Board, and it has been always held that it is the date of ascertainment of worthlessness by the taxpayer, and not of the worthlessness as later facts might develop, which governs. Jones v. Commissioner, 38 Fed. (2d) 550; Stephenson v. Commissioner, 43 Fed. (2d) 348; Murchison National Bank, 1 B. T. A. 617; Samuel Bird, 4 B. T. A. 259; Higginbotham-Bailey-Logan Co., 8 B. T. A. 566; Mitten v. Commissioner, 11 B. T. A. 731; Mrs. R. B. Lawler, Executrix, 17 B. T. A. 1083; Ida C. Calloway, et al., Executors, 18 B. T. A. 1059; American Warehouse Co., 19 B. T. A. 8. In United States v. Frost, 25 Fed. Cas. 1221, No. 15,172, this identical provision, then a part of the income-tax law of 1864, came before the United States District Court for the Northern District of Illinois for construction; the question being whether or not the judgment of the taxpayer, in respect to a similar claim, should prevail as against facts indicating worthlessness at a different date. Respecting the language used in that law, which was identical with the recitals here considered in section 214, supra, the court, among other things, said:
The language is “to ascertain to be worthless.” By whom or how? The law is silent on this important point, and, therefore, there must be a discretion given to the person making his return, and if that discretion is used fairly and honestly there would seem to be no just ground for complaint.

There has been no change of opinion expressed by the courts in respect to the construction put upon this provision of the tax laws since the early decision just cited; and in American Trust Co. v. Commissioner, 31 Fed. (2d) 47, the court, in recognition of the fallibility of human judgment, held that, to entitle the taxpayer to take such a deduction, the ascertainment need not be absolute and that a claim may be duly ascertained to be worthless though later it may prove to be in fact collectible.

It follows, from this holding, that in a reverse situation, where an over optimistic taxpayer erred in judgment, the same good faith when exercised in ascertainment of worthlessness must be the only criterion by which we can determine his rights. In support of this view, the court in Jones v. Commissioner, supra, said:

In the light of subsequent events, it is quite easy now to determine that the debt was worthless before 1921; but the real question with which we are concerned is, not when did the debt become worthless, but when did decedent ascertain it to be worthless.

Thus, the disclosure of reasonably material facts, establishing the uncollectibility of the debt, did not occur until 1929. Then, and not before, did Macdonald Engineering Co. of California ascertain its worthlessness.

Moreover, Macdonald Engineering Co. of California effectively charged the debt off in 1929 for income tax purposes.

The obligation was obviously worthless when the debt was transferred by Macdonald Engineering Co. of California to petitioner. It was then known by both parties to be so. Petitioner gained nothing and Macdonald Engineering Co. of California received nothing for it. No consideration passed. True, petitioner credited the open account of Macdonald Engineering Co. of California with the amount of the debt. But neither the adventitious similarity between the debt and credit, nor the book entries reflecting them, changed the fact of worthlessness. Doyle v. Mitchell Brothers Co., 247 U. S. 179.

In such transfer, Macdonald Engineering Co. of California actually and absolutely eliminated the worthless debt from its assets, and received nothing therefor. This was an effective charge-off. Dillon Supply Co., 20 B. T. A. 404; George H. Fraser, 6 B. T. A. 997.

When petitioner credited the account receivable of Macdonald Engineering Co. of California, in the amount of the debt, the petitioner merely increased its investment by that amount in the stock of its subsidiary.

The right to a possible second deduction predicated upon this item will be presented and denied, if and when a loss in that stock occurs. See Burnet v. Aluminum Goods Manufacturing Co., supra; Burnet v. Riggs National Bank, 57 Fed. (2d) 980; Park v. Commissioner, 58 Fed. (2d) 965. But that circumstance does not preclude the allowance of the present bad -debt deduction. See Burnet v. Aluminum Goods Manufacturing Co., supra.

Respondent argues that the transaction was an intercompany one, and therefore not effective here. But', the debt, which is the subject of the contested deduction, was not an intercompany debt, and the intercompany transaction with reference to that debt has been effectually eliminated. The purported intercompany transfer of the debt was, in fact, and we have so held, a transfer of nothing. It was intended to be and was an effective charge-off of the bad debt by Macdonald Engineering Co. of California.

Respondent contends supplementally that the case of J. C. Hawkins, 34 B. T. A. 918, concludes petitioner here. The answer is that the Hcmldns case involved a fundamentally different question— whether a loss was sustained by a debtor whose property was sold under foreclosure. Our inquiry is, When was a debt ascertained to be worthless and charged off?

We are deciding here that Macdonald Engineering Co. of California could not and did not, reasonably, ascertain the worthlessness of the Western Milling Co. debt and charge it off until it was conclusively determined that the Western Milling Co. had lost its only property from which the debt could have been paid.

The loss on that property by Western Milling Co. may have been sustained in 1927 at the conclusion of its redemption period. J. G. Hawkins, supra. But the fact of that loss, upon which the contested debt became worthless, was not reasonably ascertainable by Mac-donald Engineering Co. of California until 1929 when it was so ascertained and charged off.

Decision will be entered for the respondent in Docket No. 6111)8, and umder Rule 50 in Docket No. 62319.


author: Sternhagen:

text:
    H. S. Anderson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78683.
    Promulgated November 3, 1936.

      Marshall D. Hall, Esq., and George M. Thompson, G. P. A., for the petitioner.

      Francis L.Yam, Haaften, Esq., for the respondent.
   OPINION.

Sternhagen:

On his return for 1931 the petitioner deducted the remainder of an alleged net loss carried over from 1929. Revenue Act of 1928, sec. 117. The Commissioner in the notice of deficiency revised the 1929 net loss by a reduction of $28,010 representing the Mexican gambling gains. The Commissioner ignored the Florida gambling losses in 1929, and the petitioner assails the computation as not truly reflecting his 1929 income or loss. There is no dispute about the facts. The controversy turns upon the proper treatment, as a matter of law, of the Florida gambling losses, more particularly because gambling in Florida is prohibited by law. Compiled General Laws of Florida, secs. 7666 and 7669.

The petitioner disavows any claim for a deduction of either the whole amount of his Florida losses or the excess of such losses above the amount of his Mexican gains. In this disclaimer his position follows earlier decisions to the effect that losses in illegal transactions and expenses of an illegal business may not be recognized among deductions in the computation of taxable net income. Great Northern Railway Co. v. Commissioner. (C. C. A., 8th Cir.), 40 Fed. (2d) 372; certiorari denied, 282 U. S. 855; Burroughs Building Material Co. v. Commissioner (C. C. A., 2d Cir.), 47 Fed. (2d) 178; Chicago, Rock Island & Pacific Railway Co. v. Commissioner (C. C. A., 7th Cir.), 47 Fed. (2d) 990; certiorari denied, 284 U. S. 618; Terminal Railroad Association of St. Louis v. Commissioner (C. C. A., 8th Cir.), 61 Fed. (2d) 166; certiorari denied, 288 U. S. 604, 607; Gould Paper Co. v. Commissioner (C. C. A., 2d Cir.), 72 Fed. (2d) 698; Sarah Backer et al., Executors, 1 B. T. A. 214; James P. McKenna, 1 B. T. A. 326; Mitchell M. Frey, Jr., et al., Executors, 1 B. T. A. 338; Norvin R. Lindheim, 2 B. T. A. 229; M. L. Heide, 2 B. T. A. 451; John Stephens, 2 B. T. A. 724; Columbus Bread Co., 4 B. T. A. 1126; Wolf Manufacturing Co., 10 B. T. A. 1161; Atlantic Terra Cotta Co., 13 B. T. A. 1289; Bonnie Brothers, Inc., 15 B. T. A. 1231; M. Rea Gano, 19 B. T. A. 518, 529; E. F. Simms, 28 B. T. A. 988, 1034; Lawrence A. Wagner, 30 B. T. A. 1099. Whether this disclaimer is likewise supported by the fact that the loss was incident to recreation and, therefore, not to a transaction entered into for profit, it is not necessary to consider. See Beaumont v. Helvering, 73 Fed. (2d) 110; certiorari denied, 294 U. S. 715, and Citizens & Southern National Bank v. United States (Ct. Cls.), 14 Fed. Supp. 915.

The petitioner’s contention is that, aside from the question of his right to include the Florida loss directly among his deductions, he is in any event entitled to treat such loss as wiping out his Mexican gain, and thus precluding the Commissioner’s inclusion of such gain . within his 1929 income. There is, in our opinion, no greater reason to permit the application of the losses in illegal gambling to offset the gains from legal gambling than there is for their direct deduction. It is now established without any conflicting decisions that the illegality of the occupation or the transactions in which a taxpayer engages deprives him of any claim to the use of losses or expenses in reducing his taxable net income. In Burroughs Building Material Co. v. Commissioner, supra, the court approved the disallowance of expenses of an unlawful act, and succinctly said: “The disallowance may properly rest on a refusal to sanction expenditures of such a character as we have here on grounds of public policy.” In Terminal Railroad Association of St. Louis v. Commissioner, supra, the court said in respect of the deductibility of penalties imposed for a violation of statute: “It cannot be that Congress intended the carrier should have any advantage, directly or indirectly, or any reduction, directly or indirectly, of these penalties.” In Lawrence A. Wagner, supra, the Board sustained the disallowance of a deduction of loss in a usurious business “upon the ground of public policy,” and said also in M. Rea Gano, supra, as to the deduction, of an illegal gambling loss: “Merely to state the true character of the deduction is to demonstrate that it is not allowable.” Since illegality is the underlying and controlling factor upon which these prior decisions have been based, the illegality of gambling in Florida must operate no less to deprive the petitioner of the treatment of his Florida losses to wipe out his Mexican gains and thus enlarge the 1929 net loss which he may carry over to reduce his 1931 taxable income. Consistently'with prior authority, the determination of the respondent must be sustained.

Judgment will Toe entered for the respondent.


author: Tyson :

text:
    Mobile Bar Pilots Association, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 77016, 81295.
    Promulgated November 3, 1936.

      George E. H. Goodner, Esq., for the petitioner.

      Lloyd W. Creason, Esq., for the respondent.
   OPINION.

Tyson :

The first question for determination is whether or not the petitioner is taxable as if it were a corporation. This must be answered in the affimative, since, as shown in our findings of fact, it operated the business of piloting boats, collecting fees therefor, and distributing the fees among its members after certain deductions therefrom, and possessed many attributes of a corporation such as having a centralized management through a president, vice president, secretary, and board of directors, rules and bylaws, continuity of existence which was not interrupted by the death of a member, equal ownership by the members of shares or interest in the property of the association, such interest or share being acquired on payment to the association by each member of the amount of the value of his share, and limited personal liability of its members. From all of these facts it clearly appears that petitioner was, during the taxable years, engaged in business for profit and was an association taxable as a corporation under the rulings of the United States Supreme Court in Morrissey v. Commissioner, 296 U. S. 344; Helvering v. Coleman-Gilbert Associates, 296 U. S. 369; Swanson v. Commissioner, 296 U. S. 362; and Helvering v. Combs, 296 U. S. 365. Cf. Ora L. Pelton, Sr., et al., Trustees, 32 B. T. A. 198; affd., 82 Fed. (2d) 473.

Petitioner contends, on brief, without the citation of any authority other than the statute itself to sustain such contention, that it is exempt from taxation under either or both of subsections (1) and (12) of section 103 of the Revenue Act of 1932, and concedes that if petitioner is exempt from taxation as an association such exemption must be derived from these subsections. Subsection (1) relates to “Labor, agricultural, or horticultural organizations” and subsection (12) relates to “Farmers’, fruit growers’, or like associations organized and operated on a cooperative basis.” We do not think this contention is sound as petitioner, clearly, was not embraced within any of the classes set out in these subsections.

Relative to the question of the amount allowable as a deduction for depreciation on the three boats, the Alabamimi, the Anna Ruth, and the Godbold, owned and operated by the association, we find that there is no proof of error in the respondent’s determination of the cost basis of each separate boat upon which depreciation must be computed. Therefore, the respondent’s determination as to the separate cost basis of each boat is approved. However, the evidence does establish that the respondent erred in his determination of the useful life of each of the three boats and, consequently, also erred m the rate applied in computing the amount allowed by him as a deduction for depreciation thereon in each of the years in controversy. In our findings of fact we have determined the useful life of each separate boat, and the allowable deduction for depreciation in the taxable years must be computed at rates based on such useful lives.

Relative to the disallowance by the respondent of a deduction for pensions paid as additional compensation to the two retired Dorgans, it is shown in our findings of fact that both had been in the active service of the association for more than twenty-five years prior to the date of their retirement and that, under the rules and bylaws of the association, John Dorgan received in the taxable year ended March 31.1932, the amount of $516.65, and in the taxable year ended March 31.1933, the amount of $600, and Sid Dorgan received in the taxable year ended March 31, 1932, the amount of $1,730 and in the taxable year ended March 31,1933, the amount of $1,715, all of such amounts having been paid as reasonable additional compensation for past services rendered prior to .retirement and services rendered after retirement. We hold that both the Dorgans were members of the association at the time of their retirement and were retired members during the taxable years and that the payments made to them as additional compensation for past personal services rendered by them prior to their retirement and services rendered thereafter were reasonable amounts therefor and are deductible as ordinary and necessary expenses paid by petitioner in carrying on its business during the taxable years. Lucas v. Ox Fibre Brush Co., 281 U. S. 115; Elgin National Watch Co., 17 B. T. A. 339; Lemuel Scarbrough, 17 B.T. A. 317; Hibbard, Spencer, Bartlett & Co., 5 B. T. A. 464; Botchford v. Commissioner, 81 Fed. (2d) 914, affirming 29 B. T. A. 656.

The action of respondent in disallowing the deduction of $2,144.65 paid (Hie estate of George W. Raley, a deceased member of the association, is approved. There is no evidence in the record showing that such amount was reasonable additional compensation for the services rendered by him prior to his death. Petitioner’s failure to establish this vital fact is fatal to his contention on this issue. Brown & Haley, 21 B. T. A. 752; Model Dairy, Inc., 13 B. T. A. 545. Moreover, there is also no evidence in the record establishing the fact that this payment was an “ordinary and necessary” expense of the business of' petitioner within the meaning of section 23 (a) of the Revenue Act of 1932. Cf. Botany Worsted Mills v. United States, 278 U. S. 282. Cf. Carpinter & Baker, Inc., 9 B. T. A. 165, and Fifteenth & Chestnut Realty Co., 29 B. T. A. 1030.

Decision will be entered under Rule 50.


author: Murdock:

text:
    Arthur S. Kleeman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 68841.
    Promulgated November 3, 1936.

      Frank R. Pentlarge, Esq., and David, G. Johnson, Esq., for tbe petitioner.

      Philip M. Clark, Esq., and Stanley B. Pierson, Esq., for tbe respondent.
   OPINION.

Murdock:

The Cbmmissioner determined a deficiency of $33,351.28 in the petitioner’s income tax for the year 1929. He now claims a greatly increased deficiency on the ground that he erred in two respects in his original determination.

The Board is asked to decide the following issues which were raised by the petitioner’s assignments of error:

1. Whether the Commissioner erred in failing to allow a partnership known as Arthur S. Kleeman & Co. to inventory, as of the close of the year, the preferred stock of the Home & Foreign Securities Corporation, and in failing to allow the petitioner a deduction of $21,148.30 representing his distributive share of the loss to the partnership resulting from inventorying the stock at market;

2. Whether the Commissioner erred in including in the income of the petitioner $2,500 representing certain organization expenses of the Home & Foreign Securities Corporation paid by the partnership and subtracted by the partnership in computing its commissions from selling the stock of the Home & Foreign Securities Corporation;

3. Whether the Commissioner erred in including in the income of the petitioner a profit from the sale of 25,835 shares of the common stock of the Home & Foreign Securities Corporation made by the partnership as short sales, not all of which were completed by a covering purchase within the taxable year; and

4. Whether the partnership sustained a deductible loss from the short sale of 7,256 shares of common stock involved in issue 3, and the purchase during the year of a like number of shares to cover those particular short sales.

The Commissioner makes two afiirmative contentions in support of his claim for an increased deficiency. One, that he erred in failing to include in the petitioner’s income $765,607.47, representing the profit which the petitioner and his wife realized upon the liquidation of the (Republic Holding Corporation in 1929. The other that he erred in allowing the petitioner and his wife to deduct a loss of $314,392.53 upon the alleged sale of 75,000 shares of common stock of the Home & Foreign Securities Corporation in the year 1929.

Most of the facts have been stipulated and for that reason they need not be set forth in full here.

The petitioner is an individual. He was married and living with his wife, Alice P. Kleeman, during all of the year 1929. He filed a joint return for himself and his wife on March 15, 1930, with the collector of internal revenue at Albany, New York..

The petitioner and three other individuals formed a partnership on April 1, 1929, known as Arthur S. Kleeman & Co., for the purpose of carrying on an investment and securities business. The Commissioner, in determining the deficiency, disregarded this partnership.

One of the first pieces of business which the partnership undertook was to organize and sell the stock of the Home & Foreign Securities Corporation (hereafter called Home & Foreign). Home & Foreign was organized on June 7, 1929, under the laws of Maryland. An agreement was entered into on June 20, 1929, whereby one share of its preferred stock, one share of its common stock, and a warrant to purchase an additional share of its common stock, under stated circumstances, was to comprise an indivisible unit to be represented by an allotment certificate. The agreement further provided that 75,000 of these units were to be sold by the partnership on commission for Home & Foreign. The partnership, as a result of this agreement, felt called upon to deal in the units on its own account in order to maintain a market for the securities which it was selling. The units were to be divisible and subject to sale separately not later than January 1, 1930. Home & Foreign, as it had a right to do, divided the units on December 1, 1929. The allotment certificates which the partnership owned and held for sale as a dealer at the time of the division of the units were surrendered and in their place the partnership received preferred shares, common shares, and warrants, which it could sell separately and held for sale as a dealer in those securities. However, during December 1929 there was no demand for these securities and the partnership was unable to dispose of any of the preferred stock after the division. It inventoried 1,099 shares of preferred stock of Home & Foreign which it held on December 31, 1929, at $25 a share and claimed on its return a deduction of $21,859.60, representing the difference between the cost of the shares and their fair market value as inventoried. The Commissioner in determining the deficiency held that the partnership was not a dealer in the preferred stock and denied the deduction. The fair market value of the preferred stock of Home & Foreign on December 31, 1929, was $25 per share.

The agreement of June 20, 1929, relating to the sale by the partnership on commission of the units of Home & Foreign securities, provided that each unit should be sold by the partnership at $60; $56.66% for each unit sold was to be paid to Home & Foreign; and the difference of $3.33% was to be retained by the partnership “to cover the expenses and our charges in connection with the sale, it being further understood that we will assume and pay the expenses incident to your incorporation including taxes; legal fees; all taxes incident to the original issue of the 150,000 shares of Common Stock and the 75,000 shares of Preferred Stock above referred to; the initial fee of the Transfer Agent and Eegistrar for the stock to be issued and like fee of the Depositary and Trustee incident to the issue of the proposed allotment Certificates and Warrants; the expenses of printing, engraving and advertising and other miscellaneous expenses in connection with the issuance of the stock, incorporation of your company, the Warrants and Allotment of Certificates aforesaid * * The partnership, pursuant to this contract, sold during 1929 a substantial number of the units prior to the time they were subdivided on December 1, 1929. The partnership paid $2,799 on or about July 7, 1929, pursuant to the contract above referred to, for organization expenses of Home & Foreign, including a bonus tax to the State of Maryland in the amount of $2,200, an annual registration fee of $100, and various filing fees and expenses incident to the organization of Home & Foreign. The $2,799 thus paid was subtracted in computing the commissions of the partnership from the sale of units. The partnership reported a loss from its operations for the year 1929. The petitioner claimed all of the loss of the partnership on his return. The Commissioner, in determining the deficiency, added to the petitioner’s income $2,500 representing organization expenses of Home & Foreign paid by the partnership.

The partnership, during 1929, also bought and sold common stock of Home & Foreign on its own account. It sold during that year 25,835 shares of the common stock of Home & Foreign in this account for $410,305.50 and purchased during the year 7,256 shares for $121,073.30. It received $99,925 for the first 7,256 shares sold. The partnership made deliveries of common stock thus sold from stock borrowed from Alice P. Kleeman and kept regular records of the stock borrowed and returned. It owed to Alice P. Kleeman, or her assignee, at the end of the year 1929, 18,579 shares. The partnership accounted for its sales of common stock in this account as short sales. It did not realize any profit during 1929 from the sale of the 25,835 shares. It sustained a loss of $21,148.30 from the short sale of 7,256-shares and the covering purchases made during 1929. The Commissioner, in determining the deficiency, included in the petitioner’s income, as profit from the sale of Home & Foreign common stock, $220,233.51.

The petitioner and his wife were the owners of some stock of the Manufacturers Trust Co. and of the Long Island Lighting Co. which they desired to have Home & Foreign own. They desired, at the same time, to avoid a tax to themselves on the disposition of these shares and to avoid giving Home & Foreign a low basis for the securities which it was to acquire. They organized the Kepublic Holding Corporation (hereafter referred to as Kepublic) bn July 1, 1929, for the purpose of accomplishing these results. The petitioner then transferred 1,544 shares of Manufacturers Trust Co. stock to [Republic in exchange for 54 [Republic shares, and his wife transferred 560 shares of Manufacturers Trust Co. stock and 2,800 shares of Long Island Lighting Co. stock to Eepublic in exchange for 46 of its shares. Republic had no other shares. An agreement was then entered into on July 2,1929, between Republic, Home & Foreign, the petitioner, and his wife whereby Republic agreed to transfer all of its assets, cpnsisting of 2,104 shares of Manufacturers Trust Co. stock and 2,800 shares of Long Island Lighting Co. stock, to Home & Foreign in exchange for securities of the latter consisting of 75,000 shares of its common stock and warrants to purchase a like number of shares of its common stock. The agreement further provided that the Home & Foreign stock, together with the warrants which Republic was to receive, was to be distributed by Republic to its stockholders in proportion to their stockholdings. This agreement was carried out and the petitioner received 40,500 shares of Home & Foreign stock and a similar number of warrants. His wife received 34,500 shares and a similar number of warrants. The shares thus received by the petitioner and his wife were less than 80 percent of the voting stock and less than 80 percent of the total number of shares of all other classes of stock of Home & Foreign then outstanding. Republic, after making the above described distribution, had no further business transactions whatsoever. The cost to the petitioner of the 1,544 shares of Manufacturers Trust Co. stock above referred to was $150,411.05. The cost to his wife, Alice P. Kleeman, of the 560 shares of Manufacturers Trust Co. stock and the 2,800 shares of Long Island Lighting Co. stock above referred to was $171,481.48. The fair market value of the 40,500 Home & Foreign common shares and warrants at the time they were received by the petitioner in the above transaction was $405,000. The fair market value of the 34,500 Home & Foreign shares and warrants at the time received by the petitioner’s wife in the above transaction was $345,000.

The petitioner and his wife in December 1929 owned 75,000 shares of the common stock of Home & Foreign, and a like number of warrants, which they had acquired under circumstances set. forth above. The value of these shares was then much less than it had been at the time they were originally received by these two parties. The petitioner desired to realize a loss on these shares for income tax purposes. To accomplish this purpose he organized the Pentson Corporation (hereafter called Pentson) on December 23, 1929. The capital stock of this corporation consisted of 100 shares which were subscribed and paid for at $80 per share in cash, the petitioner taking 41 shares, his wife 34 shares, and Frank R. Pentlarge and David C. Johnson, as joint tenants, taking 25 shares. Pentlarge and Johnson were attorneys for the petitioner. They actually paid for their stock with their own cash and still owned the 25 shares which they acquired. Pentson, on or about December 26, 1929, purchased 40,500 shares of Home & Foreign common stock and a like number of warrants from the petitioner, and 34,500 shares and warrants from his wife at 10 cents a share, for a total consideration of $7,500. Pentson never acquired any other property nor did any other business.

The Commissioner in determining the deficiency held that there was no partnership and that Arthur S. Kleeman & Co. was, for income tax purposes, the same as the petitioner. The petitioner urges the Board to hold that there was a partnership, while the respondent argues strenuously that there was no partnership. The decision of that question may be unimportant in reaching a decision on the real issues in the case. Still, since it is clear that there was a partnership, we have no hesitation in saying so. The partnership claimed an inventory loss on 1,099 shares of preferred stock of Home & Foreign. The Commissioner conceded that the partnership was a dealer in the units of Home & Foreign, but he denied the right of the partnership to inventory the preferred shares because, he said, it was not a dealer in those shares. Each unit was divided into its component parts on December 1, 1929. The partnership was a dealer in the units prior to that division and, thereafter, was still a dealer in the component parts, even though if was unable to make sales due, at least in part, to the crash in the market which had just taken place. The partnership was entitled to inventory the preferred shares which it owned on December 31, 1929. The only argument which, the Commissioner presents in his brief on this issue is that $25 was not the fair market value of the shares on December 31, 1929. The evidence shows that the figure at which the preferred shares were inventoried by the partnership was a proper one for the purpose.

The Commissioner added to the petitioner’s income $2,500 representing organization expenses of Home & Foreign paid by the partnership. A corporation has no right to deduct its own organization expenses, but that is not the question now before the Board. The partnership agreed to pay these organization expenses of the corporation. The gain which the partnership made from selling the units can not be computed without giving due effect to the fact that it was required to pay and actually paid the $2,500. The commission or compensation which it was to receive for selling the units was not $3.333/3 per unit sold, but the difference between $3.33% multiplied by the number of units sold and the expenditures, including the $2,500 in question, which it made in accordance with its contract. It is not necessary to hold that these organization expenses were ordinary and necessary expenses of the partnership, since the result is the same if the $2,500 be subtracted in computing tlie commissions of tlie partnership. Why the Commissioner made a distinction between the $299 which he allowed and the $2,500 which he disallowed, does not appear. The partnership correctly computed its commissions from the sale of the units in its return for 1929, and the Commissioner erred in adding $2,500 to the petitioner’s income on account of the organization expenses of the corporation.

The next question is whether the partnership made short sales of 25,835 shares of common stock of Home & Foreign, or whether the sales of those shares were ordinary sales from which the partnership realized gain or loss in 1929. The partnership had received from the petitioner 31,000 shares of Home & Foreign common stock from which it could have made deliveries of the 25,835 shares sold. But, as a matter of fact, it did not make deliveries from the shares thus obtained from the petitioner. Instead, it made deliveries from shares borrowed from the petitioner’s wife. The wife was a separate taxpayer from the petitioner and she was not a member of the partnership. The fact that she and her husband filed a joint return for 1929 is immaterial. Frank B. Gummey, 26 B. T. A. 894. The partnership intended the sales as short sales. It made covering purchases only in the amount of 7,256 shares. Covering purchases for the remaining 18,579 shares were not made during 1929. Consequently, no gain or loss can be computed for 1929 on those sales. Robert W. Bingham, 27 B. T. A. 186; Frances Bartow Farr et al., Executors, 33 B. T. A. 557. The petitioner seeks to have the 7,256 shares purchased matched against and used to cover the first 7,256 shares sold. The respondent has apparently used the cost of the 7,256 shares as part of the basis for computing gain or loss. In any case he has failed to suggest any good reason why they should not be matched as the petitioner suggests. Cf. Robert W. Bingham, supra. A loss of $21,148.30 results and should be included in computing the petitioner’s distributive share of the gain or loss of the partnership for 1929.

The first affirmative contention made by the Commissioner is that the gain realized by the petitioner and his wife from the receipt of the 75,000 shares of common stock of Home & Foreign and the corresponding number of warrants is recognized for income tax purposes since they received this property in a distribution which was a complete liquidation of Eepublic but was not a statutory reorganization. It is apparent, since Home & Foreign acquired all of the properties of Eepublic, that the transaction is within the terms of subdivision (A) of section 112 (i) (1) of the Eevenue Act of 1928. It is not so clear that the transaction is within the terms of section 112 (g). Cf. James M. Harrison, 30 B. T. A. 966. The Commissioner relies upon the case of Gregory v. Helvering, 293 U. S. 465, in support of his contention that there was no statutory reorganization. Taxpayer Gregory owned all of the stock of the United Mortgage Corporation. That corporation held among its assets 1,000 shares of the Monitors Security Corporation. For the sole purpose of procuring a transfer of these shares to herself, in order to sell them for her individual profit, and, at the same time diminish the amount of income tax which would result from a direct transfer by way of dividend, she sought to bring about a “reorganization.” She caused the Averill Corporation to be organized. United then transferred to Averill the 1,000 shares of Monitors stock, for which all of the shares of Averill were issued to taxpayer Gregory. Averill was then dissolved and liquidated by distributing all of its assets, the Monitors shares, to taxpayer Gregory. No other business was ever transacted or intended to be transacted by Averill. The Monitors shares were then •sold. The Supreme Court held that the statute, in defining a reorganization, did not mean a transfer of assets by one corporation to another in pursuance of a plan having no relation to the business of either and that the transactions in the Gregory case involving Averill had no business or corporate purpose and were not to reorganize a business or any part of a business, but to transfer a parcel of corporate shares to the petitioner. The present case is not distinguishable in principle. Kleeman and his wife had property which they wanted Home & Foreign to have. A direct transfer would have subjected the Kleemans to income tax. To avoid that but to accomplish no business purpose of either corporation, they organized Bepublic. They transferred their property to Bepublic in exchange for its shares and had Bepublic transfer the property to Home & Foreign in exchange for some of its shares which were immediately distributed to the Kleemans by Bepublic in complete liquidation of Bepublic. No other business was ever transacted or intended to be transacted by Bepublic. There was not a transfer of assets by one corporation to another in pursuance of a plan of reorganization of either corporation, but was a transfer in pursuance of a plan having no relation to the business of either. There was no plan to reorganize a business or any part of a business. The plan was simply to transfer some property to Home & Foreign. The Gregory case is controlling. Although the undertaking was conducted according to the terms of subdivision (A), it was not a reorganization within the meaning of that definition. Bepublic was a new and valid corporation. The 75,000 shares of stock and warrants of Home & Foreign were received by Kleeman and his wife in complete liquidation of Bepublic. Amounts distributed in complete liquidation of a corporation must be treated as in full payment in exchange for the stock of that corporation. Sec. 115 (c). The cost to the Kleemans of the Eepublic stock is the same as their basis for gain or loss upon the property which they transferred to Eepublic. Sec. 112 (b) (5) ; sec. 113 (a) (6); sec. 111. That basis has been stipulated. Their gain, therefore, is the difference between that basis and the fair market value of the shares and warrants of Home & Foreign at the date of the distribution, July 2, 1929. That value has been found as a fact above.

The Commissioner makes the affirmative contention that he erred in allowing the petitioner and his wife to deduct a loss of $314,392.53 on the alleged sale by them of 75,000 shares of common stock and a like number of warrants of Home & Foreign to Pentson in December 1929. He points to the fact that the sale was made at 10 cents for each share and warrant, or for a total consideration of $7,500, whereas the last previous sale of this stock shown in the record is the sale of 150 shares for $12 per share on October 11, 1929. However, a great crash in the market took place, as is well known, in the latter part of October 1929, and, furthermore, the evidence shows that the assets of Home & Foreign in December were insufficient to give any real book value to the common stock. The evidence, therefore, does not indicate that this sale was not made át a fair market price. The Commissioner also draws attention to the fact that Pentson was organized for the purpose of reducing income taxes, Pentlarge was a cousin of Mrs. Kleeman, Pentlarge and Johnson were attorneys for the petitioner and the various corporations involved in this proceeding, the petitioner and his wife had control of Pentson, and Pentson never conducted any business other than the purchase of this stock. The Commissioner argues that the sale was not a bona fide sale at arm’s length. The evidence, however, indicates the contrary. Pentson is still in existence and, apparently, still owns the stock. The interest of Pentlarge and Johnson was a different interest from that of the petitioner and his wife. There was no agreement or understanding between the parties as to a reacquisition by the Kleemans of the property sold or of the interest of Pentlarge and Johnson in Pentson. Thus there is not only no reason to deny the petitioner and his wife the loss which they realized on the sale of Pentson, but there is sufficient reason to allow them that loss. Furthermore, as a result of the decision on the previous issue, their basis for gain or loss upon the Home & Foreign shares and warrants is now for the first time established at $750,000. They are entitled to the use of that basis in the computation of their loss.

Decision will be entered under Rude 50.


author: SteRNHAgen:

text:
    Frank G. Hogan, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75648.
    Promulgated November 5, 1936.

      A. Colder Maelcay, Esq., and Arthur McGregor, Esq., for the petitioner.

      Franh M. Thompson, Esq., for the respondent.
   OPINION.

SteRNHAgen:

1. The decisions in Douglas v. Willcuts, 296 U. S. 1; Helvering v. Schweitzer, 296 U. S. 551; and Helvering v. Stokes, 296 U. S. 551, establish that income from a trust created by a husband to provide support for his wife and children is within his gross income. This was later applied to income from a trust assigned to the wife after separation but before divorce, which was not embodied in the divorce decree, Helvering v. Coxey, 297 U. S. 694, reversing 79 Fed. (2d) 661. In Albert C. Whitaker, 33 B. T. A. 865 (on review, C. C. A., 4th Cir.), trust income which was thus assigned by the husband for support in contemplation of a divorce which subsequently occurred was h,eld to be within his gross income. These decisions completely support the Commissioner’s inclusion in petitioner’s income of the trust income which was paid to her in 1981 pursuant to the agreement of 1918 embodied in the divorce decree of 1919.

There is no need to consider the rule that an assignment of future income does not relieve the assignor of tax unless there is also an assignment of a present interest in the principal.

The petitioner attempted by his oral testimony to show that the 1918 agreement was not made in contemplation of divorce; but the agreement and its embodiment in the divorce decree too clearly establish the anticipation of divorce to be affected by oral contradiction. Testimony was also offered, of a lawyer who had be,en a judge in divorce proceedings in California, to show how much of the trust income could reasonably be regarded as hr lieu of alimony. On objection, this testimony was excluded.

The Commissioner’s determination on this point is sustained.

2. The petitioner deducted the $600 paid in 1981 on his note given in 1980 to make good his assurance to the purchaser of shares of stock in the finance corporation in which he was a large shareholder. The Commissioner disallowed the deduction.

There is no evidence to show that this payment was made either in the course of his trade of business or in a transaction entered into for profit. He was not selling the shares, and what his trade or business was is not shown. Apparently he acted voluntarily and gratuitously. In this he is in no stronger position than the taxpayer in Goldsborough v. Burnet, 46 Fed. (2d) 432, who reimbursed his mother-in-law for losses which she had sustained in her investments which he had gratuitously guaranteed. His interest in the corporation as a shareholder will not identify him with it, Menihan v. Commissioner, 79 Fed. (2d) 304; certiorari denied, 296 U. S. 651. See also Hines v. Commissioner, 58 Fed. (2d) 29; In re Parks Estate, 58 Fed. (2d) 965; certiorari denied, 287 U. S. 645; Strouse v. Commissioner, 59 Fed. (2d) 600; White v. Commissioner, 61 Fed. (2d) 726; and Clifford F. Martin, 28 B. T. A. 741.

The Commissioner’s disallowance of the deduction is sustained.

Judgment will be entered for the respondent.


author: Smith:

text:
    Charles W. Nudelman, Petitioner, v. Commissioner of Internal Revenue, Respondent. Luciano Conti, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 79126, 79793.
    Promulgated November 5, 1936.

      Benjamin Mahler, Esq., for the petitioners.

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

Smith:

In these proceedings the petitioners contend that they are entitled to deduct from their gross incomes of 1932 under section 115 (c) of the Revenue Act of 1932, losses sustained by them upon the liquidation of the Nudcon Holding Corporation. Section 115 (c) provides in material part as follows:

(c) Disteibutions in Liquidation. — Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112. * * *

The respondent, on the other hand, contends that the loss may not be deducted by reason of the provisions of section 112 (e) of the Revenue Act of 1932.

The portion of section 112 upon which the respondent relies provides as follows:

SEC. 112. RECOGNITION OP GAIN OR LOSS.
(a) General Ruud. — Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.
(b) Exchanges Solely in Kind.—
* * * si* * * *
(5) Transfer to corporation controlled by transferor. — No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.
# # 4s sfs * %
(e) Loss erom Exchanges Not Solely in Kind. — If an exchange would be within the provisions of subsection (b) (1) to (5), inclusive, of this section if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain or loss, but also of other property or money, then no loss from the exchange shall be recognized.

The position of the respondent is stated in his deficiency notice to Nudelman as follows:

It appears that what actually happened was that at one and the same time you surrendered all your holdings in the Nudcon Company, or 25 shares, and received in exchange all of the stock of the Familnud Corporation and cash and property having an admitted value of $2,258.32. Both events took place simultaneously as part of one plan. The method by which the exchange was accomplished or the form of the transaction is immaterial. The substance must determine the taxable status and as to that there can be no question.

Although there is no question but that the steps taken by the petitioners in effecting the dissolution of the Nudcon Holding Corporation had the effect of postponing the deduction of losses on their shares of stock in the Nudcon Holding Corporation, represented by the 22 shares turned over by petitioner Nudelman to the Familnud Corporation and by petitioner Conti to the Lucianna Corporation, to a future year, we are of the opinion that the steps taken may not be ignored. Thus in the case of Minnie C. Brackett, Administratrix, 19 B. T. A. 1154 (affd., C. C. A., 7th Cir., 57 Fed. (2d) 1072), certain assets were sold to a corporation and a check for the purchase price was issued by the corporation to the seller. The check was then endorsed and turned back to the corporation as a subscription for its stock. The entire procedure had been planned beforehand. The taxpayers there contended that no sale was contemplated but that the assets were intended to be turned in for the stock and that substance rather than form should govern. The Board held that: What is actually done fixes the tax liability and not what might have been done, even though the same result in the end might have been reached in another way or by another process.” To the same effect see W. A. Hoult, 23 B. T. A. 804; James E. Wells, 29 B. T. A. 222; Daisy M. Ward et al., Executors, 29 B. T. A. 1251; affd., Helvering v. Ward (C. C. A., 8th Cir.), 79 Fed. (2d) 381; Harry T. Rollins, 34 B. T. A. 319; Chisholm v. Commissioner (C. C. A., 2d Cir.), 79 Fed. (2d) 14; certiorari denied, 296 U. S. 641. Whether a contract as made and carried out consists of one or more transactions is a question of fact to be determined from the evidence. Helvering v. Ward, supra. We have found as a fact that the transactions which took place on December 28 were separate and distinct from those which took place on December 29.

The contention of the respondent, that the petitioners exchanged their shares of stock in the Nudcon Holding Corporation for all of the shares of stock of the two newly created corporations, and stocks, bonds, and cash of a value to each petitioner of $2,258.32, is not borne out by the evidence. Nudelman, on December 28, 1932, exchanged 22 shares of his Nudcon stock for all of the shares of stock of the Familnud Corporation, and Conti, on the same date, exchanged 22 shares of Nudcon stock for all of the shares of stock of the Lucianna Corporation. Any gains or losses resulting from such exchanges are not to be recognized for income tax purposes under section 112 (b) of the statute above quoted. These exchanges were independent of those which took place on December 29. The Nudcon Holding Corporation was not a party to them. After the exchanges of December 28, each of the petitioners owned three shares and each of the newly created corporations owned 22 shares of the. Nudcon Holding Corporation. On December 29 the Nudcon Holding Corporation distributed to its stockholders all of its assets pro rata and was immediately dissolved. The cost basis of the three shares of Nudcon Holding Corporation owned by each of the petitioners on December 29, was $9,141.42. Upon the liquidation of Nudcon each of the petitioners received the equivalent of $2,258.32. The transaction falls under section 115 (c), above quoted. Each of the petitioners sustained a deductible loss of $6,883.10.

Reviewed by the Board.

Judgment will be entered wider Rule 50.


author: ARUNDell :

text:
    Independent Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67700.
    Promulgated November 5, 1936.

      S. Leo Rusla/uder, Esq., and R. J. Glearf,, Esq., for the petitioner.

      Dean P. Kimball, Esq., for the respondent.
   OPINION.

ARUNDell :

Summarizing the facts, they are that in 1930 the petitioner transferred assets to a newly organized corporation for all of its stock, and then exchanged 75 percent of the stock so acquired for stock of Vacuum plus a so-called obligation of Vacuum. On the first exchange the petitioner also received income certificates of the new corporation, but the parties appear to be agreed that these were without value.

In his original determination in this proceeding the resjmndent held that the transfer by petitioner of 26,250 shares of stock of the new corporation to Vacuum was a sale resulting in taxable gain; he did not compute any gain on petitioner’s exchange of assets for stock of the new corporation. By amended answer the respondent claims that petitioner realized a greater gain than originally determined. He alleges primarily that petitioner sold or exchanged less than substantially all of its assets for a mixed consideration consisting of 8,750 shares of stock of the new corporation, 14,192 shares of Vacuum stock, a $1,312,500 obligation of Vacuum, and certain income certificates of the new corporation. In the alternative, the respondent alleges that the exchange of assets by petitioner for stock and income certificates of the new corporation was a taxable transaction.

The question for decision is whether or not the transfers and exchanges described in the findings of fact resulted in recognizable gain to the petitioner. Counsel for the petitioner, analyzing each step, contends that each waFa ’nontaxable exchange. Counsel for the respondent maintains that what was done must be viewed as a single transaction, the substance of which was the transfer by the petitioner of only a part of its assets for 25 percent of stock of the new company plus stock and an obligation of Vacuum. Counsel for the respondent contends in the alternative that, if each step be separately considered, then taxable gain resulted because the petitioner transferred less than “substantially all” of its assets.

The parties cite cases supporting both the single transaction and the separate step theories. The very number of cases on each side demonstrates that neither theory has universal application. It may well be that a completed series of transactions has all the outward appearance of a nontaxable reorganization and yet some of the separate steps may be such as to give rise to gain or loss. On the other hand, each separate step may fit exactly into the words of the statute and yet the completed undertaking may fall outside the statute. Cf. Gregory v. Helvering, 293 U. S. 465. It is not possible to say that either theory should be exclusively applied to the varying situations that arise in the many exchange and reorganization cases that are presented to us. In this case it is unnecessary to say which should be applied, for it is our opinion that either approach to the question produces the same result, namely, that the transactions gave rise to no taxable gain to the petitioner.

Viewing the transactions as the respondent primarily contends should be done, i. e., as an accomplished result and the several steps merely as parts of the whole, and considering the result first from the standpoint of the petitioner, we find that at the outset petitioner owned property used in its oil distribution business; at the conclusion of the transactions, in place of direct ownership it had a 25 percent interest through stock ownership in the transferee plus the interest represented by the income certificates, and also a further substantial interest through its stock interest in Vacuum, which owned the other 75 percent of the transferee’s stock. While the petitioner’s relationship to the assets was substantially changed, nevertheless it acquired and held a definite and substantial interest in the transferee. Cf. Helvering v. Minnesota Tea Co., 296 U. S. 378; Nelson Co. v. Helvering, 296 U. S. 374.

Still viewing the transactions as a whole, but from the standpoint of Vacuum’s participation, we find that what occurred was that Vacuum acquired 75 percent of all the stock of the new corporation. This acquisition was not accomplished by purchase, but by the issue of Vacuum stock to the petitioner. This acquisition contains all the elements of the definition of reorganization in section 112 (i) (1) (A) of the Revenue Act of 1928, as an “acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation.” Under the definition in section 112 (i) (2) both Vacuum and the new company were parties to the reorganization. Moreover, it is plain, we think, that the petitioner was a party to the reorganization. Its assets and its participation were necessary parts in the carrying out of the plan of reorganization. See Fifth Avenue Bank of New York, Executor, 31 B. T. A. 945; affd., 84 Fed. (2d) 787.

Considering the several steps separately, the first taken was the exchange by petitioner of part of its assets for all of the stock of the new corporation. The respondent’s argument that the petitioner transferred less than substantially all of its properties applies only upon an attempt to fit this step into the last clause of section 112 (i) (1) (A) defining a reorganization as the “acquisition by one corporation of substantially all of the properties of another corporation.” We have not found as a fact whether or not the assets transferred constituted substantially all the properties of the petitioner, and we think it unnecessary to do so, for in our view the transaction fits equally well into other parts of the definition section of the statute. It perhaps does not come within that part of paragraph (A) which defines reorganization as including the acquisition by one corporation of a majority of the stock of another. That part of the definition has been held to be limited to cases where the corporation acquiring the stock of another continues in existence. David Gross, 34 B. T. A. 395, 400. It does, however, come within paragraph (B), which treats of the “transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred.” Reaching this point, we meet the objection of the respondent that under the plan of reorganization the petitioner was not to remain in control of the new corporation and that, under the cases viewing a series of transactions as only parts of the whole, we must say that there was no statutory control under paragraph (B) by the petitioner immediately after the exchange. But the assertion of this view is directly opposed to that of each step being a separate transaction. The application of the cases cited by respondent denies the very premise on which the argument is based, namely, that as a matter of law the steps can be separately considered. The attempt to separate the steps and then to argue that the effect of each can not be separately judged confuses the two concepts with which the respondent starts his reasoning. If each step is separate, then the fact that each was pursuant to a plan is immaterial on this point. The existence of a plan may be highly material under other provisions of the statute, but the definition section which we are now considering does not mention it.

Under the separate step theory, the first transaction, namely, that between the petitioner and the new corporation, would come within either subsection (4) or (5) of section 112 (b). Subsection (4) exempts from tax the gain on a transfer of property by one corporation a party to a reorganization to another corporate party solely for stock or securities of the other, and subsection (5) grants exemption on a transfer of property to a corporation for stock or securities where immediately after the exchange the transferor is in control of the transferee corporation. Under subsection (5) the transfer need not be pursuant to a plan of reorganization in order to be exempt from tax.

Still considering the steps separately, the second one was the exchange by petitioner of 75 percent of the stock of the new corporation for stock of Vacuum. Section 112 "(b) (3) provides for the nonrecognition of gain or loss on the exchange of stock or securities in a corporate party to a reorganization for stock""or securities in another corporate party. Section 112 (b) (4) similarly provides for nonrecognition where a corporate party to a reorganization exchanges property for stock or securities in another corporate party. Whether we regard the stock of the new company in the hands of the petitioner as “stock” or as “property”, its exchange by the petitioner for Vacuum stock would be nontaxable under one or the other of these provisions. In Ballwood Co. v. Commissioner, 84 Fed. (2d) 733, there was a similar triangular transaction and the court held broadly that it came under both subsections (3) and (4). Under whichever provision it comes, it is nontaxable if the petitioner received only stock or securities of Vacuum.

The respondent contends that the petitioner received not only stock of Vacuum, but also the obligation of Vacuum to pay $1,312,500, and that because of the receipt of this obligation the transaction does not come within either subsection (3) or (4) of section 112 (b). We do not agree with this view of the respondent. The substance of the agreement between the parties was that the petitioner was to get stock of Vacuum and that was what it actually received. It received a total of 22,978 shares, of which it placed in escrow 8,786 shares to be later sold. There seems to be no dispute as to the petitioner’s actually receiving 14,192 shares of Vacuum stock. The contract with respect to this stock provides that “$1,312,500 * * * shall be delivered the present company [petitioner] in stock of Vacuum * * On the basis of the agreed price per share this stock amounted to 14,192 shares. The next provision of the contract is that “$812;-500 * * * in stock of Vacuum Oil Company shall on the date of closing be endorsed in blank and placed in escrow * * *.” The number of shares necessary to meet this provision was 8,786. The respondent adds together the $812,500 just mentioned and the $500,-000 designated in the contract as the “unpaid balance” and treats the sum, $1,312,500, as an obligation of Vacuum received by petitioner in addition to the Vacuum stock. In this we think there was error. First, the $812,500 was not a money obligation. It was payable and was paid in stock of Vacuum. The evidence is that 8,786 shares were delivered to petitioner and by it endorsed and placed in escrow to be sold. The petitioner according to the agreement was to receive the dividends on the stock while held in escrow and was to receive and did receive the proceeds of sales of the stock. Second, the so-called “unpaid balance” of $500,000 was not an obligation of Vacuum susceptible of treatment as “property.” It was not an obligation on the part of Vacuum to pay any definite or ascertainable amount. It was in substance only a guaranty that the petitioner would realize a certain amount on the sale of the escrowed stock. Not until the stock was sold could it be determined whether or not Vacuum would be liable for any sum at all, and this possibly might not occur for five years after the taxable year. Vacuum had no liability under this part of the contract in the taxable year, and there is no showing that any liability ever did arise. But even if the guaranty can be considered to be property, its wholly contingent nature renders it without value, and there is no measure for a tax under section 112 (c) (1), which bases the tax on the value of “other property” acquired in an exchange. These conclusions are based on our construction of the contract. The petitioner presented valuation evidence, but that was based on the assumption of the guaranty being a direct obligation to pay, and was offered only as an alternative to the conclusions we have reached.

We accordingly hold that none of the transfers and exchanges here involved gave rise to recognizable gain to the petitioner. Minor adjustments made by the respondent in the income reported are not in issue.

Reviewed by the Board.

Decision will Toe entered under Rule 50.

TueNer dissents.