author: Murdock :

text:
    John J. Newberry, Petitioner, v. Commissioner of Internal Revenue, Respondent. Myrtle H. Newberry, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 85780, 87929, 85779, 87930.
    Promulgated May 26, 1939.

      Thomas L. Zimmerman, Esq., for the petitioners.

      Harold F. Noneman, Esq., for the respondent.
   OPINION.

Murdock :

The Commissioner conceded at the hearing that the petitioners are entitled to an exclusion of $5,000 for each of the twelve gifts involved in these proceedings. The only issue for decision by the Board is the value of each of the twelve gifts on the date that it was made. Each petitioner on each of three dates made two gifts. Each gift was of 2,500 shares of common stock of the J. J. Newberry Co. The Commissioner in determining the deficiencies placed a value on each gift by multiplying by 2,500 the unit price at which shares of the stock were currently selling on the New York Stock Exchange. The petitioners, on their returns, valued the stock at about $5 less than those unit prices. Their contention would seem to be that the value of each block was about $5 per share less than the current unit price shown by the exchange sales and quotations because of the size of the blocks given in each instance, i. e., that blocks of 5,000 shares, and perhaps even blocks of 2,500 shares, if thrown upon the market at the time the gifts were made would have depressed the market more than 5 points, and the most advantageous way in which such blocks could have been sold on the basic dates would have been outside of the market to distributors who would have paid about 5 points under the market to give themselves a profit for handling the transactions. The conclusion would be that the fair market values of such lots as were given on the basic dates were at least 5 points below the prices being obtained on the market for small blocks.

The regulations of the Commissioner expressly reject the theory that a large block of stock has any different value than would be obtained by multiplying the current market price of a single unit or share by the number of units in the block. Regulations 79, art. 19. It has been held that a regulation of this kind is not binding, since it attempts to preclude factors which may have a material bearing on value. Safe Deposit & Trust Co. of Baltimore, 35 B. T. A. 259; affd., 95 Fed. (2d) 806; Commissioner v. Shattuck, 97 Fed. (2d) 790; Helvering v. Kimberly, 97 Fed. (2d) 433; Ernest A. Cronin, 37 B. T. A. 914. Fair market value is primarily a question of fact and all evidence bearing upon it should be considered, including any evidence to indicate that the market value may be affected by the size of the block. Florence Guggenheim, 39 B. T. A. 251; Safe Deposit & Trust Co. of Baltimore, supra.

The statute provides that in the case of a gift of property, “the value thereof at the date of the gift shall be considered the amount of the gift-.” Sec. 506, Revenue Act of 1932. The parties have proceeded upon the theory that value, as there used, means “fair market value.” See Regulations 79, art. 19. Cf. Frank J. Kier, 28 B. T. A. 633; Waldemar R. Helmholz, 28 B. T. A. 165; Mary A. B. duPont Laird, 29 B. T. A. 196; Caroline W. Edwards, 31 B. T. A. 879; Cecil E. Gamble, 33 B. T. A. 94; Eleanor Lansburgh, 35 B. T. A. 928; Regulations 70, art. 13. We, therefore, assume for the purpose of this opinion, that the value to be determined is the fair market value of each gift on the day it was made.

The term “fair market value” has been considered and defined frequently. The definition may be stated as the price which would probably be agreed upon by a seller willing, but under no compulsion, to sell, and a buyer willing, but under no compulsion, to buy, where both have reasonable knowledge of the facts. Phillips v. United States, 12 Fed. (2d) 598; Tracy v. Commissioner, 53 Fed. (2d) 575; Crowell v. Commissioner, 62 Fed. (2d) 51; Florence Guggenheim, supra. Actual sales made under such circumstances are reliable, if not the best, evidence of fair market value. Doric Apartment Co. v. Commissioner, 94 Fed. (2d) 985; United States v. New River Collieries, 262 U. S. 341; Ithaca Trust Co. v. United States, 279 U. S. 151; Andrews v. Commissioner, 38 Fed. (2d) 55; Grant Co. v. Duggan, 94 Fed. (2d) 859; Relvering v. Kendrich Coal & Dock Co., 72 Fed. (2d) 330, 333; Commissioner v. Robertson, 75 Fed. (2d) 540; certiorari denied, 293 U. S. 763. However, fair market value may be determined in the absence of actual sales and may even be shown to be different from the price at which actual sales were made. Crowell v. Commissioner, supra; Tracy v. Commissioner, supra.

All parties to these proceedings seem to agree that the prices at which sales were being made on the New York Stock Exchange are the most reliable indication of fair market value on that day. The petitioners accept the New York Stock Exchange prices as conclusive proof of the value on each of the basic dates of small blocks of J. J. Newberry Co. stock. Their sole contention seems to be that those prices would have to be discounted about 5 points in order to arrive at the fair market value of a block of 2,500 or 5,000 shares. The parties have stipulated ail of the basic facts and figures which are in the record. The testimony consisted of opinion evidence given by three witnesses called by the petitioner and two called by the respondent.

The three witnesses called by the petitioner were called apparently to testify, and they did testify, that the market for the Newberry stock was so thin that it would have been seriously depressed by the offer of a block of 2,500 or 5,000 shares, and such a block could have been disposed of to best advantage by a sale outside of the exchange to a dealer who would have paid about 5 points under the market for the shares and then would have sold them privately to customers at the same prices which prevailed upon the exchange. The first witness did not express an opinion as to the extent of the decline in market price which would have resulted from throwing such a block of shares on the market, nor did he express any opinion as to the price which could have been obtained for a block of 2,500 shares sold outside of the exchange. The second witness said the market would have been changed two or three points by an offer of 500 shares; it could not absorb 5,000 shares without a price reduction of several points; and a distributing house would pay 8 or 10 percent under the last sale. He stated, after considerable hesitation, that in his opinion the fair market value of 5,000 shares would be 8 or 10 percent less than the exchange price. Later, he changed his testimony to say that the lower price would not reflect the fair market value. When he was asked what would happen if someone went into the market to buy 5,000 shares and another person went into the market to sell 5,000 shares, he replied that a sale of 5,000 shares would take place at the current market price. The third witness said that a sale to a distributor at about 5 points below the current market price would have been the most advantageous way to dispose of a block of 5,000 shares. Although he said that in his opinion the fair market value of a block of that size on any of the basic dates was the current market price less 5 points, he would not venture an opinion as to the price which would have been agreed upon between a willing purchaser and a willing seller dealing for a block of 5,000 shares where each was reasonably familiar with the facts and neither was under any compulsion to deal.

The testimony of these three witnesses has been carefully considered in an effort to give to that evidence such weight as it deserves. Yet, if their testimony and the stipulation were the only evidence, such evidence would probably be insufficient to show that the “fair market value” of any of the gifts made by these petitioners was less than the amount determined by the Commissioner. Counsel for the petitioners has neither filed a brief nor argued the case orally. Consequently, it is difficult to know exactly what he had in mind when he presented his evidence or to know what he thought of the case after all of the evidence was in. It is possible, of course, that he was convinced upon consideration of the evidence that the Commissioner had not erred. However that may be, he has not offered any argument to explain why he consistently inquired about the effect of throwing a block of 5,000 shares upon the market and refrained from inquiring as to the probable price between willing buyers and sellers.

Each of the gifts in question was of 2,500 shares. Each gift was separate from every other gift. The petitioners have claimed and are being allowed separate exclusions of $5,000 for each gift. Although each of the petitioners gave away a total of 5,000 shares on each date, and the total shares given by the two petitioners on each date was 10,000 shares, they have advanced no argument that blocks of 5,000 shares or 10,000 shares should be considered in determining the value of each gift of 2,500 shares. Cf. Both v. Wardell, 77 Fed. (2d) 124; Adams Express Co. v. Ohio State Auditor, 166 U. S. 185. They did not offer any evidence to show that the value of any gift of 2,500 shares was any less by reason of the fact that on the same day three other gifts of equal size were made. Cf. Bingham v. Commonwealth, 244 S. W. 781. Such a circumstance might possibly be material in some cases as, for example, in the case of a gift of perishable goods, where the value could be realized by the donee only through a sale on the market. But the property donated in this case was not perishable. It had a continuing value and the benefit to the recipient was not dependent upon a sale. Indeed, the trusts provided that the gifts should be retained for a considerable time without sale. Therefore, it seems important to keep in mind only blocks of 2,500 shares. Furthermore, the petitioners have advanced no argument to support their theory that fair market value is to be determined by the effect of throwing large blocks of stock on the exchange for sale on one day or, in the alternative, of disposing of those blocks by private sale through distributors. Cf. Walker v. People, 61 N. E. 489. They assume that the thin market was due to a shortage of buyers and failed to realize that it may have been due to a shortage of sellers. While an offer of 5,000 shares on a single day might have depressed the market in one case, it might have had the opposite effect in the other. Another possibility would have been to feed the shares into the market intelligently over a reasonable period of time. Cf. In re Cook's Estate, 100 N. Y. S. 628.

Although we are not convinced that it is of primary importance in this case to determine the effect of throwing large blocks of stock on the exchange for sale on each of the basic dates (cf. Spaulding v. Martin, 188 Atl. 281), nevertheless some discussion of the testimony of the petitioners’ witnesses and of market conditions indicated by the stipulation may not be amiss. The witnesses were familiar with the market activities in Newberry stock and had some general knowledge of the Newberry Co. but they had made no special study of the history and earnings of that company. Two of the three witnesses did not express any opinion as to the price which would probably have been agreed upon on any of the basic dates for blocks of 2,500 or 5,000 shares between willing buyers and sellers reasonably familiar with the facts and under no compulsion to deal. The third witness expressed the opinion tbat tbat price would be the current market price on any of the basic dates.

The record of sales for 30 days prior and subsequent to July 6,1934, indicates that relatively few shares of the stock were changing hands during that period. There were no sales on many days, while on others the sales were limited to small blocks. However, 3,200 shai’es were sold on 4 days, July 25, 26, 27, and 30. A small sale had taken place on the 24th at 40%. The price ranged from 38 to 40 on the 25th, when 700 shares were sold. It varied from 31 to 37% on the 26th when 1,100 shares were sold, and it closed on the 30th at 34. The next sale was at 37% on August 3. Those figures might indicate that the sale of the 3,200 shares had driven the market down. The record of sales for 30 days prior and subsequent to August 1,1935, shows a great many more sales. Furthermore, although 2,800 sharesi were sold on July 9, 1,600 on July 10, and 1,700 on July 11, there was a small but steady rise during those days in prices. The prices held up under sales and even increased during this period. Three thousand one hundred shares were sold during the week of August 1 with little or no market fluctuation. It is difficult to believe that the market as it actually existed at that time could not have absorbed 2,500 or even 5,000 shares within a reasonably short time without any decline in the market price. The figures for the period around December 26, 1935, show fewer sales, yet there were substantial sales on various days during that period without any substantial change in the prices. Three thousand four hundred shares were sold on December 4 and 5, and the market prices increased during those days. The prices were fairly steady over the entire period. The records themselves do not indicate that if there had been a willing seller on any of the basic dates of blocks of the size here in question, he would have been unable to dispose of his shares within a reasonable time on or about the basic dates at prices substantially the same as the then current market prices. His offer might have improved the market, it might have had no influence on the market, or it might have forced the market down. The last assumption seems no more reasonable than the other two.

The question for determination is the fair market value of a block of 2,500 shares on each of the basic dates in the light of all of the evidence in the case. The probable effect of throwing 10,000 shares on the market on any one of those days is merely evidentiary at most. These petitioners had no desire to sell the stock on any of the basic dates but had entirely different uses for the shares. If counsel for the petitioners has assumed only a willing seller, he has been in error. One attempting to give an opinion of fair market value, as defined for present purposes by the Board and the courts, must assume that on the basic date there was a willing seller and also a willing buyer. This is necessary in order to do justice to both taxpayer and Govern-meat where, as here, a sale of the property was not even contemplated by the donor and donee and yet a value must be determined. Cf. United States v. New River Collieries, supra; Brooks-Scanlon Corporation v. United States, 265 U. S. 106, 123-124. Here there is no more reason to believe from the evidence that there was a willing seller of 2,500 or more of the shares on any basic date than there is to believe that there was not a willing buyer for that number of shares. The witnesses for the petitioners, in stating that the best way to dispose of 5,000 shares was to sell them privately at a discount from the exchange price, were assuming that there were willing sellers, but, apparently, were failing to assume the existence of a willing purchaser on the exchange. They went, instead, to the exchange records in an effort to determine the number of actual purchasers and the probable reduction in prices which would have to occur before a sufficient number of willing purchasers would appear. The petitioners, as we have already said, have advanced no argument to show that such a method of procedure is sound in determining “fair market value.”

However, the decision does not have to be made upon the testimony of the petitioners’ witnesses standing alone. There is, in addition, the testimony of two witnesses called by the respondent. They were shown to be men well qualified by experience and training to express opinions as to the value of the gifts in question on the basic dates. We believe that no one interested in determining the fair market value of the Newberry stock on these basic dates would fail to be impressed by the testimony of these two witnesses. Not only were they familiar with the actual records of sales of the Newberry stock, but they had also studied the history of the Newberry Co. and its business. They had made studies of market conditions and economic conditions, and had made careful comparison of the Newberry Co. and stock with other similar companies and their stocks. They considered the current market price on or about each basic date as the best and most reliable starting point from which to determine the fair market value of a block of 2,500 or more shares on those particular dates. They considered the fact that 10,000 shares in all were given on each basic date. They studied market conditions and other conditions which might have had some effect in producing the exchange prices to learn, if possible, whether those figures were to any extent artificial or whether they could be accepted as a reliable gauge of the fair market value of the stock in larger blocks on each basic date. They came to the conclusion, after considerable study, that those figures were reliable and were the best indication of the value of blocks such as were the subject of the gifts in question. We have carefully considered the testimony of these witnesses in an effort to give to it the weight which it deserves.

A review of the testimony of all five witnesses shows that three of them have expressed the belief that the price which probably would have been agreed upon for blocks of 2,500 or 5,000 shares on each of the basic dates between willing buyers and willing sellers, not under compulsion to trade but having reasonable knowledge of the facts, would have been the exchange prices multiplied by the number of shares in the blocks. No witness.has expressed a contrary view. One witness stated that in his opinion the “fair market value” of such blocks on the basic dates would have been 5 points under the current market price on the exchange. However, it appears from his testimony that the “fair market value” to which he referred was not the price which would be agreed upon between a willing purchaser and a willing seller dealing for a block of 5,000 shares, where each was reasonably familiar with the facts and neither was under any compulsion to deal. We have studied the figures and the facts disclosed by the stipulation of the parties in an effort to properly appraise the testimony of the witnesses and to assign proper weight to the evidence stipulated. The conclusion which we reached, after fully considering all of the evidence be-fore us, is that the Commissioner correctly determined the value of each gift in determining the deficiencies.

Decision will ~be entered vmder Rule 50.


source: Caselaw Access Project

author: Blaor :

license: Public Domain

text:
    Estate of Cecile Le Gierse, Deceased, by Edyth Le Gierse and Bankers Trust Company, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92103.
    Promulgated May 26, 1939.

      Frederick 0. McKenzie, Esq., for the petitioners.

      Harold F. Noneman, Esq., and E. G. Hanson, Esq., for the respondent.
   OPINION.

Blaor :

Although the facts are somewhat different, the question involved in this proceeding is the same .as was recently decided by this Board in the case of Estate of Anna M. Keller, 39 B. T. A. 1047, and is, of course, controlled by our decision in that case.

When Mrs. Le Gierse died on January 1, 1936, she was the owner .of a life insurance policy of $25.,00.0, payable to her daughter, Edyth Le Gierse, in which policy she had reserved the right to change the beneficiary. It was a regular life insurance policy, taken out by decedent upon her own life within .the meaning of section 302 (g) -of the Bevenue Act of 1926.

As we pointed out in the Keller case, we have no cause to treat the insurance payable under the policy as anything else other than insurance, merely because decedent was required to purchase a life annuity policy at the same time she purchased the insurance policy. Although Mrs. Le Gierse was 80 years of age when she purchased the two policies, she was in good health for one of her years and had a life expectancy of 'between four and five years and both the life insurance premium and the annuity premium were .calculated in .accordance with this life expectancy.

What might be the situation if someone known to himself and to the insurance .company to be -suffering from a mortal disease with only a short while to live should take out a life insurance policy together with a life annuity -policy principally to get the life insurance policy for the purpose of .availing to his estate the ’$40,000 life insurance exemption provided in section 302 (g)., we do not decide. We have no such case before us.

No other beneficiaries were entitled to receive .any amount as insurance under ,apy policy .taken out by .the decedent upon her -own life, and the $25,000, if insurance, was the only insurance receivable by Edyth Le Gierse as the beneficiary under a policy taken out by the decedent upon her own life. We hold that the $25,000 was “insurance taken out by the decedent upon her own life”, as that term is used in section 302 (g) of the Revenue Act of 1926 as amended by section 404 of the Revenue Act of 1934. Estate of Anna M. Keller, supra. It follows that the respondent erred in including the amount of $25,000 in the decedent’s gross estate.

Decision will be entered, for the petitioners.


author: ARNOLD:

text:
    Von’s Investment Co., Ltd., v. Commissioner of Internal Revenue, Respondent.
    Docket No. 74643.
    Promulgated May 26, 1939.

      A. Colder Mackay, Esq., for the petitioner.

      B. M. Coon, Esq., for the respondent.
   OPINION.

ARNOLD:

The normal and natural consequences which flow from the acts of interested parties in obtaining a desired objective will frequently reveal their intent and purpose more clearly than their declarations with respect thereto. In making the foregoing findings of fact we have analyzed the testimony of Charles and Linda Yon Der Ahe with relation to the stipulated facts and also what was done pursuant to the plan of reorganization embodied in the amended Merrill contract. The Merrill contract originally provided for the acquisition by the MacMarr Stores, Inc., a Maryland corporation, of the chain of grocery stores owned by Yon’s Inc. for a cash consideration of $880,000. By amendment Von’s Inc. was to transfer its assets to MacMarr Stores, Ltd., a California corporation, for 5,000 shares of its stock. Yon’s Inc. was to immediately exchange these 5,000 shares for 500 shares of the MacMarr Corporation, a Delaware corporation. Yon’s Inc. was then to exchange the 500 shares of the Delaware corporation for 11,000 shares of MacMarr Stores, Inc., a Maryland corporation, and $715,000 in cash, less certain minor deductions. It is stipulated that the MacMarr Stores took over the grocery business and assets of Yon’s Inc. on April 15, 1929, but that the entire transaction was not completed until October 15, 1929, at which time, Yon’s Inc. exchanged its 500 shares of stock in the MacMarr Corporation for 11,000 shares of stock and $577,317.92 in cash pursuant to the Merrill contract, as amended. The petitioner, as the owner of 30,441 shares of Yon’s Inc., was entitled to and actually received $439,360.29 in cash and 8,371.275 shares of stock of the MacMarr Stores, Inc., upon the dissolution of Von’s Inc.

Charles and Linda Von Der Ahe were in a position to cause the successive transfers of Von’s Inc. assets despite the change in form of said assets, by virtue of their stock ownership in Von’s Inc., which amounted to more than 75 percent of the outstanding capital stock. Without the interposition of Grocers and the petitioner, Charles Von Der Ahe would have realized a substantial profit upon the Merrill contract, as amended, because the dissolution and liquidation of Von’s Inc. would have resulted in the distribution to him of over 50 percent of the cash and stock received by Von’s Inc. from the MacMarr Stores, Inc. By interposing Grocers, and by going through the form of a corporate reorganization with Grocers and the petitioner, Charles Von Der Ahe attempted to change the basis of his Von’s Inc. stock from a cost of $86,723.18 to $506,330, which- represents the stipulated fair market value of the assets of Grocers at the time it exchanged the 23,015 shares of Von’s for 2,303 shares of stock in the petitioner. The substitution of the petitioner as a stockholder in Von’s Inc. in lieu of Charles and Linda Von Der Ahe, and the attempt to step up the basis for the 23,015 shares of stock formerly owned by Charles Von Der Ahe, were in furtherance of the plan of reorganization in the Merrill contract, as amended, because the individuals controlled the petitioner by virtue of their ownership of 100 percent of its outstanding capital stock. This absolute control enabled them to vote petitioner’s assets, which consisted of 30,441 shares of Von’s Inc., just as effectively as when these shares were owned by the husband and wife, individually. Through the petitioner they consummated the plan of reorganization embodied in the Merrill contract, and their acts in creating the petitioner and in transferring the stock of Von’s thereto, while circuitous in route, as compared to the direct transfer which could have resulted if they had remained stockholders in Von’s, was nonetheless in furtherance of the plan of reorganization. Our analysis of the testimony and the acts of the several parties, corporate and individual, convinces us that the intent and purpose of Linda Von Der Ahe in transferring her stock to petitioner, and the intent and purpose of Grocers in transferring its stock to the petitioner, were “in furtherance of, and for the purpose of executing and putting into effect, the plan of reorganization embodied in the Merrill contract.”

In its opinion, 92 Fed. (2d) 861, the Circuit Court stated:

* * * If, as seems likely, both transfers were made in furtherance of, and for the purpose of executing and putting into effect, the plan of reorganization embodied in the Merrill contract, they should, we think, be treated as one transaction and held to be a transaction described in section 112 (b) (5), notwithstanding they were made by different persons and were separated by an interval of five weeks.

The court then pointed out that it was not authorized to make findings of fact, and reversed the Board, remanding the case to us with the directions hereinabove set forth. Since we have found that the transfers were made in connection with the plan of reorganization embodied in the Merrill contract as amended, and since the opinion of the Circuit Court indicates that, if such were the facts, we had reached the proper conclusion in our prior decision, we hold, for the reasons set forth in 33 B. T. A. 30, that respondent correctly determined the basis upon which petitioner’s gain should be computed. Cf. Commissioner v. Griffiths (C. C. A., 7th Cir.), 103 Fed. (2d) 110; and Belle G. Loewenberg, 39 B. T. A. 844.

Decision will he entered for the respondent.


author: Van Fossan :

text:
    William Weiser, as Executor of the Last Will and Testament of William T. Fitzpatrick, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 90911.
    Promulgated May 26, 1939.

      Rush L. Holland, Esq., and Dan H. Hughes, Esq., for the petitioner.

      B. D. Daniels, Esq., for the respondent.
   OPINION.

Van Fossan :

A deficiency of $1,527.56 in estate tax was determined by respondent and is here in controversy. Error is alleged in the refusal of respondent to allow a claim of Eva M. Fitzpatrick in the sum of $41,350 as a debt against the estate of decedent. The facts were stipulated and, so far as necessary to our consideration, are as follows:

William T. Fitzpatrick, now deceased, and Eva M. Fitzpatrick were husband and wife. Two children were born as the issue of said marriage, Elizabeth Blanche Fitzpatrick and Katherine Eva Fitzpatrick.

Marital difficulties arose between the parties and separation ensued. A separation agreement was drawn which provided, among other things, that William T. Fitzpatrick should pay to Eva M. Fitzpatrick the sum of $300 per month until the youngest of said children reached majority, then $150 a month until the death or remarriage of Eva M. Fitzpatrick.

The agreement recited as follows:

* * * That the said William T. Fitzpatrick in the consideration of the fact that his wife will no longer live and cohabit with him as his wife, and in consideration of the (premises of his duty to make some provision for the sustenance and maintenance of his said wife and children in the future and for the purpose of settling all present and future property rights between himself and his said wife, hereby covenants and agrees * * *.

Subsequent to tbe execution of the agreement, final decree of divorce was entered dissolving the bonds of matrimony theretofore existing between the said parties. Thereafter, William T. Fitzpatrick remarried.

Fitzpatrick died August 14, 1933, leaving a last will and testament. He left his second wife, Ethel Fitzpatrick, as his widow.

In the administration of the estate in the County Court of Mesa County, Colorado, a claim was filed and allowed against the executor, based upon the contract or separation agreement referred to, which court ordered immediate payment to Eva M. Fitzpatrick from the moneys of said estate the sum of $13,350 at the rate of $150 per month as guardian for the two minor children; and $28,000 to her as her individual claim against the estate. This made the total sum of $41,350, which was allowed as a claim against the estate. Twenty-two thousand one hundred eighty-three dollars and thirty-five cents of the moneys due Mrs. Fitzpatrick individually, and $2,150 of the moneys due the two minors, has been paid. The balance due the minors is being paid at the rate of $160 per month.

Eespondent denied petitioner’s claim for a deduction of the sums so -determined on the ground that it had not been shown the obligation was incurred for a full and adequate consideration in money or money’s worth in accordance with section 303 (a) (1) (C) of the Bevenue Act of 1926, as amended by section 805 of the Bevenue Act of 1932, and section 303 (d) of the Bevenue Act of 1926, as amended by section 804 of the Bevenue Act of 1932.

Petitioner contends that the case is not ruled by section 303 (d) as amended by section 804, because neither dower nor curtesy is recognized in Colorado, and in Colorado neither spouse has any interest in the property of the other prior to the death of the one spouse.

Petitioner also argues that “in construing the statute we must bear in mind that statutes of this nature must be construed, if possible, in favor of the taxpayer.” Here petitioner is in error. He is claiming a deduction. To obtain a deduction a taxpayer must show that he comes clearly within the terms of the statute allowing it. Empire Trust Co. v. Commissioner, 94 Fed. (2d) 307, affirming 85 B. T. A. 866.

Congress has by successive amendments progressively narrowed the scope of the exception to the rule of inclusion of property in the gross estate from “fair” consideration to “adequate and full” in the 1926 Act and then by section 804 of the 1932 Act, which excludes from the category of consideration “in money or money’s worth” any relinquishment of dower or other marital rights in decedent’s property or estate. By the terms of the separation agreement the parties recognized mutual rights and obligations and set about “settling all present and future property rights between himself and his said wife.” In the face of this positive recognition by and expressed purpose of the parties, we are unable to attach any weight in this tax controversy to the fact that the law of Colorado does not provide for dower or curtesy. Whatever may be the rule as to dower or curtesy, certain it is that in the normal incidence of human relations, questions of property rights would arise out of the marital status in Colorado as elsewhere. Such rights are real and vital to the parties. They are broader than the rights of dower and curtesy and need not be dependent on statute. They were recognized by the court in making the allowance. Nevertheless they are “marital rights” in the property of the parties.

Such being the situation, we are of the opinion that, so far as concerns the sum of $28,000 allowed to the wife in her individual capacity, this case is ruled by section 303 (d) of the Bevenue Act of 1926 as amended by section 804 of the Revenue Act of 1932, and that respondent must be sustained. See Estate of Eben B. Phillips, 36 B. T. A. 752; Sheets v. Commissioner, 95 Fed. (2d) 727, affirming 35 B. T. A. 220; Empire Trust Co. v. Commissioner, supra.

As to the item of $13,350 allowed for support of the children, the situation differs. The obligation underlying this sum was contracted bona fide and for a full and adequate consideration in money or money’s worth, i. e., the support of the children during minority. This consideration does not fall within the compass of section 303 (d) as amended by section 804. It is a valid claim against the estate and the deduction of this item is allowed. Estate of Eben B. Phillips, supra.

Decision will be entered wider Rule SO.

       Sec. 303. For the purpose of the tax the value of the net estate shall be determined—
      (a) In the case of a resident, by deducting from the value of the gross estate—
      <1) Such amounts—
      *******
      (C) for claims against the estate,
      as are allowed by the laws of the jurisdiction, whether within or without the united States, under which the estate is being administered » * *. The deduction herein allowed in the case of claims against the estate, unpaid mortgages, or any indebtedness Shall, when founded upon a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money’s worth. * * *
      Sec. 303. (d) * * * For the purposes of this title, a relinquishment or promised relinquishment of dower, curtesy, or of a statutory estate created in lieu of dower or cur-tesy, or of other marital rights in the decedent’s property or estate, shall not be considered tp any extent a consideration “in money or money’s worth.”


author: Leech :

text:
    Howard Hotel Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87393.
    Promulgated May 26, 1939.

      William E. Davis, Esq., and B. N. Tremble, O. P. A., for the petitioner.

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

       SEC. 113. adjusted BASIS POR DETERMINING GAIN OR LOSS.
      (a) Basis (Unadjusted) of Property. — The basis of property shall be the cost of such property; except that—
      *******
      (7) Transfers to corporation where control of property remains in same persons. — If the property was acquired after December 81, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 50 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made. This paragraph shall not apply if the property acquired consists of stock or securities in a corporation a party to the reorganization, unless acquired by the issuance of stock or securities of the transferee as the consideration in whole or in part for the transfer.

   OPINION.

Leech :

Respondent admits that petitioner is entitled to a deduction for depreciation on its furniture and fixtures for each of the years involved. The basis for the computation of that depreciation is the subject of our only inquiry.

The respondent contends that petitioner purchased this equipment from the Commercial Investment Trust, Inc., for $22,500 and that this amount therefore constitutes petitioner’s basis for depreciation of the equipment. The petitioner argues that such basis is the cost of the furniture and fixtures to DeWitt.

The Revenue Acts of 1932 and 1931 apply. The pertinent sections of those acts are identical. The basis for depreciation there provided, is the cost of the furniture and fixtures to petitioner (secs. 114 (a), 113 (a) and (b)), unless they were acquired by petitioner “in connection with a reorganization, and immediately after the transfer an interest or control in such property of 50 per centum or more remained in the same persons or any of them,” and no gain or loss was recognized to the transferor in their transfer to petitioner. Sec. 113 (a)(7).

Since the Revenue Act of 1932 was in effect when the transfer to petitioner occurred, whether gain or loss was recognized to petitioner as a result of that transaction is answered by applying section 112 (b) (4) and section 112 (g) of that act. These sections follow:

SEC. 112. RECOGNITION OP GAIN OR LOSS.
(b) Exchanges Solely in Kind.—
* * * * * * *
(4) Same — gain of CORPORATION. — No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.
***** * *
(g) Distribution of Stock on Reorganization. — If there is distributed, in pursuance of a plan of reorganization, to a shareholder in a corporation a party to the reorganization, stock or securities in such corporation or in another corporation a party to the reorganization, without the surrender by such shareholder of stock or securities in such a corporation, no gain to the distributee from the receipt of such stock or securities shall be recognized.

In section 112 (i) (1) (B) of that act, a statutory reorganization is defined as “a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred.”

Obviously, there was a plan here. Blit to apply section 112 (b) (4), the plan as adopted and executed must have included a statutory reorganization under section 112 (i) (1) (B), supra. Edison Securities Corporation, 34 B. T. A. 1188. The determination of the existence of that condition depends upon whether the several steps in the plan are to be considered separately or as a single transaction here. That is the ultimate question, upon the answer to which the decision of the issue rests.

To sustain the theory of respondent, the steps in the plan must be viewed as isolated and separate transactions, from which it would necessarily follow that Walter W, Lee bought all the issued stock of petitioner for $100 which was paid by merely endorsing and returning to petitioner its check in that amount just given to Lee for services in organizing the petitioner. It would likewise then follow that DeWitt deliberately gave away, without consideration, its equity in the furniture and fixtures admittedly then worth $132,448.20.

Neither reason nor authority supports either such conclusion. Starr v. Commissioner, 82 Fed. (2d) 964; Edwin L. Dana, 36 B. T. A. 231.

“Taxation is an intensely practical matter * * Farmers Loan & Trust Co. v. Minnesota, 280 U. S. 204. The underlying purpose of the reorganization provisions of the revenue acts has never been changed. That purpose was and is merely to maintain the status, quo in tax matters where such a “transfer is primarily a matter of form and not of substance * * Rex Manufacturing Co. v. Commissioner, 102 Fed. (2d) 325.

It can not be denied that the events described in the findings of fact were “in pursuance of a plan” which culminated in the transfer of the furniture and fixtures to petitioner. The performance of each step in the plan, following its adoption, was obligatory upon the parties thereto. See Edwin L. Dana, supra. That plan, as adopted, to which petitioner, DeWitt, and the Commercial Investment Trust, Inc., were parties, was executed. See W. F. Kennemer, 35 B. T. A. 415; affd., 96 Fed. (2d) 177.

The nomenclature and designation given by the parties to any of the transactions involved in the several steps in the plan, is not controlling. Gossett v. Commissioner, 59 Fed. (2d) 365. And, it may be observed, DeWitt treated this entire series of transactions as without tax consequence to it.

The fact that the Mea prompting the- transfer here was to prerent-creditors from taking the property did not proscribe the transfer as a statutory reorganization. Commissioner v. Kitselman, 89 Fed. (2d) 458; certiorari denied, 302 U. S. 709; Frederick L. Leckie, 37 B. T. A. 252; Rest Manufacturing Co. v. Commissioner, supra, George Whittell & Co., 34 B. T. A. 1070. And those cases; except the last, hold that the interposition of a conveyance by a trustee1 in bankruptcy or in foreclosure of a mortgage does not condemn the transfer as a reorganization. A fortiori,. the conveyance here by the Commercial Investment Trust, Inc., to* petitioner does- not do so: That company acquired possession of the furniture and fixtures- from DeWitt*. solely upon its promise to so Convey if no Bids were received therefor higher than that which petitioner contracted to and did make. See Edwin L. Dana, supra.

The detailed steps in the execution of the plan as adopted and carried out here must be viewed as an entirety. Edwin L. Dana, supra; Millicent Turle Roelker, 39 B. T. A. 967; C. A. Munroe, 39 B. T. A. 685. When so considered1, We think, DeWitt, in accordance with its agreement with petitioner, transferred a part of its assets,- i. e., its equity in the- furniture and fixtures,- to petitioner for all of petitioner’s stock,.- which was then distributed to the stockholders of DeWitt in proportion to their holdings of. DeWitt’s stock, without the surrender of. their DeWitt stock.

Since the “trust” in petitioner’s stock declared, by Walter W. Lee, president of DeWitt, at least when supplemented by his assignment of, that stock, was clearly only dry and passive, it must be* considered executed here and the shareholders of DeWitt as the legal and equitable owners of all of petitioner’s stock. Matter of De Rycke, 91 N. Y. S. 159; Matter of Bell, 253 N. Y. S. 118 See Case v. Commissioner, 103 Fed. (2d) 283.

Those1 facts, literally and actually,- constituted a reorganization, within- the quoted definition (supra), and fit, exactly, the provisions of section 112 (b) (4) and 112 (g). And, aside from the-apparent fact that no gain or loss was then realized by DeWitt, the transferor (sec. 111 (a) and (b)), cf. Robert R. McCormick, Executor, 33 B. T. A. 1046, no gain or loss was recognized to DeWitt.

The shareholders of petitioner thus then owned the same 100 percent interest or control in the same equity in the furniture and fixtures after the transfer to petitioner, as they did before, as stockholders óf DeWitt.

We conclude that the contested basis for depreciation' by petitioner on the furniture and' fixtures' hete' involved was DeWitt’s original' cost thereof, which was $260,173.94, adjusted under section 113' (b)‘ (1) (B). Sec. 113 (a) (7). Rex Manufacturing Co. v. Commissioner, supra.

Decision will be emtered for the petiiiionsr.


author: Black :•

text:
    Midfield Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 93029.
    Promulgated May 26, 1939.

      Marry G. Weeks, Esq., for tbe petitioner.

      Carroll Walker, Esq., for the respondent.
   OPINION.

Black :•

Petitioner makes, two contentions; as follows:

1. That the exchange- of the Holmans-oil and gas payment due out of oil' and gas to be produced from the Mitchell1 lease for the Dawson Overriding oil and gas-royalty out óf the Mitchell lease was, under the provisions-of section 112 (b)' (1) of the Revenue Act of 1934, a nontaxable exchange of like kind of property for like kind of property, with no cash difference.

2. That even if the exchange is taxable, the gain to be recognized is only the difference between $15,000 (fair market value of the' Dawson royalty at the time of exchange) and $13,216.80 (the amount conceded to represent the nnrecovered cost of the Holmans oil payment).

The evidence supports the figures which have been stated by petitioner and we have so found in our findings of fact.

We shall first take up and decide petitioner’s first contention, which, if correct, is determinative of the case. Section 112 (b) (1) of the Revenue Act of 1934 reads as follows:

(b)i Exchanges Solely in Kind.—
(1) Property held por productive use or investment. — No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale, nor stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment.

The exceptions to the recognition of gain on a, sale or exchange provided in section 112, including the one which we have just quoted, will be strictly construed as an exception to the general rule that gain is to be recognized and taxed when it is realized. Cf. Connecticut Power Co., 28 B. T. A. 38.

We agree with petitioner that the Holmans oil payment prior to its exchange for the Dawson overriding royalty was held by petitioner for productive use or investment in its trade or business, and we likewise agree that the Dawson royalty was so held by petitioner after it was received in exchange for the Holmans oil payment, but we do not agree that the two properties were of “like kind” within the meaning of the section of the statute just above quoted.

There are two differences in the rights created by the Holmans oil payment and the Dawson overriding royalty, both of which we regard as differences of substance and not of mere form. The first difference is that the Holmans oil payment was limited in amount— that is, the right of the holder terminated after a specified amount of proceeds derived from oil and gas produced on the lease had been received by the holder of the oil payment, while the rights of the holder of the Dawson overriding royalty continued for so long as oil or gas might be produced from the leased property.

The second difference was in the fractions of the oil and gas which were to be applied currently to the oil and gas payment and to the overriding royalty. In the instant case, the fraction of the ml and gas produced on the lease which was to be applied currently to the Holmans oil payment until it was extinguished was four-eighths of the entire production of oil and gas from the property. That which was to be paid under the Dawson overriding royalty was five thirty-seconds of seven-eighths of the oil and gas until the Holmans oil payment had been paid, and then it became a one-fourth overriding oil and gas royalty, one-fourth of seven-eighths.

While we agree with petitioner that there are some points of similarity between the Holmans oil payment and the Dawson overriding royalty, the differences which we have pointed out are so substantial that we do not think the exchange in question falls within the provisions of section 112 (b) (1). On this point the Commissioner is sustained.

As we have already stated, we agree with petitioner on its second point. It is conceded that petitioner has an unrecovered cost basis in the Holmans oil payment of $13,216.80. We have found the value of the Dawson overriding royalty at the time of the exchange to be $15,000. Petitioner’s gain from the exchange should be recomputed by the use of these figures.

Decision will be entered tinder Rule 50.


author: Leech:

text:
    Minnie M. Coward, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87465.
    Promulgated May 31, 1939.

      G. A. Wuerfel, O. P. A., for the petitioner.

      L. A. Spaulding, Esq., for the respondent.
   OPINION.

Leech:

Petitioner asks redetermination of a deficiency of $2,020.10 in income tax for the calendar year 1934, of which she contests only $1,836.61. The issue is whether petitioner is entitled to deduct, from her gross income, the sum of $8,450.31, consisting of taxes assessed for and paid during 1934 on real estate situated in the State of New Jersey.

The facts have been stipulated and are found accordingly.

Petitioner kept her books and filed her income tax return on the basis ox cash receipts and disbursements. On October 16, 1938, she acquired title to real estate located at 9 Garrison Avenue, Jersey City, New Jersey; and on December 8, 1933, she acquired title to another parcel of realty located at 88 Kensington Avenue, Jersey City, New Jersey. She continued to own these properties throughout 1934.

Petitioner paid the real estate taxes due on the two properties during the calendar year 1934 as follows:

Date paitl Amount

9 Garrison Avenue, Jersey City, N. J_ 2/6/34 $1, 261.92

5/1/34 1,261.91

8/14/34 1, 891. 56

11/8/34 1, 000.00

Total_■_ 5,415.39

88 Kensington Avenue, Jersey City, N. J- 2/6/34 878.67

8/13/34 878.66

11/8/34 1,277.59

Total_ 3,034.92

The gross rental income from 9 Garrison Avenue in the sum of $19,963.75 and from 88 Kensington Avenue in the sum of $9,147.87 for the full calendar year 1934 was included by petitioner in her return for that year.

Respondent disallowed petitioner’s deduction of $8,450.31 for the real estate taxes on these properties assessed for and paid during 1934 on the ground that they were not petitioner’s taxes but those of her grantors and thus constituted part of the cost of the properties to her.

The material part of section 23 (c) of the Revenue Act of 1934 is as follows:

SEC. 23. DEDUCTIONS EROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
*******
(c) Taxes Generally. — Taxes paid or accrued within the taxable year, * * *.

It is well settled that if the purchaser of real estate pays taxes thereon which have accrued prior to the date of purchase, such payments are an additional cost of the property to the purchaser and are therefore not deductible by him as his taxes. Helvering v. Missouri State Life Insurance Co., 78 Fed. (2d) 778; Texas Coca-Cola Bottling Co., 30 B. T. A. 736; Leamington Hotel Co., 26 B. T. A. 1004.

The decisive question thus becomes one of determining whether the New Jersey real estate taxes for 1934 “accrued” before or after the respective dates of the conveyances to petitioner. The relevant New Jersey statutes are as follows:

Compiled Statutes of New Jersey, sec. 208-66d (202):

* * * All property shall be assessed to the owner thereof with reference to the amount owned on the first day of October in each year * * *.

Ibid. — sec. 208-66d (401) :

The assessor shall ascertain the names of the owners pf all real property situate in his taxing district, and shall, after examination and inquiry, determine the full and fair value of each parcel * * * at such price as, in his judgment, it would sell for at a fair and bona fide sale by private contract on the first day of October next preceding the date on which the assessor shall complete his assessments, as hereinafter required.

Ibid. — sec. 208-66d (501) :

The ¡assessor shall begin the work of making assessments upon real and personal property upon the first day of October in each year and shall complete the same by the tenth day of January following, on which date he shall attend before the county board of taxation and file with said board his complete assessment list * * *.

Further pertinent sections of the Compiled Statutes of New Jersey-are as follows:

Sec. 208-444a (6). All unpaid taxes on lands, with interest, penalties and costs of collection shall be a lien on the land on which they are assessed on and after the first day of December of the year in which they fall due.
See. 208-456d (503). Notification hy State Comptroller of amount for schools. 503. The State Comptroller shall, on or before the first day of February in each year, transmit to the State Board of Education and to the county collector of each county a statement of the amount of tax appropriated by the State for that year and to be raised by taxation for the public schools; the State Comptroller shall apportion said tax among the several counties in proportion to the amount of taxable real and personal property of said counties respectively as shown by the last annual abstracts of ratables prepared by the State Board of Taxes and Assessment and transmitted by said board to the State Comptroller; the State Comptroller shall also, on or before the first day of February annually, transmit to each county collector a statement of the amount, if any, necessary to be raised by general taxation for State purposes in said county, which the State Comptroller shall apportion in the same manner as the school tax, adding thereto the deficiency, if any, of the previous year; the county collector shall lay said statements before the county board of taxation of his county on or before the tenth day of February in each year, and said board shall apportion the amount required among the taxing districts, as in this act directed, charging the deficiency, if any, to the deficient taxing districts; * * *.
See. 20S-66d (504). Total amount m coimti.es. 504. The county collector of each county shall, on or before the first day of March in each year, transmit to the county board of taxation a statement of the total amount appropriated by the board of chosen freeholders to be raised for current expenses, debt and interest, public works and for all other county purposes, and all amounts otherwise required by law to be raised by taxation in that year for county purposes. The county board of taxation shall apportion the tax among the taxing districts as in this act directed.
Sec. 208-66d (507). Revising tax lists and duplicates. 507. Upon the filing of the assessment lists and duplicates by the assessors with the county board of taxation as hereinbefore provided, said board shall meet for the purpose of examining, revising and correcting said tax lists and duplicates. Any assessor shall attend before said board at such time and place as it may direct, and shall, under the direction and supervision of such board, make up and prepare cor-rented tax lists add' duplicates-. Such board tnay adjourn from- time to time in tire discharge- of its- duties, and shall- have the power, after investigation; to* revise, correct and equalize the assessed value of dll property in- the respective' taxing districts ;' to increase or decrease the assessed value-of any property not truly valued, to add to- said lists and duplicates any property which has been omitted or overlooked, at its true value, and in general to do and perform all' acts and things necessary for the taxation of all property in- said county equally and- at its true value. * * *
Sec. 208-66d (508)'. ToMe of aggregates. 508: The* county board of ta-xation-shall, on or before the tenth day of March, fill out a table of aggregates copied from the duplicates of the several assessors and enumerating the following items: * * * (-22) the tax rate per one hundred dollars-of valuation in each taxing district. * * *
Sec. 208-66d (606) . It shall be the duty of the collector, in person- or by'deputy, forthwith after the first day of December t'0‘ enforce the payment of al® faxes: on personal property * * *; where the tax is upon- real estate the person-assessed may be relieved from- the levy [by] showing he was not the owner at the time- the tax became a lien * * *.

Real estate taxes axe payable semiannually in New Jersey, on- April 1 and- December 1., (Sec: 208-66cl (.602)..) In the case of the" transfer of property the seller or owner shall be liable for such proportion of the current year’s taxes, as- the time between January 1 and the; date of the deed bears to the-full.calendar year. (Sec. 208-66d (514),.).

The above statutes first became law in New Jersey in 191-8.

Respondent supports his action under 6. C. M. 15305, C. B. XXV-2, p. 80, which provides, inter alia, that, as to taxpayers on- the accrual- basis, New Jersey real- estate taxes accrue October 1 preceding the year in which the tax falls due. Obviously, this ruling can not change the law. Manhattan General Equipment Co. v. Commissioner, 297 U. S. 129.

It proceeds on the premise that taxes “accrue” when they are assessed. At least as applied- to the- facts here, that theory is wrong'. As stated by the Circuit Court of Appeals for the Seventh Circuit in Commissioner v. Patriole Cudahy Family Co., 102 Fed. (2d) 930, affirming 36 B. T. A. 1147, where the date for accrual of Wisconsin-realty taxes was in issue:

It is clear that tbe entire emphasis is placed- by the- Commissioner, upon- the fact of assessment, under, the Wisconsin Act, as- of May 1.. We are of opinion that that fact alone is not controlling. “The word ‘assessment,’ as- used in-the decisions and statutes, has various meaningAs.. Properly speaking, it-, does not include the levy of taxes although sometimes the words ‘assess,’ ‘assessed',’ or ‘assessment’ are used in a statute as including both the levy and1 the'assessment. An assessment, strictly speaking, is- an official estimate of the- sums= which are to constitute the baste of an- apportionment of a tax. between the-individual- subjects of, taxation, within the district; It does not;, therefore,of itself lay the charge upon either person or property, but it is. a step preliminary thereto, and which is' essential to the apportionment. As the word’ is more commonly employed/an assessment consists in the two1 processes of listing tbe persons, property, etc., to be taxed, and of estimating the sums which are to be the guide iu an apportionment of the tax between them.” Cooley on Taxation (4th Ed.) Vol. 3, section 1044. See also Evansville and I. R. Co. v. Hays, 118 Ind. 214.

Thus here, the 1934 taxes certainly had not “accrued” when either of the two parcels of realty were conveyed to petitioner.

The work of assessing the taxes for that year began here on October 1, 1933, and was not completed until January 10, 1934. It is true the first step in assessing them was taken on October 1,1933, but:

* * * The assessment as originally made by the assessor does not become the assessment upon which the taxes are finally paid until after the eouBty board of taxation has, under section 507, revised, corrected, equalized values, and increased or decreased the assessed value of any property not truly valued, and added property which has been omitted or overlooked, and, in general, until it has done all things necessary for the taxation of all property equally and at its true value. [Middletown Tp. v. Ivins, 102 N. J. L. 36; 130 Atl. 648.]

Compiled Statutes of New Jersey, sec. 208-66d (507), referred to above, indicates that the county board does not meet for this purpose until after the assessors have filed their lists with the board, which is done, as required by section 208-66d (501), on January 10 of the taxable year. Section 208-66d (503) provides that the state comptroller shall, on February 1, send the county collector a statement of the amount to be raised by taxes, whereupon the collector is to lay this information before the board for apportionment among the various taxing districts. Thereafter, and by March 10, the county board must, on the basis of all the above mentioned data, fix the tax rate per $100 of assessed valuation. Sec. 208-66d (508).

We are aware, as respondent argues, that before the New Jersey tax law revision of 1918, the date upon which tax assessments were to commence in New Jersey was May 20, and that after such revision, that date was October 1 of the year preceding the tax year. We note also that, though taxes are not a personal liability in New Jersey, under the new law, as well as the old law, it has been there held that property was liable to taxation in the name of the person who was the owner thereof on the date upon which the assessment was to commence. Shippen v. Hardin, 34 N. J. L. 79; Broeck v. Jersey City, 44 N. J. L. 156; Jersey City v. Montville Tp., 84 N. J. L. 43; 85 Atl. 838; United States v. Hoboken, 29 Fed. (2d) 932. But section 208-66d (606) reads that “where the tax is upon real estate the person assessed may be relieved from the levy [by] showing he was not the owner at the time the tax became a lien.” Thus, no liability for the 1934 taxes could irrevocably attach to the owner of these properties until December 1, 1934, the statutory lien date (sec. 208-444a (6), supra), and by virtue of the above provision, the persons who sold the properties to petitioner could have had any levy for 1934 made against them in 1933 removed. See also section 208-66d (514), supra.

This Board and the Circuit Courts of Appeal have uniformly held, on cases coming from states other than New Jersey, that taxes do not accrue until they have become a lien on the property. In the recent case of Theodore Plestcheeff 35 B. T. A. 508; affd., 100 Fed. (2d) 62, we distinguished the lien date from the day appointed for the beginning of the work of assessment and held that, under the laws of the State of Washington, the tax incidence occurred on the lien date. See also Lifson v. Commissioner, 98 Fed. (2d) 508, affirming 36 B. T. A. 593; Helvering v. Missouri State Life Insurance Co., supra; Texas Coca-Cola Bottling Co., supra. In any event, we can not conceive that such taxes “accrue” within the meaning of section 23 (c), supra, on October 1, of the prior year, when the first step in the process of assessment occurs.

We conclude that the disputed taxes “accrued” in 1934, which was after the properties against which they were assessed had been conveyed to petitioner. It follows that petitioner is entitled to deduct the amount of them as her taxes.

Decision will be entered under Rule 50.

       This conclusion is not contra to but implicitly sustained by the decision In United States v. Anderson, 269 U.S. 422. See Theodore Plestcheeff, supra, and Commissioner v. Patriole Cudahy Family Co., supra.


author: ReRN :

text:
    Austin Corbin, 2d, Petitioner, v. Commissioner of Internal Revenue, Respondent. Katharine I. Corbin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 93974, 93975.
    Promulgated May 31, 1939.

      II. E. Fraser, Esq., for the petitioners.

      B. H. Neblett, Esq., for the respondent.
   OPINION.

ReRN :

The sole question before us, identical as to each petitioner, another question raised on the petitions having been settled at the hearing by stipulation, is whether the losses sustained by each petitioner in 1934, of $10,842 on Spokane Yalley Irrigation District bonds and of $3,120.31 on Trentwood Irrigation District bonds, are allowable as bad debts under section 23 (k) of the Revenue Act of 1934, or as capital losses under section 117 (f) of the same act, and, if the latter, therefore limited to $2,000 plus capital gams. The pertinent statutory provisions are set out in the margin.

Respondeat contends that gains or losses sustained by a bondholder on the retirement of his bonds at less than their face value are, under section 117 (f) Revenue Act of 1934, capital gains or capital losses; but if it shall be held that such losses were bad debts, he argues that adequate proof of a charge-off is lacking; and, even conceding that a “mental” charge-off — that is to say, a subjective charge-off by intention without any overt act by the taxpayer — is proper, that the evidence here rebuts the existence of such an intention In 1934.

Since the first proposition, if sustained, will dispose of the case, we shall cdnsider it first. In Fairbanks v. United States, 306 U. S. 436,■ the Supreme Court in affirming the court below (Fairbanks v. United States, 95 Fed. (2d) 294), assumed the validity of section 117 (f), Revenue Act of 1934, taxing “amounts received by the holder upon the retirement of bonds * * * as amounts received in exchange therefor”, that is to say, as capital gains; but pointed out that the provisions had no retroactive effect.

There is no specific reference to bonds in section 23 (k) of the statute. However, article 23 (k)-4 of Regulations 86 (set out in full in the margin) provides that “bonds, if ascertained to be worthless; may be treated as bad debts to the amount actually paid for them” — a survival of an earlier regulation. Cf. Regulations 69, art. 154; Regulations 74, art. 194. To the same effect see Murchison National Bank, 1 B. T. A. 617; Samuel Bird, 4 B. T. A. 259. The statute, by section 117 (f), on the other hand, clearly intends to treat the “retirement” of bonds as an “exchange” resulting in either capital gain or capital loss. There can be no doubt that the bonds in question here were “retired” within the meaning of the act, and consequently, the loss sustained on such retirement must be reckoned under section 117 (a), as specifically -provided. Cf. Pacific Employers Insurance Co. v. Commissioner, 89 Fed. (2d) 186.

Petitioner contends, however, that the provision of the regulation and that of the statute in respect of bonds -are not incompatible; that consequently, the irrigation -district bonds were ascertained in 1934 to be worthless to the -.extent which we have found; and if any difference arises between the loss sustained on the determination of worthlessness in that year and the loss resulting from the retirement of the bonds in the next year., 1935, it can be adjusted in the latter year. B.ut this contention overlooks the fact that petitioner’s ascertainment of worthlessness was -coincident with his acceptance of the retirement agreement. There may be situations in which the partial worthlessness of the bonds resulting from the obligor’s financial condition will justify charge-off, in the year of such ascertainment, and where the corporation will in a later year determine to retire them at less than par.; so that the two provisions for deduction .of the loss will successively be brought into play and the relation of their operation be determined. Although such a situation would seem unlikely to arise, we may concede its possibility; but this concession can not persuade us to accept the application of two distinct and disparate methods of deduction in successive years, where the -obligor’s -intention to retire the bond issue was clearly evidenced at the very time when the ascertainment of its financial condition would first have justified a partial charge-off of its obligations. Without deciding, therefore, that the two methods are mutually exclusive in all circumstances, we think they clearly were in the present instance; and that the capital loss deduction, foreseeable as a result of the bonds’ retirement, could not be anticipated by a bad debt deduction for worthlessness ; .that this would defeat the intention of Congress in enacting section 117 (f) and can -not be -accomplished under the clear intendment of that subsection. We hold, therefore, that the losses on both lots of bonds were capital losses and were sustained in 1935 when the bonds were retired, and limited, as provided, in the amount of their deduction. Although the petitioners had ¡done in 1934 what acts were necessary .on their part to .obtain payment of both the Spokane Valley and the Trentwood bonds by depositing them according to the respective agreements, it is not clearly shown that -they thereby acquired the right in either instance to make an unqualified demand on the district for the agreed retirement amount.

'In this view of the case we deem it unnecessary to discuss .the question of charge-off. Since there is no issue as to the deduction in 1934 of the statutory .capital loss sustained on the Trentwood bonds, -the deficiency determined will be affirmed, and

Decision will be entered for the respondent.

       Sec. 23. (k) Bad Debts. — Debts ascertained to be worthless and charged off -within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts) ; and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a deduction.
      *******
      Sec. 117. (a) Generad Rum. — In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net income:
      *******
      30 percentum if the capital asset has been held for more than 10 years.

      (d) Limitation on Capi.tae Losses. — Losses from sales or exchanges of capital assets shall be allowed only to the extent of $2,000 plus the gains from such sales or exchanges. * * »
      *'•'*****
      (f) Retirement op Bonds, Etc. — For the purposes of this title, amounts received fay the holder upon the retirement of bonds, debentures, notes, or certificates or other evidences of indebtedness issued by any, corporation (including those issued by a' government or political subdivisión thereof), with interest coupons or in registered form, shall' be considered as amounts received in exchange therefor'.

       Art. 23' (fc)-4, Worthless bonds and similar obligations. — Bonds, if ascertained' to1 be worthless, may be treated as' bad debts to the amount actually paid for them. Bonds of an insolvent corporation secured only by a mortgage from" which on foreclosure nóthfüg is realized for the bondholders are regarded as ascertained to be worthless not later than the year of the foreclosure sale, and no deduction for a bad debt is allowable in computing a bondholder’s income for a subsequent year.
      A taxpayer (other than a dealer in securities) possessing debts evidenced by bonds or other similar obligations can not deduct from gross income any amount merely on account of market fluctuation. If a taxpayer ascertains, however, that due, for instance, to the financial' condition of the debtor, or conditions other than market fluctuation, he will recover upon maturity none or only a part of the debt evidenced by the' bonds or other similar obligations and so demonstrates to the satisfaction of the Commissioner, he may deduct in computing net income the uncollectible part of the debt evidenced by the bonds or other similar obligations.


author: Aenold :

text:
    Howard S. Dudley, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89436.
    Promulgated May 31, 1939.

      Doma Latham, Esq., for the petitioner.

      B. M. Goon, Esq., for the respondent.
   OPINION.

Aenold :

We are asked by the respondent to apply the principle, announced in Douglas v. Willcuts, 296 U. S. 1, to a situation involving a trust created by the husband and wife, where the property conveyed to the trust was the wife’s portion of the community property. The principle of the Douglas case, which taxed the income of a trust to the grantor, where the trust income was paid to his wife in lieu of alimony, has been extended by subsequent decisions to trusts created to pay the settlor’s debts, Helvering v. Blumenthal, 296 U. S. 552, and to trusts for the maintenance, support, and education of the settlor’s children, Helvering v. Schweitzer, 296 U. S. 551; Helvering v. Stokes, 296 U. S. 551; Commissioner v. Grosvenor, 85 Fed. (2d) 2. The foregoing authorities, and numerous other cases involving trust income, have established the proposition that “where the income of the trust is to be used in discharge of any legal obligation which the settlor would otherwise have to satisfy, the settlor is taxable with such income to the same extent as if it were personally received.” Stephen J. Leonard, 36 B. T. A. 563, 571.

After carefully examining the documentary evidence and the California statutes it is our opinion that the property placed in trust was the wife’s portion of the community property, the amount of which was fixed and determined by the parties in their settlement agreement and therefore her separate property. The evidence shows that petitioner and his wife entered into the settlement agreement to settle for all time their property rights, regardless of whether thereafter they lived together or apart, were married or divorced. Their community property had a value at the time of the division of over $610,000 and it was agreed between them that over $325,000 thereof should be placed in trust for the sole benefit of the wife during her lifetime. If she remarried she agreed to divide the trust income equally with her children. No provision was made for any of the trust income to come to the petitioner, or for the payment and discharge of any obligation that he would otherwise have had to satisfy.

In California a wife has no right of dower in her husband’s estate, section 173, Civil Code of California, but she is authorized to enter into any engagement or transaction, respecting property, with her husband or any other person, section 158, idem. Where the wife secures a divorce for an offense of the husband:

* * * the court may compel him to provide for the maintenance of the children of the marriage, and to make such suitable allowance to the wife for her support, during her life, or for a shorter period, as the court may deem just, having regard to the circumstances of the parties respectively; and the court may, from time to time, modify its orders in those respects. [Sec. 139, idem.]

In case of a dissolution of the marriage, the community property is equally divided between the parties, if the decree is rendered on any other ground than that of adultery or extreme cruelty, sec. 146, idem.

The division of the community property made in the settlement agreement received the approval of the court in its interlocutory decree, and was subsequently made permanent in the decree dissolving the marriage. Despite the authority granted the court by section 139 of the Code, to compel petitioner to provide for the wife’s support, there is no provision in the decree giving the wife any allowance for support, or for alimony, or in lieu of alimony. The court’s failure to provide for the wife, in the same decree in which it ordered petitioner to provide for the support of his children, is deeply significant. The inference is inescapable that the court considered the prior settlement was just, and that the division of the community property between husband and wife discharged his marital obligation of support.

The presence of petitioner as one of the trustors is easily explained. The real property and the securities were in his name. The wife desired and, according to petitioner’s uncontradicted testimony requested, that her portion of the community property be placed in trust. By joining in the conveyance of her portion of the community property to the trustee, the parties eliminated a separate transfer which would have otherwise been necessary if petitioner had conveyed directly to his wife. If, as respondent contends, the petitioner had been creating a trust to discharge his legal obligations, he would have undoubtedly provided that a portion of the trust income should be used for the maintenance and support of his minor children.

In many respects the situation here is analogous to that existing in Ernestine Mitchell, 38 B. T. A. 1336. In that case the husband and wife were residents of the community property state of Texas. They executed a trust agi’eement by which they conveyed certain prop-perty to a bank, as trustee, for the benefit of themselves and their two minor children. The express purposes of the trust were to pay off the debts and obligations of the settlors, to create a trust fund for the settlors’ use for a period of 20 years, and to create a trust fund for the use and benefit of their children. By a supplemental agreement the parties agreed that the trust instrument settled all community differences and property rights of the parties. Thereafter, the wife was granted a divorce and custody of the children. The divorce decree ratified the trust agreement and the supplemental agreement, and awarded to the wife, as her separate estate, the properties that were to be distributed to her, her heirs, or devisees upon her death. In holding that the trust income was not taxable in toto to the husband, we pointed out that the payments received from the trust by the wife were not payments in lieu of alimony and were not made in satisfaction of any legal obligation of the husband. We stated that the payments were, at least in part, distributions “of income from her own separate properties which, under the trust agreement and the decree of the court, remained in the trust with properties belonging to the petitioner [husband].” (P. 1341.)

In this proceeding we are convinced that it was the wife’s separate property that was placed in Private Trust #606, and obviously the income therefrom would belong to her unless she provided for some other distribution. In any event the petitioner had no continuing obligation to support and maintain his wife after the property settlement and the decree of the court. The legal obligation to support his children was satisfied by payments from his personal income as distinguished from the income of Private Trust #606.

We have carefully examined the facts herein in the light of the numerous authorities cited by both parties hereto, but in our opinion the Mitchell case, supra, is closer factually to the instant proceeding than any other we have examined or that has been brought to our attention. The decision of the court in Commissioner v. Tuttle, (C. C. A., 6th Cir.), 89 Fed. (2d) 112, is in point, but that case did not involve a community property state. In the case of Douglas v. Willcuts, supra, and in the cases cited by the respondent, as following the rule there announced, the property placed in trust was the taxpayer’s property, and there was a determination that the trust income was used to satisfy and discharge an obligation of the settlor. In our opinion no obligation of this petitioner was satisfied by the income of Private Trust #606. The respondent’s determination is disapproved.

Reviewed by the Board.

Decision will be entered wnder Buie 50.


author: Tkussell:

text:
    Appeal of VARLEY DUPLEX MAGNET CO.
    Docket No. 1404.
    Submitted July 15, 1925.
    Decided April 21, 1926.
    Invested capital. — Evidence of value of tangible properties and patents paid in for stock held, to be insufficient to form a basis for tbe determination of such values, and tbe Commissioner’s determination, both with respect to invested capital and depreciation of sucb assets, must be approved.

      Edward T. Perine, G. P. A., for the taxpayer.

      Lee I. Parle, Esq., for the Commissioner.
    Before James, Littleton, Smith, and Tktjssell.
    In this proceeding the taxpayer claims relief from a proposed deficiency in income and profits taxes for the calendar year 1917 in the amount of $2,836.30, and alleges as grounds for such relief as follows:
    1. That the Commissioner reduced invested capital by writing down the capital value of plant assets in the amount of $52,868.73 in excess of a reasonable allowance for the exhaustion, wear and tear and obsolescence of such assets.
    2. That the Commissioner refused to restore to the valu¿ of assets of a subsidiary company the amount of $8,865.09, part of the alleged actual cost of said assets.
    3. That the Commissioner allowed as the unexhausted capital value of patents the amount of $1,064.31, when he should have allowed such value in the amount of $7,584.83.
    FINDINGS OF FACT.
    The taxpayer was incorporated on June 13, 1900, with an authorized capital stock of $300,000, and has its principal place of business in Jersey City, N. J.
    During the year 1917 the taxpayer was the owner of all of the capital stock of the Anderson Winding Machine Co. of the par value of $12,000, and of all of the capital stock of the Autocoil Co. of the par value of $51,000, and for that year the taxpayer’s liability to excess-profits taxes has been adjusted on the basis of a consolidated return of these three corporations.
    For a number of years after organization, the taxpayer’s business was not profitable; the books were not closed from the date of incorporation to July 31, 1914, and no allowance was made during any of those years for the exhaustion or depreciation of capital assets. By 1914, however, the business had become established and it was decided to bring the books up to date so as to reflect the true state of the business. An inventory was taken July 31, 1914, purporting to show the value of the taxpayer’s assets as of that date, and the book accounts were adjusted so as to reflect the result of the inventory. After taking inventory, a number of new accounts were set up, one of which was “Winding Machines and Parts.” Winding machines had been purchased from time to time during the life of the corporation at varying prices. One was acquired in 1902 at a cost of $5,300, and in 1903 James C. Anderson contracted to build three machines at a total cost to the taxpayer of $6,700.
    During the period from 1900 to July 31, 1914, the taxpayer carried upon its books an account designated as machinery and tools, which account on July 31,1914, showed a debit balance of $114,856.53. No depreciation as such had been credited to this account during that period, although in 1910 the account was credited with an amount of $7,519.88, which credit had the same effect as writing off depreciation.
    On July 31, 1914, the taxpayer readjusted this account — $7,222.39 was charged to profit and loss; $93,321.26 was carried forward as an inventory of winding machines and parts; $592.12 was carried forward as an inventory of power transmission equipment; and $13,-710.05 was carried forward as inventory of tools, etc. In or about February, 1921, the Commissioner authorized one of his field agents to make an audit of the taxpayer’s books of account for the purpose of verifying its income and profits-tax returns for the years 1917, 1918, and 1919. The field agent reported finding that on January 1, 1902, taxpayer’s machinery and tool account was charged with $75,-009.28. He computed straight-line depreciation at the rate of 5 per cent on this account and the additions thereto and upon the subdivisions thereof from July 31, 1914, to December 31, 1916, and so reduced surplus as of that date in the amount of $64,144.88 in respect to the account of winding machines and parts.
    At the time the taxpayer corporation was organized, it issued all of its authorized capital stock of $300,000 for a mixed aggregate of tangible properties and patents. There were 18 patents which then had a total remaining life of 250% years, the latest expiration date being November 12, 1918. On January 1, 1917, eleven of these patents still had a total remaining life of 9% years.
    In August, 1909, the taxpayer set up on its books an account under the name of Anderson Winding Machine Co. Between August 28, 1909, and July 31, 1914, there were charged to this account various sums aggregating $20,865.09, and on the.latter date this account was closed by charging surplus with the sum of $8,865.09 and investment with the sum of $12,000. On January 1, 1917, the taxpayer carried on its books an asset of capital stock of Anderson Winding Machine Co. $12,000, and the Anderson Winding Machine Co. carried on its books an asset designated as patents $12,000.
   OPINION.

Tkussell:

(1) The Commissioner’s reduction of invested capital on account of depreciation during prior years of the so-called winding machines appears to amount to approximately 67^ per cent of book value of this asset. While we might readily be willing to believe that on December 31, 1916, these properties were not 67¶% per cent ineffective on account of wear and tear, we are unable to make any definite finding upon that subject, for the reason that the taxpayer has failed to produce any evidence respecting the character and quality of these machines, the places where and the business in which they are used, or their then present condition. The Commissioner’s rate of depreciation of 5 per cent may be excessive, but the record is silent on that matter.

(2) The taxpayer’s account of disbursements of $20,865.09 on account of Anderson Winding Machine Co. is spread over the period from 1909 to 1914, and ripened into a capital stock asset carried on the books of the taxpayer at $12,000 par value of shares and upon the books of the Anderson Winding Machine Co. of an asset designated as patents, carried at the same figure of $12,000. While this asset, together with disbursements incident to its acquisition, appears to have cost $20,865.09, the record does not show when the patents were issued or what portion of their cost had become exhausted prior to January 1,1917. Expenses incurred in the procurement of a capital asset and charges to profit and loss or against surplus should not be restored for the purpose of invested capital, in the absence of proof that the capital value in the asset still exists at the beginning of the taxable year. Such proof is lacking in this case.

(3) The record of this appeal contains no evidence of the cash or true value of the patents for which taxpayer’s capital stock was originally issued, nor does it contain any showing of the methods or manner in which such values have been written down from year to year as the life of the patents was gradually exhausting. We are, therefore, unable to find that the unexhausted capital value of the patents existing on January 1, 1917, was greater than the amount attributed thereto by the Commissioner.

The deficiency is $2,38630. Order will be-entered accordingly.


text:
    Appeal of A. E. BURGIO.
    Docket No. 4232.
    Submitted October 12, 1925.
    Decided April 21, 1926.

      A. E. Burgio pro se.

      W. F. Gibbs, Esq., for the Commissioner.
    Before Marquette, Mokris, Love, and GreeN.
    The Commissioner has determined a deficiency in income tax for the year 1923 in the sum of $23. The deficiency results from the disallowance of certain alleged traveling expenses.
   FINDINGS OE FACT.

The taxpayer is a resident of the City of New York. He was, during the year 1923, in the employ of A. Y. Victorius & Co., a corporation with its principal place of business at 370 Broadway, New York City. During a portion of such year he traveled as a salesman for this company, and, while so traveling, his expenses were advanced to him by his employer and by the employer charged to his account. The taxpayer was not in any way reimbursed for the amounts so expended. The advances made by the employer to the taxpayer monthly were as follows:

June_ 253
September-¡_ 219
Sept. 27 to Oet. 5- 66
Total_ 785

The taxpayer paid during the year necessary traveling expenses in the sum of $785.

Order of no deficiency will be entered accordingly.