author: ARNOLD:

text:
    Grover C. Ligon, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 84765.
    Promulgated April 26, 1938.

      Joshua W. Miles, Esq., for the petitioner.

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

ARNOLD:

The sole issue for our determination is whether petitioner sustained a deductible loss in the tax year from the sale of the stock under the circumstances set forth in our findings of fact. That the sale was made and the purchase price paid November 15, 1933, is not in dispute. Neither is-the amount of the loss in dispute. The respondent filed no brief, but, as we understand his position, from the statements made at the hearing and from the course of his cross-examination, he relies solely on the fact that, as the stock was up for collateral to secure an indebtedness of petitioner and was not delivered to the purchaser by the bank until October 25, 1935, the loss was not sustained in 1933.

The petitioner claims that he completely divested himself of all interest in or title to the stock by the transaction of November 15, 1933, thereby sustaining the loss in question. His interest in the stock pledged was that of a pledgor, who retains the general property or title in the thing pledged until it is sold under foreclosure by the pledgee. The pledgee acquires only a special interest or property in the stock during the continuance of the pledge, Jennings v. Gallagher, 152 Atl. 802; Yeatman v. Savings Institution, 95 U. S. 764; In re T. A. McIntyre & Co., 181 Fed. 955. (See note at 4 L. R. A. 305.)

The interest retained by the pledgor in his pledged stock can be assigned and transferred the same as any other property right, and the pledgor’s assignee, at least where the pledgee has notice of the transfer, succeeds to all the rights in the property possessed by the pledgor. Brown v. Hotel Association of Omaha, 63 Neb. 181; 88 N. W. 175; Fuller v. Bassett's Estate (Mich.), 224 N. W. 639, 642; Bumiller v. Bumiller, 179 Cal. 119; 175 Pac. 897; and Mack v. Pardee, 147 S. E. 147.

At the time petitioner sold the stock to Mallonee he made a complete disclosure of the pledge of the stock and the lien which the bank had. Mallonee was not only advised of this fact, but he testified that he made an independent investigation with respect thereto before he purchased the stock. Mallonee was advised by the bank, and knew from the treasurer of the bank, that petitioner’s loan was undersecured and that delivery of the pledged stock would not be made unless the $200 was paid on the loan, the loan reduced, the collateral increased in value, or additional collateral posted. Nevertheless, Mallonee, with full knowledge of these facts, paid petitioner cash for the latter’s interest in the stock pledged. The intention of the parties to transfer ownership of the stock subject to the lien of the bank is fully demonstrated by the notice that petitioner gave the bank advising them of the sale of the 400 shares of stock and that delivery thereof should be made to Mallonee. Mallonee in no way conditioned his purchase of the stock in question upon delivery thereof, but bought petitioner’s interest and title subject to the lien of the bank. Under these circumstances we agree with the petitioner that he had divested himself of all ownership, in the stock in question November 15, 1933, when he received the purchase price.

Deductions under the income tax statutes, however, depend not so much upon refinements of title as they do upon meeting the requirements therein stated for deductions. A loss, to be deductible from gross income, must have been sustained in the taxable year, sec. 23 (e), Revenue Act of 1932; and must usually be evidenced by closed and completed transactions, art. 171, Regulations 77; Lucas v. American Code Co., 280 U. S. 445. The year of deductibility of a loss is determined by á practical test, Lucas v. American Code Co., supra; and the intention of the parties to the transaction is one of the controlling elements in determining whether the transaction was closed and completed in the taxable year. Dee Furey Mott, 35 B. T. A. 195; Ruml v. Commissioner (C. C. A., 2d Cir.), 83 Fed. (2d) 257, reversing Beardsley Ruml, 31 B. T. A. 534; Hoffman v. Commissioner, 71 Fed. (2d) 929, reversing Samuel L. Hoffman, 28 B. T. A. 1264.

In Ruml v. Commissioner, supra, the court, after stating that it was primarily concerned with whether or not the loss evidenced by the sale was realized within the meaning of that term as applied to income taxation, stated as follows:

* * * But when the evidence of realization is a sale of personal property Tstock], it is not always necessary to deliver the property before there may be a deduction of a loss. It is enough that the obligation to deliver is so fixed that the loss is reasonably certain in fact and ascertainable in amount. Lucas v. American Code Co., 280 U. S. 445, * * * Here the transaction was so far advanced in December that the petitioner was bound to deliver the stock to the broker at a price which was then determined by the sale the broker made. That sufficed to make the loss certain and established the amount. Moreover, the intention of the petitioner and the broker being that the particular shares then owned by the petitioner should be delivered to the broker, it follows that title to them passed to the broker in December. Hoffman v. Commissioner, 71 F. (2d) 929 (C. C. A. 2). The loss was accordingly all realized in 1928, and so was deductible in that year.

In Hoffman v. Commissioner, supra, the court, in reversing the Board as to the year in which a loss was sustained from the sale of stock, said:

* * * The ground upon which it [Board] rested the conclusion that title did not pass on July 9th when the certificates were indorsed and delivered to the attorney was that he was to hold possession of them until Dorman should perform his part of the bargain. But the law is well settled that nondelivery of possession would not preclude title to the stock passing forthwith to Dorman if such was the intention of the parties. Hatch v. Oil Co., 100 U. S. 124, 132, 25 L. Ed. 554; Hammer v. United States, 249 P. 336 (C. C. A. 2); Dahlinger v Commissioner, 51 F. (2d) 662 (C. C. A. 3); Eavenson v. Commissioner, 51 F. (2d) 664 (C. C. A. 3); Sanitary Carpet Cleaner v. Reed Mfg. Co., 159 App. Div. 587, 145 N. Y. S. 218; Sherwood v. Commissioner, 8 B. T. A. 103; Swenson v. Commissioner, 14 B. T. A. 675. Not only did the seller, the buyer and the party with whom the certificates were deposited testify that the sale was intended to be consummated on July 9th, but statements and conduct of the parties at that time and thereafter were entirely consistent with such intention. The loss on the sale was sustained in 1926.

The record in this proceeding convinces us that petitioner intended to divest himself of all interest in the stock at the time he received the purchase price and that it was the intention of the purchaser to buy the stock subject to the claim of the bank, deferring actual delivery of possession of the certificates to some time in the future. Under the facts and circumstances herein, the failure to deliver the certificates does not. prevent the transaction of November 15,1938, from being a closed and completed transaction. In view of the foregoing, petitioner is entitled to deduct the loss realized upon the sale of his stock on November 15, 1933.

For failure of proof on the second assignment of error we sustain the Commissioner on that issue.

Decision will he entered under Bule BO


source: Caselaw Access Project

author: Black: V¿N FossáN and Leech,

license: Public Domain

text:
    Frederick Ayer, Jr., et al., Trustees Under Indenture of Trust Executed by Frederick Ayer, Dated February 24, 1911, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67766.
    Promulgated April 26, 1938.

      Ralph E. Tibbetts, Esq., for the petitioners.

      George D. Brdbson, Esq., for the respondent.
   OPINION.

Black:

The sole issue in this proceeding is whether petitioners are taxable on the $225,694.35 which was paid to them during the year 1929 from the depletion reserves of the Keweenaw Land Association, Ltd., and if not taxable on the entire amount, then on what part, if any, are they taxable. The pertinent sections of the Revenue Act of 1928 are printed in the margin.

At the outset it should be noted that the last sentence of section 115 (d) is not applicable to the facts in this proceeding as the depletion reserves here involved were based upon the March 1, 1913, value rather than “on the discovery value of mines.” It should also be noted that while section 115 (b) provides that any tax-free distribution shall reduce the basis, it does not provide, as in section 115 (d), that if in excess of such basis, the excess shall be taxable.

The principal deciding factor is the determination of what portion, if any, of the distribution of $225,694.35 represents an “increase in value of property accrued, before March 1, 1913” and what portion, if any, of the distribution falls within that group of “other distributions from capital” referred to in section 115 (d). The distribution in question was made after all the earnings and profits accumulated after February 28, 1913, and before March 1, 1913, had been distributed, and, therefore, under the plain provisions of the statute, if any part was from “increase in value of property accrued, before March 1,1913”, that part may be distributed “exempt from tax” even though it is in excess of the basis and, if any part was from “other distributions from capital”, that part “shall be applied against and reduce the basis of the stock provided in section 113, and if in excess of such basis, such excess shall be taxable in the same manner as a gain from the sale or exchange of property.” See art. 626, Regulations 74.

Petitioners’ principal contention is that the new association should be regarded in substance as a mere continuation of the old association with an investment of $40,000, and that since the distribution in question was paid out of depletion reserves based upon a March 1, 3913, value of $17,076,008.22, the entire distribution (or at least over 99 percent thereof) should lie regarded as paid out of an “increase in value of property accrued, before March 1, 1913.” As alternative propositions petitioners contend that, even if any part of the distribution be held as having been paid out of “other distributions from capital”, then (1) only such distributions as were made during the effective period of the Revenue Act of 1928 may be applied against petitioners’ basis of $1,017,915, and since during this period only $406,594.35 ($180,900 plus $225,694.35) was paid from depletion reserves, petitioners’ basis would not be exceeded and they would not be taxable on any part of the distribution of $225,694.35; or (2) only such distributions as were made during the effective period of the Revenue Acts of 1924, 1926, and 1928 may be applied against petitioners’ basis, and, since during this period there was paid from depletion reserves the amount of $938,623.05, the maximum portion of the distribution in question taxable as a capital net gain could not exceed the amount of $146,402.40; or (3) in any event if all distributions made between October 6, 1915, and December 31, 1928, were applied against petitioners’ basis, the distribution in question could not exceed petitioners’ basis by more than $224,726.98, and the respondent was at least in error to the extent that he included in petitioners’ capital net gain any amount in excess of the maximum amount of $224,726.98. The respondent concedes petitioners’ third alternative contention, but contends that his determination as to all other matters should be approved.

We shall first consider petitioners’ principal contention. The old and new associations organized in 1891 and 1908, respectively, were what is known under the laws of the State of Michigan, as partnership associations. See Comp. Laws Mich., 1929, chs. 193 and 194, secs. 9909 to 9942. The act providing for such associations was first enacted in 1877. It has been amended and added to from time to time, and as amended is still in effect. The law governing corporations, rather than the law governing partnerships, is applicable to partnership associations. Rouse, Hazard & Co. v. Donovan, 111 Mich. 251; 62 N. W. 359; Staver & Abbott Manufacturing Co. v. Blake, 111 Mich. 282; 69 N. W. 508; Armstrong v. Stearns, 156 Mich. 604; 121 N. W. 312; Yonkerman Co., Ltd. v. Fuller’s Advertising Agency, 135 Fed. 613. In the last mentioned case the court said:

Plaintiff is a partnership association organized under chapter 160, Comp. Laws Mich. 1897, Sections 6079 to 6089. Such associations are legal entities, and are quasi corporations, controlled by the law applicable to corporations rather than partnerships.

Section 1 of the law under which the two associations in question were organized (sec. 9909, Comp. Laws Mich., 1929), among other things, provided that “Said articles of association shall also state * * * the contemplated duration of said association, which shall not in any case exceed twenty years * * The Keweenaw Association, Ltd., was organized February 13, 1891. Under section 9909, supra, its life would have ended on February 13, 1911. Thereafter, under section 9916 of the Compiled Laws of Michigan, 1929, “said association shall cease to carry on its business, except so far as may be required for the beneficial winding up thereof.” Cf. Manhard Hardware Co. v. Rothschild, 121 Mich. 657; 80 N. W. 707. it was not until 1919 that the State of Michigan permitted partnership associations to extend their life. See sec. 9940, Comp. Laws Mich., 1929.

What was the condition of the old association in the instant case in July 1908? It had less than three years yet to live. It was in the midst of a profitable business which could not be successfuly completed within that time. The laws of Michigan contained no provision under which its life could be extended. The members unanimously desired to carry on the business. While they could not extend the life of the old association, there was nothing to prohibit them from organizing a new association to take over the business of the old association, providing they unanimously agreed to do so, which was the case. Cf. Attorney General v. Perkins, 73 Mich. 303; 41 N. W. 426. The testimony shows that the reason for organizing the new association in 1908 rather than waiting until 1911 was that some of the members were getting along in years and they thought it advisable to make the change before the death of one or more of the members, which death might have complicated the intended action. Accordingly, the Keweenaw Land Association, Ltd., was duly organized on July 14, 1908, in the manner more fully set forth in our findings.

Petitioners, in support of their contention that the $40,000 capital of the old association remained the capital of the new association and represents the cost to it of the property taken over, and that any appreciation in the value of the assets of the old association which took place prior to October 12, 1908, represents “increase in valúe of property accrued before March 1, 1913”, within the meaning of section 115 (b) of the Eevenue Act of 1928, to the new association, as well as appreciation which took place between October 12, 1908, and March 1, 1913, cites and relies upon Commissioner v. Sansome, 60 Fed. (2d) 931; United States v. Kauffmann, 62 Fed. (2d) 1045; Helen V. Crocker, 29 B. T. A. 773; Geo. F. Baker, Jr., Executor, 28 B. T. A. 704.

We do not think these cases are controlling upon the point we have here to decide. They held that, where there has been a tax-free statutory reorganization under the provisions of the revenue act applicable at the time the reorganization takes place, earnings of the predecessor corporation retain their character as accumulated earnings rather than becoming capital to the successor corporation in reorganization. For example the concluding part of the court’s opinion in the Sansome case reads as follows: “Hence we hold that a corporate reorganization which results in no ‘gain or loss’ under Section 202 (c) does not toll the company’s life as continued under Section 201, and that what were ‘earnings or profits’ of the original or subsidiary company remain for purposes of distribution ‘earnings or profits’ of the successor or parent, in liquidation.”

To the same effect are United States v. Kauffman, supra; Helen V. Crocker, supra, and Geo. F. Baker, Jr., Executor, supra. There was no such reorganization statute in existence at the time the old association sold and transferred its property to the new association in October 1908. Hence we hold that the cases which petitioners cite and rely upon are not controlling.

In Rosenbaum Brothers, Inc., 11 B. T. A. 736, the question was the determination of the petitioner’s invested capital under section 326 (a) (2) of the Eevenue Act of 1918, and the question turned on whether the petitioner was a new corporation organized in 1916 or merely a continuation of a corporation organized in 1890. The petitioner there was a corporation chartered under the laws of Illinois on February 24, 1916, to take over the business of a corporation by the same name that had been chartered under the laws of Illinois in 1890, but whose charter had expired by limitation on July 9, 1915. Through an oversight the officers of the old corporation did not become aware that the charter had expired until the following year, at which time they immediately secured a new charter for a term of 99 years. Between the date that the old charter expired and the new charter was secured, the business continued to operate and function in the same manner as it had operated and functioned under the corporate charter secured in 1890. At the time the new charter was issued there was no change of domicile, capitalization, officers, directors, stockholders, assets, or name, nor of business methods or practices. The assets and liabilities remained on the books of the new corporation at the same figure as they appeared on the books of the old. The new corporation issued its capital stock of the pan value of $200,000 and assumed all of the liabilities of the old corporation in exchange for all of the assets of the latter, which had a value of $157,665.94 more than the amount at which they were entered on the books. The Commissioner there contended that there was no essential difference between the petitioner and the old corporation, and that, looking through form to substance, the petitioner there had had a continuing existence since 1890, and that therefore it could not write up its invested capital to correspond with the increased value of its assets. In denying this contention and holding for the petitioner, we said in part:

In our opinion the petitioner is a new entity, separate and distinct from the old corporation * * *. It was undoubtedly organized for the purpose of continuing under corporate form the business theretofore carried on by the old corporation. But the purpose in the minds of the incorporators can in no way diminish the power and authority of the State of Illinois to grant a new charter and by the granting thereof to create a new corporation. We are here dealing, not with the renewal of an old charter, but the granting of a new one; not with the extension of the life of an old corporation, but with the creation of a new corporate life. * * * This identity of stockholders might affect the situation if this case came under the provisions of section 331 of the Revenue Act of 1918, but as that section has no bearing upon corporate organizations prior to March 3, 1917, it does not apply here.

In the instant case we are of the opinion that in substance as well as form the Keweenaw Land Association, Ltd., was a new entity, separate and distinct from the Keweenaw Association, Ltd. There is no provision in the revenue laws that would require us to disregard the separateness of the two entities as is sometimes the case in reorganizations, as has already been pointed out, where the new entity is created on or after March 3, 1917. Since the Keweenaw Land Association, Ltd., was created long before 1917, we are bound to regard it in the light of what it actually is, and, when so regarded, we can not escape the conclusion that under the laws of Michigan it was in every respect a new and distinct legal entity.

It follows, therefore, that, in determining what portion of the $17,076,008.22 March 1, 1913, value of depletable properties represents an “increase in value of property accrued, before March 1, 1913”, we must look to the “value” of the properties when acquired by the new association in 1908 rather than the cost when acquired by the old association prior thereto. Unfortunately, the record does not show what the value of the depletable properties was in 1908. The nominal price of $40,000 stated in the October 12, 1908, resolutions of both associations is clearly no indication of the value of the depletable properties at that time. We do not understand the peti'tioners to so contend. Tbeir main contention, as previously stated., is that tbe new association is merely a continuation of the old, with all the consequences which follow, which contention we have denied. Ordinarily where a sale is made at arm’s length by persons familiar with the property involved, the price paid establishes the value of the property at that time. This was not such an arm’s length transaction. The members of both associations were identically the same persons, with each person having identically the same interests in both associations. They were interested only in having the properties of the old association transferred to the new so that the business could go on uninterrupted after 1911 the date when the old association was to cease by operation of law. They were not interested in establishing a value for the properties at that time. One dollar would have served the purpose as well as $40,000. The balance sheet of the new association as of April 1, 1909 (Exhibit 4 of the stipulation of facts) shows net assets of $171,469.31, exclusive of any value whatever for real estate, timber, and ores, which are listed among the assets as follows: “404,979 acres (estimated) of timber lands, farming and mineral lands, including 28 iron mines, Value not estimated.” It is therefore plain that the $40,000 recited in the resolution as having been paid by the new association to the old association for its property does not in any sense represent the true value of the property at that time.

The evidence does show, however, that of the March 1, 1913, value of the ore content of $12,385,808.22, $4,412,000 thereof represented the discovery of new mines by the Keweenaw Land Association, Ltd., between the date of acquisition in 1908 and March 1, 1913. Since the mines were not known to exist in 1908, but -were discovered between 1908 and March 1, 1913, we think that at least $4,412,000 of the total March 1, 1913, value of depletable properties of $17,076,-008.22 represents an “increase in value of property accrued- before March 1, 1913” as that phrase is used in the above quoted statute. The balance of the March 1,1913, value, in the absence of proof, must for the purposes of this proceeding be regarded as cost or paid-in surplus of the association at the time of its organization, and any distribution from a depletion reserve based upon cost or paid-in surplus must be regarded as “other distributions from capital” as that phrase is used in section 115 (d), supra. We, therefore, hold that 4,412,000/17,076,008.22 (25.837 percent) of the distribution of $225,694.35, or $58,312.65, was distributed from an “increase in value of property accrued before March 1, 1913” and is “exempt from tax” under section 115 (b), supra; and that 12,664,008.22/17,076,008.22 (74.163 percent) of the distribution of $225,694.35, or $167,381.70 represents “other distributions from capital” as that phrase is used in section 115 (d), supra. This holding makes it necessary to consider next petitioners’ alternative propositions.

Although prior to December 31, 1926, the total distributions paid to petitioners, on the 8,886 shares purchased in 1915, out of depletion reserves up to that time more than equaled the total cost of the 8,886 shares, $1,003,890, and on December 31, 1928, the total distributions paid to petitioners on the 114 shares purchased in 1923 lacked only $967.37 of equaling the cost of the 114 shares, $14,025, petitioners’ first alternative contention is that their total basis of $1,017,-915 can be reduced only by the distributions out of depletion reserves that were made during the effective period of the Revenue Act of 1928. In support of this contention petitioners point out that in section 115 (d) Congress referred only to the “basis of the stock provided in section 113” and that there is nothing in section 113 providing for an adjusted basis such as is provided for in section 111 (b). Petitioners argue that section 111 deals exclusively with the determination of gain or loss on the sale or disposition of property and does not deal with the taxability of distributions made by a corporation to its stockholders, which is specifically dealt with by section 115; that while section 111 also refers to section 113, it goes further than section 115 (d), and, by the express provisions of section 111 (b) (3j, modifies section 113; that this difference in the applicable basis as set out in section 115 (d), and as set out in section 111, was later recognized by Congress in the Revenue Act of 1934, wherein Congress in section 115 (d) provided that other distributions from capital shall be applied against and reduce the “adjusted basis” of the stock provided in section 113; and that in applying the Revenue Act of 1928 to the facts in the instant proceeding we can not read into the act something that is not there.

We are not convinced by this argument. It is a long established rule that the intention of the lawmaker is to be deduced from a view of every material part of the statute. Hellmich v. Hellman, 276 U. S. 233; Kohlsaat v. Murphy, 96 U. S. 153, 159; United States v. Fisher, 2 Cranch, (6 U. S.) 358, 386. In the latter case Chief Justice Marshall said: “It is undoubtedly a well-established principle in the exposition of statutes, that every part is to be considered, and the intention of the legislature to be extracted from the whole.” It is our opinion that in applying section 115 (d) to the facts in this proceeding, the term “basis” must be construed in the light of the entire statute, and, when so construed, it must be adjusted as Congress has provided in section 111 (b) (3).

Congress has provided in section 111 (b) (3) that the “basis shall be diminished by the amount of distributions previously made in respect of such stock, to the extent provided under the law applicable to the year in which the distribution was made.” Petitioners have received distributions in every year from 1915 to 1929, inclusive. The law applicable to these years embraces every revenue act enacted since the Sixteenth Amendment to and including the Revenue Act of 1928. To what extent do the several statutes require the basis to be diminished by distributions made in respect of petitioners’ interests or shares in Keweenaw Land Association, Ltd. ? The Revenue Acts of 1924, 1926, and 1928 all require the basis to be diminished by distributions both from “increase in value of property accrued before March 1,1913” and “other distributions from capital.” Sec. 201 (b), (d), Revenue Acts of 1924 and 1926; sec. 115 (b), (d), Revenue Act of 1928. It follows that on January 1, 1929, the beginning of petitioners’ taxable year in question, petitioners’ cost basis of $1,017,915 must be diminished by at least the total distributions of $938,623.05 paid from depletion reserves for the years 1924 to 1928, inclusive, thus leaving on January 1,1929, a tentative adjusted basis remaining of $79,291.95. We shall now consider to what extent the Acts of 1913, 1916, 1917, 1918, and 1921 require the basis to be diminished by distributions made in respect of petitioners’ shares. The pertinent section of the Revenue Act of 1921 is section 201, the material parts of which are printed in the margin.

Petitioners in their brief, after quoting section 201 (c) (printed in footnote No. 2, sufra), argue that “It is obvious that section 201 (c) has application only in case of a sale or other disposition of stock and has no bearing upon the taxability or nontaxability of distributions of dividends, whether or not they exceed the basis of the stock.” We do not agree with this statement. That is the same argument petitioners made in contending that section 111 (b) (3) of the Revenue Act of 1928 could not be applied so as to reduce petitioners’ “basis” referred to in section 115 (d) of that act. We have already considered and denied that argument. We are of the opinion that section 111 (b) (3) of the Revenue Act of 1928 requires the basis to be diminished by the distributions made during the years 1921, 1922, and 1923, the effective period of the Revenue Act of 1921, to the extent provided under that act, and that under section 201 (b) thereof the basis is to be diminished by tax-free distributions only where the distributee is claiming a loss, and that under section 201 (c) the basis is to be diminished by other distributions from capital regardless of whether a loss or gain is involved. See Paul & Mertens, vol. 2, sec. 18.191. Since in the instant proceeding petitioners are not claiming any loss, we hold that the basis should not be reduced by distributions from “increase in value of property accrued before March 1, 1913” made during the effective period of the Revenue Act of 1921, but only by other distributions from capital made during that period.

The Acts of 1913, 1916, 1917, and 1918 do not require the basis to be diminished by distributions made in respect of petitioners’ shares. Cf. Caroline S. McLean, 4 B. T. A. 487. We hold, therefore, that petitioners’ basis should not be reduced by distributions made while those acts were in force.

The record, however, does not show the amounts of the distributions made from depletion reserves during the years 1921, 1922, and 1923 on the 8,886 shares purchased in 1915. Regarding the 114 shares purchased in 1923, the record does show that $11,889.23 was distributed from depletion reserves during the years 1924 to 1928, inclusive, and that, after applying all the distributions made on such shares from February 9, 1923, to December 31, 1928, inclusive, against the total cost of $14,025, there was a remaining cost of $967.37. Therefore, we find that from February 9 to December 31, 1923, petitioners received distributions of $1,168.40 from depletion reserves on the 114 shares, $866.52 (74.163 percent of $1,168.40) of which represented “other distributions from capital.” It follows that petitioners’ cost of the 114 shares, $14,025, should be reduced by $12,755.75 ($866.52 plus $11,889.23), thus leaving a remaining cost basis of the 114 shares on January 1, 1929, of $1,269.25.

As shown in our findings, there was paid to petitioners from depletion reserves on the 114 shares during 1929 the amount of $2,858.80. Of this amount, 25.837 percent or $738.63 represents a distribution from “increase in value of property accrued before March 1, 1913” and is exempt from tax under section 115 (b) of the Revenue Act of 1928. This amount, however, must be applied against and reduce petitioners’ remaining basis of $1,269.25 to the amount of $530.62. Of the amount of $2,858.80, 74.163 percent or $2,120.17 represents “other distributions from capital” and, under section 115 (d) of the Revenue Act of 1928, must be applied against the remaining basis of $530.62 and the excess of $1,589.55 taxed in the same manner as gains from the sale or exchange of property.

Regarding the distributions made from depletion reserves on the 8,886 shares during the years 1921, 1922, and 1923, we are, of course, able to- determine from the record that at least $91,072.61 ($1,168.40 divided by 114 equals $10.249 per share times 8,886) was so distributed from February 9 to December 31, 1923. Of the $91,072.61, $67,542.18 (74.163 percent) represented “other distributions from capital.” Reducing petitioners’ cost of the 8,886 shares, $1,003,890, by the amount of $67,542.18 and by all the distributions made from depletion reserves on the 8,886 shares during the years 1924 to 1928, inclusive, or $926,733.82, would leave a remaining cost of the 8,886 shares on January 1, 1929, of $9,614. But this cost would have to be further reduced by “other distributions from capital” made from depletion reserves during the period from January 1,1921, to February 9,1923, and the record is silent as to the amount of such distributions. This lack of proof, however, becomes immaterial, for whether we apply the total distributions paid from depletion reserves during the taxable year on the 8,886 shares, or $222,835.55, against the basis as adjusted under section 111 (b) (3), or $9,614, or a lesser amount, the excess over such adjusted basis would in either event be greater than $165,261.53 (74.163 percent of $222,835.55), the maximum amount that can be taxed under section 115 (d) of the Revenue Act of 1928.

Petitioners’ tax liability for the year 1929 should be recomputed by including in capital net gain the amount of $166,851.08 ($165,261.53 plus $1,589.55) instead of the amount of $225,683.86 included by the respondent in his determination.

Reviewed by the Board.

Decision will be entered wider Rule 50.

V¿N FossáN and Leech,

dissenting: Petitioners contend that their basis for the stock on which the disputed distributions in 1929 were made, is cost, diminished only by distributions from depletion reserves, occurring within the period during which the Revenue Act of 1928 was effective. We agree.

Section 115 (d) of the Revenue Act of 1928 admittedly controls the treatment of these distributions. That section provides clearly that, in computing the taxable gain therefrom “such distribution [s] shall be applied against and reduce the basis of the stock provided in section 113.” (Emphasis supplied.) Section 113 says just as clearly that, here, such basis “shall be the cost” of the stock. Section 111, the provisions of which the majority applies, is not mentioned in section 115 (d). Not only that, but section 111, by its terms, is restricted in its application to sales or other dispositions, neither of which occurred here.

Therefore, there is no sound reason for this Board to disregard the explicit and unambiguous provisions of sections 115 (d) and 113. Koshland v. Helvering, 298 U. S. 441; Helvering v. St. Louis Southwestern Railway Co., 84 Fed. (2d) 857; Helvering v. Owens, 95 Fed. (2d) 318. Particularly is this true in view of the history of the treatment such distributions were given in the revenue acts both before and since that of 1921.

       SEC. 115. DISTRIBUTIONS BY CORPORATIONS.
      * * * * * * *
      (b) Source of distributions. — For the purposes of this Act every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings or profits. Any earnings or profits accumulated, or increase in value of property accrued, before March 1, 1913, may be distributed except from tax, after the earnings and profits accumulated after February 28, 1913, have been distributed, but any such tax-free distribution shall be applied against and reduce the basis of the stock provided in section 113.
      * * * * * 4c *
      (d) Other distributions from capital. — If any distribution (not in partial or complete liquidation) made by a corporation to its shareholders is not out of increase in value of property accrued before March 1, 1913, and is not out of earnings or profits, then the amount of such distribution shall be applied against and reduce the basis of the stock provided in section 113, and if in excess of such basis, such excess shall be taxable in the same manner as a gain from the sale or exchange of property. The provisions of this subsection shall also apply to distributions from depletion reserves based on the discovery value of mines.
      * * * * * *
      SEC. 113. BASIS FOR DETERMINING GAIN OR LOSS.
      (a) Property acquired after February 28, 1913. — The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property ; except * * *
      SEC. 111. DETERMINATION OF AMOUNT OF GAIN OR LOSS.
      (a) Computation of gain or loss. — Except as hereinafter provided in this section, the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis provided in section 113, and' the loss shall be the excess of such basis over the amount realized.
      (b) Adjustment of basis. — In computing the amount of gain or loss under subsection (a)—
      *******
      (3) In the case of stock the basis shall be diminished by the amount of distributions previously made in respect of such stock, to the extent provided under the law applicable to the year in which the distribution was made.

       (b) For the purposes of this Act every distribution is made out of earnings or profits, and from the most recently accumulated earnings or profits, to the extent of such earnings or profits accumulated since February 28, 1913; but any earnings or profits accumulated or increase in value of property accrued prior to March 1, 1913, may be distributed exempt from the tax, after the earnings and profits accumulated since February 28, 1913, have been distributed. If any such tax-free distribution has been made the distributee shall not be allowed as a deduction from gross income any loss sustained from the sale or other disposition of his stock or shares unless, and then only to the extent that, the basis provided in section 202 exceeds the sum of (1) the amount realized from the sale or other disposition of such stock or shares, and (2) the aggregate amount of such distributions received by him thereon.
      (c) Any distribution (whether in cash or other property) made by a corporation to its shareholders or members otherwise than out of (1) earnings or profits accumulated since February 28, 1913, or (2) earnings or profits accumulated or increase in value of property accrued prior to March 1, 1913, shall be applied against and reduce the basis provided in section 202 for the purpose of ascertaining the gain derived or the loss sustained from the sale or other disposition of the stock or shares by the distributee.


author: Van Fossan :

text:
    Louise G. Hill, Petitioner v. Commissioner of Internal Revenue, Respondent.
    Docket No. 80483.
    Promulgated April 27, 1938.

      G. F. Stanton, Esq., for the petitioner.

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

Van Fossan :

This proceeding was brought to redetermine a deficiency in the income tax of the petitioner for the year 1931 in the sum of $1,311.53.

The sole issue is the deductibility of interest amounting to $22,781.02, paid by the trustee of a revocable trust created by the petitioner on account of the delinquent payment of a succession tax of $19,238.02 paid by the trustee to the Registrar of the Supreme Court of British Columbia.

The facts were stipulated substantially as follows:

Arthur Hill, husband of the petitioner, died on December 6, 1909, leaving a last will and testament dated June 14,1904. He was a resident of Saginaw, Michigan, at the date of his death and his will was admitted to probate in Saginaw County. By the terms of the will, Gilbert M. Stark was named as one of the executors and the petitioner, Louise G. Hill, was named as residuary legatee and sole beneficiary.

One of the assets owned by Arthur Hill at the date of his death was an undivided one-half interest in a partnership doing business as Arthur Hill & Co. The partnership assets consisted, among other things, of interests in timber leases and licenses on Vancouver Island in the Province of British Columbia.

Upon the death of Arthur Hill, the partnership was dissolved and the one-half interest of the decedent in the partnership was, on January 19,1911, assigned to Louise G. Hill, the estate closed on that date, and the executors discharged.

The executors of the estate of Arthur Hill had apparently been advised by counsel that no succession tax was due on the timber leases and licenses to the Province of British Columbia and, accordingly, no administration was ever had in that province.

During the year 1920, and after the assignment to Louise G. Hill of her interest in the timber leases and licenses, the Great Central Timber Co. was incorporated under the laws of Delaware and the owners of the timber licenses, including Louise G. Hill, transferred their interests therein to the corporation in exchange for stock. During the year 1927 a sale of the timber leases and licenses was made by the Great Central Timber Co. to Bloedel, Stewart & Welsh, Ltd., a Canadian corporation. At the time of the sale, advice of counsel whether the British Columbia succession tax was due or payable was sought, and upon receiving advice that no succession tax was due, the sale was consummated.

In the year 1930 the question of succession taxes on the timber leases and licenses again arose and the matter was further investigated by solicitors in Canada. Louise G. Hill was then advised that it was necessary to pay a succession tax upon such timber leases and licenses, and she was further advised by her attorneys that she was liable for the tax.

Attorneys were employed for the purpose of presenting the matter to the Supreme Court of British Columbia for the determination of such tax in accordance with the provisions of the Succession Duty Act. On August 6, 1931, an order was entered directing Gilbert M. Stark, as surviving executor of the said will of Arthur Hill, or Louise G. Hill, residuary legatee, to pay on or before the 30th day of September 1931 to the Registrar of the Supreme Court of British Columbia the sum of $19,238.02, together with interest thereon at the rate of'6 percent per annum from the 6th day of December 1911 to the date of payment, this being the succession duty payable in respect to the interest of Arthur Hill in the timber leases and licenses owned by Arthur G. Hill & Co.

The taxpayer made her return on a cash receipts and disbursements basis.

On October 2, 1925, Louise G. Hill created a voluntary revocable trust, naming the Detroit Trust Co. as trustee, and conveyed to the said trustee all of her stock in the Great Central Timber Co. During the year 1931 the trustee paid, in accordance with the terms of the order entered by the Supreme Court of British Columbia, a succession tax in the amount of $19,238.02 and interest thereon in the amount of $22,781.02. The interest paid by the trustee was deducted from the amount of income received by the trust and the balance distributed to the petitioner, Louise G. Hill.

The Commissioner of Internal lie venue, in auditing the fiduciary return filed by the Detroit Trust Co. as trustee for Louise G. Hill, disallowed the deduction for interest and, in the individual income tax return of Louise G. Hill, increased her income by the amount of interest, to wit, $22,781.02.

The petitioner contends that the succession tax paid by her to British Columbia was primarily her obligation and that, therefore, the interest thereon was deductible under section 23 (b) of the Revenue Act of 1928. She concedes that the tax itself is not deductible by her under the restrictive provision of section 23 (c) of that act.

The respondent’s position is that the interest was not the liability of an obligor, but at most was that of a transferee by reason of having received the property from which the tax should have been paid.

The distinction between an estate tax and a succession tax is that the former is a tax upon the right to transfer, while the latter is a tax upon the right to receive property by devise or inheritance. Bouvier’s Law Dictionary, 3d Ed., vol. 3, p. 3176; Words and Phrases, 1st Series, vol. 7, p. 6747. The succession tax is personal to the recipient of property. It is not a property tax. See 61 C. J. 1595, et seq. “Succession duty is a tax placed on the gratuitious acquisition of property which passes on the death of any person * **." Knowlton v. Moore, 178 U. S. 41, quoting Hanson’s Death Duties. If the tax paid by the petitioner to British Columbia was a succession tax, it was her own liability and the interest thereon was deductible as being interest on her own indebtedness. It, therefore, becomes necessary to examine the circumstances and the law under which the payment was made.

The operation of the statute here, allowing deductions for “interest paid * * * on indebtedness”, is not in terms dependent upon the characterization of the quoted phrase by foreign statutes and decisions. Biddle v. Commissioner, 302 U. S. 573. The question of whether under our statutes a deduction is allowable by reason of an imposition by a foreign statute must be decided by an ascertainment of the manner in which the foreign tax is levied and collected, and whether the act of the taxpayer thereunder results in the substantial equivalent of what our statute recognizes as a deduction.

From our consideration of the statutes of British Columbia it is our opinion that they impose a succession tax which was a primary obligation of the recipient of the property., The British Columbia statute is called the “Succession Duty Act.” It imposes a graduated tax measured by the degree of relationship between the decedent and his beneficiaries. It directs that “the duties imposed * * * shall be deducted from the share of each person entitled to share in the estate.” B. S. 1924, c. 244. Compare this with our Federal estate tax, of which it has been said, “What this law taxes is not the interest to which the legatees and devisees succeeded on death, but the interest which ceased by reason of the death.” Y. M. C. A. v. Davis, 264 U. S. 47. The British Columbia statute further directs that “every person by whom any duty * * * is payable shall be personally liable therefor.” Sec. 10 (3). By section 27 executors are directed to deduct the duty from the decedent’s property “or collect the duty from the person liable therefor” and an executor is prohibited from delivery of property to a legatee “until the duty has been so deducted or collected.” This resume of the statute demonstrates that in a very real sense the duty is a succession tax for which the legatee or devisee is personally liable.

It appears from British Columbia cases cited to us that the 1924 statute quoted above, under which the succession tax was collected, was later declared invalid on the ground of violating a provision of the British North American Act of 1867 which permitted the levying of direct taxes, whereas the 1924 Act imposed a liability on the executor. This defect, however, was cured by later enactments known as the Succession Duty Act of 1934 and L. 1935, ch. 72, § 9 (1), which, as we read them, had the effect of validating taxes and interest previously paid and preventing a refund of any payments theretofore made.

We construe these provisions to mean that the succession duty upon the property of anyone dying after April 11, 1894, and before the passage of the act, if not already paid, shall be paid under the appropriate rates of any prior act, with due credit for partial payments, and if full payment of the duty has been made, it shall not be required again. They likewise fixed the requirement of interest.

Section 23 (c) of the Revenue Act of 1928 specifically and “for the purposes of this subsection” allows all state, inheritance, legacy and succession taxes as a deduction only to the estate. The petitioner thus can not be allowed, nor- does she claim, the payment of the sum of $19,238.02 as a deduction, even though under the local law the succession tax was her personal liability. Section 23 (b), however, permits her to deduct interest on her indebtedness. The succession duty paid by her to British Columbia was her personal liability and interest paid on the same is accordingly deductible. Though the question presented differed, the reasoning underlying our decision in Charles F. Fawsett, 30 B. T. A. 908, supports the above conclusion.

Decision will be entered wider Bule 60.

       SEC. 23. deductions FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions :
      *******
      (b) Interest. — All interest paid or accrued within the taxable year on indebtedness * * *.

       (c) Tames generally. — Taxes paid or accrued within the taxable year, except—
      *******
      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.

       Sec. 50. (1) This Act shall be retroactive, and shall apply in respect of persons who have died since the eleventh day of April, 1894, as well as in respect of persons who die after the commencement of this Act, * * *
      *******
      (2) * * * Every person liable for the payment of duty in respect of property passing on the death of any person who died prior to the twenty-nineth (sic) day of March, 1934, shall pay interest on the duty from the same date interest would have been payable from had this Act been in force at the date of the death of the person in respect of whose estate the duty is payable.


author: Steknhagen :

text:
    Marjorie Lipe Stacy, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78477.
    Promulgated April 29, 1938.

      Benjamin E. Shove, Esq., for the petitioner.

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

Steknhagen :

The Commissioner determined deficiencies of $1,715.89 for 1931 and $5,573.30 for 1932 in the petitioner’s individual income tax, by including in her gross income amounts received by her as guardian of three children, and allowing certain deductions. The facts are found in a stipulation.

When petitioner’s brother and his wife died in an accident in August 1929, leaving three small children, she was appointed their guardian and another was appointed guardian of their property. The father left a substantial fortune. Petitioner, with the surrogate’s approval, enlarged her house and expanded her household to provide adequately and suitably for the care and maintenance of the children. Upon order of the surrogate, issued upon proper petitions, the guardian of the property paid to petitioner, as guardian of the person, $49,425.82 in 1931 and $56,111 in 1932, for support and maintenance of the wards, exclusive of amounts for medical care, clothing, toys, and other personal effects.

In each year the guardian of the property made returns and paid the proper tax upon the income of each child.

The Commissioner, in computing the individual tax of petitioner, included in her gross income the entire amounts of $49,425.82 and $56,111, and reduced them by deducting half the household expenditures and the depreciation on a portion of the house and on a car.

The amounts received by the guardian of the children were to be regarded as received by the children and not by the petitioner individually. The distinction is made clear in Van Wart v. Commissioner, 295 U. S. 112. There is no evidence that petitioner was to be paid individually for her services as guardian. She did, apparently, report as her individual income each year an amount of rent received out of the aforesaid funds, as provided in the surrogate’s order. In the deficiency determination the respondent adopted this treatment of rent within her gross income, and she does not now contest the inclusion. The Commissioner was clearly in error in treating anything in addition to this as petitioner’s individual income. So far as this record shows, no further amount of the children’s allowance was spent by the petitioner for her individual use; although there is an ambiguous statement in the stipulation in respect of expenditures of an unascertained amount made by her from an unidentified source for the support and maintenance of herself and her immediate family. But the Commissioner has proceeded upon the incorrect method of regarding the entire amount received by her as guardian as if it had been received by her individually and therefore within her individual gross income, from which he has allowed a deduction of one-half of the expenditures made from this fund as being made for the wards, thus leaving the rest as taxable to her as if individually received by her. This entire concept of the petitioner’s relation to the income and expenses of her wards is incorrect and requires a reversal of his determination that any amount in addition to the rent already included in the petitioner’s income should be added.

Judgment will be entered under Bule 50.


author: Mellott:

text:
    The Brush-Moore Newspapers, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 86732, 86946.
    Promulgated April 29, 1938.

      William E. Vodrey, Esq., for the petitioner.

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

Mellott:

In these proceedings, duly consolidated, petitioner seeks a redetermination of (1) the deficiency in income tax determined against it by the Commissioner for the year 1933 in the amount of $7,203.67, and (2) the deficiency in income and excess profits taxes determined against it for the year 1934 in the amounts of $2,796.34 and $918.76.

One issue, common to both years, arises upon the Commissioner’s determination that certain payments made by the petitioner to the estate of Harry E. Taylor were “in the nature of advance dividends” upon second preferred stock of the corporation and not deductible a,s interest paid under section 23 (b) of the Eevenue Act of 1932 and the corresponding section of the Eevenue Act of 1934. This is the sole issue which will be discussed, the parties having stipulated that the portion of the deficiency attributable to the Commissioner’s disallowance of a payment made by the petitioner to the estate of Warren G. Harding in 1933, amounting to $8,867.04, may be settled under Eule 50 of the Board’s rules of practice in accordance with a final determination in Brush-Moore Newspapers, Inc. v. Commissioner, now pending in the United States Circuit Court of Appeals, Sixth Circuit, as No. 7462, the appellant therein seeking to reverse the decision of the Board in Brush-Moore Newspapers, Inc., 33 B. T. A. 362. Effect will be given to the stipulation of the parties on this issue in a settlement under Eule 50.

All of the facts were stipulated, which, summarized, are as follows:

The petitioner is an Ohio corporation with its principal office at 500 Market Avenue South, Canton, Ohio.

In February 1930 the petitioner purchased from Harry E. Taylor, of Portsmouth, Ohio, all the shares of the Times Publishing Co. and the Portsmouth Publishing Co., both of Portsmouth, Ohio, and one-half of the shares of the Tribune Publishing Co. of Ironton, Ohio, for a purchase price paid in part by cash and in part by 11 installment promissory notes in the aggregate amount of $550,000, payable beginning February 9, 1931, at the rate of $50,000 per year. In March 1931 promissory notes were outstanding in the amount of $500,000. In addition to this liability to Taylor, the petitioner had numerous liabilities upon which regular payments were due. It had become difficult for the petitioner to meet all these payments, due to the decrease in revenues during the depression years. The petitioner, therefore, commenced readjustment of its financial structure, in order to accommodate its disbursements to its reduced revenues.

One of these adjustments was the exchange, in March 1931, of the Taylor promissory note in the amount of $400,000 for an equivalent amount of second preferred shares of the petitioner, to eliminate annual principal payments of $50,000. This exchange was made under the provisions of a resolution of the board of directors of petitioner adopted March 25, 1931, which provided that the second note due February 9, 1932, would be paid at maturity; that in exchange for the remaining nine promissory notes in the aggregate amount of $450,000 there should be made and delivered to Taylor a promissory note dated February 7,1931, payable to his order on or before May 15, 1931, in the amount of $50,000, with interest thereon from date at the rate of 6y2 percent per annum; and that:

The Brush-Moore Newspapers, Inc., shall issue and. deliver to said Harry E. Taylor Four Thousand (4,000) second preferred shares of The Brush-Moore Newspapers, Inc. If, at any quarter, the regular dividends upon said 4,000 second preferred shares shall not be declared and be paid, The Brush-Moore Newspapers, Inc., shall pay to the registered holder or holders of such second preferred shares at said quarter, as interest in lieu of dividends on 1,500 second preferred shares, a sum of money which added to the current dividends on said 1,500 second preferred shares will amount to $2,625.00; and said amount shall be deducted from the regular dividends on said 1,500 second preferred shares, when, as and if said dividends shall be paid. And if, at any quarter, the regular dividends upon said 4,000 second preferred shares shall not be declared and be paid, The Brush-Moore Newspapers, Inc., so long as said Harry E. Taylor, and/or Pauline G. Taylor, his wife, shall be the owner or owners of said second preferred shares, shall pay to said Harry E. Taylor, or Pauline G. Taylor, at said quarter such additional sum of money not in excess of $4,375.00 per quarter as interest in lieu of dividends on 2,500 shares, as the Board of Directors of The Brush-Moore Newspapers, Inc., may deem necessary for the proper maintenance and support of said Harry E. Taylor, and/or Pauline G. Taylor; and said amount shall be deducted from the dividends on said 2,500 shares when and if dividends are paid; * * *

and that petitioner sliould cause to be assigned to, and deposited with, the First National Bank, of Portsmouth, Ohio, as trustee for Taylor, two certain life insurance policies upon the life of Louis H. Brush, in the aggregate amount of $250,000, which policies should be maintained and kept in full force by the petitioner for the purpose of protecting and guaranteeing Taylor from and against any'and all loss in connection with bis acceptance of the second preferred shares of the petitioner and for the purpose of guaranteeing the payment and redemption of such second preferred shares, both as to principal and dividends, in accordance with the terms and provisions of the certificates thereof.

Taylor died March 12, 1932, leaving his wife as his only heir. During 1933 and 1934, no payments were made to the second preferred shareholders by the petitioner, other than the payments to the Taylor estate hereafter mentioned. No second preferred dividends were declared during these two years. Louis H. Brush, petitioner’s president, personally paid the shareholders 50 cents per share on January 1, 1933. During these two years the petitioner could not legally pay any second preferred dividends, under its articles of incorporation, since its first preferred dividends were partially in default as a result of its decreased earnings.

At the January, April, and July, 1933, quarters, the petitioner paid the Taylor estate, under the minute of March 25, 1931, at the rate of $2,625 per quarter, less the payment made by petitioner’s president at the January quarter, or a total of $7,125.

On October 31, 1933, the board of directors of petitioner by resolution determined that it was necessary that the widow of Taylor receive from the petitioner on the 4,000 second preferred shares the sum of $1,500 each month for her proper maintenance and support. Inasmuch as the regular dividends on the 4,000 second preferred shares had not been declared or paid at the July or October, 1933, quarter, the petitioner by corporate resolution determined that it should pay her “as interest in lieu of dividends” $1,500 each month, commencing August 1, 1933, and continuing until further action of the board of directors. The resolution further provided that the amount so paid should be deducted from the dividends on the 4,000 second preferred shares when, as, and if dividends were paid.

During the last five months of 1933, petitioner paid to the Taylor estate under the minute of October 31,1933, $1,500 per month, making a total of $7,500 for the five months and a total for the year of $14,625. In 1934, petitioner paid the Taylor estate, under the minute of October 31, 1933, $1,500 per month, making a total of $18,000 plus an additional payment of $1,000 in September 1934, under a minute of petitioner’s board of directors dated September 18, 1934, authorizing such additional payment “as interest.in lieu of dividends” for the proper support and maintenance of Mrs. Taylor.

During the first half of 1935, all the arrears in second preferred dividends were paid, after deducting the amounts which had been paid to the Taylor estate, pursuant to resolutions adopted by petitioner’s board of directors February 15, March 26, and May 27, 1935, each of which declared and authorized the payment of a portion, of the dividends in arrears but specifically provided that “no dividends are declared or shall be paid on the shares in the name of Harry E. Taylor, in the amount of the interest in lieu of dividends previously paid on said shares.”

The issue, therefore, is simply whether the payments made to the Taylors, under the above facts, were interest, as reported by petitioner in its return, or were in the nature of advance dividends, as found by the respondent in his determination of a deficiency.

Petitioner, in support of its contention that the payments were, and were correctly reported as, interest, cites and relies upon the following cases: Richmond, Fredericksburg & Potomac Railroad Co., 33 B. T. A. 895; affd., 90 Fed. (2d) 971; National Grange Mutual Liability Co., 31 B. T. A. 666; affd., 80 Fed. (2d) 316; and Proctor Shop, Inc., 30 B. T. A. 721; affd., 82 Fed. (2d) 792. We have carefully examined the cited cases and many others decided by the courts and this Board wherein the question under consideration was substantially the same as that here involved. As was pointed out by the Board in Proctor Shop, Inc., supra, “None of the decided cases lay down any comprehensive rule by which the question presented may be decided in all cases, and ‘the decision in each case turns upon the facts of that case.’ * * * In each case it must be determined whether the real transaction was that of an investment in the corporation or a loan to it. On this the designation of the instrument issued by the corporation, while not to be ignored, is not conclusive. I. Unterberg & Co., 2 B. T. A. 274. The real intention of the parties is to be sought and, in order to establish it, evidence dliumde the contract is admissible. * * * If the evidence establishes ‘that dividends paid are, according to the intent of the parties, in fact interest, and the stock on which the dividends are paid is merely held by the creditor as security, it makes no difference what the reason was for paying in that form.’ ”

It may be noted that we do not have here a situation in which there has been incorporated in preferred stock certificates a provision guaranteeing the payment of dividends or interest whether profits are earned or not. See Proctor Shop, Inc., supra. Cf. Palmer, Stacy-Merrill, Inc., 37 B. T. A. 530. The stipulated facts do not disclose the terms and conditions contained in the preferred stock certificates. In the absence of such facts we must assume that the certificates contained the usual provisions entitling the holders to share in the earnings of the corporation and to receive the par value of the stock, if it was redeemed by the corporation, or their aliquot part of the assets in the event of dissolution. (See sec. 8671, Ohio General Code.)

The payments in question were not made to Taylor under the terms of the preferred stock certificates, but under the terms of the resolution of petitioner’s board of directors adopted coincidentally with the issuance of the shares to him. From the wording of the resolution it is apparent that the corporation had to guarantee Taylor against the possibility that he might lose either principal or interest by reason of his surrender of the notes for second preferred stock. If the corporation had sufficient earnings, Taylor was to get nothing under the terms of the collateral agreement. If the corporation did not have sufficient earnings, as in the taxable years before us, Taylor became entitled to payments which, when added to any earnings available for distribution to second preferred stockholders, would give him a 7 percent return on $400,000. But any payments made to Taylor in years when the corporation did not have sufficient earnings to pay dividends to all of its second preferred stockholders were to be taken into consideration in later years when the earnings of the corporation justified the payment of back dividends due on its second preferred stock, and were to be charged against the dividends he would then he entitled to receive but for the prior payments. Taylor thus became entitled to certain benefits which were not enjoyed by other holders of petitioner’s second preferred stock.

In Richmond, Fredericksburg & Potomac Railroad Co., supra, this Board, in determining that fixed periodic payments made to holders of “guaranteed stock” were in reality interest although denominated “dividends”, said: “It seems to us * * * that in this case the basic test to be applied is whether the stockholder invested his money with the view of receiving a return from its use dependent on the successful operation of the company, on the one hand, or, on the other hand, whether he invested with no regard to the profit or loss which the company might enjoy or sustain, but with a dependency on the regular payment of compensation for the use of the money and the assurance of its ultimate repayment.”

We believe the same test should be applied here. Taylor’s position after the exchange was in many respects similar to that of the holders of the “guaranteed stock” in the Richmond, Fredericksburg & Potomac Railroad Co. case. When he surrendered his notes he evidently demanded and received a promise of practically the same fixed return on the $400,000 that he had been receiving as a creditor and some assurance that the principal amount would eventually be repaid. He was entitled to receive, if he demanded it, $28,000 per annum, irrespective of the successful operation of the corporation, or its earnings. The only effect of the transaction was to postpone indefinitely the payment of the principal sum. Under these circumstances we are of the opinion that Taylor did not abandon his position as a creditor when he surrendered his notes to the petitioner, and the payments made were compensation for the use and detention of Taylor’s money and therefore interest.

We hold, therefore, that the respondent erred in disallowing as deductions the amounts paid to the Taylor estate in 1933 and 1934. We shall defer the entering of decision herein until final determination of the Brush-Moore Newspapers, Inc., supra, in accordance with the stipulation of the parties, and,

Judgment will be entered under Rule 50.

Reviewed by the Board,

Hill dissents.


author: Smith :

text:
    Correlia Mason Thompson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 86400.
    Promulgated April 29, 1938.

      Abraham E. Margolin, Esq., and John S. Wright, Esq., for the petitioner.

      Paul E. Waring, Esq., for the respondent.
   OPINION.

Smith :

This is a proceeding for the redetermination of a gift tax for 1934 in the amount of $752.84. The question in issue is whether the petitioner is taxable upon the total value of the gift made by herself and her husband to a trustee for the benefit of their children, or upon that value reduced by the estimated value of the inchoate right of curtesy1 of the husband in the real estate conveyed.

The petitioner is a resident of Kansas City, Missouri. She was married to E. H. Leo Thompson on September 28, 1898, and has been at all times since, and is now, his lawful wedded wife.

On December 28, 1934, the petitioner was 55 years of age and her husband 61 years of age. On that date the petitioner owned and had legal title to certain real estate in Kansas City, Jackson County, Missouri, of the fair market value of $358,815.

On December 28, 1934, the petitioner and her husband jointly conveyed by warranty deed and trust indenture this real estate absolutely and irrevocably by gift, upon the uses and trusts stated in the trust indenture, for the benefit of their three children. -

The petitioner made and filed with the collector of internal revenue at Kansas City, Missouri, a gift tax return for the calendar year 1934 on form 709, reporting thereon as the value of her entire interest in the above mentioned property so conveyed the sum of $349,404.49 and paid a gift tax thereon of $18,077.36. In determining the value of her interest in the property the petitioner deducted from the fair market value thereof, admitted to be $358,815, $9,410.51 alleged to represent the inchoate curtesy interest of her husband therein. This inchoate curtesy interest of her husband in the aforesaid property was computed in accordance with Giauque & McClure’s 4 percent contingent dower tables.

The husband of the petitioner also made and filed with the collector at Kansas City a gift tax return for the calendar year 1934 and reported thereon $9,410.50 which he contended represented the fair market value of his inchoate curtesy interest in the real estate conveyed.

In computing the deficiency herein the respondent has determined that the petitioner’s husband’s inchoate right of curtesy in the property was not the subject of a gift by him in 1934, and has accordingly added to the value of the gift reported by the wife the amount which the husband reported for gift tax purposes as the value of his curtesy interest.

Section 501 of the Revenue Act of 1932 provides:

(a) For the calendar year 1932 and each calendar year thereafter a tax, computed as provided in section 502, shall be imposed upon the transfer during such calendar year by any individual, resident or nonresident, of property by gift.
(b) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible; * * *

Section 506 of the same act provides:

If the gift is made in property, the value thereof at the date of the gift shall be considered the amount of the gift.

The Revised Statutes of the State of Missouri, 1929, vol. 1, provide as follows:

Sec. 318. I)ower in real estate. — Every widow shall be endowed of the third part of all the lands whereof her husband, or any other person to his use, was seized of an estate of inheritance, at any time during the marriage, to which she shall not have relinquished her right of dower, in the manner prescribed by law, to hold and enjoy during her natural life. Dower in leasehold estate for a term of twenty years or more shall be granted and assigned as in real estate; for a less term than twenty years, shall be granted and assigned as in personal property.
Sec. 319. Widower shall have same share in real estate of his deceased wife.— The estate which a widower may have in the real estate of his deceased wife known as “tenancy by tbe curtesy,” is hereby abolished, and in lien thereof the widower shall have the same share in the real estate of his deceased wife that is provided by law for the widow in the real estate of her deceased husband, with the same rights of election and the same limitations thereto: Provided, that nothing contained in this section shall be so construed as to defeat any estate by the curtesy which shall have vested prior to the date of taking effect of this law.
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Seo. 3015. Estate 0† wife conveyed and dower relinquished, how — covenants, when binding on wife or husband. — A husband and wife may convey the real estate of the wife, and the wife may relinquish her dower in the real estate of her husband, by their joint deed acknowledged and certified as herein provided. And any covenant expressed or implied in any deed conveying property belonging to the wife, shall bind the wife and her heirs to the same extent as if such wife was a femme sole. But no covenant in any deed, conveying property belonging to the wife shall bind the husband, nor shall any covenant in any deed conveying the property of the husband bind the wife except so far as may be necessary to effectually convey from the husband or wife, so joining therein and not owning the property, all the right, title and interest expressed to be conveyed therein: Provided, however, that where the property conveyed is owned by the husband and wife as an estate by the entirety, then both shall be bound by the covenants therein expressed or implied.

Tbe foregoing statutes were in full force and effect at tbe date of tbe gift.

In 19 Corpus Juris 493, section 105, it is stated :

The inchoate right of dower is neither a title, nor an estate in land, nor a lien upon the husband’s land, nor a personal claim against the husband. It confers upon the wife no right of possession or control of the land to which it attaches. Some decisions deny that it is even an interest in land (Goodkind v. Bartlett, 136 Ill. 18, 26 N. E. 387; Bramnock v. Magoon, 216 Mo. 722, 727, 116 S. W. 500; Witthaus v. Schack, 105 N. Y. 332, 11 N. E. 649), and describe it as a mere possibility of a future interest. * * * While inchoate dower is not a vested property right, it is more than a possibility, and amounts to a contingent right which may ripen into an estate in case the husband dies first. The wife’s interest of this contingent nature may be regarded as vested in some senses. It is generally conceded that it is a valuable, substantial right, possessing in contemplation of law many of the incidents of property to be estimated and valued as such.
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The inchoate right of dower is incapable of transfer by grant or conveyance, but during its inchoate state is susceptible only of extinguishment.

In Reiff v. Horst, 55 Md. 42, 47, it is stated:

* * * It results from these authorities that the wife’s inchoate right is not such a right as may be bargained and sold. Her deed does not pass any title. It operates only by way of estoppel or release. And any words of release would be as effectual as words of grant. She cannot convey it to a stranger. It is only released to the owner of the fee. * * *

The court also observed that “we have no scale or standard for ascertaining its present worth.”

In Frank J. Digan, 35 B. T. A. 256, the facts were that out of the sale price of real property in New York a husband caused an amount :o be paid directly by the purchaser to the wife, who had theretofore refused to release her dower. The husband claimed that the amount so paid to the wife was no part of his gross income. We held that the entire sale price inured to the husband and was properly used to measure his taxable gain, and cited in support thereof Witthaus v. Schack, 105 N. Y. 332; 11 N. E. 649; Crawford v. Woods, 117 Misc. Rep. 150; 191 N. Y. S. 786; Stokes v. Stokes, 119 Misc. Rep. 168; 196 N. Y. S. 184.

An appeal from our decision in the Digan case, supra, was taken to the Circuit Court of Appeals for the Second Circuit, but was voluntarily dismissed by the petitioner on review.

In Kober v. Kober, 324 Mo. 379; 23 S. W. (2d) 149, the Supreme Court of Missouri stated as follows:

Inchoate dower is a valuable right or interest of the wife, which constitutes an incumbrance on the husband’s title; it has the attributes of property, real property; it is a legal estate in expectancy, a right to the future enjoyment of an estate, contingent upon the happening of an uncertain event. Teckenbrock v. McLaughlin, 246 Mo. 711, 718, 152 S. W. 38. Because inchoate dower, though contingent and uncertain, possesses the elements of property, a wife may maintain an action for its protection, even against her husband. * * *

This recent case epitomizes rules made in many earlier decisions of the courts of the State of Missouri holding that inchoate dower is property and protecting it, against attempts to defeat it, as property. See Walker v. Deaver, 79 Mo. 664, 675; Hafner v. Miller. 252 S. W. 722, 725.

In Ferguson v. Dickson (C. C. A., 3d Cir.), 300 Fed. 961, it was held that the relinquishment of inchoate dower by means of an ante-nuptial agreement, in consideration of a transfer of securities in trust, was a bona fide sale for a fair consideration for money’s worth. The court held:

* * * The exact question is whether or not the property constituting her inchoate right of dower, for which Mr. Dickson sold the securities, was money or money’s worth. The statement of the proposition is its own answer. Inchoate right of dower is the separate property of the wife, and has pecuniary value and is money’s worth. Beal’s Executor v. Strom, 26 N. J. Eq. 372, 376; Wheeler v. Kirtland, 27 N. J. Eq. 534; Magniac v. Thomson, 32 U. S. (7 Pet.) 346, 8 L. Ed. 709.

In Bealey v. Blake, 153 Mo. 657; 55 S. W. 288, 292, it is said:

* * * When a wife joins a husband in a deed to his land, and relinquishes her dower, it is implied thereby that a portion of the consideration named in the deed or actually paid represented the value of her dower interest * * *

In Tebeau v. Ridge, 261 Mo. 547; 170 S. W. 871, the question in issue was whether a party who had a contract with Ridge for the purchase of real estate owned by him would be compelled to convey the property. The defendant claimed that specific performance should be denied because the wife was not a party to the contract. The Supreme Court, after an elaborate review of conflicting lines of authority, sustained the petitioner’s contention and held that the husband should convey the property and that the purchaser should pay the consideration called for in the contract;

* * * diminished by the value, as of the time of the trial, of the inchoate contingent dower of Mrs. Effie S. Ridge in the one-third part thereof, calculated at 6 per cent, upon the basis of a life in the contingent dowress of two years, nine months, and six days more than that of defendant, and being therefore the sum of $2,863, and leaving to be paid to defendant the sum of $65,337. Giauque and McClure’s Tables, pp. 18, 20, and 158. * * *

The rule of Tebeau v. Ridge, supra, has been followed by the courts of Missouri in an unbroken line of decisions. In Grayson v. Grayson, 220 Mo. App. 653; 190 S. W. 930, wherein the plaintiff sued to recover the value of an inchoate right of dower out of which she claimed the defendants defrauded her, the court held:

It is suggested that there was no tangible value to an inchoate right of dower, and that it was therefore error to include anything in the verdict for such right. This is ruled to the contrary in Tebeau vs. Ridge, 261 Mo. 547, 170 S. W. 871, L. R. A. 1915C, 367. * * *

In the instant proceeding the petitioner was the owner of the real estate conveyed. The husband had no ownership in it. At most he had a right to enjoy the income from a portion of the property if he outlived his wife. By joining in the deed of conveyance he did not make a gift to the trustee, but merely released to the owner his inchoate curtesy interest. We do not think that he made a gift of any property to the trustee for the benefit of the children. The mere fact that his curtesy interest was valuable for some purposes is not determinative of the issue involved herein. If the husband had property which was the subject of a gift, how did he acquire that property? By gift? A corollary of the petitioner’s contention herein would appear to be that in any case where a married person in the State of Missouri purchased real estate he made a gift to his spouse of the value of the curtesy interest. If this was so, the purchaser of real property after the effective date of the Gift Tax Act of 1932 would be required to make a gift tax return if the value of the dower or curtesy interest at that time was in excess of a given amount. We are of the opinion that such is not the law. We think that the respondent correctly determined that the petitioner was liable to gift tax upon the total value of the property conveyed by herself and husband jointly to a trustee for the benefit of their children.

Reviewed by the Board.

Judgment will be entered wider Rule 50.


author: Hill:

text:
    Ewald Iron Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81919.
    Promulgated April 29, 1938.

      E. J. Wells, Esq., for the petitioner.

      Jonas M. Smith, Esq., for the respondent.
   OPINION.

Hill:

Respondent determined a deficiency in petitioner’s income tax for the year 1933 in the amount of $1,712.61, from which petitioner appeals and assigns as error the refusal of respondent to allow a deduction of $11,127.79 as a loss sustained upon machinery alleged to have been discarded during the taxable year.

Petitioner is a Kentucky corporation, with its principal office at Louisville. In the year 1922 petitioner began the manufacture of drilled staybolts, which were sold to railroads and locomotive companies for use in railroad locomotives. Petitioner continued to manufacture such bolts until about October 1, 1933, when it went out of the hollow drilled bolt business entirely. Petitioner ceased to manufacture the bolts for several reasons. The first was because there had always been a large loss in this department of its business, resulting from the fact that petitioner could not charge a greater differential over the price of solid iron bars than its competitors charged, which was 3 cents per pound additional, and petitioner found it cost about 6 cents per pound additional. Petitioner manufactured the bolts only for the protection of its solid iron business, and when the N. R. A. first came into being it became apparent that the petitioner would have to operate under some other code if it continued to manufacture hollow bolts. About that time petitioner was approached by the Flannery Bolt Co. with the proposition that petitioner withdraw from the manufacture of bolts under an arrangement whereby the Flannery Bolt Co. would manufacture and supply bolts to petitioner’s customers out of petitioner’s iron. A similar arrangement was made with the American Locomotive Co., which also manufactured hollow staybolts.

Within two or three months after October 1, 1933, when petitioner discontinued the manufacture of bolts, all the machinery formerly used for that purpose, except a single machine, was moved over to one corner of the drilling plant or department. A vertical heading machine, which was very heavy, was not moved but left in position.

In respect of the machinery used by petitioner in the manufacture of bolts, the parties have stipulated the date of purchase of each machine, depreciation, and salvage value as of January 1, 1933, and agree that if petitioner is entitled to any deduction for loss of useful value, the amount so allowable is $11,127.79. The sole issue submitted for decision here is whether or not petitioner in fact abandoned its machinery during the taxable year and thereby sustained a loss of the residual value, less salvage, in the amount above stated, so as to render such amount properly allowable as a deduction from gross income.

Petitioner contends that it. discarded and abandoned its bolt machinery in 1933, with the intention of never again engaging'in that line of business; that it thereby sustained a loss of the stipulated residual value, less salvage, and is entitled to a deduction for loss of useful value in the amount claimed. Respondent denied the deduction substantially on the ground that abandonment was not established, and hence there was no present loss sustained on that account. The evidence adduced, we think, supports respondent’s position.

Whether or not there has been an abandonment of property depends upon the intention of the owner, coupled with the act of abandonment, both of which are to be ascertained and determined from all the surrounding facts and circumstances. Belridge Oil Co., 11 B. T. A. 127, 137; I. G. Zumwalt, 25 B. T. A. 566. We shall not here attempt to make any specific determination in respect of petitioner’s intention, for the reason that the evidence, in our opinion, is wholly insufficient to show an act of abandonment.

While abandonment necessarily involves nonuse, proof of nonuse is not sufficient to constitute abandonment. I. G. Zumwalt, supra. Petitioner discontinued the manufacture of bolts in 1933, primarily because that department of its business was being operated at a loss in order to protect its solid iron business. Such discontinuance was effected under arrangements made with other companies whereby petitioner could avoid further operating loss from the manufacture of bolts without injury to its solid iron business. But petitioner did not scrap its bolt machines; they were not even removed from the drilling plant or department. The heavy vertical heading machine was left in its original position, and the smaller machines were stored in one corner of the plant. By this action it is apparent that, if the arrangement made with the Flannery Bolt Co. and the American Locomotive Co. to supply petitioner’s customers with bolts made of its iron, had thereafter proved unsatisfactory to petitioner, or if petitioner had desired to do so for any other reason, it could have resumed the manufacture of bolts, with little delay. The necessary machinery was on hand and available for such purpose at any time. Petitioner made no effort to scrap and sell the machines, so far as the record shows, notwithstanding they had an admitted salvage value of $3,750. We think petitioner has not shown any loss of useful value.

Eespondent has determined that petitioner did not abandon its bolt machinery during the taxable year, and petitioner has the burden of proving by satisfactory evidence that such determination is erroneous. This, in our opinion, petitioner has failed to do. The deficiency determined by respondent is approved. Cf. Williamson Veneer Co., 10 B. T. A. 1259; Flexible File Co., 13 B. T. A. 909; affd., 41 Fed. (2d) 997; Fox River Paper Co., 28 B. T. A. 1184, 1200.

Judgment will be entered for the respondent.