author: Mellott :

text:
    R. M. Weyerhaeuser, Petitioner, v. Commissioner of Internal Revenue, Respondent. .
    Docket No. 54667.
    Promulgated November 29, 1935.

      Wayne O. Gilbert, Esq., for the petitioner.

      T. M. Mather, Esq., for the respondent.
   OPINION. '

Mellott :

A memorandum opinion was entered in this proceeding under date of November 28, 1933, in which we decided, following Canfield v. Commissioner, 62 Fed. (2d) 751, that certain distributions received by the petitioner from a corporation did not constitute taxable income. The Supreme Court having reversed the decision relied upon, a motion for reconsideration and revision, timely filed by the respondent, was granted.

The respondent determined a deficiency in income tax against the petitioner for the year 1928 in the amount of $1,227.87. Petitioner, a resident of Cloquet, Minnesota, contests such determination and claims he has already overpaid his tax liability for that year and is entitled to a refund. The deficiency arises by reason of the failure of the petitioner to report as taxable income, distributions received by him in 1928 (1) from the Cloquet Lumber Co. in the amount of $8,073.44, and (2) from the Edward Hines Lumber Co. in the amount of $1,527.75. At the hearing, the parties agreed that the tax liability by reason of the distribution made by the latter company, would be settled under Rule 50 in accordance with an agreement to be entered into between such company and the respondent.

The facts concerning the distributions received by petitioner from the Cloquet Lumber Co. were stipulated. Petitioner, in 1928, owned 248.4 shares of the capital stock of this corporation, and, during the year 1928, received as a stockholder, distributions which totaled $8,073.44. The surplus of the company as of March 1, 1913, was $11,283,450.08. Between that date and December 31, 1926, it made a number of nontaxable dividend distributions, which reduced the March 1, 1913, surplus to $9,036,218.67 on December 31, 1926.

During the year 1927 additional nontaxable dividend distributions, together with a net loss amounting to $794,678.10, further reduced its March 1, 1913, surplus so that on December 31, 1927, it amounted to $7,614,621.24, Its earnings available for distribution, realized during the year 1928, amounted to $416,463.62. At various times during the year 1928 it paid dividends in the total amount of $325,000. At the time these dividends were distributed it had on hand earnings realized during the year 1928 in excess of the amounts distributed.

The income tax return of the company for the year 1928, disclosed a net loss of $752,651.38, which resulted principally from carrying forward and deducting in computing its net income, the statutory net loss of $794,678.10 which it sustained in 1927.

The major contention of the petitioner is, that before any 1928 corporate distributions can be said to have been made from earnings or profits accumulated since March 1, 1913, all losses since March 1, 1913, must first be made good, and, inasmuch as the net operating loss of $794,678.10 for the year 1927 exceeds the earnings for the year 1928, the distribution of $325,000 made during the year 1928 simply reduced the existing March 1, 1913, surplus, and his share of such distribution, amounting to $8,073.44, is nontaxable. The respondent contends that the distributions were taxable to the recipients in their entirety, alleging, in this connection, that at the time they were made there were available for distribution, and actually distributed to the stockholders, earnings of the corporation accumulated during the year 1928.

The parties agree that subsections (a) and (b) of section 115 of the Revenue Act of 1928 are applicable. These subsections, which are substantially the same as subsections (a) and (b) of section 201 of the Revenue Acts of 1921, 1924 and 1926, define a dividend as “ any distribution made by a corporation to its shareholders, * * * out of its earnings or profits accumulated after February 28, 1913 ” and provide that “ every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings and profits ”; that “ any earnings or profits accumulated, or increase in value of property accrued, before March 1, 1913, may be distributed exempt from tax, after the earnings and profits accumulated after February 28, 1913, have been distributed * *

Our decision must be in accordance with the following rule enunciated by the Supreme Court in Helvering v. Canfield, 291 U. S. 163:

Paragraphs (a) and (b) of section 201 [Revenue Act of 1921] disclose a single purpose, and are to be construed in harmony with each other. They show that the Congress was careful to arrange its plan so that the right to receive, free of tax, a distribution of surplus accumulated prior to March 1, 1913, should not he exercised in such a fashion as to permit profits accumulated after that date to escape taxation. To that end the Congress provided that “ 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.” Then follows the exemption which is strictly limited to a distribution of profits accumulated prior to March 1, 1913. Nothing is said as to a restoration of those profits out of subsequent earnings if the former have been lost.

The loss sustained by the Cloquet Lumber Co. in 1927 was necessarily chargeable against, and hence reduced, its “ earnings or profits accumulated, or increase in value of property accrued before March 1, 1913.” In other words, its surplus. The earnings for the year 1928 can not be applied to restore any part of such surplus. We are therefore of the opinion, and must necessarily hold, that the earnings for the year 1928 were available for distribution to the stockholders, and taxable to them as dividends at surtax rates, unless the alternative contention made by petitioner should be sustained.

The alternative contention of the petitioner is that the statutory net loss of the Cloquet Lumber Co. for 1927, should be carried forward in computing its “ earnings or profits ” for 1928. Inferentially he argues that the phrase “ earnings or profits ” should be construed to be synonymous with “ taxable net income ”; that since the company had no taxable net income, the distributions to its stockholders were not distributions of earnings and profits and hence were not taxable.

Manifestly, this contention can not be sustained. We are here concerned with the sole question, Did petitioner receive a dividend out of earnings or profits made during the year 1928 — which were the most recently accumulated earnings or profits — or, did he receive a tax-free distribution of earnings or profits accumulated, or increase in value of property accrued, before March 1, 1913?

“ Net income ”, in the language of the statute (sec. 21, Revenue Act of 1928), “ means the gross income computed under section 22 less the deductions allowed by section 23.” Gross income, as defined by section 22, includes gains, profits and income derived from salaries, wages or compensation for personal services, from professions, vocations, trades and businesses, as well as from interest, rent, dividends, securities and “ income derived from any source whatever.” The section, however, specifically provides for the exclusion of life insurance, annuities, gifts, bequests, devises and interest upon the obligations of a state, territory or any political subdivision thereof.

The deductions allowed include all ordinary and necessary expenses, interest, losses, bad debts, depreciation, depletion, net losses of prior years to the extent provided in section 117, dividends received from domestic corporations, and dividends from a foreign, corporation deriving more than 50 percent of its gross income from sources within the United States.

In determining the “ taxable net income ” of a corporation, in addition to the deductions set forth above, certain credits are allowed by section 26. It is apparent, therefore, that “ taxable net income ” is purely a statutory concept.

Earnings and profits, on the other hand, are not defined by the act; but they have a settled and well defined meaning in accounting. Generally speaking, they are computed by deducting from gross receipts the expense of producing them. Mobile & Ohio Railroad v. Tennessee, 153 U. S. 486, 497; Fletcher Cyclopedia Corporations, vol. 6, p. 6092. Thus, under the ordinary method of accounting, in computing earnings and profits there will be deducted, not only the items shown above, but others which are not, under the statute, deductible in computing taxable net income. In this classification may be listed such items as extraordinary expenses, charitable contributions, taxes paid the Federal Government, and taxes assessed against local benefits tending to increase the value of the property. Welch v. Helvering, 290 U. S. 111; Old Mission Portland Cement Co. v. Helvering, 293 U. S. 289; W. M. Ritter Lumber Co., 30 B. T. A. 231; F. & R. Lazarus & Co., 32 B. T. A. 633. Again, many items, such as interest upon the obligations of a state or political subdivision, tax-free Federal securities, and dividends from other corporations, must necessarily be considered in computing earnings and profits, though forming no part of taxable net income.

In the case of Charles F. Ayer, 12 B. T. A. 284, 287, we said:

This is not the only case where some income or profit free from tax in the hands of a corporation is, nevertheless, taxable to a stockholder upon distribution. Dividends and stock of domestic corporations, interest on bonds and obligations of States and municipalities, and statutory exemptions are not a part of the statutory net income of a corporation, but are nevertheless a part of its earnings or profits and may form a part of ordinary dividends which are taxable when received by the stockholders. On the other hand, corporations frequently make expenditures which are not deductible from gross income for income-tax purposes, but which nevertheless reduce earnings or profits. It therefore follows that the earnings or profits mentioned in section 201 (a) of the Revenue Act of 1921 are not the equivalent of the taxable net income of the corporation. In this connection see National Grocer Co., 1 B. T. A. 688, and Lynch v. Hornby, 247 U. S. 339.

But it is argued that the statutory net loss as defined by section 117, “ is a pure business loss ”, and should be considered in computing earnings and profits for 1928, “ without differentiation from other losses allowed as deductions by section 23.” This argument loses sight of the fact that Congress, in enacting section 23, was concerned only with deductions to be allowed in computing net income; it was neither defining earnings and profits, nor providing a method for computing them.

While we have held that in the case of a corporation organized subsequent to March 1, 1913, there can be no accumulated earnings or profits until an operating deficit is made good (Louise Glassell Short, 22 B. T. A. 644), we have no such question here. The Cloquet Lumber Co. was organized prior to March 1, 1913, and its operating deficit for the year 1927 was made good out of its accumulated earnings. Helvering v. Canfield, supra.

We therefore hold that the statutory net loss of 1927 can not be brought forward and deducted from the gross receipts of the year 1928 for the purpose of computing the earnings and profits of that year. The distributions in question were made out of the earnings and profits of the year 1928; petitioner’s share thereof constituted taxable income to him, and our decision on this issue must be for the respondent.

Judgment will te entered under Rióle 50.


source: Caselaw Access Project

author: McMahon:

license: Public Domain

text:
    Annie Troll, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 61215.
    Promulgated November 29, 1935.

      W. A. Alien, Esq., for the petitioner.

      W. W. Kerr, Esq., G. A. Bay, Esq., and Bernard B. Daniels, Esq., for the respondent.
   OPINION.

McMahon:

This is a proceeding for the redetermination of the petitioner’s liability, as transferee, for the deficiencies in tax and penalties asserted by the respondent against Charles Troll, and interest, in the total amount of $9,119.87, as follows:

It is alleged by petitioner (1) that the respondent erred in determining that she is liable as transferee for the taxes due from Charles Troll; (2) that he erred in assessing taxes after they were barred by the statute of limitations, especially section 811 (b) (1) of the Revenue Act of 1928; (3) that, in any event, he erred in determining a liability against petitioner in excess of the fair market value of the property received by her from Charles Troll; (4) that even if petitioner is liable as transferee for the tax liability, he erred in assessing against petitioner the penalties and interest on the tax liability of Charles Troll; and (5) that he erred in his determination of items of income of Charles Troll for the years 1917 to 1921, inclusive, and failed to give him credit for proper deductions and credit for losses incurred in those years.

The amended answer of the respondent contains several affirmative allegations of fact, all to the effect that petitioner is liable as transferee. In her reply to respondent’s amended answer the petitioner denied all of the affirmative allegations of the respondent.

Petitioner is an individual, with residence at St. Louis, Missouri.

In a notice of deficiency dated December 22, 1926, the respondent determined against Charles Troll, the taxpayer and transferor, the deficiencies and penalties for failure to file returns for the years 1917 to 1921, inclusive, as set forth hereinabove. On February 10, 1927, Charles Troll filed with this Board, under Docket No. 23962, a petition for redetermination of the deficiences and penalties. On May 16, 1931, the Board entered an order of dismissal in that proceeding on the motion of the respondent to dismiss for lack of prosecution, and therein ordered that the deficiencies and penalties for the years 1917 to 1921, inclusive, are in the amounts determined by the respondent as above set forth.

Upon the death of her father in 1901 and her mother in 1906, the petitioner acquired from them stocks and bonds in the aggregate value of about $25,000. This property she placed in the hands of her brother, Charles Troll, as trustee, for management.

On January 1, 1929, Charles Troll executed, in favor of petitioner, a demand promissory note for $10,000, in which it was stated that he had pledged with petitioner, as security for payment of the note, a deed of trust of John Duggan and wife dated January 5, 1914, relating to Charles Troll’s interest in property in East St. Louis, Illinois, as acquired by deed dated February 1913 from Theodore C. Peltzer and wife.

On March 1, 1930, the petitioner and Charles Troll entered into an agreement called “Accord and Satisfaction Agreement Trusteeship Account.” This instrument established a balance due petitioner from Charles Troll at that date in the amount of $9,570. Therein Charles Troll, in satisfaction of such amount, agreed to convey to the petitioner certain real estate described as follows: (1) Part of a lot in Carondolet Commons being the north portion of block 3240 of the city of St. Louis, fronting 302 feet 6 inches on the south line of Espenschied Street by a depth southwardly of 152 feet; bounded east by Van Burén Street and west by Polk Street; (2) an undivided one-third interest in a part of a lot in Carondolet Commons being the north portion of block 3241 of the city of St. Louis, fronting 220 feet 7 inches on the south line of Espenschied Street by a depth south-wardly of 152 feet; bounded west by Van Burén Street and east by property of a railroad company; and (3) a 14/50 interest, as reflected by a declaration of trust executed by William Landwehr, in lot 59 of the Common Fields of Cahokia, situated in the city of East St. Louis, Illinois, consisting of 40-7/100 acres, more or less. The first tract was accepted by petitioner at a valuation of $3,000, the second parcel at $1,000, and the third tract at $4,961.44, a total of $8,961.44 for all this property. The balance of $608.56 due petitioner was to be paid in cash. Therein petitioner agreed to release Charles Troll from all liabilities whatsoever, upon compliance with the terms of the instrument.

The real estate described in the accord and satisfaction agreement was duly transferred on March 1, 1930, by Charles Troll to petitioner in accordance therewith for the full and: adequate consideration of $8,961.44, as above set forth; and as to each tract or parcel the fair market value thereof did not exceed the valuation at which it was then accepted by petitioner.

On March 1, 1930, Charles Troll also transferred to petitioner for a recited nominal consideration the remaining undivided two-thirds interest in the portion of the lot representing the north portion of block 3241 of the city of St. Louis, which undivided two-thirds interest had a fair market value at that time of $1,650; an undivided one-third interest in a lot in block 3240 having a frontage on Catalan Street, which had a fair market value at that time of $250; and an undivided one-third interest in a lot in block 3241 having a frontage on Catalan Street, which had a fair market value at that time of $600; and each of these fair market values was in excess of any nominal consideration paid therefor by petitioner.

Before the deeds were executed by Charles Troll transferring the above property to petitioner, title to the property was examined by a title company at the instance of Harry Troll on behalf of the petitioner.

By a declaration of trust executed February 28, 1930, Charles Troll declared that Edward Koeln had paid one half the taxes upon property purchased for $4,500 in 1922 by Troll, being the parts of lots representing the north portions of blocks 3240 and 3241 of St. Louis. Therein Charles Troll stated and agreed that Koeln should have the right, until 1950, to one half of any profit upon the sale of the property, the basis for the calculation of the profit to be the cost of $4,500 to Troll plus 6 percent interest thereon to date of sale. This instrument bears the written approval of the petitioner. This instrument neither adds to nor detracts from the values of the properties as we have fixed and found them as heretofore set forth.

At March 1,1930, Charles Troll was without funds and hence did not have cash to pay petitioner the balance of $608.56 which was due her under the accord and satisfaction agreement; but it was subsequently duly paid in cash by Harry Troll, another brother of petitioner, at the direction of Charles Troll, out of an amount collected by Harry Troll for Charles Troll under a deed of trust for $3,000. This deed of trust was held by petitioner to secure payment of the note for $10,000 executed in her favor by Charles Troll on January 1, 1929, as heretofore set forth. This cash payment settled the balance in full. Thereupon, petitioner surrendered the promissory note in the amount of $10,000, and released the deed of trust.

On May 24, 1930, the respondent assessed taxes, penalties and interest for the years 1917 to 1921, inclusive, against Charles Troll in the total amount of $9,119.87.

On June 23, 1930, the collector of internal revenue issued five warrants for distraint against Charles Troll covering the taxes, penalties and interest for the years 1917 to 1921, inclusive. In these warrants for distraint there is provided a blank space for the name of the deputy collector assigned to serve the warrants. This space in each of the warrants is blank. The space for the return of the deputy collector is blank on each warrant. No returns were made upon any of the warrants. There is no statement, certificate, affidavit, report or return that no assets were found or that there were no assets belonging to Charles Troll. Unsuccessful attempts were made to serve the warrants on Charles Troll for two or three weeks. A deputy collector finally served these warrants on Charles Troll in the collector’s office after Troll had come to such office in answer to a so-called “ 10-day letter.”

On July 2, 1930, the deputy collector filed with the clerk of the United States District Court at St, Louis a notice of tax lien. On July 3, 1930, he filed a similar notice with the recorder of deeds at St. Louis. Each notice showed that the amount of tax assessed against Charles Troll was $15,000. At the time he filed these notices of tax lien the deputy collector made efforts to locate some assets, but was unsuccessful.

By letter dated November 13', 1931, the respondent proposed to assess against the petitioner, as transferee of the 'assets of Charles Troll, the deficiencies in tax, penalties, and interest assessed against Charles Troll as hereinabove set forth in the tabulation at the beginning of the opinion. The petitioner filed her petition with this Board on January 8, 1932, for the redetermination of her liability.

Upon the foregoing facts, which we find, we are called upon to determine the liability of petitioner as transferee. The burden of proof is upon the respondent to show that petitioner is liable as a transferee. Title IX of the Revenue Act of 1924, as amended by section 602 of the Revenue Act of 1928 . This burden includes the burden of showing that the transfer of the assets to the transferee rendered the transferor insolvent, or that the transferor was insolvent at the time of the transfer. Charles B. Behr, 30 B. T. A. 1291, petition to review dismissed, Commissioner v. Behr, 14 Fed. (2d) 1011; Willard H. Ashton, 28 B. T. A. 582; Florence McCall, 26 B. T. A. 292; Eliza J. Wray, 24 B. T. A. 94; American Feature Film Co., 24 B. T. A. 18; Samuel Keller, 21 B. T. A. 84, affd., Commissioner v. Keller, 59 Fed. (2d) 499; Joseph A. Steinle, Administrator, 19 B. T. A. 325; and Phil Gleichman, 17 B. T. A. 147. In Florence McCall, supra, we stated in part:

We have held that the statute places a real burden of proof on the respondent and that he must establish the liability of the transferee against whom he proposes to proceed. Eliza J. Wray, 24 B. T. A. 94; Annie Temoyan et al., 16 B. T. A. 923. * * *
It has been held that before proceedings may be brought against a transferee it must appear that the remedies against the transferor would be of no avail. Swan and Cattle Co. v. Frank, 148 U. S. 603; Phil Gleichman, 17 B. T. A. 147. * * * [Emphasis supplied.]

In American Feature Film Co., supra, we stated in part, “ but these facts do not prove insolvency immediately after the alleged distribution.” (Emphasis supplied.)

In the instant proceeding the proof does not show that Charles Troll was insolvent at the time of the transfers in question, which was March 1,1930, or that he was rendered insolvent by such transfers to the petitioner. The only evidence as to Charles Troll’s financial condition at March 1,1930, is the evidence that he was without funds at that time and hence did not have cash to pay the petitioner the balance of $608.56, which was due her. However, this falls far short of proving that he was insolvent at that time. The word “ funds ” is defined in Webster’s New International Dictionary, 1929 Ed., as “ money and negotiable paper immediately or readily convertible into cash.” Furthermore, the evidence shows that at the time of the transfers Charles Troll had at least one other asset, namely, the deed of trust for $3,000 which he authorized Harry Troll to collect in order to pay the petitioner the cash balance of $608.56 which was due her. There is no evidence upon which we can make a finding that on March 1, 1930, or at any other date, he had no assets aside from this deed of trust and the property transferred on March 1,1930.

It may he further pointed out that we have no evidence to show that Charles Troll had any liabilities at the time of the transfers on March 1, 1930, other than his liability to the petitioner and his liability to the Federal Government for taxes, penalties, and interest.

Richard Wunsch, deputy collector, testified that at the time he filed the notices of tax lien on July 2 and 3, 1930, he made efforts to locate some assets of Charles Troll, but that he was unsuccessful. It is to be noted that the testimony of this witness is not directed toward proving what assets or liabilities Charles Troll had at the date in question,' the controlling date, March 1, 1930, but to dates more than four months later, and therefore, it is not sufficient to prove insolvency on March 1,1930, the date of the transfers in question here. Even when considered as having some bearing upon the financial condition of Charles Troll at March 1, 1930, it is insufficient to establish that Charles Troll was insolvent at the date in question. He did not testify in detail as to the efforts he made to locate assets of the transferor and we can not, in the exercise of our independent judgment, determine from his testimony that Charles Troll did not have other assets or was insolvent. It is significant that he did not return any warrant of distraint nulla ~bona or make any return whatsoever upon any warrant of distraint in the form provided thereon for the purpose or in any other form. The form of return and accompanying instructions provided on each such warrant required a thorough search and a full report, in the form of a certificate, of the result over the signature of the deputy collector supported by his affidavit in the event of a “ report of no property found liable to distraint.” His conduct is open to the inference that he was not in a position as a matter of fact to make such, return. For all we know from the evidence adduced, Charles Troll may have had other assets on March 1, 1930, of a value sufficient to cover all of his liabilities.

It is also important to note that the space on the reverse side provided for the return of the deputy collector in each of the warrants for distraint against Charles Troll is wholly blank, there being no return made as to any of the warrants; and we are therefore not called upon to decide, and do not decide, whether such returns, if they had properly shown that no assets could be found, would have been favored with a presumption of correctness as to the financial condition of the transferor as of the date of the transfers or otherwise.

This proceeding is not governed by John Thomson, Jr., 20 B. T. A. 1, petition to review dismissed by the United States Circuit Court of Appeals for the Third Circuit on February 8, 1932; B. F. Fairless, 19 B. T. A. 304; affd., Fairless v. Commissioner, 67 Fed. (2d) 475; Hatch v. Morosco Holding Co., 50 Fed. (2d) 138; certiorari denied, 284 U. S. 668, or other similar cases wherein the courts or this Board were satisfied from the evidence that the transferor was insolvent and that the Commissioner had met his burden of proof. It may not be amiss to point out that in Hatch v. Morosco Holding Co., supra, the court stated:

Ordinarily a creditor must proceed to judgment against his debtor and have an execution returned nulla bona before he can pursue third persons on his claim. [Citing cases.] * * * But, where the debt is admitted [citing cases], and it is apparent that a judgment and execution against the debtor would be futile [citing authority] the procedural requirement may be dispensed with. * * *

Here it is not apparent that Charles Troll was insolvent, and that it would have been futile to proceed against him; and we must hold that respondent has not met the burden of proof in this respect.

It may be pointed out that no legal lien attached to the property of Charles Troll which he transferred to the petitioner, by virtue of section 3186 of the Revised Statutes (sec. 613, Revenue Act of 1928), since the earliest date under such section that such a lien might arise was the date the assessment list was received by the collector. Here the property in question was transferred on March 1, 1930, whereas assessment was not made by the respondent until May 24, 1930, and it was some time thereafter that the collector received notice. It was on July 2 and 3, 1930, that the collector filed notices of tax liens.

We have found as a fact that certain real estate transferred by Charles Troll to petitioner in partial satisfaction of the indebtedness under the accord and satisfaction agreement was transferred for a full and adequate consideration of $8,961.44.

We have also found the values of the properties transferred by Charles Troll to petitioner, which were not in satisfaction of the indebtedness under the accord and satisfaction agreement, and which, so far as the record shows, were transferred for a nominal consideration.

In arriving at all of these values which we have found we have taken into consideration all of the somewhat voluminous evidence bearing on the subject of values. In fixing and finding these values we attribute nothing to the declaration of trust executed February 28, 1930, since the fair market value of all of the property covered by it does not exceed $5,650 ($3,000+$1,000+$1,650), as fixed and found by us, and Edward Koeln, mentioned therein, under its terms, could not share in any profits on a sale of the real estate therein described until $4,500 with interest at 6 per cent from some time in 1922 to the date of such sale on or before 1950 was realized, and this principal amount of $4,500 with interest totaled at least $6,335 on the date of the transfer, March 1, 1930; and, hence, Koeln then had no claim on petitioner.

However, all these values which we have found as to the properties transferred for nominal considerations become of no consequence in view of our holding that respondent has not met the burden of proving that Charles Troll was insolvent at the time of the transfer, March 1, 1930.

In view of our holding upon the questions of insolvency, it becomes unnecessary to consider any of the other issues raised by the pleadings. It may be added, however, that we have found, as heretofore set forth, all the material facts which the whole record justifies.

Decision will be entered that there is no liability on the fart of the petitioner for taxes, penalties, or interest owing from Charles Troll for the years 19TU to 1921, inclusive.

       SBC. 912. In proceedings before the Board the burden of proof shall be upon the Commissioner to show that a petitioner is liable as a transferee of property of a taxpayer, but not to show that the taxpayer was liable for the tax.

       SEC. 613. LIEN POE TAXES.
      (a) Section 3186 of the Revised Statutes, as amended, is amended to read as follows:
      “ Sec. 3186. (a) If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, penalty, additional amount, or addition to such tax, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person. Unless another date is specifically fixed by law, the lien shall arise at the time the assessment list was received by the collector and shall continue until the liability for such amount is satisfied or becomes unenforceable by reason of lapse of time.
      “(b) Such lien shall not be valid as against any mortgagee, purchaser, or judgment creditor until notice thereof has been filed by the collector — ^


author: Smith :

text:
    Thomas N. Perkins, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 57848, 58305, 58306, 58443, 58475, 58770, 58772, 58904-58907, 58917, 58918, 58925.
    Promulgated November 29, 1935.

      Kenneth W. Howes, Esq., and Charles B. Rugg, Esq., for the petitioners.

      Bruce A. Low, Esq., and L. H. Rushbrooic, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Edmund J. Shattuck; G. H. M. Company; Fiduciary Trust Co., Elizabeth Bagley Reed and Almeda Bagley Meyers, Trustees; Perkins & Buttriek Trust; Thomas N. Perkins, John Richardson and George H. Morrill, Trustees u/w George H. Morrill; Thompson Oil Company •, Eastern Carbon Black Company; W. H. Davis; Lillian A. Davis; Matilda M. Davis; Alton N. Davis; Emma Luette Davis, Executrix u/w O. L. Davis; Lue Davis; and Davis Brothers Company.

   OPINION.

Smith :

The petitioners in the nine highest docket numbers in these proceedings contend that the deficiencies are barred by the statute of limitations. They contend that the returns were filed on April 13, 1928. The deficiency notices were mailed under date, of April 14, 1981. If the returns were filed on April 13, 1928, as' claimed by the petitioners, then the period within which the respondent could mail notices of deficiency expired on April 13, 1931, or one day prior to the date, they were actually mailed. The applicable statute is section 277 of the Revenue Act of 1926, which provides, so far as pertinent, as follows:

Sec. 277. (a) Except as provided in section 278—
(1) The amount of income taxes imposed by this Act shall be assessed within three years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period.

The returns in question were prepared in Boston, Massachusetts, and sent to the offices of the Davis Brothers Co. in Charleston, West Yirgina. They were signed and verified on April 10, 1928. One H. H. Corrie, a public accountant of Charleston and the accountant for Davis Brothers Co. and most of the stockholders of that company, was to attend to the filing of the returns. April 13, 1928, fell on Friday. W. H. Davis was anxious that the returns be filed on that day. All of the nine petitioners above referred to had obtained an extension of time for the filing of the returns which expired on April 15, which was Sunday. When on April 13 Davis got back to his office after lunch he telephoned Corrie’s office to have him come over and attend to the filing of the returns that afternoon. He was informed that Corrie was already on his way to the Davis Brothers Co. office. He soon arrived, looked over the returns, and dictated to a-stenographer, who had custody of the returns, a form of receipt for the returns to be signed by the deputy collector with whom they were to be filed. Corrie then, took the returns, went across the street to the Federal Building where he purchased a money order, went upstairs and filed the returns with Emory Kirby, the deputy collector, and took his receipt therefor. The signature of Kirby upon the receipt is admitted. This was between 2 and 2: 30 o’clock that afternoon. The receipt reads in part as follows:

Charleston, W. Va.,
April 13th, 1928.
Received this day of H. H. Corrie the following tax returns with checks as noted:

Then follows a list of tax returns, including those of the last nine named petitioners. Corrie immediately returned to the office of Davis Brothers Co. and delivered the receipt to the stenographer, who filed it away with the duplicates of the returns. Corrie then busied himself with accounting matters in the office of Davis Brothers Co. for the balance of the afternoon. Corrie’s diary for April 13, 1928, has a notation that he filed the returns on that day and that he was engaged at the office of Davis Brothers Co. all of that afternoon. The next day he was engaged on other matters.

The returns are stamped as having been received in the deputy collector’s office on April 14, 1928. Kirby’s daily report for April 13 does not show the receipt of the returns by him on that date whereas his daily report for April 14 shows the receipt of the returns on that day. His daily reports for April 13 and April 14 were made out and mailed to the collector on April 14. Kirby testified that he was always careful to place his stamp upon tax returns on the day filed, and, although he had no personal recollection as to the time of the filing of the returns, he was of the opinion that they must have been filed in his office on April 14, and that in signing the receipt for the returns he inadvertently failed to notice the date borne by the receipt.

The evidence that the petitioners filed their returns on April 13 is convincing. There were several witnesses who distinctly remember that Corrie came into the office of Davis Brothers Co. on the afternoon of April 13 and left his office with the returns under his arm and that he was back in the office within a period of less than half an hour. Some of these witnesses were not in the office of Davis Brothers Co. on Saturday, April 14. It is also to be noted that Corrie was engaged in work for other clients than Davis Brothers Co. on the fourteenth and did not go near the Federal Building on that day. In view of all the evidence upon this point, the presumption of correctness as to the date of filing which attaches to the records of the collector’s office is overcome. We find as a fact that the returns were filed on April 13, 1928.

Section 241 (b) of the Revenue Act of 1926 requires that “ Returns shall be made to the collector of the district in which is located the principal place of business or principal office or agency of the corporation.” The question arises as to whether the returns filed with the deputy collector on April 13, 1928, were properly filed. Kirby testified that one of his duties, although a minor one, was that of receiving income tax returns. Under section 3148 of the Revised Statutes, as amended, each deputy collector—

* * * stall have the like authority in every respect to collect the taxes levied or assessed within the portion of the district assigned to him which is by law vested in the collector himself, but each collector shall, in every respect, be responsible, both to the United States and to individuals, as the case may be, for all moneys collected, and for every act done or neglected to be done, by any of his deputies while acting as such.

Since the collector had authorized his deputy at Charleston to receive income tax returns at his office, we think there can be no question but that the filing of the returns with the deputy collector was a filing within the contemplation of section 241 (b) of the Revenue Act of 1926. Cf. Landram v. United States, 16 Ct. Cls. 74, on powers and duties of deputy collectors.

The Federal income tax return for 1927 of Eastern and Thompson was a consolidated return together with the Owl Oil Co., the wholly owned subsidiary corporation of Eastern. These corporations had filed a consolidated income tax return for a part of the year 1925 and for the year 1926 and at the time that the consolidated return for 1927 was filed it was assumed that that return also should be a consolidated return. It was not until 1929, more than a year after the 1927 consolidated return was filed, that the respondent ruled these corporations not entitled to file consolidated returns for the years 1925 and 1926. The consolidated return filed for 1927 was filed in good faith.

The respondent contends that the consolidated return did not enable him to determine the separate income of Thompson and that therefore the filing of the consolidated return did not start the running of the statute of limitations with respect to Thompson.

An inspection of the schedules attached to the consolidated return shows that the separate gross incomes and deductions of each of the three corporations whose financial operations were included in the consolidated return are set forth in separate columns. Thus the consolidated return furnished the respondent with the information necessary to determine the net income of each corporation separately to the same extent as if they had each filed a separate return. It has been held in numerous decisions that the filing of such a consolidated return starts the statute of limitations running in favor of each of the corporations included therein. F. A. Hall Co., 3 B. T. A. 1172; Stetson & Ellison, 11 B. T. A. 397; affd., 43 Fed. (2d) 553; Continental Oil Co., 23 B. T. A. 311; Newport Co., 24 B. T. A. 1246, 1275. We hold therefore that the filing of the consolidated return set in operation the statute of limitations with respect to Thompson the same as for the other petitioners named.

The respondent makes the further contention that the income tax returns of Eastern, Thompson, the G. H. M. Co., and Davis Brothers Co. were false or fraudulent with intent to evade tax and that therefore the statute of limitations has not run with respect to these companies. At the conclusion of the hearing the respondent moved for the imposition of the 50 percent addition to the deficiency in the case of each of these companies provided for by section 275 (b) of the Revenue Act of 1926, which in material part provides as follows:

If any part of any deficiency is due to fraud witix intent to evade tax, then 50 per centum of the total amount of the deficiency * * * shall be so assessed, collected, and paid, in lieu of the 50 per centum addition to the tax provided in section 3176 of the Revised Statutes, as amended.

The respondent alleges that an inspection of the returns filed by the four corporations named shows that “ it would be utterly impossible from an examination thereof to unravel the many transactions involving transfer of assets and stock, for statements and references thereto were either omitted, studiously concealed or absolutely falsified.” We have carefully examined the record in these proceedings for the purpose of determining the correctness of the grave charges made by the respondent. On such examination we reach the conclusion that the evidence discloses no intent on the part of the four corporations involved to evade tax, and further that there is no' ground for the suspicion that the returns were false or fraudulent with an intent to evade tax. The evidence all goes to show that at most the petitioners sought to minimize their tax liabilities by meticulously following what they believed to be the proper interpretation of the provisions of the statute relating to the reorganization of corporations. Taxpayers are not required so to conduct their business as will best pay the Treasury. Helvering v. Gregory, 69 Fed. (2d) 809. The fact that in following the letter of the law they have not escaped tax liability is no ground for assuming that they had been fraudulently trying to do so.

We reach the conclusion that the statute of limitations has operated to bar the collection of the deficiency due from the nine petitioners referred to above; also, that the return of the G. H. M. Co., the only one of the corporate petitioners before us in these proceedings whose deficiency is not barred by the statute of limitations, was not false or fraudulent with intent to evade tax, and that therefore the 50 percent addition to the deficiency determined for the G. H. M. Co. was not incurred.

In these proceedings the petitioners contend that when Eastern and Thompson transferred their gas and oil properties to Interstate in exchange for all of their shares which they immediately distributed as dividends to their two corporate stockholders, the G. H. M. Co. and Davis Brothers Co., a reorganization was effected under' the provisions of section 208 (h) of the Revenue Act of 1926; that when the G. H. M. Co. and Davis Brothers Co. received the shares of stock of Interstate they realized no taxable income because those shares of stock were distributed to them pursuant to a plan of reorganization; and that when the shareholders of the G. H. M. Co. and of Davis Brothers Co. received as dividends shares of stock, on the one hand, of the Morrill Securities Co., and, on the other hand, of the Union Holding & Investment Co., they likewise received no taxable income since they represented distributions pursuant to a plan of reorganization. They admit, however, that the stockholders of the G. H. M. Co. are taxable upon the cash actually received by them from Hodges, trustee, through the G. H. M. Co.

Section 203 (h) of the Revenue Act of 1926 provides in part:

(1) The term “ reorganization ” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) 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, or (O) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.

Section 203 (b) of the same act provides in part:

(3) 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.
(4) No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange, for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.

The petitioners admit that the steps taken involving the transfer of the gas and oil properties to be sold by Thompson and Eastern to Interstate, the creation by the G. H. M. Go. and Davis Brothers Co. of the Morrill Securities Co. and Union Holding & Investment Co., respectively, and the creation of the Hodges trust, etc., were for the purpose of availing themselves of the reorganization provisions of the Revenue Act of 1926 and limiting tax liability. There was never any intention on the part of Eastern to reorganize its corporate business. Thompson was to be dissolved because it was to sell all of its assets to Hamilton. It was never contemplated that Interstate, the Morrill Securities Co., and the Union Holding & Investment Co. should be operating corporations. They were simply to hold the shares of stock turned over to them for a short period and then be dissolved. This was done. Likewise, Hodges, trustee, was simply to hold the title to the properties to be sold for a period of a few days, convey the legal title to the properties to Hamilton, receive the cash from the purchaser, and turn it back to the beneficiaries of the trust. As soon as these objects were accomplished the trust was terminated.

In Gregory v. Helvering, 293 U. S. 465, it was stated:

When subdivision (B) [section 203 (h) (1)] speaks ol a transfer of assets by one corporation to another, it means a transfer made “ in pursuance of a plan of reorganization ” (section 112 (g)) of the corporate business; * * *

There was no reorganization of the corporate businesses of Eastern, of Thompson, or of the other corporations involved in these proceedings. The following language of the Supreme Court in the above quoted case is apposite to the proceedings at bar:

* * * The whole undertaking, though conducted according to the terms of subdivision (B), was in fact an elaborate and devious form of conveyance masquerading as a corporate reorganization, and nothing else. The rule which excludes from consideration the motive of tax avoidance is not pertinent to the situation, because the transaction upon its face lies outside the plain intent of the statute. To hold otherwise would be to exalt artifice above reality and to deprive the statutory provision in question of all serious purpose.

See also Ballwood Co. v. Commissioner (C. C. A., 3d Cir.), -Fed. (2d) - (July 16, 1935), affirming 30 B. T. A. 644.

No contention is made by the petitioners that the shares of stock of Interstate, the Morrill Securities Co., and the Union Holding & Investment Co. did not have the fair market value attributed to them by the respondent in the determination of the deficiencies. The substance of the contention of the petitioners is that the recipients of those shares are not liable to income tax in respect to them as of the date of receipt, because they were received pursuant to a plan of reorganization under the statute. In accordance with the principle of law enunciated in the above cited cases the claim of the petitioners that the reorganization provisions of the Revenue Act of 1926 are applicable to these proceedings can not be sustained.

The petition of the G. H. M. Co. alleges:

(a) The respondent has improperly treated the petitioner as realizing a taxable profit of $141,797.45 upon the liquidation in the year 1927 of Thompson Oil Company, whereas the petitioner realized no taxable income as a result of such liquidation.
(b) The respondent lias allowed the petitioner a deduction of only $14,179.75 on account of “adjustment to salary of officer” whereas the petitioner is entitled to a deduction on this account of $94,316.99 and is thereby entitled to a refund of taxes for the year 1927 of $12,732.38 with interest thereon.

The issue set forth in the foregoing paragraph (a) is as to whether, as the petitioner claims, the stock of Interstate received by it in the course of liquidation of Thompson, was received pursuant to a reorganization exchange and therefore not subject to tax, or whether, as the respondent claims, it was received as a, dividend in liquidation without protection from tax by the reorganization provisions of the statute. The petitioner argues that the transfer by Thompson of all of its assets to Interstate in exchange for stock of Interstate followed by the distribution of Interstate stock thus received by Thompson to its stockholders and the dissolution of Thompson, was a reorganization under section 208 (h) (1) (A) of the statute; accordingly, that the exchange by the G. H. M. Co. of its 900 shares of stock in Thompson for stock in Interstate falls within the provisions of section 203 (b) (2) of the statute as follows:

No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.

It is submitted that both Thompson and Interstate were parties to the reorganization hereinabove described and that the exchange was made in pursuance of the plan of reorganization.

We have held above that there was no reorganization within the contemplation of the statute of Eastern and Thompson. Accordingly, the reorganization provisions of the statute may not be invoked by the G. H, M. Co. for the purpose of minimizing its tax liability. The G. H. M. Co. is liable to income tax upon the profit realized by it from the exchange of its shares of stock in Thompson for the shares of stock of Interstate, as determined by the respondent.

The G. H. M. Co. further argues that, if Thompson is liable to income tax in respect to the transaction by which it sold its assets to Hamilton, then the profit computed by the respondent in the amount of $141,797.45 is in excess of the actual profit realized by it from the receipt of the shares of stock of Interstate. We have found, however, that the collection of any deficiency from Thompson is barred by the statute of limitations. Since this is so, the taxable profit found by the respondent to be $141,797.45 is not in excess of the actual profit received by the G. H. M. Co. as a result of the liquidation in 1927 of Thompson.

In these proceedings the respondent moved to increase the deficiency due from the G. IT. M. Co. on the ground that the shares of Interstate stock received by the G. H. M. Co. as a dividend from Eastern constituted in part a liquidating dividend. In the determination of the deficiency the respondent treated the value of these shares as an ordinary dividend. The evidence of record is that Eastern was not liquidated in whole or in part. None of its outstanding shares were canceled or redeemed and the distributions made by Eastern to its stockholders were either out of earnings accumulated since February 28, 1913, or out of increase in value of assets accrued after that date. After the payment of the dividend the books of Eastern still showed a large surplus. In the determination of the deficiency due from the G. H. M. Co. the respondent treated the dividend from Eastern as giving rise to no taxable income. He has not sustained the burden of showing the liquidation of Eastern in whole or in part. Therefore, the claim of the respondent for an increased deficiency due to the receipt of the Interstate shares from Eastern can not be allowed.

In the determination of the deficiency the respondent has disallowed the deduction from: the gross income of the G. H. M. Co. of $80,134.24 representing a portion of the bonus paid to Frederick P. Bagley as treasurer and general manager. Bagley had been the chief executive of the G. H. M. Co. for a period of nearly twenty years. In 1918 or 1920 his salary had been fixed at $15,000 per year plus 10 percent of the profits of the company. He had received a bonus of 10 percent of the profits of the company for a period of several years prior to 1921. He received the same bonus in 1927. The G. H. M. Co. realized that it had sustained a large profit hi 1927 as a result of the dividends which it had received from Eastern and Thompson in the form of shares of Interstate stock. Under his contract with the company Bagley was entitled to receive 10 percent of the profits from this source. The Interstate shares received by it had a fair market value at the date df receipt of $1,375,000. It was determined that the amount received less its investment in the shares of the stock of Eastern and Thompson constituted a profit of $943,139.90 and that Bagley was entitled under his contract to 10 percent of that amount, or $94,313.99. This amount was accrued to the credit of Bagley on the books of the G. H. M. Co. as of December 31,1927, and paid to him in February 1928.

In the audit of the return the respondent determined that under the contract with Bagley the G. H. M. Co. owed him only 10 percent upon the profit made by the G. H. M. Co. from the liquidation of Thompson. The respondent therefore allowed the deduction of $14,179.75 of the $94,313.99 claimed, and disallowed the balance, $80,134.24.

The taxing statute permits the deduction from gross income of “All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered.” (Sec. 234 (a) (1), Revenue Act of 1926.) It is not necessary under the statute that services must be rendered within the year for which the payment is made. Lucas v. Ox Fibre Brush Co., 281 U. S. 115. What constitutes reasonable compensation for services deductible from gross income must be determined in the light of facts and circumstances in each individual case. In Regulations 69, promulgated under the provisions of the Revenue Act of 1926, it is provided:

* * * Generally speaking, if contingent compensation is paid pursuant to a free bargain between the employer and the individual made before the services are rendered, not influenced by any consideration on the part of the employer other than that of securing on fair and advantageous terms the services of the individual, it should be allowed as a deduction even though in the actual working out of the contract it may prove to be greater than the amount which would ordinarily be paid.
(3) In any event the allowance for the compensation paid may not exceed what is reasonable in all the circumstances. It is in general just to assume that reasonable and true compensation is only such amount as would ordinarily be paid for like services by like enterprises in like circumstances. The circumstances to be taken into consideration are those existing at the date when the contract for services was made, not those existing at the date when the contract is questioned.

In Austin v. United States, 28 Fed. (2d) 677, it was held that the fact that “ in the actual working out of the contract contingent compensation may prove to be greater than the amount which ordinarily would be paid ” was no ground for the denial of part of the deduction.

The evidence of record in these proceedings shows that the additional compensation paid to Bagley by the G. H. M. Co. in 1921 was pursuant to the contract made between the G. H. M. Co. and Bagley many years prior thereto. There is no reason to question the reasonableness of the contract, or the reasonableness of the compensation paid to him pursuant to its terms. There is no ground for a suspicion that the amount paid to Bagley was in any wise a distribution of a part of the profits to a stockholder in lieu of the payment of the same in the form of a dividend. Neither is there any element of a gift in the payment of the $94,813.99.

The fact that the amount was not actually paid to Bagley within the year 1927 is of no consequence. The G. H. M. Co. kept its books of account and made its income tax returns upon the accrual basis. All the facts necessary for the determination of the liability were known by the G. H. M. Co. within the year 1927. The accrual of the same as an expense of 1927 to the G. H. M. Co. was proper. See Continental Tie & Lumber Co. v. United States, 286 U. S. 290; New York Central R. R. Co. v. Commissioner, 79 Fed. (2d) 247.

The action of the respondent in disallowing the deduction of $80,134.24 of the bonus paid is reversed.

The motion of the respondent made at the conclusion of the hearing of these proceedings for the addition to the deficiency of the G. H. M. Co. of the fraud penalty provided for by section 275 (b) of the Revenue Act of 1926 is denied for reasons set forth above.

In view of our conclusion that the reorganization provisions of the statute are not effective to limit the liability of the stockholders of the G. H. M. Co., the appeal of the Perkins and Buttrick Trust, Docket No. 58543, presents only one allegation of error to be considered. This allegation of error is stated in the petition as follows:

(d) If the petitioners’ trust received any taxable dividend from the George H. Morrill Company (which the petitioners deny) then the respondent has erred in taxing such dividend to the petitioners’ trust since under the terms of the petitioner’s trust any such dividend would be distributable to the life beneficiary and accordingly taxable to her and not to the trust as an entity. Moreover, in such event, the respondent has erred in failing to refund to the petitioners’ trust a substantial part of the Federal income tax already paid for the calendar year 1927.

The facts applicable to this issue are contained in finding number 4. From that finding it is seen that the trustees were given the “ uncontrolled discretion ” to determine what constituted net income and in the case of securities backed by wasting assets, or associations and trusts, were given the “ uncontrolled discretion ” to determine what was principal and what was income, and, further, could in their discretion distribute to any and all of the beneficiaries any amount they decided on. On form 1041 filed for 1927, the trustees showed as distributed to beneficiary $6,587.55; then, under capital net gain or loss, “ Trustee as an equity for which a return on form 1040 has been filed, $173,396.69.” Thus it is seen the trustees treated the income as an accretion to capital, as to which, according to the instrument from which they derived their power and the beneficiary her income, their decision was absolutely final except for fraud. The trustees further filed a return on form 1040 for the trust and paid a tax thereon.

From a careful reading of the trust instrument (Exhibit 66), we are of the opinion that the respondent did not err in taxing the trust on the undistributed income. In St. Louis Union Trust Co. v. United States, 3 Fed. Supp. 630, it was held that where the income from a trust had not been distributed or paid by the trustee to the beneficiaries and was not held by the trustee to be currently and regularly distributed to the beneficiaries, the trustee was liable under section 219 of the Revenue Act of 1926 for the tax on the income of the trust. We are of the opinion that the respondent has correctly held the trust liable to income tax on the property dividend, which was not distributed to the beneficiary.

It does not follow that because the reorganization provisions of the Revenue Act of 1926 are not effective in the determination of the liability of the petitioners involved in these proceedings that the transactions taken thereunder were nullities. The G. H. M. Co. distributed as a dividend to its stockholders shares of stock of the Mor-rill Securities Co. These shares of stock had a fair market value. The recipients of the dividend, Thomas N. Perkins, Edmund J. Shattuck, and the trust u/w George H. Morrill, are liable to income tax in respect to the value of the shares received. United States v. Phellis, 257 U. S. 156. The respondent did not err in taxing each of the G. H. M. Co. stockholders upon the value of the dividend received by each. The fact that the stockholders had an understanding that a particular use would be made of the property dividend received by them in no wise serves to exempt them from tax upon the value of the property dividend received. See Sarther Grocery Co. v. Commissioner, 63 Fed. (2d) 68, and Edward A. Langenbach, 2 B. T. A. 777.

Reviewed by the Board.

Judgment will be entered under Bule 50.


author: MuRdock:

text:
    Irving S. Merrell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 70103.
    Promulgated November 29, 1935.
   OPINION.

MuRdock:

The Commissioner determined a deficiency of $5,099.83 in the petitioner’s income tax for 1930. The case was submitted upon a stipulation of facts without any appearances. The petitioner sold 1,000.16 shares of Borden Co. common stock in 1930 for $67,045.05. The petitioner reported his profit, using $63,800.21 as his basis for gain or loss on the sale of those shares. The Commissioner contends that the basis is only $24,126.70. The sole issue in this proceeding is therefore the cost to the petitioner of that Borden stock.

The petitioner acquired the Borden stock in 1928 in exchange for all of his common and preferred stock of the Merrell-Soule Co., in a statutory reorganization. The parties agree that the total cost to the petitioner of the common and preferred stock of Merrell-Soule Co. is to be allocated proportionately to the Borden shares. This is in accordance with the decision of the Board in Christian W. Von Gunten, 28 B. T. A. 702; affd., 76 Fed. (2d) 670. They also agreq as to the cost of all of the common and preferred shares of the Merrell-Soule Co. except 875 shares of common stock. The Commissioner determined that the cost of those shares was $100 per share, or $87,500. The parties agree that the deficiency is correct if the cost of those shares was $87,500.

The 875 shares in question were acquired by the petitioner from the estate of his father. The father, G. Lewis Merrell, died testate on January 7,1909. He owned at that time 2,625 shares of the common stock of the Merrell-Soule Co. Each share had a par value of $100. He placed his residuary estate, including these shares, in trust. The trustees were to pay $5,000 annually to his wife, Mary A. Merrell, during her lifetime. Each grandchild of the decedent was to receive $3,000 from the trustees when he reached his majority. The remainder of the income was to be divided equally among the testator’s three sons, Irving S. Merrell, Lewis C. Merrell, and Oliver Edward Merrell. The principal of the fund, except the Merrell-Soule Co. stock, was to be divided equally among the three sons upon the death of the testator’s wife. The Merrell-Soule Co. stock was to be held by the trustees during the lifetime of Oliver Edward Merrell and the income therefrom was to be equally divided among the three sons. The stock was to be divided into three equal parts upon the death of Oliver Edward Merrell and each son or his estate was to have one share. The thirteenth and fourteenth articles of the will were as follows:

Article Thirteenth. I further will and direct that none of my said sons shall in any manner sell or dispose of any of said stock or any interest therein unless he shall have first offered it to both or either of the others of my said three sons at a price not to exceed the par value thereof, and given to each of the others an option to purchase the same at said valuation for a period of ninety (90) days, and! that in case any one of my said sons shall desire to sell his interest in said stock, the other shall be given the privilege to purchase the same in equal amounts, except that I hereby will and direct my executors and trustees hereinafter named to convey to one of themselves enough stock of said Company to enable the holder thereof to qualify as a Director of said Merrell Soule Company.
• Article Fourteenth. I further will and direct that in case it shall seem advisable to each. and. every one of my said three executprs and trustees hereinafter named to. dispose of said stock, they shall have the privilege of so doing, provided, however, that all three of them shall agree as to the advisability of such sale.

The three sons were named executors and trustees. Oliver Edward Merrell is still living, Mary A. Merrell, the testator’s widow, died on November 11, 1911, and the trustees then distributed practically all of the property in the estate except the 2,625 shares of Merrell-Soule Co. stock. The grandchildren were paid in accordance with the will.

, The three sons, as executors, trustees, and individuals, entered into an agreement on December 20, 1919, wherein they agreed to sell to each of themselves, as individuals, at $100 per share, one third of the total shares which they held as executors and trustees. The agreement recited that they had determined that it was advisable to dispose of the 2,625 shares of Merrell-Soule Co. stock. It further provided:

. * * * said shares of stock having been offered pursuant to Article Thirteenth of said will amd testament, to said Irving S. Merrell, Lewis G. Merrell and Oliver E. Merrell, and they have each determined to purchase at par and acquire one-third of the said shares of stock constituting said trust estate as authorized by Article Thirteenth of said will and testament.

The transfer agent for the stock refused to make the transfers called for by this agreement, whereupon Lewis C. Merrell instituted suit against the transfer agent, naming as codefendants the corporation and all of the other parties in interest, to compel the transfer agent to deliver to him a proper certificate for his part of the stock. The court gave judgment for the plaintiff and held that the sale of the stock as provided in the contract of December 20, 1919, was valid and binding. The transfer agent thereafter issued the certificates in accordance with the contract and the decision of the court. The executors and trustees under the will of Irving S. Merrell filed their final account and were then discharged. The parties have stipulated that the fair market value of the Merrell-Soule Co. common stock was $333.91 per share on March 1, 1913, a,nd $800 per share on December 20, 1919.

The father made a specific bequest of 875 shares of the Merrell-Soule' Co. stock to the petitioner, to take effect in possession at the death of Oliver and subject to the contingency that the property might be sold .before that time under article fourteenth of the will. If the property had not been sold and if it had been distributed to the petitioner.'at the death of Oliver, the petitioner would have acquired the property by specific bequest, and the basis of the property for gain or loss in his hands would have been the fair market value of the property on March 1,1913, since that was greater than its value at the death of the decedent. Sec. 113 (b), Revenue Act of 1928. Thus, if the petitioner had acquired the 875 shares in that way, his basis would have been $333.91 per share. But the petitioner did not acquire the 875 shares in that way. They were not distributed to him as a part of his father’s estate in accordance with his father’s will. They could not have been distributed to him in accordance with his father’s will prior to the death of his brother Oliver. The brothers, in order to acquire title to the property prior to the death of Oliver, had to make a sale of the property under article fourteenth of the will. The court having jurisdiction over the matter of the contract determined that that contract was a valid and binding one and resulted in a valid and binding sale of the shares. Thus the petitioner acquired his title to these particular shares by purchase in 1919 and not as a distribution of property bequeathed to him under his father’s will. Section 113 (b) has no application, since the property is not such as is described in section 113 (a)(5). The general rule of section 113 (a) applies and fixes as the basis the cost of the property. The Commissioner has determined the deficiency on this basis and has allowed, as the cost, $100 per share. The petitioner has not shown by evidence nor has he demonstrated by argument that he is entitled to use any greater basis.

Decision will he entered, for the respondent.


author: Steknhagen :

text:
    Maud H. Bush, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75889.
    Promulgated December 3, 1935.

      John W. Drye, Jr., Esq., for the petitioner.

      George D. Brabson, Esq., for the respondent.
   opinion.

Steknhagen :

The respondent determined a deficiency of $11,552.16 in petitioner’s income tax for 1931. The only point upon which the petitioner assails the deficiency is that her gross income may not include $60,000 received by her from a trust fund set up by her former husband before the two were divorced. The facts are stipulated.

Petitioner and Irving T. Bush were formerly married. In May 1930 each sought divorce. Before the decree, on June 6, 1930, Bush created a trust for the express purpose of adjusting and settling any claims against him by petitioner for dower, maintenance, support or otherwise, in the event that she should secure a decree of absolute divorce. He transferred to the trustee property calculated to yield an income sufficient to enable the trustee to pay petitioner therefrom annually $60,000, and he agreed, in the event that the trust income should be inadequate, to make up the difference. Thereafter, on June 9, 1930, a decree of divorce was entered in which the agreement was recognized as a settlement of petitioner’s claims for support and maintenance and as the ground for her waiver of alimony. The agreement was approved by the decree and the income was described in the decree as “ in lieu of any alimony.”

The respondent, in the notice of deficiency, has made no explanation of the ground upon which he treats the $60,000 as income, and the determination to this effect is directly contrary to his ruling, in G. C. M. 13308, C. B. XIII-32-6936, which appears to be a consideration of this identical case.

The question whether the income of such a trust as this should be included in the husband’s taxable income has now been affirmatively answered. Douglas v. Willcuts, 296 U. S. 1. The question here is whether the income from the trust is properly to be included in the taxable income of the wife. We are of opinion that since the amount is received under an express agreement it shall settle the wife’s claims for dower, maintenance and support, and that this is expressly recognized by the court’s decree as in lieu of alimony, it is brought within Gould v. Gould, 245 U. S. 151, in which the Court held that “ the sum received by the wife on account [of alimony] can not be regarded as income arising or accruing to her within the enactment.” This is clearly the proposition adopted in Douglas v. Willcuts, supra. See also Mary R. Spencer, 20 B. T. A. 58.

The respondent’s determination, including the $60,000 in the petitioner’s taxable income, is reversed.

Judgment will he entered under Rule 50.


author: Mellott:

text:
    Joseph J. Sullivan, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 56671.
    Promulgated December 3, 1935.

      Joseph J. Sullivan, Esq., pro se.

      Paul D. Page, Jr., Esq., for the respondent.
   OPINION.

Mellott:

In this proceeding petitioner contests a deficiency in income tax determined by the respondent in the amount of $75.25 for the calendar year 1927 and $448.59 for 1928. The sole issue is whether certain compensation received by him from the city of Chicago is exempt from Federal income tax.

Petitioner is a resident of Chicago, Illinois.

The law department of the city of Chicago, an executive department of the municipal government, comprises the corporation counsel and his assistants and clerks. By ordinance, the corporation counsel is the head of the law department, empowered to superintend and conduct all the law business of the city and to appoint and remove any and all of his assistants. His office is divided into three branches — the city attorney’s office; the city prosecutor’s office; and che attorney for the board for local improvements. All attorneys and assistant attorneys are appointed by the corporation counsel and referred to as “Assistant Corporation Counsel.”

From 1919 to 1928 the city of Chicago engaged in a comprehensive plan of widening and extending several of its larger, or arterial, streets. Bond issues were floated to pay the part of the cost of such improvements charged against the city as a public benefit, and assessments were levied against contiguous property under the provisions of an act passed by the General Assembly of Illinois, in 1897, entitled “An Act concerning local improvements.” Thousands of pieces of property were condemned under the power of eminent domain contained in that act, for the purpose of acquiring property necessary to be used in widening the streets.

In 1915 petitioner was appointed to the position of assistant corporation counsel of the city of Chicago. His term of office was not fixed, but depended upon the will of the corporation counsel. From 1915 to 1919, he was assigned to the city attorney’s office and represented the city in personal injury cases brought against it. In 1919 he was assigned to the office of the attorney for the board of local improvements to try condemnation cases. From 1919 to, and including, the years 1927 and 1928, his duties consisted of trying such condemnation cases, briefing those which were appealed to the Supreme Court, and writing opinions for the board of local improvements on questions arising under the local improvement act. These services were performed under the direction of the attorney for the board of local improvements and the corporation counsel.

During the taxable years here in controversy, petitioner was engaged chiefly in matters relating to the widening of Western Avenue by taking seventeen feet off of the abutting property on each side of it for a distance of approximately twenty-three miles.

The city furnished an office for the corporation counsel and his various assistants, and petitioner’s name, as well as the names of the other assistant corporation counsel, appeared on the office door under the name of the corporation counsel.

During part of the year 1927 and for a number of years prior thereto, the city of Chicago paid petitioner an annual salary of $7,000 per annum; but in 1927 the method of payment was changed from a yearly basis to a per diem basis at the rate of $50 per day. The same duties were performed by petitioner after the change in the method of payment as were performed by him prior to the change. He was not compensated for Sundays, holidays, or Saturday afternoons, and sometimes his compensation for November and December was not received until January of the following year.

The sums received by the petitioner on the per diem basis in 1927 and 1928 were approved by the corporation counsel and charged against the special fund allocated to legal services in connection with the particular project. Bond issues had been approved by the people on a referendum. From the funds derived by the' sale of bonds, the city council appropriated the sum of $50,000 from the Western Avenue street improvement fund “ for legal services to be expended under authority and direction of the corporation counsel.” It was from the fund thus set up that petitioner was paid.

During the years 1927 and 1928 petitioner devoted all of his time to the work of the corporation counsel’s office. He was not free to engage in private law practice or in other business which would interfere with his duties as assistant corporation counsel. Occasionally he did a small amount of legal work in the evening, but he maintained no private law office. He filed his income tax returns and reported his income on the cash receipts and disbursements basis.

Petitioner was not required to take any oath of office or give any bond and he took no oath of office and gave no bond. The per diem compensation received by him amounted to $4,687.50 in 1927 and $12,750 in 1928. The deficiencies here in controversy result from his failure to report these amounts in his Federal income tax returns.

The compensation received by petitioner is “ income * * * or compensation for personal service * * * ” (sec. 22, Revenue Act of 1928) and is not exempt from Federal taxation by any specific statute. If, however, it was received from a state or political subdivision thereof, as an officer or employee, for services rendered in connection with the exercise of an essential, or usual, governmental function, exemption may be recognized, for:

* * * tlie very nature of our constitutional system of dual sovereign governments is such as impliedly to prohibit the federal government from taxing the instrumentalities of a state government * * *. Those agencies through which either government immediately and directly exercises its sovereign powers, are immune from the taxing power of the other. * * * Each government in order that it may administer its affairs within its own sphere, must be left free from undue interference by the other. [Metcalf & Eddy v. Mitchell, 269 U. S. 514.]

We therefore have for determination the composite question, the several parts of which are: (1) Were the services rendered by petitioner in connection with an essential or usual governmental function; and (2) was he an officer or employee of a state or political subdivision thereof ?

It can not be gainsaid that the law department is a part, and a very necessary part, of the executive branch of the city government. At least as to the duties performed by it through the “ City Attorney’s office ” and the “ City Prosecutor’s office ” no one would seriously contend that they were not “ usual or essential governmental functions.” But should a different conclusion be reached as to the duties performed through the “ attorney for the Board of Local Improvements ? ”

This section, or branch of the law department, like the “ City Attorney’s office ” and the “ City Prosecutor’s office ”, was comprised of a chief attorney and numerous assistants. They were all designated “Assistant Corporation Counsel ”, and were engaged in performing the duties usually performed by attorneys employed by a municipality. They were furnished offices, apparently with the corporation counsel; their names were painted on the door, along with the corporation counsel; they were appointed by him, and served during his pleasure. The attorneys in that section, or branch, were engaged chiefly in trying condemnation cases, writing briefs and advising with the board upon legal problems.

The rather voluminous stipulation filed with us quotes seriatim many provisions of the Local Improvement Act passed by the General Assembly of the State of Illinois in 1897, under which the board of local improvements was created. This act contains an authorization for the board to “ appoint an attorney for the Board who shall have charge, under its direction and control, of all legal matters ”; however, the Supreme Court of Illinois, in People v. Faherty, 306 Ill., 119; 131 N. E. 506, held that such provision had been impliedly repealed by the amended city and village act, which made the corporation counsel the head of the law department, stating, in its opinion:

“ Law department ” of a city or other government means a department having charge of the law business of the government. A city maintaining such a department cannot, as a general rule, hire or employ outside counsel to attend to the legal business of the city. * * * The intention of the Legislature making the corporation counsel * * * the head of the law department * * * was to combine in one department and under the direction of one responsible head the city’s law business.

We are convinced that petitioner was an assistant corporation counsel employed by the law department of the city of Chicago. Most of his time was devoted to condemnation proceedings necessitated by the plans of the city government to widen and extend its arterial streets. The duties he performed were in connection with and a necessary part of the work of providing streets for the comfort and convenience of people of the city. Such a function is essentially governmental. John B. Hittell, 33 B. T. A. 216.

There remains for our consideration respondent’s contention that the payment of petitioner’s compensation on a per diem basis, precludes us from determining that such compensation is immune from Federal income taxation. This contention is stated thus: “ The stip ■ ulation shows that during some time in 1927 he changed from his salary to a per diem basis, and it is upon that and, not upon the salary received at any time, that this tax [set out in the deficiencies] is based.” (Emphasis supplied.) “ During a part of the year 1927 * * * this petitioner was paid upon a salary basis and no attempt has been made to tax him upon this salary.”

This circumstance, while persuasive, is not controlling here. If petitioner was an employee — and we hold that he was — the mere fact that the parties adopted a different “ method of measuring his compensation ” (United States v. Butler, 49 Fed. (2d) 52) is immaterial. He performed the same tasks after the change in the method of payment was made as he did before. The department had first call upon his services, which were regular and continuous. He engaged very little in private practice — not even sufficient to justify the expense of maintaining a private office — confining such practice almost exclusively to drawing contracts, or examining abstracts, at his home. He testified that he had no outside law business, and that outside practice had been prohibited by his superior officer, the corporation counsel.

Presumably, respondent is contending that petitioner’s services were rendered as an independent contractor. This term is so well understood that we deem it unnecessary to define it. Suffice it to say that the evidence fails to show that freedom from direction and control which characterizes the relationship of independent contractor. On the contrary, the record is replete with testimony and circumstances indicating the ordinary relation of employer and employee. Cf. Richard E. McIntosh, 16 B. T. A. 1400; Frederick A. Brown, 22 B. T. A. 581; and John B. Hittell, supra.

We do not need to discuss or determine whether petitioner was an officer of the city of Chicago. We have found that he was an emfloyee. Being an employee, engaged, as we have found, in an essential governmental function, the rule so often enunciated, is clearly applicable. “ The instrumentalities, means and operations whereby the states exert the governmental powers belonging to them are * * * exempt from taxation by the United States.” (Ohio v. Helvering, 292 U. S. 360.) It follows that the respondent erred in determining the above deficiencies.

Judgment will he entered for the petitioner.


author: Black :

text:
    Corinne S. Koshland, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 55981.
    Promulgated December 3, 1935.

      John 0. Altman, Esq., for tbe petitioner.

      H. D. Thomas, Esq., for the respondent.
   OPINION.

Black :

Issue 2 has been settled by stipulation.

The first question for decision is whether the dividends which the petitioner received from the East Bay Water Co. included distributions of capital. Upon audit of the return filed- by petitioner the Commissioner determined that the dividends paid on the stock of the East Bay Water Co. had been paid in part from capital, rather than from earnings, the part so paid amounting to $20.1277 on each share of “A” stock and $23,659 on each share of “ B ” stock, and that, therefore, the cost basis of the stock should be reduced accordingly, as provided by section 115 (d) of the Revenue Act of 1928. Both sides concede that this issue depends solely on whether too much or too little depreciation was deducted in the various years. The Commissioner has’allówed as depreciation for the years 1917 to 1928, inclusive* in computing income tax the total amount of $4,638,277.61, and in the computation of dividends, $4,687,596.97 The difference between these sums is fully explained in the findings of fact and arises from an adjustment made as the result of a protest filed by the company. The total depreciation for these same years shown on the books of the company is $2,023,208.40.

Both sides apparently agree that the difference between the amount allowed by the Commissioner and that which appears on the books of the East Bay Water Co. arises from the method in which depreciation was computed by each. The Commissioner computed depreciation on a straight line basis, whereas the company computed it, in so far as its book entries are concerned, under the sinking fund method, in compliance with the rules of the Railroad Commission of California. Under the first method, depreciation is computed on the cost or other proper basis and allocated equally over the years of the useful life of the asset, while under the sinking fund method only so much is deducted in each year as, plus interest at a given rate, will equal the cost of the asset when it is exhausted. It is stipulated that cost used by the Commissioner and that used by the Railroad Commission of California were approximately the same and that the Commissioner accepted the findings of the commission as to the length of the useful life of the various assets.

It has been stipulated that certain officers of the East Bay Water Co. filed a protest with the Commissioner which resulted in the refund of taxes for the years 1917 to 1921, inclusive, and became the basis for the computation of depreciation for income tax for subsequent years. We assume that these men had a thorough knowledge of the assets of their company, and .their cost and useful life, and that they were sincere and honest in making the protest and furnishing the proof which resulted in the refund. It is a pertinent fact that the sinking fund method was required by the railroad commission. Apparently it was not the company’s choice. The first time its officers could exercise their independent judgment upon this question was when they appeared before the Commissioner. We think that this independent judgment of the officers of the company is entitled to greater weight than the opinion of their witnesses at the hearing. There is a wide difference between the facts of this case and those which appeared in Cumberland Glass Mfg. Co. v. United States, 44 Fed. (2d) 455, and the cases therein referred to, and we do not consider them controlling.

In the instant case, the East Bay Water Co. of its own volition adopted the straight line method for income tax purposes in preference to the sinking fund method, and its stockholders have obtained the benefit accruing from this election. By reduction in income taxes of the corporation larger amounts were available for distribution in dividends to stockholders. We recognize that net taxable income may be one thing and that earnings and profits available for distribution may be another, and that the latter may include items which would not enter into computation of net income and also reductions which would not be allowed in its computation. It is conceded by both parties that, in the computation of both net taxable income and earnings and profits available, for distribution, there is a common element and that is depreciation. The question here is whether a corporation in computing its net income for taxation purposes and its income for dividend purposes can use different methods. A similar question was presented in Benjamin Siegel, 29 B. T. A. 1289. There a corporation, in computing its net income, adopted the method of deducting individual debts which were found to be worthless and charged off, and then sought, in computing its earnings and profits for dividend purposes, to adopt the reserve method which was permitted by the Revenue Act of 1921. The petitioner, who was a stockholder, contended that the company could pursue one method in computing its net taxable income and the other in computing earnings and profits available for distribution. In reply to that we said:

* * * The fallacy of this contention lies in the fact that while these terms differ in several particulars they have elements which are common to both. Among these is a deduction of or a provision for worthless debts. Section 234 (a) (5) of the Revenue Act of 1921 gave the Company the option of using for this deduction a reasonable addition to its reserve for bad debts. It did not see fit to avail itself of this option, but continued to deduct as before the passage of that act. In order to maintain its position the Company must now assert that in respect of items common to both net income and to earnings and profits it has the right to use one method of getting the benefit of its worthless debts in respect of income taxable to itself, and to use another method in computing that part of its income which is taxable to its stockholders. The Company having elected to use the charge-off method when it could have used the reserve method, either of which could have been used to compute both net income and earnings and profits, should, in our opinion, be held to its election in both cases. It should be compelled to turn square corners in its dealings with the Government. Rock Island, A. & L. R. Co. v. United States, 254 U. S. 141; cf. Radiant Glass Co. v. Burnet, 54 Fed. (2d) 718.

Petitioner asserts that a stockholder is a separate entity from the corporation and for that reason he is not bound by the action of the corporation. That is, of course, true in many situations, but, in so far as we can see, it has no special application here. The question is, What earnings did the corporation have available for distribution when it declared dividends in the years 1917 to 1928, inclusive? The depreciation sustained by the corporation on assets used in its business is the determining factor here in arriving at a conclusion of that question.

When we have determined the correct amount of depreciation sustained by the corporation during the period in question the petitioner, a stockholder of the company, is bound by it. In our findings of fact we have sustained the Commissioner in his allowance of depreciation in computing the company’s income available for dividends, and of course that determines the amount of petitioner’s dividends which was from earnings and the amount which was paid from capital. In Wells Fargo Bank & Union Trust Co. v. McLaughlin, 8 Fed. Supp. 1009, the District Court of the United States for the Northern District of California, Southern Division, had this same question before it. Judge Kerrigan, among other things, said:

* * * While I do not wish to go so far as to hold that the stockholder is estopped from claiming another basis of depreciation than that claimed by the corporation, under the facts and circumstances of this case, it appeals to me as meritorious that the Commissioner should use the same figures of depreciation in computing whether or not dividends were paid out of capital as were claimed by the corporation in .computing its income tax. While the depreciation approved by the Railroad Commission is persuasive as to its correctness, the Commissioner of Internal Revenue is not bound by its findings and orders. San Joaquin Light and Power Co. v. McLaughlin (C. C. A. 9) 65 F. (2d) 677. Without going into the merits of the respective methods of computing depreciation, I hold and find that the depreciation claimed by the Bast Bay Water Company in computing its income tax is the depreciation which may properly be used by the Commissioner in computing whether or not the dividends paid included a return of the capital investment. * * *

The United States Circuit Court of Appeals for the Ninth Circuit, at 78 Fed. (2d) 934, sustained the judgment of the District Court in holding that the dividends paid on the stock of the East Bay Water Co. had been paid in part from capital rather than from earnings, the part so paid amounting to $20.1277 on each share of “A” stock and $23.659 on each share of “ B ” stock, and that therefore the cost basis of the stock should be reduced accordingly. That is the same question as we have here, and, while of course the question is one of evidence in each case, there being no contention that the court’s opinion in the Wells Fargo Union Trust Co. case is res judicata here, we feel constrained to reach the same conclusion on the evidence before us as the court reached in that case. The respondent is affirmed on this issue.

The petitioner next asserts that the respondent is estopped to impose the tax asserted on her by reason of the fact that he has consistently taxed her on the dividends received by her from the East Bay Water Co. There is nothing in the record to indicate that the respondent or any of his predecessors made any determination whatever as to the amount of dividends taxable to the petitioner. All that appears is that the petitioner has consistently in her returns reported these dividends as income, and that the Commissioner has accepted her returns at their face value. There is no merit in this contention. Cf. Botany Worsted Mills v. United States, 278 U. S. 282; Burnet v. Porter, 283 U. S. 230; McIlhenny v. Commissioner, 39 Fed. (2d) 356.

Decision will Toe entered under Rule 50.