author: Arnold:

text:
    Albert T. Perkins, Petitioner, et al.
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 75488, 75489, 75490, 75491, 75492, 75493, 75524.
    Promulgated November 3, 1937.

      George E. H. Goodner, Esq., Frederick, C. Rohwerder, C. P. A., and H. Stanley Hinrichs, Esq., for the petitioners.

      Wm. E. Davis, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Robert E. Einstein, Docket No. 75489; John J. Lichter, Docket No. 75490; Katharene Fruin Colnon, Docket No. 75491; Laura J. Jens, Docket No. 75492; Christopher W. Johnson, Docket No. 75493; Mercantile-Commerce Bank and Trust Co., Formerly Mercantile Trust Company, Harry Scullin and Charles L. Gilbert, Trustees under the will of John Scullin, Deceased, Docket No. 75524.

   OPINION.

Arnold:

The principal issue in these proceedings is whether the payment by the company to the petitioners in redemption and cancellation of 40 percent of their stock was essentially equivalent to the distribution of a taxable dividend. The petitioners contend that the distribution of February 11,1931, was the first of a series of distributions in liquidation of the company. • The respondent concedes that the distributions by the company in 1932 and 1933 were distributions in liquidation.

The respondent denies, however, that there was any general plan of liquidation at February 11, 1931. It was recognized that the industry was overcapacitated, and that the company would have to restrict the amount of its output. He points particularly to the testimony of Robert E. Einstein as supporting his position that no definite action was taken by the company toward liquidation until 1932, and argues that, since the stock was retired pro rata among' all stockholders, out of earnings accumulated since February 28, 1913, the distribution was essentially equivalent to a taxable dividend and taxable to these petitioners as such.

The governing statute is section 115 of the Revenue Act of 1928. This section defines a dividend as “any distribution made by a corporation to its stockholders * * * out of its earnings or profits accumulated after February 28, 1913.” Sec. 115 (a). The pertinent portion of section 115 (c) states that “amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock.” Section 115 (g) deals with the redemption of stock, and provides that if “a corporation cancels or redeems its stock * * * at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed * * * shall be treated as a taxable dividend.” Section 115 (h) defines partial liquidation.

Section 115 of the Revenue Act of 1928 and the comparable sections of the other revenue acts have been considered from time to time by the Board and the courts in determining whether distributions were in partial liquidation, or were essentially equivalent to taxable dividends. Almost without exception the decided cases hold that each proceeding must be determined upon its own particular facts, making it virtually impossible to state a general rule of construction applicable to all cases. Certain principles have, however, been enunciated by the courts and the Board which aid in arriving at the solution of the problem presented.

It has been pointed out that section 115 (c) in nowise limits distributions in partial liquidation to payments made in the course of winding up the corporation, Commissioner v. Quackenbos, 78 Fed. (2d) 156 (C. C. A., 2d Cir.); and that the redemption of a part of its stock has no necessary relation to the winding up of the corporation’s business. Commissioner v. Straub, 76 Fed. (2d) 888 (C. C. A., 3d Cir.); Commissioner v. Cordingley, 78 Fed. (2d) 118 (C. C. A., 1st Cir.).

Section 115 (g) was written into the revenue act so that corporations might not resort to the device of stock redemption or cancellation in order to make distributions essentially resulting in a division of profits, Brown v. Commissioner, 79 Fed. (2d) 73 (C. C. A., 3d Cir.). The recognized test of whether a distribution is essentially equivalent to a taxable dividend turns on whether the capitalization was for an honest business purpose. If the purposes of the corporation in capitalizing earnings and later redeeming the stock were legitimate, the courts will refuse to hold the distribution in redemption or cancellation a taxable dividend. Hyman v. Helvering, 71 Fed. (2d) 342 (D. C. App.); certiorari denied, 293 U. S. 570; Commissioner v. Babson, 70 Fed. (2d) 304 (C. C. A., 7th Cir.); Ward M. Canady, Inc. v. Commissioner, 76 Fed. (2d) 278 (C. C. A., 3d Cir.); certiorari denied, 296 U. S. 612; Commissioner v. Rockwood, 82 Fed. (2d) 359 (C. C. A., 7th Cir.)

If, however, the corporation’s actions are for the purpose of throwing a protective cloak around the distribution of its earnings, so that formally it appears to be a capitalization of earnings, followed by a redemption of all or a part of the stock representing the increase in capital, the courts hold that the distributions are essentially equivalent to a taxable dividend. McGuire v. Commissioner, 84 Fed. (2d) 431 (C. C. A., 7th Cir.); certiorari denied, 299 U. S. 591; Randolph v. Commissioner, 76 Fed. (2d) 472 (C. C. A., 8th Cir.); certiorari denied, 296 U. S. 599; Robinson v. Commissioner, 69 Fed. (2d) 972 (C. C. A., 5th Cir.); Hill v. Commissioner, 66 Fed. (2d) 45 (C. C. A., 4th Cir.).

Whether the corporation is in process of liquidation is a question of fact, W. F. Kennemer, 35 B. T. A. 415, 421, and cases there cited. Liquidation has been defined as the operation of winding -up the corporate affairs by realizing its assets, paying its debts, and distributing the balance among the stockholders. W. E. Guild, 19 B. T. A. 1186, 1204. Whether the company here was in process of liquidation must be determined from the facts of record.

The circumstances and events preceding the distribution of February 11, 1931, support petitioners’ contentions. Many years prior thereto the officers of the company recognized that certain factors were curtailing the demand for their products. The decline in the demand is depicted by the shrinkage in the company’s earnings beginning in the late twenties, a fact of which the officers and directors of the company were well aware. The record of earnings and dividends for the 11-year period 1920 to 1930, inclusive, shows that during this period the company was paying out dividends slightly in excess of earnings, and that in the taxable year 1931 an ordinary dividend of $49,600 had been paid prior to the distribution made on February 11, 1931. The intentional undermaintenance of the company’s plant and equipment for years prior to 1931 and the failure to replace retiring employees support petitioner’s position that the company was going out of business. Two efforts by the stockholders to sell all the stock of the company as a going concern lend further support to petitioner’s theory.

In addition to the foregoing we have the formal declarations and affirmative actions of the officers, directors, and stockholders which have resulted in the almost complete liquidation of the company. In December 1930 the directors recommended that 40 percent of the company’s stock be retired in partial liquidation. The president’s letter to the stockholders prior to the annual meeting and the enclosed waiver of notice and proxy forms each advised of the proposed 40 percent reduction in partial liquidation. The stockholders held their annual meeting on February 2, 1931, at which all the stockholders of the company were present in person or represented by proxy and voted the reduction as recommended. On February 5, 1931, the decrease in the company’s capital stock was authorized by the Secretary of State of Missouri, and on February 11, 1931, the redemption and cancelation occurred.

Coupling the circumstances leading up to the distribution on February 11, 1931, with the affirmative acts of the company’s officers, directors, and stockholders, it is our opinion that the distribution on that date was the first in a series of distributions in liquidation of the company. The redemption and cancelation of the stock was not “at such time and in such manner” as to make the distribution essentially equivalent to the distribution of a taxable dividend. Furthermore, the distribution of February 11, 1931, was not a distribution in the ordinary course of business, made with the intent to maintain the company as a going concern, but was made after the company decided to quit and with the intent to liquidate its business. Holmby Corporation v. Commissioner, 83 Fed. (2d) 548, affirming 28 B. T. A. 1092; Helmich v. Hellman, 276 U. S. 233; Canal-Commercial Trust & Savings Bank v. Commissioner, 63 Fed. (2d) 619; certiorari denied, 290 U. S. 628.

We can not agree with respondent’s interpretation of the testimony of the witness Einstein. The witness stated, in effect, that the company took no definite action until “we made that liquidation.” Respondent says the relative pronoun used referred to the 1932 distribution. A careful examination of the testimony preceding and following this statement will disclose that - the witness was referring to the 1931 distribution. Indeed, there is no other distribution here in question, as respondent admits the 1932 and 1933 distributions were in liquidation.

In Docket No. 75524 the petitioners, as trustees, present the additional proposition that the trust realized no taxable income by the distribution of February 11, 1931. This is true, they say, because the stock distributed to them by the executors constituted capital of the trust, and the basis for determining gain or loss upon the distribution of said stock is its fair market value at the time of distribution. Sec. 113 (a) (5), Revenue Act of 1928. Therefore, they insist that the cash received replaced the shares surrendered as capital, and, since the cash received equaled the fair market value of the stock when acquired, the petitioners realized no gain upon the redemption of 40 percent of their stock.

Our decision in St. Louis Union Trust Co. et al., Trustees, 30 B. T. A. 370, 378, supports petitioners in their contentions. The provisions of section 113 (a) (5) prescribe the basis for' determining gain or loss, and, since the parties have stipulated the fair market value at the basic date and the date at which distribution was made, the only relevant fact remaining is the amount received upon disposition of the stock. It is undisputed that petitioners received $70 per share in redemption of 40 percent of their stock, and in view of the uncontroverted facts petitioners realized no gain upon the redemption.

Decision will be entered under Rule 50.

       Sec. 115. (c) Distributions in liquidation.-—-Amounts distributed in complete liquidation of a corporation shall be treated as in full payment In exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112. In the case of amounts distributed in partial liquidation (other than a distribution within the provisions of section 112 (h) of stock or securities in connection with a reorganization) the part of such distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or profits within the meaning of subsection (b) of this section for the purpose of determining the taxability of subsequent distributions by the corporation.

       Sec. 115. (g) Redemption of stock.—If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend. In the case of the cancellation or redemption of stock not issued as a stock dividend this subsection shall apply only if the cancellation or redemption is made after January 1, 1926.

       Sec. 115. (h) Definition of partial liquidation.—As used in this section the term “amounts distributed in partial liquidation” means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock,

       Sec. 113. (a) (5) Property transmitted at death.—If personal property was acquired by specific bequest, or if real property was acquired by general or specific devise or by intestacy, the basis shall be the fair market value of the property at the time of the death of the decedent. If the property was acquired by the decedent’s estate from the decedent, the basis in the hands of the estate shall be the fair market value of the property at the time of the death of the decedent. In all other eases if the property was acquired either by will or by intestacy, the basis shall be the fair market value of the property at the time of the distribution to the taxpayer. In the ease of property transferred in trust to pay the income for life to or upon the order or direction of the grantor, with the right reserved to the grantor at all times prior to his death to revoke the trust, the basis of such property in the hands of the persons entitled under the terms of the trust-instrument to the property after the grantor’s death shall, after such death, be the same as if the trust instrument had been a will executed on the day of the grantor’s death.


source: Caselaw Access Project

author: Hill :

license: Public Domain

text:
    I. Rudman, Petitioner, v. Commissioner of Internal Revenue, Respondent. Rose Rudman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 85886, 85887.
    Promulgated November 3, 1937.

      Harry C. Weeks, Esq., for the petitioners.

      Frank M. Thompson, Esq., and R. B. Canon, Esq., for the respondent.
   OPINION.

Hill :

The first issue for decision here is whether respondent erred in including in petitioners’ gross income certain oil payments made directly to their assignors or predecessors in title from oil and gas leases operated by them. During the taxable year petitioners operated two oil and gas leases, known as the Cook lease and the Long lease, respectively. The fractions of the oil reserved by petitioners’ assignors, or their predecessors in title, were delivered to the pipe line companies and the proceeds paid directly to them by the purchasers of the oil, the amount so paid in the taxable year to the holder of the oil payment on the Cook lease being $1,762.70, and on the Long lease $5,201.97. In determining the deficiencies, respondent included these amounts in petitioners’ gross income. Such action was erroneous. The amounts in question should be excluded from petitioners’ gross income, and should also be excluded in computing the percentage depletion deduction allowable to petitioners. Thomas v. Perkins, 301 U. S. 655; Rocky Mountain Oil Co., 36 B. T. A. 365, 367.

The second and third issues will be considered together. During the taxable year petitioners caused a well to be drilled on the Long lease, and in their income tax returns claimed a deduction of $14,344.05 as intangible drilling and development expense. The deficiencies in controversy here were determined by respondent in accordance with a revenue agent’s report, approved by him. In such report the deduction mentioned was allowed in the amount of $13,-367.45. The amount of $976.60 thereby disallowed consisted of two items, the first being $360 representing cost of cement used in the well drilled on the Long lease, which petitioners charged to drilling and development expense and included in the deduction of $14,-344.05, but which respondent capitalized and added to equipment cost; the second item being $616.60 representing unpaid balance of oil payment at December 31, 1933, referred to in the revenue agent’s report as “given in payment for footage contract for drilling well.” The latter adjustment is not questioned by the petitioners, but they contend that the $360 expended for cement used in the well is properly a part of drilling and .development expense, and that respondent erred in disallowing such item.

In determining the deficiencies, respondent also deducted the sum of $13,367.45 as operating expense in computing the net income from the property, 50 percent of which is á limitation upon the amount allowable for percentage depletion under the provisions of section 114 (b) (3) of the Revenue Act of 1932. Petitioners assail this action of the respondent as erroneous, and their contention must be sustained. Whether or not the sum of $13,367.45 is properly deductible from gross income in determining the taxable net income of petitioners, it is not an operating expense, and, therefore, in any event, is not deductible in computing the limitation on the percentage depletion allowance. Respondent’s action on this point is reversed. Rocky Mountain Oil Co., supra; Wilshire Oil Co., 35 B. T. A. 450; Mountain Producers Corporation, 34 B. T. A. 409; Ambassador Petroleum Co. v. Commissioner, 81 Fed. (2d) 474.

While respondent originally allowed the sum of $13,367.45 as a deduction from gross income on account of drilling and development expense, by amended answer respondent now alleges that such action was erroneous, in that the amount allowed represented the cost to petitioners “of the drilling of a completed well under a ‘turn-key’ job contract and was improperly allowed as a deduction.” And respondent formally makes claim for the increased deficiency which would result from the correction of the alleged, error.

Decision of the question raised by respondent’s amended answer depends on whether the contract for the drilling of the well on the Long lease was a “turnkey” contract, or provided for the drilling on a footage basis. The consideration paid under a “turnkey” contract represents an expenditure for the acquisition of a capital asset, and is not a deductible expense. Old Farmers Oil Co., 12 B. T. A. 203; Fort Ring Oil & Gas Co., 30 B. T. A. 307; C. W. Titus, Inc., 32 B. T. A. 1222; O - W - R Oil Co., 35 B. T. A. 452. If the contract under consideration was not a “turnkey” contract, the amount in controversy is deductible as expense pursuant to' the option exercised by petitioners under article 236 of respondent’s Regulations 77, Revenue Act of 1932, the pertinent provisions of which are set out in the margin.

A “turnkey” contract is one which, requires the drilling contractor to furnish all casing, fuel, and material and to turn over a completed well for a stipulated price. Old Farmers Oil Co., supra; C. W. Titus, Inc., supra, at pages 1226, 1228. In Fort Ring Oil & Gas Co., supra, the contracts designated as “turnkey” contracts required a “completed well, with equipment furnished by the contracting driller, in place and ready for production.” A footage contract is one which provides for payment “at so much per foot of well drilled.”

The contract for the drilling of the well on the Long lease, involved in the instant case, we think clearly was not a “turnkey” contract, but should be classified as a “footage” contract. The contractors did not agree to furnish all labor, material, and equipment and to turn over a completed well for a stipulated price. They agreed only to furnish all labor, a complete drilling rig, and necessary equipment for drilling the well, together with accident insurance, and to drill the well to a depth of 2,950 feet, for which they were to be paid a total consideration of $11,000, consisting of $4,000 in cash, and $7,000 in oil if, as, and when produced, saved, and marketed. Thus, the consideration for the drilling of the well was slightly less than $3.78 per foot, and the contract was no less a “footage” contract because it recited a total stipulated lump sum consideration for drilling to a depth of 2,950 feet instead of an agreed price per foot.

Moreover, it appears from the record that petitioners furnished the fuel and water, labor and trucking, and cement and fittings, and made other expenditures in the nature of intangible expenses, amounting to $3,344.05; they obviously also furnished all casing and other equipment required to complete the well and put it into operation.

In our opinion, respondent’s original action, in treating the contract as a footage contract and in allowing the disputed deduction in determining the deficiencies, was proper. The claim set forth in the amended answer for increased deficiency is, therefore, denied.

This leaves for examination only the question whether respondent erred in disallowing, as a part of the deduction for intangible drilling and development expense, the sum of $360 representing the cost of cement used in the well drilled on the Long lease. Respondent’s regulations, quoted supra, provide for charging to expense, at the taxpayer’s option, “expenditures for those drilling and development items which in themselves do not have a salvage value.” The evidence before us shows that the cement used in the Long well may properly be regarded as a drilling and development item, and that after installation it did not have, and could not possibly have had, any salvage value. The amount in controversy is, therefore, deductible. Respondent’s action is reversed.

Judgment will be entered under Rule 50.

       (a) Items chargeable to capital or to expense at taxpayer’s option.
      (1) Option with respect to intangible drilling and development costs in general: All expenditures for wages, fuel, repairs, hauling, supplies, etc., incident to and necessary for the drilling of wells and the preparation of wells for the production of oil or gas, may, at the option of the taxpayer, be deducted from gross income as an expense or charged to capital account. Such expenditures have for convenience been termed intangible drilling and development costs. * * * In general, this option applies only to expenditures for those drilling and development items which in themselves do not have a salvage value. For the purpose of this option labor, fuel, repairs, hauling, supplies, etc., are not considered as having a salvage value even though used in connection with the installation of physical property which has a salvage value. Drilling and development costs shall not be excepted from the option merely because they are incurred under a contract providing for the drilling of a well to an agreed depth, or depths, at an agreed price per foot or other unit of measurement. * * *


author: Harron: Arundell,

text:
    Automobile Loans, Incorporated, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88173.
    Promulgated November 4, 1937.

      C. S. Cowan, C. P. A., for the petitioner.

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

Harron:

The petitioner is a corporation incorporated under the laws of the State of Washington, with its office in Seattle. It filed an income tax return for the year 1934 with the collector for the district of Washington. The Commissioner issued a notice of deficiency for the year 1934 in the amounts of $1,103.17, surtax liability of a personal holding company pursuant to section 351 (a) of the Revenue Act of 1934, and $275.79, 25 percent addition to tax pursuant to section 291 of the Revenue Act of 1934. The respondent has conceded by stipulation that the 25 percent addition to tax is in error and does not now claim the amount in addition to the surtax. Effect will be given, under Rule 50, to this part of the stipulation filed in this proceeding. The remaining issue is whether or not under the facts the petitioner is liable for surtax under the provisions of section 351 of the Revenue Act of 1934.

The facts have been stipulated and are adopted as our findings of fact. The facts are that the petitioner in 1934 was a personal holding company within the definition of section 351 of the Revenue Act of 1934. Its total outstanding capital stock was owned by two stockholders. On March 15, 1935, the petitioner filed its income tax return on the form known as form 1120, “Corporation Income and Excess-Profits Tax Return” and on that form left blank the space for answer to the question: “Is the Corporation a personal holding company within the meaning of section 351 of the Revenue Act of 1934?” On that return no dividends are shown to have been paid during the taxable year. Surplus and undivided profits at the end of 1934 are reported as $20,958.75. On March 15, 1935, the stockholders of the petitioner corporation filed their income tax returns on the form known as form 1040 and these returns did not include in income any dividends on stock of domestic corporations, nor their respective pro rata shares of the “adjusted net income” of the petitioner corporation.

On April 15, 1935, the collector of internal revenue at Tacoma, Washington, granted petitioner an extension of 30 days from that date within which to file the return of a personal holding company subject to surtax under section 351. (Form 1120 H.) The extension of time was in accordance with a Treasury decision, No. 4529, granting a general extension of time to personal holding companies to file surtax returns. (Form 1120 H.) Such extension was conditioned only upon the attaching of a copy of the extension to the return when filed and the payment of interest at the rate of 6 percent per annum from March 15, 1935, to the date of payment. The petitioner filed this return on form 1120 H, on April 26, 1935, with the collector in Tacoma, within the extension of time allowed. It reported its undistributed adjusted net income as “None”, the amount of the adjusted net income being entered on line 15, with the notation “Reported by shareholders pro rata.” On April 26, 1935, the stockholders of petitioner filed income tax returns on form 1140, marked “amended” returns, in which, in addition to the income reported in the returns previously filed on March 15, 1935, there were reported their pro rata shares of the adjusted net income of the petitioner herein. These items were designated “pro rata share, Automobile Loans, Inc.” All of the adjusted net income reported by the petitioner in the return on form 1120 H, filed on April 26, 1935, was included in the “amended” returns filed by the petitioner’s stockholders April 26.

The Commissioner asserted surtax under section 351, Revenue Act of 1934, against the petitioner on the ground that its undistributed profits had not been reported by its shareholders in their gross income at the time of filing their individual returns as required by section 351 (d). The petitioner alleges error and contends that the reporting by its shareholders of their pro rata share of petitioner corporation’s undivided profits on amended returns is sufficient to meet the requirements of section 351 (d), so as to avoid imposition of the surtax on petitioner.

The argument of the petitioner corporation is that its shareholders did not “file their returns” within the meaning of section 351 (d) until the “amended” or second returns were filed; that the filing of returns by the shareholders was interdependent upon the petitioner corporation’s filing its surtax return, form 1120 H, and the time for the filing of returns by its shareholders in respect to section 351 (d) was kept open until petitioner filed form 1120 H.

This argument certainly has no foundation in the applicable statute and to sustain such contention would result in adding a condition to the applicability of section 351 (d) that Congress has not provided. The filing of income tax returns by a personal holding company and by its shareholders are separate and independent acts. Under the facts in this proceeding we think it irrelevant, in determining whether or not section 351 (d) has become operative so as to avoid surtax on this petitioner, that the petitioner corporation received an extension of time to file its surtax return on the prescribed form 1120 H.

Section 351 (d), Revenue Act of 1934, is quoted in the margin. It provides the condition upon which a surtax shall not be imposed on a personal holding company. The language of the section is plain. It provides, briefly, that the tax imposed by section 351 shall not apply if all the shareholders of the personal holding company include, at the time of filing their returns, in their gross income, their entire pro rata shares, whether distributed or not, of the “adjusted net income” of the corporation for the taxable year. Emphasis is placed upon the words “at the time of filing their returns” and further emphasis is placed on the words “their returns”, the returns of the shareholders. We believe the meaning of section 351 (d) is clear and that its intent is that if the surtax imposed on a personal holding-company by section 351 is not to apply to such company its stockholders must act promptly—they must report in gross income their shares of the “adjusted net income” of their holding company at the time of filing their returns and not at any other time.

The Commissioner in this case refused to recognize the second income tax returns filed by the shareholders of this petitioner as meeting the condition set forth in section 351(d). We think his action was correct. He interprets this section to mean that the corporate net income must be included in the original returns of the shareholders if the corporation is to escape tax and this is consistent with his interpretation of a similar type provision in the taxing statutes, namely, section 104, Revenue Act of 1932, and particularly section 104 (d) of the Revenue Act of 1932, which is like section 351 (cl), Revenue Act of 1934. See I. T. 2881, C. B. XIV-1, 150. See also, Regulations 86, article 351-7.

The question has been raised before as to whether or not the Commissioner errs in refusing to accept or recognize amended income tax returns. Since the statutes are silent on the right to file so-called amended returns, it is only in exceptional cases that the courts have held that the Commissioner is arbitrary and unreasonable in rejecting amended or second returns. It has been held that such exceptional circumstances exist where the taxpayer had incomplete knowledge of material facts at the time of filing the return or where changes in the law which had retroactive effect were adopted only a short time before the due date for filing tax returns so that the taxpayer had such scant notice of the law as not to be held to have knowledge of it. See Lucas v. Sterling Oil & Gas Co., 62 Fed. (2d) 951; Patent Royalties Corporation v. Commissioner, 65 Fed. (2d) 580; Morrow, Becker & Ewing, Inc. v. Commissioner, 57 Fed. (2d) 1. But in this proceeding we do not find such exceptional circumstances as to make the Commissioner’s action arbitrary. It is noted that the Revenue Act of 1934 was adopted May 10, 1934, almost a year before the time for filing the tax returns involved here. Knowledge of the law must be presumed. We see no mechanical obstacle in the way of the shareholders’ adopting the procedure allowed them in section 351 (d) such as would make the filing of their returns dependent on the holding company’s filing its surtax return first or at the same time. Section 351 provides in clear terms, by definition and otherwise, what the shareholders shall do to -shift the tax to themselves.

There is a further rule that we take notice of, which has some bearing on the present issue. Where the revenue act provides a taxpayer with the right to elect to file one of alternative kinds of tax returns it is a general rule that “the right of choice or election to file one or the other kind of return is exercised by filing the return.” Dr. Pepper Bottling Co. v. Commissioner, 69 Fed. (2d) 768, 769; Radiant Glass Co. v. Burnet, 54 Fed. (2d) 718. Under section 351 (d) all the shareholders of a personal holding company may elect to be taxed. They make that election at the time of filing their individual returns and we believe it is consistent with the rule stated above that the tax liability becomes fixed when the original return is filed and can not be altered by filing another return or “amended” return. Cf. R. Downes, Jr., 5 B. T. A. 1029; Rose v. Grant, 39 Fed. (2d) 340. Petitioner’s shareholders filed returns March 15. At that time in effect they elected not to report their shares of the adjusted net income of the petitioner.

The determination of the'Commissioner is sustained.

Reviewed by the Board.

Decision will be entered under Rule 50.

Arundell,

dissenting: The majority opinion overlooks several facts that seem to me to be important, and by reason of these omissions in the premise an erroneous conclusion is reached. First, the tax imposed by section 351 was a new tax. Theretofore Congress had imposed a heavy tax on corporations improperly accumulating surplus in order to avoid surtax on the stockholders, but it was recognized that the administration of the statutes had not been attended with signal success. In the enactment of the Revenue Act of 1934 provisions relating to improper accumulations of surplus were retained, with a change of rates (section 102), and personal holding companies were placed in a separate classification, subjected to high rates of taxes, and surrounded with a number of statutory provisions wholly different from those applicable to any other class of taxpayer. That Congress was fully aware of the novelty of the tax is obvious from the Congressional Committee reports. 73d Cong., 2d sess., H. Rept. 704, p. 11; S. Rept. 558, p. 13.

Second, the Treasury Department recognized the novelty of the tax and the difficulties facing taxpayers subject to it by issuing T. D. 4529 on March 7, 1935 (C. B. XIY-1, p. 82) granting to personal holding companies an extension of time to April 15, 1935, for the filing of surtax returns, form 1120H, and the payment of the tax. In this case the collector granted the taxpayer a further extension of 30 days.

Third, section 351 is not an isolated, independent section to be administered without reference to other provisions of the statute.

Fourth, the petitioner and its stockholders obviously acted in good faith and filed all returns within the time allowed therefor.

The tax on personal holding companies is not strictly a revenue measure. Its purpose is to prevent avoidance of normal tax and is recognized as placing a “heavy penalty” on the companies coming within its reach. See Congressional Committee reports, supra. The rates of imposition are graduated from 30 to 40 percent on “undistributed adjusted net income” as compared with 13¾ percent on the “net income” of other corporations. These discriminatory rates were not made absolute. The same section that imposes them contains the mitigating provision allowing the stockholders to report the income and pay the tax at the rates prescribed for individuals, which begin with the comparatively low rate of 4 percent. The Treasury Department recognized the radical departure of this new imposition from the long established method of income taxation and the difficulties of administration by issuing T. D. 4529, granting a blanket extension of time for filing returns and paying the taxes. This new imposition required a new kind of return in order to arrive at “undistributed adjusted net income”, which was the measure of the tax. This form, 1120H, was apparently not ready for distribution in time to permit filing by March 15, 1935. The earliest date of publication of this form in the commercial tax services is March 20, 1935. Regulations 86 were not approved until February 11, 1935, and not released until March 2, 1935. Rept. No. 13, Prentice-Hall Federal Tax Service, 1935; Bulletin No. 7, Commerce Clearing House Federal Tax Service, 1935. The date they were available to the public was no doubt later than that. The “adjusted net income” and the “undistributed adjusted net income” not only differ from each other, but are vastly different from the net income that is the basis of the ordinary income taxes in the 1934 and prior acts. In arriving at the “adjusted net income” certain allowances are made for income, war profits, and excess profits taxes and for charitable contributions and gifts not allowable to other corporations, and capital gains and losses are given a different treatment. In arriving at “undistributed adjusted net income” deductions from “adjusted net income” are allowed for a percentage of the excess of the adjusted net income over certain dividends from personal holding companies, for amounts set aside to retire indebtedness, and for dividends paid. This short statement of the complexity of calculation demonstrates the well-nigh impossibility of preparing returns without the aid of official interpretation and forms. It also brings the case within the principles of the case of Morrow, Becker & Ewing Co. v. Commissioner, 57 Fed. (2d) 1, where the taxpayer sought to file amended returns some nine months after filing its original return. The statute affecting the case had been enacted shortly before the original return was filed. The court held that “while there is no statutory authority for an amended return, amended returns are frequently permitted” and that they should have been accepted by the Commissioner in that case. The opinion reads in part:

* * * In view of' the radical changes in the law, of which the petitioner had scant notice, if any, in fairness and justice to the taxpayer the returns should have been received and considered. Taxes are assessed on income and not on honest mistakes of the taxpayer. It was the duty of the Commissioner to do nothing arbitrary or unreasonable that would deprive petitioner of rights created by the new law and the regulations thereunder. It was a breach of discretion on the part of the Commissioner not to receive the amended return from 1925 under the circumstances disclosed.

This petitioner and. its stockholders are in a more favorable position to claim all the benefits of the law than the taxpayer in the Morrow, Becker & Ewing case. They acted as promptly as the circumstances would permit and the filing of amended returns under the facts here can not be said to be an afterthought prompted solely by a desire to reduce taxes. The stockholders and the petitioner - corporation filed timely returns reporting for taxation the income calculated in accordance with the general pattern of the income tax statutes. The only omission that can be charged to them is the failure of the stockholders to include in their original returns the then new “adjusted net income” which, because of the tardiness of the Treasury Department in distributing official information and forms, they could not reasonably be expected to know how to compute. Had the stockholders delayed filing their individual returns until the time allowed for filing the corporate return, they would have been subject to penalties and interest for their tardiness. It seems to me that the Commissioner is taking an arbitrary position in refusing to allow the stockholders to conform their returns to that of the corporation within the time allowed to the corporation to calculate and report the new and different kind of income taxed under section 351.

Under the circumstances here I do not think that the doctrine of election applies. In the first place, neither the statute nor the regulations require that the stockholders report their pro rata shares of the corporate income in their original returns. There is no expressed right of election, and if one can be implied it is not in terms confined to an original filing. In the second place, the making of an election presupposes knowledge of the facts and of the circumstances present. “In order to constitute a valid election, the act must be done with a full knowledge of the circumstances of the case, and the right to which the person put to his election was entitled.” McIntosh v. Wilkinson, 36 Fed. (2d) 801.

It is not my view that shareholders should be permitted to file amended returns in all cases. It may be that in other cases, and particularly for later years, the corporate return and the shareholders’ returns can be filed at the same time and all parties will know at that time the method of reporting that is most advantageous, and under such circumstances they would be held to have made a deliberate, conscious election. But here, where the corporation was granted additional time for filing in recognition of the Treasury’s tardiness in supplying information and forms there was a real obstacle in the way of the stockholders’ awaiting the filing of the corporate return before filing their individual returns. Had they done so, they would have been subject to the charge of delinquency. In the circumstances of this case I am of the opinion that the Commissioner’s refusal of the amended returns was arbitrary and should not be sustained. Cf. F. Harold Johnston, Executor, 33 B. T. A. 551.

       SEC. 351. SURTAX ON PERSONAL HOLDING COMPANIES.
      * * * * * * *
      (d) Payment of Surtax on Pro Rata Shares.—The tax imposed by this section shall not apply if all the shareholders of the corporation include (at the time of filing their returns) in their gross income their entire pro rata shares, whether distributed or not, of the “adjusted net income” of the corporation for such year. Any amount so included in the gross income of a shareholder shall be treated as a dividend received. Any subsequent distribution made by the corporation out of earnings or profits for such taxable year shall, if distributed to any shareholder who has so included in his gross income his pro rata share, be exempt from tax in the amount of the share so included.

       Where at the time of Cling their returns the shareholders of a corporation which comes within the provisions of section 104 of the Revenue Act of 1932, relating to accumulation of surplus to evade surtaxes, did not include in their gross incomes their entire distributive shares of the corporation’s net income in accordance with the provisions of section 104 (d) of the Revenue Act of 1932, amended returns will not avoid imposition of the tax provided by that section.


author: Hill:

text:
    Will T. Caswell, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 82331, 82332, 82333, 82334, 82335, 82336, 82337, 82338, 82339, 82340, 82341, 82342, 82343, 82344.
    Promulgated November 4, 1937.

      R. C. Fulbright, Esq., for the petitioners.

      E. A. Tonjes, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Malcolm H. Reed; Edgar H. Perry; Estate of D. T. Igleliart; Estate of E. T. Byrne; and Estate of C. J. Von Rosenberg.

   OPINION.

Hill:

Petitioners, as stockholders, admittedly received assets of the Elgin Compress Co., the San Marcos Compress Co., and the Capital Compress Co. in excess of the transferee liability determined against them respectively by respondent. So much has been stipulated by the parties. But petitioners assert that they are not liable as transferees, (1) because no additional tax is due from the corporations, and (2) if any additional tax is so due, assessment and collection of their liabilities as transferees are barred by limitations.

Article 1388 of Vernon’s Annotated Texas Statutes (Civil) provides that upon the dissolution of a corporation, unless a receiver is appointed by some court of competent jurisdiction, the president and directors or managers of the affairs of the corporation at the time of its dissolution shall be trustees of the creditors and stockholders of such corporation, with power to settle the affairs, collect the outstanding debts, and divide the moneys and other property among the stockholders, after paying the debts due and owing by the corporation at the time of its dissolution. And for this purpose it is provided that the trustees may in the name of such corporation sell, convey, and transfer all real and personal property belonging to the corporation, collect all debts, compromise controversies, maintain and defend judicial proceedings, and exercise full power and authority of the corporation over such assets and property.

Article 1389 of the same statutes provides that the existence of every corporation may be continued for three years after its dissolution from whatever cause, for the purpose of enabling those charged with the duty to settle up its affairs, except that, where a receiver is appointed by a court for this purpose, the existence of the corporation may be continued by the court so long as in its discretion it is necessary suitably to settle the affairs of the corporation.

The corporations here involved were voluntarily dissolved in accordance with the Texas law on July 30, 1927, and thereupon the president and directors assumed charge of the assets and affairs of the corporations as trustees in dissolution. On August 17, 1927, the trustees entered into a contract for the sale of the properties of the corporations, and in the following month the assets were transferred to the vendee. Shortly thereafter the proceeds were distributed among the stockholders.

Petitioners contend that no additional tax is due from the corporations on account of the profit, if any, derived from the sale of the assets subsequent to the dissolution of the corporations; that upon dissolution on July 30, 1927, the legal title to all property belonging to the corporations immediately vested by operation of law in the liquidating trustees, who were trustees for the creditors and stockholders, and that any profit derived from the sale thereafter in September was not the profit of the corporations and hence not taxable to them. No additional tax being due from the corporation, petitioners say they are not liable as transferees. Petitioners’ contentions on this point, we think, can not be sustained.

While it is true that the trustees in dissolution were trustees for the creditors and stockholders, it does not follow that they were not also trustees for the corporations and acting in their behalf when they disposed of the corporate assets. The stockholders were the ultimate beneficiaries, after payment of claims of creditors, and in that sense the trustees were acting in a fiduciary capacity for the benefit of the creditors and stockholders. In the same sense, it is often said that the officers and directors of a corporation are trustees for its creditors and stockholders, but nevertheless they manage and direct the affairs of the corporation prior to dissolution, and their acts are the acts of the corporation.

In the instant case the record clearly shows that the liquidating trustees were not only authorized to, but in effect did, directly represent and act in behalf of the corporations in many matters. They were specifically authorized by the statute (1) in the names of the corporations to sell, convey and transfer all properties belonging to them, both real and personal; (2) in the names of the corporations to collect all debts, compromise controversies, maintain and defend judicial proceedings, and exercise full power and authority of the corporations over .their assets and properties. These things the trustees did, and in doing so, they were acting for and in behalf of the corporations. The parties have stipulated that the assets' of the corporations were transferred by the corporations to the Aransas Compress Co. and in return therefor the stated consideration was “paid to the San Marcos Company, the Elgin Company and the Capital Company.” The stipulation further recites that “shortly thereafter, within a period of the next three or four months, all of the proceeds from the disposition of the properties were distributed to the stockholders, and thereafter the corporations were entirely without properties or assets of any description.”

There being no evidence to contradict the stipulation, we must accept it as correctly stating the facts, and under those facts we can not hold, as petitioners seek to have us do, that the transferred properties belonged to the stockholders at the time of sale, and that they derived the profits resulting therefrom. As we said in Paraffine Oil Co., 28 B. T. A. 207, involving Texas corporations:

Each petitioner [corporation] conveyed title to the assets sold to the vendees; that was the sale (Cf. Charles W. Dahlinger, 20 B. T. A. 176), the transaction producing the asserted gain. The assets of these petitioners [the corporations] were not distributed to or conveyed by their stockholders. The stockholders could cause the conveyance to be made, but they could not make the conveyance. Furthermore, there was no liquidation of either petitioner and we can not ignore the formal corporate acts in making the conveyances, even although the consideration for the conveyance was distributed directly to the petitioners’ stockholders. Cf. E. H. Nielsen Co., 26 B. T. A. 223.

But aside from the plainly worded stipulation of the parties above referred to, we can not sustain the contentions of the petitioners that, upon dissolution of the corporations, legal title to their assets vested in the trustees by operation of law, and that any profit realized from .the subsequent sale is taxable to the stockholders. In Mrs. Grant Smith, 26 B. T. A. 1178, we said:

It is well established that the mere dissolution of a corporation does not effect a distribution of its assets among its stockholders, and furthermore that such a distribution is not effected by the turning over of the assets of the corporation to trustees in liquidation who may also be stockholders of the corporation. * * * Until the stockholders actually receive the assets or the proceeds resulting from the sale thereof, there is no receipt by them. [Citing Wells-Fargo Bank, etc. v. Blair, 26 Fed. (2d) 532.]

The Smith case involved a corporation of the State of Washington, but the Washington statutes relating to the dissolution of corporations are substantially the same as the Texas statutes, and the same rule has been applied in the case of Texas corporations.

Article 71 of respondent’s Regulations 74, issued under tire Revenue Act of 1928, applicable here, reads in material part as follows:

Gross Income of Corporation in, Liquidation.—When a corporation is dissolved, its affairs are usually wound up by a receiver or trustees in dissolution. The corporate existence is continued for the purpose of liquidating the assets and paying the debts, and such receiver or trustees stand in the stead of the corporation for such purpose. * * * Any sales of property by them are to be treated as if made by the corporation for the purpose of ascertaining the gain or loss. * * *

The same provisions have been embodied in the regulations issued under all other revenue acts from 1918 to 1936, both inclusive. See art. 547, Regulations 45, 1918 Act; art. 22 (a)-21, Regulations 94, 1936 Act.

This regulation has been specifically approved, and the rule announced therein applied, in the following cases: Taylor Oil & Gas Co. (a Texas corporation) v. Commissioner, 47 Fed. (2d) 108, affirming 15 B. T. A. 609; certiorari denied, 283 U. S. 862; Burnet v. Lexington Ice & Coal Co., 62 Fed. (2d) 906; Hellebush v. Commissioner, 65 Fed. (2d) 902, affirming 24 B. T. A. 660; Northwest Utilities Securities Corporation v. Helvering, 67 Fed. (2d) 619, affirming 27 B. T. A. 524; Mrs. Grant Smith, supra.

In Taylor Oil & Gas Co., the court, after quoting article 547 of Regulations 45, above referred to, said:

This is a reasonable regulation, and should be given effect [citing authorities].
It may be doubted that the contract of sale was merely executory. * * * But, if it was executory, it was still the contract of the company to be executed before there could be any liquidation of its affairs. Conceding for the purpose of argument that the legal title to the property vested in the trustees by the dissolution, no part of the title passed to the stockholders thereby. The real owner was still the company until such time as its affairs were liquidated, the debts paid, and the residue distributed to the stockholders. The profit on the transaction was earned by the corporation, and the assessment of the taxes based thereon was valid.

Petitioners strongly urge that the present proceedings are distinguishable from the cited cases, for the reason that in the latter contracts had been executed, or negotiations entered into, for the sale of the assets prior to dissolution, of the corporations. Under the facts here, we think the distinction suggested is without importance. The matters mentioned are of materiality only in determining who was the owner of the property at the time of the sale, and who derived the profit resulting therefrom. In the cases at bar, the corporations owned the property when it was sold and transferred, and hence the gain realized was earned by them.

In support of their contentions petitioners cite, among others, our decisions in Robert Jemison, Jr., 3 B. T. A. 780, and Fruit Belt Telephone Co., 22 B. T. A. 440. In the Jemison case the corporation was dissolved and its assets distributed in kind among the stockholders, who thereafter made the sale. In Fruit Belt Telephone Co. the corporation sold, and by formal deed conveyed, its assets to its stockholders for a cash consideration. There was no question of mala fides. The property was thereafter sold by the stockholders. In both cases, the stockholders had, in good faith and by lawful transactions, become the legal and equitable owners of the properties of the corporations prior to the sales in controversy. Here no such procedure was followed. We have carefully examined the other decisions cited by petitioners, and find them also not in point.

On the first issue, respondent’s action is approved.

The second issue is whether assessment and collection of the liabilities of petitioners as transferees of the taxpayer corporations are barred by limitations. The corporations were dissolved on July 30, 1927, and on October 15, 1927, income tax returns were filed on behalf of the corporations as final returns for the taxable period May 1 to July 30, 1927, and the taxes shown thereon were paid. No returns were filed by or in behalf of the corporations for the fiscal year beginning May 1, 1927, and ended April 30, 1928. Prior to May 1, 1927, the corporations made their tax returns on the basis of a fiscal year ended April 30. No waiver of the statutes of limitations has been executed either by the corporations or by petitioners herein.

On April 12, 1930, respondent made a jeopardy assessment against each of the corporations, covering the period May 1 to July 30, 1927, on the basis of including in gross income for such period profit derived from the sale of the corporate assets subsequent to July 30, 1927. On April 28, 1930, respondent mailed notices of deficiency to the corporations in the respective amounts assessed on April 12, 1930. Notices determining transferee liability were mailed to petitioners on September 6, 1935.

Petitioners contend that the returns filed by the corporations on October 15, 1927, started the running of the statute of limitations in their favor, but that in any event the jeopardy assessments made by respondent on April 12, 1930, put such statute into operation, and therefore the period of limitations on assessment against the corporations expired not later than April 12, 1933. Notices of transferee liability not having been mailed within one year thereafter, petitioners say they came too late.

Upon receipt of the notices of jeopardy assessment above mentioned, the corporations seasonably filed petitions with the Board, and in an opinion reported at 31 B. T. A. 273, 278, we held that the returns filed by the corporations “for the period May 1 to July 30, 1927, were not such returns as are required by the revenue act, and that the deficiencies determined on the basis of such returns and for that period by the respondent were not authorized by law.”

Respondent argues that petitioners herein, being stockholders of the corporations, were privy to the former proceedings, and that our decision there as to the sufficiency of the returns of October 15, 1927, and the jeopardy assessments of April 12, 1930, is conclusive of those questions here. On this point, see Jahncke Service, Inc., 20 B. T. A. 837, 847, and authorities cited. Whether or not such rule is applicable here, we need not consider, for the reason that the facts before us in the instant proceedings impel us to the same conclusions.

Section 212 of the Revenue Act of 1926 provides that the net income of individuals shall be computed on the basis of the taxpayer’s annual accounting period, fiscal or calendar year, as the case may be, and section 232 provides that the net income of corporations shall be computed on the same basis. Section 41 of the Revenue Act of 1928 is similar. Article 651 of respondent’s Regulations 69, under the Revenue Act of 1926, provides that returns of income must be made on or before the fifteenth day of the third month following the close of the fiscal or calendar year, but adds that :

A corporation going into liquidation during any taxable year may upon tbe completion of such liquidation prepare a return covering its income for the fractional part of the year during which it was engaged in business and may immediately file such return with the collector.

Substantially the same provisions, with additional matter not material here, are contained in article 401 of Regulations 74, under the 1928 Act.

We think it is plain that the returns filed by the corporations on October 15, 1927, for the period May 1 to July 30, 1927, did not cover their fiscal year ended April 30, 1928, nor embrace the period from the beginning of the fiscal year .to the completion of liquidation. These returns, therefore, were not the returns required by law, meeting neither the requirements of the statute nor' of the regulations. It follows they were insufficient to start the running of the statute of limitations.

The jeopardy assessments were invalid for substantially the same reasons. Respondent is required to compute tax liability upon the basis of the taxpayer’s proper taxable year. Yet he determined deficiencies and made jeopardy assessments for the same period covered by the corporations’ returns, namely, May 1 to July 30, 1927, which was not the taxpayer’s taxable year, or a proper taxable period, and further computed the deficiencies on the basis of income derived subsequent to the close of such period. Even if the period for which the assessments were made had been the proper taxable period, respondent could not lawfully assess a tax for such period based upon income derived thereafter. Since neither the deficiencies so determined nor the jeopardy assessments based thereon were authorized by law, the assessments were null and void, and without legal effect.

In support of their contentions on the issue of limitations, petitioners cite E. B. Teague, 32 B. T. A. 641; American Locker Co., 21 B. T. A. 408; and United States v. Updike, 281 U. S. 489. Those decisions are not controlling here for the reason that they dealt with assessments the validity of which was not questioned. Furthermore in the Teague and American Locker Co. cases, the taxpayers filed proper returns, which started the applicable periods of limitation running. We held in the latter case, where respondent made a valid jeopardy assessment after having mailed a notice of deficiency, the effect of such assessment was to terminate suspension of the running of limitations. And in the Teague case, where a valid jeopardy assessment was made prior to notice, we held that such notice did not serve to suspend the running of the statute.

Section 276 (a) of the Revenue Act of 1928 provides that in the case of a failure to file a return the tax may be assessed at any time, and subdivision (e) provides that where assessment has been made within the applicable period of limitation collection of the tax may be made within six years thereafter. The same provisions are contained in subdivisions (a) and (d) of section 278 of the 1926 Act.

Where no return is filed and there is no limitation on assessment, even a lawful assessment, which is within time whenever made, has only the effect thereafter of starting the six-year period of limitation on collection. United States v. Updike, supra. Obviously, the making of a jeopardy assessment has no relation to the period of limitation, if any, on assessment. If there is an applicable period, the making of the jeopardy assessment can neither shorten nor lengthen such period. E. B. Teague, supra.

Here, since the returns filed by the taxpayer corporations were not the returns required by law, there was no period of limitation on assessment against them, and the assessments of April 12, 1930, if lawfully made, have no effect other than to put into operation the six-year period of limitation on collection, which period expired on April 12, 1936. But respondent mailed notices to petitioners within that period on September 6, 1935. Collection, therefore, is not barred.

Section 311 (b) (1) of the Revenue Act of 1928 provides a period of limitation for assessment of liability, in the case of an initial transferee, of one year after the expiration of the period of limitation for assessment against the taxpayer. There being no limitation on assessment against the taxpayer corporations in these proceedings, it can not be said that respondent did not mail notices of transferee liability to petitioners “within one year after the expiration of the period of limitation for assessment against the taxpayer.”

The one-year period for assessment against the transferee is not measured from the date on which assessment may have been actually made against the taxpayer, whether such assessment was valid or otherwise; it is to be computed from the date of the expiration of the period of limitation on assessment against the taxpayer. In any event, therefore, the period of limitation on the assessment of the liabilities of petitioners as transferees had not expired when respondent mailed notices to them on September 6, 1935. After the mailing of such notice the running of the statute is suspended until the Board’s decision herein shall have become final, and for 60 days thereafter. Sec. 311 (d), Revenue Act of 1928.

On May 17, 1934, respondent mailed deficiency notices to the corporations for the fiscal year ended April 30, 1928, which was the proper taxable period. No appeals to the Board having been taken, the amounts were assessed on September 7, 1934. Petitioners contend that such action of respondent was without legal effect for the reason that the corporations had completely terminated their existence prior to May 17, 1934, when the notices were mailed. However that may be, assessment against a taxpayer is not a prerequisite to assessment and collection of transferee liability, and the period of limitation for assessment against the corporations involved herein remained the same as if their existence had not been terminated. Sec. 311 (c) of the Revenue Act of 1928. Such fact, therefore, does not change the conclusions reached above.

We hold that assessment and collection of the liabilities of petitioners as transferees, in the amounts determined by the respondent, are not barred by limitation.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: Tyson:

text:
    Great Southern Life Insurance Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81328.
    Promulgated November 4, 1937.

      Wright Matthews, Esq., for the petitioner.

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

Tyson:

This proceeding involves an asserted income tax deficiency of $10,334.83 for the calendar year 1931 and an alleged overpayment of income tax for that year in the amount of $5,494.05.

The petitioner assigns as error (1) the inclusion in its gross income for the taxable year 1931 of the sum of $9,182.30, alleged to represent the amount collected by petitioner during that year on interest purchased during 1930, together with other assets, from the Southern Union Life Insurance Co. and the American Southern Life Insurance Co.; (2) the failure to allow as a deduction for the taxable year 1931, the sum of $39,193.07, alleged to have been disbursed by petitioner in that year as investment expenses through payment in that amount of tax on personalty to the State of Texas; and (3) the inclusion in its gross income for the taxable year 1931 of the sum of $86,123.61, alleged to represent past due and accrued interest on mortgage loans, which together with the principal of the old notes was included in new notes secured by new deeds of trust. Further, petitioner’s amended petition alleges that it is entitled to a refund of $5,949.05 for 1931, and that this amount has been paid within two years before the filing of its petition, but such allegations are denied by respondent’s amended answer.

The stipulation of facts, together with the attached exhibits, is included herein by reference. The stipulated facts on the third issue have been supplemented by oral testimony adduced at the hearing.

The petitioner, a Texas corporation having its home office at Houston, is a stock company doing business usual to that of a life insurance company, operating on the legal reserve level premium plan. Petitioner keeps its books and records and files its Federal income tax returns, form 1120-L, on the cash receipts and disbursements basis.

Since our determinations of the first and second issues in this proceeding are controlled by our decision in Great Southern Life Insurance Co., 33 B. T. A. 512, wherein, inter alia, the same questions were raised by the same taxpayer based on similar facts but for prior years, we need only set forth the ultimate facts and conclusions with respect to these issues. The cited case was affirmed in 89 Fed. (2d) 54, upon various issues presented on appeal, including one identical with the second issue herein.

Pursuant to reinsurance contracts executed on February 11 and March 12, 1930, and in effect as of January 1, 1930, the petitioner reinsured the business of the American Southern Life Insurance Co. of Lake Charles, Louisiana, and the Southern Union Life Insurance Co. of Fort Worth, Texas, respectively, and acquired certain assets from those companies equal in value to the reserves on the policies reinsured. Pursuant to contemporaneous and supplemental contracts, the petitioner agreed to purchase the balance of the admitted assets of those two companies and pay therefor “the par value thereof with accrued interest to the date that they are respectively taken over.” The assets so purchased from the American Southern Life Insurance Co. included accrued interest in the sum of $7,31.8.53, of which petitioner collected the amounts of $4,665.57 during 1930 and $225.91 during 1931. The assets so purchased from the Southern Union Life Insurance Co. included accrued interest in the sum of $112,804.99, of which petitioner collected the amounts of $85,807.94 during 1930 and $9,556.39 during 1931. The amounts of such interest collected were applied on the petitioner’s books to the earliest interest accrued, that is, interest which had accrued prior to the time petitioner acquired the assets. The interest collected during 1931, totaling $9,782.30, was reported as income by petitioner on its income tax return filed for that year. With reference to this issue it is stipulated that, “This interest collected in 1931 was reported as income by the petitioner on its income tax return filed for that year. A claim for refund was filed, but no amount has been refunded by the Commissioner of Internal Revenue on account of the inclusion of this amount in said income tax return.”

The total amount of such accrued interest collected during 1930 and 1931 was less than the cost to petitioner of the amounts of accrued and unpaid interest purchased by petitioner from the American Southern Life Insurance Co. and the Southern Union Life Insurance Co., respectively. Accordingly, upon authority of Great Southern Life Insurance Co., supra, and cases cited therein on page 530, the total amount of $9,782.30 of said accrued interest collected by petitioner during 1931 represented a return of capital and thus did not constitute taxable income. On this first issue we decide in favor of the petitioner.

During the year 1931 the petitioner paid personal property taxes in the State of Texas, to the County of Harris, in the amount of $39,793.07, as stipulated, which amount is claimed by petitioner as a deduction from gross income, as investment expense. Such taxes were paid pursuant to article 4754 of the Insurance Laws of the State of Texas, Digest of 1932, and were assessed upon the basis of petitioner’s capital and surplus, less real estate owned, in the amounts as set forth in the stipulation of facts. Throughout 1931 petitioner owned investments in an amount equal to its reserves, capital, and surplus. Upon authority of Great Southern Life Insurance Co., supra, such personal property taxes are not deductible under section 203 (a) (5) of the Revenue Act of 1928 as investment expenses, or under section 203 (a) (6) of the same act, as real estate taxes. On this second issue we approve the respondent’s disallowance of the claimed deduction of $39,793.01, personal property taxes.

The third issue involves a question of whether during 1931 the petitioner received interest income in the amount of $86,123.61 on mortgage loans.

During the year 1931 the petitioner had 21 mortgage loans, secured by deeds of trust, on which there was accrued and past due interest in the total amount of $86,123.61. After making demand for the payment of the principal of the loans and the accrued interest thereon and failure to obtain any cash collections on account of such principal and interest, an investigation by petitioner disclosed that none of the 21 mortgagors were able to pay either the accrued interest or principal of the loans and that the property securing each of such loans would not at foreclosure sale bring a sufficient amount to pay the amounts due on such loan.

The petitioner’s business policy was that it would not take title to property or force a sacrifice sale of same upon foreclosure so long as the mortgagor was inclined to pay, in which event the petitioner tried to work the matter out by rewriting the loan, especially in cases where the amount due on a loan was greater than the value of the property securing the loan. Pursuant to that policy and because petitioner could not have realized the amount due on any one of these original mortgage loans, by foreclosure, and with the hope of some day in the future making collection thereof, the petitioner renewed those 21 loans during 1931 and received from each of the 21 debtors a new note in a face amount equal to the principal sum due on the old note plus the past due and accrued interest thereon. In each instance the new note was secured by a new deed of trust which was regularly filed for record and which embraced only the identical security that the petitioner had under the old deed of trust. None of the 21 debtors had any additional collateral “or anything” to put up as security for such loans. The renewal notes merely afforded the debtors a different program on which to make payment.

The new notes and deeds of trust so received were placed in petitioner’s files together with the old notes and deeds of trust, which were not released or surrendered by petitioner. It was always the practice of petitioner in such cases to retain the old note and deed of trust and to include them with the new note and papers and make them a part thereof. The petitioner made no effort to discount any of those 21 renewal notes because there was no market for them.

On its books the petitioner carried its mortgage loans at the amount of the notes given by the makers, less any principal payments thereon. During 1931, whenever petitioner renewed a mortgage loan on which there was past due and accrued interest, an entry was made on its hooks in the following form:

At the end of the calendar year 1931 the petitioner closed into an account on its books entitled “Profit and Loss” the above mentioned account of “Interest on Mortgage Loans” as well as other accounts designated income and disbursements, as shown in the company’s annual statement. Such “Profit and Loss” account does not purport to indicate the petitioner’s actual net profit or taxable income.

Under the foregoing facts it is clear that during 1931 the petitioner did not receive in cash any part of the said total amount of $86,123.61 past due and accrued interest on the original 21 mortgage loans. It is equally clear that the receipt of the renewal notes, including such interest in their face amount, did not represent the receipt by petitioner of the equivalent of cash, for the security for such new notes was identical with that for the old notes and was not equal in value to the amounts due on the old notes and there was no market for such renewal notes. Accordingly, the petitioner, being on the cash basis, would not be in receipt of interest income until the renewal notes, or one or more of them, were paid. In our opinion,, the petitioner during 1931 did not receive income in the amount of $86,123.61, or any part thereof, as a result of the note renewal transactions. Great Southern Life Insurance Co., supra; San Jacinto Life Insurance Co., 34 B. T. A. 186, and authorities cited therein. On this third issue we decide in favor of petitioner.

With reference to petitioner’s allegations that it is entitled to a refund of $5,949.05 for 1931 and that such amount has been paid within two years before the filing of the petition herein, the only facts of record are those set out in the stipulation as to a claim for refund as hereinbefore quoted with regard to the first issue involving the amount of $9,782.30 accrued interest collected in 1931 and reported as income. From these facts we are unable to make a finding that the petitioner paid a definite amount of income taxes for 1931 within two years before the filing of a claim for refund or the petition herein, whichever was earlier.

Decision will be entered under Rule 50.


text:
    Charles Heiss, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 81179, 81997.
    Promulgated November 5, 1937.

      J. Sydney Salkey, Esq., and Wilbur B. Jones, Esq., for tlie petitioner.

      S. B. Anderson, Esq., for the respondent.
   OPINION.

Arnold:

The petitioner contends as to the first issue that the sales of the preferred stock of the Mayfair Investment Co. in December of 1932 and 1933 were bona fide, and that the stock had some value in those years. The respondent contends that the sales were not bona fide and that the stock became worthless prior to 1932.

The first issue to be determined is whether the stock was worthless and, if so, when it finally became worthless, because a taxpayer may not continue to hold worthless stock and establish a deductible loss by sales thereafter. Cf. Harry H. DeLoss, 6 B. T. A. 784; affd., 28 Fed. (2d) 803; certiorari denied, 279 U. S. 840; Harry C. Kayser, 27 B. T. A. 816; Alfred K. Nippert et al., Executors, 32 B. T. A. 892. Cf. Paul Pryibil, 31 B. T. A. 164.

In 1931 a bondholders’ committee had been formed and authorized to enter into a plan of reorganization. In 1932 it was apparent that the income of the Mayfair Investment Co. was not sufficient to meet the payments of principal and interest on their bonds. There was a foreclosure sale of the property and a reorganization. The charter of the company was allowed to expire. A new corporation was organized August 1, 1932, and new stock was issued, which was held in escrow. Owing to the fact that under certain conditions a part of the stock of the now corporation might eventually be given to the holders of stock in the old corporation, there was a possibility that in the future the stock of the old corporation might have some exchange value, but at the time of the sale it was merely the stock of a defunct corporation, the assets of which had been sold in the process of reorganization, and nothing remained in the stockholders except the hope that the hotel would for the next five years be able to so increase its business as to earn the interest on the corporation’s bonds or. reduce its bonded indebtedness. This is not a sufficient basis upon which to determine a value in 1932. Cf. William E. Steinback, 30 B. T. A. 1252; United States v. White Dental Manufacturing Co., 274 U. S. 398.

The evidence shows the stock was not worthless in 1931. It is true that the corporation was in default on its interest payments and a reorganization was being considered by the bondholders’ committee, but it was not until 1932 that its assets were sold, its charter forfeited, the reorganization effected, and the new corporation organized to take the place of the old. Thereupon, we think the stock became worthless and had no more than a nominal value thereafter. The parties themselves so considered it in their dealing. The stock having become worthless in 1932, the petitioners had the right to deduct the loss sustained thereby in that year. The sale thereafter of 100 shares in 1932 was a useless gesture and ineffective to establish a loss already sustained. Harry H. DeLoss, supra; Bair v. United States, 20 Fed. Supp. 191; Walter W. Moyer, 35 B. T. A. 1155, Peter Doelger Brewing Co., 22 B. T. A. 1176.

The stock having become worthless in 1932, the deduction of the loss claimed on the sale in 1933 is denied, and the respondent’s determination as to this issue for that year is sustained. On recomputation under Rule 50 the entire stock loss should be allowed petitioner in 1932. The amount received by petitioner from the sales in both 1932 and 1933 was income in the respective years.

The respondent has affirmatively pled that the returns of petitioner for 1932 and 1933 were false and fraudulent with intent to evade tax, and has assessed a fraud penalty as to each year. Fraud is never presumed, see Henry S. Kerbaugh, 29 B. T. A. 1014, and must be proved by convincing evidence. Cf. Oscar G. Joseph, 32 B. T. A. 1192; Thomas W. Behan, 32 B. T. A. 1088; affd., Commissioner v. Behan, 90 Fed. (2d) 609.

On the whole record the respondent has not convinced us that petitioner’s returns were false and fraudulent with intent to evade tax. The addition to the tax provided by statute where fraud is shown, therefore, may not be imposed.

In recomputation, $3,000 as the reasonable value of the living quarters and meals for each of the years before us will be included as income to petitioner, as agreed upon.

Reviewed by the Board.

Decision will be entered under Rule 50.


author: Sternhagen : ARNOLD,

text:
    Arthur Benaglia and Elise Benaglia, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87638.
    Promulgated November 5, 1937.

      Livingston Jenhs, Esq., for the petitioners.

      Arthur H. Fast, Esq., and Henry L. Young, Esq., for respondent.
   OPINION.

Sternhagen :

The Commissioner has added $7,845 each year to the petitioner’s gross income as “compensation received from Hawaiian Hotels, Ltd.”, holding- that this is “the fair market value of rooms and meals furnished by the employer.” In the deficiency notice he cites article 52 [53], Regulations 77, and holds inapplicable Jones v. United States, 60 Ct. Cls. 552; I. T. 2232; G. C. M. 14710; and G. C. M. 14836. The deficiency notice seems to hold that the rooms and meals were not in fact supplied “merely as a convenience to the hotels” of the employer..

From the evidence, there remains no room for doubt that the petitioner’s residence at the hotel was not by way of compensation for his services, not for his personal convenience, comfort or pleasure, but solely because he could not otherwise perform the services required of him. The evidence of both the employer and employee shows in detail what petitioner’s duties were and why his residence in the hotel was necessary. His duty was continuous and required his presence at a moment’s call. He had a lifelong experience in hotel management and operation in the United States, Canada, and elsewhere, and testified that the functions of the manager could not have been performed by one living outside the hotel, especially a resort hotel such as this. The demands and requirements of guests are numerous, various, and unpredictable, and affect the meals, the rooms, the entertainment, and everything else about the hotel. The manager must be alert to all these things day and night. He would not consider undertaking the job and the owners of the hotel would not consider employing a manager unless he lived there. This was implicit throughout his employment, and when his compensation was changed from time to time no mention was ever made of it. Both took it for granted. The corporation’s books carried no accounting for the petitioner’s meals, rooms, or service.

Under such circumstances, the value of meals and lodging is not income to the employee, even though it may relieve him of an expense which he would otherwise bear. In Jones v. United States, supra, the subject was fully considered in determining that neither the value of quarters nor the amount received as commutation of quarters by an Army officer is included within his taxable income. There is also a full discussion in the English case of Tennant v. Smith, H. L. (1892) App. Cas. 150, III British Tax Cases 158. A bank employee was required to live in quarters located in the bank building, and it was held that the value of such lodging was not taxable income. The advantage to him was merely an incident of the performance of his duty, but its character for tax purposes was controlled by the dominant fact that the occupation of the premises was imposed upon him for the convenience of the employer. The Bureau of Internal Revenue has almost consistently applied the same doctrine in its published rulings.

The three cases cited by the respondent, Ralph Kitchen, 11 B. T. A. 855; Charles A. Frueauf, 30 B. T. A. 449; and Fontaine Fox, 30 B. T. A. 451, are distinguishable entirely upon the ground that what the taxpayer received was not shown to be primarily for the need or convenience of the employer. Of course, as in the Kitchen case, it can not be said as a categorical proposition of law that, whore an employee is fed and lodged by his employer, no part of the value of such perquisite is income. If the Commissioner finds that it was received as compensation and holds it to be taxable income, the taxpayer contesting this before the Board must prove by evidence that it is not income. In the Kitchen case the Board held that the evidence did not establish that the food and lodging wore given for the convenience of the employer. In the present case the evidence clearly establishes that fact, and it has been so found.

The determination of the Commissioner on the point in issue is reversed.

Reviewed by the Board.

Judgment will be entered under Rule 50.

Murdock concurs only in the result.

ARNOLD,

dissenting: I disagree with the conclusions of fact that the suite of rooms and meals furnished petitioner and his wife at the Royal Hawaiian Hotel were entirely for the convenience of the employer and that the cash salary was fixed without reference thereto and was never regarded as part of his compensation.

Petitioner was employed by a hotel corporation operating two resort hotels in Honolulu—the Royal Hawaiian, containing 857 guest bed rooms, and the Moana, containing 261 guest bed rooms, and the bungalows and cottages in connection with the Moana containing 127 guest bed rooms, and the Waialae Golf Club. His employment was as general manager of both hotels and the golf club.

His original employment was in 1925, and in accepting the employment he wrote a letter to the party representing the employer, with whom he conducted the negotiations for employment, under date of September 10,1925, in which he says:

Confirming our meeting here today, it is understood that I will assume the position of general manager of both the Royal Waikiki Beach Hotel (now under construction) and the Moana Hotel in Honolulu, at a yearly salary of $10,000.00, payable monthly, together with living quarters, meals, etc., for myself and wife. In addition I am to receive $20.00 per day while travelling, this however, not to include any railroad or steamship fares, and I to submit vouchers monthly covering all such expenses.

While the cash salary was adjusted from time to time by agreement of the parties, depending on the amount of business done, it appears that the question of living quarters, meals, etc., was not given further consideration and was not thereafter changed. Petitioner and his wife have always occupied living quarters in the Royal Hawaiian Hotel and received their meals from the time he first accepted the employment down through the years before us. His wife performed no services for the hotel company.

This letter, in my opinion, constitutes the'basic contract of employment and clearly shows that the living quarters, meals, etc., furnished petitioner and his wife were understood and intended to be compensation in addition to the cash salary paid him. Being compensation to petitioner in addition to the cash salary paid him, it follows that the reasonable value thereof to petitioner is taxable income. Cf. Ralph Kitchen, 11 B. T. A. 855; Charles A. Frueauff, 30 B. T. A. 449.

Conceding that petitioner was required to live at the hotel and that his living there was solely for the convenience of the employer, it does not follow that he was not benefited thereby to the extent of what such accommodations were reasonably worth to him. His employment was a matter of private contract. He was careful to specify in Ms letter accepting the employment that he was to be furnished with living quarters, meals, etc., for himself and wife, together with the cash salary, as compensation for Ms employment. Living quarters and meals are necessities which he would otherwise have had to procure at his own expense. His contract of employment relieved Mm to that extent. He has been enriched to the extent of what they are reasonably worth.

The majority opinion is based on the finding that petitioner’s residence at the hotel was solely for the convenience of the employer and, therefore, not income. While it is no doubt convenient to have the manager reside in the hotel, I do not think the question here is one of convenience or of benefit to the employer. What the tax law is concerned with is whether or not petitioner was financially benefited by having living quarters furnished to himself and wife. He may have preferred to live elsewhere, but we are dealing with the financial aspect of petitioner’s relation to his employer, not his preference. He says it would cost him $3,600 per year to live elsewhere.

It would seem that if Ms occupancy of quarters at the Royal Hawaiian was necessary and solely for the benefit of the employer, occupancy of premises at the Moana would be just as essential so far as the management of the Moana was concerned. He did not have living quarters or meals for himself and wife at the Moana and he was general manager of both and both were in operation during the years before us. Furthermore, it appears that petitioner was absent from Honolulu from March 24 to June 8 and from August 19 to November 2 in 1933, and from April 8 to May 24 and from September 3 to November 1 in 1934—about 5 months in 1933 and 3½ months in 1934. Whether he was away on official business or not we do not know. During his absence both hotels continued in operation. The $20 per day travel allowance in his letter of acceptance indicates his duties were not confined to managing the hotels in Honolulu, and the entire letter indicates he was to receive maintenance, whether in Honolulu or elsewhere, in addition to his cash salary.

At most the arrangement as to living quarters and meals was of mutual benefit, and to the extent it benefited petitioner it was compensation in addition to his cash salary, and taxable to Mm as income.

The Court of Claims in the case of Jones v. United States, relied on in the majority opinion, was dealing with a governmental organization regulated by military law where the compensation was fixed by law and not subject to private contract. The English case of Tennant v. Smith, involved the employment of a watchman or custodian for a bank whose presence at the bank was at all times a matter of necessity demanded by the employer as a condition of the employment.

The facts in both these cases are so at variance with the facts in this case that they are not controlling in my opinion.

Smith, Turner, and Harron agree with this dissent.

       This decision has only been cited in the later English reports on another point, and seems therefore to be still good law.

       O. D. 265, 1 C. B. 71; O. D. 814, 4 C. B. 84; O. D. 915, 4 C. B. 85 ; I. T. 2232, IV-2 C. B. 144; I. T. 2253, V-l C. B. 32; G. C. M. 12300, XII-2 C. B. 30; G. C. M. 14710, XIV-1 C. B. 44; G. C. M. 14836, XIV-1 C. B. 45 ; G. C. M. 18430, XVI C. B. 22-8733 : Cf. O. D. 1135, 5 C. B. 174 : I. T. 3022. XV-2 C. B. 76.