author: SteRNHAGEn :

text:
    The France Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 64869.
    Promulgated January 3, 1934.

      H. A. Mihills, C.P.A., and 8. Sanger, Esq., for the petitioner.

      B. M. Coon, Esq., and F. S. Qettle, Esq., for the respondent.
   OPINION.

SteRNHAGEn :

This was so obviously a distribution to petitioner in complete liquidation of all its shares in the Bascom Co. that it deserves but brief consideration. The petitioner labors an argument (1) that the transaction was a purchase; (2) that, if a distribution, it was essentially the equivalent of an ordinary dividend; (3) that it was a statutory reorganization, and thus relieved from tax; (4) that the corporations were affiliated and filed a consolidated return; and (5) that upon a consolidated return the transaction was an intercompany transaction upon which no gain may be recognized.

The transaction was in destruction of the affiliation and was the occasion for the realization by petitioner of its investment in the Bascom stock. Commissioner v. Aluminum Goods Mfg. Co., 287 U.S. 544; Remington-Rand Co. v. Commissioner, 33 Fed. (2d) 77; certiorari denied, 280 U.S. 591. Were this not so, petitioner would still be not entitled to the benefits of a consolidated return, for it deliberately elected to file a separate return. Radiant Glass Co. v. Burnet, 54 Fed. (2d) 718. There was not a statutory reorganization, but quite the reverse, for instead of acquiring all the Bascom Co.’s property in a transaction which partakes of a merger or consolidation, cf. Pinellas Ice Cold Storage Co. v. Commissioner, 287 U.S. 462; Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937; certiorari denied, 288 U.S. 599, it acquired it in a transaction which completely separated the two corporations. Finally, whether the acquisition of the property be for some legalistic purposes called a purchase, it was at the same time an acquisition in liquidation, to which the statute is expressly applicable, as the respondent has determined.

Having paid $29,100 for the shares in 1924 and 1925, and had the shares liquidated by the receipt of assets worth $89,863.53 in 1929, the respondent correctly held that petitioner realized in that year a taxable gain of $60,763.53.

Judgment will he entered for the respondent.


source: Caselaw Access Project

author: Black :

license: Public Domain

text:
    Oil Shares, Incorporated, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 62828.
    Promulgated January 5, 1934.

      Frederieh L. Pearce, Esq., for the petitioner.

      Bernard D. Hatheoeh, Esq., for the respondent.
   OPINION.

Black :

This proceeding is for the redetermination of a deficiency in income tax for the calendar year 1929 in the amount of $279.78. Petitioner contends that, instead of there being a deficiency, a refund is due it of the total taxes paid for that year in the amount of $95,970.25. The only question at issue is whether, under section 22 (c) of the Revenue Act of 1928, petitioner is entitled to have its income for the taxable year computed on the basis of inventorying its securities on hand at the beginning and end of the year at cost or market, whichever is lower.

Petitioner is a corporation of the State of Maryland, with its principal office at 15 Exchange Place, Jersey City, New Jersey. On March 15, 1930, it filed an income tax return for the year 1919, and reported items of gross income and deductions, as follows:

gkoss income:
Interest_ $109, 647.12
Profit from sale of securities- 1,003,173. 86
Dividends, domestic corporations_ 300, 651.50
Dividends, foreign corporations_ 32,175. 50
Total Gross Income_$1,445, 647. 98
DEDUCTIONS :
Expenses (grouped)_$248,511.94
Interest and Taxes- 23, 758. 31
Dividends, domestic eorp_ 300, 651. 50
Depreciation_ 269. 37
Total Deductions.
$573,191.12
Net Income as reported by petitioner_ $872,456. 86

The above reported profit of $1,003,173.86 from the sale of securities was the difference between the selling price and the cost of the securities sold.

The respondent, in determining the deficiency, disallowed an item of expense in the amount of $2,543.45, thereby increasing petitioner’s net income to the amount of $875,000.31. The respondent’s action in disallowing this item is not questioned, the only question being petitioner’s right to inventory its securities at “ cost or market, whichever is lower.”

The proceeding was submitted upon a stipulation of facts, together with certain oral and documentary evidence. The stipulated facts are as follows:

1. The petitioner corporation organized in February 1928, owned on December 81,1928 and December 31,1929, securities in companies engaged in, or related to, the petroleum industry, which securities were recorded on petitioner’s books at their cost. In connection with the closing of the petitioner’s books for each year, the said securities were inventoried and valued at cost or market whichever was lower, at the end of each year. The said inventories were not adjusted upon petitioner’s books but a note was carried upon the balance sheet each year showing the decline of market value of the said securities below cost.
2. The petitioner made formal application to the Commissioner of Internal Revenue in November 1929, for permission to employ its inventories of securities on December 31, 1928 and December 31, 1929, valued on the basis of cost or market whichever is lower, in computing its net income upon its books and in its return for the calendar year 3929. The Commissioner in a letter dated in January 1930, denied such permission,
3. The securities held by the petitioner had values on the dates and bases listed below, as follows:
4. The Commissioner determined a taxable net income for the petitioner for the year 1929 (without the employment of inventories) of $875,000.31 in his deficiency notice from which the instant appeal was taken.
5. If the petitioner’s inventories of securities on December 31, 1928, and December 31, 1929, should be used in determining its income for the year 1929, there would be a loss for that year amounting to $1,206,138.70, and, after making the adjustments required by Section 117 of the Revenue Act of 1928 Including total dividends received from domestic corporations of $300,651.50, a net loss of $905,487.20 for the year 1929.

In addition to the stipulated facts, it was developed at the hearing that petitioner was organized for the purpose of getting an aggregate of capital and making use thereof in the purchase and sale of securities, bonds and stocks, in companies that were engaged in the oil and gas industry; that it had between 2,500 to 2,800 stockholders during the year 1929; that it was operated by a purchase and sales committee of the board of directors, which passed upon every purchase and sale; that there were no short sales; that 95 to 98 percent of the entire purchases and sales were of securities listed on either the New York Stock Exchange or the New York Curb; that the purchases and sales were made for its own account through brokers for cash; that it made no purchase or sale of securities for the account of customers; that petitioner had from five to six employees, one of whom was constantly on the ticker; that the average time petitioner held a security was from a week to three months; that during January 1929 petitioner made 15 separate purchases and 45 separate sales; that during February 1929 it made 8 separate purchases and 121 separate sales; that during March 1929 it made 98 separate purchases; that a general activity continued during the balance of the year; that during the entire year 465,890 shares were sold at a total selling price of $9,904,986.15; and that each transaction ranged from 100 shares to 400 or 500 shares, with one purchase as large as 25,000 shares. The letter dated January 10, 1930, and referred to in paragraph 2 of the above stipulation, is quoted in part, as follows:

Reference is made to your letter of December 23, 1929, relative to your request for permission to employ an inventory basis in computing taxable net income and to use in connection therewith a valuation method of cost or market whichever is lower. Such application is made with respect to 1928 and future taxable years.
* * * « * * * *
In reply you are advised that your employment of an inventory basis for income tax purposes is dependent upon whether or not you can qualify as a dealer in securities as that term is defined in Article 105 of Income Tax Regulations 74. * *
Upon careful consideration of the facts and statements contained in your letters of November 25 and December 13, 1929, it is held that your corporation does not fall within the classification of a dealer in securities as contemplated by Article 105 of Income Tax Regulations 74. Accordingly, the use of an inventory basis in the computation of your taxable net income is hereby denied.

Because of this ruling petitioner did not adjust its books for the year 1929 for the inventories it had taken and did not employ an inventory basis in the computation of its income in its return for 1929, but determined the profit or loss from each separate sale as being the difference between the cost and selling price of the security sold. It did, however, adjust its books to the basis of its inventory of securities during April 1931.

Is petitioner entitled to inventory its securities on hand at the beginning and end of the taxable year at cost or market, whichever is lower ?

This is substantially the same question that was before us in Adirondack Securities Corp., 23 B.T.A. 61. The petitioner in that case bought, sold, and dealt in securities solely for its own account. It made no purchases or sales for the account of customers. The year involved was 1925. It contended that it was entitled to inventory its securities on hand at the close of the year on the basis of cost or market, whichever was lower. In denying that contention, we said:

The evidence in this proceeding discloses that the petitioner did not operate as a broker and there is no evidence that it regularly sold securities to customers. The proof clearly shows, however, that the petitioner bought and sold securities solely for its own account. Article 1615 of Regulations 69 defines a dealer in securities whose income may be determined by the use of inventories as an individual, partnership, or corporation regularly engaged in the purchase of securities and their resale to customers. Obviously, the petitioner does not come within this definition, but, on the contrary, it appears that the petitioner bought, sold or held securities for investment or speculation. Therefore, it is not entitled, under section 205 of the Revenue Act of 1926 and article 1615 of Regulations 69, to deduct from income an inventory loss.

Section 205 and article 1615 referred to in Adirondack Securities Corp., supra, with the exception of the last sentence of article 1615, which is not material here, are identically the same as section 22 (c) of the Revenue Act of 1928 and article 105 of Regulations 74, respectively, the section and article applicable in the instant proceeding.

In Donander Co., 29 B.T.A. 312, the petitioner was engaged in the business of owning and trading in securities of all types. During the year 1929 it engaged in 285 transactions, all of which were made through brokers. It sought to deduct losses on such transactions in the aggregate amount of $131,228.69, where within 30 days before or after the dates of sale, identical shares of stock were acquired or reacquired. Section 118 of the Revenue Act of 1928 prohibited the deduction “ unless the claim is made by a corporation, a dealer in stocks or securities * * In holding that the Donander Co. was not a dealer in securities ” we said:

The term “ dealer in securities ” as used in section 118 of the Revenue Act of 1928 is not defined by the statute. The respondent contends that his definition for “ dealer in securities ” contained in article 105 of Regulations 74, which reads, “ a dealer in securities is a merchant of securities, whether an individual, partnership, or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers,” is applicable. We agree. In our opinion an investor or speculator who buys and sells securities on a stock exchange only is not a dealer in securities within the contemplation of the statute, regardless of the number of purchases and sales. Likewise we think that a corpoi'ation such as the petitioner, which carries on an investment business for its own profit and buys and sells shares of stock and other securities upon stock exchanges, is not a dealer in securities. The term rather has application to a merchant who holds himself out to sell to customers. If Congress had intended the word “ dealer ” to include a speculator or investor, we think that it would have used language which would more aptly convey that thought than does the language used. * * *

In the instant proceeding, however, petitioner contends that, under section 22 (c) of the Revenue Act of 1928, the provisions of article 105 of Regulations 74 with respect to inventories of a dealer in securities are not conclusive of the issue; that, in an established business in which purchases and sales with a view to profit are a material part of the operations, the use of inventories is required; that the fact that the taxpayer is not a dealer does not preclude the use of inventories; that the use of inventories is required where their employment is essential to reflect the financial condition of the taxpayer; and that the use of inventories is required where their employment is essential to reflect the result of the year’s operations and the true gain of the taxpayer for the period. Section 22 (c) provides:

(c) Inventories. — Whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.

Substantially identical provisions were contained in each of the four revenue acts preceding the act here in question. See section 203 of the Revenue Acts of 1918 and 1921 and section 205 of the Revenue Acts of 1924 and 1926. Under each of these acts the respondent has consistently provided in his regulations that in order to clearly reflect income only “ dealers in securities ” will be permitted to inventory securities, and in each of his several regulations the definition of a dealer has remained identically the same, namely, “ a dealer in securities is a merchant of securities, whether an individual, partnership, or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers: that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom.” See article 1585 of Regulations 45 and 62, article 1615 of Regulations 65 and 69, and article 105 of Regulations 74. Not only has this provision of the respondent’s regulations met with our approval in Adirondack Securities Corp. and Donander Co., supra, but it is our opinion that this long continued executive construction must be deemed to have received legislative sanction by the reenactment by Congress of the same identical statutory provision without substantial change in the several revenue acts. United States v. Falk, 204 U.S. 143; United States v. Cerecedo Hermanos y Compania, 209 U.S. 337; Komada v. United States, 215 U.S. 392; Brewster v. Gage, 280 U.S. 327; Murphy Oil Co. v. Burnet, 287 U.S. 299; United States v. Dakota-Montana Oil Co., 288 U.S. 459; Commonwealth Commercial State Bank v. Lucas, 41 Fed. (2d) 111.

It follows from what we have said that for petitioner to be entitled, under section 22 (c) of the Revenue Act of 1928, to inventory its securities on hand at the beginning and end of the taxable year at cost or market, whichever is lower, it must come within the respondent’s definition of a dealer in securities. And we do not think petitioner comes within this definition. It bought and sold securities not for the account of customers, but entirely through brokers for its own account. Under such circumstances, the respondent’s refusal to permit petitioner to inventory its securities at cost or market, whichever is lower, is sustained. Adirondack Securities Corp., supra; Donander Co., supra. Cf. Northeastern Surety Co., 29 B.T.A. 297.

Decision will he entered for the respondent.


author: Matthews :

text:
    Whitman, Ward & Lee Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Arnold & Winsor Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 61552, 61553.
    Promulgated January 5, 1934.

      Oscar McPeak, Esq., for the petitioners.

      Bernard D. Hathcock, Esq., for the respondent.
   OPINION.

Matthews :

These proceedings, which were duly consolidated for hearing, are for the redetermination of deficiencies in income tax for 1928 asserted against the petitioners as follows: Whitman, Ward & Lee Co., $8,383.93; Arnold & Winsor Co., $960.50.

The issue presented is identical in each case, namely, whether the respondent erred in determining that the petitioner was taxable on the basis of a separate income tax return for the entire taxable year. Each petitioner is contending that it was a subsidiary of the General Foods Co. for a part of the year 1928, that its income for the period of affiliation was properly included in a consolidated return filed by the affiliated corporations for the taxable year, and that this consolidated return furnishes the correct basis for the determination of its tax liability during the period of affiliation.

The cases were submitted upon a stipulation of facts entered into by the parties, which reads as follows:

1. During the taxable year and at all times hereinafter mentioned Whitman, Ward & Lee Company and Arnold & Winsor Company were corporations duly organized and existing under the laws of the Commonwealth of Massachusetts, engaged in catching or buying, preparing for market, and marketing fish and other sea foods.
2. Whitman, Ward & Lee Company on March 15, 1929, made and filed a return for the period January 1, 1928, to February 25, 1928, with the Collector of Internal Revenue for the District of Massachusetts.
3. Arnold & Winsor Company on March 15, 1929, made and filed a return for the period January 1, 1928, to March 31, 1928, with the Collector of Internal Revenue for the District of Massachusetts.
4. The net income of Whitman, Ward & Lee Company for the period February 26, 1928, to December 31, 1928, and the net income of Arnold & Winsor Company for the period April 1, 1928, to December 81, 1928, were each included in a consolidated return for the taxable year, which return was, on March 15, 1929, filed by General Foods Company, General Seafoods Corporation (N.Y.), General Seafoods Corporation (Mass.), and these petitioners, with the Collector of Internal Revenue for the District of Massachusetts.
5. General Foods Company was a Delaware corporation organized on January 21, 1926, and dissolved on January 24, 1929. Its name prior to December 9, 1927, was General Seafoods Corporation, and was on that date changed to General Foods Company.
6. From January 26, 1926, to January 1, 1929, General Foods Company owned continuously at least 95% of the capital stock, exclusive of non-voting stock limited and preferred as to dividends, of General Seafoods Corporation (N.Y.), a New York corporation organized on July 24, 1924, and dissolved on July 25, 1932.
7. From July 25, 1927, to January 1, 1929, General Foods Company owned continuously at least 95% of the capital stock, exclusive of non-voting stock limited and preferred as to dividends, of General Seafoods Corporation (Mass.), a Massachusetts corporation organized on July 25, 1927, as a subsidiary of General Foods Company.
8. From February 26, 1928, to January 1, 1929, General Seafoods Corporation (Mass.) owned continuously at least 95% of the capital stock, exclusive of nonvoting stock limited and preferred as to dividends, of Whitman, Ward & Lee Company, petitioner herein, a Massachusetts corporation organized on May 19, 1911.
9. From April 1, 1928, to January 1, 1929, General Seafoods Corporation (Mass.) owned continuously at least 95% of the capital stock, not including non-voting stock limited and preferred as to dividends, of Arnold & Winsor Company, petitioner herein, a Massachusetts corporation organized on March 1,1911.
10. On the basis of the said stock ownership the Commissioner has determined that the foregoing corporations were affiliated within the meaning of Section 240 of the Revenue Act of 1926 and Section 142 of the Revenue Act of 1928 for taxable (calendar) years and periods as follows:
Period January 26, 1926,
to December 31, 1926 — Parent Company:
General Seafoods Corporation (Del.)
Subsidiary:
General Seafoods Corporation (N.Y.)
Year 1927 — Parent Company:
General Foods Company, formerly
General Seafoods Corporation (Del.)
Subsidiaries:
General Seafoods Corporation (N.Y.)
General Seafoods Corporation (Mass.) from July 25, 1927.
Year 1928 — Parent Company:
General Foods Company'.
Subsidiaries:
General Seafoods Corporation (N.Y.)
General Seafoods Corporation (Mass.)
Whitman, Ward & Lee Company from February 26, 1928,
Arnold & Winsor Company from April 1, 1928.
11. The five corporations hereinabove mentioned were not, during the taxable year 1926, the taxable year 1927, or the taxable year 1928, affiliated with any other corporation.
12. From the time of its organization on July 24, 1924, to January 26, 1926, General Seafoods Corporation (N.Y.) was engaged in the acquisition and development of patents, processes and inventions relating to the quick-freezing of fish and other foods.
13. On January 26, 1926, the entire assets and liabilities of General Seafoods Corporation (N.Y.), were, pursuant to a plan of reorganization, transferred and conveyed to General Foods Company (then General Seafoods Corporation, Delaware) in exchange for the issue by the latter corporation of its Class “A” stock to holders of Class “A” stock of General Seafoods Corporation (N.Y.), share for share, and its Class “ B ” stock to holders of Class “ B ” stock of General Seafoods Corporation (N.Y.), six shares for one. As part' of this transaction the Class “A” stock of General Seafoods Corporation (N.Y.) was retired and its Class “B” stock was transferred to General Foods Company, Immediately after the transfer of all its assets and liabilities to General Foods Company (then General Seafoods Corporation, Delaware) pursuant to this reorganization, General Seafoods Corporation (N.Y.) became on January 26, 1926, and remained continuously to the date of its dissolution on July 25, 1932, a wholly dormant corporation which, throughout this period, transacted no business, had no assets or liabilities, kept no books of account, and had no income, expenses or losses.
14. During the taxable year 1926 General Foods Company (then General Seafoods Corporation, Delaware) was engaged in the development of the patents, processes and inventions, relating to the quick-freezing of fish and other foods, which it had acquired in reorganization of General Seafoods Corporation (N.Y.) on January 26, 1926.
15. On or before March 15, 1927, General Foods Company (then General Seafoods Corporation, Delaware) and General Seafoods Corporation (N.Y.) each filed lor the taxable year 1926 a separate income tax return on Treasury Department Form 1120 showing no income and no deductions. The said returns were accepted by the Commissioner as filed, and no change was made therein in his determination of the tax liability of the said two corporations for that year.
16. General Foods Company commenced the exploitation of the foregoing patents, processes and inventions during the taxable year 1927, and on July 25, 1927, organized an operating subsidiary, General Seafoods Corporation (Mass.), to which was transferred that portion of its business relating to fish and other sea foods.
17. On or before March 15, 1928, without having theretofore secured the permission of the Commissioner to change the basis of filing returns, General Foods Company, General Seafoods Corporation (N.Y.), and General Seafoods Corporation (Mass.), made and filed with the Collector of Internal Revenue for the District of Massachusetts a consolidated return for the taxable year 1927 showing net income or net loss of the several companies, and consolidated net loss, as follows:
Net
Corporation Income Net Loss
General Foods Company, formerly General Seafoods Corporation (Del.)_None $162,200.64
General Seafoods Corporation (N.Y.) — Inactive-None None
General Seafoods Corporation (Mass.)-None $13,530.32
Consolidated Net Loss--- $175,730. 96
18. Tlie Commissioner has not at any time since the date such return was made and filed for the taxable year 1927 notified General Foods Company, General Seafoods Corporation (N.Y.) and General Seafoods Corporation (Mass.), or any of them, that separate returns should be made and filed for that year, nor has he at any time since the date such return was made and filed given to the said corporations, or any of them, any notice, other than that represented by the notices of deficiency for the taxable year 1928 mailed by him to the petitioners herein on December 3, 1931, and other than that represented by Departmental Regulations promulgated by the Treasury Department on August 28, 1926 pursuant to the Revenue Act of 1926, that the return for the taxable year 1927 was not accepted as filed or that separate returns should have been made and filed for that year. No separate return for the taxable year 1927 has at any time been made or filed by any of the said three corporations. No waiver extending the period for assessment or collection or for assessment and collection of tax for the year 1927 has at any time been filed by the said three corporations, or any of them.
19. On March 15, 1929, without having theretofore secured the permission of the Commissioner to change the basis of filing returns, General Foods Company, General Seafoods Corporation (N.Y.), General Seafoods Corporation (Mass.), and the petitioners herein, made and filed with the Collector of Internal Revenue for the District of Massachusetts a consolidated return for the taxable year 1928 showing net income or net loss of the several companies, and consolidated net loss, as follows:
Corporation Net Income Net Loss
General Foods Company_$121,862.27
General Seafoods Corporation (N.Y.) — Inactive_ ' None None
General Seafoods Corporation (Mass.)_ 137,200.10
Whitman, Ward & Lee Company for Period Febr. 26, 1928, to December 31, 1928_$69, 866.10 _
Arnold & Winsor Company, for Period April 1, 1928, to Dec. 31, 1928_ 10,254.23 _
Consolidated Net Loss-$178, 942. 04
20. A taxable net income of $12,620.97 was reported by Whitman, Ward & Lee Company in the separate return filed by it for the period January 1, 1928, to February 25, 1928, and a tax of $1,514.52 was assessed and paid thereon.
A taxable net income of $6,525.96 was reported by Arnold & Winsor Company in the separate return filed by it for the period January 1, 1928, to March 31,1928, and a tax of $693.24 was assessed and paid thereon.
21. The consolidated net worth of the affiliated group immediately preceding the acquisition by General Seafoods Corporation (Mass.) of Whitman, Ward & Lee Company, petitioner herein, on February 26, 1928, was not more than $1,275,000. The net worth of Whitman, Ward & Lee Company on February 26, 1928, was $498,157.61.
The consolidated net worth of the group immediately preceding the acquisition by General Seafoods Corporation (Mass.) of Arnold & Winsor Company, petitioner herein, on April 1, 1928, was not more than $1,750,000. The net worth of Arnold & Winsor Company on April 1, 1928, was $73,926.26.
22. In his determination of the tax liability of each of these petitioners for the taxable year the Commissioner has ruled as follows:
General Foods Company filed a separate return in 1926, which constituted an election. Inasmuch as permission was not granted by the Commissioner to change the basis of filing returns for the year 1927 or 1928 from separate to consolidated, tlie audit is being made on tbe basis of separate returns for the year 1928.
The deficiencies in income tax of these petitioners determined by the Commissioner for the taxable year are based exclusively upon such ruling.
23. If the said ruling of the Commissioner, that the tax liability of each of these petitioners should be determined upon the basis of a separate return for the full calendar year 1928, be approved by the Board, it is stipulated and agreed that the amount of the deficiency determined by him for the taxable year in each case, being $8,383.93 for Whitman, Ward & Lee Company and $960.50 for Arnold & Winsor Company, is correct. If the said ruling be not so approved by the Board, it is stipulated and agreed that there is no deficiency in the income tax of either of these petitioners for the taxable year.

It will be observed that there is no dispute with respect to the computation of the deficiencies which have been asserted and it has been agreed by the parties that there is no deficiency in either case if the Board does not approve the ruling of the respondent that the tax liability of each of these petitioners should be determined upon the basis of a separate return for the full calendar year 1928. The respondent’s ruling is based on the theory that the General Seafoods Corporation, the Delaware corporation, which subsequently changed its name to General Foods Co., was affiliated with the General Sea-foods Corporation, the New York corpqration, from January 26 to December 31, 1926, and that the filing of separate returns for 1926 by these two corporations constituted an election to make separate returns, which election was binding, in the absence of permission to change the basis, so that the tax liability for 1928 of each corporation belonging to the enlarged affiliated group should be computed on the basis of a separate return. For the purpose of avoiding confusion we shall hereinafter refer to the parent company as the Delaware corporation and the other two companies bearing the name of General Seafoods Corporation will be designated as the New York corporation and the Massachusetts corporation.

The provisions of section 142 (a) of the Revenue Act of 1928, which are substantially the same as those contained in section 240 (a) of the Revenue Act of 1926, are set out in the margin.

There is abundant authority to support the proposition that, where an election has been made and separate returns have been filed by affiliated corporations, the addition to the affiliated group of one or more corporations in a succeeding year does not entitle the several companies to make a new election to file a consolidated return without consent of the Commissioner. Imperial Assurance Co., 19 B.T.A. 1068; Swift & Co. v. United States, 38 Fed. (2d) 365; Sweets Co. of America v. Commissioner, 40 Fed. (2d) 436. Likewise, where one corporation, a member of an affiliated group, files a separate return the remaining corporations may not file a consolidated return of their income, but must file separate returns. Apartment Corp., 17 B.T.A. 876; Fontana Union Water Co., 24 B.T.A. 1045. It has also been held that, where a consolidated return has been filed for one year, corporations thereafter coming into the group have no right of election to file separate returns, but must join in the consolidated return because the consolidated return must include all the affiliated corporations. Southern Power Co. et al., 17 B.T.A. 962; affd., Duke Power Co. v. Commissioner, 44 Fed. (2d) 543; certiorari denied, 282 U.S. 903; 950 Park Avenue Corp., 20 B.T.A. 288.

A statement of these' principles, however, does not serve to dispose of the situation presented in the instant case. Although the respondent has treated the Delaware corporation as having been affiliated with the New York corporation for the period January 26 to December 31, 1926, and has considered that these two corporations elected to make separate returns for 1926, within the meaning of the statute, when each corporation filed a separate income tax return on Form 1120, showing no income and no deductions, we are of the opinion that the facts set out in the above-quoted stipulation clearly show that no affiliation existed in 1926 and that the filing of a consolidated return for 1927 by the Delaware corporation and the Massachusetts corporation constituted the first election by an affiliated group. It appears to us that the New York corporation was completely liquidated on January 26, 1926, when all its assets and liabilities were transferred to the Delaware corporation pursuant to the plan of reorganization described in paragraph 13 of the stipulation, and that thereafter the New York corporation was a mere empty shell, transacting no business and having no income, expenses or losses. The record does not disclose what disposition was made of the class B stock of the New York corporation, but it was expressly stipulated that the New York corporation became on January 26, 1926, and remained continuously to the date of its dissolution on July 25, 1932, a wholly dormant corporation which had no assets or liabilities. There was, therefore, nothing to consolidate with the newly organized Delaware corporation after January 26, 1926, until in July 1927, when there was organized an operating subsidiary, the Massachusetts corporation, to which there was transferred that portion of the business which related to fish and other sea foods. The Delaware corporation and the Massachusetts corporation elected to, and did, file a consolidated return for 1927 in accordance with the provisions of the statute. Although this consolidated return for 1927 listed the New York corporation as a subsidiary, it showed on its face that the New York corporation was inactive, reporting no income and no loss, so that the consolidated return was actually the return of the Delaware corporation and its one live subsidiary, the Massachusetts corporation.

There are several cases to which we will briefly refer, the facts of which are not exactly on all fours with those of the instant case but which, upon careful analysis, appear to us to support the conclusion which we have reached herein.

In Aluminum Goods Mfg. Co. v. Commissioner, 56 Fed. (2d) 568; affd., 287 U.S. 544, the court said:

The statute governing affiliated returns contemplated its application to active companies only. It would be a legal and commercial impossibility for a going corporation to affiliate with a corpse — a mere shell of a former corporation. The activities of a dissolved corporation are nil. Its assets amount to a cipher. To add nullities and a cipher to a live company’s capital and to its operation would produce no change in the return.

In Duplex Envelope Co., 21 B.T.A. 692, a subsidiary corporation was organized in J uly 1922 for the purpose of taking title to certain real estate owned by the petitioner on which the subsidiary intended to erect a building for commercial uses. The subsidiary formally perfected its organization in 1922, but transacted no business, had no assets or liabilities, kept no books, received no income and issued no capital stock until in June 1923. No return was filed by the subsidiary in 1922. The petitioner (the parent company) filed a separate income tax return for 1922 and a consolidated return for 1923. The Board held that from the date of its incorporation until June 1923 the subsidiary corporation was wholly dormant and that, under the circumstances, the year 1923 was the first taxable year in which the petitioner was confronted with the election of filing either separate returns or one consolidated return. It was held further that in its return for 1923 petitioner properly elected to file consolidated returns for that and subsequent years.

In National Iron Works, 22 B.T.A. 382, the petitioner was a subsidiary corporation which was organized in 1922 to take over certain assets acquired by a bank at a foreclosure sale, which assets were handled by the bank until January 17, 1923, on which date the petitioner issued its stock to the bank in consideration of the transfer of these assets to the petitioner. The Board held that the petitioner corporation and the bank became affiliated for the first time on January 17, 1923, and the filing erroneously of a separate return for 1922 in the petitioner’s name did not preclude the filing of a consolidated return for the period January 17 to December 31, 1923. The Board said:

Here we have a corporation in embryo which had no stock, owned no property, and had no income, gross or otherwise. There was nothing to consolidate. The income returned for 1922 in its name was the income of the bank derived from the property of the bank — property which was not acquired by petitioner until January 17, 1923.

See also, with respect to the election of a new group of affiliated corporations to make a consolidated return, the case of Albert Leon & Son, Inc., 29 B.T.A. 251, and the cases cited therein.

The view which we have taken herein appears to be consistent with that expressed by the respondent in a published ruling, G.C.M. 8093, C.B. IX-1,147,151, which reads in part as follows:

* * * There are no doubt eases of inactive companies kept alive for charter purposes only, or of comparatively inactive companies with a negligible income, and other cases, where the filing of separate returns by minor subsidiaries came about by reason of mere accidental causes, in which the tax as determined on the returns as actually filed is not materially different from the total tax of the group on the basis of a single consolidated return.
*******
In the practical application of the words substantial unanimity of the affiliated corporations”, hereinabove mentioned in this paragraph, inactive corporations may be ignored. * * *

For the reasons stated above, we hold that the respondent erred in determining that the petitioners herein were taxable on the basis of separate income tax returns for the full calendar year 1928.

Judgment will be entered for the petitioners.

       Snc. 142. CONSOLIDATED RETURNS OF CORPORATIONS — TAXABLE YEAR 1928.
      (a) Oonsolldated returns permitted. — Corporations which are affiliated within the meaning of this section may, lor the taxable year 1928, make separate returns or, under regulations prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income for the purpose of this title, in which case the taxes thereunder shall be computed and determined upon the basis of such return. If return for the taxable year 1927 was made upon either of such bases, return for the taxable year 1928 shall be upon the same basis unless permission to change the basis is granted by the Commiseionor.


author: Smith:

text:
    Old Colony Trust Company, Executor of the Will of Vredenburgh Minot, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 62089.
    Promulgated January 5, 1934.

      A. P. Lowell, Esq., for the petitioner.

      Prew Savoy, Esq., for the respondent.
   OPINION.

Smith:

Section 302 (f) of the Revenue Act of 1926, which applies in this case, provides:

Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
* * ⅜ * «5 *
(f) To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will * * *.

This case turns on whether or not the decedent, Vredenburgh Minot, exercised the power of appointment vested in him under the deed of trust and will of his father so as to bring that property within the terms of the above section.

There is no specific reference in decedent’s will to the power of appointment or the exercise thereof. The respondent claims that this is unnecessary and that a general power of appointment by will is validly exercised by a general devise of real or personal property unless a contrary intention should appear in the will. Amory v. Meredith, 7 Allen, 397; Stone v. Forbes, 189 Mass. 163; 75 N.E. 141.

Petitioner concedes the above rule, but insists that it applies only where the testator was the owner of the life estate and entitled to the income thereof. As further limitations on the rule petitioner urges that the language of the will must be susceptible of including the property subject to the power of appointment, and there must be nothing in the will to show a contrary intent. From this it is argued that the power given the trustees in the will of decedent’s father to limit decedent’s income to his necessities and add the remaining income to his part of the principal, the use of the phrase “ all the property owned by me at the time of my death,” and making certain bequests dependent on the value of his estate show that decedent never intended to exercise the power of appointment, and if he did, it was ineffectual because he was not entitled to the whole of the income from the life estate.

Formerly in England and perhaps in some states in this country a general power of appointment was not validly executed unless the testator specifically mentioned the power, but because of injustice resulting in many cases from this technicality the law in England was changed by act of Parliament to do away with this technicality and the law in this country is now generally the same as it is in England.

In our opinion the objections urged by petitioner to the application of the rule are not tenable. Under both the deed of trust and the will the decedent was entitled to the income for life from one fourth of the trust property, but in the will it was provided in substance that the trustees are authorized in their discretion to set aside and add to the principal so much of the income of any child as is not required for his or her comfortable support and maintenance.

Massachusetts cases cited to us are to the effect that if a testator has a power of appointment over property in which he has a life estate, in the absence of anything to show a contrary intention, the power is well executed by a general residuary clause. Cumstom v. Bartlett, 149 Mass. 243; 21 N.E. 373; Howland v. Parker, 200 Mass. 204; 86 N.E. 287; Russell v. Joys, 227 Mass. 263; 116 N.E. 549. We think this case clearly falls within the rules laid down in those cases. The decedent was expressly designated as being entitled to one of the four equal shares in his father’s estate and the trustees were directed to pay him the income therefrom, but in certain contingencies were given the right to withhold part of the income and add it to the principal of the one from whom withheld. It will be observed that in the will of William Minot there is no limitation over to any other person or for any other purpose and consequently the income not currently paid over to the decedent became subject to the power.

The use in the decedent’s will of the words “ I give, bequeath, and devise one-half of all my property of whatever kind, and wherever situated, owned by me at the time of my death, to my wife,” and a similar expression in the bequest to Katherine Tingley, is hot exclusive, but inclusive. They are comprehensive expressions and the natural conclusion to be drawn from their use is that decedent had in mind and meant to dispose of every and any thing which he had a right to dispose of at the time of his death. A will speaks from the time of death and this was apparently in testator’s mind.

The making of several minor bequests dependent on a $100,000 value of his estate in our opinion does not show any intention not to exercise the power of appointment. There may have been many reasons for this limitation and we will not undertake to speculate upon them. We are of opinion that the limitation was a precautionary measure merely and is entitled to no other significance. Being of this opinion, we hold that the powers of appointment vested in Yredenburgh Minot under the deed of trust and the will of his father were validly exercised.

It is next contended by petitioner that the property subject to the power of appointment is not subject to estate tax because it passed by the agreement of compromise and not by the exercise of the power.

We are not concerned with the terms of the settlement. It is only necessary to state that the probate of the will was objected to, or contested after probate, and a settlement was arrived at by which the beneficiaries under the will surrendered part of their rights thereunder on consideration that the contest be withdrawn and the will established. It is immaterial what form of procedure was adopted to accomplish this purpose and obtain the approval of the courts, or whether the legal steps were initiated by the trustees of the father’s estate or the personal representative of the decedent.

We believe petitioner’s contention is not sustained by the decisions of the Massachusetts courts. While the contestants may take under the compromise settlement, the entire will is established and the estate first passes under it. Hastings v. Nesmith, 188 Mass. 190; 74 N.E. 323; Brandeis v. Atkins, 204 Mass. 471; 90 N.E. 861; Baxter v. Stevens, 209 Mass. 459; 95 N.E. 854.

We do not think the case of Catherine A. Codman, 20 B.T.A. 880; affd., 50 Fed. (2d) 763, holds to the contrary, for we there said:

However, even assuming that the law of Massachusetts applies and that the petitioner took under the compromise agreement and not under the will, we are still unable to agree with, the conclusion which the petitioner would have us reach. If there had been no contest over the will and the will had been probated and the property administered in accordance with its terms, there could be no possible doubt that the income received by the petitioner thereunder would have been subject to the tax imposed by the revenue statutes. Then, why should the settlement agreement, provided for by law in order to effect harmony and accord among heirs and legatees and for the amicable settlement of their disputed claims, affect the rights of the Government to collect taxes rightfully due it under normal circumstances. The character of the thing received, or to be received, does not suddenly change from income to something that is not income and make that which is taxable under the law nontaxable merely because the disputants under the will happen to have been mollified by a compromise agreement adjusting or modifying their rights under the will. Such a rule would “ not only defeat the reiterated purpose of Congress as expressed in various provisions of the Act, but would invite as well as permit, to an unlimited extent, subterfuges whereby those entitled to large incomes could avoid their just obligations to the government.” Codman v. Miles, 28 Fed. (2d) 823; certiorari denied, 278 U.S. 654.

In the recent case of Wear v. Commissioner, 65 Fed. (2d) 665, which affirmed 26 B.T.A. 682, the decedent, a resident of Pennsylvania, was the donee of a general power of appointment under the will of his father. He exercised the power of appointment in favor of his two daughters, who would have taken the property under the will of his father had he failed to exercise the power. Under the law of Pennsylvania in such circumstances the daughters took under the will of the donor and not as appointees under the will of the donee. This Board and the Circuit Court of Appeals for the Third Circuit both held that, notwithstanding the Pennsylvania law, the power had been exercised, that the tax was on the exercise of the power, and that it was measured by the value of the property.

In Hu L. McClung et al., Executors, 13 B.T.A. 335, the testator bequeathed the income from the residue of his estate to an educational institution which was not subject to tax. A contest of the will was compromised by the educational institution giving part of the residue to the contestants and the question arose as to whether or not the entire bequest was deductible. We held that it was, since it had been permanently set aside by the terms of the will for the educational institution.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: Leech:

text:
    North American Reassurance Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 52674, 60678.
    Promulgated January 5, 1934.

      William, H. Hotchkiss, Esq., for the petitioner.

      I. Graf, Esq., for the respondent.
   OPINION.

Leech:

In reference to the first issue, petitioner is entitled to a reasonable allowance for depreciation of furniture and fixtures used in its business. This deduction is not limited to the furniture and fixtures used in the investment department of such business. Lafa yette Life Ins. Co., 26 B.T.A. 946; Missouri State Life Ins. Co., 29 B.T.A. 401. We hold that a reasonable allowance for depreciation is at the rate of 10 percent of the total cost, which rate was used by respondent in computing depreciation allowed upon furniture and fixtures in the investment department. The total cost of furniture and fixtures has been found in accordance with the stipulation.

In respect to the second issue, no question is raised as to the inclusion of the “ valuation ” required by section 84 of the insurance law of the State of New York, the pertinent parts of which are set out below, in “ reserve funds required by law ” upon which the deduction from gross income to determine taxable income is permitted under section 245 (a) (2) of the Revenue Act of 1926 and section 203 (a) (2) of the Revenue Act of 1928. Our sole inquiry upon this assignment of error is as to the correctness of respondent’s action in disallowing petitioner’s inclusion of the so-called “ deficiency reserves ” or “ separate liability ” covered by section 85 of the same New York statute in such reserves for the computation mentioned.

Thus, the fundamental issue is whether the “ separate liability ” of this petitioner provided in section 85, is a part of the “ reserve funds required by law ” within the meaning of the pertinent sections of the applicable revenue acts, to which reference is made above.

Only by statutory enactment are any deductions permitted from gross income in determining taxable income. Burnet v. Thompson Oil & Gas Co., 283 U.S. 301. This rule has been applied repeatedly not only against asserted deductions of voluntary reserves, cf. cases cited in American Title Co., 29 B.T.A. 479, but particularly against involuntary reserves of life insurance companies, since, under section 244 (a) of the Revenue Act of 1921 and the corresponding-sections of all of the succeeding revenue acts only specific items of gross income are included for taxing purposes. American Title Co., supra; cf. Massachusetts Mutual Life Ins. Co. v. United States, 56 Fed. (2d) 897.

The law is now settled that the meaning to be given “ reserve funds required by law ” is the same under the Revenue Act of 1921 and later acts as that given under prior Federal revenue legislation. Massachusetts Mutual Life Ins. Co. v. United States, supra. The expression, therefore, denotes a reserve with certain definite legal requisites, which are: (1) It must be “required by law,” a condition present here, and, in addition thereto, (2) it must be within the technical and special meaning of “ reserves ” in the law of insurance, which includes only such as “ aid in determining what portion of the gross income constitutes the net income of a life insurance company for the purpose of the Federal statutes.” Massachusetts Mutual Life Ins. Co. v. United States, supra; American Title Co., supra.

If serviceable as such an “ aid ” it will not only be characterized by some relation to the “ value ” of outstanding policies, i.e., legal reserves, by increasing the same, but will itself constitute the fund reserved from premiums to meet policy obligations at maturity. McCoach v. Ins. Co. of North America, 244 U.S. 585; United States v. Boston Ins. Co., 269 U.S. 197; New York Life Ins. Co. v. Edwards, 271 U.S. 109; Minnesota Mutual Life Ins. Co. v. United States, 279 U.S. 856; Massachusetts Mutual Life Ins. Co. v. United States, supra; Standard Life Ins. Co., 47 Fed. (2d) 218; affirming 13 B.T.A. 13; Old Line Ins. Co., 13 B.T.A. 758; Midland Nat. Life Ins. Co., 14 B.T.A. 200; Kaskaskia Life Ins. Co., 22 B.T.A. 210.

Section 84 of the New York statutes, as amended, is similar in all pertinent respects to other state statutes providing for “ reserve funds required by law.” The “ valuation of policies ” covered therein is, in our judgment, the technical legal reserve in insurance law, and is the legal reserve required by law within the sections of the revenue acts here under consideration. Massachusetts Mutual Life Ins. Co. v. United States, supra; Old Line Ins. Co., supra.

If section 84, just mentioned, the deductions under which are not here involved, provides for the legal reserve required by law, what is the purpose of section 85, the disallowance of petitioner’s attempted deductions under which gives rise to the issue under discussion? Aside from the natural presumption arising that section 85, in such circumstances, can not be considered as having to do with legal reserves required by law, disposition of which was made in the preceding section, let us examine section 85 and the present illuminating record in connection with the foregoing rules of law.

Section 84 sets up the net premium basis for computing policy values or reserves. Under this method—

The table rate of premium provided for in life insurance on the mutual level premium plan is calculated, first by adopting an accepted table of mortality showing the death rate for every age of life, and, second, by adopting an assumed rate of interest, such as the company may safely expect to realize upon the investment of the amounts of such premiums for .the duration of all of its policies. With these two factors, a calculation is made of the sum each insured must pay in advance so as to put the company in funds with which to pay all outstanding policies as they become claims, providing deaths occur exactly in accordance with the table of mortality, and also providing the rate of interest earned on the company’s invested funds is exactly the same as the rate assumed in calculating its premiums. The sum ascertained in this way is called the net or mathematical premium. [Massachusetts Mutual Life Ins. Co. v. United States, supra.]

This fund, so calculated, is the “ value ”, “ valuation ”, or “ reserve ”, and is that part of the assets of the company which, according to the specified table of mortality and with interest at the assumed rate, must be set apart to meet or mature the company’s obligation to the insured on his death or upon the surrender or cancellation of his policy. It is this reserve, alone, which must be kept ready to meet policy obligations. Massachusetts Mutual Life Ins. Co. v. United States, supra.

This abstract computation is entirely actuarial and thus theoretical. Massachusetts Mutual Life Ins. Co. v. United States, supra. The actual premium charged in any case, of course, is not considered in such computation. Section 85 creates no additional legal reserve, but, where as here the actual premium charged is less than the net premium upon which the legal reserve and therefore the deduction is mandatorially based, merely provides a guarantee that the reserve set up in section 84 shall be maintained by providing a source, certain, from which the difference between the mathematical or net and the actual premium charged shall be made up. Nor can the fact that the computation of the value of the annuity in section 85 is actuarial, change its real purpose and character. Cf. Old Line Ins. Co., supra; Kaskaskia Life Ins. Co., supra.

That section 85 does simply provide an assured source for the reserves covered by section 84 is conclusively evidenced by the result of a practical application of the provisions of section 85. The value of the annuity there provided decreases each year by the amount of the difference between the net premium, basing the allowed deduction under section 84, and the actual premium charged, so that at maturity this value or “ deficiency reserve ” is zero, while during the same period the reserve created by section 84 increases, as computed by including the annual premium accretions of which this difference between net and actual premium is a part, and at maturity equals the amount of the policy obligation. Thus, the policy obligation can be and is therefore paid only from the reserve created in section 84.

Petitioner contends that the calculation of the reserves under section 84 is based upon the assumption that the actual premium charged will at least equal the net premium upon which the reserves there set up are mandatorially premised and that the separate liability created in section 85 is an additional legal reserve to cover a situation, such as here, where the actual premium paid is less than the net. But in petitioner’s case this “ separate liability ” or “ deficiency reserve ” is not additional to the “ reserve funds required by law ” defined in section 84, because it never reaches the latter— only the difference between the mathematical or net and the actual premium paid, which is apparently annually appropriated thereto. Petitioner has had the benefit of this difference in the computation of the reserve under section 84 upon which his deduction, already allowed, was premised. To permit the additional deduction, based on the separate liability ” set up in section 85, would thus seem to effect a double deduction of the same item, a result directly contrary to the purpose for which such deduction is permitted at all. Cf. McCoach v. United States, supra; Massachusetts Mutual Life Ins. Co. v. United States, supra; American Title Co., supra.

Thus, the separate liability directed by section 85 to be set up under certain conditions, existing here, neither increases nor decreases the legal reserve defined in section 84. It is not a fund reserved from premiums that can or does meet maturing policy obligations. It may be said to preserve the solvency of such insurance companies as are within its purview, a consideration with which we are not now particularly concerned. McCoach v. Insurance Co. of North America, supra; Old Line Ins. Co., supra; Midland Nat. Life Ins. Co., supra.

Accordingly, the separate liability contained in section 85 is not a “ reserve fund required by law ” and respondent is sustained upon this issue.

Reviewed by the Board.

Judgment will be entered u/nder Rule 50.

Smith, Trammell, and Van Fossan dissent.

       [Act of April 9, 1923, ch. 209, as amended by the Act of March 31, 1927, ch. 472.] Sec. 84. Valuation of policies. 1. The superintendent of insurance shall annually make valuations of all outstanding policies, additions thereto, unpaid dividends, and all other obligations of every life insurance corporation doing business in this state. All valuations made by him or by his authority shall be made upon the net premium basis.
      2. The legal minimum standard for contracts issued before the first day of January, nineteen hundred and one, shall be the actuaries^ or combined experience table of mortality with interest at four per centum per annum, and for contracts issued on or after said day shall be the American experience table of mortality with interest at three and one-half per centum per annum; * * *

       Sec. 85. When actual premium is less than net premium. When the actual premium charged for an insurance by any life insurance corporation doing business in this state is less than the net premium for such insurance computed according to the table of mortality and rate of interest prescribed in this article, such corporation shall be charged aa a separate liability with the value of an annuity, the amount of which shall equal the difference between such premiums and the term of which in years shall equal the number of future annual payments clue on such insurance at the date of the valuation.


author: Smith :

text:
    Merrimac Hat Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 63831, 68184.
    Promulgated January 6, 1934.

      O. A. SchlaiTcjer, Esq., for the petitioner.

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

Smith :

The only question at issue is whether premiums paid by the petitioner and its affiliated company in 1929 and 1930 on life insurance policies of which they were the beneficiaries on the lives of two individuals, one of whom was the principal officer of a corporation acting as the petitioner’s sales agent, and the other of whom was an individual sales agent, are deductible from gross income as ordinary and necessary expenses of doing business.

Section 22 (b) of the Revenue Act of 1928 provides in part as follows:

(6) Exclusions from gross income. — The following items shall not be included in gross income and shall be exempt from taxation under this title:
(1) Life insurance. — Amounts received under a life insurance contract paid by reason of the death of the insured, whether in a single sum or in installments * * *

Section 24 (a) of the same act provides in part:

(a) General rule. — In computing net income no deduction shall in any case be allowed in respect of—
*******
(4) Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, when the taxpayer is directly or indirectly a beneficiary under such policy.

The petitioner makes two contentions in these proceedings. First, that the life insurance premiums paid are deductible from gross income as ordinary and necessary expenses under section 23 (a) of the Revenue Act of 1928; second, that the inhibition of section 24 (a) (4) of the taxing statute does not prevent such deduction.

It is apparent from the evidence in these proceedings that the petitioner was of the opinion that it was advisable for it to insure itself against loss in case of the death of Thompson or Rockwell, or both, and as a means of insuring itself against such contingency took out insurance policies on the lives of these individuals. We may therefore assume that the premiums paid constitute a necessary expense of doing business.

There is the further consideration, however, as to whether the claimed expense was an “ ordinary ” expense within the meaning of the statute; for it is to be observed that the statute permits the deduction of “ ordinary and necessary expenses ” and not of ordinary or necessary expenses. The word “ and ” is not to be construed as a disjunctive. Welch v. Helvering, 290 U.S. 111. We are of opinion that the life insurance premiums paid do not constitute ordinary ” expenses within the meaning of the statute, for a life insurance contract partakes of the nature of a capital investment. One insuring against death is insuring against a certain event. A life insurance contract is different from a fire insurance or casualty contract. If premiums are paid in accordance with the terms of a life insurance contract, the beneficiary will in due course receive the proceeds. Under all of the income tax acts the proceeds of life insurance policies have been exempted from income tax. Correlatively, Congress has provided, in all of the income tax acts beginning with that of 1916 (see section 32 of the Revenue Act of 1916 added by section 1211 of the Revenue Act of 1917), that premiums paid on life insurance policies under certain circumstances shall not be allowed as deductions from gross income.

But even if the petitioner has cleared the first hurdle, we are of the opinion that it has not shown that the inhibition of section 24 (a) (4) of the Revenue Act of 1928 is not applicable to it. In the first place, it is to be noted that Thompson was a stockholder of the petitioner, albeit he was the owner of only 80 shares out of 41,500 shares. Clearly, a stockholder is a person financially interested in a trade or business. Under his contract with the petitioner and its subsidiary, Rockwell was to receive a share of the profits, and, in any event, he was to receive minimum payments at the rate of $65,000 per year, payable in equal monthly installments. We think that he was financially interested in the trade or business of the petitioner and of its subsidiary. Cf. Rieck v. Heiner, 20 Fed. (2d) 208; affd., 25 Fed. (2d) 453. We are of opinion that the inhibition of section 24 (a) (4) of the Revenue Act of 1928 is applicable to the life insurance premium payments made by the petitioner in the taxable years.

Judgment will he entered for the respondent.


text:
    Ralph H. Seelye, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 62952.
    Promulgated January 5, 1934.

      Joseph Earl Perry, Esq., for the petitioner.

      Prew /Savoy, Esq., for the respondent.
   OPINION.

Smith :

The question in issue in this proceeding is whether the 100 shares of General Electric Co. common stock sold by the petitioner on January 9, 1929, were the 100 shares purchased by him in 1927 at a cost of $9,882.50, or the 100 shares purchased by him on December 10, 1928, for $17,725. The respondent has determined the deficiency upon the basis of article 58 of Regulations 74, which provides, so far as material, as follows:

* * ⅜ when shares of stock in a corporation are sold from lots purchased at different dates and at different prices and the identity of the lots can not be determined, the stock sold shall be charged against the earliest purchases of such stock. The excess of the amount realized on the sale over the cost or other basis of the stock will constitute gain. * * *

It is the contention of the respondent that when, on December 8, 1929, the petitioner deposited with his brokers a certificate for 100 shares of General Electric Co. common stock as collateral to bolster up his margin account the certificate no longer constituted property of the petitioner and that the petitioner had only a claim against the brokers for 100 shares of General Electric Co. common stock which might be satisfied by the broker by the delivery to the petitioner of any certificate for 100 shares of General Electric Co. common stock.

It is the contention of the petitioner that he merely pledged with his brokers the certificate of stock and that the brokers had no right to sell or transfer the certificate delivered without his order to do so; that at the time he deposited the certificate he instructed the brokers not to sell it; furthermore, that when on January 9,1929, he gave the brokers an order to sell 100 shares of General Electric Co. common stock he instructed them to sell the 100 shares which he had purchased on December 10,1928.

In bis brief counsel for tbe petitioner states that tbe petitioner pledged the certificates—

⅞ * * with his brokers as collateral with distinct orders not to sell it, but with implied authority to do so on one condition, namely, if the petitioner should fail to pay his indebtedness to the brokers. That condition never occurred, for he never did fail to pay his indebtedness and he never, during 1929, authorized the sale of that stock. * * *

The evidence with respect to the agreement made by the petitioner with his brokers with respect to the deposit of the certificate of stock is not very definite. The petitioner testified that when he deposited the certificate, “ I told them it was to be used as collateral with other stock which I had as collateral, and was not to be sold.” The brokers did not testify. At the time the certificate was put up as collateral it was endorsed in blank by the petitioner. Prior to the time that it was deposited with the brokers the petitioner received dividends upon the stock. After its deposit all dividends paid upon shares of stock of the General Electric Co. owned by the petitioner and held by the brokers were received by the brokers and credited upon the petitioner’s margin account with them. The brokers’ statement rendered to the petitioner on December 31, 1928, shows that the certificate which he had deposited was placed to his credit in the margin account along with the other 100 shares of General Electric Co. common stock which he had purchased on December 10, 1928. The petitioner was thus apprised by this statement that the certificate that he had deposited with the brokers was treated by them the same as the 100 shares of General Electric Co. common stock purchased by them for his account and risk on December 10,1928.

We think it was clearly immaterial as to what the petitioner’s intention was with respect to the shares of stock to be sold on January 9, 1929. Burdett Stryker, 21 B.T.A. 561; J. T. Hedrick, 24 B.T.A. 444; Estate of Richard B. Turner, 26 B.T.A. 1204. There is no evidence that the brokers sold any particular certificate for 100 shares of stock. From the brokers’ standpoint it was immaterial what shares were sold.

Where shares of stock are carried on margin it is impossible to earmark the particular shares. In Snyder v. Commissioner, 54 Fed. (2d) 57, the court, referring to the so-called “ first in, first out ” rule, stated:

Evidently this rule was framed with especial reference to gains and losses in marginal transactions where, as in this case, shares purchased by a customer, while legally “ owned ” by him, are evidenced by a certificate not in his name but in the name of the broker until the transaction is closed out by sale or payment of the full purchase price. The evidence of the transaction and of the customer’s ownership is merely a book entry of a debit of the shares purchased against a credit of the margin paid. Tlie shares are commingled with perhaps many thousand held by the broker for other customers, subject always to be hypothecated by him in raising the difference in money between the customer’s margin and the purchase price of the shares, which of course the broker must pay in order to get a certificate. The shares are not delivered or earmarked or allocated to the customer even on the books.
Where shares “ are sold from lots purchased at different dates and at different prices ” in a marginal account it is clear that, in the absence of something else, the identity of the lots sold cannot be determined, hence the cited regulation, which is tersely called the “ First in, first out ” rule. The rule is an arbitrary one, as from the very nature of the case it must be; yet, again from the nature of the case, it is reasonable. * * ⅜

See also Towne v. McElligott, 274 Fed. 960; Skinner v. Eaton, 45 Fed. (2d) 568); certiorari denied, 283 U.S. 837. The contention of the petitioner upon this point is not sustained.

The deficiency will be recomputed in accordance with other matters stipulated.

Judgment will be entered under Rule 50.


author: Arttndell:

text:
    Scranton, Lackawanna Trust Company, Trustee, Katherine W. Murray Trust, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 51978.
    Promulgated January 5, 1934.

      H. Kennedy MeCook, Esq., for the petitioner.

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

Arttndell:

The principal question here is whether the basis for determining the gain on the sale of the trusteed stock is the same as the basis in the hands of the grantor of the trust, or the value at the time it was placed in trust. There is no issue as to any of the basic figures. While some of the stock appears to have been acquired by the grantor prior to March 1, 1918, and some by gift and by Avay of stock dividends, the basic figure of $68,985.50, denominated as “ cost ” in the Form 1041 executed by the collector, is not challenged by petitioner. Nor is any claim made by either side that the value of the stock when conveyed to the trustee was any less or greater than the price at which it was sold a few days later.

The governing statute is the Revenue Act of 1926, the sections thereof cited by the parties being set out in the margin. Stated shortly, the substance of the statutory provisions is that the basis for gain or loss on the sale of property transferred in trust is the same as it would be in the hands of the grantor, but if the transfer is one in contemplation of or intended to take effect at or after death the basis is the fair market value of the property at the time of acquisition by the vendor.

There can be but little doubt as to the intent of Congress in enacting that different bases shall apply to trust property depending on whether the trust was one resulting in a complete transfer inter vivos or one in contemplation of or to take effect at or after death. In the case of a completed and irrevocable transfer the property was to take the same basis as an outright gift, which since the Revenue Act of 1921 had been the basis in the hands of the donor, thus taxing as income the increment in value of the property while in the hands of the donor. See Taft v. Bowers, 278 U.S. 470. In the other class of cases — transfers in contemplation of or to take effect at or after death — the tax on the increment in value in the hands of the donor is levied as an estate tax when the death of the donor occurs.

Petitioner has not attempted to show that “ the thought of death ” was “ the impelling cause of the transfer ” of the property. United States v. Wells, 283 U.S. 102. Consequently it cannot be said, on the record made, that the transfer was in contemplation of death.

Nor do we think that the transfer was one to take effect at or after death. It was a completed transfer upon the execution of the trust instrument and no interest remained in the grantor to be transferred at her death. Beginning with May v. Heiner, 281 U.S. 238, it has been held many times that a transfer under which the grantor reserves only the income is not one to take effect at or after death. See Morsman v. Commissioner, 283 U.S. 783; Burnet v. Northern Trust Co., 283 U.S. 782. Here it is conceded by counsel for petitioner that by the trust instrument legal title to the corpus was irrevocably transferred. While the grantor reserved the right to change the “ distribution of income and principal ”, the trust instrument specifically provided that “no limitation of principal shall be made in behalf of the donor or her estate.” In Frederic Ullman et al., Executors, 20 B.T.A. 782, the settlor conveyed property by warranty deed, reserving to herself not only the income from the property, but also the use and entire management and control of it for life. We held, following May v. Heiner, supra, that the property passed at the time of execution of the deed and not at the time of the settlor’s death, hence it was not subject to the tax provided for in section 302 (c) of the Revenue Act of 1924. See also Lucy Belle Dunham et al., Executors, 26 B.T.A. 286, in which case income of the trust was payable to the grantor for life, and she reserved the right to direct the change of capital of one of the trusts from realty to personalty, and in the case of the other trust the trustee could not sell or exchange the corpus without the consent of the grantor. We held that the grantor had completely disposed of the corpus of the trusts during her life, and there was no taxable transfer at her death under section 302 (c) of the Revenue Act of 1926. These decisions are in point here. Under the trust deed executed by the grantor the property has passed beyond recall by her and at her death no interest will pass from her to the living. May v. Heiner, supra.

It is our conclusion that the transfer of the property in trust was not a transfer coming within the provisions of section 302 (c) of the Revenue Act of 1926, hence under the first sentence of section 204 (a) (3) the basis for gain or loss to the trustee is the same as it would be in the hands of the grantor.

It may well be that the trust in this case would come within the provisions of subdivision (d) of section 302 of the Revenue Act of 1926, which taxes transfers by trust or otherwise where the enjoyment of the property at the time of death “ is subject to change through the exercise of a power * ⅜ * to alter, amend, or revoke * * See Porter v. Commissioner, 288 U.S. 436. We are not concerned with this, however, for the reason that the income tax sections of the statute which allow the use of a new basis do not include cases falling within section 302 (d).

The conclusion we have reached makes it unnecessary to enter into the question of whether the last sentence of section 204 (a) (3) and section 204 (a) (5) could in any event apply to a case where a grantor is living at the time of sale of the property. See section 302, which refers to property in respect of which “ the decedent ” has made a transfer. Cf. Lettie Snyder, 27 B.T.A. 1285.

As to the 25 percent penalty, petitioner attempts to show “ reasonable cause ” for its failure to file a return by the testimony of its auditor. He testified that at the time for filing returns for 1927 he gave consideration to whether a return should be filed for the Murray trust and concluded that there was no taxable profit from the sale of the stock by the trustee “ because of the kind of a trust that it was,” and the income from other sources was insufficient to require the filing of a return.

The statute imposing the 25 percent penalty, section 3176 of the Revised Statutes, as amended by section 1103 of the Revenue Act of 1926, provides in part:

* * * except tliat when a return is filed after such time and it is shown that the failure to file it was due to a reasonable cause and not to willful neglect, no such addition shall be made to the tax.

This provision of the statute requires that a return be made by the taxpayer at some time as a prerequisite to a plea of reasonable cause. Where, as here, no return is ever filed, it is mandatory that the penalty be imposed and we may not inquire into the cause of delinquency. John T. Sline, 9 B.T.A. 1222; E. M. Green, 11 B.T.A. 185.

Decision will be entered for the respondent.

         Sec. 204 (a) (8). If the property was acquired after December 31, 1920, by a transfer in trust (other than by a transfer in trust by bequest or devise) the basis shall be the same as it would be in the hands of the grantor, increased in the amount of gain or decreased in the amount of loss recognized to the grantor upon such transfer under the law applicable to the year in which the transfer was made. The provisions of this paragraph shall not apply to the acquisition of such property interests as are specified in subdivision * * * (c) * * * of section 302 of this Act.
      SBC. 204 (a) (5). If the property was acquired by bequest, devise, or inheritance, the basis shall be the fair market value of such property at the time of such acquisition. The provisions of this paragraph shall apply to the acquisition of such property interests as are specified in subdivision * * * (c) * * * of section 302 of this Act.
      Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—

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


author: Van Fossan:

text:
    L. H. Wolf, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 63589.

      Melvin D. Wilson, Esq., for the petitioner.

      Alva C. Baird, Esq., and A. L. Murray, Esq., for the respondent.
   OPINION.

Van Fossan:

A deficiency in the amount of $1,249.44 for the year 1929 is here in issue. The proposed additional tax arises from the respondent’s determination that the proceeds of an award received by taxpayer in connection with a land condemnation proceeding were taxable as income. Petitioner assigns this recognition of gain on the involuntary conversion of his property as error.

In 1920 petitioner acquired a parcel of property located in Hollywood, California, described as lot A, tract 2129, Map Book 24, page 68, Los Angeles County, California. The cost of such property was $21,000.

Between 1920 and 1925 petitioner constructed various buildings on said property. The buildings covered the entire lot, except for a driveway through the property. A two-story brick building stood on the front portion of the lot. The second story was built over the driveway. A smaller frame and stucco building was on the rear of the lot.

The property was 103 feet wide, fronting on Cahuenga Avenue, and 883 feet deep.

In 1929 the city of Los Angeles, for the purpose of opening up Ivar Avenue, a public thoroughfare, condemned a strip 70 feet wide running diagonally across the approximate center of petitioner’s land. This strip represented 20 percent of the total area of petitioner’s property. By Ordinances No. 53214 (approved November 10, 1925), and No. 54065 (approved February 24, 1926), the city of Los Angeles created a special improvement district and the condemnation proceedings and improvements herein referred to were made pursuant thereto.

By order of court petitioner was awarded the following amounts:

(1) Award ior building taken-$10, 267
(2) Award for the land taken from petitioner_ 23, 549
(3) As severance damages for the balance of land not taken — __ 4,006
Total- 37,822

The city of Los Angeles levied special assessments for opening and widening work on the newly created street adjacent to parcels of petitioner’s property in the amounts of $19,470.32 and $19,243.28 respectively, totaling $38,713.60.

Petitioner paid the special assessments amounting to $38,713.60 by applying the awards amounting to $37,822 against assessments and paying the balance of $891.60 in cash.

In 1931 the city of Los Angeles levied, and the petitioner paid, further special assessments on the two newly created parcels of $1,317.20 and $1,315.55 for the paving, sidewalks, storm drain, etc., along Ivar Avenue, occasioned by the opening of the avenue in 1929.

In 1929 petitioner paid $1,000 attorney’s fees in connection with the awards and special assessments.

It was determined by the respondent that the petitioner derived income of $18,349 on the payment made for the land, computed as follows:

Award received for portion condemned-§23, 549
Cost of portion condemned-•- 4,200
Difference_ 19,349
Less attorney fees_ 1, 000 •
Tasable gain_ 18, 349

In respect of the buildings the petitioner sustained neither gain nor loss.

Petitioner did not sell, exchange, or otherwise dispose of the above described property in 1929 except as stated above.

On the basis of these facts taxpayer makes two contentions: First, that there was not a closed transaction giving rise to taxable gain, and, second, in the alternative, the award was expended in the acquisition of property similar or related in service or use to that taken, bringing the case under the statutory exception of section 112 (f) of the Revenue Act of 1928.

We are unable to find merit in either of petitioner’s contentions. As to the first, it seems obvious that a closed transaction has occurred. Petitioner’s property has been taken and he has parted with all interest. The fact that it was an involuntary proceeding brings no hope or comfort to taxpayer. It is gone beyond chance of return. Petitioner has been paid for the property by an official award by a court of competent jurisdiction. He has accepted the award by applying it against the assessment against the remainder of the property. Thus he has been paid for the property involuntarily sold to the city. The fact that there was an assessment for benefits does not alter the case. This relates to benefits accruing to the remaining property from the improvement. It also has been judicially fixed. In this situation we find every element of a closed transaction and a proper situation for imposition of tax on tbe gain derived.

Nor is there any substance in petitioner’s second point — the conversion of the award into property similar or related in use. The simple fact is that petitioner did not expend the award in any such manner. The highly artificial argument advanced that he has converted the award into an interest or right in the new thoroughfare does not impress us as worthy of extended consideration. Such an interpretation would make the statute a meaningless nullity. It would present imponderable questions of valuation. It would depart from all recognized canons of construction, among the most fundamental of which is that an unambiguous statute couched in words of ordinary comprehensible meaning should be interpreted in accordance with its plain terms and not distorted by artificial reasoning. Here the statute is plain in word and meaning and permits of no such construction or application as petitioner would give it.

We find the respondent’s action to be in accord with law and the facts. John J. Bliss, 27 B.T.A. 803.

Decision will he entered for the respondent.