author: Murdoch::

text:
    Daniel Tracy Beers, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 69641.
    Promulgated August 29, 1934.

      Bernhard KnoTlenberg, Esq., for the petitioner.

      B. W. Wilson, Esq., for the respondent.
   OPINION.

Murdoch::

The Commissioner determined a deficiency of $1,032.93 in income tax for the calendar year 1930. Facts have been stipulated to raise two questions of law for decision by the Board. The first is whether the gain from the disposition of a piece of real property in 1930 is to be determined by using the value of the property on March 17,1925, as the basis for gain or whether the Commissioner was right in using the value of the property on March 1, 1913, as the basis.

The property in question was a part of the residuary estate of the petitioner’s mother. The mother died in 1904, the year in which the petitioner was born. The following is a pertinent excerpt from the mother’s will:

All tbe rest, residue and remainder of the real estate of which I may die seized and possessed, I give, devise, and bequeath to my Trustees hereinafter named, or their survivor, in fee simple, Iw Trust, nevertheless to hold the same for the benefit of my said child [the petitioner], appropriating the rents for his benefit during his minority, with power to make all necessary alterations and improvements and sell the same, and to make good deed or deeds of conveyance therefor; And In Trust, upon the attainment by my child of his majority, to convey said real estate to him in fee simple; or in the event of the death of my said child during his minority, leaving children, to convey the same to them; or in the event of the death of my said child during his minority without leaving any children, to hold the same in trust to convey the said real estate to my aunts, * * *.

The trustee conveyed the real estate to the petitioner on March 17, 1925, his twenty-first birthday. The petitioner disposed of the property in 1930.

Is the basis for gain the value on March 17, 1925, when legal title to the property was acquired by the petitioner, or was the property acquired before March 1, 1913, in which event the basis would be the agreed value on March 1, 1913? Section 113 of the Revenue Act of 1928 provides the basis for determining gain or loss from the sale or other disposition of property. The section has two main subdivisions, (a) and (b). Subdivision (a) provides the basis for “property acquired after February 28,1913 ”, while (b) provides the basis for “ property acquired before March 1, 1913.” In these respects these provisions are exactly like the corresponding provisions of earlier acts, including those of section 202 of the 1918 Act and section 202 of the 1921 Act, considered in Brewster v. Gage, 280 U.S. 327, and those of section 204 of the 1926 Act, considered in Chandler v. Field, 63 Fed. (2d) 13, and Warner v. Commissioner, 72 Fed. (2d) 225, affirming 28 B.T.A. 1178. The first step is to determine whether (a) or (b) applies in the present case.

The Supreme Court of the United States in Brewster v. Gage, supra, carefully considered the question of the meaning of the word “ acquired ” as used in section 202 (a) of the Revenue Act of 1921. There the testator, by will, disposed of a part of his estate in a residuary clause which made his son the residuary legatee. The father died in 1918 and in 1920 a final decree of distribution was entered, pursuant to which certain stocks were distributed to the son. lie sold the stocks in 1920, 1921, and 1922. The Court held that the son “ acquired ” the property within the meaning of that word as used in section 202 (a) of the Revenue Act of 1918 upon the death of his father and not at the date of the distribution. The basis was held to be the value at the date of the father’s death. The Court said that at that time the son acquired a vested right in the residue and “ became enriched by its worth, which was directly related to and would increase or decrease correspondingly with the value of the property.” The postponement of transfer of legal title to the son was not regarded as important. “ The generality of the words used in both acts [1918 and 1921] indicates an intention that the value at the time of' death of the decedent was to be taken as the basis in all cases.”

The Circuit Court of Appeals for the First Circuit decided the case of Chandler v. Field, supra, involving section 204 (a) (5) of the Revenue Act of 1926. The court there, on authority of the Brewster case, held that stock delivered to the taxpayer in 1920 and 1925 was “ acquired ” by him in 1915 at the time of his mother’s death. The stock was part of the mother’s residuary estate which she gave to her husband for life, after his death to trustees to pay $150 a year to her maid for life upon a condition subsequent and the balance of the income to her son, and, after providing for the above, to pay the principal to the son, one third when he became 30-, one third when he became 35, and one third when he became 40 years of age, with provisions for his children in case he died before receiving all of the principal. Certain stock was delivered to the son by the trustee when the son became 35 years of age and more was delivered when he became 40 years of age. The court decided that the son took a vested interest in the last two thirds of the estate when the mother died and “ acquired” the-stock, in, question at that time.

Warner v. Commissioner, supra, is the most recent case upon the subject. It involved facts rather parallel to those in the present case, except that there personal property was sold, while here real property was sold. The court there said that the test in such cases was whether or not the interest vested in the taxpayer at the death of the testator and, if there was a vesting of some recognized sort at that time, then the taxpayer “ acquired ” the property at that time.

The Federal courts follow the decisions of the state courts respecting the nature of property -interests within that state. Lane v. Corwin, 63 Fed. (2d) 167; Pringle v. Commissioner, 64 Fed. (2d) 863; Warner v. Commissioner, supra. The courts of Pennsylvania, like those of some other states, in construing a devise of a remainder to A upon his attaining a certain age, try to determine whether the testator intended, the time element to apply to the substance of the gift or to the time of payment only. If they find that the former is true, they hold that the estate is contingent (Grothe's Estate, 237 Pa. 262; 85 Atl. 141) but, if the latter is true, then they hold that the estate is vested (Bowman’s Appeal, 34 Pa. 19; Cooper v. Scott, 62 Pa. 139). Where as here an estate is left in trust for the benefit of A, t,o pay the income to A until he reaches a certain age, at which time he is to have the estate absolutely, the courts of Pennsylvania would hold that A’s remainder vests at the date of the death of the testator. McClure’s Appeal, 72 Pa. 414; Appeal of Reed, 118. Pa. 215; 11 Atl. 787; In re Middleton's Estate, 212 Pa. 119; 61 Atl. 808; McCall's Estate, 11 Phila. 41; Cladding's Estate, 13 Pa. Dist. Rep. 314. Thus Beers received a vested estate in the property at Erie, Pennsylvania, at the time of his mother’s death in 1904.

The Brewster, Chandler, and Warner cases would seem to be authority for holding that this, petitioner acquired his interest in the Pennsylvania real estate when his mother died in 1904, unless the word “ acquired ” in the Revenue Act of 1928 has a different meaning from that of the same word as used in the earlier acts. Section 113 (a) (5) changed the law as to basis in so far as it is applicable. Brewster v. Gage, supra; Bane v. Gorwin, supra. But it applies only in the case of property acquired after February 28, 1913. It does not require that a different meaning be attributed to the word “ acquired ” as used in (a) and (b) of section 113 from the meaning of that same word as used in corresponding provisions of prior acts. The petitioner acquired the property in question prior to March 1, 1913, and under section 113 (b) the basis is cost or fair market value on March 1, 1913, whichever is greater. The parties are not in disagreement as to the figure to be used under this decision.

The petitioner has relied entirely upon Lane v. Corwin, supra, as complete and compelling authority for using, as the basis for gain, the value of the property on March 17, 1925, the date upon which legal title was conveyed to this petitioner. The two cases are distinguishable. Clearly in that case subsection (a) of section 113 applied rather than subsection (b), since Mrs. Lane died long after March 1,1913. Here, however, (a) does not apply, since Mrs. Beers died prior to March 1, 1913, and at her death her son acquired a vested interest in the properties in question. The Lane sons took only a contingent interest at the death of their mother. If, because of these differences (b) is applicable here, then, of course (a) (5) would not apply and the Lane case would not be directly in point. The court held in the Lane case that the devise was not a general devise. We have not' decided whether the devise to Beers was or was not a general devise under the law of Pennsylvania. If it were that would be an added reason for taking the value as of the earlier date as the basis. See section 113 (a) (5). The court said in the Lane case that even though a residuary legatee after an executor’s trust is enriched at the death of the testator, as held in the Brewster case, a similar result would not follow where an express trust is set up by will, even if a different statute [sec. 113 (a) (5) of the Eevenue Act of 1928] were not involved. This statement does not seem to have been necessary in the decision. In the Ghandler case there was an express trust intervening, yet the Court held that the legatee acquired the property at the death of the testator. The same is true in the Warner case, .decided by the same court that decided the Lane case. The present case more nearly resembles the Chandler case than it resembles the Lane case and it is not distinguishable from the Warner case. See also Isabel Richardson Molter, 27 B.T.A. 442; affd., 69 Fed. (2d) 7; William Huggett, 24 B.T.A. 669, 671-673; affirmed on this point, 64 Fed. (2d) 705; Rodman E. Griscom, 22 B.T.A. 979.

The second question has been virtually settled by the agreement of the parties. An installment obligation on an installment sale of real estate made in 1926 was satisfied at less than face value in 1930. Therefore under section 44 (d) of the Revenue Act of 1928 gain results to the extent of the difference between the basis of the obligation ($78,675) and the amount realized ($81,125). This difference is $2,450.

Decision will be entered under Rule 50.


source: Caselaw Access Project

author: Murdock:

license: Public Domain

text:
    Henriette T. Noyes, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 73177.
    Promulgated August 29, 1934.

      Daniel B. Priest, Esq., for the petitioner.

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

Murdock:

The State League was not incorporated. It was an association and the petitioner argues that it was a “ corporation ” within the meaning of that term as defined in section 701 (a) (2) of the Revenue Act of 1928. Not all associations are “ corporations ” and the evidence contains very little information in regard to the form of organization of this one or the manner in which it carried on its business. However, the Commissioner has not mentioned this point and it need not be decided. The stipulation in regard to the 15 percent limitation is not as complete as it should be, but apparently the parties are agreed that the 15 percent limitation would not bar a deduction equal to the amount of these two contributions.

The question most extensively presented and argued by the parties and the one upon which the decision depends is whether or not the two leagues were, or either of them was, organized and operated exclusively for educational purposes within the meaning of section 23 (n) (2) of the Revenue Act of 1928. “ Educational ” is the word in the section picked by the petitioner for obvious reasons. She makes no contention that either league was organized or operated for any of the other purposes mentioned and it will not be necessary or helpful to consider those other purposes.

The petitioner relies upon a prior decision of the Board, Charles W. Dahlinger, 20 B.T.A. 176. That decision was appealed upon another point and was affirmed. Dahlinger v. Commissioner, 51 Fed. (2d) 662; certiorari denied, 284 U.S. 673. A contribution in 1923 to the Pennsylvania League of Women Voters was allowed as a deduction. Here the year and the donees are different. Likewise the evidence is different in the two cases. Each case of this kind depends upon its own evidence. The Dahlinger-ca.se, is not helpful here.

Education was undoubtedly one of the most important purposes, probably the most important purpose, for which each of these leagues was organized and for which each was operated during 1930. But there was another purpose for which each was organized and operated. The organizers and operators of the leagues at all times material hereto had this other purpose in mind and were constantly active in furthering it. It was not educational, nor was it merely incidental to a broad educational purpose. Neither was it carried on merely to permit the leagues to more effectively carry on a predominant educational purpose. Cf. Unity School of Christianity, 4 B.T.A. 61; George E. Turnure, 9 B.T.A. 871; Robert W. de Forest, 19 B.T.A. 595; John H. Watson, Jr., 27 B.T.A. 463; James J. Forstall, 29 B.T.A. 428; Slee v. Commissioner, 42 Fed. (2d) 184; Weyl v. Commissioner, 48 Fed. (2d) 811; Leubuscher v. Commissioner, 54 Fed. (2d) 998; Trinidad v. Sagrada Orden de Predicadores, 263 U.S. 578. This latter purpose was too important and prominent to be classed as incidental, contributory, subservient, or mediate to a primary purpose of education.

The purpose referred to was declared and manifested in many ways. The certificate of incorporation of the National League states “ The business and objects of the corporation are to foster education) in citizenship and to support needed legislation.” The bylaws of the National League once used these same words but were later changed to state that the object of the league should be “to promote education in citizenship, efficiency in government, needed legislation, and international cooperation to prevent war ” and that its policy should be not to “ ally itself with or support any political party, but it may endorse measures and policies.” Its “ Program of Work ” was divided into two main subdivisions, entitled “ Recommendations for Study” and “Recommendations for Support.” Items went on the latter list only after they had been studied, but, once on, both leagues actively supported or opposed specific measures in legislatures touching upon the subject and in other ways agitated for and supported the position which had been taken by the leagues on that particular subject. In many instances the leagues agitated for and supported a particular view upon subjects extremely controversial in their nature. Other individuals and other organizations, probably equally high minded and public spirited, undoubtedly took a different view on many of these subjects. The leagues actively participated in urging the appropriation of Government funds for particular purposes, the adoption or rejection of certain bills and treaties, the cooperation of the Federal Government in the World Court and other international affairs, the adoption of a certain system of prohibition enforcement, and the participation of the Federal Government in the operation of certain utilities.

Neither the original bylaws, those in effect during 1930, nor any other document showing the original purpose of the organizers of the State League is in evidence. However, the State League was closely affiliated with the National League and, in general, its purposes and activities were the same as those of the National League. It gave particular study and support to matters affecting the State of Minnesota, including legislation in the state legislature. The National League was composed of the members of the state leagues. The plan of work of the National League was likewise the plan of work of the State League and each could call upon the other for assistance in carrying out the measures, bills, and projects listed “ for support.” The State League in 1930 actively assisted the National League on many of the issues mentioned above and in addition was active in supporting and opposing bills in the state legislature which were .controversial in nature.

The above is merely a discussion of some of the evidence. There is evidence more favorable to the petitioner and there is other evidence supporting the respondent’s determination. The evidence as a whole does not justify a finding that either of these leagues was organized or that either was operated during 1930 exclusively for educational purposes. On the contrary the evidence supports the findings of fact above set forth. The contributions were not deductible under section 23 (n) of the Kevenue Act of 1928. John H. Watson, Jr., supra; Slee v. Commissioner, supra; Leubuscher v. Commissioner, supra.

Decision will be entered for the respondent.

       SEC. 23. deductions FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions: ****.***
      (n) Ohwritablc and other contributions. — In the case of an individual, contributions or gifts made within the taxable year to or for the use of:
      *******

        (2) any corporation, or trust, or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual.


author: ArtindelIí:

text:
    Charles Hall, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 59299.
    Promulgated August 29, 1934.

      A. A. Smith, Esq., for the petitioner.

      Chester A. Gwinn, Esq., for the respondent.
   OPINION.

ArtindelIí:

The parties have signed and submitted two stipulations covering the facts in great detail, so we have related only such facts as may lie necessary to an intelligent discussion of the question. The Commissioner has determined the deficiency on the ground that the petitioner realized a gain when he exchanged securities owned by him for stock of a newly organized corporation, while petitioner urges that he falls within the nonrecognition provisions of section 112 (b) (5) of the Revenue Act of 1928.

Pacific Bancorporation was a creature of petitioner and was organized on July 7, 1928, for the purpose of holding and dealing in bank stocks. The original articles of incorporation provided for 9,000 shares of class A preferred stock of no par value, and 1,000 shares of class B common, also of no par value. The common alone was to have voting rights unless there was a failure to pay dividends for two consecutive years, and petitioner subscribed for all of this class at the first meeting of the incorporators on July 27,1928. With the increase in the number of shares on August 2, 1928, to 50,000, divided into 45,000 shares of class A preferred and 5,000 shares of class B common, petitioner on the same day subscribed for the additional 4,000 shares of common. Later the same day the directors of Pacific Bancorporation accepted petitioner’s offer to settle his two subscription agreements by transferring to the corporation certain securities and cash.

At this point petitioner contends there was a transfer of securities for stock which brings the case under section 112 (b) (5) of the Revenue Act of 1928 and, as this transaction left him in control of the newly organized company, there was no present recognition of gain or loss.

If we could strike a balance on that date and treat the transactions as fully consummated, the petitioner might prevail. But there are several matters that stand in the way of so viewing the situation on that date.

It should be remembered that the general rule of the statute is to recognize gain or loss on the exchange of property (sec. 112 (a)), and it is only in the specifically excepted cases that gain or loss is not recognized. The taxpayer seeking the benefit of the nonrecognition provisions must bring himself unequivocally within their terms. Tex-Penn Oil Co., 28 B.T.A. 917, 954.

The statute relied upon by petitioner refers to the transfer of property to a corporation “ solely in exchange for stock or securities in such corporation ” and where immediately after the exchange the transferor is in control of the corporation through the ownership of at least 80 percent of the voting stock and of all other classes of stock.

This statute envisions a completed transfer, a fully consummated exchange of property for stock or securities. Where, as here, there is a plan for the launching of a corporation which contemplates bringing in cash and various kinds of property in exchange for stock, we cannot apply the statute to a single step in the plan and disregard all others which may be of equal importance. In applying similar provisions of the 1921 Act we have held that “ the question of control is to be determined by the situation existing at the time of the completion of the plan rather than at the fulfillment of one of the intermediate steps.” See Wilbur F. Burns, 30 B.T.A. 163, 172, and cases cited. The reasons for this are obvious. If the participants in a complicated reorganization, or the Government, were left free to determine tax liability upon a single step, the result might well be entirely out of harmony with the realities of the case and the actual situation of the taxpayer. Moreover, as the best laid plans sometimes go awry, the taxpayer might find his ultimate situation entirely different from the one he contemplated at some intermediate stage of the proceedings.

The matter of petitioner’s claimed control on August 2, 1928, has two aspects. First, assuming that the 6,000 common shares of Pacific Bancorporation stock were all of its outstanding stock on August 2, it is difficult to see how petitioner was in control through ownership. Not only was the stock not issued at that date, but the property that petitioner was to exchange for it was not then in existence. His offer was to exchange 8,000 shares of West Coast Utilities Corporation stock in partial payment for the Bancorporation common stock. ■ It is stipulated that the West Coast Utilities Corporation was not organized until August 27, 1928. Although it is stipulated that the interim certificates were accepted by the Bancorporation as full compliance with petitioner’s offer, it is not stipulated nor shown when the substitution was accepted, and the fact remains that at August 2 he was not in a position to deliver the stock offered. It may well be that the reason for delaying the issuance of the Bancorporation stock to petitioner until September 6, or later, was that the West Coast Utilities Corporation was not organized until shortly before that time and the- directors wanted assurance that the organization would be completed and the stock forthcoming. There is also a discrepancy in dates that has not been explained. According to the copy of the minutes of the directors’ meeting in evidence, petitioner’s offer, stated to be in writing, was voted upon at the meeting of August 2, 1928. The copy of the written offer in evidence is dated August 11, 1928. Moreover, petitioner’s offer to exchange stock for stock was only part of the offer. His entire subscription amounted to $317,500 and the West Coast Utilities stock was to take care of $200,000 of this. The- balance was to be paid in cash, but this was specifically stated to be contingent upon Bancorporation purchasing four blocks of stock from petitioner for the sum of $226,200. No time limit was set on this purchase and it is not shown when it was consummated. In view of these several considerations we do not believe that petitioner can be said to have been the owner of the common stock of Bancor-poration on August 2, 1928.

The other aspect of the question of control depends upon the position held by other subscribers. On and prior to August 2, 1928, a number of persons, not including petitioner, had subscribed for 2,069 shares of preferred stock of Bancorporation, such subscription being payable partly in cash and partly in various securities. As early as July 31, 1928, there had been paid in on these subscriptions $7,985, which was then on deposit to the credit of Bancorporation. Petitioner argues that these were conditional subscriptions only, subject to acceptance by the directors, and as they had not been accepted by the directors at August 2, 1928, the preferred stock so subscribed for cannot be regarded as outstanding stock on that date. As above pointed out, petitioner’s subscription was conditioned upon Bancorporation purchasing stock from him at some unnamed date. If it cannot be said that stock became outstanding until fulfillment of all conditions, it must follow that none of Ban-corporation’s stock was outstanding on August 2, from which it would follow that petitioner could not have been in control of any of it on that date. We think the rights of the subscribers to the preferred stock on August 2 must be regarded as equal to those of petitioner to the common. stock. Whatever those rights were we need not decide. The stipulation is that the minutes of Bancorporation do not show any formal action at any time in respect of acceptance of subscriptions to the preferred stock. However, the stock was eventually issued, and when, before that, interim certificates were issued they were dated back to the subscription dates. This fact, and the acceptance of the cash paid in by depositing it to the credit of Bancorporation, indicates most strongly that the subscript tions were considered to be effective as of their several dates.

Petitioner strenuously insists that August 2, 1928, is the crucial date for the determination of the question here presented; that on that date he exchanged stock for stock of Bancorporation, and that immediately after such exchange he was in control of Bancorporation. We cannot agree with him for reasons above given, which we summarize here. We are not satisfied that there was an exchange of stock for stock on the date mentioned. There was an offer to acquire Bancorporation stock partly in stock and partly for cash. This appears in one place in the record as being accepted on August 2, but in another the offer appears not to have been made until August 11. Petitioner was not in a position to complete his offer, for the corporation whose stock he offered was- not then in existence. His offer related to only one class of stock and at that time there were on file subscriptions to a substantial portion of the other class on which money had been paid in and accepted by Bancorporation, and the rights of such subscribers to the preferred stock appear to have been equal to those of petitioner to the common stock. Consequently petitioner has failed to prove either a completed exchange on the elate said to be the effective date, or that he was in control through the 80 percent ownership required by statute.

The case of Carel Robinson, 19 B.T.A. 751, cited by petitioner, does not support his contentions here. In that case the taxpayer purchased a coal lease which he agreed to turn in to a corporation to be organized. The corporation was organized in June 1922. The property had been purchased in May of that year by petitioner under court order of sale and he then entered into possession, but by reason of the court proceedings he did not acquire a deed until November. Upon organization of the corporation petitioner subscribed for all of its stock except qualifying shares. We held that the effective date of the exchange of the property for stock was in June, when the directors of the corporation met and directed that the lease be copied into the records. Several distinctions are at once apparent. In the Robinson case the property turned in was in existence and required but certain formalities before actual turning in. Here, as above pointed out, the West Coast Utilities Corporation had not been organized at the time of petitioner’s offer. In the Robinson case the taxpayer had subscribed for all the stock, whereas in this case petitioner had subscribed for only one class of stock and there were other subscriptions for the other class of stock.

After this case was heard petitioner moved that the deficiency proposed by the respondent be abated by reason of a decision entered in the case of Pacific Bancorporation, Docket No. 63206. It appears that in that case Bancorporation sold some or all of the West Coast Utilities Corporation stock turned in to it by petitioner, and in computing the gain realized the respondent used as a basis the cost thereof to petitioner. When the case was called for hearing no appearance was entered, and upon motion of counsel for respondent the case was dismissed for failure to prosecute and decision was' entered for the respondent. Petitioner’s motion in this case was denied, but is renewed in his brief. It is sufficient to say that the default decision entered in Docket No. 63206 was not an adjudication on the merits and cannot in any way operate to bar the respondent from maintaining this cause or prevent our determination of the question presented on the issues raised.

Decision will be entered under Rule 50.

       Sec. 112. RECOGNITION OP GAIN OR LOSS.
      (a) General rule. — Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.
      (b) Exchanges solely in lcind.—
      ******
      (5) Transfer to corporation controlled by transferor. — No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person, or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of .the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.
      ******
      (j) Definition of control. — As used in this section the term “control” means the ownership of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation.


author: Arundell:

text:
    Wobber Brothers, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 72343.
    Promulgated August 31, 1934.

      F. E. Youngmam,, Esq., for the petitioner.

      J. M. Leinenkugel, Esq., and W. R. Lansford, Esq., for the respondent.
   OPINION.

Arundell:

The first issue requiring consideration is whether assessment and collection are barred by the statute of limitations. The petitioner’s return for 1925 was filed on March 15, 1926, and the deficiency notice was mailed March 27, 1933, which was after the expiration of the three-year period provided for in section 277 (a) (1) of the Revenue Act of 1926. Counsel for the respondent relies upon section 501 of the Revenue Act of 1928 as suspending the operation of the statute of limitations'. That section, as far as material here, reads as follows: ,

SEC. 501. AFFILIATED CORPORATIONS — STATÜTE OF LIMITATIONS.
(a) Section 240 of the Revenue Act of 1926 is amended by adding at the end thereof a new subdivision to read as follows:
“(h)(1) If a notice under subdivision (a) of section 274 in respect of a deficiency for the taxable year 1922, 1923, 1924, 1925, 1926, or 1927, has been mailed to a corporation, the suspension of the running of the statute of limitations, provided in subdivision (b) of section 277 and in subdivision (1) of section 283, shall apply in the case of corporations with which such corporation made a consolidated return for such taxable year.’’

Subdivision (b) of section 277 of the Eevenue Act of 1926 provides that the running of the statute of limitations shall be suspended after the mailing of a deficiency notice for the period during which the Commissioner is prohibited from making an assessment. Under section 274 (a) the Commissioner is prohibited from assessing “ until the decision of the Board has become final,” which under section 1005 (a) (1) is upon “ expiration of the time allowed for filing a petition for review,” and that time under section 1001 (a), as amended by section 1001 of the Eevenue Act of 1932, is “ within three months after the decision is rendered.”

As set out in our findings, the deficiency notices in the prior proceedings were mailed January 30, 1928, and decision was entered November 10, 1932, and became final February 10, 1933. Between the dates of January 30,1928, and February 10,1933, a period of more than five years elapsed during which the respondent was prohibited from assessing, and such period, if it can be added to the time when the statute would otherwise have run in petitioner’s favor, extends the- time, well beyond the date of March 27, 1933, when the deficiency notice in this proceeding was mailed. It is our opinion that such period can be added. The situation here seems to fit exactly into the pattern of section 501 (a) of the Eev-enue Act of 1928. The substance of that provision is that where a deficiency notice has been mailed to a member of a group which filed a consolidated return, the suspension of the statutory period applies to the other members of the group in respect of the years covered by the deficiency notice. In this case two of petitioner’s affiliates with which it filed a consolidated return for 1925 were sent deficiency notices for that year. Now the petitioner has received a notice of deficiency for the same year. Section 501 (a) clearly applies tO’ this situation, and we hold that assessment and collection were not barred at the time the deficiency notice was sent to the petitioner.

It is alleged in the petition, and admitted in the respondent’s answer, that on January 2, 1925, petitioner received an installment payment of $64,000 on the sale price of the Imperial Theatre property sold to Famous Players-Lasky Corporation.' It is further alleged by petitioner and admitted by respondent that on July 1, 1925, petitioner received an installment of $4,120 on the sale price of the Monterey Theatre properties. These amounts respondent has included in income, less a deduction of $6,057.14 for commissions in the Imperial Theatre case, which deduction is not here in dispute.

Petitioner contends, however, that when its stock was issued to the partnership for the sales contracts a gain was recognized to the partnership under the 1921 Act, which gain, when added to the basis in the hands of the partnership, (sec. 204 (a) (8), Revenue Act of 1924) gives the petitioner a basis equal to the full amounts received by it from the contracts, hence there was no income upon receipt of any of the installments.

Respondent’s view is that the questions urged by petitioner in the • case at bar were considered and disposed of in the prior proceedings hence are res adjudicata. We agree with the respondent. Petitioner was a party to the other proceedings reported at 26 B.T.A. 822, in which the respondent determined a deficiency against petitioner for the year 1924 arising out of the receipts from the Imperial and Monterey theatre contracts. There were other issues in those proceedings, but one of the questions presented and decided was the same as that here under consideration. . We said in the opinion (p. 327) that petitioners contend that any profit from the sale was realized by the partnership and that the corporation has sold nothing from which profit could be realized.” We then proceeded to consider the application of the same sections of the various statutes which are cited by the petitioner in this proceeding and reached the conclusion that the receipt of installment payments under the contracts resulted in income. We furthermore specifically held that the $64,000 received by petitioner in 1925 under the Imperial Theatre contract should be included in income for that year. The respondent had determined that that installment had been received in 1924 and had included it in income for that year. We found from the evidence that it was received in 1925, and upon respondent’s amendment of his answer asserting an increased deficiency for 1925 by reason of the receipt in that year, we held that that amount should be included in group income for that year.

Thus the matters presented here appear to have been presented, considered, and decided in the earlier proceedings and under the authorities they are res adjudicaba. Tait v. Western Maryland Ry. Co., 289 U.S. 620; Mary Haller, 26 B.T.A. 895; Charles P. Leirdnger, 29 B.T.A. 874; Portage Silica Co., 29 B.T.A. 881. The argument that the doctrine of res adjudicata should be applied only where an appeal has been taken from the prior decision is without merit. “ * * * A judgment of a court in a matter within its jurisdiction, however erroneous, is final and conclusive if not appealed from.” Fisher v. Browning, 107 Miss. 729; 66 So. 132, 136.

Decision will he entered u/nder Rule 50.


text:
    Charles R. Weiden and Hermann J. Weiden, as Executors of the Estate of Robert Weiden, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 70763.
    Promulgated August 31, 1934.

      L. S. Pendleton, Esq., for the respondent.
   OPINION.

Arundell:

This proceeding involves estate taxes determined by the Commissioner in the sum of $7,319.48. The case has been submitted on the pleadings and a signed stipulation of facts. The decedent died on January 9, 1931. The question of law presented is the right to include in decedent’s gross estate the value of certain real property located in the State of New York which was owned by decedent and his wife as tenants by the entirety. The property in question was acquired between 1893 and 1908. The governing statute is section 302 (e) of the Revenue Act of 1926. It is petitioner’s contention that the Federal Government may not tax the transfer of such property where the acquisition occurred prior to the passage of the first Federal estate tax act of 1916. The constitutionality of the levy has now been definitely established. Tyler v. United States, 281 U.S. 497; Gwinn v. Commissioner, 287 U.S. 224; Third National Bank & Trust Co. v. White, 45 Fed. (2d) 911; affd., 287 U.S. 577; Luman W. Goodenough, Executor, 30 B.T.A. 69.

Petitioners contested the taxation of the same property by the taxing authorities of New York under a statute similar to the Federal estate tax act, and in a decision by the Court of Appeals of New York, rendered November 21, 1933, In re Weiden's Estate, 188 N.E. 270, the constitutionality of the state statute was sustained and the entirety property included in decedent’s estate in determining the amount of the New York State transfer tax.

Decision will be entered for the respondent'.


author: Aeundell :

text:
    Charles F. Fawsett, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 64474.
    Promulgated September 5, 1934.

      Charles F. Fawsett, Esq., pro se.

      E. A. Ton jes, Esq., and Paul D. Page, Jr., Esq., for tbe respondent.
   OPINION.

Aeundell :

At the time the sales of securities took place both petitioner and his wife were taxpayers within the meaning of the Revenue Act of 1928. Each had bought securities at a price and each had sold these securities for a price less than what they had paid for them. Under such circumstances each sustained a loss which section 23 (e) permits to be deducted in determining their net income for the purpose of taxation.

But respondent contends that by reason of electing to report their income for 1929 in a joint return, a privilege which the statute grants to married persons, petitioner and his wife must, for all purposes of the revenue act, be treated as one. In Frank B. Gummey, 26 B.T.A. 894, we held against the respondent’s contention. While there may be some logic in his view, we find no authority for it in the revenue acts, and it is a cardinal rule of construction of taxing statutes that there can be no tax imposed by implication or construction, and in case of doubt or ambiguity, either as to the fact of the imposition or as to the amount thereof, it must be resolved in favor of the taxpayer. Gould v. Gould, 245 U.S. 151; Crooks v. Harrelson, 282 U.S. 55.

Sections 11 and 12 of the Revenue Act of 1928, the imposing provisions of the statute, impose a tax upon the taxable income of each individual. Each is defined as a taxpayer and the fact that the Congress, having regard to the marital status and in order to eliminate a large number of returns, sees fit to permit the inclusion in the one return of the income of husband and wife, does not serve to deny to these individual taxpayers the other benefits of the taxing statutes. No authority has been pointed out to us that a husband and wife are to be denied deductions for losses sustained by them because they see fit to jointly return their taxable income. Hoeper v. Tax Commissioner of Wisconsin, 284 U.S. 206, would seem to be authority for the proposition that Congress could not forcibly require a husband and wife to jointly return tbeir income, and while the Federal taxing acts have never pretended to do so, but have only permitted married people to file joint returns, we feel that this privilege is not bought by the sacrifice of their other rights under the statutes. Nor are we impressed with the argument of respondent that, if the view here announced is to prevail, then the deduction of each spouse is to be limited to the gross income of each. To accept this view we must deny 20 years of history in the administration of the income tax laws. “A page of history is worth a volume of logic.” New York Trust Co. v. Eisner, 256 U.S. 345, 349. The acceptance of the privilege of filing a joint return by a married couple carries with it no denial of their individual’ rights under the statute. Congress has exacted no penalty for the privilege it has granted and the Commissioner may not exact one.

Counsel for the respondent makes some contention as to the bona tides of the sales. The evidence settles this beyond possibility of question. Orders were given to and executed by an established brokerage house with membership on the New York Stock Exchange. Upon execution of the orders the separate accounts of petitioner and his wife were appropriately debited and credited and each was furnished the usual broker’s memorandum showing execution. The wife had not only a separate account with the broker, but a separate estate amply sufficient to meet her obligation. In this respect the facts are different from those in W. E. Brochon, 30 B.T.A. 404, where the wife had no brokerage account and no funds and it was necessary for the husband to guarantee her account for the purchase of a block of stock like that which he ordered sold. The sales here were actual, completed transactions, and under the holding in Frank B. Qwmmiey, supra, the loss sustained may be deducted on the joint return. See also Joseph E. Uihlein, 30 B.T.A. 399.

Decision will be entered under Rule 50.


author: Aeundell:

text:
    Porte F. Quinn, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67156.
    Promulgated September 5, 1934.

      Richard 8. Doyle, Esq., for the petitioner.

      Harry F. Morton, Esq., for the respondent.
   OPINION.

Aeundell:

This case presents the familiar question of whether the cancellation of indebtedness constitutes taxable income. If the taxpayer is in fact enriched by the transaction, if he is relieved of his liabilities without a corresponding shrinkage of his assets incident to the transaction, he has realized income, United States v. Kirby Lumber Co., 284 U.S. 1; Commissioner v. American Chicle Co., 291 U.S. 426. But he has not realized income by being relieved from paying that which he in fact is unable to pay. u Gain or profit is essential to the existence of taxable income. A transaction whereby nothing of exchangeable value goes to or is received by a taxpayer does not give rise to or create taxable income.” Dallas Transfer & Terminal Warehouse Co. v. Commissioner, 70 Fed. (2d) 95; Burnet v. Campbell Co., 50 Fed. (2d) 487; Meyer Jewelry Co., 3 B.T.A. 1319.

The evidence is clear that petitioner was insolvent when the Searles settlement was made and the mortgages were canceled. Petitioner’s home “ El Bravo ” in 1929 did not have a fair market value in excess of the first mortgage of $16,000. The real estate market in Florida was demoralized and it was practically impossible to dispose of property at any price. Nor did the petitioner realize income by reason of the cancellation of the mortgage on the 50-acre tract of undeveloped land. In 1929 this property appears to have had little, if any, value. Moreover, whatever interest petitioner had in this tract he had conveyed in June of 1929 to the Quinn Holding Co., a corporation, which assumed petitioner’s obligations under the mortgage on this undeveloped tract. This was several months before the Searles settlement took place. The cancellation of the mortgage in this case did not, as in Kirby Lumber Co., supra, make available any assets to petitioner, and we hold that there was no realization of income from the transaction.

Decision will be entered under Rule 50.


author: Seawell :

text:
    Charles R. Rosevear, Petitioner, v. Commissioner of Internal Revenue, Respondent. J. Edward Young, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 59625, 59626.
    Promulgated September 11, 1934.

      Allen G. Gartner, Esq., and Edward I. Sproull, G.P.A., fop the petitioners.

      Elden MeFarlamd, Esq., for the respondent.
   opinion.

Seawell :

The two above styled proceedings were consolidated for hearing and decision. The petitioners seek a redetermination of deficiencies in income taxes for the year 1928 determined by respondent, as follows: Charles R. Rosevear, Docket No. 59625, $4,098.41; J. Edward Young, Jr., Docket No. 59626, $2,371.27.

The issue in each case is the same, that is, whether or not certain assignments to their respective wives by the petitioners, who constituted the partnership of Thurston & Braidich, made the wives copartners with the petitioners in the firm and thereby made the parnership income taxable one fourth to each of the four.

Under articles of copartnership executed December 10, 1921, each of the petitioners owned a 50-percent interest in the partnership of Thurston & Braidich, importers, whose place of business was in New York City. Petitioner Rosevear resided in Montclair, New Jersey, and petitioner Young in New York City.

The assignments heretofore referred to were executed on February 1, 1923. The J. Edward Young, Jr., assignment recited:

Whereas, X have invested in said firm of Thurston and Braidich $249,090.60 on January 1, 1923; and
Whereas, Minnie Young is desirous of acquiring a fifty (50) per cent sub partnership interest in my capital as shown by the books of Thurston and Braidich on January 1, 1923, and fifty (50) per cent of any earnings accruing yearly to me on this capital when and as determined at the close of each year:
Now, Therefore, To Ann Whom It Mat Concern, be it known that, for and in consideration of one (1) dollar to me in hand paid together with other good and valuable consideration the receipt whereof is hereby acknowledged, I, J. Edward Young, Jr., Rave sold, assigned and transferred unto Minnie Young a fifty (50) per cent interest in tfie capital to the credit of my account as at January 1, 1923, said fifty (50) per cent interest amounting to $124,545.30, together with a fifty (50) per cent interest in the earnings accruing to me under partnership agreement between me and Charles R. Rosevear dated December 10, 1921.
This assignment is made, however, subject to the following express conditions, to wit:
That my capital account on the books of Thurston and Braidich shall be kept intact and without giving effect to this assignment, and that losses suffered or incurred in and about the business of the partnership of Thurston and Braidich, through operations or otherwise, shall be borne by me in the ratio expressed in the original partnership agreement between me and Charles R. Rosevear dated December 10, 1921, and without giving any consideration to this sub partnership agreement, and in no event shall Minnie Young be liable for an amount in excess of the capital assigned under this assignment together with any undistributed profits to the credit of said Minnie Young.

In the Charles R. Rosevear assignment to his wife, Edith D. Rosevear, it is recited: “Whereas, I have invested in said firm of Thurston and Braidich $404,395.84 on January 1, 1923,” and thereafter the wording of the instrument, except for the figures and names, is identical with the Young assignment. Each of the petitioners had knowledge of the other’s assignment.

In their individual income tax returns for 1928 each of the petitioners reported one fourth of the partnership profits and each wife one fourth. The respondent held that one half of the partnership income was taxable to each petitioner, resulting in the proposed deficiencies.

The partnership return of income for 1928 indicates a distribution of partnership income to the wives in the same amount (omitting salaries paid petitioners) received by their husbands. The 1928 individual tax returns filed by the petitioners and their wives included as income the amount shown on the partnership return as representing their respective portions of the partnership income. The wives paid with their individual checks the amount of tax shown on their returns to be due.

The partnership returns for the years 1923 to 1927, inclusive, all reported the distribution of partnership income similar to that reported in the return for 1928.

The question of the validity and effect of the aforesaid assignments by the petitioners to their wives was raised by the respondent when the partnership returns of income and individual income tax returns filed by the petitioners and their wives for 1923 were audited, and it was then held, and such ruling was followed thereafter until returns for 1928 were audited, that the wives of the petitioners were members of the partnership known as Thurston & Braidich, equally interested with their husbands therein, and as such properly included their reported distributive share of partnership profits m their individual returns of income.

Article 5, paragraph 53, of chapter 408 of the Laws of New York, 1919, provides:

A conveyance by a partner of IAs interest in the partnership does not of itself dissolve the partnership, nor, as against the other partners in the absence of agreement, entitle the assignee, during the continuance of the partnership, to interfere in the management or administration of the partnership business or affairs, or to require any information or account of partnership transactions, or to inspect the partnership books; but it merely entitles the assignee to receive in accordance with his contract the profits to which the assigning partner would otherwise be entitled.

The evidence is clear and uncontradicfced that the petitioners’ wives were not copartners in the original partnership of Thurston & Braidich.

The legal effect of the assignments was not altered because partnership returns were filed showing the wives as partners with their husbands and income of the partnership so reported. That such returns, prior to the 1928 returns of the petitioners, were filed and approved by the then Commissioner, who recognized the assignments as valid and having the legal effect now claimed .for them by petitioners, of course, in no way binds or controls our determination as to their legal effect when the question is raised with respect to petitioners’ returns for the year now in issue, 1928.

The -assignments relied on by petitioners are specific in their declaration of intent. Taking the expressions used in the assignments in their ordinary legal meaning, it appears clear that the original partnership of Thurston & Braidich was to continue and that the assignments were merely intended to have the effect of forming subpartnerships. It is plainly and positively stated in the assignments that losses suffered or incurred in and about the business of the partnership of Thurston and Braidich ” were to be borne “ without giving any consideration ” to the subpartnership agreements.

A subpartnership is defined to be a partnership formed between a member of a partnership and a third person for a division of the profits coming to him from the partnership enterprise, by an agreement. of such a character as to disclose the essentials necessary to a partnership between the partner and the third person. Such third person does not become a member of the first partnership nor is he liable for its debts. Ballentine’s Law Dictionary, p. 1244 ; 20 B.C.L., p. 1073.

On the record as presented, we are of the opinion and hold that the petitioners by or through said assignments did not make their wives copartners with them in the partnership known as Thurston & Braidich and, in fact, their wives were not such partners.

The statute (section 182 of the Revenue Act of 1928) specifically provides: “ There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year.” The wives not being copartners with petitioners in the firm of Thurston & Braidich, the distributive income of the firm is taxable to petitioners alone, though each petitioner may by virtue of his subpart-nership with his wife have to account to her in accordance with his agreement with her. In view of the fact that it is not shown that the wives contributed any capital whatever to the firm and it is shown that the assignments were subordinate to the original partnership agreement between the two petitioners, as has been set out above, we are of the opinion and hold that the respondent did not err in his determination of deficiency in income tax in either of the two cases herein, consolidated for hearing.

While the facts and circumstances in the case of Burnet v. Leinin-ger, 285 U.S. 136, cited and relied on by the respondent, are not identical with those in the instant cases, we are, nevertheless, of the opinion that the principles and reasoning set forth in the opinion in that case are applicable and controlling herein.

Judgment in each case will he entered for the respondent.


author: Black:

text:
    Estate of Richard O’Brien, Mary A. O’Brien, Coexecutrix, Helen O’Brien, Coexecutrix, Richard O’Brien, Coexecutor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 61620.
    Promulgated September 14, 1934.

      Alvin M. Powell, G.P.A., for the petitioner.

      Richard W. Wilson, Esq., for the respondent.
   OPINION.

Black:

Respondent bas determined a deficiency in income tax against petitioner for the year 1929 of $6,682.37. In the statement attached to the deficiency notice respondent states the reasons upon which he computed the deficiency as follows:

The issue involved at the conference is whether corpus gains are taxable to the trust estate or to the beneficiaries who are also the remaindermen.
Careful consideration has been given to all information submitted with the result that this office cannot allow your contentions.
You are advised that article 861, Regulations 74, provides in part as follows:
“ In general, the income of a trust for the taxable year which is to be distributed to the beneficiaries must be returned by and will be taxed to the respective beneficiaries, but the income of a trust which is to be accumulated or held for future distribution, whether consisting of ordinary income or gain from the sale of assets included in the corpus of the trust, must be returned by and will be taxed to the trustee.”
In the instant case the question to be decided with respect to distribution of income is whether the term “ income ” includes profits from the sale of corpus of the estate. Ordinarily such profits are considered as part of corpus and are not available for periodic distribution. However, in some cases litigated in state courts it is realized that enhancement of values of securities included in corpus has been distinguished as in the several cases cited by your representative in conference with respect to Pennsylvania laws. Under the conflict of laws, the Federal law, however, would govern.

Petitioner assails the correctness of the foregoing determination on the ground that it results in taxing to the petitioner profit from the sale of corpus of the estate. Petitioner states in the amended petition as follows:

(а) Petitioner contends such profits from sale of corpus is properly taxable to the heirs to whom the entire estate was distributed in January, 1930.
At a hearing before the Bureau in Washington the taxing of profit $23,415.00 from sale of rights to- the heirs was conceded, but the deficiency notice and accompanying statement do not disclose the appropriate adjustment.
(б) Wherefore, the petitioner prays that this Board may hear the proceeding and determine that the deficiency due from the petitioner for the year 1929 should not be in excess of $3,600.00.

Facts were stijralated as follows:

Bichard O’Brien died testate January 9‘, 1923. His will provides for disposition of his estate as follows: (a) certain specific bequests; (b) creation of an $18,000.00 trust for the benefit of a certain individual; and (c) creation of a trust estate from the residue to terminate January 1, 193Ó, “ at which time my said executors * * * shall divide the principal or corpus of any residuary estate * * * equally among my grandchildren, their mother, Mrs. Mary Agnes O’Brien * * * share and share alike * * These same residuary legatees were to receive “ the income, interest or dividends ” for the duration of the trust.
In 1929 the executors sold a large portion of the securities owned by the estate realizing thereon a profit of $60,811.86, which was shown in the 1041 return, together with other income, as distributable to the seven beneficiaries who included their respective shares in their returns.
The proceeds from the sale of securities were immediately reinvested in other securities in quantities evenly divisible by the number of beneficiaries (7) in order that the assets be made more easily distributable at January 1, 1930. Title was taken in the name of the executors, who were also the trustees and the securities were retained by them until after January 1, 1930.
The Commissioner takes the position that the profit on corpus was taxable to the trust estate and that taxes paid thereon by the beneficiaries. should be refunded.

In addition to the foregoing stipulation, respondent introduced in evidence the return of the fiduciary on Form 1041 for the year

1929. The first item appearing under schedule C of the return is “ 316 rights First National Bank, date bought 1923-1925, sold 1929; cost $3,387.93; selling price $23,415.”

The only evidence which petitioner introduced in addition to the stipulation was the will of decedent, Richard O’Brien, setting up the trust involved here. The following portion of his will is pertinent to the issue which we now have before us to decide.

Second. To keep the remainder of my residuary estate invested on good security either in the securities which may come into their hands from my estate at my death or by a disposal of the same or a part thereof, without prejudice to my estate and without sacrifice as to values and a reinvestment thereof on good security with power to vary and transpose the said investment, or investments, thereof, from time to time, for other good and substantial investments preferably of the best bonds of the American Telephone and Telegraph Company, listed on the New York Stock Exchange, or stock of the Peoples-Savings and Dime Bank of Scranton, Pennsylvania, or the First National Bank of Scranton, Pennsylvania, and to pay over the meóme, interest or dividends arising from such investment or investments in equal semi-annual installments (having first deducted therefrom legal commissions and other costs and charges by way of taxes or otherwise) unto my daughter-in-law Mrs. Mary Agnes O’Brien, wife of my said son Bichard Marks O’Brien, as long as she remains the wife or the unmarried widow of my said son Richard Marks O’Brien, to be applied and expended by her for the reasonable support of herself and the support and education of my grandchildren until January 1st, 1930, at which time my said executors, or the survivors or survivor of them, shall divide the principal or corpus of my residuary estate * * *. [Emphasis supplied.]

The petitioner contends that the profits resulting from the foregoing transaction in stock rights were taxable to the beneficiaries of the trust and not to the trust itself. Petitioner concedes that the profits resulting from the sale of the stock itself were taxable to the fiduciary and that respondent is correct on that point.

Thus it wTill be seen from the foregoing recital of facts that the only issue we have here to decide is whether the profits on the sale of certain stock rights by the trust estate were currently distributable income to the beneficiaries of the estate or whether such profits were to be added to the corpus of the trust estate to be turned over to the remaindermen on the final distribution of the estate. If the profits from the sale of these stock rights were a part of the “ income, interest or dividends ” from the trust corpus, then they were, under the terms of the will, currently distributable to the beneficiaries and would be taxable to them whether actually distributed or not. If, however, such profits were not “ income, interest or dividends ” from the trust corpus within the meaning of the law, then they were not currently distributable to the beneficiaries, but became a part of the trust corpus to be distributed later to the remaindermen and were taxable to the fiduciary.

In support of its contention petitioner cites In Re Waterhouse’s Estate, 162 Atl. 295. We have examined that case and we do not think it supports petitioner’s contention when applied to the facts which are in evidence. In the Waterhouse case the Supreme Court of Pennsylvania holds that the presumption is that the proceeds from the sale of stock belong to the corpus of a trust and that likewise the same presumption holds as to the sale of stock rights because stock rights are a species of stock. On this point the Supreme Court of Pennsylvania said in the Waterhouse opinion:

Tlie presumption is that the proceeds from the sale of stock belong to the corpus of the trust, and the burden of proving that they do not rests on the person asserting a claim to them.17
(d) Proceeds arising from the sale of stock rights should he distributed in the same manner and have the same presumptions following as m the sale of stock. They are a species of stock. This is the main question here involved.
We have held18 that proceeds from the sale of stock rights “ * * * must be apportioned in the same manner as an extraordinary stock dividend would be; that is, there should be allotted to the corpus of the trust sufficent thereof to maintain unimpaired the intact value of the stock held by it, and the life tenant should receive the balance, because it represents corporate earnings which accumulated after he became entitled to all dividends. * * * ” But in the case cited18 we considered the sale of stock rights in reference to intact value and accumulated earnings only, but decided nothing as to stock rights sold at a profit due to the stock’s earning power, good will, or its intrinsic or speculative value in the market. The benefits resulting from the sale of stock rights under the latter circumstances should be apportioned in the same manner as-in the sale of stock. In all cases, in determining the share which the life tenant is to receive based on apportionment, his share is limited to such an amount as is attributable to income or can be fairly included therein.20 It does not include increases of capital assets not due to earnings, and, in the sale of stock rights, earnings do not include such items as speculative value, enhanced market value, or the stock’s earning power.
When the trustees sell stock rights, the presumption is that the proceeds derived therefrom represent capital assets of the estate, and the burden of shotting the contrary rests on those who assert a claim to the fund or part of it. [Emphasis supplied.]

Petitioner has offered, no evidence which would enable us to make any apportionment of the profits resulting from the sale of the stock rights between the beneficiaries of the income and the remain-dermen in accordance with the rule announced in the Waterhouse case even conceding that we have authority to make such an apportionment, the trustees apparently having made none. In the absence of such evidence, the profits from the sale of stock rights must be treated the same way as the profits resulting from the sale of the stock out of which the stock rights grew. Petitioner concedes that the profits from the sale of the stock itself are taxable to the fiduciary and not to the beneficiaries. If the profits from the sale of the stock rights are to be treated differently, the burden of proving why that should be so rests upon the petitioner, and this burden of proof, as we have already endeavored to point out, petitioner has not met. It is not contended by petitioner that any of the profits resulting from the sale of the stock rights were actually distributed to the beneficiaries during the taxable year, and it must be borne in mind that a trust in rendering its income for taxation can only deduct income which has been actually distributed or properly credited to the beneficiaries, or such income as is mandatorily distributable currently by the fiduciary to the beneficiaries. (See sec. 162, Revenue Act of 1928.) It will of course be admitted that under the terms of decedent’s will in the instant case all “ income, interest and dividends ” received in any particular taxable year were.mandatorily distributable to the beneficiaries in that taxable year and were therefore taxable to the beneficiaries and not to the fiduciary, but, for reasons already stated, that does not apply as to the profits resulting from the sale of stock rights because these profits were not “ income, interest and dividends ” from the property.

Our holding in this respect is in harmony with our decision in Anna M. Chambers et al., 29 B.T.A. 971, in which we discussed In re Waterhouse’s Estate, supra. It is true that in the Chambers case we had before us only the question of the treatment of the profits resulting from the sale of stock, whereas here we have the question of the treatment of the profits from the sale of stock rights, but, as already pointed out, the treatment is the same except under certain exceptional circumstances which,- so far as the evidence shows, do not exist in the instant case.

Decision will be entered for the respondent.


author: Black :

text:
    Alvan T. Fuller, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 73759.
    Promulgated September 14, 1934.

      John W. Townsend, Esq., for the petitioner.

      Elden McFarland, Esq., for the respondent.
   OPINION".

Black :

From the foregoing findings of fact it will be seen that in the taxable year petitioner sold 40,000 shares of his holdings of Packard Motor Car Co. stock. Fifteen thousand shares were of a purchase made after the splitup of September 3, 1929. As to the profits on this block of 13,000 shares, there is no controversy. Of the 40,000 shares sold, 25,000 were acquired in the splitup, and it is concerning the taxable profit on these 25,000 shares that the controversy arises. Petitioner has sought by a method of bookkeeping to identify the 25,000 shares of stock in question with some of the later higher priced purchases made prior to the splitup. By this method he allocates the 25,000 shares sold to the higher cost stock and thereby reduces the taxable gain. This of course would be permissible if the shares sold could be actually identified as being part of the higher priced purchases, but it seems plain that there can be no such identification. What petitioner has done is a mere mental process, and this does not amount to an identification in fact.

Petitioner’s counsel in his opening statement at the hearing stated that “ Neither the books of the petitioner nor those of the Packard Company give information sufficient to identify the newly acquired stock certificates with specific shares of previously held stock.” The accuracy of this statement seems to be quite well borne out by the evidence in the case.

Because there could be no actual identification of these 25,000 shares with the later bought higher cost shares, as petitioner endeavored to make, respondent contends that article 600 (3) of Regulations 74, familiarly known as the first in, and first out rule, applies. We see no reason for the application of the first in, first out rule in the present proceeding. What petitioner did was to sell 25,000 shares of a lot of 270,270 shares, which he acquired in a splitup September 3, 1929. The cost of these 270,270 shares was the aggregate cost of all the shares for which they were exchanged. The basis of each of the 25,000 shares sold is the aggregate cost of all the shares owned by petitioner at the time of the exchange, September 3, 1929, divided by 270,270 shares received by petitioner in exchange on that date. This is in accordance with the rule laid down by the Board in Christian W. Von Gunten, 28 B.T.A. 702, and Olive Hume Oliver, 30 B.T.A. 1381. The latter case seems particularly in point with the case at bar. In that case there had been two or three splitups of stock of the Standard Sanitary Co. shares and finally a statutory reorganization with the American Radiator Co. After reciting the facts connected with these several transactions, we stated, in discussing the first in, first out rule, as follows:

The first in, first out rule was adopted as a rule of convenience, in the absence of clear evidence as to the identity of lots sold and their cost. When all lots purchased and acquired by stock dividend distributions are exchanged for new shares of a different par value, the cost of all of the shares exchanged becomes the basis of the total shares received. The shares received are ope lot acquired at the same time, whether the number of shares acquired is represented by one or more certificates. Hence, there is no necessity for such a rule. The question here involved was suggested in Mickler Holding Co., 29 B.T.A. 300, but' was not decided.

Again, in the concluding part of the opinion, we said:

It would appear from these comments that it was the intention of the framers of the act that the cost of all the property exchanged should be considered to be the cost of all property received. This being the case, and the language of the statute carries this meaning, there is no occasion for treating any particular part of stock received on a nontaxable exchange as taking the place of any particular stock exchanged, and the cost of all the stock exchanged is to be the basis of all the stock received.
Although an exchange of stock for stock in the dame corporation made in 1923 would appear to have been a taxable transaction .under the Revenue Act of 1921, as amended, the respondent did not treat it as such, presumably under T.B.R. 39 referred to above. Congress approved this ruling by incorporating it in all subsequent acts. This being the case, the exchange was a nontaxable exchange, and under the provisions of section 202 (d) (1) the basis of the shares received on such an exchange is the cost of the shares exchanged. Both the exchange in 1923 and the exchange in 1928 of stock for stock in the same corporation call for tlie same rule with respect to the basis of the stock received. We hold, therefore, that under both the exchange in 1923 and the exchange in 1928 the cost of the stock exchanged should be averaged over the total shares received on the exchange.

In the instant case there is no dispute as to the number of shares sold, and none as to the price received for them. The only dispute is as to the cost basis to be used in determining the profit. That basis should be computed in accordance with the views hereinabove expressed and thé deficiency computed accordingly.

Decision will be entered under Rule 50.


author: Trammell:

text:
    Braden Steel Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 54902.
    Promulgated September 14, 1934.

      Maxwell M. Mahaney, Esq., for the petitioner.

      Owen W. Swecker, Esq., for the respondent.
   opinion. '

Trammell:

This proceeding is for the redetermination of a deficiency in income tax of $2,632.71 for 1928. The only matter in controversy is the action of the respondent in determining the tax liability of the petitioner on the basis of a separate return instead of on the basis of a consolidated return with two other companies.

The proceeding was submitted on an agreed statement of facts, pertinent portions of which are as follows:

The Braden Company, owning 100% of the stock of the petitioner, is an express Trust, organized in 1923 under the Laws of Oklahoma, with 20,000 shares of a par value of $100, authorized under its Declaration of Trust, and has been taxed at all times since its organization as a Corporation under the Federal Income Tax Acts. As of January 1, 1926 the Braden Company caused to be organized under the laws of Oklahoma the Braden Steel and Winch Company, and immediately thereafter transferred to such corporation all of the auto-winch, boiler and tank manufacturing equipment and business of the Braden Company, receiving in return all of the issued stock of the Braden Steel & Winch Company. As of January 1, 1928, the Braden Company caused to be organized under the laws of Oklahoma the Braden Steel Corporation, petitioner in this proceeding, and transferred to it all of its fabricated and structurál steel manufacturing equipment and activities, and received in exchange therefor the total issued stock of the petitioner. At all times since the organization of the Braden Steel & Winch Company in 1926, and the Braden Steel Corporation, the petitioner, in 1928, the Braden Company has owned 100% of their total outstanding stock.
The Braden Company and the Braden Steel & Winch Company have never requested, nor has the Commissioner granted permission to change the basis used in. filing their, income tas returns for the years 1926 and 1927.
For the years 1926 and 1927 the Braden Company and the Braden Steel & Winch Company filed separate returns showing the following:
1926 The Braden Company-$31, 812. 75 Loss
Braden Steel & Winch Company- $1, 064. 61 Net Income
1927 The Braden Company---$32, 809.18 Loss
Braden Steel & Winch Company- $8, 808. 24 Loss
For the year 1928 the Braden Company, as parent, filed a Consolidated Corporation Income Tax Return, Form 1120, including therein both of its subsidiaries, which subsidiaries did not file returns, nor pay any tax for 1928, the consolidated return indicating the following computation:
The Braden Company_$21, 65®. 71 Loss
Braden Steel & Winch Company_1_-_$43, 289.05 Loss
Braden Steel Corporation (petitioner)_$24,814.75 Net Income
Consoudated Total____1_$40,131.01 Loss ■
The Commissioner adjusted the foregoing amounts to read as follows:
The Braden Company_$19,472.25 Loss
Braden Steel & Winch Company_$43,289. 05 Loss
Braden Steel Corporation-■_$24, 939. 75 Net Income
The Commissioner determined that the petitioner, Braden Steel Corporation, although affiliated with the Braden Company and the Braden Steel & Winch Company, should be taxed separately, and issued a 60 Day Letter addressed to and finding a deficiency against the petitioner for the year 1928 in the amount of $2,632.77.

The petitioner contends that under the provisions of section 142 of the Revenue Act of 1928 the consolidated return filed for the group for 1928 was proper. It urges that, due to its coming into existence in 1928 and its becoming affiliated with the other two corporations, there was in that year a new group which as such was entitled to make an election respecting the basis upon which returns would be filed. It also urges that the fact that the other two corporations, although affiliated in 1927, had elected to file separate returns for that year is not controlling with respect to the basis for the three corporations for 1928. The respondent contends that, since the two corporations that were in existence and affiliated in-1926 and 1927 elected to file separate returns for those years and since permission was not granted to change to the other, basis fop 1928, his action is correct and should be sustained.

In Imperial Assurance Co., 19 B.T.A. 1068, .a. case arising under the 1921 Act, four domestic corporations were affiliated throughout 1922 by reason of the ownership or control of substantially all of their voting and outstanding capital stock by a foreign corporation. For 1922 the four domestic corporations filed separate income tax returns. In the early part of 1928 the foreign corporation acquired the ownership or control of substantially all of the voting and outstanding capital stock of two other domestic corporations and by reason thereof the six domestic corporations throughout the remainder of 1923 were affiliated. For the year 1923 the six affiliated domestic corporations filed a consolidated return. The permission of the respondent for filing a consolidated return not having been obtained, we held that the filing of the consolidated return for 1923 was not permissible and sustained the action of the respondent in determining'the tax liability of the corporations on the basis of separate returns.

Huntington Beach, Inc., 30 B.T.A. 731, arose under the Act of 1928. There two individuals owned equally all of the outstanding stock of the Donberry Corporation, which in turn owned all of the outstanding stock of two other corporations. For 1927 the three corporations filed separate income tax returns. In January 1928 the two individuals who owned in equal amounts the stock of the Don-berry Corporation became the owners in equal amounts of all the outstanding stock of a fourth corporation, and from that time until the end of 1928 the four corporations were affiliated. Without first having obtained the permission of the respondent to do so, the four corporations filed a consolidated return for 1928. The respondent determined their tax liability for that year on the basis of separate returns instead of on the basis of a consolidated return. It was there contended that the four corporations were entitled to file a consolidated return for 1928, regardless of their not having obtained permission of the Commissioner to do so. We considered the question at length in the light of certain court and Board decisions which had been rendered since our decision in Imperial Assurance Co., supra, and among which was Stonega Coke & Coat Co. v. Commissioner, 57 Fed. (2d) 1030, a case relied on by the petitioner in the instant case. We concluded that the four corporations were not entitled to file a consolidated return for 1928 and sustained the respondent in determining their tax liability on the basis of separate returns.

In Smith Paper Co., 31 B.T.A. 28, a case arising under the Acts of 1926 and 1928 we followed our decision in Huntington Beach, Inc., supra, and held that, where the same parent corporation in an affiliation continued throughout 1926, 1927, and 1928, no new right of election of basis for income tax returns resulted to the affiliation in 1927 or in 1928 from the addition thereto of one corporation in the former and two in the latter year.

We think our decisions in the foregoing cases are determinative of the question here. Accordingly, we hold that the respondent did not err in determining the tax liability of the petitioner on the basis of a separate return.

Judgment will be entered for the respondent.


author: Leech :

text:
    Paul Pryibil, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 58952.
    Promulgated September 14, 1934.

      Daniel B. Priest, Esq., for the petitioner.

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

Leech :

This proceeding seeks the redetermination of a deficiency of $11,321.18 for the calendar year 1928. The total deficiency is not in controversy. The only issue is whether respondent erred in disallowing a deduction of $91,027.97 claimed as a bad debt.

Petitioner is an individual having his office in New York City, and is engaged in the business of a stock broker. Prior to 1929, he was engaged chiefly in the real estate business.

In 1925 petitioner went to Florida and organized- a corporation under the laws of that state, known as Pryibil & Co., to engage in the real estate business. He paid $10,000 cash for all of the corporation’s capital stock, consisting of 100 shares, and became its president and treasurer. In or about June and July 1925, the corporation acquired four parcels of real estate and on or about September 25, 1925, it entered into a contract for the purchase of another parcel, but that contract was not consummated. Petitioner advanced the funds necessary for such purchases and, also, such funds as were necessary for interest on mortgages and taxes. The corporation gave petitioner a blanket mortgage in the amount of $90,000, subject to the prior mortgages on the several properties, as security for his advances, which totaled $145,468.29.

The only books kept by the corporation were its check books on two Florida banks. In such books there were entered all deposits by petitioner and all withdrawals for the real estate transactions, and also withdrawals for the personal use of petitioner, including checks for cash, hotel, laundry, maid, apartment rent, groceries, entertainment, expenses of various clubs, clothing, stock margin accounts, and other miscellaneous items. Petitioner’s withdrawals for his personal use amounted to $62,058.02. The last entries in the two check hooks were made in March 1926.

A portion of the funds advanced to the corporation by petitioner was borrowed by the latter from his mother. As security for such loans, he assigned to her the 100 shares of stock of Pryibil & Co. and the above mentioned $90,000 blanket mortgage. Although the record is not clear, it appears that in 1927 petitioner’s mother offered the $90,000 mortgage for sale at public auction in New York City, and bid it in herself for $1,000.

At some time during 1927, one parcel of real estate was sold by the corporation and two others were deeded back to the parties from whom they had been purchased. On December 31, 1927, the only asset which the corporation had was lot 9, Barton Avenue, Kendleton Tract, Palm Beach, the purchase price of which was $40,000 in or about June 1925, including a mortgage of approximately $28,000 assumed by the corporation. On the same date, December 31, 1927, the corporation had outstanding $10,000 par value capital stock and is alleged by petitioner to have been indebted to him in the amount of $83,410.27 on account of his advances. There is no evidence of the market value of the corporation’s equity in lot 9, December 31,1927.

At the end of the year 1926, petitioner and two other men were developing plans to build a cooperative apartment building on lot 9, and certain adjoining property. Their prospectus, published about February 1927, set forth the plan in detail and under the heading “ Payment Plan ” stated in part: If the construction does not begin on or before July 1, 1927, the trustee will return to the purchaser the cash payment and the notes and the purchaser will be free of all obligation.” The venture never materialized and after an unsuccessful effort to sell lot 9, Pryibil & Co., in March 1928, deeded it back to the party from whom it was purchased. In July 1928, the corporation was dissolved. Petitioner never recovered any portion of the $10,000 invested in the stock of Pryibil & Co., nor the $83,410.27 indebtedness of the corporation to him.

On his return for 1928, petitioner claimed a deduction of $91,-027.97 as a bad debt which the respondent disallowed. Petitioner now claims a deduction of $10,000 as a loss on Pryibil & Co. stock, and $83,410.27 as a bad debt for the year 1928. Respondent determined that the stock and the debt became worthless prior to December 31, 1927.

With reference to the claimed stock loss, section 23 (e) of the Revenue Act of 1928 provides for a deduction of “ losses sustained during the taxable year.” Petitioner’s loss on the Pryibil & Co. stock was sustained in the year in which such stock became worthless, Forbes v. Commissioner, 62 Fed. (2d) 571, and petitioner is entitled to the deduction only in the year in which the loss was actually sustained. Upon this record we are unable to determine as a fact, when the stock actually became worthless, but our conclusion is that apparently it became worthless prior to 1928. In William E. Steinback, 30 B.T.A. 1252, we held that where respondent’s determination rests upon a finding of fact that the taxpayer’s stock became worthless in a year other than the taxable year for' which a loss deduction was sought, and the taxpayer failed to establish that his stock did not become worthless in such other year, the respondent’s determination must be approved. In the instant proceeding, we sustain the respondent’s disallowance of the claimed loss deduction of $10,000.

With reference to the claimed bad debt deduction on account of advances made by petitioner to Pryibil & Co., there is no question, upon this record, but that the debt was worthless in 1928 when the corporation was dissolved. However, before a claimed deduction may be allowed, the taxpayer seeking it must show that it comes within the provisions of the applicable revenue act. Cf. New Colonial Ice Co. v. Commissioner, 292 U.S. 435. Section 23 (j) of the Revenue Act of 1928 provides for a deduction of “ Debts ascertained to be worthless and charged off within the taxable year * * Peti-

tioner does not have an election as to the year in which he may take a deduction for a worthless debt, for such deduction may be allowed only in the year in which two things occur, (1) the ascertainment of worthlessness and (2) the charge-off. D. P. Harris Hardware & Mfg. Co., 24 B.T.A. 752; affd., 71 Fed. (2d) 1004; Avery v. Commissioner, 22 Fed. (2d) 6. If a taxpayer keeps no books and is therefore unable to make a formal charge-off, he is entitled to the deduction if claimed on his return for such year. Frank A. Spencer, 21 B.T.A. 859. Here, the record does not disclose whether petitioner kept a set of books or not, and there is no showing of a charge-off for the year 1928 except the deduction claimed on his return for that year. In cases where there has been an actual charge-off in the taxable year, but a failure to prove the ascertainment of worthlessness in the same year, the claimed bad debt deduction has been disallowed. Cf. Frank B. Essex, 21 B.T.A. 270; Avery v. Commissioner, supra. Here, petitioner has given considerable testimony concerning the creation of the debts and the financial condition of the corporation, which leads us to the conclusion that apparently the debts were actually as worthless prior to 1928 as they were upon the dissolution of the corporation. The record is silent as to when petitioner actually ascertained the debt to be worthless. Upon this state of the record, we can not find as a fact that petitioner, for the first time, ascertained the debts to be worthless in 1928. Cf. Ida A. Van Dyke, 23 B.T.A. 946; affd., 63 Fed. (2d) 1020.

The foregoing discussion of this issue has been upon the premise that the corporation was in fact indebted to petitioner in the amount of $83,400.27 in 1927 and 1928. However, under the present record, it is impossible for us to determine definitely whether this was the fact, as petitioner’s testimony is in many respects contradictory. It is not claimed that petitioner advanced more than $145,468.29 to the corporation, and it is admitted that he recouped this advance to the extent of $62,058.02 by personal withdrawals. As security for his advances, petitioner received a $90,000 mortgage on the corporation’s real estate, which mortgage he assigned to his mother as collateral security for certain indebtedness due from him to her. It is indicated that petitioner’s mother in 1927 foreclosed on this security and bid it in herself for a nominal amount.

On this state of facts, it is readily seen that after the foreclosure, petitioner’s mother became the corporation’s creditor instead of petitioner, and if such was the fact, petitioner was not a creditor of the corporation at the close of the year 1927, for the amount of the mortgage exceeded the balance due petitioner at the time his mother became the owner of the mortgage debt. We sustain respondent’s disallowance of the claimed bad debt deduction.

Decision will ~be entered for the respondent.


author: Adams :

text:
    Fashion Center Building Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Jacob Steinberg, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 63825, 71715.
    Promulgated September 14, 1934.

      Oscar Moss, C.P.A., for the petitioners.

      T. F. Callahan, Esq., for the respondent.
   OPINION.

Adams :

These proceedings involve the income tax liability of the Fashion Center Building Co., a California corporation, for the calendar year 1928, and the liability of Jacob Steinberg, an individual, as transferee. The tax proposed by respondent is $11,565, plus penalty thereon of $2,891.25.

The facts are stipulated, and the stipulation is included herein by reference as our findings of fact. The petitioner, Jacob Stein-berg, concedes that, in the event we find Fashion Center Building Co. liable for the tax, he is liable as transferee.

The facts are summarized as follows:

During the year 1923 Jacob Steinberg, an individual, acquired a vacant lot at the cost of $240,000, $60,000 of which was paid in cash, the balance represented by notes secured by a lien on the property conveyed to him. Prior to the year 1925 Steinberg paid $5,000 on these notes. During the year 1925 he received $11,815 net for an easement. During the year 1927 Steinberg transferred the property, subject to encumbrances of $175,000, to the Fashion Center Building Co., the petitioner here, and received therefor 2,249 shares of the capital stock of the company, the company assuming the encumbrances of $175,000 against the property.

The Fashion Center Building Co. was organized in 1927, under the laws of the State of California, with an authorized capital stock of $250,000, divided into 2,500 shares of a par value of $100 each. Two hundred and fifty-one shares of its capital stock were sold at par for cash and 2,249 shares were issued to Jacob Steinberg in the manner above set out.

Immediately after the transfer of the vacant lot to the Fashion Center Building Co., Jacob Steinberg owned more than 80 percent of the outstanding capital stock of the corporation.

During the year 1928 the Fashion Center Building Co. sold the vacant lot for a total consideration of $375,000, payable by immediate liquidation by the purchaser of the mortgages on the property in the amount of $175,000, the remainder, $200,000, being evidenced by an installment note payable over a period of five years from February 8, 1928. During the year 1928, before any payments were received thereon, the Fashion Center Building Co. distributed the installment note of $200,000 to Jacob Steinberg, and was dissolved by order of the Superior Court of the State of California.

The Fashion Center Building Co. did not file a Federal income tax return for the year 1928, and the transaction regarding the transfers of the property was covered by individual income tax returns.

Under these facts petitioners present two issues. Issue (1), as stated in petitioners’ brief, is: “ The Commissioner erred in determining that the Fashion Center Building Company realized any taxable gain from the disposition of an installment obligation during the calendar year 1928.” On this issue they relied upon three points, as follows:

(a) The sale of the property by Jacob Steinberg to the Fashion Center Building Company was a transaction wherein, under the provisions of Sec. 203(d) (1) of the Revenue Act of 1926, gain was recognized to Jacob Steinberg in an amount not to exceed $175,000.
(b) The basis for determining the gain or loss from the sale of the property acquired by the Fashion Center Building Company from Jacob Steinberg was, under the provisions of Sec. 113(a) (8) of the Revenue Act of 1928, the adjusted cost to Jacob Steinberg, increased in the amount of gain recognized to Jacob Steinberg upon the sale of the property to the Fashion Center Building Company.
(e) The Fashion Center Building Company did not derive taxable gain upon the disposition of an installment obligation during the year 1928, under See. 41(d) of the Revenue Act of 1928, for the reason, that the fair market value of the obligation transferred did not exceed the basis of said installment obligation in the hands of the Fashion Center Building Company.

Petitioners contend under (a) above, that the sale of the lot by Jacob Steinberg to the Fashion Center Building Co. was a transaction wherein gain was recognized to Jacob Steinberg in an amount not to exceed $175,000; that the Fashion Center Building Co. purchased the property at a price of $399,900, being $175,000 indebtedness assumed, plus $224,900, value of capital stock issued; that the cost of the adjusted basis of the property to Jacob Steinberg was $228,125; that the gain to Steinberg upon the sale was, therefore, $171,775.

The pertinent provisions of the Revenue Act of 1926 are as follows:

Seo. 203. (a) Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 202, shall be recognized, except as hereinafter provided in this section.
* * * * * * *
(b) (4) No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.

Petitioners contend that although there would have been no gain or loss under the above quoted provisions of the statute to Jacob Steinberg, yet section 203 (b) (4), as quoted above, modified by section 203 (d) is as follows: ■

(d)(1) If an exchange would be within the provisions of paragraph (1), (2), or (4) of subdivision (b) if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.

Petitioners say that this section applies by reason of the fact that the Fashion Center Building Co. assumed the indebtedness on the property conveyed to it, amounting to $175,000, and that this was other property under the terms of section 203 (d) (1) quoted above. With this contention of petitioners we cannot agree.

The liabilities assumed by the corporate vendee are not treated as other property ” received as referred to in the above quoted section; Ethel Gary, 18 B.T.A. 1204; Paradox Land & Transport Co., 23 B.T.A. 1229; Arthur H. Earle v. Commissioner, 38 Fed. (2d) 965.

In American Compress & Warehouse Co. v. Bender, 70 Fed. (2d) 655, the court said:

To attribute to the exchange now in question of property solely for corporate stock the effect of causing gain or loss to a party to that exchange, or of justifying the adoption of a new basis for computing depletion or depreciation of the transferred property, would involve an obvious disregard of substance and reality, as immediately after the exchange was effected, the beneficial interests of the transferors in the transferred property remained in existence and unimpaired, being substantially the same as they wore before the exchange occurred, no third person then having acquired any beneficial interest in property which was a subject of the transfer. It is apparent that property owners do not gain or lose by transferring their properties solely in exchange for all the capital stock of a corporation brought into existence to take over that property where such stock is apportioned between the transferors in accordance with their respective beneficial interests in the transferred property.

We conclude that the sale of the property by Jacob Steinberg to the Fashion Center Building Co. was a transaction in which no gain was recognized to Steinberg. It follows that the basis to Fashion Center Building Co. was the cost to Steinberg.

Petitioners’ contention under (c) also falls by reason of our holding above.

Petitioners’ second contention, as stated in the brief, is as follows: “ The Commissioner erred in determining any penalty for failure o,f the Fashion Center Building Co. to file a return for the calendar year 1928 within the time prescribed by law.”

Petitioner has presented us no reasonable excuse for having failed to file the return as required by law. The evidence discloses that petitioner corporation was in existence during a part of the year 1928. Its sole assets were sold on February 8, 1928. There was a distribution in complete liquidation and legal dissolution on April 6, 1928. The Revenue Act of 1928 required the filing of a corporate Federal income tax return by the Fashion Center Building Co. None was filed by it. The law and regulations.make it mandatory upon a corporation to file Federal income tax returns, regardless of the amount of its net income, and in case of liquidation or dissolution to furnish certain additional information. The petitioner did none of these things. Twenty-five percent penalty has been properly asserted by the Commissioner.

Decision will be entered for the respondent.