author: Arundell: Leech,

text:
    August Horrmann, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 77141, 77142, 77143, 77144, 77145, 77200.
    Promulgated October 21, 1936.

      Edgar J. Goodrich, Esq., and Eugene Untermyer, Esq., for the petitioners in Docket Nos. 77141-77145.

      Theodore B. Benson, Esq., for the petitioner in Docket No. 77200.

      Hartford Allen, Esq., and Walter W. Kerr, Esq., for the respondent.

       On motion of counsel for petitioners proceedings of the following petitioners were consolidated with the above entitled case: Paula Uhl; Prances Horrmann; Ellen Horrmann; William C. Horrmann, Jr.; and Minnie Badenhausen.

   OPINION.

Arundell:

The respondent has treated the $240,000 cash distribution by the brewing company in 1930 as a distribution out of the corporate earnings or profits accumulated after February 28, 1913, hence, taxable as a dividend under section 115 of the Revenue Act of 1928. The petitioners claim that the post-1913 earnings were exhausted before the 1930 distribution. Consequently, that distribution was from earnings prior to March 1, 1913, and was not taxable.

Between February 28, 1913, and the time of the increase in capitalization in 1922 the company accumulated earnings in the amount of $510,577.67. This sum, the petitioners say, was exhausted by the issuance of the $400,000 preferred stock in 1922, plus subsequent losses. In 1927 when the preferred stock was redeemed, the accumulated post-1913 earnings were $373,931.03. This sum, it is contended, was exhausted by the redemption of the preferred stock in 1927 for $400,000. If either of these propositions be sound, there was no post-1913 accumulation of earnings available for dividends in 1930 and the distribution in that year is tax-free. We are of the opinion that the first proposition can not be sustained and that the second one is right only in part.

Much of the argument here is addressed to the matter of the nature of dividends paid in stock and their effect on corporate earnings and surplus. A dividend in cash, of course, operates to diminish earnings and profits. A stock dividend of the type dealt with in Eisner v. Macomber, 252 U. S. 189, does not. Hugh R. Wilson, 3 B. T. A. 957; J. T. Hedrick, 24 B. T. A. 444; Edward D. Untermyer, 24 B. T. A. 906; J. W. McCulloch, 29 B. T. A. 67; H. Y. McCord, 31 B. T. A. 342; Walker v. Hopkins, 12 Fed. (2d) 262. The dividend in the Eisner v. Macomber case, supra, was in common stock stock of the same kind; here, it is in preferred stock on common stock, which was the only class outstanding. We held in Pearl B. Brown, Executrix, 26 B. T. A. 901; affd., 69 Fed. (2d) 602, that a dividend like the present one, namely, in preferred stock on common, where only common was outstanding, was a pure stock dividend “constitutionally free from tax”, following Eisner v. Macomber, supra. We said that its effect was “a mere proliferation of existing interests.” Further:

At the moment of change, each shareholder’s proportionate rights were absolutely and relatively the 'same, except that each in the same ratio had preferred as well as common shares, a difference without significance here. These are the essential characteristics of a stock dividend — those which have always given point to the cases in which the question has arisen. Gibbons v. Mahon, 136 U. S. 549; Towne v. Eisner, 245 U. S. 418; Eisner v. Macomber, 252 U. S. 189; La Belle Iron Works v. United States, 256 U. S. 377; see also Graves v. Graves, 120 Atl. 420; Kaufman v. Charlottesville Co., 23 S. E. 1003 ; United States v. Siegel, 52 Fed. (2d) 63.

To the same effect are Alfred A. Laun, 26 B. T. A. 764; Frances Elliott Clark, 28 B. T. A. 1225; aff'd., 77 Fed. (2d) 89; and H. C. Gowran, 32 B. T. A. 820. In the last cited proceeding we summarized the holding of the several cases as follows:

In all those cases, no preferred stock was outstanding when the preferred in question was distributed as a dividend on or in partial exchange for common stock. Thus, since (1) there was no severance of assets from the declarant corporations, and (2) there was no alteration of the preexisting proportionate interest of the stockholders, but “only a proliferation of preexisting interests” (Pearl B. Brown, Executrix, supra), the disputed dividend was held nontaxable.

We do not believe that the recent case of Koshland v. Helvering, 297 U. S. 702, requires a different conclusion. The facts there were different in that both common and preferred stock were outstanding when a dividend.on the preferred was paid in common stock. There is, as pointed out in the Koshland decision, a distinction between cases like the Macomber case and those where “the proportional interests of the stockholder after the distribution was essentially different from his former interest. * * * Where a stock dividend gives the stockholder an interest different from that which his former stock holdings represented, he receives income.” The quoted words state the theory upon which the Boar,d and the Circuit Court of Appeals proceeded in Tillotson Manufacturing Co., 27 B. T. A. 913; aff'd., 76 Fed. (2d) 189. In that case there were both common and preferred stock outstanding when the dividend on the preferred was paid in common stock.

But whether we are right or wrong in our interpretation of the Koshland case and whether or not the preferred stock dividend of 1922 was income, we are of the opinion that it was not taxable to the stockholders. Of course, if it was a stock dividend within the compass of Eisner v. Macomber, it was not income under the Sixteenth Amendment; if it was income as in the Koshland. case, it was nevertheless a stock'dividend which was specifically exempt from tax under section 201(d) of the Revenue Act of 1921.

This exemption has been of long standing as pointed out in the opinion in the Koshland case. All of the revenue acts from 1921 to 1934, inclusive, have specifically provided for the exemption and the Treasury regulations over an equally long period of time have broadly held stock dividends nontaxable.

The next question under this branch of the case is whether the preferred stock dividend effected a “distribution of earnings or profits” within the meaning of the statute. It is obvious that dividends in cash (Lynch v. Hornby, 247 U. S. 339) or in property of the corporation (Peabody v. Eisner, 247 U. S. 347) reduce the corporate assets and are in fact distributions. But the possible effect upon the corporate earnings of the several different kinds of stock dividends is not so clear and the matter has not been, as far as we know, squarely decided in any of the cases. It is our view that a stock dividend is a statutory “distribution of earnings or profits” only when it is of a kind that is taxable to the stockholder. Thu provisions of the statute relating to distribution are concerned with the effect on the stockholder of the distribution and not with- its effect on the corporation. The aim is to tax to the stockholder the income realized by him through the distribution of earnings or profits accumulated after March 1, 1913. This aim would be defeated if a nontaxable stock dividend were treated as diminishing the amount of earnings and profits available for subsequent distribution. Conversely, if a stock dividend were taxable and corporkte earnings were not thereby diminished, the imposition of the tax on a subsequent distribution in cash or property would result in a double tax. A correlation between taxability to the stockholder and the effect on corporate earnings or profits avoids these situations. It does no violence to the statute, but rather harmonizes its provisions; in fact, it accords with what we believe was the intent of the statute as clarified by subsequent enactments hereinafter discussed. It also accords with the construction that has been given to the somewhat analogous question of the effect of stock issued in connection with a reorganization. In Commissioner v. Sansome, 60 Fed. (2d) 931, the court, speaking of the Revenue Act of 1921, said that “Section 202 (c) (2) [recognition of gain or loss on an exchange] should be read as a gloss upon Section 201 [dividends].” The court held that an amount not recognized as gain under the exchange provisions should not be recognized as “changing accumulated profits into capital.” In the latter case of Harter v. Helvering, 79 Fed. (2d) 12, involving a reorganization, the same court held:

When the Philadelphia Paper Manufacturing Company and the Fibre Container Company merged, on June 30, 1923, no gain was “recognized” to the shareholders for 'it was a “reorganization” under Sec. 202 (c) (2) of the Revenue Act of 1921, and Sec. 203 (b) (2) of the Act of 1926. A consequence of this is that for the purposes of allocating dividends under Sec. 201 (b) of the Act of 1926, against earnings before and after March 1, 1913, the surplus is regarded as unchanged. [Italics ours.]

The Harter case arose under the Revenue Act of 1926, as did Murcheson’s Estate v. Commissioner (C. C. A., 5th Cir.); 76 Fed. (2d) 641, in which the same result was reached. To the same effect are United States v. Kaufman (C. C. A., 9th Cir.)5 62 Fed. (2d) 1045; George F. Baker, Jr., Executor, 28 B. T. A. 704; aff'd., 80 Fed. (2d) 813; Helen V. Crocker, 29 B. T. A. 773.

Any doubt as to the correctness of the holding in the above cases was removed in the Revenue Act of 1934 where by section 115 (h) it was provided that a distribution of stock or securities in a reorganization “shall not be considered a distribution of earnings or profits * * * for the purpose of determining the taxability of subsequent distributions * * The same rule is more broadly stated in the Revenue Act of 1936 (sec. 115 (h)) with the explanation by the Senate Finance Committee that the section makes no change in the rule as applied under existing law. This enactment and the explanation thereof confirm our view expressed above that the intent of the taxing law is to produce correlation between the taxability of dividends to the stockholder and the effect of dividends on corporate earnings or profits. As we have held above that the 1922 stock dividend was not taxable to the stockholders of the brewing company, it follows that that dividend did not operate to diminish earnings for the purpose of determining the taxability of subsequent distributions.

The alternative claim is that the redemption of the preferred stock in 1927 for $400,000 was “essentially equivalent to a taxable dividend” under section 201 (g) of the Revenue Act of 1926, and that no part of the funds used for redemption was properly .chargeable to capital account under section 201 (c). If the redemption was essentially equivalent to a taxable dividend it would more than exhaust the earnings or profits accumulated after March 1, 1913. We find no evidence here to establish that the redemption was essentially equivalent to a taxable dividend. In the recent case of Commissioner v. Rockwood, 82 Fed. (2d) 359, it is pointed out that normally the redemption of stock is a return of capital and that a normal situation should be held to exist “unless there is a series of acts, which bring to a court or administrative officer the conclusion that the taxpayer has intentionally planned such series of independent acts with the purpose, through such continuity, of bringing about evasion of the law.” See Pearl B. Brown, supra, in which it was said:

* * * The statute does not provide that every cash redemption of shares shall be treated per se as a dividend, but only those which because of some circumstance of time and manner are in fact the essential equivalent of a dividend. ⅜ * *

See also Henry B. Babson, 27 B. T. A. 859; aff'd., 70 Fed. (2d) 304; Louis Rorimer, 27 B. T. A. 871; Annie Watts Hill, 27 B. T. A. 73; aff'd., 66 Fed. (2d) 45. The petitioners here do not point out any circumstance of time or manner and we find none in the record which brings the case within the statute as interpreted by the above decisions. We accordingly hold that the redemption in 1927 was not essentially equivalent to a taxable dividend.

Holding as we do, that the petitioners have not established their claim that the 1927 redemption was essentially equivalent to the distribution of a taxable dividend, there is no occasion to consider respondent’s argument that petitioners are estopped to so claim.

Since we hold the $400,000 distribution in 1927 to be a distribution in partial liquidation, it becomes necessary under the statute to determine what part of the liquidation is “properly chargeable against capital account” within the meaning of section 201 (c), the remainder being chargeable against earnings and profits. As an accounting matter the whole would be chargeable against capital because as a matter of accounting the capital account would have been increased to cover the new stock when issued. However, we think the “capital account” referred to by the statute is not increased by the issuance of a nontaxable stock dividend, but comprises only the paid-in capital. Therefore, it would be improper to charge the whole redemption against capital account; such procedure here would wipe out the entire capital account, leaving no capital to represent the common stock still outstanding. The petitioner argues that the whole redemption is properly chargeable against surplus in that the issuance of the stock served only to earmark a part of the surplus. This seems to us equally improper. We are unwilling to disregard the interest which shares of stock represent in the assets of the corporation and to say that they serve only to earmark a portion of surplus. Also, we are unwilling to attempt to earmark shares of stock and say that the redemption of the original shares is entirely chargeable against capital account (to the extent of the amount originally paid in) while the redemption of dividend shares is chargeable in no part against capital. We think that a proportional part of the paid-in capital must be considered as standing behind each of the shares outstanding at any particular time, so that on redemption of any of them a certain part of the redemption is properly chargeable against capital account. Since the capital structure as distinguished from the statutory “capital account” was increased to $1,000,000 by the issuance of new stock of the par value of $600,000 in 1922, while the paid-in capital (the statutory capital account) remained at $400,000, we think that the 1927 redemption should be chargeable against capital account in the ratio of $400,000 to $1,000,000. The reduction of the common stock to a nominal par value before 1927 and the corresponding creation of paid-in surplus was a mere bookkeeping entry and did not alter the capital structure, which includes both capital stock and paid-in surplus accounts. Using the ratio indicated above, $160,000 of the 1927 redemption is chargeable against capital account and $240,000 is chargeable against post-1913 earnings. Applying this method of calculation, the taxable portion of the 1930 distribution will be found by subtracting from the post-1913 earnings the $240,000 of the 1927 redemption chargeable thereto and the losses sustained between the 1927 redemption and February 8, 1930.

Counsel for the petitioners cite Harter v. Helvering, supra, as authority on the point last discussed. We do not regard that case as decisive of the point at issue here. While in that case the court said that the redemption of stock “must be marshaled first against the earnings after February 28, 1913”, it does not appear that the question of allocating a part of the redemption price against capital was presented to or considered by the court. The issue, as stated by the court, was whether the distribution in redemption was out of earnings before or after March 1, 1913.

The final issue is whether the $85,960 received by the two trusts for the benefit of Frances Horrmann and William Horrmann, Jr., respectively, is taxable to the beneficiaries as income “which is to be distributed currently by the fiduciary to the beneficiaries” (sec. 162, Revenue Act of 1928). ' Whether this amount was currently distributable by the trusts depends on the directions of the will under which they were created, which provided that:

All stock dividends or extraordinary dividends declared by any corporation whose securities at any time form part of my estate are to be treated as capital.

The question is whether the cash distribution here was such an “extraordinary dividend.” The considerations controlling this determination are stated in the A. L. I. Restatement of Trusts, comments on section 226:

Whether a dividend is an ordinary or an extraordinary dividend depends upon all the circumstances of the case. Among the circumstances which may be of importance in determining- whether a dividend is an ordinary dividend are the following: (1) whether similar dividends have been declared with regularity in the past; (2) whether such dividends are regularly paid out of current earnings; (3) the frequency with which such dividends are declared; (4) the size of the dividend in relation to the market value of the shares at the time of the creation of the trust; (5) the designation, if any, placed upon it by the directors of the corporation; (6) the source of the earnings from which the distribution is made.

When the $240,000 was distributed in 1930 there had never been a comparable dividend in the 17 years of the company’s history of which we have evidence. There had been no dividend at all in six of the preceding eleven years, and no dividends in any of the other five years, had ever exceeded $28,000. In 1930 and in four out of the five preceding years, the company operated at a loss. The source of the 1930 distribution was entirely from earnings of the corporation prior to the creation of the trusts in 1927. We are of the opinion that the $240,000 dividend was an “extraordinary dividend”, and therefore not distributable under the will. The Surrogate's Court so held in approving the retention of the dividends by the trustees in the case of the Frances Horrmann trust. We hold the distributions to the two trusts are not taxable to the beneficiaries.

Reviewed by the Board.

Decision will he entered wider Rule 50.

Black, Sterni-iagen, Turnee, Disney, and HarROn concur only in the result.

Leech,

dissenting: I dissent from the result reached in the majority opinion because I think its conclusion on the first point is wrong on both its premises. Commissioner v. Tillotson Manufacturing Co., 76 Fed. (2d) 189, affirming 27 B. T. A. 913; H. C. Gowran, 32 B. T. A. 820; James H. Torrens, 31 B. T. A. 787.

Morris agrees with this dissent.

       SBC. 115. DISTRIBUTIONS BY CORPORATIONS.
      (a) Definition of dividend. — The term “dividend” when used in this title (except in section 203 (a) (4) and section 208 (c) (1), relating to insurance companies) means any distribution made by a corporation to its shareholders, whether in money or in other property, ,out of its earnings or profits accumulated after February 28, 1913.

       Sue. 201. (d) A stock dividend shall not be subject to tax

       Sec. 115. (la) Emci on Earnings and profits of Distributions of Stock. — The distribution (whether before January 1, 1936, or on or after such date) to a distributee by or on behalf of a corporation of its stock or securities or stock or securities in another corporation shall not be considered a distribution of earnings or profits of any corporation—
      (1) if no gain to such distributee from the receipt of such stock or securities was recognized by law, or
      (2) if the distribution was not subject to tax in the hands of such distributee because it did not constitute income to him within the meaning of the Sixteenth Amendment to the Constitution or because exempt to him under section 115(f) of the Revenue Act of 1934 or a corresponding provision of a prior Revenue Act. * * *

         The rule, under existing law, with respect to the effect on corporate earnings or profits of a distribution which, under the applicable tax law, is a nontaxable stock dividend or a distribution of stock or securities in connection with a reorganization or other exchange, on which gain is not recognized in full, is that such earnings or profits are not diminished by such distribution. In such cases, earnings or profits remain intact and hence available for distribution as dividends by the corporation making such distribution, or by another corporation to which the earnings or profits are transferred upon such reorganization or other exchange. This rule is stated only in part in section 115 (h) of the Revenue Act of 1934, and corresponding provisions of prior acts, but is the rule which is applied by the Treasury and supported by the Courts in Commissioner v. Sansome, 60 Fed. (2) 931; U. S. v. Kauffmann, 62 Fed. (2) 1045; Murcheson v. Comm., 76 Fed. (2) 641. While making no change in the rule as applied under existing law, the recommended amendment is desirable in the interest of greater clarity. [Rept. No. 2156, p. 19.]

       Snc. 201. (g) If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earning? of profits accumulated after Rebruary 28, 1913, shall be treated as a taxable dividend. In the case of the cancellation or redemption of stock not issued as a stock dividend this subdivision shall apply only if the cancellation or redemption is made after January 1, 1926.

       Sue. 201. (c) * * * in the case of amounts distributed in partial liquidation (other than a distribution within the provisions of subdivision (g) of section 203 of stock or securities in connection with a reorganization) the part of such distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or profits within the meaning of subdivision (b) of this section for the purpose of determining the taxability of subsequent distributions by the corporation. [Italics supplied.]


source: Caselaw Access Project

license: Public Domain

text:
    Edison Securities Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 52662.
    Promulgated October 21, 1936.

      James O. Wyrm, Esq., and C. J. McGuire, Esq., for the petitioner.

      James D. Read, Esq., and Hugh R. Dowling, Esq., for the respondent.
   OPINION.

The earlier opinion proceeded upon the view that the plan of statutory reorganization which was ultimately carried through first became definitive on' February 4, 1926, when the formal corporate resolution of the directors of Republic was adopted, there being inadequate evidence in the record as then made to establish that the plan was authoritatively adopted at an earlier date. The Circuit Court of Appeals, however, recognizing that the second transaction was so near in point of time and so similar in purpose to the third that there was ground for entertaining the belief that it too was a part of the plan of ultimate reorganization, remanded the proceeding for an ascertainment of the facts, in order that an accurate determination in this respect could be made. Thereupon the parties presented a detailed stipulation of facts showing the evidence to be found in the corporate books and records, and the petitioner supplemented this stipulation with the oral testimony of one of the men who participated in the series of conferences. From this evidence, it is unmistakable that the agreement to carry out the statutory reorganization which was ultimately consummated was reached on January 29, although not formally expressed in corporate resolution until February 4. The exchange of February 3 was not made, as the Commissioner contends, as an added step in the earlier negotiations of 1925, but was only made because on January 29 the authorized representatives of all parties had reached such an agreement as provided satisfactorily for the rights of the preferred shareholders represented by Eastman, Dillon & Co., together with other details which had theretofore not been provided for. Thus the transaction of February 3 stands in the same case as the later transactions which have heretofore been held to be part of a plan of statutory reorganization.

It results that the exchange on February 3 by petitioner of 5,753 shares of Republic common for 11,506 shares of Penn-Ohio common and $143,825 of Penn-Ohio bonds was a transaction pursuant to a plan of reorganization within the meaning of the statute, and is not to be treated as a nonreorganization exchange as held in the prior opinion of the Board.

In its opinion, the court required that the liquidation dividend of $7,500 in 1926 and the net loss of $51,950.73 in 1925 should be properly considered. These have been covered by a stipulation of the parties that the petitioner is entitled to no such net loss deduction and that the distribution of $7,500 is not to be included in petitioner’s 1926 income. In accordance with this stipulation and with' the holding of the Board upon the matter in issue,

Judgment will be entered vmder Ruis 50.


author: Black:

text:
    The Liquid Carbonic Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 50985, 61319, 72270.
    Promulgated October 22, 1936.

      Wm. N. Haddad, Esq., for the petitioner.
    <7. B. Marshall, Esq., for the respondent.
   OPINION.

Black:

Petitioner contends it is entitled to deduct from its gross income for the fiscal years ending September 30, 1928 and 1929, unamortized bond discount and expense in the amounts of $277,859.06 and $91,532.97, respectively, which amounts are allocable to the $2,848,000 and $978,000 par value of bonds converted into petitioner’s common capital stock during those respective years. This alleged right is denied by respondent.

On at least three occasions we have had this identical question before us and have held contrary to petitioner’s contention each time. See Chicago, Rock Island & Pacific Railway Co., 13 B. T. A. 988. 1035; aff'd., 47 Fed. (2d) 990; certiorari denied, 284 U. S. 618; 375 Park Avenue Corporation, 23 B. T. A. 969; Pierce Oil Corporation, 32 B. T. A. 403, 421. These holdings are also in accord with the respondent’s consistent treatment of the question over a long period of years. See I. T. 2347, C. B. VI-1, p. 86; G. C. M. 9674, C. B. X-2, p. 354; T. D. 4603, C. B. XIV-2, p. 58, 59.

The ground upon which these decided cases stand is that the conversion of bonds into capital stock of the obligor is purely a capital transaction; that is, a readjustment of the-obligor’s capital structure, which does not result in either a deductible loss or a taxable gain. The obligor does not pay out anything. It merely readjusts its capital. As we said in 375 Park Avenue Corporation, supra, “Instead of suffering the outlay of money in excess of the amount borrowed, it created a new distribution of its shares, thus avoiding its fixed financial obligation and devoting the borrowed money to the ordinary rfsks of its business.”

In its briefs petitioner contended that the cases of Chicago, Rock Island & Pacific Railway Co., supra, and 375 Parle Avenue Corporation, supra, were decided on premises and assumptions which are no longer tenable. In support of this contention petitioner has cited and discussed several cases wherein a corporation taxpayer has dealt in its own stock in one way or another and has been held to have had gain or loss by reason of the transaction. Not any of these cited cases involves the situation that is present here, and, in view of the decisions referred to above, it is believed that no useful purpose would be gained in discussing these several cases in this opinion.

We hold, therefore, that the respondent was correct in disallowing the two items of $277,859.06 and $91,532.97.

The second assignment of error is that respondent erred in not allowing as a deduction from petitioner’s gross income for 1929 “expenses of $33,310 incurred by petitioner in said year in redeeming $978,000 par value of its First Mortgage 6% Convertible Gold Bonds.”

In the stipulation of facts filed by the parties it was agreed that during the fiscal year 1929 petitioner paid Potter & Co., bankers, $33,310 “as a commission for underwriting 16,665 shares of its stock pursuant to the agreement” between petitioner and the bankers, which agreement is quoted in our findings of fact.

It is well settled that commissions paid for underwriting shares of a corporation’s capital stock are not allowable as deductions from gross income. See Alamo Coal Co., 31 B. T. A. 869, 875, and cases there cited; footnote 3 in Helvering v. Union Pacific Railroad Co., 293 U. S. 282; Surety Finance Co. v. Commissioner, 77 Fed. (2d) 221; and Baltimore & Ohio Railroad Co. v. Commissioner, 78 Fed. (2d) 460. While it is true that this underwriting fee was incurred in connection with the retirement of $978,000 of petitioner’s bonds by conversion into 16,665 shares of petitioner’s common stock, nevertheless it seems to us that the $33,310 remains an underwriting fee, incurred and paid in connection with the issuance of shares of petitioner’s common stock. We do not see where there is any warrant to treat the expenditure differently from the ordinary underwriting fee incurred and paid by a corporation in the sale or other disposition of its shares of caiptal stock. Petitioner’s contentions on this issue are denied.

Both parties have departed from their original positions on the bonus issue and are now in agreement as to the fiscal year 1930 that $163,700 is the amount deductible as additional compensation for that year. This is the amount that was stipulated as having been actually fixed and expended during that year.

The parties also stipulated that the amounts actually fixed and expended for the fiscal years 1928 and 1929 were $103,266.64 and $161,540.89, respectively. For the year 1928 the respondent has affirmatively alleged that petitioner’s income for that year should be increased by $79,768.12 representing the difference between $183,-034.76 and $103,266.64. For the year 1929 the respondent in his brief concedes that petitioner’s income for that year should be decreased by $45,000 representing the difference between $161,540.89 and $116,540.89. Petitioner contends that, because the amounts actually fixed and expended for the fiscal years 1928 and 1929 were paid’ partly in stock and partly in cash, the amount that is deductible for each year is measured by the fair market value of the stock at the time of payment, plus the amount of cash paid rather than the amount of the liability that was extinguished by the payment of the stock and cash. In other words, it is petitioner’s contention that, since the 2,000 shares of stock paid during the fiscal year 1928 had a fair market value of $106,250 on the date of payment, the amount allowable for that year is $106,250 plus the $2,000 in cash that was also paid during that year; and that, since the 2,000 shares of stock paid during the fiscal year 1929 had a fair market value of $214,000 on the date of payment, the amount allowable for the fiscal year 1929 is $214,000 plus the $14,500 in cash that was also paid during that year.

Petitioner relies principally upon our decision in Package Machinery Co., 28 B. T. A. 980. In that case we stated the situation and our conclusion as follows:

The respondent’s position, we think, is premised upon an. erroneous interpretation of the resolution authorizing the additional compensation. The resolution provided that 25 per cent of the profits, after certain specified deductions had been made, should be set aside to pay the officers, in certain proportions, additional compensation, payment to be made in petitioner’s common stock at par. Its effect was to create a liability on the pari of the petitioner to its officers, not for a specific sum in terms of dollars and cents, but for a number of shares of stock of an aggregate par value equal to the profits in whñch the officers were entitled to participate. In other words the amount set aside was not the petitioner’s absolute liability, but merely the measure of the number of shares to be issued. Thus the petitioner’s liability for additional compensation to officers for the taxable year involved was 931 shares of its common stock, plus fractional shares for which cash was paid. This liability must, of course, for the purposes of the tax, be translated into dollars and cents; and we have consistently held that the translation must be based upon the fair market value of the stock as of the date of issue. [Emphasis supplied.]

Respondent contends that the doctrine of this case is inapplicable here, and further suggests that, since it is now settled that a corporation may realize gain or loss upon dealings in its own stock, depending upon the real nature of the transaction involved, Allyne-Zerk Co., 29 B. T. A. 1194; affd., 83 Fed. (2d) 525, it would make no difference in the final result whether petitioner be allowed deductions for additional compensation paid its employees on the basis of the cost of the 4,000 shares in question, or on the basis of the fair market value of such shares on the dates of payment, for the reason that if petitioner were allowed to deduct the compensation on the latter basis, it would at the same time realize taxable income measured by the difference between the cost to it of the 4,000 shares and the fair market value of such shares on the date they were disposed of in payment of a liability equal to their fair market value, and that the taxable income thus resulting ivould exactly equal the increased deduction now claimed by petitioner. We think the issue we have here to decide may be decided without consideration of this argument and solely by reference to the facts that were stipulated.

It is true that for the fiscal years 1928 and 1929 the bonuses were paid partly in stock and partly in cash. But it is by no means clear, as petitioner contends, that petitioner’s directors were to pay the bonuses in stock, as the resolution provided in the Package Machinery Co. case. On the contrary, it wras stipulated by the parties that during each of the fiscal years in question “the directors by informal action fixed the amount to be distributed” and that the amounts “so fixed and actually expended for this purpose” were $103,266.64 for the fiscal year 1928 and $161,540.89 for the fiscal year 1929.’

Upon such a stipulation we can not find that the measure of petitioner’s bonus liability was shares rather than an amount fixed in dollars and cents. All that petitioner was obligated to pay as additional compensation for the years 1928 and 1929 were the amounts fixed by its board of directors of $103,266.64 and $161,540.89, respectively, and set up on its books as a liability, and that was all it actually expended for that purpose. We know of no authority in law for allowing petitioner a greater deduction for business expenses than that for which it was legally obligated to pay, namely, $264,-807.53, for the two years in question. Furthermore, as a matter of fact, petitioner was out of pocket only the amount of $264,807.53. It used $248,307.53 of the amount fixed as additional compensation to purchase 4,000 shares of its own stock which it distributed to its employees, together with the balance of $16,500 in cash. In this respect we think the instant case is distinguishable from Package Machinery Co., supra, and cases there cited, and requires a different treatment of the allowable deductions. In the Package Machinery Co. case there was no absolute monetary liability from the corporation to the officers and employees to distribute any definite amount of monetary bonus. The obligation to distribute was in certain shares of stock, which in that case figured 931 shares. So we understand the cases cited and relied upon in the Package Machinery Co. case to mean. In the instant case the amounts in the years which we have before us were definitely fixed in dollars and cents by petitioner’s board of directors and in one of the years, 1930, the amount fixed in dollars and cents was actually paid in cash, and in the other two years, to wit, 1928 and 1929, most of the amount fixed was expended by the corporation in the purchase of stock to be distributed to the employees. Wo fail to see where this latter method gives petitioner the right to a deduction greater than the amount which it had incurred on its books .for the payment of bonuses and which it actually expended for that purpose.

It is our opinion, and we so hold, that petitioner is entitled to deduct from its gross income for the fiscal years 1928 and 1929, as additional compensation incurred and paid to its officers and employees, the amounts of $103,266.64 and $161,540.89, respectively. As we have already stated, the parties are in agreement that the allowable deduction in this respect for the fiscal year 1930 is $163,700.

Reviewed by the Board.

Decisions will be entered under Bule 50.


author: Sternhagen : Smith,

text:
    Helen W. Heilbroner, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 71698.
    Promulgated October 22, 1936.

      Joseph R. Little, Esq., for the petitioner.

      James H. Yeatman, Esq., for the respondent.
   OPINION.

Sternhagen :

The Commissioner determined a deficiency of $450.75 in petitioner’s individual income tax for 1930. Income was increased because of an omission of $120 in dividends reported. This item is not contested. The petition assails the following determination:

2. Commissions for collecting income, $583.13, and business expenses, $1,200, for keeping records, have been disallowed as deduction from income, inasmuch as you are not engaged in business. The expenses in question are held to be personal.

By amended petition, the income included by the taxpayer on her return is sought to be reduced by $19,109 received under life insurance policies of her deceased husband. The facts as to this item are stipulated and need not be specially found. They are essentially the same

as those in Edith M. Kinnear, 20 B. T. A. 718; and, following that decision, the amount of $19,109 is held to have been properly included by the taxpayer in her gross income.

The evidence shows that petitioner was a widow who, upon her husband’s death, received a substantial estate, mostly in securities. She had no business experience. She placed some'of her securities with a trust company to collect the income, and paid the trust company $583.13 as its charge or commission for such service. Her brother had an individual office and a secretary or bookkeeper. Petitioner’s accounts and affairs were to some extent looked after by this secretary, and, by arrangement with her brother, petitioner paid $1,200 as her proper share of the secretary’s compensation and the office rent. This she deducted on her return, and the Commissioner disallowed the deduction.

Unless the deduction is within the fair intendment of the statute, Revenue Act of 1928, it may not be taken. New Colonial Ice Co. v. Helvering, 292 U. S. 435; Helvering v. Inter-Mountain Life Insurance Co., 294 U. S. 686. There is no deduction among those set forth in the statute which covers these expenditures. It would be an unwarranted distortion of language to say that they were “ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business” (sec. 23 (a)). Petitioner was not carrying on any trade or business. Even the “very comprehensive term” referred to in Flint v. Stone Tracy Co., 220 U. S. 107, does not reach her for, as shown by this evidence, there was nothing about which petitioner was employed and nothing that occupied her time, attention, or labor for livelihood or profit. She did not manage her estate or direct its management. She merely received income from investments, and this is not a trade or business. Gertrude D. Walker, 20 B. T. A. 937; affd., 63 Fed. (2d) 351; certiorari denied, 289 U. S. 746. In Marion Stone Burt Lansill, 17 B. T. A. 413, 425; aff'd., 58 Fed. (2d) 512, the Board said:

How can it be said that these petitioners were carrying on a trade or business? They were the passive recipients of royalties which inured to them by reason of their ancestor’s will and the court’s decree. They carried on no activity in which they were employed and there was nothing to “occupy their time, labor or attention for the purpose of livelihood or profit,” as the term “business” has been sometimes broadly defined. Bouvier’s Law Dictionary; Flint v. Stone Tracy Co., 220 U. S. 107. See also Charles L. Suhr, 4 B. T. A. 1198; Albert M. Briggs, 7 B. T. A. 409; Ignats Schwinn, 9 B. T. A. 1304; B. H. Kizer, 13 B. T. A. 395. It is not enough to say that by virtue of their contract with the attorneys this percentage was a “charge against the income when derived,” because, while such charges may be treated as deductible expenses if incident to a trade or business, as in La Monte v. Commissioner, 32 Fed. (2d) 220; American Cemetery Co. v. United States, 28 Fed. (2d) 918, the statutory language expressly restricts the charge to that of trade or business. This also distinguishes Kornhauser v. United States, 276 U. S. 145, in which the attorneys’ fees were incurred as an incident of litigation of an undisputed business.

Article 121 of Regulations 74 can not expand the statute, and it does not purport to. It deals only with business expenses, and enumerates some of them, including management expenses and commissions. Expenses and commissions outside of business are beyond the scope of the article, as they are of the statute. The Commissioner has made this determination, and defends it as a matter of law. Upon the law, it must be decided; and since there is nothing in the statute permitting the deduction, its disallowance must be upheld. It may be added that had Congress, instead of confining the deduction to business expenses, intended to broaden it as it is now suggested that the statute should be construed, it could plainly have described the deduction to include the expenses incident to the earning or receipt of income irrespective of trade or business.

Reviewed by the Board.

Judgment will be entered for the respondent.

Leech dissents.

Smith,

dissenting: I am of the opinion that the petitioner is entitled to deduct from gross income of 1930, $583.13 representing commissions paid for collecting income and the $1,200 paid as her proper share of the secretary’s compensation and office rent.

The whole theory of the income tax acts is that an individual shall be taxed only upon “gains, profits, and income” derived from various sources. See section II B of the Revenue Act of October 3, 1913, and section 22 (a) of the Revenue Act of 1928. Section 23 of the Revenue Act of 1928 provides, in part, as follows:

In computing net income there shall be allowed as deductions:
(a) Expenses.- — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * * *******
(Is) Depredation. — A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. * * *

These deductions in substantially this form have been allowed under all the income tax acts from October 3, 1918.

Section 24 of the Eevenue Act of 1928 provides in part as follows:

(a) General rule. — In computing net income no deduction shall in any case be allowed in respect of—
(1) Personal, living, or family expenses;
<2) Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate;
(3) Any amount expended in restoring property or in making good the exhaustion thereof for which an. allowance is or has been made; * * *

The Commissioner, by his regulations, has in general permitted, the deduction from gross income as necessary business expenses any amounts paid out in connection with the acquisition of the gains. In Treasury Decision 2090, December 14, 1914, it was held: “A commission paid to a real estate agent for collecting rents and management of property is a legitimate expense and constitutes an allowable deduction in computing net income.” This permission has always been allowed and has been carried into the regulations. The deduction has never been made to depend upon whether the recipient of the rent was a real estate dealer or had a real estate business. Ee-pairs upon the rented real estate have also always been allowed as an “ordinary and necessary expense paid * * * in carrying on * * * business.” See article 124 of Eegulations 14, promulgated under the provisions of the Eevenue Act of 1928. A reasonable allowance for depreciation upon the rented property has likewise been allowed as a deduction from the gross income, even though the owner was only an investor. See article 201 of Eegulations 74. Consonant with this interpretation the respondent ruled, in I. T. 2579, C. B. X-2, page 129: “If a safety deposit box is used primarily in connection with the safeguarding of income-producing securities the rent paid therefor would constitute a deductible business expense.”

It has also always been held that an estate or trust is entitled to deduct from gross income the commissions paid to the executor or to the trustee. The estate or trust has always been regarded as carrying on “business”, although the services performed consisted only of the collection of the income.

In Holmes Federal Taxes, Sixth Edition, p. 908, it is stated: “As a general rule, the expenses which may be deducted are those necessary for or incidental to the creation of the income which is taxed.”

Manifestly, in view of the Commissioner’s regulations, the question as to whether commissions paid for the collection of rents or other income has not hitherto been presented to the Board or to the courts. The Board has held, however, in many cases, that the cost of repairing rented property is an ordinary and necessary expense even where the facts indicated that the taxpayer was only an owner of the rented real estate and had no “business” in. connection with the real estate in the sense in which' that term is used in the majority opinion. See Salo Auerbach, 2 B. T. A. 67; Louise Kingsley, 11 B. T. A. 296. It is also pertinent to note that, in Harold Mortenson, 3 B. T. A. 300, we held that expense of premiums on an insurance policy taken out by a stockholder on a vessel, practically the sole asset of the corporation, in order to protect his investment, was an ordinary and necessary business expense and deductible from the gross income. In Alfred Le Blanc, 7 B. T. A. 256, we held that a stockholder of a corporation, who, to protect and conserve his own business interests, enters into an agreement with an employee of the corporation that such employee shall receive the dividends upon his shares of stock so long as the employee shall remain with the corporation, is entitled to deduct the amounts of the dividends paid to the employee as a business expense.

In Lillian M. Goldsmith, 7 B. T. A. 151, we held that an item of $1,040, personally paid by the taxpayer to one Louis Kottler to look after her interests in a corporation in which she owned a one-half interest during her temporary residence in a state other than the state in which the business was carried on, was a legal deduction from gross income as-a necessary business expense.

In Biscayne Trust Co., Executor, 18 B. T. A. 1015, we held that the petitioner’s decedent was entitled to deduct as ordinary and necessary expenses amounts paid for care and maintenance of property held as investment for future profits.

In article 121 of Regulations 74 the respondent treats as ordinary and necessary expenses:

* * * management expenses, commissions, labor, supplies, incidental repairs, operating expenses of automobiles used in the trade or business, traveling expenses while away from home solely in the pursuit of a trade or business (see article 122), advertising and other selling expenses, * * *

It appears to me that the petitioner was engaged in a trade or business within a fair interpretation of the law and the regulations and that the commissions paid to the trust company were clearly a business expense deductible from gross income.

The regulations of the Commissioner permitting the deduction of commissions of the nature of those paid by the petitioner have been in force for more than 20 years. Successive income tax acts have been passed by Congress permitting the deduction from gross income of “ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” It must be assumed that Congress was aware of this interpretation by the respondent and that it put its stamp of approval upon those regulations by enacting in successive income tax acts the above quoted provision without change.

In Kornhauser v. United States, 276 U. S. 145, the question was whether the taxpayer for the year 1918 was entitled to deduct from gross income as a business expense an attorney’s fee paid in securing to himself the benefits of a law partnership which had been dissolved apparently prior to 1918. The United States Court of Claims had denied the deduction as an ordinary and necessary expense of carrying on any trade or business. The Supreme Court held, however, that the amount was a legal deduction, upon the ground that it was paid in protection of income that had been previously earned. The facts do not indicate that Kornhauser was engaged in any “business” within the year 1918.

In the majority opinion it is stated: “Petitioner was not carrying on any trade or business.” I think that she was. I think that the management of her estate was “the carrying on of * * * business” within the intendment of the statute. The language of the statute does not require that the taxpayer must be engaged in a business. The language of section 23 (a) of the applicable statute is “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on * * ⅜ business.” The classification contained in the statute warrants the deduction from gross income of “business expenses.” Section 24 of the statute is specific that personal, living, or family expenses, and amounts paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate may not be deducted from gross income. The commissions paid by the petitioner in 1930 were clearly not of the nature of expenses specifically disallowed as deductions from gross income.

I think it is clear that the commissions paid by the petitioner constituted a necessary business expense. They were paid for services in connection with the collection of income upon her securities.

If the interpretation placed upon the statute in the prevailing opinion is the correct one, then the settled practice of the Commissioner from the inception of the income tax acts has been wrong. He should not have allowed mere investors in real estate to deduct from gross income commissions paid for the collection of rents, repairs made upon rented property, and depreciation in respect of the rented property, except in those cases where the lessor is to be regarded as giving such time and attention to the rental of the real estate as would constitute a “business.” The deduction would be allowed to large investors but not to small investors. I can not believe that such a construction was contemplated by Congress in permitting the deduction from gross income of “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on * * * business.”

It appears to me that there is no essential difference between the deduction of the $1,200 paid by the petitioner as her proper share of the secretary’s compensation and office rent and the $583.13 paid as commission to the trust company. In fact the respondent at the hearing of this proceeding (he filed no brief) made no such contention. In my opinion both amounts are legal deductions from gross income as “ordinary and necessary expenses paid * * * in carrying on * * * business.”

ARNOLD agrees with this dissent.

      Aet. 121. Business expenses. — Business expenses deductible from gross income include the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer’s trade or business, except the classes of items which are deductible under the provisions of articles 141-271. The cost of goods purchased for resale, with proper adjustment for opening and closing inventories, is deducted from gross sales in computing gross income. (See article 55.) Among the items included in business expenses are management expenses, commissions, labor, supplies, incidental repairs, operating expenses of automobiles used in the trade or business, traveling expenses while away from home solely in the pursuit of a trade or business (see article 122), advertising and other selling expenses, together with insurance premiums against fire, storm, theft, accident, or other similar losses in the case of a business, and rental for the use of business property. A taxpayer is entitled to deduct the necessary expenses paid in carrying on his business from his gross income from whatever sourse. As to items not deductible, see section 24 and articles 281-284.


author: Murdock:

text:
    H. B. Leary, Sr., Petitioner, v. Commissioner of Internal Revenue, Respondent. Myra L. Leary, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 76845, 76846.
    Promulgated October 22, 1936.

      Thomas M. WilMns, Esq., for the petitioners.

      R. P. Hertzog, Esq., for the respondent.

      Homer Hewlrichs, Esq., filed brief as amicus curiae.

   OPINION.

Murdock:

The Commissioner determined the following deficiencies in the petitioners’ income tax for 1931:

Two issues are submitted for decision by the Board — first, whether the exchange by the petitioners of stock of the General Baking Corporation of Maryland for stock of the General Baking Co. of New York was a nontaxable exchange or a taxable distribution in liquidation of the Maryland corporation, and, second, whether cash equal to 50 cents a share on the common stock of the New York Co., which they received from the New York company was taxable as an ordinary dividend or as a liquidating dividend. The Commissioner has held that each transaction was a liquidating dividend distributed by the Maryland corporation, taxable under section 115 (c) of the Revenue Act of 1928. The facts have been stipulated. A brief statement of them will suffice for present purposes.

The petitioners are individuals. They owned common and preferred stock of the General Baking Corporation at the beginning of 1931. The General Baking Corporation (hereafter referred to as the Maryland corporation) was a corporation organized in 1925 under the laws of Maryland to hold the common stock of the General Baking Co. (hereafter referred to as the New York company). The latter was organized in 1911 under the laws of New York to own and operate a large number of baking plants located in various places in the United States. The Maryland corporation held practically all of the common stock of the New York company in the early part of 1931. Those in charge of the two corporations decided to eliminate the Maryland corporation and have the common stock of the New York company held directly by the former stockholders of the Maryland corporation. Plans for the change were made, agreed to, and carried out. The Maryland corporation transferred substantially all of its assets, including its principal asset, the common stock of the New York company, to the New York company. The stockholders of the Maryland corporation, including these petitioners, surrendered their stock in the Maryland corporation and received in exchange stock of the New York company, bonds of the New York company, and a small amount of cash. The Maryland corporation was dissolved and the New York company continued to conduct its baking business, as formerly. These things were all done pursuant to the plan. After the former stockholders of the Maryland corporation had received the stock of the New York company they were in control of that corporation, i. e., they owned at least 80 per centum of the voting stock and there was no other class of stock of the New York company then outstanding.

The petitioners contend that they exchanged their stock in the Maryland corporation for stock and securities of the New York company and cash in pursuance of a plan of reorganization to which both corporations were parties and, therefore, their gains are taxable only to the extent of the cash received. Sec. 112 (b) (8) and (c) (1), Revenue Act of 1928. Their contention is clearly right if there was a reorganization to which both corporations were parties. The principal difference between the parties arises over the question of whether there was. a reorganization within the meaning of the statute.

A reorganization is defined in section 112 (i) (1) as follows:

(i) Definition of reorganization. — As used in this section and sections 113 and 115—
(1) The term “reorganization” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least á majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (C) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.

The petitioners argue that there was a reorganization within the meaning of (A), (B), and (D). Although there was no statutory merger or consolidation, the New York company did acquire substantially all of the properties of the Maryland corporation. It immediately reissued its own stock, but that seems to be relatively unimportant. The result of these transfers was not unlike a merger of the Maryland corporation into the New York company. The interest of the Maryland corporation stockholders in the business persisted with but slight diminution. Thus there was a reorganization within the meaning of (A). But if there is any doubt about the application of (A), then it seems clear that (B) applies. There was a transfer by the Maryland corporation of all or a part of its assets to the New York company and immediately after the transfer the stockholders of the transferor were in control of the New York company. Discussion of (D) is unnecessary. Cf. Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U. S. 462; Helvering v. Minnesota Tea Co., 296 U. S. 378; Helvering v. Watts, 296 U. S. 387; Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937; C. H. Mead Coal Co. v. Commissioner, 72 Fed. (2d) 22; Helvering v. Winston Brothers Co., 76 Fed. (2d) 381, affirming 29 B. T. A. 905.

The dividend of 50 cents a share was declared and paid by the New York company on its own stock to its own stockholders. That company was not liquidating. The dividend was not a liquidating dividend. The company had accumulated earnings sufficient to pay the dividend. The distribution was taxable as an ordinary dividend when received by these petitioners.

Reviewed by the Board.

Decision will he entered wider Rule 50.

Tuener dissents.


author: Leech:

text:
    E. P. Greenwood, Petitioner, v. Commissioner of Internal Revenue, Respondent. Edna M. Greenwood, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 81484, 81485.
    Promulgated October 23, 1936.

      Wright Matthew's, Esq., and A. M. Cameron, C. P. A., for the petitioners.

      B. M. Coon, Esq., for the respondent.
   OPINION.

Leech:

These proceedings, consolidated for hearing and decision, seek redetermination of deficiencies of $6,738.91 in income tax proposed against each of the petitioners for the calendar year 1932. Petitioners are husband and wife, and the income in question is from community property. Separate returns were filed for the taxable year. The issues in each case are identical.

The stipulation of most of the facts was supplemented by certain evidence, principally upon the question of fair market value, if any, of contracts received by petitioner, E. P. Greenwood, during the tax year, for the purchase of stock.

The facts, briefly stated, follow:

The petitioners, throughout the tax year, were husband and wife, and the income which gives rise to the pending controversy is derived from community property. The petitioners were on a cash basis.

The petitioner, E. P. Greenwood, is the president of the Great Southern Life Insurance Co. of Houston, Texas, and maintains his residence and place of business at Dallas, Texas.

In the tax year, 1932, he was the owner of more than 200,000 shares of a total of 300,000 issued shares of stock of the Great Southern Life Insurance Co. Additional stock in that company, owned by his family and close business associates, together with his stock, constituted 90 percent of the total issued stock of that company.

At the time of the transactions involved here, the stock of Great Southern Life Insurance Co. had a market value of about $50 per share. The par value of this stock was $10 per share, and that owned by the petitioner, E. P. Greenwood, had a cost to him of much less than its market value. At or about the beginning of 1932. this petitioner decided to sell from 5,000 to 25,000 shares of his stock, for the purpose of realizing a profit therefrom, and to secure a distribution of such stock in the territory in which the company did the larger part of its business.

This petitioner employed a stockbroker, E. J. Silvers, to dispose of such stock. Under that contract of employment, Silvers was to employ the salesmen. The stock was to be sold for $50 per share and Silvers was to receive a commission of $10 on each share of stock sold. All sales were to be made on one of two plans. One of these plans provided that 40 percent of the consideration should be paid in cash and the balance in equal payments, at the end of the first and second years, with interest at 6 percent. The other plan provided that 10 percent of the consideration should be paid in cash and the balance in 24 equal monthly installments, with interest at 6 percent.

These printed contracts, covering both these plans, identical, except as stated, describe the petitioner, E. P. Greenwood, as the seller, and obligate the buyer therein to purchase the specified number of shares at $50 per share. The contracts provided also that the ownership of the stock should not pass nor be transferred upon the books of the company until full payment therefor had been made. They contained the further provision that, pending such full payment, all dividends declared upon the stock should be retained by petitioner, E. P. Greenwood, and that all regular and special cash dividends should be applied by him, first, to interest and, second, to the principal of the amounts owing under the contract. All of the stock dividends declared were to be delivered to the purchaser, together with the purchased shares, upon the full performance of the contract.

Silvers employed salesmen who entered upon the sale of the stock. As many as 14 men were engaged at one time in that work. Silvers’ commission of $10 per share was paid out of the initial cash payment in each sale. The records covering the transactions with each purchaser were kept in the office of petitioner, E. P. Greenwood. He answered, personally, all correspondence from prospective purchasers, and attended to all complaints and adjustments on the purchase contracts.

During the year 1932 there were 288 sales made, totaling 43,062 shares of stock. Five hundred forty-nine of these shares were sold for cash and the balance were sold under either one or the other of the two forms of installment contracts. The sale of 237 shares was canceled after 1932.

Dividends were declared by the Great Southern Life Insurance Co. in a stipulated amount upon certain of the stock, under certain of the contracts. These dividends were received by that petitioner and credited to the accounts of the purchasers of the stock under those respective contracts, as payments of interest due or to become due in the future on those contracts.

The principal issue raised by the assignments of error is whether, in thus selling this stock, the petitioner was “a person who regularly sells or otherwise disposes of personal property on the installment plan.” Revenue Act of 1932, sec. 44 (a).

The petitioner was not engaged in the regular business of buying and selling stock. His regular business was that of an insurance company executive. He owned stock in that company, a part of which he desired to sell. In its sale, he adopted the installment basis. Numerous sales under that plan, consuming a comparatively considerable period of time, occurred in disposition of that stock. In those circumstances, were petitioners within the purview of section 44 (a), supra?

Petitioners cite Marshall Brothers Lumber Co., 13 B. T. A. 1111. In that case the petitioner was obviously in, the business of buying and selling building materials. The only inquiry was whether, upon that premise, the fact that its sales for cash were much more numerous than those on the installment plan contradicted the regularity of its use of the installment plan and thus defeated its right to the statutory installment computation of income. Here, however, the consistency in the use of the installment plan in the sales that were made is undoubted. The mechanics of the admitted transactions are not in issue. But, the question presented is merely whether the petitioners regularly sold or otherwise disposed of stock so as to entitle them to the benefits of the quoted statutory provision.

The sale of petitioner’s stock was in no way connected with his business as an executive. It would be completed upon the disposition of the stock to be sold. The actual sale of these shares of stock was accomplished by many transactions, but neither that fact, nor the length of time such transactions consumed, characterizes them as having been made by “a person who regularly sells or otherwise disposes of personal property on the installment plan” or any other plan. Such transactions were casual sales. A business which ⅛ limited to the disposition of certain specific property of an individual is not a business regularly carried on under section M (a), supra.

This identical question was considered by the Board in 50 East 75th Street Corporation, 29 B. T. A. 277. The petitioner there sold stock in an apartment house. Sales were limited to that one stock and were made on the installment basis. In denying the benefits of section 212 (d) of the Revenue Act of 1926, which included the same provision here involved, as limited to dealers in personal property, the Board said:

There is no evidence that petitioner ever engaged in any other project similar to the one described in the findings, and so the question must be decided entirely on the facts as they are shown in connection with the sale of stock of the one corporation. The statute limits the use of the installment basis to those persons who “regularly” sell “on the installment plan.” The statute does not define the term “regularly”, but the respondent’s regulations have consistently employed the phrase “dealers in personal property” as descriptive of the class to whom the installment provisions apply. We strongly doubt whether the acquisition and sale of one lot of personal property can properly constitute one a dealer in such property. The term rather applies to those who engage continuously in such an activity. * * *

In affirming the case on the pending issue, 50 East 75th Street Corporation v Commissioner, 78 Fed. (2d) 158, the Circuit Court of Appeals for the Second Circuit said:

We think the Commissioner was right in not regarding the taxpayer as “a person who regularly sells or otherwise disposes of personal property on the installment plan.” The first provision of section 212 (d) was perhaps intended primarily to relieve persons engaged in selling furniture or other chattels on the installment plan from paying a profit tax on the entire transaction at the outset, when, owing to the failure of the purchasers to meet all their payments, nothing like the expected profit might ever be realized. While we do not suggest that the provisions will only mitigate the sorrows of persons engaged in selling chattels on the installment plan, it seems clear that it was not intended to include the disposition of a single block of stock sold in order to close out one enterprise, but rather contemplated a business that was to con-tiuue for a substantial period of time and to involve numerous transactions. It certainly did not relate to a corporation marketing a single block of stock and then going out of business.

We conclude that the petitioner was not regularly carrying on a business of selling stock on the installment plan within the provision of section 44 (a) of the Revenue Act of 1932, supra, even though his sales may have been on the installment basis. Accordingly, the Commissioner was correct in computing the profit of petitioner on the installment basis only as to those sales for prices exceeding $1,000 each, as provided by section 44 (b) of that Revenue Act.

Petitioners contend, secondly, that even if such sales were casual and, therefore, within the provisions of section 44 (b), supra, the expenses paid in the tax year in connection with those sales of stock which fell within the provisions of section 44 (b), supra, permitting the return upon the installment basis of profit therefrom, should be allowed as deductions from gross income for the year in which paid.

This position is without merit. These expenses were the commissions paid the broker for securing the contracts of sale. They amounted to $10 per share and were paid by Greenwood. He was not required to return the income from these sales on the installment basis. The law merely gave him the option of so doing. If he elects to so return the income, he assumes the consequences of that method of computation unless his taxable income was not thus properly reflected — a situation that does not exist here. Chaples J. Derbes, 24 B. T. A. 276; aff'd., 69 Fed. (2d) 788; Johnson Realty Trust, 21 B. T. A. 1333. The installment method of computation requires that the total gain be computed and returned over the period of payment, in proportion to the cash payments actually received in the several years.

Under this plan, proper expenses of sale are deducted from the gross selling price in order to reach the correct amount of gain from the sale. To permit petitioners, after that computation, to deduct from gross income the commission paid, would be to allow a double deduction. On the other hand, a failure to reflect the amount of the commission in the computation of the net gain from the transaction, would result in a failure to compute the actual gain.

In his determination of the profit arising on petitioners’ stock sales, upon which the present deficiency is predicated, the respondent treated the contracts received for the purchase of such stock as of á fair market value equal to the face value.

Petitioners’ position here is that those contracts had no fair market value when received. We agree. The contracts were not obligations to pay for property purchased and delivered. They were only agreements to buy. They evidenced an obligation with petitioner Greenwood, personally, and his obligation thereunder could not be assigned without the agreement of the purchaser of the stock. Upon the un-contradicted testimony in the record, as well as the contracts themselves, we find that such contracts had no fair market value when received by petitioners. Their value was limited to the payments made thereon. Consequently, petitioners are entitled to recover their cost and proper expenses before being charged with taxable gain. Burnet v. Logan, 283 U. S. 404; J. Darsie Lloyd, 33 B. T. A. 903; C. W. Titus, Inc., 33 B. T. A. 928.

In determining the present deficiencies, respondent treated all the cash dividends mentioned in the findings of fact as interest received and, therefore, income of the petitioners for the calendar year. Petitioners now question this action.

At the time Greenwood received these disputed dividends, the unpaid principal accounts of each purchaser, plus interest then due thereon, exceeded such respective dividend payments. By reason of that fact, under the contract, these dividends were gross income to Greenwood when received by him. Corliss v. Bowers, 281 U. S. 376; Eisner v. Macomber, 252 U. S. 189.

However, were those dividends received by Greenwood as interest and therefore taxable in their entirety as such when received, under the statute (Bevenue Act of 1932, sec. 22 (a)), or were such dividends received by Greenwood as a payment on account of the principal due on the stock purchased and thus taxable on only so much as constituted income for the year of their receipt? The only evidence on this question in the record is the written contracts, by virtue of the provisions of which, alone, Greenwood retained these dividends. The natural construction of the provision of those contracts, having to do with these dividends, is that they should be applied first in payment of interest due in the tax year from the respective stock purchasers, and any balance against the respective principal accounts then unpaid. True, Greenwood, by his bookkeeping entries, may not have treated them as payments of principal. But, under the controlling contract and the facts as they existed upon the receipt of those dividends by Greenwood, they were received by him as interest payments only, in the amounts then due from the respective purchasers as interest. The balance of such dividends were received by him as payments on account of principal. The contradicting book entries made by Greenwood do not. change that fact. Doyle v. Mitchell Brothers Co., 247 U. S. 179.

Petitioners attack respondent’s disallowance of certain incidental expenses incurred by petitioner Greenwood in connection with the disputed sales of his stock.

The necessary premise of petitioners’ position is that they were deductible as ordinary and necessary expenses of carrying on a trade or business. Revenue Act of 1932, sec. 23 (a).

Since we have already held herein that the disputed sales of petitioner Greenwood’s stock were casual, it follows such sales did not constitute a trade or business within the cited statutory provision. Mente v. Eisner, 266 Fed. 161; Bedell v. Commissioner, 30 Fed. (2d) 622; Washburn v. Commissioner, 51 Fed. (2d) 949. Accordingly, petitioners are denied this deduction.

Judgment will be entered under Bule 50.

       SEC. 44. INSTALLMENT BASIS.
      (a) Dealers in Personal Property. — Under regulations prescribed by the Commissioner with the approval of the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may return a.s income therefrom in any taxable year that proportion of the installment payments actually received in that year which the gross profit realized or to be realized when payment is completed, bears to the total contract price.

       SEC. 44. INSTALLMENT BASIS.
      (b) Sales of Realty and Casual Sales of Personalty. — In the case (1) of a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year), for a price exceeding $1,000, or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed 40 per centum of the selling price, the income may, under regulations prescribed by the Commissioner with the approval of the Secretary, be returned on the basis and in the manner above prescribed in this section. As used in this section the term “initial payments” means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made.


author: Aenold :

text:
    Charles T. Fisher and Sarah W. Fisher, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 71371.
    Promulgated October 28, 1936.

      Benjamm E. Jafe, Esq., for the petitioners.

      W. Frank Gibbs, Esq., for the respondent.
   OPINION-.

Aenold :

The first issue in this case is whether the basis for computing gain or loss from the sale in 1930 of certain shares of General Motors Corporation common stock is the original cost to petitioners of the Fisher Body Corporation common stock which they exchanged therefor in 1926, or whether the basis is the fair market value of the General Motors stock at the time of the exchange, and this involves a determination of the question of whether the transaction by which General Motors acquired all the assets of the Fisher Body Corporation was a nontaxable reorganization. Petitioners were stockholders of the Fisher Body Corporation, and upon its dissolution in 1926 surrendered their stock therein and received in exchange shares of General Motors common stock, which they sold in 1930. Petitioners treated the transaction as a nontaxable reorganization, and reported the profit derived from sales of General Motors stock in the subsequent years, to and including the taxable year 1930, computed on the basis of the cost to them of their original Fisher stock.

Respondent accepted as correct the method of computing the profits as reported by petitioners in their returns, and the present deficiency does not result from any adjustments of such profits by respondent. However, in 1934 petitioners filed an amended pleading herein substantially to the effect that they had overstated the taxable gain realized from the sales of General Motors stock, for the alleged reason that the transaction between the General Motors Corporation and the Fisher Body Corporation in 1926 did not constitute a reorganiza-I tion, and that the proper basis of the shares of General Motors stock | received in exchange for the Fisher stock was the fair market value of lithe General Motors stock at the time of the exchange.

Respondent contends that the transaction in 1926 between the two corporations mentioned constituted a nontaxable reorganization, and that the petitioners computed upon the correct basis the profits derived from the subsequent sales of General Motors stock. Respondent further asserts that since petitioners reported no gain in their returns from the exchange of the Fisher stock for the General Motors stock in 1926, but at all times treated the transaction as a nontaxable reorganization until after limitations had barred adjustment of their tax liability for 1926, they are now estopped to change their position and assert otherwise, to the injury of the Government.

Petitioners take the position that the Fisher Body Corporation was first dissolved and afterwards its assets were transferred by the directors to the General Motors Corporation in exchange for shares of the latter stock, and that the exchange was pursuant to the dissolution of the Fisher Body Corporation, and was made by the directors as trustees for the stockholders. It is argued, therefore, that the transaction was not a reorganization, and that any gain derived in that connection was taxable, and hence petitioners are entitled to a new cost basis for the General Motors stock received in exchange for their Fisher stock.

We are not impressed by this argument. There is no evidence before us that the directors of the Fisher Body Corporation were acting as trustees for the stockholders rather than for the corporation. A corporation can act only through its officers or directors, and while the Fisher Body Corporation had been formally dissolved prior to the exchange of its assets for General Motors stock, it was continued in existence as a matter of law for the purpose of disposing of its assets, distributing the proceeds, paying debts, and otherwise winding up its affairs. Hence it must be assumed that the Fisher directors were acting for the corporation in transferring the assets to General Motors. Taylor Oil & Gas Co. v. Commissioner, 47 Fed. (2d) 108; certiorari denied, 283 U. S. 62; Northwest Utilities Securities Co. v. Commissioner, 67 Fed. (2d) 619; Hellebush v. Commissioner, 65 Fed. (2d) 902.

The record does not show that the Fisher assets were transferred by the corporation to its directors as trustees for the stockholders, but only that pursuant to dissolution the assets were transferred by the directors to General Motors for stock of the latter.

It is to be noted that the Fisher Body Corporation joined with the directors in effecting such transfer; that the corporation received the proceeds of the exchange, and through its agent, the stock transfer department of the General Motors Corporation, made distribution thereof to its stockholders. While it is true that the Fisher assets were transferred pursuant to the dissolution of the corporation, such transfer was nevertheless also pursuant to a definite plan of reorganization formally adopted by the directors of the Fisher Body Corporation. The plan of reorganization contemplated and required the dissolution of the transferor corporation, and the entire transaction was carried out step by step as provided for in the prearranged plan.

Section 203 (h) (1) of the Revenue Act of 1926 defines the term “reorganization” as meaning, among other things, “A merger or consolidation (including the acquisition by one corporation of * * * substantially all the properties of another corporation)

It is not contended here that there was a strict statutory merger or consolidation, but that the transaction partook “of the nature of a merger”, which is sufficient to constitute a reorganization within the purview of the above statute where in that connection one corporation acquires substantially all the properties of another corporation. Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U. S. 462. General Motors Corporation acquired all the properties of the Fisher Body Corporation in exchange for shares of its stock, merged the Fisher business with its own, and thereafter operated the two businesses as a single enterprise. Thus the transferor acquired a substantial interest in the transferee corporation. The Fisher stockholders then exchanged their stock in that corporation for General Motors stock, and so retained a substantial and continuing interest in the transferred assets. The transaction constituted a reorganization. Helvering v. Minnesota Tea Co., 296 U. S. 378; Helvering v. Winston Brothers Co., 76 Fed. (2d) 381; Milton Smith, 34 B. T. A. 702.

Petitioners having exchanged their stock in the Fisher Body Corporation, a party to the reorganization, solely for stock in General Motors Corporation, also a party to the reorganization, all pursuant to the plan of reorganization, it follows that no gain or loss resulting therefrom was recognizable for tax purposes. Sec. 203 (b) (2), Revenue Act of 1926. Petitioners, therefore, properly reported no ⅞ gain from the transaction in 1926. It likewise follows that the basis '¡for computing gain from the sales by petitioners of their General ¡i Motors stock in 1930 was “the same as in the case of the property ¡' exchanged”, that is, the cost of their Fisher stock. Sec. 113 (a) (6), ) Revenue Act of 1928. The contention of petitioners on this issue is ⅜ denied.

Having reached the foregoing conclusion, it becomes unnecessary to consider the question of estoppel raised by respondent.

The second issue involves the taxability to petitioner Charles T. Fisher of certain income received in 1930 by the trustees of the Charles T. Fisher Trust under the facts and circumstances set out hereinabove. The same question, arising under the same facts but relating to income received by the trustees in prior years, was decided by the Board adversely to petitioner in Charles T. Fisher, 28 B. T. A. 1164. We hold that this income was taxable to Charles T. Fisher.

Petitioners do not press this issue here, but state in their brief that the point is reserved on appeal to the Circuit Court of Appeals, if such an appeal should be taken. Respondent’s action on the second issue is approved.

The third issue involves the deduction to which petitioners are entitled on account of charitable contributions made during the taxable year. The parties have stipulated, and we have found, that petitioners made such contributions within the meaning of section 23 (n) of the Revenue Act of 1928 in the amount of $112,996.87. In computing the deficiency respondent allowed no deduction for charitable contributions for the reason that all of petitioners’ income was determined to be capital gain, which respondent held was not includable in computing such deductions. Subsequently, the Supreme Court, in Helvering v. Bliss, 293 U. S. 144, ruled that a taxpayer is entitled to include capital gain in net income in determining the base for computing the 15 percent deduction allowable for charitable contributions, and respondent now confesses error. Respondent’s action on this issue is reversed, and the deduction to which petitioners are entitled will be computed under the limiting provision of the statute last above referred to.

Reviewed by the Board.

Judgment will be entered under Rule 50.


author: SteRnhagen :

text:
    Montgomery B. Case, Petitioner, v. Commissioner of Internal Revenue, Respondent. Philip L. Gerhardt, Petitioner, v. Commissioner of Internal Revenue, Respondent. E. Morgan Barradale, Petitioner, v. Commissioner of Internal Revenue, Respondent. Billings Wilson, Petitioner, v. Commissioner of Internal Revenue, Respondent. John J. Mulcahy, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 75816, 77375, 77376, 77377, 80769.
    Promulgated October 28, 1936.

      Julius Henry Gohen, Esq., Austin J. Tobin, Esq., and Wilbur La Roe, Jr., Esq., for the petitioners.

      George D. Brabson, Esq., Francis H. Uriell, Esq., and John D. Kiley, Esq., for the respondent.
   OEINION.

SteRnhagen :

The question raised by this proceeding is whether the compensation received by an officer or employee of the Port Authority for services regularly rendered is subject to Federal income tax. The compensation was held constitutionally immune in Leon Moisseif, 21 B. T. A. 515, and Robert Carey, 31 B. T. A. 839. Modjeski, an engineer of the Port Authority, was held taxable as an independent contractor. Commissioner v. Modjeski, 75 Fed. (2d) 468; certiorari denied, 295 U. S. 764. Commissioner v. Ten Eyck, 76 Fed. (2d) 515, involved directly the Albany Port District, but the court expressly dealt with the Port Authority as of the same character. Commissioner v. Harlan, 80 Fed. (2d) 660, held immune the pay of an attorney of the Golden Gate Bridge & Highway District at San Francisco, Thus the question might be regarded as fairly well closed for this Board. But the Government says that for one reason or another each of those decisions lacks authoritative force to control the general question. It now presents these cases as complete both in facts and argument to serve as a definitive test. The evidence has been stipulated at length and also given in the testimony of Port Authority employees.

The Port Authority is organized for and operating in the traditionally sovereign function of protecting, improving, and developing the Port of Hew York; and all its activities are directed to and are incident to that end. The dual nature of our government requires that the state and Federal governments shall be adjusted to each other to produce the greatest power for each with the least friction. The problem is not one of logical or legal absolutes, but of the promotion of a smooth practical interrelation of the two in recognition of their several sovereign necessities. Neither may so exercise its powers as to encroach upon the necessary or traditional sovereign functions of the other; and, since this doctrine is firmly established, it is not to be supposed that either is attempting to do so. The revenue act and its broad definition of income may not be regarded as an attempt to tax the salary of the state executive although it may be literally within its terms. The Attorney General expressed this opinion in 1919, 31 Op. A. G. 441. The immunity of such salary from Federal tax is inherent in the sovereignty of the state. If it inures to the benefit of the individual, this is but collateral to the effect upon the state. To him, it is not a matter of independent personal right, but of perquisite of his office.

We are bound, when the Circuit Court of Appeals has held, in affirmance of our own earlier decisions, that the Port Authority and other organizations similarly engaged are performing a traditionally sovereign function, to apply the doctrine and hold the pay of its employees to be exempt from Federal tax. Commissioner v. Ten Eyck, supra; Leon Moisseiff, supra; Robert Carrey, supra; Commissioner v. Harlan, supra. That the Ten Eyck case is regarded by the court as a holding that port development is a traditionally sovereign function is fortified by its more recent opinion in Brush v. Commissioner, 85 Fed. (2d) 32.

The argument is pressed that the immunity is lost when the activity of the state is one involving interstate commerce or navigation or is carried on under an interstate compact requiring Congressional consent. The argument is not new. It was considered and rejected in Commissioner v. Harlan, supra, and there is enough in the opinion and briefs in the Ten Eyck case to show that the Federal power over interstate commerce and navigation were not overlooked. But to deal with the issue squarely, we are of opinion that the development of the port may not be interfered with by Federal tax even though the interstate and foreign commerce passing through the port and upon its highways, bridges, and tunnels is subject to Federal regulation, even though the navigable waters under its bridges and over its tunnels are under Federal control, and even though the underlying interstate compact required the consent of Congress. To this may be added that there is no reason to regard the revenue act as a means used by Congress to regulate interstate commerce, to control navigation, or as an implied condition of its consent to the interstate compact. Cf. United States v. Butler, 297 U. S. 1. Such a view, if accepted, might go so far, for example, as to subject the employees of a state highway department or public service commission to Federal tax under the present law. It would mean that in making an interstate compact the states would be surrendering the very sovereignty which the Constitution takes for granted and upon which the compact is founded — and this, not directly by an express condition in the resolution of consent, but by an implied relation between the general terms of the consent and the broad terms of the revenue act. Is it to be supposed that in the blanket consent to interstate compacts for crime prevention (TJ. S. C. A., title 18, § 420) lurks a power to tax the state police officers who are employed under the compact?

Relying upon Commissioner v. Powers, 68 Fed. (2d) 634, the argument is made that the Port Authority is engaged in proprietary functions for profit with the effect of withdrawing sources of revenue from the Federal taxing power*. This is said in respect of the rents from the Inland Terminal Building, more particularly the upper stories privately occupied; of the tolls from the bridges and tunnels; and of the destruction of private ferry competition. If these were independent profit-making ends in themselves, the argument would be more engaging. But these several operations, even though the revenues produced are substantial, are but incidental to the great and comprehensive sovereign project of improving the port and terminal facilities of the port district. Bush Terminal Co. v. City of New York, 152 N. T. Misc. 144. The Inland Terminal Building was not constructed to produce rent as a profit on investment, but to provide a more efficient terminal and thus expedite traffic and relieve highway congestion. The bridge and tunnel tolls and the reduction of traffic on the private ferries were incidental to the governmental project of providing highways to facilitate traffic and reduce port and harbor congestion in the common public interest. It has not heretofore been suggested that the maintenance of a free state highway was a proprietary function subject to Federal tax because it diminished or destroyed the traffic on an existing private toll road. State public school teachers are not regarded as taxable because a new public school may reduce the taxable profits of an existing private school. The essential question of the preservation of the state’s sovereign powers in the interplay of our dual government may not be lost sight of by a pursuit of each detail of the method of exercising it as if it stood alone with a different history and a different purpose. Burnet v. Coronado Oil & Gas Co., 285 U. S. 393; University v. People, 99 U. S. 309; G. C. M. 13745, XIII-2 C. B. 76. Cf. Trinidad v. Sagrada Orden de Predicadores, 263 U. S. 578. It may be doubted whether the Port Authority has any right to engage in business for the sole or primary purpose of making profit; but not until it does so will the effect upon its tax immunity require consideration.

We hold that the Port Authority is engaged in the performance of a sovereign function of each of the states of New York and New Jersey and that the compensation received by its employees is exempt from the Federal income tax. This is primarily because of the constitutional right of the state to be free from Federal interference in the exercise of its sovereign powers. We hold further that even if the Port Authority’s functions are not constitutionally immune from interference by Federal taxation, the power of the Federal Government to regulate commerce and control navigable waters has not been exercised by Congress through the imposition of tax in the general provisions of the revenue act, nor has such tax been provided for as an implied condition of consent to the interstate compact.

Reviewed by the Board.

Judgment will be entered for the 'petitioners.

Mellott dissents.