author: ÁRundell :

text:
    Harry C. Fisher, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 53229.
    Promulgated February 7, 1934.

      Charles E. Kelly, Esq., and Edward, V. McKeown, Esq., for the petitioner.

      C. H. Curl, Esq., for the respondent.
   OPINION.

ÁRundell :

The first question is whether the income carried through the partnership books in 1925 was in reality partnership income and distributable among petitioner, his father, and his mother, or whether it was income to petitioner alone and taxable to him.

The respondent allowed the income to be divided in prior years and petitioner places stress on this as overcoming the presumptive correctness of respondent’s determination for 1925. We do not know what facts were presented as to the prior years, but, whatever they were, the findings for the prior years do not preclude the respondent from reaching a different conclusion for the current year either on questions of fact, Carney Coal Co., 10 B.T.A. 1397, 1404, or law, if the prior interpretation is erroneous, Basil Robillard, Executor, 20 B.T.A. 685; affd., 50 Fed. (2d) 1083.

Petitioner’s contention throughout the trial of this case is that the first question for decision is limited to the narrow issue of whether a partnership existed in 1925. Two errors are alleged in respect of the partnership matter. First, the respondent erred in determining “ that no valid partnership existed during the year 1925,” and, second, that he “ erred in increasing the net income reported by the petitioner in the amount of $111,149.79.” Both of the alleged errors are denied by the respondent.

One of the first steps in petitioner’s proof was establishing that under the laws of New York a partnership may continue without express agreement beyond the time fixed for its termination. The statutes of New York provide that in such cases “ the rights and duties of the partner remain the same as they were at such termination.” McKinney’s Consol. Laws, Book 48, sec. 45. But we do not understand the question before us to be solely that of whether there was a partnership in 1925. Even though there was a valid partnership, it does not follow that all of the amounts recorded on its books constituted income to it. The issues framed by the two allegations of error, particularly the second, and the denial thereof, take the question out of the narrow range suggested by petitioner and require a determination of whether the income was in reality petitioner’s or that of the alleged partnership.

We have in this case a great mass of documentary evidence, all of which, summarized, merely tends to show that there was a partnership agreement and that records were kept in partnership form. There is no evidence tending to show a contribution by petitioner’s father and mother of either property or services to the enterprise conducted under the name of Fisher & Fisher. “ The requisites of a partnership are that the parties must have joined together to carry on a trade or adventure for their common benefit, each contributing property or services, and having a community of interest in the profits.” Meehan v. Valentine, 145 U.S. 611, quoted in Schumacher v. Davis (Dist. Ct., E. Dist. New York), 1 Fed. Supp. 959. See also George M. Cohan, 11 B.T.A. 748; affd. on this point, 39 Fed. (2d) 540. Here, none of the so-called partners contributed any services. Petitioner said that he brought his father in because he needed ideas,

and that his mother did the bookkeeping, but the record contains no evidence of the contribution of ideas by the father, and it appears that the books were kept by a firm of certified public accountants. It is argued that the father and mother contributed capital by reason of their ownership of interests in the two corporations which preceded Fisher & Fisher. The evidence as to their interests in the corporations is decidedly unsatisfactory. The stock records of the corporations were not produced and petitioner’s attorney who organized the corporations testified that he had never seen the stock records. He further testified that he knew that the stock was equally divided among the three. It seems to us that, confronted with a question as to the source of property from which income was derived, a clearer showing than this ought to have been made. The failure to produce the corporate records was not even explained.

The evidence as to the contributions of petitioner himself is likewise vague. It is clear that he performed no services for Fisher & Fisher in the taxable year. The firm’s operations were conducted wholly by paid employees. There has been no record produced of petitioner’s assignment of his interest in the Mutt and Jeff cartoons to the partnership. There is some testimony that the cartoons had not been successfully copyrighted, but it must be assumed that petitioner somehow had the exclusive right to the cartoons and the characters portrayed, else he could not have commanded the high prices paid by the syndicate and others for the right to publish or otherwise use them. Petitioner originated the cartoons, and, as far as the record shows, had a property right therein throughout the years. Under the contract of January 3, 1921, with the syndicate, the petitioner was personally obligated to supply the cartoons. Ho mention is made of a partnership in that contract, and clearly under it the income was petitioner’s. It is not until December 12, 1923, that we find the partnership mentioned in connection with the contract, when by endorsement on the contract it is stated that it had “been assigned by the party of the second part to the partnership of Fisher and Fisher.” But thereafter, and through the taxable year, petitioner took for his own use the bulk of the income alleged to belong to the partnership. His conduct in this respect, and the apparent acquiescence of the father and mother, strongly indicates that all three continued throughout to regard the cartoons and contracts as property of the petitioner and that the others had no substantial interest therein. He not only drew in full the one third claimed to be his share, but took out substantial sums which he alleges belonged to his father and mother. Each year he did so, and by the end of 1925 he had taken out $374,091.43 more than what he now says was his. This huge overdraft he has never repaid, though subsequent credits.to his account have reduced it to $123,759.67. By far the greater part of the reduction appears to be due to petitioner’s inheritance of his father’s estate. The value of decedent’s estate as returned for estate tax purposes was $253,466.86, from which deductions of $14,707.82 were claimed, leaving a net amount of $238,759.04. The total reduction of the overdraft amounts to $250,231.76.

It is inconceivable that a bona fide business partnership would be conducted in this way. On the one hand, we have a written document declaring three persons to be equal partners; on the other, there is the conduct of the parties, which in no respect is that of equal partners. He who created the property from which income is derived continues to enjoy that income. While the parties to the agreement, on the strength of it alone, might have compelled an accounting, this does not prevent the Government from inquiring into the practical questions of the source and recipient of income. When the true facts as to source and destination are disclosed “ no distinction can be taken according to the motives leading to the arrangement by which the fruits are attributed to a different tree from that on which they grew.” Lucas v. Earl, 281 U.S. 111.

Peyton v. Gordon, 246 N.Y. 213; 158 N.E. 77, cited by petitioner, has this to say on the question of whether a partnership existed:

Assuming some written contract between the parties, the question may arise whether it creates a partnership. If it be complete, if it expresses in good faith the full understanding and obligation of the parties, then it is for the court to say whether a partnership exists. It may, however, be a mere sham intended to hide the real relationship. Then other results follow. In passing upon it, effect is given to each provision. Mere words will not blind us to realties. Statements that no partnership is intended are not conclusive. If as a whole a contract contemplates an association of two or more persons to carry on as co-owners a business for profit, a partnership there is. Section 10. On the other hand, if it be less than this, no partnership exists. Passing on the contract as a whole, an arrangement for sharing profits is to be considered. It is to be given its due weight. But it is to be weighed in connection with all the rest. It is not decisive. It may be merely the method adopted to pay a debt or wages, as interest on a loan or for other reasons.

In the case before us the form of the written agreement was that of an association to carry on as co-owners a business for profit.” But the realities of the case are far different from the form of the contract as above pointed out. There was an ostensible “ arrangement for sharing profits ”, but this, as we have seen, was utterly disregarded, and when it is “ weighed in connection with all the rest ” it is found wanting as a true expression of the intent of the parties to the agreement.

Arrangements within families for the diversion of income, while not necessarily subject to condemnation because of the close relationship of the parties, are always subject to careful scrutiny and clear and convincing evidence is required to establish their bona fides. See P. B. Fouke, 2 B.T.A. 219; James L. Robertson, 20 B.T.A. 114. It is helpful in such cases to have the background of the transaction that is under review and evidence of the actual operation through the testimony of the participants. In this case neither the petitioner nor his mother was called as a witness on the partnership question, although the presiding Member, during the trial, clearly expressed his view that such testimony was desirable as a possibly important element in the decision of the case. Near the close of the trial petitioner was called as a witness on another issue, and, when counsel for respondent attempted to cross-examine him on the partnership matter, counsel for petitioner objected and insisted that for any examination on that question the petitioner became a witness for respondent. The only testimony given by petitioner respecting the partnership was elicited by the presiding Member.

If, as alleged, the three were equal partners, the dissolution of the firm would seem to be an appropriate time for the casting up of accounts and a division of the property. But no such division was made. A part of the property was transferred to what is called a joint account. This, as we understand it, reflected petitioner’s overdrafts. He neither then nor later repaid to the other two their shares. The rest of the property, consisting of three contracts, was assigned to the corporation organized to succeed to the business of Fisher & Fisher. If the three were equally interested in the partnership it would seem, in the absence of any other agreement, that their interests would be the same in the corporation. The evidence as to how the stock of the corporation was distributed is not at all satisfactory. The instrument of assignment of the three contracts to the corporation recites a consideration of 75 shares of stock of the new corporation. It does not appear that these shares were distributed to the three individuals, either directly or carried into the joint account established upon dissolution of the partnership. In the estate tax return filed by petitioner as executor of his father’s estate, the father is shown as owning but one share of the stock. In the income tax return of Fisher & Fisher, Inc., for 1926, executed by petitioner as president and treasurer, it is stated that petitioner owned 98 shares of stock and his father and mother one share each. At the trial of this case petitioner testified that his father and mother each owned one third of the 100 shares of capital stock of the corporation. Here again we feel that more reliable evidence might have been produced by the petitioner. The attorney who tried this case for petitioner was active in the organization and operation of the corporations preceding and the one succeeding Fisher & Fisher, and must be presumed to have access to the corporate records. Upon the record before us, confused as it is on this question, we are unable to make a definite finding as to who received the stock of Fisher & Fisher, Inc.

It is accordingly our conclusion that the partnership agreement did not reflect the true relation of petitioner, his father, and his mother; that, having regard to the substance of the matter rather than the mere form of the written instrument and bookkeeping entries, there was no bona fide partnership; that petitioner was the real owner of the income-producing property and the income in the first instance was his and taxable to him.

The second question is whether the loss sustained in the operation of petitioner’s racing and breeding stables is deductible. Petitioner cities several cases in which losses incurred in operating stables have been allowed. See George, D. Widener, 8 B.T.A. 651; affd., 33 Fed. (2d) 833; Margaret E. Amory, 22 B.T.A. 1398; James Clark, 24 B.T.A. 1235; Marshall Field, 26 B.T.A. 116; affd., 67 Fed. (2d) 876. In all of the cases cited it was found that the stable had been created with the expectation of making profits. For example, in the Field case, the court points out that the taxpayer testified that he established his stables “ with a serious and business-like desire to make his operation profitable ” and that “ it was his intention to give up the enterprise if it was not successful in making money.” We have no such evidence here. We know nothing of petitioner’s object in embarking upon the hazardous enterprise of breeding and training horses for the race track. The substance of the evidence before us is that petitioner required detailed records to be kept of the cost of operating stables, and that he personally attended to a number of matters, such as the purchase and sale of horses and the selection of those to be entered in races. This evidence is insufficient to overcome the presumptive correctness of the respondent’s determination. The keeping of accounts does not in and of itself demonstrate the object of an enterprise. And so as to the personal attention given to some phases of the stables, their operation as a hobby or pleasure would not preclude his giving them his attention. The evidence does not convince us that the stables were operated for profit and the deduction claimed cannot be allowed.

Reviewed by the Board.

Decision will be entered for the respondent.


source: Caselaw Access Project

author: McMahon :

license: Public Domain

text:
    Ellen Ayer Wood, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 65211.
    Promulgated February 9, 1934.

      Charles IF. Morrill, Esq., for the petitioner.

      Warren F. Wattles, Esq., for the respondent.
   OPINION.

McMahon :

The petitioner contends that where corporate stock is obtained through the exercise of stock rights by one who has received the rights on shares of the same stock already held, the date to be taken for the purpose of computing the two-year period under section 101 of the Revenue Act of 1928 is the date of acquisition of the parent stock, and not the date when the rights were exercised.

The pertinent provisions of section 101 of the Revenue Act of 1928 are set forth in the margin.

The same question was considered by the Board in Rodman E. Griscom, 22 B.T.A. 979, wherein the taxpayer had sold on August 7, 1925, together with other stock, 34 shares of certain stock, of which 19 had been acquired by the taxpayer in July 1923 through the exercise of rights to subscribe and 15 had been acquired in July 1924 through the exercise of rights to subscribe. The Board held that:

Since tlie 34 shares, together with the 130 shares of Pennsylvania Water & Power Company stock were sold on August 7, 1925, it follows that the 19 shares acquired by purchase in July, 1923, constituted capital assets of the petitioner within the meaning of section 208 (a) (8) [of the Kevenue Act of 1024, defining "capital assets”], but the 15 shares acquired in July, 1924, are not capital assets for the reason that they were held less than two years from the date of sale.

However, the petitioner on brief contends that, since the introduction of the capital net gain provision in the Eevenue Act of 1921, the Commissioner has consistently held that in the case of a stock dividend the basic date to be used in reckoning the capital asset period is the date of acquisition of the parent stock; that his position with respect to stock acquired through the exercise of rights to subscribe was the same as that respecting stock dividends as disclosed by I.T. 1786, C.B. II-2, 45 (1923); that in the case of Rodman E. Orisoom, supra, the previous long established ruling is ignored and a new rule is set up with no attempt at explanation or justification; that thereafter I.T. 1788 was revoked by I.T. 2609, C.B. X-2, 389 (1931), upon authority of the decision in Rodman E. Griscom, supra; that during the time I.T. 1786 was in force, 1923 to 1931, the statute in question was reenacted by Congress without substantial change in 1924,1926, and 1928; that the case of Rodman E. Griscom, supra, is wrong in theory and on authority and is an unjustifiable reversal of a rule long established and impliedly approved by Congress ; and that at the very least such new rules seems to be in direct conflict with the ruling in the case of Miles v. Safe Deposit & Trust Co., 259 U.S. 247.

I.T. 1786 is a ruling of the Income Tax Unit. These rulings are published and on the outer page of each weekly publication, entitled “ Internal Eevenue Bulletin ”, as well as on the cover page of each semiannual publication thereof, known as “ Cumulative Bulletin ”, ajjpears the following:

SPECIAL ATTENTION is directed to the cautionary notice on this page that published rulings of the Bureau do not have the force and effect of Treasury Decisions and that they are applicable only to the facts presented in the published case.
* * * * ⅜ ⅜ *
The rulings reported in the Internal Eevenue Bulletin are for the information of taxpayers and their counsel as showing the trend of official opinion in the administration of the Bureau of Internal Eevenue; the rulings other than Treasury Decteions have none of the force and effect of Treasury Decisions and do not commit the Department to any interpretation of the law which has not been formally approved and promulgated by the Secretary of the Treasury. * * * [Emphasis ours.]

While article 1651 of Eegulations 62, Act of 1921, Eegulations 65, Act of 1924, and Eegulations 69, Act of 1926, and article 501 of Begulations 74, Act of 1928, each contain a ruling to the effect that if the taxpayer has held for more than two years stock upon which a stock dividend has been declared, both the original and dividend shares are considered to be capital assets, we are unable to find that I.T. 1786 has been incorporated in such articles or regulations.

In George Bullock, 23 B.T.A. 710, after discussing the history of section 206 (a) (6), section 208 (a) (8), and section 208 (a) (8) of the 1921,1924, and 1926 Acts, respectively, defining the term “ capital assets ”, the Board states as follows:

We think that when Congress in the Acts of 1921 and 1924 defined capital assets to mean “property held by the taxpayer for more than two years” it intended that the specific property sold must have been held by the taxpayer for more than two years, and that under the Revenue Act of 1926 it intended to and did enlarge the term “ capital assets ” to include the kind of cases provided for in section 208 (a) (8) thereof. It seems clear that the provisions of the 1926 Act in this respect were new provisions. [Emphasis ours.]

Both the Committee on Ways and Means, in its report accompanying H.E. No. 1, Eept. No. 1, Union Calendar No. 1, 69th Cong., 1st sess., and the Committee on Finance in the Senate, in its report accompanying H.E. No. 1, Eept. No. 52,. Calendar No. 54, 69th Cong., 1st sess., state:

The 12½ per cent capital gain and loss provisions apply only to the sale or exchange of capital assets which have been held by the taxpayer for two years. Under the reorganization provisions many transactions are exempt from tax until the stockholder disposes of his stock received as a result of the reorganization. As a result of this fact the question frequently arises as to whether the period that the taxpayer held the stock which he exchanged for new stock should be added to the period for which he held his new stock, in order to determine whether or not he has held it for two years. The amendment proposed to this section (The House Bill) incorporates in the law the present regulation of the Treasury and provides that these two periods shall be added for the purpose of determining the period during which the property sold was held for the purpose of determining both gain and loss under this section. The same question arises in the case of property received by gift after December 31, 1920. The amendment (The House Bill) provides that the period for which the property was held by the donor shall be added to the period for which the property was held by the donee in determining whether or not the property so received falls within the capital gain or loss section.

However, to its report the Senate Committee on Finance added the following:

The committee recommends a further provision that in determining the period for which the taxpayer has held stock or securities received upon a distribution where no gain is recognized to the distributee under section 203 (c) of this bill or the Revenue Act of 1924 there shall be included the period for which he held the stock or securities in the distributing corporation. Inasmuch as section SOS (c) in this bill and in the Revenue Act of 192Sf is broad enough to include the case of stock dividends, the committee amendment takes care of the determination of the two-year period in the case of stock dividends, as to which the present Treasury regulations apply the same rule. [Emphasis ours.]

The provision recommended by the Senate Committee on Finance is Senate amendment numbered 10 and is as follows:

In determining the period for which the taxpayer has held stock or securities received upon a distribution where no gain is recognized to the distributee under the provisions of subdivision (c) of section 203 of this Act or of the Revenue Act of 1924, there shall be included the period for which he held the stock or securities in the distributing corporation prior to the receipt of the stock or securities upon such distribution.

This provision was added to section 208 (a) (8) as it appeared in the House bill and also appears in substantially the same form as subdivision (C) of subsection (c) (8) of section 101 of the Revenue Act of 1928.

Thus it will be seen that, although I.T. 1786 had not been revoked at the time of the enactment of the 1926 Act, the Senate Committee on Finance in its report refers only to the Treasury regulations and in particular to the “ determination of the two-year period in the case of stock dividends.”

The petitioner, on brief, relies in particular upon Miles v. Safe Deposit & Trust Co., supra. The only question involved in that case is whether the entire amount received by a taxpayer on the sale of certain rights to subscribe to stock is taxable income. The Supreme Court in its opinion does not state that the stock received upon the exercise of rights to subscribe is analogous to a stock dividend. It states:

* * * The stockholder’s right to take his part of the new shares therefore — assuming their intrinsic value to have exceeded the issuing price — was essentially analogous to a stock dividend. [Emphasis ours.]

To the extent thus indicated the right to subscribe is analogous to a stock dividend; but, as stated by the Court in the above case:

The right to subscribe to the new stock was hut a right to participate, in preference to strangers and on equal terms with other existing stockholders, in the privilege of contributing new capital called for by the corporation * * *. [Emphasis ours.]

And the Court indicates the distinction between stock dividends and rights to subscribe to stock in the following language:

This privilege of itself was not a fruit of stock ownership in the nature of a profit; nor was it a division of any part of the assets of the company.

Furthermore, while the stockholder receiving an ordinary proportionate stock dividend retains the same interest in the corporation that he had before the issuance of the stock dividend (the corporation merely transferring surplus to capital, Eisner v. Macomber, 252 U.S. 189), whether or not the stockholder’s interest will be the same after issuance of rights to subscribe depends upon whether or not such rights are exercised by the stockholder receiving the rights. When rights to subscribe to new stock are given, the stockholder retains his former interest in the corporation only upon condition that he exercise the right according to its terms and pay the price fixed in such right for such new stock. It is, therefore, analogous to, if not strictly in fact, a purchase of stock, not at the market price, if any, but at a price fixed by the corporation, the right to purchase being first extended to stockholders rather than to strangers.

In view of the foregoing and after due consideration of all of the other authorities cited in petitioner’s brief and of the argument of her counsel, we are of the opinion that the Griseom, case should not be overruled; and that since the 82 shares of stock in question, having been purchased on December 30, 1927, and sold on April 16, 1929, were not “ held ” by the petitioner for “ more than two years,” the same were not “ capital assets ” within the meaning of sevtion 101 (a), (c) (8) of the Revenue Act of 1928.

The facts disclose that the four-eighths share was part of a stock dividend received August 3, 1929, by the petitioner on shares purchased on June 15, 1929, under rights to subscribe received May 24, 1929, on stock purchased on April 20, 1926, under rights to subscribe received March 3, 1926, on stock acquired by the petitioner prior to January 1, 1923. Since the stock on which the four-eighths share stock dividend was issued was purchased June 15, 1929, in the same year the four-eighths share was sold, such four-eighths share was not a capital asset within section 101 (c) (8) (C).

The petition alleges that the respondent erred in decreasing the deduction for contributions by allowing only 15 percent of the ordinary net income instead of 15 percent of the sum of the ordinary net income and capital gains.

The respondent calls attention to the decision of the Board in Aaron Straus, 27 B.T.A. 1116, but cites and relies on Board cases overruled by it. Upon the authority of Aaron Straus, supra, we hold that the respondent erred in decreasing the deduction for contributions from 15 percent of the sum of petitioner’s net income and capital net gain to 15 percent of her net income. See Bliss v. Commissioner, 68 Fed. (2d) 890, and Harbison v. Commissioner, 68 Fed. (2d) 1004.

Reviewed by the Board.

Decision will be entered under Rule 50.

       Sec. 101. (c) Definitions.- — For the purposes of this title—
      *******
      (8) “ Capital assets ” means property held by the taxpayer for more than two years (whether or not connected with his trade or business), but docs not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the case of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business. For the •purpose of this definition—
      ⅜ » ⅜ * e * *
      (C) In determining the period for which the taxpayer has held stock or securities received upon a distribution where no gain is recognized to the distributee under the provisions of section 112 (g) of this title or under the provisions of section 203 (c) of the Revenue Act of 1924 or 1926, there shall be included the period for which he held the stock or securities in the distributing corporation prior to the receipt of the stock or securities upon such distribution.

       I.T. 1786. In the ease of stock acquired upon the exercise of rights, if the stock with respect to which such rights were issued was acquired and held by the taxpayer for profit or investment for more than two years, he may elect to be taxed upon the gain from the sale of such stock under the provisions of section 206 of the Revenue Act of 1921.


author:
MuRdogk:
      Aiíundell,

text:
    Hoosac Mills Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67032.
    Promulgated February 13, 1934.

      Theodore B. Benson, Esq., for the petitioner.

      J. R. Johnston, Esq., for the respondent.
   OPINION.

MuRdogk:

The Commissioner notified the petitioner that he proposed to hold it liable, as transferee of a transferee, for a deficiency in income taxes of the Nemasket Mill for the year 1919 in the amount of $27,300.72. The only issue is whether the statute of limitations has run so as to bar the Commissioner from assessing against and collecting from the petitioner the deficiency in taxes of the taxpayer. The facts were stipulated and we give only enough of them here for an understanding of the question presented.

In 1924 and 1925 the taxpayer, Nemasket Mill, executed and filed with the Commissioner two waivers, the sufficiency and validity of which are not questioned, and both of which contain the following-provision :

This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1926, and shall then expire except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom' with the United States Board of Tax Appeals, then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision of said Board.

On February 20, 1926, the Commissioner sent to the Nemasket Mill a notice of a deficiency in its 1919 taxes in the amount of $27,-300.72, from which notice an appeal was timely filed with the Board and was docketed as proceeding No. 14821. On May 26, 1930, counsel for the parties in that proceeding filed a stipulation setting forth that the deficiency was in the amount determined by the Commissioner and “ that the Board may enter an order of redetermination accordingly.” The stipulation contained the following provision:

It is understood and agreed that the Commissioner may assess and collect the said deficiency immediately upon the issuance by the Board of its order of redetermination without regard to the restrictions, if any, contained in section 274 (a) of the Revenue Act of 1926 or section 272 (a) of the Revenue Act of 1928.

On May 29, 1930, the Board entered its decision reading as follows:

DECISION.

Under written stipulation signed by counsel for the parties in the above-entitled proceeding and filed with the Board on May 26, 1930, it is
Ordered and Decided : That there is a deficiency for the year 1919 in the amount of $27,300.72.

On July 26, 1930, the Commissioner assessed the deficiency of $27,300.72 against the Nemasket Mill.

On May 18, 1932, the Commissioner sent to the petitioner herein a notice that he would hold it liable, as a transferee, for the deficiency in taxes of Nemasket Mill in the amount of $27,300.72 for the year 1919. This proceeding is based on that notice.

The parties have stipulated that the petitioner is liable under section 280 of the Revenue Act of 1926 for the deficiency in income taxes of the Nemasket Mill for 1919 in case we hold that the statute of limitations had not run on May 18, 1932, with respect to the liability asserted by the notice of that date.

The Revenue Act of 1928 was in effect at the time the notice to the petitioner was mailed. The proceeding, however, is not governed by that revenue act, although in a similar case the Board erroneously treated that act as applicable. 375 Park Avenue Corp., 23 B.T.A. 969. Section 311 of the Revenue Act of 1928, which provides for additional time for assessment against an initial transferee and also against a transferee of a transferee, is a part of Title I of the act, and section 1 of that title provides as follows:

SEO. 1. APPLICATION OF TITLE.

The provisions of this title shall apply only to the taxable year 1928 and succeeding taxable years. Income, war-profits, and excess-profits taxes for taxable years preceding the taxable year 1928 shall not be affected by the provisions of this title, but shall remain subject to the applicable provisions of prior Revenue Acts, except * * *

Plainly under this provision section 311 is not applicable to taxes for years prior to 1928.

The applicable statute is the Revenue Act of 1926. That act provides in section 280 (b) (1) that the period of limitation for assessment against a transferee is “ one year after the expiration of the period of limitation for assessment against the taxpayer.” It is thus necessary to decide when the period for assessment against the taxpayer, Nemasket Mill, expired. When a notice of deficiency is sent to a taxpayer and an appeal therefrom is filed with the Board, the Commissioner is prohibited under section 274 (a) of the Revenue Act of 1926 from making an assessment “ until the decision of the Board has become final.” The decision becomes final under section 1005 (a) (1) “upon expiration of the time allowed for filing a petition for review,” and that time was “ within six months after the decision is rendered.” Section 1001 (a). Section 277 (b) provides that the running of the statute of limitations shall be suspended after the mailing of .a deficiency notice for the period during which the Commissioner is prohibited from making an assessment “ and for 60 days thereafter.”

On February 20, 1926, when the notice of deficiency was mailed to the transferor, the statutory period for assessment against the taxpayer, as extended by waivers, had not expired. The parties agree that the date of final decision was May 29, 1930, and that the period of six months allowed by section 1001 (a) for filing a petition for review should not be added in. It was obviously the intent of both parties in filing the stipulation that a decision should be entered immediately, and that such decision should be final without the right to either side to appeal therefrom. The petitioner’s contention is that the period for assessment against the transferor expired, at the latest, 60 days after final decision of the Board was. entered.

The statutory period for assessment against the taxpayer was extended under the terms of the waivers from December 31, 1926, for four years, three months, and nine days (the time which elapsed between the date of the deficiency notice and that of final decision by the Board). Thus, under the waivers, the statutory period of limitation on assessment expired on April 9,1931. But after the parties had thus consented to extend the statutory period for assessment, section 277 (b) of the Revenue Act of' 1926 was enacted, which provides that the running of the statute of Imitations on the making of assessments shall be suspended for the period during which the Commissioner is prohibited from making the assessment and for 60 days thereafter. This provision of the statute may not be disregarded merely because the Commissioner and the taxpayer had provided in their consents for an adequate extension of the statutory period in the event that the Commissioner sent a notice of deficiency to the taxpayer. Despite its legislative history and purpose, section 277 (b) is not limited to those cases in which the Commissioner would otherwise have less than 60 days after final decision in which to assess. Clearly the parties consented to extend the statutory period for assessment in any event to December 31, 1926. The waivers also contain provisions under which the statutory period for assessment was extended even longer, but the Commissioner does not need to resort to those provisions in this case. Prior to December 31, 1926, on February 20, 1926, while “ the period of limitation for assessment against the taxpayer ” still had at least ten months and eleven days to run, the Commissioner mailed a notice of deficiency to the taxpayer under section 274 (a). The Commissioner was prohibited from making an assessment from February 20, 1926, until May 29, 1930, and, under section 277 (b), the running of the statute of limitations on the making of an assessment was suspended during all of that period “ and for 60 days thereafter.” Thus the running of the statutory period on the making of an assessment against the taxpayer was suspended until July 28,1930 (60 days after May 29,1930, when the decision became final). The unexpired portion of the limitation period then picks up again to run until it expires. Northern Anthracite Coal Co., 21 B.T.A. 1116. Cf. American Locker Co., 21 B.T.A. 408. The phrase “ statutory period of limitation ” includes not only the five years after the return was due or was made, provided in section 250 (d) of the Revenue Act of 1918, but includes also any extension of that period to which the taxpayer and the Commissioner have consented in writing as provided in later acts. Northern Anthracite Coal Co., supra, and cases there cited. As we have already pointed out, the unexpired portion of the limitation period amounted to at least ten months and eleven days. It began to run on July 28, 1930, and clearly had not expired on May 19,1931. Thus the notice to the transferee mailed on May 18, 1932,. was mailed “ within one year after the expiration of the period of limitation for assessment against the taxpayer ” and was not too late under section 280.

Reviewed by the Board.

Decision will he entered for the respondent.

Aiíundell,

dissenting: My dissent from the majority view arises from the fact that it disregards the plain terms of the waiver agreement. It is true that section 277 (b) suspends the running of the statutory time from the date the deficiency notice was mailed February 20, 1926, to the date of the Board’s final decision, and for 60 days thereafter, to wit, July 28, 1930. But this time is not sufficient for the respondent and he must look to the waiver agreement for an additional period. The waiver agreement plainly states what that time shall be. It provides that the tax must be assessed by December 31, 1926, unless a notice of deficiency is mailed and proceedings are brought to the Board, in which event the number of days between the mailing of the notice and the date of final decision by the Board shall be added to December 31, 1926. The waiver does not provide for a different or longer period and such additional time should not be added to it.

Counting the unexpired time under the waivers of ten months and eleven days from the date of final decision, May 29, 1930, the period for proceeding against the taxpayer would expire April 9, 1931, and in the case of the transferee, one year later or April 9,1932. The respondent’s notice to petitioner as transferee was not sent until May 18, 1932, and therefore was not timely.

Smith and Teammell agree with this dissent.

       Sec. 277. (b) The running of the statute of limitations provided in this section or in section 278 on the making of assessments and the beginning of distraint or a proceeding in court for collection, in respect of any deficiency, shall (after the mailing of a notice under subdivision (a) of section 274) be suspended for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or a proceeding in court, and for 60 days thereafter.


author: Marquette:

text:
    A. L. Miller, Petitioner, v. Commissioner of Internal Revenue, Respondent. Ida W. Hawk, Executrix, Estate of Henry C. Hawk, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 60689, 60690.
    Promulgated February 13, 1934.

      Bernard J. Oren-, Esq., and Homer Hendricks, Esq., for the petitioners.

      James K. Polk, Esq., for the respondent.
   OPINION.

Marquette:

The petitioners assert that they are not taxable on the gain arising from the exchange of part of their stock in the News Co. for a part of the stock of Publications, Inc. They contend that there was a reorganization within the meaning of subsection (i) (1) of section 112 of the Eevenue Act of 1928, with the result that subsections (b) (3) and (c) (1) of the same section apply.

Subsection (i) (1) provides:

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

Disregarding the contract of sale and giving the cryptic sign u Ex.” the force of altering the written contract of subscription for stock, we find that what actually occurred was that Publications, Inc., purchased 600 shares of stock of the News Co. (part of which belonged to Miller and Hawk) for $375,000 cash, and acquired the remaining 200 shares from Miller and Hawk in exchange for 6,250 shares of its own common stock. Publications, Inc., was authorized to issue 150,000 shares of common stock. Of this amount it sold 49,988 shares to subscribers, issued 12 shares at its organization, reserved for other purposes 89,500 shares, and did not issue 10,500 shares. It also issued and disposed of 52,000 shares of its preferred stock. The News Co. has not been dissolved and, so far as the record discloses, except perhaps the personalty and realty which Miller and Hawk reserved the right to withdraw, it possesses the same property it had before its stock was sold and exchanged, and is doing the same business. There was no alteration in its corporate or capital structure. The only thing that was changed was the ownership of its stock.

There was no transfer of any of the assets of the News Co. to Publications, Inc., and neither the News Co. nor its stockholders came into control of Publications, Inc. There was no recapitalization of either corporation and there was no change in identity, form, or place of organization. So parts (B), (C), and (D) of subsection (i) (1) do not apply. Publications, Inc., did not acquire any, much less substantially all, of the assets of the News Co. It did acquire all the capital stock of the latter company. This fact, the petitioners insist, brings this case within the subsection. They further assert that if this is not sufficient, then, since Miller and Hawk exchanged one fourth of the capital stock of the News Co. for a comparatively small amount of the stock of Publications, Inc., there was a continuing interest on the part of the stockholders of-the News Co. which converted what was a sale and exchange of stock into a reorganization;

In Pinellas Ice Co. v. Commissioner, 287 U.S. 462, the Supreme Court construed a provision of the Eevenue Act of 1926 similar to that which we are called upon to apply. There the Court said:

The paragraph in question directs — “The term ‘reorganization’ means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation).” The words within the parenthesis may not be disregarded. They expand the meaning of “ merger ” or “ consolidation ” so as to include some things which partake of the nature of a merger or consolidation but are beyond the ordinary and commonly accepted meaning of those words — so as to embrace circumstances difficult to delimit but which in strictness cannot be designated as either merger or consolidation. But the mere purchase for money of the assets of one Company by another is beyond the evident purpose of the provision, and has no real semblance to a merger or consolidation. Certainly, we think that to be within the exemption the seller must acquire an interest in the affairs of the purchasing company more definite than that incident to ownership of its short-term purchase-money notes. This general view is adopted and well sustained in Cortland Specialty Co. v. Commissioner of Internal Revenue, 60 F. (2d) 937, 939, 940. It harmonizes with the underlying purpose of the provisions in respect of exemptions and gives some effect to all the words employed.

Tested by the above rules we find nothing in the facts of this case which bears any resemblance to a consolidation or a merger. The News Co. certainly was not consolidated with Publications, Inc., and there was no new corporation arising on the ruins of either or both. Neither was the News Co. merged into Publications, Inc. Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937. When the Supreme Court speaks of the old company acquiring an interest in the new, it is referring to a case where something occurred which partook of the nature of a consolidation or a merger, and where, in the language of the Court in Cortland Specialty Co. v. Commissioner, supra, the “ interests of the stockholders and creditors of any company which disappears remain and are retained against the surviving or newly created company.” Here no company disappeared. -The creditors of the News Co. acquired no rights against Publications, Inc. Three fourths of the stockholders in amount of the News Co. had no rights against Publications, Inc., except to sell their stock for cash.

It is clear that the stockholders of the News Co., as a whole, had no right to acquire any interest in Publications, Inc. The News Co. was not a party to any of the agreements. The contracts of Miller and Hawk were personal to themselves. In the absence of anything bearing the slightest resemblance to a consolidation or to a merger, we are of opinion that the fact that the owners of one fourth of the stock of the News Co. exchanged that proportion of the stock for a small minority interest of the common stock of Publications, Inc., did not convert what was, in fact, a mere exchange of stock into a reorganization, as that term is defined in section 112 (i) of the He venue Act of 1928. Respondent is approved on this issue. John J. Watts, 28 B.T.A. 1056; Minnesota Tea Co., 28 B.T.A. 591; Central Natl. Bank of Lincoln, Nebraska, 29 B.T.A., 530.

Under the facts we have found with reference to the use by Henry C. Hawk of his automobile in his busiuess, his executrix is entitled to take as a deduction the sum of $2,056.84.

Reviewed by the Board.

Judgment in Docket No. 60689 will be entered for the respondent. Judgment in Docket No. 60690 will be under Rule 50.


author: Matthews : LaNsdoN,

text:
    Isabel K. Dibblee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 61036.
    Promulgated February 13, 1934.

      Albert J. Dibblee, Esq., for the petitioner.

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

Matthews :

The respondent has determined a deficiency in income tax for the year 1928 in the amount of $1,690.30. Petitioner alleges that respondent erred in determining that the two-year period contemplated by the “ Capital Net Gain ” provision of section 101 of the Revenue Act of 1928 commenced to run from the date of distribution to her of certain stocks which she had acquired by general bequest under the will of her deceased mother, and not from the date of her mother’s death. The parties have filed a stipulation, from which we summarize the pertinent facts as follows:

Petitioner is an individual, residing at Ross, in Marin County, California. Her mother died testate on March 28, 1926, and in her will disposed of her property, leaving “All my property, real, personal and mixed, of any kind and nature whatsoever, and wherever situate, * * * unto my four children, Lucia Hamilton Kittle Sherman, Isabel Kittle Dibblee, Allen Irving Kittle, and John Cas-per Kittle, share and share alike.” The will was duly probated and the estate distributed under a decree of final distribution dated May 21, 1927, the petitioner receiving one fourth of certain stocks and bonds so distributed from the estate of her mother. Thereafter and on certain dates extending from April 18 to December 18, 1928, petitioner sold some of the securities thus acquired. These sales were made more than two years after the death of her mother, but less than two years after the date of the distribution to the petitioner of the property sold. In her income tax return for 1928 petitioner reported the profit from such sales as capital net gain in the amount of $27,712.33, based on the value of the securities at March 28, 1926. The profit based on fair market value at the time of distribution is $28,441.86. Upon audit of the return the respondent included this latter amount as ordinary income and determined the deficiency in controversy.

Although it is alleged in the petition that respondent erroneously computed income from the sales in question on the basis of the value of the securities sold at the date of their distribution, petitioner has accepted the respondent’s computation of profit as in conformity with the provisions of section 113 (a) (5) of the Revenue Act of 1928, as follows:

Sec. 113. (a) (5) Property transmitted at death. — If personal property was acquired by specific bequest, or if real property was acquired by general or specific devise or by intestacy, the basis shall be the fair market value of the property at the time of the death of the decedent. If the property was acquired by the decedent’s estate from the decedent, the basis in the hands of the estate shall be the fair market value of the property at the time of the death of the decedent. In all other cases if the property was acquired either by will or by intestacy, the basis shall be the fair market value of the property at the time of the distribution to the taxpayer. * * * [italics supplied.]

It is still contended by the petitioner, however, that this profit of $28,441.86 should be treated as capital net gain under the provisions of section 101 of the Revenue Act of 1928, set out m the margin, on the theory that petitioner acquired the securities in question at the date of her mother’s death and that they were held by her for more than two years before they were sold. It is admitted that she did not hold these securities for more than two years after they were distributed to her, but the petitioner insists that the basic date for determining gain, under section 113 (a) (5), supra, is not necessarily the basic date for computing the running of the two-year period specified in section ¿01. Thus the petitioner urges that, although the value of the securities at the date of distribution is the correct basis for determining the amount of the gain from the sale thereof, it is the date of the death of the petitioner’s mother which establishes the beginning of the period the securities were held by petitioner.

Petitioner has directed our attention to the laws of California, under which title to personal property transmitted by will vests in the legatee immediately upon the testator’s death (secs. 28, 300, and 581 of the Probate Code). Reliance is placed upon the case of Murphy v. Crouse, 135 Cal. 14, in which the Supreme Court of California held that both real and personal property descend directly to the beneficiary named in the will, with a qualified right in the personal representative who holds the property for purposes of administration, and it is pointed out that an undivided one-fourth interest in the estate of her mother vested in the petitioner in the instant case on March 28,1926, the date of her mother’s death. It does not follow, however, that from the moment of her mother’s death the petitioner began holding one fourth of the specific assets of the estate. All of the decedent’s property went into the possession of the executors and was chargeable with the expenses of administering the estate and the payment of debts. Clearly the petitioner had no dominion or control over, and could not have sold, any of the particular assets until there had been a division of the estate among herself and the other legatees and certain specific assets bad been delivered over to her. We cannot agree with the petitioner’s contention that the issue before us for determination, which involves the taxable gain from the sale of certain securities, is governed by the laws of California with respect to the passing of legal title to property transmitted by will. In our opinion we must look to the provisions of the Federal taxing statutes. We have already shown that, under section 113 (a) (5), it is not the value of the property on the date she acquired legal title thereto, but the value on the date the securities were distributed to the petitioner, which is used as the basis for computing gain. It would be a forced construction of the statute to say that the date of distribution should not also be taken as the starting point for determining the period the securities were held by the petitioner.

The securities in question were sold by the petitioner during the taxable year 1928, between April and December. Petitioner had acquired the securities by general bequest under the will of her deceased mother and they were distributed to the petitioner under a decree of final distribution dated May 21, 1927. Prior to that date the possession of the securities was in the executors of the estate for purposes of administration and not in the petitioner. In view of these facts we conclude that the petitioner had not held the assets, within the meaning of section 101, for a period of two years before they were sold and is, therefore, not entitled to report the profit as capital net gain.

The view which we have taken herein is in accordance with our decision in the case of Nancy K. McFeely, 29 B.T.A. 998, which case is not identical upon the facts but presents the same question of law. In that case we held that the profit on the sale of shares of stock distributed to the petitioner on November 3, 1927, and sold by her on March 14, 1929, was not taxable as capital net gain, although the petitioner’s donor (her mother) had acquired in 1919 an absolute title to one half of the estate of a deceased husband and the stock in question was received by the petitioner under an assignment to her, dated June 23, 1924, of 10 percent of the donor’s one-half interest in the estate. We said:

In our opinion the evidence does not support the contentions of the petitioner. While the shares of stock were in the custody of the executors of the estate of T. H. Given they were not in any proper sense “ held ” by the petitioner. If the executors by agreement of the parties or otherwise had sold the shares and realized a profit therefrom the profit would unquestionably have been taxable to the estate and not to the beneficiaries. Anderson v. Wilson, 289 U.S. 20.
It seems clear that if Martha A. Given [the donor] had not assigned any portion of her estate to the petitioner, but had received the 1,000 shares of Radio stock in question on November 3, 1927, and had sold them on March 14, 1929, the profit would have constituted ordinary net income and would have been taxable accordingly, for she would have held them for a period of less than two years at date of sale. Section 113 (a) (5). We can not see that the petitioner stands in any better position than her donor.

The respondent’s determination is sustained.

Reviewed by the Board.

Judgment will be entered for the respondent.

LaNsdoN,

dissenting: I am unable to agree with the prevailing

opinion. Under the laws of California, which govern here as to rules of property, it is well established that title to devised property vests in the legatee at the date of the death of the prior owner. Probate Code, secs. 28, 300, 581. In Murphy v. Crouse, 135 Cal. 14, the Supreme Court of California held that the common law doctrine that the title to personal property passes to the executor and not to the heir has never prevailed in California and that in that state both real and personal property descend directly to the beneficiary named in the will, subject only to the qualified right in the personal representative who holds it for purposes of administration. In Western Pacific Co. v. Godfrey, 166 Cal. 346, the court held that “ The legatee does not derive title from the decree of distribution but from the will, which takes effect immediately upon the death of the testator. The decree of distribution does not create the title. It merely declares that title accrued under the will.” This principle was nationalized by the Supreme Court in Brewster v. Gage, 280 U.S. 327, and has been applied by the Board in many decisions.

The securities sold were a part of the estate of the petitioner’s mother at the date of her death. In the light of the authorities above cited it is perfectly clear that an undivided one-fourth interest therein vested in the petitioner at March 28, 1926. I think it immaterial that such interest was not identified or segregated from the corpus of the estate until May 21, 1927, the date of distribution. From the moment of her mother’s death, title to one fourth of all the securities left by the decedent vested in the petitioner. The executor or personal representative of the estate held the property only as the agent of the actual owner or of the probate court. His possession was the possession of the heirs. California Civil Code, sec. 1581. His duty is to marshal and conserve the assets of the estate and, under the direction and order of the proper court, distribute them to their real owners. Without the consent of the court he cannot convert a dollar’s worth of the assets in his charge into new investments. Subjected to such limitations, it is plain that he holds only for the owners and that his acts are theirs.

In support of his determination the respondent relies on sections 113 (a) (5) and on 101 (c) (8) (B) of the Revenue Act of 1928, which provides that to determine the two year period “there shall be included the period for which such property was held by any other person, if under the provisions of section 113, such property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as it would have in the hands of such other person.” I cannot see the applicability of this provision to the situation here. In my opinion the securities in question were acquired by the petitioner at the date of her mother’s death and held by her until the date of the sale, and so, for the purpose of this proceeding, were never held by any other person.

Trammell agrees with this'dissent.

       Sec. 101. (a) Tam in case of capital net gain. — In the ease of any taxpayer; other than a corporation, who for any taxable year derives a capital net gain (as hereinafter defined in this section), there shall, at the election of the taxpayer, be levied, collected, and paid, in lieu of all other taxes imposed by this title, a tax determined as follows: A partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner as if this section had not been enacted and the total tax shall be this amount plus 12⅜ per centum of tile capital net gain.
      a a a a a # *
      (c) Definitions. — For the purposes of this title—
      * * * a * * a
      (8) “ Capital assets ” means property held by the taxpayer for more than two years (whether or not connected with his trade or business) * * *. For the purposes of this definition—
      a o a * a * 'a
      (B) In determining the period for which the taxpayer has held property however acquired there shall be included the period for which such property was held by any other person, if under the provisions of section 113, such property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as it would have in the hands of such other person.


author: Trammell:

text:
    Edwin J. Marshall, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 52938, 62311, 70430.
    Promulgated February 13, 1934.

      Thomas O. Marlar, Esq., for the petitioner.

      John H. Pigg, Esq., for the respondent.
   opinion.

Trammell:

These are consolidated proceedings for the redeter-mination of deficiencies in income tax as follows:

The issue, broadly stated, involves the question whether petitioner made a completed gift to his wife of certain corporate stocks prior to or during the taxable years. In the returns of petitioner’s wife for these years, she reported dividends received on the stocks in question, together with capital gain derived from the sale of certain stocks, and deducted capital loss sustained on the sale of other stocks.

In computing the deficiencies respondent treated the stocks as belonging to the petitioner, including in his income the dividends and capital net gain and allowing the capital net loss as a deduction. Petitioner assails the determinations of the respondent on the ground that in or prior to the taxable years he had made valid gifts of all of said stocks to his wife.

Certain stocks involved in the present proceedings were also involved in a former proceeding, and as to these respondent contends that our former decision is res judicata and that petitioner is concluded thereby. In respect of the balance of the stocks involved in controversy here, respondent contends that the acts of the petitioner fell measurably short of effecting completed gifts to his wife. We will therefore consider the issue as it relates to the two classifications of stock indicated.

Our report in the prior proceeding was promulgated May 29, 1930, at 19 B.T.A. 1260. The taxable years were 1923, 1924, 1925, and 1926, while the taxable years in the present case are 1927, 1928, 1929, and 1930. The parties in both cases are the same. In the earlier case the petitioner contended that he had made a valid gift of certain corporate stocks to his wife, the dividends from which respondent had included in petitioner’s income and taxed to him. We there held that the evidence was insufficient to establish that the petitioner had made a completed gift to his wife of the stocks in controversy, and approved respondent’s determination.

The petitioner prosecuted an appeal from our decision, which was affirmed in part and reversed in part by the United States Circuit Court of Appeals for the Sixth Circuit on April 5, 1932, at 57 Fed. (2d) 633 (certiorari denied, 287 U.S. 621). The court held that, as to those stocks which had . been transferred on the book's of the respective corporations from petitioner, to his wife, valid gifts had been made and that dividends on such stocks were properly taxable to her. The record disclosed that dividends were paid by the Champion Spark Plug Co., the Richardson- Co., and the Fifty Associates Co. upon stocks standing in the name of petitioner’s wife. In all other respects our decision was affirmed.

Both the petitioner and his wife had stocks of the following companies standing in their names: Richardson Co., Fifty Associates Co., and Commerce Guardian Trust <& Savings Bank. Respondent alleged in his pleadings, and the petitioner does not deny, that ½ computing the deficiencies involved in these proceedings respondent did not transfer from the wife’s returns and include in petitioner’s income dividends on any stocks standing in the wife’s name. On the contrary, petitioner alleges that the transferred dividends in respect to which he complains were paid by checks of the respective corporations drawn to his order, and that he endorsed such' checks and deposited them in his wife’s savings account. We must assume, therefore, that all dividends involved in the present case were paid on stocks standing in the name of the petitioner, and that dividends on stocks of the corporations above mentioned, in which corporations both petitioner and his wife held stocks of • record in their names, were in fact paid on the stocks standing in the petitioner’s name.

In Docket No. 52938 petitioner alleges that the respondent erroneously included in his income dividends paid on stock of the Champion Spark Plug Co., which dividends were reported in the wife’s return for 1927. However, the record discloses that respondent determined that the stocks on which said dividends were paid stood in the wife’s name, and they were not transferred from the wife’s return and included in petitioner’s income.

Stocks of the following companies involved in the present proceedings, exclusive of stocks standing in the name of petitioner’s wife, were also embraced in the former proceeding hereinabove referred to: J. D. Insulator Co., Tiedeman Glove Co., National Supply Co., Eeserve Building Co., Commerce Guardian Trust & Savings Bank, Fifty Associates Co., American Eolling Mills Co., Eichardson Co., Maumee Collieries Co., and Larrowe Milling Co.

These are all the companies involved in the prior case except the Champion Spark Plug Co., which is not in the present case for the reason that the dividends paid on the stock of this corporation, standing in the wife’s name and reported in her return for 1927, were not transferred to the petitioner.

The first question for .consideration is whether or not our former decision is res judicata and conclusive in respect of dividends paid during the taxable years on stocks of the above named companies, of record in the name ,of the petitioner, which stocks petitioner contends, nevertheless, he had given to his wife.

In Tait v. Western Maryland Ry. Co., 289 U.S. 620, the Supreme Court held that the doctrine of res judicata is applicable in actions concerning Federal income tax, notwithstanding the. scheme of the revenue acts is an imposition of tax for annual periods, and the exaction for one year is distinct from that for any other. In this connection, the Court pointed out that,

The scope of the estoppel of a judgment depends upon whether the question arises in a subsequent action between the same parties upon the same claim or demand or upon a different claim or demand. In the former case a judgment upon the merits is an absolute bar to the subsequent action. In the latter the inquiry is whether the point or question to be determined in the later action is the same as that litigated and determined in the original action.

Since the claim or demand in the first proceeding before us concerned taxes for the years 1923-1926, and the claims or demands in the present proceedings embrace taxes for 1927-1930, the case at bar falls within the second class above mentioned, and the inquiry is whether the point or question to be determined here is the same as that litigated .and determined in the former proceeding.

Petitioner argues in the instant case that the dividends paid during the taxable years 1927-1930 on stocks of the corporations above named should not be taxed to him because he had given those stocks to his wife prior to 1927. The acts which he contends effected valid gifts are the same acts which he urged in the former proceeding respecting the same stocks. None of those stocks, which then stood in petitioner’s name, was transferred from petitioner to his wife on the records of the corporations subsequent to 1926 and prior to the close of 1930.

No new act or circumstance has been alleged or proved to establish a subsequent gift, but petitioner here relies upon substantially the same facts which we considered in the former proceeding and held insufficient to constitute completed gifts.

Our decision on this point was approved by the Circuit Court of Appeals in the following language, “As to the shares of stock not transferred upon the books of the issuing companies, we are of the opinion that the decision of the Board of Tax Appeals was correct.”

Thus, the point or question to be determined in the case at bar, in so far as concerns dividends paid on the stocks of the corporations above set out, is precisely the same as that litigated and finally determined in the original proceedings. We hold, therefore, on authority of Tait v. Western Maryland Ry. Co., supra, that our former decision is res judicata in respect of the stocks of the corporations involved therein and above set out, and that the parties are concluded thereby. See also Charles P. Leininger, 29 B.T.A. 874; Portage Silica Co., 29 B.T.A. 881; Mary Haller, 26 B.T.A. 395.

The present proceedings embrace stocks of the following companies which were not considered in the prior case: Airway Electric Appliance Co., Toledo Trust Co., Toledo Steel Products Co., Toledo Mortgage Co., Morris Plan Bank, First National Bank-Toledo, Defiance Machine Co., Citizens Necessities Co., and American Reserve Insurance Co.

Whether the dividends paid during the taxable years 1927-1930 on the stocks of the companies last aboye named, and whether the capital gains and losses resulting from sales of some of said stocks should be reflected in the computation of petitioner’s tax liability, depends upon whether or not petitioner made valid and completed gifts of the stocks to his wife subsequent to 1928, as contended by him. As to such alleged subsequent gifts, our former decision, of course, is not res judicata, and the issue must be decided on the evidence before us.

However, the evidence submitted by the petitioner in the present record to show that he made gifts to his wife of the stocks here in question subsequent to 1926 is substantially the same as that offered to establish gifts of the stocks embraced in the original proceeding, and the reasons which impelled us in that case to hold the evidence insufficient leads to the same conclusion here in respect of the alleged later gifts.

All the stock alleged to have been given to the wife after 1926 stood in petitioner’s name on the books of the corporations. They were transferred of record from petitioner to his wife some time subsequent to April 5, 1932, more than a year after the close of the last taxable year now before us. The circumstances which petitioner contended constituted the making of valid gifts to his wife of the stocks embraced in the former proceeding were stated by us in our report at 19 B.T.A. 1266, as follows:

From time to time at undetermined dates, the petitioner endorsed certificates of stock which he owned in various corporations, and also executed powers of attorney and attached to other certificates of stock, all of which he turned over to his confidential secretary, Gertrude M. Eeswick, with instructions that the said documents should bo placed in a safety box in the Commerce Guardian Trust and Savings Bank under the name of his wife, Helen B. Marshall. The petitioner was a director of some of the corporations referred to, and continued as the record owner of the stock on the records of all the corporations. The dividend checks received on the stock so endorsed and placed in the safety box of his wife, as well as the dividend checks received on certain other stocks not so placed in said box, were endorsed by the petitioner or by his secretary acting for him, and were deposited in a savings account carried in the name of his wife, as above set forth. The petitioner did not deliver any stock certificates to his wife personally, but merely told her in a general way what he was doing. Mrs. Marshall did not make deposits in or withdrawals from the savings account in which the said dividend checks were deposited.

Concerning the stocks alleged to have been given to his wife subsequent to 1926 petitioner testified in the present case as follows:

The Witness : Every certificate was either endorsed in blank or there was a legal power for transfer. You are familiar with the little form, properly signed and. fastened to the certificate and delivered to Miss Reswiek, and, I believe, put in Mrs. Marshall’s safe deposit box.
Q And all that occurred prior to 1927?
A As to the stocks then owned?
Q Yes.
A And all' stocks since acquired have been handled in exactly the same way, in so far as, from any circumstances, they happen to he in my name.
Q Or any split-up?
A Yes, any split-up.

Since the circumstances surrounding the malting of the alleged gifts subsequent to 1926 are the same as those disclosed in the former proceeding, we hold, for the reasons there set forth, that the evidence in the case at bar is insufficient to establish valid gifts of the stocks here in controversy.

Accordingly, respondent’s determinations are approved.

Judgment will be entered for the re,span dent.


author: Lansdon: TRAmmell,

text:
    James R. McCahill, Petitioner, v. Commissioner of Internal Revenue, Respondent. Francis T. McCahill, Petitioner, v. Commissioner of Internal Revenue, Respondent. Eugene P. McCahill, Petitioner, v. Commissioner of Internal Revenue, Respondent. Charles M. Denny, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent. Catherine M. Lane, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 69743-69746, 69766.
    Promulgated February 13, 1934.

      Guy Chase, Esq., for the petitioners.

      James E. Pollc, Jr., Esq., for the respondent.
   OPINION.

Lansdon:

The single issue here is whether the ore content of a mine, valued in 1922 for estate tax purposes at $206,662.24, may be revalued later as a basis for computing deductions from income on account of depletion. The Revenue Act of 1928 provides for a reasonable allowance for depletion and that the basis for the computation' thereof, when the property is transmitted by death of a prior owner, shall be its fair market value at- the time of death. In this proceeding the prior owner died on August 14,1922, and by the terms of her will the property in controversy was later distributed to the trustees. In such circumstances the property is deemed to have been acquired by the trust on the date of death of the testator. Gage v. Brewster, 280 U.S. 327; Security Trust Co., 25 B.T.A. 29; affd., 65 Fed. (2d) 877.

The facts disclose that after the death of the testator, appraisers duly appointed by a court of competent jurisdiction determined that on August 14,1922, the property in controversy had a value of $206,-662.24. This appraisal was based on data on file in the offices of the Minnesota State Tax Commission. Taking the estimated tonnage from such records and applying the royalty rate, less expense, the present worth thereof on the basis of a seven-year life of the mine was computed in the amount above set out. The estimated tonnage and computation of value were not made personally by the executors, who had no practical knowledge of such matters, but by other persons employed for such purposes. The value so computed was included in the inventory of decedent’s estate attached to the Federal estate tax return duly filed by the executors. In so doing the executors acted in good faith. Upon audit of such return a deficiency was determined by the Commissioner, and on petition to the Board the controversy was finally settled and closed by order of the Board at Docket No. 31743, on December 30,1930, about two years before the deficiency notices herein were mailed to the several petitioners, and the statute of limitations has now run against any additional estate tax. At no time during the pendency of such estate tax proceedings did the Commissioner question the correctness of the appraisal as of the date of the decedent’s death.

The rate of depletion necessary to exhaust the value of the ore reserve determined by the appraisal was applied to the tonnage produced annually and deductions based thereon were allowed by the respondent until some time in 1928, when the entire original valuation was exhausted, and since then no depletion has been allowed. About 1925 it was discovered that the tonnage estimate of August 14, 1922, was very much too low, but no new estimate or valuation was made at that time. By the middle of 1928 such estimated tonnage had all been recovered. For the remainder of 1928 and the taxable years 1929 and 1930 ore in excess of the original estimate was mined and shipped in the respective quantities of 340,255, 557,403, and- 435,260 tons.

In 1932, at the request of the petitioners, an experienced and competent engineer, long familiar with the geology of the Mesaba Range, made a new estimate of the tonnage recoverable from the mine as of August 14,1922. This estimate was based only on information accessible in 1922, but its preparation involved the use of the so-called “ slump theory ”, which was known to very few mining engineers in 1922, but was generally used in 1932. We are satisfied that such estimate is approximately correct and that at the basic date there were at least-4,723,109 tons of recoverable ore in the mine.

The petitioners contend that upon the basis of the facts they should be allowed depletion during the remaining life of the mine after January 1, 1929, sufficient to recover the amount of the 1922 value which they now claim. In support of this contention they rely on the statutory provision which entitles them to reasonable allowances on account of depletion, and Regulations 74, articles 228 and 229. This Board and the courts have held that if an estimate of reserves at the basic date is erroneous, depletion allowance after discovery of error may be adjusted in accordance with facts not known at the date of the original estimate. In every instance, however, it was expressly set out that the sole purpose of the adjustment was to enable the taxpayer to recover the capital cost of the ore reserves without tax. Big Four Oil & Gas Co., 28 B.T.A. 61; Stouts Mountain Coal Co., 4 B.T.A. 1292; Sterling Coal Co., Ltd., 8 B.T.A. 549. In none of these cases was there any controversy over the total amount of cost or value to be recovered, and our decision related only to the redetermination of the unit of depletion necessary to exhaust the remaining unrecovered capital cost during the life of the property. In passing upon a similar question in Kehota Mining Co. v. Lewellyn, 28 Fed. (2d) 995; affd., 30 Fed. (2d) 817; certiorari denied, 219 U.S. 864, the court said: “ Under the language of this regulation it is perfectly plain that the new estimate is only to be applied to the capital remaining to be recovered”, and further laid down the principle now recognized as governing the depletion of all natural resource reserves, except oil and gas, that “ The taxpayer is entitled to recover the cost of the property by way of depletion.”

In our opinion the above cited authorities relied on by the petitioner have no bearing on the exact question here, which is the contention of the petitioner that it is entitled to revalue the ore x-eserve acquired in 1922, and then valued at $206,662.24, for the purpose of exhausting such new value by the application of an adjusted rate of depletion thereto. It is obvious, of course, that if the reserve in question had been acquired by purchase after March 1, 1913, this question would not be here and the only function of the Board would be to adjust the depletion rate to enable the petitioner to recover the unexhausted cost at the date to which the new estimate of recoverable tonnage is applicable. Here the petitioners have no cost, and their basis, for depletion is an estimated value at date of acquisition.

In the Revenue Act of 1928 it is provided, that in the case of property transmitted by death the basis upon which depletion is to be allowed shall be the fair market value of the property at the time of the death of the decedent. Article 221 (b) of Regulations 74 defines fair market value as that amount which would induce a willing-seller to sell and a willing buyer to purchase. Article 226 (a) provides that:

(a) * * * Where the fair market value of the property at a specified date is the basis for depletion and depreciation deductions, such value must be determined, subject to approval or revision by the Commissioner, by the owner of the property in the light of the conditions and circumstances known at that date, regardless of later discoveries or developments in the property or subsequent improvements in methods of extraction and treatment of the mineral product. * s *

At the basic date herein the fair market value of petitioners ore reserve was estimated in exact conformity with the regulations. It was approved and has never been revised by the Commissioner, and depletion deductions completely exhausting such value have been allowed. Upon the evidence it is perfectly clear that the value of $206,662.24 was based on all the information known at that time. Article 228 states that no revaluation so determined and approved will be allowed during the continuation of the ownership under which such value was determined, except in case of subsequent discovery as defined in article 240 or of misrepresentation, fraud, or gross error as to any facts determinable on the basic date, and this only with the wi-itten permission of the Commissioner. The present question is not within the purview of article 240, which relates to discovery value. Neither misrepresentation nor fraud is alleged and it is clear that the executors acted in good faith. We are equally convinced that there was ixo gross error as to facts determinable at that time. The Commissioner has not granted written permission authorizing revaluation. It follows, therefore, that petitionei-s’ claim must be denied, because the value determined in 1922 was the fair market value of the property at that time and such value is the amount which petitioners are entitled to exhaust by depletion allowances. Baucum v. Arkansas Power & Light Co., 15 S.W. 1261; J. J. White Lumber Co., 24 B.T.A. 274.

Reviewed by the Board.

Decision will be entered for the respondent.

TRAmmell,

dissenting: In my opinion, the question is, What was the value of the ore property at the basic date ? My view is that the evidence shows that the original valuation was erroneous and should be corrected, not on any evidence subsequently developed or based on subsequent events, but on account of gross error in the original valuation.

       Art. 228. * * * No revaluation of a property whose value as of the basic date has been determined and approved will be made or allowed during the continuance of the ownership under which the value was so determined and approved, except in the case of a subsequent discovery as defined in article 240, or of misrepresentation or fraud or gross error as to any facts determinable on the basic date. Revaluation on account of misrepresentation or fraud or such gross error will be made only with the written approval of the Commissioner. * •* t:

      Art. 229 * * *
      When information subsequently obtained clearly shows the estimate to have been materially erroneous, it may be revised with the approval of the Commissioner.


author: Morris :

text:
    Virginia Iron, Coal and Coke Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 51576.
    Promulgated February 13, 1934.

      L. A. Nuclcols, Esq., for the petitioner.

      J. A. Lyons, Esq., for the respondent.
   opinion.

Morris :

This proceeding is for the redetermination of deficiencies in income tax of $11,794.94, $14,913.92, and $16,967.68 for the calendar years 1922, 1923, and 1925, respectively.

Two questions are raised for our consideration; whether income arising from the purchase by a taxpayer of its own bonds is to be reported in the year in which the purchase is made or in the year when the bonds are canceled and retired, when purchase and cancellation do not occur in the same year, and whether the amount of the gain is the difference between the issuing price and the purchase price or the March 1, 1913, value and the purchase price when the bonds were issued prior to that date, and the value as of that date was less than the issuing price.

The petitioner is a corporation organized under the laws of Virginia, with its principal office at Roanoke. At or about the time of its organization in 1899 it executed and issued 8,940 first mortgage 5 percent bonds of the par or face value of $1,000 each, secured by a first mortgage upon certain of its properties. These bonds were due and' payable 50 years after their date. All of the 8,940 bonds were issued by the petitioner for cash or the equivalent equal to their par or face value. The fair market value on March 1,1913, of all of its bonds then outstanding was $970 per bond of the par or face value of $1,000.

During the calendar year 1922 the petitioner canceled and retired 523 of the bonds of a total par or face value of $523,000, which prior to such cancellation it had reacquired from the holders thereof for the aggregate sum of $447,531.25, or $75,468.75 less than the issuing price of the bonds so canceled and retired, and $59,778.75 less than their fair market value as of March 1, 1913. During the calendar year 1922 the petitioner purchased and reacquired 227 of its bonds from the holders thereof for the aggregate sum of $212,628.75, or $14,371.25 less than the issuing price of the bonds so acquired and $7,561.25 less than their fair market value as of March 1, 1913.

During the calendar year 1923 the petitioner, canceled 11 of said bonds of a total par or face value of $11,000, which petitioner prior to cancellation had reacquired from the holders thereof for the aggregate sum of $9,571.62, or $1,428.38 less than the issuing price of the bonds so canceled and retired, and $1,098.38 less than their fair market value as of March 1, 1913. During the calendar year 1923 the petitioner purchased and reacquired 322 of its sáid bonds from the holders thereof for the aggregate sum of $297,488.75, or $24,511.25 less than the issuing price of the bonds so acquired, and $14,851.25 less than their fair market value as of March 1, 1913.

During the calendar year 1925 the petitioner canceled and retired two of the bonds of a total par or face value o.f $2,000, which prior to such cancellation it had reacquired from the holders thereof for the aggregate sum of $1,651.40, or $348.60 less than their issuing price, and $288.60 less than their fair market value as of March 1, 1913. During the same calendar year the petitioner purchased and reacquired 64 of its bonds for the aggregate sum of $58,212.50, or $5,787.50 less than the issuing price, and $3,867.50 less than their fair market value as of March 1, 1913.

During the taxable years in question the petitioner kept its accounts and made its income tax returns on the calendar year basis and in accordance with the accrual system of accounting.

In making its income tax returns for the years 1922, 1923, and 1925 the petitioner did not report any income from the transactions hereinabove set forth. The respondent in determining the deficiencies treated the difference between the par value of the bonds canceled and retired in each of said years and the purchase or reacquired price paid by the petitioner therefor as income to the petitioner for each of said years.

The first contention of the petitioner is that the income derived by it from the purchase of its bonds accrued during the year in which the purchase took place and not in the year in which the bonds theretofore purchased were canceled and retired. This issue is decided in favor of the petitioner on the authority of Garland Coal & Mining Co., 28 B.T.A. 348.

In order to determine the petitioner’s second contention, namely, that the measure of gain is the difference between the purchase price and the March 1, 1913, value of the bonds, it is necessary to consider briefly the basis of the Supreme Court’s decision in United States v. Kirby Lumber Co., 284 U.S. 1, holding that such a transaction gives rise to taxable gain. The Court held there was no shrinkage of taxpayer’s assets and as a result of its dealings it made available assets previously offset by the obligation of bonds now extinct. The use of March 1, 1913, value as a measure of gain must be predicated on the theory that part of the gain accrued prior to that date. If the gain, however, results from the freeing of assets previously obligated, no portion of that gain could have accrued prior to March 1, 1913, as the obligation on the bonds as of that date was equivalent to their par or face value. Although the market value may have been less, there was no proportionate freeing of assets or making them available. The obligation was the same, and remained so until extinguished through purchase. We are unable to agree with the petitioner that part of the gain accrued prior to March 1, 1913, and that therefore the value as of that date should be used in measuring the gain.

Although the question of March 1, 1913, value was not involved in the Kirby case, the bonds having been issued and repurchased in 1923, the Supreme Court approved the regulations as a correct statement of the law. Article 545 (1) (c) of Regulations 62, and a similar provision appears in subsequent regulations, sets the amount of gain as the excess of the issuing price or face value over the purchase price. The same conclusion was reached by the Board in Consolidated Gas Co. of Pittsburgh, 24 B.T.A. 901, in which the bonds in question were issued in 1898.

Judgment will be entered under Rule 50.