author: Goodeich: VaN FossaN,

text:
    F. A. Pease, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 50283, 50889, 65238, 66847.
    Promulgated March 6, 1934.

      John Enrietto, Esq., for the petitioner.

      Hartford Allen, Esq., for the respondent.
   OPINION.

Goodeich:

In these proceedings, which were consolidated upon motion, petitioner contests respondent’s determinations of deficiencies in income tax as follows:

The sole issue is whether payments received by petitioner during these years from certain Ohio municipalities are exempt from Federal tax. Petitioner contends that they are so exempt because he was an officer of each of these municipalities, and, as such, was engaged in carrying out an essential function of government. Respondent determined and maintains that petitioner was an independent contractor, and has laid a tax on his receipts. Petitioner does not claim to be a servant of the municipalities; respondent does not dispute that the municipalities were political subdivisions of the state.

As our findings of fact we adopt the stipulation of counsel, but do not here repeat it since a briefer statement is sufficient for the purposes of this report.

It appears that, under ordinances providing for the employment of an engineer adopted by their respective councils, petitioner was “ employed and appointed ” village engineer for each of eight villages in Ohio and served as such during the period here material. During this period also he served as city engineer for the city of Cleveland Heights, having been “ employed and appointed ” as such by the city manager, with the approval of the council, by written contract. Generally, his duties for all these municipalities were to supervise “ the improvement and repair of streets, avenues, alleys, lands, bridges, viaducts, sidewalks, sewers, drains and water courses” within them. He passed on subdivision plats; he verified the list of property owners concerned under petitions for improvements. He, or his representative, attended council meetings and supplied requested information as to matters of engineering. He made surveys for improvements, prepared the plans, specifications, and estimates; and assisted, with his information, the solicitor in drafting ordinances pertaining to improvements. The proposal blanks and advertisements for bids on projects were prepared by him, and he received and tabulated the contractors’ bids. After council awarded the work, he drafted the contract specifications and supervised its performance. He directed, inspected, and supervised the construction, tested materials (in the laboratory of his own corporation) and made monthly reports of the progress of the work on which the contractors received their pay, and issued certificates of completed contracts. After analyzing the cost of the completed improvements he prepared the assessment rolls and specified the amount to be levied against each property. In the performance of his duties he was responsible to the several village councils and, with respect to Cleveland Heights, to the city manager. He took no oath of office.

During this time petitioner was free to accept professional engagements other than his work for these municipalities. He was president and principal stockholder of the Pease Engineering Co., did some work for it and received from it a salary of $16,500 annually. Some of petitioner’s work for the municipalities was done with the facilities and employees of this company. He employed also an assistant (H. C. Gallimore). Petitioner’s compensation from the municipalities was based upon a percentage of the cost of the projects undertaken, except as to Cleveland Heights, which paid him a fixed salary. Respondent allowed as deductions from income expenses paid by petitioner to the Pease Co. for use of its employees, laboratory, office, and an allowance for overhead, as well as the salary of his assistant; in short, all of his expenses in connection with these employments. His gross receipts from the municipalities, the expenses allowed, and the net amounts included in income (against which petitioner protests) are as follows:

In advertisements for bids, in correspondence, in certification of invoices, and in reports of examinations made by the Auditor and by the Bureau of Public Offices of Ohio, petitioner was designated and described as “ village ” or “ city engineer ” of these municipalities and was so listed (with respect to Cleveland Heights) in a directory of city officials compiled by a department of the State University.

In attempting to determine petitioner’s status, whether officer of a political subdivision or independent contractor, we are met by contradictions of evidence, a situation not unusual in cases involving this problem. Upon analysis the evidence in part supports petitioner’s claim that he was an officer; in part it supports the view that he was an independent contractor, as respondent maintains. For instance, the designation of petitioner as village or city engineer (an office for which the state statute provides) by ordinance duly adopted and in official lists and directories; the assignment to him of important duties (some of which were prescribed by statute) and the reliance upon his skill and discretion in the performance of them; the right of the municipalities to call upon him for information and advice, to demand his time; and, in general, the acceptance of him by the public as an officer of these several municipalities, all tend to prove that such was his status. On the other hand, the fact that he took no oath (though the statute so required) ; the fact that he was not, and could not be, a qualified elector (another statutory requirement of a municipal officer in Ohio) of each of these several municipalities; the indefiniteness of his tenure in his various engagements, some of which could be terminated at the pleasure of the respective councils; the contractual characteristics of the various ordinances under which he was “ appointed and employed ”; the fixing (but not by statute), except in one instance, of his compensation upon a percentage basis, rather than as a definite salary; and the furnishing of his supplies, equipment, and assistants at his own, instead of the public expense — these aspects tend to characterize him as an independent contractor.

We fully recognize that no single one of the considerations mentioned, nor of the other evidentiary bits disclosed in the record and not here set out, is controlling in an attempt to classify petitioner, but that all must be weighed together and the determination made upon the whole view. So doing, and following as best we can the few clear guides emerging from the welter of decision upon this highly controversial subject, and adding our unwillingness to believe that, for the purpose of exempting his earnings from the necessary burden of taxation, one may be deemed an “ officer ” of nine different municipalities at one and the same time — officering at wholesale so to speak — we conclude that respondent was right in his determination that petitioner was an independent contractor. See Metcalf & Eddy v. Mitchell, 269 U.S. 514; Mesce v. United States, 64 Ct. Cls. 481; Lucas v. Reed, 34 Fed. (2d) 263; reversed, 281 U.S. 699; Roberts v. Commissioner, 44 Fed. (2d) 168; affirming 13 B.T.A. 438.

In support of the opposite view, petitioner relies heavily upon the decision of the Supreme Court of Ohio in Wright v. Clark, 164 N.E. 512, wherein a village engineer, “ appointed and employed ” and serving under facts almost identical with those respecting the situation of petitioner in, the case at bar, was held to be an officer of the municipality and subject to the statutory prohibition against making and profiting from other contracts with the village which employed him. Petitioner urges, of course, that we are bound by this decision, in view of the well established practice of Federal tribunals of following the settled construction of state statutes without further inquiry. But that practice has been disregarded where, as here, the construction by the state court was occasioned upon considerations of law and policy wholly different from those underlying a case concerning Federal taxation. See Frelmort Realty Corp., 29 B.T.A. 181, and cases there cited. Consequently, in determining petitioner’s status in his attempt to save his income from taxation, we are not bound by the view of the state court respecting his relation to the municipalities, determined from a different angle in a different problem.

Our conclusion precludes the necessity of classifying petitioner’s various duties toward the municipalities, and his acts, as between proprietary and essential governmental functions. And, since there is nothing in the record to indicate that the laying of a tax upon petitioner’s compensation as an independent contractor would impair his ability to perform his duties, or interfere with the ability of the municipalities to procure necessary aid to them in their undertakings, that feature need not be considered.

Reviewed by the Board.

Judgment will be entered vmder Rule 50.

VaN FossaN,

dissenting: The petitioner contends that he was an officer of the several municipalities referred to in the findings of fact and that, therefore, the imposition of a Federal income tax on his receipts from the municipalities is in contravention of the doctrine that the Federal Government may not tax the governmental instru-mentalities of a state or political subdivision thereof. The position of the respondent, on the other hand, is that the petitioner is 'merely a contractor who performed services which were not essential goy-ernmental functions and, therefore, the income in question is taxable. The facts of record are not disputed, albeit they are scantily presented in the majority opinion. Likewise that the municipalities are political subdivisions of a state is not questioned.

The doctrine upon which the petitioner bases his contention is the settled law of the United States. Collector v. Day, 11 Wall. 113; United States v. Railroad Co., 17 Wall. 322; Ambrosini v. United States, 187 U.S. 1. Although it is sometimes difficult to classify a particular instrumentality of a state so as to determine its right to exemption from Federal taxation, it is settled that one who is an actual incumbent of an office created by state statute and engaged in a government function falls within the established exemption and his income derived from the compensation of the office is immune from Federal taxation. Collector v. Day, supra; Metcalf & Eddy v. Mitchell, 269 U.S. 514; David K. Cochrane, 26 B.T.A. 1167, and cases therein cited. Cf. George W. Fuller, 9 B.T.A. 708.

In the Metcalf & Eddy case the Supreme Court applied several tests to determine whether the plaintiffs were officers. The Court held that the facts failed to satisfy any of the tests applied. The Court said:

We think it clear that neither of the plaintiffs in error occupied any official position in any of the undertakings to which their writ of error in No. 183 relates. They took no oath of office; they were free to accept any other concurrent employment; none of their engagements was for work of a permanent or continuous character; some were of brief duration and some from year to year, others for the duration of the particular work undertaken. Their duties were prescribed by their contracts and it does not appear to what extent, if at all, they were defined or prescribed by statute. We therefore conclude that, plaintiffs in error have failed to sustain the burden cast upon them of establishing that they were officers of a state or a subdivision of a state within the exception of section 201 (a).
An office is a public station conferred by the appointment of government. The term embraces the idea of tenure, duration, emolument and duties fixed by law. Where an office is created, the law usually fixes its incidents, including its term, its duties and its compensation. United States v. Hartwell, 6 Wall. 385; Hall v. Wisconsin, 103 U.S. 5. The term “ officer ” is one inseparably connected with an office; but there was no office of sewage or water supply expert or sanitary engineer, to which either of the plaintiffs was appointed.
The contracts with them, although entered into by authority of law and prescribing their duties, could not operate to create an office or give to plaintiffs the status of officers. Hall v. Wisconsin, supra; Auffmordt v. Hedden, 137 U.S. 310. There were lacking in each instance the essential elements of a public station, permanent in character, created by law, whose incidents and duties were prescribed by law. See United States v. Maurice, 2 Brock. 96, 102, 103; United States v. Germaine, 90 U.S. 508, 511, 512; Adams v. Murphy, 165 Fed. 304.

I do not believe, however, that the Metcalf & Eddy case is authority for the proposition that if there is actually an office to which an incumbent has been appointed, the immunity of his compensation from tax depends upon his ability to meet every one of the tests suggested by the court. We will first inquire, therefore, whether the positions held by Pease were public offices.

The several municipalities to which the petitioner furnished supervisory services as an engineer were organized under the Home Rule Section of the Constitution of the State of Ohio and also pursuant to statutes of that State. Section 3 of Article XVIII of the Constitution of Ohio reads as follows:

Municipalities shall have authority to exercise all powers of local self-government and to adopt and enforce within their limits such local police, sanitary and other similar regulations, as are not in conflict with general laws. (Adopted Sept. 3, 1912.)

The phrase “ all powers of local self-government ” contained in the foregoing constitutional provision was construed by the Supreme Court of Ohio in Fitzgerald v. Cleveland, 88 Ohio St. 338; 103 N.E. 512. In that case the court said :

As to the scope and limitations of the phrase “ all powers of local self-government ”, it is sufficient to say here that the powers referred to are clearly such as involve the exercise of the functions of government, and they are local in the sense that they relate to the municipal affairs of the particular municipality.
It 'will not be disputed that one of the powers of government is that of determining what officers shall administer the government, which ones shall be appointed and which elected, and the method of their appointment and election. These are essentials, which are confronted at the very inception any undertaking, to prepare the structure or Constitution for any government. Obviously such power would be included among “all powers of local self-government ” which any municipality has authority to exercise under section 3 of Article XVIII as to any officers of such municipality, unless the election of such officers is not a matter of municipal concern, or unless such power has been excepted in some manner from those granted.

The city of Cleveland Heights was organized on the “ City Manager Plan ”, General Code of Ohio, section 3515-19. The charter provides for an elective council and for the election by the council from its own members of a president thereof with the title of mayor. It also provides for the appointment by the council of a city manager who shall be the chief administrative officer of the city. It creates several administrative departments and provides for the appointment of directors thereof. A department of engineering was not created by the charter, but it is provided that the city council may create and abolish any offices not specifically created by the instrument. The charter authorizes the city manager to appoint all administrative officers except as therein otherwise provided. As to the method of appointment of such administrative officers, it is stipulated by the parties to this proceeding as follows:

The use of an agreement between the City Manager and the officer with confirmation and approval by the Council is the usual and ordinary method of filling all offices not specifically covered by the charter. This procedure has at all times been approved by the State Examiner from the Department of the Auditor of State, Bureau of Inspection and Supervision of Public Offices. Thereafter said S’. A. Pease served continuously as City Engineer for the City of Cleveland Heights during the taxable years in question, all by virtue of appointments made by the City Manager of said City with the approval of the Council in each instance.

The other eight municipalities were respectively governed by a mayor and council, section 3515-29, General Code of Ohio, the mayor and members of the council each being elected for terms specified in the statute. Section 3515-29 provides that the legislative authority of a municipality is vested in the council and section 3515-30 of the General Code of Ohio provides that the council may create and discontinue municipal departments and offices. Clearly, therefore, the legislative power vested in the council by the statute and the powers of local self-government conferred on municipalities by Article XVIII of the Constitution of Ohio, as contrued in Fitzgerald v. Cleveland, supra, could only be exercised by the passage of ordinances not contrary to law.

The office of engineer of a municipality was created by a statute of the State of Ohio. Sections 4364 and 4366 of the General Code of Ohio, which relate to cities and villages within the state, provide as follows:

Seo. 4364. General duties. Under tbe direction of council, the street commissioner, or an engineer, when one is so provided by council, shall supervise the improvement and repair of streets, alleys, lands, lanes, squares, wards, landings, market bouses, bridges, viaducts, sidewalks, sewers, drains, ditches, culverts, ship channels, streams and water courses. Such commissioner or engineer shall also supervise the lighting, sprinkling and cleaning of all public places, and shall perform such other duties consistent with the nature of his office as council may require.
Sec. 4366. Duties of various officers; compensation. In each municipal corporation having a fire engineer, civil engineer or superintendent of markets such officers shall each perform the duties prescribed by this title and such other duties not incompatible with the nature of his office as the council by ordinance requires, and shall receive for his services such compensation by fees, salary or both as is provided by ordinance.

The sections refer to the engineer’s “ office ”; they describe his duties and speak of him as an “ officer.”

Each of the nine municipalities, acting with the right of local self-government, and in the manner provided by the fundamental law of their respective governmental organization, appointed the petitioner to this office so created. That he was the engineer for each municipality is stipulated. With respect to the appointment by tbe city of Cleveland Heights, it is stipulated, in effect, that his appointment was made in the same manner as appointments to all other offices not specifically designated in the city’s charter; namely, by contract executed by the city manager and approved by the mayor and council. His appointments so made by the city of Cleveland Heights were for definite terms of one year each and his compensation stated in the agreement of appointment was approved by the mayor and council.

The other eight municipalities, acting by ordinances passed by their respective council, appointed Pease as village engineer. These ordinances, on their face, were acts of municipal legislation and not contracts. Some of these ordinances specified the petitioner’s duties in terms substantially similar to those of section 4364 of the General Code of Ohio and the facts show that in respect to all of the municipalities involved herein his duties and powers were such as are defined in the statute. Moreover, it clearly appears in the facts that the petitioner’s duties as engineer for the nine municipalities were such official duties as would be performed by a municipal officer only. As engineer he prepared an assessment roll, fixing special assessments against property benefited by public improvements, and determined what property was so benefited. As engineer he was a member of a board of review to review assessments made. These acts were quasi-judicial in their nature and were of a character which is consistent only with an official status.

In the case of Wright v. Clark, 119 Ohio St. 462; 164 N.E. 512, it appeared that the plaintiff in error had been designated to serve as village engineer for the village of Bedford, Ohio, by an ordinance similar in form to those involved in these proceedings. The basis of the action against Wright was an alleged violation of section 3808 of the General Code of Ohio. That section provides in substance that no officer of a municipal corporation shall have any interest in the expenditure of money on the part of the corporation other than his fixed compensation, and the section provides a penalty for violation. The fundamental issue was whether Wright was an officer. The Supreme Court of Ohio, referring to the resolution passed by the council of the village of Bedford, naming Wright as village engineer, said that all services performed by Wright were performed under the resolution. The court also said:

In the case of State ex rel. Attorney General v. Jennings, 57 Ohio St. 415, 49 N. E. 404, 63 Am. St. Rep. 723, Judge Minshall discussed the essentials of a public office and reached the conclusion that a public officer is one who exercises in an independent capacity a public function in the interest of the people by virtue of law, which is only saying in another form that he exercises a portion of the sovereignty of the people delegated to him by law. Sections 4364 and 4366 impose upon a city or village engineer the duty to “ supervise the improvement and repair of streets, avenues, alleys, lands, lanes, squares, wards, landings, market houses, bridges, viaducts, sidewalks, sewers, drains, ditches,' culverts, ship channels, streams and water courses.” Those statutes further impose upon such engineer any other duties consistent with the nature of his office, as council may require. By reference to the resolution it will be seen that he was charged with the duty of preparing plans, specifications, estimates and profiles, together with engineering work necessary for the installation of water improvements, pavements, sewers, and other contract improvements to their completion. He was also charged with inspection of all such improvements. Naturally the terms of the resolution would imply that he should supervise the letting of contracts, determine when the work was properly completed, and make preliminary and final estimates and certificates to authorize payment. The evidence shows that he in fact did all of, these things. The statute having named an engineer as an officer, it only remains to he determined whether Wright in fact exercised the powers and performed the duties referred to in the statutes. Even without the aid of those statutes, it is inevitable that Wright should be determined to be an officer. His position was one which involved the exercise of judgment, skill, discretion, initiative. His judgment was depended upon by those who were charged with ultimate responsibility. It is said in 28 Cyc. 583: “A city engineer is an ‘ officer ’ within a statute providing for the appointment of officers by the municipal government * * *. In determining whether a contract for street improvements has been substantially complied with, the city engineer acts in the exercise of quasi-judicial functions.” An engineer certainly occupies a very responsible position in protecting the interests of the public in the expenditure of public funds. His inspection requires that he should ascertain and certify quantities and qualities of materials, and the nature of workmanship. Even in this village of 6,000 inhabitants the amounts of money expended for public construction during his period of service must have been approximately a million dollars. The engineer is peculiarly the officer who stands between the village and the threatened impositions of those who have dealings with the village in matters of public work.
Tested by the standards of common law definitions, Wright must be held to fully measure up to the essential elements of a public officer. It is further claimed by Wright that the council created the office and filled it in the same resolution. We do not take this view of the matter. The office was created by Section 4364, General Code. It was filled by the resolution of council.

The duties performed by the petitioner herein were the same class of duties as those performed by the plaintiff in error in the TVright case. No distinction exists between the facts in this case and those in the Wright case except that the petitioner in these proceedings performed services as engineer for nine municipalities, while in the Wright case it does not appear that the plaintiff in error acted as village engineer for more than one municipality. But there is no statute of Ohio declaring that the same individual may not be engineer for several municipalities, nor do we know of any statutory requirement in Ohio that an officer shall be a resident of the municipality in which he is an officer.

It is my opinion that the Wright case is determinative of the question as to the character of the positions occupied by petitioner. He was an officer of the several municipalities. The contracts of appointment executed by the petitioner and the city manager of Cleveland Heights, with the approval of the mayor and council, did not create an office. They filled one already provided by statute, and the same is true with respect to the ordinances referred to in the findings of fact.

The respondent contends, however, and the majority opinion holds, that the case of Wright v. Clark, supra, does not bind the Federal Government. It is true that the Federal courts have held that the Federal taxing acts have their own criteria. Burnet v. Harmel, 287 U.S. 103; Weiss v. Wiener, 279 U.S. 333. But it has also been held that state law controls where the operation of a taxing act, either by express language or by necessai’y implication, is dependent upon state law. Crooks v. Harrelson, 282 U.S. 55; Poe v. Seaborn, 282 U.S. 101; United States v. Cambridge Bldg. & Loan Co., 278 U.S. 55. If we must consult state law to determine whether a building and loan company is of such a corporate character as to be exempt from Federal taxation under the taxing statutes (United States v. Cambridge Bldg. & Loan Co., supra), it would seem that with like necessity we must refer to state statutes as interpreted by the highest coiirt of the state to determine what offices have been created within the borders of a state and by what procedure they may be filled. The interpretation of a state statute by the highest court of the state becomes a part of the statute itself and is as binding on the United States as the text of the statute. Balkan v. Woodstock Iron Co., 154 U.S. 117; Walker v. Marks, 17 Wall. 648. However, even if the decision of the Ohio Supreme Court is not binding in the matter, I am of the opinion that it correctly interpreted the law and that our decision on the law of the instant case should be to the same effect.

It is objected by the respondent that the petitioner took no oath of office and that, therefore, he was not an officer judged by the criteria stated by Mr. Justice Stone in Metcalf & Eddy v. Mitchell, supra. Examination of the Court’s opinion in that case leads to the conclusion that the Court does not hold that one can not be an officer unless he has taken an oath of office. I understand the Court’s reference to an oath to mean that the taking of an oath is one of the customary requirements of office, and, therefore, one of the usual indicia of office. The statutes of Ohio provide that any municipal officer shall take an oath before entering upon the duties of his office, and section 4242 of the General Code provides in effect that the council may declare vacant the office of any person who has failed to take the oath of office. It does not follow, however, that the taking of the oath is a condition precedent to the incumbency of office. Unless the council has acted under the statute and declared the office vacant the incumbent is an officer, notwithstanding the failure to take an oath. The council of the municipalities involved herein did not declare the office of engineer vacant at any time and it is clear from the facts that the petitioner performed his duties during all of the taxable years. In the Wright case the plaintiff in error had taken no oath of office. Nevertheless the court held that he was an officer.

It is contended also by the respondent that, since some of the ordinances provided that the petitioner’s appointment might be rescinded on due notice and since, admittedly, any of the ordinances might be repealed at any time, there was no permanence attaching to his appointment and that, therefore, the facts in this respect fail to satisfy the test of permanence. Metcalf & Eddy v. Mitchell, supra. It is my opinion that these facts are of little importance with respect to the issue involved herein, for the reason that in general it is within legislative power to discontinue as well as to create and fill offices. Hall v. Wisconsin, 103 U.S. 5. In Hugh W. Ogden. 24 B.T.A. 1239, where the respondent, as in the present proceedings, contended that the petitioner was an independent contractor, we held that the fact that the petitioner’s tenure was indeterminate in time did not of itself make him an independent contractor.

Nor can it now be doubted that the functions performed by petitioner were essential governmental functions, a question mooted by the majority opinion. As said by the Supreme Court in Trenton v. New Jersey, 262 U.S. 182, “ the basis of the distinction [between governmental and proprietary powers] is difficult to state, and there is no establish rule for the determination of what belongs to the one or the other class.” In South Carolina v. United States, 199 U.S. 438, the Supreme Court observed that the decisions “ indicate that the thought has been that the exemption of state agencies and instrumentalities from national taxation is limited to those which are of a strictly governmental character, and does not extend to those which are used by the state in the carrying on of an ordinary private business.” In the case before us there is no suggestion of private business. Petitioner had supervision of the installation of all public improvements. The Supreme Court of Ohio, in Wooster v. Arbenz (1927), 116 Ohio St. 281; 156 N.E. 210, made the following observation:

Tlie state of Ohio has always recognized its obligation to keep the public ways open, and has delegated that duty to municipalities so far as streets and alleys within municipalities are concerned, and, further recognizing the public character of that obligation, has enjoined by § 3714, General Code, upon municipalities an obligation to keep them open, in repair, and free from nuisance. This duty was for the first time imposed by legislation on May 3, 1852 (50 Ohio Laws, p. 244 § 63), in practically the identical language in which that obligation is now couched in § 3714, General Code. By that enactment the Legislature of Ohio has removed all doubt as to the public character of streets and alleys within municipalities, and by the same token it has become firmly established that the maintenance of streets, alleys, and other highways is th< performance of a governmental function. * * *

Though the actual installation of public streets has been called a proprietary function by some courts, there would seem a valid distinction between the work of those actually installing the improvement and that of the official charged with the supervision, on behalf of the city, of such work, involving as it does the direct protection of the financial interests of the city and its taxpayers. This latter would seem clearly to be a governmental function.

In Harris v. District of Columbia, 256 U.S. 650, the Supreme Court of the United States held that the sprinkling of streets to keep down dust for the purpose of promoting the health and comfort of the general public is a public or governmental act. Certainly the supervision of the laying out of sewers for proper sanitation and the installation of similar public improvements are official duties incident to the provision of necessities essential to the health of the citizens. They are not functions capable of performance equally well by those acting in a private capacity. Nor are they conducted by the munici-¿jality for profit. Cf. South Carolina v. United States, supra. I am of the opinion that the duties which petitioner performed were essential governmental functions. For the most recent discussion of the trend of the law on this subject see Leland Powers v. Commissioner, 68 Fed. (2d) 634, in which the court reversed the Board.

It will readily be admitted that in some respects petitioner bore resemblance to a contractor. He furnished the services of his organization for municipal projects, he maintained a testing laboratory and otherwise found it necessary to employ others to aid him. His charges were in some instances on a percentage of work done basis. I do not believe, however, that these facts are of preponderating weight, nor do they overcome the express holding of the Supreme Court of Ohio that a man in all ways similarly situated was an officer of the municipalities which he served as engineer.

It is my opinion that the petitioner was an officer of the political subdivisions of the State of Ohio engaged in performing essential governmental functions and that, .therefore, the Federal Government may not tax his compensation as such officer.


source: Caselaw Access Project

author: Aeundell :

license: Public Domain

text:
    Alexander M. Crane and Caroline E. Crane, Executors of the Estate of Alexander B. Crane, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 71718.
    Promulgated March 6, 1934.

      James H. Mofnagle, Esq., for the petitioners.

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

Aeundell :

This proceeding was initiated to test the correctness of respondent’s determination of a deficiency in the amount of $3,343.95 in income tax for the period January 1 to April 16, 1930, on which latter date Alexander B. Crane died. On the date of Crane’s death he owned certain obligations the transmission of which, occasioned by his death, respondent claims resulted in a taxable gain under section 44 (d) of the Revenue Act of 1928.

We adopt as our findings of fact a stipulation filed by the parties. It appears that on March 1, 1913, Crane owned a tract of land in Scarsdale, Westchester County, New York, which he continued to own until May 17,1929. On that date he sold 42.295 acres for $400,-000, receiving $10,000 in cash and a bond from the purchaser in the amount of $390,000, payable in installments, the bond being secured by a mortgage on the land sold. The fair market value of the land sold was $125,000 on March 1, 1913. In the income tax return filed by the decedent for the calendar year 1929 he elected to return the total profit of $212,272.33 from the sale on the installment basis, pursuant to section 44 (b) of the Revenue Act of 1928. This method of reporting the- profit from the sale was approved by the respondent.

The face value of the bond and mortgage when received by the petitioners on the occasion of the decedent’s death was $387,000, and the fair market value thereof on that date was $344,430.

In the income tax return filed by the decedent’s executors for the period January 1 to April 16, 1930, income in the sum of $194,038.33 was reported by reason of the fact that decedent died owning the aforesaid bond and mortgage, and such income was computed as if the change in ownership of the bond and mortgage resulting from decedent’s death had been a transmittal of an installment obligation embraced within the provisions of section 44 (d) of the Revenue Act of 1928. The income so reported was returned as capital net gain and tax thereon computed pursuant to the provisions of section 101 (a) of the Revenue Act of 1928. In connection with reporting this item the petitioners filed a protest and stated that they would apply for a refund.

In the notice of deficiency mailed March 2, 1933, the respondent, in computing the tax liability for the period January 1 to April 16, 1930, increased the income from $194,038.33 to $220,853.48 and the petitioners now agree that respondent’s computation of income in this latter sum is correct. The deficiency so determined was computed by the respondent as taxable under section 101 (a) as a capital net gain, but in an amended answer filed with the Board the respondent alleges that he erred in computing the tax at capital gain rates and claims an additional deficiency on the ground that the income is ordinary income and taxable at normal and surtax rates under sections 11 and 12 (a) of the Revenue Act of 1928.

The identical questions raised in the instant proceeding were before the Board in the case of Provident Trust Co., of Philadelphia, Executor, of the Estate of Owen Osborne, 29 B.T.A. 374, and the decision herein is governed by that opinion. We there held, following Estate of Erskine M. Ross, 29 B.T.A. 227, that section 44 (d) of the Revenue Act of 1928 covered the case of the transmission of installment obligations occasioned by death, and it follows that the decedent realized income which was subject to tax. We further held, in Estate of Owen Osborne, supra, that the gain subject to tax on the death Of the owner of installment obligations is the gain realized on the sale of the property in connection with which the installment obligations were received, and the taxation of which was merely deferred under the installment sales provisions of the taxing statute. In this case the property sold in 1929 had been held since prior to March 1, 1913, and was a capital asset as that term is defined in the revenue act. The gain is therefore subject to tax at the capital gain rate. Respondent’s request for an increased deficiency, based on his prayer that the gain be computed at ordinary rates, is denied.

Decision will be entered under Rule 50.


author: OPINION. ARUndell:

text:
    Gertrude H. Thompson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 70828.
    Promulgated March 6, 1934.

      •Joseph B. Lynch, Esq., for the petitioner.

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

ARUndell:

This proceeding was initiated to test the correctness of respondent’s action in determining a deficiency for the year 1930 in the amount of $12,761.77. The case was submitted on the petition and answer and certain facts orally stipulated in the record.

The question involved is the right of petitioner to file a joint return for the calendar year 1930 in which was included the income (or loss) of her deceased husband, who died on June 27, 1930. Her husband, the late William Boyce Thompson, suffered a net loss from January 1, 1930, to the date of his death in the amount of $209,450, and if this amount may' be offset against petitioner’s income, which was less than that amount, it would serve to relieve her from tax liability for the year in question.

The point raised is squarely covered by respondent’s regulations and more particularly by article 381 of Regulations 74, promulgated under the Revenue Act of 1928, which is controlling here. We quote the pertinent words: “A joint return of husband and wife may be filed only if they were living together at the close of their taxable year. Where one spouse dies prior to the last day of the taxable year, the surviving spouse should not include the income of the deceased spouse in a joint return for such taxable year.” A similar regulation appears in article 401 of Regulations 69, under the Revenue Act of 1926, and article 381 of Regulations 77, under the Revenue Act of 1932. The petitioner presented no argument or authority which convinces us that the regulations of the respondent are improper or in any wise contrary to law. There have been two revenue acts enacted by Congress since this provision first appeared in the regulations, the Revenue Acts of 1928 and 1932, and no change in this provision was made in either of them. While the statute itself is not specific on this point, “ it is the settled rule that the practical interpretation of an ambiguous or doubtful statute that has been acted upon by officials charged with its administration will not be disturbed except for weighty reasons.” Brewster v. Gage, 280 U.S. 327. See also United States v. Dakota-Montana Oil Co., 288 U.S. 459; Murphy Oil Co. v. Burnet, 287 U.S. 299.

In Katherine B. Bliss, 29 B.T.A. 1037, we reached a similar conclusion in a case arising under the Revenue Act of 1924, under which act the Commissioner had no regulation covering the point.

Decision will be entered for the respondent.


author: ARunbell:

text:
    The National Tile Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 64013.
    Promulgated March 8, 1934.

      William S. Hammers, Esq., for the petitioner.

      Harold Allen, Esq., for the respondent.
   OPINION.

ARunbell:

The pleadings raise an issue concerning a deduction for patent rights allegedly worthless, but no evidence was offered on this question, except the stipulated amount of expenditures in connection with the acquisition and development of the patent rights, and on brief counsel for petitioner abandoned this issue.

On the other issues, in addition to the facts that we have found, the parties have stipulated that there is no dispute as to the correctness of the amounts claimed by petitioner as deductions for the year 1929.

We take it as established law that the discount and expenses incurred in connection with the disposal of bonds or other obligations of indebtedness are a part of the cost of the funds secured, and should normally be amortized over the time the obligations are to be outstanding. United States Playing Card Co., 15 B.T.A. 975; East Ninth Euclid Co., 26 B.T.A. 32; affirmed on rehearing, 27 B.T.A. 1289. We think it is equally well established that a deduction is allowable when the obligations so sold at a discount are retired before maturity, the measure of the deductible amount being the unamortized discount and expense in connection with the issuance of the security which has not theretofore been charged off. American Chicle Co., 23 B.T.A. 221.

The respondent undoubtedly does not dispute the general principles here announced, for they are in accordance with his regulations, articles 68 and 176 of Regulations 74, but he advances an exception to the general rule in this case by reason of the fact that the money used to retire the bonds was obtained from the sale of petitioner’s stock, under the tei’ms of which sale it was understood that the bonds would be retired. By reason of these circumstances respondent takes the position that the cost of retiring the bonds was an expense incurred in connection with the issuance of the stock, and, as the expense of securing additional capital by way of a stock issue may not be deducted as an ordinary and necessary business expense, the deduction sought should be disallowed. Emerson Electric Co., 3 B.T.A. 932.

Where the bonds are retired by payment of the indebtedness in cash, it does not seem to us important how the obligor secured the money to discharge the obligations. The fact that the money was obtained by the issuance of stock rather than out of earnings is not here controlling. It is the discharge of the obligation that creates the occasion for writing off the unamortized portion of the discount and expense and any premiums paid in connection with the retirement of the bonds. The case is ruled by East Ninth Euclid Co., supra, and the petitioner must prevail. See also American Chicle Co., supra; Indiana Lamp Corp., 28 B.T.A. 491. In the last cited case we specifically held that the payment of a premium on the retirement of bonds gives rise to a deductible loss.

Decision will be entered under Bule 50,


author: McMahon :

text:
    Lulu Tirrill Coombs, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 62490.
    Promulgated March 8, 1934.

      David, A. Buckley, Esq., and L. P. Mattingly, Esq., for the petitioner.

      E. A. Ton jes, Esq., for the respondent.
   OPINION.

McMahon :

The petitioner on her income tax return for the year 1929 deducted from gross income the amount of $82,089.73 as representing a loss alleged to have been sustained upon the sale at public auction of 1,572 shares of stock of the Fajardo Sugar Co. and 45 shares of stock of the National City Bank of New York, which deduction was disallowed by the respondent. There is no controversy as to the cost of the stock. The only question before us is whether the transaction on or about December 26, 1929, herein involved constitutes an actual sale.

The only witness in behalf of the petitioner was John Bass, a member of the partnership for approximately ten years last past. He testified that he took no part in the negotiations conducted by. the partnership for the purchase of this stock; that he was not present at the auction sale at which the partnership made a bid for the stock; that, although he was positive some representative of the partnership was present at the auction sale, he could not recall who was present; that he did not know “ the physical handling of the transaction ”, but that he did know that the auctioneer “ turned over the stock in exchange for the check ”; that the partnership was interested in acquiring any stock in the Fajardo Sugar Co. offered for sale because they had learned that several large stockholders of that company were getting ready to “ proxify ” at the next annual meeting of its stockholders for the purpose of obtaining the control of the company’s voting stock.

In the case of Luella Hoyt Slayton, 29 B.T.A. 931, the Board stated :

* * * While a sale for tax purposes is not to be disregarded because of its motive, on the other band, a mere gesture without the vital intent to change ownership is not to be recognized as a sale merely because superficially it resembles one. * * * [Emphasis ours.]

James B. Coombs had but a third interest in the partnership and the remaining interest therein was divided among five other members. However, his financial interest does not measure the extent of his influence or control over the other members or the affairs of the partnership. Furthermore, although the partnership paid to the auctioneer the purported purchase price, which apparently was turned over to the petitioner, less the auctioneer’s commission, such purported purchase price less commission received by the petitioner was returned to and deposited with the partnership. Thus the purported consideration for the stock found its way back into ■ the possession and control of the partnership. The witness testified that he did not know whether the petitioner made any substantial withdrawals thereafter and, there being no evidence to the contrary, it may be inferred that the partnership had the use of this money until the stock was returned to the petitioner on March T, 1930. There is no showing in what manner the payment of the consideration for the purported resale to the petitioner on March 7, 1930, was handled. Her deposit account with the partnership was not produced and it is just as reasonable to assume that the transaction required merely a bookkeeping entry, there being sufficient moneys on deposit and in the possession of the partnership to cover the amount.

The reason advanced for the purported purchase by the partnership of the Fajardo Sugar Go. stock is not very convincing. The witness testified that, having learned toward the end of 1929 that “ several large stockholders in the Fajardo Sugar Company ” were trying to secure proxies, apparently in an effort to divest the partnership of voting control, the partnership was “ not interested in letting any such stocks that may be offered for sale go into other peoples’ hands.” Upon cross-examination, he testified that the partnership made a practice of buying and selling this stock and that he did not know exactly whether or not the partnership bought considerable stock at that time—

but they [the partnership] usually buy and sell Fajardo stock m vieio of the fact that we [the partnership] own most of the stoeTc, and we have a particular interest in this particular security. The people naturally come to us first in order to find out whether we would like to buy or sell, because at times we can give them better quotations. [Emphasis supplied.]

This apparent inconsistency upon the subject of the ownership of the stock is not explained in the record. Furthermore, it seems rather strange that, at a time when the partnership was concerned about maintaining its voting control of the Fajardo Sugar Co., the petitioner should offer her stock for sale through a securities auctioneer, assuming, of course, that she knew, as she undoubtedly did, that her husband had a third interest in the partnership and that the account of the Fajardo Sugar Co. was its largest account at that time.

The witness testified that when the partnership check was issued to the auctioneer the cash account on the partnership’s books of account was credited showing cash paid out, and that he did not know what asset account was charged but it was charged on the hooks.” Therefore we do not know how this transaction was treated on the books of the partnership.

Furthermore, the evidence is meager and not at all enlightening as to the attitude or actions of the petitioner in this transaction. The witness testified that “ we knew that the stock was put up for sale because it was advertised, probably by Mr. Coombshe knew about it.” We must assume that she endorsed the stock certificate in order to have it canceled and transferred to the partnership and that she endorsed the check received from the auctioneer in order to turn it over to the partnership, but even as to this the record is barren. Although the witness was a member of the partnership and the partnership apparently controlled the Fajardo Sugar Co., and although the witness became, some time after the transaction herein involved, vice president of the company, he testified that he was not familiar with the records of the corporation showing the stock transfer as he was not an officer of the corporation at that time. The stock records of the company were not introduced in evidence.

We are not convinced that the transaction on or about December 26, 1929, was actuated on the part of the petitioner by the intent or purpose of absolutely getting rid of the stock and on the part of the partnership of absolutely acquiring it as its own without any condition covering its later return to the petitioner. Harold B. Clark, 2 B.T.A. 555. In that case the Board stated:

* * * The payment of a price and the delivery of certificates do not constitute the sole requisite of a valid sale. The parties must make a bona fide transfer as persons dealing at arm’s length would do — the seller for the purpose of absolutely getting rid of the stock and the buyer for the purpose of absolutely acquiring it as his own without any condition covering its later return to the seller. Receiving a credit for the price and the mere indicia of ownership without the mutual element of intent on both sides to complete an absolute .sale, can not constitute a basis for a deduction for loss under the provisions of the tax law. A loss to be deductible must be a reality. [Emphasis supplied.]

The action of the respondent must therefore be approved.

Reviewed by the Board.

Decision will he entered for the respondent.


author: Arundell:

text:
    I. C. Brill, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 49663.
    Promulgated March 8, 1934.

      Johnston Wilson, Esq., for the petitioner.

      Willis R. Lamsford, Esq., for the respondent.
   OPINION.

Arundell:

Petitioner bases his claim for a deduction in 1928 on the theory that the sale of his stock in January 1928 was an embezzlement thereof. “Embezzlement may be defined broadly as the fraudulent appropriation of another’s property by a person to whom it has been intrusted or into whose hands it has lawfully come.” State v. Cooke, 130 Ore. 552; 278 Pac. 936. In the cited case the Supreme Court of Oregon sustained the conviction of the president of Overbeck & Cooke Co. for embezzlement where the firm had received securities on an order to sell and deliver the proceeds to the owner and, after making the sale, refused to pay over the money. The court there points out that the customer had no general account with the firm, that his relation with the firm was that of principal and agent rather than debtor and creditor, and that a very different relation would have occurred had the customer merely directed the sale of securities and the credit of the proceeds to his account.

The evidence here, in our opinion, does not establish an embezzlement of the stock. The brokerage firm acted within its rights in repledging the stock with Logan & Bryan as security for its marginal account with the latter. Richardson v. Shaw, 209 U.S. 365, 379.

The established rules in such cases are set forth in Rothschild v. Allen, 90 App. Div. 233; 86 N.Y.S. 42; aff'd., 73 N.E. 1132, as follows:

* * * The relation which is established between the broker and a customer who buys stocks upon margin is that of pledgor and pledgee. The legal title to the stocks is in the purchaser, and the brokers are the pledgees of the same for the repayment of all advances made by them in connection with the transaction. Markham v. Jaudon, 41 N.Y. 235; Baker v. Crake, 66 N.Y. 518, 23 Am. Rep. 80; Gillett v. Whitting, 120 N.Y. 402, 24 N.E. 790. Under such relation the broker has the right to pledge the stocks and obtain from the pledgee advances of money thereon, and the latter, by such transaction, obtains a good lien thereon which he may enforce by a sale of the pledge without notice to the owner of the legal title, and without incurring any liability to him therefor, or to the broker making the pledge. * * *

The duty of Overbeck & Cooke Co. was not to deliver the specific securities purchased for petitioner, but to keep on hand or under their control either those securities or a like kind and amount so as to be able to make delivery when petitioner paid up his account and made demand for the stock. The act of the firm in placing itself in the position of being unable to deliver, by failure to meet its obligation to Logan & Bryan, perhaps constituted a conversion for which it would be liable to petitioner in a civil suit had he made demand for his stock. Rothschild v. Allen, supra. But it is stipulated that petitioner made no demand; hence, it is at least doubtful whether he could maintain an action in trover for conversion. MacDonnell v. Buffalo L. T. & S. D. Co., 193 N.Y. 92; 85 N.E. 801; Branch v. Latham, 174 N.Y.S. 295; Jeffries v. Pankow, 112 Ore. 439; 229 Pac. 903.

Thus, as we view the case, petitioner has failed to establish that his relation to the firm in 1928 was other than that of a creditor. According to the testimony the claim of petitioner against Overbeck & Cooke Co. was treated by the bankruptcy court as only a general claim, and he shared in the distribution as a general creditor. Those customers who made demand for stock purchased for their accounts by the bankrupt were accorded a preferred status in the distribution of the estate.

In view of the above, petitioner’s right to a deduction, if any, must be under the bad debt provisions of the taxing statute. He must fail under these provisions because he has established neither an ascertainment of worthlessness nor a charge-off within the year. Throughout the entire year 1928 the trustee in bankruptcy was of the opinion that there would be sufficient l'ecoveries so that there would be no loss to creditors. There is no evidence that petitioner had any information different from that of the trustee upon which he could predicate a claim of ascertainment of worthlessness.

On brief counsel for respondent states that, by reason of discovery of an error, a deficiency of $450.55 is now claimed.

Decision will be entered for the respondent in the amount of $4-60.55.


author: Adams :

text:
    Scott P. Myers, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 54747.
    Promulgated March 8, 1934.

      Glande W. Dudley, Esq., for the petitioner.-

      Harold Allen, Esq., for the respondent.
   OPINION.

Adams :

Under the facts as found, the sole question presented for determination is:

Was the $200,000, a part of the consideration for the stock in question, income to the petitioner for the year 1928 ?

The respondent contends that title to the securities passed from the petitioner to the purchaser; that delivery was made and the agreed consideration was paid in full; that the transaction was closed as between the seller and purchaser, and the entire- amount of the consideration must be considered in determining the profit or loss arising from the sale.

Petitioner argues in his brief that he did not actually or constructively receive the $200,000 during the year 1928 and cites us to authorities which discuss the doctrine of constructive receipt. In the view we take of the case these authorities are not controlling and it is unnecessary to discuss them.

Petitioner relies upon the case of Cleveland Trinidad Paving Co., 20 B.T.A. 772, and other cases to like effect, where the Board held that a portion of the compensation withheld by a city under the terms of a paving contract providing for such withholding as a guarantee of maintenance was not income of the petitioner for the year in which the work was completed and did not accrue as income until received.

We do not believe that these authorities are applicable to the situation presented to us here. In those cases the petitioner was not entitled to receive that part of the compensation withheld until he had fully performed and it was uncertain whether he would ever be entitled to receive it. The cases of Maro Brownfield, 8 B.T.A. 1164; K. E. Merren, 18 B.T.A. 156; and Union Guardian Trust Co. v. Burnet (D.C.App.), 64 Fed. (2d) 712, are, in our judgment, readily distinguishable from the case under consideration.

Here the purchaser paid the full purchase price for petitioner’s stock and petitioner voluntarily agreed that a part of the price so paid would be placed by the depositary with a trustee, during a limited period of time, for the purpose of protecting the purchaser against any loss which might accrue to it by reason of any defect in petitioner’s title. While so held petitioner had the right to require the trustee to invest and reinvest the fund according to his direction and the income derived from the amounts so invested accrued to him.

As between the purchaser and the seller it was a closed transaction; title to the stock passed to the purchaser and the purchaser parted with the consideration. It retained no right or title to any part of the guarantee fund and could acquire none except upon the happening of a condition subsequent. In the meantime the trustee, in a practical sense, acted merely as a custodian of the fund which it held; all the economic benefits of the fund belonged to the petitioner.

The respondent contends that this cas'e is controlled by the holding of the Board in Federal Development Co., 18 B.T.A. 971, in which proceeding, we said: “ The fact that one who sells property guarantees the purchaser against some contingency arising in some future year and makes a deposit as security for the guarantee does not lessen by the amount of the guarantee or the amount of the deposit the profit which he had made on the sale. If in such case the happening guaranteed against takes place in the following year and a portion of the deposit is in consequence lost, the result is one affecting income for that year to the extent of the loss.”

The petitioner undertakes to distinguish the Federal Development Co. case from the case under consideration, among other things, saying that this case is distinguished from the Federal Development Co. case in that in that case the asset sold was the undisputed property of the taxpayer.

In the reply brief of the petitioner, his counsel argues that the interest of the minors in the 668 shares is real and cannot be ignored; that the petitioner did make a gift of the 668 shares in question to the said minors and by virtue thereof they have a vested right therein. Further, petitioner’s counsel argues that Myers had no right to sell the 668 shares and, therefore, no right in the $200,000 fund set aside, and, consequently, should have no liability for taxes in connection therewith.

The petitioner in his dealing with this stock treated it as his own. He asserted in the Probate Court that it was his own. He represented, in the option contract and the sales contract which followed it, that it was his property and that he had a right to sell and dispose of it.

We are unable to agree to the conclusion reached by the petitioner in his 'brief. We recognize that this case is distinguishable from the Federal Development Co. case in that in the Federal Development Co. case the consideration was paid directly to the seller and then a part of the purchase price was deposited as a guarantee against possible contingencies; while in this case the consideration was paid to a designated depositary and a part thereof deposited by it with a trustee selected by petitioner. Outside of this, we are unable to perceive any distinction between the two situations, and we do not regard this distinction as material. Cf. B. S. Roberts, 7 B.T.A. 1162; Blaine L. Stoner, 29 B.T.A. 953; Edwin R. Effler, 29 B.T.A. 784.

In the view we take of this case, the respondent’s determination must be affirmed. •

Decision imlEbe. entered for the respondent.


author: Smith:

text:
    Carl P. Dennett, Petitioner, v. Commissioner of Internal Revenue, Respondent. Marie G. Dennett, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 71858, 72023.
    Promulgated March 13, 1934.

      R. Kemp Slaughter, Esq., and Hugh 0. Bickford, Esq., for the petitioners.

      Dean P. Kimball, Esq., for the respondent.
   OPINION.

Smith:

In these proceedings the petitioners claim the deduction from gross income of 1930 of losses alleged to have been sustained by each of them upon the sale of securities to the other. The respondent has disallowed the losses upon the ground that under the laws of Massachusetts there can be no valid sale of property between husband and wife. We think there is no merit in this position. We so held in a memorandum opinion entered April 20, 1932, in the case of Richard W. Kale, which was affirmed by the United States Circuit Court of Appeals for the First Circuit in Commissioner v. Hale, 67 Fed. (2d) 561. In that case the petitioner claimed the deduction of a loss upon the sale of shares of stock to his wife. The Board and the court allowed the deduction of the loss, the court observing: “ He has sustained an actual loss by the transfer as fully as though he had conveyed it for the same sum to a stranger.” To the same effect is Andrew J. Peters, 28 B.T.A. 976; Anna E. Riley, 29 B.T.A. 160.

A more serious question which is presented by these proceedings is whether the transfers of the wife to the husband and of the husband to the wife, in the circumstances, constituted bona fide sales of securities from which losses were sustained. From the standpoint of the marital community no loss was sustained. The community owned the same property and the same amount of cash after the transfers as before. But husband and wife are not taxed as a community under the income tax laws. Each is liable to income tax upon his or her gains and income. If a bona fide sale is made by husband or wife to the other, the transaction is to be treated in all respects as though it were a transaction with a stranger. Transactions of the character of those here involved invite scrutiny. If not made at a fair market price a question may arise as to whether the sale was bona fide. But in these proceedings the evidence proves that they were made at the market price. The General Capital Corporation was a large corporation. There was an active market for its shares. The sales were made at the quoted price for the shares. The respondent does not question that the sales were at the market price.

There can be no question but that the transactions between the petitioners effected a transfer of title to and possession of the shares. The separate estates of the two petitioners have always been dealt with as separate estates. It is true that the investment cash of the petitioners was kept in the “ J ” account, together with other cash, and it is true that either petitioner could draw checks against the account. But the books of account kept for the two petitioners and for others for whom Dennett handled moneys were kept rigidly separate. At any time the cash in the “ J ” account could be segregated to the several owners. The law of Massachusetts is entirely clear that the money in that account recorded as belonging to either the husband or wife and derived in each case entirely from their sole and separate estates actually was owned by the party thus shown as entitled thereto.

In Duggan v. Wright, 157 Mass. 228; 132 N.E. 159, a husband had turned over to his mother-in-law a check payable to him which he had received from a third party. The mother-in-law made a gift of the check to her daughter, the wife. Before the check was cashed some creditors of the husband attached his property. The wife gave him the check, told him to pay oif the attachment, and for them to assign the attachment to her. Thereafter, other creditors of the husband claimed this property and in doing so presented the proposition (1) that the check became his property because she had turned it over to him and (2) that, the money having become his, he in effect paid off the mortgage himself and the property belonged to him. The court brushed both contentions aside with the statement:

* * * They proceed upon the theory that money of the wife which passes into hands of the husband, even as her agent, become ipso facto the property of the husband, without regard to justice or the intentions of the parties. The doctrine that a husband may be the agent of his wife is too familiar to need the citation of authorities; and the law does not compel a husband to deprive the wife of her own money, if it comes to his hands as her agent, nor does such possession of her property by him change its ownership.

To like effect is Springfield Inst. for Savings v. Copeland, 160 Mass. 380; 35 N.E. 1132. In that case tbe first suit was to require tbe John Hancock National Bank to turn oyer to tbe wife’s estate tbe money in that bank which the husband had deposited in his name alone and subject only to his signature. The court found that the money was derived from the proceeds of the wife’s separate property. The court pointed to old cases where it might be inferred under certain circumstances that a wife had made a gift of money, but pointed out that this was only a rebuttable inference, to be determined by the evidence in a particular case. The court said:

* * * We think, however, that the most reasonable inference from the facts found or agreed in the cases at bar is that the wife intended neither to give nor to lend to her husband the money which he deposited in his own name in the John Hancock National Bank, but that she permitted it to be deposited in this manner for convenience, until it should be invested, with the intention that it might be used either for her own benefit or. that of her husband. It is evident that the whole of the balance of $748.94, standing to the credit of Mr. Goodenough on the books of the John Hancock National Bank, together with what has heretofore been expended for the use of Mrs. Good-enough, including the deposits in the savings banks, will not make up the amount of her money which is shown to have been deposited in that bank; and that, so far as appears, all the money which remains in that bank is her money, unless she has effectually given it to him. * * *

We are of opinion that the transfer made by each petitioner to the other constituted a bona fide sale of stock at the then market price.

In her return Mrs.. Dennett claimed the deduction of a loss of $50,024 on the sale of 2,000 shares of stock of General Capital Corporation. For this stock she received $100,000. The cost of the stock to her was $150,000. It is claimed that a stamp transfer tax of $24 was paid. But whether this payment, if made, was made by the husband or the wife does not appear. For lack of proof upon this point the loss is a legal deduction from gross income in the amount of only $50,000. Similarly, Dennett contends that he sustained a loss of $46,040 upon the sale of 1,000 shares of the stock to his wife in 1930. The cash book introduced in evidence does not show the payment of a stamp transfer tax. Accordingly, the apparent loss may not be increased to the extent of the $40 claimed to have been paid as such tax.

The respondent contends that if the petitioner is entitled to deduct any loss in respect of the sale to his wife he is entitled to deduct only six tenths of the claimed loss, on the ground that within 30 days from the date of the sale he acquired 400 shares of stock at $29 per share and that under section 118 of the Revenue Act of 1928 he is not entitled to deduct any loss in respect of the sale of 400 of the 1,000 shares. Dennett contends that he was a dealer in securities within the meaning of the section, and that section 118 has no application to him. The evidence does not show, however, that Dennett was anything more than an investor in securites. The contention of the respondent upon this point is sustained. Cf. Donander Co., 29 B.T.A. 312.

Mrs. Dennett further contends that she is entitled to deduct from her gross income a loss of $10,000 upon the bonds of the Detroit Railway & Harbor Terminal Co. At the time she made out her return for 1930 she was not aware that she had sustained this loss. The bonds were sold at auction in 1931, at a time when they were entirely worthless, at a price of $10, from which she received proceeds of $4. The fact that she succeeded in selling bonds that were entirely worthless in 1931 at an amount to return her $4 does not, we think, bar her from the deduction of the loss in 1930. The evidence proves the utter worthlessness of the bonds in 1930. The contention of Mrs. Dennett upon this point is sustained.

Reviewed by the Board.

Judgment will be entered wnder Bule SO.

SteRNhagen, Seawell, and Adams dissent.


author: Teammell :

text:
    Margaret E. Kidder, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 68845.
    Promulgated March 13, 1934.

      William B. Lare, Esq., for the petitioner.

      G. O. Holmes, Esq., for the respondent.
   OPINION.

Teammell :

The petitioner contends that she sustained a deductible loss on the sale on July 16, 1980, of 500 shares of Indian Refining Co. stock trust certificates for common stock, on the ground that the purchase on the same day of 500 shares of common stock of that company was not the acquisition of substantially identical property within the meaning of section 118 of the Revenue Act of 1928. That section provides as follows: .

SEC. 118. LOSS ON SALE OE STOCK OR SECURITIES.

In the case of any loss claimed to have been sustained in any sale or other disposition of shares of stock or securities where it appears that within thirty days before or after the date of such sale or other disposition the taxpayer has acquired (otherwise than by bequest or inheritance) or has entered into a contract or option to Acquire substantially identical property, and the property so acquired is held by the taxpayer for any period after such sale or other disposition, no deduction for the loss shall be allowed under section 23 (e) (2) of this title; nor shall such deduction be allowed under section 23 (f) unless the claim is made by a corporation, a dealer in stocks or securities, and with respect to a transaction made in the ordinary course of its business. If such acquisition or the contract or option to acquire is to the extent of part only of substantially identical property, then only a proportionate part of the loss shall be disallowed.

The respondent takes the position that the acquisition of -the common stock was the acquisition of substantially identical property as the voting trust certificates for .common stock and that, therefore, under the statute, the petitioner sustained no deductible loss.

The voting trust certificates represented the interest of the petitioner in the common stock. She would have been entitled to the common stock represented by the trust certificates six days after the sale of the certificates. We think that the voting trust certificates for common stock were substantially the same, within the meaning of the statute, as common stock. The holders of the common stock voluntarily created the trust to hold the stock for them. While after the creation of the trust the holders of common stock did not hold legal title to the stock, they were the beneficial owners. The trustee held the stock for them. It is true that the owners of the common stock could not vote it during the existence of the trust agreement. In our opinion, this fact is not sufficient to make such certificates a substantially different kind of property from the common stock itself. Otherwise, stockholders could circumvent the statute by creating trust agreements in order to sell certificates representing their ownership within 30 days from the creation of the trust agreement and buy back common stock. We do not believe that it was the purpose of the statute to permit such transactions.

It would seem clear that an exchange of voting trust certificates for common stock would be such an-exchange as would leave the taxpayer with substantially the same property as was possessed before and would not result in gain or loss. This is the position the respondent has taken in IT-2292, C.B. V-l, p. 12. A sale of trust certificates under circumstances such as existed in this case would not result in an actual loss. The petitioner, on the same day of the sale, purchased an equal number of shares of stock to which she would have been entitled, in any event, six days after the sale. The common stock merely took the place of the certificates and it is our opinion that no deductiblb loss resulted from the transaction within the meaning of section 118 of the Revenue Act of 1928.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: TRAmmell: Smith,

text:
    Frederick Krauss, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67922.
    Promulgated March 13, 1934.

      Virgil Y. Moore, Esq., for the petitioner.

      Roy N. McMillan, Esq., and P. 8. Crevie, Esq., for the respondent.
   OPINION.

TRAmmell:

It is the contention of the petitioner that the real estate in controversy became wholly worthless in 1930 and that he is entitled to a deduction of the cost thereof in that year. The respondent contends that no deduction is allowable with respect to real estate so long as the taxpayer holds title thereto, at least in the absence of some identifiable event which would create.a closed transaction giving rise to gain or loss.

The petitioner asks the Board to reverse itself in a-long line of decisions, beginning with A. J. Schwarzler Co., 3 B.T.A. 535, and relies upon the decision of the Circuit Court of Appeals for the Sixth Circuit in the case of Denman v. Brumbach, 58 Fed; (2d) 128, and contends that our decision in the case of Greenleaf Textile Corp., 26 B.T.A. 737, aff'd., 65 Fed. (2d) 1017, is distinguishable.

In the Greenleaf Textile case, supra, we distinguished the Brumbach case as follows:

* * * The Circuit Court of Appeals for the 6th Circuit, in the case of Brumbach v. Denman, 58 Fed. (2d) 128, affirming 48 Fed. (2d) 255, apparently recognized an exception to this theory by applying the “ practical test ” :of the Supreme Court in United States v. White Dental Co., 274 U.S. 398, and Lucas v. American Code Co., 280 U.S. 445, which had to do with losses in the value of personal property, to losses involving real estate. The exception which the court there recognized is the occurrence of an identifiable event during the taxable period in which the controverted loss is claimed of such consequence as to definitely fix the taxpayer’s loss, regardless of title. It was held there that a court order authorizing a bond issue and assessing a tax against lands for the payment of the principal and interest on the bonds when due, was such an event.
Although petitioner in the instant case has our sympathy, we are unable to find in the evidence before us any event of comparable effective consequence, upon the happening of which the worthlessness of the land in question was definitely and decisively determined. The absence of such occurrence brings this ease within the operation of the rule in A. J. Schwarzler Co., supra, the facts in which were somewhat similar to those here. * * *

We think that in this case no particular significance may be attached to the fact that the property was sold for taxes and that tax certificates were issued. In section 972 of the Compiled General Laws of Florida, 1927, Cumulative Supplement of 1932, it is provided as follows:

In case there are no bidders the whole tract shall be bid off by the tax collector for the State, and the tax collector must offer all such lands as assessed.

Section 983 of the statutes further provides that:

All tax sale certificates * * * issued to the State shall be held by the clerks of the circuit courts of the several counties wherein are situated the lands covered by such certificates * * *.

Section 1003 (1) of the statutes (Acts 1929, Extra. Sess.) provides as follows:

Any holder of a certificate of tax sale or a tax deed therefor, whether heretofore or hereafter issued, including the State of Florida, is hereby authorized on and after January 1st, 19S0, to file a bill in chancery to foreclose the lien of such certificate or deed, and the practice, pleading and procedure for foreclosure shall be in accordance with the practice, pleading and procedure for foreclosure of mortgages on real estate, except as herein otherwise provided and except that no personal judgment shall be given. No suit shall be brought on any tax sale certificate until after expiration of two years from the date of the certificate nor shall the State commence any such suit before the time hereinafter provided for such suit by the State; Provided,, however, that no suit shall be brought on any tax sale certificate upon any homestead until after the expiration of four years from the date of such certificate.

In construing these sections of the Florida statutes as they existed in 1930, the Supreme Court of Florida, in the case of Ridgeway v. Peacock, 131 So. 140, stated:

The statute gives the state a lien upon lands for taxes duly assessed thereon. Sections 896, 1020, Comp. Gen. Laws 1927. Such lien is evidenced by tax sale certificates issued at the sale for nonpayment of taxes. When the certificates are purchased by private parties at the sale, or from the state when the certificates are sold to the state, the statute provides that the owner of the land or others interested therein may redeem the cerificates within two years. At the end of the two-year redemption period, the private holder may get a deed or foreclose the lien evidenced by tbe tax certificate. If tbe state bolds tbe tax certificate when tbe redemption period expires, tbe title to tbe land vests in the state under tbe statutes. Tbe state may sell the certificate and issue a deed thereon after due notice to tbe owner, or may authorize tbe lien of the tax certificate to be foreclosed and tbe rights of the owners cut off. The state exercises this authority by virtue of its sovereignty to enforce tax payments. Tbe sovereign power is exerted through statutes that afford due process and equal protection of tbe laws to property owners.

Since there were no bidders for the property when it was offered for sale by the tax collector, it was bid in by the tax collector for the state. This, however, did not deprive the taxpayer of the ownership of that property. He had two years in'which to redeem and longer if someone did not purchase the certificates from the state and undertake proceedings in accordance with the- statute to obtain title. The tax sale involved in this case did not have any more effect than to establish a lien in behalf of the state for these taxes. The taxpayer, therefore, still owns the property and this brings us to the question as to whether the record in this case presents such facts as to entitle the taxpayer to a deduction for a loss with respect to this property. The taxpayer testified that he felt that the chance of Florida real estate having any value was long in the future and that the lots would never be worth the taxes, plus interest, in his lifetime. He also expressed the opinion that the property was worthless in 1930. We do not believe, however, that any identifiable event occurred in 1930-of sufficient character as to entitle the taxpayer to a deductible loss with respect to the property.

We see noWeason to depart in this case from our long line of decisions on that subject. See A. J. Schwarzler Co., supra; H. M. N. Muhle, 19 B.T.A. 1247; Consolidated Brick Co., 17 B.T.A. 831; Coalinga-Mohawk Oil Co., 25 B.T.A. 261; aff'd., 64 Fed. (2d) 262; certiorari denied, 290 U.S. 637.

With respect to the testimony as to the property being worthless, this consists of the opinion of the taxpayer based largely upon what was told him. He was not an expert in property values in Florida and we cannot attach sufficient weight to this testimony to find that the property was in fact worthless in 1930. The petitioner did testify that he undertook to give the property away. However, he did not state under what conditions, with respect to obligations for certain improvements or to what extent he made a search for someone who could have put such property to use. It may well be that the particular individual or individuals to whom he made such an offer might not have been able to either undertake to sell same or to use it. Because of the general reduction in value in the so-called collapse of land values in the United States, and particularly the reduction in values in Florida since the collapse of the boom in that state, property may be very-slow in selling. A purchaser might not be found within any particular time, but we are not convinced that the property had no value whatever.

Following our previously decided cases, we hold that the petitioner is nqt entitled to the. deduction claimed.

Reviewed by the Board.

Judgment will be entered for the respondent.

Smith,

dissentingIn my opinion the petitioner’s investment in the real, estate in question is deductible as a loss of the taxable year 1930. The facts as set forth in the majority report show conclusively that the real estate was acquired by the petitioner in transactions entered into for profit and that it was totally worthless in 1980. Section ,23 (e) of the Revenue Act of 1928 permits the deduction of losses sustained during the taxable year and not compensated for by insurance or otherwise., if incurred in any transaction entered into for profit. The statute makes no distinction between transactions involving the purchase of real estate and other transactions. I therefore disagree with the reasoning of the majority opinion, or at least with the inference to be gained from the reasoning of the cases cited and relied upon, that no deduction can be taken for a loss of an investment in real estate until such real estate has been sold or otherwise; disposed of irretrievably. The unreasonableness and impracticability of such a requirement is clearly illustrated by the facts in the instant proceeding, where the petitioner during the taxable year tried to sell the property for the amount of the taxes due but was unable either to sell it or to give it away with the tax overburden.

It seems to me that the identifiable event fixing the loss in 1930, which, in the majority opinion, is said to be lacking, is to be found in the foreclosure proceedings brought on its tax liens against the property by the State of Florida in that year, resulting in the issue of the tax sale certificates to the state and in the fruitless attempts of the petitioner to dispose of the property. In my opinion the statutory equity of redemption did not effect a postponement of the realization of . the petitioner’s loss, nor did the expiration of the redemption period, supply as sound or practical a test for identifying the loss as is afforded by the events which occurred in the taxable year before us. I think that our decision in this proceeding should follow Denman v. Brumback, 58 Fed. (2d) 128, cited in the majority opinion.

Black agrees with this dissent.


text:
    Luman W. Goodenough, Executor and Trustee under the Will of Philip H. Gray, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 32059.
    Promulgated March 13, 1934.

      Russell A. MeNwir, Esq., for the petitioner.

      F. T. Homer, Esq., for the respondent.
   opinion.

Smith:

On October 31, 1933, the Board promulgated its opinion in the above entitled proceeding, holding that the value of entirety property acquired in 1915 was not includabl'e in the gross estate of the decedent, who died November 25, 1922. On January 24, 1934, the respondent filed a motion:

* * * that the Board enter an order vacating and setting aside its decision promulgated October 31, 1933, and its final order of redeterminat’ion entered December 29,1933, in the above-entitled case, and set this case down for reargument on the merits upon the basis of the record heretofore made, * * *

The principal reason advanced in support of the motion is that the Board’s opinion is in conflict with the opinion of the Supreme Court in Griswold v. Helvering, 290 U.S. 56, which was handed down after the Board had entered its opinion in the above entitled proceeding. The premises considered, it is deemed unnecessary to calendar the motion for argument. In its opinion the Board relied particularly upon the language of the Supreme Court in Knox v. McElligott, 258 U.S. 546. In the Griswold case the Supreme Court stated:

The decedent died in 1923, while the foregoing provision was in effect. At the time of his death he and his wife held as joint tenants certain real estate in Illinois, title to which vested in them, by conveyance on October 5, 1909. The commissioner valued this real estate at $90,000, and included the whole of it in the value of decedent’s gross estate as being within the reach of § 402 (d). Upon appeal to the Board of Tax Appeals, that tribunal, disapproving in part the commissioner’s determination, held that the value of only decedent’s one-half of the property could be included for the purposes of the tax. 23 B.T.A. 635. The circuit court of appeals affirmed. 62 F. (2d) 591.
Whether this application of the statute gives it a retroactive effect is the sole question here involved; and with that we find no difficulty. Under the statute the death of decedent is the event in respect of which the tax is laid. It is the existence of the joint tenancy at that time, and not its creation at the earlier date, which furnishes the basis for the tax. By the judgment under review, only half of the value, that is to say, the value of decedent’s interest, lias been included, leaving the survivor’s interest unaffected. After the creation of the joint .tenancy, and until his death, decedent retained his interest in, and control over, half of the property. , Cessation of that interest and control at death presented the proper occasion for the imposition of a tax. See Gwinn v. Commissioner, 287 U.S. 224, and cases cited. And since that is all that is sought to be reached by the tax here in question, the complaint that the statute has been given a retroactive application obviously is without substance. The statute as applied does not lay a tax in respect of an event already past, but in respect of one yet to happen.
Petitioners insist that Knox v. McElligott, 256 U.S. 546, is to the contrary, but, clearly, it is not. There the tax return included the value of decedent’s one-half of the jointly owned property but did not include the value of the half which had been owned and enjoyed by the surviving joint tenant. Nevertheless, the commissioner undertook: to impose a tax in respect of the value of this latter half as well. This court held that to do so was to apply the statute retroactively, and that this, under the circumstances of that case, could not be done. It did not hold, or intend to hold, that the statute was retroactive in so far as the value of the decedent’s half of the joint estate was concerned. That question was not there involved. It is the only question here.

The above quoted opinion was concerned with an estate in joint tenancy created prior to the effective date of the Revenue Act of 1916, while that involved in the proceeding at bar is an estate by the entirety. We are of opinion, however, that the principle enunciated is equally applicable to estates by the entirety. It is the existence of such an estate at the date of death, and not its creation it an earlier date, which furnishes the basis for the tax. In view of the ruling of the Supreme Court upon this point, the opinion of the Board promulgated in this proceeding bn October 31, 1933, 29 B.T.A. 211, is modified to the extent of holding that the value of the entirety property is includable in the gross estate.

Reviewed by the Board.

Judgment will be entered wider Bule 50.