author: Marquette :

text:
    Comar Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 36721.
    Promulgated November 10, 1931.

      Truman Post Young, Esq., for the petitioner.

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

Marquette :

The petitioner’s contention is that the amounts paid by it in 1923 out of oil produced, with respect to the previously purchased oil leases, did not constitute a capital investment; that such amounts did not represent income at all to the petitioner, but were in reality merely deliveries to petitioner’s assignors of royalties reserved to such assignors in the contracts assigning the leases; and, hence, such amounts are not properly taxable to the petitioner.

We can not agree with that contention. The terms of the various assignments of leases effected absolute conveyances to the petitioner of the entire interests owned by the respective assignors, none of whom made any reservation of royalties. A royalty, as to minerals, is a rent reserved. Here, the grantor sold and the petitioner bought mineral rights for definite, fixed considerations which were to be met, in part, by deferred payments out of minerals if, as, and when produced from the leased lands. Such payments in our opinion do' not constitute rentals or royalties for the use of the property.

This Board has decided adversely to the petitioner’s contention, in several proceedings wherein the factual conditions were substantially the same as those now under consideration. Cf. Mrs. J. C. Pugh, Sr., Executrix, 17 B. T. A. 429; affd., 49 Fed. (2d) 76; L. T. Waller, 16 B. T. A. 574; affd., 40 Fed. (2d) 892; Lena Brown et al., 24 B. T. A. 30; S. L. Herold, 17 B. T. A. 933; affd., 42 Fed. (2d) 932. In the Pugh case, supra, Pugh executed an instrument purporting to sell one-half of his royalty interest in an oil lease for a stated consideration which was to be paid partly in cash and the balance “ out of the one-half royalty herein conveyed,” The instrument was held to be a contract of sale which divested Pugh of his property rights so conveyed. The other cases above cited were to like effect. All of them are directly in point with the present instance and the principle which they announce is, we think, controlling here. We find no error in the respondent’s determination.

Judgment will be entered for the respondent.


source: Caselaw Access Project

author: Marquette:

license: Public Domain

text:
    Frank G. Wild, Petitioner, v. Commissioner of Internal Revenue Respondent.
    Docket No. 35107.
    Promulgated November 10, 1931.

      Lawrence A. Balcer, Esq., and Henry Bavenel, Esq., for the petitioner.

      John D. Foley, Esq., and James Maddox, Esq., for the respondent.
   OPINION.

Marquette:

Each of the syndicates here involved realized net income, during either or both of the taxable years, which was not distributed to the members at the time. The respondent contends that the petitioner is taxable upon his proportionate share of such syndicate income for the years when earned, and bases his contention upon the ground that, otherwise, the syndicate members have it in their power to postpone indefinitely the taxation of income. The petitioner takes the position that under the syndicate agreement undistributed earnings were not available to him as having been constructively received, and, therefore, did not constitute taxable income to him.

In Realty Associates, 17 B. T. A. 1173, we decided that one of the syndicates here involved, Brighton Syndicate No. 1, was not an association within the meaning of section 2 (2) of the Revenue Act of 1921. The same conclusion applies to Brighton Beach Hotel Syndicate, for the essential structure of the two syndicates is the same.

Presumably the manager, Realty Associates, was a member' of Syndicate No. 1, since it is one of the seventeen members named in the agreement, as well as being the syndicate manager with whom the members contracted. In the Hotel Syndicate agreement it is definitely set forth that the syndicate fund shall include the money already invested in the enterprise by the manager. It therefore appears that Realty Associates was a managing owner in both syndicates.

In Ferry Market, Inc., 5 B. T. A. 167, we held that:

* * * the managing owner of a vessel jointly owned by several co-owners is tbe agent of sucb co-owners and that net earnings received by him must be regarded as received by tbe several co-owners in tbe proportion of their interests in sucb vessel. While the co-ownership of a vessel does not constitute a partnership or a joint stock association, it does result in the creation of an operating entity that earns income by the use of capital. Such income is taxable.

See also Walter S. Dickey, 14 B. T. A. 1295.

We perceive no essential difference in principle between the case quoted, and the one now before us. In our opinion the syndicate constituted a joint adventure; the managing owner of the two syndicates was the agent of the petitioner and the other members, and the net earnings of each syndicate are properly to be included as gross income to the members for the year or years when earned.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: Maequrtte :

text:
    Glenmore Securities Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 40255, 46666, 50559.
    Promulgated November 10, 1931.

      ' Lawrence A. Baker, Esq., and Henry Ravenel, Esq., for the petitioner.

      John D. Foley, Esq., and James Maddox, Esq., for the respondent.
   OPINION.

Maequrtte :

The plan and terms upon which the Carbarn Syndicate was organized are essentially the same as the plan and terms of Brighton Syndicate No. 1, and the Brighton Beach Hotel Syndicate. Respecting the latter two, we held in Franh G. Wild, 24 B. T. A. 691, that net profits of the syndicate constituted taxable income to the members for the years when earned, even though such profits were not then distributed by the managing member of the syndicates. The basis of that decision applies in this proceeding as to profits earned but not distributed by the Carbarn Syndicate in 1926 and 1927. See also Ferry Market, Inc., 5 B. T. A. 167; Walter S. Dickey, 14 B. T. A. 1295. On that point, therefore, we sustain the respondent’s determination.

The petitioner’s second point is, that of the amount received by it from the syndicate in 1925, $40,395.83 was a return of capital and not taxable. The respondent has determined that the entire amount was distributed from profits and constituted taxable income.

The petitioner’s contention is based upon a theory that under the syndicate agreement no member can derive taxable income until he has first received back the capital he invested.

The agreement itself does not expressly require a return of capital before any distribution of profits, except at the termination of the syndicate. The distribution in question was made before the syndicate terminated.

To support its theory as to the legal effect of the syndicate agreement, petitioner relies strongly upon the case of Burnet v. Logan, 283 U. S. 404. In that case the court was dealing with the question of gain or loss from the sale or other disposition of property, with respect to its March 1, 1913, value. The property in question consisted of shares in a mining company. The shares were sold for a consideration which, in part, consisted of a promise of future payments wholly contingent upon uncertain facts and circumstances. The court held that such promise was not the equivalent of cash, and had no ascertainable fair market value; that the transaction was not a closed one, and the taxpayer might never recoup her capital investment from payments only conditionally promised; and therefore “ she properly demanded the return of her capital investment before assessment of any taxable profit based on conjecture.”

The distinction between the case cited and the present proceeding is quite apparent. We are not here considering any question of gain or loss from the sale of property, but only whether a distribution from a fund consisting of invested capital and a somewhat larger amount of net profits shall be deemed a division of the profits or a return of capital. The two questions are not in the same category. To follow the Logan decision, supra, in the present proceeding would require us to ignore the widely different circumstances of the two cases, and to hold in effect that there can be no profit derived from any business enterprise, however long continued and however great its earned surplus, until all the invested capital has been returned to the investors. We do not consider that the Logcm decision justifies such a proposition, nor do we consider that decision applicable to the facts before us.

It is not disputed that the net income of the syndicate for the year 1925 amounted to $817,293.56. The business enterprise carried on by the syndicate was not terminated in 1925, but continued thereafter for several years and earned a substantial net income in 1926, and also in 1927. The syndicate, although not a corporation, earned income by the use of capital. The respondent has determined that the amount distributed to members in 1925 was not a return of capital. The only evidence offered to disprove the correctness of that determination was that in making the distribution the major portion of the amount was denominated as capital by the syndicate manager. Standing alone, as it does, that evidence is not sufficient to overcome the respondent’s determination.

Although it appears that in 1925 there was distributed to members $27,722.67 more than the net earnings of the syndicate for that year, we are unable to say whether the amount in excess of earnings was taken from capital, or whether it represented net earnings prior to 1925. The record is silent on that point.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: Smith:

text:
    Lyle H. Olson, Petitioner, v. Commissioner of Internal Revenue, Respondent. Fred S. Olson, Petitioner, v. Commissioner of Internal Revenue, Respondent. A. F. Bailey, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 33061, 33199, 33274.
    Promulgated November 10, 1931.

      W. W. Spaldmg, Esq., for the petitioners.

      James L. Baclcstrom, Esq., and P. A. Sebastian, Esq., for the respondent.
   OPINION.

Smith:

In so far as material hereto, section 213 of the Revenue Act of 1921 provides:

That * * * the term “ gross income ”—
(a) Includes gains, profits, and income derived from salaries, wages, or compensation for personal service * * * of whatever kind and in whatever form paid * * * and income derived from any source whatever. The amount of all such items * * * shall be included in the gross income for the taxable year in which received by the taxpayer * * *.

The petitioners’ first allegation of error is to the effect that they received additional compensation in the form of money or credits in the amount of $4,000 each in 1922. On brief, the petitioners argue that:

The proper construction of the contract set forth in the resolution of March, 1917, is that it fixes as a measure of the additional compensation for service (the generating cause of the income) a definite amount in dollars and cents, which with the consent of petitioners was to be invested annually in stock of the employer company.

This argument seeks to apply literally the method or form employed and not the substance of the transaction. The intent of the parties was the issuance of certain treasury stock as additional compensation for services rendered by the petitioners; that was the substance of the transaction. The plain language of the minutes and resolution, and the fact of the issuance of stock to the petitioners and other employees as additional compensation for services rendered in other years, support no other interpretation. The fact that those credits were the measure of the company’s deduction from gross income as an expense for compensation paid for services rendered is not controlling here. Robert K. Wehner et al., 21 B. T. A. 614. The income of these petitioners must be measured by the fair market value of the stock when received and not the amount of the credits entered upon their or the trustee’s accounts upon the corporate boobs. Samuel Graydon, 2 B. T. A. 552; Charles F. Pearce, Jr., 6 B. T. A. 450; C. A. Tilt, 14 B. T. A. 437.

The second allegation of error raises the question of the number of shares of stock that each petitioner received in the taxable year 1922. The facts regarding the agreement and issuance of the stock to the trustee for the benefit of the petitioners are not in dispute. The petitioners contend that each received only 40 shares of stock, whereas the respondent insists that, each petitioner received 200 shares of stock in 1922. On brief, the petitioners argue that:

Under the resolution, no one had any beneficial interest in the stock after its issuance and delivery to the trustee other than petitioners themselves. So far as the issued stock was concerned, the contract embodied in the resolution was no longer an executory one. The issued stock could never revert to the company. Any such reversion would be inconsistent with the clause that the stock was to be “ held for and on behalf of these three gentlemen ”,
' We are not unmindful of the fact that petitioners agreed to remain in the service of the company for five years after March, 1917; but a careful study of the resolution — what it says and what it omits to say- — leads to the conclusion that it was not intended that any breach of this agreement should operate to divest petitioners of their beneficial interest in the stock previously issued. In the first place there is no provision for such devestiture and forfeitures are not favored in the construction of contracts.

The petitioners further contend that the issuance of these shares each year and their receipt by the trustee of the petitioners on their behalf was equivalent to and constituted receipt by the petitioners; that the trustee was the representative of the petitioners and that the receipt of the stock by him was equivalent to its receipt by them.

Section 213 of the Kevenue Act of 1921 requires a return of “ income derived from salaries * * * or compensation for personal services,” and section 212 (b) provides:

The net income shall be computed upon the basis of the taxpayer’s annual accounting period * * * in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income. * * *

Although the income-tax returns of the petitioners for 1922 were not offered in evidence, no contention is made that petitioners’ books of account were kept or their income-tax returns made upon other than a receipts and disbursements basis. In the absence of such evidence it must be held that the additional compensation paid to petitioners was income to them in the year in which they “ received ” the shares of stock. No evidence has been offered that the petitioners reported in their income-tax returns for the years prior to 1922 any amount in respect of the shares of stock which were turned over to them in 1922. In fact the evidence shows conclusively that each petitioner returned in his income-tax return for 1922 the par value of the shares of stock, a certificate for which was issued to him in 1922. All that the respondent has done in the determination of the deficiency is simply to increase the value of the stock from $20,000, the amount returned, to $80,000, the amount which the respondent contends to be its fair market value.

In Eisner v. Macomber, 252 U. S. 189, the Supreme Court defined income as that gain which is “received or drawn by the recipient [the taxpayer] for his separate use, benefit, and disposal.” The petitioners contend that they were the beneficial owners of the shares of stock from the time that certificates for the shares of stock were turned over to the trustee. But the incidence of the tax is not upon the value of property beneficially owned by an individual. A receipt by the trustee can not be regarded as a receipt by the petitioners. The shares of stock were received by the petitioners at the time they were turned over to them and made subject to their disposal. A fair reading of the agreement between the petitioners and the American Appraisal Company is that they were not to have the disposal of the stock until the stock was placed in their name. We have heretofore held, in construing similar arrangements, that a taxpayer employee realized income in the year in which he received the certificates of stock in the corporate employer, regardless of the prior delivery of such stock to a bonus custodian or trustee, or its deposit in escrow. James B. Lister, 8 B. T. A. 475; Roscoe H. Aldrich, 3 B. T. A. 911; Anthony Schneider, 3 B. T. A. 920; Charles F. Pearce, Jr., 6 B. T. A. 450; Charles B. Johnson, 8 B. T. A. 992; C. A. Tilt, 14 B. T. A. 437; Fred J. Collins, 16 B. T. A. 1426; H. L. Carnahan, 21 B. T. A. 893.

The facts in these proceedings are more nearly those in Jackson v. Smietanka, 272 Fed. 970. There it was held that where a receiver, by order of the court, was paid a sum ihonthly for his services, with liberty to apply for additional compensation at the end of receivership, such final allowance, made at the end of five years, was income of the year received and that it was not distributable for income-tax purposes through preceding years, even though an order had been entered by the District Court that the additional compensation was earned and had accrued in equal monthly installments throughout the receivership. The respondent did not err in holding each of the petitioners liable-to income tax in respect of the fair market value of the 200 shares of stock issued to him in 1922.

The remaining issue is the determination of the fair market value of the 200 shares of stock received by each petitioner within the taxable year. In the statement attached to the deficiency notice the respondent stated that:

* * * inasmuch as the only sales at this time of stock of the American Appraisal Company to willing purchasers by willing sellers were for $400.00 a share, also, in view of the large dividends paid by the corporation during the years 1918 to 1922 melusiye as well as the computation of the value of the stock in accordance with A. K. M. 34, Cumulative Bulletin Number 2, Page 31, indicates a value in excess of $400.00 per share, this office holds the value of $400.00 per share as placed on the stock to be fair and equitable.

The respondent’s valuation is based upon a sale of 800 shares of this stock by the widow of a deceased officer of the Company to the petitioners and another officer of the Company. .The sale was made in 1921 at a price to be paid not in cash, but in installments largely out of the dividends upon the stock sold.

The petitioners included the 200 shares of stock received in 1922 in their income-tax returns for 1922 at its par value of $100 per share, but now contend that the stock either had no readily realizable market value in 1922 or that such .value did not exceed the par value. Certain witnesses testified that the stock had no market value, such opinions being predicated largely upon the fact that the stock was not listed or dealt in on any exchange and that the stock was closely held.

In George M. Wright, 19 B. T. A. 541, 548, affd., 50 Fed. (2d) 721; certiorari denied by United States Supreme Court, October 26, 1931, we said:

* * * Tbe absence of active trading in a stock does not necessarily sbow lack of fair market value, and under the circumstances other evidence, including evidence as to the intrinsic value of the assets back of the stock, should be considered in determining whether the stock had a fair market value. William Ziegler, Jr., 1 B. T. A. 186; Napoleon B. Burge, 4 B. T. A. 732; W. C. Arthurs, 3 B. T. A. 374; Wilson E. Schmick, 3 B. T. A. 1141; William Schoenheit et al., Executors, 14 B. T. A. 33. * * *

We are not convinced that the stock had no fair market value merely because there were no sales of the stock in 1922. James Couzens, 11 B. T. A. 1040, 1163, 1164. There was a sale of the stock in 1921 at a price of $400 per share and the earnings of the company in 1920 were in excess of $200 per share. The company paid cash dividends of at least 500 per cent over the four-year period from 1918 to 1921, inclusive, and had profits in excess of the dividends paid. It paid a 100 per cent cash dividend in 1921. The evidence supports the contention of the respondent that the market value of the stock at the time received by the petitioners in 1922 was at least $400 per share.

Since under the statute taxpayers receiving compensation for services in whatever form paid are required to include the same in their income-tax returns, we are of the opinion that each of the petitioners is liable to income tax in 1922 upon the 200 shares received in that year at the rate of $400 per share. Cf. John B. Nordholt, 4 B. T. A. 509; Fred J. Collins, 16 B. T. A. 1426; Benedict Crowell et al., 21 B. T. A. 849.

Reviewed by the Board.

Judgments will be entered under Bule 50.


text:
    W. T. Waggoner Estate, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 48152.
    Promulgated November 11, 1931.

      Lee I. Park, Esq., for the petitioner.

      John E. Marshall, Esq., for the respondent.
   OPINION.

Marquette:

The only question here presented is whether petitioner is entitled to depletion in respect of amounts paid to it, over and above royalties, as consideration for numerous oil and gas leases granted by the petitioner. By the terms of the leases the payments in question were to be made in oil produced from the respective lands so leased. The respondent takes the position that “the allowance of depletion on a bonus is a departure from the depletion concept,” and relies upon Murphy Oil Co., 15 B. T. A. 1195.

That contention is unsound, in our opinion; nor is the Murphy case authoritative in the present instance. If oil is taken from the land, clearly there results a depletion of the oil resources or reserves of such land, and the owner’s capital asset has been reduced pro tanto; whether the oil so taken is called a bonus or a royalty in no wise affects the fact that assets have been impoverished. It is to overcome that situation and to protect capital, that deductions for depletion are allowed. The Murphy case, upon the facts, is to be distinguished from the present proceeding.

But by the settled law of Texas, in which State the petitioner and its oil lands are located, it is a rule of property that, an instrument granting the right to extract oil and gas from the land is a conveyance of the title to the minerals in place. Manifestly, a grantor who has sold and no longer owns a wasting asset suffers no loss from the depletion of such asset, and the principle of depletion deductions can not operate in his behalf. Waggoner Estate v. Sigler Oil Co., 118 Tex. 509; 19 S. W. (2d) 27; Ferguson v. Commissioner, 45 Fed. (2d) 573. That is the situation of this petitioner respecting oil received as a bonus for granting the leases, and we must sustain the respondent’s determination.

Bespecting the amounts of oil received as royalties, however, a different rule applies. The royalties represent interests retained by the petitioner in the properties granted. Such interests were not conveyed by the petitioner under the leases and they remain protected by the statuory provision allowing annual deduction for. depletion. Ferguson v. Commissioner, supra. The respondent having allowed such deductions, no change in his determination of deficiency is required.

Judgment will he entered for the respondent.


author: Black:

text:
    E. Michna, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 20820.
    Promulgated November 11, 1931.

      Harry G. Weeks, Esq/., for the petitioner.

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

Black:

It is the contention of the respondent that the entire amount of the oil royalties and the proceeds of the sale of a one-half interest in the royalties on the 80-acre tract are the separate property of the petitioner and taxable to him. He contends that the character of the 80-acre tract was fixed as the separate property of petitioner prior to his marriage and that it remained the separate property of petitioner, notwithstanding it may have been partially paid for with tbe proceeds of community property, or separate property of tbe wife.

Eelative to the gift of the undivided 3/44 interest in the 218-acre tract by petitioner’s parents to him, the respondent’s position is that as this was a gift to petitioner, it constituted petitioner’s separate property under the Texas statutes, although it was acquired during the marriage. The applicable Texas statutes to the questions here involved, are given in the footnotes.

The courts of Texas have had these questions before them in a number of cases, and as to the first have laid down the rule that the status of title, as belonging to one estate or the other, is determined by the status of the original right, subsequently matured into full title. Creamer v. Briscoe, 109 S. W. 911; Mills v. Brown, 69 Tex. 246; 6 S. W. 612; improvements made on the husband’s separate property after marriage and paid for with community funds, or the wife’s separate funds, do not change the character of the husband’s separate estate, Pellum v. Fleming, 283 S. W. 531. In this case the court said:

The fact that the 85 acre tract included in the lands sought to be partitioned was the separate property of J. L. McGee was a meritorious defense in part to the allegation in plaintiff’s petition that all said land was community, and to the claim asserted by plaintiff in said petition that the children of Mrs. McGee by her first marriage were entitled to participate in the distribution of the proceeds of such tract. This fact was available to her in meeting the burden of showing such a defense as a requisite part of her motion for a new trial and it was so alleged in said motion. The allegation in plaintiff’s petition was that the property sought to be partitioned was community. Plaintiffs could not by controverting affidavit enlarge the allegations in their petition on which the case was tried nor introduce new issues to defeat Mrs. Pellum’s motion. They in said controverting affidavit admitted, in effect, that the 85 acre tract was the separate property of J. L. McGee, as alleged in said motion, but attempted to avoid the effect of such admitted fact and defeat a new trial on the ground that improvements were made on said separate property after the marriage of J. L. and Hannah McGee. If such improvements were in fact made as alleged, they would not change the character of said property with reference to its being separate or community, regardless of whether they were paid for with commwnity fwnds or with the proceeds of sale of Mrs. McGee’s separate property. Creamer v. Briscoe, 109 S. W. Oil; 101 Texas 490; Welder v. Lambert, 44 S. W. 281; 91 Texas 510; Jackson v. Jackson (Tex. Civ. Appeals) 258 S. W. 231. Any sums so expended for improvements after said marriage may on another trial, under proper pleadings, be made a charge upon said 85-aore tract m favor of the community or of the separate estate of Mrs. McGee, as the facts proved at that time may justify under the rules of law applicable in such cases. * * * [Italics supplied.]

Where in an exhibition of the whole title it appears its origin preceded the marriage, it is the separate property of the spouse in whom it originated, Jaclcson v. Jackson, 283 S. W. 923; Price v. McAnnelly, 287 S. W. 77.

One of the leading Texas cases on this subject is Welder v. Lambert, 44 S. W. 281. There the Supreme Court of Texas considered the question and reached the conclusion that the separate estate of the husband was not changed by the use of community funds in payment for the property or to discharge encumbrances thereon and that the only right to which the community is entitled is a claim for reimbursement. In that case the Supreme Court of Texas, after reviewing the authorities of Louisiana and the Spanish law, states:

The only right to which the community is entitled, is that of claiming the reimbursements of the sum paid on account of the entry of the double concession, if such payment has been made out of the funds of the community. The principle was also embraced in the later case of In re Moseman’s Estate, reported in 38 La. Ann. 219, and the previous rulings of the court wore followed. In that case the husband a short while before his marriage, had taken out a policy of insurance on his own life, payable “ to his executors, administrators, or assigns ”. After his marriage the premiums were paid from community funds. After his death, upon settlement of his estate the question was agitated whether the money paid by the insurance company upon the policy belonged to the community; and it was held that it was property of his separate estate, but that it was chargeable, in favor of the community, with the premiums which had been paid with community funds.
* * * * * * *
The rule of the Spanish law as to 'improvements made with community funds upon the separate property belonging to one of the spouses belongs to the community, but gives the other no claim to the property itself. Schmidt, Spanish Law, Art. 48 * * *.

It is clear from these cases that the 80-acre tract was the separate property of petitioner. For tax purposes we are not concerned with what claims the community or the wife may have against it for reimbursement. There is no dispute about the gift of the 3/44 interest in the 218-acre tract to the petitioner and under the terms of Article 4613, Texas Statutes, this must also be considered his separate property.

In several cases we have held that oil royalties and proceeds from the sale of oil royalties derived from separate property constitute separate income to the party owning the land. John O'Neil et al., 16 B. T. A. 614; W. P. Ferguson, 20 B. T. A. 130; affirmed on this point, 45 Fed. (2d) 573; Oscar Chesson, 22 B. T. A. 818. See also Stephens v. Stephens, 292 S. W. 290, one of the leading Texas cases on this subject.

We conclude that the action of respondent in determining the deficiency was correct.

Decision will he entered for the respondent.

       The Revised Civil Statutes of Texas, , in force during the taxable year, provide as follows:
      Art. 4613. — Husband’s separate property.

      All property of the husband, both real and personal, owned or claimed by him before marriage, and that acquired by gift, devise, or descent, as also the increase of all lands thus derived therefrom, shall be his separate property. The separate property of the husband shall not be subject to the debts contracted by the wife, either before or after marriage, except for necessaries furnished herself and children after her marriage with him, nor for torts of the wife. During the marriage the husband shall have the sole management, control and disposition of his separate property, both real and personal. Art. 4619. — Community Property.

      All property acquired by either the husband or wife during marriage, except that which is the separate property of either, shall be deemed the common property of the husband and wife, and during coverture may be disposed of by the husband only. All the effects which the husband and wife possess at the time the marriage may be dissolved shall be regarded as common effects or gains, unless the contrary be satisfactorily proved.


author: Smith: AruNdell,

text:
    Robert D. Green, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 53647.
    Promulgated November 11, 1931.

      E. Barrett Prettyman, Esq., for the petitioner.

      Eugene Harpole, Esq., and Edwin M. Niess, Esq., for the respondent.
   OPINION.

Smith:

The petitioner contends that:

* * * If these exchanges were one transaction, they were a reorganization within the definition in the Act, since under that view, two corporations, in one transaction, transferred all their assets to two new corporations for the securities of the latter, and, in the same transaction, these securities were cross-exchanged. In that view, if these constituted hut one transaction, Community of Delaware and Power were parties to this same reorganization and the exchanges fall squarely within Section 203 (b) (2). On the other hand, if these are to be considered as separate transactions and to be viewed independently each of the other, there is no contention by petitioner that the exchange of Community of Delaware stock for securities of Power came within subdivision (2) of Section 203 (b) ; our contention is that the transaction, if viewed separately and apart from the others, is covered by subdivision (4) of that section. * * *

The respondent contends that the petitioner realized a taxable gain upon the exchange of his common stock in Community of Illinois through the medium of these several transactions for debentures and preferred stock of Power and Class A and Class B common stock of States.

It is to be noted that the agreements for the consummation of the stipulated transactions were made by and between a group of the common stock holders of Community of Illinois and the corporation designated as States. As a corporation Community of Illinois had no part in the several agreements and resulting transactions except to be reorganized into Community of Delaware with the same capital structure and assets. In the original agreement (Exhibit 1), between the majority common stock holders of Community of Illinois and States is the following:

* * * It is the desire anci plan of the parties hereto to effect a reorganization and consolidation of their * ⅜ ⅜ public utility holdings, while preserving their control of and proportionate interests in the aggregate property to be included in the consolidation and, pursuant to said general plan of reorganization and consolidation, to organize a new corporation under the laws of Delaware, to be called American Commonwealths Power Corporation, for the purpose of consolidating said properties and interests now owned and controlled by the respective parties hereto * * *

On brief the petitioner argues that:

* * * The properties owned by two corporations were consolidated into one new corporation and through an exchange of stock and securities the equities of the former unrelated groups of shareholders were preserved.

The stipulated facts show this argument to be erroneous. Power acquired the property of States and certain shares of the common stock of Community of Delaware, the property of the petitioner and other stockholders in that corporation. Viewing the transactions here involved as a whole, we are convinced that there were two parallel reorganizations with two resulting corporations, Community of Delaware and Power, which, for reasons hereinafter stated, were neither merged nor consolidated.

As we said in William H. Mullins, 14 B. T. A. 426, 433:

It may he conceded that the purpose and plan of this transaction was a reorganization * * * but that fact is not determinative of the question here nor is it of any special significance. * * *

We are here concerned with whether the petitioner realized a taxable gain within the purview of the statute.

* * * And this question must be resolved upon what was actually done, and not the effect of what was done. (B. F. Saul, 4 B. T. A. 639, 647), nor upon what may have been the design and purpose of the parties to the transaction (United States v. Phellis, 257 U. S. 156, 172). Neither is it material that the same result might have been obtained by some other method or plan of reorganization. In the case of Anna M. Harkness, 1 B. T. A. 127, 130, we said:
It seems to us to be fundamentally unsound to determine income tax liability by what might have taken place rather than what actually occurred. Even though the practical effect may be the same in either case, the resulting tax liability may be quite different. United States v. Isham, 17 Wall. 496.
Speaking generally, in determining what was actually done in any case, this Board will regard substance rather than form. However, material and essential facts will not be dismissed or put aside as mere matters of form simply because they are related to and are steps in a comprehensive plan of reorganization, or together constitute a method for the attainment of a single desired result. Edward A. Langenbach, 2 B. T. A. 777, 784. In the instant case each step employed to bring about the ultimate result was essential to the consummation of the transaction and it can not be said that each, or any one, was not substantial.
* * * The fact that these several transactions together comprised a single plan of reorganization does not render them any the less separate and distinct undertakings. The nature of each transaction is determinable from the facts relating to it, and is not changed because of its association with other transactions in a larger and more comprehensive plan. [William S. Mullins, supra.]

The material provisions of the Bevenue Act of 1926 are as follows:

Sec. 203. (b) (2) No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
(3) No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.
(4) No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.
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(h) As used in this section * * *
(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 the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) a transfer by a corporation of all or a part of its assets, to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (O) a recapitalization, or (D) a mere change in identity, form, or place or organization, however effected.
(2) The term “ a party to a reorganization ” includes a corporation resulting from a reorganization and includes both corporations in the case of an 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.
(i) As used in this section the term “ control ” moans the ownership of at least 80 per centum of the voting stock and at least SO per centum of the total number of shares of all other classes of stock of the corporation.

Transaction One. — Pursuant to their agreement, the majority common stockholders of Community of Illinois caused Community of Délarum'e to be organized and the assets of Community of Illinois conveyed to Community of Delaware in exchange for the latter’s capital stock, which was issued in the same amount as that of Community of Illinois. This was a reorganization (section 203 (h) (1)) resulting in no recognized gain (section 203 (b) (3)).

Transaction Two. — The stockholders of Community of Illinois, a party to the reorganization under Transaction One, exchanged their stock for stock in Community of Delaware, a party to the same reorganization (section 203 (h) (2)), and there was no recognized gain or loss upon the exchange (section 203 (b) (2)).

Transaction Three. — The petitioner and other former stockholders of Community of Illinois transferred their 137,108 shares of the common stock of Commmnity of Delaware (acquired by Transaction Two) to Power in exchange for $2,364,000 (par) debentures, 13,711 shares of preferred and 27,422 shares of common stock of Power. This was not a reorganization, since Power did not acquire the first and second preferred stock of Community of Delaware (see section 203 (h) (1) (A)), but merely acquired the property of individual stockholders in exchange for its securities and stock. The record indicates that each transferor received stock and securities “ substantially in proportion to his interest in the property ” exchanged. This transaction falls within the purview of section 203 (b) (4), since the transferors received all of the then issued stock and were in control of Power “ immediately after the exchange ” (section 203 (i)). The fact that this control was soon relinquished does not negative the import of the statute, the requirement of which is fulfilled when the transferor is in control immediately after the exchange. Cf. Federal Grain Corporation, 18 B. T. A. 242; Minnie C. Brackett, 19 B. T. A. 1154; affirmed by Circuit Court of Appeals, 7th Circuit, Apr. 21, 1931.

Transaction Four. — Power acquired all the assets of States in exchange for 82,266 shares of the common stock of Power. This was a reorganization within the purview of section 203 (h) (1) (A), resulting in no recognized gain under section 203 (b) (3). However, the language used in section 203 (h) (1) (B) would seem to indicate otherwise, but, as stated in G. C. M. 1753 (Cumulative Bulletin VI-1, p. 138):

Section 203 (h) (1) (A) is not inconsistent with section 203 (h) (1) (B). One supplements the other. For example, a transfer of all the assets • of a corporation constitutes a reorganization under the second part of definition (A) irrespective of the element of 80 per cent control demanded by definition (B). Again, a transfer of but a part of the assets of a corporation can never, of itself, result in a reorganization under section 203 (h) (1) (A), but it does result in a reorganization under section 203 (h) (1) (B) if there is present an additional element, namely, immediate control of the transferee corporation by the transferor or its stockholders, or both.

Cf. National Pipe & Foundry Co., 19 B. T. A. 242; Crosby-Wirth Sales Book Co., 19 B. T. A. 1074; First National Bank of Champlain, N. Y., 21 B. T. A. 415; A. W. Leonard et al., 21 B. T. A. 549; Cortland Specialty Co. et al., 22 B. T. A. 808.

Transaction Five. — The petitioner and other stockholders who acquired 27,422 shares of common stock of Power (Transaction Three), a party to a reorganization (Transaction Four), exchanged this stock for 237,276 shares of Class A common and 132,768 shares of Class B common of States, a party to the reorganization (Transaction Four), and there was no recognized gain upon the exchange (section 203 (b) (2)).

It follows, therefore, that the petitioner realized no present gain recognized under the taxing acts, upon the exchanges by which he disposed of his stock in Community of Illinois and ultimately acquired stock and securities in Power and States. The respondent’s determination of a deficiency can not be approved.

Reviewed by the Board.

Judgment will be entered for the 'petitioner.

Marquette concurs in the result only.

AruNdell,

concurring: In my opinion the several transactions discussed in the Board’s report were all steps in carrying out one general plan and their effect should bo considered as a whole and not separately. So considered, they constitute a reorganization within the meaning of the Act, and, by reason of section 203 (b) (2), the exchange does not give rise to gain or loss.

GoodRICh agrees with the foregoing.