text:
    Emil Stein and Julia Stein, Petitioners, v. Commissioner of Internal Revenue, Respondent. Bertha Zucker, Petitioner, v. Commissioner of Internal Revenue, Respondent. William B. Stein, Petitioner, v. Commissioner of Internal Revenue, Respondent. Jacob Stein and Frances Stein, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 104553, 104554, 104555, 104556.
    Promulgated January 21, 1942.

      John A. Gonlin, O. P. A., for the petitioners.

      Albert H. MonaeelU, Esq., for the respondent.
   OPINION.

Smith :

These proceedings, consolidated for hearing, involve income tax deficiencies for 1934 as follows:

The sole question presented in each proceeding is whether certain distributions received by the petitioners in 1934 from the Elizabeth Amusement Co., a New Jersey corporation, of which the petitioners were stockholders, constituted taxable dividends.

Petitioners’ returns for 1934 were filed with the collector of internal revenue at Newark, New Jersey.

The proceedings were submitted on a written stipulation of facts filed at the hearing, which we adopt as our findings of fact.

During 1933 and 1934 the petitioners were the majority stockholders of the Elizabeth Amusement Co., a New Jersey corporation organized in 1920, which was from 1924 through 1934 the lessor of the Motion Picture Theatre.

The authorized capital stock of the Elizabeth Amusement Co., hereinafter sometimes referred to as the corporation, consisted originally; of 10,000 common shares of a par value of $100 each, of which 2,400 shares were outstanding as of June 30, 1933.

At January 1, 1933, the corporation had a deficit of $70,971.52, which resulted from distributions having been made to its stockholders in excess of earnings during the years 1928 to 1932, inclusive, as follows:

On July 28, 1933, the certificate of incorporation of the Elizabeth Amusement Co. was amended to provide for the changing of the authorized capital stock from 10,000 shares of $100 par value to 5,000 shares of no par value.

On July 28, 1933, the corporation’s board of directors passed the following resolution:

Mr. William B. Stein thereupon moved that immediately upon the completion of legal formalities changing and amending the certificate of incorporation in the mode and manner aforesaid, that the present outstanding stock of the corporation be called in for exchange and surrender, and in lieu of each one-eighth interest now outstanding there be issued two hundred (200) shares of no par value stock and that as an added consideration for the surrender of the present outstanding stock by each of the stockholders and his acceptance of the new stock, that there be created for the benefit of tbe present stockholders of record, a provisional interest in a note to be executed by tbis Corporation to William B. Stein and Emil Zucker, as Trustees, which note is to be in the sum of Eighty Thousand ($80,000.,) Dollars, and to run for Twenty (20) months, and is to be amortized in the sum of Four Thousand ($4,000.,) Dollars per month, said amortization payments to be distributed by the Trustees, as, when and if received, to each of the present stockholders, in the proportion which their present holdings bear to the entire capital stock issued and outstanding, it being further understood, however, that default in the xjayment of said amortization payments, or in the payment of the entire note, shall not be charged against the Elizabeth Amusement Company and no suit thereon be brought, unless and until the Trustees shall have received a written demand in that behalf executed by two-thirds of the holders in interest of the beneficial proceeds of said note at the time of said default.

On July 28, 1983, the corporation recapitalized and canceled its par capital stock, consisting of 2,400 shares, par value $100 per share, by issuing 1,600 common shares of no value stock and also issuing its note for $80,000 payable at the rate of $4,000 per month. Those payments in liquidation of note indebtedness were made out of earnings for the year in which paid to the trustees and distributed to the stockholders. The value per share of the new stock was stated on the corporation’s books to be the same as the old stock, namely, $100 per share. Before the recapitalization the total stock account as shown by the books was $240,000; thereafter, $160,000, a reduction of $80,000. The purpose of the recapitalization was to ultimately eliminate the book deficit caused by distributions in excess of earnings in prior years.

The corporation created upon its books of account in 1933 an account headed “Note Payable” and stated liability thereunder $80,000.

Petitioners in 1933 surrendered to the corporation their par shares of capital stock in the corporation, which had cost them par, and received in lieu thereof their proportionate shares in 1,600 shares of no par stock plus their proportionate beneficial interest in a note of $80,000 issued by the corporation to William B. Stein and Emil Zucker as trustees.

Pursuant to the resolution of the corporation’s board of directors on July 28,1933, a trust indenture dated August 7,1933, was executed, under the terms of which the corporation agreed to pay to the trustees the $80,000 note referred to in the resolution in accordance with the terms thereof.

The records of the corporation reflect a deficit as of January 1, 1934, of $48,556.18, and as of December 31, 1934, of $58.10, shown as follows:

Book deficit January 1, 1933_$70,971.52
Less Surplus adjustments of prior years___ 1, 800. 33
69,171.19
1933 book earnings- 44,615.01
24,556.18
Dividends paid 1933- 24, 000. 00
Book deficit January 1, 1934- 48,556.18
Surplus adjustment of prior years_ 382.52
48,938. 70
1934 book earnings_ 48,880. 60
Book deficit December 31, 1934- 58.10

, The following schedule indicates payments made by the corporation from July 1, 1933, until December 31,1936:

It has been the practice of the corporation for a number of years before the taxable year to distribute rentals collected by it without declaring formal dividends. The corporation did not in 1934 declare dividends to its stockholders.

Petitioners in 1934 received the following amounts as their shares of payments made on the $80,000 note:

Julia Stein_$12, 000
-Bertha Zucker_ 6,000
William B. Stein_ 6, 000
Jacob Stein_ 6.000

These amounts the corporation charged in its books of account against “Note Payable” and they are included in the totals stated above as having been paid in the year 1934 on the note.

During the period from July 29, 1933, to March 5, 1935, when payments were made upon the $80,000 note, no other distributions were made by the corporation. On March 14, 1935, a resolution was passed by the corporation’s board of directors directing that dividends of $30 per annum be resumed upon each of the 1,600 shares outstanding, the payments to be made monthly.

The distributions in payment of the $80,000 note were made in direct proportion to the stockholdings of the several stockholders.

In their income tax returns for 1934 the petitioners did not report as taxable income the amounts received by them from the corporation in part payment of the note. In the determination of the deficiencies the respondent has included in the petitioners’ gross incomes such payments received by the petitioners. In each of the deficiency notices attached to the several petitions the respondent says: “The distributions received by you from the Elizabeth Amusement Company are held to constitute ordinary taxable dividends.”

The petitioners submit that the amounts received by them from the corporation in 1934 “did not constitute in 1934 taxazle dividend [s] to these petitioners.”

The respondent submits that the amounts received by the petitioners from the corporation in 1934 are taxable either under section 115 (a) of the Revenue Act of 1934 as taxable dividends, or under section 115 (g) of the same act as being amounts “essentially equivalent to the distribution of a taxable dividend.”

The applicable provisions of the Revenue Act of 1934 are as follows:

SEC. 115. DISTRIBUTIONS BY CORPORATIONS.
(a) Definition of Dividend. — The term “dividend” when used in this title (except in section 203 (a) (4) and section 207 (c) (1), relating to insurance companies) means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913.
*******
(d) Other Distributions fbom Capital. — If any distribution (not in partial or complete liquidation) made by a corporation to its shareholders is not out of increase in value of property accrued before March 1, 1913, and is not out of earnings or profits, then the amount of such distribution shall be applied against and reduce the adjusted basis of the .stock provided in section 113, and if in excess of such basis, such excess shall be taxable in the same manner as n , gain from the sale or exchange of property.
* # * * * * * •
(g) Redemption of Stock. — If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend.

In support of their contentions that the amounts received by them’ in 1934 from the corporation do not constitute taxable income, the petitioners cite Louise Glassell Shorb, 22 B. T. A. 644; Arthur C. Stifel, 29 B. T. A. 1145; Elton Hoyt, 2nd, 34 B. T. A. 1011; Loren D. Sale, 35 B. T. A. 938; and Roy J. Kinnear, 36 B. T. A. 153. Those cases merely stand for the proposition that in computing the amount of earnings accumulated by a corporation subsequent to March 1, 1933. for the purpose of determining whether a taxable distribution had been made by a corporation, operating losses and dividends paid must be deducted from the gross earnings in determining whether there are any available earnings in the corporation’s treasury for payment of a dividend. The cases are obviously inapposite in these proceedings. The record here does not show that the corporation, Elizabeth Amusement Co., had any operating losses for any year. The facts are simply that the corporation in years prior to 1934 had distributed to its stockholders more than the earnings available for distribution. To the extent that those distributions were in excess of earnings available for the making of the distributions there was an invasion of capital. The excess distributions in prior years did not constitute taxable income of the recipients. Crystal Ice Co., 14 B. T. A. 682; J. L. Washburn, 16 B. T. A. 1091,; Roy J. Kinnear, supra. The stipulated facts are that these distributions out of capital received in years prior to 1934 were returned as taxable income of the petitioners. We think it plain that it is immaterial in these proceedings that they were so returned. Petitioners can not for 1934 obtain a benefit for the erroneous inclusion in taxable income of prior years of amounts which in point of fact were not taxable income of the years in which received. Apparently the principal purpose of the recapitalization effected by the corporation in 1933 was to correct the erroneous report made by the stockholders of these distributions in prior years. Such purpose can have no material bearing upon the issue which is before us.

The question for decision is whether petitioners derived taxable income from the receipt in 1934 of payments made by the corporation upon its note pursuant to the indenture of trust of August 7, 1933. There is no evidence that the petitioners reported as taxable income of 1933 the value of their interest in the $80,000 note. They received no distribution from the corporation in 1933 and if they were on the cash basis they clearly were not required to include in their taxable incomes any value for their interests in the note.

We do not think that it is material whether the distributions received by the petitioners in 1934 were considered by the taxpayers as taxable dividends or not. In any event, they received the distributions in 1934 and we think they constituted taxable income of that year.

But we do not think that the respondent erred in treating the distributions of 1934 as taxable dividends. The stipulated facts are that the corporation had earnings in 1934 of $48,880.60 and the payments made on the note were in the amount of $44,500. Since under the statute distributions made by a corporation are to be regarded as paid out of the most recently accumulated earnings, it must be held that the payments on the note were out of the earnings of 1934. Cf. Helvering v. Canfield, 291 U. S. 163.

In H. Y. McCord, 31 B. T. A. 342, the Board held that a distribution made by a corporation in 1929 of an amount not in excess of surplus accumulated after February 28,1913, is taxable to the shareholders as an ordinary dividend., notwithstanding it occurs at the same time as an exchange of shares as a part of recapitalization. See also Mabel I. Wilcox, 43 B. T. A. 931.

Furthermore, it is not material that there was no formal declaration of the dividend made by the corporation in 1934. A declaration of a dividend is not essential to a taxable dividend distribution. Hadley v. Commissioner, 36 Fed. (2d) 543; Helen Sperry Lea, 35 B. T. A. 243.

Even if the distribution made by the corporation does- not fall-under section 115 (a) of the Revenue Act of 1934, we think that it must be held a taxable distribution under section 115 (g) of that act, for the distributions were essentially equivalent to the distribution of a taxable dividend. See W. & K. Holding Corporation, 38 B. T. A. 830; Annie Watts Hill, 27 B. T. A. 73; affd., 66 Fed. (2d) 45; James D. Robinson, 27 B. T. A. 1018; affd. (C. C. A., 6th Cir.), 69 Fed. (2d) 972; J. Natwick, 36 B. T. A. 866. It is not material that there was no “artifice, subterfuge, or bad faith” on the part of the corporation or its stockholders. McGuire v. Commissioner C. C. A., 7th Cir:), 84 Fed. (2d) 431. The important factor is the result. Smith v. United States (C. C. A., 3d Cir.), 121 Fed. (2d) 692; George Hyman, 28 B. T. A. 1231; affd., 71 Fed. (2d) 342; certiorari denied, 293 U. S. 570. In Smith v. United States, supra, the court said:

* * * However, it is our opinion that the bona fieles in a company’s capitalization of its earnings is immaterial to the applicability of Section 115 (g). * * * The statute is aimed at the result. [Citations]. The basic criterion for the application of Section 115 (g) is “the net effect of the distribution rather than the motives and plans of the taxpayer or his corporation.” Flanagan v. Helvering, 116 F. (2d) 937, 939-940, (Ct. of App., D. C.) * * *.

The respondent’s determination that the distributions received by the petitioners in 1934 from the Elizabeth Amusement Co. constituted taxable dividends is approved.

Decisions will be entered for the respondent.


source: Caselaw Access Project

author: SteRnhagen:

license: Public Domain

text:
    Stimson Mill Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 104290.
    Promulgated January 22, 1942.

      E. E. Adams, C. P. A., for the petitioner.

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

SteRnhagen:

In determining a deficiency of $380 in petitioner’s income tax for 1938, the Commissioner disallowed a loss of $2,000, saying:

The loss claimed in your return of $2,000 upon the liquidation of Second Holding Corporation is disallowed for the reason that the transaction in which the loss is claimed to have occurred represented the receipt of property upon complete liquidation of another corporation in connection with which no loss may be recognized under section 112 (b) (6) of the Revenue Act of 1938. In addition, the basis of loss of the stock in question has not been proven.

The facts are found as stipulated. The return was filed in Tacoma, Washington.

The petitioner owned all the shares of the Second Holding Corporation from the time of its organization in 1930, having received them in exchange for two tracts of land from which petitioner had removed the timber. The cost to petitioner of the land, and hence its basis for the shares, was $9,000. Second Holding Corporation was organized for the sole purpose of liquidating the land and transferring the proceeds to petitioner as soon as converted into cash. Such proceeds were transferred to petitioner, as follows:

1931-$1,038.50
1932- 1,185. 00
1937_1_ 279. 99
1938- 2,158. 65
Total_ 4,662.14

The Second Holding Corporation was then abandoned, after the trustees had resolved that the liquidation begun in 1931 was completed and that the payment of the foregoing liquidating dividends was approved.

. The $2,158.6'5 received by the petitioner in 1938 was the last item of liquidation of the Second Holding Corporation. By section 115 (c) of the Revenue Act of 1938 it “shall be treated as in part or full payment in exchange for the stock. The gain or loss to the dis-tributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112.” By section 111, “the loss shall be the excess of the adjusted basis provided” in section 113 (b) “for determining loss over -the amount realized.” The amount realized is, by section 111 (b), “the sum of any money received.” The extent of the gain is, by section 111 (c), determinable-under section 112.

Section 112 covers the entire subject of recognition of gain or loss, and provides as the general rule that upon sale or exchange of property the entire amount of gain or loss shall be recognized, and provides specific exceptions. Subdivision (b) describes eight exceptions of “exchanges solely in kind”, and subdivisions (c), (d), and (e) describe exceptions of “exchanges not solely in kind.” The Commissioner’s determination that no loss of petitioner may be recognized is founded upon section 112 (b) (6), dealing with “Property Received by a Corporation on Complete Liquidation of Another”, which provides, “No gain or loss shall be recognized upon the receipt by a corporation of property distributed in complete liquidation of another corporation.” The petitioner contends that section 112 (b) (6) is inapplicable because its receipt of only money may not be regarded as a receipt of property.

The petitioner’s position is correct. The entire Supplement B, sections 111 to 121, covering the subject of computation of net income, contains repeated references to property and to money in separate classes and there is a clear manifestation of legislative intent to prevent the confusion of one with the other. A taxpayer corporation which bought a property for $x organized a new corporation, to which it transferred the property in exchange for all the shares, had the new corporation sell the property for $3x, and transferred the $3x to the taxpayer in complete liquidation, would surely not have been permitted to avoid tax on the $2x gain in reliance upon section 112 (b) (6). The no-gain-or-loss provision was intended to cover situations in which the corporate taxpayer received property and not money, so that realization would not occur until the property was converted into cash. In a liquidation of property requiring a further step by the distributee to bring about realization of money, no gain or loss was to be recognized as the subject of tax or deduction until the conversion into money. How else and when would such a clear gain as appears in the foregoing illustration be taxed? We can not agree, therefore, with the conclusion of G. C. M. 19,435, 17 C. B. (1), p.176.

The holding of Halliburton v. Commissioner, 78 Fed. (2d) 265, construing the word property in section 203 (b) (4), Revenue Act of 1924 (section 112 (b) (5), Revenue Act of 1938), as including money, may not be extended beyond its own rationale into any of the other subdivisions of section 112. The reasoning of the court was to promote the intendment of subdivision (b) (5), and the language of the opinion was clearly limited within that scope. It may not be adopted as a pronouncement that elsewhere in the statute the meaning of the word property must be read as including money. No decisions have applied the doctrine to any other provisions of the statute. See Portland Oil Co. v. Commissioner, 109 Fed. (2d) 479, 488; George P. Skouras, 45 B. T. A. 1024.

The Commissioner was in error in disallowing any deduction for petitioner’s loss. The deduction should have been allowed within the capital loss limitation, and the determination is reversed.

Decision will be entered for the petitioner.


author: Black:

text:
    Parks-Chambers, Incorporated, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101802.
    Promulgated January 23, 1942.

      Edward B. Kane, Esq., for the petitioner.

      J. Marvin Kelley, Esq.-, for the respondent.
   OPINION.

Black:

The respondent concedes error as alleged in petitioner’s assignment “(c)”, and adjustment for the item there involved will be made under Bule 50. The remaining issues are: (1) Whether the petitioner is entitled to use a fiscal year ending on January 31 for computing net income for each taxable year, or, if not (2) whether all or any part of a $30,000 dividend declared and paid by it on January 25, 1937, may be credited as “dividends paid” in determining petitioner’s surtax on undistributed profits for the calendar year 1936.

The first question is determined by certain identical provisions in the Bevenue Acts of 1934 and 1936 printed in the margin.

In applying identical provisions to those set out in the margin, relating to the use of a fiscal year in filing income tax returns, the courts and this Board have strictly construed the statutory language and rejected the fiscal year basis for computing net income in cases where the accounting period involved did not end upon the last day of some calendar month. Thus in Swift & Co. v. United States, 38 Fed. (2d) 365, the taxpayer’s annual accounting period, for determining profits for dividends and other business purposes, ended in October of each year. The period was composed of twelve smaller accounting groups of four or five weeks, each ending upon a Saturday and not on the last day of a month except by accident. The Government contended in that case that, since the period in dispute correctly reflected the taxpayer’s true income and otherwise met the substantial conditions of a fiscal year, its date of ending was unimportant. The court denied the contention so made, and in its decision, among other things, said:

The contention on behalf of the defendant is that the words “ending on the last day of any month” are not to be taken literally, but may be construed to refer to a day which is not the last day of a month but somewhere near it * * *. We are unable to agree that this statute may be so construed. It is not ambiguous, but positive and direct, and if not held to mean just what it says, by the words “the last day”, it may mean any day between the middle of the month and the last day, or at least any day at all near the last day, and thus practically lose all meaning or significance so that it might just as well have never been enacted. * * *

Typical holdings of the Board in harmony with the above decision are Clara A. McKee, Administratrix, 11 B. T. A. 1381; Dewitt C. Dunn, 15 B. T. A. 1042; and J. W. Vaughan, 19 B. T. A. 478. In Clara A. McKee, Administratrix, supra, the question was whether a 12-month period, within which the entire business affairs of an estate were administered, could be treated as a fiscal year for computing the net income of that period. The period began April 17, 1921, at the death of the decedent and ended with the administratrix’s final report on April 17, 1922. Substantially all of the estate income was collected in the first half of this period, while most of the taxes admittedly deductible from income were paid in the last half of the period. In these circumstances, the petitioner contended that equity justified use of the fiscal year basis for computing the net income for the whole period. Otherwise, the estate would not get the full benefit of the deductions to which it was entitled.

Basing its decision squarely upon the wording of the statute, the Board denied the contention of the petitioner in that case and, in such connection said:

* * * The taxing statute specifically requires that net income shall be computed upon the basis of a twelve-month period “ending on the last day of any month other than December” or on the basis of the calendar year. A twelvemonth period ending April 17th is not a “fiscal year” as defined in the statute and is not an accounting period which the respondent has authority under the statute to accept as a basis for an income tax return.

Obviously these decisions are in point and decisive of the issue involved in petitioner’s assignment of error (a). Since neither of the periods which petitioner claims as taxable years ends upon the last day of any month, it follows that neither may be treated as a fiscal year for computing net income, and the contentions of the petitioner on this point are not sustained.

We next take up for decision petitioner’s assignments of error (b) and (d). Manifestly petitioner’s assignment of error (b) fails when we bold that it is not entitled to use a fiscal year basis, as tbe Commissioner bas determined. However, petitioner contends in assignment of error (d):

If Petitioner is required to use the calendar year 1936, then the Commissioner erred by failing to prorate and allocate to the calendar year 1936 340/365 of the $30,000 dividend paid by Petitioner on January 25, 1937.

Tbe applicable statute and regulations are printed in tbe margin.

The substance of petitioner’s contentions in support of its assignment of error (d) is set out in its brief as follows:

In determining Petitioner’s tax liability for the calendar year 1936, Respondent allocated to 1936 34%6stbs of every factor which enters into the computation of Petitioner’s tax liability and which occurred during the fiscal year ending January 26, 1937, with the sole and single exception of the $30,000 dividend paid by Petitioner on January 25, 1937.
Since no justification can possibly be found for Respondent’s inconsistent treatment of the $30,000 dividend, Respondent should be required to allocate to 1936 in like manner 3i%65tbs of the $30,000 dividend, and Petitioner accordingly should be allowed a dividends paid credit for 1936 of 34%6sths of the $30,000 dividend.

Petitioner concedes that tbe method by which the Commissioner bas arrived at petitioner’s net income for the calendar year 1986 appears to be fair and reasonable, with the exception of the dividends paid credit, and is authorized by A.. B>. R. 8092 II-2 C.B. 190. The substance of A. R. R. 3092, referred to in petitioner’s brief, is as follows:

It is the opinion of the Committee, since appellant closes its books on December 20 of each year, that taxable net income for the calendar year 1917 should be computed by adding that part of the income for each of the years ended December 20, 1917, and December 20, 1918, which falls in the calendar year 1917. Such income for the calendar year 1917 will be obtained by dividing taxable net income for the year ended December 20, 1917, by 12 and multiplying such one-twelfth by ll2%i, to which should be added mss of the taxable net income for the year ended December 20, 1918, * * *

It is clear from tbe deficiency notice, and is further made plain in the stipulation of facts herein, that in applying the proration method described above, the Commissioner prorated to the calendar year 1936 34%65 °f each and every factor which enters into the computation of petitioner’s tax liability and which occurred during petitioner’s so-called fiscal year ending January 26, 1937, with the sole and single exception of the $30,000 dividend paid by petitioner on January 25, 1937.

The Commissioner justifies his failure to prorate the $30,000 dividends paid credit in the same manner as he prorated all other items of income and deductions in his brief as follows:

The petitioner, no doubt, will contend that the respondent should allocate the dividends of $30,000.00 paid on January 30, 1937, over the calendar year 1936. There is no law authorizing the Commissioner or the taxpayer to allocate a dividends paid credit. If the payment of the dividend meets the requirement of the statute it is allowable in full. If it does not meet such requirements it is totally unallowable.

It will be noted that in the foregoing quotation from the Commissioner’s brief he speaks of the dividend in question as having been paid on January 30, 1937. If that were the date of the payment of the dividend there would be no argument at all but that the Commissioner should be sustained. If January 30, 1937, were the date of the payment of the dividend, then even under petitioner’s theory there would be no warrant for prorating any part of the $30,000 dividends paid credit to 1936. However, petitioner contends that the date of the payment of the dividend was January 25,1937. Under the facts which have been stipulated in the record, we think petitioner must be sustained in this contention. See Atlantic Land Co., 43 B.T.A. 74, and Valley Lumber Co. of Lodi, 43 B.T.A. 423.

Treating the date of the payment of the dividend as January 25, 1937, as we think we must, is petitioner entitled to have the $30,000 dividends paid credit prorated in the same manner as the Commissioner has prorated other items of income and ordinary deductions? We think not. We do not think that the language of the statute or the applicable Treasury regulations printed in the margin will permit of such treatment.

The petitioner’s situation is perhaps unfortunate in this respect, since it accumulated the surplus involved in these dividends in prior years and could and obviously would have distributed them during the taxable year had it realized its exact status as a taxpayer upon an irregular accounting period basis. This error, however, was not one for which the Commissioner was responsible. He in any event was required by law to compute the net income upon the basis of the calendar year. Since the authority for these credits is section 27 (a), supra, which limits the allowance to dividends paid during the taxable year, it follows that the petitioner’s claim under this issue must be denied. Petitioner will, of course, be entitled to receive dividends paid credit for this $30,000 dividend paid in its income tax return for the calendar year 1937. What effect that will have on its taxable income for 1937 we do not know, for we do not have that year before us. But, as already stated, we find no warrant in the law or regulations for allowing any part of this credit in computing petitioner’s taxable income for the calendar year 1936.

Decision will be entered wider Rule 50.

       SEC. 41. GENERAL RULE.
      The net income shall be computed upon the basis of the taxpayer’s annual áccounting period (fiscal year or calendar year, as the case may be) 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 in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. If the taxpayer’s annual accounting period is other than a fiscal year as defined in section 48 or if the taxpayer has no annual accounting period or does not keep books, the net income shall be computed on the basis of the calendar year.
      SEC. 48. DEFINITIONS.
      * * *****
      (b) Fiscal Teak. — “Fiscal year” means an accounting period of twelve months ending on the last day of any month other than December.

       See. 27 (a), Revenue Act of 1936 :
      “(a) Dividends Paid Credit in General. — For the purposes of this title, the dividends paid credit shall he the amount of dividends paid during the taxable year.”
      Article 27 (a)-l (b) and (c) of Regulations 94 provides in part:
      (b) When dividends are considered paid. — A dividend will be considered as paid when it is received by the shareholder. A dividends paid credit can not be allowed unless the shareholder receives the dividend during the taxable year for which the credit is claimed.

        * * * * * * «
      If a corporation, instead of paying the dividend directly to the shareholder, credits the account of the shareholder on the books of the corporation with the amount of the dividend, the credit for a dividend paid will not be allowed unless it be shown to the satisfaction of the Commissioner that such crediting constituted payment of the dividend to the shareholder within the taxable year.
      *******
      (c) Methods of accounting. — The determination of whether a dividend has been paid to the shareholder by the corporation during its taxable year is in no way dependent upon the method of accounting regularly employed by the corporation in keeping its books or upon the method of accounting upon the basis of which the net income of the corporation is computed. ‘See section 43.


author: Mellott :

text:
    Schermerhorn Oil Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent. Schermerhorn-Winton Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Charles Weldon Tomlinson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103049.
    Docket No. 104204.
    Docket No. 100663.
    Promulgated January 23, 1942.

      George H. Abbott, O. P. A., and L. Karlton MosteTler, Esq., for the Schermerhorn Oil Corporation and Schermerhorn-Winton Co., petitioners.

      Ezra Dyer, Esq., for Charles Weldon Tomlinson, petitioner.

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

Mellott :

Under the applicable provisions of the Kevenue Acts of 1934 and 1936, the Schermerhorn Oil Corporation and the Schermer-horn-Winton Co., hereinafter sometimes referred to as the Schermer-horn companies, are allowed deductions for depletion of oil and gas properties either: (a) on the basis of 27% percent of the gross income from such properties not exceeding 50 percent of the net income; or (b) on the basis of cost, whichever is greater. Secs. 23 (m) and 114 (b) (1) and (3), Kevenue Acts of 1934 and 1936.

In their income tax returns for the taxable years the Schermerhorn companies deducted, in computing net income for those years, allowances for depletion on each of the oil and gas leases acquired upon the recommendation of Tomlinson. In some instances the amount deducted was based upon a percentage of the gross income and in others upon cost. The corporations also deducted as general expenses, and in one instance (the return of the Schermerhorn Oil Corporation for 1937) excluded from income, the payments made to Tomlinson and his assigns during the taxable years. Respondent disallowed the claimed expense deductions and exclusions from gross income and determined that the payments should have been capitalized. This resulted in increasing the corporations’ respective gross incomes but allowed them larger cost bases for the purpose of computing depletion based upon cost under the statutes referred to above.

Petitioners’ alternative contention ((b) as set out in the statement of the issues) may be considered first. It is that 10 percent of the gross income and 10 percent of all expenses from the oil and gas producing properties acquired upon the recommendation of Tomlinson should be excluded in computing the net taxable incomes of the Schermerhorn companies. They argue that the payments were simply transferred by the corporations to the rightful owners without any effect upon the capital or income of the corporations (which will be considered more fully in connection with the discussion of (a), i. e., whether they were capital transactions), since the agreements between them and him constituted a joint venture and since, regardless of how the contracts may be construed, Tomlinson had, with respect to each property, “a right in the nature of a thing in action * * * from the moment such properties were acquired.” They insist, in other words, that Tomlinson or his assigns held a 10 percent economic interest in the properties.

Petitioners’ contention that a joint venture existed is not sound. An agreement to share profits is not of itself sufficient to create the relationship. “There must be some additional fact such as control over or proprietary interest in the subject matter involved or a share in the risks and burdens incident to the transaction or transactions to be carried forward, showing that the parties intended the relationship.” Alfred M. Bedell, 9 B. T. A. 270; affd., 30 Fed. (2d) 622. Each joint adventurer must have some voice and right to be heard in the control and management of the joint venture. Hughes v. Baker, 169 Okla. 320, 327; 35 Pac. (2d) 926. The agreements between Tomlinson and the companies provided that he should have no voice in determining whether properties recommended by him should be purchased, sold or abandoned or in the operation or management of such properties. He could not bind or obligate the Schermerhorn companies under any contract Avith third parties, except when authorized in writing to do so, nor could the companies bind him or his portion of the net profits. There was no provision in the agreements that he should have an interest in any oil or gas lease, as in Shoemake v. Davis, 146 Kan. 909; 73 Pac. (2d) 1043, cited and relied upon by petitioners. He was given merely an interest in the net profits of leases recommended by him, and acquired, operated, and developed by the Schermerhorn companies. Neither of the companies ever caused a partnership return to be filed, treating Tomlinson as a joint adventurer, nor did he ever cause any such return to be filed. (Secs. 187 and 801 (a) (3), Revenue Act of 1934.) Evidence of an intention to create a joint venture is entirely lacking and in our opinion no such relationship was in fact created.

Petitioners’ contention that Tomlinson had, with respect to each property acquired under the agreements, a right in the nature of a “thing in action”, is based primarily upon the Oklahoma statutes. They argue that it was personal property, the ownership becoming “completely fixed in all respects Avith reference to a particular property the moment such property was acquired under the agreements”; that, being personal property, the income derived from it was his, rather than the corporations’; and that the provisions of the contract under which the corporations retained exclusive control over the property and its development were “no more than a mere carving out of the parts of the whole which constitute the separate properties of each * * *.” The same thought is expressed in a query contained in their brief on this phase: “What do the Schermerhorn companies acquire when they transfer that which is produced by property which is owned by Tomlinson or his assigns?”

The statutes upon which petitioners rely are of slight, if any, aid to them. They seem to do no more than provide for assignment and survivorship of a chose in action. If considered as an attempt by the state to classify such a right as Tomlinson had under the agreements they are not applicable; for until a dispute arose or a breach occurred, neither of which has been shown, no “right to recover money or other personal property by judicial proceedings” arose. As we view the facts Tomlinson had a mere contractual right to a percentage of the net profits produced by certain leases. This was a right to receive income if and when realized; but he had no economic interest in the property producing the income. The property was “acquired by First Party” — the oil corporation — and Tomlinson, under the contract, was merely its “representative.” In other words the contract was a contract of employment or limited agency and the net profits were paid for services rendered.

Petitioners’ further alternative contentions (issues (c) (1), (2), and (3)) may be considered next. They have been set out above in substantially the language used by petitioners upon brief. Epitomizing the contentions and the arguments made in support of them, petitioners claim they are entitled to deduct from gross income 100 percent of the amounts paid to Tomlinson in addition to deducting depletion based upon the cost of the properties or 271/2 percent of the gross income. They contend that such was the method approved by this Board in North American Oil Consolidated, 12 B. T. A. 68 (reversed upon other issues, 50 Fed. (2d) 752; 286 U. S. 417). In that case the petitioner had agreed to pay its attorneys 4 percent of the oil, gas, and other minerals produced from certain property in the event the attorneys were successful in accomplishing a satisfactory termination of court and land office proceedings relating to the property. The proceedings were successfully terminated. It was held that the payments to the attorneys were capital expenditures and that depletion was allowable in respect of such amounts. They were not held to be deductible either as ordinary and necessary business expenses, general overhead expenses, or direct overhead expenses. It was stated:

* * * The solution that seems to us will produce a proper result is to allow as depletion in each year an amount equal to the 4 percent paid to the attorneys. By this method, when eventually production ceases, the petitioner will have returned to it through the depletion allowances exactly the amount of its capital expenditure and the depletion deduction each year will be reasonable.

Petitioners’ interpretation of the decision, that it allowed the deduction in the year in which the payments were made, either as ordinary and necessary business expenses in the nature of a depletion deduction or as an item of general or direct overhead expense, is erroneous. In addition, it may be pointed out that the tax years involved in the cited case were 1917, 1918, and 1919 and the revenue acts relating to those years contained no alternative provision for percentage depletion such as is now contained in section 114 (b) (3), supra. Petitioners are entitled, under the above statute, to a depletion allowance based either upon cost or upon 27% percent of the gross income from the property, whichever is greater. It is obvious that, if petitioners should be permitted to deduct from the gross income of the property the 10 percent of the net profits paid to Tomlinson and also 27% percent of the gross income from the property, they would thus secure a double deduction for depletion. No double deduction for depletion was ever contemplated by the statute.

The principal issue is whether the Commissioner committed any error in treating the payments to Tomlinson as capital expenditures. As pointed out above, the North American Oil Consolidated case, supra, treated comparable expenditures as capital expenditures. This, we think, was proper. It has been pointed out that the contracts between Tomlinson and the oil companies were either contracts of employment or of limited agency. Under them the companies were permitted to acquire oil and gas leases, explored by Tomlinson, in consideration of the payment to him of a salary and drawing account and in consideration of the additional payment to him of 10 percent of the net profits from the property after deducting the original cost or after the companies had reimbursed themselves from the profits on the first oil sold for all of the expenses incurred in acquiring and developing the property. The obligation to make the additional payments to Tomlinson was just as much a part of the cost of acquiring the leases as the consideration which the companies agreed to pay to the lessors. It arose when the properties were acquired, the time of payment being postponed until net profits should be realized. If the companies had convenanted to pay Tomlinson certain lump sums at the time of the acquisition of each property, it would perhaps be more obvious that such payments were made in connection with the acquisition of a capital asset; but there is no substantial distinction between such payments and -those which the corporations covenanted to make. As we view them they are somewhat analogous to commissions paid in connection with the purchase of property, expenditures made for surveys, abstracts of title, or geological opinions, and amounts paid in defending or perfecting title to real estate, all of which have been held to be capital expenditures. Helvering v. Winmill, 305 U. S. 79; Seletha O. Thompson, 9 B. T. A. 1342; Moynier v. Welch, 97 Fed. (2d) 471. The mere postponement of payment until the realization of net profits does not change the nature of the expenditures, nor is it material that the payments made in the later year do not add to the property interest previously acquired. The test is whether the expenditures are made in connection with the acquisition or preservation of a capital asset. If so, they are capital expenditures. Applying this test we think that the payments in issue were made in connection with the acquisition by the Schermerhorn companies of the properties from which the net profits were realized. We are therefore of the opinion and hold that the respondent properly treated them as capital expenditures.

The conclusion which has been reached accords with the view recently expressed by the Board in Quintana Petroleum Co., 44 B. T. A. 624 (promulgated June 3, 1941, later reviewed by the Board and adopted November 11, 1941). In that proceeding petitioner, like the oil corporations before us, was under obligation to account to the Gulf Production Corporation for a portion (one-fourth) of the net proceeds from the operation of leased property. The total production of oil from the lease during 1937 was $46,895.65. In its income tax return for that year petitioner claimed and was allowed percentage depletion of $12,896.30, representing 27% percent of its gross income from the property. In addition it claimed a deduction of $7,142.28, being the amount paid out in its agreement with the Gulf Production Co. It was held that the payment constituted a part of the consideration paid for the lease, was a capital expenditure and not an expense payment.

The issue in Docket No. 100663 involves $7,882.21, this amount being 10 percent of the net profits realized in 1937 from leases and properties acquired by the Schermerhorn Oil Corporation upon Tomlinson’s recommendation. It was paid to Tomlinson’s wife and included in her gross income in the separate return which she filed. The Commissioner determined: “that the principles enunciated in Lucas v. Earl, 281 U. S. 111; Van Meter v. Commissioner, 61 Fed. (2d) 817, and Gerald A. Eubank, 39 B. T. A. 583 govern.” Pie accordingly added the amount to the net income shown in Tomlin-son’s return, made other adjustments not now in issue, and determined the deficiency in tax.

Petitioner Tomlinson contends “that the interests acquired by him under his contracts of employment in the particular properties were vested interests in the property”; that the contract right to receive tjie profits wqs a vested property right, assignable by him; that the. income was derived by his wife from the property interest conveyed to her; and that the respondent erred in including it in his income.

Since the deficiency in issue was determined the Supreme Court has affirmed the holding of the Board in Gerald A. Eubank, supra (Helvering v. Eubank, 311 U. S. 122); decided Helvering v. Horst, 311 U. S. 112; reexamined its decisions in Blair v. Commissioner, 300 U. S. 5, and the line of cases stemming from Lucas v. Earl, supra; and said:

The power to dispose of income is the equivalent of ownership of it. The exercise of that power to procure the payment of income to another is the enjoyment and hence the realization of the income by him who exercises it. (Helvering v. Horst, supra.)

It is true that the owner of a legal or equitable interest in property may assign it and “the one who is to receive the income as the owner of the beneficial interest is to pay the tax.” Blair v. Commissioner, supra. If the “interests acquired by petitioner under his contracts of employment * * * were vested interests in the particular properties” they would be assignable and the income would be taxable to the assignee. We do not believe, however, that petitioner had, or that he attempted to assign to his wife, a vested property right. As pointed out above the contracts between him and the oil companies were contracts of employment or limited agency and an agreed percentage of the net profits was to be, and was, paid for services rendered. The payments were not unlike those made to Eubank and his wife (Gerald A. Eubank, supra). Nor does the fact that the contracts of employment permitted Tomlinson to sell, assign, or transfer “his pecuniary interest in any specific property acquired pursuant to” the contracts of employment have the effect of making his “pecuniary interest” a vested property right. Having rendered services which resulted in the development by the oil companies of properties which were being operated at a net profit, he undoubtedly had a pecuniary interest which could be assigned; but it was still compensation for services which he had rendered and hence, as we view it, governed by the principle of Lucas v. Earl, supra, and kindred cases. We therefore hold that the Commissioner did not err in including it in Tomlinson’s income.

Tomlinson makes the alternative contention that if it should be held he is subject to tax upon the income of $7,882.21, then he should be allowed a depletion deduction with respect to this income and also with respect to income received by him in 1937 in connection with the Kloh lease and the Phillips royalty. We do not agree.

A deduction for depletion is allowable only to the individual or corporation having a capital investment in the oil and gas in place. Tomlinson had no such investment. Under his contracts he was entitled to receive 10 percent of the net profits from certain leases and properties acquired upon his recommendation. In Anderson v. Helvering, 310 U. S. 404, the Supreme Court said:

* * * A share in the net profits derived from development and operation, * * * does not entitle the holder of such interest to a depletion allowance even though continued production is essential to the realization of such profits. Helvering v. O’Donnell, 303 U. S. 370; Helvering v. Elbe Oil Co., 303 U. S. 372.

Respondent did not err in refusing to allow the claimed depletion.

Decision in each docket will be entered under Rule 50.

       SEC. 23. DEDUCTIONS PROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      *******
      (m) Depletion. — In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case; such reasonable allowance in aR cases to be made under rules and regulations to be prescribed by the Commissioner, with the approval of the Secretary. * * *
      SEC. 114. BASIS FOR DEPRECIATION AND DEPLETION.
      * ******
      (b) Basis por Depletion.—
      (1) General eule. — The basis upon which depletion is to be allowed in respect of any property shall be the adjusted basis provided in section 113 (b) for the purpose of determining the gain upon the sale or other disposition of such property, except as provided in paragraphs (2), (3), and (4) of this subsection.
      * ******
      (3) Percentage depletion por oil and gas wells. — In the case of oil and gas wells the allowance for depletion under section 23 (m) shall be 27l£ per centum of the gross income from the property during the taxable year, excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property, except that in no case shall the depletion allowance under section 23 (m) be less than it would be if computed without reference to this paragraph.

       A thing in action is a right to recover money or other personal property, by judicial proceedings. (60 Okla. St. Ann. 812.)
      A thing in action, arising out of the violation of a right of property, or out of an obligation, may be transferred by the owner. Upon the death of the owner, it passes to his personal representatives, except where, in the case provided by law, it passes to his devisees or successors in office. (60 Okla. St. Ann. 313.)

       Respondent incorporates in his brief a computation of net income based upon an assumed gross income from a leasehold costing $100,000 with an expected recoverable oil reserve of 1,000,000 barrels and a net production for the year of 100,000 barrels. Column 1 seems to be as petitioners would compute it while Column 2 indicates respondent’s method of computation.

        Ool. 1 Col. 2

      Gross Income_ $100, 000 $100, 000
      Deductions, including ordinary overhead, operating expenses and depreciation_ 10, 000 10, 000
      Net Income before Depletion-!-1-90, 000 90, 000
      50% of Net Income-$45, 000 . $45, 000
      27% % of Gross Income-27, 500 27, 500
      Cost Depletion to be considered in applying the limitation provisions of sec. 114 (b) (3) :
      (a) Computed on leasehold cost-10, 000 10, 000
      (b) Computed on Capitalized Net Profits-None 9, 000
      10, 000 19, 000
      Allowable Depletion under Sec. 114 (b) (3) 27, 500 27, 500
      Additional Depletion (Issue (c) (1))--9, 000 None
      Total allowable depletion. 36, 500 27, 500
      Net Taxable Income. 53, 500 62, 500


author: Disney:

text:
    Amory L. Haskell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103967.
    Promulgated January 27, 1942.

      Ambrose L. O'Shea, Esq., for the petitioner.

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

Disney:

This proceeding involves income taxes for the calendar year 1937 in the amount of $33,479.82, the entire deficiency determined. The question for examination is whether income received by the petitioner was distributed as a part of a complete liquidation by a corporation under section 115 (c) of the Revenue Act of 1936, or whether gain is to be recognized under section 117 (a) of the Revenue Act of 1936.

The case was submitted upon stipulations, and exhibits attached and referred to therein. Certain objections to some of the exhibits were overruled, and we find the facts to be as so stipulated. We set forth herein only those portions thereof deemed pertinent to discussion of the issue.

The petitioner, who filed his income tax return for the calendar year 1937 in the first district of New Jersey, at Camden, New Jersey, was a stockholder in, and the president of, Triplex Safety Glass Co. of North America, hereinafter referred to as the company. He .received from the company in 1937 as distributions in liquidation and reported as income the sum of $143,157.10. He computed his income tax on the theory that the distributions were in complete liquidation of the company, and therefore reported taxable long term gain, under section 117 of the Revenue Act of 1936, of 40 percent on certain preferred stock held more than five years at the date of the distribution and 30 percent on certain common and preferred stock held for more than ten years at the date of the distribution. There seems no dispute as to the periods of holding, the amounts received, or the actual gain realized. The respondent determined that the distributions were received in partial liquidation and included 100 percent of the gain in petitioner’s income, resulting in the deficiency above stated. The question, therefore, turns upon whether the company distributed to the petitioner in 1937, by way of complete liquidation as petitioner argues, or partial liquidation as respondent contends, conceding that there was distribution in liquidation.

From December 31, 1928, until after the taxable year .the company, organized to manufacture reinforced glass, was in litigation over alleged infringement of its patents. The result, after the case had been taken to the Supreme Court of the United States and sent back to the District Court, was a master’s report on July 9, 1937, recommending that the company recover from Pittsburgh Plate Glass Co. (hereinafter called Pittsburgh) $1,560,378.59. On July 29, 1937, Pittsburgh paid the company $1,008,858.08 on the account, which amount was accepted under written stipulation that payment was without prejudice to further claims. With due diligence, the company on October 28, 1937, brought before the District Court its motion to confirm the master’s report. On February 17, 1938, that court held that Pittsburgh was liable to the company for $1,520,378.59. Cross-appeals were perfected May 24, 1938, and the case was argued and submitted to the Third Circuit Court of Appeals on the record and briefs on December 12, 1938. On January 29, 1940, the matter .was reargued to the Third Circuit Court of Appeals, pursuant to its directions. Delay in the decision of the matter was due to the reargument, and was beyond the control of the company. Decision was rendered by the Circuit Court on March 7, 1940.

The company on its income tax returns for 1930 to 1932, inclusive, reported as accrued income amounts claimed to be due for the patent infringement involved in the litigation above described. Prior to a resolution of its stockholders on November 16,1937, below described, the company’s officers had considered the possibility of Federal income tax for that year because of the payment from Pittsburgh and had computed a possible maximum income tax of $199,156.20, and set up a reserve therefor at that time of about $200,000. In March 1938 an internal revenue agent reported to the company that its 1937 income and excess profits tax liability was $197,465.46. The company had been advised by counsel at the time of the resolutions in 1937, and was advised later that there was, in counsel’s opinion, no income or excess profits tax liability in 1937 upon the payment from Pittsburgh. The claim for excess profits tax was successfully resisted, and on July 16, 1938, the Commissioner allowed the claim of the company for exemption from the provisions of the capital stock tax law and has not since claimed that the company is subject thereto. Resistance to income tax being unsuccessful, it was paid June 13,1939, claim for refund was filed, and on January 5, 1940, suit was filed for recovery in the amount of $136,727.62. That suit was still pending at the time of the hearing herein.

From January 1,1937, to the present time the company has engaged in no activities other than the prosecution of the above detailed litigation, and tax controversy with the United States Government over its income, capital stock, and excess profits taxes; and since November 16,1937, the date of the above mentioned adoption of resolutions by the company’s stockholders, has been in process of winding up its affairs. The claim for patent infringement was at all such times practically the only asset of the company.

On August 26,1937, the president of the company stated the situation to a directors’ meeting, reciting the payment received from Pittsburgh, the prosecution of the claim for the balance found due by the master, the fact that the company had certain obligations, and possible tax liability (though counsel had advised otherwise) for which it was recommended that about $240,000 be reserved, leaving, out of the payment from Pittsburgh, $531,000. He suggested that a stockholders’ meeting consider liquidation of the company, as of December 3, 1937. The board of directors accordingly resolved to retain $240,000 for possible tax claims, current expenses, and patent litigation, and that $531,000 be distributed in liquidation of the company as of December 3, 1937, that a special meeting of stockholders be called to approve such action, and that the officers be authorized to take steps necessary to collect the balance due from Pittsburgh.

Notice was given of a special meeting of stockholders to be held November 16, 1937, for the purpose of considering authorizing the prosecution of the claim for the remainder due from Pittsburgh, to authorize the officers to proceed with the orderly liquidation of the company and distribute funds currently available in liquidation, to appoint an agent for the complete liquidation of preferred stock and partial liquidation of common stock, and to distribute, on surrender of the certificates for cancellation $154.50 per share of preferred stock in complete liquidation thereof, and after setting aside a sum sufficient for complete liquidation of the preferred stock, to pay out $1.70 per share in partial liquidation of the common stock, all as of December 3, 1937. A letter from the president of the company accompanied the notice of the stockholders’ meeting, explaining the situation as above outlined and the existence, after payment of obligations and reserves for liabilities, of funds sufficient to completely liquidate preferred stock and partially liquidate the common stock.-

On November 16, 1937, the stockholders passed resolutions authorizing the reservations for liabilities, the continuance of prosecution of the claim of the balance due from Pittsburgh, and the liquidation of the company, in full as to preferred stock and partial as to the common stock, and to that end to appoint an agent to take steps to accomplish the complete liquidation of the preferred stock and partial liquidation of the common stock, and to pay as of December 3, 1937, $154.50 per share in full liquidation of the preferred stock on surrender of the certificates for cancellation and $1.70 per share in partial liquidation of the common stock. It was further resolved:

And pursuant to paragraph 3, sub-division (d) of the Notice of the Meeting, dated October 14, 1937, that the officers be and they are hereby empowered at their sole and full discretion to make any other and further disbursements to the Common Stockholders as may be warranted, should there be any further receipt on account of damages from Pittsburgh Plate Glass Company between this date and December 31,1937.

On November 22, 1937, the president and the secretary of the company wrote a letter to the stockholders, notifying them that on November 16, 1937, at a special meeting, the stockholders bad resolved to authorize the complete liquidation of the preferred stock and the partial liquidation of the common stock, and notifying the stockholders to surrender the certificates of preferred stock for cancellation and the certificates of common stock for endorsement stamp. The petitioner, pursuant to such notice, surrendered his certificates of common stock for stamping, and about December 3, 1937, received thereon $102,523.60 and the subsequent return of the certificates; also surrendered his certificates of preferred stock and received in payment therefor $40,633.50.

On March 25, 1938, a special meeting of the board of directors of the company was held at which there was considered a proposition from Pittsburgh that they would pay the additional claim for patent infringement in the amount of approximately $515,000 provided the company would not appeal on the question of interest, but otherwise a cross-appeal on the question of $515,000 would be taken. After discussion including consideration of possible income tax, though it was stated counsel advised there was such liability in the matter, it was resolved that counsel be instructed to proceed with an appeal, and that the views of some of the larger stockholders be obtained on the subject.

On September 19, 1938, the internal revenue agent in charge wrote the petitioner proposing adjustments resulting in a deficiency of tax in the amount of $33,479.82 in effect because of the view expressed that though it appeared to be the intention of the company to liquidate the entire capital stock of the company, the facts available did not indicate that the plan of liquidation specified a time in which the transfer of the property is to be completed and that it was held therefore that the- distributions were not in complete liquidation of the corporation within the meaning of section 115 (c) of the Revenue Act of 1936.

At a directors’ meeting on October 25, 1938, the president of the company stated the situation, in effect, that $199,160 had been reserved for tax liabilities, that on November 16, 1937, a plan for complete liquidation of the company had been adopted, that though an original assessment of $197,465.48 had been proposed, this upon reconsideration after protest had been reduced to about $127,000, that therefore about 30 cents per share on common stock could be distributed “as a partial distribution in accordance with the plan for complete liquidation of the company as heretofore adopted.” The directors passed resolutions accordingly, referring to the previous plan for prompt and complete liquidation of the company and authorizing distribution of 30 cents per share “as a further partial liquidation” and authorizing the officers to take all necessary steps “for such further partial liquidation oí the common capital stock” and authorizing the officers to appoint an agent to make such payment “in partial liquidation of the common capital stock”, referring further to the distribution to be made “as a further partial liquidation” and further resolving as follows:

Resolved Further that pursuant to the plan for the complete liquidation and dissolution of this Company, as adopted at the Special Meeting of the Stockholders duly called and held on the 16th day of November, 1937, the officers of this company are hereby directed to complete the liquidation of the Company and to take such steps as may be requisite for the purpose of dissolving the Company not later than December 31,1939.

On November 21, 1938, the stockholders of the company were advised by letter from the president and the secretary that due to decision of the Income Tax Bureau of the Internal Revenue Department the full amount theretofore reserved for Federal taxes need not be maintained and that the directors had released from the reserve an amount sufficient to pay 30 cents per share on the common stock “as a second payment in the series toward the complete liquidation of the Common Capital Stock of the Company.”

On January 31, 1939, the annual meeting of the stockholders of the company was held. The following resolution was passed:

Resolved Further that all tlie acts of the Board of Directors and the officers of the Company in distributing the sum of $54,679.50 as a further partial liquidation of the common stock of the company, pursuant to the plan heretofore adopted by the stockholders of this Company for the prompt and complete liquidation and dissolution of the company be and the same are hereby approved, ratified and confirmed.

At the regular meeting of the board of directors on February 2, 1939, the chairman reported that in their regular meeting on January 31, 1939, the stockholders had, among other things, “approved a plan for the complete liquidation of the company by December 31, 1939.”

At the regular quarterly meeting of the directors on October 31, 1939, there was discussion of the fact that the stockholders had authorized dissolution not later than December 31, 1939. The president of the company reported that such dissolution might be impossible by the end of the year since the expected decision of the Third Circuit Court of Appeals had not yet been handed down, although the company was to all intents and purposes already liquidated except for the claim against Pittsburgh.

On January 9, 1940, the president and the secretary of the company notified the stockholders that no decision had as yet been rendered by the court and that “Accordingly, it is necessary to continue the corporate existence of our Company until such time as a final determination of that case is had from the Courts.” At the annual stockholders’ meeting on January 30, 1940, the president reported inter alia that a decision had not yet been rendered by the court and it was therefore not possible to carry out the stockholders’ directions for complete liquidation not later than December 31, 1989. Thereupon a resolution was adopted approving the actions of the board of directors in prosecuting the appeal and in instituting a suit against the collector of internal revenue, and repealing the stockholders’ resolution at the last annual meeting that the date for complete liquidation be fixed at not later than December 31, 1939, and that in lieu thereof the following resolution be adopted:

Resolved Ftjkther that the date for the complete liquidation and dissolution of the Company be and the same is hereby fixed at not later than December 31, 1940 and that the plan of liquidation adopted at the Special Meeting of the Stockholders held on November 16, 1937 be reaffirmed to the end that the same shall be completely accomplished before December 31, 1940.

At a special meeting of the board of directors on March. 15, 1940, the officers were instructed to proceed as rapidly as possible in the complete liquidation of the company “and when, as and if the Pittsburgh Plate Glass Company shall have complied with the mandate of the court and liquidated its indebtedness counsel and treasurer be prepared to submit to the Board of Directors a plan for this complete liquidation, distribute to stockholders all assets except what cash will be required to prosecute the claim for tax recovery and to consider the advisability of issuing to each stockholder script for his pro rata share in such recovery if received * *

At a special meeting of the board of directors on May 13, 1940, a resolution was adopted referring to passage of a resolution for complete liquidation on November 16, 1937, and providing, inter alia, that there is $371,820.60 available for final liquidation to the stockholders and that therefore, pursuant to and in continuation of the plan adopted November 16,1937, and the resolutions adopted January 31, 1939, as amended, the following plan for the “final and complete liquidation of the Company be and the same is hereby adopted and recommended for adoption by the stockholders * * A special meeting of the stockholders was called for June 18,1940, to pass upon the proposals, which were in effect that all common stock be canceled and $2.04 per share be paid thereon in full and complete liquidation and that liquidating certificates be issued to the stockholders for their interests, if any, in any further liquidation distribution, and “That this plan for final and complete liquidation of the Company be consummated and completed on or prior to December 31, 1940.” On June 18, 1940, such proposals were, in effect, adopted by the stockholders.

The petitioner’s position is that he is entitled under section 117 (a) of the Revenue Act of 1936 to report less than 100 percent of the gain realized by him upon the corporate distributions received because under section 115 (c) of the Bevenue Act of 1936 they were received as part of a “complete liquidation” defined by that section as one in complete cancellation of all stock in accordance with a bona fide plan under which the transfer is to be completed within a time specified in the plan not exceeding two years from the close of the taxable year during which is made the first of the series of distributions under the plan. He argues in brief that the company adopted a bona fide plan of liquidation of all of its stock, that the plan specified a date, within two years from the close of the taxable year within which the transfer of the property was to be completed, either in the original plan as shown by corporate resolutions passed in 1937, setting the date as December 31,1937, or by amendment thereof by corporate resolution in 1938, specifying the period as ending December 31, 1939; further, he says that the statute does not require the distribution actually to be made within the two-year period, and that therefore the fact that it was not so made is immaterial. The respondent on his part, although conceding that the plan was one of liquidation, argues that it was not one of “complete liquidation” within the statute because no time limit was set, and that the resolutions in the following year did not serve, and were not intended to serve to fix a time limit affecting the distribution made in the prior year, and that if there was amendment in 1938 to provide a time limit mmc pro time for the distribution made in 1937, then there was in 1940 repeal thereof and a change of the time limit to three years, and that a three-year plan does not come within section 115 (c), Bevenue Act of 1936. He further argues that the plan was not bona fide because the company was at all times concerned with the question of Federal income taxes, and that the revenue agent had pointed out to the taxpayer the lack of a time limit in the plan.

We will first consider what appears to be the point most stressed by both parties, to wit, whether the plan of liquidation specified a time not exceeding two years from the close of the taxable year in which the first distribution is made, within which the liquidation is to be completed.

The petitioner says on this point that there was such time specified because of the following language in the stockholders’ resolution of November 16, 1937:

Resolved : * * *
(d) And pursuant to paragraph 3, subdivision (d) of the notice of the meeting, dated October 14, 1937, that the officers be and they hereby are empowered at their sole and full discretion to make any other and further distributions to the common stockholders as may be warranted should there be any further receipt on account of damages between this date and December 31, 1937.

December 31, 1937, was therefore, he argues, the termination of the time specified. The respondent calls such contention an afterthought and points out that the petition contains no such allegation or view. We think that examination of the pleadings justifies the respondent’s view. The petition does allege that the Commissioner erred in holding that no time limit was specified in the resolutions passed by the board of directors and stockholders, and that the Commissioner erred in failing to hold that the resolutions passed November 16, 1937, stated a plan of liquidation, and further erred in failing to hold that by resolutions adopted October 25, 1938, the officers were directed to complete the liquidation not later than December 31,1939; but neither allegations of error nor the statement of facts relied upon indicate any theory that the resolutions adopted November 16,1937, contained any specification of time within which liquidation should be completed. On the contrary, the petition indicates a view that on November 16, 1937, a plan of liquidation was stated, and on October 25,1938, a time limit was specified as two years from December 1937. We think that the petitioner did not at the time of filing this proceeding entertain a theory that the resolutions of November 16, 1937, specified a date within which liquidation was to be completed.

Nor do we think that such resolutions did in fact specify such time. When analyzed, the resolution relied upon is found to state that the officers are empowered in their discretion to make distributions to the common stockholders as may be warranted “should there be any further receipt on account of damages between this date and December 31, 1937.” It seems obvious to us from the context and the whole tenor of the paragraph that the date December 31, 1937, refers to the time within which there might be “further receipt on account of damages” thereby empowering the officers to make further distributions, but that such distributions might be made at any time thereafter so far as any limitation being set is concerned. It would require distortion of the language to hold that the words “to make any other and further distributions” must be read as if followed immediately by “between this date and December 31, 1937”, when the words actually immediately preceding the latter expression and not separated therefrom even by a comma are “should there be any further receipt on account of damages.” If there had been any further receipt on account of damages on December 30, 1937, the officers on petitioner’s theory would have been authorized to distribute it, yet likewise on their theory they would have been required to distribute it, if at all, on the same date. We think the only reasonable construction calls for reading and considering the language in the order it was actually used and that the officers were empowered to distribute “should there be any further receipt on account of damages between this date and December, 31, 1937”, but that the time within which they might distribute was in nowise limited. This view is consonant, we think, with the situation at that time. Litigation was pending in the United States Circuit Court of Appeals for the Third Circuit, involving.at least $500,000, and complete liquidation was dependent upon the outcome of that litigation. The resolutions of November 16, 1937, arranged for the further diligent prosecution of that litigation and for the expense thereof, including payment of future legal fees. Though of course it is possible that there might have been some hope that by December 31, 1937, only 45 days after the date of the resolutions, such litigation might be terminated and the proceeds thereof ready for distribution, no evidence so indicates and we think that considering the preparations for litigation there can not reasonably be said to have been any such hope. Certainly in our view there was no intent, under all the circumstances, to set only a period of 45 days within which to complete the liquidation. The litigation, in fact, continued for more than two years, and though much of that time is not to be ascribed to any fault or delay on the part of the company, nevertheless we think it obvious that on November 16, 1937, there was no expectation that the corporation could be liquidated by the end of the year. Indeed, upon brief the petitioner, discussing the resolution of October 25, 1938, says: “At that time the appeals in the patent suit had been perfected and were sure to be reached for argument within the following two months.” Since apparently some such period as two months is considered by the petitioner reasonable within which to expect argument after perfection of the appeals, it appears to us that the end of litigation, payment and distribution could not have been expected within six weeks after November 16, 1937, before the litigation had reached the state of perfected appeal.

Again, in the minutes of the board of directors on October 30, 1939, appears a statement that the previous authorization of the officers to dissolve by December 31, 1939, was discussed, and that the president reported that the dissolution would take place, if possible, but the decision of the court had not yet been handed down “and unless such decision were handed down by the end of the year it might be impossible for the officers actually to dissolve the corporation * * If as late as October 31, 1939, after the litigation had been pursued for almost two years aftei the date of the resolutions of November 16, 1937, it was still the opinion of the president that dissolution would not be possible unless the decision were handed down by the end of the year, it seems to us wholly unreasonable to think that much earlier in such litigation, on November 16, 1937, there was any expectation that the litigation would be ended, distribution made, and the corporation dissolved by the end of the year 1937. After the decision in the Circuit Court, on June 18, 1940, resolutions provided for final and complete liquidation. Yet the remainder of the year, to December 31, 1940, was allowed therefor — several times as much time as between November 16, 1937, and the end of that year. Indeed, when the various resolutions and corporate acts throughout the year 1937 are reviewed, they contain indications that as to common stock, only a partial distribution was then contemplated; for reference is made in the president’s statement on August 26, 1937, to “partial liquidation of the capital stock of the company”, while in the resolutions of the directors on the same date reference is made to liquidation of the preferred stock and, thereafter, with the remaining funds to the partial liquidation of the common stock; also to the complete and full liquidation of the preferred stock and the partial.liquidation of the common stock. This reference to complete liquidation of preferred and partial liquidation of common stock is repeatedly used in such resolutions, in the notice of the stockholders’ meeting to be held November 16, 1937, in the letter of the president accompanying such notice, in the resolutions of November 16, 1937, and in the letter from the president and secretary of November 22, 1937. These recitations throughout that year seem to us to cast doubt upon the idea of a plan of complete liquidation of both preferred and common stock at any time during 1937. We conclude and hold that the language of the resolution of November 16, 1937, does not express or specify a time limit for completion of liquidation within the intendment of section 115 (c) of the Revenue Act of 1936.

We next consider, therefore, whether, as petitioner contends, the resolutions of October 25,1938, have the effect of incorporating in the plan of liquidation the requisite specification of time limit. We think they do not have that effect with respect to the distribution in 1937 here involved. It seems to us plain that in order to get the benefit of section 115 (c) petitioner must show that at the time of taxability of the distribution to him, there was extant a plan containing the requisite specification of time. The history of the legislation indicates well that the time element was by no means immaterial and that it was intentionally inserted for a purpose. In. our opinion, even if we assume an amendment, on October 25, 1938, of the resolutions of November 16, 1937, it should not be given retroactive effect to cover a distribution prior to that time, but that the distribution when taxable to the recipient must have been under a plan containing the statutory requisite of a specification of a time limit for complete liquidation. Otherwise the distribution was not at that time a part of a complete liquidation.

Respondent asserts, however, that there was in fact no such amendment. We agree with the petitioner that specific words of amendment are not necessary if the tenor of the resolution in fact constituted the amendment of the earlier resolution. The language relied upon reads as follows:

Resolved Fup.thee that pursuant to the plan for the complete liquidation and dissolution of this Company, as adopted at the Special Meeting of the Stockholders duly called and held on the 16th day of November, 1937, the officers of this company are hereby directed to complete the liquidation of the Company and to take such steps as may be requisite for the purpose of dissolving the Company not later than December 31, 1939.

The gist of such resolution, in our opinion, is that the officers of the company are, pursuant to plan adopted November 16, 1937, directed to complete the liquidation not later than December 1,1939. It does not seem to us that this is an amendment of the earlier plan, but that it is at most a reference to it, and a statement that what is now done is done pursuant to the earlier plan. In our opinion there is neither express nor implied amendment of the earlier plan, and when it is recalled that the lack of a time limit specified in the plan had been called to the attention of the company by a revenue agent prior to the passage of the resolutions of October 25, 1938, it appears that the statement in the language above quoted is a rather self-serving reference to the action as being taken pursuant to the plan of November 16, 1937. We do not think that it serves to affect, modify or amend the plan as it existed throughout the year 1937.

Moreover, we find that when it became apparent that because of the litigation the liquidation could not be completed within the time set in the resolution of October 25, 1938, the time was extended, by resolution on January 30, 1940, so as to expire December 31, 1940. This action was of course taken after the expiration of the original time set in the resolution of October 25, 1938, which time expired December 31, 1939. If the resolution of October 25, 1938, was an amendment of the resolution of November 16, 1937, it was repealed expressly by that of January 30, 1940; leaving us to consider the distribution made in 1937, as taken, under petitioner’s theory, under a resolution providing for the completion of liquidation within a period of three years from the end of the year 1937. Such period was not, in 1937, allowed, although allowed by section 115 (c) of the Revenue Act of 1938. No logic permits us at this time to view the distribution made in 1937 as made under a resolution of October 25, 1938, when in turn that resolution must be on petitioner’s theory considered itself repealed, and another substituted in lieu thereof, in 1940. So that if we consider the matter amended at all, it must be considered as amended by the resolution of January 30, 1940. That resolution and three-year period it provides can not be applied under section 115 (c) of the Revenue Act of 1936, providing only for a two-year limitation. Under the law then effective, it is plain that the distribution, in order to be free from the effect of section 117 (a) of the Revenue Act of 1936, must be under the plan providing a two-year limitation upon completion of liquidation. It is therefore our opinion that the distributions to the petitioner in 1937 were not made under a plan of complete liquidation specifying completion within two years from the end of that taxable year, as required by section 115 (c), Revenue Act of 1936.

This conclusion makes it unnecessary to consider further questions suggested as to whether the plan of liquidation was bona fide and whether it was necessary for the plan actually to be consummated and the liquidation completed within the two years specified in the plan, which admittedly was not done in this case.

We therefore conclude and hold that the respondent did not err in applying to the distributions to the petitioner in 1937 the provisions of section 115 (c) of the Revenue Act of 1936 and including in petitioner’s income 100 percent of the admitted gain resultant from such distributions.

Decision will be entered wider Bule 50.

       SEC. 116. DISTRIBUTION'S BY CORPORATIONS.
      * ■(=*****
      (c) Disteibutions in Liquidation. — Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part' or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 131, but shall be recognized only to the extent provided in section 112. Despite the provisions of section 117 (a), 100 per centum of the gain so recognized shall be taken into account in computing net income except in the case of amounts distributed in complete liquidation of a corporation. For the purpose of the preceding sentence, “complete liquidation” includes any one of a series of distributions made by a corporation in complete cancellation or redemption of all of its stock in accordance with a bona fide plan of liquidation and under which the transfer of the property under the liquidation is to be completed within a time specified in the plan, not exceeding two years from the close of the taxable year during which is made the first of the series of distributions under the plan. In the case of amounts distributed (whether before January 1, 1934, or on or after such date) in partial liquidation (other than a distribution within the provisions of subsection (h) of this section of stock or securities in connection with a reorganization) the part of such distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or profits.

       SEC. 117. CAPITAL GAINS AND LOSSES.
      (a) General Rule. — In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net income:
      100 per centum if the capital asset has been held for not more than 1 year;
      80 per centum if the capital asset has been held for more than 1 year but not for more than 2 years;
      60 per centum if the capital asset has been held for more than 2 years but not for more than 5 years;
      40 per centum if the capital asset has been held for more than 5 years but not for more than 10 years;
      30 per centum if the capital asset has been held for more than 10 years.