author: Phillips:

text:
    Appeal of HUGH R. WILSON.
    Docket No. 2403.
    Submitted April 29, 1925.
    Decided February 23, 1926.
    Where a corporation in 1920 declares and pays stock dividends, the par value of which exceed the earnings or profits of such corporation accumulated since February 28, 1913, and thereafter in 1920 declares and pays a cash dividend in an amount less than the amount of such earnings or profits, held, that under the provisions of section 201 (b) of the Revenue Act of 1918 the cash dividend is deemed to have been made from earnings or profits accumulated subsequent to February 28, 1913, and is to be included as a part of the gross income of the stockholder receiving such cash dividend.

      Karl D. Loos and E. Barrett Prettymam,, Esqs., for the taxpayer.

      ..Robert A. Littleton, Esq., for the Commissioner.

      Fred B. Bodge, Esq. (A. W. Clapp, Esq., on brief), as amicus curice.

    Before Sternhagen, Phillips, and Love.
    The facts are stipulated and present the question whether, under the Revenue Act of 1918, after a corporation has declared stock dividends in amounts exceeding the earnings or profits accumulated after February 28, 1913, it pays cash dividends which'are alleged to be out of earnings accumulated prior to March 1, 1913, such cash dividends are taxable income of the stockholder.
    FINDINGS OF FACT.
    The taxpayer during the calendar year 1920 was a stockholder in Wilson Bros., Inc., a domestic corporation. On July 15, 1920, the corporation declared a cash dividend of $122,500 on its common stock, of which the taxpayer received $7,729.75. On October 15, 1920, the corporation declared a cash dividend of $56,036.76 on its preferred stock, of which the taxpayer received $6,346.38. The corporation’s profits and dividends from March 1,1913, to December 31, 1919, inclusive, were as follows:

      During 1920 the corporation suffered a net loss of $1,329,986.70, which is equivalent to $3,633.84 per day. Multiplying this per diem average by 197 days from January 1, 1920, to July 15, 1920, the net loss for that period was $715,866.48; and for the 92 days from July
    15,1920,to October 15,1920, the net loss was $334,313.28. Dividends were declared in 1920 as follows:
    May 17, 1920, stock dividend_$1, 000, 000. 00
    June 10, 1920, stock dividend- 500,000. 00
    July 15, 1920, stock dividend_ 3, 500, 000.00
    July 15, 1920, cask dividend- 122, 500.00
    Oct. 15, 1920, cask dividend- 56,036.70
    The corporation prior to March 1, 1913, had accumulated earnings or profits of not less than $178,536.70, or an amount sufficient to include the amount of the cash dividends of July 15,1920, and October
    15.1920. The Commissioner determined a deficiency, and in so doing included in the taxpayer’s income the aforesaid amounts of $7,729.75 and $6,346.38 received by the taxpayer on July 15, 1920, and October 15.1920, as cash dividends from the corporation. '
    DECISION.
    TÜe determination of the Commissioner is approved.
   OPINION.’

Phillips:

This appeal involves the construction of section 201 of the Revenue Act of 1918, and particularly paragraph (b)-thereof, in the light of the decision of the Supreme Court in Eisner v. Macomber, 252 U. S. 189; 40 Sup. Ct. 189; 3 Am. Fed. Tax Rep. 3020. This section, so far as it is material to this appeal, provided:

Seo. 201. (a) That tke term “ dividend ” wken used in tkis title * * * means (1) any distribution made by a corporation, \ * * to its shareholders or members, whether in cash or in other property or in stock of the corporation, out of its earnings or profits accumulated since February 28, 1913, * * *.
(b) Any distribution shall be deemed to have been made from earnings or profits unless all earnings and profits have first been distributed. Any distribution made in the year 1918 or any year thereafter shall be deemed to have been made from earnings or profits accumulated since February 28, 1913, * * *; but any earnings or profits accumulated prior to March 1, 1913, may be distributed in stock dividends or otherwise, exempt from the tax, after the earnings and profits accumulated since February 28, 1913, have been distributed.
(c) A dividend paid in stock of the corporation shall be considered income to the amount of the earnings or profits distributed. * * *.

The determination of the appeal turns upon the proper interpretation of the words “ any distribution ” in paragraph (b) of this section. If these words include the amount of earnings or profits capitalized by a stock dividend, it follows from the findings of fact that all earnings of Wilson Bros., Inc., subsequent to February 28, 1913, were absorbed by the cash dividends of years prior to 1920 and the 1920 stock dividends, with the result that the 1920 cash dividends are not to be deémed to have been made from earnings or profits accumulated since February 28, 1913. This is the construction for which the taxpayer contends.

These provisions of the 1918 Act are substantially similar to those of the Revenue Act of 1916, as amended by the Revenue Act of 1917, which provided:

Seo. 31. (a) That the term “ dividends ” as used in this title shall he held ■to mean any distribution made or ordered to be made by a corporation, joint-stock company, association, or insurance company, out of its earnings or profits accrued since March first, nineteen hundred and thirteen, and payable to its shareholders, whether in cash or in stock of the corporation, joint-stock company, association, or insurance company, which stock dividend shall be considered income,' to the amount of the earnings or profits so distributed.
(b) Any distribution máde to the shareholders or members of a corporation, joint-stock company, or association, or insurance company, in the year nineteen hundred and seventeen, or subsequent tax years, shall be deemed to have been made from the most recently accumulated undivided profits or surplus, and shall constitute a part of the annual income of the distributee for the year in which received, andr shall be- taxed to the distributee at the rates prescribed by law for the years in which such profits or surplus were accumulated by the corporation, joint-stock company, association, or insurance company, but nothing herein shall be construed as taxing any earnings or profits accrued prior to March first, nineteen hundred and thirteen, but such earnings or profits may be distributed in stock dividends or otherwise, exempt from the tax, after the distribution, of earnings arid profits accrued since March first, nineteen hundred and thirteen, has been made/ This subdivision shall not apply to any distribution made prior to August sixth, nineteen hundred and seventeen, out .of earnings or profits accrued prior to March first, nineteen hundred and thirteen. ^

It was this section of the 1916 Act which was the subject of the decision of the Supreme Court in Eisner v. Macomber, supra. In that case,the court held that a stock dividend is not income, that it distributes no earnings or profits but on the contrary capitalizes such earnings or profits and makes them unavailable for actual distribution. In the course of its reasoning, and as the basis for its decision, the court said, in part:

This, however, is no more than a book adjustment, in essence not a dividend but rather the opposite; no part of the assets of the company is separated from the common fund, nothing distributed except paper certificates that evidence an antecedent increase in the value of the stockholder’s capital interest resulting from an accumulation of profits by the company, * * *. In order to make the adjustment, a charge is made against surplus account with corresponding credit to capital stock account, equal to the proposed “ dividend ”; the new stock is issued against this and the certificates delivered to the existing stockholders in proportion to their previous holdings.
* ⅝ * * S; * *
A “ stock dividend ” shows that the company’s accumulated profits have been capitalized, instead of distributed to the stockholders or retained as surplus available for distribution in money or in kind should opportunity offer. Far from being a realization of profits of the stockholder, it tends rather to postpone such realization, in that the fund represented by the new stock has been transferred from surplus to capital, and no longer is available for actual distribution. ’•
*******
Thus, the Government contends that the tax “ is levied on income derived from corporate earnings,” when in truth the stockholder has “ derived ” nothing except paper certificates which, so far as they have any effect, deny him present participation in such earnings. It contends that the tax may be laid when earnings “ are received by the stockholder,” whereas he has received none; that the profits are “ distributed by means of a stock dividend,” although a stock dividend distributes no profits; that under the Act of 1916 “ the tax is on the stockholder’s share in corporate earnings,” when in truth a stockholder has no such share, and receives none in a stock dividend; that “ the profits are segregated from his former capital, and he has a separate certificate representing his invested profits or gains,” whereas there has been no segregation of profits, nor has he any separate certificate representing a personal gain, since the certificates, new and old, are alike, in what they represent — a capital interest in the entire concerns of the corporation.
* * * * * * *
The Government’s reliance upon the supposed analogy between a dividend of the corporation’s own shares and one made by distributing shares owned by it in the stock of another company, calls for no comment beyond the statement that the latter distributes assets of the company among the shareholders while the former does not; and for no citation of authority except Peabody v. Eisner, 247 U. S. 347, 349-350.

It is urged on behalf of the taxpayer that the statute laid down a rule of construction by which stock dividends, as well as other dividends, were to be deemed to distribute the earnings and profits of the corporation to the extent thereof, and that this construction is not affected by the decision in Eisner v. Macomber, supra, which passed upon the constitutionality of a tax upon stock dividends as income and did not pass upon the right of Congress to provide, as a matter of construction, that stock dividends should be deemed to distribute earnings and profits. Congress, it is urged, had the right and power to declare that a stock dividend should be deemed for the purpose of the Act to be a distribution of earnings and profits, and a distribution of earnings and profits accumulated subsequent to February 28, 1913, and its power and right to do this was not at all dependent upon its power to tax a stock dividend as income. The purpose of subdivision (b), it is contended, was to enact an absolute and conclusive rule for the allocation of distributions for the purpose of determining when and under what circumstances a distribution might be made exempt from the tax, and this rule of construction is not changed by reason of the decision that stock dividends are not taxable income to the recipient. The further contention is that, reading the section as a whole, Congress intended the words any distribution ” to include a stock dividend, and that this intention must be the same to-day for the purposes of construction as it was the day the Act was passed.

Much of the argument advanced on behalf of the taxpayer may be conceded. The decision of this appeal, as we view it, depends upon the construction to be placed upon the words “ any distribution ” appearing in subdivision (b). For that purpose an examination of the situation existing at the time of the passage of the 1917 and 1918 Acts is proper and helpful.

Prior to the passage of the 1917 Act, amending the 1916 Act, as set out above, the Supreme Court had handed down its decision in the case of Gibbons v. Mahon, 136 U. S. 549; 10 Sup. Ct. 1057. In that case the court had before it the allocation of a stock dividend as between life tenant and remainderman of a trust. In the course of its opinion in that case the Supreme Court had occasion to go very thoroughly into the question of the character of a stock dividend. It quoted with approval the opinion of the court below to the effect-that—

A dividend is something with which the corporation parts, but it parted with nothing in issuing this new stock. It simply gave a new evidence of ownership which already existed.

and from Williams v. Western Union Telegraph Co., 93 N. Y. 162, as follows:

A stock dividend does not distribute property, but simply dilutes the shares as they existed before.

deferring to the resolution voting th§ stock dividend, the court states:

The resolution is clearly an apportionment of the new shares as representing capital, and not a distribution or division of income.

At the time the 1917 Act was under discussion in Congress, there was much, doubt whether a stock dividend distributed any profit of the corporation so as to render the recipient subject to an income tax thereon. The District Court for the Southern District of New York, in Towne v. Eisner, 242 Fed. 702; 1 Am. Fed. Tax Rep. 811, had decided that stock dividends were taxable, and that case was pending before the Supreme Court on a writ of error. Prior to the. date when the 1918 Act was drafted and introduced into Congress as a bill, the Supreme Court had reversed the District Court in Towne v. Eisner, holding that a stock dividend was not income, and quoting from and affirming the position taken by it in Gibbons v. Mahon, supra. Towne v. Eisner, 245 U. S. 418; 38 Sup. Ct. 158; 3 Am. Fed. Tax Rep. 2959.

Towne v. Eisner arose under the 1913 Act, which did not specifically provide for the taxation of stock dividends. The Commissioner interpreted the decision of the Supreme Court as passing upon the construction of the 1913 Act, and not upon the constitutionality of a tax on stock dividends as income. 'Prior to the introduction in Congress of the Revenue Bill of 1918, the United States District Court for the Southern District of New York, in Macomber v. Eisner, had decided that the 1916 Act, expressly providing that stock dividends were subject to income tax in the hands of the recipient, was unconstitutional with respect to such provision, basing its decision upon the decision of the Supreme Court in Towne v. Eisner, supra. At the time that the 1918 Act was under discussion in Congress, the Macomber case was pending before the Supreme Court on a writ of error.

In this state of uncertainty, no one could say with authority whether a stock dividend was taxable or whether it distributed any of the property of a corporation to its stockholders. It was in such circumstances that the 1918 Act was drafted and enacted, and it is in the light of such circumstances that the Act must be construed.

Two purposes clearly appear in the 1918 Act: (1) The earnings of a corporation accumulated after February 28, 1913, were to be subject to tax when distributed to stockholders, and (2) stock dividends were to be taxed to the extent to which they distributed such profits.

It must be assumed that the persons responsible for the drafting of the 1918 Act were familiar with the decisions in Gibbons v. Mahon, supra; Towne v. Eisner, supra; and Macomber v. Eisner, supra. At best, it was doubtful whether the second purpose of Congress (to tax stock dividends) could be accomplished. The Supreme Court had already declared that the declaration of a stock dividend was not a distribution or division of the income of the corporation as between life tenant and remainderman. The word “distribution ” used in the Act appears to have been deliberately chosen in the light of the language used by the court in Gibbons v. Mahon, supra, either to include- or exclude a stock dividend, dependent upon, whether or not such a dividend was a distribution. Nowhere in the Act are the words “ any distribution ” defined. Nowhere is a stock dividend stated to be a distribution. The Act .assumes that a stock dividend is a distribution of property by a corporaion to its stockholders. It is only if this assumption be correct that a stock dividend is to be deemed to be made from earnings and profits accumulated since February 28, 1913, for it is clear from the Act that it is only where a distribution takes place that any presumption arises as to the source of such distribution.

It is contended that the 1918 Act, while not defining the words “ any distribution,” plainly intended that a stock dividend should be included within those words. It is our opinion that the Act had the twofold purpose mentioned above, and that the words “ any distribution ” were intended by the draftsman of the Act and by Congress to include only what the words import, namely, a distribution of property by a corporation to its stockholders, and that, a stock dividend having been held not to be a distribution of property by a corporation to its stockholders, it does not fall within the word or intent of the statute.

Taxpayer cites the provisions of section 1402 of the Revenue Act of 1918 providing:

Sec. 1402. That if any clause, sentence, paragraph, or part of this Act shall for any reason be adjudged by any court of competent jurisdiction to be invalid, such judgment shall not affect, impair, or invalidate the remainder of this Act, but shall be confined in its operation to the clause, sentence, paragraph, or part thereof directly involved in the controversy in which such judgment has been rendered;

and contends that the decision in Eisner v. Macomber invalidated the attempt to tax a stock dividend as income, but that it affects no other provision of the statute. Admitting this to be so, it is of no avail unless we find that the Act includes a stock dividend within the words “ any distribution.” We have pointed out above that the words “ any distribution ” are not defined, and that, in our opinion, the words were intended to include only what was in fact a distribution, leaving it for the courts to determine what was and what was not included within that term. Entirely aside from the decision that so much of the law as taxes a stock dividend as income is unconstitutional, the Supreme Court has pointed out that a stock dividend does not, in fact, distribute any property, and for that reason such a dividend does not, we believe, fall within the words “ any distribution.”

It is further urged on behalf of the taxpayer that a stock dividend converts the surplus of the corporation into capital and that, under the Act, it must be assumed that it is the most recently accumulated earnings or surplus that are to be converted. So to construe the Act would defeat the very purpose of Congress to tax all distributions of property made by a corporation to its stockholders to the extent of the earnings or profits accumulated after February 28, 1913. Congress, having power to tax all dividends irrespective of whether paid from earnings accumulated subsequent or prior to March 1, 1913 (Lynch v. Hornby, 247 U. S. 339, 38 Sup. Ct. 543, 3 Am. Fed. Tax Rep. 2992), surely has power to prescribe, and has prescribed, the conditions under which dividends shall be exempt. Furthermore, the-argument advanced by the taxpayer loses sight of the fact, pointed out in Eisner v. Macomber, supra, that the capitalization of surplus is the opposite of a distribution, removing such surplus from any possibility of distribution as a dividend.

On reference to the Board, Trtjssell dissents.


source: Caselaw Access Project

author: Geeen:

license: Public Domain

text:
    Appeal of FREDERICK H. HOFFMANN.
    Docket No. 3361.
    Submitted July 30, 1925.
    Decided February 23, 1926.
    Upon the evidence, held, that the taxpayer made a hona fide gift to his wife of certain stock and that he derived no taxable gain from the subsequent sale of said stock by his wife.

      Hugh Satterlee and Roy M. O’Hara, Esgs., for the taxpayer.

      Willis D. Nance and E. O. Lake, Esgs., for the Commissioner.
    Before Ivins and GReen.
    This appeal is from the determination of a deficiency in income tax for the year 1919 in the amount of $661,996.74, and arises from a transaction which the Commissioner contends constituted a sale of stock by the taxpayer at a profit.
    FINDINGS OE FACT.
    The taxpayer is an individual residing in Weehawken, N. J. During the early part of 1919, and for over 25 years prior thereto, he was engaged with Arthur Zinn and Martin Zinn in the manufacture and sale of Gem safety razors and razor blades. Arthur Zinn and Martin Zinn were also during the same period engaged in the metal novelty business, under the name of Simon Zinn, Inc., in which the taxpayer has never had an interest. Throughout the taxpayer’s connection with the Gem safety razor business it was conducted under his active management, said Arthur Zinn and Martin Zinn devoting their major attention to their metal novelty business.
    For some years the Gem safety razor business was carried on by the taxpayer and Arthur and Martin Zinn as a partnership. On or about January 1, 1913, a corporation was organized, under the name of the Gem Cutlery Co., to sell the Gem safety razor products, with a paid-in capital stock of $10,000. Later, and in or about the year 1915, the taxpayer and his associates caused to be organized the Superior Safety Blade Manufacturing Co., Inc., with a capital stock of $2,000, which carried on the manufacture of safety razor blades for tlie Gem safety razor and manufactured some of the other parts. Thereafter, and until the taxable year here in question, the .business was carried on through the medium of these three organizations.
    On or about January 8, 1919, the Gem Safety Eazor Corporation was incorporated under the laws of New York, with an authorized capital stock of $250,000, but no property was at that time transferred to that corporation and none of its stock was issued.
    On July 21, 1919, the taxpayer had an informal conference with one Storm, representing those persons who subsequently formed the American Safety Eazor Corporation, and at that conference Storm suggested to the taxpayer that the interests which he represented were desirous of acquiring the interests of the taxpayer and the Zinns connected with the manufacture and sale of the Gem safety razor, and asked the taxpayer to arrange a conference with his associates for the purpose of considering an offer which he was prepared to make.
    Thereafter, on July 22, 1919, a conference was called at which there were present the taxpayer, Martin and Arthur Zinn, one Stern, counsel for the taxpayer and his associates, one Dammann, counsel for the proposed American Safety Eazor Corporation, one Bennett, also of counsel for those interests, Kaufmann, who became the president of that corporation, and Storm, the promoter of the plan. At that conference, Kaufmann and his associates offered to pay $4,000,-000 for the Gem safety razor business. The taxpayer at that time indicated that the price was satisfactory to him. It de reloped, however, upon discussion of counsel, that a very heavy tax, amounting for the three individuals to approximately $2,000,000, would result from such a sale, and the taxpayer’s associates immediately stated that they would not make a sale which would produce such a net price to them, and in that decision the taxpayer acquiesced. Thereupon, one of the conferees suggested that if the taxpayer and his associates made a gift of their interests in the business to their wives and their wives consummated the transaction, and the gifts were made in absolute good faith, and the taxpayer and his associates never received the proceeds of the sale, no tax would result, except possibly upon any increment of value between the value at the date of the gift and the sale price.
    The taxpayer had been in ill health for a considerable period of time and was desirous of terminating his association with the business and retiring. He had in addition to his interest in this business a fortune of $700,000 to $800,000. His wife was concerned about his physical condition, and was exceedingly desirous that he retire.
    On July 23, the taxpayer, upon arriving at his office, was informed by his brother, who was the office manager of the Gem safety razor business, that he proposed to quit and go to Florida. In the then state of the taxpayer’s health, this announcement greatly upset him, and he returned home in a condition approaching mental and physical collapse, and went to bed in the middle of the afternoon. Upon arising, he informed his wife that he had determined to turn over to her his interest in the Gem safety razor business to do with as she wished, and that he intended to retire. On the day previous he had reported to her the substance of the conversation with Kaufmann and his associates in respect of the proposed sale to the American Safety Razor Corporation.
    On July 23, 1919, the taxpayer and his associates caused the authorized capital stock of the Gem Safety Razor Corporation to be increased to $1,100,000.
    On July 24, the taxpayer, upon arriving at the office, announced to his associate, Martin Zinn, his intention of giving his interest in the business to his wife and retiring. Martin Zinn protested that he, Martin, did not want to retire, and urged the taxpayer to take a long vacation to recover his health and to go on with the business. The taxpayer was obdurate. These conversations were renewed on July 25, and Martin Zinn called his wife on the telephone, when she asked him to bring the taxpayer to their summer home on Lake Placid, where she then was. The taxpayer left that night with Martin Zinn for the Zinn home at Lake Placid, arriving there early Saturday morning, July 26. In the meantime, Arthur Zinn had departed for his summer home at Bethlehem, in the White Mountains.
    On July 26, upon his arrival with Martin Zinn at their home, the taxpayer was met at the station by Mrs. Zinn and the conversation immediately was centered upon the proposed retirement of the taxpayer. Mrs. Zinn added her urgings to those of her husband that the taxpayer take a long vacation but remain in the business. These conversations continued through the greater part of the 26th. In the evening, finding that the taxpayer would not alter his determination, Martin Zinn announced his intention also to turn his interest in the Gem safety razor business over to his wife, and thereupon called Arthur Zinn over the phone at his home and communicated his determination to him, and Arthur Zinn at that time stated that he also would make a gift of his interest in the business to his wife.
    On Sunday night, July 27, the taxpayer and Martin Zinn left for New York, arriving Monday morning, July 28. On that day they and Arthur Zinn subscribed for, and there was issued to them. $975,000 par value of the stock of the Gem Safety Razor Corporation, and they paid cash therefor. On July 29, $125,000 par value of stock was issued to the taxpayer and his associates for the transfer to the Gem Safety Razor Corporation of the stock of the Gem Cutlery Co. at a valuation of $15,000; the stock of the Superior Safety Blade Manufacturing Co. at a valuation of $45,000; and for machinery belonging to the partnership at a valuation of $65,000. Immediately thereafter the Gem Safety Razor Corporation purchased for cash from the taxpayer and his associates the good will of the business, the sole remaining asset of the partnership, for $975,000.
    Thereafter, on July 28, the taxpayer and his associates had instructed Stern to take all necessary legal steps to carry into effect the transfer of their interests in the business to their respective wives.
    On July 29, the taxpayer endorsed and delivered to his wife all the stock certificates in the Gem Razor Safety Razor Corporation theretofore issued to him, reserving one share to qualify himself as a director. Each of his associates, Martin and Arthur Zinn, pursued the same course, and thereupon the certificates theretofore issued to each of them and so indorsed and delivered were turned back and new certificates of stock were issued to the respective wives. At the same time each of the three executed a separate assignment of his stock to his wife. The certificates so indorsed by the taxpayer and the new certificates issued in lieu thereof were delivered to Mrs. Hoffmann and were by her indorsed and delivered to Stern.
    On August 5, Mrs. Hoffmann, Mrs. Tessie Zinn, wife of Martin, and Mrs. Florence Zinn, wife of Arthur, entered into an agreement with the American Saftey Razor Corporation for the sale of their stock and interest in the Gem Safety Razor Corporation for a consideration of $4,000,000, $250,000 to be paid upon the execution of the agreement and $8,750,000 to be paid at a later date, in default of which payment the initial $250,000 was to be forfeited.. On August 12, payment of the first $250,000 was made and delivered to Mrs. Hoffmann, who deposited the same in her bank for the account of herself and the associate wives, and with these funds purchased United States Treasury certificates. On or about September 22, 1919, the American Safety Razor Corporation made a final payment of $8,750,000 to Stern, who delivered $1,250,000 to each of the three wives, including the wife of the taxpayer, who received it and has ever since retained it or the investments or reinvestments into which such payments were converted. At the same time, the American Safety Razor Corporation entered into separate agreements with Emma Hoffmann, Tessie Zinn, and Florence Zinn, whereby it agreed to indemnify each of them “upon being notified in writing * * * within six years hereof of a final decision or decisions of the United States Treasury Department levying and assessing * * * a tax in excess of $133,333.33 * * * up to $533,333.33.” At the same time Hoffmann and his associates entered into an agreement with the American Safety Eazor Corporation not to engage in the safety razor business for a period of 10 years from and after the date of that agreement.
    In his income-tax return for the year 1919, the taxpayer reported as gain or income $16,000, being the difference between the par value of the stock of the Gem Safety Eazor Corporation ($20,000) received by him in exchange for the stock of the Gem Cutlery Co. and the Superior Safety Blade Manufacturing Co. ($4,000), previously owned by him, but reported no gain, profit or income of any other sort arising out of the above-mentioned transactions or any of them.
    The Commissioner, in the audit of the taxpayer’s return, and as a basis for the deficiency here in issue, asserted that the taxpayer derived a profit from the sale of the stock of the Gem Safety Eazor Corporation to the American Safety Eazor Corporation in the amount of $966,666.67, being one-third of the difference between $1,100,000, the par value of the stock of the Gem Safety Eazor Corporation transferred by the taxpayer to his wife, and by her to the American Safety Eazor Corporation, and $4,000,000, the price received therefor.
    DECISION.
    The deficiency determined by the Commissioner is disallowed.
   OPINION.

Geeen:

This appeal is one of three arising from the Commissioner’s determination that this taxpayer, together with Arthur Zinn and Martin Zinn, realized a taxable gain at the time the American Safety Eazor Corporation acquired the stock of the Gem Safety Eazor Corporation.

The Commissioner asserted the deficiency upon the theory that the gifts of stock of the Gem Safety Eazor Corporation, made by the taxpayer and Arthur and Martin Zinn to their respective wives, were not tona fde gifts and that the sale of the stock was in fact made by the husbands to the American Safety Eazor Corporation with a consequent taxable gain to the husbands. The Commissioner determined this gain to be the difference between the par value of the stock held by the taxpayer in the Gem Safety Eazor Corporation and the price at which it was purchased by the American Safety Eazor Corporation.

Only one issue was raised by the petition and answer. That issue was whether the gifts were tona -fide. All of the proof was directed toward this issue. ISTo evidence was introduced which would serve as a basis for the determination of a taxable gain from any other transaction.

In cases of this type, all of the circumstances surrounding the questioned transaction are and should be subjected to the closest scrutiny. It is difficult indeed to distinguish between cases where the parties have acted in good faith and cases where they have not acted in good faith. This difficulty is due to the close relationship of the parties and to the fact that they may have had verbal agreements or understandings which are unknown to the Commissioner and which they refuse to disclose on the witness stand. Such cases arouse a suspicion as to the bona fides of the transaction. That is the case here. The entire record in this appeal has been examined and analyzed with unusual care by every member of the Board. We have tested it from every angle which the record will permit and we find therein nothing to warrant us in holding that the transfer of the stock by this taxpayer to his wife was not a bona fide gift, vesting in her unconditionally every right of title and ownership which the taxpayer had. It was not a gift of the proceeds of the sale. No contract was made by the taxpayer and his associates for the sale of this stock. The sale was made pursuant to a contract between the wives and the American Safety Razor Corporation. Upon the issue presented, we must find for the taxpayer.

There is in this record no proof which would warrant any conclusion on our part as to the amount of the gain or loss, if any, realized or sustained by the partners on the transfer of the assets of the Gem Safety Razor business to the Gem Safety Razor Corporation.

On reference to the Board, Arundell did not participate.

Korner, Marquette, Smith, and Trussell dissent.


author: Geeen

text:
    Appeal of MARTIN ZINN.
    Docket No. 3444.
    Submitted July 31, 1925.
    Decided February 23, 1926.
    Upon the evidence, held, that the taxpayer made a "bona fide gift to his wife of certain stock and that he derived no taxable gain from the subsequent sale of said stock by his wife.

      Hugh Satterlee and Roy M. OH ara, Esgs., for the taxpayer.

      Willis D. Nance and E. G. Lake, Esgs., for the Commissioner.
    Before Ivins and Green.
    This appeal is from the determination of a. deficiency in income tax for the year 1919 in the amount of $611,443.80, and arises from a transaction which the Commissioner contends constituted a sale of stock by the taxpayer at a profit.

      FINDINGS OF FACT.
    The taxpayer is an individual residing in New York City. During the early part of 1919, and for over 25 years prior thereto, he was engaged with Arthur Zinn and Frederick H. Hoffmann in the manufacture and sale of Gem safety razors and razor blades. The taxpayer and Arthur Zinn, his brother, were also during the same period engaged in the metal novelty business, under the name of Simon Zinn, Inc., in which the taxpayer has never had an interest. Throughout the taxpayer’s connection with the Gem safety razor business it was conducted under the active management of Hoffmann, said Arthur Zinn and the taxpayer devoting their major attention to their metal novelty business.
    For some years the Gem safety razor business was carried on by Arthur Zinn, Hoffmann, and the taxpayer as a partnership. On or about January 1, 1913, a corporation was organized, under the name of Gem Cutlery Co., to sell the Gem safety razor products, with a paid-in capital stock of $10,000. Later, and in or about the year 1915, the taxpayer and his associates caused to be organized the Superior Saftey Blade Manufacturing Co., Inc., with a capital stock of $2,000, which carried on the manufacture of safety razor blades for the Gem safety razor and manufactured some of the other parts. Thereafter, and until the taxable year here in question, the business was carried on through the medium of these three organizations.
    On or about January 8, 1919, the Gem Safety Razor Corporation was incorporated under the laws of New York, with an authorized capital stock of $250,000, but no property was at that time transferred to that corporation and none of its stock was issued.
    Certain persons, who subsequently formed the American Safety Razor Corporation, were desirous of acquiring the Gem safety razor business, and on July 22, 1919, a conference was called at which there were present the taxpayer, Arthur Zinn, Hoffmann, one Stern, counsel for the taxpayer and his associates, one Dammann, counsel for the proposed American Safety Razor Corporation, one Bennett, also of counsel for those interests, Kaufmann, who became the president of that corporation, and Storm, the promoter of the plan. At that conference, Kaufmann and his associates offered to pay $4,000,000 for the Gem safety razor business. It developed however, upon discussion of counsel, that a very heavy tax, amounting for the three individuals to approximately $2,000,000, would result from such a sale, and the taxpayer and his brother immediately stated that they would not make a sale which would produce such a net price, and in that decision Hoffmann acquiesced. Thereupon, one of the conferees suggested that if the taxpayer and his associates made a gift of their interests in the business to their wives and their wives consummated the transaction, and the gifts were made in absolute good faith, and the taxpayer and his associates nevei received the proceeds of the sale, no tax would result, except possibly upon any increment of value between the value at the date of the gift and the sale price.
    Hoifmann, who managed the business, had been in ill health for a considerable period of time and was desirous of terminating his association with the business and retiring, and on the 24th of July he advised the taxpayer of his intention to quit the business on this account and at the same time he stated that his brother, who was office manager of the Gem safety razor business, proposed to quit and go to Florida.
    On July 23, 1919, the taxpayer and his associates caused the authorized capital stock of the Gem Safety Razor Corporation to be increased to $1,10.0,000.
    On July 24, Hoffmann, upon arriving at the office, announced to the taxpayer his intention of giving his interest in the business to his wife and retiring. The taxpayer protested that he did not want Hoffmann to retire and urged him to take a long vacation to recover his health and to go on with the business, but he was unable to alter the latter’s decision. On July 25, the taxpayer called his wife on the telephone and discussed the situation with her, and she asked him to bring Hoffmann to their summer home on Lake Placid, where she then was. The taxpayer left that night with Hoffmann for the Zinn home at Lake Placid, arriving there early Saturday morning, July 26. In the meantime Arthur Zinn had departed for his summer home at Bethlehem, in the White Mountains.
    On July 26, the taxpayer and Hoffmann were met at the station by Mrs. Zinn and the conversation immediately was centered upon the proposed retirement of Hoffmann. Mrs. Zinn added her urgings to those of her husband that Hoffmann remain in the business. These conversations continued through the greater part of the 26th. In the evening, finding that Hoffmann would not alter his determination, the taxpayer announced his intention also to turn his interest in the Gem safety razor business over to his wife, and thereupon called Arthur Zinn over the telephone at his home and communicated his determination to him. Arthur Zinn at that time stated that he also would make a gift of his interest in the business to his wife.
    On Sunday night, July 27, the taxpayer and Hoffmann left for New York, arriving Monday morning, July 28. On that day they and Arthur Zinn subscribed for, and there was issued to them, $975,000 par value of the stock of the Gem Safety Razor Corporation, for which they paid cash. On July 29, $125,000 par value of stock was issued to the taxpayer and his associates for the transfer to the Gem Safety Razor Corporation of the stock of the Gem Cutlery Co. at a valuation of $15,000; the stock of the Superior Safety Blade Manufacturing Co. at a valuation of $45,000; and for machinery belonging to the partnership at a valuation of $65,000. Immediately thereafter the Gem Safety Razor Corporation purchased for cash from 'the taxpayer and his associates the good will of the business, the sole remaining asset of the partnership, for $975,000.
    Thereafter, on July 28, the taxpayer and his associates had instructed Stern to take all necessary legal steps to carry into effect the transfer of their interests in the business to their respective wives.
    On July 29, the taxpayer indorsed and delivered to his wife all the stock certificates in the Gem Safety Razor Corporation theretofore issued to him, reserving one share to qualify himself as a director. Each of his associates pursued the same course and thereupon the certificates theretofore issued to each of them and so indorsed and delivered, were turned back and new certificates of .stock were issued to the respective wives. At the same time each of the three executed a separate assignment of his stock to his wife. The certificates so indorsed by the taxpayer and the new certificates issued in lieu thereof were delivered to the taxpayer’s wife and were by her indorsed and delivered to Stern.
    On August 5, Mrs. Hoffmann, Mrs. Tessie Zinn, wife of the taxpayer, and Mrs. Florence Zinn, wife of Arthur, entered into an agreement with the American Safety Razor Corporation for the sale of their stock and interest in the Gem Safety Razor Corporation for a consideration of $4,000,000, $250,000 to be paid upon the execution of the agreement and $3,750,000 to be paid at a later date, in default of which payment the initial $250,000 was to be forfeited. On August 12, payment of the first $250,000 was made and delivered to Mrs. Hoffmann, who deposited the same in her bank for the account of herself and the associate wives and with these funds purchased United States Treasury certificates. On or about September 22, 1919, the American Safety Razor Corporation made a final payment of $3,750,000 to Stern, who delivered $1,250,000 to each of the three wives, including the wife of the taxpayer, who received it and has ever since retained it or the investments or reinvestments into which such payments were converted. At the same time the American Safety Razor Corporation entered into separate agreements with Emma Hoffmann, Tessie Zinn, and Florence Zinn, whereby it agreed to indemnify each of them “ upon being notified in writing * * * within six years hereof of a final decision or decisions of the United States Treasury Department levying and assessing * * * a tax in excess of $133,333.33 * * * up to $533,333.33.” At the same time the taxpayer and his associates entered into an agreement with the American Safety Razor Corporation not to engage in the safety razor business for a period of 10 years from and after the date of that agreement.
    From time to time up to the present time said Tessie Zinn has invested and reinvested for her own account the $1,333,333 which she received from the American Safety Razor Corporation in accordance with the terms of the contract of August 5, 1919, together with the income derived from the securities and stocks in which said sum has been invested. Said Tessie Zinn still holds the avails and fruits of said $1,333,333, without impairment or diminution, except for depreciation in the value of her investments and except for such expenditures as she has made for her personal benefit and, since 1920, for household expenses.
    After the gift to said Tessie Zinn by the taxpayer on July 29, 1919, of his stock in the Gem Safety Razor Corporation, the taxpayer has not exercised any dominion or control over said stock, or over the proceeds of the sale of said stock, or over any income therefrom. On the contrary, said Tessie Zinn, after July 29, 1919, and prior to the sale of said stock to the American Safety Razor Corporation, exercised complete dominion and control over such stock, and since such sale has at all times exercised complete dominion and control over the proceeds of the sale of such stock to the American Safety Razor Corporation and of all investments thereof and income therefrom.
    Throughout the year 1919 the taxpayer owned and possessed property and*assets of a market value of about $850,000, exclusive of his stock in the Gem Safety Razor Corporation and his prior interest in the Gem safety razor business. .
    The Commissioner, in the audit of the taxpayer’s return, and as a basis for the deficiency here in issue, asserted that the taxpayer derived a profit from the sale of the stock of the Gem Safety Razor Corporation to the American Safety Razor Corporation in the amount of $966,666.67, being one-third of the difference between $1,100,000, the par value of the stock of the Gem Safety Razor Corporation transferred by the taxpayer to his wife, and by her to the American Safety Razor Corporation, and $4,000,000, the price received therefor.'
    OECISION.
    The deficiency determined by the Commissioner is disallowed.
   OPINION.

Geeen

: This appeal was presented at the same time as the Appeal of Frederick H. Hofmann, decided this day, 3 B. T. A. 964. Wliat we there said is in the main applicable here. The facts in the two appeals are very similar and the issue is identical.

This appeal received the same careful consideration by the entire Board as did the Hoffmarm appeal, and we find therein nothing to warrant us in holding that the transfer of the stock by this taxpayer to his wife was not a tona fide gift, vesting in her unconditionally every right of title and ownership which the taxpayer had. It was not a gift of the proceeds of the sale. No contract was made by the taxpayer and his associates for the sale of the stock. The sale was made pursuant to a contract between the wives and the American Safety Razor Corporation. Upon the issue presented we must find for the taxpayer.

On reference to the Board, Arundele did not participate.

Korner, Marquette, Smith, and Trussell dissent.


author: Morris

text:
    Appeal of ARTHUR ZINN.
    Docket No. 2789.
    Submitted July 30, 1925.
    Decided February 23, 1926.
    On tbe facts stated, hold, that the taxpayer in 1919 made a gift of certain property to his wife and did not derive a taxable gain from the subsequent sale of that property.

      F. S. Bright, E. J. Nathan, and B. H. Stern, Esgs., for the taxpayer.

      Willis D. Nanee and E. 0. Lake, Esgs., for the Commissioner.
    Before Ivins and Morris.
    This appeal is from the determination of a deficiency in income tax for the year 1919 in the amount of $678,840.39, and arises from a transaction which the Commissioner contends constituted a sale of stock by the taxpayer at a profit.
    FINDINGS OF FACT.
    The taxpayer is an individual residing in New York City.
    During the early part of 1919, and for many years prior thereto, he was engaged with his brother, Martin Zinn, and Frederick H. Hoffmann in the manufacture and sale of Gem safety razors, in which business each of the three owned an equal interest. The taxpayer and Martin Zinn were also during the same period engaged in the metal novelty business under the name of Simon Zinn, Inc., in which Hoffmann had no interest. Throughout taxpayer’s connection with the Gem safety razor business, it was conducted under Hoffmann’s management, the taxpayer and Martin Zinn devoting their major attention to their metal novelty business.

      On or about January 8, 1919, the Gem Safety Razor Corporation was incorporated, but no property was at that time transferred to that corporation and none of its stock was issued.
    On July 22, 1919, a conference was called, at„which were present, the taxpayer, Frederick H. Hoffmann, Martin Zinn, one Stern, counsel for the taxpayer, and his associates, one Dammann, counsel for the proposed American Safety Razor Corporation, one Bennett, also counsel for those interests, one Kaufmann, owner of the Ever-Readv Safety Razor business, and one Storm, a promoter, who was endeavoring to bring about the sale of the Gem safety razor business. At that conference, Kaufmann and his associates offered to pay $4,000,000 for the Gem safety razor business. The taxpayer and his associates at that time indicated that the the price was satisfactory. It developed, however, that a very heavy tax would result from such a sale and the taxpayer and his associates stated that they would not make a sale which would produce a net price to them of less than $8,600,000. Thereupon, one of the conferees suggested that if the taxpayer and his associates should make a gift of their interests in the business to their wives, and their wives should consummate the transaction, the gifts being made in absolute good faith, and the taxpayer and his associates should not receive the proceeds of the sale, no tax would result, except possibly upon the increment of value between the value at the date of the gift and the sale price.
    On July 25, the taxpayer left to spend the week-end at his summer home in Bethlehem, N. H., in the White Mountains. Martin Zinn and Frederick H. Hoffmann departed for the summer home of Martin Zinn at Lake Placid, N. Y., at or about the same time.
    On Saturday evening, July 26, taxpayer’s brother, Martin, called him from Lake Placid and announced that he and Hoffmann intended to turn their interests in the Gem safety razor business over to their wives. The taxpayer had theretofore discussed the matter with his wife and then communicated to her his intention to turn over to her his interest in the business.
    On Sunday night, July 27, the taxpayer left for New York, arriving on the morning of July 28. Hoffmann and Martin Zinn also arrived from Lake Placid on that date. An organization meeting of the Gem Safety Razor Corporation was held and 21,800. shares of its common stock, and 100 shares of its Class B preferred stock, of a total par value of $1,100,000, were issued to the taxpayer and his associates, of which the taxpayer received 32 shares of preferred stock, of a par value of $3,200, and 7,267 shares of a par value of $363,350, in exchange for cash, machinery, and processes. On the same day the taxpayer and his associates instructed Stern to . take all necessary legal steps to carry into effect the transfer of their interests to their respective wives.

      On July 2$, the taxpayer indorsed all of the stock certificates in the Gem Safety Razor Corporation theretofore issued to him, except qualifying shares, and executed an assignment of his interest therein to his wife. Thereupon, the certificates issued in the name of the taxpayer were surrendered and new certificates of stock were issued in the name of the taxpayer’s wife. The certificates so issued were sent by Stern to Mrs. Zinn, and she in turn indorsed them and returned them to him. At or about the same time Stern sent to Mrs. Zinn the draft of an agreement with the American Safety Razor Corporation for the sale of her stock and interest in the Gem Safety Razor Corporation for a pro rata share of $4,000,000, $250,000 to be paid on the execution of the agreement and $3,750,000 to be paid at a later date, and in default of payment of the latter amount the initial $250,000 was to be forfeited. This agreement was signed by Mrs. Zinn and returned to Stern and, on August 5, 1919, was delivered by Stern, together with other copies signed by Mrs. Hoff-mann and Mrs. Tessie Zinn, wife of Martin Zinn, to the American Safety Razor Corporation. On August 12, payment of the first $250,000 was made and delivered to Mrs. Hoffmann, who deposited the same in her bank for the account of herself, Tessie Zinn, and Florence C. Zinn. On or about September 22, 1919, the American Safety Razor Corporation made a final payment of $3,750,000 to Stern, who delivered $1,250,000 to Florence C. Zinn, wife of taxpayer, who received it, and has ever since retained it or the investments or reinvestments into which it was converted. At the same time, the American Safety Razor Corporation entered into separate agreements with Emma Hoffmann, Tessie Zinn, and Florence C. Zinn, whereby it agreed to indemnify each of them “ upon being notified in writing * * * within six years hereof of a final decision or decisions of the United States Treasury Department levying and assessing * * * a tax in excess of $133,333.33 * * * up to $533,333.33.” At the same time the taxpayer and his associates entered into an agreement with the American Safety Razor Corporation not to engage in the safety razor business for a period of 10 years from and after the date of that agreement.
    In the audit of the taxpayer’s return, and as a basis for the deficiency here in issue, the Commissioner asserted that the taxpayer derived a profit from the sale of the stock of the Gem Safety Razor Corporation to the American Safety Razor Corporation in the amount of the difference between one-third of $4,000,000 and the amount hereinabove set forth as the par value of stock of the Gem Safety Razor Corporation, received by the taxpayer in the taxable year, transferred to his wife, and by her sold to the American Safety Razor Corporation.

      DECISION.
    The deficiency determined by the Commissioner is disallowed.
   OPINION.

Morris

: In this appeal the sole question presented by the evidence is whether the transfer by the taxpayer of his stock to his wife was a mere subterfuge whereby he sought to evade a tax upon a profit realized from the sale of his interest in the Gem safety razor business. Upon this point, we are clear. The taxpayer prior to the consummation of the sale of the business made a gift of the property he then owned, namely, his stock in the Gem Safety Razor Corporation, to his wife, and from the moment of that gift his wife exercised entire dominion over the stock so given. She sold it, she received the proceeds, and, except in very minor particulars, has retained those proceeds not only as her own property but, so far as the record discloses, without in any way directly or indirectly contributing to the benefit of the taxpayer. She did reimburse her husband for expenditures made by him upon their summer home in New Hampshire, which home was acquired and is still owned by her and in her own separate right, and she did acquire a home in which they both reside in New York City. This ivas, however, in her own name and retained as her separate property.

We find nothing in the record to indicate that the transaction was other than one involving the absolute gift of stock and the subsequent sale thereof by the donee from which the taxpayer did not realize taxable gain.

On reference to the Board, Arundell did not participate.

Korner, Marquette, Smith, and Trussell dissent.


text:
    Appeal of GRESS MANUFACTURING CO.
    Docket No. 3102.
    Submitted October 19, 1925.
    Decided February 24, 1926.
    1. The Board lias no jurisdiction to consider whether any overpayment of tax has been made in any year not considered in the deficiency letter for the purpose of determining a credit to be applied against the deficiency determined by the deficiency letter.
    2. Adjustment of invested capital denied upon the evidence.

      Ernest W. Mitchell, Esq., for the taxpayer.

      Benj. E. Saunders, Esq., for the Commissioner.
    Before Geeen and Phillips.
    Taxpayer appeals from the determination of a deficiency of $32,-786.89 in income and profits taxes for 1920.

      FINDINGS OF FACT.
    1. Taxpayer is a Florida corporation with its principal office in Jacksonville. It keeps its accounts on the accrual basis and files its income-tax returns on the basis of the calendar year.
    2. On July 31, 1916, the taxpayer’s books of account showed that the blew York & Florida Lumber Co. was indebted to the taxpayer in the amount of $27,401.31. The taxpayer charged off this account on its books as a worthless debt as follows: July 31, 1916, $7,401.31: December 31, 1916, $9,000; December 31, 1917, $11,000; and upon its income-tax returns it claimed $16,401.31 as a deduction for 1916 and $11,000 as a deduction for 1917.
    3. The Commissioner, in his final determination of the taxpayer’s tax liability for the taxable years 1915, 1916, and 1917, allowed deductions on account' of said indebtedness as follows :
    1915_$3,750.00
    1916_12,651.31
    1917_ 11,000.00
    4. The Commissioner, in his final determination of the taxpayer’s tax liability for the year 1917, disallowed the claim of the taxpayer that $16,401.31, the amount of said indebtedness charged off on the taxpayer’s books in 1916, should be restored to invested capital for 1917 and allowed as a deduction in computing taxpayer’s net income for that year. The Commissioner determined the tax liability for 1917 at $38,008.60, and assessed an additional tax for. 1917 of $34,122.38, which was paid on October 26, 1923.
    5. The Commissioner, in the final determination of the taxpayer’s tax liability for 1918, in computing invested capital, adjusted the deduction therefrom because of 1917 tax due and payable, on the basis of $38,008.60 as the correct amount of tax due for 1917, and assessed an additional tax for 1918 of $7,355.11. Of this additional assessment, $6,031.18 was offset by the credit of an overpayment of 1919 taxes, and $1,323.93 was paid on March 23, 1925.
    6. The Commissioner, in the final determination of the taxpayer’s tax liability for the year 1920, in computing invested capital for 1920, deducted therefrom the full amount of unpaid additional assessments of tax for 1917 and 1918, in the amount of $34,422.38 for 1917 and $7,355.11 for 1918.
    7. The Commissioner, in the final determination of taxpayer’s tax liability for the year 1920, in computing taxable income, allocated thereto sales in the amount of $502,651.57, less costs in the amount of $422,355.93, a net addition to income for 1920 in the amount of $80,295.64, which sales and costs the taxpayer had previously reported in its income-tax return for 1921.

      8. In its income-tax return for 1921 taxpayer reported taxable income of $21,564.61, which included the sales and costs subsequently transferred by the Commissioner to 1920 income, as set forth in the preceding paragraph. Taxpayer reported and paid income and profits tax for 1921 of $1,956.46.
    9. The taxpayer filed its income-tax returns and paid the tax due thereon in due course for the years 1922 and 1923, said returns showing taxable income and tax liability as follows:

    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Phillips:

The taxpayer does not question the adjustment of its 1920 income made by the Commissioner. It does question the computation of the invested capital and the computation of the deficiency.

It is the contention of the taxpayer that its 1917 and 1918 income tax liability was incorrectly computed by the Commissioner in the respects hereinafter set forth, and that, to the extent that such compuation of tax was excessive, its invested capital for 1920 was erroneously reduced. The 1917 and 1918 taxes, as computed by the Commissioner, have been paid in full by the taxpayer, but the time within which it may file a claim for refund or bring suit to recover the additional assessments has not yet expired. The contention of the taxpayer appears to be well taken, provided the 1917 and 1918 taxes were in fact erroneously computed.

It is taxpayer’s contention that the 1917 tax was erroneous because the debt of $27,401.31, due it on July 31, 1916, from the New York & Florida Lumber Co., was ascertained to be worthless in 1917 and should have been allowed in whole as a deduction in that year rather than allowed in part in each of the years 1915, 1916, and 1917, as was done by the Commissioner. It was incumbent upon the taxpayer to establish that the debt claimed by it existed in 1917 and was ascertained to be worthless in that year. After a very careful consideration of the record, we can not find that the taxpayer has sustained that burden.

As ivas pointed out to counsel before the close of the hearing, the testimony with reference to the transactions between the taxpayer and New York & Florida Lumber Co. does not present a connected story. It appears that the New York & Florida Lumber Co. owned 28,000 acres' of timber land and that the taxpayer was engaged in buying and selling timber at wholesale. The officers of the two companies appear to have been the same, and the same individual owned more than a majority of the stock in each. The taxpayer entered into some arrangement with the New York & Florida Lumber Co., the details of which are not in evidence, by which the taxpayer was to'take lumber from lands of that company. It expended over $28,000 in placing mills, rails, and other property upon these timber lands, giving rise to the debt here in question. During 1916 taxpayer sold a part of this personal property and credited the proceeds to the New York & Florida Lumber Co. account. During the years 1916 and 1917 taxpayer was removing timber from the lands of that company, but the only credit which it gave that company for timber so removed was $856.15 in 1916 and $1,999.20 in 1917. There is testimony to the effect that there was a mortgage upon the property which required that there should be paid to the trustee under the mortgage $8 for each 1,000 feet of timber that was removed from the property. The sums credited by taxpayer to the New York & Florida Lumber Co. appear to have been paid to the trustee and the company debited with such payments, so that during the years in question the only amounts applied in reduction of the indebtedness were those realized from the sale of the personalty placed upon the property by the taxpayer. The price to be paid for timber removed was fixed by the same person acting for both corporations.

In 1917 the bonds issued under the mortgage came into the hands of interests unfriendly to the taxpayer. The situation which resulted is described in a letter from one officer of the taxpayer to another, as follows:

⅞ :■> ⅜ He [the bondholder] demands that we cease cutting all timber and cross ties on the New York and Florida Lumber Co.'s property at once.
If we will not do this he will start a lot of law suits against us. He claims ho has purchased about all the bonds of the above named company and is a real owner. He is willing to cancel all claims he might have against our company provided we stop Gritting now, and turn the property over to him.
I told him we would comply with his request and would stop, and I would advise you accordingly.

Operations were accordingly abandoned in November, 1917, and no other amounts were realized by the taxpayer after that date.

Even though it be conceded that the taxpayer has established that after that date the New York & Florida Lumber Co. was unable to meet its indebtedness and that its property was worth less than its bonds, we do not feel that we would be justified, in the circumstances of this appeal, in disturbing the action of the Commissioner in writing off the so-called indebtedness over the period during which timber was being removed by the taxpayer. The evidence is too indefinite to permit us to determine satisfactorily what was ■the true situation.

Taxpayer claims that, by reason of the adjustment of sales from 1921 to 1920, a net loss resulted in 1921, deductible from 1922 and 1923 income, and that a refund is due it for those years, which should be credited to reduce the 1920 deficiency. The returns for those years have not been audited by the Commissioner and the deficiency letter sent to the taxpayer by the Commissioner relates only to the year 1920. In our opinion, this Board has no jurisdiction to pass upon the tax liability of the taxpayer for those years to determine whether any refund is due which can be used as a credit against the deficiency for 1920 determined by the Commissioner.

Under section 274 of the Revenue Act of 1924, this Board is authorized to review an appeal from the determination of a deficiency by the Commissioner and to determine whether or not there is such a deficiency. It has no jurisdiction over refunds, Appeal of Everett Knitting Works, 1 B. T. A. 5; nor is the deficiency in question in this appeal a net deficiency arising from a determination by the Commissioner of a deficiency for one year and an overassessment for another, where both years had been audited by the Commissioner. as was the situation in the Appeal of E. J. Barry, 1 B. T. A. 156. We should be going beyond the power vested in this Board were we to go into the tax liability for a year not audited by the Commissioner in order that we might determine whether there was a refund to be applied as a credit against the deficiency determined by him.