author: KeRn:

text:
    J. P. Jerpe, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103377.
    Promulgated September 26, 1941.

      George E. H. Goodner, Esq., and D. F. Prince, Esq., for the petitioner,

      E. M. Woolf, Esq., for the respondent,
   OPINION.

KeRn:

The single issue is the amount of income taxable in 1938 under the installment plan elected by the taxpayer, after the reduction in a prior year of the amount of the purchase price agreed on in the contract sale of August 3, 1929. The relevant provisions of the statutes are set out in the margin. Petitioner contends that this-contract was an agreement to sell and not a contract of sale; in other words, that it was executory in character. Resting on this premise, he then argues that the sale price was altered and reduced by the sum of $100,000, involved in petitioner’s cancellation in 1931 of two notes, each in the face amount of $50,000; and that this readjustment must, therefore, be reflected in the profit taxable on the next to the last installment paid and returned in 1938. The petitioner makes the same contention on the reflection of actual profit, apparently regardless of the nature of the contract. Respondent, on the other hand, argues that a deductible loss resulted under section 44 (d) in the year 1931, through the cancellation in that year of the two notes for a total amount of $100,000, and that this loss did not operate to change the taxable percentage of profit as originally computed, realized on the payment in 1938. In other words, his theory appears to be that, once the installment method is elected, gain or loss is determined for tax purposes in each year on the basis of the original sale price without regard to the outcome of the whole transaction. He relies on his ruling G. C. M. 11845, C. B. XII-1 (June 1933), p. 52, and on our decision in Gilbert W. Lee, 6 B. T. A. 135.

The installment provision obviously was intended to relieve the petitioner, where he gets less than 40 percent of the sale price as a cash payment, from the burden of returning the full amount of the profit at the time the sale is executed, and to allow him to apportion the profit evenly over the later payments as received. The introductory clause of section 44 seems to indicate this intention in plain language. See 70th Congress, S. Rept. 960 (Committee on Finance), p. 24; H. Rept. 2 (Committee on Ways and Means), p. 16; on the 1928 Revenue Act. If the installment method is open to the petitioner, it becomes of no consequence whether the obligation has fully accrued to him in the year of the contract by the passage of title, whether he has retained a vendor’s lien, or whether the contract is executory until the final payment. He is to return a percentage of each payment as profit when made in any case. We leave on one side, therefore, any consideration of petitioner’s argument that the contract was executory, and proceed to discuss the question solely on the ground that it was an installment contract and, as such, income under it was to be determined in accordance with the statute.

The respondent’s argument takes little account of the actualities of taxation, and does too much homage to the mere form of the statute. A profit never made and income never received can scarcely be taxable, Kerbaugh Empire Co. v. Bowers, 271 U. S. 170. While it is true that the installment loss of 1931, if it had been claimed by the petitioner and allowed in that year, might have offset other gain in the same year and have thus become a real factor in the determination of taxable income in that year, that was not the case here. The loss was neither claimed nor allowed in that year, nor is there any intent expressed in the statute that it shall be so taken, as respondent contends. The whole deferred payment plan of returning income looks to the whole transaction, and not to separate losses or gains in the several years of payment. The percentage return of gain is a logical means to this end. While section 44 (d) provides, therefore, for the reckoning of a loss on such payments, it must look to such a loss on the whole transaction, which can not properly be reflected in vacuo, but must be reflected either in the reduction of total gain or as a net loss on the whole transaction, which can not be known until the final payment. On the other hand, the same section provides for reckoning gain also on the basis of actual realized gain; and, consequently, where the seller has reduced the buyer’s obligation, the seller’s gain must be reduced accordingly, and the percentage of gain to be returned for tax purposes must be readjusted to the new condition of things. Although no case has been called to our notice in which the question has been fully considered before, we are clearly of the opinion that any other reading of the section would stultify its obvious purpose. Cf. Daniel Tracy Beers, 31 B. T. A. 117, 121; affirmed on another issue, 78 Fed. (2d) 447.

Lee's case, supra, relied on by the respondent, is not in point, for it holds merely that the petitioner may not elect the installment basis and thereafter change to another basis. Obviously, adherence to the elected basis is necessary to protect the revenue. But here we are concerned with the proper application of that basis to the final fulfillment of the contract. Although the final payment was not made until 1939, the seller’s gain could not be greater than the amount he now claims for 1938. Nor does the Commissioner’s ruling, supra, help more, for it involved a net loss on a transaction which was nondeductible, since it was not entered into for profit, the object of the sale being the taxpayer’s own dwelling house. The Commissioner, consequently, denied the refund of “gain” earlier returned in installment payments.

We think that the reduction of $100,000 in the selling price of petitioner’s stocks, through cancellation of the two notes in 1931, must be reflected in the percentage of taxable gain returned thereafter, and that the gain for 1938, now before us, must be reduced accordingly-

Reviewed by the Board-

Decision will be entei-ed wader Rule 50.

       Revenue Act 1928.—
      SEC. 44. INSTALLMENT BASIS.
      (a) Dealers in Personal Property. — Under regulations prescribed by the Commissioner with the approval of the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received In that year which the gross profit realized or to be realized when payment Is completed, bears to the total contract price.
      * * * * * * *
      (d) Gain or Loss Upon Disposition op Installment Obligations. — If an installment obligation is satisfied at other than its face value or distributed, transmitted, sold, or otherwise disposed of, gain or loss shall result to the extent of the difference between the basis of the obligation and (1) in the case of satisfaction at other than face value or a sale or exchange — the amount realized, or (2) in case of a distribution, transmission, or disposition otherwise than by sale or exchange — the fair market value of the obligation at the time of such distribution, transmission, or disposition. The basis of the obligation shall be the excess of the face value of the obligation over an amount equal to the income which would be returnable were the obligation satisfied in full.


source: Caselaw Access Project

author: Black:

license: Public Domain

text:
    CHARLES H. Black, Sr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 103558, 105830.
    Promulgated September 26, 1941.

      Sidney J. Hayles, O. P. A., for tbe petitioner.

      J. Y. Porter, Esq., for tbe respondent.
   OPINION.

Black:

Two questions are presented for decision by the issues raised in the pleadings: (1) Whether the loss sustained by petitioner upon the foreclosure of the first mortgage and sale of the Franklin Building in 1936 was an ordinary business loss deductible in full, or whether it was a capital loss and limited in the amount deductible as determined by the respondent; (2) whether amounts expended in 1937 and 1938 in connection with the second and third mortgages on the Franklin Building, which were assumed by petitioner, were losses deductible in those years.

In his deficiency notices the respondent held that the amounts in question were not proper deductions. In his brief the respondent seems to defend his disallowance of these 1937 and 1938 deductions upon the ground that they were parts of the same loss which occurred in 1936 and that, inasmuch as the 1936 loss was a capital loss, the entire loss, including that which was incurred in 1937 and 1938, is limited by section 117 (d).

The applicable sections of the Revenue Act of 1936 are set out in the margin. The provisions of the 1938 Act are the same as the 1936 Act in these respects.

The petitioner contends that the Franklin Building was purchased and held for sale at a profit in the ordinary course of his business as a trader or dealer in real estate and the loss sustained by the foreclosure of the first mortgage and sale of the property is deductible under section 23 of the Revenue Act of 1936. He further contends that the payments made by Mm in 1937 and 1938 in satisfaction of the second and third mortgages on the property, which he had assumed, constitute losses deductible in the years in which they were paid.

The First Issue.

As has already been stated, in his income tax return for 1936, petitioner claimed a loss on the foreclosure of the first mortgage on the Franklin Building in the sum of $35,351.86. The amount of his loss is not in dispute. In the computation of the deficiency for 1936, the respondent treated the loss in question as a capital loss and allowed a deduction of $1,000 as the amount of capital loss allowable to petitioner on his one-half interest in the property. It is settled that a mortgage foreclosure and sale results in a “sale or exchange” within the provisions of section 117 of the taxing statute, Helvering v. Hammel, 311 U. S. 504.

The issue turns on whether the Franklin Building was acquired and held for sale to customers in the ordinary course of petitioner’s business, or whether it was acquired and held as an investment. The facts in the record, we think, support petitioner’s contention that it was acquired and held for sale in the ordinary course of his business to customers, and we have so found as a fact from the evidence presented.

The facts show that petitioner was engaged in the business of buying and selling real estate for profit and had been engaged in this business in Atlanta for many years. His transactions included the buying and selling of buildings, and the buying, subdividing, and developing of large tracts of land for sale. Sometime prior to 1924 petitioner and his brother-in-law, Gould, bought about 3,000 acres of land in Webster County, Georgia, for the purpose of planning it in pecan trees and subdividing it into small* tracts to be sold to customers for small pecan orchards. After planting about 100 acres in pecan trees it became evident that it was going to be a long and doubtful process. Petitioner and Gould wanted to get their money out of the property, but there was not a ready sale for farm land and it was decided to trade it for other property which could be more readily sold.

In 1924 petitioner traded the pecan farm as part consideration for the Franklin Building in Atlanta. The Franklin Building was leased to an automobile agency at approximately $7,000 per year and seemed to offer a likely prospect for petitioner and Gould to get their money out of the pecan farm venture. They thought that a building of that kind well leased would be readily salable, but before it could be sold the lessee became insolvent and the lease was canceled, leaving the building vacant and more difficult to sell at a favorable price. Thereafter, petitioner was compelled to pay out large sums of money to hold it. Finally, in 1936, he could no longer make the payments and the building was sold at a foreclosure sale, occasioning the loss here in question.

The respondent does not rest his argument solely on the fact that the Franklin Building was held by petitioner for twelve years before it was sold at foreclosure sale. He concedes that petitioner was engaged in the real estate business and that” the property here involved constituted “property held by the taxpayer” during a part of the calendar year 1936. He argues, however, that the property in question was not held by petitioner primarily for sale to customers in the ordinary course of his trade or business. The respondent apparently would limit petitioner’s customers to customers for residential property because he dealt principally in that type of property. That construction it seems to us is too narrow. It is obvious from the record that the Franklin Building was acquired by petitioner and Gould for the purpose of selling it and was continuously held for sale from the time it was purchased until it was lost on foreclosure sale.

Where, as here, one is regularly engaged in the business of buying and selling real estate, as was petitioner, any person who can be found to buy such property is a customer, as that term is ordinarily understood, and where such property is held for sale under such circumstances it must be deemed to be held for sale to customers within the meaning of the statute. Julius Goodman, 40 B. T. A. 22.

The case here is readily distinguished on its facts from Thompson Lumber Co., 43 B. T. A. 726, cited and relied upon by the respondent. In the Thompson case,- the taxpayer was not engaged in the business of buying and selling real estate for profit, and that fact we strongly emphasized in our opinion, but it acquired real estate in payment of accounts receivable for lumber and other materials which it furnished. The corporation’s holding of the real estate was merely incidental to its business. In the instant case the property in question was held ‘by the petitioner primarily for sale to customers in the ordinary course of his trade or business, as shown by the evidence upon which our findings of fact are based. See Neils Schultz, 44 B. T. A. 146; A. R. Calvelli, 43 B. T. A. 6. It follows that the loss sustained was an ordinary loss, all of which is deductible from income in the taxable year, and is not a capital loss limited by section 117 of the statute.

The Second Issue.

After the loss of the Franklin Building through foreclosure sale in 1936, petitioner remained liable on the second and third mortgage obligations which he bad assumed. In 1937 and 1938 he paid out in connection with these liabilities the respective sums of $7,115.57 and $15,992.44, which amounts he claims as a loss sustained on the Franklin Building and deductible from income in the years in which they were paid. Of the amount of $7,115.57 claimed as a deduction for the year 1937, the respondent allowed the sum of $3,325 as a bad debt in connection with the Franklin Building transaction and $507.33 as insurance paid out. There is, however, some confusion in the record about the treatment of the interest claimed in the amount of $155. In the “Explanation of Adjustments” attached to the deficiency letter, the respondent said:

(c) To disallow one-half of interest payment of $310.00 in connection with Blaek-Gould Building. Since the entire amount was claimed as interest on the original return, the payment made by you for Mr. Gould’s part has been disallowed for the reason that it was not claimed as a bad debt.

This indicates that the $155 claimed as representing petitioner’s one-half of the interest was allowed. It also indicates that the $155 representing the amount petitioner paid on Gould’s obligation was disallowed and not included in the $3,325 allowed as a bad debt. However, petitioner testified that the $155 allowed was tifie amount paid for Gould and that the $155 representing his one-half of the interest paid was disallowed. Since both parties seem to accept petitioner’s understanding, and there is no reference to the matter in briefs, this is an item which can be properly adjusted under Rule 50.

In a recomputation under Rule 50 it should be noted that $8,832.33 of the $7,115.57 deduction claimed by petitioner for the year 1937 has already been allowed by respondent.

The respondent relies on the Board’s decision ha Harry H. Diamond, 43 B. T. A. 809, in support of his disallowance of 1937 and 1938 claimed losses, but we do not think that decision supports his contention here. In the Diamond case there was no contention that the property in question was held for sale to customers ha the ordinary course of the taxpayer’s business. Admittedly, it was a capital asset and the Board found that the payment made after the foreclosure sale was merely a payment on the purchase price of the property which the taxpayer had obligated himself to make and was a part of the cost to petitioner of the mortgaged property and a part of the total loss sustained by him as a direct result of the foreclosure sale. We think this reasoning is sound, but it is not applicable in the case here under consideration. We have found that the Franklin Building was held by petitioner primarily for sale to his customers in the regular course of his business, and on these facts have held that the capital loss provisions contained in section 117 (d) are not applicable.

It naturally follows that the losses occasioned by the payments in 1937 and 1938 must be regarded as of the same character as the loss occasioned by the foreclosure sale in 1936, i. e., ordinary losses and not capital losses. They would therefore be deductible as ordinary losses in the years when paid.

The general rule as set out in sections 41 of the Revenue Acts of 1936 and 1938 is that the net income shall be computed upon the basis of the taxpayer’s annual accounting period in accordance with the method of accounting regularly employed in keeping the books of such taxpayer. Sections 43 of the applicable revenue acts provide that:

The deductions and credits * * * shall be taken for the taxable year in which “paid or accrued” or “paid or incurred”, dependent upon the method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income the deductions or credits should be taken as of a different period. * * *

The petitioner kept his books and made his income tax returns on the cash receipts and disbursements method. The mere existence of liability of one on the cash basis is not enough to establish loss and there can be no deduction until the debt is paid. Page v. Rhode Island Hospital Trust Co., 88 Fed. (2d) 192; cf. Helvering v. Price, 309 U. S. 409, Burnet v. Huff, 288 U. S. 156; Eckert v. Burnet, 283 U. S. 140; Jenkins v. Bitgood, 101 Fed. (2d) 17.

We think the above authorities establish that in the instant case petitioner sustained losses in 1937 and 1938 due to payments on the second and third mortgages. These losses were occasioned by the foreclosure sale of property held for sale in the ordinary course of petitioner’s business and are of the same character as the loss sustained at the time of the sale. Harry H. Diamond, supra. They were, therefore, oi'dinary losses, realized and deductible in the years when paid. Cf. Tams v. United States, 33 Fed. Supp. 764.

Decision will he entered u/nder Rule SO.

       SEC. 23. DEDUCTIONS FROM GROSS INCOME.
      ****** *
      (e) losses By Individuals. — In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise—
      (1) if incurred in trade or business; * * *
      SEC. 117. CAPITAL GAINS AND LOSSES.
      * * * * * * *
      (b) Definition of Capital Assets. — For the purposes of this title, “capital assets” means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.
      *******
      (d) Limitation on Capital Losses. — Losses from sales or exchanges of capital assets shall be allowed only to the extent of $2,000 plus the gains from such sales or exchanges.


author: Leech :

text:
    Brown Shoe Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102047.
    Promulgated September 26, 1941.

      Charles B. Mclnnis, Esq., for the petitioner.

      Oa/rroll Walher, Esq., for the respondent.
   OPINION.

Leech :

Respondent has taxed the petitioner upon the difference on the price it paid and that received for its stock sold in the taxable year to its president and certain employees. Whether authority existed for this action presents the only issue.

The Revenue Act of 1936 applies. Respondent argues that section 22 (a) of that act is effectively construed by Regulations 94, article 22 (a)-16, and supports the tax. Petitioner contends that the quoted regulation is not a valid interpretation of the statute and, even if so, it precludes the contested tax since, it is argued, in carrying on the transactions giving rise to the tax, the petitioner was not dealing in its own stock “as it might in the shares of another corporation.”

Of course the intention of Congress, as expressed in section 22 (a), supra, is controlling. But section 22 (a), the provisions of which have appeared in every revenue act without pertinent change since that of 1916, is so general in its terms as to be the appropriate subject of an interpretative regulation. Commissioner v. Reynolds Tobacco Co., 306 U. S. 110; First Chrold Corporation v. Commissioner, 306 U. S. 117. Until May 2, 1934, respondent by regulation had consistently construed the provision as meaning that the corporation realized no gain and sustained no loss upon purchases and sales of its own stock. National Home Owners Service Corporation, 39 B. T. A. 753. On May 2, 1934, respondent issued T. D. 4430, reported in C. B. XIII-1, p. 36, amending the outstanding regulations as follows:

* * * Whether the acquisition or disposition by a corporation of shares of its own capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction, which is to be ascertained from all its facts and circumstances. * * *
But where a corporation deals in its own shares as it might in the shares of another corporation, the resulting gain or loss is to be computed in the same manner as though the corporation were dealing in the shares of another. * * * Any gain derived from such transactions is subject to tax, and any loss sustained is allowable as a deduction where permitted by the provisions of applicable statutes.

In National Home Owners Service Corporation, supra, we held that the regulations, as amended by T. D. 4430, supra, was not an effective interpretation of section 22 (a) as passed by Congress in the Revenue Act of 1934, on May 3, 1934. The basis for that decision was that “Congress, in enacting that act, can not be presumed to have had in mind the regulation as amended.”

Here we are concerned with the prospective application of the Revenue Act of 1936 passed by Congress on June 20,1936. See Helvering v. Wilshire Oil Co., 308 U. S. 90. True, section 22 (a) of the 1934 Act was there reenacted without change, but, when Congress) passed the 1936 Revenue Act, the regulations, as amended by T. D. 4430, supra, appearing without further change as article 22 (a)-16 in Regulations 86, promulgated under the 1934 Act, had been outstanding for more than two years. In such situation, we think that, by passing the 1936 Act, Congress approved the interpretation of section 22 (a) announced in the regulations as amended by T. D. 4430, supra, and in article 22 (a)-16 of Regulations 86, and thus authorized the repetition of that interpretation in article 22 (a)-16 of Regulations 94 issued under the latter act. This interpretation was therefore valid and effective during the tax year. Helvering v. Wilshire Oil Co., supra; Trinity Corporation, 44 B. T. A. 1219; see also Elizabeth G. Augustus, 40 B. T. A. 1201; affd., 118 Fed. (2d) 38; cf. Squibb & Sons v. Helvering, 98 Fed. (2d) 69; modified, 102 Fed. (2d) 681.

Were the present transactions of petitioner in its own stock taxable under section 22 (a) of the Revenue Act of 1936 as construed by Regulations 94, article 23 (a)-16? We think they were.

Under the circumstances, the intention of respondent as expressed by such regulations is controlling. Section 22 (a) defines income as including “gains, profits, and income derived from * * * sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property * * The Supreme Court, in Helvering v. Clifford, 309 U. S. 331, said: “The broad sweep of this language [section 22 (a)] indicates the purpose of Congress to use the full measure of its taxing power within those definable categories.” In Commissioner v. Woods Machine Co., 57 Fed. (2d) 635; certiorari denied, 287 U. S. 613, the Circuit Court of Appeals reversed the Board and held that:

Whether the acquisition or sale by a corporation of shares of its own capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction involved. Walville Lumber Co. v. Com. of Internal Revenue 35 F. (2d) 445; Spear & Co. v. Heiner 54 F. (2d) 134. If it was in fact a capital transaction, i. e., if the shares were acquired or parted with in connection with a readjustment of the capital structure of the corporation, the Board rule applies. Doyle v. Mitchell Bros. Co. 247 U. S. 179, 184; Eisner v. Macomber, 252 U. S. 189. But where the transaction is not of that character, and a corporation has legally dealt in its own stock as it might in the shares of another corporation, and in so doing has made a gain or suffered a loss, we perceive no sufficient reason why the gain or loss should not be taken into account in computing the taxable income. * * *

Respondent, thereafter, promulgated T. D. 4430, supra, amending the then existing regulations which, as thus amended, were repeated as article 22 (a)-16 of Regulations 86 and 94.

Thus, it seems scarcely possible that either respondent in so amending the regulation or Congress in approving it intended to limit the application of section 22 (a) to an extent both must be presumed to have then known was unnecessary. Helvering v. Wilshire Oil Co., supra; Elizabeth G. Augustus, supra. Cf. National Home Owners Service Corporation, supra. Yet that is the position of petitioner. Commissioner v. Woods Machine Co., supra; Commissioner v. Boca Ceiga Development Co., 66 Fed. (2d) 1004; Johnson v. Commissioner, 56 Fed. (2d) 58; certiorari denied, 286 U. S. 551; Dorsey Co. v. Commissioner, 76 Fed. (2d) 339; certiorari denied, 296 U. S. 589; Allyne-Zerk Co. v. Commissioner, 83 Fed. (2d) 525; Houghton & Dutton Co., 26 B. T. A. 52; E. F. Simms, 28 B. T. A. 988; William L. James, 30 B. T. A. 491; and Griswold Co., 33 B. T. A. 537. It singles out the provision in article 22 (a)-16, Regulations 94, which reads: “But if a corporation deals in its own shares as it might in the shares of another corporation, the resulting gain or loss is to be computed in the same manner as though the corporation were dealing in the shares of another.” This sentence, it is argued, limits the transactions in its own stock upon which a corporation realizes a taxable gain to those there described. But, assuming the existence of the doubtful premise that petitioner did not so deal with its own stock here and would not have done so, if necessary to hold its valued employees, or otherwise, petitioner “might” have so bought and sold the stock of another corporation.

However, there is another and, we think, fatal weakness in petitioner’s position. The meaning of the pertinent regulation must be gathered from its entire context. Inconsistencies and contradictions must be avoided so far as possible. The first sentence of this regulation is: “Whether the acquisition or disposition by a corporation of shares of its own capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction, which is to be ascertained from all its facts and circumstances.” It is apparent that to give controlling effect to the sentence of the regulation to which petitioner points would require the elimination of the condition named in the quoted first sentence that the taxable character of the transaction “depends” upon “the real nature of the transaction.” In our opinion, “the real nature of the transaction” is the determinant under this regulation, which fixes the taxable status of transactions of a corporation in its own stock. The rest of the regulation includes only examples of such transactions to facilitate the intended delineation of that “real nature.”

The stock involved here was not canceled and then reissued. The capital structure of petitioner was not affected. No capital transaction, in fact, occurred. It is admitted that the stock was purchased for resale and sold. The limited field of purchasers and the bargain prices at which some of the stock was sold indicates only the reason for such purchases and sales. See Chrysler Corporation, 42 B. T. A. 795.

Respondent is sustained.

Reviewed by the Board.

Decision will be entered under Rule 50.

Murdock dissents.

       Art. 22 (a)-16. Acquisition or disposition ty a corporation of its own capital stock.— Whether the acquisition or disposition by a corporation of shares of its own capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction, which is to be ascertained from all its facts and circumstances. The receipt by a corporation of the subscription price of shares of its capital stock upon their original issuance gives rise to neither taxable gain nor deductible loss, whether the subscription or issue price be in excess of, or less than, the par or stated value of such stock.
      But if a corporation deals in its own shares as it might in the shares of another corporation, the resulting gain or loss is to be computed in the same manner as though the corporation were dealing in the shares of another. So also if the corporation receives its own stock as consideration upon the sale of property by it, or in satisfaction of indebtedness to it, the gain or loss resulting is to be computed in the same manner as though the payment had been made in any other property. Any gain derived from such transactions is subject to tax, and any loss sustained is allowable as a deduction where permitted by the provisions of the Act.

         It is to be noted that this case was decided by the Second Circuit Court of Appeals before the Supreme Court decided Helvering v. Wilshire Oil Co., Inc., supra.


author: Smith:

text:
    Thos. Goggan & Bro., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103927.
    Promulgated September 26, 1941.

      Roy L. Arterbwry, Esq., and K. S. Mandell, G. P. A., for the petitioner.

      Wilford- H. Payne, Esq., for the respondent.
   OPINION.

Smith:

Section 44 (d) of the Revenue Acts of 1936 and 1938 provides in part as follows:

SBC. 44. INSTALLMENT BASIS.
ife Sfc ifc * # # 5jC
(d) Gain ob Loss upon Disposition of Installment Obligations. — If an installment obligation is satisfied at other than its face value or distributed, transmitted, sold, or otherwise disposed of, gain or loss shall result to the extent of the difference between the basis of the obligation and (1) in the case of satisfaction at other than face value or a sale or exchange — the amount realized, or (2) in ease of a distribution, transmission, or disposition otherwise than by sale or exchange — the fair market value of the obligation at the time of such distribution, transmission, or disposition. Any gain or loss so resulting shall be considered as resulting from the sale or exchange of the property in respect of which the installment obligation was received. The basis of the obligation shall be the excess of the face value of the obligation over an amount equal to the income which would be returnable were the obligation satisfied in full. * , * *

Our question under this issue is, therefore, whether during the taxable years 1936,1937, and 1938 the petitioner “distributed, transmitted, sold, or otherwise disposed of” the above described installment contracts on the sales of pianos and electric refrigerators. The petitioner’s contentions are that it merely “pledged” these contracts with the finance companies as security for loans.

We do not have before us the specific provisions of petitioner’s agreements with any of the finance companies. ISTo written contracts were offered in evidence. Petitioner’s vice president and treasurer testified that he did not remember whether there were any written contracts with the finance companies.

The evidence does show that in each taxable year the petitioner turned over certain of its installment sales contracts to finance companies and received either cash or a credit for the face amount of such contracts, less either a standard finance charge or a “hold-back” of a certain percentage of the contract price pending final settlement of the account, or both. In lieu of» a finance charge the petitioner paid the W. W. Kimball Co. 6 percent interest on the balance of its open account in which credit for the contracts had been entered.

As to the electric refrigerator contracts, the procedure seems to have been that commonly followed by many retailers of automobiles and household appliances, under which the installment sales contracts are immediately turned over to finance companies or banks for cash.

Even prior to the enactment of section 44 (d), sufra (first enacted in the Revenue Act of 1928), it was held in a number of cases that where installment obligations are sold or discounted at a bank, or otherwise disposed of, the transaction giving rise to the installment obligation is closed and the gain or loss must be reported in that year. See Grace T. Mytinger, 4 B. T. A. 896; Pochard Cleveland Motor Co., 14 B. T. A. 118; Lucius H. Elmer, 22 B. T. A. 224; affd., 65 Fed. (2d) 568; Alworth-Washburn Co., 25 B. T. A. 140; affd., 67 Fed. (2d) 694; Miller Saw-Trimmer Co., 32 B. T. A. 931. Referring to section 44 (d) of the 1928 Act, the court said in Duram Building Corporation v. Commissioner, 66 Fed. (2d) 253:

* * * That statute of course, is not controlling as to the petitioner's transactions in 1926; hut we view it as merely an express recognition of what was equally true under the 1926 act by reason of the general provisions (sections 202-204 [26 USCA §§ 933-935]) with respect to the sale of property by a taxpayer. * * *

In Elmer v. Commissioner, 65 Fed. (2d) 568, the court found, sustaining the Board, that the transactions by which certain automobile installment sales contracts were placed with a finance company were sales, rather than loans with the contracts pledged as security. In Alworth-Washburn Co. v. Helvering, supra, the taxpayer, in the year following the sale of real estate, discounted the purchase money notes payable over a five-year period at the bank and received the face amount of the unpaid balance of the notes in cash. There, as in Elmer v. Commissioner, supra, the question turned upon the nature of the transaction between the taxpayer and the bank. The court said:

It Is undoubtedly a fact that the terms “loan,” “discount,” and “sale,” as applied to a transaction such as Is Involved in this case, are frequently so used by courts as to result in a rather vague and inexact distinction between them. * * *
But in the view we take of this case, it is not necessary we should be at pains to find a subtle distinction between the words we have discussed. * * * Whether the transfer of the notes received by petitioner as part of the purchase price for its property be denominated a loan, a sale, a discount, or a sale by way of discount, is not determinative of the rights of this case. The question rather is whether the tax statutes, fairly construed, make the money received by petitioner in the year 1927 gain or profits within the purview of section 213 of the Revenue Act of 1926 (44 Stat. 23, 26 USCA § 954).

The petitioner here points out that it guaranteed all of the sales contracts which it turned over to the finance companies and in case of a purchaser’s default it was obligated to reimburse the finance company for the balance advanced on the contract. So, however, were the taxpayers liable on the notes which they discounted at the banks or turned over to finance companies in the Alworth-Washburn case and in the Elmer case.

The petitioner further relies upon the fact that it handled all of the repossessions of merchandise and reimbursed the finance companies for the balance due on the contracts. In Elmer v. Commissioner, supra, the seller repossessed the automobiles upon default of the purchaser “probably as its [the finance company’s] agent” the court stated, and repaid the amount so realized to the finance company. We do not think it material that here the petitioner acted in its own behalf in repossessing merchandise upon a default in payment by the purchaser. While the contracts were in good standing all collections made thereon belonged to the finance company holding the contract, and the petitioner merely acted as agent for the finance company in making the collections.

As to the transactions involving the assignment of the electric refrigerator contracts, particularly, the evidence fails to show that the procedure followed by the petitioner differed in any material respect from that followed by one or more of the taxpayers in the cases cited above. Some of the piano contracts, those turned over to the W. W. Kimball Co., were handled in a somewhat different manner in that the petitioner paid interest on the credit advanced to it in lieu of a finance charge, but we do not think that this difference seriously affects the result. In all instances the petitioner realized in cash or- its equivalent all or a substantial portion of the sale price of the article sold at the time when the sale contract was turned over to the finance company. This is enough, we think, to require the inclusion in the gross income of each year of the profits represented in such cash receipts. We therefore sustain the respondent in his determination that the installment obligations Avere distributed, transmitted, sold, or otherwise disposed of, within the meaning of section 44 (d) supra.

The petitioner alleges as error in paragraph 4 (c) of its petition the “Disallowance of sufficient depreciation on automobiles and trucks in 1938 to return capital invested which resulted in an additional tax of $33.13.” Apparently this allegation of error was intended to put in issue the respondent’s disallowance of the amount of $145.14 which the petitioner claimed in its return for 1938 as a loss on the sale of the Chrysler automobile which it traded in on the Buick. In disallowing the deduction the respondent held that there was no sale but an exchange within the meaning of section 112 (b) (1) of the Revenue Act of 1938 on which no gain or loss is recognized.

Section 112 (b) (1) of the Revenue Act of 1938 provides in part:

SEO. 112. RECOGNITION OP GAIN OR LOSS.
# $ ‡ ‡ * 4
(b) Exchanges Solely in Kind.—
(1) Property held foe productive use oe investment. — No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale, nor stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment.

The pertinent provisions of Regulations 94, which are the same as the corresponding provisions of Regulations 101, are:

Art. 112 (b) (1)-1. Property held for productive use in trade or business or for investment.— * * *
No gain or loss is recognized if (1) a taxpayer exchanges property held for productive use in his trade or business, together with cash, for other property of like kind for the same use, such as a truck for a new truck or a passenger automobile for a new passenger automobile to be used for a like purpose, * * *

Respondent’s determination relative to the depreciation allowance for 1938 is in accord with the decisions of the Board in W. H. Hartman Co., 20 B. T. A. 302; George E. Hamilton, 30 B. T. A. 160; National Outdoor Advertising Bureau, Inc., 32 B. T. A. 1025; affd., on this point (C. C. A., 2d Cir.), 89 Fed. (2d) 878; Graves, Cox & Co., 27 B. T. A. 546.

The cited cases hold that under the provisions of section 112 (b) (1) of the Revenue Act of 1938, or corresponding provisions of prior acts, no recognizable gain or loss results from the exchange of automobiles or trucks held for productive use in trade or business for other automobiles or trucks intended for a like use.

Petitioner conceded at the hearing of this proceeding that the Chrysler automobile in question was traded in and not sold and that no deductible loss was sustained on the trade-in. It asserted, however, that the excess of undepreciated cost over the trade-in allowance should be allowed as additional depreciation in the year 1938. This contention is without merit. The allowance for depreciation depends upon the actual usage of the property. There is no evidence before us that the depreciation actually sustained on the automobile in question either in 1936, 1937, or 1938 was in excess of that set up by the petitioner on its books and claimed and allowed in the audit of its income tax returns. Certainly, the amount of the trade-in value allowed on an automobile which has been used in a trade or business for a given period can not be said to determine the amount or the rate of the depreciation to be allowed on it in any year of its use.

The evidence before us affords no basis for the allowance of any greater amount of depreciation on any of the automobiles in question than was claimed by the petitioner in its return and allowed by the respondent in the determination of the deficiency. Upon this issue the respondent is sustained.

Reviewed by the Board.

Decision will he entered wider Bule 50.


author: Murdock :

text:
    Wilmore Steamship Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 104508.
    Promulgated September 26, 1941.

      J. T. Haslam, Esq., for the respondent.
   OPINION.

Murdock :

The Commissioner determined a deficiency of $12,211.56 in income tax for 1931. The issues for decision are (1) whether a gain of $64,798.81 from an involuntary conversion is not recognized because the money was expended in the acquisition of similar property within the meaning of section 112 (f) of the Revenue Act of 1928, and (2) whether similar gains of 1929 and 1930 are a part of gross income in computing net losses to offset 1931 income. The Board adopts as its findings of fact the facts as stipulated by the parties.

The petitioner, a corporation, filed its return for 1931 with the collector for the second district of New York. A steamship owned by the petitioner was sunk in September 1917 by a German submarine. The petitioner collected insurance in that year in the amount of $1,750,000, which exceeded the depreciated cost of the vessel by $377,-241.06. The petitioner reported the latter amount as income for 1917. The record does not show and the petitioner does not contend that any part of the $1,750,000 was ever invested in a new vessel.

The petitioner filed a claim against Germany for the destruction of the vessel and the Mixed Claims Commission made an award to the petitioner in 1926. This award, with interest, but less certain fees and commissions, was paid to the petitioner. The petitioner reported the interest as income when received. The principal award was received by the petitioner as follows:

Tear Amount
1928_$312,157. 60
1929_ 126, 545.55
1930 _ 73,443. 07
1931_ 64,978. 81
Total_ 577,125.03

The petitioner, in anticipation of the receipt of the award, contracted in 1928 for the construction of two new vessels similar in use to the sunken vessel. The new ships were completed in 1929 and cost over $1,500,000. The petitioner paid the purchase price in 1928 and 1929, using the award payments, other funds of its own, and some borrowed money. All of the total amount received on the award, except $3,195.62 received in 1930, was promptly expended either in direct payment of the purchase price or in discharge of the loans used to pay the purchase price of the two new vessels. '

The petitioner did not report any part of the $64,978.81 as income for 1931. It had net losses for 1929 and 1930, within the meaning of section 117, in the amounts of $3,312.93 and $36,232.86, excluding the 1929 and 1930 award payments from gross income. It claims the right to deduct those losses from 1931 income. The Commissioner included the $64,978.81 in income for 1931 and did not allow deductions for the losses.

The petitioner never reported any of the principal award payments as income, claiming always that the gain was not recognized under section 112 (f). The Commissioner has sought to tax it in each year. This is the third time that the petitioner has appealed to the Board in regard to these four payments.

The first petition related solely to the year 1928. The Commissioner held that the cost of the sunken vessel had been recovered through insurance and all of the further recovery, consisting of the entire award and interest through 1928, was accrued income. The Board agreed that the gain was the excess of all amounts received by way of insurance and award over the cost of the single piece of property on account of the destruction of which the amounts were received. It held that, since the gain was merely that upon one piece of property destroyed at one time, that gain was recognized to the' extent that “the money”, all of the money including insurance and award, was not expended in the acquisition of any replacing vessel. See sec. 112 (f), particularly the last sentence; Wilmore Steamship Co., 30 B. T. A. 866. The Circuit Court of Appeals for the Second Circuit reversed, 78 Fed. (2d) 667, and held that the award was an entirely separate conversion from the recovery of the insurance and, since all of the “profit” received in 1928 was forthwith expended in the acquisition of new vessels, it was not recognized under section 112 (f) and could not be included in gross income. The Government did not seek a writ of certiorari.

The years 1929 and 1930 next came before the Board, Docket No. 68696. The respondent there contended that the award money was not identified as having been expended for the new vessels, since some of it was used to retire indebtedness. The Board held that the tracing of the funds through the loans was sufficient and the payments of award thus traced were not a part of gross income, following the Circuit Court decision for 1928.

The respondent merely reargues in this proceeding the points decided adversely to his contentions in the two prior proceedings. The first issue is decided for the petitioner upon authority of the two prior decisions. See also Paul Haberland, 25 B. T. A. 1370. Cf. Frisehkorn Development Co., 30 B. T. A. 8; affd., 88 Fed. (2d) 1009, where the payments were not adequately traced.

The Commissioner contends on the second issue that the unrecognized gain of 1929 and 1930 must, nevertheless, be included in gross income for the purpose of determining whether or not the petitioner sustained net losses within the meaning of section 117. The Board has heretofore held that the 1929 and 1930 gains were not a part of gross income as defined in section 22 because of the nonrecognition provisions of section 112, which are specifically referred to in section 22. Section 117 provides that certain deductions and items of income, including tax-free interest, shall not be excluded in computing a net loss to be deducted in a later year. There is no provision that unrecognized gain is to be included in income for this purpose. Expressio unius est exclusio altcrius. H. O. Wood, Jr., 33 B. T. A. 806, 814; United States v. Barnes, 222 U. S. 513; Founders General Corporation v. Hoey, 300 U. S. 268. Thus the contention of the Commissioner is not supported by the statute. The legislative history of the net loss provisions does not support the contention. See H. R. 179, 68th Cong., 1st sess. The plain words of the statute must be followed and the contention of the Commissioner denied. Cf. Crooks v. Harrelson, 282 U. S. 55; Armstrong Co. v. Nu-Enamel Corporation, 305 U. S. 315; Southern Pacific Co. v. Lowe, 247 U. S. 330. See also Regulations 77, art. 41 (b). Cases dealing with earnings and profits available for dividends, such as F. J. Young Corporation, 35 B. T. A. 860; affd., 103 Fed. (2d) 137, are distinguishable because of the difference in the wording of the applicable statutory provisions.

Reviewed by the Board.

Decision will he entered under Bule 50.

       SEC. 112. RECOGNITION OF GAIN OR LOSS.

        *******

      (f) Involuntary conversions. — If property (as a result of its destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation, or the threat or imminence thereof) is compulsorily or involuntarily converted into property similar or related in service or use to the property so converted, or into money which is forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, expended in the acquisition of other property similar or related in service or use to the property so converted, or in the acquisition of control of a corporation owning such other property, or in the establishment of a replacement fund, no gain or loss shall be recognized. If any part of the money is not so expended, the gain, if, any, shall be recognized, but in an amount not in excess of the money which is not so expended.


author: Tyson:

text:
    Ben R. Meyer, Petitioner, v. Commissioner of Internal Revenue, Respondent. Ray C. Meyer, Petitioner, v. Commissioner of Internal Revenue, Respondent. Milton E. Getz, Petitioner, v. Commissioner of Internal Revenue, Respondent. Estelle C. Getz, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 72248, 72249, 72250, 72251, 75610, 75611, 75612, 75613, 79030, 79031, 79032, 79033, 84684, 84685, 84686, 84687, 93046, 93047, 93048, 93064.
    Promulgated September 30, 1941.

      Thomas R. Dempsey, Esq., and Wellman P. Thayer, Esq., for the petitioners.

      Samuel Taylor, Esq., for the respondent.
   OPINION.

Tyson:

The respondent, on brief, concedes that there are no de-ficiences of any of the petitioners for the year 1934. He also concedes, on brief, that the amounts of withdrawals by petitioners from Limited in each of the years 1932,1933, and 1934, determined by him to constitute dividends to petitioners in those respective years, should be reduced by the amounts which were paid by petitioners in each of such years and designated on the books of Limited as “interest” in the accounts of “Ben R. & Bay C. Meyer” and “Milton E. & Estelle O. Getz.”

The only issues remaining for decision are (1) -whether the net withdrawals of petitioners from Limited during each of the taxable years, except 1934 (i. e., their total withdrawals less the total amounts, including “interest”, paid by them to Limited), constituted loans, as contended by the petitioners, or distributions, taxable as dividends, as contended by the respondent; and (2) whether, if held to be loans, “interest” paid by petitioners in the years 1932, 1933, and 1934, is deductible from their respective gross incomes in those years.

The first issue presents two questions: First, were petitioners “shareholders” of Limited during the taxable years, within the purview of section 115 (a) of the Revenue Acts of 1928, 1932, and 1934, notwithstanding they were not the record owners of Limited’s stock; and, second, if they were such shareholders, did petitioners’ net withdrawals from Limited during the taxable years constitute dividends, that is, “distributions” made by Limited “out of its earnings or profits”, within the purview of that section.

In seeking the answer to the first question, the principle, that substance and not form should control in the application of Federal income tax laws, is particularly applicable to the facts as shown in our findings in the instant proceedings. United States v. Phellis, 257 U. S. 156; Gregory v. Helvering, 293 U. S. 465; Griffiths v. Helvering, 308 U. S. 355; Higgins v. Smith, 308 U. S. 473; Helvering v. Gordon, 87 Fed. (2d) 663; and Kaspare Cohn Co. Ltd., 35 B. T. A. 646.

Looking through the form of the corporate organization of Cohn, Inc., and its record ownership of the stock of Limited, we find that, in substance, the petitioners were in reality the shareholders of Limited. Through ownership of all of the stock of Cohn, Inc., a closely held family corporation, which, in turn, owned all of the stock of Limited, the petitioners were the beneficial and real owners of the assets of Cohn, Inc., including Limited’s stock. During the taxable years petitioners Ben B. Meyer and Milton E. Getz were alternately president and vice president of Limited and at least three of petitioners, viz, those two and Estelle C. Getz, were among the five directors of Cohn, Inc., and the sole directors of Limited. Through the holding of such offices, petitioners were in fact and in actual practice in absolute control of Limited and the latter’s assets; and through the exercise of that control, petitioners, over a period of years including the taxable years in question, have withdrawn Limited’s earnings or profits at their own discretion, for their own personal uses, and in a manner which best suited their own purposes.

In answer to the first question, as stated above, we hold that through their control of and their beneficial and real ownership of the stock of Limited, petitioners were the “shareholders” of that corporation, within the purview of section 115 (a), supra.

Petitioners cite Howard M. Taylor, 14 B. T. A. 863, as authority for their contention that they were not the shareholders of Limited. The facts in that case differed materially from the facts presented here. The fact in that case, that the taxpayer was not the record owner of the stock of the corporation from which his withdrawals were made, was not the basis upon which the decision rested, but it rested upon the application to the facts therein of principles which would have applied had the taxpayer been the record owner of such stock. In this connection see Helvering v. Gordon, supra.

We now turn to consideration of the second question, as above stated. The principle that substance and not form controls is also applicable here. Under the set-up evidenced by our findings the answer to this question must turn on the effect of what was actually done rather than on the form of the transaction, Gregory v. Helvering, supra; cf. Helvering v. Gordon, supra, for “fictional corporate camouflage cannot be made the device to escape taxation.” North Jersey Title Insurance Co. v. Commissioner, 84 Fed. (2d) 898. Taxpayers will not be permitted to shift from themselves the tax burdens imposed upon income or taxable benefits derived by them merely because of the form employed in carrying out a transaction; but, instead, the form will be looked through to discover the reality of the transaction. Gregory v. Helvering, supra; Higgins v. Smith, supra; Griffiths v. Helvering, supra; Helvering v. Gordon, supra; and Kaspare Cohn Co. Ltd., supra.

Through the exercise of their control of Cohn, Inc., and Limited we find petitioners, for their personal uses including living expenses, withdrawing Limited’s accumulated earnings or profits on open accounts until, according to their respective balance sheets, at the end of 1935 the Meyers owed Limited a total of $2,840,124.26 and the Getzes owed Limited a total of $1,961,155.45, notwithstanding certain credits made to those accounts from time to time, which credits were evidently designed to reduce the amounts of the withdrawals and give the color of loans to the form of the transactions. By making withdrawals in such a manner the necessity of going through the formalities of having Limited declare dividends to Cohn, Inc., and thereafter having Cohn, Inc., declare dividends to petitioners, in order for petitioners to receive the benefit of their withdrawals, was obviated. Through their control of these two corporations petitioners took a direct route in securing for their personal uses large portions of Limited’s accumulated earnings or profits without the formalities just mentioned.

From the facts before us we are convinced that petitioners used their control of Limited to withdraw from Limited whatever funds they desired at such times and in such amounts as they chose, very much in the manner of a sole- proprietor appropriating the proceeds of the business in which he is engaged to supply his personal needs and recording the transactions as charges to his personal account without any specific requirement for repayment, except if, as, and when he chose. This was the position occupied at all times by petitioners with regard to the accounts carried on the books of Limited as “Ben R. & Ray C. Meyer” and “Milton E. & Estelle C. Getz”, since those accounts would never become due and payable except as and when the petitioners chose to render them so through the affirmative action of Limited, which they controlled.

At no time subsequent to 1928 did Limited make any formal distribution by way of dividends, although during each of the taxable years Limited had accumulated earnings or profits available for distribution as taxable dividends in amounts greatly in excess of the net withdrawals by petitioners in such years. It therefore appears that in following their usual practice petitioners withdrew during the taxable years earnings or profits from Limited which were available for distribution as dividends and had such withdrawals treated as loans on the books of Limited. Such a practice, in lieu of paying dividends, had many advantages: First, it did not affect the apparent book value of Limited’s capital assets; second, it was a convenient method of distributing the earnings and profits of Limited without the formal declaration of dividends; and last, but not least, petitioners would be relieved of paying income tax on the withdrawals as dividends distributed if the withdrawals were held to be loans.

During each of the taxable years petitioners’ withdrawals were used for their personal and living expenses. The Meyers were insolvent and could not have repaid their withdrawals; and the Getzes could not have repaid their withdrawals without selling most, if not aS, of their assets, including their home and household furniture.

The fact that the withdrawals of petitioners were treated on the books of Limited and also on the books of petitioners as “loans” to petitioners is not controlling, for book entries may not be used to conceal realities as a means of relieving a taxpayer from liability for income taxes. Chattanooga, Savings Bank v. Brewer, 9 Fed. (2d) 982; affd., 17 Fed. (2d) 79; Christopher v. Burnet, 55 Fed. (2d) 527, affirming L. J. Christopher, 13 B. T. A. 729; A. W. Mellon, 36 B. T. A. 977, 1025, 1060; Roy J. Kinnear, 36 B. T. A. 153; M. Jackson Crispin, 32 B. T. A. 151; C. W. Murchison, 32 B. T. A. 32; George P. Marshall, 32 B. T. A. 956; S. Schulein Co., 20 B. T. A. 261; Daniel Hunt, Sr., 6 B. T. A. 558; and Anketell Lumber & Coal Co. v. United States, 1 Fed. Supp. 724. The fact that the payments, including payments designated as “interest”, made to Limited by petitioners were credited on their respective accounts on Limited’s books is not persuasive evidence that the withdrawals constituted debts of the petitioners. In all of the taxable years, except 1934, the withdrawals by each petitioner exceeded the amounts paid by such petitioner to Limited and the net result in each of those years was that the debit balance of the account of each petitioner was not reduced, but the total net withdrawals steadily increased from year to year. C. W. Murchison, supra; A. W. Mellon, supra.

We do not regard the giving of petitioners’ demand notes dated August 1, 1934, December 31, 1934, and January 2, 1936, to Limited, in face amounts equal to the balance shown in their accounts on certain dates, of weighty significance as indicating that withdrawals of petitioners constituted debts; since the collection of those demand notes, as well as the making of same, was under the absolute control of petitioners througn their control of Limited and the notes could, at their will, never become actually due and payable. Furthermore, the record shows that such notes were not worth their face value and neither of the two petitioners who testified, Meyer and Getz, could give any satisfactory reason why petitioners waited until August 1,1934, to give the first four of such notes; but it is to be noted that those four notes were executed subsequent to the time petitioners had been apprised that deficiencies had been determined against them for the years 1930 and 1931.

Petitioners contend that the execution by Meyer and Getz of the deed of trust by which they conveyed practically all their properties to the trust to guarantee certain indebtednesses of Limited is strong evidence that the withdrawals here involved were loans. We are of the opinion that this contention is unsound. The execution of the trust deed seems to bear no relation to the withdrawals in question. By executing the trust deed, Meyer and Getz simply guaranteed certain of the debts of Limited, for a portion ef which (but for what portion is not shown) they were already liable on guarantees theretofore made by them at a time or times not shown by the record.

The testimony herein of Ben It. Meyer and Milton E. Getz that at the time the withdrawals were made they considered them as loans and intended to repay them with interest, taken in the light of the facts and circumstances set out in our findings of fact, is not persuasive as evidence going to establish that the withdrawals constituted loans rather than distributions of Limited’s accumulated earnings or profits. In determining whether the withdrawals in question constituted loans or dividends, “one must look not alone to book entries * * * or to isolated expressions of witnesses or parties, but one must endeavor to visualize the entire situation as it existed.” Chattanooga Savings Bank v. Brewer, supra.

The fact that the withdrawals from Limited by petitioners were not in proportion to their stock holdings in Cohn, Inc., is not determinative of whether such withdrawals constitute loans or dividends. It is well settled that earnings may be distributed to stockholders without regard to the proportions in which the shares of stock are held; especially where, as here, the record does not disclose that any of the stockholders complained of such distributions, but, on the contrary, shows that they at least tacitly agreed thereto.. Lincoln National Bank v. Burnet, 63 Fed. (2d) 131, affirming Lincoln National Bank, Executor, 23 B. T. A. 1304; Cleveland Shopping News Co. v. Routzahn, 89 Fed. (2d) 902; Speier v. United States, 9 Fed. Supp. 1020; Peoples Gin Co., 41 B. T. A. 343; affd., 118 Fed. (2d) 72; Roy J. Kinnear, supra; C. W. Murchison, supra; and Henry F. Michell Co., 16 B. T. A. 1297.

We have found as a fact that petitioners’ net withdrawals from Limited during the taxable years in question were in the following amounts:

In the light of all the facts and circumstances shown in our findings, we conclude in answer to the second question, as set out above, that the net withdrawals by' petitioners were distributions to them of the earnings or profits of Limited accumulated since February 28,1913, and not loans; and we therefore hold that the net withdrawals, in the amounts and for the taxable years as set out in the immediately preceding paragraph, are taxable to them as dividends. Chattanooga Savings Bank v. Brewer, supra; Christopher v. Burnet, supra; George P. Marshall, supra; M. Jackson Crispin, supra; C. W. Murchison, supra; Daniel Hunt, Sr., supra; Garvan, Inc. v. Eaton, 20 Fed. (2d) 422; and Anketell Lumber & Coal Co. v. United States, supra. Cf. Helvering v. Gordon, supra; Roy J. Kinnear, supra; A. W. Mellon, supra; Henry F. Michell Co., supra.

Counsel for petitioners argue, on behalf of Milton E. and Estelle C. Getz, that the amount of $150,000 paid to Limited in 1933 and credited by Limited on an account standing in the name of “Milton E. Getz a/c Mtg. Maria de Francis” should be considered as a credit to the account of “Milton E. & Estelle C. Getz.” Since the parties themselves, at the time, treated this transaction as something separate and distinct from the withdrawals here in question, the testimony of Milton E. Getz that the account was set up in error is not persuasive. We hold that no part of this amount should be considered as a credit to the account of “Milton E. & Estelle C. Getz” for the year 1933 in determining their net withdrawals for that year: For the same reasons we make the same holding with regard to the following: The amounts of $6,600 and $4,037.05 credited on the books of Limited during 1935 to the “Ben B. Meyer Special A/c, A/c Trust Agreement 1028”, and the amount of $6,458.90 credited on the books of Limited during 1935 to the account “Milton E. Getz Special A/c, A/c Trust Agreement 1028.”

We have held that through ownership of the stock of Cohn, Inc., the petitioners were the shareholders of Limited and that as such shareholders they received distributions from Limited’s earnings or profits within the purview of section 115 (a), supra. Since the stock of Cohn, Inc., owned by Ray C. Meyer and Estelle C. Getz in the amount of 288 shares each, was their separate property, it follows that their corresponding separate shareholding interests in Limited were also their separate property and the income derived therefrom by them as dividends is taxable to them as their separate income, respectively. Also, since the stock of Cohn, Inc., owned by Ben R. Meyer and his wife and by Milton E. Getz and his wife, respectively, was community property, it follows that their corresponding shareholding interests in Limited were community property and the income derived from their respective shares as dividends is taxable one-half to each husband and one-half to his wife.

The record discloses that the withdrawals charged to the account of “Ben B. & Bay C. Meyer” were made by Ben B. Meyer and his wife in equal amounts and that the withdrawals charged to the account of “Milton E. & Estelle C. Getz” were made by Milton E. Getz and his wife each in equal amounts. It is immaterial that the withdrawals were not in proportion to the husband’s and wife’s respective shareholding interests in Limited, since as hereinbefore stated, it is well settled that earnings of a corporation may be distributed to stockholders without regard to the proportions iii which the shares of stock are held.

We hold that the net withdrawals of each petitioner constituted the amount of dividends received by each and, further, that one-half of the net withdrawals charged to the account of “Ben B. & Bay C. Meyer” during each of the years in question is taxable to Bay O. Meyer as her separate income and the other half thereof is taxable as the community income of Ben B. Meyer and his wife. The same is true as to the net withdrawals charged to the account of “Milton E. and Estelle C. Getz.” Effect to the foregoing divisions of the income in question will be given upon the recomputation under Rule 50.

In view of decision that the withdrawals in question did not constitute loans, it follows that petitioners are not entitled to the deductions from gross income claimed as interest paid on loans.

Reviewed by the Board.

Decisions will Toe entered under Bule 50.

Murdock, Black, Leech, Turner, and Hill concur only in the result.

       SEC. 115. DISTRIBUTIONS BY CORPORATIONS.
      (a) Definition of Dividend. — The term “dividend” when used in this title * * * 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.


author: Opper: Kern,

text:
    Aktiebolaget Separator, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101328.
    Promulgated September 30, 1941.

      Ben A. Matthews, Esq., for the petitioner.

      Ocrrnay Kitchen, Esq., for the respondent.
   OPINION.

Opper:

The question is whether petitioner, a foreign corporation, was a resident within the definition of Revenue Act of 1936 so as to be entitled to avail itself of the credit for dividends received from domestic corporations allowed to resident and withheld from nonresident foreign corporations.

The definition of a resident corporation for our purposes is one “engaged in trade or business within the United States or having an office or place of business therein.” Petitioner concedes that it was “established at the hearing that petitioner was not engaged in business in the United States.” It has a principal office in Stockholm, Sweden, exists under the laws of that country and “was engaged in the business of manufacturing centrifugal machinery with interests over most of the world”, to use petitioner’s language. We take the concession to mean, as we think the evidence shows, that no part of that business was carried on in the United States at any time during the taxable year.

Petitioner focuses its claim upon the second half of the definition and insists that it had an office or place of business in the United States which is sufficient to bring it within the statutory description. We shall, without deciding, accept as a preliminary petitioner’s contention that the definition is in the disjunctive; that compliance with either part is therefore sufficient; that Congress would not have used the quoted language had it not intended to cover more than the mere transaction of business, since otherwise the additional phrase would have been superfluous; and that, therefore, it is not necessary that a foreign corporation transact business in the United States within the taxable year if it can show that it has “an office or place of business” here during such year.

But this is not to say that the business aspect of a foreign corporation’s relationship to the physical territory of the United States is entirely absent. Accepted definitions of the word “office” are intimately associated with the transaction of business. The conjunction of the words “place of business” in the same phrase indicates that it was in that sense that Congress was using the term. This assumption is accepted by petitioner, for it says in its brief: “In the latter alternative ‘office’ and ‘place of business’ are so nearly synonymous as to he so in effect.” We think it necessary, therefore, to construe the second alternative in the sense that the words were more fully “office for the transaction of business or other place of business.” And there is no reason to assume that Congress used the word “business” with two different meanings in the same section; so that the activities which would be required for a corporation to qualify as being “engaged in business” would appear to be no different from those for the conduct of which it would be necessary that its location in the United States be created in order for that to be considered a “place of business.” Such a construction does no violence to our acceptance of the view that the statutory language goes beyond the mere transaction of business. The two concepts may not be mutually exclusive, but they are certainly different. One may transact business without having a regular place for that activity, such as an office. Or one may have a place for the transaction of business within a taxable year without, for one reason or another, actually engaging in the business for which the office was created.

The question then appears to be whether what petitioner established was an office for the transaction of its business. If it was, then even though no business was transacted there,- the definition would apply. If it was not, since the admitted absence of the transaction of any business within the United States would prevent petitioner from falling within the first portion of the definition, the combination would be fatal to its contention.

We think petitioner’s evidence, which we agree was not controverted, fails to establish that the space which it leased was designed for the transaction of any part of its business. A summary description of that design may be quoted from petitioner’s brief: This in our view falls short of the transaction of. business. The object was to collect dividend income. That was not only a purpose less than the transaction of petitioner’s business, it was less than the transaction of any business. McCoach v. Mine Hill & Schuylkill Haven, Railroad, Co., 288 U. S. 295. The location was used for the purpose for which it was procured and yet petitioner concedes that no business was transacted in the United States. In fact, petitioner seems to admit that the purpose of the arrangement as it was established was not the transaction of business; for the brief goes on to refer to the leased space as a place “which, should the occasion arise, might even be utilized for the conduct of petitioner’s business.” There is thus no contention and no showing that the purpose which petitioner had presently in mind in leasing the space was the conduct of its business or that the occasion had arisen or was imminent which would create that purpose.

* * * Petitioner, for many years, Rad owned stock in two domestic corporations. Its income from sources within the United States was substantial. To receive and dispose of such income, petitioner needed some reliable person in this country wbo could be in daily attendance at its New York office, ready to attend to its interests as instructed by correspondence or cable.

We are, therefore, of the opinion that the activities for which petitioner rented desk space and hired a part-time employee were not the transaction of any part of its business; that, therefore, it had no “office or place of business” in the United States at any time during the taxable year; and that, accordingly, it is not entitled to the credit available to resident foreign corporations.

Reviewed by the Board.

Decision will ~be entered for the respondent.

Kern,

dissenting: I respectfully dissent from the reasoning and conclusion of the majority opinion. That conclusion may be paraphrased as follows: For a foreign corporation to become a resident corporation within the meaning of section 231 (b) of the Revenue Act of 1936, it is necessary that it either engage in trade or business within the United States, or have “an office or place of business” within the United States which is used or established for the purpose of being used in the conduct, within the United States, of the corporation’s activities which are a part of its engagement in business therein. Tims, according to the rationale of the majority opinion, when a foreign corporation carries on no trade or business here, and has nc intent to do so, it can not be said to have “an office or place of business” within the United States.

“The corporation [petitioner] states its representative is vested with no authority to conduct business or engage in business activities of any character on behalf of the corporation and ‘she has not done so’; that during the taxable year the only activities of the corporation in the United States consisted of the receiving of dividends * * *.
“Although the corporation has on various occasions made purchases of United States products for use in its foreign business from several sources within the United States, and has made sales of its products in Sweden for shipment to the United States, all of such purchases and sales have been made and carried out by correspondence at its Stockholm office and ‘none of them through its New York office’.”
The further statement by respondent in that letter that petitioner “became a resident foreign corporation” must be either an inadvertent acceptance of petitioner’s own representations or a misconstruction of the applicable law as treated in the present opinion, by which this Board can not consider itself bound. See footnote 5.

The attempt, in the majority opinion, to identify the maintenance of an office with the carrying on of trade in this country disregards a distinction clearly made by the statute. Congress sets up two categories in the act and we are not to confuse the two. Concededly here the petitioner was not engaged in trade in America, but that is no reason to assert that it did not have an office. The disjunctive use of. the two phrases “engaged in trade or business” and “having an office or place of business” in the United States occurs not only in the statute but in the reports of both houses of Congress on the revenue bill, House Rept. 2475, 74th Cong., p. 9, et seq.; Sen. Rept. 2156, 74th Cong., p. 21, et seq., and clearly indicates, by all canons of construction, see Crooks v. Harrelson, 282 U. S. 55, that two different situations were contemplated by Congress. Section 148 which deals with the withholding of tax of nonresident alien corporations, also uses the same phrases here in question and uses them disjunctively. We see no ground for supposing that such careful repetition of alternative conditions was meaningless.

When legislation is unambiguous, resort to legislative intent in the proceedings of Congress is unnecessary. However, if we do look to the Congressional reports, loc. cit. supra, we find that the provision was introduced in the 1936 Revenue Act for administrative convenience and was thought by the House Ways and Means Committee to be “productive of substantial amounts of additional revenue, since it replaces a theoretical system impractical of administration in a great number of cases.” Foreign corporations not engaged in trade in the United States or not having an “office or place of business” were taxed at 15 percent of gross income and collection, as the report of each House mentions, and this tax was to be withheld at the source under section 143. Foreign corporations engaged in trade or having an office or place of business in the United States, on the other hand, were to be taxed at a higher rate, 22 percent, but on net, not gross, income. There was some difference between the Houses on the rate, but none on the principle applicable, which obviously differentiated between resident and nonresident foreign corporations on the simple and sound administrative ground of collectibility and ease in administration of the tax, the lower rate being applied when withholding at the source was necessary, and the higher rate when the presence of the corporation in the country through trade carried on here or by the maintenance of a business headquarters with a responsible agent would enable the Treasury to collect directly from the corporation or its agent. Likewise, the difference in rate between the two classes was sought to be equalized by allowing the resident foreign corporation the benefit of deductions, the maintenance of proper books at an “office or place of business” within the country making the determination of income received from American sources and of deductions in respect of such income (and by express provision so limited) feasible.

When the statutory phrase now in question is read in the light of the statutory purpose which we have set out, two significant things appear: First, that the whole provision as to foreign corporations was one of administrative convenience in collecting the tax laid, and, consequently, was not the conference of an exemption or other special benefit on the foreign corporation claiming residence which must be construed strictly in a tax act; and, second, that the test of residence is the practical one of the collector finding a properly authorized agent of the corporation at a fixed office or place where adequate records of the corporation’s American income may be found, and where control over that income is retained, and where an agent may always be found by the Government in the event of differences in taxes paid and claimed. These are all practical tests; and too meticulous consideration of the physical aspects of the “office”, on the one hand, or speculation on the metaphysical concept of the maintenance of an office for some future conduct of business in the United States, on the other hand, are alike wide of the mark in reaching a sound conclusion as to whether the particular foreign corporation is taxable as a resident or not.

My opinion that the taxpayer here was a resident foreign corporation having the requisite American “office” does not require the disapproval of Commissioner’s Regulations 94 and 101, art. 231-1, where the term is said to imply “a place for the regular transaction of business and does not include a place where casual or incidental transactions might be, or are, effected.” I can not believe, however, that its meaning should be restricted by the same criteria as those applied to the doing of business within the country. Doing business and maintaining an office are two different things, and whatever deference should be paid to administrative construction, it can not be allowed to alter the clear meaning of the statute. I think that the business purpose for which the New York office, in the instant case, was used, the collection of petitioner’s revenue from American corporations, was a “regular” business within the meaning of the regulations and not “incidental” or “casual”; and, as such, complies with them as well as with the statute.

Leech and Mellott agree with this dissent.

       SEC. 231. TAX ON FOREIGN CORPORATIONS.
      * * - * * * * *
      (b) Resident Cokpobations. — A foreign corporation engaged in trade or business within Ihe United States or having an office or place of business therein shall be taxable without regard to the provisions of subsection (a), but the normal tax imposed by section 13 shall
      be at the rate of 22 per centum instead of at the rates provided in such section.

       Sec. 231. TAX ON FOREIGN CORPORATIONS.
      (a) Noneesidhnt Cospoeations. — There shall be levied, collected, and paid for each taxable year, in lieu of the tax imposed by sections 13 and 14, upon the amount received by every foreign corporation not engaged in trade or business within the United States and not having an office or place of business therein, from sources within the United States as interest (except interest on deposits with persons carrying on the banking business), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income, a tax of 15 per centum of such amount, except that in the case of dividends the rate shall be 10 per centum, and except that in the case of corporations organized under the laws of a contiguous country such rate of 10 per centum with respect to dividends shall be reduced to such rate (not less than 5 per centum) as may be provided by treaty with such country.

        ****** #

       E. g., Webster’s New International Dictionary: “The place where a particular kind of business or service for others is transacted; a house, room, or apartment in which public officers and others transact business; the building, room, or department in which the clerical work of an establishment is done; a countinghouse; the room, etc., in which the business or work of some particular department of a large concern or institution is carried on or from which it is directed; as, the register’s office; a lawyer’s office; the office of a school or hospital; freight office.”

       “The distinction between the meaning of ‘doing’ or ‘transacting business’ under one statute and the term ‘for the transaction of business’ in the present one is in our judgment too shadowy and unsubstantial to serve as a secure foundation for the differentiation of the statutes and for the pursuit by the state of opposing policies under them.” Honey v. De Long Hook & Eye Co., 211 N. Y. 420; 105 N. E. 667.

       This is the construction placed upon this part of the statutory definition by respondent in his regulations which, for the reasons stated, we regard as entirely justified: “The term ‘office or place of business’ however implies a place for the regular transaction of business and does not include a place where casual or incidental transactions might be or are effected.” Regulations 94, art. 231 (1) (b).

       This accords with representations made to respondent, as set forth in his letter of May 21, 1038, introduced as an exhibit on behalf of petitioner, that :


author: KeRN :

text:
    Recherches Industrielles, S. A., R. I. S. A., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101863.
    Promulgated September 30, 1941.

      John Eugene Baker, Esq., for the petitioner.

      Charles Oliphant, Esq., for the respondent.
   OPINION.

KeRN :

In this case petitioner was not engaged in trade or business within the United States and no showing is made that it intended to engage in trade or business here. Therefore, under the reasoning of the majority opinion in Aktiebolaget Separator, 45 B. T. A. 243, it could have no “office or place of business” within the United States within the meaning of section 231 (b) of the Eevenue Act of 1936, and on the authority of that case we must decide in favor of respondent.

However, it might be well to point out that, even under the reasoning of the dissenting opinion filed in that case, we should reach the same result.

Here the “office” was not a fixed place in which the collector could find a properly authorized agent of petitioner; it was not a place where adequate records of the petitioner’s American income could be found; and it was not a place from which control over that income was retained.

In reality, this “office” performed no real function. O’Connor, representing petitioner’s appointed agent, the MacKae firm, visited the office only about six times during the year, and three of these visits had to do solely with New Jersey tax matters. Whether or not petitioner was taxable in New Jersey under New Jersey law obviously will not aid us in construing the Federal statute. Burnet v. Harmel, 287 U. S. 103. Petitioner had the exclusive use, apparently, of no room in the suite of the lawyer, McTague, and it may be doubted on the evidence whether it had the exclusive use of even a desk. McTague stated that he extended the use of his office for a like consideration to some fifty other corporations at the same time, and that they were all there, “but”, he carefully added, “of course, you couldn’t see them.” Apparently his office, like that of many other lawyers in Jersey City, was a sort of corporation clubroom where their agents might abide temporarily, but hardly simultaneously, in communion with the domiciliary State of New Jersey, in order to comply with the requirement of a local office under state law. Petitioner’s agent received no mail for petitioner at this “office,” save advertisements, had no listed telephone, collected no dividends, handled no New Jersey bank account for petitioner, kept no books of account, had no permanent employees, and, in so far as the evidence shows, did no acts of an ordinary business nature at its New Jersey “office.” Obviously, therefore, petitioner’s use of the “office” was both “incidental” and “casual” within the meaning of the Treasury regulations, and in no way did it fulfill the tests laid down in the dissenting opinion in ATctiebolaget Separator, supra.

Decision will be entered for the respondent.