author: Smith :

text:
    George F. Baker, Jr., Executor of the Estate of George F. Baker, Sr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 52097.
    Promulgated July 18, 1933.

      R. N. Anderson, Esq., for the petitioner.

      Harold Allen, Esq., and L. H. Rushhrooie, Esq., for the respondent.
   OPINION.

Smith :

The question presented by this proceeding is whether the decedent is liable to income tax in respect of the entire amount of $665,000 received by him in 1926 as dividends from the New Jersey General Security Co. The petitioner admits that the dividends are taxable to the extent of 61.098 percent of the amount thereof, but claims that the balance represented a return of capital and hence is not taxable.

In so far as material to our determination the statute and regulations are as follows:

Sec. 201. (a) The term “dividend” when used in this title (except in paragraph (9) of subdivision (a) of section 234 and paragraph (4) of subdivision (a) of section 245) 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.
(b) For the purposes of this Act every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings or profits. Any earnings or profits accumulated, or increase in value of property accrued, before March 1, 1913, may be distributed exempt from tax, after the earnings and profits accumulated after February 28, 1913, have been distributed, but any such tax-free distribution shall be applied against and reduce the basis of the stock provided in section 204. [Revenue Act of 1928.]
Akt. 1541. Dividends. — Dividends for the purpose of Title II comprise any distribution in the ordinary course of business, even though extraordinary in amount, made by a domestic or foreign corporation to its shareholders out of its earnings or profits accumulated since February 28, 1913. Although interest on State bonds and certain other obligations is not taxable when received by a corporation, upon amalgamation with the other funds of the corporation such income loses its identity and when distributed to shareholders in dividends is taxable to the same extent as other dividends.
Art. 1542. Source of distribu Hon. — JTor the purpose of income taxation every distribution made by a corporation is made out of earnings or profits to the extent thereof and from the most recently accumulated earnings or profits. [Regulations 69.]

In liis brief the petitioner states that the respondent found that the New Jersey General Security Co. had accumulated earnings and profits since March 1,1913, which it had not distributed as of December 31,1925, of $2,594,973.44 and had earned during the calendar year 1926 the amount of $555,790.98, which sums the petitioner admits were ample with which to make distributions to its stockholders during the year 1926 of $2,631,804 paid by it. The petitioner contends, however, that there should be excluded from the total of the undistributed earnings two items of $384,223.26 and $1,158,458.28, respectively.

The $384,223.26 item represents advances made by the New Jersey General Security Co. to the Jersey City Water Supply Co. which the petitioner on its books of account charged as expenses or losses of the years in which the payments were made. The advances made in the year 1923 were claimed as deductions from gross income in the Federal income tax return of the New Jersey General Security Co. for 1923, and allowed as a deduction in the audit by the respondent. The advances made for 1924 and 1925 were likewise claimed as deductions from gross income in the returns of the New Jersey General Security Co. for those years, but disallowed by the respondent. The advances made in 1926 were not claimed as a deduction by that company in its return for 1926. The amounts were advanced in accordance with the surety agreement of the New Jersey General Security Co. dated February 28, 1913, which provides, inter alia:

* * * It is not hereby understood that this said payment of $115,000 is in full settlement of any such claims for all time, but it is understood that the party of the second part [New Jersey General Security Oo.] may have further recourse upon the party of the first part, in such sums of money as they may later receive, in order to indemnify themselves more fully against the present liabilities and against future liabilities.

We are of the opinion that the respondent did not err in including in the earnings of the New Jersey General Security Co. accumulated since February 28,1913, the $384,223.26. In Glendinning, McLeish & Co., 24 B.T.A. 518, this Board held that advances made by a corporation under a contract which provided for repayment were not in the circumstances of that caso deductible as expenses.

The Board’s decision was affirmed by the Circuit Court of Appeals for the Second Circuit, 61 Fed. (2d) 950, the court stating:

Being advances made by the petitioner in accordance with its agreement to make them and the agreement oí the Belfast company to repay them, the amounts here involved were not within the statute permitting the deduction of ordinary and necessary business expenses since they could not be expenses of any kind provided the petitioner could and did enforce its right to reimbursement. * * * The agreement for reimbursement made them at least advances on the credit of the Belfast company and requires that they be so treated in computing the net income of the petitioner. As such they were not deductible. Cohen v. Commissioner, 39 Fed. (2d) 540; Island Petroleum Company v. Commissioner, 57 Fed. (2d) 992.

In the circumstances of this case, we are of opinion that the advances made by the New Jersey General Security Co. for the years above cited were not deductible items of the years in which paid and that they did not serve to reduce its income.

The petitioner’s contention with respect to the $1,158,458.28 item is that the $1,200,000 dividend paid by the Passaic Consolidated Water Co. to the New Jersey General Security Co. on November 18, 1924, was a distribution in liquidation of the Montclair Water Co. property then owned by the Passaic Consolidated Water Co.”, and that as such it could not constitute a part of the earnings of the New Jersey General Security Co. in so far as it represented a distribution of the capital of the Montclair Water Co. or of the earnings of that company accumulated prior to March 1, 1913. It is further contended that the only earnings of the Passaic Consolidated Water Co. accumulated since February 28, 1913, are those resulting from its own operations subsequent to October 31, 1923, to the dates the dividends were paid in 1924, which the petitioner submits were far less than the dividends paid. The petitioner then attempts to show, by the respondent’s computation set forth in our findings, that $1,158,-458.28 of the dividends paid by the Passaic Consolidated Water Co. in 1924 was not from earnings accumulated by it.

The petitioner makes this contention by virtue of article 1543 of Regulations 65, promulgated under the provisions of the Revenue Act of 1924, which, so far as material, provides:

* * * Whenever one corporation receives from another corporation distributions out of earnings or profits accumulated by such other corporation prior to March 1, 1913, or out of increase in value of its property accrued prior to March 1, 1913, and the “ receiving ” corporation, after having first distributed all of its earnings and profits accumulated since February 28, 1913, distributes to its stockholders the amount so received by it from such other corporation, the distribution by the “ receiving ” corporation to its stockholders is not a dividend within the meaning of the Act and is exempt from tax.

Substantially the same provision is found in article 1543 of Regulations 69, promulgated under the provisions of the Revenue Act of 1926. In Arthur Curtiss James, 13 B.T.A. 764, this Board held, in a situation parallel to the present case but involving the Revenue Act of 1918:

The distributions made by the subsidiary to the parent in 1918 from sources other than earnings accrued subsequent to February 28, 1913, are to be regarded for tax purposes as in the nature of a return to the parent of a part of the amount invested or of the March 1, 1913, value of it's investment and are not a part of the earnings or profits of the parent; at least until there is a gain to the parent by reason of a return to it of amounts in excess of the cost or March 1, 1913, value of the stock. * * *

We held in that case that the portion of the dividend paid over to the petitioner by the Phelps Dodge Corporation, which had been received by that corporation from the Moctezuma Copper Co. out of earnings accumulated by the latter prior to March 1, 1913, was tax-exempt in the hands of the petitioner. Our decision was affirmed by the Circuit Court of Appeals for the Second Circuit in Commissioner v. James, 49 Fed. (2d) 707. In the course of its opinion the court stated that a question was submitted by the Commissioner, but not argued, as to the treatment of sums paid by Moctezuma Copper Co. to the Phelps Dodge Corporation during 1918. The court said, however, that it did not decide the question of the legality of the Board’s ruling since the Commissioner made no contention that his regulation in this regard was incorrect and that the taxpayer was content with the result.

A fair question might be raised as to whether the dividends received by the New Jersey General Security Co. in 1924 from the Passaic Consolidated Water Co. did not, in their entirety, constitute earnings of the New Jersey General Security Co. accumulated subsequent to February 28, 1913, since the dividends were paid in ordinary course, and under the decision of the Supreme Court in Lynch v. Hornby, 237 U.S. 339, such dividends constituted taxable income of the recipient. In Caroline 8. McLean, 4 B.T.A. 487, we said:

A dividend is none the less income to the stockholder though a distribution of earnings accumulated by the corporation prior to March 1, 1913, and is taxable in the absence of express statutory exemption. * * *

In the circumstances of this proceeding we do not find ourselves under the necessity of passing upon the validity of the Commissioner’s regulation above referred to. For, in any event, we think that the Passaic Consolidated Water Co. had earnings accumulated subsequent to February 28, 1913, in excess of the amount of the dividends paid by that company to the New Jersey General Security Co. in 1924.

In the first place it should be noted that the earnings of the Pas-saic Consolidated Water Co. accumulated subsequent to February 28, 1913, as computed by the respondent, did not take into account a write-up in the assets of the Montclair Water Co. of $761,415.80 at the time of the organization of the Passaic Consolidated Water Co. in 1923. This write-up in the assets of the Montclair Water Co. at the time they were transferred to the Passaic Consolidated Water Co. was apparently overlooked by the respondent at the time he made his computation of the available earnings of the Passaic Consolidated Water Co. for the payment of dividends in 1924. It is evident, however, from perusal of the schedules attached to the consolidated returns of the New Jersey General Security Co. for the years 1923 and 1924, which were introduced in evidence, that this write-up actually took place and a witness for the petitioner admitted that the properties of the several water companies transferred to the Passaic Consolidated Water Co. on October 31, 1923, were appreciated on the books of that company to correspond with appraisals made at or about that time over the amounts shown to be their cost or value on the books of the constituent companies. When the Passaic Consolidated Water Co. sold the Montclair distribution system this write-up in value was received in cash and to the extent that the amount received was in excess of the basis before the write-up it constituted income; for the basis for the computation of gain or loss upon the sale was the same basis which would have applied to the Montclair Water Co. had it made the sale itself prior to the consolidation. Sec. 204 (a), Revenue Act of 1924. The undistributed earnings of the Passaic Consolidated Water Co. on January 1, 1924, were therefore $761,415.80 greater than the amount computed by the respondent.

It is furthermore to be noted from our findings that upon the organization of the Passaic Consolidated Water Co. the undistributed earnings of the five constituent companies accumulated subsequent to February 28, 1913, were $1,142,031.05. The jjetitioner’s contention is that these earnings were capitalized by the organization of the Passaic Consolidated Water Co. and were not a part of its earnings accumulated subsequent to February 28, 1913. The respondent contends, however, that they constituted a part of those earnings. He relies upon the decision of the Circuit Court of Appeals for the Second Circuit in Commissioner v. Sansome, 60 Fed. (2d) 931; cer-tiorari denied, 53 S.Ct. 291, in which the court held that where a corporate reorganization results in no “ gain or loss ” under section 202 (c) (2) of the 1921 Act, the company’s life as a continued venture does not stop under section 201, so that what were “ earnings or profits” of the original or subsidiary company remain, for purposes of distribution, “ earnings or profits ” of the successor or parent. In the course of its opinion, the court stated:

* * * Section 201 [Revenue Act of 1921] was passed, in some measure at least, to fix what should come into the computation of “ gain or loss ” ; it allowed all payments except those cut out by subdivision c. It appears to us extremely unlikely that what was not “ recognized ” as a sale or disposition for the purpose of fixing gain or loss, should be “ recognized ” as changing accumulated profits into capital in a section which so far overlapped the latter. That in substance declared that some corporate transactions should not break the continuity of the corporate life, a troublesome question that the courts had beclouded by recourse to such vague alternatives as “ form ” and “ substance,” anodynes for the pains of reasoning. The effort was at least to narrow the limits of judicial inspiration, and we cannot think that the same issue was left at large in the earlier section. Hence we hold that a corporate reorganization which results in no “ gain or loss ” under section 202 (c) (2) (42 Stat. 230) does not toll the company’s life as continued venture under section 201, and that what were “ earnings or profits ” of the original, or subsidiary, company remain, for purposes of distribution, “ earnings or profits ” of the successor, or parent, in liquidation * * *.

The Circuit Court of Appeals for the Ninth Circuit reached a like conclusion in United States v. Kauffmann, 62 Fed. (2d) 1045. The petitioner contends that the Sansome and Kauffmann decisions are not applicable to the situation presented here for the reason that those cases were decided under the provisions of the Kevenue Act of 1921, which the petitioner contends are substantially different from the provisions of the 1924 Act. From a careful study of the statutes we are of the opinion that the alleged differences are not substantial. Clearly the organization of the Passaic Consolidated Water Co. on October 31, 1923, did not give rise to any recognized gain or loss to any of the companies involved. Sec. 202 (c), Kevenue Act of 1921. Upon the legal principle laid down in those cases the undistributed earnings of the constituent companies became the undistributed earnings of the Passaic Consolidated Water Co. When, therefore, that company paid dividends those dividends were paid out of earnings or profits to the extent thereof and from the most recently accumulated earnings or profits as provided by section 201 (b) of the Kevenue Act of 1924. We find that the undistributed earnings of the Passaic Consolidated Water Co. accumulated subsequent to February 28, 1913, were greatly in excess of the amounts necessary to pay the dividends which were declared and paid by that company in 1924. Such being the case, all of the dividends paid by the New Jersey General Security Co. in 1926 were from earnings accumulated subsequent to February 28, 1913, and the $665,000 dividends received by the decedent in 1926 from the New Jersey General Security Co. are subject to surtax.

Reviewed by the Eoarcl.

Judgment will ~be entered under Bule 50.


source: Caselaw Access Project

author: Seawell:

license: Public Domain

text:
    Addie Malloy, Executrix, Estate of Angus P. Malloy, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43045.
    Promulgated July 19, 1933.

      R. G. Wright, Esq., for tbe petitioner.

      Nathan Gammon, Esq., for tlie respondent.
   OPINION.

Seawell:

The petitioner bases her claim to immunity to the further income tax proposed by the Commissioner upon two grounds, viz: (1) That tbe Malloy Apartment property was community property, one half belonging to her individually; and (2) that under the will of Augus P. Malloy his interest in said property immediately upon his death vested in the devisees, who were entitled, rather than the estate, to the profit arising from its sale. We will consider these propositions in their order.

1. Was the Malloy Apartment community property? Under the facts here present we must hold against petitioner on this proposition. Mr. and Mrs. Malloy went from Atlanta, Georgia, to Seattle, Washington, in July 1909. They had resided in Florida and Georgia since their marriage in 1899. At the time of their marriage, neither was possessed of any estate. Before they left Georgia, a considerable estate had been accumulated. The community property law did not obtain in Georgia or Florida, and of this fact we may take judicial notice, although we understand the fact to have been conceded at the hearing.

After arriving in Washington, Malloy invested in the land upon which the apartment was built and other lands also; but he never worked for or received a salary or bought or sold land for any other person. His only resources for his investments were his accumulations in Florida and Georgia before going to Washington. Mrs. Malloy was examined as a witness. She made no claim to any interest in the funds invested in the apartment lots or other property ; it does not appear in the nine years of her executorship of the testator’s estate that prior to 1926 she ever made claim that this apartment property was community property; title to the property was taken in Malloy’s name, who paid all the purchase money for it, and the property was standing in his name at the time of his death. Joining her husband in the execution of a purchase-money mortgage on the lots did not show them to be or convert them into community property. Dart v. McDonald, 114 Wash. 448; 195 Pac. 253. It then appears that the claim that the property was community property is reduced to the bare presumption that the law raises, without any fact in evidence of a corroborative character. Yesler v. Hockstettler, 4 Wash. 349; 30 Pac. 398. But does the presumption relied on by petitioner arise in a case like this, where it affirmatively appears in the muniments of title to the very property in controversy that the husband at the time title passed to him was not domiciled in and not a citizen of the State of Washington? It is assumed to to be the law everywhere that the husband can and should select the marital home. In the bond for title and the deed his residence is stated then to be in the State of Georgia. The petitioner, however, urges upon our consideration the decision of the court in Plath v. Mullins, 87 Wash. 403; 151 Pac. 811. Upon examination of the facts of the case, we do not consider it to be authority for the proposition that individual or separate property or funds when carried from a common law property state into a community property state become themselves community property, or if invested in such state the property so purchased becomes community property. In the case cited, land was purchased at North Yakima, Washington, by A. W. Burnett and conveyance taken in his name while he and his wife were residents of Montana. The controversy was mainly as to whose money paid for the land. Mrs. Burnett had made $4,400 in the restaurant business in Montana while he was away for 18 months in Alaska. The evidence was conflicting. When it was urged that Montana was not a community property state, the court said the laws of Montana were neither pleaded nor proved and the court would presume they were the same as those of Washington. Under this presumption the earnings of the husband and wife in Montana were held community earnings and the property purchased with such funds was itself community property. The requirement that the laws of other states must be pleaded and proved in state courts does not apply to Federal courts and as the jurisdiction of the Board of Tax Appeals is geographically coextensive with the Federal courts it is assumed that the Board, as well as the Federal courts, may and should take judicial notice of the laws of the various states. Mo., Kans. & Tex. Ry. v. Wulf, 226 U.S. 570.

In California it was held that property rights already acquired are not changed by a change of domicile. Kraemer v. Kraemer, 52 Cal. 302. In the State of Washington it is held that vested rights in property acquired in a foreign state or country by married persons there domiciled will not be divested by a change of domicile to a community property state, for the latter state will recognize and protect the rights of property of married persons acquired under the foreign laws. Witherill v. Fraunfelter, 46 Wash. 699; 91 Pac. 1086. In another case, Brookman v. Durkee, 46 Wash. 578; 90 Pac. 914, before the Supreme Court of Washington, the express question was involved. Eugene R. Durkee, domiciled with his wife Cynthia in the State of New York, used a portion of his own fortune to purchase real estate in Pierce County, Washington. Cynthia died and then her heirs claimed that the land was community property which they inherited from her. In deciding against their claim, the court said in part:

* * * personal property acquired by either husband or wife in a foreign jurisdiction, which is by law of the place where acquired the separate property of one or the other of the spouses, continues to be the separate property of that spouse when brought within this state; and, it being the separate property of that spouse owning and bringing it here, property in this state, whether real or personal, received in exchange for it, or purchased by it, if it be money, is also the separate property of such spouse.

To the same effect are Elliott v. Hawley, 34 Wash. 585; 76 Pac. 93; In re Brown's Estate, 124 Wash. 273; 214 Pac. 10; and Merrick v. Appenzeller, 115 Wash. 181; 196 Pac. 629.

Petitioner also calls to our attention cases in Washington holding that separate funds mingled and confused with community funds may work a forfeiture of their character as separate and the whole become community funds. This doctrine is not presented here as Malloy used only his own funds in the purchase he made, so far as the evidence discloses. The services of Mrs. Malloy in assisting in renting out the apartments would partake of no such character and even if she had been possessed of funds and had expended them in the erection of the apartment building, it would not have changed the character of the property as the separate property of the decedent. See Commissioner v. Burke, 62 Fed. (2d) 7, which overruled the decision of the Board in 22 B.T.A. 337.

It therefore appears to us in the first place that Mr. and Mrs. Malloy were not residents of the State of Washington at the time the lots in question were purchased by him; but if they were, the lots were purchased with the individual funds of Malloy, which gave her no community interest in them.

2. Are the profits from the sale of the Malloy Apartments taxable to the estate or the devisees? This property was part of the property of the decedent and came into the hands of the petitioner by virtue of her office of executrix under the will of the testator. The estate had not been closed at the time of the sale of the apartments, but if the estate had been closed and the apartments were then being held by the trustee it would not seem to change the tax situation with which we are here concerned. The Revenue Act of 1926 provides;

Sec. 219. (a) The tax imposed by Parts I and II oí this title shall apply to the income of estate or of any kind of property held in trust, including—
(1) Income accumulated iu trust for the benefit of unborn or unascertained persons or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust;
(b) Except a-s otherwise provided in subdivisions (g) and (h) [not here pertinent], the tax shall be computed upon the net income of the estate or trust, and shall be paid by the fiduciary. The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212, except that — [not here material].

Income to a fiduciary under this section of the law may be classified under three headings, viz:

(1) That which must be held and accumulated for future distribution, which includes that received by estates of deceased persons during the period of administration.
(2) That which must be distributed currently or periodically.
(3) That which the fiduciary is authorized by the instrument of his appointment, or in the case of a guardian of an infant, by order of the court, to either hold or distribute.

Under the further provisions of the statute, subsections (b) (1), (2) and (3), with reference to certain deductions allowed fiduciaries, the practical effect on taxation, broadly speaking, is: (1) That income which must be held and accumulated, including that received during the period of administration, is taxable to. the fiduciary; (2) that which must be distributed is taxable to the beneficiary; and (3) that which may be distributed in the discretion of the fiduciary, is taxable to the fiduciary if not distributed, and taxable to the beneficiary if distributed. Guitar Trust Estate, 25 B.T.A. 1213.

The fiduciary in the case at bar was expressly directed to keep the estate intact and not to distribute it until the youngest child was 21 years of age. She had authority, in her discretion, to sell any or all of it and under this authority she made the sale of the Malloy Apartments in question. But even if she had discretion to make distribution, the discretion was not exercised, and the distribution was not made.

It seems the facts as disclosed in the evidence fit the case exactly into the provisions of the statute. The income was not distributed or distributable to any beneficiary; but under the terms of the will was accumulated and held for future distribution. No child had any present right to the estate or the income therefrom, or any part of either as a distributee or devisee; and the rights of the widow were not as a distributee or devisee of the estate, but only as the fiduciary named in the will and appointed to the office by the court.

Petitioner, however, in the brief insists that upon the death of Angus P. Malloy his wife and children, as the devisees of his will, were immediately invested with title to the Malloy Apartment property and on sale thereof the profits were theirs. This result is claimed under section 4640 of Ballenger’s Annotated Code of Washington (Remington’s Comp. Stats. 1366), wherein heirs and devisees are declared invested immediately upon the death of the ancestor or testator with lands of the deceased. This statute obviously has reference to lands of an intestate ancestor or to lands directly devised. In the proviso, par tty quoted in the brief, the title and rights to possession, etc., by the heir or devisee are made expressly subject to the rights and powers of the executor or administrator. The construction of the statute contended for by petitioner would seem to deny to a testator in Washington the right or power to attach conditions or limitations to the disposition of his real estate by will. In the will of Angus P. Malloy, his estate, including the Malloy Apartments, was devised to Addie Malloy in trust for the purposes therein named, which included power to lease, sell, exchange for other property and manage and dispose of it in any way the testator could have done, subject alone to the limitations contained in the will. It would seem to be contrary to the law to ignore the trust created. Remington’s Compiled Statutes of Washington provides:

§ 1415. All courts and others concerned in the execution of last wills shall have due regard to the direction of the will, and the true intent and meaning of the testator, in all matters brought before them.

The same contention made by petitioner in this phase of the case before us was made by the devisees of J. M. Moore who died in 1901, in Washington State, leaving a will in which he devised to his daughter “ the one-half of the proceeds of the lots when sold ” of certain lands of the testator, and to his son in the same language the other half of said land, adding as to the son, “ his share of said proceeds to be invested to make a fund for him when he becomes of age.” The will was probated and the executor was appointed. The executor sold the land included in the devise to the daughter and the son, to a purchaser who brought an action in the courts of Washington to quiet his title, in which the daughter and son and the son’s guardian and the mother of both children were made parties defendant. The defendants claimed that, under section 4640 of Ballen-ger’s Annotated Code of Washington, title vested in said daughter and son immediately upon the testator’s death, and the executor had no right to sell, and the sale made by him to the plaintiff was without authority of law and void. The trial court held against this contention of defendants and upon appeal the Supreme Court of Washington (Martin v. Preston, 49 Wash. 288; 94 Pac. 1087) affirmed the judgment of the lower court, saying:

* * * The terms of the trust could not be carried out without the power to sell the land and to transfer the title thereto. The title, therefore, vested in the trustee for that purpose. It is established doctrine that “ trustees take exactly that quantity of interest which the purposes of the trust require.”
****** *
* * * The reai estate did not descend to appellant as contended, but the title rested in the trustee until the purpose of the trust could be effectuated by the actual exchange of the land for money.

The last sentence in Regulations 69, article 343, is cited in petitioner’s brief to sustain the contention here made. The excerpt cited is more or less meaningless when taken out of the context. A portion of that regulation, however, which is complete within itself and appropriate here, is as follows :

* * * Where, however, the executor sells property of the estate for more than its value at the death of the decedent, the excess is income, or may be capital gain, taxable to the estate.

After careful consideration of all the authorities cited in the brief and at the hearing, and of all contentions made, we conclude that the profit on the sale of the Malloy Apartments and lots 23 and 24, under the existing circumstances, is taxable against the estate, and the respondent is sustained also on this point.

Judgment will he entered for the respondent.


author: Matthews :

text:
    Coastwise Transportation Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 39916.
    Promulgated July 21, 1933.

      Hams H. Gilman, Esq., for the petitioner.

      W. B. Lansford, Esq., for the respondent.
   OPINION.

Matthews :

The Circuit Court, in reversing the former decision of this Board, stated:

* * * * * *
From the record in this case and the findings of fact by the Board, and in accordance with its recent practice since the decision in the Kirby Lumber Co. case, it is clear, we think, the Board should have sustained the ruling of the Commissioner.
It is urged by the taxpayer, however, that there was no release of free assets by the transactions involved in this case; that the petitioner lost a large sum of money in 1924, the inference being that its assets had thereby been depreciated; and it is further urged that the substitution of bonds of the face value of $375,000 for serial notes of the face value of $456,300 was in the nature of a reorganization of the taxpayer. But the stipulated facts and the findings of the Board do not sustain this. What the petitioner could have shown in this respect we do not know. Under the Board’s practice prior to the decision of the Supreme Court in the Kirby Lumber Co. case, it was not necessary to stipulate or determine such facts.
Upon the record before this court and the facts agreed upon, we think the case is controlled by the Kirby Lumber Co. case, and the decision of the Board of Tax Appeals must be reversed and the case remanded to the Board for a new hearing on the facts and such further proceedings as are not inconsistent with this opinion.

The question now before us is whether, upon the facts disclosed upon the new hearing, the rule of the Kirby Lumber Co. case applies.

The reorganization issue was not argued at our original hearing of the case, nor is it raised before us now. Since the facts do not suggest, even remotely, a reorganization of petitioner, it is not necessary to consider this question.

In addition to the other points urged before the Circuit Court, counsel for the petitioner contends (1) that the decision of the Supreme Court in United States v. Kirby Lumber Co. applied to a situation totally different from that existing in this case; (2) that the settlement of a balance due upon the purchase price of property for an amount less than the original agreed price, does not constitute income to the purchaser; (3) that petitioner did not purchase its own, bonds in 1924 and 1925, but merely paid part of the agreed purchase price for a fleet of vessels, in full settlement of the original price thereof; (4) that the entire transaction through December 31, 1924, resulted in a loss, and even if the transaction dealt with the purchase of securities, it is within the exception of the rule in the Kirby case and comes within the decision in Bowers v. Kerbaugh Empire Co., 271 U.S. 170.

On the first point, counsel for petitioner argues that the Kirby case and the article of the regulations which it approves, refer to cases where a corporation sells its bonds or notes as commodities, receiving money therefor, and then repurchases them for less than the price at which sold. He points out that the decisions of this Board rendered since the Kirby decision and following it, which were cited by the first circuit in its decision in this case, all relate to cases where the corporation had issued its bonds for money and retired them for less than the issuing price.

We agree with petitioner that the transactions merely amounted to a reduction in the purchase price of the fleet of vessels, that there was no release of free assets by the transactions involved, and that the operation in 1924 resulted in a loss.

Under the agreement of October 1924, the seller agreed to accept $450,000, payable in cash on or before November 15, 1924, in settlement of the outstanding notes amounting to $608,400. The money was paid, petitioner contributing $75,000 cash (which it had to borrow), and the syndicate (made up of petitioner’s stockholders) contributing the balance. The syndicate obtained all the purchase money notes outstanding and immediately canceled and turned over to petitioner the two notes due in 1925 and 1926. Shortly thereafter, upon the issuance of bonds in the amount of $375,000, the balance of the notes were canceled and delivered to petitioner. As we view the transactions, the payment of the $75,000 in November 1924, and the issuance of bonds in the amount of $375,000 in January 1925, which were dated and bore interest from November 15, 1924, were nothing more than steps in the settlement of the balance of the purchase price for $450,000. Petitioner’s financial condition was such that it could not have paid the cash in November 1924. By the method followed, however, petitioner was able to obtain the benefit of the reduction in purchase price. This benefit, while reducing petitioner’s liabilities, was not sufficient to wipe out the deficit. It did not, therefore, release any free assets.

The petitioner had a deficit at the close of 1923 of over $73,000. Its operating loss for 1924 was over $100,000. The deficit at the end of 1924, taking into consideration the reduction in the mortgage payable that year of $77,100, was $113,883.31. If it had not been for the cancellation of the two notes in the amount of $152,100 by payment of $75,000, thus reducing liabilities by $77,100, the deficit at the end of 1924 would have been $190,983.31. And applying the $81,300 by which the liabilities were further reduced on January 19, 1925, to the deficit of $113,883.31 as of December 31, 1924, there would still remain a deficit of $32,583.31. It is not likely that the operation of the corporation the first part of January was sufficiently profitable to have wiped out the 1924 deficit. Furthermore, the vessels had suffered depreciation to December 1924, on the basis of the original purchase price, in an amount in excess of the reduction in price. And even if depreciation at the same rate were computed on the reduced cost price, the difference would not be sufficient to wipe out the deficit.

In the Kirby Lumber Co. case, the taxpayer issued its own bonds for which it received their par value. Later, in the same year, it purchased in the open market some of the same bonds at less than par, the difference of price being held a taxable gain in the year of purchase. The court approved the regulations covering such a situation. In distinguishing the Kerbaugh case, Holmes, J., said:

* * * At tlie time oí payment the marks had fallen in value, which so far as it went was a gain for the defendant in error, and it was contended by the plaintiff in error that the gain was taxable income. But the transaction as a whole was a loss, and the contention was denied. Here there was no shrinkage of assets and the taxpayer made a clear gain. As a result of its dealings it made available $137,521.30 assets previously offset by the obligation of bonds now extinct. We see nothing to be gained by the discussion of judicial definitions. The defendant in error has realized within the year an accession to income, if we take words in their plain popular meaning, as they should be taken here. Burnet v. Sanford & Brooks Co., 282 U.S. 359, 364.

Here, the transaction as a whole — the purchase and operation of the ships — was a loss. There was a shrinkage in assets. The reduction in purchase price in the instant case did not make available to petitioner $158,400 of assets offset by the notes retired. It merely reduced the liabilities and thereby diminished the loss.

Since the decision by the Circuit Court in this case, a similar question has been passed on by the Second Circuit in Commissioner v. American Chicle Co., 65 Fed. (2d) 454. In that case the taxpayer had bought all of the assets of another company and assumed its debts; these included an issue of bonds which provided for an annual amortization by purchase in the market. In the years 1924 and 1925 the taxpayer, in accordance with its obligations, bought a number of these bonds for less than their face and so retired them. The Commissioner charged the corporation with income — the difference between the face of the bonds and the amounts at which they were bought. The taxpayer appealed and the Board sustained the petitioner. On appeal .by the Commissioner, the court held that the question depended on the scope of the decision of the Supreme Court in Kirby Lumber Co. After referring to the decision of the First Circuit in the instant case, and the regulations, the court said:

We can see no difference between bonds retired in tbe same year and later; nor between those issued in payment for property, and an existing mortgage assumed by the buyer when the property is transferred. But the distinction does seem to us critical between obligations whose consideration is money, and those issued or assumed for property which the obligor still holds. Every increase in the value of property might indeed be treated as a “ gain ”, though that would involve appraising taxpayers’ property each year; but such is not the notion underlying our system of taxation. The gain must be “ realized ”, either by sale of the property for money, or by its exchange for something else. Section 395, Title 26, U.S. Code. When a taxpayer gets money by issuing an obligation which he later discharges for less than its face, the transaction is completed, because money need not be sold or exchanged to be “realized.” So we read U.S. v. Kirby Lumber Co., supra, (284 U.S. 1). But if he buys property by an obligation in the form of a bond, note, or the like, and if it remains in kind after the debt is paid, there can be no “ gain.” The cost has indeed been definitely settled, but that is only one term of the equation; as long as the other remains at large there is no “ realized ” gain.

Here the notes were given in purchase of a fleet of ships, property. The unpaid notes were settled for $158,400 less than their face. Under the American Chicle decision, cost alone has been established. No income was realized.

By remanding this case for a new hearing, to determine from the facts whether there was a release of free assets by the transactions involved and whether the assets had been depreciated by the loss in 1924, we take the First Circuit’s view to be that, if there was no release of free assets and if the assets had depreciated, no income was realized from the transaction. Under either the view of the First Circuit or that- of the Second Circuit in the American Chicle case, petitioner realized no gain in the transactions either in 1924 or 1925.

Reviewed by the Board.

Judgment will be entered for the fetitioner.

Arundell and Black concur in the result.


author: Morris :

text:
    William R. Kenan, Jr., and Lawrence C. Haines, Trustees, u/w Mary Lily (Flagler) Bingham, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 61166, 66540.
    Promulgated July 25, 1933.

      A. Roberts MacMannis, O.P.A., for the petitioners.

      'William E. Davis, Esq., and Paul E. Waring, Esq., for the respondent.
   OPINION.

Morris :

Since the allegations of error numbered 2 to 5, inclusive, hereinbefore set forth, have been settled by the stipulation entered into between the parties, to which effect shall be given in the determination hereunder, our sole question pertains to the deductibility of the annual payments or distributions to Louise Wise (Lewis) Francis, under item seventh of the Bingham will, in the determination of the net taxable income of the petitioners.

While the taxable years 1927 to 1930, both inclusive, are in dispute, and while the 1926 as well as the 1928 Revenue Act are both to be considered, the similarity of the controlling provisions obviates specific reference to both and, therefore, we set forth only the governing provisions of the latter act which have been relied upon by the parties.

Section 22 (b) (3) of the 1928 Act:

(b) Exclusions from gross income. — The following items shall not be included in gross income and shall be exempt from taxation under this title:
*******
(3) Gifts, bequests, and devises. — The value of property acquired by gift, bequest, devise, or inheritance (but the income from such property shall be included in gross income).

Section 23 (b) of the 1928 Act:

In computing net income there shall be allowed as deductions:
❖ * * * * * *
(b) Interest. — All interest paid or accrued within the taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer) the interest upon which is wholly exempt from taxation under this title.

Section 161 (a) (2) of the 1928 Act:

(a) Application of tax. — The taxes imposed by this title upon individuals shall apply to the income of estates or of any kind of property held in trust, including—
* * * * * * *
(2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct.

Section 162 (b) of the 1928 Act:

The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that—
*******
(b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year.

The position of the respondent is that the amounts in question constitute “ bequests ” within the meaning of section 22 of the Revenue Act of 1928, “ exempt from taxation ”, not taxable income, and consequently may not be deducted by the trustees in computing the net taxable income of the trust, relying upon Burnet v. Whitehouse, 283 U.S. 148. The petitioners contend in effect, that the terms of item seventh, considering all of the other provisions of the will in connection therewith in arriving at the intention of the testator, established a trust fund of $5,000,000 for the benefit of Louise Clisby Wise, payable at or after attaining the age of forty, and that the $200,000 legacy provided by the same item of the will, payable annually to her, represented either income of a testamentary trust, distributable under section 162 of the act aforesaid, or “ interest ” payments under section 23 of said act, and therefore is deductible in the determination of the net taxable income of the estate in either event.

It should be stated, before proceeding to the merits of the question, that where the language of a will is perfectly clear and unmistakable in its terms, judicial construction may not be resorted to. Our attention has been directed to no single instance of ambiguity, nor do we find any ourselves; consequently, it is our plain duty to give to the words used by the testator their natural and usual meaning, at the same time realizing and fully appreciating the importance of considering the will in its entirety in order to arrive at the true intention of the testator. See Schouler on Wills, Executors, and Administrators, vol. 2.

Let us examine the will from “ all four corners ”, as the petitioner urges, and see just what effect, if any, the other provisions thereof may have upon item seventh. Items first and second deal with the payment of funeral expenses and expenses of administration and with the appointment of executors and trustees. Items third and fourth dispose of the testator’s realty and jewelry. Item fifth leaves all the residue of the testator’s property to trustees, in trust, with directions to satisfy certain specific bequests mentioned therein — item sixth providing that such legacies be paid “ as soon as in their judgment is compatible with the due administration of my estate and with the carrying out of my wishes with reference to the Florida East Coast Kailway Company and the Florida East Coast Hotel properties hereinafter mentioned.” Item seventh, which is the item in question here, the pertinent portion of which has been set forth in our findings of fact, directs the payment to the testator’s niece, Louise Clisby Wise, of the sum of $200,000, annually, until she shall have reached the age of forty, “ at which time or as soon thereafter as compatible with the interests of my estate, they shall pay to her the sum of five million ($5,000,000) dollars.” Item eighth directs the annual payment of a legacy to the University of North Carolina for certain specified purposes. After providing for the foregoing, the testator, in item ninth, directs that “ all the rest and residue of my estate including all lapsed bequests or devises, shall be held for the term of twenty-one years from the date of this will by my said trustees in trust for the maintenance and administration and development of the Florida East Coast Kailway and the Florida East Coast Hotel properties (which are hereinafter called ‘ principal properties ’) and the properties held by subsidiary companies. And to that end, my said trustees shall have power to sell any of my said residue estate, except the stocks and bonds of said ‘ principal properties ’, to invest the proceeds of such sales and the income and increments of all my said residue estate in such securities or other properties as they may think best; to use any of the said proceeds or said income or increments for the benefit of any of said principal or subsidiary properties.” Item tenth provides for the division of the properties just mentioned after such term. The remaining items of the will, numbered eleventh, twelfth, thirteenth and fourteenth, can have no possible effect upon the question at issue and need be given no further consideration.

Having thus reviewed and carefully studied all the provisions of the testator’s will, we are convinced that the solution of our problem lies exclusively in item seventh and that it is independent of all of the other provisions of the will and they independent of it, certainly so far as the $200,000 legacy is concerned.

As we view the situation the question here must be tested by the principles laid down in Irwin v. Gavit, 268 U.S. 161, and the result reached must depend upon whether the facts shown come within Burnet v. Whitehouse, supra, as the respondent contends, or within Heiner v. Beatty, 17 Fed. (2d) 743, affirmed by the Supreme Court in 276 U.S. 598, as the petitioner contends.

In Heiner v. Beatty, supra, the court, after referring to item fifth of the will under consideration, providing for an annual annuity to each of the stated beneficiaries, remarked that had the will “ stopped there ” the legacy would no doubt have been a “ bequest ” under the act and not taxable income. It then referred to the following item of the will, item sixth, which provided:

Sixth: I direct my executor and trustee either to set apart, hold in trust, invest and keep invested,, -in separate funds, one for each annuitant, sufficient sums to produce by the clear net interest and income thereof respectively, the several annuities provided in the Fifth Article of this will, * * * and to pay the said several annuities from the interest and income of the respective funds in semi-annual payments, or to purchase such annuities in Life Insurance companies * * *.

Similarly, if item seventh of the will here in question had not “ stopped ” where it did, but had contained provisions like or similar to those just quoted, the $200,000 annual payment would doubtless be classified as taxable income as distinguished from a bequest. Of course the petitioner would have us hold that the $5,000,000 fund was created and intended to yield the amount of annual distribution of $200,000, but about that the will is totally silent and we are unable alter a thorough study of its terms to reach such a conclusion. The two bequests, while contained in the same clause, in fact, in the same sentence, are entirely independent of each other, one to be paid annually for a specified period and the other to be paid in a lump sum at or after such period. The court there held that the income in question was “ produced from a capital sum created specifically to produce it ” and was taxable income within the meaning of the act. For the reason stated we are of the opinion that the instant case is clearly distinguishable upon its facts from that, and that it can not be followed.

In Burnet v. Whitehouse, supra, the case relied upon by the respondent, we find a totally different situation. There, it appears, no fund was set aside or created to produce the amount of income in question and, as the court said, the legacy “ was not one to be paid from income but of a sum certain, payable at all events during each year so long as she should live.” As we read item seventh of the will in question, the $200,000 legacy was “ payable at all events ” until the beneficiary arrived at the age of forty. In holding the result reached by Irwin v. Gavit, supra, inapplicable, the court, in Burnet v. Whitehouse, supra, said: “The bequest to Gavit was to be paid out of income from a definite fund. If that yielded nothing, he got nothing. This court concluded that the gift was of money to be derived from income and to be paid and received as income by the donee. Here the gift did not depend upon income but was a charge upon the whole estate during the life of -the legatee to be satisfied like any ordinary bequest.” Such is the situation here. The bequest to Louise Clisby Wise was unconditional and was a charge upon the “ whole estate.” And whether it became necessary to discharge the bequest by the payment thereof out of income of the estate, if such should have become necessary, does not change its legal status as a “ bequest.” The controlling principle is dictated by the will itself and it directed payment without reference to the existence or absence of income; therefore, as was said in Burnet v. Whitehouse, supra, “ It would be an anomaly to tax the receipt for one year and exempt them for another simply because executors paid the first from income received and the second out of the corpus.”

Nor, for the reasons stated, are we impressed with the argument of counsel that simply because $200,000 happens to amount to 4 percent upon $5,000,000 the annual distributions were in the nature of interest payments and therefore deductible. We find no justification for any such speculative conclusions.

We are of the opinion, therefore, that the distributions in question, being a bequest, do not constitute “ income ” to the beneficiary within the meaning of sections 161 (a) (2) and 162 (b), nor “interest” under section 23 (b) of the Revenue Act of 1928, and that these payments are not deductible by the trust. Boston Safe Deposit & Trust Co. v. Commissioner, 66 Fed. (2d) 179.

Judgment will be entered under Rule 50.


author: Goodrich :

text:
    Clifford F. Martin, Petitioner, v. Commissioner of Internal Revenue, Respondent. Charles W. Power, Petitioner, v. Commissioner of Internal Revenue, Respondent. Z. Marshall Crane, Petitioner, v. Commissioner of Internal Revenue, Respondent. Stanley P. Benton, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 53837-53840.
    Promulgated July 26, 1933.

      G. A. O'

       Donohue, Esq., for the petitioners.

      John El. Pigg, Esq., for the respondent.

       Also $2,181.26 for 1927 not in controversy.

   OPINION.

Goodrich :

In these proceedings, which were consolidated for hearing, the following deficiencies in income tax for 1928 are in controversy:

Doclcet No. Amount
53837_$1, 058. 25
53838_ 5, 354. 54
53839_ 7, 097. 57
53840_1_ 3,300.05

There is but one issue, namely, whether each of petitioners may deduct from his income his pro rata share of a loss sustained by a syndicate of which he was a member, upon the sale of stock of the Standard Publishing Co. The determination of that issue depends upon whether the loss was “ incurred in any transaction entered into for profit, though not connected with the trade or business ” and therefore allowable as a deduction under the provisions of section 23 (e), Revenue Act of 1928. The facts were submitted upon stipulation of counsel, supplemented by the testimony of one witness, petitioner Martin. As there is no dispute as to what occurred, and the events are clearly disclosed by the record, we recite herein only those facts essential to an understanding of the issue.

Except Crane, who is a resident of nearby Dalton, petitioners are residents of Pittsfield, Massachusetts. At the times here material all were directors of the Pittsfield National Bank, and of its subsidiary, the Securities Corporation, and also served as officers of one concern or the other. In 1926 the corporation sold a considerable quantity of the stock of the Standard Publishing Co. at prices ranging from $16 to $20 a share, to persons in and about Pittsfield, many of whom were customers of the bank. Within a short time thereafter the stock declined sharply, being sold before the close of the year at $3.50 a share, and it appeared that the purchasers had incurred, or would incur substantial losses from their investments therein. The corporation, the bank, and the officers thereof as individuals were openly censured for having sold the stock to the public. Petitioners feared that this public criticism would react to the detriment of the institutions and themselves and, moreover, felt morally bound to protect the purchasers. Accordingly in July 1927, they formed a syndicate, making petitioner Crane, who was a market operator of considerable experience, the manager, for the purpose of trading on the market to obtain profits with which to repurchase the Standard stock from those who had bought it from the corporation. They informed the corporation, and it informed its customers, that they stood ready to take over the stock on December 15, 1927, at the prices the customers had paid therefor, and, further, to reimburse those customers who had already disposed of their Standard holdings for the losses sustained thereon. Under the syndicate agreement, any profits in excess of the amount necessary to cover the Standard stock purchases and reimbursements were to be divided pro rata among the syndicate members, each of whom contributed to the syndicate funds in agreed proportions, and assumed agreed liabilities against losses which might result from its operations. However, under their notice to the corporation, petitioners agreed to indemnify the Standard stock purchases regardless of the results of the syndicate operations; if trading profits were realized they were to be applied to that end; but if profits were not obtained, or were insufficient, petitioners were to contribute from their personal funds.

An investigation of the affairs of the Standard Co. revealed a possibility that it might eventually be saved through reorganization, which was effected shortly thereafter. While petitioners did not expect to effect the reimbursement of the Pittsfield purchasers through market recovery of Standard stock, they believed that the amount required to that end would be less than it proved to be and, regarding as one plan and purpose the two operations of the syndicate, that is, its trading operations on the market and the indemnifying of the Standard purchasers, they sought and anticipated a profit from the syndicate transaction.

The syndicate was successful in its trading, and realized therefrom a profit of $116,492.54. About December 15, 1927, when the market value of the Standard stock was $4.12 a share, it bought the Standard stock from the corporation’s customers or made good the losses of those who had already sold their holdings. It expended $96,450.26 of its profits in thus covering the corporation’s customers. Thereafter, in February 1928, it exchanged the Standard stock thus acquired, together with an undisclosed amount it had purchased on the market “ to round out a block,” for stock in the reorganized company, and, in May 1928, sold its holdings for $12,776.14. The difference between the cost of the Standard stock and the amount received therefor, or $83,818.42, is claimed by petitioners (in their pro rata shares) as a loss in reduction of the profits realized from the syndicate’s trading operations.

Respondent has allowed a loss of $8,631.89, being the difference between the market value of the stock ($4.12 a share) when purchased by the syndicate from the corporation’s customers, and the amount received by the syndicate upon its sale. But, although he has not moved for increased deficiencies, he now contends upon brief that no part of the loss is deductible for the reason that it was not incurred in a transaction entered into for profit. The operations of the syndicate he regards as falling in two categories; first, its trading operations on the market, and, second, its purchases and sales of Standard stock. The transactions in the latter class he maintains were not entered into for profit, since it was apparent from the beginning that no profit could be hoped for, and therefore petitioners were discharging a moral, not a legal obligation.

It is well settled that losses incurred solely in discharge of a moral obligation, even though that is necessary to the preservation of one’s business reputation, as has been argued, are not allowable as deductions from income under the specific provisions of the statute. B. Estes Vaughan, 15 B.T.A. 596, and 17 B.T.A. 620; Edward Hines, 18 B.T.A. 21; affd., 58 Fed. (2d) 29; Willard W. White, 21 B.T.A. 1087; affd., 61 Fed. (2d) 726; Phillips Lee Goldsborough, 18 B.T.A. 181; affd., 46 Fed. (2d) 432; William G. Park, Executor, 22 B.T.A. 1263; affd., 58 Fed. (2d) 965; certiorari denied, 287 U.S. 645. It follows that if respondent is correct in treating separately tbe two principal activities of tbe syndicate, tbe loss sustained from its transactions in Standard stock may not be deducted from tbe income of the members and his determinations must be sustained.

In our opinion his view is correct. A syndicate, or any other body, may consummate any number of transactions, all perhaps related to its business or purpose, but not all having the same status under the statutory provisions defining items deductible from income. Of this syndicate agreement some provisions mutually bound petitioners to contribute certain portions of such amounts as might be necessary to indemnify the customers of their institution for losses sustained; others set up an arrangement whereby petitioners might obtain funds for that purpose. Upon the record before us it is clear that there was no expectation nor hope of deriving a profit from the purchase and resale of Standard stock by the syndicate, and petitioners recognized that the funds necessary to indemnify the corporation’s customers would have to be produced- from their own then resources, unless the syndicate’s market operations should supply them. Had thejr made such contributions from their own resources, as they were mutually bound to do, whatever their success in trading, the amounts thereof would not have been deductible under the rules laid by the decided cases. We fail to see wherein the situation is changed because they were enterprising and fortunate enough to acquire additional income more than sufficient to permit them to carry out their purpose- — the discharge of their moral obligations.

Judgment will be entered for the respondent.


author: McMahon :

text:
    Edwin W. Eisendrath, Rose L. Eisendrath and Emanuel Lowenstein, the Duly Appointed and Qualified Executors under the Last Will and Testament of William N. Eisendrath, Deceased, Petitioners, et al.,
      v. Commissioner of Internal Revenue, Respondent
    Docket Nos. 36724-36729.
    Promulgated July 26, 1933.

      Harry Thom, Esq., and Freeman Day, Esq., for the petitioners.

      J. Arthur Adams, Esq., for the respondent.

       William B. Eisendrath; Edwin W. Eisendrath; Marion Eisendrath; Rose L. Eisen-drath and Edwin W. Eisendrath, Trustees for William N. Eisendrath, Jr., and William N. Eisendrath, Jr.; and Isaac M. Bernstein.

   OPINION.

McMahon :

We must first dispose of the motion of counsel for the petitioners to dismiss the petition in Docket No. 36724. It is the contention of the petitioners that since the taxpayer, William N. Eisendrath, was dead at the time the deficiency notice was mailed, the notice was sent to a nonexistent person and that the “ taxpayer ” erroneously named in the deficiency letter did not file the petition with the Board. Petitioners therefore contend that the Board does not have jurisdiction because section 274 (a) of the Revenue Act of 1926 was not complied with. There are set forth- in the margin the applicable provisions of the Revenue Act of 1926.

In so far as we are advised, the respondent, prior to the time he mailed the notice of deficiency, which is the basis for the petition in this proceeding, had received no notice as provided in section 281 of the Revenue Act of 1926. The only notice of which we have any proof, was filed with respondent after the mailing of the deficiency notice. Therefore under subdivision (d) of section 281 the deficiency notice which he mailed to the deceased taxpayer was sufficient for the purposes of section 274 (a).

We also consider that the executors of the deceased taxpayer were authorized under section 274 (a), supra, to file the petition with the Board, since they stand in the place of the deceased taxpayer.

In Butler v. Eaton, 141 U. S. 240, the Supreme Court ref erred to a decision of the Supreme Court of Massachusetts. The Supreme Court of Massachusetts had decided that for the purpose of res judicata the parties were the same in an action by Mary J. Eaton, against the Pacific National Bank and an action between the receiver of the bank and Mary J. Eaton. The Supreme Court stated in regard to this holding:

* * * We are inclined to think, however, that the court below was right-in determining that the two actions were substantially between the same parties, inasmuch as a receiver of a national bank, in all actions and suits growing out of the transactions of the bank, represents it us fully as an executor represents his testator. * * * [Italics supplied.]

In Gertrude H. Miles, Executrix, 12 B.T.A. 519, we stated in part:

* * * There is nothing in the record which indicates that respondent inoeeeded under section 280. We have not been favored by a brief from counsel for petitioner but are under the impression that he relies on Owensboro Ditcher & Grader Co. v. Lucas, 18 Fed. (2d) 798. Without passing on the merits of that decision, it is sufficient to point out that it is apparent that petitioner is not a .íansferee, such as was involved, in that case. She is the personal representative of the deceased, taxpayer and as such she stands in his shoes. She represents him in the settlement of his estate; in the collection of all that is clue it and in the payment of all his obligations. As such, it was her duty not only to return the income of the estate but also all the income of her testator which he had not returned. Section 225 of the Revenue Acts of 1918, 1919, 1921, 1924 and 1926. Cf. Bankers’ Trust Co. v. Bowers, 295 Fed. 89. She has the right to file in behalf of the estate waivers extending the period of limitation. Aldridge v. United States, 64 Ct. Cls. 424. She has the right to recover any overpayments of decedent’s taxes and she is under obligation to pay all Ms taxes which remain unpaid. In fact, she is what the term “ personal representative ” imports — the representative of her deceased husband in all matters that pertain to his liabilities and to his estate. She is his ia-dem persona. Matter of Martin, 144 N. Y. S. 174. Not only is she the representative of decedent, but she is also the representative of those who have claims against his estate, including the Government. 23 C.J. 1170. [Italics supplied.]

See also Charles M. Howell, Administrator, 21 B.T.A. 757.

Since the parties who filed the petition herein on behalf of tbe estate of William N. Eisendratb were the duly appointed executors of such estate, we conclude that we have jurisdiction of the proceeding brought by them. See Rule 6 of the present rules of practice before this Board which provides:

The iiroeeecling shall be brought by and in the name of the person against whom the deficiency [or liability, as the case may be], is asserted by the Commissioner, or a fiduciary legally entitled to institute a proceeding on behalf of such person. (Sec. 281, Revenue Act of 1926). * * *

The case of William A. Matern, 21 B.T.A. 384, cited by petitioners, is not in point. There neither of the parties who filed the petition with the Board was the legal representative of the decedent or his estate.

The motion of counsel for petitioners to dismiss the proceeding in Docket No. 36724 for lack of jurisdiction is hereby denied.

The petitioners having waived other issues raised in the pleadings, the only question left for decision is whether gain was derived by the stockholders of the Illinois Co. upon the reorganization of that company whereby they received, for every share of stock of the Illinois Co. which they owned, 50 shares of the stock of the Delaware Co. plus $1,400 in cash.

There are set forth in the margin applicable provisions of the Revenue Act of 1921, as amended by the Act of Congress of March 4, 1923.

The stockholders of the Illinois Co. received, in addition to the stock of the Delaware Co., no “ other property ” upon the reorganization than money. In the instant proceeding under section 202(c) of the Revenue Act of 1921 the gain is to be computed in accordance with subdivisions (a) and (b) of section 202 (that is, by taking into consideration the total amount realized in the disposition of the stock of the Illinois Co. including the readily realizable market value, if any, oí the stock of the Delaware Co.), but the gain to be recognized for tax purposes is not in any event to be greater than the amount of money received by the petitioners from the Delaware Co.

It has been stipulated that the basis for the determination of gain or loss upon the disposition of the stock of the Illinois Co. is the March 1, 1913, value thereof, which value was $1,410.03 per share. The respondent apparently determined that the stock of the Delaware Co. received by the stockholders of the Illinois Co. had a value at least equal to the March 1, 1913, value of the stock of the Illinois Co. since he has held that the full amount of the cash received by each stockholder constituted taxable gain. Petitioners contend that the stock of the Delaware Co. at the time it was received by them had no readily realizable market value and that since the amount of cash received did not exceed the March 1, 1913, value of the stock of the Illinois Co. no taxable gain was derived upon the reorganization.

At the outset it is interesting to examine the intent of the Congress in enacting the provisions of the Kevenue Act of 1921 relating to the recognition of gain or loss upon the exchange of property. In the report of the Ways and Means Committee on the Eevenue Bill of 1921 there is contained the following:

EXCHANGES OF PROPERTY .FOR OTHER PROPERTY
The bill (subdivision (d), p. 6) provides new and explicit rules for determining gain or loss where property is exchanged for other property. Under existing law “ when property is exchanged for other property, the property received in exchange shall for the purpose of determining gain or loss be treated as the equivalent of cash to the amount of its fair market value, if any * * Probably no part of the present income-tax law has been productive of so much uncertainty and litigation or has more seriously interfered with those business readjustments which are peculiarly necessary under existing conditions. Under existing law the presumption is in favor of taxation. The ‘proposed bill modifies that presumption by providing that on an exchange of property for property no gain or loss shall be recognized unless the property received in exchange has a definite and readily realisable market value; and specifies in addition certain classes of exchanges on which no gain or loss is recognized even if the property received in exchange has a readily realizable market value. [Italics supplied.]

The Finance Committee Report upon the same bill contains similar language.

We shall first determine what is meant by the term “ readily realizable market value.”

The word readily ” is defined in Webster’s New International Dictionary, 1929, as “ In a ready, or prompt manner; quickly, easily.”

Article 1564 of Regulations 62, relating to the Revenue Act of 1921, provides in part as follows:

* * * Property has a readily realizable market value if it can be readily converted into an amount of cash or its equivalent substantially equal to the fair value of the property. In other words, the property received in exchange must be readily marketable at substantially its fair value in order that a gain or loss be recognized. * * *

In Anton M. Meyer, 3 B.T.A. 1329, we quoted with approval the portion of the regulations above set forth and held that certain personal notes given by a member of a partnership did not have a readily realizable market value.

That provision of the regulations was also approved in Biscayne Trust Co., Executor, 18 B.T.A. 1015, and in Clarke v. Welch, 46 Fed. (2d) 563. In the latter case certain stock was held not to have a readily realizable market value. The court there stated in part:

* * * There is no question as to the intendment of the statute, or regulations pertaining thereto, which, I conceive, contemplates that property, real, personal, or mixed, shall not be subject to. income taxes unless on transfer the property received in exchange has a readily realisable market value; and it is invested with such value if it can be readily converted in an amount of cash or its equivalent substantially equal to its fair value (see article 156J¡., Reg. 62); and it is stated that whether property has a readily realizable market value depends upon the facts and circumstances in each particular case.
Tested by this rule, I am constrained to hold that there was no evidence that the oil stock could have been readily sold in the market at approximately its par value. No sales were made of the 250 shares allotted to husband and wife, respectively, and consequently there were no gains or profits. Indeed, at such time the enterprise was involved in uncertainty as to the outcome. It cannot in fairness be regarded as income, in my opinion, until a market value is established or unless it appears that a certain amount of gain is realisable therefrom. * * *
* * * The evidence before me, as I see it, outweighs the prima facie showing of the United States, and the conclusion is not, I think, unwarranted that it preponderatingly appears that the shares of stock received by Mrs. Clarke and her husband did not have a realizable market value, and that no tax is assessable thereon until there is a transfer, exchange, or sale upon a basis of fair market value. [Italics supplied.]

In Alexander D. Falck, 26 B.T.A. 1359, we stated in part:

* * * The term “ readily realizable market value ” has been used in the revenue acts where the recipient of property in an exchange is to be taxed on the gain resulting from the exchange. Before such a transaction is considered to give rise to taxable gain under the statute, the property received in the exchange must have a readily realizable market value, i. e., he practically the equivalent of cash,. * * * [Italics supplied.]

To the same effect are Smith v. Dean, 52 Fed. (2d) 291, and A. O'Day, 20 B.T.A. 455.

In the instant proceeding the evidence shows that at the time the stock of the Delaware Co. was issued to the stockholders of the Illinois Co., and theretofore, the independent leather companies, such as the Delaware Co., had been subjected to severe competition by the shoe manufacturers and by the packers, who had also gone into the manufacture of leather; that during the war the leather companies had overexpanded and as a consequence in 1923 there was an oversupply of leather-tanning facilities; that many of the larger leather companies had in 1923 and years just previous thereto suffered tremendous losses; that in September 1923, the stocks of leather companies were in disfavor; that there were no sales of stock of the Illinois Co. from March 1, 1913, until the date of reorganization; that none of such stock has ever been listed or dealt in on any stock exchange and has never been dealt in or offered for sale by any dealer in stock or securities or by any of the petitioners; that there have never been any offers to buy such stock outside of the members of the Eisendrath family; and that in the year 1923 the combined income tax return of the Illinois Co. and Delaware Co. showed a net loss.

Three well qualified witnesses testified as to the marketability of the stock in question.

Edwin W. Eisendrath, one of the petitioners herein, who is now president of the Delaware Co. and who has been in the leather business since 1913, testified that the stock of the Delaware Co. had no readily realizable market value in 1923.

David Stern, who is vice president of A. Gr. Becker & Co., a general investment banking house loaning money to corporations and selling stocks and bonds as underwriters, and which did business with quite a few leather companies, including the Illinois Co. and the Delaware Co., testified that in 1923 the securities of leather companies were in great disfavor and that the stock of the Delaware Co. in September 1923, was absolutely not marketable or salable as a whole.

Arthur W. Newton, vice president and loan officer of the First National Bank of Chicago, the largest national bank in Chicago and the second largest bank in size in Chicago, who has been connected with that bank for over forty-four years, testified that the stock of the Delaware Co. did not have a readily realizable market value in September 1923. Newton further stated that the stock of the Delaware Co. would not be acceptable as collateral for a bank loan. The First National Bank of Chicago had been doing business with the Illinois Co. since 1907 and made loans to both the Illinois Co. and the Delaware Co. Annual statements had been furnished by those companies to the bank. Newton, in connection with his duties as loan officer of the bank, has had occasion to accept collateral on loans and has had experience with the sale of stock of close corporations which he received as collateral on loans. Newton was, in 1928, trustee of the Northwestern Leather Co., referred to in our findings of fact. The object of that trust was to liquidate the company to the best advantage of the creditors. Difficulty was experienced in liquidating that company and the stockholders received little if anything in the liquidation.

The opinions of these witnesses are well corroborated by the other evidence adduced, and their testimony was not contradicted. The opinion testimony of these witnesses is entitled to consideration. In Clarke v. Welch, supra, the court stated:

That the opinion testimony of plaintiff and expert opinions of other witnesses is entitled to consideration is amply supported by the decisions of this state.

In Anton M. Meyer, supra, we stated in part:

The proof satisfies us that the notes had no readily realizable market value at the time of their receipt. Two bank officials, familiar with the business and commercial standing of the partnership of Ginocchio, Oosta & Co., and the individual credit ratings of its members, stated in no uncertain terms that there was no market for the notes. * * *

In Biscayne Trust Co., Executor, supra, we stated:

* * * The uncontradicted testimony of a real estate dealer, well qualified to testify as to real estate values in and around "Miami, establishes that lots in Tatum’s Ocean Bay Park liad no readily realizable market value. * *

See Montana Ry. Co. v. Warren, 137 U.S. 348, for general discussion as to the value of opinion testimony. The Supreme Court there stated in part:

* * * In respect to such value, the opinions of witnesses familiar with the territory and its surroundings are competent. * * * Here as elsewhere, we are driven to ask the opinions of those having superior knowledge in respect thereto. * * *

Considering the testimony of these witnesses together with the other facts adduced, it is our opinion, and we have found as a fact, that at the time the stockholders of the Illinois Co. received the stock in the Delaware Co. such stock had no readily realizable market value within the meaning of the statute.

The respondent contends that there were valuable assets in the Delaware Co. giving the stock of that company a readily realizable market value. He points to the large values at which the assets were carried on the books of the Delaware Co. He also points to the fact that at a meeting of the board of directors of the Delaware Co. held on September 15, 1923, it was stated that the board of directors of that company were of the opinion that the stock of the Illinois Co. had a value of at least $3,200,000, and that the Delaware Co. reported in its books and records the value of $3,200,000 as its investment in the stock of the Illinois Co. From this the respondent argues that the stock of the Delaware Co., after the reorganization, miist have been worth $2,500,000, since the Delaware Co. then owned precisely the same assets as were owned by the Illinois Co. except for the $700,000 paid the stockholders of the Illinois Co. at the time of the reorganization. Eespondent further points out that in its capital stock tax return,the Delaware Co. showed the fair average value of its stock during the period September 1923 to June 30,1924, as'$70.41 per share. However, these facts do not prove that the stock had a “ readily realizable market value.” In this respect the instant proceeding is similar to George S. Parker, 10 B. T. A. 854 (in which “ fair market value ” was involved instead of “ readily realizable market value ”), wherein we stated:

* * * We are satisfied that under the conditions that prevailed at the time the petitioner received his stock it could not have been marketed for more than a nominal amount and that because of such, unusual conditions its fair market value can not be said to be measurable by either its intrinsic value under normal conditions or by earnings of past years.

In Andrew B. C. Dohrmarm, 19 B.T.A. 507, we held that the' fact that assets back of stock had substantial intrinsic value did not necessarily prove that the stock had a fair market value.” The Board applied the rule that “ if, in fact, the evidence in each Case proves that the property in question has ‘ no fair market value ’ on the date involved, neither the taxing authorities nor the courts home authority to construct such a value by means of any set rule or formula.” (Italics-supplied.) In Gladys Bilicke, 20 B.T.A. 784 (petition for review dismissed on motion of Commissioner, 51 Fed. (2d) 1075), we stated:

We think our views expressed in that case [A. B. C. Dohrmann, supra] are pertinent to the question whether or not property has a readily realizable market value under the provisions of section 202(c) of the Act of 1921. [Italics supplied.] '

None of the cases cited by respondent are governing. None of them involves the determination of “readily realizable market value ” except Fesler v. Commissioner, 38 Fed. (2d) 155; certiorari denied, 281 U.S. 755, and the evidence there as to lack of readily realizable market value was not as strong and convincing as that in the instant proceeding. That case is clearly distinguishable from the instant proceeding.on the facts. There the contract for the exchange of securities provided that the taxpayer should not place any of the securities upon the market within six months for fear it would depress the market for the remainder of the issue. The court stated that this provision was rather persuasive of the fact that the securities had some market value on the date in question in that case. There the only evidence introduced by the taxpayer was the testimony of one, witness. Such witness interpreted the word “ readily ”.jbo mean “ immediately.” The court pointed out that such a definition was too restricted and that “ readily ” means “ easily or promptly.’’

Here the. petitioners, upon whom rested the burden of proof in the first instance, adduced evidence, which, in our opinion, overcame the presumption in favor of the correctness of the respondent’s determination that the stock in question had a readily realizable market value at the time in question. Thereupon the burden shifted to the respondent to go forward with the evidence.- This the respondent has failed to do. See. Milton Smith Jr., Executor, 28 B.T.A. 422.

Since we have held that the stock of the Delaware Co. had no readily realizable market value at the time in question and since the amount of cash, $1,400, which thie stockholders of the Illinois Co. received in exchange for each share of their stock in the Illinois Co. does not exceed the basis, $1,410.03, of each share of such Illinois Co. stock, no taxable gain was derived by such stockholders upon the transaction in question.

Reviewed by the' Board.

Decision will be entered under Rule SO.

Goodrich concurs in the result.

Yan Fossan, Seawell, and Adams dissent.

       Sec. 200. When used in this title —
      * * * * * * *
      (b)The term “ fiduciary ” means a guardian, trustee, executor, administrator, receiver, conservator, or any person acting in any fiduciary capacity for any person.
      Sec. 274. (a) If in the case of any taxpayer, the Commissioner determines that there is a deficiency in respect of the tax imposed by this title, the Commissioner is authorized to send notice of such deficiency to the taxpayer by registered mail. Within 60 days after such notice is mailed (not counting Sunday as the sixtieth day), the taxpayer may file a petition with the Board of Tax Appeals for a redetermination of the deficiency. * * *
      Sec. 281. (a) upon notice to the Commissioner that any person is acting in a fiduciary capacity such fiduciary shall assume the powers, rights, duties, and privileges of the taxpayer in respect of a tax imposed by this title or by prior income, excess-profits, or war profits tax Act (except as otherwise specifically provided and except that the tax shall be collected from the estate of the taxpayer), until notice is given that the fiduciary capacity has terminated.
      (b) upon notice to the Commissioner that any person is acting in a fiduciary capacity for a person subject to the liability specified in section 280, the fiduciary shall assume, on behalf of such person, the powers, rights, duties, and privileges of such person under such section (except that the liability shall be collected from the estate of such person), until notice is given that the fiduciary capacity has terminated.
      (c) Notice under subdivision (a) or (b) shall be given in accordance with regulations prescribed by the Commissioner with the appi-oval of the Secretary.
      (d) In the absence of any notice to the Commissioner under subdivision (a) or (b), notice under this title of a deficiency or other liability, if mailed to the taxpayer or other person subject to liability at his last known address, shall be sufficient for the purposes of this title even if such taxpayer or other person is deceased, or is under a legal disability, or, in the case of a corporation, has terminated its existence.

       Sec. 202. (a) That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, Shall be the cost of such property; except that—
      *******
      (b) The basis for ascertaining the gain derived or loss sustained from the sale or other disposition of property, real, personal, or mixed, acquired before March 1, 1913, shall be the sanre as that provided by subdivision (a) ; but—
      (1) If its fair market price or value as of March 1, 1913, is in excess of such basis, the gain to he includes, in the gross income shall he the excess of the amount reaUtsed therefor over such fair market value or price; [Italics supplied.]
      * * * * * * *
      (c) For the purposes of this title, on an exchange of property, real, personal or mixed, for any other such property, no gain or loss shall be recognized unless the property received in exchange has a readily realizable market value; but even if the property received in exchange has a readily realizable market value, no gain or loss shall be recognized—
      *******
      (2) When in the reorganization of one or more corporations a person receives in place of any stock or securities owned by him, stock or securities in a corporation a party to or resulting from such reorganization. The word “ reorganization,” as used in this paragraph, includes a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or of substantially all the properties of another corporation), recapitalization, or mere change in identity, form or place of organization of a corporation, (however effected) ; * * *
      (e) Where property is exchanged for other property which has no readily realizable market value, together with money or other property which has a readily realizable market value, then the money or the fair market value of the property having such readily realizable market value received in exchange shall be applied against and reduce the basis, provided in this section, of the property exchanged, and if in excess of such basis shall be taxable to the extent of the excess; but when property is exchanged for property specified in paragraphs (1), (2) and (3) of subdivision (c) as received in exchange, together with money or other property of a readily realizable market value other than that specified in such paragraphs, the amount of the gain resulting from such exchange shall be computed in accordance with subdivisions (a) and (b) of this section, but in no such case shall the taxable gain exceed the amount of the money and the fair market value of such other property received in exchange.


author: Marquette: Seawell, Black,

text:
    The Evening Star Newspaper Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 61870, 66855.
    Promulgated July 27, 1933.

      Edward H. Hart, Esq., for the petitioner.

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

Marquette:

The sole question for decision is whether the petitioner should be permitted to deduct from its gross income its contributions of the Washington Community Chest. Such a contribution when in the nature of a gift is deductible to a limited extent from tlie gross income of an individual.. Sec. 23 (n) (2), Eevenue Act of 1928. No such deduction is allowed to a corporation. But either may deduct such a contribution when it is shown that the contribution is in fact a business expense. American Rolling Mill Co. v. Commissioner, 41 Fed. (2d) 314; Killian Co., 20 B.T.A. 80. Since a contribution may be either a charitable gift or a business expense, a taxpayer in order to secure -a deduction as a business expense must show by sufficient evidence that the expenditure had in a direct sense a reasonable relation to its business. (Thomas Shoe Co., 1 B.T.A. 124) or, as said in Killian Co., supra, it must be “ reasonably motivated by or related to the proper conduct of the business.” See also American Rolling Mill Co. v. Commissioner, supra. Tested by these standards we think that the petitioner has shown that its contributions were ordinary and necessary expenses within the meaning of section 23 (a) of the Eevenue Act of 1928. Harris & Co. v. Lucas, 48 Fed. (2d) 187.

The petitioner depends on its advertising revenue for its profits and these in turn depend on the circulation of the Star. By a long and consistent policy of advocating those causes and policies, civic and political, which its management believed to be for the good of the residents of Washington, this paper now enjoys the largest circulation of any paper in that city. Its advocacy of the community chest was in direct line with this policy. It could not have done otherwise without to some extent forfeiting the good will of its readers. It advocated and insisted on giving by all, rich and poor, and giving until it hurt. While other papers also took part, the Star took the lead — a course to be expected of this family newspaper, devoted especially to local interests. This was not only a proper policy; it was good publicity. It was the same character of publicity by which the Star had previously advertised itself and which has secured for it the prestige it enjoys. These contributions were given publicity by the workers in the campaign and advertised by the Star on its front pages “ shamelessly ”, to use the word of its •business manager.

The contributions were reasonable in amount when compared with the net income of the petitioner. In our opinion they had a reasonable and direct relation to its business. They were the result of a policy long continued with the results shown in our findings. In view of the attitude of this paper to the people of the city, it could not well have declined to take the lead in the campaign for subscriptions and, having taken the lead, it could not have afforded to refuse to do what it-was urging others to do. Such was-the judgment of the petitioner’s directors who viewed the matter as a purely business proposition. After a mature consideration of all the facts presented we concur.

Counsel for the respondent points out that the petitioner’s witnesses were unable to show any specific gain in dollars arising from the contributions. This is an unreasonable demand. Alexander Sprunt & Son, Inc., 24 B.T.A. 599; Matson Navigation Co., 24 B.T.A. 14. It is sufficient that the directors had reasonable grounds to believe that their actions would be beneficial to the corporation. It was not necessary for them to expect additional gain. It was sufficient that they, with reasonable grounds, expected that it would prevent a loss. Kornhauser v. United States, 276 U.S. 145. Under either aspect we think the petitioner is entitled to the deductions claimed.

Reviewed by the Board.

Judgment will he entered under Rule SO.

Seawell,

dissenting: The Washington Community Chest is a charity, its purpose the alleviation of the poor. Contributions to it are prima facie charitable. Indeed, it is difficult to see how they could be otherwise. It is hard for me to perceive that donations to it could be made to advance, in any way as a business is carried on, the giver’s “ trade or business ”; or to accumulate wealth for the donor; that is, for any of those things which a trade or business, carried on, has for its object. Newspapers are quasi-public institutions, and accept as their natural duty the creation and maintenance of a healthy moral public sentiment, and the guardianship of the good name and fame of the community where they circulate. The Star, with its exceptional facilities, has for years lived well within this duty and prospered. Content that its conduct has been conformable to its creation, at the first it demanded no deduction in taxes because of its contributions for the relief of contemporary men through this agency of the Community Chest. Its former generous contributions recognized by it to have been mere charitable donations, tend strongly to estop us, and it, to claim them now as a business expense. There is nothing in the years here under review to change the quality of these donations from that of former years.

But such contributions can not be, it seems to. me, in any sense business expenses such as are contemplated under the statute. (Section 214 (a) of the Revenue Act of 1926.) Every good deed produces its reward, often in a material way; but good deeds performed with hope of material results are not necessarily a business expense even when money is used. There must be that quality and character of expense usually understood as the ordinary and necessary outgo in carrying on a business. The expenditure to a charity that men charitably minded may think well of the contributor and be possibly dra,wn to patronize tbe contributor is too remote to be considered as a business expense. It is certainly not of the ordinary and necessary kind.

American Rolling Mill Co. v. Commissioner, 41 Fed. (2d) 314, cited as authority for the conclusion of the majority opinion, occupies a twilight zone and is, in my judgment, as far as the law can be stretched. The mill company employed half the wage earners of the city where it was located. To promote the contentment of these wage earners, and prevent strikes among them, and secure their permanent employment for the petitioner and advance their efficiency the petitioner, the mill company, contributed to the erection of a Y.M.C.A. and a hospital where the sick and injured employees might receive rest, recreation, care and treatment. It is inconceivable that petitioner in this case expected any of its relatively few employees in Washington'to receive alms from the Community Chest, or that they would be restrained from moving away and leaving petitioner’s employ, or prevented from going on a strike or becoming discontented, by reason of the fact that the Chest was established here.

The case of Eitingon-Schild Co., 21 B.T.A. 1163, wherein a contribution made to the “Charity Chest of the Fur Industry of .the City of New York,” by the corporation, a world-wide dealer in furs, was denied as a business expense, notwithstanding in that case it was found as a fact that the contribution to the charity possessed a “definite advertising value” to the petitioner, is direct authority against the majority opinion in this case.

Congress intended to differentiate between a business expense and a charitable donation, but the prevailing opinion would seem to make them synonymous when desired.

AeuNdell and Matthews concur in the above dissent.

dissenting: I think the majority opinion is in conflict with our decision in Eitingon-Schild Co., 21 B.T.A. 1163. I believe that decision interpreted the law correctly and I see no reason why we should depart from the rule there laid down.

Black,

Morris concurs.