author: MtjRdock : McMahoN, Leech, TURNER: Mellott :

text:
    H. O. Wood, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent. C. O. M. Sprague, Petitioner, v. Commissioner of Internal Revenue, Respondent. J. F. B. Mitchell, Petitioner, v. Commissioner of Internal Revenue, Respondent. J. T. Terry, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent. Willis D. Wood, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 65832-65835, 69844.
    Promulgated December 31, 1935.

      Howard 0. Wood, Esq., for tlie petitioners.

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

MtjRdock :

The following table shows the deficiencies in income tax for the year 1929 as determined by the Commissioner, the names of the petitioners, and the docket numbers:

There are but two questions for decision and they are common to all of the proceedings. A third issue, raised only in the petition of Willis D. Wood, has been settled by agreement of the parties to abide by the decision of the court in Rogers v. Strong, 72 Fed. (2d) 455; certiorari denied, 293 U. S. 621.

The parties have attempted to state the issues as a part of a stipulation of facts, but the real issues in the case admit of more accurate and clearer statements than those made by the parties.

The first issue can be best understood by a brief statement of some of the facts. A partnership, of which the petitioners were members, owned a number of securities which it transferred to a new partnership at the then market value of the securities. The total cost of those securities to the old partnership exceeded the total market values at the time of the transfer by $132,941.24. The old partnership at the time of the transfer had accumulated earnings amounting to $467,982.15. The question for decision is whether, in computing the petitioners’ distributive shares of the net income of the partnership, a loss from the disposition of the securities should be deducted.

The case was originally submitted for decision upon a certain stipulation of facts. The Board considered that stipulation, but came to the conclusion that it was an unsatisfactory basis for a decision of the case. The Board, therefore, returned that stipulation to the parties and directed them to prepare a proper stipulation of facts or otherwise move in respect to the proceeding. The parties then submitted another stipulation of facts, which they say states “ all the facts necessary to present the triable issues herein involved.” The stipulation, in so far as it pertains to the first issue, is as follows:

1. Previous to the first day of January, 1929 and up to and including the 30th day of June, 1929, Willis D. Wood, Howard O. Wood, Jr., O. O. M. Sprague, J. IT. B. Mitchell and J. T. Terry, Jr., all of the petitioners herein, were members of a co-partnership known as Wood, Low & Company, with offices at 63 Wall Street, New York City. The business of Wood, Low & Company consisted chiefly of the purchase and sale of securities for the account of others, and for their own account, on the New York Stock Exchange, New York Curb, “ Over the Counter ” and of transactions with other dealers, institutions and investors.
2.On June 30, 1929, the then partnership of Wood, Low & Company, hereinafter referred to as the Old Firm, transferred all its assets as a going concern to a different partnership which continued the same business under the same firm name of Wood, Low & Company, hereinafter referred to as the New Firm, for the second six months of the year. The New Firm consisted of all the petitioners herein and Carroll Dunham, III.
The interests in profits and losses of the members of Wood, Low & Company, Old Firm, up to and including June SO, 1929 were as follows:
Members of Partnership:
W. D. Wood_ 36. 63%
J. F. B. Mitchell_ 22. 77
C. O. M. Sprague_ 14. 85
John T. Terry, Jr_ 10. 89
H. O. Wood, Jr_ 11. 88
Total of above items_ 97. 02%
Interest of employees in profits_ 2. 98
Total_,_ 100.00%
The interests in profits and losses of the members of Wood, Low & Company, New Firm, from July 1 to December 31, 1929, inclusive, were as follows:
Members of Partnership:
W. D. Wood_ 32. 8375%
J. F. B. Mitchell_ 20.35
C. O. M. Sprague_ 13.4125
John T. Terry, Jr_ 10.175
H. O. Wood, Jr_ 11.1
Carroll Dunham, III_ 4. 625
Total of above items_ 92. 5000%
Interest of employees in profits_ 7. 5
Total_ 100. 0000%
3. Annexed hereto and made a part hereof marked “ Taxpayers’ Exhibit No. 10” is a Summary Statement of the Old Firm balance as at June 30, 1929 and the New Firm balance as at July 1, 1929.
This Summary Statement shows assets of the Old Firm as at June 30, 1929 of a total of $25,309,888.50 and liabilities totalling $23,176,906.42; the difference of $2,132,982.15 includes partners’ capital account balances of $1,665,-000.00 and an accumulated balance in the profit and loss account of $467,982.15; against this balance there was charged $132,941.24, which represented the loss sustained on the disposition of the Old Firm’s securities and the balance of $335,040.91 was distributed to the personal accounts of the partners.
4. All of the Petitioners herein maintained personal checking accounts with and as customers of the Old Firm and the New Firm and it was these accounts which were credited with the distributable profits of the Old Firm of $335,-040.91 and charged with the contributions to capital of $215,000.00.
The following table sets forth the changes in partners’ personal balance which were made at that time:
In each of the above cases where a partner’s personal account is a debit account, such debit was fully secured by deposit as collateral of the personal securities of that partner.
The additional contributions of capital, amounting to $215,000.00, as shown above, were reflected in the individual capital accounts of the Old and the New Firms as follows:
5. The New Firm acquired the assets and assumed the liabilities of the Old Firm and the New Firm started business July 1,1929 with assets amounting to $25,086,005.83, liabilities of $23,206,005.83 and capital of $1,880,000.00 * * *
6. Annexed hereto and made a part hereof marked “ Taxpayers’ Exhibit No. 9” is a Schedule of the securities owned by the Old Firm showing a taxable cost to the Old Firm of $3,339,907.04. These securities were acquired by the New Firm effective July 1, 1929, on the basis of the market values as at the close of business June 30, 1929. The total of such securities at market value June 30, 1929 was $3,206,965.80.
Upon acquisition of these securities of the Old Firm by the New Firm at market values at the close of business June 30, 1929 there was a loss of $132,941.24, which amount was duly reflected in the profit and loss account of the Old Firm.
7. These securities set forth in “ Taxpayers’ Exhibit No. 9 ” from and after the beginning of business on July 1, 1929 were wholly the property of the New Firm; there was no distribution in kind to the partners of the Old Firm and the assets of the Old Firm, including securities, were acquired by the New Firm for specific money values as sot forth in the Summary Statement marked “ Taxpayers’ Exhibit No. 10 ”.
8. Tlie boot value of the assets of Wood, Low & Company, Old Firm, as shown in Paragraph 3 on June 30, 1929, prior to acquisition by the New Firm, were $25,309,888.57, and the liabilities were $23,176,906.42. The total assets of the Old Firm were divided as follows:
Assets other than Securities_$21,969, 981. 53
Securities Owned (at cost)- 3,339,907.04
Total_ 25, 309, 888. 57
All assets, other than securities, were valued and acquired by the New Firm at boot value, that is, $21,969,981.53. The securities owned were acquired by the New Firm at market value June 30, 1929, that is, $3,206,965.80, making a total of $25,176,947.33, which the New Firm owed to the Old Firm in acquiring the assets. At the same time, the New Firm assumed the liabilities of the Old Firm at book value, that is, $23,176,906.42. After deducting such assumed liabilities from the total payable on account of assets acquired, there remained due the Old Firm a balance of $2,000,040.91. This sum, as applied to the partners of the Old Firm, represented—
Capital Released_$1, 665, 000. 00
Undistributed Profit & Loss_ 335, 040. 91
Total_ 2, 000, 040.91
As described above, the profit and loss balance ($335,040.91) was duly distributed to the partners of the Old Firm, in accordance with their partnership interests, and represented the entire amount of profit which they received upon the closing of the Old Firm books. The capital amount of $1,-665,000.00 was released from the Old Firm and returnable to the partners of the Old Firm, in accordance with their capital contributions. This amount, plus additional cash amounts, was in turn contributed by the partners as capital to the New Firm. The sums so contributed are above set forth in Paragraph 4.
The apparent differences between total assets and liabilities of the New Firm (July 1, 1929) as shown in “Taxpayers’ Exhibit No. 10” and the values at which the assets and liabilities of Old Firm were acquired, are reconciled as follows:
Assets acquired from Old Firm and liabilities Assets Liabilities
assumed, as above_$25,176,947. 33 $23,176, 906.42
Adjustment for distribution of Old Firm Profit & Loss balance ($335,040.91) which Old Firm partners left with New Firm as Personal balances (See paragraph 4)_ —173,179.36 +161,861.55
$25, 003, 767. 97 $23, 338, 767. 97
Adjustment for contribution of new capital ($215,000.) which was charged to New Firm partners’ Personal accounts (See paragraph 4)___ +82,237. 86 132, 76|2.14
Total New Firm assets and Liabilities, July 1, 1929, as per Taxpayer’s Exhibit No. 10- $25, 086, 005.83 $23, 206,005.83
The books of the Old Firm and the New Firm show that the securities were acquired by the New Firm for the equivalent of cash; they were not transferred to the New Firm and credited to the accounts of the old partners as capital contributions to the New Firm, except to the extent that their value at market prices June 80, 1929 was included in the excess of total assets over total liabilities of the New Finn. The credits for additional contributions to capital of the New Firm did not include credits for any securities deposited by the partners, but represented cash from1 personal accounts.
10. The books of the New Firm and Old Firm1 do not record a physical passing of currency or cheques from the New Firm to the Old Firm; the books of the business which began on July 1, 1929 show the same net balance for firm securities as would have been shown if the New Firm had actually made payment by cash or cheque to the Old Firm for the securities on the basis of market values at June 30, 1929. The loss upon disposition of the securities by the Old Firm was the same as it would have been if cash or cheques had been paid by the New Firm for the securities which the New Firm acquired on the basis of market values as at June 30, 1929.
11. The capital account of each member of the Old Firm, as appeared on the books at the close of business on June 30, 1929, was cash capital, not securities. The capital of each member of the New Firm appearing on the books as of July 1, 1929 was the samei cash capital of each partner to which was added contributions in cash made by each member of the New Firm.
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13. There was disallowed by the Commissioner as partnership losses to the Old Firm on the transfer of the aforesaid securities to the New Firm the sum of $127,704.86.

Thus it appears that the Commissioner disallowed $127,704.86 of the total amount of $132,941.24 shown as a loss. The difference is not in controversy, since the respondent makes no claim for an increase in any deficiency and the petitioners limit their claim to a deduction of $127,704.86 ia computing the net income of the old partnership.

Supplement JF of the Revenue Act of 1928 deals with partnerships. It provides that “ individuals carrying on business in partnership shall be liable for income tax only in their individual capacity.” Sec. 181. The general rule is that “ there shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year.” Sec. 182. The net income of the partnership is computed, for present purposes, “ in the same manner and on the same basis as in the case of an individual.” Sec. 183. The act, like earlier acts, is not specific in regard to many of the details involved in the method of computing partnership income. The problem of supplementing the acts has always been an unusually difficult one, due, at least in part, to the fact that they treat a partnership as an entity for some purposes, but not for other purposes. See sections 182 and 184. Furthermore, the treatment of partnerships for Federal income tax purposes is not always entirely consistent with the status of partnerships for other purposes. Difficult questions must be considered “realistically, without being overwhelmed by concepts.” Edward B. Archbald, 27 B. T. A. 837; 70 Fed. (2d) 720; certiorari denied, 293 U. S. 594. A comprehensive view1 of the entire subject of partnership income and deductions must be taken, since all questions relating to the taxation of partnerships are all more or less interrelated. Yet the field is so large that it is easy to overlook a part of it.

The Commissioner has not called attention to- any long established practice relating to the point in issue. He quotes article 604 of Regulations 74 in full in his brief and says that it is similar to article 1603 of Regulations 69 and 65, and article 1570 of Regulations 62. However, he makes no reference to the regulations in his argument. Article 604 contains a provision that if a partnership distributes its assets in kind and not in cash, the partner realizes no gain or loss until he disposes of the property thus received in liquidation. That sentence describes a long established practice of the Bureau. Yet, the respondent not only does not invoke its application here, but has expressly stipulated that “ there was no distribution in kind to the partners of the Old Firm and the assets of the Old Firm, including securities, were acquired by the New Firm for specific money values ” and “ they were not transferred to the New Firm and credited to the accounts of the old partners as capital contributions to the New Firm.” Since it is conceded that there was no distribution in kind of the assets of the old partnership to the old partners, the petitioners’ contention is in no way contrary to article 604. There is no good reason to extend the application of the quoted rule relating to distributions in kind to cases such as the present, where there has been no distribution in kind. Cf. Helvering v. Walbridge, 70 Fed. (2d) 683.

If the old firm sold the securities at a price equal to their fair market value, then it actually sustained the loss and should deduct it in computing its net income distributable to the old partners. The parties have stipulated that “ upon acquisition of these securities of the Old Firm by the New Firm at market values at the close of business June 30,1929, there was a loss of $132,941.24 which amount was duly reflected on the profit and loss account of the Old Firm.” The accumulated earnings of the old firm were reduced by this amount. Thus reduced, they amounted to $335,040.91. The parties have stipulated that this latter profit and loss balance “ was duly distributed to the partners of the Old Firm, in accordance with their partnership interests, and represented the entire amount of profit which they received upon the closing of the Old Firm books.” They further stipulated that the capital of the old firm was released and, with the additional amounts derived from the net profits of the old firm, “ was in turn contributed by the partners as capital to the New Firm.” There is no mention in the stipulation of a bill of sale transferring the securities of the old firm to the new firm. However, the only fair conclusion to be drawn from the stipulation of the parties is that the securities were actually sold by the old firm to the new firm. The consideration for the transfer of the assets was the assumption by the new firm of the liabilities of the old firm and the credits given to the old partners on the books of the new firm. The parties have stipulated the total amount “ which the New Firm owed to the Old Firm in acquiring the assets.” Paragraph 10 of the stipulation shows the short cut which the parties to that transaction took instead of making payments back and forth in cash. The nature of the transaction would not have been different had they passed currency or checks instead of accomplishing their purpose by mere book entries. The respondent expects and is content to have the issue decided on the basis of a sale of the securities by the old firm to the new firm for cash. Even if it was not, strictly speaking, a sale, the question would remain whether it should not be treated, for income tax purposes, like a sale. The only alternative which would defeat the petitioners’ contention under the Commissioner’s Regulations would be to treat it as a liquidation in kind of the securities to the members of the old partnership. But that would be contrary not only to the facts but to the express stipulation of the parties. Therefore, it seems proper to treat the transaction as a sale of the securities by the old partnership.

The final net income of the partnership distributable to the partners was not $467,982.15, but was $335,040.91. The Commissioner erred in disallowing $127,704.86 as partnership losses to the old firm from the transfer of the securities to the new firm.

The respondent’s position, as disclosed in the few pages of his brief, devoted to the question, is somewhat difficult to understand. He states in effect that the difference between the old and new partnerships was so slight that it should be disregarded in deciding the case; the business continued without change in control and should be treated like a nontaxable reorganization of a corporation; the partners can not deduct a loss by selling to themselves; the petitioners’ theory is unreasonable and would lead to confusion and an absurd impractical result in many cases which Congress did not intend; and, finally, “ the changes here were clearly made to reduce income taxes.” The attempt to draw an analogy between this case and the reorganization of a corporation fails completely. There can be no reorganization of a partnership under section 112 (i), since that provision applies only to corporations. Special statutory provisions were necessary to prevent the recognition of gain or loss when one taxpayer transfers assets to another. Those special provisions do not apply in the present case. Expressio unius est exclusio alte-rius. If any inference is to be drawn from the reorganization and nonrecognition provisions of the statute, it is that the loss here should be recognized. The changes which took place may not be disregarded in deciding this case. Nor is there any reason t<3 believe that they were made to reduce income taxes. Although none of the old partners severed his connection with the business, nevertheless each one of them increased his capital contribution and changed the ratio in which he was to share in the profits and losses of the business. A new partner came in with a substantial investment of new funds. Furthermore, there was a real necessity for a revaluation of the assets of the business and, in fact, the new firm did not take the securities in question at their cost or book value to the old firm, but, instead, acquired them at their then fair market value. The partners of the old firm were entitled to the gains of that firm. They determined those gains and divided them in accordance with the percentages provided in their old partnership agreement. The new partner had no right to share in the gains of the old partnership, but, on the other hand, he was not required to accept, as assets of the new firm, the securities of the old firm at their book values to the old firm, since those book values were less than the market value of the securities. Consequently, the partners adopted the procedure outlined in the statement of facts. The new partnership acquired the securities at their market values and thereafter would compute its gain or loss upon that basis. Elmer R. Wallingford, 4 B. T. A. 634; Edward B. Archbald, supra. Cf. Carroll v. Commissioner, 70 Fed. (2d) 806, (which is in conflict with the Archbald decision in holding that an asset may have more than one basis for computing partnership income). Otherwise, the gains and losses of the old partnership would become confused and mingled with those of the new in such a way as to prevent the determination of each partner’s distributive share of the net income of the new partnership. The act requires the use of bookkeeping methods which will clearly reflect income. The new partnership was but complying with that requirement. Where, as in this case, new capital comes in, interests are changed, and old assets are taken by the new partnership at market values, which differ from the book value of those assets to the old partnership, failure to draw a sharp line between the income of the old partnership and the income of the new partnership would lead to confusion and improper taxes. There may be cases in which that line need not be drawn because of lack of evidence, because the old partnership is not dissolved, or because no assets have been transferred from the old to the new partnership in such a way as to create gain or loss and the new partner has contributed nothing but has acquired merely an interest in the old partnership. Cf. Alpin J. Cameron, 8 B. T. A. 120; Henry Wilson, 16 B. T. A. 1280; Henry W. Healy, 18 B. T. A. 27; Cameron v. Commissioner, 56 Fed. (2d) 1021, affirming 20 B. T. A. 305; Lester W. Fritz, 28 B. T. A. 408; affd., 76 Fed. (2d) 460. Since the old partnership here made a real disposition of its assets to the new partnership at a figure less than its basis for gain or loss, it must take that circumstance into account and compute its loss accordingly in order to clearly reflect its income and the income taxable to the partners.

The stipulation of facts on which the second issue is to be decided is as follows, except that the stipulation contains references to certain exhibits attached to it:

14. Certain of the securities purchased by the New Firm were later sold and re-purchased in the open market before the end of the year, 1029, the facts surrounding such sales and re-purchases being as follows:
15. On the 29th day of December, 1920, the New Firm of Wood, Dow & Company owned 1334 shares of Manhattan Modified Guaranty stocks, 1166% shares of which were acquired from the Old Firm at a cost of $39,666.67 and 167% shares of which were purchased by the New Firm for $2,535.01, making the total cost of the said 1334 shares to the New Firm $42,201.68.
16. On the 29th day of December, 1929, the New Firm, in order to liquidate a portion of its losses, sold on the floor of the New York Stock Exchange to J. H. Oliphant & Co., also members of the New York Stock Exchange, the aforesaid 1334 shares of Manhattan Modified Guaranty stock at 30% per share, for a total price of $40,633.64, thereby sustaining a loss of $1,568.04.
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17. Later, on the same day, December 29, 1929, the New Firm placed a “ buy ” order with and did purchase from J. H. Oliphant & Co. on the floor of the New York Stock Exchange, 1334 shares of Manhattan Modified Guaranty stock at 80% per share for a total cost of $40,853.75 and on the 30th day of December, 1929, Wood, Low & Company sent its cheque for this purchase to J. H. Oliphant & Co.
In accordance with, the practice between brokerage houses of delivering only the net difference in the day’s purchases and sales of any given stock, there was no actual delivery of the 1334 shares of Manhattan Modified stock to J. H. Oliphant & Co., or to Wood, Low & Co., as the incoming and outgoing shares of that stock balanced.
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Wood, Low & Co. received on December 30, 1929 the cheque of J. H. Oliphant & Co. for $40,687 in payment of the purchase by it, as set forth in paragraph 16. The $53.36 difference between each cheque and the actual net price represents the Federal and State transfer stamps, paid by the seller.
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18. On the 19th day of November, 1929, the New Firm, in order to liquidate a portion of its losses, sold and delivered to the Bankers Company of New York, 126 Third Avenue Railway Adj. 5s, 1960 for $29,610.00 and 161 I. R. T. 5s, 1966 for a net $94,990.00 or a total amount of $124,600.00, thereby sustaining a loss by reason of their purchase from the Old Firm, of $26,222.50.
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19. On the 20th day of November, 1929, the New Firm placed an order with and purchased from the Bankers Company of New York 126 Third Avenue Railway Adj. 5s 1960 for $29,767.50 and 1611. R. T. 5s, 1966 for a net $95,191.25 or a total amount of $124,958.75.
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The petitioners claim the right to deduct the “ losses ” under section 23 (e) (1) of the Revenue Act of 1928, which applies in the case of a partnership. See section 183. “ Losses sustained ” by an individual (or partnership) are allowed as deductions under section 23 (e) (1) “ if incurred in trade or business.” The petitioners contend that the partnership “ sustained losses ” in the amounts stipulated and that those losses were incurred in the business of the partnership. The petitioner in each instance parted with the title to the securities in question for a short period of time. But in each instance it reacquired the same property or acquired substantially similar property within a few hours. The sales and acquisitions were all part of a prearranged plan. The prices at which the purchases were made were substantially the same as the prices at which the sales were made. The petitioners state that the sales were made solely for the purpose of reducing taxes. The petitioners concede that a loss, to be deductible under section 23 (e) (1), must have been incurred in the regular course of the business of the partnership. They erroneously state that the respondent has admitted the losses in question were so incurred. One of the respondent’s arguments is that these sale transactions were not made in the regular course of the partnership business. Is a loss “ incurred in trade or business ” within the intended meaning of those words where, in accordance with a plan, the “ sale ” is made solely “ to liquidate a portion of its losses ” for tax purposes and is followed almost immediately by an offsetting purchase?

A corporation can not deduct a loss on a wash sale of stock or securities unless it is a dealer in those commodities and incurs the loss in “ a transaction made in the ordinary course of its business.” Sec. 118. “ The ordinary course of its business ” must mean a sale regularly made to a customer in order to dispose o.f stock in trade at the most advantageous terms. The words quoted must exclude a sale made to another dealer solely to register a loss for tax purposes, followed almost immediately by a purchase intended to replace the stock in trade with as little actual change as possible. Taxpayers, other than corporations, can not deduct a loss on a wash sale under any circumstances, unless they incur the loss in trade or business. Sec. 118. The parties erroneously state that the issue here is whether the losses in question “ constitute deductible allowances within the meaning of section 118.” That section has no direct application where, as here, a deduction is claimed under section 23 (e) (1). Nevertheless, the parties are right in assuming that Congress did not intend to allow any taxpayer a deduction for a loss from a wash sale, except where the sale was made and the loss was incurred in the regular course of the taxpayer’s business. Cf. Shoenberg v. Commissioner, 77 Fed. (2d) 446; certiorari denied, 296 U. S. 586; Dyer v. Commissioner, 74 Fed. (2d) 685; certiorari denied, 296 U. S. 586.

Such sales and replacements as the partnership made solely to “ liquidate ” losses for tax purposes and with an existing intention to immediately repurchase were not made in the regular course of any trade or business in which it was engaged. They were not made, nor did they serve, to dispose of any of its stock in trade, to create profits, or to reduce loss. If profits were to result, no sales would have been made. The transactions would never have been made in the absence of a taxing statute. Thus they were outside of the regular course of the business of the partnership, although made in the ordinary way in which regular business deals would have been made. Their artificiality and lack of substance clearly distinguish them from all natural measures which a taxpayer may legally and successfully adopt to minimize taxes. Since the “ losses ” were not incurred in trade or business, there is no statutory authority for the deductions claimed.

The partnership sold and immediately repurchased in accordance with a predetermined plan. It made no effort to conceal or disguise its intent or acts. The courts and the Board have denied deductions in many cases where some artifice was used to conceal the fact that the taxpayer did not intend to, and did not, permanently part with control over his property even though he went through the form of selling it. Shoenberg v. Commissioner, supra, affirming 30 B. T. A. 659; Rand Co., 29 B.T.A. 467; affd., 77 Fed. (2d) 450; Dyer v. Commissioner, supra; Esperson v. Commissioner, 49 Fed. (2d) 259; affirming, 13 B.T.A. 596; certiorari denied, 284 U. S. 658; Joseph Blumenthal, 30 B.T.A. 125; Luella Hoyt Slayton, 29 B.T.A. 931; affd., 76 Fed. (2) 497; certiorari denied, 296 U. S. 586; Mrs. J. B. Atkins, 28 B. T. A. 500; petition for review denied, 76 Fed. (2d) 387; James Brown, 10 B. T. A. 1036, 1053; J. R. Young, 6 B.T.A. 656; M. I. Stewart & Co., 2 B.T.A. 737; Harold B. Clark, 2 B.T.A. 555. Several of those cases involved sales made through an exchange in the usual way, but deductions were denied because the taxpayer never intended to definitely and completely part with ownership and control and in reality did not dispose of his property. Since the property was retained with the same chance of ultimate profit or loss as before, the transaction was not definitely closed and the deduction was not proper. The same reasoning applies here and the result is the same. The partnership in this case may not succeed by doing openly and directly the same thing which the other taxpayers unsuccessfully sought to disguise.

Reviewed by the Board.

Decision will be entered wnder Rule 50.

McMahoN,

concurring in part: Upon the last issue I concur only in the result reached by the majority and I thus concur for other reasons as follows :

In the last analysis the ultimate and primary question here presented is whether an actual loss was sustained. In Shoenberg v. Commissioner, 77 Fed. (2d) 446, affirming Sydney M. Shoenberg, 30 B. T. A. 659; certiorari denied, 296 U. S. 586, the court stated:

* * * Tax laws deal with realities. [Cases cited.] * * *
To secure a deduction, the statute requires that an actual loss be sustained. An actual loss is not sustained unless when the entire transaction is concluded the taxpayer is poorer to the extent of the loss claimed — in other words, he has that much less than before.
A loss as to particular property is usually realized by a sale thereof for less than it cost. However, where such sale is made as part of a plan whereby substantially identical property is to be reacquired and that plan is carried out, the reaMeation of loss is not genuine and substantial- — it is not real. This is true because the taxpayer has not actually changed his position and is- no poorer than before the sale. The particular sale may be real but the entire transaction prevents the loss from being actually suffered. Taxation is concerned with realities and no loss is deductible which is not real.
* * * He was no poorer when the plan was executed than he had been before the sales by him, except for the brokerage commissions. He suffered no real loss but solely a paper one which could be shown only by considering one part of an entire plan and transaction. The entire plan was devised for the purpose of showing such loss. Its results must be judged as an entirety.
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Herein the petitioners were no poorer after the alleged repurchases than they were before the alleged sales. They had the same interests in the assets of the corporations the securities of which are involved herein after such repurchases that they had prior to such sales. There is no proof to the contrary. They suffered no real or actual loss as a result of everything that occurred in this respect considered as a whole, as it should be.

Since the evidence establishes that the taxpayer did not by any dealings disclosed here intend to and did not, in reality, permanently part with the property interests involved, even though purported sales, in form only, were made, such dealings did not constitute sales resulting in deductible losses within the meaning of the revenue acts. Sydney M. Shoenberg, supra; Joseph Blumenthal, 30 B. T. A. 125; and United National Corporation, 33 B. T. A. 790. In each instance the alleged sale and repurchase occurred practically simultaneously. In on© instance both occurred on the same day. In each instance the alleged buyer was known to petitioners, the alleged sellers who were dealing on their account, as disclosed by the stipulation. The whole plan discloses an intention on the part of petitioners to retain the securities indefinitely, the alleged sales and repurchases being matters of form and not of substance. Here there was more than a mere expectancy or hope to reacquire the same securities at some indefinite future time. There is disclosed an executed plan to retain them. The intention to retain the same property interests was the dominant factor in the plan. The petitioners did, in fact, retain indefinitely the same identical property interests, represented by the securities, and hence, they did not absolutely or permanently dispose of any of them or intend to do so. Their conduct in these respects is controlling upon the question of their intention. In Chisholm v. Commissioner, 79 Fed. (2d) 14; certiorari denied, 296 U. S. 641, the court stated that “the purpose which counts is one which defeats or contradicts the apparent transaction, not the purpose to escape taxation which the apparent, but not the whole, transaction would realize.” In the instant proceedings the alleged immediate repurchase of the securities disclosed a purpose which defeated or contradicted the apparent transaction, i. e., the alleged sale. Such is the purpose which counts here and defeats the deduction of the losses claimed.

The reason given by the majority for the result reached by them on this issue, which is to the effect that the claimed losses involved here are not deductible since sales were not made in trade or business because they were made solely to liquidate losses for tax purposes and hence were not made in the ordinary course of business is erroneous, not in accord with the decisions of the courts and the Board, and contrary to common practice. The majority proceeds upon the theory that sales were made but outside of petitioner’s business. The taxpayers were engaged as partners in the business of buying and selling securities for customers and on their own account. Assuming, for the purposes of this discussion only, that sales were made, it follows that such sales were in the line of their business, since they involved securities dealt in by the petitioners. To increase the net profits of a business of buying and selling securities by means of a sale to reduce taxes is as much in the line of that business as a sale for profit or for avoidance of loss. These taxpayers, before us in these proceedings, did not in or by the making of the sales in question step out of their line of business or out of the ordinary course of their business. They remained therein all the while. The avoidance, reduction and postponement of taxes has been and is increasingly becoming a vital factor in many, if not most, business transactions. They have become matters of primary importance in the ordinary course of many a business. In fact the very structure of business organization and the very mode of doing business is, in many instances, influenced to a large extent by taxation; and comparatively few business transactions of importance are entered into without considering the effect of taxation, which is a dominant factor in the field of business generally. The motive or purpose behind such sales, whether to make a profit, avoid a probable or greater loss, or avoid, reduce or postpone taxes is not determinative so long as the means or devices employed are legal and are not prohibited by the revenue acts. A sale is such a means; in fact, deductible losses are often sustained through sales. “ The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, can not be doubted.” Gregory v. Helvering, 293 U. S. 465 (and cases cited therein). To the same effect are Commissioner v. Eldridge, 79 Fed. (2d) 629, affirming 30 B. T. A. 1322; and Chisholm v. Commissioner, supra. As heretofore pointed out, upon the authority of the latter case the purpose which counts is one which defeats or contradicts the apparent transactions, not the purpose to escape taxation which the apparent, but not the whole, transaction would realize.” “ It is immaterial that the motive prompting the sale or the plan of which the sale was a part was to secure a deduction.” Shoenberg v. Commissioner, supra.

We are not bound by the conclusions of the stipulation.

In any event, the petitioners have not met their burden of overcoming the presumption in favor of the correctness of the determination of the respondent in disallowing the losses in question.

Leech,

dissenting: (1) The majority opinion holds that the so-called old partnership sustained a deductible loss on the transfer of its assets to the so-called new partnership. I do not agree.

Either the old and new partnerships were, for present tax purposes, separate and distinct partnerships, or they were not.

In my judgment, the per curiam opinion of the Circuit Court of Appeals for the Second Circuit in the case of Edward B. Archbald, 27 B. T. A. 837; affd., 70 Fed. (2d) 720; certiorari denied, 293 U. S. 594, in which, as in the present case, partnership law of the State of New York was involved, is decisive that, for present purposes, the two partnerships before us were the same. If that be true, of course, the old partnership sustained no deductible loss on a transfer of its assets to itself.

On the other hand, if the old and new partnerships were separate and distinct, for present tax purposes, I think the record amply establishes the absence of any sale or conversion of the assets of the old partnership upon which any deductible loss was sustained.

The changes of capital interests of the old partners in the new firm are comparatively trifling. All the old partners remained in the new partnership. All the assets of the old partnership continued as assets of the new partnership. Its business was the same. Nowhere in the stipulation upon which the case was submitted is it possible to find any intimation that any new money was contributed to the new partnership, except the $50,000 contribution of Dunham, which made no substantial change in the picture presented. The assets of the old partnership were merely distributed to the old partners by a series of bookkeeping entries, and, by the same means, were then used as the contributions of the old partners to the new partnership. In my judgment, no deductible loss was sustained by the old partnership in that transaction. Lester W. Fritz, 28 B. T. A. 408; affd., 76 Fed. (2d) 460. Cf. Grace A. Cowan, Executrix, 30 B. T. A. 296.

(2) The majority opinion denies petitioners a loss on the sale of securities by the partnership of which they were members. The partnership was a “ dealer in securities.” Therefore, the “ wash sale ” provision in section 118 of the Revenue Act of 1928 is not applicable. The immediate reacquisition of securities, similar to those sold, is relevant here, only as evidence of the retention by the seller of an enforceable right to repurchase, thus contradicting the fact of a juristic sale. J. R. Young, 6 B. T. A. 656; Harold B. Clark, 2 B. T. A. 555, cited with approval as late as the Shoenberg case, 30 B T. A. 659.

The loss is deductible, if at all, under section 23 (e) (1) of that Act.

A so-called sale to support a loss under any circumstances necessarily imports the absolute passing of title, legal and equitable. That was so before section 118 (supra) and its earlier prototypes became law. Harold B. Clark, supra. Such statutory provision did not abolish that prerequisite in any case. But, the mere intention of the seller to reacquire even the property sold does not contradict the passing of absolute title in a sale. Harold B. Clark, supra. Such an intent did not have that effect before section 118 (supra), and the similar provisions in the earlier revenue acts, became law. Harold B. Clark, supra. It does not do so now. The intent, alone, to repurchase the same or similar property, except when coupled with the concurrent power to execute it, in the form of a contract or option, does not now affect the tax results against which section 118 is directed. Cf. Shoenberg v. Commissioner, 77 Fed. (2d) 446; certiorari denied, 296 U. S. 586; Dyer v. Commissioner, 74 Fed. (2d) 685; certiorari denied, 296 U. S. 586. However, section 118 is not applicable here. So, any denial of loss on the present sale must rest on the retention, by the seller, of an enforceable right to repurchase the property sold, from the buyer. See Harold B. Clark, supra.

The actual immediate reacquisition of substantially similar securities may be some evidence of the seller’s intention, when selling, to repurchase. But that fact, even if established, is certainly not enough, alone, upon which to predicate the conclusion that the seller retained an equitable title in the securities in the form of an enforceable right to repurchase from the buyer, which is necessary to contradict the admitted sale. Harold B. Clark, supra.

None of the cases cited in support of the majority view, I think, dispute that position. The Shoenberg and Dyer cases, supra, upon which the majority opinion is largely supported, involved section 118. In both cases, the seller completely controlled the buying-corporations and their actions as to the purchase and sale of securities. From this fact, together with actual reacquisition, the courts concluded that, within the time, before or after the sale, proscribed by section 118, the seller had “ entered into a contract or option to acquire substantially identical property.” That conclusion, under section 118, precluded any deductible loss.

In the present record, it is not even suggested, much less established, that the seller controlled the buyer. The absence of that premise would prevent the conclusion reached in the Schoenberg and Dyer cases, supra, where section 118, supra, was involved. And, much more certainly here, where that provision is not applicable, the absence of that premise prevents the conclusion, essential to the majority view, that the seller retained any enforceable right to repurchase from the buyer.

The present record, in my judgment, discloses an absolute sale.

But the majority view is that no loss on such sale is deductible, in any event, because such sale was not “ in the ordinary course of business ” of the partnership, since its purpose was tax reduction. I disagree. The selling partnership was in business for profit. A purpose to reduce, postpone or avoid Federal income taxes does not condemn the present transaction. Gregory v. Helvering, 293 U. S. 465, affirming 69 Fed. (2d) 809, which reversed 27 B. T. A. 223; Chisholm v. Commissioner, 79 Fed. (2d) 14, reversing 29 B. T. A. 1334; certiorari denied, 296 U. S. 641.

Seduction of its taxes, by any legal means, was, obviously, I think, “ in [its] trade or business ” of increasing the partnership profits. Cf. Walter Thiele, 32 B. T. A. 134.

Arundell agrees with this dissent.

Black and Trammell agree with the second point of this dissent.

TURNER:

I concur in the above dissent with reference to the first point. If under New York law there was only one partnership, certainly no loss was sustained. If a new partnership was formed, the members of the old partnership, as their contributions to capital, merely transferred in kind their distributive shares of the old partnership assets. There was no completed transaction, and no loss was sustained.

Smith agrees with the above.

Mellott :

I concur in the dissent, but only on the first point. The majority opinion, I believe, is correct on the other issues.

       AST. 604. Readjustment of ■partnership interests. — When a partner retires from a partnership, or it is dissolved, he realizes a gain or fiss measured by the difference between the price received for his interest and the cost to him of his interest in the partnership, including in such cost the amount of his share in any undistributed partnership net income earned since he became a partner on which the income tax has been paid. However, if such interest in the partnership was acquired prior to March 1, 1913, both the cost as hereinbefore provided and the value of such interest as of such date, plus the amount of his share in any undistributed partnership net income earned since February 28, 1913, on which the income tax has been paid, shall be ascertained, and the gain derived or the loss sustained shall be computed as provided in article 561. If the partnership distributes its assets in kind and not in cash, the partner realizes no gain or loss until he disposes of the property received in liquidation. Whenever a new partner is admitted to a partnership, or any existing partnership is reorganized, the facto as to sucii change or reorganization should be fully set forth in the next return of income, in order that the Commissioner may determine whether any gain or loss has been realized by any partner.

       Where inventories are used the situation is so different that comparison is not helpful. Since 'sales are not necessary “ wash sales ” are not resorted to. But the taxpayer must follow a regular method and can not adopt any unusual procedure to register a loss under that system.

       SEC. 23. deductions FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      (e) Losses T>y individuals. — In the case oí an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise—
      (1) if incurred in trade or business.


source: Caselaw Access Project

author: Aeundell:

license: Public Domain

text:
    H. A. Green, Petitioner, v. Commissioner of Internal Revenue, Respondent. Clarke E. Dye, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 74910, 74911.
    Promulgated December 31, 1935.

      O. A. Neal, Esq., for the petitioners.

      B. P. Eert&og, Esq., for the respondent.
   OPINION.

Aeundell:

The parties are in agreement as to the cost to petitioners of their Doernbecher Co. stock, and further that the exchange of that stock for Furniture Corporation stock and debentures was a nontaxable exchange. Counsel for petitioners also concedes that the transfer of Furniture Corporation stock at $20 per share in cancellation of the petitioners’ indebtedness would be a taxable transaction if it were practicable to make an allocation of basis between the stock and debentures.

It is the contention of the petitioners that it is impracticable to apportion the cost of the Doernbecher stock between Furniture Corporation stock and debentures and that the respondent’s apportionment is wholly arbitrary and has no basis or foundation in fact. Then they say that it being impracticable to apportion cost, there can be no gain or loss until they have disposed of enough of the new stock and debentures to have recovered their entire cost of the old stock and thereafter all the balance received will be profit, or, if an insufficient amount is realized on the disposition of all the stock and debentures to equal the cost of their old stock, there will be a loss.

There is no provision in the statute (Revenue Act of 1928) directing either an apportionment of cost between two or more kinds of property received in a nontaxable exchange, nor is there any statutory authorization for deferring the reporting of a profit where an apportionment is impracticable. However, for a number of years the respondent’s regulations have provided for apportionment of cost under various circumstances and for the deferment of recognition of gain until full cost is recovered where apportionment is impracticable. See art. 39, Regulations 45; arts. 39, 1567, Regulations 62; art. 39, Regulations 65 and 69. The validity of these regulations has been recognized. See Salvage v. Commissioner, 76 Fed. (2d) 112, and cases there cited. Article 1567 of Regulations 62, interpreting the Revenue Act of 1921, provided in part as follows:

* * * tlie proportion of the original cost, or other basis, to be allocated to each class of new securities is that proportion which the market value of the particular class bears to the market value of all securities received on the date of the exchange. * * * [Italics supplied.]

Regulations issued under subsequent revenue acts do not contain the exact language that appears in the foregoing quotation. It has been held, however, that the quoted provision lays down a principle that is equally applicable in determining gain or loss under subsequent revenue acts. See I. T. 2335, C. B. VI-1, p. 18, so holding with respect to the Revenue Act of 1926, which we approved in Glenn H. Curtiss, 21 B. T. A. 629; affd., 57 Fed. (2d) 847, a case arising under the Revenue Act of 1924; Sallie Strickland Tricou, 25 B. T. A. 713, involving the Revenue Act of 1926. Cf. Edwin D. Axton, 32 B. T. A. 613, a case under the Revenue Act of 1928.

In making his allocation of basis the respondent started out with the assumption that the Furniture Corporation stock was worth $20 per share and the debentures were worth their face value. His computation then, in the case of petitioner Green, was as follows:

A similar computation in the case of petitioner Dye resulted in a determined cost of $3.0896814 per share.

It is plain enough we think that $20 per share for the stock and face value for the debentures did not represent market values of those securities when received by the petitioners. The evidence is that the valuation figures which were assembled as a basis for the merger of the furniture companies were based on appraisals made at peak prices in 1929, plus arbitrary good will values, and that those figures were far above true values in 1930 when the companies were tentatively brought together. The testimony of Green, who was thoroughly familiar with the entire transaction, is that the merger negotiations amounted to a “ horse trading ” proposition, and that the figures used did not purport to represent actual values. Even if we assume that when the first agreements were signed by the constituent companies their assets would support a value of $20 for the stock and par for the debentures, that situation did not obtain when the merger was actually consummated. The companies never received the cash called for by the agreements; they consented to take debentures in lieu of cash under an agreement that the debentures were to be taken up for cash and that agreement was not fulfilled; 7 of the 10 companies withdrew and of course took their assets out of the merger; the bankers failed without completing their contracts. The so-called net worth of the three companies remaining in the merger was $883,055.93 as compared with the figure of $3,948,-199.09 for the 10 who originally agreed to join. This situation gives ample support for petitioner Green’s testimony that it “ looked ridiculous ” to assign a value of $20 to the stock and to treat the debentures as worth par.

The evidence goes further than establishing error in the values ascribed by respondent to the stock and debentures. It establishes that neither of them had a market value. Petitioner Green so testified, and he was thoroughly familiar with the merger negotiations; he was president of both the Doernbecher Co. and the Furniture Co.; he was an experienced furniture manufacturer, having been in the furniture business more than a quarter of a century. His testimony is fully supported by other evidence. The stock and debentures were not listed on any exchange and there were no sales of either of them. The merger or consolidation of the several companies into the Furniture Corporation was conceived when prices were at an extreme high, and the plans for bringing the companies together were based on the peak prices of 1929, to which were added arbitrary figures for good will. The bankers who were managing the negotiations apparently ignored the financial cataclysm of 1929 and attempted to complete the merger on the basis of prices which to a great extent were nonexistent. They tried and failed. It is inconceivable that the comparatively minor group of assets finally brought together could give any substantial value to the huge issue of debentures and stock which were designed to be issued on the padded peak prices for the assets of all 10 companies plus the Doernbecher stock. During the year 1930 the whole matter was in a state of flux. The bankers were having to change their plans; prices were falling; it was not known what companies would finally be in the merger, and it could not be known what assets the new company would have. In these circumstances we are of the opinion that the stock and debentures had no market value and we have so found as a fact.

As above pointed out, the principle of allocation is based on market value. Where there is no market value, no allocation can be made and the taxpayer is entitled to recover his entire original basis before gain or loss will be recognized on the disposition of the new securities. Edwin D. Axton, supra.

As the evidence in these cases not only shows the respondent’s allocation to have been erroneous, but further establishes that the new securities had no market value when acquired by the petitioners, we hold that the petitioners may recover the full cost of their Doern-becher stock before gain or loss will be recognized. The debts which were canceled in 1931 in consideration of the Furniture Corporation stock were less than cost of the Doernbecher stock and no gain is to be recognized to petitioners on that transaction.

Decision will he entered u/nder Rule 50.


author: Aeundell: Leech,

text:
    Mark L. Gerstle, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 54216, 54379, 61367, 62854-62856, 62911, 62944-62947, 63669, 64421, 64835, 64836, 65380, 65592, 67554, 68221, 70623.
    Promulgated December 31, 1935.

      Francis W. Murphy, Esq., Walter M. Bridges, O. P. A., Homer H. Tooley, G. P. A., and Fred H. Brown, G. P. A., for the petitioners.

      Dean KimbaTl, Esq., for the respondent.

       The following cases were submitted on the same stipulation of facts and are decided in this report: Wells Fargo Bank and Union Trust Company, a Corporation, and Marguerite Molly Steines, as Executor and Executrix, respectively, of the Last Will and Testament of C. W. Steines, Deceased; Hilda H. Gerstle; William L. Gerstle; A. B. C. Dohrmann; Hattie Hecht Sloss; Marcus C. Sloss; William Fries; Joel W. Kaufmann: Hans Lisser; and Sadie D. Patelc.

   OPINION.

Aeundell:

In these proceedings the respondent determined that the syndicates of which the petitioners were members were taxable as associations, and on that theory he disallowed claimed losses growing out of the operation of the syndicate properties and on the demolition of buildings.

The several syndicates, in our opinion, were not taxable associations. An association that is taxable as a corporation has “ the general form and mode of procedure of a corporation.” Hecht v. Malley, 265 U. S. 144. At the outset it is to be noted that the syndicate agreements provide that the members “ are desirous of acting jointly ”, which is directly opposed to the corporate theory. While some of the provisions of the syndicate agreements vest in the managers substantial powers similar to those of corporate directors, the stipulations disclose that the practice was to decide all questions of importance only after the views of all concerned had been obtained. The syndicates as such had no name, no office, no officers, no stationery, no bylaws or other regulatory rules, no books of record, and no certificates of stock or similar evidence of beneficial interest. The only persons who might be said to stand in the position of officers or directors were the managers, and, as above set out, they did not act as such. The only books of record were those kept by the bank that acted as fiscal agent for the syndicates. The syndicate managers did not organize; they elected no officers, had no office, no stationery, no bylaws; they held no stated meetings and kept no books of record. Neither the managers nor any member held title to any of the syndicate real estate; title was held by two title companies. The fiscal affairs were not handled by the managers or any member, but by a bank.

The syndicate members did not initially invest funds to get the enterprises going. The money to purchase and carry the properties was advanced by the bank on the temporary security of notes of the managers and it was reimbursed by the members upon call by it.

From the above outline of the form and mode of procedure of these syndicates the distinctions between them and corporations are obvious. Moreover, they were not organized with the idea of remaining in existence for any substantial length of time or of actively operating any business, as is generally the case when corporations are created. It is stipulated that the intent was to purchase properties which it was believed could be quickly resold at a profit. It was not intended to improve any properties, and such management and operation as were necessary were to be only those incident to ownership in the interim between purchase and expected sale. Two of the syndicates acquired one property each, one of them acquired two parcels, and the other acquired six. The operation of these properties was entirely fortuitous and outside the purpose for which the syndicates were organized. Unfortunately for the hopes of the participants the acquisitions were made at peak prices, necessitating the holding of the properties for a time during which the management and operation of the properties was necessary but nevertheless incidental to the main purpose. We conclude that the syndicates were not associations taxable as corporations. See The Highlands, etc., Trust No. 1546, 32 B. T. A. 760.

The syndicates here involved meet the tests of the definition of joint ventures. A joint venture is “ a special combination of two or more persons, where, in some specific venture, a profit is jointly sought, without actual partnership or corporate designation.” Bowmaster v. Carroll, 23 Fed. (2d) 825; Motter v. Smyth, 77 Fed. (2d) 77. Property acquired by participants in a joint venture for the purposes of the venture is the property of the participants, McCausey v. Burnet, 50 Fed. (2d) 491; as tenants in common, Clark v. Sidway, 142 U. S. 682. Such being the status of the participants, any income realized upon the venture would be their income, Walter S. Dickey, 14 B. T. A. 1295, and any statutory deductions would be available to them. See Ada R. Giles, 1 B. T. A. 1066, allowing deductions for depletion to a tenant in common. In addition to the general propositions thus far discussed, it is to be noted that in these cases the petitioners were actually out of pocket as the result of the losses sustained in operating the several properties. The funds to maintain and operate the properties were advanced by the fiscal agent, a bank, on notes of the managers and then assessments from time to time were made on the participants by the bank and paid by them. The payments so made were not capital expenditures, but were expenses or operating losses in connection with property owned by the participants as tenants in common. We accordingly hold that the operating losses are allowable deductions to the petitioners in proportion to their interests in the syndicates.

The case of Wild v. Commissioner, 62 Fed. (2d) 777, is distinguishable from these. There the court had the narrow question of whether the enterprise “ was either a partnership, strieti jiuris, or such a joint venture as interposed no fiduciary to insulate the owners from direct taxation.” It was held that the enterprise was not a partnership, and, further, without giving a name to the arrangement, it was found that there was an entity between the participants and the enterprise sufficiently substantial to insulate them from direct liability. The question there was that of the liability of a participant for taxes on undistributed income which the Commissioner treated as partnership income. We reached the same conclusion in Alger Melton, 7 B. T. A. 717. In the present cases we have no question of income of the several ventures, distributed or undistributed, for there was no net income. The recent cases of William S. Gordon, 33 B. T. A. 460 and Oliver W. Birckhead, 33 B. T. A. 466 are also distinguishable. Those cases involved income or loss to syndicate participants in the year of dissolution of the syndicates. Both cases proceeded on the fact of an independent control of syndicate assets vested in the manager. In the Gordon case it is said, “* * * it is immaterial whether we call such an entity an association or a trust, it has a. reality of its own apart from its contributors.” In those cases, and the Wild case, the syndicates were stock pools organized for trading purposes, with substantial powers in the managers. In these cases each syndicate was organized for the limited purpose of buying and selling specific parcels of realty. While the literal words of the syndicate agreements in these cases gave the managers extensive powers, they did not operate in that way. No matter of any importance was undertaken without consultation with all the participants.

We have held that the operating losses of the syndicate properties are allowable to the petitioners. A part of the loss claimed by members of Syndicate No. 2 for 1929 arises from the demolition of buildings on the St. Mary’s College property. Included in the stipulation filed in these proceedings is the following:

* * * While the members did not intend to demolish the buildings or subdivide the property themselves, they did contemplate reselling the property as a unit, and deUevvng that one of the elements which would: enhance the value was the fact that the property by reason of its size and location was suited for sub-division and sale in smaller parcels, contemplated that such sub-division would entail a demolition of the existing structures. However, it was believed that the property might be bought and resold several times as a unit before it would be so sub-divided. [Italics supplied.]

From this stipulation it would appear that the demolition of the buildings was intended to enhance the value of the property. If so, no loss was sustained and no deduction is allowable. Cf. Robert B. Griffin, 17 B. T. A. 255.

Furthermore, the evidence does not establish the cost attributable to the buildings demolished. Apparently no separate sum was paid for the buildings when the property was purchased in 1927. Where land and buildings are purchased for a lump sum it is proper in order to find the basis of each, to allocate the total cost between the two kinds of property based on fair market value. See McGowin-Foshee Lumber Co., 10 B. T. A. 961; Belle Isle Creamery Co., 14 B. T. A. 737. Cf. Prudential Insurance Co. of America, 33 B. T. A. 332. Petitioner’s evidence in this case consisted of the testimony of an appraiser who appraised the buildings in 1927 for the purpose of determining their insurable values. We have no means of knowing how such values compared with the market values of the buildings. In many cases the insurable value is lower than market; in this case it may well be, in the light of the anticipated demolition of the buildings, that insurable value was higher than market. The petitioners offered no evidence as' to the value of the land. In this state of the record we must hold that petitioners have failed to establish the amount allocable as cost of the buildings, and the respondent is sustained in the disallowance of a demolition loss.

An issue in the cases of Joel W. Kaufmann, Docket Nos. 65592 and 70623, concerning income from community property for the years 1929 and 1930, is conceded by counsel for respondent in his brief.

The case of Hattie Hecht Sloss, Docket No. 64835, presents issues as to earned income credit for 1929 and the proper treatment of dividends which the respondent has taxed as income in both 1928 and 1929. Petitioner’s husband was a member of a law partnership, the earnings of which consisted entirely of fees for legal services rendered by the partners. Petitioner filed a separate return for 1929 and reported therein $27,793.23 as her community one half of her husband’s share of partnership income. During the year 1929 petitioner’s husband received $600 for services rendered as a director of the Emporium-Capwell Corporation, and the petitioner reported one half thereof as her community share. The respondent computed the earned income credit to which petitioner was entitled in the amount of $5,000. We sustain the respondent on this issue on authority of Mrs. Frank Andrews, 26 B. T. A. 642.

On the issue concerning the dividends, it appears that the petitioner included in her 1929 return dividends received in 1928 from the Hecht Broadway Corporation in the amount of $1,503. Upon examination of her return for 1928 by a revenue agent this item was transferred to 1928 income and she paid a tax thereon. The item should not again be included in 1929 income and we hold for the petitioner on this issue.

Reviewed by the Board.

Decision will be entered in each proceeding imder Rule 50.

TURNER dissents.

Leech,

concurring, I concur in the result reached in the majority opinion on the second point, upon the ground, only, that the present record does not establish any basis for the building demolished.

Trammell concurs in the above.


author: Aeundell :

text:
    John M. Perata, Petitioner, v. Commissioner of Internal Revenue, Respondent. Paul Masoni, Petitioner, v. Commissioner of Internal Revenue, Respondent. Guiliano Rolandelli, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 57479, 57923, 58413, 67286.
    Promulgated December 31, 1935.

      Leo J. McEnerney, Esq., for the petitioners.

      Myrtile Cerf, C. P. A., appearing in addition for petitioner Rolandelli.

      Allin H. Pierce, Esq., for the respondent.
   OPINION.

Aeundell :

The syndicate, of which the petitioners were' members, was organized in July 1928 for the sole purpose of raising funds to enable the Italo Corporation to make the cash payments required by its contracts of purchase of the assets or stock of various corporations. A careful reading of the articles under which the syndicate was organized discloses that the syndicate manager had no authority to go further than the raising of such funds, the payment of the debts of the Italo Corporation, and distribution of the remaining proceeds among the syndicate members. The life of the syndicate was limited, and it was to engage in but the one operation.

The syndicate performed its functions, not as originally contemplated through the taking over of the Italo Corporation’s contracts, but through what in substance was the purchase and sale of Italo Corporation stock. The petitioners say that there was no sale of the stock to the syndicate. The facts establish that there was a sale. The stock was placed in escrow, the syndicate paid to the trustee certain of the funds advanced by its members and drew down a block of stock which was sold and the proceeds used to draw down additional stock and, in the words of the stipulation, “ These operations were repeated until December 20, 1928, when total payments were made by the syndicate manager to the trustee in the total sum of $3,400,000.” This, in our opinion, was a purchase and sale of Italo Corporation stock by the syndicate. All the parties knew the amount of stock that the syndicate was to take and all knew the amount that it was to pay in to get the stock. Consequently, the price of each share was ascertainable. This being determined, any amount received on any share in excess of cost was gain in the year of sale. The gain on the purchase and sale, less expenses, amounted to $662,211.60 and dividends amounted to $51,843.50. The respondent has treated as income to each petitioner his pro rata share of such income and dividends. In the case of petitioner Perata, his share amounted to $46,703.52 and he actually received within the year $43,750. The shares and receipts of the others were in proportion to their interests. We see no reason at all why the amount actually distributed was not income to each of the petitioners. There can be no question of the return of capital in these cases because, as set out in the findings, the respondent in calculating the gain has taken into consideration the cost of each share sold and thereby allowed full capital return before computing net income. The respondent has not treated as income any amount with respect to the stock held by the syndicate at the close of the year.

Nor do we see any error in the inclusion of income in each case of an amount somewhat in excess of the sum actually distributed to each petitioner within the year. The amount so included in income was each petitioner’s distributive share of gain made by the syndicate on the shares of stock purchased and sold within the year plus dividends received by the syndicate within the year. This syndicate was, as petitioners say, a joint venture. As such, its income was their income. Walter S. Dickey, 14 B. T. A. 1295; McCausey v. Burnet, 50 Fed. (2d) 491; Mark L. Gerstle, 33 B. T. A. 830. The facts in these cases distinguish them from the case of Wild v. Commissioner, 62 Fed. (2d) 777. In the Wild case, the syndicate was a continuing enterprise in which the corporate manager was to use the funds to buy and manage securities and for whatever purpose it thought advisable, and'the syndicate was to last until the manager ended the venture at its pleasure. Here the syndicate was formed for the limited purpose of aiding the Italo Corporation in the purchase of certain properties and this aid took the form of the purchase of Italo shares and their resale. The life of the venture was limited to one year, with power in the manager to extend it to 18 months. Within the year 1928 it had served its function. It had performed its duty to the Italo Corporation, had received the stock to which it was entitled and had nothing left to do but to distribute and dissolve. Some point is made of the fact that on the books the syndicate owed $33,228.53 at the close of the year. Upon this it is argued that the transactions were not closed in 1928. Opposed to this view is the fact that dividends had been declared by the Italo Corporation on the syndicate stock sufficient to offset this sum. It was obviously intended that the dividends were to be used as an offset, as was formally done in 1929, otherwise the Italo Corporation would not have released the stock to the syndicate in 1928, and the failure of the parties to make book entries can not be said to have kept the transactions open. It is also pointed out that the syndicate manager was entitled to a commission on the profits of the syndicate; that this had not been paid and could not be calculated until the syndicate was completely wound up. This is not a sufficient reason for carrying over to a subsequent year the profits actually realized on the purchase and sale of stock in 1928. Cf. Burnet v. Sanford & Brooks Co., 282 U. S. 359. The manager’s commission can bo calculated on the profits made in 1928. In Heinz v. Commissioner, 70 Fed. (2d) 461, where an attempt was made to carry over profits by reason of the failure to make final distribution, the court said :

* * * It was not open to the petitioner or his agent, the syndicate or its manager, to avoid the inclusion in his gross income for 1928 of his share of the syndicate’s undistributed profits by postponing beyond the end of that year the ascertainment of the exact amount of that share or the actual delivery to the petitioner of the amount of profits to which he was entitled. Wright v. Commissioner (C. C. A. 50 F. (2d) 727; Newman v. Commissioner (C. C. A.) 41 F. (2d) 743; Webb v. Commissioner (C. C. A.) 67 F. (2d) 859.

We therefore conclude that the Commissioner did not err in including in petitioners’ gross income their shares of the profits made on the sales of stock and of the dividends, but we can not agree that the amounts reached by the respondent are in all respects correct. A part of this income was composed of dividends, which should be taxed to the members only at surtax rates. Furthermore, the syndicate manager was entitled to a commission of 2% percent on all income received and disbursed by him. Adjustments should be made for these purposes; otherwise the respondent is affirmed on the issues growing out of the syndicate operations.

The dividends in issue in the case of petitioner Bolandelli for the year 1929 are dividends on the same stock as was involved in the case of Elvira Scatena, 32 B. T. A. 675. In that case, as this, the question was whether such dividends were income in the year 1928 or 1929. Following our holding in the Scatena case, we hold here that the dividends represented by stock of the Bank of America National Association were income to this petitioner in the year 1928. The respondent by affirmative answer has asked that the deficiency for 1928 be increased accordingly in the event it is held that the dividends were income in that year. This will be done on recom-putation; and in accordance with the stipulation the profit on disposition of the dividend shares in 1929 will also be adjusted.

Decision will be entered in each case under Rude 50.


author: Black: Matthews,

text:
    Sylvia S. Strauss, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67176.
    Promulgated December 31, 1935.

      Arthur B. Hyman, Esq., for the petitioner.

      G. R. Sherrijf, Esq., and H. B. Linton, Esq., for the respondent.
   opinion.

Black:

The issue involved in this case is whether petitioner has the right to report on the instalhnent basis the profit derived in the taxable year on the sale of certain real estate which she had inherited from her husband. A deficiency of $463.12 for the year 1929 is involved.

Petitioner is an individual and resides at Lawrence, Long Island, New York. Prior to 1929 she inherited from her husband certain improved real estate which she sold in that year for the sum of $41,500. In her original income tax return for 1929 the profit on the sale of this property was computed on the basis of the cost thereof to petitioner’s husband. On this basis the total profit was $16.63’, all of which was reported in the original return. Within a month thereafter, petitioner realized that in computing the profit on the sale of the property acquired by inheritance she should have used as a basis the value of the property at the time of her husband’s death. Sec. 113(a) (5), Revenue Act of 1928. Immediately, therefore, petitioner filed an amended return in which she computed the profit on the basis of the value of the property at the date of her husband’s death and reported such profit on the installment basis. Sec. 44(b), Revenue Act of 1928. The total profit on the sale was $11,114.33, of which petitioner reported $6,062.40 in her amended return as income for the taxable year. The cash payments received in the taxable year were less than 40 percent of the selling price. The sale was on the installment plan, within the meaning of the statute and the regulations, and on such basis the profit to be returned in the year of sale was the amount reported by petitioner in her amended return. The respondent refused to permit the use of the installment method in reporting petitioner’s gain, on the gi-ound that she had elected in her original return to report the profit on the basis of a completed transaction. He added the balance of the profit to income and determined the deficiency here in question.

In our opinion the respondent’s determination must be sustained. The facts in the instant case are practically on all fours with the facts in Liberty Realty Corporation, 26 B. T. A. 1119. The petitioner there had sold certain real estate on the installment basis in 1928. It, however, filed its original return for 1928 upon the accrual or completed transaction basis for the reason that at that time it was not cognizant of the provisions of the Revenue Act of 1928, section 44 (b), supra, which permitted a taxpayer to report income from installment sales on either the completed transaction basis or installment basis. We held, nevertheless, that the petitioner there could not later file an amended return upon the installment basis. In the instant case, petitioner sold certain real estate on the installment basis in 1929. In her original return she likewise reported upon the completed transaction basis due to a mistaken knowledge of the law. The only difference between the two cases is that in Liberty Realty Corporation the petitioner acted without actual knowledge of section 44 (b), supra, while here, the petitioner acted without knowledge of section 113 (a) (5), supra. This difference, however, does not require a different result. We hold, therefore, that the respondent was correct in refusing to permit petitioner to report the income in question upon the installment basis. To the same effect see Ambridge Furniture Co. v. Heiner (U. S. D. C. W. Dist. Pa., Oct. 25, 1935). Cf. Morgan Rundel, 21 B. T. A. 1019; Johnson Realty Trust, 21 B. T. A. 1333; Sarah Briarly, 29 B. T. A. 256.

Reviewed by the Board.

Decision uMl be entered for the respondent.

Matthews,

dissenting: Under the provisions of section 44 of the Revenue Act of 1928 a taxpayer may report on the installment basis the profit from the sale of real estate where the initial payments received in cash in the year in which the sale is made do not exceed 40 percent of the selling price. In such cases it is obvious that the amount of profit to be derived from the sale is the important factor in determining whether the income therefrom shall be reported on •the installment basis. If the total profit to be realized is so small in amount as to be negligible, or there is a loss on the sale, there is no occasion to determine whether the sale is an installment sale ¡and, therefore, no occasion for an election. A total profit of $16.63 is a negligible amount. When, therefore, petitioner reported a total profit of $16.63 in her original return, it was not an election tto report an $11,000 profit on the completed transaction basis. She made no election as to how she would report the $11,000 profit until ¡she filed her amended return, a month after filing the original return, and reported such profit on the installment basis. The Commissioner should have permitted the petitioner to report the profit ¡to foe realized on the installment basis, as she had a right to do ¡under section 44, Revenue Act of 1928. (Anna D. Jamieson v. United States, Dist. Ct. of Mass., decided Nov. 26, 1935.)

Nan Fossan and McMahon agree with this dissent.