author: Mellott :

text:
    Bessie C. Williamson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 80545.
    Promulgated August 11, 1936.

      Harry Stichney, Esq., and Murray Seasongood, Esq., for the petitioner.

      O. G. Holmes, Esq., and G. G. Guy, Esq., for the respondent.
   SUPPLEMENTAL OPINION.

Mellott :

Under date of June 5, 1936, the Board promulgated its opinion (Bessie C. Williamson, 34 B. T. A. 668) in which it was held that the respondent did not err in determining the deficiency but that the amount thereof must be adjusted in accordance with the views therein expressed. The petitioner filed a motion for rehearing and for reconsideration and, in the alternative, asked that the decision be reviewed by the full Board. An order was duly entered denying the alternative request and the motion for rehearing and reconsideration was referred to Division No. 11 for attention and consideration. Subsequently petitioner filed a supplemental motion, supported by affidavit, asking in substance that, in the event the motion for rehearing and reconsideration should not be granted, she be permitted to show when actual distribution of the stock in question was made, to the end that the rule enunciated by this Board in Robert A. Taft, Trustee, 34 B. T. A. 603, be applied.

Said motions came duly on for bearing and oral argument before Division No. 11 on July 22, 1936. Petitioner was permitted to show, and we now find as a fact, that the stock of the American Rolling Mill Co. was actually transferred to her on Jujy 11, 1932, at which time it had a fair market value of $4.37½ per share; and that the stock of the Columbia Gas & Electric Corporation was actually transferred to her on July 14, 1932, at which time it had a fair market value of $6.62½ per share. We accordingly modify the opinion promulgated June 5, 1936, by substituting for our holding:

We hold that the time of distribution was June 28, 1932, [citing cases]. The fair market value of the stocks at that time (which value has been stipulated) is the basis which must be used in computing petitioner’s gain.

the following:

We hold that the time of distribution of the stock of the American Rolling Mill Co. was July 11, 1932, at which time it had a fair market value of $4.37y2 per share, and that the time of distribution of the Columbia Gas & Electric Corporation stock was July 14, 1932, at which time it had a fair market value of $6.62½ per share. The fair market value of the shares of stock as herein set out is the basis which must be used in computing petitioner’s gain.

The motion for rehearing and reconsideration has been duly considered, but the Board adheres to its decision as promulgated under date of June 5, 1936, in all respects other than as above stated.

The parties agree that the deficiency computed in accordance with the views expressed in our former opinion and as modified herein is $11,639.90 for the year 1932, and $4,425.02 for the year 1933, or a total of $16,064.92. Decision will accordingly be entered finding the deficiency to be as above set out.


source: Caselaw Access Project

author: Murdock:

license: Public Domain

text:
    Henry H. Epstein, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 66350.
    Promulgated August 11, 1936.

      George Walter Smith, Esq., for the petitioner.

      E. A. Tonjes, Esq., for the respondent.
   OPINION.

Murdock:

The petitioner argues that all questions between the Commissioner and the taxpayer relating to taxes and penalties for 1925 have been settled in a criminal proceeding. The taxpayer there pleaded guilty to an indictment charging him with an attempt to evade income tax upon his income for 1925. He was sentenced to pay the tax of $5,679.65 and he has paid it. The court was not concerned with the penalties here involved.

The present proceeding before the Board is quite different from the criminal proceeding above described. Charles E. Mitchell, 32 B. T. A. 1093. The Board has been established to review the action of the Commissioner in determining deficiencies. It reviews and approves or disapproves this administrative act. If the Commissioner acted properly in determining the deficiency and claiming the penalty in a case before the Board, the Board must affirm the administrative action of the Commissioner. The Board then says that the Commissioner did not err in the performance of his duty in so far as he determined that the tax and penalty were due at the time he sent his notice of deficiency. The payment of the tax after the mailing of the notice in no way changes the function of the Board. It still reviews the action of the Commissioner as set forth in his notice of deficiency. Payment is a matter between the Commissioner and the taxpayer which does not change the fact that the determination of the Commissioner as expressed in his deficiency notice was either correct or incorrect and does not change the duty of the Board to decide whether or not that determination was correct. Here the only evidence before the Board indicates clearly that the Commissioner did not err in determining the deficiency and claiming the penalty. Pincus Brecher, 27 B. T. A. 1108. The criminal proceeding does not relieve the Board of its function and duty to review the determination of the Commissioner. William R. Scharton, 32 B. T. A. 459.

Decision will he entered for the resfondent.


author: McMahon: Tyson,

text:
    Harold B. Franklin, Petitioner, v. Commissioner of Internal Revenue, Respondent. Anna May Franklin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 66716, 66717.
    Promulgated August 14, 1936.

      I. Herman 6'her, Esq., and Hugh Satterlee, Esq., for the petitioner.

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

McMahon:

The first question to consider is whether the transactions relating to the acquisition and disposition of the Wesco stock accomplished the purpose intended of avoiding or reducing taxes on the purchase and sale of 20,000 shares of Wesco stock.

The petitioner had an option to purchase Wesco stock. He organized two corporations. To one of them he assigned such option in exchange for its common stock and with funds paid by the petitioner for some of its preferred stock such company purchased the Wesco stock under the option. The petitioner turned over the common stock of the first corporation to the second corporation for its common stock. The first corporation dissolved and the petitioner, as preferred stockholder, received in liquidation the Wesco stock, which he thereafter disposed of.

The factual situation in Chisholm v. Commissioner, 79 Fed. (2d) 14, wherein no fraud issue was raised, is distinguishable from the factual situation herein. In the GhisJiolm case the taxpayer, his brother, and three others owned all the stock of the Houde Engineering Corporation. On September 26, 1928, all five gave a 30-day option upon their shares to Krauss & Co. which that company on October 11 agreed to take up. The Houde shares had increased in value very much and, upon the advice of their attorney, for the purpose of avoiding income tax on the prospective sale of the Houde stock the Chisholm brothers, on October 22, formed a partnership and transferred to it their Houde stock, and notified Krauss & Co. that the partnership would perform their contract. Krauss & Co. took up the option on October 24 and the partnership received the money therefor. The firm was not then nor has it since been dissolved. The court, in holding therein that the situation presented was not analogous to the situation presented in Gregory v. Helvering, 293 U. S. 466, stated that the purpose of the Chisholm brothers was certainly “to form am. enduring firm which should continue to hold the joint principal and to invest and reinvest it” (emphasis supplied), whereas:

⅜ * * In Gregory v. Helvering, supra, (293 U. S. 466) the incorporators adopted the usual form for creating business corporations; but their intent, or purpose, was merely to draught the papers, m fact not to create corporations as the court understood that word. That was the purpose which defeated their exemption, not the accompanying purpose to escape taxation; that purpose was legally neutral. Had they really meant to conduct a business by means of the two reorganized companies, they would have escaped whatever other aim they might have had, whether to avoid taxes, or to regenerate the world. [Emphasis supplied.]

In the instant proceedings, Harbrook was incorporated on January 24, 1928. As soon as the options had been transferred by the petitioner to Harbrook and the Wesco stock acquired by it with funds provided by the petitioner through purchase by him of its preferred stock, Harbrook on February 10,1928, was dissolved. The activity and the life of Harbrook were limited to the purpose of acquiring the Wesco stock and transferring it to the petitioner in exchange for its preferred stock to establish a cost basis that would reduce or eliminate all taxable gain. The evidence adduced here does not disclose, as in the Chisholm case, an intention to form an “enduring firm” to engage in the business for which it was organized. While a valid corporation was created, its existence and purpose of existence was limited at the outset to that of acting as a contrivance, conduit, or transfer agent for Franklin for his own purpose. No real, subsisting, and enduring corporation was intended in the incorporation of Harbrook. The language of the United States Supreme Court in Gregory v. Helvering, supra, is equally applicable here;

* * * Putting aside, then, the question of motive in respect of taxation altogether, and fixing the character of the proceeding by what actually occurred, what do we find? Simply an operation having no business or corporate purpose — a mere device which put on the form of a corporate reorganization as a disguise for concealing its real character, and the sole object and accomplishment of which was the consummation of a preconceived plan, not to reorganize a business or any part of a business, but to transfer a parcel of corporate shares to the petitioner. No doubt, a new and valid corporation was created. But that corporation was nothing more than a contrivance to the end last described. It was brought into existence for no other purpose; it performed, as it was intended from the beginning it should perform, no other function. When that limited function had been exercised, it immediately was put to death. [Emphasis supplied.]

See, also, Sydney M. Shoenberg, 30 B. T. A. 659; affirmed in Shoenberg v. Commissioner, 77 Fed. (2d) 446; certiorari denied, 296 U. S. 586.

The case of Commissioner v. Eldridge, 79 Fed. (2d) 629, affirming A. S. Eldridge, 30 B. T. A. 1322, is distinguishable on the facts. That case involved sales of .stock to a corporation, the stock of which was all owned by taxpayers. The Circuit Court and .the Board held that generally a corporation and its stockholders must be treated as separate entities and that the facts presented did not warrant disregarding such rule. Therein, the corporation was a going concern and had been engaged in business prior to the sales involved and continued in business thereafter. Herein, on the other hand, the corporation. was organized not to transact business as a going concern, but for one purpose only, and, having performed such function, it was dissolved.

In the instant proceedings, Harbrook should, from the standpoint of Federal income taxation, be disregarded as a separate entity.

The purchase price of the 20,000 shares of Wesco stock was $656,738. While it appears that, under plan (a) of the Fox Film Corporation offer, $54 per share was to be paid for the stock, or $810,000 for 15,000 shares, the account of the petitioner with Hay-stone was credited with $809,400, representing a price of $53.96 for each share. It was testified that a transfer tax of $800 was paid on the 20,000 shares of Wesco stock. The difference in the price of $54 per share and $53.96 per share for 15,000 shares amounts to $600, which would indicate that the price of $53.96 reflects the purchase price less transfer tax of a total of $600. The account shows that the petitioner was charged with $200 for transfer tax on 5,000 shares of Wesco exchanged for Fox Film stock. Thus a transfer tax of $800 was paid by the petitioner. The petitioner further received $303,750 from Brookin for the 3,750 shares of Fox Film exchanged for the remaining 5,000 shares of Wesco. Hence he actually received $810,000 plus $303,750 for the 20,000 shares of Wesco, less $800 for transfer tax, or $1,112,950. The community profit is the difference between $1,112,950 and $656,733, or $456,217. From this amount there should be deducted the amount of $33,600, representing the community profit reported by petitioners upon the sale to Brookin of the 3,750 shares of Fox Film stock exchanged for 5,000 shares of Wesco stock, leaving a taxable community gain of $422,617, one-half of which is to be added to the reported taxable income of each petitioner for 1928. Since Brookin issued its 1,000 shares for 1,000 shares of the common stock of Harbrook and received $423,267 less $3,952.26, or $419,314.74, for the Harbrook stock, such amount represents the amount which the petitioner paid for the 1,000 shares of Brookin stock. Looking through form to substance, the petitioner in effect borrowed $1,080,000 from Haystone, of which $656,733 was used to purchase the 20,000 shares of Wesco stock under the option, for which he had not paid anything, and of which $423,267, less $3,952.26, or $419,314.74 was used to purchase 1,000 shares of Brookin stock. The Wesco stock was disposed of and the petitioner received $809,400 for 15,000 shares thereof and $303,550 for 5,000 shares thereof which had been exchanged for 3,750 shares of Fox Film.

The respondent at the opening of the hearing requested leave to file amended answers, stating that it was his intention, as to a possible fraud issue, to see what the evidence amounted to, and then at the close of the hearing to ask for leave to amend his amended answers to conform to proof. The presiding Member ruled that the burden of pleading and proving fraud rested upon tbe respondent and that no proof of fraud would be received over objection unless fraud was pleaded by the respondent before the taking of testimony. The respondent thereupon requested leave to amend his amended answers to allege fraud, which request was granted over the objection of the petitioners based upon the ground that to do so at the opening of the hearing was an abuse of discretion on the part of the Board. Opportunity was extended therefor and the petitioners could have then requested a postponement of the hearing to prepare their defense, but counsel stated that unless counsel for respondent alleged something not covered in his opening statement he would prefer to proceed immediately with the hearing. W. S. Gilman, 18 B. T. A. 1277; affirmed in Gilman v. Commissioner, 53 Fed. (2d) 47, is not applicable here. Therein the respondent, after the hearing, moved to amend his answer by adding thereto an affirmative allegation of fraud. The Board denied the motion, stating in part:

* * ⅜ Under the law the respondent has the burden of proof to sustain an allegation of fraud. We think the petitioner must be put on notice that such a charge is to be made and permitted to prepare his defense thereto in advance of hearing.

The petitioners here were put on notice as to the issue of fraud at the opening of the hearing and waived their right to further time in which to prepare their defense by proceeding to hearing.

The burden of proving fraud on the part of the petitioners rests upon the respondent. Sec. 907 (a), as amended by sec. 601, Revenue Act of 1928. Such burden is discharged only by clear and convincing evidence. In Henry S. Kerbaugh,, 29 B. T. A. 1014; affirmed in Commissioner v. Kerbaugh,, 74 Fed. (2d) 749, the Board stated:

* * * A charge of fraud has always been regarded as a serious matter in the law. Not only is it never presumed, but the ordinary preponderance of evidence is not sufficient to establish such a charge. It must be proved by clear and convincing evidence. * * *
* * * If not admitted it must be proved. * * *

That Harbrook and Brookin were legally organized and that all the transactions set forth in our findings involved in the acquisition and disposition of the Wesco stock and the Fox Film Corporation stock were duly and actually carried out by the respective parties, is not questioned. That such transactions were carried out for the purpose of avoiding or reducing income tax does not invalidate such transactions. Transactions, legal in themselves, carried out with an intent to avoid income taxes, do not constitute a fraud upon the Government merely because of such underlying purpose. In Helvering v. Gregory, 69 Fed. (2d) 809, the court stated:

We agree with the Board and the taxpayer that a transaction, otherwise within an exception of the tax law, does not lose its immunity, because it is actuated by a desire to avoid, or, if one choose, to evade, taxation. Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose the pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes. U. S. v. Isham, 17 Wall. 496, 506 * * *; Bullen v. Wisconsin, 240 U. S. 625, 630. * * *

To the same effect see Gregory v. Helvering, 293 U. S. 465, affirming Helvering v. Gregory, supra; Chisholm v. Commissioner, 79 Fed. (2d) 14; and Joseph E. Uihlein, 30 B. T. A. 399; affirmed in Commissioner v. Brumder, 82 Fed. (2d) 944.

There are two issues involved herein, i. e., the question whether the transactions were such as to avoid taxes, which we have answered in the negative, and the question of fraud. To negative the first does not necessarily prove the second. The fact that the respondent determined a greater tax liability than reported and his determination is sustained does not of itself establish fraud. James Nicholson, 32 B. T. A. 977.

As to fraud with intent to evade taxes, the record herein does not disclose that petitioners, or either of them, “attempted to obtain unallowable deductions by falsely representing the character of the same” or the “swearing to the truth of divergent statements of facts”, or other facts clearly establishing fraud, as in M. Rea Gano, 19 B. T. A. 518, 533, cited by respondent. Nor does the record disclose any concealment of income by fictitious means as in Garden City Feeder Co., 27 B. T. A. 1132, cited by respondent, or in John Kehoe, 34 B. T. A. 59. Fred Ascher, 2 B. T. A. 1257; I. J. Adelson, 7 B. T. A. 110; Bert M. Wuliger, 16 B. T. A. 1220; 19 B. T. A. 462; and L. Schepp Co., 25 B. T. A. 419, also cited by the respondent, are distinguishable on the facts from the instant proceedings.

Two field examinations and investigations were made by different revenue agents, one in Los Angeles, California, in July 1931, and another in New York later in 1931. In making his recomputation and in his notices of deficiency, dated April 27, 1932, the respondent did not take the position that the transactions herein were fraudulent with intent to evade taxes. No affirmative allegations of fraud were made in the original answers filed nor in the first amended answers presented at the hearing, counsel for respondent stating that he intended to withhold alleging fraud until the close of the hearing, and his so doing depended upon the evidence adduced at the hearing. In his computation of the deficiency the respondent allowed the cost basis of $1,080,000 as claimed by the petitioners, and in his original answer admitted that the 10,800 shares of preferred stock of Harbrook were acquired at a cost of $1,080,000. At the time respondent pleaded fraud affirmatively, at the hearing, he had no newly discovered evidence upon which to base his plea of fraud except the voluntary admission of the petitioner that it had been discovered a few days prior to the hearing that the item of $42,500 had been inadvertently omitted from the gross community income for 1928. Although he attempted to show, upon cross-examination of petitioners’ witness, that the petitioners refused to permit the revenue agents to examine petitioners’ records, which was emphatically denied by such witness, he failed to call the revenue agent to rebut the testimony of petitioners’ witness in this respect. All the papers, statements and other data relating to the transactions here involved or used in the preparation of the returns of petitioners were submitted to the revenue agents. It would appear that up to the time of the hearing respondent had found no evidence of fraud and that at that time he was uncertain what position to take and intended to permit the evidence adduced at the hearing to shape his course. The attitude of the respondent throughout indicates that the results of his examinations and investigations up to the time of the hearing negatived fraud or, at least, were insufficient to justify the determination of a fraud penalty.

As to the item of $42,500, the secretary of the petitioner testified in substance that although he had seen the item on the Hayden, Stone & Co. statement, he had not included it in income because he thought it represented a capital transaction; that about two days before the hearing of these proceedings, in examining correspondence of the petitioner for possible use thereat, he came across a telegram sent by the Gore Brothers referring to this item; that he called it to the attention of the petitioner, who asked him whether he had included it in his reported income; that upon his reply in the negative, the petitioner stated that he should have done so; and that he thereafter mentioned the matter to petitioners’ counsel on the day before the hearing while traveling to Washington.

Harold B. Franklin testified that he recalled receiving the amount of $42,500 from Gore Brothers in March 1928; that he did not receive it personally, but that it was sent to Hayden, Stone & Co. and deposited to his credit while he was in Portland, Oregon; that the amount represented “an expression of appreciation for a job well done” in developing West Coast Theatres, Inc., of which Gore Brothers owned considerable stock, from a losing to a profitable enterprise.

There is no showing of any attempt to conceal the item of $42,500, or any other item or transaction involved herein, so as to prevent the discovery thereof. As stated in Drawoh, Inc., 28 B. T. A. 666;

* * * while it is of course lawful for taxpayers to use means and methods which are legal and not tainted with fraud to avoid taxes, Brillen v. State of Wisconsin, 240 U. S. 625, Isham v. United States, 17 Wall, 496, it is never lawful for taxpayers to use methods of concealment and deception to evade taxes. It is in the use of the latter methods that taxpayers run afoul of the fraud penalties. * * *

The evidence presented as to the transactions relating to the Wesco stock does not justify a finding of fraud and the imposition of a fraud penalty, nor does the evidence presented justify a finding that the omission of the income item of $42,500 was due to fraud with intent to evade income tax. Ned Wayburn, 32 B. T. A. 813; Oscar G. Joseph 32 B. T. A. 1192. On the contrary the evidence, in our opinion, shows' that the transactions here involved and the failure to report the income item were not due to fraud with intent on the part of the petitioners, or either of them, to evade income taxes, and we have so found.

Consideration of the testimony as it was adduced at the hearing, together with a consideration of the entire record thereafter, leads to the conclusion that the conduct of the petitioners is reconcilable with good faith on their part and establishes that they are not guilty of fraud as charged by the respondent in his amended answer. There is no basis in the record adequate to sustain a finding or holding that they, or either of them, are guilty of fraud. On the other hand the record does sustain the finding and holding, which we have made, that neither is guilty of fraud.

The petitioner, Harold B. Franklin, who was present throughout the hearing, was not called as a witness in his own behalf, but he was called as a witness by the respondent and examined touching various aspects of the affirmative allegations of fraud of the respondent. After direct examination he was cross-examined by his counsel, and his counsel apparently considered that there was no occasion for further examination of the petitioner as a witness. Petitioner’s attorney at law, who at the times in question handled all of the transactions pertaining to the Wesco stock for him, his confidential secretary and accountant employed by him in about February 1929, who made the 1928 separate income tax returns for him and his wife, and others were called as witnesses by the petitioner, and other witnesses were called by the respondent. In the testimony of all of these witnesses all of the transactions in question and all of the details and corporate minutes and records and book entries touching the issues presented here were gone into extensively. This petitioner at that time was president and manager of West Coast, which operated approximately five hundred theatres, and he filed returns of about one hundred corporations. He traveled extensively and obviously, of necessity, he was obliged to leave most details, and some things that were more than details, to others, and more particularly to his attorneys and his secretary, and even to those acting for the corporations. There is no justification in the record for an inference that this petitioner or his wife attempted to withhold from the Board any evidence necessary to a proper disposition by it of the issues raised. In any event, in the light of the whole record, the failure of this petitioner to testify further is not an adequate basis for reaching results, other than those reached herein.

The respondent alleges and claims, in the alternative, that the 5 percent negligence penalty should be imposed for failure to report the item of $42,500 as community income. The petitioner testified that he did not audit or check his return prepared by his secretary to see whether any particular transactions were included; that he did not have the item of $42,500 in mind at the time, although he had knowledge of receiving it; that he did not have time to check over his return; that it was impossible for him with his various duties to have done so; that he filed returns of perhaps one hundred corporations; that he traveled a lot; that he had to rely on some one in this respect; and that he had confidence in his secretary and depended upon him entirely to prepare his return. As stated in Irving Fisher, 30 B. T. A. 433, 443, “Petitioner can not escape liability for a correct return by committing its preparation entirely to his secretary.” See also cases cited therein, and Milton A. Mackay, 11 B. T. A. 569. Section 51(a) of the Revenue Act of 1928 provided that he llshall make under oath a return stating speevfieanAj the items of his gross income.” (Emphasis supplied.) We conclude, therefore, and we have so found, that the omission of this item of $42,500 from the reported community income was due to the negligence of Harold B. Franklin and the negligence penalty of 5 percent should therefore be imposed as to him upon the whole of his deficiency. Sec. 293 (a), Revenue Act of 1928.

As to Anna May Franklin, the secretary of her husband testified that she did not provide him with any books or statements for the preparation of her return; that the return was submitted to her to sign; and that he did not know how complete an examination of it she made. Franklin testified that he discussed casually with Mrs. Franklin the transaction relating to the Wesco stock; that she had some knowledge of this transaction, but not as to details. The returns for 1928 of the petitioners disclose that Anna May Franklin had no other income than that derived from the earnings of her husband, dividends from securities bought after July 29, 1927, and the profits resulting from her husband’s dealings in securities, in which she acquired a community interest because of their residence in California and their relationship as husband and wife, the basic relationship as between them. From the evidence it appears that the transactions herein were all carried out by the direction of her husband, and that he managed and controlled the community property as his own. In 1928, so far as we know, Anna May Franklin resided in California. Harold B. Franklin traveled a good part of the time and transacted a large part of his business in New York. The community interest of Anna May Franklin in the earnings and property of her husband and the fact that her return was substantially a duplicate of her husband’s return is not sufficient proof of fraud or negligence on her part. The evidence adduced as to her is wholly insufficient to prove fraud with intent to evade taxes or negligence on her part, the burden of proving which rests upon the respondent, Henry S. Kerbaugh, supra, and American Ideal Cleaning Co., 30 B. T. A. 529. There is no evidence disclosing that she had knowledge of the receipt by her husband of the $42,500; that she could have with due diligence discovered the receipt of such income, or that she did not use due diligence and care in the preparation of her return. Although two revenue agents examined her husband’s records upon two different occasions, they failed to discover this item and no claim was made for the tax thereon until her husband voluntarily, at the hearing, admitted receiving the same.

Reviewed by the Board.

Decision will be entered under Bule 50.

Black, Murdock, and Mellott dissent because they do not think the separate entity and the acts of the Harbrook corporation can be ignored.

Tyson,

dissenting: The opinion as adopted by the Board finds that there is negligence on the part of Harold B. Franklin, the husband of Anna May Franklin, both being petitioners in these consolidated proceedings, in omitting from his return his share in the item of $42,500 received as community income, and imposes upon him as a result the statutory penalty of 5 percent, but absolves Anna May Franklin from the imposition of a like penalty for an identical omission. I disagree with the opinion in so far as it fails to impose a negligence penalty on Anna May Franklin.

In the preparation of the returns in which the omissions occurred both petitioners acted through an agent, who knew of the item, but did not include it in income because he thought it a capital transaction, and each petitioner filed his or her respective return as so prepared. At the time of the preparation of these returns the only difference between the relative positions of the husband and wife with regard to this item was that the husband had actual knowledge of having received it, while it does not appear from the opinion that the wife did have such actual knowledge. However, in the opinion it is said:

From the evidence it appears that the transactions herein were all carried out by the direction of her husband and that he managed and controlled the community property as his own.

It thus appears that in managing and controlling the community-property the husband was acting as the agent of the wife, and his knowledge of the receipt of this $42,500 as well as any negligence on his part in thereafter failing to see that this item was included in her return is imputable to her.

Mrs. Franklin’s return having been prepared by her husband’s secretary as her agent for that purpose, the negligence of such agent, if any, in its preparation is also imputable to her. So, regardless of whether the negligence in oromiting the item from her return was attributable to either her husband or his secretary, or to the joint negligence of both, such negligence was hers under the familiar rule that the negligence of an agent when acting within the scope of his authority is the negligence of the principal.

I dissent from the opinion in so far as it failed to assess the statutory penalty of 5 percent against Anna May Franklin.

       In north Jersey Title Insurance Co. v. Commissioner, 84 Fed. (2d) 898, the court stated:
      "The principle that substance and not form should control in the application of income tax law is fundamental. Fictional corporate camouflage cannot be made the device to escape taxation.”
      See also 112 West 59th St. Corp. v. Helvering, 68 Fed. (2d) 397. Cf. Edward Securities Corporation, 30 B. T. A. 918; aff'd., 83 Fed. (2d) 1007.


text:
    George E. Morse, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78600.
    Promulgated August 14, 1936.

      James Irving Mason, G. P. A., for the petitioner.

      Hugh Brewster, Esq., for the respondent.
   OPINION.

Murdock:

The Commissioner determined a deficiency of $18,-174.92 in the petitioner’s income tax for the year 1930. The deficiency resulted from the disallowance of a deduction of $114,168.44 claimed as representing losses on stock. The explanation shows that the losses disallowed were those claimed on the sale of 1,736 shares of Murray Corporation stock and on 2,000 shares of Continental Baking Co. “B” stock. The explanation further stated that the losses were disallowed “since no sales of these stocks were made during the year 1930.” A number of issues were raised in the pleadings, but all have been disposed of by a stipulation save the question of “whether or not the transactions above described, considered in the light of the facts agreed upon herein, constitute a bona fide legal sale by the petitioner in 1930 of the stocks in controversy, within the meaning of the Federal income tax laws and the regulations issued in accordance therewith.”

The petitioner filed a joint return for 1930 for himself and his wife, Helen C. Morse, with the collector of internal revenue for the district of Vermont. Other pertinent provisions of the stipulation are as follows:

On December 19, 1930 petitioner is alleged to have sold through Farnum, Winter & Co., a brokerage firm then operating in New Vork, 1736 shares of Murray (Body) Corporation stock at 12⅜, which amounted to a total of $21,483.00. Against the sale were charged a commission of $217.00 by Farnum, Winter & Co., a Federal tax of $34.72 and State tax of $34.72, leaving a net credit to the account of $21,195.56. The confirmation slip shows this stock as having been sold to Farnum, Winter & Co. The said confirmation slip is attached hereto and made a part hereof as joint Exhibit “B”.
On December 19, 1930, there was an alleged purchase for an account in the name of Mrs. Helen C. Morse through Farnum, Winter & Co. of 1736 shares of Murray (Body) Corporation stock ¿t 12%, for a total of $21,483.00, against which was charged a commission of $217.00 leaving a net debit to the account of $21,700.00. This is shown as purchased from Farnum, Winter & Co. by the confirmation slip attached hereto as joint Exhibit “C”.
On December 20, 1930, petitioner is alleged to have sold through Farnum, Winter & Co., 2,000 shares of Continental Baking “B” stock at 2½, for a total of $4,500.00 against which was charged: $150.00 commission, $40 Federal tax, and $40 State tax, leaving a net credit of $4,270.00. The confirmation of sale slip attached hereto and made a part hereof as joint Exhibit “D” shows the alleged sale as being made to Farnum, Winter & Co.
On December 20, 1930, there was an alleged purchase for an account in the name of Mrs. Helen C. Morse on the books of Farnum, Winter & Co. of 2,000 shares of Continental Baking “B” stock at 2¾ for a tqtal of $4,500.00, against which was charged a commission of $150.00 making a net debit of $4,650.00. The confirmation-of-purchase slip attached hereto and made a part hereof, marked joint Exhibit “E”, shows the purchase as having been made from Far-num, Winter & Co.
It is agreed that all the transactions shown by joint Exhibits “B” to “E” inclusive, were ordered by George E. Morse, the printed wording of the said Exhibits to the contrary notwithstanding, and that the foregoing transactions in the name of Helen C. Morse opened that account, as is more clearly shown by joint Exhibit “G” hereinafter referred to.
Joint Exhibit “F” attached hereto and made a part hereof contains a statement of the account of George E. Morse with Farnum, Winter & Co. from November 30, 1930, to October 23, 1931, both inclusive, reflecting the alleged sales heretofore referred to, and showing a credit balance of $11,933.74 on October 23, 1931, which balance was on that date transferred to the account in the name of Mrs. Helen C. Morse, thereby closing his account.
Joint Exhibit “G” attached hereto and made a part hereof contains a statement of the account in the name of said Helen G. Morse with Farnum, Winter & Go. from December 22, 1980 to October 23, 1931, both inclusive, reflecting the alleged purchases heretofore referred to and reflecting the sales during May and June 1931 of the stocks in controversy. On October 23, 1931 this account was closed by a transfer to it of the credit balance in the account of George E. Morse as above-stated. This action was taken by Farnpm, Winter & Oo. on authority given by George E. Morse, at their request.

The petitioner’s basis for gain or loss on the shares disposed of is not in dispute. The Commissioner concedes that there will be no -deficiency if the petitioner is entitled to the deductions claimed. If the Commissioner ⅛ sustained in disallowing the claimed deductions for losses, a settlement under Rule 50 will be necessary in order to give the petitioner the benefit of a stipulated deduction for interest.

The determination of the Commissioner in disallowing the deductions claimed is presumed to be correct until the contrary appears from the evidence. Furthermore, transactions in which a husband sells securities for the purpose of taking a deduction in his income tax returns and an offsetting purchase of a like amount of the same kind of stock is made at the same time in the name of the wife, call for careful scrutiny. The transactions involved in the present case were carried out solely on the order of the husband. It does not appear from the record that the wife was a party to the transactions or that she ever knew of them. It does not appear that she had any separate estate of her own or that she ever exercised any dominion or control over the securities in question. It does not appear that she ever authorized the opening of the brokerage account in her name, that she ever assumed liability in connection with that account, that she ever authorized the transactions in question, or that she ratified them in any way. Therefore, although the petitioner went through the form of selling these securities to his broker and having the same securities purchased in the name of his wife, it does not appear that he ever relinquished dominion and control over the shares suffciently to establish .for himself a loss for income tax purposes. This case is clearly distinguishable on its facts from the cases of Frank M. Arguimbau, 31 B. T. A. 604, and Thomas W. Behan, 32 B. T. A. 1088. Exhibits F and G, which are statements of the broker’s accounts in the name of the husband and wife, show that the purchase of the securities in question and the sale of those same securities in 1931 were the only transactions in the account in the name of Helen 0. Morse. Comparison of the two accounts and the manner in which they were finally closed, tends strongly to support the Commissioner’s determination that the petitioner is not entitled to the deductions claimed. Not only did the husband fail to part with dominion and control over the shares, but even if we were to hold that he sold the shares, he would not be entitled to the deduction, because the account in the name of his wife was in reality his own account. Therefore, he would be held to have purchased substantially identical property within thirty days of the date of the sale, and, under the wash sales provision of the statute, he would not be entitled to a deduction in any event. Sec. 118, Revenue Act of 1928.

Reviewed by the Board.

Decision will be entered under Rule 50.


author: Mellott:

text:
    Hector McGowan Curren, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81826.
    Promulgated August 14, 1936.

      John W. Townsend, Esq., for the petitioner.

      Fremit, M. Thompson, Esq., for the respondent.
   OPINION.

Mellott:

The issue, as succinctly stated by the respondent upon brief, is “whether the Federal Government, in asserting an income tax upon the amount received by this petitioner as Counsel to the Clerk of King’s County, is in reality, attempting to tax an instrumentality of a state or a political subdivision thereof.” If it is, the petitioner must prevail; for, as recognized by both parties, “* * * neither government may destroy the other nor curtail in any substantial manner the exercise of its powers. Hence, the limitation upon the taxing powers of each * * ' (Metcalf & Eddy v. Mitchell, 269 U. S. 514, and cases cited.)

Petitioner contends that he was an officer of King’s County; in the alternative he contends that “if not an officer, he must in any event be considered as an employee of the county.” Respondent argues that the relationship between petitioner and the county clerk was that of attorney and client, and that he was neither an officer nor an employee of the county but an independent contractor.

Much has been written by the courts and this Board upon the fundamental question in issue. Counsel for both parties, with commendable thoroughness, have cited many of the most pertinent cases, all of which have been considered; but in the interest of brevity we will refrain from discussing them in detail. We will limit our discussion to those which seem most important.

Petitioner relies most strongly upon the decision of this Board in Jeremiah Wood, 31 B. T. A. 1141. In that case petitioner, a lawyer, was employed by one of the towns (townships) of Nassau County, New York, as its counsellor. His duties were somewhat similar to those of petitioner, and consisted generally in advising with the town officers, conducting the litigation in which the town was involved, and performing “all the legal services which a town of that size and nature might require of its principal legal officer.” It was held that, if he was not an officer — which was not definitely decided — he was at least an employee engaged in performing usual governmental functions, and the salary paid to him was held to be exempt from the Federal income tax.

Respondent cites George H. Gabel, 25 B. T. A. 60, in which the claimed exemption was denied. In that case the petitioner, who likewise was an attorney, represented and advised with a village and two separate school districts. He was paid a “retainer” for his general services and a per diem to cover other services. His time was his own and neither the village board nor the school boards had first call upon his services, or imposed upon him any restrictions as to the number of his clients. He attended to the business of the various boards substantially as he attended to the business of any other client, which clearly justified the conclusion reached that he was an independent contractor, and that the compensation paid to him was not exempt from the Federal income tax.

Numerous cases have come before the courts and this Board in which a professional man has claimed that the compensation received by him for services rendered to a political subdivision was exempt. Uniformly, exemption has been denied where the facts showed that such services were rendered as an independent contractor. Typical cases are: Lucas v. Reed, 281 U. S. 699, an attorney employed by a state to conduct one piece of litigation; Lucas v. Howard, 280 U. S. 526, an attorney employed by cities under contracts for specific services; Burnet v. Jones, 50 Fed. (2d) 14; and W. A. Franken, 24 B. T. A. 39, an attorney employed as special counsel for a drainage district; and George H. Gabel, supra. As to architects, see Emma B. Brunner, Executrix, 5 B. T. A. 1135; Clarence H. Johnston, 14 B. T. A. 605; aff'd., 41 Fed. (2d) 1002; R. Clipston Sturgis, 10 B. T. A. 1394; H. A. Underwood, 20 B. T. A. 1117; Underwood v. Commissioner, 56 Fed. (2d) 67; John E. Beaman, 22 B. T. A. 1387; John Reid, Jr., 28 B. T. A. 1217; and Eric E. Hall, 33 B. T. A. 953. As to engineers, see F. A. Pease, 30 B. T. A. 17; aff'd., 83 Fed. (2d) 122; and cases cited in Eric E. Hall, supra. Cf. Donald Francis Campbell, 33 B. T. A. 101, actuary for policemen’s and firemen’s benefit funds, and Harry Goldstine, 33 B. T. A. 173, real estate valuator.

The underlying principle of the cases, as recognized in the briefs filed with us, is that one employed in an isolated transaction, or to accomplish a specific object, being free to select the manner, means and instrumentalities to be adopted in completing the task undertaken, is not an officer or an employee but is an independent contractor. In such cases there is not present that control or right of control by the employer “which characterizes the relation of employer and employee.” (Metcalf & Eddy v. Mitchell, supra.) Respondent argues that such control and right of control are lacking here, citing in that connection, the Gabel case, supra, and Commissioner v. Modjeski, 75 Fed. (2d) 468; certiorari denied, 295 U. S. 764; but we are of the opinion that no such holding is justified under the facts set out in our findings.

While it is true that petitioner was required to exercise, and did exercise, 'his independent judgment and best professional skill in rendering the services here involved, that is true in the majority, if not in all, of the cases where a professional man is employed. A chemist, bacteriologist, or technician in a laboratory, whether employed by a private industry or by a political subdivision, is required to exercise his independent judgment and best professional skill in performing the task assigned; but he may nevertheless be an employee if his employer retains the right of control over- his activities and can direct how and when he shall perform his work. If, however, either an industry or a municipality engages a technician to deliver to it a completed task, and exercises no control over the means or instrumentalities whereby the results sought are achieved, and has no right to exercise such control, then the relationship between the parties is that of independent contractor rather than employer and employee.

The courts and this Board have applied the above test in many cases and have held that even in the absence of the actual exercise of the right of detailed control, a professional man nevertheless may be an employee. Some of the cases are: Charles J. Tobin, 17 B. T. A. 1261; Frederick A. Brown, 22 B. T. A. 581; D. F. Strickland, 16 B. T. A. 419; Burnet v. Livezey, 48 Fed. (2d) 159; R. E. McIntosh, 16 B. T. A. 1400; B. F. Martin, 12 B. T. A. 267; W. B. Mathews, 13 B. T. A. 1133; Rosalie C. Rand, Executor, 27 B. T. A. 182; George H. Harlan, 30 B. T. A. 804; aff'd., 80 Fed. (2d) 660; Jeremiah Wood, supra; Joseph J. Sullivan, 33 B. T. A. 629; John B. Hittell, 33 B. T. A. 276. The crucial test is the right to exercise control, which we believe the evidence clearly indicates the county clerk had as to this petitioner.

We are of the opinion that petitioner was an employee of a political subdivision of New York, engaged in a usual and essential governmental function. (See art. 643, Regulations 74.) We therefore hold that the compensation received by him during the taxable years before us was exempt and that respondent erred in determining the above deficiency.

Judgment will be entered for the petitioner.


author: Leech:

text:
    Mary Clark de Brabant, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75546.
    Promulgated August 18, 1936.

      'William B. Gower, Q. P. A. and Edward L. Blackman, Esq., for the petitioner.

      William E. Davis, Esq., and S. B. Anderson, Esq., for the respondent.
   OPINION.

Leech:

The respondent determined a deficiency in income tax, in the sum of $38,739.83, against the petitioner for the year 1930. Petitioner attacks this determination on the ground that it was taxable income to a trust and not to the petitioner as beneficiary thereof.

The facts, which were stipulated, are substantially as follows:

During all of the year 1930, and for approximately 12 years prior thereto, the Commercial Trust Co. of New Jersey, a New Jersey banking corporation, as trustee under a trust agreement with William A. Clark, dated February 16, 1918, held title to 36,000 shares of the capital stock of the United Yerde Copper Co. As such stockholder, it received a distribution of $12 a share or a total of $432,000 on January 15, 1930, and on April 15, 1930, received a further distribution on such stock of $5 per share, or an aggregate of $180,000. Of these distributions, the Commercial .Trust Co. of New Jersey, trustee, paid to the taxpayer, beneficiary, during the year 1930, $77,644.80 of the January 15 distribution, but retained and did not pay or credit to the petitioner the remainder of the distribution of January 15 nor any of the distribution of April 15. The grandchildren of the taxpayer, who were infants, were probable ultimate remaindermen under the trust agreement. The Commercial Trust Co. of New Jersey, trustee, retained and declined to pay or credit to the petitioner, beneficiary, any part of the above distributions in excess of the $77,644.80, in good faith and solely to protect itself from having to pay the same funds to two beneficiaries.

The distributions of the United Yerde Copper Co. to the trustee, here, in 1930 and in prior years, were made in part from depletion reserve of that company set up pursuant to a determination of the Bureau of Internal Revenue to take account of the gradual exhaustion of its ore bodies. Late in 1929, questions arose with regard to the proper interpretation of the said trust agreement and with regard to other trust agreements made by said William A. Clark and by others, and whether this taxpayer and the other life beneficiaries were entitled to have paid to them annually all of the distributions made to the trust company by the United Verde Copper Co., or whether the trust company was obligated to retain from such distributions sufficient funds to keep the corpus of the trust intact in recognition of the fact that the value of the United Verde stock would constantly shrink with the extractions from the mine; that is, retain and add to the capital of the trust the portions of the distributions made from depletion reserve.

The petitioner instituted suit in the courts of New Jersey against the Commercial Trust Co. of New Jersey, trustee, for construction of the trust agreement. On May 31, 1933, she obtained a judgment (DeBrabant v. Commercial Trust Co., 166 Atl. 533) that she was entitled to the entire distributions of January 15 and April 15, above mentioned, under the trust agreement, regardless of whether they arose from profits or depletion reserve. That decree became final. The taxpayer received the amounts of those distributions in excess of the $77,644.80 received in 1930, subsequent to that year.

The pertinent provisions of the trust agreement are as follows:

Third: During the continuance of the trust payment of income shall be made as follows: to the said Mary Clark Kling during her life time and after her death to the living children of said Mary Clark Kling and the issue of any deceased child or children, the issue of any deceased' child to take the share of the deceased ancestor.
All payments of income hereunder shall be made on the second days of January and July in each and every year. All income on hand at the time of the death of said Mary Clark Kling shall be paid to the person or persons entitled to the income of the trust fund upon her death, and no beneficiary hereunder shall be entitled to any income for any half year, or any part thereof, unless living at the time fixed for such payment.
Fourth: The trustee shall make each and all of the payments above provided for, both of principal and interest, as soon as may be after the same shall become due and payable, pursuant to the terms of this agreement; and upon the termination of the trust by any of the contingencies above described, it shall assign, transfer, pay over, surrender and deliver to the person or persons entitled thereto all of the property, money or securities then comprising the trust fund, both principal and interest.
Payment of the principal shall be made in kind as far as possible by the transfer of the appropriate number of securities authorized hereunder for investment of the trust fund held by the Trustee at the time of such distribution or payment.
Eighth: In case securities are taken or purchased for the trust fund at a premium, the Trustee shall not be required to set aside any part of the income thereof as a sinking fund to retire or absorb such premium, or to make any other provision for possible depreciation in the value of the securities constituting the trust fund by reason of the approaching maturity of said securities or otherwise.

The petitioner was alive on July 2,1930, and was on the cash basis.

The only question submitted is whether the amounts received by the Commercial Trust Co. of New Jersey, trustee, on January 15 and April 15, 1930, as dividends on the trusteed United Verde Copper Co. stock, and not distributed to the taxpayer, the petitioner, beneficiary of the trust, during that tax year, were taxable for that year to the trust or to the beneficiary, petitioner.

Sections 161 and 162 (b) of the Revenue Act of 1928 are controlling.

Undoubtedly, the disputed income here was returnable for income tax purposes by the trust for 1930. Sec. 161 (a), supra.

But, the trust provided that “all payments of income hereunder shall be made on. the second days of January and July in each and every year. All income on hand at the time of the death of said Mary Clark Kling shall be paid to the person or persons entitled to the income of the trust fund upon her death, and no beneficiary hereunder shall be entitled to any income for any half year, or any part thereof, unless living at the time fixed for such payment.”

Thus, the contested amounts were mandatorily distributable by the trustee to the petitioner, beneficiary, on July 2, 1930, the year involved, and were, therefore, deductible by the trust and taxable to the petitioner, beneficiary, for that year, under section 162 (b), supra, unless, throughout 1930, after their receipt, such amounts were withheld or accumulated by the Commercial Trust Co. of New Jersey, trustee, “for the benefit of * * * unascertained persons or persons with contingent interests * *

Petitioner urges two positions.

First. It is argued that the latter section applies because “Income is being accumulated for the benefit of unascertained persons in all cases where the trustee refuses to pay out or credit the sum pending a judicial determination of conflicting claims.” The premise of that argument is incorrect. The quoted part of the section upon which petitioner relies taxes to the trust only that income which is “accumulated in trust for the benefit of * * * unascertained persons or persons with contingent interests ⅜ -* Thus, it is only where the identity of the beneficiary is unascertained or contingent that the quoted provision applies. Cf. Benton Wilson, 33 B. T. A. 649; O. O. Owens, 26 B. T. A. 1147; affirmed in part here material, 78 Fed. (2d) 768; R. S. Goforth, 32 B. T. A. 1206; Augustus H. Eustis, 30 B. T. A. 820. None of the authorities cited by petitioner, even the case of Ferguson v. Forstmann, 25 Fed. (2d) 47, upon which she heavily relies, though possibly contra to Benton Wilson, supra, contradict that statement.

Here the identity of the beneficiary under the trust was never uncertain. She was obviously always ascertained. She was named as beneficiary in the trust indenture. That beneficiary was petitioner. The only uncertainty, evidenced by this record, upon which the Commercial Trust Co. of New Jersey, trustee, withheld the contested amounts, was as to the legal status of those amounts under the trust agreement. Were they all or what part of them, if any, was capital and therefore not distributable under the pertinent trust contract? The trust withheld the controverted dividends not because of any uncertainty in the identity of the beneficiary, but solely because of uncertainty as to whether or not they were distributable under the trust.

Second. It is contended that the tenor of the pending trust indicates that the grantor’s intention was that petitioner had no right to receive the controverted amounts unless she was alive when the litigation was concluded by the decision of the state courts affirming her right to that income under the trust. Since that litigation was not concluded during the tax year, it is then said that the petitioner, to whom such funds were distributable under the trust, on July 2 of the tax year, had only a contingent interest therein at that time and thus, under section 161 (a) (1), supra, and the decision of the Board in Augustus H. Eustis, supra, the trust, and not petitioner, beneficiary, was taxable thereon. However, that argument overlooks the distinguishing facts that petitioner, as beneficiary under the pending trust, was alive on July 2, 1930, and that the state courts, in construing the trust, held that she, as such beneficiary, had a present, unconditional, not a contingent right, on that date, to the contested income.

It is that right of petitioner, beneficiary, to receive the contested income then, not her actual or constructive receipt of such income during that year, which fixes her liability for the tax thereon, as income “currently distributable” during that year, under sections 161 (a) (2) and 162 (b), supra. The possession of that right to receive income, not its actual or constructive receipt, is the test of petitioner’s liability here. That is the applicable test announced in Freuler v. Helvering, 291 U. S. 35. Id that case, where the trustee distributed to the beneficiary during the tax year, more than the proper state court held he then had a right to receive under the trust, rather than less, as was the fact here, the Supreme Court held that the beneficiary was taxable only on the amount which, in the tax year, he had the right then to receive. Cf. Jack M. Franks, 32 B. T. A. 260; and Rita M. Kohler White, 25 B. T. A. 243.

So here, the current distributability of the contested income to petitioner, the ascertained beneficiary, during the tax year, was ultimately controlled by the pending tax instrument as construed by the proper state courts. Those courts decided, finally, that petitioner had the present right to receive the income in question on July 2, 1930. That decision concludes us here. The disputed income was “currently distributable” during 1930, the year involved, by the trustee to petitioner, the ascertained beneficiary, and was, therefore, taxable to her for that year as such beneficiary and not to the trustee. Revenue Act of 1928, secs. 161 (a) (2) and 162 (b); Freuler v. Helvering, supra; McCaughn v. Girard Trust Co., 19 Fed. (2d) 218; Letts v. Commissioner, 84 Fed. (2d) 760, affirming 30 B. T. A. 800; Elnora C. Haag, 19 B. T. A. 982.

In accordance with the stipulation, formally filed of record, the pending deficiency against petitioner is redetermined in the amount of $28,818.48.

Judgment will be entered for the respondent.

       SBC. 161. IMPOSITION OF TAX.
      (a) Application of tax. — The taxes imposed by this title upon Individuals shall apply to the income o£ estates or of any kind of property held in trust, Including—
      (1) Income accumulated in 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;
      (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;
      (3) Income received by estates of deceased persons during the period of administration or settlement of the estate; and
      (4) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.
      (b) Computation and payment.- — The tax shall be computed upon the net income of the estate or trust, and shall be paid by the fiduciary, except as provided in section 166 (relating to revocable trusts) and section 167 (relating to income for benefit of the grantor). For return made by beneficiary, see section 142.
      SBC. 162. NET INCOME.
      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.


author: ARUndell :

text:
    Clarence M. Freedman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 79424.
    Promulgated August 19, 1936.

      J. W. Townsend, Esq., for the petitioner.

      B. N. MoMillan, Esq., for the respondent.
   OPINION.

ARUndell :

This case involves the application of the principle of immunity of state instrumentalities from Federal taxation. As Mr. Chief Justice Hughes puts it in Willcuts v. Bunn, 282 U. S. 216, 225:

The familiar aphorism is “that as the means and instrumentalities employed by the General Government to carry into operation the powers granted to it are exempt from taxation by the States, so are those of the States exempt from taxation by the General Government”. Ambrosini v. United States, 187 U. S. 1, 7.

Many of the recent cases involving this principle carefully point out, in juxtaposition with the statement of it, its limitations. “The limitation of this principle to its appropriate applications is also important to the successful working of the governmental system.” Willcuts v. Bunn, supra. “It is a principle implied from the necessity of maintaining our dual system of government. * * * Springing from that necessity it does not extend beyond it.” Board of Trustees of the University of Illmois v. United States, 289 U. S. 48, 59. “Of course, the reasons underlying the principle mark the limit of its range.” Indian Motocycle Co. v. United States, 283 U. S. 570. “This Court, in drawing the line which defines the limits of the powers and immunities of state and national governments, is not intent upon a mechanical application of the rule that government instrumentalities are immune from taxation, regardless of the consequences to the operations of government.” Educational Films Corporation v. Ward, 282 U. S. 379, 391.

The immunity question has many facets and in this case the parties are at odds on nearly all of them. They argue the questions of whether petitioner was either an officer or employee of the state; whether his services were rendered in connection with the exercise of an essential governmental function; the materiality of the source of his compensation; and whether the tax will result in any burden on the state.

Our conclusion, based on reasons hereinafter given, is that the $3,000 compensation received by the petitioner in 1932 is not exempt from taxation by the Federal Government.

In the first place, we are not satisfied that petitioner can properly be classified as an employee of the Commonwealth of Pennsylvania. The facts are that in 1932 the petitioner, while appointed and supervised by the attorney general, was actually performing the duties of counsel for the liquidator for a group of banks in the Philadelphia area. The duties performed, as set out in the findings of fact, were those that would usually be performed by an attorney for a liquidator or receiver of insolvent corporations. These duties did not require all of his time, but left him free to follow his profession in private practice, which he did, resulting in income of $2,700 from outside sources. These considerations leave considerable doubt as to whether it can be said that petitioner was an employee of the commonwealth in the usually accepted sense of the term. His relation with the secretary of banking appears to be that of attorney and client rather than that of employee and employer.

The basic ground for denying the petitioner’s claim to immunity from tax, however, is that the source of his income precludes any possibility of a burden on the state resulting from a tax thereon. We do not think it can seriously be urged that petitioner was compen-

sated by the state merely because his checks were issued by the officers of the state, as the fact is that both by statute* and in actual practice the source of his compensation was the assets of the several banks in the process of liquidation. These assets were not public funds as are taxes; they were not susceptible of appropriation by the legislature for general public use; they were private property being administered by the secretary of banking in a fiduciary capacity. Therefore, if any burden falls elsewhere than on petitioner, it is on those banks or their creditors, for whose benefit the petitioner was acting, rather than on the state. We held in Ned R. Harman, 84 B. T. A. 654, that fees received by a statutory court reporter from litigants for transcripts of stenographic records are not exempt from tax because they are not paid by the state itself and no burden on the state was shown. Similarly, it has been held that the compensation of an auditor appointed by the Orphans’ Court in Pennsylvania to report on the financial condition of corporations applying as sureties on bonds tendered to the court was taxable since it was paid out of deposits made by the surety companies for that purpose with the clerk of the court, and was not paid by the state itself. Miller v. McCaughn, 22 Fed. (2d) 165; aff'd., 27 Fed. (2d) 128. The District Court in that case pointed out that the “moneys paid are never in any sense public moneys” and held:

The compensation must not merely come to a state officer or employee, but it must come to him from the state, to be exempt. Unless this second line is drawn, and drawn where we have drawn it, it is difficult to determine where it should be drawn. A moment’s thought will bring to mind scores of instances in which the recipient might well be held to be such “officer or employee,” but in which the compensation does not come directly or indirectly from the state, otherwise than in the sense that he would not be in the enjoyment of it, were it not for the relation of officer or employee of the state which he enjoys.

The Circuit Court of Appeals for the Third Circuit, affirming the District Court, held that the taxpayer could not be regarded as an officer or employee of the state and also emphasized the lack of any burden on the state, saying:

The exemption of state employees from federal income tax rests on the ground that the agencies the state employs in government should not be burdened by federal taxes, which would lessen the state’s power to employ, and compel it to pay more for the services of its employees. But no such reason exists in the case of this examiner. No power of the state is crippled or lessened by his paying tax on his income. Neither the state nor the court pay Mr. Miller.

Following the Third Circuit in the Miller case, the Board held, as one of the grounds for denying exemption in two cases decided by memorandum opinions, that no burden resulted to the state from taxation of compensation received from a source other than the state. Robert S. Spangler, Docket No. 46886 (1933); Charles A. Roberts, Docket No. 74214 (1934). In the Spangler case, the taxpayer was a “special attorney” appointed by the commissioner of banking of the State of Pennsylvania to represent him in the liquidation of a state bank and his compensation was paid out of the assets of the bank, and in the Roberts case the taxpayer was an attorney appointed by the superintendent of banks of the State of New York to assist in the liquidation of a trust company, his compensation being paid by the bank in liquidation. To the same effect see Mim. 3838, dated January 17, 1936, I. R. Bulletin XV, No. 5. Following the above cases it must be held here that the petitioner’s compensa-^ tion was not exempt from tax.

The petitioner advances the view that, once he has established himself to be an officer or employee of the state engaged in performing a governmental function, his immunity from Federal taxation is absolute, irrespective of the source of his compensation or of any other consideration. In view of the disposition that we have made of the petitioner’s premise it is unnecessary to decide this matter, but it is worthy of brief note. The petitioner’s contention is based on expressions in some of the cases to the effect that where the principle of immunity applies it is absolute and is not affected by the amount of tax or the extent of the resulting interference. Cf. Indian Motocycle Co., supra. This contention, often urged in tax cases, has its genesis in the apprehension expressed in McCulloch v. Maryland, 4 Wheat. 316, in the maxim that “The power to tax is the power to destroy.” The cases quoted at the outset of this opinion establish that the courts are not stampeded into broadly granting exemption by the quotation of the McGulloch maxim. On the contrary, they inquire into all the facts and circumstances of the case. They inquire into whether an officer or employee is engaged in an essential governmental function, Helvering v. Powers, 293 U. S. 214; Brush v. Commissioner, 85 Fed. (2d) 32; Ohio v. Helvering, 292 U. S. 360; whether the tax works any substantial interference with governmental functions, Metcalf & Eddy v. Mitchell, 269 U. S. 514; or whether it exerts but a remote influence, Willcuts v. Bunn, 282 U. S. 216; Brush v. Commissioner, supra. They also inquire, as we have here, into the source of the funds taxed, Miller v. McCaughn, supra. These cases indicate that the so-called rule of absolute immunity is not so broad in its application as is indicated by a literal reading of the words apart from the context of the case in which they are used. They also establish the right of inquiry into all matters affecting petitioner’s employment, including that of the source of the funds from which he receives his compensation.

In view of the conclusion we have reached we do not deem it necessary to discuss other arguments advanced.

Decision will be entered for respondent.


author: Arundell:

text:
    Edward McLoughlin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 80484.
    Promulgated August 19, 1936.

      Bernhard Knollenberg, Esq., and Joseph W. Wyatt, Esq., for the petitioner. ^

      James H. Yeatman, Esq., for the respondent.
   OPINION.

Arundell:

This proceeding is in all material respects like that of Clarence M. Freedman, 34 B. T. A. 956, decided this day. The arguments of the parties are along the same lines in both cases and it is unnecessary in this case to repeat our views on the several points urged. It is sufficient to say briefly in this case, as we said at length in the other, that we are not satisfied that petitioner can be classified as an employee of the state engaged in carrying on an essential governmental function and that in any event the fact of his compensation being from private funds and not from those of the state precludes the allowance of exemption from Federal income tax.

Decision will be entered for the respondent.


author: Hill:

text:
    William H. Redfield, Petitioner, v. Commissioner of Internal Revenue, Respondent. James D. Biggs, Petitioner, v. Commissioner of Internal Revenue, Respondent. George F. Green, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78860, 79122, 79321.
    Promulgated August 25, 1936.

      Emil J. Monde, Esq., and George E. H. Goodner, Esq., for the petitioners.

      Paul A. Sebastian, Esq., and Wilford H. Payne, Esq., for the respondent.
   OPINION.

Hill:

Issue (1). — Each of the petitioners herein deducted in his income tax return for 1932 the cost of his stock in the Connecticut Corporation on the theory that the stock of the Process Corporation became worthless in 1932, and that the transaction by which the Process Corporation acquired all the assets of the Connecticut Corporation for shares of stock in 1930 was a reorganization in connection with which no profit or loss was recognizable for tax purposes. Hence, the measure of the loss was the cost of the stock in the Connecticut Corporation.

Respondent disallowed the claimed deductions on the grounds (1) that the losses were sustained in 1931 and not in 1932; (2) that there was no statutory reorganization; (3) that in any event, the stock received by the Connecticut Corporation in exchange for its assets was not distributed to its stockholders pursuant to any plan of reorganization ; and (4) that no basis for the computation of the losses is disclosed by the record. That each of the petitioners has sustained a loss is not in controversy, but the parties are in disagreement as to the year in which the respective losses were sustained and whether or not the record establishes the amount.

The first question under this issue, therefore, is, In what year did the losses occur % The year of loss is the year in which occurred some identifiable event which fixed with reasonable certainty the fact of loss. The law does not require a taxpayer to be an incorrigible optimist to the extent of deferring a deduction until the most remote possibility of recovery is exhausted; nor may a taxpayer at his option take the deduction in a subsequent year if it reasonably appears that the loss was sustained in a prior year. United States v. White Dental Manufacturing Co., 274 U. S. 398.

The respondent contends that the identifiable event which fixed the date of the losses in controversy here occurred in 1931, when the suit instituted by the Process Corporation against the Caro Cloth Co. was dismissed for lack of prosecution. Petitioners argue that the losses could not be said to have been sustained at that time for the reason that thereafter there was reasonable expectation of effecting recovery of a substantial amount of their investments through friendly negotiations with the president of the Caro Cloth Co. These negotiations were concluded late in 1932, at which time all hope of recovery was abandoned.

From a careful consideration of the evidence, we are of the opinion that the contention of the petitioners on this point must be sustained. At the end of 1931 it could not be said that the losses of these petitioners were complete. The circumstances as they existed at that time undoubtedly indicated a strong probability that there would be some loss, but negotiations were being actively carried on with a view to the recovery in one form or another of at least a portion of the petitioners’ investments. Apparently petitioners believed in good faith that something would be recovered, and the situation, we think, reasonably supported such belief. Except for the financial difficulties encountered by the Caro Cloth Co. in 1932, the negotiations conducted by Biggs would have probably resulted in saving a substantial amount of the petitioners’ investments. When those negotiations definitely failed during the taxable year solely because of the bad financial condition of the Cloth Co., the stock in the Process Corporation became worthless, and this event fixed the date of the petitioners’ losses.

The next question which arises under issue (1) concerns the proper basis for computing the amounts of the losses sustained by the petitioners in 1932. Respondent determined that the acquisition of the assets of the Connecticut Corporation by the Process Corporation did not constitute a statutory reorganization, and that in any event the subsequent distribution of the stock to the stockholders of the Connecticut Corporation was not made in pursuance of a plan of reorganization, as required by section 112 (g) of the Revenue Act of 1928. Respondent urges, therefore, that the basis for computing the losses is the value of the stock of the Process Corporation at the date received by the stockholders of the Connecticut Corporation, or the value of the assets of the Connecticut Corporation at tire time transferred.

The undisputed evidence establishes that early in 1930 the Process Corporation acquired all the assets of the Connecticut Corporation in exchange for 45,000 shares of its capital stock, which stock was distributed pro rata among the stockholders of the Connecticut Corporation. The latter corporation thereupon ceased to do business. The record does not disclose whether or not this corporation was dissolved, but, irrespective of dissolution, the transaction constituted a reorganization within the meaning of section 112 (i) (1) (A) of the Revenue Act of 1928. Helvering v. Minnesota Tea Co., 296 U. S. 378; Nelson Co. v. Helvering, 296 U. S. 374; Western Industries Co. v. Helvering, 82 Fed. (2d) 461.

Also, the record does not disclose whether the stockholders of the Connecticut Corporation surrendered their shares of stock in that corporation at the time of the distribution to them of the stock of the Process Corporation. If they did in fact surrender or exchange their shares of stock in the Connecticut Corporation for stock in the Process Corporation, both corporations being parties to the reorganization, no gain or loss was recognizable under the provisions of section 112 (b) (3) of the Revenue Act of 1928, if such exchange was “in pursuance of the plan of reorganization.” On the other hand, if the stock of the Process Corporation was distributed to the stockholders of the Connecticut Corporation without the surrender of their stock in that corporation, no gain to the distributees from the receipt of such stock was recognizable under section 112 (g) of the 1928 Act, if the distribution was “in pursuance of a plan of reorganization.” To come within the provisions of either subdivision of the statute referred to, the distribution or exchange of stock must be made in pursuance of a plan of reorganization. National Pipe & Foundry Co., 19 B. T. A. 242; Arctic Ice Machine Co., 23 B. T. A. 1223; J. M. Harrison, Inc., 30 B. T. A. 455.

It is not necessary, however, that such a plan of reorganization be evidenced by a formal written document, such as a contract or corporate minutes. It is sufficient if the circumstances indicate that the various steps taken were pursuant to a definite plan of reorganization. Western Industries Co. v. Helvering, supra.

In the instant case, we do not know whether a formal plan of reorganization was embodied in the minutes of the Connecticut Corporation or other record, since it was testified that the records of that corporation, including its minute books, are out of existence, but the facts and circumstances, we think, clearly indicate a plan of reorganization. It follows that, under section 113 of the Revenue Act of 1932 the basis for determining the losses sustained by petitioners is the cost to them of their stock in the Connecticut Corporation. These amounts are set out in our findings of fact.

In addition to the losses so computed, petitioner George F. Green (Docket No. 79321) is entitled to a deduction in the amount of $2,500 representing the cost of the additional shares of stock in the Process Corporation purchased by him subsequent to the issue to the Connecticut Corporation of the 45,000 shares of stock in exchange for assets. Sec. 113, supra. On the first issue, respondent’s action is reversed.

Issues (0) and (3). — These issues are involved only in the case of petitioner William H. Redfield. In 1928 this petitioner acquired 110 shares of stock in the Tool Corporation, referred to in our findings of fact, at a cost of $1,100, and in the same year loaned the corporation $135 in cash. Petitioner contends he is entitled to deduct these amounts from gross income for 1932 for the reason that both the stock and the debt became worthless in that year. Respondent takes the position that the losses were sustained prior to 1932, and therefore do not constitute allowable deductions for the taxable year. Thus the year of loss is the sole question presented for decision.

The Tool Corporation went into receivership in 1930, petitioner being appointed receiver. It is not shown that the corporation was then wholly insolvent. Whether or not it was insolvent depended upon the realizable value of certain patents and other assets owned by the corporation. Tbe assets were sold by the receiver under order of the court in 1932, and the proceeds applied to the payment of preferred claims. Nothing remained for the general creditors or stockholders. The corporation was left Avithout assets of any kind and its stock and unpaid obligations thereupon became worthless.

We think it can not be said, under the facts here, that the corporation was so clearly insolvent that its stock and debts owed by it became wholly worthless prior to the sale of the assets in 1932. The mere fact of the corporation being in receivership alone is not enough to establish worthlessness of its stock. P. J. Qucaly, 6 B. T. A. 419; Henning Bruhn, 11 B. T. A. 809. While there may have been some probability prior to the taxable year that the stock of the corporation would prove worthless, this fact was not definitely established until the assets were sold. William E. Metzger, 21 B. T. A. 1271; Peter Doelger Brewing Co., 22 B. T. A. 1176; Royal Packing Co. v. Lucas, 38 Fed. (2d) 180, affirming 13 B. T. A. 773; Burnet v. Imperial Elevator Co., 66 Fed. (2d) 643, affirming 25 B. T. A. 234. Petitioner is entitled to deduct the amount of his investment in the stock of the Tool Corporation as a loss sustained in 1932.

The facts referred to above which establish that the stock of the corporation became worthless in 1932 also support the conclusion that the debt owing to petitioner by the corporation became worthless in the same year. The statute requires not only that a debt, in order to be deductible, must be ascertained to be worthless, but also must be charged off within the taxable year. Sec. 23 (j), Revenue Act of 1932. But petitioner kept no individual books of account, and could not therefore charge off the debt in the ordinary way. He claimed a deduction of the amount in his return for 1932, and respondent raises no question on this point. Petitioner is entitled to the deduction claimed on account of the worthless debt. Merritt J. Gorbett, 15 B. T. A. 698; aff'd., 50 Fed. (2d) 492.

Judgment will be entered under Rule 50.

       SEC. 112. RECOGNITION OF GAIN OR LOSS.
      #**♦*#*
      (b) (3) Stock for stock on reorganization. — No gain or loss shall he recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.

       Sec. 112. (g) Distribution of stocJc on reorganization. — If there is distributed, in pursuance of a plan of reorganization, to a shareholder in a corporation a party to the reorganization, stock or securities in such corporation or in another corporation a parly to the reorganization, without the surrender by such shareholder of stock or securities in such a corporation, no gain to the distributee from the receipt of such stock or securities shall be recognized.


author: Disney :

text:
    Word Specialty Manufacturing Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent. T. T. Word Supply Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 68856, 68857.
    Promulgated August 25, 1936.

      G. Kilby Munson, Esq., and Moultrie Hitt, Esq., for the petitioners.

      Willis R. Lcmsford, Esq., for the respondent.
   OPINION.

Disney :

The main issue turns upon whether or not the petitioners and the Texas corporation were members of an affiliated group of corporations within the meaning of section 141 of the Revenue Act of 1928, subsection (d) of which reads as follows:

(d) Definition of “affiliated group". — As used in this section an “affiliated group” means one or more chains of corporations connected through stock ownership with a common parent corporation if—
(1) At least 95 per centum of the stock of each of the corporations (except the common parent corporation) is owned directly by one or more of the other corporations; and
(2) The common parent corporation owns directly at least 95 per centum of the stock of at least one of the other corporations. As used in this subsection the term “stock” does not include nonvoting stock which is limited and preferred as to dividends.

The contention of the petitioners is that Word held in excess of 95 percent of the stock of the Texas and Manufacturing corporations as a trustee for the Supply Co. and, accordingly, the latter owned the statutory percentage of stock to entitle the three corporations to file consolidated returns for the taxable years. The position of the respondent is that Word had absolute title to the stock of the Texas and Manufacturing corporations outstanding in his name. The question thus becomes one of whether such stock was, in fact, owned by Word or the Supply Co. If it was owned by Word, the corporations were not affiliated and no right existed to file consolidated returns. Sec. 141 (a).

The respondent’s finding is in accordance with representations consistently made by Word as president of the Supply Co. for a period of four years and the manner in which the stock was issued. We are asked to ignore such allegations and indications of real ownership and accept, as reflecting the true situation, testimony of Word and another witness of the petitioners that the intent was to have the Supply Co. acquire the stock; that Word took title to the securities merely on the advice of counsel that a Texas corporation may not legally own stock of another corporation; and that the books do not reflect the real facts. We have not been referred to any authority opposed to the right of a Texas corporation to acquire and own stock of another corporation.

It is argued that the allegations of ownership were made at a time when the question was unimportant, and for that reason they have little, if any, probative force. We think otherwise. They represent, in our opinion, a conclusion reached within a short time after completion of the transactions by one chiefly concerned with the result, and adhered to without change of position for a long period of time. It would require strong evidence to overcome the facts so consistently represented by the person primarily concerned with the outcome of these proceedings. See Evan V. Quinn, 26 B. T. A. 970.

The contract of March 10, 1926, involved only the purchase of claims against the Texas corporation and the North Texas Supply Co., and stock of the latter corporation, but the consideration was regarded as part of the cost of the stock of the Texas corporation, apparently under the assumption that the contract and the subsequent acquisition of the stock were one transaction. That Word was fully aware of the fact that he had been charged with the sum of $160,000 as part of the purchase price of the stock of the Texas corporation is shown by clear proof that he claimed interest on so much thereof as was borrowed by the Supply Co. as a deduction in his individual income tax returns, including his 1932 return, filed after he caused these proceedings to be instituted. No part of such interest was claimed as a deduction by the corporation.

The stock was purchased directly from the Tennessee corporation. Whether the transaction was made the subject of a written agreement does not appear. Word testified that the “Tennessee Company gave us the stock of the company in return for some patterns and raw material that wo had on hand at Houston.” The material testified to seems to have been property of the Texas corporation which the Supply Co. had under consignment. A consulting accountant was requested to advise the Supply Co. the entries to make to reflect the acquisition of the stock and the terms of the March 10, 1926, contract. In a letter addressed to Word, as president of the Supply Co., the accountant stated that “I understand that to acquire the capital stock of the Lucey Manufacturing Corporation of Texas you paid the nominal sum of one dollar and agreed to have the Corporation ship the Tennessee plant, of the New York Corporation, approximately $38,000 worth of raw material.” On cross-examination Word testified that the communication set forth the correct facts. It was pursuant to the instructions set forth in the letter that Word was charged with the value of the material. Thereafter the amount was carried on the books of the Texas corporation as a debt due from Word.

As to the ownership of the stock of the Manufacturing Corporation outstanding in the name of Word, the only evidence before us in any way indicating that the Supply Co. was the real owner, is a showing that the Supply Co. furnished the corporation’s capital. Such meager evidence proves nothing substantial, in the light of declarations of Word until these appeals were taken that he was the owner of the securities.

The finding of the respondent that the petitioners and the Texas corporation were not affiliated is prima facie correct and is presumed to rest upon a correct determination of the facts. The evidence before us supports, rather than overcomes the determination of the respondent. Accordingly, we find that the respondent did not err in refusing to compute the tax liability of the petitioners and the Texas corporation on the basis of consolidated returns.

Under the alternative issue the Supply Co. seeks the benefit of operating expenses of the Texas corporation as deductions from its gross income. It refers to the resolutions of the respective corporations as making such expenses chargeable to it. No statutory or other authority is cited to support the claimed right, and we find none.

Operating expenses of the Texas corporation in and after 1926 were allocated between it and the Supply Co. in accordance with a plan proposed by the consulting accountant of the Texas corporation in January 1927, and as so apportioned were claimed as deductions by the respective corporations in the consolidated returns filed for the taxable years. The deductions so claimed were allowed by the respondent in his determination of the deficiencies. From this course of action it would seem that the terms of the resolutions were never carried into effect, even though they were adopted prior to the time allocation instructions were issued by the accountant consulted for that purpose. No reason is assigned for failing to apportion the expenses in accordance with the resolutions.

The expenses in controversy were incurred in the first instance by the Texas corporation and, in the absence of any evidence to the contrary, we assume that it paid, and if not, accrued, the liabilities on its books. It does not appear that the Supply Co., aside from the allocations referred to, was ever charged with or reimbursed the Texas corporation for any of the operating costs. Thus there is no proof that the Supply Co. ever paid or accrued the expenses on its books during or since the taxable year. Neither is any assurance given us that the Supply Co. proposes to recognize the obligation at this late date.

If there were proof in the record of the payment or accrual of the expenses as liabilities of the Supply Co., we would be compelled to disallow the claim.

Deductions from gross income are a matter of legislative grace. New Colonial Ice Co. v. Helvering, 292 U. S. 435, and may not be allowed unless plainly authorized. Helvering v. Inter-Mountain Life Insurance Co., 294 U. S. 686. Authority for the deduction from gross income of items such as are involved in this issue are contained in section 23 of the Revenue Act of 1928. Business expenses are limited to “All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses * * *; and rentals * * Subsection' (a'. Interest paid or accrued within the taxable year on indebtedness may be deducted. Subsection (b). The same section authorizes the deduction of “Taxes paid or accrued within the taxable year” and a reasonable allowance for exhaustion of property used in the trade or business. Subsections (c) and (k).

The Supply Co. voluntarily and without consideration agreed to assume the operating costs of the Texas corporation. The statute contemplates the deduction of only such ordinary and necessary business expenses as are personal to the taxpayer. It does not embrace such operating costs of a separate and distinct taxpayer. Sigmund Spitzer, 23 B. T. A. 776. To the same effect are Caldwell & Co., 26 B. T. A. 790; and Coosa Land Co., 29 B. T. A. 389. A husband who pays taxes on property in his wife’s name may not deduct the amount thereof in his individual return even though he assumed the obligation at the time of his gift of the property to his wife. Eugene W. Small, 27 B. T. A. 1219; William Ainslie Colston, 21 B. T. A. 396; affd., 59 Fed. (2d) 867; certiorari denied, 287 U. S. 640.

The Supply Co. also contends under its alternative issue that the operating expenses of the Texas corporation should be allocated to it under the provisions of section 45 of the Revenue Act of 1928, reading as follows:

In any ease of two or more trades or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion, or allocate gross income or deductions between or among such trades or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion taxes or clearly to reflect the income of any of such trades or businesses.

As already pointed out all of some, and a portion of other, operating expenses of the Texas corporation were allocated to the Supply Co. each year in and after 1926, on the basis of advice given by a consulting accountant. The allocations so made were reflected in the consolidated returns filed by the corporations for the taxable years and accepted by the respondent in fixing the income tax liability of the Supply Co. and the Texas corporation. We are asked to go a step further under the statute and apportion all of the deductions of the Texas corporation, except a small amount for rent, bad debts, and net losses for previous years, to the Supply Co.

A taxpayer claiming the benefits of the statute must prove the necessity for the consolidation and a reasonable, accurate method of allocation. Nowland Realty Co. v. Commissioner, 47 Fed. (2d) 1018, affirming 18 B. T. A. 405; Roessler & Hasslacher Chemical Co., 25 B. T. A. 915; Flambeau Public Service Co., 27 B. T. A. 299; Drawoh, Inc., 28 B. T. A. 666.

The Supply Co. says that the activities of the Texas corporation decreased each year, making it necessary, in order to clearly reflect the income of the corporations, to apportion a greater part of the expenses of the Texas corporation to the Supply Co. in succeeding years. The respective corporations represented to the respondent that the apportionments made were sufficient to clearly reflect their income, and a mere showing of decreased business income is not sufficient for us to hold to the contrary.

The Texas corporation had gross income each year from sales of material, interest, and other activities, which was reported as “Other Income”, and a net loss without the benefit of the amounts in controversy as a deduction. If we allocated its operating expenses to the Supply Co., the accounts of the Texas corporation would show no expense to offset the earning of such income. Such a distribution, under the circumstances, would distort, rather than clearly reflect, the income of the respective corporations.

Ho evidence was offered to show that there was a commingling of accounts of the respective corporations and, in the absence of such proof, we may assume that the income and expenses of the respective corporations are accurately recorded in books of account separately kept by each. From such books the taxable income of each corporation can be clearly determined. Where such a condition exists there is no need to consolidate accounts to clearly reflect income. Drawoh, Inc., sufra.

From the record made, we hold that the Supply Co. is not entitled to a greater apportionment of the expenses of the Texas corporation than that claimed by the respective parties and allowed by the respondent. Decision will he entered for the resfondent.