author: Goodkich:

text:
    Riley Stoker Corporation, formerly named Sanford Riley Stoker Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 36584.
    Promulgated July 29, 1932.

      Frederick L. Fierce, Esq., and George M. Morris, Esq., for the petitioner.

      J. M. Leinenkugel, Esq., and T. G. Eiston, Esq., for the respondent.
   opinion.

Goodkich:

Petitioner assails respondent’s determination of a deficiency in its income-tax liability for the year 1923 in the amount of $5,451.74, and contends that it has already overpaid that liability and is entitled to a refund. In general, there is at issue here the proper application to 1923 income, under section 204, Revenue Act of 1921, of net losses sustained by certain members of a group of affiliated corporations in the years 1921 and 1922. Specifically, petitioner complains that respondent has treated as a “ taxable year ” each of the two periods of the calendar year in which affiliation occurred, prior and subsequent to the date of affiliation, thus barring from application to the year 1923 certain of the net losses which, under the statute, may be carried forward two succeeding taxable years. It further complains specifically of respondent’s failure to offset against income earned in 1923 by certain of the corporations during affiliation the net losses sustained by the same corporations prior to affiliation. After this case was submitted, the Supreme Court handed down its decisions in the cases of Woolford Realty Co. v. Rose, 286 U. S. 319, and Planters Cotton Oil Co. v. Hopkins, 286 U. S. 332. In view of the fact that the principles announced in those decisions must guide us in the determination of this proceeding, opportunity was afforded to both parties, and availed of, to submit further argument in this case in the light of those decisions, with the result that petitioner’s claims as to the amounts of net losses applicable to 1923 income have been modified substantially.

The facts, as admitted by the pleadings and stipulated by the parties, are as follows:

Tlie petitioner is a Massachusetts corporation with its principal office at Worcester, Massachusetts. Its name was changed from Sanford Riley Stoker Company to Riley Stoker Corporation on December 27, 1924. Dor the entire calendar year 1923 the Sanford Riley Stoker Company, Murphy Iron Works (Inc.), Underfeed Stoker Company of America, Craig Damper Regulator Company, and A. W. Cash Company were affiliated. The net income or loss of each of these corporations and their affiliated net income for the calendar year 1923 as determined by the Commissioner, without allowing net loss prior to January 1, 1923, is as follows:
Net Incomes
Sanford Riley Stoker Corporation-$157,135. 01
Underfeed Stoker Co. of America- 163, 616.30
Craig Damper Regulator Company_ 454.49
A. W. Cash Company_ 18, 960.89
Total aggregate net income-$340,166. 69
Loss
Murphy Iron Works (Inc.)_ 3,165.82
Consolidated net income, 1923_$337, 000. 87
The following corporations were affiliated with each other for the calendar year 1922 from the date set respectively after each name to December 31, 1922:
Sanford Riley Stoker Company from January 1, 1922.
Murphy Iron Works (Inc.) from January 1, 1922.
Underfeed Stoker Co. of America from June 12, 1922.
A. W. Cash Company from August 31, 1922.
Craig Damper Regulator Company from June 12, 1922.
• A consolidated return was filed for the calendar year 1922 including the above named companies.
The net income or net loss of each corporation from the date indicated to December 31, 1922, and the consolidated net income for the year 1922 (as finally determined by the Commissioner) were as follows:
Net Incomes
Sanford Riley Stoker Co. (from January 1, 1922)_ $17,276.77
Murphy Iron Works (Inc.) (from January 1, 1922)_ 87,377.16
A. W. Cash Company (from August 31, 1922)_$3,102. 57
A. W. Cash Company (1921 Net Loss $38,739.45 offset)-- None.
Aggregate Net Income. $104, 653. 93
Net Losses
Underfeed Stoker Co. of America (from June 12, 1922) _ $6,298.34
Craig Damper Regulator Co. (from June 12, 1922)_ 10.26
Aggregate Net Losses_ $6,308.60
Consolidated Net Income, 1922_ $98,345. 33
The following corporations were affiliated with each other but not with any other corporation from January 1, 1922 to June 11, 1922:
Craig Damper Regulator Company and Underfeed Stoker Co. of America.
A consolidated return was filed covering this period in 1922 including the above named companies.
The net loss resulting from the operation of the business regularly carried on by each corporation, after making adjustment for non-taxablo interest and dividends received and for unallowable deductions, and after intercompany adjustments, for the period from January 1, 1922, to June 11, 1922, were as follows:
Net Losses
Craig Damper Regulator Co_ $8.19
Underfeed Stoker Co. of America-4, 581.33
The A. W. Cash Company was not affiliated with any other corporation for the period from January 1, 1922, to August 30, 1922. The net income of the said corporation for the said period in 1922 was $6,104.18.
The following corporations were affiliated with each other but not with any other corporation for the entire calendar year 1921:
Craig Damper Regulator Company and Underfeed Stoker Co. of America.
The net loss resulting from the operation of the business regularly carried on by each corporation, after making adjustment for nontaxable interest and dividends received and for unallowable deductions, and after intercompany adjustments, for the calendar year 1921 were as follows:
Net Losses
Craig Damper Regulator Company-$3, 587. 42
Underfeed Stoker Co. of America- 103,972. 30
The A. W. Cash Company was not affiliated with any other corporation for the calendar year 1921. The net loss resulting from the operation of the business regularly carried on by the A. W. Cash Company, after making adjustment for non-taxable interest and dividends received and for unallowable deductions, for the calendar year 1921, was $38,739.45.
The income tax computed as a unit upon the basis of the consolidated return of net income as filed for the calendar year 1923 has been assessed all upon the Sanford Riley Stoker Company in the sum of $36,673.37.

The following summary discloses in convenient form the items of income or loss of these corporations as above set out:

The entire deficiency of $5,451.74 computed by the Commissioner upon the basis of a consolidated net income in the sum of $337,000.87 for the calendar year 1923 has been proposed against the Sanford Riley Stoker Company in the deficiency notice of January 20, 1928.

It will be noted that for three of the corporations the calendar year 1922 is divided into two parts, the Craig Damper Regulator Company and the Underfeed Stoker Company of America having become affiliated with the group on June 12, and the A. W. Cash Company on August 31. Respondent has refused to apply against 1923 income any part of the net losses sustained by these corporations during the year 1921, urging that the periods before and after affiliation in 1922 were each a taxable year and therefore 1923 is the third succeeding taxable year, into which the loss can not be carried. • Respondent erred in so ruling. The distinction between the situation where, because the first or last accounting period is less than twelve months, that period must be treated as a taxable year and where, as here, an affiliation occurs to break up a taxable year into shorter taxable periods, was clearly drawn in General Box Corporation, 22 B. T. A. 725. We there held that in applying a statutory net loss under the 1921 Act the term “ taxable year ” as used in section 204 (b) means a taxable period of twelve months and is not changed by an affiliation occurring therein.' The periods before and after affiliation are not to be taken as two separate taxable years, but are to be taken together to constitute one taxable year in computing the net income of the taxpayer. Cf. Sweets Co. of America v. Commissioner, 40 Fed. (2d) 436; Swift & Co. v. United States, 38 Fed. (2d) 365; Hoffman, v. United States, 52 Fed. (2d) 269; Thomas J. Corcoran Lamp Co., 24 B. T. A. 284.

It is clear therefore that, so far as the element of time is concerned, net losses sustained by these corporations in the year 1921 may be applied to 1923 income. However, whether these losses, and other net losses sustained prior to the date of affiliation, may be applied in whole or in part to income earned thereafter mu^t h§ determined in the light of the Supreme Court decisions to which we have previously referred.

As we understand the decisions in Woolford Realty Co. v. Rose, and Planters Cotton Oil Co. v. Hopkins, supra, the net loss sustained by a corporation prior to affiliation may be applied in the succeeding taxable year to the income not of the consolidated group, but of that same corporation, and in case that corporation has no net income, but sustains a loss in this first succeeding taxable year the losses are not to be pyramided, but the first loss is to be carried over to the second succeeding taxable year. However, since the court cites with apparent approval Swift & Co. v. United States, supra, the application of the loss to the corporation’s income for the succeeding taxable year must be limited to the amount not absorbed by the income of the consolidated group in the year the loss was sustained. See Delaware & Hudson Co., 26 B. T. A. 520; Washburn Wire Co., 26 B. T. A. 464; Hennessy Realty Co., 26 B. T. A. 196; Summerfield Co., 26 B. T. A. 440. With these rules in mind, the determination of the case at bar becomes merely a matter of arithmetic.

The Riley Stoker Company had income of $157,135.01 in 1923, and no net losses in prior years. The Murphy Iron Works had a net loss in 1923 of $3,165.82, and not net losses in prior years. The Craig Damper Regulator Company had income in 1923 of $454.49. It had a net loss in 1921 of $3,587.42 which was neither offset against income for 1922, since in that year it likewise sustained a net loss, nor absorbed by income of the consolidated group. Therefore, this loss may be applied in 1923 to the extent of the company’s income in that year. The Underfeed Stoker Company of America had net income of $163,616.30 in 1923. In 1921 it sustained a net loss of $103,972.30, which was previously neither applied nor absorbed and which may therefore be offset against its 1923 income. In 1922 it sustained a net loss also, but a part thereof, sustained in the period June 12 to December 31, was absorbed by the income of the group for the year 1922 and may not now be carried forward. However, the loss sustained prior to affiliation in the period January 1 to June 12, amounting to $4,581.33, may be applied against its income for 1923. The A. W. Cash Company had net income of $18,960.89 in 1923. In 1921 its net loss was $38,739.45, which must first be applied against the company’s earnings in 1922, amounting to $9,206.75, leaving a balance of $29,532.70, which may be applied to the extent of the company’s 1923 income. It thus appears that the consolidated net income for the year 1923 is $209,-031.86, which should be used as the basis for computation of petitioner’s income-tax liability.

Judgment will be entered under Rule 50.


source: Caselaw Access Project

author: Leech:

license: Public Domain

text:
    J. Edgar Davidson, Executor, and Mary E. Davidson, Executrix, of the Estate of R. J. Davidson, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 41174.
    Promulgated July 29, 1932.

      Montgomery B. Angelí, Esq., Otis T. Bradley, Esq., and Marvin Lyons, Esq., for the petitioners.

      George R. Sheriff, Esq., for the respondent.
   OPINION.

Leech:

Whether the transaction detailed in the findings of fact created an indebtedness to the taxpayer on the part of his son depends upon the intention of the taxpayer in the transfer of the securities. Jacob Grossman, 9 B. T. A. 643. If taxpayer’s intention was that his son be permitted to use the securities as a pledge and return them when no longer needed and also to pay him their value in case of sale by the pledgee, the transaction would leave the son indebted as claimed by petitioners. However, if the intent was that the son return the securities when no longer needed by him, but that in the case of their sale by the pledgee, his son would not be indebted to him for their value, no indebtedness would arise. Hattie Wolff, 26 B. T. A. 622.

The evidence from which we must draw our conclusion is meager. It is well settled that a transfer of money or other property by a father to a son is presumed to be a gift or advance rather than a loan. Storey v. Storey, 214 Fed. 973. However, such presumption is not conclusive, but may be rebutted by a sufficient showing of intent to the contrary. William M. Fleitmann, Jr., et al., Executors, 22 B. T. A. 1291; Redfield v. Eaton, 53 Fed. (2d) 693; Elizabeth N. C. Hetherington, 20 B. T. A. 806.

The record shows that the transfer of these securities was made by the taxpayer upon a request by his son to establish a credit upon which he might draw to protect his equity in a stock-trading account. We think the evidence of his discussion of the matter with another son before making the transfer and his final agreement thereto after that son expressed the belief that the need for the securities was only temporary, is sufficient to show that it was the taxpayer’s intention that these securities be returned to him if not sold to satisfy the indebtedness of the pool account. However, in the face of the contrary presumption and without additional evidence, may we conclude that it was the taxpayer’s intention that his son pay him or remain indebted to him for the value of these securities in case they were sold by the broker? There was no specific agreement between petitioner and his son and we have no evidence indicating that after the securities were sold by the brokers petitioner considered an indebtedness as existing. The taxpayer died in 1930 and it does not appear that the son and daughter, who are the executors of his estate and who, it is assumed, realize what his intention was in respect to this matter, have listed any indebtedness of R,. J. Davidson, Jr., as an asset of the estate or charged against him in the settlement of the estate any indebtedness owing to the decedent.

We do not think that the transfer of property by a father to a son with the understanding that it be returned if not lost by him is sufficient basis for a presumption of intention that the value of the property be paid by the son in case of its loss. It appears that such is the situation here. However, even in the event that petitioners’ contention with respect to the intent of the taxpayer in the transfer of these securities could be sustained and an indebtedness neid to have been created on the part of the son, such indebtedness would not be subject to a charge-off by the taxpayer as a worthless debt. It is shown that the transfer of these securities by the taxpayer was with the knowledge that the use to which they were to be put was a most hazardous one and that their sale by the pledgee would only be under conditions leaving his son utterly unable to pay an indebtedness of this amount. It appears, further, that the securities were in no sense sold by the taxpayer to his son, but that he permitted their use merely as security. It is clear that they remained the property of the taxpayer, subject to the right of the pledge to sell them if necessary. Any increase in their value while held by the pledgee was to the benefit of the taxpayer, and if the transaction did give rise to an indebtedness on the part .of the son, such indebtedness arose only upon the contingency of the sale of the securities by the pledgee. Osterloh v. Lucas, 37 Fed. (2d) 277. The happening of such contingency would necessarily leave the son bankrupt, the debt would be wholly worthless and uncollectible when it came into existence, and there would consequently be no value represented by it to be charged off by the taxpayer. Eckert v. Burnet, 283 U. S. 140.

We have noted carefully the recent opinion of the Circuit Court of Appeals for the Second Circuit in Shiman v. Commissioner, 60 Fed. (2d) 65, reversing a decision of the Board which denied a bad debt deduction growing out of a guarantee by the taxpayer of certain brokerage accounts of his brother-in-law. In that case a substantially different situation was presented. Here, we have a case of a transfer by a father to his son with knowledge of the critical condition of the latter’s affairs, in which the father had no interest other than that arising from his paternal interest in his son’s welfare. In the SMman case there was a guarantee of brokerage accounts of a brother-in-law at a time when the latter was known to be solvent and in certain of these accounts the taxpayer himself owned a part interest.

Our conclusion is that as a result of the transaction in question the taxpayer had no indebtedness due him, on account of these securities transferred to his son, for which he was entitled to take credit as a debt ascertained to be worthless and charged off in the taxable year.

Petitioners assert no claim to this deduction as a loss and manifestly it does not represent a deductible loss as the transaction was neither in the course of a trade or business nor entered into for profit.

Judgment will be entered for the respondent.


author: Thammiíill :

text:
    Harriet M. Hooper, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 55376.
    Promulgated July 29, 1932.

      Charles O. Parlin, Esq., for the petitioner.

      O. J. Tall, Esq., for the respondent.
   opinion.

Thammiíill :

This proceeding is for the redetermination of a deficiency in income tax of $11,148.52 for 1927. The proceeding was submitted on an agreed statement of facts as follows:

1. That the only question involved in the above-entitled proceeding is whether the profit of $95,168.75 realized b'y the taxpayer on the sale in 1927 of certain real estate located in Bedford Hills, New York, is to be taxed as an item of ordinary income or as a capital gain.
2. That said property was sold by the taxpayer on October 10, 1927.
3. That said property was acquired by the taxpayer on October 10, 1925.

In determining the deficiency the respondent determined that the profit from the sale was taxable as ordinary income. The petitioner contends that this was. error, as the profit is taxable as capital gain.

The Revenue Act of 1926, which is applicable to the year here involved, provides as follows:

Sec. 208. (a) For the purpose of this title—
(1) The term “ capital gain ” means taxable gain from the sale or exchange of capital assets consummated after December 31, 1921;
$ sjs * * # • Hi X
(8) The term “capital assets” means property held by the taxpayer for more than two years * * *
(b) In the case of any taxpayer (other than a corporation) who for any taxable year derives a capital net gain, there shall (at the election of the taxpayer) be levied, collected and paid, in lieu of the taxes imposed by sections 210 and 211 of this title, a tax determined as follows:
A partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner provided in sections 210 and 211, and the total tax shall be this amount plus 12% per centum of the capital net gain.

The question presented for determination is whether the profit from the sale of real estate here involved constituted a capital gain within the meaning of the statute. In order for such profit to constitute a capital gain the property must have been “ held by the taxpayer for more than two years.”

Here the property was acquired by the petitioner on October 10, 1925, and was sold on October 10, 1927. The petitioner contends that having owned the property on October 10, 1925, and also on October 10, 1927, and that taking the day as the unit of the measure of time she therefore “ held ” the property two years and one day or “for more than two years,” as required by the statute. The respondent raises no question as to the inclusion of October 10, 1927, in the computation of time during which the petitioner held the property, but contends that the day on which the property was acquired should be excluded from the computation and that the petitioner accordingly held the property for exactly two years and not for more than two years. The controversy between the parties therefore resolves itself into the question of whether October 10, 1925, the day on which the petitioner acquired the' property, is to be included in computing the time during which the petitioner held it.

The petitioner points out that in the decisions of some courts on the question of computing time a distinction is made between computations of time “ from ” or after ” an event as contrasted with a specified day and states that when the period follows a specified day such day is to be excluded, but when the period follows a specified event the day of the event is to be included in the computation. She then insists that the measurement of time in the instant case is not “ from ” or “ after ” an event or day, but represents the period of a “ continuing state ” (the holding of property) and that the first day is to be included in the computation.

The statute does not furnish any rule or prescribe any method for computing or measuring the time during which the petitioner held the property. Nor does it indicate that fractional parts of a day or days are to be considered or that a more precise unit of measure than a day is to be used. Under such circumstances the United States Supreme Court in the case of Burnet v. Willingham Loan & Trust Co., 282 U. S. 437, said:

We are seeking a measure of time, and therefore we have to translate the event into the language of time; and when, as here, there is ho special reason for being, more precise, the day is the unit, because people generally measure periods of more than one day by days, months or years.

In view of the foregoing we think that the fractional parts of a day are to be disregarded. It is clear that the petitioner did not own the property the entire day on which she acquired it, nor the entire day on which she disposed of it. Yet it is only by including both days that she can be said to have held it for more than two years.

In order for there to be any measurement of the duration of or the length of the period for which the petitioner held the property, such period must hare a starting point or time of beginning, and such time of beginning must be regarded either as a day or as an event. In order for the petitioner to get the relief here sought, she must have held the property for more than two years from the time she acquired it, or the beginning point of measurement, whether such point is regarded as a day or as an event. We think it is immaterial whether the beginning point be considered as a day or as an event, since the rule for the computation of time as laid down by the Supreme Court appears to be the same in either case. In Sheets v. Selden's Lessee, 2 Wall. 177, 190, the Supreme Court said:

The general current of the modern authorities on the interpretation of contracts, and also of statutes, where time is to be computed from a particular day or a particular event, as when an act is to be performed within a specified period [rom or after a day named, is to exclude the day thus designated, and to include the last day of the specified period. “ When the period allowed for doing an act,” says Mr. Chief Justice Bronson, “ is to be reckoned from the making of a contract, or the happening of any other event, the day on which the event happened may be regarded as an entirety, or a point of time; and so be excluded from the computation.”

In Siegelschiffer v. Penn Mutual Life Ins. Co. 248 Fed. 226, it was said:

It is also, we take it, settled by the weight of authority that the time within which an act is to be done is to be computed by excluding the first day and including the last. Sheets v. Selden, 2 Wall. 177, 17 L. Ed. 822; Elliott National Bank v. Gill (D. C.) 210 Fed. 933, 940.

See also United Timber Co. v. Bivens, 253 Fed. 968; In re Antonnen, 293 Fed. 473; Chambers v. Lucas, 41 Fed. (2d) 299. Also cf. Burnet v. Willingham Loan & Trust Co., supra, affirming 15 B. T. A. 931.

The act required of the petitioner in the instant case to entitle her to the benefit of the capital gain provisions was the holding of the property in question for more than two years from the time she became the owner of it. Under the rule laid down by the Supreme Court the time she held it is to be computed by excluding the day on which she acquired it, October 10, 1925, and including the day on which she sold it, October 10, 1927. A computation made in accordance with that method makes it apparent that the petitioner held the property for exactly two years and not “ for more than two years.” The petitioner not having held the property for more than two years, it was not a capital asset within the purview of the statute and the profit from the sale thereof is not to be taxed as a capital net gain.

Judgment will be entered for the resfondent.


author: Aeundell:

text:
    Wayne County and Home Savings Bank, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 49144.
    Promulgated July 29, 1932.

      Paul E. Shor'd, Esq., for the petitioner.

      George D. Brabson, Esq., for the respondent.
   OPINION.

Aeundell:

Under the provisions of the revenue act the petitioner is entitled to deduct from its gross income taxes imposed upon the stock of its shareholders which are paid by it without reimbursement from its stockholders. Sec. 284 (a) (8), Eevenue Act of 1926.

The laws of Michigan provide for the assessment of personal taxes on shares of bank stock to their owners ” in the township, village or city where the bank is located, “ Provided, that the shares owned by a person residing in the county where the bank or trust, deposit or security company is located shall be assessed in the township or city where he resides * * Secs. 4002 and 4008, Compiled Laws of 1915, State of Michigan, as amended by Public Act No. 8 of 1917, and Public Act No. 163 of 1923.

Section 4042 of the same laws reads:

In the case of taxes assessed, upon the shares of the capital stock of any bank, he (the Treasurer) shall call upon the cashier of such banks and demand payment thereof, and thereupon it shall be the duty of such cashier to pay the same and charge the amount so paid against the shares of stock so taxed.

The parties differ only in whether the taxes were paid by the petitioner within the meaning of the'taxing act. This question turns upon whether the payment of the amounts by the stockholders under the credit arrangement set forth in the stipulation of facts constitutes payment by the petitioner. We think it does.

The Michigan statute has been construed to mean that, where a demand for payment of tax assessed against a stockholder on his stock is made upon the cashier of the bank, it is his duty to pay the same from funds of the bank, and that an action will not lie against him personally because of this duty of the bank to pay. City of Muskegon v. Lange, 104 Mich. 19; 62 N. W. 158; Eyke v. Lange, 104 Mich. 26; 63 N. W. 535.

Here, the petitioner, instead of paying the taxes directly to the taxing authorities, as it had done in the case of taxes levied on stock held by residents of Detroit and counties other than Wayne, credited the account of each stockholder with an amount for the payment of the taxes purely as a matter of convenience. Had the petitioner placed the funds in the hands of its cashier or another officer or employee, with similar directions, there would.be little, if any, doubt as to the deductibility of the taxes paid under such a plan of procedure. The petitioner accomplished the same purpose by designating the stockholders to pay the tax levies with its money. A payment of tax by a stockholder was, under the plan adopted, a payment by the petitioner, and, under the provisions of section 234(a) (3), is deductible in the year paid.

The parties have stipulated the amount of tax paid by the various stockholders during each taxable year. The total amount so paid each year will be determined therefrom and proper allowances made therefor in the recomputation to be filed under Eule 50.

Effect will also be given in the Eule 50 proceedings to the admission of petitioner that it is not entitled to a loss deduction of $25,900 in 1927 on certain securities.

Decision will be entered) under Rule 50.


author: McMahon. Smith,

text:
    Alfred A. Laun, Petitioner, v. Commissioner of Internal Revenue, Respondent. J. B. Laun, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 45347, 45348.
    Promulgated July 30, 1932.

      Frederic Sammond, Esq., for the petitioners.

      W. Frank Gibbs, Esq., for the respondent.
   OPINION.

McMahon.

At the hearing the petitioner, J. B. Laun, moved to amend his petition by striking out the allegation of error (a) in Docket No. 45348 and subparagraph (a) of paragraph (5) of the petition, all relating to the alleged failure of the respondent to allow a deduction of $5,225.50 for losses alleged to have been sustained in the year 1926. This motion was granted. Therefore, the respondent’s determination in this respect will not be disturbed.

This leaves for consideration only one question. The respondent contends that the shares of preferred stock of the Kiel Furniture Company originally issued as a stock dividend were purchased and canceled “ at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend,” within section 201(g) of the Revenue Act of 1926. This contention is also made with respect to similar transactions between the petitioner, J. B. Laun, and the Company in 1926 and 1927.

Both petitioners, on the other hand, contend that the transactions constituted sales, and Alfred A. Laun, in his income-tax return for 1926, reported the transaction as a sale with a resultant profit of $1,808.17.

Section 201(g), supra, provides as follows:

If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend. In the case of the cancellation or redemption of stock not issued as a stock dividend this subdivision shall apply only if the cancellation or redemption is made after January 1, 1926.

Whether or not the transactions between petitioners and the Company in 1926 and 1927 amounted to sales or were distributions “ essentially equivalent to the distribution of a taxable dividend ” depends upon whether or not the issuance of the preferred stock in 1923 by the Company was in fact a stock dividend. Whether or not it was a stock dividend is dependent upon the relevant facts. George T. Smith, 21 B. T. A. 782; J. E. Brading, 17 B. T. A. 436; W. J. Hunt, 5 B. T. A. 356.

In Eisner v. Macomber, 252 U. S. 189, it is held that a stock dividend is not taxable, and the Supreme Court states as follows:

A “ stock dividend ” shows that the company’s accumulated profits have been capitalized, instead of distributed to the stockholders or retained as surplus available for distribution in money or in kind should opportunity offer. Far from being a realization of profits of the stockholder, it tends rather to postpone such realization, in that the fund represented by the new stock has been transferred from surplus to capital, and no longer is available for actual distribution.
The essential and controlling fact is that the stockholder has received nothing out of the company’s assets for his separate use and benefit; on the contrary, every dollar of his original investment, together with whatever accretions and accumulations have resulted from employment. of his money and that of the other stockholders in the business of the company, still remains the property of the company, and subject to business risks which may result in wiping out the entire investment. * * *

The board of directors of the company by resolution declared a preferred stock dividend. It is undisputed that the company did not have sufficient cash on hand to pay the dividend declared in cash. The Company had, however, a surplus of about $180,000, which was in excess of the amount of the dividend declared, but this surplus was not available for cash dividends.

Although it was the intention of the Company, as is customary with respect to preferred stock, to retire and redeem preferred stock out of future earnings, such stock issued as a dividend is not a charge against future earnings, but against surplus already accumulated. Charles Watson Hull, 13 B. T. A. 299.

Whenever a cash dividend is declared the relation of the Company and its stockholders thereto is changed, the corporation becoming the debtor of the stockholders and the stockholders becoming the creditors of the corporation. W. J. Hunt, supra, and cases cited therein. The relationship of debtor and creditor at no time arose in this proceeding between the Company and its stockholders or between the Company and the petitioners.

The Company, instead of redeeming and retiring the stock as provided in its articles and by-laws, sent out notices giving the stockholders an opportunity to offer their stock for purchase by the Company, as provided in its by-laws. The purchase of such stock by the Company was at the option of the Company. At no time was the stockholder given the right to demand an exchange of cash for the stock. The redemption, retirement or purchase of the preferred stock was under the control of the board of directors of the corporation. The fact that officers and directors anticipate future profits out of which to redeem or purchase preferred stock is not determinative of its character as a stock or cash dividend. If this were true, no preferred stock could be issued as a stock dividend.

The respondent contends that the purchase of this stock by the Company was under the authority of the general scheme adopted in 1923. Even so, there is no evidence that a cash dividend was intended. It is proper for a corporation at the time it makes provision for the issuance of preferred stock also to make provision at the same time for its redemption, retirement or purchase by the company. This of itself does not indicate an intention on the part of the company or its directors and stockholders to evade taxation.

That the laws of the State of Wisconsin permit the Company to purchase such stock, hold it as treasury stock, and treat it as an asset (Pabst v. Goodrich, 113 N. W. (Wis.) 398), as pointed out by respondent, is no reason -why the Company could not legally purchase the preferred stock and retire and cancel the same. Its articles provide that the sinking fund is to be used for the purchase and cancellation and redemption of preferred stock and that the preferred stock purchased or redeemed by the Company shall never be sold or reissued by the Company. There is nothing in the record to indicate that the issuance of the preferred stock dividend was not a bona fide stock dividend.

In view of the entire record and the intent and purpose of the Company therein disclosed and a consideration of all the relevant facts, we are of the opinion that the dividend declared in 1923 by the Company was a stock dividend, resulting in a dilution of the shares then outstanding. Eisner v. Macomber, supra. See also George T. Smith, supra; George E. Michel, 5 B. T. A. 979.

The only case cited by the respondent in support of his contention that the distributions received by the petitioners represented proceeds from the retirement, redemption and cancellation of their stock by the Company and, therefore, under section 201 (g), Revenue Act of 1926, were taxable as a dividend is William C. Huntoon, 14 B. T. A. 459. As pointed out in the opinion in that case, the testimony was confusing. The opinion further states that all the record clearly shows is that the taxpayer received a stock dividend in 1921 consisting of 249 shares, which, with some additional shares, he turned in to the corporation and thereupon his indebtedness to the corporation in the amount of $36,400 was canceled. The Board held in that case that the taxpayer’s showing was not sufficient to warrant an overturning of the Commissioner’s determination. That case is clearly not controlling in this proceeding and is not helpful.

At the hearing it was stipulated that, in the event the Board should hold that the transactions in question constituted sales, and the amounts received by the petitioner, Alfred A. Laun, in 1926 and by petitioner, J. B. Laun, in 1926 and 1927, respectively, from the Company did not represent a taxable dividend, the petitioner Alfred A. Laun had reported the correct profit in his income-tax return for the year 1926, and that the profit from the sale of 153 shares in 1926 and 80 shares in 1927 by J. B. Laun to the Company should be computed upon the basis of $79.59 per share. Since we have held that the petitioners did not receive taxable dividends from the Company in the years involved, judgment will be entered in accordance with such stipulation.

Reviewed by the Board.

Judgment of no deficiency will be entered as to 'petitioner Alfred A. Laun. Judgment will be entered under Bule 50 as to petitioner J. B. Laun.

Teammell, Matthews, and Goodeich concur in the result.

Smith,

dissenting: The transactions here involved were not sales, but in substance the “ redemption in * * * part ” of the stock distributed as a dividend by the corporation in 1923. At that time, the corporation had accumulated profits in excess of the amount of the stock dividend; instead of a cash dividend it declared the stock dividend, retaining' the assets reflected in its surplus account, and provided for the redemption of the preferred stock from future earnings set aside for that purpose. Section 201 (g) of the 1926 Act is not ambiguous and does not prescribe the method of redemption ; the only restriction being that the redemption be treated as a taxable dividend to the extent of earnings accumulated since March 1, 1913. This stock was redeemed out of current earnings. I do not agree that the petitioners sold their stock to the corporation; but in any event, what is the basis upon which to compute their gain ? I think the amount received by these petitioners was “ essentially equivalent to the distribution of a taxable dividend ” and should be taxed as such.


author: Teammell :

text:
    The Morris Plan Company of Binghamton, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 53221.
    Promulgated August 5, 1932.

      John Ma/rey, Jr., Esq., for the petitioner.

      O. W. Swecher, Esq., for the respondent.
   OPINION.

Teammell :

Counsel for the petitioner contends in his brief that the amount of $52,000 advanced to the petitioner by the Morris Plan Company of New York and the contributing stockholders of the petitioner constituted an indebtedness owing by the petitioner to them, and that the amount of $3,120 declared by the petitioner as a dividend during each of the taxable years and paid to the trustees, who in turn distributed it to the parties who had advanced the $52,000 to the petitioner, constituted interest paid by the petitioner on its indebtedness. The respondent contends that the transaction was in substance one whereby all of the stockholders of the petitioner borrowed $52,000 from 13 of their number, designated contributing stockholders, and the Morris Plan Company of New York, pledging with trustees as collateral for the payment thereof their stock in the petitioner, and that, having thus raised $52,000, they contributed it to the capital of the petitioner without any obligation for repayment being assumed by the petitioner. Pie urges that under such circumstances dividends thereafter declared by the petitioner out of its earnings and paid to the trustees who were holding its outstanding capital stock may not be deducted by the petitioner as interest paid on its indebtedness.

From a consideration of the terms of the agreement and the other facts in the case we think it is clear that the contributing stockholders of the petitioner and the Morris Plan Company of New York were to be repaid the amounts advanced by them to the petitioner first from the dividends or distributions of the earnings and profits of the petitioner as distributed by it to the trustees from time to time. If at the end of six years such distributions had been insufficient for that purpose, then payment was to be had from the stockholders of the petitioner, or, in the event they failed to pay within 15 days from the time demand was made upon them, then payment was to be had from the sale of the stock deposited with the trustees. We think it is equally clear that at the time the $52,000 was paid in to the petitioner it assumed no obligation with respect to the repayment thereof. There is nothing in the record to indicate that it was in any way liable to repay the amount either to the parties who actually paid the money over to it or to its stockholders. The testimony of the petitioner’s counsel, who was a witness in the case, indicates that if the petitioner, being insolvent as it was, had assumed such liability it would still have been subject to being closed by the banking authorities of New York State. The whole purpose of the stockholders in having the $52,000 paid in to the petitioner was to “ rehabilitate the capital ” and restore the petitioner to solvency. This certainly could not have been done if the petitioner had been liable for repayment of the amount, as it would have been just as insolvent after the amount was paid in as it was before.

The fact that the petitioner during the taxable years declared dividends in an amount exactly equal to 6 per cent on $52,000 and paid such dividends to the trustees does not establish that the petitioner was liable for 'the payment of the amount advanced to it. So far as the record shows, the petitioner’s earnings, after making provision for the reserves required by the superintendent of banks of the State of New York as referred to in the agreement, might have been insufficient to pay larger dividends. Or, if the earnings would have permitted the payment of larger dividends, it might have been that for business reasons the directors of the petitioner did not deem it advisable to make larger payments than were made. Since the stockholders of the petitioner. had deposited their stock with the trustees, had specifically assigned and transferred to the trustees all dividends on the stock, and had authorized the trustees to collect and receive any and all dividends declared on the stock so deposited and to distribute them to the parties who had actually furnished the $52,000, it was the only proper thing for the petitioner to do to pay to the trustees the dividends declared. Having thus received the dividends, it was incumbent on the trustees under the agreement to pay them over to the contributing stockholders and the Morris Plan Company of New York pursuant to the terms of the agreement.

In order for a taxpayer to be allowed a deduction for interest paid the interest must have been paid on an obligation of the taxpayer claiming it, and not on an obligation of another or others. Ohio Valley Tie Co., 3 B. T. A. 339; Continental Trust Co. et al., 7 B. T. A. 539; William Ainslie Colston, 21 B. T. A. 396; aff'd., 59 Fed. (2d) 867.

If it be conceded, for the sake of argument,- that the amounts the petitioner here seeks to deduct were in fact paid as interest on the $52,000, they would not be deductible by the petitioner, since they were not paid on its obligation, but on an obligation of its stockholders. The evidence, however, shows that the amounts in controversy were declared and paid as dividends by the petitioner and appear as such in its records. The respondent has determined that they were dividends, and the evidence before us does not indicate that they were anything else. Therefore, we think that the respondent’s action in disallowing the amounts as deductions was correct and should be sustained.

Judgment will be entered for the respondent.


author: Marquette:

text:
    Beverly W. Smith, Administrator of the Estate of Richard H. Lynch, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 45908.
    Promulgated August 9, 1932.

      Lelamd T. Atherton, Esq., for the petitioner.

      W. Frank Gibbs, Esq., for the respondent.
   OPINION.

Marquette:

The petitioner contends that under section 218 (a) of the Revenue Act of 1924 the principle of “ constructive receipt ” of income applies only to general partners in the ordinary common law partnership and hence is not applicable in the proceeding before us. Reliance is placed upon the statement in Goldman et al., Executors, 15 B. T. A. 1341, and also in Burk-Waggoner Oil Ass'n v. Hopkins, 269 U. S. 110, that “ the term partnership as used in section 218 refers only to ordinary partnerships.” In the Burk- Waggoner Oil Ass'n case the court was dealing with a joint-stock association and made use of the quoted statement in distinguishing such an association from a partnership. We find nothing in the statement or in its context to indicate that the court interpreted the statute as excluding limited partnerships from its scope, and we think petitioner has misconstrued the effect of the words quoted.

Similarly, in the Goldman case, supra, the quoted statement was used in a general discussion of partnerships in a proceeding having no question of general or limited partnerships for decision. Hence, the statement, even if we concede to it the meaning claimed by petitioner, is merely obiter dictum. In our opinion the statute in question applies to members of both limited and general partnerships. Burns et al., Exec., 13 B. T. A. 293.

The present proceeding closely resembles that of Clarence B. Davison, Exec., 20 B. T. A. 856; aff'd., per curiam, 54 Fed. (2d) 1077. In that case we said:

Tile fact that the partnership business was to be continued by agreement until the end of the partnership’s accounting period does not, in our opinion, mean that when the profits of the business for the year are finally determined at the end of the year a part thereof may not be properly attributed to the period when the decedent was alive and a part to the period after his death. * * * a case closely analogous to that with which we are concerned is Maurice L. Goldman et al., Executors, 15 B. T. A. 1341, where both the partnership and partner who died during the year were on the calendar year basis and the Board there held that the share of partnership profits allocable to I he decedent for the period of the year prior to his death should be included in the return filed for the decedent for such year.
The petitioners seek to distinguish the Goldman case from the case at bar, on the ground that the partnership was on the receipts and disbursements basis in that case, whereas in the present case the accrual method is being followed, but we fail to see that a distinction can be drawn on this ground which would in one instance exclude from the return of the decedent the income of the partnership attributable to such decedent to the date of his death and in the other include it. In either event, what we are seeking t'o arrive at is the decedent’s share of the partnership net income as of the date of his death. Even though such share, in the case at bar, might not be distributable until the end of the partnership’s accounting period, such end would be within the calendar year for which a return was required to be filed on behalf of the decedent and all income of the partnership for such accounting period properly attributable to the decedent would be includable in such return whether distributed or not. And this would be true whether the decedent was on the cash or accrual basis.

In our opinion there is no fundamental distinction between the Damson case, supra, and the present proceeding. Petitioner does not dispute the method by which respondent computed the proportion of profits allocable to the decedent Lynch, nor the amount. We conclude, therefore, that the determination of deficiency was correct.

Decision will be entered, for the respondent.


author: Maequette:

text:
    Carrie Lutcher Brown, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 29495.
    Promulgated August 9, 1932.

      W. A. Bolinger, Esq., and L. J. BencleenStein, Esq., for the petitioner.

      B. M. Ooon, Esq., for the respondent.
   OPINION.

Maequette:

All issues in controversy have been settled by stipulation of the parties except one, namely, whether the receipt of corporate stock in 1921 pursuant to a contract made in 1917 resulted in taxable gain to petitioner in 1921.

On March 1, 1913, and on February 12, 1917, petitioner owned a one-sixth interest in extensive timber lands in Texas, and she and her husband owned another one-sixth interest in the lands in community. On February 12, 1917, the owners of the land entered into contract respecting the timber as set out in our findings of fact. In June, 1917, petitioner individually owned a one-fourth interest, the value of which as of March 1, 1913, amounted to $104,673.75 for the land itself and to $1,571,171.28 for the timber. From the date of the contract until December 31, 1921, petitioner received $297,438.26 in cash for her share of the timber sold. She also received, in 1921, 500 shares of stock of the Weir Long Leaf Lumber Company, pursuant to the contract. The shares had a fair market value of $116,800. It is her contention that until she has received the full amount of her capital investment in the timber, $1,571,171.28, no taxable income, profit or gain accrues to her.

The petitioner relies upon the decision of the Supreme Court in Doyle v. Mitchell Brothers Co., 247 U. S. 179. In that case a corporation owning timber lands operated its own mills and manufactured lumber from its own stumpage. The court held that for the purpose of computing net income for Federal tax purposes the company was entitled to deduct from its gross receipts from lumber sold the fixed market value of the standing timber cut during the taxable year, saying: “ * * * the deduction did but restore to the capital in money that which had been withdrawn in stumpage cut, leaving the aggregate of capital neither increased nor decreased, and leaving the residue of the gross receipts to represent the gain realized by the conversion.”

But the court distinctly negatived the idea that no taxable gain should be computed until the sales of lumber had fully covered the investment value of the entire stumpage tract. Speaking of the conversion of capital assets from standing timber into money, the court said:

The suggestion that the entire proceeds of the conversion should be still treated as the same capital, changed only in form and containing no element of income although including an increment of value, we reject at once as inconsistent with the general purpose of the act. Selling for profit is too familiar a business transaction to permit us to suppose that it was intended to be omitted from consideration in an act for taxing the doing of business in corporate form upon the basis of the income received “ from all sources.”

The principles thus laid down by the Supreme Court have been followed here. Petitioner was taxed each year only upon the net profit over investment value of the timber cut and sold, and capital representing the timber sold has been restored to her through deductions from gross income.

Petitioner also relies upon the decision in Burnet v. Logan, 283 U. S. 404. In that case the taxpayer sold and delivered certain shares of corporate stock for a consideration to be paid in part in annual installments from ore as received under a mining lease by the purchaser of the stock. The lease did not require the lessee to produce any maximum or minimum tonnage or to make any definite payments of ore. The court held that under those conditions the taxpayer was entitled toi a full return of capital investment before paying income tax based upon a conjectural market value of annual payments of ore.

Petitioner’s argument is based upon the assumption that the principle followed in the Logaav case, supra, should be universally applied where capital assets are sold, regardless of the conditions or manner of such sale. We do not concur in that yjqwpoint, nor do we consider the Logon, case controlling in this proceeding. In that case the taxpayer made a definite sale of her stock in one company and delivered it to the purchaser. Her dominion over the stock was ended, although she received at the time only part of the agreed purchase price. Payment of the balance was dependent upon conditions which were uncertain and it was quite possible that such balance might never be paid in full. In the present proceeding there was no outright, completed sale of the entire stand of timber. Rather, the parties entered into a contract to sell such amounts of timber as the second party should cut and remove from the land. Florence A. Foster, 18 B. T. A. 819; Edward G. Swartz, Inc., 25 B. T. A. 1065; Carter v. Clark & Boice Lumber Co., 149 S. W. 278; Houston Oil Co. v. Boylein, 206 S. W. 815. Actual sale took place only when and to the extent the timber was cut and paid for. The consideration to petitioner was to be: (1) A cash payment for timber as and when cut, slightly greater than the investment value of the stumpage; (2) participation in the price received in excess of $13.50 per thousand feet for lumber sold; (3) a 'pro, rata amount of stock in the Wier Long Leaf Lumber Company after its original outlay had been reimbursed from profits on lumber sold. The second and third items of the consideration were not certain, it is true. But as petitioner received more than her capital investment in the timber footage cut each month she was not confronted with the hazard which existed in the Logan case, supra.

Petitioner also contends that the corporate stock she received in 1921 was part of an exchange in which neither gain nor loss is recognized. If the stock was received in exchange for property held for investment or for productive use in trade or business and the exchange was of property of a like kind or use, then no taxable gain resulted. Section 202 (c) (1), Revenue Act of 1921.

In our opinion the contention is not sound. Petitioner does not indicate what property she exchanged for the stock. Was it all of her interest in the standing timber, worth more than ten times the value of the stock? If so she would not then be entitled to any cash consideration for the timber as it was cut and presumably would have received none. Further, such an exchange would have divested her completely of any ownership of the timber, altogether contrary to the terms of the contract above referred to, and which contract, the record shows, was carried out according to its terms. If petitioner exchanged only a part of her timber interest for the stock, what degree of interest was so traded? The record is silent. The standing timber and the land on which it grew are the only species of property mentioned in the record which petitioner might have exchanged for the corporate stock. Nothing in the record indicates that she parted with her interest in the land. The situation here presented is very similar to tRat in Hobbs et al., 26 B. T. A. 241. where the taxpayer contracted to sell oil lands and interests for a consideration partly of cash and partly of corporation stock, and contended that an exchange of properties had taken place. We there said:

We do not agree to this contention. The organization of the Hobbs Oil Company and the transfer to it of the lands and leases was merely a part of one main transaction, which was to sell certain oil lands and interests in oil lands * * * for a consideration of $2,100,000 cash and $600,000 capital stock of the Delaware Company. The fact that to perform the contract the organization of a common-law trust or association was resorted to as a means to carry through the deal does not alter the character of the transaction. There was no intention on the part of Hobbs or his associates to effect an exchange of their oil lands for stock in the Hobbs Oil Company, but their intention was to make a sale of their lands to Haskell and the Delaware Company by which they were to receive a large part of the agreed purchase price in cash and the balance in stock of the Delaware Company.

See also Commissioner v. Moore, 48 Fed. (2d) 526 (certiorari denied) ; Commissioner v. Garber, 50 Fed. (2d) 588.

We fully agree with the above decisions and hold that in the present proceeding there was no exchange of property within the meaning of the revenue act. The value of the stock received by petitioner in 1921, namely, $116,800, was properly taxable to her in that year.

Readjustment of petitioner’s income tax for 1921 should allow her a deductible loss of $31,705.98 with respect to litigation over timber land in the Canfield League Survey in Sabine County, Texas,’ should include only $10,009.96 of the dividends from the Vinton Petroleum Company as taxable income; and should include only $116,800 as the value of stock in the Wier Long Leaf Lumber Company.

Decision will be entered under Bule 50.


author: Speiínhagen:

text:
    Pilgrim Laundry Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Unit System Laundry Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 51087, 51088.
    Promulgated August 9, 1932.

      J. D. Kiley, Esq., for the respondent.
   OPINION.

Speiínhagen:

The respondent determined deficiencies of $3,961.34 and $506.17, respectively, in income taxes for 1928 of the Pilgrim Laundry Company and Unit System Laundry Company. The petitioners contend that net losses sustained by the Beacon Laundry Company in 1926 and 1927 are deductible in the computation of the consolidated net income of that company and the petitioners for 1928. The facts were stipulated as follows:

1. The Pilgrim Laundry Company, one of the petitioners in the above-entitled proceeding, was incorporated under the laws of the State of Massachusetts, and during the years 1926, 1927 and 1928 maintained its offices and principal place of business at 65 Allerton Street, Boston, Massachusetts. The Unit System Laundry Company was incorporated under the laws of the State of Massachusetts, and during the years 1926, 1927 and 1928 maintained its offices and principal place of business at 82 Parkman Street, Dorchester, Massachusetts. The Beacon Laundry Company was incorporated under the laws of the State of Massachusetts and during the years 1926, 1927 and 1928 maintained its offices and principal place of business at 14 Lenox Street, Boston, Massachusetts.
2. In November, 1921, the Pilgrim Laundry Company acquired all of the issued and capital stock of the Unit System Laundry Company and in November, 1926, acquired all the issued and outstanding capital stock of the Beacon Laundry Company, and has continued to hold this stock up to the present time.
8. For the years 1926 and 1927 the Pilgrim Laundry Company, the Unit System Laundry Company, petitioners herein, and the Beacon Laundry Company filed separate income tax returns. For the year 1928 the three corporations filed a consolidated income tax return. The consolidated income tax return for the year 1928 was filed with the Collector of Internal Revenue for the District of Massachusetts at Boston, Massachusetts.
4. The Pilgrim Laundry Company had a taxable net income for the years 1926, 1927 and 1928 as follows:
1926_$44,523.00
1927_ 53, 041.84
1928_ 42,091.34
5. The Unit System Laundry Company had a net taxable income for the years 1926, 1927 and 1928 in the following amounts:
1926_$7,934.57
1927_ 5,190. 48
1928__ 5,378.24
6. The Beacon Laundry Company sustained net losses for the years 1920, 1927 and 1928 in the following amounts:
1926-$18,886.66
1927- 32, 739. 50
1928- 10,240. 35
The net losses referred to herein are statutory net losses within the meaning of Section 206 of the Revenue Act of 1926 and Section 117 of the Revenue Act of 1928.
7. In his notices of deficiency from which the appeals are taken, the Commissioner has refused to allow the consolidated group to deduct from the consolidated net income for the year 1928, the net losses sustained by the Beacon Laundry Company for the years 1926 and 1927, while tile taxpayer contends that such net losses should properly be deducted from consolidated net income for the year 1928.

In principle, there is no difference between the situation here and that dealt with in Woolford Realty Co. v. Rose, 286 U. S. 319, and Planters Cotton Oil Co. v. Hopkins, 285 U. S. 533. The earlier net losses of the Beacon Company are available only to that corporation, “ and this is as true in respect of affiliated corporations as of independent corporations.” Delaware & Hudson Co., 26 B. T. A. 520.

The petitioners argue that they might have filed consolidated returns for 1926 and 1927, applying the Beacon Company’s current losses as respective offsets against their own incomes, and that their failure to do so is a reason for their present claim. Since, however, they elected to disregard their statutory affiliation and to file separate returns, there is no avoiding the adverse consequences of the election, Radiant Glass Co. v. Commissioner, 54 Fed. (2d) 718; Alameda Investment Co. v. McLaughlin, 33 Fed. (2d) 120. But even if that doctrine could be set aside here and the affiliation given effect for 1926 and 1927, it would not result that the losses of the Beacon Company could be used by its affiliates or the affiliated group in 1928, which is the only year now under consideration. In an affiliated group the loss of one member may be used to offset the contemporaneous income of other members in computing the consolidated net income, but no part of its prior losses may be so used, nor may the unused excess of its current loss be carried forward except for its own use.

Judgment will be entered for the respondent.


text:
    Caldwell & Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43708.
    Promulgated August 12, 1932.

      Benjamin Weiner, Esq., Arthur Bothstein, Esq., and Herman Goldman, Esq., for the petitioner.

      F. K. Blanker, Esq., for the respondent.
   OPINION.

Leech:

The tax liability in connection with which the legal fees here sought to be deducted were paid was that of the original partnership of Caldwell & Company for the year 1917, during which a partnership was a taxable entity* The evidence shows clearly that the second partnership, composed of Rademan and Fowler, assumed the liability for two-thirds of any tax liability of the prior partnership for 1917 and that petitioner assumed such liability as one existing on June 30,1919, as a part of the consideration for its acquisition of the assets of the second partnership.

It is clear that if petitioner’s liability was limited to the reimbursement of Rademan and Fowler to the extent of additional taxes the latter were required to pay for 1917, and did not extend to liability for attorney fees accruing in connection therewith, as created subsequent to June 30,1919, then its reimbursement of the former partners for these expenditures was voluntary and accordingly not an expense ordinary and necessary in carrying on business. It would follow that it was not deductible under section 234 (a) (1) of the Revenue Act of 1926. Cf. Sigmund Spitzer, 23 B. T. A. 776; National Piano Mfg. Co. v. Burnet, 50 Fed. (2d) 310; Whitney Son, Inc., 20 B. T. A. 380.

Conversely, if petitioner was liable to Rademan and Fowler for the $20,000 in fees paid by them, such liability was one assumed as a part of the consideration for the acquisition of the property of the second partnership and we can see no difference between this and any other item of the capital cost of any such property to petitioner. The fact that the legal fees in question accrued subsequent to the acquisition of the assets is of no significance when the obligation to assume them, if and when they accrued, was one assumed under the contract, and as a part of the consideration for the property received. If petitioner was liable to Rademan and Fowler for a deficiency in tax for 1917, recovered from them, the payment of such liability would not entitle it to a corresponding deduction as an expense of doing business. In the case of F. Tinker & Sons Co., 1 B. T. A. 799, often cited with approval by us in later cases, we said: “ The liquidation of a liability of known or unknown amount assumed by a corporation as a part consideration for the purchase of assets is not an ordinary and necessary expense of doing business. It is a capital transaction. It is not a legal deduction from gross income.”

It makes no difference as to petitioner, that the liability of Rade-man and Fowler for attorney fees might, as to them, represent a deductible expense. As to petitioner, the reimbursement of that expense by it to Rademan and Fowler is merely the payment of something it agreed to pay in part consideration for the assets acquired and, accordingly, constitutes a capital expenditure.

Judgment will be entered for the respondent.


author: Matthews:

text:
    Columbus Brick & Tile Company and Gamble & Stockton Company, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 42707.
    Promulgated August 15, 1932.

      E. A. Mihills, G. P. A., for the petitioners.

      T. M. Mather, Esq., for the respondent.
   OPINION.

Matthews:

The respondent has not determined a deficiency against the Gamble & Stockton Company for 1920, and the proceeding, in so far as it purports to be on behalf of that company, is, therefore, dismissed.

The first issue involves the computation of invested capital.

Petitioner contends that it is entitled to include in invested capital $210,000 as the value of the Shepherd plant paid in for stock in that amount, and $90,000 as the value of the notes of Gamble, Stockton, and Dixon paid in for stock in the same amount.

The respondent, in his deficiency notice, does not give any reason for the exclusion of the value of plant and the value of the notes from invested capital, but counsel for respondent in his brief argues that aside from the $51,000 paid by Stockton and Gamble for the Dennison stock, which they turned in to the Columbus Brick & Tile Company for stock, the rest of the transaction was merely a paper one, with the result that the Gamble & Stockton Company owned stock of the Columbus Company in exchange for assets, and, since the two corporations were affiliated, this amounted to a purchase of its own capital stock, resulting in no change in invested capital.

We can not agree with respondent’s view of the transaction.

Subdivision (a) of section 240 of the Revenue Act of 1918 requires corporations which are affiliated to make a consolidated return of net income and invested capital for income-tax and excess-profits-tax purposes. Subdivision (b) of that section provides that:

Por the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests.

All the stock of the Gamble & Stockton Company and of the Columbus Brick and Tile Company was owned by the same persons in 1920, and both corporations were controlled by the individuals, Telfair Stockton and Robert Gamble, who owned in equal amounts substantially all the stock. The corporations were affiliated, therefore, within the meaning of the second class of affiliations enumerated in section 240 (b). The question to be decided is the correct amount of the consolidated invested capital.

In American Bond & Mortgage Co., 15 B. T. A. 264, we said:

We have repeatedly held that consolidated invested capital should be determined by computing separately the statutory invested capital of each corporation, as defined by section S26, and then eliminating from the combined statutory invested capital of the affiliated group, so determined, the amount of any duplications which may appear. * * *
In Middlesex Ice Go. et al., 9 B. T. A. 156, we had before us a question involving the determination of consolidated invested capital, and in the course of our opinion, we said:
“Bach member of the affiliated group enters the consolidation with its invested capital as defined by section 326 of the Revenue Acts of 1918 and 1921. Prom this preliminary exhibit there is then eliminated such items or amounts as are shown to be duplications either of investment or of earned surplus and undivided profits. The law does.not specifically provide for, and we are unable to find, that it in any sense contemplates any reduction or elimination of actual assets not appearing as duplications.”

Section 326 provides as follows:

Sec. 826. (a) That as used in this title the term “invested capital” for any year means (except as provided in subdivisions (h) and (c) of this section) :
(1) Actual cash bona fide paid in for stock or shares;
(2) Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment, but in no case to exceed the par value of the original stock or shares specifically issued therefor, * * *
* Sjt * * * * *
(c) There shall be deducted from invested capital as above defined a percentage thereof equal to the percentage which the amount of inadmissible assets is of the amount of admissible and inadmissible assets held during the taxable year.

In computing the invested capital of the Columbus Company under section 326, supra, we must determine how much can be included on account of the notes and the plant paid in for stock. Petitioner admits that the Dennison stock can only be included at $51,000 under the provisions of section 331. We have found, upon a consideration of the evidence, that the notes were worth their face value at the time paid in and that they were bona fide paid in. The makers were responsible and solvent, and bankers with whom the individuals and corporations did business and obtained credit testified that the notes were worth face value. Interest was paid on the notes when due. They should be included in invested capital at their face value. Harding Glass Co., 15 B. T. A. 621.

There is no doubt that the plant was worth at least $210,000 when paid in for capital stock. This was the amount paid for it by the prior owners and by the Gamble & Stockton Company in an arm’s length transaction only a few months before, and the evidence substantiates such a valuation. It should be included in invested capital at $210,000.

Thus, by following the method outlined in the case of American Bond & Mortgage Co., supra, and computing separately the invested capital of these two corporations, we find that the Columbus Company has an invested capital of $35i,000, before adjustment for inad-missibles, computed under the provisions of section 326. This amount is arrived at as follows:

Stock of the Dennison Company paid in for stock_$51, 000
Plant of Shepherd Bros, paid in for stock_210, 000
Notes of Gamble, Stockton and Dixon paid in for stock_ 90, 000

The respondent has allowed the .Gamble & Stockton Company an invested capital of $200,000, representing the par value of its capital stock. This would make a consolidated invested capital of $551,000, before necessary adjustments in which there are no duplications.

The fact, as shown by the evidence, that in 1921 the notes for $90,000 were paid to a large extent in stock of the Gamble & Stockton Company and the note for $210,000 held by the Gamble & Stockton Company was paid in stock of the Columbus Company, can not affect invested capital for 1920. The year 1921 is not before us and, therefore, we do not have to determine the effect on invested capital of such payments. Neither does the fact that in 1922 the Columbus Company paid out of its earnings the note for $110,000 given by the Gamble & Stockton Company to the Shepherd Brothers Company and in 1923 received stock of Gamble & Stockton Company, affect invested capital for 1920.

The invested capital of the Columbus Company should be averaged from the date of issue of its stock. At the hearing the respondent moved to amend his answer to conform to the proof in that the evidence showed that the stock of the Columbus Company was not issued until March 2, 1920, which would require that invested capital of the Columbus Company be averaged from the date of issue. See section 326 (d) of the Revenue Act of 1918; Federal Development Co., 18 B. T. A. 971.

The second assignment of error relates to the disallowance by the respondent of the cost, less salvage, of a Boss burner and steam drier equipment which were discarded in the early part of 1920 as obsolete in order that more up-to-date systems might be installed. At the time the plant was conveyed to the Columbus Company the process of replacing these two systems was in progress, though not completed until April and August of that year, respectively. The respondent disallowed the deduction upon the ground that it was definitely known not later than January that these systems would be discarded, and increased the depreciation claimed by the amount of $1,696.75, representing 5 per cent of the $33,935.05 disallowed. The deficiency on this point is based on the report of the revenue agent, in which the following explanation of this disallowance appears:

* * * The purchase was at a lump sum price for the brick yard as a whole, and in disallowing the deduction of $33,935.05, it of course restores that amount to the total purchase price to be allotted to such parts of the plant as did possess a value at the time of acquisition; that is, the plant as a whole was worth as much without the useless burning and drying systems (less the salvage) as it was with such useless and valueless systems.

It has been held both by the courts and by this Board that where a taxpayer purchases real estate and a building and intends at the time of such purchase to tear down a part of the building to make alterations thereon, the cost of such demolition and of the property destroyed is not deductible as a loss, but constitutes a part of the purchase price. See Liberty Baking Co. v. Reiner, 34 Fed. (2d) 513; Union Bed & Spring Co. v. Commissioner, 39 Fed. (2d) 383; and Milwaukee Woven Wire Works, 16 B. T. A. 75. In Union Bed & Spring Co., supra, the court said: “ If he [the taxpayer] intends at the time of purchase, to demolish and rebuild, then the cost of so doing must be considered as part of his capital investment.”

It seems to us that the instant case presents a somewhat similar situation. The corporation paid the $210,000 for the plant and clay lands, knowing that the Boss burner and steam drying plant were obsolete and were at that time in the process of being dismantled. The petitioner contends that the property was operated for the Columbus Company and in the name of the Columbus Company from the first of January, and that, since it was not until later that these two systems were scrapped, the corporation is entitled to the claimed deduction. We see no merit in this contention. Although the charter for the Columbus Company had been granted, the property in question was not conveyed to it until March 2, at which time these systems were being dismantled. We are, therefore, of the opinion that the respondent was correct in assuming that the corporation expended the total purchase price for the property as a whole, without the Boss burner and steam drying equipment. The Columbus Company is, accordingly, not entitled to any deduction for obsolescence of these two systems.

Further proceedings may be had u/nder Rule 6& (b) and (c).


author: Matthews :

text:
    Telfair Stockton, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 42708.
    Promulgated August 15, 1932.

      H. A. Mihills, O. P. A., for the petitioner.

      T. M. Mather, Esq., for the respondent.
   OPINION.

Matthews :

The petitioner contends that the stock of the Denni-son Company exchanged in 1920 for stock of the Columbus Company did not belong to him, but to the Stockton Company, and that the profit, if any, derived upon such exchange was taxable to the company and not to him, and that the dividends received on the stock of the Columbus Company in 1923 were for the same reason not taxable income to him.

The question of the ownership of the stock is one of fact, to be decided upon consideration of all the evidence introduced. This evidence shows, on the one hand, that the stock was issued in the name of the petitioner, voted by him, and dividend checks were issued in his name. Upon the organization of the Columbus Company he treated this Dennison stock as if it were his own and exchanged it for stock of the Columbus Company issued in his name. All the evidence shows that at this time he acted as if he were the owner of the stock. In connection with an appraisal made at the request of the revenue agent with respect to the value of the property transferred to the Columbus Company, Stockton executed an affidavit in 1925 in which he stated that he was the owner of the stock. In 1929, in connection with the reorganization, he made an endorsement on the certificate of the Columbus Company stock in which he referred to it as his stock, although he testified that he had endorsed this stock in blank in 1922 and had turned it over to the Stockton Company.

On the other hand, we have the evidence that the Stockton Company paid the note given to the bank for the money with which the Dennison stock was purchased, that the Dennison stock and that of the Columbus Company were entered on the books of the Stockton Company, and that dividends when received by the petitioner were turned over to the Stockton Company and entered in its dividend account. However, in view of the fact that the petitioner used the books of the Stockton Company to record some of his personal transactions and that the dividend account in the Stockton Company’s books also shows receipt of dividends on the Dennison stock on September 2, 1920, December 14, 1920, and March 5, 1921, which dates were all after the transfer of such stock to the Columbus Company, the entries on the books of the Stockton Company are not in any way conclusive as to ownership of the stock.

We are of the opinion that the petitioner has not overcome the prima facie correctness of the respondent’s determination that the stock belonged to him. See Baiss et al., 21 B. T. A. 593. The fact that he received the money from the corporation to pay for the stock does not necessarily make the stock the corporation’s stock. The evidence as to the reason for the corporation furnishing the money is not clear. It may well be that this was a loan to the petitioner from the corporation. Nor does the fact that he turned the dividends over to the corporation after receiving them relieve him of tax liability thereon. Godfrey R. Rebmann, 18 B. T. A. 1265.

It is clear, therefore, that any profit realized on the exchange of Dennison stock for Columbus Company stock in 1920 and the dividends received from the Columbus Company stock in the amount of $15,000 in 1923 constitute taxable income to the petitioner in the respective years.

It remains to be seen, however, whether the petitioner as the owner of the Dennison stock realized any profit upon the exchange in 1920 of this stock for stock of the Columbus Company. The respondent has determined that the petitioner realized a profit of $74,500, being the difference between the par value of the Columbus stock, $100,000, and the cost of the Dennison stock, $25,500.

We do not agree with the contention of the petitioner that this was an exchange in connection with a reorganization, merger or consolidation. It is clear that the Columbus Company was an entirely new corporation and not a party to a reorganization of any old corporation. Upon incorporation it issued its entire capital stock to three individuals for property, notes and other stock.

The basis for determining the gain or loss upon the exchange in 1920 is, therefore, the fair market value of the Columbus Company stock at the date of exchange. Sec. 202 (a) and (b), Revenue Act of 1918. Respondent determined this value to be the par value of the stock. The evidence introduced by petitioner not only does not overcome this determination, but, on the showing made of the intrinsic value of the assets back of the stock, tends to confirm it. Although the Dennison stock could not be included in invested capital at more than $51,000, the cost to prior owners, the stock had been paying and continued to pay a dividend in excess of 6 per cent. The plant of the Shepherd Brothers was valued by the Columbus Company and by Stockton and Gamble at $600,000, and was so set up on the books of the company. Depreciation and depletion were claimed, and the total amounts finally allowed bj^ respondent were based on a value in excess of the value at which the plant could be included in invested capital. There is no evidence of any sales of the Columbus Company stock, but it can not be said that it has no fair market value, because such value may be established by other factors. See Lyle LI. Olson, 24 B. T. A. 702, and cases cited therein. The determination of the respondent on this point is approved.

Judgment will be entered wader Rule 50.


author: GoodRicii :

text:
    Hardinge Brothers, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 42148.
    Promulgated August 15, 1932.

      ■J. Robert Sherrod, Esq., and F. O. Graves, Esq., for the petitioner.

      R. H. Transwe, Esq., for the respondent.
   OPINION.

GoodRicii :

This proceeding is for the redetermination of a deficiency in income taxes for the calendar year 1926, in the amount of $3,709.14. The sole question presented is whether certain of the net losses sustained by the petitioner’s subsidiaries, Hardinge Oil Burner Corporation of Massachusetts and Hardinge Oil Burner Corporation of New York, prior to affiliation, should be deducted from the consolidated net income of the affiliated group for 1926.

The facts are stipulated as follows:

Hardinge Brothers, Inc., the petitioner herein, was organized as a corporation under the laws of the State of Illinois in 1908.
On Januarjr 27,1926. Hardinge Brothers, Inc. acquired all the capital stock of Hardinge Oil Burner Corporation of Massachusetts.
On April 8, 1926, Hardinge Brothers, Inc. acquired all the capital stock of Hardinge Oil Burner Corporation of New York.
Hardinge Brothers, Inc. filed a Federal income tax return for the calendar year 1926. showing therein a consolidated net income of $6,657.18 for the following affiliated companies:
Net Loss Net Income
Hardinge Brothers, Inc_$62, 251. 27
Hardinge Oil Burner Corporation of Massachusetts_$3,196. 65
Hardinge Oil Burner Corporation of New York_ 52, 397. 44
- 55,594.09
Consolidated net income reported_ $6, 657.18
In determining a net loss of $52,397.44 for Hardinge Oil Burner Corporation of New York for the calendar year 1926, there was deducted the sum of $13 511.86 representing a net loss sustained by said corporation during the calendar year 1925.
Hardinge Oil Burner Corporation of New York was organized as a corporation on January 13,1925, and was not affiliated with any other corporation prior to April S, 1926, when all of its capital stock was acquired by the petitioner. Said Hardinge Oil Burner Corporation of New York sustained statutory net losses as follows:
January 13, 1925 to December 31, 1925_$13, 511. 86
January 1, 192.6 to April 7, 1926_ 9, 234. 32
April 8, 1926 to December 31, 1926_ 25,158. SI
Hardinge Oil Burner Corporation of Massachusetts was not affiliated with any other corporation prior to January 28, 1926, when all of its capital stock was acquired by the petitioner. Said Hardinge Oil Burner Corporation of Massachusetts sustained statutory net losses as follows:
1924_$12,442.49
1925_ 10, 913. 79
January 1-27, 1926_ 236. 46
January 28, 1926 to December 31, 1926_ 2, 960.19
In the deficiency letter from which this appeal is taken, the respondent determined a consolidated net income of $29,527.39, as follows:
Hardinge Brothers, Inc. Net Loss Net Income
(January 28-Dec. SI, 1926)_$57,646.39
Hardinge Oil Burner Corporation of Massachusetts (January 28-Dec. 31, 1926)_$2,960.19
Hardinge Oil Burner Corporation of New York (April 8,-Dec. 31, 1926)_ 25,158.81
- 2S.119.00
Consolidated net income__ 29, 527.39
In arriving at such consolidated net income of $29,527.39, the respondent has deducted no part of the net losses sustained by Hardinge Oil Burner Corporation of Massachusetts and/or Hardinge Oil Burner Corporation of New York prior to affiliation with the petitioner.
Both Hardinge Oil Burner Corporation of Massachusetts and Hardinge Oil Burner Corporation of New York kept their books and made their returns on the basis of a calendar year for the years prior to affiliation as well as for the year 1926.

Petitioner contends that the net losses sustained by each of the subsidiary corporations during the year 1925 and the respective periods in 1926 prior to affiliation should be added together and applied against the income of the parent company (this petitioner) in determining the consolidated net income for 1926.

It is well settled that, in determining the consolidated income of an affiliated group, net losses sustained by any of the members thereof prior to affiliation may be applied thereafter not to the income of the group directly, but to the income of the member sustaining the loss. However, if such member has no income in the first year, but again sustains a net loss, the losses are not to be pyramided, but the first loss is to be carried over to the second succeeding taxable year. Then, if the corporation still has net income, the loss sustained in the second year may be applied, reduced by the amount thereof absorbed by the income of the group in that year. Woolford Realty Co. v. Rose, 286 U. S. 319; Planters Cotton Oil Co. v. Hopkins, 285 U. S. 533; Swift & Co. v. United States, 38 Fed. (2d) 365; Delaware & Hudson Co., 26 B. T. A. 520; Washburn Wire Co., 26 B. T. A. 464; Summerfield Co., 26 B. T. A. 440; Sailors Bros. Co., 26 B. T. A. 700; Hennessey Realty Co., 26 B. T. A. 196; Riley Stoker Corporation, 26 B. T. A. 749.

As neither of the subsidiary companies here had net income during the affiliation 'period in 1926, there is nothing against which the net losses they sustained prior to affiliation may be applied in determining their separate incomes for the purpose of computing the net income of the group.

Judgment will be entered for the respondent.


author: Trammell:

text:
    Dorcas G. Rehtz, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 54187.
    Promulgated August 15, 1932.

      John T. Kennedy, Esq., for the petitioner.

      I. Graff, Esq., for the respondent.
   OPINION.

Trammell:

The petition in this proceeding presents two issues: (1) Whether the petitioner was under legal obligation to make payment of the $11,875 paid by her to Christine Plusch in May, 1928, under the circumstances set out in our findings of fact, and (2) whether the petitioner is entitled to deduct from her gross income for (he taxable year the amount thus paid.

The real question is whether the amount paid out is deductible in determining taxable income. Whether there was a legal or moral obligation to make the payment may fairly be considered in determining the question, but we do not regard that as being an issue in and of itself. It may well be that if there was no legal or moral obligation to make the payment, it might have been a gift. In any event, even if this question were considered an issue in the pleadings, it apparently has been abandoned and the proceedings are disposed of by our decision on the other issue in the petition.

The petitioner contends that the amount here in controversy was not an additional cost of Christine Plusch’s interest in the partnership, but was an ordinary or necessary business expense or a loss arising from a transaction entered into for profit and therefore an allowable deduction. The respondent contends that the amount represented an additional sum paid by the petitioner to Christine Plusch for the conveyance of the latter’s interest in the partnership and that it is, therefore, a capital expenditure and as such is not an allowable deduction.

In support of her contention the petitioner urges that the amount was paid solely for the purpose of settling a controversy, avoiding litigation and fulfilling what she deemed to be a moral obligation arising out of a transaction entered into respecting the business.

In Colony Coal & Coke Corporation v. Commissioner, 52 Fed. (2d) 923, affirming 20 B. T. A. 326, the court said:

It is contended on belialf of the petitioners that because any liability on the part of the coal companies to the railroad was denied, and the payments only made by way of compromise to avoid litigation, they constituted expense and not capital expenditures. We think not. The fact that a payment is made voluntarily or involuntarily, in tlie course of legal proceedings or as a result of a compromise settlement does not change the nature of the transaction. The real test is the character of the transaction that occasions the payment.

What was the character of the transaction that occasioned the payment by the petitioner to Christine Plusch? We think it is clear that it was the acquisition by the petitioner and her husband of property, the one-fourth interest of Christine Plusch in the petitioner that occasioned the payment. The demand for payment was based on the transaction by which they became the owners of such interest. Neither the demand nor the payment was based upon any transaction arising out of or connected with the management or operation of the business either by the petitioner or her deceased husband either before or after June 18, 1926, but both demand and payment were founded upon the acquisition of a retiring partner’s interest in the firm. The petitioner’s testimony shows that Christine Plusch was to get for her interest in the firm the same amount as the other retiring partner, $30,000. While in negotiating a settlement of the controversy the petitioner disclaimed any legal liability in the matter, she recognized her moral obligation to make the payment demanded. Irrespective of whether the petitioner considered her liability to be a legal liability or a purely moral obligation, the fact remains that the payment was made primarily in connection with the petitioner’s acquisition of an interest in the partnership, and the fact that the controversy was thereby settled and possible litigation avoided was only incidental. Under the facts in the case we think the amount of $11,875 here in controversy constituted an additional payment for Christine Plusch’s interest in the partnership and therefore a capital expenditure, and, as such, is not an allowable deduction in computing the petitioner’s taxable income. The petitioner having continued to hold, at the end of the taxable year, the interest which she and her husband had acquired from Christine Plusch, we do not perceive any basis for allowing the amount in controversy as a loss. The action of the respondent is sustained.

Judgment will ~be entered for the respondent.