author: Mubdock : Adams,

text:
    James M. Harrison, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 66193.
    Promulgated June 19, 1934.

      Paul L. Holden, Esq., for the petitioner.

      Harold Allen, Esq., for the respondent.
   OPINION.

Mubdock :

The Commissioner determined a deficiency of $21,019.38 in the petitioner’s income tax for the calendar year 1929. In determining the deficiency the Commissioner added to the total income reported $7,520.90, representing dividends which he held were received through revocable trusts. The petitioner assigned this action as error, and in his brief the Commissioner concedes that the income from these trusts was not taxable to the petitioner. The Commissioner also added to total income as reported “ Gain on sale $99,250”, which he explained as follows:

Gain on the sale of contracts of James M. Harrison, Inc., to the Ross Industries Corporation has been determined as follows:
Received 1,000 shares of preferred stock of Ross Industries Corporation, market value-$100, 000. 00
Less:
Cost of 150 shares of James M. Harrison, Inc_ 750. 00
$99, 250. 00
It is held that proceeds from the sale represent income taxable to you on the liquidation of the corporation James M. Harrison, Inc.

The petitioner assigns this action of the Commissioner as error and contends that under section 112 of the Revenue Act of 1928 the gain from this transaction was not recognized, and, furthermore, that only one fourth of the 1,000 shares was received by and belonged to him.

The facts have been presented by a stipulation which is set forth in full in the companion case to this one, J. M. Harrison, Inc., 30 B.T.A. 455. J. M. Harrison, Inc., (hereinafter referred to as the Harrison Co.) was an Ohio corporation, organized on July 11, 1927. for the purpose of .developing a market for drying equipment and processes employed in baking enamel used extensively in the automobile industry and for other drying operations under patents owned by the petitioner. Prior to March 1929 this company had entered into several contracts for the manufacture and sale of this equipment. In the case of J. M. Harrison, Inc., supra, we held that these contracts were valuable assets on March 21, 1929, and constituted property as that term is used in the statute. On March 21, 1929, the Harrison Co. transferred these assets to the Ross Industries Corporation of New York (hereinafter referred to as the Ross Co.) in exchange for $100,000 par value of the preferred stock of the latter company. In the case of J. M. Harrison, Inc., supra, we held that this transaction constituted a reorganization to which the two corporations were parties, the property was exchanged solely for stock pursuant to a plan of reorganization, and no gain or loss to the Harrison Co. was recognized under section 112 of the Revenue Act of 1928. The Harrison Co. had agreed, as a part of the plan of reorganization, to distribute to its stockholders the shares of preferred stock which it received in exchange for its assets, to wind up its affairs, and to dissolve. On March 20, 1929, there were 150 shares of the Harrison Co. stock outstanding. Gertrude A. Harrison, the wife of the petitioner, owned 20 of these shares, and the petitioner owned the remaining 130 shares. On that day he made actual and bona fide gifts of 17 *4 shares to his wife and 87y2 shares to each of their two children. Two hundred and fifty shares of preferred stock of the Ross Co., received by the Harrison Co. on March 21,1929, were distributed in accordance with the plan of reorganization to each of the four stockholders of the Harrison Co. without the surrender by those stockholders of their Harrison Co. stock. Thus the petitioner and his wife each received 250 shares and their two children each received 250 shares. Thereafter, the Harrison Co. had assets of $2,209.24 which it had reserved for taxes and contingencies pending its dissolution. The taxes and contingencies against which these assets were reserved included:

Auditors’ fees- $225.00
Attorneys’ fees- 1,750.00
Income tax- 477. 70
Total_ 2, 452. 70

These amounts were paid by the corporation subsequent to March 21, 1929, and on August 24, 1929, the Harrison Co. dissolved. The petitioner filed a joint return for himself and wife for the calendar year 1929 in which he did not report any income from the receipt by him and his wife of 500 shares of the preferred stock of the Ross Co.

The ownership of the shares at the time of the distribution has been settled by agreement of the parties. The only question left for decision is whether the gain realized by the petitioner and his wife from the distribution of the Ross Co. stock is recognized under the Revenue Act of 1928 and, therefore, is taxable to them on their joint return, or whether their gain is not recognized. The Commissioner’s whole argument on this point is that the transaction between the two corporations was a sale, not a reorganization within the meaning of section 112 (i) (1) (A), and, therefore, none of the nonrecognition provisions of section 112 would relieve the gain to the shareholders from tax. His argument falls under our decision in J. M. Harrison, Inc., supra, that the transaction was a reorganization within the meaning of section 112 (i) (1) (A). He has not argued that the petitioner would be taxable if there was a reorganization within the meaning of the statute. The petitioner contends that his gain and that of his wife is not recognized because of the provisions of sections 112 (g) and 112 (b) (3) of the Revenue Act of 1928. He does not care which provision is applied so long as the gain is not recognized. The stipulated facts in this case and the conclusion reached by the Board in the companion case of J. M. Harrison, Inc., supra, bring the distributions to this petitioner and his wife squarely within the letter of the provisions of section 112 (g) of the Kevenue Act of 1928. Those provisions are as follows:

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

There was distributed, in pursuance of a plan of reorganization, to the petitioner and his wife, shareholders in a corporation a party to the reorganization, stock in another corporation a party to the reorganization, without the surrender by these shareholders of their certificates of stock in the first corporation. The provision, on its face at least, seems to provide that under such circumstances no gain to these shareholders shall be recognized from the receipt of the Ross Co. stock. Cf. Rudolph Boehringer, 29 B.T.A. 8.

It is suggested, however, that this transaction does not come within the spirit and intent of section 112 (g) and the gain is taxable just as any other gain from the liquidation of a corporation. The alleged justification for this view is that the failure to surrender the Harrison Co. stock was a mere empty gesture, lacking in substance, and done merely for the purpose of avoiding tax by bringing within the letter of section 112 (g) a gain from a distribution which Congress did not intend should go unrecognized. The plan of reorganization involved the prompt dissolution of the Harrison C'o. and the argument is made that this dissolution could have taken place simultaneously with the distribution of the Ross Co. stock and that the continuance of the Harrison Co. for a short time and the retention by its stockholders of their interest in this corporation for that short time were circumstances which lack substance and should be disregarded in the decision of this case. We are unable to say, however, that these circumstances were wholly lacking in substance. They were not done to avoid tax, but had some other purpose.

The statutory provision contained in section 112 (g) of the Revenue Act of 1928 was originally enacted as section 203 (c) of the Revenue Act of 1924. The explanation of its purpose given in the Committee Reports might indicate that it was never intended to cover a reorganization involving the dissolution of the original company. See House Report 179, 68th Cong., 1st sess., p. 14; Senate Report Ho. 398, 68th Cong., 1st sess., p. 15. If the word “ stock ” in this section were interpreted as meaning a shareholder’s actual interest in a corporation, instead of the mere paper evidence of that interest, the provision might be held inapplicable where no real interest is retained in the original corporation. However, the words used in the statute are the primary source from which the intention of the legislators should be determined, and unless the meaning of those words is doubtful or ambiguous, resort may not be had to other sources to determine intent. The words used in section 112 (g) are reasonably clear and seem to cover the present case. Cf. Burnet v. Brooks, 288 U.S. 378, 391. But in any event, the question does not have to be decided in this case and may never require a decision in any case. The point was neither raised by the Commissioner nor briefed by the parties. No matter which way it would be decided, the final decision in this case would be the same. The reason for this is that the application of section 112 (g) could only be avoided by holding that in substance the Harrison stockholders exchanged their interest in that company solely for an interest in the Ross Co., and that holding would bring the transaction within the scope and intent of section 112 (b) (3), which provides that no gain or loss shall be recognized where stock of one corporation a party to a reorganization is exchanged solely for stock of another corporation a party to a reorganization. Winston Bros. Co., 29 B.T.A. 905. This seems to demonstrate at least that this transaction comes within the spirit and intent of the nonrecognition provisions of section 112. In form it comes within section 112 (g) and the argument which would take it out of that section would necessarily place it within section 112 (b)(3). Therefore we decide this point for the petitioner.

Reviewed by the Board.

Decision will be entered under Rule 50.

Adams,

dissenting: I am unable to agree -with the conclusion reached in the prevailing opinion. I believe that J. M. Harrison, the petitioner, received stock of the Ross Industries Corporation in liquidation of his stock in J. M. Harrison, Inc., and that under the circumstances the transaction is one in which gain or loss must be recognized in so far as this petitioner is concerned.

We held in J. M. Harrison, Inc., 30 B.T.A. 455, that under the facts presented there was a statutory reorganization between J. M. Harrison, Inc., and the Ross Industries Corporation. That holding is not controlling here, we having before us in that case the two corporations; here, an individual stockholder of one of them. Petitioner contends in his brief that gain to him in this transaction cannot be recognized by reason of section 112 (g) of the Revenue Act of 1928, and he says in the alternative that if this section of the statute does not exempt him from taxation, then section 112 (b) (3) applies.

I am of the opinion that the facts here do not bring this case within the meaning of provisions of section 112 (g).

The plan of reorganization as proposed and carried out by the parties included the transfer of the Boss Co. stock to the Harrison Co. in exchange for substantially all of its assets and the dissolution of the Harrison Co. It is immaterial that the stockholders of the Harrison Co. did not surrender their certificates of stock immediately upon the receipt of the Boss Co. stock distributed to them. The Boss Co. stock was distributed in complete liquidation of the Harrison Co., and with this distribution the Boss Co. had nothing to do. Under this state of facts, it becomes immaterial whether the mere physical process of surrender and cancellation of the certificates of stock is accomplished. The mere retention of stock in a dissolved corporation that has been completely liquidated means nothing. It is of no value. A distribution in complete liquidation necessarily has the effect of rendering the certificate of stock valueless, and, in such case, we think it must be regarded as having been surrendered within the meaning of section 112 (g) of the statute. That section allows an exception to a transaction which, without such exception, would give rise to gain or loss under the statute. In order to avail himself of the benefit of that statute, petitioner must bring himself clearly within its intendment. This we think the facts of this case fail to do. To say that petitioner comes within the exception of that paragraph of the statute would be to recognize the shadow while the substance escapes our attention.

I think the distribution here results in a transaction from which gain or loss to the petitioner must be recognized in the amount of the difference between the cost of the Harrison Co. stock and the fair market value of the Boss Co. stock distributed to him in liquidation and dissolution of the Harrison Co.

Section 112 (b) (3) applies only where stock or securities in a corporation a party to a reorganization are, in fwrsuanee of a flam, of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization. Here, there was no exchange of stock between the Boss Co. and the Harrison Co. It was not contemplated in the plan of reorganization that the Boss Co. should exchange its stock or securities for stock or securities in the Harrison Co., and it would appear that the Boss Co. deliberately refrained from taking the Harrison Co. stock.

The prevailing opinion says:

* * * In the case of J. M. Harrison, Inc., we held that this transaction constituted a reorganization to which the two corporations were parties, the property was exchanged solely for stock pursuant to a plan of reorganization, and no gain or loss to the Harrison Co. was recognized under section 112 of the Revenue Act of 1928. The Harrison Co. had agreed, as a part of the plan of reor- ganination, to distribute to its stockholders the shares of preferred stock which it received in exchange for its assets, to wind up its affairs and to dissolve. * * * [italics supplied.]

I do not believe that the opinion in the case quoted justifies this statement. It, as I understand it, was not held there that the plm of reorganization included a provision that the stock received by the Harrison Co. was to be distributed to its stockholders. An inspection of the record together with the opinion in that case, I think, will demonstrate that this statement is erroneous. The record shows that on March 15, 1929, at a meeting of the board of directors of the Harrison Co. the following resolution was adopted:

In view of the fact that this company will receive from Ross Industries Corporation, in pursuance of the plan of reorganization, stock in Ross Industries Corporation, the following resolution was on motion duly made, seconded, put and unanimously carried, adopted:
Resolved: That in event the merger of this company with Ross Industries Corporation is completed, along the lines authorized in the foregoing resolution, such stock of Ross Industries Corporation as may be received by this company, in effectuating the said merger, shall as soon after the transaction is completed as is convenient, be distributed among the various stockholders of this company, in proportion to the stockholdings of each stockholder.

The reorganization was accomplished by a contract entered into by and between the Boss Co. and the Harrison Co., the agreement being dated March 21, 1929, and executed by the officers of the two corporations on that date. This agreement, being Exhibit H, a part of the stipulation of fact in this case, is made a part hereof by reference. It provides for the transfer of part of the assets of the Harrison Co. to the Boss Co. in consideration of the issuance to the Harrison Co. of $100,000 par value of 7 percent preferred stock of the Boss Co. It further provides that the Harrison Co. will dissolve not later than six months from and after March 21, 1929. There is no reference to or agreement about what disposition shall be made of the Boss Co. stock which is to be transferred to the Harrison Co. by the Boss Co. The resolution of March 15, 1929, passed by the directors of the Harrison Co. was not made a part of that contract and was not referred to by it. There is no circumstance indicating that the Boss Co. had any knowledge of such resolution. What disposition was to be made of this stock by the Harrison Co. was not the subject of contract or agreement between the two corporations. The resolution of March 15 relative to the, distribution of such stock, if and when it should be received, was purely a matter of concern to the Harrison Co. and its stockholders. It was not a part of the plan of reorganization and the reorganization was not effected with relation to what disposition the Harrison Co. would make of such stock.

The prevailing opinion states that the respondent here has not argued that the petitioner would be taxable if there was a reorganization of the two corporations within the meaning of the statute. I understand it to be the duty of this Board to redetermine proposed deficiencies by the Commissioner of Internal Revenue where the same are properly brought before us and I do not understand that we are limited in that determination to the questions either of law or fact raised or relied upon by either of the parties; nor are we to be controlled in our determination by the construction placed upon the law by either of the parties. If the record before us presents a question which we believe should be controlling, I believe it to be our province to deal with that question where properly raised by the pleadings whether it is insisted upon or not.

I do not believe that the Ross Co. stock was distributed to petitioner in pursuance of the plan of reorganization between the two corporations.

It is said in the prevailing opinion that the things done by petitioner and the corporations were not done to avoid tax, but had some other purpose. I think this statement is at most dictum. The prevailing opinion cites Winston Bros. Co., 29 B.T.A. 905. I think that case is distinguishable from this in that there we had before us one of two corporations. Here we do not have the corporation, but an individual stockholder.

Entertaining these views, I feel the determination of the Commissioner as to the receipt of the Ross Co. stock by the petitioner should be sustained.


source: Caselaw Access Project

author: Arundell:

license: Public Domain

text:
    Doernbecher Manufacturing Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. St. Johns Investment Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 34853, 43527, 46421, 50607, 50613, 63628, 71534.
    Promulgated June 21, 1934.

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

      Chester A. Gwinn, Esq., for the respondent.
   OPINION.

Arundell:

The issue that runs through all the years before us in these proceedings is that of whether amounts' paid to petitioner’s stockholders, who were also employees, are deductible in full as reasonable allowances for salaries. From 1922 on through 1925 petitioner paid its stockholder-employees certain salaries plus bonuses designated in the minutes of directors’ meetings as “ additional compensation.” Beginning with 1926 the bonus system was discontinued and thereafter the stockholders were paid flat amounts approximately equal to the total of salaries and bonuses previously paid. The bonuses paid in the earlier period were not distributed according to individual efforts or results, but were based on petitioner’s gross sales and allocated according to predetermined percentages. The respondent allowed as deductions the basic salaries paid, and disallowed the bonuses on the theory, that they were distributions of earnings and not ordinary and necessary business expenses. In the later period, 1926 to 1930, the respondent allowed as salary deductions amounts equal to, and in some cases substantially more than, the amounts he determined represented deductible salaries in the earlier years. The respondent having made a determination that the amounts claimed by petitioner are excessive, the burden is on petitioner to show that the amounts involved are but reasonable compensation for the services rendered and are no more than ordinary and necessary expenses of conducting its business. Botany Worsted Mills v. United States, 278 U.S. 282. In L. Schepp Co., 25 B.T.A. 419, 429, we said:

When the Commissioner has made a determination, the taxpayer who attacks it must prove by evidence of the services rendered and their value that a correct determination would exceed that of the Commissioner. Where the payments are to kinsfolk or to shareholders, the proof must also show that they were not influenced by family considerations and were not disguised distributions of profits.

In Becker Bros. v. United States, 7 Fed. (2d) 3, in discussing the question of reasonableness of salaries, the court said:

There can be no doubt that the corporation was entitled to deduct from the income it received all the ordinary and necessary expenses incurred in carrying on its business, including a reasonable compensation to its officers and employees. But the salaries which are paid in order to constitute an allowable deduction must be a reasonable and fair compensation for the services rendered. The expenses which can be deducted aré the “ ordinary and necessary expenses.” If a corporation sees fit to pay its employees extraordinary, unusual, and extravagant salaries, distributing the profits of the business in the guise of salaries to its officers, who hold the stock and control its affairs, such salaries manifestly do not constitute the “ ordinary and necessary expenses ” of the business, which can be deducted under the statute. The government is not bound or concluded either by any resolution which the corporation adopts, or by its method of beeping books, upon the question as to whether any particular payment is a salary payment or a division of surplus.

Examining the documentary evidence, a close relationship between stock ownership and the distribution of the so-called bonuses at once appears. The several stockholder-employees, the percentages of Doernbecher’s stock for which they were to pay under the contract of December 1, 1920, and the percentages of bonus distributions were as follows:

While the distributions based on petitioner’s gross sales were not exactly in the same ratio as stock ownership, the two are sufficiently close to raise a most strong presumption that there was a direct connection between them. Although there was the variation between percentage of stock ownership and that of distribution as set out above, the amounts distributed, with but insignificant variations, were in direct proportion to stockholdings. Thus in 1922 and 1923 F. A. Tauscher,- owning twice as much stock as P. J. Lychywek and Conrad Tauscher, received twice the amount distributed that they did. C. E. Dye and E. S. Beach each owned twice the amount of stock owned by F. A. Tauscher and each received double the amount paid to Tauscher, H. A. Green and B. P. John in all the years 1922 to 1925 received the same amounts as “ bonuses ”, there being a difference of one share in amount of stock issued to them at December 1, 1920, and their stockholdings being equal after December 19, 1928. In 1924 and 1925 the same situation obtained, with differences of but a few cents. Thus in 1924 F. A. Tauscher, with twice the stock of Lychywek, received in distribution $3,093.75 and Lychywek $1,546.90. Based on stock, Tauscher should have received 5 cents more. In the same year Beach and Dye, with twice the stock of Tauscher, were paid twice as much as Tauscher as bonuses. In 1925 Beach and Dye each received the same amount, $6,416.54, which was slightly more than twice Tauscher’s $3,203.46, and this latter sum was not quite double Lychywek’s $1,606.52. Moreover, comparing the basic salaries and the bonuses, a further relationship between stockholdings and bonuses is apparent. It may be presumed that the basic salary is some indication of the directors’ judgment of the worth of the employee to the business. Here we find employees with substantially different basic salaries, but having contracted to purchase the same amounts of stock, receiving the same amounts as bonuses. Beach with a basic salary of $8,500 from 1922 to 1924 and $9,374.97 in 1925, and Dye with a basic salary of $12,000 in all these years, each contracted to buy the same amount of stock, and each received the same distribution every year. Conrad Tauscher’s basic salary was $3,600 in 1922 and 1923 and that of Lychywek was $4,000. Each contracted to purchase the same amount of stock and received equal amounts in distribution. With these figures before us the conclusion is inescapable that the annual distributions designated as bonuses were in fact distributions .of profits to stockholders and were not salaries paid for services rendered.

For the purpose of this phase of the case we think that the several employees who contracted to purchase Doernbecher’s stock on December 1, 1920, should be considered to be stockholders throughout the entire period, although stock was not issued in their names until in December 1923. All of them were parties to the contract of purchase and all eventually received their stock.

Beginning with 1926 the distribution of bonuses was discontinued and the amounts paid to stockholder-employees were thereafter designated as salaries. The principal stockholders, Green and John, thereafter were paid $75,000 each, which was but $278.46 less than the total received by each in 1925. The other stockholders all received more after 1925, the increases from 1925 to 1926 being as follows: Beach, $2,708.49; Dye, $183.46; F. A. Tauscher, $196.54; Lychywek, $1,043.46. No reason is given for the change from salary plus bonus system to the straight salary method of compensation. It is apparent, however, that none of the stockholders suffered any decrease, except Green and John in comparatively small amounts, in the annual sums received, and which in the prior years we have held represented in part distributions of profits to stockholders. In each of the years involved the respondent has allowed deductions of substantial amounts as compensation to these employees for services rendered, and the evidence does not convince us that the amounts so allowed were not reasonable sums.

The petitioner offered the testimony of witnesses to establish what amounts would constitute reasonable salaries for Green and John. These- witnesses were experienced in the wholesale and retail furniture business and knew something of some of the manufacturing concerns. However, they did not know what salaries were paid by manufacturers to the men who occupied the positions similar to those of Green and John, and we are not convinced that they had sufficient familiarity with the manufacture of furniture to be able to give an opinion of what constituted reasonable salaries sufficiently reliable to form the basis for a finding of fact. The evidence abundantly establishes that the several stockholders performed valuable services for petitioner, that each was skilled in his field of duty, and that they all served petitioner loyally and whole-heartedly. But it does not establish to our satisfaction that they were entitled to any greater sums than allowed by the respondent as reasonable compensation. We accordingly sustain the respondent on the salary issue for all years.

The item of $9,902.58 paid by petitioner in 1929 as its share of the expenses of investigating the possibilities of a proposed merger of furniture concerns in our opinion should be allowed as an expense deduction in that year. It appears that the respondent’s only reason for disallowance is that some of the information gathered in that investigation was availed of by companies entering into another merger in 1930. The evidence is that petitioner was not a party to the 1930 merger. Its nearest approach to participating was that in 1930 a newly organized corporation which took over the assets of a number of companies purchased petitioner’s stock from its stockholders. As far as petitioner was concerned the proposed merger in connection with which it incurred expenses was abandoned in 1929 and it is entitled to the deduction claimed.

The remaining question is that of affiliation in the year 1930 with the Furniture Corporation of America, Ltd., hereinafter called the Furniture Corporation. The facts, in brief, are that on June 26,1930, Green, Beach, and Dye assigned all their stock except qualifying directors’ shares to the Furniture Corporation, expressly subject to the contract of July 18, 1927, between Green, Beach, Dye, Tauscher, and Lychywek, on the one side, and John on the other. Under that contract all of the stock which Green, Beach, and Dye assigned to the Furniture Corporation was placed in escrow with the United States National Bank at Portland as collateral security to guarantee the performance of the contract under which the petitioner had contracted to purchase John’s stock. The.contract with John gave him the right to foreclose on the stock in case of default, but it was provided that until he did foreclose, “ this agreement shall not in any way or manner affect the rights of the first parties to vote their respective stock hereby pledged as collateral.” The assignors attempted to deliver the stock to the assignee on October 1, 1930, hut John refused to release it from escrow. The petitioner filed a consolidated return with the Furniture Corporation for the period June 26 to December 31,1930. The respondent allowed affiliation and determined income on a consolidated basis from October 1 to December 31, 1930, and refused to allow affiliation prior to October 1.

The respondent’s position now is that there was no statutory affiliation at any time in the year 1930.

The assignment of June 26,1930, in our opinion was effective as of that date to transfer ownership to the Furniture Corporation of 10,844% shares of stock. The prior pledge agreement of the assignors with John did not deprive them of title and ownership. Where there exists the requisite statutory ownership, affiliation is not denied because the stock has been pledged, Lavenstein Corp. v. Commissioner, 25 Fed. (2d) 375, or leased, including the right to the lessee to vote the stock, Connecticut & Passumpsic Rivers R.R. Co., 24 B.T.A. 394. But there is still the question of whether the 10,847½ shares of Green, Beach, and Dye constituted all the outstanding stock at June 26, 1930, or whether the 8,135% shares standing in the name of John and held in escrow throughout 1930 should also be considered to be outstanding stock.

Petitioner’s view is that the contract with John was a contract of purchase and sale and that John’s stock thereupon became treasury stock, leaving only the 10,847% shares of Green, Beach, and Dye as outstanding stock in 1930. We think it unnecessary to decide whether the agreement with John was a contract of sale vesting title presently in the petitioner, or a contract to sell under which John retained title until payment was completed. In either event the 8,135% shares which were the subject of the contract continued to be outstanding stock throughout 1930. If title passed to the corporation upon execution of the contract, the stock again becaihe outstanding when it was deposited with the bank as collateral security for performance of the terms of the contract. If title remained in John the stock clearly was outstanding. By the same token that stock pledged or leased was taken into consideration in determining the matter of affiliation in the cases above cited, John’s block of stock must be treated as outstanding stock here. It cannot be ignored or treated as nonexistent. “ Stock once issued is and remains outstanding until retired and canceled by the method provided by statute for the retirement and cancellation of capital stock.” Commissioner v. Woods Machine Co., 57 Fed. (2d) 635, quoting Knickerbocker Improvement Co. v. Board of Assessors, 65 Atl. 913. No action is shown to have been taken by petitioner to retire and cancel the John block of stock. The statute requires direct ownership of at least 95 percent “ of the stock ” in order to constitute an affiliation. It follows from, what we have said that the John block of 8,135% shares must be considered as part “ of the stock ” of petitioner. As that block was not owned by the Furniture Corporation at any time during 1930, there was no affiliation in that year, and the respondent erred, as he now claims, in allowing affiliation for a part of the year.

Decision will he entered under Rule 50.


author: Arundell :

text:
    William C. Fordyce and Andrew W. Johnson, as Statutory Liquidating Trustees of Anco Investment Company, Formerly a Corporation, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 58647.
    Promulgated June 21, 1934.

      Henry J. Richardson, Esq., for the petitioners.

      James A. Polk, Esq., for the respondent.
   OPINION.

Arundell :

In this proceeding the petitioners assert that the Anco Investment Co. is not only not liable for the deficiencies determined by the Commissioner for the years 1928 and 1929 in the respective amounts of $6,873.86 and $5,321.02, but that all income taxes paid by the Anco Co. for the years in question should be refunded. The facts have been stipulated and we will make only such reference to them as seems necessary to a discussion of the questions involved.

On May 1, 1924, Lorenzo E. Anderson, Arthur C. Hilmer, and Oliver J. Anderson entered into an agreement of copartnership under the firm name of Lorenzo W. Anderson & Co., which provided among other things that in the event of the death of Lorenzo E. Anderson and the continuance of the business of that firm by the surviving partners or either of them, 25 percent of the net profits of the business of the successor firm by that name should be paid to the estate of Lorenzo E. Anderson for a period of three years after his death.

On June 22, 1925, Lorenzo E. Anderson died. On July 1, 1925, Oliver J. Anderson and Arthur C. Hilmer, together with two new partners, entered into an agreement of copartnership under the firm name of Lorenzo E. Anderson & Co., which continued until May 31, 1927. This copartnership agreement provided that 25 percent of the net .profits of the business for a period of three years should be paid to the estate of Lorenzo E. Anderson before any division of the partnership income should be made among the partners. It also provided that Oliver J. Anderson and Arthur C. Hilmer should be considered as the owners of the good will and trade name of the firm. Oliver J. Anderson and Arthur C. Hilmer also contracted as individuals with the executors of the estate of Lorenzo E. Anderson that this payment should be made.

On or as of May 31, 1927, Arthur C. Hilmer purchased the interests of the other partners in the firm and assets of Lorenzo E. Anderson & Co. To enable him to carry out this purchase he obtained loans or advances from nine persons in the total amount of $170,000. This money Hilmer deposited in a special account and checked the same out in two checks, one to Oliver J. Anderson for $85,000 and the other to the firm of Lorenzo E. Anderson & Co. for $385,000. This latter amount was in turn paid out to the retiring partners for their interest therein. Hilmer, by the same contract, agreed that he would carry out the obligation to pay 25 percent of the net profits of the business of Lorenzo E. Anderson & Co. to the estate of Lorenzo E. Anderson, deceased, for the period formerly agreed upon.

On June 20,1927, Hilmer and William C. Fordyce entered into an agreement of copartnership under the firm name of Lorenzo E. Anderson & Co., which partnership continued until January 2, 1928, when a new agreement was entered into by Hilmer and Fordyce.

On the same date, January 2, 1928, an agreement was entered into by and between the Anco Investment Co., as party of the second part, and Lorenzo E. Anderson & Co., as party of the first part, which contained the following provision:

First-. Party of the second part agrees to advance to the party of the first part cash and securities as required by the party of the first part for all purposes of the business to be conducted by the party of the first part for the party of the second part, it being understood that the party of the second part shall bear all expenses and losses connected with said business and shall receive all profits derived therefrom after deducting said expenses, including salaries to be fixed by the Board of Directors of the party of the second part, but nothing herein shall be taken as making said corporation or any of its shareholders, other than those who have personally signed the articles of co-partnership of Lorenzo E. Anderson & Company, partners in said firm of Lorenzo E. Anderson & Company.

Tlie Anco Investment Co. was incorporated under the laws of the State of Missouri on December 27, 1927, and was qualified to do business only in that state. The members of Lorenzo E. Anderson & Co. were members of a number of stock and commodity exchanges, including the New York Stock Exchange. Such exchange memberships were assets of the partnership of Lorenzo E. Anderson & Co. and were used exclusively by it in the conduct of its business. All of the exchanges had rules permitting only natural persons to be members of and trade on the exchanges.

The partnership had its principal offices in St. Louis, Missouri, Avith branches in San Antonio and Dallas, Texas. It transacted ail its business in its own name, including dealing Avith its customers, underwriting of securities, purchase and salé of securities, borrowing money and maintaining bank accounts, and advertising and soliciting business, and otherAvise acted as principal in all'its dealings. The entire operations of the business of Lorenzo E. Anderson & Co. were reflected on the partnership books. The net profits therefrom, with the exception of the amounts paid to the estate of Lorenzo E. Anderson, deceased, were credited to the account of “Arthur C. Hilmer Agent Capital Account ”, Avhich account when so credited represented the entire net worth of the copartnership. With the exception of the amounts paid during each of the taxable years to the estate of Lorenzo E. Anderson, the total profits of the partnership which had been credited to the'account of “Arthur C. Hilmer Agent Capital Account ” were then taken upon the books of the Anco Investment Co. under an account entitled “Arthur C. Hilmer Agent.” The Anco Investment Co. had no income from any other source.

The partnership made an income tax return for its fiscal year ended May 31, 1928, in which it showed a total income of $252,541.06 and the following distribution thereof under the heading “ Partners’ share of income and credits ”; to “Arthur C. Hilmer, Agent for Anco Investment Company ”, $186,929.09; “ 25 per cent of the net income paid to the estate of Lorenzo E. Anderson, deceased, $50,-611.97.” “Arthur C. Hilmer, $15,000.”

For the fiscal year ended May 31, 1929, the partnership returned a total income of $494,929.06, and showed the following distribution thereof under the title “ Partners’ share of income and credits ”: to “Arthur C. Hilmer, Agent for Anco Investment Company ”, $454,-346.14, and Estate of Lorenzo E. Anderson, deceased ”, $40,582.92.

The Anco Investment Co. made its returns on a calendar year basis and for the years 1928 and 1929 reported as taxable income the amount shown aboA^e as its distributive share of the partnership earnings.

On audit of these returns the Commissioner held that the entire income of the partnership, without reduction on account of the amount paid by the partnership to the estate of Lorenzo E. Anderson, deceased, was the income of the Anco Investment Co. In the personal income tax returns of the members of the copartnership only the amounts they had actually received from the partnership were reported as income therefrom.

The broad question we have to decide from these facts is whether the money received by the Anco Investment Co. from the partnership pursuant to the contract of January 2, 1928, was income to it, and whether the portion of the income of the partnership paid to the estate of Lorenzo E. Anderson & Co., which in fact was not turned over to the Anco Investment Co., should be taxed to the latter on the ground that the partnership was merely the agent of the corporation.

Petitioners’ argument is that the income sought to be taxed to the Anco Investment Co. was in fact income to the partnership and as such may be taxed only to the partners, citing in support of their position, among other authorities, Mitchel v. Bowers, 15 Fed. (2d) 287; Burnet v. Leininger, 285 U.S. 136; and Lucas v. Earl, 281 U.S. 111. They further argue that the corporation was not a partner in Lorenzo E. Anderson & Co., not only because as a matter of law a corporation may not be a member of a partnership, but also because it was made clear by the agreement of January 2, 1928, between the Anco Investment Co. and the partnership that it was not the intention of the parties that the corporation should become a member thereof. Petitioners also urge that the partnership did not operate its brokerage and banking business in the capacity of agent for the Anco Investment Co., but that the partnership at all times acted as principal and solely and only for itself.

It does not seem to us that the arguments made by petitioners meet the situation, even assuming that as a general proposition of law they are sound, a matter which it is not necessary to decide for the moment. It is an undisputed fact that the Anco Investment Co. received certain sums of money from the partnership which represented the net earnings of the partnership other than the 25 percent of the profits that went to the estate of Lorenzo E. Anderson and the $15,000 that went to Hilmer. This money was paid to the Anco Investment Co. pursuant to the terms of the contract of January 2, 1928. It was not a gift, but was paid over for a valid consideration. There is no evidence that it was a return of capital to the Anco Investment Co. The Anco Investment Co. reported it as income in its income tax returns and paid a tax on it. The Commissioner treated it as income and opposes a claim now made for the refund of the tax paid. The burden rests on the petitioners to prove that the money received by the Anco Investment Co. was not income, and that they have failed to do. We may assume that the Anco Investment Co. was not a partner in the partnership of Lorenzo E. Anderson & Co. and that the partnership was not the agent of the corporation in the conduct of its affairs. The Anco Investment Co., nevertheless, received money under a valid contract for a valid consideration and there is no showing that the money so received was not income, but on the record it clearly was income to the corporation and properly taxable to it.

The deficiency arose by reason of the attempt by the Commissioner to tax the Anco Investment Co. with the 25 percent of the partnership income which was paid over to the estate of Lorenzo E. Anderson, deceased. We held in Arthur C. Hilmer, 27 B.T.A. 1165, that the agreement to pay this sum to the estate of Lorenzo E. Anderson was not a deductible expense of a prior partnership, but that the surviving partners were in fact buying out the deceased partner’s interest in the business. That decision is authority for holding that the 25 percent paid to the executors of Lorenzo E. Anderson is not a deductible item.

There is no doubt that to the partnership income there should be added the 25 percent so paid, or rather that such amount should not have been allowed as a deduction in computing the partnership’s net income. But it does not follow that this sum may be added to the income of the Anco Investment Co., for that company never in fact received that sum and the amount can only be taxed to it on the theory that the Anco Investment Co. was a partner in the partnership of Lorenzo E. Anderson & Co., which earned the money, a contention that the Commissioner no longer seems to urge, or on the theory that the partnership was the agent of the Anco Investment Co. (a mere managing partnership) and that the income of the agent was income of the principal and consequently the 25 percent paid out should be added to the amount paid over by the Anco Investment Co. While the contract between the Anco Investment Co. and the partnership did not specifically provide that the 25 percent to be paid to the estáte of Lorenzo E. Anderson should be deducted before determining the amount to be paid over to the Anco Investment Co., we think a fair construction of the several contracts requires the conclusion that not only the partnership immediately succeeding that of May 1, 1924, but any and all successors thereof were obligated to pay 25 percent of the net profits to the Anderson estate. Such is the construction placed upon the agreement by the interested parties, as shown by the distributions made and entered on the books and reported for tax purposes. In these circumstances it seems to us that the 25 percent of the partnership income which was paid over to the estate of Anderson may not be treated as constructively received by the Anco Investment Co. and accordingly may not be taxed to it. Only so much of the income of the partnership as was actually received by the Anco Investment Co. or that it had a right to receive under its agreement with the partnership may be properly taxed to it, and it appears that it has already fully paid the tax on the actual amount paid it by the partnership under the contract of January 2, 1928.

In view of the conclusion reached it is unnecessary to discuss the further contention of the Commissioner that the conduct of the Anco Investment Co.-has been such as to estop'it from now claiming that the sums received from the partnership may not be taxed to it.

Decision will be entered under Rule 50.


author: Mokris :

text:
    The W. J. Scholl Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67079.
    Promulgated June 21, 1934.

      W. A. Mason, Esq., and A. M. Henderson, Esq., for the petitioner.

      Arthur Gamdujf, Esq., and F. S. Gettle, for the respondent.
   OPINION.

Mokris :

The respondent having determined a deficiency in tax of $3,648.05 for the calendar year 1930, the petitioner brings this proceeding for the redetermination thereof, alleging as error in such determination the respondent’s failure to adhere to sections 41 and 42 of the Revenue Act of 1928, and certain articles of Regulations 74 promulgated thereunder, hereinafter set forth. Specifically, the question for consideration is whether or not the income from certain contracts was taxable in the year 1930, as the respondent has held, or in 1931, as the petitioner contends.

The petitioner is a corporation, with its principal office in Youngstown, Ohio, where it is engaged in the installation of heating, plumbing, ventilating, and power plant systems.

The petitioner entered into a contract on April 16, 1929, to install a complete heating and ventilating system, including boilers, radiators, piping, and plumbing in the Central Bank Building at Youngstown, Ohio, which contained the following clause;

Guarantee. This, contractor shall guarantee his work generally for a period of two heating seasons after the acceptance of the work; ordinary wear and tear excepted, but not releasing him from return trap repairs.
Should imperfections develop due to faulty workmanship during the above period, this contractor shall repair same in a proper and satisfactory manner to the architect, without cost to the owner.

It entered into a contract with the school district of Sharon, Pennsylvania, on June 25, 1929, for the installation of boilers, stokers, ventilating equipment, unit heater for class rooms, and temperature regulation, in the Sharon Junior School Building, which contained the following clause:

Guarantee: All labor and materials shall be guaranteed in writing for one year against all defects, except such as are due to wear, neglect and bad management of the plant. The contractor shall guarantee the free circulation of steam throughout the entire system, without noise or hammering, and that the operation of the motors and fans will be reasonably free from noise. He shall furnish all necessary instructions and make all adjustments required to develop the full capacity of the apparatus and to warm the building in accordance with the requirements of the plans and specifications, without undue strain or excessive length of time, provided that the heating and ventilating apparatus is in continuous operation and all doors, windows and other openings are tightly closed; also that the ventilating system will provide at least 50 cubic feet of fresh air per minute for each pupil accommodated, in accordance with the requirements of the Pennsylvania State Code.
All defective material, as mentioned above, shall be repaired without extra charge by the contractor.. Any radiators, coils, etc., failing to circulate properly, or piping' or equipment showing leaks, shall be altered, remodeled or changed until same performs properly, without charge by the contractor.
The contractor shall keep the entire plant in proper operative adjustment and condition for one year following its completion without charge. Natural wear, accident, or carelessness on the part of others, however, shall not be made good by this contractor. All machinery shall be left in successful operation and adjusted to its work on the most economical basis.

It entered into a contract on August 10,1929, to furnish and install a boiler plant, plumbing, heating, and ventilating equipment in the Niles Trust Co. Building, which contained the following clause:

When the herein specified apparatus is wholly completed, the heating contractor shall guarantee same for a period of one year after date of completion; that the work is installed in accordance with the plans and specifications; that vapor will circulate freely to all radiators, and that the plant is free from leaks or defective materials.

All of the petitioner’s contracts contained guarantee clauses similar to those above, some of which are for the period of one year and others for two years, under which it conducts periodical inspections, and where faulty material or workmanship is discovered proper replacements or repairs are made. In some cases the actual expenditures for material and labor in connection with such guarantees have been very small, but in other instances they have amounted to as much as 25 percent of the contract. For instance, in the case of the Sharon School contract it was required to install additional radiation and temperature regulation.

The work upon the three contracts aforesaid was begun in April, July, and October, 1929, respectively, and final payments were received thereunder in the respective months of' March, December, and October, 19S0. The petitioner incurred direct expenses and apportioned the following indirect expenses against the several contracts during the guarantee period:

No direct expenses were incurred under the Central Bank contract during the guarantee period. The entire $389.99 charged against the Niles Trust contract was incurred in 1930 so that, with the exception of the $664.54 charged against the Sharon School contract, there were no other direct expenses incurred beyond the taxable period in which final payments were actually received, under the contracts. The amounts charged against the several contracts as “ Overhead expense during the maintenance and guarantee period ” represent an arbitrary percentage of general overhead chargeable against the entire business. To the $665.54, direct charges above, should be added $38.70, premium paid by the petitioner for a bond to insure faithful performance under the guarantee provisions of the Sharon School contract covering one year of the two-year period of guarantee.

Prior to 1922 the petitioner set up ’ a reserve from year to year to provide for expenses arising under the “ guarantee ” clause of its contracts. In or about that year it was required by the Bureau of Internal Revenue to change to the method of accounting now employed, i.e., computing and recording profits upon contracts at the termination of the maintenance or “ guarantee ” period.

At the completion of the contracts aforesaid the petitioner had no means of determining what the actual cost of the installation and compliance with the “ guarantee ” clauses therein or the actual net profits therefrom would be.

In its return for the taxable year 1931 the petitioner deducted $27,424.25, composed of $13,485.80, $8,366.86, and $4,729.08, plus $842.51 not here in controversy, representing the profits from the three contracts here considered, together with the amount not in controversy, which apparently, though the record is not positive in this respect, had been included in the gross income for that year. The deduction was accompanied by the following explanation: “Amount of profit realized on contracts closed out in 1931 which was considered as 1930 taxable income by Revenue Agent at time he examined 1930 return.” Such amount was not, however, included in the gross income in the petitioner’s return for 1930, the year in which the respondent contends it should be included. Nor was it carried upon the petitioner’s books as a profit in that year.

So much of sections 41 and 42 of the Revenue Act of 1928 and the articles of Regulations Y4 promulgated thereunder as are pertinent hereto and are relied upon by the petitioner are as follows:

Siso. 41. The net income shall be computed upon the basis of the taxpayer’s annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayers; * * *
Sec. 42. The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under section 41, any such amounts are to be properly accounted for as of a different period.
Akt. 331. When included in gross income. — Gains, profits, and income are to be included in the gross income for the taxable year in which they are received by the taxpayer, unless they are included as of a different period in accordance with the approved method of accounting followed by him. (See articles 321-323.) * * *
Abt. 321. * * * The time as of which any item of gross income or any deduction is to be accounted for must be determined in the light of the fundamental rule that the computation shall be made in such a manner as clearly reflects the taxpayer’s income. * * *
Akt. 334. Long-term contracts. — Income from long-term contracts is taxable for the period in which the income is determined, such determination depending upon the nature and terms of the particular contract. As used herein the term “ long-term contracts ” means building, installation, or construction contracts covering a period in excess of one year. Persons whose income is derived in whole or in part from such contracts may, as to such income, prepare their returns upon the following bases:
# ' Jj* * * # ;Js $
(b) Gross income may be reported in the taxable year in which the contract is finally completed and accepted if the taxpayer elects as a consistent practice so to treat such income, provided such method clearly reflects the net income. If this method is adopted there should be deducted from gross income all expenditures during the life of the contract which are properly allocated thereto * * *.
Abt. 322. Bases of computation. — Approved standard'methods of accounting will ordinarily be regarded as clearly reflecting income. * * *
Abt. 323. * * * each taxpayer shall adopt such forms and systems of accounting as are in his judgment best suited to his purpose. * * *

The respondent, as we have stated, has determined that the profits from the three foregoing contracts were taxable in 1930, the year in which final payment of the several considerations thereunder were received. We begin, therefore, with the presumption that such is the correct method to be employed.

The petitioner contends that (a) the contracts here in question were not completed until the taxable year 1931; (b) that its return for the taxable year 1930 clearly reflected the true net income for that year; and (c) that the respondent had approved its method of accounting for approximately eight years.

It should be pointed out at this juncture that this is not a case where the subject matter of the contracts had' not been completed within the taxable year and where it is sought to postpone the reporting of profits, until such completion.. The contention here is that, although final payments, under the' contract were received within the taxable year for the performance of the subject matter thereunder, the contracts themselves were nevertheless not completed until the periods of the guarantee clauses expired. It is to be doubted whether the respondent’s regulations governing “ long-term contracts ” were intended to cover, not only the performance of the subject matter of the contract itself, but also the incidental or collateral functions which may or may not arise thereunder— depending upon future necessity — by reason of an expressed or implied guarantee. At any rate it would seem reasonable to say that his regulations contemplate that a completion of the subject matter of the contract constitutes substantial performance thereof and is a completion of that contract within the meaning of his regulations. So that, in any event, his regulations, do not support the jjosition which the petitioner takes, that although the subject matter was completed and full payment received, in 1930, the reporting of profit must be postponed because of the possibility or probability that further costs may be incurred. Vang v. Lewellyn, 35 Fed. (2d) 283.

The petitioner’s first contention relies primarily upon the fact, as the testimony shows, and as we have found, that the “ actual ” cost, hence the “ actual ” profit, under a given contract can not be determined until the expiration of the guarantee period. This is easily understood, but in the administration of the taxing statutes, while it is highly desirable that accuracy be stressed and, indeed, insisted upon wherever the exigency will permit, those charged with the administration thereof, in the great majority of cases, must be satisfied with substantial accuracy, since the “ actual ” determination of profit or loss, where every element is given full effect, is seldom possible if the accounting therefor is at all complex. So that it might be said that this is merely another of the manifold accounting problems to be considered in determining whether or not the chosen method clearly reflects net income or whether some other method should be substituted.

We fully appreciate, as the petitioner contends, that its consistent practice over a period of years should be strongly considered, especially where the respondent has impliedly approved that method by his failure to reject it; but if we find that the method so adopted was incorrect and does not, within the taxable year, clearly reflect net income, we must correct rather than perpetuate the error. See R. G. Bent Co., 26 B.T.A. 1369.

Circumstances closely paralleling those of the instant case are to be found in Vang v. Lewellyn, supra, in which the court held that the method of accounting there employed — wherein the reporting of profits from construction contracts was postponed until the end of the maintenance period — did not correctly reflect income for (ax purposes. The plaintiff in that case was engaged in the road construction business under contracts requiring installment payments as work progressed. Generally, the construction work was finished within the year, but in some instances it extended into the following year. When work was finished and the final installment under the contract paid, the company deducted all expenditures made from the total receipts in the determination of profit or loss and, by reason of the fact that it was required, at its own expense, to maintain the road free of all defects for a period of five years after completion, it further reduced the amount so received by an estimated amount of the probable maintenance cost and reported the difference as taxable net income for the year the work was finished. The respondent rejected this method and disallowed the estimated reserves as deductions. Whereupon the company filed amended returns by which it sought to establish it-s accounts on the basis of completed contracts, representing that a contract was not completed until the end of the maintenance period, and it reported its income from the contract as having been received at that time. The court observed that the method used was entirely lawful, “ but for tax purposes it was not lawful unless it clearly reflected income,” and it finally said:

* * * We hold that, when the construction work was finished and the contract price paid and the road turned over to the city or county, the contract was completed, disclosing definitely gain or loss in the transaction. This was how the company itself first regarded it when it made and set aside estimated reserves to cover costs of maintenance on its many contracts and then claimed them as deductions from income received in the year the transactions came to an end by payment and delivery. The company’s engagement to maintain the work in good condition for live years after completion as a pledge of its workmanship was clearly a contingent liability which might or might not cost money' — it occurred in only 3 out of every 12.5 jobs — and, accordingly, might or might not reduce the net income from a contract closed by final payment long before. Costs of maintenance, if any, would of course be a subject for reduction from income in the year in which income was received, but such costs, having no effect upon or relation to the final payment of the contract price at the end of the work, would not keep the contract open and postpone payment of the tax on the income received.

Except for the amounts of indirect expenses apportioned to these contracts on an arbitrary basis — which might have been, but which were not, supported by a showing of the amount of indirect labor actually expended upon each project — the expenses incurred during the guarantee period were comparatively insignificant. It would be a gross distortion of net income to say that the taxability of the $26,582.74 received upon these three contracts, subject to its unfettered use, should be postponed until the following year by reason of a purely contingent possibility that the petitioner might be compelled to expend some further amounts in order to satisfy an incidental requirement under the contract.

We are of the opinion that the respondent properly rejected the petitioner’s method of accounting and that his determination should be approved.

Judgment will he entered for the respondent.


author: Black :

text:
    James Simpson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 61434.
    Promulgated June 21, 1934.

      Clay Judson, Esq., for the petitioner.

      J. R. Johnston, Esq., for the respondent.
   OPINION.

Black :

This proceeding is for a redetermination of deficiencies in income tax for the calendar years 1927 and 1928 in the respective amounts of $16,639.74 and $6,070.25, determined against petitioner, an individual residing in Chicago, Illinois.

The petition alleges that the entire amount of the deficiencies is in controversy. The parties, however, have filed a stipulation in which they agree that a certain item in the amount of $52,356.71 received by petitioner in 1927 should be taxed as a capital net gain at 1214 percent, and that the additional tax thereon is the amount of $6,544.59. Petitioner has also conceded two other errors assigned in the petition regarding the disallowance by the respondent as deductions claimed by petitioner of certain real estate taxes for 1927 in the amount of $3,338.75, and of certain contributions for 1928 in the amount of $385. This leaves for our determination the sole remaining question of whether the respondent erred in holding that income, amounting to $30,274.86 in 1927, and $30,000 in 1928, received by the Northern Trust Co. as trustee for petitioner’s three sisters is taxable to petitioner, the grantor of the several trust estates, under the provisions of section 219 (g) of the Revenue Act of 1926, and section 166 of the Revenue Act of 1928.

The facts were stipulated. The stipulation recites that the income sought to be taxed to petitioner with respect to which the sole remaining question relates was all derived from the trust estates created by an indenture made on July 19, 1923, between petitioner, as party of the first part, and the Northern Trust Co. of Chicago, Illinois, as trustee and party of the second part. This indenture, consisting of six articles, is incorporated herein by reference. In the first article petitioner “ being desirous of establishing and creating the trusts hereinafter mentioned ” sells, assigns, transfers, and sets over unto the trustee 3,000 shares of the common class A stock of Marshall Field & Co. “ subject to the terms and provisions of this Indenture.” In the second article the trustee is given the power and authority to receive and collect all the income from the corpus, to sell, transfer, and assign any of the corpus, and to invest and reinvest the proceeds thereof and any undistributed net income derived therefrom, “ provided, however, that no change shall be made by said trustee in the securities or obligations held in trust by it without the written direction or approval of the said party of the first part so long as he shall be living and able to act in the premises * * The third article provides that the 3,000 shares of stock shall be divided by the trustee into three equal parts, which shall be held and administered as separate trust estates for the benefit, respectively, of petitioner’s three sisters, “ Subject, however, to the conditions, limitations and provisions hereinafter set forth * * The fourth article provides that each beneficiary is to receive the net income from her trust estate as long as she shall live. Article fifth is quoted in full, as follows:

(1) The said party of the first part shall have power to terminate the said several trusts hereby created, or any or either of them, on the 31st day of December, A. D. 1924, or on the 31st day of December of any subsequent year, by giving sixty (60) days previous notice in writing of such termination to the said trustee, and unless so terminated each of said three trusts shall cease, terminate and be at an end upon the death of the beneficiary entitled to receive the income therefrom, as hereinbefore set forth.
(2) Upon the termination of each of said several trusts the trust estate held by said trustee under the trust so terminated shall immediately revert to and vest in said first party, his heirs, devisees or assigns.
(3) The said several trusts hereinbefore created are established for the purpose of providing support and maintenance for the several beneficiaries entitled under the terms of this indenture to receive the income therefrom, and therefore no beneficiary under this indenture shall have any power to anticipate, assign or part with any beneficial interest which she shall at any time be entitled to under the provisions of this indenture, nor shall the same be subject to be taken from such beneficiary by process of law.

The last article of tlie indenture dated July 19, 1923, provides for the administration of the trust estates by the trustee, the latter’s compensation therefor, and the appointment of a successor in trust in the case of the resignation of the trustee therein named.

The last paragraph of the stipulation filed by the parties is as follows:

(b) Although the respondent reserves the right to object to the materiality of any of the facts set forth in this subparagraph (b) [Note: No objection was raised], it is agreed that all of the income which the Bureau of Internal Revenue is seeking to tax to this petitioner was paid out during both the years 1927 and 1928 by the Trustee pursuant to the provisions of said Indenture to the beneficiaries of the trusts named therein, namely Martha S. Stevens, Jane B. Krebs and Grace Hosmer. It is further agreed that neither of the trusts created by this Indenture, the income from which is in question in this case, was terminated during either of the years 1927 or 1928, but that all continued in effect throughout all of both years. It is further agreed that no income whatever was received by the Trustee under said trust Indenture in either of said trusts for distribution or otherwise on the calendar day December 31, 1927, or on the calendar day December 31, 1928.

Section 219 (g) of the Revenue Act of 1926, and section 166 of the Revenue Act of 1928 are identical, and provide as follows:

Where the grantor of a trust has, at any time during the taxable year, either alone or in conjunction with any person not a beneficiary of the trust, the power to revest in himself title to any part of the corpus of the trust, then the income of such part of the trust for such taxable year shall be included in computing the net income of the grantor.

Petitioner contends that in accordance with the fifth article of the trust indenture he could revoke only on the 31st day of December of any given year, by giving 60 days’ previous notice in writing of such termination; that he did not, therefore, have the power, “ at any time during tlie taxable year ” to revest in himself title to any part of the corpus of the trust, but had such power only on the last day of the taxable year, provided the required 60-day notice was given prior thereto; and that, in any event, to tax petitioner on the income in question would be in violation of the Fifth Amendment to the Constitution, and of. other provisions and amendments thereof. Petitioner concedes, however, that if there had been any income on the last day of each of the years before us, such income would be taxable to him under the sections of the statutes above quoted.

The respondent contends that the power which the grantor reserved, by virtue of the fifth article of the indenture, to revest in himself title to the corpus of the trust estates comes within the provisions of sections 219 (g) and 166, supra; and that the income of the trust estates is, therefore, taxable to the grantor, the petitioner herein.

Section 219 (g) of the Revenue Act of 1926 and section 166 of the Revenue Act of 1928 do not violate any provision of the United States Constitution. Corliss v. Bowers, 281 U.S. 376; Reinecke v. Smith, 289 U.S. 172.

The trust estates which petitioner created by the indenture dated July 19, 1923, were revocable by himself alone, and not in conjunction with any other person. The test as to whether the income from such trust estates is taxable to petitioner under sections 219 (g) and 166, supra, depends upon the provision made in the trust instrument itself as to the time when the revocation could be made. If the revocation could be made within the taxable year, the income is taxable to the grantor. Corliss v. Bowers, supra; Clapp v. Heiner, 51 Fed. (2d) 224; Reinecke v. Smith, supra. If, however, the revocation could not be made within the taxable year, as is the case when an advance notice to revoke is required to be delivered to the trustee during the preceding year and no such notice is delivered, the income is not taxable to the grantor. Lewis v. White, 56 Fed. (2d) 390; White v. Lewis, 61 Fed. (2d) 1046; Langlep v. Commissioner, 61 Fed. (2d) 796; Faber v. United States, 1 Fed. Supp. 859; Mabel A. Ashforth et al., Executors, 26 B.T.A. 1188.

The trust estates involved in the instant proceeding fall within the class where the revocation could be made within the taxable year. The instrument creating the trust estates clearly reserved this power to the grantor wherein it provided that “ The said party of the first part [the petitioner herein] shall have power to terminate the said several trusts hereby created, or any or either of them, on the 31st day of December, A.D. 1924, or on the 31st day of December of any subsequent year, by giving sixty (60) days previous notice in writing of such termination to the said trustee * * Here the notice, if given, and the revocation, if exercised, would both occur during a single taxable year. In other words, petitioner had reserved to himself alone the power to revoke in any taxable calendar year after 1923. But petitioner argues that, because he could only revoke on December 31 of any given year, his power was not one- that could be exercised “ at any time during the taxable year ” as that phrase; is used in the respective statutes. This is the same argument that was rejected by the Circuit Court of Appeals for the Third Circuit in Clapp v. Heiner, supra, wherein the court in interpreting the words “ at any time ” concluded that “ the context refers to the conditional happening of an event which may occur one or more times.” [Italics supplied.]

The phrase “ at any time during the taxable year ” was continued in section 166 of the Revenue Act of 1932, but was changed in section 166 of the Revenue Act of 1934 to read merely “ at any time ” thereby omitting the words “ during the taxable year.” In explaining this change the Conference, Report relating to the Revenue Bill of 1934 said:

Amendments Nos. 96 and 97. Under existing law, the income from a revocable trust is taxable to the grantor .only where such grantor (or a person not having a substantial adverse interest in the trust) has the power within the taxable year to revest in the grantor title to any part of the corpus of the trust. Under the terms of some trusts, the power to revoke .cannot be exercised within the taxable year, except upon advance notice delivered to the trustee during the preceding taxable year. If this notice is not given within the preceding taxable year, the courts have held that the grantor is not required under existing law to include the trust income for the taxable year in his return. The Senate amendments require the income from trusts of this type to be reported by the grantor. The House recedes.

If petitioner’s interpretation of the words “ at any time ” were correct, the income from the trust estates here involved would not. even under the Revenue Act of 1934, be required to be reported by the grantor, for the reason that petitioner could only revoke on December 31 of any given year and not on any of the other 364 days of such year. We think it is plain, however, that such is not, the correct interpretation to be applied, and that the instant proceeding is controlled by the cases of Corliss v. Bowers; Clapp v. Heiner; and Reinecke v. Smith, all supra. It follows that the .income, amounting to $30,274.86 in 1927, and $30,000 in 1928, received by the Northern Trust Co. as trustee for petitioner’s three sisters is taxable to petitioner.

Decision will he entered under Rule 50.