author: Leech :

text:
    The Greif Brothers Cooperage Corporation, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 88368-88390.
    Promulgated December 8, 1938.

      F. E. Gleaeh, Esq., and H. A. MiMlls, G. P. A., for the petitioners.

      O. H. Owrl, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Goodman Stave Company; Vaiden Stave Company; West Stave Company; Jefferson County Stave Company ; The Southern States Manufacturing Company; Etowah Heading Company; Greif Brothers Cooperage Company; The J. R. Raíble Company; Alabama Stave Company; Struthers Cooperage Company.

   OPINION.

Leech :

These consolidated proceedings involve deficiencies in excess profits taxes for the fiscal year ended October 31,1934, determined by respondent as follows:

Transferee liabilities have been proposed by respondent against the petitioner, Greif Brothers Cooperage Corporation, with respect to the deficiencies set out above against the first seven listed petitioners. These latter proceedings are before the Board under Docket Nos. 88B68, 88369, 88374, 88375, 88376, 88377, and 88378. In seven of the proceedings, Docket Nos. 88379 to 88385, inclusive, transferee liability is also proposed against the Southern States Manufacturing Co. In these latter proceedings it is stipulated that no transferee liability exists on the part of that petitioner but that the Greif Brothers Cooperage Corporation is the transferee of the assets of the seven taxpayers there in question and is liable for any deficiency in excess profits tax owing by them. It was further stipulated that the 25 percent penalty proposed should not be exacted in any of the cases.

The facts are stipulated and the only issue presented is the right of the several petitioners, against whom excess profits tax deficiencies have been determined, to file a consolidated return for the purpose of computing excess profits tax for the fiscal year ended October 31, 1934, or to have such tax computed on that basis.

During that fiscal year, the Alabama Stave Co., Etowah Heading Co., Greif Brothers Cooperage Co., Goodman Stave Co., Jefferson County Stave Co., Vaiden Stave Co., West Stave Co., J. R. Raíble Co. and Struthers Cooperage Co. were trust associations or subsidiary companies in an affiliated group consisting of petitioner, the Greif Brothers Cooperage Corporation, and 28 subsidiaries.

A consolidated return was filed by the petitioner, Greif Brothers Cooperage Corporation, for itself and affiliates for the fiscal year ended October 31,1934, reporting an income tax liability but accounting for no excess profits taxes. This return included the income of the several affiliates as shown by separate schedules made parts of the return. No issue is raised with respect to the correctness of the figures included in this return, but respondent has computed an excess profits tax upon the basis of the separate income as shown for each of the affiliates. This resulted in deficiencies in excesb profits tax against each of the nine petitioners first listed above. If petitioners are entitled to have such tax liability computed upon a consolidated basis, no deficiencies exist, but if it is to be computed on a separate basis, the deficiencies, as determined by respondent, are correct.

The Revenue Act of 1934 provides:

SEC. 701. CAPITAL STOCK TAX.
(a) For each year ending June 30, beginning with the year ending June 30, 1934, there is hereby imposed upon every domestic corporation with respect to carrying on or doing business for any part of such year an excise tax of $1 for each $1,000 of the adjusted declared value of its capital stock.
SBC. 702. EXCESS-PROMTS TAX.
(a) There is hereby imposed upon the net income of every corporation, for each income-tax taxable year ending after the close of the first year in respect of which it is taxable under section 701, an excess-profits tax equivalent to 5 per centum of such portion of its net income for such income-tax taxable year as is in excess of 12 ½ per centum of the adjusted declared value of its capital stock (or in the case of a foreign corporation the adjusted declared value of capital employed in the transaction of its business in the United States) as of the close of the preceding income-tax taxable year (or as of the date of organization if it had no preceding income-tax taxable year) determined as provided in section 701. If the income-tax taxable year in respect of which the tax under this section is imposed is a period of less than 12 months, such adjusted declared value shall be reduced to an amount which bears the same ratio thereto as the number of months in the period bears to 12 months. For the purposes of this section the net income shall be the same as the net income for income tax purposes for the year in respect of which the tax under this section is imposed.
(b) All provisions of law (including penalties) applicable in respect of the taxes imposed by Title I of this Act, shall, insofar as not inconsistent with this section, be applicable in respect of the tax imposed by this section, except that the provisions of section 131 of that title shall not be applicable.
SEC. 703. CAPITAL STOCK TAX AND EXCESS-PROFITS TAX IMPOSED BY NATIONAL INDUSTRIAL RECOVERY ACT.
Sections 217 (d) and (e) of the National Industrial Recovery Act are amended to read as follows:
“(d) The capital-stocfc tax imposed by section 215 shall not apply to any taxpayer in respect of any year except the year ending June 30,1933.
“(e) The excess-profits tax imposed by section 216 shall not apply to any taxpayer in respect of any taxable year ending after June 30,1934.”

The petitioners filed a consolidated return for the fiscal year prior to the one here involved and, under the regulations of the Commissioner applying to that year, computed excess profits tax liability upon a consolidated basis. They contend that, under these conditions, they were required to file a consolidated income and excess profits tax return for the succeeding fiscal year now in dispute and that article 5 of Treasury Decision 4469, C. B. XIII-2, page 115, requiring separate returns for fiscal years ending subsequent to June 30, 1934, is contrary to law, in view of the provisions of section 141 of the Revenue Act of 1932.

It is contended by respondent that the logical interpretation of sections 701 (a), 702 and 703 of the Revenue Act of 1934 is that corporations subject to these provisions are not permitted to file consolidated returns for excess profits tax purposes if their fiscal year ends after June 30, 1934, and that Treasury Decision 4469, supra, correctly construes these statutory provisions and carries into effect the legislative intent. Upon careful consideration, we agree with this contention.

Section 217 (e) of the National Industrial Recovery Act,, as amended by section 703 of the Revenue Act of 1934, provides that excess profits taxes imposed by section 216 of the National Industrial Recovery Act shall not apply to a taxpayer in respect of any taxable year ending after June 30, 1934, and in the present cases, the taxable year in question ended after that date. It is significant that there is no provision in the Revenue Act of 1934 for the filing of consolidated returns and that section 702 of that act clearly imposes a new excess profits tax “upon the net income of every corporation, for each income-tax taxable year ending after the close of the first year in respect of which it is taxable under section 701.”

Petitioners argue that they may not be denied the right to file a consolidated return for excess profits tax purposes for the year here in controversy because a consolidated return for such purpose was required and filed for the prior fiscal year. But the propriety of such requirement is, at least, not without question. In Colson Co., 37 B. T. A. 1031, we held improper the regulation of the Commissioner requiring a consolidated return for excess profits tax under the former act where the filing of such return resulted in the computation of a tax as due where, on the basis of a separate return, no such liability would have existed. A fortiori, the same conclusion follows here where the converse of that situation obtains. Neither the National Industrial Recovery Act nor the Revenue Act of 1934, which imposed the corporate excess profits tax, specifically permitted or required computation of that tax on affiliated corporations on a consolidated basis. Rather, this legislation taxed individual corporations upon the basis of their separate net incomes in excess of the specified percentage of the declared capital stock value of each such corporation. Thus, any regulation, in so far as its application exempts such separate corporations from the tax thus imposed, is invalid. Manhattan General Equipment Co. v. Commissioner, 297 U. S. 129. The primary purpose of this legislation, as disclosed by the Report of the Finance Committee of the Senate accompanying it, was to require corporations to declare a fair value for their capital stock and such purpose would be largely defeated by consolidation of such value with other affiliated corporations. Senate Finance Committee Report on section 702 of the Revenue Act of 1984, pp. 6 and 7. See infra.

If any doubt about the interpretation of the pertinent excess profits tax provisions of the Revenue Act of 1934 by Treasury Decision 4469, supra, existed, we think it is dispelled by that Senate Finance Committee Report, which reads as follows:

(b) Excess-Promts Tax ( Section; 702). — The bill reported by your committee, as already stated, provides for an excess-profits tax on every corporation for each income-tax taxable year ending after the close of the first year in respect of which it is taxable under the capital stock tax imposed by this bill. The primary purpose of this tax is to induce corporations automatically to declare a fair value for their corporate stock under section 701. The rate is 5 percent on the portion of the net income in excess of 12½ percent of the adjusted declared value of the stock of the corporation. The secondary object of the tax is to subject to a somewhat higher rate of tax abnormal profits which are out of proportion of the capital of the corporation.
The rulings of the Treasury Department permitted the filing of the consolidated return for the purpose of the excess-profits tax imposed by the (National Industrial Recovery Act. The bill as reported does not permit this privilege. Inasmuch as the capital stock tax is on a separate return basis, it is impossible to make proper adjustments in the capital stock tax values without computing the net income of each corporation separately. The officials of the Bureau of Internal Revenue foresaw great difficulty in making proper adjustments under the Recovery Act in the case of the second capital stock tax return. This difficulty is obviated by the repeal of that tax, and its replacement by the tax carried in this bill for the year ending June 30, 1934.

In accordance with the stipulation of the parties, decisions of no deficiency will be entered in the proceedings in which the petitioner is the Southern States Manufacturing Co. With respect to the other proceedings, after elimination of the 25 percent penalties, as agreed,

Decisions will be entered for the respondent.

       Art. 5. Return. — Every corporation which Is subject to the capital stock tax imposed by section 701 of the Revenue Act of 1934 shall make an excess-profits tax return for each income-tax taxable year which ends aftei the close of the first year in respect of which it is subject to such capital stock tax. There is no provision in the Revenue Act of 1934 which authorizes the making of a consolidated return by any affiliated group of corporations for the purpose of the excess-profits tax imposed by section 702 of that Act Accordingly, every corporation which is liable for the making of an excess-profits tax return under section 702 of the Revenue Act of 1934 (for any income-tax taxable year ending after June 30, 1934), whether or not such corporation is a member of an affiliated group of corporations, must make its excess-profits tax return and compute its net income separately, without regard to the provisions of section 141 of the Revenue Act of 1932, as amended by section 218 (e) of the National Industrial Recovery Act, or section 141 of the Revenue Act of 1934.
      The excess-profits tax return shall be made within the time prescribed for making the corporation’s Federal income tax return for the income-tax taxable year, and shall be made to the collector of internal revenue with whom such income tax return is required to be made.

       SEC. 141. CONSOLIDATED RETURNS OF CORPORATIONS.
      (a) Privilege to File Consolidated Returns. — An affiliated group of corporations shall, subject to the provisions of this section, have the privilege of mailing a consolidated return for the taxable year in lieu of separate returns. The malting of a consolidated return shall be upon the condition that all the corporations which have been members of the affiliated group at any time during the taxable year for which the return is made consent to all the regulations under subsection (b) (or, in case such regulations are not prescribed prior to the making of the return, then the regulations prescribed under section 141 (b) of the Revenue Act of 1928 in so far as not inconsistent with this Act) prescribed prior to the making of such return; and the making of a consolidated return shall be considered as such consent. In the case of a corporation which is a member of the affiliated group for a fractional part of the year the consolidated return shall include the income of such corporation for such part of the year as it is a member of the affiliated group.


source: Caselaw Access Project

author: Smith :

license: Public Domain

text:
    Ernestine Mitchell, Petitioner, v. Commissioner of Internal Revenue, Respondent. J. A. Mitchell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 90710, 90711.
    Promulgated December 8, 1938.

      Edwin E. Buhr, Esq., and H. I. Wilhelm, O. P. A., for the petitioners.

      Francis B. Gettle, Esq., for tlie respondent.
   OPINION.

Smith :

The respondent has determined that all the income of the trust for 1933 is taxable as community income of petitioner and his present wife, Ernestine Mitchell. The correctness of this determination is the sole issue before the Board.

The petitioner’s contentions are that the amount paid to Jewell Li. Mitchell in 1933 out of the income of the trust fund created by her and J. A. Mitchell prior to their divorce in 1929 was not the income of the petitioner; that the payments were not made in lieu of alimony or in discharge of any legal obligation of the petitioner; that under the laws of the State of Texas the wife has no dower right in the estate of the husband and is not entitled to any alimony payments in the case of divorce.

It is true and is admitted by the respondent that the laws of the State of Texas do not provide for alimony payments or any other payments by a husband to his divorced wife except an allowance during pendency of the divorce suit if the wife does not have sufficient means of her own. See art. 4637, Vernon’s Annotated Texas Statutes, vol. 13, p. 364. Article 4368 provides that the court in pronouncing a decree of divorce shall make a division of the property such as is just and right, having due regard to the rights of each party and their children. A division of the property between petitioner and Jewell L. Mitchell was ordered by the court in its decree of August 5, 1929, Jewell L. Mitchell being awarded the identical properties which under the trust agreement were to be distributed to her or her devisees or heirs upon the termination of the trust. These properties were at the time held by the trustee and, the trust agreement having been ratified by the court, were so held during 1933. In these circumstances we think that the petitioner is right in his contention that the payments made to Jewell L. Mitchell out of the income of the trust for her own use were not payments in lieu of alimony and were not made in satisfaction of any legal obligation of the petitioner. The payments were, at least in part, distributions to Jewell L. Mitchell of income from her own separate properties which, under the trust agreement and the decree of the court, remained in the trust with properties belonging to the petitioner. The petitioner had no present or reversionary rights in any of the properties which were awarded to Jewell L. Mitchell by the court’s decree, and, consequently, he had no rights in respect to the income from the properties so set apart for Jewell L. Mitchell.

In holding the petitioner taxable upon the income of the trust paid to Jewell L. Mitchell, the respondent relies upon Douglas v. Willcuts, 296 U. S. 1. We are of the opinion, however, that the rule in Douglas v. Willcuts, supra, is not applicable to the facts in the instant proceedings. There a divorce had been obtained in the State of Minnesota, where alimony for the wife may be decreed out of the husband’s income. Payments to the divorced wife were made from the income of a trust created solely by the husband out of his own property in contemplation of the divorce and were, as the court found, “in lieu of alimony.” The court pointed out that there was a recognized preexisting legal duty on the part of the husband to support the divorced wife and that the payments made to her from the income of the trust were in discharge of that duty. The court said in its opinion:

* * * The creation of a trust by the taxpayer as the channel for the application of the income to the discharge of his obligation leaves the nature of the transaction unaltered. Burnet v. Wells, supra. In the present case, the net income of the trust fund, which was paid to the wife under the decree, stands substantially on the same footing as though he had received the income personally and had been required by the decree to make the payment directly.

In the instant case, as shown above, the petitioner was under no obligation to make any alimony payments to his divorced wife after the divorce and under the court’s decree the wife had her separate estate, which comprised a portion of the properties held in the trust. We think that the trust income which was paid to her for her own use was her separate income. It was not paid in satisfaction of any legal obligation of J. A. Mitchell and it is not taxable to him.

The respondent further points out in his brief that under the laws of the State of Texas a father is under a legal obligation to support his minor children, citing Freybe v. Tiernan, 76 Tex. 286; 13 S. W. 370; Snell v. Ham (Civ. App. Tex. 1912), 151 S. W. 1077; San Antonio & A. P. Ry. Co. v. Boyed (Civ. App. Tex. 1918), 201 S. W. 219; Linskie v. Kerr (Civ. App. Tex. 1896), 34 S. W. 765. He contends that, since some portion of the income of the trust which was paid to Jewell L. Mitchell was used for the support of petitioner’s minor children and the exact amount is not shown by the evidence, the petitioner must be held taxable on all of the trust income.

The laws of the State of Texas as pronounced in the cases cited by the respondent and in others which we have reviewed place the legal obligation on the husband to support his minor children. Under the decisions of the Supreme Court of the United States in Helvering v. Schweitzer, 296 U. S. 551; Helvering v. Stokes, 296 U. S. 551, decided upon authority of Douglas v. Willcuts, supra; and of the Circuit Court, Commissioner v. Grosvenor, 85 Fed. (2d) 2, a husband is taxable on the income from a trust fund created out of his own property which is used to support his minor children. We believe that the principle announced by the court is as applicable in a community property state as in a noncommunity property state. The trust agreement herein in question provides that the payments to be made to Jewell L. Mitchell were “for her individual use and the support of her said children.” The trust instrument does not say just how much of the amounts to be paid to the wife is for the support and maintenance of the children but we think it is a fair inference that it was the intention of the settlors that $500 per month of the amount to be paid to Jewell L. Mitchell was for the support and maintenance of the minor children. The trust instrument does provide that in case of the death of Jewell L. Mitchell during the minority of the children $500 per month was to be paid for their support and maintenance. Furthermore, it is to be noted that when the minor children attained their majority each was to receive out of the trust fund an amount of $250 per month, which was to be deducted from the allowance made to Jewell L. Mitchell. Since these provisions of the trust agreement were approved by the court in its divorce decree, it must be assumed that the trust income payable for the support of the children was derived from or was allocable to the income from the property of J. A. Mitchell, on whom rested the legal obligation for the children’s support.

In our opinion it must be assumed that $6,000 of the trust income payable to Jewell L. Mitchell was community income of the petitioners. The respondent has held that the entire amount of the income of the trust fund payable to Jewell L. Mitchell ($12,208.10) was taxable to the petitioners as community income. We find the correct amount to be $6,000. The deficiencies will be recomputed accordingly.

Reviewed by the Board.

Judgments will he entered u/nder Rule SO.


author:
Keen :
      TURNER,

text:
    Merchants National Bank, of Cedar Rapids, Transferee and Fiduciary, Being Trustee under Four Certain Trust Agreements Executed by Elmer A. Higley for the Benefit of Helen L. Higley, Harvey D. Higley, Fred M. Higley, and Helen E. Higley, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78576.
    Promulgated December 8, 1938.

      Dan Barnes, Esq., and Park Chamberlain, Esq., for the petitioner.

      L. S. Pendleton, Esq., for the respondent.
   OPINION.

Keen :

The primary issue presented in this proceeding is whether the transfers of property made by the decedent Elmer A. Higley some four years prior to his death on September 4,1926, were made by him in contemplation of death and whether, therefore, as respondent contends, the property was includable in his gross estate pursuant to the provisions of section 302 (c) of the Revenue Act of 1926, set out in the margin.

At the time the transfers were made decedent was 65 years old and he was, and had always been, in good general health. While he suffered from an atrophied arm and a slight deafness, and had, on occasion been treated for catarrh, colds, and a sinus infection, he had been remarkably free from organic illness throughout his life. Not only was he in good general health, but he was also a man of cheerful disposition, engrossed in his work, and greatly interested in the office buildings which he had acquired or constructed and in their management. He did not think or have reason to think that his death was imminent or would occur in the reasonably near future. In making the transfers involved in this proceeding he regarded his death as a remote contingency, but one to be guarded against.

Decedent made the transfers of his property to the corporation and established the trusts which ultimately held its stock for several reasons. He was keenly interested in the success of his office buildings and was deeply concerned with the importance of lessening the indebtedness which' constituted a lien on them. He was anxious that his children should take an interest in them and was especially anxious to interest his son, Fred M. Higley, in their management. He desired in the event of his death to obviate the necessity of selling the buildings in order to settle his estate, having had difficulties himself along this line on the occasion of the death of his father. He wished to provide for the payment of some of the income from the buildings to his children as soon as the indebtedness against the buildings was reduced to a figure which he considered safe. At the same time he was determined to maintain control over the operation of these properties during his lifetime and he provided for this and also for compensation to him for his services. The plan which was worked out during the years immediately prior to the transfers and was accomplished by them effected purposes connected with life and not with death. The plan, it is true, was intended to make provision for his family in the event of his death, but it was also designed, regardless of the disposition of the properties, to protect them during the remainder of his life, as well as after his death. He had no purpose of evading estate taxes in maiding these transfers.

Under these circumstances it is our opinion that the transfers were not made in contemplation of death. United States v. Wells, 283 U. S. 102; Becker v. St. Louis Union Trust Co., 296 U. S. 48; Colorado National Bank of Denver v. Commissioner, 805 U. S. 23.

It is, therefore, unnecessary to discuss the other issues presented.

The 25 per centum additional tax claimed falls, of course, with the deficiency.

Keviewed by the Board.

Decision will be entered for the petitioner.

Disney dissents.

TURNER,

dissenting: Because of difficulties experienced in the distribution of his father’s estate, the decedent above all desired to control the division of his property at death and in my opinion that desire and intent to so control the division of his property at death wad the dominant motive for the transfer by the decedent of all of his property to Elmer A. Higley, Inc., and the subsequent transfer of the stock of that corporation to the Merchants National Bank of Cedar Rapids, as trustee. Matters pertaining to life were of secondary importance. The usual argument is advanced that the decedent made the transfers to trust in- order that his son, in this case Fred M. Higley, might gain experience during the lifetime of his father in the management of the office buildings and properties. It is to be noted, however, that the decedent very carefully and definitely avoided and refrained from placing any responsibility upon and from delegating any authority to Fred M. Higley during his lifetime by making a specific provision that he, the decedent, should be the sole officer and director of the corporation) during his lifetime and in the event he should become incapacitated the decedent’s wife should become the sole officer and director. It was only after the death of both the decedent and his wife, or until his wife should become incapacitated or should decline to act, that Fred M. Higley or any of decedent’s children should have any voice in the management of the properties.

I respectfully disagree with the conclusion of the majority that the transfers in question were not made in contemplation of death.

Opper agrees with this dissent.

       Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
      *******
      (c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. Where within two years prior to his death but after the enactment of this Act and without such a consideration the decedent has made a transfer or transfers, by trust or otherwise, of any of his property, or an interest therein, not admitted or shown to have been made in contemplation of or intended to take effect in possession or enjoyment at or after his death, and the value or aggregate value, at the time of such death, of the property or interest so transferred to any one person is in excess of $5,000, then, to the extent of such excess, such transfer or transfers shall be deemed and held to have been made in contemplation of death within the meaning of this title. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death but prior to the enactment of this Act, without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title.


author: Opper:

text:
    Crane Johnson Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91809.
    Promulgated December 8, 1938.

      John A. Gull, G. P. A., for the petitioner.

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

Opper:

This proceeding involves a deficiency in income tax of $1,707.36 for the year 1936. Petitioner is a corporation incorporated in 1903 under the laws of the State of North Dakota. Among other facts, all of which are found, it is stipulated that “as of January 1, 1936 the petitioner had a deficit of at least $21,251.40” and that “the records prior to January 1, 1929 are not susceptible to analysis to definitely show whether this deficit occurred from operating losses or capital distributions in excess of earnings or was affected by other adjustments.” Its “net income for income tax computation for the year 1936 is $13,450.16.” No distributions to stockholders were made during the taxable year. Petitioner claims to be entitled to a credit in the amount of its entire current income against the surtax on undistributed profits imposed by section 14 of the Revenue Act of 1936, which would free it from that surtax. The credit provision claimed to apply is section 26 (c) (1), respecting contracts restricting the payment of dividends. It allows credit for:

An amount equal to the excess of the adjusted net income over the aggregate of the amounts which can he distributed within the taxable year as dividends without violating' a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the payment of dividends. * * *

Petitioner argues that nothing could be distributed by it because of section 4543 N. D. Compiled Laws of 1913, which prohibits the payment of dividends by corporations except out of surplus. It claims that its charter constitutes in law a contract with the State (Dartmouth College case, 4 Wheat. 518) which contract includes all statutes of the state applicable to corporations.

Whether or not under other circumstances the corporate charter and statutes of the state could be said to be a written contract “executed by the corporation,” any ambiguity in the provision now under consideration is dispelled by reference to its legislative history. As it passed the House of Representatives the Revenue Bill of 1936 contained three distinct relief provisions imposing in lieu of the graduated undistributed profits tax flat rates of tax irrespective of whether dividends were paid. As explained in detail in the Ways and Means Subcommittee and Committee Reports the provisions were designed respectively for the relief of corporations having deficits (section 14), corporations having outstanding contracts not to pay dividends (section 15), and corporations having outstanding indebtedness (section 16). The provision for corporations having deficits would clearly have applied to the petitioner.

The Senate changed, the undistributed profits tax into a flat rate surtax. It simultaneously struck out sections 14, 15, and 16 but retained the principle of relief for corporations under contract not to pay dividends (section 15 of the House Bill) by allowing them a credit against the undistributed profits surtax. Sec. 26 (c) (1). A floor amendment restored the relief for corporations under contract to pay indebtedness, by inserting a similar credit for them. Sec. 26 (c) (2). But no relief provision was restored for deficit corporations generally. By changing the definition of dividends a “dividends paid” credit was allowed to deficit corporations which distribute current earnings, but no credit was allowed for those which do not distribute.

It does not appear that this omission was unintentional. On the contrary the Finance Committee’s explanation of the change in the dividend definition indicates that the reason for the omission may Rave been the difficulty of determining the existence of accumulated earnings and profits; that is, whether or not there is a true deficit. Precisely that difficulty is illustrated by the present case. Although it is stipulated that a deficit exists, the facts also show that the stipulated deficit reflects only the present book condition and that it can not be shown whether this represents an actual deficit or merely book adjustments prior to 1929, which may or may not have been artificial or improper. The underlying plan of this surtax is to allow credit only for actual distributions. The petitioner, having failed to bring itself clearly within any of the exceptions to that plan, must be governed by the general principle. New Colonial Ice Co. v. Helvering, 292 U. S. 435.

Petitioner contends further that at least if construed to apply to the present circumstances the undistributed profits surtax is beyond the constitutional power of Congress. We are thus unavoidably required to give a limited consideration to its validity. Rita O'Shaughnessy, Executrix, 21 B. T. A. 1046.

Constitutionality of the measure is attacked on three grounds. First, petitioner claims that it is not a tax on incomes within the Sixteenth Amendment and therefore is unconstitutional because not apportioned among the states according to population as required by Article I, section 2, of the Constitution. What was said by the Supreme Court in Helvering v. National Grocery Co., 304 U. S. 282, we believe to be equally applicable here and to be conclusive of the question:

It is said that the statute is unconstitutional because the liability imposed is not a tax upon income, but a penalty designed to force corporations to distribute earnings in order to create a basis for taxation against the stockholders. If the business had been carried on by Kohl individually all the year’s profits would have been taxable to him. If, having a partner, the business had been carried on as a partnership, all the year’s profits would have been taxable to the partners individually, although these had been retained by the partnership undistributed. See Heiner v. Mellon, Nos. 144 and 145, decided May 16, 1938. Kohl, the sole owner of the business, could not by conducting it as a corporation, prevent Congress, if it chose to do so, from laying on him, individually the tax on the year’s profits. If it preferred, Congress could lay the tax upon the corporation, as was done by section 104.

Second, petitioner claims that this surtax violates the Tenth Amendment in that “it attempts to regulate the internal affairs of the state in its relation to its corporations by imposing a surtax for failure to distribute”, thus disturbing “the whole economic policy of the corporation”, “by attempting to state what are dividends and what would be a return of capital contrary to the laws of the state of incorporation”, and by offering an inducement for the declaration of dividends in violation of state law which would subject the directors and the corporation to penalties. A similar argument was also advanced and rejected in Helvering v. National Grocery Co., supra. The statute before us is not invalid “because it interferes with the power to declare or to withhold dividends — a power which the State conferred upon the corporation. The statute in no way limits the powers of the corporation”, as Mr. Justice Brandéis said in that case. Any corporation not distributing its profits prevents the imposition of the individual surtax thereon. An obstruction to Federal taxation is thus created. “ ‘Congress in raising revenue has incidental power to defeat obstructions to that incidence of taxes which it chooses to impose.’ United Business Corporation v. Commissioner, 62 F. (2d) 754, 756.” Helvering v. National Grocery Co., supra.

Third, petitioner alleges that our interpretation of section 26 (c) makes this surtax violative of the due process requirement of the Fifth Amendment. The crux of this contention as stated in petitioner’s reply brief is that:

It discriminates unfairly between corporations of the same class by allowing a dividend paid credit under Section 26 (e) to corporations having written contracts of a particular type, but not allowing a similar credit to other corporations with the same legal obligations differently evidenced. It discriminates unfairly against the weaker corporation not permitted under state law to pay dividends and in favor of the stronger corporation in a position to legally pay dividends and thus escape tax liability.

Congress undeniably has the power to levy a tax, graduated or otherwise, on the current income of all corporations, including those having deficits. Foley Securities Corporation, 38 B. T. A. 1036; Long Beach Improvement Co., 5 B. T. A. 590; see Willcuts v. Milton Dairy Co., 275 U. S. 215, 219; Brushaber v. Union Pacific Railroad Co., 240 U. S. 1. Petitioner has not been singled out for special taxation. It comes within the general ambit of the tax. Bather it is in reality complaining of the failure to include it in specific exceptions granted to corporations situated in some respects like itself but in other respects differently. Thus it is doubtful whether the petitioner is in a position to raise the constitutional question since the burden of a tax deduction allowed to others falls in too remote and indefinite a way upon the remaining taxpayers. See Frothingham v. Mellon, 262 U. S. 447, 486. But, in any event, deductions of ibis type are a matter of legislative grace within the sound discretion of Congress. New Colonial Ice Co. v. Helvering, supra; Davis v. United States, 87 Fed. (2d) 323. Petitioner can not complain if this grace did not extend to cover it.

The due process limitations on the taxing power are that the means be “appropriate to the end”, Helvering v. City Bank Farmers Trust Co., 296 U. S. 85; and that the end be taxation rather than confiscation, Brushaber v. Union Pacific Railroad. Co., supra. See also Stella S. Housman, 38 B. T. A. 1007. The objective of the present statute, like the personal holding corporation provisions involved in Foley Securities Corf oration, sufra, is to subject the income of the corporations concerned “to surtax either in the hands of the stockholders or in the hands of the corporations themselves.” In this case, as in the Foley case, that end is accomplished by means which we. can not say are inappropriate. Since the income is not taxable to the stockholders it is taxed to the corporation.

The fact that in certain instances corporations unable for other reasons to distribute their income are expressly exempted or are allowed deductions having a similar effect, does not make the tax confiscatory as to the petitioner. Congress in those instances sacrificed its general objective to make what it considered desirable exceptions. There are many other conceivable situations where distribution of income is difficult or impossible, for which Congress did not think it necessary to provide. Whenever deductions or exemptions are allowed there are necessarily taxpayers in closely related situations who remain subject to the general rule. “The difficulty of adjusting any system of taxation so as to render it precisely equal in its bearing is proverbial and such nicety is not even required of the states under the equal protection clause, much less of Congress under the more general requirement of the due process of law in taxation.” La Belle Iron Works v. United States, 256 U. S. 377. The question is whether the concept underlying the statutory treatment “is one that an enlightened legislator might act upon without affront to justice.” Burnet v. Wells, 289 U. S. 670.

The failure of Congress to except deficit corporations generally from the underlying concept of the undistributed profits surtax may be justified on several grounds. Among these are the ease with which a deficit cap be created by mere bookkeeping changes; the administrative difficulties of investigating the actual as distinguished from the apparent condition and value of the corporate assets, and the extent of the liabilities, both subject to constant fluctuations; and, particularly pertinent in this case, the fact that the deficit may not be an operating item, as shown by the stipulation of facts, but may have arisen from the- management’s own improper action in making distributions out of capital. With these possible bases for its action in mind, we can not conclude that Congress acted unreasonably in withholding from deficit corporations the deductions it allowed to certain others, if indeed our determination of that question is required. Certainly there is no discrimination greater than those complained of in the Brushaber case, supra, and none which may reasonably be said to amount to confiscation.

Reviewed by the Board.

Decision will be entered for the respondent.

       House Report No. 2475, 74th Cong., 2d sess., p. 8; Subcommittee Report, p. 6.

       SBC. 14. ACCUMULATED EARNINGS AND PROFITS LESS THAN ADJUSTED NET INCOME.
      (a) General Rule. — If the accumulated earnings and profits of the corporation as of the close of the taxable year (computed without diminution by reason of the distribution during the taxable year-of earnings and profits, or by reason of the taxes imposed by this title for the taxable year) are less than the adjusted net income, the tax imposed by
      section 13 shall, in lieu of being computed under section 13, be computed by adding :
      (1) A tax of 15 per centum of the excess of the adjusted net income over such accumulated earnings and profits; and
      (2) A tax upon the remainder of the adjusted net income (less the tax under paragraph (1)) computed under section 13 as if the adjusted net income were equal to the amount of such remainder so reduced.

       As stated in the report of the Ways and Means Committee (footnote 1, supra.) which proposed a 22⅜ percent rather than a 15 percent tax:

        “It has been recognized that in certain cases corporations cannot pay out dividends or that sound policy demands the nonpayment of dividends. Therefore, in certain cases, a flat rate of tax is imposed on corporate incomes, or parts thereof, in lieu of the undistributed profits tax proposed in the general case.

        Deficits. — Dor example, section 14 of the bill provides that corporations with a deficit shall pay a tax of 22⅜ percent on the amount of earnings necessary to make up this deficit and only come under the new plan in respect to earnings in excess of this deficit, and in excess of the tax paid at the 22⅞ percent rate. This rule is more accurately stated in the section.

       H. R. 12395, Senate Amendments, Nos. 46 and 48, 74th Cong., 2d sess.; Congressional Record, vol. 80, part 8, pp. 8790, 8791, 74th Cong., 2d sess.

       Senate Report No. 2156, 74th Cong., 2d sess., p. 12 :
      “Instead of having a graduated undistributed-profits tax like the House bill with rates ranging as high as 42.5 percent, your committee has adopted a flat rate of 7 percent. By this moderate rate your committee has eliminated most of the complicated relief provisions in the House bill relating to debt and deficit corporations. However, the principle of the House bill affording relief to corporations which are unable to pay dividends because of express prohibitions in contracts entered into prior to March 3, 1936, have been retained for the purpose of the 7-percent undistributed-profits tax.”

       Congressional Record, vol. 80, part. 8, p. 9071, 74th Cong., 2d sess., and see Conference Report, Revenue Bill of 1936, House Report No. 3068, p. 4.

         SEC. 115. DISTRIBUTION BY CORPORATIONS.
      (a) Definition of Dividend. — The term “dividend” when used in this title (except in section 203 (a) (3) and section 207 (c) (1), relating to insurance companies) means any distribution made by a corporation to its shareholders, whether in money or in' other property, (1) out of its earnings or profits accumulated after February 28, 1913, or (2) out of the earnings or profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the .distribution was made.

       Although a graduated rate was later substituted for the flat surtax proposed by the Senate (Revenue Act of 1936, sec. 14), the credit provisions remained unchanged.

       SEC. 115 (a). DIVIDENDS OUT OF CURRENT EARNINGS.
      In order to enable corporations without regard to deficits existing at the beginning of the taxable year to obtain the benefit of the dividends paid credit for the purposes of the undistributed profits surtax, section 115 (a) changes the definition of a dividend so as to include distributions out of the earnings or profits of the eurrrent taxable .year. The amendment simplifies the determination by providing that distributions during the year, not exceeding in amount the current earnings, are dividends, constituting taxable income to the shareholder and a dividends paid credit to the corporation. As respects such dividends the complicated, determination of accumulated earnings or profits is rendered unnecessary. [Emphasis added.] Senate Report No. 2156, 74th Cong., 2d sess., p. 18.

         These arguments as set out more fully In petitioner’s main brief are:
      a - It is unreasonable, arbitrary and capricious, at least as to deficit corporations in that it encourages and rewards violation of state law, exacts a penalty for restoring impaired capital, does not conform to established income tax principle of taxing according to ability to pay, exacts a penalty for adherence to soundly established and regularly accepted accounting principles and is an excessive super tax approaching confiscation.
      b - It discriminates unfairly between corporations ini the same class, by favoring the strong over the weak, by specifically relieving insolvent corporations and other corporations of certain types and failing to relieve the weak but struggling corporations, by allowing a dividend paid credit to corporations which give up and liquidate within the year but providing none for deficit corporations attempting to carry on, by allowing credits under Section 26 (c) to corporations having written contracts of a particular type but not allowing similar credits to other corporations with the same legal obligations differently evidenced, by allowing greater credits under Section 26 (c) to corporations having one large contract than to corporations with the same total obligation made up of several smaller contracts and by failing to provide any dividend credit to corporations suffering a capital loss during the year without having prior earnings at the beginning of the year.

       See Ways and Means Committee Report, House Report No. 2475, 74⅞ Cong., 2d sess., p. 4.

       See La Belle Iron Works v. United States, supra, p. 390.

       See footnote 9, supra.


author: Leech:

text:
    Charles T. Carlson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87564.
    Promulgated December 8, 1938.

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

      Henderson A. Melville, Esq., for the respondent.

       Vacated. See 39 B. T. A. 185.

   OPINION.

Leech:

The first two issues will be considered together. Is petitioner entitled to deduct any loss for 1934 on his stock in the Bank or because of his payment of $5,000 as the owner of such stock? Revenue Act of 1934, sec. 23 (e) (2). Petitioner contends he is so entitled on the ground that the stock became worthless and was relinquished by him during that year.

Assuming the stock did become worthless during the tax year, it was not worthless at the close of that year. The Bank was not liquidated but resumed business December 31, 1934. If, at that time, petitioner still retained the right to repossess the stock — and we are not convinced that he does not yet have that right — of course he sustained no deductible loss on the stock during that year. On the other hand, if he actually relinquished his stock in June 1934, when he gave it to the Bank, endorsed in blank with the comment “This stock is of no value to me — do whatever you want with it”, or on December 31 of that year, when he refused to accept his 50 shares in the resuming Bank, it is unquestionably true that such relinquishment was wholly voluntary and not compulsory. Cf. Commissioner v. Wright, 47 Fed. (2d) 871; Peabody Coal Co. v. United States, 8 Fed. Supp. 845. Petitioner was dissatisfied with the management and operation of the Bank. That he considered the stock worthless is beside the point. Deliberately and entirely of his own volition, he severed, or at least attempted to sever, all his connection with the Bank as a stockholder. If successful, he thus gave up any rights he might have had to the return of his stock without any further payment on his part if and when, under the plan, the obligations the stock was deposited to secure were paid. Cf. Estate of C. T. Grant, 36 B. T. A. 1233. But, petitioner had more than that right. Although no stock assessment was made, he had, likewise voluntarily, paid $5,000 to the Bank, in trust, “⅜ ⅜ * as a payment of $100.00 per share on said Charles T. Carlson’s stock in said bank under said reopening plan hereinbefore referred to * * * ” with the understanding that if the Bank failed to resume, then the $5,000 thus paid was to be returned to the petitioner.

We pass the obvious difficulty to petitioner that this money was not actually transferred from the trust to the Bank, as such, until 1935. We assume that the conditions of the trust, under which this transfer was to be made, existed prior to the close of the year 1934, and that petitioner thereafter had no right to this money. This payment, therefore, became an additional cost to petitioner of his stock in the Bank. In re Park's Estate, 58 Fed. (2d) 965; certiorari denied, 287 U. S. 645; First National Bank in Wichita v. Commissioner, 46 Fed. (2d) 283.

Thus, at the end of 1934, except for the possible effect of his voluntary action, during that year, in relinquishing or attempting to relinquish his stock in the Bank, the petitioner would have owned stock in the same Bank of the reduced par value. Such stock was then worth approximately that reduced par. But, unless the stock became worthless during 1934 and was so when the petitioner’s alleged relinquishment thereof occurred, no deductible loss was sustained in that year. See Bair v. United States, 20 Fed. Supp. 191; Walter W. Moyer, 35 B. T. A. 1155. Assuming the doubtful conclusion from this record that the stock became worthless in 1934, it certainly is not established that it was so either when petitioner endorsed it in blank and turned it in to the Bank, or when the stock was offered to him in December at the time the Bank reopened and he refused it. The stock was worth its then par at the latter date, as has been found as a fact, and it is little less clear, from the evidence, that the stock was not worthless on the earlier occasion, since, at that time, the plan to reopen the Bank, which had been promulgated in April, was apparently progressing favorably, and, only a month or two thereafter, its license to resume business was issued.

The conclusion is inescapable from this record that, if petitioner possessed no valuable rights in his stock in the Bank at the end of 1934, it was solely because he had made a complete gift of that stock during that year at a time when the stock was valuable or at least not shown to have been worthless. That gift does not support a deductible loss. Robinson v. Commissioner, 53 Fed. (2d) 810; Western Maryland Dairy Corporation, 32 B. T. A. 769; R. B. Lawler, 17 B. T. A. 1083. Respondent is, therefore, sustained on the first two issues.

The last issue is whether petitioner may deduct, as a bad debt, the difference between the face amount and the actual value of the note received by him in lieu of the unpaid portion of his deposit in the Bank. Respondent has limited the deductibility of the admitted loss here, under the provisions of the Revenue Act of 1934, section 117 (a). The propriety of this action is determined by whether the acceptance of this note by petitioner in lien of the balance on his deposit constituted the “sale or exchange of a capital asset.”

¡Respondent supports his action on the ground that the transaction constituted an “exchange.”

We think the facts here are not distinguishable in any effective degree from those in either the case of Harry Payne Bingham, 38 B. T. A. 918, or that of Betty Rogers, 37 B. T. A. 897. On the authority of those cases, we accordingly hold that the petitioner’s receipt of the note of the Loan Co. in lieu of the restricted portion of his Bank deposit was an “exchange” within the meaning of the Revenue Act of 1934, section 117 (a), supra. It follows that respondent was right in thus limiting the deduction of petitioner’s loss arising therefrom. Harry Payne Bingham, supra.

Decision will he entered for the respondent.

       SEC. 23. DEDUCTIONS FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions :
      * * * * * * *
      (e) Losses bx Individuals. — In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise—
      *******
      (2) if incurred in any transaction entered into for profit, though not connected with the trade or business.

       SEC. 117. CAPITAL GAINS AND LOSSES.
      (a) General Rule. — In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net income:
      *******
      SO per centum if the capital asset has been held for more than 1 year but not for more than -2 years;


author: TURNER:

text:
    William R. Tracy, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82578.
    Promulgated December 13, 1938.

      Ernest B. Butler, G. P. A., and Franhlim, D. Dougherty, Esq., for the petitioner.

      Philip A. Bayer, Esq., for the respondent.
   OPINION.

TURNER:

The respondent contends that the sales of General Motors common stock reflected in the special account constituted short sales within the meaning of section 23 (s) of the Revenue Act of 1932, and that, as to the 22,400 shares which were delivered in 1932, the gain realized must be considered as gain from sales of stock which were not capital assets. The petitioner contends that all the sales reflected in the special account are long sales and that such sales made prior to 1932, to the extent of 20,400 shares, were closed transactions and not taxable in 1932, and further that the sale of 2,000 shares in January 1932 must be treated as a sale of capital assets.

The facts presented in the case of du Pont v. Commissioner, 98 Fed. (2d) 459, seem to be on all fours with the present case. There the taxpayer, more than two years prior to the taxable year, purchased certain shares of stocks which were left in the possession of his broker and carried in long accounts. Thereafter the taxpayer directed his broker to sell short, and his broker did sell short, the same number of shares of the same stocks as were deposited in his long accounts. The proceeds of the sales were credited by the broker to short accounts of the taxpayer. Subsequently and during the taxable year the broker, acting upon the taxpayer’s instructions, transferred from his long accounts to his short accounts the necessary number of shares of stock to cover the short sales. In deciding that such sales constituted short sales, the court said:

It will be observed that both transactions in the case at bar possessed, to a certain degree, a dual nature and reciprocal characteristics. When the petitioner covered the short sales by delivery of the securities held by him in the long accounts he disposed by one step of a long interest and of a short obligation. The price at which the short sales were made did in fact fix < ne price or value of the stock delivered by him from his long accounts. On the other hand, the sales made by the petitioner were short sales of the type known generally as “hedging sales” or “sales against the box.” Such sales are made when the owner of stock desires to avoid the risk of future price fluctuations of stock owned by him. He has shares on hand and available but does not desire to dispose of them immediately for reasons which he deems sufficient. If the stock declines, he can cover at a profit. If the stock increases in value, he can deliver the shares which he owns and avoid loss.
⅜ * * * * * *
It is true that the petitioner purchased the stock in his long account for purposes of profit, and to say that the profit realized did not come from his original investment would be untrue. The fact remains, however, that he moulded the disposition of bis long interest into the form and substance of short sales. When the petitioner once ordered his brokers to sell stock short, a covering process of some kind was inescapable. Had he covered the short sales by the purchase of securities upon the open market and had achieved a gain thereby, such a gain would have been the result of a short sale. Had he sold his long interest without relation to a short sale, the net gain, if any, would have been taxable solely under the provisions of Section 101 of the Revenue Act of 1932. But the petitioner has elected to make use of a short sales device to dispose of his long interest. It cannot be said that the sales made by the petitioner were short sales in form and not in substance for they were short sales in fact. * * *

In Frances Bartow Farr, Executrix, 33 B. T. A. 557, we held that where a taxpayer makes short sales of stock and thereafter covers such sales by delivering shares out of a quantity of stock which, on the date of the short sales he had held for more than two years, section 23 (s), supra, applies and the entire gain is taxable as ordinary income. In our discussion of short sales in that case we referred to three principal purposes for which the device is generally used in connection with securities, the third of which seems to fit the facts of the present case, and in respect of which we said the following:

* * * In the third class are short sales made for the purpose of “hedging.” These are called also “sales against the box.” They occur when an owner of stock resorts to a short sale in order to avoid the risk of future price fluctuations. He owns sufficient securities to make delivery, but chooses to make a short sale involving the borrowing of shares for delivery, rather than to sell and make the delivery of the shares which he owns. The owner of a large block of stock, which gives him a measure of control over the affairs of the corporation, may desire to take advantage of the current market price and yet retain his control in the corporation. He can accomplish his purpose by making a short sale. Later, if the stock declines, he can make a covering purchase and realize a profit, or, if the stock advances, he can make delivery of his own stock and lose control, or make a covering purchase and sustain a loss. Hedging is also resorted to by the “odd lot dealers” on the floor of the exchange in order to avoid the risk of owning a large block of stock. It is also adopted by professional speculators who seek to profit by buying in the cheaper and selling in the dearer market, where the same security is listed on two different exchanges. As authority for the statements in this paragraph, see Short Selling (1932) Meeker; The Work of the Stock Exchange (1922) Meeker; Short Selling (1933), Owen Taylor; Short Selling, For and Against (1932), Whitney and Perkins.

In the instant case the petitioner instructed his brokers to make the sales of General Motors stock in question for the special account, and not to sell any of such stock deposited in the regular account without giving him notice before doing so. It was agreed that the General Motors stock deposited in the regular account would not be sold unless it became necessary to do so for the brokers’ protection and it apparently never became necessary because the brokers, within the time limits prescribed by the rules of the New York Stock Exchange, covered all sales in the special account with borrowed stock. We think the important point is that when the various sales of General Motors stock were made for the special account it was not contemplated by either the petitioner or the brokers that a like number of shares of General Motors stock -would be withdrawn from the regular account for delivery. The shares sold were unidentifiable at the time of the sale, there being no intention to sell the particular shares on deposit in the regular account. We think these facts bring the transactions in question within the meaning of short sales and on the authority of the cases cited we hold that section 23 (s), supra, applies and the entire gain realized from the sales of the 22,400 shares is taxable as ordinary income.

Decision roill Toe entered rmder Bule 50.

       SEC. 23. DEDUCTIONS FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions :
      ******1 *
      (s) Same — Short Sales.. — For the purposes ol this title, gains or losses (A) from short sales of stocks and bonds, or (B) attributable to privileges or options to buy or sell such stocks and bonds, or (C) from sales or exchanges of such privileges or options, shall be considered as gains or losses from gains or exchanges of stocks or bonds which are not capital assets.


author: Mtjedock :

text:
    E. L. Cord, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 84860, 84861, 84862, 84863, 84864, 84890, 84891, 84892, 84893, 84919, 85016, 85018, 85019, 85032, 85033, 85034, 85035.
    Promulgated December 15, 1938.

      John Enrietto, Esq., for the petitioners.

      Broolcs Fullerton, Esq., and Joseph O. Bruce, Esq., for the respondent.

       The titles and docket numbers of the proceedings of the 17 petitioners consolidated herein are set forth in the preliminary statement.

   OPINION.

Mtjedock :

There are a number of issues raised by the pleadings in these proceedings. If all of those issues were to be discussed and decided, additional facts should be stated. However, the first issue must be decided in favor of the petitioners and, that being so, all other issues and facts supporting those issues become immaterial. The first issue is whether the Commissioner has correctly determined that this syndicate was an association taxable as a corporation. If it was not taxable as a corporation, then it matters not what it was for tax purposes because the Commissioner here seeks to tax it solely as a corporation. Section 1111 (a) (2) of the Eevenue Act of 19S2 defines the term “corporation” as including associations. It does not define the term “association.” It defines the term “partnership” as including “a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this Act, a trust or estate or a corporation.” The above quoted definition of “partnerships” appeared for the first time in the Eevenue Act of 1932, but the classification of associations as corporations appeared in earlier acts.

The Supreme Court, in discussing this question, said that the “inclusion of associations with corporations implies resemblance; but it is resemblance and not identity.” Morrissey v. Commissioner, 296 U. S. 344. That case is one of the leading cases on the subject, but it did not lay down an absolute test. Each case must be decided upon its own facts by comparing the characteristics of the alleged association as shown in those facts with the characteristics typical of a corporation. If there is sufficient resemblance, the organization is taxable as a corporation, while if there is little similarity, it may not be so taxed. N. B. Whitcomb Coca-Cola Syndicate, 35 B. T. A. 1031; affd., 95 Fed. (2d) 596; Mark L. Gerstle, 33 B. T. A. 830; affd., 95 Fed. (2d) 587; Stantex Petroleum Co., Trustee, 38 B. T. A. 269; C. H. Clovis, 32 B. T. A. 646. The petitioners rely upon the above cited cases, as well as upon Carol Trading Account, 34 B. T. A. 837; W. S. Farish, 36 B. T. A. 1114; and American Cities Power & Light Corpo ration, 38 B. T. A. 74, and argue that the present case presents features which are even more favorable to the holding that the syndicate was not an association taxable as a corporation. The Commissioner admits that the Whitcomb and Darol cases support the petitioners, but contends that the present case is more like the case of Vernon J. Bert, 34 B. T. A. 805; affd., 92 Fed. (2d) 491. He further contends that the Whitcomb case can not be reconciled with the Bert case and the latter should be followed rather than the former. We distinguished the Bert case in the Whitcomb case. We hold, on authority of the group of cases cited above, that this syndicate "was not an association taxable as a corporation.

The group got together for a short period only and for a single purpose, namely, to effect the sale of a block of Auburn stock owned by Cord so that Cord, in which all of the members were interested, could make a partial shift from the automobile to the aviation business. When as much of that stock as could be sold was sold, the syndicate was terminated. Title to the stock was never taken in the name of the syndicate. As the court said in the Whitcomb case, “An association which can be taxed as a corporation is organized with more permanency. It owns its property. Its managers are its agents. Its profits and losses are conceived of as its own, the associates as having ownership only in what may finally be distributed to them. A joint adventure is not such.” That language is appropriate here also. There is this difference between the present agreement and that in the Whitcomb case which might be deemed unfavorable to the contention of the present petitioners. Here the manager was to buy and sell “for the account of the syndicate” and the stock was referred to as “held for the syndicate account”, whereas in the Whitcomb case the corresponding language was “for the account of each subscriber.” However, the word “syndicate” is a word of business and not of legal art, Gates v. Megargel, 266 Fed. 811, and the conclusion can not be drawn from the words used in this agreement that the syndicate was an entity separate from the participants, or that the manager was agent for the syndicate leather than for the participants. Cf. William K. Dick et al., Executors, 20 B. T. A. 637; Gates v. Megargel, supra. The evidence in the present case clearly indicates that the subscribers did not intend that the manager should be manager for a separate entity rather than for the individual subscribers. The manager had sole discretion in making purchases and sales, as well as in deciding upon other matters. The subscribers had practically no control over the manager. No capital was paid in and all transactions were financed with money advanced by the manager upon the credit of the members. The syndicate had no bank account. There were no certificates of interest. There was no provision for taking in additional capital or members or for the transfer of interests, although, it is probably true that adjustments might have been made if there had been any necessity for them. There were no directors, officers, employees, bylaws, meetings, minutes, place of business or use of the syndicate name as an entity. The Commissioner concedes that the subscribers did not attain the advantage of limitation of liability, as in the case of a corporate stockholder, and it is apparent that there was not such limitation of liability as in the case of a corporation since the remaining subscribers were to be liable pro rata for the obligations of any defaulting subscriber. Cf. American Cities Power & Light Corporation, supra. Also, the members were liable for expenses. Cf. Stantex Petroleum Co., Trustee, supra. The Darol case is quite like the present case in many important respects.

Reviewed by the Board.

Decisions will ~be entered for the petitioners.

Smith and Tubnee dissent.


author: SteRnhagan : Smith,

text:
    Andre deCoppet and Muriel deCoppet, Petitioners, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 85685, 85877, 85965, 85985, 86202, 86203, 86796, 86818.
    Promulgated December 15, 1938.

      Elden McFarland, Esq., for petitioners Andre deCoppet and Muriel deCoppet.

      Horace N. Taylor, Esq., for petitioners Allen K. Brehm, Siegfried Gabel and Paula. A. Gabel, Ferdinand Anthony Grien, Woolsey A. Shepard, and Henry M. Wise.

      Samuel Nichtberger, Esq., for petitioners Walter Frederichs and Frederick H. Hornby.

      Edward A. Tonyes, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Allen K. Brehm; Siegfried Gabel and Paula A. Gabel; Ferdinand Anthony Grien; Walter Frederichs; Frederick H. Hornby; Woolsey A. Shepard; and Henry M. Wise.

   OPINION.

SteRnhagan :

The petitioners demand a deduction in 1933 for loss because of the worthlessness of the shares of the Continental Corporation of New York, the “investment corporation.” The Commissioner disallowed the deduction for the reason that “* * * no part of the cost of the [bank] stock can be allocated to the [investment corporation] stock.”

The shares of the investment corporation were owned by the trustees, and the petitioners’ interest in them was that of beneficiaries of the trust, a position which was always incidental to their ownership of shares in the bank. Notwithstanding this unity, petitioners have undertaken to prove a cost basis to them of the investment corporation shares, by way either of direct cost or of apportionment in the manner of Regulations 77, article 58. They rely heavily on the Board’s decision in Stanley Hagerman, 34 B. T. A. 1158 (on review C. C. A., 3d Cir.), where an allocation was used to arrive at a basis for computing gain from the sale of interests in a security investment corporation similarly affiliated with a bank. There was some similarity in the purpose of organization of the Security Co. in that case and of the organization of the investment corporation in this, but the allocation of basis as between the bank shares and the Security Co. shares, found practicable in the Mag&rman case, was predicated, largely upon an actual separation. The Board said it was “only because the unit [of bank and Security Co. shares] was in fact separated and one of its constituent parts sold that the present issue arose.” It may not be assumed that allocation would have been recognized as proper if there had been no such separation.

The petitioners say that they sustained a loss when the investment corporation dissolved without assets and its shares became wortliless. We find it impossible to accept this view. Strictly speaking, in accordance with the conception which underlies the trust agreement of May 1, 1929, they were never the owners of investment corporation shares from the time of its organization until its dissolution. Their investment was always in shares of the bank, and indissolubly within that investment was embedded their more remote interest in the affairs of the investment corporation; and that interest went only so far as those affairs, conducted by the directors of the bank, might result in distribution to the trustees and in turn to them. In 1929 petitioners paid $40 entirely to the bank and the bank was to use $10 of it as a subscription for two shares of investment corporation stock to be issued to the trustees, who were the bank’s directors. Aside from the New York law’s requirement of a separate corporation, the affairs conducted in the name of the investment corporation were inseparable from those of the bank. They were conducted by the same persons, not because they happened to be holding positions as directors of both corporations, but because it was designed so and anything else was inherently impossible. The identity of a trustee was not in his person but in his position as a director or officer of the bank. Thus it was assured that there could be no conflict between the interests of the two. This unity was carried out in the identity of bank shareholders and trust beneficiaries; in distributive interests of the investment corporation, one being proportionate to the other; and in the evidence of both being shown by the same certificate. To all this was added the injunction that no holder might dispose of either alone; both must be held inseparably. This unitary conception was thoroughly adopted and adhered to by everyone at all times throughout the life of the enterprise at every stage and in every change in its course. Through the Smith & Gallatin transactions (with one unimportant exception) and through the Straus and International merger the composite units were preserved. The new corporation was never for a moment treated practically as independent. During the merger the investment corporation transferred its assets to the bank’s distributing agent, changed its shares with changes by the bank, and transferred its assets so that after the merger it owned the Thirty Broad Street shares, worth $2,000,000 more than the assets given up.

The final event which is relied upon to demonstrate the petitioners’ loss is itself an indication of the inseparable composite character of their investment. The Thirty Broad Street Building was found to be unprofitable. In itself this was not a recognizable loss to its owner, the Thirty Broad Street Corporation, but merely a failure of expected profits; it still owned the building, subject to a mortgage, and the mortgage had not been foreclosed. In actual value its assets were less than its liabilities. To its only shareholder its condition was not such an “identifiable event” as to establish a deductible loss. For its own reasons, the investment corporation transferred the shares of Thirty Broad Street Corporation to the mortgagee; and thus by its own act it made itself destitute and its own shares worthless. The teust corpus consisted of only such worthless investment corporation shares, and petitioners as beneficiaries were thus forever deprived of the expectation of trust distributions of amounts received by the trustees as dividends and capital distributions of the investment corporation. But the petitioners still had their bank shares for which they had paid various amounts at various times under various circumstances, all including the $40 per share in June 1929, of which $10 was in turn used by the bank to subscribe for two shares of the new investment corporation.

The conclusion which seems to us inevitable is that petitioners’ investment must be regarded as existing in their bank stock and that their relation to the investment corporation and the trust was an inherent part of their ownership of bank shares, the ultimate disposition of which will reflect gain or loss upon the full basis of their cost.

But if it were proper to consider the petitioners’ investment as divisible between the bank shares and the beneficial interest in the investment shares, the question of the practicability of apportionment of basis would become important. We should find such an apportionment wholly impracticable. There is only a short parallel of the complex circumstances of acquisition here, as in deCoppet’s case, and the comparatively simple circumstances of the transactions considered in Stanley Hagemnan, supra. These petitioners bought shares for cash, acquired them by inheritance, in discharge of loans, as dividends, and by the exercise of rights; both corporations canceled shares, 'the bank participated in a merger which involved a change in the investment corporation’s share structure, and its assets and liabilities were shifted for the convenience of the bank. The problem of computing the basis of shares in the investment corporation is thus far more difficult than in the cases cited.

Complexity and difficulty of computation are in themselves insufficient reasons for denying the deduction, and neither the Commissioner nor the Board may refuse to ascertain the amount of deduction merely because its computation is a burdensome task. The question whether an apportionment is practicable, however, goes further.

If this case had involved but the sale by each petitioner of a separate share in the investment corporation received from the trustees at a time when the shareholder’s right thereto was the direct result of his paying the $40 to the bank upon the understanding that $10 would be turned in to the investment corporation, the gain or loss from such a sale might have been computed upon the basis of such $10 for each two shares sold. That, however, is not the question to be decided. The acts of June 1929 were still more complex and were soon enmeshed in such later transactions as obscured them entirely. Any calculation of a separate basis would require some appraisal of several imponderable factors. The $2,000,000 gain in Thirty Broad Street shares is illustrative. The apportionment would be entirely artificial and quite unworthy of use — hardly reliable enough to be called “practicable.”

The necessity is thus eliminated for considering the question whether there was a statutory reorganization in September 1931 affecting the basis of the investment shares, and also for considering the question, affirmatively raised by the respondent, whether in any event petitioners are estopped.

The Commissioner’s determination is sustained.

Reviewed by the Board.

Decision will be entered wider Rule 50.

Leech, Disney, and Kern concur only in the result.

Smith,

dissenting: The evidence shows that the bank and the investment corporation were separate corporations. The shares of the investment corporation became worthless in 1933. It follows that a stockholder owning shares in the investment corporation sustained a loss in 1933 represented by his investment in the shares of the investment corporation.

The petitioners claim the right to deduct from their gross incomes of 1933 the amounts they paid for shares of stock in the investment corporation. The Board has denied the claimed deductions upon the ground that it is difficult, if not impossible, to determine the exact amount of their investments in those shares. I am of the opinion that the deductions are not to be disallowed upon this ground. It is the function of the Board to determine the amount of the losses, if any such were sustained. The Board is not absolved from the duty of making such determinations because of difficulty in doing so. Cf. Cohan v. Commissioner (C. C. A., 2d Cir.), 39 Fed. (2d) 540; National Outdoor Advertising Bureau v. Helvering (C. C. A., 2d Cir.), 89 Fed. (2d) 878.

In the case of Andre deCoppet it is shown that he acquired 11,000 shares of the bank’s stock prior to June 1929, and that on June 15, 1929, he paid $440,000 in the acquisition of an additional 11,000 shares. He was required to pay $40 a share, of which amount $10 was the cost to him of beneficial rights in 2 shares of the investment corporation, which shares were to be held by trustees for the benefit of the bank’s shareholders. The shares of the investment corporation became worthless in 1933. DeCoppet plainly sustained a loss on his investment in 22,000 shares of the investment corporation of at least $110,-000. I think the Board is in error in disallowing the deduction of the proven loss.

DeCoppet also claims the right to the deduction of additional amounts representing his investment in shares of stock acquired subsequent to June 15, 1929. I think it is possible to determine that the loss was in excess of $110,000. But in any event deCoppet is entitled to deduct from the gross income of 1933 his proven loss.

It is also possible to determine minimum amounts of losses sustained by other petitioners which likewise are deductible.

Arundell, Van Fossan, and Harron agree with this dissent.

       * * * Where common stock Is received as a bonus with the purchase of preferred stock or bonds, the total purchase price shall be fairly apportioned between such common stock and the securities purchased for the purpose of determining the portion of the cost attributable to each class of stock or securities, but if that should be impracticable in any case, no profit on any subsequent sale of any, part of the stock or securities will be realized until out of the proceeds of sales shall have been recovered the total cost.


author: Arundell:

text:
    Will County Title Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91448.
    Promulgated December 15, 1938.

      Harry W. Bank, Esq., for the petitioner.

      J. P. Wenchel, Esq., for the respondent.
   OPINION.

Arundell:

The petition in this case is based on determinations of the Commissioner as follows:

1933, income tax overassessment_$57.92

1934, income tax deficiency_ 529.25

1934, excess profits tax overassessment_ 745.04

The parties have stipulated that for the year 1933 the Board may enter an order dismissing the proceeding for lack of jurisdiction. For the year 1934 the parties have stipulated to submit the question of jurisdiction for determination.

As set out above, the respondent has determined a deficiency in income tax in the amount of $529.25 and an overassessment of excess profits tax in the amount of $745.04, making a net over-assessment of both taxes in the amount of $215.79. Section 272 of the Revenue Act of 1934 gives taxpayers the right to petition the Board for a redetermination of deficiencies determined by the Commissioner in respect of the tax imposed by title I of the act. Section 13 of title I imposes the corporate income tax. The facts concerning the income tax involved in this case bring it within these provisions. That is, the Commissioner has determined a deficiency in the corporate income tax, he has sent a notice of his determination to the taxpayer, and the taxpayer has petitioned for redetermination. Every jurisdictional element is present in respect of the income tax.

The excess profits tax is imposed by section 702 (a), which is a part of title Y of the Eevenue Act of 1934. Section 702 (b) .provides as follows:

All provisions of law (including penalties) applicable in respect of the taxes imposed by Title I of this Act, shall, insofar as not inconsistent with this section, be applicable in respect of the tax imposed by this section, except that the provisions of section 131 of that title shall not be applicable.

The effect of this provision is to permit the filing of petitions for redetermination of deficiencies in excess profits tax in the same manner as deficiencies in income tax. It does not authorize a petition in any case other than where .there has been a determination of a deficiency. In a long line of cases, of which Cornelius Cotton Mills, 4 B. T. A. 255, is a leading one, we have held that the determination of a deficiency is vital to our jurisdiction, and that we have no jurisdiction where the Commissioner determines that there is an overassessment. As the basic jurisdictional element of the determination of a deficiency is the same under both the income tax and excess profits tax provisions of the statute, the holdings in the income tax cases on the jurisdictional question here presented require a like holding here. We are accordingly of the opinion, and so hold, that we have no jurisdiction in this proceeding in so far as the petition is based on the Commissioner’s determination of an overassessment of excess profits tax.

The fact that the Commissioner’s determinations concerning the two taxes result in a net over assessment does not oust us of jurisdiction over the petition for redetermination of the income tax deficiency. The two taxes are imposed by entirely separate provisions of the statute. The combination of the two determinations in one mathematical calculation does not change the fact that there has been a determination of a deficiency in the income tax, and a proper petition for redetermination thereof is within our jurisdiction.

The parties have stipulated that if we hold that we have jurisdiction with respect to income tax but not as to excess profits tax, we may enter decision that there is a deficiency in income tax for 1934 in the amount of $395.19.

Order will be entered dismissing the proceeding m so far as it pertains to 1933 and to excess profits tax for 193J¡,; decision will be entered that there is a deficiency in income tax for 1931¡. in the amount of $395.19.


author: Disney :

text:
    The Colonial Trust Company, Executor of The Estate of Thomas I. Walker, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87395.
    Promulgated December 15, 1938.

      Alfred 0. Frodel, Esq,, for the petitioner.

      Daniel A. Taylor, Esq., and Wm. G. Buy man, Esq., for the respondent.
   OPINION.

Disney :

The petitioner contends that the decedent and his wife held their interests in the corpus of the trust as tenants in common and that only one-half of the value of the principal of the trust estate is includable in the decedent’s gross estate. The respondent’s contention is that the decedent and his wife held their beneficial interests in the estate as joint tenants and that 89.53 percent of the value of the corpus is taxable as part of the gross estate of the decedent. In the view we take of the proceeding, it is unnecessary to pass upon the character of the interest the beneficiaries had in the trust property.

Each of the grantors reserved the right to terminate the trust upon 30 days’ written notice, but the power was never exercised. The petitioner argues that if the power of revocation had been exercised, the decedent would not have been entitled to receive in excess of one-half of the corpus of the trust estate. The view of the respondent is, in effect, that the decedent, having made his contribution coupled with a power to revoke, would have been entitled to receive 89.53 percent of the principal in the event of termination of the trust by either of the grantors. The petitioner’s theory is that the trust instrument effected a gift m praesenti by the decedent to his wife of so much of his property as exceeded that of his wife. The respondent’s position on the point is that the power reserved to revoke stood in the way of a completed gift inter vivos, and brings into operation the provisions of section 302 (d) (1) of the Revenue Act of 1926, as amended by the Revenue Act of 1934, reading, in part, as follows:

To the .extent of any interest therein of which the decedent has. at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, * * * except in case of a bona fide sale for an adequate and full consideration in money or money’s worth.

No claim is being made by the petitioner and it does not appear that the transfer was a “bona fide sale for an adequate and full consideration in money or money’s worth.” Safe Deposit & Trust Co. v. Tait, 295 Fed. 429; Phillips v. Gnichtel, 27 Fed. (2d) 662; Pauline L. Sheets et al., Executors, 35 B. T. A. 220; affd., 95 Fed. (2d) 727.

The preamble of the trust deed recited that the object of the trust was to insure the grantors income during their joint lives and the life of the survivor of them. Nowhere in the instrument is there an express declaration on the part of either grantor to mate a gift inter vivos of property to the other. Neither did the grantors specify the proportions in which they were to receive the income of the trust or the corpus in the event the trust was terminated by either grantor. The trustee distributed all of the income, except the amount represented by the last distribution, directly to the decedent in accordance with requests made upon it by one or both of the grantors. These instructions were apparently given to the trustee from time to time as the occasion therefor arose and obviously did not modify the trust deed as to distribution of income, or the corpus. Until the death of the decedent the trust continued in full force and effect, with a provision empowering the decedent to terminate the trust. Upon the happening of such an event, the trustee was directed “to pay over a.nd deliver to the Grantors or to the surviving Grantor all property held by it under the agreement.” The death of the decedent terminated this power of revocation and until then there was no gift inter vivos of any part of the corpus transferred to the trust by the decedent. Burnet v. Guggenheim, 288 U. S. 280; Day Kimball et al., Administrators, 29 B. T. A. 60; affd., 71 Fed. (2d) 1011; certiorari denied, 293 U. S. 607. The transfer occurred upon the extinguishment of the power and this was brought about by the death of the decedent. The termination by death of the power of revocation constituted a transfer subject to the imposition of estate taxes. Katherine B. Albrecht et al., Executrices, 27 B. T. A. 1091; Fidelity-Philadelphia Trust Co., Trustee, 34 B. T. A. 614, and cases cited therein.

Moreover, under the principles enunciated in Burnet v. Guggenheim, supra, and Day Kimball et al., Administrators, supra, the trust being revocable, there was no gift inter vivos by the decedent to his wife of any portion of what he contributed to the trust, and the whole of his contribution remained in his estate for the purposes of the estate tax. If we were to assume that a tenancy in common was created, as contended by petitioner, any presumption that the tenants in common held by moieties is overcome by the fact that the contributions by decedent and wife were in unequal proportions, the proportions determined by the respondent. Lowell v. Lowell, 185 Iowa, 508; 170 N. W. 811; Bittle v. Clement, 54 Atl. 138; Byers v. Doheny, 287 Pac. 988. Generally, whatever is true at law of a legal estate is true in equity of a trust estate. Croxall v. Shererd, 72 U. S. 268.

Aside from reinvestments of the corpus, securities and cash were added to the trust, but the record does not disclose by whom the contributions were made. In the absence of proof that the decedent’s interest in the trust at the time of his death was less than 89.5B percent, the Commissioner’s action in including in the gross estate of the decedent the sum of $171,706.84 as the value of decedent’s interest in the principal trust will not be disturbed.

Decision will T>e entered under Rule 50.