author: Mellott :

text:
    Lunsford Richardson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 85905.
    Promulgated May 19, 1939.

      Will B. Gregg, Esq., Leslie D. Dawson, Esq., and Allin H. Pierce, Esq., for tlie petitioner.

      Thomas E. Lewis, Esq., for the respondent.
   OPINION.

Mellott :

Respondent determined deficiencies in petitioner’s gift tax in the amounts of $10,991.69 for the year 1932 and $13,298.25 for the year 1934. The deficiency for 1932 results from respondent’s determination that petitioner made a gift of 55,699 shares of Vick Financial Corporation stock subsequent to June 6, 1932 (the effective date of the gift tax provisions, section 501 et seq., Revenue Act of 1932). This deficiency will be considered first.

The facts relating to the 1932 transactions, which petitioner contends show gifts consummated prior to June 6 of that year and respondent contends show gifts consummated subsequent to such date, are as follows:

The petitioner and his wife, Margaret B. Richardson, are residents of Greensboro, North Carolina. Petitioner filed no gift tax return for the year 1932.

The Piedmont Financial Co. (hereinafter referred to as Piedmont), was a corporation organized under the laws of the State of New York in 1928 for the purpose of administering and managing financial and property affairs for certain corporations and individuals. Petitioner was its1 vice president and his brother H. Smith Richardson, its president, and they were its sole stockholders. George R. Dawson was its secretary-treasurer.

Piedmont maintained an office in New York. It managed investment accounts for the Richardson brothers, their wives, and others. The securities of petitioner and those of his wife were handled in separate accounts.

Petitioner, on or about the 18th day of May 1932, was the owner of 55,699 shares of the capital stock of the Vick Financial Corporation, of which 53,599 shares were registered in the name of Lunsford Richardson or L. Richardson, who was one and the same person, and the remaining 2,100 shares were in the custody of Piedmont, were registered in the name of nominees, Salkeld & Co. and Lewis & Co., and were deposited in a custodian account at the Bankers Trust Co. of New York, designated “Piedmont Account No. 3.”

The 53,599 shares registered in the name of petitioner were evidenced by unendorsed certificates and were kept in petitioner’s safe deposit box in the North Carolina Bank & Trust Co. at Greensboro, North Carolina. Certain certificates owned by his wife were also kept in that box. The only persons who had access to it were petitioner and his brother, H. Smith Richardson, the brother. having access only when accompanied by George R. Dawson, or by Pearle Hubbard, an employee of the Vick Chemical Co., each of whom had one of the two keys to such box.

At the office of the Vick Chemical Co. in Greensboro, Pearle Hubbard kept a set of record cards showing the various securities owned by petitioner and separate cards showing the securities owned by petitioner’s wife. These cards disclosed the amount of stock of the Vick Financial Corporation owned by each, the date of acquisition, the cost, the date of disposition, and other relevant data. Other records with respect to the securities of petitioner and his wife were kept by Piedmont in New York. It also kept records of her income and disbursements, prepared her income tax returns, and acted generally as her financial agent.

During the spring of 1932 petitioner discussed with his brother and some of his business associates the advisability of making gifts of stock to his wife prior to the time the gift tax law, which was then being considered by Congress, should become effective. On May 18, 1932, he told Pearle Hubbard that he was making a gift of all of his Vick Financial Corporation stock to his wife and directed her to make a notation on the cards “so that there couldn’t be any conflict about it.” On the same date petitioner told his wife he had made the gift to her and that he had requested Pearle Hubbard to change the record cards accordingly. His wife indicated her willingness to accept the gift. In accordance with petitioner’s request, Pearle Hubbard made the following entry on the record cards showing petitioner’s holdings of Vick Financial stock:

Certificate, Mo. Date Amount
“Given to Mrs. R.” 5/18/S2 55,699

No corresponding entry was at that time made on the card of petitioner’s wife.

On May 27,1932, petitioner, while in New York, informed Dawson and other officers of Piedmont that he had given his Vick Financial stock to his wife and asked Dawson to prepare whatever papers were necessary to have it transferred of record to his wife’s name.- Dawson examined the records of Piedmont and determined that petitioner owned 55,699 shares, 53,599 shares of which were registered either in the name of Lunsford Richardson or L. Richardson, and located in the safe deposit box at Greensboro, North Carolina, and 2,100 of which were registered in the name of the nominees heretofore mentioned. Thereupon and thereafter the following steps were taken:

(a) In Connection with the 53,599 Shares in the Safe Deposit Box at Greensboro.

Dawson told petitioner that it would be necessary for him to execute two assignments, one in the name of Lunsford Richardson, and the other in the name of L. Richardson, “so as to take care of whichever way the stock was registered.” The assignments were prepared by Dawson and read as follows:

[Assignment No. 1]
Know Am Men by These Pbesents
That, the undersigned for value received has bargained, sold, assigned and transferred, and by these presents does bargain, sell, assign and transfer unto (Mrs.) Margaret B. Richardson, % Yicli Chemical Co., Greensboro, N. C., 53599 shares of the Capital Stock of the certificate (s) for which stand (s) in the name of , and the undersigned hereby constitute (s) and appoint (s) the true and lawful attorney of the undersigned, Irrevocably, for and in the name and stead of the undersigned, to sell, assign, transfer, and make over, all or any part of the stock and for that purpose to make and execute all necessary acts of assignment and transfer thereof, and to substitute one or more persons with like power hereby ratifying and confirming all that the Attorney or his substitute or substitutes shall lawfully do by virtue hereof.
In Witness Whereof, this instrument has been executed by the undersigned under the seal of the undersigned, this 27th day of May, 1932.
Lunsford Richardson
[Assignment No. 2]
For Value Received, I, L. Richardson, hereby sell, assign, and transfer unto (Mrs.) Margaret B. Richardson Shares of the Capital Stock of the Vick Financial Corporation standing in my name on the books of said represented by Certificate No. herewith and do hereby irrevocably constitute and appoint attorney to transfer the said stock on the books of the within named Company with full power of substitution in the premises.
Dated May 27, 1932.
L. Richardson

These assignments were signed by petitioner in the presence of Dawson, who signed them; as a witness. Dawson informed petitioner that it would be necessary to have the actual stock certificates before he could effect a transfer of record ownership. Petitioner handed the assignments to Dawson and told him to hold them until he (petitioner) returned to Greensboro and forwarded the certificates in his safe deposit box, whereupon Dawson should have the stock in petitioner’s name transferred into the name of Margaret B. Bichardson.

Petitioner returned to his home in Greensboro on June 9, 1932, removed the stock certificates covering 53,599 shares of Vick Financial Corporation stock from his safe deposit box, and had Pearle Hubbard mail them to Dawson in New York. On June 20, 1932, Dawson personally delivered these certificates, together with the written assignments, to the transfer agent, Bankers Trust Co., of New York, for transfer. The following day Dawson wrote a letter to the Bankers Trust Co. requesting that new certificates be issued in the name of Margaret B. Bichardson. On June -23, 1932, the Bankers Trust Co. issued new certificates for 53,599 shares in the name of Margaret B. Bichardson, and they were forwarded to petitioner’s wife, % Vick Chemical Co., Greensboro, North Carolina. When the certificates were received Pearle Hubbard made the following entry on the card of petitioner’s wife:

Date Amount Certificate No.
6/23/32 53,599 CO 14047 C 22003/7 C 13341/3 C 17603/4 Trans, from •L.RieRardson’s name

(b) In Connection with the 2J.00 Shares Stcmding in the Name of the Nominees.

Piedmont had designated the Bankers Trust Co. of New York as its depository for stocks, bonds, and securities which it was holding for the Richardsons, their wives, and others. When petitioner, on May 27, 1932, informed Dawson and other officers of Piedmont that he had given his Vick Financial Corporation stock to his wife and asked Dawson to prepare the necessary papers to transfer this stock to her, Dawson informed him that it would not be necessary for him to execute any assignment in order to transfer to her the 2,100 shares in the custodian account because this stock was held in the name of nominees and no transfer of record ownership was required. Dawson also informed petitioner at that time that he (Dawson) as an officer of Piedmont, could have this stock removed from his account and placed in his wife’s account. Petitioner asked Dawson to have this change made when the certificates in his safe deposit box at Greensboro were received by Dawson.

On June 25, 1932, Dawson, as secretary-treasurer of Piedmont, wrote a letter to the Bankers Trust Co. instructing it to “withdraw from the custodian account of Lunsford Richardson (Piedmont Account No. 3) 2,100 shares of Vick Financial stock * * * represented by certificates issued in the name of your nominee and deliver this stock against receipt to Mrs. Margaret B. Richardson (Piedmont Account No. 12) * * These instructions were complied with and on June 27, 1932, in a “Vault Transaction” the certificates were changed from Piedmont Account No. 3 to Piedmont Account No. 12.

Petitioner did not file a gift tax return for the year 1932, his theory and present contention being that the gift was made prior to June 6. The value of the property is not in controversy. If petitioner’s contention be upheld there is no deficiency in tax for the year 1932. If the gift was made after June 6 then petitioner’s alternative contention that the respondent erred in failing to allow him the specific exemption of $50,000 provided by section 505 (a) (1) must be considered.

Respondent urges, and determined the deficiency on the theory, that one of the essentials of a valid gift, i. e., delivery of the subject matter of the gift to the donee, was lacking prior to June 6,1932. He argues that prior to that date most of the stock which petitioner purported to transfer to his wife was where it had previously been, namely, in the safe deposit box in North Carolina, to which the supposed donee had or was given no access; that petitioner did not do all lie reasonably could have done to divest himself of dominion; that delivery of the assignments was conditional and was not to become operative until petitioner forwarded the certificates from Greensboro ; and that the gift was not completed by delivery until petitioner gave up dominion and control, which was either when he took the certificates from his safe deposit box and had them mailed to Dawson or when the record title was transferred, both of which events' occurred subsequent to June 6,1932. As to the shares in the custodian account, respondent argues that they were not delivered to petitioner’s wife prior to June 6, 1932, because petitioner did not order them transferred from his account to her account prior to that date, and that the gift of the securities in such account was not made until such instructions were carried out and the account actually transferred on the books of the custodian.

It is well settled that before there can be a completed gift the donor must surrender dominion and control of the subject matter of it. Edson v. Lucas, 40 Fed. (2d) 398; Allen-West Commission Co. v. Grumbles, 129 Fed. 287; Delight Ward Merner, 32 B. T. A. 658; 79 Fed. (2d) 985; Adolph Weil, 31 B. T. A. 899; 82 Fed. (2d) 561; certiorari denied, 299 U. S. 552; Jackson v. Commissioner, 64 Fed. (2d) 359; Dulin v. Commissioner, 70 Fed. (2d) 828. The “delivery” must be as perfect as the nature of the property and the circumstances and surroundings of the parties will reasonably permit. City Bank Farmers Trust Co. v. Hoey, 23 Fed. Supp. 831; In re Van Alstyne, 207 N. Y. 298; 100 N. E. 802. Manual delivery of the thing given is not necessary, Owen v. Commissioner, 53 Fed. (2d) 329; and delivery need not be made directly to the donee. The gift may be executed by delivery to a third person for the benefit of the donee where there is an intention that present title and ownership shall pass and appropriate language is employed to effect such intention. Grissom v. Sternberger, 10 Fed. (2d) 764. In such instances “constructive delivery is recognized, not on principles of agency, but because the third person becomes a trustee for the donee.” Dulin v. Commissioner, supra. The fact that such third person also acted as agent of the donor does not affect the validity of the gift nor prevent title to the subject matter from passing to the donee. Bingham v. White, 31 Fed. (2d) 574; Copland v. Commissioner, 41 Fed. (2d) 501; but “If the donor deliver the property to the third person simply for the purpose of his delivering it to the donee as the agent of the donor, the gift is not complete until the property has actually been delivered to the donee.” Bickford v. Mattocks, 95 Me. 547, 550; 50 Atl. 894, 895. Cf. Vincent v. Putnam, 248 N. Y. 76; 161 N. E. 425.

Applying these principles to the facts pertaining to the shares referred to above under (a) — i. e., the 53,599 shares in the safety deposit bos in Greensboro, North Carolina — we are of the opinion that a complete gift was not made prior to June 6, 1932. No doubt petitioner intended to make a gift prior to that date; but one of the elements essential to the consummation of a valid gift was clearly missing, namely, a delivery as perfect as the nature of the property and surroundings of the parties reasonably permitted. On May 18, 1932, when petitioner told his wife that he had given her all of his Yick Financial stock and requested Pearle Hubbard to make the necessary notations on the record cards showing such gift, petitioner made no effort to place the stock within the dominion and control of his wife. He was in Greensboro and could have taken the certificates from his safe deposit box, arranged for their transfer of record to the name of his wife, and ordered that the new certificates be delivered to her; but he did not do so. Neither did he make any constructive or symbolic delivery of the subject matter of the gift. He was content to let the stock remain under his dominion and control in his safe deposit box, to which his wife had no access. Obviously, therefore, he did not on May 18,1932, put the subject matter of the gift beyond recall; and until that was done no gift was consummated. Burnet v. Guggenheim, 288 U. S. 280, 286.

Did the acts performed by petitioner when he arrived in New York on May 27, 1932, have the effect of completing what was theretofore an incomplete gift? We think not. On that date petitioner apparently believed that he had effected a complete gift of his Vick Financial Corporation stock to his wife, because he told several officers of Piedmont that he had made such a gift. Nevertheless, he then, for the first time, initiated steps which resulted in the dominion and control of the stock passing from him to his wife. He asked Dawson, the secretary-treasurer of Piedmont, to prepare the papers necessary to have the stock transferred of record into her name. The evidence indicates that neither Dawson nor petitioner knew the number of shares in the safe deposit box at Greensboro which were in the name of “Lunsford Richardson” or the number which were in the name of “L. Richardson”, though they knew the total number in the safety deposit box. Dawson therefore prepared the two assignments heretofore mentioned “so as to take care of whichever way the stock was registered”, but informed petitioner that it would be necessary to have the actual stock certificates before he could effect the transfer of record ownership. Petitioner executed the assignments, handed them to Dawson, and told him to hold them until he (petitioner) returned to Greensboro and forwarded the certificates, whereupon Dawson was to take such steps as were necessary to have the stock transferred into the name of petitioner’s wife.

Petitioner argues that the delivery of the assignments was a symbolic or constructive delivery of the subject matter of the gift, and points to the testimony of Dawson to the effect that he was acting for Piedmont and as the agent of petitioner’s wife when he received the assignments. While the evidence shows that Piedmont had acted as the financial agent of Margaret B. Richardson, we are not convinced that either it or Dawson was acting for her when the assignments were received from petitioner. Petitioner delivered them to Dawson for the purpose of effecting a transfer of the record title to the stock to her name when the certificates should be received from Greensboro. In our opinion (and this seems to be conceded by both parties) Dawson acted as the agent of petitioner when he prepared the assignments and signed them as a witness. We do not believe that a metamorphosis occurred and that he then received them from petitioner as the agent of petitioner’s wife, attached them, as her agent, to the certificates afterwards received from Greensboro, and ordered the bank to issue new certificates in her name and forward them to her. In other words, in spite of Dawson’s testimony, we are of the opinion that all of his acts were performed as the agent of petitioner rather than agent of petitioner’s wife. The total absence of any evidence showing that any instructions were received by Dawson or Piedmont from her tends to support this conclusion.

But even if it be assumed that Dawson received the assignments as agent or trustee for petitioner’s wife, we would nevertheless be compelled to hold that the delivery of the assignments in the form in which they were executed did not constitute a constructive or symbolic delivery of the stock to her. One of the assignments made no mention of the number of shares assigned, and the other, while specifying the number of shares, did not contain the name of the corporation whose shares were assigned. If petitioner had died prior to the time the certificates were received from Greensboro and attached to the assignments, or if he had refused to forward the certificates to Dawson, no court, in our opinion, would hold that the assignments as executed were sufficient to give the wife the ownership of the 53,599 shares of Vick Financial Corporation stock. We do not agree with petitioner that the sufficiency of the assignments was proved by the fact that they were accepted by the transfer agent and that the stock was actually transferred pursuant to them without any change being made. The transfer agent was justified in making the record transfer when he received the assignments together with the stock certificates attached thereto because it was then able to ascertain, by reference to the certificates, the number of shares which were to be transferred and the name of the corporation whose stock was the subject matter of the transfer. Standing alone, however, the assignments were ambiguous, incomplete, and defective and did not serve to divest petitioner of his interest in the stocks.

The facts with reference to the 2,100 shares in the custodian account need not be restated in detail. These shares were held by Piedmont as the corporate bailee for petitioner. The only instructions he ever gave for their ultimate disposition — and all of the interested parties concede that title vested in the wife during the year 1932 as the result of a gift made by him — were given on May 27, 1982. On that date he advised three officers of Piedmont (excluding himself) that he had given this stock to his wife. The response of Piedmont’s secretary was that “it would not be necessary to execute any assignment in regard to that stock because it was already in the nominee’s name and no transfer of record ownership would be required.” This, we think was tantamount to an unequivocal acknowledgment by Piedmont that the stock thenceforth was being held by it as the agent of the wife and the subsequent action confirms, rather than refutes, this view. Under the circumstances we are of the opinion that the gift of the 2,100 shares was consummated on May 27, 1932, rather than when the letter was written to the custodian or when it, in a “vault transaction”, made the shift, both of which events occurred subsequent to June 6, 1932. Cf. Tracy v. Commissioner, 70 Fed. (2d) 93; Voltz v. Treadway & Marlatt, 59 Fed. (2d) 643; Rose v. Commissioner, 65 Fed. (2d) 616; Kaufmann v. Commissioner, 44 Fed. (2d) 144; J. T. Hedrick, 24 B. T. A. 444. We therefore hold that the respondent erred in determining that the value of the 2,100 shares is subject to the gift tax.

Petitioner alleges that if it be held he made a gift of the stock sub ■ sequent to June 6, 1932, and that he is therefore subject to tax, then he should be allowed the specific exemption of $50,000 provided by section 505 (a) (1) of the Revenue Act of 1932 which is as follows:

SEC. 505. DEDUCTIONS.
In computing net gifts for any calendar year there shall he allowed as deductions :
(a) Residents. — In the ease of a citizen or resident—
(1) SPEcmo exemption. — An exemption of $50,000, less the aggregate of the amounts claimed and allowed as specific exemption for preceding calendar years.

The question is not discussed upon brief. Petitioner merely asserts that the deficiency should “be recomputed in a manner which will allow” him the $50,000 exemption. Respondent states that no claim was made for the exemption in the return for the year 1932, which is manifestly true since no return was filed. Pointing out that the specific exemption was claimed in the year 1934 and allowed in computing the tax for that year, he says: “Obviously the exemption is not allowable in both years and while its transfer from one year to the other affects only the amount of interest payable, the respondent is of the opinion that the petitioner should be held to the election which he made in filing his 1934 return.”

It is doubtful whether petitioner made such an “election” in claiming the specific exemption in the year 1934 that it can not now be claimed in the year 1932. Generally, the doctrine of election applies only where there are two or more remedies, all existing at the time of election, and which are inconsistent with each other. If the remedies are not cumulative the choice of one makes all others unavailable. But we have no such situation here. Our first question is whether or not petitioner is subject to a gift tax for the year 1932. We have held that he is. Then, says petitioner, he is entitled to the $50,000 specific exemption allowed by section 505 (a) (1) of the Revenue Act of 1932. Since the act specifically grants him the exemption, and since, in our opinion, he has not heretofore “elected” to claim it in some other year, we hold that in recomputing the deficiency for 1932 the specific exemption of $50,000 should be allowed.

The deficiency for the year 1934 resulted from respondent’s determination that petitioner was not entitled to exclusions totaling $25,000 ($5,000 for each of the trusts created by petitioner for his five children) in computing the amount of gifts subject to tax in that year. Respondent now concedes that he erred in denying the claimed exclusions. Cf. Thomas E. Wells, 34 B. T. A. 315; aff'd., Commissioner v. Wells, 88 Fed. (2d) 339.

But petitioner is not entitled to a judgment of no deficiency in tax for the year 1934. In his return for that year he claimed, and the respondent in determining the deficiency allowed, a specific exemption of $50,000 under section 505 (a) (1), supra. It is the duty of this Board to determine the correct deficiency in tax and do full justice to the parties. Cf. Commissioner v. Edison Securities Corporation, 78 Fed. (2d) 85. Justice in this instance requires that, because of our allowance of the $50,000 specific exemption as a deduction in 1932, the same deduction claimed in 1934 must be disallowed even though respondent did not urge such disallowance in connection with his determination for the latter year. Crowell v. Commissioner, 62 Fed. (2d) 51; Beaumont v. Helvering, 78 Fed. (2d) 110; J. & O. Altschul Tobacco Co. v. Commissioner, 42 Fed. (2d) 609. We hold, therefore, that petitioner is not entitled to a $50,000 specific exemption for 1934. Inasmuch as respondent has not asked for an increased deficiency for that year, no greater deficiency than that determined can be allowed.

Reviewed by the Board.

Judgment will be entered umder Rule SO.

AeuNdell, SteRNhageN, Van- FossaN, Black, Leech, and Opper dissent.


source: Caselaw Access Project

author: Hill:

license: Public Domain

text:
    G. M. Jackson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89908.
    Promulgated May 23, 1939.

      Frank Hempstead, Esq., and Elmer M. Olson, Esq., for the petitioner.

      James G. Maddox, Esq., for the respondent.
   OPINION.

Hill:

Respondent determined a deficiency in petitioner’s income tax liability for the year 1933 in the amount of $1,736.11. The issue submitted for decision is whether or not respondent erred in taxing to petitioner the entire proceeds from the sale of certain stock, not shown to have had any cost basis, where petitioner transferred the stock at $1.20 per share to a corporation of which he was the sole stockholder and the corporation shortly thereafter sold the stock for $3.50 per share.

Petitioner is an individual, who during the taxable year was residing in New York and was employed as sales manager by Aleo Products, Inc. The capital stock of this corporation consisted of $500,000 of preferred stock, which was owned by the American Locomotive Co., and 100,000 shares no par value class B common stock. Petitioner owned 6,190 shares of Aleo class B common stock, and all of the capital stock of the Jackson Engineering Corporation. On December 19, 1933, petitioner transferred to the last named corporation 5,190 shares of Aleo class B common stock at $1.20 per share. During 1933 the Jackson Engineering Corporation was not actively engaged in business but was in the process of liquidation. It was wholly under the control and direction of petitioner.

The transfer of 5,190 shares of Aleo stock to the Jackson Engineering Corporation was treated by petitioner as a sale, and the entire proceeds at the rate of $1.20 per share in the amount of $6,228 petitioner reported as taxable income in his return for 1933.

On December 29, 1933, the Jackson Engineering Corporation sold 2,000 shares of Aleo class B common stock to the American Locomotive Co. for $3.50 per share, and on January 5, 1934, sold to the same company at the same price 3,190 shares of such stock.

Respondent treated the sales by the Engineering Corporation as sales by petitioner, holding that the entire profit realized on the transaction was taxable to him, and accordingly increased the amount reported in petitioner’s income tax return for 1933 by $11,937.

Petitioner had a contract with Aleo Products, Inc., which gave the corporation an option to purchase his stock at $5 per share or book value, whichever was greater, upon termination of petitioner’s employment prior to December 31, 1933. The contract further provided that if petitioner’s employment was terminated after December 31, 1933, then the corporation should have the right to purchase the stock at a price per share of four times the average net earnings per year as shown by the books of the company on the aggregate number of shares of class B common stock then outstanding, computed for the two calendar years immediately preceding the year in which such termination of employment occurred, or book value, whichever was greater.

At December 19, 1933, petitioner had sustained losses during that year on sales of securities which were not capital assets, in the amount of $6,066.91, not offset by gains from like sales. This fact was known to petitioner, and such aggregate loss was in fact offset by the amount of $6,228 reported by petitioner in his income tax return for 1933 as gain derived from the sale of 5,190 shares of Aleo stock to the Jackson Engineering Corporation.

At December 19, 1933, the Jackson Engineering Corporation had a loss sustained in that year sufficient to offset the profit on a large part of the 5,190 shares of Aleo class B common stock, measured by the difference in the price of $1.20 per share fixed by petitioner, acting individually as seller and on behalf of his corporation as purchaser, and a sale price by the corporation of $3.50 per share; and this fact was also known to petitioner.

The facts in this case, we think, very clearly indicate that the transaction between petitioner and his corporation was not a sale of Aleo stock. This conclusion does not rest upon the assumption that a sole stockholder can not under any circumstances make a valid sale of property to his corporation, but upon the evident lack of intention by petitioner to do so. It is quite obvious that he did not intend that the stock should become the property of the corporation for any business purpose. The corporation was not then carrying on the business for which it was organized, but was in process of liquidation.

It is significant that by selling 5,190 shares of Aleo stock at $1.20 per share petitioner derived gain in the approximate amount of his loss on sales of non-capital assets in the taxable year and that such loss would otherwise have been unavailable for tax purposes. There is further significance in the fact that by routing the stock sale to the American Locomotive Co. through petitioner’s wholly owned corporation an additional portion of the gain derived from such sale was also offset by losses sustained in the taxable year by the latter corporation. These losses could not otherwise have been availed of by the corporation. The gain realized on the sale of the entire 5,190 shares of Aleo stock to the American Locomotive Co. exceeded the losses of the corporation for the taxable year 1938, computed without reference to such gain. However, notwithstanding that the American Locomotive Co. agreed on December 29, 1933, to purchase the entire block of 5,190 shares of stock at $3.50 per share, petitioner caused only 2,000 of such shares to be transferred to the locomotive company on that date and caused the corporation to transfer the remaining 3,190 shares to the locomotive company on January 5, 1934.

The losses of the Jackson Engineering Corporation for 1933 were sufficient to offset the gain on the 2,000 shares transferred in 1933. Whether the gain on the 3,190 shares transferred in the taxable year 1934 was offset by losses in that year the record does not disclose, but, as to the taxable year 1933, petitioner so handled the stock sale as to make available both his individual and his corporation losses to offset the profit returnable on the sale in that year.

Since the number of shares transferred by petitioner to his corporation at the price of $1.20 per share fixed by him and their transfer by the latter to the locomotive company at $3.50 per share produced a gain which substantially absorbed petitioner’s and the corporation’s losses in the taxable year, there would have been nothing to gain from a transfer by him of his remaining 1,000 shares of Aleo stock through the Jackson Engineering Corporation to the American Locomotive Co., so he sold those shares direct to that company. Obviously it was not important to petitioner whether taxable gain was derived by his corporation or by himself individually, except as it affected his tax liability.

In the light of the foregoing facts, we must assume that petitioner intended to accomplish the results which normally and naturally flowed from his acts, and hence that his intention was not to make a sale of the stock to his corporation for a legitimate business purpose; the transfer plainly was only a device to escape tax. Cf. Sydney M. Shoenberg, 30 B. T. A. 659; aff'd., 77 Fed. (2d) 446. If petitioner had sold his stock to the locomotive company after first having transferred it to an employee or other dummy, the profit would nevertheless have been taxable to him.

While each case must stand on its own facts and be decided on the particular facts involved, both this Board and the courts generally have condemned “anticipatory arrangements” entered into solely for the purpose of diverting income to a controlled corporation in order to reduce or escape tax liability; and such arrangements must be disregarded for purposes of taxation. Gregory v. Helvering, 293 U. S. 465; Steinberger v. United States, 81 Fed. (2d) 1008; Groves v. Commissioner, 99 Fed. (2d) 179; Commissioner v. Griffiths, 103 Fed. (2d) 110; Belle G. Loewenberg, 39 B. T. A. 844.

Under the facts here and for the reasons above indicated, it is our opinion that form must give way to substance, and that the sales of Aleo stock by the Jackson Engineering Corporation to the American Locomotive Co. must be regarded for tax purposes as if made directly by petitioner. We hold, therefore, that the profit derived is taxable to petitioner.

However, respondent erred in including in petitioner’s gross income for 1933 the profit realized on the sale of 3,190 shares of Aleo stock on January 5, 1934. Petitioner made his income tax returns on the basis of cash receipts and disbursements, and hence may not be taxed in 1933 on income derived from a sale in 1934. The deficiency will be redetermined accordingly.

Reviewed by the Board.

Decision will be entered under Rule 50.


author: Smith :

text:
    Harry F. Doyle and Lucy J. Doyle, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 86406.
    Promulgated May 23, 1939.

      Thomas M. Wilkins, Esq., for the petitioners.

      Harold D. Thomas, Esq., for the respondent.
   OPINION.

Smith :

The petitioners’ first contention in this proceeding is that the $60,000 received by them in 1929 and 1930 did not constitute taxable income for 1934, or for any other year, within the meaning of the word “income” as defined in Eisner v. Macomber, 252 U. S. 189. The Revenue Act of 1934 requires the inclusion in gross income of gains, profits, and income derived from “sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; * * * or gains or profits and income derived from any source whatever.” (Section 22 (a).) At the close of 1934 the petitioners were in possession of their property which they had contracted to sell to the Tishman Realty Co. and also of $60,000 cash which they had received from the Tishman Realty Co. upon its executory contract of sale entered into in 1929. The Board is of the opinion that there is no merit in the petitioners’ contention that this $60,000 did not constitute taxable income to them in some year.

The only question which remains to be decided is whether the $60,-000 constituted taxable income of 1934. The petitioners contend that it was either taxable income of 1929 and 1930, as shown by the amended returns filed for those years, or of 1931, when the contract was alleged to have been breached by the Tishman Realty Co. The respondent contends that the entire $60,000 constituted taxable income of the petitioners for 1934 and in support of that contention cites Virginia Iron Coal & Coke Co., 37 B. T. A. 195; aff'd. (C. C. A., 4th Cir.), 99 Fed. (2d) 919. The question presented in that case was whether certain payments received by the Virginia Iron Coal & Coke Co. in 1931 and 1932 upon option contracts to sell real estate constituted taxable income of 1933, the year in which the optionee elected to forfeit the payments made upon the option contract. The Board and the court both held that the forfeited payments constituted taxable income of 1933. To the same effect is Miles Realty Co., 31 B. T. A. 443, and Dexter Sulphite Pulp & Paper Co., 23 B. T. A. 227. The syllabus of our opinion in the Miles Realty Co. case, supra, reads as follows:

Where land is sold on the installment plan under contracts which provided in substance that, if the buyer breached the contract, it should thereupon become null and void without any act on the part of the seller, and that all amounts paid and improvements made should be retained by the seller, who was entitled to immediate repossession, as liquidated damages, held, (a) some affirmative action is necessary on the part of the seller to cancel the contract and declare the forfeiture; (b) the seller may by conduct, or expressly, extend time after he has the option to cancel and forfeit; (c) until such time as the seller elects to forfeit the contract, the payments and improvements subject to forfeiture do not constitute income to the seller.

We said in our opinion:

It seems to us that under the facts of this case, the contracts were voidable only and that as petitioner not only took no steps to enforce the forfeiture, but after default endeavored to make further collections, forfeitures did not occur until 1928, when the contracts were formally canceled on the books. * * *

We, therefore, reversed the action of the Commissioner in taxing the forfeitures in 1926 and 1927 and sustained the claim of the taxpayer that the amounts constituted taxable income of the year 1928.

In Dexter Sulphite Pulp & Paper Co., supra, the facts were that a vendee in 1920 paid $100,000 upon an executory contract for the sale of property. In 1921 the vendee refused to make a further payment upon the contract and the company brought suit for damages. The litigation was settled and the company received a large amount for damages in 1921. The Board held that both the payment made in 1920 and the amount collected as damages in 1921 constituted taxable income of 1921.

Although the Tishman Fealty Co. in the proceeding at bar breached the executory contract which it had with the petitioners for the purchase of the property, the petitioners elected to overlook such breach. They were insistent that the Tishman Eealty Co. live up to its contract and instituted suit against it in 1933 for the specific performance of the contract. It was not until 1934 that the court dismissed the suit for specific performance and also dismissed the counterclaim of the Tishman Eealty Co. for a repayment to it by the petitioners of the $60,000 which it had paid them in 1929 and 1930, together with interest thereon. It was not until 1934 that the petitioners learned as a result of the decision of the court that they could not obtain specific performance of the contract and that the $60,000 which they had received from the Tishman Realtjr Co. was not subject to repayment. The Board is of the opinion that the respondent correctly determined that the gain of $60,000 constituted taxable income of the petitioners for 1934.

Relative to the claim of the petitioners that the $35,000 received in 1929 and the $25,000 received in 1930 constituted taxable income of those years, and not of 1934, it may be observed that if the contract for the sale of the property had not been breached by the Tish-man Realty Co. the total amount to be received by the petitioners would not constitute taxable income, but only the amount over the cost or March 1, 1913, value of the property, whichever was greater. In their petition the petitioners alleged that the March 1, 1913, value of the property was $90,000. This was denied by the respondent in his answer and no proof was offered upon the point. Since the taxable income would not have been the entire amount of $60,000 if the contract had been carried out the Board is of the opinion that the amounts received in 1929 and 1930 did not constitute taxable income of the petitioners for those years. Cf. Burnet v. Logan, 283 U. S. 404.

Undoubtedly, also, the petitioners would have been warranted in declaring in 1931 that the contract had been breached by the Tish-man Realty Co. and that the down payments had been forfeited in 1931. But the petitioners did not elect to declare the contract forfeited in 1931. Therefore, we are of the opinion that the $60,000 received in 1929 and 1930 was not taxable income of the petitioners for 1931.

Judgment will be entered for the resfondent.


author: Van Fossan:

text:
      Joe May, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91874.
    Promulgated May 23, 1939.

      Frederic A. Pike, G. P. A., for the petitioner.

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

Van Fossan:

The first issue presents the question of the right of the petitioner to return his income under the community property laws of California while he was living in that state by the grace of a visitor’s visa. The petitioner contends that such laws do not discriminate against aliens, resident or nonresident, but grant them the same rights as those enjoyed by citizens of California. He insists, however, that he was a resident of that state and that, in harmony with his intent to become a citizen of the United States, he had done his utmost to perfect his application for citizenship under the immigration laws and procedure.

The respondent’s position is that the petitioner did not become a resident of California and was not domiciled in that state until November 23, 1934, the day on which he entered the United States as an immigrant under the Austrian quota. The respondent cites the Political Code of California, Title II, section 52, defining the term “residence” and argues that the petitioner’s presence in California was not the “unrestricted presence required by the Code,” because the union of act and intent could not exist until after he entered the United States as a quota immigrant. The respondent also asserts that the petitioner is bound by his representations made to secure his visitor’s visa.

The community property laws of California do not specifically exclude a resident or nonresident alien from its benefits.

The facts before us clearly establish that the petitioner was a resident of California during 1934 within the definition of section 52. It is beyond doubt that the petitioner’s intent and purpose were to become an American citizen. His original entry into the United States was accomplished through a visitor’s visa only because his immediate presence in Hollywood was vital to his securing a contract with Columbia. Almost immediately on arrival in California, i. e., early in January 1934, he discussed with his English teacher ways and means of entering the country under a quota and he employed her to supervise his various moves to that end. The “union of act and intent,” which the respondent challenges, was manifest at the very outset of his residence in Hollywood and continued until November 23, 1934, when he accomplished his desire and entered under the Austrian quota.

We note that on the same day, he made application for citizenship papers and that he remained in Hollywood for over a year without employment. His entire conduct and behavior were consistent with his professed intention of remaining in California and becoming an American citizen.

The respondent contends that the fact that the petitioner was living in California under a visitor’s visa automatically made it impossible for him to have an “intent” to reside in that state. We considered the same situation in J. P. Schumacher, 32 B. T. A. 1242, in which we held that the petitioner’s entry under a visitor’s visa did not affect his status as a resident alien. There we said that he had adopted that course on consular advice and that his explanation of the reason therefor seemed reasonable. In the case at bar the petitioner’s explanation for his securing a visitor’s visa is likewise reasonable and convincing.

The petitioner is entitled to return his income derived from salary on a community property basis under the laws of California.

Our decision on the first issue also determines the disposition of the second issue. The petitioner is entitled to a personal exemption of $2,500. .

The third issue involves claims for the deduction of various expenditures as ordinary and necessary business expenses.

In Cohan v. Commissioner, 39 Fed. (2d) 540, the court, in discussing the duty of - the Board in situations where exact proof is lacking, stated:

* * * The Board should make as close an approximation as it can, hearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making.

The petitioner is a motion picture director and writer. His popularity and success upon coming to this country, resulting in a future demand for his services, were dependent in no small measure upon personal contacts made with prominent individuals of the motion picture industry. The expenditures made in the taxable year were very largely for business reasons. Of total expense of $1,271.85 proved, the sum of $1,076.64 claimed in petitioner’s return is a reasonable approximation and is allowed as business expense.

The petitioner owned two automobiles which he used partly for pleasure and partly in his professional work. In his tax return he claimed as business expense 50 percent of all automobile expense, or $615.02, itemized as to depreciation and upkeep. This sum has been reasonably substantiated and is an allowable deduction.

The petitioner claimed expenditures of $1,245.77 for telephone, telegraph, and cable services in his tax return, of which he allocated 50 percent to his business and profession. At the hearing he established total expenditures of $954.07 for such purposes, but claimed a greater proportion to be attributable to business. The variation in the estimates was not explained. We approve the original allocation. The sum of $477.03 has been supported and is an allowable deduction.

Decision will be entered under Rule 50.

         See. 52. Residence, rules for determining.

      Every person has, in law, a residence. In determining the place of residence the following rules are to be observed:
      1. It is the place where one remains when not called elsewhere for labor or other special or temporary purpose, and to which he returns in seasons of repose;
      2. There can only be one residence;
      3. A residence cannot be lost until another is gained;
      4. The residence of the father during his Ufe; and after his death the residence of the mother, while she remains unmarried, is the residence of the unmarried minor child;
      5. The residence of the husband is the residence of the wife;
      6. The residence of an unmarried minor who has a parent living cannot be changed by either his own act or that of his guardian;
      7. The residence can be changed only by the union of act and intent.


author: Smith : Mellott,

text:
    Morris Polin, Petitioner, v. Commissioner of Internal Revenue, Revenue, Respondent.
    Docket No. 87460.
    Promulgated May 23, 1939.

      George E. H. Goodner, Esq., for the petitioner.

      Rollin H. Transue, Esq., for the respondent.
   OPINION.

Smith :

In this proceeding the petitioner contends that the tenants in common sustained a loss in 1934 from the operation of the garage property of $8,066.64 and that petitioner is entitled to deduct from his gross income one-fourth of that amount, or $2,016.66. He further contends that he is entitled to deduct from gross income the full amount of his share of the loss upon the surrender of the property, which is admitted to be $38,440.21.

The respondent, on the other hand, contends that the tenants in common, making their returns upon a cash receipts and disbursements basis for 1934, had a profit from the operation of the garage property of $4,933.86, one-fourth of which, or $1,233.34, is includable in the petitioner’s gross income. He further contends that the tenants in common are not entitled to the benefit of any deduction whatever for the payment of the $13,000 to the Philadelphia Saving Fund Society in 1934, nor entitled to the deduction from gross income of any part of their capital investment in the garage property, upon the ground that the loss was not sustained in 1934.

We shall first consider the question as to whether the claimed loss upon the abandonment and surrender of the garage property in 1934 fell within the year 1934 or, as claimed by the respondent, in 1935. It is alleged in the petition and admitted in the answer that “Petitioner’s loss upon abandonment and surrender of the property” was $38,440.21. (This computation does not take into account any part of the $13,000 paid by the tenants in common to the Philadelphia Saving Fund Society.) How then can the respondent argue that the loss did not fall within the year 1934 when it is clear that the abandonment and surrender of the property, which he admits occasioned the loss, occurred within that year?

Entirely aside from the pleadings in this case, however, the Board is satisfied that the loss fell within the year 1934. Pursuant to the agreement of April 23, 1934, the tenants in common of the property surrendered possession thereof and all beneficial interest therein on or before May 1, 1934. The bondholder, the Philadelphia Saving Fund Society, agreed to foreclose the property at its own expense and in its own good time. The plain intent of the agreement is that the tenants in common were to divest themselves of all interest in the property on or before May 1,1934. They did this. All that they could hope to receive on and after May 1, 1934, was the cancellation of the bond. The loss was sustained by the tenants in common when they divested themselves of all their interest in the property and not when the foreclosure sale took place.

The next question for consideration is the determination of the amount' of the deductible loss. Independently of the admitted loss of $38,440.21 the petitioner contends that the tenants in common sustained a loss in 1934 of $8,066.64, computed as follows:

Gi-oss income (rents)_$0,610.86
Deductions:
Paid the Philadelphia Saving Fund Society_$13, 000. 00
Expenses- 669.97
Depreciation- 1, 007.53
--— 14,677.50
Loss- 8, 066. 64

The petitioner contends that one-fourth of this amount, or $2,016.66, constitutes an operating loss deductible from his gross income.

The respondent computes the results of operation as follows:

Gross income (rents)---$6,610.86
Deductions:
Expenses paid_ $669.97
Depreciation- 1, 007.53
- 1,677.50
Gain- 4, 933.36

The petitioner’s share of the gain is computed to be $1,233.34, which the respondent contends should be included in his gross income. The respondent does not concede that the $13,000 paid the Philadelphia Saving Fund Society pursuant to the agreement of April 23, 1934, is a deductible item.

We do not think it necessary to pass upon the question as to whether the $13,000 was an ordinary and necessary expense of operating the garage in 1934. Clearly these funds were assets of the tenants in common and were paid by them to the Philadelphia Saving Fund Society pursuant to the agreement of April 23, 1934. The entire transaction relating to the garage property was a transaction entered into for profit. Therefore, if the respondent’s contention that the petitioner is required to include in his gross income $1,233.34 from the operation of the garage is correct, he likewise is entitled to deduct from his gross income as a loss one-fourth of the $13,000 paid under the agreement of April 23, 1934, or $3,250. Whether the $13,000 be regarded as an ordinary and necessary expense of the operation of the garage under the principle of Kornhauser v. United States, 276 U. S. 145, or as a loss, the result is the same. In either event, the deduction, exclusive of the admitted loss of $38,440.21, is $2,016.66.

This brings us to the final question as to whether the petitioner is entitled to deduct from gross income the full amount of the admitted loss of $38,440.21 upon his investment in the garage property or whether his deduction is limited, under the capital net loss provisions of the statute, to only $2,000 of that amount.

Section 23 (e) of the Eevenue Act of 1934 provides that in computing net income individuals may deduct losses incurred during the taxable year. Subdivision (j) of the same section provides that losses from “sales or exchanges” of capital assets shall be allowed only to the extent provided in section 117 (d). That section provides in material part as follows: “Losses from sales or exchanges of capital assets shall be allowed only to the extent of $2,000 plus the gains from such sales or exchanges.”

There can be no question that the petitioner’s investment of $38,-440.21 in the mortgaged property was a capital asset within the meaning of the taxing statute. He had held his interest in the property for more than two years. The petitioner contends, however, that he did not “sell or exchange” his interest in the capital asset. We think that he did.

Many of the decisions of the Board and the courts bearing upon this point have been reviewed in James R. Stewart, 39 B. T. A. 87. In our opinion therein we said:

Had the purchaser surrendered his interest in the land or reconveyed it to the vendor in exchange for a cancellation of the debt, the transaction would have been regarded as a sale or exchange of capital assets. Betty Rogers, 37 B. T. A. 897; Harry Payne Bingham, 38 B. T. A. 913. * * *

Cf. White v. United States, 305 U. S. 281, and Helvering v. Chester N. Weaver Co., 305 U. S. 293.

There may be some question as to whether the transaction between the tenants in common and the Philadelphia Saving Fund Society under the agreement of April 23, 1934, was a “sale” within the meaning of the statute. See Commissioner v. Freihofer (C. C. A., 3d Cir.), 102 Fed. (2d) 787, affirming 37 B. T. A. 542. We are nevertheless of the opinion that the transaction constituted an exchange within the purview of the above cited cases. The tenants in common relinquished their rights in the garage property in return for specific benefits which were to accrue to them. In our opinion the limitation upon the deduction of capital losses contained in section 117 (d) of the Bevenue Act of 1934 applies.

In the determination of the deficiency the respondent allowed the petitioner a deduction of only one-fourth of the total loss of $2,000 upon the ground that the petitioner was a member of a partnership.

The evidence clearly shows, however, that the petitioner and his associates were not partners but were tenants in common of the garage property. The deduction of capital net losses is available to every taxpayer, other than a corporation, subject to the statutory limitations. (See sec. 117, Bevenue Act of 1934.) The maximum deduction of $2,000 on the loss from the sale or exchange of capital assets is available to every taxpayer in his individual income tax return. The petitioner here is entitled to the deduction of the full amount of $2,000 of his capital loss.

Beviewed by the Board.

Judgment will be entered wider Rule 50.

Mellott,

dissenting: The conclusion of the majority that the petitioner exchanged a capital asset and thereby sustained a capital loss seems to me to be erroneous.

The agreement set out in the majority opinion indicates that the owners of the property gave up (1) $13,000; (2) their cause of action against the mortgagee; (3) possession of the property; and (4) caused their tenants to release their cause of action against the mortgagee. They received (1) a release from liability for delinquent taxes; (2) a release from liability for all interest due on the bond which they had executed; and (3) conditional cancellation of the bond without personal liability for the payment of the principal.

The maj ority hold that a loss occurred in the year 1934. If this conclusion is correct, then I think it is an ordinary loss rather than one from a sale or exchange of a capital asset. It was sustained when the owners ascertained that the property not only was not worth the amount of the mortgage indebtedness but actually constituted a liability to them. Cf. DeLoss v. Blair, 28 Fed. (2d) 803; certiorari denied, 279 U. S. 840; United States v. White Dental Manufacturing Co., 274 U. S. 398.

The capital asset was the real property; but it was neither sold nor exchanged. The foreclosure proceeding cut off and extinguished the equity of redemption of the owners; but this did not occur until 1935. If the loss had been claimed in that year it would probably be allowable as an ordinary loss under the rationale of Commissioner v. Freihofer, 102 Fed. (2d) 787, affirming Sol Greisler, 37 B. T. A. 542; and C. Griffith Warfield, 38 B. T. A. 907. That question, however, is not before us.

I am of the opinion that the Commissioner correctly computed petitioner’s gain from the operation of the garage to be $1,233.34. The $13,000 paid to the mortgagee, however, was not an ordinary and necessary expense of carrying on a trade or business. It was paid as part of the consideration for canceling the bond. It, therefore, merely increased the owners’ loss on the property.

Black and Disney agree with this dissent.


author: Murdock:

text:
    Sidney Williamson Kirtland, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 88600, 88601.
    Promulgated May 23, 1939.

      Sidney W. Kirtland pro se.

      Arthur H. Fast, Esq., for the respondent.
   OPINION.

Murdock:

The Revenue Act of 1934 in section 25 (b) (1) allows a single person an exemption of $1,000, but allows “a head of a family” an exemption of $2,500. The term “head of a family” is not defined in the statute, but it is defined in article 25-4 of Regulations 86 as “an individual who actually supports and maintains in one household one or more individuals who are closely connected with him by blood relationship, relationship by marriage, or by adoption, and whose right to exercise family control and provide for these dependent individuals is based upon some moral or legal obligation.” This petitioner actually supported and maintained in one household his two minor children and his former wife. He had a right to provide for these dependent individuals which was based not only upon a moral but also upon a legal obligation. The only possible question that could be raised in regard to his claim to the exemption is whether he had a right to exercise family control. The decree of divorce gave the care, custody, and control of the children to the wife, but the evidence shows that the divorce proceeding was a friendly one in which the parties agreed to let the wife have custody of the children as the only practical solution. The evidence further shows as a matter of fact that the petitioner has exercised family control and his wife has recognized his right to do so. The regulations only require that the taxpayer have a right to exercise family control and they do not require that he have the exclusive right. The petitioner comes within the definition of a head of a family as set forth in the regulations. He was entitled to a personal exemption of $2,500 as provided in section 25 (b) (1). Cf. F. Hunt Lowry, 11 B. T. A. 409; Meier S. Block, 37 B. T. A. 945.

Decision will Toe entered under Rule 50.


text:
    Universal Winding Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87354.
    Promulgated May 23, 1939.

      W. Sidney Felton, Esq., for tbe petitioner.

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

Van Fossan:

The petitioner claimed credit for accrued taxes payable to the United Kingdom of Great Britain under section 131 of the Kevenue Act of 1932. The agreed amount of such taxes, if credit therefor is allowable, is $12,557.89.

The respondent has disallowed such credit and has based his action on the decision of the Board in Columbian Carbon Co., 25 B. T. A. 456. He determined that April 6, 1935, was the date of accrual under the British law. In his brief he relies also on G. C. M. 10613, C. B. XI-1, page 173, which applies the principle set forth in the Columbian Carbon Co. case to the Revenue Acts of 1924 and 1926.

In Columbian Carbon Co., supra, the Board had before it British taxes imposed by the British Income Tax Act, 1918, and attempted to be accrued by the petitioner in 1920.

After an exhaustive discussion of the question of accrual as laid down in United States v. Anderson, 269 U. S. 422, and as applied to the situation there before us, we held that not all of the events had occurred which fixed the amount of the tax and determined the liability of the taxpayer to pay it, specifically that the contingency that the taxpayer might not be in business on the first day of the assessment year, April 6, and, hence, liable to no tax, prevented accrual until that date. The principle that those discontinuing business prior to the year of assessment so escaped liability for tax had been established in the decisions of the House of Lords in Brown v. National Provident Institution, 2 Appeal Cases, 222; 8 Tax Cases 57, 100 (House of Lords, 1921); and Whelan v. Henning, Appeal Cases, 293 (House of Lords, 1926).

In the Columbiam, Carbon Co. case, after referring to these decisions and discussing their effect, we observed:

* * * However, the 1926 Finance Act did not change the rule that where the taxpayer discontinued business prior to the beginning of the year of assessment no liability to tax for such year was incurred.

The record in the Columbian Carbon Co. case refers only to section 22 of the British Finance Act, 1926, and does not indicate that sections 31.-(1) (a), 34.-(l) and 35.-(l) and (2) of that act were considered by the Board. Had those sections been called to the Board’s attention and their full import appreciated, the Board would not have volunteered the observation that the Finance Act, 1926, did not change the rule that where the taxpayer discontinued business prior to the year of assessment, no liability for tax for such year was incurred. This statement was clearly in error.

A careful reading and study of these various sections of the Finance Act, 1926, in view of the previous decisions of the House of Lords under the Income Tax Act, 1918, demonstrate that the Finance Act, 1926, accomplished the following changes in the British income tax law:

(1) It abolished the three-year average profit provision and substituted the full amount of profits or gains or income of the year preceding assessment.
(2) It made the taxpayer subject to tax even if be made no profit or had no gains during the year of assessment.
(3) If the taxpayer discontinued business, it rendered him liable for all income taxes chargeable to him whether his accounting period was concurrent with or different from the “year of assessment”, April 6 to April 5.

Our conclusions in the above respects are fully supported by the observations of the authors of “Income Tax Law, Practice and Administration”, by Sharles, Croom-Johnson, Graham-Dixon, and Eccott, a recognized authority on British income tax, in which we find the following pertinent references:

The Finance Act, 1926, was an exceedingly important one, inasmuch as it entirely altered the basis of assessment under Schedule D from the average profits of the preceding three years to the profits of the preceding year. [Vol. I, P. 4.]
Discontinued Businesses. For the year in which the business is discontinued, the assessment is based on the actual profits, from the 6th of April of that year to the date of discontinuance * * *. [Id., p. 8.]
Basis of Assessment. Profits, adjusted according to the Rules, of the year preceding the year of assessment * * *. [Id., p. 8.]
Profits of Trade. * * * the assessment is based on the profits of the accounting year which ends in the calendar year immediately preceding the' year of assessment * * *. [Id., p. 10.]
It is provided that where income tax is computed on profits [other than those in the regular Schedules] of a previous period it is to be charged though there are no profits in the year of assessment. [Id., p. 133.]
Under the Income Tax Act, 1918, before the amendments of F. A., 1926, a person might have been assessed, say, in 1924 on the average of the profits of 1921, 1922, and 1923 at £2000. But 1924 itself might have been a bumper year, producing £10,000, and it might have paid him to retire on fifth April, 3925, because the £10,000 had not come into the average. Now under the Act of 1926 he has to pay on the last penny that he makes. [Id., p. 136.]

The respondent admits that the case of Wesley v. Manson, Appeal Cases, 635 (House of Lords, 1982), is “persuasive that a taxpayer does not avoid tax liability by ceasing to engage in a business if the end of its fiscal year be prior to the British Government’s next assessment year.”

In that case the taxpayer, who had sold his business July 2, 1928, argued that the tax on his profits and gains for the year ended April 5, 1928, should be computed on his accounts for his fiscal year ended June 30, 1921, while the Crown contended that the actual profits for that year were based on his profits for his fiscal year ended June 30, 1928, properly apportioned by section 35.

The court upheld the contention of the Crown. The result of the decision was to make the taxpayer subject to a tax on all his profits up to the time of the sale of his business.

Applying these conclusions to the case at bar, we find that all the events which fixed the amount of the tax and determined the liability of the taxpayer to pay it had occurred on June 80, 1934, and taxes accrued on that date.

It follows that the credit of $12,557.89 is allowable to the petitioner under the provisions of section 131.

Decision will be entered wider Bule 50.

       SEC. 131. TAXES OP FOREIGN COUNTRIES AND POSSESSIONS OF UNITED STATES.
      (a) Allowance of Credit. — If the taxpayer signifies in his return his desire to have the benefits of this section, the tax imposed by this title shall be credited with:
      (1) Citizen and Domestic Corporation. — In the case of a citizen of the united States and of a domestic corporation, the amount of any income, war-profits, and excess-profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the united States; and
      * *
      (b) Limit on Credit. — The amount of the credit taken under this section shall be subject to each of the following limitations :
      (1) The amount of the credit in respect of the tax paid or accrued to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer’s net income from sources within such country bears to his entire net income for the same taxable year; and
      (2) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer’s net income from sources without the united States bears to his entire net income for the same taxable year.
      * * * * ¥ * *
      (d) Year in Which Credit Taken. — The credits provided for in this section may, at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year in which the taxes of the foreign country or the possession of the united States accrued, subject, however, to the conditions prescribed in subsection (c) of this section. If the taxpayer elects to take such credits in the year in which the taxes of the foreign country or the possession of the united States accrued, the credits for all subsequent years shall be taken upon the same basis, and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year.


author: Disney:

text:
    Millicent Turle Roelker, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81230.
    Promulgated May 24, 1939.

      Alfred Roelker, Esq., for tbe petitioner.

      D. D. Smith, Esq., and L. H. Bushbrook, Esq., for the respondent.
   OPINION.

Disney:

In his determination of the deficiency the respondent found that the petitioner exchanged 3,090 shares of stock, consisting of two blocks of 1,545 shares each, acquired at different times, for 1,946.7 shares of stock in the same corporation of the value of $42,-340.73, or $21.75 per share, and a cash dividend of $8 per share on 3,090 shares, a total of $24,720, pursuant to a plan of reorganization under section 112 (c) (1) of the Revenue Act of 1928. He allocated one-half of the value of the stock and cash received to each block of stock, and determining that petitioner had a basis of $14,420 for the first block and of $41,200 for the second block, determined that petitioner realized capital gain of $19,110.37 (limited to cash of $12,360 received) on the first block acquired and a capital loss of $7,669.63 on the second block. Of the capital taxable gain of $12,360 on the first block of stock the respondent determined that $3,285.44, or $2.1265 per share on 1,545 shares, was taxable as a dividend under the provisions of section 112 (c). The loss was not recognized because of the provisions of section 112 (e).

The petitioner argues that she received a return of capital in a partial liquidation of the Bank under section 115 (h) , in an amount less than her investment, thereby merely reducing the basis for her stock under section 115 (c). She regards her stock as having a single basis of $55,620. She also contends that the stock received had a fair market value of $17.50 per share and that no part of the cash received is taxable as a dividend.

The petitioner admits that there was a merger of Straus and the Bank within the meaning of section 112 (i) (1) (A) but expresses a doubt whether the acquisition by the Bank of the business of the International Trust Co. also resulted in a reorganization under the same provisions of the statute. We hold that International participated in a reorganization. There is nothing of record that the Bank did not acquire substantially all the properties of the International Trust Co. In each case the transferor acquired a definite and substantial interest in the transferee. Such transactions are within subdivision (A). Helvering v. Minnesota Tea Co., 296 U. S. 378; Nelson Co. v. Helvering, 296 U. S. 374. The reduction of the capital stock in the Bank was a recapitalization under section 112 (i) (1) (C). R. D. Walker, 34 B. T. A. 983; H. Y. McCord, 31 B. T. A. 342.

Petitioner argues, however, that reorganization does not affect her position, for the reason that she exchanged nothing in connection therewith; that she received cash in partial liquidation of the Bank and new stock certificates in conformity with the reduction in capital stock merely in lieu of the older certificates to represent the part of her stock not canceled by the reduction in capital stock and liquidation, which she contends was effective prior to and separate from the reorganization.

We have examined with care the facts involved. They do in some ways bear out petitioner’s theory; but in many others they contradict it. The facts are not consistent with each other. The evidence is contradictory as to the effective date of the liquidation, as to whether it was prior to merger or coincidental therewith. The merger agreement between the Bank and Straus provides that the assets to be distributed to stockholders shall be transferred to the distributing agent as of the effective date of the merger, which is specifically stated to be the close of business on September 15, 1931, and that the assets distributed shall be valued as of the effective date of the merger. Yet, the circular letter accompanying the notice to stockholders sent out August 8, 1931, states that the capital structure of the Bank will be altered prior to the effective date of the merger, while the contract between the Bank, Straus, and Continental Corporation provides for reduction of capital of the Continental Corporation prior to the effective date of the merger, and that after such change of capitalization of Continental becomes effective all its assets shall be sold to the distributing agent. This sale was, in fact, made on September 15, 1931. The change in capitalization of the Bank (and Continental Corporation owned by the Bank’s stockholders) took place prior to September 15,1931, being voted August 31, and the certificate being executed August 31, approved by the Superintendent of Banks September 11, received in Albany, New York, September 13, and recorded in the office of the County Clerk in New York on September 15. The transfer of assets to the distributing agent was made on September 15, before the completion of the merger. Petitioner relies heavily upon these facts to demonstrate liquidation prior to and separate from the merger.

After reviewing in detail all of the intricate facts involved, we come to the conclusion, not wholly without hesitation, that petitioner has not shown such priority and separation of liquidation from merger. True, the reduction of capital stock of the Bank and its associate, Continental Corporation, was prior to merger, in the sense that the reduction was voted, certified, and recorded prior thereto. Yet, it has not been demonstrated that such reduction became, in. fact, effective prior to actual exchange of stock in accordance with the reduction. We understand the actual decrease to be effected by the actual transfer in, and out, of stock under the New York statute under which the reduction here took place. Op. Atty. Gen. (1896) 64. Even if the reduction in capital stock were effective prior to merger, this would not answer our question, which is, of course, whether the liquidation is no essential part of the merger. It must be an essential part thereof, and not merely connected in some way therewith, in order to have the effect for which respondent here contends, under section 112 (c) (1) of the Revenue Act of 1928. Liquidating Co., 38 B. T. A. 1173; General Motors Corporation, 35 B. T. A. 523, 525; Walter B. Lashar, 34 B. T. A. 768, 777; Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U. S. 462.

Review of the complicated facts here involved leads ns to believe that the liquidation was such essential element of the reorganization. It is true that the contracts do not in express terms make the merger conditional or contingent upon liquidation, and it is plain that the participants intended to so reduce the capital of the Bank as to put only a portion of its assets into the merger. Yet, it is obvious that the liquidation enters intimately into the plan. In the first place, the resolution of the board of directors of the Bank on July 31, 1931, recommended, “as a part of the! program contemplated by said agreement” (with Straus and International) that the capital be decreased to 352,000 shares and then increased to 400,000 shares. Again, the notice to stockholders, the accompanying explanatory letter, and the action taken at the stockholders’ meeting on August 31,1931, recite the liquidation as only one item of several, i. e., the contracts, the proposed merger, reduction and increase of capital stock, sale of new stock to Straus and International, and purchase of assets of the Continental Corporation for $4,000,000. These matters, proposed in the same notice, discussed in the same letter, voted on in the same meeting, and all therein adopted by the same number of votes, can not easily be separated, but appear as parts of a single plan, of reorganization. Indeed, the circular letter, after extensive recitation of the above matters, recites “to carry out this plan * * *” and “upon completion of this plan * * The agreement between the Bank, Straus, and the Continental Corporation provides for sale of all assets of the Continental Corporation to “the Distributing Agent appointed by the Trust Company [in this opinion referred to as the Bank] pursuant to the provisions of said merger agreement.” The “Merger Agreement” between the Bank and Straus states that “the terms and conditions of said merger and the mode of carrying the same into effect shall be as follows” — then recites same under numbered paragraphs and in paragraph “Third” recites the provision for distribution by the distributing agent to the stockholders of the Bank of all its assets in excess of those of a value as of the effective date of the merger, equivalent to liabilities other than capital, surplus, undivided profits, and reserves, plus $9,500,000. Thus specifically paragraphed and numbered as one of the “terms and conditions of said merger and the mode of carrying same into effect”, the distribution in liquidation can not be said to be no essential part of the merger.

Moreover, it is to be noted that the distributing agent acted not merely in distributing assets in partial liquidation to stockholders, but he received assets of much greater value than those distributed, and used such assets in dealing with the Continental Corporation. He received assets of $7,841,091.57, including cash of $4,016,482.52. There was paid to the Continental Corporation $4,000,000 for assets belonging to it. He sold certain assets to the Continental Corporation for $4,000,000. He paid $8 per share to holders of 558,700 shares of stock in the Bank, or $4,469,600. Since the stockholders were to receive only about $1.40 per share in addition, or about $782,180, or a total of $5,251,780, it is obvious that the distributing agent, receiving $7,841,091.57, received large assets for disposition other than to the old stockholders of the Bank, and in connection with the merger. In addition, the circular letter accompanying the notice to stockholders not only refers to “the plan contemplated” (referring obviously to the merger already therein recited), but states that “On completion of the plan contemplated, each present stockholder of the Continental Bank will for each share of stock now owned by him receive 63/100ths of a share of stock in the continuing bank together with a beneficial ownership of 63/100ths of a share of stock of the Continental Corporation, and $8.00 in cash upon the completion of the merger and, subject to liquidation of the remaining assets, approximately an additional $1.40 in cash at a later date.” Petitioner received in stock 1,946.7 shares, which is 63/100ths of her former 3,090 shares — and the $24,720 is $8 per share on the 3,090 former shares — as stated on the checks received by her. The cash and stock were to be received and were received “on completion of the plan contemplated.” We think it could have been denied to the stockholders until completion of the merger, and that under all the circumstances, the old stock was exchanged for new stock in the Bank, certificates of beneficial ownership of new stock in the Continental Corporation, and money, under section 112 (c) (1) of the Revenue Act of 1928.

The decrease in capital stock and partial liquidation of the assets of the Bank, though plainly intended as such partial liquidation and duly effected, can not, in our opinion, in the face of all of the facts above recited, be viewed as an integer so separate from the reorganization as not to be considered therewith for the purposes of the revenue act. We have considered Kelly v. Commissioner, 97 Fed. (2d) 915, but find that, though the question of liquidation entered therein, that of application to a concurrent and closely connected admitted reorganization did not. It therefore is not of material assistance here. United States v. Rodgers, 102 Fed. (2d) 335, does involve the question of reorganization, but the element attempted to be considered as a part thereof was a sale of stock, not a distribution in liquidation as here. Though the court does not neglect the question of whether there was one transaction, or two, involved (as herein), the decision is based in the main upon the fact that in a literal sense a sale was, in terms, made and that the statute, section 203 (b) (1) (4) of the Act of 1926, refers to an “exchange” of stock, and not to sale. Also, the court finds that the sale was “divided sharply” from the other transactions. This sharp division we can not find herein. The case, therefore, is not deemed determinative here. We believe, rather, that the liquidation is an essential part of the whole plan of reorganization within the thought and scope of Helvering v. Elkhorn Coal Co., 95 Fed. (2d) 732; Helvering v. Minnesota Tea Co., 89 Fed. (2d) 711; Starr v. Commissioner, 82 Fed. (2d) 964; Thurber v. Commissioner, 84 Fed. (2d) 815; Ahles Realty Corporation v. Commissioner, 71 Fed. (2d) 150; West Texas Refining & Development Co. v. Commissioner, 68 Fed. (2d) 77.

We conclude and hold, therefore, that petitioner’s stock was exchanged for stock and money in pursuance of the plan of reorganization, within the purview of section 112 (c) (1) of the Revenue Act of 1928.

On the question of the amount of taxable income realized, the parties disagree on three points — first, the fair market value of the new stock; second, whether, as the respondent contends, we should allocate the fair market value of the stock and cash received in the exchange equally to two blocks of stock, each with a separate basis, or, as the petitioner contends, compute the profit on the basis of an exchange of a single block of stock acquired in 1929; and, third, whether any part of the cash received is taxable as a dividend.

The Bank’s stock was an unlisted security. The respondent’s value of $21.75 per share is the mean of the bid and asked prices for the stock on September 15,1931, listed in the Wall Street Journal as counter market quotations, but such prices were quotations upon the old stock, there being no quoted price for the new stock prior to September 21, 1931. We are not concerned with the value of the old stock at any time. On September 21, 1931, the same publication shows the prices of the new stock to be 16% bid, 18% asked, a mean of $17.50. From this evidence we find that the stock had a fair market value at the time received by the petitioner of $17.50 per share.

As to the second point the petitioner contends that the exchange in 1929 of stock issued in the name of the Continental Bank of New York for stock in the name of the Continental Bank & Trust Co. of New York, share for share, resulted in the receipt of stock in a new corporation in a nontaxable reorganization and that the stock so received does not represent property acquired at different times at different prices. The respondent argues that the Continental Bank of Ne-w York merely changed its name, and consequently petitioner received nothing more for her old stock than a like number of shares issued in the new name of the corporation. We agree with the respondent.

The Bank was organized and operated as a bank until 1929, when it followed the procedure set out in section 138 of the Banking Law of New York, as amended by chapter 10 of the 1923 Laws, to become a trust company. It does not appear that section 138 has ever been interpreted by the courts. It provides that when the trust company comes into existence all property and rights of the bank:

* * * shall immediately by act of law and without any conveyance or transfer, and without any further act or deed, be vested in and become the property of such trust company, which shall have, hold, and enjoy the same in its own right as fully and to the same extent as the same was possessed, held and enjoyed by said bank; and such trust company shall be deemed to be a continuance of the entity and of the identity of said bank operated under and pursuant to the laws of this State, and all the rights, obligations and relations of said bank to or in respect of any person, estate, creditor, depositor, trustee or beneficiary of any trust and in or in respect to any executorship or trusteeship or other trustee or fiduciary function, shall remain unimpuaired, and such trust company as of said beginning of its corporate existence shall by operation of this section succeed to all such rights, obligations, relations and trusts, and the duties and liabilities connected therewith, and shall exe-ecute and perform each and every such trust or relation in the same manner as if said trust company had itself assumed the trust or relation, including the obligations and liabilities connected therewith.

Other statutes of the State of New York provide for merger of trust companies and they have been construed to mean that a merged corporation does not continue to exist as a part of the merging corporation but remains a corporation with the sole power of being sued and defending causes of action alleged to exist against it a,t the time of the merger. In re Bergdorf's Will, 206 N. Y. 309; 99 N. E. 714; In re Wolbertf's Estate, 144 Misc. 328; 259 N. Y. S. 127. However, the statute relating to mergers does not apply when a bank is transformed into a trust company, that situation plainly being covered by section 138.

Federal statutes provide that when a state banking institution is merged with a national bank “ * * * the corporate existence of each of the constituent banks and national banking associations participating in such consolidation shall be merged into and continue in the consolidated national banking association and the consolidated association shall be deemed to be the same corporation as each of the constituent institutions”, but that “No such consolidation shall be in contravention of the law of the State under which such bank is incorporated.” Sec. 34-a, title 12, U. S. Code Annotated. The law has been construed to mean that in the absence of a state statute to the contrary, “the corporate identity of the merged state institution is not lost, but continues, in spite of the fact that it gives up one charter and takes another * * Adams v. Atlantic National Bank of Jacksonville, 155 So. 648. To the same effect are Midhigan Insurance Bank v. Eldred, 143 U. S. 293; Metropolitan National Bank v. Olagett, 141 U. S. 520; Poisson v. Williams, 15 Fed. (2d) 582.

In Citizens Trust Co., 20 B. T. A. 392, we held that upon the merger of two trust companies under the laws of New York, the corporate existence of the merged institution is not extinguished to the extent of acquiring a right to deduct organization expenses as a loss.

The transformation of the Bank into a trust company did not involve the acquisition of new assets, alteration of capital structure, or new stockholders. The effect of change was merely an alteration of powers with no loss of assets or increase of liabilities. To hold that a corporation separate and distinct from the banking institution came into existence would require us to ignore the plain statutory declaration that when a banking institution changes into a trust company the former’s entity and identity shall continue. No rule called to our attention or within our knowledge compels such a conclusion. Accordingly we hold that the certificates which the petitioner received in 1929 in the name of the Continental Bank & Trust Go. for stock issued in the name of the Continental Bank of New York, share for share, were not for stock of a different corporation. One-half of the reissued certificates continued to have a basis of $14,420 and the other half a basis of $41,200. Solomon B. Kraus, 33 B. T. A. 1088; affd., 88 Fed. (2d) 616; Christian W. Von Gunten, 28 B. T. A. 702; affd., 76 Fed. (2d) 670; Jacob Epstein, 36 B. T. A. 109.

As to the third point, whether cash received was taxable as dividend: Bespondent regards petitioner as receiving for her old stock, new stock and certain cash, which cash, to the extent that it was paid from earnings since February 28, 1913, he treats as taxable as a dividend. We have above concluded that stock and cash were in fact received ratably for the old stock pursuant to a plan of reorganization. Therefore, to any extent that the cash was paid from earnings accumulated since February 28, 1913, the cash received by petitioner should be taxed as dividend. The burden is upon the petitioner to demonstrate that it was not so paid, the respondent having determined it to be taxable as dividend. The petitioner admits that there were earnings since February 28,1913, in the amount of $1,343,-697.43. This amount is more than sufficient to cover the amount considered by the Commissioner as taxable, since he calculates a taxable dividend of $2.1265 per share, 558,700 shares participated, and the amount involved would therefore be $1,188,075.55.

Has petitioner demonstrated that this amount of earnings was not distributed ? That amount, and in excess of that amount, in fact, was distributed. Was it distributed from the earnings since February 28, 1913? To demonstrate that it was not, petitioner contends only that the earnings were dissipated by a loss taken by the distributing agent of $1,668,313.50 by canceling 41,300 shares of Bank stock at about $40 per share, and a further loss of $925,790.40 incurred in the distributing agent’s purchase from Continental, for $4,000,000, of net assets worth only $3,074,209.60 (assets received $4,479,191.98, less liabilities assumed $1,404,982.38). If these alleged losses are to be deducted from the earnings since February 28, 1913, none were left for a distribution taxable as dividend, and the distribution actually made to the stockholders, including petitioner, was from other funds, that is, from capital and paid-in surplus, since the evidence shows that the distributing agent received only the three items, capital, paid-in surplus, and earned surplus. We think petitioner has not demonstrated that the two losses contended for by her were from earned surplus. The cancellation of the stock on the effective date of the merger had been directed by the stockholders of the Bank by resolution on August 31, 1931, and the distributing agent therefore appears, in canceling the stock, merely to have acted as the agent of the bank for that particular purpose, and not in his capacity as distributor. In canceling the stock, he distributed nothing. The mere cancellation of the stock resulted in no loss to him as distributor. In any event, to the extent of its par value, $413,000, any such loss would be charged to capital and not earned surplus. The stockholders of the Bank had voted to make a contribution of $4,000,000 to Continental. At the meeting of the board of directors of the Bank on July 31, 1931, the president had explained that the capital structure of the Continental would be altered by reduction to 352,000 shares and that a surplus of $2,500,000 was to be provided for Continental. The loss taken by the Bank in the purchase and cancellation of the stock was gain, in the same amount, to Continental, and in that way was a contribution by the Bank to Continental, plainly in accord with the intent to alter the capital structure of Continental, as well as the Bank. Capital, paid-in surplus, and earned surplus, of the Bank in a total sum of $7,841,091.57, were available for that purpose and the other purpose, i. e., distribution. There is no presumption that the earned surplus was dissipated in making the contribution to Continental, and, in the light of the intent to change capital structure and at the same time to make a distribution, it appears more reasonable to believe that the contribution was from capital or paid-in surplus, rather than an invasion of the earned surplus funds necessary to make the distribution. At any rate, respondent’s treatment amounts to a determination that the distribution was from earned surplus, and we think petitioner has failed to show otherwise as to the cancellation of stock.

The same considerations apply to the loss taken in the transfer of assets of Continental valued at $8,074,209.60 for $4,000,000. This was gain to Continental, a part of the contribution by the Bank to it, with nothing to show that earned surplus instead of paid-in surplus or capital should be charged with the loss. These matters were represented by bookkeeping entries on, or as of, September 15, 1981. No actual payment from earned surplus, by check or otherwise, is shown. Though $4,000,000 was the consideration to Continental for assets of only $3,074,209.60, on the same day $4,000,000 is the consideration from Continental for the stock of the 30 Broad Street Corporation.

Moreover, the figure as to earned surplus, considered by petitioner, and admitted by her as received by the distributing agent in the amount of $1,343,697.43, is based upon the balance in the Bank’s earned surplus account as of September 15, 1931, with necessary adjustments for earnings prior to March 1, 1913, transfers from the account to capital and paid-in surplus, and contributions by stockholders to earned surplus. The book entry is evidential of the Bank’s earnings, but not conclusive. Doyle v. Mitchell Brothers Co., 247 U. S. 179. We recently held that, under the circumstances prevailing in the proceeding, book figures submitted as evidence of lack of worthlessness of stock were sufficient to shift the burden of proof. B. F. Edwards, 39 B. T. A. 735. Here the respondent has made a determination that upon the completion of the transaction with the Continental Corporation and the cancellation of 41,300 shares of Bank stock, the distributing agent had in his possession, and actually distributed to the Bank’s stockholders, earnings since February 28, 1913, in the amount of $1,188,075.55. This finding of the respondent is presumed to be correct. Nothing appears of record that the respondent did not take the dealings of the distributing agent in liquidating assets into consideration in arriving at his result. The figure submitted by the petitioner as correct contains an upward adjustment of earned surplus for appreciation of $109,215.11 in the value of certain assets transferred to the distributing agent. This adjustment, contrary to the prevailing rule in such matters, Elton Hoyt, 2nd, 34 B. T. A. 1011, casts considerable doubt upon whether the balance in the account, which we are asked by the petitioner to accept as correct, reflects the true earnings of the Bank since February 28. 1913. For instance, as the Bank regarded unrealized appreciation in the value of amounts as requiring a write-up in earned surplus, the account may, if the theory was consistently carried out, contain adjustments for depreciation in value of assets during prior years. For aught we know, the account may reflect changes computed on other than cost. See Loren D. Sale, 35 B. T. A. 938. We therefore think the book figure as to earned surplus is not sufficient basis for petitioner’s contention.

From the record made, we find no error in respondent’s determination that of the amount received by petitioner $3,285.44 is taxable as a dividend.

Petitioner also contends that she had no income because she immediately used same to discharge a purchase-money lien given for the price of the stock involved. Such contention is denied as obvious error.

Reviewed by the Board.

Decision will be entered wider Bule 50.

       (h) Definition of partial liquidation. — As used In this section the term “amounts distributed in partial liquidation” means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.