text:
    Amy H. DuPuy, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75907.
    Promulgated July 18, 1935.

      Miles H. England, Esq., for tbe petitioner.

      E. A. Ton jes, Esq., for the respondent.
   OPINION.

Smith :

The respondent has determined a deficiency in petitioner’s income tax for 1931 in the amount of $8,693.52. So much of the deficiency as is here in dispute results from the respondent’s action, in adding to the petitioner’s income the gains realized upon the, sale .of certain securities belonging to the residuary estate of the petitioner’s deceased husband, Herbert DuPuy, in which the petitioner was bequeathed a life estate.

The petitioner’s husband, Herbert DuPuy, died testate on January 10, 1930. After making numerous specific bequests, the decedent provided in article 13 of his will that:

All the residue and remainder of my estate and property, real and personal, I dispose of as follows,—
(A) If my wife, Amt H. DuPuy, shall survive me, I devise and bequeath the said property to her, for and during the term of her life, and she shall receive and retain, as her absolute property, the rents, issues, income and profits thereof accruing during her life. I hereby authorize and empower my said wife during her life to retain any and all of my investments or property, real and personal, which may come into her possession,' under this Article of my will, or in her discretion, from time to time, to sell, absolutely and in fee simple or for any less estate (at public or private sales to such person or persons, for such price and upon such terms as she shall deem proper) convey and convert all or any part thereof, and from time to time, in like manner, to invest, sell, convey and reinvest the said property in such real estate, stocks, bonds, notes, mortgages or other securities as she shall deem to be safe and wise investments, r>he shall' not' be required to convert all or any part of said property into legal investments for trustees, or to invest any of the proceeds received from the sale or other disposition thereof, in legal investments for trustees. No purchaser of any property from my said wife shall be under any responsibility or liability for the application of the purchase money. In holding or managing any real estate, which may at any time form a part of the property to be held by my wife during her life, as aforesaid, I authorize and empower my said wife, from time to time, not only to lease the same in such manner, for such time, upon such terms and at such rental as she shall deem proper, but also to improve all or any part of such real estate by the erection of buildings or other improvements thereon or otherwise, and to repair, alter or remove the same as she shall deem proper and make all such expenditures in connection therewith as she may deem advisable, all such expenditures to be made from the principal of the funds or property in the possession of my wife as legatee or devisee for life under this will. My wife shall not be required to give any security as legatee or devisee for life, under this will.

Article 16 of the will provides in part that:

I hereby appoint my wife, Amt H. DuPuy, and the Peoples-Pittsburgh Tbust Company, of Pittsburgh, Pennsylvania, jointly as executors of this will. * * *
I hereby authorize and empower my executors or executor, who may be acting as aforesaid, to sell at public or private sales all or any part of my real or personal estate (except that specifically devised or bequeathed) to such person or persons, for such price and upon such terms as they shall deem proper, and to transfer and convey the property thus sold without any liability of the purchasers for the application of the purchase-money.

During the taxable year 1931 certain securities belonging to the decedent’s residuary estate, consisting of 16^ shares of stock of the Klondike Supply Co. and miscellaneous bonds, were sold at a profit of $12,235.38. The profit on the sale of the shares of stock, which occurred in complete liquidation of the company, was $10,293.50 and on the bonds $1,941.88, these amounts representing the difference between the selling price of the securities and their value at the date of death of the testator. In computing the deficiency herein the respondent has increased the petitioner’s net income by the amount of $50,051.86, including the profits on the sale of the above described securities computed at $26,221.15. The parties have stipulated in this proceeding that except for the item of $26,221.15 the computation as shown in the deficiency notice is correct and have further stipulated that the correct amount of the profit on the sale of the securities in question is $12,235.38 instead of $26,221.15.

It is further stipulated that:

The sum of $12,235.38, gains realized on sales of securities, has been treated by Peoples-Pittsburgh Trust Company, Pittsburgh, Pennsylvania, the agent for the petitioner, as a corpus or capital gain of the trust estate in which Mrs, Amy H. DuPuy has a life interest and has not in fact been distributed or paid to Mrs. Amy H. DuPuy.

It is further stipulated, subject to its materiality, that of the $10,293.50 gain realized on the final liquidation of the Klondike Supply Co. only $6,997.84 represents undistributed earnings on the 16i/2 shares of stock owned by the decedent’s estate accruing or earned from the date of the decedent’s death, January 10, 1930, to the date of the liquidation of the company on September 30, 1931.

The petitioner’s rights in the residuary estate as well as her tax liability in respect of the income from the estate must, of course, be determined by construction of the will in accordance with the testator’s intent and the laws of the Commonwealth of Pennsylvania. The wording of the will is that the petitioner “ shall receive and retain, as her absolute property, the rents, issues, income and profits thereof accruing during her life.” What part of the gains derived from the sale of the bonds and the shares of stock over and above their value at the date of death of the testator constitutes “ income and profits ” distributable to the petitioner ?

It is the petitioner’s contention that the amounts of $1,941.88, representing the gain on the sales of bonds, and $3,295.66, which is the amount of gain realized on the liquidation of Klondike Supply Co. due to appreciation in value of the shares of stock and not undistributed earnings accrued or earned after the decedent’s death, are not taxable income to the petitioner “ for the reason that these gains are accretions to the principal of the trust estate and therefore belong to the remaindermen named in Mr. DuPuy’s will.” The petitioner concedes in her brief that $6,997.84 of the $10,293.50 gains realized on the liquidation of the Klondike Supply Co., representing the undistributed earnings since the date of the testator’s death attributable to the 16y2 shares of stock owned by the estate, is taxable to her under authority of In re Nirdlinger’s Estate, 290 Pa. 457; 139 Atl. 200, decided June 25, 1927. The Supreme Court of Pennsylvania held in that case, making an extensive review of its prior decisions, that where shares of corporate stock held in trust under the testator’s will were sold for a price greater than their value at the time of the testator’s death, the increase in value being due in part to the accumulation of earnings and in part to the enhancement of original value, such part of the gain on the sale as represented the accumulated earnings since the testator’s death belonged to the life tenant, who was entitled to receive the “rents, issues, income, dividends and revenue” of the trust estate for life, and that the gain attributable to the enhancement of value belonged to the remaindermen. The court in its opinion said:

Under the Pennsylvania or American rule adopted in most American jurisdictions, the rights of the life tenant and the remainderman to an extraordinary cash or stock dividend declared during the life tenancy are determined by a division of the dividend between the claimants so as to preserve intact the book value of the devised property (the corpus) as it existed at testator’s death. This was made clear by the decision in Earp's Appeal, 28 Pa. 368, long recognized as a leading authority. The effect of the rule is to give to the life tenant the income which has been earned since the trust came into being, but, at the same time, to preserve the value of the corpus as it was at the date of the death of the testator, or, to use a more convenient term, to preserve the intact value of the estate. This intact value includes the par value of the stock, plus any accumulation of income earned before the death of the testator. Earp’s Appeal, supra. From it must be subtracted capital losses. Dickinson's Estate, 285 Pa. 449, 132 A. 352. * * *
* * “ * * * * *
* * * In McKeown’s Estate, 263 Pa. 78, 106 A. 189, one phase of accumulated earnings presented itself when the stock of one company was sold by its shareholders to another concern. What actually happened was a sale of stock by the trustee, but we treated it as a distribution by a corporation in the course ox-liquidation. A part of the proceeds was accumulated earnings; we held it should be distributed as though the company had in fact declared a dividend, and hence was payable to the life tenant, the intact value being unimpaired. The facts in that case, important to the instant case, were substantially as follows: Four thousand shares of stock of the Pure Oil Company, at the death of testator, had an intact value of $12.22 a share. It was sold for $24.50 a share to an Ohio company, which acquired all Pure Oil stock. The book value at this time was $15.18, the difference, $2.96, being due to accumulation of earnings. The difference between the selling price and the then book value, $9.32, represented the inherent, intrinsic, or super value of the stock over and above its then book value, and was awarded, without objection, to the corpus of the estate. The life tenant claimed the accumulated profits, or $2.96 per share. The court below refused to allow the claim and was reversed by this court in an opinion by Mr. Justice Simpson.
* * * We will not detail the reasoning on which we reached the conclusion that accumulated earnings, not declared by dividends, but realized on a sale, belong to the life tenant, but will state the four primary rules evolved by Mr. Justice Simpson from the decided cases:
“ * * * (4) When a corporation is liquidated, those entitled to the income of the trust are to be awarded so much of the sums received for the stock as they show was income accruing after their right to income began, and the balance goes to the principal; and this is so although the course pursued takes the form of a sale of the stock.”
*******
In conclusion, we may summarize what has been said above. * * * Fourth, where the trustee sells stock and the sale in substance effects a distribution, as in the case of liquidation of the company, the court will disregard the form and treat the sale as a distribution. McKeown’s Estate, supra. * * * Sixth, where the trustee sells stock and receives a price greater than the value of the stock at the time of the death of the testator, or at the time it was acquired, the supervalue being due to the enhancement or increment of original value through the stock’s earning power, or what may be termed its “ good will ” or its intrinsic value, this increased value is part of the corpus and belongs to the remainderman. * * *

We will first inquire whether in the instant proceeding there was a trust such as existed in Nirdlinger’s Estate, supra, and whether the petitioner held the testator’s residuary estate as trustee for the re-maindermen. The testator in his will made no provision for such a trust. He did create a specific trust in respect of other properties of his estate, but not in respect of his residuary estate as to which the will provides: “ I devise and bequeath * * * to her [the petitioner], for and during the term of her life, and she shall receive and retain, as her absolute property, the rents, issues, income and profits thereof accruing during her life.”

In In re Kirkpatrick's Estate, 284 Pa. 583; 131 Atl. 361, decided November 23, 1925, the testator bequeathed the residue of his estate to his wife—

* * * for and during the term of her natural life, or so long as she remains my widow, she to have full possession, control over, and management of the principal of'all my personal estate, and to manage and invest same in whatever manner she may deem proper, and shall not be required to give any security therefor, to my hereinafter named executors,

with the remainder over to his children. The court held that the widow was a debtor to remaindermen in the amount originally received, and not a trustee, and that, as respects liability for inheritance tax, the increase of testator’s estate descended to the children from the widow and not from the testator. In its opinion the court said:

The Act of May 17, 1871 (P. L. 269), provides that where personal property is given to one for life with remainder over, the life tenant may take possession thereof on giving security. We held in Reiff’s Appeal, 124 Pa. 145, 16 A. 636, that one, under such circumstances giving security under a similar act, became simply a debtor to the remaindermen for the appraised value, the latter’s claim being payable out of the life tenant’s estate or by his sureties. Letterle’s Estate, 248 Pa. 95, 93 A. 935, is to the same effect; the life tenant was a debtor, not a trustee, and had to pay • over to the remaindermen only the amount originally received. * * *
Where the testator directs that no security be given, the legal relations between life tenant and remaindermen must be the same as if a bond had been given under the act of 1871. Prior to that act, section 49 of the Act of February 24, 1834 (P. L. 70, 83), controlled; the wording is substantially the same as in the act of 1871. Under the earlier statutes we held the life tenant was not a trustee within the Act of June 16, 1836 (P. L. 784), Mackinson v. Mackinson, 2 Grant, Cas. 286. And under the act of 1871, further bearing on the nonexistence of a trust estate, we held that no fiduciary relation existed to prevent the life tenant from becoming a purchaser of testator’s property. (Fidelity Ins. Trust & Safe Deposit Co. v. Dietz, 132 Pa. 36, 18 A. 1070) ; also where the life tenant has unlimited power of consumption his estate is not compelled to show what has been consumed (Welsh’s Estate, 239 Pa. 616, 86 A. 1091). Here testator did not direct his residuary estate to be held in trust for the use and benefit of his wife for life nor as long as she remained his widow, but gave her “ full possession, control over and management of the principal of the personal estate and to manage and invest the same in whatever manner she deems proper.”

Other cases in which the Supreme Court of Pennsylvania has held that life tenants do not hold as trustees for the remaindermen are In re Welsh's Estate, 239 Pa. 616; 86 Atl. 1091; Appeal of Reiff, 124 Pa. St. 145; 16 Atl. 636; German-American Title & Trust Co. v. Fidelity Insurance, Trust & Safe-Deposit Co., 132 Pa. St. 36; 18 Atl. 1090; In re Letterle’s Estate, 248 Pa. 95; 93 Atl. 935, It seeing conclusive upon authority of the cases cited that the petitioner herein was not a trustee under the will of her deceased husband and was not subject to the rule restricting the trustee’s rights to the income of the residuary estate.

The petitioner submits that it is immaterial whether she is considered a trustee or merely a debtor to the remaindermen, since in either situation the amount of her debt or the amount of her trust fund is determined by her right to the increment. •

Was the petitioner, as life tenant and not trustee of the residuary estate, entitled to the use of, and therefore taxable on, such part of the income realized on the sale of the securities held in the residuary estate as represented the increase in value thereof due both to the enhancement of value and the accumulation of earnings during the life tenancy? In Letterle's Estate, supra, decided February 8, 1915, it was held that where personal property is given to one for life with remainders over, the life tenant, on taking possession and giving bond to protect the remainder interest, as required by the Act of May 17, 1871 (P. L. 269), may use the property at his own discretion, and on his death his estate will be entitled to any profit made in the investment thereof; the life tenant being not a trustee for the remaindermen, but their debtor in the sense that his estate is liable only for the appraised value of the property when received by him. To the same effect is In re Weir’s Estate, 251 Pa. 499; 96 Atl. 1086, where the life tenant refused to give bond as required by the statute and a trustee was appointed by the court to hold the property.

A different conclusion was reached in In re Loewer’s, Estate, 268 Pa. 517; 106 Atl. 789, decided February 10, 1919, where the life tenant under the will refused to give bond and a trustee was appointed by the court to take over the estate. In holding that the increase in value of the securities held in the trust estate during the life tenancy inured to the remaindermen and not the life tenant, the court distinguished Letterless Estate and Weir's Estate, supra, the former on the grounds that there the bond was given by the life tenant as required by law and no trusteeship existed, and the latter on the ground that the trustee in that case was appointed upon the sole application of the life tenant without joinder of or notice to the remaindermen, while in Loewer’s Estate the trustee was appointed on the application of all parties in interest, and further that in Loewer's Estate the property consisted of securities held in kind and not a cash fund as in Weir’s Estate.

In In re Chalfant's Estate, 294 Pa. 331; 144 Atl. 134, decided November 26, 1928, it was held that a life tenant was entitled, as against the remaindermen, to all of the profits from the sale of tangible assets of the testamentary estate. The court distinguished Loewer's Estate, supra, saying:

Loewer’s Estate, 263 Pa. 517, 106 A. 789, relied on by appellant, does not aid him. There, bonds and other securities, given to the widow for life, remained in the trust unconverted until the death of the widow, and it-was held that they had at all times belonged to the corpus of the trust estate, and hence passed to the remaindermen in specie. The fact that they had enhanced in' value, as would also have been the ease had the opposite been true, was an incidental matter wholly unimportant; the remaindermen got exactly what testator bequeathed to them. The same conclusion would have been reached in the instant case, if the tangible assets had been unconverted. Fortunately for him, they were sold by him in carrying on the business, for their character was such that, if this had not been done, they would have had little or no value when the life tenant died.

In In re Dickinson's Estate, 285 Pa. 449; 132 Atl. 352, decided February 8, 1926, it was held that extraordinary dividends on corporate stock left by decedent in trust were distributable by giving to the corpus sufficient to keep intact the value of the shares as they were at the time the trust began and giving the rest of the dividends to those entitled to the income. The court there said:

* * * From Earp’s Appeal, 28 Pa. 368, to Harkness’ Estate, 129 A. 458, 283 Pa. 464, we have uniformly held that:
“Where extraordinary dividends, whether of cash, scrip or stock, are declared and paid on shares of corporate stock left by a decedent in trust, they are to be distributed by giving to the corpus sufficient to keep intact the value of the shares as they were at the time the trust began, and by giving the rest of the dividend to those entitled to the income of the estate.”

To the same effect is In re Wittmer's Estate, 129 Atl. 85, decided April 13, 1925, and In re Harkness' Estate, 129 Atl. 458, decided May 11, 1925.

The petitioner in her brief cites and relies upon In re Graham's Estate, 198 Pa. 216; 47 Atl. 1108. There, the life beneficiary of a trust estate was held not entitled to the profits on the sale, by condemnation, of certain stock and bonds of the trust estate, which profits were not attributable to surplus or earnings of the corporation. The court in that case pointed out that under the testator’s will the life tenant was entitled only to the “ income " of the trust estate and not the “ profits ”, which possibly distinguished that case from In re Park's Estate, 173 Pa. 190; 33 Atl. 884, as well as the instant case. In Park's Estate the court held that the profits on the sale of securities of a trust estate belonged to the life tenant, who was entitled to receive the income and profits thereof. The court there adopted as its opinion the dissenting opinion of one of the judges in the lower court, which reads in part as follows:

I dissent from the view which the auditing judge has taken in respect of what shall constitute “ income and profits,” and what “ principal.” If the gift had been of specific property for life, with remainder over, it may be conceded that Mrs. Leech [life tenant] would have had no right to share in the proceeds of its sale; for such proceeds when realized would simply have been the measure of value of the specific property which, by the terms of the will, those in remainder would otherwise have had a right to demand at her death. The gift, however, being general, gave those in remainder no title to any specific property, but implied conversion into cash, which referred the value of the corpus to the date of the testator’s death. Had the gift to Mrs. Leech been legal as well as equitable, that value would have been the measure of her liability to those in remainder, and the source of the income and profits beneficially intended for her. Investment and reinvestment would have been in her control, and for her sole benefit. Those in remainder would have had no interest further than the safety of this corpus, and its payment at her death. This being conceded, why should the mere separation of legal and equitable estates imply any change in her beneficial estate? The obvious purpose of separation was to vest in the trustee the duty of administration of the trust estate. The gift of the beneficial interest was as absolute as- though coupled with a legal estate. It was no greater or less because of the separation. In either event the trust estate would consist, at the beginning, of cash, and Mrs. Leech, by the terms of the will, be entitled to whatever “ income and profits ” it might earn during her life. * * * .
* * * * * ' * *
The authorities cited in the support of the theory of capitalization of profits are not, in my opinion, entitled to the weight which has been given them. The rule as quoted from Hill, Trustees, to the effect that “ any extraordinary ” profits realized from “ stocks or other property ” belong to the corpus, was no doubt the result of the English cases which had been decided when the text was written; but later cases have greatly modified, if not reversed, it, while it has been distinctly repudiated in Pennsylvania. Appeal of Earp, supra. * * *
These suggestions sufficiently indicate the trend of decision, and the principle which should settle the question raised here. The gift being, not of specific property, but general and residuary in its character, the measure of the remainder is its value at the date of testator’s death, and that of the life estate the increase thereafter. It follows that the amounts invested in mortgage, which were admittedly parts of the estate at testator’s death, should be treated as the corpus, and the residue in the hands of the trustees, arising from foreclosure, as belonging to Mrs. Leech, as “income and profit,” within the “purpose and intent ” of Mr. Park’s will.

The same distinction as was pointed out between Parle’s Estate and Graham’s Estate is present as between the instant case and Nirdlinger’s Estate, that is, in Nirdlinger’s Estate the life beneficiary was entitled to receive the “ rents, issues, income, dividends and revenue ” in the profits, while in the instant case the life tenant was entitled to receive the “ rents, issues, income and profits.”

From our review of the cases we conclude that under the prevailing rule in the Commonwealth of Pennsylvania the petitioner herein, as life tenant of the testator’s residuary estate, was entitled to all of the profits derived from the sale of the assets of the estate over and above their value at the date of the testator’s death.

Eeviewed by the Board.

Judgment will be entered under Rule 50.


source: Caselaw Access Project

author: McMahon :

license: Public Domain

text:
    James Nicholson, Petitioner, v. Commissioner of Internal Revenue, Respondent. Ada M. Nicholson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 66966, 66967.
    Promulgated July 19, 1935.

      Chase Horsey, Esq., for the petitioners.

      Nathan Gammon, Esq., for the respondent.
   OPINION.

McMahon :

In Docket No. 66966, in the statement attached to the notice of deficiency it is stated that “ Loss on sale of National Cash Eegister Co. stock disallowed. It is held that the sale was not bona fide.” It also appears that the respondent increased James Nicholson’s net income for 1929 from $40,424.66 to $73,435.88 and that he added to the deficiency of $5,516.51, as determined by him, “ 50% penalty as provided by section 293 (b) of the Revenue Act of 1928 ” in the amount of $2,758.26.

In the petition it is alleged, among other things, that the respondent erred in asserting such penalty and that the petitioner did not file or. cause to be filed a personal income tax return for the year 1929 which was false or fraudulent or filed with intent to evade tax and prays that the Board find that he is not guilty of violating the law so as to be subjected to any penalty under section 293 (b), sufra.

In his answer the respondent denies that he erred as alleged in the petition and alleges affirmatively that the petitioner “ filed false or fraudulent Federal income tax return for the taxable year 1929 and that part of the deficiency found for said year was due to fraud, all with intent to evade tax.” The facts upon which such allegations are based are alleged to be that the petitioner filed his return for 1929 on April 20, 1930; that the return showed a net income of $40,424.66 whereas his correct net income was $73,435.38; that he had, with intent to evade tax, understated his income by $33,010.72; and for further facts respondent adopts in his answer, by reference thereto, the notice of deficiency and statement attached thereto, copies of which are appended to the petition, as fully as if incorporated in his answer.

At the time of hearing the petitioner had not filed a reply. Counsel for petitioner stated.that while he did not believe it was necessary to file a reply as the answer contained no new matter, it might be advisable to do so for the purpose of completing the record. Counsel for respondent stated that he had no objection to allowing petitioner to file a reply, conceding that he had the right to do so. Upon permission granted by the presiding member the petitioner filed a reply denying all the allegations contained in the answer and alleging that he is not guilty of filing a false and fraudulent return to evade tax.

The respondent contends, however, that by failing to file a reply within 45 days as required by Rule 15 of the Board’s rules of practice James Nicholson has effectively admitted the affirmative allegations of fact set up in the answer, thereby relieving the respondent of further proving the fraudulent and evasive intent of petitioner in filing his return for 1929 and understating his income therein.

F. O. Stabler, 27 B. T. A. 342, cited by respondent, is distinguishable from the instant proceeding: Furthermore, in Solomon Beringer, 29 B. T. A. 250, wherein the Stabler case has also been distinguished, the Board stated:

* * * If the answer merely reiterates affirmatively matters already covered by his notice of deficiency and assailed by the petition, there is no requirement that the petitioner shall as to those matters file a reply, and his failure to do so is not prejudicial. * * *

and denied the respondent’s motion for judgment on the pleadings in the full amount of the deficiencies and penalties. The instant proceeding is, in this respect, thereby controlled adversely to the respondent.

In both of those cases no reply had been filed. Here the presiding member, in conformity with the Board’s Bule 19, during the hearing, permitted the filing of a reply, after counsel for respondent had stated that he had no objection thereto. The mere fact that petitioner failed to file a reply within the 45-day period provided by Bule 15, when petitioner was thereafter permitted to file it in conformity with Bule 19, can not relieve respondent of the burden of proof placed upon him expressly and in unambiguous terms by section 907 (a) of the Bevenue Act of 1924, as amended by section 601 of the Bevenue Act of 1928, in any proceeding involving the issue whether the petitioner has been guilty of fraud with intent to evade tax.

Under Bule 19 extensions of time to file pleadings, except for the filing of the petition, may be ordered by the Board on its own motion or may be granted by it in its discretion on motion of either party. Thus, the Board, under its own rule, could, in its discretion, extend the period of 45 days, after the expiration thereof, within which the reply under Bule 15 could be filed. The principle of Rio Grande Irrigation Co. v. Gildersleeve, 174 U. S. 603, 608, relied upon by respondent, is not applicable here, since there no such discretionary power was reserved to the trial judge by the rule of the superior court.

Bule 19 is a valid rule. See Commissioner v. Kerbaugh, 74 Fed. (2d) 749, affirming Henry S. Kerbaugh, 29 B. T. A. 1014, and Helvering v. Continental Oil Co., 68 Fed. (2d) 750.

Nor can the allegations denying fraud set forth, in the petition be deemed of no effect as merely anticipatory of affirmative allegations of fact to be set forth in the answer to be filed by respondent. Here the petitioner did not, in his petition, anticipate a defense; he stated in his petition his defense to the assertions, in the notice of deficiency and attached statement, made by the respondent, including, among others, the determination of a penalty. Everything alleged in the petition was germane to the contents of the notice of deficiency and attached statement which were challenged by petitioner; and petitioner was justified in thus presenting the issues in his petition. Pleadings and proceedings before this Board are dissimilar to those before courts, and general rules and principles as to pleading and practice before courts can not be- applied indiscriminately without a recognition of those differences. Farmers Feed Co., 10 B. T. A. 1069, 1072-73.

It is claimed by petitioners that the National Co. stock, the Industrial Process & Engineering Co. stock, and all other property involved herein was owned jointly by petitioners.

The record shows that James Nicholson was the record owner of 172% shares of the Ellis Co. stock, and his wife was the record owner of 118% shares of the same stock. Of the 290 shares of National Co. stock, 172 shares were in his name and 118 shares in her name. There is no evidence disclosing in whose name the 500 shares of the same stock were carried. James Nicholson testified that he bought them and they were carried originally in his regular brokerage account. He testified that he wanted the moneys received by himself and wife for the Ellis Co. stock deposited with his brokers in part as a credit against his loan, which would leave to his credit quite an amount at 5 percent until he invested it, and also because he intended to purchase some National Co. stock. However, there is no evidence showing that the stock of that company purchased thereafter was paid for out of these funds deposited with the brokers. He also testified that the certificates of stock of another corporation, the Industrial Process & Engineering Co., were not taken out in the name of himself and wife jointly, but that they were divided and some were in the name of his wife and some in his own name, and that he was not positive whether half of them were in his name and half in her name. There is no evidence whatever as to whether Mrs. Nicholson ever regarded any of such property as actually belonging to her. It does not appear that she was ever consulted or that she knew anything about any of the transactions except that she drew the checks for the money to be deposited with the brokers. James Nicholson’s testimony that the property was-held jointly is a conclusion, which is not binding on the Board and it is not borne out by the evidence. He may have honestly wished and felt that his wife should have an equal share and interest in all the property, but that is not sufficient for the purposes of the income tax law. The burden of proof is upon the petitioners in this respect and from the evidence we are unable to find that the petitioners owned any or all the property involved jointly.

The respondent disallowed a loss of $21,485.13 deducted by each petitioner, part of which petitioners claim was sustained upon the sale of 395 shares of the stock of the National Co., upon the ground that these sales were not bona fide. In Docket No. 66966 the respondent added a fraud penalty of 50 percent of the deficiency determined to be due from James Nicholson. No fraud penalty has been determined against the petitioner Ada M. Nicholson.

Here then we have two questions — one, whether the petitioners sustained deductible losses, and, two, whether James Nicholson has been guilty of fraud with intent to evade tax. L. Schepp Co., 25 B. T. A. 419, 436.

The first question to be considered here is whether the purported sales of the National Co. stock were actual sales in 1929 entitling the petitioners to deduct any loss sustained therefrom.

A revenue agent who had a conference with James Nicholson in about March 1932 relating to these matters, testified that during such conference James Nicholson stated in substance that the transfers of the National Co. stock to Joseph B. Morrill were made “ for the purpose of reducing income tax liability.” James Nicholson denied that such had been his purpose and that he had so advised the revenue agents who were making the examination of the return. In Helvering v. Gregory, 69 Fed. (2d) 809; affirmed in Gregory v. Helvering, 293 U. S. 465, the Circuit Court for the Second Circuit stated:

We agree with the Board and the taxpayer that a transaction, otherwise within an exception of the tax law, does not lose its immunity, because it is actuated by a desire to avoid, or, if one choose, to evade, taxation. * * *

However, in Luella Hoyt Slayton, 29 B. T. A. 931; affd., 76 Fed. (2d) 497, the Board stated:

* * * on the other hand, a mere gesture without the vital intent to change onmership is not to be recognized as a sale merely because superficially it resembles one. * * * [Emphasis supplied.]

There is no evidence whatever as to whether Ada M. Nicholson intended to sell the stock standing in her name. The evidence fails to disclose that these matters were even discussed with her or in her presence. While one of the notes was made payable to her, there is no evidence that she ever saw the note or knew that it had been made. The matter was discussed by her husband and son-in-law and they were the active participants in the transactions. The stock in her name and the stock in the name of her husband were transferred to the name of Joseph B. Morrill and he executed three notes and endorsed the certificates as collateral to such notes.

Joseph B. Morrill testified that the 290 shares of stock were sent by the brokers to the registrar’s office for transfer, that “ when the stock came back they called me down to Knight, Dysart & Gamble’s and Mr. Nicholson — I turned it over to him and endorsed it as collateral on his notes.” The certificates were retained by the brokers and remained in the regular account of James Nicholson until December 5, 1929, when 290 shares were transferred to his safe-keeping account, and later, some time before March 19, 1930, retransferred in part to his regular account. As to the 500 shares he testified that “ that stock was sent through and transferred to my name, and that stock instead of being endorsed I signed some kind of a blanket endorsement which allowed Mr. Nicholson to keep the stock up as collateral in his account.” The certificates for the 500 shares were retained by the brokers and remained in the account of J ames Nicholson. So far as the record discloses the three notes of Joseph B. Morrill were kept by James Nicholson and were not delivered to the brokers with the stock. Thus the stock which supposedly was given as collateral to these notes may not have been treated as collateral to such notes but was, in fact, separated therefrom and deposited with the brokers to the account of James Nicholson. Furthermore, there is no evidence showing that the brokers had no claim against the stock. The 500 shares when transferred were in the possession of the brokers and remained with the brokers until sold in 1930. At the end of 1930, 290 shares still remained with' the brokers in James Nicholson’s regular account.

We have not overlooked the fact that the stock was transferred to Joseph B. Morrill: This is not sufficient to establish a bona fide sale in a situation such as is presented in the instant proceedings. Harold B. Clark, 2 B. T. A. 555, and Theodore C. Jackson et al., Administrators, 32 B. T. A. 470.

In our opinion the petitioner, James Nicholson, after the transfer had practically the same use and benefit of the stock for whatever purpose he desired as he had had before the transfer. Although the stock was transferred and notes therefor executed, we are not convinced that this was done with mutual intent on the part of the petitioners and their son-in-law to complete an absolute sale thereof. Lulu Tirrill Coombs, 30 B. T. A. 35; Joseph Blumenthal, 30 B. T. A. 125.

Furthermore, transactions involving members of the same family or those bearing a close relation to each other should be carefully scrutinized. Joseph E. Uihlein, 30 B. T. A. 399, 402, and cases cited therein.

The action of the respondent in disallowing these claimed losses must be sustained.

However, this is not tantamount to holding that James Nicholson filed a false and fraudulent return with intent to evade tax or that a part of the deficiency was due to fraud. The deduction may have been taken through a mistaken belief that the transactions entered into were sales, the loss resulting from which he was entitled to deduct. That this was his belief is, in our opinion, shown by the testimony of the revenue agent who had a conference with James Nicholson as to the tax liability of petitioners for 1929. He stated James Nicholson claimed that he had a right to sell the stock, that it was a “ perfectly legitimate sale, a bona fide sale ”, and that he expressed the thought that “ he was being abused when other people were being allowed similar deductions — that he was being abused, discriminated against.”

In Henry S. Kerbaugh, 29 B. T. A. 1014; affirmed in Commissioner v. Kerbaugh, supra, the Board stated:

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

Here fraud is not admitted. The mere fact that his return showed a net income for the taxable year 1929 in the sum of $40,424.66 and the respondent, in recomputing his tax liability, determined that the net income for that year was $73,435.38, by itself, does not establish fraud. If it did, then all taxpayers against whom deficiencies are determined would be guilty of fraud and subject to the imposition of a fraud penalty. Nor does the lack of evidence to sustain the petitioners’ contentions prove fraud. As stated in L. Schepp Co., supra, “ both parties may fail through inadequate proof in their several issues, and thus the deficiency would be sustained and the penalty set aside.” The burden of proving fraud is upon the respondent and his proof must be clear and convincing. The evidence viewed as a whole is not clear and convincing and hence- we must hold that the respondent, upon whom rests the burden of proving fraud, has not discharged that burden and therefore no fraud penalty may be imposed.

The respondent further alleges that, in the event the Board finds from the evidence that James Nicholson was not guilty of fraud “ but that part of the deficiency was due to negligence or intentional disregard of rules or regulations, then the Board should find the taxpayer guilty of negligence and the appropriate penalty should be asserted.” No determination of negligence was made by the respondent, no penalty for negligence was added to the deficiency in tax as determined, no facts tending to disclose negligence, were pleaded by the respondent, and no evidence was offered by either party upon that subject. On brief respondent, in concluding, states “ the Board’s attention is drawn to the prayers of the answer of respondent which asks in any event for the assertion of the negligence penalty * *

The record as made is insufficient to sustain a finding or holding that a negligence penalty should be imposed. American Ideal Cleaning Co., 30 B. T. A. 529, and authority cited therein.

The next question to be determined relates to the alleged loss of $1,650, being the cost of 3,300 shares of stock of the Industrial Process & Engineering Co., deducted by each petitioner from gross income in 1929. It is claimed by petitioners that this stock became worthless in 1929. The respondent disallowed the deduction upon the ground that such stock was worthless prior to 1929. The petitioner James Nicholson testified that he did not know when the company ceased to do business, but thought it was about 1926, 1927, or 1928, that he tried to find the old officers at the addresses which he had but failed to locate them, and that he finally wired the Secretary of State of Delaware, from whom he received the telegram set forth in our findings.

From the evidence adduced we are unable to determine whether the stock had any value prior to 1929, or whether it became worthless in 1929 or prior thereto. The petitioners argue on brief that the fact that the plants in Colorado and St. Louis were abandoned prior to 1929 does not show that the stock was worthless prior to 1929 as the patent which the company owned was still in existence and believed by petitioners to be very valuable. The record is wholly without any evidence as to the value of this patent or what became of it. There is no evidence showing that the Industrial Process & Engineering Co. is the same as the “ Carbonizing Process Corporation ” referred to in the above telegram. The petitioners having failed to show that the respondent erred, his determination in disallowing the loss of $1,650 deducted by each petitioner must be sustained.

All other errors assigned in the respective petitions not discussed herein have been abandoned, since no evidence was presented or arguments made in respect thereto. Hence the action of the respondent in respect thereto must be approved.

Eeviewed by the Board.

In Docket No. 66966 decision for the respondent for the deficiency' without any fraud or negligence penalty will be entered. In Docket No. 66967 decision will be entered for the respondent.


author: Turner :

text:
    American Snuff Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 56039.
    Promulgated July 19, 1935.

      John 8. Glenn, G. P. A., for the petitioner.

      Frank B. Sehlosser, Esq., for the respondent.
   OPINION.

Turner :

The deduction claimed was disallowed by the respondent on the ground that it represented salary payments for services rendered in years prior to 1928 and, for that reason, was not a proper charge against income for the taxable year. In his brief the respondent offers the further objection that the petitioner has not produced proof to show that these salary payments were reasonable and necessary business expenses for the taxable year, in accordance with the provisions of section 23 (a) of the Revenue Act of 1928.

The petitioner contends that the salary payments in question could not have been accrued as obligations in the years to which they relate because the exact amounts, as well as the liability of the company in respect thereto, were not determinable in those years. It bases this contention upon the fact that the treasurer refused to pay the additional sums requested by the officers until after submission of the matter to the petitioner’s attorney and the receipt of his opinion that the company was liable for the amounts so claimed under its bylaws adopted in 1912. In support of this contention it is claimed that this case is controlled by numerous decisions of the courts and of this Board. To maintain its position, the petitioner has cited Lucas v. American Code Co., 280 U. S. 445; John R. Lankenau Co. v. United States, 46 Fed. (2d) 158; J. N. Pharr & Sons, Ltd. v. Commissioner, 56 Fed. (2d) 832; New Process Cork Co., 3 B. T. A. 1339; Bump Confectionery Co., 4 B. T. A. 50; Hamler Coal Co., 4 B. T. A. 947; Coghlin Electric Co., 3 B. T. A. 1071; Hidalgo Steel Co., 8 B. T. A. 76; and a number of similar cases.

In substantially all of the cases cited by the petitioner the liability for the payments claimed was disputed by the taxpayer and the amounts finally paid resulted from compromise or litigation. In the case of compromise of a disputed liability, a new liability is then and there created through agreement of the parties. We have nothing of that kind present in this case. With reference to payments made as the result of litigation, the situation is also different. In Lucas v. American Code Co., supra, a former sales manager of the taxpayer, after being discharged, brought suit for damages under his employment contract. He was discharged in 1919, but his claim was not paid until 1923, when the judgment rendered in 1922 was affirmed. The taxpayer sought the deduction as a loss in 1919, when the discharge occurred. As a reason for disallowing the deduction in 1919, the court pointed out that on the facts the liability of the company and the amount of the damages were wholly unpredictable until the judgment was rendered and that it could not have been said that the loss actually paid was, as a matter of law or of undeniable fact, sustained in the year of the discharge, and further that the taxpayer, by its contest in the court and payment only after judgment, clearly did not consider the amount of the judgment as a liability in the prior year.

In this case, the final conclusion of the petitioner itself was that as a matter of law and of fact the payments made to its officers in 1928 were the payments of liabilities which existed in the years with respect to which they were paid. It is true that the treasurer of the petitioner at first contended that he had properly computed the amounts payable to the officers, but after numerous conferences and discussions, he asked the advice of petitioner’s general counsel, and upon receipt of his opinion, to the effect that the compensation of the officers had been erroneously computed for the years from 1912 to 1927, inclusive, the treasurer, without further objection, paid to the officers the amounts bere in question. It is thus apparent that the amounts so paid to the officers were liabilities in the years prior to 1928, and the action of the respondent in disallowing the deduction claimed is sustained. Tyler & Hippach, Inc., 6 B. T. A. 636. Cf. Lucas v. Ox Fibre Brush Co., 281 U. S. 115; Continental Tie & Lumber Co. v. United States, 286 U. S. 290.

By reason of the above disposition of the contention of the petitioner, it is not necessary to consider the question raised by the respondent as to the reasonableness of the compensation.

Decision will be entered for the respondent.

       SEC. 23. DEDUCTIONS PROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      (a) Expenses. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; * * *


author: Sternhagen:

text:
    Grace Johnson Munroe, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 76942.
    Promulgated July 19, 1935.

      Lcmrence E. Green, Esq., for the petitioner.

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

Sternhagen:

The evidence is all one way, and leaves no room for question. The petitioner, is actively engaged in business as the manager and part owner of the hotel. It was necessary, in order that she should properly conduct her business, that she employ an associate manager, and this she did. Apparently her husband was the most satisfactory person for her to employ. As to this, her judgment is wellnigh final. Certainly in this record there is no reason to question its soundness. It was also her judgment that $4,000 was reasonable compensation for his services. This is supported by what evidence there is in the record. Later the husband was paid $5,000 by the joint enterprise, with the approval of the sisters. The record, therefore, fully supports the fact that this was an ordinary and necessary business expense of the petitioner.

As a matter of law, the deduction comes clearly within the Eevenue Act of 1928, section 23 (a), and since Commissioner v. Hale, 61 Fed. (2d) 561, there is no room for question as to the propriety of recognizing a contractual payment from one spouse to another as legal. This has been held to apply equally to a salary paid by a wife to a husband, both residents of Massachusetts, Anna E. Riley, 29 B. T. A. 160 (petition for review dismissed, 70 Fed. (2d) 1013).

Judgment will be entered for the petitioner.


author: Murdook:

text:
    Union Guardian Trust Company, a Michigan Corporation, as Administrator with Will Annexed of the Estate of Carl H. L. Flintermann, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75516.
    Promulgated July 19, 1935.

      Llewellyn A. Lv>ee, Esq., for the petitioner.

      Harry F. Morton, Esq., and Charles P. Beill/y, Esq., for the respondent.
   OPINION.

Murdook:

The Commissioner determined a deficiency of $30,-434.13 in estate tax. The issue is whether or not the Commissioner erred in disallowing $308,860.39 of a deduction claimed on account of debts of the decedent. The petitioner also raises an alternative issue as to $156,740.78 of the above amount. The facts have been stipulated.

The decedent, Carl H. L. Fliiiterrnarm, died on January 18, 1931, a resident of Oakland County, Michigan. His gross estate consisted of the following:

1. Assets as inventoried in the Probate Court of Oakland County, Michigan, at values determined by the Commissioner (hereinafter referred to as probate court assets)_ $157, 527. 85
2. Property held jointly as valued by the Commissioner_ 32,197.29
3. Life insurance (in excess of $40,000) on life of decedent, all payable to beneficiaries other than the estate of the decedent_ 1, 250,458.74
Total value of the gross estate_ 1, 440,183. 88

The parties agree that the value of the gross estate should be reduced by the following items:

Specific exemption_$100, 000. CO
Funeral expenses, administration expenses, unpaid mortgages, and support of dependents totaling_ 74,183.40
Debts of decedent allowed by Commissioner_ 479,044.90
553,228.30

The actual debts of the decedent aggregate the sum of $787,905.29.” A list of the “ actual ” debts was made a part of the stipulation. “All of said debts were incurred or contracted boom fide and for an adequate and full consideration in money or money’s worth.”

Debts of the decedent amounting to $365,205.95 were paid, pursuant to agreements made by the decedent during his lifetime, from proceeds of life insurance included in the gross estate. A preferred debt of $6,243.12 was paid from the probate court assets.

The Commissioner allowed deductions for the debts paid pursuant to the decedent’s agreement from insurance proceeds, for the preferred debt of $6,243.12, and for the other debts to the extent of the excess of the value of the probate assets over the deduction allowed for funeral expenses, administration expenses, unpaid mortgages, and support of dependents. The total amount of the debts of the decedent exceeded the amount thus allowed as a deduction by $308,860.39.

The widow of the decedent voluntarily paid, from proceeds of insurance included in the gross estate, debts of the decedent amounting to $156,740.78. The remaining debts, amounting to $259,715.44, are unpaid and the only resources available for payment of those debts under the laws of Michigan are the probate court assets.

The petitioner, citing no case precisely in point, says' that the question involved herein has never been decided by the Board or any court. See, however, Commissioner v. Strauss, 77 Fed. (2d) 401. The respondent cites no case whatever, but insists that he has correctly computed the deduction in question. The contention of the petitioner is that all of the debts of the decedent are deductible, regardless of whether or not they have been or ever will be paid, and, therefore, the deduction should be $787,905.29, instead of $479,044.90, as allowed by the Commissioner. As an alternative, it contends that a deduction should be allowed at least for the debts actually paid by the widow out of insurance proceeds included in the gross estate.

Congress, in the Revenue Act of 1926, imposed a tax upon the transfer of the net estate of every decedent dying after the enactment of that act. Section 301 (a). It specified, in section 302, how the value of the gross estate should be determined and, in section 303, how the value of the net estate should be determined. The deduction involved herein is claimed under section 303 (a) (l), which provides that there shall be deducted from the value of the gross estate such amounts for claims against the estate, to the extent that such claims were incurred or contracted bona fide and for an adequate and full consideration in money or money’s worth, as are allowed by the laws of the jurisdiction under which the estate is being administered. ‘ The parties argue about the meaning of the words “ as are allowed by the laws of the jurisdiction * * * under which the estate is being administered.”

The intent of Congress, as expressed in the words quoted, is reasonably clear and supports the petitioner rather than the Commissioner. The latter argues that the deduction allowed tor debts of a decedent is limited to that portion of the debts which is equal to the value at death of that part of the gross estate from which payment of the debts could be lawfully enforced. However, although the statute contains certain express limitations, it contains no limitation of the kind contended for by the respondent. Therefore Congress probably intended no such limitation. Cf. Jeptha H. Wade, Jr., et al., Executors, 21 B. T. A. 339. Congress did not say “ paid from the gross estate ” (cf. Buck v. Helvering, 73 Fed. (2d) 760), nor did it say “ allowed by a court ” (cf. James D. Bronson et al., Trustees, 7 B. T. A. 127; affd., 32 Fed. (2d) 112); and 0ormrdssioner v. Strauss, supra. A claim against the estate of a decedent is allowed by the laws of the jurisdiction * * * under which the estate is being administered ” if its character is such as to entitle it to recognition in the settlement of the estate as an actual valid claim, payable, along with others of the same class, to the extent of the available assets. Cf. Estate of Andrew A. Kroeg, 2 B. T. A. 722. The right to payment is what determines the question. If the claimant has a right to payment before the net estate subject to administration can be distributed pursuant to the will or the laws relating to intestacy, his claim is allowed by the laws. Such claims may exceed the amount of assets available to pay them. The question of payment arises in a probate proceeding after claims allowed by law have been proved to be such. All of the debts involved herein were of such character as to require payment in full had assets been available. Payment of them was authorized by the laws of Michigan. Only an economic law prevents payment in full. Thus the statute contains express authority for the deduction as claimed by the petitioner.

There is no long continued consistent interpretation of similar provisions impliedly approved by repeated reenactments to aid the Commissioner here. His regulations have been changed and . the one upon which he particularly relies (Regulations 70, art. 29) does not support his present argument. The latter provides that a claim to be deductible must “ be one the payment of which out of the estate is authorized by the laws of the jurisdiction under which the estate is being administered.” Payment in this case was authorized by the laws of Michigan though prevented by an inadequacy of funds. Nor is it unreasonable to attribute to Congress an intent to allow deductions under such circumstances as are here present, although good reasons why such deductions ought to be limited to the value of that part of the gross estate from which the claims might be satisfied could be presented to Congress. The primary source for determining the intent of Congress is the words used. Where, as here, the words are reasonably clear and indicate that Congress meant to make the deductibility of claims against the estate depend upon the right to payment, rather than upon actual payment, or availability of assets to satisfy the claims, resort to other means of statutory interpretation is not justified. Commissioner v. Strauss, supra.

Decision- will be entered under Bule 50.

       Sec. 303. For the purpose of the tax the value of the net estate shall be determined—
      (a) In the case of a resident, by deducting from the value of the gross estate—
      (1) Such amounts for funeral expenses, administration expenses, claims against the estate, unpaid mortgages upon, or any indebtedness in respect to, property (except in the case of a resident decedent, where such property is not situated in the united States), to the extent that such claims, mortgages, or indebtedness were incurred or contracted bona fide and for an adequate and full consideration in money or money’s worth, losses incurred during the settlement of the estate arising from Ares, storms, shipwreck, or other casualty, or from theft, when such losses are not compensated for by insurance or otherwise, and such amounts reasonably required and actually expended for the support during the settlement of the estate of those dependent upon the decedent, as are allowed by the laws of the jurisdiction, whether within or without the united States, under which the estate is being administered, but not including any income taxes upon income received after the death of the decedent, or any estate, succession, legacy, or inheritance taxes.


author: Trammell:

text:
    United Carbon Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46499.
    Promulgated July 23, 1935.

      Robert A. Littleton, Esq., W. W. Spalding, Esq., and James A. Coifrbdlor, C.P. A., for the petitioner.

      Bruce A. Low, Esq., T. G. Histon, Esq., and L. H. RwsKbrooh, Esq., for the respondent-
   OPINION.

Trammell:

This proceeding is for the redetermination of a deficiency in income tax of $15,848.57 for the period February 14 to December 31, 1925. Issues raised by the pleadings and not conceded by the respondent are whether the respondent erred (1) in determining that the basis for computing depreciation and depletion with respect to certain exhaustible assets acquired by the petitioner in exchange for its capital stock was the cost of such assets in the hands of the transferors, (2) in failing to allow a deduction of $20,000 as an expense for services of accountants, and (3) in failing to allow a deduction of $16,636.47 as expenses incurred for a number of items including amounts paid to states other than that in which the petitioner was organized for the privilege of carrying on business in such states, for numbering stock certificates, and for “ transfer services.” The proceeding was submitted upon oral and documentary evidence and a stipulation of facts, the latter of which is incorporated herein by reference.

Basis for Computing Depreciation and Depletion.

The petitioner is a Delaware corporation, organized on or about February 19, 1925, and having its principal place of business at Charleston, West Virginia. It is engaged in the business of manufacturing carbon black and gasoline.

Sometime prior to February 14,1925, Oscar Nelson, who was president of the Cosmos Carbon Co., a corporation engaged in the manufacture of carbon black, discussed with G. A. Williams, who was general manager of the Liberty Carbon Co. and the Louisiana Carbon Co., corporations also engaged in the manufacture of carbon black, the idea of bringing together in one organization the assets of various corporations engaged in the manufacture of carbon black. Nelson asked Williams to discuss the idea with the officers of the corporations with which he (Williams) was associated and it was agreed that Nelson would approach the officers of one or two other corporations. Thereafter a meeting was held in Pittsburgh, at which four corporations were represented, and as a result of the meeting it was agreed that certain appraisals would be made. Following this Nelson called Williams into a conference with himself and A. B. Koontz, who was secretary of the Natural Gas Products Co., a corporation also engaged in the manufacture of carbon black, at which a discussion was had as to the purchase of carbon plants. The three proceeded from Charleston, West Virginia, to Monroe, Louisiana, and there interviewed the officers of the various corporations whose assets they desired to purchase. After spending some time in Monroe they proceeded to points in Texas where officers of certain of the corporations lived and interviewed them.

During the trip Nelson and Williams visited the various plants which they wished to acquire and examined the physical properties thereof. After examining the properties and approximating the inventories of the various corporations and considering appraisals which had been made recently by an appraisal company, they entered into negotiations with the corporations for the acquisition of their properties, the negotiations being conducted separately and independently with each corporation and none of the corporations being informed as to the price that was to be given for the properties of any other corporation. The amount of consideration to be offered the various corporations for their properties was arrived at by using the appraisals and the information acquired by Nelson and Williams during their examinations of -such properties.

The properties of the various corporations that Nelson, Williams, and Koontz were interested in acquiring consisted of buildings for the burning of carbon black, leaseholds, plant sites, and other appurtenances that go with the business of manufacturing carbon black. Their object in acquiring such properties was to secure the elimination of competition, to have a sufficient amount of carbon black to maintain a sales organization of their own, and to be independent of the way that they had had to do business theretofore, viz., “ a lot of separate units competing for business and none of them getting very much.”

Later another meeting was held, which representatives of more than twenty corporations attended, but not all of the corporations represented participated in the transactions which were to follow.

The petitioner was organized with a total authorized capital stock of $10,000,000,7 percent noncumulative preferred stock, divided into 100,000 shares of a par value of $100 per share and redeemable at the option of the petitioner at $110 per share, and 400,000 shares of common stock without nominal or par value.

Prior to the organization of the petitioner Nelson, Koontz, Williams, and C. A. Barbour, acting for and on behalf of the proposed incorporators of the petitioner, had, during the period January 13 to February 17, 1925, submitted offers to certain corporations and a partnership for the purchase by the petitioner, when organized, of their inventories of carbon black, gasoline, crude oil and manufacturing supplies, and certain of their other assets used in connection with the manufacture of carbon black, such as real estate, manufacturing plants, plant sites, warehouses, equipment contracts, leases, etc. These offers provided that the inventories were to be paid for in cash. With respect to the other assets they provided for payment to be made in shares of the preferred stock of the petitioner and voting trustees certificates representing shares of common stock of the petitioner, both in certain stated amounts. These offers specifically excepted corporate franchises, cash on hand, and bills and notes receivable. The offers also provided that the assets to be acquired for stock and voting trustees certificates were to be free from all liens and encumbrances, that the corporation or partnership to which the offer was made would join in a voting trust agreement covering the voting of the stock of the petitioner for a period of five years, and that if the offer was accepted it would be effective as of February 14, 1925.

By February 17, 1925, the partnership and 12 corporations, one of which was also the assignee of the assets of a thirteenth corporation, had accepted in whole or in part the offers made in behalf of the proposed incorporators of the petitioner. At a meeting of the board of directors of the petitioner held on February 21, 1925, the offers made for and on behalf of the proposed incorporators of the petitioner were approved and ratified. In order to provide funds with which to make payment for the inventories of the partnership and the various corporations and to provide working capital the directors of the petitioner at a meeting held on February 23,1925, authorized the issuance by the petitioner of not to exceed $2,500,000 of 7 percent 6 year bonds.

Pursuant to the action of ratification of the petitioner’s directors on February 21, 1925, the petitioner acquired from the partnership and the corporations shown below inventories and other assets of the fair market values indicated, cash being paid for the inventories in the amount of their fair market value and stock being issued for the other assets as indicated. Included in the item of other property are properties of a depletable nature and of a depreciable nature, as well as those of a nondepletable nature and those of a nondepreciable nature.

There is shown below the cost to the partnership and each of the corporations of all assets, exclusive of inventory, owned at the time of the acquisition by the petitioner of assets from them, the cost to each of the assets, exclusive of inventory, acquired by the petitioner from each, the cost to each of assets retained by it, the percentage of assets of each, other than inventory, that were transferred and the percentage of assets retained:

The assets shown above as having been acquired from the Cumberland Carbon Co. were acquired through the Cosmos Carbon Co., which was the assignee of the assets of Cumberland Carbon Co. The directors of the Humphreys Carbon Co. had taken steps looking toward the dissolution of that corporation prior to the time an offer was made to the corporation on behalf of the proposed incorporators of the petitioner for the acquisition of some of its assets.

In its income tax return for the taxable year in controversy the petitioner took depreciation deductions on the depreciable assets acquired by it from the partnership and the corporations shown above for stock on the basis of values placed thereon in a revaluation of such assets. In determining the deficiency here involved the respondent determined that the depreciation allowable on such assets, with the exception of those acquired from the Tampico Gas Co., should be computed on the basis of the cost to the transferors. In the case of the depreciable assets acquired by the petitioner from the Tampico Gas Co. the respondent determined that the basis for computing depreciation was the value of the stock issued by the petitioner therefor.

In its return for the taxable year here involved the petitioner took depletion deductions on the depletable assets acquired for stock on the basis of values placed thereon in a revaluation of such assets. In determining the deficiency the respondent determined the depletion allowances on the percentage of income method provided in section 204 (c) (2) of the Eevenue Act of 1926, based on estimated income.

There is no controversy between the parties as to the inventories which the petitioner acquired from the partnership and the various corporations for cash and as a result of a purchase and sale. The controversy relates to the assets acquired by the petitioner in exchange for its stock. The petitioner contends that the basis for determining depreciation and depletion allowances with respect to assets subject to such allowances is the fair market value of such assets at the time of acquisition. The respondent on the other hand contends that the basis for determining such allowances is the..basis in the hands of the transferors.

Pertinent portions of the Revenue Act of 1926, which is applicable to the year in controversy, are as follows:

Sec. 204. (c) The basis upon which depletion, exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the same as is provided in subdivision (a) * * * for the purpose of determining the gain or loss upon the sale or other disposition of such property * * *.
Sec. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that—
* * * * * * si:
(8) If the properly (other than stock or securities in a corporation a party to a reorganization) was acquired after December 31, 1920, by a-corporation by the issuance of its stock or securities in connection with a transaction described in paragraph (4) of subdivision (b) of section 203 (including, also, cases where part of the consideration for the transfer of such property to the corporation was property or money in addition to such stock or securities), then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made.
Sec. 203. (b) (4) No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.
Sec. 203. (i j As used in this section the term “ control ” means ownership of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation.

The evidence shows that the transferors of assets to the petitioner for stock were in “ control ” of petitioner after the transfers within the meaning of that term as used in the statute, and the petitioner makes no contention that they were not. The fact that the assets in controversy were owned separately by the various transferors prior to the time of acquisition by the petitioner does not of itself take the transactions by which they were acquired by the petitioner out of the application of the provisions of section 203 (b). Ared Corporation, 30 B. T. A. 1080; American Compress & Warehouse Co. v. Bender, 70 Fed. (2d) 655; certiorari denied, 293 U. S. 607.

The petitioner contends, however, that the provisions of section 203 are inapplicable, on the ground that the amount of the stock received by each of the transferors for assets transferred is not substantially in proportion to their respective interests in the assets prior to the exchange.

There is shown below for each transferor the percentage of the total market value of the assets transferred, exclusive of inventory, the percentage of the total shares of stock of each class that was received for assets transferred and the variation or difference between the percentage of total assets transferred and the percentage of each class of stock received.

In Ared Corporation, supra, we held that a variation of 1.73 percent between the amount of stock received and the interest in assets transferred did not require a holding that the amount of stock received was not substantially in proportion to the interest in the property prior to the transfer. In that case only two transferors were involved and the combined range of variation was 3.46 percent. In the instant case the greatest range of variation is between the Pelican Carbon Co. and the Humphreys Carbon Co. The Pelican Carbon Co. transferred to the petitioner 4.7772 percent of the total assets transferred by all the transferors and received 3.4012 percent of the preferred stock and 3.4379 percent of the common stock issued by the petitioner for assets. The percentage of preferred stock received by this transferor was 1.3760 less than the percentage of assets transferred and the percentage of common stock was 1.3393 less than the percentage of such assets. The Humphreys Carbon Co. transferred to the petitioner 11.1738 percent of the total assets transferred by all the transferors and received 12.4664 percent of the preferred stock and 12.5972 percent of the common stock issued by the petitioner for assets. The percentage of preferred stock received by this trans-feror was 1.2926 more than the percentage of assets .transferred and the percentage of common stock was 1.4234 more than the percentage of such assets. The greatest variation with respect to preferred stock therefore was 2.6686 and that with respect to common stock was 2.7627. If the extreme of 1.3760 with respect to the preferred stock received by the Pelican Carbon Co. is combined with the extreme of 1.4234 with respect to the common stock received by the Humphreys Carbon Co. the combined range of variation is only 2.7994. The extreme variations as well as the combined range of variation are well within those held to be substantially in proportion to the interest in the property prior to the transfer in AredI Corporation, supra. In view of our holding in that case we think that in the instant case the stock received by the transferors for assets was substantially in proportion to their respective interests in the assets prior to the transfer to the petitioner.

The petitioner urges that due to the variation between the percentage of the value of the assets transferred by each of the trans-ferors and the percentages of stock received by each there resulted material disproportions between the value of the assets owned by the separate transferors prior to the transfer and the value of their respective beneficial interests in the combined assets after the transfer. It insists that the provision of section 203 (b) limiting its application to those cases in which “ the amount of the stock * * * received by each is substantially in proportion to his interest in the property prior to the exchange ” requires not only that the amount of stock received by each of the transferors shall be substantially in proportion to his respective interest in the property prior to the exchange, but that in addition there shall be no substantial change in the continuity of the amount of the value of the interest in property transferred by each. In other words the petitioner contends that, where there are transfers by a number of persons of separately owned assets of varying amounts for stock and because of slight variations between the value of assets transferred by some and the amount of stock received by them the others acquire beneficial interests in the combined assets substantially greater or less in value than the interest in the assets they had transferred, there develops a situation which would take the case out of the application of the statute.

The theory advanced by the petitioner' as to a continuity of substantially the same value of interest in assets proceeds a step further than is provided by the statute. The petitioner not only cites us to no case in which the decision was predicated on the theory advanced by it, but urges that our decision in Ared Corporation, supra, when considered in the light of. this theory, is erroneous.. Our decision in that case was based on the rule expressly provided-by the statute and we think it is sound. Since the statute has provided a clear rule to be followed, we would not be warranted in attempting to read into it a requirement not contained in it.

We think the instant case comes within the provisions of section 203 (b) (4) and section 204 (a) (8) of the act, and so hold.

In determining the deficiency the respondent allowed a different basis to the petitioner with respect to depreciable assets acquired from the Tampico Gas Co. However, at the hearing he moved for an increase in the deficiency resulting from a change in depreciation rates as stipulated by the parties in event that we should hold that the basis for depreciation is that in the hands of the transferors. Since we find nothing in the record to warrant the depreciable assets transferred by the Tampico Gas Co. being accorded a basis for depreciation other than they would have if in the hands of that company, we hold that such basis is to be used in computing depreciation on those assets.

In making his determination the respondent apparently concluded that the acquisition of assets by the petitioner in exchange for stock was a transaction coming within the provisions of section 203 (b) (4); and this was his contention at the hearing. In his brief he states that he does not think those provisions are controlling and urges that the transaction was a reorganization within the meaning of the provisions of section 203 (h)(1) (A) and (B). Inasmuch as we have found that the transaction comes within the provisions of section 203 (b)(4) and section 204 (a)(8), it becomes unnecessary to determine whether it also comes within the provisions of section 203 (h)(1) (A) and (B).

In their stipulation the parties have submitted the data requisite for a recomputation on the basis the assets would have if in the hands of the transferors of the depletion and depreciation allowances on the various items of the different classes of assets subject to such allowances. In the recomputation of the deficiency to be submitted by the parties under Bule 50 effect will be given to their stipulation.

Expenditures for Services of Accovmdcmts.

In 1925 the petitioner paid a firm of accountants $20,000 for services. The services consisted of identifying as of February 14, 1925, the inventories acquired by the petitioner from the various transferors heretofore referred to, examining reports of such transferors, preparing audit reports on the cash receipts and disbursements of such transferors subsequent to February 14, 1925, devising and installing a general accounting system and a cost accounting system for the petitioner and making the opening entries therein, and supervising the operation of the accounting system of the petitioner for practically all of 1925. The amount paid by the petitioner for the services thus rendered was charged to organization expense, was not claimed as a deduction in the petitioner’s return, and was not allowed as a deduction in determining the deficiency in controversy.

The petitioner contends that the expenditure in question was an ordinary and necessary expense of doing business. This the respondent denies. The petitioner urges that the work for which the expenditure was made may be divided into that relating to the inventories which it purchased and that relating to the installation of an accounting system. It insists, however, that it is of no importance to allocate the amount of the expenditure between the two divisions for the reason that no part of the amount has ever been claimed or allowed. It contends that the portion of the amount that was paid for work relating to inventories was an additional cost of the inventories and, since it was not added to inventories nor allowed as a deduction when sold, it is now deductible.

We agree with the idea of the petitioner that the work done by the firm of accountants may be divided into two parts, but we differ with it as to the importance of the allocation of the amount expended. We think the portion of the amount that was for work done in checking or identifying inventories is properly chargeable to the cost of such inventories and deductible as part of the cost of merchandise sold as and when the inventories were sold by the petitioner. But the petitioner has failed to inform us as to what portion of the amount was for work relating to inventories. Nor is there any indication in the record as to what portion, if any, of the inventories remained on hand and unsold at the end of the year. Whether the petitioner is able to furnish such information we do not know; however, it has made no attempt to do so and now urges that it is not important that it should. Under these circumstances we are not in a position to allow as a deduction any portion of the expenditure as the amount applicable to work done on inventories. With respect to the portion ef the amount applicable to the work of installing a general accounting system and a cost system, that is allowable. Schlosser Bros., Inc., 2 B. T. A. 131; North Star Granite Corporation, 21 B. T. A. 222. But again the petitioner has failed to furnish us any basis for determining the portion of the expenditure applicable to this phase of the work, and consequently nothing can be allowed with respect to it. In view of the foregoing we think the petitioner’s contention for the allowance of the amount of $20,000 as a deduction must be denied.

Expenditures for Privilege of Carrying. on Business, Stock Transfer Services, etc.

Although the petitioner is a Delaware corporation, its principal office is at Charleston, West Virginia, and its operating office is at Monroe, Louisiana, where its principal gas properties are located. During 1925 it qualified to do business in West Virginia and Louisiana and for the privilege of carrying on business in these states it paid them in 1925 amounts totaling $2,867.50.

The Guaranty Trust Co. of New York is the transfer agent for the preferred stock and common stock of the petitioner. On May 11, 1925, the petitioner paid that company $189.50 for the “ numbering of the stock certificates issued ”, apparently as stock issued in exchange for assets. On June 30, 1925, the petitioner paid the company $182.75 for “transfer services” which, so far as we can determine, were also in connection with the original issuance of the petitioner’s stock.

The amount of $2,867.50 paid the states of West Virginia and Louisiana for the privilege of doing business in those states and the amounts of $139.50 and $182.75 paid the Guaranty Trust Co. of New York were charged by the petitioner to its organization expense account, which in turn was charged off the petitioner’s books in 1926. The amounts were never taken out of the organization expense account, were never taken as deductions, and were not allowed as deductions in determining the deficiency in controversy.

In its petition the petitioner alleged that the respondent erred in failing to allow a deduction in the amount of $16,636.47 representing a number of specified expenditures, including those set forth above as made to the states of West Virginia and Louisiana and the Guaranty Trust Co. of New York. However, at the hearing the petitioner waived its claim for a deduction of the expenditures except in so far as it involved the items set out above. These the petitioner contends constituted ordinary and necessary expenses of carrying on its business and therefore are allowable deductions.

In our opinion the amounts paid to the States of West Virginia and Louisiana for the privilege of carrying on business in those states are allowable deductions. With respect to the nature of the expenditures for numbering stock certificates and “transfer services ” the evidence is not very clear. So far as we can determine these expenditures were in connection with the original issue of the petitioner’s stock. An expenditure incurred in connection with the issuance of capital stock does not constitute “ an ordinary and necessary expense of carrying on a trade or business ” and hence is not an allowable deduction. Baltimore & Ohio Railroad Co., 29 B. T. A. 368. The contention of the petitioner with respect to the allowance of these items is accordingly denied.

Decision will be entered wader Rule 50.