author: Tyson :

text:
    Lepman Bros. Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 104815.
    Promulgated November 21, 1941.

      Harry Thom, Esq., for the petitioner.

      Jonas M. Smith, Esq., for the respondent.
   OPINION.

Tyson :

The parties are in agreement that a loss represented by a “stockholders liability” such as is here involved is deductible under section 23 (f) of the Revenue Act of 1936 in the year in which the amount of such loss is paid, if the taxpayer is on the cash basis, or in the year in which such loss is definitely determined and properly accrued, if the taxpayer is on the accrual basis. The petitioner’s stockholders’ liability was not paid during the taxable year, but its net income was computed on the accrual method of accounting and therefore the only question presented in this proceeding, is whether the petitioner’s stockholders’ liability actually “accrued,” within the meaning of sections 43 and 48 of the Revenue Act of 1936, during its fiscal year ended May 31, 1938.

Petitioner contends that on August 1,1937, when the appeal period lapsed with no appeal having been taken by it, the District Court’s decree of May 1, 1937, as to petitioner’s liability for payment of $9,400 with interest thereon became final as to it, notwithstanding that court’s order of June 9, 1937. Petitioner further contends that it incurred its stockholders’ liability and accrued the same on its books during the taxable year and that the District Court’s order of June 9,1937, merely provided for a possible future refund to it of the amounts so accrued and paid to the receiver subsequent to the taxable year.

Respondent contends that petitioner’s stockholders’ liability remained contingent throughout its fiscal year ended May 31,1938, and thus was not incurred and was not properly accruable during that year, on the ground that, while petitioner did not file an appeal, the final result of the appeals taken by its codefendants ultimately fixed and determined petitioner’s actual liability in a subsequent year, pursuant to the provisions of the District Court’s order of June 9, 1937; and respondent further contends that this final result was the denial of certiorari by the Supreme Court on October 9,1939.

In Brown v. Helvering, 291 U. S. 193, a deduction claimed for amounts which were alleged to have been incurred and were accrued on the taxpayer’s books as a liability for refunds of commissions which it was required to make in the event of probable future cancellations of insurance policies, was denied because the liability “was not fixed and absolute”, but instead remained contingent during the taxable year.

Under the principle established in the Brown case, supra, the petitioner can prevail in the instant proceeding only upon a showing that its stockholders’ liability was not contingent but became “fixed and absolute” during the taxable year, and in our opinion such a showing has not been made.

The petitioner and others denied a stockholders’ liability asserted against them under Illinois Statutes as the respective owners of the stock of a bank which had failed. Petitioner and its codefendants contested the suit brought to impose that liability against them in the District Court and that court, on May 1, 1937, decreed that those defendants, including petitioner, were liable, respectively. The petitioner did not file an appeal, but prior to the lapse of its appeal period the District Court, on June 9,1937, entered an order extending certain rights to -all the defendants, including petitioner, fin connection with the decree theretofore entered.

The court order of June 9, 1937, was entered upon the petition of the receiver, with the consent of the plaintiff, Eeconstruction Finance Corporation, and without objection by any defendant in that cause, and it was acquiesced in by petitioner. Petitioner, as a defendant before the District Court, was a party to and was affected by the terms of that order. Pursuant thereto, petitioner had the right to and, subsequent to the taxable year, did make payment to the receiver, who was directed to hold such funds during the pendency of appeals by any of the defendants. The funds in the hands of the receiver guaranteed payment to the plaintiff, Eeconstruction Finance Corporation, in the event of aifirmance by higher courts and also guaranteed a return to the respective defendants of the payments made by each of them in the event of a reversal. Also pursuant to the court order of June 9, 1937, the final decision in that cause by the appellate courts was to determine the ultimate liability of all of the original defendants before the District Court, including petitioner and others who did not file appeals. During the pendency of the appeals taken and until the United States Supreme Court’s denial of a writ of certiorari on October 9, 1939, it was not known that there would be any liability of petitioner on account of the bank stock owned by it and, accordingly, we hold that the liability was contingent and not properly accruable during the fiscal year ended May 31, 1938. Cf. North American Coal Corporation, 28 B. T. A. 807, 848-851, and authorities cited therein.

The petitioner cites Pittsburgh Hotels Co. v. United States, 63 Ct. Cls. 475; certiorari denied, 275 U. S. 546, as a closely analagous case, but it is clearly distinguished from the instant proceeding. There, the Hotels Co. was. billed for public utility services, under the new tariff of a public utility company increasing its rate schedule above the rates provided for in an unexpired contract between it and the Hotels Co., and the Hotels Co., while actually paying only the contract rates, accrued the higher rates on its books as a liability for the year 1919 there in question. Another taxpayer, Frick, had a similar contract with the public utility company and brought suit contesting his liability for the increase in rates which was terminated in 1925 adversely to Frick. The Hotels Co. claimed a deduction for its accrued liability (difference between its contract rate and the higher rate at which it was billed) and the Commissioner disallowed the item as a legal deduction. The court held that the liability of the Hotels Co. was fixed in the taxable year there involved and was a proper accrual for that year. In reaching its conclusion the court pointed out that the Hotels Co. was not a party to the proceedings brought by Frick and that the utility was free at all times to enforce collection from the Hotels Co. without awaiting a termination of the proceedings by Frick. The court further said that the Commissioner had allowed the Hotels Co. a similar deduction for the subsequent years 1920 and 1921 and there appeared no ground for a different treatment for 1919.

We hold that the respondent did not err in disallowing the claimed deduction of $9,909.17 as an accrued liability for the petitioner’s fiscal year ended May 31,1938.

Decision will be entered for the respondent.

       SEC. 23. deductions FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions: •
      $ * * * * * *

      (f) Losses by Corporations. — In case of a corporation, losses sustained during the taxable year and not compensated for by insurance or otherwise.

       SEC. 43. PERIOD FOR WHICH DEDUCTIONS AND CREDITS TAKEN.
      The deductions and credits * * * provided for in this title shall be taken for the taxable year in which “paid or accrued” or “paid or incurred”, dependent upon the method of accounting upon the basis of which the net income is computed, * * *
      SEC. 48. DEFINITIONS.
      When used in this title—
      ****** *<
      (c) Paid, Incurred, Accrued. — The terms “paid or incurred” and “paid or accrued” shall be construed according to the method of accounting upon the basis of which the net income is computed under this Part.


source: Caselaw Access Project

author: Murdock:

license: Public Domain

text:
    Julia A. Forhan, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 85367.
    Promulgated November 25, 1941.

      Edgar B. Bronson, Esq., for the petitioner.

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

Murdock:

The Commissioner determined a deficiency of $43,974.41 in the petitioner’s income tax for the calendar year 1932. He has now stipulated that she owed no tax for that year, but has made an overpayment of $441.74, the amount shown on her return filed with the collector of internal revenue for the third district of New York. The only question presented for decision by the Board is whether the Board can make a finding that the overpaid tax was paid within two years before the filing of a claim for refund. The evidentiary facts have been stipulated.

The Commissioner is not permitted to make a refund of overpaid tax after two years from the time the tax was paid, except under certain circumstances. The taxpayer has filed a timely petition with the Board after receiving a notice of deficiency. A refund can not be made under such circumstances unless the Board determines as a part of its decision that the tax was paid within two years before the filing of a claim for refund or the filing of the petition, whichever was earlier. Sec. 322, Revenue Act of 1932. The overpaid tax in the amount of $441.74 was paid quarterly in 1933, the last payment having been made on December 16. The petition was filed more than two years after the last payment. The petitioner argues that a protest .which she filed on December 1, 1934, together with a memorandum in support of that protest filed by her attorney on January 5, 1935, were sufficient to constitute a claim for refund. Those papers were filed within two years after the payment of the tax, so that the only question is whether they constitute a claim for refund within the meaning of section 322.

The petitioner and her husband separated under an agreement dated April 5, 1932. He revived an old trust of December 15, 1922, by placing new property in that trust. He was trustee and his wife was beneficiary. He guaranteed that she would receive at least $15,000 a year from the trust. He also provided her with a place to live by causing his wholly owned corporation, Forhan Realty Corporation, to give her a lease for life on a house at a nominal rental, and he further agreed that if she was prevented from occupying the house, he would pay her $500 a month so that she could secure other quarters. The above matters were all incorporated in the agreement of April 5,1932.

The total gross income which the petitioner reported on her return for 1932 and upon which the tax shown on that return was computed and paid was $17,666.29, received from the trust above mentioned. The Commissioner sent the petitioner a letter dated November 17, 1934, stating that a review of her return for 1932 disclosed a deficiency of $11,364.93. He explained in the letter that he had eliminated the items of gross income which she had reported and had taxed them to her husband, but had included in her income $60,000 representing the value of her life interest in the lease, which she had received under the agreement of April 5, 1932. The petitioner was told in the letter that she could file a protest in writing against the income tax liability proposed, provided she did so within fifteen days, and she was also advised what information the protest should contain.

The petitioner filed a protest on December 1,1934. She had signed the document and sworn to it. It was submitted pursuant to the letter of November 17, 1934. The grounds for the protest were: (1) That the lease “was in the nature, and in lieu of alimony and support”; (2) in any event, the entire value of the lease was not income in 1932, but no more than the value of the use of the premises for that year would be income for that year; and (3) the value in 1932 of the yearly use of the premises and the lump sum value of the lease for the life of the petitioner were only nominal or, at least, very much less than the value assigned in the letter of November 17, 1934. She stated in the protest that it was her intention and the intention of her husband that she should receive for her maintenance and support in lieu of alimony the income from the trust “and the lease, which is the subject of this protest.” No reference whatsoever to the taxes already paid was made in the protest. The petitioner asked for a hearing on the protest.

A hearing on the protest was held on January 5, 1935, at which the duly appointed attorney for the petitioner appeared and submitted to the conferee an eight-page memorandum in support of the protest. He also filed with the conferee, at the latter’s request, copies of the trust and agreements. He argued in the memorandum that “Neither alimony, nor a provision or allowance for the support and maintenance of the wife, pursuant to a separation agreement, is taxable income to her.” He cited authorities in support of that proposition and concluded that the lease “which is the subject of this protest” was a part of the plan to provide for her support and “like other allowances or provisions for support, based on the separation agreement, it is not taxable to her.” He also argued that the Commissioner had overvalued the lease and, in any event, a yearly value rather than a lump sum value would be the most that could be included in income for 1932. The conclusion of the memorandum was that the protest should be sustained, the value of the lease should be excluded from the taxpayer’s income, and, even if something should be included, it should be no more than the real annual value of the use of the house for the tax year. No mention of the taxes shown on the return and theretofore paid was made in that memorandum.

The attorney appeared before another conferee on April 9, 1935, and argued that the value of the lease, the income from the trust, and money received by the petitioner upon the execution of the separation agreement were not taxable income to her for 1932. Thereafter, the Commissioner advised the petitioner in letters that the matter of her income tax liability for 1932 was being considered. However, he never allowed the protest and mailed the petitioner the notice of deficiency on March 16, 1936. The deficiency of $43,-974.41 was determined by adding to the net income of $17,056.78 reported by the petitioner on her return, $60,000 representing the value of her life interest in the lease, and $50,000 described as received in part settlement of a law suit.

Counsel for the respondent explained, when this case was called for hearing, that the Government had taxed the income in question both to the petitioner and to her husband to assure collection of the tax, no matter which one owed it. He said the Government did not seek to collect the tax from both parties, and, since it had won the case against the husband by default, an appropriate adjustment would be made in the case of the petitioner. The stipulation followed and the Commissioner now concedes that the petitioner owed no tax for 1932 and has made an overpayment in the amount of $441.74 shown on her return.

The petitioner reasons as follows: The Commissioner’s letter of November 17, 1934, in effect, acknowledged that the tax paid on the return was an overpayment unless the new item of $60,000, representing the lease, was properly taxable; the protest and memorandum filed by the petitioner claiming and showing that the new item of $60,000 was not taxable to her conveyed notice of the overpayment and that refund was due to the petitioner; consequently, those documents constituted a sufficient refund claim. Courts have been rather liberal in deciding just what constitutes a proper claim for refund. For discussion of this subject see Law of Federal Income Taxation, Paul and Mertens, sec. 51.16, et seq. The taxpayer, however, must have filed some kind of a document within the statutory period. He must have indicated thereon, with reasonable clarity, the fact that he was demanding a return of overpaid taxes and the ground upon which he was making his demand. Furthermore, the ground which he advanced must be one which actually supports the overpayment. In other words, the Commissioner must be put upon notice. Perfect claims filed after the period of limitations had run have been recognized as amending informal or imperfect claims filed before the statute had run. A protest against an additional assessment ordinarily may not be recognized as a claim for refund.

The present protest and memorandum were not intended as a claim for refund and were not treated as a claim for refund. They were intended and treated merely as a protest against the assertion of any additional tax. Even if they could be regarded as an imperfect claim for refund, susceptible of amendment, nevertheless, no amendment was ever filed and the issuance of the notice of deficiency was a complete rejection of any pending claim. Thereafter, it was too late to amend. Furthermore, the petition to the Board may not be regarded as an amendment of an imperfect claim theretofore filed.

The parties have not cited any case which contains facts at all comparable to those in the present case. The petitioner never protested against the taxes shown on her return and never filed any claim for the return of those taxes. She never advised the Commissioner in writing that she had overpaid her taxes for 1932 or that she demanded the return of any taxes paid for that year. One may reason, of course, that, since she protested against the inclusion of the $60,000 proposed in the letter of November 17, 1934, and the Commissioner had eliminated the income which she had reported on her return, she was, in effect claiming that she owed no taxes for 1932 and, therefore, she must have been claiming that she had overpaid the taxes shown on her return. But the notice to the Commissioner would have to be more direct than that to constitute a proper claim for refund. She made only collateral reference in her protest to the income from the trust which she had reported and on which she had paid the tax. The protest was in the alternative and not only contains no reference to taxes paid, but also fails to state any demand for refund of taxes already paid. We are unable to determine, as a part of our decision, that the tax was paid within two years before the filing of a claim for refund.


author: Turner :

text:
    Estate of William McDougall, by Anne A. McDougall and Kenneth Dougal McDougall, Co-executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100915.
    Promulgated November 25, 1941.

      Albert W. Kerman, Jr., Esq., for the petitioners.

      Harold F. Noneman, Esq., for the respondent.
   OPINION.

Turner :

In the estate tax return filed for the decedent the preferred stock of the Fre-Dou Corporation was returned at $50 per share and the common stock was returned at $25 per share. The respondent determined that the preferred stock had a value of $100 per share and the common stock $50 per share. It is alleged in the petition and petitioners now claim that the preferred stock had a value of only $10 per share and the common stock $1 per share and that they are entitled to a refund on account of an overpayment of tax.

The burden is on the petitioners to prove that the value placed on the stock by the respondent was incorrect. Commissioner v. Robertson, 75 Fed. (2d) 540. In addition to the prima facie correctness of the respondent’s determination, he has established that from May 1935 through November 1938 the corporation sold its preferred stock for $100 per share and its common stock for $50 per share and that during that period it received from such sales the total sum of $44,581. The dates of the sales were rather evenly spaced throughout that period and one of such sales was made to the wife of the president of the corporation. For reasons unknown to us the petitioners did not establish whether the decedent purchased the stock in question, and, if so, the cost thereof, or when or how he acquired it. The president of the corporation indicated in his testimony that there were several stock transfers on the books of the corporation which did not represent stock subscriptions, but the details of these transactions were not brought out.

The respondent places a great deal of reliance on the sales above described, while the petitioners attempt to minimize their importance in so far as they tend to establish fair market value, contending on brief that sales of stock by subscription to capital negotiated by promoters do not establish a “market value.” The authorities cited by the petitioners do not support any such proposition. In Heiner v. Crosby, 24 Fed. (2d) 191 cited by petitioners, the court said that sales alone without regard to the circumstances under which they are made do not conclusively establish value. In the instant case the evidence does not show, as suggested, that such sales were made only after a “diligent effort” to develop a buyer, Walter v. Duffy, 287 Fed. 41, nor does it appear, as suggested, that such sales were made to organizers or promoters who Were to receive salaried positions with the corporation, Premier Packing Co., 12 B. T. A. 637. True, the stock was not listed or traded in on any exchange, but that fact does not'establish that the stock had no market value. Here the record does not show whether the decedent or his estate ever made any effort to sell the stock.

The petitioners argue that the business of the corporation is highly speculative and that that fact tends to negative market value. The cases cited do not support that proposition, and, as the respondent suggests, the speculative character of stock might well be the element which gives it value. The facts here are too meager to support either view.

A study of the balance sheet and the statement of receipts and expenditures of the Fre-Dou Corporation gives very little aid in determining the value of its stock. The importance to be attached to the balance sheet would seem to depend largely upon the proper value to be placed upon the Hebrew contract (the contract with Mt. Sinai was not listed at all), but, accepting the various items as listed, the preferred and common stock seems to have a book value at least equal to the value determined by the respondent. In view of the working arrangement between the Fre-Dou Corporation and the Frederick Douglas Memorial Park and the fact that a considerable portion of the funds advanced by the former to the latter was used for development purposes, it would seem that the financial position of one would have to be considered in conjunction with the other. The cemetery during the period prior to the decedent’s death was obviously in the development stage and the absence of quick assets under the circumstances does not show the absence of value for the stock.

We do not think the petitioners have shown that the respondent, erred in determining the fair market value of the preferred and common stock of the Fre-Dou Corporation owned by the decedent at the time of his death and his determination is accordingly sustained.

The next question is whether the respondent erred in including in the decedent’s gross estate certain intangible personal property situated in England. The decedent was a British subject, but at the time of his death Durham, North Carolina, was his domicile and place of residence. The petitioners concede that the statute by its language requires the inclusion of the property in question in the decedent’s gross estate. Secs. 303 and 304, Revenue Act of 1926, as amended by sec. 403, Revenue Act of 1934. They contend, however, that, since the decedent was a British subject, the United States and its laws afforded no protection to him with respect to his property located in England and therefore the imposition of the tax on the transfer of such property at and by reason of his death is as to the United States extrajurisdictional and beyond the power of Congress; and, further, that the inclusion of such property in the gross estate is in violation of rights guaranteed by the Fifth Amendment to the Constitution.

Although the statutory provision in question has stood unchanged since the passage of the Revenue Act of 1934, this seems to be the first time the question here involved has been presented for the consideration of this Board or any of the courts; at least neither party has cited a case directly in point, and we have found none.

According to the pronouncements of the Supreme Court in Burnet v. Brooks, 288 U. S. 378, the national power as it relates to other nations and their subjects and apart from “any self-imposed constitutional restriction” is to be determined “by applying the principles of jurisdiction recognized in international relations.” In that case the Court upheld the right and power of Congress to tax as a part of the gross estate of a nonresident alien certain securities, the physical evidences of which were located in the United States. The Court pointed out that the jurisdiction to impose a tax with respect to the same property might exist in more than one government and might rest on any one of four distinct grounds — the citizenship of the owner, his domicile, the source of income, or the situs of the property. The situation, said the Court, has resulted in efforts “to preclude multiple taxation through the negotiation of appropriate international conventions.” It was noted however that these endeavors have proceeded “upon express or implied recognition, and not in denial, of the sovereign taxing power as exerted by governments in the exercise of jurisdiction upon any one of these grounds.”

In the instant case the decedent, though a British subject, was domiciled in the United States, and, domicile being one of the distinct grounds recognized as fixing the jurisdiction of a sovereign power, Congress was clearly within its power in requiring the inclusion of the decedent’s intangible personal property in his gross estate, even though the evidences of such property were actually located in England. In Burnet v. Brooks, supra, and First National Bank of Boston v. Commissioner, 63 Fed. (2d) 685, the jurisdictional ground for the tax was the situs of the property. In United States v. Bennett, 232 U. S. 299, and Guaranty Trust Co. v. Commissioner, 79 Fed. (2d) 245, it was citizenship. In this case the power to impose the tax rests on domicile.

It is the further claim of the petitioners that in the Fifth Amendment there is a constitutional restriction on the power of the United States to impose a tax with respect to the property of an alien where the situs of the property is in a foreign country. It is argued that inclusion of such property in the gross ¡estate of such alien for Federal estate tax purposes amounts to the taking of his property without due process. Answering this contention, the respondent relies on the decision of the Supreme Court in Curry v. McCanless, 307 U. S. 357, wherein it was held that both Tennessee, the state of the decedent’s domicile, and Alabama, where certain securities belonging to the decedent were actually located, had the power to impose death taxes in respect of the said securities and the imposition of such taxes by either state was not in violation of the due process clause of the Fourteenth Amendment'. With respect to the applicability of Curry v. McCanless, the petitioners in their brief state that “The cases cited * * * show the basis of that decision to be one resting on the fact that under our Constitutional system the full faith and credit clause thereof gives any state full protection over intangible rights, regardless of where the property interests are supposed to be situated.” Beading that decision, we find no justification for such a contention, even though some of the cases cited may have dealt with the full faith and credit clause of the Constitution. In Curry v. McCanless the Supreme Court found that the decedent, being domiciled in Tennessee, enjoyed certain rights and privileges under Tennessee law' with respect to the intangibles involved, even though the evidences thereof were located in another state, and found therein a sufficient ground to support a right in the State of Tennessee to impose the tax. The Court said: “The decedent’s power to dispose of the intangibles was a potential source of wealth which was property in her hands from which she was under the highest obligation, in common with her fellow citizens of Tennessee, to contribute to the support of the government whose protection she enjoyed. Exercise of that power, which was in her complete and exclusive control in Tennessee, was made a taxable event by the statutes of the state. Taxation of it must be taken to be as much within the jurisdiction of the state as taxation of the transfer of a mortgage on land located in another state and there subject to taxation at its full value.”

While in the instant case the decedent was not a citizen of the United States, he was domiciled here, and much that was said by the Supreme Court in Curry v. McCanless, supra, with respect .to the rights and privileges of the decedent therein under the laws of Tennessee is equally applicable to the rights and privileges enjoyed by the decedent in the instant case under the laws of the United States. It is true that certain of the decisions of the Supreme Court have indicated a difference in the practical application of the due process clause as contained in the Fourteenth Amendment to the states and similar application of the due process clause contained in the Fifth Amendment to the Federal Government. But where such distinctions have been drawn they have tended to show much greater restrictions with respect to the powers of the states as between themselves than with respect to the powers of the Federal Government as they relate to other nations and their subjects. Burnet v. Brooks, supra, pp. 403-5. In Union Refrigerator Transit Co. v. Kentucky, 199 U. S. 194, the Court said: “Because the limitations of the Constitution are barriers bordering the states and preventing them from transcending the limitation of their authority, and thus destroying the rights of other states, and at the same time saving their rights from destruction by the other states * * *, affords no ground for constructing an imaginary constitutional barrier around the exterior confines of the United States for the purpose of shutting that government off from the exertion of powers which inherently belong to it by virtue of its sovereignty.” The application to the states of the rule of due process, said the Court, “has no application to the government of the United States so far as its admitted taxing power is concerned”, which, power “embraces all the attributes which appertain to its sovereignty in the fullest sense.” We have not been able to find anything in the cases cited to indicate that the due process clause of the Fifth Amendment restricts, or was in any way intended to restrict, the power of the Federal Government in the imposition of the tax with respect to intangible property owned by an alien domiciled in and a resident of the United States, even though the physical evidences of such property are located in a foreign country. The property in question was properly included in the decedent’s gross estate. Cf. Frank W. Ross, 44 B. T. A. 1.

Reviewed by the Board.

Decision will be entered under Rule 60.

Mellott dissents on the second point.

       According to a footnote one of tlie drafts of convention referred to by the Supreme Court appears in a publication entitled “Double Taxation Relief,” Bureau of Foreign and Domestic Commerce, Department of Commerce, Jan. 3928. One of the subjects covered in that publication was the problem of multiple taxation as it relates to succession duties. In stating a proposed solution, the framers of the document said: “In the first place, the principle is recognized that the country in which the deceased was domiciled at the time of his death may levy succession duties on the entire estate.” They recognized that, in drawing up any proposal for the elimination of double succession duties, “an agreement had at first to be reached as to which country should yield its right to tax, that of domicile or that of situs.”


author: Smith:

text:
    George W. Schoenhut, Petitioner, v. Commissioner of Internal Revenue, Respondent. Otto Schoenhut and Minnie Schoenhut, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 100583, 100584.
    Promulgated November 25, 1941.

      Philip Dechert, Esq., for the petitioners.

      Paul E. Waring, Esq., for the respondent.
   OPINION.

Smith:

The principal question presented by this proceeding, is whether or not the petitioners sustained deductible losses in 1937 upon their investments in shares of common stock of the Schoenhut Co. The respondent has disallowed the claimed loss deductions upon the ground, as stated in his deficiency notices, that the shares of stock became worthless prior to 1937. The burden of proof is upon the petitioners to show otherwise. They contend that the “identifiable event” which fixed the loss occurred in 1937, at which time the Schoen-hut Co. lost all of its properties as a result of the foreclosure sale of the remaining assets of the bankrupt in that year. They further contend that the cost and replacement value of the company’s real estate and buildings, which were not sold until 1937, were several times greater than the outstanding liabilities of the company and that if the market for industrial properties had returned to normal during the years 1936 and 1937 they would have been able to receive something upon their investments in the common stock of the company.

It should be noted that the petitioners were owners of the common stock of the Schoenhut Co. and not of the preferred stock. The evidence does not disclose whether the preferred stockholders were preferred as to assets upon any liquidation of the company. The preferred stock was outstanding in the face amount of $115,500.

The question as to whether a loss upon worthlessness of stock is sustained in a taxable year is a question of fact, to be determined from all of the facts in the case. The Board and the courts have many times recognized that the stock of a corporation in financial difficulties may become worthless long prior to the taxable year in which the corporation finally disposes of its assets. Thus in Sterling Morton, 38 B. T. A. 1270, 1279; affd., 112 Fed. (2d) 320, the Board said:

There are, however, exceptional cases where the liabilities of a corporation are so greatly in excess of its assets and the nature of its assets and business is such that there is no reasonable hope and expectation that a continuation of the business will result in any profit to its stockholders. In such cases the stock, obviously, has no liquidating value, and since the limits of the corporation’s future are fixed, the stock, likewise, can presently be said to have no potential value. Where both these factors are established, the occurrence in a later year of an “identifiable event” in the corporation’s life, such as liquidation or receivership, will not, therefore, determine the worthlessness of the stock, for already “its value had become finally extinct.” De Loss v. Commissioner, supra, at 803. Cf. Squier v. Commissioner, supra; Monmouth Plumbing Supply Co. v. United States, 4 Fed. Supp. 349. In cases where the stock has concededly lost any liquidating value in a certain year, but an event occurs in a subsequent year which the taxpayer claims is “identifiable,” and where the Commissioner of Internal Revenue has determined that stock became worthless in the year in which it lost its liquidating value, then the taxpayer, in order to be entitled to the loss deduction in the latter year, has the burden of proving that, although the stock lost its liquidating value in the prior year, it continued to have a potential value until the occurrence of the event. This we consider to be implicit in the rule stated in Mark D. Eagleton, 35 B. T. A. 551; affd., 97 Fed. (2d) 62, and John J. Flynn, 35 B. T. A. 1064. Cf. William E. Steinback, 30 B. T. A. 1252.
Applying these principles to the instant case, we find that petitioner’s common Stock apparently had no present value as early as the spring of 1930. * * *

In our opinion the Schoenhut Co. was insolvent prior to 1936. The court which had jurisdiction of the case so determined and we see nothing in the evidence which would indicate otherwise.

The situation presented by these proceedings is much the same as that which obtained in a case which arose in the United States District Court for the Eastern District of Pennsylvania in In re Hoffman, 16 Fed. Supp. 391. The question there was whether Hoffman, a stockholder in the Franklin Trust Co., sustained a loss in 1932 or in 1931, in the earlier of which years the Secretary of Banking for the Commonwealth of Pennsylvania ordered that the Franklin Trust Co. be liquidated. In its opinion the District Court said:

Tbe question is whether the fact that a bank is closed by the authorities (without a finding of insolvency) and liquidation ordered in- a given year establishes the worthlessness of the stock as of that year.
What was said by Judge Dawson in Wesch v. Helburn (D. C.) 5 F. Supp. 581, is applicable to this situation:
“Taxation is eminently a practical matter, and a reasonable and practical construction should be given to section 23 (e). In Lucas v. American Code Company, 280 U. S. 445, 50 S. Ct. 202, 203, 74 L. Ed. 538 [67 A. L. E. 1010], it is declared: ‘The general requirement that losses be deducted in the year in which they are sustained-calls for a practical, not a legal, test.’
“In discussing a similar provision of the 1918 act, the Supreme Court of the United States, in the ease of United States v. S. S. White Dental Manufacturing Company, 274 U. S. 398, 47 S. Ct. 598, 600, 71 L. Ed. 1120, used this language: ‘The statute obviously does not contemplate and the regulations (article 144) forbid the deduction of losses resulting from the mere fluctuation in value of property owned by the taxpayer. * * * But with equal certainty they do contemplate the deduction from gross income of losses, which are fixed by identifiable events.’ ”
To say that stockholders of a bank which has been closed by order of the authorities and ordered liquidated do not sustain a loss upon their stock until some subsequent date when liquidation finally takes place, or until the official appraisement of the bank’s assets, seems to me to be losing touch with reality. It is just conceivable that cases might arise in which some realization could be had by the stockholders in the long future. As a practical matter, however, the business world never remotely considers that contingency. To all intents and purposes the stock of a bank becomes unsalable at any price when the bank is taken over and liquidation begins.
The government’s position that the loss occurred in the year in which the bank was closed is in accordance with the general practice of the Department. There is no formal regulation, and it would not be controlling if there were, but it is certainly a sensible, practical rule and in accordance with actual facts. I therefore hold that the bankrupt’s loss in the Franklin Trust Company stock was sustained in the year 1931 and not in the year 1932.

The decision of the District Court in that case was affirmed fer curiam by the United States Circuit Court of Appeals for the Third Circuit, 87 Fed. (2d) 200.

As in that case, so in the instant proceedings, we thiulr that the claim of the petitioners loses “touch with reality.” For all practical purposes the common stock of the Schoenhut Co. was worthless in 1935, if not in prior years. The record shows that there had never been any sales of the common or preferred shares of the Schoenhut Co. after Í933, so far as the witnesses knew. The company had not been able to operate after the beginning of 1935. Its liquid capital was all gone. Although the plant represented a large investment, there was no means of realizing upon it. The stock was worthless in 1935 and nothing occurred in later years to give it any value. Cf. Welsh v. Helvering, 290 U. S. 111; Burnet v. Houston, 283 U. S. 223; Sterling Morton, supra. We approve the action of the respondent in disallowing the claimed deductions.

Petitioners Otto Schoenhut and Minnie Schoenhut claim that they are liable for deficiencies in income tax only in accordance with the net income of each reported in the joint return and that the deficiencies must be determined against each separately. In support of. this contention they cite Cole v. Commissioner (C. C. A., 9th Cir.), 81 Fed. (2d) 485; reversing 29 B. T. A. 602.

In its opinion in Frida Hellman Cole, Executrix, 29 B. T. A. 602, the Board held that, where a joint return representing the combined gross income and deductions therefrom of husband and wife is duly filed, the election granted under section 51 of the Revenue Act of 1928 is exhausted and the tax liability thereunder is a joint obligation of husband and wife. In our opinion we stated:

* * * It is now well established that the right of election granted in section 51 of the Revenue Act oí 1928 and in similar provisions of prior acts is exhausted when a joint return is filed. McIntosh v. Wilson, 36 Fed. (2d) 807; Herman Einstein, 10 B. T. A. 240.

As above indicated, the United States Circuit Court of Appeals for the Ninth Circuit reversed our decision in that case. We followed the Ninth Circuit in Frank W. Darling, 34 B. T. A. 1062; Ella T. Flaherty, Executrix, 35 B. T. A. 1131; and Celia Seder, Executrix, 38 B. T. A. 874. In the last cited case we said:

On authority of the cited decisions, we hold that the total deficiency tax, the amount of which is not in controversy, should he apportioned between the estate of Abraham Seder, the deceased husband, and his surviving wife, Celia Seder, according to the net income attributable to each, which amounts may be determined from the facts stipulated by the parties and set out hereinabove.

In Helvering v. Janney, 311 U. S. 189, the Supreme Court held that in joint returns for 1934 under section 117 (d) of the Revenue Act of 1934 the gain from the sale of capital assets by one spouse may be offset by the loss from the sale of similar assets by the other spouse. In its opinion the Supreme Court cited Solicitor’s Opinion 90, Cumulative Bulletin IV (1921), p. 236, in which it was said:

* * * If a single joint return is filed it is treated as the return of a taxable unit and the net income disclosed by the return is subject to both normal and surtax as though the return were that of a single individual. In cases, therefore, in which the husband or wife has allowable deductions in excess of his or her gross income, such excess may, if joint return is filed, be deducted from the net income of the other for the purpose of computing both the normal and surtax.

We think that this opinion requires us to adhere to the position taken by the Board in Frida Hellman Cole, Executrix, supra. Petitioners Otto Schoenhut and Minnie Schoenhut filed a single joint return for 1937. They appealed to this Board from the determination of a deficiency made against them jointly by the respondent upon their joint income tax return for 1937. The respondent did not determine a deficiency due from either of the parties individually but a deficiency due from the two of them. We do not think upon the basis of the opinion of the Supreme Court in Helvering v. Janney, supra, that the Board is authorized to determine a deficiency against each “according to the net income attributable to each.” The deficiency was determined by the .Commissioner against the two jointly. We approve his determination.

In Moore v. United States, 37 Fed. Supp. 136, the United States Court of Claims had before it the question, as stated by the court:

* * * whether, under the Revenue Act of 1932, a wife, having no taxable income of her own but a considerable net loss, is liable for the income tax originally assessed and for a deficiency assessed upon the aggregate taxable income of herself and her husband, she having made no separate income-tax return, and her husband having made a joint return of the incomes and losses of both, with no separation of the items of income and loss as between himself and his wife shown on the return. * * *

The court held, relying upon Helvering v. Janney, supra, and Taft v. Helvering, 311 U. S. 195, that the wife was liable for the income tax originally assessed and for a deficiency assessed upon the aggregate taxable income of herself and her husband. The court pointed out that under the Revenue Act of 1938 and later acts, section 51 (b) of the Revenue Acts of 1932, 1934, and 1936 was clarified to expressly provide that where a joint return is filed a husband and wife are jointly and severally liable for the tax liability for that year. The court held, in reliance upon the Committee Report of the House recommending the change, that:

* * * It would not be a wise process of construction to treat the action of a legislature in clarifying a statute as an acquiescence in the contention that the statute had a different meaning before the clarifying change was made.

The court therefore held that the Revenue Act of 1932 was to be given the same construction upon the point involved as would be given to the Revenue Act of 1938 and later acts. The Supreme Court denied a writ of certiorari in this case on October 13,1941.

In view of the opinions of the Supreme Court in the Janney and Taft cases and of its action in denying a writ of certiorari in the Moore case, the rulings made by the Board in the Darling, Flaherty, and Seder cases, supra, will not be followed in the future.

Reviewed by the Board.

Decisions will T>e entered for the respondent.

Arundell dissents on the. second point.


author: Black :

text:
    William E. Mitchell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 85612.
    Promulgated November 25, 1941.

      W. A. Sutherland, Esq., Edward R. Kane, Esq., and Elbert P. Tuttle, Esq., for the petitioner.

      Jonas M. Smith, Esq., for the respondent.
    BefoRE Black and Turnee.
   SUPPLEMENTAL FINDINGS'OF FACT AND OPINION PURSUANT TO MANDATE OF THE COURT.

Black :

On August 15,1939, our findings of fact and opinion were promulgated in this proceeding. Seé 40 B. T. A. 424. We had before us for redetermination the deficiencies in income tax and fraud penalties which the Commissioner had determined against petitioner for the years 1925, 1926, 1928, 1929, and 1930. In the concluding paragraph of our findings of fact thus promulgated, we found (p. 441):

Petitioner’s income tax returns filed for the years 1925, 1926, 1928, and 1929 were not false or fraudulent, with intent to evade tax, and the statute of limitations has barred the deficiencies determined by the Commissioner for those years. Petitioner’s income tax return for the year 1930 was false and fraudulent, with intent to evade tax, and part of the deficiency for that year is due to fraud with intent to evade tax.

Following these findings, we gave, in an opinion, our reasons for the conclusions thus reached. Pursuant to these findings of fact and opinion, on January 10,1940, we entered a decision that there were no deficiencies for the years 1925, 1926, 1928, and 1929, because barred by the statute of limitations, and that there was a deficiency in petitioner’s income tax for 1930 in the amount of $20,872.59 and in addition thereto there was a 50 percent fraud penalty for the year 1930 in the amount of $10,436.30.

From our decision for the years 1925, 1926,1928, and 1929 the Commissioner did not petition for review and our decision for those years has now become final. From our decision for the year 1930, the taxpayer petitioned for review to the United States Circuit Court of Appeals for the Fifth Circuit, and that court has reversed our decision. See Mitchell v. Commissioner, 118 Fed. (2d) 308. Following its reversal of our decision the court issued its mandate, in which, among other things, it said:

It is now here ordered, adjudged and decreed by this Court, that the decision of the United States Board of Tax Appeals in this cause be, and the same is hereby reversed; and that this cause be, and it is hereby, remanded to the said Dnited States Board of Tax Appeals for further fact-findings as indicated in the opinion of this Court, and for a redetermination, reopening it for additional evidence if either side has any to offer.

Following the receipt of the court’s mandate, an order was issued by the Board which contained, among other things, the following:

Said proceeding is hereby set for hearing under the said mandate of the Court in Washington, D. C., July 16, 1941, before a special division composed of Members Black and Turner, at which time the Board will receive any additional evidence which either side may have to offer. If neither side desires to offer any additional evidence, then oral arguments by the respective parties 'will be heard as to what further action the Board should take under the mandate of the Court.

At the hearing under the mandate of the court held on July 16,1941, both parties appeared by their counsel, and each announced that they had no additional evidence to offer. Also, the counsel for each party announced they had no argument to make in addition to that already made in the original briefs filed with the Board, and left to the decision of the Board what further action it should take under the mandate of the court.

In making our findings of fact following the original hearing in this proceeding, we found the facts separately for each taxable year and then made some general findings, entitled “Other Findings.” Based upon these evidentiary facts, as previously stated, wo found as to the year 1930:

* * * Petitioner’s income tax return for the year 1930 was false and fraudulent, witb intent to evade tax, and part of the deficiency for that year is due to fraud with intent to evade tax.

In our opinion which accompanied these findings of fact, we undertook to state with some degree of particularity the reasons upon which our ultimate findings were based for the year 1930. Among other things, we stated as follows (p. 448) :

The Commissioner does not have to establish his determination of fraud “beyond a reasonable doubt.” All that he is required to do is to make proof of his fraud charges by a preponderance of the evidence which is clear and convincing. In re Locust Building Co., 299 Fed. 756. In the instant case he has proved dearly that in filing his income tax return for 1930 petitioner used in large part all over again as his basis of cost for Commonwealth shares sold in that year the cost basis of shares which had been largely used up in the prior years of 1928 and 1929, he has proved that petitioner knew that he had no right to do this, and that the use of such unauthorized basis of cost was largely responsible for an understatement of income for 1930 of $209,040.34. This, in the absence of any satisfactory explanation by petitioner, is convincing proof to us that petitioner’s income tax return for 1930 was false and fraudulent with intent to evade tax. Cf. White v. United States, 20 Fed. Supp. 623; M. Rea Gano, 19 B. T. A. 518; Frank A. Weinstein, 33 B. T. A. 105; Charles E. Mitchell, supra.

The court , in its opinion in reversing us, reviewed at some length the reasons which we gave for our ultimate finding that there was fraud for 1930 and, as we construe the court’s language, it holds that the facts which we found covering the year 1930 are not sufficient in law to support our finding that there was fraud for that year. The court directed that we make further findings of fact. In compliance with the court’s order that we should make “further fact-findings as indicated in the opinion of this Court”, we have carefully read the opinion of the court and have reexamined the entire record of evidence. After this reexamination, we find ourselves unable to make any material changes in the findings of evidentiary fact upon which our ultimate findings were based, that “Petitioner’s income tax return for the year 1930 was false and fraudulent with intent to evade tax and part of the deficiency for that year is due to fraud with intent to evade tax.”

As we have already stated, we construe the court’s opinion to hold that as a matter of law the evidentiary facts which we have found in our prior report are not sufficient in law to sustain our ultimate finding that there was fraud for the year 1930. The court, in the concluding part of its opinion, stated in this connection as follows:

* * * Negligence, whether slight or great, is not equivalent to the fraud with intent to evade tax named in the statute. The fraud meant is actual, intentional wrongdoing, and the intent required is the specific purpose to evade a tax believed to be owing. Mere negligence does not establish either. Griffiths v. Commissioner, 50 Fed. (2) 782 [2 USTC ¶766]. We think there ought to be a fact-finding that Mitchell in. making this return knew or did not know its probable falsity, and that he intended to evade a tax or did not. If Mitchell, though negligent, acted in good faith and with honest intent, and it is thought that Nabors did not, but that Nabors’ bad faith can be visited on Mitchell, the exact facts again ought to be found that the legal application of them may be considered. Another question that has occurred to us, but has not been argued, is how far the Commissioner is bound by the testimony of his own witness Nabors, Nabors not being a party.

Therefore, in respectful compliance with the opinion of the court and its mandate, we adhere to all of our findings of fact contained in William E. Mitchell, supra, except the last sentence thereof, which was the ultimate findings of fact as to the year 1930 and has been quoted above. We strike out that sentence and the findings of fact which it contains and substitute in lieu thereof the following findings:

In the preparation of petitioner’s income tax return for the year 1930, P. H. Nabors who prepared it for him was grossly careless in using as the cost basis of 22,050 shares of Commonwealth stock sold the cost basis of 5,000 shares of Southeastern stock which petitioner had acquired at a high cost in 1927 and substantially all of which had been used in the preparation of petitioner’s income tax returns for the years 1928 and 1929 as the basis of cost of stock sold by petitioner in those years. Nabors, by the use of a slight degree of diligence, could have discovered the error and could have avoided it. The petitioner, in signing and swearing to his 1930 income tax return as being correct, was grossly negligent in doing so. He might have, by the exercise of a slight degree of care and diligence, discovered the above mentioned error which led to a large overstatement of the cost of the shares of stock which petitioner sold and a consequent large understatement of his income for 1930. Notwithstanding their gross carelessness in these respects, neither Nabors nor Mitchell had actual knowledge that petitioner’s income tax return'for 1930 was false.

Therefore on these revised findings of fact and following the opinion of the court in Mitchell v. Commissioner, supra, we conclude that petitioner’s income tax return filed for the year 1930 was not false or fraudulent with intent to evade tax and the statute of limitations has barred the deficiency and penalty determined by the Commissioner for the year 1930. This results in a holding for petitioner that there is no deficiency for the year 1930 because it is barred by the statute of limitations. Naturally, if there is no deficiency, there can be no penalty.

At the hearing held July 16, 1941, under the mandate of the court, counsel for petitioner stated that, in lieu of filing an appeal bond, the petitioner had paid a portion of the tax which the Board had adjudged against him for the year 1930. Inasmuch as there is no deficiency and no penalty for the year 1930, because barred by the statute of limitations, there is an overpayment of the amount paid by petitioner pending his petition for review.

Reviewed by the Board.

Decision will be entered wnder Rule 50.

Sternhagen, Turner, and Opper dissent.


author: Murdock :

text:
    Mary Pyne Filley, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 98818.
    Promulgated November 25, 1941.

      Allen G. Gartner, Esq., and Edward I. Sproull, G. P. A., for the petitioner.

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

Murdock :

It is provided in section 162 (b) of the Revenue Act of 1936 that a trust shall be allowed a deduction of the amount of the income of the “trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries”, and in section 162 (c) that “in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated”, the amount which is properly paid or credited during such year to the beneficiary shall be allowed as a deduction. The amount allowed as a deduction under either of the above provisions is required to be included in computing the net income of the beneficiary. The Commissioner has made his determination upon the theory that the income of each trust was taxable to the beneficiary under section 162 (b) as income which was to be distributed currently by the fiduciary to the beneficiary. Actual receipt by the beneficiary during the taxable year is not essential under that provision. Cf. Freuler v. Helvering, 291 U. S. 35; Willcuts v. Ordway, 19 Fed. (2d) 917. The petitioner contends that the trustee had the discretion to accumulate the income of this trust or to distribute it to the beneficiary, consequently, (c) applies, and, since none of the income was actually paid to the beneficiary during the year, none of it is taxable to the petitioner. Although the proof does not show that the income was not properly credited to the petitioner during the year, decision need not turn upon this failure of proof. «

“Accumulated” in (c) is used in opposition to “distributed currently” in (b). The latter is intended to cover all cases where the trust instrument imposes a duty upon the trustee to make a prompt or periodic distribution of the trust income to the beneficiary. Commissioner v. Stearns, 65 Fed. (2d) 371; Commissioner v. First Trust & Deposit Co., 118 Fed. (2d) 449, affirming 41 B. T. A. 107; Freuler v. Helvering, supra; Florence M. Smith, Executrix, 5 B. T. A. 225. Cf. Albert J. Appell et al., Executors, 10 B. T. A. 1225. (c), by its express terms, covers only those cases where the fiduciary has the right and the duty to choose between prompt distribution and accumulation beyond the time when a prompt distribution would normally have been made. Discretion requires the exercise of judgment and reason. It involves consideration of whether, on the one hand, there is good reason to distribute and no justification for withholding, or whether, instead, he should deliberately refrain from distributing at the usual time and withhold for some definite reason which, in his opinion, better carries out the purpose of the trust than would a current distribution. A provision for the distribution of “net” income does not make (b) inapplicable. This is so even though distribution is not to be made until after the close of the year in which, the income is earned by the trust. Income which is distributed annually is being distributed currently, as well as promptly and periodically, and comes within (b), upon authority of the cases above cited. The grantor in the present case did not intend that the income of either trust should be accumulated within the meaning of that word as it is used in (c), but intended that the income should be distributed currently to the beneficiary within the meaning of (b). This is apparent- from the words he used in the trust instruments. Similar words have been similarly interpreted. Cf. Leo A. Balzereit et al., Guardians, 38 B. T. A. 345; affd., 107 Fed. (2d) 1008; Leonard Marx, 39 B. T. A. 537; Sewell v. United States, 19 Fed. Supp. 657. The only discretion given under the two trusts here in question was a discretion to the trustees of the inter vivos trust to pay the income directly to the beneficiary or to apply the same to her use and benefit. That is not a discretion to accumulate within the trust and is not the kind of discretion which brings the case within (c). The income was not to be accumulated, but was to be distributed currently, either directly to the beneficiary or for her use and benefit. It is taxable to the beneficiary.

The Commissioner, by an amended answer, raises the issue that he erred in allowing the petitioner a deduction of $12,660.80 under section 23 (a). That amount included the office expenses, fees for investment counsel, for custodian, and for accounting, as well as two other small charges. Recent decisions hold that merely keeping records, collecting interest and dividends, and keeping funds invested, with or without the aid of investment counsel, and regardless of the size of the estate, do not constitute carrying on a trade or business within the meaning of section 23 (a). Higgins v. Commissioner, 312 U. S. 212; City Bank Farmers Trust Co. v. Helvering, 296 U. S. 85; United States v. Pyne, 313 U. S. 127; Wilcox v. Commissioner, 119 Fed. (2d) 899; Helvering v. Wilmington Trust Co., 124 Fed. (2d) 156; Estate of Mary R. Donald, 43 B. T. A. 1114; and Estate of Elizabeth Felt, 44 B. T. A. 593. The facts in the present case, when considered in the light of the foregoing cases, permit no other finding than that the petitioner was not engaged in any trade or business during 1935.

It is unnecessary to decide whether the activities of the petitioner relating to the rental of one house in New York City constituted the operation of a business or whether a proportionate part of the expenses properly allocable thereto should be allowed as a deduction. The general office expenses are not deductible in any event, since they were not paid by the petitioner. See further discussion in the last paragraph of this opinion. Obviously, no part of the investment counsel fees or the custodian fees could be allocated to the real estate.' No basis for allocation of any of the other expenses to the real estate is shown in the record and, furthermore, any part which might properly be allocable thereto is too insignificant for further consideration.

The petitioner contends that, if the office expenses are to be disallowed as a deduction, then she erred in including in her income the amount of $8,505.84 described as trustees’ commission. This point is well taken. She never received any commission for her services. She and her brothers intended to contribute their services to the trusts under their father’s will without charge. The money in question was withdrawn directly from the testamentary trusts to pay office expenses for the office from which the affairs of those trusts were conducted. It was merely intended to pay the office expenses of the trusts from the trust funds. The withdrawal of the money from the trusts did not benefit the petitioner personally and the fact that she called it trustees’ commission in her return does not make it so. She erred in including it as part of her gross income.

Decision will be entered under Rule 50.


author: Arnold:

text:
    Estate of Arthur Jordan, by Alice B. Jordan, as Executrix and Administratrix, and James L. Gavin, as Administrator, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92584.
    Promulgated December 2, 1941.

      Nathaniel L. Goldstein, Esq., E. F. Oolladay, Esq., and Wilton H. Wallace, Esq., for petitioners.

      E. O. Algire, Esq., Allen T. AMn, Esq., and Thomas R. Gharshee, Esq., for the respondent.
   OPINION.

Arnold:

The respondent in arriving at the net taxable estate for the purpose of determining estate taxes disallowed the deduction of $100,000, principal amount of the note of decedent paid to Butler University after his death, on the ground that the decedent’s obligation under the note was not incurred for an adequate and full consideration in money or money’s worth. Sec. 303 (a) (1), Revenue Act of 1926.

The facts are not in dispute. The validity of the claim against the estate or the bona fides of the transaction is not questioned. The United States Supreme Court, in Taft v. Commissioner, 304 U. S. 351, held that a promise to pay money to a charitable or educational institution, where the only consideration was a stipulated application of the amount received, does not constitute a claim against the estate contracted for an “adequate and full consideration in money or money’s worth.” This decision is controlling here. That the promise of decedent in the Taft case was evidenced by a letter and herein by a promissory note is of no import.

The petitioners contend that the “University spent $239,384.59 of its own funds in completing the building in 1928”, which constituted a consideration not only adequate and full, but also in cash or money, for the decedent’s promise to pay $100,000 sixty days after his death. There is no basis in the stipulation of facts for the statement that the university spent its own funds in completing the building. It was stipulated that the building- was completed at a cost of $1,139,384.59 and that the value of the real property and stock transferred under the agreement aggregated $900,000. This would leave a balance of $239,384.59. However, it appears from the agreement that the decedent had contributed prior to the execution of the agreement “a substantial amount toward the cost of the college building” and was desirous “to contribute an additional sum sufficient to complete the three buildings, which in effect constitute one large college building now in course of construction.” While the amount previously contributed by decedent is not disclosed, the statement in the contract above referred to is open to the inference that the decedent intended to contribute, and that his contributions covered, the entire cost of the building. The agreement of the university to designate the building by decedent’s name and to inscribe or carve his name above the doorways of the building does not constitute an adequate and full consideration for money or money’s worth. This agreement of the university was not a consideration in the sense of conferring a right or privilege of monetary value upon the decedent in payment or exchange for his contributions. As disclosed by the agreement, the designation of the building by the name of decedent was merely to evidence the university’s appreciation of the decedent’s contributions made prior to and under the agreement and of his interest in the university as a member of the board of directors, executive committee, and building committee.

The $100,000 is not deductible from the gross estate under section 303 (a) (3) of the Revenue Act of 1926 as'a bequest or transfer to or for the use of a corporation operated exclusively for educational purposes. The payment of $100,000 was not made to fulfill a bequest made in decedent’s will. There was no transfer of the $100,000 by decedent during his life. He merely promised to do so. As stated in Taft v. Commissioner, supra, “fulfillment of the promise by the executor does not relate back to the time the promise was made so as to convert her [his] promise into a transfer by her [him].” Turner v. Commissioner, 85 Fed. (2d) 919, and Commissioner v. Bryn Mawr Trust Co., 81 Fed. (2d) 607, cited by petitioner, were decided prior to the Taft case and such decisions were inferentially overruled in the latter case. The United States Supreme Court referred to such decisions as contrary to holdings of the Board and the Circuit Courts that a promise to pay money to a charitable or educational institution, when the only consideration was a stipulated application of the amount received, did not constitute a claim against the estate contracted for an adequate and full consideration in money or money’s worth, notwithstanding the fact that under local law the promise was enforceable, with which view the United States Supreme Court agreed.

The respondent’s disallowance of the deduction of $100,000 is sustained.

Reviewed by the Board.

Decision will be£ntered under Buie SO.

Leech and Mellott dissent.


author: Disney:

text:
    Edna C. Gutman, Petitioner, v. Commissioner of Internal Revenue, Respondent. Cecile S. Lehman, Petitioner, v. Commissioner of Internal Revenue, Respondent. Harriet Lehman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 104130, 104131, 104366.
    Promulgated December 2, 1941.

      Laurence Chaves, Esq., for the petitioners.

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

Disney:

These proceedings were consolidated for hearing and report. They involve the redetermination of deficiencies in income taxes for 1936 as follows:

Docket No.r 104130_ $494. 05
Docket No.' 104131- 8,060.26
Docket No. 104366_ 6,576. 80

The facts are set forth in a stipulation of facts, which is incorporated herein by reference as our findings of fact.

The issue common to all of the proceedings is whether distributions made in January and April 1936 to the petitioners, whose taxable year was the calendar year 1936, out of earnings of the Lehman Corporation during its fiscal year ended June 30, 1936, insufficient to absorb a deficit at the beginning of that year, were taxable dividends.

The Lehman Corporation, a Delaware corporation, has at all times since its organization in 1929 kept its books and accounts and filed its income tax returns on the basis of a fiscal year ended June 30.

In January and April 1936, the petitioners and a trust of which petitioner Cecile S. Lehman was the sole beneficiary, as stockholders of the Lehman Corporation, received distributions of 75 cents per share. The amounts received by the trust were distributed to petitioner Cecile S. Lehman during 1936.

The Lehman Corporation had earnings and profits during its fiscal year ended June 30, 1936, of an amount less than its deficit at the beginning of that year, but in excess of the distributions made to its stockholders during the year.

The petitioners and the trust kept their books and records and filed their income tax returns on the basis of a calendar year. Petitioner Harriet Lehman filed her return for 1936 with the collector for the second district of New York and the other petitioners filed their returns for 1936 with the collector for the third district of New York.

The amounts reported by the petitioners as taxable dividends received in 1936 from the Lehman Corporation did not include the distributions made to them and the trust in January and April 1936. The Commissioner, following G. C. M. 18602, C. B. 1937-2, p. 134, included the amounts in the taxable income of* petitioners as dividends in his determination of the deficiencies.

The respondent, upon brief, contends that the reasoning of G. C. M. 18602, supra, should be adopted by us as a proper interpretation of section 115 (a) of the Revenue Act of 1936. The facts involved in that ruling are, on the present question, in all material respects the same as those here. The conclusion there reached is that a distribution made out of earnings in March 1936 to a shareholder filing his returns on the calendar year basis, by a corporation keeping its books and filing its returns on the basis of a fiscal year ended June 30, is a taxable dividend to the recipient, irrespective of the fact that at the time of the distribution the corporation was subject to the Revenue Act of 1934 and the shareholder the Revenue Act of 1936. The ruling contains no discussion disclosing the reasoning of the conclusion. The inference is that the statute applicable to the taxable year of the shareholder, not that of the corporation, determines whether the distribution constitutes a taxable dividend. The respondent concedes that if the question here is governed by section 115 (a) of the Revenue Act of 1934, judgment should be for the petitioners, since the Lehman Corporation had no “earnings or profits accumulated after February 28, 1913.” His argument is that the taxpayers here are the stockholders, not the Lehman Corporation, and, since the petitioners filed their returns on the calendar year basis and the Lehman Corporation had earnings and profits during a fiscal year ending during such calendar year, that is ending June 30, 1936, in excess of the distributions, such distributions meet the statutory definition of a taxable dividend in section 115 (a) of the 1936 Act.

Prior to the Revenue Act of 1936 a dividend was defined to be, to the extent material here, a distribution made out of earnings or profits accumulated subsequent to February 28, 1913. Sec. 2 (a), Revenue Act of 1916; sec. 201 (a), Revenue Acts of 1918, 1921, 1924, 1926; sec. 115 (a), Revenue Acts of 1928, 1932, 1934. These provisions have been construed to mean that a corporation does not have earnings or profits available for distribution to its stockholders as taxable dividends until impairments of capital or paid-in surplus resulting from operating losses have been restored. Roy J. Kinnear, 36 B. T. A. 153, and cases cited therein; Foley Securities Corporation v. Commissioner, 106 Fed. (2d) 731. The earnings and profits of the Lehman Corporation during the fiscal years ending June 30 in 1933, 1934, 1935, and 1936 were less than the deficit existing on June 30, 1932. It is clear, therefore, that if the distributions in question had been made under any act prior to the 1936 Act they would have been distributions of capital and not taxable dividends. Do the changes made in the Revenue Act of 1936 alter the situation under the prevailing facts ?

The provisions of Title I of the Revenue Act of 1936, embracing sections 1 to 322, inclusive, are applicable only to taxable years beginning after December 31, 1935. Sec. 1. Accordingly, the income tax liability of the petitioners for their calendar year, beginning January 1, 1936, is governed by the 1936 Act and tax liability of the Lehman Corporation for its fiscal year ended June 30, 1936, is governed by the Eevenue Act of 1934. Section 22 (d) of the Revenue Act of 1936 provides that “Distributions by corporations shall be taxable to the shareholders as provided in section 115.” Section 115 relates to “Distributions By Corporations.” In other words, section 22 (d) of the Revenue Act of 1936, applicable to these taxpayers, provides for taxation of the taxpayers upon any distribution by a corporation “as provided in section 115”; and section 115 (aside from other provisions not here applicable), concerns only dividends, which term is specifically defined. Therefore, to be taxable to the taxpayers here, the distributions must be dividends. Our question therefore is, whether the distributions here involved come within that definition. Dividend is defined first as a distribution made by a corporation (1) “out of its earnings or profits accumulated after February 28, 1913.” It is agreed that because of the deficit existing at all times herein concerned, the distributions do not meet that portion of the definition. Secondly, the definition goes on,' a dividend must be a distribution “out of the earnings or profits of the taxable year (computed as of the close of the taxable year * * *).” The expression “of the taxable year” is the key to the question here, for if, as the respondent urges, it means of the taxpayers’ taxable year, and if, as here, such taxable year began after December 31, 1935, respondent’s position must be sustained; whereas the petitioners’ position is in substance that the expression means “of the corporation’s taxable year”, that the corporation could distribute no such “dividend” during the first half of 1936 because the modification and extension of the previous definition did not apply to the corporation until the year beginning July 1, 1936, and that therefore petitioners are not taxable thereon as a “dividend” received.

It is to be observed that the expression “of the taxable year” occurs twice in section 115 (a), referring first to the earnings and profits of the taxable year and second to the computation thereof as of the close of the taxable year. It is obvious, we think, and in line with general rules of statutory interpretation, that the expression twice used in the same sentence has the same meaning in both instances. Certainly nothing indicates to us that the Congress used the expression in a different sense in the second instance. It is equally obvious that the second expression “of the taxable year” refers to the corporation’s taxable year, for it is as of the close thereof that earnings or profits are to be computed, and to say that this refers to the taxpayers’ taxable year would mean that the corporate earnings or profits are computed, not at the end of the corporate year, but six months thereafter. We reject such conclusion and hold that the second expression “of the taxable year”, in the parenthetical clause referring to computation of earnings or profits, refers to the corporation’s year. Therefore, since we have above concluded that the expression does not change its meaning from that earlier in the same sentence, it follows that “of the earnings or profits of the taxable yéar” refers to the corporate year, a “dividend” is a distribution from the earnings or profits of the corporations taxable year, and was therefore nonexistent during such year, under the definition applicable thereto, the definition not applying until in a year beginning July 1, 1936. The corporation could not pay a “dividend” prior to July 1, 1936, and there was none for the petitioners to receive. They received a distribution of capital and the corporation in closing its books on July 1 could properly record the transaction in no other way; and under section 115 (d) the amount of the distribution would, instead of being included in petitioners’ income, be applied against and reduce the adjusted basis of the stock, or any excess over basis be taxed as gain from sale or exchange of property. We can not conceive of computation of the corporation’s earnings or profits for a certain year being delayed beyond the close of the corporate year, yet under the respondent’s view fair interpretation of the sentence involved calls for that conclusion. Our opinion is borne out, we think, by the report of the Senate Finance Committee upon section 115 (a) of the Revenue Act of 1936. Both parties rely thereon. The report reads:

In order to enable corporations without regard to deficits existing at the beginning of the taxable year to obtain the benefit of the dividends-paid credit for the purposes of the undistributed-profits surtax, section 115 (a) changes the definition of a dividend so as to include distributions out of the earnings or profits of the current taxable year. The amendment simplifies the determination by providing that distributions during the year, not exceeding in amount the current earnings, are dividends constituting taxable income to the shareholder and a dividends-paid credit to the corporation. As respects Such dividends the complicated determination of accumulated earnings or profits is rendered unnecessary.

This discloses that the primary intent of section 115 (a) was to affect the tax position of corporations, and that the changes in the definition of “dividend” were made in connection with new legislation imposing surtax on undistributed profits computed in part by application of credits for dividends paid during the taxable year. The report refers to dividends paid “during the year” as creating tax liability to recipient and credit to the distributing corporation — indicating to some extent at least correlation of dividend received and credit given. ISTo corporation was to receive a credit for dividends paid prior to its first taxable year under tbe act. Sec. 27 (a) (b) . Since the first taxable year of the Lehman Corporation under the 1936 Act began July 1, 1936, after the distributions here involved, it was not entitled to dividends paid credit until after that date.

We conclude and hold that the amounts in question do not constitute taxable dividends to the petitioners.

Decision will be entered wider Bide 50.

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

       SEC. 115. DISTRIBUTIONS BX CORPORATIONS.
      (a) DBMNmotr of Dividend. — The term “dividend” when used in this title (except in section 203 (a) (4) and section 207 (c) (1), relating to insurance companies) means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28,1913.

       SEC. 1. APPLICATION OF TITLE.
      The provisions of this title shall apply only to taxable years beginning after December 31, 1935. Income, war-profits, and excess-profits taxes for taxable years beginning prior to January 1, 1936, shall not be affected by the provisions of this title, but shall remain subject to the applicable provisions of prior revenue Acts, except as such provisions are modified by legislation enacted subsequent to thi3 Act.

       SEC. 27. CORPORATION CREDIT FOR DIVIDENDS PAID.
      (a) Dividends Paid Credit in General. — For the purposes of this title, the dividends paid credit shall be the amount of dividends paid during the taxable year.
      (b) Dividend Carrt-Over. — In computing the dividends paid credit for any taxable year, if the dividends paid during the taxable year are less than the adjusted net income, there shall be allowed as part of the .dividends paid credit, and in the following order :
      (1) Dividends paid during the second preceding taxable year in excess of the adjusted net income for such year, to the extent not needed as a dividends paid credit for the taxable year preceding the taxable year the tax for which is being computed; and
      (2) Dividends paid during the first preceding taxable year in excess of the adjusted net income for such .year.
      No credit shall be allowed for dividends paid by a corporation prior to its first taxable year under this title.


author: Van Fossan:

text:
    The Sharples Solvents Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101546.
    Promulgated December 2, 1941.

      'William, B. Spofford, Esq., Frank, G. Hendryx, Esq., and Ghordes S. Jacobs, Esq., for the petitioner.

      Brooks Fullerton, Esq., for the respondent.
   OPINION.

Van Fossan:

The respondent held there was no contract restricting the payment of dividends by petitioner and, hence, that the credit was not allowable under section 26 (c) of the Revenue Act of 1936.

Petitioner makes four contentions:

1. It was legally impossible for petitioner to have paid dividends during 1936 and 1937 because of the corporation law of Delaware, the State of its incorporation;

2. Its accumulated deficit and bad financial position prevented any distributions as a matter of fact;

3. Taxation of petitioner under section 14 violates the spirit and purpose of that statute;

4. Such taxation results in confiscation of petitioner’s property in violation of the Fifth Amendment to the Federal Constitution.

Petitioner’s arguments are all specifically answered by the opinion of the Supreme Court in Helvering v. Northwest Steel Rolling Mills, Inc., 311 U. S. 46, in which case, under comparable facts, the claim for credit was denied.

Decision will be entered for the respondent.


author: Leech :

text:
    The Exolon Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101276.
    Promulgated December 2, 1941.

      George H. B. Green, Esq., and David Bursbeim,, Esq., for the petitioner.

      Henry O. Clark, Esq., for the respondent.
   OPINION.

Leech :

The parties are in agreement that the issue is determined by the answer to the question as to whether the sales of property set out in the findings were made within the United States under the provisions of section 119 (e) of the Revenue Act of 1936. It is not disputed that this property was produced wholly without the United States. Respondent admits that with respect to orders specified in paragraph (2) (b) of the stipulation above the sales were made in Canada.

Respondent contends that, although the property was produced without the United States and was sold and delivered to foreign cus-Comers, the orders for the merchandise having been received and accepted in the United States, the sale must be considered as taking place there and not in Canada, notwithstanding the fact that the goods for which the order had been accepted were not yet manufactured. He argues that the place where title passed to the purchaser is not determinative of the place of sale, but is merely incidental.

We do not agree. We have consistently held that the word “sale” as used in section 119 (e), supra, must be considered as having its usual and customary meaning and that the place of sale is where the title to the personal property passes to the purchaser. In East Coast Oil Co., S. A., 31 B. T. A. 558; affd., 85 Fed. (2d) .22, we held that, under contracts executed in this country, sales to purchasers in this country, of oil to be produced or purchased in Mexico by the seller, although payment was to be made therefor in the United States, were sales occurring in Mexico since the contracts provided for delivery to the purchasers in Mexico or c. i. f. ports in the United States on shipments from Mexico by common carrier. In that case we said:

Bespondent points also to the fact that the contracts and the payments under them were made in this country, urging that here was the place of sale. Of course, the place of contract, the place of delivery and of payment, the terms of the agreement, and extraneous circumstances may each have a bearing. But the ultimate goal of the examination of all such considerations is to ascertain when and where the title to the goods passes from the seller to the buyer. It is then and there a sale is consummated — -when and where property in the goods passes, when and where the incidents of ownership vest in the vendee. Such is the rule, long and firmly established.

In its opinion affirming the decision of the Board in this case the Circuit Court said:

* * * No profit resulted from the mere execution of the contracts. The oil was delivered to the buyer in Mexico. The title passed to the buyer in Mexico. When title passed the profit was earned in Mexico. Collection of the price in the United States was incidental and did not earn profit.

In our recent decision in Ronrico Corporation, 44 B. T. A. 1130, we reaffirmed this rule in holding that, under contracts executed in the United States by a Puerto Bican corporation for the sale of rum produced in Puerto Bico and to be shipped to purchasers in the United States, the sales occurred in Puerto Bico, where the contracts provided for delivery to the purchaser under bills of lading vesting title in him at point of shipment in Puerto Rico. See also Hazleton Corporation, 36 B. T. A. 908, and Elston Co., Ltd., 42 B. T. A. 208.

Bespondent contends that the present question is* new and not controlled by our decisions in the cited cases because those involve foreign corporations, whereas the petitioner here is a domestic corporation. Bespondent points to no reason nor is any apparent to us 'why, in two identically similar transactions under contracts entered into at the same place for goods to be produced in a foreign country, a sale would immediately be effected if the party agreeing to sell was of foreign citizenship but would be delayed until actual transfer of title to the goods where such party was a citizen of the country in which the contract was executed. We think the issue is controlled by our decisions in the cited cases.

Decision■ will he entered for the petitioner.

       SEC. 119. INCOME PROM SOURCES WITHIN UNITED STATES.
      *******
      (e) Income Prom Sources Partly Within and Partly Without United States.— Items of gross income, expenses, losses and deductions, other than those specified in subsections (a) and (c) of this section, shall be allocated or apportioned to sources within or without the United States, under rules and regulations prescribed by the Commissioner with the approval of the Secretary. Where items of gross income are separately allocated to sources within the United States, there shall be deducted (for the purpose of computing the net income therefrom) the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of other expenses, losses or other deductions which can not definitely be allocated to some Item or class of gross income. The remainder, if any, shall be included in full as net income from sources within the United States. In the case of gross income derived from sources partly within and partly without the United States, the net income may first be computed by deducting the expenses, losses, or other deductions apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which can not definitely be allocated to some items or class of gross income; and the portion of such net income attributable to sources within the United States may 1)0 determined by processes for formulas of general apportionment prescribed by the Commissioner with the approval of the Secretary. Gains, profits, and income from—
      (1) transportation or other services rendered partly within and party without the United States, or
      (2) from the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the United States, or produced (in whole or in part) by the taxpayer without and sold within the United States,
      shall be treated as derived partly from sources within and partly from sources without the United States. Gains, profits and income derived from the purchase of personal property within and its sale without the United States or from the purchase of personal property without and its sale within the United States, shall be treated as derived entirely from sources within the country in which sold, exeejit that gains, profits, and income derived from the purchase of personal property within the United States and its sale within a possession of the United States or from the purchase of personal property within a possession of the United States and its sale within the United States shall be treated as derived partly from sources within and partly from sources without the United States.