text:
    Robert E. McGrath, Petitioner, v. Commissioner of Internal Revenue, Respondent. Louisville Trust Company and James E. Fahey, Trustees for James W. and Antonette McGrath, Petitioners, v. Commissioner of Internal Revenue, Respondent. Fidelity and Columbia Trust Company, Trustee for Mrs. Leo Thieman, Petitioner, v. Commissioner of Internal Revenue, Respondent. Fidelity and Columbia Trust Company, Trustee for Marie Louise McGrath, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 65039-65042.
    Promulgated April 27, 1934.

      Camden R. McAtee, Esq., for the petitioners.

      A. H. Fast, Esq., and J. H. Yeatman, Esq., for the respondent.
   OPINION.

Smith:

These proceedings, consolidated for hearing, involve deficiencies in income tax for 1929 and penalties as follows:

The petitioner, Robert E. McGrath, and the three individuals, James W. McGrath, Mrs. Leo Thieman, and Marie Louise McGrath, for whom the other named petitioners are trustees, are children and devisees of Frank McGrath, who died June 27, 1921, leaving a will by which he bequeathed all of his personal property and the residue of his real property to his wife for life, with the remainder over to his five children.

The penalties herein are asserted for failure to make and file returns for the year 1929 and to include therein the alleged profit from the sale of real estate. The petitioner, Robert E. McGrath, filed a return for the year 1929, but no returns were filed by James W. McGrath, Mrs. Leo Thieman, or Marie Louise McGrath, or their trustees on their behalf, because they had no taxable income except such as might result from the sale of the real estate in question, and believed that none resulted therefrom. The individuals named are all inhabitants of Louisville, Kentucky. The trustees named filed their own income tax returns for the calendar year 1929.

The proceedings were all submitted on a written stipulation of facts, which reads in material part as follows:

(2) Frank McGrath died testate on June 27, 1921, a resident of Louisville, Kentucky, leaving surviving him a wife and five children, as follows: Robert E. McGrath, James W. McGrath, Mrs. Leo Thieman, (nee Helen F. McGrath), Marie Louise McGrath and Edward F. McGrath. The said children and/or their trustees, excepting Edward F. McGrath are the petitioners in these proceedings.
(2a) Edward F. McGrath is petitioner in another appeal, viz., No. 63448, McGrath v. Commissioner, involving the same issues as the appeals herein, and also other issues, whereby same is not consolidated herewith; he filed a return for the taxable year involved.
(3) The said will and testament of Frank McGrath, duly probated and disposing of his estate, so far as material, is as fallows:
(1) : I appoint my wife, Margaret J. McGrath, and the Louisville Trust Co., Executors of this "Will.
(2) : I devise my house and lot, No. 1510-Fourth Street, in the City of Louisville, Kentucky, to my wife, Margaret J. McGrath, absolutely in fee simple.
(3) : All the rest of my real estate and all of my personal estate, I devise and bequeath to my wife, Margaret J. McGrath, for life, and at her death, the same shall be divided equally among my five Children,— James W. McGrath, Edward F. McGrath, Robert E. McGrath, Helen F. McGrath and Marie Louise McGrath, and any other children who may be born to me by my said wife after the execution of this will; each child to receive his or her share when and not before he or she reaches the age of twenty-four years.
(4): If any of my children should be under the age of twenty-four years at the death of my wife, then I appoint the Louisville Trust Company as Trustee, to hold in trust the respective shares of such child or children as may be under the age of twenty-four years, to pay the income thereof to such child or children respectively, and to pay the principal of the shares of each child to such child when and as he or she attains the age of twenty-four years.
(5) : If any of my children should at any time die before reaching the age of twenty-four years, the share which any child so dying would otherwise have received under this will, shall go to the lawful issue of such child, then to my surviving children equally upon the same terms and conditions hereinabove set forth with respect to their original shares.
(4) At the time of his death, three parcels of real-estate situated on Broadway in the City of Louisville, State, of Kentucky, were owned by Frank McGrath and were part of his residuary estate disposed of by Par. 3, 4 and 5 of the provisions of his last will.
(4a) It is agreed that the value of the said three parcels of property (fee interest on June 27, 1921, the date of death of Frank McGrath, was $36,000, and on said date, that the aggregate value of any remainder interest was $17,751.96, and that the value of life estate of the widow (age 51), was $18,248.04.
(5) The widow, Margaret J. McGrath, died on January 9, 1929. The ages of the four McGrath children involved in these appeals at the date of the death of the mother were as follows: . .
(6) On December 7, 1929, said three parcels of real estate were acquired in condemnation proceedings by the United States Government from the aforesaid children of Frank McGrath, and/or their trustees, for a net consideration of $146,852.92. The value of said real estate on and after October 5, 1928, and until sold on December 7, 1929 was the same, to wit $146,852.92. Its value on or about August 3, 1924 was $110,000.
Respondent has computed a profit to each of the five children from the sale of said real estate upon the theory that the basis for gain or loss to them on such sale under Section 113(a) (5) of the Revenue Act of 1928, is the value of any remainder interests at the date of their father’s death in 1921. Said profit is determined as follows:
Total sale price_$159,000.00
Less sale expense_!_ 12,147. 08
-=-- $146, 852. 92
Less value of any remainder interests----- 17,751.96
$129,100. 96
Taxable Profit, one fifth_ $25, 820.19

The respondent has determined that the interest in the real estate in question vested in each of the children at the death of the decedent and that the sale of the property in 1929 resulted in a taxable gain to them, measured by the difference between the net sale price and the 1921 value of their several interests. The petitioners contend that the interest of the children under the testator’s will was not vested at the father’s death, but, on the contrary, was contingent or defeasible and did not vest until the mother’s death and until each child had become 24 years of age, and that no taxable profit resulted from the sale of the real estate, since its value was the same on those dates as on the date of sale.

The property involved herein was real property which was acquired by the children of Frank McGrath by general devise.

Section 113 of the Revenue Act of 1928 provides in part that—

SEC. 113. BASIS FOR DETERMINING GAIN OR LOSS.
(a) Property acquired after February 28, 1918. — The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1918, shall be the cost of such property; except that— '
* * * * * * *
(5) Pboperty transmitted at death. — If personal property was acquired by specific bequest, or if real property was acquired by general or specific devise or by intestacy, the basis shall be the fair market value of the property at the time of the death of the decedent. * * * In all other cases if the property was acquired either by will or by intestacy, the basis shall be the fair market value of the property at the time of the distribution to the taxpayer. * * *

The question here in issue in substantially similar form has been decided in Rodman E. Griscom, 22 B.T.A. 979; Molter v. Commissioner, 69 Fed. (2d) 7; affirming 27 B.T.A. 442; Hopkins v. Commissioner, 69 Fed. (2d) 11; affirming 27 B.T.A. 845. We held in the Griscom case that title to the remainder interest in certain trust property vested in the taxpayer upon the death of the testator and that its value on March 1, 1913, the testator’s death having occurred prior to that time, was the basis to be used in computing the profit upon its subsequent sale by the taxpayer. See also Huggett v. Burnet, 64 Fed. (2d) 705. In Molter v. Commssioner, supra, the Circuit Court of Appeals for the Seventh Circuit held, affirming 27 B.T.A. 442, that the taxpayer acquired a vested rather than a contingent remainder interest under her father’s will, which provided that upon the death of the life tenant she was to receive one fourth of the estate and was to receive one fourth each second year thereafter. If she predeceased the life tenant the corpus was to go to her lineal descendants. The court said:

It is obvious that a remainder without condition precedent can not take effect in possession and enjoyment until the death of the life tenant, or other determination of a particular estate, but that it does take effect in interest and right immediately on the death of the testator is a rule which, so far as we know, is not denied in American jurisprudence, and is strictly followed in Illinois. Schofield v. Olcott, 120 Ill. 362; Ducher v. Burnham, 146 Ill. 9. The possibility of death of the remainderman always renders it uncertain whether the remainder will ever take effect in possession and enjoyment, hut that fact does not make his survival a condition precedent, and does not render the remainder contingent. It is vested if his interest is fixed. Knight v. Pottgieser, 176 Ill. 368; Chapin v. Crow, 147 Ill. 213. His death before enjoyment of possession is merely a condition subsequent. * * *

See also Chandler v. Field, 63 Fed. (2d) 13; Brewster v. Gage, 280 U.S. 327; Security Trust Co. et al., Trustees, 25 B.T.A. 29; George Emlen Roosevelt, Trustee, 28 B.T.A. 194; and Robert C. Roebling, 28 B.T.A. 644.

The above cited cases involved' income tax deficiencies arising under income tax laws prior to the Bevenue Act of 1928, where the basis for the determination of the gain from the sales of property was the fair market value at the “time of acquisition.” This was held to be the March 1, 1913, value or the value at the date of the death of the decedent from whom acquired where the date of death was on or after March 1, 1913. The Bevenue Act of 1928 applied the same basis for real property, which is the character of the property with which we are here concerned, acquired by general or specific devise or by intestacy.

Upon authority of the above cited cases we hold that the value of the real estate in question at the time of the testator’s death, which is stipulated to be $36,000, is the basis to be used in computing the gain upon its subsequent disposition.

The petitioners strongly urge, and cite numerous cases in support of their contention, that under the laws of the State of Kentucky an interest such as that acquired by the devisees here under the will of their father did not vest upon their father’s death, or that if title did vest at that time it was a defeasible title, the value of which in the hands of the remainderman would not be the value of a vested and absolute title.

After a careful study of the cases relied upon by the petitioners, and other cases interpreting the laws of the State of Kentucky, we have reached the conclusion that under the laws of that state title to the remainder interest in the real estate involved in these proceedings vested in the testator’s children upon his death.

It is the established policy of the State of Kentucky that in construing wills and deeds vested estates will be favored over contingent estates. Snyder v. Snider, 259 S.W. 700; Howard v. Howard's Trustee, 280 S.W. 156; Stallard v. Lambert, 33 S.W. (2d) 682. In Howard v. Howard's Trustee, supra, the court said:

It was said in tbe case of Louisville Gas & Electric Co. v. Starin, 170 Ky. 819, 186 S.W. 669, that tbe law will always treat an estate as vested where it can do so without violation to the language contained in the will. “ In every case of doubt the doubt will be resolved in favor of the vesting of the estate.” Prewitt v. Prewitt, 178 Ky. 346, 198 S.W. 924.

See also Knox v. Knox, 186 Ky. 320; 216 S.W. 844.

In their rejoinder brief the petitioners state that:

The early decisions in Williams v. Williams, 16 S.W. 361, and Hillger v. Dolle, 37 S.W. 1492, while persuasive toward the respondent’s position, are constructions of clumsy wills to give effect to the reasonable intention of the testator, and did not directly involve the present question. They are not the law of Kentucky.
In Roy v. West, 194 Ky. 96 [238 S.W. 168], the Sillger case and similar cases are expressly overruled to any extent that such cases decide the remainder interest is absolute under the circumstances of those cases.

Roy v. West, 194 Ky. 96, was discussed in the later case of Stallard v. Lambert, supra, where it was held that, under a will devising real estate to a beneficiary during her lifetime and at her death to the testator’s heirs, the heirs took a vested remainder interest in the real estate. The court in its discussion said:

It is argued, however, that Weil v. King [104 S.W. 380] was overruled in Roy v. West, 194 Ky. 96, 238 S.W. 167, 168. In that case the devise involved was: “ If my daughter Emma R. Cosby should die without issue either before or after my death I will and direct that the portion of my estate devised in trust for her shall be held upon the same terms for the child or children of my daughter Lilly Roy, until the youngest child arrives at the age of 21 years or marries; and then it shall he divided among said children as it would descend under the laws of Kentucky.”
The question presented in that case was, What interest did the children of Lilly Roy take during the lifetime of Emma R. Cosby. It was held that they either took a contingent remainder interest or a vested interest subject to being defeated by their death prior to the death of Emma R. Cosby, it not being for the purpose of that case, imperative to decide which, as in either event any child of Lilly Roy could not pledge his interest so as to give the pledgee a lien upon it after the death of such child prior to the death of Emma R. Cosby. It is quite apparent from this statement how widely different the case of Roy v. West is from that of Weil v. King and the instant ease. It is true that towards the end of the opinion, after referring to and discussing those classes of cases which create a defeasible vested interest, the court said that some of the language of Weil v. King would seem to indicate that a vested interest created by a character of devise such as the court in Roy v. West was discussing would create an absolute estate and not a defeasible one, and to that extent Weil v. King would be no longer followed. But this court only meant that the discussion in Weil v. King when applied to a devise such as the court was discussing in Roy v. West would not be followed. * * *

It is clear, we think, from this discussion of Roy v. West, supra, and the general subject of vested remainder interests, that the case does not support the petitioners’ contention in these proceedings that the remainder interest in the real estate in question was a contingent and not a vested interest. In Fulton v. Teager, 209 S.W. 535, it was held that a devise to a widow for life, with remainder to her son and niece equally, the niece’s share to revert to the widow for life in case of death of the niece unmarried and without children, the remainder to the son, vested a half interest in the son which the son might sell and convey, subject to the life estate.

While it is true that the interest of the children of the testator in these proceedings was not absolute and was subject to defeat by their death without issue prior to the date that the interest should become absolute, that fact does not prevent the vesting of title in the children upon the death of the testator. Molter v. Commissioner, supra.

In Isabel Richardson Molter, 27 B.T.A. 442 ,we said:

* * * But if the remainderman be designated by name accompanied by words giving a vested remainder interest, a subsequent provision disposing of the same estate in the event he dies before payment or distribution merely creates a condition subsequent, and the estate will vest mstemter, subject to being divested uppn the remainderman’s death prior to the falling in of the particular estate or the arrival of the appointed time for payment or distribution. * * *

We were discussing in that case the rule as to the vesting of remainder interests under the laws of the State of Illinois. The rule appears to be the same, however, in the State of Kentucky. See also Marian B. Pringle, 26 B.T.A. 362.

Since under our ruling in these proceedings a taxable gain resulted from the disposition of the property in question, the penalties asserted by the respondent against the petitioners in Docket Nos. 65040, 65041, and 65042 for failure to file returns and report such income must be sustained. Where a taxpayer fails to file a return the imposition of a 25 percent penalty is mandatory under section 291 of the Revenue Act of 1928. Scranton, Lackawanna Trust Co., Trustee, 29 B.T.A. 698.

Reviewed by the Board.

Judgment will be entered under Rule SO.


source: Caselaw Access Project

author: Lansdon:

license: Public Domain

text:
    Signal Gasoline Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.

      Docket No. 47621.
    Promulgated April 27, 1934.

      Ward loveless, Esq., for the petitioner.

      Hartford Allen, Esq., J. A. Lyons, Esq., and E. G. Sievers, Esq., for the respondent.
   OPINION.

Lansdon:

The respondent determined deficiencies in income tax for the years 1924,1925, and 1926. In its appeal from such determinations the petitioner contended that' its allowances for depletion in the taxable years had been erroneously reduced in the respective amounts of $45,816.06, $124,445.17, and $257,187.32. In Signal Gasoline Corp., 25 B.T.A. 861, we held as to the principal issue that owners of casinghead gas contracts have no depletable interest in the oil and gas properties from which the wet gas is recovered and affirmed the determinations of the respondent. In due course the petitioner appealed from our decision as to the years 1925 and 1926. In Signal Gasoline Corp. v. Commissioner, 66 Fed. (2d) 886, the U.S. Circuit Court of Appeals for the Ninth Circuit reversed our decision, on the authority of Palmer v. Bender, 287 U.S. 551, and remanded the cause to us for computation of depletion allowances to which petitioner is entitled.

At the hearing for settlement under the mandate the parties submitted diverse computations. They agree that the amounts of depletion allowable under the opinion of the court must be computed for both years in conformity with section 204 (c) (2) of the Revenue Act of 1926 and that the only question submitted to us is the amount of gross income received by the petitioner under its contracts in the years 1925 and 1926, respectively.

In its own plant the petitioner converts the wet gas acquired under contracts into commercial gasoline. It contends that the total amounts realized from sales of such gasoline in any given year should be regarded as the gross income from its property in the contracts under which it acquires casinghead gas from the owner of gas and oil properties, or at least by such amount reduced only by royalties paid under the contracts. The respondent contends that the extraction of commercial gasoline from casinghead gas is manufacturing, that the gross returns from the sale of such gas is income therefrom and not from the exploitation of a natural resource, and that the gross income, if any, from petitioner’s property in contracts to purchase casinghead gas must be measured by the fair market value, or field price, of the wet gas as and when received by the petitioner at the mouth of the well or wells for use as raw material in the manufacturing operations, reduced by the amount of royalties paid under the contracts.

Apparently the petitioner's theory is that in marketing gasoline extracted from wet gas in its own plant it sells only what it acquires under its contracts and that the necessary processing or conversion is a mere preparation for sale by cleaning or otherwise. In Brea Canon Oil Co., 29 B.T.A. 1134, we discussed and decided a similiar contention. We held there that the conversion of wet gas into marketable gasoline is manufacturing, that receipts from the sale of the finished product in their entirety must be regarded as gross income from manufacturing operations, and that the cost of the raw material, the wet gas, is an element thereof only to the extent of its fair market value as and when received by the manufacturer at the mouth of the well.

In the circumstances here the petitioner is a producer from oil and gas property. Signal Gasoline Gorp., supra. In fact, however, it produces raw material only. It is also a manufacturer converting raw material into a finished commercial commodity. Brea Canon Oil Co., supra. Its income as a producer from oil and gas property is subject to depletion. Its gross income as a manufacturer is reducible to taxable income by the deduction of all the expenses of its operations, which include cost of raw material and depreciation resulting from the wear and tear of physical assets which it owns and uses in its business. Since, as a manufacturer, it is not engaged in producing from a natural resource reserve, its gross income from manufacturing forms no basis for the computation of depletion allowances. It recovers the entire cost of its raw material, including royalties, in the sale price of its finished product.

The petitioner contends that in determining gross income from its interest in the oil and gas property royalties to be paid under its contracts should not be deducted from the amounts realized in its operations. The opinion of the court reversing our original decision in this proceeding is in effect that petitioner’s contracts are in the nature of leases through which it acquired interests in oil and gas producing properties. Section 214 (a) (9) of the Eevenue Act of 1926 provides that in cases of leases deductions allowable for depletion shall be equitably apportioned between lessors and lessees. Obviously the royalties are the gross income of the lessors and the amount thereof is the basis for computing the proportion of depletion to which such lessors are entitled. It is well established that a taxpayer may not claim the benefit of a deduction which the statute grants to another. Dalton v. Bowers, 287 U.S. 404; Burnet v. Clark, 287 U.S. 410; Burnet v. Commonwealth Improvement Co., 287 U.S. 415. It follows that the gross income of the lessee from the same production, if any, must be the excess of the fair market value of the wet gas as and when received, over the royalties which it pays under its contracts. The contention of the petitioner would result in a double deduction from the same gross income, first for depletion and second by the subtraction of cost of raw material from its gross income from manufacturing.

If the fair market value of wet gas when received by the lessee is not greater than the royalties which it pays, there is no income of any kind from its property in the leases and, consequently, no gross income that can be used as a basis for computing depletion. In the circumstances herein the petitioner must show that when received by it the wet gas had a fair market value in excess of royalties paid to the lessors. This it has failed to do, and in the absence of such showing we must assume that the fair market value of the wet gas was not in excess of the royalties paid. We conclude, therefore, that in the taxable years the petitioner had no gross income from its interest in oil and gas producing property within the meaning of section 204 (c) (2) of the Eevenue Act of 1926, and so is entitled to no allowance for depletion in such years. Since this is the only question necessary for us to decide under the mandate of the United States Circuit Court of Appeals, it follows that the deficiencies for the years 1925 and 1926 are in the respective amounts of $19,340.18 and $40,804.19, as determined by the respondent.

Eeviewed by the Board.

Decision uMl he entered accordingly.

       Shu. 204(c)(2) In tile caso of oil and gas wells tlie allowance for depletion shall be 27% per centum of the gross income from the property during the taxable year. Sucli allowance shall not exceed SO per centum of the net income of the taxpayer (computed without allowances l'or depletion) from the property, except that in no case shall the depletion allowance be less than it would be il computed without reference to this paragraph.

       Sec. 214 (a) In computing net income there shall be allowed as deductions:
      *******
      (9) In the case of mines, oil and gas wells, other natural deposits and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each ease; such reasonable allowance in all cases to be made under rules and regulations to be prescribed by the Commissioner, with the approval of the Secretary. In the case of leases the deduction allowed by this paragraph shall be equitably apportioned between the lessor and lesspe,


author: Black:

text:
    W. Gibson Carey, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent. Isaac Harter, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 46599, 58009, 61445.
    Promulgated April 27, 1934.

      Theodore B. Benson, Esq., for the petitioners.

      L. W. Greason, Esq., for the respondent.
   OPINION.

Black:

We will dispose of the issues in the order of their statement. The first issue is as to the amount of taxable gain received by petitioner Carey on the redemption in 1926 of preferred stock which he owned in Boxboard. Respondent made the allocation of costs in accordance with his regulations, approved in Glenn H. Curtiss, 21 B.T.A. 629; aff'd., 57 Fed. (2d) 847. Petitioner introduced no evidence to show that respondent’s allocation of cost between the two classes of stock was incorrect. There being no evidence to overturn respondent’s allocation of cost, it remains unchanged. Petitioner’s assignment of error on this point is denied.

Petitioners’ next contention is that the dividends received by them in 1927 from Boxboard are taxable only in small part and that the balance thereof was a return of capital and therefore nontaxable.

This claim is based upon the contention that when Boxboard redeemed its preferred stock in September 1926, it did so out of the most recently accumulated earnings of the new Philadelphia Paper Manufacturing Co. and that hence when Boxboard declared and paid the $980,210 dividends in 1927, only a small part thereof was paid out of accumulated earnings and the balance was out of capital. For reasons we shall presently state, we do not think this contention can be sustained.

In the recent case of John B. Stewart, 29 B.T.A. 809, we had occasion to pass on a somewhat similar question, but we think that case is distinguishable on its facts from the facts of the instant case. In that case a corporation in 1926 bought and paid for 50 percent of its outstanding shares from two of its four shareholders and afterwards distributed this stock as a stock dividend to its two remaining shareholders. We held that the amounts paid for the stock in 1926 were statutory distributions as defined by section 201 (b) and (c), Revenue Act of 1926, and should be charged to profits accumulated since March 1, 1918, and if such profits were consumed by such distribution, additional distributions by way of dividends later made should be charged to earnings and profits accumulated prior to March 1, 1913, and treated accordingly. But it should be observed that in the Stewart case it was the earnings of the Windsor Tobacco Growers’ Corporation, the company which did the purchasing of its own stock, which we said were distributed out of most recently accumulated earnings of that company. Here it was Box-board which redeemed its own preferred shares in September 1926, and sought to apply thereto, not its own accumulated earnings, for at that time it had very little, if any, accumulated earnings, but the accumulated earnings of its subsidiary.

Boxboard, although, at that time owning all of the capital stock of the new Philadelphia Paper Manufacturing Co., did not own its assets and therefore did not own its accumulated earnings. Cf. Arthur Curtiss James, 13 B.T.A. 764, 769; affirmed on another point, 49 Fed. (2d) 707. The property of a corporation is owned by the corporation and not its stockholders. Boxboard got the money from its subsidiary by borrowing and executing its promissory note therefor. It was not until December 16, 1926, that Boxboard became the owner of the assets of the new Philadelphia Paper Manufacturing Co., through a complete merger and liquidation of the latter company with the former. Then it was, under the authorities which we will presently cite, that the accumulated earnings of the new Philadelphia Paper Manufacturing Co. became the accumulated earnings of Boxboard and therefore available for dividend distribution. The Commissioner determined that the amount available to Boxboard for the distribution of dividends as at December 31, 1926, was $1,807,814.47. We do not find it necessary to decide whether the respondent’s determination of this amount was precisely correct or not. From the facts we have stated in our findings of fact, we are certain, and so hold, that when Boxboard paid dividends of $980,210 in 1927 it had ample earnings accumulated since February 28, 1913, with which to pay them, and that the dividends which petitioners Carey and Harter received were paid out of earnings accumulated since February 28, 1913, and not out of capital and were therefore taxable. On this issue we find for respondent.

In view of our holding on this issue, it becomes unnecessary to consider respondent’s alternative contention.

Upon the question of whether earned surplus of the constituent companies remains earned surplus of the successor company in nontaxable reorganizations, we deem it necessary to cite only the cases of Commissioner v. Sansome, 60 Fed. (2d) 931, and United States v. Kauffman, 62 Fed. (2d.) 1045, in which the Circuit Court of Appeals for the Second and Ninth Circuits both held “ that a corporate reorganization which results in no gain or loss ’ under section 202 (c) (2) (42 Stat. 230) does not toll the company’s life as continued venture under section 201, and that what were ‘ earnings or profits ’ of the original, or subsidiary company remain, for purposes of distribution, earnings or profits ’ of the successor, or parent, in liquidation.” To the same effect are our decisions in George F. Baker, Jr., Executor, 28 B.T.A. 704, and Helen V. Crocker, 29 B.T.A. 773.

Reviewed by the Board.

Decision will be entered under Buie 50.

Goodrich dissents.


author: Lansdon :

text:
    Remco Steamship Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Caspar Lumber Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 57728, 57729.
    Promulgated April 27, 1934.

      Stiles W. Burr, Esq., and Anson Herrich, G.P.A., for the petitioners.

      Allin H. Pierce, Esq., for the respondent.
   OPINION.

Lansdon :

The petitioners, at the hearing and on their brief, have abandoned their contention that Nedwood was affiliated with them for Federal tax purposes in the taxable years. As their first contention they now claim that a partial consolidation of their accounts with those of Nedwood for the years 1926,1927, and 1928 is necessary in order to determine the correct taxable income of each for such years. The effect of consolidation would be to increase the net loss of Caspar for 1926 and so reduce its tax liability for 1927, and at the same time decrease its operating income for' each of the years 1927 and 1928. Nedwood is not a party to these proceedings and the year 1926 is not involved herein, except as facts relating to Caspar’s income in that year may affect the tax liabilities now in controversy. As provided in section 274 (g) of the Nevenue Act of 1926, in any proceeding the Board may consider facts relating to prior years if necessary to the correct redetermination of the deficiency under review. W. C. Mitchell Co., 27 B.T.A. 645.

In support of their claim the petitioners rely on section 240 (f) of the Nevenue Act of 1926 and section 45 of the Nevenue Act of 1928, which they argue were enacted to relieve related concerns not affiliated under the law from any harsh consequences resulting from their inability to make consolidated returns.

This so-called relief provision appeared first in our taxing statutes as a part of section 240 (d) of the Revenue Act of 1921, and apparently originally was intended to protect the revenues in situations in which the members of related, groups of enterprises could not be required to file a consolidated return. Its purpose was to prevent the shifting of profits between members of such a group by the use of arbitrary prices charged by one member thereof to another. Under the Act of 1921 the taxpayer corporation had no right to ask for a consolidation of accounts, but certainly had some legal remedy for any injustice resulting therefrom when such consolidation was made by the Commissioner.

In the Revenue Acts of 1924 and 1926, Congress included in its reenactment of section 240 (d) of the Revenue Act of 1921 as sections 240 (d) and 240 (f), respectively, the additional words “and at the request of the taxpayer shall.” Such language may have been so included because in 1924 the definition of affiliation was clarified to require ownership or control of 95 percent of the stock of related corporations. In identical sections 45 of the Revenue Acts of 1928 and 1932, the words added in the Act of 1926 were not included, but “the Commissioner is authorized to. distribute, apportion, or allocate gross income or deductions between or among such trades or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such trades or businesses.” This change in the Acts of 1928 and 1932 was made despite the fact that neither included any material changes in the requirements for consolidated returns. In our opinion there is nothing in the provision of section 240 (f) of the Revenue Act of 1926 or section 45 of the Act of 1928 that indicates Congressional intent to provide relief for taxpayers. The rule that requires liberal construction of relief provisions therefore does not apply in controversies thereunder. The taxpayer basing its appeal on such provisions must adduce convincing evidence sufficient to overcome the presumption of correctness which attaches to the determination of the Commissioner.

The facts show that Caspar sold all its output to Redwood at figures substantially in excess of the prices which the vendee paid to the Goodyear Lumber Co. for lumber of similar classes and grades. At the time the policy was adopted it was believed that Redwood was a member of the group entitled to make a consolidated return. If that had been true tax liability would not have been affected by the arbitrary prices at which Caspar sold timber to Redwood, as the artificial gains of one, if any, would have been offset by the equally artificial losses of the other.

Petitioners contend that on the record herein the situation is squarely within the provisions of the statutory provisions upon which they rely. Caspar manufactures rough lumber which Remco transports to Redwood for conversion by curing, planing, and other processes into finished products ready for sale to the retail lumber trade. In these circumstances we are-of the opinion that the three concerns are related within the meaning of the law, since, in effect, they are three branches of a single business enterprise engaged in the production of finished lumber. They are owned or controlled directly by the same interests. All of the capital stock of Remco and about 90 percent of Redwood is owned directly by Caspar, a fact that fully satisfies the requirements of section 240 (f) of the Revenue Act of 1926 and section 45 of the Revenue Act of 1928.

Counsel for respondent argues that denial of a request for consolidating the accounts of two or more related trades or businesses is the exercise of a discretionary authority with which the Commissioner is clothed by act of Congress and, therefore, not subject to review by the Board. In this proceeding we have authority to redetermine the amounts of the disputed deficiencies for the years under review, as provided in section 274 (a) of the Revenue Act of 1926. It follows, we think, that in such redetermination we have authority to review any act of the Commissioner that affects the amount of a deficiency which has been determined. The situation is analogous to that in which the Commissioner denied our right to review his refusal to grant special assessment. Our authority to review that particular discretionary act was settled in Blair v. Osterlein Machine Co., 17 Fed. (2d) 663. In its opinion in that case the Court of Appeals of the District of Columbia said:

* * * The appellate power [of the Board] includes the authority not only to review, but to investigate <Le novo, the matters in controversy between the government and the taxpayer. To this end the Board may affirm, set aside, or modify, in such manner and to such extent as it may be advised, the findings of the Commissioner.

In its opinion affirming the opinion of the Court of Appeals of the District of Columbia, the Supreme Court in Blair v. Osterlein Machine Co., 275 U.S. 220, speaking through Mr. Justice Stone, in discussing the authority of the Board under section 274 of the Revenue Act of 1924, said:

In the light of such provisions there is plainly no sufficient ground for reading into Section 274, allowing an appeal whenever a deficiency is found by the Commissioner, an exception based on the supposedly sacrosanct character of his determinations under Sections 327 and 328.

In our opinion the authorities above cited are sufficient answer to the respondent’s argument that his denial of the right to consolidate the accounts of a related group of taxpayers is not subject to review by the Board, if such consolidation affects a deficiency subject to redetermination under section 274 of the Revenue Act of 1926.

The respondent also contends that the facts, that one of the members. of the related group is not before the Board, and that one of the years for which consolidation of accounts is asked is not under review, are fatal to the contention of the petitioner. We think not. Under section 274 (g) of the Revenue Act of 1926 we have complete authority to consider facts relating to a prior year not before us, so far as they may affect the deficiencies under review, but no conclusion reached as to such facts can affect the tax liability of Caspar for any years not here in controversy or that of any other taxpayer not before us.

The evidence adduced to show the results of the alleged arbitrary prices at which lumber was sold by Caspar to Redwood is not convincing. It indicates only that Redwood, under a five-year contract, purchased about one third of the lumber used in its operations from the Goodyear Lumber Co., at rates substantially lower than cargo list or prevailing market prices. This signifies only that by agreement to take the entire output of the Goodyear Lumber Co., over a long period of time, a price somewhat below the prevailing market was obtained. By reason of such contract the vendor was able to dispose of all its products without selling cost and therefore could well afford to make price concessions over a period of five years.

The sales by Caspar to Redwood were on open account and at rates substantially equal to prevailing cargo lists and open market prices at which Redwood bought at least a third of its raw materials from outside concerns. It is clear, therefore, that the Caspar-Redwood prices followed the market. That Redwood, under a five-year contract, was able to purchase from another concern at lower rates, does not show that it suffered by its purchases from Caspar at prevailing open market prices which it could have obtained on the open market from other concerns. In the circumstances, we cannot say that the prices at which Caspar sold lumber to Redwood should have been lower than those fixed by the president of the two concerns. Cf. Flambeau Public Service Co., 27 B.T.A. 299.

The law seems to contemplate a consolidation of all the accounts of closely related enterprises. That, however, is not the claim of these petitioners. They would consolidate only those accounts which reflect sales of lumber by Caspar to Redwood. Even if such procedure is authorized by the law, it is obvious that such a partial consolidation might fall far short of an accurate distribution or apportionment of gains or profits, income, deductions, or capital as between the two concerns. The record discloses that Redwood was heavily indebted to both Caspar and Remco and that as to Remco no interest was paid. There may have been many other intercompany transactions f avoidable to one or another of the members of the related group. We think the purpose of section 240 (f) of the Revenue Act of 1926 can be effected only by a complete consolidation of all the accounts of the three related concerns. On this issue the respondent is affirmed. Western Hide & Fur Co., 26 B.T.A. 354; Crossett Western Co., 27 B.T.A. 258; Abe Ackerman, 27 B.T.A. 413; Broadway Strand Theatre Co., 12 B.T.A. 1052.

In the year 1926 Caspar received a dividend from Remco in the amount of $50,550. In that year they were affiliated. The dividend so received was eliminated in computing the consolidated net income of the group. In an amendment to his answer the respondent now alleges that the amount of the dividend should be added to the gross income of Caspar for 1926 for the purpose of computing its statutory net loss in that year, and he has moved to increase Caspar’s tax liability for 1927 and 1928 to correspond to the reduced net loss which would result from such addition to its income in 1926. In support of his contention he relies on section 206 (a) (4) of the Revenue Act of 1926. He argues that the obvious purpose of this provision is that while dividends received by one affiliated corporation from another would not be subjected to tax, it must be recognized that they do increase the surplus of the recipient and must be applied to reduce the amount of the statutory net loss which it can carry into a subsequent year.

If the dividend in question had been received from a nonaffiliated corporation, there would be no question that the position of the respondent is correct. In the circumstances here it was received from a corporation owned 100 percent by the recipient and so did not increase the consolidated gross income for tax purposes. Respondent argues that consolidated returns are permitted only for tax-computing purposes and that it is well settled that otherwise each member of an affiliated group must be regarded as a separate entity, as held in Woolford Realty Co. v. Rose, 286 U.S. 319. He also points out that the statutory provision upon which he relies is specific and unambiguous and makes no distinction between dividends received from affiliated and nonaffiliated corporations.

The only question here is the correct method of computing the statutory net loss of Caspar for 1926, which may be carried forward in the computation of its tax liability for 1927 and 1928. The consolidated net loss of a group of corporations may not be carried forward to apply against the consolidated, net income of the same group in the next year. Woolford Realty Co. v. Rose, supra. The net operating loss of the whole group must first be determined and the total thereof then prorated among the losing members thereof in proportion to their respective losses. The separate net losses so determined are then carried forward and applied severally against the income of each in the succeeding year. Kaiwiki Sugar Co. v. Burnet, 63 Fed. (2d) 822. We are not concerned with consolidated net loss sustained by the affiliated group in 1926, but with the individual net loss of Caspar, which may be applied to its individual income in 1927 and 1928 for the purpose of computing its taxable income for those years. It is obvious that as a business entity Caspar’s operating loss in 1926 was! reduced by the amount of the dividend which it received from Remco in that year. On this issue we approve the contention of the respondent and grant his motion for an increased deficiency.

In 1926 Caspar owned 448 shares of the preferred stock of Redwood for which it had paid $44,800. In that year Redwood had an accumulated deficit of $258,577.45, but it paid dividends on its preferred stock in the amount of $17,000, of which Caspar received $3,173.33. It is obvious that the amount received by Caspar was a distribution of the capital of Redwood and a nontaxable return of capital to Caspar and, therefore, not an element in the computation of net income or net loss in the year in which it was received. On this issue the determination of the respondent is reversed.

Reviewed by the Board.

Decision will Tje evle'red y/nder Rule 5p.

Goodkich concurs in the result.

       Sec. 274. (g) The Board in redetermining a deficiency in vespect 0f any taxable year shall consider such facts with relation to the taxes for other taxable years as may be necessary correctly to redetermine the amount of such deficiency, but in so doing shall have no jurisdiction to determine whether or not the tax for any other taxable year has been overpaid or underpaid.

         Sec. 240. (f) In any case of two or more related trades or businesses (whether unincorporated or incorporated and whether organized in the united States or not) owned or controlled directly or indirectly by the same interests, the Commissioner may and at the request of the taxpayer shall, if necessary in order to make an accurate distribution or apportionment of gains, profits, income, deductions, or capital between or among such related trades or businesses, consolidate the accounts of such related trades or businesses.

       SBC. 45. ALLOCATION OP INCOME AND DEDUCTIONS.
      In any case of two or more trades or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Commisioner is authorized to distribute, apportion, or allocate gross income or deductions between or among such trades or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such trades or businesses.

       Sec. 240 (d) For the purposes of this section a corporation entitled to the benefits of section 262 shall be treated as a foreign corporation: Provided, That in any case of two or more related trades or businesses (whether unincorporated or incorporated and whether organized in the United States or not) owned or controlled directly or indirectly by the same interests, the Commissioner may consolidate the accounts of such related trades and businesses, in any proper case, for the purpose of making an accurate distribution or apportionment of gains, profits, income, deductions, or capital between or among such related trades or businesses.

       Sec. 206. (a) As used in this section the term “ net loss ” means the excess of the deductions allowed hy section 214 or 234 over the gross income, with the following exceptions and limitations:
      »**»*»*
      (4) The deduction provided for in paragraph (6) of subdivision (a) of section 234 of amounts received as dividends shall not be allowed.


author: Smith:

text:
    Missouri Pacific Railroad Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. New Orleans, Texas & Mexico Railroad Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 33301, 40575, 50822, 52865, 59142, 66783, 67052.
    Promulgated May 1, 1934.

      James M. Chaney, Esq., for the petitioners.

      Orris Bermett, Esq., and /. T. Haslam, Esq., for the respondent.
   OPINION.

Smith:

In the above entitled proceedings trustees for the petitioners in bankruptcy have filed motions for orders staying these proceedings upon the grounds that the petitioners are now in bankruptcy and that their affairs are being administered by trustees under the direction of the District Court of the United States, Eastern Division, Eastern Judicial District of Missouri.

The only facts material to a decision on these motions are that while these proceedings were pending before the Board and on March 31, 1933, the petitioners filed in the District Court of the United States for the Eastern Division, Eastern Judicial District of Missouri, in Cause No. 6935, a petition for reorganization of their capital structures under section 77, chapter VIII, of the Acts of Congress relating to bankruptcy; that upon the same date the judge of that court entered an order approving the petition and finding that the petition was in accordance with section 77, chapter VIII, of the Acts of Congress relating to bankruptcy and that the petition had been filed by the debtor in good faith. In that order the District Court reserved full right and jurisdiction to make from time to time such orders as the court might deem proper, and to appoint a trustee or trustees of the debtor’s property and estate, with all title and powers of trustees under and subject to the provisions of the Acts of Congress relating to bankruptcy. On November 14, 1933, the District Court entered an order (No. 116) staying all pending suits against the debtors in Cause No. 6935 until after final decree in the bankruptcy proceeding. The order provided as follows:

Prom and after tlie entry of this order, all suits (other than claims for injuries to or death of employes), wherever pending, against any of the Debtors, shall be stayed until after final decree in this cause, and the continued prosecution of any and all suits (other than claims for injuries to or death of employes) which have for their object the enforcement of any lien or judgment against the property of the Debtors in the hands of the Trustees shall be, and the same is, hereby, enjoined until after final decree entered in this cause.
Statutes Involved.
Revenue Act of 1932.
SEO. 274. BANKRUPTCY AND RECEIVERSHIPS.
(a) Immediate Assessment. — Upon the adjudication of bankruptcy of any taxpayer in any bankruptcy proceeding or the appointment of a receiver for any taxpayer in any receivership proceeding before any court of the United States or of any State or Territory or of the District of Columbia, any deficiency (together with all interest, additional amounts, or additions to the tax provided for by law) determined by the Commissioner in respect of a tax imposed by this title upon such taxpayer shall, despite the restrictions imposed by section 272 (a) upon assessments be immediately assessed if such deficiency has not theretofore been assessed in accordance with law. Claims for the deficiency and such interest, additional amounts and additions to the tax may be presented, for adjudication in accordance with law, to the court before which the bankruptcy or receivership proceeding is pending, despite the pendency of proceedings for the redetermination of the deficiency in pursuance of a petition to the Board; but no petition for any such redeter-mination shall be filed with the Board after the adjudication of bankruptcy or the appointment of the receiver.
(b) Unpaid Claims. — Any portion of the claim allowed in such bankruptcy or receivership proceeding which is unpaid shall be paid by the taxpayer upon notice and demand from the collector after the termination of such proceeding, and may be collected by distraint or proceeding in court within six years after termination of such proceeding. * * *
Bankruptcy Act.

Section 11 (United States Code, title 11, ch. 3, sec. 29) :

a. A suit which is founded upon a claim from which a discharge would be a release, and which is pending against a person at the time of the filing of a petition against him, shall be stayed until after an adjudication or the dismissal o£ the petition; if such person is adjudged a bankrupt, such action may he further stayed until twelve months after the date of such adjudication, or, if within that time such person applies for a discharge, then until the question of such discharge is determined.

Section 17 (United States Code, title 11, ch. 3, sec. 35);

A discharge in bankruptcy shall release a bankrupt from all of his provable debts, except such as (1) are due as a tax levied by the United States, the State, county, district or municipality in which he resides.

Section 77 (enacted March 3,1933) :

(1) In addition to the provisions of section II of this Act for the staying of pending suits against the debtor, such suits shall be further stayed until after final decree the judge may, upon notice and for cause shown, enjoin or stay the commencement or continuance of any judicial proceeding to enforce any lien upon the estate until after final decree.
*******
(n) In proceedings under this section and consistent with the provisions thereof, the jurisdiction and powers of the court, the duties of the debtor and the rights and liabilities of creditors, and of all persons with respect to the debtor and his property, shall be the same as if a voluntary petition for adjudication had been filed and a decree of adjudication had been entered on the day when the debtor’s petition was filed.

Section 274 of the Revenue Act of 193'2, above quoted, is a substantial reenactment of section 282 of the Revenue Act of 1926 and of section 274 of the Revenue Act of 1928. (In Plains Buying & Selling Assn., 5 B.T.A. 1147, we reached the conclusion that where adjudication of bankruptcy occurs subsequent to the filing of a petition with this Board the jurisdiction of the courts and of the Board is concurrent and that the Board is not ousted of its jurisdiction by reason of the bankruptcy of the petitioner. In our opinion we exhaustively discussed the legislative history and the object and purpose of section 282 of the Revenue Act of 1926, which has its counterpart in section 274 of the Revenue Act of 1932. In the course of our opinion we stated:

In commenting on the Act as it was reported out of conference, the managers on the part of the House made the following statement:
Amendment No. 8&: The Senate amendment adds a new section, the House bill containing no corresponding provisions. The House recedes with an amendment making a clerical change. The provisions of the Senate amendment are summarized in the following paragraphs.
During bankruptcy proceedings or State or Federal receivership, proceedings the assets of the taxpayer come within the control of the bankruptcy or equity court whenever the taxpayer has been finally adjudicated a bankrupt by the bankruptcy court or the receiver has been finally appointed by the equity court. If a deficiency is determined by the commissioner during the pendency of such proceedings, the amendment permits the deficiency to be assessed and the bankruptcy or receivership proceedings to continue despite the prohibitions of section 274 (a). If a petition for the redetermination of a deficiency has been filed with the hoard prior to the adjudication of bankruptcy or the appointment of a receiver, the amendment permits the proceedings for the redetermination of the deficiency to be continued simultaneously with the bankruptcy or receivership proceedings. The claim for the amount of the deficiency may, of course, be filed with the bankruptcy or equity court. In case of final decision of the board before termination of the bankruptcy or receivership proceedings, a copy of the decision could be filed with the bankruptcy or equity court and the decision would presumably be followed by such courts. During the pendency of the bankruptcy or receivership proceedings a deficiency may be assessed in accordance with the final decision of the board, but the amount thereof may not be collected by distraint against the assets while under the jurisdiction of the bankruptcy or equity court. (See Conference Report, Report No. 356, House of Representatives, Feb. 22, 1926, p. 45.)

The petitioners claim that although our opinion in Plains Buying & Selling Assn., supra, may have been a correct interpretation of the law as it existed prior to March 3,1933, it is not a correct interpretation of the law as modified by the Act of March 3, 1933, and as applied to these petitioners. It is their contention that the bankruptcy law was materially modified by the Act of March 3, 1933, by adding thereto chapter VIII and that by subdivision (1) of section 77, contained in that chapter, the District Court is given plenary power over the “ reorganization of railroads engaged in interstate commerce ” and that it has authority to “ stay the * * * continuance of any judicial proceeding to enforce any lien upon the estate ” of the bankrupt until after final decree; that since it has such plenary power the District Court’s Order No. 116, referred to above, stays the proceedings now pending before this Board.') The petitioners also call our attention to the statement of the Supreme Court of the United States in United States Fidelity & Guaranty Co. v. Bray, 225 U.S. 205, 217, as quoted with approval by the same Court in New York v. Irving Trust Co., 288 U.S. 329, 332, as follows:

We think it is a necessary conclusion from these and other provisions of the Act that the jurisdiction of the bankruptcy courts in all “ proceedings in bankruptcy ” is intended to be exclusive of all other cowts and/ that such proceeding's include, among others, all matters of admmiistration, such as the allowance, rejection and reconsideration of claims, the reduction of the estates to money and its distribution, the determination of the preferences and priorities to be accorded to claims presented for allowance and payment in regular course * * *. [Italics supplied.]

The immediate question for our consideration is whether the proceedings before us constitute “ suits ” or “ judicial proceedings ” within the meaning of subdivision (1) of section 77 of the Bankruptcy Act. We are of the opinion that they do not. The proceedings are not suits against the railroad companies. The railroad companies themselves instituted the proceedings before the Board. They were instituted for the purpose of reducing the taxes claimed to be due the United States. They were for the petitioners’ benefit. fWe think it clear that it was not the intention of Congress to amend the Bankruptcy Act so as to provide that suits which were pending before the courts and this Board which had been brought by the railroad companies should be stayed. The language of section 77 added to the Bankruptcy Act on March 3, 1933, is not fairly susceptible of such construction.

Under section 274 (a) of the Revenue Act of 1932, the respondent is permitted to file claims with the bankruptcy court “ despite the pendency of proceedings for the redetermination of the deficiency in pursuance of a petition to the Board.” The bankruptcy court may adjudicate such claim in the winding up of the affairs of the bankrupt. (if before such claim is adjudicated by the bankruptcy court the Board has redetermined the deficiency, the respondent and, we apprehend, the petitioner may make such representation to the bankruptcy court with respect thereto as either desires. In any event the bankruptcy court has plenary power to adjudicate the claim. But it was clearly the intent of Congress, as shown by the Conference Report (No. 356, House of Representatives, Feb. 22, 1926) above quoted, that the Board should not be ousted of jurisdiction to hear and determine the proceedings pending before it,

Orders will be entered in these proceedings denying the motions of the petitioners.

Reviewed by the Board.


author: Sternhagen:

text:
    Lucy A. Blumenthal, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 64975.
    Promulgated May 1, 1934.

      George E. Cleary, Esq., and Eugene Blumenthal, Esq., for the petitioner.

      Thomas M. Mather, Esq., for the respondent.
   OPINION.

Sternhagen:

The Commissioner determined a deficiency of $7,541.47 in petitioner’s individual income tax for 1929. He added to the net income which she reported on her individual return an amount of dividends on corporate shares which had theretofore been transferred by her in trust, and this she contests. The facts are all contained in a written stipulation, which, omitting the appended exhibits, is as follows:

•1. On January 16, 1929, Lucy A. Blumenthal, the petitioner herein, being the owner of three thousand shares of the par value of $100. each of cumulative preferred stock of Sidney Blumenthal & Co., Inc., a New York corporation, registered in her name on the stock transfer books of Sidney Blumenthal & Co., Inc., obtained a loan in the’ amount of $75,000 from Guaranty Trust Company of'New York, and in consideration thereof, executed and delivered to said company a negotiable demand note in the sum of $75,000 carrying interest at 5%%; that said note was payable to said company; that at t¡he same time said Lucy A. Blumenthal endorsed over to said company as collateral security for the payment of said loan the stock certificates for the aforesaid three thousand shares of cumulative preferred stock. Attached hereto and marked Exhibit No. I is a true copy of said note.
2. Said three thousand shares of cumulative preferred stock of Sidney Blumenthal & Co., Inc., had a value of approximately $300,000 on February 5, 1929. Such stock was listed on the New York Stock Exchange. Said three thousand shares of cumulative preferred stock of Sidney Blumenthal & Co., Inc., were acquired by the petitioner on December 21, 1928, by gift from her husband, Sidney Blumenthal.
3. It was the custom of Guaranty Trust Company of New York, in enforcing payment of any note secured by a pledge as collateral of stock listed: on the New York Stock Exchange, to sell such collateral and apply the proceeds thereof in payment of the note before seeking to enforce payment from the maker of the note, and said note signed by Lucy A. Blumenthal was executed and delivered by her with knowledge of such custom.
4. The copy of the deficiency letter which was received by the petitioner from the Commissioner of Internal Revenue on or about February 27, 1932, with respect to her federal income tax for the year 1929 is attached to the petition herein as Exhibit I thereof and is a true copy of said deficiency letter.
5. Attached hereto and marked Exhibit No. II is a correct copy of a trust instrument duly executed and delivered on February 1, 1929, by Sidney Blu-menthal as donor, husband of said Lucy A. Blumenthal, to Guaranty Trust Company of New York and Andre Blumenthal as trustees. Said trust so created and said trust instrument are still in full force and effect. The trust hereinafter referred to as Exhibit No. Ill was established by the petitioner for the purpose of providing for payment of the debt due Guaranty Trust Company of New York and providing for payment of the premiums on the life insurance on the life of Sidney Blumenthal described in Exhibit No. II, and providing income for herself and her children and capital for her children, all as set forth in said trust agreement.
6. Attached hereto and marked Exhibit No. Ill is a correct copy of the trust indenture duly executed and delivered on February 5, 1929, by Lucy A. Blu-menthal, the petitioner herein as donor, to Sidney Blumenthal and Guaranty Trust Company of New York as trustees. Said trust so created and the trust instrument are still in full force and effect.
7. On February 5, 1929, Lucy A. Blumenthal transferred, set over and assigned to Sidney Blumenthal and Guaranty Trust Company of New York as trustees under and in pursuance of the aforesaid indenture, referred to as Exhibit No. Ill, said three thousand shares of cumulative preferred stock of Sidney Blumenthal & Co., Inc., subject to the pledge thereof to Guaranty Trust Company of New York as collateral security for the payment of said note.
8. On February 5, 1929 and at the time when said Lucy A. Blumenthal set over, transferred and assigned to said trustees said three thousand shares of cumulative preferred stock, she also executed and delivered to Guaranty Trust Company of New York as trustee a power of attorney authorizing said trustee to transfer the said stock to its name as such trustee on the stock transfer books of Sidney Blumenthal & Co., Inc., and as such trustee to receive and collect all dividends thereon.
9. On February 5, 1929, there remained due and owing by said Lucy A. Blu-menthal to the Guaranty Trust Company of New York, on account of the aforesaid note, the principal sum of $33,000', together with accrued interest thereon, the balance of said note having theretofore been paid by her.
10. The said Guaranty Trust Company of New York, tire holder of said note, and the lender of the said amount of $33,000, was and is the same company which on February 1, 1929, and February 5, 1929, became the corporate trustee under the trust instruments hereinbefore respectively referred to as Exhibits Nos. II and III.
11. On February 5, 1929, there were unpaid and accumulated back dividends on said three thousand shares of cumulative preferred stock, amounting to $10.50 per share, a total of $31,500, none of which had then been declared or paid by said Sidney Blumenthal & Co., Inc.
12. After February 5, 1929, and prior to January 1, 1930, there were declared and paid to the said trustees, as dividends upon the said three thousand shares of cumulative preferred stock, the sum of $31,500 in full payment of the aforesaid unpaid and accumulated back dividends.
13. The said trustees, under the trust indenture, hereinbefore referred to as Exhibit No. Ill, paid over during 1929 said sum of $31,500 to Guaranty Trust Company of New York as holder of the aforesaid note in payment of interest due thereon in the amount of $1,303.69 and in payment of principal due thereon in the amount of $30,196.81.
14. After the 5th day of February, 1929, and prior to the 1st day of January, 1930, both dates inclusive, there were paid to the said trustees under the trust indenture, hereinbefore referred to as Exhibit No. Ill, by Sidney Blumenthal & Co., Inc., the sum of $15,750 as current dividends on the three thousand shares of cumulative preferred stock. The said trustees, under the trust instrument hereinbefore referred to as Exhibit No. Ill, disbursed said sum of $15,750 to the insurance companies enumerated in schedule “A” annexed to the aforesaid trust instrument referred to as Exhibit No. II, as and for current premiums upon said policies.
15. Said payment of $15,750 was made to said insurance companies under and pursuant to the provisions of the trust indenture hereinbefore referred to as Exhibit No. III.
16. The said trustees, under the trust indenture hereinbefore referred to as Exhibit No. Ill, filed a federal income tax return for the calendar year 1929 on form 1040 in which they reported as income taxable to them as trustees the said dividends received during the calendar year 1929 in the amount of $47,250, and paid a federal income tas due thereon in the amount of $2,473.56.
17. The life insurance policies enumerated in schedule “A” annexed to the trust indenture hereinbefore referred to as Exhibit No. II had been irrevocably assigned by Sidney Blumenthal, the person insured thereunder, prior to February 5, 1929, to Guaranty Trust Company of New York as trustee under and pursuant to the trust indenture executed on February 1, 1929, hereinbefore referred to as Exhibit No. II, and were payable at maturity to said trustee. Sidney Blumenthal reserved no right to change the designation of beneficiaries in such policies.
18. Lucy A. Blumenthal and Sidney Blumenthal were during 1929 and are now living.
19. Lucy A. Blumenthal, the petitioner herein, was not entitled, under the trust indenture hereinbefore referred to as Exhibit No. Ill, to receive any of the income thereunder until all current premiums upon the policies referred to in the trust indenture, hereinbefore referred to as Exhibit No. II, had been fully paid and until the aforesaid debt of $33,000 to Guaranty Trust Company of New York had been fully paid with all interest due thereon. Except for any income remaining after such payments were made, no part of the income of such trust could be distributed to, or accumulated for the benefit of, the said Lucy A. Blumenthal.
20. Said Lucy A. Blumenthal had no power, under the aforesaid trust indenture, referred to as Exhibit No. Ill, either alone or in conjunction with any other person, to revest title in herself to any part of the corpus of the said trust.
21. None of the income of said trust received under the indenture, herein-before referred to as Exhibit No. Ill, was, or could be, applied under the terms of the said indenture to the payment of premiums on policies of life insurance on the life of said Lucy A. Blumenthal.
22. No part of the dividend income of $31,500 (representing the unpaid and accumulated back dividends on said three thousand shares of cumulative preferred stock) received by said trustees in 1929 under the trust indenture, hereinbefore referred to as Exhibit No. Ill, was received by said Lucy A. Blumenthal, nor could any part thereof in her discretion, either alone or in conjunction with any other person, be distributed or paid to her or accumulated for future distribution to her.
23. It is stipulated and agreed that Exhibits Nos. I, II and III hereof, and Exhibit I of the petition herein, may be introduced in evidence with the same force and effect as if the originals of the instruments, of which these Exhibits are copies, were put in evidence.

It is not entirely clear, either from the notice of deficiency or from the respondent’s argument, what his conception is of the taxable nature of the transactions from which the alleged income results. Primarily he treats the facts as constituting a device for tax evasion, and, citing Burnet v. Wells, 289 U.S. 670, urges that as a tax-reducing contrivance it should not be permitted to succeed. Whatever doubt as to the result we might have if there were evidence before us of a controlling purpose to reduce or evade taxes, cf. Commissioner v. Gregory, 69 Fed. (2d) 809, the present record is devoid of such evidence. Although it is quite conceivable that the petitioner and her husband executed these trusts as a means of keeping down their taxes, there is nothing in the evidence to indicate whether this is so, or, if so, whether this was the controlling purpose or merely incidental. We may not, therefore, approach the question, as the respondent suggests, as if to determine whether an obvious tax-evading device shall succeed, but proceed rather to determine whether the legal eifect of what was done is to impute to the petitioner the income which the Commissioner has ascribed to her.

The petitioner in February 1929, being indebted for $33,000, for which she had posted collateral consisting of $300,000 worth of cumulative preferred shares upon which unpaid dividends had accumulated, made a trust. To the trustee she transferred the foregoing shares and imposed upon it the obligation to pay her $33,000 debt out of the accumulated dividends when paid. She further provided that out of current dividends the trustee should pay the premiums upon her husband’s policies of insurance upon his own life. The trust was irrevocable and she had no further direct interest in it. The accumulated dividends, to the amount of $31,500, were, in 1929, declared and paid by the corporation to the trustee, and by the trustee were in turn used to pay the petitioner’s indebtedness to the extent of $1,303.69 interest and $30,196.31 principal. Of current dividends, the trustee received $15,750, and this amount was paid by the trustee to the insurance company as premiums upon the husband’s insurance policies.

The Commissioner has treated the amount of $31,500 and the amount of $15,750 as petitioner’s income and has allowed her a deduction of $1,303.69 as interest paid by her. The petitioner argues that she is not chargeable with the amounts thus added to her income, nor does she seek the deduction for interest which the respondent has allowed.

1. It is contended by the petitioner that by the trust instrument which she executed the income from the shares was irrevocably put out of her reach, and that the fact that simultaneously she was as a practical matter relieved from all likelihood of demand for payment of her indebtedness did not serve to enlarge her income. We say “ as a practical matter ” because while the petitioner was not legally released from her obligation upon the note, she urges that the collateral of $300,000 was so far in excess of the amount of the debt as to make the possibility of her payment too remote to deserve serious consideration. We think, however, that her personal liability as that of a primary obligor can not be thus minimized. Her liability persisted despite the pledge of collateral security; and, whether at any given time the value of the collateral was large or small in relation to the amount of the debt, it does not serve to change her legal position as primary debtor.

The accumulated dividends as well as the current dividends were clearly income of the trust. They were entirely derived from the ownership of the shares upon which they wei*e declared and paid. Were they to be held, say for unascertained persons, they would clearly be taxable income of the trust. The accumulated dividends, however, were by the terms of the instrument to be immediately used in the discharge of the indebtedness of Lucy Blumenthal. As to this amount, it seems clear that Lucy Blumenthal was just as much a beneficiary of the income of the trust as if by express direction it had been immediately turned over to her and she had used it in discharge of her debt. Since the accumulated dividends were to be distributed by the trust as quickly as received, they must be regarded as immediately distributable to her as beneficiary. By sections 161 (a)(2) and 162 (b), they are therefore included within her income and deductible from the gross income of the trustee.

It can not be said, as the petitioner suggests, that each payment made by the trustees to discharge Lucy Blumenthal’s indebtedness was in effect a purchase by the trustee of additional corpus of the trust. The entire 3,000 shares were the property, first, of Lucy Blumenthal, and then, of the trustee. The effect of the payment of the debt was not to enlarge the corpus of the trust, but merely to release the shares from the lien of the pledge. This effect was produced as a corollary to the primary benefit to Lucy Blumenthal of discharging her debt. It is anomalous to say that, although she derived this clear benefit solely by virtue of the terms of the trust instrument, yet she was not a beneficiary of the trust. Had the trustee failed to use the accumulated dividends for her in this way, there is little doubt that she would have had an unchallengeable standing in a court of equity as a beneficiary in an attempt to enforce the terms of the trust.

The respondent’s determination is therefore sustained as to the $31,500 and the correlative interest deduction.

2. The current dividends on the shares amounting to $15,750 were received by the trustee and were paid by the trustee to the several insurers as premiums upon the policies insuring the life of Sidney Blumenthal, petitioner’s husband. The Commissioner treated this amount as petitioner’s income and she objects. Her only relation to the insurance is that, by the terms of Sidney Blumenthal’s trust, in which the policies were held, the trustee was required to pay the income of such trust to petitioner during her life. These current dividends were not income of Sidney’s trust. They were income of Lucy’s trust. But they were not distributable to Lucy at any time and were not to be used for payment of premiums on any policies of insurance on her life. Clearly section 167 of the Revenue Act of 1928 is not applicable, and we can find no other specific provision taxing such income to her. The general provisions of the statute give no support to the Commissioner’s determination, and as to the $15,750 the determination is reversed.

Judgment will be entered under Bide SO.

       SEC. 167. INCOME EOR BENEFIT OF GRANTOR.
      Where any part of the income of a trust may, in the discretion of the grantor of the trust, either alone or in conjunction with any person not a beneficiary of the trust, be distributed to the grantor or be held or accumulated for future distribution to Mm, or where any part of the income of a trust is or may be applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in section 23 (n), relating to the so-called “charitable contribution” deduction), such part of the income of the trust shall be included in computing the net income of the grantor.


author: Sternhagen : Black,

text:
    Forest Anderson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 64360.
    Promulgated May 1, 1934.

      Stanley Suydam, Esg., for the petitioner.

      James B. Johnson, Esg., for the respondent.
   OPINION.

Sternhagen :

The Commissioner determined a deficiency of $2,639 in petitioner’s income tax for 1929.

1. The petitioner claims the deduction of approximately $14,000 as a “ loss sustained during the taxable year and not compensated for by insurance or otherwise * * * incurred in trade or business.” (Revenue Act of 1928, sec. 23 (e) (1)). The amount claimed represents the uninsured part of his liability for damage for death resulting from his negligent driving of his own automobile. If allowable at all, such a loss must be the proximate result of the business (cf. Kornhauser v. United States, 276 U.S. 145); and such a finding of fact is not justified by the evidence. The petitioner, the sole witness, testified that in order to procure the prompt services of a laborer to do some cement work in the floor of a building of which he was the owner and lessor, he was driving his own Cadillac car a distance of 220 miles in the nighttime with a friend when the collision occurred for which he was liable. We think the payment of the judgment is too remote to be characterized as a loss incurred in business.

2. The respondent affirmatively pleads that $142,000 received by petitioner in the taxable year is ordinary net income and not statutory capital gain, as petitioner in his return treated it. In Schedule D of his return the petitioner called this amount “ oil royalty.” As such, it was clearly to be treated as ordinary income and not capital gain, Burnet v. Harmel, 281 U.S. 108. But the petitioner contends that the designation “ oil royalty ” was a mistake and that the amounts were received as a consideration for several mineral deeds, all of which are in evidence, transferring to various persons fractional “ interests in and to all of the oil, gas, and other minerals in and under and that may be produced from the following described lands situated in Seminole County, State of Oklahoma.” The descriptions vary in form in the several instruments, some calling the interest conveyed an “ interest in the royalty,” but no point is made of these differences. The petitioner continued to own the fee to the land. He contends that these transactions were sales of capital assets and legally different from the leases considered in earlier cases.

While it may be true that there is a technical difference between a mineral deed in Oklahoma given for a single consideration, and an oil or mining lease in Texas or some other state given for either periodic royalties or a single “ bonus,” the practical effect of both is substantially the same and the legal distinction is overridden in applying a nationally uniform Federal income tax. We find it impossible to interpret Burnet v. Harmel, supra, as meaning anything else. Oil leases in Texas are called sales, but the proceeds were held to be ordinary income even though paid in lump. We can see no essential, practical, or economic difference when in Oklahoma a land owner conveys to another the lesser estate of an interest in the subterranean contents and the right to produce it.

The decisions in J. E. Murphy, 9 B.T.A. 610, and J. D. Reynolds, 10 B.T.A. 651, were cited in Ferguson v. Commissioner, 45 Fed. (2d) 573, and support the petitioner’s view. But they must give way before the broader principle of Burnet v. Harmel, supra. The recent opinion of the General Counsel in G.C.M. 12118, Cumulative Bulletin XII-2, which is contrary to his affirmative claim here, seems to us to be incorrect.

Following, as we think, the purport of Burnet v. Harmel., supra, we hold the $142,000 to be ordinary income, and sustain the respondent’s affirmative claim for the resulting increase in the deficiency. Cf. Alexander v. King, 46 Fed. (2d) 235.

Reviewed by the Board.

Judgment uMl be entered under Rule 50.

TRAmmell concurs in the result.

Black,

dissenting: I am unable to agree that Burnet v. Harmel, 287 U.S. 103, and Alexander v. King, 46 Fed. (2d) 235, cited in the majority opinion, control the disposition of the instant case and justify the Board in sustaining the Commissioner in his plea for an increased deficiency.

It should be noted that the conveyances here involved are not oil and gas leases. What petitioner did was to execute several mineral deeds transferring to various persons fractional “interests in and to all of the oil, gas, and other minerals in and under, and that may be produced from, the following described lands situated in Seminole County, State of Oklahoma, etc.” and received for such mineral deeds the sum of $142,000 in the taxable year.

It seems to me that these transactions come within the purview of our decisions in J. E. Murphy, 9 B.T.A. 610; affirmed without opinion (D.C.Ap., Feb. 20, 1930); and J. D. Reynolds, 10 B.T.A. 651. In both of these cases we held that profits derived by the'taxpayers from the sede of their interest in oil and gas underlying land owned by them for more than two years prior to the date of sale were capital gains under section 206 of the Revenue Act of 1921.

An examination of the Murphy case will show that the granting clause in the deed in that case was almost identical with the granting clause in the deed in the instant case.

Of course the Board has held in many cases that bonuses and royalties received as rentals from oil and gas leases are not receipts from the sale of capital assets and therefore are not entitled to the capital gains provision of the law. One of these cases was Henry Harmel, 19 B.T.A. 376. The Circuit Court of Appeals reversed us in that case, following its decision in Ferguson v. Commissioner, 45 Fed. (2d) 573. The Harmel case was carried to the United States Supreme Court and that Court reversed the Circuit Court and affirmed the Board. Burnet v. Harmel, supra.

I do not find anything in the Supreme Court’s decision in Burnet v. Harmel, supra, which overruled our decisions in the Murphy and Reynolds cases, supra. What the Supreme Court held in Burnet v. Harmel was that bonuses and oil royalties received under an oil and gas lease were in the nature of rentals and therefore did not come within the meaning of the capital gains section of the revenue act and that this was true in Texas, the same as in other states, notwithstanding the courts in that state construed the lease to be a sale of oil in place. The General Counsel so interpreted Burnet v. Harmel, recently in G.C.M. 12118, published in Internal Revenue Bulletin, September 11, 1933, Vol XII-2, No. 37.

In discussing Burnet v. Harmel, the General Counsel in his memorandum says:

As heretofore indicated, the case of Burnet v. Harmel, supra, establishes the principle that all payments from lessee to lessor under an oil and gas lease are income from the use of the land and are not gain from the sale or conversion of capital assets. This rule should be applied in all cases where the instrument of grant may be classified properly as a lease. This office is of the opinion, however, that in the case of an unlimited conveyance for a cash consideration of the lessor’s reserve royalty under an oil and gas lease or of a fractional interest therein, as in the cases of J. E. Murphy v. Commissioner, supra, and the Appeal of Arma Taylor, supra, the conveyance may be treated as a sale of a capital asset within the purview of the capital gains provision (section 101) of the Revenue Act of 1928, provided the interest in the property sold otherwise falls within the definition of the term “ capital assets ” as defined in section 101.

In my judgment, tbe General Counsel correctly interpreted Burnet v. Harmel, in G.C.M. 12118.

In Alexander v. King, cited in tbe majority opinion, the court held that proceeds of sales of oil received as royalties under a lease were taxable as ordinary income and not as capital gain arising from the sale of capital assets. In so holding the court was in harmony with what the Board had decided in many cases.

The court there distinguished income received from oil royalties under a ilease from income received from the sale of the mineral content of land such as we had before us in the Murphy and Reynolds cases. By pointing out such a distinction, the court indicated a clear intent not to overrule these cases.

In view of the facts established in the instant case, I believe the capital gains provision of the law is applicable under the doctrine we laid down in the Murphy and Reynolds cases, supra, which cases have not been overruled by any Board or court case, so far as I have been able to find.

LaNSboN, Smith, and Adams agree with this dissent.


author: Smith :

text:
    D. A. Belden, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 73173.
    Promulgated May 1, 1934.

      H. B. MeOawley, Esq., for tbe petitioner.

      B. M. Goon, Esq., and Bernard D. Daniels, Esq., for tbe repondent.
   OPINION.

Smith :

The petitioner claims the deduction of a loss on the sale of the real estate under section 23 (e) (2) of the Revenue Act of 1928 as a loss resulting from a transaction entered into for profit.

Where a taxpayer acquires property with the intention of selling it at a profit, and where the purpose of making a profit is the predominating motive, even though he may have used the property as a residence, he is entitled to any loss sustained upon the sale thereof. Helen Converse Thorpe, 3 B.T.A. 1006; Henry J. Gordon, 12 B.T.A. 1191; W. W. Holloway, 19 B.T.A. 378; Marjorie C. Randall, 27 B.T.A. 475.

In his testimony the petitioner gave as his reasons for purchasing the property that he and his wife were “ wanting to get out into the country;” and that “I was born in the corn fields of Illinois, and I wanted to get my feet on some ground of my own, again.” He further testified that he knew that his residence in Boston was only temporary and that he had no desire to acquire a permanent residence there; that he thought, and was advised by the real estate agents who sold him the property, that he would be able to dispose of it at a profit; that it was his idea to sell off some of the property for summer homes; and that he had continuously made efforts to interest his neighbors and friends in developing the property, but had been unable to do so. The petitioner’s wife testified that she understood that their residence on the property in question was to be temporary in the sense that it would last only as long as the petitioner’s work kept him in that vicinity.

In our opinion the evidence does not overcome the presumption of correctness, of the respondent’s determination that the property was acquired by the petitioner primarily for residential purposes and not for the purpose of resale at, a profit. See Henry DeFord, 7 B.T.A. 630; aff'd. 29 Fed. (2d) 532; Tom May, 20 B.T.A. 1211; W. H. Moses, 21 B.T.A. 226; William H. Upmeyer, 22 B.T.A. 971; Frances G. Smith, 23 B.T.A. 1134; Marjorie G. Randall, supra. The property was never converted into business property or used for income-producing purposes. Cf. Heiner v. Tindle, 276 U.S. 582; W. B. Brooks, 12 B.T.A. 31; George Bullock, 23 B.T.A. 710.

With respect to the deduction claimed on account of the loss on the sale of the shares of stock of the American Corporation, the respondent questions the bona tides of the alleged sale of the shares by the petitioner where the petitioner’s wife on the same day reacquired from the same broker the same shares at the same price. The petitioner sought to prove that in so doing his wife acted independently and contrary to his advice, because of her own faith in the American Corporation and its president, and that there was no relationship between- his sale of the stock and her purchase of it. It seems to us that other elements of the transaction weigh against this contention. The petitioner’s wife did not have the necessary funds to purchase the shares of stock. The petitioner gave her a check for the exact amount as soon as the bill was presented by the brokers. In Lulu Tirrill Coombs, 30 B.T.A. 35, we held that where the taxpayer offered through a securities auctioneer to dispose of certain stock which was purchased by a partnership of which her husband was a member, and immediately thereafter the amount paid to the auctioneer by the partnership as purchase price, less commissions, was deposited by the taxpayer to her account with the partnership, and a few months later the taxpayer reacquired the same number of shares from the partnership, the transaction did not constitute an actual sale resulting in a deductible loss, it not appearing that there was a mutual intention to transfer absolute ownership. Also, in Joseph Blumenthal, 30 B.T.A. 125, where a taxpayer instructed his broker to sell certain shares of stock and at the same time instructed the broker to purchase the same shares in the name of the taxpayer’s wife, and instructed his bank to charge the purchase price to an account opened for that purpose in his wife’s name with a check on his own account, we held that the transaction did not constitute an actual sale resulting in a deductible loss to the taxpayer. See also Luella Hoyt Slayton, 29 B.T.A. 931, and W. E. Brochon, 30 B.T.A. 404. We are of the opinion that the facts in this proceeding bring the issue within the rule of the cases cited. The reasons for denying deductions for claimed losses in circumstances similar to those in the instant case were fully discussed in those cases. We hold accordingly that the petitioner did not sustain a deductible loss as alleged upon the sale of the shares of stock of the American Corporation.

Judgment will he entered for the respondent.