author: ITaReon:

text:
    Justin Potter, Petitoner, v. Commissioner of Internal Revenue, Respondent. Valere Blair Potter, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 97018, 97019.
    Promulgated August 21, 1942.

      Norman R. Minieh, Esq., and James IV. Allen, O. P. A., for the petitioners.

      John R. Stivers, Esq., and Frank M. Thompson, Esq., for the respondent.
   OPINION.

ITaReon:

(1) In determining the deficiency for 1936 of Potter, respondent added $3,228.75 to income as interest received by petitioner on the note of A. E. Potter estate. In his brief respondent abandoned this item. The facts, as found, show that Potter received interest on the Potter estate note in 1936 in the amount of $1,653.75, only, which he included in income in his return. Eespondent erred in adding $1,575 to Potter’s income in 1936 as interest received. That amount was received and reported as income by Potter in his returns for 1931 and 1932.

(2) In determining the deficiencies for 1935 and 1936 of Potter, respondent increased his income by $30 for dividends received in 1935 (dividends of Anne reported in her return), and increased his income in 1936 by $76 and $66, dividends of Anne and Justin, Jr., respectively, reported in their returns. Eespondent has not referred to these three adjustments in his brief, and, apparently, has abandoned them. The facts, as found, show that the miscellaneous stocks on which these dividends were paid were the property of each child, purchased with their money, the certificates standing unendorsed in their respective names. These dividends were the income of each child and were not Potter’s income. Respondent erred m 'adding the above amounts to Potter’s income in 1935 and 1936.

(3) The main question in each proceeding is whether or not valid gifts were made to each child in 1934 of interests in the Nashville Coal Co. partnership so that the children acquired present property rights, and the income and other property derived therefrom were the separate property and income of each child.

The respondent’s argument in his brief is devoted to the broad aspects of the question. He argues that the dominion and control exercised by Potter over all the income and property alleged to have become the property of the children was such that the gifts, if any were effectively made, did not bring about any substantial change in the economic interests of the donors after the alleged gifts were made. Respondent’s position is that the circumstances here require application of the rationale of Helvering v. Clifford, 309 U. S. 331.

Before discussing the validity of respondent’s broad argument, consideration must be given first to the narrower question of whether or not valid gifts of interests in the partnership were made to the children.

The facts are not disputed. The evidence offered by the petitioners is not contradicted or even questioned by respondent. The petitioners have presented evidence which is as complete as it could be. The problem is one of examining all of the evidence and determining the legal effect. Read in its entirety, the record does not reveal any plan or effort on the part of the petitioners to circumvent the burden of taxation. Scrutiny of the facts means no more here than setting forth the facts, which has been done fully in the findings of fact. They are not repeated here. The facts show that the petitioners intended to make irrevocable gifts of a part of their respective interests in the partnership to the children. Advice of competent counsel was sought and followed so that the disability of the donees, residing in their infancy, would be met, and would not later raise any question as to the effectiveness of the gifts. The gifts were made orally, each child being told of the gift. The petitioners had the right to transfer all or part of their interests in the partnership to third parties without working a dissolution of the partnership under the Uniform Partnership Act, which has been adopted by Tennessee (Michie’s Tennessee Code of 1932, par. 7841-7882; Modern Law of Partnership, Scott Rowley, par. 552), and the minor children could become members of the partnership. Parker v. Oakley (Tenn. Ch. App.), 57 S. W. 426; Frank E. Eyestone, 12 B. T. A. 1232, 1236; Lindley on Partnerships, par. 74; Rowley on Partnerships, supra, par. 188. All of the partners consented to and agreed orally that the two children could become members of the partnership, and permanent entries in the permanent books of the partnership capital account were made showing the transfers of the interests from the petitioners to the children as of January 1, 1934, the entries being made during January. Gift tax returns were filed and gift tax was paid upon the gifts. Thereafter, the children were regarded as partners and they shared in the partnership earnings. No record was made with any state or county official of a change in the membership of the partnership because such record is not required by Tennessee law. See William W. Parshall, 7 B. T. A. 318. When it was decided to form the corporation and transfer partnership property to it, a bill was filed in the Chancery Court to adjudicate the property rights of the minors in the partnership property, as well as to protect their interests, and the court ratified and approved the contract between the partnership and the corporation for the children, noting that the partnership was composed of the children as well as the adult partners by naming all of the persons as members of the partnership.

It is essential to the validity of a gift that the donor not only have a manifest intention to make the gift, but that the subject matter of the gift, or something symbolic thereof, be delivered to the donee, or someone acting for the donee, so that the thing given is put definitely and irrevocably beyond the ownership and control of the donor. There can be no doubt here of the clear intent of the petitioners to make the gifts, irrevocably, in view of the ample record on the point. Nor does the record leave doubt on the points of delivery and acceptance. A definite agreement was made by and between all of the partners that the two children should become partners, and petitioners agreed to this in the dual capacity of partnership members, for themselves, and of natural guardians at law, for the children. The children were told that they were to become members of the partnership. Entries were made in the partnership capital accounts under written directions from Potter. The subject matter of the gifts was intangible. The method of effecting technical “delivery” must be considered with regard for all of the circumstances. It is concluded that the donors took substantial steps in carrying out a verbal conveyance of personal property, effective to vest title in each child. Tatum v. Jamison, 2 Humph. 298; Voltz v. Treadway & Marlatt, 59 Fed. (2d) 643; J. M. Kessler, 31 B. T. A. 849; William W. Parshall, supra; Estate of John Barnes, Jr., 7 B. T. A. 924; B. M. Phelps, 13 B. T. A. 1248; Charles W. Crane, 19 B. T. A. 577; Walter W. Moyer, 35 B. T. A. 1155.

The cumulative effect of all of the evidence is that valid and irrevocable gifts of partnership interests were made to the children on January 1, 1934, and that the children were, thereafter, members of the partnership.

The factor of the dominion and control exercised by Potter over all of the moneys, notes, and stocks which thereafter came to the children, as well as his investment and reinvestment of moneys, is not overlooked. The element of Potter’s control does not weigh against petitioner’s case in so far as the making of effective gifts, in praesemti, is concerned. The evidence is clear that none of the money or property derived from the gifts to the children, and which went to them by checks, notes, and securities, made in their respective names, was ever used by petitioners for their own uses or for the support of the children. Mrs. Potter did not exercise any control over the property or income of the children. Potter managed all of the business and financial matters of and for his wife and children. But his control over the fruits of the gifts to the children was that of their natural guardian at law. Under the statutes of Tennessee the parents are the natural guardians of their children. Tennessee Code of 1932, sec. 8463. As such, they are equally charged with their care, education, support, and also with the “care, management, and expenditure of their estates.” The Board has held that, when a parent, after making a gift to an infant, thereafter handles the receipt of proceeds and manages the property for the child, such conduct by the adult donor with respect to property given to a minor is entirely consistent with the making of an effective gift in jurisdictions where the parent is the natural guardian at law of the donee. The parent holds as natural guardian and the possession is the infant’s. H. C. Priester, 33 B. T. A. 230; Harry C. Moores, 3 B. T. A. 301; Frank J. Vlohek, 7 B. T. A. 1244. Potter handled all moneys and other property for the children in such way that the propriety of his conduct •is not and can not be questioned. Records were kept' by him of all receipts and disbursements on behalf of the children. Under all the facts here, it is not material that he did not open separate bank accounts in the names of the children. While such procedure would have eliminated some of respondent’s questioning of the status of the matter, in general, Potter’s counsel advised Potter that the procedure of depositing proceeds from checks made payable to the children (and all were so made) in his own bank account was all right. Potter regarded this account as a temporary resting place for all of the children’s money until he could invest it for them. There was no misuse by Potter of this procedure, nor of his broad powers of control, as guardian. All that petitioner did in exercising dominion and control over the fruits of the gifts of partnership interests to the children is consistent with the view that the partnership interests and all money and property resulting therefrom belonged to the children. H. C. Priester, supra.

The following cases cited by respondent are distinguishable under the facts of each case and, further, the rationale of these cases does not apply to these proceedings under their distinct facts: Burnet v. Leininger, 285 U. S. 136; Weil v. Commissioner, 82 Fed. (2d) 561; certiorari denied, 299 U. S. 552 (where, among other distinguishing facts, the father was not the guardian of his children under the law of Alabama) ; Harry F. Canelo, 41 B. T. A. 713; James L. Robertson, 20 B. T. A. 112; Higgins v. Smith, 308 U. S. 473; S. A. MacQueen Co. v. Commissioner, 67 Fed. (2d) 857; Shoenberg v. Commissioner, 77 Fed. (2d) 446; Gregory v. Helvering, 293 U. S. 465; Griffiths v. Commissioner, 308 U. S. 355; Hellebush v. Commissioner, 65 Fed. (2d) 902.

Whether or not the donees in these proceedings became members of the partnership, or owners of interests in the partnership, or both, is a matter of local law. Blair v. Commissioner, 300 U. S. 5. ite-spondent has not cited any law to controvert the recognition to be given to the decree of the Chancery Court at Nashville dated July 17, 1936. The court found that the children were members of the partnership under the gifts from their parents, incorporating the master’s report of July 16, 1936, in the decree. The court ordered the corporation to deliver its promissory notes to each child and appointed Potter their trustee to receive interest on the notes. Under that decree, there can be no holding other than that the interest paid on the notes to the children in 1936 was their income, and that the notes were their property. Clearly, respondent erred in adding the interest to Potter’s income in 1936.

Whether or not the decree of the Chancery Court is dispositive of the matter of whether valid gifts of the partnership interests were made in 1934 to the children, so that the same force is to be given here to the holding of a state court, as was done in the Blair case, we need not decide, in view of all the other evidence which supports a holding for the petitioners on the point. However, we give much weight to that decree as evidence of the donative intent of petitioners and their conduct with respect to the subject matter of the gifts after making the gifts.

There remains the question to which respondent’s chief argument is addressed, namely whether or not the rule of Helvering v. Clifford, 309 U. S. 331, applies here. ^Respondent's argument is that the petitioners did not part with the substantial attributes of ownership over the property (the partnership interest), essential to nontaxability under section 22 (a), because of the control exercised by Potter over all receipts of money and his power to invest and reinvest proceeds and manage the property involved, and because he deposited all receipts of money in his own bank account. In other words, was the whole situation such that for purposes of taxation petitioners continued to be the owners of the property given to their children so that income derived from the property was the income of each petitioner under section 22 (a) of the pertinent revenue acts? In the Cliford case it was not the fact alone that the taxpayer’s wife was the beneficiary of a short term trust, that there was a family relationship, which dictated the conclusion reached by the Supreme Court;rather there were combinated powers over income of a trust retained by the donor which so diluted the economic consequences of the gift in trust that the donee, in reality, received no certain thing, and the donor retained the status of owner of the property for all practical' purposes. “In substance, his control over the corpus was in all essential respects the same after the trust was created, as before”, and that “control” was self-prescribed.

In this case the donors did not make gifts with strings attached. No powers were reserved as conditions of the gifts. The gifts effected a substantial reduction in the property of each petitioner, and real changes in ownership of the subject matter of the gifts. The control which Potter exercised was not self-prescribed. Bather it was imposed upon him by law. He was a natural guardian at law of each child. When the children attain their majority, Potter’s control ends. The kind of dominion and control over property given to an infan^i which is exercised'by a natural guardian at law differs from the kind of dominion and control with which the Court was concerned in the Clifford case. Under the facts neither petitioner remained the owner of the partnership interests after the gifts were made, giving consideration to the broad provisions of section 22(a). The management by Potter as a guardian at law of the minors was not a retention of command over income incident to ownership. There seems to be no statutory basis for treating the income as that of the grantors under section 22(a) merely because one donor managed all income and property for minors incapable of performing that function. Commissioner v. Branch, 114 Fed. (2d) 985; Jones v. Norris, 122 Fed. (2d) 6. Our appraisal of the facts leads to the conclusion that petitioners made irrevocable gifts of the interests in the partnership without retention of any power to revest the property or the income in themselves. With respect to all of the items of income involved — partnership distributions and earnings, interest, dividends, and capital gains — the rule which applies here is that tax liability on income attaches to ownership of the property producing the income. The rule of the Clifford case is not applicable here. Blair v. Commissioner, supra; Julius E. Lilienfeld, 35 B.T.A. 391.

It is held that petitioners are not taxable for the income derived from the interests in the partnership given to the children. Determination of the main question disposes of all the other adjustments made by the respondent involved in the issues before the Board. The children of petitioners owned the Nashville Coal Co. notes issued to them, the proportion of the preferred and common stock of Dawson Daylight stock purchased with their funds, and other securities in which their funds were invested, and they were members of the Potter-Wilson partnership. Petitioners are not taxable on the interest, dividends, earnings, and profits in question. The findings of fact cover these items in detail.

Eespondent’s determinations are reversed.

Because of stipulations relating to increases in the amounts of the earnings of the Nashville Coal Co. partnership in various years, it appears that recomputations under Bule 50 may be necessary. Accordingly,

Decisions will be entered wilder Bule 50.

       In the recomputation under Rule 50 attention should be given to error in the computation in the deficiency notice where it appears that total interest involved in 1936 is $6,228.75. The correct amount is $7,281.93, consisting of $900 on Potter’s note from the coal corporation; and $1,053.18 from Edward Potter, neither of which is in dispute; and $2,100 on the children’s notes from the corporation; and $3,228.75 on the Potter estate note.

       The correct amount of Anne’s dividends in 1935 from the miscellaneous stocks is $75.


source: Caselaw Access Project

author: Van Fossan :

license: Public Domain

text:
    Jordan C. Skinner, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 106733.
    Promulgated August 21, 1942.

      James B. Malone, Esq., for the petitioner.

      Edward M. Woolf, Esq., for the respondent.
   OPINION.

Van Fossan :

The issue is whether or not the petitioner is entitled to deduct a loss arising from the sale to his brother of certain assets whose depreciated net value was found to be $18,046.07, for the sum of approximately $6,500. The respondent disallowed the deduction as violative of the provisions of section 24 (a) (6) (A) and (D) of the Revenue Act of 1936 and ruled also that the petitioner’s alternative claim of a ioss of useful value had not been substantiated.

The language of the statute is clear and unmistakable. If a sale or exchange of property is made by the taxpayer to or with members of his family as defined in section 24 (a) (6) (D), no deduction shall be allowed to him for any loss arising therefrom. The petitioner made such a sale and the statutory prohibition requires us to approve the respondent’s action. Charles J. Stamler, 45 B. T. A. 37.

The petitioner argues further that he is entitled to the deduction because the useful life of the property was exhausted in 1937, before the sale, and that the amount he received from his brother thus represents and measures its salvage value. The facts of record do not support him. Prior to 1937 he had transferred all of his entire retreading machinery to his Springfield factory, with the exception of a large calender machine which he sold to a Cleveland firm. He continued to use the Dayton plant as a storage warehouse and as a convenient housing facility for the inspection, sorting, and buffing of tires.

The petitioner himself testified that during both the taxable year and the succeeding year he could have used the property for storage purposes and that it would have had some value to him. The record gives us no basis for measuring this value. Furthermore, there are certain other fatal deficiencies of record, such as proof of original cost and amounts of depreciation, which make it impossible to ascertain the actual loss sustained even if it were allowable.

The record does not sustain petitioner’s claim.

Decision will be entered for tjie respondent.

       SEC. 24. ITEMS NOT DEDÜCTIBLE.
      (а) Genbeap Role. — In computing net income no deduction shall in any case be allowed in respect of— ‘
      ***** I* *
      (б) Loss from sales or exchanges of property, directly or indirectly, (A) between members of a family, or * * *; (D) the family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants.


author: Abnold:

text:
    Michael Carpenter Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 105718.
    Promulgated August 21, 1942.

      George D. SpoTm, Esq., and John 3. Best, Esq., for the petitioner.

      8. Ü. Hihen, Esq., for the respondent.
   OPINION.

Abnold:

Petitioner asserts that the $660 item received from the International Milling Co. was erroneously reported as income in its 1936 return. Respondent in his amended answer alleges he erroneously included it in 1936 income. Thus both parties are in agreement that it should not be included in 1936 income, and we so hold.

Our findings show that in 1937 petitioner received $11,246.50 no part of which was reported as income in its 1937 return, but all of which was included as income by the respondent in determining the 1937 deficiencies. Petitioner now admits that $2,888.50 thereof was properly determined to be 1937 income as a tax benefit was derived by its predecessor to this extent because of flour included in the January 1, 1936, inventory. The issue with respect to 1937, therefore, relates only to whether the amount of $8,358 constituted taxable income.

Briefly, petitioner contends that, since the Wisconsin corporation’s assets were acquired pursuant to a tax-free reorganization, all property received by it has the same basis in its hands as the property had in the hands of the transferor, section 113 (a) (7), Revenue Act of 1936; that the contract rights had a basis of $1.38 per barrel in the transferor’s hands, and had the same basis in petitioner’s hands; and that it received only $1 per barrel by virtue of the payments by the millers, and, therefore, realized no taxable income. As an alternative, petitioner contends that, even if the payments were not tax free under section 112 (b) (4), or if it is held that the basis thereof to petitioner is zero under section 113 (a) (7), nevertheless they are not taxable to it because the contract rights were capital assets and the mere liquidation of such assets gave rise to no taxable income. McLaughlin v. Harr, 99 Fed. (2d) 638; Merchants Bank Building Co. v. Helvering, 84 Fed. (2d) 478. Finally, petitioner contends that, if the payments were not received in settlement of contract rights, they were gifts which are excluded from gross income by section 22 (b) (3) of the Revenue Act of 19B6.

By the bill of sale the Wisconsin corporation transferred certain properties, specified therein, plus all other property of whatever nature, real or personal, tangible or intangible, that it owned or in which it had “any interest whatsoever”, in exchange for 840 shares of petitioner’s capital stock. The language “any interest whatsoever” used m the bill of sale is broad enough to cover any claims, demands, or rights that the transferor had against its vendors. As between the Wisconsin corporation and the petitioner, the latter acquired any claims or rights that its transferor had, and, since such claims were acquired for stock along with the other capital assets of the transferor, each claim represented one of the capital assets involved in the reorganization. McLaughlin v. Harr, supra. Whether said claims were legally enforceable or not is immaterial here. The evidence shows that the claims were the subject matter of negotiations which led to settlements of at least a portion of the amounts claimed and that payment of the amounts agreed upon was conditioned upon a full and complete release and discharge from any and all liability on account thereof.

Section 113 (a) (7) of the Revenue Act of 1936 provides that where property is acquired after December 31,1917, by a corporation in connection with a reorganization, the basis for determining gain or loss upon disposition of the property shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor at the time the transfer was made.

Petitioner contends that section 113 (a)(7), supra, applies to the exchange of December 23, 1936, and that under that section the “interest” or claims acquired from the Wisconsin corporation had the same basis in its hands that said claims had in the hands of the transfer- or. While we agree that section 113 (a) (7) applies, we can not agree that the basis of the claims in the transferor’s hands was $1.38 per barrel at the time of exchange, or that any basis it may have had is available to petitioner. In our opinion any such basis had already been exhausted by the transferor, and the basis of such claims in the trans-feror’s hands at the time of the exchange was zero. National Bank of Commerce of Seattle v. Commissioner, 115 Fed. (2d) 875, affirming 40 B. T. A. 72.

In the last cited case, as here, there was a reorganization, and petitioner admits that the same question would be presented except that there the reorganization was a taxable transaction, while here the reorganization is agreed to be tax free. We can attribute but little weight to the suggested distinction. Section 113 (a) (7) of the Revenue Act of 1936 used the term “reorganization” without regard to whether the reorganization is tax free or not. Muskegon Motor Specialties Co., 45 B. T. A. 551, 559.

This proceeding and the National Bank of Comm&rce of Seattle case, supra, are similar in several important aspects. In the cited case the transferors charged off certain debts ascertained to be worthless, and took such debts into account in determining their taxable income for the year deducted. In this proceeding the transferor included the $1.38 per barrel in the cost of materials entering into its finished products and took said sum into account in determining the results of its 1935 operations. Here the transferor’s tax return for 1935 showed a net loss in excess of the amount of the processing tax included in the price of flour. Similarly, in the National Bank of Commerce of Seattle case five of the transferors sustained net losses in an amount greater than the debts charged off and claimed as deductions, 40 B. T. A. 12, 74; and yet, the Circuit Court, in affirming the Board, held that the debts at the time of the transfer had a zero basis in the transferor’s hands for the reason that they had been ascertained to be worthless and charged off in a prior year and deducted from income by the transferor banks in such prior year. Having used up its cost basis, the transferor here had no cost basis that it could1 independently ascribe to “the claims” transferred, any more than the transferor banks had because of debts charged off prior to their transfer in the National Bank of Commerce of Seattle case. As to each proceeding the cost basis had been accounted for prior to the exchange and cost could not again be taken into account in determining the taxable income of either corporation.

As an alternative, petitioner contends that, since the transferor derived no benefit tax-wise from thus taking the cost basis into account in 1935, it should be allowed the benefit which but for the reorganization would be available to the transferor. We tbi-nk the answer to this contention is to be found in the Supreme Court’s decision in New Colonial Ice Co. v. Helvering, 292 U. S. 435. The facts there show that a new corporation, organized for the purpose, took over the assets and business of another corporation in exchange for a portion of the new corporation’s stock. The old company had sustained a statutory net loss prior to the transfer which the new corporation sought to deduct under section 204 (b) of the Kevenue Act of 1921. In denying the deduction the Court pointed out that “the statutes have disclosed a general purpose to confine allowable losses to the taxpayer sustaining them, i. e., to treat them as personal to him and not transferable to or usable by another.” (P. 440.)

While we do not have here a question involving the deduction of a statutory net loss by an entity separate and distinct from the corporation sustaining the loss, we do have a comparable situation in that pe-tioner, in reliance upon the rule announced in Central Loan & Invest ment Co., 39 B. T. A. 981, seeks to offset $8,358 of its 1937 income by an equivalent amount of the 1935 net loss of its transferor. In the cited case the taxpayer was formed for the purpose of liquidating its predecessor corporation, which had been in the hands of a receiver for almost three years. Actually, the taxpayer there was the liquidating agent of its transferor, and the case was tried and decided upon the theory that the reorganization resulted in no change in corporate identity. Just the opposite is true here; and the separate identity of the transferor and transferee must be recognized, as it was in the New Qolonial lee Go., supra. Believing as we do that the situation here is governed by the rule announced in the latter case, we hold that the 1935 loss of the Wisconsin corporation was not transferable to or usable bypetitioner, either directly or indirectly, and that the personal defense available to the transferor did not survive the transfer to petitioner.

Having determined that the claims petitioner acquired from the transferor constituted capital assets, and that said claims had a zero basis in the transferor’s hands at the time of the exchange, it is apparent under sections 113 (a) (7) and 111 (a) that anything realized thereon by petitioner in 1937 constituted taxable income. As pointed out in the National Bank of Commerce of Seattle case, supra, when an asset with a zero basis is liquidated the taxpayer realizes a gain to the extent of the amount received. Suffolk Co., Ltd., 42 B. T. A. 994, 996 (on appeal, C. C. A., 4th Cir.).

Petitioner’s final contention is that, if the payments were not received in settlement of contract rights, they were gifts to be excluded from gross income under section 22 (b) (3) of the Eevenue Act of 1936. A similar argument was advanced by the vendee-taxpayer in Sportwear Hosiery Mills v. Commissioner (C. C. A., 3d Cir.), 129 Fed. (2d) 376, affirming 44 B. T. A. 1026. We find the opinion of the court very pertinent to the issues here. It points out that the Board found no evidence of a donative intent and that it agreed with this finding. The court stated that the payments were income to the taxpayer, that the taxpayer and its vendor were involved in continuous business dealings, that it was not unreasonable to consider the payments or credits as made for maintaining good will and encouraging future business, and finally that, while the vendors sought a possible intangible benefit, the taxpayer realized a real profit. The court further stated that the refunds reduced the price paid by the taxpayer for the goods it had recently sold, thereby increasing the gain realized on those sales. Specifically, the court said: “It is at this increment of gain that the Unjust Enrichment Act was aimed. This additional profit constituted taxable income.” See also White Packing Co. v. Robertson (C. C. A., 4th Cir.), 89 Fed. (2d) 775, and Ben Bimberg & Co. v. Commissioner (C. C. A., 2d Cir.), 126 Fed. (2d) 412, 424. Houbigant, Inc., 31 B. T. A. 954; affd., 80 Fed. (2d) 1012; certiorari denied, 298 U. S. 669.

In accordance with, the foregoing discussion and authorities, we hold that the payments received from the milling companies during 1937 constituted taxable income of this petitioner for that year.

Decision will be entered that there is no deficiency for 1936. Decision will be entered for the respondent as to the year 1937.


author: Van Fossan:

text:
    Estate of C. William Meinecke, the Trust Company of New Jersey and Edward Bose, Executors, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 107147.
    Promulgated August 21, 1942.

      Theodore L. Harrison, Esq., for the petitioner.

      Robert JS. Garnett, Esq., for the respondent.
   OPINION.

Van Fossan:

The central question in this case is whether from the record of negotiations, letters, agreements, and other documents we can spell out a completed or executed contract before 5:20 a. m. of March 24, 1938, the date of decedent’s death, or whether the option or offer to sell proposed by decedent did not mature into a contract until actually accepted by Davol on March 25. Or, as stated by counsel for the Government at the hearing, “The sole question is: was this agreement a binding agreement while Meinecke lived? If it was, he individually was taxable on the profit made from that agreement. If the agreement did not become binding and enforceable during Meinecke’s lifetime then the profit from that agreement is not taxable to Meinecke individually.”

A reading of the facts leads us clearly to the conclusion that petitioner is correct in his position and that no completed or enforceable contract was entered into during decedent’s lifetime. There can be no question that the parties so considered it. See Commissioner v. Segall, 114 Fed. (2d) 706. In the letter of March 18, 1938, transmitting the proposed agreement to Davol, the decedent stated:

* * * I herewith offer said agreement for acceptance by you — provided the same is satisfactory to you and is accepted by you in writing on or before the 25th day of March 1938.

In this letter decedent twice referred to the proposed agreement as an offer, stating:

I agree that the offer which I make to you, as evidenced by said instrument, may be modified by you before the acceptance thereof by making minor changes therein * * * such changes, however, to be approved by my attorney, Mr. War-land, above mentioned, and, if accepted by you with any such changes, will be fully binding upon me as if such changes had been made prior to my execution of the instrument.

In Warland’s letter to Davol, dated March 19, the arrangement is referred to as “an option until March.25th.” Davol’s letter of March 23 to Warland, suggesting two typographic changes, states: “With these two changes, if you will forward the contracts to us, they will immediately be signed.”

Thus the matter stood when Meinecke died. The offer or option had not been accepted. The contracts had not been signed. Although on March 23 Davol fully intended to consummate the contracts, there existed a locus poenitentiae within which they could have changed their minds and elected not to sign and complete the contracts. The signature of Davol was affixed on March 25. At that time the offer ripened into a completed contract. Then and not before did Davol assume any enforceable obligations.

Petitioner decedent was not taxable in his lifetime on the profit arising from the contract of March 25, 1938. See Lucas v. North Texas Lumber Co., 181 U. S. 11.

Decision will be entered under Rule 50.


text:
    Dumari Textile Co., Inc., a New York Corporation, 78 Worth Street, New York, N. Y., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 106875.
    Promulgated August 25, 1942.

      William E. Russell, Jr., Esq., for the petitioner.

      J. Richard Riggles, Jr., Esq., for the respondent.
   OPINION.

Van Fossan:

This proceeding raises the issue whether payments made under section 602 of the Revenue Act of 1936 were income'accruing in 1936 when this section was enacted, or in the year when the payments were actually received by the taxpayer. Petitioner contends that because it was on an accrual basis the payments it received under this section were income in 1936. Respondent, on the other hand, argues that the payments were income in 1938 since they were not determined to be due petitioner until that year.

Income accrues to a taxpayer on an accrual basis when the right to receive the income becomes fixed and not when the income is actually received. Spring City Foundry Co. v. Commissioner, 292 U. S. 182. The statute! provided that:

There shall be paid to any person who-, at the first moment of January 6, 1936, held for sale or other disposition ⅞ ⅞ * any article processed * * * from a commodity subject to processing tax, an amount computed as provided in subsection (b), * * *

Thus, the payment under this section was mandatory if petitioner held any article within the scope of the section. The right to receive the payment was not contingent on any future event. Everything had happened which could have happened from which to determine the amount of the payment. There remained only the necessity of filing the claim and proving the facts to the Commissioner of Internal Eevenue for petitioner to become entitled to the payment. These requirements, obviously, had no bearing on when the payment accrued since they did not affect the amount.

This situation is' strikingly similar to the one in Continental Tie & Lumber Co. v. United States, 286 U. S. 290, which involved a payment received by a taxpayer in 1923 pursuant to an award in that year by the Interstate Commerce Commission under section 204 of the Transportation Act of 1920 providing for compensation to railroads operated by the Federal Government from December 28, 1917, to June 3, 1918. Under the act the Commission was directed to compare the results of the operation of the railroad while under Federal control with those of a test period from June 30, 1914, to June 30, 1917, and if these results were less favorable during the period of Federal control than during the test period to award an amount calculated as prescribed by the section. In that case the position of the parties was exactly the reverse here found. The Government contended for the conclusion here asked by petitioner. The Supreme Court decided that the award to the taxpayer had accrued in 1920 and therefore was taxable income in that year instead of in 1923, the year the award was made, stating as follows:

* * * The petitioner correctly states that at the date of the act’s adoption no railroad had a vested right in any amount; until the Commission made an award nothing could be paid, no proceeding was available to compel an allowance, or to determine the elements which should enter into the calculation. In short, says the petitioner, the carrier had no rights, but was dependent solely upon the Commission’s exercise of an unrestrained discretion, and until an award was made nothing accrued. But we think that the function of the Commission under the act was ministerial, to ascertain the facts with respect to the carrier’s operating income by a comparison of the experience during the test period with that during the term of federal control. The right to the award was fixed by the passage of the Transportation Act. What remained was mere administrative procedure to ascertain the amount to be paid, Petitioner’s right to payment ripened when the act became law. What sum of money that right represented is, of course, a different matter.
The petitioner says that at the date of the passage of the act it was impossible to predict that any award would be made to the railway, and, assuming one would eventuate, its amount could not be estimated, for the reason that the principles upon which awards were to be made had to be settled by the Commission and were not finally formulated until 1923. The government insists that, while adjustments or settlement of principles by the Commission might vary the amount to be awarded, the petitioner’s case presented problems not differing from those confronting many business concerns which keep accounts on an accrual basis and have to estimate for the tax year the amount to be received on transactions undoubtedly allocable to such year. Admitting there might be differences and discrepancies between the railway’s estimate and the amount awarded by the Commission, these, says the government, could, as in similar cases, have been adjusted by an additional assessment or a claim for refund after final determination of the amount due.
* * * But in spite of these inherent difficulties we think it was possible for a carrier to ascertain with reasonable accuracy the amount of the award to be paid by the Government. Subsequent to its order of June 10, 1920, the Commission made no amendment or alteration of the rules with respect to the information to be furnished under section 204. Obviously the data had to be obtained from the railway’s books and accounts and from entries therein all made prior to March 1, 1920. These accounts contained all the information that could ever be available touching relevant expenditures. Compare United, States v. Anderson, 269 U. S. 422, 46 S. Ct. 131, 70 h. Bd. 347. The petitioner was promptly informed by the terms of section 209 as supplemented by the instructions issued by the Commission of the method to be followed in allocating charges to operation during periods under inquiry. It does not appear that a proper effort would not have obtained a result approximately in accord with what the Commission ultimately found.

The above quotation answers the argument of respondent that the payment did not accrue until 1938 because final action upon the claim was entirely within the discretionary powers of the Commissioner of Internal Revenue. The Supreme Court held that the function of the Commission was ministerial. So we believe was the function of the Commissioner in the instant case. It was his duty to ascertain the amount of the burden of the processing taxes actually borne by petitioner in the price he had paid for articles held by him. This was purely a matter of computation under the express direction of the statute.

This proceeding is also like Continental Tie & Lumber Co. v. United States, supra, in that the data from which to determine petitioner’s claim had to be obtained from petitioner’s books and accounts, which had been closed as of June 30,1936, and in that “these accounts contained all the information that could ever be available touching relevant expenditures.” That it was possible to ascertain the amount of the payment with a fair degree of accuracy for the taxable year in question was shown when petitioner filed a claim for refund prior to the enactment of section 602 and when the amount was estimated by petitioner before it closed its books for the fiscal year in question. That this estimate later turned out to be too large is immaterial, as indicated in Continental Tie & Lumber Co. v. United States, supra, wherein it is stated:

* * * The books and accounts fixed the maximum amount of any probable award, and, if petitioner had endeavored to make reasonable adjustments of book figures, it could have arrived at a figure to be accrued for the year 1920. Any necessary adjustment of its tax could readily have been accomplished by an amended return, claim for refund, or additional assessment, as the final award of the Commission might warrant.

That the Commissioner had the final power to determine the merits of petitioner’s claim did not affect petitioner’s right to the claim. This right was fixed by the statute, and under the statute it was the Commissioner’s duty to make the payment to petitioner if the facts supporting the claim were proved to the Commissioner’s satisfaction. Thus, the statute did not give the Commissioner the discretionary power of denying arbitrarily petitioner’s claim.

Neither does the fact that the functions of the Commissioner in respect of claims filed under section 602 were of a judicial nature, in that no other remedy was available to claimants, affect our decision. The determination by the Interstate Commerce Commission regarding claims under the Transportation Act of 1920 involved in Continental Tie & Lumber Co. v. United States, supra, was also final and of a judicial nature, but this was regarded by the Supreme Court as unimportant. Butte, A. & P. R. Co. v. United States, 290 U. S. 127.

Accordingly, we hold that petitioner’s right to receive the payments in question was fully ripened on June 22, 1936, the date section 602 became law, and therefore they were income which accrued in petitioner’s fiscal year ended June 30,1936.

Decision will be entered for the petitioner.

       SEC. 602. FLOOR STOCKS AS OF JANUARY 6, 1936.
      (a) There shall be paid to any person who, at the first moment of January 6,1936, held for sale or other disposition (including manufacturing or further processing) any article processed wholly or in chief value from a commodity subject to processing tax, an amount computed as provided in subsection (b), except that no such payment shall be made to the processor or other person who paid or was liable for the tax with respect to the articles on which the claim is based.
      (b) The amount of the payment under subsection (a) shall be equal to the processing tax which would have been payable with respect to the commodity from which the article was processed, if it had been processed on January 5, 1936, but not in excess of (1) the amount of the burden of the tax with respect to the article which was shifted to the claimant in the price he paid for the article (to the extent that the claimant has not received and is not entitled to receive reimbursement for such burden from the processor or other vendor) and not in excess of (2) the amount of that part of the burden of the tax applicable to the articles held on January 6, 1936, which the claimant has not passed on to his vendees and has not included in the sale price of such articles. In lieu of a detailed schedule of articles, purchases, sale prices, and sales under clauses (1) and (2) of this subsection, the claimant may (subject to the approval of the Commissioner and such investigations as he may cause to be made) submit, as a part of his claim, an affidavit setting forth the total amount of tax burden passed on to him on the articles with respect to which claim is made; the total amount of such burden for which he has received or is entitled to receive reimbursement from the processor or other vendor; the total amount of such burden that he has passed on to his vendees or has included in the sale prices of such articles; and the total amount of such burden that he has borne himself.
      ♦ ***** *
      (d) No payment shall be made under this section unless the claimant files a claim therefor prior to January 1, 1937, in conformity with regulations prescribed by the Commissioner with the approval of the Secretary, nor unless he establishes to the satisfaction of the Commissioner the facts on which such claim is based.
      (e) No claim under this section shall be disallowed on the ground that the tax with respect to the article or the commodity from which processed has not been paid, but no claim shall be allowed in an amount less than $10. No payment shall be made under this section in connection with any article with respect to which a refund has been allowed or credit has been taken under the Agricultural Adjustment Act, as amended, or a refund has been allowed or is allowable under section 601 of this title.
      **••**•
      (h) In the absence of fraud the findings of fact and the decision of the Commissioner upon the merits of any claim under this section, and the mathematical calculation therein shall not be subject to review by any other administrative or accounting officer, employee, or agent of the United States.
      (i) The determination of the Commissioner with respect to any payment under this section shall be final and no court shall have jurisdiction to review such determination.


author: Leech :

text:
    Estate of William J. O’Shea, Deceased, William J. O’Shea, Jr., Vincent J. O’Shea and Maurice C. O’Shea, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 105942.
    Promulgated September 8, 1942.

      William J. O'Shea, Jr., Esq., and Edward D. Burns, Esq., for the petitioners.

      W. G. Byman, Esq., for the respondent.
   OPINION.

Leech :

At his retirement from the office of superintendent of schools of the city of New York petitioners’ decedent became the owner of a right to an annuity of $12,678.84 from the System. Kernochan v. United States, 29 Fed. Supp. 860; certiorari denied, 309 U. S. 675. With this right, decedent also acquired the option to surrender that right in exchange for an annuity in a lesser amount, $9,137.60, with a •guarantee of minimum payments aggregating the reserve of $85,946.82, the value at retirement of his basic annuity, which guarantee included the right upon the part of decedent to designate a beneficiary to receive the unexhausted balance in the reserve, at decedent’s death, and to change that beneficiary at any time. Decedent exercised this option, by virtue of which $41,020.68, the unexhausted balance of this reserve, was paid by the System upon the decedent’s death to his designated beneficiaries. The issues are (1) whether all or any part of that payment is “insurance” within the purview of section 302 (g) of the Revenue Act of 1926 as amended, and, if not, (2) is such amount or any part of it properly includable in the estate of decedent for Federal estate tax purposes under section 302 (c) of that same statute.

That the city of New York had contributed $83,095.74 and decedent only $2,851.08 of the reserve set up by the System to meet its liability under its contract with decedent, does not seem to us significant in resolving these issues here. Nor is the fact important that the obligor on the contract was the System and not an insurance company. Cf. J. Darsie Lloyd, 33 B. T. A. 903; Frank C. Deering, 40 B. T. A. 984.

In our opinion, when petitioners’ decedent died, he owned a contract providing for the payment of an annuity to him and an offsetting death benefit to his named beneficiaries. The System assumed no “insurance risk” in that contract. Any such risk inherent in the death benefit obligation was neutralized by the annuity provision. Thus we think Helvering v. LeGierse, 312 U. S. 531, is controlling. Upon the authority of that decision we hold, (1) that none of the contested payment is “insurance” under section 302 (g) of the Revenue Act of 1926, as amended, and (2) all of it is properly includable in the estate of decedent for Federal estate tax purposes under section 302 (e) of the same act.

Decision will he entered for the respondent.


author: Black :

text:
    American National Realty Company, a Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 106414.
    Promulgated September 8, 1942.

      E. E. Kleinecke, Jr., Esq., for the petitioner.
    IF. II. Payne, Esq., for the respondent.
   OPINION.

Black :

The Commissioner determined deficiencies of $2,823.28 and $15,227.97 in petitioner’s income tax for the years 1988 and 1939,-respectively. He also determined a deficiency of $216.20 in petitioner’s excess profits tax for the year 1939.

These deficiencies are due to several adjustments made by the Commissioner in the income tax returns filed by petitioner for the years 1938 and 1939. Petitioner contests only two of these adjustments, and as to them it assigns error as follows:

I. The Commissioner erred in determining the adjusted cost basis of land sold in 1938 by reducing Petitioner’s cost price by the amount of depletion. Petitioner deducted in its income tax returns in prior years of 27½% of the bonuses received from mineral leases on the land and in holding that Petitioner derived a taxable gain from the sale of $7,641.11 instead of $67.87.
■ II. The undisputed facts being that Petitioner during the years 1030 to 1936 inclusive deducted in its income tax returns for said years depreciation on cattle purchased for breeding purposes and that during each of said years Petitioner had net income tax losses in excess of the depreciation deducted for each year, the Commissioner erred in determining the adjusted cost basis of the cattle sold in 1039 by deducting from the actual cost Petitioner’s depreciation reserve set up thereon for the years 1930 to 1936 inclusive.

The facts have all been stipulated, and we adopt the facts so stipulated as our findings of fact. A summary of these facts will suffice for the discusshm which follows.

Petitioner is a corporation, duly incorporated under the laws of the State of Texas, with its principal office in Galveston, Texas, and it filed its income and excess profits tax returns for the taxable years 1938 and 1939 on a calendar year basis with the collector of internal revenue for the first district of Texas, at Austin, Texas.

Adjusted, Cost Basis of Lanid Sold in 1938.

In 1922 petitioner purchased 2,139 acres of land in Matagorda County, Texas, for $21,331.33. At that time the land had no independent mineral cost and petitioner carried none on its books. ' During the years 1936 and 1937 petitioner leased the land in question for mineral purposes and received bonuses therefrom amounting to $27,539.05.' Petitioner reported the bonuses as income for the two years in question and took percentage depletion of 27½ percent thereon aggregating $7,573.24 as deductions from gross income, which deductions were allowed by the Commissioner for the respective years. The amounts of the bonuses received and the amounts of depletion deductions taken and allowed thereon are as follows:

In 1938 petitioner sold the land, including its interest in the oil leases, for $21,399.20. The leases were still in effect on December 31, 1938, and there was no production of minerals under the leases prior to that date.

' Petitioner computed a capital gain from the sale of said land of $67.87, being the difference between the sale price in 1938 of $21,399.20 and the cost in 1922 of $21,331.33. The Commissioner adjusted the basis of $21,331.33 to $13,758.09, a difference of $7,573.24, being the • amount of the depletion deducted and allowed in the two prior years, ■ and determined a capital gain of $7,641.11 on the sale of the land.

Adjusted Cost Basis of Cattle Bold in 1939.

During the years 1930 to 1939, inclusive, petitioner purchased cattle for breeding purposes at a cost aggregating $124,254.13. During the year 1939 petitioner sold all of its cattle for $92,369.50. For the years 1930 to 1938, inclusive, petitioner, using a depreciation basis instead of an inventory basis, charged off depreciation on its cattle aggregating $105,210.29, which was deducted from gross income'in its income tax returns for the respective years. The amounts of depreciation so deducted were reasonable and have never been adjusted by the Commissioner for any of said years. At the time the cattle were sold the aggregate amount of $105,210.29 appeared and was carried on petitioner’s books of account as a reserve for depreciation. The years 1937 and 1938 are admitted to be gain years, and petitioner does not contest the propriety of adjusting the cost of cattle by the amounts of depreciation taken and allowed for those years, which amounts aggregated $11,632.17. During the years 1930 to 1936, inclusive, petitioner had net losses for income tax purposes in excess of the amount of depreciation on cattle deducted from gross income for the respective years. These latter amounts aggregated $93,578.12.

In determining the deficiency for the year 1939 the Commissioner determined that the depreciation claimed of $105,210.29, including the $93,573.12 claimed for the years 1930 to 1936 on the cattle in prior years, was reasonable, based upon the useful life of the cattle, and constituted an allowable deduction, which must be taken into consideration in computing the gain or loss from the sale of the cattle. The Commissioner, thus determined a net gain of $73,325.66 from the sale of the cattle in 1939. The method used by the Commissioner in determining such gain is as follows:

Cattle sales, 1939-$32,389. 50
•Cost --$124,254.13
Less: Depreciation sustained 1930 to 1938, inclusive_ 105,210. 29
Unrecovered cost- 19,043. 84
Profit realized-$73,325.66
Loss claimed on income tax return- 14,400. 71
Adjustment- 87,726. 37

We shall first take up assignment of error I. We think the issue raised by this assignment of error must be decided in favor of the respondent. When property is sold by a taxpayer the statute requires that certain adjustments shall be made to cost in arriving at the taxpayer’s gain or loss on the transaction.

Section 113 of the Revenue Act of 1938 deals with the adjusted basis for determining gain or loss. The pertinent parts of that statute are printed in the margin.

In the year 1922 the petitioner purchased 2,139 acres of land in Matagorda County, Texas, for the sum of $21,331.33. During the taxable years 1936 and 1931 petitioner granted certain mineral leases on the land and received bonus payments therefrom in the aggregate amount of $27,539.05. The amounts of these bonuses were reported by petitioner as gross income for the years 1936 and 1937, and deductions for depletion thereon aggregating $7,573.24 were taken by it at the rate of 27½ percent, permitted under the provisions of law applicable for those years, which deductions were allowed by the Commissioner. In the taxable year 1938 petitioner sold the land, including its interest in the leases, for $21,399.20. It is stipulated that in 1922, when petitioner acquired the land in question, it had no independent mineral cost and petitioner carried none on its books and that the sale of the land which petitioner made in 1938 also included its interest in the oil leases. The total original cost to petitioner of its combined interest'in the land and oil leases sold was $21,331.33. Petitioner was allowed in 1936 and 1937 percentage depletion aggregating $7,573.24 on the oil bonuses which it received.

It seems to us that under these facts section 113 (b) (1) (B) requires that petitioner’s original cost basis of the land and its mineral content must be adjusted by subtracting the depletion which was allowed in the prior years.

Petitioner points out in its brief that the bonuses which it received in 1936 and 1937 were in the nature of advanced royalties and cites authorities in support of that statement. We do not question the accuracy of that statement. The stipulation does not show what percentage royalty petitioner reserved in the oil leases when it made them in 1936 and 1937. Presumably it was the usual one-eighth royalty reserved to the landowner in such leases. But, whatever royalty interests were reserved by petitioner in these leases, it sold them along with the land in 1938.

If petitioner had sold only the land in question and had still retained its oil royalty interests, there might be merit in its position that the $7,573.24 depletion deduction taken in prior years should not be applied to reduce the cost basis of the land, because it was not the surface of the land which was depleted. It was bonus depletion, and an oil bonus, as we have already said, is in the nature of an advanced royalty. However, petitioner did not sell its surface rights in the land alone, but it also sold the interest which it had reserved in the oil leases. These facts, we think, when taken together, require the adjustment which the Commissioner has made. If adjustment were not made in rhe taxable year when petitioner sold its every interest in the land, when could it ever be made ?

Petitioner makes the further contention that, even if the Board should hold that an adjustment must be made for the 27½ percentage depletion taken in prior years, the depletion deduction for 1936 should not be taken into consideration because it amounted to only $2,299.72, whereas petitioner’s net loss for that year was $15,180.32. Therefore, says petitioner, its depletion deduction for 1936 did not avail it anything in reducing net income. In respect to this contention it should be pointed out that the 27½ percentage deduction which petitioner took against its receipts from oil bonuses in 1936 was an allowable deduction under the provisions of section 114 (b) (3) of the Revenue Act of 1936.

In Beckridge Corporation, 45 B. T. A. 131, we held that the cost basis of property must be adjusted foe depreciation which was allowable, even though the taxpayer had not actually deducted such depreciation from net income on its income tax return in the year when it was incurred. This decision has been affirmed by the Second Circuit. See Beckridge Corporation v. Commissioner, 129 Fed. (2d) 318. i We think that decision is controlling here as to the point raised by petitioner witli particular reference to 1936 depletion.

We next discuss and decide petitioner’s assignment of error II. The applicable statute in the determination of this issue is section 113 of the Revenue Act of 1938, printed in the margin above.

The amounts of depreciation on these cattle which petitioner deducted in its income tax returns in prior years are not in dispute. Also, it has been stipulated that:

* * * ¾⅛ amounts of depreciation so deducted by petitioner for tbe respective years 1930 to 1938, inclusive, were reasonable and have never been adjusted by the Commissioner for any of said years.

It is also agreed by' the parties that for the years 1937 and 1938 petitioner got the full benefit of these depreciation deductions in the reduction of taxable income and that the adjustments made by the Commissioner for the depreciation taken by petitioner for those years should be sustained. It is also agreed by the parties that petitioner in all the years 1930 to 1936, inclusive, had net losses in excess of its depreciation deductions on its cattle, so that even if petitioner had taken no deductions at all for depreciation on the cattle, it would still have had josses and would have owed no income taxes for those years. Therefore, the issue raised is one of law and not of fact. The issue, we think, has been decided against the contention of petitioner in our decision in Beckridge Corporation, supra.

This fact the petitioner concedes in its brief. The petitioner contends, however, that the Board erred in the Bechridge case, and that the court laid down the correct rule in Pittsburgh Brewing Co. v. Commissioner, 107 Fed. (2d) 155, and that under that decision the depreciation taken by petitioner on its income tax returns in its loss years of 1930 to 1936, inclusive, was neither allowed nor allowable; that the basis for determining petitioner’s gain or loss from the sale of its cattle in 1939 should not be adjusted under section 113 (b) (1) (B) by deducting from petitioner’s cost the depreciation of $93,578.12 claimed as deductions in the loss years; and that petitioner had a loss of $20,252.40 on its sale of cattle instead of a gain of $73,325.66 as the Commissioner has determined. We discussed the Pittsburgh Brewing Co. case in Beckridge Corporation, supra, and reached the conclusion that, despite certain language used by the court in the Pittsburgh Brewing Co. case, section 113 (b) (1) (B) required that an adjustment be made for depreciation allowable to the taxpayer in prior years, regardless of whether the taxpayer had actually deducted it from net income on its income tax returns. As already stated, our decision in the Bechridge Corporation case has been affirmed by the Second Circuit. On authority of that case we sustain the Commissioner on issue II.

Decision will be entered for the respondent.

       SRC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.
      (a) Basis (Unadjusted) oe Property. — The basis of property shall be the cost of such property ; except that—
      *******
      (b) Adjusted Basis. — The adjusted basis for determining the gain or loss from the -sale or other disposition of property, whenever acquired, shall be the basis determined under subsection (a), adjusted as hereinafter provided.
      (1) General rule. — Proper adjustment in respect of the property shall in all cases be made—
      *******
      (B) in respect of any period since February 28, 1913, for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent allowed (but not less than the amount allowable) under this Act or prior income tax laws. * * *


author: Smith:

text:
    Estate of Lucy O. McGugan, Deceased, Arthur McGugan, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 109208.
    Promulgated September 10, 1942.

      Eldridge Hart, Esq., for the petitioner.

      E. M. Woolf, Esq., for the respondent.
   opinion.

Smith:

This proceeding is for the redetermination of a deficiency of $5,098.31 in the estate tax of Lucy O. McGugan, deceased. The question in issue is whether the expenses of decedent’s last illness and .funeral are deductible from the gross estate in determining the value of the net estate. The respondent has determined that under the laws of the State of Florida, where the decedent was a resident, these items were the primary liability of the decedent’s surviving husband and are therefore not properly allowable as deductions from the decedent’s estate. The facts are stipulated.

The decedent died a resident of the State of Florida on June 20, 1988, leaving a will which was probated and administered in Orange County, Florida. Item I of the will provided: “I direct that all my just debts and funeral expenses be paid out of my estate as soon after my decease as shall be found convenient.”

The decedent was survived by lier husband, Arthur McGugan, who was named executor of her estate. An estate tax return was filed by the executor with the collector of internal revenue for the district of Florida. In the estate tax return the deduction was claimed, of $685 representing $450 of physician’s fees and nursing fees of $100, which were incurred in decedent’s last illness, and funeral expenses of $135. These items were all paid out of the funds of the estate.

In his deficiency notice the respondent disallowed the deduction of all these items, stating:

Funeral expenses In the amount of $100.00 have been disallowed for the reason that under the laws of the State of Florida such expenses are the personal liability of the decedent’s husband and therefore do not constitute a proper deduction from the gross estate of the decedent.
The deduction for debts of the decedent has been decreased $575.00, made up of the following items:
(a) Physician’s Fee-:-$450.00
(b) Nursing Fee_ 100. 00
(c) Pledge to Winter Park Symphony Orchestra- 25.00
(a) and (b). The expenses of the last illness of the decedent have been disallowed on the ground that under the Florida State laws they are the personal liability of the decedent’s husband and hence do not constitute a proper deduction from the taxable estate of the decedent’s wife.

Section 303 (a) of the Revenue Act of 1926, as amended by section 805 of the Revenue Act of 1932 and section 403 (a) of the Revenue Act of 1934, provides in part as follows:

Seo. 303. For the purpose of the tax the value of the net estate shall be determined—
(a) In the case of a citizen or resident of the United States, by deducting from the value of the gross estate—
(1) Such amounts—
(A) for funeral expenses.
(B) for administration expenses.
(O) for claims against the estate.
* * * * * * *
as are allowed by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered, * * *

The respondent’s determination that the expenses of decedent’s last illness and funeral are not deductible from the gross estate because not allowed by the laws of the State of Florida is based upon the ruling of the Supreme Court of Florida in Fletcher v. Rickey (1934), 154. So. 147. It was held in that case that the expenses of the deceased wife’s last illness and funeral were a primary liability of the surviving husband and that the separate real estate of the deceased wife, which upon her death passed to her husband and daughter in equal shares, was not subject to sale by the administrator for the purpose of paying such expenses.

The court’s opinion reads in part as follows:

On the face of the record it appears that the claims presented, and for the payment of which the separate property of the decedent was sold, were valid claims against her surviving husband, William Snyder, and there existed no authority of law to subject in the probate court the separate property of the decedent to sale for the payment of these claims. On the death of Tillie Snyder-the property descended by virtue of the statutes of inheritance to William Snyder, the husband, and Dora, the daughter, in equal parts, and at the death of William Snyder, which the record shows to have later occurred, his interest in the property descended to the daughter, Dora.
***** * *
• Now the record shows, as hereinbefore stated, that Tillie Snyder was under the disabilities of coverture at the time of her death, and, therefore, her separate property could not then have been reached by creditors, except by that course of procedure which is authorized by statute to carry into effect the provisions of section 2 of article 11 of the Constitution of Florida. The debts accruing, as the debts here are alleged to have accrued, became and were the debts of the husband, and, therefore, the married woman was not liable for that part of the debt which accrued prior to her death and her separate estate was not liable to be held for it after her death. When she died, the property here involved immediately became vested in her surviving heirs, the husband and daughter, and was ho more liable to be sold for the payment of her debts or for her funeral expenses, in so far as the share of the daughter was concerned, than if she, the daughter; had acquired the property through some other and different source. * * *

Section 2 of article 11 of the Constitution of Florida has no application to the facts in the instant case. It merely provides creditors of a married woman’s estate certain remedies against the assets of the estate for a limited number of purposes, none of which relates to the payment of last illness and funeral expenses.

While Fletcher v. Rickey, supra, offers some basis for the respondent’s determination in the instant proceeding, it is to be noted that the facts there were entirely different from those in the instant proceeding. There, the wife died intestate, survived by her husband and daughter and leaving a separate estate consisting of a parcel of realty. Before administration of her estate the husband diéd. Thereafter, an administrator was appointed for the wife’s estate and the administrator, pursuant to order obtained from the county court, sold the real estate which .the decedent had owned at the time of her death to pay “some debts alleged to be due” by her consisting of a $3.60 doctor bill and $85 due on her funeral expenses. The court pointed out that upon the death of the wife her real estate passed to her husband and daughter in equal shares and that upon the death of the husband his interest also passed to the daughter, so that at the time of the appointment .of the administrator for the wife’s estate the property in question was wholly owned by the daughter and was not subject to administration as a part of the wife’s estate.

In the instant proceeding the decedent left an estate consisting ¡of both real and personal property and provided in her will that the expenses of her last illness and funeral be paid out of her estate. The statutes of the State of Florida provide that: -

Order of payment of expenses of administration and claims against the estate.— Personal representatives shall pay the expenses of administration and claims against the estate in the following order:
Class 1. Costs, expenses of administration, compensation of personal representatives and their attorneys’ fees.
- Class 2. Reasonable funeral expenses not to exceed the sum of three hundred and fifty dollars and any excess over said sum shall be considered as included in the payments specified to be made in Class 8.
Class 3. Expenses of last illness of the decedent, including debts for hoard and lodging, hospital, physicians’, surgeons’, and druggist bills and nursing, attendance and medicine during the last sickness of the deceased, incurred, within a period of sixty days prior to the death of the decedent. [§5541 (96), .Title I, ch. V, art. 7, Compiled General Laws of Florida.]

Even conceding for the sake of argument that under the rule of Fletcher v. Rickey, supra, the decedent’s real estate could not have been sold for payment of the disputed items, that is not determinative of our question. Schedule O of the decedent’s estate tax return shows mortgages, notes, and cash of over $13,000, jointly owned property of over $12,000, other miscellaneous property of approximately $14,800, and “Transfers during decedent’s life” of approximately $300,000. Thus, apparently there were ample funds for payment of the amounts specified in the will out of decedent’s, personal property. We do not have here any question as to the right of the executor of decedent’s estate to sell any real estate left by the decedent.

We do not construe Fletcher v. Rickey as prohibiting the payment of expenses of a decedent’s last illness and funeral out of the general funds of the estate, where the decedent has so directed by will and where there are ample funds for such purpose. It has been held that, even though under the common law these expenditures are regarded as primary liabilities of the surviving husband, the husband is relieved of such liability where the wife directs in her will that they be paid out of her estate and leaves sufficient property for their payment. See In re Skillman’s Estate, 146 Iowa 601; 125 N. W. 343; Brown v. Brown, 199 N. C. 473; 154 S. E. 731.

It is clearly the purpose of the Federal estate tax law to permit the deduction of such items if allowed by the laws of the jurisdiction under which the estate is being administered. Since it is stipulated that the items in dispute were paid by the executor and that the administration of the estate has been closed, the items apparently were allowed as deductions from the gross estate by the laws of the State of Florida.

We are of the opinion that the respondent erred in his disallowance of the deduction from the gross estate of the funeral expenses and 'expenses of decedent’s last illness.

No question is raised in this proceeding as to respondent’s disallowance of the pledge of $25 to the Winter Park Symphony Orchestra, as shown in the deficiency notice.

Decision will he entered wnder Rule SO.


author: Arnold :

text:
    Ernest Granucci and Bernice Granucci, Husband and Wife, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 107011.
    Promulgated September 10, 1942.

      Tobias.J. Bricca, Esq., for the petitioners.

      Marry R. Morrow, Esq., for the respondent.
   OPINION.

Arnold :

The respondent determined that the amounts of $3,500 and $2,650 claimed as deductions by petitioner in his returns for 1938 and 1939, respectively, were personal expenses and paid out by petitioner for the support and maintenance of his mother. He disallowed the deductions claimed, but allowed in each year a credit of $400 for one dependent under section 25 (b) (2) of the Revenue Act of 1938.

The petitioner contends that during the taxable years his mother was a silent partner of the Belli Motor Co. and that he held her partnership interest in trust; that he held 157 shares in the corporation, of which he was the owner of 90.5 shares (½ of 133 shares plus 24 shares) and his mother was the owner of 66.5 shares (½ of 133 shares) held in trust by him for her, and upon transfer of the corporate assets to the partnership he acquired an interest of 90.5/157 of 11/32 in the partnership and held 66.5/157 of 11/32 interest in the partnership in trust for his mother; that petitioner is taxable only on 90.5/157 of his distributive partnership share, or $5,218.13 for the year 1938 and $4,387.62 for the year 1939, the mother being entitled therefore to $3,834.31 in 1938 and $3,224.05 in 1939 of the partnership income.

The petitioner paid his mother out of his personal checking account $3,797.56 in 1938 and $2,681.42 in 1939. He deducted on his income tax returns for 1938 and 1939 as payments made to his mother the amounts of $3,500 and $2,650, respectively. Whether or not he is entitled to the deductions claimed depends upon whether he became the owner of the 133 shares of stock of M. Belli & Co., Ltd., under the agreement entered into by petitioner and his mother on May 1, 1936. If he owned such shares he was also the owner of the 11/32 interest in the partnership created July 1, 1937, to take over the assets and business of the corporation, which interest the petitioner received as the holder of 157 shares of stock of the corporation, 24 shares of which he purchased on or about April 13-, 1937, and 133 shares of which were transferred to him on April 19,1934. The petitioner concedes that he became the owner of one-half of the 133 shares, or 66.5 shares, under the agreement with his mother, but claims that he held the other half of the stock as trustee for her benefit.

As shown by the partnership agreement the partnership consisted of three partners, Altieri, Soldavini, and the petitioner. Neither in the distribution of partnership earnings nor in the partnership agreement was the mother of petitioner recognized as a partner. Whatever funds she received she received from the petitioner out of his personal • funds in the performance of his obligations under the agreement with his mother or as voluntary contributions. Although he now claims that his mother was entitled to $3,834.81 in 1938 and $3,224.05 in 1939 of the partnership profits, he paid her only $3,797.56 in 1938 and $2,681.42 in 1939. She signed the partnership agreement not as a partner, but merely to indicate her consent to the transfer of the business from the corporation to the partnership. She was interested because 133 shares had been pledged to her by petitioner for the performance by him of his obligations under the agreement with her. The agreement specifically states that the mother did not sign as a party to the agreement. The partnership agreement recognizes the existence of the agreement between the petitioner and his mother, but expressly provides that the partners Altieri and Soldavini do not thereby guarantee the performance of such agreement. They agree only that, in the event of any default oh the part of the petitioner in the performance of his obligations under such agreement, his mother shall have the same rights against the interest of the petitioner in partnership property as she had in the stock of the corporation legally owned by the petitioner.

" To determine what rights the mother had in the stock we must look to the agreement of May 1, 1936, entered into by petitioner and his mother. In that agreement the mother transferred all her interest in the 133 shares of stock to the petitioner, retaining only a right of lien as security for the performance of .the obligations assumed by the petitioner therein. The agreement provides that the mother “transfers, assigns, sets over and conveys to” the petitioner “all her right, title, interest and equity” in the 133 shares of stock, and she “agrees that the same shall be fully, completely and absolutely the property” of the petitioner. No language of transfer could be more specific. Though the absolute ownership of petitioner was subject to certain terms and conditions, it was complete and absolute nevertheless so long as he performed and abided by such terms and con-ditibns.

The petitioner on brief states that pursuant to the contract he became absolute owner of 66.5 shares upon his marriage in September 1936, that upon the happening of that condition his “conditional contingent interest in the contract wdiich petitioner had with his mother, ripened into a vested interest * * *.” This conclusion is based upon the provision in the agreement requiring the petitioner to keep in force a will during the life of the agreement providing that his mother should receive all the stock if he died unmarried and without legitimate children or one-half thereof “if he shall leave him surviving either a widow or legitimate issue.” In our opinion the requirement that petitioner keep a will in force disposing of the 133 shares of stock indicates that a transfer to the petitioner of all the stock was intended. Furthermore, we can not agree that the above provision makes the marriage of petitioner a condition upon the happening of which title to one-half of the shares would vest in him. If such provision were determinative of title, then the mother retained title to all the stock until the death of petitioner, for it could not be determined until then whether or not he would be survived by either a widow or legitimate issue. There is no provision in the contract which may be construed as vesting title in petitioner to only one-half of the stock upon his marriage. He either acquired all of the stock or none of it under the agreement.

The agreement apparently had two purposes: (1) To provide support and maintenance for the mother during her life, and (2) the acquisition of the 133 shares of stock by petitioner. That the petitioner wanted to acquire the stock and that it was intended that he should acquire it, appears from the transfer to him in 1934 of the 133 shares by his grandmother and his testimony that such transfer was made for the reason that he wanted to enter into an agreement with his mother so that in case anything happened to her he would be protected in the business and the business would go to him instead •of his brothers and sister. The petitioner had supported his mother for nearly six years prior to the agreement by giving her the greater part of his salary. Under the agreement he was required to pay to his mother a substantial portion of his salary and in addition one-half of dividends, if any, paid on the stock. It was stated in the agreement, however, that under the conditions then prevailing the payment of dividends could not be expected for an indefinite period. Therefore the petitioner’s earnings derived from his personal services were intended to be the source of her support rather than the stock. If he died she would be left without means of support unless some provision was made for that eventuality. The requirement in the agreement that petitioner keep in force a will during the life of the •agreement was intended as a provision for the support and maintenance of the mother in the event the petitioner predeceased her. If the petitioner died before his mother he would be unable to provide her support and maintenance out of his salary or earnings during her life and hence in effect a default would occur in his promise to pay her a certain amount a month out of his salary during her life. If the mother had not intended to transfer the stock to petitioner there would have been no necessity to provide for and to keep in force a will of petitioner under which all or a part of the stock would be reacquired by her in the event he died before she did. The •agreement is rather long and in considerable detail, from which it would appear that if it had been intended to transfer the stock to petitioner as trustee for the benefit of the mother, provision would undoubtedly have been made for the appointment of another trustee in the event of petitioner’s death rather than to have the stock go to the mother through the estate of petitioner Furthermore, if the stock had been transferred to petitioner as trustee the mother would have been entitled only to the dividends paid upon the stock. ■ In- the agreement the petitioner pledged the stock to his mother for the complete performance of his obligations thereunder. This also indicates a transfer of the stock to the petitioner.

In our opinion the petitioner held the 133 shares of stock and the partnership interest as owner thereof and not as trustee for his mother. The right of the mother to any of the corporation or partnership income was derived from the agreement she entered into with petitioner on May 1,1936, and not as owner of the stock, or any part thereof, or as beneficiary of a trust. Although it may be said that, by virtue of her lien upon the stock and partnership interest the mother had an .equitable interest therein, nevertheless, under the circumstances herein, petitioner’s entire distributive share of the partnership earnings or profits for the years involved is taxable to him. Burnet v. Leininger, 285 U. S. 136. Cf. Rose v. Commissioner, 65 Fed. (2d) 616.

The payments made by petitioner under the agreement with his mother were in part payment for the stock and in part for the support and maintenance of his mother. There is not sufficient evidence from which we can determine the amount petitioner was required to pay under the contract to his mother. The contract provides that 85 percent of the amounts agreed to be paid by the petitioner were to be in discharge of petitioner’s legal and filial duty to care for and support his mother. Any amounts paid by petitioner to his mother in excess of the amount required to be paid under the contract were voluntary contributions to the support and maintenance of his mother or gifts. Such payments are not deductible. In New Colonial lce Co. v. Helvering, 292 U. S. 435, it is stated that “a taxpayer seeking a deduction must be able to point to an applicable statute and show that he comes within its terms.”

■ It was agreed between counsel that the two adjustments made by respondent were mutually dependent, i. e., in the event that respondent erred in disallowing the deductions of the amounts paid his mother claimed by petitioner in his 1938 and 1939 returns, then he likewise erred in allowing the credit for one dependent, and in the event he did not err in disallowing the deductions claimed, then petitioner is entitled to the credit. Since we conclude that the respondent did not err in disallowing the deductions claimed, the petitioner is entitled to the credit for one dependent in each taxable year as determined by the respondent.

Decision will be entered for the respondent.


author: Arundell :

text:
    Eugene E. Hinkle, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103224.
    Promulgated September 11, 1942.

      Davis Hashin, Esq., for tlie respondent.
   OPINION.

Arundell :

Respondent’s denial of the sought deduction of $163,000 in our opinion was correct. The money was expended to secure petitioner’s release from a mental institution to which he had been committed by appropriate court action. The fact that the decree which restored his freedom also gave him control of his property and served to discharge the conservator theretofore in control is unimportant. Such a restoration of control over his property naturally would follow from the court’s determination that he was competent to handle his own affairs. Expenses of this character are personal, the deduction of which is expressly denied by statute. Sec. 24(a) (1) of the Revenue Act of 1936; David G. Joyce, 3 B. T. A. 393. The argument, similar to petitioner’s here, that expenses though personal in nature may be deducted because they incidentally advance his property interests or inure to the benefit of the business in which the taxpayer is engaged, has been uniformly rejected in analogous situations. Lloyd v. Commissioner, 55 Fed. (2d) 842; David G. Joyce, supra; Fred S. Markham, 39 B. T. A. 465; Bula F. Croker, 21 B. T. A. 240; affd., 62 Fed. (2d) 991. If some portion of the expenses could conceivably be regarded as allocable to the restoration of his property, an assumption which, we do not think is permissible, there is in the record no basis on which such an allocation could be made. Fred S. Markham, supra.

Moreover, it is clear that the expenditure of $163,000 could in no event be regarded as an ordinary and necessary expense of carrying on a trade or business. In Annie Ratkowsky, 44 B. T. A. 156, we held that expenses incurred in an incompetency proceeding were not deductible because the incompetent was not engaged in a trade or business. It is not believed that the activities of the present petitioner constituted the carrying on of a trade or business within the holding of Higgins v. Commissioner, 312 U. S. 212. The collection of interest and dividends, keeping accounts, and making limited shifts of securities from time to time in the interest of safety and returns do not constitute the carrying on of a trade or business, regardless of the amounts involved. John C. Scully, 44 B. T. A. 1279. Even where one is engaged in business it is necessary that the expense be both ordinary and necessary to make it allowable. Welch v. Helvering, 290 U. S. 111. In no event do we think the expenditure in question could be regarded as ordinary. Bula E. Croker, supra.

• Petitioner’s further suggestion that, in any event, the outlay of $163,000 should be added to the cost of his property as a capital expenditure is, in our opinion, equally without merit. If such an assumption wras indulged we would again be confronted with the fact that the record is barren of any means of allocating this cost to the various types of property owned by petitioner. Nor is there any statutory warrant for the assertion that the expenditure is deductible as a loss whether or not petitioner was engaged in a trade or business. The deduction of losses is confined by section 23(e) to those incurred in a trade or business, in transactions entered into for profit, or arising from fire, storm, shipwreck, or other casualty. The claimed deduction obviously does not fall within any of these categories.

With respect to the amount of taxable gain realized upon the liquidation of the Hinkle Iron Co. in 1937, the parties differ only as to the March 1, 1913, value of the shares of stock. Respondent has determined a value of $203.63 per share and the burden rests on petitioner to offer evidence to overcome the correctness of this determination. Pie reported in his tax returns and continues here to urge a value of $210.55 per share.

Value is sought to be established by first determining the March 1, 1913, value of the assets of the Hinkle Iron Co. and then dividing that value by the number of outstanding shares. It is the value of the good will on March 1,1913, on which the parties differ. Each party has submitted a mathematical computation which he urges proves the value contended for by him. No other evidence is before us. In our opinion the value of shares of stock is not to be proven by the submission of such computations and formulae. “The value of property on March 1,1913, is its actual value on that date, and that valuation can not be determined by any sort of theoretical computation * * Rockford Malleable Iron Works, 2 B. T. A. 817, 819; National Packing Corporation, 24 B. T. A. 952. “The ascertainment of value is not controlled by artificial rules. It is not a matter of formulas, but there must be a reasonable judgment having its basis in a proper consideration of all relevant facts.” Standard Oil Co. of New Jersey v. Southern Pacific Co., 268 U. S. 146, 156. The important thing in computations of this sort is the selection of the factors to be used and they can only be determined after a careful weighing of all the surrounding facts and circumstances. In the absence of such facts, we do not feel that we are called upon to hazard a guess as to the correctness of the two computations. The determination of the Commissioner is presumably correct and we are not prepared to say that his method of arriving at his basis, as disclosed by the computation submitted by him, is incorrect. In the circumstances we sustain the value of the shares of the Hinkle Iron Co. as determined by the respondent. ,

Decision will be entered for the respondent.