author: ÁRUndell :

text:
    Carlisle Packing Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 55209, 64926.
    Promulgated December 6, 1933.

      Olías. A. Wallace, Esq., and George B. Whittle, O. P. A., for the petitioner.

      Warren F. Wattles, Esq., for the respondent.
   OPINION.

ÁRUndell :

This proceeding has been brought to test the correctness of the respondent’s determination that a profit was made by petitioner in the disposition of certain of its plants and equipment to the Bank of California, National Association, during the fiscal year 1927. Deficiencies have been asserted for the fiscal years November 30, 1927, 1928, and 1929 in the respective amounts of $12,429.82, $1,435.49, and $1,473.88. It is petitioner’s contention that the disposition of its plants and equipment in 1927 under the circumstances hereinafter related did not result in taxable gain, and that, if respondent’s determination is corrected in this particular, then by reason of the net loss provisions of the statute the deficiencies for the fiscal years ended November 30, 1928 and 1929 will be wiped out. The evidence presented consisted of a stipulation of facts and the oral testimony of several witnesses.

It appears that the petitioner is a corporation, organized and existing under the laws of the State of Washington, and for a number of years has been engaged in the business of salmon fishing and packing, with plants in both Alaska and the State of Washington. The company had been successfully operated, particularly during the years 1917, 1918, and 1919, and on January 20, 1920, its book surplus was $1,017,749.22. Thereafter and for the next five years the petitioner suffered heavy losses. For the fiscal year ended November 30, 1926, it had net income of $24,982.28, without adjustment for losses of previous years. In order to carry on it started in 1920 to borrow various sums from the Bank of California, National Association (Seattle branch), and by February 15, 1927, its indebtedness to that institution approximated $1,250,000, evidenced by promissory notes made by petitioner and its president and sole stockholder, Frank Wright.

Early in 1927 the Bank of California advised Wright that the bank would not finance petitioner during the coming fishing season and demanded that petitioner liquidate its indebtedness to the bank. After some negotiations petitioner agreed to and did transfer and convey to the Bank of California its canneries at Cordova and Bristol Bay, Alaska, together with certain equipment, boats, docks, land, etc., all of which is set forth and described in an instrument of transfer which was introduced in evidence as exhibit A to the stipulation of the parties. All of the property was taken over by the Bank of California at an agreed price of $650,000 and at the same time petitioner was given its canceled notes in that amount. This transaction was consummated on February 15, 1927. Thereafter, and on or about February 21, 1927, the Bank of California completed negotiations begun about February 1, 1927, and sold the plant and equipment, etc., at Cordova, Alaska, to the New England Fish Co. for the sum of $300,000; and on or about February 22, 1927, the bank sold the Bristol Bay plant and equipment, etc., to the Alaska Packers Association for the sum of $350,000, making a total of $650,000. The respondent determined that the depreciated cost of the property sold, both tangible and intangible, was $346,106.87, and the petitioner apparently does not dispute this figure. Based thereon the respondent determined that the petitioner realized a profit by the above described transaction in the amount of $303,893.13.

■ It seems to us that on these facts the respondent must prevail. If the petitioner had directly sold the assets in question for $650,000 in cash and had used the money to pay the bank, there would be no question but that the profit so realized was taxable. It is none the less realized where the petitioner had first received the money by way of borrowed funds. The cancellation of petitioner’s indebtedness to the Bank of California in the sum of $650,000 constituted a realization of gain on the disposition of its property. Cf. United States v. Kirby Lumber Co., 284 U.S. 1. In Hagan Corp., 21 B.T.A. 41, the taxpayer delivered stock of another corporation, that cost it $16,000, to its creditor and received its notes in the face amount of $31,901.03, which it had given the creditor in a prior year. We sustained the Commissioner’s determination that a profit of $15,901.03 had been realized on the transaction, saying in part:

The petitioner gave value for what it got and it received a valuable consideration for what it gave. It had a gain derived from capital, from labor, or from both combined. Eisner v. Macomber, 252 U.S. 189. A solvent corporation had its outstanding notes in the amount of $31,901.03 returned to it for some services performed and/or some stock which cost it $16,000'. It does not matter if, as contended by the petitioner, these notes were originally given for a capital asset. We arc not xiarticularly concerned with the origina' transaction nor with the proper treatment of what was acquired in that transaction. It is sufficient for present purposes to know that after the petitioner received its own notes, it had income or a profit amounting to $15,901.03 which it has never reported for tax purposes and which it could not have reported properly at any other time.

We accordingly hold that petitioner realized taxable profit on the transaction here involved, and

Decision will be entered for the respondent.


source: Caselaw Access Project

author: McMahon:

license: Public Domain

text:
    F. L. G. Straubel, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 56867.
    Promulgated December 6, 1933.

      B. L. Parker, Esq., and F. N. Trowbridge, Esq., for the petitioner.

      J. E. Marshall, Esq., for the respondent.
   OPINION.

McMahon:

This is a proceeding for the redetermination of a deficiency in income taxes for the calendar year 1927 in the amount of $18,258.03.

In the petition there are alleged as errors:

A. The failure of the Commissioner to find, as to stock received bv the petitioner in exchange for patents and inventions in 1927, that it was received in an exchange tax free under Section 203 (b) (4) of the 1926 Law, and his failure to exclude the value of said stock from the income of the petitioner for 1927.
B. The failure of the Commissioner to exclude (or deduct) from the gross income of the taxpayer, the sum of $45,000.00, being the value of certain stock issued to two other parties in connection with the said exchange.

The petitioner is an individual with residence at Green Bay, Wisconsin.

In 1901 he, with his brother, O. C. Straubel, started in a small way in the business of manufacturing filing cabinets, desks, and office supplies in Green Bay, Wisconsin. The petitioner furnished what little money was had at the start and O. C. Straubel made the cabinets. The business was conducted as a partnership until 1907, when it was incorporated under the name of the Automatic File & Index Co., hereinafter referred to as the company or the corporation. Thereafter the petitioner and O. C. Straubel continued as stockholders. The petitioner was president of the company. Prior to incorporation, the company had manufactured a fiat sheet file under a patent which had been issued to the petitioner. After incorporation that particular patent was not used, because it was obsolete. After incorporation other patents were issued in the name of the petitioner, which were used by the company.

In 1911 the petitioner’s son, C. W. Straubel, began working for the company at full time. He started at the bottom and became, successively, salesman, sales manager, and secretary of the company. He held the position of secretary through the year 1927. He also had many other duties. It was a part of his duties to call on customers, and he frequently brought back to the plant ideas for improvements and developments. The petitioner, his brother, and his son worked together very closely.

O. C. Straubel was factory superintendent of the company, his duties being mainly manufacturing and running the plant. Blueprints and also verbal statements were given to him for development.

The following patents were issued in the name of the petitioner:

Four of the patents or the applications for such patents above set forth, namely, Nos. 1013234,1083304,1303985, and 1319431, were used by the company between the years 1907 and 1918. There was no written agreement regarding the use of these patents or applications by the company. The company did not pay the petitioner anything for the use of these patents or applications between 1907 and 1918. After 1918, the company continued to use these patents or applications.

The remainder of the above listed patents, namely, Nos. 1350186, 1477783,1498132,1561752, and 1567874, were not used by the company until after 1918. There was no written agreement with the company for the use of these patents. From 1918 to 1921, inclusive, the company paid the petitioner royalties for the use of such patents or applications in the amount of $500 a year. Thereafter the royalties which were paid by the company were paid to the petitioner, O. C. Straubel and C. W. Straubel. The royalties paid to the three were as follows:

By 1926 the business of the company had expanded considerably and overtures had been made by outside interests to purchase it. One interested party, in particular, had been trying to buy the business principally to get the patents. Due to the fact that it was contemplated that the business might be sold, it was decided that it would be advisable for the company to buy the patents.

The petitioner, his brother, and his son worked together very closely on a number of the patents. C. W. Straubel conceived the idea of a lift-out tray and drew pictures of it when he was on a trip. When he returned to the factory, a discussion was had and the petitioner obtained the basic patent upon it with some of C. W. Straubel’s ideas. This lift-out tray is covered by Patent No. 1477783. It became a valuable part of the line of the company.

A number of discussions were had by the petitioner, C. W. Straubel and O. 0. Straubel with reference to the interests in the patents issued to the petitioner. These discussions occurred at various times and some were as early as 1922. The substance of these discussions was that it was agreed that C. W. Straubel and O. C. Straubel were to have an interest in all of the patents, and that although the'patents were issued from time to time to the petitioner, nevertheless the other two were to have an interest in all the patents as issued. When, in 1927, disposition of the patents to the corporation for stock was considered, C. W. Straubel and O. C. Straubel insisted that they had certain interests therein. The petitioner at first insisted that he should receive $100,000 in stock of the company which was to be issued, but he finally agreed that he should receive stock of the agreed valuation of $90,000 and that C. W. Straubel and O. C. Straubel should receive stock of the agreed valuation of $45,000 between them — that is, petitioner was to take two thirds of the consideration received and C. W. Straubel and O. C. Straubel were to get the remaining one third of the consideration. C. W. Straubel and O. C. Straubel then agreed between themselves that O. W. Straubel was to receive two thirds of such remaining consideration (two ninths of the whole consideration) and that O. C. Straubel was to receive one third of the remaining consideration (one ninth of the total consideration). This determination was finally arrived at just before the meeting of the stockholders and directors of the company in August 1927 at which the purchase of the patents was considered.

The petitioner submitted in writing to the corporation a proposal for the sale of the patents listed hereinabove, together with other applications and inventions. Such proposal is not dated, but is contained in the minutes of a special meeting of the stockholders of the corporation held on August 15,1927. In such proposal the petitioner stated in part:

There are nine patents under which we are operating and three more applied for, also two inventions that are patentable, all of which would under the proposed arrangement become the property of the company.
My price for my entire interest in these patents, patents applied for and patentable inventions is $135,000, which with the assistance and cooperation of my active associates I have decided to distribute as shown by the following schedules, together with a list of stockholders with present and final holdings: * *

In the proposal the petitioner proposed that the stock in payment for the patents, patent applications, and the inventions should be paid as follows:

To F. L. G. Straubel, 552 shares of common stock and 210 shares of preferred stock.
To O. W. Straubel, 240 shares of common stock.
To O. C. Straubel, 150 shares of preferred stock.

The minutes of the special stockholders’ meeting held on August 15, 1927, contain the following:

"Whereas, F. L. G. Straubel, C. W. Straubel and O. O. Straubel are personally interested in such patents and are willing to sell the same to the company for One Hundred and Thirty-five Thousand Dollars ($135,000), payable in the common and preferred stock of this company, viz., 792 shares of common stock and 360 shares of preferred, * * *
Therefore, be it resolved that this company purchase the said patents affecting its product for the sum of $135,000, payable in the stock of this company, to wit, 792 shares of common stock and 360 shares of preferred stock.

The resolution also provided that the stock should be issued to the petitioner, C. W. Straubel and O. C. Straubel in the proportion proposed by the petitioner in his proposal to the corporation.

The petitioner approved these minutes in writing as follows: “Approved : F. L. G. Straubel, Pres.”

On September 14, 1927, the petitioner wrote a letter, headed “Assignments of Patents,” to the Commissioner of Patents, wherein, in reference to certain listed patents, he stated in part:

* * * whereas I am now the sole owner of said patents * * *. Now, therefore, * * * I, Frederick L. G. Straubel, by these presents do sell, assign, and transfer unto the said The Automatic File & Index Co., the whole right, title and interest in and to the said letters patent * * *.

The petitioner, C. W. Straubel and O. C. Straubel each received, on September 1,1927, the stock of the corporation as contemplated by the resolution of the stockholders at their meeting of August 15, 1927. Two hundred shares of the preferred stock paid to the petitioner were taken in the names of Dorothy and Marjorie Straubel.

Immediately prior to the transfer of these shares to petitioner, his brother, and his son, the stockholdings in the corporation were as follows:

In determining the deficiency for the year 1927, the respondent included in petitioner’s taxable income a gain on the transfer of the patents to the company in the amount of $129,049.42.

The respondent determined that the petitioner was the sole owner of the patent^, patent applications, and patentable inventions transferred to the company in 1927 in exchange for stock, and held that the petitioner derived a gain of $129,049.42 upon such transaction. The petitioner contends that the transaction constituted such a transaction as is contemplated by section 203 (b) (4) of the Revenue Act of 1926, in which no gain or loss is recognized for income tax purposes. Section 203 (b) (4) and section 203 (i) of the Revenue Act of 1926 are set forth in the margin. Petitioner contends that the property transferred to the corporation was owned by himself, his brother, O. C. Straubel, and his son, G. W. Straubel; that the stock received by each was substantially in proportion to his interest in the property prior to the exchange; and that immediately after the exchange he, his brother, and his son were in control of the corporation. It is the position of the respondent that the transaction is not one in which gain or loss is to be ignored for income tax purposes, since the petitioner, who, respondent contends, was the sole owner of the property prior to the transfer, was not in control of the corporation after the transaction within the meaning of the statute.

The evidence discloses that as a result of numerous discussions among the three individuals, some of which were held as early as 1922, it was orally agreed that C. W. Straubel and O. C. Straubel were to have an interest in all of the patents and that although the patents were issued from time to time to the petitioner, nevertheless the other two individuals were to have an interest in all the patents as issued. In 1927, when the question of disposing of the patents to the corporation was considered, the question of the proportionate interest of each therein was considered and definitely settled. It was decided that the petitioner owned a two-thirds interest, that C. W. Straubel owned a two-ninths interest and that O. C. Straubel owned a one-ninth interest. These proportions were agreed to among the parties orally.

While, under the United States Revised Statutes, legal title in a patent can not be conveyed except in writing, equitable title therein may be transferred by oral contract; and such assignment is valid as against the assignee of the legal title who takes with knowledge of the equitable assignment, as was done in the instant proceeding. Dalzell v. Deuber Watchcase Mfg. Co., 149 U.S. 315; Spears v. Willis, 151 N.Y. 443; 45 N.E. 849; Blakeney v. Goode, 30 Ohio St. 350; Whitcomb v. Whitcomb, 85 Vt. 76; 81 Atl. 97; Searle v. Hill, 35 N. W. 490 (Ia.); Whitney v. Burr, 115 Ill. 289; 3 N. E. 434. Under an agreement that a patent is to be taken out in the joint names of two or more persons, or for their joint benefit, the parties are, in equity, joint owners. Duke v. Graham, 19 Fed. 647; Whiting v. Graves, 29 Fed. Cases #17577; and Blakeney v. Goode, supra. And an invention may be assigned before application for a patent thereon is made, the assignee taking equitable title in the invention. American Bank Protection Co. v. City Natl. Bank, 181 Fed. 375.

In the light of the above authorities it is our opinion that here the petitioner, prior to the transfer of the patents, patent applications, and patentable inventions to the corporation, effected a valid oral assignment of equitable interests therein to C. W. and O. C. Straubel. It appears that such assignment was made as early as 1922 or earlier, and in conformity therewith, from 1922 until 1927, C. W. and O. C. Straubel each received royalties from the-corporation for the use of the patents, patent applications, and patentable inventions; and prior to the date that such patents, patent applications, and patentable inventions were assigned to the corporation it was established by oral agreements among the parties that the petitioner had a two-thirds equitable interest therein, that O. W. Straubel had a two-ninths equitable interest therein, and that O. 0. Straubel had a one-ninth equitable interest therein. We are satisfied that such were the interests therein immediately prior to the transfer of the property to the corporation and not later than August 15, 1927, and considerably before the formal written assignment of the legal title by the petitioner to the corporation of certain patents under date of September 14, 1927.

Counsel for the respondent stresses the fact that in this assignment the petitioner recited, “ I am now the sole owner of said patents ”, and that he therein stated that he thereby assigned and transferred “ the whole right, title and interest in and to the said letter patents.” That assignment dealt with the legal title which the petitioner held. It is not inconsistent with the view that certain equitable interests were held by others. The petitioner was the record holder of the legal title and his letter to the Commissioner of Patents was therefore worded to conform to the records. It is to be noted that in his proposal to the stockholders, the petitioner stated that the consideration to be received was to be distributed not only to himself, but also to C. W. and O. C. Straubel. It is also to be noted that the corporation, of which the petitioner was president, recognized the interests of C. W. and 0. C. Straubel by stating in the notice to stockholders that the “owners of the patents have agreed to sell them to the corporation and take stock in the corporation in payment therefor,” and by providing for the payment of the stock to the three individuals and by reciting in the preamble of the resolution set forth in its minutes of August 15, 1927, all of which were approved by the petitioner in writing, as follows: “ Whereas, F. L. G. Straubel, C. W. Straubel and O. C. Straubel are personally interested in such patents * * * [Italics ours].

We have not overlooked the testimony of L. E. Houston to the effect that petitioner subsequent to 1927 told him that “ he was the sole owner of those things that were behind the manufacture of this product and the sole inventor of them.” In view of the other proof in this proceeding, this statement made by the petitioner to Houston does not justify a holding that C. W. and 0. C. Straubel did not own equitable interest^ in the patents, applications, and inventions transferred to the corporation. This testimony of Houston is not inconsistent with our view that petitioner held the legal title to the patent rights in question while C. W. and O. C. Straubel owned equitable interests therein, as heretofore pointed out.

Upon the exchange the petitioner received two thirds of the stock, C. W. Straubel received two ninths of the stock and O. C. Straubel received one ninth of the stock upon the basis of the valuation thereof (both preferred and common) agreed upon by the corporation and the individuals. Such valuation is not disputed by the respondent, but, on the contrary, was adopted by him in the determination of the deficiency herein. Of the total number of shares issued for these patents, the petitioner received approximately 66 percent, C. W. Straubel received approximately 21 percent, and O. C. Straubel received approximately 13 percent. It is thus to be seen that upon either basis of calculation the amount of stock received by each was substantially in proportion to his interest in the property prior to the exchange.

After the transaction in question there were outstanding 2,156 shares of common stock of the corporation, of which these three individuals owned 1,199 shares or 88.44 percent. After the transfer there were outstanding 450 shares of preferred stock, of which these three individuals owned 360 shares or 80 percent. Thus, these three individuals were in control of the corporation after the exchange within the meaning of “ control ” as defined in section 203 (i) of the Revenue Act of 1926.

We hold that no gain or loss is to be recognized upon the transaction in question, and that no part of the amount of $129,049.42 should be included in the gross income of the petitioner for the year 1927.

Decision will be entered under Rule 50.

       Sec. 203. (b) (4) No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to exchange.
      Sec. 203. (i) As used in this section the term “ control ” means the ownership of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation.


author: Lansdon :

text:
    Joseph Paper, Petitioner, v. Commissioner of Internal Revenue, Respondent. David Paper, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 59040, 64744.
    Promulgated December 12, 1933.

      Francis D. Butler, Esq., and Thomas J. Shannon, QJP.A., for the petitioners.

      James K. Polk.. Jr., Esq.% fqr (he respondent.
   OPINION.

Lansdon :

These petitioners have appealed from the respondent’s determinations of their income taxes for the year 1929. Each also asks affirmative relief in the way of refunds for alleged overpay-ments of taxes in the year reviewed. The items in dispute are, in Docket No. 59040, taxes, $677.52, and refund claims, $161.60; in Docket No. 64749, taxes, $168.75, and refund claim, $32.75.

The sole issue is whether or not the respondent committed error in holding the petitioners taxable for dividends paid in the stock of a family corporation known as Paper, Calmenson & Co., hereinafter referred to in these proceedings as the corporation.” The petitioners are and were in the tax year stockholders and managing officers of the corporation, which had 5,000 shares of common and 2,550 shares of preferred stock outstanding. Of these shares, 3,522 of the common and 1,108 of the preferred stock were owned by petitioners’ mother, who depended upon dividends thereon for her sole support. Because of the needs of this stockholder, the petitioners, who controlled the corporation’s board of directors, adopted a plan of declaring yearly dividends and paying their mother’s portion of them in cash, but accepting the corporation’s preferred stock in payment of their interest in them. At the end of the year 1928 the corporation had on hand a balance of earned surplus subject to distribution among its stockholders, and on February 18, 1929, pursuant to custom and an understanding that they would accept the corporation’s preferred stock in lieu of cash, its board of directors met and passed the following resolution:

Resolved, that a dividend of 6 percent on the outstanding common stock of the corporation be, and the same hereby is, declared out of the surplus earnings of the corporation, said dividend to be payable to the holders of such stock of record at the close of business on the 31st day of December, 1928. That a dividend of 7 percent on the outstanding preferred stock of the corporation be, and the same is, hereby declared out of the surplus earnings of the corporation, said dividend to be payable to the holders of such stock of record at the close of business on the 31st day of December, 1928.
Be it further resolved, that said dividend on the common and preferred stock of the corporation, be paid at the option of the individual stockholders, either in cash or in preferred stock of the corporation.

The authorized dividends, following this corporate action, accruing to petitioners’ mother were paid to her in cash, and those due the petitioners were paid in preferred stock of the corporation in the respective amounts of 108 and 31 shares and in cash in the respective amounts of $31 and $14.

In their respective income tax returns for 1928 each petitioner reported the stock received as dividends upon his common stock as income, but excluded the shares received as dividends on his preferred stock.

The respondent held that all of the stock received by the petitioners as aforesaid constituted income taxable to them as corporate dividends and added the omitted shares to their gross income in computing their surtax. The petitioners now contend that none of the stock received from that dividend should be taxed, and' ask us to overrule the respondent’s determination and also to hold that they are entitled to a refund of taxes paid on the stock erroneously reported in their returns.

The petitioners base their claims upon the decision in Jackson v. Commissioner, 51 Fed. (2d) 650, which involved facts similar in some respects to those here considered.

We have carefully considered that case and find it on all fours with the facts in the case at bar, with one important exception — in the Jackson case practically all of the dividends were liquidated with the stock of the declarant corporation and only a scattering few of “ employee ” stockholders were paid in cash. The court, in the review, seems to have considered the cash payments too trivial to affect the substance of the transaction, and in considering that phase of the situation it said:

Jackson and the Crellins, after tlie stock was issued to them, held no greater proportion of the assets of the corporation than they did before as to the January dividend, because Whitacre and Smith also turned back their dividend checks for stock, so that all stockholders, after the January dividend, held the same proportion as before. After the August dividend was declared, however, some few of the employees elected to take cash instead of shares of stock. As is shown in the Board’s findings, that stock was not of the same class as that owned by Jackson and the Crellins but was “ Employees Stock.”
⅞ * ⅜ ¶⅛ }gsues r!lised in these cases have all been considered and decided adversely to the respondent’s contentions by this court in the case of United States v. Mellon, 281 F. 645, and Unites States v. Davison, 9 F. (2d) 1022, certiorari denied 271 U.S. 670, 46 S.Ct. 484, 70 L.Ed. 1143.

The case of United States v. Mellon, supra, is also cited; but the facts there are also different from those involved here in that the declarant corporation there paid all stock and no cash in discharging its dividend obligation. Mellon and his associates took, in addition to the shares due them, the shares of the small stockholders who desired cash, and paid them the cash. These facts, the court there held, left the taxpayers’ relationship to the corporation’s assets exactly as they were before, and brought them within the rule laid down in the much cited case of Eisner v. Macomber, 252 U.S. 189.

Going back to the case at bar, these petitioners were minority stockholders and owned between them less than one half of the corporation’s stock at the time the dividends here involved were declared and paid. Their mother, who received her dividends in cash, owned more than 70 percent of all of the corporation’s common stock and in excess of 40 percent of its preferred stock. These facts, we think, are sufficient to distinguish the present case from those which the petitioners cite as authority for their contentions here urged.

The attribute of stock dividends, proper, which renders them tax free, lies in the fact that they take nothing out of the assets of the corporation and do not increase the relative holdings of its stockholders. Their only effect is to divide up the corporation’s capital into smaller title units and to increase the stockholders’ title tokens by which their interests are evidenced. Towne v. Eisner, 245 U.S. 418; Gibbons v. Mahon, 136 U.S. 549; Logan County v. United States, 169 U.S. 255.

We do not think it will be seriously contended in this case that the corporation’s surplus was not affected by the cash withdrawal made by its major stockholder; or that the petitioners’ interests in the corporation were not proportionately increased in the process followed. Before the distribution of the dividends the petitioners owned 1,308 shares of the corporation’s common and 1,271 shares of its preferred stock. As a result of the distribution they increased these holdings by 139 shares of preferred stock. These certificates increased the petitioners’ capital assets proportionately as their mother’s interest in the corporation decreased. Their gains, therefore, in the distribution of the corporation’s earnings were real and constituted income taxable to the petitioners as corporation dividends. W. J. Hunt, 5 B.T.A. 356; Tillotson Mfg. Co., 27 B.T.A. 913.

Reviewed by the Board.

Decision will be entered under Rule 50.


author: SteRniiagen :

text:
    Worcester Salt Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 60271.
    Promulgated December 12, 1933.

      Laurence Graves, Esg., for the petitioner.

      J. M. T^einenhugel, Esg., for the respondent.
   OPINION.

SteRniiagen :

Tlie Commissioner, after examining the returns of the Worcester Salt Co., the Kerr-Remington Salt Co., and Alexander Kerr Bro. & Co. for 1928, determined that for the first five months, until June 1, a separate return was proper for the Worcester Salt Co., and that a consolidated return for the whole year should include the year’s operations for the other two corporations and the last seven months of the Worcester Co. This is accepted by both parties as correct, and upon that basis respondent determined a deficiency of $8,808.58 for the earlier period and $4,988.75 for the consolidated return period. The only issue is the validity of the respondent’s dis-allowance on the consolidated return of a deduction taken by Kerr-Remington Co. of $261,423.85 as a loss upon the sale by it in December 1928 of bonds of the Worcester Co.

The facts are all submitted in a written stipulation, as follows:

1. The petitioner, Worcester Salt Company, is a corporation organized under the laws of the State of New York in the year 1894 with principal place of business at 40 Worth Street, New York, New York, formerly at 71 Murray Street, New York, New York.
2. Kerr-Remington Salt Co., Inc., was the owner of all of the issued and outstanding capital stock of Alexander Kerr Bro. & Co., Inc. during the entire calendar year 1928. On June 1, 1928, the petitioner acquired the entire issued and outstanding capital stock of Kerr-Remington Salt Co., Inc., at a cost of $679,319.04 and continued to own said stock during the remainder of the calendar year 1928.
3. Kerr-Remington Salt Co., Inc., and Alexander Kerr Bro. & Co., Inc., were affiliated for the calendar year 1928 within the meaning of the provisions of section 142 of the Revenue Act of 1928 and Worcester Salt Company was affiliated with the aforesaid corporations for the period June 1, 1928, to December 31, 1928, within the meaning of said section. The respondent has correctly determined that the income tax liability of the petitioner for said period June 1, 1928, to December 31, 1928, should be computed upon the basis of a consolidated return including the net income of Kerr-Remington Salt Co., Inc., and Alexander Kerr Bro. & Co., Inc., for the entire year 1928 and of the petitioner for said period June 1, 1928, to December 31, 1928. The petitioner was not affiliated with any other corporation within the meaning of the provisions of section 142 of the Revenue Act of 1928 for the period January 1, 1928, to May 31, 1928. The respondent has correctly determined that the income tax liability of the petitioner for said period January 1, 1928, to May 31, 1928, should be computed upon the basis of a separate return.
4. On or after June 1, 1928, and after the petitioner had acquired the stock of Kerr-Remington Salt Co., Inc., as aforesaid, Kerr-Remington Salt Co., Inc., transferred to the petitioner all of its assets, subject to all its liabilities, in exchange for the issuance to said Kerr-Remington Salt Co., Inc., by the petitioner of its bonds of a face value of $680,000. In December, 1928, Kerr-Remington Salt Co., Inc., sold to a national bank $300,000 face value of said bonds of the petitioner for $300,000 cash.
5. The depreciated cost of the assets of Kerr-Remington Salt Co., Inc., less liabilities, transferred to the petitioner in exchange for said $680,000 face value of bonds was $1,274,434.02.
6. The petitioner’s net taxable income for the period January 1, 1928, to May 31, 1928, was in the amount of $4,637.92 and its net taxable income for the period June 1, 1928, to December 31, 1928, was in the amount of $171,533.72.

Briefly, Kerr-Remington had net assets at a depreciated cost of $1,274,434.02. On June 1, 1928, Worcester bought all Kerr-Remington’s outstanding shares for $679,319.04 cash, thus establishing a statutory affiliation, Revenue Act of 1928, section 142 (c). Thereupon Kerr-Remington transferred its net assets, the value of which is not shown, to Worcester and Worcester issued bonds of $680,000 to Kerr-Remington. Later in the same year Kerr-Remington sold $300,000 of these bonds at par to a national bank. From this the contention is made that Kerr-Remington sustained a loss measure at 30/68 of the difference between $1,274,434.02, taken as the cost of the bonds, and $680,000, their value when received.

The petitioner’s primary argument takes this form: (1) The exchange of assets for bonds was a statutory reorganization, within section 112 (i) (1); (2) under section 112 (b) (4) no gain or loss was recognizable to Kerr-Remington at the time of the exchange; (3) under section 113 (a) (6) the depreciated cost of Kerr-Remington’s assets, which would have been the basis for determining gain or loss if gain or loss were then recognized, was carried over as the basis upon which to determine gain or loss upon disposition of the bonds; and (4) that this is proportionately true as to the sale of part of the bonds. Petitioner also argues that such a loss is deductible even though Kerr-Remington was a member of an affiliated group.

The respondent, arguing also from the proposition that there was a statutory reorganization, invokes section 113 (a) (7) and contends that the issue of bonds by Worcester to Kerr-Remington was a transfer of property which retains the same basis upon disposition by the transferee Kerr-Remington as it would have had in the hands of the transferor Worcester, which basis he takes to be the $679,319.04 paid for the Kerr-Remington shares. He argues further that, since the corporations were affiliated, the exchange of assets and bonds was an intercompany transaction and thus the basis remained unchanged.

In our opinion, since at the time of the sale by Kerr-Remington of the Worcester bonds the two corporations had become affiliated within the affiliation provision of the statute, the question of tax liability is primarily governed by the affiliation aspect of the transaction so far as the corporations are concerned. The group, after the transfer of assets and issuance of bonds, was still in the same situation as before — that is, the group still owned the assets and merely held its own bonds. The exchange was an innocuous internal event. When the $300,000 of bonds were sold at par, this was the first time that the financial position of the group was altered, the group becoming a debtor on its bonds to this extent to the holder. This is merely the position of a borrower, who, by giving his note, realizes neither gain nor loss. At that point, he is not affected by the doctrine of United States v. Kirby Lumber Co., 284 U.S. 1, which attributes to him a taxable gain if and when he discharges the obligation of his outstanding note at less than he borrowed.

There is no more reason to recognize the loss when Kerr-Remington sold the bonds than there would be if Kerr-Remington had sold its assets to its affiliate for cash in the first place. Such an intragroup sale would undoubtedly involve no recognizable gain or loss.

Petitioner cites Ohio Central Telephone Co., 28 B.T.A. 96. In that proceeding the petitioner, being affiliated with six other corporations, acquired from them upon the liquidation of their assets the shares and bonds of a third corporation, thus simultaneously destroying the first affiliation with the six and establishing the second affiliation with the third. The allocation of the assumed cost as between the bonds and several classes of stock of the third corporation was not shown. Thereafter the petitioner sold the bonds thus acquired to an outsider. The Commissioner determined a gain which the Board sustained. Whatever be the ratio decidendi of that decision, its complexity alone precludes it as a precedent for the present case. Here we have simply an original issuance, after the affiliation was established, of bonds by one affiliate to another, and the disposition of such bonds at par by the other within the period of affiliation. That the considerations affecting such facts entirely within the period of affiliation may be different from those which include transactions either before, after, or simultaneously with the formation or destruction of affiliation is well established. Cf. Farmers Deposit Nat. Bank, 5 B.T.A. 520; Remington Rand, Inc. v. Commissioner, 33 Fed. (2d) 77, certiorari denied, 280 U.S. 591; Burnet v. Aluminum Goods Mfg. Co., 287 U.S. 544. Cf. Revenue Act of 1928, sec. 113 (a) (12). The difficulties inherent in Ohio Central Telephone Co., supra, may not, therefore, control the more simple case which we have here.

It is unnecessary, since the affiliation is the dominant and controlling fact, to decide whether the acquisition by Worcester of the Kerr-Remington shares for cash, or the exchange of assets for bonds, constituted either separately or in conjunction a statutory reorganization; or whether the issuance by Worcester of its bonds was a transfer of property, within the meaning of the reorganization provisions; or whether the acquisition by Worcester of the shares and later the assets is to be treated as a purchase by it of the assets for cash.

Since the parties agreed at the hearing that if it is held, as it has been, that Kerr-Remington sustained no deductible loss by the sale of the $300,000 of bonds, the deficiency as determined is correct.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: Murdock : Lansdon,

text:
    Central National Bank, Petitioner, v, Commissioner of Internal Revenue, Respondent. Central Trust & Savings Bank, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 42587, 42588.
    Promulgated December 14, 1933.

      O. D. Brundidge, Esq., and J. R. Nelson, O.P.A., for the petitioners.

      J. M. leinenhugel, Esq., for the respondent.
   OPINION.

Murdock :

The Central National Bank is the petitioner at Docket No. 42587. The Commissioner determined a deficiency of $6,217.83 in its income tax for the period March 6 to December 31, 1925. The Central Trust & Savings Bank is the petitioner at Docket No. 42588. The Commissioner determined deficiencies of $2,403.67 and $4,062.90 in its income tax for the period March 6 to December 31, 1925, and for the calendar year 1926, respectively.

The Central National Bank in its petition assigns eight errors relating to the calendar year 1926. Since the Commissioner determined no deficiency in this taxpayer’s tax for that year, the Board has no jurisdiction as to its tax liability for that year. In the same petition nine errors are assigned which relate to the deficiency determined for the period March 6 to December 31, 1925. Four of these relate to depreciation deductions and have been settled by agreement between the parties. Another is not urged. The other assignments of error may be summarized as follows:

(a) The Commissioner erred in refusing to allow a deduction of $12,541.83 representing a loss of interest in the state depositors’ guaranty fund sustained during the period March 6 to December 31, 1925.

(b) The Commissioner erred in refusing to allow the Central State Bank, the Central National Bank, and the Central Trust & Savings Bank to file a consolidated return for the full calendar year 1925 in which the income of the two petitioners for the period March 6 to December 31, 1925, was more than offset by the loss: of the Central State Bank for the period January 1 to March 6, 1925, leaving a net loss for the group for the year 1925.

The Central Trust & Savings Bank assigns seven errors in its petition. Three of these have been disposed of by agreement and one is no longer urged, having no facts to support it. Two other assignments may be summarized as in (b) above. The remaining assignment is:

(c) The Commissioner erred in refusing to allow the affiliated bardes to bring forward the net loss of all three banks in 1925 as a deduction in 1926.

A stipulation of facts was filed at the hearing and at that time the Commissioner made claim against the Central Trust & Savings Bank for an increased deficiency for the year 1926, based upon the facts as stipulated. He claims that he has erroneously failed to include in the consolidated income of. the two affiliated companies for 1926, $37,625.60 received by the Central National Bank from the depositors’ guaranty fund, representing a return of advances made by the Central State Bank to the fund and for which the Central State Bank had taken deductions from its income.

The Central State Bank was incorporated under the laws of Texas a number of years prior to 1925. It conducted a banking business at Dallas, Texas, until March 7, 1925. In 1925 its directors were concerned about its condition. It had charged off a large amount of bad loans and had made substantial contributions to the state depositors’ guaranty fund. They believed that an assessment of stockholders would be an unwise move. In accordance with a plan suggested by a committee which the directors had appointed, two new banks were organized on or about March 6, 1925. One is the Central National Bank, organized under Federal laws with capital of $500,000. The other is the Central Trust & Savings Bank, organized under the laws of Texas with capital of $200,000. Some of the assets of the Central State Bank were acquired by these two new banks, as will hereafter more fully appear. The two new banks were housed in the same banking rooms which the Central State Bank had occupied. They were operated as separate institutions. During some part of 1925 and 1926 B. F. Joyner was cashier of the Central National Bank and assistant vice president of the Central Trust & Savings Bank.

In the written stipulation the parties agreed that the proceedings might be submitted upon the facts therein agreed upon, together with such other evidence as might be submitted at the hearing. The parts of the stipulation relating to the questions before us for decision are as follows :

1. The Central National Bank and the Central Trust & Savings Bank were affiliated corporations under the Revenue Act oí 1924 from and after March 6th, 1925, and during the year 1926.
2. Consolidated returns for the Central State Bank, Central National Bank and the Central Trust & Savings Bank were filed for the year 1925. Consolidated returns were filed by the Central National Bank and Central Trust & Savings Bank for the year 1926. The consolidated return for 1925 included the entire income and all deductions of the Central State Bank for that period, and the net loss thus created was carried forward and shown in the consolidated return for 1926.
3. The Central State Bank was a state bank, incorporated under the laws of the State of Texas and was a member of the Depositors Guaranty Fund of the State of Texas.
4. The stockholders and directors of the Central State Bank, during the early part of 1925, decided to and did incorporate and organize the Central National Bank and the Central Trust & Savings Bank for the purpose of taking over the assets and continuing the business theretofore conducted by the Central State Bank, as shown by Exhibits “A” and “ B ”.
5. The stockholders of the Central State Bank did, on March 6th, 1925, organize the Central National Bank and the Central Trust & Savings Bank for the purpose of taking over and continuing the business theretofore conducted by the Central State Bank, as shown by Exhibit “E” [sio], and the Central State Bank was then dissolved, as shown by Exhibits “ C ” and “ D ”.
6. The stockholders of the Central State Bank received in lieu of their stock in said bank and for every ten shares of their stock in that bank, five shares of stock in the new Central National Bank and two shares of stock in the new Central Trust & Savings Bank.
7. The capital stock of the Central State Bank was $1,000,000.00, but its assets were appraised for the purpose of the conversion at the sum of $700,000.00.
8. From and after the date of their incorporation, to-wit, March 6th, 1925, the Central Trust & Savings Bank and the Central National Bank! were two branches of the same business, owned by the same stockholders, managed by practically the same Board of Directors, and the same officers, the Central Trust & Savings Bank conducting the savings and trust department of the Central National Bank.
9. On March 6th, 1925, the Central National Bank and the Central Trust & Savings Bank were owned by the same stockholders and in exactly the same proportion as they had theretofore held stock in the Central State Bank.
10. During the period from March 6th, 1925, to December 31st, 1925, the Central National Bank and the Central Trust & Savings Bank conducted an affiliated business with approximately the same assets owned by the Central State Bank during the period from January 1st, 1925, to March 6th, 1925.
11. During the period from March 6th, 1925, to December 31st, 1925, and during the year 1926, affiliated corporations, Central National Bank and Central Trust & Savings Bank, conducted their business at 1602 Main St., Dallas, Texas, owning the same banking house, office building and banking fixtures owned and used by the Central State Bank prior to that time.

Exhibit A is a copy of minutes of a meeting of the stockholders of the Central State Bank held on March 5, 1925. At that meeting the stockholders of the Central State Bank authorized the officers and directors of that corporation to sell to the Central National Bank “ for the consideration of Five Hundred Thousand Dollars and the assumption of individual deposits, bank deposits, certificates of deposit, cashier’s checks, certified checks, and customers’ bonds deposited, aggregating $3,587,685.83; all that portion and part of the assets of said Central State Bank representing loans and discounts, bonds, money, deposits, real estate, and assets, as follows :

Loans & Discounts,
Commercial_$2,099,647.23
Call Loans, New York City_ 300,000. 00
Accent anees_ 221, 220.00
Bonds, Securities,
Stock in Federal Kes. Bank_ 19, 500. 00
Customers Bonds Deposited_ 125, 550. 00
Other Stocks, Bonds & See_ 136, 322.11
Furniture & Fixtures- 71,146.67
Banking House_ 425,000. 00
Interest in Dep. Gty. Fund_ 50,167.43
Cash,
Due from Banks_ 755, 872.78
Cash in Vault & Exch_ 200,975.09
Cash collections outstanding- 83,115. 93
Total . $4,289-, 517.24
Capital Stock_ $500, 000.00
Surplus--- 130, 000.00
Undivided Profits- 40,230.16
Reserved for Taxes_ 3, 650.00
“ “ Int. Cert. Dep_ 2,469:57
“ “ Int. on Bank Bldg_ 2,291. 68
“ “ Blanket Bond_ 3,190.00
Deposits
Individual_ 2, 361, 577.27
Bank_ 934,606.09
Certificate of Deposits- 113, 850.17
Cashiers Checks_ 49,534. 21
Certified Checks_ 2, 568. 09
Customers Bonds Deposited_ 125, 550.00
Total $4,289, 517.24 ”

At the same meeting the stockholders of the Central State Bank also authorized the officers and directors of that corporation to sell to the Central Trust & Savings Bank “ for the consideration of Two Hundred Thousand ($200,000) Dollars, and the assumption of the savings deposits aggregating $1,059,391.58; all that portion and part of the assets of the Central State Bank representing loans and discounts, bonds, money, deposits, real estate, and assets as follows:

Loans & Discounts,
Commercial- $129, 625.44
Savings- 677, 052.39
Other Stocks Bonds & Sec_ 83, 374. 82
Furniture & Fixtures_ 6, 801. 90
Other real estate_ 17,247.48
Assessment Dept. Gty. Fund_ 28,058.73
Cash,
Due from Banks_ 1, 741. 81
“ “ “ _ 181,283.46
Cash in Vault_ 7, 581.73
Total_$1,332,767.76
Capital Stock_ $200,000. 00
Surplus_ 50, 000.00
Undivided Profits_ 10,230.17
Reserved for Sav. Int_ 6, 326. 00
“ “ Cal. Banks_ 1,620.01
Bills Payable_ 5, 000.00
Deposits,
Savings- 1, 037,976. 66
Xmas Sav- 20,131.50
1924 Xmas Sav. Dep_ 72.50
Ford Sav. Dep_ 1, 210.92
Total-$1,332,767.76”

The minutes nest show the adoption of a resolution as follows:

Be it euether resolved by said stockholders that, on completion of the sale as aforesaid, the stock held by each respective stockholder in the Central State Bank shall be exchanged for stock in the Central National Bank in Dallas and in the Central Trust & Savings Bank of Dallas, in the following manner, to-wit: For each share of stock in the Central State Bank, the owner thereof shall be entitled to stock in the respective institution so purchasing the assets of the Central State Bank, on the respective bases of 3/7 in the National bank and 2/7 in the Trust & Savings Bank, on a valuation of the Central State Bank stock of Seventy Dollars per share.

In these same minutes the stockholders authorized and directed the officers and directors of the Central State Bank to proceed to dissolve their corporation and dispose of its remaining assets, and to cease doing business as a state bank at the close of business on March 6, 1925, and transfer the assets above mentioned to the Central National Bank and Central Trust & Savings Bank on or before nine o’clock March Y, 1925.

Exhibit B is a copy of minutes of a meeting of stockholders of the Central State Bank held on March 6, 1925. These minutes show the adoption of a resolution in part as follows:

Whereas there remains in the hands of the Central State Bank certain assets which were not passed to either of said institutions, to-wit:
Loans & Discounts_$133, 866.10
Charge offs_ 463,171. 60
$597, 037. 70
as shown in, detail by Exhibit “ C ” in blotter No. 1 at page —, et seep, and here referred to; and
Whereas it is the purpose of the Central State Bank to dissolve its corporation and cease business, and it is advisable, therefore, that said remaining assets be placed in the hands of a trustee, to be collected and distributed among the stockholders in said Central State Bank, or to have said assets sold and the proceeds so distributed; and
Whereas the stockholders in the Central State Bank are exchanging their stock respectively for stock in the National Bank and in the Central Trust & Savings Bank.
Therefore, be it resolved by the stockholders of the Central State Bank that the directors be and they are authorized to either place the remaining assets of the Central State Bank in the hands of a trustee for sale and distribution to the stockholders of said bank, or sell the same for the best price obtainable for the benefit of the stockholders of the Central State Bank.
Be it further resolved that the proceeds of said assets be distributed to the stockholders of the Central State Bank by paying over the proceeds of said assets so here ordered to be sold or placed in trust, to the Central National Bank in Dallas, and to the Central Trust & Savings Bank of Dallas, in the proportion in which the stockholders of the Central State Bank have exchanged their stock for stock in the two institutions above; and
Be it further resolved that the directors aforesaid be authorized to do any and all other acts necessary to a disposition of the assets of said Central State Bank still remaining in their hands at this date, and to a dissolution of said corporation.

Exhibit C is a copy of minutes of a meeting of the board of directors of the Central State Bank held on May 22, 1925. These minutes show that a stockholders’ meeting authorizing dissolution had been held that same day and a certified copy of those minutes was directed to be filed with the secretary of state, the charter surrendered, and the corporation dissolved.

Exhibit D is a copy of the certificate of dissolution of the Central State Bank, which certificate was issued from the office of the Secretary of State of the State of Texas on June 23, 1925.

Exhibit E is a copy of minutes of the first stockholders’ meeting of the Central National Bank held on March 5, 1925, at which the officers and directors were authorized and directed to purchase from the Central State Bank “ for the consideration of Five Hundred Thousand ($500,000.00) Dollars cash, to be paid by the said National Bank to the said State Bank, all that portion of the assets of the said Central State Bank aforesaid, set forth and shown in Exhibit A, made a part of the minutes of the stockholders’ meeting, and to do and perform any, all and every act and things necessary to the completion of said purchase; and the said National Bank, in taking over the deposits of the Central State Bank, assumes the obligations of the Central State Bank to each depositor for the amount of his deposit so taken over at the close of business of the Central State Bank on the 6th day of March, A.D. 1925.” At the same meeting the stockholders ordered the bank to open for business on the morning of March 7, 1925.

Exhibit F is attached to the stipulation, but is not mentioned in the body of the stipulation. It is as follows :

Guaranty Fund Assessments
CENTRAL NATIONAL BANK :
Balance, March 6, 1925. _$50,167.43
Charge off, 1925_ $5, 000. 00
Charge off, 1926_ 2, 500. 00
Recovered, 1926_ 37,625.60
- 45,125.00
Balance_ $5, 041.83
CENTRAL TRUST & SAVINGS BANK I
Balance, March 6, 1925_ 28,058. 73
Additional Remittance, 1925. 23, 839. 43
$51, 898.16
Recovered, 1925_ $8,320.18
Profit & Loss_ 10, 000. 00
- 18,320.18
Balance, December 31, 1925. $33, 577. 98
Assessment, 1926_ 3,121.26
$36, 699. 24
Recovered, 1926_ 11, 064.27
Profit & Loss, 1926_$25,634.97

The Comptroller of the Currency requested the Central National Bank to charge off $2,500, being the item shown on Exhibit F as “ charge off, 1926, $2,500.” There was at that time $2,500 in the account which had never been charged off previously. The item Balance, March 6,1925, $50,167.43 ” on Exhibit F represents money in the hands of the state and money on deposit in the Central National Bank to the account of a state agency, which had been paid over a period of years by the Central State Bank into the state depositors’ guaranty fund. The payments made to this fund had not been deducted by the Central State Bank as ordinary and necessary expenses for the years in which made, but had been set up in a special asset account as its interest in the depositors’ guaranty fund.

The Central State Bank, the Central National Bank, and the Central Trust & Savings Bank each kept its accounts on the basis of actual cash receipts and disbursements.

The respondent, in making claim at the hearing for an increased deficiency against the Central Trust & Savings Bank, filed an amended answer in which he set forth his contention and the facts to support it. He stated that he relied entirely upon facts already stipulated. The Central Trust & Savings Bank, after the hearing, prepared and filed a so-called reply to the amended answer. The last two paragraphs of this so-called reply seem to have been intended as assignments of error. A reply, under the Board’s rules of practice, is solely for the purpose of admitting or denying facts and for setting forth facts upon which the petitioner relies as a defense against the affirmative contentions made by the respondent. Rule 15. It can not be used to raise new issues in which the petitioner seeks affirmative relief. Neither petitioner has ever made any request to amend its petition to raise any new issues. Consequently we will consider only the issues raised by the petitions and the answer above referred to. Cf. North American Coal Corp., 28 B.T.A. 807.

There is no question before us of the right of the Central National Bank to take a deduction in connection with its interest in the depositors’ guaranty fund for the year 1926. Such a question can not arise here in connection with its own tax liability for 1926, for as to that we have no jurisdiction. Furthermore, although we have jurisdiction as to the tax liability of its affiliate, the Central Trust & Savings Bank, for 1926, that petitioner has not assigned any such error. Petitioner Central National Bank has properly raised a question of its right to a deduction in this connection for the period March 6 to December 31, 1925. See “(a)” above. It no longer claims the entire amount mentioned in that assignment as a deduction for that period, but limits its claim to a deduction of $5,000, the amount charged off in that period. The Commissioner claims an increased deficiency from the Central Trust & Savings Bank for 1926 on the theory that the consolidated income of the two corporations for 1926 should be increased by $37,625.60, the amount which the Central National Bank received in 1926 from the depositors’ guaranty fund. Thus, the two questions before us in connection with the depositors’ guaranty fund are (1) whether petitioner Central National Bank is entitled to a deduction of $5,000 for the period March 6 to December 31,1925, and (2) whether the deficiency of the Central Trust & Savings Bank determined for 1926 should be increased through the increase of consolidated income of the two corporations for 1926 which would result from adding $31,625.60 to the income of the Central National Bank for 1926.

The respondent, relying upon First State Bank of Brackettville, 9 B.T.A. 975, and First State Bank of Weimer, 10 B.T.A. 396, contends that assessments for or contributions to such a fund are deductible when made, and recoveries from the fund are income when received. He would thus win his point that the $31,625.60 was income in 1926 and defeat the Central National Bank on its point that the $5,000 was a proper deduction for the short period in 1925, for the latter never contributed to the fund. Unless the Central National Bank stands in a position different from that of the Central State Bank, the case is governed by the two cases relied upon hy the respondent. Those cases dealt with payments to the fund and recoveries from the fund made by a member bank. However, the Central National Bank, the petitioner here, was not a member bank, did not contribute to the fund, and was not eligible, since it was a national bank, to join and have its deposits guaranteed by the fund. We think the Commissioner’s reliance on the Board cases is misplaced.

The Central State Bank had certain rights to refunds from the fund based upon its contributions. One event which entitled it to a refund was its withdrawal from the fund. It transferred a portion of these rights to the Central National Bank on March 6, 1925, and withdrew from the fund. These rights were assets in the hands of the Central National Bank if they had any value and normally would have a new basis for gain or loss in the new hands. This basis would be their cost to the Central National Bank. Sec. 204 (a), Revenue Act of 1926. (The cost might be measured by their fair market value at the date of acquisition if they were acquired through an exchange.) If the assets took a new basis, the Board cases above referred to would be inapplicable and we would have to leave the parties as we found them, because we do not know either the cost of these assets to the Central National Bank or their value at the time of acquisition. The $50,167.43 is a mere book entry and does not show cost or value. Neither a charge-off nor a conversion of the assets into cash could be translated into gain or loss without knowledge of the basis. Each party would thus fail in its affirmative contention for failure to prove the proper basis for gain or loss. There are other reasons why the alleged loss would have to be denied on this theory of the case.

If this petitioner is not to have a new basis for gain or loss on the property, but instead is to stand in the shoes of the Central State Bank, it must be because of the provisions of section 204 (a) (6) or (7) of the Revenue Act of 1926. These and the other provisions upon which they depend create exceptions to a general rule and should not be extended by implication or otherwise to situations not expressly provided for. Neither of these provisions applies unless the Central National Bank acquired the property (these rights) in connection with a reorganization as defined in section 203 (h) (1). Even if there was a reorganization, section 204 (a) (6) would not apply unless the property were acquired in an exchange described in subdivision (b), (d), (e), or (f) of section 203, or unless the property consisted in part of the type of property permitted by paragraph (1), (2), (3), or (4) of subdivision (b) of section 203 to be received without the recognition of gain or loss. Section 204 (a) (6) is expressly inapplicable to property acquired by a corporation by the issuance of its stock as whole or part consideration for the transfer of the property to it. It is apparent that none of the provisions of section 203 (b), (d), (e), or (f) fits the facts in this case. No provision of (b) is appropriate here, either directly, or in the alternative required for the application of (d), (e), or (f). Subdivision (b)' (1), (4), and (5) require no discussion to show that they are inapplicable. Subdivision (b) (2) has to do only with gain or loss on stock or securities of a corporation and has nothing to do with the exchange of such property as the rights here involved. Nor does (b) (3) cover this property. It deals with a corporation which exchanges property with another for stock or securities in one of the other corporations, a party to the reorganization. The Central State Bank received no stock or securities in either of the other banks. Thus section 204 (a) (6) does not apply in this case. The language of section 204 (a) (7) which we must consider is as follows:

If the property * ⅜ * was acquired ⅜ * ⅜ by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 80 per centum or more remained in the same persons * * ⅜, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made.

There is no provision' of the Revenue Act of 1926 which prevented the recognition of gain or loss to the Central State Bank, the trans-feror, upon the transfer of these assets in 1925. Yet we have not been shown what its gain or loss amounted to. Therefore, even if section 204 (a) (7) applied and if we knew the basis in the hands of the Central State Bank, still we could not compute the adjusted basis for gain or loss which this particular property would have in the hands of the Central National Bank. Consequently we would be just where we were before, i. e., we would be unable to give to either party the affirmative relief sought, and would have to leave the parties as we found them.

We have already pointed out that there would be no occasion for a consideration of section 204 (a) (6) or (7) if there was no reorganization. The minutes attached to the stipulation describe the transactions as sales for cash and the assumption of certain liabilities. Cf. Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937; certiorari denied, 288 U.S. 599; Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462; Prairie Oil & Gas Co. v. Motter, 1 Fed. Supp. 464; Warner Co., 26 B.T.A. 1225. Details of how and when the petitioners obtained the cash and of how and when the stock was exchanged are not 'clearly shown. There was quite the reverse of a consolidation or merger. We have been referred to no case in point. However, as appears from our discussion above, we need not decide whether or not there was a reorganization.

The stipulation contains several misleading statements as to just how close these three banks were. See paragraphs 8 and 10. Since we think these statements are immaterial in the decision of the case, we do not discuss them in detail, but give our attention next to the petitioners’ assignments of error relating to returns and losses.

The Commissioner agrees that the Central National Bank and Central Trast & Savings Bank were affiliated from the beginning of their existence throughout the remainder of 1925 and during all of the year 1926. He further agrees that they were entitled to file a consolidated return for the period March 6 to December 31, 1925, and another for the year 1926. But he has refused to compute the tax liability of these taxpayers on the basis of a consolidated return which includes and combines with the income and deductions of these two the income and deductions of the Central State Bank for all or a part of the period of its existence in 1925. The petitioners did not have to file any return for that period of the year 1925 prior to their incorporation. There was a short period in 1925, from March 6 to June 23, during which all three corporations were in existence and, apparently, were affiliated. The petitioners had three choices, to wit, separate returns, a consolidated return for the two, or a consolidated return for all three for the period from March 6 to June 23,1925. The taxpayers did not choose to file a consolidated return for the latter period and no question arises based upon their rights to file such a return. The question is not in the case. We assume that the Central State Bank had been filing its returns on a calendar year basis. But it was dissolved on June 23, 1925, apparently was completely liquidated at that time, and had no further activities of any kind. It follows that the Central State Bank had, as its last taxable year or period, the period from January 1, 1925, to June 23, 1925. Maurice L. Goldman et al., Executors, 15 B.T.A. 1341. Its income or loss for the period should have been reported on a separate return. It certainly was not affiliated with either petitioner during the first part of 1925 or during the last part of 1925. There was here no consolidation, merger, or mere conversion of a state bank into a national bank. One was incorporated under Federal laws. The other two were incorporated under state laws. The three were separate corporations and separate taxpayers. Their taxable periods did not coincide. There is no statutory authority for combining the three for tax purposes as if there had been but one corporation or one affiliated group in existence during all of the year 1925. Cf. Planter's Cotton Oil Co. v. Hopkins, 286 U.S. 332. The three were not affiliated for the year and were not permitted to file one consolidated return for the entire year 1925. Frelmort Realty Corp., 29 B.T.A. 181. The Commissioner did not err in computing the income of the petitioners for the period March 6 to December 31 without regard for any loss which the other separate taxpayer may have had prior to that period.

Nor do the net loss provisions aid either petitioner for 1925 or the Central Trust & Savings Bank for 1926. There is nothing in the statutes to authorize a net loss of one taxpayer for a period January 1 to June 23, 1925, to be applied against income of one or two other separate taxpayers for a period March 6 to December 31, 1925, or for the year 1926.. In the first place the “taxpayers” are different, (New Colonial Ice Co. v. Commissioner, 66 Fed. (2d) 480; affirming 24 B.T.A. 886), and in the second place there is no appropriate “ succeeding taxable year.”

The questions of returns for 1925 and of net losses for 1925 and 1926 are moot questions, so far as this case is concerned, unless the record contains sufficient proof of the alleged loss sustained by the Central State Bank. This should include proof that a loss was actually sustained, the amount of the loss, and, if the case depends upon carrying forward a net loss, the amount which may be carried forward as a net loss under section 206 (a). The Commissioner in his deficiency notices not only did not allow any loss, but he did not even mention any loss of the Central State Bank. He does not admit in his pleadings that there was any such loss. A taxpayer, in order to prove its case, must show that the Commissioner committed error and, in addition, must prove facts from which a correct determination of its tax liability may be made. Botany Worsted Mills v. United States, 278 U.S. 282. F. G. Bishoff, 6 B.T.A. 570; affd., 27 Fed. (2d) 91; Murphy Oil Co. v. Burnet, 55 Fed. (2d) 17; Ramsay v. United States, 55 Fed. (2d) 333; Duffin v. Lucas, 55 Fed. (2d) 786; Union Co. v. United States, 46 Fed. (2d) 717.

The evidence in this case contains but one reference to a net loss. It is in paragraph 2 of the stipulation. That paragraph informs us that the three banks filed a consolidated return for the calendar year 1925 which included the entire income and all deductions of the Central State Bank for that period. It then continues in the following words: “ and the net loss thus created ivas carried forward and shown in the consolidated return for 1926.” This statement, in our opinion, means no more than that the deductions shown on the consolidated return filed by these three banks for 1925 exceeded the income shown on that return. It is not a concession by the Commissioner that the income, deductions, and net loss thus created were properly or correctly shown on that return. But suppose we are wrong; still the return is not in evidence; there are no figures in evidence relating to the income or deductions of the Central State Bank for any period in 1925, nor are there any figures in evidence to indicate the statutory net loss of the Central State Bank computed under section 206 (a). The latter may be quite a different thing from the excess of deductions over income as shown on a return. Thus the petitioners must fail on issues (b) and (c) even though their theory of consolidated returns and net losses were correct.

Reviewed by the Board.

An order will be entered dismissing the proceeding at Docket No. Jfi587 in so far as it relates to the year 1986, and decision will be entered under Rule 50 in respect to the periods for which the Commissioner determined deficiencies.

Lansdon,

dissenting in part: I am unable to agree with the majority report on the question of whether the banks involved were entitled to make a consolidated return for the year 1925. The record discloses that the old bank was merged into the two new banks on March 6, 1925, but that its corporate existence was continued for certain limited purposes until June 23 of that year. It is certain, therefore, that for at least a part of the year all three banks were affiliated, since the same stockholders owned all the stock of two of them in the same proportion and the two new banks owned all the stock of the old bank.

There was no period within the taxable year in which either of the new banks could be required to file a separate return. All three constituted for the year a single business owned by a single group of stockholders. The old bank was merged into the new organization and its business was continued unchanged even if under different names for the remainder of the year. In my opinion the inclusion of its income and deductions in a single consolidated return covering the entire year was not only lawful but necessary to prevent a violation of the principle that income is taxable on an annual basis. The old bank was on the calendar year basis and if it could be required to file separately, its return must be for the year and not for any fractional part thereof.

The effect of the respondent’s ruling and of the majority report is to break down the taxable year of an economic unit into two taxable periods in circumstances that foreclose the deduction of losses sustained in the first from profits realized in the second, and results in a heavy tax in a year in which the business actuallly sustained a very considerable loss. Certainly Congress contemplated no such inequitable result from administrative interpretation of the provisions of section 240 of the Revenue Acts of 1924 and 1926. In H. S. Crocker Co., 5 B.T.A. 537, in discussing a somewhat similar situation we said:

It is our conception of the law, that, for purposes of taxation, the affiliated group must be considered as a single economic unit The requirement with respect to computing the taxes of an affiliated group on the basis of a consolidated return was first introduced into the law to prevent avoidance and resulting injustice, either to the Government or to the taxpayer, as the case might be, and not to create that situation. The normal treatment- in the case of an affiliated group as a single economic unit, therefore, is to disregard the internal structure, to break down the separate legal existence of the constituent members, and to treat them in all respects, so far as taxation is concerned, as one.

In Automatic Fire Alarm Co., 13 B.T.A. 1195, where an old corporation was in existence throughout the entire taxable year of 1920, and a holding company was incorporated during the year to take oyer the stock and securities of other companies held by the old company and also the stock of such company, we held that the income of the two companies should be computed on the basis of a consolidated return of their income for the full year. In American Paper Exports v. Bowers, 54 Fed. (2d) 508, the Circuit Court of Appeals for the Second Circuit held that where a parent corporation organized during the taxable year took oyer a subsidiary corporation, the latter was not required to file separate returns for the period preceding the taking oyer by the former. The facts in the cases cited above are so similar to the situation in the instant proceeding that I think the conclusion therein reached should control here. In my opinion the income of the single business conducted by the banks here involved should be reported in a consolidated return covering the entire year 1925. Cf. Grand Rapids Nat. Bank, 9 B.T.A. 1119; Hutt Contracting Co., 17 B.T.A. 818; Newblock Oil Co., 26 B.T.A. 696; Bankers Trust Co. v. Bowers, 295 Fed. 89; Industrial Cotton Mills v. Commissioner, 61 Fed. (2d) 291; Western Maryland Ry. Co. v. Commissioner, 33 Fed. (2d) 695.

       Sec. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property ; except that—
      *******
      (G) If the property was acquired upon an exchange described in subdivision (b), (d), (e), or (f) of section 203, the basis shall be the same as in the case of the property exchanged, decreased in the amount of any money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized upon such exchange under the law applicable to the year in which the exchange was made. If the property so acquired consisted in part of the type of property permitted by paragraph (1), (2), (3), or (4) of subdivision (b) of section 203 to be received without the recognition of gain or loss, and in part of other property, the basis provided in this paragraph shall be allocated between the properties (other than money) received, and for the purpose of the allocation there shall be assigned to such other property an amount equivalent to its fair market value at the date of the exchange. This paragraph shall not apply to property acquired by a corporation by the issuance of its stock or securities as the consideration in whole or in part for the transfer of the property to it;
      (7) If the property (other than stock or securities in a corporation a party to the reorganization) was acquired after December 31, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 80 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made.


author: Leech :

text:
    Thrift Realty Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 50653.
    Promulgated December 14, 1933.

      Marry Troll, Esq., for the petitioner.

      J. G. Gibbs, Esq., for the respondent.
   OPINION.

Leech :

Petitioner here contests a deficiency of $3,482.25 in income tax for the year 1922 and $174.11 representing a 5 percent negligence penalty as provided by section 250 (e) of the Revenue Act of 1921.

The deficiency arises by reason of the disallowance of certain deductions representing business expenses and amortization upon a leasehold and from an increase of petitioner’s income by $31,975.45 as representing profit from the sale of certain real estate in the taxable year.

By the proceeding petitioner puts in issue the action of respondent in respect to each disallowance of a deduction claimed and also respondent’s action in increasing income by the asserted profit upon the sale of real estate. The petition also raises additional issues, claiming a statutory net loss of $6,426.26 for 1921 and an overpayment of tax for 1922. However, upon the hearing, proof was presented solely upon the issue relating to the increase of income by $31,975.45 as representing profit from the sale of real estate. Petitioner has abandoned the other issues, and respondent is therefore sustained therein. Petitioner contends that respondent wras in error in computing profit as realized by petitioner from the sale of real estate upon two grounds; the first being that the real estate in question was not the property of petitioner and any profit realized in its sale was consequently not taxable to petitioner, but to the then beneficial owners; and the second, that respondent is estopped to assert ownership of the property in petitioner by reason of the fact that he had settled by stipulation with petitioner an appeal covering prior years, in which the question presented was the beneficial ownership of this property for those years. Petitioner asserts that by the stipulation its returns for those years, which included in income none of the rents from this property, were agreed to be correct.

The facts are that the Thrift Realty Co., a Missouri corporation, was organized in the year 1909 with a capital stock of $25,000, its business being that of dealing in real estate.

From 1917 to March 1922 the stock of this company was held by Philip H. Sauter and Marion S. Fuqua, its president and its secretary-treasurer, respectively, and one or two of their relatives.

Early in the year 1917 Sauter and Fuqua were desirous of acquiring the Kolb Coal Co. The attorney for that company was one Harry Troll. This individual controlled the sale of certain parcels of real estate in St. Louis. When approached by Sauter and Fuqua, Troll proposed a deal whereby the funds necessary to be obtained for the purchase of the Kolb Co. stock would be secured for them by him if they in turn would acquire properties in his hands for sale, at certain designated figures. As a result of the negotiations Sauter and Fuqua in May 1917 acquired the coal company stock and also acquired through Troll a property known as 3518-26 Easton Avenue. For this latter property they agreed to pay $20,000. Title to this property was taken in the name of Sauter, owing to the fact that Fuqua had certain suits pending against him. Upon taking title Sauter executed a trust deed for $20,000 for the purchase price and also executed an assignment to the Lort Realty Co., as trustee, of the rents to be received from the property, this assignment being for the benefit of the holder of the deed of trust. Sauter executed also a quitclaim deed to the property to Troll, as trustee, to be held in escrow and not recorded. This latter deed was executed in accordance with the agreement for purchase of the Kolb Coal Co. stock and to serve as additional security for the deferred payments on that stock due from Sauter and Fuqua.

In the following year Sauter became financially embarrassed and it was anticipated that suits would be filed against him, probably resulting in judgments encumbering such real estate as he held, and Troll, to maintain the security held by him under the Kolb Coal Co. deal, insisted that title to the Easton Avenue property be conveyed to another holder. Thereupon the quitclaim deed to this property held by Troll in escrow was canceled and Sauter conveyed title to the property to petitioner, subject to the deed of trust and assignment of rents standing against it. Upon receiving this conveyance petitioner executed a quitclaim deed to Troll, as trustee, to be held in escrow in place of the former quitclaim deed which had been canceled.

On April 9, 1919, the Easton Avenue property was exchanged for a property known as the Freemont Apartments, the deed of trust on the Easton Avenue property being released and a new deed of trust placed on the Freemont Apartments. The quitclaim deed held in escrow by Troll was canceled. The execution of this conveyance of the Easton Avenue property was by petitioner, which also executed the new deed of trust on the Freemont Apartments. Thereupon petitioner gave a quitclaim deed in trust to Troll for title to these apartments, to be held in place of the former quitclaim deed which was canceled. This deed was not recorded.

In December 1920, at which time the original loan to Sauter and Fuqua through Troll of approximately $400,000 had been reduced to $200,000 by payments of funds accruing to Sauter and Fuqua on account of rentals and income from the sale of other properties of these individuals, these two individuals borrowed this latter amount from the Kolb Coal Co., giving among the collateral therefor an assignment of rents from the Freemont Apartments, their Thrift Co. stock, and an escrow deed from the Thrift Co. for the Freemont Apartments in place of the one canceled by Troll upon repayment of his loan.

In November 1921 a contract to sell was made and in January 1922 the Freemont Apartments were sold in accordance therewith to Stanza & Co. Negotiations prior to the actual execution of the contract for the sale of the Freemont Apartments were conducted by Sauter and Fuqua as individuals. The contract for and the conveyance of this property to the purchasers were executed by the petitioner, the quitclaim deed thereon held by Troll was canceled, and the payments by Stanza & Co. were made to petitioner. These payments were turned over by petitioner to the Kolb Coal Co. and applied upon the loans mentioned above of Sauter and Fuqua from that company. Sauter and Fuqua and his wife included in their individual income tax returns for 1922 certain amounts as representing profit on the sale of the Freemont Apartments received in that year.

The checks covering rental for the Easton Avenue and Freemont properties during the time record title stood in petitioner were made by the collector to the petitioner, but were taken up in the individual accounts of- Sauter and Fuqua in equal proportions and so returned by them on their income tax returns for that period.

In 1923 a suit was filed against Sauter, Fuqua, and the petitioner by a real estate agent for commissions claimed to be due for the sale of the Freemont Apartments to Stanza & Co. To this suit an answer was filed by petitioner disclaiming any interest in the Freemont Apartments. This suit was ultimately compromised for $500, which amount was paid by Fuqua personally.

Respondent determined deficiencies against petitioner for the years 1917 to 1921 by increasing reported income by the rents received from the Easton Avenue property and Freemont Apartments. These deficiencies were appealed from by petitioner and this proceeding was terminated by a no deficiency order by this Board under Docket No. 23956, entered upon a formal stipulation filed by the parties that no deficiencies existed for those years.

The only issue here is the beneficial ownership of the Freemont Apartments in 1918, when sold by petitioner.

Inasmuch as this inquiry involves the title to real estate, the law of the State of Missouri, in which this property is situate, will control. Kuhn v. Fairmont Coal Co., 215 U.S. 349.

This question would ordinarily turn upon the existence of a trust for the benefit of another than the record title holder of the property conveyed, at the time of the sale from which the profit basing the disputed tax arose.

There is no evidence of fraud or mistake in the transfer to petitioner and therefore no constructive fraud is apparent. Gates Hotel Co. v. Davis Real Estate Co. (Mo., 1932), 52 S.W. (2d) 1011. Nothing appears in the record indicating that the consideration for the conveyance to petitioner was furnished by anybody other than petitioner, except the possible intimation that no consideration at all passed, which can not contradict the recital of consideration in the deed. Rogers v. Ramey, 137 Mo. 598; 39 S.W. 66; Hunter v. Briggs, 162 S.W. 204; Eaton v. Curtis (Mo., 1928), 4 S.W. (2d) 819. There is therefore no resulting trust, and if any trust relationship then existed it must have been an express trust. Shaw v. Shaw, 86 Mo. 594; Moss v. Ardrey, 260 Mo. 595; 169 S.W. 6; Crawford v. Crafton, 193 Mo. 421; Long v. Conrad (Mo., 1931), 42 S.W. (2d) 357; Gates Hotel Co., supra.

The statute of frauds was in effect in Missouri at the time of the conveyance of the Freemont Apartments to petitioner. Missouri Revised Statutes 1909, sec. 2868. If a trust existed at all here, it has been completely executed. The general rule is that after a parol trust in real estate has been fully performed and executed, it will be upheld and the statute of frauds deemed to have no application. 39 Cyc., p. 52, and cases there cited. But the cited Missouri statute provides, not that a parol express trust in realty shall be voidable or not enforceable, but that such a trust shall be “ void.” It would seem that this statute, the purpose of which was to prevent the perpetration of fraud or perjury in connection with titles to real estate, Kennedy v. Kennedy, 57 Mo. 73; Truskett v. Rice Bros. Live Stock Co. (Kansas City Court of Appeals), 180 S.W. 1048, has an equally important function in preventing income tax evasion in reference to such titles by those means. Cf. George E. Farrington et al., Executors, 13 B.T.A. 274; Guaranty Trust Co. of New York et al., Executors, 27 B.T.A. 550.

However, “that it [trust in realty] was not created by written evidence is a matter of defense or to be raised by objection of the evidence offered to prove a trust.” Mugan v. Wheeler (Mo., 1912), 145 S.W. 462. Respondent here has not taken advantage of either of these methods for properly raising the suggested position. Not only was much of the parol evidence of the alleged trust admitted at the hearing herein without his objection, but he has not questioned its competency since.

The present record shows not only that Sauter and Fuqua carried on the negotiations for the sale here involved, up to the actual execution of the contract therefor, as individuals, cf. Nace Realty Co., 28 B.T.A. 467, but also that during the record ownership of the Easton Avenue and the Freemont properties by Sauter and petitioner they took into their individual accounts and reported in their appropriate income tax returns in equal proportions the rentals from these properties. It must be noted further and unavoidably that the several unrecorded escrow deeds to the changing holders of Sauter and Fuqua obligations, incurred in the original transaction in which these individuals acquired the Easton Avenue property, are emphatic in establishing the real beneficial ownership in Sauter and Fuqua.

The position that the purpose of the conveyance by these individuals to petitioner was fraudulent because intended to avoid the payment of a debt, as was present in Keener v. Williams, 271 S.W. 489, is unsound. From the present record, silent as to the insolvency of Sauter and Fuqua at the time of such transfer, there was at most an intent on the part of these individuals to prefer a creditor.

A scrutiny of the evidence here discloses no established fact which, considered separately or in conjunction with others, is inconsistent with the status of trusteeship of this property in petitioner at the time of the sale in question. It does disclose direct, definite, and uncontradicted evidence consistent only with such status. Cf. Moro Realty Holding Corp., 25 B.T.A. 1135.

In any event, the Missouri view seems to be that when A transfers lands to B by absolute conveyance, but for the purpose of selling the same and distributing the proceeds therefrom to A or his creditors, such a situation is outside the Missouri statute of frauds and may be ju'oven by parol. The rationale of this rule is that a mere agency is thus created. Forest v. Rogers, 128 Mo. App. 6; 106 S.W. 1105; 39 Cyc., p. 52.

In our judgment the present record discloses that the transfer of the Easton Avenue property to petitioner was for the purpose of its sale and the distribution of the proceeds therefrom to certain creditors of Sauter and Fuqua. The exchange of the Easton Avenue property for the Freemont Apartments was merely an incident in effectuating that purpose. The execution and delivery of the unrecorded quitclaim deeds to each consecutive holder of the obligation of Sauter and Fuqua, which originally arose in their purchase of the Easton Avenue property, strengthens this view. The fact that petitioner was a corporation in which Sauter and Fuqua and their relatives owned all the stock does not affect the status of agency. Burnet v. Commonwealth Improvement Co., 287 U.S. 415.

The record is large and a great part of the evidence has little, if any, bearing upon the issue. The preponderance of undisputed testimony seems unquestionably to sustain the position of petitioner. Harriman Nat. Bank v. Commissioner, 43 Fed. (2d) 950. After carefully considering the record as a whole, we sustain petitioner’s contention that the beneficial ownership of this property was not in it, but in Sauter and Fuqua, at the time of its sale in 1922. It follows, consequently, that any profit arising from this sale is not taxable to petitioner.

The conclusion reached by us with respect to the taxability of the profit from the sale of this property makes it unnecessary to pass upon the issue of estoppel raised by petitioner.

Judgment will ~be entered u/nder Rule 50.


author: Makquette :

text:
    Edward Leszczynski, Trustee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 44586.
    Promulgated December 14, 1933.

      O. W. Lynghlif, G.P.A., for the petitioner.

      James K. Polk, Esq., for the respondent.
   OPINION.

Makquette :

The sole question presented is whether the respondent has erred in determining that the petitioner was taxable as an association. Sec. 2 (a) (2), of Revenue Acts of 1924 and 1926. It returned its income as that of a trust the income of which was to be accumulated and therefore taxable to the fiduciary. Sec. 219, Revenue Acts of 1924 and 1926. It insists that its returns were proper, or, in the alternative, that its members were taxable as partners. It further asserts that, having filed its return for 1924 as a trust, under section 704 of the Revenue Act of 1928, it is taxable as such.

The organization created by the agreement of April 28, 1922, was not imposed on the members by any third person, but was the result of their voluntary action. Blair v. Wilson Syndicate Trust, 39 Fed. (2d) 43. As shown by the terms of the agreement and by the petitioner’s actions, it appears that the parties associated themselves together for the purpose of purchasing land contracts and realizing on them by collection, or, if that was not possible, by foreclosure or repossession. The contracts were payable in installments which the petitioner collected as they fell due. These activities were not confined to isolated transactions. New investments were being made out of fresh contributions by the members and out of payments received on the contracts. Its aim was not liquidation, but acquisition. These repeated transactions, all entered into for gain, constituted doing business as that term is defined in Flint v. Stone Tracy Co., 220 U.S. 107. A-C Investment Assn., 24 B.T.A. 582. The fact that organizations operating under trustees were doing business has been especially stressed by the courts anf by the Board in determining whether they were associations. Ittleson v. Anderson, 2 Fed. Sup. 716, and cases cited.

At the organization of the petitioner the members were careful to retain full control over the funds and the trustee. This control was retained in paragraphs 6, 8, 10, 11, and 13 of the agreement. The fact that these powers were not exercised is immaterial. Such is the case in many corporations.

Petitioner’s counsel attempts to differentiate this organization from those which have been held to be associations on two grounds— first, that no dividends could have been or were paid, and, second, there were no certificates of stock. With respect to the first contention, it is only necessary to point out that this was the result of a voluntary agreement which could be altered in this or any other respect whenever a majority of the members so desired. The decisions in Sears, Roebuck & Co. Employees Savings, etc. v. Commissioner, 45 Fed. (2d) 506, and in A-C Investment Assn., supra, afford a negative answer to the second contention.

It is cl'ear that the members did not contemplate the formation of a partnership, nor did they consider themselves partners. Cf. Commissioner v. Olds, 60 Fed. (2d) 252. So far as we are informed, none made a partnership return. The petitioner’s organization has little similarity to those “ ordinary partnerships ” the members of which are taxable as partners under the revenue acts. The local law does not control in these cases. Burk-Waggoner Oil Assn. v. Hopkins, 269 U.S. 110. Thus a Massachusetts trust, which the petitioner closely resembles, is held by the Massachusetts courts to be a partnership in those instances where, as here, the members retain control over the trustees, but such an organization is an association within the meaning of the revenue acts. Hecht v. Malley, 265 U.S. 144. We find no merit in this contention.

We conclude that the petitioner was taxable as an association.

Section 704 of the Revenue Act of 1928 is not applicable: first, for the reason that the Commissioner’s regulations and rulings prior to the decision in Hecht v. Malley, supra, as well as subsequent thereto, were to the effect that organizations similar to the petitioner were taxable as associations in those cases where the members could control the trustees (E. A. Landreth Co., 15 B.T.A. 655), and, second, because the rulings and regulations referred to in section 704 (none of which was applicable to a case like this) were altered prior to the date on which the petitioner filed its return for 1924. Mary L. Dutton et al., Trustees, 18 B.T.A. 1151; C. W. Cowell Co., 21 B.T.A. 1274.

Judgment mil he entered for the respondent.