author: Keen :

text:
    Harriet A. Heath, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 90599.
    Promulgated November 9, 1938.

      Dana Latham,, Esq., for the petitioner.

      Alva O. Baird, Esq., for the respondent.
   OPINION.

Keen :

The only question involved is whether the interest received on certain California municipal and county bonds was exempt from taxation as income under section 22 (b) (4) of the Revenue Act of 1934 as being interest upon the obligations of a state or its political subdivision. Treasury Regulations 86, article 22 (b) (4)-l, set out in the margin, indicates the Treasury’s interpretation of the section. The bonds fall into two categories and we shall so consider them.

Interest on bonds issued under the California Improvement Act of 1911, as amended; and under the California Improvement Act of 1915, as amended. — The first lot of bonds was issued for the improvement of Glendale Street, in the city of Glendale, California, under the California Improvement Act of April 7, 1911, as amended, and the California Improvement Bond Act of June 11, 1915, as amended; the second lot was issued under the same acts for improvement of Tujunga Street in the city of Los Angeles; and the third lot was issued under the same acts and was for the construction of sewers in an assessment district of Sacramento, California. The stipulation provides that the bonds, although authorized under the Act of 1911, were issued under the Act of 1915, and the rights and liabilities of the parties under the bonds were and are to be determined under the later act. The Act of 1915, of which we take judicial notice, of course, is set out in the General Laws of California (Deering’s Ed., 1931), as Act 8209, vol. 3, p. 4644. It is unnecessary here to do more than point out briefly what that act provides. By section 1 it authorizes a city to issue serial bonds “to represent and be secured by the assessments, which shall be made to pay for the cost of any work or improvement which shall be made in any one or more of the streets * * and by section 3 it fixes the time of payment and interest rate, and requires the city treasurer to “keep a redemption fund designated by the name of said bonds, into which he shall place all sums received by him from the collection of tbe assessments made for the payment of the cost of the work or improvements upon which the said bonds are issued and of the interest and penalties thereon and from which fund he shall disburse and pay the said bonds and the interest due thereon * * *; and under no circumstances shall said bonds or the interest thereon be paid out of any other fund.” Section 11 makes the unpaid assessments a trust fund for the payment of the bonds and interest, and constitutes the assessments a lien against the lots and parcels of land on which made; section 12 provides for sale of the land upon default of payment; and section 16 provides for the levying by the city of a special tax with the proceeds of which to purchase such assessed lands on sale; section 20 provides that the act shall not affect the Improvement Acts of 1893 and of 1911 “but is intended to and does provide an alternative system for the issuance of bonds to represent and be secured by the assessments mentioned in this act.” Other provisions not pertinent here are omitted. Section 6 establishes the form of the bonds, already set out in our findings of fact, but a portion of which may be quoted here:

Under and by virtue of the act * * * the of (a municipal corporation) will on the second day of July, 19 , out of the redemption fund for the payment of the bonds issued upon the assessments made for the work upon and improvements on certain streets * * * pay to bearer, the sum of ($ ), with interest thereon * * *.
This bond is one of several annual series of bonds of like date, tenor amd effect, but differing in amounts and maturities, issued by said municipality under said act for the purpose of providing means for paying for the work and improvements described in said resolution of intention, and is secured by the moneys in said redemption fund and by the unpaid assessments made for the payment of said work, and, including principal and interest, is payable exclusively out of said fund.

We considered this type of bond issued under the Act of 1915 in Milo W. Bekins et al., Executors, 38 B. T. A. 604, and are ruled by our decision in that case. There we held that bonds issued under the Improvement Bond Act of 1915 are “obligations * * * of a political subdivision” of the State of California and that interest received on such bonds was therefore not properly includable in petitioner’s gross income.

We hold accordingly that petitioner’s interest from such bonds was exempt.

Bonds issued under authority of the Road District Improvement Aot of California of 1907, as amended. — The petitioner here received interest in 1935 on bonds issued by the Counties of San Bernardino, Merced, and Orange in California under authority of the Road Improvement Act of March 21, 1907, as amended, Act 3276, General Laws of California (Deering’s Ed.) vol. 1, p. 1573, of which we take judicial notice.

Section 22 of that act provides for the form of the bonds, which has been set out in full in our findings of fact and only two portions of which need be quoted here:

Under and by virtue of an act of the Legislature of the State of California known as the “Road district improvement act of 1907” (here may be inserted a further designation of the act if desired) the county of , State of California will pay to the bearer out of the fund hereinafter designated, at the office of the treasurer of the said county, on the day of , 19 , the sum of Dollars in gold coin of the United States of America, with interest thereon * * *.
This bond is payable out of road district improvement fund number exclusively, as the same appears on the books of the treasurer of said county, and neither said county nor any officer thereof shall be holden for its payment otherwise; but in accordance with said act the board of supervisors of said county will annually, at the time of levying other taxes, levy upon all the land in said road improvement district a special assessment tax in an amount clearly sufficient to pay the principal and interest of said bonds as the same shall become payable.

Section 24 provides for the equal payment of principal and interest of the bonds in accordance with the determination of the board of supervisors. Section 26 provides for interest and sinking fund, and a special assessment tax in part as follows:

In each road improvement district in which bonds have been issued, a special fund to be named “Road district improvement interest and sinking fund number ” (the number to be that of the district) for the discharge and payment of such bonds and interest thereon, shall be constituted as follows, to wit: There shall each year, at the time of the general tax levy for state and county taxes, be levied against and upon all of the land (not including improvements, but including any land which is the operative property of any public utility) within said road improvement district a special assessment tax in an amount clearly sufficient, together with any moneys which are or may be in said fund, to pay all the principal which has become or will become due and all interest which has become or will become payable on said bonds, before the proceeds of another tax levy made at the time of the general tax levy for state and county purposes, can be available for the payment of such bonds.

The same section further provides for the levying of the special assessment tax against ail public lands not specifically excepted in the resolution of intention to issue the bonds and makes the obligation enforceable against the owner of the land or governing body controlling it, and concludes with the following provisions for the taxation of operative property of public utilities and for the transfer of funds to the road district improvement interest and sinking fund:

Transfer. The board of supervisors may annually, at the time of making the said tax levy, transfer from the general road fund of the county, or from the fund of the road district or districts in which the road improvement district is situated, to the road district improvement interest and sinking fund, such amount as in the judgment of said board should be transferred.
Operative properties of public utilities. Transfer of funds. In any event it shall be the duty of said board of supervisors to levy a special assessment tax upon all lands including lands comprising operative property of public utilities within said road improvement district, sufficient to pay the principal and interest of said bonds as the same shall become payable, and the board of supervisors is hereby vested with power to do all and singular the things which in this section aforesaid it is declared shall be done. Whenever any of said bonds or any interest thereon shall become due and there shall not be sufficient money in said road district improvement interest and sinking fund to pay same, the board of supervisors may, pending the levy and collection of a tax therefor, order the amount of money necessary to pay the bonds or interest so falling due, to be transferred from the general fund to said road district improvement interest and sinking fund, and the amount of money so transferred shall be deemed a loan to said road district improvement interest and sinking fund, and shall be repaid to the general fund from the first money coming into said road district improvement interest and sinking fund thereafter. The special assessment taxes provided for herein shall be levied and collected in the same mode and manner and by the same officers as the ordinary county taxes, and all laws applicable to the levy, collection and enforcement of such county taxes are hereby made applicable to said special taxes.
Any money remaining in any road district improvement interest and sinking fund after all the bonds of the district have been retired, shall be transferred to the general fund of the county, and may be used in repairing any road in the district. If the greater part or all of the district has been annexed to an incorporated city said money shall be placed in the general fund of the city to be used in repairing any road within the district. [Amendment approved June 19, 1931; Stats. 1931, p. 2313.]

Other provisions not relevant to the question here presented are omitted.

It should be noted that in the bond itself it is stated that “the county * * * will pay to the bearer out of the fund hereinafter designated” the principal and interest, and that it is also stated that it will be “payable out of road district improvement fund number exclusively, * * * and neither said county nor any officer thereof shall be holden for its payment otherwise”, and further that “the county will annually, at the time of levying other taxes, levy * * * a special assessment tax in an amount clearly sufficient to pay the principal and’ interest * * The parties stipulated that the assessment was included in every assessment district land owner’s “general tax bill”, and was never billed separately, and that the county tax collector would not accept “any payment on account of general taxes which does not include his liability on account of the bonds here in question.” Attention may also be called to that part of section 26, which provides for the transfer of money from the “general fund”, as a loan, whenever it shall become necessary to meet payment of principal or interest on the bonds and the “road district improvement interest and sinking fund” shall lack sufficient money for that purpose. It will be observed that the county promises to “pay to the bearer” the principal and interest, a fund is set aside to meet these obligations, and statutory provision is made for the transfer of money from a general fund for the same purpose, and that the special assessment is collected as a part of the general taxes.

We have recently sustained the immunity of bonds with a similar obligation in Milo W. Bekins et al., Executors, supra,, at page 13 (California Acquisition and Improvement Act of 1925 bonds). Our decisions in Michael Pontarelli, 35 B. T. A. 812; affd., 97 Fed. (2d) 793; and Carey-Reed Co., 36 B. T. A. 36, support the same conclusion.

Upon the authority of those cases we hold that on these facts the bonds issued under the California Road Improvement Act of 1907 were the obligations of the several counties, and as such the obligations of a political subdivision of the State of California within the meaning of the statute. The interest on such obligations is not, therefore, to be included in petitioner’s gross income for Federal tax purposes.

Decision will be entered wider Rule SO.

       Art. 22 (b) (4) — 1. Interest upon State obligations. — Interest upon the obligations of a State, Territory, or any political subdivision thereof, or the District of Columbia is exempt from the income tax. Obligations issued by or on behalf of the State or Territory or a duly organized political subdivision acting by constituted authorities empowered to issue such obligations, are the obligations of a State or Territory or a political subdivision thereof. Special tax bills issued for special benefits to property, if such tax bills are legally collectible only from owners of the property benefited, are not the obligations of a State, Territory, or political subdivision. The term “political subdivision,” within the meaning of the exemption, denotes any division, of the State or Territory which is a municipal corporation, or to which has been delegated the right to exercise part of the sovereign power of the State or Territory. As thus defined, a political subdivision of a State or Territory may, for the purpose of exemption, include special assessment districts so created, such as road, water, sewer, gas, light, reclamation, drainage, irrigation, levee, school, harbor, port improvement, and similar districts and divisions of a State or Territory.


source: Caselaw Access Project

author: Turner:

license: Public Domain

text:
    Harold M. Blossom and Margaret T. Blossom, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91572.
    Promulgated November 15, 1938.

      William A. Borrusch, Esq., for the petitioners.

      Edward G. Adams, Esq., for the respondent.
   OPINION.

Turner:

The petitioners contend that they are entitled to a deduction as interest paid of $4,117.34 representing the amount of accrued interest included in the bid price of Collateral Liquidation, Inc., which purchased the property. In support of their contention they rely entirely on the decision of the Supreme Court in Helvering v. Midland Mutual Life Insurance Co., 300 U. S. 216; rehearing denied, 300 U. S. 688. The respondent has not filed a brief and we are not informed as to his position aside from the reason given in the deficiency notice for the disallowance of the deduction and a suggestion made at the hearing that the right of petitioners to redeem the property in the following year might have some bearing on the question.

In Helvering v. Midland Mutual Life Insurance Co., supra, the taxpayer, which kept its books and reported its income on the cash receipts and disbursements basis, in 1930 caused to be foreclosed several mortgages on real estate given to secure loans which were in default. The greater part of the real estate was located in Michigan. At the foreclosure sales the taxpayer was the only bidder. Its bids were accepted and the properties were conveyed to it. At each sale its bid included accrued interest as well as principal. Under the taxpayer’s system of accounting and reporting income, it entered on its books only payments of interest actually made to it during the year. Upon acquiring the foreclosed properties the amounts of interest included in the bids on foreclosure were not entered on its books either as a part of the cost of such properties, as an asset, or as income. While all of the properties were situated in states where a period of redemption from foreclosure is allowed, in no case was there a redemption. The question before the Court was whether the amount of accrued interest included in the taxpayer’s bids constituted taxable income to it for 1930.

In holding that the accrued interest included in the bids was income to the taxpayer in 1930, the Court said:

* * * A mortgagee who, at foreclosure sale, acquires the property pursuant to a bid of the principal and accrued interest is, as purchaser and grantee, in a position no different from that of a stranger who acquires the property on a bid of like amount. It is true that the latter would be obliged to pay in cash the amount of his bid, while the formality of payment in cash is ordinarily dispensed with when the mortgagee acquires the property on his own bid. But the rights acquired Qua purchaser are the same in either ease; and, likewise, the legal effect upon the mortgage debt is the same. In each case the debt, including the interest accrued, is paid. Where the stranger makes the purchase, the debt is discharged by a payment in cash; where the mortgagee purchases the property, the debt is discharged by means of a credit. The amount so credited to the mortgagor as interest paid would be available to him as a deduction in malcing his own income tax returns. It would be strange if the sum deductible by the mortgagor debtor were not chargeable to the mortgage creditor as income received. * ⅜ *
* ⅜ * * * * * *
* * * At the sale, it was free either to bid or to refrain from bidding. If it bid, it was free to bid such sum as it pleased. It chose to bid the full amount of principal and interest. Thus it obtained, in legal contemplation, full payment of the interest as well as the principal. * * ■ * [Italics supplied.]

Under the above decision payment of the accrued interest was effected in the taxable year through the sale under foreclosure of the petitioners’ property and the petitioners, being on the cash receipts and disbursements basis, are entitled to deduct the interest so paid. Secs. 23 and 43, Eevenue Act of 1934.

Decision will he entered under Rule 50.

       See Revenue Act ol 1928, § 23 (b), 45 Stat. 791, 799 (26 U. S. C. A. § 23 note).


author: Smith :

text:
    W. E. Branch, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 88893, 89584.
    Promulgated November 15, 1938.

      Robert Ash, Esq., and Frank G. Rodgers, G. P. A., for the petitioner.

      Frank T. Horner, Esq., and Edward 0. Adams, Esq., for the respondent.
   OPINION.

Smith :

The question presented to the Board by these proceedings is whether the petitioner is liable as a withholding agent for the years 1933, 1934, and 1935 in respect of amounts of money received by the Piedras Negras Broadcasting Co. The petitioner denies liability upon two grounds — first, that the Piedras Negras Broadcasting Co. is a foreign corporation which transacted business in the United States and had an office or place of business therein during the taxable years, and, second, that the petitioner during the years 1933, 1934, and 1935 did not have the “control, receipt, custody, disposal” of any funds belonging to the Piedras Negras Broadcasting Co.

It should be noted that the petitioner’s income tax liability is not involved in these proceedings. It is his liability as a withholding agent of the Piedras Negras Broadcasting Co. which is in issue.

The deficiencies are claimed to be due as a result of withholding tax returns, form 1042, prepared by the respondent under the provisions of section 3116 of the Revised Statutes. Thus, for 1933 the respondent determined that the petitioner was liable as a withholding agent upon $29,814.32 received by the Piedras Negras Broadcasting Co. in that year, and for 1934 and 1935 upon $76,084.85 and $49,220.17 similarly received. The returns were prepared by D. U. Emmert, deputy collector. With respect to the preparation of the returns, D. U. Emmert testified as follows:

Q. Where did you get the information showing the amounts that you used?
A. The amounts that I used thereon were secured from work papers in the possession of the other attorney of record in this case, Mr. F. 6. Rogers, in his office in San Antonio, upon his representation that they were transcriptions of the records of the Piedras Negras Broadcasting Company made prior to their destruction by fire.
Q. And these figures were taken from the records of the Piedras Negras Broadcasting Company?
A. That I don’t know, sir.
Q. Well, from the work sheets?
A. I said it was stated to me by this Mr. F. G. Rogers that those figures were taken from the records of the Piedras Negras Broadcasting Company.
Q. And you assumed that they were the correct figures of the Piedras Negras Broadcasting Company, did you not?
A. That is correct.
Q. Did you cheek any work sheets or any other papers, or any kind of papers? *******
A. I did not.
Pertinent provisions of the Revenue Act of 1932 are as follows:
SEO. 143. WITHHOLDING OF TAX AT SOURCE.
*******
(b) Nonbesident Aliens. — AH persons, in whatever capacity acting, including lessees or mortgagors of real or personal property, fiduciaries, employers, and all officers and employees of the United States, having the control, receipt, custody, disposal, or payment of interest * * * rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income, of any nonresident alien individual, or of any partnership not engaged in trade or business within the United States and not having any office or place of business therein and composed in whole or in part of nonresident aliens, (other than income received as dividends of the class allowed as a credit by section 25 (a)) shall (except in the cases provided for in subsection (a) of this section and except as otherwise provided in regulations prescribed by the Commissioner under section 215) deduct and withhold from such annual or periodical gains, profits, and income a tax equal to 8 per centum thereof; * * *
(c) Return and Patment. — Every person required to deduct and withhold any tax under this section shall make return thereof on or before March 15 of each year and shall on or before June 15, in lieu of the time prescribed in section 56, pay the tax to the official of the United States Government authorized to receive it. * * *

SEC. 144. PAYMENT OP CORPORATION INCOME TAS AT SOURCE.

In the case of foreign corporations subject to taxation under this title not engaged in trade or business within the United States and not having any office or place of business therein, there shall be deducted and withheld at the source in the same manner and upon the same items of income as is provided in section 143 a tax equal to 12 j>er centum thereof in respect of all payments of income made before the enactment of this Act, and equal to 13 ¾ per centum thereof in respect of all payments of income made after the enactment of this Act, and such tax shall be returned and paid in the same manner and subject to the same conditions as provided in that section: * * *

The corresponding provisions of the Revenue Act of 1934 are substantially similar.

The respondent has filed no brief m this case and the Board is not informed as to what his contentions are in the light of the evidence in these proceedings. From the testimony of D. U. Emmert it is clear that the respondent made no determination whatever that the petitioner was ever in the control, receipt, or custody of the funds which he found had been received by the Piedras Negras Broadcasting Co. So far as anything is shown to the contrary the entries shown on the books of that company may have been received entirely from broadcasts made in Mexico. No showing is made that the petitioner ever had the control or custody of any of the funds received by the Piedras Negras Broadcasting Co.

From a consideration of all of the evidence, the Board is of the opinion that the contentions of the petitioner must be sustained upon either or both of the grounds upon which he is relying.

The evidence shows that during the years 1933, 1934, and 1935 programs were broadcast over the two stations of a Mexican corporation either in Mexico or at the Eagle Hotel in Eagle Pass. All of the mail received in response to those broadcasts was received at the Eagle Hotel. Employees of the Mexican corporation opened the mail and deposited the money in the bank accounts. In the light of this evidence the Board can not doubt but that the Mexican corporation was doing business in the United States during the years 1933, 1934, and 1935 and that it had an office at the Eagle Hotel in Eagle Pass, Texas. If the Mexican corporation had any gain from the transaction of that business it is subject to tax. But the petitioner, even though he was president of the Mexican corporation, was not subject to tax as a withholding agent.

The evidence further shows that the petitioner never had the receipt, control, or custody of funds belonging to the Mexican corporation. Payments for advertising were received by employees of the Piedras Negras Broadcasting Co. in Eagle Pass, Texas. The petitioner did not handle these funds personally. They were deposited in the bank by the employees of the Mexican corporation and were not subject to withdrawal by the petitioner except upon a check jointly signed by him and a Mexican stockholder or officer of the corporation. In such circumstances we think it plain that the withholding provisions of the Revenue Acts of 1982 and 1934 do not apply to this petitioner.

The respondent has not determined any deficiency against the Piedras Negras Broadcasting Co. Accordingly, it is not necessary for the Board to determine whether that company had any liability to income tax in respect of business transacted in the United States.

Judgments of no deficiency will he entered.


author: Muedock :

text:
    Estate of Harry E. R. Hall, Deceased, Irwin W. Warshauer and John W. Walters, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 85588.
    Promulgated November 15, 1938.

      Lawrence B. Condon, Esq., for the petitioners.

      Walter Mandry, Esq., for the respondent.
   OPINION.

Muedock :

The Commissioner determined a deficiency in the income tax of this estate for the year 1933 in the amount of $2,381.95. The only issue for decision is whether the agreed profit realized by the estate from the sale of the decedent’s seat on the New York Stock Exchange is taxable as capital gain or whether it was correctly taxed by the Commissioner as ordinary income. The facts have been stipulated and the stipulation is adopted as the findings of fact.

The decedent died on October 25, 1931. He owned at that time a seat on the New York Stock Exchange which he had owned for over seven years. The cost of the seat to him is not shown, but it had a value at the date of his death of $161,000. The executors of the estate sold the seat on July 8,1933, for $225,000. Prior to that time they had paid dues in the amount of $1,790.22, which they added to the value of the seat at the time they acquired it in order to arrive at their basis for gain or loss on the asset of $162,790.22. They reported the profit of $62,209.78 as a capital net gain on their income tax return for the calendar year 1933. The Commissioner, in determining the deficiency, held that the profit was taxable as ordinary income.

The petitioners contend that this seat was a capital asset in their hands. Although they had not held the asset for more than two years at the time of the sale, nevertheless they contend that their period of holding is to be combined with that of the decedent. Section 101 (c) (8) of the Revenue Act of 1928 provides in part:

“ ‘Capital assets’ means property held by the ta'xpayer for more than two years * * The Commissioner contends that “the taxpayer” in this instance was an estate, that taxpayer was separate and distinct from the decedent, and it did not hold this asset for more than two years. He cites a number of authorities in support of this contention, which need not be set forth herein. The case of Herbert Tutwiler et al., Trustees, 28 B. T. A. 495, is on all fours with the present case and fully supports the Commissioner’s contention. The only difference in the cases is that the Tutwiler case arose under the Revenue Act of 1926, but section 208 (a) (8) of that act is substantially the same as the corresponding provisions of the Revenue Act of 1928.

The petitioners cite and rely upon McFeely v. Commissioner, 296 U. S. 102. That case did not involve the question with which we are concerned and does not support the petitioners’ contention. The question there was when the period of holding began for a person receiving property from a decedent’s estate, i. e., did it begin at the date of the decedent’s death or did it begin at the ‘date of distribution? The Court held that it began at the date of death, which is consistent with, rather than contrary to, the contention of the Commissioner here. Neither is the case of Helvering v. New Yorh Trust Co., 292 U. S. 455, in point. The question there arose under the Revenue Act of 1921. The taxpayer was a trust to which property had been transferred by way of gift. The question was whether the period of holding of the donor should be added to that of the trust. The Court held that the two periods should be added together since the trust took the same basis for gain or loss that the donor had had. The Court said the Revenue Act of 1921 would be inconsistent if it permitted the old basis to be retained without also permitting the old period of holding to be added to the new. Here the estate does not take the same basis for gain or loss on this property that the decedent bad, and the Revenue Act of 1928 is not inconsistent in this connection. As a matter of fact, section 101 (c) (8) contains express provisions for adding tbe two periods together where there is no change in the basis. None of those provisions applies in the present case. The Commissioner did not err.

Decision will be entered for the. respondent.


author: Smith:

text:
    Charles R. Stuart, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89096.
    Promulgated November 15, 1938.

      Raymond R. Hails, Esq., and A. L. Moreton, G. P. A., for the petitioner.

      Alva G. Baird, Esq., for the respondent.
   OPINION.

Smith:

In this proceeding the petitioner seeks the redetermination of a deficiency in income tax for 1934 of $756.33. The question in issue is whether the petitioner sustained a deductible loss of at least $12,621.06 — the amount of the net income determined by the respondent resulting from the petitioner having, during 1934, turned over to the trustee for his bankrupt estate real and personal property which had cost him $76,800.

The facts have all been stipulated. They may be summarized as follows:

The petitioner is a resident of the City of Glendale, County of Los Angeles, California. He filed an income tax return for 1934 which shows as his total gross income $13,750 representing one-half of the salary which he received from Chas. R. Stuart, Inc. He claimed the deduction from gross income of a loss of $41,200. The return showed a net loss of $28,578.94. The deduction of the $41,200 was disallowed by the respondent in the determination of tire deficiency, and a net income of $12,621.06 determined.

The petitioner was a director and vice president of the Guaranty Building & Loan Association of Los Angeles from the date of its organization in 1921 to the time of the confessed defalcation of Gilbert H. Beesemyer in December 1930.

The petitioner also became a director of United States Guaranty Corporation at the time of its organization and continued to act as a director of that corporation at all times between the date of its organization and the time Bessemyer confessed his defalcation.

On or about December 15,1930, there was filed in the Superior Court of the State of California, in and for the County of Los Angeles, an action entitled “W. H. Douglas v. Guaranty Building and Loan Association of Los Angeles, et al., No. 313-332.” The petitioner was made a defendant in that action as a director of the Building & Loan Association. Thereafter, and on or about September 28, 1933, pursuant to stipulation, a judgment was entered against the petitioner and other defendants in that action in the amount of $7,661,793. The petitioner was insolvent at all times between the date of the judgment on September 28, 1933, and January 9, 1934, when a petition in voluntary bankruptcy was filed.

On April 29, 1931, Ernest U. Schroeter, as trustee in bankruptcy for the United States Guaranty Corporation, filed a suit in the Superior Court of the State of California, in and for the County of Los Angeles, No. 320-640, against Gilbert H. Beesemyer, petitioner, and the other directors of the United States Guaranty Corporation, praying for a judgment of $193,333.86. That action was never brought to trial but was dismissed as to petitioner on May 15, 1934.

During 1931 seven suits were instituted in the Municipal Court of the City of Los Angeles in which petitioner was named a defendant. All of the suits were based either upon petitioner’s liability as a director or a stockholder in the Guaranty Building & Loan Association of Los Angeles or United States Guaranty Corporation. With the exception of one of the suits, in which judgment was rendered for the defendant for costs, the remaining suits are still pending and unadjudicated.

On January 9, 1934, the petitioner filed in the United States Distinct Court for the Southern District of California a voluntary petition in bankruptcy, and was adjudicated a bankrupt. On February 19,1934, Hiram E. Casey was appointed trustee in bankruptcy in the bankruptcy proceeding.

By virtue of his appointment as trustee, Hiram E. Casey acquired from the petitioner by operation of law and without other consideration title to all of the property belonging to petitioner. Actual delivery of the property was made to the trustee by the petitioner during the month of February 1D34. The assets turned over to the trustee were as follows:

The total claims proven against petitioner’s bankrupt estate were as follows:

No dividends have been paid as yet to any of these claimants by the trustee.

In his income tax return for 1934 petitioner claimed no loss for any assets turned over to the trustee in bankruptcy except on the Leland Tract which was acquired by the petitioner on December 24, 1925, and April 17, 1927, at a cost of $41,200.

The petitioner has at all times made his income tax returns, including his return for 1934, on the cash receipts and disbursements basis.

Petitioner received his discharge in bankruptcy on June 4,1934.

The petitioner sustained a loss in 1934 as the result of acting as a director of the Guaranty Building <& Loan Association. The loss sustained, in the amount of at least $12,621.06, is a legal deduction from gross income.

The question presented by this proceeding is whether the petitioner sustained a loss in 1934 which is deductible from gross income; and, if so, the amount thereof. The respondent submits that petitioner was insolvent in 1933 and that he sustained no deductible loss when he turned his property over to the trustee in bankruptcy.

’ The reason for tbe disallowance by the respondent of the claimed deduction of $41,200 from the gross income of 1934 is as follows:

Tie loss on the sale of the Leland Tract has heen disallowed in accordance with I. T. 2898, Cumulative Bulletin XIV-1, page 70, which states that a taxpayer may not deduct as a loss in computing his net income either for the year in which he was adjudicated a bankrupt or for the year in which he received a discharge in bankruptcy under the National Bankruptcy Act, the cost or other basis of the property turned over by him to the trustee in bankruptcy to be applied in payment of his indebtedness in accordance with the provisions of that Act.

The pertinent provisions of the Revenue Act of 1934 are as follows:

SEO. 23. deductions FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
*******
(e) Losses by Individuals. — In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise—
(1) if incurred in trade or business; or
(2) if incurred in any transaction entered into for profit, though not connected with the trade or business; or
(3) of property not connected with the trade or business, if the loss arises from fires, storms, shipwreck, or other casualty, or from theft. * * *

Article 23 (e)-l of Kegulations 86 provides in material part as follows:

Losses dy individuals. — Losses sustained by individual citizens or residents of the United States and not compensated for by insurance or otherwise are fully deductible if (a) incurred in the taxpayer’s trade or business, or (b) incurred in any transaction entered into for profit, or (c) arising from fires, storms, shipwreck, or other casualty, or theft, * * *
In general losses for which an amount may be deducted from gross income must be evidenced by closed and completed transactions, fixed by identifiable events, bona fide and actually sustained during the taxable period for which allowed. Substance and not mere form will govern in determining deductible losses. Full consideration must be given to any salvage value and to any insurance or other compensation received in determining the amount of losses actually sustained. * * *

In Ms brief the respondent submits:

* * * the petitioner’s contentions [with respect to the claimed deduction of a loss of $41,200] are without merit because the facts clearly show that he made no payment on the judgment as such at any time and if the books of petitioner had been kept on the accrual system then the loss, if any, would have been deductible in 1933 when the judgment was entered against him. While it is true that by the transfer of his assets to the trustee in bankruptcy, the petitioner was forever divested of his said property, nevertheless he at the same time as a result of the whole proceedings, namely, his discharge in bankruptcy, was benefited by the cancellation of adjudicated indebtedness against him, which amounted to a sum that was many times more than the value of the property. * * *

In article 43-2 of Kegulations 86, promulgated under the provisions of the Kevenue Act of 1934, it is stated:

* * * Judgments or other binding adjudications, sueh as decisions oí referees and boards of review under workmen’s compensation laws, on account of damages for patent infringement, personal injuries, or other cause, are deductible from gross income when the claim is so adjudicated or paid, unless taken under other methods of accounting which clearly reflect the correct deduction, less any amount of sueh damages as may have been compensated for by insurance or otherwise. * * *

The Board is of the opinion that there can be no question but that the petitioner sustained a loss in 1933 or 1934 greatly in excess of $12,621.06, the amount of the net income determined by the respondent. He clearly lost in either one year or the other all of his property which cost him $76,800.

The respondent makes no contention that the loss was not one sustained “in trade or business.” We think that no such contention could validly be made. The judgment was obtained against the petitioner by reason of his having been a director and vice president of the Guaranty Building & Loan Association of Los Angeles. This was a business undertaking of the petitioner and the loss was one sustained in trade or business.

The respondent admits that if the petitioner had kept his books of account upon the accrual basis rather than upon the cash receipts and disbursements basis the loss sustained by the petitioner would have been a legal deduction from the gross income of 1933, the year in which a final judgment was obtained against him. Since the petitioner kept his books of account and made his tax returns upon the cash receipts and disbursements basis the loss was not “sustained” in 1933 within the meaning of the income tax acts. We do not believe that it was the intention of Congress to deprive taxpayers making their returns on a cash receipts and disbursements basis of losses which would be deductible in returns made on the accrual basis. The only difference in treatment countenanced by the income tax law is the year of deduction. The petitioner made his returns on a cash receipts and disbursements basis. His loss was sustained in 1934, the year in which he lost his property. Cf. Sidney-Hill System of Health Building Co., 12 B. T. A. 548.

The contention of the respondent appears to be that since the petitioner went into bankruptcy in 1934 he is precluded from deducting the loss. His sole reliance is on I. T. 2898, supra, which was apparently written to cover this case. We are of the opinion that the bankruptcy proceeding has nothing to do with the deductibility of the loss.

In Yoder v. Nauts, 34 Fed. (2d) 450, it was held that, where an officer of a corporation guaranteed another against certain losses anticipated as possible in 1920 and this guaranty ripened into liquidated indebtedness in 1921, which was met by delivery of promissory notes, such losses became “business losses” to the taxpayer as and when the notes were paid.

In John P. Dillon, 9 B. T. A. 177, it was held that a payment made by a guarantor for relief from liability, past and future, under a guarantee contract constituted a deductible loss.

The Board has held that where a paymment was made in satisfaction of judgments obtained under mechanics’ liens the payment was a legal deduction from gross income, Leichner & Jordan Co., 4 B. T. A. 133; that where profits were surrendered in order to avoid a damage suit the amount thereof was likewise a legal deduction, W. R. Hervey, 25 B. T. A. 1282; also, that where a payment was made to settle a controversy over stock fraudulently issued the amount paid was a legal deduction, North American Investment Co., 24 B. T. A. 419.

In O. D. 978, Cumulative Bulletin No. 5, p. 135, a taxpayer was allowed a deduction on account of payment of a judgment based upon his misrepresentations in a real estate deal. In O. D. 1091, Cumulative Bulletin No. 5, p. 139, it was held that an amount paid out in compromise of a judgment recovered in a suit against a taxpayer on account of dereliction and neglect of his duty while serving as a director of a bank was an allowable deduction. In I. T. 1853, Cumulative Bulletin II-2, p. 124, it was held that an amount paid in liquidation of a judgment recovered against the taxpayer for the recovery of secret profits arising from the purchase of certain property on behalf of a corporation formed by him and others was deductible from gross income.

In In re Park's Estate (C. C. A., 2d Cir.), 58 Fed. (2d) 965, it was held that an amount paid in to a bank by the president to prevent closing thereof because of the treasurer’s defalcations was not deductible from the president’s income. The court observed that the president “did not put in his $100,000 in additional money in settlement of any recognized legal liability so to do.” It held that the amount was simply an additional investment in the shares of stock owned by the president. That case is distinguishable from the proceeding at bar, for here the petitioner had a legal liability arising from his being a director of the Guaranty Building & Loan Association of Los Angeles.

The Board is of the opinion that it was not the intention of Congress in the enactment of the Revenue Act of 1934, or of any other revenue act, to disallow the deduction from gross income of losses arising from purely business transactions. We think it clear that if the petitioner in 1984 had sold the assets which he later turned in to the trustee in bankruptcy and paid the cash in compromise of his liability on the judgment, the amount paid would be a legal deduction from gross income. We can not see how the fact that he paid his property in to a trustee in bankruptcy bars him from the deduction of the loss actually sustained.

It will be noted above that the total claims proven against the petitioner’s bankrupt estate included three claims as follows:

The stipulated facts do not show the nature of these proven claims. For aught shown to the contrary they may have been claims against the petitioner’s bankrupt estate which were not incurred “in trade or business.” It certainly can not be said that a taxpayer sustains a deductible loss in respect of claims proven against his bankrupt estate which were not incurred “in trade or business.” The total of such claims was, however, in the instant proceeding, insignificant. The balance of the claims proven against the bankrupt’s estate arose from transactions connected with the petitioner’s trade or business. To the extent that the petitioner paid off such claims in the taxable year the amount is a legal deduction from gross income.

There may also be a question as to whether the petitioner would be in any event entitled to deduct from his gross income for 1934 the full amount of $76,800 representing the entire cost of all of the property turned in by him to the trustee in bankruptcy in that year. It is questionable whether his purchase of a special life membership in the Flintridge Country Club at a cost of $1,000 is an item of property which was purchased with the expectation of realizing a profit therefrom. It would appear that the investment was for the personal benefit of the petitioner. It may also be true that certain other items of property turned over to the trustee were not purchased with any intention of realizing a profit from them. But we are satisfied that the petitioner’s investment of $31,830 in 317 shares of the capital stock of Harry E. Jones, Inc., and the investment of other amounts of money in personal property were made by the petitioner for the purpose of realizing a profit therefrom, and that the cost to the petitioner of such, items of property was much in excess of $12,621.06, the amount of the net income determined by the respondent in the determination of the deficiency. The petitioner is entitled to the deduction of a loss of $12,621.06. With the allowance of such deduction the petitioner had no net income for 1934.

Reviewed by the Board.

Judgment of no deficiency will be entered.


author: TurneR: Artjndell,

text:
    Dorothy Glenn Coal Mining Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89934.
    Promulgated November 15, 1938.

      Arthur 8. Dayton, Esq., for the petitioner.

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

TurneR:

In its 1933 and 1934 income tax returns the petitioner claimed depletion deductions computed on the unit basis. The respondent disallowed the deductions on the ground that the lease had no cost to petitioner within the meaning of the statute. The petitioner now admits that the respondent is correct and that it is not entitled to depletion computed on the unit basis, but contends that its claims for depletion in those returns were made in good faith and under a misapprehension of fact and law, and for that reason it should now be allowed to have a depletion allowance computed on the percentage basis. The respondent’s position is that petitioner has made binding elections under sections 114 (b) (4) of the Kevenue Acts of 1932 and 1934 to compute its depletion allowance for the years here in question without regard to percentage depletion and that it can not now make a new election and claim depletion on that basis.

Section 114 (b) (4) of the Eevenue Act of 1932 provides that the allowance for depletion in the case of coal mines shall be 5 per centum of the gross income from the property, provided such allowance shall not exceed 50 per centum of the net income of the taxpayer from the properties, “except that in no case shall the depletion allowance for the taxable year 1932 or 1933 be less than it would be if computed without reference to this paragraph.” It further provides that a taxpayer making a return for the year 1933 shall state in such return whether he elects to have the depletion allowance for such property “for succeeding taxable years” computed with or without reference to percentage depletion, and that if the taxpayer fails to make such statement in the return, the depletion allowance “for succeeding taxable years” shall be computed without reference to percentage depletion.

With respect to 1933, the respondent has apparently interpreted the statute as requiring some act on the part of a taxpayer as a prerequisite to the allowance of percentage depletion for that year. Obviously the statute does not so provide. As we pointed out in the preceding paragraph, the allowance of percentage depletion for 1932 and 1933 is outright and the right of a taxpayer to take percentage depletion or unit or cost depletion, whichever will give him the greater deduction, is carefully and plainly stated. There are some provisions of the statute which may operate to limit the amount of the deduction, but there is no limitation whatever as to the years mentioned of the right to take one or the other. If the allowance is computed on the percentage basis it may not exceed 50 percent of the net income from the property, while, on the other hand, a taxpayer may not be required to compute his depletion allowance on the percentage basis if it results in no deduction or in a deduction less than it -would be if computed on the unit or cost basis. Furthermore, if there were any ambiguities in the statute or doubts as to its meaning they would be immediately removed upon examination of Report No. 665 of the Senate Committee on Finance, dated May 9, 1932. With respect to section 114 (b) (4), the report reads in part as follows:

* * * In respect to the taxable years 1932 and 1933 the taxpayer is privileged to have the greater of either (1) the percentage depletion allowance or (2) an allowance computed on the adjusted basis provided in section 113 (b) (usually cost or March 1, 1913, value, with adjustments). This privilege is the same for those two years as that accorded both under the existing law and the bill in the case of oil and gas wells for all years.
In the return for the taxable year 1933, however, the taxpayer is required to state as to each property whether he elects to have the depletion allowance for such property for succeeding taxable years computed with or without reference to percentage depletion; this election must be as between either percentage depletion or depletion computed upon the adjusted basis. * * *

There is no room for doubts as to the intent and meaning of the statute. The right of a taxpayer to take percentage depletion or unit or cost depletion, whichever would give him the greater deduction, was for 1932 and 1933 unconditional, and for 1933 that right was in no way affected by the fact that petitioner did claim on its return for that year a depletion deduction erroneously computed on the unit or cost basis.

For the year 1934 and all years subsequent to 1933 the provisions of the controlling statute are quite different. As to those years there was no outright or unconditional grant of alternative depletion allowances as was true for 1932 and 1933. Percentage depletion was put in reach of the taxpayers for 1934 and subsequent years but was not unconditionally provided. The allowance of percentage depletion for 1934 and subsequent years is governed by section 114 (b) (4) of the Revenue Act of 1934, the effect of which we considered in G. H. Mead Goal Go., 38 B. T. A. 1163, promulgated of even date. The instant case is similar to the Mead case in that the petitioner made no claim for percentage depletion on its 1934 return and a proper computation of the depletion allowance on any basis other than the percentage basis will not result in a depletion deduction. It is unlike the Mead case in that the petitioner here affirmatively claimed depletion on the unit basis and has not at any time made a request in connection with any return, amended or otherwise, for percentage depletion. In C. H. Mead Coal Co., supra, we held that, since the petitioner failed to make an election in respect of depletion on or at the time of filing its 1934 return, it lost the opportunity to take percentage depletion, and, the method of computing depletion having become fixed under the statute, it was not thereafter changed or affected by the later filing of an amended return wherein percentage depletion was claimed. The reasoning in that case is equally applicable here and points to a conclusion contrary to that contended for by the petitioner. In the Mead case, however, the petitioner in effect conceded that if percentage depletion was to be obtained a taxpayer was required by statute to make an affirmative election to that effect on its return even though, having no cost basis, he could obtain a depletion deduction on the percentage basis only, the contention of the petitioner there being that an affirmative election stated on an amended return was an election within the meaning of the statute. In this case the petitioner argues that, even though it did not on any return elect to take depletion on the percentage basis but did in fact claim a depletion deduction on the unit basis, it is still not precluded from claiming and obtaining percentage depletion in this proceeding in view of the fact that the computation of depletion on any basis other than the percentage basis will not result in a deduction to it. The petitioner’s reasoning is that two remedies or rights must actually exist and if a party elects to take a supposed right or benefit which is in fact nonexistent he is not precluded thereby from later claiming the other. We are not here concerned with the doctrine of election of remedies, however, but with a question of statutory allowance of a deduction from gross income, and, as we have pointed out in C. H. Mead Coal Co., supra, the allowance of a deduction is a matter of legislative grace and Congress may prescribe such prerequisites and conditions for the allowance thereof as it sees fit and a claim for deduction must come clearly within the conditions prescribed. New Colonial Ice Co. v. Helvering, 292 U. S. 435, and Independent Life Insurance Co. v. Helvering, 292 U. S. 371.

Prior to the Eevenue Act of 1932 there was no provision in any of the revenue acts which would permit the owners of coal properties or leases thereof to take a deduction for depletion on the percentage basis. Up to that time Congress had seen fit to limit the owners of such properties to deductions for depletion computed on the unit or cost basis, and if any such property had no unit or cost basis in the hands of the taxpayer no deduction was allowed. Percentage depletion has been allowed in the case of oil and gas wells since the enactment of the Eevenue Act of 1926, and from its inception its applicability to properties having no cost basis has been recognized. Accordingly, if Congress had made an outright grant of percentage depletion in the case of coal and metal mines as it had done in the case of oil and gas wells, there would be no question but that the petitioner here should be sustained but, as we pointed out in C. H. Mead Coal Co., supra, the outright grant of percentage depletion was made for 1932 and 1933 only. If a taxpayer desired percentage depletion for subsequent years, he was first required under the Eevenue Act of 1932 to so state in his return for 1933. By the terms of the Eevenue Act of 1934 Congress extended the time in which a taxpayer was required to make such a statement with respect to 1934 and subsequent years to the time of filing the 1934 return. In each of the acts, however, Congress in positive terms prescribed the time and conditions on which the right of a taxpayer to the depletion allowance computed with or without regard to percentage depletion should become final and fixed, by stating that “If a taxpayer fails to make such statement in the return the depletion allowance * * * shall be computed without reference to percentage depletion.”

The language of the statute is general and all-inclusive. There are no exceptions. It draws no distinction whatever between properties having a cost basis and those that do not. The depletion deduction Was originally designed as the medium through which the owner of a mineral deposit or other “natural resource” might set aside free from income tax so much of the proceeds from the exploitation of the property as would by the time of exhaustion return to him his cost or investment therein. Prior to the enactment of the Eevenue Act of 1932, the owners of coal properties having in their hands no cost or unit basis were denied any depletion deduction in respect of such properties and we are unable to find any provision of the Eevenue Act of 1932 or 1934 granting percentage depletion for years subsequent to 1933 to the owners of such properties except under the conditions plainly stated in the statute. We can not ascribe to Congress a lack of knowledge of such cases or any intention to exempt such property owners from the necessity of making an affirmative election at the time of filing their returns for 1934 if they are to obtain percentage depletion.

In the instant case it is stipulated that the petitioner did not elect in its return for 1934, or for any year, to have the depletion allowance in respect of its property computed on the percentage basis. After the enactment of the Revenue Act of 1932, in which percentage depletion was first allowed in respect of coal, metal, and sul-phur mines, petitioner did file returns for 1933 and 1934 and on each return claimed a depletion deduction on the unit basis. Accordingly, if an election was made it was an election to have the depletion allowance computed without regard to percentage depletion. If, on the other hand, it is not possible, as the petitioner contends, for a taxpayer to elect to take depletion on the unit basis when on the unit basis no deduction will result, the petitioner is in the position of having failed to make any election with or without regard to percentage depletion, and under such circumstances Congress has said “the depletion allowance * * * shall be computed without reference to percentage depletion.” C. H. Mead Coal Co., supra. The petitioner has lost no deduction to which it was at any time entitled, but through its failure to act as Congress prescribed has failed to obtain an added deduction.

The respondent also contends that for the year 1933 it makes no difference whether petitioner is entitled to percentage depletion or not because in any event it had no net income “from the property” upon which to compute the 50 percent limitation prescribed in the statute. He has determined that petitioner sustained a loss from mining operations in that year in the amount of $3,005.88. The petitioner contends that the term “income from the property” as used in the statute includes income from its store and tenements and in the alternative that the respondent erred in failing to allocate to the store and tenements a part of the royalties, and further for 1934 that the amount of officers' salaries allocated to the said store and tenements is inadequate.

It is well settled that in computing the depletion allowance on the percentage basis income from other sources or activities may not be included as “income from the property.” Consumers Natural Gas Co., 30 B. T. A. 1263; affd., 71 Fed. (2d) 161; certiorari denied, 296 U. S. 634. The petitioner’s claim for the inclusion of income from the store and tenements as “income from the property” is accordingly denied.

With respect to the alternative contention that part of the royalties paid should be allocated to the store and tenements, the petitioner relies upon a statement in Burnet v. Hutchinson Coal Co., 64 Fed. (2d) 275; certiorari denied, 290 U. S. 652, to the effect that coal mining royalties are paid for privileges more extensive than the mere mining of coal and may include other considerations such as the right to erect the plant, the right to erect houses for the miners, etc. The question in that case was whether a minimum royalty paid during the year in excess of the royalty on coal actually mined was deductible by the lessee in the year expended or should be treated as a capital expenditure, a question quite different from the one under consideration in the present case. Assuming without deciding, however, that the same reasoning is applicable and the petitioner is entitled to allocate part of its royalties to its store and tenements, it has failed to make any showing as to the amounts which should be so allocated. According to the stipulation of the parties the royalties for 1933 amounted to $4,781.10 and after deducting the full amount of the royalties from the gross income from mining operations the respondent arrived at a net loss of $3,005.88. It is thus apparent that if as much as 60 percent of the royalties paid is allocated to stores and tenements there would still be no amount shown as “net income from the property”, and on the record before us there is no basis whatever for allocating any such percentage of royalties to stores and tenements even though the petitioner’s theory of allocation be assumed to be correct.

As to 1934 there is no occasion to consider the allocation of either royalties or salaries of officers in view of our holding that petitioner is not entitled to percentage depletion for that year.

Reviewed by the Board.

Decision will ~be entered under Rule 50.

Oi’per concurs only in the result.

Artjndell,

dissenting: I can not agree with the holding of the majority opinion that this petitioner is not entitled to percentage depletion for the year 1934. In denying a deduction for percentage depletion the effect is to deny to petitioner any depletion deduction whatever, inasmuch as it has no cost or other basis recognized by statute on which to compute depletion on the unit basis. This denial will operate in perpetuity, unless the law be changed, and in utter disregard of the actual depletion of the properties. I do not believe that this was the intended result of Congress in granting the privilege of a choice under section 114 (b) (4). Neither do I think that such a result necessarily follows from the language used by Congress in the statute.

True, as said in the majority opinion, Congress may limit and condition deductions and the prerequisites to their allowance. But the depletion provisions of the Revenue Acts of 1932 and 1934 are liberalizing, rather than limiting, provisions. The allowance of percentage depletion to coal miners by the Revenue Act of 1932 gave depletion deductions to taxpayers who, because of a lack of basis, could not take depletion deductions under prior statutes. And to those who had a basis, the statute gave the choice of taking the greater of unit or percentage depletion. In the light of these provisions it is difficult to find any restrictive intent in the allowance of percentage depletion to coal mines. Consideration of these provisions from this point of view indicates the way to the solution of the question here. The sound premise, it seems to me, is that Congress intended to allow depletion deductions by one of the two methods, and intended to give taxpayers a right to elect whichever method they deemed most favorable under the circumstances in each case. From this premise it follows logically that an election is to be made only where a choice between the two methods is available, and that where there is no choice percentage depletion is to be allowed. Election presupposes the existence of the right of a choice between alternatives. Allis v. Hall, 56 Atl. 637; Standard Oil Co. v. Hawkins, 74 Fed. 395; McIntosh v. Wilkinson, 36 Fed. (2d) 807; Tide Water Oil Co., 29 B. T. A. 1208; 48 Harvard Law Review 1281. To say that one is put to his election where he lias no choice is to give him nothing more than a “Hobson’s” choice. The Acts of 1932 and 1934 both use the terms “elects” and “election.” These words become meaningless if applied so as to require an election where there is no right of choice. Where this situation exists and the taxpayer has no alternative from which to choose, then percentage depletion should be allowed under the opening sentence of section 114 (b) (4) that “the allowance for depletion shall be, in the case of coal mines, 5 per centum * ⅝ ⅜.”

It is not a sound answer to the taxpayer to say that it has lost nothing by the denial of percentage depletion because prior statutes did not give percentage depletion to coal mines. The 1932 and 1934 statutes are designed to correct that situation and to give to coal properties the deductions allowed to other depletable properties under the earlier statutes.

       SEC. 114. BASIS FOR DEPRECIATION AND DEPLETION.
      * * * * # * *
      (b) Basis foe Depletion.—
      * * # * * # *
      (4) Peecentage depletion foe coal and metal mines and sulphdk. — Tlie allowance for depletion shall be, in the case of coal mines, 5 per centum, in the case of metal mines, 15 per centum, and, in the case of sulphur mines or deposits, 23 per centum, of the gross income from the property during the taxable year, excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property, except that in no case shall the depletion allowance for the taxable year 1932 or 1933 be less than it would be if computed without reference to this paragraph. A taxpayer making return for the taxable year 1933 shall state in such return, as to each property (or, if he first makes return in respect of a property for any taxable year after the taxable year 1933, then in such first return), whether he elects to have the depletion allowance for such property for succeeding taxable years computed with or without reference to percentage depletion. The depletion allowance in respect of such property for all succeeding taxable years shall be computed according to the election thus made. If the taxpayer fails to make such statement in the return, the depletion allowance for such property for succeeding taxable years shall be computed without reference to percentage depletion. * * *

       SBC. 114. BASIS FOR DEPRECIATION AND DEPLETION.

      (b) Basis for Depletion.—
      * * * * * * *
      (4) Percentage depletion for coal and metal mines and sulphur. — The allowance for depletion under section 23 (m) shall be, la the case of coal mines, 5 per centum, in the case of metal mines, 15 per centum, and, in the case of sulphur mines or deposits, 23 per centum, of the gross income from the property during the taxable year, excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property. A taxpayer mating his first return under this title in respect of a property shall state whether he elects to' have the depletion allowance for such property for the taxable year for which the return is made computed with or without regard to percentage depletion, and the depletion allowance in respect of such property for such year shall be computed according to the election thus made. If the taxpayer fails to make such statement in the return, the depletion allowance for such property for such year shall be computed without reference to percentage depletion. The method, determined as above, of computing the depletion allowance shall be applied in the case of the property for all taxable years in which it is in the hands of such taxpayer, or of any other person if the basis of the property (for determining gain in his hands is, under section 113, determined by reference to the basis in the hands of such taxpayer, either directly or through one or more substituted bases, as defined in that section.


author: TuRnbe:

text:
    C. H. Mead Coal Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88687.
    Promulgated November 15, 1938.

      Edgar J. Goodrich, Esq., for tbe petitioner.

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

TuRnbe:

The sole issue in this proceeding is whether or not the petitioner has complied with the requirements of section 114 (b) (4) of the Revenue Act of 1934 so as to be entitled to a deduction computed on the percentage basis for the depletion of its coal properties.

The allowance of a deduction for depletion of coal and metal mines on a percentage basis was first provided by section 114 (b) (4) of the Revenue Act of 1932, which reads in part as follows:

* * * A taxpayer making return for the taxable year 1933 shall state in such return, as to each property (or, if he first makes return in respect of a property for any taxable year after the taxable year 1933, then in such first return), whether he elects to have the depletion allowance for such property for succeeding taxable years computed with or without reference to percentage depletion. The depletion allowance in respect of such property for all succeeding taxable years shall be computed according to the election thus made. If the taxpayer fails to make such statement in the return, the depletion allowance for such property for succeeding taxable years shall be computed without reference to percentage depletion. ⅜ ⅜ *

The corresponding provision of the Revenue Act of 1934, under which petitioner seeks to compute the claimed depletion allowance, is to be found in section 114 (b) (4) of that act. The pertinent provision reads as follows:

* * * A taxpayer making his first return under this title in respect of a property shall state whether he elects to have the depletion allowance for such property for the taxable year for which the return is made computed with or without regard to percentage depletion, and the depletion allowance in respect of such property for such year shall be computed according to the election thus made. If the taxpayer fails to make such statement in the return, the depletion allowance for such property for such year shall be computed without reference to percentage depletion. The method, determined as above, of computing the depletion allowance shall be applied in the case of the property for all taxable years in which it is in the hands of such taxpayer ⅜ ⅜ *.

The petitioner on brief recognizes that the statute governing this case requires that the taxpayer elect affirmatively to take depletion on the percentage basis and that otherwise it automatically follows that the privilege of obtaining percentage depletion is lost even though, as here and in Dorothy Glenn Coal Mining Co., 38 B. T. A. 1154, promulgated of even date, the taxpayer, having no cost basis, has only one choice that will result in a depletion deduction to it. Here petitioner rests its claim on the contention that it has made an election within the meaning of the statute to compute its depletion allowance on the percentage basis. It is claimed, first, that the statement of election filed with its return for 1933 under the provisions of section 114 (b) (4) of the Revenue Act of 1932 was effective for subsequent years and no further statement of election was required under the Revenue Act of 1934 and, second, that even though a new election was required under the provisions of the 1934 Act, and although no election was in fact made at the time of filing or in connection with the 1934 return, the filing of the amended return for 1934 on February 6, 1936, containing the statement quoted in our findings of fact constituted an election within the meaning of section 114 (b) (4) of the Revenue Act of 1934.

As we read the provisions of section 114 (b) (4) of the Revenue Act of 1934, a new election was required on the 1934 return in respect of any property covered by that return, and it matters not that an election to compute depletion on the percentage basis in respect of such property may have been made on the return for 1933. The language of section 114 (b) (4) of the Revenue Act of 1934 is plain and pointed. It made it mandatory that a taxpayer desiring to compute its allowance for depletion on the percentage basis should so show in “making his first return under this title.” As to the meaning of the term “title”, section 1 of the Revenue Act of 1934 provides that “the provisions of this title shall apply only to taxable years beginning after December 31, 1933.” Furthermore, both the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate, in reporting the bill which was enacted as the Revenue Act of 1934, stated in their reports that to avoid administrative complexities it was thought that a taxpayer making his first return under the “proposed bill” should be permitted to make a new election as to the method of computing his allowance for depletion. The language of the act, when it became a law, not only permitted a taxpayer to make a new election but made it mandatory that a new election be made by providing that “a taxpayer making his first return under this title in respect of a property shall state whether he elects to have the depletion allowance for such property for the taxable year for which the return is made computed with or without regard to percentage depletion”, and further that “if a taxpayer fails to make such statement in the return, the depletion allowance shall be computed without reference to percentage depletion.” Accordingly, as we view the issue, the election made at the time of filing the 1933 return is ineffective for 1934 and subsequent years and the petitioner’s case must stand or fall under the terms of its return for 1934.

Admittedly the petitioner did not file with its 1934 return any statement of election to have its depletion deduction computed “with or without regard to percentage depletion.” Furthermore, it made no el aim on the return for a depletion deduction computed on the percentage basis or any other basis. After the close of the next succeeding taxable year, through an amended return for 1934, it did seek to apply an election claimed to have been made under the Revenue Act of 1932 in connection with the filing of its 1933 return. In fulfillment of the claimed election, the petitioner deducted on the amended return the amount of $33,138.44 as the proper depletion allowance for 1934, computed on the percentage basis. Our question then is whether or not this action, taken by the petitioner in filing with the collector of internal revenue on February 6, 1936, an amended return for the year 1934, constituted an election to take depletion on the percentage basis within the meaning of section 114 (b) (4) of the Revenue Act of 1934. The petitioner argues, first, that the filing of the amended return is proper and that when filed it relates back and becomes a part of the taxpayer’s return for that particular year just as if it bad been, filed at tbe same time as tbe return, and, second, that the respondent’s refusal to accept the amended return in the instant case and tbe statements made therein as a proper election under section 114 (b) (4) of the Revenue Act of 1934 was arbitrary and capricious.

The claim of the petitioner here involved is a claim for the allowance of a deduction against gross income. It is well settled that the allowance of deductions is a matter of legislative grace and that only those deductions specifically permitted by Congress may be taken by any taxpayer. Further, Congress may prescribe such prerequisites and conditions for the allowance of deductions as it sees fit and a claim for deductions must come clearly within the conditions prescribed. New Colonial Ice Co. v. Helvering, 292 U. S. 435, and Independent Life Insurance Co. v. Helvering, 292 U. S. 371.

Section 114 (b) (4) here involved prescribes that a taxpayer shall state whether he elects to have his depletion deduction for the year 1934, or any subsequent year, computed “with or without reference to percentage depletion.” Congress did not stop, however, with the general grant of election as it has done in numerous other statutory provisions permitting elections, but proceeded to prescribe not only the time and manner of making the election but also the effect of failure on the part of the taxpayer to act affirmatively. Congress first said: “A taxpayer making his first return under this title in respect of a property shall state whether he elects to have the depletion allowance for such property for the taxable year for which the return is made computed with or without regard to percentage depletion”, but it then added: “If a taxpayer fails to make such statement in the return the depletion allowance for such property for such year shall be computed without reference to percentage depletion.” The facts admittedly show that the petitioner did not make any statement whatever on its 1934 return in respect of depletion and, by the plain wording of the statute, its “depletion allowance * ⅜ * shall be computed without reference to percentage depletion.” There is nothing in the sentence referred to to indicate that Congress intended that it was to operate unless within the period of limitation the taxpayer should file an amended return in which the contrary method of computing depletion was claimed. By the terms of the statute itself the method of computing depletion was fixed one way or the other when the return was filed, and we know of no power or authority in any taxpayer to make it otherwise by the filing of an amended return. Cf. George Freese's Sons, 18 B. T. A. 416. Congress must have intended to have the matter finally and definitely settled at the tima of filing the return; otherwise, there could have been no purpose in writing into the statute the sentence prescribing the result of failure on the part of a taxpayer to make an affirmative statement as to depletion. We can not ascribe to Congress any such failure of purpose in respect of the provisions of a statute.

It is argued, however, that the petitioner should not be bound by its failure to comply with the requirements of the statute, because it had been advised by counsel that, since it had no cost basis in respect of the properties under consideration, it was not entitled to either unit or percentage depletion. Generally speaking percentage depletion was not new in either the 1932 or 1934 Acts. As to oil and gas wells it had been in effect since the enactment of the Revenue Act of 1926, and its application in respect of properties where there was no cost basis had been recognized from its inception. Furthermore, in the case of coal and other minerals Congress, in enacting the Revenue Act of 1932, allowed a period of two years for taxpayers holding interests in such properties to familiarize themselves with its meaning and application by making an outright allowance of percentage depletion for the two-year period. After that two-year period, however, a taxpayer was required to act affirmatively in a given manner and at a prescribed time if it desired to retain the benefits of percentage depletion. There were no exceptions. In enacting the Revenue Act of 1934, Congress apparently retained its belief that the two-year period of outright allowance of percentage depletion had been sufficient for coal and other mineral operators to become thoroughly familiar with its scope and effect, and in section 114 (b) (4), supra, it left the matter entirely to the taxpayers themselves, making it perfectly clear that the trial period was over and that as to each and every property the method of computing depletion should thereafter be definitely and finally settled at the time of filing the return, either through the affirmative act of the taxpayer or the operation of the statute in the event the taxpayer failed to act. But even under the 1934 Act Congress, by providing for a new election, allowed a taxpayer an additional year, or up to the time of filing its 1934 return, within which it might finally determine and announce its desire for percentage depletion.

In the instant case the failure of the petitioner to act was not because it was unaware of the requirements of the statute, for, according to the facts, it had filed a statement of election with reference to each of its properties with its return for 1933, even though it had no income in that year against which a depletion deduction might be applied. Furthermore at the time of making its return for 1934 it had the matter in mind and the absence of a statement in the return for that year was due to failure on the part of the taxpayer and an attorney employed by it to make a reasonable examination as to the operation and effect of a statute of which both had knowledge. The statute makes no exception for such cases. The petitioner has lost nothing, but by its failure to act has failed to obtain an added deduction, and, as we have pointed out, Congress may prescribe such prerequisites and conditions for the allowance of deductions as it sees fit and a claim therefor must come clearly within the conditions prescribed. New Colonial Ice Co. v. Helvering, supra, and Independent Life Insurance Co. v. Helvering, supra.

The petitioner relies particularly on the opinion of this Board in Ralph Leslie Raymond, 34 B. T. A. 1171, but in that case the statute contained no provision prescribing that the taxpayer’s failure to act at the time of filing his return should operate in the negative. The same is true of other cases relied upon by the petitioner. Cf. William A. Webster Co., 37 B. T. A. 800; Glenn v. Ortell Co., 13 Fed. Supp. 651; Scaife & Sons Co. v. Driscoll, 94 Fed. (2d) 664; Lucas v. Sterling Oil & Gas Co., 62 Fed. (2d) 951; and Automobile Loans, Inc., 36 B. T. A. 809.

Reviewed by the Board.

Decision will be entered under Rule 50.

Offer concurs only in the result.

ArtjNdelIi,

dissenting: For reasons set forth in my dissent in Dorothy Glenn Coal Mining Co., 38 B. T. A. 1154, and for other reasons hereinafter discussed, I am impelled to disagree with the majority holding that denies percentage depletion to this petitioner.

It seems to me that the facts in this case give this petitioner an even stronger claim to an allowance of percentage depletion than is present in the Dorothy Glenn Coal Mining Co. case. This petitioner made an election in its 1933 return; it failed to make an election in 1934 because of the advice of counsel. Thereafter, it became convinced that it should have expressed an election and very promptly sought to do so by tendering an amended return. The original return was filed on March 15, 1935, and the amended return on February 6, 1936. While there is no statutory authority for amended returns, “it is well known that the Treasury Department, both in practice and by regulation * * * has been liberal in authorizing and accepting such returns.” Lucas v. Sterling Oil & Gas Co., 62 Fed. (2d) 951. In that case the taxpayers had exercised an option, granted by regulation, of charging certain expenditures to capital. In February of the following year, after other facts had been ascertained, it filed an amended return claiming the expenditures as operating expenses. The court held that under the facts there present “the initial return may properly be regarded as tentative in its nature, and as not constituting an election. In such case the taxpayer should be permitted to do what he had the right to do in the first instance.” In Morrow, Becher & Ewing, Inc. v. Commissioner, 57 Fed. (2d) 1, the court recognized the lack of statutory authority for amended returns, but held that it was a breach of discretion for the Commissioner to refuse to accept an amended return wherein the taxpayer, greatly to its own benefit, sought to change from the installment basis to the deferred payment basis of reporting income. Cf. F. Harold Johnston, Executor, 33 B. T. A. 551. These cases establish the power in the Commissioner to accept amended returns under circumstances similar to those in the present case, particularly where the taxpayer acts with reasonable promptness to take advantage of a statutory privilege clearly granted. That is the situation here. Before the petitioner’s return was due for the next taxable year it sought to secure the statutory privilege of securing percentage depletion. Under the facts here I think that the petitioner should be permitted to do what it had the right to do in the first instance, namely, choose percentage depletion.

Mellott agrees with this dissent.


author: Kern:

text:
    Joseph B. Wilson, Petitioner, v. Commissioner of Internal Revenue, Respondent. Alice Fynes Wilson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 86618, 86619.
    Promulgated November 18, 1938.

      William L. Latimer, Esq., for the petitioners.

      Carroll Walher, Esq., and Chester C. Guy, Esq., for the respondent.
   OPINION.

Kern:

The first issue is a very narrow one — whether petitioners are to be denied a deduction as a capital loss on the ground that they made a short sale, although they did not intend to make a short sale and were then long on the stock sold and could have made delivery immediately, but, in fact, did not make delivery until several days later.

The record is silent on what stock certificates were actually delivered by the broker on the sales, but the Federal stamp tax which was imposed under section 723 of the Kevenue Act of 1932 and was charged by the broker to petitioners on the transactions, and the well known rule of the New York Stock Exchange requiring delivery within twenty-four hours, raises a strong presumption that deliveries of the stock sold were made immediately and that the certificates actually delivered to the purchaser, therefore, were not those held by petitioners and received by the broker from them some four to eleven days afterwards, but were certificates either held by the broker himself in “street names” or borrowed by him for just such an emergency. Upon this presumption respondent strongly relies to support his contention that the “sale” by the broker was necessarily a short sale, made on petitioners’ behalf. He disregards, however, the question of whether the intent of the petitioners was to make a short sale.

We shall assume in respondent’s favor that the broker did not deliver petitioners’ certificates to the market purchaser.

A “short sale”, as defined by the Supreme Court in Provost v. United States, 269 U. S. 443, 450, “is a contract for the sale of shares which the seller does not own or the certificates for which are not within his control so as to be available for delivery at the time when, under the rules of the Exchange, delivery must be made.” In that case the Supreme Court held that both the “loan” of stock certificates by one broker to another and their “return” after the seller has fulfilled his obligation to the borrowing broker constituted transfers of title to the certificates physically passing, and as such were taxable transfers under the Federal stamp tax then applicable. The above definition of a short sale would not apply to the circumstances here presented, but, as we intimated in Frances Bartow Farr, Executrix, 33 B. T. A. 557, 561, the Supreme Court may not have intended the definition as an “all-inclusive one.” We thereafter held, in Arthur S. Kleeman, 35 B. T. A. 17, that where the taxpayer clearly intended to sell certain shares short and made deliveries from certificates later obtained, the sale was a short sale notwithstanding the fact that the taxpayer was during the transaction “long” on the same stock in another account. We considered the taxpayer’s intent as important in determining whether the sale was “short” or “long.”

In Provost’s case, supra, the Supreme Court set out with great particularity the various sales which successively took place in completion of the transaction of a so-called short sale, “in each of which”, the Court pointed out, “there is either a sale or a complete transfer of all the legal elements of ownership.” They are:

(1) the sale of the stock by the person effecting the short sale, followed by the transfer and delivery of the certificates for the borrowed stock to the purchaser’s broker; (2) the transfer of the shares from the lender to the borrower, who uses them for delivery on the customer’s short sale; (3) the purchase by the borrowing broker of the stock required to repay the loan; and (4) the transfer and delivery by the borrower to the lender of the certificates for the purchased shares to replace the shares borrowed. * * *

Physical transfer of the certificates may accompany all four transfers, but usually accompanies only (1) and (4). We touch upon these particulars merely to emphasize the fact that, as the Supreme Court’s definition of a short sale quoted above may not have been intended to be definitive, so, likewise, its analysis of the several steps of legal import involved in a short sale may not have been intended to comprehend the situation of a sale by a person then “long” on the stock, much less that of a person, as here, both long on the stock and not intending to make a short sale but to make later delivery of certificates held at the time of the sale. Situation (1) above in such circumstances would require further analysis. The Court speaks of the sale “by the person effecting the short sale”, assuming, apparently, that the broker acts for his principal, the short-seller, and effects the sale for him by delivery of the borrowed certificates. In doing so, obviously, the broker, as agent, merely carries out the will of his principal and acts within the scope of his authority in procuring by “loan”, or, more accurately, as the Court has held, by purchase, the necessary certificates for prompt delivery. But what if the seller does not intend to sell short? The broker then would have no implied authority to obtain other certificates and deliver them for the seller. On the contrary, the broker then becomes a principal, acting for himself, if he chooses to sell immediately and to deliver other certificates. Two sales are effected — the sale by the broker to the purchaser on the market and the sale by the “seller” to the broker.

While our prior decisions have not carried the analysis so far in words, it is obvious that this principle has been controlling. In Francis S. Appleby, 31 B. T. A. 533, appeal dismissed April 8, 1935, petitioner owned shares of certain stocks and held them in his safe deposit box. He ordered his broker to sell them on December 30, 1930, which was done, but no delivery was made imtil January 5,1931. We held that it was not a short sale, that “failure to make delivery was a mere inadvertence, for he was at all times in position to make a complete transfer”, and that the loss was sustained in the earlier year. In C. B. Ferree, 32 B. T. A. 725; affd., 84 Fed. (2d) 124, the situation was similar but, if anything, went further. There the petitioner had the certificates in his safe deposit box. On December 19, 1929, he sold part of the certificates through his broker and made delivery on the next day. The remainder he instructed the broker to sell on December 27, identifying them as those in the box. The broker sold on December 31, but no delivery was made. Finally, a month later, on January 31, 1930, and February 3, 1930, petitioner bought certain certificates of the same stock through the broker, the broker delivering only the balance after deducting a number equal to those sold on December 31. We held the sale not a short sale and that the loss was sustained in 1929, when the sale became effective, saying (p. 726):

* * * Indeed, if we are to treat tlie broker as a mere agent, it must be assumed that in behalf of his principal, the petitioner, he made a delivery as required by the rules of the Stock Exchange, and thus completed the sale. It was to his own broker that the petitioner was then obligated to deliver the certificates, and we can not regard his delay as postponing the realization of loss. * * *

In Dee Furey Mott, 35 B. T. A. 195, the same question of the year of loss was involved. The taxpayer directed sale on December 30, 1930, of certain stock which she held in a safe deposit box, and sale was then made by her broker, but there was no delivery by the taxpayer until January 2, 1931. The Commissioner contended that it was a short sale, and that in any event no title passed until delivery of the certificates. We answered these two objections, respectively, as follows:

* * * Here the petitioner owned the shares and they were within her control and available for delivery. She intended to sell the shares that she owned, and it is stipulated that they were sold. Mere failure to deliver certificates is not alone enough to establish a short sale. * * * [P. 197.]
* * * The petitioner intended to sell in 1930 specific shares then available for delivery and the broker intended to sell those shares. And, as said in the JPerree case, the Sales Act allows delay in delivery. [P. 201.]

The respondent relies upon our decision in Frances Bartow Farr, sufra. However, in that case it was stipulated that the sale of stock was a “short” sale. It is, therefore, apparent that the question presented by this case was not considered or decided by Farr’s case.

Since our decision in that case, the Third Circuit Court has affirmed our earlier decision in Feme’s case, sufra, and the Second Circuit Court, in Ruml v. Commissioner, 83 Fed. (2d) 257, has reversed our decision in that case, 31 B. T. A. 534. In RumVs case the taxpayer in December 1928 owned certain stock which was deposited with a bank as collateral for a loan. As the Circuit Court said:

* * * He desired to sell that stock at the then market, and instructed his broker to do so, advising him how the shares were held as collateral, and telling him that there might be some delay in making delivery. His broker informed him that the stock would be sold, and that petitioner might make delivery to the broker at his convenience when he paid off-the loan or substituted other collateral to release the shares.

The broker sold the same number of shares of the same stock as petitioner held in December, and the taxpayer delivered part of his certificates in the same month, but the majority not until February 1929.

On January 1, 1929, the petitioner received a statement from the broker indicating that he was being carried short 2,500 shares of the stock, and upon inquiring what that meant, was told, “That is simply the way we carry it until you deliver it.” The petitioner neither intended to make what is known as a short sale nor instructed his broker to do so, though he did direct his broker to sell the shares, leaving the broker free to make the sale as he might.

The question was whether a short sale had been made, and, if so, whether the loss was realized in 1928 or 1929. The court continued:

It is clear that the petitioner intended to sell the specific shares he owned and only those. If the broker made a short sale to his customer, it was for his own account, not for the petitioner who had authorized no short sale for his account. It seems to us clear that the transaction between the petitioner and the broker was a sale by the petitioner to the broker of the specific shares pledged to the bank, under an understanding with the broker that certificates therefor were to be later delivered. The result was that the petitioner became bound in December, 1928, to deliver to the broker the shares sold to him. Actual delivery was not made that month, and so the transaction in that respect was not completed, but we are primarily concerned with whether or not the loss evidenced by the sale was realized within the meaning of that term as applied to income taxation * * *. But when the evidence of realization is a sale of personal property, it is not always necessary to deliver the property before there may be a deduction of a loss. It is enough that the obligation to deliver is so fixed that the loss is reasonably certain in fact and ascertainable in amount. * * *

Here we are not concerned with the precise time when title passed from petitioner, as was so in BumVs case, supra, and others discussed, but only with the point whether title to the shares held by petitioner passed so as to create a loss on capital assets. Under both the common law and the Uniform Sales Act the seller’s intent will govern in cases of such sales of stock as in the instant case, cf. Arthur E. Otto, 37 B. T. A. 479; so that delivery was not necessary to effect the sale, but delivery was, in fact, made by the petitioner here as soon as he could conveniently do so. Petitioner here had at all times complete dominion over the certificates in question, and his arrangement with his broker was very similar to that involved in BumVs case.

We think that there was here a sale by petitioner of certificates which he had held for more than two years; that this sale was not a short sale, and was not, therefore, within the terms of section 23 (s) ; and that a capital loss thereby resulted which should have been allowed.

We pass now to the question of depreciation. Petitioner Alice Wilson claims that 4 percent and not 2½ percent should have been allowed in respect of a stuccoed frame dwelling. Since the evidence is insufficient to establish the probable life of the house, we must hold on this point for the respondent.

This opinion is in substitution for the division opinion in the same cases, 38 B. T. A. 463, promulgated September 6, 1938, and ordered reviewed by the Board on September 26, 1938.

Beviewed by the Board.

Decision will be entered under Buie 60.