author: MaRqtjette:

text:
    Dr. Pepper Bottling Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43169.
    Promulgated April 29, 1932.

      M. P. Wormhoudt, Esq., and H. C. Anderson, O. P. A., for the petitioner.

      G. A. Ray, Esq., for the respondent.
   OPINION.

MaRqtjette:

There is no dispute concerning the affiliation of the Dr. Pepper Company, the parent corporation, with petitioner and the Circle “A” Ginger Ale Company, as subsidiaries, throughout the year 1926. The only question is whether the filing of a separate income-tax return by the parent company after the affiliation took place precluded the petitioner from the privileges of a consolidated return without permission of the Commissioner of Internal Revenue.

When the Dr. Pepper Company filed its separate return in 1926 its accounting basis was the fiscal year ending June 30, but petitioner was upon the calendar year accounting basis. After filing its separate return the Dr. Pepper Company, in November, 1926, received permission to change from the fiscal year to the calendar year basis for accounting. Neither the parent company nor either of the affiliates requested or received permission from respondent to file consolidated returns. However, in March, 1927, the three corporations filed a consolidated return which covered the entire year 1926 for the subsidiaries, and the last six months of that year for the parent company. It is contended that that return should be considered as the first one exercising an election by petitioner. The respondent’s view is that the filing of a separate return by the parent company during the first year of the affiliation constituted an election binding its subsidiaries to file separate returns unless permission to change is granted.

The question is controlled by section 240 (a) of the Revenue Act of 1926, reading as follows:

Corporations which are affiliated within the meaning of this section may, for any taxable year, make separate returns or, under the regulations prescribed by the Commissioner, with the approval of the Secretary, make a consolidated return of net income for the purpose of this title, in which case the taxes thereunder shall be computed and determined upon the basis of such return. If return is made on either of such bases, all returns thereafter made shall be upon the same basis unless permission to change the basis is granted by the Commissioner.

There is no doubt that under the above statute the petitioner and affiliates had the right to choose freely whether they would file separate or consolidated returns. It is also clear that when a return is filed upon either basis after affiliation has taken place, the right to elect has been completely exercised and exhausted and the choice so made can not be abandoned without permission. Such has been our holding repeatedly. Harbour-Longmire Co., 18 B. T. A. 33; George Freese's Sons, 18 B. T. A. 416; Ohio Mining Co., 20 B. T. A. 1062; Patent Royalties Corporation, 25 B. T. A. 1032. The same view is upheld in Lucas v. St. Louis National Baseball Club, 42 Fed. (2d) 984.

The first opportunity to exercise a choice under the statute above cited came with the close of the fiscal year, on June 30, 1926, of the Dr. Pepper Company. Arrangements for synchronizing the accounting periods of all the companies and for filing consolidated returns might readily have been made, but nothing of the sort was done until after the parent company had filed its separate return in September, 1926. The filing of that return, in our opinion, operated as the exercise of the right of choice between two bases and precluded the use thereafter of consolidated returns except by permission. Such permission was never sought by the corporations involved. And the situation is not cured by the fact that the corporations desired and intended to report upon a consolidated basis. As was said in Patent Royalties Corporation, supra:

We can not determine tax liabilities on the basis of desires and intentions; we must proceed upon the basis of what was actually done, and a given taxpayer must be held to the consequences of its own acts.

Petitioner urges that filing the separate return by the parent company can not be considered an election, under the statute, by the entire affiliated group. It is not necessary that all affiliates unite in choosing the method of reporting income in order to make the choice binding on all. If one member of the group elects to file a separate return, as was done here, the others are thereby precluded from filing consolidated returns. The theory of affiliation of corporations is based upon the idea of a single business unit, and that single unit idea in turn requires that all affiliates must report their incomes and deductions in like manner, that is, either separately or jointly, but not separately and jointly. And the binding force of the choice is stronger, if possible, when the choice is made by the parent concern. Cf. Duke Power Co. v. Commissioner, 44 Fed. (2d) 543; B. B. Bathing Park, Inc., 17 B. T. A. 748; Apartment Corporation, 17 B. T. A. 876; Patent Royalties Corporation, supra.

Petitioner further contends that the statute provides for a genuine election between consolidated and separate returns; that in order to have a valid election the act must be done with full knowledge of the circumstances, and that what the taxpayer really intended to do is the controlling factor. In support of that argument reliance is placed upon Dexter Sulphite Pulp & Paper Co., 23 B. T. A. 227. In that case three corporations were involved, the ownership of two of them being involved in litigation during the taxable years. During the litigation two of the companies filed no returns, while the third filed separate returns, reporting only such income as was not involved in the litigation, and advising the Commissioner of the peculiar conditions existing. Under those circumstances we held that the filing of a separate return by one company did not constitute the exercise of the option provided by the statute. We based that decision upon the ground that, until the litigation was terminated, it was impossible to determine the fact of affiliation, and hence was impossible to determine whether or not the companies were entitled to make any choice under the statute.

We think it quite clear that that decision is not applicable here. It is definitely distinguished from the present proceeding upon the facts. There, it was impossible to determine whether the right of choice existed; here, the right to choose was known to exist, but the taxpayers followed a procedure which did not produce the result they desired. The right to intelligent freedom of choice is one thing; the method used to express that choice is another, and the two must not be confused. And while a taxpayer’s intention does have a bearing upon the matter of choice, yet, if he definitely and without explanation follows one method of filing his return, he can not be heard to say that he has made no choice because the result produced was not what he wanted. Cf. Cavanaugh Brothers Garage, 25 B. T. A. 935, and cases above cited.

We find no error in respondent’s determination that petitioner was not entitled to the benefits of a consolidated return for the year 1926. The income tax for that year should be recomputed, however, and petitioner’s taxable income reduced by the amount of $7,271, pursuant to stipulation of parties.

Decision will he entered under Rule 50.


source: Caselaw Access Project

author: MaRQUette:

license: Public Domain

text:
    Stockholms Enskilda Bank, Petitioner, v. Commissioner of Internal Revenue, Respondent
    Docket No. 55755.
    Promulgated April 29, 1932.

      Truman Henson, Esq., for the petitioner.

      O. J. Tall, Esq., for the respondent.
   OPINION.

MaRQUette:

The petitioner is a foreign corporation, organized and existing under and by virtue of the laws of the Kingdom of Sweden, with its principal office in said country, and has no office or place of business in the United States. During the year 1927 petitioner received from the United States Government the sum of $8,688.91 as interest on a refund of Federal income taxes theretofore overpaid for a prior year. The Commissioner increased petitioner’s income for the year 1927 by including therein said sum of $8,683.91; and on account of such increase determined a deficiency in the sum of $1,173.32, from which determination the petitioner brings this appeal.

The only question for decision is whether interest paid by the United States to a nonresident foreign corporation on a refund of Federal income taxes in 1927 is a part of gross income from sources within the United States as defined in section 217 (a) (1) of the Revenue Act of 1926.

Section 233 of the Revenue Act of 1926 provides as follows:

(b) In tbe case of a foreign corporation, gross income means only gross income from sources within the United States, determined (except in the case of insurance companies subject to the tax imposed by sections 243 or 246) in the manner provided in section 217.

Section 217 (a) of the Revenue Act of 1926 provides in part as follows :

(a) In the case of a nonresident alien individual * * * the following items of gross income shall be treated as income from sources within the United States:
(1) Interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, not including (A) interest on deposits with persons carrying on the banking business paid to persons not engaged in business within the United States and not having an office or place of business therein, * * *

Subdivision (c) of the said section 217 provides in part as follows:

(c) Tie following items of gross income shall be treated as income from sonrces without the United States:
(1) Interest other than that derived from sources within the United States as provided in paragraph (1) of subdivision (a).

Section 284 (a) of the Revenue Act of 1926 provides:

Where there has been an overpayment of any income, war-profits, or excess-profits tax * * *, the amount of such overpayment shall * * * be credited against any income, war-profits, or excess-profits tax or installment thereof then due from the taxpayer, and any balance of such excess shall be refunded immediately to the taxpayer.

Section 1116 of the Revenue Act of 1926 provides in part:

(a) Upon the allowance of a credit or refund of any internal-revenue tax erroneously * * * collected * * * interest shall be allowed and paid on the amount of such credit or refund at the rate of 6 per centum per annum from the date such tax * * * was paid to the date of the allowance of the refund * * *.

The petitioner rests its case on two propositions, (1) that interest paid by the United States Government upon a refund of Federal income tases is not “ interest on bonds, notes or other interest-bearing obligations” within the purview of section 217 (a) (1) of the act, and invokes the rule of ejusdem generis to support its contention; and (2) that in any event, the interest is not upon the obligations “ of residents, corporate or otherwise,” for the reason that the United States is not a “ resident ” within the intent and meaning of the statute.

It is at once apparent that all interest, even though concededly from sources within the United States, is not to be treated as interest from sources within the United States, for subdivision (c) (1) of section 217 provides that interest other than that derived from sources within the United States as provided in paragraph (1) of subdivision (a) shall be treated as income from sources without the United States. Therefore to constitute gross income from sources within the United States the interest herein must be brought within the provisions of said paragraph (1) of subdivision (a).

We think the petitioner’s first contention can not be sustained. The rule of ejusdem generis is but an aid in the construction of a statute, and the rule must give way where the statute manifests a contrary purpose. Reading this subdivision as a whole, we think it is apparent that the Congress did not intend to restrict the inclusion to interest on obligations of a like character as bonds or notes, for it speaks of interest on deposits of a particular character which are not included, manifesting an intention that interest on other deposits should be included. The words “ other interest-bearing obligations ” should not, therefore, be restricted to obligations of a like character as bond or notes.

The petitioner’s second contention seems to contain more of merit. The statute provides for inclusion of interest on “ interest-bearing obligations of residents, corporate or otherwise,” and petitioner argues that even if the interest received is interest upon an interest-bearing obligation within the meaning of the statute, nevertheless, the obligation is not that of a resident, corporate or otherwise. In other words, its proposition is that the United States is not a “ resident,” and that the term can not be applied to a sovereign or government.

In State v. Inhabitants of the City of Trenton, 40 N. J. L. 89, the Supreme Court of New Jersey held that indebtedness to the state could not be deducted from the taxable value of property under a statute permitting the deduction of indebtedness to residents. The court said, in part:

It is only by the greatest latitude of construction that we can say that the state resides within the state. The word “ residing ” refers to individual abode, though it is sometimes used figuratively. It will not apply to the state in its representative and governmental relation to its citizens. The people, as individuals, reside in the state, but the political body called the state cannot be said, in the proper use of language, to reside anywhere.

In Consorzio Veneziano di Armamento e Navigazione, 21 B. T. A. 984, 988, this Board had occasion to discuss the question of whether interest .paid on an award of just compensation to a foreign corporation came within the statute, and it was there said:

In our opinion, even if the amount constituted interest, it was not interest on bonds, notes or other interest-bearing obligations of residents, corporate or otherwise. It would be a strained construction to say in the first place that the United States was a resident, corporate or otherwise, of the United States. Wherever in the statute obligations of the United States are referred to they are referred to specifically as “ obligations of the United States.” The expression “ resident ” in its ordinary acceptance does not refer to the Government itself and the language in the statute “ resident, corporate, or otherwise,” we think should be given its ordinary and generally accepted meaning.

However, if this be a doubtful construction of the statute, we think the rule should be applied that the taxing statutes must be strictly construed, and if there be doubt as to the proper construction, that doubt must be resolved in favor of the taxpayer. United States v. Merriam, 263 U. S. 179; Reinicke v. Northern Trust Co., 278 U. S. 339; Burnet v. Niagara Falls Brewing Co., 282 U. S. 648.

In United States v. Merriam, supra, the Supreme Court said:

On behalf of the government it is urged that taxation is a practical matter and concerns itself with the substance of the thing upon which the tax is imposed rather than with legal forms or expressions. But in statutes levying taxes the literal meaning of the words employed is most important for such statutes are not to be extended by implication beyond the clear import of the language used. If the words are doubtful, the doubt must be resolved against the government and in favor of the taxpayer.

We are therefore of opinion that the interest paid to the petitioner herein on a refund of Federal income taxes should not be treated as income from sources within the United States, within the purview of section 217 (a) (1) of the Revenue Act of 1926.

Decision of no deficiency will he entered.


author: Trammell. :

text:
    James W. Pennock, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 57266.
    Promulgated April 29, 1932.

      Robert Ash, Esq., for the petitioner.

      Arthur Camduff, Esq., for the respondent.
   OPINION.

Trammell. :

The only error assigned in the petition is as follows: “ The Commissioner erred in determining that the loss of $56,287.00 incurred in 1927 on account of the bankruptcy of the Andrews Sporting Goods Company is not a statutory net loss which is deductible in computing 1928 income.” This allegation of error was denied by the respondent in his answer.

In his brief the petitioner, apparently relying on the reason given by the respondent for disallowing the deduction, contends that the only question in the case is whether the loss here involved was attributable to the operation of a trade or business regularly carried on by him. He further contends that such loss was clearly attributable to the operation of a trade or business regularly carried on by him. The respondent in his brief contends that the evidence indicates that the stock became worthless in 1926; that the petitioner has not established that he had a net loss in 1927 within the meaning of the statutes; and that, conceding for the sake of argument that the stock became worthless, in 1927 and that he had a net loss in that year within the meaning of the statute due to the stock becoming worthless, he has not established a statutory net loss for 1928, because his business was that of an employee of a corporation and his loss, if any, was the loss of an investment.

We think the petitioner has taken a too limited view of the burden assumed by him in seeking to have the respondent’s determination set aside. It is the respondent’s denial of the deduction taken by the petitioner that gave rise to a cause of action, and not the respondent’s reason for the disallowance. The respondent’s reason for the disal-lowance does not in any wise lessen the burden assumed by the petitioner when he comes before this Board to have the determination reversed. In Edgar M. Carnick, 21 B. T. A. 12, we said:

If the Commissioner finds one fact or reason which he believes supports his adverse determination, he is not required to express his views on any or all other matters relating to the item, and his failure to deal with them carries no implication as to their treatment. It is not the Commissioner’s method of determination or computation which is the substance of the proceeding, for the deficiency may be correct despite a weakness in arriving at it or explaining it. Woodside Cotton Mills Co., 13 B. T. A. 266; Jacob F. Brown et al., 18 B. T. A. 859. “ It is immaterial whether the Commissioner proceeded upon the wrong theory in determining the deficiencies. In any event the burden was on petitioner to show that the assessment was wrong.” Altschul Tobacco Co. v. Commissioner, 42 Fed. (2d) 609.

From the pleadings we think that in order to prevail it is incumbent on the petitioner not only to establish that the loss claimed was a loss sustained in the operation of a trade or business regularly carried on by him, but also that the amount contended for is the proper amount, if any, to be allowed.

Section 117 of the Bevenue Act of 1928 provides for the deduction in that year of a net loss sustained in 1926 and 1927, and coming within the meaning of that term as used in the Bevenue Act of 1926, to the same extent and in the same manner as a net loss sustained under the Bevenue Act of 1928. Sections 117 of the Bevenue Act of 1928 and 206 of the Bevenue Act of 1926 specify the manner in which a net loss must be computed and it is obvious that the amount may not be the same as the amount of loss shown on a correct return. John H. Carpenter, 23 B. T. A. 1118; Julius Mendelson, 21 B. T. A. 958. With the exception of the fact that the petitioner had an investment of $56,287 in the stock of the Andrews Sporting Goods Company, which was adjudicated a bankrupt on July 3, 1926, and that the petitioner never received anything from his investment upon the liquidation of the assets of the company, we are wholly without evidence upon which to compute any possible statutory net loss. These facts are not sufficient to show that the loss was sustained in 1927 instead of in 1926 as contended by the respondent, and, more especially, do not show a statutory net loss in 1927. We know nothing as to items of income for any of the years 1926, 1927, or 1928, or as to the deductions applicable thereto. Nor are we informed as to what extent the amount of the loss sought as a deduction in 1928, if sustained in 1926, was absorbed or was properly applicable to 1927 income. We are therefore unable to determine any statutory net loss to be deducted in 1928.

In view of the foregoing it is unnecessary for us to discuss the question argued by petitioner as to whether the net loss claimed was sustained in a trade or business regularly carried on.

Judgment will ~be entered for the respondent.


author: Trammell:

text:
    Jefferson Standard Life Insurance Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43199.
    Promulgated April 29, 1932.

      E. S. Parker, Jr., Esg., for the petitioner.

      John D. Foley, Esg., and James G. Maddox, Esg., for the respondent.
   OPINION.

Trammell:

In its return the petitioner deducted the amount of $137,000 on account of injury or damages done to the McWilliams Plantation by the flood waters. It now contends that the loss sustained by it as a result of the flood was $114,250. The items and amounts upon which the petitioner bases its contention are as follows:

Loss from destruction of levee-$37, 500
Loss from destruction of buildings- 35, 000
Loss from damage to land — 650 acres at $65 per acre- 42,250
114,750

At this point it is to be noted that the total of the items on which the petitioner bases its contention is $114,750 and not $114,250, the amount used in various places throughout the petitioner’s brief as the amount of the deduction now contended for. The discrepancy between the amounts apparently is due to an error in addition on the part of the petitioner.

With respect to the amount of $37,500 claimed to represent a loss from the destruction of a levee, the facts show that there was a levee on the McWilliams Plantation when acquired by the petitioner and that a portion of the levee was maintained by the Yazoo & Mississippi Levee District and the other portion was maintained by the Ward Lake Levee District. The evidence fails to show whether the petitioner was the owner of the levee or whether it was the property of the levee districts. If the levee was the property of the levee districts, clearly the petitioner could not claim as a deduction a loss resulting from its destruction. Being unable to determine from the record who the owner of the levee was, the petitioner’s contention with respect to this item must be denied.

There remains for determination the question of whether the petitioner is entitled to a deduction for loss from the destruction of the buildings and the damage to the 650 acres of land. The petitioner contends that, having established that the buildings destroyed had a value of $35,000 at the time destroyed and that the 650 acres of land had a value of $65 per acre less after being flooded than before, it is entitled to deduct as a loss the amounts of $35,000 and $42,500. The respondent contends that since the petitioner is a life insurance company taxable under the provisions of sections 242 to 245, inclusive, of the Revenue Act of 1926, and since those sections of the act contain no provision with respect to the allowance of a loss sustained on property owned by such a company, the petitioner is not entitled to the loss here involved. The respondent also relies on our decision in Midland National Life Insurance Co., 18 B. T. A. 1240.

In Midland National Life Insurance Co., supra, the petitioner, a life insurance company, during 1924 sustained losses resulting from the failure and insolvency of several banks in which it had cash deposits represented by certificates of deposit. We there held that in computing its net income the petitioner was not entitled to deduct such losses since the provisions of sections 242 to 245, inclusive, of the Revenue Act of 1924, under which the petitioner’s income-tax liability was to be computed, did not include any provision for the deduction of bad debts or losses.

Sections 242 to 245, inclusive, of the Revenue Act of 1926, which are applicable to the taxable year here involved, are substantially the same as those sections of the Revenue Act of 1924. Those sections, like the same sections in the 1924 Act, do not contain any provision for the deduction of losses. This being true, we think our decision in Midland National Life Insurance Co., supra, is applicable and controlling here. The petitioner’s contention is therefore denied.

In its brief the petitioner concedes that its contention for the allowance of the • loss here involved is contrary to our decision in Midland National Life Insurance Co., supra, but urges that to disallow the loss would result in levying a tax on an income which does not exist and that such tax is unconstitutional. We are not convinced, however, that Congress did not have the power in levying taxes to make the classification which it did and to treat insurance companies differently from other corporations. See Barclay & Co. v. Edwards, 267 U. S. 442. Certain income was omitted from the tax as well as certain deductions allowable to other corporations in computing net income.

The petitioner further contends that the amount determined by the respondent as rentals to be reported by it from the home'office building should be reduced by $11,596.98, and in support of this contention relies on our decision in Independence Life Insurance Co. of America, 17 B. T. A. 757.

During the taxable year the petitioner received rents amounting to $226,262.73 from tenants who occupied a portion of the home office building. For the purpose of allowing as deductions depreciation and other expenses incurred in operating the building the respondent, pursuant to the provisions of section 245 (b) of the Revenue Act of 1926, determined that the amount to be included in the petitioner’s income as rentals from the home office building was $237,859.71, or $11,596.98 in excess of the amount of rents actually received by the petitioner. Such excess amount was the rental value of the space occupied by the petitioner as computed by the respondent under the provisions of section 245 (b).

Among the deductions provided in section 245(a) of the Revenue Act of 1926 are the following:

(6) Taxes and other expenses paid during the taxable year exclusively upon or with respect to the real estate owned by the company, not including taxes assessed against local benefits of a kind tending to increase the value of the property assessed, and not including any amount paid out for new buildings, or for permanent improvements or betterments made to increase the value of any property. * * *
(7) A reasonable allowance for the exhaustion, wear and tear of property, including a reasonable allowance for obsolescence.

Paragraph (b) of section 245 provides:

No deduction shall be made under paragraphs (6) and (7) of subdivision (a) on account of any real estate owned and occupied in whole or in part by a life insurance company unless there is included in the return of gross income the rental value of the space so occupied. Such rental value shall be not less than a sum which in addition to any rents received from other tenants shall provide a net income (after deducting taxes, depreciation, and all other expenses) at the rate of 4 per centum per annum of the book value at the end of the taxable year of the real estate so owned or occupied.

In Independence Life Insurance Co. of America, supra, we considered the validity of section 245 (b) of the Revenue Acts of 1921 and 1924, which is identical with section 245 (b) of the 1926 Act quoted above. In that case we held invalid the requirement that no deduction shall be made of taxes, expenses and depreciation in respect of real estate occupied by the owner unless the rental value of such real estate be included in gross income in computing taxable net income. For the same reasons set forth in our opinion in that case, we think the identical requirement contained in section 245 (b) of the Revenue Act of 1926 is also invalid. The contention of the petitioner is accordingly sustained. See Reserve Loan Life Insurance Co., 18 B. T. A. 359; petition for review dismissed by Circuit Court of Appeals, Seventh Circuit, January 12, 1932.

The pleadings raise certain issues with respect to the respondent’s determination of the book value of the petitioner’s home office building for the purpose of computing under the provisions of section 245 (b) the rental value to be included in gross income of the space occupied by the petitioner. In view of our holding above with respect to the requirements of this section, these issues become moot questions and it is not necessary for us to decide them.

Judgment will he entered under Rule 50.


author: TRAmmell:

text:
    Selwyn Eddy Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 21612.
    Promulgated April 29, 1932.

      O. R. Folsom-Jones, Esg., and F. E. Yoimgman, Esg., for the petitioner.

      F. R, Shearer, Esg., for the respondent.
   OPINION.

TRAmmell:

The parties are not in accord as to the relationship existing between Charles A. Eddy, Charles F. Eddy, the Eddy Investment Company, and the petitioner from the organization of the petitioner in February, 1914, down to 1920. The petitioner, apparently relying upon the agreement of February 4, 1899, between the members of the then existing partnership and set out in our findings of fact, takes the view that the partnership was continued on down into 1920. The respondent, relying on certain decisions of the Supreme Court of Michigan, takes the view that the partnership was dissolved by the death of John F. Eddy, which occurred about 1900; that thereafter the surviving partners were trustees for the purpose of winding up the affairs of the partnership; that the Eddy Investment Company and the petitioner never became members of the partnership and that they merely acquired equitable interests in the properties of the former partnership held by the surviving partners as trustees. In view of our disposition of the issues presented by this proceeding we do not deem it necessary to decide which, if either, of the above views is correct. Irrespective of the legal relationship existing between the parties, properties were held and business was conducted under the name of Eddy Brothers & Company. Our decision would be the same regardless of whether Eddy Brothers & Company were a partnership or some other form of organization.

The respondent has included in the petitioner’s taxable income for 1920 the amount of $51,033.85 received by the petitioner in that year in connection with the final settlement of the controversy as to the transfer of the stock of the Dominion Sugar Company, Ltd., as set out in our findings of fact. The respondent’s position is that the petitioner’s capital investment in its one-fourth equitable interest in this stock, together with its investment in the other properties held by Eddy Brothers & Company, was returned to it by the payments in cash and stock which it received from Charles A. Eddy and Charles F. Eddy or their representatives as surviving partners; that the amount received by the petitioner in settlement of the controversy relating to the stock was income to the petitioner for the year in which petitioner’s claim was finally adjusted; and that the amount which the petitioner was to receive was not finally ascertained until 1920. The petitioner contends that the amount of $57,033.35 constituted a return of capital, but that if it was taxable income it accrued prior to 1920 and therefore is not to be included in income for 1920.

Where a taxpayer keeps its books on the accrual basis its income is to be reported in the year in which it accrues, irrespective of the fact that it is received in a subsequent year. Mianus Motor Works, Inc., 5 B. T. A. 435. The parties are in agreement that the petitioner kept its books on the accrual basis. Consequently, if the amount in controversy accrued prior to 1920 it may not be included in income for that year. The evidence shows that in 1916 the petitioner’s right to receive further payment on account of the stock was admitted. It also shows that some time prior to 1920 a settlement of the controversy was reached between the interested parties, wherein it was agreed that the petitioner was to receive an additional payment based on the value of the stock of the Dominion Sugar Company, Ltd., on January 1, 1915. This agreement not only definitely fixed the petitioner’s right to receive an additional payment, but also fixed the basis for computing the amount or extent of such payment. The petitioner’s right to receive such payment and the basis upon which it was to be made were no longer an open question. It was thenceforth entitled to receive the amount disclosed by a computation based on the agreement.

The basic idea underlying the accrual system of accounting is that the books shall immediately reflect obligations and expenses definitely incurred and income definitely earned. It is not necessary that the amount of such items be exactly ascertained in order to accrue them, if a mere calculation or computation based on ascertained factors is all that remains to be done. H. H. Brown Co., 8 B. T. A. 112. In the instant case we are not informed as to when the computation of the amount received by the petitioner was made. However, that is not important since we know that the right to receive such amount became fixed and determined prior to 1920. In our opinion the petitioner’s right to receive the payment here involved accrued prior to 1920. Consequently, the amount accrued prior to that year, even though it may not have been exactly ascertained until during 1920. Since the amount accrued prior to 1920, it becomes unnecessary to determine whether it constitutes income as contended for by the respondent or was a return of capital as contended by the petitioner. In any event, it would not be taxable in 1920.

In an amended answer filed at the hearing the respondent alleges that the petitioner realized a profit on the liquidation of its interest in Eddy Brothers & Company in 1920, and seeks to have the amount of the deficiency increased by including in the petitioner’s income the amount so realized. The burden with respect to the issue thus raised is upon the respondent.

In his brief the respondent contends that the amount of income realized by the petitioner on the liquidation of its interest in Eddy Brothers & Company was $101,765.85, which he computes as follows:

Fair market value of petitioner’s interest at the time acquired on February 4, 1914_$165, 954. 83
Cash or its equivalent received by the petitioner between 1914 and 1920 and representing a return of petitioner’s investment in its interest__ 87, 344. 59
Unreturned basis on January 1, 1920_ 78, 610.24
Received in 1920:
Cash_ $3, 000. 00
Stock of Eddy Brothers, Ltd., of a fair market value of_ 177, 376. 09
- 180,376.09
Profit realized in 1920_ 101, 765. 85

To sustain his contention the respondent relies very largely upon entries contained in the petitioner’s books of account.

To determine whether the petitioner realized any profit on the liquidation of its interest in Eddy Brothers & Company it is necessary for us to know the cost to the petitioner of such interest at the time of acquisition on February 4, 1914, as well as the amount of money and the fair market value at the time of receipt of property received by the petitioner in liquidation. The record shows that upon organization on February 4, 1914, the petitioner took over all the assets and assumed all the liabilities of the estate of Selwyn Eddy and issued therefor its authorized capital stock of $100,000 par value. With the exception of the estate’s interest in Eddy Brothers & Company, which the evidence indicates was its principal asset, and its liability of $5,830.15 to that company, we are not informed as to the assets taken over by the petitioner or their value, nor are we informed as to tbe liabilities or the amount thereof. No evidence was offered as to the market value of the stock issued in exchange for the net assets taken over, and, even if we knew such value, we are still uninformed as to the amount of stock issued for the interest in Eddy Brothers & Company. Assuming that the stock had a value equal to the fair market value of the net assets received therefor and that the cost to the petitioners of its interest in the association was the fair market value thereof at the time of its receipt, we will examine the respondent’s computation of profit in the light of the evidence. The evidence shows that when it acquired its interest in Eddy Brothers & Company on February 4, 1914, the petitioner set such interest up on its books at a value of $100,000. The secretary-treasurer of the petitioner, under whose supervision the books were kept, testified that in placing the interest on the books at that amount no thought was given to values, but there was just “ the question of putting these things on the books, any item that came into my head. That is the way the books were started; it was not done as a matter of valuing those upon the books.”

The evidence further shows that under date of December 31, 1918, the petitioner made an adjusting entry on its books with respect to the entry by which it had placed on its books its interest in Eddy Brothers & Company at $100,000 on February 4, 1914. In this adjusting entry the petitioner wrote up by $65,954.83 the value at which its interest had been entered on the books on February 4,1914. The explanation as given in the entry for this write-up in value was that it was to set up the fair value of petitioner’s interest at the date acquired. The amount of $65,954.83 was explained as follows:

Net worth — 12-31-11_'_$663, 819.33
%- 165, 954. 83
As set up- 100, 000. 00
Difference- 65, 964. 83

This computation indicates that the net worth of Eddy Brothers & Company at December 31, 1911, was used as a basis for arriving at the amount of $65,954.83, even though the petitioner had not then acquired its interest in that company and did not acquire it until more than two years afterwards.

With respect to the adjusting entry, the petitioner’s secretary-treasurer testified that the amount of $65,954.83 was not arrived at as the result of any appraisal, nor was it the result of any investigation on his part, but was based on a statement sent to him. Apparently this statement was sent by those in active charge of the business of Eddy Brothers & Company.

Relying on the foregoing book entries and on the statement contained in the petitioner’s capital-stock-tax return for the fiscal year ended June 80, 1916, that the fair value of the total capital stock for that fiscal year was $162,500, the respondent contends that the cost to the petitioner of its interest in Eddy Brothers & Company at the time of acquisition on February 4, 1914, was not in excess of $165,954.83.

From what has been said above, we think it is clear that the amount of $100,000 at which the interest was entered on the petitioner’s books on February 4, 1914, can not be accepted as representing its fair market value at the time acquired. Nor is the fact that this amount was increased on the books by $65,954.83 at December 31, 1918, of any weight when it is considered that the entry was not based on any appraisal nor upon any investigation made by the petitioner, but apparently upon the financial condition of Eddy Brothers & Company at a date more than two years prior to the date the petitioner acquired its interest therein. There is nothing in the record to indicate that the financial condition of Eddy Brothers & Company was the same on both dates. The' statement contained in the petitioner’s capital-stock-tax return for the fiscal year ended June 30,1916, as to the fair value of its stock during that fiscal year does not throw any more light on what the fair market value of the interest was on February 4, 1914, than the other evidence relied on by the respondent. We recognize the force of the respondent’s argument that book entries in and of themselves might be considered to be admissions against interest and, as such, to be some evidence, but the testimony relating to these entries is in our opinion sufficient to deprive that evidence of any evidentiary force. The entries must be considered in the light of the explanations with respect thereto. Considering all the evidence on the point, we are unable to determine the fair market value of the petitioner’s interest in Eddy Brothers & Company at the time of acquisition. Being unable to determine this essential fact, we can not determine that the petitioner realized a profit of $101,765.85 or any other amount on the final liquidation of its interest in the association in 1920. -The respondent’s contention that the petitioner realized a profit in 1920 on the final liquidation of its interest must therefore be denied.

The petitioner amended its petition to allege that it sustained a loss on the liquidation of its interest in Eddy Brothers & Company. Apparently the issue raised by this allegation has been abandoned by the petitioner, since it offered no evidence in support thereof and makes no contention with respect thereto in its brief. But whatever may be the petitioner’s position with respect to the issue, it must be decided adversely to the petitioner for the reason that we are unable to determine what the fair market value of the petitioner’s interest was at the time of acquisition.

The remaining issue relates to the running of the period of limitations against assessment and collection of the increase in the deficiency as proposed by the respondent at the hearing. Since the proposed increase in the deficiency was based upon the respondent’s contention that the petitioner realized a profit in 1920 on the final liquidation of its interest in Eddy Brothers & Company, and as this contention has been decided adversely to the respondent, the issue relating to limitations becomes a moot question which we are not called upon to decide.

Judgment will be entered under Buie 50.


author: Smith :

text:
    Clifford Hemphill, Petitioner, v. Commissioner of Internal Revenue, Respondent. Jansen Noyes, Petitioner, v. Commissioner of Internal Revenue, Respondent. Charles E. Gardner, Petitioner, v. Commissioner of Internal Revenue, Respondent. Harold C. Strong, Petitioner, v. Commissioner of Internal Revenue, Respondent. Stanton Griffis, Petitioner, v. Commissioner of Internal Revenue, Respondent. Walter S. Marvin, Petitioner, v. Commissioner of Internal Revenue, Respondent. Elizabeth E. Cook, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 38573-38579.
    Promulgated April 29, 1932.

      Thomas G. Haight, Esq., J. Marvin Haynes, Esq., James O. Wyrm, Esq., and G. J. McGuire, Esq., for the petitioners.

      Nathan Gammon, Esq., and Vernon F. Weehley, Esq., for the respondent.
   OPINION.

Smith :

The deficiencies are based- upon the respondent’s determination that the petitioners received certain shares of the common stock of the American Chain Company as a bonus or compensation for services rendered by the partnership in underwriting the securities of the American Chain Company. By amended answers, the respondent makes affirmative allegations to the effect that petitioners received other securities in like manner. The evidence adduced does not support the respondent’s position on this point, and we have found as a fact that all of these securities were purchased by the' partnership. On brief, the respondent abandoned his original position and contends for a redetermination as set forth in his affirmative allegations, to wit, that the entire cost of the securities purchased be allocated between the several classes of securities purchased and that the profits realized by the partnership be redetermined accordingly. The petitioners would then be taxed upon their distributive share of such profits. Section 218 (a) of the Revenue Act of 1921.

The respondent has the burden of proving facts necessary to maintain his affirmative allegations. Rule 30, Board’s Rules of Practice. See Stewart & Bennett, Inc., 20 B. T. A. 850. In these proceedings, it amounts to proving the proper basis for allocating the cost of the several classes of securities purchased by the partnership, some of which were sold to the public and some distributed to the petitioners. The petitioners argue that “ to make an apportionment of cost among securities of different classes purchased for a lump sum, it is necessary to know the market value of the several classes of stock.”

The matter of allocating the cost or other basis between the several classes of securities (bonds, preferred and common stock) and warrants for the purchase of stock is not one of simple mathematical computation. See Edward Stephen Harkness, 21 B. T. A. 1068. But the purchase price of the securities now under consideration may be “ fairly apportioned ” between the several classes in the “ proportion which the market value of the particular class bears to the market value of all securities ” purchased. See articles 89 and 1567 of Begulations 62.

The evidence adduced related largely to the fair market value of the common stock of the American Chain Company, which we have found was $5 per share. This finding is based upon the opinions of qualified experts that this stock had a speculative value of not to exceed $5 per share. Their reasoning is persuasive and their testimony was not weakened upon cross-exalnination. They were familiar with the market for such stock. These opinions are entitled to weight, and in the circumstances we believe that the frima facie correctness of the respondent’s determination of value for this stock is overcome. Cf. American Cigar Co., 21 B. T. A. 464; Old Mission Portland Cement Co., 25 B. T. A. 305. The Class A stock sold at $25.50 per share in 1923, and since there is nothing to indicate that these were not bona fide sales and since there is no contention that the fair market value of this stock was more or less, we have found that sum to be its fair market value. On brief, the petitioners concede that if the cost of the Class A and common stocks of the American Chain Company is to be allocated between these stocks, then the allocation should be in the proportion that the fair market value of each class bears to the total fair market value of both classes. With this we agree, and so hold.

Applying the above principle to the purchase and sale of the 125,000 shares of Class A stock of the American Chain Company which, with 20,000 shares of the common stock, were purchased for $2,250,000, this cost being allocated to the Class A stock in determining the profit upon its sale, we find that the profit realized by the partnership has been understated. The fair market value of the Class A stock and the common stock is $25.50 and $5 per share, respectively. The cost to be allocated to the Class A stock is:

125 000x25 50
(125,000X25.50)"+ (20,000X5)of $2>250.°00> or $2,181,558.93.

The profit realized by the partnership upon the sale of the Class A stock should be recomputed upon this cost basis and the petitioners’ shares of such distributive profit taxed accordingly. The profits of the partnership were not affected by the distribution of the common stock to the petitioners and we need not further consider the common stock in our determination.

The evidence relating to the purchase of the other securities consists of the admissions by the petitioners that the securities set forth in our findings were acquired by purchase and that they received the securities indicated. The petitioners do not admit, and the respondent has not shown, that they received the stock of the American Furniture Mart Building Corporation as alleged by the respondent. The transactions respecting the McCrory Stores Corporation preferred stock and warrants for the purchase of common stock are unexplained and we have no evidence upon which to consider the issue as it relates to this stock and warrants. We have no evidence explaining the charge of $1 per share for the common stock of the Phoenix Silk Manufacturing Company when distributed by the partnership to the petitioners. The only evidence of the fair market value of the other securities in controversy is (1) respondent’s Exhibit B, a prospectus regarding:

$3,500,000
Illinois Coal Coepobahon
First Mortgage Sinking Fund Gold Bonds Series A, 7%

in which the financial condition of that corporation is set forth; and (2) respondent’s Exhibit C, a prospectus regarding:

$1,500,000
Phoenix Silk Maniutactubing Company, Ino.
First Mortgage Twenty-Year 7% Sinking Fund Gold Bonds

in which the financial condition of that corporation is set forth. Both prospectuses were issued in 1923, and, assuming that they correctly show the financial condition of those corporations at a certain time, we do not know the fair market value of the several classes when purchased, and can not make an allocation of the cost basis to each class.

Except for the American Chain Company stocks, the facts of record are not sufficient to enable us to make an allocation of the cost basis to the several securities involved in these proceedings. Cf. John L. Kirkland, 20 B. T. A. 309, reversed by the Court of Appeals, D. C., March 14, 1932; Commonwealth Improvement Co., 20 B. T. A. 1189; Edward Stephen Harkness, supra; Collin v. Commissioner, 32 Fed. (2d) 753. The distributive profits of the partnership should be redetermined by recomputing the profit realized upon the sale of the Class A stock of the American Chain Company in accordance with this opinion, and the deficiencies redetermined accordingly.

Judgments will ~be entered u/nder Rule 50.


author: TRAMmell :

text:
    Fidelity-Philadelphia Trust Company, Trustee Under the Will of William L. DuBois, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 48492, 51669.
    Promulgated April 30, 1932.

      Robert T. McCracken, Esq., and John B. Peery, C. P. A., for the petitioner.

      Maxwell M. Mahany, Esq., for the respondent.
   OPINION.

TRAMmell :

During the taxable years the petitioner trustee paid over to the decedent’s widow income from the corpus of the trust estate in accordance with directions contained in the will. The widow elected to take under the will in lieu of her statutory dower interest. The amount so paid to the widow in the taxable years, together with the amounts paid to. her in prior years, did not equal the value of her dower interest at the date of decedent’s death, thereafter surrendered by her. Kespondent, in computing the deficiencies, disallowed as deductions from the petitioner’s gross income the amounts so paid to the widow during the taxable years. The correctness of this action of the respondent is the basis of the first issue presented for consideration here.

The amounts of said income of the trust estate so paid to the widow are claimed by the petitioner as deductions under section 219 (b) (2) of the Revenue Act of 1926, the provisions of which are the same as those of section 219 (b) (2) of the Revenue Act of 1924. The decedent died a resident of Pennsylvania.

In Julia Butterworth et al., Trustees, 23 B. T. A. 838, the decedent died testate in 1925, while a resident of Pennsylvania, and the widow in that case elected to take under the will in lieu of dower. In the taxable years 1924 and 1925 the trustees under the decedent’s will paid over to the widow the sums to which she was entitled under the will and claimed deductions therefor in computing the net income of the testamentary trust. The amounts so paid to the widow, plus the amounts similarly paid to her in previous years, were not equal to the value of the dower interest that she relinquished by electing to take under the will. We held that the amounts so paid to the widow were paid to her in satisfaction of her dower right and were not distributions of income within the meaning of section 219 (b) (2) of the Revenue Act of 1924, and, hence,' not deductible in computing net income of the trust. To the same effect see also Frank Pardee et al., Trustees, 23 B. T. A. 846.

The question presented in the case at bar is the same as that considered and decided by us adversely to the petitioner’s contention in the cases above referred to, and both the law and the facts in all essential respects are identical. Accordingly, on authority of those decisions, the respondent’s action on the first issue here is approved.

The second issue raised by the petitioner involves the question whether the respondent erred in denying as deductions amounts equal to one-third of the income of the trust paid to the widow in the taxable years, one-third of the corpus being payable, after the death of the widow, to certain charitable institutions. This issue also, we think, must be decided against the petitioner.

In Paragraph VI of his will, decedent devised and bequeathed the residue of his estate to the trustee, for the purpose, among other things, of collecting the income and paying first the sum of $4,000 per annum to decedent’s son, Henry, until the death of his mother, and the balance of the income to the decedent’s wife (widow) “ for and during all the term of her natural life.” Upon the death of the widow two-thirds of the income was to be paid to the son for and during the term of his natural life. The remaining one-third of the income, after the death of the widow, was to be accumulated during the minority of the decedent’s granddaughter, and this accumulated income upon the happening of certain contingencies, was to be given to the Pennsylvania Hospital. The principal, consisting of one-third of the decedent’s residuary estate, or corpus of the trust, after the decease of the granddaughter, was to be transferred to the granddaughter’s children, if any, but in default of such issue, was to go to certain designated charities.

By these provisions of the will, the entire income from the decedent’s residuary estate, which constituted the corpus of the trust, less $4,000 per annum given to the son, was payable to the widow for and during the term of her natural life. It follows that during the widow’s lifetime the charitable institutions were not entitled to receive any portion of the income. Upon the death of the granddaughter in 1924 without issue, the contingent interest of the charities in the one-third part of the residuary estate became vested, but such institutions still were not entitled to receive any income therefrom until after the death of the widow. The amounts of income from the trust estate paid over to the widow during the taxable years in accordance with the terms of the will do not, therefore, constitute income accumulated for the benefit of or in any event payable to the charitable institutions, and hence are not deductible from gross income in computing the net income of the trust estate. The respondent’s action on this point is approved.

In Docket No. I¡8jj9%, judgment will be entered under Bide 50. In Docket No. 51669, judgment will be entered for the resgondent.


author: Akundell :

text:
    Ed. Peterson, Petitioner, v. Commissioner of Internal Revenue, Respondent. Ida Belle Peterson, Petitioner, v. Commissioner of Internal Revenue, Respondent. J. A. McCarty, Petitioner, v. Commissioner of Internal Revenue, Respondent. Adah McCarty, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 36066, 36067, 36092, 36093, 42020, 42021, 42027, 42029.
    Promulgated April 30, 1932.

      Robert P. Smith, Esq., for the petitioners.

      Elden MoFa/rland, Esq., for the respondent.
   OPINION.

Akundell :

The several revenue acts applicable to these cases (Acts of 1921,1924 and 1926) each permit a deduction in respect of oil and gas wells of “ a reasonable allowance for depletion * * * according to the peculiar conditions in each case * * Each of the revenue acts (with exceptions not material here) further provides that the primary basis for computation of depletion shall be cost, with further provisos in the Acts of 1921 and 1924 allowing the use of discovery value in place of cost where the wells were discovered by the taxpayer on or after March 1,1913, and “ where the fair market value of the property is materially disproportionate to cost.” The several revenue acts limit the depletion allowance as follows:

Section 214 (a) (10), Revenue Act of 1921:

* * * And provided further, That such depletion allowance based on discovery value shall not exceed the net income, computed without allowance for depletion, from the property upon which the discovery is made, except where such net income so computed is less than the depletion allowance based on cost * * *.

Section 204 (c), Revenue Act of 1924:

* * * but such depletion allowance based on discovery value shall not exceed 60 per centum of the net income (computed without allowance for depletion) from the property upon which the discovery was made, except that in no case shall the depletion allowance be less than it would be if computed without reference to discovery value.

Section 204(c) (2), Revenue Act of 1926:

In the case of oil and gas wells the allowance for depletion shall be 27% per centum of the gross income from the property during the taxable year. 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 ease shall the depletion allowance be less than it would be if computed without reference to this paragraph.

The computations of the parties, which they claim are correct, are as follows:

Respondent’s computation
1923
Net income before depletion - $52,495.08
Depletion on discovery appreciation_ 40,400. 77
Depletion on cost_ 36,150.82
Total depletion_ 76, 551. 59
Depletion allowable_ 52,495. 08
1924
Net income before deple-tion_$126,421.87
50% of net income_ 63,210.93
Depletion on cost_ 67, 706.24
Depletion allowable_ 67, 706.24
Petitioner’s computation
1923
Depletion on 60% discovery interest-$31, 497. 05
Depletion on 40% cost interest _ 36,150. 82
Total allowable_ 67, 647.87
1924
Discovery interest — 60% of net income_$75, 853.12
Discovery depletion (60% of above)_ 37,926.56
Depletion on cost_ 67, 706.24
Depletion allowable_ 105, 632.80
Respondent’s computation
1925
Gross income_$166,374.46
Net income before depletion _ 124,075.37
27%% gross income_ 45,752.98
Depletion on cost_ 46, 337. 03
Depletion allowable_ 46,337. 03
1926
Net income before depletion _$116,412. 68
27%% of gross income_ 49, 828. 31
Depletion on cost_ 21, 999.65
Depletion allowable_ 49, 828.31
Petitioner’s computation
1925
60% of net income before depletion-$74,445.22
40% of net income before depletion_ 49, 630.15
27%% of 60% of gross income_ 27,451.78
Depletion on cost_ 48,337.03
Depletion allowable_ 73,788.81
1926
60% of net income before depletion_$69, 847.60
40% of net income before depletion_ 46, 565.08
27%% of 60% of gross income_ 29, 896.99
Depletion on cost_ 21, 999.65
Depletion allowable_ 51,896. 64

From these computations it appears that the respondent for each of the years figured the depletion separately (1) on cost and (2) on discovery value or in the later years on percentage of income, and compared the two figures, and allowed the greater as a deduction, except for 1923, when the deduction allowed was limited to the net income from the property. Petitioners have figured depletion on cost as being attributable to 40 per cent of their leasehold interest and have added thereto depletion on discovery, or depletion measured by a percentage of income under the later acts, as being attributable to a 60 per cent discovery interest, and claim the total of the two sums as a proper deduction.

The provisions of the revenue acts above cited are designed to permit a return of cost through the depletion deductions authorized. Or, as stated in the Commissioner’s regulations:

The essence of these provisions of the statute is that the owner of mineral deposits, whether freehold or leasehold, shall, within the limitations prescribed, secure through an aggregate of annual depletion * * * deductions the return of either cost of his property, or the value of his property on the basic date * * *. Art. 201, Regulations 62, 65 and 66.

The Revenue Acts of 1921 and 1924 allow depletion deductions on discovery value, limited however, in the 1921 Act to the net income from the property and in the 1924 Act to 50 per cent of the net income. In the enactment of the Revenue Act of 1926, discovery provisions in the case of oil and gas wells were purposely omitted because of the difficulty of administration (see Senate Rept. No. 52, 69th Cong., 1st sess., p. 17), and in lieu thereof it was provided that depletion deductions should be allowed at the rate of 27y2 per cent of gross income, but not to exceed 50 per cent of the net income from the property. All three of the revenue acts provide further that in no case shall the depletion deductions be less than if computed on the basis of cost.

Tears 1923 and 1924.

Discovery value is limited by law to those persons making the discovery and is not allowed as a basis to purchasers of proven property. The interest on which petitioners are entitled to a discovery value for purposes of depletion is a 60 per cent interest. By the purchase of the 40 per cent interest theretofore owned by other parties, petitioners acquired no right to a discovery value on that interest, because at the time of purchase a discovery thereon had already been made. It is the respondent’s position, as we understand it, that the discovery value of the 60 per cent interest theretofore owned by petitioners is to be compared with the cost of the 40 per cent interest (as in the instant case no cost is shown for the 60 per cent interest before discovery), and depletion will be allowed in the greater of the two amounts. While the statement of respondent’s position may seem fair and may seem to give that reasonable allowance for depletion that the statute contemplates, a simple example shows its fallacy. If A owns a one-eighth interest in an oil lease acquired without cost and on which he is entitled to a discovery value of $50,000, and thereafter buys another one-eighth interest in the same lease for $49,000, it would be respondent’s position that the total depletion on the entire two-eighths interest- would be limited to the $50,000 theretofore allowed on the one-eighth interest, for he would take cost or discovery value and allow the greater of the two amounts. In other words no additional depletion whatever would be allowed on the newly acquired one-eighth interest. If, on the other hand, A had acquired without cost a two-eighths interest, and the same discovery had been made, A’s basis for depletion allowance on discovery value would be $100,000. So incongruous a result can not, in our opinion, give that reasonable allowance for depletion contemplated by the statute. The difficulty with respondent’s formula is that it compares unlike interests — a discovery interest and a cost interest — and allows only a portion of the total depletion sustained. As petitioners are the owners of the entire leasehold, they are entitled to deductions for depletion of their whole interest, and we can not believe the statutes contemplate that the deductions should be reduced by the application of such a formula as worked out by the respondent. While, as pointed out above, cost is the primary basis for computation of depletion, that basis can be applied here to only a portion — 40 per cent — of petitioner’s interest. The remaining 60 per cent was acquired under circumstances which give the petitioners the right to use a discovery basis. Although the use of discovery value as a basis has been termed an “ exceptional benefit ” (Melville G. Thompson, 10 B. T. A. 25, 29) and an “ extraordinary basis ” (S. T. Hunt, 4 B. T. A. 1077), still, taxpayers are entitled to use it when they come within the terms of the statute. The parties are agreed.that petitioners made a statutory discovery when they owned a 60 per cent interest and we see no reason for denying them the right to a discovery basis with respect to that interest. As to the remaining 40 per cent, cost is established and we think petitioners are entitled to use it.

Years 1925 cm3 1926.

Discovery basis, as pointed out above, may not be used under the Revenue Act of 1926, which as far as material here, is retroactive to January 1, 1925. Section 286. Depletion deductions are allowable under the 1926 Act equal to 27% per cent of gross income, and this, in our opinion, precludes any consideration of the source of title. The depletion allowed under this act is to be determined by the amount of income from petitioner’s interest in the property during the year without regard to the method of acquisition. An exception is made in cases where depletion based on cost is greater than on the percentage basis, and this has been recognized by the respondent and given effect for the year 1925, the only year in which the exception is applicable under the facts here. It thus appears that the respondent has correctly applied the statute to, the years 1925 and 1926.

Concluding, we are of the opinion that the method of petitioners is proper for the years 1923 and 1924, and that the respondent’s method is proper for 1925 and 1926.

Reviewed by the Board.

Decision will be entered wider Bule 50.


author: ARUNdell:

text:
    Paul Haberland, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 29289.
    Promulgated April 30, 1932.

      O. R. Folsom-Jones, Esq., and J. S. Y. Ivins, Esq., for the petitioner.

      Prew Savoy, Esq., for the respondent.
   OPINION.

ARUNdell:

Several of the questions involved in the present step in this proceeding may be disposed of without much discussion. The first is the question of the statute of limitations. We fail to see any merit in the petitioner’s contention that the statute has run against assessment and collection. His return for 1918 was filed on May 4, 1922, and the deficiency notice was issued April 28, 1927, less than five years after the date of filing. Petitioner argues that he was not taxable for the year 1918 and was not required to file a return. Whether he was taxable or not, he had sufficient income in 1918, as held in our previous report, to require the filing of a return. To the argument that the Alien Property Custodian should have filed a return for petitioner in 1919, it is a sufficient answer to point out that the Custodian did not do so. As far as we know, the Custodian has not yet filed a return on behalf of the petitioner, and if we are to base our decision on the premise that he should have done so, the present proceeding would resolve itself into a “ no return ” case with a consequent lengthening of the limitation period.

Petitioner produced no evidence whatsoever on the issue of the March 1, 1913, value of the common stock. The respondent determined that value to be $130 per share, and in the absence of any evidence we are bound to treat that figure as correct. Avery v. Commissioner, 22 Fed. (2d) 6.

Petitioner claims, in the event that he does not prevail on the other issues, that the tax on the profit on the sale of his stock should be limited under section 18(c). of the Settlement of War Claims Act of 1928, which provides that:

So much of the net income of a taxpayer * * * as represents gain derived from the sale or exchange by the Alien Property Custodian of any property * * * seized by him, may at the option of the taxpayer be segregated from the net income and separately taxed at the rate of 30 per centum.

In his brief counsel for respondent concedes that petitioner’s case comes within the above quoted statutory provisions, that petitioner made a timely election, and that he is entitled to have the capital net gains arising from the seizure and sale of his property by the Alien Property Custodian segregated and taxed at 30 per centum.”

We have left, then, the question of whether petitioner is entitled to deduct from the gain on the sale of his Garfield Worsted Mills stock so much thereof as he subsequently invested in the Haberland Manufacturing Company. The pertinent provisions of the statutes are set out in the margin. Briefly, they provide that property seized and sold by the Alien Property Custodian shall be treated as compulsorily or involuntarily converted, and that where the taxpayer proceeds forthwith and in good faith to expend the proceeds of the conversion to acquire other property “ of a character similar or related in service or use,” or to acquire 80 per cent or more of the stock of a corporation owning “ such other property,” then a deduction shall be allowed of a portion of the gain derived.

In approaching the question for decision here it must be borne in mind that the sections of the statutes quoted in the margin are relief provisions (International Boiler Works Co., 3 B. T. A. 283; Washington Market Co., 25 B. T. A. 576), and as such are to be liberally construed to effectuate their purpose. Bonwit-Teller & Co. v. United States, 283 U. S. 258.

Having this purpose of the statute in mind, we are of the opinion that petitioner’s investment in the Haberland Company should be treated as taking the place of the Garfield stock if it otherwise meets the requirements of the statute. While the sums that he put into the new business were treated on the corporate books in the first instance as loans, it is shown by the evidence that petitioner intended to have stock issued to him from time to time to take the place of the loans. His intention in this respect was carried out to the extent that, beginning with January 2, 1923, the net amount of the advances was largely covered by stock issued at various times and charged to his account. At the beginning of 1923 his balance was $298,186.70 and on January 2 stock of the par value of $298,000 was issued to petitioner. By the end of 1924 his stock holdings amounted to $449,000, an amount not far below the net proceeds realized from the conversion of his Garfield stock. In these circumstances, it is our opinion that the advances made by petitioner out of the proceeds of the involuntary conversion of his stock should be treated as expenditures in the acquisition of other property, within the meaning of the revenue act.

The respondent places considerable stress on the fact that petitioner purchased sundry securities between October 26, 1921, and January 25, 1922. We attach no significance. to those purchases as the evidence shows that petitioner purchased them only as a temporary investment and intended to and did convert them into cash as and when he needed funds for the promotion of his new business. It is hardly to be expected that a fund approaching a half million dollars would be left lying idle for any considerable length of time, and petitioner apparently knew that some time must elapse before the new business could be organized and ready for operation. It was only natural that under the circumstances he should temporarily put his funds in income-producing securities.

If section 214(a) (12) of the Revenue Act of 1921 limited the acquisition to “ similar ” property, we might have some difficulty in finding that the petitioner’s investment met the test, inasmuch as the Haberland Company’s activities were similar to only one phase of those of the Garfield Worsted Mills. But the word “ similar ” is followed immediately by the phrase “ or related,” which, in' our opinion, considerably broadens the scope of the statute and gives the taxpayer more latitude in making an investment than is contended for by the respondent in this case. The evidence establishes that the use of sizing is essential to the textile industry. Prior to the time that the Haberland Company’s products came on the market it was the practice of textile mills to make their own sizing. The Garfield Worsted Mills had about 15 employees engaged in the making of sizing for its own use. The Plaberland Company’s customers were mostly textile mills which used its products in place of the sizing they had previously made. Only one exception is shown, and that is in the use of Hamaco to treat felt, which it would seem is not a far cry from the treatment of fabrics in the strictly textile business. In our opinion the business of the Haberland Manufacturing Company was “ related to ” that of the Garfield Worsted Mills within the meaning of the statute.

One of the requirements of the statute is that the proceeds of the conversion must be expended “ forthwith.” We had occasion to examine into this requirement to some extent in Chickasha Cotton Oil Co., 18 B. T. A. 1144. We there quoted the definition of “forthwith ” in Webster’s New International Dictionary as follows:

Immediately; without delay; directly; hence, within a reasonable time under the circumstances of the case; promptly and with reasonable dispatch ;■ — the meaning of the term in a particular ease is relative to the circumstances.

Also, Bouvier’s definition, cited with approval in Dickerman v. Northern Trust Co., 176 U. S. 181: “As soon as by reasonable exertion, confined to the object, it may be accomplished.”

It is shown by the account books of the Haberland Manufacturing Company that petitioner continued to advance funds to or for it during all the years from 1921 to 1930, inclusive. Prior to the opening of petitioner’s account on the company’s books in April, 1922, he had advanced certain sums as shown by his check stubs. Advances thereafter purport to be recorded on the check stubs and also credited to his account on the company’s books. The two records are not in agreement and it is impossible to determine from them the total amount advanced, but it appears that the total from 1921 to 1930, inclusive, was somewhere in the neighborhood of $500,000. Counsel for the petitioner computed the total amount advanced between November 3, 1921, and September 19, 1928, as $498,125.02. Granting that this aggregate is correct, it does not appear that the net amount of his advances was as much as that at any time. The credit to his account for advances was offset by numerous charges, in addition to stock issued, which for the most part are unexplained. In 1922, according to the company’s ledger, petitioner’s advances totaled $331,-840.10, but this was offset by various charges which at the end of the year left a balance in his favor of $298,186.70. By the end of 1923 his balance was reduced on the books to $16,783.09. There is an unexplained discrepancy between petitioner’s account on the books and the company’s balance sheet which lists among its liabilities $111,-924.86 as “ loaned by Paul Haberland.” Similar unexplained discrepancies appear in each of the years 1926, 1928 and 1929.

But passing these matters, we are of the opinion that not all of petitioner’s expenditures, extending as they did over a period of nine years, can be said to have been made “forthwith.” “A word * * * is the skin of a living thought * * Towne v. Eisner, 245 U. S. 418. Certainly the thought conveyed by the word “ forthwith ” is not in harmony with that contended for by petitioner, namely, that a taxpayer may spread the proceeds of the involuntary conversion over a long term of years and still fulfill the conditions of the statute. We can not conceive that it was intended in the enactment of the statute to withhold imposition of the tax over an indefinite number of years until such time as the newly established business could demonstrate its ability to stand on its own feet.

We are of the opinion, however, that at least a portion of petitioner’s advances were made sufficiently soon after realizing the proceeds to come'within the statute. He received the proceeds of the conversion on October 26, 1921, and on November 3, 1921, he caused the Haberland Manufacturing Company to be incorporated. The necessary ground for a plant was selected and construction begun in April, 1922. By the first of November, 1922, the plant was ready to, and did, begin operations. In the meantime petitioner found it necessary to make two trips abroad to select machinery and. transact other business for the new corporation. We are convinced by petitioner’s testimony that, considering all the circumstances, the Haberland Manufacturing Company was organized and started to operate as quickly as was practicable. In our opinion the expenditures made by petitioner up to the time the company began operations and within ninety days thereafter may properly be considered as having been made under the conditions specified by the statute. The sums advanced during the first ninety days of operations were for the most part in large amounts which apparently were reasonably necessary to start operations, and hence were a part of petitioner’s initial investment in the business. Thereafter the advances were in relatively small amounts until the latter part of 1923, which under the circumstances here we consider too remote to come within the statute. The amount we are able to determine may not be exactly the amount expended, but is based on what we consider the most satisfactory evidence offered. Petitioner read into the record a number of expenditures made as shown by his check stubs. While some of these were made prior to the opening of his account on the company’s books, we do not know whether or not they were later taken up in the accounts under some of the indefinite descriptions given to a number of the credit items. On the other hand, the ledger account contains credits for which there do not appear to be corresponding check stubs. In this situation we have chosen the ledger account as being more likely to be an accurate reflection of what actually occurred, particularly in view of the fact that it contains charges as well as credits to petitioner’s account. According to the ledger account, petitioner advanced a gross amount of $397,283.41 up to January 31, 1923. During the same period he was charged with $340,119.64, which included charges of $299,000 par value of stock and which should not be used as an offset as it represented a part of petitioner’s investment in the business. The difference between the gross amount advanced, $397,283.47, and the net charges of $41,119.64, or $356,163.83, in our opinion, may properly be said to have been expended forthwith in the acquisition of property of a character related in use or service to that involuntarily converted and a deduction may be allowed on that basis.

While it does not appear pertinent to the issues here, it may not be amiss to record that at the hearing petitioner agreed to the terms of Article VI of Treasury Decision 4168, which provides that no person shall be entitled to the benefits of section 18(d) of the Settlement of War Claims Act unless he agrees to file at the proper time a return of all income for the taxable period in which he disposes of the property acquired from the proceeds of the conversion, and agrees to pay all internal revenue taxes in respect of such conversion.

Reviewed by the Board.

Decision will he entered under Buie 50.

       [Section 214(a) (12), Revenue Act of 1921.] If property is compulsorily or involuntarily converted into cash or its equivalent as a result of (A) its destruction in whole or in part, (B) theft or seizure, or (C) an exercise of the power of requisition or condemnation, or the threat or imminence thereof; and if the taxpayer proceeds forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary to expend the proceeds of such conversion in the acquisition of other property of a character similar or related in service or use to the property so converted, or in the acquisition of 80 per centum or more of the stock or shares of a corporation owning such other property, or in the establishment of a replacement fund, then there shall be allowed as a deduction such portion of the gain derived as the portion of the proceeds so expended bears to the entire proceeds. » * *

        [Section 18(d), Settlement of War Claims Act of 1028.] Any property sold or exchanged by the Alien Property Custodian (whether before or after the date of the enactment of the Settlement of War Claims Act of 1928) shall be considered as having been compulsorily or involuntarily converted, within the meaning of the income, excess-profits, and war-profits tax laws and regulations; and the provisions of such laws and regulations relating to such a conversion shall (under regulations prescribed by the Commissioner of Internal Revenue with the approval of the Secretary of the Treasury) apply in the case of the proceeds of such sale or exchange. Por the purpose of determining whether the proceeds of such conversion have been expended within such time as will entitle the taxpayer to the benefits of such laws and regulations relating to such a conversion, the date of the return of the proceeds to the person entitled thereto shall be considered as the date of the conversion.


author: Trammell :

text:
    United Gas Improvement Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 42449, 43662.
    Promulgated April 30, 1932.

      John 27. Minds, Esq., for the petitioner.

      O. J. Tall, Esq., for the respondent.
   OPINION.

Trammell :

The question raised in these proceedings is whether or not the payments made by the petitioner to the State of Pennsylvania on account of increases of its capital stock during the taxable years, under the circumstances indicated in the stipulated facts, constitute “taxes” within the purview of section 234 (a) (3) of the Revenue Act of 1926, which provides that in computing the net income of a corporation there shall be allowed as deductions, among other things, “ taxes paid or accrued within the taxable year,” with exceptions not important here.

The petitioner deducted the controverted amounts in computing its net taxable income,' and contends that said amounts constitute deductible “ taxes ” within the meaning of the statute. The respondent disallowed the claimed deductions, and -asserts that the Pennsylvania capital stock “ bonus ” is not a tax.

The name by which said payments were designated in the Pennsylvania statute is not necessarily controlling, nor is the designation given thereto by the state treasurer. They are referred to in the state statute as a bonus,” and they were accounted for by the treasurer as “ corporation taxes.” In order to determine whether or not they are taxes, we must inquire into the purpose and essential nature of these exactions. New Jersey v. Anderson, 203 U. S. 483; Choctaw & Gulf R. R. Co. v. Harrison, 235 U. S. 292.

The revenue act does not define the term “ taxes,” and the word must, therefore, be given its ordinary and commonly accepted meaning as established by the judicial decisions.

In Lane County v. Oregon, 7 Wall. 71, 80, the Supreme Court quoted with approval the following definition:

A tax is an impost levied by authority of government upon its citizens, or subjects, for the support of the State. It is not founded on contract or agreement.

The same court has also approved the following definitions:

A “ tax ” says Webster’s dictionary, “ is a rate or sum of money assessed on the person or property of a citizen by government for the use of the nation or state.” “ Taxes are burdens or charges imposed by the legislature upon persons or property to raise money for public purposes.” (Cooley on Constitutional Limitations, 479.)

Colter, J., in Northern Liberties v. St. John's Church (13 Pa. St. 104), says, very forcibly, “ I think the common mind has everywhere taken in the understanding that taxes are a public imposition, levied by authority of the government for the purpose of carrying on the government in all its machinery and operations — that they are imposed for a public purpose.” Loan Association v. Topeka, 20 Wall. 655, 664.

In the case of Greensburg Coal Co. v. United States, decided April 9, 1929, the District Court of the United States for the Western District of Pennsylvania held that an amount paid to the State of Pennsylvania as a bonus on an increase in its capital stock was not a tax within the meaning of the revenue act. This decision was rested squarely upon two prior decisions, as appears from the following statement contained in the court’s opinion:

In support of' tbis conclusion, we need only say that the Court of Appeals of this Circuit has ruled that the capital stock bonus paid by Pennsylvania corporations is not a tax. Re York Silk Mfg. Co., 188 Fed. 735; Penna. v. York Silk Mfg. Co., 192 Fed. 81.

The case of Re York Silk Mfg. Co., supra, arose out of bankruptcy proceedings. The Commonwealth of Pennsylvania filed with the referee in bankruptcy a claim against the bankrupt, York Silk Manufacturing Company, for 'a “ bonus ” imposed by the State law (P. L. 1901, p. 5 ¶3), on account of an increase of the capital stock of the company. The capital stock had been increased prior to, but no return of increase had been made until after, the corporation had been adjudged a bankrupt. The Commonwealth contended that the “ bonus ” was a tax, and should therefore be allowed as a preferred claim. The District Court, affirming the decision of the referee, held that the “ bonus ” was not a tax, but a consideration payable to the Commonwealth for a benefit conferred.

The United States Circuit Court of Appeals for the Third Circuit (192 Fed. 81), in affirming the decision of the District Court, said:

. The Supreme Court of Pennsylvania, we are advised, has never construed the Pennsylvania Act of 1901 respecting the payment of a bonus when the capital stock of a corporation is increased * * ». The Legislature denominated the payment a “ bonus ”. A bonus is a debt, and, as a consideration for a grant by the state, it may be payable before or after the grant according to the terms of the statutory contract.

The “ bonus ” is required for the privilege of being permitted to increase capital stock. It is in the nature of a grant of authorization in consideration of a fee, rather than in the nature of an excise tax on the doing of certain things. It is not a recurring imposition. Even if such a requirement or obligation be placed in a revenue law, it is not material and certainly not determinative that it is a tax. Nor does it throw any light on the question that the “ bonus ” money is turned into the state treasury for public purposes. Fees are undoubtedly so turned in and used as well as taxes. In our opinion the so-called bonus was not a tax, but a fee, and as such is governed by our decision in the case of Logan-Gregg Hardware Co., 2 B. T. A. 647, where we said: “ Fees paid to a state on account of the increase of the capital stock of a corporation are capital expenditures and are not deductible in computing net income.”

That a payment required to be paid to the state in connection with increase of capital stock may sometimes be held to be a fee and sometimes a tax, see Holeproof Hosiery Co., 11 B. T. A. 547, and Borg & Beck, 24 B. T. A. 995. An analysis of the state law is required in each case.

Reviewed by the Board.

Judgment will be entered wader Rule 50.

Sea well dissents.