author: Teammell :

text:
    Appeal of ESTATE OF JOHN C. F. SLAYTON.
    Docket No. 6383.
    Submitted February 21, 1926.
    Decided April 20, 1926.
    Gifts to a city of an organ and a fund for its maintenance are not deductible as charitable contributions under the Revenue Act of 1918.

      G-. Noyes Slayton, Esq., for the taxpayer.

      Bruce A. Low, Esq., for the Commissioner.
    Before GRAupner and Trammell.
    This is an appeal filed by the executors of the estate of John C. F. Slayton, deceased, from a deficiency in individual income tax in the amount of $9,321.59 for the fiscal years April 1, 1918, to March 31, 1919, and April 1, 1919, to March 31, 1920. The deficiency arises on account of the disallowance by the Commissioner in the return of the decedent of deductions in the amount of $25,300, representing the purchase price of a memorial organ given by the decedent to the City of Melrose, Mass., for the use of its citizens, and $10,000 which represented a fund established for the maintenance of the organ.
    FINDINGS OF FACT.
    The decedent, at the time of his death, was a resident of Massachusetts.
    During the fiscal year ended March 31, 1919, the decedent erected and installed an organ in the Memorial Building of the City of Melrose, at a cost of $25,300, and presented it to the city. In offering the organ to the mayor and the board of aldermen the decedent stated in a letter of January 22, 1919:
    Recognizing tbe desirability of developing the musical sentiment of our Community, and wishing to offer a Memorial to those of our boys who have paid the last great price, and to all soldiers and sailors of Melrose, who during the World War have laid their all on the altar of human liberty, I beg to submit the following:
    1 will, at my own expense, install on the rear of the stage of the Memorial Éuilding, a grand organ, similar in construction and musical expression, to the one in the Municipal Building at Portland, Maine, to be dedicated to the purpose herein stated. * * . *

      Should the foregoing meet with your approval, it will be my pleasure to deposit in trust with the. Oity Treasurer, on or before the date of completion of the organ a 4% New York City Bond, for the sum of $10,000 — to be reinvested at maturity in Government, State, or Municipal Bonds, — or other strong banking institution — there to remain cumulative, subject to the order of the Advisory Committee of the Memorial Building, by a two-thirds vote of its members, for the following purposes, to wit:
    Important repairs and renewals of said organ and such future improvements thereof as may be deemed desirable by said Advisory Committee, — and also for the purpose of promoting public musical education in this Community in connection with this instrument.
    It is the desire of all that our building may continue to be the medium, through which the patriotic and social life of our city, shall find its best expression — that the example of the Heroes of 61-65 may continue to be emulated — that the last days of those remaining be made best — and that the life of the Heroes of 1914-19 — with youth, high hopes, and happy achievements before them, may take on a new and deeper significance.
    The Board of Aldermen, on January 27, 1919, accepted the gift by the following resolution:
    City or Melbose,

      In Board. of Aldermen, Jan. 27, 1919.

    1 c is unanimously voted:
    That the City of Melrose, by its Mayor and Board of Aldermen, with deep appreciation and gratitude, accepts the splendid gift from its honored and beloved citizen, Mr. John C. F. Slayton, of the Grand Organ to be placed by him in the Memorial Building “ as a Memorial to those of our boys who have paid the last great price, and to all soldiers and sailors of Melrose, who during the World War have laid their all on the altar of human liberty,” together with the fund of $10,000.
    That we are deeply appreciative of this splendid gift and its great patriotic purpose, and of its great value to our City in its services to all our people; in extending its reputation and good name, and in increasing the importance, service and influence of our Memorial Building.
    That we approve of the conditions and suggested ordinances in relation to the care and use of the organ, which are suggested in the communication, and that they be referred to a committee for preparation and adoption by the City Government.
    That a special committee of three (3) be appointed by the President to draw up and present for adoption by the City Government a suitable form of vote, more expressive of the appreciation of our City for this great gift, and its formal acceptance, and that such vote be properly engrossed and presented to Mr. Slayton.
    Passed January 27, 1919.
    Albert M. Tibbetts, President of the Board of Aldermen.

    January 30, 1919.
    Approved:
    Charles H. Adams, = Mayor.

    January 27, 1919. In Board of Aldermen. Immediately considered and unanimously ordained.
    W. DeHaven Jones, Cleric.

      During the fiscal year April 1, 1919, to March 31, 1920, the decedent created and set aside a trust fund of $10,000 for the maintenance of the organ. The income from the trust fund was to be paid out on the order of the Advisory Committee of the Memorial Building by a two-thirds vote of its members, as set forth in the letter of decedent above quoted.
    The contribution of the organ and the trust fund for its maintenance were intended as a gift to the city as a memorial to the soldiers and sailors of the World War and to encourage musical education in the community. The organ was used in community meetings and was also used on Sundays and at other times for organ recitals for the benefit of the public.
   OPINION.

Teammell :

The petitioners; contend that the cost of the organ and the amount of the trust fund set aside for its maintenance are deductible under section 214 (a) of the Revenue Act of 1918. That section of the statute is as follows :

(a) That in computing net income there shall be allowed as deductions : * * *
(11) Contributions or gifts made within the taxable year to corporations organized and operated exclusively for religious, charitable, scientific, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual, or to the special fund for vocational rehabilitation authorized by section 7 of the Vocational Rehabilitation Act, to an amount not in excess of 15 per centum of the taxpayer’s net income as computed without the benefit of this paragraph. Such contributions or gifts shall be allowable as deductions only if verified under rules and regulations prescribed by the Commissioner, with the approval of the Secretary. In the case of a non resident alien individual this deduction shall be allowable only as .to contributions or gifts made to domestic corporations, or to such vocational rehabilitation fund.

The Commissioner disallowed the deductions claimed, upon the ground that the statute made no provision for such a deduction in that the gifts were not to a corporation organized and operated exclusively for religious, charitable, scientific, or educational purposes, or for the prevention of cruelty to children or animals.

The Revenue Act of 1921, section 214 (a) (11), provides as follows:

Contributions or gifts made within the taxable year to or for the use of: (A) The United States, any State, Territory, or any political subdivision thereof, or the District of Columbia, or exclusively for public purpose's. * * *

The above provision of the 1921 Act was not contained in the Revenue Act of 1918. The taxpayer contends that this provision which was added in the 1921 Act was interpretative and not an enlargement of the same section of the 1918 Act.

We are unable to agree with the taxpayer’s contention. The deductions allowed on account of charitable contributions are purely statutory, and the Board can not supply an omission in the statute. It is clear that a municipal coi'poration is not a corporation organized and operated exclusively for religious, charitable, scientific, or educational purposes, or for the prevention of cruelty to children or animals, and we must interpret the statute as we find it. Its language is clear and unambiguous and leaves no room for doubt or the application of any rules of construction applicable to doubtful statutes. The gifts made by the decedent are not deductible under the Revenue Act of 1918.

The deficiencies are redeternvined to he $6fi91¡..60 for the fiscal year ending March 31, 1919, and $3,126.99 for the fiscal year ending March 31,1920. Order will he entered accordingly.


source: Caselaw Access Project

author: Mokeis :

license: Public Domain

text:
    Appeal of OLD '76 DISTILLING CO.
    Docket No. 1262.
    Submitted May 25, 1925.
    Decided April 20, 1926.
    On the facts stated, held, that the taxpayer did not sustain a deductible loss in the taxable year in question.

      Laurence A. Baker and Thomas R. Rutter, Esgs., for the taxpayer

      AIR. Marrs, Esq., for the Commissioner.
    Before Ivins, Marquette, and MorRis.
    This is an appeal from the determination of a deficiency of $59,425.78 in income and profits taxes for 1917. The controversy arises out of the disallowance of a deduction from gross income of an alleged loss of $172,715.54.
    FINDINGS OF FACT.
    During 1917 the taxpayer was a Kentucky corporation, with its principal office and plant on Licking Pike, Newport, and was engaged in the manufacture of whisky. It was dissolved in 1920.
    It was a close corporation, the stock being owned principally by three families, each of whom had a representative on the board of directors. The three representatives were in active charge and management of the business.
    As of December 31,1917, the total cost of the buildings, machinery, equipment, etc., was $390,006.42. This amount was charged off, either around the end of 1917 or at the beginning of 1918, but before the closing of the books for 1917, and as of December 31. At the same time, an estimated salvage value of $120,000 was set up on the books. Against the cost there was a depreciation- reserve of $99,610. The sum of the last two items, subtracted from the total cost, leaves a balance of $170,396.42, which is the amount now claimed by the taxpayer as a deduction.
    During 1917 the stockholders felt it was desirable to discontinue the business owing to the spread of prohibition sentiment and to the enactment of adverse State and local laws. On September 10, 1917, the Federal Food Control Act went into effect. This Act prohibited the use of food materials in the production of distilled spirits for beverage purposes during the period of the war, and necessitated the suspension of the manufacture of whisky by the taxpayer in that month. The stockholders and directors then decided definitely to retire from the distillery business.
    Prior to the enactment of the Food Control Act, the officers consulted experienced engineers and builders to ascertain if it were possible to adapt the plant to some other use. This could not be done economically, and, except as a distillery, its only value was as scrap. After the passage of the Federal Food Control Act on August 10, 1917, the directors sought actively to find a purchaser of the plant, but were unsuccessful until, in June, 1918, they sold it for $60,000. .
   OPINION.

Mokeis :

The question involved in this appeal is whether the taxpayer is entitled to deduct as a loss in the year 1917 the difference between the depreciated cost of certain tangible assets used in the manufacture of whisky and their salvage value. There is no question of obsolescence, as the revenue acts prior to that of 1918 did 'not provide for such a deduction. Section 12 (a) (2) of the Revenue Act of 1916 (unamended by the Revenue Act of 1917), provides for the deduction of “ all losses actually sustained and charged off within the year and not compensated by insurance or otherwise.” A loss “actually sustained” connotes a completed transaction. There was no sale of the assets in the taxable year in question. If any allowable loss was sustained, therefore, it must be based upon the fact that the directors prior to the close of the taxable year definitely decided to retire from the distillery business by reason of adverse State and local laws, the passage of the Federal Food Control Act, which suspended business during the period of the war, and the fact that the plant could not be economically converted to any’- other use, and, except as a distillery, its only value was as scrap.

There is no question but that the plant was an efficient operating unit prior to the cessation of business and that its machinery and other facilities performed the services for which they were acquired until the effective date of the Federal Food Control Act. That Act was purely a temporary measure designed to be operative only during the period of the war. We are unable to agree that the temporary restriction against the manufacture of whisky destroyed the value of the assets as a distillery and reduced them to scrap value. We are therefore of the opinion that a loss was not actually sustained by the taxpayer in the year in question, but in the following year, when the assets were sold.

The deficiency is $S9fi.25.78. Order will be entered accordingly.


text:
    Appeal of ABRAHAM KINS.
    Docket No. 6760.
    Submitted March 8, 1926.
    Decided April 20, 1926.
    Salaries paid held, to be reasonable for services rendered.

      Frank J. Albus, Esq., for the taxpayer.

      F. O. Graves, Esq., for the Commissioner.
    Before Phillips and Trammell.
    This appeal involves a deficiency in income tax for the years 1919 to 1922, inclusive, in thé amount of $2,180.73. The deficiency arises in part from the disallowance by the Commissioner of a deduction claimed by the taxpayer on account of salaries paid to employees.
   FINDINGS OF FACT.

The taxpayer is an individual residing at Newark, N. J. During the years involved he was engaged in the cloak and suit business at Newark. Fie had in his employ during 1919, Hannah Strum, Lena Goldbaum, and Charles Strum.

During 1919 the taxpayer paid salaries to the above-named employees as follows:

Hannah Strum-$2, 080
Lena Goldbaum_ 2,080
Charles Strum_ I, 560

During 1920 the taxpayer had in his employ the same employees and one Irwin Kins. During that year he paid salaries to. such employees as follows:

Hannah Strum_$1,271. 07
Lena Goldbaum_ 2, 600. 00
Charles Strum_ 1,750.00
Irwin Kins- 1,200.00

During tbe years 1919 and 1920 the above amounts of salaries were paid said employees for services actually rendered, which compensation was reasonable.

The Commissioner disallowed the deductions for salaries claimed to have been paid by the taxpayer to the extent of $4,569 in 1919 and $4,035 in 1920, because the employees were relatives of the taxpayer and no entries were made upon the taxpayer’s books of account showing such payment.

Order of redetermination will be entered on 10 days’ notice, under Rule 50.


text:
    Appeal of MAX S. ROSENTHAL.
    Docket No. 3405.
    Submitted October 17, 1925.
    Decided April 20, 1926.

      Chester A. Bennett, Esq., for the taxpayer.

      L. C. Mitchell, Esq., for the Commissioner.
    Before Trussel and Green.
    The taxpayer appeals from determinations of deficiencies in income tax as follows:
    For tbe year 1918_$2, 675. 30
    For tbe year 1919_ 474.21
    For tbe year 1920_• . 539. 88
    He claims that the Commissioner, in using his record of bank deposits and withdrawals in estimating his gross and net income, erred in failing to exclude from the deposits various items which did not represent taxable income.
   FINDINGS OF FACT.

The taxpayer is a resident of the District of Columbia. During the year 1918 he operated three small stores, dealing in men’s furnishings. During 1919 he disposed of two of these stores and continued in business at 913 Seventh Street, N.W., Washington, where he carried and sold ladies’ furnishings, wearing apparel, and millinery. During those years he kept some crude records of business in what he calls a journal book, a daily book, and an ordinary ledger in which he entered items of merchandise purchased and amounts paid therefor. Once or. twice each week he made deposits in his bank of moneys received from sales and other sources, and sometimes made memoranda on the stubs of checks drawn against such' deposits of the purpose for which the check was drawn.

For the calendar year 1918 he made an income-tax return on Form 1040, in which he reported gross income from business $114,983; that his merchandise purchases cost $95,775; that other business expenses aggregated $15,378, leaving a net income from business of $3,830, and net income from rents of $285. For the year 1919 he made a similar income-tax return, in which he showed a gross income from business $66,302; merchandise purchased at a cost of $55,252; a gain in inventory of $600, and business expenses aggregating $7,852, leaving a net income from business of $3,798, and a net income from rents of $377. For the year 1920 he made a similar income-tax return, in which he showed gross receipts from business $28,768; merchandise purchased $22,895' other business expenses $4,288, leaving a net income from businesss of $1,585 and a net income from rents of $1,013. For these years he paid income taxes in the amount of $84.90, $71, and $11.92, respectively.

In August, 1923, one of the Commissioner’s field agents undertook to verify this taxpayer’s return for the years hoie in question. The field agent made an examination "(A all the accounting records and bank check stubs which the! taxpa$fr was then able to produce, such examination being made at the taxpayer’s place of business and in frequent consultation and conference with him. As a result of .this investigation, after eliminating from the bank deposits all items which could be identified as not being receipts from business or other income, and eliminating from check withdrawals all items which could be identified as being for other than business expenses or purchases, the agent found results which may be tabulated as follows:

He was able to and did identify from the check stubs and segregate business expense disbursements and contributions as follows:

Upon this basis the field agent reported net taxable income for the year 1918 in the amount of $20,848.61; for the year 1919, $9,883.69; and for the year 1920, $9,798.17.

An examination of the check stubs failed to show any checks drawn in favor of employees of the store. It was, therefore, found that these items of business expense were paid in cash before merchandise receipts were banked. The check stubs show sums withdrawn from bank for taxpayer’s personal expenses:

1918_$1, 536.10 ■
1919_ 3,876.89
1920 _ 4, 347.82

The total of these personal expenses for the year 1918 being so much less than the totals for the years 1919 and 1920, the sum of $2,000 was arbitrarily added to the above figures for bank deposits for the year 1918 as representing personal expenses taken out of cash by the taxpayer before merchandise receipts were deposited. The Commissioner adopted these results.

At various times during the years 1918, 1919, and 1920, the taxpayer received moneys, from his mother’s estate,' in payment of loans previously made, or placed in his hands by other persons for specific purposes. Throughout these years he was treasurer of Hebrew educational or charitable organizations or committees, and received moneys collected for the uses of such organizations or committees. The amounts of such funds or moneys are not definitely shown by the testimony. All or part of the money or funds so received the taxpayer mingled with moneys received from his business or with his business bank deposits. So much of such funds as can be identified by taxpayer’s books and check stubs, both as to receipts and withdrawals, have been eliminated from the above tabulated statement. Any receipts of such funds which can not be identified remain as part of the gross receipts of business, and such withdrawals or disbursements of such funds as can not be identified are included in the amount shown as business payments or are disbursements of cash prior to the banking of the cash receipts of the business.

The taxpayer’s net income for the years here under consideration is found to be as follows:

1918_$20, 848. 61 ‘
1919_ 9, 883.69
1920_ 9, 798.17

There appears to be a mathematical error in the computation of tax liability for one of said years. A Rule 50 decision is, therefore, directed.

Order of redetermination will be entered on 15 days’ notice, under Bule 50.


author: Green :

text:
    Appeal of WORKINGMEN’S COOPERATIVE ASSOCIATION OF THE UNITED INSURANCE LEAGUE OF NEW YORK.
    Docket Nos. 2476, 4253.
    Submitted October 10, 1925.
    Decided April 20, 1926.
    A nonfraternal, mutual assessment, life and bealtb insurance association, incorporated under the laws of New York and doing business within the limits of Greater New York, having no capital stock and not organized for profit, is not exempt from taxation by section 231 of the Revenue Act of 1918.

      Henry B. Salisbury, Esq., for the taxpayer. .

      Ellis W. Manning, Esq., for the Commissioner. '
    Before Marquette, Green, and Love.
    These appeals are from determinations of deficiencies of $1,010.99 and $1,469.40 in income and profits taxes for the years 1918 and 1919, respectively. The question in each appeal is whether the taxpayer is exempt from taxation by section 231 of the Revenue Act of 1918.
    FINDINGS OF FACT.
    The taxpayer is a corporation of the State of New York, with its principal office in New York City. It was formed under chapter 175 of the Laws of 1883, entitled, “An act to provide for the incorporation and regulation of cooperative or assessment life and casualty insurance associations and societies,” the first section of which reads as follow’s:
    Section 1. Any number of persons not less than nine, residents of the state of New York, hereafter desiring to form an organization fraternal or nonfra-ternal for the purpose of transacting the business of life or casualty insurance, or both life and casualty insurance, upon the cooperative or assessment plan, may associate themselves together, and effect such organization as hereinafter prescribed, and not otherwise.
    The certificate of incorporation, which was approved August 24, 1886, contains the following statement of purposes:
    That the association proposes to carry on the business of Life and Casualty Insurance upon the co-operative or assessment plan and non-fraternal, * ⅜ ⅝.
    That the association proposes to carry on the business of Lif and Casualty Insurance upon the basis of weekly assessments graded on the basis of age and amount of Life or Casualty Insurance and on the basis of Special Assessments on its members to meet losses and liabilities whenever the weekly assessments are inadequate for that purpose.
    By chapter 353, Laws of 1884, all moneys received or collected by this kind of corporation, derived from admission fees, dues, and assessments, or any interest or other accretions thereon, and which are to be used for the payment of assessments, or for death losses, or for benefits to disabled members, are exempt from assessment and taxation.
    The association is governed by a board of 13 directors who are elected by the members. The board of directors has general control and management of its affairs and funds, and elects an executive boai'd of officers, consisting of a president, vice president, secretary, treasurer, and attorney, which has charge of the business of the association.
    It issues certificates of membership or policies under which it insures the lives of members upon the payment of weekly assessments and such special assessments as the directors shall make to meet losses and liabilities whenever the weekly assessments are inadequate to- meet them. The weekly assessment for life policies in 1918 •ranged from 5 cents to 60 cents per week, and the amount of insurance from $13 to $200. Sick benefit certificates are issued to holders of life policies, under which they are entitled to receive indemnity for loss of time through accident or sickness, upon payment of weekly and special assessments. In 1918 the sick benefit certificates provided for the payment of either $2 or $4 per week.
    The association confines its operations to the limits of Greater blew York City, but if a member leaves New York City his policy does not thereby become void. There are many members now residing elsewhere-to whom policies were issued while they were residents of Greater New York. The membership is composed almost entirely of poorer classes of working people, such as laborers and domestic servants. The number of certificates, both life and health and accident, in force at the end of the year 1918, was 18,124, and the amount of insurance in force was $1,448,867.82.
    The association has no capital stock outstanding and is not organized for profit. The weekly salaries of officers in 1918 were:
    President_^-$75
    Vice president_
    Secretary_ 40
    Treasurer_ 45
    At the close of 1918 the assets were $79,803.52; liabilities, $4,018.26; assessments collected during year, $95,724.57. Among the assets were $3,000 par value of United States Liberty bonds and $75,000 par value of corporate stock of the City of New York of an aggregate hook value of $69,749. The deficiencies were arrived at by special assessment under section 328, Revenue Act of 1918.
   OPINION.

Green :

The taxpayer claims exemption from taxation under section 231, Revenue Act of 1918, and contends it may properly be brought within one of the classes of organizations mentioned in the following subdivisions of this section:

(1) Labor, agricultural, or horticultural organizations;
⅜ ⅜! ⅜ ⅛ ⅜ ⅜ *
(3) Fraternal beneficiary societies, orders, or associations, (a) operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system, and (b) providing for the payment of life, sick, accident, or other benefits to the members of such society, order, or association or-their dependents;
* * ⅝ ⅜ * * *
(10) Farmers’ or other mutual hail, cyclone, or fire insurance companies, mutual ditch or irrigation companies, mutual or cooperative telephone companies, or like organizations of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting expenses.

Taxpayer argues it is a labor organization, and thus exempt under subdivision (1). We can not, however, find a basis for this contention. The fact that its membership happens to consist mainly of laborers is not determinative. The only restriction in its constitution is.that applicants shall be between the ages of 21 and 60 and “first-class insurance risks in health, habits and moral character.” The express purpose is to carry on the business of health and casualty insurance. It is equally clear that it does not come within the terms of subdivision (3). Its certificate of incorporation provides expressly that it shall be nonfraternal.

It is also argued on. behalf of the taxpayer that it would come within subdivision (10) as a “like organization” to those there enumerated; that it is like those in that it is mutual. The word “mutual” is an adjective qualifying the kinds of organizations named. The word “ like,” as here used, means “ the same as or of the same character ”; it does not mean '“ similar.” Life and health insurance companies or associations are essentially different from the kinds of companies specified in subdivision (10), and we can not impute to Congress an intention to include such associations.

It is a cardinal rule of construction that an exemption from taxation must be expressed in clear and unambiguous terms, and no claim for exemption can be sustained unless within the express letter or necessary scope of the exempting clause.

The subdivision of the Revenue Act of 1924 corresponding to subdivision (10) does name benevolent life insurance associations of a local character and mutual casualty companies, and the report of the Senate Committee on Finance on the 1924 Revenue Bill states that they were being added.

The deficiencies are $1,010.99 for the year 1918 and $1,1/19.40 for the year 1919. Order will be entered accordingly.


text:
    Appeal of HUNTINGTON & GUERRY, INC.
    Docket No. 3948.
    Submitted March 4, 1920.
    Decided April 20, 1926.

      Franklin 0. Parks, Esq., for the taxpayer.

      J. Arthur Adams, Esq., for the Commissioner.
    Before Graupner and Trammell.
    This appeal is from the determination of a deficiency in income and profits taxes for the calendar year 1918. The deficiency asserted by the Commissioner is $3,438.39 and the’whole amount thereof is in controversy in this appeal. The sole issue for consideration is whether the Commissioner properly denied the petitioner classification as a personal service corporation.
   FINDINGS OF FACT.

1. The petitioner is a South Carolina corporation with its principal place of business in Greenville. During 1918 it was engaged in the business of planning, installing, and supervising construction of electrical power and lighting systems for cotton mills and other industrial plants in South Carolina. On organization early in January, 1919, the capital stock of the taxpayer was $25,000. Shares to the par vaue of $12,500 were issued to each of R. S. Huntington and DuPont Guerry, Jr., for the going business and assets of a partnership which had been organized by them in January, 1916, and conducted under the firm name of Huntington & Guerry. The assets taken over from the partnership consisted of cash in bank, tools, furniture and fixtures, and accounts receivable, less accounts payable. The net worth of these assets was $29,169.92.

2. Both Huntington and Guerry devoted practically their entire time to the affairs of the corporation. Both men were electrical engineers by profession. When the services of the taxpayer were desired, one of these men would confer with the representative of the interested party. The conditions requiring service having been explained, one or both of the stockholders would study the problem presented and make plans and recommendations for its solution. If repair, installation, or construction work was required to correct or improve conditions existing in the plant of such a concern, the taxpayer would offer to contract for the work. Such contract work was performed upon varying bases — straight contract, which meant a contract for a definite amount and included cost of labor and materials and an estimated profit; percentage, which gave the taxpayer a profit based on an agreed percentage of the total cost of materials, labor, and overhead on a contract; labor and material, which was a charge for cost of labor and material on small jobs, plus a percentage; days work, which involved only a charge of labor on small jobs.

3. Most of the important contracts of the taxpayer were made on a percentage basis. The contracting parties in the instance of each of the contracts in evidence are designated as “ purchaser ” and “ contractor.” The germane portions of the form of contract usually employed by the contractor are as follows:

The Contractor agrees to furnish all materials except Lamp Bulbs necessary for a complete Village Lighting Installation in Purchaser’s “ Seneca Plant ” and install same in accordance with attached Plans prepared by Contractor in consideration of a sum equal to actual cost of the work as defined below, plus a fixed sum of One Thousand Dollars ($1,000.00) to cover Contractor’s overhead expenses' and profit.
And the Purchaser agrees to pay the Contractor between the first and fifth day of each month an amount equal to the total value of the materials furnished by the Contractor for the work, the total amount of the payroll for the preceding month, and the expenses incurred by the Contractor in performance of the work as defined below, and a partial payment of Two Hundred Dollars ($200.00) to apply on above mentioned fixed sum.
The Purchaser also agrees to pay the Contractor upon the completion of the work, the balance due upon the fixed sum above mentioned.
The cost of work shall include the following:
The actual cost of labor required, including the traveling expenses of men brought from outside points and the transportation of tools.
The actual cost of Liability Insurance on the payroll.
The actual cost of materials furnished by the Contractor, on the Purchaser’s premises including transportation charges.
The actual cost of first class foreman who shall employ all of his time not required for supervision in labor on the installation, and the living expenses of this foreman not exceeding the sum of one dollar ($1.00) per day.
The actual cost of State or Municipal License and Inspection Pees.
The cost of work shall not include the value of the time of the contractor in ordering and following up the materials which he is to furnish, nor any of his overhead expenses, allowance for which is included above, nor the value of his time in inspecting the work, but it shall include his traveling and living expenses during such inspection and the cost of telephone and telegraph messages made on account of the work. ,
Additional work not included in Plans will be done at cost plus Ten Per cent (10%) said cost for Contractor’s overhead expenses and plus Ten Per cent (10%) of said cost for Contractor’s profit, said cost to include all labor, material and expenses involved in additional work.
The number of working hours per day shall be nine (9) and for time in excess of this, ¿nd for night and Sunday work, the rate of pay for labor shall be fifty per cent (50%) greater than for day work.

4. In practically all instances contracts were entered into between the taxpayer and its customers before work was commenced, and no major items of material or supplies required for construction work were ordered or purchased before contracts for a job were signed. The only stock of materials carried by the taxpayer was composed of materials left over from jobs, which it agreed to take back and give credit for on its contracts. This stock was held until it could be used on other contracts. Materials to be used in the. performance of contracts were ordered by and shipped to the taxpayer in care of the customers. Invoices on such purchases were made out in the name of the taxpayer and required payment thereon in the month next succeeding the month in which the purchases were made. According to the usual form of contract, the taxpayer vgis paid “between the first and fifth of each month an amount equal to the total value of the materials furnished” by it for the work.

5. The taxpayer had four office employees who were regularly employed during the taxable year. All labor required for contract work was employed in the name of the taxpayer only for the period their services were needed. The number of such employees varied between forty and fifty per month. Liability insurance was car-, ried in a blanket policy in the name of the taxpayer, but the proportion due to any one contract was charged by it to the concern making the contract. All discounts received on materials purchased were retained by the taxpayer. The schedule of purchases, labor costs, collections, and payments made by the taxpayer for the taxable year is as follows:

C. The bank balances and deposits of the taxpayer for each of the months during the year 1918 were as follows:

7. The earnings and expenses of the taxpayer for the year 1918, as shown by statement accompanying its income-tax return for 1918, were as follows:

Gross earnings:
Profits on finished jobs_$12, 811. 02
Discounts from jobbers_ 540. 08
Suspense_ 509. 41
Estimated profits 1918_ 20, 889. 00
34, 749. 51
Less losses on finished jobs_ _ 2, 000. 53
- $32, 742. 98
Overhead and other expense:
Prospective jobs_ _ 88.10
Salaries of officers_ _ 12, 000.00
Office expense_ _ 0, 765. 38
Charity_ _ 220.00
Incorporation_ _ 50.00
Advertising—
Southern Textile Exposition. $279. 87
Miscellaneous_ 446. 52
■- 726. 39
Automobile depreciation_ 1, 692. 73
Automobile (U. S. A.)_1_ 277.70
Depreciation — •
Furniture and fixtures (30 per cent)_$410.96
Tools (50 per cent)_ 603.00
1, 013. 96
- 22,834.28
Net profit-1- 9, 908.70

8. The assets and liabilities of the taxpayer as of December 31, 1918, as shown by statement accompanying its income-tax return for 1918, were as follows:

ASSETS AND LIABILITIES, DECEMBER 31, 191S
Assets.
Cash in bank-$3, 451. 99
Receivables (Schedule 1)-:- 44,308.42
Investments (Schedule 4) — 1- 4,608.17
Inventories (Schedule 4)- 5,533.99
Estimated profits 1918- 20, 889.00
78, 791. 57
Liabilities.
Accounts payable-:-$30, 330. 34
Unfinished jobs--- 9, 382.61
Capital stock--- 10, 000.00
Undivided profits_ 29, 078. 62
78, 791. 57

9. The assets and liabilities of ’the predecessor copartnership as of December 31, 1917, were as follows:

Assets.
Cash in bank_■- $4, 078.24
Receivables:
Accounts (Schedule 1)-$40,465.07
Advances to employees- 3.37
-- 40,468.44
Investments:
Southern Textile Exposition_ 150.00
“ Liberty bond ”_ 100. 84
- 250.84
Inventories:
Automobile (Lexington)_ 600.00
Automobile (U. S. A.)_ 277.70
Furniture and fixtures- 755.26
Books, stationery, etc_ 200. 00
Electric materials and supplies- • 575.39
Tools_ 512. 06
-:- 2, 920.41
Total assets_ 47, 717. 93
Liabilities.
Accounts payable (Schedule 2)_$18,548.01
Total liabilities_ 18,548. 01
Investments:
R. S. Huntington_. $5, 000.00
DuPont Guerry, Jr_ 5, 000.00
Undivided profits (from attached sheet)_ 19,169. 92
Net worth-.- 29,169. 92
Total- 47,717.93

The deficiency is $3,438.39. Appeal of Thompson & Bimger, Inc., 1 B. T. A. 1093. Order will be entered accordingly.


text:
    Appeal of ESTATE OF WARREN H. SIMMONS.
    Docket No. 3885.
    Submitted March 2, 1926.
    Decided April 20, 1926.

      Mark H. Miller, Esq., for the taxpayer.

      J. S. Hoilstead,, Esq., for the Commissioner.
    Refore ARtjndell and Lansdon.
    The Commissioner has determined a deficiency in estate tax in the amount of $7,425.79. The petitioner alleges that such deficiency results from an erroneous overvaluation of certain shares of common stock owned by the decedent at the date of his death.
   FINDINGS OF FACT.

Warren H. Simmons, the decedent, died testate on April 15, 1922. Among other assets disposed of by will were 1,731 shares of the common stock of the Bemis Brothers Bag Co. of the par value of $100 per share.

The Bemis Brothers Bag Co. is a corporation engaged in the manufacture of bags from paper, cotton, jute, and other suitable materials. It has factories located at different points throughout the country. Its stock is rather closely held and is not listed on any stock exchange. It made no sales of stock in the year 1921, and, in the same year, only small amounts of the stock were sold by individual owners at prices not disclosed by the record.

During the year 1920 the Bemis Brothers Bag Co. sustained losses in the operation of its business in the amount of $23.34 for each share of outstanding common stock, and, in 1921, it earned a profit of $5.27 per share on such stock. It paid no dividends in 1921 and a 2 per cent dividend on January 31, 1922. Its balance sheet at December 31, 1921, was as follows:

Assets.
Current:
Cash_$2,203,243.94
Notes and accounts receivable_ 3, 029,389.88
Inventories__ 10>.640, 630.92
Stocks and bonds of other companies- 48, 658. 63
Cash and advances to affiliated companies_ 19, 396.12
Fixed:
Land and buildings_ 6, 544,106. 38
Machinery and tools_"- 3, 210, 785.79
Miscellaneous:
Unexpired insurance and other prepaid items_ 244, 875. 52'
Total. 25, 941, 087.18
Liabilities.
Current:
Notes "payable_$1,181, 062.50
Accounts payable_ 83, 230.42
Due to stockholders and employees_ 638,387.30
Reserves for taxes_ 226,459.38
Reserve pension fund_ 21,071.96
Three-year notes_i_ 650, 000.00
Fixed:
Common stock_ 11, 085,000.00
Preferred stock_ 1, 954, 900.00
Surplus_ 10,100,975.62
Total_ 25,941,087.18

The common stock of the Bemis Brothers Bag Co. had a fair market value of $150 a share at April 15,1922.

Order of redetermination will be entered on 15 days1 notice, wader Bule 50.


author: Trammell:

text:
    Appeal of ESTATE OF ISABELLA C. HOFFMAN, MEYER C. HOFFMAN et al., Executors.
    Docket No. 5338.
    Submitted February 15, 1926.
    Decided April 20, 1926.
    1. That part of the estate of a former decedent of which the present decedent was given the power of appointment by will should not he included in the present decedent’s estate, the power of appointment not having been exercised.
    2. Held, under the evidence, that the property of the decedent can be identified as having been received by bequest, devise or inheritance from a person who died within five years prior to the death of the decedent, or as having been received in exchange for property so received.

      If. L. Seidman, C. P. A., for the taxpayer.

      Frank T. Horner. Esq., for the Commissioner.
    Before Grattpner and Trammell.
    This is an appeal from the determination of a deficiency in estate tax in the amount of $9,221.51. The issue involved is whether, under section 403 of the Revenue Act of 1921, a certain amount of property appearing in the estate of Isabella C. Hoffman is deductible as having been taxed in a previous estate.
    FINDINGS OF FACT.
    Isabella C. Hoffman died on April 26, 1923, a resident of New York City. Meyer C. Hoffman, her son, and Pauline H. Rosenberg, her daughter, are the duly qualified executors of her estate.

      Charles Hoffman, the husband of Isabella C. Hoffman, died March 9, 1919, and under his will designated his wife, Isabella C.,Hoffman, his daughter, Pauline H. Rosenberg, and his son, Meyer C. Hoffman, as his executors, who qualified as such under the laws of New York on April 3, 1919.
    The net estate of Charles Hoffman was $314,072.15, upon which an estate tax of $10,462.89 was paid. One half of his estate was left to Isabella C. Hoffman, and the income from the other half was left to her during her life with a power of appointment as to the principal. The power of appointment was not exercised by Isabella C. Hoffman by her will, which was executed October 13, 1922, as provided in the will of Charles Hoffman which gave her such power.
    The pertinent portions of the respective wills are as follows:
    ' WILL OF CHARLES HOFFMAN.
    Third: I give, devise and bequeath one-haif of all of the residue and remainder of my property of whatsoever nature or description and wheresoever situated, both real and personal, of which I may be seized or possessed at the time of my death, unto my beloved wife, Isabella O. absolutely and forever.
    Fourth: I give, devise and bequeath the remaining one-half share of said residue and remainder of my estate unto my said wife for her use during the remainder of her natural life; my said wife to receive the net income, rents or profits therefrom during her life, and upon her death, such one-half share of my estate to go to such person or persons as she, my said wife, may by her last Will and Testament appoint or designate, giving her full power unto that end; or in default of the exercise by my said wife of such power said one-half share of my estate or so much thereof as she may fail to dispose of by her Last Will and Testament, shall, upon her death, go, and I hereby give, devise and bequeath the same in such event, upon her death, to our children Meyer and Pauline in equal shares or, in the event of either of my said children not surviving my said wife, but leaving lawful issue him or her surviving, then and in such event the share of my said child to go to such issue per stirpes and not per capita; the issue taking collectively the share which its parent would have taken if living; provided, however, that in the event that our son Meyer shall die during the lifetime of my said wife, without leaving a widow or issue him surviving, that in such event I direct that the entire said one-half share of my estate, upon the death of my said wife, go to my lawful heirs and next of kin other than my daughter Pauline or her descendants; per stirpes and not per capita in the same manner as if my said daughter Pauline or her descendants were not then living.
    WILL OF ISABELLA C. HOFFMAN.
    Second: I give, devise and bequeath one-half share and moiety of all my property of whatsoever nature or description, both real- and personal, and wheresoever situated, unto my son Meyer, to have and to hold unto him absolutely and forever.

      Third: I give, devise and bequeath the retraining one-half share and moiety of all my said property unto my son Meyer and my daughter Pauline as Trustees to hold the same in trust for the following purposes; to pay the income from such property to my daughter Pauline during her life, the principal of such share, upon her death to go to her children, if she leave any, her surviving, and in the event of her leaving no children her surviving, to my son Meyer. In the event that my said son shall, predecease my said daughter, leaving no widow or children him surviving, title to such share shall vest in my daughter absolutely.
    The estate of Charles Hoffman wa@ administered at all times during the life of Isabella C. Hoffman by Meyer C. Hoffman, one of the executors. The estate was never partitioned and no part of the principal or corpus was ever distributed. No accounting with the Surrogate’s Court of the State of New York was filed, nor were the executors ever discharged by the court. The income of the estate of Charles Hoffman was paid over currently to Isabella C. Hoffman.
    On April 9, 1919, there was on deposit to the credit of Charles Hoffman' $8,658.52 in the Metropolitan Bank, and $11,869.25 in the Public National Bank of the City of New York. These accounts were on the above date turned over to the credit of the estate of Charles Hoffman. On September 1, 1922, the account with the Metropolitan Bank was changed to the Metropolitan branch of the Chase National Bank when the two banks merged. On' September 14, 1922, the balance on deposit with the Public National Bank was transferred to the Chelsea Exchange Bank. On April 9, 1919, and thereafter, all deposits and withdrawals were made from these accounts by Meyer C. Hoffman, one of the executors, on behalf of the estate.
    Isabella C. Hoffman, prior to the death of Charles Hoffman, owned no property in fee. She had a life interest in three parcels of real estate through her father’s estate, the income from which was paid to her. She had no bank account.
    The executors of the estate of Charles Hoffman at no time merged any funds or property of their own or of any other person with the funds or property of the estate. At all times the property belonging to the estate of Charles Hoffman consisted either of the property which he left at the time of his death or the proceeds of the reinvestment of such property. The estate of Charles Hoffman had a number of notes and mortgages which were constantly being paid off. At the time of his death he was involved in some real estate ventures which had not been completed. Among his assets were various securities which were deemed by the executors to be too speculative, and they were sold. As the notes and mortgages were collected, the real estate ventures liquidated, and the securities sold, the proceeds were reinvested in real estate and other property, which was held until the death of Isabella 0. Hoffman.
    A number of the properties that were left by Charles Hoffman were held without change by the estate until the death of Isabella C. Hoffman, and were included in the identical form in her estate. The value of these properties was $207,600, upon which the Commissioner has allowed a deduction as property previously taxed. The Commissioner disallowed the amount of $166,472.15, which was obtained from notes and mortgages paid off and the liquidation of other securities and reinvested in real estate and other property, on the ground that it had not been identified as having been previously taxed.
   OPINION.

Trammell:

The question involved in this appeal is whether tlie estate of Isabella C. Hoffman is entitled to a deduction in excess of that allowed by the Commissioner, under the provisions of section 408 (a) (2) of the Revenue Act of 1921, on account of property forming a part of her gross estate which the taxpayer alleges has been identified as having been received from a prior decedent by gift, bequest, devise, or inheritance, or as having been acquired in exchange for property so received, and if so, the extent of such deduction in excess of that allowed by the Commissioner.

The value of the gross estate of Charles Hoffman, the prior decedent, was $695,602.60. The net estate was $374,072.15, and the estate tax levied thereon was $10,462.89, which was duly paid.

In determining the tax liability of the estate of Isabella C. Hoffman the Commissioner allowed $207,600 as a deduction on account of property previously included for tax, but disallowed $166,472.15 claimed by the taxpayer, upon the. ground that there had been more than one transfer of the securities and other property making up that amount. It was contended by the Commissioner that that part of the estate was not received by gift, devise, or inheritance from the estate of Charles Hoffman and was not received in exchange for property so received within the meaning of the statute.

The taxpayer apparently assumed that all of the assets of which Charles Hoffman died seized and possessed either went to Isabella C. Hoffman under the terms of the will or were transferred by her in her will by virtue of a general power of appointment. The will of Charles Hoffman left to Isabella C. Hoffman only one-half of his property, real and personal.' The other one-half he did not give to his wife by will but gave her a general power of appointment thereof, together with the income, rents, and profits from the property during her natural life. At her death she was given power to designate or appoint by her last will and testament the person or persons to whom it should go, and, in the absence of the exercise of such power, it was to go to his son and daughter or to the survivor.

The Commissioner in his brief alleges that Isabella C. Hoffman did not exercise the power of appointment conferred upon her by her husband’s will. From an examination of the two wills introduced in evidence we are of the opinion that the power of appointment was not exercised. Isabella 0: Hoffman did not in her will appoint or designate any person to whom the property over which she had the power of appointment should go. She merely gave, devised, and bequeathed her own property, making no reference whatever to property not owned by her and over which she had the power of appointment.

The pertinent provisions of section 402 of the Revenue Act of 1921 are as follows:

That the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated— * * *
<e) To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will, or (2) by deed executed in contemplation of, or intended to take effect in possession or enjoyment at or after, his death, except in case of a bona fide sale for a fair consideration in money or money’s worth.

Since we find that the said Isabella 0. Hoffman did not exercise the power of appointment given her in the will of Charles Hoffman, no property passed under a general power of appointment as , contemplated in section 402 (e), above quoted.

Only one-half of the property belonging to Charles Hoffman at the time of his death passed under his will to Isabella C. Hoffman. The other half passed under the will of Charles Hoffman directly to his children by virtue of the fact that Isabella C. Hoffman failed to exercise the power of appointment vested in her. This being true, an amount in excess of the value of the property which is claimed as a deduction was never a part of the estate of Isabella O. Hoffman.

With respect to the property which was a part of the estate of the present decedent, we do not agree with the contention of the Commissioner. In our opinion, if property can be identified as having been included in the estate of a prior decedent, the estate of the subsequent decedent is entitled to a deduction on account thereof. There is no limitation to one exchange if the property remains segregated and distinguishable. Here there was no commingling of funds or assets. The assets could be and were kept identified.

Upon consideration. of all the-facts we are of-the opinion that the assets in the amount of $166,472.15 were included in the estate of the prior decedent and were subjected to tax.

All of the property of the present decedent, which consisted of only one-half of the estate of the prior decedent, was subjected to the estate tax as a part of her husband’s estate, or was received in exchange for property so taxed.

Order of redet&rmdnation will te entered on 10 days' notice, wnder Rule 50.


author: Smith:

text:
    Augusta Bliss Reese, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 70410.
    Promulgated March 6, 1934.

      Laurence Graves, Esq., for the petitioner.

      B. M. Goon, Esq., for the respondent.
   OPINION..

Smith:

This proceeding involves a deficiency in petitioner’s income tax for the year 1930 in the amount of $17,294.47. The two issues involved are based upon the petitioner’s allegations:

(1) That the respondent erroneously reduced the deduction to which the petitioner is entitled for contributions to charitable organizations by $4,498.77 upon the ground that the deduction for contributions is limited to 15 percent of the ordinary net income, excluding capital net gain; and

(2) That the respondent erroneously included in petitioner’s gross income the amount of $96,801.32 representing income distributable to the petitioner from the estate of George Bliss.

The principal facts are stipulated. The petitioner was the sole beneficiary under a trust created by the will of her father, George Bliss, the income of which was distributable to her in accordance with item 14 of the will, which reads as follows:

Fourteenth. — The Sixth of said Shakes, designated as the share of my daughter Augusta, I give, devise and bequeath to my said Executors, the survivors and survivor of them and their successors, In Trust, for the uses and purposes following, that is to say:
To retain and hold the said share as Trustees under this my will, with all the powers and authority hereinafter given to such Trustees; to invest and keep invested said share as and in the manner hereinafter provided; to collect and receive the rents, issues, income, dividends and interest of the said 9hare; and after paying all taxes and assessments that may be imposed thereon, or any part thereof, and all other expenses incidental to the execution of the trusts hereby created, including the legal compensation of the trustees therein, to apply the net income of said share half-yearly, or as the same shall be received, to the use of my said daughter Augusta during her natural life, and upon her death, to convey, transfer, pay over and distribute the same equally in fee simple to and among her lawful issue then living in equal shares, per stirpes and not per capita; and in case my said daughter shall leave no lawful issue surviving her, then in such case, to convey, transfer, pay over and distribute the said share equally in fee simple to and among her surviving brothers and sisters, whether of the whole or half blood, but being of my blood, and the lawful issue then living of any and each deceased brother and sister of such blood, per stirpes and not per capita.

During the taxable year 1930 the fiduciary distributed all of the income of the trust to the petitioner, with the exception of certain deductions not here in dispute. The total amount paid to petitioner during the year was $192,177.04, of which the respondent determined that $126,419.56 was net taxable, income.

By order of the Surrogates’ Court dated May 26,1930, the fiduciary paid out an aggregate of $96,801.32 representing commissions to trustees for receiving and distributing the corpus of the trust. The decree of the Surrogates’ Court is as follows: ■ >

Ordered', adjudged and decreed that out of the balance of the trust for the benefit of Augusta Bliss Reese found as above remaining in the hands of the trustees they make the following payments:
From Principal—
To Katherine Baldwin Bliss, Cornelius Reese Agnew, George M. Clark and John J. Carolan, as executors of the will of Walter Phelps Bliss, deceased, the sum of $27,040.76, representing commissions found to be due the estate of Walter Phelps Bliss, deceased, late executor.
To George Bliss Agnew, the sum of $35,232.48, representing commissions found to be due him.
To William Willis Reese, the sum of $34,528.08, representing commissions found to be due him.

In her income tax return for 1930 the petitioner did not include the amount of $96,801.32 in her gross income, reporting a net income of only $12,917.91.

The petitioner reported a capital net gain of $29,991.85 in her return and elected to have such capital gain taxed at 12% percent in accordance with the provisions of section 101 (a) of the Revenue Act of 1928. The return showed charitable contributions aggregating $46,215.81, for which a deduction was claimed of $21,854.31, computed under section 23 (n) of the Revenue Act of 1928. By an adjustment shown in the deficiency notice the respondent has increased the allowance for contributions to charity by the amount or $10,021.43.

The first issue, as stated above, is decided in favor of the petitioner’s contention upon authority of Aaron Straus, 27 B.T.A. 1116; Edgar A. Igleheart et al., Executors, 28 B.T.A. 888; Bliss v. Commissioner, 68 Fed. (2d) 890, reversing 27 B.T.A. 205; and Harbison v. Commissioner, 68 Fed. (2d) 1004, reversing 26 B.T.A. 896.

Witb respect to the second issue, the respondent has added to the income reported by the petitioner the amount of $96,801.32 representing the trustees’ commissions paid by the fiduciary out of the principal of the trust fund. The question is whether the petitioner is entitled to a reduction of her taxable income, by such amount.

Under clause fourteenth above of the trust agreement the entire net income of the trust fund was payable to the petitioner. All of such income for the taxable year 1930 was distributed to the petitioner without diminution on account of the $96,801.32 paid out as trustees’ commissions. We see no reason why the petitioner should not be taxed on all of the taxable income distributed to her, in the absence of any showing that such amount was erroneously or unlawfully distributed. Cf. Freuler v. Commissioner, 291 U.S. 35. In that case it was held that where a trustee under a will distributed all the income of the trust, including amounts representing depreciation of the corpus, and where later the Probate Court held that such distributions were erroneous as to the amount representing depreciation and ordered such amounts repaid by the beneficiaries, the amounts in question were not taxable income to the beneficiaries. In the instant case the trustees’ commissions were paid out of the principal of the trust fund by decree of the Surrogates’ Court dated May 26, 1930. It does not appear that the validity of the decree of the court directing that the payment of the commissions be made from principal has ever been questioned. Until reversed or overruled it is conclusive in matters regarding the distribution of the trust property. Freuler v. Commissioner, supra.

The instant case is also distinguished from Helvering v. Falk, 291 U.S. 183, where the Supreme Court held that the beneficiaries under a trust, the income of which, after deduction of taxes and expenses of administration, was payable to them, were entitled to deduct depletion from the income received in the years 1922 to 1926, inclusive. The reasoning of the Court in that case was that the deductions .for depletion properly should have been made from the trust income. In the instant case the trustees’ commissions were a charge against the principal of the trust fund and did not affect the amount of income distributable to the beneficiary. We hold that the petitioner is taxable on the amount of income actually distributed to her in the taxable year.

Keviewed by the Board.

Judgment will be entered wider Buie 50.


author: Trammell :

text:
    Francis M. Bass, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 73626.
    Promulgated March 6, 1934.

      George M. Spears, O. P. A., for tbe petitioner.

      0. W. Sweeher, Esq., for the respondent.
   OPINION.

Trammell :

In this proceeding the petitioner seeks a redetermination of a deficiency in income tax for the year 1930 in the amount of $288.66. The sole issue is whether or not petitioner is entitled to deduct from gross income for the taxable year a loss sustained under the following facts stipulated by the parties:

During the year 1924 the petitioner built a house, which was intended for and occupied by him exclusively as a residence.
During 1930 the said residence was destroyed by fire.
In filing his income tax return for the year 1930 the petitioner claimed a loss of $5,900.74, representing the difference between the cost of the said residence, reduced by the salvage value, and the insurance received.
The above-mentioned loss of $5,900.74 was computed as follows:
Cost of residence_$27,542.07
Less: Salvage value_ 1, 000. 00
Net cost_$26, 542. 07
Less: Insurance recovered- 20, 641. 33
Loss as deducted_ $5,900.74
The residence destroyed by fire was immediately replaced by petitioner and the insurance proceeds were invested therein.
In the audit of the petitioner’s 1930 return the respondent disallowed the loss of $5,900.74.
It is agreed that if any loss is held to be deductible, it shall be the sum of $5,900.74.

Petitioner contends that the above loss is allowable as a deduction under the following provisions of the Revenue Act of 1928:

SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
*******
(e) Losses T)y individuals. — In the ease of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise—
* ft * * * * *
(3) of property not connected with the trade or business, if the loss arises from fires, storms, shipwreck, or other casualty, or from theft.
Respondent contends that the loss is not recognizable for tax purposes, under the following provisions of.the same act: .
SEC. 112. RECOGNITION OF GAIN OR LOSS.
* * * * * ' •* *
(f) Iiwohmtary conversions. — .If property (as a result of its destruction in whole or in part, * * *) is compulsorily or involuntarily converted into property similar or related in service or use to the property so converted, or into money which is forthwith in good faith * . * * expended in the acquisition of other property similar or related in service or use to the property so converted, * * * no gain or loss shall be recognized.

We think petitioner’s contention must be sustained. That part of petitioner’s property in the fire-destroyed residence which was not compensated for by insurance was not compulsorily or involuntarily converted into similar property, or into money which was expended in the acquisition of similar property, and hence such loss does not come within section 112 (f), supra, but is an allowable deduction under section 23 (e) (3), supra.

Reviewed by the Board.

Judgment will be entered wnder Bule 50.


text:
    J. P. Roddy, Petitioner, v. Commissioner of Internal Revenue, Respondent. Ben A. Morton, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 71403, 71405.
    Promulgated March 6, 1934.

      M. W. Egerton, Esq., for the petitioners.

      O. W. Sweelcer, Esq., for the respondent.
   OPINION.

Teammell :

The petitioner takes the position that the facts in this case distinguish it from that line of cases which hold that the dividends declared on December 31 of one year and the checks then mailed but not received by the stockholder until the following year constitute taxable income in the year of distribution instead of in the year of receipt. See Effie B. Shearman, 26 B.T.A. 716; affirmed by the Circuit Court of Appeals for the Second Circuit, 66 Fed. (2d) 256; Franklin J. Matchette, 26 B.T.A. 909; Mary Miller Braxton, 22 B.T.A. 128. The petitioner does not attack the soundness of our decisions in those cases.

In this case, however, we are unable to draw the distinction contended for. It is not necessary that there be a formal declaration of dividends in order for a corporation to distribute its earnings. The distribution may be authorized by informal action and when so authorized and actually distributed the effect is the same as if the dividends had been declared and distributed as a result of formal action.

The formal action of the directors at a meeting January 27, 1931, ratified the action taken in an informal way authorizing the distribution on December 31, 1930. However, the informal action was sufficient to authorize the distribution and the distribution was actually made and has never been attacked.

The factors upon which the theory of constructive receipt is invoked existed at the end of 1930. We think therefore that the dividends should be taxable to the petitioner in 1930.

Reviewed by the Board.

Judgment will he entered under Rule 50.

Smith and Sea well dissent.


author: Maequette:

text:
    Frischkorn Development Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 30496, 35170, 42452.
    Promulgated March 6, 1934.

      J. Ii. Amicic, O.P.A., for the petitioner.

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

Maequette:

These proceedings were consolidated. Docket Nos. 80496 and 42452 involve deficiencies in income tax for fiscal years ended June 80, as follows:

1923_ $647.89
1924_ 10,575.54
1925_ 1,439.52
1926_ 1,630.44
1927_ 1, 436. 02

Docket No. 35170 involves the liability of the petitioner as a transferee of the property of the Frischkorn Homes Co., hereafter referred to as the Homes Co., for a deficiency in income tax for the calendar year 1922 in the amount of $28,881.84 and a delinquency jienalty of $7,095.46. The petitioner admits its liability as a transferee of, but disputes the amount of the tax and also the penalty due from, the Homes Co.

These proceedings were submitted on a stipulation, which is made a part of this report, oral evidence, and certain exhibits. The issues are (a) whether the Homes Co. realized taxable gain in 1922 on the disposition of its assets to the petitioner and, if so, to what extent such gain should be recognized; (b) whether a 25 percent penalty for delinquency should be added to the tax, if any, due from the Homes Co. for the year 1922; (c) the determination of the cost or other basis of the petitioner, and its allocation (for the purpose of ascertaining the gain derived from the subsequent realization and disposition) of the assets acquired from the Homes Co. in April 1922; (d) whether, and to what extent, the gain of $66,366 derived by the petitioner in the fiscal year 1922 from the disposition of certain real estate to the city of Detroit should be recognized for income tax purposes; and (e) determination of the cost or other basis to the petitioner of certain lands alleged to have been acquired by petitioner with the proceeds of the disposition of the real estate to the city of Detroit. The respondent makes claim for any increased deficiencies that may result from the determination made by the Board in these proceedings.

The petitioner was organized in 1919 under the laws of Delaware. On April 1, 1922, the Homes Co. transferred all its assets to the petitioner in consideration for 941 shares of the petitioner’s 7 percent cumulative preferred stock having a par value of $94,100, petitioner’s negotiable promissory note in the principal amount of $39,196, and the assumption by the petitioner of all its liabilities. The total cost or other basis of the assets so disposed of to the Homes Co. was $385,688.96. The respondent, in computing the gain to the Homes Co. arising from this transaction, valued the 941 shares of stock at $94,100 and the promissory note at $39,196. The liabilities assumed by the petitioner amounted to $349,796.08. On this basis the profit on the transaction was $97,403.12.

The note for $39,196 was payable in approximately two years after date and bore interest at 6 percent. It was secured by no lien, nor did it bear the signature of any other person than the petitioner. The note and all interest thereon was paid January 18, 1924, by the petitioner to E. S. Frischkorn, who acted as agent for the stockholders of the Homes Co. which was dissolved November 15, 1922. The amount of the payment was $43,155.85.

The petitioner’s articles of incorporation authorized the issue of 1,500 shares of preferred stock each of the par value of $100. This stock was preferred both as to assets and dividends. Of this total amount, 950 shares were issued in May 1919 and 550 shares were issued in October 1919. Prior to April 1, 1919, the petitioner had retired 941 of these shares. Certain shares were retired at $102, others at $105, and others at $110 per share. On March 6, 1922, 12% of these shares were retired. The 941 shares.which had been retired were reissued in part payment for property of the Homes Co. and were issued directly to the 11 stockholders of that company in proportion to their stockholdings therein. All these stockholders were business associates of E. S. Frischkorn, who was the president of both companies. The shares thus issued to the stockholders of the Homes Co. were redeemed at par or over in October 1926, November 1926, and January 1927. The petitioner had never defaulted in the payment of the 7 percent dividend due on its preferred stock. The balance sheet of the petitioner as of April 1, 1922, and after taking over the assets and liabilities of the Homes Co., was as follows;

ASSETS

LIABILITIES

The item Contracts Payable in Default ” represents land contracts of the Homes Co. which were past due but were in good standing. The inability of the Homes Co. to meet these liabilities when due was one of the principal causes for the transaction of April 1, 1922.

Business conditions in Detroit, where or near which the real estate of the petitioner was situated, were not good in 1921. In 1921 and in the early part of 1922 money was tight and hard to borrow. There was a large amount of unemployment. A large amount of the petitioner’s land contracts was in default. Beal estate was sluggish. Sales had fallen off. The petitioner was a part of the group of Frischkorn corporations. All of them were engaged in the real estate business. The total sales of the group for the first six months of 1920 were $1,949,981; for the whole year 1920, $2,043,215; for the year 1921, $120,980; and for the first three months of 1922, about $16,000, as against sales of about $830,800 for the first three months of 1920.

The Homes Co. made its income tax return on the calendar year basis and its returns were due on March 15 of each year. For the year 1921 it did not file its return until September 28, 1923, and then only after notice of the delinquency had been given to it by the collector. The making of the returns for the Frischkorn group of 11 companies and 3 individuals was in the hands of, an accounting firm assisted by an officer (Paul) of one of the corporations, who overlooked the making of the return for the Homes Co. As soon as notified, the return was made and filed, reporting a loss of $5,889.12. The Homes Co. did not report any gain arising from the transfer to the petitioner, but the balance sheets attached to the return disclosed that the stock and note of the petitioner had been substituted for its assets which were on hand at the beginning of the year.

In 1924,10 acres of a larger tract owned by the petitioner and held for subdivision and sale were condemned by the city of Detroit for park purposes. The amount of the award, all of which was received by the petitioner, was $111,180. This money was first collected by the Frischkorn Real Estate Co., which was the collector for the whole Frischkorn group, and after receipt by the petitioner was deposited by it in the Dime Savings Bank in its general bank account. The following deposits were made in that bank ■ from money derived from the award:

May 12, 1924_$34, 803.23
May 21, 1924_ 50, 000.00
May 31,1924_ 10, 000.00

The remaining part of the money received from the city was included in a remittance of $32,036.92 from the Frischkorn Real Estate Co. and deposited by the petitioner in the Dime Savings Bank on June 13, 1924. No replacement fund was set up and the moneys received from the condemnation award were not segregated, but were deposited in the petitioner’s general account in the Dime Savings Bank. During the spring, summer, and fall of 1924 the petitioner was making large collections and disbursements which were respectively deposited and withdrawn from this bank.

The balance sheet of the petitioner as of June 30,1924, shows cash in the amount of $18,370.52.

(1) On May 21, 1924, the petitioner purchased from Albert L. A. David a tract of land for which it paid by two checks totaling $32,338 of that date on the Dime Savings Bank. (2) On May 21, 1924, the petitioner entered into a contract with Eugenie O. Morell for the purchase of certain lands for which it made cash payments by checks of that date on said bank for the total amount of $14,555.05. (3) On May 21, 1924, the petitioner entered into a contract of purchase of land with Emile O. Morell and Eugenie O. Morell and made cash payments by two checks on the Dime Savings Bank of that date in the total amount of $22,153.05. (4) On July 9, 1924, the petitioner entered into a contract of purchase with Joseph J. Baker and wife, on which it made a cash payment by check of that date on said bank in the amount of $5,000. (5) On November 14, 1924, the petitioner entered into a contract of purchase of real estate with Anna David, for which it made a cash payment of $20,000, evidenced by two checks of that date of $10,000 each on the Dime Savings Bank. (6) On November 14, 1924, the petitioner entered into a contract with Ellen Ford for the purchase of land for which it made payment by check of even date on the Dime Savings Bank for the sum of $20,000.

All the above tracts of land were purchased for subdivision purposes, and were properties similar or related in service and use to the property condemned. The proceeds of the property condemned by the city of Detroit were used in the purchase of properties (1), (2), and (3).

Two questions grow out of the transfer of April 1, 1922, from the Homes Co. to the petitioner. They are, first, Did taxable gain result to the Homes Co. from the transfer? and, second, What was the proper basis upon which to compute the gain or loss to the petitioner on sales of the property so acquired? With respect to the first issue, the petitioner asserts that, since the transaction was in the nature of an exchange, no taxable gain was realized for the reason that neither the stock nor the note received in payment had on April 1, 1922, any readily realizable market value. Sec. 202 (c), Revenue Act of 1921.

With respect to the second issue, we are of opinion that petitioner’s note for $39,196 should be included in the cost of the property to it, and this irrespective of its value when given. It was a direct obligation of the petitioner, accrued on its books, and a part of the cost of the property to it. Counsel for the petitioner asserts that, since section 9050 of the Compiled Laws of Michigan (1915) provides that every certificate of preferred stock shall contain a provision to the effect that it is redeemable at par at a certain time, therefore the petitioner’s preferred stock constituted a contractual obligation. The answer to this is that the statute referred to applies only to corporations organized under the laws of Michigan, while the petitioner was organized under the laws of Delaware. This, however, does not dispose of the petitioner’s contention, since if the preferred stock had, when received, a fair market value, then it should be included in cost to the extent of that value. Fred J. Collins, 16 B.T.A. 1426; I. C. Bradbury, 23 B.T.A. 1352. Thus we have presented the questions of whether the stock had a readily realizable market value and whether it had a fair market value, and, if so, what that value was.

Petitioner introduced in evidence its balance sheet as of April 1, 1922. Not only does it not dispute the facts disclosed by the balance sheet, but, by introducing it in evidence, stands sponsor for it. That balance sheet shows that the $150,000 par value of petitioner’s preferred stock had behind it assets of net worth of $557,550.09 and that each share of the stock of $100 par value was backed up with assets of the net worth of over $370. Of course, the same is true to a larger extent as to the note. Such a showing alone might not be sufficient to prove a readily realizable market value or even perhaps a fair market value, especially if the stock were that of a new concern just having been issued. But such is not the case;.the petitioner had then been a going concern for nearly three years. It had a history. That history discloses that all of its 1,550 shares of preferred stock had been issued in May and October 1919, and that of this amount 941 shares had been called in and redeemed prior to April 1, 1922, for prices as high as $110 per share. It had not then and never has defaulted in payment of the dividend of 7 percent. It is further shown that the same 941 shares were issued in part payment for the assets of the Homes Co. Using the future as corroborative of the past (Wright v. Commissioner, 50 Fed. (2d) 727), we find that before the hearing of these proceedings this same stock had been again redeemed at more than par, and that the note and all interest thereon had been paid.

On the question whether the note had readily realizable market value, the petitioner introduced two officers of a certain bank, and as to whether the stock possessed such value, it introduced two stock brokers. The bankers testified that their bank would not have discounted the note and gave as their reasons, length of time the note had to run, the amount of secured indebtedness of the corporation which would have to be first paid, and, further, that it was not eligible for a rediscount in a Federal Beserve Bank. One of them stated that a good endorser might be a material factor on the question of whether the note would be discounted. We thus find that this witness was not so sure that the length of time the note had to run would have precluded its discount. He also stated that his bank would not accept the stock as collateral in the absence of other security. The brokers stated that this stock could not have been quickly disposed of; that the public did not desire real estate stock because of the bad real estate conditions; and since (as they assert) this was a close corporation, the stock could have been sold only to insiders.

We would be disposed to give weight to the conclusions of these witnesses, although they go to the extent not only of attributing to these securities no readily realizable market value, but practically denying to them even a fair market value, if - they had displayed any real knowledge of the petitioner’s business history. Not one of them testified that he knew that history. Each confined himself to a balance sheet which all but one apparently then saw for the first time. The exception stated that perhaps, as an officer of his bank, he might have seen another balance sheet, but he was very uncertain about it. No effort was made to enlighten these witnesses as to petitioner’s history or its business standing, nor were they told the peculiar history of the stock. One witness went so far as to state he did not desire to see the balance sheet. Instead of the balance sheet disclosing, as intimated by the bankers, that a large amount of the indebtedness of the petitioner was secured by liens, it showed that the total amount of lien indebtedness was something less than $300,000 out of a total liability including surplus and preferred stock of over $1,290,000.

Taking into consideration the amount of assets behind the note and the preferred stock and the history of the stock, we are of opinion that this note and stock had a fair market value at least equal to the face value of the one and the par value of the other. We are further of opinion that the testimony introduced by the petitioner is not sufficient to overcome the determination of respondent that the note and the stock had readily realizable market value. George M. Wright, 19 B.T.A. 541; aff'd., 50 Fed. (2d) 727; Crowell v. Commissioner, 62 Fed. (2d) 51; Fesler v. Commissioner, 38 Fed. (2d) 155. Cf. Imperator Realty Co., 24 B.T.A. 1010. Since among the liabilities assumed by the petitioner was the tax liability of the Homes Co., the amount of the tax, when computed, should be added to petitioner’s cost in computing gain or loss from the sale of the property acquired.

The only cause advanced for the failure of the Homes Co. to file its return for 1922 until after it had been notified by the collector that it was delinquent is, that for reasons unknown, a firm of accountants employed to make the return, and an officer of one of the Frischkorn corporations who was to assist them, failed or forgot to prepare and file the return. This excuse is not sufficient. Eagle Piece Dye Works, 10 B.T.A. 1360; Gus V. Winston, 22 B.T.A. 1194; Berlin v. Commissioner, 59 Fed. (2d) 996.

Respondent asserts that the petitioner paid a commission to the Frischkorn Real Estate Co. out of the money received by it from the city of Detroit, and that this indicates that the proceeding by the city, although in the nature of a condemnation proceeding, did not result in an “ involuntary ” conversion as required by section 203 (b) (5) of the Revenue Act of 1924. That paragraph provides:

If property (as a result of its destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation, or the threat or imminence thereof) is compulsorily or involuntarily converted into property similar or related in service or use to the property so converted, or into money which is forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, expended in the acquisition of other property similar or related in service or use to the property so converted, or in the acquisition of control of a corporation owning such other property, or in the establishment of a replacement fund, no gain or loss shall be recognized. If any part of the money is not so expended, the gain, if any, shall be recognized, but in an amount not in excess of the money which is not so expended.

This paragraph not only provides for an “ involuntary ” conversion, but also for a compulsory, conversion. However this may be, the evidence is clear that the petitioner did not desire that its property be taken for park purposes, and that the proceeding by the city was both compulsory and involuntary. Besides, we do not think any commission was paid. The petition in Docket No. 30496 alleges that the petitioner received from the city $111,180. which was $66,366 in excess of the cost of the property to it. Respondent, in his answer, admits the amount of the profit. In his deficiency notice he arrived at the same profit by determining that the cost of the acreage condemned was $44,814, and the amouni received by the petitioner was $111,180.

It is true that the witness for the petitioner first testified that all that was received by it from the condemnation award was $94,803.23 apd that the remainder was retained by the Frischkorn Real Estate Co. as commissions. He later testified that the remainder of the money derived from the city was included by the Frischkorn Real Estate Co. in the remittances of June 13, 1924, and that he did not know whether a commission had been paid. It is pertinent to point out that by the stipulation the Board is requested to determine to what extent the gain of $66,366 received from the city of Detroit should be recognized for income tax purposes. In view of these facts and of the utter incongruity of the idea of paying a commission for the collection of money which was the petitioner’s for the asking, we are of opinion that no commission was paid, and that the petitioner received all of the condemnation award.

The petitioner did not seek to set up a replacement fund. Cf. Eastern Steamship Lines, Inc., 17 B.T.A. 787.

It asserts that there was no necessity to earmark the money received from the city in order to comply with the provisions of the above paragraph. We assent to this and also agree that the petitioner “ forthwith ” made its investments as that word is used in the paragraph. Paul Haberland, 25 B.T.A. 1370. While it is not necessary that the money be earmarked, still it is necessary that the petitioner show by proper evidence that the money received from the city was used for the purchase of the properties thereafter acquired. That this is a proper construction is made clear by the last sentence of paragraph 5, where it is provided that if any part of the money is not so expended, gain shall be recognized to an amount not in excess of the money not so expended. This clearly indicates that the money could not have been spent for a general purpose, and if so spent, that the taxpayer may use other money for the purchase of like property and still receive the benefits of the paragraph. The petitioner has afforded us no assistance in tracing the money. The only evidence on this issue was introduced by the respondent. From the evidence before us, however, we are convinced that the amount of $69,046.10 expended May 21, 1924, was derived from the proceeds of the condemnation, but we can not proceed further. We do not know how the bank account may have fluctuated. We find from the petitioner’s return for the fiscal year ended June 30, 1924, that it had on hand on that date in cash, $18,370.52. The one thing that is clear is that it could not have had on hand the proceeds of the condemnation proceeding in an amount in excess of its cash. We do not know how much of its cash was in bank nor whether the bank balance had fallen to a lower sum. We are not able to determine whether any further proceeds of the condemnation remained on hand. While this is a relief provision and should be liberally construed, yet when one seeks to take advantage of its benefits he should be held to a full and open disclosure. Cf. Rock Island A. & L. R. Co. v. United States, 254 U.S. 141. The petitioner’s gain should be recognized to the extent of the money not expended as required by the paragraph and its gain on the sale of the land acquired on May 21,1924, should be computed under section 204 (a) (10) of the Revenue Act of 1924, John J. Bliss, 27 B.T.A. 803; Chickasha Cotton Oil Co., 18 B.T.A. 1144. Paul Haberland, supra, is not in conflict with these views, since there the money found to be properly reinvested was clearly but circuitously traced into the investment. Such is not the case here.

Judgment will be entered under Rule 50.