author: Hill:

text:
    Kansas City, St. Louis & Chicago Railroad Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 94886.
    Promulgated November 6, 1940.

      Silas H. Strawn, Esq., Edward G. Ince, Esq., Arthv/r D. Welton, Jr., Esq., and Robert McDougal, Jr., Esq., for the petitioner.

      John D. Riley, Esq., for the respondent.
   OPINION.

Hill:

The question presented involves the determination of the amount of income, if any, received or accrued to petitioner during the taxable year under the terms of the leasehold agreement.

Petitioner in its income tax return reported income in tlie total amomit of $141,079.58, comprised of $124,026 representing the amount of dividends paid for it by the Alton Co. plus Federal income tax thereon in the amount of $17,058.58 paid for it by such company. The deficiency determined herein results from the action of respondent in increasing petitioner’s income to the amount of $379,954.58, comprising $334,026 determined by respondent as representing the amount of dividends on petitioner’s stock paid or payable for it by the Alton Co. in the taxable year plus $45,928.58 representing, as determined by respondent, the amount of income tax on such last amount paid or payable by the Alton Co. for petitioner.

Aside from the question of whether the amount of Federal income tax on the net earnings of petitioner’s railroad, paid or payable by the lessee out of the gross earnings of such railroad, is chargeable as rental under the lease, the maximum amount of the rental to petitioner provided by the leasehold agreement is the total of a 7 percent dividend on $3,000,000 par value of preferred stock and $271,800 par value of common stock, and a 6 percent dividend on $1,750,000 par value of preferred stock. Such maximum rental is payable only in the event the gross earnings of the railroad for the year preceding the taxable year, less a deduction of 65 percent thereof for operating expenses, renewals and repairs and less a further deduction of all taxes and assessments of every description, are sufficient to pay the full amount of such dividends. We have found that the total amount of such dividends in the taxable year was $334,026 and the amount of the gross earnings of the railroad for the year preceding, less the stated deductions, was approximately $729,000.

A somewhat parallel situation was presented in the case of Gold & Stock Telegraph Co., 26 B. T. A. 914; affd., 83 Fed. (2d) 465. In holding in favor of the Commissioner, the Board there said:

* * * But they argue that they are under no obligation to their stockholders and therefore do not own or derive any benefit from the payments to the stockholders. The use to which money is put does not determine whether or not it was income before being so used. Nor need it determine who owned the income. Rent is income of the lessor who is entitled to say what shall be done with it. Why should it make any difference what the lessee agreed to pay on behalf of the lessor, whether a debt or a dividend? In either case it has applied the rent in accordance with the wishes of the lessor. If constructive receipt applies in the one case it may just as well apply in the other. Cf. Blalock v. Georgia Ry. & Elec. Co., 246 Fed. 387. * * *

On appeal tbe decision of the Board was affirmed; the Circuit Court, per bland, C. J., adding:

It is argued that the rentals payable upon the large stockholdings of the Western Union [lessee] itself should not be taxed as income of the lessor because the rentals to that extent were not paid out, but we can see no merit in the contention. The Western Union, like every other stockholder of the lessor, chose to acquire an interest in the corporate association. Rent accrued to it as a stockholder of the corporation and, whether it chose to pay to itself or not, its rights were as truly worked out through the corporation as those of the other stockholders. The property of the corporation of which it was a beneficiary yielded a return, and that corporation cannot avoid taxes because the guaranty could not be enforced by the Western Union against itself. * * *

Petitioner has pointed to the later case of Louisville, Henderson & St. Louis Ry. Co., 20 Fed. Supp. 483 (1937), in an effort to distinguish the instant case from the Gold & Stock Telegraph case. In the Louisville case, the court, in finding for the taxpayer, pointed out that the lessee in the Gold & Stock Telegraph case was required to pay a lump sum in rent. The fact in the latter case was that the Western Union Co. agreed to pay annual rental of $300,000, payable quarterly, being a sum equal to 6 percent per annum on the lessor’s stock.

In the instant case, although the amended instrument does not name any lump sum, it does name the method by which a sum certain can be obtained as the result of a simple arithmetical calculation. This difference between the two cases is immaterial. However, to return to the Louisville, Henderson & St. Louis case, supra, the real distinction between that case and the instant case is pointed out by the court in its opinion:

In the cited case, [Gold & Stock] the lessee was required to pay a lump sum in rent. It was not measured by the number of shares of stock of the lessor outstanding, excluding that owned by the lessee, nor did the contract fixing rent exclude in measurement the stock of the lessor owned by the lessee.

It is easy to see that the same distinction could be applied to the present case. Consequently, in following the Gold & Stock Telegraph case, we do not misinterpret the doctrine of the Louisville case.

Petitioner insists, however, that Treasury Regulations 77, article 70, has no bearing on the present controversy, inasmuch as that article deals only with leases, and petitioner asserts that under the laws of the State of Missouri, the instrument in controversy here is the acknowledgment of a transfer in fee. Regardless of which is the correct view of the indenture, and this Board makes no determination thereof, the conclusions to be arrived at in either case must be the same. If there is a ground upon which to sustain the Commissioner’s determination other than that evoked by Commissioner, this Board feels compelled to take notice of that ground and render decision accordingly. If, as petitioner asks, the instrument be treated as an absolute conveyance, the petitioner nevertheless is in a sense, by reason thereof, being relieved of an annual obligation. It is true that this obligation, except in regard to the guaranteed preferred stock, was conditioned on the sufficiency of petitioner’s net income. It is also obvious, however, that, since there could never be income other than that provided under the instrument, the “rent” provision was intended to be looked upon as a satisfactory annual income for the corporation, and on such understanding the stockholders ratified the plan. This was the wish of the petitioner. A taxpayer can not retain its corporate form of association and the benefits to be derived therefrom without being subject to the taxes which are naturally involved.

There remains the question of liability for income taxes guaranteed to be paid by the Alton Co. because of dividends on the stock. On this question we have found as a mixed conclusion of fact and law that the indenture, even as amended, requires the Alton Co. to pay taxes on account of the dividends on the 6 percent guaranteed preferred stock only; and in effect such taxes in the amount of $14,437.50 actually were paid therefor by the Alton Co. Consequently, petitioner realized income in this amount but not in the amounts of any other income taxes claimed by respondent to have been assumed by the Alton Co., except for any amounts actually paid by the Alton Co. because thereof, which were in the amount of $2,616.08.

There is also the question as to whether the Alton Co. owed all petitioner’s stockholders the amounts set forth as maximum rental or only that amount required as the minimum in any one year. The indenture is sufficiently clear on this point, and, if the gross income of the premises (computed according to the formula set forth in the indenture), is sufficient to pay the maximum rent, then the maximum is due. Inasmuch as we have found as a matter of fact that the application of this formula to the gross income derived by the Alton Co. from the premises in 1932 was sufficient to cover the maximum rent, it must of necessity follow that the Alton Co. was obliged in the taxable year 1933 to pay that maximum.

That part of such maximum rental not paid by the Alton Co. in the taxable year represented the amount of dividends payable to it on stock of petitioner which the Alton Co. held. Funds being available in the hands of the Alton Co. under the terms of the lease contract for the payment of such maximum rental, the obligation of petitioner in respect of such dividends was discharged, notwithstanding that the Alton Co. neither credited petitioner nor charged itself with such payment. Consequently petitioner is taxable on an amount as income equal to such stated amount of maximum rental.

Finally petitioner makes the contention that the Alton Co. did not assume the obligations of its predecessor under the indenture. The ground for this contention is that the Alton Co. never ratified the contract in writing, and still has the power under the court decree to disaffirm contracts entered into by its predecessor. As respondent points out, however, this is a power to disaffirm, not to affirm, and consequently the mere fact that the Alton Co. enjoyed the benefits of the indenture in the year 1933 is sufficient ground to estop it from denying the obligations set forth therein. Cf. Dunlop v. James, 67 N. E. 60 (1903); Broadwell v. Banks, 134 Fed. 470 (1905).

Decision will be entered v/nder Rule SO.

       Ain?. 70. Income to lessor corporation from leased, property. — Where a corporation has leased its property in consideration that the lessee shall pay in lieu of other rental an amount equivalent to a certain rate of dividend on the lessor’s capital stock or the interest on the lessor’s outstanding, indebtedness, together with taxes, insurance, or other fixed charges, such payments shall be considered rental payments and shall be returned by the lessor corporation as income, notwithstanding the fact that the dividends and interest are paid by the lessee directly to the shareholders and bondholders of the lessor. The fact that a corporation has conveyed or let its property and has parted with its management and control, or has ceased to engage in the business for which it was originally organized, will not relieve it from liability to the tax. While the payments made by the lessee directly to the bondholders or shareholders of the lessor are rentals as to both the lessee and lessor (rentals paid in one case and rentals received in the other), to the bondholders and the shareholders such amounts are interest and dividend payments received as from the lessor and as such shall be accounted 'for in their returns.

       Revenue Act of 1932—
      SBC. 22. GROSS INCOME.
      (a) General Definition. — “Gross income” includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * *


source: Caselaw Access Project

author: Disney :

license: Public Domain

text:
    Nocona Cotton Seed Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97526.
    Promulgated November 8, 1940.

      Barry O. Weeks, Esq., and R. B. Oannon, Esq., for the petitioner.

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

Disney :

The respondent determined the deficiencies above stated by adding to the $11,366.33 net income reported the item of $715.36, because of the depreciation sustained during the taxable year ended May 31, 1937, but not taken into consideration in determining the gain from the sale shown by the return, thus arriving at a capital gain of $18,073.86, instead of $17,358.50; and by determining an adjusted undistributed net income of $9,522.38 subject to surtax. Petitioner avers that there was error in the determination of deficiency in that there was no capital gain, but a loss, contending that the petitioner sold for $6,000, and that the depreciation taken in earlier years and used in the return and by the Commissioner in calculating profit or loss was excessive. It further alleges a right to a credit due to payment of the sales price to the bank under a written contract executed prior to May 1, 1936. Upon brief it contends also that the conveyance of the assets was one in liquidation, resulting in no gain, and finally that, since McCall held 40 percent of petitioner’s stock, it is entitled to a dividends paid credit for 40 percent of the amount of funds going into McCall’s hands.

1. The first question for our determination is the amount which petitioner received for the property sold. If petitioner received only $6,000 as it contends, there would be loss instead of gain in the transaction, on the theory of either party, and hence no further question for solution. Whether petitioner received $6,000, or $26,000 (net $25,000 after payment of $1,000 commission) depends upon the status of C. McCall and his relation to petitioner in the transaction. The petitioner contends that McCall was not trustee for it, or its stockholders, that the sale was an arm’s length sale at public auction for $6,000, resulting in a loss to it, and that McCall in disposing of the $26,000 received by him acted only for the bank. We think the record contradicts such conclusion. Though there is some evidence that the stockholders’ resolution designating McCall as trustee for them was not participated in by him, that he made no agreement with them, and that the original agreement terminated because the proposed purchaser refused to take title from the petitioner, thus ending any trusteeship by McCall, the matter proceeding as an arm’s length sale under the trustee’s deed; nevertheless McCall’s further testimony and other facts of record convince us that he was trustee for petitioner and its stockholders. He testified that the trustee’s sale was merely to perfect the title so that the Norris people would take it and that he represented both the bank and petitioner’s stockholders. The resolution of August 31,1937, shows Norris to be the proposed purchaser in the transaction as to which McCall was designated trustee; and Norris did in fact ■purchase. The second return for the taxable year here involved, which McCall transmitted by letter, recites that $4,445.02 cash was being “held by C. McCall, Trustee, for Stockholders per resolution August 31, 1937.” (Italics supplied.) Though the return was not signed by him, his letter of transmission recites that “We” are enclosing the return, and refers to C. C. Littleton, petitioner’s president, who signed the return, and a copy of the resolution of August 31, 1937, is attached. We think McCall was familiar with the return and that it represents his view as well as that of the officers of petitioner. Moreover, the fact is that McCall still holds money for petitioner’s stockholders, and his letter recites that, after paying the Federal tax, he wishes to pay them their remaining funds. He paid, out of the $25,000 from the sale, not only for cottonseed purchased by petitioner, which was not covered by the deed of trust, but other bills for petitioner. Had McCall purchased the property for $6,000 at an arm’s length sale, he would have had no duty of paying petitioner’s debts. In such case the trustee under the deed would have had the duty of applying the $6,000 in part satisfaction of the debt of $8,900 and interest, and the balance would have remained unpaid by the petitioner, unless it had other property, which appears not to be the case. We think it plain that McCall acted as trustee for petitioner and stockholders and that the petitioner received $25,000 net for its property. We so hold.

2. Was any profit realized upon $26,000 received, after paying $1,000 commission? The petitioner’s amended return, on the accrual basis, introduced by respondent showed an original basis of $50,850.66 (without land valued at $1,000) and a reserve for depreciation of $43,445.45 with only $7,405.21 remaining cost or other basis to be recovered. This would, of course, upon the above determined sales price of $26,000 show a large capital gain, and petitioner’s return itself, therefore, lists a capital gain of $17,358.50 (which respondent increased by $715.36 because of petitioner’s failure to consider that amount of depreciation). To this the petitioner’s answer and contention is, in effect, that in its return it committed error, in that in fact the depreciation set up was excessive, leaving to it a greater base, and that, for the years 1933 to 1937, the petitioner had net losses instead of income against which to charge the depreciation taken under principles announced in Pittsburgh Brewing Co. v. Commissioner, 107 Fed. (2d) 155. Assuming, without here considering, the correctness of the principle announced in that case, we do not find in the record as to the years 1933 to 1937, sufficient evidence to cause its application, for all that the record before us shows is that the petitioner filed returns for 1933 to 1937 showing net losses, and depreciation deductions charged off, as above shown in the findings of fact. This of course does not prove the facts shown in such returns. It is in evidence, moreover, that expense amounts not shown, other than the depreciation deductions, entered into the computation of net losses, and we have no evidence as to whether such expenses were, or were not, in fact, incurred or allowed or disallowed by the Commissioner. In other words, we do not know that in fact the depreciation items did not offset taxable income, which showing is required by the Pittsburgh, Brewing Co. case, if they are to be held not “allowed.” The petitioner argues that whether the Commissioner disallowed items so as to affect the net losses relied upon to show that the depreciation items were not “allowed” was for the respondent to show, he having known in advance of petitioner’s contention and having had the returns in question at trial. He cites cases as to failure to produce evidence readily available. But such principle did not require the respondent to prove what was petitioner’s burden. Petitioner also relies upon the fact of the determination by the Commissioner of depreciation of $715.36 for the year 1937, as proving that for the years 1933 to 1937 the reasonable allowance was not more than that amount per year. It does not follow from this that the actual depreciation was the same in earlier years. Washburn Wire Co. v. Commissioner, 67 Fed. (2d) 658. The same case, citing Kansas Milling Co., 3 B. T. A. 709, holds that “A contemporaneous estimate of depreciation, made by a manufacturer with respect to his own machinery, and entered on his books, is some evidence of its correctness.” Here we have petitioner reporting, in 1937, a depreciation reserve of $43,445.45 and remaining cost to be recovered of only $6,438.23. Obviously this, assumedly the bona fide judgment of petitioner, should not without convincing reason be found not to prevail, particularly as to the earlier years, against the respondent’s figure of $715.36 for 1937. As to the years prior to 1933, the evidence is even less effective. We have, in effect, only the fact that in 1937 there was an accumulated operating loss of $56,911.31, without information as to what in particular, or what years, contributed thereto. Nor can the evidence that the plant was used only three or four months per year, and repairs and replacements made, be considered to prevail. These items were charged to expense, and are not shown to be other than ordinary repairs. No more can be said for the fact that the plant was sold for $26,000. The fact that the plant was kept in repair and the corporation was a going concern may well have influenced the purchaser. We consider this evidence insufficient to meet petitioner’s burden to show excessive depreciation taken in former years, and hold that it has not proven such excessive deduction of depreciation as to require readjustment of the basis determined upon sale in the taxable year as reported by petitioner and determined by the respondent.

3. The next problem presented is, whether the conveyance to C. McCall on October 5,1937, was a sale giving rise to recognizable gain or loss. Petitioner in the alternative says that it was not, but was a distribution of assets in liquidation. Though stated, this contention is not argued. We have held that C. McCall was trustee for petitioner’s stockholders. Conveyance to him was not by way of distribution in liquidation. He lias not yet distributed to the stockholders the proceeds of the sale.

4. Next we consider whether petitioner is entitled to a credit under section 26 (c) (2) of the Revenue Act of 1936, on the theory that the sale of the petitioner’s assets provided a credit under the words of that statute “An amount equal to the portion of the earnings and profits of the taxable year which is required (by a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the disposition of earnings and profits of the taxable year) to be paid within the taxable year in discharge of a debt.” Though agreeing upon brief that the contract evidenced by the trust deed did not require, so long as petitioner retained the ownership of the property, that it set aside or pay out of its current earnings any specific sum, with the possible exception of interest, petitioner argues that as soon as the property was sold, the entire proceeds of sale was required by the trust deed to be paid over (to the amount necessary) to the bank and applied on the indebtedness ; and that thus the facts here involved comply with the statutory requirement that earnings and profits be paid in discharge of a debt. Petitioner says that its only gross income, if any, was from the sale of the assets, that “practically the entire amount of these proceeds were required to be and were paid over to the bank”, and that therefore credit is due. Even assuming the correctness of the theory, the record shows, however, that out of the $26,000 only about $9,000 was paid to the bank under the deed of trust, or its written provisions. The payment of about $13,000 (for cottonseed purchased) is not shown to have been under a written contract, or one executed prior to May 1, 1936. On the contrary, McCall testified:

Q I will ask you what agreement, if any, existed between the bank and the mill with respect to the deed advances as to whether they were to be secured by this deed of trust?
A Well, probably I was securing the bank more than anything else. I don’t know that the deed of trust would have secured those seed, but it was willing to, and understood it could be paid.

This tends to show payment under some sort of oral and apparently contemporaneous agreement. An oral agreement is not sufficient. Certainly one in writing is not shown. Northwest Steel Rolling Mills, Inc. v. Commissioner, 110 Fed. (2d) 286. To the extent of payment for cottonseed, plainly petitioner can not rely on section 26 (c) (2).

Considering then the amount covered by the trust deed: Upon brief the respondent refers to the amount paid the bank as in satisfaction of an ordinary debt “of long standing” and seems therefore to make no contention that the contract involved was not executed prior to May 1, 1936. We so assume. Was there, under such contract, paid to the bank an amount entitling petitioner to credit under the statute above quoted? We think not. There was no measurement of the payment to be made by the earnings and profits of the petitioner. The contractual provisions do not, within the language of G. B. R. Oil Corporation, 40 B. T. A. 738, cited by petitioner “inevitably require in their performance a drawing on current earnings, thus removing current earnings as a source of dividend payments.” In that case the bank was by the contract assigned the properties with right to collect the entire income therefrom and apply the entire amount on the debt. Here there is only the usual provision for sale upon default of property mortgaged. The contract did not, as petitioner argues, require that all or “practically all” proceeds of the sale be paid to the bank, and thereby include “all earnings and profits.” In fact, only about $9,000 out of $26,000 proceeds of sale was so paid. The balance was payable to the petitioner, so far as the written contract was concerned, and even after about $13,000 had been paid to the bank under a separate and apparently oral understanding for seed purchased, the remainder was held for the petitioner, or its stockholders. No amount “equal to a percentage of earnings and profits” was required by the trust deed to be paid or set aside. We conclude and hold that such a contract is not within the purview of section 26 (c) (2) of the Revenue Act of 1936.

5. The petitioner lastly argues in the alternative that, since C. McCall owned 40 percent of the stock of petitioner, therefore to the extent of 40 percent of the assets or property received by hi nr and subject to his command, a credit should be allowed in computing surtax on undistributed adjusted net income. We think such contention is untenable. Apparently the theory is based on section 27 of the Revenue Act of 1936. Subsection (g) thereof provides that a dividends paid credit can not be allowed unless the distribution is pro rata, equal in amount and with no preference to any share of stock as compared with other shares of the same class. McCall alone could not be the subject of a dividends paid credit. Moreover, no dividend has been paid or distributed to the stockholders. We hold that petitioner is not entitled to dividends paid credit. Finding no error in the determination of the deficiencies involved,

Decision will be entered for the respondent.

       (c) Contracts Restricting Payment op Dividends.—
      ****** *
      (2) DisposeetoN op profits of Taxable year. — An amount equal to the portion of the earnings and profits of the taxable year which is required (by a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the disposition of earnings and profits of the taxable year) to be paid within the taxable year in discharge of a debt, or to be irrevocably set aside within the taxable year for the discharge of a debt; to the extent that such amount has been so paid or set aside. Por the purposes of this paragraph, a requirement to pay or set aside an amount equal to a percentage of earnings and profits shall be considered a requirement to pay or set aside such percentage of earnings and profits. As used in this paragraph,, the word “debt” does not include a debt incurred after April 30, 3936.


author: HaRRON:

text:
    Wilhelmina Dauth, Petitioner, v. Commissioner of Internal Revenue, Respondent. John P. Dauth, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 96882, 96883.
    Promulgated November 14, 1940.

      Howard L. Kuttner, Esq., and Samuel Weiss, O. P. A., for the petitioners.

      F. S. Gettle, Esq., for the respondent.
   OPINION.

HaRRON:

Petitioners contend that the Unidauth Realty Corporation was insolvent on November 17, 1936, the date of dissolution, and that it owed petitioners $19,873.66, the balance in the “Notes Payable” or running account of the corporation with petitioners. Petitioners claim deductions in the year 1936 for loss on their investment in the capital stock of Unidauth and for loss from an uncollectible debt owing to them by the corporation.

Respondent contends that petitioners did not sustain losses upon liquidation of Unidauth. For brevity, respondent’s argument is not set forth here, but it will be discussed hereafter.

The question presented is simply whether or not petitioners sustained actual losses on the dissolution of their wholly owned corporation. Respondent disallowed the claimed deductions. The underlying reason for respondent’s determination is that, because petitioners owned and controlled Unidauth, their decisions being the decisions of the corporation, certain transactions can not be recognized as arm’s length, bona fide transactions producing any real loss to petitioners. Respondent relies upon the principles expressed in Gregory v. Helvering, 293 U. S. 465; Griffiths v. Commissioner, 308 U. S. 355; Higgins v. Smith, 308 U. S. 473.

The record in this case, including evidence covering petitioners’ transactions utilizing Unidauth from its creation to its dissolution, requires that all matters relating to the question of whether petitioners sustained' actual losses from their investment in and loans to Unidauth be examined. As will be shown later, respondent’s claim for increases in the deficiencies must be denied. But in considering the questions at issue two things must be kept in mind: First, that the burden of proof is upon the petitioners to show that they actually lost the sums of money for which deductions are claimed in order to overcome the prima facie correctness of respondent’s original determinations disallowing the deductions; second, that the close relationship between petitioners and their wholly owned corporation requires close scrutiny of the facts. Also, it should be pointed out that the real question for decision is the correctness of respondent’s determinations and not the soundness of the reasons which he assigned in his notice of deficiency or of the arguments advanced by him. Raoul H. Fleischmann, 40 B. T. A. 672, 681.

' Consideration of the facts shows that Unidauth’s only substantial business activity consisted of its purchase and sale of the University Avenue propérty to the Gaines-Eoberts Corporation. Thereafter, it owned a purchase money second mortgage on that property from 1929 to 1934, for a period of about five years. The mortgagee paid $4,000 of principal on the mortgage and interest. Unidauth filed income tax returns, kept books, paid salaries and dividends to petitioners, • and, in general, functioned as a business corporation with respect to the real estate transactions. It is clear that actual corporations existed in Unidauth and Unavista. The record does not support respondent’s broad contention that they should not be regarded as-entities separate from their stockholders.

It is the disposition in 1936 of the second mortgage, the satisfaction of a mortgage of $86,000 for $20,000 in cash, which respondent asks us to disregard. If that transaction should be disregarded, then, respondent contends, Unidauth was not insolvent upon dissolution and petitioners did not sustain losses. Eespondent asks that the sale of the second mortgage to Unavista be disregarded; that it be held that Unidauth owned an interest in the University Avenue property of a value of $66,000; that this interest passed to petitioners upon Unidauth’s dissolution; and, finally, that petitioners realized a gain of $36,126.34 when Unidauth was dissolved.

Petitioner called a witness who was duly qualified to testify upon the value in 1936 of the second mortgage on the University Avenue property. His testimony stands uncontradicted. He testified that the second mortgage, in August of 1936, upon a cash sale, was worth about $24,000, but that it would have been practically impossible to obtain a purchaser for a second mortgage at that time. Petitioners elected to have the title to the University Avenue property held by a corporation, Una.vista, when Gaines-Eoberts relinquished title. A taxpayer may elect to form corporations for the transaction of business enterprises. If bona fide transactions are conducted by the corporations they may not be disregarded. Unidauth and Unavista were separate and distinct entities. Here the circumstances surrounding the cancellation of the second mortgage upon a payment of $20,000 by Unavista were not such that it can be concluded that the transaction was not bona fide. Unavista had continued to pay Unidauth interest on the second mortgage from 1934 to 1936. In 1936 the officers of Unavista, petitioners, negotiated the refinancing of the first mortgage and they intended to endeavor to sell the University Avenue property. They found that the property could not be sold subject to two mortgages aggregating $246,000 ($160,000 plus $86,000), and they determined that satisfaction of the second mortgage was necessary. Unavista paid Unidauth $20,000 for the second mortgage, and this was a fair price according to the testimony of petitioner’s real estate expert witness. The sale of the second mortgage was consummated as an arm’s length transaction. The mere fact that the stockholders of both corporations were the same individuals is not such an “exceptional circumstance” as to render the sale ineffective or invalid as a bona fide sale. It is concluded that full recognition should be given to the sale of the second mortgage for $20,000 and that respondent’s claim that petitioners received an equity in a second mortgage of a value of $66,000 upon dissolution of Unidauth is not sustained. Accordingly, respondent’s claims for increased deficiencies are denied. Burnet v. Commonwealth Improvement Co., 287 U. S. 415; Dalton v. Bowers, 287 U. S. 404; General Securities Co., 38 B. T. A. 330.

However, the above conclusion does not dispose of the question, for the following reasons. Petitioners claim that Unidauth owed them a total sum of $19,873.66 on the basis of a book balance in the “Notes Payable” account. The credits in this account aggregated $218,493.81, representing an amount due petitioners from Unidauth. $81,517.50 of the credits represents the “purchase price” of securities which Unidauth is said to have purchased from petitioners in 1929 and which were sold, apparently, a few days thereafter for $49,157.50, which sum clearly was received by petitioners from Unidauth in January of 1930. If that transaction was not a bona fide, arm’s length transaction between petitioners and their wholly owned corporation it should be disregarded in our consideration of whether petitioners actually were losers of money upon the dissolution of Unidauth. Eliminating the credits and debits from the “Notes Payable” account relating to that transaction in stocks, the facts are that Unidauth was not indebted to petitioner upon dissolution, and, further, that just prior to dissolution Unidauth paid to petitioners a total of $25,500, with the result that petitioners received $12,486.34 in excess of all valid indebtedness of Unidauth. Under such facts it can not be held that petitioners sustained losses on loans or on their investment in the stock of Unidauth. Therefore, consideration is now given to the 1929 stock transaction.

In 1929 Unidauth sold the University Avenue property to Gaines-Roberts at a profit. Petitioners owned stocks which they had previously acquired jointly at a cost of $81,517.50. It appears that the market prices of these stocks in December of 1929 was much less than the cost prices. On the books of Unidauth a notation of a purported sale of the stocks to Unidauth appears, and a credit was made in the “Notes Payable” account as of December 24, 1929, for $81,517.50, cost to petitioners. Notation of a resale appears on December 31, 1929, by Unidauth to Theodore Prince & Co., brokers, for $49,157.50. Profit and loss is charged with a loss of $32,360. In January of 1930 the “Notes Payable” account shows that about $51,000 in cash was paid to petitioners. These are the only facts in the record relating to the transaction. But from these facts it appears that the transaction may have been for the purpose of enabling Unidauth to show a loss on its income tax return for 1929 to offset a profit from the sale of the University Avenue property. The question is whether there was a bona fide sale of the stocks to Unidauth in 1929 which created a debt of Unidauth to petitioners in the sum of $81,517.50.

It has been shown above that determination of the main questions turns upon the above question. Petitioners claim that at the end of the life of Unidauth the net result of their financial interests in that corporation showed a loss, and deductions therefore are claimed. It is proper and necessary to examine all matters which have a bearing upon the question of whether petitioners sustained actual losses upon the liquidation of Unidauth in 1936. “To secure a deduction, the statute requires that an actual loss be sustained. An actual loss is not sustained unless when the entire transaction is concluded the taxpayer is poorer to the extent of the loss claimed; * * * Taxation is concerned with realities, and no loss is deductible which is not real.” Schoenberg v. Commissioner, 77 Fed. (2d) 446, 449; certiorari denied, 296 U. S. 586.

The courts have held that a loss is deductible upon a bona fide sale by an individual to a wholly owned corporation. Jones v. Helvering, 71 Fed. (2d) 214; Commissioner v. Eldridge, 79 Fed. (2d) 629. Where there is a bona fide sale it may be made without a cash payment at the time and it may create an indebtedness. The mere fact that the purpose of the transaction may be to minimize taxes does not make the transaction ineffective if it is in all other respects a bona fide transaction. But if there is no real transfer of title, no complete relinquishment of dominion and control to the purchaser by the seller, the transaction is not effective to constitute a bona fide sale the consequences of which may be given effect for purposes of tax benefits by way of providing a basis for a deduction. Wickwire v. United States, 27 Fed. Supp. 724; Pierre S. du Pont, 37 B. T. A. 1198; Shoenberg v. Commissioner, supra; Higgins v. Smith, supra. The test to determine whether a transaction is a bona fide transaction is described by the term “arm’s length”, or, in other words, Was the transaction carried out in the way that the ordinary parties to a business transaction would deal with each other ?

When actual market prices play no part in a sale of stocks a question at once arises whether the transaction is bona fide. It is not reasonable that a seller is willing to sell property at less than its! worth, or that a buyer is willing to buy for more than the reasonable worth of property. Where the facts show that the parties to a sale demonstrate such a lack of interest as to the price at which one sells to another that the buyer purportedly gives a sum greatly in excess of the worth of the property, such facts indicate that what was done was not a real business transaction and “was not intended to have the usual results and significance of a bona fide business deal.” Pierre S. du Pont, supra, p. 1242. Here petitioners, the sole stockholders of Unidauth, could establish an apparent loss to Uni-dauth by offering to sell and selling the stocks in question at cost to them at a time when Unidauth, selling the stocks on the market, would realize a loss. The effect was to give to their wholly owned corporation the benefit of a loss which, otherwise, they would be entitled to realize. It mattered not to petitioners, because they expected to receive reimbursement of the full cost of the securities to them from Unidauth from its earnings.

Under such circumstances it must be held that the purported sale in 1929 was not a bona fide sale effective to create a valid debt from Unidauth in the amount of the agreed purchase price and effective later, in the taxable year, to support petitioners’ claims that they sustained losses from their transactions with and investments in Unidauth. There is not enough of substance in the stock deal in 1929 finally to determine that petitioners were losers in fact of the sums of money claimed upon the dissolution of Unidauth. Higgins v. Smith, supra. See also Rubay Co., 9 B. T. A. 133; John M. Burdine Realty Co., 20 B. T. A. 54; Grace A. Cowan, Executrix, 30 B. T. A. 296; William H. Albers, 33 B. T. A. 373. Unidauth may have been no more than an agent of petitioners, selling the stock in question and remitting the proceeds of the sale to them soon after the sale through a brokerage firm. Or, if it could be held that there was a sale, then Unidauth can not be held to have owed petitioners, for purposes of their tax question here, more than the fair market value of the stock, and from the record it was no more than $49,157.50. Then .the transaction cancels itself out, for Unidauth paid that sum to petitioners. In any event, it is concluded that the stock transaction in 1929 must be disregarded in determining whether OR not petitioners sustained losses from a debt of Unidauth and investment in stock of Unidauth upon its dissolution. In the findings of fact the effect of eliminating the transaction is shown, and the result is that petitioners received from Unidauth just prior to its dissolution in 1936 more than the total of the balance actually owing to petitioners in the “Notes Payable” account and of their capital investment. Respondent’s disallowance of the loss deductions is sustained. Decisions of deficiencies will be entered in the amounts determined by respondent in the notice of deficiency.

Decision will be entered for the respondent.


author: Aenold :

text:
    The Morris Plan Company of St. Joseph, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97814.
    Promulgated November 14, 1940.

      Richard L. Douglas, Esq., for the petitioner.

      Angus R. Shannon, Esq., for the respondent.
   OPINION.

Aenold :

There is no serious dispute in this proceeding with regard to the principal facts. Petitioner purchased notes secured by chattel mortgages, which were represented to be genuine but were later discovered to be forgeries. The question we must determine is whether the transactions between the Appliance Co. and petitioner created debts, as contended by respondent, or amounted to a loss in the nature of theft by deceit and artifice, as contended by the petitioner. No contention is made by petitioner that its funds were embezzled.

Respondent concedes that petitioner is entitled to a deduction, but denies that it is so entitled in 1986. It is his theory that the transactions created debts ascertained to be worthless in 1937. Petitioner contends that the transactions amounted to theft of its funds by the misrepresentation and deceit practiced upon it by the Appliance Co. Petitioner denies that it voluntarily extended credit to or accepted the Appliance Co. as a creditor, and contends that the transactions can not be treated as loans because there was no voluntary contractual arrangement. It is urged that the manner and circumstances under which the forged and fictitious notes were sold to petitioner constituted theft or larceny of its funds.

The evidence shows that petitioner had been purchasing the paper of the Appliance Co. since 1933 and that the purchase of such commercial paper constituted about three-fourths of its business. The endorsement on the back of each instrument and the testimony of record convinces us that the transactions between petitioner and the Appliance Co. were not loans but were purchases and sales of commercial paper at a discount. After a transfer of instruments the Appliance Co. was not indebted to petitioner, nor petitioner to the Appliance Co. The latter had sold a secured promissory note payable in installments for a sum less than the face amount of the note. The primary obligor on the note was the maker; the Appliance Co. was liable only in the event of the maker’s default. Where valid notes were paid by the makers there was never any liability of the Appliance Co. to the petitioner. Thus the question is reduced to a determination of the rights and liabilities of the parties where the subject matter of the sale was forged and fictitious instruments.

It is stipulated that the Appliance Co. represented to petitioner that the articles of merchandise for which the notes and chattel mortgages were given were sold to persons who purportedly executed the instruments. It is also stipulated that the Appliance Co. represented that the repayments were to be applied to certain designated forged and fictitious notes. The course of dealing between petitioner and the Appliance Co. facilitated the deception and fraud that were practiced upon the petitioner. Failure of petitioner to adopt the practice of notifying the makers of the notes and mortgages played directly into the hands of the Appliance Co. to perpetrate the fraud. Notices of default to the Appliance Co. enabled it to pass additional forged and fictitious instruments, or otherwise pay up the overdue installments, and temporarily allay suspicion. In view of the stipulated facts and of the circumstances under which the transactions occurred, the endorsement and guarantee of each instrument formed a part of the scheme to defraud the petitioner.

Whether the fraud, trickery, and deceit practiced upon petitioner amounted to theft will depend upon the Missouri law. The rule there announced is that, where possession of property is obtained by fraud and trickery with intent to convert it to the use of the wrongdoers, which is thereafter accomplished, a theft or larceny results. State v. Anderson, 186 Mo. App. 25; 84 S. W. 946; Farmers Loan & Trust Co. v. Southern Surety Co., 285 Mo. 621; 226 S. W. 926; see also Borden v. Commissioner, 101 Fed. (2d) 44. Possession of petitioner’s money was obtained by deceit and trickery consisting of fraudulent representations and the use of forged instruments. Clearly there was an intent by the wrongdoers to convert it; and it seems equally clear that the conversion was accomplished. No title to the money could be found on the forgeries, Farmers Loan & Trust Co. v. Southern Surety Co., supra, nor could the endorsement and guarantee of the instruments by the Appliance Co. in any way validate these instruments. The forging and uttering of the promissory notes and chattel mortgages, and the endorsement and guarantee thereof by the Appliance Co. were all a part of the trickery whereby petitioner was deceived and defrauded of over half a million dollars during 1936.

For the purpose of the present report, exactness in determining the nature of the crime, i. e., whether it be larceny, embezzlement, obtaining money under false pretenses or otherwise, or in naming the guilty party or parties, is of less importance than the character of the deduction. The controlling fact is that petitioner sustained its loss as a result of transactions in 1936 which amounted to theft under the laws of Missouri.

Section 23 (f) of the Bevenue Act of 1936, under which petitioner claims the deduction, provides that a corporation may deduct losses sustained during the taxable year and not compensated for by insurance or otherwise. The issue was tried upon the question of whether the transactions created debts, or were losses ordinarily characterized as theft by deceit or artifice. The proof shows that the transactions resulted in losses in the nature of theft which occurred in 1936, and are deductible in that year.

Decision will be entered for the petitioner.


text:
    Estate of Stuart Wilson, Deceased, Stella M. Wilson, Executrix, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99676.
    Promulgated November 14, 1940.

      FrcmJdin M. Tomlin, Esq., for the petitioner.

      'William G. Ruymaim, Esq., for the respondent.
   OPINION.

Disney :

The petitioner contends that the sum of $4,517.01, payable to the decedent’s wife in monthly installments was erroneously included by the Commissioner in decedent’s estate because it was insurance within the intent of section 302 (g) of the Revenue Act of 1926, as amended.

The respondent’s position is that the amount is not insurance, but was properly included in decedent’s gross estate and was transferred from the decedent to his wife within the meaning of section 302 (©) or (d) of the Revenue Act,of 1926, as amended.

Examination of the circumstances and provisions under which the amount in controversy was accumulated and paid to decedent’s wife discloses that the money, except- interest allowed, was subtracted from the decedent’s salary over a period of years, that in case of his resignation or dismissal he had a right to draw the sums accumulated and interest; that upon October 27, 1932, he had' served for 35 years and thereafter had a right to retirement on pension and to withdraw the accumulations with interest. The designation of his wife as beneficiary provided that she be paid the sums involved in the event of his death prior to retirement on pension. It thus appears that both prior to the completion of 35 years’ service, by resignation, or dismissal, and after such period by voluntary retirement on pension, the petitioner was in a position to assume command of the moneys, within the thought expressed in Corliss v. Bowers, 281 U. S. 376, and therefore the funds constituted his property at the date of his death; moreover that any transfer effected by the designation of beneficiary being effective only upon his death prior to retirement upon pension, was, after the expiration of the 35 years’ service, several years prior to his death, subject to his power to revoke and terminate by the voluntary act of retirement upon pension. In the light of the decedent’s power at all times over the fund, it is plain, we think, that any transfer intended by the designation of beneficiary was intended to be effective only at death. Had he retired upon pension, the designation of beneficiary would have become of no effect. Only absent such retirement could the beneficiary collect? It is to be noted that the respondent did not include the “death benefit” in gross estate and that the controversy arises only as to the salary deductions accumulated in the annuity savings fund at the death of the decedent, plus interest. It is seen from the treatment accorded by the actuary that the two funds were separately considered. To the one the city contributed; to the other, only the decedent, except to the extent of interest allowed, by deductions from his salary. In Kernochan v. United States, 89 Ct. Cls. 507; 29 Fed. Supp. 860, the Court of Claims considered this question as to insurance or property includable in gross estate, in the case of a member of the city employees’ retirement system of the city of New York. Examination of that case reveals no material difference in the facts from those here involved. There as here the employee died before retirement, after amounts had been deducted from his salary as contributions to the retirement system, and his wife was entitled to a return of the amounts deducted, with interest. The decedent had, as herein, nominated his wife as beneficiary to receive payment of the accumulations “in the event of my death prior to retirement on pension.” Likewise as herein, he also named his wife as beneficiary of the death benefit. In short, the system as to employees there involved seems upon the same model as that involved here as to teachers. The court, after extensive examination of the facts and consideration of the same Federal tax statute here involved, held that the fund was not insurance, but was an asset of the decedent’s estate and properly included in decedent’s gross estate.

The petitioner cites to us In re Estate of Mary V. Fitzsimmons, 158 Misc. 789; 287 N. Y. S. 171; affd., 248 App. Div. 862, which, like' the present proceeding, involved the teachers’ retirement system and where the New York courts held that the amount received was, as insurance, exempt from the New York estate tax. That case was cited to the Court of Claims in the Kernochan case, supra. The court stated: “It does not appear that any attempt was made in that case to differentiate between the amount refunded and the amount paid as a death benefit”, and that the point raised in the Kemochan case was not raised in the New York case. Though apparently urged, as we are, to hold that the state court decisions were binding, the Court of Claims held otherwise, citing Lyeth v. Hoey, 305 U. S. 188, and Burnet v. Harmel, 287 U. S. 103. We agree that the definition of what is insurance is a question for the Federal courts and for this Board, and that we are not bound by the Fitzsimmons case. We conclude and hold that the $4,517.01 was not insurance within the purview of section 302 (g) of the Revenue Act of 1926, as amended, and that the Commissioner did not err in including the amount in the gross estate of decedent, under section 302 (c) and (d) of the same act.

Decision will Toe entered for thá resyondent.

       SBC. 302 [as amended by section 404 of tbe Revenue Act of 1934], 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, except real property situated outside the united States—
      *******
      (c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, * * *
      (d) (1) To the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona-fide sale for an adequate and full consideration in money or money’s worth), by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exercisable) by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power), to alter, amend, revoke, or terminate, or where any such power is relinquished in contemplation of decedent’s death.
      *******
      (g) To the extent of the amount receivable by the executor as insurance under policies taken out by the decedent upon his own life; and to the extent of the excess over $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life.

       See footnote No. 1, supra.


author: Leeoh:

text:
    Farmers Union Cooperative Exchange, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100552.
    Promulgated November 14, 1940.

      Jess Johnson, fresident of Farmers Union Gooyeraiive Exchange, for the petitioner.

      James L. BacJcstrom, Esq., and Stanley B. Anderson, Esq., for the respondent.
   opinion.

Leeoh:

Respondent has determined deficiencies in income tax of $410.02 and $162.10 for the fiscal years ended March 31, 1937 and 1938, respectively, and a deficiency of $29.21 in excess profits tax for the first of these two years. These deficiencies arise because of respondent’s decrease of the amounts deducted by petitioner in its return for each year as so-called “patronage dividends.” The proceeding was submitted upon a stipulation of facts under Rule 30 of the Board’s Rules of Practice.

Petitioner is a corporation, organized January 20, 1921, under the laws of the State of Oklahoma, pertaining to cooperative associations. It operates a general retail store at Stillwater, Oklahoma, dealing in groceries and farm products and selling to members and nonmembers. It also operates a service station and garage for members and nonmembers.

Petitioner claims deductions of $11,022.23 and $7,217.73 for the fiscal years ended March 31,1937 and 1938, respectively, as patronage dividends. These amounts are the net earnings for the years in question which it determined to be available for the payment of patronage dividends.

The parties are in agreement that petitioner, though not exempt from taxation, is entitled to deduct from its gross income the amounts constituting profits upon its business done with members and returnable to them as rebates or so-called patronage dividends. Trego County Cooperative Association, 6 B. T. A. 1275; Fruit Growers Supply Co., 21 B. T. A. 315; Uniform Printing & Supply Co. v. Commissioner, 88 Fed. (2d) 75. It is also agreed that the method to be used for determining the amount available for patronage dividends is as outlined in A. R. R. 6967, C. B. III-1, p. 287. This method is set out as follows:

First compute the apparent net income of the cooperative association. From this amount deduct the fixed dividend paid or payable on any outstanding capital stock. The amount of such fixed dividend is the portion of net income properly attributable to the investment made in the association by the holders of any outstanding capital stock.
The balance consists of (1) the amount available for refund to the members of the association and (2) the profits made from nonmembers. In the absence of evidence to the contrary, it will be assumed that the dealings with members and nonmembers are equally profitable, and, accordingly, that the amount available for refund consists of that proportion of the apparent net profits, after deducting the fixed dividend on outstanding capital stock, which the amount of business transacted with members bears to the entire amount of business transacted. Up to the amount available for refund thus computed, a distribution by a cooperative association to its members, upon the basis of the business transacted with them, will be deemed, to be a true patronage dividend, deductible by the association in computing its taxable net income for Federal income and profits tax purposes.

Petitioner’s net income for tbe fiscal year ended March 31, 1937, was $17,618.66 and for the fiscal year ended March 31, 1938, was $7,751. These amounts constitute net income before deduction of Federal taxes, penalties, and patronage dividends. For the fiscal year 1937 the percentage of sales to members represented 62.56 percent of total sales and for the fiscal year 1938 the percentage of sales to members was 92.12 percent of total sales. As there was no fixed diyidend paid or payable on outstanding capital stock, petitioner, in making its returns for the two fiscal years in question, computed its deduction for patronage dividends by applying to the net income for each year the percentage of sales to members and thus determined a deduction of $11,022.23 for the fiscal year 1937 and a deduction of $7,217.73 for the fiscal year 1938.

In determining the deficiencies here in question respondent adjusted the computations made in only one respect. In each year he reduced the net book earnings by the amount of Federal income and excess profits taxes and penalties paid, before applying the percentage rates of 62.56 and 92.12 as used by petitioner. This computation results in decreases in the deductions for the fiscal years 1937 and 1938 in the amounts of $890.39 and $884.73, respectively.

It can thus be seen that the only question presented here is whether in making the computation under the regulation set out above, net income for, the year from' the business transacted should be reduced by the amount of nondeductible Federal taxes and penalties.

The purpose of the computation provided by the regulation is clear.- What is sought is the segregation of the earnings from business done with members. These are available for return in rebates to them and, as such, constitute a proper deduction by petitioner, leaving subject to tax only the profit accruing from nonmember business.

- Keeping this purpose in mind, it is apparent that petitioner’s computation in each year is in accord with the regulation. The computation made by respondent not only departs from that regulation but defeats its purpose and results in the imposition of tax upon profits on member business admittedly refundable as a rebate and admittedly subject to deduction by petitioner. If Federal taxes and penalties, which are a burden borne by the profits accruing from nonmember business, are deducted from the total net income before application of the percentage of the member business to the total business, in determining the amount of the profit from the total business returnable in rebates to member's, it may be readily seen that the result of the computation is to include with the taxable profit accruing from nonmember business a portion of that derived from sales to members.

We find that the amounts as computed and deducted by petitioner in each of the taxable years represented the correct amount of the so-called patronage dividends available for payment to members.

Decision will be entered for the petitioner.


author: Black :

text:
    Olin Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 80133.
    Promulgated November 15, 1940.

      James O. Wynn, Esq., Thomas G. Haight, Esq., and J. Marvin Haynes, Esq., for the petitioner.

      R. P. Hertzog, Esq., for the respondent.
   OPINION.

Black :

As previously stated, we have only one question left for our determination, and that is whether petitioner was either formed or availed of for the purpose mentioned in section 104 of the Revenue Act of 1932. The material provisions of this section are printed in the margin. This question is one of ultimate fact rather than law. Our function is to draw inferences, to weigh the evidence and to declare the result. Helvering v. National Grocery Co., 304 U. S. 282. The respondent’s determination that section 104 applies “is presumed to be correct until the contrary appears from the evidence.” Nipoch Corporation, 36 B. T. A. 662.

Section 104 (b) mentions certain facts, which, if any one is present, shall be prima facie evidence of the condemned purpose. The presumption thus arising under subsection (b) is in addition to the presumption of correctness attaching to the respondent’s determination. Almours Securities, Inc. v. Commissioner, 91 Fed. (2d) 427; certiorari denied, 302 U. S. 765; A. and J., Inc., 38 B. T. A. 1248. Any of these presumptions that may exist are rebuttable, however, and the respondent can not prevail if there is satisfactory proof that petitioner was neither formed nor availed of for the purpose mentioned in the statute. Delaware Terminal Corporation, 40 B. T. A. 1180, 1192; Trico Securities Corporation, 41 B. T. A. 306, 314.

At the outset petitioner concedes that it comes within the term “corporation” as defined in section 1111 (a) (2) of the Revenue Act of 1932.

Although the respondent did not indicate in his deficiency notice the ground upon which his determination was based other than that petitioner was “subject to taxation under the provisions of section 104”, he now contends that the evidence shows (1) that petitioner was formed in 1924 and during tbe taxable years was availed of for the purpose of preventing the imposition of the surtax upon the owners of its units of beneficial interest, (2) that during the taxable years in question petitioner was a mere holding or investment company, and (3) that during those years petitioner permitted its gains or profits to accumulate beyond the reasonable needs of the business. We shall now consider these respective contentions in their order.

(1) In our findings of fact we have found that petitioner was not formed in 1924 for the purpose of preventing the imposition of the surtax upon the owners of its units of beneficial interest. Petitioner has introduced much evidence bearing upon this point. We think it is unnecessary to discuss this evidence in detail. We think it is sufficient to say that it convinces us that the purpose motivating the organization of petitioner was not to prevent the imposition of the surtax upon the holders of its units of beneficial interest.

(2) Likewise in our findings of fact we have found that during the taxable years 1932 and 1933 petitioner was not a mere holding or investment company. There is much evidence in the record bearing upon petitioner’s business activities, both during the taxable years and prior years. We think that this evidence shows that petitioner was primarily a holding and investment company. Cf. Almours Securities, Inc., 35 B. T. A. 61; Rands, Inc., 34 B. T. A. 1094. But while we think that the facts show that petitioner was primarily a holding and investment company, we would be unwilling to say that it was a mere holding or investment company, within the meaning of the applicable statute. Cf. Industrial Bankers Securities Corporation v. Higgins, 104 Fed. (2d) 177.

(3) During the taxable years, did petitioner permit its gains and profits to accumulate beyond the reasonable needs of its business? We think it. did and we have so found in our findings of fact.

Petitioner, in support of its contention that its accumulation of profits during the taxable years should be held to have been in the pursuance of the reasonable needs of its business, cites among other cases the following: Mellbank Corporation, 38 B. T. A. 1108; C. H. Spitzner & Sons, Inc., 37 B. T. A. 511; Dill Manufacturing Co., 39 B. T. A. 1023; Industrial Bankers Securities Corporation v. Higgins, supra. We think these cases are distinguishable on their facts.

We think the facts of the instant case fall more in the ambit of such cases as Keck Investment Co., 29 B. T. A. 143; Almours Securities, Inc., supra; Rands, Inc., supra; Chicago Stock Yards Co., 41 B. T. A. 590.

In Almours Securities, Inc., supra, in discussing our finding that during the taxable years in question the taxpayer corporation permitted its gains and profits to accumulate beyond the reasonable needs of its business, v^e said? among other things:

Coming now to title question of whether the petitioner was “availed of” for the interdicted purpose for the years 1931 and 1932, the evidence shows that the petitioner’s book income for those years was $2,585,795.57 and $1,563,201.18, respectively, and that the dividends paid were $863,839.15 and $867,660.40, respectively. From the date of its inception to the end of 1932 the corporation accumulated undistributed earnings and profits amounting to more than $18,000,000. The petitioner contends that this accumulation was necessary to carry out the purpose of its organization. We are of the opinion, however, that there is no merit in this contention. The petitioner had substantially no liabilities. It was not actively engaged in any business which required this large accumulation of earnings. Its assets were approximately 90 percent liquid. Its balance sheet at December 81, 1930, showed a surplus of $7,882,959.52. The evidence does not show that there were “reasonable needs” for any further accumulation of earnings. The accumulated earnings apparently were already greatly in excess of the reasonable needs of the business.

It is true of course that the security holdings of Almours Securities, Inc., were much larger than those of the petitioner in the instant case and consequently the annual income and the accumulated surplus in that case were much larger than in the instant case, but the differences are of degree only, we think. Considering things in proportion, we are unable to see any more substantial need for additional accumulated surplus in the instant case than there was in Almours Securities, Inc., supra. Petitioner had substantially no liabilities except to the holders of the units of its beneficial interest. It had no funded debt and its assets appear to have been, for the most part, liquid.

Eespondent, in discussing in his brief his contention that in the taxable years 1932 and 1933 petitioner permitted its earnings and profits to accumulate beyond the reasonable needs of its business, says, among other things:

From the date of organization in 1924 until the end of 1933, petitioner realized a total net income of almost $4,000,000.00, exclusive of the 100% dividend in preferred stock of the Western Cartridge Company received in 1926 and later set up on the books at a value of $1,472,400.00, while during the same period it paid dividends of only $1,220,000.00 and had an accumulated surplus at the end of 1933 of approximately $2,700,000.00, also exclusive of the preferred stock dividend referred to. The accumulated surplus at the beginning of the first taxable year, 1932, was $2,326,939.57, exclusive of the dividend in preferred stock. The earnings for 1932 were $270,833.01 and for 1933 were $210,682.05, from which a dividend of $100,000.00 was paid in 1932 and none in 1933, although a dividend of $150,000.00 was paid in the early part of 1934.
This is not a case where large earnings were realized and no dividends were declared, but with an accumulation of earnings of more than $2,300,000.00 as shown by the books and of $3,772,800.00, including the dividend in preferred stock * * * the further accumulation during 1932 and 1933 of any amount was unnecessary and beyond the reasonable needs of the business in those years. * * *

As we have already indicated, we agree with this contention. Even though there had been a very substantial shrinkage in the market value of some of the securities owned by petitioner, we are not convinced that there was any reasonable need in petitioner’s business for the accumulation of additional earned surplus. Petitioner lays much stress on the fact that it was financial backer and aid to the Equitable Powder Manufacturing Co. and the Western Cartridge Co., the controlling stock of which constituted its most valuable holdings, and contends that it was but natural and reasonable that it should continue to add to its surplus funds during the taxable years, especially in view of the fact that there was much uncertainty in business during those years, due to the depression.

This argument, we 'think, would be much more persuasive if Equitable and Cartridge had been weak and struggling corporations. Both, however, were strong companies, with long records of success behind them, and there is no evidence that either was in any financial distress. True it is that in 1931, when Cartridge acquired the Winchester Repeating Arms Co. it was unable to borrow from the banks all the cash which it needed in the transaction on account of the 10 percent loan limit which applied to banks, and petitioner gave its aid by borrowing $1,000,000 and turning it over to Cartridge to use in the transaction, but early in 1932 Cartridge repaid this amount by borrowing some funds from the National City Bank of New York City.

Congress has said, in section 104 (b) of the Revenue Act of 1932, that the fact that any corporation permits its gains or profits to accumulate beyond the reasonable needs of the business shall be prima facie evidence of a purpose to escape the surtax. The additional tax which Congress has imposed under the provisions of section 104 is a severe one, but Congress in the same section of the act provided a way by which the severe penalty might be avoided by those corporations which fall within its provisions. Subsection (d) of section 104 provides:

(d) The tax imposed by this section shall not apply if all the shareholders of the corporation include (at the time of filing their returns) in their gross Income their entire distributive shares, whether distributed or not, of the net income of the corporation for such year. * * *

In the instant case, if F. W. Olin, John M. Olin, Spencer T. Olin, and Mary M. Olin, who owned all the units of beneficial interest in the Olin Security Co., had included in their individual income tax returns for the respective taxable years their distributive shares of the net income of the Olin Security Co., whether distributed or not, the 50 percent additional tax imposed by section 104 would have been avoided. This they did not do. But be that as it may, it is not our function to discuss and decide the wisdom or unwisdom of an act of Congress. It is our duty to apply the law as we find it.

In the instant case we are unable to see where, during the taxable years, there was any reasonable need for petitioner, primarily a holding and investment company, to add further to its already large accumulated surplus. Cf. Chicago Stock Yards Co., supra. We have, therefore, found that in both taxable years petitioner permitted its gains and profits to accumulate beyond the reasonable needs of its business. The existence of these facts raises the statutory presumption that petitioner was availed of in 1932 and 1933 for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed. We do not think the evidence is sufficient to overcome this presumption. We, therefore, decide in favor of the Commissioner on the only issue which is presented for our decision.

Reviewed by the Board.

Decision will be entered wider Rule 50.

       SBC. 104. accumulation OP SURPLUS TO EVADE SURTAXES.
      (a) If any corporation, however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there shall be levied, collected, and paid for each taxable year upon the net income of such corporation a tax equal to 50 per centum of the amount thereof, which shall be in addition to the tax imposed by section IS and shall be computed, collected, and paid upon the same basis and in the same manner and subject to the same provisions of law, including penalties, as that tax.
      (b) The fact that any corporation is a mere holding or investment company, or that the gains or profits are permitted to accumulate beyond the reasonable needs of the business, shall be prima facie evidence of a purpose to escape the surtax.

       The phrase “the surtax” was stricken out by the National Industrial Recovery Act of June 16, 1933, and the phrase “any internal revenue tax” substituted therefor. The amendment is, however, without significance in this case aud will not be discussed further.