author: Hakron :

text:
    The Gray Processes Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 95279.
    Promulgated February 14, 1941.

      Benjamin, E. Bartholow, Esq., for the petitioner.
    IF. Frank Gibbs, Esq., for the respondent.
   OPINION.

Hakron :

The first question is whether the amounts which were paid by petitioner in the taxable years to the stockholders’ committee in accordance with subparagraphs (a), (b), and (c) of paragraph 27 of the agreement should be excluded from its taxable income in those years.

'yÜnder subparagraph (a) of paragraph 27 of the agreement petitioner was to pay to the stockholders’ committee an amount equal to 50 percent of the amount actually collected in each calendar quarterly period as royalties received on account of present installed treating capacity of present licensees of petitioner; under subparagraph (b) petitioner was to pay to the stockholders’ committee an amount equal to 20 percent of the amount actually collected in each calendar quarterly period (1) as royalties received from present licensees of petitioner on account of capacity in excess of their present installed treating capacity, (2) as royalties received from others than present licensees of petitioner, and (3) as amounts received from the oil companies as gross royalties derived from licenses which they might, after the closing date, grant under their patent rights, and as the net recoveries from infringers thereof; and under subpara-graph (c) petitioner was to pay to the stockholders’ committee an amount equal to 20 percent of the amount actually collected in each calendar quarterly period as amounts recovered from infringers of patent rights and as all other amounts actually received by petitioner arising out of its business from and after the closing date after deducting therefrom all costs of collection."!’ Petitioner was to continue to make the payments under subparagraphs (a), (b), and (c) as long as it was in receipt of any of the amounts specified in those subparagraphs.

In the taxable years the entire receipts of petitioner consisted of royalties, with the exception of very small amounts received as interest; the amounts received as interest were so small that, for the purposes of this opinion, it will be assumed that the entire receipts of petitioner in the taxable years consisted of royalties. Petitioner paid to the stockholders’ committee in accordance with subparagraph (a) $106,099.89 in 1934, $99,593 in 1935, and $98,630.37 in 1936; and in accordance with subparagraphs (b) and (c) $992.08 in 1934, $1,830.04 in 1935, and $33,339.64 in 1936, or a total of $107,091.97 in 1934, $101,423:04 in 1935, and $131,970.01 in 1936.

On its income tax returns for the years 1934 and 1935 petitioner did not exclude from its taxable income the amounts which it paid to the stockholders’ committee in accordance with subparagraphs (a), (b), and (c) of paragraph 27 of the agreement, but reported in its taxable income the entire amounts which it received as royalties and then deducted the amounts which it paid to the stockholders’committee in accordance with subparagraphs (a), (b), and (c).\TXe-spondent disallowed the deductions on the ground that the amounts which petitioner paid to the stockholders’ committee in accordance with subparagraphs (a), (b), and (c) constituted a distribution of profits;'/ On its income tax return for the year 1936 petitioner ex-cludecTfrom its taxable income the amounts which it paid to the stockholders’ committee in accordance with subparagraphs (a), (b), and (c), with the explanation that it had received such amounts “as trustee” for the stockholders’ committee “representing the beneficial owners of the amounts.” Kespondent included the amounts which petitioner paid to the stockholders’ committee in accordance with sub-paragraphs (a), (b), and (c) in petitioner’s taxable income.

In its briefs petitioner contends that the amounts which it paid in the taxable years to the stockholders’ committee in accordance with subparagraphs (a), (b), and (c) should be excluded from its taxable income. \The substance of petitioner’s argument is that the amounts which it paid in the taxable years to the stockholders’ committee in accordance with subparagraphs (a), (b), and (c) were not a part of the purchase price which was to be paid for the capital stock of petitioner, but that the effect of subparagraphs (a), (b), and (c) was to transfer from petitioner to the"stockholders’ committee an interest in petitioner’s license agreements, and that thus in the taxable years petitioner merely acted as an agent, or conduit, in collecting and paying to the stockholders’ committee the. .royalties derived from its interest in petitioner’s license agreements. | On the other hand, in his briefs respondent contends that the amotmts which petitioner paid in the taxable years to the stockholders’ committee in accordance with subparagraphs (a), (b), and (c) were a part of the purchase price which was to be paid for the capital stock of petitioner and that the effect of subparagraphs (a), (b), and (c) was not to transfer from petitioner to the stockholders’ committee any interest in petitioner’s license agreements.] Both parties agree that, in the final analysis, the inclusion or exclusion of the amounts in question on petitioner’s taxable income depends upon whether or not, under the agreement, the payments under subparagraphs (a), (b), and (c) were a part of the purchase price which was to be paid for the capital stock of petitioner. (-Both parties apparently reason that, if under the agreement the payments under subparagraphs (a), (b), and (c) were a part of the purchase price, it follows that petitioner was the owner of the entire amounts which it received in the taxable years as royalties and that the amounts in question should not be excluded from petitioner’s taxable income'; but that, if under the agreement the payments under subparagraphs (a), (b), and (c) were not a part of the purchase price, it follows that petitioner merely acted as an agent, or conduit, in collecting and paying over to the stockholders’ committee the royalties derived from its interest in petitioner’s license agreements, and that the amounts in question should be excluded from petitioner’s taxable income^ Thus the answer to the question is to be found in an interpretation of the agreement.

(in our opinion, the amounts in question should not be excluded from petitioner’s taxable income. A careful examination of the agreement compels the conclusion that the payments under subpara-graphs (a), (b), and (c) of paragraph 27 were a part of the purchase price which was to be paid by petitioner on behalf of the oil companies to the stockholders’ committee for the purchase of the capital stock of petitioner^ Subparagraphs (a), (b), and (c) are contained in that part of the agreement which deals with the purchase price which was to be paid for the capital stock of petitioner. Subpara-graphs (a), (b), and (c) are immediately preceded by paragraph 26, which provides for the payment of $500,000 by the oil companies on the closing date, and are immediately succeeded by subparagraph (d), which provides for the payment by petitioner of amounts representing the total estimated net income of petitioner for each calendar quarterly period remaining after making the payments under sub-paragraphs (a), (b),and (c) until the payments under subparagraph (d) should aggregate $500,000. Thus subparagraphs (a), (b), and (c) are flanked by provisions which admittedly deal with the purchase price which was to be paid for the capital stock of petitioner.

The conclusion that the payments under subparagraphs (a), (b), and (c) were a part of the purchase price which was to be paid for the capital stock of petitioner is strengthened by the absence of any provision in the agreement either expressly or impliedly transferring from petitioner to the stockholders’ committee any interest in petitioner’s patent property or license agreements. It is pointed out that prior to the execution of the agreement the then stockholders of petitioner had no interest in petitioner’s patent property^ or license agreements. Cf. Helvering v. O'Donnell, 303 U. S. 370. ^Paragraph 20 of the agreement deals with the so-called “reserved” assets of petitioner which were to be transferred from petitioner to the stockholders’ committee. Under that paragraph substantially all of the assets of petitioner, with the notable exception of its patent property and license agreements, were to be transferred from petitioner to the stockholders’ committee. ? In view of the very careful specification of the assets which were to be transferred, the failure of the parties to provide in that paragraph for the transfer from petitioner to the stockholders’ committee of any interest in petitioner’s patent property or license agreements appears deliberate.

The provisions of subparagraphs (a), (b), and (c) did not effect an assignment from petitioner to the stockholders’ committee of any interest in petitioner’s patent property or license agreements, or even in the royalties to be derived therefrom. Under subparagraphs (a), (b), and (c) petitioner simply promised to pay to the stockholders’ committee amounts equal to certain designated percentages of the amounts actually received by petitioner from royalties and other sources. It is pointed out that before petitioner was obligated to pay, it had to receive, cf. Lansill v. Burnet, 58 Fed. (2d) 512; Fay Harvey Moore, 42 B. T. A. 949; and that even upon receipt, petitioner was not obligated to pay out of any designated fund. Cf. Lansill v. Burnet, supra; Fay Harvey Moore, supra. i^Ke test of a legal or equitable assignment has been stated to be “whether the debtor would be justified in paying the debt, or the portion contracted about, to the person claiming to be assignee.”) Donovan v. Middlebrook, 95 App. Div. 365, 367; 88 N. Y. S. 607; Fairbanks v. Sargent, 117 N. Y. 320; 22 N. E. 1039; Lanigan's Administrator v. Bradley & Currier Co., 50 N. J. Eq. 201; 24 Atl. 505. Merely by reason of the provisions of subparagraphs (a), (b), and (c) no licensee or other debtor of petitioner would be justified in paying directly to the stockholders’ committee any portion of the amounts which he owed to petitioner. It follows that under subparagraphs (a), (b), and (c) petitioner simply made a personal covenant to pay the various amounts specified therein and did not make a legal or equitable assignment of any interest in its patent property or license agreements, or even in the royalties to be derived therefrom. Cf. Helvering v. O'Donnell, supra.

A further examination of the agreement indicates that petitioner was to have complete control over the entire amounts which it received from royalties and other sources. A provision requiring the segregation of the amounts which petitioner subsequently was obliged to pay to the stockholders’ committee under subparagraphs (a), (b), and (c) is conspicuously absent from the agreement. Cf. Central Life Assurance Society Mutual v. Commissioner, 51 Fed. (2d) 939. Under paragraph 21 of the agreement petitioner was to have the right to set off any amounts payable under subparagraphs (a), (b), and (c) against any liabilities existing on the closing date. And under paragraph 31 of the agreement each of the oil companies from time to time was to lend to petitioner one-quarter of such sums as might reasonably be required by petitioner as working capital so as to permit petitioner to make the payments under subparagraphs (a), (b), and (c).

Moreover, under the agreement petitioner was to have substantially complete control over its patent property and license agreements, at least subsequent to the release of the stock from escrow and the consequent passage of title thereto to the oil companies. It should be emphasized that passage of title to the stock was dependent upon the $500,000 payment to be made by the oil companies under paragraph 26 and the further payments aggregating $500,000 to be made by petitioner under subparagraph (d) of paragraph 27, and not upon the payments to be made by petitioner under subparagraphs (a), (b), and (c). Prior to passage of title to the stock petitioner had the right to sell, assign, or otherwise dispose of or encumber any of its patent property only with the written consent of all the other parties to the agreement. However, after passage of title to the stock petitioner apparently had the right to dispose of or encumber any of its patent property without the consent of the other parties to the agreement even though petitioner was still under obligation to make the payments under subparagraphs (a), (b), and (c). Moreover, petitioner at all times had substantially complete control over the granting of licenses. The only limitations upon petitioner’s control over the granting of licenses were that under paragraph 30 of the agreement petitioner was to grant licenses to the oil companies in accordance with certain prescribed forms and that under paragraph 29 of the agreement petitioner was not to grant licenses containing a privilege to grant sublicenses except with the written consent of the other parties to the agreement. The scale of royalty rates set forth in paragraph 28 was not an actual limitation upon petitioner’s control over the granting of licenses. Under subparagraph (e) of paragraph 27, if the royalty rates payable by petitioner’s licensees (other than the oil companies) under the terms of their respective license agreements (except royalty rates prescribed by license agreements in eifect on the closing date) were in any case less than the scale of royalty rates set forth in paragraph 28, petitioner was to pay to the stockholders’ committee, in addition to the payments under subparagraphs (a), (b), and (c), additional amounts equal to the specified percentages of the difference between the amounts actually collected and the amounts which would have been collected if the royalty rates had been the same as those set forth in paragraph 28. It is thus apparent that petitioner was not required under sub-paragraph (e) of paragraph 27 to incorporate the scale of royalty rates set forth in paragraph 28 in the licenses which it granted subsequent to the execution of the agreement.

tíThe conclusion that the payments under subparagraphs (a), (b), and (c) were a part of the purchase price for the stock and that petitioner did not transfer any interest in its patent property or license agreements or in the royalties derived therefrom finds support in

the interpretation of the agreement which was made, by the stockholders’ committee immediately prior to the execution of the agreement/j In the notices which the stockholders’ committee sent out to the then stockholders of petitioner the committee stated that it obviously could not advise “as to the total price per share” which might be received for stock sold under the terms of the agreement, but that it was estimated that the proceeds of sale during the first three years of operation of the agreement would aggregate at least $14 per share “and thereafter additional amounts from year to year as long as the business continues without substantial impairment.” Thus it was clearly the understanding of the stockholders’ committee that the payments under subparagraphs (a), (b), and (c), which were to continue after the first three years of operation of the agreement, were a part of the purchase price of the stock. Furthermore, in the ^notices the stockholders’ committee stated that the agreement provided for the reservation for the benefit of the then stockholders of petitioner of the entire net assets of petitioner, “except its patent property and license contracts.” Thus it was also the understanding of the stockholders’ committee that petitioner was not to transfer any interest in its patent property and license agreements to the stockholders. The action of the former stockholders of petitioner subsequent to the execution of the agreement was in conformity with the understanding of the agreement expressed by the stockholders’ committee in the notices, wn filing their income tax returns for the years subsequent to the execution of the agreement the former stockholders of petitioner treated the payments made by petitioner under sub-paragraphs (a), (b), and (c) as being in payment of their stock. Even petitioner in filing its income tax returns for 1984 and 1935 did not exclude from its taxable income the payments made by it under subparagraphs (a), (b), and (c)?| Little weight is to be attached to the fact that the oil companies did not charge the payments made by petitioner under subparagraphs (a), (b), and (c) to their investment in the stock of petitioner.

Petitioner points to the fact that under paragraph 22 the passage of title to the stock to the oil companies was conditioned only upon the completion of the $500,000 payment which was to be made by the oil companies on the closing date under paragraph 26 and the payments aggregating $500,000 which were to be made by petitioner over a period of years under subparagraph (d) of paragraph 27 and not upon the completion of the payments which were to be made by petitioner under subparagraphs (a), (b), and (c). Petitioner argues that this fact conclusively shows that the payments which were to be made by it under subparagraphs (a), (b), and (c) were not a part of the purchase price of the stock. There is little merit in this argument. The parties to a sale can provide, and frequently do provide, for the passage of title before payment of all or even any part of the purchase price. Dahlinger v. Commissioner, 51 Fed. (2d) 662; certiorari denied, 284 U. S. 673. Petitioner also points to the fact that in paragraph 22 the time of the passage of title to the stock is referred to as the consummation of the sale and argues that this fact also shows that the payments which were to be made by it under subparagraphs (a), (b), and (c) were not a part of the purchase price of the stock. This argument, too, possesses but little merit. The consummation of a sale depends not upon the payment of the purchase price but upon the passage of title: and a sale is consummated when title passes, even though the purchase price is not yet paid. Dahlinger v. Commissioner, supra.

Petitioner urges that two considerations of “logic and normal business practice” support its contention that the payments which were to be made by it under subparagraphs (a), (b), and (c) were not a part of the purchase price of the stock. The substance of the first of the two considerations urged by petitioner is that, if the continuing payments under subparagraphs (a), (b), and (c) were a part of the purchase price of the stock, then the oil companies would never be in a position to ascertain the cost of the stock as long as the payments__continued. This first consideration is entitled to but little weight, \jjhe ascertainment of the cost of the stock to-the oil companies was simply a matter of adding the payments made by petitioner under subparagraphs (a), (b), and (c) to the rest of the consideration which had been paid for the stock. Apparently the former stockholders in filing their returns for the taxable years were able to compute the gain realized from the sale of the stock even though they treated the payments made by petitioner under subparagraphs (a), (b), and (c) as a part of the purchase priceij' It should be emphasized that somewhat similar provisions for continuing payments of the purchase price are not uncommon in contracts of sale. Cf. Helvering v. O'Donnell, supra. The substance of the second of the two considerations urged by petitioner is that, if the continuing payments under subparagraphs (a), (b), and (c) were a part of the purchase price of the stock, then this would mean that the stockholders’ committee had adopted the “unheard-of practice” of protecting the stockholders by a carefully drawn escrow agreement against a default in the early assured payments of the purchase price and not protecting the stockholders against a default in the later, doubtful payments. This second consideration is entitled, similarly, to but little weight. It is sufficient to point out that the promise of petitioner to make the payments under subparagraphs (a), (b), and (c) was guaranteed by the Texas Corporation, the Standard Oil Co. of Indiana, the Standard Oil Development Co., and the Pure Oil Co. The guarantee of these oil companies would seem to constitute substantial protection against a default by petitioner in the payments under subparagraphs (a), (b), and (c).

As further support of its contention that the payments under subparagraphs (a), (b), and (c) were not a part of the purchase price of the stock, petitioner argues that these payments did not benefit the oil companies, the purchasers of the stock. This argument is unfounded. In promising to make the payments under sub-paragraphs (a), (b), and (c) of paragraph 27, as well as the payments under subparagraph (d), petitioner was acting on behalf of the oil companies. If provision had not been made in the agreement for the payments under subparagraphs (a), (b), and (c), provision would have had to have been made for some other form of consideration for the stock. In the event of a default in the payments under subparagraphs (a), (b), and (c), even though title to the stock had passed to the oil companies, the stockholders’ committee could proceed not only against petitioner but also against the oil companies on their guarantees, i The conclusion is inescapable that the payments under subparagraphs (a), (b), and (c) directly benefited the oil companies)

^The above interpretation of the agreement compels the conclusion that petitioner was the sole owner of the entire amounts of royalties which it received in the taxable years, as well as the sole owner of the patent property and license agreements which produced the royalties in question. It follows that the entire amounts of royalties which petitioner received in the taxable years should be included in its taxable income without the exclusion of the amounts which it later paid to the stockholders’ committee in the taxable years under subparagraphs (a), (b), and (c) of paragraph 27 of the agreement] Cf. Helvering v. Clifford, 309 U. S. 331; Anderson v. Helvering, 310 U. S. 404; Helvering v. Horst, 311 U. S. 112; Lansill v. Burnet, supra; Fay Harvey Moore, supra.

In our opinion the cases cited by petitioner in its briefs are distinguishable. Proceeding on the assumption that the stockholders’ committee had the beneficial interest in a part of the royalties which petitioner received in the taxable years, petitioner cites the following cases as enunciating the principle “that the purpose of the income tax laws is to tax income to the person having the beneficial interest therein and not to the mere collector or conduit of income belonging to another”: Central Life Assurance Society Mutual v. Commissioner, supra; Bettendorf v. Commissioner, 49 Fed. (2d) 173; Mark D. Eagleton, 35 B. T. A. 551; affd., 97 Fed. (2d) 62; Shellabarger v. Commissioner, 38 Fed. (2d) 566; 112 West 59th Street Corporation v. Helvering, 68 Fed. (2d) 397; Commissioner v. Turney, 82 Fed. (2d) 661; Decatur Water Supply Co. v. Commissioner, 88 Fed. (2d) 341; Parish-Watson & Co., 2 B. T. A. 851; Mente & Co., 29 B. T. A. 804; Michael Fay et al., Executors, 34 B. T. A. 662; Christian H. Droge, 35 B. T. A. 829; Samuel L. Huntington, 35 B. T. A. 835; Mountain View Cemetery Association, 35 B. T. A. 893; Ferncliff Cemetery Mausoleum Co., 35 B. T. A. 1037. The assumption on which petitioner proceeds in citing these cases is unsound because in fact petitioner was not a mere collector or conduit, but had the entire beneficial interest in the royalties which it received in the taxable years. Petitioner relies in particular upon Central Life Assurance Society Mutual v. Commissioner, supra; Bettendorf v. Commissioner, supra; and Mark D. Eagleton, supra. In Central Life Assurance Society Mutual v. Commissioner, supra, the taxpayer was organized for the purpose of taking over the assets and assuming the liabilities of the Central Life Assurance Society; the taxpayer was organized to do only a participating life insurance business, while its predecessor was organized to do both a participating and a nonparticipating life insurance business; under the transfer agreement the taxpayer was to maintain a separate department for the nonparticipating life insurance business and was to pay to the stockholders of its predecessor any earnings from the nonparticipating business for a period of twenty-two years, within which period it was estimated that the entire nonparticipating business would be liquidated; and after the transfer the earnings of the nonparticipating business were segregated by petitioner and handled in a separate department. As the Circuit Court stated: “These earnings never became the absolute property of petitioner, and it could lawfully do with them but one thing, which was to pay them over in accordance with the contract. It secured no beneficial interest whatsoever from them. There was as complete segregation of these earnings as could possibly be made under the circumstances,” In Bettendorf v. Commissioner, supra, the original owner of certain securities transferred the securities to the taxpayer in accordance with an agreement under which the original owner expressly reserved for life the right to the income from the securities. The Circuit Court stated that by assenting to the reservation the taxpayer became a trustee for the original owner and was required to account to the original owner for the income received from the securities. In Mark D. Eagleton, supra, certain outside attorneys obtained personal injury cases and then turned them over to the taxpayer, an attorney, for handling under agreements to divide the fees. The Board pointed out that the taxpayer and the outside attorneys had joint interests in the cases and in the fees collected by the taxpayer. On the assumption that subparagraphs (a), (b), and (c) of paragraph 27 of the agreement effected an assignment from the petitioner to the stockholders’ committee of a part of the royalties which petitioner received in the taxable years, petitioner cites the following cases as supporting the principle that “assigned rents and royalties are taxable to the assignee and not to the assignor.” Nelson v. Ferguson, 56 Fed. (2d) 121; Julius E. Lilienfeld, 35 B. T. A. 391; Fontaine Fox, 37 B. T. A. 271; Estate of Henry N. Brinsmade, 39 B. T. A. 195; and George O. Knapp, 40 B. T. A. 1144; petitioner relies especially on Nelson v. Ferguson, supra. In all of these cases the taxpayers actually effected assignments. In view of the conclusion that subparagraphs (a), (b), and (c) did not effect a legal or equitable assignment of any interest in petitioner’s patent property or license agreements or even in the royalties to be derived therefrom, these cases are obviously inapplicable.

Both parties cite Thomas v. Perkins, 301 U. S. 655. In the Perkins case the owners of certain oil and gas leases on undeveloped lands providing for a royalty of one-eighth assigned the leases to the taxpayer. The assignment provided for the payment to the assignors of $395,000, to be paid out of one-fourth of the oil produced from the lands and to be paid directly to the assignors by the purchasers of the oil produced from the lands. Thereafter taxpayer produced oil from the lands. The purchasers of the oil made payments directly and proportionately to the assignors, to the taxpayer, and to the owner of the royalty reserved in the lease. The Supreme Court held that the assignors had reserved an “economic interest” in the oil in place and that the sums paid to the assignors by the purchasers of the oil should be excluded from the taxpayer’s gross income. Since the situation present in the Perkins case is essentially different from the situation present here, the principles enunciated in the Perkins case are not considered applicable here. Cf. Anderson v. Helvering, supra.

Petitioner contends that, even if the amounts which it paid to the stockholders’ committee in the taxable years under subparagraphs (a), (b), and (c) are not to be excluded from its taxable income, it is entitled to deduct such amounts in the taxable years as ordinary and necessary expenses paid during those years in carrying on its business under section 23 (a) of the Revenue Acts of 1934 and 1936, the pertinent provisions of which are set forth in the margin. On its income tax returns for the years 1984 and 1935 petitioner deducted the amounts which it paid to the stockholders’ committee under sub-paragraphs (a), (b), and (c) as royalties paid, and on its income tax return for the year 1936 petitioner excluded the amounts which it paid to the stockholders’ committee under subparagraphs (a), (b), and (c) from its taxable income. In the statement attached to the deficiency notice respondent determined that the payments which petitioner made to the stockholders’ committee in the taxable years under subparagraphs (a), (b), and (c) constituted distributions of profits and as such were not proper deductions from taxable income.

Respondent’s determination that the amounts which petitioner paid to the stockholders’ committee in the taxable years under subpara-graphs (a), (b),and (c) were not proper deductions must be sustained, uíven though the stock of petitioner was held in escrow during the taxable years, the oil companies had the right to vote the stock and were in substance the sole stockholders of petitioner. Ruphane B. Iverson, 29 B. T. A. 863. [The payments under subparagraphs (a), (b), and (c) were made by petitioner for the benefit of its sole stockholders, the oil companies, and benefited the oil companies in proportion to their interests in the stock of petitioner.] Ruphane B. Iverson, supra; Security First National Bank of Los Angeles et al., Executors, 28 B. T. A. 289; L. J. Christopher, 13 B. T. A. 129; affd., 55 Fed. (2d) 527. [Thus, the payments under subparagraphs (a), (b), and (c) constituted constructive distributions from petitioner to its sole stockholders, the oil companies. Ruphane B. Iverson, supra; Security First National Bank of Los Angeles et al., Executors, supra; L. J. Christopher, supra. Respondent determined that the distributions were paid out of profits, and petitioner introduced no evidence to show that the distributions were not so paid. Cf. Ruphane B. Iverson, supra; L. J. Christopher, supra. Therefore, in the final analysis, the payments under subparagraphs (a), (b), and (c) constituted constructive dividends from petitioner to its stockholders, the oil companies. Ruphane B. Iverson, supra; Security First National Bank of Los Angeles et al., Executors, supra; L. J. Christopher, supra. It should be noted that the payments which petitioner made to the stockholders’ committee under subparagraph (d) of paragraph 27 of the agreement were treated by the oil companies as dividends which had been received constructively by them from the petitioner. [The payments under subparagraphs (a), (b), and (c) should likewise be treated as dividends constructively received by the oil companies from the petitioner. It follows that respondent correctly determined that the payments under subparagraphs (a), (b), and (c) were not proper deductions from petitioner’s taxable income.]

The cases which petitioner has cited in support of its eoritention that the payments under subparagraphs (a), (b), and (c) are deductible as ordinary and necessary business expenses are distinguishable. In Louis C. Rollo, 20 B. T. A. 799, the making of the monthly payments there in question by the transferor corporation “was a definite condition without which the corporation could have no receipts.” Grey Bull Corporation, 27 B. T. A. 853; Walter T. Gudeon, 32 B. T. A. 100; and Richard P. Hallowell, 2nd, 39 B. T. A. 50, deal solely with questions of inclusion in taxable income, and not with questions of deduction from taxable income.

Decision will be entered for the respondent.

       SEC. 23. deductions FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions :
      (a) Expenses. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business; including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for the purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.


source: Caselaw Access Project

author: TURNER:

license: Public Domain

text:
    The Tobin Packing Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99483.
    Promulgated February 14, 1941.

      Clement J. Clarke, Jr., Esq., for the petitioner.

      William V. Crosswhite, Esq., for the respondent.
   OPINION.

TURNER:

The petitioner’s first contention is that a definite and fixed liability in the amount of $34,360.91 accrued in the year 1935. It argues on brief as follows:

* * * The contract agreed upon provided that the Attorneys should get a percentage of the processing taxes which the petitioner was saved. The effect of this contract was that if the petitioner’s Attorneys were successful, a portion of the processing taxes would go to the Attorneys instead of the Government. From the first million dollars of processing taxes saved after the execution of the contract, the Attorneys were to receive 5%. The payment of this 5% was a definite and fixed liability of the petitioner, and so far as this 5% was concerned the petitioner was in the position of a stakeholder waiting to see which of two claimants should receive the money. The only contingency, from the standpoint of the petitioner, was as to the other 95% of the processing taxes. Regardless of what happened, the petitioner had a definite fixed liability for 5% of the processing taxes which it was incurring by the processing. This liability was complete at all times and did not depend on some future event.

Therefore, the petitioner argues, the attorneys’ fees paid in 1936 are deductible in 1935, under the doctrine enunciated by the Supreme Court in United States v. Anderson, 269 U. S. 422. The petitioner’s second contention is that in order to clearly reflect income this liability must be deducted in 1935, citing section 34 of the Revenue Act of 1934.

On brief the respondent simply contends that in 1935 the petitioner was under no “enforcible liability” to pay the attorneys’ fees, advancing no argument or discussion relative to petitioner’s alternative liability for processing taxes. He also argues that section 43 of the Revenue Act of 1934 does not permit the deduction in 1935.

We think the respondent erred in disallowing the deduction. ■ It must be conceded that at the end of 1935 the petitioner had incurred a liability for at least the amount of the deduction claimed. It was not known at that time whether it would be paid out as taxes to the Government or as expenses to the attorneys, but in either event it would have been a deductible item. At the end of 1935 all the events had occurred fixing the amount of a definite liability and the contingency settled by the decision of the Supreme Court was that the amount was to be paid to the attorneys instead of the Government. Up to the amount involved here the petitioner’s economic position was not and could not have been changed by the decision of the Supreme Court and we do not think the deduction should be denied merely because the obligee could not be identified at the end of the year. To allow the deduction in 1935 clearly reflects income.

Moreover, we do not think this case can be satisfactorily distinguished from Sanford Cotton Mills, Inc., 42 B. T. A. 190. There a cotton processor in 1935 accrued its liability for processing taxes and contracted to readjust its sale price to relieve its vendees of so much as represented the passing on of the processing tax if and when the tax was held invalid. After the tax was held invalid on January 6,1936, it canceled the accrual of 1935 taxes and substituted the amount of its contractual liability to its vendees and claimed deductions in its 1935 return for such contractual liability. We held the deduction was proper, stating that “an accrual of either income or outgo which is clearly in doubt may, and often should, be adjusted when shortly thereafter in the next year the doubt is removed.” That doctrine is equally applicable to the facts of the present case. Cf. Cartex Mills, Inc., 42 B. T. A. 894, and Smith Packing Co., 42 B. T. A. 1054.

Another issue raised in the petition has been disposed of in the written stipulation of facts as follows:

Counsel for respondent stipulates tliat the processing taxes disallowed in the amount of $9,264.20 in the deficiency letter shall now he allowed as a deduction in the said amount of $9,264.20. This stipulation is in consideration of an agreement executed this 13th day of May, 1940 by the petitioner that the petitioner shall include in gross income in income tax returns under existing income and profits tax acts or corresponding provisions of future income and profits tax acts, for the year or years received or accrued, depending upon the method of accounting employed, any and all sums paid as taxes under the provisions of the Agricultural Adjustment Act subsequently refunded or credited.

Decision will be entered under Rule 50.


author: Disney:

text:
    Ethel S. Garrett (Formerly Ethel S. Darlington), Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99445.
    Promulgated February 18, 1941.

      J. Gar-field Houston, Esq., for the petitioner.

      William A. Schmitt, Esq., for the respondent.
   OPINION.

Disney:

The petitioner was the principal beneficiary under the provisions of her husband’s will. In years previous to the taxable year, the executors had accumulated from income and had on hand at the beginning of the taxable year, 1934, the sum of $262,486.08. During the taxable year the estate had income of $132,701.73 (in addition to an amount paid to another beneficiary not here involved). During the taxable year the executors paid petitioner $294,526.45. Thereof $60,000 was paid by voucher marked “Payment on Account of Personalty Income for Year 1934.” Of the $60,000 the petitioner reported as income $57,284.47, the remainder not being reported because nontaxable. As to the $60,000 there is no controversy here. The respondent in the deficiency notice took the position that petitioner should have reported the entire $132,701.73, and increased income by $75,417.26, the difference between $57,284.47 and $132,-701.73. In other words, the position was taken that the payments to petitioner in the taxable year were from the income of the estate for that year; whereas the petitioner contends that, except for the $60,000, the payments to her were from the income of the estate for previous years, as to which the executors had reported and paid the income tax, and that therefore she is not taxable thereon for 1934.

Although there is some confusion in the briefs as to exactly what constitutes the issue presented to us, upon review of all that is said thereon, we conclude that, as petitioner points out and agrees, the respondent correctly framed the issue in the following language:

The question recurs, were the payments made to the beneficiary in 1934 from income of the taxable year or prior years — not whether income was or was not paid or credited during the taxable year. It is stipulated that certain ■payments were in fact actually made during 1934, as hereinabove narrated— hut from what source, is the question at issue.

What then is the source of the payments by the executors in 1934? Section 162 (b) and (c) of the Revenue Act of 1934 is involved. We are not sure, from the briefs, whether the respondent contends for the application of section 162 (b). At any rate, in our opinion, that subsection is not applicable here, for no provision of the will authorizes or requires that income “be distributed currently by the fiduciary”, in the language of that subsection, at least so far as the executors are concerned; and the trustees are not here involved, :since they were not to receive the residue of the estate until the end of administration, and the trust was not set up until March 28, 1935, upon which date by final decree of the Probate Court the residuary estate was awarded to the testamentary trustees. We therefore need not consider the trust, but only the estate in the hands of the executors. Section 162 (c) provides that in case of income received by estates of deceased persons during the period of administration, the estate in computing net income, may deduct the amount of the income for its taxable year which is properly paid or credited during such year to any legatee, heir, or beneficiary, but such amount shall be included in computation of the net income of the recipient. Was the petitioner such recipient of the income of the estate for the taxable year ? In paying her, the executors attempted to identify the payments as from income of previous years, paying $110,000 by vouchers marked “Payment on account of 1932 Income Collected” and $124,526.45 by a voucher marked “Payment in full of Balance of Personalty Income for Year 1933.” In Clara Louise Flinn, 37 B. T. A. 1085 (1096), referring to a distribution to a beneficiary under section 162 of the Revenue Act of 1932, we said:

* * * The distribution of $22,500 appears to have been made out of trust income of earlier years and is not properly taxable at tbe time of actual distribution in 1933. * * *

As to another distribution, we held that nothing appeared requiring the exclusion thereof from the individual’s income. It thus appears that the question is one of fact as to whether the disbursement is, or is not, from the income of earlier years, or of the taxable year. The respondent argues that the petitioner can not prove that the distribution was from pre-1934 estate income merely by so stating upon the vouchers paying same. The petitioner points out, however, that the evidence is not so limited, but that it is stipulated:

Tbe Union Trust Company of Pittsburgh, one of tbe said executors, kept tbe books and records for tbe estate. It maintained separate book accounts for income and principal. Tbe income account shows in detail tbe items of income received in each year and tbe disbursements therefrom to tbe beneficiaries.

Therefore the petitioner contends there is identification of the distribution as from 1932 and 1933. We think this position should be sustained. Of course a mere notation on a voucher or check as to the source of payment is not sufficient proof of source of payment; but if other records bear out and supplement that notation, the proof may be sufficient. It is true that there was only one bank account in which all estate income was deposited, upon which all vouchers were drawn, and out of which all payments were made. Yet on the books kept for the estate there was careful segregation. Income was shown in account books separate from those showing principal. “The income account shows in detail the items of income received in each year and the disbursement therefrom to the beneficiaries.” This stipulation can mean only that the books showed in detail the items of income received, separated by years, and that the “disbursements therefrom” also appear in detail, separated by years. In other words, there was a detailed record of the income, and net income, for each year. This showing, with supplementary reference to the year upon the voucher paying the income, is sufficient identification of the source of payment, unless it is necessary to show complete separation of the income of the earlier years, into bank acounts separate from that of the taxable year and checks or vouchers upon such earlier bank accounts. We think that is not necessary. Account books are kept for purposes of information and identification. Kept in the current course of business, by the depositor, they indicate, by accounts separate as to subject matter (such as income) and year, identification and segregation no less than would separate accounts upon a bank’s books, or accounts in separate banks. Under the stipulation herein, the disbursement to the petitioner of the amounts here involved appear, in detail, and by years, upon the account books of the estate showing income in accordance with the notations on the vouchers. For them to appear elsewhere would obviously cause confusion in bookkeeping. We think such can not be presumed in the face of the stipulation. The petitioner, accepting and cashing such vouchers, could not successfully contend that she had received income from years other than those indicated by the vouchers. In other words, the identification is binding upon her. We think it is likewise sufficient in her favor. We hold that the disbursements have been shown to be from pre-1934 income.

The respondent suggests that the petitioner was entitled, under the will, to all of the income, and that the executors had no right to accumulate it. We understand this to mean, in effect, that since she received in 1934 an amount within the income of the estate for that year, and the executors had no right to accumulate income, she therefore received the estate income of 1934 and not of earlier years. We think such contention is not well founded. The executors were not required to pay the petitioner currently, or by years — either by the will or the law of Pennsylvania. Eespondent on brief agrees that under such law presumably an executor can not be compelled to distribute assets during the settlement of the estate, within reasonable limits; but suggests that he can set up proper book entries, segregate specific funds, and take credit without actually paying out the money, from which we assume it is contended that the petitioner has a right to such credit, and if she actually receives payment, receives it from current income. In Commissioner v. Stearns, 65 Fed. (2d) 371, it is held that, under section 162 of the Eevenue Act of 1928, “credit” means allotment to the beneficiary beyond recall, and for practical purposes means payment. In our opinion the petitioner had no right to such credit prior to settlement of the estate by the court, and therefore the fact of payment does not on such ground, indicate payment from current income.

We conclude and hold that the petitioner has shown payment, above the $60,000, to have been from income of 1932 and 1933, and that respondent erred in including same in petitioner’s income.

Decision will be entered under Rule 50.

       SEC. 162. NET INCOME.
      The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that—
      *******
      (b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (e) of this section in the same or any succeeding taxable year;
      (c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year, which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary.


author: Aeundell:

text:
    Estate of John Edgerly Morrell, Deceased, National Bank of Topeka, Kansas, Administrator with the Will Annexed, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103776.
    Promulgated February 18, 1941.

      Ralph W. Oman, Esq., for the petitioner.

      Gene W. Reardon, Esq., for the respondent.
   OPINION.

Aeundell:

The question arising for decision in these proceedings is whether the estate of John Edgerly Morrell, petitioner, may deduct 1936 personal property taxes paid by the decedent on property held in trust for him during the year 1936.

Allowance of deductions for tax obligations of the taxpayer which are paid by him is made by section 23 (c) of the Bevenue Act of 1936. This provision of the statute has generally been construed to grant the deduction only for payment by the taxpayer of levies which accrue as an obligation during the time when he owns the property taxed. Patrick Cudahy Family Co., 36 B. T. A. 1147; affd., 102 Fed. (2d) 930; Carl K. Lifson, Administrator, 36 B. T. A. 593; affd., 98 Fed. (2d) 508; Henry J. Burchell, Executor, 41 B. T. A. 55; affd., 115 Fed. (2d) 681; California Sanitary Co., Ltd., 32 B. T. A. 122. We have recently held that Iowa property taxes such as are involved here accrue •on the date on which the applicable rate is determined and the tax is levied, which is accomplished, by direction of the statute, at the meeting of the county board of supervisors in September of the year for which the tax is assessed. Lowell H. Chamberlain, 43 B. T. A. 259.

The circumstances of the instant case, however, require that principles other than those involved in these decisions be applied here. The petitioner was the beneficial owner of the trust properties during the whole of the year 1936, even though legal title did not pass to him until the year’s end, and by express provision of sections 6956 and 6957 (Iowa Code of 1935) these trust assets were reported for assessment by the trustees as the property of the beneficiary for whom they were held in trust. The provisions of this statute are substantially similar to those of Ohio considered in Hord v. Commissioner, 95 Fed. (2d) 179. In that case personal property taxes accruing against property held in trust were paid by the beneficiary to whom distribution was made after their accrual. It was held there that the taxes were an obligation of the beneficiary, since the. Ohio statute in order “to secure more effectively the collection of its revenue burdened the beneficiaries with at least a secondary obligation to discharge the taxes” in the event distribution of the taxed assets was made to them before the taxes were paid (p. 181). Accordingly, it was held that the tax obligation which the beneficiary paid and for which he sought deduction was essentially his own, and he was therefore allowed to deduct these taxes paid by him after the distribution.

The facts in the instant case are similar in all significant details to those in the Hord case, supra, and in face of the identity between the provisions of Iowa and Ohio law in this respect, that case must control our decision here.

Respondent’s argument that the petitioner is not shown to have been the beneficial owner of the trust properties prior to the accrual of the taxes is not well taken. By provisions of the four inter vivos trusts he was during the entire year the beneficiary entitled to income and distribution of the corpus on attaining 25 years of age. In the instance of the testamentary trust he was likewise entitled during the year 1936 to the distribution of the corpus, and while under this trust it is possible that other children of John H. Morrell might have been, during that year, presumptively entitled to the share in the distribution, it is not essential that the petitioner be the sole beneficiary at the time the taxes accrue, when he later receives the entire property taxed. See Hord v. Commissioner, supra.

Our decision must, accordingly, be for the petitioner on the issue presented.

Decision will he entered under Bule SO.

       6956. Listing — hy whoni. — Every inhabitant of this state, of full age and sound mind, shall list for the assessor all property subject to taxation in the state, of which he is tho owner, or has the control or management, in the manner herein directed:
      1. The property of one under disability, by the person having charge thereof.
      2. The property of a married woman, by herself or husband.
      3. The property of a beneficiary for whom the property is held in trust, by the trustee.
      4. The personal property of a decedent, by the executor or administrator, or if there is none, by any person interested therein.
      5. The property of a body corporate, company, society or partnership, by its principal accountant, officer, agent, or partner, as the assessor may demand.
      6. Property under mortgage or lease is to be listed by and taxed to the mortgagor or lessor, unless listed by the mortgagee or lessee. [C51, §458; R60, §714; C73, §803; C97, §1312 ; S13, §1312 ; C24, 27, 81, §6956.]
      6957. Listing property of another. Any person required to list property belonging to another shall list it in the same county in which he would be required to list it if it were his own, except as hex-ein otherwise directed; but he shall list it separately from his own, giving the assessor the name of the person or estate to which it belongs. [C51, §461; R60, §716; C73, §805 ; C97, §1316; C24, 27, 31, §6957.]


author: Smith :

text:
    Hawaiian Gas Products, Ltd., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99806.
    Promulgated February 18, 1941.

      Heaton L. Wrenn, Esq., for the petitioner.

      T. M. Mather, Esq., for the respondent.
   OPINION.

Smith :

This is a proceeding for the redetermination of a deficiency in income tax for 1937 in the amount of $5,903.56, only a part of which is in controversy. The sole question in issue relates to the propriety of the action of the respondent in limiting to $2,000, under the provisions of section 117 (d) of the Revenue Act of 1936, a loss in the amount of $12,479.48 sustained by the petitioner during the year 1937 as a result of the condemnation by the Territory of Hawaii of certain real estate then owned by the petitioner.

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

The petitioner is an Hawaiian corporation, with its principal place of business in Honolulu.

In 1933 the petitioner acquired certain real estate in the Territory of Hawaii that had an adjusted cost basis in its hands in 1937 of $44,979.48. On November 2, 1937, the Territory of Hawaii filed an action in the Circuit Court of the First Judicial Circuit of the Territory of Hawaii to condemn, among other parcels of land, the above-mentioned real estate belonging to the petitioner. To that action the petitioner filed an answer in which it put the Territory of Hawaii to its proof and alleged, among other matters, that the petitioner did not wish to sell the real estate in question, but that it recognized the, power and capacity of the Territory to take it under the power of eminent domain. Judgment of condemnation was eventually entered in the action on December 1,1937, decreeing the real estate condemned and ordering the payment of damages to petitioner in the amount of $32,500, that amount representing the value of the land as found by the court on the date of condemnation. This sum was paid by the Territory of Hawaii to petitioner herein during the year 1937. A loss of $12,479.48 resulted to the petitioner in the year 1937 from the taking of its real estate. The condemnation and taking of the real estate was done without the consent and contrary to the desires of the petitioner.

It is stipulated that, if the loss is found by the Board to be limited to $2,000, the Board may enter its decision determining a deficiency in the amount of $5,903.56 for 1937. If, on the other hand, the Board finds the loss to be an ordinary loss, deductible in full from gross income, the Board may enter a decision determining a deficiency in the amount of $2,412.04.

There is no question in this proceeding but that the petitioner in 1937 sustained a loss of $12,479.48 from the taking of the real estate in question under the power of eminent domain; or that the taking of such real estate was without the consent and contrary to the desires ■of the petitioner. The only question before us is whether the entire ■amount of the loss is deductible from gross income in the petitioner’s tax return for 1937.

It is deductible from gross income in full unless the deduction is limited by section 117 of the Revenue Act of 1936. That section relates only to gains and losses from the “sale or exchange” of a .capital asset. Subdivision (d) of the section provides, so far as material: “Losses from sales or exchanges of capital assets shall be ■allowed only to the extent of $2,000 plus the gains from such sales or exchanges.”

In his deficiency notice the respondent advised the petitioner that “(a) Loss on condemnation of real estate by the Territory is held to be a capital loss, subject to the limitations of Section 117 (d) of the Revenue Act of 1936.”

On January 6, 1941, the Supreme Court promulgated opinions in the cases of Helvering v. Hammel, 311 U. S. 504, and Electro-Chemical Engraving Co. v. Commissioner, 311 U. S. 513, holding in the first cited case that section 117 of the Revenue Act of 1934 applies to forced sales as well as voluntary sales, and in the latter case that a debtor’s loss on mortgage foreclosure was a capital loss, subject to the $2,000 limitation in section 117 of the Revenue Act of 1934. Section 117 (d) of the Revenue Act of 1936 is the same as the corresponding section of the Revenue. Act of 1934. The Board is of the ■opinion that there is no substantial difference between a loss sustained upon a foreclosure sale of mortgaged property and a loss sustained as the result of the condemnation and taking of property by the Territory of Hawaii. The opinions of the Supreme Court above cited rule the present case. The deduction of the loss is limited to $2,000.

Decision will be entered for the respondent.


author: Arnold:

text:
    Forrester Box Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 93748.
    Promulgated February 18, 1941.

      John H. McEvers, Esq., Reece A. Gardner, Esq., and H. J. Plagens, Esq., for the petitioner.

      Gene W. Reardon, Esq., for the respondent.

       Appraisal values, land $193,363.20, plus buildings, $113,543.88, equals $306,907.08; $113,543.88“$306,907.08 equals 36.99617 percent; 36.99617 percent oí $250,000 equals $92,490.43.

   OPINION.

Arnold:

The petitioner contends that it realized a gain in 1935 of not more than $176.76, which represents a proportionate part of the total depreciation of $1,893.89 on machinery and equipment allowed petitioner prior to the sale thereof. Petitioner further contends that it is entitled to a deduction for depreciation on its buildings during 1935 of $3,853.76, which is less than the amount claimed in its petition.

Petitioner’s contentions are grounded upon the premise that its basis for computing gain on the sale and its basis for computing depreciation on its buildings are the fair market values of these assets when acquired. Petitioner fixes the fair market value of the machinery and equipment when acquired at $128,571.36; it contends that this value or basis should be adjusted by the depreciation allowed petitioner prior to the sale totaling $1,893.89, which gives an adjusted basis for gain or loss of $126,677.47. The sale price on July 1, 1929, being the same as the alleged fair market value of the assets when acquired in 1922, the gain admitted by petitioner equals the total amount of depreciation previously allowed.

The basis for depreciation of the buildings is fixed by petitioner at $92,490.43, with a stipulated life of 24 years. Petitioner arrived at the basic value by allocating the agreed value of land and buildings, $250,000, in accordance with the appraised values of the land and buildings fixed by appraisal engineers on September 8, 1921.

Eespondent contends that the basis for determining gain and the basis for depreciation of the buildings is the cost of the assets to petitioner’s transferor, the Nace Co. Eespondent asserts that the substance of the 1922 transactions was that petitioner delivered its 600 shares of capital stock to the Nace Co. in exchange for the lands, buildings, machinery, and equipment, and that the Nace Co. transferred petitioner’s stock to its three stockholders in cancellation of 600 shares of its own capital stock. Eespondent cites and relies upon our decisions in Briggs-Darby Construction Co., 41 B. T. A. 136, where we denied petitioners a stepped-up basis for depreciation of machinery and equipment, and Paradox Land & Transport Co., 23 B. T. A. 1229, where we held that the basis for depreciation was the transferor’s cost.

The opposing contentions squarely present the question of whether the 1922 transaction was a taxable exchange. With respect to this question petitioner urges that the character of the 1922 exchange is res judicata under the Board’s decision in Forrester Box Co., supra. In that case we held, in determining the basis for gain or loss on the sale in 1923 of one of the assets acquired in the 1922 exchange, that the assets were purchased from the Nace Co., payment being made therefor with petitioner’s capital stock. We denied petitioner any loss on the sale because there was “no evidence in the record to show the value of the stock paid for the” asset.

Petitioner has specifically pleaded that our decision in the foregoing proceeding has become final and that said decision is res judicata of the following determinations: (1) That petitioner acquired the assets in exchange for its capital stock; (2) that said exchange constituted a purchase; (3) that the property was not acquired by petitioner pursuant to a reorganization within the meaning of section 202, Eevenue Act of 1921; and (4) that the cost of the property to petitioner was the fair market value of the stock issued in exchange therefor.

In our opinion petitioner’s plea that respondent is estopped by the decision in the former proceeding to reexamine the character of the 1922 exchange is well founded, Bennett v. Commissioner, 113 Fed (2d) 837. In its opinion in the latter case the' Fifth Circuit, speaking with regard to the plea of res judicata, said:

For, the rule of res judicata does not go on whether the judgment relied on was a right or a wrong decision. It rests on the finality of judgments in the interest of the end of litigation and it requires that the fact or issue adjudicated remain adjudicated. It, in short, is that one, who has permitted a final .judgment to go against him, is estopped, by that judgment, from contending ■elsewhere, against the parties to it and their privies that the fact or issue is ■otherwise than as there adjudged.

See also Tait v. Western Maryland Railway Co., 289 U. S. 620; Leininger v. Commissioner, 86 Fed. (2d) 791; and Pryor & Lockhart Development Co., 84 B. T. A. 687.

Since respondent is estopped from again litigating the character of the 1922 exchange, the evidence adduced to establish the fair market value of the assets exchanged for stock must be considered. Accepting the recognized rule that the fair market value of property is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, the petitioner argues that both parties to the 1922 exchange had full knowledge of the value of the assets. Petitioner asserts that it and the Nace Co. agreed in 1922 that the fair market value of the lands and buildings was $260,000 and that the fair market value of the machinery and equipment was $128,571.36. It is pointed out that these values were agreed upon for the purpose of fixing the rent base and also to fix the purchase price under the options granted in the lease indenture and the supplemental agreement thereto. In addition to the documentary evidence the petitioner offered the testimony of D. Bruce Forrester, who testified that the foregoing amounts were the agreed fair market values between the contracting parties, petitioner and the Nace Co.

The values agreed to for rental purposes and the price fixed at which the assets could be purchased for cash by the lessee or conveyed for preferred stock by the lessor are somewhat less, in the aggregate, than the appraised values fixed by the appraisal engineers on September 8, 1921. But the inferences to be drawn therefrom are more favorable than opposed to petitioner’s contentions, since petitioner does not assert that cost of replacement new, less accrued depreciation, is the equivalent of fair market value. Petitioner’s position is that the exchange was an arm’s length transaction, and, that being so, the values fixed by the contracting parties are the best proof of fair market value. The decided cases support the latter proposition, Kitrell v. United Stales, 79 Fed. (2d) 259, 260; Andrews v. Commissioner, 38 Fed. (2d) 55, 56; John J. Flynn, 35 B. T. A. 1064, 1067; and, since the facts herein establish that the Nace Co. and the petitioner were separate and distinct corporate entities, with separate and distinct stockholding groups, it is a fair inference that each corporation negotiated for its own best advantage.

Bespondent has offered no evidence in opposition to petitioner’s proof that the fair market value of the assets was the agreed value between the parties. His cross-examination of petitioner’s witness did not weaken the valuation placed by the witness on the depreciable assets. Even granting respondent’s assertion that the witness was interested in the pending proceeding, something more than interest is required to destroy the effect of testimony given under oath. The testimony of value here given, it must be remembered, is supported by the purchase price agreed upon by the contracting parties with respect to the possible future sale or purchase of the leased assets. It is our opinion, therefore, that petitioner has established that the cost of the property to it was the value of the stock issued therefor, and that the value of the stock is to be measured by the value of the assets behind it.

With respect to the machinery and equipment the fair market value is $128,511.36, but the fair market value of the land and buildings, $250,000, must be allocated between the land and the buildings. Petitioner proposes that the allocation be made in accordance with the appraised values for land and buildings fixed by appraisal engineers on September 8, 1921. The witness testified that this appraisal was made to establish the value of the properties for the purpose of leasing or renting the same, and to fix the sale price under the options granted the lessor and lessee in the supplemental agreement. True, the agreed rental base and the agreed optional purchase price as to land and buildings were less than their total appraised values, but we agree with petitioner that such values may be used to allocate the fair market value. Such an allocation gives a fair market value for the buildings in 1922 of $92,490.43 which, with a useful life of 24 years, gives an annual depreciation deduction on the buildings of $3,853.76. Since both the aggregate amount of depreciation on buildings claimed by petitioner and allowed by respondent is less than the aggregate amount allowable for the period March 1, 1922, to December 31, 1934, petitioner is entitled to an annual depreciation deduction on its buildings for 1935 and each year thereafter of $3,853.76.

Having determined that the basis to petitioner of its machinery and equipment is cost, the next question is the amount of gain realized from the sale thereof on July 1, 1929. Petitioner claimed it was allowed depreciation of $1,893.89 from 1922 to 1929, and it insists that its adjusted cost base is $126,677.47 ($128,571.36 — $1,893.89). Petitioner contends that, contrary to general experience, its leased machinery and equipment did not depreciate in value during the time it owned the assets and that, therefore, its only gain from the sale is the amount of depreciation claimed and allowed.

In answer, no doubt, to the requirements of section 111 (b) (2) of the Revenue Act of 1928, that the basis be diminished by the amount of the deductions for exhaustion, wear and tear, etc., allowable since the acquisition of the property, the petitioner introduced evidence to show that no depreciation of machinery and equipment in excess of $1,893.89 was claimed or resulted while it owned the property for the reason that the Nace Co. expended $15,000 to $20,000 a year in replacement and repairs. It is asserted that these expenditures not only arrested exhaustion, wear, and tear of the property, but actually increased the value thereof, so that said machinery and equipment were more valuable in 1929 than when acquired in 1922.

Petitioner further asserts that it is well settled that to be entitled to depreciation one must not only own an interest in property, but must also establish a present actual loss. Petitioner argues further that it sustained no present actual loss by the depreciation (exhaustion, wear, and tear) of its machinery and equipment, because at any time during the lease period it had the right to require the lessee to purchase the property for $128,571.36 of class A preferred stock of General Box Corporation, which fact, it is asserted, pegged the salvage value of the machinery and equipment at $128,571.36. Furthermore, since the difference between cost and salvage value at the end of the useful life of the property is the only amount that may be depreciated under the Treasury Department’s regulations (Regulations 101, art. 23 (1)-1), petitioner contends that it sustained no actual loss during any year.

Petitioner also points out that its evidence shows conclusively that there was no loss sustained by depreciation since the General Box Co. paid $128,571.36 for the property in 1929. Petitioner urges that this is not unusual because the Board and the courts have held in numerous instances that “where a lessee agrees to and does maintain, repair, and replace the leased property to the extent that no actual loss falls upon the lessor, no deduction for depreciation is allowable”, and in support thereof petitioner cites numerous authorities. The other evidence which petitioner says conclusively -shows that no loss was sustained by reason of depreciation in value consists of the appraisals in 1921 and 1929, and the testimony of D. Bruce Forrester.

Petitioner’s argument that its cost basis should be adjusted only by the depreciation allowed, and not by the depreciation allowable, -is untenable. The rule is established by United States v. Ludey, 274 U. S. 295, and many other cases, that the base must be reduced by the aggregate amount of depreciation sustained in order to determine •the gain or loss resulting from the disposition of a depreciable asset. Machinery and equipment used in production become exhausted and worn regardless of replacements, repairs and improvements. As parts are replaced or improvements are added, the depreciation shifts from the old to the new. In the final analysis petitioner’s argument is that appreciation, together with repairs, replacements and improvements, have offset and prevented any actual loss through ■depreciation.

We can not agree. In our opinion each annual rental payment from the Hace Co. represented a partial recovery of petitioner’s investment in the leased machinery and equipment. The expenditures of the Hace Co. had for their purpose the maintenance of the operating efficiency of the box factory. Whether such expenditures resulted in an appreciation in value of petitioner’s property is immaterial, because the nature of the assets involved was such that they gradually became exhausted from use. Ho amount of appreciation in value, which grows out of extrinsic causes, will prevent the exhaustion, wear, and tear which result from the continuous use of machinery and equipment. Petitioner’s argument that depreciation in this instance has been offset by appreciation is not therefore convincing. Even Realty Co., 1 B. T. A. 355.

Heither are we persuaded that petitioner’s situation is similar to those in Atlantic Coast Line Railroad and the Cincinnati Gas & Electric Co., or the other cases hereinabove referred to. The lease indenture executed by this petitioner only required the lessee to “keep all of the leased property in good order and repair”, and to return it upon termination of the lease “in as good order as when received, reasonable wear and tear, * * * excepted.” This lease indenture contemplated that exhaustion, wear, and tear of the machinery and equipment would be borne by petitioner. Ho obligation to make good the depreciation was imposed on the lessee by the indenture. In the cases cited there was a specific obligation placed on each lessee to maintain, repair, and replace the depreciable assets so that they would be returned in as good condition as when received and, accordingly, the decided cases denied the owner-lessors any depreciation deductions.

The probative effect of the appraisals and the oral testimony is to corroborate the appreciation in value resulting from the repairs, replacements, and improvements made between 1922 and the date of sale. The appraisal values represent the cost of reproduction new, less accrued depreciation, which would give effect to extrinsic forces. The oral testimony likewise corroborates the appreciated value of the machinery and equipment when sold. It must be remembered, however, that the sale on July 1, 1929, established this fact by fixing the amount of appreciation that petitioner would realize. Prior thereto any appreciation in value might have been wiped out by competition, by progress in the art, by fear of invasion, by a business depression, or by some other extrinsic cause. Even Realty Co., supra.

The petitioner converted the appreciated value of its machinery and equipment into a money obligation against the General Box Co. for $128,571.36 on July 1, 1929. A portion of this obligation was paid on July 1,1929, and the balance was due in monthly installments of $1,000 each. The problem is what part of the $12,000 received in 1935 represented a return of investment and what part represented realized appreciation. Respondent determined that the entire $12,000 was income and no part thereof a return of investment. The burden of proof rests upon the petitioner to show what part, if any, was a return of capital, and what part was income. If it fails to sustain this burden respondent’s determination must be approved.

In our opinion the petitioner has failed to sustain its burden of proof. We are satisfied that exhaustion, wear, and tear of the leased equipment resulted from the use thereof by the lessee, but the amount of such exhaustion, wear, and tear is not disclosed by the record. Petitioner attempted to limit the amount of depreciation sustained to $1,893.89, the amount allowed, but this gives no consideration to the amount allowable. When it is recognized that this small amount covers depreciation on $128,571.36 of machinery and equipment over a period of seven and one-half years, the weakness of petitioner’s position is at once apparent. Failure to establish some reasonable allowance for depreciation leaves us no alternative but to approve respondent’s determination.

The stipulated taxable income of $7,957.62 for 1935 should be adjusted by the gain realized on the sale and the depreciation sustained on its buildings, and the deficiency recomputed accordingly.

Decision, will be entered imd&r Rule 50.

       (b) Adjustment op Basis. — In computing the amount of gain or loss under subsection (a) — ■
      *******
      (2) The basis shall be diminished by the amount of the deductions for exhaustion, wear and tear, obsolescence, amortization, and depletion which have since the acquisition of the property been allowable in respect of such property under this Act or prior income tax laws: * * *

        Weiss v. Wiener, 279 U. S. 333; Commissioner v. Terre Saute Electric Co., Inc. (C. C. A., 7th Cir.), 67 Fed. (2d) 697; certiorari denied, 292 U. S. 624; Georgia Railway & Electric Co. v. Commissioner (C. C. A., 5th Cir.), 77 Fed. (2d) 897; certiorari denied, 296 U. S. 601; Terre Saute Electric Co., 33 B. T. A. 975; affirmed on this point, 96 Fed. (2d) 383.

         Atlantic Coast Line Railroad Co. v. Commissioner (C. C. A., 4th Cir.), 81 Fed. (2d) 309; Cincinnati Gas & Electric Co. v. Commissioner, 36 B. T. A. 1122; appeal dismissed (C. C. A., 4th Cir.), 105 Fed. (2d) 1016; Mississippi River & Bonne Terre Railway, 39 B. T. A. 995; Commissioner v. Terre Haute Electric Co. (C. C. A., 7th Cir.), 67 Fed. (2d) 697, affirming on this point, 24 B. T. A. 197; Nashville, C. & St. L. Ry. Co. v. United States (C. C. A., 6th Cir.), 269 Fed. 351; A. Wilhelm Co., 6 B. T. A. 1.


author: Van Fossan:

text:
    Fincher Motors, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100212.
    Promulgated February 19, 1941.

      W. L. Donohue, G. P. A., for the petitioner.

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

Van Fossan:

The Commissioner disallowed the bonus to Fincher in so far as unpaid on March 15, 1938, “as a deduction under the provisions of section 24 (c) of the Revenue Act of 1936, as amended by the Revenue Act of 1937.” It is clear that all three conditions stated in the statute must coexist, i. e., as to payment, difference of accomiting methods, and limitation by section 24 (b). Under the rules of the Board petitioner undertook the burden of proving that respondent erred in applying the cited statute.

Admittedly there was no cash payment. Petitioner contends, however, there was constructive payment. We are unable to agree. Constructive payment is a fiction applied only under unusual circumstances not existing here. Sanford Corporation v. Commissioner, 106 Fed. (2d) 882; certiorari denied, 309 U. S. 657, affirming 38 B. T. A. 139; Massachusetts Mutual Life Insurance Co. v. United States, 288 U. S. 269; Cox Motor Sales Co., 42 B. T. A. 192. We believe respondent was correct in holding that the bonus was not paid within the taxable year or within two and one-half months after the close thereof.

It is stipulated that Fincher did not report the disallowed, unpaid bonus in his income for the taxable year and petitioner does not challenge the correctness of respondent’s action as to the second requisite of the statute.

Addressing itself to the third condition found by respondent to exist, petitioner argues that, by reason of the difference between the rights and privileges enjoyed by holders of class A stock and those limited by the provisions of the class B certificates, class A stock was more valuable than class B stock, although both had the same par value. However, it has made no attempt to ascertain or prove the relative or actual values of the stock. Submission of such proof was part of its burden in the case. The Board can not assume values or speculate with respect thereto. Since the record shows that Fincher owned 68 percent of the total outstanding stock and the petitioner has failed to prove that its value did not exceed the value of the class A stock held by the holding division, we can not say that respondent erred in holding that the situation falls under subsection (3) of section (c).

It is axiomatic that the allowance of deductions is a matter of legislative grace. Congress has seen fit to limit that allowance by the enactment of section 301. Respondent determined that petitioner came under the ban raised by this section. The petitioner undertook to prove that this was erroneous. It has failed to do so. We sustain the Commissioner.

Decision will be entered, for the respondent.

       SEC. 301. DISALLOWED DEDUCTIONS.
      (a) Section 24 (a) of tlie Revenue Act of 1936 is amended to read as follows:
      * * * * * * *
      “(c) Unpaid Expenses and Interest. — In computing net income no deduction sliall be allowed in respect of expenses incurred under section 23 (a) or interest accrued under section 23 (b) — -
      “(1) If not paid within the taxable year or within two and one-half months after the close thereof; and
      “(2) If, by reason of the method of accounting of the person to whom the payment is to be made, the amount thereof is not, unless paid, includible in the gross income of such person for the taxable year in which or with which the taxable year of the taxpayer ends; and
      “(3) If, at the close of the taxable year of the taxpayer or at any time within two and one-half months thereafter, both the taxpayer and the person to whom the payment is to be made are persons between whom losses would be disallowed under section 24 (b).”

       The pertinent part of section 24 (b) reads as follows :
      “(B) Except in the case of distributions in liquidation, between an individual and a corporation more than 50 per centum in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; * * *’ [Sec. 24 (b) (1) (B).]


author: Van Fossan :

text:
    Robert A. Pulfer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97262.
    Promulgated February 19, 1941.

      William A. Borrusch, Esq., for tlie petitioner.

      Homer J. Fisher, Esq., for the respondent.
   OPINION.

Van Fossan :

The Board has no jurisdiction of the year 1936, as to which respondent determined an overassessment. Cornelius Cotton Mills, 4 B. T. A. 255. Consequently, the only issue for our consideration is whether or not petitioner realized recognizable gain in the year 1935 upon an exchange of stock.

Petitioner contends that he exchanged his stock in the Dibble Color Co. for stock in Pratt & Lambert, Inc., pursuant to a plan of reorganization, and that no gain is recognizable on the exchange. In the alternative, he contends that even if gain is recognized, the exchange occurred in 1936.

Respondent argues that no tax-free reorganization was effected by the exchange because Pratt did not acquire “in exchange solely for all or a part of its voting stock * * * at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares” of Dibble stock. He urges that gain is recognized on the transaction in 1935 since the exchange for which petitioner transferred his holdings in Dibble for stock in Pratt occurred in that year.

The applicable provisions of the statute are section 112 (b) (3) and (g) (1) (B) of the revenue Act of 1934.

Petitioner relies heavily on Commissioner v. Dana, 103 Fed. (2d) 359, in his argument that the “80 per centum” requirements of section 112 (g) (1) (B) are fulfilled by the “tacking” of Pratt & Lambert’s prior ownership of 1,220 shares of Dibble stock to the stock acquired by exchange with petitioner. See also Rawco, Inc., Ltd., 37 B. T. A. 128. Assuming, but not deciding, that Pratt acquired at least 80 percent of the voting stock and at least 80 percent of all other classes of shares of Dibble, we are yet of the opinion that there was no reorganization within the meaning of the statute. Section 112 (g) (1) (B) plainly states that the acquisition must be solely in exchange for all or a part of its voting stock. The acquisition by Pratt was not of the category stipulated by the statute. Petitioner, upon cross-examination at the hearing, stated that he believed Pratt’s original holding of Dibble stock had been purchased for cash. No proof was presented which would indicate otherwise. Petitioner failed to sustain the burden of proving that the acquisition of the Dibble stock by Pratt was in exchange solely for all or a part of its voting stock. Petitioner, therefore, did not receive the shares of Pratt stock in the course of a tax-free reorganization.

Thus it becomes necessary that we determine the year in which the exchange occurred. Petitioner contends that title to the shares could not pass until delivery of the Pratt stock and that since those shares were not received by the Detroit bank until January 2, 1936, the exchange was not effective until that date. He cites the Uniform Sales Act, section 19, rule 5, enacted as section 9458 of the Michigan Compiled Laws of 1929, and the Uniform Stock Transfer Act, section 1 (a), (b), enacted as section 9520, of the Michigan Compiled Laws of 1929, as his authority for this contention. The Uniform Acts have also been adopted in New York.

Respondent maintains that the exchange in question -was a sale within the meaning of the Uniform Sales Act and asserts that title passed at the time the parties intended, i. e., in 1935. Uniform Sales Act, section 18' (section 9457, Mich. C. L., 1929; N. Y. Personal Property-Law, section 99). He urges that the provisions of the Uniform Stock Transfer Act requiring delivery as a prerequisite to passage of title do not preclude the application of the Uniform Sales Act to determine the effective date of the exchange. He relies upon Dee Furey Mott, 35 B. T. A. 195; affd., 103 Fed. (2d) 1009.

In the Mott case the owner of shares which were held in a safety deposit box, on December 30, 1930, directed her broker to sell those shares. The broker sold the stock on December 30 but petitioner did not deliver the shares until January 2, 1931. We held that the sale was completed for purposes of realization of loss in the year 1930. In the course of our opinion there we considered the Uniform Sales Act and the Uniform Stock Transfer Act as enacted in the Michigan statutes and said:

From a consideration of the above cases it seems to us sound to conclude that the Uniform Stock Transfer Act is not intended to prescribe an exclusive method for transferring property in shares of stock and that the question of when the property passes may be determined under the provisions of the Uniform Sales Act (Sale of Goods Act). The courts of Michigan do not appear to have passed on this question, although it has been held in that State that corporate stock is “goods” within the statute of frauds. Sprague v. Hosie, 155 Mich. 30; 118 N. W. 497. Under the provisions of the Uniform Sales Act quoted above it is not necessary that the goods be actually delivered in order to have a completed sale. The time of passing of title, and completion of sale, of specific or ascertained goods depends on the intent of the parties to the contract. * * *

Further, it was held that the Federal statute was controlling, the Board stating:

Our conclusion here need not rest on our interpretation of the Uniform Acts. These acts can not control the matter of deductions under a Federal revenue act. Deductions for losses, like those for depletion, Palmer v. Bender, 287 U. S. 551, and depreciation, Weiss v. Wiener, 279 U. S. 333, are determinable by the Federal statute. “State law may control only when the operation of the Federal taxing act by express language or necessary implication makes its own operation dependent on state law.” Burnet v. Harmel, 287 U. S. 103.

In the Mott proceeding we made an extensive examination of the Michigan law on this point and the pertinent cases. We regard that case as controlling here. The Hew York law in regard to the applicability of the Uniform Sales Act to the determination of passage of title in stock transactions is similar to that of Michigan. Agar v. Orda, 144 Misc. 149; 258 N. Y. S. 274; affd., 264 N. Y. 248; 190 N. E. 479. See Francis S. Appleby, 31 B. T. A. 533.

In Ruml v. Commissioner, 83 Fed. (2d) 257, the Circuit Court of Appeals for the Second Circuit considered the case of a taxpayer who, like petitioner here, had shares of stock pledged as collateral for a loan. He directed his broker to sell the pledged shares but informed the broker that he could not deliver the shares immediately. The broker accordingly sold the shares in the year in which he was directed to sell them. The shares were not delivered to the broker until after the year in which the direction to sell had occurred. The court held that the taxpayer sustained a deductible loss in the year of sale, regardless of the fact that the taxpayer was unable to make delivery in that year. A like holding in regard to realization of gain was made by the Circuit Court of Appeals for the Sixth Circuit in Huntington National Bank v. Commissioner, 90 Fed. (2d) 876.

We are of the opinion that the intent of petitioner and Pratt & Lambert, Inc., was that the exchange should take place in the year 1935. The letter of transmittal sent to Buffalo by the receiver of the First National Bank-Detroit plainly indicated that the parties desired the exchange to take place in the year 1935. In any event, for all purposes of the provisions of the revenue act regarding recognition of gain or loss, the exchange was effective in 1935. Dee Furey Mott, supra. We hold that petitioner received the shares of Pratt & Lambert, Inc., in a taxable exchange in the year 1935. Ke-spondent’s determination is sustained.

Decision will be entered for the respondent.

       SBC. 112. RECOGNITION OF GAIN OR LOSS.

      (b) Exchanges Solely in Kind.—
      *******
      (3) Stock for stock on reorganization. — No gain .or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another .corporation a party to the reorganization.
      *******
      <g) Definition op Reorganization. — As used in this section and section 113—
      (1) The term “reorganization” means *» * * (B) the acquisition by one corporation dn exchange solely for all or a part of its voting stock: of at least 80 per centum of the -voting stock and at least 80 per centum of the total number of shares of all other classes •of stock of another corporation; or of substantially all the properties of another corporation * * *.

       9458. 'Sbc. 19. Rules for ascertaining intention. Unless a different intention appears, the following are rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer:
      *.* * * * * *
      Rule 5. If the contract to sell requires the seller to deliver the goods to the buyer, or at a particular place, or to pay the freight or cost of transportation to the buyer, or to a particular place, the property does not pass until the goods have been delivered to the buyer or reached the place agreed upon.

       9520. Section 1. (How title to certificates and shares may he transferred.) Title to a certificate and to the shares represented thereby can bo transferred only,
      (a) By delivery of the certificate indorsed either in blank or to a specified person by the person appearing by the certificate to be the owner of the shares represented thereby, or
      (b) By delivery of the certificate and a separate document containing a written assign, ment of the certificate or a power of attorney to sell, assign, or transfer the same or the shares represented thereby, signed by the person appearing by the certificate to be the owner of the shares represented thereby. * * *

       Sections of the New York law comparable to the Michigan statutes cited by petitioner are New York Personal Property Law, section 100 (the same as section 9458, Michigan C. L., 1929) and New York Personal Property Law, section 162 (same as section 9520, Michigan C. L. 1929).

       9457. Sec. 18. Property in .specific goods passes when parties so intend.

      (1) Where there is a contract to sell specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred.
      (2) For the purpose of ascertaining the intention of the parties, regard shall be had to the terms of the contract, the conduct of the parties, usages of trade and the circumstances of the ease.