author: Sternhagen :

text:
    Financial and Industrial Securities Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 68441.
    Promulgated March 24, 1933.

      J. A. Selby, Esq., for the petitioner.

      J. A. Adams, Esq., for the respondent.
   OPINION.

Sternhagen :

The respondent moves that this proceeding be dismissed because the Board does not have jurisdiction of it.

The petition was filed November 12, 1932, and contains the following allegation:

1. The petitioner was a corporation organized under the laws of the State of Maryland and was duly dissolved on or before March 11, 1929 in voluntary dissolution and liquidation proceedings under Sections 88 and 89 of Article 23 of the Maryland Annotated Code. Its principal office was at No. 411 East Baltimore Street, Baltimore, Maryland and its present mailing address is No. 30 Pine Street, New York, N. Y. The Continental Trust Company, a trust company duly organized and existing under the laws of the State of Maryland, has been duly appointed as Receiver for petitioner in said dissolution and liquidation proceedings under Sections 88 and 89 of Article 23 of the Maryland Annotated Code and said trust company is at present acting as such Receiver, and in that capacity is empowered to bring all suits and prosecute all proceedings in the name of the petitioner.

Attached to the petition is the following verification:

STATE OP MARYLAND ss: CITY OF BALTIMORE
W. J. Casey being duly sworn, says: That he is the Vice-President of The Continental Trust Company; that said Trust Company was duly appointed the lawful receiver of petitioner herein, pursuant to order of appointment dated March 11, 1929; that said Trust Company is duly authorized by law to sign the foregoing petition, and that said Trust Company has duly authorized him, the said W. J. Casey, to sign the foregoing petition.
W. J. Oasey.

A deficiency notice dated September 14, 1932, and addressed to Financial and Industrial Securities Corporation is appended to the petition.

The respondent relies upon Revenue Act of 1928, section 214 (a), which is as follows:

Sec. 27 4. BANKRUPTCY AND RECEIVERSHIPS.
(a) Immediate assessment. — Upon the adjudication of bankruptcy of any taxpayer in any bankruptcy proceeding or the appointment of a receiver for any taxpayer in any receivership proceeding before any court of the United States or of any State or Territory or of the District of Columbia, any deficiency (together with all interest, additional amounts, or additions to the tax provided for by law) determined by the Commissioner in respect of a tax imposed by this title upon such taxpayer shall, despite the restrictions imposed by section 272(a) upon assessments, be immediately assessed if such deficiency has not theretofore been assessed in accordance with law. Claims for the deficiency and such interest, additional amounts and additions to the tax may be presented, for adjudication in accordance with law, to the court before which the bankruptcy or receivership proceeding is pending, despite the pendency of proceedings for the redetermination of the deficiency in pursuance of a petition to the Board; but no petition for any such redetermination shall be filed with the Board after the adjudication of bankruptcy or the appointment of the receiver.

He contends that the above quoted allegation of the petition establishes that there has been the appointment of a receiver for the taxpayer in a receivership proceeding before a court of a state, and that this petition was filed with the Board after such appointment of the receiver in direct contravention of the prohibition of section 274 (a). The petitioner retorts that this is not such a receivership proceeding as section 274 (a) contemplates, but that, although called a receiver by Maryland law, the Continental Trust Company is but a trustee in dissolution and hence no more within the ambit of section 274 (a) than is the trustee in many other states where the corporation laws provide that the directors shall remain trustees in liquidation.

We are constrained, after considering the statutes involved and the arguments, to grant the motion and dismiss the proceeding. We find no compelling reasons for reading into the terms “ receiver ” or “receivership proceeding,” as used in section 274 (a), a restriction against the application to the situation described in the petition. The Continental Trust Company is alleged to be a receiver, and an examination of article 23 of the Maryland Code indicates, we think, that its appointment occurred in a receivership proceeding. This article comprises the general corporation statute of Maryland; sections 88 to 102, inclusive, cover dissolution. Sections 88 and 89 are as follows:

88. Any corporation of this State may close its affairs and authorize a bill for its dissolution to be filed in the following manner:
A majority of the whole board of directors shall pass a resolution declaring that dissolution is advisable and calling a meeting of the stockholders or members to take action thereon. The meeting of the stockholders or members shall be duly warned in the manner provided in Section 19 of this Article. If two-thirds of all the shares (or, if two or more classes of shares have been issued, two-thirds of each class), outstanding and entitled to vote, or two-thirds of the members vote in favor of dissolution, a petition for dissolution shall be forthwith filed in the name of the corporation and on its behalf in a Court of Equity of the county or city in which its principal office is located. Whenever all of the stockholders or members shall consent in writing to a dissolution, no meeting of stockholders or members or notice thereof shall be necessary.
89. Every such petition shall contain a statement of the reasons why the dissolution of the corporation is sought, and there shall be filed as an exhibit with it: a full and true inventory of its assets and liabilities; a list of all the stockholders, if any, their respective addresses, the number of shares belonging to each and the amount, if any, remaining due thereon; a full statement of all the incumbrances on the property of the corporation, and a full list of its creditors, with their respective addresses and the amounts- due each. Such exhibit shall be verified by the oath or affirmation of some officer or stockholder of the corporation, and upon the filing of such petition accompanied by the exhibit, the court shall pass an order requiring all persons interested in the corporation to show cause by a day to be named, if any they have, why it should not be dissolved on another day to be named in said order, which said order shall be published, for such time as the court shall direct, in some newspaper published in the county or city in which such court is held; if an answer shall be filed to such petition, evidence shall be taken in the manner usual in courts of equity; if no answer is filed, or if upon consideration of the petition, answer and proof, the court shall be of opinion that no sufficient cause against a dissolution has been shown, a decree shall be entered dissolving the said corporation and appointing one or more receivers of its estate and effects, if any; and any of the directors or other officers or any of the stockholders or members of the corporation may be appointed its receivers or such other person or persons as the court may select.

Section 90 provides for a certification of the dissolution decree to the State Tax Commission.

Section 91 covers the procedure for dissolution of a corporation possessing no assets and owing no debts.

Section 92 covers the dissolution of a corporation determined or proved to be insolvent.

Section 93 prevents dissolution until the discharge of the corporation’s state tax liability.

Section 94 provides, “ Whenever any corporation shall be dissolved by the decree of any court of this State, its property shall vest in its receivers appointed and named therein,” and then deals with fraudulent preferences, etc.

95. Upon the dissolution of any corporation of this State in any manner otherwise than hy judicial proceedings, and until other persons shall be appointed as receivers by some court of competent jurisdiction, the directors at the time of dissolution shall become and be trustees for the creditors, stockholders and members of the corporation so dissolved. * * *
96. The dissolution of a corporation shall not relieve its stockholders or directors or other officers from any obligations and liabilities imposed on them by law; nor shall it abate any pending suit or proceeding by or against the corporation, and all such suits may be continued with such change of parties, if any, as the court in which the same are pending shall direct. No receiver shall institute suit except by order of the court appointing him; and such suit may be brought in his own name as receiver or (notwithstanding its dissolution) in the name of the corporation, to his use.
97. All defenses, including limitations and laches, may he pleaded by any stockholder of any corporation now or hereafter dissolved by judicial proceedings, as effectually as by such corporation or the receiver thereof, at any time before the final ratification of the auditor’s account distributing the assets of such corporation among its creditors and stockholders.

Sections 98 to 102, inclusive, deal-with forfeiture proceedings by the state.

Since it is affirmatively alleged that the petitioner’s dissolution occurred in proceedings under sections 88 and 89, we may not regard the dissolution as otherwise than by judicial proceedings ” as covered by section 95. Furthermore, since, to a tribunal of special and limited jurisdiction such as this Board, jurisdictional facts may not be assumed but must be shown, we must adopt as a possible hypothesis within section 89 the belief that there has been not only the petition but also answer and proof, followed by a decree and the appointment of a receiver. Consistently with this, and also irrespective of answer and proof, we may assume that the assets of the dissolved corporation are now in custodia legis. Although we may lack power to decide authoritatively that the state court of equity by which the receiver was appointed is authorized or charged to determine the claim of the United States for Federal income taxes, no decision of the state court has come to our attention holding to the contrary.

Section 2†4 (a) of the Revenue Act of 1928 is the sequel of section 282 (a) of the Revenue Act of 1926. This earlier provision was described in the Report of the Senate Committee on Finance (69th Cong., 1st sess., Report No. 52, to accompany H. R. 1), as follows:

BANKRUPTCY AND RECEIVERSHIP
Section 282: During bankruptcy proceedings or State or Federal receivership proceedings, the assets of the taxpayer are placed within the control of the bankruptcy court or the court of equity in which the receivership proceedings are instituted, whenever the taxpayer has been finally adjudicated a bankrupt or the receiver has been finally appointed. If during the pendency of the bankruptcy or receivership proceeding, a proceeding is pending before the board or on appeal therefrom for the redetermination of a deficiency, the Commissioner of Internal Revenue would, despite a favorable decision for the Government, be unable to assess and distrain upon the assets under the control of the bankruptcy or equity court. The section therefore provides, in case of determination of deficiency, that i'f petition for redetermination therefor has not been presented to the board, the deficiency shall be assessed and the claim presented to the bankruptcy or equity court. If petition for a redetermination has been presented to the board but is not on appeal therefrom, the proceedings shall be dismissed and the deficiency assessed and claim therefor presented to the bankruptcy or equity court. If proceedings for determination of a deficiency are on appeal before the Circuit Courts of Appeal or the United States Supreme Court, the committee deems it advisable to permit these courts finally to determine the deficiency rather than dismiss the proceeding. Pending such final decision on appeal, claim for the amount of the deficiency may be presented to the bankruptcy or equity court in the amount allowed by the board, or if decision is reached by such appellate courts prior to the termination of the receivership or bankruptcy proceedings, then such claim may be modified to accord with the decision.
The bankruptcy and receivership proceedings do not foreclose any unsatisfied portion of the claim of the United States and such portion may be collected by distraint or otherwise within six years after the termination of the bankruptcy or receivership proceedings. In case the final decision on appeal from the board in a proceeding for redetermination of deficiency is reached after termination of the bankruptcy or equity proceedings, such portion of the deficiency allowed as has not already been satisfied may likewise be collected by distraint or otherwise within six years after the termination of the bankruptcy or receivership proceedings.

There is a plausible suggestion that the juxtaposition in the statute of bankruptcy and receivership indicates an intendment to restrict receiverships to such proceedings as arise from insolvency or a desire to avoid threatened insolvency. But the language which was actually used seems to defy such restriction. The difficulty of expressing a meaning for the term which is narrower than its ostensible breadth and yet broad enough to fulfill such an assumed purpose is itself enough to argue against the restriction. It requires but a cursory examination of the subject of receiverships to realize the multitude of variations in proceedings to which the term may be aptly applied. Congress, with this information readily at hand, may be presumed to have used the broad term deliberately. The intention to restrict the application of the section to particular classes of receivership proceedings, such as those related to insolvency or those resembling bankruptcy or those resulting from adversary proceedings, could have been so much more clearly expressed that we are forced to believe that Congress rejected it. This Board of course has no power to adopt a construction at variance with the meaning which the legislature apparently intended. Bowers v. New York & Albany Lighterage Co., 273 U. S. 346.

It is no answer to say that the rule under section 274 thus is different in respect of corporations in Maryland from those in some other states where dissolution may be had without a receiver. If, as we have assumed, under the Maryland statute, the assets are in the custody and control of the court of equity and the court may entertain the government’s claim, the situation is quite different from that in states where voluntary dissolution is accomplished without the intervention of a court or receiver.

This proceeding is unlike French Co., 10 B. T. A. 665, and Clifton City Bank, 6 B. T. A. 643. In those cases there was clearly no “ receivership proceeding ” pending in any court. The question was whether the Bank Commissioner of the State of Missouri and the Superintendent of Banks of the State of Oregon were, respectively, receivers appointed by a court in a receivership proceeding within the meaning of section 282, Revenue Act of 1926. The decision whether such officers acting under their own peculiar statutes were permitted to file a petition with this Board is not controlling in respect of the petition here, which is filed by a receiver appointed by a court in what we deem to be a receivership proceeding.

The Board lacks jurisdiction, and for this reason,

The proceeding is dismissed.

Reviewed by the Board.

Lansdon and Van Fossan dissent.


source: Caselaw Access Project

author: Matthews :

license: Public Domain

text:
    William Semar, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 52300, 59030.
    Promulgated March 24, 1933.

      Frank S. Bayley, Esq., for the petitioner.

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

Matthews :

The only question is whether the stock of the Sunny Point Packing Company acquired by petitioner is community property. This depends in Washington law, as will be shown, mainly on when it was acquired — if acquired before marriage, it is separate property of the husband; if afterwards, the nature of its acquisition becomes important, for all such after-acquired property except as specifically excepted belongs to the marital community. The petitioner contends that he acquired before his marriage on March 1, 1924, only an option, or executory contract, to purchase the shares of stock, and that before the delivery of title and possession of the stock to him in November 1924, he had no property interest or rights in the stock. Respondent, on the other hand, argues that petitioner acquired a substantial property interest in the stock before his marriage, this interest being matured by the expiration of of his first contract of service with the corporation on January 1, 1924. Alternatively, it is urged upon us by respondent that since under the contract petitioner performed no services in consideration for the stock after January 1, 1924, it follows on the petitioner’s theory that the petitioner’s services were not given before that date, that the stock when delivered in November 1924, was a gift and as such under Washington law petitioner’s separate property, the income from which is also separate property and, therefore, taxable to petitioner.

The relevant provisions of the Washington statutes (2 Remington’s Comp. Stat. (1922)) are as follows:

§ 6890. Separate property of Husband.
Property ancl pecuniary rights owned by the husband before marriage, and that acquired by him afterward by gift, bequest, devise or descent, with the rents, issues, and profits thereof, shall not be subject to the debts or contracts of his wife, and he may manage, lease, sell, convey, encumber, or devise, by will, such property without the wife joining in such management, alienation, or encumbrance, as fully and to the same effect as though he were unmarried. § 6891. Separate property of Wife.
The property and pecuniary rights of every married woman at the time of her marriage, or afterward acquired by gift, devise, or inheritance, with the rents, issues, and profits thereof, shall not be subject to the debts or contracts of her husband, and she may manage, lease, sell, convey, encumber or devise by will such property, to the same extent and in the same manner that her husband can, property belonging to him.
§ 6892. Community Property Defined — Husband’s control of Personalty.
Property, not acquired or owned as prescribed in the next two preceding sections, acquired after marriage by either husband or wife, or both, is community property. The husband shall have the management and control of community personal property, with a lifce power of disposition as he has of his separate personal property, except he shall not devise by will more than one-half thereof.

If we turn now to the provisions of petitioner’s contract with the company, we find that he agreed on January 5, 1922, to act as manager for the company at a salary of $250 per month (to be increased to $420, in the discretion of a stockholder, one H. C. Strong) until January 1,1924. As a further consideration for petitioner’s services, the stockholders of the company, also parties to the contract, agreed to sell to petitioner 16% shares, being one-sixth of the company’s capital stock, on January 1, 1924, at its December 31, 1921, book value. The stockholders agreed to deliver this stock to two of their number as trustees to hold until paid for by the petitioner. It was expressly provided that: ’

* * * All dividends declared upon any of said stock after Jan. I, 1922, while this contract is in force and while any of said stock remains unpaid for, shall be paid to third parties, but shall be credited upon the purchase price of said stock in case first party buys the same as herein provided. * * *
If first party is unable to pay in full for all of said stock on January 1, 1924, he shall be entitled to receive from the Trustees such part thereof as is then paid for either by him or by application of dividends. The balance of said stock shall be held by the Trustees until January 1, 1929, and the terms of this agreement shall be extended to that date; * * *

Then follows this significant paragraph:

It is understood and agreed that in case of a sale of the assets of second party or the liquidation thereof before January, 1924, and while first party is still in its employ hereunder, first party shall receive from said Trustees any and all amounts distributed to and on account of the stock set aside hereunder for the first party in excess of its book value December 31, 1921, deducting from said book value, however, dividends paid on said stock since January 1, 1922. It being the intention that in case the completion of this contract is rendered impossible because of a sale or liquidation of second party’s assets, then first party shall be entitled to receive the distributive share of said stock less any amount then unpaid on its purchase price.

The petitioner was still in the company’s employ on January 1, 1924, and continued to act thereafter as manager for it. On that date, however, he had not paid anything toward the purchase of the stock nor had any dividends been declared which must have been applied toward its purchase. In November 1924, the company sold its assets at a large profit, declared a resulting dividend, and the amount thereof allotted to the petitioner was sufficient to pay for his stock, which was thereupon, and after his marriage on March 4, 1924, delivered to him.

Was petitioner’s interest in this contract after January 1, 1924, and before his marriage on March 4 of that year “ property ” within the meaning of Washington law and therefore part of his separate estate ? A well known authority on the law of community property says:

That the word “property” as used in the codes and statutes defining separate and community property, should be given a broad and inclusive meaning is conceded by all the authorities. * * *
The term “property,” as used in the statutes defining separate and common property can not reasonably be held to be less than the meaning oí the same word in the law of bankruptcy. It includes choses in action as well as choses in possession, and inchoate rights as well as those perfected by higher forms of legal security. And accepting these decisions relating to causes of action for personal injuries as sound, we have, as the result, a meaning of the word “ property ” so broad as to include not only property in the ordinary sense but all forms of enforceable claims having a pecuniary value, even when they arise out of the violation of the right to personal security. (McKay on Com. Prop. 2nd ed., 1925, § 178, pp. 137, 138.)

It is quite obvious that the petitioner had much more than, as he contends, a mere option to buy the stock. He had a right to have the dividends which might be declared on such stock applied by the stockholders toward the purchase of the stock for himself. While not owning legal title to the tree, in other words, he was to be given its fruits; the right to enjoy the fruits being, of course, one of the most important incidents of ownership. Furthermore, in the event of sale of the company’s assets so as to render performance of the contract according to its terms impossible, petitioner was to receive his proportionate share of amounts distributed to stockholders in excess of the 1921 book value plus dividends. The facts amply show that the company’s stock had increased greatly in value by January 1, 1924, and that its surplus was large. Moreover, there had already been initiated at this time the contract of sale which was finally performed later in the year. While it is no doubt true that even a stockholder has no ownership of his corporation’s assets, the legal personality of the corporation intervening between stockholder and assets, Rhode Island Hospital Trust Co. v. Doughton, 270 U. S. 61, it is nevertheless true that a stockholder has a very immediate interest in those assets on their sale and the dissolution of the corporation. And again, while petitioner here was not on January 1, 1924, a stockholder in the company, his interest on that date so closely approximated one that it would be very difficult to draw any line of substance between his interest and that of a stockholder of record. We are of the opinion that petitioner’s contract right on January 1, 1924, which later brought him title to the company’s shares, was one of real substance and clearly “property” within the meaning of the Washington statutes.

And we are of the opinion that petitioner’s “property” was acquired before March 4, 1924, when he married. It has been said:

As between husband and wife, when a right, legal or equitable, is acquired whether before or during marriage, all things of value into which the initial right develops by the performance of conditions, the running of time or the like, or into which it is converted by an assignment, or if the initial right rests in obligation, all that which is obtained through the performance, discharge, satisfaction, enforcement or assignment of the obligation, are deemed in law to have been acquired as of the date of the acquisition of the initial right, and take the character, as separate or common, of that right. [McKay, §517, p. 352.]

And again by the same authority:

Property acquired by or in discharge of a conventional obligation. — Such property as between husband and wife and all others claiming under them, has its origin and is acquired as of the date when the obligation becomes binding, and not as of the time when the money is paid or the thing is delivered or conveyed. Welder v. Lambert, 91 Tex. 510, 44 S. W. 281; In re Moseman’s Estate, 38 La. Ann. 219; Guye v. Guye, 63 Wash. 340, 115 Pac. 731, 37 L. R. A. (N. S.) 186. The authorities are practically unanimous in support of this rule. * * * [§533, p. 359.] .

There is no doubt on the authorities that this rule obtains in Washington. The date ef acqaisition of property determines its character as separate or community property, In re Brown's Estate, 214 Pac. 10 (Washington); and cases therein cited. And the date of acquisition taken is that when the equitable interest arises and not when the legal title is transferred, Guye v. Guye, supra; Ahern v. Ahern, 71 Pac. 1023 (Washington); Forker v. Henry, 57 Pac. 811 (Washington); Teynor v. Heible, 133 Pac. 1 (Washington). The same rule appears to be general, as stated by McKay, §533, supra, and to obtain also in Nevada, Barrett v. Franke, 208 Pac. 435, 437; and in California, Vieux v. Vieux, 251 Pac. 640, 643. Cf. 5 R. C. L. 834.

Our prior decisions have supported the same view. In K. E. Merren, 18 B. T. A. 156; affirmed in 51 Fed. (2d) 44, money and stock received by the petitioner during marriage in payment for property sold by him before marriage was held not community property. The stock was held in escrow so that he did not receive title to it until after marriage. We said:

* * * The property which was sold and which gave rise to the money, the income now under consideration, was the separate property of the husband. He had sold it and had completely divested himself of title thereto and dominion thereover prior to his marriage. At the time of the sale the amount to be received by the petitioner was definitely fixed and constituted an obligation due him. The right to receive the purchase price was itself property; it became vested in the petitioner prior to his marriage and could not, therefore, become community property under the Louisiana statute.

More recently we held in John M. King, 26 B. T. A. 1158, with respect to a fee received by a lawyer after the death of his wife but on a contract entered into with his client during the period of his marriage, that it was community property, to be returned as income by the lawyer and his deceased wife’s estate, one-half each, as such. We said:

* * * Petitioner contends that in cases of inchoate rights it is the time of the inception of the initial rights that determines the status of property as between community and separate. In this connection, McKay, a recognized authority, in his book on Community Property, 2d ed., par. 520, says:
An inchoate title or pecuniary right is property in the sense of the law of separate and common property, just as truly as the most unimpeachable or perfect title. It takes its rank as separate or common property, for the same reason, and in response to the same tests, as the perfect or complete title or right, and it retains its character as separate or common so long as it can be traced; its development from an inchoate to the absolute or complete form does not shift it from one fund to another; it may be relieved of conditions and burdens but this does not change its character; it may pass from a conditional to an unconditional form, without change or legal character; it may be exchanged for other things or rights, and its character as separate or common passes to whatever was acquired by the exchange. If the property consists of an obligation, either contractual or delictual, it may be performed or enforced; and whatever is so acquired takes the same character as the obligation. [Italics supplied.]

We think, as we have said, that the petitioner here had an inchoate right to the stock in question before his marriage which does not, because of the subsequent acquisition of legal title and receipt of the stock certificates thereafter, any the less constitute property owned before the marital community began; that such stock was the separate property of the petitioner; and that all dividends from it, therefore, constitute income to the petitioner for all the years here in question.

Reviewed by the Board.

Judgment wül he entered for the respondent.


author: Smith :

text:
    Wendell W. Fish and Neil H. Marsh, Executors of the Estate of H. H. Fish, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 33993, 48383.
    Promulgated March 24, 1933.

      Ralph W. Smith, Esq., and Claude I. Parker, Esq., for the petitioners.

      R. W. Wilson, Esq., for the respondent.
   OPINION.

Smith :

The filing of the estate and gift tax returns with respect to the same property is explained by the petitioners on brief as follows:

* * * Upon the death of Mr. Fish, the Berkeley attorney, who was a general practitioner and not acquainted with the demands of the revenue laws, prepared and filed only a federal estate tax return. Not any of the parties in interest were aware of the gift tax statute. It was only while the federal estate tax return was being audited that the examining officer suggested a gift tax return should he filed. Upon this direction and more than a year after decedent’s death a Return of Federal Gift Tax, Form 706 (a) was duly filed. Under the Federal Estate Tax return, a tax was paid in accordance with the value of the net estate therein indicated. Also the tax was paid as disclosed on Form 706 (a). The Commissioner, however, has declared deficiencies in each of the taxes, i. e., the federal estate tax and the gift tax. From these deficiencies the appeals resulted. * * *

The petitioners contend that the community property involved in these proceedings was improperly included in the decedent’s gross estate, and that only that portion (an undivided one-half interest) conveyed to the six children in 1924 is subject to the gift tax. The respondent contends that all of the community property was subject to the estate tax, and that all of the same property was subject to the gift tax. The parties have stipulated that the community property in question had a fair market value of $300,000, which we assume is the agreed value as of the date of the alleged gifts (September 23, 1924), and as of the date of the decedent’s death (August 26, 1925). The decedent’s wife testified that this was “purely community property,” and it appears that she did not contribute any of her separate property in the acquisition of the community property involved in these proceedings.

It is well settled that a Avife’s interest in California community property is included in the husband’s gross estate. Talcott v. United States, 23 Fed. (2d) 891; Henshaw v. Commissioner, 31 Fed. (2d) 946; Title Insurance & Trust Co. v. Goodcell, 60 Fed. (2d) 803. But for the alleged gifts in September 1924, there would be no question in the instant proceedings as to the incidence of the estate tax upon the property involved. By amendments to the petitions, the petitioners duly allege that the transfers were not made in contemplation of death, and, in effect, assert that the transfers in September 1924, are not within the purview of section 302 (c) of the Kevenue Act of 1924, by the terms of which property so transferred is to be included in a decedent’s gross estate unless shown to have been neither in contemplation of death nor to take effect in possession or enjoyment at or after death. The facts do not take the transfers outside the ambit of the statute.

It should be noted in these proceedings that there is no question before us as to whether there was a gift of the property by the decedent to his wife and children on September 23, 1924. The respondent admits so much of the petition in Docket No. 33993 “ as alleges that prior to the death of the decedent on September 23, 1924, he transferred a portion of his property, a one-half interest therein, to his Avife, and the other one-half interest therein to his children in equal shares, as more fully appears from Schedule E of the return on Form 706.”

With respect to the liability to estate tax upon the property transferred on September 23, 1924, it is to be noted that the decedent, although at that time in comparatively good health, had been advised by his physician that he had hardening of the arteries. He had engaged in no active business since 1907, but occupied himself in his garden and in the management of his investments. He continued the management of the property transferred in September 1924, after the transfer, the same as before. The income from the property was deposited in a joint account with his son. In the circumstances of the case we are of the opinion that the transfers of property on September 23, 1924, were made in contemplation of death within the meaning of the statute. Heiner v. Donnan, 285 U. S. 312; United States v. Wells, 283 U. S. 102. In the Wells case the Supreme Court said:

* * * The statutory description embraces gifts inter vivos, despite tlie fact that they are fully executed, are irrevocable and indefeasible. The quality which brings the transfer within the statute is indicated by the context and manifest purpose. Transfers in contemplation of death are included within the same category, for the purpose of taxation, with transfers intended to take effect at or after the death of the transferor. The dominant purpose is to reach substitutes for testamentary dispositions and thus to prevent the evasion of the estate tax. Nichols v. Coolidge, 274 U. S. 531, 542, 47 S. Ct. 710, 71 L. Ed. 1184, 52 A. L. R. 1081; Milliken v. United States, 283 U. S. 15, 51 S. Ct. 324, 75 L. Ed. —, decided March 2, 1931. As the transfer may otherwise have all the indicia of a valid gift inter vivos, the differentiating factor must be found in the transferor’s motive. * * *
As the test, despite varying circumstances, is always to be found in motive, it cannot be said that the determinative motive is lacking merely because of the absence of a consciousness that death is imminent. It is contemplation of death, not necessarily contemplation of imminent death, to which the statute refers. It is conceivable that the idea of death may possess the mind so as to furnish a controlling motive for the disposition of property, although death is not thought to be close at hand. Old age may give premonitions and promptings independent of mortal disease. Yet age in itself cannot be regarded as furnishing a decisive test, for sound health and purposes associated with life, rather than with death, may motivate the transfer. The words “ in contemplation of death ” mean that the thought of death is the impelling cause of the transfer, and while the belief in the imminence of death may afford convincing evidence, the statute is not to be limited, and its purpose thwarted, by a rule of construction which in place of contemplation of death makes the final criterion to be an apprehension that death is “ near at hand.”
*******
* * * There is no escape from the necessity of carefully scrutinizing the circumstances of each case to detect the dominant motive of the donor in the light of his bodily and mental condition, and'thus to give effect to the manifest purpose of the statute. [Italics supplied.]

In the Wells case the transfers were found not to have been motivated by the state of the decedent’s health at the time of the gifts, but that “ the immediate and moving cause of the transfers was the carrying out of a policy, long followed by decedent in dealing with his children of making liberal gifts to them during his lifetime ” and intended by the donor “to accomplish some purpose desirable to him if he continues to live.” There, the decedent had given much of his property to his children during his lifetime to see how they would handle it, and, as he said, “ I will then know when my time is up what I ought to do with the balance.” Here, there is no evidence of such a policy on the part of the decedent, who retained possession and management of and received the proceeds from the property in controversy. When asked if she and the decedent discussed, at the time the deeds were executed, “ any reason why they should not be recorded and the properties and its management turned over to the children?,” Mrs. Fish said:

I think it was a matter of pride with Mr. Fish; he was quite a well known man; he was mayor of Bakersfield for eight years * * *
* * # * * *
* * * he did not want it done.

The evidence does not overcome the presumption of the correctness of the respondent’s determination that the gifts were made in contemplation of death.

Although we have found that the gifts or transfers in September 1924, were made in contemplation of death, and subject to the estate tax, it is nevertheless necessary to determine whether or not the gift tax has been properly levied. In so far as material hereto, the Eevénue Act of 1924, as amended by the Eevenue Act of 1926, is as follows:

Sec. 319. For the calendar year 1924 and each calendar year thereafter, a tax equal to the sum of the following is hereby imposed upon the transfer by a resident by gift during such calendar year of any property whenever situated, whether made directly or indirectly * * *. [The rates applicable are set forth in section 324 (a) of the Revenue Act of 1926, which amended this section.]
Sec. 320. If the gift is made in property, the fair market value thereof at the date of the gift shall be considered the amount of the gift, * * *
Sec. 321. In computing the amount of the gifts subject to the tax imposed by section 319, there shall be allowed as deductions:
(a) In the ease of a resident—
(1) An exemption of $50,000.
* * * * * * *
Sec. 322. In case a tax has been imposed under section 35.9 upon any gift, and thereafter upon the death of the donor the amount. thereof is required by any provision of Part I of this title to be included in the gross estate of the decedent then there shall be credited against and applied in reduction of the estate tax, which would otherwise be chargeable against the estate of the decedent under the provisions of section 301, an amount equal to the tax paid with respect to such gift; * * *

The gifts in question were made after the enactment of the Eeve-nue Act of 1924 and are therefore subject to the gift tax imposd by Part II of Title III of that act. Untermyer v. Anderson, 276 U. S. 440; Blodgett v. Holden, 276 U. S. 594; Bromley v. McCaughn, 280 U. S. 124; Harold T. White et al., Executors, 15 B. T. A. 1417; Victor Weichman, 20 B. T. A. 616. On brief, the petitioners admit that the property transferred to the six children is subject to the gift tax, but contend that, in effect, Mrs. Fish purchased the property transferred to her for an adequate and valuable consideration, to wit, the relinquishment of her interest in the community property and her consent to the gifts to the children. They state that “ it is our contention that the value of the interest of the husband should be measured by one-half the value of all the community property.” Similar contentions with respect to an alleged purchase by the wife were of no avail in Title Insurance & Trust Co. v. Goodcell, supra, where the court refused to limit the incidence of the estate tax to one-half of the community property, because at the husband’s death “ property rights were brought into being or ripened for the survivor which before could not be exercised.” Likewise here, by the gifts, Mrs. Fish acquired property rights “ which before could not be exercised.”

In Blethen v. Pacific Mutual Life Ins. Co., 243 Pac. 431, 434, the Supreme Court of California said:

The husband is the owner of the community property, and the interest of the wife therein is but a mere expectancy. Van Maren v. Johnson, 15 Cal. 308, 311; Tolman v. Smith, 24 P. 743, 85 Cal. 280; Spreckels v. Spreckels, 48 P. 328, 116 Cal. 339, 36 L. R. A. 497, 58 Am. St. Rep. 170; Spreckels, v. Spreckels, 158 P. 537, 172 Cal. 775; Winchester v. Winchester, 165 P. 965, 175 Cal. 391; Estate of Brix, 186 P. 135, 181 Cal. 667; Dargie v. Patterson, 169 P. 360, 176 Cal. 714; Roberts v. Wehmcyer, 218 P. 22, 191 Cal. 601. Certain statutory limitations for the protection of the wife have, however, been placed upon his power of disposal.
Thus, by section 172 of the Civil Code, the husband is expressly prohibited from giving away any part of the community personal property without the written consent of the wife. This restriction on the husband’s power of disposal does not, however, vest any interest in the community property in the wife. Spreckels v. Spreckels, 158 P. 537, 172 Cal. 775. If a gift is made by the husband in contravention of the statute, the gift is not a nullity. On the contrary, the property vests in the donee, subject to a right on the part of the wife to have one-half of the gift revoked. If, after the gift is made, the wife gives her consent the requirements of the statute are fulfilled, and no further action is required to make it a valid and effective gift. Spreckels v. Spreckels, 158 P. 537, 172 Cal. 775; Dargie v. Patterson, 169 P. 360, 176 Cal. 714; McDougald v. First Federal Trust Co., 199 P. 11, 186 Cal. 243, 245. In short, a gift of community property by the husband during his lifetime without the consent of his wife is not void but voidable.

While the wife’s interest in community property under the laws of California is more than an expectant estate, it does not ripen into a vested estate until her husband’s death. Talcott v. United States, supra; In re Brix Estate (California), 186 Pac. 135. In Paduveris v. Paris, (California), 1 Pac. (2d) 986, 988, it is said:

That the wife may relinquish to her husband her interest in the community property, which is thereby converted into the separate property of the husband, is too well settled to require discussion. See Sanguinetti v. Sanguinetti, 51 Cal. App. 347, 196 Pac. 799, and cases there cited; Estate of Brix, 181 Cal. 667, 186 Pac. 135.

Upon the death of the decedent “ one-half of the community property belongs to the surviving spouse; the other half is subject to the testamentary disposition of the decedent ” (sec. 1401, Civil Code of California, 1927, Deering). By joining in the conveyance in September 1924, Mrs. Fish relinquished her right to receive one-half of the community property upon the death of Mr. Fish, thereby effectively converting the community property into the separate property of the husband (Paduveris v. Paris, supra), who eo instanti made gifts of the same property to Mrs. Fish and their children. By those gifts Mrs. Fish acquired an interest vesting in fraesenti, instead of an interest vesting in futuro which she theretofore had. Her consent to the gifts was not the equivalent of a purchase of one-half of the property, but a relinquishment of her interest in the other half, from which petitioners argue that only the portion of the property given to the children is subject to the gift tax, as per their concession. If there was a purchase by Mrs. Fish, it was of property of the agreed value of $150,000 for a consideration of her future interest in that same property — in other words, by the transaction she received a present vested interest in lieu of an interest that would have vested upon the death of her husband. There being no evidence of the value, if any, of the consideration which she is alleged to have paid for the property received from Mr. Fish in September 1924, we can not determine what, if anything, was the consideration therefor. Furthermore, the decedent could have made a valid gift of community property to his wife without her consent. Logan v. Thorne (Cal.), 269 Pac. 626. In the circumstances, we hold that the decedent made gifts on September 23,1924, of property of the agreed value of $300,-000, and that such property is subject to the gift tax imposed by the Bevenue Act of 1924, as amended by the Bevenue Act of 1926.

In accordance with section 322 of the Bevenue Act of 1924, the amount of the gift tax should be credited against the estate tax.

Beviewed by the Board.

Judgments will be. entered under Bule 50.


text:
    P. R. Peterson, Petitioner, v. Commissioner of Internal Revenue, Respondent. R. B. Moore, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 32419, 32579.
    Promulgated March 24, 1933.

      Neil E. Larhin, Esq., for the petitioners.

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

Smith :

The petitioners claim that the earnings of the Partnership belong to the Corporation, and that they never received any portion of such earnings. In effect, they seek to repudiate the sworn statement on the Partnership return for 1923 and contend that they were not the owners or operators of the Glenn Colusa Sheep Company, but that it was in reality the enterprise of the finance company and that they (the petitioners) were mere employees. It appears that the Partnership was “ set up ” for the purpose of creating a more favorable balance sheet so that the same operations, theretofore conducted through the Corporation (owned' and controlled by these petitioners), could be continued under a new finance arrangement. At the hearing, petitioner Moore testified that he and Peterson set up the Glenn Colusa Sheep Company.

Section 2395 of the Civil Code of California defines a partnership as “ the association of two or more persons, for the purpose of carrying on business together, and dividing its profit between them.” No sufficient evidence has been offered to show the nonexistence of the Partnership, which the petitioners now seek to repudiate. Section 218 (a) of the Eevenue Act of 1921 provides in part that:

* * * There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year, * * *

The reported net income of the Partnership has been properly included in the net income of these petitioners. The income of the Partnership was used to reduce the indebtedness of the Corporation, for which the petitioners had a liability as endorsers. The reduction of that liability pro tanto benefited these petitioners, and their acquiescence in such application of the income that otherwise would have been distributed to them does not relieve them of their tax liability thereon. Cf. Gold & Stock Telegraph Co., 26 B. T. A. 914.

Judqment will l>e entered for the respondent.


author: Seawell:

text:
    Mortimer J. Kaufmann, Petitioner, v. Commissioner of Internal Revenue, Respondent.

      Docket No. 63041.
    Promulgated March 24, 1933.

      Arthur L. Strasser, Esq., for the petitioner.

      I. Graf, Esq., for the respondent.
   OPINION.

Seawell:

The record shows that petitioner was a member of a copartnership under an agreement containing provisions whereby in the event of the death of one of the partners the surviving partners were to undertake certain obligations to the legal representatives of any partner dying during the term of the agreement. One of the partners, Maurice S. Bondy, died December 9,1925, during the term, which covered the period January 1, 1923, to December 31, 1925.

After the death of Maurice S. Bondy, a dispute arose between the surviving partners, of whom the petitioner was one, and the representatives of the estate of said Bondy as to the amount to be paid his -estate in satisfaction of his interest in the partnership. The legal representatives of the Bondy estate contended that the surviving partners were bound absolutely to pay the estate of Maurice S. Bondy the value of the interest which he had in the partnership as of December 31, 1924, which was $161,422.05. The surviving partners insisted that under the partnership agreement it was optional with them either to purchase the interest of the deceased partner by the payment to his estate of the value of his interest in the partnership as of December 31, 1924, or to liquidate the business of the partnership, in which event the deceased partner’s estate would be liable for a portion of any losses incurred in the course of liquidation.

In 1927, the legal representatives of the Maurice S. Bondjr estate instituted suit in the Supreme Court of the State of New York to recover from the surviving partners aforesaid the amount asserted to be due from them to the estate of said Bondy, and in 1929 a judgment in favor of said representatives was rendered to the effect that Maurice S. Bondy was not liable for any part of the operating losses sustained by the partnership in 1925 to 1928, inclusive. In 1929, after the rendition of that judgment, the surviving partners made payment to the legal representatives of Bondy in the sum of $51,198.43, being the total amount of loss charged to Maurice S. Bondy’s capital account during the years 1925 to 1928, inclusive, and allocated to the aforesaid years in the proportion and amounts heretofore indicated in our findings of fact. Prior to January 1, 1929, the surviving partners made payment to the representatives of the estate of Maurice S. Bondy of substantially the entire value of his interest in said partnership as of December 31, 1924, except as to the extent of the proportion of the operating losses charged to him as heretofore stated in our findings of fact. The petitioner’s share of the operating losses (amounting to $51,198.43), paid as aforesaid by the surviving partners in 1929, was $12,190.10 and such amount he claimed as a deduction from his gross income in his tax return for the calendar year 1929.

The question for our determination is whether or not the respondent committed error in disallowing such amount ($12,190.10) as a deduction from petitioner’s gross income for 1929. It is the insistence of the respondent that this amount is allocable to the years 1925 to 1928, inclusive, rather than to the year 1929, as contended by the petitioner.

Partnerships as such are not subject to Federal taxation, but the individuals carrying on business as a partnership are taxable upon their distributive shares of net income of such partnership, whether distributed or not, and are required to include such distributive shares in their individual tax returns. Where the result of partnership operations is a net loss, the loss is divisible by the partners in the manner agreed upon between them and may be taken as a deduction by the individual partners in their income tax returns for the year in which the same occurs.

In the instant case, it is stipulated that in carrying on the business operating losses were sustained during the years 1925 to 1928, inclusive, and that on the partnership books of account the value of Maurice S. Bondy’s share in the partnership as of December 31, 1924, was reduced at the end of each of the years 1925 to 1928, inclusive, by an amount representing sixteen per cent of said operating-losses incurred in those years. The proportion of the losses charged to said Bondy’s capital account in each of those years is stipulated and set out in our findings of fact.

In support of the contention that petitioner is entitled to deduct from his 1929 income tax return the amount ($12,190.10) which he paid in that year pursuant to the judgment rendered by the Supreme Court of the State of New York, as indicated in our findings of fact, numerous authorities are cited in the brief of his counsel. The attempt is made to make applicable and controlling in the instant case Lucas v. American Code Co., 280 U. S. 445 (other cases also relied on cite same), but in our opinion the facts and circumstances of the instant case are not such as to bring it within the principle therein enunciated. In Lucas v. American Code Co., supra, for instance, the court was considering a single item claimed as a deduction from gross income and resulting from liability for a breach of contract that had nearly eighteen more 3rears to run at the time of the breach and where the amount of damages, “ if any, was wholly unpredictable.’’ In the instant case, the item we are dealing with represents a part of alleged operating net losses, covering a period of several years, none of which years is the same as the year in which the deduction is claimed. Under the principle that each year’s return must stand alone, no part of the losses occurring in 1925 to 1928, inclusive, as indicated in our findings of fact, may be deducted in 1929, when the alleged loss is now asserted to have been sustained by reason of the payment of the amount thereof to the representatives of the deceased member (Maurice S. Bondy) of the partnership, pursuant to the judgment of the Supreme Court of the State of New York, which held said Bondy was not liable for any part of the aforesaid losses. See Arthur H. Earle, 15 B. T. A. 668; affirmed in 38 Fed. (2d) 965.

Viewing the facts in a different light from that discussed in the briefs of counsel, the payment made in 1929 to the representatives of Bondy’s estate appears to have been merely the return of money to the Bondy estate which the Supreme Court of the State of New York decreed was rightfully Bondy’s and that he was not chargeable with any part of the losses occurring in the years 1925 to 1928, inclusive. The payment so made in 1929 was merely the payment or return of money really due and owing Bondy’s estate and was made pursuant to judgment as stated and was in no sense a deductible loss from petitioner’s gross income in the year 1929.

In our opinion, viewed in either of the aspects stated or in any other aspect, the petitioner is not entitled to the deduction claimed nor has the respondent committed error in his determination.

Judgment will be entered for the respondent.


author: Trammell:

text:
    James D. Robinson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 61179.
    Promulgated March 24, 1933.

      Sidney J. Eagles, Esq., for the petitioner.

      W. FramJc Gibbs, Esq., for the respondent.
   opinion.

Trammell:

This is a proceeding for the redetermination of a deficiency in income tax for 1929 in the amount of $8,753.61. The question involved is whether the petitioner received an ordinary dividend in the taxable year as the result of the corporation, of which he was a stockholder, purchasing a portion of a stock dividend theretofore issued.

The petitioner is an individual, residing in Atlanta, Georgia.

On January 15, 1929, the petitioner was the owner of 5,300 shares of common stock of the Coca-Cola Company, a Delaware corporation. On January 15, 1S29, the Coca-Cola Company declared a dividend on its common stock payable in Class “A” stock, share for share. At the same time of issuance, the Coca-Cola Company advised its common stockholders, one of whom was this petitioner, that the company was willing to purchase 20 per cent of this dividend stock at $50 a share at any time prior to March 16,1929.

The written offer sent to this petitioner was as follows:

THE COCA-COLA COMPANY
(Organized under the laws of the State of Delaware, 1919)
CERTIFICATE OP PURCHASE CLASS “a” STOCK
The Coca-Cola Company will, upon the presentation and surrender of this certificate, and upon the transfer of - shares or any part thereof, of the Class “A” Stock of this Corporation, properly endorsed to the Coca-Cola Company, and the payment of all transfer or any other charges or taxes thereon or in connection therewith, at the Trust Company of Georgia, Atlanta, Georgia, or the Guaranty Trust Company, New York City, during regular business hours, at any time prior to the close of business on Saturday, March 16, 1929, but not thereafter, purchase from the bearer hereof, said shares at Fifty ($50.00) Dollars per share. Fractional shares will not be purchased.
Harrison Jones J. C. Wekklby,
President, Secretary,
*Viee-President.
* Assistant-Secretary.

In accordance with this offer petitioner transferred to the Coca-Cola Company 1,060 shares of Class “A” stock, and received therefor $50 per share. The petitioner endorsed his certificates, placing regular transfer stamps thereon and delivered to the Coca-Cola Company, this latter company placing this stock in the treasury of the Coca-Cola Company, as indicated in the financial reports of the company for the years 1929 and 1930.

The Coca-Cola Class “A” stock is listed on the New York Stock Exchange, and an active market has existed for it at all times. None of this Coca-Cola Class “A” stock was retired by the Coca-Cola Company during the years 1929, 1930 and 1931.

The company had one million shares of Class “A ” stock. Five million dollars was set aside from the surplus account and assigned to Class “A stock which had been distributed as a stock dividend. The petitioner in his return treated the transaction in which he surrendered 1,060 shares of his Class “A ” stock to the Coca-Cola Company as a sale. The Commissioner in his deficiency notice treated the transaction as the equivalent of a taxable dividend.

In our opinion the reacquisition of the stock issued as a stock dividend is so closely connected and related to the issuance of the dividend as a part of a single plan as to constitute the money paid out to the stockholders in this connection the equivalent of a taxable dividend, provided the terms of section 115 (g) of the Revenue Act of 1928, providing for cancellation or redemption of stock, are broad enough to include the transaction which took place here. Section 115 (f) of that act provides that “a stock dividend shall not be subject to tax,” but subsection (g) of this section provides :

If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend. * * *

The question here is, Did the corporation cancel or redeem this stock issued as a stock dividend at such time and in such manner as to make the distribution and cancellation or redemption essentially equivalent to the distribution of a taxable dividend ? It is clear that the stock was not canceled. The only question left is, Was the stock issued as a stock dividend redeemed within the meaning of the statute when it was reacquired by the corporation by the payment out of its earned surplus ? In other words, Is the language, “ cancellation or redemption,” sufficiently broad to include the reacquisition of stock which is not retired but kept as an asset in the treasury of the corporation ?

With reference to section 201 (f) of the Revenue Act of 1926, the Committee on Ways and Means stated as follows:

It bas been contended that under existing law a corporation, especially one which has only a few stockholders, might be able to make a distribution to its stockholders which would have the same effect as a taxable dividend. For example: Assume that two men hold practically all the stock in a corporation, for which each had paid $50,000 in cash, and the corporation had accumulated a surplus of $50,000 above its cash capital. It is claimed that under existing law the corporation could buy from the stockholders, for cash, one-half of the stock held by them and cancel it without making the stockholders subject to any tax. Yet this action, in all essentials, would be the equivalent of a distribution through cash dividends of the earned surplus. The amendment proposed to this subdivision is intended to make clear that such a transaction is taxable.

The Committee report refers to the purchase and cancellation of stock as being the equivalent of a cash dividend. The question is, Does the purchase of the stock have the same effect ? It is clear that the stock was reacquired by the corporation out of its earned surplus and if the surplus had been distributed direct to the stockholders it unquestionably would have been taxable as ordinary dividends.

The statute clearly contemplated a difference between “ cancels ” and “ redeems.” The use of the words “ cancel ” and “ redeem ” carries the idea that it is not necessary that stock be canceled if it is redeemed — that stock may be redeemed without being canceled. The word “ cancel ” has a different meaning from the word “ redeem.”

Webster’s New International Dictionary defines the word “redeem ” as, “ To regain possession of by payment of a stipulated price; to repurchase. (2) To recover or regain, as pledged or mortgaged property * * *. (3) To buy off, take up, or remove the obligation of, by payment or rendering of some consideration.” •

The word “ redemption ” has its origin in the Latin words “ re ” and “ emers ” and means to repurchase or to regain possession by payment of a stipulated price. Murphy v. Caselman, 139 N. W. 802 (N. D.); Maxwell v. Foster, 45 S. E. 929; Pace v. Barbies, 20 Atl. 352 (N. J.); Miller v. Batteman, 24 N. E. 496 (Ohio). Considering the word “redeem” in the light of the above definitions, the corporation involved here redeemed the stock from the petitioner. It acquired it back or repurchased it. The statute does not refer to “ retirement ” of stock. If the statute had used the expression “ cancels or retires ” the stock there would be another question. But the contention of the petitioner is that “ redeems ” or “ redemption ” means “retires” or “retirement.” We do not think the statute should be so limited. This view is consistent with the theory of the statute. The object of the statute was to avoid the distribution of corporate earnings to stockholders by means of distributing stock dividends or the issuance of stock and taking surplus from the corporation to replace those stock dividends or such stock issued. If an actual physical cancellation or retirement of stock were contemplated, the real object of the legislation would not be accomplished. In our opinion the redemption of stock declared as a stock dividend is accomplished by the repurchase of such stock by the corporation, and the purpose of the statutes can not be avoided by placing the stock in the corporation’s treasury. We do not question the fact that a corporation may deal in its own stock by purchase and sale. See S. A. Woods Machine Co., 21 B. T. A. 818. The record does not show, however, that the corporation was dealing in its own stock by purchase for sale, although the stock had a ready market. A purchase of stock, however, out of earned surplus, under the circumstances here presented, in our opinion, brings the case within section 115 (g) of the Bevenue Act of 1928 and subjects the amounts so paid to tax as ordinary dividends.

While the record is silent as to whether there was a pro rata purchase of stock from all stockholders, conceding, for the sake of argument, that a pro rata purchase is necessary in order that a purchase may amount to “ redemption,” the petitioner could not secure an advantage by failing to introduce evidence. The Commissioner determined that there was a cancellation or redemption of stock within the meaning of the statute. The burden was on the petitioner to show that there was not. This burden is not met by showing that the stock was not physically canceled or retired. If a purchase from one of many stockholders is not a redemption, then the petitioner should have shown that was the case. It might well have been a pro rata purchase from all stockholders. In view of the Commissioner’s determination that the stock dividend was canceled or redeemed, if it be necessary for redemption that a purchase be pro rata as to all stockholders, the presumption is that is what occurred in the absence of evidence to the contrary. If the petitioner is relying on an isolated stock purchase or a purchase otherwise than pro rata, he should have shown it by evidence. In our opinion the petitioner has not shown that the stock was not redeemed. We, therefore, approve the Commissioner’s determination that the stock was canceled or redeemed under such circumstances as to make the distribution and cancellation or redemption essentially the equivalent to a cash dividend.

Judgment will he entered wider Bule 50.


author: Lansdon :

text:
    Edmond A. Hughes, Petitioner, v. Commissioner of Internal Revenue, Respondent. C. B. Little, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 44113, 61821.
    Promulgated March 24, 1933.

      Lloyd B. Anderson, Esq., for the petitioners.

      J. A. Lyons, Esq., and B. M. Goon, Esq., for the respondent.
   OPINION.

Lansdon :

The petitioners contend that their advances in cash and property to the Beulah Coal Mining Company during its operations constituted bad debts which were ascertained to be worthless in 1924. As the basis for his determination in respect of this issue, the respondent contends, first, that the petitioners suffered no deductible loss in their transactions with the Beulah Company; and, second, that, even if that corporation’s obligations to them could at any time have been considered in the category of bad debts, in the circumstances the time of the ascertainment of worthlessness must have been prior to 1924.

We think the record supports both theories advanced by the respondent. Respecting the first, the petitioners have not adduced proof convincing to us that they ultimately lost the whole, or even part of their outlays made in their operations through the Beulah Company, which they here claim were debts which were ascertained to be worthless in 1924.

The petitioners’ advances to the Beulah Company were made prior to October 1922, when they closed it down and began using its plant and equipment in their partnership operations. They did this under a lease which provided for certain compensation to the Beulah Company for the use of the property, but no accounting was made to it for such use and the record shows that they paid nothing on such account. If such use had any value whatever the corporation was entitled to a credit against any indebtedness the petitioners held against it. The fact that the partnership used this plant and other assets for more than a year and thereby was enabled to develop the mining properties and mines which it delivered as a going business to the corporation succeeding it is evidence to us that such use was valuable. What that value was we are unable to say in the absence of proof. Conceivably to the petitioners it may have exceeded the amount in dispute, inasmuch as by use of the equipment and other assets held over by them from the Beulah Company they were enabled to organize their new corporation without capital expenditures or any interruption of their mining business.

Other facts shown in the record to our mind tend to support either or both of two theories which are fatal to the petitioner’s contention, viz: (1) that the petitioners determined these alleged bad debts worthless and lost to them not later than December 31, 1923, and/or (2) that their claims on that date were taken over and assumed by the corporation. An abstract of the account of the Beulah Company with the partnership which was put in evidence shows that on December 31,1923, the partnership balanced the account with a closing credit entry of $104,375.69, the amount now claimed as a bad debt, which it charged to surplus. These books and all other partnership accounts were taken over by the corporation and adopted by it as its own. Although the exhibit introduced by petitioners showing the successive transfers of these accounts, first to the partnership and last to the corporation, was not explained, it indicates that the partnership and the corporation in the order stated each assumed the payment of the obligations here in issue and that they were written off as losses of the corporation at the close of the year 1923. In any event the petitioners have not convinced us that the respondent erred in denying the deductions of the petitioners claimed for them in 1924, and his acts are approved. Since the record fails to disclose that advances made by petitioners to the Beulah Company became worthless debts at any time or that any loss was sustained therefrom, the alternative contention that, if the Board should find the debts worthless in 1922 or 192B, net losses applicable to income tax liability for 1924 resulted, need not be considered.

Other assignments of error urged in the appeal of petitioner Little at Docket No. 61821 remain to be considered. The petitioner gave his individual promissory note for $10,000 and paid $99.17 in interest to a bank in discharge of a note for $10,000 upon which he was bound as indorser for one Twitchell, an insolvent maker. He claimed the amount of this note as a bad debt deductible from his income in 1924. This Board and the courts have held that the giving of a note in the circumstances shown and where the maker thereof keeps his accounts and makes his income tax return on the cash receipts and disbursements basis does not result in a deductible loss until such note is paid in cash and by such holding we are bound. United States v. Mitchell, 271 U. S. 9; Eckert v. Burnet, 283 U. S. 140. The payment of $99.17 for interest constitutes a deductible claim and will be allowed; all in excess of such sum will be disallowed.

We are unable to find proved facts in the record to sustain petitioner Little’s claims of losses from his investments in the Kelly Springfield Truck Company and Goodridge-Call Lumber Company stocks, which securities he contends became worthless in 1924. Little testified at the hearing that he paid $19,600 for his Kelly Springfield stock, but the only evidence introduced as to the value of such stock in .the taxable year consists of copies of correspondence and an unverified copy of an alleged financial statement purporting to show the condition of that corporation as of December 16,1922. There is nothing to show that such stock was valueless in 1924 or at any other time. The document or statement if accorded probative value at all would support the theory that the corporation was insolvent in 1922, which facts the petitioner must have known. We hold, therefore, that the petitioner has failed to sustain the burden of showing that the respondent erred in denying the deduction in the year claimed.

Little’s stock holdings in the Goodridge-Call Lumber Company were acquired at different times prior to March 1, 1913, part by purchase at par and part through stock dividends to him. He claims that his 196 shares of this stock had a fair market value on March 1, 1913, of $21,797.16 and that they became worthless in 1924. No testimony of witnesses who pretended to know the fair value of this stock on March 1, 1913, or its lack of value in 1924, was introduced at the hearing of these appeals. The petitioner however introduced in evidence a letter received by his agent in October 1928, with a statement purporting to show the book value of that stock on March 1, 1913. This letter and statement are incompetent and without probative force. The same may be said of a great mass of other miscellaneous hearsay memoranda put in evidence which merely reflect the opinions of parties not under oath or present for cross examination before the Board. For lack of proof showing error we sustain the act of the respondent in denying this claim.

Since we are unable to find that petitioner Little sustained any losses in connection with the stock transactions above discussed, it is unnecessary to consider the alternative claim that such losses if sustained in prior years resulted in net losses applicable to income tax liability in 1924.

The remaining assignments of error, which relate to deductions claimed by petitioner Little, were abandoned at the hearing and the acts of the respondent in denying them are therefore approved.

Little has neither denied the items of income which the respondent found were omitted from his income tax return for 1924, nor offered any satisfactory explanation for such omissions. There is ample proof in the record to justify the imposition of the negligence penalty, which, under the facts shown, was mandatory under section 275 (a) of the Revenue Act of 1924. These penalties are therefore affirmed.

No evidence in respect of the deficiency asserted against Little for 1925 was adduced. The determination of the respondent thereto is affirmed.

In Dochet No. H113 decision will be entered for the respondent. In Docket No. 618%1 decision will be entered under Rule 60.


author: Smith:

text:
    Noxon Chemical Products Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 50568.
    Promulgated March 27, 1933.

      Joseph, H. Kraus, O. P. A., and Victor A. Pascal, Esq., for the petitioner.

      Francis L.Vam, Ha,a,fien, Esq., for the respondent.
   OPINION.

Smith:

The petitioner contends that it is entitled to deduct in the taxable year ended August 31,1928, as a business expense of that year, the amount of $50,000 representing a portion of the cost of the litigation to remove the receivership under which it had been placed by order of the United States District Court in 1925. The respondent opposes the deduction on the grounds that the cost of the litigation does not represent an ordinary and necessary expense of the corporation, but was either a personal expense to the stockholders or was a capital expenditure, and that in any event the amount claimed is not deductible as an ordinary and necessary business expense of the taxable year ended August 31, 1928.

It is generally recognized that attorneys’ fees and other expenses incident to litigation occurring in the regular course of business and directly connected with the business, except those incurred illegally or in relation to some unlawful act, are deductible as ordinary and necessary expenses of the year when paid or incurred. Kornhauser v. United States, 276 U. S. 145; Lucas v. Wofford, 49 Fed. (2d) 1027; Udolpho Wolfe Co., 15 B. T. A. 485; H. M. Howard, 22 B. T. A. 375; Matson Navigation Co., 25 B. T. A. 14; Samuel D. Leidesdorf, 26 B. T. A. 881.

The costs of the' receivership were paid by the petitioner after the taxable year 1928 and during the years 1929, 1930, 1931, and 1932. The petitioner contends, however, that since its books were kept on an accrual basis, it is entitled to deduct the amount claimed, $50,000, as an accrual of the year 1928. The facts do not support this contention, even if we assume that the petitioner’s ousted officers were authorized legally to bind it in the period during which the receivership held the petitioner’s assets and that the acts of Balph Notte-baum and the stockholders in employing attorneys and contracting other obligations on behalf of the petitioner were, for the purposes of the present question, the acts of the petitioner. The evidence does not show that the agreements with any of the attorneys were entered into during the taxable year ended August 31,1928, or that there was ever any understanding that any definite amounts were to be paid to them for their services in that year. The evidence, does not show, either, what part of the services of these persons was performed during the taxable year 1928 or what portion of the compensation was paid to them for services performed in that year.

It appears, too, that some of the attorneys’ fees were contingent and were to be paid only when the petitioner had recovered its assets. This is true of the $5,000 which was to be paid to Eobert Carey, Jr., under the agreement set forth above. Clearly, no liability for this contingent fee accrued either to the petitioner or to the individual officers until after the close of the taxable year 1928. We do not know whether the fees under the agreements with any of the other attorneys were contingent or not.

At the hearing of this proceeding, petitioner’s counsel stated as follows:

If your Honor asks me how we arrived at the $50,000 and asks me to say that I know the $50,000 can be absolutely applied to the year 1928, I say we cannot prove it; but, taking the entire picture as a whole, we say that we are entitled, by virtue of the evidence adduced here, to say that $50,000 of the $140,000 is properly applicable to the year in question. We have no other way of determining it; we have no way of saying when a certain piece of work was started and when it was concluded; wTe have no way of saying how much of Mr. Seymour’s work, for instance, was performed prior to August 31, 1928, or how much of my work or of Mr. Unger’s work, hut we do know that a certain portion had been done by that particular time and for that particular portion the legal obligation had been incurred at that same time * * *.

Upon the facts of record, we can not determine that any part of the expenses of the receivership is deductible by the petitioner in the taxable year ended August 31, 1928.

Judgment will be entered for the resfondent.


text:
    Herbert J. Blum, Petitioner, v. Commissioner of Internal Revenue, Respondent. Frank E. Alstrin, Petitioner, v. Commissioner of Internal Revenue, Respondent. Benjamin F. Stein, Petitioner, v. Commissioner of Internal Revenue, Respondent. L. Montefiore Stein, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 39629-39632.
    Promulgated March 27, 1933.

      S. Sidney Stein, Esq., for the petitioners.

      Chester A. Gwinn, Esq., for the respondent.
   OPINION.

Trammell:

It is the contention of the petitioners that the stock transaction was not completed in 1924 so as to be taxable in that year; that the “ secondary distribution ” of the stock was only a part of the underwriting scheme; and that it is necessary to look to the 1924 transaction as well as the 1925 transaction in order to determine whether there is a profit. The petitioners’ brief states their contention as follows:

The agreement to purchase the stock and the undertaking with respect to the “ secondary distribution ” thereof constituted a single transaction.

We do not understand that the Commissioner has determined a tax for the year 1924 based upon the purchase of stock alone. The fact is that the petitioners acquired the stock and sold it in 1924 and the partnership realized, according to the Commissioner’s determination, $280,209.21 as profit, which it prorated to the individual partners. In 1925, in order to support the market and afford a secondary distribution of the stock, the partnership lost money. We agree that pursuant to the obligation of the partnership it was necessary for it to continue to deal in stock in 1925 for the purpose of supporting the market and afford the secondary distribution, which obligation it was necessary to assume in order to put the stock upon the stock exchange and to carry out its original obligation in connection with the underwriting. However, we see nothing in this transaction or undertaking inconsistent with the Commissioner’s theory that the profit made in 1924 should be subject to tax in that year, and that any profit or loss in 1925, as the result of buying and selling stock in that year in order to bolster up the market, should be treated for tax purposes separately. If a profit was made in 1925 it should be taxed in that year and any loss sustained in that year would be deductible in computing income, if any, for that year. Even considering the underwriting agreement and the agreement with respect to the secondary distribution of the stock in order to protect the market as one transaction, in our opinion, it would be governed by the rule laid down by the Board in the case of Consolidated Asphalt Co., 1 B. T. A. 79, where we said:

It is quite true that not all amounts received constitute income; but when a- taxable corporation in the course of its business of making profits receives contractual compensation for work done and material furnished, it cannot contend that a part of the amount received is not income because the taxpayer is subject to a collateral obligation, the fulfillment of which may require it to spend some of the amount.

The petitioners rely on our decision in Henry S. Parker, 11B. T. A. 1336. In that case two individuals named Kinne and Lyon, in 1919, approached the partnership of Colgate, Parker & Company with a proposition to acquire the stock of the Mercer Motors Company and sell the same through a syndicate. The partnership agreed to the arrangement on the basis of dividing the profits, one-half to the partnership and one-half to Kinne and Lyon. Thereupon, the partnership and Kinne and Lyon (purchase group) purchased 89,000 shares of Mercer Motors stock and at the same time it entered into an agreement with Kinne and Lyon to form a syndicate (selling group) to sell the stock. The partnership was to be the manager of the syndicate, with power to purchase and sell said stock at such time or times and upon such terms as the partnership should determine. The principal function of this selling group was to make secondary distribution of the stock. The purchase group, after purchasing the stock went through the form of selling it to the same individuals as the selling group and erroneously entered on their books a profit from this transaction. This so-called profit we held was not income. The question there was whether the transfer from the purchasing group to the selling group was a closed transaction resulting in gain or loss. The partnership and Kinne and Lyon were working together. When the transfer was made from the purchase group to the selling group no profit actually resulted, because it was agreed that it was merely turned over for sale and no sale to outsiders had actually occurred. It could not be determined what the profit would be until there were some actual sales. The selling group which received the stock was to sell the stock and profits to be derived from sales were to be divided. We held in that case that there was no gain or loss until the transaction was completed.

But here we have a different situation. In this case profit was actually realized in 1924. The partnership received the cash in that year from the purchase and sale of the stock. The agreement to protect the market for a reasonable time after 1924, although it may be held to be in substance and effect a part of the original agreement, does not prevent what was received as income in 1924 from being taxed as income in that year. This case is in some respects similar to the case of J. C. Clemmons, 20 B. T. A. 334; affd.. 54 Fed. (2d) 209. In that case two individuals sold one-half of the corporation’s stock and made a collateral agreement to do other things. It was contended that no gain should be reported upon the sale of the stock until the collateral agreement had been complied with. The court rejected this theory and held that there was gain or loss on the sale of the stock, notwithstanding the fact that the sellers were obligated to do other things in the future. The court said:

They (the sellers) received and receipted for the cash payment, and the notes representing the balance of the purchase money were payable to them. The proceeds were deposited by them in bank to their own credit. The written agreement to help build a theatre in the future did not require that any particular money be used; and, if it had, it would not prevent the gain from the sale which produced the money being taxable, there being merely an investment provided for it in advance of its receipt. Lonsdale v. Commissioner (C. C. A.), 32 Fed. (2d) 537; Detroit Egg Biscuit Co. v. Commissioner, 9 B. T. A. 1365; Hoult v. Commissioner, 24 B. T. A. 79.
****$$:!:
There was a completed sale of the stock by Gordon and Clemmons in 1925 resulting in gain; in nowise defeated by the collateral agreement to make future contribution to or for the use of the corporation, or by the pledge cf the purchase price to secure this being done, or by the actual use of part of it in making the contribution.

The case at bar is even stronger on its facts than the Clemmons case, supra. In this case the petitioners bought and sold stock in 1924 and realized a profit therefrom. In 1925 the partnership of which the petitioners were members bought and sold stock resulting in a loss. The money received in 1924 was not deposited for the purpose of securing the carrying out of the contract to protect stock.

Even if we should hold that the two contracts involved in this case are tied up together and each mutually dependent upon the other, it does not follow that the determination of gain or loss from the purchases and sales of one contract is dependent upon the amount of gain or loss from the purchases and sales under the other contract. Even if there had been one contract and not two, which ran over from one year into the next and involved purchases and sales, the gain or loss in one year should not be postponed until the gain or loss in the subsequent year is determined. On the petitioners’ theory, if gain had been realized in 1925 out of the dealings in stock to protect the market, all of the gain in 1924 should be added to the gain in 1925 and taxed in that year. We think this is inconsistent with the theory of taxation, which is based upon an annual accounting. The gains should be taxed in the year in which received. Each year is on a separate basis. This contract does not involve one single transaction even though we consider the two contracts as one. Even if it were one which involves several transactions, it would not be necessary to wait until all the transactions had been completed to determine the gain. If this were true, a person who secured a contract for a term of years to sell stock on a commission basis and agreed to pay his own expenses would have to wait until the expiration of his contract to determine his gain or loss. We think the more correct method would be to determine, the gain or loss on a, contract involving separate transactions computed on an annual basis.

The sales made in 1924 by the partnership were fully completed and closed in 1924. Title to the stock passed to the purchasers and payment therefor was received. The partnership was not under obligation to the purchasers to buy this stock back at any time or at any price. The partnership’s participation in the syndicate formed to trade in stock, and the fact that it did trade in stock in the following year, does not prevent the gain received in a previous year from buying and selling stock being taxable in that year. It is our opinion, therefore, that the Commissioner properly determined the tax upon the 1924 gains and that those gains should not be offset by 1925 losses in dealings in stock.

Judgment will be entered under Rule BO.