author: Disney :

text:
    Shamrock Oil and Gas Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 98588.
    Promulgated October 22, 1940.

      Harry 0. Weeks, Esq., R. B. Garmon, Esq., and Dempsey A. Wwm, G. P. A., for the petitioner.

      Jannes L. BaeJcstrom, Esq., for the respondent.
   OPINION.

Disney :

This proceeding involves income taxes for the year 1935. Deficiency was determined in the amount of $5,821.36. A stipulation and supplemental stipulation of facts were filed, and in addition thereto a single documentary exhibit was admitted in evidence. We find the facts to be as stipulated and as set forth in said document. They may be summarized for purposes of examination of the question presented, as follows:

The petitioner, a Delaware corporation with its principal office and place of business at Amarillo, Texas, in 1935, the taxable year, kept its accounts on the accrual basis. On January 1, 1935, it was indebted upon a first mortgage bond issue, an eight-year debenture bond issue, and a ten-year debenture bond issue. The debentures provided for payment of interest semiannually on March 1 and September 1. No interest had been paid since September 1, 1932, though it had been regularly accrued upon petitioner’s books and income tax returns. From January 1 to August 31, 1935, and in accord with its regular accounting practice, petitioner accrued on its books, as expense, interest on the debenture bonds in the amount of $5,640 each month, a total to August 31, 1935, of $45,120. On July 8, 1935, a Delaware corporation, the Shamrock Oil & Gas Corporation, was formed. On July 9, 1935, a plan of reorganization was entered into between petitioner and the new corporation. The plan was approved by the stockholders on July 24, 1935, and was carried out on or about September 1, 1935, by the transfer of all of petitioner’s assets to the new corporation in consideration of all of the stock and all of the securities, consisting of bonds, of the new corporation. Thereupon the securities so received by petitioner were issued, ratably and in accordance with the plan of reorganization, to its stockholders, the holders of its first mortgage bonds, and the holders of its debenture bonds. The holders of petitioner’s stock and bonds surrendered them, with the unpaid interest coupons on the bonds, in consideration of receipt of the stock and bonds of the new corporation, and petitioner’s stocks and bonds were duly canceled. Of the stock in the new corporation, 84.213 percent was issued to persons holding stock in the petitioner corporation. The reorganization was nontaxable under sections 112 (b) (4) and 112 (g) (1) of the Revenue Act of 1934. Under the plan the holder of $1,000 face value of petitioner’s first mortgage bonds (with interest coupons from March 1, 1933) received $1,100 of bonds and 40 shares of common stock of the new corporation; the holder of $750 face value of petitioner’s debenture bonds (with interest coupons since March 1, 1933) received bonds of face value of $300 and 75 shares of common stock of the new corporation; and stockholders of petitioner received common stock in the new corporation, share for share. The new corporation assumed the liabilities of petitioner, but received the assets of petitioner free from the lien and operation of the first mortgage bonds and debentures.

The petitioner in its income tax return claimed deduction of the $45,120 interest accrued during the period from January 1 to August 31, 1935, upon the debenture bonds. The claim was disallowed by the Commissioner and deficiency determined accordingly. The sole question presented is, therefore, whether the petitioner is entitled to such deduction of accrued interest.

The petitioner in effect contends that the interest was accruable by one operating on the accrual basis, was duly accrued prior to the reorganization, and was discharged by the receipt of stock and bonds of the ne,w corporation, in the reorganization. The respondent, on the other hand, in substance argues that the interest is not an allowable deduction, because it was canceled prior to the end of the year by the reorganization.

There is no contention about the amount of the interest, the liability of the' petitioner therefor, nor the fact of nontaxable reorganization. Nor does respondent contend that payment is necessary to accrual. Indeed, there is dispute, not as to facts, but as to the legal effect thereof. The petitioner cites and strongly relies upon Hummel-Ross Fibre Corporation, 40 B. T. A. 821, wherein we held that interest upon bonds accrued within the taxable year, but discharged within the year by the issuance of preferred stock in a nontaxable reorganization, was properly deducted. The respondent seeks to distinguish that case and cites others, none of which, however, are in our opinion here applicable. Respondent agrees that the Hummel-Ross Fibre Corporation case is applicable to the interest accrued on petitioner’s first mortgage bonds (which respondent allowed to be deducted), but in effect argues that as to the first mortgage interest provision was made in the reorganization for payment, whereas there was no such provision as to the interest on the debentures. The only difference lies in the fact that the holders of first mortgage bonds and interest coupons received in exchange more than the face amount of their bonds, i. e., the holder of $1,000 face value of first mortgage bonds received $1,100 face value in new bonds, and 40 shares of stock in the new corporation; while) the holder of debenture bonds received less than face value, that is, the holder of $750 in debenture bonds received $300 face value of new bonds and 75 shares of the stock in the new corporation. We think the difference has no effect on the present question. In each case, as in the Hummel-Ross Fibre Corporation case, supra, bonds with accrued interest coupons were exchanged for a consideration, to wit, new; securities. It is immaterial whether the new securities, for which the interest coupons (and bonds' to which attached) were exchanged, were the issue of the same corporation, as in the Hummel-Ross Fibre Corporation matter, or another corporation, as herein. In both instances the exchange was made as a part of a reorganization and by a party thereto. This rendered nonrecognizable any profit made by the corporation in the acquisition of its debenture bonds and interest coupons thereon, but does not alter the fact of exchange of the coupons for a consideration, the bonds or stock received therefor. The fact that petitioner made a nonrecognized profit on the transaction does not mean that the previously accrued liability for interest was “eliminated”, is “no longer real”, or has become extinct in such a manner as to require disallowance of deduction of the interest accrued. It had been eliminated for a consideration, as fully as in the Hummel-Ross Fibre case. Being unable to discern any distinction! in principle between that case and the instant proceeding, we hold on the authority thereof that the respondent erred in disallowing deduction of the interest accrued.

Decision will be entereé for the petitioner.


source: Caselaw Access Project

author: Smith:

license: Public Domain

text:
    Mary duPont Faulkner, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92815.
    Promulgated October 22, 1940.

      Robert O. McKay, Esq., for the petitioner.

      Davis Raskin, Esq., for the respondent.
   SUPPLEMENTAL OPINION.

Smith:

The Board promulgated its opinion in the above entitled proceeding on April 18, 1940, 41 B. T. A. 875. One of the questions in issue was whether a contribution to the Birth Control League of Massachusetts made by the petitioner in 1985 in the amount of $6,000 was subject to gift tas.

In a companion case, Docket No. 95624, the question in issue was whether this same gift was a legal deduction from the petitioner’s gross income for 1935 under section 23 (o) of the Revenue Act of 1934. The Board held in that case, in a memorandum opinion entered July 11, 1939, that the gift was not a legal deduction from gross income under section 23 (o) of the Revenue Act of 1934. The petitioner took an appeal from the adverse decision of the Board in that case to the United States Circuit Court of Appeals for the First Circuit, 112 Fed. (2d) 987, which reversed the decision of the Board and held that the gift was a gift to a charity under section 23 (o) of the Revenue Act of 1934 and hence was a legal deduction from gross income. The Board is-advised by counsel for the respondent that no writ of certiorari will be asked for in that case.

Both parties are agreed that if the $6,000 gift is a legal deduction from gross income under section 23 (o) of the Revenue Act of 1934, it is likewise a legal deduction from gross gifts under section 505 (a) (2) (B) of the Revenue Act of 1932, as amended by section 517 (a) of the Revenue Act of 1934. The question in issue in this proceeding is ruled by the opinion of the appellate court in the above cited case. The petitioner is entitled to the deduction from gross gifts of the $6,000 in question in the determination of the amount of the net gifts subject to gift tax. The opinion of the Board at 41 B. T. A. 875, is modified accordingly.

Reviewed by the Board.

Decision will be entered under Rule 50.

Murdock dissents.


author:
Disney :
      Black,

text:
    Credit Alliance Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100561.
    Promulgated October 22, 1940.

      Dean Acheson, Esq., and W. Graham Glaytor, Esq., for the petitioner.

      Joe D. Hughes, Esq., for the respondent.
   OPINION.

Disney :

The question before us is: To what dividends paid credit is the petitioner entitled under the Revenue Act of 1936 because of distributions made by it in that year? Section 14 of that act imposes a tax upon “undistributed net income”, to compute which it is necessary to deduct from net income (adjusted in other particulars not here important) the sum of the dividends paid credit. Section 27 (a) provides that such dividends paid credit shall be the amount of the dividends paid during the taxable year. Section 27, by subsections (f) and (h), provides as follows:

(f) Distributions in Liquidation. — In the case of amounts distributed in liquidation the part of such distribution which is properly chargeable to the earnings or profits accumulated after February 28, 1913, shall, for the purposes of computing the dividends paid credit under this section, be treated as a taxable dividend paid.
*******
(h) Nontaxable Distributions. — if any part of a distribution (including stock dividends and stock rights) is not a taxable dividend in the hands of such of the shareholders as are subject to taxation under this title for the period in which the distribution is made, no dividends paid credit shall be allowed with respect to such part.

In the taxable year the petitioner distributed from its surplus earnings and profits and by way of complete liquidation cash and property of the value of $950,734.80, of which $947,228.40 or 99.63 percent of the distribution was received by a corporation owning the same percentage of its stock. Petitioner therefore contends that the amount distributed to the parent corporation is the basis for a dividends paid credit under the terms of section 27 (f); while respondent argues that under section 27 (h) the distribution does not constitute a dividends paid credit, ■for the reason that the distribution is not a “taxable dividend” because profit or loss is not recognized in the hands of the distributee, under the language of section 112 (b) (6) of the Revenue Act of 1936.

1. The petitioner argues that subsection (f) is an exception to subsection (h); the respondent, that subsection (h) is a limitation upon subsection (f). The petitioner contends that it was the intent of Congress through section 112 (b) (6) to encourage liquidation of corporations in chains of holding companies and that to deny the dividends paid credit would nullify such encouragement; whereas the respondent contends .that the prime object in the legislation was to force either the corporation or the distributee-stock-holder to pay tax.

Excerpts from the committee reports can be found to bear out in some measure both views. We think it obvious that Congress had in mind both the idea of forcing the payment of tax upon corporate earnings and of encouraging liquidations of corporations forming parts of corporate chains. After reviewing the various committee reports on the subject, we have concluded that they are not inconsistent upon the present question, and that, considering the form of the legislation, it can be resolved by the application of the usual principles of interpretation.

With reference to such principles of interpretation, the petitioner urges that subsection (f) is a more particular subsection than subsection (h), and therefore under the familiar principle in that re-< gard must control over subsection (h); while the respondent points out that subsection (h) is later than subsection (f) in the statute and therefore should be considered as an exception to subsection (f). We do not consider the latter principle of great weight. Though sometimes recognized, it is “a purely arbitrary rule of construction which is subject to the rule that the statute must be construed as a whole to find the legislative intent.” 59 C. J. 1000. It has been called artificial, not inflexible, and to be resorted to only in extremis. People ex rel. Mason v. McClane, 90 N. Y. 83; Commercial Trust Co. v. Hudson County Board of Taxation, 86 N. J. L. 424; 92 Atl. 263.

In Rodgers v. United States, 185 U. S. 83, the Court said:

* * * So, when in section 13, Congress prescribed a general rule for the salaries of naval officers, such general rule cannot within the scope of this canon be understood as repealing the special provision in the prior section, but the special provision must be taken as an exception to and limitation of the general rule.

As indicated in Rodgers v. United States, supra, the common rule that a specific provision shall be held to control one more general is more salutary and stronger than the idea that the later of two provisions is the exception. We therefore consider the question whether subsection (f) or, on the contrary, subsection (h) is the more specific provision. Subsection (h) concerns itself with distributions in general, the subject matter being that any part of a distribution to confer dividends paid credit must be a taxable dividend. Subsection (f) concerns itself with distributions in liquidation, and the gist of the subject matter is that any part of a liquidation distribution which is properly chargeable to the earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend paid. It seems to us wholly obvious that, on the face of the two subsections, (f) is the more specific. Indeed, not only does it limit its effect to distributions in liquidation, patently a subdivision of “distributions” covered by subsection (h), but closer examination reveals that it is even more specific, for it involves, covers, and is effective upon not the entire distribution in liquidation, but only a specific part thereof, to wit, the part “which is properly chargeable to the earnings or profits”, etc. We think it can not be denied that subsection (f) is the more specific subsection and that its language in general is to be given effect greater than that of subsection (h). Since in Rodgers v. United States, supra, the Court followed the more particular previous section rather than the later more general provision as to salaries of naval officers, we seem to be required here to consider and give effect to what is said in subsection (f) as to a certain part of a distribution in liquidation, rather than the language of subsection (h) as to distributions in general. The respondent calls our attention to the case of Centennial Oil Co. v. Thomas, 109 Fed. (2d) 359; certiorari denied, 309 U. S. 690, in which the majority opinion held that “Subsection (h) modifies subsection (f) * * * by way of exception”, and denies dividends paid credit for a distribution in liquidation under section 112 (b) (6). The petitioner takes sharp issue with the decision and urges us to follow the yiews expressed in an extensive dissenting opinion to the effect that subsection (f) is not in conflict with, or modified by, subsection (h) and confers dividends paid credit.

Examination of the majority view discloses that it relies, without discussion, upon the idea that subsection (h) modifies (f) as an exception thereto and that, though a distribution in liquidation of profits will in general be treated as an ordinary taxable dividend, conferring dividends paid credit, credit is not to be allowed unless the distribution is a taxable dividend in the hands of the distributee. The conclusion of the court that subsection (h) is an exception to subsection (f), though urged upon us by the respondent here, is in contradiction of language used in the Treasury regulation propounded upon the subject.

Regulations 94, article 27 (f) — 1, in part, recites:

To the general rule that the dividends paid credit is allowable only with respect to taxable dividends paid, section 27 (f) makes one exception, namely, for that part of an amount distributed in liquidation which, under the Act, constitutes a distribution of, and is properly chargeable to, earnings or profits accumulated after February 28,1913. * * *

We are of the opinion that the above language of the regulations is properly based upon that of the statute, not only because of the fact that the language in subsection (f) is more specific than that in subsection (h), but because the language of subsection (f) precludes the application of subsection (h) to it, if, as principles of statutory interpretation require, we give effect to all of the language of both subsections. Subsection (h) provides in effect that in order to confer dividends paid credit a distribution must be a taxable dividend in the hands of shareholders who are subject to taxation; but subsection (f) seems on its face designed to fulfill the requirement of “taxable dividend” in the case of a distribution in liquidation as to the part properly chargeable to earnings and profits, for it, with minute particularity, provides that such part of the liquidation distribution “shall * * * be treated as a taxable dividend paid.” In other words, subsection (f) provides that the distribution complies with subsection (a) in that it shall be considered “paid” and further complies with subsection (h) in that it shall be treated as “a taxable dividend.” To say, as does the respondent, that subsection (h) limits (f) and provides that although under the language thereof the distribution shall “be treated as a taxable dividend paid”, it must, nevertheless, in order to confer dividends paid credit, be to the distributee “a taxable dividend”, seems repetition without meaning, for subsection (f) has already provided that this particular type of distribution shall be treated as such taxable dividend. Not only so, but it shall be so treated “for the purposes of computing the dividends paid credit under this section.” If subsection (f) does not entitle the distribution there involved to the dividends paid credit, it would seem useless to provide treatment of it for the purpose -of computing such dividends paid credit. Computation thereof without allowance would be idle. If subsection (f) merely provided that the distribution there involved be “treated as a dividend”, plainly subsection (h) would directly apply and credit would be denied if the dividend was not also taxable. But the same phrase which provides treatment of the distribution as a dividend requires treatment as taxable dividend. There is no opportunity for the distribution to be considered a dividend without being considered taxable and paid, and subsection (h), requiring a distribution to be taxable, has already been complied with, and is in that respect superfluous. In effect, respondent’s view that subsection (h) must be applied to subsection (f) is tantamount to the view that subsection (f) merely provides that the distribution be considered a “dividend paid” and ignores the expression “taxable.” Congress might well have so provided. A distribution in liquidation is not considered a dividend; Hellmich v. Hellman, 276 U. S. 233; and the object of subsection (f) in that regard is plain — to include in the category of “dividends” that which is not a dividend, to wit, a distribution in liquidation. Had Congress stopped there, that purpose would have been accomplished, and, as the respondent argues, distributions in liquidation (to the extent of the part “properly chargeable to the earnings or profits”, etc.) would, though treated as dividends, still have been subject to the more specific requirement of subsection (h) that they be “taxable”, and since under section 112 (b) (6) there is no recognition of gain or loss in case of the liquidation involved, the dividends paid credit would not have been allowable. But Congress did not stop at that point, but proceeded further to provide specifically that the treatment of the distribution should be also “as taxable”, and, as if to close the matter completely, “paid” as well. Subsection (f) provides the specification “taxable” and (h) adds nothing in that regard.

Viewing all of the language of both sections as we must, and giving it ordinary significance, we come to the conclusion that subsection (f) is not modified by subsection (h), and, with all respect for the majority opinion in Centennial Oil Co. v. Thomas, supra, we differ with the conclusion there expressed.

Though our conclusion that subsection (h) does not modify or limit subsection (f) may be reached by considering subsection (f) as modifying the more general terms of subsection (h), we think that neither section modifies the other, but that they cover different ground. In our opinion, Congress by subsection (h) intended ta. cover dividend distributions and to say that, if taxable, they confer dividends paid credit; and, separately, intended by subsection (f) to cover a different category, to wit, distributions in liquidation, and to say that, although not within the category of “dividends”, they shall be treated so as to confer dividends paid credit, to the limited degree provided in subsection (f). The fact that dividends and distributions in liquidation had been1 theretofore by the Supreme Court considered in different categories suggests a separation made by Congress between subsections (f) and (h), the one covering dividends, the other, to a limited degree, liquidation distributions, which would otherwise not receive treatment as dividends, for subsection (h) by its terms requires a distribution to.be a “taxable dividend” (italics supplied) in order to gain the “dividends paid” credit. Subsection (h) does not cover the subject matter of subsection (f). Covering dividends, it may modify subsection (g) as to preferential dividends without modifying subsection (f), which embraces a different subject. Its use of the word “dividend” does not limit (f), but eliminates it from the category covered by (h). It is not without significance that subsection (h) includes and covers, by special parenthetic inclusion, subsection (e) as to stock dividends, but does not so include subsection (f). Subsections (e) and (f) both cover categories of distribution ordinarily viewed differently from ordinary dividends. Under the doctrine of expressio imius exclusio alterius, there is reason to believe that subsection (h) was definitely not intended to cover the subject matter of subsection (f).

2. However, the conclusion that subsection (h) does not limit subsection (f) does not settle the problem presented to us. The respondent contends, in effect, that subsection (f) confers dividends paid credit only as to that part of a distribution in liquidation which is “properly chargeable to the earnings or profits accumulated after February 28, 1913”, that it is not properly chargeable if there is no recognition of profit or loss to the distributee, and that, since section 112 (b) (6) precludes such recognition, no dividends paid credit can be allowed. An interpretation of the expression “properly chargeable to the earnings or profits” is required of us. The petitioner’s view is that only a distinction between charge to earnings or profits, or to capital, was intended by Congress; the respondent’s attitude is based upon such cases as Commissioner v. Sansome, 60 Fed. (2d) 931; certiorari denied, 287 U. S. 667, which hold that if a corporate reorganization results in no recognition of profit or loss to the distributee corporation, as to earnings or profits of the distributor corporation, they remain for purposes of distribution “earnings or profits” of the distributee corporation', and do not become capital of the distributee. The precise question in the Samóme case was whether a stockholder in both the distributor and the distributee corporation should, upon the liquidation of the distributee, be taxed upon what he received as a dividend or be allowed to apply against it the cost of his stock in the original corporation. Under the then revenue act, a distribution in liquidation was taxable as a dividend and not as capital gain, to the extent of corporate earnings or profits. The court held the distribution to be from earnings and profits, though the distributee corporation had itself made no profit. Does the Samóme decision have bearing upon section 27 (f), Eevenue Act of 1936, as to undistributed profits tax?

Our difficulty with the respondent’s view is that it is not in accord with the usual significance of the term “properly chargeable” to the earnings and profits. We think it obvious that ordinary use and interpretation of the expression indicates what is paid or distributed out of earnings or profits, as contradistinguished from that which is distributed out of the capital, such as was done in the amount of approximately $3,700,000 in the liquidation here involved. That only a distinction between capital and earnings or profits is intended in section 27 (f) seems indicated by the language of section 115 (g) of the Revenue Act of 1936. Therein, with reference to distributions in redemption of stock essentially equivalent to the distribution of a taxable dividend, it is provided that the amount distributed shall be treated as a taxable dividend paid “to the extent that it ref resents a distribution of earnings or profits accumulated after February 28, 1913.” (Italics supplied.) Patently, a distinction between capital and earnings or profits was intended. Was that not all that was intended in section 27 (f) ? Again, we find in section 115 (c) the provision that in case of distribution in partial liquidation the part of such distribution “which is properly chargeable to capital account shall not be considered a distribution of earnings or profits.” (Italics supplied.) This seems, in the converse, to indicate the same distinction between capital account and earnings or profits, as herein involved. The same is true of section 113 (b) (1), having reference to adjustment of the basis for determining gain or loss. “Proper adjustment * * * shall in all cases be made * * * for expenditures, receipts, losses, or other items, properly chargeable to capital account(Italics supplied.) It is obvious that in subsection (f) the language “the part of such distribution which is properly chargeable to the earnings or profits accumulated after February 28, 1913” eliminates earnings or profits accumulated prior to that date. It seems equally plain that Congress did not intend to confer dividends paid credit for a return of capital. The intent, in our opinion, went no farther. Indeed, Regulations 94, article 27 (f)-l (b) states: “To determine the amount properly chargeable to the earnings or profits accumulated since February 28, 1918, there must be deducted from the amount of the distribution that part allocable to capital account.” The regulation goes on, however, to state that, “The capital account, for purposes of these regulations, includes” amounts representing the value of the stock, the stockholder’s share of paid-in surplus and “such other corporate items, if any, which for purposes of income taxation, are treated like capital in that they are not taxable dividends when distributed but are applied against and reduce the basis of the stock,” and concludes that the remainder of the distribution in liquidation is properly chargeable to earnings and profits. Yet the respondent allowed the dividends paid credit upon the amount distributed to the minority stockholders — which amounts, of course, because distributed in liquidation “are applied against and reduce the basis of the stock” under section 115 (c), being “treated as in full payment in exchange for the stock.” Thus we see that respondent’s reason for a distinction between petitioner and the minority stockholders fails, and his position is seen to depend upon nontaxability of the distribution. The intent of the Revenue Act of 1986 in this matter is indicated by the report of the subcommittee to the Committee on Ways and Means (March 26, 1936), recommending the undistributed profits tax:

In computing undistributed net income, it is recommended that the corporation be allowed a deduction for any part of liquidating dividends properly allocable to earnings and profits, but no deduction shall be given for the portion thereof properly chargeable to capital account.

We think, therefore, that such cases as Commissioner v. Sansome, supra, do not suffice to demonstrate that under section 27 (f), and “for the purposes of computing the dividends paid credit under this section”, there was no part of the distribution in liquidation “properly chargeable to the earnings or profits * * Cases considering reorganizations and “transfer of profits” intact, as respondent phrases the matter, do not convince that herein there was not distribution of profits, to a distributee in liquidation. Such cases as Commissioner v. Sansome, supra, consider and interpret different statutes and have to do with the position of a transferee corporation, not the distributing corporation, as here, and the fact that the dis-tributee may be considered to be distributing its profits and not capital when it distributes the distribution in liquidation does not, in our opinion, for purposes of section 27 of the Revenue Act of 1936, determine the present question of dividends paid credit.

In arriving at this conclusion we do not disregaz’d respondent’s contention that the Revenue Act of 1938 added “property or money” to the language of section 115 (h) of the Act of 1936, to the effect that a nontaxable distribution of “stock or securities” of ih.e dis> tributor or another corporation should not be considered distribution of earnings or profits. Respondent argues that the 1938 Act merely clarifies the intent of that of 1936. We do not think that the latter act was a clarification. It seems, on the contrary, clearly an addition to what was not enacted in 1936. We therefore do not apply it to the transactions in. 1936 here involved. Moreover, the fact that section 115 (h) provides that distribution of stock or securities shall not be considered distribution of earnings or profits if no gain to distributee is recognized, indicates that here, where stock or securities are not involved, the distribution under the general language of section 115 (b) “is made out of earnings or profits” regardless as to recognition of gain to the distributee.

The respondent says that there has been implied Congressional approval of its interpretation of section 27, inasmuch as Regulations 94, article 27 (f)-l, setting forth his view of the statute, was promulgated prior to the substantial reenactment of the 1936 statute in 1938. This is, of course, a “weight in the scale”, Woolworth Co. v. United States, 91 Fed. (2d) 973, but to be somewhat sparingly applied where the reenactment is not continued and the statute is later repealed, as herein in 1939. Moreover, it can not with accuracy be said there was reenactment without substantial change in 1938, since the undistributed profits tax was not continued in the legislation of that year. Considering the whole state of flux of the subject, we think we should give no great consideration, in construing the 1936 Act, to what was done in 1938, and undone in 1939.

Petitioner contends that the respondent’s Regulations 94, article 27 (f)-l (c), is without statutory authority. That section provides in effect that in case a corporation distributes in liquidation to another corporation its earnings or profits under section 112 (b) (6), any dividend paid by the transferee corporation later in the same year may be allocated to the transferor as a distribution of its earnings or profits. Inasmuch as herein petitioner’s parent corporation-distributee paid no such dividends during the taxable year and no such allocation was made, we consider it unnecessary here to pass upon the validity of that portion of the regulation. Our conclusions above expressed signify that we consider as exceeding the statute Regulations 94, article 27 (f)-l (a), (6), wherein there is in substance set forth the view of section 27 (f) which is advanced by the respondent herein.

We therefore conclude and hold that the petitioner is entitled to dividends paid credit in the amount of the distribution in liquidation to the Commercial Credit Co., to wit, $947,228.40, and that the respondent erred in disallowing same.

Reviewed by the Board.

Decision will he entered for the petitioner.

Black,

dissenting: I respectfully dissent from the majority opinion. I am unable to agree with the view that subsection (f) is not limited by subsection (h) of section 27, Revenue Act of 1936. My views in that respect harmonize with the views expressed in the opinion of the majority of the court in Centennial Oil Co. v. Thomas, 109 Fed. (2d) 359. Hence, I will only say that I think that case should be followed in our decision of the instant case.

TURNER agrees with this dissent.

       (6) PROPERTY RECEIVED BY CORPORATION ON COMPLETE LIQUIDATION OF ANOTHER.-No gain or loss shall be recognized upon the receipt by a corporation of property distributed in complete liquidation of another corporation. For the purposes of this paragraph a distribution shall be considered to be in complete liquidation only if—
      (A) the corporation, receiving such property was, on the date of the adoption of the plan of liquidation, and has continued to be at all times until the receipt of the property, the owner of stock (in such other corporation) possessing at least 80 per centum of the total combined voting power of all classes of stock entitled to vote and the owner of at least 80 per centum of the total number of shares of all other classes of stock (except non-voting stock which is limited and preferred as to dividends), and was at no time on or after the date of the adoption of the plan of liquidation and until the receipt of the property the owner of a greater percentage of any class of stock than the percentage of such class owned at the time of the receipt of the property; * * »


text:
    Staunton Industrial Loan Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101322.
    Promulgated October 22, 1940.

      O. G. Quesenbery, Esq., for the petitioner.

      L. W. Oreason, Esq., for the respondent.
   OPINION.

Disney :

In his determination of the deficiencies the Commissioner held that the petitioner was not a bank within the meaning of section 104 of the Revenue Act of 1936 and accordingly applied the surtax provisions of the statute to the undistributed net income of the petitioner each taxable year. The question is whether petitioner comes within the definition of a bank in section 104, supra.

Section 104 (b) of the applicable revenue act provides for the taxation of banks in the same manner as other corporations, except that they shall not be subject to the surtax imposed by section 14 and the rate of normal tax shall be 15 per centum instead of the rates provided in section 13. Section 104 (a) provides:

As used in tins section the term “bank” means a bank or trust company incorporated and doing business under the laws of the United States (including laws relating to the District of Columbia), of any State, or of any Territory, a substantial part of the business of which consists of receiving deposits and making loans and discounts, or of exercising fiduciary powers similar to those permitted to national banks under section 11 (k) of the Federal Reserve Act, as amended, and which is subject by law to supervision and examination by State or Federal authority having supervision over banking institutions.

The petitioner contends that the term “bank” was used in section 104 by Congress in its commonly accepted sense and is not confined to banks organized under the banking laws of Virginia. It makes no contention that it is a trust company and the proof is clear that it did not exercise fiduciary powers. Respondent contends that petitioner was neither formed nor doing business as a “bank” under the laws of Virginia and therefore does not meet the test set forth in the revenue act. The contention of petitioner will be considered first.

The term “bank” as used in section 104 means “a bank * * * incorporated and doing business under the laws of * * * any State.” Sec. 104 (a), supra. The section is an exemption from the surtax provisions applicable to corporations in general and should bd strictly construed. It does not apply to all banks so organized, but only to those a substantial part of the business of which consists of receiving deposits and making loans and discounts. Petitioner’s power to receive money from customers was limited to the proceeds of sale of certificates of investment or similar obligations. Its charter contains no right to accept deposits, subject to checks or otherwise, as banks are authorized to do. That is one of the chief distinctions between petitioner and a bank.

To support his argument, petitioner refers to reports of committees of Congress. In its report on the Revenue Act of 1936, the Committee on Ways and Means said:

Banks and trust companies are not brought within the new plan, but pay a flat rate of tax of 15 percent on their net income and domestic corporations in receivership are treated in the same manner. This seems to be a wise public policy, since the surplus of banks must be built up for the protection of the depositors and because receiverships in the vast majority of cases cannot, of course, pay dividends. Bor similar reasons there is a flat tax of 15 percent on the net income of all insurance companies whether domestic or foreign.

The report of the Committee on Finance, Report No. 2156, p. 13, contains no additional light on the intent of the section. These reports merely disclose the reason for the exemption and contain nothing to show that the committees intended the term “bank” to embrace more than the definition in the statute. We conclude that to be entitled to the benefits of section 104 petitioner must show that it was organized and doing business as a bank under the laws of Virginia. Was it such an institution during the taxable years ?

State banks of Virginia are defined in and regulated by the provisions of chapter 164-A of the Virginia Code of 1936, known as the Banking Code. Virginia corporations organized to conduct an industrial loan business are regulated by the provisions of chapter 166-A, relating to industrial loan associations. The statutes of Virginia make a clear distinction between the two classes of corporations. The term “bank”, as used in chapter 164 — A, includes “banks of deposit and discount, savings banks, savings societies, savings institutions and trust companies.” Sec 4149 (1). Corporations not lawfully engaged in the banking business may not use an office sign indicating thereon that such place is the office of a bank or use, among other things, letterheads having thereon any word indicating that such business is the business of a bank. Sec. 4149 (4). No bank may acquire shares of its own stock except as a protection against loss from debts previously contracted. Sec. 4149 (13). No bank may pay interest on deposits or certificates of deposits in excess of 4 percent per annum. Sec. 4149 (25). The total liability of any person to a bank shall at no time exceed 15 per centum of the capital and permanent surplus of the bank. Sec. 4149 (47). Section 4149 (73), enacted in 1928, provides that “No bank shall hereafter be granted in its charter, or in any amendments thereto, authority to do business as an industrial loan association. No industrial loan association shall hereafter be granted authority in its charter, or in any amendment thereto, to do a banking business, and no such association shall, except as hereinafter provided, hereafter be granted in its charter, or in any amendment thereto, the right to have in its title the word ‘bank,’ ‘banking,’ ‘savings’ or ‘trust’ or any words tending to indicate that it is permitted to do a banking business in Virginia.”

Chapter 166-A provides that corporations for conducting an industrial loan business may be formed under chapter 147 of the Code of Virginia and shall be subject to all the restrictions and shall have all the general powers set forth in that chapter, except as otherwise provided in chapter 166-A. The statute then provides that every association shall have as part of its title the words “industrial loan which shall not be used disjunctively.” Sec. 4168 (2). Industrial loan associations may loan money, repayable in periodical installments secured by the obligation of the borrower or other security, but no loan shall be for a longer period than, ten years or at an amount exceeding 20 percent of the paid-in capital stock and surplus of the association. Sec. 4168 (5). They may charge in advance the legal rate of interest upon the entire amount of the loan (Sec. 4168 (6)) and impose fines not in excess of a specified amount for failure of the borrower to pay any installment of the loan. Sec. 4168 (7). Power is granted in section 4168 (8) to sell certificates of investment or similar obligations upon either the fully paid or partial payment plan and pay interest thereon at rates provided for in their certificates of incorporation or bylaws. Section 4168 (10) gives the State Corporation Commission supervision of all industrial loan associations, with directions to examine their affairs at least once a year. The same commission exercises like jurisdiction over banks. Sec. 4149 ( 52). Section 4168 (11½) (e), enacted in 1936, provides that any industrial loan association theretofore chartered with power to operate a bank of discount and deposit which actually does business only as an industrial loan association shall not be subject to section 4149 (25), the provisions of which regulate the maximum amount of interest payable on bank deposits.

It appears from the statutes just referred to that industrial loan associations organized and doing business thereunder have nothing more than some of the characteristics of a bank, as defined therein. The statutes not only provide for the formation of the institutions under different chapters of the Banking Code, but specifically provide that an industrial loan association shall not do business or hold itself out as doing business as a bank. The powers of banks and corporations doing an industrial loan business differ in respect to Joans and interest payments. No bank may make a loan in excess of 15 percent of its capital and permanent surplus, but an industrial loan corporation may make a loan up to 20 percent of its capital and surplus. Interest paid by banks is regulated by statute. Petitioner had power to determine its own rate of interest. Petitioner’s charter authorized it to impose fines upon borrowers for defaults on any installment of a loan. State banks of Virginia do not seem to have such power. The charter of petitioner also empowered it to buy and sell, and exercise the rights and privileges of owners of, securities of other corporations. The powers of state banks in that respect are limited. Sec. 4149 (13). The distinction was definitely recognized by the General Assembly of Virginia in 1934. It declared that “The objects of an industrial loan association and a bank are hereby declared to be similar in nature” and authorized industrial loan associations chartered prior to January 1, 1934, to amend their charters to become “a bank of discount and deposit and/or a trust company” and retain the right to conduct the business of an industrial loan association. Sec. 4168 (37) (c). Petitioner never took advantage of the privilege granted by the act. The act was repealed in 1936. The petitioner was not incorporated and doing business as a bank under the laws of Virginia.

From the conclusions reached it follows that the respondent committed no error in refusing to classify petitioner as a bank within the meaning of section 104 of the Revenue Act of 1936.

Reviewed by the Board.

Decision will be entered for the respondent.


author: KgRn: Mellott,

text:
    Paul Cavanagh (Also Known as William G. Atkinson), Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 95500.
    Promulgated October 22, 1940.

      Henry, Grivi, Esq., and Irving Lesser, G. P. A., for the petitioner.

      Edward H. Mitchell, Esq., and Byron M. Goon, Esq., for the respondent.
   OPINION.

KgRn:

Two issues are presented in this proceeding — (1) the question of a deduction for a “bad debt” and (2) whether petitioner must report his entire California income as his own.

On the first issue, in our findings of fact we have concluded that the transaction between the petitioner and Pauly was not a loan, but an investment on the part of petitioner. Although the petitioner testified that Pauly had asked for the money as a loan, it is apparent and admitted by the petitioner that the details and nature of the transaction are very hazy in his mind. In view of the written agreement between the two, we conclude that the transaction was an investment. Consequently, petitioner can not take the deduction as a bad debt, deductible in the year in which it was ascertained by petitioner to be worthless and charged off, but only as a loss pursuant to the provisions of section 23 (e), which requires that it be sustained during the taxable year.

The petitioner surmised in the taxable year that nothing could be realized on the transaction, but the record does not prove that he could not realize his initial investment, there being no evidence that Pauly had irrevocably dissipated the funds invested by petitioner or was unable to account for them. However, assuming that petitioner’s investment was lost, there is not a scintilla of evidence that this loss was sustained during the taxable year, rather than during the years 1934 or 1936. The burden is upon the petitioner to establish this fact, in view of respondent’s determination. The petitioner has not sustained this burden of proof, and, consequently, the first issue must be resolved in favor of respondent.

There remains the issue of whether petitioner must report as his income the total amount of his salary earned in California. Petitioner, though not an American citizen, was a resident of the State of California throughout the taxable year 1935, and we have found that he was domiciled in that state. The avowed intention of the petitioner to remain in California fulfills the requirement which, in addition to residence, provides the basis for a finding of domicile. Chambers v. Hathaway, 187 Cal. 104; 200 Pac. 931; Joe May, 39 B. T. A. 946; and Herbert Marshall, 41 B. T. A. 1064. Respondent contends that, notwithstanding the husband’s domicile, the community property statutes can be applied to his property only if California is also the marital domicile.

An examination of the Marshall case, supra, discloses that the actual residing of husband and wife together within the state and their joint intent to make that residence permanent are not necessary in order to bring the husband within the provisions of the California community property laws. In that case the facts recite that the wife joined her husband in California in February 1934, accompanied by their baby daughter, and the couple lived together as man and wife in a rented house. Motion pictures did not appeal to the wife and she was anxious to resume her career on the English stage. By reason of the diverse interest of the parties an estrangement sprang up between them and, without protest on the part of the husband, the wife returned to England in April 1934, where she lived until the midsummer of 1939. The parties did not live together as man and wife after April 1934. Up to the date of the hearing there had been no divorce and no property settlement between the parties. The Board, in its opinion, said:

We are of the opinion that the earnings of the petitioner [the husband] during the taxable years 1934 and 1935 constituted community property, upon the ground that he was a married man and domiciled in the State of California. His wife had not technically deserted him during these years. Section 52 of the California Political Code provides: “5. The residence of the husband is the residence of the wife.” It must be held that the petitioner and his wife were legally domiciled in California during 1934 and 1935, and that the earnings of the petitioner constituted community property. [Emphasis ours.]

In the instant case there have been no court proceedings instituted for divorce, separation, or property settlement. Neither can the wife be said to have deserted her husband. There is m> evidence that he ever asked her to live with him in California. Under these circumstances the general common law rule that the wife’s domicile follows that of her husband is applicable. It is a legal fiction, but California has followed that rule. Wickes’ Estate, 128 Cal. 270; 60 Pac. 867 (1900). And this is true even though the wife has never lived with the husband. Cf. Kashaw v. Kashaw, 3 Cal. 312 (1853).

Thus, even though the wife never entered the State of California in her life, we must conclude that she was domiciled therein and can thus avail herself of the benefits of the community property statutes.

Respondent argues that, even if the salary in question be deemed community property, the wife’s interest therein is not sufficient to allow the husband to report only one-half thereof as his earnings. Undoubtedly, this contention is true as to any community earnings acquired before section 161a took effect in 1927. Cf. United States v. Robbins, 269 U. S. 315, and Myran v. Smith, 4 Pac. (2d) 219. However, in 1931 the Supreme Court, in the case of United States v. Malcolm, 282 U. S. 792, clearly showed that the 1927 amendment had worked a drastic change in the California law. In that case two questions were certified from the Circuit Court of Appeals for the Ninth Circuit. The second of these questions was as follows:

2. Has the wife under § 161 (a) of the Civil Code of California such an interest in the community income that she should separately report and pay tax on one-half of such income?

The answer, per curiam, was “Yes”, citing Poe v. Seaborn, 282 U. S. 101; Goodell v. Koch, 282 U. S. 118; and Hopkins v. Bacon, 282 U. S. 122, which interpreted the community property laws of Washington, Arizona, and Texas, and held that the taxation of community income to the husband alone was improper.

The only fair inference from this opinion is that the interest of the wife under the California community property laws is of such a vested nature that one-half of the earnings of the community can be attributed to her.

The fact that under the California law the husband has a broad power of control does not detract from the wife’s interest. This power is conferred upon him merely as the agent of the community and does not make him the owner of all the community property and income, nor negative the wife’s present interest there as equal coowner. Cf. Poe v. Seaborn, supra, where the Supreme Court so held as to an analagous section of the Washington community property laws.

In the case of Gillis v. Welch, 80 Fed. (2d) 165 (1935), the Circuit Court of Appeals for the Ninth Circuit went so far as to declare that the wife had a definitely vested interest hi community property. This was said by way of dictum in a footnote:

1 In 1927 an amendment to the Civil Code of California (section 161a) provided that the wife was to have a vested interest in the community property equal to that of the husband, although he was still left with the possession and control thereof.

Gross income, as defined in section 22 (a) of the Revenue Act of 1934, 48 Stat. 680, ch. 277, includes “income derived from * * ⅛ dealings in property, whether real or personal, growing out of the ownership or * * * interest in such property, * * * or gains or profits and income derived from any source whatever * * Such income must be reported by the individual to whom the statute attributes it. Clearly, therefore, the petitioner’s wife is taxable on one-half of the community income. She is the owner thereof, although not entitled to present possession. This appears to be the inescapable conclusion to be drawn from the Supreme Court’s opinion in the Malcolm case, supra.

Consequently, there is no longer the situation whereunder the wife may at her option return one-half of the income. Since she now must do so, it follows that the petitioner is taxable only on the other half of the entire community property. Therefore, as to the second issue in this proceeding the Board holds in favor of the petitioner.

Reviewed by the Board.

Decision will he entered under Bule 50.

Murdock dissents.

Mellott,

dissenting: The basic and fundamental purpose of the community property law is to afford a modicum of protection to the wife, domiciled in the state. We should, therefore, in passing upon what amounts to a belated claim by this petitioner that one-half of his income should be exempted from tax, require that he establish, by a preponderance of the evidence, that his wife was domiciled in the State of California during the taxable year.

The only evidence upon which a conclusion can be based is the testimony of petitioner. He stated that in 1922 he and his wife separated; that the last place they lived together was in Edmonton, in the Province of Alberta; that after the separation he continued to live in Edmonton and the wife went to Toronto in the Province of Ontario; and that he and his wife had “never been domiciled together in the United States in any of its 48 states.” In response to a question as to where his wife was living at the time of the hearing he stated: “Well, I think she is in Toronto.” Upon cross-examination he stated that at the time of his marriage it was the intention of his wife and himself that a home be maintained in Alberta, Canada, and that neither, at that time, had any intention of establishing a home in any other locality. When asked whether he and his wife had ever changed that intention he replied," “No.”

After hisi wife left him in 1922 he remained in Alberta and continued to vote there at elections, leaving Alberta in 1924 or 1925 when he went to England. He did not consult with his wife about his trip to England, nor did he consult with her about his trip to the United States in 1929. When asked whether the separation, which had taken place in 1922, was temporary or permanent he stated: “It was pretty permanent.” He elaborated this answer by stating: “Although it was not — I mean you could hardly call it official until probably, I think, 1928 or 1929.” Counsel then asked him to explain the word official, to which he responded: “Well, it wasi a silly word to use. I really meant that it was perhaps more definitely understood.”

In the prevailing opinion it is stated that the wife can not be said to have deserted her husband. This is the caveat upon which the conclusion is predicated that her domicile during the taxable year was “that of her husband.” The conclusion might be sound if the parties had been united in marriage in California, if they had lived together as husband and wife within that state, or if they had been living together elsewhere when the husband decided to change the “matrimonial domicile” and the wife had refused to accompany him to the new state. But it is not an absolute rule of law that the wife can not, when necessary, establish her own domicile. Cf. Cheever v. Wilson, 9 Wall. 108; Haddock v. Haddock, 201 U. S. 562; and Watertown v. Greaves, 112 Fed. 183. The California statutes give her the right to do so when she desires to institute an action for divorce. (Sec. 129, Civil Code of California, 1933. Deering.) But the statute is an enabling act; and it should not be construed as preventing the wife from acquiring a separate domicile, when necessary. In the case cited by the majority (Wickes’ Estate, 128 Cal. 270; 60 Pac. 867) the soundness of the rule enunciated by Mr. Justice Swayne in Cheever v. Wilson, supra — “[The wife] may acquire a separate domicile whenever it is necessary or proper for her to do so” — is recognized, the court saying: “Supposing this rule to apply to a domicile for other purposes than divorce, this case is still not within it.”

But, leaving for the moment the California statutes and decisions, it seems to be clear that the wife — assuming, as the prevailing opinion holds, that she had not deserted her husband — had actually established a separate domicile.

In Restatement of the Law — Conflict of Laws — pp. 51, 52, it is said:

Par. 28. Domicile of Wipe Living Apart prom Husband. If a wife lives apart from her husband without being guilty of desertion according to the law of the state which was their domicile at the time of separation, she can have a separate domicile.

Under “Comment” it is said:

If a wife lives apart from her husband without being guilty of desertion, she can retain her domicile, although he changes his domicile.

When the wife left the husband in 1922 in Edmonton in the Province of Alberta and went to live in the Province of Ontario, it is obvious that she was endeavoring to establish a domicile separate from his domicile. If we accept the view of the majority, then her domicile has, since 1922, been Toronto. If, on the other hand, it be held that the wife was guilty of desertion when she left her husband in 1922— (see definitions, sec. 95 et seq. Civil Code of California 1933 Peering) — surely he ought not be penalized to the extent of being required to give her half of his earnings merely because he took up a temporary abode in Hollywood! The California statutes provide otherwise. See sec. 175, Civil Code 1933.

The instant proceeding presents an anomalous situation to say the least. Petitioner, according to his own sworn testimony, gave his wife no part of his California earnings and never even asked her to share “the place or mode of living selected by” him. (Secs. 103, 104, and 156 Civil Code, supra.) He did not even advise her as to the amount of his earnings. Yet, says he, the Government should look to her for half the tax. If that be so — though I do not believe that it is — then petitioner by his own admissions has shown himself to be liable not only for the tax, as a withholding agent under the provisions of sections 143 and 211 et seq. of the Eevenue Act of 1934, but also for the interest and penalties. (Sec. 143 (c), Eevenue Act of 1934.)

Being of the opinion that the Commissioner’s determination should be upheld, I respectfully note my dissent.

Smith, Turner, and Offer agree with this dissent.

        Civil Code of California.—
      See. 161a. Interests in community property. The respective interests of the husband and wife in community property during continuance of the marriage relation are present, existing and equal interests under the management and control of the husband as is provided in sections 172 and 172a of the Civil Code. This section shall be construed as defining the respective interests and rights of husband and wife in community property. [Added by Stats. 1927, p. 484.] * * *


author: Oppee : Meelott,

text:
    William Stark Towne, Petitioner, v. Commissioner of Internal Revenue, Respondent. William Stark Towne Trust, under the Will of Florence Lindsay Johnson, Deceased, Josephine Johnson Milton and George S. Towne, Trustees, Petitioners, v. Commissioner of Internal Revenue, Respondent. William Stark Towne Trust, under the Will of William Pierce Johnson, Deceased, George S. Towne and Josephine Johnson Milton, Trustees, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 99197, 99198, 99199.
    Promulgated October 22, 1940.

      Douglas Ershine, Esq., for the petitioners.

      Marry B. Morrow, Esq., for the respondent.
   OPINION.

Oppee :

Deficiencies were determined by respondent in the income tax of the individual petitioner for the year 1935 in the amount of $4,390.95; and in the income tax of the petitioning trustees for the same year of $100.71 and $722.34 for the Florence Lindsay Johnson and William Pierce Johnson trusts, respectively. Their correctness is put in issue by these consolidated proceedings. The facts are stipulated and are hereby found accordingly. For present purposes a summary will suffice.

The trusts for the benefit of the individual petitioner, hereinafter for convenience referred to as petitioner, of which the petitioning trustees were the respective fiduciaries, contained the following provision in almost identical language.

During the minority of my grandson William Stabk Towne [petitioner], my said trustees shall pay out of the net income of said trust fund- so much as may be necessary for the support, maintenance and education of my said grandson and (shall) accumulate the balance of said net income, paying the balance of said income so accumulated to my said grandson when he attains the age of majority. After my said grandson shall have attained the age of majority, my said trustees shall pay the whole of the net income of said fund to my said grandson.

The only difference between the two provisions is the single word in parentheses.

Petitioner reached his majority on November 8, 1935. On that day income received by the trusts during the preceding portion of the calendar year and not theretofore distributed was credited to accounts on the books of the respective trusts entitled “Surplus— Ordinary Income” and on the same day was paid to petitioner. These are the amounts in issue here as to the individual petitioner. During previous years the amount of income not distributed during the year in accordance with the provision above noted was entered in the same account at the end of each year.

In determining deficiencies against the trusts respondent made an “alternative adjustment” charging them with “the entire income of the trusts.” Kespondent now concedes that the trusts are entitled to deductions for amounts expended on the beneficiary’s behalf before, and for amounts currently distributable to the beneficiary after, reaching his majority. With respect to the income received during the taxable year which was paid to the beneficiary on attaining his majority, which is the real subject of this litigation, the trusts did not claim and respondent did not allow a deduction. Subsequently, the trusts claimed overpayments, in the alternative, in the event these amounts were chargeable to the beneficiary.

These payments to the beneficiary were not the result of an exercise of the trustees’ discretion, and the Revenue Act of 1934, section 162 (c), is accordingly inapplicable in any event. Robert C. Roebling, 28 B. T. A. 644, 652; reversed on other grounds (C. C. A., 3d Cir.), 78 Fed. (2d) 444. As to the application of section 162 (b), we can not distinguish this case from Spreckels v. Commissioner (C. C. A., 9th Cir.), 101 Fed. (2d) 721, reversing 37 B. T. A. 709. Following that decision, we are constrained to sustain petitioners’ contention that the income in question is taxable to the trust and not to the petitioner beneficiary.

The deficiencies determined against the trusts do not involve this income, for which, as we have said, no deduction was claimed by the trusts nor allowed by respondent. Such deficiencies can not stand on any theory, since they cover income which was distributable or actually distributed to petitioner and on which it is conceded that the trusts are not taxable. Respondent’s action in this respect is accordingly disapproved.

Reviewed by the Board.

Decisions will be entered v/nder Rule SO.

Leech dissents.

Meelott,

dissenting: In Adolph Bernard Spreckels, 37 B. T. A. 709, during the minority of the children, including the petitioner then before us, “their respective shares of said net income * * * [were to] be accumulated” and, as each child attained his majority, he was to receive “his or her proper share of the accumulated net income.” The court, in reversing the Board (Spreckels v. Commissioner, 101 Fed. (2d) 721), pointed out that, under section 162 (b), trust income dealt with therein “falls within two distinct and mutually exclusive categories: (1) Income accumulated for future distribution under the terms of the will or trust and (a) income which is to be distributed currently.” Holding that the income involved “belonged to the first category, not the second,” it correctly concluded that the income was taxable to the trust and not to the petitioner.

Under the trust instruments in the instant proceeding the trustees were required to pay out of the net income of the trusts “so much as may be necessary for the support, maintenance and education” of the cestui que trust. This clause, it seems to me, vested in the fiduciary a discretion as to the amount which might be paid over to the beneficiary. That the trustees so considered it is evident from their treatment of the income; for it was not until petitioner had reached his majority that the income was placed in the surplus account and on the same day it was paid over to him. It is apparent, therefore, that until the very moment of distribution the trustees had the discretion either to pay the income over to petitioner or to accumulate it. If so, then under section 162 (c) the amount “which is properly paid or credited during such year to ⅜ * * [the] beneficiary” should be included in computing his net income and be “allowed as an additional deduction in computing the net income of the * * ⅜ trust.” Cf. State Savings Loan & Trust Co., Trustee, 25 B. T. A. 228; affd., 63 Fed. (2d) 482.

Being of the opinion that the instant proceeding is distinguishable upon its facts from the Sprockets case and that the majority err in holding section 162 (c) to be inapplicable, I respectfully note my dissent.


author: Disney:

text:
    Daniel G. Tenney, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99690.
    Promulgated October 22, 1940.

      William S. Hammers, Esq., for the petitioner.

      Clay C. Holmes, Esq., for the respondent.
   OPINION.

Disney:

The Eevenue Act of 1936, bearing upon the issue for our determination, is, in part, as follows:

SEC. 23. DEDUCTIONS EROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
* * * * » ⅜ *
(1) Depreciation. — A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. ⅜ * *
SEC. 113. ADJUSTED BASIS EOR DETERMINING GAIN OR LOSS.
(b) Adjusted Basis. — The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis determined under subsection (a), adjusted as hereinafter provided.
(1) Generad ruee. — Proper adjustment in respect of the property shall in ah eases be made—
(B) in respect of any period since February 28, 1913, for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent allowed (but not less than the amount allowable) under this Act or prior income tax laws. * * *

Kegulations 94 provide in part as follows:

Art. 23 (a)-11. Expenses of farmers.— ⅝ * * Amounts expended in purchasing work, breeding, or dairy animals are regarded as investments of capital, and may be depreciated unless such animals are included in an inventory in accordance with article 22 (a)-7. * * ⅝
Art. 23 (e)-5. Losses of farmers.— * * * If live stock has been purchased after February 28, 1913, for any purpose, and afterwards dies from disease, exposure, or injury, or is killed by order of tbe authorities of a State or the United States, the actual purchase price of such livestock less any depreciation allowable as a deduction in respect of such perished live stock, may be deducted as a loss if the loss is not compensated for by insurance or otherwise. * * *
ART. 23 (1)-10. Depreciation in the case of farmers.— ⅜ ⅜ ⅞ A reasonable allowance for depreciation may also be claimed on live stock acquired for work, breeding, or dairy purposes, unless they are included in an inventory used to determine profits in accordance with article 22 (a)-7. Such depreciation should be based on the cost or other basis and the estimated life of the live stock. * * *

The record shows that the petitioner in computing his net income for 1936 did not include his cattle then owned in any inventory or allow any depreciation for their exhaustion, wear, and tear as a deduction, as contemplated by the statute and required by the regulations, in respect of said cattle or those that died and for which he claims a loss.

The fact that for some years prior to 1936 the petitioner made his income tax returns in the same manner as in 1936, and that depreciation, ratably or otherwise, had never been deducted in determining the profit or loss from the sale or other disposition of any of the cattle nor had any adjustment for the same been made or required by the Commissioner on account thereof, did not preclude the Commissioner from taking proper action in 1936 with respect to the return for that year.

It is well settled that depreciation must be deducted in arriving at profit or loss realized or sustained on disposition of a depreciable asset. It was held in United States v. Ludey, 274 U. S. 295, that the aggregate amount of depreciation which the taxpayer was entitled to deduct in his income tax returns in prior years should be applied in reduction of the base. See also Fidelity-Philadelphia Trust Co. v. Commissioner, 47 Fed. (2d) 36. No evidence indicates that petitioner did not have income from which to deduct depreciation, under Pittsburgh Brewing Co. v. Commissioner, 107 Fed. (2d) 155.

We have found as a fact that the animals constituting petitioner’s herd were depreciable assets within the meaning of the Fedei’al revenue law and now state reasons for such finding. The petitioner alleges and the record shows that the loss claimed by petitioner to have been sustained by the death of certain cattle in 1936 was of “cattle purchased for breeding purposes” and that the cattle were so used in petitioner’s business. It is reasonable, in fact evident, that the animals had a more or less definite life and that such life was diminished each year the cattle were retained and used by petitioner, whether he retained them for a few or many years. It is entirely possible, as contended for petitioner, that some of the animals acquired or purchased by petitioner may have increased in value due to the excellence of the progeny they produced, but that does not change the fact that the particular animal had become older and that a portion of its productive life, for which it was acquired and used, had been expended. The same arguments made in behalf of petitioner might be applied to orchards of various kinds which might increase in value due to the trees becoming older and larger and to their increased production of a very high type of fruit. However, the Board has recognized the depreciable character of orchards and has allowed depreciation. See (as to vineyard and peach orchard) Harry B. Hooper, 8 B. T. A. 397; (as to lemon grove) Kaweah Lemon Co., 5 B. T. A. 992; (as to apple and pear orchard) Ribbon Cliff Fruit Co., 12 B. T. A. 13. Though it may be that the present contention was not made, depreciation has been applied to live stock in various cases, e. g., Lassen Lumber & Box Co., 6 B. T A. 241 (247); Lord & Bushnell Co., 7 B. T. A. 86; F. Kieser & Son Co., 15 B. T. A. 359; Max Kurtz, 8 B. T. A. 679; Magdalen Doerfler, 13 B. T. A. 921; Caflisch Lumber Co., 20 B. T. A. 1223.

In support of his contention the petitioner’s counsel cites F. E. Heath, 7 B. T. A. 114, wherein the Board held the Commissioner erred in computing depreciation with respect to a dairy herd and including such depreciation as a factor in his determination of gain realized from the sale of an interest in certain property. However, the Board said: “The petitioner has proved that there was no diminution and that on the contrary there was a continuous and very appreciable increase in the actual productive capacity of the herd from year to year during the whole period of his ownership * * In the instant case, the petitioner has not proved that there was no diminution of “actual productive capacity” of his herd during the whole or any part of the period of his ownership, as was done in the case above cited. Moreover, in the cited case the facts indicated an “accounting procedure by the petitioner that is equivalent to making annual additions to a reserve for depreciation and simultaneously charging all the cost of maintaining the standard of the herd against such reserve. The effect was the measurement of annual depreciation by the cost of replacements for each year.” Similar facts do not appear herein and we can not consider the case controlling in the present question.

In view of the facts heretofore set forth herein and the authorities cited, we are of the opinion and hold that the animals constituting petitioner’s herd and those dying in 1936, for which a deductible loss is asserted, were depreciable assets.

The next question for our determination is whether or not the Commissioner asserted proper depreciation for deduction. The determination of the Commissioner is presumed to be correct and the burden of showing his determination is arbitrary, excessive, or erroneous is on the petitioner. Lucas v. Kansas City Structural Steel Co., 281 U. S. 264; Welch v. Helvering, 290 U. S. 111. However, where the Commissioner’s determination is shown to be without rational foundation and excessive, it will not be necessary for the taxpayer to prove he owes nothing, or if liable at all, to show the correct amount, in order to prevent the enforcement of the Commissioner’s determination. Helvering v. Taylor, 293 U. S. 507.

In the light of the record in the instant case, we do not think it has been shown that the Commissioner’s determination is without rational foundation or excessive.

The petitioner did business and kept his books on a cash receipts and disbursements basis in determining the profit or loss from his business and assumed that his cattle were not subject to depreciation. In this record he has failed or neglected to show the date of the acquisition of any of the cattle, or any of their ages, or the length of time that any of the cattle upon which he claimed losses on account of their deaths in 1936, were a part of the herd.

Just what investigation the Commissioner may have made touching the above and other facts before reaching his determination, reducing petitioner’s alleged loss on account of death of cattle from $10,100 to $1,971.25 and allowing $1,036 depreciation for the year 1936 — though none had been claimed in the return — the l’ecord does not show. In the absence of material evidence in the record of the character above indicated, we do not think it can be said that the determination of the Commissioner has been overcome or found to be invalid. Therefore, his determination is approved.

Decision will be entered wnder Bide SO.


author: HaeRon:

text:
    Smith Packing Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101249.
    Promulgated October 23, 1940.

      James W. Allen, O. P. A., and Seymour Samuels, Jr., Esq., for the petitioner.

      John B. Stivers, Esq., for the respondent.
   OPINION.

HaeRon:

The basic question is whether the amount of $2,101.29 which was deposited with the Commerce Union Bank for petitioner’s account in escrow pending the outcome of certain litigation involving the validity of the Federal processing tax under the Agricultural Adjustment Act and was released from escrow and returned to petitioner shortly after the processing tax was held invalid on January 6, 1936, should be included in petitioner’s taxable income for 1936.

In our opinion, respondent erred in including the $2,101.29 in petitioner’s taxable income for 1936. The amount in question was supplied by petitioner and was deposited with the Commerce Union Bank in escrow for petitioner’s account and was never actually paid to the Jacobs Packing Co. During the period when this amount was held by the Commerce Union Bank in escrow, title thereto remained in petitioner. 21 Corpus Juris, pp. 882, 883. Obviously petitioner realized no income when the $2,101.29 was released from escrow and returned to it. Any liability which petitioner had to pay that amount to the Jacobs Packing Co. was purely contingent on the outcome of the litigation involving the validity of the processing tax, and petitioner could not properly accrue such a contingent liability, Lucas v. American Code Co., 280 U. S. 445; Reuben H. Donnelley Corporation, 22 B. T. A. 175; and it follows that the extinguishment of such a contingent liability could not result in the accrual of income.

It is true that in 1935 petitioner entered on its books the amounts deposited with the Commerce Union Bank in escrow as debits to processing tax. However, the actual facts, and not the entries made by petitioner on its books, are controlling, especially where, as here, the bookkeeping methods employed are faulty. Paul & Mertens, Law of Federal Income Taxation, vol. I, sec. 5.07.

Moreover, even if it were assumed that such book entries at the time they were made correctly reflected the accrual of the amount in question as outgo, the accrual was in doubt and could be adjusted when the doubt was removed shortly after the end of 1935 and before the closing of petitioner’s books for 1935. Sanford Cotton Mills, Inc., 42 B. T. A. 190. Petitioner did just that. After the amount in question was released from escrow and before petitioner closed its books for 1935, petitioner by appropriate entries on its books canceled the entries debiting processing tax with that amount, and, although petitioner had deducted the amount in question on its original corporation income and excess profits tax return for 1935, it subsequently filed an amended return on which it eliminated that deduction.

Therefore, it is held that respondent erred in including the amount in question in petitioner’s taxable income for 1936.

Although respondent’s determination of a deficiency in income tax for 1936 resulted from several adjustments, his determination of a deficiency in unjust enrichment tax under section 501 of the Revenue Act of 1936 resulted solely from his inclusion of the amount in question in petitioner’s taxable income for 1936. In the deficiency notice respondent based his determination of a deficiency in unjust enrichment tax on the ground that the amount in question represented a reimbursement received by petitioner from the Jacobs Packing Co. of amoimts representing Federal processing tax burdens included in the prices which had been paid by petitioner to the Jacobs Packing Co., within the meaning of subdivision (2) of section 501 (a).

The conclusion that respondent erred in including the amount in question in petitioner’s taxable income for 1936, entirely eliminates the deficiency in unjust enrichment tax, as is conceded by respondent.

Decision will he entered under Rule 50.

       SEC. 501. TAX ON NET INCOME PROM CERTAIN SOURCES.
      (a) The following taxes shall be levied, collected, and paid for each taxable year (in addition to any other tax on net income), upon the net income of every person which arises from the sources specified below:
      *******
      (2) A tax equal to 80 per centum of the net income from reimbursement received by such person from his vendors of amounts representing Federal excise-tax burdens included in prices paid by such person to such vendors, to the extent that such net income does not exceed the amount of such Federal excise-tax burden which such person in turn shifted to his vendees.


author: TuRNee :

text:
    Retsal Drilling Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 95776, 97715.
    Promulgated October 23, 1940.

      Harry G. Weeks, Esq., and R. B. Gam/non, Esq., for the petitioner.

      D. D. Smith, Esq., for the respondent.
   OPINION.

TuRNee :

That a completed oil well is a capital item seems to be well settled, Grison Oil Corporation v. Commissioner, 96 Fed. (2d) 125; Harris Co. v. Commissioner, 112 Fed. (2d) 76, affirming 38 B. T. A. 383; O-W-R Oil Co., 35 B. T. A. 452; Old Farmers Oil Co., 12 B. T. A. 203; and Hughes Oil Co. v. Bass, 62 Fed. (2d) 176; certiorari denied, 289 U. S. 726, and certainly the rule is general, if not fundamental, that the cost of a capital asset, whether expended as purchase price or for construction, creation, or development, must be capitalized and may not be deducted as expense in determining gross income, unless definitely and clearly provided by statute or valid regulation. The income tax statutes contain no such provision for the deduction of any of the amounts expended in drilling and equipping oil wells, and if such expenditures are allowable as deductions, it is because they fall within the provisions of article 23 (m)-16 of [Regulations 86 and 94, which has been recognized as valid and which reads in part as follows:

(a) (1) Option witli respect to intangible drilling and development costs in general: All expenditures for wages, fuel, repairs, hauling, supplies, etc., incident to. and necessary for the drilling of wells and the preparation of wells for the production of oil or gas, may, at the option of the taxpayer, be deducted from gross income as an expense or charged to capital account. Such expenditures have for convenience been termed intangible drilling and development costs. * * s= Drilling and development costs shall not be excepted from the option merely because they are incurred under a contract providing for the drilling of a well to an agreed depth, or depths, at an agreed price per foot or other unit of measurement.

The petitioner does not question the soundness of the decisions of the Board and the courts to the effect that payments made to a contractor under what are commonly known as turnkey contracts are not deductible under the above regulation. Grison Oil Corporation v. Commissioner, supra, and other cases previously cited. It is argued, however, that, since petitioner in the case of wells drilled by F. H. Brown agreed to furnish fuel, water, storage tanks, and connections and in the case of wells covered by the contract with the Producers Supply & Tool Co. was to furnish water, fuel, tanks, flow lines, and a man to supervise the drilling of the sand area and the running of the casing, and also to swab in the wells, the said contracts are not turnkey contracts and therefore such portions of the amounts paid under those contracts as may be said to have covered the cost of intangibles are deductible. The sum and substance of petitioner’s argument is that the test of deductibility of intangible drilling costs is whether the particular contract is a turnkey contract and not whether it falls within the letter and spirit of the regulation. No discussion is required to demonstrate the fallacy of such an argument. If any part of the amounts expended for drilling, equipping, and completing an oil well is to be deducted, it must meet the test of the statute and regulation, and it is not enough to say that such expenditures are deductible because the contract under which they were made is not, strictly speaking, a turnkey contract.

The contracts here were not contracts for the employment of labor and the purchase of various items of material and equipment but were contracts for the drilling and completing of oil wells. In other words, the petitioner was contracting for a finished job and the mere fact that it agreed to furnish some of the items needed by the contractors for use in the operations does not convert the contracts here into contracts for the employment of labor and the purchase of equipment.

What was said in Grison Oil Corporation v. Commissioner, supra, is equally applicable here. In that case the court said:

⅜ * * They cannot trace part of the price paid to a contractor for a capital asset of that kind through his hands and deduct as their ordinary business expense any part of the amount which the contractor paid for intangible drilling and development costs. It may be inequitable and seemingly harsh to allow one taxpayer to exercise the option where he purchases the material, employs workmen, and drills and equips the well, and to deny another taxpayer the privilege where he lets a turnkey contract for a completely drilled and fully equipped well for a fixed price. But taxation is a matter of statutes and valid regulations promulgated under authority of law. Equitable considerations are no warrant for courts to override governing statutes and regulations, to make insertions in their provisions, or to supply omissions in them.

The petitioner argues that a segregation of costs can and should be made, and in support of that argument, points to the supplemental agreement with F. H. Brown under date of August 12, 1935, wherein it is stated that “the real consideration was and is the sum of $6,500.00 for the equipment and $6,000.00 for the labor, insurance, drilling-expenses, etc., and making an aggregate of $12,500.00 for each well * * The original contract, dated July 22, 1935, had provided that of the aggregate amount of $12,500 to be paid, $5,500 was for equipment, $5,000 for labor, insurance, etc., and $2,000 was a bonus. With respect to the wells drilled by the Producers Supply & Tool Co., petitioner points out that the respondent’s agent, in connection with his investigation of petitioner’s liability herein, has made an allocation of the amounts paid for the various wells between equipment and intangible drilling costs and that the respondent may not now be heard to argue that the intangible drilling costs to petitioner are not determinable for the purpose of applying article 23 (m)-16, supra. Such allocation or segregation of costs is, in our opinion, of no moment here. In practically all of the turnkey cases which have been called to our attention the parties have agreed upon an allocation of the amrtnnt.fi paid to the contractors between cost of equipment and intangible drilling costs and for all we know the allocation so made and agreed npon may have reflected in some instances the exact dollars and cents expended by the contractors for items of the same nature and character as those termed by the regulation as “intangible drilling and development costs.” Nevertheless it was held in those cases that the amounts paid by the contractor for intangible drilling and development costs did not retain their identity for the purpose of applying article 23 (m)-16 to the payments made by the taxpayer to the contractor. See particularly Grison Oil Corporation v. Commissioner, supra, and O-W-R Oil Co., supra. Similarly the contracts here were not coh-tracts for the employment of labor and the purchase of supplies, material, and equipment. The relationship between the parties was not that of employer and employee, but that of independent contractors. The petitioner did not hire labor or buy materials and supplies, but agreed to pay an independent contractor a stated sum for a finished job, leaving it to the contractor to make his own deal for labor and equipment, and the fact that the petitioner may have furnished some of the supplies and some items of equipment does not change the contracts so as to bring any portion of the amounts paid to the contractors within the provisions of article 23 (m)-16.

The petitioner makes the further contention, relying strongly on I. Rudman, 36 B. T. A. 803, that the contracts here under consideration were footage contracts and that amounts allocable to intangible development and drilling costs are deductible under the last sentence of the excerpt previously quoted from article 23 (m)-16. The claim that the contracts are footage contracts is based on the provision, contained in the contract with the Producers Supply & Tool Co. to the effect that the wells were to be drilled to the Woodbine Sand found at “3600'-3650'” and testimony that the producing sand in the East Texas field could be estimated to within a few feet. Obviously those contracts were not footage contracts. In the I. Rudman case, the contractor was required to drill “to a depth of 2,950 feet” and we said that “the contract was no less a ‘footage’ contract because it recited a total stipulated lump sum consideration for drilling to a depth of 2,950 feet instead of an agreed price per foot.” The obligation here was to drill completed wells in a proven field, or to a designated sand, and not to a depth of so many feet, and the fact that the parties may have had a fairly definite idea as to the approximate depth of the producing sand and may have so indicated in the contracts does not make the contracts footage contracts.

Bearing in mind that the expenditures here in question constituted part of the costs to petitioner of capital assets, namely, completed oil wells, we find nothing in the statute, the decisions of the Board or the courts, or the regulation itself to justify any extension of article 23 (m)-16, supra, to cover any part of the payments made to the contractors under contracts of the character here considered. It is accordingly our conclusion that no part of the amounts paid by petitioner to F. H. Brown or to the Producers Supply & Tool Co. in respect of the wells described in our findings of fact constituted expenditures by the petitioner for intangible drilling and development costs within the meaning of article 23 (m)-16,, supra, and the respondent is sustained in his disallowance of the deductions claimed therefor.

The respondent admits on brief that of the $34,917.24 disallowed as deductions for intangible drilling costs for 1935, the petitioner actually paid or incurred $652.44 for repairs and supplies, $414.60 for surveying and permits, $420 for swabbing, and $157.50 for trucking, a total of $1,644.54. Accordingly the petitioner was within its rights under the regulation in electing to deduct as expenses the items enumerated.

The petitioner presented no evidence relative to the contracts under which the Taylor well No. 3 and the Nathan well No. 2 were drilled, and on brief it presented no argument to contest the respondent’s dis-allowance of the deductions claimed in respect of those two wells. The respondent’s action is accordingly sustained.

An issue involving percentage depletion for the year 1935 has been abandoned by the petitioner. Another issue for 1935, involving the respondent’s action in including in petitioner’s income $1,093.15 representing the proceeds of oil produced and paid over to petitioner’s grantor under an oil and gas lease, has been abandoned by the respondent. The petitioner has abandoned another issue for 1937 involving allowance for depreciation on lease and well equipment.

Decision will be entered v/nder Rule 50.