author: Littleton:

text:
    John F. Archbold, Executor, Estate of Annie M. Dustin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8629.
    Promulgated October 21, 1927.
    1. Tbe amount allowable as a deduction under section 403(a) (2) of tbe Revenue Act of 1921 should not be reduced by tbe amount allowable as deductions under section 403(a)(1) and (3) or any part thereof where one bank account is maintained in which is deposited funds received from the sale of prior-taxed property and funds received from other sources and payments are made therefrom which give rise to the deductions under section 403(a) (1) and (3), provided the latter funds are always sufficient to pay the amounts which are allowable as deductions under section 403(a) (1) and (3).
    2. The value of securities on hand at decedent’s death which are bought with the proceeds of prior-taxed property as referred to in section 403(a) (2), Revenue Act of 1921, should be deducted as acquired in exchange for prior-taxed property in establishing the value of the net estate whose transfer is subject to be taxed for estate-tax purposes. Appeal of Elmer E. Bodenbough, 1 B. T. A. 477.
    3. Where a decedent is entitled to a deduction as prior-taxed property on account of shares of stock received from a prior decedent as contemplated by section 403(a) (2), Revenue Act of 1921, and stock dividends are declared upon this stock between the deaths of the prior and second decedent, not only the value of the original shares, but also the value of the shares received as a stock dividend should be considered as prior-taxed property in determining the deduction allowable.
    4. Where a decedent is entitled to a deduction as prior-taxed property on account of shares of stock received from a prior decedent as contemplated by section 403(a) (2), Revenue Act of 1921, and during the period between the deaths of the prior and second decedent, the second decedent exercises options offered by the corporations, whose stocks are so held, to subscribe for additional stock at a price which is less than the prevailing market price at the time, the value of the additional stock received is not to be considered as prior-taxed property in determining the deduction allowable.

      John G. Jackson, Esq., and Wm. H. White, Jr., Esq., for the petitioner.

      R. E. Copes, Esq., for the respondent.
    This proceeding involves a deficiency in estate tax in the amount of $65,402.77 under the Revenue Act of 1921, arising from the failure of the Commissioner to exclude certain property from the taxable estate of Annie M. Dustin as property which had been taxed as a part of the estate of a prior decedent who died within five years of the decedent whose executor appears in this proceeding. In addition, the executor raises two points which were not considered by the Commissioner in the determination of the foregoing deficiency and which, if allowed and if the deficiency should be disallowed, would give rise to a refund. The two new points relate to the effect of stock dividends upon stock of the prior decedent and the exercise of stock subscription rights arising subsequent to the death of the prior decedent on previously taxed property.
    FINDINGS OF FACT.
    John D. Archbold (hereinafter sometimes referred to as the “prior decedent ”) died a resident of New York on December 5,1916, leaving him surviving a widow, Annie M. Archbold, who thereafter became by marriage Annie M. Dustin.
    Annie M. Dustin (hereinafter sometimes referred to as “decedent ” or “ second decedent ”) died a resident of Georgia on March 22, 1921, that is, within five years subsequent to the death of her husband, the aforementioned John D. Archbold.
    Under the will of John D. Archbold, one-third of his estate passed to his widow, the decedent in this proceeding, and a Federal estate tax was paid thereon under the statute then in force. Included among the property received by the second decedent were various securities which were taxed in the estate of the prior decedent. The prior-taxed property which is included in the estate of this decedent is admitted by the Commissioner to have had a value of $3,153,290.89 at the date of the second decedent’s death, but this amount was reduced by the Commissioner to $2,811,817.27 in his determination for the following reason set forth in the deficiency notice:
    There was deducted from this schedule in the Bureau’s tentative audit the sum of $501,690.14, representing funeral expenses, executor’s commission, attorney’s fee, miscellaneous administration expenses, debts of decedent and charitable, public and similar bequests, the estate having failed to show that such charges had not been paid from funds received from, the prior estate. It appears, however, that the estate paid these total charges out of commingled funds of the present and prior estates. However, as the estate had deposited in this fund a total of $341,473.65 derived from the sale of property taxed in the prior estate which is less than the total of the allowable deductions, the sum of $341,473.65 instead of 501,690.14 should be deducted from the total of Schedule K for the reason that the funds having been commingled the money derived from the sale of property of the prior estate loses its identity and it cannot be said that the particular money derived from the sale of property previously taxed was not used in the payment of these charges. Accordingly, the estate is entitled to a deduction of $160,216.49, this being the difference between $501,690.14 and $341,473.65, or the amount which is identified as having been paid from funds of the present estate.
    After the death of the second decedent, her executor opened and maintained one bank account for the estate in which was deposited all funds, whether representing principal or income and from whatever source derived. The executors sold certain securities which the second decedent received from the prior decedent upon which a Federal estate tax had been paid in the estate of the prior decedent, and the amount derived from these sales, $351,473.65, was deposited in the aforementioned bank account without being earmarked or segregated in any way from cash received from other sources. In addition, deposits were made in this account from sources other than the sale of prior-taxed property in the amount of $880,662.46. Disbursements were made by the executor from this account in the amount of $501,690.14, divided as follows: funeral expenses, $2,141.95; executor’s fees, $75,000; attorney’s fees, $43,108.66; miscellaneous administration expenses, $39,984.95; debts of decedent, $211,454.58; and charitable bequests, $130,000. This bank account at all times contained funds, exclusive of the deposits from the sale of prior-taxed property, sufficient to pay the items enumerated above, but the checks which were drawn for the payment of the same did not specify that the payments were being made from any particular money. The Commissioner’s deficiency notice allowed the foregoing expenses as deductions from the gross estate, but reduced the total prior-taxed property of the decedent by the difference between the total of the foregoing expenses, $501,690.14, and receipts from the sale of prior-taxed property which were deposited in this account, $341,473.65 (both parties concede that this amount should have been $351,473.65).
    On September 27, 1920, decedent sold for $58,485, through Jessup and Lamont, brokers, 1,000 shares of Chicago, Milwaukee & St. Paul stock acquired from the first decedent upon which a Federal estate tax had been paid at a value of $125,250. The proceeds of this sale were reinvested in $20,000 First Liberty Loan bonds, which cost $18,524.17, and 365 shares of Southern Pacific Railway Co. stock, which cost $36,608.50. The values of these securities on the date of the death of the decedent were $18,082 and $27,110, respectively.
    During the period from November 10, 1919, to December 2, 1919, the decedent sold through Jessup and Lamont, brokers, securities as follows which had been taxed in the estate of the prior decedent for Federal estate-tax purposes at a valuation of $377,110.37:
    1919
    Ñov. 10. 300 shares International_ $7, 452. 00
    34 shares Nickel Common_ 840. 29
    334
    Nov. 14. 300 shares St. Paul Common_ 13, 705. 50
    19. 200 do_ 8,412. 00
    500
    Nov. 18. 400 shares Anaconda_ ___ 26, 469. 50
    433 shares Copper Co_ ___ 27, 713. 25
    833

      1919
    Nov. 18. 300 shares Brooklyn Union Gas-$18, 368. 00
    Dec. 2. 200 do_ 10, 162. 00
    Nov. 24. 100 do_ 6, 881. 00
    Nov. 25. 200 do_ 11, 362. 00
    Dec. 2. 200 do_ 10, 024. 50
    1, 000
    Nov. 20. 333 shares Inspiration Copper Co- 18, 512. 26
    Nov. 20. 1, 055 shares Midvale Steel_ 53, 887. 09
    Total_ 212, 789. 39
    During the same period the following sales were made through the same brokers of securities on which a Federal estate tax had not been paid:
    1919
    Nov. 10. 300 shares International_ $7, 814. 50
    300 shares Nickel Common_ 7, 452. 00
    600
    Nov. 20. 166 shares Midvale Steel_ 8, 478. 95
    Nov. 20. 333 shares Inspiration Copper Co_ 18, 512. 26
    Interest_ 4. 22
    Total___ 42, 261. 93
    Total from both groups of securities_ 255, 051. 32
    A “ running ” account was kept with the brokers during this period; the sums realized from the sale of both groups of securities were not “ earmarked ” by the brokers as to their source, but were credited to the decedent in a single account. The following purchases were charged against this account as made and the account was closed on December 11,1919, by mailing the decedent a check for her credit balance as indicated in the following statement:
    1919 Cost
    Nov. 18. $20, 000 United States Government 3kj%--— $20, 076. 40
    Nov. 20. 50,000 do_!_ 50,055.00
    Nov. 21. 20, 000 do_— — — 20, 026. 00
    Nov. 24. 123, 000 do_ 123, 159. 90
    Nov. 25. 6, 000 do_ 5, 005. 50
    Nov. 25. 12, 000 do_ 12, 015. 60
    Dec. 3. 20, 000 do_ 19, 946. 00
    250, 000
    Interest on bonds when purchased--- 3, 880. 98
    Transfer taxes_ 115. 82
    Check for balance- 770. 12
    255, 051. 32
    The Commissioner disallowed as a deduction on account of previously taxed property, the value, or any part of the securities set out above. United States Government First Liberty Loan bonds of $212,500 face value which were purchased between November 18 and December 8, 1919, had a value on the date of decedent’s death of $192,340.31.
    The decedent, prior to her death, received stock dividends with respect to shares of stock identified as received by her from the estate of the prior decedent, which shares were included in the estate of the said prior decedent and an estate tax paid thereon. The shares of stock which were issued as a stock dividend, the value of the original stock in the estate of the prior decedent on which a Federal estate tax was paid, value of original and stock dividend shares at date of death of the second decedent, value allowed by the Commissioner in the estate of the second decedent as prior-taxed property, and the additional amount claimed by petitioner in this proceeding as prior-taxed property are shown by the following tabulation:

    Among the assets received by the second decedent from the prior decedent on which a Federal estate tax had been paid were shares of stock in certain corporations which corporations, between the deaths of the prior and second decedents, increased their stock and gave to the then stockholders the right to subscribe for certain of the additional stock at a price which was less than the market price of the stock at the time. The stock on account of which the stock subscription rights were exercised, the additional stock subscribed for, the value of both classes of stock at the death of the prior decedent and the death of the second decedent, the deduction allowed the second decedent as prior-taxed property, and the manner in which an additional deduction claimed on account thereof was arrived at by the petitioner, are shown by the following tabulation:

      The foregoing subscriptions were made and such additional stock acquired in two ways: (a) In the case of the 333 shares of the National Fuel Gas Co., the 1,034 shares of the Ohio Fuel Supply Co., and the 40 shares of the General Electric Co., the subscription rights were exercised by the prior decedent’s personal representatives and payments for the new stock were made by them from funds of his estate. The second decedent, who was devised a one-third interest in- her husband’s estate, was charged in her accounting with the estate with her proportionate part of the sum thus paid and certificates for her shares of stock thus acquired were issued to her and were owned by her at the time of her death, together with the original shares as to which such subscription rights appertained, (b) In the case of the 100 shares of the National City Bank and the 20 shares of the Continental Oil Co., the second decedent made her subscriptions and paid for the new shares thus issued to her direct to the issuing corporations, using her own funds therefor.
   OPINIOH.

Littleton:

The following contentions are advanced by the executor:

1. That he should be allowed as a deduction in establishing the net taxable estate the sum oí $501,690.14 expended for items deductible under section 403 (a) (1) and (3) of the Revenue Act of 1921 and that no part of said sum was paid with the proceeds of the sale of prior-taxed property as claimed by the Commissioner.
2. That securities aggregating $237,432.31 in value at the date of the decedent’s death, and bought with the proceeds of the sale of prior-taxed property, should be deducted as acquired in exchange for prior-taxed property in establishing the net taxable estate, pursuant to the provisions of section 403 (a) (2) of the Revenue Act of 1921.
3. That he is entitled to deduct in establishing the net taxable estate herein, not only the value of shares of stock received by the decedent herein from the prior decedent, and upon which stock the estate of the prior decedent had paid a Federal estate tax, but, also, and as a part of such prior-taxed property, stock dividends received by the decedent on such stock.
4. That since the decedent or the prior decedent’s estate exercised the right to subscribe to certain shares of stock accorded by corporations which had issued shares owned by the prior decedent, and upon which original stock his estate had paid a tax, the petitioner is entitled to deduct as prior-taxed property and as a part of the prior-taxed property the value of shares so acquired less the subscription price.

The first point arises under section 403 (a) (1), (2), and (3) which reads as follows:

That for the purpose of the tax the value of the net estate shall be determined—
(a) In the case of a resident, by deducting from the value of the gross estate—
(1) Such amounts for funeral expenses, administration expenses, claims against the estate, unpaid mortgages upon, or any indebtedness in respect to, property (except, in the case of a resident decedent, where such property is not situated in the United States), losses incurred during the settlement of the estate arising from fires, storms, shipwreck, or other casualty, or from theft, when such losses are not compensated for by insurance or otherwise, and such amounts reasonably required and actually expended for the support during the settlement of the estate of those dependent upon the decedent, as are allowed by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered, but not including any income taxes upon income received after the death of the decedent, or any estate, succession, legacy, or inheritance taxes;
(2) An amount equal to the value of any property forming a part of the gross estate situated in the United States of any person who died within five years prior to the death of the decedent where such property can be identified as having been received by the decedent from such prior decedent by gift, bequest, devise, or inheritance, or which can be identified as having been acquired in exchange for property so received: Provided,, That this deduction shall be allowed only where an estate tax under this or any prior Act of Congress was paid by or on behalf of the estate of such prior decedent, and only in the amount of the value placed by the Commissioner on such property in determining the value of the gross estate of such prior decedent, and only to the extent that the value of such property is included in the decedent’s gross estate and not deducted under paragraphs (1) or (3) of subdivision (a) of this section. This deduction shall be made in the case of the estates of all decedents who have died since September 8, 1916;
(3) The amount of all bequests, legacies, devises, or transfers, except bona fide sales for a fair consideration in money or money’s worth, in contemplation of or intended to take effect in possession or enjoyment at or after the decedent’s death, to or for the use of the United States, any State, Territory, any political subdivision thereof, or the District of Columbia, for exclusively public purposes, or to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including the encouragement of art and the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual, or to a trustee or trustees exclusively for such religious, charitable, scientific, literary, or educational purposes. This deduction shall be made in case of the estates of all decedents who have died since December 31, 1917; and * * *

The prior-taxed property was found by the Commissioner to have a value of $3,153,290.89 in the estate of the second decedent, but this amount was reduced by the Commissioner to $2,811,817.29 on the theory that it had not been shown that the difference was not in effect being allowed once as a deduction under section 403 (a) (1) and (3) and that, therefore, to allow the total of the prior-taxed property as exempt might allow a double deduction.

The facts as to this issue are not in dispute. Decedent’s executor maintained one bank account in which were deposited funds received from sources other than the sale of prior-taxed property and also funds received from the sale of prior-taxed property. The former amount aggregated $880,662.46 over the period in question and the latter, $851,473.65 ($341,473.65 being erroneously used by the Commissioner). The expenditures from this account which are accepted as deductions by the Commissioner under section 403 (a) (1) and (3) amounted to $501,690.14 and the balance in the account from sources other than from prior-taxed property was at all times sufficient to pay these expenses without using funds received from the sale of prior-taxed' property. However, funds derived from taxed property, and from other sources, were not segregated in this account and when payments by check were made out of this account there was no way of knowing whether such payments were made from specific funds of prior-taxed property or funds derived from other sources.

The respondent contends if we should allow the deductions allowable under section 403 (a) (1) and (3) which arise by payments out of this account and at the same time allow the total prior-taxed property as a deduction, a double deduction would result to the extent that the deductible expenses were paid by the use of funds received from the sale of prior-taxed property. This would be true if such a situation should exist. For example, if prior-taxed property, which is allowable as a deduction under section 403 (a) (2), is sold by the executors of the second decedent and the funds used to make payments which are deductible under section 403 (a) (1) and (3) the allowance of the value of the prior-taxed property as a deduction and at the same time the allowance of the payments made as deductions would result in a double deduction. See Appeal of Fidelity Union Trust Co., Executor, 6 B. T. A. 125.

The problem, however, which we are considering is not the one presented above, but may be said to be analogous to the situation to which the Board referred to in the foregoing opinion in these words:

We are not attempting to decide what the proper deductions under this section would he had it been shown that there was money or property of the decedent available to pay this bequest to charity, exclusive of any money received from the estate of the prior decedent, and exclusive of any property required to satisfy the specific bequests under the will.

It may be that some of the funds which were received from the sale of prior-taxed property were used to make payments which gave rise to the deductions which are being allowed under section 403 (a) (1) and (3), but should this be sufficient to defeat the petitioner’s right to the exemption to which he is otherwise entitled when there were always sufficient other funds on hand in the same account from which the payments might have been made? In effect, the controversy arises merely because the petitioner failed to keep two accounts in which the funds were deposited separately. Had this been done, the estate would have been neither richer nor poorer at the end of the period of administration, and the executor would always have had sufficient funds, exclusive of the funds received from prior-taxed property, to meet the administrative expenses, etc., in question. In other words, the Commissioner’s viewpoint renders an absolute identification of the specific money a prerequisite to the allowance under the circumstances of the case at bar.

Upon a consideration of the statute in question and its applicability to the situation here presented, we are not convinced that an identification of the funds is here called for. In Appeal of Elmer E. Rodenbough, Executor, 1 B. T. A. 477, the Board said:

This argument leads to the necessity of earmarking the funds, else there can be no way of showing they were identical. We do not think the statute goes to the length of such a requirement.

We regard the method employed and interpretation given to the statute by the Commissioner as too technical under the circumstances. We are not dealing with adverse claimants to a fund such as was the case in Clayton's case, 1 Mer. 572, where the theory that the first money in was the first drawn out was applied. Here we are attempting to apply a taxing statute which allows certain classes of expenditures as deductions to an estate before subjecting the transfer of the net estate to tax and at the same time prevents any part of the same estate from being subjected to the same kind of tax within a five-year period. We are of the opinion that either one, or part of both of the foregoing objects are being defeated by the strict and unnecessarily technical interpretation of the statute by the Commissioner, and that a more reasonable interpretation should be given in order to carry out the intent of Congress that administrative expenses should be allowed as deductions and that prior-taxed property should not again be included in the net estate of the second decedent. It is only by resolving doubts against the estate that the deduction in question is excluded. Taxing statutes should be interpreted from a reasonable viewpoint. Gould v. Gould, 245 U. S. 151. In the case of United States v. Davison, 1 Fed. (2d) 465, later affirmed in 9 Fed. (2d) 1022, it was held that:

In determining whether a particular transaction is subject to tax, the decisions hold that the substance, and not the form, is to be regarded. In United States v. Phellis, 257 U. S. 156, 42 Sup. Ct. 63, 66 L. Ed. 180, the Supreme Court said: “ We recognize the importance of regarding matters of substance and disregarding forms in applying the provisions of the Sixteenth Amendment and income tax laws enacted thereunder. In a number of cases besides those just cited we have under varying conditions followed the rule. Lynch v. Turrish, 247 U. S. 221; Southern Pacific Co. v. Lowe, 247 U. S. 330; Gulf Oil Corporation v. Lewellyn, 248 U. S. 71.” This has been the rule from the time of the decision in Bailey v. Railroad, 106 U. S. 109, 1 Sup. Ct. 62, 27 L. Ed. 81, to the present time.

Accordingly, we sustain the contention of the petitioner for a deduction of prior-taxed property in the amount of $3,153,290.89 and for deductions on account of administrative expenses, debts, charitable bequests, etc., in the amount of $501,690.14.

The second point involves the question of whether the value of property purchased by decedent through the investment of the proceeds of the sale of securities acquired by decedent from a prior decedent who died within five years and on whose estate an estate tax was paid may be deducted from the gross estate under section 403 (a) (2), Revenue Act of 1921. The same question was before the Board in the Appeal of Elmer E. Rodenbough, Executor, supra, and there decided in favor of an allowance of such property as a deduction. In the Rodenbough case we were concerned with a corresponding provision of the statute under the Revenue Act of 1918, but the reasoning there advanced would be equally applicable under the Revenue Act of 1921.

This question was before the United States District Court for the Western District of New York in the case of George Cary v. United States, 22 Fed. (2d) 298, and, in its opinion rendered August 11, 1927, the court said:

A rehearing was subsequently granted, it being urged by the Government that another question was involved, which had not been presented or passed upon, viz: whether any of the securities owned by plaintiff’s intestate at the time of her death, can, under see. 403(a) (2) of the Revenue Act of 1921, be identified as securities received from her father by bequest, or whether they were acquired by her by exchange for property so received and upon which an estate tax had been paid by the testator, her father, within five years before his death. The Government claims that, since it is shown that the securities, in the main, were acquired by plaintiff’s intestate, in her lifetime, through purchase with securities or money received by her in lieu of the bequest, and in some instances were sold by her, the proceeds being used for purchase of other securities, they can not, as stated in the Act, “be identified as having been acquired in exchange for property so received,” and, hence, that they were subject to the tax imposed.
A different conclusion, however, has been reached. The undisputed evidence fully shows that the securities bought by her, after the payment of the bequest, were acquired in exchange for property, securities, or money paid to her by the executors of her father’s will. The findings of fact and conclusions of law approved by me make it unnecessary to set forth the details of the various purchases and sales. The law is well settled that in matters of taxation the subject of the transactions must be considered, that substance and not form is to be regarded, and, accordingly, the Revenue Act of 1921 must be given a reasonable construction. U. S. v. Phellis, 257 U. S. 156; U. S. v. Davison, 1 Fed. (2d) 465. Its purpose manifestly was to prevent collecting a double tax on property of deceased persons within five years. That such was the intent of Congress is fairly shown by the report of the Ways and Means Committee on the revenue bill of 1918, which had a similar exemption clause, together with the ensuing discussions.
The crucial point in this case turns upon whether the wording of the statute “ as having been acquired in exchange for property so received ” implies a limitation to a single transaction or an exchange of property for property. I am unable to adopt this view. It is true that by Art. 44 of the internal Revenue Regulations, a narrow construction is given the quoted phrase, but I nevertheless think that the Revenue Act in question cannot in reason be accorded such a restricted meaning. The evidence shows that the property’ bequeathed or devised, and paid by the executors in satisfaction of the bequest, was shortly thereafter invested by the legatee, during her lifetime, in other property, stocks and bonds. I am of opinion that these later securities can fairly be traced and identified to the securities and money acquired under the will, and that it constituted substantially an exchange thereof. True enough, the word “ exchange ” ordinarily implies the giving of one thing for another, which, ordinarily is régarded as an equivalent, but the statute in its use of the word “ exchange ” must be considered and given effect with the terms of the provision which are consistent with each other. Such was the ruling in U. S. v. 99 Diamonds, 139 Fed. 961. And in the Rodenbouffh appeal decided by the United States Board of Tax Appeals, Vol. 1, Board of Tax Appeals, 477, wherein a similar question arose, it was substantially held that if the property of a deceased was identified or traced to purchases of other properties, it was not subject to taxation under the Revenue Act. In that case, as here, the proceeds of the property bequeathed was invested in other securities and the Government contended that, under the provisions of the Act, only one exchange was presumable, and a reinvestment of securities or of moneys received under the will of a testator was not a single exchange.
There is nothing contained in the Act, however, as heretofore indicated, to form a reasonable basis for holding that merely a single exchange was intended. Upon this point it was ruled in the Rodenbough case by tile Board of Tax Appeals that the intendment of Congress was not to limit the meaning of the word “ exchange ” to a single transaction, but “ That a reinvestment of money realized from property received from a prior decedent was an exchange within the terms of the Act”. This ruling, the Government insists, was obviously erroneous in that it ignored the real meaning of the word “ exchange ” and confused purchases, sales and investments with an exchange. However, I have carefully considered the opinion of the Board, and I am unconvinced of its asserted error.

On August 15, 1927, the U. S. District Court for the Eastern District of Pennsylvania in United States v. Rodenbough, 21 Fed. (2d) 781, held that the conclusions reached by the Board in Appeal of Elmer E. Rodenbough, 1 B. T. A. 477, that property acquired by the decedent ivith the proceeds from the disposition of property which had been included in the estate of the prior decedent and used as the measure of the estate tax paid by such prior estate should be excluded from the net estate of the second decedent was erroneous, and held that the word “ exchange ” in the phrase “ or which can be identified as having been acquired by the decedent in exchange for property so received ” (from the prior decedent) should be strictly construed.

We have carefully considered the opinion of the learned court in United States v. Rodenbough, supra, but notwithstanding our great respect for and deference to the opinion of the Court, we are unable to agree with the conclusion reached and we still adhere to our construction of the statute in Elmer E. Rodenbough, 1 B. T. A. 477, and in Honoro Gibson Pelton, Executrix, v. Commissioner, 7 B. T. A. 1144, decided August 22, 1927.

Section 403 (a) (2) of the Revenue Act of 1921 provides—

That for the purpose of the tax the value of the net estate shall be determined—
(a) In the case of a resident, by deducting from the value of the gross estate—
* * * * # 4: *
(2) An amount equal to the value of any property forming a part of the gross estate situated in the United States of any person who died within five years prior to the death of the decedent where such property can be identified as having been received by the decedent from such prior decedent by gift, bequest, devise, or inheritance, or which can be identified as having been acquired in exchange for property so received: Provided, That this deduction shall be allowed only where an estate tax under this or any prior Act of Congress was paid by or on behalf of the %state of such prior decedent, and only in the amount of the value placed by the Commissioner on such property in determining the value of the gross estate of such prior decedent, and only to the extent that the value of such property is included in the decedent’s gross estate and not deducted under paragraphs (1) or (3) of subdivision (a) of this section. This deduction shall be made in case of the estates of all decedents who have died since September 8, 1916.

We think when the nature of the estate tax and the entire provisions of Section 403, of the Revenue Act of 1921 are considered, it is evident that the underlying intent of Congress was that an amount equal to the value placed upon the property of a decedent for the purpose of the estate tax should not again be used as the measure of the tax within five years, and that the word “ exchange ” used in the phrase “ or which can be identified as having been acquired in exchange for property” received from the prior decedent, was not intended to be given a technical interpretation.

The property in issue under this point was stipulated by the parties as having a value in the estate of the second decedent as follows:

$20,000 first Liberty Loan bonds_:_$18, 082.00
365 shares Southern Pacific Oo- 27,010.00
$212,500 first Liberty Loan bonds_192, 340. 31
Total_ 237, 432.31

Since these amounts are less than the amounts at which the property sold was valued in the estate of the prior decedent, deductions should be allowed in the foregoing amounts.

The third question is, Shall stock dividends on stock, which is properly includable as a deduction from the gross estate as prior taxed property under section 403 (a) (2) and where the dividends were declared within the five-year period mentioned under the foregoing section, be considered as prior-taxed property which may be deducted from the gross estate? In other words, is the value of the original stock which was received from the prior decedent the value which the second decedent is entitled to deduct or is it the value of the original stock plus the value of the stock dividends declared thereon, subject always to the limitations under section 403 (a) (2) ?

A review of court decisions involving stock dividends and a consideration of the inherent nature of such dividends lead us to the conclusion that stock dividends are as much a part of the prior-taxed property as the original stock on which declared and, therefore, its value should be considered, along with the value of the original stock, in determining the deduction allowable for prior-taxed property. From the very nature of such a dividend the foregoing answer follows. The receipt of stock dividends by the decedent on stock which she held did not mean any increase in the property which she formerly held; it means a division of the property which she already held and whose value in her estate was entitled to be deducted as prior-taxed property. For example, if A holds 500 shares of stock in corporation B which has a capital stock of 1,000 shares, and a 50 per cent stock dividend is declared, thereby giving A 750 shares and increasing the capital stock to 1,500 shares, A’s relative holdings in corporation B are not thereby increased. Both before and after the receipt of the stock dividend, A would be entitled to the same amount of cash dividends when declared and would share to the same extent in dividends upon final liquidation of the company. As the court said in Gibbons v. Mahon, 136 U. S. 549:

A stock dividend really takes notliing from the property of the corporation, and adds nothing to the interests of the shareholders. Its property is not diminished, and their interests are not increased.
After such a dividend, as before, the corporation has the title in all the corporate property; the aggregate interests therein of all the shareholders are represented by the whole number of shares; and the proportional interest of each shareholder remains the same.
The only change is in the evidence which represents that .interest, the new shares and the original shares together representing the same proportional interest that the original shares represented before the issue of new ones.

And likewise, Eisner v. Macomber, 252 U. S. 189, wherein this statement is made:

The essential and controlling fact is that the stockholder has received nothing out of the company’s assets for his separate use and benefit; on the contrary, every dollar of his original investment, together with whatever accretions and accumulations have resulted from employment of Ms money and that of the other stockholders in the business of the company, still remains the property of the company, and subject to business risks which may result in wiping out the entire investment.
Having regard to the very truth of the matter, to substance and not to form, he has received nothing that answers the definition of income within the meaning of the Sixteenth Amendment.

Also see McDonald v. Maxwell, 274 U. S. 91. This involved a case where the executors had filed an account in which they had claimed commissions on the receipt by them of stock dividends. In denying the claim of the executors that these stock dividends represented an increase in the principal of the estate and that accordingly they were entitled to commissions, the court said:

After their issuance, which necessarily “ diluted ” the value of the original shares, the dividend shares and the original shares together represented the same proportional interest in the corporate properties that had previously been represented by the original shares alone; no more and no less. Clearly, therefore, the dividend shares themselves represented no increase in the value of the estate; and they could not properly be taken as the basis for the allowance of a commission to the executors on the theory that their receipt, in and of itself, constituted an increase in its capital.

In the shares of stock here in issue a deduction is not being asked of a value of the original shares plus the shares received as a stock dividend in an amount greater than the value at which the transfer of the original shares was taxed in the estate of the prior decedent, and in four out of six classes of the stock the deduction claimed is less than the value allowed in the estate of the prior decedent. Where no stock dividend has been declared and a deduction is being claimed on account of shares of stock whose transfer was taxed in the estate of a prior decedent, the deduction allowable to the second decedent is an amount which is no greater than the value allowed in the estate of the prior decedent, though the value may be equal to or less than that previously allowed in the estate of the prior decedent. Since the shares of stock held at the death of the second decedent (original shares plus shares received as a stock dividend) represent the same proportional interest that the original shares represented before the issue of the new ones, we fail to see why the deduction allowable to the second decedent is not to be based upon a valuation of the original shares plus the value of the shares received as a stock dividend on these shares in the same manner and with same limitations as if we were dealing with the original shares where no stock dividend has been declared. The contention of the petitioner for an additional deduction on this account of $355,039.50 is, therefore, sustained.

The final contention advanced by the petitioner is that shares of stock owned by the prior decedent, and with respect to which his estate had paid a Federal estate tax, were represented in the second decedent’s estate by the value of the shares owned originally by the prior decedent and inherited by the second decedent, plus the value of the shares acquired through the exercise of subscription rights, and less the amount paid to acquire the additional shares. On the petitioner’s theory, the amount claimed would not exceed the value of the shares owned by the prior decedent at the time of his death or the value of those shares, plus the additional shares acquired by subscription, at the time of the death of the decedent herein after subtracting in the latter instance the subscription price.

In advancing the foregoing contention, the petitioner relies principally on Miles v. Safe Deposit & Trust Co., 259 U. S. 247, wherein the court stated that “ The stockholder’s right to take his part of the new shares therefore — assuming their intrinsic value to have exceeded the issuing price — -was essentially analogous to a stock dividend” and argues that the result contended for there necessarily followed from the argument on the preceding point as to stock dividends. The case referred to involved a determination of the gain derived from the sale of certain subscription rights, and the court held that the entire amount received from such a sale was not to be considered gain, but that there must be taken into consideration both the cost of the original shares and the price at which the additional shares were offered to the stockholders in a computation which would produce the cost of that which was sold. The method followed is essentially that followed by the Commissioner in the determination of gain or loss derived from the sale of stock received as a dividend. (Article 1547, Regulations 45 (1920 Edition).)

In the opinion of the Board the problem presented in the instant case is essentially different from the foregoing case. Here we are seeking to determine the value of property which may be identified as having been received from a prior decedent within five years prior to the death of the second decedent and where a Federal estate tax has been paid thereon. Upon the death of the prior decedent, the decedent received certain shares of stock which were taxed in the estate of such prior decedent. Beyond the fact that the right to subscribe to the new stock is an equity that inheres in stock ownership (Miles v. Safe Deposit & Trust Co., supra), the subscription rights had not yet come into existence upon the death of the prior decedent. An act was necessary on the part of the second decedent in order to gain any benefit from the option offered to subscribe for the new stock. This was accomplished in the case at bar by subscribing for the new stock when offered, using for the payment of the subscription price either the personal funds of second decedent or funds of the estate of the prior decedent which it has not been shown were taxed in the estate of the prior decedent. To say that the advantage derived from the subscription to such stock is property which may be identified as having been received from the estate of the prior decedent on which a Federal estate tax was paid, is going further than we feel an interpretation of the statute warrants. The contention of the petitioner on this point is, therefore, denied.

Reviewed by the Board.

Judgment mil be entered on %0 days’ notice, wnder Rule 50.

TRAmmell and Green dissent.


source: Caselaw Access Project

author: Aettndell :

license: Public Domain

text:
    James B. Waller, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6902.
    Promulgated October 22, 1927.
    Federal estate tax paid by a devisee to prevent sale of real estate is not deductible from the income of such devisee.

      Wheaton Augur, Esq., for the petitioner.

      Arthur H. Fast, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income taxes for the calendar years 1919, 1920, and 1921, in the total amount of $5,162.62. At the hearing petitioner waived the allegation of error as to depreciation, leaving in issue only the propriety of the disallowance as a deduction from income for the year 1921 of the amount of estate tax paid by the petitioner on account of the estate of his father.
    FINDINGS OF FACT.
    Petitioner is an individual residing at Chicago, Ill. His father, James B. Waller, Sr., died August 3, 1920, leaving a last will and testament in and by which he divided all his property in shares approximately but not exactly equal, to his son, the taxpayer, and to a daughter, Mrs. Ellen Waller Borden, and in which the taxpayer was appointed executor. The estate consisted of real estate valued at $913,031 and personal property valued at $59,420.60. Liabilities of the estate, exclusive of estate and inheritance taxes, amounted to $75,889.02. State inheritance taxes and the Federal estate tax increased the total liabilities of the estate to an amount in excess of the personal property by $68,901.58. This excess was paid by the two devisees to prevent sale of the real estate.
    Among the items of personal property in the estate was approximately $20,000 of United States Liberty bonds, which were used in partial payment of the Federal estate tax, the balance being paid in cash. The deduction in the sum of $16,270.24 taken by the taxpayer represents his share of the apportionment of the estate tax between himself and his sister, computed as nearly as possible in proportion to the share which each took in the total estate. Both taxpayer and his sister received net income from the real estate devised to them sufficient to pay all such excess.
   OPINION.

Aettndell :

The petitioner says that being the devisee of real estate he represents the estate as to such property and as he paid the estate tax he is entitled to a deduction therefor from his income. His proposition is based upon the law of Illinois, which we understand is the law generally, that real estate passes direct to the devisee and not through the hands of the executor.

If the Federal estate tax were imposed on the right of a devisee to receive property or on the interest to which he succeeds there might be some merit to the contention made. But it is not such a tax. In the recent case of Nichols v. Coolidge, 274 U. S. 531; 47 S. Ct. 710; 6 Am. Fed. Tax Rep. 6758, the estate tax is thus described:

Y. M. C. A. v. Davis (264 U. S. 47, 50) says of this tax: “What was being imposed here (act February 24, 1919) was an excise upon the transfer of an estate upon death of the owner.” Edwards v. Slocum, (264 U. S. 61, 62), “this is not a tax upon a residue, it is a tax upon a transfer of his net estate by a decedent, a distinction marked by the words that we have quoted from the statute, and previously commented upon at length in Knowlton v. Moore (178 U. S. 41, 49, 77). It comes into existence before and is independent of the receipt of the property by the legatee. It taxes, as Hanson, Death Duties, puts it in a passage cited in 178 U. S. 49, ‘not the interest to which some person succeeds on a death, but the interest which ceased by reason of the death.’ ”

In the case of United States v. Woodward, 256 U. S. 632, it is said of the tax that “ it is made a charge on the estate and is to be paid out of it by the administrator or executor substantially as other taxes and charges are paid. * * * It does not segregate any part of the estate from the rest and keep it from passing to the administrator or executor for purpose of administration * * * but is made a general charge of the gross estate and is to be paid in money out of any available funds, or, if there be none, by converting other property into money for the purpose.”

Nowhere in the taxing act is there anything imposing an estate tax on the devisee or on the property devised. True, the tax becomes a lien on the estate but that is merely a means of safeguarding the collection of the revenue. Hampton’s Administrator v. Hampton, 188 Ky. 199; 221 S. W. 496; 4 Am. Fed. Tax Rep. 4877. Should the devisee by reason of any circumstances pay the tax in his individual capacity the law provides that he shall be reimbursed out of any undistributed part of the estate or by contribution of those whose interest would have been reduced by payment before distribution or whose interest is subject to a lien for the tax. Section 408, Reven’ue Act of 1918.

Petitioner’s argument as we have said above is predicated on the law of Illinois under which real estate passes directly to the devisee. The law of that State does not, in so far as we know, nor is it so claimed by the petitioner, exempt real estate from being subject to charges against a decedent’s estate. Even if there were no provisions in the State law authorizing the sale of real estate for the payment of the tax, such property would nevertheless be included in the gross estate for Federal tax purposes. Steedman v. United States, 63 Ct. Cls. 226, decided February 28, 1927. But the law of Illinois makes specific provision for the sale by an executor or administrator to pay claims against the estate. See ch. 3, sec. 99 et seq., Callaghan’s 1924 Illinois Statutes.

The nature of the Federal estate tax imposed by the Revenue Act of 1916 is considered in the case of In re Hamlin, 226 N. Y., 407; 124 N. E. 4. The legislative history of that Act as set out there is illuminating. We quote from the court’s opinion:

The House of Representatives’ bill (No. 16763) was referred to the committee on ways and means, of which Mr. Kitchin was chairman. On July 5, 1916, the committee on ways and means through its chairman reported the bill to the House of Representatives (Report No. 922, 64th Congress, 1st Session), and recommended that the bill do pass. The report of the committee under the heading “ Estate Tax ” reads:
“ Thirty states have laws imposing inheritance or share taxes both upon direct and collateral heirs. Twelve other states have laws imposing inheritance taxes upon collateral heirs. Your committee deemed it advisable to recommend a Eederal estate tax upon the transfer of the net estate rather than upon the shares passing to heirs and distributees or devisees and legatees. The Federal estate tax recommended forms a well balanced system of inheritance taxation as between the Federal Government and the various states, and the same can be readily administered with less conflict than a tax based upon the shares.”
On July 6th, when the proposed measure was under consideration in the committee of the whole, while Mr. Kitchin, the chairman of the ways and means committee, was explaining the nature of the estate tax, he was asked by a member of the House if he recalled how the proposed tax rate compared with the inheritance tax rates in the state of New York, to which inquiry Mr. Kitchin replied:
“No, I do not know. We levy an entirely different system of inheritance taxes. We levy the tax on the transfer of the flat or whole net estate. We do not follow the beneficiaries and see how much this one gets and that one gets, and what rates should be levied on lineal and what on collateral relations, but we simply levy on the net estate. This also prevents the Federal Government, through the Treasury Department, going into the courts contesting and construing wills and statutes of distribution.”

The basic plan of the statute with respect to payment is set forth in section 408 of the Revenue Act of 1921, in the following words:

* * * It being tlie purpose and intent of this title that so far as is practicable and unless otherwise directed by the will of the decedent the tax shall be paid out of the estate before its distribution.

The statute makes no distinction between real and personal property passing upon the death of a decedent. Neither class of property, as said above, is subject to tax and both must be included in the return of the estate as forming the measure of the tax. In view of the failure of the statute to distinguish between the two great classes of property, legatees and devisees might equally lay claim to a deduction for the estate tax. That legatees can not do so is settled by Y. M. C. A. v. Davis and Edwards v. Slocum quoted above. We fail to see, in view of the plainly expressed purpose of the estate-tax act, wherein a claim for deduction by a devisee is any more tenable than that of a legatee.

Judgment will be entered on 15 days’ notice, under Rule 50.

Considered by Lansdon and Sternhagen.


author: Arundell:

text:
    Metropolitan Life Insurance Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7257.
    Promulgated October 22, 1927.
    Petitioner claims as a deduction an amount representing the fair rental value of space in a building owned by it and occupied in connection with its investment department. Held, that the deduction claimed is not allowable under section 245(a) (5) of the Revenue Act of 1921 even though the rental value of the entire space occupied by it was returned by the petitioner as income.

      Leroy A. Lincoln, Esq., for the petitioner.

      Thomas P. Dudley, Jr., Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax asserted by the Commissioner for the calendar year 1921 in the amount of $8,413.14.
    Only that portion of the deficiency is in controversy which arises from the disallowance by the Commissioner of a deduction from gross income under the heading of “ investment expenses ” of the gum of $82,644.96, representing “ rents charged to home office suites.” The facts have been stipulated by the parties.

      FINDINGS OP PACT.
    Petitioner is a mutual life insurance company organized under the laws of the State of New York with its principal office in New York City.
    In its return for the taxable year 1921 it included in gross income the rental value of space occupied by it in buildings owned by it amounting to $2,085,211.59, said sum being a part of the larger sum of $3,816,092.29 appearing on its income-tax return as rents received. Petitioner in its return deducted from gross income taxes and other expenses with respect to real estate owned by it and also a reasonable allowance for depreciation on buildings, in accordance with paragraphs (a) (6) and (a) (I) of section 245 of the Revenue Act of 1921.
    Petitioner in its income-tax returns for the taxable year deducted $690,841.29 as being “ investment expenses.” The Commissioner conceded the deductibility of $608,196.33 as representing investment expenses, which amount included expenses for clerk hire, taxes, etc., and a portion of the salary of certain officers and employees of the taxpayer allocated to investment expenses in proportion to the time and efforts of each such officer and employee devoted to matters of investment. Included in the total sum deducted by petitioner in its income-tax return as investment expense was the item of $82,644.96, which sum represented in part an allocation to investment expenses of the rental value of all space occupied by the officers and employees of petitioner whose time and efforts were devoted to matters of investment, such allocation being in the same proportion as the allocation of the salaries of the officers and employees, and the balance of the sum of $82,644.96 represented the rental value of space used as a coupon room and vault and as a bond and mortgage vault and the rental value of space occupied by the employees of the loan division of petitioner’s office, all having to do entirely with investments of the petitioner.
    The Commissioner disallowed as a deduction from gross income the sum of $82,644.96 so sought to be deducted.
   OPINION.

Arundell:

The petitioner having returned as a part of its gross income $2,085,211.59, representing the rental value of space occupied by it in biiildings owned by it, now seeks to deduct as a part of its investment expenses the rental value of all space occupied in connection with its investment department.

The Revenue Act of 1921 provides a method of taxing life insurance companies differently from that applicable to ordinary commercial enterprises. Section 244(a) states that the term “gross income” in the case of a life insurance company means “the gross amount of income received during the taxable year from interest, dividends, and rents.” Section 245 of the same Act provides for certain deductions in determining net income, among which is a deduction contained in subdivision 5, which reads as follows :

- Investment expenses paid during the taxable year: Provided, That if any general expenses are in part assigned to or included in the investment expenses, the total deduction under this paragraph shall not exceed one-fourth of 1 per centum of the book value of the mean of the invested assets held at the beginning and end of the taxable year.

The sole reason assigned by the Commissioner for disallowing the claimed deduction is that the sum of $82,644.96 was not “ paid ” within the meaning of the above provision. While conceding that no money actually changed hands on account of the occupation of the premises bjr petitioner’s officers and departments having to do with investment matters, petitioner nevertheless urges that inasmuch as the total rental value of said premises, including the rental value of the portion of the premises occupied by its investment business, was included in gross income and became subject to tax, the portion thereof attributable to investment expenses was “ paid ” in the same sense that the total amount was “ received ” so as to be included in gross income under the terms of section 244(a).

The statute does not require that petitioner shall return as a part of its gross income the rental value of the space occupied by it but merely conditions certain deductions upon the inclusion in income of the rental value of the property so occupied. Thus, the deduction found in paragraph (6) of section 245 (a) covering “ taxes and other expenses paid during the taxable year exclusively upon or with respect to the real estate owned by the company * * * ” and the deduction found in paragraph (7) which permits a “ reasonable allowance for obsolescence,” are not permitted unless the rental value of the space occupied is returned as income. Section 245(b) which governs this phase of the matter provides as follows:

(b) No deduction shall be made under paragraphs (6) and (7) of subdivision (a) on account of any real estate owned and occupied in whole or in part by a life insurance company unless there is included in the return of gross income the rental value of the space so occupied. Such rental value shall be not less than a sum which in addition to any rents received from other tenants shall provide a net income (after deducting taxes, depreciation, and all other expenses) at the rate of 4 per centum per annum of the book value at the end of the taxable year of the real estate so owned or occupied.

The deductions allowed by paragraphs (6) and (7) of section 245(a) are conditioned upon the inclusion in gross income of the rental value of the space occupied. There are nine paragraphs under section 245(a). Of those nine only two, namely paragraphs 6 and 7, relate to deductions for real estate. Hence, they alone needed mention in section 245(b). The implication is that had there been an intent to allow such deduction as is here claimed it would have been mentioned in connection with those specifically provided for and that there was no purpose to allow any other. Expressio unius est exclusio alterius.

Section 200 of the Revenue Act of 1921 states that the term “ paid ” for the purpose of deductions and credits under the title of the act we are here considering means “paid or incurred” and “paid or accrued ” in accordance with the method of accounting upon the basis of which the net income is computed. That the amount sought to be deducted was not in fact paid is not disputed, nor was there any liability to pay which Avould permit of the accrual of the item as an accrued expense. Deductions from income are purely statutory and can not be allowed unless they meet the test of the statute. That the item sought to be deducted is not one allowed by the statute we think is self-evident. The inclusion in income of the rental value of the space occupied by petitioner being purely optional, we must assume petitioner exercised its option in the way it did because of corresponding advantages which flowed from that course. Certain it is that such inclusion did not serve to permit the additional deduction now sought.

Judgment will be entered for the respondent.

Considered by Lansdon, Steknhagen, and Geeen.


author: Lansdon :

text:
    Baltimore County Jeffersonian Printing & Publishing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10131.
    Promulgated October 22, 1927.

      John E. McOlure, Esq., for the petitioner.

      Robert A. Littleton, Esq., for the respondent.
    The respondent has asserted deficiencies in income and profits taxes for the years 1920,1921, and 1922, in the respective amounts of $168, $168, and $1,098.29. The deficiencies for 1920 and 1921, and a part of that for 1922, result from the respondent’s disallowance of parts of the deductions from gross income which the petitioner took for such years on account of depreciation of certain printing presses and other machinery used in the printing business. The greater part of the deficiency for 1922, results from the disallowance as a deduction from gross income of the amount of an alleged loss which, the petitioner asserts, was sustained and charged off its books in that year.

      FINDINGS OF FACT.
    The petitioner is a Maryland corporation with its principal office at Towson, where it is engaged in the printing and publishing business. At the date of its incorporation in 1910, it purchased five automatic job presses, one large cylinder press, and two linotype typesetting machines at a cost of $12,000. During the period from such purchase until December 31, 1919, it annually charged off 5 per cent of the original cost of such machines as depreciation, and deducted the amounts so charged off from its income and profits-tax returns for such years.
    In the years 1920, 1921, and 1922 petitioner secured and executed certain large orders for job printing and throughout such years it operated its automatic printing presses 24 hours daily. In its income and profits-tax returns for the taxable years it deducted annually from its gross income the amount of $1,200, or 10 per cent of the original cost of its entire mechanical plant, as depreciation. Upon audit of such returns the respondent disallowed the accelerated depreciation claimed and reduced the petitioner’s annual deductions for depreciation of its mechanical equipment to 5 per cent of the original cost.
    In November 1921, the petitioner acquired from the New Era Publishing Co. the ownership and the right to publish a weekly newspaper known as the “New Era.” Soon after such acquisition the management of the petitioner concluded that the “ New Era ” could not be published and circulated with any hope of profit from such operations and discontinued it after one or two weekly issues. The petitioner never surrendered or sold any of the rights or property acquired by the purchase of the “New Era.” It charged the purchase price of the “ New Era ” in the amount of $6,186.26 off its books in 1922 and deducted the same from its gross income in its income-tax return for that year.
   OPINION.

Lansdon :

The evidence is clear that the automatic presses owned by the petitioner were operated 24 hours daily during the taxable years. Such presses may have sustained accelerated depreciation, at the rate claimed. The record, however, discloses no cost basis upon which such additional allowance can be computed, as the only proof of cost is that five automatic presses, one large cylinder press and two linotype machines were acquired in 1910 at a cost of $12,000. There is no claim that the linotype or the cylinder press sustained any accelerated depreciation nor is there any segregation of the costs of the several kinds of machinery. In the state of the record there is no basis for the computation of the accelerated depreciation claimed by the petitioner.

The action of the respondent in disallowing the cost of the “ New Era 15 as a loss sustained and charged off in the taxable year is approved. Upon the evidence, assuming that the purchase in question resulted in the loss claimed, it is clear that such loss was not sustained in 1922. The “ New Era ” was acquired in November of 1921, and its publication as a newspaper was discontinued after only one or two issues. It is also in evidence that the petitioner still retains the ownership and right to publish the “ New Era.” In fact it now owns everything that it purchased from the New Era Publishing Co. and the fact that it discontinued the issue of the “ New Era ” is not in itself sufficient to convince us that the property acquired became worthless in the taxable year.

Judgment roill be entered for the respondent.

Considered by Steiinhagen, Green, and Arundell.


text:
    James A. Weaver, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8488.
    Promulgated October 22, 1927.
    Deduction from gross income of cost of stock that became worthless in taxable year allowed.

      Frank J. ATbus, Esq., for the petitioner.

      P. J. Rose, Esq., for the respondent.
    This appeal is from the determination by the respondent of a deficiency of $864.12 in the petitioner’s income tax for the year 1919. The deficiency arises from the disallowance by the respondent of petitioner’s deduction from his income of a loss of $12,600 claimed to have been sustained during the year on account of certain stock owned by him in the Fort Worth Lead & Zinc Co.
    FINDINGS OF FACT.
    In 1917 petitioner paid $12,600 in cash for stock in the Fort Worth Lead & Zinc Co., hereinafter sometimes referred to as the corporation. The total stock of the company had a par value of $50,000, all of which was sold at par for cash.
    In 1917 the corporation purchased of Roe & Wiley for $12,000 a contract entered into between that concern and Pottorff & Smith for a lease on certain lead and zinc-mining property in Ottawa County, Oklahoma. It paid $5,000 cash and gave its promissory note due in six months for the remainder. At maturity it took up the note and executed a note in favor of Pottorff & Smith for $7,210. the amount of the original note and the interest due thereon, and as security therefor executed a chattel mortgage on the personal property it had acquired for mining operations on the land covered by the lease contract. It had no written contract with either of these two parties.
    The property for which the lease was to be made had on it a water-filled shaft which had not been worked for some years. After making such improvements as were necessary the corporation pumped out the water and made further excavations and improvements costing about $10,000 and also took out some lead and zinc. It borrowed the $10,000 so used, giving its note therefor secured by the endorsement of two of its stockholders. In addition to this $10,000 it also spent the $50,000 received from the sale of stock and $6,000 which it had borrowed and its full receipts from the sale of lead and zinc in pumping and other work in connection with its mining operations. By this time it had ascertained that due to the exceedingly high rate of royalty it had agreed to pay and the decreased prices of zinc and lead, the undertaking was a losing venture. It had also ascertained that the firm of Pottorff & Smith not only had no lease or other interest in the land, but was unable to secure one from the Indian owner.
    When the corporation’s $7,210 note became due it was unable to pay, and Pottorff & Smith instituted suit for the collection thereof and to foreclose the mortgage on all the buildings, machinery, etc., which the corporation had executed to secure its payment. The corporation filed a cross-bill for damages in the amount of $90,000 on account of fraud and misrepresentation on the part of the plaintiffs in inducing the Fort Worth Lead & Zinc Co. to invest in the mining venture by leading it to believe that the former would execute a lease in its favor when, in fact, there was no true basis for a belief that it could do so.
    The trial court held that a cross-complaint for a tort not arising out of the transaction constituting the basis of the suit could not be maintained, refused to admit any testimony in support of the cross-complaint, and judgment in favor of the plaintiff was entered. An appeal was taken to the Supreme Court of Oklahoma, which was decided in 1923, in favor of the appellant and the case was remanded to the trial court for hearing on the merits of the original suit and cross-bill. No further hearing has been had as the defendants considered that no beneficial results could arise therefrom.
    There was also a second mortgage on the mining property in favor of Coffey and Renfro for borrowed money, amounting to about $6,000. The record contains no evidence that this has been satisfied.

      Early in 1919 the corporation abandoned all mining operations and its property passed into the possession of Pottorff & Smith under the judgment of foreclosure. The machinery was secondhand, having been brought to Oklahoma from the Joplin mines, and was in poor condition at the time it came into the possession of the corporation. It was of no value after the abandonment of the works. The investments made by the Fort Worth Lead & Zinc Co. were all in this venture and it had no assets whatever after the foreclosure of the mortgage, and none of practical value prior to that time after it had spent the $50,000 received from the sale of its capital stock. It paid no state franchise tax subsequent to that for 1918.
   OPINION.

Lansdon :

The petitioner testified that in December, 1919, he considered his stock in the Fort Worth Lead & Zinc Co. absolutely worthless, and therefore deducted the cost thereof from the gross income shown by his tax return for that year. The Commissioner disallowed the deduction. The evidence indicates clearly that the stock had no value at December 31, 1919. Henry M. Jones v. Commissioner, 4 B. T. A. 1286; Harry H. DeLoss v. Commissioner, 6 B. T. A. 784.

Judgment of no deficiency will be entered for the 'petitioner.

Considered by Sternhagen and AR undell.


author: Love:

text:
    Bair Brothers, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9177.
    Promulgated October 22, 1927.
    In October, 1920, through a court decision, the petitioner lost title to a certain timber tract purchased in 1917, upon which entry-had not been made. Suit could not be maintained against the vendor for breach of warranty because the petitioner had not been evicted. No refusal of refund of purchase price had been made, and, upon request in February, 1921, the vendor repaid the purchase price. Held, that petitioner did not sustain an actual loss in 1920, and, therefore, no deduction may be taken on account thereof.

      Theo. B. Benson, Esq., for the petitioner.

      Bruce A. Low, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income and profits tax for the calendar year 1920 in the amount of $5,222.73. The entire amount of the deficiency is not in controversy but only so much thereof as results from the respondent’s action in disallowing as a deduction from gross income the amount of $11,'709.25 on account of a loss alleged to have been sustained by reason of a defective title to a timber tract previously purchased by the petitioner.
    FINDINGS OP FACT.
    The petitioner is a corporation organized in 1919 under the laws of the State of West Virginia and succeeded to all of the assets and liabilities of Bair Brothers, a partnership. Its principal place of business is at Beckley, W. Va.
    Under date of July 24, 1917, by warranty deed, one Sarah A. Fuller, attempted to convey to the partnership of Bair Brothers a fee simple interest in a timber tract of 600 acres. The deed recited a consideration of $10,000, the full amount of which was paid on or before July 24, 1919. The petitioner also paid taxes, interest and legal' expenses, the amount of which is not disclosed. The deed contained the following covenants and warranties:
    The said party of the first part hereby covenants to and with the said parties of the second part that she has the right to convey the timber and the rights, privileges and easements hereby conveyed; that the said parties of the second part shall have quiet enjoyment of the same, free from all encumbrances; that the said party of the first part will execute such further assurances of said timber and the rights, privileges and easements hereby conveyed as may be requisite and that she will warrant generally the property hereby conveyed, subject, nevertheless, to a vendor’s lien to secure the unpaid purchase money evidenced by the notes aforesaid which lien is hereby expressly retained.
    Sarah A. Fuller had acquired the land through one James Mc-Creary, whose title thereto was contested in a suit by one Sprigg. On October 12,1920, the Supreme Court of Appeals of West Virginia in the case of Spriggs v. McGreary, 87 W. Va. 204, decided that McCreary had no title to the property in question and as a result of this decision the conveyance from Sarah A. Fuller to the petitioner was determined to be of no effect.
    Upon learning of the court decision of October 12, 1920, the officers of the petitioner consulted their attorney in Beckley, and an attorney at Uniontown, Pa., where Mrs. Fuller then lived, relative to bringing suit against her. Petitioner’s officers were advised in both instances that a suit could not be maintained at that time against Mrs. Fuller to recover the purchase money.
    Robert T. Bair, one of the petitioner’s officers, in December, 1920, went to Uniontown, Pa., and procured from the clerk of the court a list of the property holdings of Mrs. Fuller, which list showed her holdings to consist of a dower interest in an estate. While in Uniontown at this time, Mr. Bair endeavored to see Mrs. Fuller with respect to repayment of the purchase price, but by reason of the fact that she was ill he was unable to do so. He was referred to Mrs. Fuller’s attorney, with whom the matter was discussed, but apparently an agreement was not reached at that time as to the repayment of the purchase price.
    The petitioner in response to its letter of January 6, 1921, to Mrs. Fuller was advised by a letter dated February 3, 1921, from Mrs. Fuller’s attorneys, that she did not intend to stand on technicalities and that she was ready and willing to pay back the consideration money of $10,000 and the petitioner was requested to forward a quit claim deed so that the repayment of the money could be promptly made. On February 18, 1921, one of the petitioner’s officers, on the occasion of his first conference with Mrs. Fuller, collected and received from her the sum of $10,749.94 as a return of the purchase money for the property in question.
    At no time from the date of the purchase of the property to the date of the decision of the court in 1920, did the petitioner make any entry thereon or did it cut and remove any of the timber.
    The petitioner claimed as a deductible loss in its return for 1920 the amount of $11,959.81 alleged to represent a loss sustained on account of the defective title to the property which it purchased from Mrs. Fuller.
    Upon audit of the return, the Commissioner determined that of the sum of $11,959.31 claimed as a deduction for the alleged loss, $959.31 represented appreciation and that the cost of the timber tract was $11,000. The Commissioner further determined that the petitioner was entitled to a deduction of $250.06, being the difference between the cost of.the timber tract and the amount of $10,749.94 recovered from Mrs. Fuller, and accordingly allowed the deduction of that amount.
   OPINION.

Love:

The petitioner claims the right to deduct the sum of $11,-709.25 upon the ground that it lost the title to the timber in question in 1920, and that it was immediately determined that no recovery could be had against the vendor, Sarah A. Fuller. However, as stated in the findings of fact, the record herein does not disclose the amount, over and above the consideration named in the deed, expended by the petitioner for taxes, interest, and legal expenses, and the Commissioner having determined that the cost of the timber tract was $11,000, the loss, if any, must necessarily be restricted to that amount.

In support of this contention the petitioner takes the position that under the law of West Virginia an action for breach of warranty would not lie against the vendor because it had not been evicted from the property in question. The petitioner then urges that having no right of action against the vendor it necessarily suffered a loss in 1920, no recovery having been had in that year.

Assuming that the law of West Virginia has been correctly stated, we are unable to agree that the petitioner suffered a deductible loss in the year 1920.

Section 234 (a) (4) of the Revenue Act of 1918 authorizes, as deductions in computing net income, “ Losses sustained during the taxable year and not compensated for by insurance or otherwise.” We have on other occasions been called upon to interpret this section and in Jackson County State Bank, 2 B. T. A. 1100, we stated that:

Tlie statute provides for a deduction on account of losses sustained during the taxable year. The expression “loss sustained” means actual losses and not paper losses * * *.

In Carl Muller, 4 B. T. A. 169, we said:

The statute does not permit the deduction of doubtful debts partly written off, Steele Cotton Mill Co., 1 B. T. A. 299, nor of possible or probable losses. The loss must be actually sustained in the taxable year to be deductible. * * * On the other hand, claiming a loss he must prove as a fact that it was actually sustained within the year. The sustained loss and not his ascertainment is the statutory factor * * *.

It is clear to us, in view of the above-quoted statements of the Board, that the petitioner did not sustain an actual loss in 1920.

It appears that the petitioner, upon learning that it could not proceed immediately against Mrs. Fuller for breach of warranty, assumed that she would not or could not repay the purchase price. But the record shows that the petitioner was not justified in such an assumption. No investigation of Mrs. Fuller’s financial standing was made other than that of her property holdings. Neither Mrs. Fuller nor her attorneys refused to repay the purchase money, and, as a matter of fact, the evidence discloses that Mrs. Fuller was anxious to settle the matter. She was ill in December, 1920, and the petitioner’s officer who visited Uniontown at that time was unable to see her, but in February, 1921, at the time of his first talk with her she gave Robert Bair, the above-mentioned officer, a check for $10,749.94 and the matter was closed.

In view of the fact that the petitioner was unjustified in assuming that Mrs. Fuller would not or could not repay the purchase money, and of the further fact that the petitioner during 1920 negotiated relative to the repayment of the money, which negotiations resulted in the repayment thereof early in 1921, we think that it is conclusively established that the loss claimed was not real and consequently an actual loss was not sustained in 1920.

We, therefore, approve the respondent’s action in regard thereto.

Judgment will be entered for the resfondent.

Considered by Trtjshell, Littleton, and Smith.


author: Love :

text:
    Estate of David W. Crews, Frank H. Crews, Samuel T. Crews et al., Heirs at Law and Next of Kin, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9010.
    Promulgated October 22, 1927.
    The value of property transferred by the decedent prior to the passage of the Revenue Act of 1918, may not be included in the gross estate under the provisions of section 402 (c) of that Act merely because the conveyance was intended to take effect in possession or enjoyment at or after his death.

      L. L. Hamby, Esq., for the petitioners.

      R. E. Gopes, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in respect of estate tax in the amount of $2,337.32, arising from the inclusion in the decedent’s gross estate, under the provisions of section 402 (c) of the Revenue Act of 1918, of the value of certain real estate of which he made transfers under the conditions described below.
    FINDINGS OE FACT.
    David W. Crews, a resident of Texas, died October 13, 1921. Ry deeds of conveyance, in which his wife joined, dated April 13, 1912, the decedent transferred his Texas lands as follows: 1,043.91 acres in two tracts of 225.91 and 818 acres, respectively, to his son, Frank H. Crews; 344.6 acres to his son, Paul L. Crews; 328.5 acres to his daughter, Annie M. Syler; 1,806.16 acres in two tracts of 225.91 and and 1,580.25 acres, respectively, to his son, Samuel T. Crews; and 1,223.8 acres to his son, S. E. Crews, as trustee, for the donor’s grandchildren, David, Annie, William, and Minnie Haile.
    In each of the deeds it was provided that it should have the effect of immediately vesting the title to the said land in the respective grantee and that it should be operative and effective from the dates thereof, but in each deed there was reserved, during the lifetime of the decedent, David W. Crews, the use, possession and control of the land and the rents and profits accruing therefrom; and in each deed the grantor agreed in consideration of the reservation of the rents and profits to pay all taxes accruing against the land during his lifetime.
    Thereafter, during the latter part of the year 1914, the decedent, by parole, relinquished to his son, Frank H. Crews, any right that he had reserved in the control and possession of the income and profits from the 225.91-acre tract and in the latter part of the year 1917 he made a similar relinquishment as to the 818-acre tract which had been deeded to the same son.
    In the fall of 1914 the decedent made a similar relinquishment of any right he had reserved in the deeds to his son, Paul L. Crews, and his daughter, Annie M. Syler. During the latter part of the year 1914, decedent made a similar relinquishment of ail reservations contained in the deed to the 225.91-acre tract conveyed to his son. Samuel T. Crews, and as to 400 acres of the 1,5801,4-acre tract which had been conveyed to this son. During the year 1918 the decedent made a similar relinquishment of any reservation contained in the deed to this son as to the remaining part of the 1,5801,4-acre tract.
    Subsequent to the relinquishments above set out, the children entered into possession of and made valuable improvements on the lands theretofore deeded to them respectively, paid all of the taxes and received all of the income from the property during the lifetime of the decedent.
    The Commissioner in determining the deficiency under the provisions of section 402 (c) of the Revenue Act of 1918, included the transferred lands in the gross estate as gifts intended to take effect in possession or enjoyment at or after the decedent’s death.
   OPINION.

Love :

The issue presented by this proceeding is whether the Commissioner erred in including in the gross estate of David W. Crews, the value at the time of his death of the land transferred by him on April 13,1912, to his sons, Frank H., Paul L., and Samuel T. Crews; his daughter Annie M. Syler, and his son, S. E. Crews, a trustee for his grandchildren, in all of which land the decedent reserved a life estate.

Petitioners contend that since the transfers of the land involved herein were made before the passage of the Revenue Act of 1918, that Act, so far as it requires the inclusion in the decedent’s gross estate of the land so transferred, contravenes the Constitution.

It is further contended by the petitioners that the land transferred does not constitute a part of the gross estate for the reason that the decedent had, prior to his death and prior to the passage of the Revenue Act of 1918, verbally relinquished his life estates in the transferred properties to the respective donees. With respect to this contention, the Commissioner takes the position that the alleged verbal relinquishments of the life estates were not valid transfers of those estates under the law of Texas.

The issue presented herein is concluded by the decision of the United States Supreme Court in the case of Nichols v. Coolidge, 274 U. S. 531, wherein it was stated:

This court has recognized that a statute purporting to tax may be so' arbitrary and capricious as to amount to confiscation and offend the Fifth Amendment. Brushaber v. Union Pacific R. R., 240 U. S. 1, 24; Barclay & Co. v. Edwards, 267 U. S. 442, 450; see also Knowlton v. Moore, 178 U. S. 41, 77. And we must conclude that section 402 (c) of the statute here under consideration, in so far as it requires that there shall be included in the gross estate the value of property transferred by the decedent prior to its passage merely because the conveyance was intended to take effect in possession or enjoyment at or after his death, is arbitrary, capricious and amounts to confiscation.

It is unnecessary, therefore, to discuss petitioner’s contention as to the verbal relinquishments of the life estate.

Judgment will be entered for the petitioners.

Considered by Tkussell, Littleton, and Smith.


author: Lansdon:

text:
    Gilbert W. Lee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 1408.
    Promulgated October 22, 1927.

      H. A. Mihills, G. P. A., for the petitioner.

      John D. Foley, Esq., for the respondent.
   Lansdon:

This proceeding came on for hearing and was heard upon the merits on October 21, 1926, upon petitioner’s claim that the Commissioner erred in computing the profit upon the sale of real estate in 1916 on the installment sales basis and in allocating a loss on stock of the bankrupt Lozier Motor Car Co. to a year prior to 1917.

As set forth in the Board’s findings of fact and opinion promulgated February 18, 1927 (6 B. T. A. 135), the Commissioner determined deficiencies of $9,817.20 for 1918 and $4,973.91 for 1920, and overassessments of $157.31 for 1917 and $22,280.65 for 1919. In its decision promulgated February 18, 1927, the Board after finding of facts with reference to the Lozier Motor Car Co. in connection with the alleged stock loss made no decision in respect thereof but held that the Board was without jurisdiction to make a determination for 1917 and 1919 since the Commissioner had determined overassess-ments for those years. No error was assigned by the petitioner as to the year 1919.

Subsequent to the promulgation of the Board’s decision, herein-before referred to, counsel for petitioner filed a motion asking that the Board reconsider its decision with reference to the question of jurisdiction to make a redetermination for the year 1917. This motion came on for hearing and was heard, and it appears that the overassessment of $157.31 determined by the Commissioner for 1917 was the result of an assessment of a deficiency and a subsequent denial in part in the deficiency notice of a claim for abatement filed by the taxpayer and that by reason of this action the Board has jurisdiction to make a determination in respect of the year 1917.

The first and last paragraphs of the Board’s opinion promulgated February 18, 1927, were therefore in error in stating that the Board was without jurisdiction to make a determination in respect of the year 1917.

From a consideration of the evidence submitted in the case, the Board is of the opinion that whatever loss the petitioner sustained as a result of his investment in the stock of the Lozier Motor Car Co. was sustained not later than February 4, 1915, when all of the assets of the company were sold for less than one-third of an amount sufficient to pay the proven claims of indebtedness against the company. We think that after February 4, 1915, the petitioner had no reason to expect that he would receive anything whatever on account of the dissolution of the company.

The conclusion which we have reached with reference to the claimed loss in the year 1917 results in no change in the decision reached by the Board in its decision promulgated February 18, 1927, and the order of redetermination will be entered on 10 days’ notice, under Rule 50, as directed.

Considered by Thussell, Smith, Littleton, and Love.


author: MoRRis:

text:
    Enterprise Cigar Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8192.
    Promulgated October 24, 1927.
    The Board does not have jurisdiction to determine whether a credit is barred by the statute. Appeal of DioJcerman & EngUs, Inc., 5 B. T. A. 633.

      E. Walter Beebe, Esq., for the petitioner.

      D. D. Shepard, Esq., for the respondent.
    The petitioner brings this proceeding for a redetermination of deficiencies in income and profits taxes amounting to $1,717.92' for 1920 and $211.49 for 1921. The error alleged is that in determining the petitioner’s income and excess-profits tax for the year 1920 the respondent has not given the petitioner credit either for the loss which it sustained in 1919, nor given credit for the amount of taxes which it paid on its 1918 income.
    FINDINGS OE FACT.
    The petitioner is a New Jersey corporation with its principal office at Newark.
    For the year 1919 the petitioner reported a net loss on its return of $11,981.86 which the Commissioner increased to $16,868.05. This net loss was first applied against the petitioner’s corrected net income for 1918 of $12,001.49, which income had been increased from $11,508.89 by the disallowance of donations of $497.60. The balance of the net loss for 1919 of $4,866.56 was applied against the corrected net income for the year 1920 of $52,872.52, leaving an adjusted net income for the year 1920 of $48,005.96.
    In January, 1925 the petitioner filed a waiver as follows:
    JANUARY, 1925.
    Income and Profits Tax Waiver.
    (For taxable years ended prior to March 1, 1921.)
    In pursuance of the provisions of existing Internal Revenue Laws Enterprise Cigar Company, a taxpayer organized under the laws of State of New Jersey, and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the year(s) 1919, 1920 and 1921 under existing revenue acts, or under prior revenue acts. This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1925, and shall then expire except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board.
    Enterprise Cigar Co.,

      Taxpayer.

    By Jacob Mazer, Pres.

    D. H. Blair,

      Commissioner.

    The instrument was received by the agent in charge at Trenton, N. J., January 26,1925.
    The petitioner further filed with the Commissioner a purported claim for credit or refund, although not filed on Form 843. This claim was entitled “Affidavit and Memorandum ” and was sworn to by an officer of the petitioner on March 27, 1925, and was filed with the Treasury Department on or before March 31, 1925. The purpose of the document, as therein stated, is to take “an appeal pursuant to provisions of section 250 (d) of the Revenue Act of 1921 and all prior and subsequent acts relating thereto and from the tax of $1,928.16.”
    The Commissioner refused to apply any credit for taxes paid upon the income of 1918 against the taxes for the year 1920 on the ground that such credit was barred by the statute of limitations.
   OPINION.

MoRRis:

As no evidence was introduced as to the correctness of the deficiency for the year 1921, the respondent’s determination for that year is approved.

The petitioner claims a credit against the 1920 income of the $12,001.49 which the Commissioner allocated against the 1918 income, or in the alternative a credit of $1,140.47, which appears to be the taxes paid on 1918 income, against the additional tax assessed for 1920. Its claim is based on sections 204 (b), 250 (b), and 252 of the Revenue Act of 1918, and the reasoning thereunder is as follows: That the loss sustained in 1919 created the credit, that the credit could not be determined until the 1919 return was filed, that such credit was applicable to the 1920 tax, that the statutory period expired on such credit five years after the 1919 return was due unless before the expiration of such period a claim therefor was filed by the taxpayer, and that the petitioner made a claim for this credit within five years from the time the 1919 return was filed.

As the Commissioner has asserted a deficiency against the petitioner for the year 1920 there can be no question of our jurisdiction over that year. Section 204 (b) of the Revenue Act of 1918 provides that if the net loss for 1919 is in excess of the net income for the preceding taxable year the amount of such excess shall be allowed as a deduction in computing the net income for the succeeding taxable year. The excess of the net loss in the instant case over the 1918 net income is $4,866.56, which is the only amount, therefore, which may be allowed as a deduction from the net income of 1920. This amount has been allowed in the Commissioner’s computation of the petitioner’s 1920 net income, and there is no statutory authority for the allowance of the additional amount now claimed by the petitioner.

Whether the statutory period on the crediting of taxes paid on 1918 income starts to run from the date the 1919 return was due under the facts in this proceeding or whether the purported claim filed by the petitioner in March, 1925, is a valid claim are questions which, under our previous decisions, it is unnecessary to decide. In the Appeal of Dickerman & Englis, Inc., 5 B. T. A. 633, we said, p. 635, “After a careful examination, we can find no expression of any intention that the Board shall determine whether an overpayment is to be credited or refunded or that credit or refund is barred by the statute.” See also Lester H. Cranston, et al., Executors, v. Commissioner, 5 B. T. A. 993; Wallace State Bank v. Commissioner, 6 B. T. A. 709. In our opinion the above decisions are controlling of the petitioner’s alternative proposition that the taxes paid on 1918 income should be applied against the additional tax for 1920.

Judgment will be entered for the respondent.

Considered by Trammell, Murdock, and SiefkiN.