author: Van Fossan:

text:
    Harold F. Seymour, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 52349.
    Promulgated December 21, 1932.

      W. H. Annat, Esq., for the petitioner.

      Dean Kimball, Esq., and E. G. Adams, Esq., for the respondent.
   opinion.

Van Fossan:

This proceeding was brought to redetermine deficiencies in the income tax of the petitioner for the years 1927 and 1928 in the amounts of $647.90 and $1,058.45, respectively.

The petitioner alleges that the respondent erred in disallowing deductions for losses sustained by the petitioner on two sales each of 500 shares of the common stock of the Columbian Hardware Company made on December 30, 1927, and December 27, 1928, respectively.

In 1927 the petitioner was president and owner of 2,800 shares of the common stock of the Columbian Hardware Company out of an outstanding issue of 5,000 shares. On December 30, 1927, the petitioner purported to make a sale of 500 shares of such stock for $50, less brokerage fee, to A. F. Munhall, treasurer of a company of which the petitioner was vice president. The petitioner and Munhall, occupying offices in close proximity to each other, came into daily contact and regularly discussed business matters with each other. Munhall had known the petitioner for twelve years and was familiar with the books of the Columbian Hardware Company. He took the petitioner’s acknowledgment to his income tax returns for the years 1927 and 1928. On April 6, 1928, the petitioner repurchased the same 500 shares of stock from Munhall for $50.

On December 27, 1928, the petitioner again purported to make a sale of 500 shares of stock of the Columbian Hardware Company to A. F. Munhall for $50 and repurchased the same 500 shares in April, 1929, at the same price. In both transactions where petitioner transferred the stock to Munhall the parties negotiated the deals between themselves and then, at the suggestion of petitioner, put the matter through a broker’s office. Petitioner testified that since the sale was for tax purposes, he thought “ it was a better transaction if it was a matter of record with the broker.” The retransfers from Munhall were not put through a broker’s office.

Both purported sales were for the accommodation of the petitioner and were admittedly made for the purpose of establishing tax losses. In each year the sale of 500 shares of stock was calculated to be sufficient to wipe out his income for such year. No other transactions involving stock of the Columbian Hardware Company were negotiated by the petitioner or Munhall during the years 1927, 1928 and 1929. As to the 1927 transaction, Munhall testified that he did not particularly want the stock, but took it as a gamble. He further testified that the stock was not a good investment. In April, 1928, Munhall asked the petitioner to repurchase the stock. In April, 1929, he was asked by the petitioner to resell it. He stated that he did not care whether he held it or sold it.

No evidence was presented as to the value of the assets of the Columbian Hardware Company, but the balance sheet of the company for December 31, 1927, showed a deficit of $164,092.94 plus a personal indebtedness due petitioner of $141,870. The condition of (he company became worse in 1928 and on February 28, 1929, the deficiency amounted to $183,260.99 plus the same amount of personal indebtedness.

The case at bar involves the sole question of the bona tides of the stock transactions above set forth. The facts show clearly that the petitioner and Munhall were close business associates and that Mnn-hall occupied a position rather subordinate to that of the petitioner. The alleged sales in both years were made for the admitted purpose of extinguishing the petitioner’s income tax liability for those years. The consideration in each of the four transactions, the sales of December 30, 1927, and December 27, 1928, and the resales of April 6, 1928, and April, 1929, was identical — $50. Under such circumstances we must scrutinize with special care the conditions surrounding the ostensible sale of stock. James S. McCandless, 5 B. T. A. 1; J. R. Young, 6 B. T. A. 656; Albert W. Finlay, 17 B. T. A. 828; Mrs. Niels (Mellie) Esperson, Executrix, 13 B. T. A. 596.

In Harold B. Clark, 2 B. T. A. 555, we stated:

The payment of a price and the delivery of certificates do not constitute the sole requisite of a valid sale. The parties must mate a bona fide transfer as persons dealing at arm’s length would do — the seller for the purpose of absolutely getting rid of the stock and the buyer for the purpose of absolutely acquiring it as his own without any condition covering its later return to the seller. Receiving a credit for the price and the mere indicia of ownership, without the mutual element of intent on both sides to complete an absolute sale, can not constitute a basis for a deduction for loss under the provisions of the tax law. A loss to be deductible must be a reality.

Though the Board has approved deductions for losses where the evidence was not decidedly more favorable to petitioner than that surrounding the first purported sale, we can recall no case in which approval has been given where the same parties went through almost the identical process in the next year. To approve a single instance requires the resolving of many doubts in favor of the petitioner, but to permit af recurrence of the same procedure in the next year under the circumstances here present overtaxes our credulity. Despite the statements of the parties to the transactions that they were outright sales, we are not convinced that such sales were free and genuine. In our judgment they were lacking in bona fides.

If the transaction of 1927-1928 stood alone the deduction might conceivably have been allowed, but the repetition thereof for the years 1928-1929 in precise parallelism goes beyond mere coincidence. It casts such doubt on the good faith of petitioner in both years as to make it impossible for us to approve the purported sales. The evidence and the inferences reasonably to be drawn therefrom lean too strongly against petitioner to permit us to approve the deductions.

Reviewed by the Board.

Decision will be entered for the respondent.


source: Caselaw Access Project

author: Smith:

license: Public Domain

text:
    Russell-Miller Milling Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 59998.
    Promulgated December 21, 1932.

      Ben Jenkins, Esq., and Earle W. Wallick, Esq., for the petitioner.

      E. L. Gorbin, Esq., for the respondent.
   opinion.

Smith:

This proceeding involves a deficiency in petitioner’s income tax for the fiscal year ended August 31, 1929, in the amount of $5,110.65. The only question at issue is whether the petitioner is entitled to a credit against its tax liability for the taxable year 1929 of $582.60, representing income taxes paid to the British Government in that year on income of the prior years 1925, 1926, and 1927. The respondent has disallowed the credit for the petitioner’s taxable year ended August 31, 1929, for the stated reason that since the petitioner kept its books and accounts on the accrual basis the credits for the foreign taxes must be taken on the accrual basis and not in the year of payment. The material facts are stipulated, as follows:

1. The Russell Miller Milling Company is a corporation organized under the laws of the State of North Dakota, with its principal office in Minneapolis, Minnesota, is engaged in the milling of wheat flour, and was so engaged in the years 1925, 1926, and 1927.
2. Petitioner’s books of account were kept on the accrual method,, of accounting during the years herein mentioned, and on the basis of a fiscal year ending August 31, for each year, and its federal income tax returns were likewise prepared and filed on the accrual basis, for fiscal years ending August 31 in each case, and were approved by the Commissioner of Internal Revenue in these particulars.
3. During its fiscal year ending August 31, 1927, petitioner was called upon by the Department of Inland Revenue for Great Britain, to make its return of Income Taxes payable to Great Britain for the years 1925-26, and 1926-27. The Department of Inland Revenue aforesaid demanded audited accounts showing the profit or loss upon such sales; and, upon being advised that petitioner was unable to supply such accounts, sent assessments as follows:
1925/26_ £40
1926/27_ 200
1927/28_ 40
Total_ 280
4. Petitioner denied any liability for such taxes, on the grounds, first, that petitioner was not trading in Great Britain, and was not subject to tax upon profits from sales made in that country and, second, that even tho it was held that petitioner was trading in Great Britain, no profit had been earned upon sales made there.
5. In October, 1928, petitioner was advised by its London Agent that if said petitioner would admit its liability the Department of Inland Revenue might be willing to modify the above assessments to the following amounts.
1925/26_ £20
1926/27_ 100
1927/28_ None
Total_ £120
On October 30, 1928, petitioner authorized its London Agent to settle on this basis, and on November 20, 1928, cabled £120, in payment of the amount agreed upon, the rate of exchange paid for this amount being $4.855, making a total payment of $582.60.
6. During its fiscal years ending August 31, 1926, 1927, and 1928, petitioner did not accrue or enter upon its books of account any amount for such Income Taxes payable to Great Britain, and made no claim in its Federal Income Tax Returns for said fiscal years, for a deduction for such taxes, or for credit for Taxes Paid or Accrued to a Foreign Country.
7. To its income tax return for its fiscal year ended August 31, 1929, petitioner attached Form 1118, claiming credit of $582.60 for Taxes paid to a Foreign Country, which claim for credit has now been denied and disallowed by the Commissioner.

Section 131 of tlie 1928 Act provides with respect to credits for foreign taxes, in part as follows:

SEC. 131. TAXES 0E FOREIGN COUNTRIES AND POSSESSIONS OF UNITED STATES.
(a) AllMownce of credit. — The tax imposed by this title shall be credited with:
(1) Citizen and domestic corporation. — In the case of a citizen of the United States and of a domestic corporation, the amount of any income, war-profits, and excess-profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States; and
# * * * * * *
(e) Adjustments on payment of accrued taxes.- — If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the Commissioner, who shall redetermine the amount of the tax for the year or years affected, and the amount of tax due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the collector, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer in accordance with the provisions of section 322. In the case of such a tax accrued but not paid, the Commissioner as a condition precedent to the allowance of this credit may require the taxpayer to give a bond with sureties satisfactory to and to be approved by the Commissioner in such sum as the Commissioner may require, conditioned upon the payment by the taxpayer of any amount of tax found due upon any such redetermination; and the bond, herein prescribed shall contain such further conditions as the Commissioner may require.
(d) Year in winch, credit taken. — The credits provided for in this section may, at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year in which the taxes of the foreign country or the possession of the United States accrued, subject, however, to the conditions prescribed in subsection (c) of this section. If the taxpayer elects to take such credits in the year in which the taxes of the foreign country or the possession of the United States accrued, the credits for all subsequent years shall be taken upon the same basis.

Section 43 of the Act provides:

SEC. 43. EERIOD FOR WHICH DEDUCTIONS AND CREDITS TAKEN.
The deductions and credits provided for in this title shall be taken for the taxable year in which “ paid or accrued ” or “ paid or incurred ”, dependent-upon the! method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income the deductions or credits should be taken as of a different period.

See also the corresponding sections 238 and 200 (d) of the 1926 Act.

A taxpayer keeping its books and reporting its income upon the accrual basis is required to report in each year all items of income or expenses properly accruable in that year; otherwise, the taxpayer’s true income will not be reflected by such bookkeeping method. See United States v. Anderson, 269 U. S. 422; Aluminum Castings Co. v. Routzan, 282 U. S. 92; Continental Tie & Lumber Co. v. United States, 286 U. S. 290; Ernest M. Bull, Executor, 7 B. T. A. 993; Columbian Carbon Co., 25 B. T. A. 456; Permanent Homes Land Co., 27 B. T. A. 142. This doctrine of accruals is applicable also in determining the year in which the statutory credits for foreign taxes may be taken. See Mead Cycle Co., 10 B. T. A. 887; W. J. Burns, 12 B. T. A. 1209; Columbian Carbon Co., supra. See also section 43 of the 1928 Act, quoted above.

With the exception provided for in section 131 (d) above, a taxpayer is required to apply the credit for foreign taxes allowed under section 131 of the act, either in the year when “ paid,” if reporting its income upon the cash receipts and disbursements basis, or in the year when “ accrued,” if reporting on the accrual basis. The exception mentioned in section 131 (d) permits a taxpayer at his option to accrue the credit prior to the year of actual payment, even if reporting on a cash basis, but does not authorize a taxpayer reporting on the accrual basis, as was the petitioner, to postpone taking the credit until the foreign taxes are actually paid in a subsequent year. We can not extend the scope of the statute by implication.

The petitioner contends, however, that, as a matter of correct accounting under its accrual method, the taxes paid to the British Government in its taxable year ended August 31, 1929, were not accruable expense items of the prior years for which they were levied, because the petitioner did not admit its liability for any part of the taxes in the prior years. We do not know upon what grounds the taxpayer, in the prior years, denied its liability for the taxes, whether with good reason or otherwise. The facts demonstrate that the petitioner in 1929 admitted its liability, still for reasons not shown, and in a compromise agreement the amount of the tax originally proposed was reduced slightly more- than half.

We can not suppose, however, that the petitioner’s liability for the taxes was in any sense contingent upon its own recognition of the claim of the British Government or that the liability was any less fixed and certain because of the petitioner’s failure to admit it. In United States v. Anderson, supra, the Supreme Court said:

Only a word need be said with reference to the. contention that the tax upon munitions manufactured and sold in 1916 did not accrue until 1917. In a technical legal sense it may be argued that a tax does not accrue until it has been assessed and becomes due; but it is also true that in advance of the assessment of a tax all the events may occur which fix the amount of the tax and determine the liability of the taxpayer to pay it. In this respect, for purposes of accounting and of ascertaining true income for a given accounting period, the munitions tax here in question did not stand on any different footing than other accrued expenses appearing on appellee’s books. * * *

The agreed facts in evidence do not show just when the taxes in question became due and payable or when they were assessed by the British Government, but, of whatever materiality this may be, it appears that these events took place prior to the taxable year ended August 31, 1929. Certainly, all of the events had occurred which fixed the amount of the tax due to the British Government and determined the liability of the taxpayer to pay it.

We are of the opinion that the credits for the taxes in question were accruable in the prior years and may not be taken when actually paid in the taxable year ended August 31, 1929.

Reviewed by the Board.

Judgment will he entered for the respondent.


author: Leech :

text:
    John C. Hermann, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 51959.
    Promulgated December 21, 1932.

      John 0. Hermann, Esq., pro se.

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

Leech :

Section 23 of the Revenue Act of 1928 allows as a deduction in computing net income: “All interest paid or accrued within the taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities * * * the interest upon which is wholly exempt from taxation under this title.”

It is respondent’s contention that petitioner, on a cash basis and indebted for borrowed money and accrued interest, having in the taxable year borrowed a larger sum from his creditor and with part of it paid off the first loan and interest, has in fact not paid interest, but merely increased his loan, and is not entitled to credit for the interest satisfied.

The question raised appears to be original. We have found no decision of the courts or the Board directly in point. Respondent insists that the correctness of his theory is demonstrated by application of the rule laid down in certain cases involving claimed deductions for losses sustained by one on a cash basis. He cites A. F. Osterloh, 13 B. T. A. 713; affd., 37 Fed. (2d) 277, where the taxpayer lost certain borrowed stock in the taxable year and was under obligation to pay the owner its full value, it being held that, not having paid his obligation, he had not sustained a deductible loss. He also calls attention to the line of cases holding that an endorser of a note is not entitled, when on a cash basis, to credit for a loss when the maker becomes insolvent in the tax year, where payment under the endorsement was not made in such year. O. D. Haskett Lumber Co., 19 B. T. A. 714; J. P. Badenhausen, 7 B. T. A. 910. Respondent further relies upon Eckert v. Burnet, 283 U. S. 140, affirming 42 Fed. (2d) 158, and 17 B. T. A. 263, holding that one liable on a note, the payment of which would constitute a deductible loss, is not entitled to such credit, when on a cash basis, where in the taxable year he merely satisfies the old obligation by giving a new note.

In our opinion, the cited cases are not in point. They hold, only that where credit is allowed to one on a cash basis for a loss sustained, it must be actually sustained and not merely postponed. The present question is not one of loss, but of credit claimed for interest paid.

Although taxation is highly practical and has regard for substance rather than form, Tyler v. United States, 281 U. S. 497; Weiss v. Stearn, 265 U. S. 242, it is sometimes difficult to recognize the effective difference between these vague alternatives. Cf. Commissioner v. Sansome, 60 Fed. (2d) 931. However, assuming the existence of such difference here, certainly, in form, this transaction evidenced the payment of the original loan and interest thereon, since it is uncon-tradicted that the original note or loan certificate was returned to petitioner marked paid in full with interest as of the date of the new loan. Clarendon County v. Curtis, 46 Fed. (2d) 888. In re Dixon, 13 Fed. 109. The forms or steps adopted and thereafter executed to carry out the disputed transaction were legal and effect must be given to them individually. E. H. Nielsen Co., 26 B. T. A. 223; Evelyn F. Gregory, 27 B. T. A. 223.

Nor does the substance of what here occurred seem other than a deductible payment of interest. We can see no real difference, where credit under section 23 is concerned, in a taxpayer’s payment of interest with money borrowed or cash already on hand and representing accumulated earnings. We have consistently held that the borrowing of money with which to pay deductible business expenses does not postpone credit for the payment to the year of repayment of the loan. Ida Wolff Schick, 22 B. T. A. 1067; Robert B. Keenan. 20 B. T. A. 498. The fact that the full amount of the second loan was not handed to this petitioner in cash and the sum necessary to cover the first loan and interest handed back is of no importance. It was applied in satisfaction of petitioner’s indebtedness and so was constructively received and disbursed by him. United States v. Boston & Maine R. R. Co., 279 U. S. 732; Henry D. Muller. 16 B. T. A. 1015; Mrs. Frank Andrews, 26 B. T. A. 642. Nor do we think the fact that both loans were from the same party is material. There is no difference in the case of one who is indebted to his bank for principal and interest and negotiates with the bank for a new and larger loan and pays with the proceeds of the second loan the interest on the first, and a case where the second loan was negotiated with a different bank. Nor can we differentiate the legal effect, under the first example given, where the bank deducts from the proceeds of the second loan an amount necessary to cover interest and principal on the first loan or credits the f J1 amount to the borrower’s deposit account and charges against that account the first note and interest, or, alternatively, pays the full amount to him in cash and receives back cash sufficient to satisfy the first obligation. In all of these cases the same thing in fact .is done. The taxpayer has paid a debt and accrued interest with borrowed cash. Actual payment of interest on an indebtedness by the taxpayer within the taxable year meets the requirements of the statute. Where the taxpayer obtained the money to make the payment is not material. In the cases cited involving claimed deductions for loss, no credit was allowed, as no loss was actually sustained, because the satisfaction of the first liability merely created a similar one to take its place, but, in the present case, the interest in question was actually satisfied. At the time the second loan was negotiated petitioner was indebted for interest on borrowed money. Upon the second transaction being completed, he had no such liability. The situation is not similar to that presented in Utah Orpheum Co., 3 B. T. A. 1041, where the payment of an existing debt not created by a loan was merely deferred by the giving of a promissory note. In the instant case the note was the basis of a new loan, and the prior note and interest were satisfied from the proceeds.

Respondent admits that petitioner, on a cash basis, is entitled to have his net income determined on the basis of the amount actually or constructively received and disbursed by him during the taxable year. Had petitioner maintained a formal set of books on the cash basis it would have been perfectly proper in our opinion to record the transaction detailed in the findings by debiting cash with the full amount of the second loan obtained and crediting cash with the $2,250.66 of interest paid.

Respondent’s theory, if accepted, would preclude the allowance of credit against gross income to one on a cash basis of interest paid except in cases where payment was made from cash surplus, and we can see no intent on the part of Congress in the enactment of section 23 of the Revenue Act of 1928 so to limit the deduction allowed.

We hold that petitioner is entitled, in determining his net income for the year in question, to deduct $2,250.66 representing that portion of the loan obtained by him in that year which was applied in satisfying his interest obligations.

Jiulgment will he entered under Bule 50.


author: Teammell :

text:
    Abe Ackerman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43295.
    Promulgated December 22, 1932.

      Paul E. Bhorb, Esq., and George B. Buist, O. P. A., for the petitioner.

      Dean P. Kimball, Esq., for the respondent.
   OPINION.

Teammell :

The petitioner contends, first, that in determining the deficiencies for both taxable years here involved, the respondent erred in refusing to grant the petitioner’s request for a consolidation of the accounts of the partnership and of the corporation pursuant to the provisions of section 240 (d) and 240 (f) of the Revenue Acts of 1924 and 1926. These statutes are identical in form, and read as follows:

In any case of two or more related trades or businesses (whether unincorporated or incorporated and whether organized in the United States or not) owned or controlled directly or indirectly by the same interests, the Commissioner may and at the request of the taxpayer shall, if necessary in order to make an accurate distribution or apportionment of gains, profits, income, deductions, or capital between or among such related trades or businesses, consolidate the accounts of such related trades or businesses.

The petitioner urges that if the accounts of the two businesses in question were consolidated for the taxable years, the transfer of assets from the partnership to the corporation in 1924 would be eliminated as an intercompany transaction, resulting in no taxable gain to the partnership and no deficiency on that account in petitioner’s tax for that year; and that likewise there would be no deficiency in petitioner’s tax for 1925 if the accounts were consolidated, because, it is argued, in such event the gain determined by the respondent as derived by the partnership from the sale of the corporation’s stock would be eliminated as a nontaxable capital transaction.

Without deciding the correctness of the petitioner’s arguments respecting the results which would flow from a consolidation of accounts, it is sufficient to point out that he has failed in the matter of proof on two essential points to bring his case within the statutes relied upon. The evidence adduced by the petitioner shows only that the corporation furnished office space rent-free to the petitioner, and also supplied heat, light, clerical, legal and other services to the partnership without charge, but no attempt was made to show the reasonable value of such services rendered in the taxable years— whether merely of nominal or material amount — and no proof offered to show the necessity otherwise for consolidation of the accounts “ in order to make an accurate distribution or apportionment ” of the income and expenses of the alleged related businesses.

ISTo reason is assigned or proof offered to show that any portion of the taxable income determined by the respondent should be distributed or apportioned to the corporation, and, since the evidence before us relating to expenses affords no basis for a distribution or apportionment of those items, the respondent’s action in refusing the petitioner’s request for a consolidation of the accounts will not be disturbed. Roessler Hasslacher Chemical Co., 25 B. T. A. 915; Western Hide & Fur Co., 26 B. T. A. 354. This being the only error alleged in respect to the year 1925, the deficiency determined by the respondent for that year is approved.

It is not necessary for us to decide whether, if the accounts were consolidated, it would result in the elimination of taxable gain as distinguished from “ an accurate distribution or apportionment of gains, profits, income, deductions, or capital between or among such related trades or businesses.”

The transaction whereby the assets of the partnership were transferred to the corporation took the form of a sale of assets to the corporation. The minutes of the stockholders’ meeting and the minutes of the directors’ meeting referred to the sale of assets by the partnership and the purchase of assets by the corporation. The stipulation of facts states that the assets referred to in the minutes which were transferred by the partnership to the coi-poration in pursuance of a contract ratified in the minutes were transferred in pursuance of the contract.

The contention of the petitioner is that the form of the transaction should be disregarded and that the substance should be considered in determining the tax liability. The respondent contends that the terms of the written instrument, that is, the contract of sale, should not be disregarded and that the parties should be bound by their written instrument. Considering, for the sake of argument, that oral testimony might be considered to show what the actual transaction was, even to the extent of varying the terms of the written contract, see J. W. Solof, 1 B. T. A. 776, Rubay Co., 9 B. T. A. 133, James J. O'Toole, 12 B. T. A. 769, Stockyards Bank of Cincinnati, 25 B. T. A. 964, the facts in this case, based on oral testimony, do not indicate that the transaction was other than what it purported to be, that is, a sale by the partnership. The actions of the parties, on the other hand, affirmatively indicate that all parties to the transaction considered it a sale.

To the extent of $195,768.16, the purchase price was offset by indebtedness due by the partnership to the corporation and the balance of $127,947.34 was set up on the books of the corporation as an indebtedness to the partnership and was set up on the books of the partnership as an account receivable due from the corporation. After 1924 there were various debits and credits on the books of the corporation and the partnership. At one time, at the end of 1924, the indebtedness due from the corporation to the partnership was $57,162.95. This indebtedness was later increased and decreased in various amounts. On April 30,1926, the corporation was indebted to the partnership in the sum of $172,443.48. On May 1, 1927, the amount of the corporation indebtedness to the partnership at that time being $72,076.36, the petitioner received credit for one-third of that amount and at that time the amounts credited to the partners were donated by them to the surplus of the corporation.

Interest was allowed on the credit balance due by the corporation to the partnership.

From the foregoing facts, it may well be that the corporation actually paid the amount of $127,947.34 which was credited to the partnership by the corporation when the assets were transferred to the corporation at the end of 1924. In any event, the subsequent transactions indicate a recognition by both the corporation and the partnership of indebtedness for the assets acquired by the corporation. The partnership, which was on the accrual basis, treated the indebtedness as a valid account receivable. If the excess value of assets over the indebtedness of the partnership had been an actual contribution to surplus, there would have been no account to be used for subsequent credits and debits and no occasion to charge interest thereon. The question also arises as to why the partnership contributed to the surplus in 1927 the balance due by the corporation if the assets were contributed in 1924.

The petitioner contends, and one witness testified, that it was the intention of the partnership to contribute all of the above mentioned assets to the corporation. The fact is, however, that since consideration was undoubtedly paid in the form of offsetting liabilities, at least to the extent of the liabilities owing by the partnership to the corporation, there was a valid consideration and the transfer amounted to a sale.

As to the excess of the amount stated to be the purchase price of the assets over the amount of the indebtedness of the partnership as being paid-in surplus, the evidence indicates that there was but one transaction in so far as assets to the extent of the amount of $323,715.50 are concerned. These are the only assets over which there is controversy in this case.

Even looking through form to the substance of the transaction, it is difficult to see how the one single transaction could be divided into two factors, that is, one a sale of the assets to the extent of $195,768.16, and another a contribution of assets to the extent of the difference; that is, to the extent of $127,947.34, especially in view of the facts of this case. We think, however, that the testimony is inconsistent with this theory of the case. Aside from the written instruments, consisting of the contract, minutes of the directors’ meetings, and minutes of the stockholders’ meetings, which the stipulation of facts states were carried out, the evidence convinces us that there was a valid consideration for the assets in the form of an account receivable in addition to the satisfaction of the indebtedness due the partnership and that this account receivable was credited with various amounts.

We think, therefore, that there was a sale of assets from the partnership to the corporation giving rise to a taxable gain. The assets which were transferred to the corporation cost $236,310.42. Included in those assets, however, there were the Valencia Apartments which were transferred at a price of $72,584.72, which counsel for the petitioner concedes in his opening statement was at a price of $20,000 in excess of cost and which amount was credited to the partnership on the corporation’s books. This would leave the assets which were transferred at a value of $323,715.50 to be reduced by the amount of the cost of the Valencia Apartments, $52,584.72, and the cost should also be reduced by the amount of $1,050 representing assets which were transferred by the partnership and that amount credited to the partnership account.

The respondent has determined that the partnership received the sum of $387,135.22 for the assets transferred to the corporation and that the partnership realized a profit of $150,824.80 and that the petitioner herein received $50,274.93 thereof. The $387,135.22 valuation of assets includes the Valencia Apartments which were transferred as aforesaid in a separate transaction. From the admission of counsel that these apartments were transferred at a price of $20,000 in excess of cost, whether they are in a separate transaction or not is immaterial. Considering the transactions separately, this $20,000 profit is subject to tax and the cost of assets transferred should be reduced to the extent of the cost of these apartments, but if the transfer of the assets from the partnership to the corporation, including the Valencia Apartments earlier in the year, is considered as one transaction, then the cost of assets would be $236,310.42 and the $72,584.72 should be added to the selling price. For the purpose of computing taxable gain for the year 1924 the same result is reached on either theory.

There is some testimony in the record that the value of the assets transferred by the partnership to the corporation was considerably less than the figures at which they were transferred on the books. However, since it appears that the corporation received them at the agreed price representing book value, and from the evidence it appears that from the offsetting book entries, credits and debits, the assets were paid for, or were to be paid for, on the basis of book values, we do not feel inclined to disturb the determination of the Commissioner as to the selling price. The evidence discloses that the only thing which was contributed to the corporation by the partnership was the balance of $72,076.36 in May, 1927, and the partnership received gain before they made their contribution to the corporation. We do not agree with the taxpayer that all of the assets were contributed to the surplus of the corporation.

With respect to the year 1925, the partnership, according to the stipulation) sold stock of the Straus Brothers Company to J. Bich for $1,370 in excess of cost to it. The respondent has included one-third of this said amount in petitioner’s taxable income for 1925. We see no error in so doing. The petitioner contended that this was an intercompany capital transaction. There is no intercompany transaction involved in this proceeding.

Reviewed by the Board.

Judgment will be entered under Rule 50.


author: Maequette :

text:
    Farmers Life Insurance Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43317.
    Promulgated December 22, 1932.

      R. W. Golflesh, Esq., and Thomas Waiters, Jr., Esq., for the petitioner.

      John D. Foley, Esq., and James G. Maddox,; Esq., for the respondent.
   OPINION.

Maequette :

Five main questions are presented for decision by this proceeding. The first is whether petitioner’s guaranteed dividend fund, its survivorship fund, and its coupon fund constitute “ reserve funds required by law ” within the meaning of the Revenue Acts of 1924 and 1926. The provisions of those acts which are here pertinent are identical in wording and read as follows:

Sec. 245. (a) In the case of a life insurance company the term “ net income ” means the gross income less—
(2) An amount equal to the excess, if any, over the deduction specified in paragraph (1) of this subdivision, of 4 per centum of the mean of the reserve funds required by law and held at the beginning and end of the taxable year.

Petitioner concedes in argument that the term “ reserve funds required by law ” means a true insurance reserve based upon a life contingency and not assets held for the ordinary running expenses of the business. It is contended, however, that the guaranteed dividend fund meets the requirement of a true insurance reserve because the excess premium charged enabled the policyholder to participate in the fund if he survived for twenty years. Hence, petitioner says, there is a mortality element in the fund which distinguishes it from funds set aside for ordinary running expenses.

We can not agree with that contention. In Massachusetts Mutual Life Ins. Co. v. United States, 56 Fed. (2d) 897, the true insurance reserve is described thus:

* * * Under the level-premium, plan the insured pays during his early years a sum in excess of the cost of his insurance. The excess is devoted to the creation of a reserve fund which enables the insurance to be maintained in later years when the stipulated level premium would be insufficient to meet the current costs of insurance on the mutual-premium plan.
The table rate of premiums provided for in life insurance on the mutual level-premium plan is calculated, first, by adopting an accepted table of mortality showing the death rate for every age of life, and second, by adopting an assumed rate of interest, such as the company may safely expect to realize upon the investment of the amounts of such premiums for the duration of all of its policies. With these two factors, a calculation is made of the sum each insured must pay in advance so as to put the company in funds with which to pay all outstanding policies as they become claims, providing deaths occur exactly in accordance with the table of mortality, and also providing the rate of interest earned on the company’s invested funds is exactly the same as the rate assumed in calculating its premiums. The sum ascertained in this way is called the net or mathematical premium.
The calculation of the reserve is thus an actuarial function, and, being the amount theoretically necessary for reinsuring the risks, is sometimes called the reinsurance fund or reinsurance reserve. As applied to a policy, the term means value or valuation, but that part of the assets of the company, which, according to a specified table of mortality, with interest at the assumed rate, must be set apart to meet or mature the company’s obligation to the insured on his death or upon the surrender or cancellation of his policy.
As thus calculated, this reinsurance reserve is, we think, the reserve which has a technical and special meaning in the law of insurance and is the reserve required by law within the meaning of the Federal statutes in so far as the question here involved is concerned. None of the reserves here claimed is calculated upon the basis above set forth, and possess none of the characteristics of the legal reserve required by law, as above described. McCoach v. Insurance Co. of North America, 244 U. S. 585; Maryland Casualty Co. v. United States, 251 U. S. 342; United States v. Boston Insurance Co. 269 U. S. 197; New York Life Insurance Co. v. Edwards, 271 U. S. 109; and Minnesota Mutual Life Insurance Co. v. United States, 66 C. Cls. 481, certiorari denied 279 U. S. 856.

In Midland Mutual Life Ins. Co., 19 B. T. A. 765, we held that reserves for dividends left to accumulate at interest, and for premiums paid in advance, are not “ reserve funds required by law ” within the meaning of the revenue acts. See also Old Line Ins. Co., 13 B. T. A. 758.

Petitioner’s guaranteed dividend fund requires no actuarial computation to determine any liability of the company. Such liability is not affected by the probable mortality rates of the policyholders. Indeed, it is quite possible that all the policyholders of a class may die before the end of the twenty-year period necessary for participation in the fund, or all might allow their policies to lapse. In either event, under the terms of the contract, no liability would attach to the petitioner with respect to that class. The fund, to that extent, would become the property of the petitioner, apparently, for there is no provision for distributing it other than to surviving, persistent policyholders of the class. No liability attaches to petitioner with respect to the fund unless and until it is found that at the end of twenty years there are living policyholders who have kept their insurance policies in force. Otherwise, no enforceable interest in the fund can be acquired. Such a condition is very different from the petitioner’s liability upon an insurance policy, for the holder thereof acquires an enforceable interest upon the payment of the premiums and the only uncertainty is the exact time when the company will be called upon to make good its liability. We see no essential difference between the petitioner’s guaranteed dividend fund and the funds dealt with in the cases above cited.

The same reasoning applies with respect to petitioner’s surviv-orship fund, which was identical in plan of structure and conditions of distribution with the dividend fund. In our opinion, therefore, no deduction is allowable with respect to either fund for the years here in question.

With respect to petitioner’s coupon fund, we find that guaranteed premium reduction coupons which entitle the policyholder to a credit of a definite amount on a fixed future date are attached to policies of a certain kind. We have held that such coupons constitute an insurance obligation and that the reserves maintained on account thereof are “ reserves required by law ” within the meaning of the revenue statutes. Cf. Standard Life Ins. Co. of America, 18 B. T. A. 13; affd., 47 Fed. (2d) 218; Reserve Loan Life Ins. Co., 18 B. T. A. 359; Commissioner v. Western Union Life Ins. Co., 61 Fed. (2d) 207. Following those decisions, we hold that the amount of reserve petitioner is required to hold for payment of such coupons and interest is a reserve fund required by law for which deduction should be allowed under section 245 (a) (2) of the Bevenue Acts of 1924 and 1926.

The next question is whether $1,000 received by petitioner as a forfeit constitutes taxable income. The Bevenue Act of 1926, in section 244 (a), provides that the gross income of a life insurance company means the gross amount received in any taxable year from interest, dividends and rents. No other source of income is mentioned, and, therefore, all income from other sources is to be excluded in computing income tax of petitioner. The sum in question was paid to petitioner as consideration for an option to purchase a ranch. The option was not exercised and the amount of $1,000 paid was forfeited to petitioner. We think it is obvious that money so received is not to be classed either as dividends, interest, or rents. The amount is not taxable income, therefore, under the statute, and should be excluded from petitioner’s return of gross income.

The third question relates to the proper amount of deduction from petitioner’s gross income on account of investment expenses during the year 1925. The Bevenue Act of 1924, in section 245 (a) (5), provides that in the case of a life insurance company the term “net income ” means the gross income less: “ 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.”

Petitioner deducted $7,554.24 as investment expense and that was allowed by the respondent. It is now claimed that petitioner’s expenses amounted to several thousand dollars more than the amount deducted and that, therefore, such additional deduction should be allowed as will bring the total up to $8,811.88, which is one-fourth of 1 per cent of the mean of invested assets. The items making-up the additional expenses include postage, printing and stationery, telegraph and telephone charges, discounts on collections and home office traveling expenses. While the record does not clearly set forth the proportions of these expenses between petitioner’s investments and its underwriting, we are satisfied that they are attributable in part to each line of business activity. The statute does not require that any definite proportion of general expenses be assigned to investment expenses and we think the petitioner is fairly entitled to the additional deduction which is now sought. The additional expenses, as well as those for which deduction was taken in the first instance, were all actual expenses of the petitioner for the year 1925. We must now consider them as an entirety, not as separate groups. Some part of the general expenses were assigned to investment expense, which brings into operation the statute above cited. We are of opinion that in recomputing petitioner’s income tax: the full deduction of $8,811.88 should be allowed for investment expense.

The next question concerns deductions for depreciation on office furniture and fixtures and on an automobile. The Kevenue Acts of 1924 and 1926, in section 245 (a) (?), state that net income of a life insurance company means gross income less “ a reasonable allowance for the exhaustion, wear and tear of property, including a reasonable amount for obsolescence.” Petitioner contends that a reasonable rate of depreciation is 10 per cent for its furniture and fixtures and 83% per cent for its automobile, which was secondhand when purchased.

The record discloses that petitioner purchased office furniture and • fixtures during each of the years 1921 to 1926, inclusive. The amount of $1,290.60 was so expended in 1921 and a total of $1,692.29 during the succeeding five years. Whether the subsequent purchases were for additional equipment needed because of expanding business, or were to replace obsolete or worn out furniture, is not disclosed. The record does not indicate the amount of depreciation allowed by the respondent or the basis upon which it was computed. Petitioner’s assistant secretary was asked to state, from his experience in a life insurance office, the average life of the furniture and fixtures used about petitioner’s office. His answer was: “ Well, that of course is difficult to state, but I should say probably, as a general rule, ten years would be a maximum life.” Nothing further is offered by the record to aid us in determining what is a reasonable allowance for depreciation of the petitioner’s office equipment. The petitioner had the burden of showing what would be a reasonable rate for depreciation upon the office furniture. We think it has failed to sustain that burden and its claim for a 10 per cent deduction for depreciation should be denied.

Pespecting the secondhand automobile purchased in 1926, we have something more concrete to work upon. The car was used in petitioner’s business. The witness, himself the owner of a car, knew how petitioner’s automobile was used and placed its useful life at three years. That period, we think, is not unreasonable for a secondhand automobile and, therefore, a depreciation of 33ys per cent of the price of the car should be allowed for the year 1923.

The last question here presented is whether cash received as consideration for executing leases of oil bearing lands in Texas constitutes taxable income.

While it is a rule of property in Texas that an oil and gas lease such as we have now before us vests in the grantee a fee title in the minerals themselves, the Supreme Court has held that that rule can not vary the operation and intendment of section 208 of the Revenue Act of 1924. Burnet v. Hatrmel, 287 U. S. 103. That case involved oil ,and gas leases of land in Texas, and the court held that the Revenue Act neither says nor implies that the determination of gain from the sale or exchange of capital assets is to be controlled by state law. It was accordingly held that the capital gain rate might not be applied to either the bonus received upon execution of the leases or the usual royalties later received. That decision is controlling in the present case and applies to both taxable years, for section 208 of the Revenue Act of 1924 is reenacted without change in the Revenue Act of 1926. We hold, therefore, that the cash consideration of $3,000 and $30,000 received by petitioner for oil and gas leases in 1925 and 1926, respectively, constituted taxable income to it.

Reviewed by the Board.

Decision will be entered under Rule 50.


author: Artjndell :

text:
    First Bond and Mortgage Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 60116.
    Promulgated December 22, 1932.

      Charles C. Potter, C. P. A., for the petitioner.

      J. E. Yeatmam,, Esq., for the respondent.
   OPINION.

Artjndell :

The deficiency for redetermination in this proceeding relates to income tax in the amount of $755.78 for the fiscal year ended June 30, 1929. The single issue is whether all of the state taxes paid by the petitioner on real estate properties acquired in 1928 and in 1929 prior to June 30 through foreclosure proceedings are a part of the cost of the properties, or only so much thereof as applies to the period of the calendar year prior to acquisition.

From the stipulation of facts, which is incorporated herein by reference as our findings of fact, it appears that the petitioner, a Florida corporation engaged in the general bond and mortgage business, kept its books on the accrual basis.

During 1928 and in 1929 prior to June 30 the petitioner acquired numerous parcels of real estate through foreclosure proceedings resulting from defaults in payments by the mortgagors. It has been the practice of the petitioner to consider the state tax on such property applicable to the calendar year prior to acquisition as part of the cost of the property, and the portion applicable to the calendar year subsequent to acquisition as a deductible expense for income tax purposes. The respondent refused to prorate the taxes on that basis and held that all of the tax paid for the calendar year in which the property was acquired constituted a part of the cost of the property.

We have heretofore held that where real estate taxes accrue and become a lien against the property before a purchaser acquires ownership, and such taxes are subsequently paid by the new owner, the amount thereof constitutes a part of the cost of the property and may not be deducted as a tax of the purchaser. The theory back of the decisions is that the taxes are not the purchaser’s own taxes. Leamington Hotel Co., 26 B. T. A. 1004; Grand Hotel Co., 21 B. T. A. 890; John Hancock Mutual Life Ins. Co., 10 B. T. A. 736; H. H. Brown Co., 8 B. T. A. 112.

The parties are in agreement that Florida taxes on real estate are assessed against the record owner' on January 1 of each year and that such taxes are levied for the calendar year. The laws of Florida provide that all real property shall be subject to taxation on the first day of January each year; that owners of property are required to make a return therefor prior to the first of April of each calendar year; that personal property shall be “ responsible ” for taxes on real property; that assessments of taxes shall create a lien upon the property assessed superior to all others, from the first day of January of the year for which the property is liable for assessment; that all taxes assessed shall have the force and effect of a judgment and execution at law against the owner of the property; that personal property shall be construed to include all goods and chattels, moneys and effects, boats and vessels, debts due and to become due from solvent debtors, public stocks and shares in incorporated or unincorporated companies, and that all taxes are due and payable on November 1' of each year or as soon thereafter as the assessment roll mav come into the hands of the collector of taxes. Secs. 896, 913, 950 and 958, Comp. Gen. Laws of Florida, 1927.

The lien of the state for taxes attaches by a valid assessment of the property, Florida East Coast Fruit Land Co. v. Mitchell, 80 Fla. 291; 85 Son. 661; State v. Beardsley, 94 Sou. (Fla.) 660, and it has been held that the lien attaches from the first day of January of the year for which the assessment is made. Aiken v. United States (U. S. Dist. Ct., S. Dist. Fla., Oct. 12, 1932).

The properties on which the taxes in dispute applied were acquired by the petitioner on different dates in the calendar year 1928 and during the first half of 1929. The stipulation does not include an agreement as to the times when the properties were validly assessed for state taxes, and there is no allegation in the petition on the point. In the absence of anything in the record to the contrary, we will assume that valid assessments were made against the properties prior to the times they were acquired by the petitioner.

In Bloxham v. Consumers Electric Light & Street R. R. Co., 36 Fla. 519; 18 Sou. 444, certain real property was sold by judicial sale free and clear of liens after an assessment had been made for state taxes. The court held that the state could have intervened in the sale proceedings and asserted a claim for taxes against the proceeds of sale. During the course of its opinion, the court said:

The property had been assessed for its taxes, and a lien for tlie same had been acquired by the state before the judicial sale. The state’s lien for taxes, having attached by the assessment of the property, could not be divested by the subsequent judicial sale.

The case of Huckleby v. State, 57 Fla. 433; 48 Sou. 979, is to the same effect.

The taxes in question had been liens, superior to all others, since the first day of January of the respective years, and the then owners could have accrued the amounts on their books as tax liabilities in case they operated on the accrual basis of accounting, even though the taxes were not payable until November first next. H. H. Brown Co., supra; Arcade Department Stores, Inc., 18 B. T. A. 1172.

The deduction allowed by the statute for taxes paid or accrued within the taxable year is limited to the taxpayer’s own taxes. Grand Hotel Co., supra. When the petitioner acquired these properties it knew, or should have known, that the then owners and the properties were liable for the tax liens. In subsequently paying the liens they liquidated taxes of others. The amounts so paid must be regarded as part of the cost of the properties, as the respondent has determined.

Decision will be entered for the respondent.


author: Trammell:

text:
    United Autographic Register Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 30384.
    Promulgated December 23, 1932.

      Edward, B. Luches, Esq., for the petitioner.

      Arthur Oamduff, Esq., for the respondent.
   opinion.

Trammell:

This proceeding is for the redetermination of a defi-

ciency in income tax of $3,582.68 for 1922. The only question presented for our determination is the correctness of the respondent’s action in disallowing a deduction of $13,000 taken by the petitioner as a loss sustained on the liquidation and dissolution of the Auto-graphic Register Company of San Francisco, all of whose stock was owned by the petitioner. The other issue raised by the petition has been waived by the petitioner.

The proceeding was submitted on a stipulation of facts, the pertinent portions of which are as follows:

The petitioner on or about May 16, 1922, purchased 199 shares of the capital stock of the Autographic Register Company of San Francisco, being all the shares, from persons not stockholders of petitioner corporation for the sum of $18,000.00. In December of 1922 the Autographic Register Company of San Francisco was liquidated and dissolved and the corporate enterprise abandoned. Total assets of the company, minus an item of good will and advertising expense listed on said books at $10,571.02, consisted of cash, accounts receivable, merchandise, inventory, machinery and fixtures, and had a full, fair, cash market value of $5,000.00 on December 30, 1922, the date of liquidation of said company. The balance sheet of the Autographic Register Company of San Francisco, attached to its income tax return for the year 1922 showed net tangibles of $10,573.76 and good will of $10,571.02. Thereupon a bill of sale was executed by the liquidating company to the petitioner for all of the assets except good will so listed as aforesaid, and payment was made by the petitioner to the Autographic Register Company in the amount of $5,000.00. This was thereupon distributed as a liquidating dividend to the petitioner corporation and its nominees as sole stockholders thereof. Copies of the minutes of the special meeting of the stockholders of December 21, 1922, and of the special meeting of the Board of Directors of December 30, 1922, containing the resolutions providing for the liquidation of the company, and of the bill of sale are attached hereto, and shall have the effect of original documents. The Auto-graphic Register Company of San Francisco was thereupon dissolved and its corporate franchise abandoned.
Petitioner held the stock of the Autographic Register Company of San Francisco over a period of approximately seven and one-half months before the liquidation of that company. The petitioner had had no transactions or inter-company relations with the Autographic Register Company prior to the purchase of the stock, nor were any inter-company operating transactions or any other transactions had between the petitioner and the Autographic Register Company of San Francisco at any time after the purchase of said stock. The Autographic Register Company was operated entirely independent of the petitioner and there were no inter-company accounts whatsoever. Separate returns of income taxes were filed by the petitioner and by the liquidating company and there was no interchange of accounts or assets in any way by reason of which any income of either company was added to or subtracted from for the benefit of the other company. The petitioner received no physical return upon the purchase other than the liquidating dividend above recited, which was $13,000 less than the amount previously paid for the stock. The liquidating company was a small company selling locally in the State of California. Its net income for the year 1922 was $3,199.60 as reported in its income tax return. The name of the company was in no way retained by the petitioner upon liquidation of the Autographic Register Company of San Francisco, but was lost upon its liquidation. The loss claimed by the petitioner represents the difference between the amount paid for the stock of the Auto-graphic Register Company of San Francisco and the amount received as a liquidating dividend.

In its income tax return for 1922 the petitioner took a deduction of $13,000 as a loss sustained on the above mentioned transaction representing the difference between $18,000, the amount it paid for the stock of the Autographic Register Company of San Francisco, and $5,000 representing the amount received upon liquidation and dissolution of that company. In determining the deficiency here involved the respondent disallowed the. deduction thus taken.

The petitioner contends that, having paid $18,000 for the stock of the Autographic Register Company of San Francisco and having received only $5,000 upon the liquidation and dissolution of the company, it sustained a loss of $13,000 which is an allowable deduction in determining its net income.

The respondent contends that in acquiring all of the stock of the company in May, 1922, the petitioner acquired its corporate structure, its good will and the assets of a going concern; that after the liquidation and dissolution of the company in December, 1922, the petitioner had everything it had acquired in May and that consequently the petitioner never sustained any allowable loss.

In support of his contention the respondent urges that the transaction by which the petitioner acquired the tangible properties of the company for $5,000 was not an arm’s-length transaction and that strangers could not have acquired these properties and an agreement to discontinue business for the amount paid by the petitioner. While the parties have stipulated that the net tangibles of the company appear in its balance sheet at $10,573.76, they have also stipulated that the “ full, fair, cash market value ” of such assets on December 30, 1922, the time at which the petitioner acquired them, was $5,000. The petitioner thus paid full value for the assets, consisting of tangible assets and accounts receivable.

The respondent urges that there is no evidence in the case that the Autographic Register Company of San Francisco was ever legally dissolved. In this connection tbe parties have specifically stipulated that “In December of 1922 the Autographic Register Company of San Francisco was liquidated and dissolved and the corporate enterprise abandoned.” In view of this stipulation of the parties further comment on this contention of the respondent is unnecessary.

The respondent states as a fact in his brief that the liquidated company had been a competitor of the petitioner and implies that the petitioner was merely buying out a competitor for the benefit of its own business. We find nothing in the record to support this statement. The pleadings show that the petitioner is an Illinois corporation, with its principal office and place of business at Chicago. The stipulated facts show that the liquidated company was a small company selling locally in the State of California. There is nothing to show that the corporations were competitors. The inference to be drawn from the record is against the respondent’s statement.

The respondent’s brief contains the statement that the liquidated company had a good will worth $10,571.02. The petitioner contends that the liquidated company did not have any good will of value. While the stipulated facts show that the company listed good will and advertising expense on its books at $10,571.02 and showed good will in its balance sheet at that amount, we find nothing else in the record to indicate that the company had any good will, or, if it did, what the value was. While the stipulated facts indicate that in 1922 the company earned a net income of $3,199.60 with tangible assets which had a value of only $5,000 at the end of the year, we are not warranted, in the absence of evidence, in concluding that the earnings in excess of a fair return on tangibles at the end of the year are to be attributed to good will. The tangible assets may have had a very much greater value throughout most of the year. So far as the record discloses, the tangible assets and accounts receivable at the beginning of the year and at the time petitioner acquired the stock might have been worth at least the amount paid for the stock. The acquisition of the stock and the liquidation of the corporation in this case occurred in a year when consolidated returns were not required, and no such return was filed. The earnings may have been due to favorable contracts which had expired or they might have been due to facts and conditions existing in the first part of the year before petitioner acquired the stock, which had no relation to good will, or other factors aside from good will might have produced the income. From the stipulated facts, it appears in any event that what was distributed to petitioner on liquidation and dissolution of the California corporation was the $5,000 in cash which petitioner had paid in to that corporation for its tangible assets and accounts receivable when it took them over. This being true, and the petitioner having paid $18,000 for stock, and on liquidation and dissolution having received $5,000, it sustained a loss of $13,000.

The liquidation of a subsidiary by the parent company during the taxable year being a transaction in which possible gain or loss is recognizable, we think, from a consideration of the facts in the case, that the petitioner is entitled to the deduction of $13,000 taken by it. Riggs National Bank, 17 B. T. A. 615; affd., 51 Fed. (2d) 980; Canal-Commercial National Bank, 22 B. T. A. 541.

Judgment will be entered under Rule 50.


author: MuRDOCK:

text:
    The R. & M. Property Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 61022.
    Promulgated December 23, 1932.

      James O. Tripp, Esq., for the petitioner.

      L. M. Leinenkugel, Esq., for the respondent.
   OPINION.

MuRDOCK:

The petitioner contends that it exchanged real estate for other real estate and the transaction is nontaxable under the provisions of section 112 (b) (1) of the Eevenue Act of 1928. It argues that the nontaxable character of the exchange is not affected by the fact that in the same transaction it transferred stock and cash, assumed an increased mortgage liability and received the benefit of some adjustments. Section 112 (a) of the Eevenue Act of 1928 states, as a general rule, that upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized. Subdivision (b) of section 112 provides for certain exceptions and is in part as follows:

(5) Exchanges solely in Mncl.—
(1) Pkopektt hecjd fo® peoduciive us® ok investment. — No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale, nor stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment.

The petitioner argues that the word “ solely,” as used above, refers only to the property received in the exchange. In this it may be right (see subdivisions (c), (d), and (e)), but we need not decide that question here, for the Commissioner has not recognized any gain upon the exchange of the real estate in Columbus.

However, in the same transaction the petitioner also exchanged stock. Stock is expressly excluded from the exception contained in section 112 (b) (1). If stock were exchanged solely for real estate, the entire amount of the gain or loss would be recognized. The gain or loss would be the difference between the basis for the property exchanged and the fair market value of the property received. Sec. 111. The parties agree that the basis for the stock in question was $2,121.59. We see no reason why the gain or loss upon the exchange of this stock should not be recognized in this case. The only difficulty would be to determine the fair market value of the property received for the stock. If the various items were properly valued by the parties in their agreement, the petitioner has not been overtaxed, for the petitioner received in the exchange the full market value of the stock. The Commissioner has reduced this value by the basis and has also further reduced it by an adjustment of $886.69 which benefits the petitioner and is not fully explained in the record. The petitioner argues, however, that the values at which the properties were exchanged were not true market values, but were inflated values. It alleges that the fair market value of the Detroit property was $200,000. In attempting to support this allegation, Eoss testified that the petitioner’s equity in the Columbus real estate amounted to $4,000 only, instead of $35,000, as mentioned in his letter and recognized in the final settlement. He and Moores had been advised that the petitioner could dispose of its Borden Company stock in this exchange tax-free, whereas a sale would involve a 12% per cent tax on the profit. Therefore, he said they considered that in this transaction the stock represented an expenditure by the petitioner of only $81,000, instead of $99,125, its fair market value. He testified further that he had heard of a sale of property on- Grand Eiver Avenue in Detroit for $3,000 a front foot. This property was within 100 feet of the property which the petitioner had acquired and was improved with a two-story building. He, therefore, multiplied the frontage of the petitioner’s property by $3,000, added $40,000 as the value of the building, and arrived at $214,000, which he said would be, apparently, the value of the property. Even with the adjustments claimed, the petitioner paid far more than this amount for the property. Eoss’ testimony did not indicate that he had any other knowledge of the value of the property which the petitioner had acquired. He admitted that he had no special qualifications for the valuation of real property. Obviously, the petitioner has not shown that the fair market value of the Detroit property was $214,000. Neither do we feel justified in using any other value for this property in the decision of this case than $275,000, the figure agreed upon and used by the parties in a transaction Avhich, so far as we know, was carried out at arm’s length.

If, however, we were wrong in using this value of $275,000, the Commissioner would not necessarily be wrong in his determination of the amount of gain to the petitioner from the disposition of the Borden Company stock. If the properties were put in at inflated values, the Commissioner’s determination might nevertheless be right if the amount of inflation in the value of the Detroit property did not exceed the amount of inflation in the Columbus property. If there was some excess of this kind, the Commissioner’s determination would require adjustment. The problem of making such an adjustment need not be solved until it arises.

Decision will be entered for the respondent.


author: Smith :

text:
    John G. Bullock, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 40692.
    Promulgated December 28, 1932.

      A. Gadder Macleay, Esq., and Thomas B. Dempsey, Esq., for the petitioner.

      J. M. Leinenhugel, Esq., for the respondent.
   OPINION.

Smith :

The petitioner claims the deduction of the cost of moving the house from Wilshire Boulevard and Vermont Avenue to Plymouth Boulevard, amounting to $16,854, in the year 1924 as an ordinary and necessary business expense of that year. The respondent has determined that the cost of moving the house is a capital expenditure and is therefore not deductible in computing the petitioner’s net income for 1924, but must be added to the cost of the property for the purpose of determining the gain or loss upon its subsequent sale or other disposition.

Section 214 (a) (1) of the itevenue Act of 1924 authorizes the deduction from gross income of all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Section 215 (a) (2) of the act provides that in computing net income no deduction shall be allowed in respect of any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate.

The facts here clearly show that the cost of moving the dwelling from Wilshire Boulevard and Vermont Avenue to Plymouth Boulevard falls within that class of expenditures referred to in section 215, that is, that it was an amount paid out for permanent improvements or betterments made to increase the value of the petitioner’s property, as distinguished from an ordinary and necessary business expense. The petitioner testified that he moved the house with the idea of renting or selling it in its new location and also for the purpose of rendering the lot on Wilshire Boulevard and Vermont Avenue more available for business purposes.

The cases cited by the petitioner, involving for the most part expenditures incurred in moving machinery from one location to another, are not in point. There is an obvious distinction between moving machinery and tools from one factory or place of business to another and moving a 15 or 16-room dwelling house from a business section to a residential section.

We think that the respondent has properly classified the expenditure in question as a capital expenditure, although from the record we are unable to determine whether the amount should be added in whole or in part to the cost of the lot at Wilshire Boulevard and Vermont Avenue or to the property on Plymouth Boulevard now occupied by the petitioner as his permanent residence. The record indicates that the value of both of these properties was increased. However, this question is not before us in this proceeding and need not be decided.

Judgment wül be entered for the respondent.


author: Leech:

text:
    Isabel Richardson Molter, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 47308.
    Promulgated December 28, 1932.

      Donald V. ELumier, Esq., and Oscar A. Kropf, Esq., for the ¡letitioner.

      J. M. Leinenlmgel, Esq., for the respondent.
   OPINION.

Leech:

The parties have limited the issue to the question of whether petitioner took a vested or a contingent remainder under the provisions of her father’s will.

The applicable section of the Revenue Act of 1926 is as follows:

Sec. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1013, shall be the cost of such property; except that—
* * * * * * *
(5) .If the property was acquired by bequest, devise, or inheritance, the basis shall be the fair market value of such property at the time of such acquisition. The provisions of this paragraph shall apply to the acquisition of such property interests as are specified in subdivision (c) or (e) of section 402 of the Revenue Act of 1921, or in subdivision (c) or (f) of section 302 of the Revenue Act of 1924, or in subdivision (c) or (f) of section 302 of this Act.

Petitioner agrees that if she took a vested remainder the deficiencies as determined by the Commissioner are correct. The Commissioner agrees that if petitioner took a contingent remainder the time of acquisition was the date of the distribution of the stock to her by the trustee; that no gain or loss was realized upon the sale of the Belding Bros. & Company stock, and that the gain realized upon the sale of the S. S. Kresge Company stock may be recomputed under Bule 50, pursuant to the foregoing findings of fact.

In determining this issue we are bound by the rules of property established in Illinois, Spindle v. Shreve, 111 U. S. 542; Poe v. Seaborn, 282 U. S. 101; E. K. Wood Lumber Co., 25 B. T. A. 1013.

The same general principles which regulate the vesting of devises of real estate apply to a considerable extent to personal legacies. The general rule in regard to the vesting of personal legacies, the payment of which is postponed to a period subsequent to the decease of the testator, is that where there is no general gift, but only a direction to pay in the future, the vesting will be postponed until the appointed time. But an exception to the general rule, constituting practically another general rule, is that although a gift arises wholly out of directions to pay or distribute in futuro, if futurity is hot annexed to the substance of the gift for reasons personal to the legatee, but merely for the convenience of the fund or property, because the testator desired to appropriate the subject matter of the legacy to the benefit of another for a certain period (such as a life estate) the legacy in remainder will vest inslanier, the right of possession and enjoyment, only, being deferred. Schofield v. Olcott, 120 Ill. 362; 11 N. E. 351; Ducker v. Burnham, 146 Ill. 9; 34 N. E. 558; Pearson v. Hanson, 230 Ill. 610; 82 N. E 813; Armstrong v. Barber, 239 Ill. 369; 88 N. E. 246; Mettler v. Warner, 243 Ill. 600; 90 N. E. 1099.

A contingent remainder, by which no present interest passes, is where the estate in remainder is limited to take effect either to a dubious or uncertain person or upon the happening of a dubious or uncertain event, Ducker v. Burnham, supra. The status of such estate depends not upon the uncertainty of enjoyment, but upon the uncertainty of the right to enjoyment, Smith v. Chester, 272 Ill. 428; 112 N. E. 325. A vested remainder, by which a present interest passes to the remainderman instanier, though to be enjoyed in futuro, is where the estate is invariably fixed to remain to a determinate person after tlie particular estate terminates, Ducker v. Burnham, supra. Although it may be uncertain "whether the remainder will ever take effect in possession and enjoyment, it will nevertheless be vested if the interest is fixed, Chapin v. Crow, 147 Ill. 219; 35 N. E. 536.

If survivorship or other conditional element be incorporated into the description of the gift or the designation of the remainderman, such as to the children surviving the life tenant, as'a condition precedent, the remainder will be contingent and the vesting deferred, Ohapin v. Grow, supra; Dxicker v. Bwrnham, supra. But if the -re-mainderman be designated by name accompanied by words giving a vested remainder interest, a subsequent provision disposing of the same estate in the event he dies before payment or distribution merely creates a condition subsequent, and the estate will vest instanter, subject to being divested upon the remainderman’s-death prior-to the falling in of the particular estate or the arrival of the appointed time for payment or distribution. Golladay v. Knock, 235 Ill. 412; 85 N. E. 649; Northern Trust Co. v. Wheaton, 249 Ill. 606; 94 N. E. 980; Smith v. Chester, supra; Pearson v. Hanson, supra; Ducker v. Burnham, supra. The controlling consideration in deciding whether a remainder is vested or contingent upon the beneficiary being alive at the time of distribution is to discover the intention of the testator, which must be given effect, Mettler v. Warner; supra. However., the law not only favors vested remainders, Chapin v. Crow, supra; Pearson v. Hanson, supra, and in cases of doubt or ambiguity in -the language employed, will determine the remainder to be vested, Smith v. Chester, supra, but will presume that "words of postponement relate to enjoyment and possession. The testator’s intent to postpone the "vesting of -the interest must be clear and manifest. Ducker v. Burnham, supra.

A spendthrift -trust is the term commonly used -to designate a trust created to provide a fund for the maintenance of the beneficiary and at the same time to secure the enjoyment of it to the object of the testator’s or grantor’s bounty by providing that it shall not be alienable by the beneficiary or be taken by his creditors, Wagner v. Wagner, 244 Ill. 101; 91 N. E. 66. The limits of such provisions depend upon the law of the jurisdiction "wherein the real property is situate, or, as to personalty, the law of the jurisdiction wherein the trust was created and is to be administered, and, where permitted, such provisions áre a valid restriction even -upon a vested property interest, Hyde v. Woods, 94 U. S. 523; Spindle v. Shreve, supra. The Illinois rule of law is that there is one exception to the rule -that "any limitation is bad which restrains an owner in fee simple from alienating his property, and this exception is that property may be devised in fee, subject to a spendthrift trust which effects only a deferment of possession or enjoyment. Hopkinson v. Swaim, 284 Ill. 11; 119 N. E. 985; Wagner v. Wagner, supra; Pearson v. Hanson, supra.

In the case at bar, paragraph sixth of the will provides for a particular estate for the lifetime of the testator’s widoAV, and then provides “ at the death of my wife, in case she survives me, or at my death, in case she does not survive me, I will and direct that twenty-five per cent (25%) in value of my estate be turned over to my daughter, Isabel M. Richardson, and that twenty-five per cent (25%) thereof shall be turned over to her each second year thereafter * * The last sentence of paragraph sixth provides that, in case of the death of Isabel M. Richardson before the testator’s death or distribution to her, the whole or remaining principal be distributed to her lineal descendants, if any. Paragraph seventh provides that, in the event of the death of testator’s daughter without leaving lineal descendants before distribution is made to her as directed in paragraph sixth, or before the testator’s death, the trustees are directed, upon death of testator’s widow or if she predecease him within one year after his death, to make several specific payments in cash and turn over the residue to the Old Peoples Home. Paragraph ninth of the will is a spendthrift clause applying to both the income and the corpus of the testator’s estate.

The will makes a specific gift of the remainder of the testator’s estate to his daughter by name and at the date of death of the testator she was in esse and then answered fully the description by which she was to take. She had a present fixed right to future enjoyment. There was no intervening circumstance in the nature of a condition precedent which had to happen before she received the right to take in possession, under the terms of the will. Survivorship was not included in the description of the remainderman, but, instead, the words employed created a vested interest, subject to being divested upon her death prior to the falling in of the particular estate or the periods appointed for distribution to her. Had the testator’s wife predeceased him, petitioner would have taken possession of 25 per cent of the remainder immediately upon the death of the testator. The obvious reason for postponing enjoyment of this portion of the remainder was “ for the convenience of the fund or property' ” by providing for the life estate of the widow — not for any reasons personal to the legatee. Certainly then, petitioner took a vested interest in the first 25 per cent of the remainder of testator’s estate. There is nothing in the will to denote an intention by the testator that she was to take a vested interest as to 25 per cent of his remainder estate and a contingent interest as to the other 15 per cent. The words of postponement are presumed to relate to enjoyment and possession, for there is no clear and manifest .intent expressed by the testator to postpone the vesting of the whole or any part of the remainder interest in his daughter at the date of his death. The spendthrift clause was a valid limitation upon the right which vested in petitioner at date of testator’s death and effected only a postponement of enjoyment. We conclude that petitioner acquired a vested remainder interest.

The date of acquisition of the property disposed of in these tax years was the date of death of the testator, namely, February 13, 1919, and the basis for determining gain or loss is the fair market value of such property on that date. Brewster v. Gage, 280 U. S. 327. Also, cf. Lane v. Corwin, 1 Fed. Supp. 151; Chandler v. Field, 58 Fed. (2d) 370; Rodman E. Griscom, 22 B. T. A. 979; William Hugget, 24 B. T. A. 669; Marian B. Pringle, 26 B. T. A. 362. The Commissioner has used, as the basis for determining gain, the value for estate tax purposes of the shares of stock in question on the date of the testator’s death, reduced by dividends declared subsequent to that date. No issue has been raised as to those values.

Judgment will he entered for respondent.