text:
    Malcolm W. Greenough, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 58098, 58942.
    Promulgated November 14, 1933.

      W. Sidney Felton, Esq., for the petitioner.

      Prew Savoy, Esq., for the respondent.
   OPINION.

Smith :

The applicable statutes are as follows:

Revenue Act of 1926:

Sec. 219. (g) Where the grantor of a trust has, at any time during the taxable year, either alone or in conjunction with any person not a beneficiary of the trust, the power to revest in himself title to any part of the corpus of the trust, then the income of such part of the trust for such taxable year shall be included in computing the net income of the grantor.
(h) Where any part of the income of a trust may. in the discretion of the grantor of the trust, either alone or in conjunction with any person not a beneficiary of the trust, be distributed to the grantor or be held or accumulated for future distribution to him, or where any part of the income of a trust is or may be applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in paragraph (10) of subdivision (a) of section 214), such part of the income of the trust shall be included in computing the net income of the grantor.

Revenue Act of 1928:

SEC. 166. REVOCABLE TRUSTS.
Where the grantor of a trust has, at any time during the taxable year, either alone or in conjunction with any person not a beneficiary of the trust, the power to revest in himself title to any part of the corpus of the trust, then the income of such part of the trust for such taxable year shall be included in computing the net income of the grantor.
SEC. 167. INCOME FOR BENEFIT OF GRANTOR.
Where any part of the income of a trust may, in the discretion of the grantor of the trust, either alone or in conjunction with any person not a beneficiary of the trust, be distributed to the grantor or be held or accumulated for future distribution to him, or where any part of the income of a trust is or may be applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in section 23 (n), relating to the so-called “charitable contribution” deduction), such part of the income of the trust shall be included in computing the net income of the grantor.

In these proceedings the respondent makes two contentions. He first contends that the trust was a revocable trust during the tax years involved herein. He submits that under articles 4 and 5 of the trust indenture petitioner was the sole trustee who could not be removed; that if he continued to reside in Massachusetts he could remove, in conjunction with one of the trustees, the third trustee, who might not consent to a revocation of the trust, and appoint one who would consent. He also submits that the petitioner could establish his legal residence in another state; then remove the two trustees and appoint others compliant with his wishes. Hence, it is argued that the petitioner in effect had the right to revoke the trust.

The second contention made by the respondent is that the gains made by the trust upon the sales of securities were taxable gains within the purview of the taxing statutes; that the trustees could determine in selling capital assets whether they would treat the gain derived therefrom as income or principal and that they could act similarly with respect to stock dividends, stock rights, etc., all without court sanction. The argument is that the petitioner, being the grantor of this trust, could, with the consent of the other trustees, declare that the gains from the sale of securities were income and that as such they could have been distributed currently to the petitioner.

Without expressing an opinion as to the merits of the first contention of the respondent, we are of the opinion that the second contention is sound. In Weiss v. Wiener, 279 U.S. 333, the Supreme Court, speaking through Mr. Justice Holmes, said:

It does not matter that in Ohio, where the properties lie, these long leases are treated as in many respects like conveyances of the fee. The Act of Congress has its own criteria, irrespective of local law, that look to certain rather severe tests of liability and exemption and that do not allow the deductions demanded whatever the lessees may be called. * * *

Consonant therewith, we a,re of the opinion that it is immaterial that under the decisions of the Massachusetts courts profits from the sale of securities constituting the corpus of a trust fund are treated as principal and not income. Under the taxing statute such gains clearly constitute taxable income.

The statute is plain that if the grantor of a trust in conjunction with any person not a beneficiary of the trust may cause the profits of the fund to be distributed to him, the grantor is liable to income tax in respect of such income received by the trust fund. That is the situation here. Cf. Charles Kaplan, 26 B.T.A. 379; affirmed in principle in Kaplan v. Commissioner, 66 Fed. (2d) 401.

In Docket No. 58942 the petitioner alleges error in that the respondent included in his taxable income for 1929, $1,125 representing the proceeds of the sale of stock rights. These proceeds were received by the trustees. At the hearing of this proceeding counsel for the petitioner stated that the $1,125 in question “ represented rights to subscribe to bonds of the American Telephone & Telegraph Co. which, under the rulings, I understand, are subject to the surtax but not to the normal tax.” The petitioner submitted no further evidence upon the point. The respondent has treated the proceeds from the sale of the stock rights as income of the petitioner liable to surtax only. In the absence of evidence showing error on the part of the respondent in so treating the amount, his action is sustained.

Judgment will he entered for the respondent.


source: Caselaw Access Project

author: McMahon :

license: Public Domain

text:
    Wilson Furs, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent. Selbert, Ltd., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 57058, 57059.
    Promulgated November 14, 1933.

      William Gellin, Esq., for the petitioners.

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

McMahon :

The petitioner, Wilson Furs, Inc., contends that the account designated “Reserve for Forfeited Deposits ” is truly a liability account, that the cancellation of sales and forfeiture of deposits were made without the consent of the customer, and that should the customer thereafter demand the refund of the deposit, the petitioner would be obliged to (1) refund the deposit, (2) give credit for same on sale of another garment, or (3) issue a credit slip to be applied against a future sale; and that therefore the sum of $3,000 should be treated as a liability and not as income.

The auditor of petitioner testified that for the year ended December 31, 1926, the books of account showed that' there was credited to “Income Forfeited Deposits ” the amount of $846.85; that this was treated as income and was included in gross income reported by the petitioner in its income tax return for the year 1921; that there appears on the petitioner’s books of account an account called “ Credit Checks ” in the sum of $2,546.10 as of January 1, 1921 [which does not appear as a liability on its income tax balance sheet as of December 31, 1926, notwithstanding his testimony to the contrary] ; that the credit item of $3,343 shown on the income tax balance sheet as of December 31, 1921, as “ Credit Checks & Reserve Forfeited Deposits ” is reflected in its books of account, the $343 appearing as credit checks and the $3,000 appearing as reserve for forfeited deposits; and that the sum of $3,000 was treated as reserve for forfeited deposits to set up the estimate of possible claims for forfeited deposits. The auditor also testified that “this business does about $200,000 worth of advertising a 3rear, and it could not afford lawsuit's so that it does return, as a matter of practice, the deposits when demanded by customers rather than go to court ”; and, again, that “ In the year 1921, they paid $200,204.15 for advertising; they did a business of $1,429,941.46, so that this business can not afford to have lawsuits for return of deposits ”; and that the difference between the balance of January 1 and the balance of December 31 in credit checks represents “payments actually made to customers by checks or credits given on new sales.” The latter statement as to payment's is ambiguous, particularly in view of the testimony of the auditor that “ credit checks ” is petitioner’s designation for “ credit slips.”

It is argued by the petitioner that, although the account may have been designated as a reserve, it is a true liability account; that the charge of this reserve was properly deducted by the petitioner; and that the $3,000 should be treated as a liability and not as income.

In view of the notation “ Deposits are refunded in 5 days if the customer changes her mind ” appearing on the sales slips; the testimony of the auditor that, rather than go to court, deposits were refunded ; and the unsatisfactory and indefinite testimony as to actual cash refunds of forfeited deposits, it seems to us reasonable to conclude that the petitioner considered a sale closed and final after the lapse of five days; that thereafter it did not recognize or admit liability for the return of such deposits; and that it did not return or refund such deposits unless court proceedings impended. Furthermore, the journal entry discloses that the reserve was set up to meet possible claims for forfeited deposits.

The Board has considered the question of the deduction of reserves in a number of cases. In William J. Ostheimer, 1 B.T.A. 18, the Board stated:

While it might have been sound business practice on the part of the taxpayer to set up a reserve out of his income to.meet a future liability, such a reserve is not deductible in determining net income. The revenue laws prior to the 1921 Act have never recognized reserves as being deductible from gross income in determining net income except in the case of insurance companies. In the Revenue Act of 1921 specific provision was made for the deduction of reserves for bad debts. If reserves had been deductible under ihe general provisions of the Act it would not have been necessary to make specific provision for the deduction of particular reserves in the case of insurance, companies or for bad debts. The statute specifies what deductions are allowable and, except in the case of insurance companies, no provision is made in the 1918 Act for the deduction of a reserve as such. Items of expense must actually have been paid or liability therefor incurred in order to be deductible under that Act.

See also Hanff-Metzger, Inc., 4 B.T.A. 1214; Amigo Coal Co., 8 B.T.A. 598; Commercial Liquidation Co., 16 B.T.A. 559, and cases cited; and Atlas Mixed Mortar Co., 23 B.T.A. 245, and cases cited. Cf. Union Security Co., 16 B.T.A. 1412.

The action of the respondent in disallowing the deduction of the amount of the reserve and in adding it to net income is therefore approved.

In 1928 Wilson Furs, Inc., and Seibert, Ltd., had net incomes of $24,175.85 and $9,508.72, respectively, and Ford Furs, Inc., had a loss of $6,701.62. In computing consolidated net income the respondent disregarded the 1926 unabsorbed statutory net loss of Sei-bert, Ltd., of $31,954.53, and computed consolidated net income by deducting the loss of Ford Furs, Inc., of $6,701.62 from the combined income of the petitioners of $33,684.57. From such net consolidated income of $26,982.95, he deducted a portion of the unabsorbed statutory net loss of Seibert, Ltd., of 1926 in the amount of $7,616.94, computed in the manner heretofore shown by our findings. The consolidated net income as thus computed by the respondent is $19,336.01.

The petitioner contends that the 1926 unabsorbed statutory net loss of the petitioner, Seibert, Ltd., should be allowed as a deduction in 1928 against the income of Seibert, Ltd., to the extent of $9,508.72, which would offset its income of $9,508.72 for 1928; and that such unabsorbed statutory net loss of 1926 should be deducted from the net income of Seibert, Ltd., in 1928 before computation of consolidated net income for 1928.

The applicable provisions of the Revenue Act of 1928 are set forth in the margin.

In 1926 there were only two members in the affiliated group, one, Seibert, Ltd., sustaining a net loss of $33,553.48, and the other, Wilson Furs, Inc., having a net income of $1,598.95, the result being a consolidated statutory net loss of $31,954.53. This amount represents the unabsorbed statutory net loss of Seibert, Ltd.

While a statutory net loss of a member of an affiliated group may not be carried forward to a succeeding year if such member does not have a net income in the succeeding year, we find no authority which holds that a consolidated net loss, representing the unabsorbed net loss of only one member of the affiliated group, may not be carried forward to a subsequent year to the extent of the net income in such subsequent year of the member which sustained such net loss. On the contrary, in Beneficial Loan Society, 26 B.T.A. 858 (affirmed in Beneficial Loan Society v. Commissioner, 65 Fed. (2d) 759, on authority of Woolford Realty Co. v. Rose, 286 U.S. 319; certiorari denied, October 23, 1933), the Board stated:

The statutory net loss provisions are to be applied separately to each member oí an affiliated group. Where some members of the group, as here, have losses and others have income in 1923, but the total loss exceeds the total income of the group, the losses are first used to absorb the income and the excess loss is distributed proportionately among the members having losses. The amount thus apportioned to each company having a loss is used to compute the statutory net loss of that company. Swift & Co. v. United States, 38 Fed. (2d) 365; Kaiwiki Sugar Co., 21 B.T.A. 997. In the following year this statutory net loss may be used to offset any income which that particular company has for the year before being reduced by any losses of its affiliates. If there is an excess of loss it is carried over to the third year. See Delaware & Hudson Co., 26 B.T.A. 520. Cf. Woolford Realty Co. v. Rose, 286 U.S. 319; Planters Cotton Oil Co. v. Hopkins, 285 U.S. 533.

To the same effect, see Kaiwiki Sugar Co. v. Burnet, 63 Fed. (2d) 822, affirming Kaiwiki Sugar Co., Ltd., 21 B.T.A. 997; Delaware & Hudson Co. v. Commissioner, 65 Fed. (2d) 292; affirming Delaware & Hudson Co., 26 B.T.A. 520; Sweets Co. of America v. Commissioner, 40 Fed. (2d) 436; California Wharf & Warehouse Co., 28 B.T.A. 509; Albert Leon & Son, Inc., 29 B.T.A. 251. Cf. Crocker First Nat. Bank of San Francisco, 26 B.T.A. 1078.

Since the unabsorbed net loss in 1926 of Seibert, Ltd., is the amount of $31,954.53, such amount may be carried forward by such petitioner to 1928 to the extent of its own net income for that year, or $9,508.72. The net income of Seibert, Ltd., in 1928 being entirely offset by its statutory net loss of 1926, the consolidated net income for 1928 is $17,474.23, which is arrived at by deducting the loss of Ford Furs, Inc., of $6,701.62 from the net income of Wilson Furs, Inc., of $24,175.85. Upon the authority of the foregoing cases the excess of such statutory net loss over such 1928 income may not be used in computing consolidated net income for 1928.

The respondent on brief states that his contention upon this issue is set forth in G.C.M. 8132, IX-1 C.B. 287, 292. We have examined this memorandum, but we cannot agree with the view therein presented that the portion of a consolidated net loss for a prior year properly attributable to a member of an affiliated group may be applied in a subsequent year against the “ consolidated net income allocable ” to such member, or in other words, that the net income of a member in a subsequent year must first be reduced proportionately by the loss of other members before deducting the prior year’s net loss attributable to such member.

Decision will be entered under Bule 50

       SEC. 23. DEDUCTIONS PROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      * * # ⅜ * ? *
      (i) Net losses. — The special deduction for net losses of prior years, to the extent provided in section 117.
      SEC. 117. NET LOSSES.
      (b) Net loss as a deduction. — If, for any taxable year, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be allowed as a deduction in computing the net income of the taxpayer for the succeeding taxable year (hereinafter in this section called “second year”), and if such net loss is in excess of such net income (computed without such deduction), the amount of such excess shall be allowed as a deduction in computing the net income for the next succeeding year (hereinafter in this section called “ third year ”) ; the deduction in all cases to be made under regulations prescribed by the Commissioner with the approval of the Secretary.
      *******
      (e) Net loss for 3926 or 33123. — If for the taxable year 1926 or 1927 a taxpayer sustained a net loss within the provisions of the Revenue Act of 1926, the amount of such net loss shall be allowed as a deduction in computing net income for the two succeeding taxable years to the same extent and in the same manner as a net loss sustained for one taxable year is, under this Act, allowed as a deduction for the two succeeding taxable years.


author: Smith: Goodeioh,

text:
    Founders Associates, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 62684.
    Promulgated November 14, 1933.

      Henry J. Richardson, Esq., for the petitioner.

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

Smith:

The petitioner contests a deficiency in income tax in the amount of $767.33 for its first fiscal period ended November 30,1929. The point in issue is the correct method of computing the tax liability for the return period.

The petitioner is a Massachusetts common law trust, created by agreement or declaration of trust on February 4, 1929, upon which date it began business. It adopted November 30 as the end of its fiscal year, closed its books as of November 30, 1929, and thereafter filed its return as an association covering its income from the date of organization to November 30, 1929. The petitioner’s net income for the period February 4 to November 30,1929, was $920,807.26, upon which a tax of $101,288.79 was assessed, under the Revenue Act of 1928 as amended by Public Resolution No. 23,71st Congress, approved December 16, 1929.

In the determination of the deficiency the respondent, using the same net income, has determined that the correct tax liability is $102,056.12. In making this computation he has spread the net income reported on the return ($920,807.26), over a 12-month period and has assumed that one twelfth of that amount is income for the month of December 1928, and that the tax upon that amount of income should be taxed at the 12 percent rate applicable to income earned within the calendar year 1928. By this method the respondent has determined that the tax due on the one-twelfth part of the net income falling within the month of December 1928 is $9,208.07 instead of $8,440.74 which would be the amount of the tax if it were computed at the 11 percent rate applicable to income falling within the calendar year 1929.

The basis for the respondent’s contention is stated in the deficiency notice upon which this computation is predicated, as follows:

In accordance with the provisions of General Counsel’s Memorandum 8156 appearing in Cumulative Bulletin IX-2, page 124, it is held that your return is for the full twelve-month period December 1, 1928 to November 30, 1929, although the return only included income received from February 4, 1929 to November 30, 1929.

In General Counsel’s Memorandum 8156, above referred to, it appears that a taxpayer was incorporated January 2, 1929, and made its return for the fiscal year ended June 30, 1929. It was held by the respondent that the net income for the return period should be spread over a 12-month period and that six twelfths thereof should be taxed at the 12 percent rate and six twelfths at the 11 percent rate, and Bankers Trust Co. v. Bowers, 295 Fed. 89, Treasury Decision 3547, Cumulative Bulletin III-l, page 237, is cited in support of the ruling.

In his brief the respondent cites sections 47, 48, and 105 of the Revenue Act of 1928 as authority for the determination of the deficiency. These are set forth in material part in the margin.

We are of opinion that the respondent has incorrectly applied the statute to the facts in the present case. In the first place, we have not a taxable period embracing years with different laws. All of the petitioner’s income was earned within the calendar year 1929. It was not in existence during any part of the calendar year 1928. Section 105, therefore, has no application to this proceeding. Likewise, section 47 (a) has no application, for the taxpayer has not, with the approval of the Commissioner, changed the basis of computing net income from fiscal year to calendar year or vice versa. The only portion of section 47 applicable to the facts here presented is the following language in subdivision (b) :

* * * in all other cases where a separate return is required or permitted, by regulations prescribed by the Commissioner with the approval of the Secretary, to be made for a fractional part of a year, then the income shall be computed on the basis of the period for which separate return is made.

In article 824 of Regulations 74 it is stated:

* ⅜ * Except in the case of a first return for income tax a taxpayer shall make his return on the basis (fiscal or calendar year) upon which he had made his return for the taxable year immediately preceding * * ⅜.

In article 871 of Regulations 74 it is stated :

⅜ * * Tlie tax on net income computed on the basis of the period for which a separate return is made shall be paid thereon ah the rate for the calendar year in which such period is included. * ⅞ *

We think that this latter regulation aptly fits the facts in the instant case. There can be no question but that the rate applicable to income falling within the calendar year 1929, under Public Resolution No. 23, 71st Congress, approved December 16, 1929, is at the rate of 11 percent of the net income. That resolution reads in part as follows:

PUBLIC RESOLUTION — NO. 23 — 71ST CONGRESS
H.J.Res. 133.
Joint Resolution Reducing rates of income tax for the calendar year 1929.
Resolved Toy the Senate and Rouse of Representatives of the United States of America in Congress assembled, That in lieu of such rates of income tax specified in the Revenue Act of 1928 (United States Code, Supplement III, title 26, chapter 24) as are set forth in the following table, which under such Act are applicable to the calendar year 1929, the rates applicable to such year shall be those set forth in such table:
Sec. 2. This joint resolution shall take effect as of January 1, 1929. Approved, December 16, 1929.

The decision of the Circuit Court of Appeals for the Second Circuit in Bankers Trust Co. v. Bowers, supra, has no application to the proceeding at bar. In that case the court held that a return made for a decedent by his executors of the income received by the decedent during the calendar year 1921, in which he died, and a return made by them for his estate of the income received by the estate during the same calendar year, are returns for the full calendar year. This is far from saying that the income received by a corporation from the date of its organization in 1929 to the end of its fiscal year ended in 1929 is in part income for a period within the calendar year 1928 and subject to tax at the rate applicable to income received within the year 1928. In point of fact the petitioner had no income in 1928 and in our opinion it was not the intention of Congress to tax the petitioner upon income earned in 1929 as though a part of it were earned in 1928.

Reviewed by the Board.

Judgment will be entered for the petitioner.

Goodeioh,

dissenting: I disagree with the majority opinion. Here, respondent has treated petitioner’s return as one for a fiscal year and has computed the tax upon that basis, applying the rates in effect during the 12 months preceding the closing date of the fiscal year. True, of those 12 months, one falls back in 1928, when the rate was higher than it was in 1929 and when petitioner was not in existence, but that is not saying, as the majority opinion infers it is, that income earned in 1929 is income earned in 1928. That is only taxing the income earned by petitioner during its fiscal year at the rates prevailing during the whole of that year, which, in my opinion, is correct.

The fundamental inquiry is whether the period between the date petitioner was organized and the close of its fiscal' year is a “ taxable year ” within the meaning of that term as used in the statute, so that the tax must be computed on the basis of a full year of 12 months, or whether that period may be covered by a return for a fractional part of a year and the tax computed upon that basis.

Any doubt concerning the meaning of the term “taxable year” was removed by the enactment of section 200 (a) of the Revenue Act of 1924, which defined it as follows:

* * * xhe term “taxable year” includes, in tlie case oí a return made for a fractional part of a year under the provisions of this title or under regulations prescribed by the Commissioner ⅜ * ⅜ the period for which the return is made. * * *

See Weissberger Moving & Storage Co., 26 B.T.A. 1375, and cases there cited.

The same definition of the term “ taxable year ” is found in the 1928 Act (sec. 48 (a)) and the general rule established by the statute (sec. 41 et seg., Revenue Act of 1928) is that the net income shall be computed and taxed upon -the basis of the taxpayer’s annual accounting period. Petitioner relies upon paragraph (b) of section 47, which deals with returns for a period of less than 12 months. But it does not expressly provide that the period of less than 12 months from the organization of a taxpayer to the end of its accounting period shall be covered by a separate return and the tax computed on the basis of that period. It provides that such separate returns shall be made, and the tax computed in that manner, only where there is a change in the accounting period, or where such a return is required or permitted by the Commissioner’s regulations. What regulation has the Commissioner promulgated which requires or permits the filing of a return for a period of less than 12 months, and the computation of the tax upon that basis, in the situation here obtaining ? Petitioner fails to bring such a regulation to our attention, nor do we find any. On the contrary, respondent’s regulation covering this matter of returns for periods of less than 12 months clearly indicates that the income shall be computed upon an annual basis except where the return is occasioned by a change in the accounting period. This view finds support in respondent’s ruling of long standing, interpretative of his regulation, to the effect that a corporate return from date of incorporation to the end of the first accounting period, though covering a period of less than 12 months, is a return for the period of a full year, not for a fractional part of a year, and the statutory exemption is not to be correspondingly decreased. See G.C.M. 2292, VI-2 C.B. 78. Cf. Bankers Trust Co. v. Bowers, 295 Fed. 89. See also Carrol Chain Co., 1 B.T.A. 38 (8 Fed. (2d) 529). This ruling has been followed in G.C.M. 8156, IX-2 C.B. 124, promulgated to govern a situation arising upon facts almost identical with those in the case at bar; it is neither erroneous nor unreasonable and is here controlling. Respondent’s determination should be sustained.

Steenhagen and Leech agree with this dissent.

       SEC. 47. RETURNS EOR A PERIOD OF LESS THAN TWELVE MONTHS.
      (a) Returns for short period resulting from change of accounting period. — If a taxpayer, with the approval of the Commissioner, changes the basis of computing net income from fiscal year to calendar year a separate return shall be made for the period between the close of the last fiscal year for which return was made and the following December 81. If the change is from1 calendar year to fiscal year, a separate return shall be made for the period between the close of the last calendar year for which return was made and the date designated as the close of the fiscal year. If the change is from one fiscal year to another fiscal year a separate return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year.
      (b) Income computed on hosts of short period. — Where a separate return is made under subsection (a) on account of a change in the accounting period, and in all other cases where a separate return is required or permitted, by regulations prescribed by the Commissioner with the approval of the Secretary, to he made for a fractional part of a year, then the income shall be computed on the basis of the period for which separate return is made. [Italics supplied.]
      (c) Income placed on annual basis. — If a separate return is made under subsection (a) on account of a change in the accounting period, the net income, computed on the basis of the period for which separate return is made, shall be placed on an annual basis by multiplying the amount thereof by twelve and dividing by the number of months included in the period for which the separate return is made. The tax shall be such part of the tax computed on such annual basis as tbe number of months in such period is of twelve months.
      SEC. 48. DEFINITIONS.
      When used in this title—
      (a) Taxable year. — “ Taxable year ” means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under this Part. “ Taxable year ” includes, in the case of a return made for a fractional part of a year under the provisions of this title or under regulations prescribed by the Commissioner with the approval of the Secretary, the period for which such return is made. The first taxable year, to be called the taxable year 1928, shall be the calendar year 1928 or any fiscal year ending during the calendar year 1928.
      (b) Fiscal year. — “ Fiscal year ” means an accounting period of twelve months ending on the last day of any month other than December.
      SEC. 105. TAXABLE PERIOD EMBRACING YEARS WITH DIFFERENT LAWS.
      If it is necessary to compute the tax for a period beginning in one calendar year (hereinafter in this section called “first calendar year”) and ending in tbe following calendar year (hereinafter in this section called “ second calendar year ”) and the law applicable to the second calendar year is different from the law applicable to the first calendar year, then the tax under this title for the period ending during the second calendar year shall be the sum of: (1) the same proportion of a tax for the entire period, determined under the law applicable to the first calendar year and at the rates for such year, which the portion of such period falling within the first calendar year is of the entire period; and (2) the same proportion of a tax for the entire period, determined under the law applicable to the second calendar year and at the rates for such year, which the portion of such period falling within the second calendar year is of the entire period.


author: SteRnhagen :

text:
    The Ann Arbor Railroad Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Manistique and Lake Superior Railroad Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 25869, 35337.
    Promulgated November 14, 1933.

      L. H. Strasser, Esq., for the petitioners.

      E. 0. Algire, Esq., for the respondent.
   OPINION.

SteRnhagen :

As shown in the preliminary statement, several of the assignments of error have been removed from controversy. The adjustment of these matters will be reflected in the final judgment. The matters at issue are considered in this opinion under Roman numerals which are correlated to the findings of fact.

I.

The issue covered by the second assignment is the propriety of including the sp-oalled guaranty income received from the United States, by virtue of section 209 (c) of the Transportation Act, 1920, within petitioners’ taxable income. In view of Texas & Pacific Ry. Co. v. United States, 286 U.S. 285, the petitioners now concede that the inclusion was proper, and the respondent’s determination is therefore affirmed.

II.

The petitioners urge that the aforesaid guaranty income paid by the United States pursuant to section 209 of the Transportation Act of 1920, is subject only to an 8 percent rate of tax and not the ordinary 10 percent rate. They argue that, since the income received during Federal control as just compensation was relieved from the normal tax of 2 percent, see New York, Ontario & Western Ry. Co., 1 B.T.A. 1172, and the guaranty income was measured by the same standard, namely, the railway operating income of the test period, the guaranty income must be likewise relieved. Otherwise, it is said, the guaranty income will fall short of its purpose to give the carrier an equal measure of operating income with that of the pre-war period.

This view can not, we think, be sustained. The statute does not so provide expressly and there is no reason for its implication. The Ontario <& Western case not only involved an entirely different question, whether the express release from the normal tax of 2 percent could itself be treated as taxable income, but was founded in a special provision of the Revenue Act of 1918, which has no force here. Union Pacific R.R. Co., 26 B.T.A. 1126; New York, Chicago & St. Louis R.R. Co., 26 B.T.A. 1229. Section 230 (b) was by its terms limited to the purposes of the Federal Control Act, which ended February 28, 1920, and the lower tax' rate therein prescribed was clearly not, without more, to be applied to the income derived after that date. That this is true as to income actually earned from operations should be beyond doubt. So that a carrier, which by reason of its adequate earnings could not invoke the guaranty, could furthermore not claim an 8 percent tax rate. See Texas & Pacific Ry. Co. v. United States, 286 U.S. 285. A Congressional intent to give more than this to a carrier receiving its income through the guaranty we may suppose would be plainly stated and not left for a holdover construction-of an obsolete provision covering Federal control.

III.

Petitioners urge that the respondent has erroneously disallowed $598,111.26 of the deduction for maintenance of way and structures and of equipment .during the period of the last ten months of 1920. This amount is part of the actual expenditures for the period which were accounted for as maintenance, but the disallowance is based on the respondent’s determination that to this extent the petitioners’ ostensible maintenance cost was really not its own, but a burden assumed by the Director General, the liability for which accrued during the ten-month period. See Continental Tie & Lumber Co. v. United States, 286 U.S. 290.

Unlike New York, Chicago & St. Louis R.R. Co., supra, there is no evidence here, outside the carriers’ claim, that the Director General failed in his contractual duty to maintain the petitioners’ properties adequately during Federal control. But the respondent has determined that they received, in their final settlements in 1921, allowances for undermaintenance of their properties during Federal control in the respective amounts of $674,191.51 and $23,979.75, a total of $598,171.26, and this is the amount by which the respondent has reduced the petitioners’ deduction for maintenance expenses. As in New York, Chicago & St. Louis R.R. Co., the question arises not because respondent calls the Director General’s allowance income, but because he reduces the petitioners’ deduction for maintenance expense by the amount of the Director General’s allowance. Thus the issue, as to the measure of petitioners’ actual and deductible maintenance expenses, is quite different from Terminal R.R. Assn. of St. Louis v. Commissioner, 61 Fed. (2d) 166; certiorari denied, 288 U.S. 604; 17 B.T.A. 1135; Norfolk Southern R.R. Co. v. Commissioner, 63 Fed. (2d) 304; 290 U.S. 672 ; 22 B.T.A. 302; and Chicago & North Western Ry. Co. v. Commissioner, 66 Fed. (2d) 61; 290 U.S. 672; 22 B.T.A. 1407. In those cases whether gross income was received as a matter of fact (Terminal R.R. Assn. of St. Louis, supra), or whether, being received in fact, the amount was gross income in law (Norfolk Southern R.R. Co., supra, and Chicago & North Western Ry. Co., supra), were questions which imposed a different and less burden on the petitioning taxpayer than the question of his right, despite the respondents determination, to deduct all amounts expended for maintenance without regard for the extent to which, as determined by respondent, such expenditures embodied an amount derived from the Director General in discharge of his contractual obligation.

The petitioners did not enter into the standard agreement provided for by section 1 of the Federal Control Act, but by acceptance of the benefits of section 2 thereof they brought themselves within the entire provisions of the act; consequently, their properties were taken over and used by the Director General subject to the same conditions as those contained in the standard agreement so far as they provided for the return of the properties to the carriers “ in substantially as good repair and in substantially as complete equipment as it was in at the beginning.of federal control.” At the end of Federal control, the-petitioners filed claims with the Director General setting forth numerous items due from and to the Director General. The Ann Arbor’s claim contained, among others, a claim for undermaintenanee of way and structures of $507,968, and a claim for undermaintenanee of equipment of $700 566.34, a total for under-maintenance of $1,208,534.34, and claimed a net balance due the corporation of $603,601.26. The Lake Superior’s claim contained an item for undermaintenanee of way and structures of $20,631.95, and claimed a net balance due the corporation of $69,079.98. In the final settlement agreements, the Ann Arbor acknowledged an indebtedness of $600,000 to the Director General, and the Director General acknowledged an indebtedness of $50,000 to the Lake Superior, and the account was closed by the Ann Arbor giving two notes, of a total face amount of $550,000, to the Director General.

The petitioners contend that nothing whatever was allowed by the Director General for undermaintenanee. They say:

Instead oí receiving: any money as (lie result of the settlement, the petitioner paid a large sum to the Director General. An analysis of the claims presented and the settlement consummated leads irresistibly to the conclusion that nothing whatever was allowed on the claim for undermaintenanee.
The Ann Arbor Railroad Company’s claim (91, Respondent’s Exhibit A) contains an item of $1,208,534.34 for undermaintenanee. If this item had been allowed, the net amount due the Ann Arbor would have been $603,601.26. If the claim for undermaintenanee be eliminated, the statement would show a balance of $604,933.08 due the Director General, and since the Ann Arbor paid the Director General $600,000 in the settlement, it is obvious that nothing whatever was allowed petitioner for undermaintenanee on its claim.
The Manistique and Lake Superior Railroad Company’s claim. (93, Respondent’s Exhibit B) contained an item of $20,631.95 for undermaintenanee. If this claim had been allowed, petitioner would have been entitled to receive in settlement $69,079.98. If the claim for undermaintenanee be eliminated, the statement would show a balance of $48,448.03 due the railroad company. It was actually allowed $50,000 by the Director General in the final settlement. The logical conclusion, therefore, is that the claims for undermaintenanee in the case of both the Manistique and Lake Superior and the Ann Arbor Railroad Companies were wholly disallowed, and that neither company was allowed anything whatever for undermaintenanee in the final settlement.

This assumes that all items in the claims, except the two under-maintenance items, were allowed by the Director General, and that the claims for undermaintenanee were wholly eliminated. This assumption is not justified by the evidence.

The only witness on this matter was one of the Ann Arbor’s representatives in the conferences with the Director General, which culminated in the final settlement agreement. He testified:

We went down; the representatives of the Ann Arbor Railroad went to Washington in, as I recall it, April, 1921; I know we left on Easter Sunday morning, and we had conferences with the representatives of the Director General, Mr. Tracy being the Comptroller of the Railroad Administration at that time and Mr. Alexander Smith, I believe, was their counsel, and we sat around the table for about a week, and there was a question of give ⅝¾⅜ t^ke all the way through, there was Mr. Erb, our president, he was there and he made certain concessions to the counsel for the Director General, who, in turn, of course allowed similar concessions, and when the thing- all wound up there was a lump sum 'settlement agreed upon.
Q. What was the — what credit was allowed the Ann Arbor in that settlement of the account?
A. I do not know; the balance was against the Ann Arbor to the extent of six hundred thousand dollars, when the final figures were computed and agreed to by the President of the Company and the Director General’s representatives.
Q. Mr. Kiefaber, you testified this morning that the closing journal entry in both of these cases, or rather in the case of both petitioners recording the final settlement with the Director General was made in accordance with the I.C.C. regulations issued on January 25, 1922, which has been introduced here as Petitioner’s Exhibit No. 4; I call your attention to paragraph 2 of that letter, or of that order which provides that items on which the amount of settlement may be mutually agreed upon between the Director General and the carrier, whether or not previously recorded in the account, shall be recorded in the accounts in accordance with the effective accounting regulations on the basis of settlement agreed upon. Now, as I understand it, you did not record these items which you had agreed upon in accordance with the I.C.C. regulations in effect at that time, but you carried the entire net credit to profit and loss, or the net debit, as the case may be, instead of allocating these items which had been agreed upon to the accounts where they belonged; is that a fact?
A. We could not identify the whole, because our inability to allocate the entire amount of six hundred thousand dollars charged by the Director General, prevented us from making a definite division of that figure, therefore all we could do was to wipe off the open accounts standing on the corporation’s books, and then setting up this liability for the $600,000 and calling the rest profit and loss; -we have no other way of determining what the amounts were other than what were on our books.
Q. In other words, you made no allocation of the net balance as between different items?
A. No, sir, we did not know what the $600,000 represented.

As to the Lake Superior’s claim and the settlement agreed upon, the witness testified that according to notations which he made during the course of the conferences with the Director General, the items of $5,699.27 for interest on deferred compensation and $14,-505.50 for interest on open accounts due the corporation were entirely eliminated.

Q. Now the remaining item is maintenance of way and structures under $20,631.95; -what is your recollection with respect to that?
A. Apparently from my recollection of the transaction and the notations which I have on my working copy, that amount evidently was practically allowed in full by the Director General, for this reason you will note that the total of the statement to which you refer is $69,079.98 due to the corporation, the items of interest or deferred compensation amounting to $5,699.27, and interest on open accounts due to corporation $14,505.50, or a total of $20,204.77, have been shown as having been deducted from the total of $69,079.98, leaving a balance of $48,875.21, due the corporation from the Director General, and in view of the fact that in setting this thing down and making final settlement with the Director General, he allowed the M. & L. S. a flat figure of $50,000 and called it square, so that it would indicate that all other items had been allowed, there was only a difference of $1,200 between the amended claim and his round flat settlement figure of $50,000.

That is all the evidence to indicate whether the Director General made allowances for undermaintenance.

The petitioners, however, do not rest their case entirely upon the proposition that no allowances were made to them for under-maintenance, but urge that, even if the amounts in question be regarded as allowances for undermaintenance and within the field of the so-called reimbursement rule, still the respondent’s action is erroneous, because “ no part of the expenditures for maintenance in 1920 were made for the purpose of rehabilitating the property or making good deferred maintenance, but on the other hand the entire amount included as maintenance expenses covered only the usual, ordinary and necessary maintenance expenses in the operation of petitioner’s property.” Upon this proposition was predicated the introduction of elaborate statistical studies and opinion testimony to show that the petitioners’ maintenance expenditures during the last ten months of 1920 were no more than can properly be attributed to the current maintenance requirements of that period.

The petitioners’ first method of demonstrating that the maintenance charges of the last ten months of 1920 do not include restoration of the prior undermaintenance is an equated comparison with the cost figures of the test period. Applying this process, the Ann Arbor’s actual average test period charges for maintenance become an equated figure of $1,480,721.90 in comparison with the 1920 figure of $1,600,814.19, and the Lake Superior’s average test period charges become an equated figure, without adjustment for differences in the quantity of property used and in the extent of such use, of $94,473.81 in comparison with the 1920 figure of $73,633.35, which shows that the 1920 maintenance cost was $120,000 greater for the Ann Arbor, and $20,800 less for the Lake Superior, than the normal test period cost. The Ann Arbor’s greater 1920 maintenance cost, as disclosed by the statistical study, is explained by the petitioners as due to unusual conditions in that year, such as numerous derailments and breakdown of equipment, caused by the bad condition and the lack of proper maintenance of the Atm Arbor’s roadway, and to excessive running (minor) repairs to equipment, which were made necessary by the Ann Arbor’s failure to provide the usual classified (major) repairs. To support this explanation, there was introduced the testimony of three witnesses and several other statistical studies.

Parvin, superintendent of the Ann Arbor, testified that he made weekly inspection trips over the road; that he kept himself intimately acquainted with the condition of the road, from day to day and month to month; and when asked what the condition of the road was during the years 1920 and 1921, he replied as follows :

Putting it mildly, the condition was bad, basing that statement on the physical condition oí the road from a standpoint of maintenance during the years 1920 and 1921, and on the further basis of our derailment record for those two years, notwithstanding every precaution that the Transportation Department could exercise over its men, — that is the department I had charge of, educating its men to operate as cautiously and as carefully as possible, and by placing slow orders to protect bad track, some of which if it is permissible, I will insert into the record, in the year 1920 we had 122 main liue derailments on our 292 miles of railroad; 391 side track derailments. I think I should qualify that, though, by the statement that for the first three months in 1920, 16 of the main line derailments were occasioned by ice on the track, — ■ we had a very severe ice storm in the first of 1920, which resulted in sixteen derailments on that account, but in 1921 we had no unusual conditions, we had 72 main line derailments, 289 side track derailments. Your Honor has been connected with the railroad, and for your information we had departmental jurisdiction — -there is always considerable controversy between the departments when you have derailments, particularly when conditions were as I have stated.
By the Member :
Q. Do you mean controversy as to which department is at fault?
A. Yes, sir; also the track will contribute to other causes, such as broken arch bars on cars; broken springs on locomotives, and in several instances the Grand Trunk Railroad complained of the condition of our track because they could not keep springs under our locomotives. Conditions got to the point where our vice-president and general manager at that time, Mr. Blomeyer, walked a lot of the track with me; we walked as much as seventeen miles a day; he finally remarked that from then on when I reported a derailment due to track conditions there would not be any further argument about it. That conditions did not only exist during 1929 and 1921, but right up until 1925, when the Wabash bought the property and started rehabilitating the property. As an offset, in 1930 we had 18 main line derailments, two chargeable to track. If it would be permissible, and to support my statement as to the conditions, I could put into the record for the month, say, of November, 1921 and November 1920, the slow orders over the track that were in effect at that time, but in view of these slow orders we still had those derailments, for instance in 1920, in November, we had twelve main line derailments, and in November 1921, we had ten derailments, — main line derailments, and we had a page full of slow orders at the time, as slow a speed over some of the track as five miles per hour.
Q. Do you, as an experienced railroad man, attribute any relation of cause and effect, between the number of derailments you had during 1920 and 1921, and the state of maintenance of the track?
A. Derailments certainly indicate poor maintenance, or lack of maintenance.
Q. Now, do you have any knowledge of the state of maintenance of the mechanical and car equipment of the Ann Arbor during this same period?
A. * ⅜ * I would not care to state as to the maintenance of equipment, but I can state as to the maintenance of the locomotives, which was poor and in direct line with the track maintenance.
Q. Can you state whether or not any rehabilitation of the Ann Arbor track or roadway was undertaken or conducted during either 1920 or 1921?
A. No rehabilitation was undertaken or conducted.
Q. Now, can you state whether or not any rehabilitation of locomotives, cars or other equipment was undertaken in either of these years, or conducted during those years?
A. In the case of locomotives there was not; in the case of cars, if you consider rebuilding some express cars, why I do not think I am prepared to say whether that would be or would not be.

He further testified that the track was very poorly maintained in 1920 and 1921; that such failure to maintain “naturally would cause considerable increase in your operating expenses ”; that the derailments or wrecks to which he referred tended to increase expenditures in connection with track maintenance, equipment maintenance, operation of wrecking outfits, and claim payments; and that expenses of 1920 were materially increased, due to those wrecks and derailments. On cross-examination he testified, in part, as follows:

Q. Mr. Parviu, what do you understand by rehabilitation of properties?
A. Go ahead and putting your property in shape to do that for which the property was intended.
Q. That is to say, assuming in the beginning that it was grossly undermain-tained.
A. Yes.

Butler, master mechanic of the Ann Arbor, testified that he inspected the power — locomotives, stationary boilers, pump stations and all of that sort of equipment — when he first became associated with the company in 1922; that he found all of such equipment to be in very bad condition; that the condition of the power was such as to lead him to believe that since 1920 it had not been kept in good condition or maintained in good repair up to the best standard of condition ; and that he would even say that far less than the ordinary and necessary repairs had been made since March 1, 1920. After examining petitioners’ Exhibit 43, being a statement of monthly expenditures for repairs to locomotives in an average ten months of the test period and in the last ten months of 1920, segregated as between classified (major) and running (minor) repairs, he testified that the exhibit indicated to him that the power was not in proper condition either in the test period or in the last ten months of 1920; that in order to keep locomotives in proper condition, classified and running repairs should be made thereto on a fifty-fifty basis; that unless approximately the same amount of money is spent for classified repairs as for running repairs, the power is not in proper condition and you are spending too much money on running repairs trying to operate the railroad; and that, judging from the condition of the equipment in 1922, it is his opinion that the locomotives had not been put in proper condition or rehabilitated in 1920. He testified:

Q. Do you mean anything more than this: that when you saw them in 1922 they were in bad condition and if they had been properly maintained before 1922 they probably would not have been in such bad condition?
A. No, sir.
Q. And from that you concluded that at some time before 1922 they were permitted to get in bad condition?
A. That is right.
Q. And you do not know at what time before 1922 they were permitted to get in bad condition, do you?
A. No, I do not.
Q. You just know they did not have as much maintenance as they should have had in the period prior to 1922?
A. I know they had not been properly maintained.
Q. At any time prior to 1922?
A. Prior to 1922.
Q. You do not have any information of any period prior to 1922, do you? They might have been in bad condition in 1916 or in 1918 or in 1920, and all of those things would result in the bad condition in which you found them in 1922?
A. That is right; what I mean is if you had a bunch of fifty engines in good condition that it would take more than two years to put them in the condition rhat I found them in.
Q. So you do not know, as a matter of fact, what was done to them in 1920?
A. No, sir, I was not there.

Exhibit 21, containing data taken from the annual reports of the chief inspector of locomotive boilers to the Interstate Commerce Commission, shows, in respect of the Ann Arbor’s locomotives, as follows:

Exhibit 43, previously referred to in connection with Butler’s testimony, shows repairs applied to Ann Arbor’s locomotives, as follows:

Treacy, car foreman of the Ann Arbor since 1918, testified that he has been at car work since 1896, and that he supervises all of the Ann Arbor’s car work; that the condition of the Ann Arbor’s car equipment was “ quite bad ” from March 1, 1920, to the end of 1921; that the ordinary and necessary repairs were not made to the Ann Arbor’s car equipment in 1920; that it was the practice in 1920 to make only necessary repairs to good cars; that during and after Federal control the cars were operated “ all over the country, and when they came back to us, they were in bad condition ”; that “ we picked out the lightest cars [cars needing the least repairs] that we could get and made repairs and let the other ones stand that “ we did not work full force or full time in 1920, because we did not have the money to do it with ”; and that the bad order cars “ coming in on the line ” for repairs in 1920 were heavier than usual.

Exhibits 44, 46, and 47 show that the number of Ann Arbor freight cars in bad order in March 1920 was 191, which is 9.10 percent of the number of cars owned and leased in that month; and that the number of freight cars in bad order in December 1920 was 293, which is 13.88 percent of the number of cars owned and leased in that month.

Exhibits 45,46, and 47 show that the average number of Ann Arbor freight cars repaired during each month of the test period was 620, which is 26.90 percent of the average number of cars owned and leased in that period; and that the average number of cars repaired during each of the last 10 months of 1920 was 358, which is 16.89 percent of the average number owned and leased during those months.

The petitioners contend that this oral and documentary evidence “ discloses facts which rationally account for the excess expenditure [greater maintenance cost of the 1920 period] indicated by the result of the study [comparison of 1920 period maintenance cost with test period maintenance cost], and supports our contention that no rehabilitation of the Ann Arbor property occurred during 1920.”

From the foregoing, it will be observed that the petitioners’ position is that maintenance expenditures of the 1920 period in an amount equal to the equated expenditures of the test period are to be regarded as having been made for current maintenance and as necessarily excluding prior undermaintenance; that the statistical study of comparative maintenance costs of the 1920 and test periods discloses that all but approximately $120,000 of the Ann Arbor’s 1920 maintenance expenditures was for current maintenance, and that all of the Lake Superior’s 1920 maintenance expenditures was for current maintenance ; that the greater 1920 maintenance cost in the case of the Ann Arbor is rationally accounted for by the facts disclosed by the oral and documentary evidence; hence, there was no restoration of prior undermaintenance in 1920.

This is the identical proposition which was presented in New York, Chicago & St. Louis R.R. Co., supra, and Southern Ry. Co., 27 B.T.A. 673. It was fully and carefully considered and rejected in those opinions, the decision in Missouri Pacific R.R. Co., 22 B.T.A. 267, to the contrary, being pro tanto expressly overruled.

Since the statistical study, or comparison of 1920 maintenance cost with test period maintenance cost, is the only evidence we have, in the case of the Lake Superior, bearing upon the question of whether Federal control undermaintenance was made good by that company in the 1920 period, it follows, in line with the decision in the Southern Ry. case, that the respondent’s determination, so far as it affects that company, must be sustained. As to the Ann Arbor, it remains to be determined whether the evidence, other than the statistical study of comparative maintenance costs of the 1920 and test periods, justifies overturning the respondent’s determination as to it.

It is clear from the evidence that the Ann Arbor’s roadway, locomotives, and freight train cars were not in good repair in 1920. As to structures, miscellaneous facilities, passenger train cars, floating equipment, and miscellaneous equipment, for the maintenance of which the Ann Arbor expended $403,115.56 in the last ten months of 1920, there is no evidence as to their condition or state of maintenance in the 1920 period, or as to any other facts pertaining to them; and, consequently, there is no proof that the expenditure of $403,115.56 for the maintenance of these facilities in the 1920 period contains nothing for restoration of prior undermaintenance. The fact that the Ann Arbor’s roadway, locomotives, and freight train cars were not in good repair in 1920 does not prove that the 1920 expenditures included nothing for restoration of prior undermain-tenance. The question can not be decided by reference to the condition of the facilities in 1920; for, if no more than a single item of maintenance had been performed in the 1920 period — in which event, the condition of repair might obviously be very bad — the question would still remain as to whether the particular item of maintenance performed was one which the Director General had undertaken. The proposition was considered in New York, Chicago & St. Louis R.R. Co., supra, and rejected in the following language:

The petitioner’s assistant chief engineer stated that he had inspected the railroad according to his periodic wont and found it to be in his opinion in no better condition at the end of 1920 than at the beginning. This opinion adds little or no force to the petitioner’s contention, for, aside from the fact that this is an opinion of an interested person regarded by the Director General as inadequate for official recognition (Director General’s Report to the President, supra, p. 17), and not controlling with this Board (Uncasville Mfg. Co. v Commissioner, 55 Fed. (2d) 893), the physical appearance o£ the road in general is not shown to disclose whether $459,000 of the year’s maintenance expense had been devoted to such restoration of road as the Director General had failed in his contractual duty to maintain.

Likewise, in Southern Ry. Co., supra., it was said:

The fact that there was no improvement in the average condition of maintenance by the expenditures of the 1920 period is of no importance; that, like the accounting test, indicates only that not more than the usual and normal amount of maintenance was accomplished in the period, or that such maintenance as was performed was not greater than current necessity required. The real question here is, Was the maintenance performed in the 1920 period, or some portion thereof, that which actually belonged to the Federal control period for which the petitioner was reimbursed by the Director General?; and that cannot be answered by a mere comparison of maintenance conditions at the beginning of the period with the conditions existing at the end of the period, as was held in the Missouri Pacific case, but requires an examination of particular items of maintenance performed. ⅜ * *

Parvin’s statement that there was no rehabilitation of the Ann Arbor’s roadway and locomotives in 1920, and similar statements by Butler in respect of locomotives and Treacy in respect of freight train cars, are inconsistent with other evidence. Exhibit 33 shows the application of labor and materials to roadway in the 1920 period in greater quantities than in the test period; and Parvin testified that these were applied at points where most needed. Butler did not become associated with the Ann Arbor until 1922; and, consequently, he had no knowledge of what had been done in 1920 in respect to locomotives. His statement was based entirely upon what he saw in 1922 and his judgment that the locomotives could not have reached the condition in which he found them in 1922 had they been kept in a state of good repair after March 1, 1920. Exhibit D, however, being a photostatic copy of the supplemental claim which the Ann Arbor filed with the Director General, received in evidence without objection by petitioners’ counsel, shows that of the number of locomotives turned back by the Director General at the end of Federal control in bad condition, 10 were fully repaired and 22 partially repaired between March 1 and December 31, 1920, at a cost of $157,-416.32. And, as to freight train cars, Exhibit E, a photostatic copy of a further supplemental claim which the Ann Arbor filed with the Director General, also received in evidence without objection by petitioners’ counsel, shows that 799 “'heavy bad order cars ” were “ returned to our line for rebuilding during the period January 1, 1920, to January 31, 1921,” and that the cost of “ actual rebuilding ” of 675 of said cars amounted to $351,836.58.

The respondent’s determination that petitioners’ maintenance deductions must be cut down so as to exclude the Director General’s undermaintenance allowance is sustained, the disallowance of the Lake Superior being apparently properly admitted by respondent to amount of $20,631.95, instead of $23,979.75 originally disallowed.

IY.

The parties have stipulated that on May 1, 1919, the petitioner issued its two-year 6 percent notes, of the face value of $750,000, maturing May 1, 1921, for $720,077.92 cash; that in 1920, the petitioner purchased and retired $27,200 face value of such notes, paying therefor $25,024; that the issuing price of the notes retired in 1920 was $26,114.83; that the discount allocable to the notes retired in 1920 previously amortized is $361.72; and that if, as a matter of law, the difference between the purchase price and the sale price of the notes retired in 1920 is taxable income, the amount to be included in respect of the transaction is $1,452.55. On the brief, the petitioners concede that the amount of $1,452.55 is taxable income. United States v. Kirby Lumber Co., 284 U.S. 1. Since the amount included in income by the respondent is $2,176, net income shown in the deficiency notice should be reduced by $723.45.

V.

The proposed findings in this subdivision relate to the eighth and ninth assignments of error, which are considered together. In the eighth assignment the Ann Arbor contends that the deduction for operating expenses allowed by the respondent is understated by reason of an offset of $31,000, representing the proceeds from the sale of the spur track to the Owosso Sugar Co.; and in the ninth assignment it is charged that the Ann Arbor sustained a loss of $37,007.36 upon the sale of the spur track, which loss the respondent has not allowed as a deduction.

The property in question was acquired prior to March 1, 1913. Under the applicable statute, the Revenue Act of 1918, the basis for determining any gain from the sale is cost or March 1, 1913, value, whichever is higher, and the basis for determining any loss is cost or March 1,1913, value, whichever is lower. United States v. Flannery, 268 U.S. 98. On the brief, the petitioners contend that the cost of the track was $69,774.17; that the fair market value at March 1, 1913, was $68,494.43; and, using the alleged March 1, 1913, value as the basis, that the Ann Arbor sustained a deductible loss of $37,494.43.

The alleged cost of $69,774.17 represents the $28,131.73 expended by the Ann Arbor plus the $41,642.44 alleged to have been expended by the New Haven Co. Clearly no amount expended by the New Haven Co. can be included in the Ann Arbor’s cost basis, and this is not argued. The evidence shows that no cash refunds were ever paid by the Ann Arbor to the New Haven Co. under paragraph 7 of the agreement. The findings show that the New Haven Co. had rendered statements of amounts due it under paragraph 7, in the total sum of $2,300 or $2,400, and the Ann Arbor’s auditor testified that “ I can recall there was one bill made against them [the New Haven Coal Mining Co.] for around $5,400 for a bridge, and my best recollection is that these refunds that were due them [the New Haven Coal Mining Co.] was [sic] credited to that bill as part of the track.” Evidently, then, the Ann Arbor had not been reimbursed for the cost of the bridge at the time the New Haven Co. discontinued operations and went out of business. The evidence does not prove a greater cost than $28,131.73; and, since the track and bridge were disposed of for $31,000, no loss resulted to the Ann Arbor from the transaction; and none is deductible.

As to the eighth assignment, we are of opinion that the basis to be used is the original cost to the Ann Arbor of $28,131.73 and that the profit of $2,868.27 is properly within its income. This transaction has nothing to do with the deduction for expenses.

We are not persuaded that the theoretical construction of a figure to represent the fair market value of the property on March 1, 1913, is demonstrative of the value in fact or that the evidence establishes a value on March 1, 1913, in excess of the cost of $28,131.73. We also find no sufficient evidence to support a finding that 1,132 feet of the track were omitted from the sale.

The respondent’s determination in respect of the sale of the spur track is modified, by reducing the determined net income by $28,131.73.

VI.

The net income for January and February 1920, taxable at the rate of 8 percent, and the net income for the period March 1 to December 31, 1920, taxable at the rate of 10 percent, will be determined in accordance with the findings.

Judgment will Be entered under Rule B0.


author: Lansdon :

text:
    First National Bank of Birmingham, Trustee, E. T. Schuler Trust Fund, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 54372, 63374.
    Promulgated November 15, 1933.

      W. S. Pritchard, Esq., for the petitioner.

      Hartford Allen, Esq., for the respondent.
   OPINION.

Lansdon :

The appeals consolidated in these proceedings challenge income taxes determined for the years 1927, 1928, and 1929 in the respective amounts of $2,812.50, $1,875, and $1,456.52.

The only dispute between the parties relates to the March 1, 1913, value of certain corporation stock sold by the petitioner and upon which taxable gain in each year is at issue.

During each of the taxable years the petitioner sold a certain number of shares of the common stock of the Southeastern Power & Light Co., successor to a Canadian corporation known as the Alabama Traction, Light & Power Co., hereinafter sometimes designated holding company. The only assets of the holding company were stocks of domestic corporations and their subsidiaries. The sales here involved are of stock which the petitioner received in exchange for original stock in the holding company, acquired prior to March 1, 1913, increased by other shares received through stock dividends. The parties agree that petitioner’s shares, at the time of sales, with additions, amounted to ten times the original number acquired in the holding company and seek to establish the cost of the stock sold by showing the fair market value at March 1, 1913, of the original stock and dividing that value by ten.

The holding company owned a number of subsidiaries, and, to show the value of its stock on the basic date, the petitioner sought to establish the value of the subsidiary company’s properties by several witnesses who testified at the hearing. One was an accountant who, since duly 1923, had been auditor of one of the subsidiaries known as the Alabama Power Co. He told in his testimony about the development of the Alabama Power Co., stating that in 1912, from March 1 to August 6, inclusive, it acquired some eleven utility corporations. He did not state, however, what assets these acquired utility corporations owned, or their financial condition. This witness made a valuation table of the properties of the Alabama Power Co. as of July 1, 1913, upon information supplied by its treasurer, but at no time was there any audit of the holding company’s properties. Because of its vagueness and hearsay character, the testimony of this witness is without value to us in this inquiry. Lee Sturgess, Administrator, 2 B.T.A. 69; Seminole Hills Land Co., 8 B.T.A. 882; Huron Building Co., 15 B.T.A. 1107.

E. T. Schuler, another witness, testified for the petitioner. He was managing agent for the Coosa Land Co., which owned a one-third interest in the Alabama Power Co., acquired in 1912. Schuler testified, in direct examination, that his company purchased 3,000 shares of the holding company’s capital stock for $100 per share in 1913, but on cross-examination corrected this as to the year and stated that the purchase was made in 1912. He knew of no market value or quotation for this stock at any time, or of sales of it in the United States in 1913, but on cross-examination said that he knew of a sale made in London on or about March 1, 1913, at $40 per share. The witness, on cross-examination, admitted that he once placed a March 1, 1913, valiie on this stock of $40 per share in making out income tax returns for himself and the Coosa Land Co., but explained that these were temporary estimates made in the absence of correct information. Later, he filed amended returns and increased those values to $160 per share. Schuler’s opinion was that the physical properties owned by all of the subsidiaries of the holding company had a fair and reasonable market value on March 1, 1913, of from thirty to forty million dollars.

Three other witnesses testified for the petitioner at the hearing and one of these expressed his opinion that the physical assets of all of the subsidiary corporations belonging to it on March 1, 1913, were worth from forty to fifty million dollars. The others expressed no opinion.

There was no market for the Alabama Traction, Light & Power Co. stock in the United States in 1913, and the only evidence in the record of the underlying values of the assets is the bare estimates made as to the value of the physical properties of its subsidiaries. If these estimates were properly supported by inventories or other basic data, so as to enable us to'determine the gross value of all assets owned by the holding company, we would still be unable to value the stock, because there is no showing as to offsetting liabilities or the number of shares into which the authorized capital was divided. We cannot accept opinions in substitution for facts and, therefore, are unable to determine the basic value of the holding company’s stock from the proof thus offered. Tracy v. Commissioner, 53 Fed. (2d) 575; American Anchor Co. v. Commissioner. 42 Fed. (2d) 99; Am-Plus Storage Battery Co. v. Commissioner, 35 Fed. (2d) 167.

Obviously the stock had some intrinsic value on March 1, 1913, although the company’s earnings are at no time indicated. Some 3,000 shares of the stock were sold in 1912 for $100 per share and 500 more in some other year not shown at $8 per share. Five hundred shares were sold in London about March 1, 1913, at $40 per'share. We think the first two sales mentioned are too remote in time to furnish any guide for fixing values of March 1, 1913. Estate of A. Plumer Austin, 10 B.T.A. 1055; Ethel P. Hunt et al., Executrices, 12 B.T.A. 396. Between these extremes we have the price of $40 per share paid in London at about the basic date. This price, while in no way conclusive of what the value of the stock was in the United States is, to say the least, evidence of what some one was willing to pay for it on that date; and, being identical in point of time, we are obliged to accept such indication of value as the best proof under the circumstances of the true value on March 1, 1913.

We, therefore, find for the purpose of this inquiry that the value of the stock of the Alabama Traction, Light & Power Co. on March 1, 1913, was $40 per share; and that the cost price to be attributed to the petitioner’s stock in the Southeastern Power & Light Co., which it sold in the tax year, for computing taxable gain, is $4 for each share sold.

The respondent produced the testimony of one witness in an attempt to prove that the valuations adopted by him in his original audit were too high and to establish his claim for increased tax deficiencies. The testimony of that witness, however, dealt with facts too remote and indefinite to be of any value in this case. We, therefore, must hold that the respondent failed in that effort. His prayer for increased deficiencies is accordingly denied.

Inasmuch as our determination of the value for the stock sold confirms the base used by the respondent in his determination from which this appeal is taken, the deficiencies found by him are hereby confirmed.

Judgment of deficiencies in petitioner's income tax for the years 1927,1928, and 1929 in the respective amounts of $2,812.60, $1,875, and $lji56.52 will he entered.


author: Murdock :

text:
    Ward M. Canaday, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 58632.
    Promulgated November 15, 1933.

      George W. Ritter, Esq., and Leo Dalton, G.P.A., for the petitioner.

      M. B. Leming, Esq., for the respondent.
   OPINION.

Murdock :

The Commissioner determined a deficiency of $63,061.16 for the year 1928. The petitioner assigns as error the action of the Commissioner in holding (1) that the distribution of stocks and securities received by the petitioner as a stockholder of the Dealers Finance Co., pursuant to a resolution of the board of directors of the latter corporation passed on December 26, 1928, declaring as a dividend its earúed surplus, consisting of stocks and securities in excess of a sum equal to $125,000, the par value of its outstanding capital stock, constituted a liquidating dividend, and (2) that the sum of $25,000 received by the petitioner from the Dealers Finance Co. in cancellation of 5,000 shares of stock in the latter corporation theretofore issued to the petitioner as a stock dividend was a liquidating dividend instead of a taxable dividend within ‘the meaning of section 115 (g) of the Revenue Act of 1928.

At the hearing the respondent made claim for an increased deficiency on the ground that he had failed to include $3,622.11 as a liquidating dividend to the petitioner on its Dealers Finance Co. stock, being $2,997.68 received as its pro rata part of certain reserve funds of the Dealers Finance Co. and $624.43 received as a refund of income taxes of the Dealers Finance Co. for 1928.

The parties filed a stipulation which included a great many exhibits. We think, and the parties seem to agree, that a full statement of all of the facts and circumstances disclosed by the stipulation and the accompanying exhibits is not necessary to a decision of the case.

The petitioner is a Delaware corporation. All of its stock was owned by Ward M. Canaday and John N. Willys in equal proportions at all times material hereto. The petitioner owned all of the issued and outstanding Class A stock of the Dealers Finance Co. from May 1921 until and including the twenty-sixth day of December 1928. It originally subscribed and paid $100,000 for 20,000 shares of this Class A stock. On December 3, 1926, the Dealers Finance Co. declared a 25 percent stock dividend, as a result of which the petitioner received 5,000 additional shares of Class A stock, each of the par value of $5.

The Dealers Finance Co. was incorporated on February 19, 1925, under the laws of the State of Delaware. The business of the Dealers Finance Co. from the time it began operations, April 1, 1925, until February 29, 1928, consisted of financing retail time sales of automobiles manufactured by Willys-Overland Co. and sold by Willys-Overland Co. dealers, i.e., the purchase of notes secured by chattel mortgages or conditional sales contracts, or both, representing balances of the selling prices of automobiles manufactured by the Willys-Overland Co. and also of certain used automobiles sold by dealers of the Willys-Overland Co.

The Class B stock of the Dealers Finance Co. originally had a total par value of $34,000, but was increased to $42,500 on December 3,1926, by a 25 percent stock dividend.

The Class B stockholders of the Dealers Finance Co. consisted solely of officers and directors of the Willys-Overland Co. and their wives, of officers of the United States Advertising Corporation, and of employees of these two corporations.

The directors of the Dealers Finance Co. during all times material hereto were also either directors of the Willys-Overland Co. or officers of the United States Advertising Corporation. The latter corporation acted as advertising agency for the former. The petitioner owned all of the common stock of the United States Advertising Corporation.

On March 5, 1928, the Commercial Credit Co. of Baltimore and the Dealers Finance Co. entered into an agreement to “ consolidate.” Under the agreement the Dealers Finance Co. transferred all of its property and assets to the Commercial Credit Co. in exchange for stock and notes of the Commercial Credit Co. and the assumption by the Commercial Credit Co. of all of the liabilities of the Dealers Finance Co. The Dealers Finance Co. received from the Commercial Credit Co. stock and notes having a total fair market value of $600,000. The Dealers Finance Co. reported no gain in its income tax return for 1928 upon the transfer of its assets and paid no tax thereon.

The Class B shareholders of the Dealers Finance Co. surrendered their stock on April 18, 1928, in exchange for their proportionate part of the securities owned by the Dealers Finance Co. During 1928 the Dealers Finance Co. sold some of the notes and stock received from the Commercial Credit Co. and reported a profit of $203,645.58 upon the sale of these items. It made no other purchases or sales of securities during the period from March 1 to December 26, 1928, and had no other income except interest on the notes and dividends on the stock acquired in the transaction above mentioned.

On March 8, 1928, Willys-Overland entered into an agreement with the Commercial Credit Co., whereby the Commercial Credit Co. agreed to finance both new and used cars for Willys-Overland dealers, both wholesale and retail, for a period of three years. Willys-Over-land agreed to deal and do business exclusively with the Commercial Credit Co., to reconunend exclusively to its distributors and dealers the financing facilities provided by the Commercial Credit Co., to use its best efforts to discourage the use by its distributors and dealers of other financing facilities, and that during the life of the contract “ neither it nor any of its subsidiary companies now existing or hereafter to be organized, shall engage in the business of the financing of retail sale of automobiles; nor shall it, nor any of its subsidiary companies, become associated with or identified with or aid directly or indirectly any corporation, common law trust, firm or other association than Commercial Credit, and its Affiliated Companies in financing the retail sale of automobiles during the life of this contract.”

The financial condition of the Dealers Finance Co. at the close of business December 25,1928, and at the beginning of business December 26, 1928, as shown by the books of the company was as follows:

Assets :
J. H. Gerkins — trustee account_$7,143.18
Less: Delaware filing fee not entered_ 2. 00
- $7,143.18
Accounts receivable — securities ledger_ 390,247. 28
Securities owned—
6 Shares Com. Credit 6½ Preferred_ 282. 84
4,644 Shares Com. Credit Common_ 55, 825. 74
Accounts receivable — Com. Credit Co_ 859.49
Total assets_ 454, 356. 53
Liabilities :
Reserve for Federal Taxes—
Additional Assessment 1927_ $859. 00
Year 1928_ 24, 994.29
Interest on 1927 additional tax_ 42. 98
Contingent reserve-$13, 364. 37
Less: charge for interest on 1927—
Additional tax assessment_$42.98
Charge for Delaware filing fee not
entered- 2. 00
•-- 44. 98
-:— 13,319.39
Capital stock — Class A-1_ 125, 000. 00
Surplus_$287,773.75
Reserve for Federal taxes in excess of tax liability- 2,366. 52
Total surplus. 290,140. 27
Total liabilities_,_ 454, 356. 53

The net assets of Dealers Finance Co. on December 26, 1928, per books, and the fair market value thereof on the same date, were as follows:

The minutes of a meeting of the board of directors of the Dealers Finance Co. held on December 26, 1928, are in part as follows:

On motion, duly seconded and unanimously carried, the following resolution was adopted:
Whereas, this corporation has surplus profits invested in stock and/or securities the value of which exceeds the par value of outstanding Class A shares of the corporation and which are available for distribution to the holder of the Class A shares of this corporation, subject, however, to the rights which the persons who were the holders of Class B shares of this corporation have in certain reserves set up on the books of the corporation pursuant to the resolution of the board of directors of this corporation passed on March 7r 1928;
Therefore, Be It Resolved that a dividend equal to the amount of the surplus of this corporation be declared, payable in such stock and/or securities as the corporation may have in excess of the value of $125,000.06, the amount of the par value of the Class A shares of this corporation, and the amount of the reserves subject to the interest of the former holders of the Class B shares in the reserves which are set up on (he books of the corporation pursuant to the resolution of the board of directors of this corporation passed on March 7, 1928. Distribution pursuant to the provisions of this resolution shall be made at the earliest convenience of the officers of this corporation to the stockholders of record at the close of business on December 26, 1928.
On motion, duly seconded and unanimously carried, the following resolution was adopted:
Be It Resolved that this corporation liquidate by distributing to the holder of the Class A shares the assets of this corporation amounting to $125,000.00, upon the surrender by the holder of the Class A shares of this corporation of $125,000.00 par value of Class A shares of this corporation, subject, however, to the rights of the former holders of the Class B shares to participate in the reserve set up on the books of this corporation pursuant to the resolution of the board of directors passed on March 7, 1928, the property represented by said reserve to be transferred to the holder of the Class A shares of this corporation except that such holder shall receive the property set up in said reserve subject to the terms and conditions of the aforesaid resolution providing for said reserve. Distribution pursuant to the provisions of this resolution shall be made at the earliest convenience of the officers of this corporation to the stockholders of record at the close of business on December 26, 1928. Ward M. Canaday. Inc. shall, upon receipt of such distribution, file with this corporation an agreement to pay any outstanding liabilities of this corporation.

Assets of a market value of $500,509.69 were delivered by the Dealers Finance Co. to the petitioner on December 26,1928, and were entered on the books of the petitioner at that value. Thereafter, on the same day, assets of the Dealers Finance Co. having a value of $125,000 were delivered by the Dealers Finance Co. to the petitioner upon surrender by the petitioner of the Class A stock of the total par value of $125,000.

There was also delivered to the petitioner on the same day the sum of $39,216.26, subject to rights of the holders of Class B shares therein, and subject also to the payment of Federal taxes. Of this reserve, $25,896.87 was later paid out by the petitioner on account of Federal income taxes of the Dealers Finance Co., as follows:

Income taxes for 1928_$24, 994.29
Additional income taxes for 1927_ 859. 60
Interest on additional taxes for 1927_ 42. 98
Total_ 25, 896. 87

The amount of $10,321.71 was distributed to Class B stockholders and the balance of the reserve, $2,997.68, was retained by the petitioner. The Commissioner in 1930 refunded to the Dealers Finance Co. $624.43 of the tax paid for 1928.

On December 26, 1928, the Dealers Finance Co. amended its certificate of incorporation and thereafter issued new classes of its stock for certain property and thereafter dealt in securities and stocks of other corporations, but did not thereafter deal in financing time sales of automobiles.

The petitioner contends that the distribution by the Dealers Finance Co. of the latter’s assets of the value of $500,509.69 on December 26, 1928, was the distribution of an ordinary dividend, not taxable to a corporation. See section 23 (p), Revenue Act of 1928. The Commissioner has held that the distributions on December 26, 1928, were in liquidation and taxable to the petitioner to the extent that the value of the assets received exceeded $100,000, the cost of the stock to the petitioner, in accordance with section 115 (c) of the Revenue Act of 1928. Section 115 defines a dividend as “ any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913.” Subsection (c) provides:

(c) Distributions in liquidation. — Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. ⅜ * *

Subsection (h) is as follows:

(h) Definition of partial liquidation. — As used in this section the term “ amounts distributed in partial liquidation ” means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.

The distribution here in question was out of earnings or profits accumulated after February 28, 1913. But if it was, at the same time, a distribution in liquidation, an amount distributed in partial liquidation, or one of a series of distributions in liquidation of the corporation so that (c) applies, the Commissioner did not err. W. E. Guild, 19 B.T.A. 1186. Hellmich v. Hellman, 276 U.S. 233. The petitioner relies very strongly upon the fact that the resolution of the board of directors directing the distribution of a “ dividend ” of all surplus, payable in such assets “ as the corporation may have in excess of the value of $125,000” was recorded as having been adopted prior to the adoption of the resolution to liquidate. We do not think that this fact is determinative of the issue. It is but one circumstance. We must decide whether there was an ordinary dividend or a distribution in liquidation within the meaning of section 115 after considering all of the facts in this particular case. W. E. Guild, supra. We make special reference here to our discussion of the law on this question in the Guild case. State statutes and decisions are not binding in interpreting this language of the Federal statutes. Frelmort Realty Corp., 29 B.T.A. 181. We must also look beyond the mere words used in the corporate resolutions. Estate of Rudolph F. Rabe, Sr., 25 B.T.A. 1242.

A full consideration of all of the facts in this case leads us, as it did the Commissioner, to the conclusion that all of the amounts' distributed on December 26, 1928, were distributed in liquidation of the corporation. Although the Dealers Finance Co. was authorized to do a number of things under its charter, as theretofore amended, there can be no question as to the business in which it was actually and regularly engaged prior to March 1928. In March 1928 it disposed of all of its assets with which it had carried on that business and never thereafter engaged in that business. Cf. James P. Gossett, 22 B.T.A. 1279; affd., 59 Fed. (2d) 365; Milton Tootle, Jr., 20 B.T.A. 892; affd., 58 Fed. (2d) 576. From that time until it made the distributions here in question, it carried on no business but limited its activities to- the conversion into cash of some of the securities received in exchange for its former assets and to the retirement of its Class B stock. Then came December 26, 1928, with the resolutions and distributions described above. Thereafter the corporation was dead so far as its old business was concerned, a mere empty shell without shareholders or property. Cf. Rochester Ry. Co. v. Rochester, 205 U.S. 236. Later, new stockholders refilled the shell with different property. The corporation then went into a new and totally different life. Its failure to dissolve is not inconsistent with our holding that the distributions were in liquidation of the corporation. Frelmort Realty Corp., supra. The facts here show that the corporation was in the course of liquidation at the time of the distribution and that it completed its liquidation on the same day. The distribution of the $500,509.69 was a step in that process. Tecla M. Straub, 29 B.T.A. 216. Cf. Fred T. Wood, 27 B.T.A. 162.

The petitioner next contends that the distribution of $25,000 out of the $125,000 which it received in cancellation or redemption of its stock was essentially equivalent to the distribution of a taxable dividend so that section 115 (g) applies. As a basis for this contention it points out that it originally paid in only $100,000 for 20,000 shares and that it received 5,000 shares as a stock dividend in 1926. It argues therefore that the $25,000 distributed must have been earnings accumulated after February 28, 1913. Section 115 (g) provides that “ if- a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed * * * to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend.” The petitioner has fallen far short of showing that this distribution was made at such time and in such manner as to make it essentially equivalent to the distribution of a taxable dividend. Henry B. Babson, 27 B.T.A. 859; Annie Watts Hill, 27 B.T.A. 73; affd., 66 Fed. (2d) 45; Pearl B. Brown, Executrix, 26 B.T.A. 901; Rudolph Boehringer, 29 B.T.A. 8. It was what the Commissioner held it to be — a distribution in liquidation of the corporation,

The respondent has moved to increase the deficiency so as to include as a part of the liquidating dividend, $2,997.68 and $624.43. He had the burden of proof in this connection. On December 26, 1928, the Dealers Finance Co. delivered to the petitioner the sum of $39,216.26. From this fund the petitioner was to pay certain Federal taxes of Dealers Finance Co. It actually paid out of this fund $25,896.87 on account of Federal income taxes of the Dealers Finance Co. This included an overpayment of $624.43 of the tax due for 1928. A refund of this amount was made to the Dealers Finance Co. by the Commissioner in 1930. Any balance remaining after the discharge of all Federal taxes of Dealers Finance Co. was to be divided in some way not shown in the record between the petitioner, as Class A stockholder, and the former Class B stockholders. The petitioner actually retained as its share $2,997.68. This amount was income to it in 1928, as the respondent contends. We do not know, however, that the petitioner ever received any part of the $624.43 refunded by the Commissioner in 1930 to the Dealers Finance Co., nor do we know the portion of this amount, if any, to which the petitioner was entitled. Consequently, we can not ,say that any part of the $624.43 should be included in the petitioner’s income for 1928.

Decision will be entered under Rule 50.

       Income tax attributable to first two months o£ 1928 assumed and paid by Commercial Credit Co.