author: McMahon:

text:
    Ora L. Pelton, Sr., and S. L. Gabby, Surviving Trustees of Pelton Clinic, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 43350, 51253.
    Promulgated March 7, 1935.

      Charles 0. Parker, Esq., for the petitioners.

      Arthur Oarndujf, Esq., for the respondent.
   OPINION.

McMahon:

The sole question presented is whether during the years 1924 to 1927, inclusive, the Pelton Clinic was an association within the meaning of section 2 (a) (2) of the Revenue Acts of 1924 and 1926, and hence taxable as a corporation under the provisions of section 230 of those acts.

The word “ association ” is not defined in the revenue acts. However, in Hecht v. Malley, 265 U. S. 144, where the Supreme Court had under consideration an act of Congress providing that every corporation, association, joint-stock company, and insurance company should pay a special excise tax with respect to the carrying on or doing business, the word “ association ” is defined. The Supreme Court there stated:

The word “ association ” appears to be used in the Act in its ordinary meaning. It has been defined as a term “used throughout the United States to signify a body of persons united without a charter, but upon the methods and forms used by incorporated bodies for the prosecution of some common enterprise.” 1 Abb. Law Diet. 101 (1879) ; 1 Bouv. Law Diet. (Rawle’s ed Rev.) 269 ; 3 Am. & Eng. Enc. Law (2 Ed.) 162; and Allen v. Stevens, 33 App. Div. 485, 54 N. Y. Supp. 8, 23, in which this definition was cited with approval as being in accord with the common understanding. Other definitions are:
“ In the United States, as distinguished from a corporation, a body of persons organized for the prosecution of some purpose, without a charter, but having a general form and mode of procedure of a corporation.” Webst. New Internat. Diet.
“ [U. S.] An organized but unchartered body analogous to but distinguished from a corporation.” Pract. Stand. Diet.
We conclude, therefore, that when the nature of the three trusts here involved is considered, as the petitioners are not merely trustees for collecting funds and paying them over, hut are associated together in much the same manner as the directors in a corporation for the purpose of carrying on business enterprises, the trusts are to he deemed associations within the meaning of the Act of 1918; this being true independently of the large measure of control exercised by the beneficiaries in the Hecht and Hayma/rlcet cases, which much exceeds that exercised by the beneficiaries under the Wachusett Trust. * * * [Emphasis supplied.]

Article 1502 of Regulations 69, promulgated under the Revenue Act of 1926, is identical with the same numbered article of Regulations 65, promulgated under the Revenue Act of 1924. Such article and article 1504 of Regulations 69, which for present purposes is substantially the same as the same numbered article of Regulations 65, are set forth in the margin. It will be seen that, under these regulations, trusts and other organizations, by whatever name known, which act or do business in an organized capacity, whether created by declaration of trust or otherwise, the net income of which is distributed or distributable among the shareholders or members on the basis of their proportionate interests, is an association taxable as a corporation. These regulations further provide that where trustees of a trust are not restricted to the mere collection of funds and payments thereof to the beneficiaries, but are associated together in much the same manner as directors in a corporation for the purpose of carrying on some business enterprise, the trust is an association within the meaning of the statute, and therefore taxable as a corporation. These regulations are either substantially the same as other regulations promulgated under prior and subsequent acts or are consistent with such other regulations.

It is well settled that a regulation by a department of the Government, addressed to and reasonably adapted to the enforcement of an act of Congress, the administration of which is confided to such department, has the force and effect of law if it be not in conflict with express statutory provisions. Maryland Casualty Co. v. United States, 251 U. S. 342. It is also well settled that the practical interpretation of an ambiguous or doubtful statute that has been acted upon by officials charged with its administration will not be disturbed except for weighty reason. The substantial reenactment in later acts of the provisions theretofore construed by the department is persuasive evidence of legislative approval of the regulation. Brewster v. Gage, 280 U. S. 327; and Helvering v. Bliss, 293 U. S. 144.

The provisions of the regulations in question, so far as applicable in these proceedings, are not in conflict with the provisions of the statutes. These provisions of the statutes have been reenacted by Congress in successive revenue acts, which is persuasive evidence of the approval of Congress of the administrative interpretation thereof.

It is our opinion that during the years in question the Pelton Clinic was an association within the meaning of the revenue acts. It was comprised of three individuals who became voluntarily associated for the purpose of carrying on the practice of medicine and surgery. The same three individuals were the sole trustees and the sole beneficiaries. The clinic had shares of beneficial interest similar to shares of stock in a corporation and such shares were transferable. It also distributed its net profits to the beneficiaries in proportion to their holdings in much the same manner as a corporation would distribute its earnings. The trust indenture provided for the succession of the trustees by action of the beneficiaries and for the alteration or amendment of the indenture by action of the holders of 51 percent of the beneficial interest. The fact that the trustees did not take titles as officers of the organization, as they were authorized to do under the indenture, and that the business was conducted through informal meetings, rather than through formal meetings of which minutes were kept, is immaterial. It is also immaterial that the clinic had no seal or bylaws. The clinic carried on a business in much the same manner as a corporation, deriving large income therefrom which, as stated, was distributed proportionately to the holders of the beneficial interests. There was here no mere passive trust. This proceeding is governed in principle by Hecht v. Malley, supra; Joseph E. Swanson et al., Trustees, 29 B. T. A. 1123, and cases cited therein; Black Diamond Oil Trust No. 513, 25 B. T. A. 142; and Reinecke v. Kaempfer, 72 Fed. (2d) 469; certiorari denied, 294 U. S. 708. The last cited case involved an excise tax, but it also involved the question of whether a trust was an association within the meaning of the statute, and is governing in principle. In Joseph E. Swanson et al., Trustee, supra, we stated:

* * * While prior decisions enunciate general principles and illustrate the application thereof to the facts presented in each case, it is apparent that each case must be determined upon its own peculiar facts.

The petitioners contend that the indenture in question bears more resemblance to a will than to a corporate charter, in view of the fact that there are provisions therein for the devolution of the beneficial interests in the event of the death of the holders of the beneficial interest. Clearly, however, this was not the primary purpose of the indenture. The primary purpose was to carry on a business. A similar contention was made in Kaempfer v. Reinecke, 7 Fed. Supp. 599, but was rejected by the United States District Court for the Northern District of Illinois, Eastern Division. That case was reversed by the United States Circuit Court of Appeals for the Seventh Circuit in Reinecke v. Kaempfer, supra, but upon other grounds.

.The respondent’s holding that during the years 1924 to 1927, inclusive, the Pelton Clinic was an association taxable as a corporation, is approved.

Decision will be entered for the respondent.

       Sec. 2. (a) When used in this Act—

      (2) The term “ corporation ” includes associations, joint-stock companies, and insurance companies.

       Art. 1502. Association. — Associations and joint-stock companies include associations, common law trusts, and organizations by whatever name known, which act or do business in an organized capacity, whether created under and pursuant to State laws, agreements, declarations of trust, or otherwise, the net income of which, if any, is distributed or distributable among the shareholders on the basis of capital stock which each holds, or, where there is no capital stock, on the basis of the proportionate share or capital which each has or has invested in the business or property of the organization. * * *
      Art. 1504. Associatio?i distinguished from trust. — Where trustees merely hold property for the collection of the income and its distribution among the beneficiaries of the trust, and are not engaged, either by themselves or in connection with the beneficiaries in the carrying on of any business, and the beneficiaries have no control over the trust, although their consent may be required for the filling of a vacancy among the trustees or for a modification of the terms of the trust, no association exists, and the trust and the beneficiaries thereof will be subject to tax as provided by section 219 and by articles 341-347. If, however, the beneficiaries have positive control over the trust, whether through the right periodically to elect trustees or otherwise, an association exists within the meaning of section 2. Even in the absence of any control by the beneficiaries, where the trustees are not restricted to the mere collection of funds and their payment to the beneficiaries, but are associated together with similar or greater powers than the directors in a corporation for the purpose of carrying on some business enterprise, the trust is an association within the meaning of the statute.

       Articles 1502 and 1504 of each of Regulations 62, promulgated under the Revenue Act of 1921, and Regulations 45, promulgated under the Revenue Act of 1918; article 57 of Regulations 33 promulgated under the Revenue Act of September 8, 1916, as amended by the Revenue Act of October 3, 1917; articles 1312 and 1314 of Regulations 74, promulgated under the Revenue Act of 1928; and articles 1312 and 1314 of Regulations 77, promulgated under the Revenue Act of 1932.

       Section 10 of the Revenue Act of September S, 1916; section 200 of the Revenue Act of October 3, 1917; section 1 of the Revenue Act of 1918; section 2 of the Revenue Act of 1921; section 701 (a)(2) of the Revenue Act of 1928; section 1111(a)(2) and (3) of the Revenue Act of 1932; and section 801 (a)(2) of the Revenue Act of 1934.


source: Caselaw Access Project

author: Sea well :

license: Public Domain

text:
    Fifth Avenue Bank of New York as Executor of the Estate of Cettie G. Shepherd, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 69166.
    Promulgated March 7, 1935.

      A. P. Bachman, Esq., for the petitioner.

      Ralph E. Smith, Esq., for the respondent.
   OPINION.

Sea well :

The section of the Revenue Act of 1926 here involved is as follows:

Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
* * * * $ * *
(f) To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will, or (2) by deed executed in contemplation of, or intended to take effect in possession or enjoyment at or after, his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth.

Heretofore there has existed irreconcilable conflict in some of the court decisions interpreting this statute, which has now been definitely cleared away. The United States Supreme Court, in a decision handed down on February 4, 1935, Helvering v. Grinnell, 294 U. S. 153, dealing- with said section of the law on a state of facts comparable to those in the instant case, said:

The crucial words are “ property passing under a general power of appointment exercised by the decedent by will.” Analysis of this clause discloses three distinct requisites — (1) the existence of a general power of appointment; (2) an exercise of that power by the decedent by will; and (3) the passing of the property in virtue of such exercise. Clearly, the general power existed and was exercised; and this is not disputed. But it is equally clear that no property passed under the power or as a result of its exercise since that result was definitely rejected by the beneficiaries. If they had wholly refused to take the property, it could not well be said that the property had passed under the power, for in that event it would not have passed at all. Can it properly be said that because the beneficiaries elected to take the property under a distinct and separate title, the property nevertheless passed under the power? Plainly enough, we think, the answer must be in the negative.

In the instant case petitioner does not admit that the power of appointment by will was exercised as in Helvering v. Grinnell, supra; but even if so admitted, it nevertheless appears that the beneficiaries definitely rejected title in that way and took as remaindermen, as they had the right to do. It therefore appears that title did not pass under the power of appointment given in the trust indenture, and the value.of the trust property should not be added to decedent’s gross estate. We hold respondent was in error.

Judgment mil be entered for the petitioner.


author:
ARtjndell:
      Van Fossan, McMahon,

text:
    Fisher and Fisher, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 60929.
    Promulgated March 12, 1935.

      Charles F. Kelley, Esq., and Frank J. ATbus, Esq., for the petitioner.

      A. H. Fast, Esq., and F. L. Van Haaften, Esq., for the respondent.
   OPINION.

ARtjndell:

The respondent, in auditing petitioner’s returns for 1926 and 1927, computed the tax under both section 230 of the Eevenue Act of 1926 (at the 13% percent rate) and section 220 (at the 50 percent rate). Petitioner does not question the computation under section 230. It takes issue with the respondent’s application to it of section 220, contending that it does not come within the provisions of that section, and that that section is unconstitutional. Subsections (a) and (b) of section 220, which are all we are concerned with here, are set out in the margin.

The constitutionality of section 220 of the Eevenue Act of 1926, and the corresponding provisions of earlier statutes, has been sustained by all the tribunals that have considered the question. See United States Business Corporation v. Commissioner, 62 Fed. (2d) 754, affirming 19 B. T. A. 809; Williams Investment Co. v. United States, 77 Ct. Cls. 396; William C. DeMille Productions, Inc., 30 B. T. A. 826. We follow those decisions on this point.

If the petitioner was either “ formed or availed of ” for the purpose of preventing imposition of surtaxes on its stockholders, it becomes subject to the additional tax. We are convinced that the petitioner corporation was not formed for the purpose described in the statute. The creation of the petitioner was entirely Kelley’s idea, and he carried it through not only without help from the Fishers, but even over the opposition of Harry O. Fisher. Kelley testified at length as to his reasons for organizing the petitioner, and we have set them forth in considerable detail in our findings of fact. A restatement of them is unnecessary here and we need say no more than that on this point, on which Kelley was undoubtedly qualified to testify, we give full credence to his testimony and hold that in so far as the formation of the petitioner is concerned it does not come within section 220.

The question of whether the petitioner was “ availed of ” to avoid surtaxes is more difficult to decide. The statute lays down as a rule of evidence that permitting gain, or profits “ to accumulate beyond the reasonable needs of the business, shall be prima facie evidence of a purpose to escape the surtax.” In this connection we have said that the statute does “ not contemplate that a business should remain static; it must be assumed that any business shall have the right to grow.” William C. DeMille Productions, Inc., supra. In this case the petitioner made no distribution of its profits in 1926 and 1927, but permitted them to accumulate through both years. It was not until the close of 1928 that a dividend was declared. In 1926 the petitioner had a gross income of $201,701.47 and a net of $92,344.85, and this latter figure represented its surplus at the end of the year. For 1927 its gross income and net were, respectively, $209,320.02 and $103,503.78, and its surplus at the end of 1927 was $168,848.07. The evidence is that, had the contingencies facing the business materialized, a sum of $200,000 would have been insufficient to meet them. From this it follows that the profits accumulated were not in excess of the reasonable needs of the business. Consequently, the accumulation of profits does not.make out a prima facie case and we must go to other evidence in the record to determine whether the petitioner corporation was availed of to escape surtax.

Throughout the record there is apparent a difference of opinion between Kelley, the actual, active manager of the petitioner, and Harry C. Fisher, its nominal head and majority stockholder. Kelley, on the one hand, bent every effort toward accumulating a sufficient surplus to meet the several contingencies facing the business and to keep up its earning power. Fisher, on the other hand, did not even want a corporation to take over the business, and after he “ adopted the corporation ” — using Kelley’s words — he apparently saw no need of accumulating any capital, for he proceeded in 1927 to overdraw his account by more than $73,000. In fact his withdrawals appear to have been greater than indicated by this figure, for some of his personal withdrawals were charged against the firm of Fisher & Fisher. In 1926 one item of over $39,000, representing a withdrawal by Harry C. Fisher, was charged to the firm, so that as a matter of fact he was overdrawn at the end of that year instead of having a balance to his credit as shown by the books. Kelley tried to interest the Fishers in producing Mutt and Jeff moving pictures in order to keep up the earning power of the cartoons, but they refused to go in with him on the deal.

If we were to judge the purpose of using the corporation for carrying on the cartoon business by the conduct of Harry O. Fisher, we would be confronted with a difficult task. His conduct in 1925 and during the taxable years indicates no purpose but to spend lavishly. Herein lies the solution to the question before us. Fisher did not appear at the hearing. We know, however, from the evidence in both this case and a prior case involving his own income tax for 1925 (see 29 B. T. A. 1041) that he was merely the nominal head of the business. He performed no services either for the petitioner or the firm that preceded it. He had no initial investment in it and refused to put any in. His only contact with it was to draw funds from it for his personal use. In this situation the conduct of the individual who in the majority of cases would be the responsible head of the business cannot be taken as establishing the purpose for which the corporation was used. And because of his lack of responsibility we think it not only proper but necessary to determine the true purpose for which the corporation was created and used from the testimony of Kelley, who was its organizer and actual head. Kelley, it is shown by the evidence, has been actively in charge of Fisher’s business affairs since about 1911. He knew Fisher’s propensity for spending and he knew too the hazards of the cartoon business; he had seen syndicates fail and knew the necessity for the business to be in a position to make its own distribution of cartoons. Kelley’s testimony is directly to the point that in organizing the corporation and operating the business through it he had two objectives in view, one of which was to curb Fisher’s lavish spending, and the other to provide capital to meet the contingencies of the business. It is a demonstration of his seriousness of purpose that when in 1927 he discovered Fisher’s overdraft — part of which had been charged to Fisher & Fisher- — he demanded and secured a restoration to the petitioner.

Considerable stress is placed by respondent on the fact that in 1928 petitioner invested in Cartoonist Court, Inc., a corporation organized to take over Harry C. Fisher’s real estate and his racing and breeding-stables, and that in subsequent years petitioner made substantial advances to that corporation. We have considered these facts, but we do not believe that they reflect the purpose for which petitioner was operated in 1926 and 1927.

We accordingly conclude that petitioner was not formed nor, during 1926 and 1927, availed of for the purpose of permitting its stockholders to escape surtax.

Reviewed by the Board.

Decision will be entered imder Rule 50.

Van Fossan,

dissenting: I am unable to agree with the prevailing opinion. In my judgment the petitioner has not furnished evidence sufficient to demonstrate that the surplus was not more than was reasonably necessary for the needs of the business. The burden of proof rested on petitioner. I do not believe he has discharged it.

McMahon,

dissenting: The “ gains or profits ” of the petitioner in question here were “ permitted to accumulate beyond the reasonable needs of the business; and hence we have prima facie evidence of a purpose to escape the surtax.” Sec. 220 (b), supra. No evidence has been presented which is adequate to overcome the prima facie evidence or the defense thereby established for the respondent. Obviously, a prima facie showing of this character cannot be overcome by the very same evidence which, under the very same subsection of the statute, establishes it. Furthermore, in addition to this prima facie evidence, there likewise appears from the majority report other evidence which supports the position of the respondent in this respect. To illustrate: Harry 0. Fisher, who at all times in question here owned at least 98 percent of the petitioner’s stock, at the outset did not consider the formation of petitioner necessary, and after its incorporation he did not consider the accumulation of the surplus in question necessary; the corporation conducted its business successfully during the years in question without the stockholders ever paying in any cash to the corporation for its stock; at the end of 1927 Harry C. Fisher owed the petitioner $73,627.27 and his account was, in reality, also heavily overdrawn in 1926; none of the surplus was ever actually used for any of the alleged purposes for which it was accumulated; and it was actually used, promptly after 1927, for wholly different purposes and primarily, if not exclusively, to the personal advantage of Harry C. Fisher.

All of the foregoing applies to the accumulations of surplus by petitioner (1) in the unsuccessful attempt to curb the extravagant expenditures of Harry C. Fisher, (2) in the unsuccessful attempt to make a capital investment in a minority interest in the New York World, and (3) in the attempt at preparation to meet imaginary contingencies, which might have arisen if the Bell Syndicate, Inc., had breached its contract or if Wheeler, its president, had severed his connection with it. There is no showing of a breach of contract on the part of the Bell Syndicate, Inc., or that such breach was ever imminent. The only showing made in this respect is to the contrary. The same is true of Wheeler’s severance of his connection with the Bell Syndicate, Inc. There is no adequate showing that the accumulation of surplus in question would have been necessary or adequate if contingencies had arisen because of a breach of contract by the Bell Syndicate, Inc., or Wheeler’s severance of his connection with it. There is some showing that they would not have been necessary or adequate if either or both events had occurred to create contingencies.

In connection with what is said herein, see the dissent in Cecil B. DeMille, 31 B. T. A. 1161. See also William C. DeMille Productions, Inc., 30 B. T. A. 826.

It is well settled that a corporation is an entity, distinct, separate, and apart from its stockholders and each of them, even where it is almost wholly owned and completely controlled by a single stockholder, as petitioner was by Harry C. Fisher. Edward Securities Corporation, 30 B. T. A. 918, and cases cited therein. Hence the personal affairs and business of Harry C. Fisher were not those of the corporation. To the extent that the corporation participated in his personal affairs and business it stepped out of its own business. Its business, as actually carried on, at all the times material here, was that of furnishing to the Bell Syndicate, Inc., exclusively, drawings for the Mutt and Jeff cartoons for sale and distribution, by the latter, to newspapers. While Harry C. Fisher was the originator of these cartoons, he did not even make any of the drawings for them in the years before us. To the extent that the petitioner corporation participated in an unsuccessful attempt to curb Harry 0. Fisher’s extravagant personal expenditures by accumulating its surplus, and this is the underlying, controlling reason why the gains or profits ” were “ permitted to accumulate ”, it was concerned with his personal affairs and business and was not confined to its own business; and hence what it did in this respect was “ beyond the reasonable needs of the business ” and “ is prima facie evidence of a purpose to escape the surtax ”, under applicable provisions of the statute. It is unnecessary to pass upon the question as to whether what petitioner did in these respects was ultra vires. That it was “ beyond the reasonable needs of the business ” is sufficient to establish a prima facie case for the respondent, without other grounds; but, as heretofore indicated, there are other grounds.

I also find it unnecessary to pass on the question as to whether the petitioner was “ formed ” for the purpose denounced by the statute. To sustain respondent’s position in these respects it is sufficient that it was “ availed of ” for that purpose; and the inescapable conclusion is that it was thus availed of.” Sec. 220 (a), supra.

Since this prima facie case for respondent has not been overcome, as heretofore stated, I can not agree with the majority in so far as they hold that any of the “ additional ” taxes in question herein,' as specified in section 220 (b), supra, are not to be imposed.

         See. 220. (a) If any corporation however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there shall be levied, collected, and paid for each taxable year upon the net income of such corporation a tax equal to 50 per centum of the amount thereof, which shall be in addition to the tax imposed by section 230 of this title and shall (except as provided in subdivision (d) of this section) be computed, collected, and paid upon the same basis and in the same manner and subject to the same provisions of law, including penalties, as that tax.
      (b) The fact that any corporation is a mere holding or investment company, or that the gains or profits are permitted to accumulate beyond the reasonable needs of the business, shall be prima faeie evidence of a purpose to escape the surtax.


text:
    Alfred E. Fuhlage, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 61754.
    Promulgated March 12, 1935.

      Stanley S. Waite, Esq., for the petitioner.

      T. M. Mather, Esq., for the respondent.
   OPINION.

McMahon:

The Beacon Paper Co. in 1929 redeemed and canceled $200,000 par value of its capital stock, paying cash therefor. The petitioner surrendered to the company 1,213% shares of stock, receiving from the company in payment therefor $121,333.33. This wag stock which the petitioner had purchased from Louis Alt in 1927 at a cost of $101.59 per share or $128,252.53. The respondent held that the payment of the amount of $121,333.33 to the petitioner in 1929 was the equivalent of a taxable dividend under section 115 (g) of the Revenue Act of 1928. The petitioner contends that the amount received by him in redemption of such stock was not the equivalent of a taxable dividend, but was a payment in partial liquidation of the company, and that the distribution is controlled by section 115 (c) of the Revenue Act of 1928. There are set forth in the margin applicable provisions of the Revenue Act of 1928.

We agree with the contention of the petitioner. On September 22, 1920, the company increased its authorized capital stock from $100,000 to $500,000 by capitalizing $400,000 of the earned surplus and issuing additional common stock of $400,000. The balance sheets of the company at the end of the years 1919 and 1920 indicate that during the year 1920 the company did not have cash or its equivalent sufficient to pay a cash dividend even approximating $400,-000. The declaration of the stock dividend was pursuant to a plan to capitalize some of the surplus to make it available to take care of increased business and for the purpose of going into the wrapping paper business. The company was already in the business of dealing in fine paper, such as is used by printers. The stipulated facts show that in order to care for its increased business and in order to enter the wrapping paper business, additional capital would be required for the purpose of carrying larger inventories and for the purpose of purchasing an additional warehouse. Due to the depression of 1921, in which year the company sustained a loss of $154,975.60, thereby impairing its capital to the extent of $68,668.88, the matter of going into the wrapping paper business and the purchase of a new warehouse was deferred. In 1922’ the company made a profit, but its capital still remained impaired. However, in 1923 the company made a substantial profit and resumed the payment of dividends and again considered the matter of expanding its business and purchasing a warehouse, but no definite action was taken. The business did not improve after 1921 to the extent anticipated and the amount invested in merchandising during each year subsequent to 1921 was approximately $200,000 less than the amount invested in merchandise as of December 31, 1920. Thereafter the matter of expansion was frequently considered, but in 1929 the company definitely determined not to go into the wrapping paper business or to purchase a warehouse. In 1929 it was determined that the company did not need all of its capital for successful operations and that it could be successfully operated and conducted with a capital of $300,000. Thereupon, in that year, the capitalization was reduced from $500,-000 to $300,000 by the redemption of stock as heretofore pointed out.

In our opinion, the evidence of the reasons for the declaration of the stock dividend in 1920 and the subsequent redemption and cancellation of a part thereof nine years later, in 1929, is Sufficient to show that there was no continuing plan to distribute corporate earnings by means of a distribution made in connection with cancellation or redemption of stock rather than by the declaration of ordinary dividends. It should be noted that from 1923 to .1929 the company did declare substantial cash dividends. If there had been such a continuing plan it is reasonable to suppose that the petitioner, being one of the principal stockholders, would have known thereof. The fact that in 1927 he purchased 1,516% shares of stock in excess of its par value tends to show that there was no such plan; otherwise his purchase of the stock would have been an unreasonable act.

From a consideration of all the stipulated facts it is clear to us that the cancellation or redemption of the stock was not “ 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” within the meaning of section 115 (g) of the Revenue Act of 1928. This proceeding is governed in principle by the authorities cited by the petitioner. Pearl B. Brown, Executrix, 26 B. T. A. 901; affd., Commissioner v. Brown, 69 Fed. (2d) 602; certiorari denied, 293 U. S. 579; Robert R. Meyer, 27 B. T. A. 44; and Henry B. Babson, 27 B. T. A. 859; affd., Commissioner v. Babson, 70 Fed. (2d) 304; certiorari denied, 293 U. S. 571. To the same effect is T. Pierre Champion, 27 B. T. A. 1312. See Alfred A. Laun, 26 B. T. A. 764. We hold that the amount of $121,333.33 paid to the petitioner upon the surrender of his stock constituted an amount distributed in partial liquidation of the company, within the meaning of section 115 (c) and (h) of the Revenue Act of 1928.

It has been stipulated by the parties that the 1,213% shares of stock surrendered by the petitioner in 1929 was a part of that which petitioner had purchased in 1927 for $101.59 per share. The cost of such stock to the petitioner was $123,252.63. The total cost of the stock to the petitioner is the basis for the determination of gain or loss. Sec. 113 (a), Revenue Act of 1928. Thus the petitioner sustained a deductible loss upon the surrender of the stock in the amount of the excess of the basis over the amount realized, or $1,929.20. Sec. Ill (a), Revenue Act of 1928.

The petitioner, who is a single man, contends that the respondent erred in denying him a personal exemption of $3,500 as the head of a family under the provisions of section 25(c) of the Revenue Act of 1928.

Article 292 of Regulations 74, promulgated under the Revenue Act of 1928, is set forth in the margin. This portion of the regulations is not in conflict with the statute, but is a fair interpretation thereof. It, therefore, has the force and effect of law. Maryland Casualty Co. v. United States, 251 U. S. 342. This provision of the regulations is the same as corresponding provisions of prior and subsequent regulations, and the fact that Congress has continued to reenact, in the successive revenue acts, the provisions regarding the personal exemption of the head of a family, without change, is persuasive evidence of legislative approval of the regulation. Brewster v. Gage, 280 U. S. 327; Helvering v. Bliss, 293 U. S. 144.

In the instant proceeding the evidence shows that during the year in question the petitioner actually supported and maintained in his household his unmarried sister, age 55 years. In our opinion, the petitioner’s right to exercise .family control and provide for his dependent sister was based upon a moral obligation. He was her sole support. She had no trade or occupation and had no income. It is our conclusion that the petitioner is entitled to a personal exemption of $3,500 as the head of a family. Paul Polichroniades, 2 B. T. A. 1263.

W. E. Massey, 14 B. T. A. 407, affirmed in Massey v. Commissioner, 51 Fed. (2d) 76, is distinguishable. There we held the taxpayer was not entitled to an exemption as the head of a family where his sister, 43 years of age, lived with him and supervised the running of the household. The taxpayer there paid the expenses of the home and also his sister’s expenses. Upon the evidence there we held, in effect, that the taxpayer’s sister had the status of an employee, rather than a dependent. See Massey v. Commissioner, supra. This is not true in the instant proceeding. It is true that it is stipulated that the petitioner’s sister “ acted as petitioner’s housekeeper.” However, the meaning of the word “ housekeeper ” is not limited to one who is employed (see Webster’s New International Dictionary, 1929); and the other stipulated facts show that she was not employed by the petitioner. Among other things it is stipulated that during the year in question he was her sole support and maintained her, and that she had no trade or occupation and had no income. Furthermore, the petitioner did employ a servant during the year in question. Under the circumstances we consider it only natural that a feeling of gratitude or an interest in the household would prompt the sister to act as housekeeper. The only inference to be drawn in view of all o.f the stipulation, covering this point, is that what she did in this respect was done gratuitously. There are numerous facts appearing in the instant proceeding which were not present in W. E. Massey, supra, some of which appear from the stipulation herein in part as follows:

* * * Throughout said year, petitioner was, and he still is, the sole support of his unmarried sister whom he maintained during said year and still maintains in the household at said address at petitioner’s expíense. Petitioner’s said sister is 55 years old, and during 1929 had no trade or occupation, had no income and acted as petitioner’s housekeeper. It is, and was during 1929 necessary for petitioner to employ a servant. * * *

In our opinion the stipulated, facts are sufficient to overcome the presumption in favor of the respondent’s determination that the petitioner was not, in 1929, the head of a family. See Helvering v. Taylor, 293 U. S. 507.

Reviewed by the Board.

Decision will he entered under Rude 50.

Seawell concurs in the result.

       SEC. 115. DISTRIBUTION BY CORPORATIONS.
      * * * * * * *
      (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. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112. In the case of amounts distributed in partial liquidation (other than a distribution within the provisions of section 112 (h) of stock or securities in connection with a reorganization) the part of such distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or profits within the meaning of subsection (b) of this section for the purpose of determining the taxability of subsequent distributions by the corporation.

        *******

      (g) Redemption of stock. — If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend. In the case of the cancellation or redemption of stock not issued as a stock dividend this subsection shall apply only if the cancellation or redemption is made after January 1, 1926.
      (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.

       SBC. 113. BASIS BOR DETERMINING GAIN OR LOSS.
      (a) Property acquired, after February 28, 1813. — The basis for determining the gain or loss from the sale or other disposition of property acquired after Eebuary 28, 1913, shall be the cost of such property; except that — [exceptions not material here].

       SEC. 111. DETERMINATION OF AMOUNT OF GAIN OR LOSS.
      (a) Computation of gain or loss. — Except as hereinafter provided in this section, the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis provided in section 113, and the loss shall be the •excess of such basis over the amount realized.

       SEC. 25. CREDITS OF INDIVIDUAL AGAINST NET INCOME.
      There shall be allowed for the purpose of the normal tax, but not for the surtax, the ¡following credits against the net income;
      s* * # * * # *
      •(c) Personal exemption. — In the case of a single person, a personal exemption of .■$1,500; or in the case of the head of a family or a married person living with hus-iband or wife, a personal exemption of $3,500. * * *

       AM. 292 [Regulations 74]. Personal exemption of head of family. — A head of a ¡family is an individual -who actually supports and maintains in one household one or ¡more individuals who are closely connected with him by blood relationship, relationship Iby marriage, or by adoption, and whose right to exercise family control and provide for ithese dependent individuals is based upon some moral or legal obligation. * * *

       Article 302 of Regulations 69 (1926), 65 (1924), Regulations 62 (1921), and 45 ((1918) ; and article 292 of Regulations 77 (1932).

       Section 216 (c) of the Revenue Acts of 1918, 1921, 1924 and 1926; section 25 (c) of the Revenue Acts of 1928 and 1932; and section 25 (b) (1) of the Revenue Act of 1934.


author: McMahon :

text:
    Chicago Dock & Canal Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 48268.
    Promulgated March 14, 1935.

      Harry B. Sutter, Esq., for the petitioner.

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

McMahon :

The first question presented is whether the amount of $23,452.16 expended by the petitioner in the fiscal year ended April 30.1928, as brokerage fees and attorney fees incident to the execution of a 40-year lease on property owned by the petitioner, constituted ordinary and necessary business expense for that year and hence was deductible in that year, or whether it constituted a capital expenditure, deductible over the years of the lease. It has been repeatedly held that such expenditures constitute capital expenditures deductible pro rata over the life of the lease. Edward T. Blair, 31 B. T. A. 1192, and cases cited therein; James M. Butler, 19 B. T. A. 718; Central Bank Block Association, 19 B. T. A. 1183; affd., Central Bank Block Association v. Commissioner, 57 Fed. (2d) 5; Starr Piano Co., 26 B. T. A. 835; Blanche B. Burley, Executrix, 26 B. T. A. 615; and M. & F. Holding Corporation, 26 B. T. A. 504.

The petitioner, however, contends that those cases are distinguishable from the instant proceeding, since the business of the taxpayer involved in each one of those cases was not solely that of leasing its own properties. Petitioner contends that since it was in such a business, the expenditure in question constitutes an ordinary and necessary expense of such business. We fail to see a valid distinction. While it is true that such an expenditure as this might be termed an ordinary and necessary expenditure in the petitioner’s business, yet it can not be said that it was an ordinary and necessary expense of the biosiness within the meaning of the revenue act. The benefit to be derived from the income-producing asset resulting, from the expenditure in question was not confined to the taxable year ended April 30, 1928, but will extend over the years of the lease. This, as we construe the intent of the revenue acts, is the distinction between an ordinary and necessary business expense and a capital expenditure. See C. F. Lytle, 21 B. T. A. 1423. As to this issue, the respondent’s determination is approved.

The remaining question is whether the respondent erred in disallowing the deduction, in the year in question, of the amount of $9,486.70 representing attorney fees and fees paid to a witness for expert testimony before the County Court of Cook County, Illinois, in accomplishing the reduction of the amount of a special assessment against the petitioner for alleged benefits flowing to the petitioner’s property by virtue of the widening of LaSalle Street. The amount of the original assessment was $65,149, and the-result of these expenditures by the petitioner was a holding by the court that the benefit resulting - to the petitioner from the widening of such street amounted to only $22,286.45, and that the assessment should be the latter amount. The question is whether this expenditure of $9,486.70 constituted an ordinary and necessary expense of the petitioner’s business, and, therefore, was deductible in the year in which expended.

The question of what constitutes ordinary and necessary expenses was before the Supreme Court in Welch v. Helvering, 290 U. S. 111. The Court there said:

* * * Now, what is ordinary, though there must always be a strain of constancy within it, is none the less a variable affected by time and place and circumstance. Ordinary in this contract does not seem to mean that the payments must be habitual or normal in the sense that the same taxpayer will have to make them often. A lawsuit affecting the safety of a business may happen once in a lifetime. The counsel fees may be so heavy that repetition is unlikely. None the less, the expense is an ordinary one because we know from experience that payments for such a purpose, whether the amount is large or small, are the common and accepted means of defense against attack. Cf. Kornhauser v. United States, 276 U. S. 145, 48 S. Ct. 219, 72 L. Ed. 505 * * *

See also Udolpho Wolfe Co., 15 B. T. A. 485, and A. Harris & Co. v. Lucas, 48 Fed. (2d) 187.

We believe that the expenditure in question must be considered an ordinary and necessary business expense and, therefore, deductible. It is to be noted that the expenditure was not made for the purpose of obtaining benefits to the petitioner’s property, but was for the purpose of reducing the amount of an assessment, reflecting the cost of those benefits, and that the assessment was, in fact, reduced. In our view, it is to be considered the same as any other legal or witness fee paid to reduce liability, whatever the nature of the liability. Leichner & Jordan Co., 4 B. T. A. 133; Lena G. Hill, 8 B. T. A. 1159. By virtue of this expenditure of $9,486.70, the petitioner obtained no asset which it did not have before, nor did any benefit flow to the property itself by virtue of the expenditure. The benefit to the property is measured by the reduced assessment of $22,286.45, and not by the attorney fees or witness fees. That this expenditure was an ordinary and necessary incident to the petitioner’s business of owning and leasing properties cannot, we think, be denied. In our opinion, it is equally clear that it was an ordinary and necessary expense of the business rather than a capital expenditure. This expenditure is not like the expenditure to obtain a lease, such as is involved in the first issue in this proceeding, the benefit of which, barring contingencies, is certain to be reflected over a fixed number of years. The deduction should be allowed. In principle, this view is supported by Leichner & Jordan Co., supra, and Lena G. Hill, supra. See also Udolpho Wolfe Co., supra; H. E. Bullock, 16 B. T. A. 451; Benjamin Paschal O'Neal, 18 B. T. A. 1036; Flemmon E. Gloyd, 19 B. T. A. 966, affirmed on another issue in Gloyd v. Commissioner, 63 Fed. (2d) 649; certiorari denied, 290 U. S. 633; Fred T. Ley, 21 B. T. A. 216; Samuel D. Leidesdorf, 26 B. T. A. 881; Memphis Memorial Park, 28 B. T. A. 1037; A. Harris & Co. v. Lucas, supra; and Saks & Co., 20 B. T. A. 1151, 1156.

Decision will he entered voider Rule 60.


author: Leech:

text:
    George A. Neracher, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 74411.
    Promulgated March 14, 1935.

      Sterling Newell, Esq., and Paul L. Holden, Esq., for the petitioner.

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

Leech:

Our sole inquiry here is the right of the petitioner to deduct, in his income tax return for 1931, the entire amount of the interest paid by him upon a certain promissory note which was executed by the petitioner and his wife as joint and several makers. The taxpayer claimed the sum of $3,161.01 as a deduction on that return, the full amount of interest paid by him upon this note in 1931. The respondent disallowed one half of such interest paid and deducted by the petitioner, and so determined a deficiency of $1,010.94 in income taxes against the petitioner for that year. Petitioner here attacks the propriety of that disallowance.

The facts were stipulated by the parties substantially as follows:

1. The petitioner and. his wife were joint and several makers of a promissory note secured by a mortgage on real property, title to which was held by his wife. This note contained the following promise:
“ For value received, we jointly and severally promise to pay to the order of the Engineers National Bank of Cleveland Fifty-eight Thousand Dollars ($58,000), in installments * * * with interest at the rate of six percent (6%) per annum, payable on the 15th day of January, April, July and October of each year until paid.”
2. In 1931 the petitioner paid interest in the amount of $3,161.01 upon the said note and deducted the amount of the said payment from his gross income in reporting his net taxable income for that year. In redetermining the deficiency proposed in the sixty-day deficiency notice upon 'which the petition herein is based, the respondent disallowed one-half of said amount, to wit, $1,580.50.
3. Separate returns were filed by the petitioner and his wife for 1931. Petitioner’s wife paid no part of the said interest and did not deduct any part of the interest paid in her income tax return.

Tlie applicable statutory provision is section 23 (b) of the Revenue Act of 1928, which, so far as here pertinent, provides:

In computing net income there shall be allowed as deductions:
*******
(b) Interest. — All interest paid or accrued within the taxable year on indebtedness * * *.

It has been held that interest, to be so deductible, must be upon a legally enforceable indebtedness (Sand Springs Railway Co., 21 B. T. A. 1291) of the taxpayer. Morris Pidan Co., of Binghamton, 26 B. T. A. 772.

Respondent relies upon the case of William Ainslie Colston, 21 B. T. A. 396; affd., 59 Fed. (2d) 867; certiorari denied, 287 U. S. 640. However, the interest, the deductibility of which was there denied, was paid by petitioner (husband) upon mortgage obligations of his wife, on her property, and, as was there said:

This was properly disallowed because he was not paying interest on his obligations, but voluntarily discharging an obligation of another. A. Backus, Jr., & Sons, 6 B. T. A. 590; Continental Trust Co., 7 B. T. A. 539, 552; P. P. Griffin, 7 B. T. A. 1094; F. A. Smith, 11 B. T. A. 301; Hal E. Roach, 20 B. T. A. 919.

Here, petitioner paid the disputed interest on a note which alone fixed the obligation for its payment. That obligation was several and joint. The payment was the individual obligation of petitioner, as well as that of his wife. It is not disputed that petitioner’s proper basis for returning taxable income was that of cash receipts and disbursements. Such was the basis of petitioner’s claim for the entire interest deduction as it was of respondent’s questioned disallowance. It follows that the whole amount of interest so paid by petitioner was deductible by him. F. C. Nicodemus, Jr., 26 B. T. A. 125. Cf. William D. Hutchins, 14 B. T. A. 421.

It appears that the issue submitted herein and decided in favor of the petitioner accounts for only $169.91 of the proposed deficiency of $1,010.94, the balance of that deficiency in the sum of $841.03 not being in dispute.

Reviewed by the Board.

Judgment will ~be entered for a deficiency in. the sum of $81¡1.03 for the calendar year 1931.


author: Matthews :

text:
    Handbird Holding Corporation, Petitioner, v. Commissioner of Internal Revenue, Responent.
    Docket No. 72200.
    Promulgated March 15, 1935.

      Leroy B. Iserman, Esq., for the petitioner.

      M. B. Leming, Esq., for the respondent.
   opinion-.

Matthews :

The record clearly establishes, and it is not denied by the petitioner, that all of the steps set out in our findings were part, of one plan and purpose, to effect a stepped-up basis for the property sold and thus to avoid or at least to “ postpone ” the tax upon the profit from the sale of the assets belonging to Greason, Son & Dal-zell, Inc., on February 6,1930, which assets were used in the conduct of its business as coal dealer and which it agreed to sell to another corporation also engaged in the coal business.

Respondent does not question the organization of Handbird and Fidelis and Sentinel corporations. He recognizes that they were separate legal entities properly organized under the laws of the State of New York. Neither does he deny that these corporations took the formal steps contemplated by the agreement dated February 6,1930, between Greason, Son & Dalzell, Inc., and Pattison & Bowns, Inc. He does contend, however, that Sentinel never purchased any of the stock of petitioner nor any of its bonds, and that, stripped of all unessential details, Sentinel purchased the assets of Handbird for $315,000 in cash. It is the respondent’s position that the basis of these assets in the hands of Handbird is the same as that in the hands of the transferor, namely, $117,715.72.

Petitioner contends (1) that the transaction between Greason, Son & Dalzell, Inc., and Fidelis was a reorganization within the meaning of section 112 (i) (1) (B) of the Revenue Act of 1928 and nontaxable because of the provisions of section 112 (b) (4); that both Greason, Son & Dalzell, Inc., and Fidelis were parties to a reorganization within the meaning of section 112 (i) (2) and that under section 113 (a) (7) the basis of the assets to Fidelis was the same as the basis of the same assets in the hands of Greason, Son & Dalzell, Inc.; (2) that the transaction by which Fidelis transferred the assets it had received from Greason, Son & Dalzell, Inc., to Handbird, the petitioner, was a statutory reorganization between Fidelis and Handbird within the meaning of section 112 (i) (1) (A) and a nontaxable transaction to Fidelis; (3) that the assets acquired by Handbird from Fidelis for $315,000 had a valuation in the hands of Handbird of $315,000, irrespective of cost or basis to either Fidelis or Greason, Son & Dalzell, Inc., for the reason that although the exchange between Fidelis and Handbird was such an exchange as is described in section 112 (b) to (e), inclusive, and ordinarily the property in Handbird’s hands would take the same basis as it had in the hands of the person from whom received, the last sentence of section 113 (a) (6) specifically excludes such transaction; that section 113 (a) (7) does not apply because the interest of Fidelis in the property was less than 80 percent at the time of the transaction, since Fidelis acquired only 66% percent interest in the stock of Handbird, and only 62 percent of the bonds of Handbird; and that by the plain terms of these sections, therefor, “ the reorganization between Handbird and Fidelis and the transfer of property for stock and securities are within the very exceptions named in these sections, and it is equally clear that the value of these assets in the hands of Handbird was $315,000, the amount that it paid for the assets and property and the amount which the directors of Fidelis had adjudged them to be worth.” Counsel for petitioner argues that legal avoidance or postponement of taxation is entirely proper and it is insisted that the petitioner comes within the “ protection ” of those sections of the statute relating to reorganizations and nonrecognition of gain or loss, and that petitioner is entitled to the stepped-up basis. It is pointed out that “in the corporate proceedings every I was dotted and every T was crossed.”

The contention of petitioner is not sustainable. Under the principle announced by the Supreme Court of the United States in Gregory v. Helvering, 293 U. S. 465, the transfer of the assets of Greason, Son & Dalzell, Inc., to Fidelis for all the stock of Fidelis, and the transfer of the same assets by Fidelis to Hand-bird for stock and bonds of Handbird, under the circumstances outlined above, (Were not reorganizations within the meaning of the» statute even though they may come within the letter of the. statute/ But the transfer of the assets by Greason, Son & Dalzell, Inc., to Fidelis for all the stock of Fidelis was a nontaxable transaction under section 112 (b) (5) and we are of the opinion that the transfer of assets by Fidelis to Handbird for stock and bonds of Handbird is also a nontaxable transaction falling under section 112 (b)(5). This being the case, under section 113 (a) (8) the basis of the property in the hands of Fidelis is the same as the basis in the hands of Greason, Son & Dalzell, Inc., and the basis to Handbird is the same as the basis to Fidelis.

The applicable sections of the statute follow:

SEO. 112. RECOGNITION OE GAIN OR LOSS.
(b) (5) Transfer to corporation controlled by transferor. — No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such' corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.
* $ * $ * $ *
(j) Definition of control. — As used in this section the term “ control ” means the ownership of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation.
SEC. 113. BASIS FOR DETERMINING GAIN OR LOSS.
* at * * * * *
(a) (8) Same — Corporation controlled by tkansferor. — If the property was acquired after December SI, 1920, by a corporation by the issuance of its stock or securities in connection with a transaction described in section 112 (b) (5) * * * then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made.
# # * * * *

In the light of the whole agreement between Greason, Son & Dalzell, Inc., and Pattison & Bowns, Inc., and the admitted purpose of the incorporation of Fidelis and Handbird, it is clear that the payment to Handbird of $191,000 by Sentinel on March 28, 1930, was in reality a part of the purchase price which Pattison & Bowns, Inc., had agreed to pay for the assets of Greason, Son & Dalzell, Inc., and that stock and bonds of the face amount of $191,000 were issued to Sentinel, to be held until the assets to be purchased could be transferred to Sentinel, merely as an accommodation to Greason, Son & Dalzell, Inc., in its scheme to handle the sale so that the property would have a stepped-up basis in the hands of Handbird. Handbird was created solely for the benefit of Greason, Son & Dalzell, Inc., and was the legal entity designated to transfer the assets to Sentinel and to receive the $315,000 cash from Sentinel. Under the circumstances here present Sentinel never was the real owner of any stock of Handbird and was the record owner only from March 28, when Handbird received the $191,000 cash, until the transfer to Sentinel on March 31 of the assets acquired from Fidelis, upon the. payment by Sentinel of the balance of the purchase price, $124,000, and the return of the stock and bonds. Pattison & Bowns, Inc., never intended for Sentinel to become a real owner of stock or debentures of Handbird. The stock was issued to Sentinel only a few hours before the assets were acquired from Fidelis and the balance of the stock issued to Fidelis. In view of these circumstances, to hold that, because 100 shares of Handbird’s stock were in the name of Sentinel at the time it acquired the assets from Fidelis for the balance of its stock and so-called debentures, Fidelis did not have control of Hand-bird would be to exalt artifice above reality and to deprive the statutory provision in question of all serious purpose. Cf. Hazeltine Corporation, 32 B. T. A. 4; West Texas Refining & Development Co. v. Commissioner, 68 Fed. (2d) 77. Viewing the transaction as a whole, Fidelis was in control of Handbird immediately after the exchange, which brings the transaction squarely within section 112 (b) (5), and under section 113 (a) (8) the basis of the property in the hands of Handbird is the same as it had in the hands of Fidelis.

The organization of the petitioner corporation, and its dissolution within the taxable year after it had served the purpose for which it was incorporated, was a part of the preconceived plan which is clearly set forth in our findings of fact and which had as its sole object not the reorganization of any business, but the sale and transfer of certain assets for a specified price. The basis of these assets in the hands of Greason, Son & Dalzell, Inc., was $117,715.72, which was also the basis thereof in the hands of Fidelis and of Handbird, and the sale price to Sentinel was $315,000.. We hold, therefore, that the difference between the two figures, or $197,284.28, represents the gain realized by the petitioner in the taxable year. The respondent, in determining the deficiency, computed the profit in this way and we approve his action. Cf. Royal Marcher, 32 B. T. A. 76; Helvering v. General Utilities & Operating Co., 74 Fed. (2d) 972.

Reviewed by the Board.

Judgment will ~be entered for the respondent.


author: Artjndell:

text:
    Chicago Title & Trust Company, as Executor of the Estate of Rhea Logan Munroe, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 73455.
    Promulgated March 20, 1935.

      Hairry J. Rudich, Esq., for the petitioner.

      James K. Polk, Esq., for the respondent.
   OPINION.

Artjndell:

The statement of the facts here is somewhat complicated by reason of using English terms in some places and American terms in others to describe sums of money. The facts themselves, though, are simple. Mrs. Munroe owned securities which in 1930 were worth less than they had cost her. Faced with an income tax which she wanted to reduce by reflecting in her return shrinkage in value of securities, she transferred the securities to a corporation in which her husband owned all the stock, taking the corporation’s note for the current value of the securities, which was $100,922.48 less than cost. That corporation, in February 1931, transferred them to another in which Munroe owned or controlled all the stock, at the then market price, which was about $29,000 (£5,962.12.10) higher than the price at December 16,1930. The second corporation paid no cash for the securities, but assumed the first corporation’s note to Mrs. Munroe and gave its note for the increase in market price. Mrs. Munroe then got the securities back from the second corporation, agreeing to pay therefor an amount of cash $2,193.19 in excess of the amount of the first corporation’s note, and giving her note for £5,432.7.5, about $26,000. At or about the time of delivery of the securities to Mrs. Munroe on March 3, 1931, the several accounts were cleared up by exchange of checks in which the only one who profited was Mrs. Munroe. She received $427.88, and the note that she gave to the second corporation was destroyed.

The question presented here is whether Mrs. Munroe suffered a deductible loss in 1930 upon the transfer of her securities to the Inverness Corporation. The answer to this question turns upon whether that transfer was a bona fide sale in which Mrs. Munroe intended “ absolutely getting rid of the stock ”, Harold B. Clark, 2 B. T. A. 555, or whether it was merely an “ accommodation ” transaction. Harold B. Clark, supra; J. B. Young, 6 B. T. A. 656. The community of interest that existed among several parties to the transactions described in the findings requires that their activities be closely scrutinized to see that their transactions were actually what they purported to be and not merely formal acts which, though complying with statutory words, were outside the intent of the statute. Cf. Gregory v. Helvering, 293 U. S. 465. The statute is “ concerned only with realized losses ”, Lucas v. American Code Co., 280 U. S. 445, and claimed losses, in order to be allowable, must “ usually be evidenced by closed and completed transactions.” United States v. White Dental Manufacturing Co., 274 U. S. 398.

A bona fide sale is, of course, a closed and completed transaction within the intent of the statute. Petitioner here claims that it has established such a sale, pointing to various bits of evidence — the delivery and transfer of the stock certificates, the delivery of the note of Inverness to Mrs. Munroe, and the financial responsibility of Inverness. None of these matters are in dispute. They do not, however, reach the question we have here. Delivery and transfer of certificates, while establishing change of title, do not necessarily prove bona fides, Wishon-Watson Co. v. Commissioner, 66 Fed. (2d) 52. Surrounding circumstances, including subsequent acts of the taxpayer, often establish intent more clearly than the words of the participants. Cf. Commissioner v. Dyer, 74 Fed. (2d) 685.

Putting aside for the moment the details of the various transactions and looking at the result, it does not on its face support the claim of a sustained loss. Within three months after Mrs. Munroe made the transfer to Inverness she was again-in possession of the same securities, and she also profited on the deal by $427.88, despite the fact that the securities had appreciated some $29,000 in value in the meantime. It is difficult to see in this where any realized loss was sustained.

Taking up the details of the transactions, it is equally hard to find in them support for petitioner’s claim. The securities were marketable and had Mrs. Munroe desired to divest herself entirely of ownership she could have sold on the stock exchange. The testimony of Charles A. Munroe is that the reason for not selling on the exchange was to avoid broker’s fees., He also testified that Inverness did not have the cash to pay for the securities when it acquired them. But he further testified that the company had abundant stock exchange collateral ” to finance the acquisition, and his testimony in this respect is supported by the balance sheet in evidence. And so, even though Mrs. Munroe could have received cash for her stock, which is the most logical way of effecting an outright sale, she chose the more indirect way of taking a note. The execution of a bill of sale from Inverness to Manistee was another step in the scheme to avoid taxes. While there is no evidence that Mrs. Munroe had anything to do with that transaction, it must be remembered that these companies were dominated by Munroe, and he was the advisor in the several transactions. By reason of the increase in market value of the stocks Inverness was in a position to reap a profit on them. Munroe caused a bill of sale to be executed in the Bahama Islands so as to make the profit appear to have been realized outside the United States, but retaining the securities in the name of Inverness and having them remain in the custody of the agent of Inverness in New York. At the same time he hoped to give Manistee an increased basis for the securities so that there would be no taxable gain on the retransfer to Mrs. Munroe. The bills of sale from Inverness to Manistee and from Manistee to Mrs. Munroe bear the same date, February 9, 1931. Throughout these transactions the guiding hand of Charles A. Munroe is apparent, every move carefully planned to escape taxes, no payment of money involved, and the securities not allowed to get beyond the possibility of ready reacquisition. Finally, Munroe’s destruction of Mrs. Munroe’s note for £5,432.7.5 (something over $26,000) is not consonant with a bona fide business transaction. It is suggested that this was in substance a gift from Munroe to his wife. But the note did not run to him; it was drawn in favor of a corporation, Manistee. If he and his corporations are to be treated as one, it emphasizes the lack of bona fides in the several transactions to which the corporations were parties. Munroe’s explanation of the reason for the destruction of the note is, “ I did not want to profit, nor want any company that I owned to profit from a transaction with Mrs. Munroe.” This does not square with his other testimony that he insisted upon Mrs. Munroe paying the market price when she expressed a desire to reacquire the securities.

Upon a consideration of all the evidence we are unable to conclude that the transfer of the securities to Inverness in December 1930 was a bona fide sale and we accordingly sustain the respondent’s disallowance of the claimed loss.

Decision will be entered for the respondent.


author: Smith:

text:
    Frances A. Krause and W. Washburn Hinds, Executrix and Executor of the Estate of Walter De Witt Hinds, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 49860.
    Promulgated March 20, 1935.

      'William, E. Hayes, G. P. A., for the petitioners.

      J. R. Johnston, Esq., for the respondent.
   OPINION.

Smith:

The petitioners seek a redetermination of a deficiency in estate tax of $14,270.06. The petitioners allege that the respondent has erred in the determination of the deficiency by including in .the gross estate $234,366.93 representing one half of the value of a trust fund created by the decedent on September 3,1925, and supplemented on October 1, 1925, by the addition of other property.

By an amended answer the respondent—

* * * avers that the full value of the corpus of the trust executed by the decedent on September 3, 1925, as supplemented by the indenture of October 1,1925, one-half of the corpus of which was included in the decedent’s gross estate in determining the deficiency set forth in the deficiency notice, is subject to be included in the value of the decedent’s gross estate, pursuant to the provisions of the Revenue Act of 1926, as property of the decedent at the time of his death, and/or as property of which the decedent had made a transfer in contemplation of and/or intended to take effect in possession or enjoyment at or after his death; that by the indenture of October 1, 1926, additional property was conveyed to and made a part of the corpus of the trust of September 3, 1925; and that the corpus of said trust of September 3, 1925, possessed a total value, as of the date of the decedent’s death, of $468,733.86.

The respondent prays for an increase in the deficiency determined.

Walter De Witt Hinds, the decedent whose estate is involved in this proceeding, was 49 years of age on September 3, 1925. His expectation of life at that time, computed in accordance with the American Tables of Mortality without considering other factors, if any, was 21.63 years. His wife, Frances A. Hinds, was 29. years of age and her expectation of life computed in accordance with the American Tables of Mortality, without considering other factors, if any, was 36.03 years. On September 3, 1925, Walter De Witt Hinds created an irrevocable trust by a certain deed. The grantor delivered the trust deed and the subject matter of the trust securities to the trustee, Fidelity Trust Co., Portland, Maine, on or about September 3, 1925, at which time the trust was accepted by the trustee, and the trust has been administered by the trustee in accordance with the trust since the execution of the deed. •

Under date of October 1, 1925, by a supplemental indenture of trust, Walter De Witt Hinds transferred certain additional securities to the trust created on September 3, 1925.

Under the terms of the trust deed the income from the trust property was to be paid equally to the grantor and his wife for a period of 20 years, at the end of which time the trust was to be terminated and the corpus distributed equally between the grantor and his wife. If either the grantor or his wife died during the trust period, the income of the trust fund was to be paid to the survivor during the balance of the trust period, at the expiration of which the corpus was to be paid to such survivor; if, however, the survivor did not live to the end of the 20-year period, the entire corpus, together with any undistributed income in the hands of the trustee, was to be paid over to the survivor’s executor or administrator.

On the morning of January 3, 1928, the decedent, the grantor of the trust, was found dead in his home. He left a last will and testament which was admitted to probate and duly probated by the Probate Court at Holton, Maine.

On February 21, 1928, the executor and executrix, W. Washburn Hinds and Frances A. Krause, respectively, qualified as such and on December 29, 1928, filed with the collector of internal revenue for the district of Maine a Federal estate tax return reporting a net estate of $460,370.27. Nothing was included in the return filed by the executors representing the value as of date of death of any interest in the trust estate passing from the decedent at his death.

In the determination of the deficiency the respondent found that the total value of the trust estate as of the date of the death of the decedent was $468,733.87, one half of which, or $234,366.93, he included in the gross estate in the determination of the deficiency.

It is stipulated:

* * * that the value as at January 3, 1928, the date of the death of the decedent, and as at any other date or dates found material to this controversy of any property or interest herein involved may be determined in accordance with the particular table of experience applicable thereto known as the Actuaries or Combined Experience Table of Mortality, published on pages 22 and 23 of Regulations 70, relating to Estate Tax.

The petitioners contend in this proceeding that the trust fund was not created in contemplation of death and that the only interest which was retained by the grantor up to the transfer and which passed at his death on January 3, 1928, was:

* * * a reversionary interest in a one-half interest in the corpus of the estate, subject to a precedent estate for years terminating on September 3, 1945. * * * that the present value of that future interest as at January 3, 1928, was no more than $114,690.07 ( 49.3628% of $234,366.93) computed in accordance with Table B published on page 23 of Regulations 70 (1929 Edition), using the “ number nearest ” the “ certain number of years ” possession is postponed.

The petitioners submit that the following alienable estates were created by the trust of September 3, 1925:

(1) An estate for 20 years.
(2) A remainder over in fee after 20 years in one half of the corpus to Frances.
(3) A reversion in fee after 20 years in the grantor,

They further submit:

Under the law of trusts a trustee takes no greater estate than is necessary for him to perform his duties as trustee. Thus, there was conveyed to the trustee by a valid gift inter vivos an estate for 20 years with a remainder over as to a one-half interest in the corpus to Frances, leaving a reversion as to the residue, i. e., the other half interest, in the corpus to the grantor after the expiration of the 20-year estate. The reversion vested by operation of law which differs from the remainder in that it was expressly created by deed. The deed provided that in the event Frances should die before the expiration of said 20 years from date thereof, leaving the grantor surviving at the expiration of said 20 years, then the said trustee was to pay over to such survivor the whole of the principal of said trust fund remaining in his hands.

The Federal estate tax is imposed “ upon the transfer of the net estate of every decedent dying after the enactment o.f this Act.” Sec. 301 (a), Kevenue Act of 1926. Section 302 of that act provides:

The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
*❖***##
(c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. * * *

The reason stated by the respondent in his deficiency notice upon which this proceeding is based for including in the gross estate one half of the total value of the trust property as at the date of the death of the decedent is in part as follows:

Article 18 of Treasury Department Regulations 70, as amended by T. D. 4285, provides in part:
“Where the decedent reserved only a portion of the income, only a corresponding proportion of the value of the property should be included in the gross estate. Thus, for example, if the reservation was one-half of the income then one-half of the value of the transferred property should be included.”
It is evident from the language of the trust instrument that the decedent’s interest to one-half of the trust would not and could not pass to his wife until after his death. The value of the one-half interest of said trust is, therefore, taxable under the provisions of the law and regulations referred to above.

We shall first consider the contention raised by the respondent in his amended answer that the entire value of the trust property should be included in the gross estate of the decedent. This argument proceeds upon the theory that no “ vested remainder ” was fixed by the creation of the trust. In his brief the respondent submits the following:

The trust instrument in the present controversy was irrevocable. The following possibilities pertinent here arise from its terms:
1. Equal shares of one-half of the entire trust property should be distributed to the grantor and his wife, if each Tie living at the expiration of 20 gears from the date of creation of the trust. * * *
2. If either the grantor or his wife die before tile expiration of the 20 year period, and the survivor is living at the expiration of that period, the trustee should turn over the trust in its entirety to such survivor. * * *
3. If both the grantor and his wife should die before the expiration of the 20 year period, then upon the death of the survivor of them the trustee should pay over the trust in its entirety to the administrator or executor of such survivor. * * *
Discussing these possible interests in the order shown, under 1, it is clear that prior to decedent’s death “ no present interest passed to a certain and definite person ”, to be enjoyed in futuro. Equally patent is the fact that no vested interest in any part of the corpus passed to any other person prior to the death of the grantor. Measured by the test uniformly applied by the Supreme Court and adopted by the lower Federal Courts, the facts under 1 above establish that no more than a contingent remainder was created by the provisions of the trust instrument referred to above in 1.

We cannot agree with the respondent’s contention that “ no vested remainder ” was fixed by the creation of the trust. In Elizabeth B. Wallace, Executrix, 27 B. T. A. 902; affirmed in Commissioner v. Wallace, 71 Fed. (2d) 1002, we discussed at some length the difference between vested and contingent remainders. We there quoted from Doe v. Considine, 6 Wall. 458, as follows: “A contingent remainder is where the estate in remainder is limited either to a dubious and uncertain person, or upon the happening of a dubious and uncertain event.”

When the decedent on September 3, 1925, created the trust estate involved herein the decedent’s wife, Frances A. Hinds, was in being. Under the deed of trust she received a right to receive one half of the income of the trust estate during the trust period of 20 years and a right to receive one half of the corpus upon the dissolution of the trust at the end of the 20-year period. This was a gift inter vivos. There was no contingency about it.

Furthermore, there is no evidence that the trust fund was created in contemplation of death. The language used by the Supreme Court in May v. Heiner, 281 U. S. 238, “ The transfer of October 1, 1917, was not made in contemplation of death within the legal significance of those words. It was not testamentary in character and was beyond recall by the decedent ”, is equally applicable to the situation which obtains here, so far as the right to one half of the trust estate is concerned. By the deed of trust such one-half interest passed irrevocably to Frances A. Hinds.

The fact that the decedent, the grantor of the trust, might have received the income of the trust estate and the entire corpus if his wife had died prior to the expiration of the 20-year term of the trust and prior to the decease of the grantor of the trust in no wise made Frances A. Hind’s interest in the trust estate contingent. See Helvering v. St. Louis Union Trust Co., 75 Fed. (2d) 416, affirming 28 B. T. A. 107.

The petitioners do not deny that there was a transfer of some interest in the trust fund which arose from the death of the decedent. They contend, however, that the present value of that future interest as at January 3, 1928, the date of the death of the decedent, was no more than $114,690.07, which represented the claimed value then of a reversionary interest in a one-half interest in the corpus of the estate subject to a precedent estate for years terminated on September 3, 1945. This contention is not sustained.

Manifestly, by the deed of trust of September 3,1925, and the supplement thereto of October 1, 1925, a one-half interest in the trust estate passed to Frances A. Hinds. A like one-lialf interest in both the income and the corpus remained in the decedent, the creator of the trust. Up to the date of the death of the decedent on January 3, 1928, the interests of the decedent and of Frances A. Hinds in the trust estate were precisely equal.

In Y. M. C. A. of Columbus, Ohio v. Davis, 264 U. S. 47, 50, it was stated: “What this law taxes is not the interest to which the legatees and devisees succeeded on death, but the interest which ceased by reason of the death.” Since the decedent up to the date of his death had a one-half interest in both the income and the corpus of the trust estate and since that interest ceased upon his death, it necessarily follows that the value of that interest, whatever it may be, is includable in the gross estate. This was the position taken by the respondent in the determination of the deficiency, and that position is sustained.

The petitioner’s contention that the situation here is the same as that which obtained in May v. Reiner, supra, is not' sustained. The facts in that case were that the grantor, Mrs. May, transferred property in trust, the income therefrom to be paid to her husband during his life and upon his death to her for her life; upon her death the trust was to terminate and the property was to be distributed equally among her four children. The Supreme Court said at page 243:

The record fails clearly to disclose whether or no Mrs. May survived her husband. Apparently she did not. But this is not of special importance, since the refund should have been allowed in either event.
* * * The interest therein which she possessed immediately prior to her death was obliterated by that event.

The petitioners’ argument that the decedent had an interest in the income of the trust fund only up to the date of his death on January 3,1928, is not sustained. He had an interest in one half of the trust estate to September 3, 1945. Upon his death that interest passed to his widow, Frances A. Hinds.

The petitioners have stipulated that:

* * * The value as at January 3, 1928, the date of the death of the decedent, and as at any other date or dates found material to this controversy of any property or interest herein involved may be determined in accordance with the particular table of experience applicable thereto known as the Actuaries or Combined Experience Table of Mortality, published on pages 22 and 23 of Regulations 70, relating to Estate Tax.

The decedent’s one-half interest in the trust estate includable in the gross estate of the decedent will be determined in accordance with that stipulation.

Judgment will be entered under Rule 50.