text:
    Georgia M. Spangler, Petitioner, v. Commissioner of Internal Revenue, Respondent. J. W. Spangler, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 56320, 56321.
    Promulgated October 31, 1933.

      J. W. Fisher, Esq., for the petitioners.

      H. F. Noneman, Esq., for the respondent.
   OPINION.

Black :

In the stipulation it was agreed that either party thereto might object to the relevancy or materiality of any of the facts stipulated. At the hearing, petitioners objected to the minutes of the board of directors’ meeting, of December 7, 1927 (Exhibit A of the stipulation) and to the notice of the annual meeting of the stockholders, dated December 9, 1927 (Exhibit B of the stipulation) and to the stockholders’ consent agreement dated December —, 1927 (Exhibit C of the stipulation). Petitioners’ objection to the foregoing evidence was to the effect that the plan of declaring a 30 percent dividend to the stockholders of the bank and using the money to subscribe for the stock of the National Co. on behalf of the stockholders was abandoned for other plans and hence the evidence contained in these exhibits was irrelevant and immaterial. It was agreed that the Board would withhold its ruling until the time of its decision.

Whether or not a taxable dividend has been declared or whether a reorganization has taken place under such circumstances as to make the distribution to the stockholders a nontaxable one, is often a difficult and complex matter.

We think it is important to the Board in all such cases to have all the evidence before it which will throw light on the transactions.

In our judgment the evidence contained in Exhibits A, B and C of the stipulation should be admitted. Hence petitioners’ objections are overruled and their exception is noted, as requested.

Exhibit K attached to the stipulation was a circular letter dated March 3, 1930, addressed to the former stockholders of the bank, relating to the tax controversy resulting from the Commissioner’s determination that the stockholders had received a dividend in 1928 of $30 a share on their bank stock. Petitioners’ objection to this letter was that it was not written until two years after the transactions occurred; it did not contain any admissions against interest of these petitioners or anyone in privity with them; and was irrelevant and immaterial.

We think these objections should be sustained. The letter does not purport to give any recital of the details of the transactions in question. It simply purports to give a brief account of the tax controversy which has arisen between the stockholders and the Commissioner and states the purpose to test the controversy before the Board and in the courts. We do not see where this letter will throw any light on the matters which we have before us for decision. Hence it is excluded from the evidence and respondent’s exception is noted, as requested.

We come now to decide the main issue in the case, which is whether the bank declared and paid a SO percent cash dividend to its stockholders, as respondent contends, ,or whether the bank transferred $300,000 of its assets to the National Co. in payment of all of its capital stock and immediately distributed this stock in pursuance of a plan o,f reorganization which made the transaction nontaxable to the stockholders under the applicable provisions of the Revenue Act of 1928.

It seems clear from a reading of the minutes of the bank’s board of directors at a meeting held December T, 1927, and the notice to stockholders dated December 9, 1927, of the annual meeting, and the consent agreement of the stockholders bearing date December —, 1927, all given in detail in our findings of fact, that it was the original intention of the bank’s directors to declare and pay a 30 percent dividend to the bank’s stockholders and then that they would use the money to subscribe and pay for the stock in the National Co. If this had been done we would have had much the same situation which we had before us in John G. Lonsdale, 11 B.T.A. 659; affd., 32 Fed. 537, certiorari denied, 280 U.S. 575; Mrs. Frank Andrews, 26 B.T.A. 642; Walter Hopkins, 27 B.T.A. 1331.

In the Lonsdale and Andrews cases the board of directors of the respective banks declared cash dividends in favor of their stockholders, payable to trustees which had been selected by them to receive the money and use it' in subscribing and paying for the stock in the newly created securities corporation. In the Hopkins case the dividend declared to the stockholders, instead of being cash, was of the remaining assets of the Citizens National Bank after all its quick assets had been conveyed to the new bank which resulted from its merger with the First National Bank of Baltimore. We held that the dividend declared to the stockholders of the Citizens National Bank of its surplus assets was no different from a dividend in cash and that the same rule applied in such a case as we had announced in the Lonsdoile case and followed in the Andrews case. In all these cases we held that the dividends were taxable to the stockholders, notwithstanding they were paid to the trustees and used by them in paying for the stock of the subsidiary-corporations.

But petitioners contend that the facts in the instant case are distinguishable from those which we had before us in the above cited cases. Petitioners say that in the instant case there was no declaration of a cash dividend or of a dividend of property by the directors ; that under the stockholders’ resolution adopted at the annual stockholders’ meeting on January 10, 1928, approving the directors’ plan of reorganization, the bank was authorized to transfer $300,000 to the National Co. solely for the purpose of acquiring ownership of all the stock of that company, with the understanding that it would distribute a beneficial interest in such stock to its stockholders; that in view of the terms of the resolution, the $300,000 remained the property of the bank and never did become the property of the stockholders; that the stockholders in the instant case, unlike the stockholders in the Lonsdale and Andrews and Hopkins cases, never did receive a cash dividend or a dividend of property prior to the organization of the National Co., but received a distribution from the bank of beneficial interests in the stock of the National Co. after it was organized.

We believe that the distinction in facts is a valid one. Whether this distinction will cause the distribution which the bank made to its stockholders of beneficial interests in the National Co. to be a nontaxable transaction, we will discuss later. For the moment we will turn our attention to what was actually done in these transactions. Our findings of fact show that at the directors’ meeting on December 29,1927, it was resolved to submit to the annual meeting of the stockholders of the bank “ a proposition of reorganization of the Seattle National Bank by having the bank hold all of its assets excepting $300,000 * * * and to turn these $300,000 of assets into an investment company to be called the Seattle National Company with common stock of 20,000 shares and that this $300,000 of assets belonging to the bank should be turned over to the investment company as payment in full for the 20,000 shares of no par value of the common stock of such investment company.” It was exactly this plan which the stockholders approved at their annual meeting held January 10, 1928. It was this plan which was carried out in the organization of the National Co. and the distribution of beneficial interests in its stock ratably to the stockholders of the bank. It is true that this plan was not the plan as first proposed in the directors’ meeting of December 7, 1927, and in the notice to stockholders of the annual meeting, dated December 9, 1927, and consented to by the stockholders December —, 1927.

But we must determine tax matters upon what was done rathei than upon what the parties may have at one time intended to do. Cf. George M. Brady, 22 B.T.A. 596. In the Brady case the original offer and acceptance was for the stockholders of the Bank of Hampden to sell their stock to the Baltimore Trust Co. The Commissioner contended that although the transaction started out to be a sale of stock, it was subsequently changed to a sale of assets by the Bank of Hampden to the Baltimore Trust Co. and a subsequent distribution in liquidation to the stockholders of the Bank of Hamp-den in cancellation of their stock and that, by reason of the fact that the transactions were actually carried out in this manner, the Bank of Hampden was liable for a tax on the profits arising from the sale of its assets and the stockholders were liable as transferees because of the fact that they received in liquidation of their stock the entire amount of cash received by the Bank of Hampden from the sale of its assets.

We sustained the Commissioner in these contentions because the evidence supported his version of the transactions. The same logic which caused us to base our decision in the Brady case not upon what the parties started out to do, fiut upon what they actually did, should cause us in the instant case to base our decision on not what the parties started out to do, but upon what they actually did.

Was there a tax liability arising from what was actually done in the instant case ? A dividend payable in stock of the Seattle National Co. to the stockholders of the Seattle National Bank would of itself ordinarily be taxable, since a dividend of one corporation payable in stock of another corporation is taxable in the same manner as a cash dividend. United States v. Phellis, 257 U.S. 156; Rockefeller v. United States, 257 U.S. 176. The question we have to decide is whether, because of certain provisions of the Bevenue Act of 1928, the admitted gain resulting to the stockholders of the bank because of the distribution to them of beneficial interests in the stock in the National Co. should not be recognized for tax purposes.

Section 112 (g) of the Revenue Act of 1928, reads:

(g) Distribution of stooJc on reorganization. — If there is distributed, in pursuance of a plan of reorganization, to a shareholder in a corporation a party to a reorganization, stock or securities in such corporation or in another corporation a party to the reorganization, without the surrender by such shareholder of stock of securities in such a corporation, no gain to the distributee from the receipt of such stock or securities shall be recognized.

This provision is the same as section 203 (c), Eevenue Acts of 1924 and 1926. In reporting the Eevenue Bill of 1924,- the House Committee on Ways and Means made the following statements with reference to the foregoing language:

* * * There is no provision of the existing law which corresponds to subdivision (c). Under the existing law, if corporation A organizes a subsidiary, corporation B, to which it transfers part of its assets in exchange for all the stock of corporation B, and distributes the stock of corporation B as a dividend to its stockholders without the surrender by the stockholders of any of their stock, then such a dividend is a taxable one. If, however, corporation A organizes two new corporations, corporations B and O, and transfers part of its assets to corporation B and part to corporation C, and the stockholders of corporation A surrender their stock and receive in exchange therefor stock of corporations B and C, no gain from the transaction is recognized. Thus, under the existing law, the same result, except as to tax liability, may be obtained by either of two methods; but if the first method set out above is adopted, the gain is taxable, while if the second method set out above is adopted, there is no taxable gain. Subdivision (c) of the bill permits the reorganization to be accomplished in the first manner set out above without the recognition of gain. This method represents a common type of reorganization and clearly should be included within the reorganization provisions of the statute as long as the exemption under the present law is continued.

In order for a distribution to fall within section 112 (g) of the Eevenue Act of 1928, the following requirements must be met: (1) The distribution must be in pursuance of a plan of reorganization; (2) the distribution must be made to a shareholder in a corporation a party to the reorganization; (8) the distribution must be of stock or securities in the corporation making the distribution or in another corporation a party to the reorganization; (4) the distributee does not surrender stock or securities already held. We think that the facts show that all the foregoing conditions are met in the instant case if the paying into the treasury of the National Co. of $300,000 in cash out of the assets of the bank and the issuance to the bank or its trustees of all the common stock of the National Co. and the immediate distribution of the beneficial interests in that stock to the stockholders of the bank, was a reorganization within the meaning of section 112 (i) of the Eevenue Act of 1928. Section 112 (i) reads:

(1) The term “reorganization” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, ⅞ ⅜ * or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred * * *.
(2) The term “ a party to a reorganization ” includes a corporation resulting from a reorganization and includes both corporations in the case of an acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation.

While petitioners argue that the facts show a reorganization under either (A) or (B) of the reorganization provision above quoted, we do not think that the facts of the instant case show a reorganization under (A). While it is true that the bank acquired all the stock of the National Co. and this acquisition would come squarely within the language of the parenthetical clause of (A) if that clause is to be read independently of what comes before it, that clause must not be so read. Prairie Oil & Gas Co. v. Motter, 66 Fed. (2d) 309; Pinellas Ice & Gold Storage Co. v. Commissioner, 287 U.S. 462; Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937; Minnesota Tea Co., 28 B.T.A. 591.

The effect of the foregoing decisions is to hold that the acquisition of stock or the acquisition of property mentioned in the parenthetical clause of (A), to constitute a reorganization, must be in connection with a merger or a consolidation or something which partakes of or resembles a merger or a consolidation. We do not think that the organization of a subsidiary corporation by a parent corporation and the acquiring of all its capital stock and the distribution of that stock to its stockholders would be a merger or a consolidation or akin thereto. We think a merger or a consolidation referred to in (A) means a merger or consolidation of existing corporations. Hence we think if there was a reorganization in the instant case it must fall under (B), and not under (A). We think the facts of the instant case come squarely within the provisions of (B) above.

The bank transferred a part of its assets, to wit, $300,000 in cash, to the National Co. and immediately thereafter the bank or its stockholders, or both, were in control of the National Co. because they owned its entire capital stock.

In Rudolph Boehringer, 29 B.T.A. 8, petitioner was a stockholder in the American Zeolite Corporation of New York. For reasons stated in our opinion, the American Zeolite Corporation of New Jersey was organized and on August 23, 1928, the New York corporation sold all of its assets except $50,000 to the New Jersey corporation for all of its stock. The stock thus received from the New Jersey corporation was distributed pro rata to the stockhlders of the New York corporation. Among other things, we said in that opinion: “ There was a reorganization, since there was a transfer by New York of a part óf its assets to New Jersey and immediately thereafter New York or its stockholders were in control of New Jersey. Section 112 (i)(l)(B). The petitioner received his New Jersey stock tax free. Section 112 (g) exactly covers this case.”

On the facts of the instant case we hold that there was a reorganization, and that whatever gain resulted to the stockholders of the bank bjr reason of their receipt of beneficial interests in the stock of the National Co. was not taxable because of the provisions of section 11,2 (g) of the Revenue Act of 1928.

Reviewed by the Board.

Decision will be entered for 'petitioners.

Trammell dissents upon authority of the language used in the court’s opinion in Prairie Oil & Gas Co. v. Motter, 66 Fed. (2d) 309, and also upon authority of Warner Co., 26 B.T.A. 1225.


source: Caselaw Access Project

author: Matthews:

license: Public Domain

text:
    Gordon Can Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 51845.
    Promulgated October 31, 1933.

      Edgar M. Morsman, Jr., Esq., for the petitioner.

      P. M. Clark, Esq., for the respondent.
   OPINION.

Matthews:

This is a proceeding for the redetermination of a deficiency in income tax for the year 1928 in the sum of $4,458.75. It is alleged by the petitioner that the respondent erroneously added to the petitioner’s reported income for the taxable year the sum of $37,367.98, representing commissions paid to the Wallace Realty Co. by C. S. Davis & Co. under the circumstances which will be hereinafter set out.

Petitioner is a corporation, organized under the laws of the State of Nebraska, with its principal place of business in Omaha, Nebraska. It is engaged in the business of manufacturing and selling tin cans.

During the taxable year the entire common stock of the petitioner corporation was owned by its president, A. W. Gordon, and his wife, Almyra B. Gordon, in the respective amounts of 790 and 200 shares. There were outstanding 667 shares of preferred stock, all of which were owned by Mrs. Gordon with the exception of 12 shares; this preferred stock was being retired and 100 shares belonging to Mrs. Gordon were retired during the taxable year.

Petitioner’s business was extremely profitable. A. W. Gordon, as president of the corporation, handled the large contracts and had exclusive control of the buying of the tin plate used in the manufacture of the cans. His nephew, S. R. Gordon, as secretary-treasurer, attended to the manufacturing end and the routine work. A. W. Gordon was a close personal friend of C. S. Davis of the firm of C. S. Davis & Co., which will be hereinafter referred to as the Davis Co., from whom the petitioner purchased tin plate. Because of this friendship A. W. Gordon received concessions which would not have been otherwise obtainable. He was always given first-hand information as to purchases by large consumers who had tin plate made to order by exact measurement and, was given the opportunity to procure at very advantageous prices the surpluses or “ spots ” left on hand with the Davis Co. after filling these orders. By purchasing these spots from the Davis Co. at a price considerably below the prevailing market price for tin plate, petitioner was enabled to make large profits.

The Eevenue Act of 1924 contained a provision making income tax returns open to the public. Petitioner had three large customers, located in Omaha, and it was believed that if they knew the amount of the petitioner’s profits they would insist upon a reduction of the prices paid by them for the tin cans manufactured by the petitioner. Accordingly, after the enactment of the Eevenue Act of 1924, the Wallace Eealty Co. was organized by A. W. Gordon and his associates, with A. W. Gordon as president, for the purpose of holding a certain building which was owned by the petitioner and to receive the profits attributable to the advantageous position occupied by A. W. Gordon on account of his friendship with C. S. Davis, which profits had previously been received and reported as income by the petitioner. These profits were termed commissions upon purchases of tin plate made for the petitioner and were received by the Wallace Eealty Co. from the Davis Co. Payment for its tin plate was made by the, petitioner to the Davis Co. and the latter company then rebated to the Wallace Eealty Co. the difference between the price at which the tin plate was billed to the petitioner, which was approximately the market price, and the lower price at which the Davis Co. was willing to furnish the tin plate to the petitioner. The Davis Co. consented to this arrangement and made these rebates to the Wallace Eealty Co. at the direction of the petitioner corporation. Prior to the organization of the Wallace Eealty Co. petitioner had purchased its tin plate direct from the Davis Co. at the lower price without the payment of any commission or rebate by the Davis Co. All purchases of tin plate were made or authorized by A. W. Gordon personally, by mail or over the telephone. A. W. Gordon drew no salary from the Wallace Eealty Co.; he received an annual salary of $36,000 as president of the petitioner corporation. During the taxable year 5 shares of stock of the Wallace Eealty Co. stood in the name of A. W. Gordon and the balance of 95 shares of stock stood in the name of his wife.

At intervals between 1924 and the taxable year, in accordance with its instructions, petitioner’s purchases of tin plate were handled direct from the Davis Co. without being billed through the Wallace Eealty Co. Under date of February 27, 1926, which was the day following the date of enactment of the Kevenue Act of 1926, which act repealed certain provisions of the Revenue Act of 1924, including the provision with respect to making income tax returns open to the public, the petitioner corporation addressed the Davis Co. as follows:

We wish to aclvise you that from now on we will appreciate very much if you will bill tinplate to the Gordon Can Company in the regular -way as you used to do. We appreciate the trouble that you were put to in order to figure our commissions but the emergency which caused us to do this has now been repealed, so from now on you may bill Ihe tinplate to us the regular way. We want you to know that we appreciated your cooperation with us.

These instructions were countermanded under date of November 15, 1926, when the Davis Co. was advised by the petitioner to bill the cars of tin plate “ on the same basis that you billed them a year ago, sending the commission check to the Wallace Realty Company.”

The commissions or rebates paid to the Wallace Realty Co. by the Davis Co. amounted to $37,367.98 for the taxable year 1928. The Wallace Realty Co. included this amount in its income tax return for 1928.

In determining the deficiency herein complained of the respondent included in the petitioner’s income these commissions in the sum of $37,367.98 and explained this adjustment as follows:

Tin plate purchased from O. S. Davis and Company was billed to your corporation at a price in excess of actual prices and the difference between the billed price and actual price was refunded to the Wallace Realty Company in the guise of commissions. It is therefore held that this is merely a diversion of profits and is restored to income by reducing purchases to actual cost through elimination of excess cost transferred to the Wallace Realty Company.

It is not disputed that payment of commissions to the Wallace Realty Co. was made by the Davis Co. in accordance with instructions from the petitioner and that the Wallace Realty Co. furnished no goods and performed no services for the Davis Co. The petitioner is contending that the tin plate used by it was purchased from the Davis Co. by A. W. Gordon as president of the Wallace Realty Co. and urges that Gordon had the right to take the commissions personally or to give them to the Wallace Realty Co. or to give them to the petitioner corporation. As stated in the brief filed by counsel for the petitioner, “A. W. Gordon decided that this personal drag of his with Davis & Company should inure to the benefit of the Wallace Realty Company and not to the benefit of the Gordon Can Company,” and for this reason petitioner insists that it is not taxable upon the amount of the commissions.

The petitioner’s contention cannot be sustained. The record clearly shows that the commissions in question were paid to the Wallace Realty Co. not because they were earned in any way by that corporation but because the petitioner was desirous of preventing its customers from knowing how much profit it was making on the manufacture of tin cans, and this method of billing petitioner’s purchases of tin plate would result in a reduction of the profits which it would have to report. A. W. Gordon and his wife owned all of the common stock of both the petitioner and the Wallace Realty Co. It was through Gordon’s personal efforts and on account of his friendship with C. S. Davis that the tin plate used in the manufacture of its tin cans was obtained by the petitioner at such a low figure. As president of the petitioner corporation Gordon would be expected to so manage its affairs that its best interests would be protected. Certainly he would not undertake to benefit personally by receiving from the Davis Co. commissions on orders placed by him for the petitioner corporation. Had there been other stockholders in the petitioner corporation who did not own stock in the Wallace Realty Co. they undoubtedly would have objected to the latter corporation’s receiving such commissions. In effect the commissions were paid by the petitioner to the Wallace Realty Co. for no other purpose than to reduce petitioner’s profits. The fact that the Wallace Realty Co. reported these sums as income does not change the liability of the petitioner.

While respondent does not base his action upon the provisions of section 45 of the Revenue Act of 1928, it may be assumed that the adjustment was made in order that the real income of the petitioner might be clearly reflected. This section reads as follows:

SEC. 45. ALLOCATION OF INCOME AND DEDUCTIONS.
In any case of two or more trades or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion, or allocate gross income or deductions between or among such trades or businesses, if lie determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such trades or businesses.

We hold that under the circumstances outlined above the respondent did not err in adding to the petitioner’s income for 1928 the sum of $37,367.98.

Judgment will be entered under Bule 50.


author: Matthews :

text:
    Alfred W. Gordon, Petitioner, v. Commissionenr of Internal Revenue, Respondent.
    Docket No. 57483.
    Promulgated October 31, 1933.

      Edgar M. Morsman, Jr., Esq., for the petitioner.

      P. M. Clark, Esq., for the respondent.
   OPINION.

Matthews :

This is a proceeding for the redetermination of a deficiency in income tax for the year 1928 in the sum of $4,518.54. The sole issue presented herein is whether the respondent erred in adding to the petitioner’s reported income for the taxable year the sum of $29,919.20, which amount the respondent has determined to represent additional dividends received by the petitioner from the Gordon Can Co.

It has been agreed by the parties hereto that the testimony in the case of the Gordon Can Co., Docket No. 51845, reported at 29 B.T.A. 272, may be treated as a part of the testimony in the instant case, and reference is made to our opinion in that case for a more complete statement of the facts upon which the respondent has based his determination.

In 1928 the petitioner owned 790 shares and the petitioner’s wife owned 200 shares of the common stock of the Gordon Can Co., and of the common stock of the Wallace Realty Co. petitioner owned 5 shares and his wife owned 95 shares. These shares constituted all of the common stock of these two corporations.

During the taxable year C. S. Davis & Co. paid to the Wallace Realty Co., as commissions on the sale of tin plate furnished by C. S. Davis & Co. to the Gordon Can Co., sums totaling $37,367.98. We have held, in our opinion in Gordon Can Co., supra, that this amount constituted income to the Gordon Can Co. and should have been included in its income tax return for 1928.

The Wallace Realty Co. declared a dividend of $40,000 in 1928 and of this amount the petitioner received and reported $2,000, being ym of the amount of the dividend. The Gordon Can Co. declared no dividend in 1928 and of the dividends reported by the petitioner for 1928 no portion represented dividends from the Gordon Can Co.

It is the respondent’s position that the $40,000 dividend, declared by the Wallace Realty Co. was taken out of the earnings of- the Gordon Can Co. and that this dividend should be treated as having been distributed to the stockholders of the Gordon Can Co. in proportion to their holdings in that company, which would result in the petitioner’s receiving 790/990 of $40,000, or $31,919.20. Since the petitioner reported only $2,000, which he received as the holder of five shares of stock of the Wallace Realty Co., the respondent has added to the dividends reported by the petitioner the sum of $29,919.20.

The record is clear that the petitioner reported all the dividends actually received by him in 1928 and that the Gordon Can Co. paid no dividends in that year. It may be that the Wallace Realty Co. would not have declared a $40,000 dividend if it had not received the above mentioned commissions in the sum of $37,367.98, but it does not follow that this $40,000 dividend may be regarded as having been declared and paid by the Gordon Can Co. or that the stockholders of the Gordon Can Co. are taxable on dividends which they did not receive. We do not have before us the income tax return of the Wallace Realty Co. for 1928, but we do know that this company had income from other sources. At the hearing in Gordon Can Co., supra, A. W. Gordon testified that the Wallace Realty Co. was formed in 1924 for the purpose of holding a certain building which brought in a large annual rental, and in addition to receive the commissions referred to above. The revenue agent’s report, which was introduced in evidence, indicates that for the taxable year 1928 a part of the income of the Wallace Realty Co. consisted of interest on securities and profit from the sale of securities. We are not called upon to consider the tax liability of the Wallace Realty Co. The petitioner has shown that he included in his income tax return all the dividends received by him in 1928. The respondent committed error in determining that additional dividends should have been reported by him for the taxable year. Inasmuch as the respondent made another adjustment to income which the petitioner is not contesting,

Judgment will be entered wider Bule 50,


author: Abttndell :

text:
    50 East 75th Street Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket 49250.
    Promulgated October 31, 1933.

      Francis L. Gasey, Esq., and Henry Mannim, Esq., for the petitioner.

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

Abttndell :

Petitioner contends that in selling the stock of the corporate owner of the apartment house it regularly sold personal property on the installment plan, hence it is entitled to report income from such sales on the installment basis prescribed in section 212 (d) of the Revenue Act of 1926. The material part of the statute is set out in the margin. Petitioner reported income from the sale of stock on the installment basis, using as basic figures the cash received, $532,600, and the net contract sales price of the 10,290 shares in the amount of $1,013,683.47. The fraction represented by these figures, it applied to the profit of $322,195.47 and thus computed a taxable profit for 1927 of $169,281.50. There is no dispute as to the profit figure of $322,195.47. The respondent treated the entire profit, less a discount of $4,500 on second mortgages, as taxable in 1927. In so doing he included in income the promissory notes of purchasers at full face value, mortgages receivable at 85 percent of face value, accounts receivable in the amount of $255,755, and real estate received for stock at $80,345, which is stated to be appraised value less a mortgage of $30,000 We may say in passing that the pleadings raise an issue as to the-values attributed by respondent to the notes, mortgages, accounts receivable, and real estate, but no evidence whatsoever was introduced by petitioner to show error in this respect. Respondent’s position is that the sale of stock was a single venture and petitioner was not engaged in regularly selling on the installment plan.

There is no evidence that petitioner ever engaged in any other project similar to the one described in the findings, and so the question must be decided entirely on the facts as they are shown in connection with the sale of stock of the one corporation. The statute limits the use of the installment basis to those persons who “ regularly ” sell “ on the installment plan.” The statute does not define the term “ regularly ”, but the respondent’s regulations have consistently employed the phrase “ dealers in personal property ” as descriptive of the class to whom the installment provisions apply. We strongly doubt whether the acquisition and sale of one lot of personal property can properly constitute one a dealer in such property. The term rather applies to those who engage continuously in such an activity. The installment plan of returning income is intended for use where the purchaser extends his payments into at least one year following that of the sale. Obviously if all installments are paid up in the year of sale there is no occasion for applying the installment method of computing profit, as it is all realized within the year. The evidence here leaves considerable doubt as to whether petitioner operated on the installment plan as that term is commonly understood. It is stipulated that petitioner erected the apartment house “ in 1926 and 1927 ”, which, we take it, means that it was completed and ready for occupancy in the year 1927. Ten of the twenty-two subscription agreements provided for payment of the last installment upon issuance of a certificate of occupancy, and as to these it must be assumed that full payment was contemplated within 1927 when the building was completed. Six of the group of ten were actually paid up in full in 1927 and' these involved 3,090 shares. Another subscription agreement for 630 shares became a closed transaction within the year when the purchaser deeded real estate to petitioner for the stock. In other cases bonds secured by mortgages were given covering the deferred payments, and in one case the purchaser contracted to deliver to petitioner stock of another corporation and a lease on another apartment. Whether such property was accepted in payment or only as evidence of indebtedness, the acceptance of it by petitioner does not accord with the usual method of doing business on the installment plan. As we understand it, a dealer on the installment plan usually carries the deferred payments on open account or on notes of the purchasers sometimes secured by chattel mortgages on the property sold. Upon the evidence we are not convinced that petitioner, in selling the stock here involved, may properly be classified as one regularly selling on the installment plan and we affirm the respondent’s refusal to compute income on the installment basis.

The other question has to do with the amount of $14,739.80, representing assessments paid by petitioner in 1927 on the stock of the corporate owner of the apartment property. Of this sum $4,341.20 was paid on stock sold in 1927. Petitioner contends that the entire sum is deductible as an ordinary and necessary business expense.

It has been repeatedly held that assessments paid on stock of national banks are not deductible by the stockholders but are contributions to capital. Harry E. Lutz, 2 B.T.A. 484; John G. Paxton, 7 B.T.A. 92; W. R. Ranney, 16 B.T.A. 1399; affd., 46 Fed. (2d) 283. We see no reason for applying a different rule here. Petitioner claims that in effect it was acting as agent for the sale of the property owned by 812 Park Avenue Corporation and that, following the holding in Salathiel R. Fletcher, 24 B.T.A. 75, it should be allowed to deduct the assessments as part o,f the selling expense of the property. We fail to see the claimed analogy between the two cases. Petitioner wa,s selling only the stock that it owned in the corporate owner of real estate. As a stockholder it was liable for stock assessments, which in our opinion, under the cases above cited, constitute additional cost of the stock to be taken into account on the sale or other disposition. Counsel for respondent concedes that an adjustment should be made on account of the $4,341.20 paid on stock sold in 1927. This sum will be added to cost in the recomputation.

Decision will he entered under Rule 50.

       Sec. 212. (d) Under regulations prescribed by the Commissioner with the approval of the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as Income therefrom in any taxable year that proportion of the installment payments actually received in that year which the total profit realized or to be realized when the payment is completed, bears to the total contract price. * * *


author: Teammell :

text:
    Edward S. Bacharach, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 48779, 50509.
    Promulgated October 31, 1933.

      Ferdinand Tannenbaum, Esq., for the petitioner.

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

Teammell :

During 1926 the petitioner received from the Jefferson Distilling & Denaturing Co. two distributions in the aggregate amount of $35,700, from which amount he deducted the sum of $6,400 as representing the cost of his stock in that company, and reported in his return for the year 1926 the balance of $29,300 as an ordinary dividend, subject only to surtax.

During 1927 the petitioner received two additional distributions from the same company in the total amount of $4,680, which he reported in his return for the year 1927 as an ordinary dividend, subject only to surtax.

The respondent determined that the distributions, less the cost of petitioner’s stock, constituted liquidating dividends, subject to tax at both normal and surtax rates. The correctness of the respondent’s determination in this particular is the only issue submitted for decision.

The petitioner contends that the transaction by which the Jefferson Co. transferred its assets on April 9, 1926, to the American Solvents & Chemical Corporation, in. consideration of the payment by the American Corporation, of 12,166 shares of its preferred stock and cash in the sum of $1,445,520, constituted a reorganization within the purview of the taxing statute, and that the distributions by the Jefferson Co. of the cash so received, to the extent of its accumulated earnings and profits, constituted ordinary dividends.

In the view we take of this case, it is immaterial whether or not the exchange transaction constituted a reorganization. If it were a reorganization, that fact alone would not make the distributions in question ordinary dividends. The petitioner contends that the distributions were ordinary dividends only to the extent of accumulated earnings and profits, and this might be so whether or not the transaction involved a reorganization.

The important question here, upon which the decision of the issue must turn, is whether the distributions were or were not a part of the process of liquidating the Jefferson Co. At the time the distributions of April 12, 1926, November 9, 1926, and August 1, 1927, were made, the Jefferson Co. had accumulated book earnings and profits in excess of the sums distributed, and at the time of the distribution of $125,000 on October 31, 1927, the company had accumulated book earnings and profits of $46,358.50. The petitioner argues that, notwithstanding the fact that the accumulated earnings and profits were invested in the property transferred to the American Corporation, the distributions to the extent of the accumulated earnings and profits did not invade capital, and hence were not liquidating but ordinary dividends.

In Tootle v. Commissioner, 58 Fed. (2d) 576, 579; affirming 20 B.T.A. 892, the Circuit Court of Appeals for the Eighth Circuit disposed of the same argument there urged bj the taxpayer, as follows:

The first heading is that the stipulated facts compel the conclusion that this was an ordinary dividend because the directors had and exercised the discretion (without fraud) to declare this dividend from surplus and profits without impairment of capital, and because the dividend was so declared under compulsion of the Revenue Act of 1926 (Section 220) (26 USCA Par. 961 note) and Regulations 69, articles 353, 1545).
As to the first reason, two matters are destructive. The first is that the dividend was, as a matter of fact, not paid and could not have been paid from surplus and/or earnings. At the time this dividend was declared, the entire property of the corporation had been sold, under authorization of the stockholders, except the cash on hand and a claim for tax refund * * *
It is difficult to see how a part of the total price for all assets (which happen to include property bought with surplus and earnings) can be segregated and called “ surplus ” or “ earnings ”. It is purchase price and nothing else. * * *

The facts on this point in the instant case are in all material respects the same as in the Tootle case.

The question presented here is governed by section 201 (c) of the Revenue Act of 1926, which provides as follows:

(c) 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. * * *

Whether the distributions here in controversy represented amounts distributed in partial liquidation of the Jefferson Co., and must, therefore, be treated as in part or full payment in exchange for the stock, depends on the legal effect of -what was actually done, and not upon the designation of the character of the dividends by the directors or their failure to apply the correct designation. It is also immaterial, we think, that no resolution was adopted by the stockholders authorizing dissolution of the corporation, nor that certificates for shares of stock were not surrendered for cancellation.

Upon the transfer of its assets to the American Corporation, the Jefferson Co. ceased to be a going concern, in the sense that it was no longer engaged in carrying on for profit the business for which it was organized. So far as the stipulated facts show, it thereafter devoted itself to the winding up of its affairs preparatory to final dissolution. It had contracted not to engage again in the alcohol business, and while it had also agreed not to dissolve or go into liquidation until the purchaser of its assets had secured the necessary permits to operate the business, the purchaser was obligated to obtain such permits “ with all proper expedition,” and thereafter the Jefferson Co. was free to dissolve at any time.

Within three days after the transfer of its assets, the Jefferson Co. made a cash distribution of $590 per share, or in other words, declared a dividend of 590 percent on its outstanding common stock. In the absence of more facts than we have before us, we can not regard such dividend, paid under such circumstances, as an “ordinary dividend ”, which, as commonly understood, is defined to be “ a recurrent return on stock paid to stockholders by a going corporation in the ordinary course of business.” Hellmich v. Hellman, 276 U.S. 233. This dividend undoubtedly was not a “ recurrent return on stock ” and was not paid by “ a going corporation ” nor “ in the ordinary course of business.”

In Gossett v. Commissioner, 59 Fed. (2d) 365; affirming 22 B.T.A. 1279, the court, in commenting upon a similar situation, said:

The company appears to have paid an 8 per cent, dividend, or $105,728. The amount oí the federal taxes does not appear. This was the “ regular ” dividend. Shortly after the extraordinarily large 50 per cent, dividend was paid out of the money received for the sale of the corporation. Certainly at the time of the payment of the dividend in question the corporation was not a going concern, in the legal sense, as its dissolution was already under way. It makes no difference what the directors called it when the dividend was declared, nor does the fact that subsequent dividends were termed “ liquidating ” dividends when this particular dividend was not so termed alter its character. The question of whether it was a “ partial liquidating dividend ” is to be determined, not from what it was called but by the facts as shown by the record. The record shows that it was a very unusual dividend, and entirely outside of the due course o£ the business of the corporation.
The decision of the Commissioner and the Board that it was a “ partial liquidating ” dividend was clearly right, and petitioners were properly chargeable in their income tax with the amount of the dividend “ as if they had sold their stock to third persons.”

From the facts before us we can reach no other conclusion than that the distributions in controversy were steps taken by the Jefferson Co. in the process of liquidation, and constituted liquidating dividends within section 201 (c) of the 1926 Act, supra.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: Adams :

text:
    Udylite Process Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 59133.
    Promulgated November 2, 1933.

      Abraham Levin, Esq., for the petitioner.

      Owen W. Swecher, Esq., for the respondent.
   opinion.

Adams :

The issue presented is whether one corporation of an affiliated group, which sustains successive net losses in 1927 and 1928, may carry forward and deduct its unabsorbed 1927 net loss from consolidated net income for 1928.

The stipulated facts show that petitioner was incorporated under the laws of Indiana on November 11, 1919, and was affiliated during the period July 26 to December 31, 1927, and the entire year 1928 with the General Chromium Corporation. Consolidated returns were filed for the period in 1927, and for the year 1928.

The following schedule shows the corrected net losses and income of petitioner and the General Chromium Corporation for the period July 26 to December 31, 1927, and the calendar year 1928:

The General Chromium Corporation also sustained a net loss for the period January 1 to July 25, 1927, in the amount of $77,474.59. During this period the petitioner was not affiliated with the General Chromium Corporation and no claim is made for the allowance as a deduction in 1928 of the net loss sustained during the period January 1 to July 25, 1927.

The respondent determined that the consolidated net income of the two corporations for 1928 was $16,942.03, computed as follows:

Net income, petitioner_$100,454. 88
1928 net loss, General Chromium Corporation- 83, 512.85
Consolidated net income_ 16,942.03

The respondent asserted a deficiency for the year 1928 in the amount of $1,673.04.

The petitioner contends that, since section 26 of the Revenue Act of 1928 provides that a domestic corporation is entitled to a credit of $3,000, whereas section 142, which concerns consolidated corporations, provides for only one specific credit for the consolidated group, the Congress intended to treat the group as a unit in arriving at consolidated net income. It argues, therefore, that it is entitled to deduct the unabsorbed net loss of the General Chromium Corporation for the period July 26 to December 31, 1927, amounting to $74,870.04, from the consolidated net income as determined by the respondent for 1928, which would result in a consolidated net loss for 1928 with no tax due.

This principle of cumulating net losses for successive taxable years for the purpose of reducing consolidated net income of an affiliated group has been considered by the Board and the courts in numerous cases. California Wharf & Warehouse Co., 28 B.T.A. 509; New Castle Leather Co., 26 B.T.A. 282; affd., 65 Fed. (2d) 294; Delaware & Hudson Co., 26 B.T.A. 520; affd., 65 Fed. (2d) 292; Sailors Brothers Co., 26 B.T.A. 700; Woolford Realty Co. v. Rose, 286 U.S. 319; Planters Cotton Oil Co. v. Hopkins, 286 U.S. 332; Swift & Co. v. United States, 38 Fed. (2d) 365; Commissioner v. Ginsburg Co., 54 Fed. (2d) 238. None of these cases permits the pyramiding of net losses; therefore, unless petitioner can show some distinguishing factor, which removes this proceeding from the rule enunciated in the cited cases, we must approve the determination of the respondent.

Petitioner attempts to distinguish this case from the decided cases by pointing out that a continuing affiliated group is a single economic unit and that losses are as much a characteristic of affiliation as profits. It is asserted that it is shocking to think that Congress wished to recognize the unit for one purpose and failed to recognize it for another, and points out that, since only one specific credit is allowed to affiliated groups by sections 26 and 142(b) of the Revenue Act of 1928, there must be an intention to treat income and loss side by side, so that the loss of one member of the group is the loss of the other. It is further pointed out that the Woolford case, supra, is not an authority for the instant proceeding, since no evasion of taxes is here being attempted, and, therefore, the reason for the rule in the Woolford case does not apply.

This contention, in our opinion, completely ignores the above cited cases, which have repeatedly stated that each member of an affiliated group is a taxpayer and must be viewed in its individual capacity for the purpose of carrying forward net losses from one year to another. In Sailors Brothers Go., supra, we expressly stated that, “ one corporation may not carry forward its net losses other than for the purpose of reducing its own income; New Castle Leather Co., 26 B.T.A. 282.” In view of the rule announced by the cited cases, petitioner’s contention must be denied.

In this connection we wish to point out the fallacy of petitioner’s position regarding the credit deduction allowed to corporations generally and affiliated corporations specifically. The grant of a credit or an exemption by the Congress is a matter of grace; it is not an inherent right of the taxpayer, but a benefit conferred by the sovereign which can be increased, lowered, or wiped out at the will of the Congress. Cf. Samuel S. Bloch, 16 B.T.A. 425, 430. For example, the Revenue Acts of 1926 and 1928 granted a personal exemption to the head of a family of $3,500, and a personal exemption to single persons of $1,500; the Revenue Act of 1932 reduced the personal exemption in both instances to $2,500 and $1,000, respectively, being the same exemptions allowed under the Revenue Acts of 1924 and 1921, provided net income, under the 1921 Act, did not exceed $5,000, in which event the personal exemption of the head of a family was reduced to $2,000, provided no increase in tax resulted. The Revenue Act of 1918 granted exemptions of $2,000 and $1,000, respectively, while the Revenue Act of 1916 allowed an exemption of $3,000 from the net income of each person, plus $1,000 if such person was the head of a family, etc., but in no event was the additional $1,000 exemption to be deducted by both husband and wife.

Undoubtedly the Congress, in the exercise of its legislative functions, could have completely eliminated the credit deduction allowed to corporations. ' However, it has determined, and so provided in the Eevenue Act of 1928, that but one specific credit shall be allowed to an affiliated group, Trustees for Ohio & Big Sandy Coal Co. v. Commissioner, 43 Fed. (2d) 782, and this determination -is mandatory so far as the interpretation of the revenue acts is concerned. Any change in the credit allowed the affiliated group must come through legislative action because there is no ambiguity in the credit allowance provided for by sections 26 and 142 of the Eevenue Act of 1928.

Decision will be entered for the respondent.


author: Seawell:

text:
    The Phoenix Insurance Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 48867.
    Promulgated November 2, 1933.

      John G. Parsons, Esq., for the petitioner.

      W. F. Wattles, Esgniov the respondent.
   OPINION.

Seawell:

The closing agreement executed on March 7, 1929, relating to the total income tax liability of the petitioner and its subsidiaries for 1926, was entered into pursuant to section 606 of the Eevenue Act of 1928, which reads as follows:

(a) Authorisation.' — Tbe Commissioner (or any officer or employee of the Bureau of Internal Eevenue, including the field service, authorized in writing by the Commissioner) is authorized to enter into an agreement in writing with any person relating to the liability of such person (or of the person or estate for whom he acts) in respect of any internal revenue tax for any taxable period ending prior to the date of the agreement.
• (b) Finality of agreements.- — If such agreement is approved by the Secretary, or the Undersecretary, within such time as may be stated in such agreement, or later agreed to, such agreement shall be final and conclusive, and, except upon a showing of fraud or malfeasance, or misrepresentation of a material fact—
(1) the case shall not be reopened as to the matters agreed upon or the agreement modified, by any officer, employee, or agent of the United States, and
(2) in any suit, action, or proceeding, such agreement, or any determination, assessment, collection, payment, abatement, refund, or credit made in accordance therewith, shall not be annulled, modified, set aside, or disregarded.

The language of section 606 clearly evidences an intention on the part of Congress that cases closed by agreements executed under its terms should be held to settle for all time the tax liability agreed upon, in this case the total income tax of the petitioner and its subsidiaries for 1926, except upon a showing of fraud or malfeasance, or misrepresentation of a material fact.

In this proceeding no claim is made of fraud or malfeasance. The respondent does contend, however, that the agreement should be set aside for the determination of a deficiency for 1926 because of misrepresentation of a material fact. The basis for his claim is that schedule 5, which was attached to the consolidated return to support the deduction of $1,149,496.12 taken in the return for “ Taxes ”, was prepared in such a manner as to make it appear that the amount deducted was exclusive of Federal income taxes. The importance of the question is due to the fact that Federal income taxes paid or accrued within the taxable year are not deductible from gross income. Secs. 247 (a) (8) and 234 (a) (3), Eevenue Act of 1926. The petitioner’s position is that the respondent’s error in allowing the full amount claimed as a deduction for taxes, without first eliminating therefrom an amount erroneously included by the petitioner for Federal income taxes, was due to a mistake of fact, not misrepresentation by it of a material fact.

The decision turns almost entirely upon whether schedule 5, when read in connection with the annual statements, misrepresented the material fact that the net amount of $1,149,496.12 deducted included a sum for Federal income taxes.

We shall first decide whether the inclusion of $145,000 for Federal income taxes in the amount of $900,000 accrued for all taxes at December 31, 1926, was a misrepresentation of a fact.

The facts of schedule 5, briefly stated, are these. The petitioner first listed, under the subject of taxes, licenses and fees, amounts aggregating $1,084,824.12, including $104,159.19 for “ Federal taxes ” paid by each of the corporations during the year, and then the sum of $900,000 for taxes, licenses and fees accrued at December 31, 1926. Of the amount of $900,000, $145,000 represented an accural for Federal income taxes. From the total of $1,984,824.12 for taxes, licenses and fees paid during the year and accrued at the end of the year, the petitioner deducted the amount of $724,000 accrued December 31,1925; $103,831.29 for Federal income taxes paid during the year and $7,496.71 for income taxes paid to foreign countries and possessions of the United States. The petitioner claimed the remainder of $1,149,496.12 in the consolidated return as an expense deduction for taxes and the respondent allowed the deduction in determining the income tax liability of the petitioner and its subsidiaries for 1926 to be $109,716.27, as set forth in the closing agreement.

The return was examined by an auditor of the respondent experienced in income tax matters relating to insurance companies, and the papers which were filed with the return were before him when he made his audit. He testified that he was aware that the item of $900,000 appearing in schedule 5 agreed in amount with the aggregate of the amounts shown in the annual statements as liabilities for “ Estimated amount hereafter payable for Federal, State and other taxes based upon the year of this Statement,” and that he made no inquiry to ascertain the nature of the Federal taxes, the amounts of which were represented by the figure. No claim is made by the respondent and it does not appear from the record that the auditor ever believed that the entries represented different liabilities or accruals.

When read without refei'ence to the annual statements, the purport of the entry of $900,000 in schedule 5 is not entirely clear. We think, however, that it is sufficiently explained by the corresponding entries in the annual statements to convey the idea that it included Federal income taxes. The term “ Federal taxes ” embraces income taxes imposed by the United States. The return filed by the petitioner for 1926 showed a tax liability of $108,482.54, all or the greater part of which the respondent must or should have known was included in the annual statements as Federal, state and other taxes, in view of the fact that the approved form of annual statements made provision for showing all liabilities and did not call for an itemization of accruals for taxes. This, we think, was direct notice to the respondent that the accrual of $900,000 included an estimated amount for Federal income taxes. Certainly it is not representation that it was exclusive of such taxes, and we so hold.

The respondent points to the deduction of $108,831.29 made in schedule 5 for Federal income taxes paid within the year as representing an elimination of all of such taxes, paid and accrued, from the statement.

The initial explanatory note for the deduction, reading “ Deduct Federal Income Taxes,” does not represent that the sum actually included an amount for accrued taxes. All of the figures making up the total were in dollars and cents and closely approximated the amounts listed in the annual statements as having been paid during 1926 for “ Federal taxes,” the difference being but $327.90, including the sum of $153.90 paid by the Phoenix Securities Co., which was a holding company and apparently did not file an annual statement. The auditor who examined the return was fully aware of this slight difference between the two figures and believed, without making an investigation to sustain his opinion, that it repre-sentecl “stamp taxes or some miscellaneous minor Federal taxes, not income taxes.” He further testified that he thought the deduction represented taxes paid for 1925 together “with any probable addition to the reserve for the current year, 1926.” There appears to be no justification for such a conclusion in the light of the fact that the consolidated return for 1926 showed an income tax liability of $108,482.54, all or most of which respondent should have known was included in the annual statements as an accrual for 1926 Federal taxes.

As we view the evidence the petitioner unintentionally neglected to eliminate all Federal income taxes from the statement and the respondent failed to detect the error in his examination of the return, with the result that the petitioner received an unauthorized deduction from its income. There was no misrepresentation on the part of the petitioner as to how the deduction was accomplished. All of the facts were before the respondent and we think a fair interpretation of them is that the entry of $103,831.29 does not purport to eliminate any amount previously included as an accrual for Federal income taxes for 1926, but merely excludes amounts paid within the year for such taxes.

In our opinion there has been no showing of misrepresentation of a material fact, and, accordingly, the closing agreement entered into respecting the income tax liability of the petitioner and its subsidiaries for 1926 may not be disregarded by the respondent.

Having reached such a conclusion, it is unnecessary for us to set forth our reasons for finding as a fact that the amount of Federal income taxes claimed by the petitioner and allowed by the respondent for 1926 was $71,000.

Eeviewed by the Board.

Decision will be entered for the petitioner.

Smith, Trammell, and Murdock concur in the result.

Adams dissents.


author: Tkammell :

text:
    Northeastern Surety Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 62624.
    Promulgated November 2, 1933.

      Henry Brack, O.P.A., for the petitioner.

      Allin H, Pierce, Esq., for the respondent.
   OPINION.

Tkammell :

This is a proceeding for the redetermination of a deficiency in income tax for the year 1929 in the amount of $15,316.97. The sole issue is whether or not the petitioner is entitled to have, its income for the taxable year computed by reference to inventories of securities taken at market value at the beginning and end of the year. It is conceded that, if the taxable income is to be determined without reference to such inventories, the deficiency asserted by the respondent is correct.

The petitioner is a New York corporation, with its principal office in New York City. It was organized for the purpose of engaging in the business of writing indemnity and casualty insurance and surety bonds.

It was the practice of the petitioner during the taxable year to place a large portion of its funds in stocks and bonds of various corporations, including the bonds of various states, counties and municipalities. The purchases and sales of securities which the petitioner made were for its own account. Its officers believed that they had a knowledge of the markets and the ability to buy and sell securities at an advantage for petitioner’s account.

The petitioner did not possess any license from the State of New York or New York City, as required by New York law, to engage as a dealer in the purchase and sale of securities; it did not advertise or otherwise hold itself out to the public as a dealer in securities ; and it did not publish or offer any lists of securities to the public for sale. It did not employ any salesmen to sell securities to customers, and it did not buy the securities, as merchandise or stock in trade, with a view to deriving gain or profit from resale to customers. The petitioner’s principal business, the purpose for which it was organized and in connection with which it held itself out to the public, was that of an insurer of properties, and consisted largely of writing casualty insurance on taxicabs in New York City.

The petitioner’s business was subject to regulation by the Superintendent of Insurance of the State of New York, and it was required to file annual reports of its operations. The annual reports included an inventory of securities on hand at the close of the current year. The petitioner did not use inventories in connection with its income tax return for the year 1928, nor in connection with its tentative or final return for 1929, and offered no proof that it had at any time received authority from the Commissioner to change its method of accounting for tax purposes so as to use inventories. The petitioner did not make entries on its ledger necessary to adjust to market value the securities on hand at the end of the year.

The Revenue Act of 1928 contains the following provisions:

Sec. 22. (c) Inventories. — Whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.
Sec. 41. GENERAR RULE. — The net income shall be computed upon the basis of the taxpayer’s annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. * * *

Pursuant to section 22 (c), supra, the respondent promulgated in his Regulations 74, under the Revenue Act of 1928, the following provisions :

Abt. 105. Inventories oy dealers im. securities. — A dealer in securities, who in his books of account regularly inventories unsold securities * * * may make his return upon the basis upon which his accounts are kept; provided that a description of the method employed shall be included in or attached to the return, that all the securities must be inventoried by the same method, and that such method must be adhered to in subsequent years, unless another be authorized by the Commissioner. For the purpose of this rule a dealer in securities is a merchant of securities, whether an individual, partnership, or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers; that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom. * * * Taxpayers who buy and sell or hold securities for investment or speculation and not in the course of an established business, and officers of corporations and members of partnerships who in their individual capacities buy and sell securities, are not dealers in securities within the meaning of this rule.

This regulation, we think, is reasonable, and designed to carry out fairly the terms and intent of the statute.

The facts, in our opinion, clearly show that this petitioner was not a merchant or dealer in securities. Its activities in relation to securities were of a twofold nature — a portion of its funds was required by law to be and was invested in securities of designated classes, and the securities so purchased represented more or less permanent investments; all other securities it bought and sold on the market for its own account on the basis of speculation, and not in the regular course of an established business as a dealer who purchases securities for resale to customers.

Nor is it shown that in its books of account the petitioner regularly inventoried unsold securities, a,s required by respondent’s regulation; the petitioner concedes that it did not. In its tax returns for 1928 and 1929, which are in evidence before us, petitioner did not compute its taxable income by the use of inventories. While inventories were used in making reports to the state superintendent of insurance and to the stockholders, this we think is not sufficient. Section 41 of the statute, quoted supra, requires that net income shall be computed for tax purposes in accordance with the method of accounting regularly employed in keeping the books of the taxpayer, unless such method does not clearly reflect income. Inventories were not regularly employed by this petitioner either in keeping its books or in making its tax returns, and hence it is not entitled to have its taxable income computed by the use of inventories unless such method is necessary in order clearly to reflect its income.

Petitioner contends, however, that the use of inventories for the taxable year is necessary in order clearly to reflect its income. We cannot agree with this contention. On the contrary, the use of inventories, as demanded by petitioner, would in our opinion distort its true income. Eespondent computed the deficiency on the basis of the cost and selling price of the securities actually disposed of. Admittedly, petitioner seeks here to offset its taxable income by giving effect to unrealized losses which would result from inventorying at market the unsold securities at the end of the year. In the circumstances shown, the petitioner is not entitled to deduct from income an inventory loss. Adirondack Securities Corp., 23 B.T.A. 61. Cf. Kansas City Structural Steel Co. v. Commissioner, 33 Fed. (2d) 53.

Respondent’s determination is approved.

Judgment will be entered for the respondent.


author: Goodrich:

text:
    Mickler Holding Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 60676.
    Promulgated November 7, 1933.

      F. H. Stinchfleld, Esg., for the petitioner.

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

Goodrich:

Respondent determined a deficiency of $7,899.36 in income tax for the fiscal year ended July 31, 1929. Petitioner, a Minnesota corporation, having its principal office at Minneapolis, admits liability for $70.04 of this deficiency, but contends the remainder was determined in error. At trial, counsel presented a stipulation of facts which we adopt as our findings but need not repeat here in full for an understanding of the issue. The controversy relates to the amount of profit derived by petitioner upon sales of securities during the period before us. The question is, Did petitioner sell the stock most recently acquired by its transferors? Petitioner claims it did, and that, consequently, the cost in the hands of its transferors must be used as the basis in determining the gain derived from the sales. But respondent has determined and maintains that the stock sold could not be identified, and that, consequently, applying the rule of “ first in, first out,” the cost of the stock first acquired by petitioner’s transferors is to be used as the basis in determining the profit.

Petitioner was organized in 1928 by four related individuals to whom all its stock was issued in exchange for property. The parties agree that this transaction was one upon which neither gain nor loss is to be recognized and that the basis to be used by the corporation in determining gain or loss upon its subsequent disposition of the property is the cost thereof to the individual transferors.

The bulk of the property so transferred to petitioner consisted of 11,780 shares of the common capital stock of the F. W. Woolworth Co., which had been acquired by the several transferors over a period of years through purchases and stock dividends. The exact number of shares transferred to petitioner by each individual does not appear, nor can it be ascertained from their records which particular certificates represented shares acquired by them in any particular purchase or dividend receipt, as from time to time during the period they owned the stock they had sent in various certificates for reissue in desired amounts, and kept no account of the identity of the shares so represented. After the transfer, petitioner sent in to the Woolworth Co. the certificates received from the individuals, with instructions to reissue the stock to the Mickler Co. in stated convenient amounts. No instructions were given to issue any new certificates as representing any particular shares or certificates surrendered, nor did petitioner maintain records sufficient to control the identity of the shares or certificates, either when received in exchange for its own stock or when sent in to the Woolworth Co. for reissue.

In November 1928 petitioner’s stockholders adopted a resolution in part as follows:

Upon motion duly made and seconded it was decided to sell 5,000 shares of the most recently acquired common stock of the F. W. Woolworth Company at $215.00 per share, or better.

Thereafter, and within the period now before us, petitioner sold 5,000 shares of that stock for a total of $1,092,250. In reporting its profit on the sale petitioner used $156,558 as the cost of the shares sold, which, it is agreed, is the cost of the 5,000 shares last acquired by petitioner’s transferors. Respondent, however, has used $87,980 as the cost, which, it is agreed, is the cost of the 5,000 shares first acquired by petitioner’s transferors. From respondent’s use of the .lower cost, with a resultant increase in profit, arises the deficiency in controversy.

Article 58 of Regulations 74, upon authority of which respondent made his determination, and the same rule as contained in corresponding provisions of regulations promulgated under earlier revenue acts, has been adjudged reasonable and necessary and has been given the effect of law. Skinner v. Eaton, 45 Fed. (2d) 568; certiorari denied, 283 U.S. 837; Snyder v. Commissioner, 54 Fed. (2d) 57 (affirming 20 B.T.A. 778) ; Robert W. Bingham, 27 B.T.A. 186. Apparently, the parties agree that it is here controlling unless the shares sold by petitioner may be identified and their cost determined. We accept that view in considering the case, but point out that, in fact, petitioner acquired all its Wool worth shares in a single transaction and therefore article 58 perhaps is not applicable, even though the basis for the shares when owned by petitioner is the same as when in the hands of the transferors, under section 113 (a) (8) of the Revenue Act of 1928. We suggest the question but do not decide it, preferring to dispose of the case upon the issue presented.

We are willing to assume for the purposes of this case, though we do not so decide, that, as petitioner contends, there may be a distinction between those cases where the shares involved were dealt in through brokers upon margin account and the case at bar where petitioner had complete ownership of the shares and had in its possession the several certificates representing them. We can agree that, as petitioner asserts, the identity of the mere certificates representing shares sold is not controlling and that the shares here involved were specifically owned and possessed by petitioner. We will agree, arguendo, with petitioner’s further assertion that it had the right to choose which shares it should sell. But we cannot agree to its conclusion, wherein it relies chiefly upon Howbert v. Penrose, 38 Fed. (2d) 577, that the resolution of its stockholders directing to be sold the 5,000 shares last acquired (by its transferors) effected an actual sale of such shares and an identification of the shares sold with any lot purchased. In our opinion, the decision in the Howbert case does not mean, as petitioner contends it does, that stock sold may be identified sufficiently to escape the application of the “ first in, first out ” rule by a mere mental operation or a declared intention to make sale of shares acquired at any particular time, without an ascertainment of identity based upon fact. Such an interpretation would conflict with the later decisions in Skinner v. Eaton, supra, and Snyder v. Commissioner, supra. See also Burdett Stryker, 21 B.T.A. 561. Simply declaring that certain shares were acquired at a particular time neither proves nor alters the facts of the purchase, nor is any more accomplished by merely saying that shares sold were from those acquired at a particular time, if actual identification be lacking. Words do not change fish to fowl, nor do they, alone, serve to effect the positive identification required to avoid the rule here applied.

As said in Robert W. Bingham, supra:

Wherever, for one reason or another, the shares sold can be, and, by the evidence, are identified with the lots purchased, there is no occasion to use the rule of article 58.

Petitioner says upon brief: “ But the important thing is * * * adequate records as to the price paid and the price received for shares of stock.” To that we add that these necessary factors must be coupled to the shares involved in any particular transaction. That, petitioner has failed to do.

We cannot agree that the decision in the Howbert case goes so far as petitioner would have it. There the trial court found as a fact, from evidence disclosed by books of account and private mem-oranda, that shares sold were identified as shares bought at a particular time and certain price. The appellate court did not disturb that finding because it was supported by the evidence, but it laid as a test not the identity of the certificates delivered, nor the intention of the seller, but what was done. Mary E. Horner, 28 B.T.A. 360.

Here, under instructions from the stockholders to sell the 5,000 shares last acquired (by petitioner’s transferors), petitioner sold that amount of stock. It claims it sold those particular shares because it was instructed, and therefore intended to do so. Yet it is plain that petitioner could not identify those shares as to date and price of acquisition, either from its records or from those of its transferors; it could not tell one share from another. It could not couple to the price received the record of the price paid for the shares sold; nor otherwise identify the shares sold with the lots purchased. Consequently, it could not itself know that the shares sold were those last purchased, nor prove to us that they were. The rule of “ first in, first out ” was properly applied in this transaction.

Judgment will be entered for the respondent.


author: Seawell :

text:
    William B. McIlvaine and John P. Wilson, Jr., Trustees under the Deed of Trust of John P. Wilson, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 52931, 57226.
    Promulgated November 7, 1933.

      Olay Judson, Esq., and John P. Wilson, Esq., for the petitioners.

      F. R. Shearer, Esq., and E. L. Updike, Esq., for the respondent.
   opinion.

Seawell :

By stipulation of the parties our decision is limited to the sole question of whether the trust deed of March 19, 1913, as amended in 1919 and 1920, created one trust or three trusts. The petitioners contend that the amendments made thereto created three separate and distinct trusts, one for each beneficiary of the original trust, and that the income earned from the property held by them under the indenture, as amended, should be taxed on the basis of three trusts instead of one. The respondent adheres to the conclusion he reached when proposing the deficiencies, that but one trust was in existence throughout the taxable years.

The Supreme Court has said that “No general rule can be stated that will determine when a conveyance will carry with it the whole beneficial interest, and when it will be construed to create a trust; but the intention is to be gathered in each case from the general purpose and scope of the instrument.” Colton v. Colton, 127 U.S. 300. Whether a trust has been created is largely a question of fact, McCartney v. Ridgway, 160 Ill. 129; 43 N.E. 826, and one alleging the existence of a trust has the burden of proving it by clear and explicit proof in the light of all of the attending circumstances. Allen v. Withrow, 110 U.S. 119; Trubey v. Pease, 240 Ill. 513; 88 N.E. 1005; Hinton v. Pritchard, 107 N.C. 128; 12 S.E. 242. This rule, however, is not so strict as to require that nothing be left to inference or implication. Orr v. Yates, 209 Ill. 222 ; 70 N.E. 731; Osborn v. Rearick, 325 Ill. 259; 156 N.E. 802. It has also been held that to establish a trust three elements must be present, namely, sufficient words to raise it, a definite subject, and an ascertained object. Mills v. Newberry, 112 Ill. 123; 1 N.E. 156; Snyder v. Snyder, 280 Ill. 467; 117 N.E. 465; Carter v. Gibson, 29 Neb. 324; 45 N.W. 634.

The parties are agreed that the indenture of March 19, 1913, created only one trust. Whether more than one trust existed throughout the taxable years depends upon the intent of the amendments made thereto in 1919 and 1920.

The trust deed gave the beneficiaries broad powers respecting modifications to the instrument. The respondent does not question the right of the beneficiaries to alter the indenture in the manner they did, but claims, however, that the amendments are merely directory and to a limited extent operate to segregate the several beneficial interests for bookkeeping purposes.

John P. Wilson, Jr., one of the beneficiaries of the original trust, who signed all of the amendments as such, testified, without contradiction, that the purpose of the amendments was to establish three trusts in' place of the one then in existence. There appears to be ample language in the several amendments to show intent of all the parties thereto to create three separate and distinct trusts. Section “ First ” of the first amendment provided for the division of the trust “ into three separate and equal parts or shares,” each to be designated by the respective names of the beneficiaries. Section “ Second ” required the division “ between said separate trust estates” of additions to the trust estate. In section “Fourth” it was provided that “ Upon the termination of the trusts established ” the “ several trust estates held in trust ” under the indenture should be paid over in the manner prescribed. The second amendment, executed December 1, 1920, substituting new provisions for section “ Third ” of the first modification, provided for the payment of net income each year “ from each of the said separate trusts ” and that any net income from “ each separate trust estate ” not paid out within the year of its receipt should be added to the principal of the “ separate trust estate ” from which it was derived. The final amendment continues all of these provisions in effect, and contains other language evidencing intent to establish and continue the existence of three trusts. Article III (1) provides that the estate shall be kept divided into three equal parts “ each of which shall be held and administered as a separate trust for the benefit respectively of one of the three children of said party of the first part ” and that the trustees shall keep a separate account for “ each of said trusts.”

It is true that other provisions of the instrument, as amended, contain terms usually found in documents establishing a single trust. For instance, in the second paragraph of the first amendment (now the third paragraph of Article III (1)) the words “ trust estate ” are used in connection with provisions for the treatment of additions of property acquired by the trustees under the instrument. The same sentence, however, as already pointed out, provides for the division of any additional property acquired “ between the said separate trust estates.” A similar circumstance appears in Article IV (1) and (2). The terms “trust” and “trust estate” are used in Article V, which was not modified in any respect.

The language referred to, on which the respondent relies to some extent as supporting his view, is evidence of an intention to create a single trust. We may not, however, decide the issue from that alone. All of the provisions of the instrument, as amended, must be considered in the light of all of the attending circumstances. When this is done, the terms referred to as indicating intent to establish but one trust must give way to clearer and more certain language showing that the purpose and intent of the amendments was to create three trusts for the one then in existence. The intention is clear and we think sufficient words were used in the amendments to create three separate and distinct trusts.

The case of Johnson v. United States, 65 Ct. Cls. 285; certiorari denied, 278 U.S. 611, is cited by the respondent as being on all fours with this one. In that case no provision was made, as there was here, for holding and administering each part of the trust fund as a trust separate and distinct from the other shares. In the final analysis cases of this sort must stand or fall on the basis of their own peculiar facts. It has been said that “no will has a twin brother.” In re King's Estate, 200 N.Y. 189; 93 N.E. 484. The same is equally true as regards instruments executed with respect to the creation of trusts.

We do not think that the failure of the trustees to make a physical division of the property controls the question. They had ample authority to assign an undivided one-third interest in the whole or any part of the property to the beneficiary of each trust (section “ First ”, amendment June 19, 1919) and had broad powers in holding property belonging to the trusts. Article III (1). Neither do we think the parties in interest should be criticized for pursuing the course they did to create the three trusts. More than one trust may be established by a single instrument, DeVer H. Warner, Trustee, 7 B.T.A. 1292; affd., 26 Fed. (2d) 1023, and we are not aware of any authority against the establishment of more than one trust by amendments to an instrument creating a single trust. The beneficiaries and grantor could have terminated the single trust and, with the same property, created three trusts. The device adopted accomplished the same result by a shorter method. Had the trustees acted as though there were but one trust, they could have by proper proceedings been forced to administer the assets under three separate trusts.

From all the facts we hold that the instrument, as amended, created three taxable trusts, and that for each taxable year the income from all the property held in trust, not distributed or distributable to the beneficiaries, should be taxed on the basis of three separate trusts and three separate returns.

The parties stipulated that in case we so found, orders could be entered finding that there are no deficiencies due from, nor overpay-ments due to, the petitioners respecting income tax liability as trustees under the indenture of March 19, 1913, as amended, for the taxable years. In accordance therewith, orders to that effect will be entered herein.


author: Smith :

text:
    Donander Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 62634.
    Promulgated November 8, 1933.

      Robert H. Rissinger, G.P.A., for the petitioner.

      John H. Pigg, Esq., for the respondent.
   OPINION.

Smith :

This proceeding involves a deficiency in petitioner’s income tax for the calendar year 1929 in the amount of $6,866.60. The sole question at issue is whether the petitioner is entitled to the deduction under section 23 (f) of the Revenue Act of 1928 of losses sustained upon the sales of shares of stock, or whether under the provisions of section 118 of the Revenue Act of 1928 the losses are not allowable as deductions because within 30 days before or after the dates of sale it purchased identical shares. The pertinent facts which are not in dispute are as follows:

The petitioner is a Delaware corporation, organized in 1913, with its principal office located at Wilmington. It- has other offices in New York City and in Philadelphia. It has a capitalization of $1,000,000. All of its capital stock is owned by its president and his sister, heirs of Alexander Gordon. The petitioner was organized for the purpose of taking over the assets of the estate of Alexander Gordon. Since its organization it has been engaged in the business of owning and trading in securities of all types, stocks, bonds, mortgages, notes, and of collecting interest and dividends therefrom. Most of its purchases and sales of shares of stock are made through licensed brokers on the New York Stock Exchange and other exchanges. During the calendar year 1929 the petitioner engaged in 285 such transactions, all of which were made through brokers. The total purchases amounted to $2,667,813.14 and its total sales to $1,977,082.96. It sustained losses in that year on such transactions in the aggregate amount of $131,228.69 where within 30 days before or after the dates of sale identical shares of stock were acquired or reacquired. The respondent has disallowed the deduction of these losses upon the ground that the petitioner is not a “ dealer in securities ” within the meaning of section 118 of the Revenue Act of 1928.

Section 22 (c) of the Revenue Act of 1928 reads as follows:

(c) Inventories. — Whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upou such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.

Section 23 of the same act provides in part as follows:

In computing net income there shall be allowed as deductions:
* ⅜ * * # * #
(e) Losses by individuals. — In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise—
(1) if incurred in trade or business; or
(2) if incurred in any transaction entered into for profit, though not connected with the trade or business; or
*******
(f) Losses by corporations. — In the case of a corporation, losses sustained during the taxable year and not compensated for by insurance or otherwise.

Section 118 of the same act provides;

In the case of any loss claimed to have been sustained in any sale or other disposition of shares of stock or securities where it appears that within thirty days before or after the date of such sale or other disposition the taxpayer has acquired (otherwise than by bequest or inheritance) or has entered into a contract or option to acquire substantially identical property, and the property so acquired is held by the taxpayer for any period after such sale or other disposition, no deduction for the loss shall be allowed under section 23 (e) (2) of this title; nor shall such deduction be allowed under section 23 (f) unless the claim is made by a corporation, a dealer in stocks or securities, and with respect to a transaction made in the ordinary course of its business. If such acquisition or the contract or option to acquire is to the extent of part only of substantially identical property, then only a proportionate part of the loss shall be disallowed.

Article 105 of Regulations 74, promulgated pursuant to section 22 (c) of the Revenue Act of 1928, reads, so far as material, as follows:

* * * For the purpose of this rule a dealer in securities is a merchant of securities, whether an individual, partnership, or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers; that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom. If such business is simply a branch of the activities carried on by such person, the securities inventoried as here provided may include only those held for purposes of resale and not for investment. Taxpayers who buy and sell or hold securities for investment or speculation and not in the course of an established business, and officers of corporations and members of partnerships who in their individual capacities buy and sell securities, are not dealers in securities within the meaning of this rule.

Article 661 of Regulations 74, promulgated pursuant to section 118 of the Revenue Act of 1928, provides, so far as material, as follows:

* ⅜ * A taxpayer, other than one in the trade or business of buying and selling securities, can not deduct any loss claimed to have been sustained from the sale or other disposition of stock or securities, if within 30 days before or after the date of such sale or other disposition he has acquired (otherwise than by bequest or inheritance), or has entered into a contract or option to acquire, substantially identical property, and the property so acquired is held by the taxpayer for any period after such sale or other disposition. * * * This provision is designed to prevent a taxpayer who owns securities, other than one in the trade or business of buying and selling securities, from claiming as a deduction in computing net income the so-called “ loss ” sustained from a sale of securities which is immediately followed or immediately preceded by a purchase of substantially identical securities. * * *

We held in Adirondack Securities Corp., 23 B.T.A. 61, that a taxpayer trading in stocks and other securities on the stock exchange through brokers was not a dealer in securities entitled to the use of inventories within the meaning ox article 1615 of Regulations 69. In our opinion we said:

The evidence in this proceeding discloses that the petitioner did not operate as a broker and there is no evidence that it regularly sold securities to customers. The proof clearly shows, however, that the petitioner bought and sold securities solely for its own account. Article 1C 15 of Regulations 69 defines a dealer in securities whose income may be determined by the use of inventories as an individual, partnership, or corporation regularly engaged in the purchase of securities and their resale to customers. Obviously, the petitioner does not come within this definition, but, on the contrary, it appears that the petitioner bought, sold or held securities for investment or speculation. Therefore, it is not entitled, under section 205 of the Revenue Act of 192G and article 1615 of Regulations 69, to deduct from income an inventory loss.

The petitioner does not contend that it is a dealer in, securities within the meaning of that term as defined by article 105 of Regulations 14. It points out, however, that it is not here claiming the deduction of any inventory loss on securities, but simply claiming a loss upon the sale of securities which were acquired or reacquired within 30 days before or after the dates of sale. It contends that it was a “ dealer in securities ” within the meaning of article 661 of Regulations 74 and that therefore it is entitled to deduct from gross income the losses sustained upon the sales.

The term “ dealer in securities ” as used in section 118 of the Revenue Act of 1928 is not defined by the statute. The respondent contends that his definition for “ dealer in securities ” contained in article 105 of Regulations 74, which reads, “ a dealer in securities is a merchant of securities, whether an individual, partnership, or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers,” is applicable. We agree. In our opinion an investor or speculator who buys and sells securities on a stock exchange only is not a dealer in securities within the contemplation of the statute, regardless of the number of purchases and sales. Likewise we think that a corporation such as the petitioner, which carries on an investment business for its own profit and buys and sells shares of stock and other securities upon stock exchanges, is not a dealer in securities. The term rather has application to a merchant who holds himself out to sell to customers. If Congress had intended the word “ dealer ” to include a speculator or investor, we think that it would have used language which would more aptly convey that thought than does the language used. It was apparently the intention of Congress that a corporation which sells securities and repurchases them within a period of 80 days should not be permitted to deduct a loss in respect of the sale, but that the repurchased securities should stand in the stead of those which were sold. The respondent has so interpreted the law. Article 802, Regulations 74.

Reviewed by the Board.

Judgment will be entered for the respondent.

MoMai-ion dissents.