source: Caselaw Access Project

author: Disney:

license: Public Domain

text:
    John J. Raskob, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 69673.
    Promulgated June 30, 1938.

      Joseph M. Hart-field, Esq., Walter S. Orr, Esq., A. Chauncey New-lin, Esq., and Winslow M. Lovejoy, Esq., for the petitioner.

      Mason B. Leming, Esq., James D. Head, Jr., Esq., J. Arthur Adams, Esq., L. J. Schwartz, Esq., H. L. Brown, Esq., and Hugh B. Dowling, Esq., for the respondent.
   Disney:

The original petition and original answer put in issue only questions involved in a deficiency of Federal income tax for the year 1929 in the sum of $15,977.61. Thereafter, respondent filed amended answer, claiming increased deficiency of $1,026,340.40; thereafter, petitioner filed amended petition asserting errors additional to those asserted in the original petition. The proceeding came on for hearing on May 26, 1937. The filing of briefs was completed on January 27, 1938. Some issues have been abandoned, and others disposed of by stipulation, and decision thereon will be entered under Rule 50, so that only the controverted issues need be discussed herein. These consist of (1) an issue as to the deduction of losses from sales of stock; (2) an issue as to losses claimed in Copper Stocks Trading Account; and (3) an issue as to income from the Simms Petroleum Co. Syndicate. Each issue when stated will be followed by findings of fact and opinion thereon.

Issue as to Deduction of Losses on Sales of Stock.

This issue involves losses on sales of stock made by the petitioner to Pierre S. du Pont, petitioner in Docket No. 69674, as a part of cross sales to each other in the year 1929. Petitioner in his income tax return for 1929 claimed with respect to this issue a deduction of $4,375,523.51 for alleged losses on the sale of certain stocks. This claim was not disallowed in the determination of deficiency by the respondent, but respondent allowed a further deduction in the amount of $80,434.03 on account of certain adjustments. Both of - these amounts the respondent by his answer to amended petition alleges to have been erroneously allowed as deductions and asks that the deficiency be increased accordingly.

FINDINGS OF FACT.

This issue is common to this proceeding and to the proceeding in Docket No. 69674, Pierre S. du Pont, and, the evidence being the same in both proceedings on this issue, by virtue of consolidation of the two proceedings as to this issue by agreement of counsel at hearing, the findings of fact set forth in proceeding No. 69674 are made the findings of fact herein by reference.

OPINION.

The question on this issue being common with the same issue in Pierre S. du Pont, 37 B. T. A. 1198, in which opinion has this day been rendered, for the reasons therein set forth we hold that the respondent erred in allowing the deductions claimed by petitioner for :said alleged stock losses as adjusted, in the amount of $4,455,957.54.

Issue as to Loss Claimed in Coffer Stocks Trading Account.

The issue here is as to computation of losses claimed by reason of participation in and termination of Copper Stocks Trading Account, involving the question as to the nature of such trading account or ■syndicate.

FINDINGS OF FACT.

The facts on this issue are stipulated, except entries made by a broker in an account to reflect Baskob’s participation in the trading account, which are embodied in Exhibit E-5. There is no dispute as to the amounts shown in such exhibit. The stipulation- and exhibit are therefore adopted by reference as our findings of fact on this issue, and the facts will be set forth herein only so far as necessary for consideration of the issue.

OPINION.

On or about March 27, 1929, petitioner invested $2,000,000 in Copper Stocks Trading Account, which he had entered on or about March 19, 1929. On May 23, 1929, he received, after termination of the trading account on May 21, 1929, 7,066 shares of stock in the Anaconda Copper Mining Co. and on May 24, 1929, received $801,290.89 in cash. The stock had a fair market value when received of $731,331. The losses from sales by the trading account of copper stocks, interest paid, interest received, and taxable dividends received on the Anaconda Copper Mining Co. stocks, attributable to petitioner’s proportionate interest in the trading account, were as follows:

Losses from sales_$373, 730.14
Interest paid- 15,778.89
Interest received_ 12, 988.65
Taxable dividends_ 13, 238.35

The petitioner did not report in his Federal income tax return for 1929 any of these items on account of the operations of the trading account. He did not claim any loss, and respondent in determining the deficiency did not allow any deduction on account of operations of the trading account.

Petitioner’s contention is, in effect, first, that the trading account was a taxable entity and not a partnership or joint venture, and that therefore his tax position is determined upon liquidation thereof, in which he then suffered a deductible loss; and, in the alternative, that if the trading account was not a taxable entity, he suffered individual losses in its operations, plus certain losses by the liquidation of the account.

For convenience in consideration, the instrument creating the Copper Stocks Trading Account is set forth in the margin.

Each case of this character must be decided upon its own facts. The test is pragmatic. Morrissey v. Commissioner, 296 U. S. 344. The account here under consideration carries features tending both to affirm and contradict the idea of legal entity as distinguished from that of partnership or joint venture on the part of the individuals. Among the characteristics determinative of this question, as set forth by the Supreme Court, are centralized management of business, assignability of interest, ’ continuity of organization independent of the individual participation, and limited liability and association of parties in a business enterprise for gain. Morrissey v. Commisioner, supra; Helvering v. Coleman-Gilbert Associates, 296 U. S. 369. The Copper Stocks Trading Account was under the control of managers, who, for the account, had uncontrolled discretion to buy, sell, and trade in copper stocks listed on the New York Stock Exchange, to borrow money for and pledge the assets of the account, to compel compliance with the obligation of a participant, and to sell his rights, interest and obligation for noncompliance (he to be liable for any deficiency to the extent of his pro rata, and to receive any excess of sales price over same). Some indication of individual control does appear in the provision that a participant could take up against payment his proportion of any stocks in the hands of the managers, but only with the consent of the managers, and only for carrying purposes. We hold that centralized management inhered in this organization. Provision was expressly made against partnership between participants or with the managers. This trading account was not a partnership; it was a business enterprise and not a mere trust. It had “the distinctive feature of being created to enable the participants to carry on a business and divide the gains which accrue from their common understanding.” As to personal liability, there is no limitation to the amount contributed, though there is limitation as to each participant to the proportion his participation bears to the whole, the participants sharing in the profits and losses of the account on a pro rata basis, and, in case of a participant failing to pay his share of a loss, the amount being chargeable to the account but the participant not being relieved of his liability. Assessments were limited to the amount subscribed by participant, but this appears to refer not to liability for debts, but to the amount of enforced participation under the contract. The commitment of the trading account, either for a long or short account, was limited to the aggregate amount of participation in the trading account, which was a maximum of 1,000,000 shares. The managers had power to make apportionment and distribution of profits, losses, and expenses, which was conclusive upon participants. We conclude that there was no limitation of liability similar to that in a corporation. Evidence is not definite as to whether title to assets was in the trading account or in the participants, though mention is made of assets of the account and purchases and sales were made for the account. As to assignability of interests, no mention is made other than by sale by the manager in case of participant’s default; nor does any certificate of participation appear other than a letter of proposal of formation, accepted by participant by signing an attached form. Considering the personal nature of the services rendered by the manager under this contract, there seems no presumption of assignability, and we conclude the contract here was not assignable in any usual or convenient manner, as in case of certificates evidencing corporate stock. Commissioner v. Gerstle, 95 Fed. (2d) 587, and that it is doubtful whether it was assignable at all. The trading account continued only a short time, from about March 27, 1929, to about May 23, 1929. Of course the continuity of business characteristic of the business entity alleged to exist here does; not refer merely to length of life of organization, yet that element has been considered. N. B. Whitcomb Coca-Cola Syndicate, 35 B. T. A. 1031; affd., 95 Fed. (2d) 596, and the very brief, and easily terminable, life of the trading account is obviously dissimilar to the ordinarily extensive existence granted by a corporate charter. Moreover, it does not appear, aside from power in managers to sell a participant’s interest for default, that the-organization continued regardless of continuance of participation of a member. Indeed, considering the highly personal and financially important duties of the manager, the lack of any provision for selection of his successor seems to negative any idea of continuity of existence of the syndicate regardless of vacancy in that office. Considering all the elements of this trading account in the light of the guidance furnished by decided cases, we conclude that men were not in this syndicate associated together in a manner sufficiently similar to the status of stockholders as to constitute an association taxable as a corporation within the purview of the statute. We hold that the Copper Stocks Trading Account was a joint venture. Swanson v. Commissioner, 296 U. S. 362; Helvering v. Combs, 296 U. S. 365; Helvering v. Coleman-Gilbert Associates, supra; Morrissey v. Commissioner, supra; Commissioner v. Gerstle, supra.

In liis amended, petition, petitioner claimed a loss deduction of $376,520.38, a figure reached by adding to syndicate losses of $373,-730.14 on stock sales, the amount of $15,778.80 for interest paid by the syndicate, less interest of $12,988.65 received by the syndicate. Upon brief, he claims a deductible loss of $467,378.11 under two contentions, one in the alternative. By his first method the result is reached by deducting from his investment of $2,000,000, the cash and fair market value of the stock received on liquidation of the venture. In the alternative, he claims a net loss of $363,282.03 in the operations of the venture and a loss of $104,096.11 on liquidation, the latter figure being arrived at by deducting from an adjusted cost of $1,636,717.97 ($2,000,000 invested, less $363,282.03 losses) for his interest in the venture, the cash and fair market value of the stock received upon the termination of the venture, a total of $1,532,621 89. The main contention seems to be made on the theory that the trading account was an association taxable as a corporation, and the alternative on the ground that it was an entity of a different character.

Our conclusion that the trading account was a joint venture disposes of petitioner’s main point. Petitioner and the other participants were co-owners of the property acquired by them during the existence of the joint venture and any income or loss sustained constituted income and loss of all as individuals, prorated among them. We cannot approve the additional claim under the alternative contention. Petitioner and’ other participants having retained individual status in the syndicate, there was no entity or association to liquidate when the trading account came to an end. Walter S. Dickey, 14 B. T. A. 1295; affd., 56 Fed. (2d) 917; certiorari denied, 287 U. S. 606; D. H. Byrd, 32 B. T. A. 568; John M. Perata, 33 B. T. A. 843; Mark L. Gerstle, 33 B. T. A. 830; affd., 95 Fed. (2d) 587; Reynolds v. McMurray, 60 Fed. (2d) 843; certiorari denied, 287 U. S. 664; 77 Fed. (2d) 740; First Mechanics Bank v. Commissioner, 91 Fed. (2d) 275. Accordingly, we find that petitioner’s deductible loss was $376,520.38.

Issue as to Simms Petroleum Co. Syndicate.

Petitioner did not report in his Federal .income tax return for 1929 and respondent in determining deficiency did not include any amount in gross income from petitioner’s participation in the Simms Petroleum Co. Syndicate. The issue arises upon allegation by respondent in his amended answer that petitioner had additional net taxable income of $95,036.25 from gains, profits and income from the Simms Petroleum Co. Syndicate. Petitioner does not brief this question, merely referring to Ms discussion of a related question (Copper Stocks Trading Account).

FINDINGS OF FACT.

Tlie facts involved in tMs issue were stipulated by the parties, as “Stipulation C,” which stipulation is adopted as our findings of fact, and made a part hereof by reference; and the facts will be set forth herein only in so far as necessary to a consideration of the issues involved.

OPINION.

The Simms Petroleum Co. Syndicate was entered by petitioner on or about May 29, 1929.

The Syndicate was extended to October 28, 1929, by the manager under power given in the syndicate agreement, and by agreement with petitioner successively to April 28, 1930, to July 28, 1980, and to the close of business October 27, 1930, at which time it was terminated and he first received returns from the payments made by him.

The question here presented is the same, involving the same syndicate and the same year, as considered in Pierre S. du Pont, supra. Therefore, following the conclusion reached by us therein, we hold that the Simms Petroleum Co. Syndicate was a joint venture, from which it follows that petitioner received income therefrom during the taxable year in the sum of $95,036.25.

Reviewed by the Board.

Decision on all issues will be entered wider Buie 50.

Van Fossan, Leech, and Mellott concur only in the result.

Stebnhagen, Smith, and Murdock dissent from the finding and conclusion that the sale of November 13 was not a true sale, that no loss was thereby sustained, and that the deduction was improperly taken.

       Private ano Confidential
      W. E. Hutton & Company
      52 Wall Street
      New York
      “Copper” Stocks Trading Account
      March 19, 1929.
      Mr. J. J. Raskob.

        DuPont Bldg., Wilmington, Delaware.

      Dear Sir : We beg to confirm our understanding with you that we are forming “ ‘Copper’ Stocks Trading Account” to trade in any copper stocks listed on the New York Stock Exchange, and that you are to have a participation of 50,000 shares in the same-out of a total not to exceed One Million (1,000,000) shares, upon the terms and conditions hereinafter set forth:
      We are to be the Managers of the Trading Account and we and/or the firm of which we are members may also participate therein. All transactions for the Trading Account shall be in accordance with and subject to the constitution, by-laws, rules, regulations, requirements and customs of the New York Stock Exchange, as well as of the governing committees, boards of governors, other governing bodies, committees and officials thereof. As Managers, we shall have full power in our uncontrolled discretion for this Account to buy, sell and generally trade in any of the aforesaid "copper” stocks, either for long -or short account, and to deal in "puts” and “calls” thereon, at such times and prices as -we shall deem for the best interests of the Account; provided, however, that the commitment of the Trading Account, either for long or short account, shall not at any one time exceed the aggregate of the Trading Account participations.
      The Managers, for all purposes of this agreement, hereby appoint as their agents W. E. Hutton & Co., upon whose hooks the said Trading Account is to be carried.
      The Managers, and/or their agents, W. E. Hütton & Co., from time to time and upon two days’ notice, may call, and the participants thereupon agree to pay in cash, such amount or amounts as margin as the Managers may deem proper, but all calls for payment shall be made pro rata among the participants.
      In case of the failure of any participant to make such payment as and when called, the Managers may sell the rights and interest of the defaulting participant in and under this agreement and the stock represented thereby at public or private sale at any time ■thereafter without advertisement or notice and, after deducting all interest or other costs and expenses, the residue shall be applied on any liability or indebtedness of such defaulting participant, and if there be any deficiency said participant shall pay and discharge same, any overplus shall be paid over to such defaulting participant. The Managers may purchase at any such sale the rights and interests of any defaulting participant for the 'benefit of the non-defaulting Trading Account and may call for and apportion any assessment to pay for the same; provided, however, that no such assessment shall be- made if the result thereof would be to increase the amount subscribed to the Trading Account by the participants, respectively.
      Any participant may, at his election and with the consent of the Managers, take up -against payment for carrying purposes only his proportion of any share of stock then in the hands of the Managers for this Account. The Managers, and/or their said agents, ■may, at their election upon two days’ notice, require any participant to take up against payment for carrying purposes only his proportion of any shares of stock then held by him for the Account.
      The Managers shall have full discretionary power to borrow money for the Trading Account, either from themselves or others, and to pledge as security therefor any assets •of the Trading Account, and also to pledge as security therefor this agreement and the •several obligations of the participants hereunder.
      Unless sooner terminated by the Managers in their discretion, the Trading Account will •expire at the close of business on June 19, 1929. The Managers, however, without notice, ■may terminate the Account at any time, or may extend it for a further period of 90 •days.
      At the expiration of the Trading Account, each participant shall take up and pay for his respective proportion of any shares of stock then in the hands of the Managers for the Trading Account. Apportionment and distribution by the Managers of the profits, losses and expenses shall he conclusive upon the participants. Participants will share pro rata in the profits and losses of the Trading Account after allowing for all expenses. Any loss resulting from the failure of any of the participants to carry out his or their obligation thereunder shall be charged as a loss to the Trading Account, but this shall not operate to relieve any participant from his liability hereunder.
      Nothing herein contained shall constitute the participants partners with the Managers, or with one another, or render the Managers liable for the obligations of any of the participants. The default of any participant shall in no way relieve any other participant from his full obligation hereunder. The Managers shall not be liable under any of the provisions of this agreement, or for any matter in connection therewith, or for the exercise of his judgment and discretion in the management of the Trading Account, except for want of good faith.
      Any notice from the Managers to any participant shall be deemed to have been duly given if mailed or telegraphed to such participant at the address furnished to the Manager by such participant.
      The Managers are to receive ten (10%) per cent of the net profits of the Trading Account as and for their services to be rendered herein, said payment to be made prior to the distribution of the profits of said Trading Account among the participants.
      Will you kindly confirm the acceptance of your participation in this Account by signing, the form of acceptance upon the enclosed duplicate and returning it to us.
      Very truly yours,
      Bradford Ellsworth and Thomas E. Bragg,

        Trading Account Managers.

      By [Signed] W. E. Hutton Co.

        Agents.

      W. E. Hutton & Co., Agents,

        52 Wall Street, New York City.

      The undersigned hereby accepts a participation of shares in the above Trading Account upon the terms and conditions above set forth.
      Address to which all notices shall be sent


author: Black:

text:
    Molly-’es Doll-outfitters, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92642.
    Promulgated July 8, 1938.

      Morris J. Cohen, Esq., for tlie petitioner.

      B. O. Whitley, Esq., for the respondent.
   OPINION.

Black:

On March 19, 1938, the petition in this proceeding was filed contesting a deficiency determined by the Commissioner in his deficiency notice dated December 22, 1937. Prior to the filing of any answer thereto by respondent, to wit, on May 4, 1938, a stipulation was filed by the petitioner and the Commissioner agreeing that there are deficiencies in Federal income tax and excess profits tax due from the petitioner for the fiscal year ended January 31, 1938, and penalties as follows:

On May 7, 1938, the Board entered a decision in accordance with the foregoing stipulation. On May 12,1938, respondent filed a motion asking the Board to set aside and vacate the decision entered May 7, 1938, and dismiss the appeal for lack of jurisdiction. As a reason for his motion respondent alleged that on February 10, 1938, the taxpayer filed in the District Court of the United States for the Eastern District of Pennsylvania a debtor’s petition for reorganization under section 77B of the Federal Bankruptcy Act; that on February 11, 1938, the court approved the petition; that on March 19, 1938, the taxpayer filed its petition with the Board of Tax Appeals; that under the provisions of section 274 (a) of the Revenue Act of 1936 no petition for redetermination of the deficiency asserted in the notice of deficiency dated December 22, 1937, may be filed with the Board after the adjudication of bankruptcy.

Respondent’s motion was set for hearing June 8, 1938, of which, petitioner was duly notified and served with a copy thereof. The motion came on for hearing June 8, 1938, and petitioner did not appear and no reply has been filed to respondent’s motion. Respondent renewed his motion and it is believed it should be granted. Respondent has introduced in evidence in support of his motion a certified copy of the petition of “Molly-’es Doll-outfitters, Inc., Debtor”, for reorganization under section 77B of the Federal Bankruptcy Act, filed February 10, 1938, in the District Court of the United States for the Eastern District of Pennsylvania, and has also introduced in evidence a certified copy of the order of the judge of that court dated February 11, 1938, approving the debtor’s petition and setting out at length the court’s orders with reference thereto, all of which is incorporated herein by reference.

Section 274 (a) of the Revenue Act of 1936 reads in part: “But no petition for any such determination shall be filed with the Board after the adjudication of bankruptcy or the appointment of the . receiver.”

Article 274-2, Treasury Regulations 94, applicable to the Revenue Act of 1936, reads in part as follows: “In no case shall a petition be filed with the Board for a redetermination of the deficiency after the adjudication of bankruptcy, the filing of a debtor’s petition or answer in a Federal court in proceedings for the relief of debtors under sections 74, 75, and 77 of the Bankruptcy Act, as amended, the approval of the debtor’s petition or answer in a debtor proceeding under section 77B of the Bankruptcy Act, as amended, or the appointment of a receiver.”

While, of course, the Commissioner can not by his regulations add anything to the Board’s jurisdiction or take anything away from it, the regulation above quoted seems correctly interpretative of the statute.

From the facts introduced in evidence by the respondent, it seems clear that prior to the time petitioner filed its petition herein on March 19,1938, the United States District Court for the Eastern District of Pennsylvania had approved the debtor’s petition of Molly-’es Doll-outfitters, Inc., for reorganization under section 77B of the Federal Bankruptcy Act and liad assumed jurisdiction of it. Therefore, we bold that we have no jurisdiction of the proceeding instituted by the filing- with this Board of the petition March 19, 1938. Cf. Missouri Pacific Railroad Co., 30 B. T. A. 587; Financial & Industries Securities Corporation, 27 B. T. A. 989. Accordingly, an order will be entered vacating and setting aside the decision entered in this proceeding May 7, 1938, and dismissing the proceeding for lack of jurisdiction.


author: Murdock :

text:
    Estate of Harry W. Hahn, Deceased, Harry W. Hahn, Jr., and Arthur H. Hahn, Surviving Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 90310.
    Promulgated July 8, 1938.

      Theodore D. Peyser, Esq., for the petitioners.

      Eugene Smith, Esq., for the respondent.
   OPINION.

Murdock :

Section 302 (g) of the Revenue Act of 1926 includes in the gross estate “the excess over $40,000 of the amount receivable by all other beneficiaries [than the executor] as insurance under policies taken out by the decedent upon his own life.” That provision does not cover these policies, since they were not taken out by the decedent. Furthermore, he did not own the policies and actually had none of the indicia of ownership such as possession, power to pledge, or power to surrender. He had a limited power to name and change the beneficiary, but that was only with the approval of the owner, William Hahn & Co. The Commissioner erred in including the value of these policies in the decedent’s gross estate.

Decision wUl 5c entered imder Bule 60.


text:
    Mamie S. Hammonds, Petitioner, v. Commissioner of Internal Revenue, Respondent. Fred P. Branson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 78210, 78211, 85896.
    Promulgated July 12, 1938.

      Charles H. Garnett, Esq., and Fred P. Branson, Esq., lor the petitioners.

      W. B. Lansford, Esq., for the respondent.
   OPINION.

Black:

In these proceedings the amounts of the cash payments received by petitioners in the sale of the Texas oil leases are not disputed. The amounts received by petitioners Hammonds and Bran-son from in-oil payments in 1932 and the amount received by petitioner Branson in 1933 are likewise not disputed.

The questions which are at issue are as to whether the amounts received by petitioner Hammonds as her part of the proceeds from the sale of the leases were her separate property and therefore her separate income, or represented the community property of petitioner Hammonds and her husband, O. O. Hammonds, and therefore their community income, taxable one-half -to each on their separate returns, which were duly filed. Other issues concern the question of proper depletion allowances and one or two other issues of a more or less minor nature, which will be stated separately later.

The first question which we shall consider is whether the income of petitioner Hammonds from the sale of oil and gas leases, entered into and consummated within the State of Texas, is community income of herself and husband under the community property laws of Texas, taxable one-half to her and one-half to him, notwithstanding they were residents of and domiciled in the State of Oklahoma at the time.

In order to have a proper discussion of the point which we have here to decide, we must first determine whether the oil leases which were acquired by petitioner Hammonds in Texas in 1930 were personal property or represented an interest in real estate. If the oil leases were personal property, then the decision is not difficult because there can be no question that, where either of the spouses who are domiciled in a noncommunity property state acquire personal property during coverture, the law of the domicile governs and not the law of the situs of the property. McKay on Community Property, sec. 641.

In this proceeding both parties agree that the domicile of petitioner Hammonds was in the State of Oklahoma and that if the oil leases acquired in Texas are properly classed as personal property the laws of Oklahoma control and the property would belong to the separate estate of petitioner Hammonds. However, it seems perfectly clear that under the laws of Texas the oil leases acquired in that state were not personal property, but represented an interest in realty. Stephens v. Stephens, 292 S. W. 290; John O’Neil, 16 B. T. A. 614. So we are led to inquire what law governs when one of the spouses domiciled in a state where the community property law does not prevail acquires real property in a community property state. The status of land and of the income from the sale thereof involves a rule of property in respect of which we are bound by the law of the state where the land is situated. Rosalie Hampton, 31 B. T. A. 853, and cases there cited. That much being decided we inquire, What is the rule of law in Texas applicable to real estate located there which has been acquired by one of the spouses where the husband and wife are domiciled in another state in which community property laws do not prevail? Looking to the Texas law we find that article 4619, sec. 1, vol. 13, Vernon’s Annotated Texas Statutes, reads:

All property acquired by either the husband or wife during marriage, except that which is the separate property of either, shall be deemed the common property of the husband and wife and * * * all the effects which the husband and wife possess at the time the marriage may be dissolved shall be regarded as common effects or gains, unless the contrary be satisfactorily proved.

It seems rather clear that under the Texas decisions, the foregoing presumption applies to real estate acquired by nonresidents as well as residents. See Thayer v. Clarke, 77 S. W. 1050.

But this presumption which applies in favor of the community status of the real estate thus acquired is rebuttable both as to real estate acquired by residents of Texas and that acquired by nonresidents. The Court of Civil Appeals, in Thayer v. Clarke, supra, states what appears to be the rule in Texas, in the following language:

We state briefly what in our opinion is the law upon the point: It is well settled that as to all personal property acquired during coverture the law of the matrimonial domicile controls, such property having in theory no fixed situs. As to all real estate so acquired the law off the state in which it is situated controls, so that in conveying or incumbering it, wherever the transaction may occur the evidence of the sale or incumbrance must be executed according to the requirements of the law of the state of its situs. * ⅜ * So if the husband buy real estate with his separate money, the real estate is his, wherever located. The presumption groioing out of the fact of its acquisition during marriage, affects only the burden of proof and, is a mere detail which becomes immaterial when the facts are established. [Italics ours.]

And the court went on to hold in that case that, it haring been proved that the funds with which the real estate in Texas had been acquired were the separate property of the husband, the real estate so acquired was his separate property. This decision of the Court of Civil Appeals in Thayer v. Clarke was affirmed in a per curiam opinion of the Supreme Court of Tesas, reported at 81 S. W. 1274. Petitioner Hammonds concedes the force of this opinion against her if the oil leases in question had been purchased with her separate funds, but she contends that the leases were acquired as compensation for her individual efforts and services and that no money was paid for them. She contends further that under the laws of the State of Texas compensation earned by the wife for her services in Texas is the community property of herself and husband, and therefore the oil leases are community property. That would undoubtedly be true if the parties were domiciled in Texas, but they were not. It is true that, without proof of anything but that the leases were acquired during coverture, the presumption that the property is community property would prevail. For example, if petitioner Ham-monds had died while she was the owner of an interest in these oil leases, and her husband had brought suit in the Texas courts for a community interest in the leases and in support of his claim had proved that the leases were acquired during coverture and had stopped there, and Mrs. Hammonds’ heirs had offered no proof in opposition and had not proved that the leases were acquired by Mrs. Hammonds’ own individual efforts and industry while she was domiciled in Oklahoma, we think that in all probability under such circumstances the community property presumption of the Texas statutes would prevail, and the leases would be held to have been community property of petitioner Hammonds and her husband. But, as was said in Thayer v. Clarke, supra: “The presumption growing out of the fact of acquisition during marriage, affects only the burden of proof and is a mere detail which becomes immaterial when the facts are established.” In the instant case the facts have been established. As we have already pointed out, it has been established that petitioner Hammonds was domiciled in the State of Oklahoma, and the oil leases were acquired by her own separate efforts and industry. They were not acquired with joint funds belonging to petitioner and her husband. Under these circumstances, we think the oil leases were her separate property.

One of the cases strongly relied upon by petitioner Hammonds in support of her contention that the leases were community property was the case of Joiner v. Joiner, 87 S. W. (2d) 903, decided by the Court of Civil Appeals of Texas. In that case the wife after divorce from her husband sued him in the courts of Texas for a one-half interest in a large amount of property, including oil leases, situated in Texas, which had been acquired during coverture. It was conceded that the domicile of the husband and wife was in the State of Oklahoma when the property in question was acquired. The lower court held against Mrs. Joiner and denied her any recovery. The Court of Civil Appeals of Texas reversed the lower court and held that Mrs. Joiner owned a one-half interest in the property. The court in its opinion likened property owned jointly by husband and wife in Oklahoma to community property owned by husband and wife in Texas. Undoubtedly this decision did lend some support to petitioner’s contention in the instant case, but, since the filing of briefs herein, the Joiner case has been reversed by the Supreme Court of Texas. See Joiner v. Joiner, 112 S. W. (2d) 1049, decided by the Supreme Court of Texas, February 2, 1938.

In its opinion the Supreme Court of Texas held that under the laws of Oklahoma there were two recognized classes of property owned by husband and wife — (1) that which was jointly acquired; and (2) that which was separately acquired. In discussing “jointly” acquired property the court said: “In several cases the Supreme Court of Oklahoma has defined ‘jointly’ acquired property within the meaning of section 672, 12 Old. St. Ann. par. 1278, as property ‘accumulated by the joint industry of the husband and wife during marriage’. See Tobin v. Tobin, 89 Okl. 12, 213 Pac. 884, 888 and Bruce v. Bruce, 141 Okl. 160, 285 Pac. 30.”

In discussing “separately” acquired property, the court said: “The statutes of that state [Oklahoma] do not specifically define separate property but the decisions, in light of the definitions of ‘jointly acquired’ property, have by necessary implication defined separate property as property acquired by either spouse as result of his or her separate earnings, skill, industry or labor.”

The court then held that the property in Texas, including real estate situated there, had been acquired during coverture by the separate industry and efforts of the husband, C. M. Joiner, and had been acquired while the parties were domiciled in Oklahoma, and under the laws of Oklahoma the property was the separate property of the husband and retained the same character in Texas, and that the wife was not entitled to recover any of it. The court concluded its opinion with this language:

Under the decisions oí the Supreme Court of Oklahoma, above mentioned, we have no hesitancy in expressing the conclusion that none of the properties in which plaintiff in this suit claims an interest were “jointly acquired” within the purview of the Oklahoma laws. This being true, the controversy with reference to the settlement agreement becomes of no consequence, as plaintiff had no interest whatever in said properties.

We think the same logic requires us to hold that the interest in the oil leases acquired by petitioner Hammonds by her own efforts and industry were under the laws of the State of Oklahoma her own separate property and that the rule followed by the Supreme Court of Texas in the Joiner case and other cases is to recognize and apply the Oklahoma law in such a situation, even as to real estate located in Texas. This being so, we hold that respondent did not err in treating the income from the sale of the Texas leases as the separate income of petitioner Hammonds and not the community income of herself and her husband. On this point we sustain the Commissioner.

We shall next consider other issues which have been raised by the pleadings.

Two questions involving identical considerations may be disposed of together — (1) whether the petitioners are entitled to a depletion deduction of 27½ percent of $139,800, cash received by them upon the sale of their leases in 1931, each being entitled to one-half thereof, and (2) whether they are entitled to depletion of 27½ percent of $34,785, received by them in 1932 from the Faith Oil Corporation as a part of the original consideration paid by checks of that company which were bad and as a credit on notes given to replace those checks. The petitioners concede that these issues are governed by decisions in William Fleming, 31 B. T. A. 623; Roy H. Laird, 35 B. T. A. 75; and Commissioner v. Fleming, 82 Fed. (2d) 324. Arguments advanced by the petitioners are merely by way of repetition of what has already been carefully considered in those cases, particularly respecting the distinction between those and Palmer v. Bender, 287 U. S. 551, which, needless to say, we have carefully considered and find no reason to recede. It is clear from the facts in our findings that petitioners made an outright sale of the leases for a cash consideration and a further consideration to be paid out of oil if and when produced. Under the foregoing decisions petitioners are not entitled to depletion of the cash consideration and are entitled to depletion of the in-oil payments.

The respondent now concedes two of the petitioners’ contentions— (1) that they are entitled to a depletion deduction of 27½ percent of $51,111.02 received by them in 1932 on account of in-oil payments from leases sold in 1931, each being entitled to one-half thereof, and (2) that petitioner Branson is entitled to deduct depletion of 27½ percent of $34,437.92, received by him in 1933 on account of in-oil payments to be made from leases sold in 1931, on the authority of Thomas v. Perkins, 301 U. S. 655, and the cases above cited. Effect to these concessions will be given in a computation under Bule 50.

Another contention of the petitioners is that they are entitled to deduct from income, as ordinary and necessary business expenses, the intangible drilling and development costs under a turnkey job contract, of $12,426.66 expended on the well drilled by them in 1932, each being entitled to one-half thereof. The respondent contends that this issue is controlled by our decision in O- W-R Oil Co., 35 B. T. A. 452. This, the petitioners concede, offering argument against the correctness of that decision. Upon consideration of the argument presented we find no reason to recede from our former position. The Commissioner is sustained as to this issue.

Petitioner Branson contends that he is entitled to deduct $2,082.18 as a one-third share of the $6,246.55 cost of drilling a nonproductive well known as the Brandenburg well, alleging that the respondent allowed only $422.84 therefor. It of course requires no citation of authority to support the proposition that respondent’s determination in the deficiency notice is presumed to be correct and the burden is on petitioner to show by evidence that respondent has erred. We find no evidence in the record which supports petitioner’s contention on this point and therefore sustain the Commissioner’s determination for lack of evidence to show that it was error.

Finally, the respondent has affirmatively plead the erroneous allowance of a $1,200 credit for three dependents claimed by petitioner Branson for the calendar year 1932, at the same time asserting a claim for any increase in the deficiency for that year which may result from a correction of this alleged error. The burden to support this affirmative allegation is upon the Commissioner and we do not consider that he has discharged that burden.

The only witness offered by respondent to prove his affirmative allegations was petitioner Branson, himself. The substance of Branson’s testimony was that in 1932 he spent much more than the $1,200 claimed as credit for dependents, in support of his brother, who was a Methodist preacher whose health broke down and was unable to work and had no means of support, and in support of his family, including his children and also in support of some nephews and nieces who were orphans. One of the nephews was under 18 years of age and one of Branson’s nieces was sick most of 1932 and required a serious operation, the entire cost of which Branson paid. Branson testified that in 1932 he contributed practically the entire support of his brother, his wife, and these nephews and nieces. None of them were legally dependent upon him for support. He testified that an accountant made out his income tax return for 1932 and claimed the credit for three dependents upon information which Branson furnished him at that time, but that he is now unable to identify the names of which three of the relatives above referred to the credit for dependents was claimed. If the respondent had disallowed the deduction for dependents in his determination of the deficiency, the presumption of correctness would exist in his favor and we would hold that Branson’s testimony above summarized would not be sufficient to overcome it. But the shoe is on the other foot. The burden of proof is on respondent to sustain his affirmative allegations and we do not think lie lias done so. Counsel for respondent seems to think that, because Branson frankly testified that none of the relatives to whom he contributed the chief support in 1932 were legally dependent upon him, that fact is sufficient to deprive him of the right of a credit for dependents. That is not true. The statute giving a credit for the support of dependents does not require that they live in the same household as the taxpayer who contributes the support, nor does it require that those who are supported shall be legally dependent upon the taxpayer. Those are some requirements for a credit as “head of a family” — see section 25 (c) and the Commissioner’s regulations thereunder — but not for the allowance of credit for dependents. Section 25 (d) of the 1932 Act, providing for the credit for dependents, is printed in the margin.

The Commissioner’s regulation respecting credits for dependents, article 294 of Regulations 77, is also printed in the margin.

For aught we know the three dependents for whom petitioner Branson claimed credit in 1932 were his brother, a Methodist preacher, whose health broke down, leaving him unable to work; Branson’s nephew, who was under the age of 18 years; and Branson’s niece, who, although more than 18 years of age, was ill most of the year and unable to earn her support because of her illness, all of her expenses being paid by Branson, including hospital and medical bills. Branson was the chief support of all three of these relatives in 1932, and, if they are the three for whom he claimed the credit for dependents, they may come within the classification provided in section 25 (d) and the Commissioner’s regulations thereunder. Certainly the nephew who was under 18 years of age would come within that classification. Cf. Crocker v. Helvering, 91 Fed. (2d) 299. Whether the physical disabilities of petitioner’s brother and niece were sufficient to bring them within section 25 (d) and the applicable regulations, we do not decide. Respondent has not proved to the contrary. The burden of proof is on him to establish his affirmative allegations. Because he has not done so we hold against him on this issue.

Judgment will be entered under Rule 50.

       (d) Credit eor Dependents. — $400 for each person (other than husband or wife) dependent upon and receiving his chief support from the taxpayer if such dependent person is under eighteen years of age or is incapable of self support because mentally or physically defective.

       Art. 294. Credit for dependents. — A taxpayer, other than a nonresident alien who is not a resident of Canada or Mexico (see section 214), receives a credit of $400 for each person (other than husband or wife), whether related to him or not and whether living with him or not, dependent upon and receiving his chief support from the taxpayer, provided the dependent is either (a) under 18, or (b) incapable of self-support because defective.
      The credit is based upon actual financial dependency and not mere legal dependency. It may accrue to a taxpayer who is not the head of a family. But a father whose children receive half or more of their support from a trust fund or other separate source is not entitled to the credit.


author: Hill:

text:
    Charles A. Rogers and Louise Rogers, Husband and Wife, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 86181.
    Promulgated July 12, 1938.

      Theodore B. Benson, Esq., and II. H. Timnnering, Esq., for the petitioners.

      Jonas M. Smith, Esq., for the respondent.
   OPINION.

Hill:

In computing the deficiency for 1932 respondent added to the net income reported by petitioners certain credits to their accounts on the books of the M & R Canning Co. in the amount of $17,080.30, and in computing the deficiency for 1933 respondent added to the reported net income credits to petitioners’ accounts on the books of the Canning Co. plus bank deposits, in the total amount of $65,072.40. Respondent likewise made a number of other adjustments to net income for both years, which are not in controversy here. Petitioners concede that all amounts added to income by respondent, representing unexplained credits and bank deposits, constitute taxable income derived by them from legitimate sources, with the exception of three items, which will be referred to and discussed hereinbelow.

Petitioners contend that respondent erred in including in income for the years 1932 and 1933 the amounts of $1,000 and $1,400, respectively, as unexplained credits to the accounts of petitioners on the books of the Canning Co. and allege that such amounts represent money borrowed by petitioners from the Owensboro Building & Loan Association, and loaned to the Canning Co. by them.

The account of petitioner Charles A. Rogers on the books of the Canning Co. shows the following credit: “September 9, 1932, 500.00 Owensboro B. & L. Assn.” The account of petitioner Louise Rogers was credited with the same amount, accompanied by similar explanation. Under date of September 18, 1933, Rogers’ account was credited with $700 “B. & Loan Cks.” and Mrs. Rogers’ account was credited on the same date in the same amount as “B. & L. Check.” The amounts were included by respondent in gross income.

Petitioner Charles A. Rogers testified that on September 9, 1932, he and his wife each had a savings account in the Owensboro Building & Loan Association in excess of $500, and, being in need of money for the Canning Co., borrowed the stated amount, using their savings accounts as collateral, and took credit therefor on the books of the Canning Co. He further testified that on September 18, 1933, the savings accounts of himself and wife were in excess of $700, and they each borrowed that amount and loaned it to the Canning Co., taking credit therefor on the company’s books.

This evidence, we think, is sufficient to establish the right of petitioners to have the amounts of $1,000 and $1,400 excluded from their gross income for 1932 and 1933, respectively. Respondent’s action on this point is disapproved.

The remaining item to which petitioners take exception involves the amount of $12,000 alleged to have been included in the sum of $17,582.59 credited to the account of Charles A. Rogers on the books of the Canning Co. under date of December 31, 1933, and added to income for 1933 by respondent as part of total credits of $38,827.23.

Rogers testified that during 1933 he paid out amounts in behalf of the Canning Co. for labor, and at the end of the year directed an auditor to credit his account with the total amount taken from memoranda made at the time of the payments. In November 1933 the Canning Co. obtained a loan of $12,000 from the Ontario Warehouse Co. of Chicago, evidenced by a check dated November 29, 1933. Petitioner endorsed the check and cashed it through the city collector’s office. He testified that he used the city tax collector’s money to pay bills for the M & R Canning Co., substituting his personal checks for the cash so taken and used, and when he received the $12,000 for the Canning Co. he used it to reimburse the tax collector’s office.

Petitioner’s testimony on this point is neither clear nor convincing. The memoranda which evidenced the alleged expenditures made by the petitioner on behalf of the Canning Co. for labor and allegedly were the basis for his directions to the auditor to credit his account in the amount of $17,582.59, were not offered in evidence. Petitioner first stated that he supposed the memoranda were in the records of the Canning Co., but later admitted he did not know whether they were in existence, or what they were for “except for labor.” While petitioner’s account was credited with $17,582.59, it was not debited with the amount of the $12,000 check, and there is no satisfactory evidence in the record to show that the two amounts have any relation to each other. In explanation of what he did with the $12,000 check, petitioner testified that he “used it to pay some bills of mine, — I used it to take up some checks I had in the cash box of the City Clerk.”

It is not all clear from the record whether the $12,000 in question constituted repayment by the Canning Co. to Eogers for expenditures made by him in its behalf or was a loan by the corporation to petitioner, or whether it was in whole or in part a distribution of earnings in the nature of a dividend. If Eogers used the money in whole or in part to pay his personal bills and not to replace funds expended in behalf of the Canning Co., the transaction to such an extent may have amounted in effect to the distribution of a dividend. In reference to this matter, petitioners in their brief say:

What petitioners desire the Board to do is consider that these withdrawals [which included the $12,000 check above referred to] were payments made by the corporation in its checks which were cashed by the petitioners then became funds available to the petitioners to later return to the corporation or to pay its bills or for deposit in the several banks.

If the funds withdrawn by petitioners from the corporation were later returned to the corporation, or used to pay its bills, they constituted in the first instance loans to petitioners; but if they were deposited by petitioners “in the several banks” and appropriated to their individual uses, they constituted dividends. Again in their brief petitioners state:

What the Board should do is simply to conclude that Rogers personally paid or promised to pay the bills of the corporation and that he then used the $12,000 to reimburse himself and that the net result is as though the bills, to the extent of the $12,000, were paid by the corporation and not by Rogers and that the final entry in the amount of $17,582.69, credited to Rogers, should be reduced by $12,000 to $5,582.59.

Eespondént has determined that the amount of $12,000 in controversy constituted gross income to petitioners, and the burden is upon them to establish by competent proof that such determination is erroneous. This, we think, they have wholly failed to do. We must, therefore, approve respondent’s determination on this point.

Eespondent has assessed a 50 percent fraud penalty for each of the taxable years, pursuant to the provisions of section 293 (b) of the Revenue Acts of 1982 and 1934. Petitioners contend that they were not guilty of fraud, and that respondent’s action is erroneous.

Bearing on the issue of fraud, the record discloses the following facts: Petitioners concede that all amounts added to their income by respondent which represent credits to their accounts on the books of the M & R Canning Co., and deposits in banks, with the exception of the three items hereinabove referred to, constituted gross income derived by them during the taxable years from legitimate sources. They both personally signed the returns filed for 1932 and 1934, and the credits on the books of the Canning Co. and the deposits in the banks were made by petitioners personally or under their direct supervision. Yet in their returns they reported net income for 1932 in the amount of $8,913.78 and failed to report $9,834.80; for 1933, they reported only $1,942.11 net income and failed to report $42,410.15; for 1934 they reported $6,205.98 and failed to report $6,773.

The repeated omission from the returns of such large percentages of the total admitted taxable income, under circumstances indicating that petitioners at the time the returns were made knew that the omitted amounts constituted taxable income, can not be ascribed to oversight or honest error, but, we think, compels the conclusion that at least a part of the deficiency for each of the taxable years is due to fraud with intent to evade tax. In reaching this conclusion we consider only those items of gross income admitted by petitioners to have been received by them but not reported in their returns.

The explanation of such omissions offered by Rogers in his testimony was vague and contradictory. When questioned concerning specific items of gross income for 1932, he stated he did not know the sources from which they were derived, or whether or not they were loans. Later he stated “at that time we considered those were sums borrowed.” In respect of the unreported items which petitioners now admit constituted gross income for 1933, Rogers testified that he did not consider that the credits on the Canning C'o.’s books were profits, and later in his testimony said they represented funds borrowed from his wife.

In Charles E. Mitchell, 32 B. T. A. 1093, 1128, we said:

Under tlie revenue laws every taxpayer is, in tlie first instance, Ms own assessor. He determines tlie amount of tax due. This privilege carries with it a concurrent responsibility to deal frankly and honestly with the Government — -to make a full revelation and fair return of all income received and to claim no deductions not legally due. This responsibility is not properly discharged by resolving all doubts against the Government, or by giving effect to studied efforts to wipe out taxable income by secret and questionable practices. It is a maxim of outlaw that, in dealing with the Government, taxpayers must turn square corners.

In the instant case, we can not conclude tliat petitioners dealt fairly and honestly with the Government. Respondent’s action in assessing the fraud penalties is approved.

One further question remains for consideration. Petitioners contend that they are not jointly and severally liable for the deficiencies and penalties involved; that neither is liable for the taxes or penalties arising out of the income of the other; that the liability finally determined should be apportioned between them in accordance with the income of each. In the circumstances disclosed here, petitioners’ contentions, in our opinion, must be denied.

Petitioners elected to file a joint return for each of the taxable years, and in such returns1 they did not state the items of income and deductions allocable to each, except that in their return for 1934, in a schedule showing computation of the earned income credit, it is stated that the net income of Mrs. Rogers was $3,759.98 (not earned), and that the net income, of C. A. Rogers was $2,446 (earned). Furthermore, at the hearing petitioners offered no evidence to show the amount of the taxable net income belonging to each, other than a revenue agent’s report, to which further reference will be made below; nor is any reasonable basis otherwise shown for allocation of the deficiencies and penalties. Respondent addressed the deficiency letter to petitioners jointly, and thus in effect asserted joint and several liability for the full amount of the taxes and penalties.

In the case of a joint return of husband and wife, it has been held that the wife is not liable for any part of a deficiency, if she had no income. Cole v. Commissioner, 81 Fed. (2d) 485; Frank W. Darling, 34 B. T. A. 1062. However, in the present proceeding it is not shown that the wife had no income; on the contrary, the record indicates that a substantial portion of the unreported income, upon which the deficiencies are predicated, belonged to the wife, but no basis has been shown for making an allocation of the amount of income attributable to her.

Apparently it is the contention of the petitioners that respondent has determined for each of the taxable years the amount of the net income allocable to each of them, and that such determination should be used as the basis for apportionment of the deficiencies and penalties. Certainly respondent did not indicate in the deficiency letter, nor in the statement attached thereto, the amount of the gross income and of the deductions which he attributed to each petitioner. However, petitioners offered in evidence a copy of the revenue agent’s report, in connection with which their counsel stated:

The purposes of offering this exhibit are to show what the respondent has done in order to explain what appears in the notice of deficiency, which is not complete, and also for the further purpose of segregating the income of O. A. Rogers and Louise Rogers.

We have examined this report of the revenue agent, and it is not clear that any effort was made therein to segregate the income and deductions of either petitioner. In connection with explanations of changes made in the reported income, it appears incidentally that certain items either of income or deductions pertained to a particular petitioner, but the tax was computed for each year on the basis of joint net income and not segregated or apportioned income. Furthermore, while the revenue agent’s report discloses unexplained credits to the accounts of each petitioner on the books of the Canning Co., and unexplained bank deposits, it was not determined that such credits and bank deposits belonged to the particular individual to whom credited, but that they constituted joint income of both petitioners. If it were assumed that the credits and bank deposits constituted income of each petitioner in the amounts appearing in their respective accounts, there are other items both of income and deductions reflected in the computations of respondent which are not questioned by petitioners and in respect of some of which at least no basis for apportionment has been shown. Such items for 1932 include dividends understated in the amount of $100; deductions overstated in the amount of $504.94, and a deduction for depletion of $170.44. For 1933 such items consisted of an allowance for depletion of $85.06, depreciation of $188, and other deductions in the total amount of $20,989.19. For 1934, respondent added to the reported joint income of petitioners “Income from business understated $1,929.75”, other income understated $4,084.93, and deductions overstated on bank stock loss in the amount of $758.32.

It may be inferred from explanations contained in the revenue agent’s report that certain of these items pertained to a particular petitioner, but others are wholly unexplained, and in respect of none has respondent made any allocation or segregation. It is the position of the respondent that the unexplained credits and bank deposits taken together constitute joint income; that the total deductions are joint deductions, and that the way in which the items were set up on the books is not conclusive as to how the income was actually received or as to what proportion belonged to each petitioner. We think it is clear that respondent’s determinations afford no basis for apportionment of the deficiencies and penalties.

It appears that the credits to the accounts of petitioners on the books of the Canning Co. were made more or less arbitrarily, and without regard to apportionment. While Mrs. Kogers owned twice as many shares of the Canning Co.’s stock as her husband, yet on the company’s books he was credited with approximately the same amount of income for 1932 as was credited to his wife, and was credited with, an amount greatly in excess of that credited to her for 1933.

It was the duty of petitioners to keep proper records of their business transactions so that the amounts of their individual taxable incomes could bej determined. This they did not do, and Charles A. Rogers testified that he did not know the source or character of the unexplained items of joint income. It is obvious, therefore, that evidence to establish a proper basis for allocation does not exist, and in these circumstances we think petitioners should not be permitted to take advantage of their own wrongdoing and deprive the Government of the taxes and penalties provided by law in such cases.

Petitioners having affirmatively raised (he issue, the burden is upon them to prove a proper basis for allocation, and, in the absence of such proof, we must hold that they are jointly and severally liable. See Anderson v. United States, 48 Fed. (2d) 201; Joseph Buchhalter, 29 B. T. A. 600.

Reviewed by the Board.

Judgment will be entered wider Bule 50.

Murdock concurs only in the result.


author: Smith:

text:
    J. Edward Murray, Petitioner, v. Commissioner of Internal Revenue, Respondent. Frederick C. McCormack, Petitioner, v. Commissioner of Internal Revenue, Respondent. Lizzie May Parker, Executrix of the Estate of William H. Parker, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mercantile Trust Company of Baltimore and J. Stanley Heuisler, Executors of Philip I. Heuisler, Deceased, and Marie Hilda Heuisler, Petitioners, v. Commissioner of Internal Revenue, Respondent. Edna L. Hindes, Executrix of Joseph F. Hindes, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 88629, 88630, 88631, 88632, 88633.
    Promulgated July 12, 1938.

      Vernon Cook, Esq., for the petitioners.

      Timothy G. Histon, Esq., for the respondent.
   OPINION.

Smith:

The respondent’s position in all of these proceedings is that the amounts which the petitioners received from the trust in the taxable year 1934 represented compensation for services performed by the petitioners in their capacity as executors and trustees and that the amounts, upon their payment to the petitioners as compensation, lost their character as dividends, tax exempt interest, etc., and became earned income taxable at both the normal and surtax rates. The petitioners reported the amounts in their income tax returns as taxable at the surtax rates only in so far as they represented dividends from domestic corporations.

Argument is made by the respondent in his brief that the language contained in the first and eighteenth items of the will set out in part above can be construed:

* ⅜ * only as a testamentary fixing by the testator of the compensation to be paid to bis executors and trustees for expected services, conclusive proof of which is found in “Item Four” of the first codicil of the last will and testament of the decedent where it is stated that the distributions such as were received by the petitioners or their decedents herein were intended as compensation for services as trustees and executors.

It is to be observed, that item fourth of the first codicil relates only to the testator’s attorney, Vernon Cook, who is not one of the petitioners in these proceedings. However, it was plainly the testator’s intention that his attorney should occupy the same relationship in respect of the trust as the other executors and trustees. In item first the interest given to the executors and trustees in the trust fund was referred to as “their full compensation in' lieu of all commissions to them either as trustees or executors” and in item eighteenth the provision is that “they shall receive in lieu of the usual commissions the share of income given them out of the trust fund by the first paragraph of this will.”

It is to be observed, too, that the testator’s wife and daughter were given exactly the same status with respect to the trust estate as were the other executors and trustees except that they were each to receive 35⅜ percent of the trust income instead of 1 percent as were all the others. The respondent does not contend that the distributions of income to the widow and daughter were compensation for services performed by them as executors and trustees, hut concedes that they were not. A number of other relatives of the testator who were not named as executors and trustees and who are not before us as petitioners were given 1 and 2 percent each of the trust income — a granddaughter was given 6 percent — in the same provisions of the will (item first) under which the petitioners took. Nowhere in the will is there to be found any manifestation of an intention on the testator’s part that the gifts to the other executors and trustees were of any different character from those to the wife and daughter.

In the construction of wills it is a cardinal rule to carry out the intention of the testator if possible. Hardenbergh v. Ray, 151 U. S. 112; Smith v. Bell, 31 U. S. 68; Newlin v. Mercantile Trust Co. of Baltimore, 161 Md. 622; 158 Atl. 51. And the will must be construed as a whole. Lane v. Vick, 44 U. S. 463; Walker v. First Trust & Savings Bank, 12 Fed. (2d) 896; Gossett v. Swinney, 53 Fed. (2d) 772; Dahlgren v. Pierce, 270 Fed. 507; Safe Deposit & Trust Co. of Baltimore v. Hutton, 159 Md. 50; 149 Atl. 689. “In giving a construction to a will, all the parts of it should be examined and compared; and the intention of the testator must be ascertained, not from a part, but the whole of the instrument.” Lane v. Vick, supra.

A will and its codicils are to be construed together as one instrument and all of the provisions brought into harmony if possible. Daniels & Fisher Realty Co. v. Kenyon, 261 Fed. 407; McClelland v. Rose, 208 Fed. 503.

Where the same or similar words are used in different parts of a will they will be given the same meaning unless it clearly appears that the testator intended otherwise. Grieves v. Grieves, 132 Md. 300; 103 Atl. 572; Martin v. Erdman, 124 Md. 668; 93 Atl. 212.

Considering all of the executors and trustees as occupying the same status with respect to the trust, as clearly we must, it follows that the 71 percent of the trust income which was paid to the widow and daughter was also compensation for services rendered if the 1 percent paid to each of the petitioners is to be so treated. Tills is, of course, an absurdity which as a matter of construction should be avoided if possible.

Further provisions of the will support the view that the trustees were not given their interests in the trust fund as compensation. They were to receive the distributions during the entire life of the trust and upon its dissolution they were to receive the same percentages of the corpus. The share of any deceased trustee was to go to his or her survivors or successors. Thus it appears quite clearly that the amounts to be paid to the trustees were not for the quantum of services rendered by them.

It is also significant that Walter W. White, a stepson-in-law of the testator, who under the original will was to receive 1 percent of the trust income, did not have his share increased by reason of being appointed an executor and trustee under the third codicil of the will.

The respondent attempts to distinguish United States v. Merriam, 263 U. S. 179, upon which the petitioners strongly rely. There, the testator made certain bequests to his executors and trustees, with the provision that:

* * * The bequests herein made to my said executors are in lieu of all compensation or commissions to which they would otherwise be entitled as executors or trustees.

Holding that the bequests were legacies and were not compensation for services rendered as executors and trustees, the Supreme Court said:

* * * A bequest to a person as executor is considered as given upon the implied condition that the person named shall, in good’faith, clothe himself with the character, 2 Williams on Executors (6th Am. Ed.) 1891; Morris v. Kent, 2 Edw. Ch. 175, 179. And this is so whether given to him simply in this capacity or for care and trouble in executing the office. Id. And it is a sufficient performance of the condition if the executor prove the will or unequivocally manifests an intention to act. * * *
*******
* * * distinction to be drawn is between compensation fixed by will for services to be rendered by the executor and a legacy to one upon the implied condition that he shall clothe himself with the character of executor. In the former case he must perform the service to earn the compensation. In the latter case he need do no more than in good faith comply with the condition in order to receive the bequest; and in that view the further provision that the bequest shall be in lieu of commissions is, in effect, nothing more than an expression of the testator’s will that the executor shall not receive statutory allowances for the services he may render.

The facts here are strikingly parallel to those in the Merriam case and we find no support for the distinction urged by the respondent.

The testator’s will as a whole clearly shows, we think, that it was his intention to make bequests of the trust income to all of the named beneficiaries and that by reason of such bequests the executors and trustees were to receive no compensation for their services. The amounts distributed to the petitioners from the trust income during the taxable year were not compensation and to the extent that they represent dividends from domestic corporations they are not taxable at the normal rate.

The respondent points out that in the original estate tax return filed on behalf of the testator there was a claim for the deduction from the gross estate of $250,000 as executors’ fees. Under a compromise agreement $45,534.66 of that amount was finally allowed, which represented $25,534.66 paid to the State of Maryland as a tax on commissions and $20,000 which was an arbitrary amount allowed as executors’ fees. The evidence is to the effect, however, that no executors’ fees were ever paid. These facts, if at all material, do not alter our views that the distributions of trust income to the petitioners were not made as compensation for services.

Judgments will be entered under Bule, 50.


text:
    Moses W. Faitoute, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82387.
    Promulgated July 12, 1938.

      John A. Oonlin, O. P. A., for the petitioner.

      Charles H. Curl, Esg., for the respondent.
   OPINION.

Smith:

This is a proceeding for the redetermination of a deficiency in income tax for 1932 in the amount of $60,083.53. The petition alleges that the respondent erred in the determination of the deficiency (1) in treating as taxable dividends $94,000 which represented money borrowed by the petitioner from the Faitoute Iron & Steel Co., of which the petitioner was the sole stockholder; (2) in disallowing the deduction from gross income of $42,537.50 sustained on the sale of $100,000 par value of City of Asbury Park, New Jersey, bonds; and (3) in disallowing the deduction of a capital net loss of $18,512.50 sustained on the sale of 100 shares of stock of National Newark & Essex Banking Co. The respondent has conceded the third point in issue.

The petitioner is a resident of Short Hills, New Jersey. He filed his income tax return for 1932 with the collector of internal revenue at Newark, New Jersey. The return shows a net income of $40,-637.13. In the determination of the deficiency the respondent added to the net income reported dividends in the amount of $94,000, a loss of $42,537.50 on the sale of $100,000 City of Asbury Park bonds, and a capital net loss of $18,512.50 on the sale of National Newark & Essex Banking Co. stock.

The petitioner owns all of the capital stock of the Faitoute Iron & Steel Co., a New Jersey corporation, which is a distributor of iron and steel products. The number of shares outstanding in 1932 was 301. This corporation was profitable and had accumulated a large surplus prior to 1930. Its undivided profits at the end of 1931 were $974,524.33, and at the end of 1932, $945,895. The earnings and dividends paid upon the stock from 1929 to 1934, inclusive, were as follows:

In 1918 the corporation loaned to the petitioner $95,866.69. This loan was in an open account entitled “Exchange Account.” In this account loans by the corporation to officers and employees were debited when made and credited when paid back. A debit balance in the account has always been carried as accounts receivable on the corporation’s books of account and in its balance sheets. The petitioner never paid any interest upon the money which he borrowed from the corporation in 1918. He paid the money back to the corporation on April 9, 1936.

The corporation also made loans to the petitioner during the year 1932 as follows:

March 29, 1932_$60, 000

April 5, 1932_ 10,000

April 6, 1932_ 29,000

Total_ 99, 000

These loans were charged to the petitioner in the “Exchange Account.” The petitioner paid back $5,000 of the $99,000 on June 13, 1932. The balance of $94,000 was paid back to the corporation as follows:

October 31, 1934_$30, 000

December 5, 1934_ 20,000

12, 1934_ 15, 000

20, 1934_ 20, 000

28, 1934_ 9, 000

Upon the petitioner’s books of account the amounts borrowed from the corporation have always been carried as liabilities.

Inasmuch as the petitioner paid no interest upon his borrowings from the corporation the respondent, in the determination of the deficiency, has treated not the $99,000 but the $94,000, the net amount borrowed in 1932 and not paid back at the close of the year, as a dividend received by the petitioner.

In January 1931 the petitioner purchased $50,000 Asbury Park 5¾ percent bonds due April 1,1934, at a cost of $51,687.50. On June I,1931, he purchased $25,000 par value 6 percent Asbury Park bonds due December 1, 1933, and $25,000 par value 6 percent bonds due December 1, 1934, at a cost of $51,000, a total of $102,687.50. On December 27,1932, he sold these bonds to J. S. Eippel & Co., Newark, New Jersey, at market price, receiving therefor $60,150, plus $936.12 of accrued interest. The memorandum of the purchase received by the petitioner from J. S. Eippel & Co. reads as follows:

J. S. Rrppiix & Oo.
18 Clinton Street
Newark: Market 3-3430
New York: Rector 2-2295
Newabk, N. J.
December ¾75 1082
as of Dec. 29
Bought of Mr. Moses W. Faitoute, 182 Freliugbuysen Avenue, Newark, N. J.
Quantity Security Total
$25,000.00 Asbury Park, N. J. temp, loan 6% December 1, 1983 at 72.90 and interest-$18,225.00
Interest 28 days- 116. 67
- $18,341. 67
$50,000.00 Asbury Park, N. J. temp, loan 5¾⅝
April 1, 1934 at 55.90 and interest-$27,950. 00
Interest 2 months 28 days- 702. 78
-$28, 652. 78
$25, 000. 00 Asbury Park, N. J. temp, loan 6% December 1, 1984 at 55.90 and interest... $13, 975. 00
Interest 28 clays- 116. 67
- 14,091.67
$61,086.12

At or about the same time the same or a like amount of bonds were purchased from J. S. Eippel & Co. by the Faitoute Iron & Steel Co. The amount paid therefor is not shown by the record. The petitioner neither at the time of the sale of the bonds nor later entered into any agreement with the corporation for the repurchase of the bonds and he has never repurchased the bonds from the corporation.

The first question for consideration is whether the petitioner is liable to income tax upon the $94,000 representing his net borrowings from the Faitoute Iron & Steel Co. in 1932. The respondent has not treated the $99,000 borrowed in 1932 as a dividend, but has held that $94,000, which represents the borrowings for the year 1932 not paid back by the end of the year, is taxable to the petitioner as a dividend received from the corporation.

Section 115 (a) of the Revenue Act of 1932 provides that:

* * * £erm “dividend” when used in this title * ⅜ * means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28,1918.

The argument of the respondent appears to be that since the petitioner was the sole stockholder of the corporation it could not make a loan to him. We are of the opinion, however, that this is not so. If the money advanced was in good faith loaned by the corporation to the petitioner then it was not a dividend.

All of the evidence goes to show that the money advanced by the corporation to the petitioner in 1932 was a loan and not a distribution of profits. The petitioner testified that he had agreed in the early part of 1932 to lend to New Jersey mimicipalities large amounts of money. He had expected that certain bonds owned by him which matured in 1932 would be paid off at maturity and that he would have the funds in hand to make the loans which he had agreed to make. The municipalities were not, however, able to collect a sufficient amount of taxes to redeem the bonds which matured in the early part of 1932. The petitioner was, therefore, under the necessity of making his loans to other municipalities by borrowing the money from some source. He could have borrowed the money from a bank, since his credit was good, but the corporation had funds in the bank which were drawing little or no interest, and instead of going to a bank for a loan he went to the corporation. He testified that it was always his intention to repay the loan and his contention is supported by the fact that the corporation treated the advance as a loan, and the petitioner on his books of account treated the amount received from the corporation as an account payable. The corporation’s claim against the petitioner for the amount borrowed was an asset. Unquestionably, in case of bankruptcy of the corporation the petitioner would have been liable for the repayment of the money.

Petitioner further testified that, although the corporation had a large surplus, a large part of it was needed in its business. The corporation was contemplating the erection of a building which would have cost from $300,000 to $400,000 to construct. Additional land had been acquired for the erection of the building and a considerable amount of work has been done upon the construction of the building. Due to the depression, however, the building has not been completed.

It is further to be noted that the corporation paid out $62,608 in dividends in 1932, or at the rate of $208 per share, although its earnings for the year were only $20,944.25.

In Harry E. Wiese, 35 B. T. A. 701, it is stated at page 704:

* * * It is obvious that a withdrawal by a stockholder of funds of a corporation does not necessarily constitute a distribution of profits, even if the corporation has an accumulation of profits in excess of the withdrawal; and such withdrawal may or may not, in the light of that fact alone, be said to be a dividend. A corporation may lend its funds, including earnings, with or without interest, on open account or upon notes, secured or unsecured; and such privilege is not restricted to the lending of its funds to persons other than stockholders. Therefore, whether the withdrawals of corporate funds by petitioner, here in controversy, constituted loans or dividends in the years when withdrawn must be determined from the facts in the record before us; * * *

Cf. Christopher v. Burnet (App. D. C.), 55 Fed. (2d) 527, affirming 13 B. T. A. 729; M. Jackson Crispin, 32 B. T. A. 151.

The respondent appears to place his claim that the loans were not made in good faith largely upon the fact that the corporation received no interest upon them. Further, that it was not until after the respondent audited the petitioner’s tax return for 1932 that he repaid to the corporation the moneys which had been advanced to him in 1932.

We are of the opinion that the fact that the petitioner paid to the corporation no interest upon the advances made to him in 1932 is not determinative of the issue, because if the corporation saw fit to lend money without interest that is a matter with which the Government is not concerned. We are also of the opinion from the evidence of record that it is immaterial that the petitioner did not repay the loans made to him until after the respondent made an audit of his returns for 1932. There can be no question but that it was always the intention of the petitioner to repay the loans made to him. The Board, therefore, is of the opinion that the $94,000 in question constituted a bona fide loan by the corporation to the petitioner and not a distribution of the corporation’s profits taxable to the petitioner as a dividend.

In his income tax return for 1932 the petitioner deducted from gross income a loss of $42,537.50 on the sale of $100,000 Asbury Park bonds. The respondent disallowed the deduction of the claimed loss for the reason, as stated in his deficiency notice, that “these transactions are not of a nature giving rise to losses allowable as deductions for income tax purposes.” At the hearing of this proceeding counsel for the respondent did not state his position with regard to the dis-allowance of the claimed losses other than to say “a man can not deal with himself.” The assumption is that the basis of his claim is that, since the petitioner sold the Asbury Park bonds and Faitoute Iron & Steel Co. at the same time purcliased the same bonds or a like amount of the same issues from J. S. Rippel & Co., the loss sustained is not a deductible loss.

There is no question in this proceeding but that the Asbury Park bonds were sold at their fair market price. Although a sale by a stockholder to a corporation of which he owns all of the stock is subject to close scrutiny, a loss sustained upon a bona fide sale is deductible from gross income. Cf. Commissioner v. Eldridge (C. C. A., 9th Cir.), 79 Fed. (2d) 629, affirming 30 B. T. A. 1322; Commissioner v. McCreery (C. C. A., 9th Cir.), 83 Fed. (2d) 817; Jones v. Helvering (App. D. C.), 71 Fed. (2d) 214; certiorari denied, 293 U. S. 583; David Stewart, 17 B. T. A. 604; William H. Albers, 33 B. T. A. 373; Ralph Hochstetter, 34 B. T. A. 791.

Since all of the evidence shows that the sale of the $100,000 par value of Asbury Park bonds was made at market prices the claimed loss is a legal deduction from gross income.

Judgment will be entered wider Rule 50.


author: Kern :

text:
    Lillian O. Fehrman, Executrix of the Estate of William H. Fehrman, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87783.
    Promulgated July 12, 1938.

      Leo V. Cleary, Esq., and Clarence W. Nutt, Esq., for the petitioner.

      Ralph F. Staubley, Esq., for the respondent.
   OPINION.

Kern :

The sole question in this case is whether the sum of money paid to petitioner, as executrix of the estate of William H. Fehrman, by the F. W. Woolworth Co. in January 1935, representing 15/24 of 10 percent of the net profits of the business of Woolworth Store No. 1, Chicago, Illinois, calculated in that month for the year 1934 pursuant to the terms of the contract set out in our findings and being compensation for the services of petitioner’s decedent during the period from January 1, 1934, to the date of his death, August 14, 1934, should have been included in the gross income of the decedent for that period pursuant to section 42 of the Revenue Act of 1934, set out in the margin. To state the question more succinctly, was this payment an amount accrued up to the date of decedent’s death ?

The last sentence of the quoted section of the act, which is the part pertinent to this case, appears for the first time in the Eevenue Act of 1934. It was written into that act by Congress largely because decisions of this Board had held that, where a decedent was on a cash basis, income which had accrued but had not been actually received by decedent did not constitute income when finally received by his estate, but constituted a part of the corpus of the estate subject to the Federal estate tax. Estate of George Doehne, 6 B. T. A. 1071; Estate of John Francis McCarthy, 9 B. T. A. 525; Estate of William K. Vanderbilt, 11 B. T. A. 291; Estate of Alexander Heyman, 25 B. T. A. 179.

The legislative purpose in including this sentence in the Eevenue Act of 1934 is indicated by the report of the Committee on Ways and Means of the House of Eepresentatives to the Committee of the Whole House and the report of the Committee on Finance of the Senate on the Eevenue Bill of 1934. The pertinent part of the report of the Committee on Ways and Means is as follows:

Sections 42 and 43. Income accrued and accrued deductions of decedents: Tiie courts liave iield that income accrued by a decedent on tlie cash basis prior to his death is not income to the estate, and under the present law, unless such income is taxable to the decedent, it escapes income tax altogether. By the same reasoning, expenses accrued prior to death cannot be deducted by the estate. Section 42 has been drawn to require the inclusion in the income of a decedent of all amounts accrued up to the date of his death regardless of the fact that he may have kept his books on a cash basis. Section 43 has also been changed so that expenses accrued prior to the death of the decedent may be deducted.

The report of the Finance Committee treats the matter as follows:

Sections 42 and 43. Period for which deductions and credits taken.
The courts have held that income accrued prior to the death of a decedent on the cash basis is not income to his estate, and under the present law, unless such income is taxable to the decedent, it escapes income tax altogether. By the same reasoning, expenses accrued prior to death cannot be deducted by the estate. Sections 42 and 43 of the House bill were so drawn as to require the inclusion in the income-tax return for the decedent of all items of income and deductions accrued up to the date of death regardless of the fact that the decedent may have kept his books on a cash basis. The change made in section 43 is necessary to effectuate the policy adopted in the House bill in section 42. By reason of tlie proposed change such items as accrued dividends and interest on partially tax-exempt securities are permitted as a credit in computing the normal tax.

It is obvious from the language of the act and the legislative intent as disclosed by the committee reports quoted above that the purpose of Congress was to treat the income of a decedent as though he were on an accrual basis even though he was actually on a cash basis and kept his books on a cash basis, and that the phrase “amounts accrued up to the date of his death” means those amounts which would be properly included in a decedent’s income if he were on an accrual basis as distinguished from a cash basis.

If petitioner’s decedent had been on an accrual basis rather than a cash basis, would the amount paid to petitioner by the F. W. Woolworth Co. in January 1935 be properly considered as income accrued to the decedent at the date of his death? It is our opinion that it would not. Where a bonus or commission is earned by a taxpayer who is on an accrual basis, the amount of which is to be calculated by applying a percentage figure to net profits of a business as of the end of a year, the cases which hold that such bonuses or commissions constitute accrued income to the taxpayer for that year indicate that a condition precedent to such a holding is that the amounts be definitely ascertainable on the basis of facts ascertainable at that time and that the exact amount of the compensation be a mere matter of computation. Theodore Stanfield, 8 B. T. A. 787; Max Schott, 5 B. T. A. 79; cf. Jerome R. George, 27 B. T. A. 765. In the instant case the amount of the decedent’s compensation for the period from January 1 to August 14, 1934, as paid by the F. W. Woolworth Co. (in an amount, time, and manner as provided for in its contract with decedent at its option) would not be ascertained at any time prior to the close of business December 31,1934, nor were facts ascertainable prior to that date by which the amount of decedent’s compensation for that period could have been computed. Therefore the amount of compensation for decedent’s services from January 1 to August 14, 1934, paid by the F. W. Woolworth Co. to petitioner in 1935 was not an amount accrued up to the date of the death of petitioner’s decedent.

Respondent has relied largely upon the cases of Estate of Archibald H. Bull, 7 B. T. A. 993, and American National Co. v. United States, 274 U. S. 99, for the proposition that the word “accrued” when used in the taxing statutes may have several meanings and should be construed in such a way as to make effective a clear legislative intent and to fairly reflect net income. We do not question the language or result in either case. They do not however impel us to reach a conclusion other than that which we have expressed.

Decision will be entered for petitioner.

      SEC. 42. PERIOD IN WHICH ITEMS OP GROSS INCOME INCLUDED.
      The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless under methods of accounting permitted under section 41, any such amounts are to be properly accounted l'or as of a different period. In the case of the death of a taxpayer there shall be included in computing net income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period.