author: Lansdon:

text:
    Louisa County National Bank, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 47273.
    Promulgated January 31, 1933.

      M. J. Holland, Esq., for the petitioner.

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

Lansdon:

The respondent has asserted a deficiency of $921.91 in income tax against the petitioner for the year 1927. The only issue involved in this appeal from that determination is whether or not the petitioner sustained a deductible loss through an enforced liquidation of its assets and capital stock in that year.

The petitioner is a national banking corporation located at Columbus Junction, Iowa. The par value of its capital stock is $50,000, divided into 500 shares. On June 9, 1927, petitioner’s board of directors, through proper corporate action, suspended its business and turned all of its assets over to a national bank examiner for liquidation. At the time of the taking over by the examiner the book value of petitioner’s assets was $88,569.68, but only the cash included therein, amounting to $10,800, was considered by the examiner to be bankable assets. After a thorough examination the examiner determined that petitioner’s bank might be reopened under certain conditions. These conditions required the stockholders to surrender for cancellation all of their stock certificates, in consideration of the distribution to them of the assets of the bank, and the reissuance and sale of said stock for $125 per share, payable in cash.

Surrender, reissue and sale of the 500 shares of the bank stock were accomplished in accordance with the receiver’s plan, and on July 7, 1927, a meeting was held by the new stockholders, at which they elected a new board of directors for the corporation. On July 8, following their election, petitioner’s new board of directors held a special meeting and took action to reopen the bank. Among other things the board adopted a resolution which provided for the elimination of all of the petitioner’s nonbankable assets and their liquidation and distribution among the old stockholders. For this purpose the assets were transferred to three of their number under a trust agreement executed by them as parties of the first part, representing the so-called “new bank,” certain of the members of the former board representing interests referred to as the “ old bank,” as parties of the second part, and the trustees, parties of the third part. This instrument recited by way of inducement that the shareholders had voluntarily surrendered their stock in the “ old bank ” for resale in lieu of paying an assessment of 100 per cent on the same, and that in consideration of such surrender it was desired to convey to said shareholders certain assets formerly a part of the total assets of the “ old bank ” as at the close of business June 9, 1927. It then recited that the first party had assigned, etc., to the parties of the third part, certain assets of the “ old bank ” (as per list attached); but, under conditions which gave to the “ new bank ” the right, at its election, for a period of two years, to withdraw any assets it might select and substitute in their stead an “ equal amount ” of assets of the “ old bank,” that it had theretofore withheld and taken into its capital at the time of its recapitalization. The assets were to be so held for a two-year period, at the end of which the trustees were to liquidate the trust assets; and, after first paying all costs, including the taxes, current expenses, salaries and examiner’s fees of the “ old bank,” distribute the net proceeds ratably among the old stockholders. The trust estate was still in administration at the date of the trial of this cause, but cash dividends representing 30 per cent of the par value of their stock had been paid to the old stockholders by the trustees from receipts of assets collected or sold thus by them.

The petitioner contends that the process followed was in effect a sale of its assets to its old stockholders in consideration for their surrender of their stock for cancellation and reissue. There is nothing in the record here to support this theory, or to show that it sustained a loss through the process followed in the taxable year. In the situation which prevailed in petitioner’s affairs, after the bank examiner took charge on June 9, 1927, there was no opportunity of election left either to it or its stockholders to barter or sell its stock or assets. The examiner was in full charge and complete control of its affairs. Neither the conditions he imposed for reopening the bank nor the methods adopted by the board contemplated an immediate passing either of title to or beneficial interest in the assets to the old stockholders. Although the declaration of trust stated, by way of inducement, that it was “ desired ” to convey to the old shareholders the “ old bank ” assets, the condition which provided that the trust to be established “ shall be in the nature of a revolving fund ” over which, for a period of two years, the “ new bank ” should have the unrestricted right to take out and put back any assets that it desired in working out its recapitalization needs, prevented any present transfer other than to the trust, with contingent remainder to the stockholders.

The old stockholders, so far as the record shows, were not consulted in the arrangement made to liquidate their stock and reorganize their corporation. That was all done by the board of directors, acting under the mandates of the bank examiner. The trust scheme as devised was accepted by them to serve the single purpose of reorganization. It provided a vehicle through which the nonbankable assets could be eliminated from the bank’s capital and held in suspense for a period of two years, during which time any part or parcel of it could be returned through substitution. The trust was primarily intended to serve the interests of the bank and not the stockholders. In no event could the stockholders receive any benefits from the trust before two years after the execution of the trust instrument.

The petitioner argues that the bank “ disposed of property that cost it $98,569.68, receiving therefor $62,500 ” through which it sustained a loss of $36,069.60 in 1927. Whatever else may be said of the transaction we have discussed, it is clear, as pointed out, that the power of control over the assets which the petitioner reserved to itself through the “ revolving fund ” clause in the trust agreement, and the withholding of any benefits from the stockholders for a period of two years, are inconsistent with any theory of a sale of them to the stockholders. It is therefore erroneous to say that the petitioner disposed of its interests in such property at the instant the trust was created.

The trust agreement also provided that the taxes, current expenses, salaries and examiner’s fees of the “ old bank ” should be a first charge against the assets of the trust and that their prior payment was a condition to any distribution of the assets to the stockholders. There is no evidence as to the amount of these charges, but whatever they were they constituted debts of the petitioner which, when paid, pro tanto increased the sum realized by it in the liquidation of its assets. We therefore are unable to say, even should we hold the transaction to be a sale, that the petitioner sustained a loss as alleged.

The petitioner has wholly failed to prove that it sustained the loss contended for in the taxable year and the determinations of the respondent are therefore approved.

Decision will be entered for the respondent.


source: Caselaw Access Project

author: Seawell :

license: Public Domain

text:
    Shelby Wiggins, Petitioner, v. Commissioner of Internal Revenue, Respondent
    Docket No. 50753.
    Promulgated January 31, 1933.

      Shelby Wiggins, Esg., pro se.

      Owen W. SweeJcer, Esq., for the respondent.
   OPINION.

Seawell :

The petitioner, as director of the port of the city of Beaumont, Texas, received in 1928 a salary of $7,600, which the respondent included when computing petitioner’s taxable net income. The petitioner insists the salary is exempt from Federal income tax by reason of the fact that it was paid him as an employee of the Board of Dock and Wharf Commissioners of the city of Beaumont, which he asserts was a political subdivision of the State of Texas, and that the work in which he was employed, the conduct and management of the port, was a governmental function of the Board of Dock and Wharf Commissioners.

There is no provision in the 1928 Revenue Act expressly exempting from taxation under that act compensation received as an employee of a state or political subdivision thereof. The basis of any exemption of compensation from such sources for the year 1928, therefore, must be found in the implied immunity, if any, contained in the Federal Constitution.

In South Carolina v. United States, 199 U. S. 437, is enunciated a principle, expressed in the syllabus, as follows:

The exemption of state agencies and instrumentalities from national taxation is limited to those which are of a strictly governmental character, and does not extend to those which are used by the state in carrying on an ordinary private business.

The principle so stated is recognized and followed in article 643 of Regulations 74, interpreting the 1928 Revenue Act.

In Flint v. Stone Tracy Co., 220 U. S. 107, the court stated:

It is no part of the essential governmental functions of a state to provide means of transportation, supply artificial light, water, and the like. These objects are often accomplished through the medium of private corporations, and though the public may derive a benefit from such operations, the companies carrying on such enterprises are nevertheless private companies, whose business is prosecuted for private emolument and advantage. For the purpose of taxation they stand upon the same footing as other private corporations upon which special franchises have been conferred.
The true distinction is between the attempted taxation of those operations of the states essential to the execution of its governmental functions, and which the state can only do itself, and those activities which are of a private character. The former, the United States may not interfere with by taxing-the agencies of the state in carrying out its purposes; the latter, although regulated by the state, and exercising delegated authority, such as the right of eminent domain, are not removed from the field of legitimate Federal taxation.

How the Board of Dock and Wharf Commissioners was created and its duties were stated by the petitioner as follows, when testifying on cross-examination:

Q. Who appointed the Commissioners?
A. The Mayor, like he does in Portland.
Q. The Mayor of the City?
A. Tes, sir.
Q. What did they do? What were their duties?
A. It was to generally carry on that department of the city and district that had to do with the river and port and the wharves and the facilities and the physical properties of the port.
Q. Now why was your position created then?
A. For the reason I believe that these gentlemen were business men and they were not versed in port operation, river development, waterway development; they were not acquainted with the shipping world. It was difficult for them to take time from their duties to go down five or six times a day, or more or less, to handle various questions which are continuously coming up at ports, and if they had had time at least they stated that they did not have the training to equip them to handle it, and it was expedient that they have someone in charge of that who could handle it, or who was presumed to be able to handle it * * *.

In the light of the record in the instant case and of the law as decided in numerous cases, only a few of which are hereinafter cited, we are of the opinion and hold that the petitioner herein, while holding the position of director of the port of the city of Beaumont, was not, in the sense of the law, an officer or employee of a political subdivision of the State of Texas, nor was he, while so employed, engaged in governmental functions. The work or duties which the petitioner performed and for which he received a salary of $7,600 in 1928, and now claims exemption from income tax, were such as the Board of Dock and Wharf Commissioners aforesaid contracted with him to perform, the board itself being created or appointed by the mayor of the city of Beaumont. Neither the position held by the petitioner, the duties discharged by him, nor the salary received by him, are shown to have been prescribed by law, all being a matter of oral contract between the aforesaid board and himself, and none of his activities under his employment are shown to be the discharge of essential governmental functions of the State of Texas or any of its political subdivisions.

In Green v. Gity of Amarillo, 244 S. W. 241 (Court of Civil Appeals of Texas), the court said; “The city, in the operation of a street railway system, was unquestionably acting in its private and corporate capacity, as distinguished from its acts of governmental character * * The foregoing quotation is repeated and approved and the decision therein affirmed in City of Amarillo v. Green, 267 S. W. 702.

In Green v. City of Amarillo, supra, the court, referring to the article set out in our findings of fact which empowers cities incorporated under the “ home rule amendment ” (as was Beaumont) to buy, own, operate, etc., municipal railway terminals, docks, wharves, ferries, etc., stated: “ It is obvious that many of the activities of a municipality, engaged in operating the public utilities mentioned in this article of the statute, do not pertain to the governmental functions of the City, and necessarily many of these activities may become a matter of general public concern.”

In City of Wichita Falls v. Lipscomb, 50 S. W. (2d) 867; 872 (Court of Civil Appeals of Texas), the court said:

We have reached the conclusion that the construction and maintenance of the waterworks system in the city of Wichita Palls was not the exercise of a governmental function, but was in pursuance of a corporate enterprise, and that the alleged negligence of the city urged by the plaintiff, and the injury to her as the proximate result thereof, showed a common-law right of action for the damages she sought. * * *

We have decided a number of cases in which we have applied the same principles, which are controlling and determinative of the issue in the instant case in favor of the respondent. In view of such, there is no necessity for their further discussion. See T. P. Wittschen, 25 B. T. A. 46; Lelamd Powers, Executor, 26 B. T. A. 1381; O. S. Denman, 27 B. T. A. 256; Walter G. Winne, 27 B. T. A. 369.

Judgment will be entered for the respondent.


author: Van Fossan:

text:
    C. B. Wilcox, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46371.
    Promulgated January 31, 1933.

      Sigmond Sanger, Esq., for the petitioner.

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

Van Fossan:

The respondent proposed for assessment a deficiency in the petitioner’s income tax for the year 1924 amounting to $8,032.78, together with a penalty of 5 per cent thereof for negligence in understating the tax. The deficiency and penalty are in controversy in this proceeding.

The issue is whether or not the sum of $50,000 delivered to the petitioner during the taxable year was a gift and, therefore, not taxable income.

In the year 1924 the petitioner was, and for many years previous thereto had been, vice president and in charge of operations of The Sandusky Gas & Electric Company. He had been employed originally by the company at a salary of $25 a month, which amount was gradually increased until at the beginning of 1924 his salary amounted to $6,600 per year. Early in 1924 it was increased to $7,200 per year.

The Sandusky Gas & Electric Company was an Ohio corporation with its principal place of business in the City of Sandusky. The petitioner owned one qualifying share of the company’s stock, but otherwise was not a stockholder. All of the common stock of The Sandusky Gas & Electric Company was owned by The General Gas & Electric Company, a holding company, with headquarters in New York City. W. S. Barstow was the president of The General Gas & Electric Company and his office was in the City of New York. The General Gas & Electric Company, the holding company, also owned the capital stock of The Port Clinton Light & Power Company and of The Northwestern Ohio Railway & Power Company.

Barstow, the president of The General Gas & Electric Company, and his wife were intimate friends of the petitioner and his wife.

R. Y. Mitchell & Company were dealersi in investment securities. Some years prior to 1924 the petitioner advised Barstow that, if The General Gas & Electric Company desired to sell its stockholdings in The Sandusky Gas & Electric Company, he, the petitioner, would like to give R. Y. Mitchell & Company an opportunity to purchase them. Barstow replied to the effect that The General Gas & Electric Company had no intention of selling its holdings in The Sandusky Gas & Electric Company, but that if The General Gas & Electric Company should ever have such an intention he would give the petitioner a chance to negotiate. Nothing was done pursuant to this conversation by the petitioner or by Barstow or by The General Gas & Electric Company.

In the year 1924 The General Gas & Electric Company sold to the Cities Service Company its entire holdings of stock of The Sandusky Gas & Electric Company, The Port Clinton Light & Power Company and The Northwestern Ohio Railway & Power Company. The Cities Service Company subsequently caused The Sandusky Gas & Electric Company to transfer its properties to The Ohio Public Service Company, an Ohio corporation, which is the present operating company. A substantial part of The Sandusky Gas & Electric Company’s organization, including the petitioner, was retained by The Ohio Public Service Company, and the petitioner became one of the last named company’s vice presidents and in charge of the Sandusky properties.

The petitioner had no part in the negotiations resulting in the sale of the stock of The Sandusky Gas & Electric Company and of the other two corporations to The Cities Service Company. He owned none of the stock of The Port Clinton Light & Power Company or of The Northwestern Ohio Railway & Power Company, nor was he an officer of or employed by either of them.

At or about the date of the consummation of the transaction between The General Gas & Electric Company and The Cities Service Company, hereinbefore set forth, Barstow informed the petitioner that The General Gas & Electric Company had an opportunity to sell its holdings in The Sandusky Gas & Electric Company and that the sale, if made, would include The General Gas & Electric Company’s holdings in The Northwestern Ohio Railway & Power Company and in The Port Clinton Light & Power Company.- The stock of The Northwestern Ohio Railway & Power Company had not been a profitable investment and Barstow advised the petitioner that The General Gas & Electric Company desired to sell the stock of The Northwestern Ohio Railway & Power Company and of The Port Clinton Light & Power Company, but that this was impossible of accomplishment unless its stockholdings in The Sandusky Gas & Electric Company were at the same time sold by The General Gas & Electric Company to the proposed purchaser. Barstow thereupon requested the petitioner to release him, Barstow, from his promise made some years before during their conversation relating to the possibility of a sale of that stock to R. Y. Mitchell & Company. The petitioner, therefore, released Barstow from the promise.

After the consummation of the sale by The General Gas & Electric Company to The Cities Service Company, Barstow handed petitioner The General Gas & Electric Company’s check for $50,000, stating that it was a gift for friendship’s sake and that the amount of the check had been added to the price paid by the purchaser of the stock. The payment of this $50,000 was authorized by the directors of The General Gas & Electric Company by the following resolution:

The President also reported to the Board that some years ago Major O. B. Wilcox had discussed with him the matter of the sale of the stocks and bonds of The Northwestern Ohio Railway & Power Company and the stock of The Sandusky Gas & Electric Company and of The Port Clinton Electric Bight & Power Company and had asked permission to negotiate with that end in view; that Major Wilcox had been informed that no sale was at that time contemplated but that if it were subsequently decided to sell the property he would be given prior consideration in the matter. The President further stated that under existing circumstances it had been impossible to have the negotiations by Major Wilcox but that, in his opinion, Major Wilcox was entitled to compensation as if he had been instrumental in making the sale and recommended that the sum of Fifty Thousand Dollars ($50,000.00) be paid to him out of the proceeds of sale.
* * * * * * *
Now, Therefore, Be It Resolved, that as compensation to Major Wilcox under the arrangement above referred to there be paid to him the sum of Fifty Thousand Dollars ($50,000.00), and the Treasurer is hereby authorized and directed to make payment thereof.

The petitioner had noi knowledge of the foregoing resolution until some time in the year 1928, when he was informed of it in response to a letter written by him to Barstow.

The petitioner did not report the sum of $50,000, herein referred to, as a part of his income for the year 1924 and the sum was added to such income by the respondent.

The petitioner contends that the $50,000 in question was a gift and therefore not taxable income as determined by the respondent.

A gift is a valid transfer of property from one to another without consideration or compensation therefor. Noel v. Parrott, 15 Fed. (2d) 669; Cora B. Beatty, Executrix, 7 B. T. A. Y26; Willis L. Garey, 16 B. T. A. 274. To constitute a gift there must be an intention on the part of the donor to make a gift, as well as the transfer of possession and acceptance by the donee of the thing given. See Chawncey L. Landon, 16 B. T. A. 907, and cases cited therein.

The alleged donor is The General Gas & Electric Company, not the individual, Barstow, its president. The only direct evidence in this proceeding having any relation to the intention of The General Gas & Electric Company to make a gift to the petitioner of the amount in controversy is the testimony of the petitioner himself, and his testimony is merely to the effect that the president of that corporation and the petitioner were intimate friends and that the gift was made because of such friendship. It is difficult to conceive that a corporation would pay $50,000 of its funds to anyone under the relations here present, except in return for a valuable consideration passing to it. Moreover, it does not appear that Barstow, its president, had such a stockholding control of The General Gas & Electric Company as to be able to induce or compel its board of directors to make gifts to his personal friends. In Noel v. Parrott, supra, the court said:

It needs neither argument nor citation of authority to establish the proposition that the directors were without authority to give away the corporate assets, and that for them to make to several of their members and other persons a gift of a large sum of money from the corporate assets would be neither “wise” nor “proper,” and would amount to an illegal misapplication of corporate funds. We must assume that the directors did not intend such a flagrant violation of their trust.

The petitioner contends, however, that the evidence proves that the $50,000 in question was added to the purchase price paid to The General Gas & Electric Company by The Cities Service Company for the stock sold to the latter corporation by the former. Even were this a fact, and it is not adequately established, it is our opinion that the sum was a part of the assets of The General Gas & Electric Company, since, according to the testimony, it was to be paid to that company as a part of the purchase price of the stock sold.

The court also said in Noel v. Parrott, supra:

Although it is held that the motive accompanying a gift is not material, gifts usually proceed from the generosity of the giver; and, when there is any doubt as to the nature of the transaction, the absence of such motive is a pertinent circumstance for consideration. It is an essential characteristic of a gift, however, that it be a transfer without consideration.

The resolution of the board of directors of The General Gas & Electric Company, hereinbefore quoted, casts further doubt on the nature of the transaction in question. The petitioner testified that the statement contained in the preamble of the resolution, to the effect that some years before the sale he had discussed with Barstow the sale of The Northwestern Ohio Railway & Power Company and of The Port Clinton Light & Power Company, was incorrect and that as a matter of fact at the time referred to he had discussed with Barstow only the sale of The Sandusky Gas & Electric Company. Nevertheless, the preamble to the resolution quotes Barstow as stating- that, in his opinion, the petitioner “ was entitled to compensation” and the resolution itself authorizes payment of $50,000 to the petitioner “ as compensation.” It is apparent also from the allegations of the petition and from statements contained in a protest filed with the respondent by the petitioner and offered in evidence at the hearing, that both Barstow and the petitioner considered that the former had made a valid promise to the petitioner with respect to the negotiations of a sale of the stock of The Sandusky Gas & Electric Company. It is apparent also that Barstow conceived that petitioner possibly possessed some right of action, the existence of which might obstruct a consummation of a profitable sale of such stock and of the stock of the other two companies mentioned in the quoted resolution. The petitioner released Barstow from this promise and it is conceivable, therefore, that The General Gas & Electric Company regarded the release from the promise as of so great value that it paid the $50,000 as consideration for such release. In any event, the evidence is of such a character that it does not prove to our satisfaction that the $50,000 was a gift made to the petitioner by The General Gas & Electric Company. The petitioner has, therefore, failed to prove that the respondent erred in determining that the sum in question was taxable income for the year 1924.

The penalty of 5 per cent of the amount of the deficiency was proposed for assessment by the respondent on the ground that the petitioner was negligent in understating the amount of his income. Section 275 (a) of the Revenue Act of 1924 provides, in effect, among other things, for the assessment of such a penalty if any part of a deficiency in tax is due to negligence. In our opinion the evidence shows that the petitioner’s failure to report the $50,000 in question as a part of his income for the year 1924 was due to an honest mistake of opinion as to its character. Therefore, there was no negligence on his part and the penalty in question should not be assessed.

Decision will be entered und&r Bule 50.


text:
    Johnson, Drake & Piper, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent. Federal Building Realty Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 41434, 41435, and 44098.
    Promulgated January 31, 1933.

      Lelcmd W. Scott, Esq., for the petitioners.

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

Lansdon:

The respondent has determined deficiencies in income taxes against Johnson, Drake & Piper, Inc., for 1926 and 1927, in the respective amounts of $7,517.69 and $705.89. He has also determined a deficiency against the Federal Building Realty Corporation for 1926 in the amount of $17,906.75. The proceedings have been previously consolidated.

On their income tax returns for 1926 each of the petitioners deducted as a loss the amount of certain promissory notes surrendered by them to the maker and canceled during that year. On its income tax return for 1927 Johnson, Drake & Piper, Inc., carried forward an alleged net loss as a deduction from income. Upon audit of the returns the respondent disallowed the deductions claimed for 1926 and the alleged net loss for 1927, holding that cancellation of the notes resulted in no loss to the petitioners, but was an additional capital contribution to the maker corporation, the petitioners being stockholders of such corporation.

The petitioners are corporations with their principal offices in Minneapolis, Minnesota. During the taxable years each was a stockholder of the Drake Company, a Minnesota corporation organized in 1925 for the purpose of acquiring properties in Florida, the stock of which was held as follows:

Advances were made to the Drake Company on June 19,1925, and December 11, 1925, in the total amount of $392,000 and it issued its 6 per cent promissory notes payable on or before three years after date in equal amounts as follows:

On December 20,1926, at a special meeting of the board of directors of the Drake Company, the following resolution was adopted:

Whereas it appears from reliable appraisals by disinterested parties, that the assets of the Company have shrunk during the year 1926, to the extent of $319,000.00, and that the true value of the assets is $319,000.00 less than the figures shown on the books of the Company, and
Whereas it is desirable to reduce the liabilities of the Company to a figure not exceeding the assets thereof, and
Whereas various stockholders of the Company hold notes of the Company to the amount of $392,000.00,
Now, Therefore, Be It Resolved, That the Company, by and through its President or one of its Vice-Presidents, request the stockholders owning and holding said notes of the Company to the amount of $392,000.00, to surrender such notes and accept in lieu thereof notes of the Company which shall in each instance amount to 18.622 per cent of the present outstanding notes, such new notes to amount in the aggregate to $73,000.00, said sum of $73,000.00 being the difference between the aggregate amount of the notes now outstanding, to-wit, $392,000 and the depreciation, to-wit, $319,000 in the assets of the company;
And Be It Further Resolved that if and when the stockholders of the Company holding the present outstanding notes of the Company, shall agree to accept such reduced notes, that the President or Vice-President, and the Secretary or Assistant Secretary of this Company do, and they are hereby authorized to accept and cancel any of the present outstanding notes of the Company, and to issue for and on behalf of the Company new notes in accordance with the terms of this Resolution.

The following stockholders of the company accepted the terms of the foregoing resolution, and new notes were issued to them as follows:

As of December 31,1926, the Drake Company wrote down its assets in the total amount of $319,000, charging such amount against donated surplus created by cancellation of notes payable in a like amount as stated in the above minutes of December 20,1926. Thereafter its balance sheet as of December 31,1926, was as follows:

The petitioners’ evidence as to the fair market value of the Drake Company’s assets on December 31, 1926, which consists of the testimony of numerous real estate experts and of the Drake Company’s officers, convinces us that the Drake Company’s assets had shrunk greatly at December 31, 1926, and that the appraised value thereof, upon which it based the write-down on its books, represented the fair market value of its assets at that date. In our opinion the values shown on the books thereafter were conservative, considering the real estate situation in Florida. At the end of 1926 it was evident to those familiar with Florida values that the market had collapsed and that real values of Florida property were only a fraction of the prices at which such property had sold during the speculative era.

The petitioners ask us to conclude that the value of the assets on December 31, 1926, was much less even than the Drake Company determined and that the Drake Company’s liabilities greatly exceeded its assets even after the assets were written down and the notes canceled. The facts do. not support such a conclusion. As of December 31, 1926, the Drake Company was not commercially insolvent and the note holders had not suffered a complete loss of the face amounts surrendered and canceled.

We have consistently held that the voluntary cancellation or forgiveness of indebtedness does not give rise to a deductible loss and in the case of a stockholder who forgives debts due from a corporation, the amount is to be regarded as additional capital contributions and added to the basis for computing gain or loss upon subsequent disposition of his stock. T. B. Floyd, 11 B. T. A. 903; Antoinette P. Altmayer, 10 B. T. A. 1091; Franklin Q. Brown, 9 B. T. A. 965; Cf. United States v. White Dental Co., 274 U. S. 398; New York Life Ins. Co. v. Edwards, 271 U. S. 109.

The facts of this case are distinguished from those in Deeds & Kettering v. Commissioner, 47 Fed. (2d) 695. The court there found that the Smith Gas Engineering Company was insolvent and that the taxpayers had sustained a real loss. In the instant case the petitioners surrendered notes which were not due for almost two years and which represented a prior claim to the Drake Company’s assets. At least the petitioners would have been entitled to share with other creditors and could have realized a large part of the face of the notes. We think the respondent’s determination must be approved.

Decision will be entered‘ for the respondent.


author: Smith:

text:
    Bula E. Croker, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 41121.
    Promulgated January 31, 1933.

      Richard D. Mackey, Esq., and Francis R. Driscoll, Esq., for the petitioner.

      O. W. Swecker, Esq., for the respondent.
   OPINION.

Smith:

The first question raised by the petitioner is with respect to the addition to gross income of $7,200 claimed to represent interest on a mortgage note owned by the petitioner. At the hearing of this case the respondent admitted that only $3,600 should have been added to the gross income reported by the petitioner. The petitioner contends, on the other hand, that no part of such amount constituted taxable income to her because not received by her within the year. Petitioner further contends that if the amount of $3,600 is included in gross income it should be allowed as a deduction from gross income, upon the ground that it was embezzled by her agent in 1923.

It is a well established principle of law that receipt by an agent constitutes receipt by the principal. Maryland Casualty Co. v. United States, 251 U. S. 342; Julia A. Strauss, 2 B. T. A. 598; F. H. Wilson, 12 B. T. A. 403. With respect to the claim that the amount is deductible from gross income as a loss sustained through embezzlement in 1923, the record shows no proof of embezzlement, The petitioner brought suit against McDonald late in 1923, or in the early part of 1924, for the recovery of the amount, together with other moneys claimed to belong to her, but it appeared that the agent had a valid claim for offsets to the amounts claimed to be due. Intent is an essential element of the crime of embezzlement, and the cases hold that the crime is not committed where the agent retains money without concealment and under a claim of right, and that it is immaterial whether or not the claim was well founded. See Staples v. Johnson, 25 App. D. C. 155; State v. Collins, 14 Atl. 144; Ridge v. State, 131 N. E. 758. In any event, there is no proof of an embezzlement of the money by McDonald. Furthermore, there is no proof that the amount was a debt ascertained to be worthless and charged off in 1923, for the reason that, in so far as the petitioner knew in 1923, McDonald was financially responsible.

The second allegation of error is that the respondent has erroneously disallowed the deduction from gross income of $36,282.12 representing attorneys’ fees and disbursements of 1923. On brief the petitioner waives the right to deduct any amount except the fees for services paid to E. J. L’Engle and to Winters and Foskett. The fees paid to L’Engle were in connection with litigation brought by the petitioner’s stepson against her for the rescission of certain transfers of property made by Eichard Croker to the petitioner prior to 1920. We held in Bula E. Croker, 21 B. T. A. 240, affd., 62 Fed. (2d) 991, that the attorneys’ fees paid in connection with this suit in 1922 were not legal deductions from the petitioner’s gross income of that year. In accordance with that decision, it is held that the amounts paid in 1923 are not legal deductions from the gross income of 1923. The petitioner contends that a part of the fees paid to E. J. L’Engle in 1923 were in connection with legal proceedings taken on her behalf against her agent, McDonald. An examination of “ Exhibit 6 ” shows, however, that $1,371.20 of the amount in question was paid by the petitioner on May 19, 1923, and was in connection with the case of Croker v. Croker, in the Supreme Court of Florida. The balance of the amount, namely, $1,102.61, is made up of numerous expense items beginning June 3, 1922, and ending August 12, 1923. Some of these items clearly have reference to the ancillary probate of the will of Eichard Croker in Florida. Upon the evidence of record, the action of the respondent in disallowing the deduction of the entire amount ($2,473.81) paid to L’Engle is sustained.

The petitioner also, in 1923, paid to Winters and Foskett $900. This was for fees paid to this firm of attorneys for advice and for the purpose of employing them to prosecute legal proceedings against J. B. McDonald, the petitioner’s agent in Florida. The petitioner had, together with her husband, appointed McDonald to act as her agent in the sale of valuable real estate in Florida and for the purpose of collecting interest upon bonds and notes. The sale and care of this property and of her investments in Florida constituted her business. The fact that she employed an agent to act for her in these matters does not change the status of her business. The taxing statute permits as individual to deduct from gross income all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Section 214 (a) (1), Revenue Act of 1921. Looking after her business interests required the time and attention of the petitioner in 1923. In Kornhauser v. United States, 276 TJ. S. 145, it was held that where a suit or action against a taxpayer is directly connected with, or “ proximately resulted from, his business, the expense incurred is a business expense within the meaning of section 214 (a), subd. 1, of the act.” It is held that the petitioner is entitled to deduct from gross income the attorneys’ fee of $900 paid Winters and Foskett. Cf. Richard Croker, Jr., 12 B. T. A. 408.

The claim of the petitioner for the deduction of $24,838.25 representing the difference between the net proceeds of a mortgage sold and the amount remitted to her by her agent is claimed as a deduction from gross income as a bad debt or as a loss sustained through embezzlement. This claim stands upon the same plane as the claim with respect to the interest upon the mortgage, and for reasons above stated it is not sustained.

Petitioner, through her agent, paid in 1923 $2,957.22 real estate taxes assessed upon her property in Florida. The Commissioner has allowed the deduction of only $2,565.58 of this amount. The petitioner is entitled to the deduction of $2,957.22 for taxes paid. The petitioner further claims the right to deduct from gross income $3,355.38 paid by her agent, McDonald, in connection with real estate assessed to Palm Beach Estates, a corporation. The evidence indicates that these lands belonged to Palm Beach Estates and not to the petitioner. The taxes assessed upon those lands are taxes of the corporation and not of the petitioner. The disallowance by the respondent of the deduction for such taxes is sustained.

Judgment will he entered under Rule 50.


text:
    William R. Stewart, Mary S. Witherbee and Spotswood D. Bowers, Executors and Trustees under the Will of Lispenard Stewart, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 45282.
    Promulgated January 31, 1933.

      Spotswood D. Bowers, Esq., for the petitioners.

      Frank T. Horner, Esq., for the respondent.
   OPINION.

Van Fossan:

Section 302 of the Revenue Act of 1926 provides:

Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
*******
(c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. * * *
(d) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in ease of a bona fide sale for an adequate and full consideration in money or money’s worth. * * *

The respondent contends that the value of the property constituting the corpus of the trusts involved in this proceeding should be included in the gross estate of the trustor for Federal estate tax purposes, pursuant to the above provisions. None of the trusts was created in contemplation of death.

The tax imposed by section 302 (c) above is an excise tax on the transfer of an estate by death. Nichols v. Goolidge, 274 U. S. 531; May v. Heiner, 281 U. S. 238; Lillian M. Wheeler, Executrix, 20 B. T. A. 695; Lucy Belle Dumham et al., Executors, 26 B. T. A. 286. Consequently, when a trustor divests himself fully, completely and irrevocably of all interest in the trust which might inure to his benefit, at his death he is possessed of no interest therein which is subject to taxation under the above statute. In Reineche v. Northern Trust Co., 278 U. S. 339, the Supreme Court of The United States said:

* * * In the light of the general purpose of the statute and the language of section 401 explicitly imposing the tax on net estates of decedents, we think it at least doubtful whether the trusts or interests in a trust intended to be reached by the phrase in section 402 (c) “ to take effect in possession or enjoyment at or after his death,” include any others than those passing from the possession, enjoyment, or control of the donor at his death and so taxable as transfers at death under section 401. That doubt must be resolved in favor of the taxpayer. * * *

In the Braganca, Miller and Stewart trusts Lispenard Stewart transferred to the trustees certain shares of stock of the Khinelander Real Estate Company. Such transfers were made for and during the natural life of each beneficiary and after her or his death the trustees were directed to transfer and pay over the corpus of the trust to the beneficiary’s lawful issue, and if none survived the beneficiary, to a designated remainderman; if such person were dead, then to his issue, etc. The trustor retained neither control over the property transferred nor power of any kind over the trustees, divesting himself likewise of the economic benefits and enjoyment of the trust property. See Reineche v. Northern Trust Go., supra. He retained no right of reversion or designation. The right to alter, amend or revoke the terms of the trust instrument was reserved, but such right was to be exercised only with the approval of any two of the trustees. The status of the possessor of the life interest and of the remainderman remained after the trustor’s death precisely as it had been before that event. The remainderman was to. acquire possession of and title to the trust corpus upon the death of the life tenant, not of the trustor. Cf. H. Seldon Taylor, Jr., Executor, 27 B. T. A. 220. The revocation of the trust instrument by the trustor was an act not within his sole power to accomplish. The Heffernan trust varies somewhat in terms, but the same principles apply to it.

The respondent contends, however, that the trustor in the case at bar had the power to alter, amend or revoke the trust instruments in conjunction with the trustees and that, therefore, the corpus is taxable under the provisions of the above section 302 (d). He asserts that the trustees should not be regarded as “ adverse interests ” as contemplated by the opinion in Reinecke v. Northern Trust Co., supra, which states:

* * * Since the power to revoke or alter was dependent on the consent of (he one entitled to the beneficial, and consequently adverse, interest, the trust, for all practical purposes, had passed as completely from any control by decedent which might inure to his own benefit as if the gift had been absolute.

We can not concur in the respondent’s view. There is imposed upon the trustee the duty to manage and conserve the estate committed to him for the benefit of those whose interests must be protected and preserved. In the case before us the trustor transferred to the trustees the possession and title of the corpus unhampered by any restrictions or reservations whatever, with the single exception of the right to alter, amend or revoke “ with the approval of any two of the trustees ” in the three “ family ” trusts and with that of the Fulton Trust Company in the Heffernan trust. It is immaterial whether, at the death of the trustor, the owner of the life estate happened to be enjoying the use of the property or the remainderman was entitled to the corpus itself. The duty of the trustee remained the same — to carry out the terms of the trust instrument. Since the trustor had parted with the possession and all incidents of the ownership of the corpus, it may fairly be said that the trustee represented the beneficial interests primarily. In Erskine v. White, 43 Fed. (2d) 165, arising under the Revenue Act of 1926, the court said:

The principles on which the trustee would have acted in giving or withholding assent are not very certain, but it certainly owed duties to other parties interested in the trust besides the settlor, and it might well have declined to assent to proposed changes which it thought unfair to them or inspired by improper motives. It was not a mere rubber stamp; its judgment was required, and its assent might have been refused as well as given.

On appeal the United States Court of Appeals for the First Circuit affirmed the decision of the District Court, and in its opinion stated:

The government now contends in effect that by subdivision (d) [of section 302] Congress has undertaken to impose a new form of excise tax, viz., a tax on the power to alter or revoke before death a trust created by the grantor, whether the power be of a general or limited nature. We do not think Congress intended by the addition of subdivision (d) to add a new form of tax. It was only “ to the extent of the interest ” of the decedent in the trust fund, and at his death, that subdivision (d) adds anything to the value of the gross estate. If the decedent had no beneficial interest in the trust fund at his death, under the construction of the Supreme Court in the above-cited cases, there was nothing transferred from him at death within the meaning of section 301, which imposes the tax.
* * * * * * *
In other words, where a grantor, either alone or in conjunction with anyone not a beneficiary under the trust, has retained “ the power to revest in himself title to any part of the trust,” * * * then the body of the trust at the death of the decedent may be included in tile value of the gross estate, but where the decedent has no such power except by the consent of an adverse party as one of the beneficiaries, or as in this instance of the trustee for the beneficiaries, the right of revocation is gone from the donor and also all beneficial interest for taxing purposes under section 301 of the act.
To hold that Congress under subdivision (d) intended under the guise of a tax on the transfer of property at death to impose a tax solely on a limited power of appointment under It, would be contrary, not only to the spirit of the act, but the express terms of section 301 * * * and so doubtful a construction that the contrary intent should be resolved in favor of the taxpayer. * * *.

In Estate of Irving Lee Stone, 26 B. T. A. 1; aff'd., 61 Fed. (2d) 1022, we had before us facts quite similar to those in the case under consideration. There the trustor reserved the power to modify the trust instrument only by the joint written agreement of himself and five of the seven named beneficiaries, one of whom was the trustee. We said that the trustee “ acted as such for himself and the remaining six beneficiaries, all of whose interests were adverse to that of the decedent.” See also Cover v. Burnet, 53 Fed. (2d) 915.

The respondent further contends that a potential beneficiary of a contingent interest does not become a cestui que trust until the use vests in him. We have recently considered the same question in relation to income. Bessie B. Jones, 27 B. T. A. 171. There we held that reservation of the power of revocation in conjunction with owners of contingent beneficial interests was sufficient to exclude the income arising from the corpus of the trust from taxation to the trustor. See Smith v. Commissioner, 59 Fed. (2d) 56. So here the trustees representing beneficiaries of potential or contingent interests are “ adverse ” within the term as employed in Beinecke v. Northern Trust Co., supra.

In view of the foregoing we are of the opinion that the value of the corpus of the four trusts should not have been included in the estate of Lispenard Stewart, deceased, for tax purposes.

Decision will he entered under Bule B0.


text:
    Nathan Loeser, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 59677.
    Promulgated January 31, 1933.

      Irwin N. Looser, Esq., for the petitioner.

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

Van Fossan:

The petitioner contends (1) that the respondent delayed an unreasonable length of time before determining a deficiency after the filing of a waiver, and (2) that the waiver dated September 25,1925, applied only to the allowance of a personal service classification to The American Lawyers Company and not to an increased amount of income of that corporation as determined by the respondent.

The waiver here involved was not limited as to time. We have frequently held that an unlimited waiver permits the Commissioner a reasonable time in which to act. Cunningham Sheep & Land Co., 7 B. T. A. 652; Greylock Mills, 9 B. T. A. 1281; affd., 31 Fed. (2d) 655, certiorari denied, 280 U. S. 566; William S. Doig, Inc., 13 B. T. A. 256; Herman Frost, 23 B. T. A. 411.

What is a reasonable time is not to be determined abstractly or solely by reference to the calendar. It depends on all the circumam-bient facts of the situation. The first question is, therefore, whether, under all the circumstances, the respondent acted within a reasonable time. In the instant case, judged solely by the calendar, a very considerable time elapsed between the signing of the waiver and the issuance of the notice of deficiency. But, viewed in the light of all the facts, each being related directly or indirectly to the other, we do not believe it can properly be said that respondent failed to act within a reasonable time.

In the case at bar the question which the respondent had under consideration during the entire period was the right of The American Lawyers Company to personal service classification. If the corporation were so entitled the tax was to be paid by the stockholders; if not, the corporation itself was liable therefor. By reference to the case of such company, referred to in the stipulation, it is to be noted that petitioner was one of four stockholders and secretary of The American Lawyers Company. The petitioner filed his return and paid his tax on the theory that the corporation had a right to personal service classification. The respondent determined otherwise and refunded the petitioner’s tax. The corporation, however, challenged the correctness of the respondent’s action and appealed to the Board as to its 1921 tax. Obviously, the facts in that case must have been substantially the same as those in the 1920 case, since the respondent conceded personal service classification in the latter case on the basis of the Board’s decision in the former. It is apparent that the 1920 case was being held in abeyance until the decision in the 1921 case was handed down by the Board.

The waiver in question was requested, executed and received only because of the controversy relating to the taxable status of the corporation. It specifically refers to the matter as did the forwarding letter. The action of both the petitioner and the corporation in filing claims for refund shows that they were continuously aware of the uncertainty of the outcome and sought to protect themselves by filing such claims. In order to avoid a multiplicity of proceedings the respondent refrained from taking action as to the 1920 tax until the identical issue should be decided by the Board. Under such circumstances we are of the opinion that the respondent acted within a reasonable time. The decision on this point would be the same were we to apply the rule laid down by the Circuit Court of Appeals for the Second Circuit in Greylock Mills v. Commissioner, 31 Fed. (2d) 655, that an unlimited waiver is effective for action until notice of impending termination. We have no evidence that petitioner gave such a notice.

The second contention of the petitioner is that the waiver signed by him contemplated only the taxability of The American Lawyers Company as a personal service corporation and did not apply to the additional tax resulting from increasing distributable income of that company, as proposed by the respondent in his deficiency letter. The respondent asserts that by the terms of the waiver itself only the personal service status of the corporation was involved ánd that the sole purpose of executing the waiver was to enable him to secure from the petitioner stockholder the tax due from him in case the respondent’s, determination that the corporation was not entitled to personal service classification should be found to be erroneous.

The waiver which is presumed to embody the agreement between the petitioner and the respondent contained only one qualification:

* * * provided, that such assessment shall be attributable to the allowance of a personal service classification to any corporation from which the undersigned received dividends or other income.

There can be no question that the only assessment which the respondent could make pursuant to that restriction was that of a tax upon such of the petitioner’s income as might emanate from a corporation which received personal service classification. The waiver contains no reference or limitation, however, as to the amount of such income or the tax therefrom arising. If it had been the intent of the parties to limit it to the then found amount of income or tax, such a provision could readily have been incorporated in the waiver. We are unimpressed by the argument that the respondent was limited to the amount of the tax in issue at the time the waiver was given. The waiver clearly contemplated the assessment of all tax that might be found to be due from the granting of personal service classification to the company. The stipulated facts do not suggest that any part of the deficiency is due to causes other than the granting of such classification. The respondent was within the terms of the waiver and justified in his action. See Austin Co. v. Commissioner, 35 Fed. (2d) 910.

In A. L. Wilson Co., 24 B. T. A. 1056, we had before us a somewhat similar situation. In that case we held that the assessment and collection of increased income and excess-profits taxes were not barred by reason of the execution of a waiver which specified no definite amount to be assessed, although at the time of its execution representatives of the taxpayer and the Commissioner had understood and agreed upon a stated additional tax, much less than that named in the deficiency notice. See also Welz & Zerweck, Inc., 11 B. T. A. 1416.

Deoision will he entered for the respondent.


author: MaRQtjette:

text:
    May Kimball Smith, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 63572.
    Promulgated January 31, 1933.

      Paral Reilly, Esq., for the petitioner.

      H. B. Hunt, Esq., for the respondent.
   OPINION.

MaRQtjette:

The question here presented is whether the amount disti’ibuted in 1929 by the West Laurel Hill Cemetery Company constituted a dividend within the meaning of the taxing statute.

The petitioner contends that the cemetery company was a sole trustee not actively engaged in business and not in any way controlled by the certificate holders, and hence, that the distribution did not represent a dividend.

The record is clear that the company has retained its corporate form and structure throughout. Although it called in its outstanding capital stock and substituted therefor certificates of participation in the cemetery property, the certificate holders had voting powers and were eligible as managers of the corporation. Their rights essentially were those of stockholders. The company advertised its cemetery lots to the public, sold such lots, paid commissions to undertakers, conducted a greenhouse business and invested in income-producing securities, and the board of managers in its discretion made annual distributions to the certificate holders in proportion to their participating shares. In the face of these facts we are unable to accept the petitioner’s theory. While the cloak was that of a voluntary trust, the substance was an active corporate business.

The petitioner further contends that the amount of distribution she received in 1929 was in payment for land contributed to the cemetery company in 1869 by her husband’s grandfather. Hence, she says, he is taxable only upon the net gain derived from the sale of burial rights in 1929. By using as a basis the March 1, 1913, value of the lots sold in 1929, and deducting the operating expenses, it can be shown that no net gain at all was derived from the sale of burial lots in 1929. The record shows, however, that when the land was contributed to the company, the latter’s capital stock was issued to the grantors in exchange for the land. In our opinion the stock so issued constituted payment for the land. The transaction was no • different from any other wherein a corporation exchanged its stock for property, a bargain and sale being thereby completed. As the land had already been paid for, the distribution received by petitioner from the corporation did not represent any part of the purchase price to the grantor, his successors or assigns.

Section 115 (a) and (b) o*f the Revenue Act of 1928 defines “ dividend ” as being any distribution by a corporation to its stockholders, out of its earnings and profits accumulated after February 28, 1913. For the purposes of the act “ every distribution is made out of earnings or profits to the extent thereof ” and from those most recently accumulated. In the present proceeding the amounts distributed represented surplus remaining after payment of necessary expenses and providing for certain contingent funds. The company’s surplus for 1925 was approximately $152,000 and increased each year until in 1929 it reached $1,273,361.82. We think, therefore, that the distribution here involved falls fairly within the purview of section 115 above referred to. The fact that nominally the distribution was made among beneficiaries of a trust rather than to stockholders eo nomine is not controlling. As we have pointed out above, the trust form adopted can not annul the fact that for many years, including that of 1929, an active business was carried on, profits were realized, surplus accumulated and distributions made to certificate holders in proportion to their respective interests. The money received by petitioner represented earnings and profits of and to the corporation of which she was a participating member, that is, a stockholder in everything by name. In our opinion the money in question falls definitely within the scope of the statute above cited.

Petitioner raises another question, respecting her credit allowance for tax paid at the source upon certain bonds. In her return petitioner claimed a credit of $80.02. She was in fact entitled to a credit of $106.70 and the latter and larger amount was allowed by respondent in his computation. Petitioner alleges that the proposed deficiency really amounts to $327.99 although only $301.31 was asserted, the difference, $26.68, being the additional amount of credit for tax-free bonds allowed her by the respondent. Petitioner asks a refund of $26.68.

The jurisdiction of this Board is primarily with respect to deficiencies in assessment of income taxes, not their payment. The Revenue Act of 1928 gives us jurisdiction to determine the amount of overpayment of tax for any taxable year, provided we have first found that there was no deficiency for that year. In the present instance we have found that the respondent’s determination of deficiency is correct. We have no authority, therefore, to go further, and with respect to this last issue the petition must be dismissed.

Decision will be entered for the respondent.


author: Marquette :

text:
    E. H. Dobrin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 28086.
    Promulgated January 31, 1933.

      Edward <?. Dobrin, Esq., for the petitioner.

      F. B. Sohlosser, Esq., for the respondent.
   OPINION.

Marquette :

The petitioner contends that he is not a transferee of the assets of the Arcade Company. While it is true that the assets of that company, consisting of its stock in trade, were transferred directly to Burroughs Company, it is also a fact that the consideration paid by Burroughs was received by the petitioner. That consideration consisted of 140 shares of capital stock in the Burroughs Company, and primarily belonged to the Arcade Company. By direction of that company, as expressed in its resolution to sell its stock in trade to Burroughs, the purchase price was to be paid directly to petitioner and his wife, who were the sole stockholders of the Arcade Company. That procedure was nothing more nor less than a distribution, by shortcut methods, of the assets received by the Arcade Company in exchange for the property which it sold. It is well settled that where a corporation leases its property and the rental price is paid directly to its stockholders, such payment constitutes taxable income to the corporation. United States v. Western Union Telegraph, Co., 19 Fed. (2d) 157; affd., 50 Fed. (2d) 102; Rensselaer & S. Ry. Co. v. Irwin, 249 Fed. 726; certiorari denied, 246 U. S. 671. The same principle was upheld in Old Colony Trust Co. v. Commissioner, 7 B. T. A. 648; affd., 279 U. S. 716.

We think that principle applies in the present proceeding. The decision cited by petitioner in support of his view, Signal Gasoline Corp., 25 B. T. A. 532, is not in point, for the question here raised was not in issue in that case. We conclude, therefore, that the stock issued by the Burroughs Company in exchange for the stock in trade of the Arcade Company constituted assets of the latter, and petitioner, as a distributee of those assets, became a transferee in respect to them.

Petitioner next contends that respondent has failed to prove that the shares of Burroughs Company’s stock had any value. Liability was asserted against the petitioner under section 280 of the Revenue Act of 1926, which provides that there shall be assessed and collected the amount of:

(a) * * *
(1) Tlie liability, at law or in equity, of a transferee of property of a taxpayer, in respect of the tax * * * imposed upon the taxpayer by this title or by any prior income, excess-profits, or war-profits tax Act.

The Revenue Act of 1928 places upon the respondent the burden of proof to show that a petitioner is liable as a transferee of property of a taxpayer. Sec. 602.

We have frequently held that the burden thus placed upon the respondent is not met by showing merely that a petitioner has received property of a taxpayer. The value of the assets received must be shown. Ludwig Vogel stein, 16 B. T. A. 947. The respondent “ must establish all facts necessary to show that there is a liability at law or in equity on the part of that transferee for the payment of the whole or a part of the liability.” Annie Temoyan et al., Trustees, 16 B. T. A. 923. See also Phil Gleichman, 17 B. T. A. 147; Joseph A. Steinle, Administrator, 19 B. T. A. 325.

The record before us does not disclose what value the 140 shares of Burroughs Company’s stock may have had when issued to the petitioner. It does disclose that about six months later petitioner sold his shares for two notes aggregating $8,000, which amount was paid when due. It further appears that the Burroughs Company was losing money during the six-month period that petitioner held that company’s stock. Respondent contends that from those circumstances it may be fairly assumed that the 140 shares of stock had a value of at least $8,000.

There is nothing in the record to indicate that any event transpired between the time petitioner received the shares and the time he sold them to enhance their value. On the contrary, the fact that during that period the Burroughs Company was losing money in its business fairly indicates that if any change occurred in the value of the shares they were worth less when petitioner sold them than when he acquired them. There is no hard and fast rule by which to determine the value of property. Much depends upon time, place and conditions and what would be a good rule in one instance may be no guide in another. Neither is it necessary that a property shall be for sale nor that there shall be a known buyer for it, before it can have a market value. Chicago Railway Equipment Co. v. Blair, 20 Fed. (2d) 10.

Here we have an actual, bona fide sale. The buyer evidently regarded his purchase as worth all that he paid for it and that circumstance tends to establish the value. H. H. Blumenthal, 21 B. T. A. 901. We think the evidence justifies the conclusion, not only that the shares in question were worth $8,000 when sold by the petitioner, but, also, that they were worth at least that amount when he acquired them.

Petitioner further contends that the Arcade Company was indebted to him in excess of $11,000 and that as the value of the stock received for the company’s assets was less than the indebtedness, he is not liable as a transferee. The evidence does not support that contention.

Although it appears from the record that petitioner expended approximately $11,000 of his own funds in payment of bills for the company, it also appears that petitioner used between $12,000 and $15,000 of the company’s funds for his individual benefit. It thus seems evident that petitioner was indebted to, rather than a creditor of, the Arcade Company. But even assuming he was a creditor of the corporation, the taxes herein would have priority over his claims. Hutton v. Commissioner, 59 Fed. (2d) 66.

We sustain the respondent’s determination that petitioner is liable as a transferee of the Arcade Company, but the amount of tax as originally asserted by the respondent should be reduced in conformity with the decision in Arcade Department Store, Inc., 18 B. T. A. 1172.

Decision will he entered under Rule 50.


author: Lansdon :

text:
    F. W. Fitch, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 45552.
    Promulgated January 31, 1933.

      J. G. Gamble, Esq., for the petitioner.
    • J. B. Johnston, Esq., for the respondent.
   OPINION.

Lansdon :

The respondent has asserted a deficiency in income taxes for 1925 in the amount of $3,554.04. The only question presented is whether the cancellation of certain indebtedness of petitioner by The F. W. Fitch Company, of which the petitioner was president and principal stockholder, is taxable as a dividend. The petitioner alleges that the amount represents a gift from The F. W. Fitch Company to petitioner and that it is not subject to tax.

On January 1, 1925, the petitioner was the record owner of 2,182 shares of The F. W. Fitch Company, which had 2,372 shares of stock outstanding. The stock not owned by petitioner was owned by employees of the company and petitioner’s relatives. On December 17, 1925, 600 shares of petitioner’s stock were transferred to his wife in a settlement connected with a domestic dispute. There were no other changes in stockholdings during the taxable year.

At December 23, 1925, the petitioner was indebted to The F. W. Fitch Company in the amount of $37,500, which was represented by a promissory note held by the company. At the meeting of the board of directors on that date resolutions were adopted as follows:

*******
A motion was made by L. J. Mueble and seconded by Gail W. Fitch, that the president, F. W. Fitch, be allowed an additional salary for the year 1925 of $24,000.00. The motion was carried by unanimous vote.
A motion was made by Gail W. Fitch and seconded by J. A. Williams, that in lieu of F. W. Fitch’s credit balance of $11,971.76 with the company; and to offset the same in full; that his note held by the company for $37.500.00 be and is hereby cancelled and returned to him. Carried by unanimous .vote.

On his income tax return for 1925, the petitioner reported the additional salary of $24,000 received from the corporation, but' did not report any part of the $25,528.24 which represented the amount of indebtedness canceled. Upon audit of his return the respondent determined that the $25,528.24 represented a taxable dividend within

the meaning of Regulations 65, article 49, and determined the deficiency in controversy.

A similar question to that presented in the instant case was considered by the Board in Hugh H. Miller, 25 B. T. A. 418, where we held that the amount of indebtedness canceled was taxable as a dividend. In our opinion that decision is controlling here. At the time petitioner’s indebtedness was canceled, the corporation had a surplus of approximately $100,000 although the balance sheet as of December 31, 1925, states a “ Surplus Deficit ” of $28,999.42. The balance sheet shows “ Appropriated Surplus ” of $100,000, but there was nothing to prevent distribution thereof if the directors so declared. The corporation had assets amounting to $339,331.46. Its liabilities totaled $31,130.88 and its capital stock amounted to $237,200.

Decision will he entered for the respondent.


author: Sea well :

text:
    Surety Finance Company of Tacoma, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 44670.
    Promulgated January 31, 1933.

      H. B. Jones, Esq., and Bolt. E. Bronson, Esq., for the petitioner.

      F. B. Sehlosser, Esq., for the respondent.
   opinion.

Sea well :

The record shows, as is fully set forth in our findings of fact, that the petitioner expended prior to March 23, 1926, in the matter of its organization and the sale of its capital stock, the sum of $36,646.73. It is stipulated that $14,658.69 of said amount fairly and reasonably represents the cost of selling petitioner’s capital stock and the balance, amounting to $21,988.04, covers the other cost of organization, including the profits accruing to the California Company upon such transaction. It is also shown by the record that the entire sum of $36,646.73 was paid by the petitioner to the California Company in cash, and no part thereof represents current expense nor was any part thereof claimed or deducted by petitioner as such current expense. It is further shown that in the determination of the deficiency herein the respondent did not allow any portion of said expense of $36,646.73 as a deduction from gross income for either 1926 or 1927.

The questions for our determination are whether either the cost ($14,658.69) of selling petitioner’s capital stock or the other expense ($21,988.04) incurred in the matter of organizing and putting in operation the petitioner corporation or both such costs may be amortized.

Counsel for the petitioner in their brief state they can see no logical basis for a distinction in the method of treatment between the cost or expense of sale of capital stock and the other expense of organization of the petitioner, nor do we.

The argument in behalf of the petitioner assumes that the decision of the court in Hershey Mfg. Co. v. Commissioner, 43 Fed. (2d) 298 (which reversed this Board on the disallowance by it of a deduction for exhaustion in the matter of organization expense), is correct and will be followed by us and that as there is no logical basis for treating differently the two items above set out, aggregating an organization expense of $36,646.73, both items or the full amount should be amortized over the life of the charter and recovered by pro rata exhaustion deductions over the 50-year period of petitioner’s corporate life.

In Simmons Co., 8 B. T. A. 631, we held that the Bevenue Act of 1918 does not authorize any deduction of the amounts paid by a corporation as commissions for the sale of its capital stock. In so holding, the Board adhered to its previous rulings in the appeal of Charles H. Lilly Co., 2 B. T. A. 1058, and Emerson Electric Mfg. Co., 3 B. T. A. 932. See also Corning Glass Worles, 9 B. T. A. 771; affirmed in part and reversed in part in 37 Fed. (2d) 798; certiorari denied, 281 U. S. 742; Harrisburg Hospital, Inc., 15 B. T. A. 1014.

The Simmons Co. case, supra, was appealed and the decision of the Board therein affirmed, 33 Fed. (2d) 75, and certiorari denied, 280 U. S. 588.

We have carefully considered the opinion in the Hershey Mfg. Co. case, supra, and have the highest regard for the able court rendering the same, but, in view of the decisions and the reasons assigned therefor in the other cases cited herein, we are of the opinion that the principles applied therein are also applicable in the instant case and that the organization expenses, including the cost of sale of stock, are not, within the meaning of the Revenue law, either “ ordinary and necessary expenses incurred in carrying on the business ” of the petitioner nor a capital investment and we, therefore, hold that in computing petitioner’s taxable net income for either of the years 1926 or 1927 it is not entitled to deduct from gross income aforesaid expenses nor amortize same.

Reviewed by the Board.

Judgment will be entered for the respondent.


text:
    A. E. Hollingsworth, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 54282.
    Promulgated January 31, 1933.

      J. G. Gamble, Esq., for the petitioner.

      W. E. Davis, Esq., for the respondent.
   OPINION.

Lansdon: The petitioner has appealed from an income tax deficiency of $14,434.65, which the respondent has asserted for the year 1928. As basis for relief the petitioner alleges in his petition that the respondent committed error in (a) adding to his income for the year the sum of $80,768.83, as his share of alleged partnership profits, and (6) the sum of $2,777.34, previously deducted in his return, representing a reserve set up.

For a number of years prior to September 4, 1928, the petitioner was associated with Donald J. Metcalf and Elvyn S. Cowgill, in the buying and selling of commercial securities, which business they conducted as a copartnership under the firm name of Metcalf, Cow-gill and Company. Some time during the period of March 1 to July 1, 1928, the partnership firm acquired options to purchase a large number of shares of the capital stock of several California water company corporations. On August 8, 1928, the partnership entered into a contract with Davis, LongstafE & Company, a corporation, to sell the securities covered in its option for the sum of $1,403,450, payable in cash and in securities. The terms of the sales contract provided, among other things, as follows:

*******
On or before August 30, 1928, Seller shall deposit all of the stock of Peoples Water Company of Palms in escrow with Merchants National Trust & Savings Bank of Los Angeles, Seventh and Spring Streets Branch, Los Angeles, California, and on or before September 7, 1928, Seller shall deposit in said escrow the remainder of the stocks agreed herein to be sold. The parties shall execute appropriate escrow instructions for the delivery of said stock to Buyer and for the delivery of the money to be deposited in said escrow by Buyer to Seller in accordance with the terms and conditions of this contract.
Payment of the purchase price for said stock shall be made as follows: Buyer will deposit in said escrow on or before August 30, 1928 5% Notes of American States Public Service Company, maturing April 20, 1929, in the amount of $160,000, and said notes shall be considered as part payment of said purchase price to the extent of $142,500. On or before August 30, 1928, Buyer shall deposit in said escrow the sum of $550,000 in cash, and the balance of said purchase price, to-wit: Seven Hundred Ten Thousand, Nine Hundred Fifty Dollars ($710,950) shall he deposited in said escrow by Buyer on or before September 7, 1928.
Upon the deposit by Buyer in said escrow of the $550,000, as above provided, and upon performance by seller of all the covenants and conditions agreed by Seller to be performed respecting the stock of said Peoples Water Company of Palms, said 500 shares of stock of Peoples Water Company of Palms shall be delivered to Buyer, and said $550,000 shall be delivered to Seller; and upon the deposit in said escrow by Buyer of the final payment, as above set forth, and the performance by Seller of all the covenants and conditions agreed by Seller to be performed respecting Huntington Beach Water Company and Highland Domestic Water Company, all of the remainder of said stock shall be delivered to Buyer and the balance of said purchase price shall be delivered to Seller; provided, however-, in the event Buyer should default in the deposit of said final payment in escrow on or before September 7, 1928, then, and in such case, it is agreed that Buyer will return to Seller all of the said 500 shares of capital stock of Peoples Water Company of Palms and Seller will return to Buyer the said $550,000 but the $150,000 of Notes of American States Public Service Company shall be delivered to Seller and retained as liquidated damages for the breach of this contract.

On September 4, 1928, the petitioner and his associates organized Metcalf, Cowgill & Co., Inc., a corporation, under a charter issued by the State of Delaware, empowered to acquire and conduct the business theretofore owned and conducted by their partnership. On the same date an offer made in behalf of the partnership was accepted by the board of directors of Metcalf, Cowgill & Co., Inc., proposing a transfer to the corporation of all of the assets of the partnership in exchange for 1,000 shares of its capital stock, to be issued to said partnership or its nominees, and the assumption by the corporation of all of the partnership liabilities. The sale of the securities to Davis, Longstaff & Co., under contract with the partnership, was completed through the escrow agent on September 7, 1928, and the net profits paid to the corporation, which reported and paid income taxes upon them for the year 1928. In making out his income tax return for 1928, the petitioner reported no income received from the profits of the sale of the aforesaid securities; and the respondent has held that he is taxable upon so much of the same as represents his ratable interest in the partnership, upon the theory that all of the profits accrued to the partnership prior to its absorption by the corporation.

Considered physically, the partnership owned nothing that was sold to produce the profits in dispute. It owned an option to buy the securities it later contracted to sell to Davis, Longstaff & Company, but no rights, at least, measured in profits could accrue to it upon the mere signing of that contract. Obviously, the partnership was in no position to make immediate delivery of the securities at the instant the contract was signed. It had yet to buy and assemble them for delivery before it could demand payment of the purchase price; and all this the parties took notice of and provided for in their agreement, through the escrow clause which made the bank their joint agent to receive and hold both assets and their purchase price until all terms of the contract had been complied with. The record shows that the final acts which completed the sale were made through the escrow agent on September 7, 1928, and that the proceeds were paid to the new corporation on that date. Inasmuch as the sale was wholly executory until this closing date, it follows that no profits could or did accrue to the seller until such time. Aiken v. Commissioner, 35 Fed. (2d) 620. The respondent contends that certain amended instructions given to the escrow agent directing delivery of the avails of the sale of the securities to.the new corporation after the same had teen realized show that it was the intention of the partners not to transfer title to the profits of that transaction until after they were earned. In our opinion the instructions to the agents formed no part in the transactions through which the corporation succeeded to the rights of the partnership it replaced. In the nature of things, these amended instructions followed the change in affairs which made them necessary and in no way affected rights which had become vested through that change. They had to do with the mechanics whereby the new owner of the avails of the sales was to get possession of them without changing the escrow agency, and were adopted in the interests of administration expediency upon the advice of the partners’ attorney, who stated that, in his judgment, that form was in line with the better practice. The minutes of the meeting held by the board of directors of Metcalf, Cowgill & Co., Inc., on September 4,1928, show that the offer from the partnership which the board voted to accept, by specific reference thereto, included the option rights which the partnership held in the securities covered by this sale contract, as well as the contract itself. Through this process the partnership firm passed entirely out of the picture in that business deal on September 4, 1928, when the corporation accepted its offer. That transaction was legal and, although informal in minor respects, sufficient to effect a novation in parties to the contract of sale and in the ownership of the resulting profits. Iowa Bridge Co. v. Commissioner, 39 Fed. (2d) 777; Bedell v. Commissioner, 30 Fed. (2d) 622. Judgment on this issue will be in favor of the petitioner.

Respecting the respondent’s act in restoring to petitioner’s income the sum of $2,777.34, claimed as a reserve deduction, the petitioner has offered no proof to establish his right to such deduction and respondent’s determination is affirmed.

Reviewed by the Board.

Decision will be entered under Rule 50.


author: Smith :

text:
    Ward Ames, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 49817.
    Promulgated January 31, 1933.

      Wendell Davis, Esq., Harry LeRoy Jones, Esq., and George B. Francis, Esq., for the petitioner.

      George D. Brabson, Esq., for the respondent.
   OPINION.

Smith :

The first issue is the deductibility of the claimed loss upon the sale of the balance of petitioner’s Class E indebtedness in the amount of $221,788.33 for $100. A similar sale was made in 1927, and a similar deduction allowed. The respondent has disallowed the deduction claimed in 1928 on the ground that the debt was worthless in 1927. The bona tides of neither the 1927 nor 1928 sale is questioned, and the fact that the sales were made to offset gains upon the sales of securities does not make the transaction illegal or warrant the disallowance of the claimed deduction if the taxpayer has in fact sustained a loss upon the sale of his assets. Cf. James S. McCandless, 5 B. T. A. 1; George N. Grouse, 26 B. T. A. 477.

The record shows that the mining properties were in the process of development up to and including 1927, that most of the indebtedness was incurred for development purposes, which was largely a matter of stripping the overburden of soil from the ore, which then being exposed could be mined more easily and economically. The company had spent nearly $700,000 in this development and its sintering plant was equipped for profitable production and sale of iron ore. The petitioner was familiar with the physical condition of the properties and the financial condition of both companies at the close of 1927. The first large order had just been received and there was a sufficient ore reserve for profitable operations for many years. The mining and sintering companies, the latter as subsidiary of the former, were actively engaged in business and there was no liquidation of either in 1927 or 1928. At the close of 1927, the balance sheet of the Evergreen Mining Company reflected all of the classified indebtedness due the petitioner and his associates, and the operating deficits of prior years, but aside from the capital expenditures for development it did not reflect the value of the leasehold or the value of the ore reserve, which had become more valuable by reason of the development work.

At the close of 1927 the petitioner held a valid claim against the Evergreen Mining Company, which claim was recognized and carried upon the books of the company as an account payable, pursuant to the agreement for the classification of the indebtedness due the petitioner and his associates for money advanced by them. This is not a case in which the petitioner ascertained the debt to be partially worthless in 1927 and partially worthless in 1928, and claimed deductions in these years for the progressive worthlessness of the debt (cf. First Nat. Bank of Huntingdon, Pa., 28 B. T. A. 7), but one in which a loss is claimed upon the sale of a chose in action. The respondent argues that the provision in the revenue laws provides for deductions [for losses] in the case of sales for an actual, and not a nominal, consideration. One hundred dollars for a debt of $221,788.33 is not and cannot be regarded as evidence of an actual sale. It speaks for itself and proclaims itself a nominal and not a real consideration.” We can not agree with this argument. The evidence by no means shows that the Class E indebtedness of the Evergreen Mining Company was worthless in 1927, or in 1928, the year before us. On brief, the respondent admits that the balance sheet of the company at December 31, 1927, gave the Class E indebtedness some book value. Such Class E iiidebtedness owed to the petitioner in 1928 represented a cost to him in cash of $221,788.33. The stipulation shows that- he sold it within that year for $100. The respondent does not question that the sale was an arm’s length transaction. Has only contention is that the indebtedness was worthless in 1927 and that the only purpose of the sale in 1928 was to establish a loss which would be a legal deduction from the gross income of 1928. A bona fide sale made for that purpose is not forbidden by the statute. The respondent erred in disallowing the claimed deduction in 1928. Cf. B. B. Greener, 6 B. T. A. 587: Harry H. DeLoss, 6 B. T. A. 784; affd., 28 Fed. (2d) 803; certiorari denied, 279 U. S. 840; D. L. Larsh, 6 B. T. A. 1086; J. Harvey Ladew, 22 B. T. A. 448; George N. Crouse, supra; American Auto Trimming Co., 6 B. T. A. 1007; Mich. v. Zucos, 37 Fed. (2d) 801.

The second issue is the determination of the amount of taxable income realized by the petitioner in 1928 from the receipt of payments aggregating $24,000 from the Barnes-Ames Company. The petitioner reported his income on the cash receipts and disbursements basis. Prior to some date in 1926, the petitioner had loaned the Klearflax Linen Looms Company $165,819.75, which was evidenced by a note bearing interest at 6 per cent per annum and on which the unpaid interest amounted to $50,765.51 on September 3, 1926. On the same date petitioner owed the Barnes-Ames Company the amount of $110,121.18. It was agreed between petitioner and the Barnes-Ames Company that the note should be canceled and that the Barnes-Ames Company should stand indebted to the petitioner in the amount of $106,464.08, which is the exact difference between the face value of the note plus the accrued interest thereon and the $110,121.18 owed by the petitioner to the Barnes-Ames Company. The Barnes-Ames Company was to make payment of the $106,464.08 at the rate of $2,000 per month beginning September 1, 1926, and the company was to pay interest to the petitioner on the account at the rate of 5 per cent per annum. The stipulation is to the effect that of each $2,000 payment to the petitioner “ a portion was deemed to constitute interest on the balance of the account then payable and the balance a payment of the principal of the account.” The petitioner contends that the value of the account to the petitioner on or about September 3, 1926, was $106,464.08 less $8,500, and that the only portion of the $24,000 received in 1928 which constitutes taxable income is the portion representing interest upon the unpaid balance as of the date of each payment and the accrued discount. This was the basis upon which the petitioner’s tax liability for the year 1929 was settled and it is agreed that if this is a proper basis of settlement for the year 1928 the only taxable income received by the petitioner from the $24,000 in 1928 is $3,533.61 representing interest and $1,634.02 representing realization of the discount.

The respondent contends, however, that this was not a correct settlement; that there was no realization of income by the petitioner in 1926, when he turned in his note receivable from the Barnes-Ames Company in consideration of the cancellation of his indebtedness to it, and a credit upon its books in his favor of $106,464.08 to be paid at the rate of $2,000 per month with interest at 5 per cent per annum.

The record is silent as to whether the petitioner accounted for any profit in his 1926 return from the exchange of his note of the Barnes-Ames Company for a cancellation of his indebtedness to that company plus an open account receivable. Presumably not, for the petitioner in his 1928 return reported the entire $24,000 received in 1928 as taxable income. The petitioner was on a cash receipts and disbursements basis. The case of John B. Atkins, 9 B. T. A. 140, was one involving an exchange of property for other property and cash in deferred payments. The question there was whether the petitioner, being on the cash receipts and disbursements basis, had any taxable income from the exchange transaction. We there stated:

* * * So far as we have been able to ascertain, a promise to pay evidenced solely by an open account bas never been regarded as income to one reporting on a cash basis by the Bureau of Internal Revenue. Certainly this is true in the absence of any showing that the amount was immediately available to the taxpayer. The Board has further held that income was not constructively received by the mailing of a check, Louis Titus, 2 B. T. A. 754, or the entry on the books of a corporation of the amount of salary due when in fact money was not available to make payment, A. L. Englander, 1 B. T. A. 760. * * *
* * * hj * * *
* * * While no categorical answer is available and the facts in each ease
must be closely scrutinized, we believe that in the case of one reporting income on the receipts and disbursements basis only cash or its equivalent constitutes income. * * *

Clearly, the total profit to be realized by the petitioner from the payments to be received by him from the Barnes-Ames Company was $60,765.51 plus interest at the rate of 5 per cent per annum upon deferred payments. In his brief the respondent contends that as soon as the petitioner began to receive the deferred payments of $2,000 per month he began to realize part of his profit in the proportion that the amount of gross profit bore to the principal sum, that is, as $50,765.51 is to $106,464.08; that each monthly payment of $2,000 included interest at 5 per cent per annum on the principal yet unpaid 50 765 51 plus a realization of profit of pQg <j_Q¿ Qg payment after deducting the above interest plus a return of principal consisting of the balance of the payment.

We are of the opinion that the respondent is correct in treating a portion of each payment of $2,000 as consisting of one month’s accrued interest upon the balance owing for the monthly payment and that the balance of the payment represents in part a realization of profit and in part a return of capital.

Reviewed by the Board.

Judgment will be entered under Bule 50.