author: Trammell :

text:
    W. B. Geary, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7364.
    Promulgated April 29, 1927.
    Taxable gain from tbe sale of property determined.

      H. V. Campbell, Esq., and Arthur S. Dayton, Esq., for the petitioner.

      F. 0. Graves, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income tax for 1921 in the amount of $12,061.18. The deficiency arises from the action of the Commissioner in adding to the income of the petitioner an amount computed to be the market value of deferred purchase-price obligations on the sale of real estate made during that year.
    FINDINGS OF FACT.
    On January 3, 1921, the petitioner sold and conveyed to the F. W. Woolworth Corporation, by a warranty deed, certain properties situated on Capitol Street in Charleston, W. Ya. The consideration was $146,800, of which $46,800 was paid in cash and the balance, amounting to $100,000, the vendee agreed to pay to the petitioner, or his order, in seventeen equal annual installments of $5,882.35 each, with interest at the rate of 6 per cent per annum, payable annually. The deferred purchase price was secured by a vendor’s lien. No notes or evidence of indebtedness were given other than the agreement to make the payments as aforesaid.
    The above decribed property consisted of a lot having a frontage of 45 feet, 10y2 inches on Capitol Street, on which was located a three-story brick building and was part of the property acquired by the petitioner by deed from W. D. Payne, special commissioner, on July 17, 1917. The property acquired by the petitioner from the special commissioner consisted of 170 feet frontage on. Capitol Street, on which was located a building covering the whole property. The building contained seven store rooms. The consideration paid for this property was $340,000, of which $50,000 was paid in cash and the balance thereof was to be paid in twenty equal annual installments from the date of the delivery of the deed to petitioner. A vendor’s lien was reserved to the special commissioner to secure the payment of the deferred purchase money in the amount of $290,000. On January 3, 1921, the date of the sale by the petitioner to the Woolworth Company, there was due to the special commissioner by the petitioner the sum of $220,330.33.
    The Woolworth Company would not pay to the petitioner the full purchase price and accept a deed conveying the property encumbered by vendor’s lien for the unpaid purchase price which the petitioner was obligated to pay and did not execute notes representing the deferred purchase money.
    Contemporaneously with the execution of the deed conveying said property to the Woolworth Company, Geary executed an assignment of the agreement of the Woolworth Company to make said seventeen equal annual payments, and also transferred the cash payment which he had received, to the special commissioner who gave the petitioner credit for the amount of cash delivered and agreed to give him credit for each installment as it was paid by the Woolworth Company. This assignment authorized the special commissioner to receive from the Woolworth Company the deferred payments as and when paid and to apply such payments as credit upon the unpaid purchase price agreed to be paid by the petitioner.
    The deed executed by the petitioner to the Woolworth Company contained no acceleration clause whereby the entire debt thereby secured would become due and payable upon default in the payment of any installment of principal or interest. The obligation of the Woolworth Compaq was secured by a vendor’s lien contained in the deed of conveyance, which obligation was assigned by the petitioner to the special commissioner as aforesaid.
    By a decree entered on July 11,1917, the special commissioner was authorized to release one foot of the above property from the vendor’s lien reserved by him in the deed to the petitioner for each $2,000 paid to the said special commissioner and by an instrument dated January 4, 1921, which recited “And Whereas, the said W. B. Geary has paid to the said special commissioner $2,000 for each front foot of said property hereinafter described,” the special commissioner released a portion of the said property described as follows:

      Beginning at a point on the northeast side of Capitol Street at the common corner between the property hereinafter described and that of the Charleston National Bank; thence running with Capitol Street and a line of said property 48 feet; thence northwest parallel with the line of the Charleston National Bank property toward Summers Street 188 feet and 5/10 more or less to the back line of said property; thence with the back line of the said property to the property line of the Charleston National Bank, and with the same to the place of beginning.
    The Woolworth Company for a time made payments according to the agreement and in 1924 or 1925 made a payment of $50,000, and on January 2 or 3, 1926, that company made the final payment of all of its obligations to the petitioner. The Woolworth Company had the right under its agreement with the petitioner to pay the entire purchase price in January or July of any year prior to the maturity date of the full amount of the purchase price.
   OPINION.

Trammell :

It was contended by the petitioner, first, that the sale to the Woolworth Company was not a closed or completed transaction and that no taxable profit should be computed thereon until the cost price of the property was received; second, that the undertaking of the Woolworth Company did not have a readily realizable market value; and, third, that, if it had a readily realizable market value, it would have been so low as to justify no additional tax.

The petitioner relies upon the following provisions of the Revenue Act of 1921:

Sec. 202. (a) That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1918, shall be the cost of such property * * *.
* * * * * sfc *
(c) For the purposes of this title, on an exchange of property, real, personal, or mixed, for any other such property, no gain or loss shall be recognized unless the property received in exchange has a readily realizable market value * * *.
(d) (1) Where property is exchanged for other property and no gain or less is recognized under the provisions of subdivision (c), the property received shall, for the purposes of this section, be treated as taking the place of the property exchanged therefor, except as provided in subdivision (e) * * *.
(e) Where property is exchanged for other property which has no readily realizable market value, together with money or other property which has a readily realizable market value, then the money or the fair market value of the property having such readily realizable market value received in exchange shall be applied against and reduce the basis, provided in this section, of the property exchanged, and if in excess of such basis, shall be taxable to the extent of the excess * * *.
(f) Nothing in this section shall be construed to prevent (in the case of property sold under contract providing for payment in installments) the taxation of that portion of any installment payment representing gain or profit in tlie year in which such payment is received.

Tlie provision of the statute that where property is exchanged for other property no gain or loss is recognized unless the property received in" exchange has a readily realizable market value, is applicable only to exchanges of property and not to sales.- Where property is sold for a cash payment and certain deferred payments evidenced by notes or otherwise, the transaction is not considered an exchange of property but is a sale of property. See Five Per Cent. Cases, 110 U. S. 471; Washington v. Ogden, 1 Black 450; Williamson v. Berry, 8 How. 495. The statutory provision relating to exchanges is not, in our opinion, applicable to this case where property is sold on such a basis that the notes or obligations to make deferred payments are the equivalent of cash or have a market value and the transaction results in taxable gain based on the difference between the cost of the property (it having been acquired subsequent to March 1,1913,) and the amount of cash received added to the market value of the securities or purchase-price obligations. There was some testimony introduced to the effect that the obligations of the Woolworth Company to make the deferred payments were, under the circumstances, not worth more than 50' per cent of the face amount thereof. We are not convinced, however, from this testimony that these obligations were worth anything less than their face value. They bore 6 per cent interest and could have been paid in full under the agreement during January or July prior to the maturity date and they were, in fact, paid in full with interest in 1926.

Judgment will l)e entered on 15 days’ notice, under Rule 50.


source: Caselaw Access Project

author: Geeen :

license: Public Domain

text:
    Appeal of Miller Brothers Coal Co.
    Docket No. 6665.
    Promulgated April 29, 1927.
    1. Evidence helé insufficient to establish the value of a coal lease for the purpose of invested capital or depletion.
    2. Claim for depletion on basis of discovery value disallowed.
    3. Rates of depreciation as determined by the Commissioner approved for want of evidence.

      Roy T. Bell, O. P. A., for the petitioner.

      Arthur J. Seaton, Esq., and Granville 8. Borden, Esq., for the Commissioner.
    This is an appeal from the determination of a deficiency in income and profits taxes for the fiscal year ended March 31, 1921, in the amount of $14,269.03. The deficiency results from the disallowance in part of the claimed depletion of certain coal properties held in fee and under lease, and from the adjustment of depreciation rates on machinery and equipment.
    BINDINGS OB BACT.
    The petitioner is an Ohio corporation with its principal office located at 1509 Market Street, Youngstown, Ohio. It was organized July 3, 1918, for the purpose of mining coal in Columbiana County, Ohio. In its operations the petitioner used the strip method of mining.
    In April, 1918, T. W. Miller and George J. Miller, contractors operating as Miller Brothers, made test® and drillings to determine the mineable quantity of coal on the farm of Edgar and Mary C. Arter, the said farm being located in Columbiana County, and on July 12, 1918, they negotiated a lease for the premises. The lease, reserving to the lessors 10 of the total 152 acres, gave to the lessees the right to remove all mineable and merchantable coal in, under, or upon the premises and fixed the royalty at 25 cents per ton. It also provided that the lessees should be permitted to transport across the land in question, coal and other minerals mined from other premises but that a payment of one cent for each ton of coal or other mineral so transported should be made. The lessees were required to begin operations the day following the execution of the lease.
    On August 3, 1918, Miller Brothers proposed to transfer the lease to the Arter farm to the taxpayer corporation for 330 shares of its capital stock, said stock having a par value of $100 per share. They also proposed to rent to the petitioner certain equipment including steam shovels, wagons, horses, mining cars and track, an engine, and other miscellaneous items, for $800 per month. This equipment had previously been purchased for road building. The offer was accepted by the board of directors and approved by the stockholders on the day it was made.
    On January 5, 1920, the petitioner purchased a tract of land containing approximately 41 acres, known as the Gray farm, for $6,500, and on August 27, 1920, it purchased the Baker farm of 190% acres located south of the Arter property and west of the Gray farm, for $23,823.76. Drilling tests indicated a vein of No. 6 coal 5 feet thick on the two farms, underlying 55 acres of the Baker farm and 17 acres of the Gray farm. From these tests it was determined that the recoverable tonnage was 10,000 tons per acre, or a total of 720,000 tons for both tracts.
    North of the petitioner’s property at a distance of five and seven miles respectively, are the Washingtonville and Leetonia mines, while the West Point mines are about ten miles south. Other mines are located ten or twelve miles east.

      The coal on the Arter farm was exhausted in the winter of 1920 after approximately 42,000 tons had been mined. Operations on the Gray and Baker farms were discontinued in 1925. At that time approximately 300,000 tons had been removed from these pro}> erties. The reason given by the petitioner for discontinuing operations was the cancellation of an advantageous contract for the sale of its coal and the high cost of mining due to the heavy overburden covering the coal in places to a depth of 55 feet.
    After operating for about one year under the rental agreement of August 3, 1918, the petitioner purchased a quantity of machinery and equipment from Miller Brothers, one item of which was a three-quarter-yard steam shovel which at that time had been in use about three years. It was discarded at the time mining was discontinued in 1925. In 1921 or 1922, the petitioner puchased a secondhand shovel of Sy2 yards capacity, which was used several years and then rebuilt and sold for $40,000. At or about the same time the petitioner purchased a 6-yard shovel of the type commonly used in operations in which the petitioner was engaged. All of the equipment purchased from Miller Brothers had been used for two or more years at the time of the purchase.
    Following is a table of the depreciation rates adopted by the Commissioner in computing the deficiency and of those claimed as correct by the petitioner:

   OPINION.

Geeen :

The issues presented by this appeal for determination are: (1) What value, if any, should be attributed to the Arter lease for invested capital and depletion purposes; (2) what is the proper rate of depletion on the Gray and Baker properties; (3) whether or not the Commissioner erred in his adjustment of the depreciation rates on machinery and equipment.

Counsel for the petitioner contends that the value of the Arter lease at the time it was acquired by the petitioner was $33,000 and that this amount should be used in computing the invested capital and depletion. This contention seems to be based on the fact that the lease was paid in to the taxpayer corporation for stock having a par value of $33,000. No evidence was submitted to show that the stock had any value or that the petitioner had any assets of value either before or after the issuing of the stock. Neither does the record show that the lease had any cost to Miller Brothers or to the taxpayer corporation. The consideration recited by the lease was the 25-cent royalty to be paid on each ton of coal mined and the one-cent royalty on the coal or other mineral transported across the Arter property. This alone is not sufficient to show that the lease had any value. Appeal of Bader Coal Co., 2 B. T. A. 239.

It was suggested that due to the development of the property by the petitioner’s assignors, the petitioner was entitled to "discovery value on the lease under the provisions of sections 214(a) (10) and 234(a)(9) of the Revenue Acts of 1918 and 1921. Without going into the question as to whether or not the property in question was located in a proven field, we are able to dispose of this question by calling attention to the fact that we have been unable to -find that the lease had any value, and as a result can not hold that it had value “ materially disproportionate to cost ” as is necessary for the application of sections 214(a) (10) and 234(a) (9) of the Acts mentioned. See Appeal of H. E. Sadler, 4 B. T. A. 1014.

In arriving at the rate of depletion for the Gray and Baker properties, the Commissioner has accepted the figures as to cost and recoverable tonnage submitted by the petitioner in its valuation schedule. Regarding the rates thus arrived at, the petitioner’s counsel has set forth in his brief certain statements to show that the recoverable tonnage set out in the valuation schedules was excessive and greatly overstated; that the coal vein, instead of being of an average thickness of 5 feet as set forth in the schedule, pinched down in places to a thickness of only 20 inches, averaging only abgut Sy2 feet; and that the recoverable tonnage was in fact only 400,000 tons. Whether this is true or not we have no way of knowing. Opportunity was offered the petitioner at the hearing to submit such material evidence as was deemed necessary to prove its case, but no effort was made to prove the statements set forth in the brief. We are bound in our decision by the evidence before us and can not go outside of the record in arriving at the deficiency.

There is an intimation, nothing more, in the record, that due to the expense of mining the remainder of the coal, the recoverable coal has been exhausted and that the depletion should be computed on the basis of the coal extracted at the time operations were discontinued in 1925. We can not, however, decide cases on intimation.

With reference to the depreciation on machinery and equipment, we must also find in favor of the Commissioner. To substantiate the petitioner’s claim in this matter we have the opinion of T. W. Miller, treasurer and general manager of the taxpayer corporation, and his opinion on the items about which detailed information is given does not support the claims of the petitioner. The petitioner seeks to have steam shovels depreciated at the rate of 20 per cent, whereas the testimony offered indicates that such shovels have at least a life of seven or eight years or more. With reference to the horses used, the petitioner claims depreciation at the rate of 25 per cent and the Commissioner has allowed 20 per cent, but the petitioner’s witness testified that 15 per cent was proper. On such proof we do not feel justified in disturbing the rates used by the Commissioner.

Judgment will be entered for the Commissioner.


author: Milliken:

text:
    N. J. Prestwood, Administrator, Estate of F. M. Prestwood, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7755.
    Promulgated April 29, 1927.

      Charles 0. Stokes, Esq., for the petitioner.

      Thomas M. Wilkins, Esq., for the respondent.
   Milliken:

This proceeding results from the determination of a deficiency in income tax for the calendar year 1922 in the amount of $762.48. Error is assigned in that the Commissioner refused to allow petitioner to take a deduction of $32,746.20 for debts ascertained to be worthless and charged off within the year.

FINDINGS OF FACT.

Petitioner died on June 13, 1923. During 1921 he made advances to tenant farmers of sums of money with which to purchase fertilizer and provisions. He also advanced cash to certain individuals and corporations. In the year 1922 he went over all the accounts on his books to determine the possibility of the collection of his accounts. He ascertained the property holdings, whether the debtors had moved to other sections of the State, whether dead or living, and determined that debts in the amount of $32,746.20 had become worthless in the year 1922. The debts determined by petitioner to be worthless comprise fifty-four accounts of fifty-four individuals and corporations. The debts comprising the deduction claimed in the amount of $32,746.20 were ascertained to be worthless and charged off within the taxable year, except the debts of the following debtors, in the following amounts:

Hightower Oil Oo_$4, 297.10
Henry Prostwood_ 5, 749. 28
Henry Prostwood_ 11,270.92
J. A. Jackson_ 6, 000.00

Judgment will be entered on 15 days’ notice, under Bule 50.


text:
    John T. Kaler, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9181.
    Promulgated April 29, 1927.

      E. H. Bond, Esq., for the petitioner. •

      Brice Toole, Esq., for the respondent.
   Milliken:

This proceeding results from the determination of a deficiency in income tax for the calendar year 1921, in the amount of $823.31. Error is assigned in that the Commissioner, in determining the net income of petitioner for the year 1921, disallowed a deduction of $5,000 claimed as a loss sustained during the year in the stock of the Hercules Motor Co., which petitioner alleged became worthless in that year.

FINDINGS OF FACT.

Petitioner is an individual residing at Boston, Mass. In the year 1912, he purchased for $5,000 stock of the Plercules Motor Co. Said company was organized to manufacture "motor trucks and became, by assignment, the owner of certain patents which were believed to be valuable, particularly one designed to prevent the stripping of gears, which at that time was a serious problem in the construction of heavy trucks. The patents which the company received by assignment were secured by a man named Eckert, who upon the organization of the company became its superintendent. The company manufactured in its entire history not to exceed six 5-ton trucks and the trucks were manufactured in the year 1913 or 1914. It was desired also to manufacture 3-ton trucks. The superintendent refused to engage in the manufacture of 3-ton trucks and left the employ of the company about the year 1914, and clue to domestic troubles he left the United States. The company endeavored to engage the services of another as its superintendent but without success.

The success of the company depended almost entirely upon the retention of the services of Eckert. In the year 1914, the Hercules Motor Co. was dissolved by act of the legislature of the Commonwealth of Massachusetts. When the company was dissolved in 1914, it did not have enough assets to pay its outstanding obligations, and the various stockholders, including petitioner, contributed sums of money with which to meet its obligations and thus avert bankruptcy. The directors of the company endeavored to sell the patents which the company had acquired and carried on negotiations with the Mack Truck Co. for that purpose. In the year 1920 or 1921, a steel was invented or developed that reduced stripping of gears to the minimum and resulted in the patent of the company becoming practically worthless.

Petitioner sought, but was not permitted by respondent, to take a deduction for prior years on account of the stock becoming worthless. He testified as follows:

Q. Why did you take the deduction then?
A. Because I thought the thing was absolutely a certain loss.
. Q. Why did you think that?
A. What?
Q. Why did you think that?
A. The man had gone, skipped, and there was nobody to take his place and everything was idle and you couldn’t get anything for the stock.

The stock of the Hercules Motor Co. did not become worthless in the year 1921.

Judgment will be entered for the respondent.


text:
    Katharine N. Wurts, Petitioner, v. Commissioner of Internal Revenue, Respondent. Ella B. Du Barry, Petitioner, v. Commissioner of Internal Revenue, Respondent. Elizabeth N. Brock, Petitioner, v. Commissioner of Internal Revenue, Respondent. John W. Brock, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 8106, 8107, 8108, 8109.
    Promulgated April 29, 1927.
    Transfer taxes assessed under the laws of Pennsylvania against the estate of a decedent, which were paid by the executor and by him deducted from the shares of certain beneficiaries of the estate, are not deductible by the beneficiaries under the provisions of section 214(a) (3) of the Bevenue Act of 1921.

      John W. Brock, Jr., Esq., for the petitioners.

      J. Harry Byrne, Esq., for the respondent.
    These proceedings were, by motion made and granted, consolidated. They involve deficiencies for the year 1922. In the appeal of Katharine N. Wurts the deficiency is $1,073.81; in that of Ella B. Du Barry $262.76; in that of Elizabeth N. Brock, $255.11, and in that of John W. Brock, $5,229.06. Each deficiency arises from the fact that the respondent refused to permit the petitioners to take as deductions from gross income certain transfer taxes paid to the Commonwealth of Pennsylvania by the executor of Richard S. Brock, deceased, and deducted by the executor from the shares of the petitioners in the estate.
    FINDINGS OF FACT.
    Ella B. Du Barry is a resident of California. The remaining three petitioners are residents of Pennsylvania. Richard S. Brock died testate, a resident of the County of Philadelphia, Commonwealth of Pennsylvania, on January 30, 1922. By his will, 'which was duly probated in Philadelphia County, Pennsylvania, he appointed "John W. Brock executor. The nominated executor was granted letters testamentary. The twelfth, fourteenth, and fifteenth clauses of decedent’s will read:
    Twelfth. All the rest, residue and remainder of my estate I give devise and bequeath as follows:
    A. I direct my executor to divide the securities and cash including the amounts realized from the sale of any real estate or personal property according to his best judgment into nine (9) equal parts and to pay over and deliver the same as fellows:
    To Fanny Brock Montgomery, Sabah Coleman Brook, Ella Brook Du-Barry and Elizabeth Norris Block children of my deceased nephew Arthur Brock, each one-fourth of one-ninth; to my niece Julia W. H. Johnson one-ninth; to my nephew John W. Brock three and a half ninths; and to Catherine [sic] Newbold Wurts niece of my deceased wife three and a half ninths.
    B: If any of the distributees of my residuary estate above-named shall have died before my death leaving children, them surviving such children shall take such share as the parent so dying would have taken if living at the time of my death. If any of the distributees shall have died before me, leaving no child or children surviving such distributee, the share or interest which such distributee would have taken if living at the time of my death shall he divided among the other distributees according to their several respective proportions above set forth.
    C. My executor may make distribution of principal and income of my residuary estate from time to time without awaiting final reduction into cash and such distribution may be made of securities according to- the valuation and appraisement thereof for taxation or part cash and part securities and such division and payment shall have the same effect as though the whole of said securities were sold and the division or payment calculated or based upon the results of such sales and shall be final and conclusive upon the parties entitled to receive such legacies or shares.
    Fourteenth. I give to my executor the power to sell from time to time and at such prices as he may deem proper any and all property real or personal not specifically devised or bequeathed at public or private sale for cash or upon credit and without liability upon the part of the purchaser to see to the application of the parchase money and when from time to time such real estate may be sold it shall he deemed free from any trusts in this will contained.
    Futtbehstth. All legacies and bequests by me herein made are to be delivered or paid to the recipient free from any tax or taxes collateral inheritance or otherwise. All such taxes are to be paid from my estate and it is my will that all and every gift or gifts to or selection by any one named in the list or memorandum of instructions as to personal effects mentioned in paragraph Second of this will shall be free from every tax whatsoever as if given by me during my lifetime and I do not desire that any such articles be included in any inventory of my estate.
    It was stipulated and we so find that the executor of Richard S. Brock deducted the Pennsylvania transfer inheritance taxes before he paid the legacies in the year 1922. The legacies referred to are those of the four petitioners. It is further stipulated that the petitioners showed in their income-tax returns for the year 1922 the following deductions on account of these taxes:
    Deducted by: Amount.
    Katharine N. Wurts_$44, 056.25
    Ella B. DuBarry_ 3,146.87

    Elizabeth N. Brock_-_ 3,146. 87
    John W. Brock_ 44, 056.25
    The taxes so deducted by each petitioner had been paid during the year 1922 by the executor to the Commonwealth of Pennsylvania.
   OPINION.

Milliken:

The sole issue in this case is whether the respondent erred in refusing each petitioner the right to deduct from Ms gross income the amount of Pennsylvania transfer taxes which had been paid during the taxable year by the executor of Richard S. Brock and deducted by him during that year from the share of each petitioner before payment of transfer.

Section 214(a) (3) of the Revenue Act of 1921, with certain exceptions not pertinent to this proceeding, permits an individual for the purpose of ascertaining his net income to deduct from his gross income “ taxes paid or accrued during the taxable year.”

Section 219 provides:

(a) That the tax imposed by sections 210 and 211 shall apply to the income of estates or of any kind of property held in trust, including' — •
(1) Income received by estates of deceased persons during the period of administration or settlement of the estate.

Subdivision (b) of this section in effect provides, with exceptions not material here, that the net income of an estate shall be computed in the same manner as that of an individual. So the question narrows down to whether the transfer taxes paid by the executor of Richard S. Brock are deductible by him from the gross income of the estate or are deductible by the petitioners from whose shares such taxes were deducted by the executor before payment or transfer. This turns on the nature of the Pennsylvania tax and this in turn depends on the construction placed upon the Pennsylvania transfer tax law by the Supreme Court of Pennsylvania. Cf. Keith v. Johnson, 271 U. S. 1. The petitioners refer to certain excerpts from the opinions of the Supreme Court of Pennsylvania in In re Oliver’s Estate, 273 Pa. 400; 117 Atl. 81; In re Kirkpatrick’s Estate, 275 Pa. 271; 119 Atl. 269; and Shugars v. Chamberlain Amusement Enterprises, 284 Pa. 200; 130 Atl. 426, which, without a careful reading, would indicate that the Pennsylvania transfer tax is a tax not upon the estate as a whole but is a tax upon the share of each individual beneficiary.

In In re Frick’s Estate, 277 Pa. 242; 121 Atl. 35, the Supreme Court of Pennsylvania had occasion to pass upon the nature of this tax. After quoting a portion of section 2 and section 10 of the Pennsylvania transfer tax act of June 20, 1919, P. L. 521, sections which were in effect at the date of the death of Ei chard S. Brock, the court said:

It is clear from these sections that the tax is to he levied upon “the clear value” of the entire estate (from which has been excluded, however, real estate located outside of Pennsylvania), after deducting only “the debts of the decedent and the expenses of the administration ” of such estates. The appraisement to be made is not of the legacies or devises, but of the whole estate of a decedent; the debts and expenses of administration are not to be deducted from any particular gift or gifts, but from the whole estate, and the taxes paid to the United Stales or to any other state or territory, if permitted to be deducted, would be from the whole estate. We therefore conclude that it is the entire value of the eslate, less the credits specified, which forms the basis of the tax, and not the amounts received by the particular legatees. Hence, as stated in Knowlton v. Moore, 178 U. S. 41, 20 Sup. Ct. 747, 44 L. Ed. 969, that which the state “ taxes is not the interest to which some [or many a] person succeeds on a death, but the interest which ceased by reason of the death.” Since this is the true construction of the act, much of the argument made by these appellants, founded as it is upon the contention that the tax is levied only upon the particular gifts, when and as received, becomes ineffective because it has no relation to the actual status.
Basing their elaborate argument largely on their erroneous construction of the act as last stated, the executors and residuary legatees who appeal ask us to ignore the clear and unambiguous language of section 2, above quoted, and to decide that the court below erred in “ ascertaining the clear value ” of the estate, because it did not deduct from its “gross value” (a) the amount paid the government for the federal estate tax; (b) the amounts paid other states and the Province of Quebec for their inheritance taxes on decedent’s real and personal property there located; and (c) the inheritance tax payable to this state. Kirkpatrick’s Estate, 275 Pa. 271, 119 Atl. 269, is an express authority against the first of these claims; in principle it also decides the others adversely to these appellants. In deference to the able arguments made, however, the supposedly new points presented will be briefly considered aside from that decision.
In support of their contention upon these points, they urge that refusal to allow these items to be deducted “ adds the federal tax, the tax paid to the other states,” and that paid to this state, to the total valuation to which the tax rate is applied. This is erroneous, however; it simply refuses to allow these sums to be deducted from the “ gross value of such estates ” “ in ascertaining the clear value” thereof, exactly as does the federal estate tax act (U. S. Comp. St. §6338-1/4a et seq.; New Yorh Trust Co. v. Eisner, 266 U. S. 345, 349, 350, 41 Sup. Ct. 506, 65 L. Ed. 963, 16 A. L. R. 660), and many of the inheritance tax laws of other states. No valid reason is given why this may not be done. On the contrary, as stated in the last cited case, where “ the tax attaches to the estate before distribution — if it is a tax on the right to transmit, or on the transmission at its beginning — obviously it attaches to the whole estate except so far as the statute sets a limit.”
Recognizing that their contention now being considered is in direct antagonism to the express language of the statute, these appellants in effect ask us to ignore this language, and from isolated phrases and words in the statute to reach an opposite conclusion, partially because of general expressions found in our opinions in Oliver's Estate, 273 Pa. 400, 117 Atl. 81, and Kirkpatrick’s Estate, 275 Pa. 271, 119 Atl. 269 — though this question was not directly raised in either of them — apparently forgetting the basic rule that—
“ It is a maxim, not to be disregarded, that general expressions, in every opinion, are to be taken in connection with the case in which those expressions are used. If they go beyond the case, they may be respected, but ought not to control the judgment in a subsequent suit, when the very point is presented for decision. The reason of this maxim is obvious. The question actually before the court is investigated with care, and considered in its full extent. Other principles which may serve to illustrate it, are considered in their relation to the case decided, but their possible bearing on all other cases is seldom completely investigated.” Cohens v. Virginia, 6 Wheat. 264, 397 (5 L. Ed. 257), per Marshall, C. J. O’Malley v. O’Malley, 272 Pa. 536, 116 Atl. 500.

The same observations made by the Supreme Court of Pennsylvania relative to its opinions in Oliver's Estate and Kirkpatrick's Estate apply equally to the excerpts made by the petitioners from the opinion in the ¡Shugars case. The Frick case was taken on writ of error to the Supreme Court of the United States (Frick v. Pennsylvania, 268 U. S. 473) and was there reversed on certain points not material to this proceeding. That portion of the decision of the Supreme Court of Pennsylvania, which held constitutional the provisions of the Pennsylvania act which deny deduction from the gross estate of the decedent of estate taxes paid to the United States, was affirmed. Relative to the nature of the Pennsylvania transfer tax the court said:

While the federal tax is called an estate tax and the state tax is called a transfer tax, both are imposed as excises on the transfer of property from a decedent and both take effect at the instant of transfer. Thus both are laid on the same subject, and neither has priority in time over the other.

Again, the court said:

The objection that when no deduction is made on account of the federal tax the state tax becomes to that extent a tax on the federal tax and not a tax on the transfer is answered by what already has been said. Bnt by way of repetition it may bb observed that what the State is taxing is the transfer of particular property, not such property depleted by the federal tax! The two taxes were concurrently imposed and stand on the same plane, save as the United States possibly might have a preferred right of enforcement if the estate were insufficient to pay both.

In Keith v. Johnson, supra, the Supreme Court had before it for application the transfer tax of the State of New York. Following the construction placed on the statute by the New York courts, the court held that an administratrix had the right under the Eevenue Act of 1916 in computing the net income of the estate to deduct the transfer taxes paid to the State of New York. While following the decisions of the New York courts, the Supreme Court stated that it agreed with those courts and concluded its opinions as follows:

And we are of opinion that the transfer tax is deductible. It was primarily payable by the respondent [the administratrix] out of moneys and other property of the estate; and it was so paid by her. While this lessens the amount for distribution among the heirs, it cannot be said that they bore any part of that tax. As well might it be claimed that they paid the funeral expenses and debts, if any, of the intestate. No part of the transfer tax so paid could be taken by the heirs as a deduction in calculating their federal income taxes. It follows that the amount of the transfer tax paid in 1917 by the respondent was deductible in ascertaining the taxable income of the estate received by her in that year.

Under the above authorities it is clear that the transfer taxes paid by the executor of Eichard S. Brock are not deductible by the petitioners from the gross income.

Judgment will he entered for the respondent.


author: MillikeN :

text:
    M. L. Virden, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5200.
    Promulgated April 29, 1927.
    1. An oral contract of partnership between a husband and wife is valid under the laws of Mississippi.
    2. Determination of March 1, 1913, value of certain real estate.
    3. Determination of date of repossession of real estate previously sold.

      Chas. D. Kamel, Esq., Benj. H. Bounders, Esg., and O. B. Ewing, C. P. A., for the petitioner.

      J. E. Marshall, Esq., for the respondent.
    This proceeding involves the redetermination of deficiencies in income tax for the years 1918, 1919, and 1920, in a total amount of $33,852.64. These deficiencies arise (1) from the refusal of the Commissioner to recognize that E. L. Yirden, wife of petitioner, was a partner in the M. L. Virden Lumber Co. during the years 1918, 1919, and 1920; (2) from the refusal of the Commissioner to recognize a partnership between R. L. Virden, wife of petitioner, and J. R. Hervey in the operation of a plantation near Moorhead, Miss., during the years 1919 and 1920; (3) the determination by the Commissioner that the March 1, 1913, value of a brick business building in Moorhead, Miss., sold by petitioner in 1920, was $2,500; and (4) the determination of the Commissioner that the petitioner repossessed himself in 1920 of the property known as the Swan Lake Plantation, which he sold in 1919 to one Mike Seghesio.
    In an amended answer, respondent alleges that in addition to income set forth in the 60-day deficiency letter, which is the basis of the petition, the petitioner received income in 1920 in the sum of $10,693.90, which the respondent alleges the petitioner willfully, falsely, and fraudulently failed to report on his income-tax return for that year.
    FINDINGS OF FACT.
    The petitioner is a resident of the City of Greenville, Miss., with his principal office in that city.
    Prior to January 1, 1918, the petitioner was a stockholder in the Virden Lumber Co., which was a Mississippi corporation. This corporation, which was engaged in the lumber business, was organized with a capital stock of $1,000, of which $2,000 was issued to C. E. Couty, and $5,000 was issued in the name of petitioner. The capital stock of the corporation was increased to $10,000. The petitioner purchased the stock of Couty and thereupon all the stock of the corporation stood in his name. E. L. Virden is the wife of petitioner. At the time she married petitioner, she owned real and personal property to the extent of about $15,000, part of which was used to purchase the stock of the corporation which stood in petitioner’s name. The Virden Lumber Co. was dissolved in 1917, whereupon the petitioner proposed to his wife that they form a partnership to carry on the business. To this she agreed. The agreement was oral, providing that they sho'uld equally share the profits and losses and the partnership was organized under the firm name of M. L. Virden Lumber Co. A new set of books was not opened, but the old corporation books were continued. These books reflected as of January 1, 1918, the joint interest of petitioner and his wife in the business, each owning one-half; the books showing that the petitioner had a $25,000 investment and his wife an equal amount. At the end of the year the books showed that the petitioner was credited with $27,500 and his wife with an equal amount, thus showing an investment of each of $27,500.

      Each party made withdrawals and the petitioner drew a salary of $500 per month. The wife took no active part in the business. Upon the dissolution of the corporation and the formation of the partnership, the petitioner notified the banks and the persons and corporations with whom he was dealing, and also the mercantile agencies, of the dissolution of the corporation and the formation of the partnership and the interest of the partners therein. The partnership first transacted business with the Greenville Bank & Trust Co. The officers of this bank were informed of the dissolution of the corporation, the formation of the partnership, and the names of the members thereof. Additional credit was extended the partnership by reason of the fact that B. L. Virden was a partner. She was no longer asked to endorse the paper of the concern as she had been required to do during the existence of the corporation, for the reason that being a member of the partnership, she was bound by the obligations thereof. In November, 1920, the M. L. Virden Lumber Co. transferred its account to the First National Bank of Greenville. The officers of this bank were also informed of the facts relating to the partnership. There is in the file a signature card filed with that bank on November 15,1920, which states that the names of the partners were M. L. Virden and B. L. Virden. B. G. Dun & Co., and the Bradstreet Company, in the publications made for the use of their subscribers, rated the M. L. Virden Lumber Co. as a partnership composed of M. L. Virden and B. L. Virden. The reports by these agencies were based not only on the representations of the persons reported, but also upon a verification of their statements made after thorough investigation. Suits were filed in the name of the petitioner and his wife, as partners, and deeds of trust, which were public records, were taken in their names as partners.
    It was stipulated, and we so find, that the net income of the M. L. Virden Lumber Co. was as follows:
    Net income.
    1918-$17,954.87
    1919 - 48,143. 08
    1920- 24, 769.31
    In 1911 or 1912, M. L. Virden acquired a farm near Moorhead, Miss. The petitioner and J. B. Hervey operated this plantation as partners. In 1918, M. L. Virden, in consideration of love and affection, conveyed this farm to his wife, and Hervey and M. L. Virden rented, the property from her during the year 1918, at a rental of $5,000 per annum, and operated the farm as partners. After the expiration of the lease and beginning with 1919, Mrs. Virden conducted the farm with Hervey,' as partners. She contributed the farm and 50 per cent of the expenses as her share of the obligations, and Hervey contributed his services and 50 per cent of the expenses as his share of the expenses of the partnership. Whenever money was needed to operate the farm, Hervey would advance one-half of the money and draw upon Mrs. Yirden for the remaining half. The receipts were divided equally. Although the respondent denies that E. L. Yirden was a member of the partnership of Hervey & Yirden, it was stipulated, and we so find, that the net income of Hervey & Yirden, for the year 1919, was $46,699.79, and that said partnership sustained a net loss for the year 1920 of $10,076.28.
    It was stipulated, and we so find, that in 1910 or 1911, the petitioner purchased at a bankrupt sale a brick business building at Moorhead, Miss., for the sum of $2,250; that he sold it in 1920 for $4,250; and that the depreciation sustained to date of sale was $205.' The fair market value of the property on March 1, 1913, was $3,500.
    In 1917, the petitioner acquired what is known as the Swan Lake Plantation, at the following original cost:
    Price paid-$65, 784.07

      Commissions paid in cask- 12, 625. 00
    Expenses paid in connection with sale- 904.00
    Commissions to be paid in 1920_ 19, 625. 00
    Total cost___ 98, 938. 07
    This plantation was sold November 19, 1919, to Mike Seghesio for $199,000, paid and to be paid as follows: Cash paid during the year 1919, $35,000, liabilities assumed, $25,000, and notes as follows: January 5, 1920, $25,000, and ten notes for $11,400 each, the first being payable January 5, 1921, and the remaining nine notes on January 5 of each succeeding year. It was stipulated, and we so find, that the percentage of profit contained in each installment is 50.282 per cent. The purchaser paid the $25,000 note which matured January 5, 1920, and made no further payments on the purchase price. In November, 1920, the purchaser, who had produced a crop, notified the petitioner that he could make no further payments and was going to leave the place. This he did in November, 1920, taking with him all his personal property. The petitioner’s income-tax return for the calendar year 1920 was verified by him on March 12, 1921. In this return he states “ in 1917 and 1919 I bought three separate tracts of adjoining lands from three different owners, composing what is known as the Swan Lake Plantation, and in 1919 sold the whole place to two different purchasers at different dates and reported the sales in my 1919 I. T. return as installment sales. The portion sold to Mike Seghesio I had to repossess in 1920.”
    During the year 1920 M. L. Yirden Lumber Co. of Greenville, Miss., transmitted to the Planters Lumber Co. of Jackson, Miss., its two ehecks of $5,922.52 and $4,787.48, respectively; the Planters Lumber Co. took these checks to the Jackson-State National Bank of Jackson, Miss., where exchange was purchased payable to M. L. Virden in the amount of $5,313.62, and $600 for the first check, and $3,880.28 and $900 with the second check; and the same were endorsed by M. L. Virden. The drafts for $5,313.62 and $600 were each dated August 7, 1920, and the drafts for $3,880.28 and $900 were each dated October 19, 1920. In 1924 the Planters Lumber Co. suffered a fire which destroyed many of its records. The bills payable account of the Planters Lumber Co. showed on December 31, 1919, a total of $34,600, and this total included five notes of the Planters Lumber Co., for $2,000 each, payable January 1, 1920, to M. L. Virden, and bearing interest at the rate- of 6 per cent. It was the custom of petitioner, acting for the M. L. Virden Lumber Co. and B. L. Fulton, who was secretary-treasurer and active manager of the Planters Lumber Co., of which petitioner was president, to buy lumber in large lots for themselves and for each other. In the summer of 1920, Fulton purchased several carloads of lumber from the Edward Hines Lumber Co., some of which were consigned to the M. L. Virden Lumber Co. The petitioner returned as income for 1920, $693.90 of the $10,693.90 paid to him by the Planters Lumber Co. The remaining $10,000 was not income to the petitioner.
   OPINION.

MillikeN :

It may be stated at the outset, that among the facts found are some which are not competent to prove the existence of the partnership, but which are competent to show the good faith of the petitioner and his wife. They show that instead of the partnership being a secret affair and disclosed only when convenient, the partners published the facts to the business world.

The record in this proceeding discloses that the petitioner and his wife on January 1, 1919, joined together to carry on a trade or business for their common benefit, one contributing property and the other property and services, and that they had a community of interest in the profits. This is sufficient to constitute a partnership between them. Cf. Meehan v. Valentine, 145 U. S. 611; Brooks v. Smith, 290 Fed. 33, holding that such a contract between husband and wife was valid under the laws of the State of Mississippi. A husband and wife can form a valid partnership under the laws of Mississippi (Miss. Code, 1906, § 2517; Jones v. Jones, 99 Miss. 600; 55 So. 361). At common law a contract of partnership may be oral. See Rowley’s Modern Law of Partnership, § 212. Respondent, however, contends that a contract of partnership between a husband and wife, to be valid in Mississippi, must be in writing and cites section 2521 of the Mississippi Code of 1906. That section reads:

Restrictions as to Contracts ToeUoeen hushand and wife. — Husband and wife shall not contract with each other, so as to entitle the one to claim or receive any compensation from the other for work and labor, and any contract between them whereby one shall claim or shall receive compensation from the other for services rendered, shall be void; and it shall not be lawful for the husband to rent the wife’s plantation, houses, horses, mules, wagons, carts, or other implements, and with them, or with any of her means, to operate and carry on business in his own name or on his own account, but all business done with the means of the wife by the husband shall be deemed and held to be on her account and for her use, and by the husband as her agent and manager in business, as to all persons dealing with him without notice, unless the contract between the husband and wife which changes this relation, be evidenced by writing, subscribed by them, duly acknowledged, and filed with the chancery clerk of the county where such business may be done, to be recorded as other instruments.

This section is, with a few changes which are immaterial to the question involved, the same as section 1177 of the Code of 1880, and section 2293 of the Code of 1892. A leading case on the construction of this section is Porter v. Staten, 64 Miss. 421; 1 So. 487. In that case, the defendant was the widow of a Dr. Staten, who besides being a practicing physician, devoted his attention to the cultivation of his wife’s farm. He contracted a debt with the plaintiffs for supplies for the plantation and for the family, and for money advanced him which he used in the purchase of medicines. The plaintiffs dealt with the husband in ignorance of the fact that the farm was owned by his wife. The court thus states the evil sought to be remedied by section 1177 of the Code of 1880, now section 2521 of the Code of 1906:

The evil intended to be remedied by this section of the Code was one which was becoming of frequent recurrence, as shown by the results of litigation in this state. Husbands of the owners of separate estates would devote their attention to the business carried on with the property of the wife; but, if the business proved to be unprofitable, the wife would escape liability for debts contracted in the business by the easy device of setting up a secret arrangement or contract, by the terms of which it would be shown that the property had been leased or hired to the husband, and the business transacted as his own and for his exclusive benefit. In.such cases judgments against the husband would be fruitless, and creditors who had dealt in good faith with him, believing him to have been the agent of the wife, were defrauded by finding the property to be in one person, and the risks incident to the business to which it had been devoted shifted to an insolvent by bed-chamber arrangements, which, whether real or simulated, it was impossible to disprove.

After bolding that the common law obligation of the husband to provide for his family was not changed or modified by the statute, and that the defendant was liable as an undisclosed principal for supplies purchased for the operation of the farm, the court held:

We think the defendant is responsible, as an undisclosed principal, for those items on the account, and those only, bought for the use and benefit of the business transacted with her property, and that the burden of proof is upon the plaintiffs to show what items fall within that class.

In Boss v. Baldwin, 65 Miss. 570; 5 So. 111, the court had before it the question whether the wife could make her husband her agent in a transaction not covered by section 1177 of the Code of 1880. The opinion in that case in part reads:

This case is distinguished from Porter v. Staten, 64 Miss. 421, 1 South. Rep. 487, by the fact that, here the principal was known, and not undisclosed, as in the other case, and the credit was given to the principal, the wife. Section 1177 of the Code makes the husband the wife’s agent in the state of case it mentions, and, as a wife is not under any disability to contract, she may by her conduct, make the agency of her husband broader than that provided for by section 1177. She may do this expressly or by a course of dealing.

To the same effect see Johnson v. Jones, 82 Miss. 483; 34 So. 83.

In Leinkauf v. Barnes, 66 Miss. 207; 5 So. 402, the court held that the fact that the wife had loaned to her husband money with which to go into business, did not make her liable as a principal under section 1177 of the Code of 1880. Among other things, the court said:

The second clause of the statute begins by enumerating the plantation, houses, horses, mules, wagons, carts, and implements of the wife as things which the husband should not rent from the wife, and conduct business therewith in his own name, except by virtue of a written contract, indicating thereby that the attention of the legislature was directed principally to the evils that arose from business conducted by the use of such property, and then broadens into the terms “ or any of her means.” It is a well-settled rule of construction that where special words are used, and they are followed by words of more general import, the general words are to be limited to matters ejusdem generis with the special words, unless an intention may be found to extend their meaning. This rule, of course, excludes the suggestion that the mere use of general words is sufficient to indicate a purpose to include matters not ejusdem generis. It is but-the application of a principle that governs men in their usual intercourse, and applies language to the subject with which the speaker is dealing, and limits or expands the words used to accord to his understanding and intention. We find neither in the subject-matter nor in the other words of the statute anything indicating a purpose to include within the import of the words “ any of her means ” property other than that of a visible, tangible character, the possession of which is indicative of ownership, and calculated to invite the public to deal with the possessor as owner, and to mislead it to its injury if the truth be found to be otherwise. On the contrary, the language of the whole section is peculiarly appropriate to visible property, and unless money is included in the words “ her means ” there are none in which it may be found.

Further, the court said:

This section (1177) relates exclusively to cases in which the husband transacts the business in his own name with property which, though used in the business, continues throughout the property of the wife.

These excerpts clearly show that section 2521 of the Mississippi Code has no application to the question whether a partnership may be created between a husband and wife in Mississippi by an oral agreement. This section is clearly a creditor’s statute to protect persons dealing with a husband and wife, especially in those cases where they could, by secret contract, throw the liability from one shoulder to the other by agreements of which no creditor had any notice. This view is borne out by Boss v. Baldwin, supra, where it is pointed out that the wife is under no disability to contract and may even by her conduct, irrespective of contract, constitute her husband her agent so as to be bound by his acts.

Under these authorities it is evident that the relation between the petitioner and his wife was that of a valid partnership. One-half of the stipulated income of the partnership should be excluded from the income of the petitioner.

What has been said with reference to the partnership between the petitioner and his wife applies to the partnership between her and Hervey, and results in the exclusion of income to the petitioner from this source.

While both the petitioner and Hervey have testified that the brick business building in Moorehead, Miss., which was sold by the petitioner in 1920, was worth $4,000 on March 1, 1913, we are not impressed by the testimony of petitioner nor with the qualifications of Hervey as an expei’t in the valuation of real estate. It is shown in the record that houses in Moorehead, situated in. the same block and which are said to have been similar to the one sold by the petitioner, were sold in 1908 and 1912 for $3,300 and $3,500, respectively. It is further shown that improvements were made on the block in which the house stood, subsequent to date of purchase and prior to March 1, 1913, which tended to increase the value of petitioner’s property. The petitioner, however, testified that immediately following the World War, there was an enhancement of property values in that vicinity “ to a considerable degree.” The record shows that the sale by petitioner in 1920 was made by him as a willing seller to a willing buyer, and fairly indicates the value of the property on the date of sale. Taking into consideration the fact that a considerable portion of the increase in price arose subsequent to the World War, we believe that $3,500 was the fair market value of the property on March 1, 1913.

The sole question with reference to the Swan Lake Plantation, or so much of it as was sold to Mike Seghesio, is whether it was repossessed by the petitioner in the year 1920. The only testimony on this point is that of petitioner himself and consists of his income-tax return as set forth in the findings of fact and his testimony at the hearing, which took place in November, 1926. This latter testimony consists of what he thought he remembered relative to a transaction which took place nearly six years previous. While he testifies that repossession was had on February 9, 1921, he states that he derived this information from a telegram which he received on the day of trial of this proceeding from an attorney and which was excluded from the evidence. He was asked on cross-examination:

Q. Did he [Seghesio] sign any papers to the effect that he would agree to waive any of his legal rights in the matter so that you could have immediate possession?
A. No, sir; he did not.

Shortly afterwards he was again asked:

Q. Do you know whether or not Mike Seghesio waived any of his legal rights concerning the time or manner of the foreclosure?
A. No, sir; I do not.

In view of the fact that the testimony of the petitioner is based on an imperfect recollection of that which could have been proved by documentary evidence and in view of the fact that petitioner in his income-tax return made about three months after the transaction occurred, and when it was fresh in his mind, stated that he repossessed the property in 1920, we are impelled to the conclusion that the Commissioner did not err in taxing this transaction upon the basis of repossession in 1920.

While it is not clear how simple interest at the rate of 6 per cent on a $10,000 debt ran into the uneven amount of $693.90, and although i.t is a peculiar coincidence that the amount of the checks of the M. L. Virden Lumber Co., less the cost of exchange, amounted precisely to the debt and interest of the Planters Lumber Co. to the petitioner, nevertheless the burden rests upon the respondent to prove that the payment of $10,693.90 was income to the petitioner. It is shown that the drafts represented the proceeds of the checks of the M. L. Virden Lumber Co. If the checks were not given to the Planters Lumber Co. for value, the whole transaction would amount simply to a circuitous transfer of the funds from the M. L. Virden Lumber Co. to the petitioner, and would come out of the profits of that company. But the net income of that company has been stipulated and the amount of the checks can not be added thereto. The account of the affair given by the petitioner and by the manager of the Planters Lumber Co. is not unreasonable and that version is that the checks of the M. L. Virden Lumber Co. to the Planters Lumber Co. were given in payment for lumber bought by the Planters Lumber Co. from the Edward Hines Lumber Co. and consigned to the M. L. Virden Lumber Co., and the drafts were delivered to petitioner in payment of the debt of $10,000 and interest due by the Planters Lumber Co. to petitioner. The respondent has failed to prove that $10,000 of the said sum of $10,693.90 received by petitioner, was income to him. The remaining $693.90 was duly returned by the petitioner. We, therefore, find that the petitioner did not receive the additional income in amount of $10,693.90 in the year 1920, and there is likewise no justification for the imposition of the 50 per cent fraud penalty pursuant to the provisions of section 250(b) of the Revenue Act of 1918.

Judgment will be entered on %0 days' notice, under Rule 50.


author: Milliken :

text:
    Matilda Holz Lee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7676.
    Promulgated April 29, 1927.
    The value of land at the time it was acquired as a gift determined from opinion testimony and evidence of actual sales, for the purpose of establishing the basis thereof upon subsequent sale.

      Benjamin Saunders, Esq., and S. A. Blustein, G. P. A., for the petitioner.

      J. E. Marshall, Esq., for the respondent.
    This proceeding results from the determination of a deficiency in tax for the calendar year 1922, in the amount of $28,658.48. The entire deficiency grows out of the profit determined by the Commissioner on the sale of a certain 131 acres of land in the year 1922. The only issue raised relates to the fair market value of the land on the date acquired by the petitioner, February 15, 1918, which constitutes the basis for determining the profit on the transaction.
    FINDINGS OF FACT.
    Petitioner is an individual residing at Ronceverte, W. Ya. On February 15, 1918, she acquired as a gift from her mother 131 acres of land situate in Louden District, Kanawha County, W. Ya., in the South Hills section overlooking the City of Charleston. The property was sold in the year 1922 for $118,114.96. The property is only two miles from the business center of Charleston, and but a very short distance from the city boundary. This vicinity for a number of years prior to the acquisition of the property in question by petitioner, had been the site of expensive homes and a very desirable residential subdivision. The property was accessible to Charleston and prior to 1918 a hard road had been extended to within a quarter of a mile of the same. The topography of the land as a site for homes and subdivisions was superior to adjacent land.
    Land values in and around Charleston increased as a result of the World War. On April 6, 1917, the United States Government had located an armor plate plant in South Charleston at an expense from $20,000,000 to $30,000,000 and this was followed by the location of a nitro plant a short distance from Charleston. The United States Government expended on the nitro plant in 1917 and 1918 between $75,000,000 and $80,000,000, and the employment of people incident to the construction, ran from 15,000 to 22,000 or 23,000 persons. There were employed at the armor plate plant between 600 and 800 persons. The demand for residential property in Charleston in 1918 caused values to reach the highest points prior or subsequent to that year. In 1916 property within one-half mile of the property of petitioner sold for $600 per acre and in 1918 property within one-fourth mile of petitioner’s property sold for $1,000 per acre. In 1917 a tract located but a short distance from petitioner’s, although slightly nearer Charleston, was sold for $4,000 per acre. Petitioner was approached many times during the year 1918 concerning the sale of her property, but purchasers were advised that the property was not for sale, she desiring to hold the same for enhancement in value.
    The property of petitioner was not only valuable in 1918 for subdividing and home sites, but was also underlaid with at least three seams of mineable coal. The property contained approximately 1,958,450 tons of recoverable coal and the minimum royalty rate applicable in the Charleston district during 1918 was 10 cents per ton. • The coal underlying the property could' have been mined without making it undesirable as residential property.
    Upon the signing of the Armistice on November 11, 1918, there was a cessation of activities in the armor plate plant and the nitro plant. .Real estate subdivisions had been oversold and building in Charleston exceeded the demand. Land values declined and have not to this time reached the peak of 1918 prices.
    The fair market price or value of the 131 acres of land of the petitioner on February 15, 1918, was at least $118,114.96.
   OPINION.

Milliken :

The only issue raised by this proceeding resolves itself

into one of fact, i. e., What was the fair market price or value of the property in question on February 15, 1918? The respondent determined a fair market value for the date in question of $178 per acre. We are not informed concerning the data or information which served as a predicate for such a valuation. Petitioner called as witnesses persons who had dealt very extensively in real estate in Charleston and vicinity during the years involved in this proceeding. The local conditions affecting the value of real estate in 1918 and 1922 have been clearly and convincingly presented to us. We have set forth in our findings of fact the inflated values of real estate in 1918 and the deflated values in 1922, the causes and the results therefor. The valuation for which petitioner contends is not based solely upon a theoretical basis to be deduced from war or postwar conditions, but is also supported by recourse to actual sales of similar and adjacent property. The evidence permits of no other conclusion than that the property sold in 1922 had a fair market price or value of at least $118,114.96 on February 15, 1918.

Judgment will be entered on 15 days' notice, wnder Rule 50.


author: Lansdon:

text:
    Lavenstein Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7221.
    Promulgated April 29, 1927.
    Affiliation denied.

      Richard H. Mann, Esq., for the petitioner.

      J. Harry Byrne, Esq., for the respondent.
    The Commissioner has asserted deficiencies in income and profits taxes for the years 1919 and 1920, in the respective amounts of $2,311.69 and $339.49. The only question at issue is whether the petitioner was affiliated with the Lavenstein Bros. Co., Inc., during the taxable years, and entitled to have its tax liability computed on the basis of a consolidated return for each of such years.
    FINDINGS OF FACT.
    The petitioner is a Virginia corporation, with its principal office at Petersburg. It was incorporated in March, 1911, with authorized capital of $25,000, divided into 2,500 shares of the par value of $10, each, all of which was issued in equal proportions to M. E. Laven-stein, H. II. Lavenstein, and A. L. Lavenstein. At the date of its incorporation it took over the cash and miscellaneous assets of the Lavenstein Bros. Co., Inc., and thereafter conducted the general merchandise business theretofore operated first by Lavenstein Brothers, a partnership, and later by Lavenstein Bros. Co., Inc.
    Lavenstein Bros. Co., Inc., is a Virginia corporation, with its principal office at Petersburg. It was organized on April 13, 1915, with authorized capital of $50,000, divided into 500 shares of the par value of $100, each, all of which was issued in equal proportions to M. E. Lavenstein, H. H. Lavenstein, and A. L. Lavenstein, in exchange for all the assets and subject to all the liabilities of the business theretofore conducted by the three Lavensteins as equal partners, and hereinafter referred to as the partnership.
    On November 26, 1913, the stock and fixtures of the partnership were destroyed by fire. The insurance companies in which the partnership held fire insurance policies denied liability for the fire losses. The partnership thereupon brought suit .for the recovery of the amounts of coverage represented by their fire insurance policies, and, after several years of litigation, secured judgment for the full amount of the claims, and such judgment was paid in cash prior to June 1, 1920.
    The refusal of the insurance companies to pay the losses sustained from the destruction of the stock and fixtures made it impossible for the partnership to pay bank loans and accounts for merchandise purchased from certain wholesale merchants. With such obligations in its financial statement offset only by a disputed claim against fire insurance companies, the partnership had great difficulty in financing its business and in securing credit from wholesale houses.
    On April 13, 1915, Lavenstein Bros. Co., Inc., was organized as set forth above, and at once entered into the following agreement with the three Lavensteins and the representatives of the creditors of the partnership:
    Agreement made this 24th day of April, 1915, by and among M. E. Lavenstein, Harry H. Lavenstein, and Abraham L. Lavenstein, of the City of Petersburg, in the State of Virginia, parties of the first part, the National Bank of Peters-burg, Virginia, The Southern Dry Goods and Notion Co., Incorporated, and A. Wright Co. all of the City of Petersburg, in the State of Virginia; the Richmond Dry Goods Co., Incorporated, and Kaufman & Co., of the City of Richmond, in the State of Virginia, The Baltimore Bargain House, and Schloss Bros. & Co. of the City of Baltimore, in the State of Maryland, parties of the second part, and Lavenstein Brothers Company, Inc., of the City of Petersburg, in the State of Virginia, party of the third part:
    Whereas the parties of the first part are all of the stockholders of Lavenstein Brothers Co. Incorporated, engaged in the business of buying and selling general merchandise, with its place of business in the City of Petersburg, in the State of Virginia, with a paid up capital stock of $50,000.00, and,
    Whereas the parties of the second part are the largest creditors of the said parties of the first part, heretofore trading as partners under the firm name of Lavenstein Brothers, and which said indebtedness and other indebtedness of said Lavenstein Brothers has been assumed by the party of the third part; and,
    Whereas the parties of the first part, and the party of the third part desire further time for the payment of the indebtedness due and owing to the said parties of the second part, and to assure and secure the payment of said debts by a transfer and assignment of all of the capital stock of the said Lavenstein Bros. Co. Incorporated, excepting two shares thereof, and the control, management and direction of said business under the terms and conditions hereinafter set forth;
    Now Therefore, in consideration of the premises and the sum of $1.00 lawful money of the United States, each to the other in hand paid, the receipt of which is hereby acknowledged, and in consideration of the undertakings by the parties of the second part as herein provided, it is agreed as follows:
    First
    The said parties of the first part shall transfer, assign and deliver to E. E. Hinckle, B. F. Caston, and Samuel Burwell 498 shares of (he paid up capital stock of Lavenstein Brothers - Co. Incorporated for the joint use and benefit of the parties of the second part, in the following amounts, namely:
    Shares
    E. E. Hinckle_,_168
    B. P. Oaston_165
    Samuel Burwell_165
    the remaining two shares of the paid up capital stock to be retained by M. E. Lavenstein and Abraham L. Lavenstein, one share each, for the purpose of conducting the business, and to be held under the terms and conditions of this agreement.
    Second
    That for the indebtedness due and owing to the parties of the second part, said Lavenstein Brothers Oo. Incorporated, has executed and delivered to the several parlies of the second part, their several promissory notes bearing even date herewith, and payable three months after date in the following amounts, respectively:
    To the National Bank of Petersburg, one note for_$31,250. 00
    To Virgina National Bank of Petersburg, one note for_ 20, 000.00
    To Richmond Dry Goods Go. of Richmond, one note for_13, 001. 85
    To Kaufman & Go. of Richmond, one note for_ 3, 694. 02
    To Baltimore Bargain House of Baltimore, one note for- 16, 543.12
    To Schloss Bros. & Oo. of Baltimore, one note for_ 11,489. 04
    To Southern Dry Goods and Notion Oo. of Petersburg, one note for_ 5,512.45
    To A. Wright & Co. of Petersburg, one note for_ 2, 043. 04
    each and all of said notes being personally endorsed by said parties of the first part, and such other endorsements as are now had by any of the said parties of the second part. And it is expressly understood and agreed that such notes shall be renewed or extended until January 1st, 1916, or until the prior termination of this agreement:
    THIRD
    The absolute control and management of all of the stock of merchandise, and all furniture and fixtures, notes and accounts receivable, and other personal property of every character and description and all of the real estate heretofore transferred, and now owned by Lavenstein Brothers Co. Incorporated, shall be turned over and delivered to the said E. E. Hinckle, B. E. Oaston and Samuel Burwell, who shall be elected Directors of the said Lavenstein Brothers Oo. Incorporated, together with the said M. E. Lavenstein and Abraham L. Lavenstein.
    Fourth
    The parties of the first part further agree that the parties of the second part, by and through said E. E. Hinckle, B. E. Oaston, and Samuel Burwell, or such others as may be nominated to take their places, shall have the absolute and exclusive x*ight to determine the manner in which the said business shall be conducted, and the policies which shall be adopted for the conduct of said business, free from any interference by the parties of the first part, until all of the expenses that may be incurred by the parties of the second part, or by said E. E. Hinckle, B. E. Caston and Samuel Burwell, and all of the obligations contracted in such business and all indebtedness due and owing to the parties of the second part has been fully paid off, satisfied and discharged; and that the business shall be conducted as long as they may deem proper and right and until January 1st, 1916, if the same can be done, in their judgment, without suffering any loss, and that they will manage and conduct said business according to their best business judgment.
    The Parties further agree that during the term the said business is in operation as herein provided, under the control and direction of the parties of the second part, sales shall be made only in the course of regular retail trade for cash, and no sales shall be made on credit except with the approval and consent in writing of the Secretary of the Corporation, and such sales shall be made so as to realize a fair profit, over and above the cost price of the merchandise except when otherwise determined by the Board of Directors, and at any time after January 1st, 1916, or after such time as this contract may be terminated prior to January 1st, 1916, said E. E. Hinckle, B. P. Caston and Samuel Burwell or their successors for and on behalf of the parties of the second part shall have and reserve the privilege of selling the stock of merchandise, furniture and fixtures, real estate and all the assets of every character and description of said Corporation in such a manner and on such terms as they may deem proper and believe will bring the most net cash for same, and out of the proceeds therefrom they shall first pay all expenses and prior debts and debts contracted by the corporation after date of this agreement, and the balances then due to the parties of the second part, with accrued interest, and the remainder if any, to be paid to the parties of the first part, their legal representatives or assigns.
    Eifth
    The employment of the parties of the first part as President, Vice-President, Secretary, and of Miss Maggie Hutchinson as Assistant Secretary during the term of this agreement, is based upon the express condition that they and each of them devote their entire time and attention to the business of the corporation under the direction and supervision of the Board of Directors. And if they, or either of them, fail to discharge their duties in good faith as required by their employment they, or either, or all of them, may be discharged by the Board of Directors at any special meeting for such purpose, or by direction of said E. E. Hinckle, B. E. Caston and Samuel Burwell, or their successors, it being further stipulated and agreed that all purchases of merchandise in conducting said business shall be approved and confirmed by E. E. Hinckle, B. E. Caston, and Samuel Burwell, or either of them.
    The salaries of the President, Vice-President, Secretary and Assistant Secretary and all of the employees of the corporation shall be fixed and approved by the Board of Directors. Said E. E. Hinckle, B. E. Caston and Samuel Burwell shall receive no compensation for their services but shall be reimbursed for any and all expenses that may be incurred by them.
    Sixth
    The Treasurer shall have the supervision of the finances of the business, and shall make all of the deposits of the said corporation in the National Bank of Petersburg, and Virginia National Bank in such proportion as he may deem proper; all checks drawn against such bank accounts shall be signed by the President, and countersigned by .the said Treasurer, or in his absence, by Samuel Burwell.

      The Assistant Secretary shall also make weekly detailed reports of the business, showing the daily sales for cash and on credit, expenses, disbursements for purchases of merchandise, and payments otherwise, and ail details pertaining to the business, said reports to be made in triplicate, one thereof being kept in the files in the office of the Corporation, one to be forwarded to B. E. Caston, 500 W. Baltimore St., Baltimore, Md., and the third to be retained by the Treasurer in his office in Richmond, Virginia; and with such reports the Assistant Secretary shall send the Treasurer such checks as may be required to pay for merchandise purchases, general expenses, and other essentials, the pay roll of the employees and checks for the residue of receipts shall be made payable to the several parties of the second part in proportion to tlieir respective claims.
    Seventh
    It is further agreed that on ten days’ notice at any time before January 1st, 1916, or before the prior termination of this agreement, the parties of the first part may pay to the parties of the second part the amounts due and owing to them respectively, and upon such payments the parties of the second part agree to have transferred, reassigned and delivered to the parties of the first part all of the assets remaining on hand unsold and uncollected of said corporation, together with the capital stock thereof held by them or for their benefit, and any other or further securities held by any of them for the payment of their respective claims.
    In the event of the liquidation of the business of Lavenstein Brothers Co. Incorporated, by sale or otherwise, on or before January 1st, 1916, or at any time thereafter, any of the parties of the second part holding securities or collateral shall dispose of such securities or collateral for cash either at public or private sale for the best price they can obtain for the same, at such time and place as may suit their convenience, and said parties shall participate in the proceeds of the sale of the assets of the corporation to the extent of the remainder that may be due and owing them. Ten days’ notice of such sale shall be given in writing to the corporation by registered mail.
    If, on January 1st, 1916, the fir.e insurance policies of Lavenstein Brothers, for which suits are pending and which were transferred to Lavenstein Brothers Co. Incorporated, subject to the rights, uses and purposes for which said policies are held by B. F. Caston and the Virginia National Bank, have not been settled or collected, or their validity fully determined, this agreement may be continued on the same terms and conditions for such further time as may be mutually agreed upon by all of the parties of the second part with the parties of the first part.
    Nothing herein stated or contained shall limit or restrict the right of such of the parties of the second part as now hold securities or collateral for all or any part of the indebtedness owing to them by the parties of the first part to retain such collateral or securities for such indebtedness, their right thereto being hereby expressly confirmed and recognized, and the proceeds of any such collateral or securities that may be received prior to January 1st, 1916, or the earlier termination of this agreement shall be applied by the holder of such collateral or securities as payment on account of their respective notes.
    The said E. E. Hinckle, B. E. Caston, and Samuel Burweli join in the execution of this agreement to signify their consent and willingness to perform the duties required of them in good faith, but should they or any of them for any reason be unable to perform such duties then, in such an event, a successor or successors shall be named with the consent in' writing of a majority, of the parties of the second part, and such successor or successors shall have the same rights, powers and obligations herein given to said E. E. Hinckle, B. E. Caston and Samuel Burwell.
    Eighth
    The terms and conditions of this agreement are approved, ratified and confirmed by resolution of the Board of Directors of Lavenstein Brothers Co. Incorporated, and the President and Secretary thereof authorized to execute same on behalf of the Corporation, and the conditions of this agreement shall extend to and be binding upon all the parties hereto, and their administrators, successors, and assigns.
    Nothing herein contained shall, in any wise, affect the agreement heretofore made in connection with the loan of $10,000.00 to the said Lavenstein Brothers by or through Schloss Brothers-& Co.
    In March, 1917, it became necessary to make some further arrangements to protect the interests of the creditors and enable the Lavenstein Corporation to carry on its business. Accordingly the petitioner was organized as hereinbefore set forth and took over from the Lavenstein Bros. Co., Inc., certain properties designated as live assets. Thereafter, the Lavenstein Bros. Co., Inc., retained only the real estate and the claims against the insurance companies as its assets, and the claims of the creditors as enumerated in the agreement above set forth as its liabilities. On March 19,1917, Lavenstein Bros. Co., Inc., leased the building to which it retained title to the petitioner for a rental of $5,400 per annum. Thereafter, it held no stockholders’ or directors’ meetings and transacted no further business until it prevailed in its suit against the insurance companies prior to June 1, 1920.
    . From the date of its incorporation the petitioner paid all the expenses of operating Lavenstein Bros. Co., Inc., kept the accounts of such corporation in its own books of account and paid the taxes on its real estate. On June 1, 1920, in conformity with judgment rendered by the Supreme Court of Virginia, Lavenstein Bros. Co., Inc., received in cash the full amount of the disputed insurance claims, and immediately paid in full all the obligations due banks and other creditors as set forth above. Thereupon the nominees of the creditors’ committee assigned the stock standing in their name to the Lavenstein brothers in equal proportions, and in all other respects carried out the terms of the agreement entered into on April 24, 1915.
    The petitioner and the Lavenstein Bros. Co., Inc., made a consolidated income and profits-tax return for each of the years 1919 and 1920. Upon audit of such returns the respondent disallowed affiliation for the year 1919, and the period from January 1 to June 1, 1920, and determined the deficiencies here in question.
   OPINION.

Lansdon:

The only question here is whether the petitioner and Lavenstein Bros. Co., Inc., were affiliated during the taxable years. This issue must be determined by ascertaining the ownership of the shares of the capital stock of Lavenstein Bros. Co., Inc., which were held by the nominees of the creditors during the period in controversy. This stock was issued in equal proportions to the Lavenstein brothers, and, in conformity with the agreement which we have incorporated in our findings of fact, was assigned to nominees of the creditors’ committee, was reissued to such nominees, and stood in their names during the time here involved.

The petitioner contends that the actual ownership of the stock of Lavenstein Bros. Co., Inc., was, at all times, in the three Lavenstein brothers; that it was held by the nominees of the creditors’ committee only as security for the debts listed in the agreement; and that by the terms of the agreement it could, at any time, have the stock transferred to it on the payment of the debts in question. Upon the facts we are unable to agree with these contentions. During the period in controversy, the stock was outstanding in the names of the nominees of the creditors’ committee. Such nominees had complete control both of the stock and of operation of the business. The alleged actual owners of such stock had no record title to it.and could acquire such title only by paying the debts in question in full, which they were unable to do at any time prior to the collection of the insurance policies. In these conditions we are of the opinion that, even if the Lavensteins had an equitable title to the stock in question, they were unable to exercise any of the powers of ownership or control.

Judgment will be entered for the respondent.

Green, Phillips and Trussell dissent.


text:
    F. M. Reed, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6776.
    Promulgated April 29, 1927.
    1. The March 1, 1913, value of a clam and its probable useful life from that date determined to find the depreciated value basis upon which the allowable deduction on account of the destruction of a part thereof in 1920, is computed.
    2. The March 1, 1913, value and probable useful life of a dam, as well as the probable useful life of a portion thereof reconstructed in 1920, determined for depreciation purposes.

      PeiTy A. Sletteland, Esq., for the petitioner.

      W. F. Gibbs, Esq., for the respondent.
    This proceeding results from the determination by respondent of a deficiency in income tax for the calendar year 1920, in the amount of $120.86. Two errors are assigned: (1) The disallowance by the respondent of a loss of $2,394.30 arising from the partial destruction of a dam which had a March 1, 1913, value of $12,000; (2) depreciation on a dam for the year 1920 and years prior thereto, has been incorrectly computed.
    There is no dispute between the parties that petitioner suffered the loss of one-fourth of its dam, in the year 1920. The only questions relate to the fair market price or value of the dam on March 1, 1913, the depreciation sustained from March 1, 1913, to date of destruction on March 1, 1920, and the correct rate of depreciation for the calendar year 1920.
    FINDINGS OF FACT.
    Petitioner is an individual residing at Necedah, Wis. In 1905, he constructed a dam on the Yellow River, at Necedah, which was completed and ready for operation in 1906. On March 1, 1913, the fair market price or value of the dam was $12,000. One-fourth of said dam was destroyed by flood on or about March 1, 1920. The useful life of the dam on March 1, 1913, was 32 years.
    The cost of the new part of the dam constructed between March, 1920, and July, 1920, was $13,000, and the useful life of the new part of the dam, when so constructed and completed, was 40 years.
   OPINION.

MillikeN :

The March 1, 1913, value of the dam in question was $12,000, and it should be depreciated on the basis of the useful life, as determined, down to March 1, 1920, to determine the residual value of the dam on that date. One-fourth of the residual value of the dam on March 1, 1920, should be allowed as a loss and depreciation computed for the calendar year 1920 on the useful life as determined for the three-fourths of the old dam remaining and depreciation allowed based upon the useful life for the new part of the dam, construction of which was completed on July 1, 1920, and from which date depreciation should be allowed.

Judgment %uill be entered on 15 days’ notice, under Rule 50.