author: Aeundell :

text:
    Acme Manifolding Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 25194, 38687.
    Promulgated October 23, 1931.

      Morris Metz, O. P. A., for the petitioner.

      Harold Allen, Esq., and L. H. RusKbrooh, Esq., for the respondent.
   OPINION.

Aeundell :

The principal invested capital issue is whether certain assets acquired by the petitioner from the predecessor partnership have been included in invested capital at the full amount allowed by the statute. Good will is sought to be included at $50,000, this being the amount which the petitioner says it agreed to pay and did pay therefor in cash. An actual cash value of $92,079.50 is claimed for the plant at the date of acquisition, which is $42,079.50 greater than the value recorded on the books and allowed by the respondent. The right of the petitioner to include in invested capital the remaining tangibles acquired from the partnership, at the net value carried on the partnership books, $26,384.94, is not in question.

We are unable to agree with petitioner’s contention that the tangible property and good will were acquired separately. At the first meeting of the stockholders on June 17, 1914, the directors were authorized to acquire the partnership “ plant and machinery, stock on hand, bills and accounts receivable, good will and trade name ” for 98 shares of stock and $50,000 to be paid “ out of the net earnings of the corporation as they may accrue and be available for that purpose.” At the directors’ meeting on the same day it was resolved that the “ machinery, stock on hand, bills and accounts receivable, and name are of the value of at least $59,800.” The bill of sale recited that the partners sold to the petitioner the partnership business “ together with machinery, stock on hand, bills and accounts receivable, good will and all the right to use the name Acme Manifolding Co.” The only hint at any segregation of tangibles from intangibles is in the minutes of the first meeting of the incorporators of petitioner, where it is recited that the partners “ estimate the good will of said business to be reasonably worth the sum of $50,000.” All of the evidence indicates that the partners desired merely to incoiqporate their business in such a way as to retain control and to realize $50,000 out of the earnings and without any thought of segregating tangibles from intangibles. When they came to record the transaction on the books no record was made which would substantiate the claim now advanced. An item of $118.74 was entered which was designated “ Good Will,” but even that amount appears to be merely a balancing entry made to reflect the difference between the partners’ capital account and the petitioner’s liability to the partners, rather than an entry to actually reflect good will.

For the year 1920 respondent computed invested capital at $141,828.41. This sum included $50,000 as representing the value of the plant acquired from the partnership, adjusted to date to reflect subsequent additions and depreciation reserve. For the year 1921 the invested capital allowed by the respondent was $128,871.66, which included the plant at the same figure as for 1920, with similar adjustments for additions and depreciation. In neither year has the respondent allowed any value for good will.

We think the evidence warrants an increase in petitioner’s invested capital. A very careful inventory was prepared of the articles and equipment going to make up petitioner’s plant account at the time of acquisition, which inventory set forth in detail each item with a figure opposite it which the evidence fairly establishes to be depreciated cost, such figure representing the initial cost price depreciated at the rate of 10 per cent per year. If this were the only evidence it probably would not meet the test of the statute, as it is actual cash value of tangible property paid in for stock or shares which is included in invested capital and not depreciated cost. Throughout the examination of witnesses the words “ cost ” and “ value ” were loosely used and in this respect the record is somewhat unsatisfactory. However, the cross-examination of petitioner’s witness, W. It. Bohmert, served to elicit the opinion that the fair market value of the property in dispute was roughly $100,000 at the time it was turned over to petitioner. Bohmert had been a partner in the business from its beginning and we are perfectly satisfied of his qualifications to express an opinion of value. We have reached the conclusion that the actual cash value of the plant at the time turned in to petitioner was $92,079.50. This amount should be used in determining invested capital instead of the $50,000 allowed by the respondent.

We have found as a fact that the good will turned over by the partnership to petitioner in 1914 had an actual cash value of $50,000. Petitioner’s predecessor, the Acme Manifolding Company, a partnership. was organized in 1899, with a capital of $2,400. From this humble beginning it had grown so that in 1914 it included among its customers some of the leading mercantile establishments of New York, including B. Altman, Giinbel Brothers, Jas. McCrery, Saks & Company, and Tiffany & Company, and was supplying 90 per cent of their needs in the line of manifolding books, etc. Its gross sales for the years 1911, 1912 and 1913, the three years immediately preceding the incorporation, were $230,807.58, $255,061.45 and $243,957.14, respectively, on which the net profits were, respectively, $18,184, $14,992.47 and $21,609.88. Petitioner’s witness, Bohmert, whom we have already mentioned, testified to a value of good will in excess of $50,000. In reaching his conclusion he assumed an average value for tangibles used in the business of $80,000, and average earnings of $35,000. His estimate of earnings of $35,000 per year was excessive, as the average for the three years immediately preceding the incorporation was only something over $18,000. The rule of thumb formula used by Bohmert is one that has been frequently employed, and if we adjust the average income to the lower figure which we believe to be correct, the value for the good will set at $50,000 would not be excessive. While we do not base our conclusion on the application of a formula, we are convinced that the partnership had a substantial good will and that the earnings, testimony of Bohmert, and attendant facts justify a value in the amount of $50,000.

From the foregoing it is evident that the petitioner acquired a mixed aggregate of tangible and intangible properties for a consideration of $50,000 cash and $9,800 par value of petitioner’s capital stock. The actual cash value of the tangibles was $118,472.94, while the value of the intangibles, consisting only of good will, was $50,000. In order to determine what part of the mixed aggregate was paid in for shares of stock, the amount of the cash consideration must first be applied against the value of the tangible assets. Evansville Courier, 23 B. T. A. 862, and cases therein cited. Under this rule we find that tangibles of the value of $68,472.94 and intangibles of the value of $50,000 were paid in for $9,800 par value of petitioner’s capital stock. Allocating the issued stock to the two classes of properties according to the rule announced in St. Louis Screw Co., 2 B. T. A. 649, the par value of stock issued for the intangibles amounted to $4,135.96. Twenty-five per cent of the $10,000 par value of petitioner’s capital stock outstanding on March 3, 1917, is the lower of the three limitations on intangible values paid in for shares of stock includable in invested capital, under the provisions of sections 326(a) (4) of the Revenue Acts of 1918 and 1921; hence, the maximum amount of good will value which the petitioner is entitled to include in invested capital for 1920 and 1921, is $2,500.

It is alleged that the respondent erred in the apportionment of earnings applicable to dividends paid in 1920 and 1921. The 1918 and 1921 Acts provide in section 201 that, where dividends are paid after the first sixty days of any taxable year, the earnings shall be deemed to have been accumulated ratably during the period from the beginning of the taxable year to the date of distribution if the books do not show such earnings or profits. The respondent’s action in spreading the earnings of the taxable years is proper in the absence of evidence of the earnings to the dates of distribution. Gardner Governor Co., 5 B. T. A. 70. To show error in the respondent’s method, petitioner offered proof of the gross sales and profits during the years in question and asks us to find that the profits to the dates of payment of the dividends are in the same ratio as profits for the whole year are to the gross sales. Too many other factors enter into the earning of profits for a given period to accept such a method in preference to the statutory plan. There being-no proof that the earnings available for dividends were other than those determined by respondent, his action is sustained.

Several grounds are assigned in petitioner’s claim for special assessment. The first ground is that invested capital can not be determined because the books do not reflect the true value of tangibles acquired for stock and good will for cash in 1914. The adjustments, which will follow as a result of our decision on the first issue, very largely destroy petitioner’s argument in this particular. The second ground is that abnormalities exist because of the strike in 1919 and alleged improper proration of earnings to determine the amount of current profits available for dividends. The only proof made as to the strike is that it continued for eight weeks in July and August, 1919, making it necessary to fill accumulated orders, amounting to $75,000, in the next fiscal year. We do not know whether petitioner made any profit on those orders or how the strike otherwise affected its income, if at all. Not knowing how petitioner’s income was affected by the strike, we can not say that it created an abnormality in either capital or income. The argument as to improper proration of earnings is wholly lacking in merit.

In his computation of the deficiencies for the fiscal years ended in 1924, 1925, and 1926, respondent computed exhaustion on petitioner’s machinery, equipment, furniture and fixtures at the composite rate of 10 per cent per annum. Without asking for a definite allowance, petitioner claims the allowance is inadequate, the basis for his contention apparently being that the assets were used more than the usual number of working hours per day. No evidence was offered as to the years 1920 and 1921 or concerning the furniture and fixtures. Such evidence as was offered as to the remaining taxable years and assets shows that some of the machinery had a useful life of less than ten years and others a longer life, based on an eight-hour working schedule. There is no testimony as to the average useful life of the assets. A taxpayer is not entitled to a higher composite rate than that allowed by showing that some of the items to which the rate was applied have a shorter life than the average period of usefulness of all the assets. The evidence does not warrant a disturbance of the respondent’s allowance.

Petitioner also alleged error in disallowing moving expenses. The evidence on this consisted of testimony that petitioner moved its plant in January, 1926, and some of its equipment was not moved because not adaptable to the new quarters. This meager evidence is insufficient to form the basis of any material findings of fact and likewise insufficient to show error on the part of the respondent.

Decision will he entered under Rule 50.


source: Caselaw Access Project

author: Maequette:

license: Public Domain

text:
    Estate of Francis Abeles, Petitioner, v. Commissioner of Internal Revenue, Respondent. John T. Abeles, Petitioner, v. Commissioner of Internal Revenue, Respondent. Clifford Abeles, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. Katherine Abeles, Petitioner, v. Commissioner of Internal Revenue, Respondent. Charles T. Abeles, Petitioner, v. Commissioner of Internal Revenue, Respondent. Williemene H. Abeles, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 37693-37696, 40546, 41034.
    Promulgated October 23, 1931.

      Chase Morsey, Esq., for the petitioners.

      C. H. Curl, Esq., for the respondent.'
   OPINION.

Maequette:

Tire petitioners received their stocks in the Martha Realty Company and the Terminal Hotel Company by bequest from Julius D. Abeles, who died on August 15, 1920. That date was used by the respondent as a basis for determining gain or loss from the sale of the stocks. Each petitioner, except the estate of Francis Abeles, alleges that the proper date to be used should be November, 1923, the time when the stocks were actually released from the trust created by Julius Abeles and distributed to the legatees.

The Revenue Act of 1926, section 204 (a) (5), provides that in determining gain or loss from the sale of property acquired by bequest, “the basis shall be the fair market value of such property at the time of acquisition.”

In Brewster v. Gage, 280 U. S. 327, the Supreme Court held that upon the death of the owner of personal property his heirs or legatees were immediately vested with the right to respective distributive shares after proper administration; and that a decree of distribution conferred no new right upon the heirs or legatees, but merely identified the property, evidenced their rights of possession, and the legal title so given related back to the date of death of the deceased.

We can see no essential difference, as to the principle involved, between that case and the present proceedings. There, possession and dominion by the legatees was deferred during an indeterminate period of administration; here, possession is postponed for not to exceed a five-year trust period, the legatees meanwhile receiving the income earned by the stocks. We hold, therefore, that the stocks in question were acquired upon the death of Julius D. Abeles on August 15, 1920.

The remaining question concerns the fair market value of those stocks at the time of acquisition. The respondent apparently valued the Martha Realty Company stock at $150 per share on August 15, 1920. In so doing, we think he was in error. We have found as a fact that the value on that date was $340 per share and that amount, therefore, is the proper basis upon which to compute gain derived from sale of the stock.

As to the Terminal Hotel Company stock, we have found that its fair market value on the basic date was $150 per share. The respondent used the same amount in reaching his determination. On that basis his determination should stand.

Judgment will be entered under Rule 50.


author: Steknhagen:

text:
    Fannie Snyder Hickman, Petitioner, v. Commissioner of Internal Revenue, Respondent. O. L. Hickman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 16253, 16254.
    Promulgated October 23, 1931.

      E. L. Bono, Esq., and S. M. Cook, Esq., for the petitioners.

      T. M. Mather, Esq., and J. M. Morawski, Esq., for the respondent.
   OPINION.

Steknhagen:

Before considering the merits of any tax liability which may have existed in respect of 1920 against Fannie Snyder Hickman, it is necessary to determine whether the statutory period of limitations in respect thereof has expired, as contended by the petitioner. The original return was a joint return filed for husband and wife on March 8, 1921. It is well established that despite the fact that separate returns were later filed, the filing of this original joint return fixed the starting point of the statutory period of limitations. Belle B. Weaver, 4 B. T. A. 15; Estelle B. Sargent, 22 B. T. A. 1270. The tax being for 1920, it was imposed by the Revenue Act of 1918, and the period within which assessment and collection thereof were required to be made by the Commissioner was five years, Revenue Act of 1926, sec. 277(a)(3). Hence the statutory period expired before March 8,1926, and the determination made by the respondent in this case on April 10,1926, was too late.

The respondent, however, argues that because an earlier notice of deficiency had been mailed August 4, 1924, his time to assess was extended by 60 days, until May 7, 1926, making timely the determination in April. This contention is in all essential respects the same as that rejected by the Board in Alice Wilson, 23 B. T. A. 644. The respondent cites Wayne Body Corporation, 22 B. T. A. 401, reconsidered in 22 B. T. A. 1207, but that case is readily distinguishable. It involved the period within which the respondent could proceed against a transferee in respect of the liability for a deficiency determined against the transferor, assessed after five years bnt within five years and 60 days from the time the return was filed. In the case at bar the first deficiency of 1924 had been both assessed and paid, so as to dispense with the occasion for extending the Commissioner’s time to enforce it; and under such circumstances it was held in Alice Wilson, supra, that there was no need for an extension of the five-year period by 60 days and no reason to construe the statute so as to permit a second deficiency determination after the original five-year period had expired. Accordingly, as to this petitioner judgment of no deficiency will be entered.

As to the husband, O. L. Hickman, petitioner in Docket No. 16254, no contention is made in respect of the statute of limitations. He contends that by the gift to his wife of April 19, 1920, he divested himself of all interest in the remaining 40 acres of the Norton lease and therefore that no part of any gain realized upon the disposition thereof to the corporation could be attributable or taxable to him. He also, in the alternative, attacks the respondent’s use of the par value of the stock as representing fair market value when received in determining the gain or loss from its disposition.

The petitioner’s contention that he gave to his wife for her separate property his entire interest in the 40 acres is, in our opinion, not in accordance with the instrument of gift nor with the petitioner’s own intention and understanding in respect of such gift at the time he made it. He said that he did not intend to give his wife more than half of their undivided half interest in the 40 acres. The gift instrument, in our opinion, gives her for her separate use one-half of the interest which they both theretofore had owned in community. Snowden v. Cruse, 152 La. 144; 92 So. 764; H. C. Walker, Jr., 6 B. T. A. 1142. This left the remaining half of their interest as continuing to be held by them in community. Thus the petitioner remained the owner of a community interest in one-fourth of the 40 acres, which community interest was an undivided half in such one-fourth. In other words, of the 40 acres, one-half was never owned by the petitioners and need not be considered; and of the remaining one-half, Mrs. Hickman, by virtue of the gift, became the separate owner of one-fourth while the husband and wife together continued to remain the community owners of the remaining fourth. If, therefore, it had been necessary to ascertain a cost basis to be used in determining the gain of the husband from his sale of property, such cost would be ascertainable by attributing to him one-fourth of the half interest originally owned by him and his wife. But since the petitioner has already written off his cost in prior years, as stipulated by the parties, and as a result the entire amount received by him must be taken as gain, it is unnecessary to consider the proportionate distribution of cost resulting from the gift. Suffice it to say that the husband did not, by the gift, part with his entire interest, but retained a substantial property interest in the said lease, which interest he sold to the corporation, and whatever he derived therefrom was gain taxable to him.

. From the evidence it appears that he received one-half of the cash of $12,000, and 15,492 shares the value of which may be taken to be $5 per share, because the respondent so determined and the corporation’s appraisal committee also substantially recognized this value and there is no countervailing evidence. There were also received notes of a face value of $8,350, the distribution of which does not clearly appear in the evidence, nor does it appear how this was treated by the respondent in the determination of this petitioner’s deficiency. Hickman, in his testimony, spoke of receiving cash of $32,000, thus indicating that he regarded the notes as cash, of which he got half. We may fairly assume, therefore, that these notes were also equally divided, so that Hickman received half or $4,175. Thus the total he received from the sale to the corporation was the aggregate of $12,000 cash, $77,460 stock, and $4,175 notes, or $93,635.

But Hickman’s entire interest in the 40 acres was, as we have seen, represented by his share of the community property, so that all that he received in the Sakaba sale was received by him in behalf of the community. This was properly taxable one-half each to himself and his wife. Bender v. Pfaff, 282 U. S. 127. Hickman, therefore, must be regarded as having realized a gain from the Sakaba sale of $46,817.50.

Within the year, Hickman, still acting in behalf of the community, sold 14,400 shares out of the 15,492 which the community had theretofore received. For these 14,400 shares, the community received $16,200, thus realizing a community loss of $55,800. Half of this, or $27,900, Hickman is entitled to treat as a deduction.

Respondent has admitted that the petitioner is individually entitled to a loss, heretofore disallowed, of $13,501.45 in respect of the drilling of dry holes and the expiration of leases. Readjustment of the deficiency will, therefore, take this further deduction into account.

In Docket No. 16253 judgment of no deficiency in respect to Fannie Snyder Hickman will be entered. In Docket No. 16251 judgment will be entered wider Rule 50.


author: Matthews :

text:
    J. T. Hedrick, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 33533.
    Promulgated October 26, 1931.

      'William J. Byrne, Esq., and Thos. F. Bwrhe, Esq., for the petitioner.

      J. L. BaeJcstrom, Esq., for the respondent.
   OPINION.

Matthews :

(1) With respect to the first issue and the correctness of the respondent’s application of the rule, “ first in first out,” there is no dispute as to the sale price of the various lots of American Tobacco Company stock. The deficiency in tax results from the respondent’s determination, in application of this rule, of gain enuring to the petitioner. The petitioner contends, on the other hand, that his gain is measurably less, since it represents the difference in each instance between the sale price of a lot and the purchase price of the next preceding lot bought.

The rule applied by the respondent is that contained in article 39, Regulations 62 and 65, as follows:

When shares of stock in a corporation are sold from lots purchased at different dates and at different prices and the identity of the lots can not be determined, the stock sold shall be charged against the earliest purchasers of such stock. The excess of the amount realized on the sale oyer the cost or other basis of the stock will constitute gain.

The applicable section of the Revenue Act of 1921 is section 213:

That for the purposes of this title (except as otherwise provided in section ' 233) the term “gross income”—
(a) Includes gains, profits, and income derived from ⅜ * * sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits, and income derived from any source whatever.

The testimony of the petitioner at the hearing established without contradiction the cost price and sale price of the various lots purchased and sold during the taxable years and the number of shares, or the equivalent of scrip, owned prior to 1923 and the total cost of such stock, so that the sole question at issue is the application of the rule laid down by article 39 of the regulations.

The petitioner had projected a scheme for benefiting certain charities with which he had been connected for some time and at the same time creating annuities for himself and after his death for his widow and family. Two of these contracts were carried out, and, as under the terms of these contracts it was necessary for the petitioner within three years of their execution, or in the spring of 1925, to deliver A. T. stock in lieu of the mortgages originally transferred, he made a natural effort to accumulate sufficient stock to carry through these obligations. Each contract referred to $25,000 of stock, so that the total donation would have been only $50,000 stock, par value. But it appears he also intended to write similar contracts with certain other charities. Upon this general intention to reserve definite amounts of stock for these contracts petitioner bases his specific intention to sell a certain definite block of A. T. stock in each of the four sales in dispute.

The sales made in 1923 and 1924 by Moyse & Holmes for petitioner other than the short sale were of stock held as collateral in his regular account. It is impossible to identify shares and lots thus held. The rule of “ first in first out ” is applicable to the stock in this account, notwithstanding the fact that the seller intended to sell the shares purchased on a particular date. Burdett Stryker, 21 B. T. A. 561.

Clearly the stock in petitioner’s possession and on deposit with banks as collateral for loans and in petitioner’s account with McDonnell & Company was not the stock sold by Moyse & Holmes for petitioner. The “first in” the account from which the 1923 sale was made, was the purchase of $15,000 scrip on September 29, 1922. The “ next in ” was the $11,900 scrip purchased October 27, 1922, but $15,000 scrip was taken out on November 15, 1922, and delivered to the Hanover Bank as collateral for a loan to petitioner. This $15,000 scrip, then, is the “ first out ” of the account and we see no reason why the same principles should not be followed in the case of stock delivered to the customer, as well as with respect to stock sold for the customer. After delivery of this $15,000 scrip, the $11,900 purchased on October 27 became the “ first in ” the account. This scrip was converted into 119 shares of A. T. “ B ” stock on March 1, 1923. Then comes the 500-share lot purchased on September 5. The sale of a 500-share lot on November 27, 1923, should be charged against the 119-share purchase and 381 shares of the purchase made on September 5.

In 1924 there were delivered to the regular account the 725 shares held in the special loan account and 656 other shares, all of which were purchases made prior to 1923 and which were held elsewhere than in petitioner’s regular account with Moyse & Holmes during 1923. Both this stock and the 500-share lot purchased on August 11 were commingled with the other A. T. B ” stock held in the account and with A. T. “ B ” stock held as collateral for other customers. There were no means of identifying the particular block of stock sold on October 9, 1924. The purchase of 500 shares on October 23 was also commingled with the A. T. stock held by Moyse & Holmes for its marginal customers and there were no means of identification of the particular stock sold on December 2 and 3, 1924.

The Commissioner computed the profit on the short sale as the petitioner did, so there is no controversy as to that sale. In computing the profits on sales in 1923 and 1924, other than short sales, the Commissioner used the average cost of the 1,444 shares owned prior to November 27, 1923, based on a total cost of $164,144.85. This included the 119 shares purchased in October, 1922, for $18,236.09 and which we find were sold in 1923. The principle followed by the Commissioner is approved, but the average cost of the stock sold in 1924 should be determined by eliminating the 119 shares and the cost of such shares. Since the stock against which the purchases should be charged was held on December 1, 1921, petitioner is entitled to have the profit on such sale computed under the provisions of section 206. The deficiency notice shows that computation of income for 1924 allowed petitioner the benefit of this section.

(2) We come now to the second issue, whether the petitioner made a bona fide gift to his wife prior to the taxable years of 500 shares of American Snuff Company stock. As this Board has said:

* * * To constitute a gift in contemplation of law, there must be (1) an intention on the part of the donor to give — that is, to surrender complete control and dominion over the property to the donee; (2) there must be an acceptance of the gift by the donee; and (3) there must be a transfer of title accompanied by delivery of the property. Charles Greenblatt, 2 B. T. A. 77; Estate of David B. Daly, 3 B. T. A. 1042; F. J. Vlchek, 7 B. T. A. 1244; J. T. Lupton, 19 B. T. A. 166.

The petitioner clearly stated his intention to give the stock to his wife about Christmas, 1922. In January, 1923, when he opened his first books, he entered opposite the entry “ 700 shares ” of American Snuff Company stock a pencil notation, 500 Mrs. J. T. EL,” in the presence of his bookkeeper, at the same time telling him that these shares were Mrs. Hedrick’s property. In petitioner’s memorandum book he entered the dividends on these 500 shares in 1928 and again in 1924 to Mrs. Hedrick’s credit. It was not until 1926 that the petitioner created in his books a special account for Mrs. Hedrick. All these accounts and statements of petitioner’s show unmistakably an intention to give the 500 shares to his wife. And on her part she understood that they were hers and in her returns of income for the taxable years included the dividends on this stock.

The only fact, therefore, which raises any doubt as to the nature of this gift was petitioner’s retention of the American Snuff Company stock in his account with his New York brokers during the taxable years. But Mrs. Hedrick did not object to such a retention for trading purposes. He held it with his own American Snuff Company stock, but she received its fruits every year in the dividends. Where such an understanding exists we do not see any valid reason for questioning the delivery of the stock by petitioner to his wife. The mere fact that the stock was held in petitioner’s name, and not his wife’s, is in such circumstances immaterial, as we held in John Knell, 12 B. T. A. 1306; Milton A. Holmes, 21 B. T. A. 584.

On the second issue, therefore, we hold for the petitioner.

(3) The third issue is whether the dividend, $27,054, received by petitioner on February 6, 1924, from the Lexington Grocery Company was paid by that company from surplus accumulated prior to March 1, 1913, as the petitioner contends, and, therefore, not taxable, or from later accumulated surplus. The relevant provision of the Revenue Act of 1924 is as follows:

Sec. 201. (a) The term “ dividend ” when used in this title (except in paragraph (9) of subdivision (a) of section 234 and paragraph (4) of subdivision (a) of section 245) means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913.
(b) For the purposes of this Act every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings or profits. Any earnings or profits accumulated, or increase in value of property accrued, before March 1, 1913, may be distributed exempt from tax, after the earnings and profits accumulated after February 28, 1913, have been distributed, but any such tax-free distribution shall be applied against and reduce the basis of the stock provided in section 204.

There is no dispute of fact. The only question is whether the dividend of $40,500 paid its stockholders by the company on February 6, 1924, was paid from earnings accumulated prior to March 1, 1913, and therefore not taxable. The resolution of this question involves the question whether the stock dividend declared by the company on December 29, 1920, in the amount of $150,000, was a distribution ” within the meaning of the same section of the Act, since, if it is, the presumption of the statute that it is “ from the most recently accumulated earnings ” will apply to it, with the result in the instant case of so far reducing the available surplus accumulated since February 28, 1913, that practically all the cash dividend of February 6, 1924, must be taken to be a distribution of surplus accumulated prior to March 1, 1913, and so exempt from tax.

The company had a surplus of $79,709.77 on March 1, 1913, which had grown to $254,629.55 on January 1, 1920. This was reduced by the stock dividend of December 29, 1920, by $150,000, so that the surplus on January 1, 1921, including earnings for 1920, was $126,990.42; and on January 1, 1924 (still reckoning in the stock dividend), was $100,178.53. Two dividends were paid in 1924 prior to the one in question, one of $2,411 on January 16 and the other of $16,000 on February 2. This would leave a surplus on February 5,1924, just prior to the declaration of the dividend in question, after a proportionate amount of the company’s earnings for 1924, $28,682.99, are figured in and Federal tax liabilities for 1918, 1919 and 1923 deducted, of $79,751.39. If the Federal income tax for 1924 be regarded as accrued ratably throughout the year, the surplus would be less than $79,709.77, the surplus of March 1, 1913, and consequently the entire dividend of February 6 would be exempt from tax as a distribution of surplus accumulated before March 1, 1913. Without such allowance of 1924 Federal income tax, the February 5, 1924, surplus would still be only $41.62 in excess of the surplus of March 1, 1913 or $79,751.39.

On these facts it is contended by the petitioner that the stock dividend is a “ distribution ” within the meaning of the 1924 Eeve-nue Act and with respect to such, therefore, the presumption of that statute applies, that it was made from most recently accumulated earnings. This presumption admittedly applies to the later cash dividend, if the facts of the case allow. If no presumption applies to the stock dividend, therefore, we still have in effect the presumption respecting the cash dividend, which would on the facts render tbe latter dividend taxable. If we were to indulge any presumption as to tbe stock dividend, it would be tbe natural one of “first in first out,” which is applied to the sales of unidentifiable stock shares bought and sold at intervals; in other words, it would be natural to assume that the stock dividend here declared was a distribution from earliest accumulated surplus. It was, undoubtedly, to overcome this “ natural ” presumption and the consequent possibilities of tax avoidance that the presumption that a “ distribution ” was made from most recently accumulated earnings was written into the statute. It follows, then, that the stock dividend, in order to be regarded as paid from surplus accumulated subsequent to March 1, 1913, must be brought within the statutory presumption as a “ distribution.” The later cash dividend is clearly controlled by that presumption, and the priority of payment of the stock dividend, unaffected by the statutory presumption, is, on the present facts, immaterial.

Whether a stock dividend is a “ distribution ” within the meaning of section 201(b) has already been passed on by this Board in several cases. In Hugh B. Wilson, 3 B. T. A. 951, the Board construed the words “ any distribution ” in the similar provision, section 201(b) of the Bevenue Act of 1918. It was the essence of the taxpayer’s contention in that case that the Supreme Court’s decision in Eisner v. Macomber, 252 U. S. 189, holding a stock dividend not taxable did not affect the interpretation of this section so as to prevent a stock dividend being considered a “ distribution of earnings or profits.” The Board pointed out that the 1918 legislation was passed while Eisner v. Macomber was still pending before the Supreme Court. The court had intimated its position in Gibbons v. Mahon, 136 U. S. 549, and still more strongly in Towne v. Eisner, 245 U. S. 418; but the Act intended to tax stock dividends, if possible:

Two purposes clearly appear in the 1918 Act: (1) The earnings of a corporation accumulated after February 28, 1913, were to be subject to tax when distributed to stockholders, and (2) stock dividends were to be taxed to the extent to which they distributed such profits.

The Board’s reasoning appears in the following statements:

* * * The wor<2 “ distribution ” used in the Act appears to have been deliberately chosen in the light of the language used by the court in Gibbons v. Malion, supra, either to include or exclude a stock dividend, dependent upon whether or not such a dividend was a distribution. Nowhere in the Act are the words “ any distribution ” defined. Nowhere is a stock dividend stated to be a distribution. The Act assumes that a stock dividend is a distribution of property by a corporation to its stockholders. It is only if this assumption be correct that a stock dividend is to be deemed to be made from earnings and profits accumulated since February 28, 1913, for it is clear from the Act that it is only where a distribution takes place that any presumption arises as to the source of such distribution.
It is contended that the 1018 Act, while not defining the words “ any distribution,” plainly intended that a stock dividend should be included within those words. It is our opinion that the Act had the twofold purpose mentioned above, and that the words “ any distribution ” were intended by the draftsman of the Act and by Congress to include only what the -words import, namely, a distribution of property by a corporation to its stockholders, and that, a stock dividend having been held not to be a distribution of property by a corporation to its stockholders, it does not fall within the word or intent of the statute.
⅛ * * * * * *
* * * We have pointed out above that the words “ any distribution ” are not defined, and that, in our opinion, the words were intended to include only what was in fact a distribution, leaving it for the courts to determine what was and what was not included within that term. Entirely aside from the decision that so much of the law as taxes a stock dividend as income is unconstitutional, the Supreme Court has pointed out that a stock dividend does not, in fact, distribute any property, and for that reason such a dividend does not, we believe, fall within the words “ any distribution.”

In W. R. Kennish, 4 B. T. A. 303, the Board followed the Wilson case (1918 Act). So also in George W. Megeath, 5 B. T. A. 1274, also under the 1918 Act. Cf. Walker v. Hopkins, 12 Fed. (2d) 262.

The petitioner’s contention here would seem to be concluded on the authority of these cases.

The petitioner, however, develops an labórate argument to the effect that within the meaning of the 1924 Revenue Act “ distribution,” wherever used, is intended to include stock dividends. It is said that section 201 (f) clearly indicates an intention to include in “ distributions ” stock dividends. Section 201 (f) reads as follows:

A stock dividend shall not be subject to tax, but if before or after the distribution of any such dividend the corporation proceeds to cancel or redeem its stock at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1918, shall be treated as a taxable dividend.

We think this argument is completely answered by the Board’s reasoning in the Wilson case, supra, for it was there pointed out that on the theory of Eisner v. Macomber, supra, a stock dividend was not a distribution from profits, and it could not, therefore, be so regarded under section 201 (b). Of course, a stock dividend must be “distributed ” in order for it to reach the company’s stockholders, but the use of the word “ distribution ” in section 201 (f) with reference to stock dividends, can not vary the technical and restricted meaning which we believe it has as used in subsection (b).

But the petitioner does not rest here. He argues that Congress has the power as a matter of grace or bounty to exempt from taxation as income certain things properly classifiable as income under the Sixteenth Amendment. With this we agree. Cf. section 213 (b), Revenue Act of 1924. He predicates upon this premise the argument that Congress intended in the Revenue Act of 1924, enacted, of course, after the Supreme Court’s decision in Eisner v. Macomber, to allow the distribution of stock dividends even though not taxable, as “distributions” from profits under section 201 (b). In support of this argument he points out the different language of section 201 (f) of the 1926 Act and infers an intent on the part of Congress to withdraw a benefit to the taxpayer existing under the corresponding section of the 1924 Act. On the question of interpreting a prior act in the light of a subsequent act, he cites G. C. M. 7285,1. R. Bulletin XX-1, p. 3; G. C. M. 6717,1. R. Bulletin, IX-2, p. 9.

For the reasons already stated, we do not find this argument persuasive. Nor do we find the reasoning of the Wilson case with reference to the 1918 Act any less cogent when applied to the 1924 Act.

Judgment on the third issue, is, therefore, given for the respondent.

Judgment will be entered under Rule 50.


author: Smith:

text:
    The Allied Furriers Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 50059.
    Promulgated October 26, 1931.

      Hugh Satterlee, Esq., for the petitioner.

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

Smith:

This proceeding, involving an alleged deficiency for the calendar year 1928 in the amount of $3,238.17, is before the Board upon the respondent’s motion for judgment on the pleading’s on the ground that the amended petition fails to state a cause of action and, specifically, “ upon its face discloses that the loss, if any, from burglary was suffered on February 8, 1925, and not during the calendar year 1928.”

The allegations of fact stated in the amended petition are as follows:

1. Tlie petitioner is a corporation of the State of New York with principal office at 348 Seventh Avenue in the Oity of New York, State of New York.
2. The notice of deficiency (a copy of which is attached [to the amended petition] and marked Exhibit A) was mailed to the petitioner on or after July 15, 1930.
3. The taxes in controversy are income taxes for the calendar year 1928 and for $3,238.17.
*******
5. The facts upon which the petitioner relies as the basis of this proceeding are as follows:
(a) On or about December 19, 1924, the petitioner procured through a duly licensed insurance broker a policy of insurance indemnifying the petitioner against losses it might sustain through burglary.
(b) During tlie term of said policy of insurance the petitioner on or about February 8, 1925, suffered a loss through burglary in the amount of $23,984.72.
(c) The petitioner immediately notified the insurance company of said loss and duly filed its proof of loss for said amount of $23,984.72.
(d) Thereafter said insurance company verified said loss and found it to be correct, but asserted that a representation in the application for insurance made by the insurance broker was incorrect.
(e) The petitioner thereupon began suit against said insurance company for the collection of its claim under the policy for $23,984.72.
(f) In April, 1928, after trial of said suit in the Supreme Court of the State of New York, a final judgment was rendered against petitioner and in favor of said insurance company.
(g) Accordingly, in 1928 said loss of $23,984.72 was charged off and deducted from the gross income of tlie petitioner for that year.
(h) The respondent has disallowed the deduction of said loss for 1928.
(i) The petitioner regularly keeps its books of account and reports its income on the accrual basis.

The only question presented by this proceeding is whether the petitioner is entitled to deduct from its gross income of 1928 the amount of a loss resulting from a theft of goods in 1925, where the petitioner was protected by burglary insurance and where the Supreme Court of the State of New York decided in 1928 that petitioner was not entitled to recover the loss from the insurer.

Section 23 (f) of the Revenue Act of 1928 permits a corporation to deduct from gross income in its corporate income-tax return losses sustained during the taxable year and not compensated for by insurance or otherwise.” Section 234 (a) (4) of the Revenue Act of 1924 and the prior revenue acts provide for the same deduction. Under such acts the Treasury Department regulations uniformly require that in order for losses to be deductible “ they must usually be evidenced by closed and completed transactions.” Article 141, Regulations 45, 62, 65, 69; article 171, Regulations 74. The Commissioner early held that a loss ostensibly incurred in a taxable year should not be allowed as a deduction for sucli year where and to the extent such loss was covered by a claim against an insurer. In O. D. 165, C. B. 1, p. 125 (December, 1919), the Bureau ruled:

A loss incurred through embezzlement is an allowable deduction from gross income for the year or years in which the loss was actually sustained. The amount of such loss should be reduced by the reasonable value of any claim against the embezzler or his sureties which can fairly be said to have an ascertainable value, such as a claim against a surety company.

To the same effect see I. T. 1410, O. B. 1-2 (July-December, 1922), promulgated in respect of the Revenue Acts of 1918 and 1921.

This Board and the courts have held that where fire, embezzlement or other casualty occurs and is covered by insurance or otherwise, no deduction can be claimed for the year of the causalty, but that it is allowable for the year when the claim for compensation thereof is settled.

In Max Kurtz, 8 B. T. A. 679, merchandise was destroyed by fire in 1921. It was fully covered by insurance, recovered in later years. The partnership whose merchandise was destroyed was on the accrual basis. No deduction was allowed for 1921, the Board saying:

* * * The partnership was compensated by insurance for the total loss sustained in the year 1021. The insurance due petitioners for the loss sustained, accrued in the year 1921 and was properly applied in that year against the amount of the loss by fire.

In Pike County Coal Corporation, 4 B. T. A. 625, a deduction was held to be allowable not in the year when the fire which damaged the property occurred, but in a later year, when the extent of the resulting loss could be definitely determined. The Board said in this regard:

The statute contemplates that a deduction shall be allowed when a loss has in fact and in truth been sustained, and the establishment of the loss is a question of fact in each case and may not always depend upon the happening of any particular event. In order to have been in a position to claim a deduction in 1918, the taxpayer would have been required to justify, with at least some degree of accuracy, the amount of the loss; otherwise the deduction from gross income for 1918 would have represented a mere guess, in all probability, unjust either to the Government or to itself. It is evident, therefore, that whatever amount the petitioner might have computed, with no more information than it had, would have been conjectural, because it was not in possession of information necessary to enable it to make such computation.
The petitioner, believing that the machinery would not be a total loss, proceeded in good faith to determine the loss which it had actually sustained by returning it to those who were in a position best to judge the extent of the damage. By so doing, it determined, during 1919, that the actual loss sustained on account of damage to the machinery was $14,872.49.

In Lane Construction Co., 17 B. T. A. 826, affd., 49 Fed. (2d) 1080, the petitioner’s negligence was responsible for the death of an individual in 1920. Suit was brought against the petitioner and, after considerable litigation, the case was settled in 1924 by the payment of $75,000 by petitioner. Meanwhile, the petitioner had set up reserves on its books to cover the estimated liability and, in 1924, received $5,000 from liability insurance. The Board held that the petitioner suffered no deductible loss until 1924.

In United States v. White Dental Mfg. Co., 274 U. S. 398, the Supreme Court held that losses are deductible from gross income when they “ are fixed by identifiable events.” Cf. Lewellyn v. Electric Reduction Co., 275 U. S. 243, in which the Supreme Court refused to allow the deduction of a loss in 1918, since in such case there was:

* ⅜ * nothing in the findings from which we could conclude that the respondent in 191S had ceased to regard his rights under the contract as having value or that there was then reasonable ground to suppose that efforts to enforce them would be fruitless. * * *

In Lucas v. American Code Co., 280 U. S. 445, the Supreme Court refused to allow a deduction for loss by reason of breach of contract for the year in which the breach occurred. The court specifically rejected the theory that a loss is “ sustained ” when the events occur which fix it, so as to preclude a deduction for it in a later year when in a practical sense it is determined by litigation brought to a final conclusion. Cf. also Ledger Co. v. United States, 37 Fed. (2d) 775; Douglas County Light & Water Co. v. Commissioner, 43 Fed. (2d) 904; Farish & Co. v. Commissioner, 31 Fed. (2d) 79.

The facts in the instant case show that in 1925 the petitioner was protected by an insurance policy against any loss from burglary. It could not reasonably have claimed any loss in its 1925 return from burglary. From its standpoint it was covered by insurance. When the insurer refused to pay the loss, the petitioner in good faith brought suit against it for the recovery of the loss. The loss was sustained when the court held that the insurance company was not liable for the amount thereof. In a very practical sense the loss was sustained in 1928.

Judgment will be entered tmder Rule 50.


author: Aetondell :

text:
    William Nelson Cromwell, and John Foster Dulles, Surviving Executors of the Estate of Augustus Coe Gurnee, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 42619.
    Promulgated October 26, 1931.

      Frederick B. Bangs, Esq., Emmet McQa'ffery, Esq., and Raymond B. Goodell, Esq., for the petitioners.

      Harold Allen, Esq., for the respondent.
   OPINION.

Aetondell :

We have set out as our findings of fact only the facts that relate to the issues left for decision. Other stipulations of fact and waivers of issues will be mentioned briefly here.

Petitioners waived an issue relating to the inclusion in the estate of certain cash securities and cash held by Bankers Trust Company as trustee for Gustave Frederick Dutschke and consented to the inclusion thereof at the value of $164,813.49 as fixed by respondent.

The parties agree that the amount of the residuary estate passing to Harvard University, which is stipulated to be an educational institution and exempt from Federal estate tax, shall be computed without deduction of the estate and inheritance taxes in the amount of $262,971.22 paid by the estate to various States of the United States and to the Republic of France upon noncharitable bequests.

Respondent in the notice of deficiency determined the credit to which the estate was entitled against the Federal estate tax (including the deficiency asserted) for estate and inheritance taxes paid as amounting to $280,000, of which $55,451.83 was determined to be applicable as a credit against the deficiency asserted. The parties are agreed that by reason of the payments actually made, the proper amount of such credit on the basis of the tax asserted in the deficiency notice is $281,461.47, of which $56,913.30 is applicable as a credit against the asserted deficiency.

It was further stipulated that inheritance and estate taxes have been actually paid by the estate to States of the United States in the amount of $327,224.97. Proper proof of such payment and claim for the allowance of such taxes as part of the 80 per cent credit against the Federal estate tax has been filed in accordance with the provisions of section 301(b) of the Revenue Act of 1926 and article 9 of Regulations 70 and allowed by the respondent. The petitioners are entitled to a credit for State inheritance taxes paid against the Federal estate tax as ultimately fixed of such part of $327,224.97 as does not exceed 80 per cent of the Federal tax.

The above matters will be given effect in the settlement under Rule 50.

The first question for decision is whether the value of the personal property left by decedent, having its actual situs in France, should be included in the gross estate. It is agreed by the parties that decedent was a resident of the State of Maine at the time of his death. In Guaranty Trust Co., 21 B. T. A. 330, we had the identical question that is raised here. Counsel for petitioners urge with much earnestness that perhaps some of the underlying principles involved in this question were not presented in that case. We have carefully considered petitioners’ arguments and considered the cases cited, and, Avhile admitting that the matter is not entirely free from doubt, we find nothing in the presentation of the present case to cause us to alter our views. We accordingly find no error in the inclusion in decedent’s estate of the personal property located in France.

The next question is whether respondent erred in including the value of shares of United States Steel corporation stock that decedent gave to his secretary, Dutschke, within two years prior to his death. The agreed value o.f this stock in excess of $5,000 has been included in the estate by respondent as a gift in contemplation of death under the second sentence of section 302(c) of the Revenue Act of 1926, reading as follows:

Where within two years prior to his death hut alter the enactment of this Act and without such a consideration the decedent has made a transfer or transfers, by trust or otherwise, of any of his property, or an interest therein, not admitted or shown to have been made in contemplation of or intended to take effect in possession or enjoyment at or after his death, and the value ox-aggregate value, at the time of such death, of the property or interest so transferred to any one person is in excess of $5,000, then, to the extent of such excess, such transfer or transfers shall be deemed and held to have been made in contemplation of death within the meaning of this title.

It is stipulated in regard to this transfer that it “ is not admitted or shown in fact to have been made in contemplation of or intended to take effect in possession or enjoyment at or after death.” On this phase of the case the only issue raised by the pleadings is the validity of the above quoted part of the statute. The issue as framed and the facts as limited by the stipulation do not bring into controversy any question as to whether the transfer might have been included under the first sentence of section 302(c). Petitioners’ claim is that that part of the statute above set out is invalid and unconstitutional as in violation of the due process clause of the Fifth Amendment. This issue is decided in favor of the petitioners on authority of our decision in American Security & Trust Co. et al., Executors, 24 B. T. A. 334,

The final question involves the annuities created by the ninth and tenth clauses of decedent’s American will. Petitioners allege that the respondent erred in determining the values at which the annuities were included in decedent’s gross estate.

Decedent, by his will, made a number of specific bequests and created the annuities here involved and left the residue of his estate to Harvard University, an admittedly educational institution. The plan of the Federal estate tax act is to include in the gross estate all of the decedent’s property and then to determine the value of the net estate — upon the transfer of which the tax is imposed — by allowing specified exemptions and deductions. Among the deductions allowed are bequests to educational institutions. In this case the bequest to the educational institution is not a specific sum, but is the residuary estate after providing, among other things, for the annuities created, and so it becomes necessary to calculate the value of the residue in order to determine the amount to be deducted in arriving at the net estate. Henry B. Ickelheimer et al., Executors, 14 B. T. A. 1317. While the stipulation of the parties would indicate that our problem is to value the annuities to determine the value at which they would be included in the gross estate, as we conceive the question, this is not technically correct. As we have pointed out above, the entire gross estate is included, from which is substracted those deductions allowed by law, and the remainder constitutes the net taxable estate. The manner of the approach becomes important, as both parties rely on the actuarial tables found in article 13 of Regulations 70, which are used for the purpose of determining the present yaiues of various interests in estates. The difference between the parties is illustrated by the following computations as they relate to clause nine of the will, which provides for an annuity of $2,500 for Jeanne Baum-gartner, who was seventy-four years of age at the time of decedent’s death. Petitioners contend that the present value of that annuity is $12,960.05, computed as follows:

Amount of annuity_ $2, 500
Present worth of annuity of $1 at age 74 (taken from column 2 of Table A in Reg. 70) is $5.18402.
$2,500 multiplied by 5.18402 gives_$12, 960. 05

Respondent has not informed us how he arrived at his value of $14,865.62, but petitioners explain the computation as having been made in this way:

Amount of annuity_ $2, 500
Amount of fund which at 4% would produce annuity_$62, 500
Present worth of $1 due at end of year of death of annuitant at age 74 (taken from column 3 of table above referred to) _ .76215
$62,500 x .76215_$47,634.38
$62,500 minus $47,634.38_$14, 865. 62

A similar method of computation, according to petitioners, was used with respect to the Carter annuity. Column 2 of Table A is designed to give the present value of annuities, and column 3 the present value of remainder or reversionary interests. In this case the residue of the estate, which is the part deductible, is subject to the annuities and so it becomes a remainder. Accordingly, in our opinion, the respondent has pursued the correct method of determining the value of the net estate in that he has determined the value of the residuary estate and reduced the value of the gross estate by that amount.

It is suggested by petitioners that the difference in the result obtained by their method of calculation and that followed by the respondent is due to an improper factor in column 3 of the table. On the state of the record we can not say whether this is so or not. Both parties rely on the same table and the only dispute between them is whether column 2 or column 3 shall be applied, and as the petitioners have not attempted to show what is a proper factor in place of the one said to be wrong, we must take the table as it stands. We accordingly find no error in respondent’s determination on this phase of the case.

We may say in passing that there is no issue as to the use of actuarial tables to determine present values (Cf. Ithaca Trust Co. v. United States, 279 U. S. 151), nor as to the use of a 4 per cent interest rate, which is the basis of the tables above mentioned.

Decision will he entered wider Rule 50.


author: MoReis:

text:
    A. B. Watson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 33307.
    Promulgated October 26, 1931.

      Warren Libby, Esq., for the petitioner.

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

MoReis:

The issue .presented by the pleadings is whether the respondent erred in determining that a profit of $79,259.39 was realized by the petitioner during the year 1924 from the alleged sale of certain personalty and bus line operative rights upon the theory that the agreement of lease entered into by the petitioner, under which the property is alleged to have passed, was in fact an agreement of conditional sale.

The petitioner owned, and was engaged in operating, a bus line, which in November, 1922, he agreed to sell, together with his franchise, to the Pickwick Stages, for approximately $100,000. Prior to the consummation of said sale the Eailroad Commission of the State of California intimated that it would disapprove the transaction and consequently the agreement of sale was canceled. Another agreement was entered into, however, in February, 1923, entitled “Lease and Option Agreement,” which was finally approved by the said Eailroad Commission in March, 1924. The latter agreement, instead of providing for the outright sale of the properties, as did the former, let and demised the properties for a term of forty-seven months for a total rental of $109,900, payable $10,000 upon execution of the agreement, $20,000 after approval thereof by the Eailroad Commission and $1,700 monthly until fully paid, the petitioner to transfer to and vest in the lessee valid title to one of the twenty busses, purportedly leased thereby, upon the payment of each of said monthly instalments, and should the lessee pay said rental and otherwise perform the covenants of the alleged lease, then, it was given the option of purchasing said properties for the sum of $1 cash, the petitioner to deliver proper documents of title thereto.

We can not hold that a relationship of lessor and lessee resulted from the foregoing transaction, merely because of the legal form employed and the words used therein, when it appears more dearly that the parties obviously intended, and by their various acts and deeds accomplished, a sale instead. From the point of view of the taxing statutes we are more concerned with the practical and real effect of the things done than with the chosen means of their accomplishment, and this is especially true where they are wholly inconsistent with each other. In determining what is taxable income “ substance rather than form is to be given controlling weight.” Eisner v. Macomber, 252 U. S. 189, and Bowers v. Kerbaugh-Empire Co., 271 U. S. 170. Any other rule would permit transactions otherwise taxable to escape taxation altogether merely through the proper choice of form and words.

What are the really substantial factors versus form? To begin with, one thing is clear and unmistakable and that is that the parties intended, and in fact attempted, to consummate an outright sale of these properties, but they were thwarted in their plans by the threatened disapproval of the Railroad Commission. That was their intention in November, 1922, as manifested by their acts, and although it is entirely possible that their intentions may have changed by the time the agreement of February, 1923, was consummated, there is not a scintilla of evidence in the record to that effect. Granted that their intentions did change, or more accurately stated, were changed, we are convinced that the changed intention ran only to the means and did not affect the ends sought, which were, to accomplish an outright sale. In fact there appears to have been very little deviation from their original plans. The consideration for the outright sale of the properties in the original agreement was “ approximately ” $100,-000, whereas the total consideration, called rental, provided for in the agreement here considered was $109,900. It is highly possible, of course, that the two sums were identical, but the witness only stated “ approximately ” and we are limited by the record as made. The petitioner testified at the hearing that the agreement which was actually carried out was practically the same in its terms as the first agreement, except as to the use of the word lease.

The petitioner directs attention to the option clause of the agreement and he cites the following tests of conditional sales from 17 b. R. A. 1422 in support of his contention that this was not a sale:

With but few exceptions, the cases support the view that the essential elements of a conditional sale of personalty are a reservation of title in the seller, and an obligation upon the part of the buyer to accept and pay for the property in accordance with the terms of the contract, the title passing automatically upon the performance of that condition.

He does not contend, as he obviously could not consistently with his position, that he did not reserve the title in himself, but he doe,s contend that there was no obligation upon the part of the buyer to “ accept and pay for the property ” except that it may desire to so do. This part of the test naturally, and of necessity, presupposes that the property has not already been paid for. Here, when the option was finally alleged to have been exercised the property had been fully paid for, at least that ⅛ the practical effect of what was done since only the payment of a nominal sum of $1 was exacted and paid in order to acquire all of the property under the agreement. Respecting the remainder of the test, that is, the obligation to accept the property under the terms of the agreement, to even assume that Pickwick Stages would have failed to exercise its option and accept the property thereunder after having fully and completely paid therefor defies all natural reason and logic. Thus the option clause, in our opinion, was perfectly meaningless from a practical point of view and does not render the real state of affairs inconsistent with a conditional sale as laid down in the above test. The said option clause is rendered even more meaningless when we consider paragraph twenty-four of the agreement, which provides that “ The lessee shall have no right, power, or authority to assign, sell, or transfer this indenture, or any of the property or rights therein described to any person, natural or artificial, prior to the full payment of the term rental, without the written consent of the lessor, except, however, that it may sell such automobile busses as it may have obtained title to under this indenture.” The logical deduction to be drawn from this language is that while Pickwick Stages could not dispose of the properties prior to the full payment of $109,900, after such payment it could. Therefore, if it was necessary for that company to exercise its option to purchase, before it became the rightful owner of the properties thereunder, why should the aforesaid paragraph inferentially grant the power to dispose thereof upon payment of the entire so-called rental? Furthermore, Pickwick Stages had taken over the general properties of the line, such as depot equipment and garages, etc., had received an assignment of all subleases upon depots and had received title to all of the busses long prior to the actual exercise of the option clause, constituting all of the petitioner’s property with the exception of the franchise itself, so that, with the exception noted, no property remained to be accepted under the option clause. Tested from every conceivable angle, the option clause appears to be nothing more than a provision to satisfy the State Commission.

It is well settled that “ an interest in the reversion is necessary to the relation of landlord and tenant,” Erving v. Goodman & Co. Bank, 171 Cal. 559; 153 Pac. 945. A reversionary clause, providing that the leased properties shall revert to the lessor at the end of the term, is commonly found in instruments where the relation of lessor and lessee is intended. There is not only no reversionary clause in the present agreement, but reversion, if such was ever intended, was rendered wholly improbable, except upon default, not only by the agreement itself but by the acts of the parties. For instance, it was agreed that if the lessee complied with the provisions of the lease the petitioner, upon termination thereof, would transfer the properties absolutely in consideration of the sum of $1. As we have already pointed out, it would be ridiculously illogical to assume that the option would not be exercised, thereby depriving the petitioner of any possibility of a reversion except, as just indicated, in case of default. Then, too, all of the properties except the franchise were transferred to Pickwick Stages within a short time after consummation of the agreement, so that there was nothing to revert.

We have carefully examined the authorities relied upon by the petitioner, but are unable to concede that they are controlling. In Harron, Rickard & McCone v. Wilson, Lyon & Co., 4 Cal. App. 488; 88 Pac. 512, the court said, “ ⅞ * * when it appears from the terms of the instrument that the intention of the parties was to make a sale of the property, courts will give such construction to the instrument irrespective of the name by which the parties have designated it.” See also Harron, Rickard & McCone v. Cutting, 19 Cal. App. 780; 127 Pac. 827; Rodgers v. Bachman, 109 Cal. 552; 42 Pac. 448; Van Allen v. Francis, 123 Cal. 474; 56 Pac. 339; Wellman v. Conroy, 194 Pac. 728; and Heryford v. Davis, 102 U. S. 235, specifically, or by necessary implication, holding that the intentions of the parties shall govern in determining whether a lease or a contract of sale resulted. See also Jefferson Gas Coal Co., 16 B. T. A. 1135, affirmed as to similar question here in controversy by the Circuit Court of Appeals for the Third Circuit, 52 Fed. (2d) 120.

Viewing the intentions of the parties, the ends which they obviously sought to accomplish and the practical things done, we are of the opinion that a sale was effected and that the respondent correctly so held.

Decision will be entered for the resfondent.


text:
    Nathaniel J. Hess, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 33279.
    Promulgated October 26, 1931.

      Lawrence A. Tanzer, Esq., and James G. Peacoeh, Esq., for the petitioner.

      M. E. McDowell, Esq., for the respondent.
   OPINION,

Matthews :

In order to determine the gain resulting to the petitioner in 1922 from the sale of his 6¾ shares in the 432 Fourth Avenue Corporation in that year we must first ascertain the cost of those shares, which were acquired by petitioner in November, 1913.

The cost of the Fourth Avenue Corporation shares would ordinarily be determined by the market value of the shares of the Realty Holding Company at the time of exchange, but no evidence was presented as to such market value. It is not likely in the circumstances that the stock of this company had any market value, as it was held closely by the Hess brothers, and as the respondent suggests in his brief, the company itself was probably intended simply as a conduit of title which by its corporate form would protect the petitioner and his brother from any liability resulting from the hazards of building, injuries to workmen, etc., which they as individuals, with unlimited liability, might otherwise incur. The very nature of the holding company and the close holding of its • stock precludes the supposition that its stock had a readily realizable market value, ascertainable by market sales or quotations. It becomes necessary to inquire whether the intrinsic value of the assets back of the stock may be easily ascertained. George M. Wright, 19 B. T. A. 541, 548. If so, we may take the 1913 market value of the assets transferred by the holding company to the Fourth Avenue Corporation as the measure of the cost of the stock of the latter company received by the petitioner at that time. Indeed, while these assets were nominally transferred.by the Holding Company to the new corporation, they were in substance transferred by the petitioner and his brother, Edwin H. Hess, since they were the real parties in interest in the Holding Company. The value of the assets, then, less any charges or other indebtedness attaching to them, actually represents the cost of Fourth Avenue Corporation stock received in 1913 in exchange.

The evidence of the value of the land and building at the northwest corner of Fourth Avenue and Twenty-ninth Street, New York City, which constituted those assets, is clear and convincing. We have found it to be $1,100,000. The lot itself was desirable by reason of its location on the northwest corner and its substantial frontage on Fourth Avenue, which, at the time it was acquired by the new corporation, was becoming an important business street. The development of Fourth Avenue began after the building of the subway about 1906 or 1907 and was well advanced by 1912. The petitioner, who had had long experience in New York real estate, testified that it was worth between $1,100,000 and $1,250,000. One witness, Peter Grimm, who had been president of the Building Managers’ Association, an organization which represented some $3,000,-000,000 assessed value in New York buildings and to which most large real estate office and large building managers belong, and who was at the time of the hearing president of the real estate board of New York, testified upon the value of the property in 1913. He stated, “ I gave to the land a minimum of $450,000 and to the building a minimum of $640,000, making a total of $1,090,000, and I could with equal conscience give the land $490,000 and the building $640,000.” He explained that the variation in the estimate on land value was the maximum he would pay for the lot and the minimum he would sell it for, and that “anything between those figures would be a proper valuation in my judgment.” At another time during his examination he stated that the combined value of building and land was “ probably as much as $1,145,000.” He was inclined to think the price of $465,000, or $54 a square foot for 8,600 square feet, which he had been told the petitioner paid, somewhat high, but the sale prices of the Passavant and Ogden Mills properties, nearby on Fourth Avenue but less valuable by reason of less frontage on the avenue and other factors, justified him, he testified, in placing a value of $52 per square foot on petitioner’s land. We believe that the testimony of so well qualified a witness speaks for itself. The expert knowledge and independent character of this witness stamp his opinion with full credibility. The witness’s estimate of the value of the building, $640,000, was based on normal reconstruction value of the building, about 31 or 32 cents a cubic foot, the building containing 1,992,000 cubic feet of space. Such a method of estimating cost has received this Board’s approval. Chamber of Commerce Building Co., 11 B. T. A. 720, 722.

Moreover, the taking of a mortgage on the property by the Metropolitan Life Insurance Company in the amount of $725,000 further substantiates our finding, for the practice of that company under the State law is to take mortgages for no more than 50 per cent of value; McKinney’s Consolidated Laws of New York, Ann., Book 27, section 100, Insurance Law, 1892, as amended 1906 and subsequently.

As was said by the Supreme Court, per Brewer, in Montana Ry. Co. v. Warren, 137 U. S. 348: “At best, evidence of value is largely a matter of opinion, especially as to real estate.”

The respondent has introduced no evidence to rebut the expert testimony supporting the petitioner’s contention as to value, and we adopt it therefore as the value of the assets in November, 1913, which underlay the shares of the 432 Fourth Avenue Corporation. Anita M. Baldwin, 10 B. T. A. 1198.

It follows that the total cost of that company’s stock when received by the petitioner in exchange for the assets of building and lot transferred to the corporation by petitioner and his brother (nominally by the Holding Company) was the 1913 value of that lot and building, which we have found to be $1,100,000, less the charges upon those assets, or the sum of the insurance company’s mortgage, $725,000, plus the certificates of indebtedness, $251,108.56, which represented additional advances for building made by petitioner and his associates. The resulting difference, therefore, of $123,891.44, constitutes the cost of the company’s stock. The cost of the petitioner’s 6¾ shares (one-eighth of the total shares issued) sold in 1922 was one-eighth of this amount, and the resulting gain to him will be measured accordingly.

2. With respect to the second issue, we have been unable to find any facts to support the petitioner’s contention that he spent in 1922, for the entertainment of his customers, $4,160 which might be deducted under section 214(a) (1) as ordinary and necessary expenses incurred in carrying on his business. Checks and club and restaurant bills totaling $4,147.97 were put in evidence by the petitioner, but the petitioner’s own testimony on the stand leaves not only the amount but the purposes of these expenses in considerable doubt.

Petitioner was president of M. & L. Hess, Inc., and entertained on behalf of the corporation, but these expenses were never allowed as expenses of the corporation and they were never entered on its books. The petitioner kept no books of account or record himself respecting them, but sought at the hearing to establish the minimum amount of such expenses by trying to identify canceled bank checks, restaurant and club bills, receipts, etc. Petitioner confessed his inability to identify with any certainty checks drawn to cash and used in entertainment for business purposes, and he showed a like uncertainty as to club bills. Obviously on this state of the evidence it is impossible to say how much these expenses amounted to. On the authority of Cohan v. Commissioner, 39 Fed. (2d) 540, 544, we should, however, have to hazard a guess as to the amount allowable if another factor did not here intervene. The petitioner has not proved that these expenses were necessary. The entertainment, as said, was of customers of the corporation and if necessary in the business of the corporation was properly an expense of the corporation. But petitioner’s brother and his other associates in the corporation stoutly refused to allow the corporation to reimburse him for these expenses. Having failed to obtain reimbursement from the corporation, the petitioner now seeks to claim them as necessary business expenses incurred by himself as an individual. We do not think them allowable and on this issue hold for the respondent.

The facts stipulated on the third issue raised allow it to be disposed of by us under Eule 50, and judgment will accordingly be entered thereunder.

Judgment will be entered under Rule 50.


author: Seawell: Trammell,

text:
    Charles J. Canfield, Petitioner, v. Commissioner of Internal Revenue, Respondent. William R. Thorsen, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 34131, 38095.
    Promulgated October 27, 1931.

      Edwin E. Gassels, Esq., and Andrew L. Campbell, G. P. A., for the petitioners.

      Harold Allen, Esq., and Willis R. Lansford, Esq., for the respondent.
   OPINION.

Seawell:

The applicable law in the instant case is found in the Eevenue Act of 1921 and reads as follows:

Sho. 201. (a) That the term “ dividend ” when used in this title * * * means any distribution made by a corporation to its shareholders or members, whether in cash or in other property, out of its earnings or profits accumulated since February 28, 1913, * * *
(b) For the purposes of this Act every distribution is made out of earnings or profits, and from the most recently accumulated earnings or profits, to the extent of such earnings or profits accumulated since February 28, 1913; but any earnings or profits accumulated or increase in value of property accrued prior to March 1, 1913, may be distributed exempt from the tax, after the earnings and profits accumulated since February 28,1913, have been distributed. * * ⅜

•The petitioners contend that the difference between the total of the profits for the several years beginning with March 1, 1913, down to and including April 14, 1923, and the losses for the years in which losses were sustained in such period is the total “ accumulated since February 28, 1913.” That difference is shown to be $2,050,435.93. They insist that the surplus on February 28, 1913, of $4,332,684.78 represents earnings and profits accumulated prior to March 1, 1913, and being such are by the specific provisions of section 201 (b) of the Act exempt from the tax; that the surplus so created and existing can not be changed by any subsequent event; and that subsequent losses would have to be made good from future earnings or profits before there could be any earnings or profits “ accumulated since February 28, 1913,” which, when distributed as dividends, would be subject to tax. In other words, the petitioners do not accept the interpretation of the meaning of the word “ accumulated ” as used in the phrase- “ accumulated since February 28, 1913,” as considered in O. D. 610, C. B. 3, p. 24, and A. B. M. 82, C. B. 3, p. 36, and as likewise construed by the respondent and applied in the instant cases.

The respondent in making his determination excludes from consideration for the period “since February 28, 1913,” the losses (except to the extent of $4,594.62, profits for the year ending February 28, 1914) sustained in the year ended February 28, 1915, of $193,-139.67, and in the year ended February 29, 1916, of $211,707.32. To March 1, 1913, surplus of $4,332,684.78, he adds the profits for the year ended February 28,1914, of $4,594.62, making a total of $4,337,-279.40, from which he deducts the sum of the losses which occurred in the years ended February 28,1915, and February 29,1916, amounting to $404,846.99, still leaving a surplus of $3,932,432.41 on February 29, 1916.

After February 29, 1916, there are no further losses shown, only profits which from such date to April 14, 1923, the evidence indicates, amount to $2,450,688.30. From such amount respondent deducts the total of dividends, $1,290,000, paid prior to April 14, 1923, leaving taxable earnings or profits of $1,160,688.30 to be appropriated towards the payment of the April 14, 1923, dividend of $5,-100,000. The difference between the $1,160,688.30 and the $5,100,000 declared and paid as a dividend April 14, 1923, is $3,939,311.70 and represents, so respondent contends, the portion of the dividend of April 14, 1923, paid out of the earnings or profits which constituted part of the surplus accumulated prior to March 1, 1913, and is tax-exempt as dividends in the hands of the recipient stockholders.

Of the dividend of $5,100,000 paid April 14, 1923, the petitioner Canfield received $204,000 and the petitioner Thorsen, $1,111,800, and if the respondent’s method of tax computation is correct, each of the petitioners is taxable on 22.75 per cent of the dividend so received instead of on the larger percentage originally asserted by the respondent, but since conceded by the respondent to be incorrect.

In the year ended February 28, 1914, the company made a profit of $4,594.62 and if it had then, out of its total earnings or surplus, declared a dividend and made distribution even in excess of the $4,594.62, but less than the entire surplus, the whole dividend would have been taxable to the recipients thereof. The revenue law exempting from taxation dividends declared out of earnings accumulated prior to March 1, 1913, was not enacted until September 8, 1916. In Lynch v. Hornby, 247 U. S. 339 (decided June 3, 1918), the court said:

We repeat that under the 1913 Act dividends declared and paid in the ordinary course by a corporation to its stockholders after March 1, 1933, whether from current earnings or from a surplus accumulated prior to that date, were taxable as income to the stockholder.

No dividend was declared, however, out of the earnings for the year ending February 28, 1914, and it was accordingly proper for the corporation to add that sum, $4,594.62, to its accumulated surplus, bringing it to the sum of $4,337,279.40. When in the two succeeding years there were operating losses by the corporation charged, of course, against surplus, the surplus was reduced by the sum of the losses, $404,846.99, resulting in a new surplus on February 29, 1916, of $3,932,432.41.

The treatment to be accorded this new surplus and the earnings and profits thereafter accumulated by the corporation contains the matter in controversy here. The petitioners contend that since the new surplus is less than the surplus existing at March 1, 1913, all subsequent earnings and profits of the corporation should be added to this new surplus until it equals the surplus on hand at March 1, 1913, before dividends paid to stockholders are taxable.

In other words, the petitioners contend that they are not taxable on any dividend declared and paid at any time after March 1, 1913, although the corporation has had gains in that period, if for any cause, the corporation’s surplus is less than what it was on that basic date; and they urge on us the construction of the clause of the statute “earnings or profits accumulated since February 28, 1913,” that a period of all the years since March 1, 1913, should be considered together to ascertain whether there have been net accumulations for the whole period. It is elementary that the different parts of a statute are to be considered pari materia. Certainly no part of a statute should be so interpreted as to annul any other part. When the statute provides that “ every distribution is made ⅜ * * from the most recently accumulated earnings or profits, to the extent of such earnings or profits accumulated since February 28, 1913,” there is implied that some earnings or profits may belong to a class accumulated more recently than others. If all the years since March 1,1913, are to be taken together and additions and subtractions made to ascertain if earnings or profits have “accumulated” and the amount thereof during the period, then there would not seem to be much reason for ascertaining the nearness or remoteness of such earnings or profits. It could make no difference whether the distributions or dividends were from the most recent or most remote accumulations, since they all lie in one hodgepodge. Surely Congress had some reason for inserting in the statute the provision as to the most recent accumulations. All income-taxing statutes under the Sixteenth Amendment are based on yearly periods, either calendar or fiscal years. Returns are so made out and gains and losses calculated so as to show profit or loss during the year, and for such a period it is immaterial which part of the gain is more recent or remote. It would seem singular if Congress did adopt the yearly period in taxation matters for all times and under all circumstances, except at the time of the enactment of the statute now under consideration and then only for part of the statute. It is more consonant with reason to suppose that Congress, when.it provided for “ accumulations since February 28,1913,” had reference to accumulations in yearly periods. A contrary interpretation of the taxing law has been sought without success. In Edwards v. Douglas, 269 U. S. 204, 217, the court said, in interpreting similar provisions of the Revenue Act of 1917, section 31 (b):

* * * To accomplish the purpose of Congress it was necessary that the dividend be deemed to have been paid out of the available profits or earnings of the most recent year or years. Its intention so to provide was adequately expressed by the use of the phrase “ most recently accumulated ” in connection with the words “ undivided profits or surplus.” * * *

The Supreme Court in another case later said:

* * * A taxpayer may be in receipt of net income in one year and not in another. The net result of the two years, if combined in a single taxable period, might still be a loss; but it has never been supposed that that fact would relieve him from a tax on the first, or that it affords any reason for postponing the assessment of the tax until the end of a lifetime, oi for some other indefinite period, to ascertain more precisely whether the final outcome of the period, or of a given transaction, will be a gain or loss. [Burnet v. Sanford & Brooks Co., 282 U. S. 359.]

The only losses of the West Side Lumber Company were for the years ending February 28, 1915, and February 29, 1916. The petitioners, who received dividends in 1923 from the corporation, contend in effect that the losses for those two years should be carried forward and deducted from gains in the years ending February 28, 1917, 1918, 1919 and 1920. The Revenue Act of 1918, section 204, permitted a net loss in one year to be carried to the preceding year to reduce the income in that year, and if in excess of such income for the preceding year, to have such excess carried forward to the succeeding year for a similar purpose as to the income in the succeeding year. But we know of no such provision of law applicable to the years here involved, and the Act of 1918 is not retroactive, or claimed by petitioners so to be. There was at the time of these losses, which aggregate $404,846.99, no operating deficit of the corporation, but an undivided surplus, as before stated, of $4,337,279.40, all of which, except $4,594.62, was accumulated prior to March 1, 1913. The undivided surplus, therefore, was adequate to take care of the operating losses in the two years mentioned, without in any way impairing the capital of the corporation, which amounted to $1,500,000.

The petitioners cite two recent court decisions which they insist sustained their contentions, viz., Leland v. Commissioner, 50 Fed. (2d) 523, and Hadden v. Commissioner, 49 Fed. (2d) 709. In the Leland case, first cited, the Board of Tax Appeals, 18 B. T. A. 795, is affirmed. In the opinion of the court it is said:

Then again, as the Leland-Grifforcl Company had on hand, at the time the distributions were made, earnings or profits that had accumulated since 1913, we do not thinlc that the provisions of section 201 (c) of the Revenue Acts of 1921 and 1924 are applicable.

This case does not appear to be an authority for the petitioner. In the case of Hadden v. Commissioner, supra, the corporation never had a surplus, but operating losses from its organization in 1904, in each year until April 30, 1917, at which time the net deficit was $833,862.92. The total losses between March 1, 1913, and April 30, 1917, were $329,549.22. From April 30, 1917, to December 20, 1917, by the sale of capital assets, it had a taxable profit of $405,949.07. The court held that the operating losses or carrying charges after March 1, 1913, should be deducted from the profits of December 20, 1917, before dividends declared and paid out of such taxable profits were taxable to the stockholders receiving the dividends. What the court would have held if, as in the case at bar, the corporation had had accumulated surplus and undivided profits sufficient to have absorbed all the losses before the profits by sale of the capital assets were realized, it is mere speculation to surmise; but the facts in that case are so different in material respects from those in the instant case that we do not feel impelled to follow certain of the language used by the learned judge who delivered the opinion, even though it might be broad enough to include a situation comparable to that before us.

The respondent has conceded that his computation should be revised to show that the dividend paid by the West Side Lumber Company on April 14, 1923, was 22.75 per cent taxable instead of 28.217 per cent taxable, but insists upon the application in the instant cases of the principle adopted and maintained for many years by the Bureau of Internal Revenue and set forth in G. C. M. 3532, C. B. VII-1, p. 190, which position we think correct and we so expressed ourselves in Louise Glassell Shorb, 22 B. T. A. 644, 645, in which case the Commissioner had taken an opposite view. We are of the opinion that the principle so approved is also sustained in Blair v. United States, 63 Ct. Cls. 193; certiorari denied, 275 U. S. 546.

We are of the opinion that the deficiencies proposed should be recomputed on the basis of corrected facts and in accordance with the application of the principle contended for by the respondent, which we hold to be correct.

Beviewed by the Board.

Judgment will be entered in each ease under Bule 50.

Trammell,

dissenting: It seems to me too clear for controversy that any surplus existing at February 28, 1913, has no connection whatever with what the accumulated surplus since that date is. What the majority opinion holds might be illustrated as follows: If a taxpayer had an earned surplus of $10,000 on February 28, 1913, and subsequent to that date had earnings in some years and losses in others, and at the end of 1920 the total losses since February 28, 1913, equaled its total earnings since that date, with the result that at that time there were no earnings in fact accumulated since 1913, a distribution at the close of 1920 would be held to be out of the earnings or profits accumulated since February 28, 1913. In other words, the losses since February 28, 1913, are applied against the surplus existing on that date. Yet in the illustration given it is perfectly plain that the only surplus to be distributed was that existing on February 28,1913. This, in my opinion, results in taxing the surplus existing on February 28,1913, when distributed in dividends, contrary to the statute. In my opinion there can be no accumulated surplus since February 28, 1913, unless the earnings since that date exceed the losses since that date. These are the only factors to be considered. I see no occasion to apply losses since 1913 to surplus at that time in order to ascertain the accumulated earnings since February 28, 1913. This is quite different from the principle of determining earned surplus for invested capital purposes, where there is no requirement to determine accumulated surplus since a certain date, but only the question as to the total earned surplus existing in the taxable year or on hand when that year began. See Willcuts v. Milton Dairy Co., 275 U. S. 215. I believe the statute should be construed according to its plain language, that is, the distribution to be taxable must be out of earnings or profits accumulated since February 28, 1913, and that such amount should not be affected in any way by any surplus existing at that time.

The losses since February 28,1913, should be taken from the profits since that date to determine the accumulated profits since that date.

I do not think the Shorb case in 22 B. T. A. 644, is authority for the majority decision. The corporation in that case was not organized until after March 1, 1913.

The prevailing opinion also relies on the case of Blair v. United, States, 63 Ct. Cls. 193. In the case of J. L. Washburn, 16 B. T. A. 1091, the Board pointed out that it considered the Blair case to be unsound and declined to follow it.

In the case of Hadden v. Commissioner, 49 Fed. (2d) 709, the Circuit Court of Appeals for the Second Circuit, said:

The accumulated profits since March 1, 1913, must necessarily mean the net excess of all profits between March 1, 1913, and the date of distribution, less all losses sustained between the same dates * * *.

I think this view is correct and that it is erroneous to reduce the surplus on hand on February 28, 1913, by subsequent losses to determine the earnings and profits accumulated since that date.

Moeeis, Marquette, Smith, Love, and McMahoN agree with this dissent.