author: Van Fossan :

text:
    Mary Haller, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 39268.
    Promulgated June 13, 1932.

      Joseph Getz, Esq., and Wm. J. Byrne, Esq., for the petitioner.

      J. F. Foley, Esq., and G. G. Maddox, Esq., for the respondent.
   OPINION,

Van Fossan :

In Mary Haller, 14 B. T. A. 488, deficiencies in the income taxes of the present petitioner for the years 1917 to 1923, inclusive, were in controversy. In opposing those deficiencies the petitioner contended, among other things, that “ under the will of Jacob Haller construed in the light of surrounding circumstances at the time of his death one-seventh of the income is distributable to her and one-seventh to each of the six children who were living during the taxable years.” Substantially the same contention is made in the present proceeding. In our former decision we held in substance that the will of Jacob Haller and the codicil thereto created for the petitioner a life estate in the net profits of the grocery business, referred to in the findings of fact herein, and that there was nothing in the proof indicating that at the time Jacob Haller executed the codicil and at the time of his death he intended the petitioner and his children to share equally in the profits of the busi-' ness. We said: “ There is no basis on which we can say that it was the intention of the testator that his widow should be under the duty to pay over to the children any part of the income which, under the will, was payable to her. Nor is there any evidence sufficiently definite to permit us to determine that the operation of the business was continued under any agreement which superseded the provisions of the will.” The petitioner contends in this proceeding that there was such an agreement between her and the six living children of Jacob Haller, and that an equal partnership in the profits of the business for the years 1924 and 1925 was created thereby. The respondent urges, however, that our decision in the former case is conclusive with respect to the question of whether or not under the will of Jacob Haller the entire net income of the grocery business was taxable to the petitioner, and is also conclusive upon the question of whether or not the petitioner, her daughters and stepsons had entered into any agreement prior to December 31, 1923, whereby the provisions of the will were superseded.

It is well settled that, in the'absence of fraud or collusion, a judgment of a competent tribunal is conclusive upon the parties thereto and upon those in privity with them as to all questions involved in the controversy. Russell v. Place, 94 U. S. 606; Southern Pacific Railroad v. United States, 168 U. S. 1; Northern Pacific Company v. Slaght, 205 U. S. 122. In Jahncke Service, 20 B. T. A. 837, we applied this principle, holding in effect that when a corporate taxpayer’s liability for a deficiency in tax has been determined by the Board a transferee who was a stockholder of the taxpayer would not be heard to contest the taxpayer’s liability for the determined deficiency.

The petitioner asserts, however, that the question of whether or not a partnership in the profits of the grocery business was created by agreement between the petitioner and the six living children of Jacob Haller was not litigated or decided in Mary Haller, supra. It may be said, however, that, even if that exact question was not decided, we held, as hereinbefore stated, that there was no evidence sufficiently definite to permit us to determine that the operation of the business was continued under any agreement which superseded the provisions of Jacob Haller’s will.

It was said by the Supreme Court of the United States in Cromwell v. County of Sac, 94 U. S. 351, 353:

The language, therefore, which is so often used, that a judgment estops not only as to every ground of recovery or defense actually presented in the action, but also as to every ground which might have been presented, is strictly accurate, when applied to the demand or claim in controversy. Such demand or claim, having passed into the judgment, can not aga'n be brought into litigation between the parties in proceedings at law upon any ground whatever.

Applying the principles enunciated by the Supreme Court in the foregoing quotation from Cromwell v. County of Sac, it follows that our former decision concludes the petitioner from asserting that a partnership in the profits of the grocery business existed at any time during the years in controversy in the former proceedings, i. e., prior to January 1, 1924. In accordance with the same principles our former decision is conclusive as to the construction of the will of Jacob Haller and the codicil thereto to the effect that under the will the children: of Jacob Haller had no legal interest in the net profits of the grocery business. But, even if that decision were not conclusive in the respects set forth, we find nothing in the will of Jacob Haller or in the codicil thereto or in the facts in evidence in the present proceeding which alters the views concerning the construction of the codicil to the will expressed in our former decision. In accordance with the decisions of the Pennsylvania courts cited in that decision, it is clear that under the terms of the will and codicil the petitioner had a life estate in the net profits of the grocery business founded by Jacob Haller and to be carried on by his executors. Under the terms of the will and codicil the petitioner was not accountable to any of the children for any part of the net profits. Nor is there convincing evidence in the instant proceeding that she assigned or gave to the children or any of them any part of her beneficial property right in the net profits of the grocery business or in an other way divested herself of any part in that right prior to January 1, 1924.

In Cromwell v. County of Sac, supra, the Supreme Court stated further as follows:

It is not believed that there are any cases going to the extent that because in the prior action a different question from that actually determined might have arisen and been litigated, therefore, such possible question is to be considered as excluded from consideration in a second action between the same parties od a different demand, although loose remarks looking in that direction may be found in some opinions. On principle, a point not in litigation in one action can not be received as conclusively settled in any subsequent action upon a different cause, because it might have been determined in the first action.

The demand in the present proceeding is for a redetermination of the deficiencies in income taxes for the years 1924 and 1925. These deficiencies were not in controversy in the former proceedings. It may, therefore, be determined whether or not, during the years now in question, a partnership in the profits of the grocery business existed between the petitioner and the six living children of Jacob Haller, deceased. In solving this problem it should be borne in mind that the executors of the will of Jacob Haller had not accounted prior to those years and did not account during either of those years. During those years the legal title to the assets of the grocery business founded by Jacob Haller and to be carried on by his executors under the terms of the will was still vested in the executors. Under the will the petitioner had no title to the assets of the business. She had only ah interest in the business during her lifetime. The petitioner contends, however, that at some time prior to 1924 or at the beginning of that year she permanently and absolutely divested herself of her property right in six-sevenths of the profits of the grocery business, giving one-seventh of this property right to each of the children of Jacob Haller and keeping one-seventh interest for herself. She also contends that she and the six living children allowed the larger portion of the profits accruing to each to accumulate in the business; that there was an understanding that each of the seven would share equally in both the profits and losses of the business; that the setting up of capital accounts as of December 31, 1923, as stated in the findings of fact and the equal distribution of the net profits of the business in 1924 and 1925 were in accordance with such understanding and that, by reason of all these facts, a partnership existed between them during the taxable years now in question.

If the petitioner divested herself of any part of her property right she did so by making a gift of a part of that right to each of the living children of Jacob Haller, deceased. This Board has recently said, in Mary Katharine Dulin et al., 25 B. T. A. 1259:

* * * To constitute a gift in contemplation of law, tliere must be (1) an intention on tlie part of the donor to give — that is, to surrender complete control and dominion over the property to the donee; (2) there must he 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 Davis R. Daly, 3 B. T. A. 1042; F. J. Vlchek, 7 B. T. A. 1244; J. T. Lupton, 19 B. T. A. 166.

See also Allen-West Commission Co. v. Grumbles, 129 Fed. 287-290; Edson v. Lucas, 40 Fed. (2d) 398, 404.

It is our opinion that it is not to be concluded from the evidence in this proceeding that there was an intention on the part of the petitioner to surrender to the six children of Jacob Haller complete control and dominion over all of her beneficial property right in the grocery business excepting only one-seventh thereof. There is some evidence in the record that it was the “ understanding ” of the petitioner and Jacob Haller’s living children that they were all to share equally in the profits of the business. It seems fairly inferable, however, that this understanding grew out of their own interpretation of the provisions of Jacob Haller’s will and codicil. In other words, the petitioner and the six living children understood that the will and codicil of Jacob Haller provided, in effect, that the petitioner and the decedent’s children should share. equally in the profits of the business. Such an understanding would not supersede the proper interpretation of the codicil under the law nor control its legal incidences. This erroneous understanding of the legal effect of the testament does, however, negative the existence of an intention to make a gift. Petitioner could not intend to give the daughters and sons that which she understood was already theirs.

Likewise, the evidence does not satisfactorily show that any agreement existed between the petitioner and the children in 1924 and 1925 which created a partnership in the profits of the grocery business. Though, with the assent of the petitioner, there had been equal distributions of sums of money in 1914 and 1920, we are not convinced by the mere fact of these distributions that the petitioner had divested herself of her property right in the grocery business. The evidence as to the existence of a partnership prior to 1926 leaves too much to inference and conjecture. If a partnership had existed prior to 1926, it would have been normal to dissolve the same when the new partnership among the children and excluding the petitioner was formed. The partnership agreement entered into in July, 1926, however, makes no reference to a preexisting partnership nor does it purport to be a confirmation of any previous understanding. The language of the contract is that the parties “ do hereby form a partnership ” and “ the date upon which the partnership shall commence shall be January 1,1926.” It is but reasonable to assume that language of different tenor would have been used had the partnership existed in fact prior thereto. It is likewise significant that no partnership returns were filed for the taxable years.

The fact that in 1923 capital accounts in the name of each of the children were set up on the books is not controlling. This is but one of many facts to be weighed.

In 1926, however, the petitioner appears to have divested herself of all rights in the grocery business and to have received in exchange therefor certain real estate situated in the city of Erie. This arrangement seems to have been entered into with the assent of the executors, who filed their final accounting immediately after the partnership agreement was entered into on July 1, 1926, by the daughters and stepsons of Mary Haller. This partnership agreement and the distribution of the estate set forth in the final accounting of the executors disclose that in 1926 the petitioner transferred her interest in the grocery business to her daughters and stepsons and that the daughters and stepsons formed a partnership. These facts are not proof of the contention that the petitioner and the six children of Jacob Haller had, by agreement, created a partnership in the grocery business prior to or during 1924 and 1925.

We can not hold on the evidence that the petitioner ever divested herself of her sole right to the net profits of the business or that any of the children ever acquired an enforceable interest in the business prior to the execution of the written partnership instrument in 1926 and the contemporaneous distribution of the estate of Jacob Haller.

From the foregoing it follows that the respondent did not err in holding that the whole of the net profits of the grocery business for the years 1924 and 1925 is taxable to the petitioner.

Decision will be entered for the respondent.


source: Caselaw Access Project

author: Van Fossan:

license: Public Domain

text:
    Palgrove Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43836.
    Promulgated June 13, 1932.

      Harry Levine, Esq., for the petitioner.

      J. M. Leinenhugel, Esq., for the respondent.
   OPINION.

Van Fossan:

The petitioner asserts that it and A. Klipstein & Company were affiliated during 1925, pursuant to the provisions of section 240 (c) of the Revenue Act of 1926, which is as follows:

For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns at least 95 per centum of the voting stock of the other or others, or (2) if at least 95 per centum of the voting stock of two or more corporations is owned by the same interests. This subdivision shall be applicable to the determination of affiliation for the taxable year 1925.

During 1925 August Klipstein, Hedwig Klipstein, Louise A. Klip-stein and Herbert C. Klipstein owned two-tenths per cent, 25 per cent, 24.9 per cent and 24.9 per cent, respectively, of the stock of A. Klipstein & Company, but held no stock in the petitioner. During the same year August Klipstein, Jr., owned 25 per cent of the stock of the A. Klipstein Company and ,98 per cent of the stock of the petitioner. August Klipstein, Jr., had acquired his stock in the petitioner from Ernest C. Klipstein under the contract of December 2, 1922, which provided that Ernest C. Klipstein agreed to transfer and deliver to A. Klipstein & Company 50 shares of the capital of the petitioner, subject to the conditions stated in paragraph 5 thereof. That paragraph is as follows:

Ernest O. Klipstein, one of the parties of the first part agrees to duly transfer and deliver to said August Klipstein, Jr., 50 shares of the capital stock of Palgrove Company upon the following conditions: (a) Said August Klipstein, Jr., will procure the due transfer and delivery to him from August Klipstein of 50 shares of said Palgrove Company stock; (b) said August Klipstein, Jr., shall have the full voting rights of said 100 shares of said stock for any and all corporate purposes, with the right to' take any and all action and any and all steps necessary to procure the assumption by the Palgrove Company of the certain indebtedness of the Manetto Company to A. Klipstein & Company ; * * *

The petitioner contends that August Klipstein, Jr., was merely the nominal holder of 98 shares of its stock and that such stock was in reality the property of individual members of the August Klip-stein family, who were the stockholders of A. Klipstein & Company. There is nothing in the stipulation to support this theory. At the most August Klipstein, Jr., may have received the 50 per cent of the petitioner’s stock from Ernest C. Klipstein for the benefit of the corporation, A. Klipstein & Company, thus contributing to a Class A affiliation under paragraph (1) of subdivision (c), but this the petitioner does not claim. However, there is an express stipulation in the contract of December 2, 1922, that August Klipstein, Jr., should “ have the full voting rights of said 100 shares of said stock for anjr and all corporate purposes.” Nor does it appear how, for whose benefit, or for what consideration August Klipstein, Jr., acquired the 50 shares of the petitioner’s stock from his father. In the absence of explanatory evidence, we must look to the schedule of stockholdings as it appears from the record.

The petitioner quotes from the stipulation as follows: “ During the entire year of 1925 the August Klipstein family, taken as a unit, owned 100 per cent of the capital stock of A. Klipstein & Company and of the Palgrove Company,” and asserts that the test of the statute has been met thereby. Whatever the phrase “ taken as a unit ” may mean, we understand that it imports no more than that the entire stock of A. Klipstein & Company and the petitioner was held within the August Klipstein family. Such a situation alone does not justify affiliation. In Handy & Harmon v. Burnet, 284 U. S. 136, the Supreme Court said :

It requires no discussion to show that suck returns will not make against inequality or evasion unless the same interests are the beneficial owners in like proportions of substantially all of the stock of each of such corporations. * * * Affiliation on any other basis would not make against inequality or evasion. * * *

The phrase “the same interests” is common-to section 24.0 (c) of the Revenue Act of 1926 and section 240 (b) of the Revenue Act of 1918, under which the Handy & Harmon case arose. The court does not suggest that “ family corporations ” are exempt from the application of the above construction of the law. The purpose of section 240 was “ to secure substantial equality as between stockholders who ultimately bear the burden.” The situation surrounding the ownership of the capital stock of the petitioner and A. Klipstein & Company does not bring it within the rule as above set forth and, therefore, under the authority of Handy & Harmon v. Burnet, supra, we must deny affiliation.

Decision will he entered for the respondent.


author:
ARundell:
      MuRdock,

text:
    Askin & Marine Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10657.
    Promulgated June 13, 1932.

      Charles D. Hamel, Esq., Benjamin H. Saunders, Esq., and Arnold Marhel, C. P. A., for the petitioner.

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

ARundell:

The respondent has determined that the sum taken from petitioner’s active card file at the close of 1920 did not represent debts ascertained to be worthless and has disallowed that amount as a deduction. Petitioner alleges that this was error on the part of the respondent and claims that the total of the sum in its delinquent file plus the additional sum taken from its active cards in 1920 represented the total of its worthless accounts for that year.

The evidence fully justifies respondent’s disallowance as a bad debt deduction of that portion of the amount claimed which was taken from petitioner’s active file for the year 1920. It is established clearly that no effort was made to ascertain the worthlessness of the the amounts written off from the active cards. The proof was so clear that counsel for petitioner in his brief says, “ On the evidence the respondent is apparently correct as to 1920.” We accordingly sustain the respondent’s disallowance of $279,240.68 as a bad debt deduction for 1920.

The next question, raised in the alternative by petitioner, is whether the amount recovered in 1920 on similar items charged off for 1919 should be included in 1920 income. The same question was involved in Commissioner v. Liberty Bank & Trust Co., 59 Fed. (2d) 320; reversing 14 B. T. A. 1428. The close similarity of the two cases is apparent from the following quotation from the opinion of the court:

In its returns for 1916 to 1919, inclusive, the taxpayer charged oft and reported as worthless certain debts owing to it. Due allowances were made for these debts by the Commissioner in the assessment of taxes for those years. Upon the payment of the debts in whole or in part in 1920 and 1921, the Commissioner treated the amounts received as a part of gross income. The Board of Tax Appeals reversed this ruling, holding, to which there were dissents, that these payments were not a part of gross income for the years .received because they were not in fact ascertained to be worthless for the years for which they were so reported and charged off.

In that case, as in this, the contention of the respondent was that the taxpayer, having asserted that the debts were ascertained to be worthless and charged off, and having received the benefit of such assertion, was estopped to deny its truth to the prejudice of the Government. The taxpayer contended, and the same contention is made here, that there was no basis for the application of the doctrine of estoppel. On this phase of the case the court held:

It is said tbat it was the duty of the Commissioner, before allowing the deductions in the former years, to exercise reasonable diligence to discover whether the debts were worthless, and if he liad done so, he could have ascertained that they were not. While it may be conceded that the Commissioner may not blindly accept every statement which a taxpayer makes as to a fact, and by acting thereon preclude the taxpayer from showing at some other time that the statement was mistakenly made, we cannot assent to the view that a taxpayer which has been allowed a deduction for a debt, on its statement under oath that the debt has been ascertained to be worthless, is not estopped thereafter from denying the truth of the statement to the prejudice of the Government. The Commissioner of necessity does and must rely largely upon the representations of the taxpayer, and in order to estop the taxpayer from assuming a contrary position he is not compelled to look with suspicion upon all such representations and himself examine or cause to be examined the financial condition of all the taxpayer’s debtors. It is the duty of the taxpayer to deal fairly and truthfully with the Government. The taxpayer was in a better position to ascertain the facts in this case than the Government, and it cannot now say that the Government, by the exercise of reasonable care, ought to have done what it failed to do. The officers of the Government charged with the duty of assessing and collecting taxes have the right to assume that a taxpayer will do his duty, and we think it is to be presumed from the fact that these deductions were allowed for the years in which they were claimed that the Commissioner relied upon the taxpayer’s sworn statements that the debts were worthless. It is also to be presumed, in the absence of evidence to the contrary, that the Government was prejudiced by such reliance, for it is obvious that a deduction from gross income reduces the net income subject to taxation. The purpose which the statute has in view in authorizing deductions for bad debts is to permit the taxpayer to reduce his taxable income. It is fair to infer from the fact that deductions were claimed and allowed for these debts in former years, nothing else appearing, that there was a consequent reduction in taxable income.

In the case before us the respondent has a stronger ground for invoking estoppel against a taxpayer than he had in the Liberty Bank case, for in this case, as set out in our findings of fact, the taxpayer insisted over a period of years that the deduction claimed represented debts actually ascertained to be worthless. By reason of its representations made at conferences and affidavits filed with the respondent, petitioner was able to convince the respondent of the verity of its claims and obtained the benefit of the deductions of gross income for which it asked.

In Burnet v. Sanford & Brooks Co., 282 U. S. 359, the principle was laid down that recoveries on losses previously claimed and allowed constitute income. That decision, it is pointed out in the Liberty Bank case, is controlling in the case of recoveries on debts for which deductions had been claimed and allowed, and accords with the respondent’s long established interpretation of the revenue acts. See art. 110, Regulations 33; art. 52, Regulations 45; art. 51, Regulations 62.

In view of the foregoing, we are of the opinion that respondent properly included in income for 1920 the collections in that year on the accounts making up the amount claimed and allowed as a bad debt deduction for 1919.

On the invested capital question, petitioner alleges that the accounts making up the amount of $308,504.35 collected in 1920 were good accounts receivable and as such should be included in invested capital. As we have held that the 1920 collections constitute income, it necessarily follows that the same items can not at the same time be invested capital.

Reviewed by the Board.

Decision will be entered for the respondent.

TRAmmell dissents.

MuRdock,

concurring: I do not agree that the amount collected in 1920 on accounts charged off for prior years should be included in 1920 income because of an estoppel. An estoppel must be certain and may not depend upon argument or inference. It is a matter of defense and should be pleaded and proven by the one asserting it. This same party should suffer if the proof is inadequate. In order to work an estoppel of this kind there must be, among other things, (1) conduct, acts, language or silence amounting to a representation or a concealment of material facts; (2) the truth concerning these facts must be unknown to the other party, who claims the benefit of the estoppel, and this party must be without convenient or ready means of acquiring this knowledge by the exercise of reasonable diligence; (3) the latter must also be led by his reliance on the conduct of the other to change his position for the worse. An estoppel has no application where the material facts are known to both parties. The object of the rule is to repress fraud and render men truthful in their dealings with each other.

The Commissioner was investigating the.tax liability of this taxpayer for four years, the yrears 1917 to 1920, inclusive. The information which he obtained from the taxpayer showed that the latter pursued a consistent course in all of those years so far as the matter now under discussion is concerned. There is nothing in the record to distinguish the facts for 1920 from those for the other years. The Commissioner knew that in each year the petitioner deducted a certain amount from its income which it considered a fair amount, in the light of its experience, to represent bad debts; it next absorbed this amount by charge-offs in specific accounts, first wiping out all delinquent accounts and then spreading the remainder among the active accounts; as amounts thus charged off were collected in later years, the collections were again included in income. These are the material facts. Both parties knew them. What other fact was represented or concealed which could work an estoppel? ' The petitioner contended that it had thus met the requirements of the act as to ascertainment of worthlessness and charge off in all years. The prevailing opinion holds that having taken this position he is es-topped to take another. But this contention of the taxpayer was no more than a statement of a conclusion. The prevailing opinion seems to hold that the Commissioner may say to this taxpayer, You have persuaded me to allow you deductions for prior years, so I include certain items in your 1920 income regardless of whether or not they are properly income for 1920 and ymu may not show or even contend that they are not income for that year.” This would make the unequal resistance of the Commissioner to one argument on similar facts for four years the basis of an estoppel. The Commissioner is able to form his own conclusions from a given state of facts and can not claim an estoppel where another’s argument made him vacillate. The difficulty does not arise from any unfair advantage taken by the petitioner.

The Commissioner singled out the year 1920 and disallowed a part of the deduction for that year. We approve his action as to that year. Why he did not follow his agent’s report, disallow similar parts of the deductions for other years and exclude the collections from income, I do not know. If it was on account “ of the additional information submitted in conference of September 16, 1922,” what was that information? Apparently without any further information the Commissioner eventually proposed the large deficiency for 1920 by disallowing the excess of the bad debt deduction over the total of the delinquent accounts as an arbitrary deduction. In this connection he pointed to collections in the succeeding year, but he had the same information for 1917, 1918 and 1919.

The taxpayer says, “ If you will not adopt my consistent method, then take another consistent view, that of your revenue agent for example, whereby my income for 1920 will not be distorted.” He is not estopped to make this plea. We should not support the Commissioner if these items were not income in 1920. Errors of other years need not concern us under such circumstances, for the Commissioner has not shown that any material fact was unknown to him or misrepresented when he made his determination as to those years or when his determination became final.

The Commissioner determined that proper amounts were charged off for prior years. The presumption is that he was correct. The proof does not show that the amount charged off was incorrect in the light of the circumstances known at the end of each of those years. Amounts later collected were then unknown. In my opinion the Commissioner wins the point without benefit of an estoppel.

GoodRich agrees with this concurring opinion.


author: •Lansdon:

text:
    C. W. Hunter, Executor of Estate of George II. Hunter, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 45417.
    Promulgated June 15, 1932.

      R. G. Ransom, G. P. A. and B. L. Washington, Esq., for the petitioner.

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

•Lansdon:

The respondent has asserted a deficiency in estate tax in the amount of $9,006.61. The only question submitted to us is whether the transfer of 1,260 shares of stock of the Hunter Milling Company of Wellington, Kansas, by the decedent more than two years prior to his death was made in contemplation of death. The petitioner here is C. W. Hunter, executor of the estate of George H. Hunter, deceased.

On March 4, 1918, the decedent executed a declaration of trust by the terms of which he then transferred 1,260 shares of stock of the Hunter Milling Company to his son, C. W. Hunter, as trustee for his nine children, as beneficiaries with equal interests. The trust instrument contained no reservations and was irrevocable. It provided that the income from the corpus of the trust should be distributed by the trustee in equal parts to the beneficiaries. About nine years after the date of the declaration of trust the trustor died. An estate-tax return was duly made by the executor, in which the value of the stock at the date of decedent’s death was not included. Upon audit of such return the respondent determined that the trust had been declared and the transfer made in contemplation of death and determined the deficiency in controversy.

At the date of the declaration of trust the decedent was in good health and so continued until shortly before his death. He was a man of large affairs and without assistance managed his own business until a very short time before he died in 1921. At the date of the declaration of trust and transfer he was estranged from his wife, who was not the mother of any of his children. His motive in making the transfer was to put some portion of his property out of the reach of his wife in the event of divorce or separation proceedings, or of death. He had fully discussed this matter with his son and had often announced his intention to create such a trust for the benefit of his children. In all the circumstances we are satisfied that the transfer was not made in contemplation of death within the meaning of the Revenue Act of 1926. Estate of John A. Hicks, 9 B. T. A. 1226; Cyrus H. McCormick et al., Executors, 13 B. T. A. 423; cf. same title, 283 U. S. 784; William L. Nevin, Executor, 16 B. T. A. 15; aff'd., 47 Fed. (2d) 478.

Decision will be entered for the petitioner.


author: Lansdon:

text:
    Sconset Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 40527.
    Promulgated June 15, 1932.

      Robert D. Charlton, Esq., for the petitioner.

      'T. M. Mather, Esq., for the respondent.
   OPINION.

Lansdon:

The only controversy in this proceeding relates to the basis for computing profit from the sale of assets acquired by the petitioner from an individual in exchange for all of its capital stock. The respondent has determined that the basis is to be determined under section 204 (a) (8) of the Revenue Act of 1926 and that it is cost of the property to the transferor. The petitioner contends that the basis is cost of the assets, which is the fair market value of the stock paid therefor.

Section 204 (a) (8) of the Revenue Act of 1926 provides that where property is acquired by a corporation for stock in connection with a transaction described in paragraph (4) of subsection (b) of section 203 the basis for computing profit or loss shall be the same as it would have been in the hands of the transferor. We have held repeatedly that section 204 (a) (8) is applicable to a situation such as that presented here. Perthur Holding Co., 23 B. T. A. 1128; Paradox Land & Transport Co., 23 B. T. A. 1228; Burlington Gazette Co., 21 B. T. A. 156; and Haas Building Co., 22 B. T. A. 528. Upon authority of the above decisions the respondent’s determination is approved.

The petitioner alleges that section 204 (a) (8) of the Revenue Act of 1926 is unconstitutional as violating the Fifth Amendment. The similar section of the Revenue Act of 1924 has been before the Federal courts on at least two occasions and its constitutionality has been upheld. Newman, Launders & Co. v. United States, 68 Ct. Cls. 641; 36 Fed. (2d) 1009; certiorari denied, 281 U. S. 760; and Osburn California Corporation v. Welch, 39 Fed. (2d) 41; certiorari denied, 282 U. S. 850. Upon authority of those decisisons we uphold the validity of the section questioned.

Decision will be entered for the respondent.

         Sec. 204. (a) The basis for determining the gain or loss irom the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that—
      !¡S * * # * * *
      (8) If the property * * * was acquired after December 31, 1020, by a corporation by the issuance of its stock or securities in connection with a transaction described in paragraph (4) of subdivision (b) of section 203 * * * then the basis shall be the same as it would be in the hands of the transferor, * * *

       Sec. 203. (b) (4) No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; * * *


author: A bttndet.t. :

text:
    Dominion National Bank, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 52165.
    Promulgated June 15, 1932.

      W. H. Robertson, Esq., for the petitioner.

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

A bttndet.t. :

There is some difference between the parties as to the cash surrender value of the Smith brothers’ policies and the amount of the annual premiums. The following brief description of the policies is taken from the testimony of petitioner’s president and indicates how we arrived at the amounts set out in the findings of fact:

Petitioner now concedes that it is not entitled to a bad debt deduction on account of the Smith brothers’ indebtedness of more than the difference between the cash.surrender value of the policies in 1928 and the amount of the debt charged off in that year. In our opinion this difference, $3,147.55, ($7,096 less $3,948.45) constitutes a proper deduction as representing a debt ascertained to be partially worthless and charged off. The security held by petitioner, consisting of the insurance policies, was worth only $3,948.45 in the taxable year, and it is established that the debt, in so far as it exceeded that amount, was uncollectible. The petitioner was under no obligation to hold the policies until some future time when they would be worth more, and we see no reason why a charge-off should not be permitted in the year of ascertainment of worthlessness. The respondent relies on John Gadwalader et al., 15 B. T. A. 1, in which the creditor held insurance policies with a face value of $80,000 against an indebtedness of an equal amount. In the year of ascertainment of worthlessness the policies had a cash surrender value of $24,586. The distinguishing feature of the two cases is that the Gadwalader case arose under the Revenue Act of 1918, which made no provision for charging off a debt only partially worthless, and for that reason we refused to allow a bad debt deduction. In Northern National Bank, 16 B. T. A. 608, the creditor held as security .a term insurance policy on the life of the debtor, which policy had no cash surrender value, but had a face value in excess of the amount of the debt. The debtor disappeared in 1918 and at the close of the year, at the direction of the bank examiner, the debt was charged oif. In that case the creditor continued to hold the policy, paying the premiums, and ultimately, upon the death of the insured, collected the principal sum named in the policy. In that case we allowed as a bad debt deduction for 1918 the full ainount of the indebtedness, and it is authority for allowing here a. deduction of the difference between the cash surrender value of the policies and the amount of the debt.

In the Cadwalader case, supra, we held that the creditor was entitled to deduct the premiums paid to keep the policies alive. It was pointed out in that case that, the debt and the principal sum of the policies being equal amounts, the creditor could never recover more than the original debt. We further said:

This is unlike situations where the principal amounts of the policies are in excess of the indebtedness and there is therefore the prospect of recovering both the indebtedness and the premiums paid. It is also unlike those cases where the taxpayer is the owner of the policy on which the premiums are paid, in which case the premiums serve to increase his equity. In this case the greatest amount which it will be possible to collect will be the amount loaned.

The respondent says that under the quoted language, where there is a possibility of recovering the amount of the premiums paid in addition to the indebtedness, the premiums are not deductible. The quotation given does not so hold, and, while the inference suggested by respondent may readily be drawn, it was not necessary to the decision and we do not regard it as controlling.

While it is true that the assignee of a policy of life insurance which he holds to secure a debt of the insured may retain out of the proceeds a sufficient amount to reimburse him for premiums paid plus interest in addition to the amount of the debt (First National Bank of Roanoke v. Speece, 99 Va. 194; 37 S. E. 843), it is also true that petitioner here was under no duty to continue paying the premiums. It might have allowed the policies to lapse at any time, and taken the cash surrender value of the amount less than the debt. In that event it would not have been reimbursed for its expenditures for premiums. It is well known that the cash surrender value of life insurance does not increase dollar for dollar with the premium paid. We regard the premiums paid as an ordinary and necessary expense incurred by petitioner with the hope of ultimately recovering the full amount of the indebtedness, and in our opinion the payments made in 1928 aggregating $596.56 should be allowed as a deduction.

Decision will be entered under Rule 50,


author: Trammell:

text:
    Columbia Tire Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 49622, 53313.
    Promulgated June 15, 1932.

      Hugh F. Purvis, G. P. A., for the petitioner.

      J. Arthur Aclams, Esq., for the respondent.
   OPINION.

Trammell:

The petitioner contends that the respondent erred in determining that it and F. W. & M. L. Bell, Inc., were not affiliated during 1926, 1927 and 1928. The respondent denies that he thus erred and contends that affiliation within the meaning of the revenue acts did not exist between the two corporations during those years.

Section 240 (d) of the Revenue Act of 1926, which is applicable to the years 1926 and 1927, provides as follows:

For the purpose of this section two or more domestic corporations shall he deemed to be affiliated (1) if one corporation owns at least 95 per centum of the stock of the other or others, or (2) if at least 95 per centum of the stock of two or more corporations is owned by the same interests. As used in this subdivision the term “ stock ” does not include nonvoting stock which is limited and preferred as to dividends.

Section 142 (c) of the Revenue Act of 1928, which is applicable to the year 1928, is identical with the foregoing provisions of the Act of 1926 except for the immaterial change of “ subsection ” for “ subdivision.”

Since at no time during the years in controversy did either of the corporations own 95 per centum of the stock of the other, it is clear that provision (1) of the sections has no application. That leaves for consideration the question as to whether 95 per cent of the stock of the two corporations was owned by the same interests. The petitioner contends that it was and the respondent contends that it was not.

The stipulated facts are that during the three years here involved from 5.18 per cent to 12.79 per cent of the stock of the petitioner was owned by its employees who owned no stock in F. W. & M. L. Bell, Inc. All of this stock, with the exception of two shares which if eliminated would not reduce the percentage below 5.18, was issued to the petitioner’s employees with the restrictions set out in our findings of fact. While these stockholding employees did not attend stockholders’ meetings or vote their stock by proxy the restrictions under which such stock was issued to them in no wise contained any limitation on their right to do so. Although the restrictions applicable to the stock limited the maximum amount of dividends payable on it to 8 per cent, the stock had no preference over shares of stock held by others. In view of these facts, we do not think that the stock held by the petitioner’s employees was nonvoting stock limited and preferred as to dividends and to be excluded in determining the amount on which the 95 per cent is to be computed. Since the stock of the petitioner’s employees is to be considered in determining whether 95 per cent of the stock of the two corporations was owned by the same interests, we are confronted with the question as to whether the Bell family and the stockholding employees of the petitioner are to be considered as the same interests.

The petitioner insists that under the circumstances of this case its stockholder employees or minority stockholders comprised the same interests with the majority stockholders. In Modern Tailoring Co., 25 B. T. A. 489, we had before us substantially the same question as that presented here. In determining what is meant by the term same interests ” as used in the statute we said:

The courts have construed the words “ same interests ” as meaning the same “ beneficial interests.” Commissioner v. Hirsch & Co., 30 Fed. (2d) 645; Handy & Harman v. Commissioner, 284 U. S. 136. In the latter case the Supreme Court said:
Tlie purpose of Sec. 240 was, by means of consolidated returns, to require taxes to be levied according to tlie true net income and invested capital resulting from and employed in a single business enterprise even though it was conducted by means of more than one corporation. Subsection (b) clearly reflects the intention, by means of such returns, to secure substantial equality as between- shareholders who ultimately bear the burden. That intention is shown by the legislative history and was given effect by the regulations contemporaneously promulgated. It requires no discussion to show that such returns will not mate against inequality or evasion unless the same interests are the beneficial owners in like proportions of substantially all of the stock of each of such corporations. Alameda Investment Co. v. McLaughlin, 28 F. (2d) 81. Montana Mercantile Co. v. Rasmusson, 28 F. (2d) 916. Commissioner v. Adolph Hirsch & Co., 30 F. (2d) 645, 646. Commissioner of Internal Revenue v. City Button Works, 49 F. (2d) 705. * * *
Cf. also Commissioner v. Gong Bell Mfg. Co., 48 Fed. (2d) 205; certiorari denied, 52 Sup. Ct. 125.
Obviously the conditions existing with respect to the ownership of the voting stock of the petitioner and Farr’s Clothes, Inc., in 1926 do not meet the test laid down by the Supreme Court-for affiliation. Cerney, not being a stockholder in Farr’s Clothes, Inc., would neither have benefited by a gain nor shared a loss of that company. See also East Jersey Lumber & Timber Co., 24 B. T. A. 1047; J. P. Burton Coal Co., 24 B. T. A. 1052.

Wbat we said in that case applies with equal force here. The petitioner’s employees, who owned from 5.18 per cent to 12.79 per cent of its stock during the years before us, did not own any stock in F. W. & M. L. Bell, Inc. It is clear, therefore, that they would not have been benefited by a. profit nor have shared a loss of that company. The respondent’s action, in determining that the petitioner and F. W. & M. L. Bell, Inc., were not affiliated during 1926,1927 and 1928, is sustained.

Judgment will be entered for the respondent.


author: Smith :

text:
    George U. Hind, Individually and as a Former Member of, and on Behalf of the Partnership of Hind, Rolph & Company, Now Dissolved, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 19167.
    Promulgated June 15, 1932.

      George E. E. Goodner, Esq., for the petitioner.

      John D. Foley, Esq., and Lloyd W. Oreason, Esq., for the respondent.
   OPINION.

Smith :

The only question to be determined is whether the partnership of Hind, Rolph & Company is entitled to have its profits tax for the calendar year 1917 computed under the.provisions of section 209 of the Revenue Act of 1917. This section of the act reads as follows:

That in the case of a trade or business having no invested capital or not more than a nominal capital there shall be levied, assessed, collected and paid, in addition to the taxes under existing law and under this Act, in lieu of the tax imposed by section two hundred and one, a tax equivalent to eight per centum of tbe net income of such trade or business in excess of the following deductions: In the case of a domestic corporation $8,000, and in the case of a domestic partnership or a citizen or resident of the United States $6,000; in the case of all other trades or business, no deduction.

Under the Eevenue Act of 1917, the partnership is considered, for purposes of computing income and profits taxes, as an entity. Its invested capital is to be determined as in the case of a corporation. Section 207 of that act provides in part:

That as used in this title, the term “ invested capital ” for any year means the average invested capital for the year, as defined and limited in this title, averaged monthly.
As used in this title “ invested capital ” does not include stocks, bonds (other than obligations of the United States'), or other assets, the income from which is not subject to the tax imposed by this title nor money or other property borrowed, and means, subject to the above limitations:
(a) In the case of a corporation or partnership: (1) Actual cash paid in, (2) the actual cash value of tangible property paid in other than cash, for. stock or shares in such corporation or partnership, at the time of such payment (but in case such tangible property was paid in prior to- January first, nineteen hundred and fourteen, the actual cash value of such property as of January first, nineteen hundred and fourteen, but in no case to exceed the par value of the original stock or shares specifically issued therefor), and (3) paid in or earned surplus and undivided profits used or employed in the business, exclusive of undivided profits earned during the taxable year * * ■*.

We do not think that the evidence before us warrants a finding that the partnership had no invested capital or not more than a nominal capital in 1917.

The respondent was unable to determine the partnership’s invested capital for 1917 and therefore computed its liability to profits tax under the provisions of section 210 of the Eevenue Act of 1917. The petitioner contends that it had no invested capital and that it is entitled to assessment under the provisions of section 209 of the taxing act. The burden is on the petitioner to prove that the partnership had no invested capital in 1917.

The evidence shows that the partnership began operations in 1898 with a paid-in capital of $5,000. Its operations from that date to 1917 were admittedly profitable. Large amounts were invested in capital assets. The witness, 'Chamberlain, testified that the partnership owned a number of ships which it carried on its books at December 31, 1916, at an aggregate sum of approximately $200,000 and a hotel which it carried on its books at $143,651.22. The balance sheet as of December 31, 1916, filed with the partnership return for 1917 lists total assets of $1,167,294, among which are bills receivable of $146,093.19, amounts due from principals of $224,416.59, real estate of $252,860.96, and stock investments of $537,982.78. The stock investments item includes ships referred to at a value of $235,410.88 and miscellaneous stocks at $302,571.90. Chamberlain, who identified and explained all of the book accounts referred to above, upon being asked how he arrived at the conclusion that the partnership had no invested capital, stated as follows:

I have a knowledge oí certain conditions oí assets which were simply picked out oí the air. In other words, they would increase the valuation of an asset and credit their profit and loss or their drawing account in order to take care of withdrawals of capital. In addition to that they held as assets a number of accounts which should have been written off in prior years.

The witness was unable to furnish his computation of invested capital.

Petitioner contends that the capital assets on its books of account at December 31,1916, had been written up to the extent of more than $300,000, which the petitioner contends should apply against the net capital as shown by the partnership books at December 31, 1916, of $114,054.96, leaving a deficit or minus invested capital of more than $200,000. In the making of this computation the total capital account, as shown by the books at December 31, 1916, of $221,953.31, is reduced by the amounts of the Rolph drawing account, $31,953.32, and the Rolph insurance account, $75,945.03, leaving a partnership net worth, as shown by the books, of $114,054.96.

In LaBelle Iron Works v. United States, 256 U. S. 377, the Supreme Court stated:

* * * Section 207 [Revenue Act of 1917] shows that Congress was fully alive to this and designedly adopted a term — “ invested capital ” — and a definition of it, that would measurably guard against inflated valuations. The word “ invested ” in itself imports a restrictive Qualification. When speaking of the capital of a business corporation or partnership, such as the act deals with, “ to invest ” imports a laying out of money, or money’s worth, either by an individual in acquiring an interest in the concern with a view to obtaining income or profit from the conduct of its business, or by the concern itself in acquiring something of permanent use in the business; in either case involving a conversion of wealth from one form into another suitable for employment in the making of the hoped-for gains. * * *

The evidence clearly shows that the partnership on December 31, 1916, had large amounts of capital invested in assets from which income was derived in 1917. In the circumstances of the case, we are of the opinion that the amounts which had been advanced to the partners by the partnership did not represent distributions of earnings or distributions to the partners of the original paid-in capital of the partnership which was carried on the partnership books at December 31, 1916, in substantial amount. The partners were liable to the partnership creditors for the amounts that they had drawn from the partnership. We think the evidence does not show that the partnership had no invested capital in 1917.

If it is true that substantially all of the partnership income in 1917 was due to its commission and brokerage business, in which not more than a nominal capital was used, it is not shown by the evidence. The petitioner, Hind, testified that most of the partnership business was “foreign business.” Was the merchandise transported to and from foreign countries in the vessels which the partnership owned and operated ? The evidence before us does not show for what purpose the vessels were used or to what extent their use contributed to the partnership income. In these respects, the petitioner has failed to meet the burden of proof. See Lehman v. Tait, 58 Fed. (2d) 20; Feeders' Supply Co. v. Commissioner, 31 Fed. (2d) 274; certiorari denied, 279 U. S. 874. The evidence indicates that the partnership employed in its business large sums of money, amounting at times to $300,000 or $400,000, left on deposit with it by other concerns with which it did business. In Lehman v. Tait, supra, the court expressed the opinion that borrowed money should be considered in determining whether there was more than a nominal capital employed in the business. In Park Amusement Co. v. McCaughn, 14 Fed. (2d) 553, the court, in considering the identical question here raised, said:

* * * The real criterion is in the fact finding of whether money as an income producer played any real and substantial part in producing the income to be taxed. Each tub must thus stand on its own bottom, and the sole question becomes how the fact stands here.

With respect to the source of the partnership’s income for 1917, the respondent’s deficiency notice contains the following statement:

1. Careful consideration of all the evidence submitted fails to show “ no invested capital ” or “ not more than a nominal capital ” for the year 1917. The partnership was engaged in buying and selling merchandise as principals, made loans, owned stocks, vessels, real estate and operated a hotel and a lumber business. Depreciation was allowed for the year 1917. It is apparent that the partnership had a substantial amount of invested capital. The manner in which it was furnished by the partners does not alter the fact that it existed.
2. From the evidence submitted it is evident that in addition to the commission or brokerage business, the partnership was engaged regularly in the buying and selling of merchandise, lumber business, operating a hotel, owning and operating vessels, investing in stocks and real estate, making loans, in fact was ready to invest in any venture from which a profit could be realized. It is noted that of the total income amounting to $638,750.90 for the year 1917, only $93,542.82, or about 14%%, represented commissions.
It is accordingly held that the partnership had invested capital as set forth in office letter dated November 15, 1921, and that all the transactions requiring the use of capital were a part of the regular business of the partnership.

The evidence before us fails to overcome the presumption of correctness attaching to the respondent’s determinations, and upon the record the respondent is sustained.

Eeviewed by the Board.

Judgment will be entered for the respondent.


author: Sea well:

text:
    Summerfield Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 47462.
    Promulgated June 15, 1932.

      George M. Morris, Esq., and Frederick L. Pearce, Esq., for the petitioner.

      John D. Kiley, Esq., for the respondent.
   OPINION.

Sea well:

This case was consolidated for hearing with Docket Nos. 33651 and 36869 and onr report as to each was promulgated November 18, 1931. Thereafter respondent moved a reconsideration of the Board’s decision in the instant case, Docket No. 47462, which motion was granted, a hearing thereon had and our decision therein reserved and delayed awaiting decision in the case of Woolford Realty Co. v. Rose, 286 U. S. 319, then pending in the United States Supreme Court, in which case a question similar to that in the instant case was involved.

The Supreme Court, on May 16, 1932, rendered its opinion in the Woolford Realty Co. case, and held that net losses of a corporation for 1925 and 1926 when it was not affiliated with another corporation could not be deducted from the combined net income of the two corporations for 1927 when they were affiliated and filed a consolidated return, where the corporation that had sustained the 1925 and 1926 net losses also suffered a net loss for 1927.

In the instant case, the issue for the Board’s determination is whether the consolidated net income for the period March 21, 1925, to December 31,1925, for the affiliated group, consisting of the Sum-merfield Company and the Taylor Furniture Company (both Massachusetts corporations) should be reduced by the net losses sustained by the Taylor Furniture Company for the year 1924 and the period January 1 to March 20, 1925.

During the year 1924 and the period January 1 to March 20, 1925, the Summerfield Company and the Taylor Furniture Company were not affiliated within the meaning of the revenue acts.

During the period March 21 to December 31,1925, the Summerfield Company and the Taylor Furniture Company were affiliated.

The net income of the Summerfield Company for the respective taxable periods was as follows:

Jan. 1 to March 20, 1925_ $44, 075. 68
March 21 to Dec. 31, 1925_ 159, 565.14

The net losses of the Taylor Furniture Company for the respective taxable periods involved were as follows:

Calendar Year 1924___$63,404.46
Jan. 1 to March 20, 1925_ 23, 949. 50
Mar. 21 to Dec. 31, 1925_ 86, 703. 25

In his determination of petitioner’s tax liability for the period March 21 to December 31, 1925, the Commissioner has applied the net loss sustained by the Taylor Furniture Company for the period March 21 to December 31, 1925, in the amount of $86,703.25 against the net income of the Summerfield Company for the same period, but has refused to reduce consolidated net income by the amount of the net losses sustained by the Taylor Furniture Company for the calendar year 1924 and the period January 1 to March 20, 1925.

The facts in the instant case bring it clearly within the principle to which wé have referred, as decided by the Supreme Court in the Woolford Realty Co., case, supra.

In view of the decision of the Supreme Court cited, we are of the opinion and so hold in the instant case (Docket No. 47462) that our determination therein as promulgated November 18, 1931, should be reversed.

Reviewed by the Board.

Judgment will be entered for the respondent.